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Operation Management Flashcards

1
Q

Why use financial and non financial performance measures?

A

Both financial and non financial measures are ultimately designed to provide feedback that will motivate appropriate employee behaviors. Feedback tied to self-interest is most effective.

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2
Q

What is the issue associated with any performance measurement system?

A

Is the appropriate linkage of measures, incentives, and goals.

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3
Q

What are the Financial Measures of Performance?

A

a. Profit – income generated after expenses
b. Return on investment – ROA, ROE
c. Variance analysis – spending – actual vs. expected
d. Balance scorecard – framework used for implementing strategy converting objectives into a set of performance measures. (Financial & non financial)

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4
Q

What are the Non Financial Measures Including Benchmarking Techniques and Best Practices in general?

A

Nonfinancial measures are an effective way to observe problems as they occur and thereby direct attention to potential errors or inefficiencies before poor financial results are produced.
Nonfinancial performance measures are often preferable to financial performance measures as a means of constructively motivating operational managers since nonfinancial measures are more easily associated with operational objectives.

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5
Q

What are External Benchmarks?

Variance/Efficiency

A

They are productivity measures.
Productivity is defined as the measure of the ratio of the outputs achieved to the input of production. Productivity is a measure of efficiency and uses the relationships derived from actual performance in comparison to similar organizations over time.
Two types of productivity ratios are generally recognized:
1. Total Factor Productivity Ratio - TFP
2. Partial productivity Ratio - PPR

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6
Q

What are Total Factor Productivity Ratio - TFP?

A

Reflects the quantity of all output produced relative to the costs of all inputs used. (Ex. material & labor costs)

Output (total units produced)/total cost

This ratio can be used to compare actual cost p/unit production levels to budgeted (or prior year’s) production level

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7
Q

What are Partial productivity Ratio - PPR

A

Reflect the quantity of output produced relative to the quantity of individual input(s) used. (Ex. material OR labor costs - not both)

Output (quantity produced in units)/specific quantity (#of labor hours, # of lbs. of material)

This ratio can be used to compare actual elves of a production input needed to produce a given output,which may be used for a comparison with a budgeted (or prior year’s) input level. It is the most frequently used productivity measure.

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8
Q

What are Internal Benchmarks?

A

They are techniques to find and analyze problems. Among most common quality monitoring and investigative techniques procedures are:

  1. Control Charts
  2. Pareto Diagrams (Histogram)
  3. Cause-and-effect Diagrams (Fishbone)
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9
Q

What are Control Charts?

A

Control Charts – determine “zero” defects.
Control Charts are an important tool used in statistical quality control (SQC). Graphical tool used to plot a comparison of actual results by batch or other suitable constant interval to an acceptable range. Control charts show if there is a trend toward improved quality conformance or deteriorating quality conformance. If upper limit 20 and lower limit 10, anything in between is ok.

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10
Q

What are Pareto Diagrams?

A

Pareto Diagrams – “Histogram”
Are used to determine the quality control issues that are most frequent and often demand the greatest attention. It demonstrates the frequency from highest to lowest frequency.

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11
Q

What are Cause-and-effect Diagrams?

A

Cause and Effect (Fishbone) Diagram – One the most frequently recurring and costly defects/problems are identified by the Pareto diagram, a cause and effect diagram may be used to further analyze the defect.
This diagram provides a framework for managers to analyze the problems that contribute to the occurrence of defects. Production processes that lead to the manufacture of an item are displayed along a production line in a manner that looks like a fishbone. Managers use the diagram to identify the sources of problem in the production process by resource and

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12
Q

What are the characteristics of Effective Performance Measures?

A

Effective performance measures promote the achievement of goals. (motivate)

  1. Relate to the goals of the organization
  2. Balance long and short-term issues
  3. Reflect management of key activities, sometimes referred to as critical success factors in the balance scorecard.
  4. Are under the control or influence of the employee
  5. Are understood by the employee
  6. Are used to both evaluate and reward the employee or otherwise constructively influence behavior.
  7. Are objective and easily measured; and are used consistently
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13
Q

Marketing practices focus in one of which 5 elements?

A
  1. Product
  2. Market Segment (which customer)
  3. Delivery System (e.g. wholesalers or retailer)
  4. Communication strategy
  5. Price
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14
Q

What marketing decisions must consider?

A

Marketing decisions must consider the objectives of management and the manner in which alternative practices will achieve those objectives.

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15
Q

What is the Marketing and its Practices and Methods?

A

Marketing seeks to establish value for an organization’s products.

  1. Transaction Marketing – lowest price, single sale based on price
  2. Interaction-Based Relationship Marketing – Repeat business, loyalty discount, on going relationship.
  3. Database Marketing – target groups, information gathered in database
  4. E-Marketing – use of Internet
  5. Network Marketing – multi-level marketing – relationship and referrals
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16
Q

What is Performance?

A

When Marketing methods are selected to efficiently promote and sell the product and to drive customer and employee.

