Productivity Measurement

(In terms of Value Added Concept)

June/2022
CONTENTS
:

1. Types of Productivity Measurement

2. Importance of Productivity Measures

3. What is Value Added

4. How to Calculate Value Added?

5. How to Identify Value Added items from financial statements?

6. Exercise on how to calculate Value Added

7. Productivity Indicators & Analysis

1. Types of Productivity Measurement

There are broadly three types of productivity

measurements :

1. Single-Factor/Partial Productivity Measurement

2. Multi-Factor Productivity Measurement

3. Total (Composite) Factor Productivity

Measures

The choice between them depends on the

purpose of productivity measurement and, in
many instances, on the availability of data.
 Contd….

1. Single-Factor Productivity Measurement:

 Single-Factor Productivity is a measure of output
against single input. Partial productivity is concerned
with efficiency of one class of input. Its focus is on
utilization of one resource.
SFPM = Outputs/Single Input

Advantages of Single-Factor Productivity:

i. Easy to obtain relevant data and easy to
comprehend.
ii. Acts as a good diagnostic measure to identify areas
of
improvement by evaluating inputs separately across
the output.
 Contd…

2) Multi-factor productivity measures (a measure of output

against multiple or a bundle of inputs).
Multi Factor productivity = output
2 or more
inputs

E.g Multi Factor productivity = outputs ,

out puts
Labor +Machine
Labor +Energy
3) Total Factor Productivity:- is measured by combining the
effects of all the resources used in the production of
goods and services (labor, capital, raw material, energy,
etc.) and dividing it into the output. As such the formula
would appear as:
Total Factor Productivity = Revenues/All inputs
or
= Goods/services produced (their
worth)
 Importance of Productivity Measures

For organizations:-

 It is helpful for organizations as strategic

reasons such as for corporate planning,
organizational improvement, or comparison to
competitors.

 Itcan be also used for tactical reasons such as

project control or controlling utilization of
resources.

 Itis an important means to help managements

to better decide on the appropriate action.
 Contd….

For Nations:-

 Measure and compare competitiveness among

nations.

 Develop global cooperation among nations.

 Contributeto the development of a nation’s

socio-economic policies.
 Contd….

Example (1) – Comparison of GDP/Capita among Ethiopia &

Other African & world Countries
 Contd….
Example (2) – Comparison of Labor Productivity among
Ethiopia & Other African Countries

Source: JPC ‘International Comparison of Labor Productivity 2014’

Unit: USD Converted based on PPP in 2011
 Contd….
Firm and National approaches of
productivity:-

1. (Macro-Economy=National Level)
*Value-Added Productivity = Gross Domestic Product
(GDP) Total Labor
Force
 GDP (Gross Domestic Product): The sum of value
added of all final goods & services within a county in a
given period of time

2. (Micro-Economy=Company Level)
*Value-Added Productivity= Sales – Cost of purchased
goods and services
 Contd….
Value Chain – From the company to the Nation

 Improvements in firm level productivity translate directly

into national economic growth
 What is Value Added?

 Survival of the organizations depends on

their performance.

 Productivity is actually looking at the more

general issue of performance. It can be
described as the success of a company and its
activities.

 So that value added productivity and

performance are closely inter connected.

 Value added can be computed by subtracting

the costs of purchased materials, services and
utilities from the firm’s total revenue.
 Contd….

Productivity= Output in a period of Time

Input in the Same period of Time

Productivity
Output/Input
Land, workforce,
Material, facilities, Goods
Capital, &
Technology, Transformation Service
Equipment's &
Input Process or Value s
Output End
Tools addition Custome
r
Production
System

Conceptual Frame work of of

productivity
 Contd…
 Measures of Output

Output could be in the form of goods produced or services

rendered. Output may be expressed in:
 Physical quantity
 Financial value
 Physical Quantity
 If products or services are homogeneous, output can be
measured in physical units (e.g. number of books printed,
number of customers served). Such measures reflect the
physical effectiveness and efficiency of a process, and are not
affected by price fluctuations.
Constraints in Measuring Productivity (in physical terms)
 Changing Price of Inputs and Outputs: There is a
continuous change in the price of inputs and outputs, quality of
raw-materials, machines and tools, quality of labor, etc.
 Intangible Output of Service Sector
 Difficulty in Measuring Output:. If the output is
homogeneous, then the productivity can be measured in terms
of volume. If the output is not homogeneous, then the
productivity can be measured in terms of monetary value.
 Difficulty in Measuring Inputs:
 Contd…
 Financial Value

At the organization level, output is seldom uniform. It is

usually measured in financial value, such as the following:
 Sales
 Production value (i.e. sales minus change in
inventory level)
 Value added
 Contd…
 Measures of Input

Input comprises the resources used to produce output. The most common
forms of input are labor and capital.

