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Question: Background Economists and managers have long

Background Economists and managers have long recognized the importance of productivity in determining an organization’s success. Productivity is the relation between the firm’s output of goods and services and the inputs necessary to produce that output. If a firm is able to produce more output with the same inputs, we say it has improved its productivity. Likewise, if two firms produce the same quantity of goods and services but one firm uses less input, that firm is called more productive. Countries that produce more output per person generate more consumable wealth. Economists keep productivity statistics, and these numbers are reported in the financial press as measuring the competitiveness and well-being of that country. In the 1970s many of the largest U.S. firms became interested in productivity and better ways to measure and improve their firms’ productivity. Largely driven by foreign competition, these American firms were losing market share to Japanese and European rivals. Japanese auto companies were producing cars with fewer employee hours per car than American companies, thus offering lower-priced and often higher-quality cars than U.S. automakers. Foreign steel producers were more productive than their U.S. counterparts. Concerned about their declining relative productivity in 1977, large U.S. firms financed the formation of the American Productivity Center (later the American Productivity and Quality Center). To become more productive, some firms experimented with various productivity measures. In its most basic form, productivity is defined as: Productivity = Output / Input If the firm uses a single input (steel) to produce a single homogeneous product (horseshoes) that never changes over time, then the measure of productivity is the units of output per quantity of input, or the number of horseshoes per pound of steel. If steel waste is reduced, more horseshoes can be produced with the same amount of steel. One measure of productivity is the ratio of horseshoes to steel, in terms of physical volume. Steel is not the only input to making horseshoes. Labor is also an input, and labor is usually the input of most interest to managers. Productivity is usually thought of as the amount of output per unit of labor. Most managers want to know the number of horseshoes produced per person and how this number changes over time and compares to the competition. Proponents of productivity measurement systems argue that managers should focus on productivity instead of accounting profits. A firm can appear profitable but can be experiencing declining productivity if selling prices are rising faster than input prices. Productivity measures help identify these cases. Managers control the physical aspects of the manufacturing process, such as the amount of steel scrap in making horseshoes, but they cannot control the price of steel or the price of horseshoes. For the most part, managers cannot influence prices but must take them as a given and try to produce more output from a given physical input or the same output using less physical input. Proponents of productivity measures argue that basing managerial performance on productivity, which does not include uncontrollable price changes, yields a better indicator of the manager’s performance. They argue that traditional accounting measures, such as net income, include many factors that managers cannot control and do not focus enough attention on factors that managers can control such as labor productivity. The following example illustrates productivity measurement systems in more detail. Measuring productivity If the firm produces several types of outputs (large and small horseshoes) and the mix of output varies over time, then the productivity measure must somehow aggregate the quantities of outputs into a single aggregate quantity. Likewise, several inputs must be aggregated to derive a homogeneous input measure. The measure of productivity (outputs/inputs) must aggregate the multiple inputs and the multiple outputs. To measure firmwide productivity when multiple inputs and outputs exist, prices are used as the weighting factors. The productivity measure with two outputs and three inputs becomes:
Background Economists and managers have long recognized the importance of productivity in determining an organization’s success. Productivity is the relation between the firm’s output of goods and services and the inputs necessary to produce that output. If a firm is able to produce more output with the same inputs, we say it has improved its productivity. Likewise, if two firms produce the same quantity of goods and services but one firm uses less input, that firm is called more productive. Countries that produce more output per person generate more consumable wealth. Economists keep productivity statistics, and these numbers are reported in the financial press as measuring the competitiveness and well-being of that country. In the 1970s many of the largest U.S. firms became interested in productivity and better ways to measure and improve their firms’ productivity. Largely driven by foreign competition, these American firms were losing market share to Japanese and European rivals. Japanese auto companies were producing cars with fewer employee hours per car than American companies, thus offering lower-priced and often higher-quality cars than U.S. automakers. Foreign steel producers were more productive than their U.S. counterparts. Concerned about their declining relative productivity in 1977, large U.S. firms financed the formation of the American Productivity Center (later the American Productivity and Quality Center). To become more productive, some firms experimented with various productivity measures. In its most basic form, productivity is defined as: Productivity = Output / Input If the firm uses a single input (steel) to produce a single homogeneous product (horseshoes) that never changes over time, then the measure of productivity is the units of output per quantity of input, or the number of horseshoes per pound of steel. If steel waste is reduced, more horseshoes can be produced with the same amount of steel. One measure of productivity is the ratio of horseshoes to steel, in terms of physical volume. Steel is not the only input to making horseshoes. Labor is also an input, and labor is usually the input of most interest to managers. Productivity is usually thought of as the amount of output per unit of labor. Most managers want to know the number of horseshoes produced per person and how this number changes over time and compares to the competition. Proponents of productivity measurement systems argue that managers should focus on productivity instead of accounting profits. A firm can appear profitable but can be experiencing declining productivity if selling prices are rising faster than input prices. Productivity measures help identify these cases. Managers control the physical aspects of the manufacturing process, such as the amount of steel scrap in making horseshoes, but they cannot control the price of steel or the price of horseshoes. For the most part, managers cannot influence prices but must take them as a given and try to produce more output from a given physical input or the same output using less physical input. Proponents of productivity measures argue that basing managerial performance on productivity, which does not include uncontrollable price changes, yields a better indicator of the manager’s performance. They argue that traditional accounting measures, such as net income, include many factors that managers cannot control and do not focus enough attention on factors that managers can control such as labor productivity. The following example illustrates productivity measurement systems in more detail. Measuring productivity If the firm produces several types of outputs (large and small horseshoes) and the mix of output varies over time, then the productivity measure must somehow aggregate the quantities of outputs into a single aggregate quantity. Likewise, several inputs must be aggregated to derive a homogeneous input measure. The measure of productivity (outputs/inputs) must aggregate the multiple inputs and the multiple outputs. To measure firmwide productivity when multiple inputs and outputs exist, prices are used as the weighting factors. The productivity measure with two outputs and three inputs becomes: Output i (i = 1 or 2) and input j ( j = 1, 2, or 3) denote the physical quantities of the ith output and the jth input. Pricei and costj are the corresponding output prices and input costs. If one then compares how productivity changes over time, this aggregate measure of productivity will vary with changes in both physical quantities and relative prices. But productivity measures should exclude noncontrollable price and cost changes, thereby focusing managers’ attention on physical quantities. To exclude price and cost changes from the performance measure, yet still have a way to aggregate multiple inputs and outputs, the following scheme is used: 1. Choose a base period year and use that year’s prices and costs as the weights for future years. The base year should be one of high production, and a new base year should be chosen about every five years as the structures of production and prices change. 2. Weight the physical quantity of each input and output using the base period cost or price for that input or output. 3. Divide the weighted outputs by weighted inputs to compute the productivity index for the year. 4. Divide this year’s productivity index by last year’s to get the change in productivity.14 A simple example with two inputs (steel and labor) and two outputs (small and large horseshoes) illustrates the mechanics of the computations.15 The following data summarize operations for the last two years: Total productivity increased from 1.136 last year to 1.149 this year, or a 1.1 percent increase. Using base period prices, the productivity measure indicates that more output was produced using relatively less input. In a study of productivity systems in Canada, few firms were found to measure aggregate firmwide productivity as the ratio of firm outputs to firm inputs.16 Instead, firms develop a few distinct nonfinancial measures that capture the essential strategic elements of their business. For example, a steel company tracks tons of steel shipped divided by tons of iron purchased and tons of steel shipped divided by number of employees. In an insurance company, the number of policies processed per employee in a particular department is reported. Other companies measure yield rates, defect rates, and production rates. The study concludes (p. 132), “We believe that productivity measures are operational aids in the strategic process that helps organization members keep track of what is required for the organization to achieve its long-run goals.” bonus system for direct line supervisors and department managers to reward them for improving labor productivity. In particular, supervisors will receive bonuses if they improve their department’s labor productivity, defined as Output / Labor hours. The casting department is the primary production process whereby molten aluminum is poured into molds, cooled, and then removed to form the wheels. Operating data for the casting department for the last two months prior to announcing the labor productivity incentive program are: Calculate the productivity of direct labor for March and April and discuss how labor productivity changed between March and April. Gerry Burk asks your opinion of her proposal to increase productivity by rewarding production supervisors and plant departmental managers for increasing labor productivity. Write Ms. Burk a memo outlining your views of her plan.
