18-1 prepared by douglas cloud pepperdine university prepared by douglas cloud pepperdine university...

18-1

Prepared by Douglas Cloud

Pepperdine University

Prepared by Douglas Cloud

Pepperdine University

Productivity Productivity Measurement Measurement and Controland Control

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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.

ObjectivesObjectivesObjectivesObjectives

After studying this After studying this chapter, you should chapter, you should

be able to:be able to:

After studying this After studying this chapter, you should chapter, you should

be able to:be able to:

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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.

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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Productive EfficiencyTotal 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.

Current productivityOutputs:

6

Inputs:

Labor

Capital

4

Improving Technical EfficiencyImproving Technical Efficiency

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Same Output, Fewer InputsOutputs:

6

Inputs:

Labor

Capital

3


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More Output, Same InputsOutputs:

8

Inputs:

Labor

Capital

4


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More Output, Fewer InputsOutputs:

8

Inputs:

Labor

Capital

3


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Technically Efficient Combination I:Outputs:

8

Inputs:

Labor

Capital

Total cost of inputs = $20,000,000

3


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Technically Efficient Combination II:

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.

Outputs:

8

Inputs:

Labor

Capital

Total cost of inputs = $25,000,000

2


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Productive MeasurementProductive MeasurementProductive MeasurementProductive 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 ofdifferent input combinations

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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 MeasurementPartial Productivity MeasurementPartial Productivity MeasurementPartial Productivity Measurement

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Profile Productivity Measures

2003 2004Number of frames produced 240,000 250,000Labor hours used 60,000 50,000Materials used (lbs.) 1,300,000 1,150,000

Partial Productivity RatiosPartial Productivity Ratios

2003 Profile 2004 Profile2003 Profile 2004 Profile

Labor productivity ratio 4.000 5.000

Material productivity ratio 0.200 0.217

250,000/50,000250,000/50,000

250,000/1,150,000250,000/1,150,000

No Trade-Offs

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Profile Productivity Measures

2003 2004Number of frames produced 240,000 250,000Labor hours used 60,000 50,000Materials used (lbs.) 1,200,000 1,300,000

Partial Productivity RatiosPartial Productivity Ratios

2003 Profile 2004 Profile2003 Profile 2004 Profile

Labor productivity ratio 4.000 5.000

Material productivity ratio 0.200 0.192

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

With Trade-Offs

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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

Profit-Linked Productivity Measurement


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Number of frames produced 240,000250,000

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

2003 2004

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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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(PQ x P) (PQ x P) ––Input PQ PQ x P AQ AQ x P (AQ x P)Input PQ PQ x P AQ AQ x P (AQ x P)

Labor 62,500 $ 937,500 50,000 $ 750,000 $817,500

Materials 1,250,000 4,375,000 1,300,000 4,550,000 -175,000

$5,312,500 $5,300,000 $ 12,500



250,000/4

250,000/0.200

(1) (2) (3) (4) (2) – (4)(1) (2) (3) (4) (2) – (4)

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Output and Input Measures

Output/Input

Profile and Profit-Linked Analyses

InputInput(Resources)(Resources)

ActivityActivity OutputOutput

Activity Productivity ModelActivity Productivity Model

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Number of purchase orders 200,000 240,000

Material used (lbs.) 50,000 50,000

Labor used (number of workers) 40 30

Cost per pound of material $1 $0.80

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

2003 2004

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

Profile AnalysisProfile Analysis

2003 20042003 2004

Materials 4 4.8Labor 5,000 8,000


Labor 60,000 $ 48,000 50,000 $ 40,000 $ 8,000

Materials 48 1,584,000 30 990,000 594,000

$1,632,000 $1,030,000 $602,000

(1) (2) (3) (4) (2) – (4)(1) (2) (3) (4) (2) – (4)

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Output and Input Measures

Output/Input

Profile and Profit-Linked Analyses

InputInput(Resources)(Resources)

ProcessProcess OutputOutput

Process Productivity: Activity Output EfficiencyProcess Productivity: Activity Output Efficiency

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


2003 20042003 2004

Number of sales orders 20,000 25,000Activity data:

Making sales callsNumber of calls (output) 50,000 40,000Labor used (hrs.) 100,000 80,000Materials used (lbs.) 200,000 200,000Cost per pound of material $6 $5Labor cost (per hour) $30 $30Activity rate $84 $80

ContinuedContinuedContinuedContinued

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2003 20042003 2004

Number of sales orders 20,000 25,000Activity data:

Handling objectionsNumber of objectives handled (output) 25,000 10,000Labor used (hrs.) 30,000 15,000Materials used (number of samples) 25,000 5,000Cost per sample $40 $40Labor cost (per hour) $30 $30Activity rate $76 $76

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Resource Efficiency ComponentResource Efficiency ComponentResource Efficiency ComponentResource Efficiency Component


2003 20042003 2004

Labor 0.50 0.50Materials 0.25 0.20

Labor 80,000 $2,400,000 80,000 $2,400,000 $ 0

Materials 160,000 800,000 200,000 1,000,000 -200,000

$3,200,000 $3,400,000 $-200,000

A. Making Sales Calls


(1) (2) (3) (4) (2) – (4)(1) (2) (3) (4) (2) – (4)

Profit-Linked Productivity MeasurementProfit-Linked Productivity Measurement

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Resource Efficiency ComponentResource Efficiency ComponentResource Efficiency ComponentResource Efficiency Component


2003 20042003 2004

Labor 0.83 0.67Materials 1.00 2.00


Labor 12,048 $361,440 15,000 $450,000 $ -88,560

Materials 10,000 400,000 5,000 200,000 200,000

$761,440 $650,000 $111,440

(1) (2) (3) (4) (2) – (4)(1) (2) (3) (4) (2) – (4)

B. Handling Objections


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Activity Output EfficiencyActivity Output EfficiencyActivity Output EfficiencyActivity Output Efficiency


2003 20042003 2004

Making sales calls 0.400 0.625Handling objections 0.800 2.500

A. Activity Output Efficiency


Calls 62,500 $5,000,000 40,000 $3,200,000 $1,800,000

Objections 31,250 2,375,000 10,000 760,000 1,615,000

$7,375,000 $3,960,000 $3,415,000

(1) (2) (3) (4) (2) – (4)(1) (2) (3) (4) (2) – (4)


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Quality and ProductivityQuality and ProductivityQuality and ProductivityQuality 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.

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ChapteChapterr

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18-1 prepared by douglas cloud pepperdine university prepared by douglas cloud pepperdine university...

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