Productivity Measurement

Source: Hansen, D & Mowen, M. (2019). Strategic cost management. Quezon City: C&E Publishing, Inc
Productive Efficiency

•Productivity addresses the relationship of output

and the inputs used to produce the output
•Total productive efficiency: Point at which the
following conditions are satisfied:
• Technical efficiency: Concerned with producing a
given output using no more than necessary of any input
• Allocative efficiency: Concerned with choosing the
least costly technically efficient combination of inputs
Exhibit 15.9 - Improving Technical
Efficiency (1 of 2)

© 2019 Cengage. All rights reserved.

Exhibit 15.9 - Improving Technical
Efficiency (2 of 2)

© 2019 Cengage. All rights reserved.

Exhibit 15.10 - Improving Allocation Efficiency

© 2019 Cengage. All rights reserved.

Productivity Measurement

•Quantitative assessment of productivity changes

• Objective - To assess whether productive efficiency
has increased or decreased
•Actual productivity measurement
• Allows managers to assess, monitor, and control
changes
•Prospective measurement
• Allows managers to compare relative benefits of
different input combinations, choosing the inputs and
input mix that provide the greatest benefit
Partial Productivity Measurement

•Measuring productivity for one input at a

time
•Productivity ratio = Output/Input
•Operational productivity measure: Both
input and output are expressed in physical
terms
•Financial productivity measure: Both input
and output are expressed in dollars
Measuring Changes in Productive Efficiency

•Actual current productivity measure is

compared with the productivity measure of
a prior (base) period
• Base period: Serves to set the standard for
measuring changes in productive efficiency
Advantages of Partial Measures

•Allow managers to focus on the use of a

particular input
•Easily interpreted by everyone within the
organization
•Easy to use for assessing productivity
performance of operating personnel
Disadvantages of Partial Measures

•Can be misleading if used in isolation

•Decline in the productivity of one input may
be necessary to increase the productivity of
another
• Trade-off is desirable if overall costs decline
• Effect would be missed by using either partial
measure
Total Productivity Measurement

•Focusing on a limited number of inputs,

which, in total, indicates organizational
success
•Approaches
• Profile productivity measurement
• Profit-linked productivity measurement
Profile Productivity Measurement

•Provides a series or vector of separate and

distinct partial operational measures
•Comparison of partial productive ratios with
base ratios
• Some definitive statements about productivity
changes can be made if the partial productivity
ratios move in the same direction
• A trade-off exists if the ratios move in opposite
directions
Profit-Linked Productivity
Measurement (1 of 2)
•Measures the amount of profit change attributable to
productivity change
•Helps understand the economic importance of
productivity change
• Helps assess trade-offs
•Described by profit-linkage rule
• PQi = Amount of input i that would have been used for the
current period in the absence of a productivity change
Profit  linked productivi ty change   PQiPi   AQiPi
Profit-Linked Productivity
Measurement (2 of 2)
• Pi = Current-period price of input i
• AQi = Actual amount of input i used in the current period
•PQi = Current-period output/Base-period productivity ratio
for input i
•Price recovery component: Difference between the total
profit change and the profit-linked productivity change. It
measures the ability of revenue changes to cover changes
in the cost of inputs, assuming no productivity change.
• Price recovery = Total profit change – Profit-linked productivity
change