Output i (i = 1 or 2) and input j ( j = 1, 2, or 3) denote the physical quantities of the ith output and the jth input. Pricei and costj are the corresponding output prices and input costs. If one then compares how productivity changes over time, this aggregate measure of productivity will vary with changes in both physical quantities and relative prices. But productivity measures should exclude noncontrollable price and cost changes, thereby focusing managers’ attention on physical quantities. To exclude price and cost changes from the performance measure, yet still have a way to aggregate multiple inputs and outputs, the following scheme is used: 1. Choose a base period year and use that year’s prices and costs as the weights for future years. The base year should be one of high production, and a new base year should be chosen about every five years as the structures of production and prices change. 2. Weight the physical quantity of each input and output using the base period cost or price for that input or output. 3. Divide the weighted outputs by weighted inputs to compute the productivity index for the year. 4. Divide this year’s productivity index by last year’s to get the change in productivity.14 A simple example with two inputs (steel and labor) and two outputs (small and large horseshoes) illustrates the mechanics of the computations.15 The following data summarize operations for the last two years:
Background Economists and managers have long recognized the importance of productivity in determining an organization’s success. Productivity is the relation between the firm’s output of goods and services and the inputs necessary to produce that output. If a firm is able to produce more output with the same inputs, we say it has improved its productivity. Likewise, if two firms produce the same quantity of goods and services but one firm uses less input, that firm is called more productive. Countries that produce more output per person generate more consumable wealth. Economists keep productivity statistics, and these numbers are reported in the financial press as measuring the competitiveness and well-being of that country. In the 1970s many of the largest U.S. firms became interested in productivity and better ways to measure and improve their firms’ productivity. Largely driven by foreign competition, these American firms were losing market share to Japanese and European rivals. Japanese auto companies were producing cars with fewer employee hours per car than American companies, thus offering lower-priced and often higher-quality cars than U.S. automakers. Foreign steel producers were more productive than their U.S. counterparts. Concerned about their declining relative productivity in 1977, large U.S. firms financed the formation of the American Productivity Center (later the American Productivity and Quality Center). To become more productive, some firms experimented with various productivity measures. In its most basic form, productivity is defined as: Productivity = Output / Input If the firm uses a single input (steel) to produce a single homogeneous product (horseshoes) that never changes over time, then the measure of productivity is the units of output per quantity of input, or the number of horseshoes per pound of steel. If steel waste is reduced, more horseshoes can be produced with the same amount of steel. One measure of productivity is the ratio of horseshoes to steel, in terms of physical volume. Steel is not the only input to making horseshoes. Labor is also an input, and labor is usually the input of most interest to managers. Productivity is usually thought of as the amount of output per unit of labor. Most managers want to know the number of horseshoes produced per person and how this number changes over time and compares to the competition. Proponents of productivity measurement systems argue that managers should focus on productivity instead of accounting profits. A firm can appear profitable but can be experiencing declining productivity if selling prices are rising faster than input prices. Productivity measures help identify these cases. Managers control the physical aspects of the manufacturing process, such as the amount of steel scrap in making horseshoes, but they cannot control the price of steel or the price of horseshoes. For the most part, managers cannot influence prices but must take them as a given and try to produce more output from a given physical input or the same output using less physical input. Proponents of productivity measures argue that basing managerial performance on productivity, which does not include uncontrollable price changes, yields a better indicator of the manager’s performance. They argue that traditional accounting measures, such as net income, include many factors that managers cannot control and do not focus enough attention on factors that managers can control such as labor productivity. The following example illustrates productivity measurement systems in more detail. Measuring productivity If the firm produces several types of outputs (large and small horseshoes) and the mix of output varies over time, then the productivity measure must somehow aggregate the quantities of outputs into a single aggregate quantity. Likewise, several inputs must be aggregated to derive a homogeneous input measure. The measure of productivity (outputs/inputs) must aggregate the multiple inputs and the multiple outputs. To measure firmwide productivity when multiple inputs and outputs exist, prices are used as the weighting factors. The productivity measure with two outputs and three inputs becomes: Output i (i = 1 or 2) and input j ( j = 1, 2, or 3) denote the physical quantities of the ith output and the jth input. Pricei and costj are the corresponding output prices and input costs. If one then compares how productivity changes over time, this aggregate measure of productivity will vary with changes in both physical quantities and relative prices. But productivity measures should exclude noncontrollable price and cost changes, thereby focusing managers’ attention on physical quantities. To exclude price and cost changes from the performance measure, yet still have a way to aggregate multiple inputs and outputs, the following scheme is used: 1. Choose a base period year and use that year’s prices and costs as the weights for future years. The base year should be one of high production, and a new base year should be chosen about every five years as the structures of production and prices change. 2. Weight the physical quantity of each input and output using the base period cost or price for that input or output. 3. Divide the weighted outputs by weighted inputs to compute the productivity index for the year. 4. Divide this year’s productivity index by last year’s to get the change in productivity.14 A simple example with two inputs (steel and labor) and two outputs (small and large horseshoes) illustrates the mechanics of the computations.15 The following data summarize operations for the last two years: Total productivity increased from 1.136 last year to 1.149 this year, or a 1.1 percent increase. Using base period prices, the productivity measure indicates that more output was produced using relatively less input. In a study of productivity systems in Canada, few firms were found to measure aggregate firmwide productivity as the ratio of firm outputs to firm inputs.16 Instead, firms develop a few distinct nonfinancial measures that capture the essential strategic elements of their business. For example, a steel company tracks tons of steel shipped divided by tons of iron purchased and tons of steel shipped divided by number of employees. In an insurance company, the number of policies processed per employee in a particular department is reported. Other companies measure yield rates, defect rates, and production rates. The study concludes (p. 132), “We believe that productivity measures are operational aids in the strategic process that helps organization members keep track of what is required for the organization to achieve its long-run goals.” bonus system for direct line supervisors and department managers to reward them for improving labor productivity. In particular, supervisors will receive bonuses if they improve their department’s labor productivity, defined as Output / Labor hours. The casting department is the primary production process whereby molten aluminum is poured into molds, cooled, and then removed to form the wheels. Operating data for the casting department for the last two months prior to announcing the labor productivity incentive program are: Calculate the productivity of direct labor for March and April and discuss how labor productivity changed between March and April. Gerry Burk asks your opinion of her proposal to increase productivity by rewarding production supervisors and plant departmental managers for increasing labor productivity. Write Ms. Burk a memo outlining your views of her plan.

