Ch 9 - Operating Decisions Flashcards
Operations
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
Operating Decisions
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
Porter’s Value Chain
“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
Value Chain Support Activities
Firm Infrastructure
Human Resource Activities
Technology Development
Procurement
Value Chain Primary Activities
Inbound Logistics Operations Outbound Logistics Marketing and Sales Service
Industry Value Chain
Supplier Activities --> Company Activities --> Wholesalers Activities --> Retailer Activities --> Customer Activities
Key points in order to strategically manage a company’s industry value chain
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
Why account for the Cost
of Spare Capacity?
Utilization of capacity is a key performance driver
Accounting traditionally equates the cost of using resources with the cost of supplying resources
Unused capacity formula
Cost of resources supplied – Cost of resources used = Cost of unused capacity
Scarce resource
Limits the number of units of each product or service that the company can produce and therefore sell.
Ex. Employees, equipment, raw materials
Product/service mix
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
Contribution per Unit of Limiting Factor
Determines ranking preference when you have more than one limiting factor
- Calculate CM
- Calculate CM per limiting factor (i.e. machine hours)
- Rank by highest value in CM per limiting factor
Optimum Capacity Utilization
The goal of measuring and ranking the contribution per unit of limiting factor
Theory of constraints
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
Bottleneck resources
Resources that limit the amount of product or service a company can provide
Relevant costs
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
Sunk costs
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)
Make vs. Buy
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
Equipment Replacement Decisions
Considerations:
Purchase price of new equipment
Trade-in value of old equipment
Change in operating costs per year
Change in income per year
Costs of quality (four categories)
- Prevention costs include design, engineering, and training costs incurred to ensure that a product meets specifications.
- Appraisal costs include inspection costs and testing costs incurred to identify products that do not meet specifications.
- Internal failure costs are the costs of rework, spoilage, and repairs that occur prior to the product being sent to the customer.
- 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
Prevention costs
Cost of quality (1 of 4)
Prevention costs include design, engineering, and training costs incurred to ensure that a product meets specifications.
Appraisal costs
Cost of quality (2 of 4)
Appraisal costs include inspection costs and testing costs incurred to identify products that do not meet specifications.
Internal failure costs
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.
External failure costs
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
Total quality management (TQM)
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.
Continuous improvement
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
Six Sigma
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
Environmental Cost Management
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
- Prevention costs: incurred to avoid environmental damage (cost of equip. to reduce pollution, training employees)
- Measurement costs: incurred to determine the extent of the organization’s environmental impact (testing, monitoring, external certification)
- Internal failure costs: where remedial action is taken (clean up spillage, leaks, employee health/safety-related damages)
- External failure costs: penalties incurred for environmental damage
