BEC 1 Operations management Flashcards
Financial performance measures
- Profit
- Return on investment
- Variance analysis
- Balance scorecard
Nonfinancial measures
- External benchmarking - Productivity measures
a. total productivity ratios
b. partial productivity ratios - Internal benchmarking - Techniques to find and analyze problems
a. Control charts
b. Pareto diagrams
c. Cause and effect Fishbone diagram
Characteristics of effective performance measures
- relate to the goals of the organization
- balance long and short term issues
- reflect mgt of key activities sometimes referred to as critical success factors in the balanced scorecard
- are under the control or influence of the employee
- are understood by employee
- are used to evaluate and reward the employee or influence behavior
- objective and easily measured
- used consistently
Marketing practices and methods
- Transaction marketing
- Interaction based relationship marketing
- Database marketing
- E-marketing
- Network marketing - referrals
Performance
- Marketing methods are aligned with products
2. Performance and performance incentives
Incentive compensation
- Fixed salary
- Bonuses - based on profit or stock performance
- Other perks
Design choices for management compensation
- Time horizon
- Fixed and variable bonuses
- Stock vs accounting based performance evaluation
- Local vs company wide performance
- Cooperative vs competitive incentive plans
Total productivity ratios
Total productivity ratios reflect the value of all output relative to the value of all input.
Partial productivity ratios
Partial productivity ratios reflect the value of all outputs as compared to the value of major categories of input.
Effective performance measure
- balances both long and short term issues
- relates to the goals of organization
- be objective and easily measured
- under the control of the employee
- understood by the employee
Cost objects
Cost objects are defined as resources or activities that serve as the basis for management decisions. They require separate cost measurement and may be products, product line, departments, geographic territories or any other classification that aids in decision making.
Focus of cost objectives
integration of product costing with cost control measurement and assignment objectives maximizes the effectiveness of management accounting systems. Cost measurement and assignment may focus on valuation of product or inventory or cost control.
Product costs
All costs related to the manufacturing of the product.
- Inventory and cost of goods manufactured and sold
- Components
Inventory and cost of goods manufactured and sold
Product costs are inventoriable and attached to units of output
Components
Consist of direct materials, direct labor, and manufacturing overhead applied
Period costs
Expensed in the period in which they are incurred and are NOT inventoriable.
- Expenses - selling and administrative expenses, interest expenses.
- Components - selling the product and administering and managing the operations of the firm.
Manufacturing costs
Treated as product costs.
Include costs associated with the manufacture of a product:
- Inventory and cost of goods manufactured and sold
- components- direct and indirect costs
Nonmanufactuing costs
Treated as period costs.
Costs not related to the manufacturing of a product. These costs are expensed in the period incurred.
Costs accounting systems measure costs objects
- Product costing - inventory and cost of goods manufactured and sold
- Efficiency measurements - comparisons to standards
- Income determination - profitability
Direct costs
A. Directs costs - easily traced to a cost pool or object
- Direct raw materials = used in production + freight-in - discounts + scrap
- Direct labor = used in production + service + expected “down town” (training, set up)
Indirect Cost
Incurred to benefit two or more cost pools or objects. The specific benefit each cost gives to the cost pool or object cant be determined without making some sort of reasonable estimate or suing an allocation methodology.
- Indirect materials
- Indirect labor
- other indirect costs
Indirect materials
Not used specifically or could not be traced to the completed product with ease
Indirect labor
Not easily traceable to a specific product, service etc
Other indirect costs
indirect costs other than materials or labor
Prime cost
Direct cost + Direct material
Conversion cost
Direct labor + Manufacturing overhead
Overhead allocation using cost drivers
Indirect costs are allocated to benefiting cost pools or cost objectives using cost drivers that are considered to have a strong relationship to the incurrence of these costs.
Allocation bases
The cost drivers that are used to allocate indirect costs.
Accounting for overhead
When traditional costing is used, all indirect costs are allocated to a single cost pool called “overhead” and allocated as a single pool. Overhead may also be allocated using activity based costing.
Traditional costing
Step 1: Calculated overhead rate = budgeted overhead costs / Estimated cost driver
Step 2: Applied overhead = Actual cost driver x Overhead rate
Cost behavior
Fixed (indirect cost may be both) or variable (direct material and direct labor)
Variable cost
- Behavior - a variable cost changes proportionally with the cost driver
- Amount - constant per unit, total varies- variable costs change in total, but they remain constant per unit. As production volume increases or decreases the total variable cost will increase or decrease, but the variable cost per unit will always remain the same.
- Long- run characteristics - the short run and long run impacts of variable costs are the same within relevant ranges.
Fixed cost
- Behavior - in the short term and within a relevant range, a fixed cost does not change when the cost driver changes.
- Amount - varies per unit, total remains constant- fixed costs remain constant in total but they vary per unit. As production volume increases or decreases, fixed costs remain the same, but the cost per unit will decrease or increase respectively.
- Long run characteristics - given enough time, any cost can be considered variable.
Semi-variable costs
Mixed costs.
Costs contain both fixed and variable components. A cost that includes components that remain constant over the relevant range and includes components that fluctuate in direct relation to production are termed semi-variable.
Relevant range
The range for which the assumptions of the cost driver are valid. When the cost driver activity is no longer within the relevant range, the variable and fixed cost assumptions for that cost driver cant be used to allocate costs to cost objects.
Cost accumulation system
The manner in which the accounting system assigns costs to products. The system used is driven by the cost object involved. If the cost object is a custom order, job costing is used. If the cost object is a mass produced homogeneous product process costing is used.
Cost of goods manufactured and sold
Production costs may be summarized in the form of:
- “cost of goods manufactured statements” and
- a “cost of goods sold statement”
These statements may be prepared separately or combined as a “cost of goods manufactured and sold statements”.
A. Cost of goods manufactured
B. Cost of goods sold
Cost of goods manufactured
manufacturing costs of the products completed during the period: direct material, direct labor and manufacturing overhead costs
Cost of goods sold
statement similar to retail statement, except cost of goods manufactured is used in place of purchases
Raw materials used
How to calculate Direct material used for a statement of Cost of goods manufactured
Beginning Raw Materials \+ Net purchases Material available - Ending Raw Material Raw Materials used