Chapter 16 – Operational Performance Measurement: Further Analysis of Productivity and Sales
Chapter 16
Operational Performance Measurement: Further
Analysis of Productivity and Sales
Learning Objectives
1. Explain the strategic role of the flexible budget in analyzing productivity and sales.
2. Calculate and interpret the measures for total productivity, partial operational productivity and
partial financial productivity.
3. Use the flexible budget to calculate and interpret the sales quantity, sales mix, market size, and
market share variances.
4. Use the flexible budget to analyze sales performance over time.
New in this Edition
Two New Real World Focus (RWF) items related to productivity
Seven new or revised problems
Teaching Suggestions
The critical success factors for many firms include the effectiveness of sales and marketing efforts,
productivity of operations, and the retention and acquiring profitable customers. This chapter explains
how variance analysis is used to analyze the effectiveness of sales and marketing, the productivity of
operations, and, to complete analyses of marketing effectiveness, the identification of customer
profitability. The analytic schemes for sales and marketing analysis and for productivity are a natural
follow-up to the standard costing material presented in Chapters 15 and 16. A unique aspect of the
presentation is its unified approach — the different forms of analysis are shown in a way that shows
clearly how they are inter-related and can be integrated.
The three topics can be covered in three class periods. However, because of time constraints, you may
find you can only spend one or two days on this chapter, covering only two of the three topics. You might
begin with a short presentation on the strategic role of marketing effectiveness and explain the business
purpose of the variances — the control of the marketing and sales function and effectiveness in attaining
the strategic goals. Then give an overview of all the variances and then focus on the selling price and
volume variances before moving on to sales mix, sales quantity, market share, and market size variances.
Finally, move on to customer profitability analysis and productivity analysis.
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Chapter 16 – Operational Performance Measurement: Further Analysis of Productivity and Sales
Assignment Matrix
End-of-Chapter Exercises & Problems Learning Objectives Text Features
7e
EOC
6e
EOC
Transition
6e to 7e
X = included in Connect
Time
1.
Strategic role of productivity and sales
2.
Total and partial productivity
3.
Sales quantity, mix, market size and
variances
4.
Sales performance over time
Strategy
Service
International
Ethics
Sustainability
Brief Exercises
16-22 Moved to 16-25
16-22 16-28 Moved X 05 min X
16-23 16-23 X 05 min X
16-24 16-24 X 05 min X
16-25 Moved to 16-28
16-25 16-22 Moved X 05 min X
16-26 16-26 X 05 min X
16-27 16-27 X 05 min X
16-28 Moved to 16-22
16-28 16-25 Moved X 05 min X
Exercises
16-29 16-29 – 15 min. X X
16-30 16-30 – 15 min. X X X X
16-31 16-31 – 15 min. X X
16-32 16-32 X 20 min. X
16-33 16-33 X 20 min. X
16-34 16-34 – 15 min. X X
16-35 16-35 – 20 min. X X
16-36 16-36 – 20 min. X
16-37 16-37 – 20 min. X
16-38 16-38 – 20 min. X X
16-39 16-39 X 30 min. X X
16-40 16-40 X 25 min. X
Problems
16-41 16-41 Revised – 15 min. X
16-42 16-42 Revised – 30 min. X
16-43 16-43 Revised – 15 min. X
16-44 16-44 Revised – 45 min. X
16-45 16-45 Revised – 30 min. X
16-46 16-46 – 30 min. X
16-47 16-47 – 20 min. X
16-48 16-48 – 15 min. X X
Continued on next page …
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Chapter 16 – Operational Performance Measurement: Further Analysis of Productivity and Sales
Assignment Matrix continued
End-of-Chapter Exercises & Problems Learning Objectives Text Features
7e
EOC
6e
EOC
Transition
6e to 7e
X = included in Connect
Time
1.
Strategic role of productivity and
sales
2.
Total and partial productivity
3.
Sales quantity, mix, market size and
riances
4.
