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Cost Accounting · Employee Costs

Labour Productivity, Efficiency and Cost Control

Updated 10 October 2026 · Fact-checked

Labour productivity measures output per unit of labour input, such as units per hour. Efficiency compares standard hours for actual output with actual hours worked. Job evaluation rates the job, merit rating rates the person, and work study (method study plus work measurement) sets standards. Together they control labour cost.

Understand Labour Productivity, Efficiency and Cost Control

Labour cost control means getting the most output from every rupee paid to workers. You cannot control what you do not measure, so costing uses a few simple measures and tools.

Productivity is output compared with input. For labour it is usually units produced per labour hour, or per worker. A rise in productivity lowers labour cost per unit if wage rates stay the same. Efficiency is narrower. It compares the time a task should take (standard time) with the time actually taken.

Job evaluation is a systematic way to rank jobs by their relative worth: skill, responsibility, effort and working conditions. Its output is a fair wage structure. Merit rating rates the individual employee in a job: quality of work, attendance, initiative, reliability. Its output is decisions on increments, promotion and bonus. So job evaluation is about the job, and merit rating is about the person.

Work study has two parts. Method study (including motion study) records and examines how a job is done, to find a simpler and better way by removing unnecessary movements. Work measurement (including time study) finds the time a qualified worker needs to do the job at a defined performance level. Time study uses a stopwatch to record times, rates the worker's pace, and adds allowances for fatigue and personal needs to arrive at standard time.

These tools feed each other. Method study improves the method, time study sets the standard time, job evaluation fixes the wage rate, merit rating rewards individuals, and the efficiency and productivity ratios show whether it is all working.

Key rules to remember

Labour productivity
Labour productivity = Output ÷ Labour hours (or number of workers)
Gives units per hour or per worker. Compare across periods to see the trend.
Efficiency ratio
Efficiency % = (Standard hours for actual output ÷ Actual hours worked) × 100
Above 100% means workers took less time than the standard allowed.
Standard hours for actual output
Standard hours = Actual output × Standard time per unit
Always based on actual output, not budgeted output.
Activity ratio
Activity % = (Standard hours for actual output ÷ Budgeted hours) × 100
Shows volume of work done against plan.
Capacity ratio
Capacity % = (Actual hours worked ÷ Budgeted hours) × 100
Shows how fully the planned hours were used.
Standard time
Basic time = Observed time × Rating ÷ 100; Standard time = Basic time + allowances
Observed time is adjusted for the worker's pace, then allowances are added.

How to solve Labour Productivity, Efficiency and Cost Control questions

Use this order for any numerical or theory question on labour productivity and control.

  1. 1Read the question and identify what is asked: a ratio, a standard time, or a comparison of concepts.
  2. 2List the given data: output, standard time per unit, hours actually worked, budgeted hours.
  3. 3Convert all times to the same unit, usually hours. Convert minutes carefully.
  4. 4Compute standard hours for actual output = actual output × standard time per unit.
  5. 5Apply the required ratio with the correct numerator and denominator, and show the formula.
  6. 6State the result in one line of interpretation, for example above 100% means better than standard.
  7. 7For theory parts, answer in points: definition, purpose, method, benefit, and a short contrast if two terms are compared.

Quickest way: Three-line efficiency check

When to use it: Use for MCQs and for the first part of any ratio question where hours are given.

  1. Write SH = actual output × standard time per unit.
  2. Write AH = hours actually worked.
  3. Efficiency = SH ÷ AH × 100. Capacity = AH ÷ budgeted hours × 100. Activity = SH ÷ budgeted hours × 100.
  4. Check: Efficiency × Capacity = Activity (as ratios). If it does not tie, recheck.

Common mistakes in Labour Productivity, Efficiency and Cost Control

  • Using budgeted output instead of actual output to find standard hours.

    Students recall budgeting and pick the first quantity given.

    Fix: Standard hours for actual output always use actual units produced.

  • Inverting the efficiency ratio (actual ÷ standard).