 Labor refers to all categories of employees in an organization. It

includes directors, proprietors, partners, unpaid family workers, full-time
and part-time workers.

Labor can be measured in three ways:

1. Number of hours worked
 This measure reflects the actual amount of input used.
2. Number of workers engaged
 This measure is more commonly used, as data on hours worked may not
be readily available. Part-timers are converted into their full-time
equivalent. An average figure for a period is used, as the number of
workers may fluctuate over time.
3. Cost of labor
 Labor costs include salaries, bonuses, allowances and benefits paid to
employees.
e.t. Basic Salary of employees, Fuel and transport allowance, holiday bonus,
Overtime, Housing and hard ship allowance, Representation allowance,
Wages for indirect workers like drivers, electricians etc., Total medical
treatment expenses for employees & Others.
 Contd…

 Capital:
• Fixed capital - Land, Plant (buildings and structures),
Machinery, Tools and equipment, and others
• Working capital - Inventory, Cash, Accounts receivable,
Notes receivable.
 It can be measured in physical quantity (e.g. number of machine
hours) or in financial value, net of depreciation to account for
the reduced efficiency of older assets.
 Intermediate Input
 Include materials, energy and business services.
 Other expense -Travel, Taxes, Professional fees, Marketing, R&D,
etc.
 It can be measured in physical units (e.g. kilograms, kilowatt per
hour) or financial units (e.g. cost of energy and materials
 Contd….

 Productivity: Efficiency and effectiveness of factors

of production

 Efficiency is strongly connected to the utilization of

resources and mainly affects the denominator
(inputs) of the productivity ratio.

 It is referred as utilization rate which means how

much equipment or a process is used in practice
compared to its maximum.

 Effectiveness is often linked to the creation of value for

the customer and mainly influences the numerator
(output) of the productivity ratio.
 It is referred as Production volume which means how
much products/goods are produced in practice
compared to its maximum.
 Contd….

Productivity is a good indicator of the efficiency with which

a factory is operating.
 If a firm has higher productivity, i.e. it produces more
with a given amount of inputs, it means it is utilizing the
resources properly.

 Similarly, a lower productivity indicates wastage of

resources and time.

 Profitability of the firm is also related to its productivity.

More profits mean that more retained earnings which
would ultimately increase shareholders’ wealth.

 Thus 'productivity’ of the enterprise as a whole is a

simple function of:-

 Technological advancement,
 Improved managerial or organizational skills,
 Better entrepreneurial ability,
 Positive attitude of all concerned,
 Contd…

 Value added is a better measure of output for the

following reasons:
(value added is a good indicator of effectiveness )

• It measures the real output of an organization. It shows

the net wealth created by the organization.
• It is practical since value added is measured in financial
units, which allows the aggregation of different output.
• It can be easily derived from an organization's profit and
loss statement.
• It is applicable to both manufacturing and service
industries
 Contd….

Structure of Value-Added in firm level

 How to Calculate Value Added?

 Value added can be calculated using either the

Subtraction Method or the Addition Method.
1) Subtraction Method
 The Subtraction Method emphasizes the creation of
value added. It measures the difference between sales
and the cost of goods and services purchased to
generate the sales.
Value added = Sales – Cost of purchased goods and
services
 Contd….

2) Addition Method
. The Addition Method emphasizes the distribution of
value added to those who have contributed to the
creation of value added.

Value added = Labor cost to employees + Interest to

lenders of money +Depreciation for reinvestment in
machinery and equipment +Profits retained by the
organization + Other distributed costs (e.g. tax)
• Labor Costs are regarded as “Expenses”, but
part of “Value added”. Wages are paid out of
this “Value Added”.
 Contd….
 Creation & distribution of value added

(1) Addition Methods

(2) Subtraction Methods

 Both the Addition and Subtraction methods should generate the same
result. They are often used together to validate that value added has
been calculated accurately.
How to Identify Value Added items from financial
statements?
(1) What is financial statements?
 A financial statement (also referred to as
financial account) is a record of the financial
activities of a business.

 The purpose of financial statements is to

provide information about the financial
performance of an enterprise that is useful to a
wide range of stakeholders in making economic
decisions.
 Contd….

