Chapter 24 “Managing productivity and Marketing effectiveness”

CONCEPT:

Sustaining profitability and maintaining or improving market share requires effective marketing activities.
Effectiveness in marketing however demands proper consideration of factors such as selling price, sales
volume and market price, market share and productivity.

Improvements in productivity are achieved when fewer workers, materials, machines or other resources are
used to manufacture and sell the same or better products.

Benefits that higher productivity brings about to business firms;

Competitive advantages

Higher-than-average returns, earnings and

Attainment of long-term success

“Measuring Productivity”

A productivity measure that includes all input resources used in production is a total productivity.

Productivity is the ratio of output to input. 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 non-profit
organizations.

Productivity= Output/Input

“Two types of productivity measures”

Operational Productivity and Financial Productivity

Their formula is:

Operational Productivity= Output Units/ Input Units

Financial Productivity= P Input/ P output

“Partial Productivity”

Partial Productivity measures the relationship between the output and one or part of the required input
resources used in producing output. The higher the ratio is , the better.
It is computed as follows:

Partial Productivity= Number of units or value or output manufactured/Number of units or cost of single or
part of the input resources

A partial operational productivity is the required physical amount of an input resource to produce one unit
output while a partial financial productivity of an input resource is the number of units or the value of output
manufactured for each peso spent on the input resource.

“Advantages of Partial productivity measures”

(1) It allows managers to focus on the use of a particular input.

(2) It is easily interpreted by all within the organization and are easy to use for assessing productivity of
performance of operating personnel.

(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 measures”

(1) It measures only the relationship between an input resource and the output; it ignores any effect that
changes in other manufacturing factors have on productivity. An improved partial productivity could have
been obtained by decreasing the productivity of one or more other input resources.

(2) It ignores any effect the changes in other production factors have on productivity.

(3) It ignores the effects that changes in the firm’s operating characteristics have on the productivity of the
input resource.

(4) An improved partial productivity does not imply that the firm or division operates efficiently. No
efficiency standard is involved in the determination of partial productivity measures.

“Total productivity”

Total productivity shows the relationship between the output and the total cost of all input resources use to
produce the output.

Total productivity is a financial productivity measure.

It is computed as follows:

Total productivity = Units or Sales Value of Output / Total cost of all input resources

“Benefits of Total productivity measures”

Total productivity measures the combined productivity of all operating factors. It decreases the possibility of
manipulating some of the manufacturing factors to improve the productivity of other manufacturing factors.

“Limitations of Total productivity measure”

(1) Total productivity is a financial measure and executives at the operational level may have difficulty
linking financial productivity measures to their day-to-day operations. Furthermore, 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 measure 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.

No entity can gain success without effective marketing activities that will enable it to accomplish the
following:

Earn the projected operating income

Attain the desired and budgeted market share

Adapt to market change

The factors that can affect the marketing effectiveness of a firm includes changes in selling prices, sales quantity,
product mix, market size and market share.

“Sales variance”

Sales variance is the difference between the actual sales revenues of a period and the sales revenue in the
master budget.

“Sales price variance”

Sales price variance is the difference between the actual peso amount received from all the units sold and the
peso amount the firm would have received had the firm sold these units at the budgeted selling price per unit.

Sales price variance measures the impact of deviations of the actual selling prices from the master budgeted
selling prices on contribution margin and operating income.

Sales Price Variance = [Actual selling price per unit – Budgeted selling price per unit] x Actual no. of units sold

“ Sales Volume Variance”

A sales volume variance is the difference between the budgeted contribution margin for the actual total units
sold ( flexible budget contribution margin ) and the budgeted contribution margin for the ,budgeted units (
master budget contribution margin ). This variance measures the effect on contribution margin and operating
income when the quantity sold for one or more products differs from the quantity in the master budget for
the period.

Sales volume variance = [ No. of units sold – No. of units in master budget ] x Budgeted contribution margin
per unit

“ Sales mix variance”

Sales mix variance of a product is the product of the difference between the actual and budgeted sales mix,
the actual total units of all products sold, and the budgeted contribution margin per unit of the product. The
product’s sale mix variance measures the effect on the contribution margin and operating income due to the
deviation of the actual sales mix from the budgeted sales mix.

Sales mix variance for a product = [actual sales mix percentage for the product – budgeted sales mix
percentage for the product ] x Actual total units of all products sold x Budgeted unit contribution margin of
the product

“ Sales Quantity Variance”

A sales quantity variance measures the effect on the contribution margin and operating income due to the
deviation of the actual total sales units from the budgeted total units.

Sales quantity Variance for a product = [ Actual Total units of all product sold – Budgeted Total sales units of
all products ] x Budgeted sales mix percentage of the product x Budgeted contribution margin per unit of the
product

“ Market Size Variance”

Market size variance measures the effect of changes in the total market-size on the firm’s total contribution
margin and operating income. As the size of the total market for a firm’s products changes, the total sales of
the firm are likely to change with it. When the total market size for the firm’s products expands, the total sales
of the firm likely would increase. A firm that failed to increase its total sales in proportion to the increase in
the total market is not keeping up with the market and is losing its marketing position.

Market size variance = [ Actual total units of the market – Budgeted total units of the market ] x budgeted
market shares x Weighted-average budgeted contribution margin per unit

“Market share variance”

Market share variance compares the firm’s actual market share to its budgeted market share and measures
the effect of changes in the firm’s market share on its total contribution margin and operating income.

Market share variance = [ Actual market share - Budgeted market share ] x Actual Total units of the industry x
Weighted- average budgeted contribution margin per unit