Sales performance over time
Strategy
Service
International
Ethics
Sustainability
16-49 16-49 Revised – 25 min. X X
16-50 16-50 – 40 min. X
16-51 16-51 – 30 min. X X X
16-52 16-52 Revised – 20 min. X
16-53 16-53 – 20 min. X X
16-54 16-54 – 15 min. X
16-55 16-55 – 20 min. X X
16-56 16-56 – 35 min. X X
16-57 16-57 – 25 min. X X
16-58 16-58 – 30 min. X
Lecture Notes
Productivity
Productivity is the ratio of output to input. The higher the ratio is, the better.
Common Benchmark for Productivity Measures
• performance of a previous year,
• performance of another division of the firm,
• performance of a competitor, and
• a target measure set by management.
Classification of productivity measures:
Total productivity
Partial productivity
Operational productivity
Financial productivity
Total productivity measures the relationship between the output attained and the total input costs of all
the input resources.
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Chapter 16 – Operational Performance Measurement: Further Analysis of Productivity and Sales
The numerator can be either in number of units or in dollar amount of the output attained.
Partial productivity focuses on only the relationship between one of the inputs such as, units of
materials, persons employed, machine hours, and the output attained. In contrast total productivity
includes all the input resources.
An operational partial productivity is the required number of units of an input resource for the
production of one unit of the output.
A financial partial productivity is the number of units of output manufactured or the dollar generated
for each dollar of an input resource the firm spent.
Difference In Computations Between Operational And Financial Partial Productivity
The difference is in the denominator– an operational partial productivity uses the units of the input factor
while a financial partial productivity uses the dollar amount of the input factor.
Advantage of total productivity measures
Using a total productivity measure decreases the possibility of manipulating one or two manufacturing
factors to improve the measure.
Partitioning Financial Productivity
A financial productivity can be separated into changes due to:
productivity change – the difference between the actual and the budgeted quantity of input resources
for the manufacturing of the output,
input price change – the effects of differences in prices for the input resource between the actual price
paid and the budgeted (or a benchmark) price, and
output change – the change in cost due to changes in units of output.
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Chapter 16 – Operational Performance Measurement: Further Analysis of Productivity and Sales
An Example:
Current year: Manufactured 500 units with 1,000 pounds of materials at $4 per pound.
Last year: Manufactured 400 units with 1,000 pounds of materials at $5 per pound.
Productivity: Current year = 500/1,000 = 0.5; Last year = 400/1000 = 0.4
Output unit: 500 500 500 600
1/Productivity: × 2 × 2.5 × 2.5 × 2.5
Input cost: × $4 × $4 × $5 × $5
$4,000 $5,000 $6,250 $7,500
Productivity Change Input Price Change Output Change
= $4,000 – $5,000 = $5,000 – $6,250 = $6,250 – $7,500
= $1,000 Favorable = $1,250 Favorable = $1,250 Favorable
Measuring Productivity In Service Industries Or Not-For-Profit Organizations
Same concepts for measuring productivity are applicable to service industries and not-for-profit
organizations.
Some limitations:
oimprecise output measures,
olack of definite relationships between output and input resources, and
othe absence of revenue for not-for–profit organizations.
Managing Marketing effectiveness
Marketing effectiveness includes achieving budgeted operating income, attaining budgeted market share,
and adapting to changes in the market. To be effective management needs to monitor changes in selling
prices, sales volumes, sales mix, market sizes, and market shares on operations and the strategy of the
firm so that appropriate actions can be taken at the earliest time in responses to the changes. The
following exhibit shows the relationships of these variances.
Components of Sales Variance
Sales Variance
Selling Price Variance Sales Volume Variance
(Included in flexible budget variance)
Sales Quantity Variance Sales Mix Variance
Market Size Variance Market Share Variance
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Chapter 16 – Operational Performance Measurement: Further Analysis of Productivity and Sales
Selling price variance is the difference between the dollar amount received from all the units sold and
the dollar amount the firm would have received had the firm sold these units at the master budgeted
selling price per unit.
Selling Actual Budgeted Number
Price = Selling Price – Selling Price × of Units
Variance Per Unit Per Unit Sold
This variance is included in the flexible budget variance.
Sales volume variance is the difference in contribution margins or operating incomes between the
flexible budget amount and the master (static) budget.
