The formula for calculating efficiency
/How to Calculate Efficiency
The efficiency equation is a comparison of the work output from an operation to the work input to that same operation. The amount of "work" could refer to time, effort, capacity, or more tangible items. A high level of efficiency implies a minimal amount of wasted time, effort, capacity, materials, and so forth. This can translate into a high level of competitiveness and profitability in a business. The efficiency formula is:
(Work output ÷ Work input) x 100% = Efficiency
The work output in this definition is considered to be the useful amount of work output - that is, all scrap, spoilage, and waste is excluded from the numerator. The efficiency formula can be used in a variety of areas, such as to examine the efficiency of motors and in quantifying energy utilization. The concept has been most thoroughly formalized in cost accounting, as noted below.
Labor Efficiency Variance
The labor efficiency variance is the actual hours worked minus the standard hours worked, multiplied by the standard labor cost per hour. The formula for the labor efficiency variance is:
(Actual hours - Standard hours) x Standard rate = Labor efficiency variance
A concern with this variance is that it is based on a standard number of hours worked, which may bear little resemblance to the actual hours worked.
Material Yield Variance
The material yield variance is the actual number of units used minus the standard amount expected to be used, multiplied by the standard cost per unit. The formula is as follows:
(Actual unit usage - Standard unit usage) x Standard cost per unit = Material yield variance
A problem with this variance is that that the standard amount expected to be used could be incorrect, depending on the usage estimates of the engineering staff.
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Variable Overhead Efficiency Variance
The variable overhead efficiency variance is the difference between the actual and standard number of hours worked, multiplied by the standard overhead rate. Some other basis of allocation than hours worked may be used for this allocation. The formula is as follows:
Standard overhead rate x (Actual hours - Standard hours)
= Variable overhead efficiency variance
In short, the general concept of the efficiency equation can be applied to many specific areas. Within those areas, it may be defined or named differently.