Managing Productivity and

Marketing Effectiveness

By: Ma. Irene Fe T. Tuse

 Learning Objectives

 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.
a. Sales price variance d. Sales quantity variance
b. Sales volume variance e. Market size variance
c. Sales mix variance f. Market share variance
 Managing Productivity

 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, market price, market share and productivity.
 Benefits that higher productivity brings about to business
firms are:
1. Competitive advantage
2. Higher-than-average returns, earnings and
3. Attainment to long-term success.
 Measuring Productivity

 Total Productivity – a productivity measure that includes all input

resources used in production.

 Productivity
1. Partial Productivity
a. Partial operational productivity
b. Partial financial productivity
2. Total productivity (financial 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.
 Measuring Productivity

 A measure of productivity can be either an

operational or financial productivity measure:

𝑂𝑢𝑡𝑝𝑢𝑡 𝑢𝑛𝑖𝑡𝑠
 Operational Productivity =
𝐼𝑛𝑝𝑢𝑡 𝑢𝑛𝑖𝑡𝑠
𝑃ℎ𝑝 𝑜𝑢𝑡𝑝𝑢𝑡
 Financial Productivity =
𝑃ℎ𝑝 𝑖𝑛𝑝𝑢𝑡
 Partial Productivity

 A partial productivity measures the relationship between the output

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

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

Examples:
𝑂𝑢𝑡𝑝𝑢𝑡
Direct materials yield = 𝐼𝑛𝑝𝑢𝑡 𝑜𝑓 𝑚𝑎𝑡𝑒𝑟𝑖𝑎𝑙𝑠

Workforce productivity:
𝑂𝑢𝑡𝑝𝑢𝑡
Output per labor-hour =
𝐼𝑛𝑝𝑢𝑡 𝑜𝑓 𝑙𝑎𝑏𝑜𝑟 ℎ𝑜𝑢𝑟𝑠
𝑂𝑢𝑡𝑝𝑢𝑡
Output per person employed =
𝑁𝑜.𝑜𝑓 𝑙𝑎𝑏𝑜𝑟 𝑓𝑜𝑟𝑐𝑒
𝑂𝑢𝑡𝑝𝑢𝑡
Process (activity) productivity =
𝑀𝑎𝑐ℎ𝑖𝑛𝑒 ℎ𝑜𝑢𝑟𝑠 𝑢𝑠𝑒𝑑
 Partial Productivity

 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.
 Partial Productivity
Press Tool Company
Operating Data for XOX
(Pesos in 000's)

2017 2018 % Inc. (Dec.)

Units of XOX manufactured and sold 8,000 9,600

Total Sales @ P500 P4,000 P4,800 20%

Direct Materials
2017: 50,000 x P24/lb. 1,200
2018: 64,000 x P25/lb. 1,600 33%
Direct Labor
2017: 8,000 x P40/hr. 320
2018: 8,000 x P50/hr. 400 25%
Fixed factory overhead and other
operating expenses 600 600 -
Operating income P1,880 P2,200 17%
 Partial Productivity
Press Tool Company
Partial Productivity
Direct Materials and Direct Labor
for XOX

Partial Operational Productivity

2017 2018
Direct Materials 8,000/50,000 = 0.16 9,600/64,000 = 0.15
Direct Labor 8,000/8,000 = 1.00 9,600/8,000 = 1.20

Partial Financial Productivity

2017 2018
Direct Materials 8,000/1,200,000 = 0.0067 9,600/1,600,000 = 0.006
Direct Labor 8,000/320,000 = 0.0250 9,600/400,000 = 0.024
Advantages of Partial Productivity
Measures

 It allows managers to focus on the use of particular

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

 It measures only the relationship between an input

resource and the output; it ignores any effect that changes
in other manufacturing factors have on the productivity.
 It ignores any effect that changes in other production
factors have on productivity.
 It ignores the effects that changes in the firm’s operating
characteristics have on the productivity of the input
resource.
 An improved partial productivity does not imply that the
firm or division operates efficiently.
 Total Productivity

 Total productivity shows the relationship between

the output and the total cost of all input resources
used to produce the output. Hence,
𝑈𝑛𝑖𝑡 𝑜𝑟 𝑆𝑎𝑙𝑒𝑠 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑂𝑢𝑡𝑝𝑢𝑡
 Total Productivity =
𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡 𝑜𝑓 𝑎𝑙𝑙 𝐼𝑛𝑝𝑢𝑡 𝑅𝑒𝑠𝑜𝑢𝑟𝑐𝑒𝑠
 Total Productivity
 For Press Tool Company, Total Productivity for XOX for 2017 and 2018
can be calculated from the following data:

Press Tool Company

2017 and 2018
Section 1: Total Productivity in Units
2017 2018
a. Total units manufactured 8,000 9,600
b. Total variable manufacturing costs incurred P 1, 520,000 P 2,000,000
c. Total productivity [(a)/(b)] 0.005263 0.004800
d. Decrease in productivity 8.8%
 Total Productivity

Section 2: Total Productivity in Sales Pesos

2017 2018
a. Total Sales P 4,000,000 P 4,800,000
b. Total variable manufacturing costs P 1,520,000 P 2,000,000
incurred
c. Total productivity [(a)/(b)] P2.6316 P2.4000
d. Decrease in productivity P0.2316
 Benefits and Limitations of Total
Productivity Measures

Benefits
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 measure of other manufacturing factors.

Limitations
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.
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.
Managing Marketing Effectiveness

No entity can gain success without effective marketing activities

that will enable it to accomplish the following:

a. Earn the projected operating income

b. Attain the desired and budgeted market share
c. Adapt to market change.

