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Cost Management > Final > Flashcards

Final Flashcards

1
Q

Financial and Nonfinancial Performance Measures Includes:

What is the name of the
measurements combined?

A

Financial Perspective
Customer Perspective
Internal-Business-Process Perspective
Learning and Growth Perspective

Balanced Scorecard

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2
Q

Financial perspective goal & metrics

A

Evaluate profitability of a strategy and the creation of shareholder value

Earnings
Return on Investment
Residual Income
Economic Value Added

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3
Q

Customer perspective goal & metrics

A

Identifies targeted customer and market segments and measures the company’s success in these segments

Market Share
Customer Satisfaction
Brand Image
Repeat Customers

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4
Q

Internal-Business-Process Perspective goal & metrics

A

Focused on internal operations that create value for customers that, in turn, help achieve financial performance

Customer Service Time
Reductions in scrap, spoilage, rework
Efficiency
Cost Effectiveness

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5
Q

Learning and Growth Perspective goals & metrics

A

Identifies the people and information capabilities necessary for an organization to learn, improve, and grow

Employee Training Hours
Employee Retention
Process Improvements Implemented

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6
Q

Return on Investment definition and formula

A

(ROI) is an accounting measure of income divided by an accounting measure of investment
- Blends together all “ingredients” of profitability and can be compared to other opportunities
- ROI=Income/Investment
- ROI=Income/Revenues X Revenues/Investment
- ROI = Return on Sales X Investment Turnover

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7
Q

Residual Income definition and formula

A

an accounting measure of income minus a dollar amount for required return on some measure of investment

Residual Income = 𝑰𝒏𝒄𝒐𝒎𝒆 − (𝑹𝒆𝒒𝒖𝒊𝒓𝒆𝒅 𝑹𝒆𝒕𝒖𝒓𝒏 𝒙 𝑰𝒏𝒗𝒆𝒔𝒕𝒎𝒆𝒏𝒕)

Favored by some companies because managers might concentrate on maximizing $, not %

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8
Q

Economic Value Added definition and formula

A

a variant of Residual Income

𝑬𝑽𝑨 = 𝑨𝒇𝒕𝒆𝒓𝑻𝒂𝒙 𝑶𝒑. 𝑰𝒏𝒄𝒐𝒎𝒆 − [𝑾𝑨𝑪𝑪 𝒙 (𝑻𝒐𝒕𝒂𝒍 𝑨𝒔𝒔𝒆𝒕𝒔 − 𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑳𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔 )]
WACC = Weighted Average Cost of Capital
After-Tax Operating Income = Operating Income x (1-Tax Rate)

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9
Q

Details to consider for performance measurement

A

Time Horizons
Alternative Definitions of Investment
Alternative Asset Measurements

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10
Q

Time horizons for performance measurement

A

1 year vs multiple years
Actions for short-run not necessarily beneficial for long-run
Some investments don’t generate immediate returns

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11
Q

Alternative Definitions of Investment for performance measurement

A

The denominator of the ROI equation

Total Assets Available
Total Assets Employed (excludes “idle” assets)
Assets Employed less Current Liabilities
Stockholders’ Equity

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12
Q

Alternative Asset Measurements for performance measurement

A

Current Cost – Cost to purchase asset today
Gross vs Net Book Value

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13
Q

Target Levels of Performance and Feedback

A

Set meaningful targets
Be clear with whether historic or current costs are being used
Continuous Improvement Targets

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14
Q

Performance of Managers vs. Team for rewards

A

Creating Incentives vs. Imposing Risk
Intensity of Incentives
Benchmarks and Relative Performance Evaluation
Performance Measures at Individual Level

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15
Q

Incentives vs. Risk for employee effort

A

Idea of “moral hazard” – employee prefers to give less effort than
employer would prefer, and employer can’t monitor them
Flat Salary – Little Incentive to do more than the bare minimum
All Performance-Based Pay – Risky to employee, and incentivizes
risk taking
Combo of both balances both incentives and risks

