## Learning Outcomes

After reading this article, you will be able to distinguish between financial and non-financial measures of performance, explain key ratios for assessing resource utilisation, and apply them in manufacturing and service organisations. You will analyse capacity, efficiency, and activity ratios, understand composite cost units in services, and identify the limitations of various metrics. This knowledge will enable you to select, calculate, and interpret appropriate indicators of resource usage for different operational settings.

## ACCA Management Accounting (MA) Syllabus

For ACCA Management Accounting (MA), you are required to understand how business performance is measured using both financial and non-financial information. In particular, focus your revision on:

- The distinction between financial and non-financial performance measures
- How resource utilisation is monitored in manufacturing and service organisations
- The calculation and interpretation of the capacity, efficiency, and production-volume (activity) ratios
- The use of appropriate non-financial indicators in service and manufacturing environments
- The use and interpretation of composite cost units in service operations
- Recognising the specific challenges of measuring utilisation where output is intangible or varies with demand

## Test Your Knowledge

_Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, look more closely at that area during your revision._

1. Which ratio shows how well actual hours worked compare to budgeted hours for a given period?
2. Calculate the efficiency ratio if actual hours worked are 800 and standard hours allowed for output are 760.
3. Give one example of a non-financial resource utilisation measure for a hospital and one for a manufacturing plant.
4. Why is it often more difficult to measure resource utilisation in services than in manufacturing?

## Introduction

High-performing organisations continually monitor how effectively they use resources such as labour, machinery, and facilities. Resource utilisation reflects how fully and efficiently these resources are employed in producing goods or delivering services. Both financial and non-financial measures are used to assess utilisation in practice. This article explains the key control ratios—capacity, efficiency, and production-volume—along with relevant financial and non-financial performance metrics, showing their application in both manufacturing and service settings.

> **Key Term: resource utilisation**
> The extent to which available resources (for example, staff, equipment, facilities) are used in operations, compared to the potential or planned maximum.

### FINANCIAL AND NON-FINANCIAL PERFORMANCE MEASURES

### Financial measures

Financial indicators assess how well resources contribute to financial results, focusing on cost and return. Common examples in resource utilisation include:

- Unit cost per output
- Labour cost per productive hour
- Asset turnover (revenue divided by capital employed)

### Non-financial measures

Non-financial indicators record resource usage and effectiveness without monetary values. They provide direct information about operational performance.

> **Key Term: non-financial performance measure**
> A performance metric that uses physical or qualitative data, not monetary values, to assess aspects such as quality, output, or utilisation.
> **Key Term: composite cost unit**
> A unit of measurement combining two or more variables—such as passenger-kilometre or bed-day—to reflect service activity levels.

### CONTROL RATIOS FOR RESOURCE UTILISATION

Managers use three main control ratios to measure and monitor the use of resources against plans or budgets. These ratios are essential for comparing what was planned with what was achieved and highlight areas needing attention.

![Control-ratio calculations linking budgeted hours, actual hours, standard hours for output, capacity ratio, efficiency ratio, and production-volume ratio.](https://static.pastpaperhero.com/images/acca-ma-financial-and-non-financial-measures-resource-utilisation-in-services-and-manufacturing_00.png)

_Resource utilisation ratios are computed from actual, budgeted, and standard hours, with activity verified as efficiency multiplied by capacity divided by 100._

### Capacity Ratio

The capacity ratio measures how much of the available time budgeted was actually worked by resources (labour or machines).

$$
\text{Capacity Ratio} = \frac{\text{Actual hours worked}}{\text{Budgeted hours}} \times 100\%
$$

A ratio above 100% means more resource time was used than budgeted; below 100% means less.

> **Key Term: capacity ratio**
> The proportion of actual hours worked to budgeted hours available for resources, shown as a percentage.

### Efficiency Ratio

The efficiency ratio compares the standard hours allowed for actual output to the actual hours worked. It shows how efficiently the resource time was turned into output.

$$
\text{Efficiency Ratio} = \frac{\text{Standard hours for actual output}}{\text{Actual hours worked}} \times 100\%
$$

A ratio above 100% indicates resources converted time to output more efficiently than expected.

> **Key Term: efficiency ratio**
> The percentage relationship between standard hours allowed for output and actual hours worked, reflecting resource effectiveness.

### Production-Volume (Activity) Ratio

This ratio measures actual output achieved against the output planned, both in standard hours.

$$
\text{Production-Volume Ratio} = \frac{\text{Standard hours for actual output}}{\text{Budgeted hours}} \times 100\%
$$

It reveals whether overall output was above or below plan, combining capacity and efficiency effects.

> **Key Term: production-volume (activity) ratio**
> The standard hours produced as a percentage of budgeted hours, summarising overall output performance.

### Relationship between the Ratios

These ratios are mathematically connected:

$$
\text{Production-Volume Ratio} = \text{Efficiency Ratio} \times \text{Capacity Ratio} \div 100
$$

This means efficiency and capacity together explain the activity achieved.

