L4M7- Chapter 3- Understanding the concept of whole life costing

Question 1

What is a fixed asset?

Answer 1

Accounting term that describes assets that are acquired but not routinely sold. e.g. land or buildings

Question 2

What is the purchase price?
What core elements make up the purchase price?

Answer 2

Amount charged for a product or service.
Made up of:
Fixed price
Market price
Adjustable prices
Reference indices
Discounts
Payment arrangements
Volume
Multi part
Delivery charges

Question 3

What is the difference between fixed, market and adjustable prices?

Answer 3

Fixed price= Assurance on known costs (will be based on volume, timescales etc)
Market price= amount to acquire a specific item at a specific time
adjustable price= When purchasing over a long period the buyer and seller agree adjustments to avoid over or under pricing.

Question 4

What are current assets?

Answer 4

Assets which will be sold, consumed or exhausted within the financial year of normal business operations

Question 5

What is the difference between hire and lease?

Answer 5

Hire- a short term agreement to provide goods and service for a duration
Lease- Legal commitment allowing the lessor to charge rental fees to a lessee to be able to use the asset and will have associated responsibilities in the T&Cs (e.g. insurance)

Question 6

What is opportunity cost?

Answer 6

Potential benefits foregone due to choosing one alternative over another. E.g. investing in safety stock reduces your opportunity for capex

Question 7

What are the advantages and disadvantages of leasing?

Answer 7

Adv:
No initial purchase cost
Rental payments are not capex and can be met from monthly trading
Known lease period
Stored on your premises
lower risk if the product is insured and maintained

disadv:
contract is expected to run the whole term
Requirements may change
Newer tech could be released
Contract must be followed

Question 8

What are the advantages and disadvantages of hiring?

Answer 8

No need to borrow money for purchase or locked up in ownership
Great in low use situations
Maintenance is not your responsibility
Not locked into a specific technology
No end of life management

May need to hire an operator
It is not owned
May appear expensive in the short term
Asset required may be on hire to someone else (library)

Question 9

What is activity based costing?

Answer 9

A model where costings are allocated proportionally to the usage

Question 10

Often overlooked in costing are things like Factory Acceptance Testing (FAT) what would be some examples of acceptance testing activity?

Answer 10

Testing operating manuals
Health and safety e.g. electrical testing
Load testing
Dry running
Stress testing
Soak testing
Training
compatibility testing

Question 11

What should be considered when looking at extended warranties?

Answer 11

Cost of cover compared to replacement cost
Cost of future failure or breakdown along with time to recover
Expected number of maintenance events in the period of cover
Relative ease of replacement, including installation

Question 12

What is total productive maintenance? (TPM)

Answer 12

An approach to maintain equipment in perfect condition by minimising defects, breakdowns, accidents, disruptions and incidences of having to slow down production

Question 13

Name the key operation costs in an organisation?

Answer 13

Operating assets (set up time, management, cleaning)
Facilities management (premises maintenance)
Cost of HVAC (heating, ventilation, AC)
Cost of consumables

Question 14

Name the key maintenance costs in an organisation?

Answer 14

Corrective maintenance (following failure)
Scheduled maintenance (preventative)
Self maintained options
Replacement and spares
Warranty and guarantees

Question 15

What are the accounting implications with waste disposal/end of life?

Answer 15

Value of fixed assets are adjusted in the accounts over time to reflect value changes, the disposal may change with the final write off. If the product is sold then it may need special treatment in the accounts to identify the difference

Question 16

What are the legal implications with waste disposal/end of life?

Answer 16

May have restricted resale rules in the contract
May be clauses preventing export
Local legal requirements for scrap documentation
May be taxes on disposal
Some regulations may apply e.g. battery directive or WEEE (waste of electricals and electrical equipment.

Question 17

Why should WLC and WLAM help organisations?

Answer 17

All costs are examined from a long term perspective
Cost is assessed beyond just the acquisition cost
Forced to consider the financials and the resource requirements
For accurate results it requires a full understanding
Helps consider environmental/sustainable aspects too

Question 18

What are some of the hidden costs and risks in estimating WLC?

Answer 18

Country risk- a range of risks associated with country of sourcing, e.g. government actions, taxations, material prohibition, currency, human rights issues, natural disasters

Logistics and transport issues- What is the incoterm and who carries risk? More risk with more types of transport and distance.

Export/import taxes- clear documentation requirements

Ethical issues- e.g. minimum wage vs living wage, audit requirements and expectations, attitudes to environmental impacts

Question 19

What is the triple bottom line?

Answer 19

Concept at the heart of sustainability- making a profit, caring for people and looking after the planet (3Ps)

Question 20

What is a circular economy?

Answer 20

A principle of maximising reuse and value extraction of materials and products rather than disposal without consideration of outcome

Ie. should view resources as valuable and keep them in use for as long as economically viable and extracting the maximum benefit form them

Question 21

What is the difference between closed, open and mixed loop?

Answer 21

Closed: Product can be continuously recycled without introduction of new materials
Open: products need to be mixed with new materials in order to become a new product
Mixed: Some materials being reused for the same product but others used differently

Question 22

What is a risk register?

Answer 22

Commonly used to summaries the risks- it can take some time to document and quantify, often being difficult as not all the information is available.

