Ch 9 - Operating Decisions

Question 1

Operations

Answer 1

Operations is the function that produces the goods or services to satisfy demand from customers. (ie. purchasing, manufacturing, distribution)

The all-encompassing processes that produce the goods or services which satisfy customer demand

Question 2

Operating Decisions

Answer 2

Concerned with the conversion process between resources (materials, facilities, equipment, and people) and the products/services that are sold to customers

Depends on factors such as quality, efficiency, capacity utilization, and environmental considerations

Question 3

Porter’s Value Chain

Answer 3

“Every business is ‘a collection of activities that are performed to design, produce, market, deliver, and support its product … A firm’s value chain and the way it performs individual activities are a reflection of its history, its strategy, its approach to implementing its strategy, and the underlying economics of the activities themselves’” - Porter

Porter separates business activities into primary and support activities

Profits and costs should be assigned to the value chain in order to calculate the profitability of each activity in the chain

Accounting systems can get in the way of analyzing the costs of each activity in the value chain

The cost drivers of each value activity should be analysed to enable comparisons with competitor value chains

Question 4

Value Chain Support Activities

Answer 4

Firm Infrastructure
Human Resource Activities
Technology Development
Procurement

Question 5

Value Chain Primary Activities

Answer 5

Inbound Logistics
Operations
Outbound Logistics
Marketing and Sales
Service

Question 6

Industry Value Chain

Answer 6

Supplier Activities --> 
Company Activities --> 
Wholesalers Activities --> 
Retailer Activities --> 
Customer Activities

Question 7

Key points in order to strategically manage a company’s industry value chain

Answer 7

Focus not only on creating value with its own activities but also on creating relationships between business partners

Working together to reduce costs and increase efficiencies in the movement of goods and information

Question 8

Why account for the Cost

of Spare Capacity?

Answer 8

Utilization of capacity is a key performance driver

Accounting traditionally equates the cost of using resources with the cost of supplying resources

Question 9

Unused capacity formula

Answer 9

Cost of resources supplied – Cost of resources used = Cost of unused capacity

Question 10

Scarce resource

Answer 10

Limits the number of units of each product or service that the company can produce and therefore sell.

Ex. Employees, equipment, raw materials

Question 11

Product/service mix

Answer 11

The mix of products or services sold by the business, each of which may have a different selling price and cost

When demand exceeds capacity, it is necessary to rank the products/services with the highest contribution margin per unit of the limiting factor

Question 12

Contribution per Unit of Limiting Factor

Answer 12

Determines ranking preference when you have more than one limiting factor

1. Calculate CM
2. Calculate CM per limiting factor (i.e. machine hours)
3. Rank by highest value in CM per limiting factor

Question 13

Optimum Capacity Utilization

Answer 13

The goal of measuring and ranking the contribution per unit of limiting factor

Question 14

Theory of constraints

Answer 14

Bottleneck defines capacity

Bottleneck resources are those resources that limit the amount of product or service a company can provide

Throughput contribution = sales – direct materials

Assumes all other costs are fixed and independent of sales volume

Question 15

Bottleneck resources

Answer 15

Resources that limit the amount of product or service a company can provide

Question 16

Relevant costs

Answer 16

Those that are relevant to a particular decision.

Future, incremental cash flows that result from a decision

Relevant costs are avoidable costs

Relevant costs may be opportunity costs

The loss of a future cash flow that takes place as a result of making a particular decision

Question 17

Sunk costs

Answer 17

Costs that were incurred in the past and cannot change

Are NOT relevant (non-relevant costs are unavoidable costs: irrespective of what a decision is, unavoidable costs will still be incurred)

Question 18

Make vs. Buy

Answer 18

Considerations:

Chose alternative that is less costly from a relevant cost perspective

Purchase cost of component or product

Variable costs of producing the component or product

Fixed costs that are avoidable

Question 19

Equipment Replacement Decisions

Answer 19

Considerations:

Purchase price of new equipment

Trade-in value of old equipment

Change in operating costs per year

Change in income per year

Question 20

Costs of quality (four categories)

Answer 20

1. Prevention costs include design, engineering, and training costs incurred to ensure that a product meets specifications.
2. Appraisal costs include inspection costs and testing costs incurred to identify products that do not meet specifications.
3. Internal failure costs are the costs of rework, spoilage, and repairs that occur prior to the product being sent to the customer.
4. External failure costs include the costs of warranties, repairs, legal claims, and customer service after the product has been sent to or bought by the customer

Question 21

Prevention costs

Answer 21

Cost of quality (1 of 4)

Prevention costs include design, engineering, and training costs incurred to ensure that a product meets specifications.

Question 22

Appraisal costs

Answer 22

Cost of quality (2 of 4)

Appraisal costs include inspection costs and testing costs incurred to identify products that do not meet specifications.

Question 23

Internal failure costs

Answer 23

Cost of quality (3 of 4)

Internal failure costs are the costs of rework, spoilage, and repairs that occur prior to the product being sent to the customer.

Question 24

External failure costs

Answer 24

Cost of quality (4 of 4)

External failure costs include the costs of warranties, repairs, legal claims, and customer service after the product has been sent to or bought by the customer

Question 25

Total quality management (TQM)

Answer 25

Encompasses design, purchasing, operations, distribution, marketing, and administration.

Involves comprehensive measurement systems, often developed from statistical process control

Aims to improve performance and efficiencies by improving quality.

Question 26

Continuous improvement

Answer 26

Most common form of TQM

A systematic approach to quality management that focuses on customers, re-engineers business processes

Ensures that all employees are committed to quality

Question 27

Six Sigma

Answer 27

A measure of standard deviation

Aims to improve quality by removing defects and the causes of defects.

A customer-oriented approach to managing quality, with customer requirements defining quality improvement goals

Question 28

Environmental Cost Management

Answer 28

Importance of corporate social responsibility

Environmental management accounting is concerned with collecting, measuring, and reporting costs about the environmental impact of an organization’s activities

1. Prevention costs: incurred to avoid environmental damage (cost of equip. to reduce pollution, training employees)
2. Measurement costs: incurred to determine the extent of the organization’s environmental impact (testing, monitoring, external certification)
3. Internal failure costs: where remedial action is taken (clean up spillage, leaks, employee health/safety-related damages)
4. External failure costs: penalties incurred for environmental damage