Chapter15 pp ts

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HANSEN & MOWENHANSEN & MOWEN

Cost ManagementCost ManagementACCOUNTING AND CONTROLACCOUNTING AND CONTROL

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Productivity Measurement and ControlProductivity Measurement and Control

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Productive EfficiencyProductive Efficiency 1

Productivity is concerned with producing output

efficiently, and it specifically addresses the relationship of output and the inputs used to produce

the outputs.

Productivity is concerned with producing output

efficiently, and it specifically addresses the relationship of output and the inputs used to produce

the outputs.

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Total productive efficiency is the point at which two conditions are satisfied:

(1) For any mix of inputs that will produce a given output, no more of any one input is used than necessary to produce the output.

(2) Given the mixes that satisfy the first condition, the least costly mix is chosen.


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Technical Efficiency is the condition where no more of any one input is used than necessary to produce a given output.

Technical efficiency improvement is when less inputs are used to produce the same output or more output are produced using the same input.


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Of the two combinations that produce the same output, the least costly combination would be chosen.

Of the two combinations that produce the same output, the least costly combination would be chosen.

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Productive measurement—

is a quantitative assessment of productivity changes

can be actual or prospective

is forward looking

serves as input for strategic decision making

allows managers to compare relative benefits ofdifferent input combinations

Partial Productivity MeasurementPartial Productivity Measurement 2

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Partial Productivity Measure: Measuring productivity for one input at a time.

Productivity ratio = Output/Input

Operational Productivity Measure: Partial measure where both input and output are expressed in physical terms.

Financial Productivity Measure: Partial measure where both input and output are expressed in dollars.

Partial Productivity MeasurementPartial Productivity Measurement 2

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2006 2007

Number of frames produced 240,000250,000

Labor hours used 60,00050,000

Materials used (lbs.) 1,200,0001,150,000Productivity Measurement: Profile Productivity Measurement: Profile

Analysis, No Trade-OffsAnalysis, No Trade-Offs

Productivity Measurement: Profile Productivity Measurement: Profile Analysis, No Trade-OffsAnalysis, No Trade-Offs 250,000/50,000250,000/50,000

250,000/1,150,000250,000/1,150,000240,000/60,000240,000/60,000240,000/1,200,000240,000/1,200,000

Total Productivity MeasurementTotal Productivity Measurement 3

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2006 2007


Labor hours used 60,00050,000

Materials used (lbs.) 1,200,0001,150,000Productivity Measurement: Profile Productivity Measurement: Profile

Analysis with Trade-OffsAnalysis with Trade-Offs

Productivity Measurement: Profile Productivity Measurement: Profile Analysis with Trade-OffsAnalysis with Trade-Offs 250,000/50,000250,000/50,000

250,000/1,300,000250,000/1,300,000


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Profit-Linkage Rule: For the current period, calculate the cost of the inputs that would have been used in the absence of any productivity change, and compare this cost with the cost of the inputs actually used. The difference in costs is the amount by which profits changed because of productivity changes.

To compute the inputs that would have been used (PQ), use the following formula:

PQ = Current-period Output/Base-period productivity ratio


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Labor hours used 60,000 50,000

Materials used (lbs.) 1,200,0001,300,000

Unit selling price (frames) $30$30

Wages per labor hour $15$15

Cost per pound of material $3$3.50

2006 2007


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PQ (labor) = 250,000/4 = 62,500 hrs.

PQ (materials) = 250,000/0.200 = 1,250,000 lbs.

Cost of labor: (62,500 x $15) = $ 937,500

Cost of materials: (1,250,000 x $3.50) = 4,375,000

Total PQ cost $5,312,500

Cost of labor: (50,000 x $15) = $ 750,000

Cost of materials: (1,300,000 x $3.50) = 4,550,000

Total current cost $5,300,000

The actual cost of inputs:


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Profit-linked effect = Total PQ cost – Total current cost

= $5,312,500 – $5,300,000

= $12,500 increase in profits

The net effect of the process change was favorable. Profits increased $12,500 because of

productivity changes.


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Profit-Linked Productivity MeasurementProfit-Linked Productivity MeasurementProfit-Linked Productivity MeasurementProfit-Linked Productivity Measurement

250,000/4250,000/0.200

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Output and Input Measures

Output/Input

Profile and Profit-Linked Analyses

4Measuring Changes in Activity Measuring Changes in Activity and Process Efficiencyand Process Efficiency

Activity Productivity ModelActivity Productivity ModelActivity Productivity ModelActivity Productivity Model

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Number of purchase orders 200,000240,000

Material used (lbs.) 50,00050,000

Labor used (number of workers) 4030

Cost per pound of material $1$0.80

Cost (salary) per worker $30,000$33,000

2006 2007


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Activity Productivity Analysis IllustratedActivity Productivity Analysis IllustratedActivity Productivity Analysis IllustratedActivity Productivity Analysis Illustrated


*Materials: 240,000/4; Labor: 240,000/5,000.

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Output and Input Measures

Output/Input

Profile and Profit-Linked Analyses


Process Productivity: Activity Output EfficiencyProcess Productivity: Activity Output EfficiencyProcess Productivity: Activity Output EfficiencyProcess Productivity: Activity Output Efficiency

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Productivity Data: Sales Process, Carthage CompanyProductivity Data: Sales Process, Carthage CompanyProductivity Data: Sales Process, Carthage CompanyProductivity Data: Sales Process, Carthage Company

ContinuedContinued

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Productivity Data: Sales Process, Carthage CompanyProductivity Data: Sales Process, Carthage CompanyProductivity Data: Sales Process, Carthage CompanyProductivity Data: Sales Process, Carthage Company

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Resource Efficiency Component (Activity Productivity)Resource Efficiency Component (Activity Productivity)Resource Efficiency Component (Activity Productivity)Resource Efficiency Component (Activity Productivity)

A. Making Sales Calls

ContinuedContinued

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Resource Efficiency Component (Activity Productivity)Resource Efficiency Component (Activity Productivity)Resource Efficiency Component (Activity Productivity)Resource Efficiency Component (Activity Productivity)

B. Handling Objections

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Activity Output Efficiency and Activity Output Efficiency and Total Process Productivity Total Process Productivity


A. Activity Output Efficiency

ContinuedContinued

a20,000/50,000; 25,000/40,000.

b20,000/25,000; 25,000/10,000.

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A. Activity Output Efficiency

ContinuedContinued

*25,000/0.4; 25,000/0.8.

Note: P is the activity rate for 2007.

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B. Total Process Productivity

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Improving quality may improve productivity. If rework is reduced by producing fewer defective units, then

less labor and few materials are used to produce the same output. Reducing the

number of defective units improves quality; reducing the amount of inputs

used to improve productivity.


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End of End of Chapter 15Chapter 15

Chapter15 pp ts

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