You may have a successful business, but are your manufacturing processes as efficient as they could be? Are there any ways in which you could improve? By calculating your manufacturing efficiency based on factors that are directly related to the manufacturing process such as time taken in production, workforce productivity, capacity of production or materials used in the manufacturing process you can highlight the areas where improvements can be made. You can not only increase efficiency but increase your profits.
Calculate the actual hours it takes to manufacture a given quantity of products.
Calculate the standard hours it should have taken to manufacture that same number of products. This can be based on historical data.
Enter the above data into the following calculation: (Actual hours – standard hours) x standard labour rate = labour efficiency variance. For example, if your company spent 300 hours producing product A and it should have taken 250 hours at a rate of £15 per hour the calculation would be (300-250) x £15 = £750 labour efficiency variance.
Check to see if the efficiency is a positive figure. If it is, then the manufacturing process has cost you that amount over and above your estimates to manufacture your product. If it is a negative figure, you have saved money on your expected manufacturing costs.
Calculate the cost and quantities of materials required to produce your product for a given time period.
Calculate or take from historical data the costs and quantities of materials expected to produce your product in that same time period.
Enter the data collected into these two formulas; for the material variance deduct the budgeted figure from the actual figure for quantities and multiply this by the expected cost of the materials. For the price variance deduct the expected price from the actual price and multiply it by the quantity of materials used.
Use the figures from the above step and put them together to give you the materials variance based on price and quantity used. For example; if the company purchases 100 widgets at £3 per widget but was expecting to use 70 widgets at a cost of £4 per widget you would get the following results: (100 widgets – 70 widgets) x £3.25 = £97.50 – this is a negative variance as you have needed more materials than expected. (£3 - £4) x 100 = -£100 – this is a positive variance as the cost price was cheaper. £97.50 (materials variance) - £100 (price variance) = -£2.50 materials variance. This is a negative figure which means a positive variance as although more material was used it cost less to purchase.
Calculate your total figure for variable overheads from historical data – these are overheads that are directly related to the manufacture of your product for a given period.
Calculate the actual and the standard hours worked (Standard hours are the hours you would expect your production staff to work in a given period of time).
Calculate the standard overhead rate per hour by taking the total variable overheads and dividing this figure by the standard hours.
Calculate the variable overhead efficiency variance by deducting actual hours worked from the standard hours worked then multiply this figure by the standard overhead rate per hour.
In accountancy terms the manufacturing efficiency is calculated as a variance. If the variance calculated is a negative figure this is a positive result in the calculation of your manufacturing efficiency and vice versa for a positive figure.
Tips and warnings
- In accountancy terms the manufacturing efficiency is calculated as a variance.
- If the variance calculated is a negative figure this is a positive result in the calculation of your manufacturing efficiency and vice versa for a positive figure.
Things you need
- Set of accounts