E: ST decisions

Question 1

What is relevant costing?

Answer 1

considering future incremental cash flows

-fixed costs are irrelevant

Question 2

What costs are non-relevant?

Answer 2

sunk costs:already incurred
committed costs: incurred in future due to past decision
fixed costs: disregard those that can’t be changed
depreciation: non cash flow

Question 3

What is the relevant cost if additional labour cannot be hired?

Answer 3

contribution foregone plus direct labour cost

Question 4

What is the cost if materials can/cannot be used for other purposes?

Answer 4

can: opp cost of alternative
cannot: net realisable value

Question 5

What should be done if there is a single limiting factor?

Answer 5

maximise contribution per unit of scarce resource

Question 6

What should be done in a make or buy decision?

Answer 6

rank based on saving made per usage of scarce resource

Question 7

How to decide whether to accept or reject decision?

Answer 7

if selling price > relevant costs of order

Question 8

When should a line or business be shut down?

Answer 8

when revenue foregone < incremental cost savings from closure

Question 9

How to decide on minimum price?

Answer 9

incremental cost of production + opportunity costs

Question 10

In joint product costing, what is relevant and what isnt?

Answer 10

incremental : relevant

sunk: process costs

Question 11

Cash vs profit

Answer 11

• CASH may not affect profits:e.g many assts but negative cash flow
• PROFITS include depreciation
• cash flow affected by WCC
• cash accounting:non subjective
• accruals accounting:recognised by law, audited, matching

Question 12

What is ‘what if’ analysis?

Answer 12

sensitivity analysis

-change one assumption at a time

Question 13

What are the points on a multi-product BE graph?

Answer 13

Graph:
1st point: fixed cost as no revenue
Bow shaped points: profit and loss at different revenue levels
Final point: total revenue expected on sales volumes and total profit
Bow shaped line: sales mix based on profitability or contribution ranked
Straight line: constant mix
X-intercept: breakeven point, profit=loss=0 for each line

Question 14

How useful is the multi product BE graph?

Answer 14

• gives idea of level of revenue needed for profit levels
• relevant for low safety margin: high FC, low safety margin
• emphasise marketing expenditure on certain products
x hard to prioritise products

Question 15

How useful is the LP graph?

Answer 15

• max short-term contribution: other objectives?
x ignores long term effects: customer delays, lost sales
x doesn’t consider current inventory levels
x could find a way around constraints

Question 16

What is outsourcing?

Answer 16

Contracting out aspects of the work of the organisation previously done in house, to specialist providers

Often non-core service outsourced e.g HR, cleaning, catering

Question 17

What is a Shared service centre I.e internal outsourcing ?

Answer 17

Established for a particular activity of the organisation

A usually large, multinational organisation with processing centres in several countries chooses to consolidate these activities at one site

Question 18

What are the advantages of outsourcing?

Answer 18

Cost advantages
Quality advantages
Supplier has specialist knowledge
Can focus on core business activities
exercise buying power
Greater flexibility to switch supplier

Question 19

Disadvantages of outsourcing?

Answer 19

Cost issues
Loss of core competence
Transaction costs
Finality of decision
Risk of loss of confidential info
Supplier continuity
Agreeing/negotiating terms
Damaging to morale if redundancies happen

Question 20

What is a Service level agreement?

Answer 20

An SLA is a negotiated agreement between the supplier and customer and is a legal agreement regarding level of service

Can help control outsourcing disadvantages

Question 21

What factors should the SLA include?

Answer 21

A detailed explanation of the service supplies offering
Targets/benchmarks and consequences of failing them
Expected response time to queries
Expected time to recover operations in the event of a disaster
Procedure for dealing with complaints
Information and reporting procedures
Procedures for cancelling the contract

Question 22

Are the three main types of transaction costs?

Answer 22

Search and information costs
– e.g. cost of determining which supply is cheapest

Bargaining costs
– cost of agreeing on acceptable SLA

Policing and enforcement costs
– cost of making sure the other party stick to the terms of the condition

Question 23

What are the two methods of obtaining control over resources that organisations need to choose between?

What is the decision based on a comparison of?

Answer 23

The ownership of assets i.e. hierarchy solutions
buying in the use of assets i.e. the market solution

Make vs buy

The decision is based on a comparison of the transaction costs of the two approaches

Question 24

What is asset specificity?

Answer 24

An asset is said to be transaction specific if its value to a given transaction is greater than its value to its best alternative use

The greater the gap, the greater the degree of specificity

I.e. the degree to which it can be adapted for other purposes

Question 25

What are the 3 different levels of decision making in a business?

Answer 25

Strategic:long term, complex, strategic direction
Tactical:medium term, involve strategic plan
Operational:day to day, junior mgmt level