Following is the detailed working of the production efficiency and Idle time performed by me on my previous job in a garment manufacturing company.
It is very useful working and it can also be used for any other manufacturing company just edit it according to your industry or company.
Internal Audit Reports and related workings/ Annexure:
Click the following links to download the Audit report in MS- Word Format and Excel Workings:
Internal Audit report in MS-Word Files
The idle time in the above calculations is net of the standard idle time allowed (assumed rate) of 20% (e.g. Dec-11 actual idle time was 37% Less: standard idle time allowed 20% Net idle time = 17%)
The resulted net efficiency considering the Maximum standard idle time allowed as 20% is equals to 59% and it is less than the benchmark set by the company (65%).
It is very useful working and it can also be used for any other manufacturing company just edit it according to your industry or company.
Internal Audit Reports and related workings/ Annexure:
- Internal Audit Report on the efficiency of production department, Monetary Incentive paid based on the efficiency and Idle Time (Garments Manufacturing Company).
Internal Audit report in MS-Word Files
- Click here to download Internal Audit report for production performance and Idle Time
- Click here to download Audit Report Window
- Click here to download Audit Report Index
Internal Audit Report
Background
Information and Executive Summary
Internal
Audit reviewed the accuracy and method of performance measurement of Production
Managers (Stitching Dept. only) and Monetary Incentive paid to them on the
basis of production efficiency in the last Quarter ended 31st
December, 2011. The objective of this review was to evaluate the feasibility, adequacy
and effectiveness of the performance measurement system, the associated risk,
and identify opportunities for improvements in system. Based on our review, the
method of the performance measurement is in-effective and needs improvements to
mitigate business risk.
Production
(Stitching Dept. only) department’s performance is being measured on daily
basis by engineering and planning department in the factory on MS-Excel
worksheets, the benchmark for the measurement of Efficiency is 65%, the greater
than the 65% will be rewarded with the monetary incentives of Rs. 1,000 per
percent to the individual production manager and less than 65% there is
deduction of Rs. 500 per percent.
During the review we observed that
production lines were having huge idle
time (37% in December, 2011) as
well as overtime for the production lines is the 15% of the total time worked
on the products during the month. The efficiency is being calculated by the
engineering department is not accurate/consistent with information obtained
from the time keeping records (HR Time payroll), Having enquired about the idle
time from the concerned department it came to our knowledge that the idle time is
mostly because of the un-availability of the raw material and production lines
are stopped so this idle time is not considered while calculating the
efficiency of production managers. On the other hand when Internal Audit Team
carried out the physical stock count we found that there was much stock which
was purchased in advance for the styles will be started in future.
Objectives:
The
objective of this review was to evaluate the feasibility, adequacy and
effectiveness of the performance measurement system, the associated risk, and
identify opportunities for improvements in system. Based on our review, the
method of the performance measurement is in-effective and needs improvements to
mitigate business risk.
Scope:
Production
Line’s efficiency, Accuracy and adequacy of Monetary Incentives paid to
Managers on the basis of production efficiency, Idle Time variances.
Procedures
Performed:
·
Recalculation
of line wise efficiency using the payroll and HR Time keeping software.
·
Performed
analytical reviews.
·
Variance
analysis.
·
Obtained
understanding of the performance measurement system.
Audit
Findings and Observations:
During the
review we found the following discrepancies in the calculations of:
Ø The idle time which is not reported to management at all in the
efficiency reports whereas idle time if reaches to a certain level (more than
the standard idle time) must be informed to higher management.
Ø The Overtime reported while calculating the production efficiency and
the actual overtime paid as per payroll/HR Time payroll.
Ø Production efficiency calculated by engineering/planning department and
efficiency calculated by Internal Audit Department.
Ø
Monetary Incentive payments to production managers based on their
efficiency which is measured by accumulating the production floors efficiency
for which the individual production manager is responsible.