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16
Q

Intensity of Incentives for effort

A

Use performance metrics that manager actually has influence over
Salary is more attractive when it is hard to find measures that manager has influence over, or evaluate those measures
In some instances, non-financial measures are more influenced by manager performance
Combo of both balances both incentives and risks

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17
Q

Benchmarks for expectations

A

Peer groups – how are they set, who is in them
Relative Performance Evaluation
Benchmarking could reduce coordination/cooperation

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18
Q

Performance Measures at Individual Level

A

Performance measures for work that requires multiple tasks
Performance Measures for team activities

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19
Q

Multiple Tasks performance measures

A

Most employees do more than one thing at their job
Need to measure and compensate on all aspects

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20
Q

Team Based Incentives for compensation

A

Reward employees based on how well team performs
Team bonuses on top of individual pay
Freeloader problem

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21
Q

Decision Making Choice Types

A

Special Orders
Make or Buy
Add or Drop
Equipment Replacement

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22
Q

Relevant Costs for decision making definition

A

expected future costs/revenues that differ among courses of action being considered
Occur in the future
Differ among alternatives

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23
Q

Quantitative Factors Relevant Costs

A

outcomes we can measure with numbers
Financial – costs, revenues
Non-financial – development times, on-time deliveries

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24
Q

Qualitative Factors Relevant Costs

A

outcomes that are difficult to measure with numbers
Often non-financial – employee morale, brand reputation

25
Q

Possible mistakes in Relevant Cost Analysis

A

Incorrect General Assumptions – i.e., all variable costs relevant and fixed costs irrelevant
Including Irrelevant Costs
Using same per unit fixed costs at different output levels

26
Q

Insource/Outsource & Make/Buy Decision Making definition and other possible considerations

A

Decisions about whether a producer of goods or services will
insource/outsource are called make or buy decisions

Retention/monitoring of quality if we produce in-house
Outsourcing allows focus on developing others products
Reliance on suppliers is risky – costs, supply chain, quality

27
Q

Incremental vs Differential Costs and revenues

A

Incremental costs/revenues are the additional total costs/revenue
incurred from an activity

Differential costs/revenues are the difference in costs/revenues
between two alternatives

28
Q

Total Alternatives vs Opportunity Costs

A

Total Alternatives Approach evaluates the future costs and
revenues for all products

Opportunity Cost Approach evaluates the incremental costs and
the opportunity cost (foregone profit) of other alternative

29
Q

Equipment Replacement relevant costs

A

When it comes to replacing equipment, book value (Cost minus accumulated depreciation) is IRRELEVANT

Relevant - disposal value of old machine, cost of new machine
Irrelevant - Book value of old machine, loss on disposal of old machine

30
Q

Three major factors that affect pricing decisions are

A

Customers - have an effect on demand for product/service; managers examine pricing decisions through eyes of customers
Competitors - Managers need to be aware of actions of competitors; when competition exists, managers will attempt to learn the price of competitors
Costs - lower production costs means managers will supply more, supply product as long as revenue from additional units exceeds costs, set prices that makes product attractive while maximizing operating income

31
Q

Price control of Customers vs. Competitors vs. Costs

A

Perfect Competition: little price control
Monopoly: Total Cost Control
Somewhere in Between: Value placed on product by customer, prices charged by competitors, costs influence supply

32
Q

Costing and Pricing for the Long Run

A

Long run pricing is a strategic decision designed to build long run relationships with customers - consistent price
To charge a stable price in the long run, and earn the targeted return, managers must know and manage all future and indirect costs - need to cover product and period cost to get operating income

33
Q

Four Purposes of Cost allocation

A

Provide information for economic decisions - choose price and quantity
Motivate managers and other employees - goals, save and reduce costs
Justify costs or compute reimbursement amounts
Measure income and assets - reporting to financial documents

34
Q

Two methods of Determining Long Run Pricing

A

Market-Based: Answers the question “Given what customers want and how our competitors will react, what price do we charge”
Cost-Based: Answers the question “Given what it costs us to make our products, what price do we charge that will recoup those costs and achieve a target return”

35
Q

Calculating Product Costs for Long-Run Pricing

A

We already know how to do this for manufacturing costs!
Since we need to know ALL costs, we need to determine per unit costs for non-manufacturing costs as well