Sales Number Number of Budgeted (Standard)
Volume = of Units – Units in the × Contribution
Variance Sold Master Budget Margin Per Unit
Components of Sales Volume Variance
Firms with multiple products need to decompose sales volume variances into sales mix and sales quantity
variances.
Sales mix is the proportion of the unit of each product or service to the total units of products or services
of the firm. A sales mix variance measures the effect on operating income of the difference between the
actual sales mix and the budgeted sales mix of a firm during the period.
Sales Mix Actual sales Actual sales Total number Budgeted contribution
Variance = mix ratio of × mix ratio of × of units of all × margin per unit of
Of a Product the product the product products sold the product
Sales quantity variances of a product measures the effect of changes in the number of units sold from
the number of units budgeted to be sold. It is the product of three elements: (1) the difference between the
budgeted and the actual total sales quantity, (2) the budgeted sales mix, and (3) the budgeted contribution
margin per unit of the product.
Sales Total Budgeted Budgeted Sales Budgeted Contribution
Quantity = Units × Total Units × Mix Ratio of × Margin per Unit of
Variance Sold to be sold the Product the Product
Components of Sales Quantity Variance
Contribution factors to a sales quantity variance include changes in the total market size and in the firm‘s
market share.
The market size variance assesses the effect of changes in the total market sizes of the industry on the
firm’s operating income and is determined by the product of three factors: 1) the difference between the
actual and the budgeted total units of the market, 2) the budgeted market share of the firm, and 3) the
weighted average budgeted contribution margin per unit.
Market Actual Budgeted Budgeted Budgeted Weighted
Size = Total × Total × Market × Contribution
Variance Market Market Share Margin Per Unit
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Chapter 16 – Operational Performance Measurement: Further Analysis of Productivity and Sales
The market share variance measures the effect of changes in the firm’s market share on the firm’s
contribution and operating income and is the product of three elements: 1) the actual total units of the
market, 2) the difference between the actual and the budgeted market shares of the firm, and 3) the
average budgeted standard contribution margin per unit.
Market Actual Budgeted Actual Budgeted Weighted
Share = Market × Market × Market × Contribution
Variance Share Share Size Margin Per Unit
Strategic Implications Of Marketing Variances
Favorable variances in both selling price and market share variances can be a signal of unexplored
market potential.
A tactical action of reducing prices to gain market shares is likely to be a right decision if
the product is at the growth stage, or
the increases in operating income from the favorable market share variance is greater than the
decrease in operating income due to unfavorable selling price variance.
A tactical action of reducing prices to gain market shares is likely to be futile in a mature market.
Unfavorable market share variance is a sign that management needs to heed.
Expansions during periods of declining market sizes can lead to overcapacities, decline in prices and
operating profits, or financial distress.
The Five Steps of Strategic Decision Making for Schmidt Machinery
Schmidt Machinery is a well-established firm that produces very high-quality all-weather furniture which
is used on patios, decks, and sunrooms. Product XV-1 is a lightweight but durable lounge chair and FB-
33 is a lightweight and durable table. Because of its very high quality and reputation for design
innovation, Schmidt’s products are sold largely by catalog, and over the firm’s web site; a few high-end
retailers also carry the brand. The firm has few direct competitors in the U.S., but there are a growing
number of competitors from Europe and Asia. Also, the falling dollar has helped Schmidt maintain its
domestic sales and to have some opportunities for foreign sales. However, a global economic recession
and a recent rise in the dollar has reduced sales worldwide. While Schmidt’s sales have increased, the
company is concerned that the recession will deepen and that sales of its products will eventually be
affected. Schmidt is facing questions such as which production lines to close and which product
advertising to increase or decrease, should that happen. Schmidt know that the XV-1 product has a larger
percentage of its sales overseas than FB-33, but is not sure which of its two products should be supported
at this difficult time.
1. Determine the Strategic Issues Surrounding the Problem
Schmidt is a differentiated manufacturer, selling a high-priced product to those who value its quality,
design, and functionality. With the growth of foreign competition and the increased price competition,
Schmidt is now looking for ways to maintain its profitability by determining an effective marketing
strategy for its two products.
2. Identify the Alternative Actions
The question facing Schmidt is whether to scale back production and marketing of one or both of its
products.
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