Definition: Cycle Efficiency, often-abbreviated CE, is a ratio that measures the effectiveness and productivity of the production process by comparing the value added time with the total production time. In other words, it’s a calculation that cost accountants use to measure how efficiently products are being produced.
What Does Cycle Efficiency Mean?
The cycle efficiency formula is calculated by dividing the value added time by the total cycle time. The value added time is the actual amount of time spent working on the unit. The cycle time is the total time it takes to produce the unit. This calculation shows the value added time as a percentage of the overall time spent producing a product. This way management can analyze how much actual process work is needed and how much time is wasted in the process.
Management can use this formula for a production cycle as a whole or a single process in the production cycle. Let’s take a look at an example.
Tom’s Manufacturing Co. makes hydraulic parts for large tractors and equipment. After analyzing the production process of each hydraulic part, Tom estimates that the current process takes the following amount of time: 16 hours of process time, 8 hours of inspection time, 4 hours of moving time, and 24 hours of waiting time. Thus, the total process takes 6.5 workdays or 52 hours.
The only value added time in this entire process is the 16 hours of process time. The rest of the 52 hours is time spent doing unproductive things. Thus, the cycle efficiency is 44% (16 / 36). Only 44 percent of the total cycle time was actually spent working and manufacturing the units. The other 56 percent of the time was spent doing quality control procedures, moving units from department to department, and waiting for machines or departments to open for production.