Question 23

what is a fixed asset register?

Answer 23

A document that typically details the fixed assets in the possession of an organisation, their date of acquisition, original cost and current cost

Question 24

What are some examples of acceptance testing?

Answer 24

Health and safety e.g. electrical
Load testing- ensures limits are met without failing
Dry running- run the machinery but make nothing
Stress testing- Run at max load
Soak testing- overwhelming the system to see if it works
Compatibility testing- does it work with existing infrastructure

Question 25

What is net present value?

Answer 25

Gives a future value adjusted for today.

Effectively does cash inflow subtracted by cash outflow over a period of time.

A discount rate is applied because money now is worth more than money in the future (as money is devalued over time)

Question 26

Give examples of acquisition costs

Answer 26

Site preparation
Installation
Acceptance testing
Hidden costs e.g. travelling
Admin costs

Question 27

How can acquisition costs be reduced?

Answer 27

Buyer discretionary spend- reduces the burdens on colleagues or managers on non critical items

User buying- for some standard items it can not need to go through the buying team

Vendor managed inventory- inventory owned by buying organisation buy monitored by the supplier

Kanban- Routine purchases are managed by this JIT model rather than a buyer

Product catalogues- items are predetermined

E-procurement- reduce the time taken in the procurement cycle

Procurement cards- removes multistage processes requiring a buyer

Question 28

What are the different types of usage cost:

Answer 28

Relates to the costs associated with capital expenditure equipment.

Includes:
Maintenance
(Reactive, proactive, self maintained, replacements, warranty)
Can also include TPM

Operation
(Operating the assed, facilities, consumables, HVAC)

Utility

Training

Question 29

What is ‘sale or return’ stock?

Answer 29

This is part of consignment stock (where the supplier provides stock to the buyer but only paid when used). Sale or return means if it isnt sold then the supplier takes the stock back

Question 30

What is activity based costing?

Answer 30

Where the costs are allocated proportionally to use

Question 31

What is two bin kanban?

Answer 31

This is a reordering process involving 2 bins. Product is taken from the front bin until empty and then product is refilled. Whilst in the process of being refilled the second bin is used. Once the original bin is returned it is placed behind the bin in use currently and the process is repeated.

Question 32

What is a usage cost?

Answer 32

Often part of a multi part pricing agreement e.g. car lease plus cost per mile driven. It is to reflect that heavier usage will require more maintenance or the reduced value of a vehicle with higher mileage

Question 33

When is WLAM used?

Answer 33

Often it is:
- prior to an investment decision
- during the lifetime of an asset when additional costs have been encountered and a new asset investment opportunity is being considered

Question 34

What are the steps in a WLC?

Answer 34

Using WLAM model prior to acquisition can give you a comparison between different options. Once the purchase is then made it is worth comparing to your model for budgeting and learning forecasts for the future:
- Investigate options
- Decide based on WLC
- COmpare actual vs WLC forecast
- Review if early disposal is required
- End of life review prior to new investment

Question 35

What is discounted cash flow?

Answer 35

An investment appraisal method based on future cash flows and the time value of money

Question 36

Which set of ISO standards relates to packaging?

Answer 36

ISO 18600

Goal is to reduce environmental impact
Support packaging innovation
Avoid undue restrictions on use of packaging
Prevent barriers to trade

Question 37

What areas could be contained in a ‘project whole life cost and savings’ analysis?

Answer 37

Purchase costs
Usage costs
Disposal costs
Potential savings
Cash flow
Cumulative cash flow

Question 38

What are the key ethical issues that could be a hidden cost for an organisation?

Answer 38

1) Dual standards- issues that would not be acceptable in the buyers organisation but are acceptable in the supplier

2) SC mapping and auditing- the immediate supplier may have been audited but it may not extend down the supply chain

Question 39

What are the non financial considerations with WLC?

Answer 39

Triple bottom line
Environmental
Waste
Decommission
Packing/packaging

Question 40

What is the malthusian trap?

Answer 40

It is where as population grows there will a point where natural resources are exceeded by population demand

Question 41

What is socially responsible disposal?

Answer 41

A key part of triple bottom line

using a disposal supply chain which is socially responsible means:
- Ensuring people are safeguarded e.g. ppe
- improved policies and practices
- Minimise the potential impact on people

Question 42

What is the purpose of packing and packaging for an organisation?

Answer 42

Protect contents
Protect contents from damaging other things
Safety of handling
Meet environmental requirements
Meet cost requirements
Marketing/branding
Meet logistical or legal requirements

Question 43

What are the key elements of triple bottom line with WLC disposal? (hint SEE)

Answer 43

Socially responsible- doing things that will not impact people e.g. minimising impact on people

Environmentally responsible- Ideally there would be no waste- if there is try to make it circular.

Economically responsible- Are there opportunities to monetise scrap, redundant, obsolete or surplus stock?

Question 44

What are fixed, firm and surge prices?

Answer 44

Used in military as an example
Fixed prices move with predetermined rules
Firm prices do not change
Surge prices are associated with purchases during a war

Question 45

What are the 2 key considerations for WLC?

Answer 45

Always using the best estimates and data sources

Only develop for larger purchases