CHAPTER 16 MANAGING PRODUCTIVITY AND MARKETING EFFECTIVENESS EXPECTED LEARNING OUTCOMES After studying this chapter, you should be able to... ie 2. Describe productivity. Compute and interpret partial operational and financial productivity Compute and interpret total productivity Understand the components of sales variance to assess marketing effectiveness Sales price variance Sales volume variance Sales mix variance Sales quantity variance Market size variance Market share variance =o 29T9 ooeeCHAPTER 16 MANAGING PRODUCTIVITY AND - MARKETING EFFECTIVENESS / Managing Productivity Sustaining profitabili ‘at improving market share requires ability and maintaining or 1” a: effective marketing activities, effectiveness in marksting Tone tenants Proper consideration of factors such as selling Price sales volume, and market Price, market share and productivity. Being abie to produce more with less resources is the story behind progress and success:: This is a strategic critical success factor that all firms and organizations regardless of their chosen competitive strategy strive to attain. — Productivity has become the wealth not only of the business enterprise but of nations as well, Improvements in productivity is achieved when fewer workers, materials, machines or other resources are used to manufacture and sell the same or better products. Among the benefits that higher productivity brings about to business firms are (1) competitive advantages, (2) higher-than-average returns, earnings and (3) attainment of long-term success. Measuring Productivity A productivity measure that includes all iny total productivity. For example, the numb: put resources used in production is 4 manufacturing costs is a er of tables manufac of i total i ctured per peso 0! me al manufacturing mais measure because the denominator summarizes productivity measures ncurred to make the tables. Figure 16-1Managing P, ‘roductivit re 16-1: Productivity Measures ar righ! Operational productivity ‘ Partial financial productivity ‘otal productivity (financial productivity) productivity is the ratio of output to input. Productivit = Output ity _ pt Input ‘A company that spends five (5) days to manufa i i ‘ icture 200 units has ivi of 40 units per day. To improve productivity, firms need to know a Productivity levels of their operations. the productivity A productivity measure is often compared to the performance of a prior period, another firm, the industry standard or a benchmark in assessing a firm’s productivity. Measures of productivity are applicable to all organizations including service firms and not-for-profit organizations. However, imprecise measure of output, lack of definite relationships between output and input resources, or absence of revenue for not-for-profits may limit the usefulness of productivity measures for service or not-for-profit organization. A measure of productivity can be either an operational or financial productivity measure: 2 _Qutput units Operational Productivity F Input units Financial Productivity = P inputBOD _ Charter 16 Partial productivity Basic formula is: jors to the output relates one or part of the input fact Output ne Direct materials yield = JTnput of materials Workforce productivity: aah rife Output. sont Output per labor-hour = Input of labor hours Output Ae OU Output per person employed. =X}. of labor force Output Process (activity) productivity = G-ching hours used” PARTIAL PRODUCTIVITY i i ionship between the output and one or part A partial productivity measures the relationship ’ : of the Ged input resources used in producing the output. The higher the ratio is, the better. It is computed as follows: Number of units or value or Partial Productivity = output manufactured Number of units or cost of a single or part of the input resources hhe numerator is the number of nits or value of the goods or services produ he denominator is the number or cost of a mani facturing factor such as direct i a manu! h materials, direct labor-hours, or selected input resources, A partial ic ivity ii A part to prod Ereductiy 's the required physical amount of an input x Mt Output, while a ut resource is the number of Units or the val Spent on the Input resource, Partial financial productivity of # lue of output manufactured for ea°!Cea Afanaging Productivit absolosia te wily and Marketing Efecto is weness Se facturing, XOX dil n din of Press Tool Company i atacturing costs include total fixed mete, cvaable tthe aay The wes of P300,000 per year and ee iqitctory Overhead nd ober open 1 operating e . ; tae rnetal alloy (direct materials and diteck eens mnutacturing costs consisting of hours), man —_—_———o———— Press Tool Com , pany Operating Data for XOX (Pesos In 000's) Tris of XOX manufactured and sold 20x4 20X5 __% Ine, (Dee) 8.000 