Representative Financial Statements

(1) Balance Sheet

Also referred to as a B/S, reports on a company's
assets, liabilities and equity at a given point in
time, for example, at the end of the year.

(2) Profit and Loss Statement

Also referred to as a P/L, reports on a company's
income, expenses and profits over a period of
time.

(3) Cash Flow Statement

Reports on a company's cash flow situations.
 Contd….

Components of a balance sheet:

(1) Assets
Using funds raised in forms such as cash, deposits, land and
buildings.
(2) Liabilities
Content of funds raised that must be returned, such as debts.
(3) Net assets / equity/capital
Net assets refers to the content of funds raised that do not
need to be returned, such as capital and surplus funds
(retained earnings).
 Contd….

Description of each Components of a balance sheet:

(1) Current assets are assets to be cashed relatively short time. (e.g.
Cash, Inventory, Accounts Receivable, etc.)
(2)Fixed Assets are assets that are fixed for long periods exceeding one
year
 Tangible fixed assets i.e. Assets with physical property like Buildings,
Equipment's, etc.
 Intangible fixed assets i.e. Although not visible, assets that gain
value as assets by enabling them to secure superior status over
other assets. (e.g. Goodwill, Trademarks, Patents, etc.)
(3) Current Liabilities are liabilities, the deadline for the cash repayment
of which will arrive within one year.
(4) Fixed liabilities are liabilities, the deadline for the repayment of which
will arrive in more than one year.
(5) Net Assets refers to the content of funds raised that do not need to be
 Contd….
Balance sheet (example for first year of operation)
 Contd….

(2) Profit and Loss Statement

 The "Profit and Loss" (P+L) Statement is one

of the financial analysis tools employed by
business enterprises to track the performance
of their enterprises. The P+L statement is the
difference between sales and expenses of an
enterprise over a given period of time, often
one year. If this difference is positive, it is
called profit, while if it is negative, it is then
called loss.
 Contd….
The P+L statement has the following components:

Gross sales: This is the total value of sales, which is obtained by

multiplying the price of each product with the total units of output sold.

Returns and allowances: Stands for the value of damaged goods that
are returned by
customers to the business enterprise for which the business replaces the
damaged goods with new. It also considers payments that are made as
sales commissions, discounts, etc., which again are deducted from Gross
Sales to result in Net Sales.

Costs of goods sold: Stands for the costs involved with regard to direct
labour, direct
material and factory overhead costs which are deducted from Net Sales to
arrive at Gross Profit.

Direct material: Stands for those material costs directly accrued in the
production process, such as raw materials.

Direct labour: Refers to costs of all labour input directly used in the
production of goods/services of a given enterprise. Often the direct labour
costs are measured on unit rates and costs of the daily labour.

Factory overhead costs: Stands for those costs incurred, but which are
 Contd….

Components of P/L contd…

Administrative and selling expenses: This includes costs

incurred for certain administrative purposes and for the
distribution of products. These are deducted from Gross Profit to
arrive at Operating Profit. These expenses are for example,
salaries of management and support staff, expenses related to
telephone, water and electricity bills as well as office rentals and
other similar expenses.

Interest expense: This is the amount of interest to be paid on

the amount of loan obtained, based on the current interest rate.

Estimated income tax: The amount of tax that has to be paid

as per the income tax proclamation.
 Contd….

Types of Profits

(1) Gross margin

Gross margin is the difference between sales and the
cost of sales, before deducting SAEs.

(2) Operating income

Operating income is the difference between gross
margin and the [Link] is a measure of a firm's profit.

(3) Ordinary income

Ordinary income is the difference between operating
income and the non-operating revenues and
expenditures.
 Contd….

(2) Example of Profit and Loss Statement

 Contd….

Contents of Profit and loss statement

Tax Profit after tax

Extraordin
Profit before tax
ary loss
Non Operating
Ordinary profit
Expenses
Sales, General and
Operating Profit
Administrative Exp.
Cost of Goods Sold Gross Margin

Sales

Sales minus COGS is Gross margin.

Gross margin minus Sales and G&A is Operating profit.
Operating profit minus non-operating expenses is Ordinary profit
Ordinary profit minus extraordinary loss is PBT, profit before tax.
PBT minus Tax is Profit after tax PAT, which is net profit.

 By the way sometimes different word is used for some items.

Such as Sales is Net Revenue, ordinary profit is called operating
profit etc.

So please be careful when you use it.

 Contd….

