Chapter 11 Flashcards
DEF: Price Analysis
Process of comparing supplier prices against external price benchmarks.
DEF: Market Price Analysis
Identification and analysis of external forces that drive price change.
COMMON APPROACH
Costs drives Price!!!
This is POST-PRODUCTION
Efforts focus on reducing costs internally and cross enterprises so prices can come down.
Elements of Price & Cost Drivers
- ) Profit Margin
- ) Selling & Administrative Cost
- ) Production Overhead
- ) Direct Labor Codt
- ) Direct Materials Cost
Think about Lego activity…
DEF: Cost Analysis
Analyzing each individual cost element that makes up final price.
DEF: Reverse Price Analysis (should cost)
Analyzing a supplier’s overall cost structure to ensure that costs are assigned in an appropriate manner.
DEF: Total Cost Analysis
Process to determine all costs associated with the purchase, use & disposal of an item
Cost Analysis/Reverse Price Analysis
Detailed production cost breakdown…
Opportunities for Cost Reduction
- ) Plant Utilization
- ) Process Capability
- ) Learning curve effect
- ) Supplier’s workforce
- ) Management Capability
- ) Supply management efficiency
DEF: Total Cost of Ownership
Process of assembling all costs (direct & indirect) associated w/ the purchase, use & disposal of a product, service, or capital equipment that are incurred over its expected life.
Purchase price
Invoice amount paid to supplier
Acquisition costs
Costs of bringing product to buyer
Sourcing/ordering costs, transportation costs, etc.
Usage costs
Conversion & support costs
Inventory, maintenance, etc.
End-of-life costs
Net amounts received
Total Cost of Ownership note…
There are times when the lowest price will not be the best total cost option for the buyer.
Ex: Wild Turkey Bourbon
PROACTIVE APPROACH
Price drives Cost!!!
This is PRE-PRODUCTION!
Product designs and process design are not set, so change is easier to introduce.
DEF: Target Costing
A process that focuses cost management efforts on meeting market price & profit margin objectives.
Target Costing note…
Cost is not an outcome of design process but an input into the process.
Target Costing note…
Used in new product development
If total costs exceeds target costs, product & process designs must change.
Target Costing Process
1.) Establish the target price
2.) Establish profit margin
return on sales, earnings, etc.
3.) Determine allowable costs categories; depends
variable product cost - material, labor, manufacturing overhead
unitized costs - research & development, investment depreciation
other - gen. manufacturing & non-manufacturing
investments - inventory & equipment
Price - Profit Margin = …?
Allowable costs or Target costs
Know Cost Reduction Chart…
Generics, Commodities, Unique Products, Critical Products
DEF: Cost Analysis Financial Statement & Census Data Analysis
A simple technique to determine a best guess of supplier costs using public information.
