The correct answer is: C. Both A and B
A capacity ratio is a measure of how efficiently a company is using its resources. It is calculated by dividing the actual output by the potential output. An activity ratio is a measure of how efficiently a company is using its assets. It is calculated by dividing the sales by the assets.
Both capacity ratios and activity ratios are used by management to track the company’s performance and to identify areas where improvements can be made.
A capacity ratio that is higher than the budgeted capacity ratio indicates that the company is using its resources more efficiently than expected. This could be due to factors such as improved production methods, better employee productivity, or lower costs.
An activity ratio that is higher than the budgeted activity ratio indicates that the company is using its assets more efficiently than expected. This could be due to factors such as improved sales techniques, better inventory management, or lower costs.
Both capacity ratios and activity ratios can be used to identify areas where improvements can be made. For example, if a company’s capacity ratio is lower than the budgeted capacity ratio, it may need to invest in new equipment or improve its production methods. If a company’s activity ratio is lower than the budgeted activity ratio, it may need to improve its sales techniques or better manage its inventory.
Capacity ratios and activity ratios are just two of the many types of control ratios that can be used by management to track the company’s performance. Other types of control ratios include profitability ratios, liquidity ratios, and solvency ratios.