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BEC V > 3. Process Management > Flashcards

3. Process Management Flashcards

1
Q

Cost Relevance: What is it?

A

The future costs and benefits that differ among alternatives.

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2
Q

Cost Relevance: what is avoidable costs? Is it relevant costs?

A

Costs that can be eliminated by choosing one alternative over the other.
Relevant.

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3
Q

Cost Relevance: what is opportunity costs? Is it relevant costs? Relationship with avoidable costs? Relevant costs?

A

The benefits that are forgone when the selection of one course of action precludes another course of action.
Relevant.
*In general, opportunity cost = avoidable costs and Unavoidable cost is NOT opportunity costs.
*In general, they include relevant costs.

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4
Q

Cost Relevance: what are unavoidable costs? Are they relevant?

A

Costs that will remain the same regardless of which alternative is chosen.
Not relevant.

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5
Q

Cost Relevance: what are 2 categories of unavoidable costs?

A
  • Sunk costs: a cost that has already been incurred and cannot be changed (e.g. original price paid)
  • Future costs and benefits that do not differ between alternatives
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6
Q

Cost Relevance: What are accounting costs?

A

Costs that can be found in the fundamental books of record (e.g., the general ledger).

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7
Q

Cost Relevance: Are fixed costs unavoidable costs? Why?

A

No because unavoidable costs can’t be changed but fixed costs can be.

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8
Q

Cost Relevance: Fixed cost is fixed with respect to what?

A

Output.

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9
Q

Cost Relevance: what is marginal costs?

A

The costs of producing one more unit.

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10
Q

Cost Relevance: what is incremental cost?

A

The difference between two decision alternatives.

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11
Q

Cost Relevance: what are 4 types of decisions using relevant costs?

A
  1. Whether to process a product further or sell it now
  2. Whether to keep or drop a product line or company segment
  3. Wether to make or buy a product or component
  4. Whether to accept or reject a special order
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12
Q

Cost Relevance: Sell now or process further decisions: What is the typical products involved?

A

Joint products.

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13
Q

Cost Relevance: Sell now or process further decisions: when is the decision point?

A

At the split-off point; sell immediately or perform additional processing on some or all before sale.

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14
Q

Cost Relevance: Sell now or process further decisions: what are relevant facts?

A
  • The differential future costs and benefits
  • The separable costs incurred beyond split-off point
  • The difference between the revenue that can be earned at split off and after further processing.
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15
Q

Cost Relevance: Sell now or process further decisions: what are not relevant?

A

Joint costs.

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16
Q

Cost Relevance: Keep or drop a product line: what are reasons that this is not a simple decision?

A
  1. Some costs charged to the product may not be eliminated if the product is eliminated
  2. Changes in one part of the organization may impact other parts of the organization
  3. There may or may not be alternative uses for the resources freed up by elimination of the product
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17
Q

Cost Relevance: Keep or drop a product line: What are relevant costs?

A
  • Variable costs are avoidable costs in general = if drop the product, the variable costs related to the product will not be incurred
  • Fixed costs are a mix of avoidable and unavoidable costs in general = avoidable part will not be incurred if dropped
  • Differential costs and revenue
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18
Q

Cost Relevance: Keep or drop a product line: How is it determined?

A
  1. Compute costs with and without the product

2. Compare the result to see if its favorable or unfavorable

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19
Q

Accept or reject a special order: what is a special order?

A

One-time opportunities that are not part of the organization’s ongoing business.

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20
Q

Accept or reject a special order: what is the consideration purpose?

A

Short-term, profit maximizing.

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21
Q

Accept or reject a special order: Relevant costs?

A
  • The costs directly attributable to the special order - including avoidable fixed costs
  • Opportunity costs associated with production that must be cancelled in order to complete the special order IF the company is operating at capacity

**Unavoidable fixed OH and selling and admin costs NOT relevant because they are already covered by normal products

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22
Q

Accept or reject a special order: what are other consideration beside relevant costs?

A

Strategic considerations: gain market share, etc.

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23
Q

Accept or reject a special order: When there is excess capacity: Relevant costs?

A

Only sales revenues and variable costs of the special order.

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24
Q

Accept or reject a special order: When there is no excess capacity: Relevant costs?

A
  • Opportunity costs: the forgone profits from the products cancelled
  • Sales revenue
  • Variable costs
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25
Q

Make or buy a product or component: Relevant costs? Not relevant?

A

Relevant

  • Variable costs
  • Avoidable fixed costs
  • External costs option

Not relevant
*Unavoidable fixed costs etc

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26
Q

Transfer pricing: what is it?

A

The price charged by the selling division to the buying division, when one division of a manufacturing organization supplies components or materials to another division.

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27
Q

Transfer pricing: what is market price?

A

The price the purchasing unit would have to pay on the open market.

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28
Q

Transfer pricing: what is cost-based price?

A

One of several variations on the selling units’ cost of production: variable cost, full cost, cost “plus” (a percentage or a fixed amount).

