Chapter 7 - Cost Management Techniques

Question 1

What is value engineering?

Answer 1

Ensuring that new products are designed for quality but at a low cost by analysing how every part of the design enhances value.

Question 2

What is value analysis?

Answer 2

Analysing the value of an existing product and questioning whether its function can be achieved at a lower cost.

Question 3

Business advantages of value engineering and value analysis?

Answer 3

• continuous improvements
• higher profits
• extended product life
• more efficient use of resources

Question 4

Customer advantages of value engineering and value analysis?

Answer 4

• reduced prices without loss of quality
• quicker delivery
• better design
• improved performance and reliability

Question 5

What is total quality management?

Answer 5

The quality management becomes the aim of every part of an organisation.
It is also a technique to bring the actual results closer to the ideal standards

Question 6

What does the 4 costs of quality mean and provide examples? 
1 - prevention costs 
2 - appraisal costs 
3 - internal failure costs 
4 - external failure costs

Answer 6

1) the costs associated with preventing faulty output. E.g. production staff training costs
2) the costs of checking the quality of product. E.g. testing the finished goods
3) the costs of rectifying any problems within the organisation. E.g. re-inspection of products
4) the costs incurred when the product is in the customers hands. E.g. customer complaints and loss of customer goodwill

Question 7

What is life cycle costing?

Answer 7

A sequence of stages that a product will go through from the start of its development to the point at which it is no longer sold or supported by customer services.

Question 8

What are the 5 stages of life cycle costing and the mains costs incurred?

Answer 8

1) development - research and start up costs and negative profit due to no sales
2) launch - mainly advertising and admin costs with very small amount of sales. Probably no profit being made just yet.
3) growth - mainly advertising and marketing costs. Profit starting to increase as the sales increase.
4) maturity - higher production costs due to high demand in sales resulting in good profit.
5) decline - customer satisfaction/services costs as damaged or faulty goods may need fixing. Profits start to decrease as more expenses are incurred and fewer sales being made.

Question 9

What is value added activities?

Answer 9

Creating an aspect of a product or service that customers are willing to pay for.

Question 10

What is non value added activities?

Answer 10

Wasteful activities that do not contribute to the value of a product. E.g. clearing wastage material from production area.

Question 11

What are sunk costs?

Answer 11

Irrelevant costs that have been paid for and can’t be changed (fixed) or influences by the decision