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Is it true that profit centre managers could be evaluated using efficiency ratio? If so, can you explain it?
For example, if we take the effficiency ratio as:
Standard hours for production achieved/actual hours
then, if this is greater than 1 you have managed to produce very efficiently. For example, you made goods in 100 hours that you would have expected to take 120 hours.
This must enhance profitability as you have to pay for only 100 hours yet have made more goods to sell than expected.
If profit centre managers make more profit than expected then either (or both)
1 Sales have increased
2 Costs have decreasedEfficiency ratios relate to 2, above.
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