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29
Q

Transfer pricing: what is negotiated price?

A

A price that is mutually agreeable to both the selling and purchasing unit.

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30
Q

Transfer pricing: what is the issue when there is not established method to determine the price?

A

Managers from the selling and buying division act in their individual best interests, the organization as a whole may suffer resulting in suboptimization.

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31
Q

Transfer pricing: what is goal incongruence?

A

The existence of suboptimal decision-making usually indicates a problem with management’s incentive and reward structure.

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32
Q

Transfer pricing: when does goal incongruence exist?

A

when actions encouraged by the reward structure of a department conflict with goals for other departments or the organization as a whole.

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33
Q

Transfer pricing: how is goal incongruence handled? To promote what?

A

By senior managers establish the methodology for setting internal transfer prices.
To promote goal congruence.

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34
Q

Transfer pricing: when does goal congruence occur?

A

when the department and division managers make decisions that are consistent with the goals and objectives of the organization as a whole.

35
Q

Transfer pricing: Formula?

A

Transfer Price per Unit = Additional Outlay Cost per Unit + Opportunity Cost per Unit

36
Q

Transfer pricing: what is the additional outlay cost?

A
  • Variable production costs incurred by the selling unit
  • raw materials
  • direct labor
  • variable factory OH
  • Any additional costs
  • storage costs
  • transportation costs
  • administrative selling costs
37
Q

Transfer pricing: what are opportunity costs?

A

Benefits that is forgone as a result of selling internally rather than externally.

38
Q

Transfer pricing: Opportunity costs: when selling unit is operation at full capacity and selling all that it produces?

A

Opportunity cost per unit = Selling price per unit (revenue given up) - Additional outlay cost per unit.

39
Q

Transfer pricing: Transfer price: when selling unit is operation at full capacity and selling all that it produces?

A

Transfer price = Market price.

= Additional Outlay Cost per Unit + Opportunity Cost per Unit

40
Q

Transfer pricing: Full capacity EX:
Dept A produces X, used by Dept B. A pays $8 in direct materials, labor, variable OH. Selling price to external customer = $14.
Opportunity and transfer price?

A

O: 14 - 8 = $6
TP: 8 + 6 = 14.

41
Q

Transfer pricing: Opportunity costs: when selling unit is operation at less than full capacity? Transfer price? Issue?

A

No opportunity costs.
TP = Additional costs incurred to produce each unit
*Because there is no profit in above method, in practice, this price is used as lower threshold in negotiation as the basis for cost-based pricing.

42
Q

Transfer pricing: what is the maximum price for buying and minimum price for selling division?

A

*Buying Dept:
Maximum price = the minimum price for the item on the open market.
*Selling Dept:
Minimum price = (1) its direct costs if it has excess capacity or (2) its market price if it does not have excess capacity

When there is not market = based on standard costs and divisional profitability considerations.

43
Q

Transfer pricing: what is cost-based pricing? Benefits?

A

Transfer cost is based on the selling division’s production costs.
*Simple, easy-to understand, extensively used in practice as long as there is excess capacity and standard costs are used

44
Q

Transfer pricing: what are 3 variations of cost-based pricing?

A
  1. Variable cost pricing
  2. Full-cost (absorption) pricing
  3. Cost-plus pricing
45
Q

Transfer pricing: what is variable cost costing? What costs must be always used and why? Attractive to who and not for who?

A

Based on variable costs: direct materials, labor, variable OH, variable selling and amin costs.

Standard costs rather than actual. Using actual costs allows the division’s inefficiencies to be passed on to the purchasing division and provide no incentive for improvement.

Attractive to purchasing division, but not for selling division because it covers only costs and no profit.

46
Q

Transfer pricing: what is full (absorption) pricing? Attractive to who? Problem?

A

An allocated portion of the fixed costs of the selling division is added to the variable costing.

Attractive to both: selling division (some extra money), purchasing (less than market price).

Problem: Fixed costs allocated to the product by selling division become variable costs to the purchasing division - lead to understatement of profitability when earning opportunity is analyzed based on costs

47
Q

Transfer pricing: what is cost-plus pricing? Benefits and issues?

A

Based on the selling division’s additional costs per unit plus either a fixed dollar amount or a fixed percentage of the cost.

Benefits: simple and easy.
Issue: Inclusion of an arbitrary charge may lead to suboptimal decision

48
Q

Transfer pricing: what is dual pricing? Issue?

A

An attempt to eliminate the internal conflicts associated with transfer prices by giving both the buying and selling divisions the price that “works best” for them:

Selling: Transfer price = Market price (no loss)
Buying: Transfer price = Based on standard variable costs (keep profit)

Issue: much of the value of pricing as an incentive for divisions to control costs is lost (by giving both the buying and selling divisions prices that enhance their profitability)

49
Q

Transfer pricing: International consideration?

A

When items move across boundaries, it can be an important tool for reducing tax liability.

50
Q

Activity-based costing: what is it?