Background Economists and managers have long recognized the importance of productivity in determining an organization’s success. Productivity is the relation between the firm’s output of goods and services and the inputs necessary to produce that output. If a firm is able to produce more output with the same inputs, we say it has improved its productivity. Likewise, if two firms produce the same quantity of goods and services but one firm uses less input, that firm is called more productive. Countries that produce more output per person generate more consumable wealth. Economists keep productivity statistics, and these numbers are reported in the financial press as measuring the competitiveness and well-being of that country. In the 1970s many of the largest U.S. firms became interested in productivity and better ways to measure and improve their firms’ productivity. Largely driven by foreign competition, these American firms were losing market share to Japanese and European rivals. Japanese auto companies were producing cars with fewer employee hours per car than American companies, thus offering lower-priced and often higher-quality cars than U.S. automakers. Foreign steel producers were more productive than their U.S. counterparts. Concerned about their declining relative productivity in 1977, large U.S. firms financed the formation of the American Productivity Center (later the American Productivity and Quality Center). To become more productive, some firms experimented with various productivity measures. In its most basic form, productivity is defined as: Productivity = Output / Input If the firm uses a single input (steel) to produce a single homogeneous product (horseshoes) that never changes over time, then the measure of productivity is the units of output per quantity of input, or the number of horseshoes per pound of steel. If steel waste is reduced, more horseshoes can be produced with the same amount of steel. One measure of productivity is the ratio of horseshoes to steel, in terms of physical volume. Steel is not the only input to making horseshoes. Labor is also an input, and labor is usually the input of most interest to managers. Productivity is usually thought of as the amount of output per unit of labor. Most managers want to know the number of horseshoes produced per person and how this number changes over time and compares to the competition. Proponents of productivity measurement systems argue that managers should focus on productivity instead of accounting profits. A firm can appear profitable but can be experiencing declining productivity if selling prices are rising faster than input prices. Productivity measures help identify these cases. Managers control the physical aspects of the manufacturing process, such as the amount of steel scrap in making horseshoes, but they cannot control the price of steel or the price of horseshoes. For the most part, managers cannot influence prices but must take them as a given and try to produce more output from a given physical input or the same output using less physical input. Proponents of productivity measures argue that basing managerial performance on productivity, which does not include uncontrollable price changes, yields a better indicator of the manager’s performance. They argue that traditional accounting measures, such as net income, include many factors that managers cannot control and do not focus enough attention on factors that managers can control such as labor productivity. The following example illustrates productivity measurement systems in more detail. Measuring productivity If the firm produces several types of outputs (large and small horseshoes) and the mix of output varies over time, then the productivity measure must somehow aggregate the quantities of outputs into a single aggregate quantity. Likewise, several inputs must be aggregated to derive a homogeneous input measure. The measure of productivity (outputs/inputs) must aggregate the multiple inputs and the multiple outputs. To measure firmwide productivity when multiple inputs and outputs exist, prices are used as the weighting factors. The productivity measure with two outputs and three inputs becomes: Output i (i = 1 or 2) and input j ( j = 1, 2, or 3) denote the physical quantities of the ith output and the jth input. Pricei and costj are the corresponding output prices and input costs. If one then compares how productivity changes over time, this aggregate measure of productivity will vary with changes in both physical quantities and relative prices. But productivity measures should exclude noncontrollable price and cost changes, thereby focusing managers’ attention on physical quantities. To exclude price and cost changes from the performance measure, yet still have a way to aggregate multiple inputs and outputs, the following scheme is used: 1. Choose a base period year and use that year’s prices and costs as the weights for future years. The base year should be one of high production, and a new base year should be chosen about every five years as the structures of production and prices change. 2. Weight the physical quantity of each input and output using the base period cost or price for that input or output. 3. Divide the weighted outputs by weighted inputs to compute the productivity index for the year. 4. Divide this year’s productivity index by last year’s to get the change in productivity.14 A simple example with two inputs (steel and labor) and two outputs (small and large horseshoes) illustrates the mechanics of the computations.15 The following data summarize operations for the last two years: Total productivity increased from 1.136 last year to 1.149 this year, or a 1.1 percent increase. Using base period prices, the productivity measure indicates that more output was produced using relatively less input. In a study of productivity systems in Canada, few firms were found to measure aggregate firmwide productivity as the ratio of firm outputs to firm inputs.16 Instead, firms develop a few distinct nonfinancial measures that capture the essential strategic elements of their business. For example, a steel company tracks tons of steel shipped divided by tons of iron purchased and tons of steel shipped divided by number of employees. In an insurance company, the number of policies processed per employee in a particular department is reported. Other companies measure yield rates, defect rates, and production rates. The study concludes (p. 132), “We believe that productivity measures are operational aids in the strategic process that helps organization members keep track of what is required for the organization to achieve its long-run goals.” bonus system for direct line supervisors and department managers to reward them for improving labor productivity. In particular, supervisors will receive bonuses if they improve their department’s labor productivity, defined as Output / Labor hours. The casting department is the primary production process whereby molten aluminum is poured into molds, cooled, and then removed to form the wheels. Operating data for the casting department for the last two months prior to announcing the labor productivity incentive program are: Calculate the productivity of direct labor for March and April and discuss how labor productivity changed between March and April. Gerry Burk asks your opinion of her proposal to increase productivity by rewarding production supervisors and plant departmental managers for increasing labor productivity. Write Ms. Burk a memo outlining your views of her plan.
Total productivity increased from 1.136 last year to 1.149 this year, or a 1.1 percent increase. Using base period prices, the productivity measure indicates that more output was produced using relatively less input. In a study of productivity systems in Canada, few firms were found to measure aggregate firmwide productivity as the ratio of firm outputs to firm inputs.16 Instead, firms develop a few distinct nonfinancial measures that capture the essential strategic elements of their business. For example, a steel company tracks tons of steel shipped divided by tons of iron purchased and tons of steel shipped divided by number of employees. In an insurance company, the number of policies processed per employee in a particular department is reported. Other companies measure yield rates, defect rates, and production rates. The study concludes (p. 132), “We believe that productivity measures are operational aids in the strategic process that helps organization members keep track of what is required for the organization to achieve its long-run goals.” bonus system for direct line supervisors and department managers to reward them for improving labor productivity. In particular, supervisors will receive bonuses if they improve their department’s labor productivity, defined as Output / Labor hours. The casting department is the primary production process whereby molten aluminum is poured into molds, cooled, and then removed to form the wheels. Operating data for the casting department for the last two months prior to announcing the labor productivity incentive program are:
