Cost Accounting (14th Edition)

494 CHAPTER 13 STRATEGY, BALANCED SCORECARD, AND STRATEGIC PROFITABILITY ANALYSIS
Total Factor Productivity
Total factor productivity (TFP) is the ratio of the quantity of output produced to the costs of all inputs used based on
current-period prices.
Quantity of output produced
Total factor productivity =
Costs of all inputs used
TFP considers all inputs simultaneously and the trade-offs across inputs based on current input prices. Do not think
of all productivity measures as physical measures lacking financial content—how many units of output are produced
per unit of input. TFP is intricately tied to minimizing total cost—a financial objective.
Calculating and Comparing Total Factor Productivity
We first calculate Chipset’s TFP in 2011, using 2011 prices and 1,150,000 units of output produced (based on information
from the first part of the productivity-component calculations on p. 482).
Total factor productivity
for 2011 using 2011 prices = Quantity of output produced in 2011
Costs of inputs used in 2011 based on 2011 prices
=
1,150,000
(2,900,000 * $1.50) + (3,500,000 * $4.35)
= 1,150,000
$19,575,000
= 0.058748 units of output per dollar of input cost
By itself, the 2011 TFP of 0.058748 units of CX1 per dollar of input costs is not particularly helpful. We need something
to compare the 2011 TFP against. One alternative is to compare TFPs of other similar companies in 2011.
However, finding similar companies and obtaining accurate comparable data are often difficult. Companies, therefore,
usually compare their own TFPs over time. In the Chipset example, we use as a benchmark TFP calculated using
the inputs that Chipset would have used in 2010 to produce 1,150,000 units of CX1 at 2011 prices (that is, we use
the costs calculated from the second part of the productivity-component calculations on p. 482). Why do we use 2011
prices? Because using the current year’s prices in both calculations controls for input-price differences and focuses the
analysis on adjustments the manager made in quantities of inputs in response to changes in prices.
Benchmark
TFP
=
=
Quantity of output produced in 2011
Costs of inputs at 2011 prices that would have been used in 2010
to produce 2011 output
1,150,000
(3,450,000 * $1.50) + (3,750,000 * $4.35)
= 1,150,000
$21,487,500
= 0.053519 units of output per dollar of input cost
Using 2011 prices, TFP increased 9.8% [(058748 – 0.053519) ÷ 0.053519 = 0.098, or 9.8%] from 2010 to 2011.
Note that the 9.8% increase in TFP also equals the $1,912,500 gain (Exhibit 13-5, column 4) divided by the
$19,575,000 of actual costs incurred in 2011 (Exhibit 13-5, column 5). Total factor productivity increased because
Chipset produced more output per dollar of input cost in 2011 relative to 2010, measured in both years using 2011
prices. The gain in TFP occurs because Chipset increases the partial productivities of individual inputs and, consistent
with its strategy, combines inputs to lower costs. Note that increases in TFP cannot be due to differences in input
prices because we used 2011 prices to evaluate both the inputs that Chipset would have used in 2010 to produce
1,150,000 units of CX1 and the inputs actually used in 2011.
Using Partial and Total Factor Productivity Measures
A major advantage of TFP is that it measures the combined productivity of all inputs used to produce output and
explicitly considers gains from using fewer physical inputs as well as substitution among inputs. Managers can analyze
these numbers to understand the reasons for changes in TFP—for example, better human resource management
practices, higher quality of materials, or improved manufacturing methods.