Cost and Efficiency Ratios Quiz

Cost and Efficiency Ratios

• Cost per unit: Total production costs divided by total units produced.
• Efficiency ratio: Standard hours produced divided by actual hours worked, multiplied by 100. Measures the efficiency of labor.
• Capacity utilization ratio: Actual hours worked divided by budgeted hours, multiplied by 100. Shows how effectively capacity is used.
• Production volume ratio: Standard hours produced divided by budgeted hours, multiplied by 100. Examines capacity utilization relative to standard hours.
• IDLE time ratio: IDLE hours divided by total hours, multiplied by 100. Indicates unproductive time.
• Efficiency ratio calculation: Product of efficiency ratio and capacity ratio.

Profit and Margin Ratios

• Gross profit: Sales revenue minus production expenses. Shows profitability before considering other costs.
• Production expenses: Direct materials, direct labor, and production overheads. The costs directly tied to producing goods.
• Gross profit margin: Gross profit divided by sales, multiplied by 100. Shows the percentage of sales remaining after deducting production costs.
• Operating profit: Gross profit reduced by operating expense. Profit after considering all operating costs.
• Operating expense: Production costs plus distribution & marketing expenses, plus administrative expenses. Covers all costs associated with running the business, aside from production itself.

Profitability and Asset Ratios

• Profit to sales ratio (profit margin): Operating profit divided by sales, multiplied by 100. Measures the percentage of each dollar of sales that becomes profit.
• Net profit: Operating profit minus interest paid on debentures and tax. The final profit after all costs and taxes are considered.
• Net profit margin: Net profit divided by sales, multiplied by 100. Measures the percentage of sales remaining as net profit.
• Asset turnover: Sales divided by capital employed. Measures the efficiency of using assets to generate sales.
• ROCE (Return on Capital Employed): Profit before interest and tax (profit) divided by capital employed, multiplied by 100. A measure of the return on capital invested.
• Residual income (RI): Profit before tax minus notional interest (capital employed * interest rate). Measures the returns in excess of the minimum required return on capital employed.