36
Q

Market-Based Approach for Pricing

A

Understand Customers’ Perceived Value
Competitor Analysis
Implement Target Pricing and Costing
- Develop Product
- Choose Target Price
- Derive Target Cost
- Perform Value Engineering

37
Q

Target Operating Income and Cost per Unit

A

Target Operating Income per Unit is the operating income a company wants to gain per unit sold
Target Operating Income is usually a function of a desired return on investment
Target Operating Cost per Unit is the estimated long run cost that allows a company to achieve its Target Op. Income per Unit
Target Op Cost per Unit = Target Price – Target Op Income per Unit

38
Q

Value Engineering

A

Systematic evaluation of all parts of the value chain
Goal is to find areas to reduce costs and achieve acceptable quality

39
Q

Cost Incurrence and Locked-In Costs

A
  1. A Value-Added cost is a cost that, if eliminated, would reduce actual or perceived value of product/service
  2. A non-value-added cost is a cost that, if eliminated, would not reduce the actual or perceived value of product or service
  3. Cost Incurrence describes when a resource is consumed to meet a
    specific objective - when cost incurred
  4. Locked-In Costs are costs that have not yet been incurred, but will be incurred in the future based on past decisions - not incurred but will be
40
Q

Value-Chain Analysis

A

Understand customer requirements and value vs. non-value added costs
Anticipate how costs are locked in
before they are incurred
Use cross-functional teams to redesign products and processes to reduce costs/meet customer needs

41
Q

Cost-Based Pricing Approach

A

Given what it costs us to make our products, what price do we charge that will recoup those costs and achieve a target return
General formula for the cost-based approach is to add a markup to the product cost (also referred to as “cost plus”)

42
Q

Cost-Based Markup Calculation

A

To determine the markup they place on the product, firms will again look at the target rate of return on investment
Target Operating Income = Target Rate of Return x Investment
Required Return Rate X Investment = TOI

43
Q

Why total cost for Cost-based

A

Allows for calculation of “full recovery” of costs, and not just concerned with covering variable component
Price Stability – limits ability of sales people to cut prices
Simplicity – Don’t need to dig into as many pricing patterns to separate fixed and variable components

44
Q

Non-Cost Factors in Pricing Decisions

A

Predatory Pricing - act of deliberately pricing below costs to drive out competition in an effort to restrict supply, and then drive up prices, illegal in the US
Collusive Pricing - occurs when companies in an industry conspire in pricing and product decisions to restrain trade, illegal under antitrust law
Price Discrimination - practice of charging different customers different prices for the same goods or services, arises as a result of demand elasticity/inelasticity, legal as long as prices are justified and not intended to prevent competition
International Pricing - prices charged in different countries may vary due to different economic and requalty factors, dumping is when a foreign company sells product in another country below market value, and harms industries in that country, countries could impose anti-dumping duty
Peak Load Pricing - practice of charging a higher price for same service when demand approaches physical limit of capacity, when demand is high customers willing to pay more

45
Q

Customer Profitability Profile can help a company:

A

Expand relationships with profitable customers
Change behavior patterns of unprofitable customers
Highlight that a small percentage of customers contributes a large percentage of operating income (Pareto Principle) - 80/20

46
Q

Other items to consider when prioritizing customers

A

Likelihood of customer retention
Potential for Sales Growth
Long-Run Customer Profitability
Increases in overall demand from having “references”
Ability to learn from customers

47
Q

Four Criteria of Cost Allocation Decisions - how to choose cost drivers

A

Cause and Effect: identify variables that
cause resources to be used; likely most
credible
Benefits Received: identify beneficiaries
of outputs of cost object, and allocate in proportion to benefits received (e.g.,
advertising)
Fairness or Equity: Often used in gov’t
contracts when cost allocations exists
for establishing a “fair” price
Ability to Bear: Allocate costs in
proportion to the cost object’s ability to
bear costs allocated to it

