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. 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. 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.

Related AccountingTools Courses

Cost Accounting Fundamentals

Financial Analysis

Operations Management

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.

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.

Related Articles

Activity-Based Management

Business Process Reengineering

Learning Curve

Non Value Added Activity

Process Value Analysis

Time and Motion Study