Definition: Normally when you think of something being efficient, you think of getting a task done in the smallest amount of time or getting something done extremely quickly. Efficiency in the context of accounting is not always related to how quickly a job gets done.
What Does Efficiency Mean in Accounting?
Instead, efficiency measures the productivity of a company’s assets. Most often efficiency is measured by comparing level of assets or total assets to revenues these assets produce. Take a CNC machine for example. A company might get bids to do specialized machining work that can only be done on this one particular CNC machine. Because the jobs are highly technical, the revenues are extremely high.
One machine creating a large amount of revenue is considered efficient. Now think about the opposite. If a factory has ten machines that bring in the same amount of revenue as this one CNC machine, the factory is considered to be inefficient.
Efficiency can also refer to a machine or piece of equipment’s run time. This is the amount of time the machine can be producing. Occasionally, machines and equipment break down and need to be fixed. This down time takes away from the productivity of the machine and also makes it less efficient. Also, many plants don’t have third shift workers.
This means that machines can’t be run 24 hours a day. The idle time every night is time that the machines could have been producing products. Essentially, managerial accountants want to see the maximum amount of run time with the minimum amount of break downs.