Background Economists and managers have long recognized the importance of productivity in determining an organization’s success. Productivity is the relation between the firm’s output of goods and services and the inputs necessary to produce that output. If a firm is able to produce more output with the same inputs, we say it has improved its productivity. Likewise, if two firms produce the same quantity of goods and services but one firm uses less input, that firm is called more productive. Countries that produce more output per person generate more consumable wealth. Economists keep productivity statistics, and these numbers are reported in the financial press as measuring the competitiveness and well-being of that country. In the 1970s many of the largest U.S. firms became interested in productivity and better ways to measure and improve their firms’ productivity. Largely driven by foreign competition, these American firms were losing market share to Japanese and European rivals. Japanese auto companies were producing cars with fewer employee hours per car than American companies, thus offering lower-priced and often higher-quality cars than U.S. automakers. Foreign steel producers were more productive than their U.S. counterparts. Concerned about their declining relative productivity in 1977, large U.S. firms financed the formation of the American Productivity Center (later the American Productivity and Quality Center). To become more productive, some firms experimented with various productivity measures. In its most basic form, productivity is defined as: Productivity = Output / Input If the firm uses a single input (steel) to produce a single homogeneous product (horseshoes) that never changes over time, then the measure of productivity is the units of output per quantity of input, or the number of horseshoes per pound of steel. If steel waste is reduced, more horseshoes can be produced with the same amount of steel. One measure of productivity is the ratio of horseshoes to steel, in terms of physical volume. Steel is not the only input to making horseshoes. Labor is also an input, and labor is usually the input of most interest to managers. Productivity is usually thought of as the amount of output per unit of labor. Most managers want to know the number of horseshoes produced per person and how this number changes over time and compares to the competition. Proponents of productivity measurement systems argue that managers should focus on productivity instead of accounting profits. A firm can appear profitable but can be experiencing declining productivity if selling prices are rising faster than input prices. Productivity measures help identify these cases. Managers control the physical aspects of the manufacturing process, such as the amount of steel scrap in making horseshoes, but they cannot control the price of steel or the price of horseshoes. For the most part, managers cannot influence prices but must take them as a given and try to produce more output from a given physical input or the same output using less physical input. Proponents of productivity measures argue that basing managerial performance on productivity, which does not include uncontrollable price changes, yields a better indicator of the manager’s performance. They argue that traditional accounting measures, such as net income, include many factors that managers cannot control and do not focus enough attention on factors that managers can control such as labor productivity. The following example illustrates productivity measurement systems in more detail. Measuring productivity If the firm produces several types of outputs (large and small horseshoes) and the mix of output varies over time, then the productivity measure must somehow aggregate the quantities of outputs into a single aggregate quantity. Likewise, several inputs must be aggregated to derive a homogeneous input measure. The measure of productivity (outputs/inputs) must aggregate the multiple inputs and the multiple outputs. To measure firmwide productivity when multiple inputs and outputs exist, prices are used as the weighting factors. The productivity measure with two outputs and three inputs becomes: Output i (i = 1 or 2) and input j ( j = 1, 2, or 3) denote the physical quantities of the ith output and the jth input. Pricei and costj are the corresponding output prices and input costs. If one then compares how productivity changes over time, this aggregate measure of productivity will vary with changes in both physical quantities and relative prices. But productivity measures should exclude noncontrollable price and cost changes, thereby focusing managers’ attention on physical quantities. To exclude price and cost changes from the performance measure, yet still have a way to aggregate multiple inputs and outputs, the following scheme is used: 1. Choose a base period year and use that year’s prices and costs as the weights for future years. The base year should be one of high production, and a new base year should be chosen about every five years as the structures of production and prices change. 2. Weight the physical quantity of each input and output using the base period cost or price for that input or output. 3. Divide the weighted outputs by weighted inputs to compute the productivity index for the year. 4. Divide this year’s productivity index by last year’s to get the change in productivity.14 A simple example with two inputs (steel and labor) and two outputs (small and large horseshoes) illustrates the mechanics of the computations.15 The following data summarize operations for the last two years: Total productivity increased from 1.136 last year to 1.149 this year, or a 1.1 percent increase. Using base period prices, the productivity measure indicates that more output was produced using relatively less input. In a study of productivity systems in Canada, few firms were found to measure aggregate firmwide productivity as the ratio of firm outputs to firm inputs.16 Instead, firms develop a few distinct nonfinancial measures that capture the essential strategic elements of their business. For example, a steel company tracks tons of steel shipped divided by tons of iron purchased and tons of steel shipped divided by number of employees. In an insurance company, the number of policies processed per employee in a particular department is reported. Other companies measure yield rates, defect rates, and production rates. The study concludes (p. 132), “We believe that productivity measures are operational aids in the strategic process that helps organization members keep track of what is required for the organization to achieve its long-run goals.” bonus system for direct line supervisors and department managers to reward them for improving labor productivity. In particular, supervisors will receive bonuses if they improve their department’s labor productivity, defined as Output / Labor hours. The casting department is the primary production process whereby molten aluminum is poured into molds, cooled, and then removed to form the wheels. Operating data for the casting department for the last two months prior to announcing the labor productivity incentive program are: Calculate the productivity of direct labor for March and April and discuss how labor productivity changed between March and April. Gerry Burk asks your opinion of her proposal to increase productivity by rewarding production supervisors and plant departmental managers for increasing labor productivity. Write Ms. Burk a memo outlining your views of her plan.
Calculate the productivity of direct labor for March and April and discuss how labor productivity changed between March and April. Gerry Burk asks your opinion of her proposal to increase productivity by rewarding production supervisors and plant departmental managers for increasing labor productivity. Write Ms. Burk a memo outlining your views of her plan.