Idle
Time Trend for last Quarter ended 2011
The idle time in the above calculations is net of the standard idle time allowed (assumed rate) of 20% (e.g. Dec-11 actual idle time was 37% Less: standard idle time allowed 20% Net idle time = 17%)
Actual Overtime Paid
and Overtime Reported
Month
|
Reported O.T
|
Actual O.T
Paid
|
Un-Recorded
O.T
|
Oct-11
|
506
|
11,140
|
(10,634)
|
Nov-11
|
2,185
|
6,330
|
(4,145)
|
Dec-11
|
5366
|
20,354
|
(14,988)
|
Production Efficiency
Discrepancies
Month
|
Efficiency
Reported
|
Efficiency
As per Audit
Working
|
Difference
|
Oct-11
|
73.4%
|
48.2%
|
25.2%
|
Nov-11
|
63.4%
|
48%
|
15%
|
Dec-11
|
76.2%
|
47.8%
|
28.4%
|
Ø Managers Incentive/Target:
While calculating Incentive/Target amounts idle time is not being
considered by Engineering /Planning Department while calculating the production
efficiency and there is no “Standard
Idle Time” so we have assumed that standard idle time is Nil, Furthermore, we have also calculated
the efficiency considering standard idle time on assumption basis (assumed
standard idle time rate 10%, 15% and 20%)
v Standard Idle Time as Nil: Standard
Idle Time is considered as Nil in the following calculations.
MONETARY INCENTIVE
Month
|
Incentive
Paid
|
Incentive
As per Audit
Working
|
Difference
|
Oct-11
|
45,713
|
(53,350)
|
99,063
|
Nov-11
|
15
|
(34,150)
|
34,165
|
Dec-11
|
61,100
|
(34,400)
|
95,500
|
Total
|
106,828
|
(121,900)
|
228,728
|
Note: Negative amounts shows deductions
|
|||
v Standard Idle Time as 10%, 15% and
20%:
The following calculations are based on three different assumed
standard idle time rates, because there is no standard idle time in the company.
The resulted net efficiency considering the Maximum standard idle time allowed as 20% is equals to 59% and it is less than the benchmark set by the company (65%).
The resulted net efficiency considering the Maximum standard
idle time allowed as 20% is equals to 60% and it is less than the benchmark set
by the company (65%).
The resulted net efficiency considering the Maximum standard
idle time allowed as 20% is equals to 60% and it is less than the benchmark set
by the company (65%).
Summarized
Efficiency results as per Audit working
Month
|
Standard Idle Time 10%
|
Standard Idle Time 15%
|
Standard
Idle Time 20%
|
Oct-11
|
54%
|
57%
|
60%
|
Nov-11
|
53%
|
56%
|
60%
|
Dec-11
|
53%
|
56%
|
59%
|
The benchmark for the production efficiency is the 65% and
more than 65% there will be a monetary incentive reward of Rs. 1,000 for each
extra percent and a deduction of Rs. 500 on each percent less than 65%, as we have
also seen the detailed calculation of efficiency for the last Quarter, 2011
having the effect of net idle time (Actual Idle Time Less: Standard idle time allowed) as well as summarized
efficiency results.
After reviewing the above summarized results we can see that
the maximum efficiency in any month is equals to 60% and it is less than the
benchmark of 65% so there should not be any monetary incentive paid to
production managers as their efficiency is less than the benchmark set by the
company, in fact the in-efficiency should be investigated and necessary action
should be taken to prevent the in-efficiencies in future.
Audit
Conclusion/Opinion on the System of Performance Measurement:
Ø Adequacy
and Effectiveness:
·
The
performance measurement system in place is attainable and motivate production
managers but does not motivate all over management to contribute in the
improvement of the company’s performance, only production manager’s performance
(stitching Dept. only) is being measured and they are supposed to be paid the
monetary incentive against the production efficiency instead of overall factory
management.
·
Information
used to measure the performance of production is not adequate and accurate, the
reported overtime is understated when compared with the overtime actual paid
(stitching dept. only), and idle time is not considered while measuring the production
performance (Efficiency).