A
  • Method of assigning OH (indirect) costs to products
  • Alternative to the traditional approach
  • Better identify the costs of an activity
  • More accurate association of activities and products - More accurate product costs
  • Better insights for process - potential improvement
51
Q

Activity-based costing: what is the traditional approach?

A

Volume-based approach = accumulate OH in a single pool and assign the costs across all products based on the allocation base.

  • Simple
  • Does not accurately reflect the true relationship between the products produced and costs incurred - over-assigned costs to some products and under-assigned costs to others.
52
Q

Activity-based costing: what is activity?

A

Procedures that comprise work.

53
Q

Activity-based costing: what is cost driver?

A

Measures that are closely correlated with the way an activity accumulates costs

54
Q

Activity-based costing: what is Cost center?

A

An area where costs are accumulated and then distributed to products.
E.g: Accounts payable, product design, marketing

55
Q

Activity-based costing: what is cost pool?

A

A group of costs that are associated with a specific cost center.

56
Q

Activity-based costing: what is value-added activities?

A

Processes that contribute to the product’s ultimate value

*Include: design and packaging in addition to direct conversion of direct materials into FG

57
Q

Activity-based costing: what is nonvalue-added activities? How can cost reduction be achieved?

A

Processes that do not contribute to the product’s value
*Include: moving materials, rework
By reducing or eliminating non value-added activities

58
Q

Activity-based costing: what is the first step? Why?

A

Identifying activities.

Because activities consume,e resources.

59
Q

Activity-based costing: what are 4 categories of activities?

A
  1. Unit-level activities
  2. Batch-level activities
  3. Products-sustaining-level activities
  4. Facility-(general-operations) level activities
60
Q

Activity-based costing: what is unit-level activities?

A

Activities that must be performed for every product unit

61
Q

Activity-based costing: what is batch-level activities?

A

Activities that must be performed for each batch of products produced.

62
Q

Activity-based costing: what is product-sustaining-level activities?

A

Activities that are necessary to support the product line as a whole.
e.g. advertising and engineering activities

63
Q

Activity-based costing: what is facility-level activities?

A

Activities that are necessary to support the plant that produces the products.
e.g. plant manager salaries, property taxes, insurance

64
Q

Activity-based costing: what is 2nd step?

A

OH costs are assigned to each activity = activity cost pool

65
Q

Activity-based costing: what is 3rd step?

A

Identify cost drivers.

66
Q

Activity-based costing: what is the result for organizations?

A

A large number of smaller cost pools that can be more closely aligned to products.

  • More precise measures of cost
  • More cost pools
  • More allocation bases
67
Q

Activity-based costing: what can it be used for?

A
  • Job order and process costing systems
  • Standard costing abd variance analysis
  • Service businesses and manufacturing ones
68
Q

Activity-based costing: what is the shift?

A

Shift costs away from high volume, simple products to lower volume, complex products.

69
Q

Activity-based costing: what are steps?

A
  1. Identify activities, cost driver for each activity, budgeted cost and budgeted activity amount.
  2. Determine the rate per cost driver = budgeted cost / budgeted activity
  3. Compute allocated cost = the predetermined rate x actual activity
70
Q

Process management: what does it involve?

A

Activity analysis to achieve an understanding of the work that takes place in an organization.

71
Q

Process management: Define process.

A

A series of activities conducted to accomplish a defined objective.
Implies that a process uses resource inputs to achieve the organization’s outputs.
- refers to Activity-based management (ABM)

72
Q

Process management: what are 2 key objectives?

A
  1. Increase manager understanding: of cause-and-effect relationships between processes and resources
  2. Promote the elimination of waste: to achieve managerial objectives
73
Q

Process management: what are highlights?

A
  • Interdependencies

* Continuous improvement

74
Q

Process management: what is BPR?

A

Business process reengineering: a process-analysis approach that typically results in radical change.
*Extreme transformation

75
Q

Outsourcing: Define.

A

Contracting a business process to an external provider.

76
Q

Outsourcing: Reasons?

A

Lower costs, higher quality, risk-shifting strategies

77
Q

Outsourcing: risks?

A

Risk to quality

78
Q

What is shared service?

A

One part of an organization provides an essential business process that previously had been provided by multiple parts of that same organization.

79
Q

Shared service: Purpose?

A

To provide a process in a more effective and efficient manner with lower costs.

80
Q

Shared service: Risk?

A
  • The costs of moving or restructuring operations
  • The reduction of service specificity to the needs of specialized processes
  • Possibility of less-timely delivery
81
Q

What is offshore-operations?

A

A process is moved to a different county - can be internal or external provider.

82
Q

What are difference between offshore and outsourcing?

A

Outsourcing is always outside of the company (but may or may not be outside the country).
Offshoring is always outside of the country (but may or may not be outside the company).

83
Q

Offshore: purpose?

A

Almost always for cost savings by gaining access to lower cost economies.

84
Q

Offshore: risk?

A
  • Language or cultural issues

* Difficulty protecting intellectual property rights in some foreign countries

BEC V (7 decks)

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