Factors that affect marketing effectiveness:

1. Selling prices
2. Sales quantity
3. Product mix
4. Market size
5. Market share
 Managing Marketing Effectiveness

The components of
sales variances follow:
 Summary of variance analysis to
assess marketing effectiveness
Total Sales Variance
Total Sales Pxx
Less: Total budgeted sales xx
(Unfavorable) Favorable Pxx

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.

Formula:
Sales price variance = (Actual selling price per unit – Budgeted selling price per
unit) x Actual number of units sold
Sales volume variance
- Is the difference between the budgeted contribution margin for
the actual units sold and the budgeted contribution margin for
the budgeted units.
Formula:
Sales volume variance = (Number of units sold – Number of units in
the master budget) x Budgeted contribution margin per unit

Sales Mix Variance

- The 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.
Formula:
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
- It 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.
Formula:
Sales quantity variance for a product
= (Actual total units of all products 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

- It measures the effect of changes in the total market size on
the firm’s total contribution margin and operating income.
Formula:
Market size variance = (Actual total units of the market –
Budgeted total units of the market) x Budgeted market share x
Weighted-average budgeted contribution margin per unit
Market share variance
- It 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.
Formula:
Market share variance = (Actual market share –
Budgeted market share) x Actual total units of the
industry x Weighted-average budgeted contribution
margin per unit
Illustrative Problem 1: Sales Volume, Sales quantity and sales
mix variance

Bam and Khun operate ice cream stores that sell ice cream
in cones in Dumaguete City and its suburbs. Its budget and
operating data for 2018 follow:
Budgeted Data for 2018 Actual Operating Results in 2018
Flavor Pieces Selling Variable Pieces Selling Variable
price per Costs per price per Costs per
piece piece piece piece
Vanilla 250,000 P 120 P 50 180,000 P 100 P 45

Chocolate 300,000 150 60 270,000 135 50

Strawberry 200,000 180 70 330,000 200 75

Mango 50,000 250 100 180,000 300 120

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 2018 based on your analyses.

Answer:
Sales Mix

Budget Actual
Flavor Quantity Mix Quantity Mix
Vanilla 250,000 0.3125 180,000 0.18750
Chocolate 300,000 0.3750 270,000 0.28125
Strawberry 200,000 0.2500 330,000 0.34375
Mango 50,000 0.0625 180,000 0.18750
Total
 Requirement 1.a. Sales Volume Variance
Sales Quantity Budgeted Sales Volume
Contribution Variance
Flavor Actual Budget Difference Margin/Unit
Vanilla 180,000 250,000 70,000 U X P7.00 = P (490,000) U

Chocolate 270,000 300,000 30,000 U X P9.00 = P (270,000) U

Strawberry 330,000 200,000 130,000 F X P11.00 = P 1, 430,000 F

Mango 180,000 50,000 130,000 F X P15.00 = P 1,950,000 F

Total 960,000 800,000 P 2,620,000 F

Requirement 1.b. Sales Mix Variance

Sales Mix Total Actual Budgeted Sales Volume
Quantity Contribution Variance
Flavor Actual Budget Difference Margin/Unit
Vanilla 0.18750 0.3125 0.12500 X 960,00 X P7.00 = P (840,000) U

Chocolate 0.28125 0.3750 0.09375 X 960,000 X P9.00 = P (810,000) U

Strawberry 0.34375 0.2500 0.09375 X 960,000 X P11.00 = P 990,000 F

Mango 0.18750 0.0625 0.12500 X 960,000 X P15.00 = P 1,800,000 F

Total P 1,140,000 F
 Requirement 1.c. Sales Quantity Variance
Total Sales Quantity Total Actual Budgeted Sales Volume
Quantity Contribution Variance
Flavor Actual Budget Difference Margin/Unit
Vanilla 960,000 800,000 160,000 X 0.3125 X P7.00 = P 350,000 F

Chocolate 960,000 800,000 160,000 X 0.3750 X P9.00 = P 540,000 F

Strawberry 960,000 800,000 160,000 X 0.2500 X P11.00 = P 440,000 F

Mango 960,000 800,000 160,000 X 0.0625 X P15.00 = P 150,000 F

Total P 1,480,000 F

Recap

Flavor Sales Mix Variance Sales Quantity Variance Sales Volume Variance
Vanilla P (840,000) U + P 350,000 F = P (490,000) U
Chocolate P (810,000) U + P 540,000 F = P (270,000) U
Strawberry P 990,000 F + P 440,000 F = 1,430,000 F
Mango P 1,800,000 F + P 150,000 F = 1,950,000 F
Total P 1,140,000 F + P 1,480,000 F = P2,620,000 F
 Requirement 2

 Overall, the firm has enjoyed a good year. The total

sales substantially exceeds the budgeted amount
(20%). The increase in sales could have been a result
of the increase of the entire market size for gelatin
and other competing merchandises. In any event, the
firm still had an excellent operation by selling more
units of the flavors with contribution margins. The
favorable sales mix variances in two of the flavors
suggest that the two flavors with high contribution
margin account for all the increase in sales.
 ASSIGNMENT
Illustrative Problem 24.2. Market Share, Market Size and Sales Volume
Variance
Potter Company produces and sells gold-plated souvenir
mugs. It expects to sell 2,600 units in 2018 for P65 each to
earn a P45 contribution margin per unit. The president
expects the total market to be 42,000 units for the year.
In 2018, the Hogwarts University won the national basketball
championship. Potter sold 3,200 at p85 per unit with P60 in
variable costs per unit. Total market was 120,000 units.

Required: For Potter Company:

1. What is the market share variance?
2. What is the market size variance?
3. What is the sales volume variance?