Management Accounting · Accounting for material, labour and overheads

Labour Turnover and Labour Efficiency Ratios Explained

Updated 11 October 2026 · Fact-checked

Labour turnover is the rate at which employees leave and are replaced: replacements ÷ average number of employees × 100. Efficiency, capacity and activity ratios compare standard hours to actual hours worked, or to budgeted hours. Pick the right numerator and denominator, then express the result as a percentage.

Understand Labour Turnover and Labour Efficiency Measures

Labour turnover measures how many employees leave an organisation in a period. Managers watch it because every leaver has to be replaced, and replacing people costs money. A high rate can also signal poor morale, weak pay, bad management or a poor recruitment fit.

The costs of labour turnover are of two kinds. Preventable causes are things management can fix, such as low pay, poor conditions or poor supervision. Unavoidable causes are things like retirement, illness, death or a spouse moving abroad. Costs include recruitment and selection, training, lost output while new staff learn, more scrap and errors, overtime or temporary cover, and administration. Some of these are hard to measure.

The second half of this topic is about how well labour time is used. Three ratios all use hours. The efficiency ratio compares the hours you should have taken for the output made (standard hours) with the hours actually worked. The capacity ratio compares actual hours worked with budgeted hours. The activity ratio compares standard hours for actual output with budgeted hours.

The three ratios are linked: efficiency × capacity = activity. If you know two, you can find the third. Above 100% means better than plan for efficiency, more hours than budget for capacity, and more output than budget for activity.

Key formulas to remember

Labour turnover rate: Labour turnover rate = (number of replacements ÷ average number of employees) × 100; Some questions use the number of leavers instead. Use what the question states. Use replacements if given, and note that leavers and replacements may differ.
Efficiency ratio: Efficiency = (standard hours for actual output ÷ actual hours worked) × 100; Above 100% means output was produced faster than standard.
Capacity ratio: Capacity = (actual hours worked ÷ budgeted hours) × 100; Shows how much of planned labour time was actually used.
Activity ratio: Activity = (standard hours for actual output ÷ budgeted hours) × 100; Shows actual output compared with budgeted output, measured in standard hours.
Link between the ratios: Efficiency % × Capacity % = Activity % (as decimals, multiply and convert back); Useful as a check, or to find a missing ratio.
Standard hours for actual output: Standard hours = actual units produced × standard hours per unit; Always work this out first. It is the 'earned' hours.

How to solve Labour Turnover and Labour Efficiency Measures questions

Use this method for any labour turnover or labour ratio question.

1Read the question and note which measure is asked for: turnover, efficiency, capacity or activity.
2For turnover, find the number of replacements (or leavers, if that is what is stated) and the average number of employees. Divide and multiply by 100.
3For ratios, list three figures: standard hours for actual output, actual hours worked, and budgeted hours.
4Calculate standard hours for actual output as actual units × standard hours per unit, if it is not given.
5Choose the formula: efficiency uses standard ÷ actual; capacity uses actual ÷ budgeted; activity uses standard ÷ budgeted.
6Calculate and give the answer as a percentage, to the decimal places requested.
7Check with efficiency × capacity = activity, and check the answer makes sense (above or below 100%).

Quickest way: Three hours, three ratios

When to use it: Use in any objective test question that gives hours and asks for one or more ratios.

Write S (standard hours for actual output), A (actual hours) and B (budgeted hours) at the top of your rough paper.
Efficiency = S ÷ A. Capacity = A ÷ B. Activity = S ÷ B.
Remember that the first letter that is not B is on top for efficiency; B is only ever the bottom, and only in capacity and activity.
If asked for a missing ratio, multiply or divide the other two ratios.
For turnover, divide replacements by average staff and multiply by 100.

Common mistakes in Labour Turnover and Labour Efficiency Measures

Using the wrong numerator in the efficiency ratio, such as budgeted hours.
Students mix up the three ratios because they all use hours.
Fix: Efficiency never uses budgeted hours. It compares standard hours for actual output with actual hours.
Using standard hours for budgeted output instead of for actual output.
The budget figure is more visible in the question.
Fix: Multiply actual units produced by the standard hours per unit. Only the budgeted hours figure comes from the budget.
Turning the ratio upside down, giving actual ÷ standard for efficiency.
Students think of hours taken as the main number.
Fix: Check the result. If workers took fewer hours than standard, efficiency must be above 100%.
Using total employees at the end of the year instead of the average for turnover.
The closing figure is easier to find.
Fix: Use the average number of employees in the period unless the question tells you otherwise.
Confusing leavers with replacements in turnover.
They are often equal, so students treat them as the same thing.
Fix: Read the definition in the question. If the number of replacements is given, use it. Otherwise use leavers.
Treating all turnover as bad or all costs as measurable.
Students memorise a simple message.
Fix: Some turnover is unavoidable, and some costs, such as lost morale, are hard to quantify. Note this in a theory question.

Worked examples

Example 1

A company had 400 employees at the start of the year and 440 at the end. During the year 63 employees left and were replaced. Calculate the labour turnover rate.

Show the solution

Average employees = (400 + 440) ÷ 2 = 420.
Replacements = 63.
Rate = 63 ÷ 420 × 100.
63 ÷ 420 = 0.15, so the rate is 15%.

Answer: Labour turnover rate = 15%

Example 2

Budgeted labour hours for a month were 2,000. The standard time is 4 hours per unit. The company made 450 units and worked 1,800 actual hours. Calculate the efficiency, capacity and activity ratios.

Show the solution

Standard hours for actual output = 450 × 4 = 1,800.
Efficiency = 1,800 ÷ 1,800 × 100 = 100%.
Capacity = 1,800 ÷ 2,000 × 100 = 90%.
Activity = 1,800 ÷ 2,000 × 100 = 90%.
Check: 100% × 90% = 90%, which matches activity.

Answer: Efficiency 100%, capacity 90%, activity 90%

Exam tips

Write S, A and B on your rough paper before you touch a calculator. Most errors come from picking the wrong hours.
In multiple response questions, check each statement about turnover causes separately. Pay, morale and management are preventable; retirement and illness are unavoidable.
Number entry questions often ask for a percentage to one decimal place. Check the rounding instruction before entering.
If two ratios are given and the third is asked for, use efficiency × capacity = activity instead of recalculating from hours.
Cross-check direction: fewer actual hours than standard hours always means efficiency above 100%.

Practice questions from Accounting for material, labour and overheads

Labour Turnover and Labour Efficiency Measures in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Labour Turnover and Labour Efficiency Measures: frequently asked questions

How do I calculate labour turnover in ACCA MA?

Divide the number of replacements by the average number of employees and multiply by 100. For example, 30 replacements with an average of 300 employees gives 10%. If the question gives leavers only, use that figure.

What is the difference between capacity and activity ratios?

Capacity compares actual hours worked with budgeted hours, so it shows how much planned time was used. Activity compares the standard hours for actual output with budgeted hours, so it shows output against plan. Efficiency links the two.

What costs does labour turnover cause?

Costs include recruitment, selection, induction, training, lost output while new staff learn, extra scrap or errors, and overtime or temporary cover. Some of these are hard to measure but still matter.

Is a high efficiency ratio always good?

Not always. It means work is being done faster than standard, which is usually positive. But it can also point to a loose standard, rushed work or lower quality, so check the context.