Transcribed Image Text:

Output, X Price, + Output; X Pricez Productivity = Input, x Cost, + Input, X Cost, + Input, X Cost, TABLE 1 Physical Quantities Base Year Last This Inputs/Outputs Prices Year Year Outputs: Small horseshoes $2 $3 500 600 Large horseshoes Inputs: Steel 500 550 $1 $4 1,000 1,200 Labor 300 320 TABLE 2 Inрuts/Ouрuts Last Year This Year Outputs: Small horseshoes $1,000 $1,200 Large horseshoes 1,500 1,650 Total outputs $2,500 $2,850 Inputs: Steel $1,000 1,200 $1,200 Labor 1,280 Total inputs $2,200 $2,480 $2,500 $2,850 Productivity $2,200 $2,480 = 1.136 = 1.149 1.149 – 1.136 Increase in productivity 1.1% 1.136 March April Wheels cast 1,680 1,710 Direct labor hours 722 701 Aluminum used (pounds) Direct labor wages/hour Price of aluminum/pound 14,616 15,219 $23.10 $23.75 $ 0.92 $ 0.91

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> A punch press currently in use has a book value of $1,800 and needs design modifications totaling $16,200, which would be capitalized at the present time and depreciated. The press can be sold for $2,600 now, but it could be used for three more years if

> Can opportunity costs be negative? Give an example.

