Lecture 2 Flashcards
Decenteralisation
Organisational structure to achieve more decentralisation: responsibility centers
Important for localised info, specialised skills
Decentralised decisions need to be aligned with headquarters interests
Responsibility centers
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
Use of variance as
Variances can be analysed and used:
Early warning
Performance evaluation
Strategy evaluation
Communication of the goals of the organisation
Balance acorecard
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
Example of balance scorecard for an airport
Learning is employee training
Internal is ontime
Customer is customer satisfaction
Financial is revenue / profit
Criteria of performance measures
Goal congruence / alignment: compensate so that your employees share your goals
Controllability: only hold employees accountable for what they can influence
Types of performance measures
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
Goal congruence example google
Get people to use the internet more > individual kpi on sales growth > high sales growth 15%
Challenges of incentivised measures
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
Principes of controllability
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
What are costs
“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
Opportunity costs
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)
What is a cost object
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
Direct and indirect costs
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)
Factors affecting classification: direct vs indirect
Economic materiality of the cost
Available info gathering technology (easiness to trace)
Design of operations (eg exclusive or joint use)
Cost drivers
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
Cause and effect criterion
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
Unit costs
Total costs / quantity (units) and
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
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)
Product costs (manafacturing costs)
Direct mat
Direct labour
Manafacturing oh (indirect mat, indirect lab, other indirect costs)
Period costs (non manafacturing costs)
Selling expenses, admin expense
No allocation, P&l expenses
Sunk costs
Sunk costs are costs incurred / investments made and not recoverable
Cost estimation approaches
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)
Quantitative method example
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
