Chapter 3.1 Flashcards
1
Q
Fixed assets
A
An accounting term used to describe items acquired by an organisation which are not routinely sold but used within an organisation. Typical examples are land and buildings, fixtures and fittings, office and warehouse equipment. Fixed assets are also known as non-current assets
2
Q
Current assets
A
Assets which will be sold, consumed or exhausted within the financial year of normal business operations
3
Q
Request for quotation RFQ
A
An invitation to suppliers to bid on specific products or services
4
Q
Tender
A
A request from a buying organisation to invite suppliers to formally quote on a large value project
5
Q
Whats 2 benefits of a fixed price
A
- It gives the buyer an assurance that the cost is known and will not change
- Quote comparisons are based on the same basis at that time and that constant updates prior to commitment are not needed
6
Q
What does having a fixed price agreement allow for?
A
Forward planning and the ability to provide confirmed prices to customers themselves
7
Q
Where may you find it impossible to establish fixed prices?
A
Organisations in countries where inflation rates are high
8
Q
What is the market/trade price?
A
The amount payable to acquire a specific item at a specific time
9
Q
List 4 examples of how a firm may choose the price payable
A
- The price payable is the current list price on the day of order placement
- The price payable will be the lowest of the list price of the top three suppliers in the week prior to order placement
- The price payable will be the average of published prices for the top three suppliers in the month prior to purchase
- The price payable will be the lower of our published price and competitor X as published on the date of receipt of the order
10
Q
Commodity markets
A
Raw material or part-processed product markets with established standards and trading allowing published prices reflecting demand and supply
11
Q
Hedge
A
A technique of taking a position either in current stock or future stock to offset potential losses should the price move. A hedge will have a cost of trading and may involve the use of technical financial contracts
12
Q
Give an example of a commodity market
A
London Metal Exchange (LME)
13
Q
What does the London Metal Exchange allow for?
A
Spot buying, forward buying, forward selling and options to buy and sell
14
Q
What do historic prices for commodities allow buyers to consider?
A
The price trends and price volatility
15
Q
When may you have a part-fixed/ part-adjustable price?
A
When a contract operates over a long time or the buyer requires a price for a project that has a long time to run before materials or labour is required
16
Q
Will agreements for adjustable pricing have specific wording?
A
Yes
17
Q
What are reference indicies
A
Work on establishing a price basis at an initial fixed date
18
Q
What does a specific published price indices do?
A
Relates to the item, material or category of spend
19
Q
Indices
A
An index or indices are recognised factors that are intended to reflect the movement of a broad and hypothetical collection of products. Examples include the US stock market NASDAQ, or the Retail Prices Index or Consumer Prices Index
20
Q
Will some suppliers offer discounted prices depending on the value of the order and/or the value of the new account?
A
Yes
21
Q
Why may a promotional price be offered to suppliers?
A
To stimulate interest or orders - this can be intended to encourage larger volume orders from existing customers
22
Q
Name 3 variations of promotional prices
A
- Linked promotions - a price reduction of one item if ordered with another
- Order value promotions - reductions for ordering more than a certain value of products
- Free issue promotions - order a number of items and you get additional items free
23
Q
Can the cost of goods or services be affected by payment terms?
A
Yes
24
Q
What is trade credit often available for?
A
Business to business transactions
25
Name 4 types of payment arrangements
1. Payment in advance or on delivery
2. Delayed payment - an additional negotiated credit period
3. Settlement discount - payable as an invoice deduction for paying on time
4. Consignment stock - a supplier provides stock which is only invoiced when used
26
Consignment stocking
Product owned by the supplier which is stored on the buying organisations site to ensure immediate availability without any delivery lead times. Usage is normally invoiced when goods are used
27
Explain the concept of volume based buying
There will be different prices for different volumes purchased
28
Explain the concept of multi-part pricing
There will be two or more elements that make up the overall price package including:
1. A fixed sum payable for service availability through a standing charge
2. A usage fee based on metered usage
29
When may a supplier require a higher cost per ietm for larger volumes?
