Use of Productivity Accounting in Financial Analysis

Abstract

The use of quantitative standards is the most common manifestation of the application of productivity accounting to conventional cost accounting systems. Quantitative standards are specified in terms of desired ratios of input to output quantities. For example, a firm that employes L units of labor, and M units of materials to produce Y units of output would set quantitative standards of L̂/Y and 004D;̂/Y for labor and materials respectively. L̂ and 004D;̂ could be interpreted as the number of labor hours and the quantity of materials required to produce one unit of output. In other words, quantitative standards could be viewed as targets for input requirements (e.g., targets for quantities of inputs technically needed to produce one unit of output). The inverses of the quantitative standards ratios output per unit of labor, Ŷ/L and output per unit of materials, Ŷ/Μ, are known respectively as partial labor productivity and materials productivity indexes. Obviously, many occupational categories of labor and types of materials are commonly used in the production process. Accordingly, numerous quantitative standards are designed as integral parts of conventional cost accounting systems. Along with the quantitative standards, price standards (Ŵ for labor and 0056;̂ for materials) are set as targets for the purchasing prices of labor and materials inouts. W&#x0302 interpreted as the standard compensation paid to an hour of labor, and 0056;̂ is viewed as the standard price for which a unit of a certain material ought to be purchased.