    Mixing it up with a time-ratio idea where lower time is better.

    Fix: Remember: standard hours on top. Less time than standard gives a ratio above 100%.

  • Saying job evaluation rates employees.

    Both terms sound like assessment.

    Fix: Job evaluation rates the job; merit rating rates the person doing it.

  • Treating time study and motion study as the same.

    Both come under work study and are often used together.

    Fix: Motion study looks at movements to improve the method; time study measures the time taken. Method study is improvement, work measurement is standard-setting.

  • Forgetting allowances when computing standard time.

    Students stop after applying the rating.

    Fix: Standard time = basic time + allowances for fatigue, personal needs and delays.

  • Mixing minutes and hours in ratios.

    Standard time is given per unit in minutes while hours worked are in hours.

    Fix: Convert everything to hours before dividing.

Worked examples

Example 1

A department has budgeted 2,000 labour hours for a month. Standard time is 30 minutes per unit. Actual output is 3,600 units, and workers actually worked 1,600 hours. Calculate the efficiency, activity and capacity ratios.

Show the solution
  1. Standard hours for actual output = 3,600 × 30 ÷ 60 = 1,800 hours.
  2. Efficiency = 1,800 ÷ 1,600 × 100 = 112.5%.
  3. Activity = 1,800 ÷ 2,000 × 100 = 90%.
  4. Capacity = 1,600 ÷ 2,000 × 100 = 80%.
  5. Check: 112.5% × 80% = 90%, which equals the activity ratio.

Answer: Efficiency 112.5%, activity 90%, capacity 80%. Workers beat the standard, but used only 80% of the planned hours, so output reached 90% of plan.

Example 2

A time study of a job gives an observed time of 12 minutes per unit. The worker's rating is 110% against a standard of 100%. Allowances for fatigue and personal needs are 20% of basic time. Find the standard time per unit. If the standard wage rate is ₹120 per hour, find the standard labour cost per unit.

Show the solution
  1. Basic time = 12 × 110 ÷ 100 = 13.2 minutes.
  2. Allowance = 20% × 13.2 = 2.64 minutes.
  3. Standard time = 13.2 + 2.64 = 15.84 minutes.
  4. In hours = 15.84 ÷ 60 = 0.264 hours.
  5. Standard labour cost = 0.264 × ₹120 = ₹31.68 per unit.

Answer: Standard time is 15.84 minutes per unit and standard labour cost is ₹31.68 per unit.

Exam tips

  • Ratio questions are quick marks. Show the formula and each step so you earn marks even if arithmetic slips.
  • For difference questions, such as job evaluation vs merit rating, write four or five paired points: object rated, purpose, basis, outcome and frequency.
  • In MCQs, watch the unit. Many wrong options come from minutes left unconverted.
  • Name the parts of work study in order: method study, motion study, work measurement, time study. A short flow earns theory marks.
  • Add one line of interpretation after each ratio. ICMAI-style answers reward it.

Practice questions from Employee Costs

Labour Productivity, Efficiency and Cost Control in other exams

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

Labour Productivity, Efficiency and Cost Control: frequently asked questions

What is the difference between job evaluation and merit rating?

Job evaluation ranks jobs by their relative worth to set a fair wage structure. Merit rating assesses the individual employee's performance and traits to decide increments, promotion or bonus. The first looks at the job, the second at the person.

How is labour efficiency ratio calculated?

Divide standard hours for actual output by actual hours worked and multiply by 100. Standard hours equal actual output multiplied by standard time per unit. A result above 100% shows better than standard performance.

What is the difference between time study and motion study?

Time study measures how long a qualified worker takes for a job, usually with a stopwatch, to set standard time. Motion study examines the body movements used in the job to remove unnecessary ones and improve the method.

How does work study help control labour cost?

Method study finds a better way to do the job, and work measurement sets a realistic standard time. Together they cut wasted effort and idle time, and give a base for wage rates, incentives and variance analysis.