  1. Marketing Methods Aligned With Products
  2. Performance and Performance Incentives
    a. Sales volume driven compensation and evaluation methods are well suited to transaction marketing that involves a single transaction. (Performance and incentives are tied to a predetermined level of sales)
    b. Customer satisfaction and quality measures are more significant in relationship-based marketing. (Higher quality, customer surveys on to measure employee performance)
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17
Q

What is the purpose of incentive compensation?

A

It is design to motivate, compensate and retain employees.

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18
Q

What are the 3 general types of compensation

A
  1. Fixed Salary
  2. Bonuses – based on either profit or stock performance expectations
  3. Other Incentives “perks” – non-salary benefits such as use of vacation homes, company jets, company cars, lawn maintenance, etc.
    a. Perks must be authorized by the BOD and properly disclosed in proxy statement
    b. Perks received that are not related to performing the manager’s business activities may also need to be included in the taxable income of manager.
    c. Executive perks are often criticized as the perks are often viewed as “excessive”
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19
Q

What are the Design Choices for Management Compensation?
Or
List 5 issuers related to incentive compensation

A
  1. Time Horizon
  2. Fixed vs. Variable Bonuses
  3. Stock vs. Accounting-Base Performance Evaluation
  4. Local vs. Company-Wide Performance
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20
Q

What is the “Time Horizon” Incentive compensation?

A

Time Horizon – Incentive compensation must balance employee focus on current rewards for current performance against the impact of current decision on future performance.

a. Cash bonuses reward current performance
b. Restricted stock options may reward current performance, but the plan emphasizes future performance.
(1) Employee must typically stay through the option vesting period.
(2) The option only has value if the stock price increases

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21
Q

What is the “Fixed vs. Variable Bonuses” compensation?

A

Fixed vs. Variable – Incentives may be fixed (formula driven) or variable (subjective)

a. Fixed programs provide predictable payouts to participants, but may be adversely affected by uncontrollable events. (Objective)
b. Fixed plans are somewhat rigid and do not accommodate balanced scorecard presentation which attempt to tie in an organization’s mission or objectives with stipulated performance measures (and ultimately, compensation).
c. Variable bonus plans may be based on various performance criteria that contain subjective elements. (Subjective)

22
Q

What is the “Stock vs. Accounting Based Performance Evaluation” compensation?

A

Stock vs. Accounting Based Performance Evaluation – Incentives can be driven by upward movement in company’s stock, desired sales volume, profit margin, or ROI.

a. Stock based incentives align the manager’s interest with shareholders, but can create risk adverse behavior.
b. Stock based incentives are often linked with accounting based evaluations to balance current and future performance.

23
Q

What is the “Local vs. Company-wide Performance” compensation?

A

Local vs. Company-wide Performance – Rewards for division performance that erode company-wide performance do not contribute to entity-wide strategic objects.

a. Local performance might result in a fixed salary (base).
b. Bonuses might result from company-wide performance. Ex. A manager may get a 25% cash bonus because the company did well even though the manager’s division did not.

24
Q

What is the “Cooperative vs Competitive” compensation?

A

a. Cooperative incentive plans may result in stock options for company-wide performance. Both the basis for the award and the type of award emphasize the corporate good. (Manufacturers)
b. Competitive incentive plans might result in tiered commission structures in which commission rates increase for individuals as thresholds are reached an exceeded. (Car sales, insurance sales)

25
Q

What are cost objects?

A

COSTS OBJECTS – PIE – Product cost, Income determination, Efficiency
Defined as resources or activities that serve as the basis for management decisions. May be products, product lines, departments, geographic territories, or any other classification that aids in decision making.
PK
Cost accounting systems are designed to meet the goals of measuring cost objects or objectives. The most frequent objectives include PIE:
P – Product costing (inventory and costs of goods manufactured and sold)
I – Income determination (profitability)
E – Efficiency measurement (comparisons to standards)

26
Q

What is the focus of cost objects?

A

Integration of product costing with cost control measurement and assignment objectives maximizes the effectiveness of management accounting systems. Cost measurements and assignment may focus on valuation of product or inventory (Ex. product costing) or cost control (Ex. cost comparison to standards and budgets).

27
Q

What are the common Cost Objects and their definitions?

A
  1. Product Cost – Not expensed until product sold (matching principle)
    a. Inventory and Cost of Goods Manufactured and Sold. Product costs are inventoriable (considered as assets before the product is sold). These costs attach to the units of output.
    b. Component - Product costs consist of direct materials, direct labor, and manufacturing overhead applied.
  2. Period Costs – Expensed in the period incurred – not inventoriable - IS only
    a. Expenses – Selling, general, and administrative; as well as interest (financing) exp.
    b. Components – selling the product and administering and managing operations.
  3. Manufacturing Costs – treated as product costs
    Include all costs associated with the manufacture of a product
    a. Inventory and Cost of Goods Manufactured and Sold – capitalized to the cost of mnf product
    b. Components – Manufacturing costs consist of both direct (DM + DL) and indirect cost (OH = IM, IL, Factory)
  4. Non-manufacturing Costs - Selling, general, and administrative.
28
Q

How can cost to Cost Objects be traced?

