Lecture 2

Question 1

Decenteralisation

Answer 1

Organisational structure to achieve more decentralisation: responsibility centers

Important for localised info, specialised skills
Decentralised decisions need to be aligned with headquarters interests

Question 2

Responsibility centers

Answer 2

Cost center - responsible only for costs

Revenue center - responsible only for revenues

Profit center - responsible for revenues, costs and profits

Investment center - responsible for revenues, costs, profits and investments

Question 3

Use of variance as

Answer 3

Variances can be analysed and used:

Early warning
Performance evaluation
Strategy evaluation
Communication of the goals of the organisation

Question 4

Balance acorecard

Answer 4

Balanced scorecard is to identify, measure and incentivise appropriate performance measures

All for the vision and strategy:

Customer kpi: to achieve our vision, how should we appear to our customers

Financial kpi: to succeed financially, how should we appear to our shareholders

Internal kpi: to satisfy our shareholders and customers, what business processes must we excel at

Innovation and learning kpi: to achieve our vision, how will we sustain our ability to change and improve

Question 5

Example of balance scorecard for an airport

Answer 5

Learning is employee training
Internal is ontime
Customer is customer satisfaction
Financial is revenue / profit

Question 6

Criteria of performance measures

Answer 6

Goal congruence / alignment: compensate so that your employees share your goals

Controllability: only hold employees accountable for what they can influence

Question 7

Types of performance measures

Answer 7

Quantitative - qualitative
Sales margin vs customer satisfaction

Internal - external
Roa vs stock price
Employees training vs market share

Financial vs non financial
Inventory turnover vs store automation

Measure the past:
Benchmark: actual vs budgeted
Analyse: source of variances

Design the future:
Motivate: budget targets
Allocate: distribute rewards
Plan: forecast

Question 8

Goal congruence example google

Answer 8

Get people to use the internet more > individual kpi on sales growth > high sales growth 15%

Question 9

Challenges of incentivised measures

Answer 9

Good measures > right direction;
Bad measures > wrong direction

Bloomfield law of measurement:
Measure management arises when incentivised meausres capture performance constructs with error, the people being evaluated know the details of how performance is measured, and people have discretion either operations or reporting

Question 10

Principes of controllability

Answer 10

Subject of a responsibility center (eg cost, profit) should be controllable by the manager for a given time period

>

Performance measurement: exclude all uncontrollable costs from a managers performance report

Question 11

What are costs

Answer 11

“Resource sacrificed or foregone to achieve a given objective”

Usually expressed in monetary terms

Goal : find out the true costs (eg of producing a car)

Direct mat + direct lab + man oh

Question 12

Opportunity costs

Answer 12

A cost is a resource sacrificed or foregone to achieve a given objective

Opportunity costs are loss of potential gain from (the best of) the other alternatives when one alternative is chosen

Eg should you buy or rent house (alternative: invest in stocks)

Question 13

What is a cost object

Answer 13

A cost object is a thing for which cost information is needed 
Eg product or product lines
Departments and business units
Projects and programs 
Customers 

Depends on individual situation or interest

Question 14

Direct and indirect costs

Answer 14

Accumulated costs >

Cost tracing to cost object = direct costs

Or cost allocation to cost object = indirect costs

Direct costs = related to a particular object
Tracing economically feasible / not too costly

Indirect costs = related to a particular object
Tracing economically not feasible / too costly
Allocated based on criteria determined by the company

(Direct costs more accurate: preferred for decision making)

Question 15

Factors affecting classification: direct vs indirect

Answer 15

Economic materiality of the cost
Available info gathering technology (easiness to trace)
Design of operations (eg exclusive or joint use)

Question 16

Cost drivers

Answer 16

Cost driver = factor such as the level of activity or the quantity, that casually affects total costs over a given time span

Change in the level of cost driver > change in total costs of cost object

Eg: no. Of labour hours in a project
Number of parts

Question 17

Cause and effect criterion

Answer 17

Physical (operational / technology based) relationship (eg quantity > material costs)

Contractural arrangement (eg costs of phone provider based on number of calls)

Logic and knowledge of operations (eg number of parts in product design

Question 18

Unit costs

Answer 18

Total costs / quantity (units) and

Question 19

Example of direct vs indirect / variable and fixed

Apple produces iPhones and iPads in production facilities in china. Classify the different costs when cost object is the iPhone manafacturint cell in China

Answer 19

Direct and variable - production workers working on the iPhone (short term contracts)

Indirect and variable - glue to attach micro chips in production facilities

Direct and fixed - annual lease of machinery for iPhones

Indirect and fixed - r&d employers salaries in Apple headquarters (long term contracts)

Question 20

Product costs (manafacturing costs)

Answer 20

Direct mat
Direct labour
Manafacturing oh (indirect mat, indirect lab, other indirect costs)