Relationship between B/S and P&L

Begininng Business term Ending

B/ S P&L B/ S

L L
A Cost
Sales A
E E
Profit Profit
 Contd….

(3) Cash Flow Statement

 Cash Flow is important to help predict cash
needed, how much money will be needed and
when it will be needed, or to predict cash
surplus and plan investment.

 Cash in business can be compared to water

that flows in a river. If there is more water
coming out than coming in to the river, then it
will soon dry out. Similarly, businesses having
more cash outflows than cash inflows will
soon get into trouble.
 Contd….

Reports on a company's cash flow

situations.
(1) Cash flow from operating activities
 Cash received or expended as a result of the
internal business activities.

(2) Cash flow from investing activities

 Cash received from the sale of fixed assets, or
invested on capital expenditure.

(3) Cash flow from financial activities

 Cash received from the issue of financial
activities like debt and equity
 Contd….

* The cash balance at the end of the previous month shall be

forwarded to the beginning of the next month.
 Exercise on how to calculate Value added using Subtraction and Addition method.

Profit & Loss Statement

Sales 450,000.00
Less: Cost of Sales
Opening stock 200,000.00
Purchases 300,000.00
Less: Closing stocks (120,000.00)
380,000.00

Gross Profit 70,000.00

Non-Operating Income 10,000.00
Less: Operating Expenses
Advertising & Marketing 5,000.00
Audit fees 8,000.00
Deprecation 2,000.00
Directors fees 5,000.00
Rental 8,000.00
Repairs & maintenances 500.00
Staff costs 36,000.00
Staff welfare & development 4,000.00
Foreign Worker levy 300.00
Interest 2,000.00
Office & other supplies 800.00
Utilities 3,200.00
Transport, postage & communications 2,000.00
Other operating expenses 200.00
Total Operating Expenses 77,000.00
Non-operating Expenses 1,000.00
Profit before tax 2,000.00
Income tax expense (130.00)
Profit after tax 1,870.00
Exercise on how to calculate Value Added
 Productivity Indicators

Value Added Ratio

Value Added
Sales
Labor Productivity
Capital Intensity
Value Added
No. of Employees Total Assets
Sales per Employee No. of Employees
Sales
No. of Employees
Operation Profit Ratio Capital Turnover Ratio

Operation Profit Sales

Sales Total Assets

07/17/2025 42
 Contd….
 Explanation on each Indicators

Analysis of the indicator

Indicator Unit Purpose Formula
If it is Lower If it is Higher
Labor Productivity $ To measure how many value Value Added Poor management of labor Efficient and effective
added is created by one No. of Employees and/ or other factors which utilization and
person at a company affect the efficiency and management of labor
effectiveness of labor and other factors to
generate value added
Value Added Ratio % To measure how a company Value Added Inefficiency in the use of Efficiency in use of
can create the value Sales purchases, unfavorable purchases, favorable
effectively prices for products and price differentials
purchases, between products and
or poor control of stocks purchases, or good
control of stocks
Sales per Employee $ To measure how many sales Sales Inefficient or Efficient or good
is created by one person at a No. of Employees poor marketing marketing strategy
company (supplement for
labor productivity)
Capital Intensity $ To measure how much Total Assets Labor-intensive Capital-intensive
capital elements (equipment, No. of Employees
machinery, etc) are prepared
for each employee
Capital Turnover To measure how capital Sales Inefficient asset utilization Efficient utilization
elements are turned into Total Assets or overinvestment in fixed of fixed assets
sales effectively. assets

Operation Profit % To measure how much Operation Profit Costs are too high and are Ability to generate
Ratio profit are generated by main Sales eroding profits high
business activities, returns from a given
(Proportion of sales left to amount of sales
the organization after
deducting all Costs
 Examples on Productivity Analysis

Productivity Analysis of X Co.  Table 1 and Figure 1 show the trends of Sales, Value
Added, Labor Productivity and Labor Input.
Table 1. Sales, Value Added, Labor Productivity and Labor Inputs

2016/ 2017 2017/ 2018

Amount (Birr) / Year 2015/ 2016
(1st Level KAIZEN) (2nd Level KAIZEN)
 Sales increased slightly in year 2017/2018 by 5.9%
Sales 776,371,863 651,535,887 689,657,044 (689,657,044 Birr) when it compared with previous
Value Added 90,189,055 189,477,895 92,616,490
Labor Cost 14,266,656 107,922,511 142,061,922 year 2016/2017 (651,535,887 Birr). The increase of
Labor Productivity (Birr) 75,905.36 54,230.40 23,547.20
Labor Input (No. of employee) 1,188 3,494 3,933 the Sales amount from 2016/17 to 2017/18 was
Fixed Assets 96,408,651 192,707,437 308,902,168 around 38 million birr.