48
Q

Fully Allocated Customer Profitability

A

When it comes to determining items we care about, such as pricing, there are other indirect costs we need to consider, such as advertising, administration, R&D, etc.
Allocating these costs, as well as the other customer specific costs we have been talking about give us a picture of fully allocated customer profitability

49
Q

Variances definition, unfavorable vs favorable

A

A Variance is the difference between actual results and expected performance (budgeted performance)
A Favorable Variance has the effect of increasing operating income, relative to budget
A Unfavorable Variance has the effect of decreasing operating income, relative to budget

50
Q

Static Budget Variance

A

the difference between the actual
amount and the original budgeted amount

51
Q

Flexible budget variance

A

the difference between the actual
amount and the amount from the flexible budget

52
Q

Sales Volume Variance

A

the difference between the original
budgeted amount and the amount from the flexible budget

53
Q

Sales-Mix Variance definition and formula

A

the difference between budgeted contribution margin for the actual sales mix and the budgeted contribution margin for the budgeted sales mix

𝑆𝑎𝑙𝑒𝑠 𝑀𝑖𝑥 𝑉𝑎𝑟 = 𝐴𝑐𝑡𝑢𝑎𝑙 𝑇𝑜𝑡𝑎𝑙 𝑈𝑛𝑖𝑡𝑠 𝑥 (𝐴𝑐𝑡𝑢𝑎𝑙 𝑀𝑖𝑥 % − 𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝑀𝑖𝑥 %) 𝑥 𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑀𝑎𝑟𝑔𝑖𝑛

54
Q

Sales-Quantity Variance definition and formula

A

he difference between budgeted
contribution margin based on actual total units sold at the budgeted
sales mix and the static budget CM

𝑆𝑎𝑙𝑒𝑠 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑉𝑎𝑟 = (𝐴𝑐𝑡𝑢𝑎𝑙 𝑇𝑜𝑡𝑎𝑙 𝑈𝑛𝑖𝑡𝑠 𝑆𝑜𝑙𝑑 − 𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝑇𝑜𝑡𝑎𝑙) 𝑥 𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝑀𝑖𝑥 % 𝑥 𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝐶𝑀 𝑝𝑒𝑟 𝑈𝑛𝑖𝑡

55
Q

Market-Share Variance definition and formula

A

the difference in budgeted contribution
margin for actual market size (in units) caused solely by actual market share being different from budgeted market share

𝑀𝑎𝑟𝑘𝑒𝑡 𝑆ℎ𝑎𝑟𝑒 𝑉𝑎𝑟 = 𝐴𝑐𝑡𝑢𝑎𝑙 𝑀𝑘𝑡 𝑆𝑖𝑧𝑒 𝑖𝑛 𝑈𝑛𝑖𝑡𝑠 𝑥 (𝐴𝑐𝑡𝑢𝑎𝑙 𝑀𝑘𝑡 𝑆ℎ𝑎𝑟𝑒 − 𝐵𝑢𝑑𝑔𝑒𝑡 𝑀𝑘𝑡. 𝑆ℎ𝑎𝑟𝑒) 𝑥 𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝑊𝐴𝐶𝑀

56
Q

Market-Size Variance definition and formula

A

the difference in budgeted contribution margin at budgeted market share caused solely by actual market size in units being different from budgeted market size in units

𝑀𝑎𝑟𝑘𝑒𝑡 𝑆𝑖𝑧𝑒 𝑉𝑎𝑟 = (𝐴𝑐𝑡𝑢𝑎𝑙 𝑀𝑘𝑡 𝑆𝑖𝑧𝑒 𝑖𝑛 𝑈𝑛𝑖𝑡𝑠 − 𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝑀𝑘𝑡 𝑆𝑖𝑧𝑒) 𝑥 𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝑀𝑘𝑡 𝑆ℎ𝑎𝑟𝑒 𝑥 𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝑊𝐴𝐶𝑀

57
Q

Two variables explain revenue differences between customers:

A

Quantity Sold
Price Discounts

58
Q

Price Discounts are a function of:

A

Volume of product purchased
Desire to sell to a certain customer
Poor negotiating by the seller
Unwanted effects of incentive plans

59
Q
A

Cost Management (3 decks)

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