> Chateau Napa purchased a small vineyard and is now producing magnum bottles (1.5 liters) of Redwood Cabernet Sauvignon. This wine is much sought after, and bottling the wine in larger bottles enhances its quality, prestige, and demand. Because of the lim

> Celtex is a large and very successful decentralized specialty chemical producer organized into five independent investment centers. Each of the five investment centers is free to buy products either inside or outside the firm and is judged based on resid

> Fuller Aerosols manufactures six different aerosol can products (room deodorants, hair sprays, furniture polish, and so forth) on its fill line. The fill line mixes the ingredients, adds the propellant, fills and seals the cans, and packs the cans in cas

> Amos Doral owns a small store that rents punchbowls, dishes, silverware, glassware, tables, and chairs to people having large parties. Amos runs the business by himself. He is considering adding power spray painters to his inventory of rentable items. A

> Communities are frequently concerned about whether or not police are vigilant in carrying out their responsibilities. Several communities have experimented with incentive compensation for police. In particular, some cities have paid members of the police

> A present investment of $50,000 is expected to yield receipts of $8,330 a year for seven years. What is the internal rate of return on this investment?

> Transmation, with sales of over $2.2 billion, builds and markets several of the world's leading brands of construction and agricultural equipment. Transmation has three operating divisions that are decentralized investment centers. While the three divisi

> Chris Maynard, one of Heath Metal Products’s three customer engineers, is reviewing the costs of the radar housings for Lingle Aerospace (LA). LA is one of Maynard’s largest accounts and the radar housing is a fabricated piece of sheet metal LA uses to a

> Republic Insurance has a direct sales force that sells life insurance policies. All salespeople at the beginning of the year forecast the number of policies they expect to sell that year. At the end of the year, they are evaluated based on how many polic

> Infantino Saab is a car dealership that has been in business for 40 years at the same 20-acre location selling and servicing new and “pre-owned” (used) Saabs. Two years ago Infantino Saab replaced its aging showroom an

> An investment project involves the purchase of equipment at a cost of $100 million. For tax purposes, the equipment has a life of five years and will be depreciated on a straight-line basis. Inflation is expected to be 5 percent and the real interest rat

> Astin Car Stereos manufactures and distributes four different car stereos. The accompanying table summarizes the unit sales, selling prices, and manufacturing costs of each stereo. Selling and distribution (S&D) expenses are $1,270,000. They are trea

> You are working on a special assignment as a financial analyst for the president of household products of RBB Brands. RBB Brands is a large $4 billion diversified consumer products firm. RBB has two divisions, household products and foods, each headed by

> Oppenheimer Visuals manufactures state-of-the-art flat-panel plasma display screens that large computer companies like Dell and Gateway assemble into flat-panel monitors. Oppenheimer produces just the display panels, not any of the electronics, cases, or

> Physicians practicing in Eastern University’s hospital have the following compensation agreement. Each doctor bills the patient (or Blue Cross Blue Shield) for his or her services. The doctor pays for all direct expenses incurred in the clinic, including

> The Linda Lion Co. has an investment opportunity that involves a current outlay of $1,000 for equipment. The investment will yield net cash inflows for four years. The net cash inflow at the end of the first year will be $400. Later years’ cash inflows g

> SnapOn makes snap-together button fasteners (a male top and female bottom) for designer clothes Each top and bottom consists of several metal parts that, when attached to the garment, allow the shirt, jacket, or pants to be closed without the use of a zi

> Hurst Mats manufactures custom replacement floor mats for automobiles. The floor mats are made of spun nylon on highly automated, expensive machinery. Hurst manufactures two mat styles: Plush and Deluxe. Hurst’s unionized work force mak

> The Lancaster Chamber Orchestra is a small community orchestra that offers two distinct concert series for its patrons. Series A is devoted entirely to the performance of a classical repertoire and offers 10 concerts throughout the year, while Series B c

> Littleton Medical Center (LMC) has three service departments (accounting, human resources, and Janitorial/maintenance) and two patient units: hospital and an outpatient clinic. The following table summarizes the operations of LMC for the last fiscal year

> Tax laws in Japan tie taxable income directly to the financial statements’ reported income. That is, to compute a Japanese firm’s tax liability, multiply the net income as reported to shareholders by the appropriate tax rate to derive the firm’s tax liab

> Roberts Machining specializes in fabricating metal racks that hold electronic equipment such as telephone switching units, power supplies, and so forth. Roberts designs and produces the metal stamping dies used to fabricate the racks. It is currently fab

> Rick’s Bags manufactures both golf bags and tennis totes. Fixed manufacturing overhead is budgeted to be $187,200, variable manufacturing overhead is budgeted to be $1.10 per direct labor hour, and fixed selling and administration costs are budgeted to b

> Bio Labs is a genetic engineering firm manufacturing a variety of gene-spliced, agricultural-based seed products. The firm has five separate laboratories producing different product lines. Each lab is treated as a profit center and all five labs are loca

> Woodley Furniture is a small boutique manufacturer of high quality contemporary wood tables. They make two models: end tables and coffee tables in a variety of different woods and finishes. Current annual production of end tables is 8,000 units that sell

> Madigan produces a single high-speed modem. The following table summarizes the current month’s budget for Madigan’s modem production: Projected production and sales ………………………. 4,000 units Variable costs ………………………………………………… $ 640,000 Fixed costs ………………………

> A Wall Street Journal article (December 26, 1996) describes a series of changes at the Pratt & Whitney plant in Maine that manufactures parts for jet engines. In 1993 it was about to be closed because of high operating costs and inefficiencies. A new pla

> At the beginning of year 1, Northern Sun, Inc., a food processing concern, is considering a new line of frozen entrees. The accompanying table shows projected cash outflows and inflows. Assume that all inflows and outflows are end-of-period payments. Req

> Golf World is a 1,000-room luxury resort with swimming pools, tennis courts, three golf courses, and many other resort amenities. The head golf course superintendent, Sandy Green, is responsible for all golf course maintenance and conditioning. Green als

