COST MANAGEMENT Accounting & Control Hansen▪Mowen▪Guan COPYRIGHT © 2009 South-Western Publishing, a division of Cengage Learning. Cengage Learning and South-Western are trademarks used herein under license. 1 Chapter 15 Productivity Measure and Control

2 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.

3 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

4 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.

5 Productive Efficiency

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

10 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

11 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.

Number of frames produced240,000250,000 Labor hours used60,00050,000 Materials used (lbs.)1,200,0001,150,000 Total Productivity Measurement 240,000 ÷ 1,200, ,000 ÷ 1,150, ,000 ÷ 50, ,000 ÷ 60,000

Number of frames produced240,000250,000 Labor hours used60,00050,000 Materials used (lbs.)1,200,0001,300,000 Total Productivity Measurement 240,000 ÷ 1,200, ,000 ÷ 1,300, ,000 ÷ 50, ,000 ÷ 60,000

14 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

15 Total Productivity Measurement PQ = the inputs that would have been used

16 Number of frames produced240,000250,000 Labor hours used60,00050,000 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$3$ Total Productivity Measurement

17 PQ (labor) =250,000 ÷ 4 =62,500 hrs. PQ (materials) =250,000 ÷ =1,250,000 lbs. Cost of labor: (62,500 × $15) $ 937,500 Cost of materials: (1,250,000 × $3.50) 4,375,000 Total PQ cost$5,312,500 Cost of labor: (50,000 × $15)$ 750,000 Cost of materials: (1,300,000 × $3.50) 4,550,000 Total current cost$5,300,000 The actual cost of inputs: Total Productivity Measurement

18 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. Total Productivity Measurement

19 Total Productivity Measurement Labor:250,000 ÷ 4 Materials:250,000 ÷ 0.200

20 Measuring Changes in Activity and Process Efficiency

21 Number of purchase orders200,000240,000 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, Measuring Changes in Activity and Process Efficiency

22 Measuring Changes in Activity and Process Efficiency Labor:240,000 ÷ 4 Materials:240,000 ÷ 5,000

23 Measuring Changes in Activity and Process Efficiency

24 Measuring Changes in Activity and Process Efficiency * Activity rates are calculated as total costs of materials and labor divided by the activity output. continued

25 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.

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 Measuring Changes in Activity and Process Efficiency

COST MANAGEMENT Accounting & Control Hansen▪Mowen▪Guan COPYRIGHT © 2009 South-Western Publishing, a division of Cengage Learning. Cengage Learning and South-Western are trademarks used herein under license. 31 End Chapter 15