### Worked Example 1.1

A factory budgets 2,000 machine hours for the month. Actual hours worked are 1,900. Production achieved is 1,050 units, with standard time per unit of 1.6 hours. Calculate the capacity, efficiency, and production-volume ratios.

> **Answer:**
> Standard hours for output = 1,050 × 1.6 = 1,680
> Capacity ratio = 1,900 / 2,000 × 100% = 95%
> Efficiency ratio = 1,680 / 1,900 × 100% ≈ 88.4%
> Production-volume ratio = 1,680 / 2,000 × 100% = 84%
>
> **Exam Warning:**
> In exam scenarios, always clarify which type of hours each figure refers to—actual, standard, or budgeted. Errors here are common.

### RESOURCE UTILISATION IN MANUFACTURING

Manufacturing operations lend themselves to precise measurement. Output is tangible and processes are standardised.

### Typical financial and non-financial metrics

- Production units per hour
- Machine downtime as % of scheduled time
- Direct vs. indirect labour hours
- Scrap/rework rates

> **Key Term: machine utilisation**
> The percentage of available machine hours used for productive output over a period.

Routine calculations are possible because input and output are well-defined.

### Worked Example 1.2

A machine is available for 1,200 hours in a quarter. 200 hours are lost to breakdown. What is the machine utilisation percentage?

> **Answer:**
> Hours used productively = 1,000
> Utilisation = 1,000 / 1,200 × 100% = 83.3%

### RESOURCE UTILISATION IN SERVICE ORGANISATIONS

Service businesses must often track utilisation where output is not physical. Here, demand is variable and capacity may not be fully controllable.

### Common measures

- Bed occupancy rate (hospitals): beds filled / beds available
- Room occupancy (hotels): rooms sold / rooms available
- Patient waiting times, appointments completed (clinics)
- Average number of customers served per hour (retail)

Composite cost units are often used to account for complex service activities, such as:

- Tonne-miles: tonnes hauled × distance (haulage)
- Passenger-kilometres: number of passengers × distance (transport)
- Patient-bed days (healthcare)

Measuring output in services often requires careful definition. For instance, one outpatient “consult” or one “meal served” may be the practical cost unit.

### Worked Example 1.3

A coach company operates 10 vehicles, each with 40 seats, running 200 km round trips daily for 250 days a year. If daily average occupancy is 70%, calculate annual passenger-kilometres.

> **Answer:**
> Seats filled daily = 10 × 40 × 70% = 280
> Km/day = 200
> Annual passenger-km = 280 × 200 × 250 = 14,000,000 passenger-km

### CHALLENGES IN MEASURING UTILISATION

Measuring resource use in services presents several challenges:

- Output may not be consistently measurable
- Demand fluctuations lead to idle capacity (unused tables, beds, taxis)
- Some capacity (like in hotels) is perishable—a night not sold cannot be reclaimed

Manufacturing faces different issues—such as bottlenecks and scheduling conflicts—but capacity and output units are stable.

### NON-FINANCIAL INDICATORS IN PRACTICE

Non-financial measures allow managers to identify problems early. High capacity utilisation, for example, may signal strong demand—or can point to over-crowding or excessive staff pressure affecting quality. Over-reliance on financial ratios alone often hides such operational realities.

### Examples

- Hospital: 97% bed occupancy—risk of delays, infection, overworked staff
- Call centre: 95% of calls answered in 30 seconds—operational target met
- Manufacturing: 3% rework rate—quality under control, but further reduction possible

### CHOOSING AND INTERPRETING MEASURES

Select measures that:

- Reflect the specific resource and output (labour, machine, bed, seat)
- Are relevant to organisational objectives and context
- Allow comparison with budgets, past periods, or benchmarks
- Support improvement actions (e.g., changing staffing, investing in machines)

Always balance capacity with service quality and responsiveness needs.

> **Revision Tip:**
> _Focus on understanding which ratio or measure is appropriate for the situation—memorise formulae and know how to interpret the outcome for both services and manufacturing._

## Summary

Resource utilisation tracks how completely and efficiently available resources are used. Use the capacity, efficiency, and production-volume ratios to quantify this in repetitive operations—such as production lines or scheduled services. In manufacturing, physical output and hours enable precise ratios. In service industries, definitions of output matter more and composite units are common. Combine financial and non-financial indicators to give a true picture of operational effectiveness, and always be aware of sector-specific challenges.

## Key Point Checklist

_This article has covered the following key knowledge points:_

- The meaning and importance of resource utilisation, and how it is measured
- The distinction between financial and non-financial performance metrics
- Calculation and interpretation of capacity, efficiency, and production-volume ratios
- Applications and challenges of measuring utilisation in both manufacturing and services
- The role and calculation of composite cost units in service settings
- Choosing and interpreting appropriate non-financial indicators

## Key Terms and Concepts

- resource utilisation
- non-financial performance measure
- composite cost unit
- capacity ratio
- efficiency ratio
- production-volume (activity) ratio
- machine utilisation


Financial and non-financial measures - Resource utilisation in services and manufacturing