> Brehm Vineyards grows a unique white pinot noir grape that they use to produce a white wine that is in high demand. Brehm uses all the grapes they can grow to produce their own white pinot noir wine. Brehm pinot noir wine contains 100 percent Brehm-grown

> The keyboard division of XBT, a personal computer manufacturing firm, fabricates 50-key keyboards for both XBT and non-XBT computers. Keyboards for XBT machines are included as part of the XBT personal computer and are also sold separately. The keyboard

> Turow Trailers assembles horse trailers. Two models are manufactured: G7 and V8. While labor intensive, the production process is not very complicated. The single plant produces all the trailers with 48 work teams of two or three workers. Sixteen supervi

> Golf Specialties (GS), a Belgian company, manufactures a variety of golf paraphernalia, such as head covers for woods, embroidered golf towels, and umbrellas. GS sells all its products exclusively in Europe through independent distributors. Given the pop

> Diagnostic Imaging Software (DIS) is the leading producer of imaging software for the health sciences. DIS develops, writes, produces, and sells its software through two direct selling organizations: North America and South America. Each of these direct

> Critically evaluate the statement: The step-down method is better than the direct allocation method because at least the step-down method captures on average half of the service flows between service departments. By comparison, the direct allocation meth

> A proposed cost-saving device has an installed cost of $59,400. It will be depreciated for tax purposes on a straight-line basis over three years (zero salvage), although its actual life will be five years. The tax rate is 34 percent and the required rat

> Background Artisans Shirtcraft manufactures and sells hand-painted shirts of original design. The company was founded in 1999 by three sisters: Cathy, Linda, and Valerie Montgomery. Shirtcraft started out as a means of financing a hobby; profits from shi

> Flat Images develops and manufactures large, state-of-the-art flat-panel television screens that consumer electronic companies purchase and incorporate into a complete TV unit by adding the case, mounting brackets, tuner, amplifier, other electronics, an

> Exotic Roses, owned by Margarita Rameriz, provides a variety of rare rose bushes to local nurseries that sell Rameriz’s roses to the end consumer (landscapers and retail customers). Rameriz grows the roses from cuttings that she has spe

> Frames, Inc., manufactures two types of metal frames: large and small. Steel angle iron is first cut to the appropriate sizes; the pieces are then welded together to form the frames. The process involves a high degree of automation. There is considerable

> In 1995 Global Oil Corporation’s Marketing and Refining (M&R) Division was the fifth largestU.S. refiner with 7,700 Global-branded service stations selling about 23 million gallons per day, or 7 percent of the nation’s gasoline. All the service stations

> Giza Farms in Cairo, Egypt, has a corporate headquarters staff and three operating divisions: consulting services, chemicals, and agricultural products. Giza is considering allocating 160 million Egyptian pounds of corporate overhead (which includes sala

> Beckett Manufacturing is a contract manufacturer that assembles products for other companies. Beckett has two service departments, Maintenance and Administration, and two operating divisions, Small Components and Large Components. The following data summ

> Plastic Chairs manufactures plastic lawn chairs using a combination of new and recycled plastic. Varying amounts of each type of plastic can be used to produce a batch of 100 chairs. The table below lists the various combinations of recycled and new plas

> ITI Technology designs and manufactures solid-state computer chips. In one of the production departments, employees fabricate a six-inch circular wafer by laying down successive layers of silicon and then etching the circuits into the layers. Each wafer

> R&D Inc. has the following financial data for the current year (millions): Earnings before R&D expenditures……………………………………. $21.5 Interest expense……………………………….………………………………. $0.0 R&D expenditures…………………………….………………………………. $6.0 Total invested capital (excl

> Blauvelt Products uses a flexible budget to set the overhead rate at the beginning of the year based on units produced. In year 1 budgeted fixed overhead is $1 million and budgeted variable overhead is $2 per unit. Direct material and direct labor togeth

> Is it preferable to use an accelerated depreciation method rather than the straight-line method for tax purposes?

> Robert S. Kaplan in “One Cost System Isn’t Enough” (Harvard Business Review, January–February 1988, pp. 61–66) states, No single system can adequately answer the demands made by diverse functions of cost systems. While companies can use one method to cap

> Commando Force is a new set of children’s action toys consisting of three separately sold pieces: Matt, Kim, and the multi-terrain vehicle (MTV). The MTV can be used by itself or it can hold Matt or Kim or both. With male and female act

> Madden International is a large ($7 billion sales), successful international pharmaceuticals firm operating in 23 countries with 15 autonomous subsidiaries. The corporate office consists of five vice presidents who oversee the operations of the subsidiar

> The Transfer Price Company has two divisions (Intermediate and Final) that report to the corporate office (Corporate). The two divisions are profit centers. Intermediate produces a proprietary product (called “intermedâ€&#157

> ICB has four manufacturing divisions, each producing a particular type of cosmetic or beauty aid. These products are then transferred to five marketing divisions, each covering a particular geographic region. Manufacturing and marketing divisions are fre

> Logical Solutions reports the following overhead variances for 2010: Spending variance …………………………………$100,000 F Efficiency variance …………………………………$100,000 F Volume variance …………………………………..$300,000 F In addition, actual overhead incurred in 2010 was $1 mill

> Repro Corporation is the leading manufacturer and seller of office equipment. Its most profitable business segment is the production and sale of large copiers. The company is currently organized into two divisions: manufacturing and sales. Manufacturing

> The Ogden plant makes Beanie Babies, small stuffed toys in a variety of animal shapes. The toys are so popular that they have become collectors’ items. The plant uses a flexible budget and predetermined overhead rates to assign overhead costs to the diff

> Geico is considering expanding an existing plant on a piece of land it already owns. The land was purchased 15 years ago for $325,000 and its current market appraisal is $820,000. A capital budgeting analysis shows that the plant expansion has a net pres

