Hello sir
Hope this massage finds you well
My question is regarding what dose this 3 (capacity, production volume and efficiency ) ratios measure
I 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 other
And 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 production
Thank you
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Ma1 capacity, production volume and efficiency ratio
2y ago#1Under 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 ratio
Thank you
2y ago#3Volume 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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