1. 18-1 Prepared by Douglas Cloud Pepperdine University Prepared by Douglas Cloud Pepperdine University Productivity Measurement and Control

2. 18-2 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. ObjectivesObjectives After studying this chapter, you should be able to:

3. 18-3 Productivity: Measurement and Control Productivity is concerned with producing output efficiently, and it specifically addresses the relationship of output and the inputs used to produce the outputs.

4. 18-4 Productive Efficiency 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.

5. 18-5 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. Current productivity Outputs: 6 Inputs: Labor Capital 4 Improving Technical Efficiency

6. 18-6 Same Output, Fewer Inputs Outputs: 6 Inputs: Labor Capital 3 Improving Technical Efficiency

7. 18-7 More Output, Same Inputs Outputs: 8 Inputs: Labor Capital 4 Improving Technical Efficiency

8. 18-8 More Output, Fewer Inputs Outputs: 8 Inputs: Labor Capital 3 Improving Technical Efficiency

9. 18-9 Technically Efficient Combination I: Outputs: 8 Inputs: Labor Capital Total cost of inputs = $20,000,000 3 Improving Technical Efficiency

10. 18-10 Technically Efficient Combination II: Of the two combinations that produce the same output, the least costly combination would be chosen. Outputs: 8 Inputs: Labor Capital Total cost of inputs = $25,000,000 2 Improving Technical Efficiency

11. 18-11 Productive Measurement 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

12. 18-12 Partial Productivity Measurement: Measuring productivity for one input at a time. Partial Measure = 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

13. 18-13 Profile Productivity Measures 2003 2004 Number of frames produced240,000250,000 Labor hours used60,00050,000 Materials used (lbs.)1,300,0001,150,000 Partial Productivity Ratios 2003 Profile 2004 Profile 2003 Profile 2004 Profile Labor productivity ratio4.0005.000 Material productivity ratio0.2000.217 250,000/50,000 250,000/1,150,000 No Trade-Offs

14. 18-14 Profile Productivity Measures 2003 2004 Number of frames produced240,000250,000 Labor hours used60,00050,000 Materials used (lbs.)1,200,0001,300,000 Partial Productivity Ratios 2003 Profile 2004 Profile 2003 Profile 2004 Profile Labor productivity ratio4.0005.000 Material productivity ratio0.2000.192 250,000/1,300,000 With Trade-Offs

15. 18-15 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 Profit-Linked Productivity Measurement

16. 18-16 Profit-Linked Productivity Measurement 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$3.50 2003 2004

17. 18-17 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: Profit-Linked Productivity Measurement

18. 18-18 Profit-Linked 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.

19. 18-19 (PQ x P) – (PQ x P) – Input PQ PQ x P AQ AQ x P (AQ x P) Labor 62,500$ 937,50050,000$ 750,000$817,500 Materials1,250,000 4,375,0001,300,000 4,550,000-175,000 $5,312,500$5,300,000$ 12,500 Profit-Linked Productivity Measurement 250,000/4 250,000/0.200 (1) (2) (3) (4) (2) – (4) (1) (2) (3) (4) (2) – (4)

20. 18-20 Output and Input MeasuresOutput/InputProfile and Profit-Linked Analyses Input(Resources)ActivityOutput Activity Productivity Model

21. 18-21 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$33,000 2003 2004

22. 18-22 Activity Productivity Analysis Illustrated Profile Analysis 2003 2004 Materials44.8 Labor5,0008,000 (PQ x P) – (PQ x P) – Input PQ PQ x P AQ AQ x P (AQ x P) Labor 60,000$ 48,00050,000$ 40,000$ 8,000 Materials48 1,584,00030 990,000 594,000 $1,632,000$1,030,000$602,000 (1) (2) (3) (4) (2) – (4) (1) (2) (3) (4) (2) – (4)

23. 18-23 Output and Input MeasuresOutput/InputProfile and Profit-Linked Analyses Input(Resources)ProcessOutput Process Productivity: Activity Output Efficiency

24. 18-24 Productivity Data: Sales Process, Carthage Company 2003 2004 2003 2004 Number of sales orders20,00025,000 Activity data: Making sales calls Number of calls (output)50,00040,000 Labor used (hrs.)100,00080,000 Materials used (lbs.)200,000200,000 Cost per pound of material$6$5 Labor cost (per hour)$30$30 Activity rate$84$80 ContinuedContinued

25. 18-25 Productivity Data: Sales Process, Carthage Company 2003 2004 2003 2004 Number of sales orders20,00025,000 Activity data: Handling objections Number of objectives handled (output)25,00010,000 Labor used (hrs.)30,00015,000 Materials used (number of samples)25,0005,000 Cost per sample$40$40 Labor cost (per hour)$30$30 Activity rate$76$76

26. 18-26 Resource Efficiency Component Profile Analysis 2003 2004 Labor0.500.50 Materials0.250.20 Labor 80,000$2,400,00080,000$2,400,000$ 0 Materials160,000 800,000200,000 1,000,000 -200,000 $3,200,000$3,400,000$-200,000 A. Making Sales Calls (PQ x P) – (PQ x P) – Input PQ PQ x P AQ AQ x P (AQ x P) (1) (2) (3) (4) (2) – (4) (1) (2) (3) (4) (2) – (4) Profit-Linked Productivity Measurement

27. 18-27 Resource Efficiency Component Profile Analysis 2003 2004 Labor0.830.67 Materials1.002.00 (PQ x P) – (PQ x P) – Input PQ PQ x P AQ AQ x P (AQ x P) Labor 12,048$361,44015,000$450,000$ -88,560 Materials10,000 400,0005,000 200,000 200,000 $761,440$650,000$111,440 (1) (2) (3) (4) (2) – (4) (1) (2) (3) (4) (2) – (4) B. Handling Objections Profit-Linked Productivity Measurement

28. 18-28 Activity Output Efficiency Profile Analysis 2003 2004 2003 2004 Making sales calls0.4000.625 Handling objections0.8002.500 A. Activity Output Efficiency (PQ x P) – (PQ x P) – Input PQ PQ x P AQ AQ x P (AQ x P) Calls 62,500$5,000,00040,000$3,200,000$1,800,000 Objections31,250 2,375,00010,000 760,000 1,615,000 $7,375,000$3,960,000$3,415,000 (1) (2) (3) (4) (2) – (4) (1) (2) (3) (4) (2) – (4) Profit-Linked Productivity Measurement

29. 18-29 Quality and Productivity 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.

30. 18-30 Chapter End of

31. 18-31