A

By product, department, or geographical area.

29
Q

What costs can be directly traced?

A

Direct Cost – “Prime” - can be easily traced to a cost pool or object, as the cost directly relates to that item.

  1. Direct Raw Materials – costs of materials to be used in production (+freight in – discounts) plus a reasonable amount for normal scrap created by the process.
  2. Direct Labor – cost of labor that is directly related to the production of the product or the performance of a service plus a reasonable amount of expected “down time” (breaks, setup, training, etc.).
30
Q

What costs can be indirectly traced?

A

Indirect Costs – Overhead
Not easily traceable, typically benefits two or more cost pools or objects
• In the factory – product – manufacturing OH
• In the office – period – Selling, general & administrative
1. Indirect Materials – not used specifically or could not be traced to the completed product with ease. (cleaning supplies)
2. Indirect Labor – supports the manufacturing process but does not work directly on the specific job. (Janitors, inspectors, engineers, training, receiving staff)
3. Other Indirect Costs “In the factory” – rent, depreciation of facility and machinery, taxes

31
Q

What are prime costs?

A

Prime Cost = Direct Labor + Direct Material

32
Q

What are conversion costs?

A

Conversion Cost = Direct Labor + Manufacturing Overhead

Conversion cost could be used when the customer furnishes the material used in manufacturing a product.

33
Q

Overhead Allocation Using Cost Drivers

A

Assign factory OH to individual product
Indirect costs are allocated to benefiting cost pools or cost objects using cost drivers that are considered to have a strong relationship to the incurrence of these costs.
1. Allocation Base – Direct labor, # of hours, machine hours
The cost drivers that are used to allocate indirect costs are referred to as “allocation bases”.
2. Accounting Overhead – Total manufacturing OH
When traditional costing is used, all indirect cists are allocated to a single cost pools or account called overhead and allocated as a single pool.

34
Q

How is the application of overhead is accomplished when traditional costing is used?

A

When traditional costing is used, the application of overhead is accomplished in two steps:
1. Calculate overhead rate =
»> Budgeted OH cost / Estimated cost driver
2. Applied OH =
»> Actual cost driver X OH rate (from step 1)

Plant-wide application rates applied to machine hours is a traditional costing approach.

35
Q

Explain variable cost behavior?

A
  1. Behavior - changes proportionally with the cost driver
  2. Amount – constant p/unit, total varies
  3. Long-run Characteristics – short and long run affects of variable costs are the same
36
Q

Explain fixed cost behavior?

A
  1. Behavior – In the short term and within a relevant range, a fixed cost does not change when the driver changes.
  2. Amount – varies p/unit, total remain constant - rent/#units produced = fixed cost p/unit
37
Q

What are the long-run characteristics of fixed cost behavior?

A

Given enough time any cost can be considered variable

38
Q

Distinguish between product and period cost

A

Product costs = inventorial, they become cost of goods sold when sold
Period costs = are expensed in the current period

39
Q

Define relevant range

A

The relevant range is the range of volume for which the assumptions of the cost driver (i.e linear relationship with the costs incurred) are valid and in which the actual value of the cost driver exists.

40
Q

What are cost accumulations systems?

A

Cost accumulation systems are used to assign costs to products. The system used is driven by the cost object involved is a mass -produced homogeneous product (e.g. steel), process costing is used.

41
Q

Name the 3 components of product cost

A

DM, DL, MO

42
Q

What are prime costs?

A

DM + DL

43
Q

What are conversion costs?

A

DL + MO

44
Q

What’s the formula for COGS

A 
Beg finished goods
Add: COGSMFG
= COGSAFS
Less: End finished goods
= COGS
45
Q

Determine the traditional overhead rate

A

Budget mfg OH cost / estimated cost driver

46
Q

What the formula for COGSMFG?

A 
Beg WIP
Add: DM used
Add: DL
Add: OH applied
= Mfg costs available
Less End WIP
= COGSMFG
47
Q

Total of mfg cost incurred =

A

DM used + DL + OH applied

48
Q

Define job-order costing.

A

Job-order costing or job costing is the method of product cost that identifies the job (or individual batches) as the cost objective and is used when there are relatively few units produced and when each unit is unique or easily identified.

49
Q

Define process costing

A

Process costing is a method of product costing that averages costs and applies them to a large number of homogeneous items

50
Q

How is process costing is computed?

A

Computation of how each segment of the process should compute cost of goods transferred out and the cost of goods remaining in work in process (inventory) is the central product costing issue and process costing environments. Five steps and normally followed to resolve this issue:

  1. Summarize the flow of physical units (beginning with the production report).
  2. Calculate “equivalent unit” output.
  3. Accumulate the total costs to be accounted for open (production report).
  4. Calculate the unit costs based on total costs and equivalent units.
  5. Apply the average costs to the units completed and the units remaining in ending work in process inventory
51
Q

What is the “BASE” flow of activity of raw materials, WIP, and finished goods?

A

See pk page B1-49
Subtracted raw materials used go to WIP
Finished goods in WIP is transferred to Finished inventory

BEC (10 decks)

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