Control Ratios

True Tamplin

Written by True Tamplin, BSc, CEPF®
Updated on September 6, 2021

What Are Control Ratios?

Under a budgetary control system, actual performance is compared to budgeted performance to enable the identification of variances.

Deviations or variances may be favorable or unfavorable, and they may be expressed in terms of absolute figures or in terms of ratios.

When deviations or variances are expressed in terms of ratios, these ratios are referred to as control ratios.

Types of Control Ratios

The types of control ratios are as follows:

  1. Capacity ratio
  2. Activity ratio
  3. Efficiency ratio

Capacity Ratio

The capacity ratio is also known as the actual usage of budgeted capacity ratio. It shows the relationship between the actual number of working hours and the budgeted number of working hours.

This ratio indicates the extent to which available facilities have actually been utilized during the budget period.

Formula

Capacity ratio = (Actual hours / Budgeted hours) x 100

Activity Ratio

The activity ratio is the number of standard hours equivalent to the work produced expressed as a percentage of the budgeted standard hours. This ratio measures the level of activity at which a business is operating.

Formula

Activity ratio = (Actual production in standard hours / Budgeted production in standard hours) x 100

Efficiency Ratio

The efficiency ratio is the number of standard hours equivalent to the work produced expressed as a percentage of the actual hours spent in production. This ratio measures the efficiency of a firm’s operations.

Formula

Efficiency ratio = (Actual production in standard hours / Actual hours worked) x 100

Interpretation of Control Ratios

The results of control ratios may be interpreted as follows:

Results Interpretation
100% No deviation
Above 100% Favorable deviation
Below 100% Unfavorable deviation

Example

Product X takes 5 hours to make and Product 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, and the budgeted hours for the year are 102,000.

Required: Calculate the following control ratios:

  • (A) Capacity ratio
  • (B) Activity ratio
  • (C) Efficiency ratio

Solution

Control Ratios Data
(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 standard hours / Budgeted production in standard hours) x 100
= (11,000 hrs. / 8,500 hrs.) x 100
= 129.41%
(C) Efficiency ratio = (Actual production in standard hours / Actual hours worked) x 100
= (11,000 hrs. / 10,000 hrs.) x 100
= 110%

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