COST MANAGEMENT

Accounting & Control

HansenMowenGuan

Chapter 15
Productivity Measure
and Control
COPYRIGHT 2009 South-Western Publishing, a division of Cengage Learning.
Cengage Learning and South-Western are trademarks used herein under license.

Study Objectives
1. Explain the meaning of productive efficiency, and
describe the difference between technical and allocative
efficiency.
2. Define partial productivity measurement, and list its
advantages and disadvantages.
3. Explain what total productivity measurement is, and
name its advantages.
4. Discuss the role of productivity measurement in
assessing activity improvement.

Productive Efficiency
Productivity
concerned with producing output efficiently
specifically addresses the relationship of output and
the inputs used to produce the outputs

Total productive efficiency is the point at which

two conditions are satisfied
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.
Given the mixes that satisfy the first condition, the
least costly mix is chosen
3

Productive Efficiency
Technical Efficiency
the condition where no more of any one input is
used than necessary to produce a given output.
Technical efficiency improvement occurs when less
inputs are used to produce the same output or more
output are produced using the same input.

Productive Efficiency

Productive Efficiency

Productive Efficiency

Productive Efficiency

Productive Efficiency

Of the two combinations that produce the same output,

the least costly combination would be chosen.
9

Partial Productivity Measurement

Productive measurement
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
of different input combinations
10

Partial Productivity Measurement

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.
11

Total Productivity Measurement

2009

Number of frames produced

Labor hours used
Materials used (lbs.)

2010

240,000
250,000
60,000
50,000
1,200,000
1,150,000

240,000 60,000
250,000 50,000
240,000 1,200,000
250,000 1,150,000

12

Total Productivity Measurement

2009

Number of frames produced

Labor hours used
Materials used (lbs.)

2010

240,000
250,000
60,000
50,000
1,200,000
1,300,000

240,000 60,000
250,000 50,000
240,000 1,200,000
250,000 1,300,000

13

Total Productivity Measurement

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
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
14

Total Productivity Measurement

PQ = the inputs that would have been used

Current-period output
PQ =
Base-period productivity ratio

15

Total Productivity Measurement

2009
Number of frames produced
Labor hours used
Materials used (lbs.)
Unit selling price (frames)
Wages per labor hour
Cost per pound of material

240,000
60,000
1,200,000
$30
$15
$3

2010
250,000
50,000
1,300,000
$30
$15
$3.50

16

Total Productivity Measurement

PQ (labor) =
PQ (materials) =

250,000 4 =
250,000 0.200 =

62,500 hrs.
1,250,000 lbs.

Cost of labor: (62,500 $15)

Cost of materials: (1,250,000 $3.50)
Total PQ cost

$ 937,500
4,375,000
$5,312,500

The actual cost of inputs:

Cost of labor: (50,000 $15)
Cost of materials: (1,300,000 $3.50)
Total current cost

$ 750,000
4,550,000
$5,300,000
17

Total Productivity Measurement

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.

18

Total Productivity Measurement

Labor:
250,000 4
Materials: 250,000 0.200
19

Measuring Changes in Activity

and Process Efficiency

20

Measuring Changes in Activity

and Process Efficiency
2009
Number of purchase orders
Material used (lbs.)
Labor used (number of workers)
Cost per pound of material
Cost (salary) per worker

2010

200,000
240,000
50,000
50,000
40
30
$1
$0.80
$30,000
$33,000

21

Measuring Changes in Activity

and Process Efficiency

Labor:
240,000 4
Materials: 240,000 5,000

22

Measuring Changes in Activity

and Process Efficiency

23

Measuring Changes in Activity

and Process Efficiency

continued
* Activity rates are calculated as total costs of materials and labor divided by the activity output.

24

Measuring Changes in Activity

and Process Efficiency

continued from previous slide

* Activity rates are calculated as total costs of materials and labor divided by the activity output.

25

Measuring Changes in Activity

and Process Efficiency

26

Measuring Changes in Activity

and Process Efficiency

27

Measuring Changes in Activity

and Process Efficiency

28

Measuring Changes in Activity

and Process Efficiency

29

Measuring Changes in Activity

and Process Efficiency

30

COST MANAGEMENT
Accounting & Control
HansenMowenGuan

End Chapter 15

COPYRIGHT 2009 South-Western Publishing, a division of Cengage Learning.

Cengage Learning and South-Western are trademarks used herein under license.

31