E: ST decisions Flashcards
What is relevant costing?
considering future incremental cash flows
-fixed costs are irrelevant
What costs are non-relevant?
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
What is the relevant cost if additional labour cannot be hired?
contribution foregone plus direct labour cost
What is the cost if materials can/cannot be used for other purposes?
can: opp cost of alternative
cannot: net realisable value
What should be done if there is a single limiting factor?
maximise contribution per unit of scarce resource
What should be done in a make or buy decision?
rank based on saving made per usage of scarce resource
How to decide whether to accept or reject decision?
if selling price > relevant costs of order
When should a line or business be shut down?
when revenue foregone < incremental cost savings from closure
How to decide on minimum price?
incremental cost of production + opportunity costs
In joint product costing, what is relevant and what isnt?
incremental : relevant
sunk: process costs
Cash vs profit
- 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
What is ‘what if’ analysis?
sensitivity analysis
-change one assumption at a time
What are the points on a multi-product BE graph?
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
How useful is the multi product BE graph?
• 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
How useful is the LP graph?
• 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
What is outsourcing?
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
What is a Shared service centre I.e internal outsourcing ?
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
What are the advantages of outsourcing?
Cost advantages Quality advantages Supplier has specialist knowledge Can focus on core business activities exercise buying power Greater flexibility to switch supplier
Disadvantages of outsourcing?
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
What is a Service level agreement?
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
What factors should the SLA include?
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
Are the three main types of transaction costs?
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
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?
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
What is asset specificity?
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
What are the 3 different levels of decision making in a business?
Strategic:long term, complex, strategic direction
Tactical:medium term, involve strategic plan
Operational:day to day, junior mgmt level
