## Budget Ratios

Budget ratios are used to measure and compare actual performance against budgeted targets, especially in relation to capacity and time utilisation.

### The Five Key Budget Ratios

Ratio	Formula (conceptual)	What it measures
Capacity Usage Ratio	(Budgeted hours / Maximum possible hours) × 100	How much of maximum capacity is planned to be used
Standard Capacity Employed Ratio	(Actual hours worked / Budgeted hours) × 100	Extent to which budgeted facilities were actually utilised
Level of Activity Ratio	(Standard hours for actual output / Budgeted standard hours) × 100	Whether output was above or below budget
Efficiency Ratio	(Standard hours for actual output / Actual hours worked) × 100	Labour/machine efficiency — was work done faster or slower than standard?
Calendar Ratio	(Actual working days / Budgeted working days) × 100	Effect of calendar differences on capacity

### Relationships Between Ratios

> Level of Activity Ratio = Capacity Usage Ratio × Efficiency Ratio / 100

And:

> Standard Capacity Employed Ratio × Efficiency Ratio / 100 = Level of Activity Ratio

The calendar ratio adjusts for cases where actual working days differ from budgeted days (e.g., public holidays, plant shutdowns).

Worked example

### Example 1

Numerical illustration:

Data for a month:

Ratio	Calculation	Result
Capacity Usage	(8,000 / 10,000) × 100	80%
Standard Capacity Employed	(7,500 / 8,000) × 100	93.75%
Level of Activity	(8,250 / 8,000) × 100	103.13% — output exceeded budget
Efficiency	(8,250 / 7,500) × 100	110% — workers were more efficient than standard

Interpretation: Although only 93.75% of budgeted hours were used, higher efficiency meant actual output exceeded the budgeted level.

⚠️ Common exam mistakes

Confusing 'Capacity Usage Ratio' (budgeted vs. maximum) with 'Standard Capacity Employed Ratio' (actual vs. budgeted) — they have different denominators.
Forgetting that an Efficiency Ratio > 100% is favourable (less time taken than standard), not unfavourable.
Ignoring the Calendar Ratio when actual working days differ from budgeted days — this distorts all other capacity ratios if not adjusted.

Reference:

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