How To Measure Multifactor Productivity in 5 Steps

Multifactor productivity (MFP) is a measure of economic performance that compares the amount of output to the amount of combined inputs used to produce that output.

The formula is:
  1. Multifactor productivity = output units / (labor input + capital input + materials input)
  2. Amanda is a team manager for a marketing firm. …
  3. Amanda uses the multifactor productivity formula to see if the team raised its daily productivity rate. …
  4. Productivity = 25 units / $400 = 0.06 units per dollar.

How to calculate multifactor productivity

Why is measuring multifactor productivity important?

Multifactor productivity is more useful than some single-factor productivity formulas because it accounts for more than just one item that can affect your individual or team performance. Therefore, it may give you a more accurate ratio of production.

For example, a single-factor formula like labor productivity may only focus on labor costs. However, if you hire more employees, invest in more training, or replace team members with automation, you may not get an accurate account of your productivity. Multifactor productivity can gauge all of these elements.

What is multifactor productivity?

Multifactor productivity compares production output over labor, capital and materials. The formula is:

Multifactor productivity = output units / (labor input + capital input + materials input)

You can define each of the variables as:

What are the benefits of increasing multifactor productivity?

On a national scale, increasing multifactor productivity can raise the income per person in a country. This can influence a better cost or standard of living for the entire population. On a company scale, increasing this kind of productivity raises the income of the business. This can lead to positive changes within the organization, such as:

When do you use multifactor productivity?

Use this formula to determine if your productivity increases or decreases over a period. It can tell you if changing variables like production costs or workforce payments increase or decrease the overall productivity of your team or company. Firms, industries and government sectors use multifactor productivity to measure the state of the economy. Politicians and policymakers use it as evidence when allocating public funds and resources to different sectors of the economy, such as transportation and education.

How to measure multifactor productivity

Use these steps to learn how to measure multifactor productivity at your company or on your team:

1. Choose a time period

You measure productivity within a time construct. This means choosing a start and end date for the period in which youll track it. You can choose a day, week, month, quarter or year depending on how you plan to apply the information. Its helpful to know the time construct before you do data collection to make sure the numbers are accurate and that they all match. For example, comparing the number of units produced in a month to how much money you pay employees per week doesnt match, but comparing units per month to salaries per month does.

2. Collect your data

Collect data about the current state of productivity within the time construct. Figure out the most recent or most accurate numbers for labor, capital, materials and production units. If you keep detailed and accurate labor and accounting records, this step may be easy. Simply review your books and retrieve the correct numbers. If you dont currently keep these records, start doing so. When you have the appropriate amount of data for your time construct, you can move to the next step.

3. Match numbers to variables

Use the multifactor productivity formula as a guide to make sure you match the correct numbers with the right variables. This step is important to ensure the accuracy of your calculation. Its also important to ensure that you measure all variables under the division bar—labor, capital and materials—in the same units. This means measuring all three numbers in time, money or number of items, rather than mixing and matching units.

4. Perform the calculations

Substitute your numbers into the formula for the correct variables. Follow the PEMDAS algebraic order of operations to solve the equation. Each letter stands for:

For this formula, there is a section in parentheses, so solve that first. Add the labor, capital and materials numbers together. Then divide the number of output units by the number of input units. Make sure your answer makes sense. For example, if the number of output units is greater than the added input units, an answer greater than the number one makes sense.

5. Apply your results

Use the results of the multifactor productivity calculation to influence your business decisions. The results may help you decide if you can scale your business for greater production with the resources you already have at your company. It may also help you decide to hire more employees or make supplier changes to get materials at a less expensive cost. These are just a few examples of how you can apply multifactor productivity to make changes within your organization.

Multifactor productivity calculation example

Use this fictional example to learn how to calculate multifactor productivity at your company:

Amanda is a team manager for a marketing firm. Her group of five writers produces written articles for a client. Teach team member makes $80 per day. Amanda wants to increase their daily output, so she offers a $10 bonus for every two articles a team member completes over their assigned daily quota. Each writer works the same number of normal daily hours, but all five met the bonus quota. The team produced 35 articles instead of 25 for the day.

Amanda uses the multifactor productivity formula to see if the team raised its daily productivity rate. She calculated both the teams regular productivity rate and the new daily rate with the bonus to compare the change. The regular daily rate was:

Productivity = 25 units / $400 = 0.06 units per dollar

The productivity rate with the bonus was:

Productivity = 35 units / $400 + $50 = 0.08 units per dollar

Using the rate of change formula to compare both numbers, Amanda concluded her team increased their productivity by 33%.

FAQ

How is MFP measured?

Multifactor productivity (MFP) is a measure of economic performance that compares the amount of output to the amount of combined inputs used to produce that output. Combinations of inputs can include labor, capital, energy, materials, and purchased services.

How do you calculate single and multifactor productivity?

Calculating MFP
  1. Sk(t) = capital costs(t) / total costs(t), and.
  2. Sl(t) = labor costs(t) / total costs(t),

How do you calculate multifactor productivity in Excel?

Calculating MFP
  1. Sk(t) = capital costs(t) / total costs(t), and.
  2. Sl(t) = labor costs(t) / total costs(t),

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