 Value Added had increased in 2016/17, but it

went down in 2017/18 despite of the increase of
Sales.
 As for Labor Productivity, it shows us the
decreasing trends, due to the steady increase of
Labor Input in the consecutive three years.

07/17/2025
44
 Contd….
[Calculation of Labor Inputs]
•Data of employees provided by the company is as follows.
2015/2016: Permanent 225, Contract 27 & daily labor 16 as of the end of 2015/2016 FY
2016/2017: Permanent 220, Contact 21 & daily 10 as of the end of 2016/2017 FY
2017/2018: Permanent 232, Contract 24 daily 11 as of the end of 2017/2018 FY
2018/2019: Permanent 229, Contract 30 daily 14 as of the end of 2018/2019 FY
•The inputs of daily employees are calculated turned into the inputs of permanent employees by the following
calculation

Year 2016 (a) 2017 (b) 2018 © 2019 (d)

Monthly average No. of A
contract employee = 30
No. of average daily labor B
=14
Sales C 513201938.9 308716582.1 362233145.1 459460323.2
Ratio of sales D 112% (a/d) 67% (b/d) 79% (c/d) 100% (d/d)
Contract employee A*D 26.42 20.16 23.65 30
Daily labor B*D 15.64 9.41 11.04 14
E. Labour Data

Labour Inputs 2016 2017 2018

Permanent labor 310 363 406
contract employee 404.00 342.00 377.00
daily labor 474.18 2,788.94 3,150.23
Labour Inputs _Total 1,188 3,494 3,933
07/17/2025 45
 Productivity Analysis Contd…….

The relation between Value Added and  Labor Share (the ratio of Labor Cost to
Labor Cost.
Value Added) increased.

 Especially, in 2017/2018, Labor Cost

exceeded Value Added. Therefore, it is
crucial for the enterprise to improve its
Value Added in order to cover its Labor
Cost at least.

 To increase the value added part, the

company should decrease its cost as
much as possible, making more sales and
utilizing the resources (including fixed
assets, stocks, Labor Input) in effective
way.
07/17/2025
46
 Productivity Analysis Contd…….

07/17/2025
47
 Productivity Analysis Contd…….

Breakdown of raw material cost

 As indicated in
Figure 5, ‘Cost of
metal’ increased
from 6.7% to 20.8%

 The cost of metal

increased due to the
stocks of ‘metal’
increased to the
level of double from
2016/2017 to
2017/2018 which
may caused due to
the delay of
duration of
construction
project .

07/17/2025
48
 Conclusions on Factor Analysis

 As we can see from the above productivity analysis of sample companies, the Value Added Ratio

(Value Added to the Sales) remained in the low level. This trend shows us the importance of the

cost reduction in both direct and indirect materials for which it will bring positive impacts on the

improvement of productivity indicators through the increase of production outputs.

 And also the study shows us If the Value added increased, the other value added items such as

profit, capital costs, dividends, and taxes can be covered & finally it has also its own impact for

national GDP contribution as well.

07/17/2025 49
 Inter Relation of Productivity improvement ideas & Value Added
Indicators

Effect of Improvement ideas Increase Value Added

Items)
Increase Labor
Contribution of Productivity & Increase of Increase of
Improvement Reduction of sales & “Value VA
Ideas Costs Added “ indicators

 Improvement of OEE
(Overall Equipment If Value Added
increased, as a
Effectiveness), The effective Due to the increase result, made positive
 Shortening of
production of Value Added, impacts on the
production lead time, other Value Added improvement of
 Reduction of cost of system
items, such as productivity
direct and indirect supported the indicators, such as
increase of profit, capital costs,
materials (reduction of Labor Productivity,
dividends, tax, can
volume of waste) & production Value Added to
be covered. Sales, Operation
etc…. outputs Profit Ratio.
07/17/2025 50
 Cont….
Note: The following abbreviations are commonly use in financial
statement or excel format:
• VA = value added
• PL = profit loss statement
• MOC = manufacturing overhead cost
• CGS = cost of goods sold
• AGE = administrative general expense
• ASE = advertizing and selling expense
• SDE = selling and distribution expense
• IPE = idle period expense 51
Thanks