Control Ratios

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What are Control Ratios?

Under the system of budgetary control, the actual performances are compared with budgeted performances so as to determine the deviations or variances. The deviations or variances may be favorable or unfavorable and may be expressed in terms of absolute figures or in terms of ratios. The ratios in terms of which the deviations or variances are expressed are known as Control Ratios.

Types of Control Ratios

These Control Ratios are:

  1. Capacity Ratio
  2. Activity Ratio
  3. Efficiency Ratio

Capacity Ratio

It is also known as Actual Usage of Budgeted Capacity Ratio. It denotes the relationship between the actual number of working hours and the budgeted number of working hours. This ratio indicates the extent to which the available facilities were actually utilized during the budget period.

Capacity Ratio Calculation Formula


Capacity Ratio may be expressed or calculated as follows:

Capacity Ratio = (Actual Hours / Budgeted Hours) x 100

Activity Ratio

Activity Ratio is the number of standard hours equivalent to the work produced, expressed as a percentage of the budgeted standard hours. This ratio measured the level of activity at which a business concern is operating and may be expressed as follows:

Formula to Calculate Activity Ratio

Activity Ratio = (Actual Production in terms of Standard Hours / Budgeted Production in terms of Standard Hours) x 100

Efficiency Ratio

Efficiency Ratio is the number of standard hours equivalent to the work produced, expressed as a percentage of the actual hours spent in producing that work. This ratio measures the efficiency of the operation of the firm and may be expressed as follows:

Formula to Calculate Efficiency Ratio

Efficiency Ratio = (Actual Production in terms of Standard Hours / Actual Hours worked) x 100

Interpretation of the Results of Control Ratios

The results of control ratios may be interpreted as follows:

ResultsInterpretation
(i) 100%No deviation
(ii) Above 100%Favorable deviation
(iii) Below 100%Unfavorable deviation

 

Example

Product X takes 5 hours to make and Y requires 10 hours. In a month of 25 effective days of 8 hours a day, 1,000 units of X and 600 units of Y were produced. The company employs 50 workers in the production department. The budgeted hours are 1,02,000 for the year. Calculate the Control Ratios, i.e., Capacity Ratio, Activity Ratio and Efficiency Ratio.

Solution

Control Ratios - Example

(a). Capacity Ratio = (Actual Hours / Budgeted Hours) x 100

= (10,000 hrs. / 8,500 hrs.) x 100

= 117.65%

(b). Activity Ratio = (Actual Production in terms of standard hours / Budgeted Production in terms of standard hours) x 100

= (11,000 / 8,500) x 100

= 129.41%

(c). Efficiency Ratio = (Actual Production in terms of standard hours / Actual Hours worked) x 100

= (11,000 / 10,000) x 100

= 110%

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