If additional transport is needed or the supplier may need to contract out t another supplier
30
Why might a purchaser be reluctant to agree a standard delivery charge for regular small orders from a supplier?
Because some suppliers will absorb any additional costs and have incorporated a typical transport cost in their price
31
When may retrospective volume discounts be offered?
As a solution to the problem of an uncertain volume required over a period of time
32
Hire
A hire contract is short-term agreement to provide goods and services for a duration
33
Lease
A legal commitment with terms and conditions allowing the lesser to charge 'rental fees' to a lessee. The terms and conditions will detail the responsibilities for maintenance, insurance and end-of-contract rights and responsibilities
34
Name 3 things a purchase involves
1. It requires an ability to finance the sum required
2. The equipment will have enough use to make ownership beneficial
3. The organisation has storage space for the item
35
Is hire the same as rent
Yes
36
Name 5 items available for hire
1. Location
2. Event planning
3. Catering
4. Construction
5. Logistics
37
Name 4 characteristics of hiring that need to be considered?
1. The asset is not owned and the organisation requiring the asset cannot control the cost of hire or its condition on arrival
2. Organisation requiring the asset must agree to the terms and conditions of hire
3. The cost may appear inexpensive in the short-term but as the asset may remain un-hired for some time in its life the hire fees will need to also cover non-hire time
4. There may be times where the asset is already on hire and an alternative cannot be found - this may affect the operations of the organisation requiring the item
38
Opportunity cost
The potential benefits foregone as a result of choosing one alternative over another
39
Name 6 advantages of hiring
1. Hiring reduces the need to borrow money for purchase or commit funds to being locked up in asset ownership
2. Hiring specialist equipment for low-use situations
3. The company owning the asset will store it when it is not in use
4. Most maintenance of the asset is the responsibility of the owner
5. Hiring does not lock in an organisation to a specific type of technology
6. Buying an asset with a five year life would be an expensive mistake if technology was changing and making the equipment obsolete
40
Is it possible to hire an operator as well as the equipment?
Yes
41
When hiring, whos responsibility is the disposal and recycling (end of life)
The owner
42
How do you start to make the decision as to whether to rent/hire instead of purchase
A simple payback calculation - comparative purchase price is needed along with the rental cost and the number of occasions the asset is likely to be needed
43
What is a lease?
A contract to take possession (but not ownership) of an asset for an agreed period with payments on a regular basis
44
What regulations are leases on buildings subject to?
Land law
45
Name 4 likely scenarios of a lease
1. The current owner leasing to a commercial user
2. A manufacturer or distributer leasing to a commercial user
3. A specialist leasing company buying an asset and leasing to a commercial user
4. A specialist leasing company liaising between a buyer and a seller and financing the lease
46
What will the leasing business owning the asset want to do before making a commitment
They will need to asses the risks of the organisation agreeing to lease
47
How will a lesser assess the risks of an organisation agreeing to lease
They will typically calculate the payments required to cover all costs, including financial costs and include a profit. They may also anticipate the value at the end of the contract compared to the beginning and allow some allowance or even reduced rental payments to reflect this
48
What will be included in the contract of the lease
Detailed terms and conditions - these may include responsibilities for insurance, repairs and maintenance
49
Describe the timescale of a lease
Highly variable - some being less than 12 months and others being many years
50
What are the payments made from lessee to lessor referred to as
Rentals
51
What may the lessor do if payments are missed?
They may reclaim the asset and claim any compensation for breaking the contract
52
What usually happens at the end of the lease term?
Most lease agreements require the asset to be returned to the lessor
53
What are equipment leases often constructed around?