9,600 Total sales @ P500 a P4000. —~P4,800 20% 0x4: 50,000 x P24/b. 20X5: 64,000 x P25/Ib. sare ae / 4,600 33th ‘20X4: 8,000 x P40Mnr. 320 : 20X5; 8,000 x P5OMnr. Fixed factory overhead and other operating expenses Operating income P1880 it would be observed that the increase in operating income of 17% compares unfavorably to the increase in total sales of 20%. With the fixed factory overhead and other operating expenses remaining unchanged at P600,000 each year, the lower increase in operating income is the result of a higher-than-proportional increase in the firm’s variable costs for direct materials and direct labor. The total variable costs increased by 32% (2,000 / 1,520) while the total sales increased only by 20%. in direct materials and uted to the increase the units ‘manufactured and sold, changes ‘A number of factors could have contribt and increases In the unit cost direct labor costs, including increases in fe in the proportions of the inputs used in production; of pare The firm should identify factors the caused the change 2 oe : i i st management could institute some cost-saving measures fea al { income. Management needs to know the changes in productivities © tL production resources which partial productivities provide.Partial Pperational product ol Company in 20X4 and 20X35. Figure 16-2 Seat ag lainmencieg. Press Tool Company Partial Productivity bee Direct Materials and Direct Lat ty and partial Financia for XOX Direct Materials Direct Labor Paral Financial Produiy 20K4 Sue ae SALE TTEL ICCA 71,600,000=01 Direct Materials 800077, 200,000= 00067 $1600/7,600, cade om Direct Labor 8,000/ 320,000 = 0.0250 i ee Partial Operational Productivity i i ivi Company n 20X4 indicates that I operational productivity of Press Tool 2 8 cea ireseuracnived O16 unit of output for every pound of direct materials used i duction. Using productivity level in 20X4 as’ the benchmark to assess sr aetivity in 20X5, the operating results show that the partial operational Productivity of the direct materials decreased to 0.15, or a 6.25% decrease in productivity [(0.16 — 0.15) + 0.16 = 0.0625]. Partial productivity of direct labor, however, improved in 20XS. The firm manufactured one unit for each labor hours in 2014 and 1.2 units in 20X5,a ~ 1.00) = 1 = 0.20}, direct | 20% increase in productivity [(1.20 intained the 20X4 partial Se, the 4,800 units of XOX manufa i quired only 30,000 0.16). The Productivity necessitated additional 2,000 pounds 3000 — 30,000), Similarly, the fi eg 4 rm would have spent 4,800 direct OXS had it . pent oo The firm eae the same direct labor p productivity in 20X5 ivity in 2oreaner 200 hours of direct labor (4,800 - 4,000) “NvIY in 20XSfor direct labor inareates from 10to12.Manag 563 ing Pro ductivity and Marketing Effects Man Marketing Effectiveness _ partial Financial Productivity direct labor parti ; hens a oh ‘ gee ane prostiiy is 0.025 in 20X4 and 0.024 for 20XS, ° i .024) + 0,025). Thi — , ial operational his result fy rt ete Gn mena oe " productivity, i to higher hou ity per hour in ji eee 4 eh curly wanes more than offset the gain in Reena pearties ae ‘ceased. increased and the partial financial productivity Advantages of Partial Productivity Measures 1. Itallows S ; : managers to focus on the use of a particular input. 2.. Itis easily interpreted by all within the organization and ar easy to use for assessing productivity of performance of operating personnel. i 3: For operational control, the standard for performance are very often short term, say productivity ratios of prior batches of goods, and productivity trends within the year can therefore be tracked. Limitations of Partial Productivity Analysis \ \ Some of the observable limitations of the partial productivity measures are: t ship between an input resource and the output; ' in other manufacturing factors have on rtial productivity, could have been ivity of one or more other input (1) It measures only the relations| it ignores any effect that changes the productivity An improved pal obtained by decreasing the producti resources. (2) It ignores am productivity. For example, i raise the partial productivity © effects that changes in the fi roductivity of the input resourc other production factors have on tin materials quality are likely to ‘als as well as direct labor. y effect that changes in improvement f direct materi rm's operating characteristics (3) it ignores the For example, installation have on the pProductivity, ‘Th partial operational rode San hardly be attributed to increased labor productivity. (4) An improved parti fh not imply that the firm or division Partial productivity does te f i OPerates efficiently. No efficiency standard is involved in qe determination of partial productivity measures. ‘Total Productivity . it and the total Total productivity shows the relationship between ie output Cost of all input resources used to produce the output. Hence, Units or Sales Value of Out Total Productivity = —Fotal Cost of all Input Resources Total productivity isa financial productivity measure. It can be either the number of units or the sale value of the output obtained. For Press Tool Company, Total Productivity for XOX for 20X4 and 20X5 can be calculated from the following data: a Press Tool Company 20X4 and 20X5 Section 1: Total Productivity in Units 20X4 20X5 (a) Total units manufactured 8,000. 