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Multifactor Productivity Ratio

Small Business | Human Resources | Organizational Skills

By David Weedmark Updated December 18, 2018 SPONSORED SEARCHES

ratio calculator with solution

Tracking productivity is an important part of managing a business and, formula calculator app

while there are a few ways of doing this, multifactor productivity is one RELATED
employee productivity calculator
of the most common and useful. Labor productivity is also a common Productivity Versus E ciency

method, which is the ratio of production over labor, however, it fails to Cost Effective Productivity Bargaining asset management ratio calculator
take into account other factors that affect overall business productivity.
De nition of Cost of Labor construction cost estimator
A multifactor productivity ratio compares production output over labor,
How to Calculate Average Unit of Production in
capital and materials.
Accounting
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Labor Productivity Formula

When it comes to productivity, labor can be the most important factor because it can vary considerably from one individual Taught By World's Top
or team to another. The labor productivity ratio is simply the amount of production over amount of labor over the amount Earners
of production, or even more simply output over input. The input of labor is normally measured in hours or dollars, while the
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output of production is usually measured in units. The formula is: Become a High Income
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Productivity = Units of Output / Units of Input
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For example, if you have five workers each working 40 hours in a week, for a total of 200 hours, and they produced 4,000 1 Concept of Marginal Productivity

units at the end of the week, the productivity would be 4,000/200, or 200 units/hour. If you were paying everyone $10 per
Relationship Between Marginal &
hour, the labor productivity could also be measured as 20 units/dollar. You could then follow up in later weeks to see if 2 Average Productivity
productivity is increasing, decreasing or remaining constant.
3 What Is Unit Labor Cost?
Multifactor Productivity Formula
How to Drag a Curve or Curves to
In the real world, labor is not the only factor that affects productivity. Multifactor productivity goes beyond labor to include 4 Show the Impact of an Increase in
Productivity
other factors, such as capital and materials. These combined factors are added together and placed as a ratio under the
units of output. While the formula may look different depending on exactly what units are being used, the basic formula Ad
looks like this:

Productivity = Units of Output / Units of Labor + Units of Capital + Units of Materials

Because changes in capital and materials used in the production may also increase or decrease labor costs, this formula
will invariably give you a more accurate ratio than using labor alone. If a company hires more workers, or invests in
additional training, or replaces workers with robots will be able to see whether or not overall productivity has increased or
not, and by what amount.

Examining Multifactor Productivity Models

Most businesses, and the economists who measure productivity across industry sectors, use a multifactor productivity
ratio to determine whether or not productivity is increasing or decreasing from one period to another.

Suppose, for example, that you decided to increase output by offering every worker a one dollar bonus for every 100 units Massive Checks From
produced. At the end of the week, they work the same number of hours, producing 5,000 units instead of 4,000 According Writing?
to the labor productivity formula, productivity would have increased from 200 units/hour to 250 units/hour, without taking
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into account the additional $500 you are now paying as a bonus to the employees. A High-Income Skill And
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Using a multifactor productivity calculation, you would get a better insight into how the bonus affected overall productivity Copywriter
by adding the $500 bonus to the $2,000 you are paying in wages, giving you:
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5,000 units / $2,000 + $500 = 200 units/dollar

In fact, paying the workers the bonus has not improved productivity at all. Learn More

Adding the cost of materials will also give you a more accurate insight into productivity. Instead of producing each units
from scratch, suppose you were to buy components that were already partially assembled for a slightly increased price.
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Labor productivity would certainly increase, but only by taking the extra cost of materials into account would you know if How to Calculate Percent of
1 Productivity Using a Standard
the increased materials cost was worthwhile or not.

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3 Important to a Company?

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5 Direct Labor
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References
About the Author
A published author and professional speaker, David Weedmark has advised businesses on technology, media and
marketing for more than 20 years. He has taught computer science at Algonquin College, has started three successful
businesses, and has written hundreds of articles for newspapers and magazines and online publications including
About.com, Re/Max and American Express.

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