Local or national tax allowances available - some are specific ti particular types of asset
54
Name 6 advantages of leasing contracts
1. The initial purchase cost of an asset is avoided
2. The rental payments can be met from everyday trading income - as the asset is used it contributes to rentals
3. The cost for the lease period is known
4. The asset is normally stored or in use at the lessees premises
5. The comparative interest charge included in the rental is often at a better interest rate than an equivalent load
6.A lease with full risk of insurancem maintenance, servicing and spare parts with the lessor makes financial planning and risk management easier
55
Name 5 disadvantages of leasing contracts
1. The contract is expected to run for the whole term stated. Breaking the contract may incur additional fees
2. The requirement that the asset was leased for may change (smaller or larger volume may be required, less frequent use or just no longer needed)
3. Newer or better technology may become available, but the organisation is locked into the contract
4. The lessors estimates of residual value of the asset may be underestimated - so in retrospect the cost was higher than it should be
5. The contract agreed must be followed - if payments are missed the asset may be recovered and additional charges levied. If the asset is damaged at the end of the contract, additional fees for repairs may be charged
56
Explain acquisition costs
They can add significantly to the purchase price - these may be 'hidden' or less readily identifiable
57
Name 3 things that could be included in the acquisition cost
1. Cost of travelling
2. Time taken
3. Time taken to research, choose and place an order
58
Activity-based costing
A costing model where costs are allocated proportionally to the usage
59
Do many organisations use activity-based costing to calculate the cost of acquisition?
No
60
3Es model
The 3Es model traditionally looked at efficiency, economic and effectiveness as three ways to reduce expenditure
61
Capital expenditure (CAPEX)
Money spent on acquiring and maintaining fixed assets bought by an organisation which are used within the organisation rather than bought for resale. (Typically these assets are land, buildings and equipment)
62
Define effectiveness
How well the work is done (error or fault free)
63
Why is it difficult to assess effectiveness?
Some errors are immediately apparent, but some may take some time to discover and could have multiple causes
64
What are efficiency and effectiveness affected by?
The systems and procedures to be followed and the availability of staff or managers at each stage of the process
65
Name 3 quicker lower acquisition cost transactions
1. Repeat purchases with an established supplier
2. Standard 'catalogue' low-cost purchases
3. Familiar products
66
Name 8 slower higher acquisition cost transactions
1. New products and sectors
2. Requirements that are not finalised, with continuous changes
3. High-cost, long term contracts
4. High-cost capital expenditure items
5. Use of formal tenders rather than supplier selection and purchases
6. Service contracts with multiple variations and options
7. Projects involving interaction of many suppliers
8. Acquisition regulated by government or complex corporate governance
67
Consumables
An item or commodity that is used up quickly or requires replacing frequently
68
What may site preparation be required for?
Larger fixed asset purchases
69
What do the installation and operating manuals detail?
The appropriate operating conditions along with any ventilation and power supply specifications
70
Who may be responsible for installation requirements
1. Site owner
2. Operator
3. Contractors
4. Suppliers
71
What kind of acceptance test is likely to be used for complex equipment?
Factory Acceptance Testing (FAT)
72
How should factory acceptance testing (FAT) be conducted with?
A document set to show what has been tested and how. Any technical details should be documented so these can be used for comparison during customer installation
73
What does CAT stand for?
Customer Acceptance Testing
74
What should customer acceptance testing reflect?
