Top 3 Types of Productivity Audit | Cost Audit

This article throws light upon the top three types of productivity audit. The types are: 1. Material Productivity Audit 2. Labour Productivity Audit 3. Capital Productivity Audit.

Type # 1. Material Productivity Audit:

‘Material productivity’ means:


(i) Obtaining the higher output for given units of materials; or

(ii) Obtaining the given output at lower units of materials than before (that is, by reducing the consumption of materials).

In cost terms, ‘material productivity’, means:

(i) Obtaining more of a given output than before at the same cost of materials consumed, or

(ii) Obtaining a given output at lower costs of materials consumed than before.

Thus, ‘material productivity audit’ seeks to examine and evaluate the productivity of materials from the twin aspects indicated above.


In an audit of this factorial productivity, the auditor is concerned with the study and evaluation of:

1. Materials specification as to type and quantum required to produce a standard Job Unit or lot or batch which is determined on” the basis of either engineered measurements (for job work) or standard consumption for formulation specifications (for processed work).

2. Standard procedures for job assemblies and sub-assemblies (for job orders) or for processing system, and also standard allowances for waste, scrap, spoilage, rejec­tions, off-cuts, defectives, etc.

3. Standards of materials performance expected in their use for production or assembly work.


4. By-products being used as substitute materials and their effect on yield or processing.

5. Recycling of the process waste or scrap (specially in industries dealing with metals).

6. Standard input-output ratio.

7. Actual data on output and material consumption.


8. The variance reports on materials usage, yield, mix, and design, etc.

Type # 2. Labour Productivity Audit:

‘Labour productivity’ may mean:

(i) Performing more of a given function (work or output) than before with the same number of workmen engaged (or labour hours utilised); or

(iii) Performing a given function (work or output) with lesser number of workmen (or labour hours) than before.

In cost terms, this concept means:

(i) Obtaining the higher output at the same labour cost,

(ii) Obtaining the given output at lower labour cost than before (that is by reducing the engagement of labourers in numbers or hours).

Thus, labour productivity audit attempts to examine and evaluate the productivity of labour from the twin aspects stated above. But the concept of labour productivity is not simple as stated above, as it is typically measured as “the units of output per labour unit, and hence, it takes the credit for increases in the productivity of capital factors, such as machines and equipment. Labour productivity is, therefore, an amalgam of labour and capital productivity, and it may be quite difficult to separate the effects of each”.

While auditing this factoral productivity, the measure of labour productivity through labour cost comparisons with estimates or standards may be a satisfac­tory process in a narrow sense, but inter-relationship with other factoral productivities has to be borne in mind.

Labour productivity very much depends on the type of equipment available, the degree of mechanisation, the nature of raw materials, the quality of labour and of supervision, the availability of material handling equipment, etc. Any variation in the degree of efficiency or productivity of these allied factors influences labour productivity.

Audit in regard to the measurement of labour productivity, for the sake of simplicity, may be three important factors: Labour, Machine and Management (the latter two factors invariably represent capital).

Keeping in view the predominance of the factors like labour-intensive or machine-intensive industry, the auditor may choose the following method of labour productivity measurement:

If m = machine productivity,

n = management productivity, and

l = labour productivity,

then, m = k1l, n = k2l where k1 and k2 are constants and m, n, p expressed in terms of l i.e. labour productivity.

Type # 3. Capital Productivity Audit:

Simply stated, “capital productivity may be described as the arithmetical ratio between the amount produced and the amount of capital used in the course of production. Capital productivity is frequently measured as the output of goods or services in a given number of machine-hours”.

Some accountants define capital productivity as the physical output per rupee of investment (net or gross capital). Some others suggest to calculate capital productivity as value added by manufacture per rupee of capital.

But from the auditor’s point of view, this value- added concept itself is subject to severe limitations, viz.;

(i) The market prices are susceptible to fluctuations;

(ii) The integration of production processes may change the ‘value added’; [Example—spinning units when integrated with weaving units in a textile mill, the value-added figure will rise because payments made to spinning units for services performed is eliminated, previously such payments were deducted from the value of output.]

(iii) The increasing returns to scale may increase or decrease ‘value-added’ according as the market prices rise and fall; [The capital productivity would increase or decrease, as total value-added increases or decreases].

(iv) In a complex production function, the components of cost change and so also the functional relations owing to factors, like differential qualities of labour not being reflected in wage-rates, technological changes in production methods affecting value-added, management’s contribution towards productivity undergoing change, capital intensity i.e. capital per worker may increase, thus increasing the total value- added and giving an impression that labour productivity has increased.

Apart from the above, product-mix and variations in materials and output prices also change value-added. In case of scarcity of material, the price may be abnormally high—which leads to a conclusion that capital productivity has declined.

Thus, the concept of ‘capital productivity audit’ is a complex function. The auditing mechanism should, therefore, extend to the verification and examination of the rate of ‘return on capital’ i.e. the rewards attributable to per unit of adjusted capital in order to determine the average productivity of capital.

For a relatively better and precise estimate of the productivity of capital, some auditors suggest the following approaches:

Price of capital service (before tax):

= rate of return on capital + rate of depreciation + rate of repairs cost

Price of capital service (after tax):

= Price of Goods Investment x [R + rate of return on capital + rate of repairs cost – proportion of investment goods payable as Government taxes.]

Where R = Total Net Value Added – Total Salaries and Wages Paid/Total net adjusted capital

and when R represents the rate of return per rupee of net adjusted capital. Assuming the other factors remaining constant, its increase or decrease could represent rising or falling produc­tivity of capital.

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