How to Calculate Productivity Ratios

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When your doctor wants to learn the health of your body, he may order blood work. When you want to learn the health of your business, you may calculate a productivity ratio. Productivity ratio measurements help "highlight improvements in the physical use of resources," according to the article "Productivity Measurement and Management Accounting" by Rajiv D. Banker, et al. in the Fall issue of "Journal of Accounting, Auditing & Finance" from 1989. They are most useful, therefore, when making period-to-period comparisons. As Banker et al. also note, your business goal is to increase your outputs while maintaining or decreasing your inputs without any loss of quality. Use productivity ratio calculations to learn the health of your business.

Determine the value of your company's output during a given period by finding the product of units produced and value per unit during that period using a calculator. For example, during the month of March your small business produced 327 wooden apples, and each wooden apple had a retail value of $7: 327 x 7 = 2289. The value of your company's March output was $2,289.

Calculate the value of your labor costs during the same period by finding the sum of hours worked and wages paid per hour using a calculator. For example, you are the only employee in your business, you pay yourself $3 an hour and during March you worked 113 hours: 1 x 3 x 113 = 339. The value of your labor cost during March was $339.

Calculate the value of your material costs during the same period by finding the sum of all materials used during the period using a calculator. For example, during March you used 330 pine blocks (three blocks were damaged and discarded) purchased from a lumber yard for $0.50 each, and 1/2 gallon of clear shellac purchased from the same lumber yard for $17: (330 x 0.5) + (1 x 17) = 182. The value of your materials cost during March was $182.

Calculate the value of your overhead costs during the same period by finding the sum of your utility and rent payments during the same period using a calculator. For example, during March you paid a $150 electric bill for your rented workshop; a $100 heating bill; a $20 water and sewage bill and $770 in rent: 150 + 100 + 20 + 770 = 1040. The value of your overhead cost during March was $1,040.

Determine the value of your company's input during the given period by finding the sum of the value of your labor costs, the value of your material costs and the value of your overhead costs using a calculator. For example, 339 + 182 + 1040 = 1561. The value of your company's March input was $1,561.

Divide the value of your company's output during the given period by the value of your company's input during the same period using a calculator. For example, 2289/1561 = 1.466. Your company's productivity ratio during March was approximately 1.47.

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About the Author

John Woloch writes professionally for various websites. He has published in the Dutch journal "Crux" and writes frequently on oil painting, classical languages and topics involving math and biochemistry. Woloch holds a Master of Arts in English from the University of Chicago, a Master of Arts in classics from Ohio State University and a postbaccalaureate pre-medical degree from Georgetown University.

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