CIPS L4M2 Chapter 2 (2.3)

Question 1

What are direct and indirect cost?

Answer 1

Direct Cost - cost of activities involved in making a product or delivering a service together with any materials or components used (can be fixed and variable cost)

Indirect Cost - cost of any support activities (can be fixed and variable cost)

Question 2

What are the types of information sources that can be used to estimate the breakdown of direct and indirect costs?

Answer 2

• Company annual reports - Break even analysis sales, fixed cost, variable cost
• Market data - primary research and financial analysis
• Technical data - cost synthesis or should-cost analysis (procurement staff working with operations colleagues)
• Request for information (RFI) - asking suppliers for information on direct and indirect costs
• Plant visits - can show → how well the company is doing, how old the equipment is, the work practices, how efficient is the supplier’s buying, are the building modern and pleasant
• Discount lists - discounts once break-even point is reached

Question 3

Why is a purchasing budget important?

Answer 3

The purchasing budget is important because it controls an organisation’s cost.

An important and essential input to preparing a budget is an understanding of the direct and indirect costs of the supplied item

Question 4

What is the difference between data and information?

Answer 4

• Data is raw material
• Information is raw material processed to create a product useful to the user

Example: useful information supplier’s break-even point, data required would be cost of production for differenct levels of output

Question 5

Name one process for collecting and analysing data and information?

Answer 5

OWN-IT

Outline - Be specific •Define what is already known (mind map) •Create the outline •Define any gaps

Wide search - Google

Narrow search - Skim read books (introduction and conclusion, diagrams, pictures, graphs, note main headings, mind map)

Increase your stockpile of information - store useful information in one place •Interviews

Transform your stock pile into new knowlege - ‘theme it’

Question 6

What is a mind map?

Answer 6

An effective way of getting information down on paper and then finding relationships between the pieces of information

Question 7

What is purchase price analysis?

and

List the questions that may be answered from the analysis?

Answer 7

Information to help answer key questions that determine the cost of what an orgainisation buys

• Which cost are both necessary and legitimate?
• Are the values for these cost items reasonable?
• Is the overhead allocation subsidising another item?
• Is the basis for allocating overheads reasonable?
• Has the supplier included allowances for contingencies?
• Are the profits sufficient to keep the supplier motivated and interested?