Ø Associated
Risk with Current Measurement System:
·
It
is observed that Production lines are idle more than 30% (37% in December,
2011) and while measuring the performance of the production managers this idle
time and overtime (around 50% of total O.T) are being ignored by the management
when we enquired it was said by planning department that the idle time is
mostly due to the non-availability of the raw material, and overtime is
demanded by the management for urgent shipments etc. that’s why production
managers don’t allow us to consider the overtime while calculating efficiency
for incentive purpose.
·
Only
production managers are being paid the monetary incentive in return of a
favorable efficiency so other management (Procurement, Cutting, Finishing, etc)
they might not be motivated because of the monetary incentive paid to
production managers only, they might think that their contribution is not so
much valuable as compare to production managers. This might be the cause of
un-availability of the raw material because we found during the annual stock
count that there was much stock in ware houses for the styles/ordered which are
to be started in future which means raw material is being purchased in advance
so raw material purchasing should be on the priority basis to avoid the working
capital problems.
Internal
Audit Recommendations:
Target should
be attainable and there should be an element of challenge so that employee
could be motivated, and performance measurement should be effective that all
employees should contribute for the performance of the company not only a
particular department, when every manager is known that his contribution is
valuable to the company and he will be rewarded with a monetary incentive (e.g.
quarterly bonus etc.) if the decided target is achieved on time and
efficiently. Each manager will be motivated to improve the performance of the
company.
Performance should be measured on the
basis of overall achievement of the objective of the company (E.g. Garments
produced within the allocated time and shipped to the customer, total cost per
unit is not more than the budgeted cost per unit).
Not only
production managers but other managers whose contribution is supposed to
improve the performance of the company (e.g. Procurement, Cutting, Finishing,
Washing, Packing and Finance etc.) should be rewarded with a monetary incentive
or a quarterly/annual bonus when the desired objectives are achieved
effectively and efficiently E.g. the
order/style is completed and shipped to customer within allocated time and
specified budgeted cost, certain level of profits etc.
For example:
Only
production managers are rewarded with a Monetary Incentive when they achieve
the efficiency of the production floors pertains to them greater than the 65%,
so they are only supposed to increase the efficiency of their production
floors.
As discussed
above there is a big Idle time in production lines and the resulting Idle time
might be the because of the following:
Pre-Stitched Troubles:
·
Un-availability
of the raw material (Procurement Dept.)
·
Raw
Material in process yet not received (Cutting Dept.)
·
Machinery
Break down (Maintenance Dept.)
Post-Stitched Troubles:
·
Major
Alterations found because of the pressure of achieving the targets and maintaining
the efficiency by stitching department.
·
Machine
Break downs.
It is highly recommended that company
should:
Ø
Use
standard costing system to evaluate the performance of the factory.
Ø
The
variance analysis should be done and variances should be investigated (if
material) to find out the causes.
Ø
Prepare
an action plan to prevent it to be incurred in future.
Ø
Manager’s
incentive should be based on overall performance of the factory.
Examples of Variance analysis:
Desired Objective /Target
|
Variance Analysis
|
Process of Variance Analysis
|
·
Completion of products within
the allocated time and shipped to the customer.
|
Efficiency Variance:
Standard
Time Allowed Less: Actual Time incurred to complete the Style/Order
Idle Time Variance:
Standard
Idle Time Less: Actual Idle
Time
|
Variance
should be investigated (if Material) and actions should be taken to prevent
it to be incurred in future.
For Example;
·
If production lines are stopped due to
un-availability of raw material, machine breakdown etc. responsible
department should be accountable for the inconvenience.
·
Material purchased at higher rates, Material used is
more than the Qty allowed.
|
·
Material purchased within the budgeted price without
ignoring the quality of the material.
|
Material Price Variance:
Standard
Material Price Less: Actual
Price of Material Purchased
|
|
·
Material Usage should be within the standard Qty
allowed
|
Material Usage Variance:
Standard
Qty allowed Less: Actual
Qty consumed
|
