Operations Flashcards
Fixed costs
costs that do not vary with output (also known as overheads)
Variable costs
costs that vary directly with output (also known as direct costs)
Direct costs
costs that can be attributed to a specific activity or the production of a particular product
Overheads
or indirect costs, are the day-to-day running costs of an organisation
Average cost
the cost of producing each unit of output
Profit margin
the difference between the selling price per unit and the average cost per unit
Break even level of output
the minimum level of output a business will need to produce and sell to cover its costs
Break even analysis
using cost and revenue data to calculate the break-even level of output
Economies of scale
a fall in the average cost of producing each unit due to an increase in the scale of production
Diseconomies of scale
rising average costs due to a business being too big to operate efficiently
Profit=
Total revenue – Total costs
Profit per unit =
Selling price per unit – Average cost per unit
Total fixed costs=
Sum of all fixed costs
Total variable costs=
Variable cost per unit x total output
Total costs =
Total fixed costs + Total variable costs
Average cost per unit=
Total cost / Total output
How do you calculate break even level of output in units?
Total fixed cost/(Selling price per unit - Variable cost per unit)
What are the limitations of break-even analysis?
Products are not sold at the same price at different levels of output. As output increases, price will have to decrease (thus decreasing profit margin), to persuade customers to buy additional output.
Fixed costs DO vary when output changes e.g. moving to larger premises
Businesses are unlikely to sell everything that they produce. There may be some build up of inventory or wasted output
Most businesses sell more than one product
Variable costs do not always stay the same. They get cheaper as output rises (due to buyer power increasing i.e. being able to buy more from suppliers at cheaper prices)
Overheads that are spread across different products – will be hard to allocate costs specifically to each product e.g. premises
What are the economies of scale?
Economies of scale reduce the average cost of producing each unit of output as the scale of production is expanded in a business. 5 main types:
Purchasing economies: Being able to get price discounts for buying in bulk because of the large scale of production. It is easier for the supplier to make one large delivery than to make several small deliveries.
Marketing economies: E.g. fixed costs of advertising in a newspaper or on TV will be spread over a much larger output in a large firm than in a small firm.
Risk bearing economies: Large companies can sell to national markets and international markets, reducing risk.
Technical economies: Large businesses have the resources to invest in specialised machinery and highly skilled labour for R&D.
Financial economies: Large businesses can often borrow more money and at lower interest rates than small businesses. They can also sell shares to raise permanent capital that never has to be repaid.
What are the diseconomies of scale?
Management diseconomies: Several layers of hierarchy or communication problems due to spans of control being too long; can affect decision making and will mean decisions take longer to be acted upon.
Labour diseconomies: Large firms using specialised machinery will require specialised workers to perform repetitive tasks. This can reduce motivation and thus productivity.
Production
using resources to provide goods and services to satisfy consumer needs and wants
Productivity
a measure of the efficiency of use of resources in a business by comparing the volume or value of output with the resource inputs used in production
Labour productivity
average output or revenue per employee
Lean production
Improving efficiency and eliminating waste in a production process so that products can be made better cheaper and faster
Inventories
stocks of materials, work-in-progress and finished goods stored by a business. Keeping inventory on hand helps to ensure uninterrupted production and helps to meet peaks in consumer demand
Just-in-time (JIT) inventory control
keeping inventories of materials and work-in-progress to a minimum by taking delivery of new parts and materials only when they are needed for production
Kaizen
the continuous improvement of production processes to remove waste and increase efficiency
Job production
the production of a single item or items made to order, usually involving labour intensive techniques
Flow production
mass production of a large number of identical items in a continuous, usually automated process
Batch production
production of a limited number of identical products to meet a specific requirement or customer order. Each new batch may be slightly different from the last one produced
Computer-aided-design (CAD)
the use of computer systems to create, modify and optimise the design of a product
Computer-aided-manufacturing (CAM)
the use of computers to control and monitor the use of machinery and equipment in a manufacturing process
Research and development
improving existing products and the discovery, testing and development of new products, materials or production processes, to gain a competitive advantage or to increase social welfare
Disruptive technologies
new products, materials or processes that completely change the way businesses produce and operate or completely change what consumers want and buy
Technological spillovers
the application of a new technology developed in one sector to the products and production processes of other industrial sectors
Factor substitution
replacing one factor of production with another in a production process. For example advanced capital equipment has replaced labour in many modern production processes
