15-1 HANSEN & MOWEN Cost Management ACCOUNTING AND CONTROL

15-2 Productivity Measurement and Control 15

15-3 Productive 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.

15-4 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. Productive Efficiency 1

15-5 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. Productive Efficiency 1

15-6 Productive Efficiency 1

15-7 Productive Efficiency 1

15-8 Productive Efficiency 1

15-9 Productive Efficiency 1

15-10 Productive Efficiency 1 Of the two combinations that produce the same output, the least costly combination would be chosen.

15-11 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 of different input combinations Partial Productivity Measurement 2

15-12   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 Measurement 2

Number of frames produced240,000250,000 Labor hours used60,00050,000 Materials used (lbs.)1,200,0001,150,000 Productivity Measurement: Profile Analysis, No Trade-Offs 250,000/50, ,000/1,150, ,000/60, ,000/1,200,000 Total Productivity Measurement 3

Number of frames produced240,000250,000 Labor hours used60,00050,000 Materials used (lbs.)1,200,0001,150,000 Productivity Measurement: Profile Analysis with Trade-Offs 250,000/50, ,000/1,300,000 Total Productivity Measurement 3

15-15 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 Total Productivity Measurement 3

15-16 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 3

15-17 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: Total Productivity Measurement 3

15-18 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 3

15-19 Total Productivity Measurement 3 Profit-Linked Productivity Measurement 250,000/4 250,000/0.200

15-20 Output and Input MeasuresOutput/InputProfile and Profit-Linked Analyses 4 Measuring Changes in Activity and Process Efficiency Activity Productivity Model

15-21 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

15-22 Activity Productivity Analysis Illustrated 4 Measuring Changes in Activity and Process Efficiency *Materials: 240,000/4; Labor: 240,000/5,000.

15-23 Output and Input MeasuresOutput/InputProfile and Profit-Linked Analyses 4 Measuring Changes in Activity and Process Efficiency Process Productivity: Activity Output Efficiency

Measuring Changes in Activity and Process Efficiency Productivity Data: Sales Process, Carthage Company Continued

Measuring Changes in Activity and Process Efficiency Productivity Data: Sales Process, Carthage Company

Measuring Changes in Activity and Process Efficiency Resource Efficiency Component (Activity Productivity) A. Making Sales Calls Continued

Measuring Changes in Activity and Process Efficiency Resource Efficiency Component (Activity Productivity) B. Handling Objections

Measuring Changes in Activity and Process Efficiency Activity Output Efficiency and Total Process Productivity A. Activity Output Efficiency Continued a 20,000/50,000; 25,000/40,000. b 20,000/25,000; 25,000/10,000.

Measuring Changes in Activity and Process Efficiency Activity Output Efficiency and Total Process Productivity A. Activity Output Efficiency Continued *25,000/0.4; 25,000/0.8. Note: P is the activity rate for 2007.

Measuring Changes in Activity and Process Efficiency Activity Output Efficiency and Total Process Productivity B. Total Process Productivity

15-31 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. 4 Measuring Changes in Activity and Process Efficiency

15-32 End of Chapter 15