Zychol Chemicals Corporation

Zychol Chemicals Corporation

1.The analysis of the productivity data is shown below:Single factor productivityanalysis2006 2007 Adjusted cost* Adjusted totalcostProduction 4,500 6,000Material used (barrels) 700 900Material cost per barrel $320 $360 $345.60

$311,040

Labor Hours $22,000 $28,000 $376,320

Compensation rate $13.00 $14.00 $13.44

Capital Applied $375,000 $600,000 $595,200

$595,200Producer Price Index (PPI) 120 125 1,282,560*Change in PPI =4.16% = (125/120 = 1.04167)Total cost $885,000 $1,336,000 $1,282,560

1

360/1.04167

2

900*345.60

3

28000* 13.44

4

14/1.04167

5

600000/1.04167

Both labor and material productivity increased, but capital equipment productivity did not. Thenet result is a large negative change in productivity. If this is a one-time change in the accounting procedures, this negative change should also be a one-time anomaly. The effect of accounting procedures is often beyond the control of managers. For example, perhaps the capital allocationis based on an accelerated allocation of depreciation of newly installed technology. Thisaccounting practice will seriously impact near-term

productivity and then later years’

productivity figures will benefit from the reduced depreciation flows. This highlights the difficulty in accounting for costs in an effective managerial manner. Decisions and evaluation of operating results should be based on sound managerial accounting practices and not necessarilygenerally accepted financial accounting principles.2. An analysis of adjusted results reduces the negative impact on the capital allocation but thereis still a negative growth in multifactor productivity. After adjustment for inflation, the materialcosts are still higher in 2007. Yet, one must be aware of the extra volatility of the cost of petroleum-based products. Did the manager have control over his price increases? One shouldlook at the changes in a petroleum-based price index, including the cost of oil, over the last twoyears in order to gain a better understanding of the degree to which the manager had control over these costs. The increase in wages was beyond the m

anager’s control and a constant

rate should be used for compa

ring both years’ results. Yet a

negative result still remains. Even when materialcosts in 2007 are converted to the original cost of $320, a negative 5% growth in productivityremains. The increase in the capital base is responsible yet should not persist in future years if the increase was the result of an adoption of new technology.3. The manager did not reach the goal. An analysis of the changes in capital costs is warranted.Even after adjusting for inflation, multifactor productivity was not positive. However, labor andmaterials

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