9,600 (b) Total variable manufacturing costs incurred P1,520,000 2,000,000 (c) Total productivity [(a)/(b)} : 0.005263 0.004800 (d) Decrease in productivity 8.8% Section 2: Total Productivity in Sales Pesos " (@) Total sales Mh ee (b) Total variable it 000,000 P4,800, () Tol producti fateh 2 es neared P1,520,000 2,000,000 (@) Decrease in Produit P2.6316 P2.4000 0.2316 “As shown in the tab ereased in 20X5 which ov’? tl produ ch is not favorable in units and in sales pesos both—_— M maging Produ: - ing Productivity a f caieoiueeare Sand Marketing HMfectiveness 46, eth a wee units is an important a for s to manufactur hievts ire the output is oft ie ‘Ving higher pro ns ats Niger revenue th any 88h An nen . hater seen tl te eam, nn a i id ts and Limitations of Total Productivity Meas Benefits Total productivity measures the combi ot decreases the possibili mbined productivity of ? iawn he ono ang et ictivity measure of other manufacturing eng factors Limitations 1 ivi i 0} Le rma va aaocial Measure and executives at the operatioraal level ae ae De a ae eae productivity measures to their day-to-day ‘ : , deterioration in total productivity can result from increased costs of resources that were beyond the manager’s control or decreased productivity of some of the input resources that were outside the realm of the manager. (2) The basis for assessing changes in productivity could vary over time, that year, yearly measures use different years as the base. (3) It can ignore the effects of changes in demand for the product, changes in selling prices of the goods and services and special purchasing and selling arrangements on productivity. For example, special arrangement to sell products at a discount price decreases the productivity in pesos of output per input unit. On the ‘other hand, a special purchase of materials increases financial productivity. Neither of these actions can be attributed to loss or gain in productivity. Managing Marketing Effectiveness No entity can gain suacess without effective marketing activities that will enable itto accomplish the following: (a) Ear the projected operating income, (b) Attain te deste and budgeted market share. (c) Adapt to market change-S66 Many " Y factors a Prices, salen atfeot Marketing effectiveness, These include changes in Selling ANY OF these Seti): Product mix, market size and market share. Variances its short ay oe affect operating results and ean revere . Hp Head onering oer cl performance ot c goals. The difference betwemr thea 4 ee Objectives and strategic k salec auleS fevenues ofa period and the ales Fevers in the master brig, fe sales variance of the Period. The components of sales variances follow Actual Sales Budgeted Sales Sales Variance Sales Price Sales Volume Variance . Variance : Sales Mix Sales Quantity Variance Variance Market Share Market Size Variance VarianceMan ‘aging Productivity and Marketh summary of VAFIANCE ANAIVSIN 19 Aasoas Marke ng Bfectveners 961 arketing | Sales Variance ae “Total actual sales Less: Total budgeted sales (Unfavorable) Favorable "a _XxK sles Price Variance a = [Actual set ( se et iis _ Budgeted selling ‘Actual number price per unit of units sold significance: sales price variance is the difference between the actual peso amount received fom ali the units sold and the peso amount th : fl : fim sold these units at the budgeted selling rae TaN ee sales price variance measures the impact of deviations of the actual selling prices fom the master budgeted selling prices on contribution margin and operating income. A firm computes its sales price variance by multiplying the difference between the actual and the budgeted selling prices pet unit of the product by the actual units of the product sold. This variance also is the sales revenue flexible budget variance. Sales Volume Variance Formula: : Number of units Budgeted Sales Volume | Nuns 4 oe MMathe mabter | % conurbation eras units sol budget margin per unit Significance: ; between the budgeted mce is the difference A sales volume (activity) varia’ : > i ted contributi ee me ai tee in). This variance measures the effect on our nee ae contr nome when the quantity sold for one ‘or more PI in an ety the period. differs from