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0-SFCPA-BEC > Operations Management (15-25%) > Flashcards

Operations Management (15-25%) Flashcards

1
Q

What are the non-financial measures of performance management?

A
  • TOTAL QUALITY MANAGEMENT (TQM):
    product quality include customers returns and allowances, number/types of customer complaints - if product has high return rate, indicator of low quality
  • QUALITY OF DESIGN:
    meeting/exceeding needs/wants of customers
  • COSTS OF QUALITY:
    idea that better quality and preventing failures is cheaper than experiencing failures in products/parts
  • BALANCED SCORECARD:
    way of translating company’s mission into performance metrics
  • BENCHMARKING:
    management compares its processes or financial information to internal or outside information (industry standards/benchmarks, competitors)
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2
Q

What are the 4 categories of costs of quality?

A

A PIE
1 - PREVENTION costs: (VOLUNTARY)
engineering, training, supervision, audits QC system
2 - APPRAISAL costs: (VOLUNTARY)
costs dealing with ongoing testing/checking for defective products
3 - INTERNAL FAILURE costs: (INVOLUNTARY)
defects detected before shipment to customer (rework)
4 - EXTERNAL FAILURE costs: (INVOLUNTARY)
defects discovered by customer (returns, warranty exp)

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3
Q

The balanced scorecard is viewed from what 4 perspectives?

A

CLIF
1 - FINANCIAL - certain financial measures
2 - CUSTOMER - targeted customer and market segments - NOT customer service
3 - INTERNAL BUSINESS PROCESSES - improving operations - monitoring number of defective units
4 - LEARNING, INOVATION & GROWTH - EE training/satisfaction, infrastructure

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4
Q

Within the 4 perspectives of the balanced scorecard, the company identifies what 4 things?

A

1 - strategic goals
2 - critical success factors
3 - tactics
4 - performance measures

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5
Q

What are 3 other parts of the balanced scorecard?

A
  • STRATEGY MAP - diagram of cause-and-effect relationships between strategic objectives
  • STRATEGIC OBJECTIVE - statement of what strategy must achieve and what is critical to success of strategy
  • STRATEGY INITIATIVE - program of specific actions that will be required to achieve strategic objectives
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6
Q

What are the 3 financial measures of performance management?

A
  • return on assets (ROA/ROI)
  • return on equity (ROE)
  • contribution margin (CM)
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7
Q

What is DuPont ROE Analysis?

A

breaking ROE into 3 segments - enables user to determine ROE increase based on effective company management

profit margin X asset turnover X equity multiplier

[(net inc/sales) X (sales/assets) X (assets/equity)]

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8
Q

What is contribution margin (CM)?

A

CONTRIBUTION MARGIN = sales - variable costs

CONTRIBUTION MARGIN PER UNIT = sales (price) per unit - variable costs per unit

ex: widget sells for $10, variable costs of $6, contribution margin is $4 per widget - contribution margin ratio = 40% (4/10)

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9
Q

What is the breakeven formula?

A

BREAKEVEN FORMULA = fixed costs/contribution margin

ex: widget sells for $10, variable costs of $6, contribution margin is $4 per widget - if have fixed costs of $400 - would need to sell 100 units to breakeven (400/$4)

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10
Q

What is breakeven formula to calculate sales in # of units to achieve certain level of income?

A

(fixed costs + target profit) / contribution margin per unit

ex: widget sells for $10, variable costs of $6, contribution margin is $4 per widget, with fixed costs of $400 - if need to make $1,000 net income - would need 350 units ($400 + 1,000)/$4

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11
Q

What is margin of safety?

A

difference between current sales and breakeven sales

sales of $500K and margin of safety of $200K, then breakeven sales are $300K

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12
Q

What are classifying costs?

A
  • PRODUCT COSTS:
    costs directly associated with producing products that generate revenue (COGS), or in goods held for resale
  • PERIOD COSTS:
    cannot be matched with specific revenues, also called selling and administrative costs - expensed in period in which they occur

(nothing to do with direct or indirect costs)

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13
Q

What are manufacturing costs?

A
  • DIRECT MATERIALS:
    costs of raw materials used to create finished product
  • DIRECT LABOR:
    cost of labor goes directly to creating finished product - only wages of EEs working directly on manufacturing product
  • FACTORY OVERHEAD/MANUFACTURING OVERHEAD (INDIRECT):
    cost of indirect labor, indirect material, and other miscellaneous costs
  • ABSORPTION COSTING - assigns all 3 factors above to inventory - is required for external reporting purposes
  • DIRECT COSTING/VARIABLE COSTING - only variable manufacturing costs treated as product costs - fixed overhead costs treated as period costs and expensed
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14
Q

What are the direct/indirect costs classifications for manufacturing costs?

A

DIRECT COSTS - direct materials and direct labor

INDIRECT COSTS - same as manufacturing overhead - costs of indirect materials, indirect labor, and other miscellaneous costs

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15
Q

What are the prime/conversion costs classifications for manufacturing costs?

A

PRIME COSTS - direct materials and direct labor grouped together (top two)

CONVERSION COSTS - direct labor and manufacturing/factory overhead (bottom two)

*direct labor is included in both (overlap)

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16
Q

What are fixed costs?
What are variable costs?
What are marginal costs?

A

FIXED COSTS - costs that remain constant regardless of # of units produced

VARIABLE COSTS - costs that vary in direct proportion with # of units produced

MARGINAL COSTS - additional cost or revenue from one more unit of output

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17
Q

What is normal spoilage?

What is abnormal spoilage?