The type and range of activities commonly used in practise by the customer, rather than a supplier demonstration pattern
75
Name 11 acceptance test activities
1. Testing of operating manuals and directions
2. Health and safety
3. Load testing
4. Dry running
5. Stress testing
6. Soak testing
7. Compatibility testing
8. Use of the full range of production materials and/or sizes
9. Training and use by a variety of operating staff
10. Trial replacement of consumables and replacement parts
11. Calibration of test equipment
76
Name 7 techniques used to reduce the acquisition cost
1. Buyer discretionary spend
2. User buying
3. Vendor managed inventory
4. Two-bin kanban
5. Product catalogue
6. E-procurement techniques
7. Procurement cards
77
Explain buyer discretionary spend
Many buyers have a value and/or type of purchase they are empowered to order without reference to colleagues or managers. There may also be different spend limits for inexperienced and experienced staff and for non-critical purchases compared to one-off contracts
78
Explain user buying
Some items that are established standard specification could be left for users to undertake ordering themselves, rather than involving a buyer. This is usually in place for low-value hospitality and travel costs
79
Vendor Managed Inventory (VMI)
Inventory owned by the buying organisation that is monitored and managed by the supplier to ensure that adequate supply provision is made in line with usage and forward demand
80
Name 7 techniques which involve suppliers in supporting the purchasing process by doing more than just reacting to an enquiry or purchase order
1. Physical checking of stock at customer warehouse or retail outlet
2. Reporting on volumes sold and seasonal expected trends
3. Recommending order volumes
4. Reverse logistics - reporting on returns and recommending actions
5. Monitoring the condition of assets
6. Maintaining stocks in warehouse units, whether customer owned, supplier owned or third party
7. Where the work has contributions from supplier and buyer, the common phrase used is 'co-managed inventory'
81
Just in time (JIT)
A philosophy used in manufacturing that is based in suppliers delivering goods at the point that they are needed. It aims to reduce inventory costs and reduce waste in the supply chain
82
Two-bin Kanban
This is a reordering process involving two bins. Product is taken from the front bin until it is empty, at which stage the bin is sent back to the supplier to be refilled, during which time the second bin is used. When the replenished bin is returned, it sits behind the bin in use until that is depleted, at which point that bin is returned to the supplier for replenishment, and so on. The bin acts as a reordering Kanban
83
What can the principle of Kanban help with?
Reducing acquisition costs
84
Name 3 ways of signaling for a reorder
1. An operator taking the stock card from the box and leaving it in the designated place for a reorder
2. Using a barcode reader to alert the buyer or direct communication to the supplier
3. A supplier on a VMI delivery visit taking the box away and bringing back a full one on the next visit
85
Why is replenishment faster and more efficient with the Kanban system?
The routine process of involving a buyer is avoided
86
What is the objective of a product catalogue
The standardisation of items used, eliminating the search and quote time for a user or a buyer
87
Explain the simplest catalogue system
To select single suppliers for specific categories and allow Internet user access with password use
88
How are costs reduced when using e-procurement techniques?
Less paper required and each order being completed much faster and with the elimination of a lot of filing
89
Explain procurement cards
Corporate payment cards which may run from a specific bank account, charge card or credit card operator
90
What is the idea behind using procurement cards
To allow the cardholder to buy products and services direct, rather than following a multi-stage traditional requisition form involving a buyer
91
What may a usage cost be a part of?
A multi-part pricing agreement
92
When is a multi-part price agreement used?
Where equipment on rental or lease has replacement parts which have a limited life and a high cost
93
Name 4 types of usage costs
1. Maintenance
2. Operation costs
3. Utility costs
4. Training costs
94
Can an annual cost be converted into a usage cost?
Yes
95
What are management accounting principles used to identify?
Costs that can be directly attributed to a project or as the basis of costing work to arrive at a price
96
What did organisations often use as the basis for price bids?
Averaged usage and average costs
97
What can maintenance costs driven by?
Mostly driven by the amount of usage
98
What does maintenance include?
Periodic servicing, repair and/or replacement parts
99
Can some equipment be designed for zero maintenance?
Yes
100
What is corrective maintenance used to describe?
Maintenance only undertaken when parts or the equipment fail
101
Name an advantage of corrective maintenance
Savings made from not servicing may be much higher than the costs of a breakdown
102
Describe scheduled/proactive (routine) servicing
It works on a plan, determining the recommended service requirements of equipment or periodic intervention at pre-determined intervals
103
When may routine servicing happen?
Following the equipment completing a number of cycles or users - this is often set by taking the 'mean time between failures'
104
What is the intention of routine servicing
To take appropriate action rather than awaiting a breakdown
105
What may happen in the absence of routine maintenance?
