The problem, on the surface, seems very simple and yet has created some controversy among a group of accountants. The problem itself has to do with labour efficiency rates and only involves two variables; standard working hours, and actual working hours. The difficulty lies in deriving an efficiency % from these two numbers.
Standard working hours or the targeted number of labour hours required to produce one widget, which I will represent as "s". Actual working hour or the actual number of labour hours require to produce one widget, which I will represent as "a". Labour efficiency I will represent with "E". The prevailing calculation with which I have a problem with is this:
s/a=E or if s=3000, and a=4000 then 3000/4000=75%
What bothers me about the calculation is that the standard hours get represented as a percentage of the actual hours and in my opinion changes the focus of the calculation from standard or target, where it should be, to the actual hours. I cannot define why, but this just seems inherently wrong to me.
The calculation that I use:
(1+((s-a)/s))=E or if s=3000, and a=4000 then (1+((3000-4000)/3000))=66.67%
My calculation is like a %change from standard calculation. However, there is something that also concerns me about my calculation.
If you substitute 100 for a and 50 for s, then you come to a quandary, because if you plug those numbers into the second equation the result is of course zero % efficient which doesn't sit right with me either. If you plug them into the first calculation you get 50% efficiency which doesn't really seem to work either, because you require 100% more hours to do the same work in this case. ???
Is the first calculation correct? Am I missing something altogether? Are both calculations off base?