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Hello sir
Hope this massage finds you well
My question is regarding what dose this 3 (capacity, production volume and efficiency ) ratios measureI think the efficiency ratio measure efficiency of labour or its measure how well was the labours performance by comparing the standard hour with actual hours
But I am confused about the 2 otherAnd also could you please provide me a definition to recognize about budgeted hour and standard hour
Both of them are expectations about the time required or used with in a specific task project or production process
With differences which budgeted hour is fully based on expectation
And standard hour is based on actual unit of productionThank you
Under total absorption costing, if more units are produced than budgeted there is over absorption of fixed overheads. That is a favourable volume variance. Under absorption = unfavourable volume variance.
To get a favourable volume variance. more units than budgeted must be produced. There can be two causes:
1 Work more hours than expected per the original budget(favourable capacity variance); and/or
2 Work more efficiently than expected is producing more units than expected using the standard time per unit (favourable efficiency variance).Volume variance = capacity variance + efficiency variance.
I apologize for any confusion caused sir and kindly request further clarification.
I am still uncertain about the individual measurements and definitions of these ratios(Capacity, production volume and efficiency).
Can you please take me explanation about what does these 3 ratios individually measure
And could you please provide me a definition for each ratioThank you
Volume variance = (actual volume produced – budgeted volume) x Fixed overhead absorption rate per unit, or…
(standard hours for the units produced -originally budgeted hours) x FOAR per hour
Capacity variance = (actual hours worked – budgeted hours worked) x FOAR per hour
This is a measure of how working more hours in the factory potentially helps to cover the fixed costs
Efficiency variance = (standard hours for the units produces – actual hours for the units produced) x FOAR per hour..
This is a measure how working harder each hour, so producing more units helps to cover fixed costs.
HTH
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