Cost management accounting and control 6e by hansen mowen guan chapter 15

COST MANAGEMENT Accounting & Control Hansen▪Mowen▪Guan Chapter 15 Productivity Measure and Control COPYRIGHT © 2009 South-Western Publishing, a division of Cengage Learning Cengage Learning and South-Western are trademarks used herein under license Study Objectives Explain the meaning of productive efficiency, and describe the difference between technical and allocative efficiency Define partial productivity measurement, and list its advantages and disadvantages Explain what total productivity measurement is, and name its advantages Discuss the role of productivity measurement in assessing activity improvement 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 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 Productive Efficiency Productive Efficiency Productive Efficiency Productive Efficiency Productive Efficiency Of the two combinations that produce the same output, the least costly combination would be chosen 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 Total Productivity Measurement PQ (labor) = PQ (materials) = 250,000 ÷ = 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 ÷ Materials: 250,000 ÷ 0.200 19 Measuring Changes in Activity and Process Efficiency 20 Measuring Changes in Activity and Process Efficiency 2009 Number of purchase orders Material used (lbs.) Labor used (number of workers) Cost per pound of material Cost (salary) per worker 200,000 240,000 50,000 50,000 40 30 $1 $0.80 $30,000 $33,000 21 2010 Measuring Changes in Activity and Process Efficiency Labor: 240,000 ÷ 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 Measuring Changes in Activity and Process Efficiency 27 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 COPYRIGHT © 2009 South-Western Publishing, a division of Cengage Learning Cengage Learning and South-Western are trademarks used herein under license 31 ... 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 COPYRIGHT © 2009 South-Western... 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... 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