3. Productive Efficiency 1
Productivity is concerned
with producing output
efficiently, and it
specifically addresses the
relationship of output and
the inputs used to produce
the outputs.
15-3
4. Productive Efficiency 1
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.
15-4
5. Productive Efficiency 1
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.
15-5
10. Productive Efficiency 1
Of the two combinations that produce the same output,
the least costly combination would be chosen.
15-10
11. Partial Productivity Measurement 2
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
15-11
12. Partial Productivity Measurement 2
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.
15-12
13. Total Productivity Measurement 3
2006 2007
Number of frames produced 240,000
250,000
Labor hours used 60,000
50,000
Materials used (lbs.) 1,200,000
Productivity Measurement: Profile
1,150,000
Analysis, No Trade-Offs
240,000/60,000 250,000/50,000
250,000/1,150,000
240,000/1,200,000
15-13
14. Total Productivity Measurement 3
2006 2007
Number of frames produced 240,000
250,000
Labor hours used 60,000
50,000
Materials used (lbs.) 1,200,000
Productivity Measurement: Profile
1,150,000
Analysis with Trade-Offs 250,000/50,000
250,000/1,300,000
15-14
15. Total Productivity Measurement 3
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
15-15
16. Total Productivity Measurement 3
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
15-16
17. Total Productivity Measurement 3
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
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
15-17
18. Total Productivity Measurement 3
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.
15-18
20. Measuring Changes in Activity
and Process Efficiency 4
Activity Productivity Model
Output and Input Measures
Output/Input
Profile and Profit-Linked Analyses
15-20
21. Measuring Changes in Activity
and Process Efficiency 4
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 15-21
22. Measuring Changes in Activity
and Process Efficiency 4
Activity Productivity Analysis Illustrated
*Materials: 240,000/4; Labor: 240,000/5,000.
15-22
23. Measuring Changes in Activity
and Process Efficiency 4
Process Productivity: Activity Output Efficiency
Output and Input Measures
Output/Input
Profile and Profit-Linked Analyses
15-23
24. Measuring Changes in Activity
and Process Efficiency 4
Productivity Data: Sales Process, Carthage Company
Continued
15-24
25. Measuring Changes in Activity
and Process Efficiency 4
Productivity Data: Sales Process, Carthage Company
15-25
26. Measuring Changes in Activity
and Process Efficiency 4
Resource Efficiency Component (Activity Productivity)
A. Making Sales Calls
Continued
15-26
27. Measuring Changes in Activity
and Process Efficiency 4
Resource Efficiency Component (Activity Productivity)
B. Handling Objections
15-27
28. Measuring Changes in Activity
and Process Efficiency 4
Activity Output Efficiency and
Total Process Productivity
A. Activity Output Efficiency
20,000/50,000; 25,000/40,000.
a
b 20,000/25,000; 25,000/10,000.
Continued
15-28
29. Measuring Changes in Activity
and Process Efficiency 4
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
15-29
30. Measuring Changes in Activity
and Process Efficiency 4
Activity Output Efficiency and
Total Process Productivity
B. Total Process Productivity
15-30
31. Measuring Changes in Activity
and Process Efficiency 4
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.
15-31