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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
Improving Technical EfficiencyImproving Technical Efficiency
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More Output, Same InputsOutputs:
8
Inputs:
Labor
Capital
4
Improving Technical EfficiencyImproving Technical Efficiency
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More Output, Fewer InputsOutputs:
8
Inputs:
Labor
Capital
3
Improving Technical EfficiencyImproving Technical Efficiency
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Technically Efficient Combination I:Outputs:
8
Inputs:
Labor
Capital
Total cost of inputs = $20,000,000
3
Improving Technical EfficiencyImproving Technical Efficiency
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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
Improving Technical EfficiencyImproving Technical Efficiency
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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
Profit-Linked Productivity Measurement
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Profit-Linked Productivity Measurement
Profit-Linked Productivity Measurement
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:
Profit-Linked Productivity Measurement
Profit-Linked Productivity Measurement
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Profit-Linked Productivity Measurement
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.
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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
Profit-Linked Productivity Measurement
Profit-Linked Productivity Measurement
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
(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 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
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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Productivity Data: Sales Process, Productivity Data: Sales Process, Carthage CompanyCarthage Company
Productivity Data: Sales Process, Productivity Data: Sales Process, Carthage CompanyCarthage Company
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
Profile AnalysisProfile Analysis
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
(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)
(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
Profile AnalysisProfile Analysis
2003 20042003 2004
Labor 0.83 0.67Materials 1.00 2.00
(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 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
Profit-Linked Productivity MeasurementProfit-Linked Productivity Measurement
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Activity Output EfficiencyActivity Output EfficiencyActivity Output EfficiencyActivity Output Efficiency
Profile AnalysisProfile Analysis
2003 20042003 2004
Making sales calls 0.400 0.625Handling objections 0.800 2.500
A. Activity Output Efficiency
(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)
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)
Profit-Linked Productivity MeasurementProfit-Linked Productivity Measurement
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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
End ofEnd of
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