Threshold productivity

The productivity threshold is based on standard costs. These costs may be external and internal indicators. Threshold cost may be the following:

• market price or negotiated price
• transfer prices based on the cost calculation

Applications

Method of productivity threshold is used to rationalize the manufacturing process, and its main feature is the analysis of the decision concerning the choice of organizational solutions in the following areas:

• maintain or discard functions in the value chain process
• create new organizational units for implementation of the tasks necessary to achieve the general objectives of the company.

Managers should ask following questions:

• do you want to continue specific type of business?
• do you want to buy products, materials, ready-to-use final products, services needed for your own production?

This is the problem a choice between continuing and discontinuing activity in specific sectors and replacing it with purchase of products or services.

Among these problems is also seeking solutions to eliminate or simplify areas in which productivity is low.

The computational formulas

This method is based on the following formulas:

• $P={S \over \sum \limits _{i=1}^{m}{KP_{i}}}$
• $P_{i}={S_{n_{i}} \over KP_{i}}$
• $S_{n}=\sum \limits _{i=1}^{m}S_{n_{i}}$

where:

• S - sales revenue
• S _ni - settled proceeds from the sales in "i" link in value chain
• KP _i - threshold costs of "i" link in value chain

The productivity threshold is an indicator of the efficiency, in the case when it is higher than the actual productivity managers should stop particular activity. This also corresponds to the concept of lean management and the idea of outsourcing. Unburdened productivity - is one that is only in relation to the cost of production. Adjustment of revenue from sale is necessary. It is therefore an indicator of value which the company could achieve if it eliminated all the unnecessary costs. It is expressed by following equations:

• $P={S \over \sum \limits _{i=1}^{m}{KE_{i}}}$
• $P_{i}={S_{n_{i}} \over KE_{i}}$
• $S_{n}=\sum \limits _{i=1}^{m}S_{n_{i}}$

where:

• P - general, unburdened productivity
• P_i - partial productivity of "i" type of activity
• S_n - unburdened sales revenue
• S_ni - unburdened sales revenue settled on "i" type of activity.
• KE_i - productive cost of activity "i"

Advantages of Threshold productivity

An advantage of threshold productivity is that it provides a way to measure and compare the performance of different operations. It can be used to identify areas of improvement, help set goals, and benchmark performance. Here are some of the benefits of using a productivity threshold:

• It allows businesses to compare their operation’s performance with others to allow them to make better decisions.
• It can help businesses identify areas of improvement and set goals. By setting a productivity threshold, businesses can measure how much or how little productivity is gained.
• It can be used to benchmark performance. By setting a productivity threshold, businesses can measure their performance against industry standards and other operations.
• It can help businesses make decisions about resource allocation. By setting a productivity threshold, businesses can identify areas that require additional resources for improvement.
• It can help businesses identify cost savings. By setting a productivity threshold, businesses can identify areas where they can reduce costs or increase efficiency.

Limitations of Threshold productivity

Threshold productivity is a useful tool for measuring performance, but there are some limitations to be aware of. These limitations include:

• Cost of resources - Threshold productivity is based on standard costs and does not account for the cost of resources used to achieve the desired output.
• Inconsistent results - Threshold productivity may produce inconsistent results due to variations in the quality of resources used, the performance of the workers, and the efficiency of the process.
• Limited scope - Threshold productivity only looks at the cost of the output, not the value of the output. This can lead to an incomplete picture of performance and may not accurately reflect the return on investment.
• Subjective evaluation - Threshold productivity is a subjective measure and may not reflect the actual performance. It is dependent on the interpretation of the data and the opinion of the evaluator.

Other approaches related to Threshold productivity

Threshold productivity is an important measure of the effectiveness of a company's operations. There are several approaches that can be taken to measure the productivity threshold, including:

• Cost-benefit analysis, which takes into account both the costs and benefits of a given operation. This approach can be used to compare different operations and determine which one is most cost-effective.
• Benchmarking, which involves comparing a company's performance against the performance of other similar companies. This approach helps to identify areas where a company may need to improve its performance.
• Break-even analysis, which is a method of determining the minimum amount of revenue a business needs to generate in order to cover its costs. This helps companies to determine whether they are making a profit or a loss.
• Activity-based costing, which is a method of assigning costs to specific activities. This helps to identify which activities are most cost-effective and can help companies identify areas where they can increase their efficiency.

In conclusion, there are several approaches to determining the productivity threshold of a company. These include cost-benefit analysis, benchmarking, break-even analysis, and activity-based costing. Each of these approaches can help a company identify areas where it can improve its operations and become more efficient.

Threshold productivity — recommended articles

Management by results — Differential costing — Cost per unit — Variable Cost Ratio — Activity-based management — Costing system — Standard productivity — Value added statement — Structural productivity

References

• Ansoff, H. I. (Ed.). (1969). Business strategy: selected readings (Vol. 72). Penguin books.
• Coelli, T. J., Rao, D. S. P., O'Donnell, C. J., & Battese, G. E. (2005). An introduction to efficiency and productivity analysis. Springer Science & Business Media.
• Ciccone, A., & Hall, R. E. (1993). Productivity and the density of economic activity (No. w4313). National Bureau of Economic Research.
• Deming, W. E. (1982). Quality, productivity, and competitive position. Massachusetts Institute of Technology Center for Advanced En.
• Kendrick, J. W. (1973). Productivity Trends. Business Economics, 56-61.