It can result in more significant damage and failure
106
Name 5 ways in which equipment varies hugely in terms of maintenance
1. There is no owner/user maintenance possible
2. The terms and conditions of guarantees and/or warranties may state that only the manufacturer or supplier may undertake repairs
3. Health and safety regulations may require authorised or registered persons to conduct maintenance, test and periodically certify safety
4. Training and continuous experience may be required to diagnose and efficiently solve maintenance problems
5. Replacement parts are easy to source, and instruction manuals clearly show diagnostic and replacement instructions
107
Service level agreements (SLA)
Document outlining the expected minimum level of service between a service provider and a client. It clarifies the scope of the service, responsibilities of each party and how to escalate among other factors. A service level agreement is legally enforceable if it is referred to in a contract
108
What arrangements need detailed contracts with agreed service level agreements
Organisations considering bought-in servicing should be assured of the capability of maintenance staff and their availability
109
Why may organisations keep stocks of spare parts
Organisations await a requirement before ordering replacement parts but where equipment is vital for operations, any delay may be undesirable
110
Guarantee
A commitment from the seller (or original equipment manufacturer) that should a product not meet a stated quality in a specified period then it will be repaired, replaced or refunded. There are likely to be terms and conditions. The guarantee is usually written
111
Warranty
A commitment that the product will perform as stated for the specified period. The detailing of the warranty will determine the rights of the owner and responsibilities of the seller. A warranty for a period longer than the guarantee (or with enhanced rights) may be offered for an additional cost
112
Name 2 types of service and maintenance included packages
1. Some equipment will offer initial servicing free
2. Some will offer packages with a single payment or periodic payment to cover a number of years
113
Name an advantage of service and maintenance included packages
They provide comfort and confidence as a fixed price has been agreed and many suppliers offer impressive service standards and effectiveness
114
Name a disadvantage of service and maintenance included packages
They do not always represent good value for money - sometimes the 'risk transfer' results in servicing limited to a bare minimum or a reluctance to undertake preventative work
115
Name a disadvantage of guarantees and warranties
They may have limitations on use or circumstances that make the guarantee or warranty void
116
Why might buyers like the idea of extended guarantees or warranties?
Because they have a further period of 'known cost' maintenance
117
Do manufatcurers monitor failures via guarantee or warranty claimes?
Yes
118
Name 3 types of failures seen in manufacturing
1. Failures at or just after initial use
2. Failures in 'normal use life'
3. Failures towards the end of designed or expected life
119
Why may extended warranties be preferable?
If a product has failure uncertainty
120
Name 4 factors to consider for extended warranties
1. Cost of cover compared to replacement cost
2. Cost of a failure or breakdown, along with the time to recover
3. Expected number of maintenance events in the period to be covered
4. Relative ease of replacing equipment, including installation
121
Total productive maintenance (TPM)
An approach that seeks to maintain equipment in perfect production condition by minimising defects, breakdowns, accidents, disruptions and incidences of having to slow down the production process
122
What is the objective of total productive maintenance
To maximise overall equipment effectiveness
123
name 3 things that equipment effectiveness is assessed on?
1. Availability
2. Performance
3. Quality
124
Name 5 proactive and preventative techniques among the TPM principles
1. Training and education of operators to ensure effective use and knowledge of equipment
2. Health and safety awareness and operation
3. Responsibility for everyday machine care is with the operators
4. Planned maintenance to reduce probability of stoppages and slow working
5. Quality maintenance to ensure quality defects are detected and corrected
125
What could some asset maintenance contribute to?
A large increase in costs whether the asset is rented, leased or purchased
126
Name 4 types of operation costs
1. Cost of operating capital assets
2. Cost of facilities management
3. Cost of heating, ventilation and air conditioning (HVAC)
4. Cost of consumables
127
What may operation costs include?
The setting up time prior to operation
128
What does facilities management mean?
Wide range of operational tasks that are required to maintain an organisations premises
129
What is the objective of internal or outsourced facilities management?
To provide an appropriate level or service and expertise which represents good value for money.
130
What does using an outsourced service for facilities management allow an organisation to do?
To buy into the expertise of the provider. The everyday responsibility for the contracted services passes to the provider, allowing the organisation to focus on other tasks
131
Name 4 options available for facilities management
1. Wholly internal facilities management
2. Single-service: selecting specific tasks to be done by one or more contractors
3. Bundled-service: grouping similar services together to be done by one contractor
4. Total facilities management: a single comprehensive contract with a contractor
132
What acronym is used to refer to environmental operation requirements
HVAC - heating, ventilation and air conditioning
133
What is the cost of consumables made up of?
