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Cost Management ACCOUNTING AND CONTROL

Cost Management ACCOUNTING AND CONTROL. HANSEN & MOWEN. 15. CHAPTER. Productivity Measurement and Control. 1. Productive Efficiency. OBJECTIVE.

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Cost Management ACCOUNTING AND CONTROL

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  1. Cost ManagementACCOUNTING AND CONTROL HANSEN & MOWEN

  2. 15 CHAPTER Productivity Measurement and Control

  3. 1 Productive Efficiency OBJECTIVE Productivity is concerned with producing output efficiently, and it specifically addresses the relationship of output and the inputs used to produce the outputs.

  4. 1 Productive Efficiency OBJECTIVE 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. 1 Productive Efficiency OBJECTIVE 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.

  6. 1 Productive Efficiency OBJECTIVE

  7. 1 Productive Efficiency OBJECTIVE

  8. 1 Productive Efficiency OBJECTIVE

  9. 1 Productive Efficiency OBJECTIVE

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

  11. 2 Partial Productivity Measurement OBJECTIVE • 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. 2 Partial Productivity Measurement OBJECTIVE • 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.

  13. 3 Total Productivity Measurement OBJECTIVE 20062007 Number of frames produced 240,000 250,000 Labor hours used 60,000 50,000 Materials used (lbs.) 1,200,000 1,150,000 • Productivity Measurement: Profile Analysis, No Trade-Offs 240,000/60,000 250,000/50,000 240,000/1,200,000 250,000/1,150,000

  14. 3 Total Productivity Measurement OBJECTIVE 20062007 Number of frames produced 240,000 250,000 Labor hours used 60,000 50,000 Materials used (lbs.) 1,200,000 1,150,000 • Productivity Measurement: Profile Analysis with Trade-Offs 250,000/50,000 250,000/1,300,000

  15. 3 Total Productivity Measurement OBJECTIVE 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

  16. 3 Total Productivity Measurement OBJECTIVE 2006 2007 Number of frames produced 240,000 250,000 Labor hours used 60,000 50,000 Materials used (lbs.) 1,200,000 1,300,000 Unit selling price (frames) $30 $30 Wages per labor hour $15 $15 Cost per pound of material $3 $3.50

  17. 3 Total Productivity Measurement OBJECTIVE 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 The actual cost of inputs: 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 PQ (labor) = 250,000/4 = 62,500 hrs. PQ (materials) = 250,000/0.200 = 1,250,000 lbs.

  18. 3 Total Productivity Measurement OBJECTIVE 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. 3 Total Productivity Measurement OBJECTIVE • Profit-Linked Productivity Measurement 250,000/4 250,000/0.200

  20. Measuring Changes in Activity and Process Efficiency 4 OBJECTIVE Output and Input Measures Output/Input Profile and Profit-Linked Analyses • Activity Productivity Model

  21. Measuring Changes in Activity and Process Efficiency 4 OBJECTIVE 2006 2007 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

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

  23. Measuring Changes in Activity and Process Efficiency 4 OBJECTIVE Output and Input Measures Output/Input Profile and Profit-Linked Analyses • Process Productivity: Activity Output Efficiency

  24. Measuring Changes in Activity and Process Efficiency 4 OBJECTIVE • Productivity Data: Sales Process, Carthage Company Continued

  25. Measuring Changes in Activity and Process Efficiency 4 OBJECTIVE • Productivity Data: Sales Process, Carthage Company

  26. Measuring Changes in Activity and Process Efficiency 4 OBJECTIVE • Resource Efficiency Component (Activity Productivity) A. Making Sales Calls Continued

  27. Measuring Changes in Activity and Process Efficiency 4 OBJECTIVE • Resource Efficiency Component (Activity Productivity) B. Handling Objections

  28. Measuring Changes in Activity and Process Efficiency 4 OBJECTIVE • Activity Output Efficiency and Total Process Productivity A. Activity Output Efficiency a20,000/50,000; 25,000/40,000. b20,000/25,000; 25,000/10,000. Continued

  29. Measuring Changes in Activity and Process Efficiency 4 OBJECTIVE • Activity Output Efficiency and Total Process Productivity A. Activity Output Efficiency *25,000/0.4; 25,000/0.8. Note: P is the activity rate for 2007. Continued

  30. Measuring Changes in Activity and Process Efficiency 4 OBJECTIVE • Activity Output Efficiency and Total Process Productivity B. Total Process Productivity

  31. Measuring Changes in Activity and Process Efficiency 4 OBJECTIVE 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.

  32. End of Chapter 15

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