Production Efficiency Formula: What It Is and Who Uses It

Updated December 30, 2022

Production efficiency = (actual output rate / standard output rate) x 100

Businesses consider many factors when deciding to use their resources to produce goods. Production efficiency, which is an important production factor, refers to a point where production reaches full capacity and maximum efficiency. If your job involves production, it's important to understand the concept of production efficiency and the production efficiency formula. In this article, we explain the definition of production efficiency, the production efficiency formula, how to use the production efficiency formula and who uses the production efficiency formula.

What is production efficiency?

Production efficiency is the point where production reaches full capacity. At this point, you're using all of your resources, and you can't produce more products without giving up the production of another product. This means that this point is the most efficient level of production, and it can allow you to produce goods at the lowest cost for your business. Therefore, production efficiency is important to understand so that you can make the best possible decisions for your company.

You can visualize production efficiency by using a production possibility frontier (PPF). A PPF is a curve on a graph that shows the different combinations of production outputs when you produce two goods from the same resources. Analyzing a PPF can help you find the point where production efficiency is highest.

Related: What Is Production Efficiency?

What is the production efficiency formula?

The production efficiency formula is a simple formula that you can use to calculate your production efficiency based on your company's data. The production efficiency formula is:

Production efficiency = (actual output rate / standard output rate) x 100

The formula means that production efficiency equals the actual output rate divided by the standard output rate times 100%. To use the production efficiency formula, you need to know two important factors:

  • Actual output rate: Your business's actual output rate is your actual costs divided by your actual output. Essentially, the actual output rate describes the output that has actually occurred.

  • Standard output rate: Your business's standard output rate is your work produced per a designated unit of time. Standard output rate describes the output that could occur, contrasting to the actual output rate, which describes the output that has actually occurred. You can use your business's historical data to find your standard output rate.

Related: How To Solve Simple Equations (With Examples)

How to use the production efficiency formula

Here are three simple steps that you can follow to calculate production efficiency using the production efficiency formula:

1. Find your actual output rate

The first step to using the production efficiency formula is finding your actual output rate. You can calculate your actual output rate by dividing your unit of time per the number of products produced. For example, if you run a small business that produces 24 handmade necklaces in eight hours, your actual output rate is three handmade necklaces per hour.

24 handmade necklaces / 8 hours = 3 handmade necklaces per hour

Related: 39 Common Business Terms

2. Find your standard output rate

The next step to using the production efficiency formula is finding your standard output rate. You can calculate your standard output rate by finding the amount of work that an average worker can produce per unit of time. You can determine this value by reviewing your business's historical data. Using the same example, if your business can produce an average of 16 high-quality handmade necklaces in eight hours, your standard output rate is two handmade necklaces per hour.

16 handmade necklaces / 8 hours = 2 handmade necklaces per hour

3. Apply the production efficiency formula

Once you know your actual output rate and your standard output rate, you can apply the production efficiency formula. Plug your values into the formula to solve for production efficiency. First, divide your actual output rate by your standard output rate. Then, multiply the resulting amount by 100%. The resulting amount represents production efficiency.

Therefore, if your average output rate is three necklaces per hour and your standard output rate is two necklaces per hour, your production efficiency is 150%. This means that your handmade necklace business is working at a high level of efficiency.

(3 handmade necklaces / 2 handmade necklaces) x 100 = production efficiency

(3 / 2) x 100 = 150%

Related: How To Measure Productivity and Increase Efficiency in the Workplace

Who uses the production efficiency formula?

People in many careers can use the production efficiency formula, especially people who work in economics or manufacturing. Business owners can also use the production efficiency formula to help them figure out how to operate at full capacity and maximum efficiency. This can help them make the best production decisions for their businesses and increase their businesses' success, including:

  • Creating strategies to improve production efficiency

  • Lowering costs associated with production

  • Reducing waste generated by production

  • Determining how to allocate production resources

Related: Business Efficiency: What It Is and How To Improve It

Tips for improving production efficiency

Here are a few tips you can use to help you improve your business's production efficiency:

Change how you allocate your production resources

One tip for improving your production efficiency is changing how your business allocates its production resources. You can do this by changing the materials that you use to produce goods, reducing production waste, changing how you package your products and taking other actions.

Related: What Is Resource Management? A Guide to Resource Allocation and Planning

Measure your performance

Another tip for improving your production efficiency is measuring your business's performance. You can create key performance indicators (KPIs) and other metrics to help you measure your business's performance. Periodically measuring your performance can help you identify the specific areas or processes that your business can improve in order to increase production efficiency.

Streamline your workflows

Streamlining your workflows is another way you can improve your business's production efficiency. You can streamline your business's workflows by keeping your workspace organized, as this can make it easier for employees to lower their operation time. You can also streamline your workflows by standardizing frequent processes. Standardizing processes can help employees quickly complete processes and yield intended results. You can start standardizing processes by creating process guidelines that explain the important steps and objectives of each process.

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