The items that are required to support the use of equipment
134
Cost benefit
A calculation that considers the benefits resulting from a specific cost or process. Some benefits may not have monetary values
135
What are utility costs?
The services consumed by organisations that are used by both organisations or individuals
136
Name 6 types of utility costs
1. Electricity
2. Gas
3. Mains water
4. Telephone
5. Broadband
6. Media
137
What are utilities often protected or controlled by?
Higher levels of legislative process - Utilities Contract Regulations 2016
138
Name 3 approaches different countries may have towards utilities
1. A traditional monopoly market with a single dominant provider, often state owned or state controlled
2. An oligopoly market, with a few dominant providers, often state regulated
3. An 'open market' with few limitations for providers which may or may not be the subject of state or industry self-regulation
139
Are all utilities sensitive to demand and supply?
Yes
140
What does economics principles suggest?
That unless there is state intervention, utility costs will rise if demand rises
141
Name 9 different cost structures that can be used for utilities
1. Costs based on usage with fixed per unit costs for a period
2. Costs based on usage with variable, market costs per unit
3. Costs with a low rate for low-usage and a higher rate for higher usage
4. Costs with low (off-peak) time elements and high (peak) time elements
5. Two-part costs with a fixed-cost element and a rate per unit
6. Costs quoted against a variable wholesale commercial market price
7. Costs based on type of user (some industries may be charged differently)
8. Energy costs based on 'origin' of energy sources
9. Water costs may have two elements - one for provision of water, the other for waste water
142
What can brokers do? (utilities)
Aggregate customer demand and negotiate packages for the buying group
143
When may utilities create a significant additional cost?
If high-usage machinery is operated or cost control is not undertaken
144
Name 4 things that could happen if training for the use of equipment is not provided
1. Affect the quality of a product
2. Cause damage to the equipment
3. Reduce the operating life of the equipment
4. Cause death or injury
145
What kind of training might some machinery require?
Certification of training, sometimes by an independent assessor. This may also be a licence-type requirement in order to meet legal requirements
146
Obsolescence management
A structured approach to assets or their component parts to help anticipate and manage them becoming obsolete
147
Obsolete stock
Stock which has been assessed as having been replaced by other stock or outdated, perhaps by a change of user requirements or technology
148
Redundant Stock
Stock which an organisation has no foreseeable requirement to use or us no longer marketing. It is possible that the stock may have users and a demand, but this will nit be in the normal business experience of the organisation
149
Surplus stock
Stock which is overstocked
150
Scrap stock
Stock that is considered as having no conventional market for the items original intention. Disposal may be a cost to the organisation
151
What is likely to be the ultimate destiny of obsolete, redundant or surplus stock?
Scrappage
152
What kind of implications may disposal of both fixed assets and stock may have?
Accounting implications
153
What may the disposal of a product result in?
A final change of value that may require a cost of disposal, write-down, write-off or profit on disposal
154
What may current asset stock that is disposed of require?
Special treatments in the accounts in order to identify the difference between ordinary trading and disposals
155
Batteries Directive
An EU directive used to manage the use, recycling and disposal of battery products
156
WEEE Regulations
WEEE stands for waste electrical and Electronic equipment directive. These are regulations protecting the effective and environmentally most sustainable management of electrical products and their constituent parts
157
Name 4 situations where an organisation has legal obligations when considering disposal
1. A purchase contract may contain clauses preventing resale of items without express permission of the supplier
2. There may be local legal requirements for any scrap to be documented and the disposal method and/or organisations to be licensed
3. There may be local or national taxes to pay for disposal, or manage the process, which could be imposed on the owner of the waste or the disposal contractor
4. Specific regulations may apply to some types of waste
158
What other considerations should procurement professionals take into account when dealing with irresponsible waste removal?
Reputational risks
159
Name 3 types of cost disposal of waste may incur?
1. Transport costs
2. Processing cost
3. Taxation charges
160
What are transport and processing costs based on?
Volume and weight