> You work for the strategy group of Adapt Inc., a firm that designs and manufactures memory cards for digital cameras. Your task is to gather intelligence about Adapt’s key competitor, DigiMem, a privately held company. Your boss has asked you to estimate

> Rothwell Inc. is the leader in computer-integrated manufacturing and factory automation products and services. The Rothwell product offering is segmented into 15 product categories, based on product function and primary manufacturing location. Rothwell’s

> Sunder manufactures hard rubber pet toys. The purple dog chewy has a variable cost of $3.00 per unit. It is produced on a machine that is leased. The three models of this machine have three different capacities. Maximum Daily Daily Lease Capacity (Units)

> Eastern Educational Services is considering the following proposal to sell its teaching machine and purchase a new, improved machine. The following data are presented by the department head: Additional information: 1. The company expects to produce 10,00

> JLE Electronics is an independent contract manufacturer of complex printed circuit board assemblies. Computer companies and other electronics firms engage JLE to assemble their boards. Utilizing computer-controlled manufacturing and test machinery and eq

> Salespeople at a particular firm forecast what they expect to sell next period. Their supervisors then review the forecasts and make revisions. These forecasts are used to set production and purchasing plans. In addition, salespeople receive a fixed bonu

> The Mopart Division produces a single product. Its standard cost system uses a flexible budget to assign indirect costs on the basis of standard direct labor hours. At the budgeted volume of 4,000 direct labor hours, the standard cost per unit is as foll

> The standard cost sheet calls for 80 pounds of zinc per batch of 70 faucets. Zinc has a standard price of $5.10 per pound. One thousand pounds of zinc are purchased for $5,530. Ten batches of the faucets are produced, and 840 pounds of zinc are used. The

> Kitchen Rite is considering outsourcing the production of a steel chassis that is used in a kitchen appliance. Two thousand chassis are produced per month. An outside vendor will supply an identical chassis for $9.90. The chassis is manufactured in two s

> A firm has four service centers, S1, S2, S3, and S4, which provide services to each other, as well as to three operating divisions, A, B, and C. The distribution of each service center’s output as well as its cost (in millions) is given

> Employees at White’s Department Store are observed engaging in the following behavior: (1) They hide items that are on sale from the customers and (2) they fail to expend appropriate effort in designing merchandise displays. They are also uncooperative w

> The Mowerson Division of Brown Instruments manufactures testing equipment for the automobile industry. Mowerson’s equipment is installed in several places along an automobile assembly line for component testing and is also used for reco

> Assuming the firm sells everything it produces and assuming that variable cost per unit does not change with volume, total profits are higher as volume increases because fixed costs are spread over more units. Required: a. True or false? b. Explain your

> Fast Photo operates four film developing labs in upstate New York. The four labs are identical: They employ the same production technology, process the same mix of films, and buy raw materials from the same companies at the same prices. Wage rates are al

> Equity Corp. paid a consultant to study the desirability of installing some new equipment. The consultant recently submitted the following analysis: Cost of new machine………………………………………………………. $100,000 Present value of after-tax revenues from operation ………

> Employee satisfaction is a major performance measure used at American Inter Connect (AI), a large communications firm. All employees receive some bonus compensation. The lower-level employees receive a bonus that averages 20 percent of their base pay whe

> The Chicago Omni Hotel is a 750-room luxury hotel offering guests the finest facilities in downtown Chicago. The hotel is organized into four departments: lodging, dining, catering, and retail stores. Each of these departments is treated as a profit cent

> One MBA student was overheard saying to another, “Accounting is baloney. I worked for a genetic engineering company and we never looked at the accounting numbers and our stock price was always growing.” “I agree,” said the other. “I worked in a rust buck

> City Hospital is a city government-owned and -operated hospital providing basic health care to low income people. Most of the hospital’s revenues are from federal, state, county, and city governments. Some patients covered by private insurance are also a

> Savannah Products, a small integrated wood and lumber products company with substantial timber holdings, has two divisions: Forest and Lumber. Forest Division manages the timber holdings, maintains the land, and plants and harvests trees. It acquired its

> Background Woodhaven Service is a small, independent filling station located in the Woodhaven section of Queens. The station has three gasoline pumps and two service bays. The repair facility specializes in automotive maintenance (oil changes, tune-ups,

> Secure Servers Inc. (SSI) is one of the largest software and service providers directed at providing high levels of backup and security for computer servers to the financial community, military, and other clients requiring off-site backup and security sy

> Sanchez Gadgets purchases innovative home kitchen gadgets from around the world (such as kitchen torch, a pasta maker, and an automatic salad spinner) and sells them to specialty cooking retail stores. Sanchez has a marketing department that locates and

> Phonetex is a medium-size manufacturer of telephone sets and switching equipment. Its primary business is government contracts, especially defense contracts, which are very profitable. The company has two plants: Southern and Westbury. The larger plant,

> Jason Rocks is small rock quarry that produces five different sizes of stones, from small crushed stones (#1 stones) to large (3-inch) rocks (#5 stones). The stones are first mined and sorted into the five grades. Once the stones are mined and sorted, th

> It is often argued that private country clubs tend to have low-quality food operations because the members do not join or frequent their clubs for the food but rather for the golf and fellowship. (Note: A private country club charges an initiation fee an

> DVDS manufactures and sells DVD players in two countries. It manufactures two models—Basic and Custom—in the same plant. The Basic DVD has fewer options and provides lower-quality output than the Custom DVD. The basic

> Farmers in a valley are subject to occasional flooding when heavy rains cause the river to overflow. They have asked the federal government to build a dam upstream to prevent flooding. The construction cost of this project is to be repaid by the farm own

> Measer Enterprises produces standardized telephone keypads and operates in a highly competitive market in which the keypads are sold for $4.50 each. Because of the nature of the production technology, the firm can produce only between 10,000 and 13,000 u

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