the quantity " the m fe budget contributionS68 _c, ter 16 Sales Mix Variance Formula: Busy . ! ted uni Sales mix Actual sales mix "Budgeted sal x onuagtal Contrbaton’ Variance fora, = Percentage for mix percentage oducts sold gin of Ppoduct the product for the product J P Product Significance: he difference betw, The sales mix Variance of a product is the product of : all products sold pe w actual and budgeted sales mix, the actual total atdtick A product's sales mix budgeted contribution margin per unit of the product, operating income due tg Variance measures the effect on contribution ected sales mix. the deviation of the actual sales mix from the a Sales Quantity Variance Formula: Budgeted Budgeted Budgeted total] sales mix contribution oe feral eas ese tients | percentage of X margin pert ao teodaee ne Rel etl sold all products the product of the product product Significance: A sales quantity variance measures the effect on the contribution ‘margin ua operating income due to the deviation of the actual total sales units from the budgeted total units. Market Size Variance Formula: Weighted-average Market Actual total Budgeted total Budgeted budgeted Sh ee arene | oy market X contribution margin variance market market share per unit Significance: # iment Size for a firm’s products expands, the total sales of 2 Would increase. “A firm that failed to increase its total sales in Proportion to the increase in th is i : losing its marketing Position, ee an yee foe -Managi Productivity and Marker warket Share Variance ing Effeo poral: Market Actual B sare market Muddacted oon tT amar | Arita SRS " indust ‘comteibvution margin ‘sigmficance: "y per tal Market share variance compares the firm’, et share and measure: '¢ firm’s actual market F ‘contribution margi s the effect of changes in the hemes ee sarees awe argin and operating inne the Fem™'s market share on its uustrative Problem 16.1: Sal i ales Volume, Sales Quantity and Sales Mix Enzo and Gabe operate ice cream stores that sell i ir n i x sell i i tae sd ts suburbs. Its budget and opeivg de feratXa lows Budgeted Data for20x4__- ‘Actual Operating Results in 20X4 Seling Variable Seling Variable Price Per Costs Per Price Per Costs Per Flavor + Pieces Piece Piece Pieces Pieve Pieoe, Vania 250,000 P120 P 50 160,000 P10 Pa Chocolate 300,000 150 60 270,000 135. 50 Srawbery 200,000 180 70 330,000 200: 5. Mango 0,000 250 100 180,000 300 420 REQUIRED: 1, Compute for the individual flavors and total sold: a. Sales volume variances. b. Sales mix variances. c. Sales quantity variances. 2. Assess the operation of 20X4 based on your analyses. Answer: Sales Mix Budget atu ig Mix Quantity — _Mx__ i er SR oars Sans Vanilla ea eee bet \" Chocolate 200,000 01,2500 a 018750 \ Strawberry “30,000 0.0625 190,000 “90000 \ Mango 300.000 41,0000 | Total‘800,000 Requirement 1.b. Sales Mix Variance Sales Mix Flevor Actual _ Budget _—_ Dikerce_ Vanilla 0.18750 ~~0.3125 ~ 0.12500 Chocolate 028125 0.3750 0.09375 Strawberry 0.34375 0.2500 0.09375 Mango 0.18750 0.0625 0.12500 Total ogoo0 4.0000 * Requirement 1.c. Sales Quantity Variance Total Sales Quantity Flavor Okerce Vanilla 160,000 ‘Chocolate , 160,000 ‘Strawberry 160,000 Mango 160,000 Total Recap Total Actual: Quant x 960,000 x 960,000 x 960,000 x 960,000 Budgeted Sales x 0.3125 x 0.2500 x 0.0625 4.0000 Flavor Sales Mc Varince Sales Quantity Varian Vanilla P (840,000) Us P 350,000 Chocalte (810,000) Uis 540,000 F eae 900,000 F + 440,000 F éo0.000 F 0 Tota oe 150,000 F FE ce Sales Volume Variance (490,000) U (270,000) u 1,430,000 F 1,950,000 F ‘P2.620,000 F2 ae Managing Prod n "roductivity and and Marketing vy Uffectiveness m1 Mg amount (20%). ‘Th he incre The 10 ed market size fOr gelatin and other al sales subsaniay i. ‘ 9 compen narorarae increase A favors rative Probl 1 . lem 16.2: Market Share, Market Si 7 Size and i Sales Volume Variance BR Company produ Mp0 units in 20X4 apes an ells gold-plated sowvent president expects the total each to eam a P25 contribution ma It expects to sell market to be 32,000 units f baal margin per unit. The x or the year. in 20X4, the University of th 1 West won the nati Wak sold 3,000 at P75 per unit with P40 in Variable o a erty ee unit. market yas 100,000 units. REQUIRED: For MBR: (1) What is the market share variance? 0) What is the market size variance? 3) What is the sales volume variance? =” Answer: (1) Market share: Actual 3,000 / 100,000 = 3% Budget: 1,600/ 32,000 5% Market share variance = G%- 5%) (100,000) (P25) (50,000) unfavorable (2) Market size variance = (100,000 — 32,000) (0.05) (P25) : = p35,000 favorable ) Sales volume variance * 3,000 - 1,600) (P25) = p35,000 favorable 50,000. Unfavorable Reconciliation: Market share variance Market size variance 85,000 rae Sales volume variance p3s.o00 Fe eo —