Fundamentals of Cost Accounting 3rd Edition by William N. Lanen, Shannon W. Anderson, Michael Maher

Exercise 43

Productivity Measures

Refer to the data in Exercise 18-29 (McKinley Industries). From the accounting records, you also gather the following information for the two years:

	Year 2	Year 1
Cost of inputs (per gallon)	$85	$90
Wage rate (per hour)	$22	$19
Total manufacturing overhead	$3,200,000	$2,900,000
Selling price of output (per gallon)	$360	$370

Required

a. Compute the total factor productivity measures for year 1 and year 2 based on the three inputs (material, labor, and overhead).

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b. Comment on the results.

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c. Describe briefly the advantages and disadvantages of the total factor productivity relative to the partial measures computed in Exercise 18-29. Would it be useful to report both?

Step 1 of 10

Business strategy

It is an approach used by a company for deploying its resources, assets and capabilities to provide maximum returns to its investors and meeting customer expectations. It is component of high-level strategy plan and defines value preposition.

Partial productivity measures

Partial productivity measures are used to assess the productivity for each factor like material, labor and overheads. Productivity for each factor is measured separately. It helps to assess the which factor’s productivity is higher. Productivity of each factor is calculated by dividing the total output with total input.

Total factor productivity

Total factor productivity is calculated by adding the cost of all factors and then diving the total output with total input costs. This helps to assess total productivity at company level and makes it comparable at industry level also. Company‘s performance over a period of time and within industry can not be compared when partial productivity measures are used.