COST MANAGEMENT Accounting Control HansenMowenGuan Chapter 15 Productivity

COST MANAGEMENT Accounting & Control Hansen▪Mowen▪Guan • Chapter 15 • Productivity Measure and Control 1

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. 2

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 3

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. 4

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

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 10

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. 11

Total Productivity Measurement Number of frames produced Labor hours used Materials used (lbs. ) 2009 2010 240, 000 60, 000 1, 200, 000 250, 000 1, 150, 000 240, 000 ÷ 60, 000 250, 000 ÷ 50, 000 240, 000 ÷ 1, 200, 000 250, 000 ÷ 1, 150, 000 12

Total Productivity Measurement Number of frames produced Labor hours used Materials used (lbs. ) 2009 2010 240, 000 60, 000 1, 200, 000 250, 000 1, 300, 000 240, 000 ÷ 60, 000 250, 000 ÷ 50, 000 240, 000 ÷ 1, 200, 000 250, 000 ÷ 1, 300, 000 13

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 14

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

Total Productivity Measurement 2009 Number of frames produced Labor hours used Materials used (lbs. ) Unit selling price (frames) Wages per labor hour Cost per pound of material 240, 000 60, 000 1, 200, 000 $30 $15 $3 2010 250, 000 1, 300, 000 $30 $15 $3. 50 16

Total Productivity Measurement PQ (labor) = PQ (materials) = 250, 000 ÷ 4 = 250, 000 ÷ 0. 200 = 62, 500 hrs. 1, 250, 000 lbs. Cost of labor: (62, 500 × $15) Cost of materials: (1, 250, 000 × $3. 50) Total PQ cost $ 937, 500 4, 375, 000 $5, 312, 500 The actual cost of inputs: Cost of labor: (50, 000 × $15) Cost of materials: (1, 300, 000 × $3. 50) Total current cost $ 750, 000 4, 550, 000 $5, 300, 000 17

Total 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. 18

Total Productivity Measurement Labor: 250, 000 ÷ 4 Materials: 250, 000 ÷ 0. 200 19

Measuring Changes in Activity and Process Efficiency 20

Measuring Changes in Activity and Process Efficiency 2009 2010 Number of purchase orders 200, 000 240, 000 Material used (lbs. ) Labor used (number of workers) Cost per pound of material Cost (salary) per worker 50, 000 40 $1 $30, 000 50, 000 30 $0. 80 $33, 000 21

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

Measuring Changes in Activity and Process Efficiency 23

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

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. 25

Measuring Changes in Activity and Process Efficiency 26

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Measuring Changes in Activity and Process Efficiency 28

Measuring Changes in Activity and Process Efficiency 29

Measuring Changes in Activity and Process Efficiency 30

COST MANAGEMENT Accounting & Control Hansen▪Mowen▪Guan –End Chapter 15 31