Question 21

Period costs (non manafacturing costs)

Answer 21

Selling expenses, admin expense

No allocation, P&l expenses

Question 22

Sunk costs

Answer 22

Sunk costs are costs incurred / investments made and not recoverable

Question 23

Cost estimation approaches

Answer 23

Industrial engineering or work measurement method: step by step monitoring and measuring of inputs
Time consuming and often not feasible

Conference method: use estimates on the basis of Analysis and opinions of experts from different areas
Quick but highly dependent on experts inputs

Account analysis method: classification in variable fixed mixed cost drivers
Theory driven (eg contracts as source) but can be subjective 
Widely used in practice 

Quantitative analysis: (high low or regression based)
Data driven classification: 
Independent variable (cost driver)
Dependent variable (cost of an object)

Question 24

Quantitative method example

Answer 24

Use the Low high method
So find the lowest value (cost driver) and the higehst value (cost driver)
Y= a + b*Q where
A = intercept so approximation of fixed costs
B = slope of the line = variable costs

Costs 55000 and 1000 meals sold
Costs 80000 and 4000 meals sold

Work out b: (80,000-55,000)/(4000-1000)=8.3 a meal

A = 80,000 -8.3*4000 =46700 
Y= 46700+8.3Q

Question 25

Regression method example

Answer 25

Regression estimates on low high method:

Costs: 45000 1500 meals sold
80,000 4000 meals sold

Use same method as low high

Question 26

Cvp analysis

Answer 26

Operating profit = revenue - vc- fc where

Revenues is unit selling price times quantity of revenue driver
Variable costs is unit variable costs times quantity of cost driver

Question 27

Cvp analysis assumptions

Answer 27

Assumptions of cvp:
Revenue / costs change due to the same driver (=quantity of output)
Linear behaviour of cost and revenue functions
Unit variable cost, fixed cost and selling prices are known and are assumed to be constant
No inv levels assumed, all cost and revenues are added withou taking into account time value of money

Question 28

Cvp analysis break even points

LG wants to launch a tv at price of 200. Fc are 1,000,000 and Vc are 100. How many screens need to be sold to break even?

Answer 28

Break even point = output level for zero profit

200Q - 100Q -1,000,000 = 0
100Q =1,000,000
Q = 10,000 units in

Question 29

Cvp analysis: target profit

Eg LG wants to realise a target profit of 350,000 fc =1,000,000 vc =100 sp =200

How many units does it have to sell?

Answer 29

Output level to achieve a given operating profit objective

350,000 = 200Q-100Q - 1,000,000
1,350,000 =100 Q
Q= 13500 units

Question 30

Cvp Analysis: influence of taxes

Eg assume a tax rate of 30%. Does the break even point for LG change?

Answer 30

No taxes are only relevant if OP>0 (by definiton not the case for the break even point)

Question 31

Cvp analysis: influence of taxes

What happens with the number of units that lg needs to sell if it still wants to earn an profit of 350,000 but after taxes?

Answer 31

350,000 / 1-0.3 = 500,000

500,000 = 200Q-100Q -1,000,000
1,500,000 =100q

15,000 units

Question 32

Cvp analysis: other what if analyses

Effect of priCe / unit cost changes

Eg a sudden cost increase of 5% in UVC

Answer 32

Q= fv +op / usp- uvc

Question 33

Cvp analysis and uncertainty

Eg assume LG has outdone contacting options of a fully variable cost structure of 130 a unit or fully fixed cost structure of 2,000,000 and selling price 200 a unit.

Which conrector should it choose knowing bag marker for low budget led TVs is 
9000 units (30% prob)  or 
19000 units (70% prob)

Answer 33

General approach = expected value (based on prob * outcomes)

Fixed cost structure:

2009000 -2,000,000 = -200,000
20019000 - 2,000,000 = 1,800,000
E(op) = 0.3 * -200,000 + 0.7* 1,800,000 =1,200,000

Variable cost structure:
200-130 9000 = 630,000
200-13019000 = 1,330,000
E(op) = 0.3630,000 + 0.7 1,330,000 = 1,120,000

Given these expectations fixed cost structure preferred

Question 34

Cvp analysis in gov/non profit

Hosp has budget of 400,000. Fixed costs are 150,000 and vc =400. How many patients can receive treatment

Answer 34

In these they get a fixed budget. They can have a goal to maximise the number of people profiting instead for company profits.

400,000 = 150,000 +400Q

250,000/400 = Q Q=625

Question 35

Cvp analysis gov/non profit

Eg assume that the budget of agency is reduced by 10%. How many patients can receive treatment

Answer 35

400,000x.9 = 360,000
360,000=150,000 + 400Q

210,000/400 = Q 
Q= 525