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 profitability in a business.
The efficiency formula is:
(Work output ÷ Work input) x 100%
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. For example:
- Labor efficiency variance. This is the actual hours worked minus the standard hours worked, multiplied by the standard labor cost per hour.
- Material yield variance. This is the actual number of units used minus the standard amount expected to be used, multiplied by the standard cost per unit.
- Variable overhead efficiency variance. This 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.