A

NORMAL SPOILAGE - unavoidable spoilage due to manufacturing process, included as inventoriable PRODUCT COST - added to inventory account

ABNORMAL SPOILAGE - unplanned spoilage due to natural disaster/carelessness, deducted as PERIOD COST (expense) in calculation of net income

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18
Q

What is the Hi/Low Method?

A

used to identify variable cost per unit, can then be used to find fixed costs - subtract lowest cost from highest cost and divide by lowest # of units subtracted from highest # (same as using slope formula)

ex: (highest cost - lowest cost) / (most units - least units)
this gives you the cost per unit

19
Q

What is activity-based costing (ABC)?

A

looking at multiple cost drivers to better understand what drives costs of business - assumption of multiple cause and effect relationships driving costs of products

ex: product A requires 20 hours & 200 sq ft, product B requires 100 hours & 600 sq ft - the engineering hours and factory floor space are cost drivers

cost reduction is accomplished by identifying activities that do not add value and eliminating them

20
Q

What are some of the terms under activity-based costing (ABC)?

A
  • ACTIVITIES:
    processes that create products (painting the products)
  • COST DRIVERS:
    how different activities drive costs (labor hours to paint)
  • COST CENTER:
    department that accumulates costs, then assigned to products
  • COST POOLS:
    group of costs associated with specific cost center
  • VALUE-ADDED ACTIVITIES:
    processes contribute to products value - makes product more valuable
  • NON-VALUE-ADDED ACTIVITIES:
    processes that do not constitute a products value
21
Q

What is job costing?

A

process of accumulating and applying costs to production of large or unique items - costs accumulated in different WIP accounts - overhead determined at predetermined rate

when product is finished, costs flow into finished goods, then when sold, costs flow into COGS

22
Q

Under job costing, what happens when factory overhead is over-applied and under-applied?

A

factory overhead over-applied when more overhead costs applied to a product than actually incurred - product costs have been OVERstated, and COGS will be decreased to correct it

factory overhead under-applied when less overhead costs applied to product than actually incurred - product costs have been UNDERstated, and COGS will be increased to correct it

23
Q

What is process costing and how is it calculated?

A

used to assign costs to mass-produced and similar products

1 - calculate equivalent units (# units that could have been produced) = nominal units X % complete
2 - determine cost per equivalent unit
3 - determine COGS transferred out of WIP & ending inventory

24
Q

What is expected value and how is it calculated?

A

generalization of the weighted average, and is intuitively the arithmetic mean of a large number of independent realizations of X

calculating weighted average of outcomes to determine long-run average outcome - multiply each variable by its probability, then add values in right column to arrive at expected value

ex: (sales volume X probability = expected value)
100 X 0.8 = 80
1,000 X 0.5 = 500
10,000 X 0.2 = 2,000 = 2,580 total expected value

25
Q

What is regression analysis?

A

relationship between fixed, variable, and total costs as a regression equation = y = A + Bx

y = total cost (dependent variable)
A = fixed costs (the y intercept)
B = variable costs (the slope)
x = # of units (independent variable)

correlation coefficient (R) measures strength of relationship between dependent and independent variable - ranges from -1 (negative correlation) to 1 (high correlation) - 0 would be no correlation

y L\ = negative
x

y L / = positive
x

coefficient of determination (R2) is degree to which independent variable can predict dependent variable

26
Q

What are the different types of relevant/irrelevant costs?

A
  • RELEVANT costs:
    costs that have different future costs and benefits
  • IRRELEVANT costs:
    future costs which do not changed based on different alternatives
  • AVOIDABLE costs:
    costs that can be avoided by choosing one alternative over another
  • SUNK costs:
    costs in past and irrelevant for decision making going forward - joint costs another type, not relevant in a ‘sell or process’ further decision
  • OPPORTUNITY costs:
    cost of choosing one opportunity over the other, very relevant in making financial decisions
  • INCREMENTAL/DIFFERENTIAL costs:
    total difference between two alternatives
27
Q

What should be considered on whether to do a special order if company had idle capacity?

A

AVOIDABLE COSTS (direct materials, direct labor, variable costs) - fixed costs are same no matter what - calculation will see if would make or lose money on special order

28
Q

What is transfer pricing?

A

one department in manufacturing company sells materials to another department - price changed is the transfer price

minimum transfer price (floor) - equal to avoidable outlay costs (cost incurred in order to execute a strategy or acquire an asset)
maximum transfer price (ceiling) - equal to market price

*fairest transfer price will usually be standard variable cost + lost contribution margin

29
Q

What is variance analysis?

A

involves developing standards for production, such as materials, labor and overhead, then COMPARING ACTUAL results TO BUDGETED results, CREATES VARIANCES between standards costs and actual costs

  • material variances allocated to WIP, finished goods, and/or COGS
  • labor/overhead variances (nonmaterial variances) written off to COGS
30
Q

What are the 4 different types of variances?

A

PURE
1 - PRICE variance (how much materials cost)
2 - USAGE variance (how much materials used)
3 - RATE variance (how much was paid for labor)
4 - EFFICIENCY variance (how many hours of labor went into each unit)

31
Q

What is general formula for calculating a variance?

A

standard amount - actual amount = difference/variance

  • negative # - indicates unfavorable variance
  • positive # - indicates favorable variance

difference/variance then taken and:

1 - if is a price/rate variance - multiply by actual quantity (finding difference in prices/rates and multiplying by actual quantity) - (Price Variance = (AP-SP)AQ))
PR-AQ

2 - if is usage/efficiency variance - multiply difference by standard rate (finding difference in labor hours/quantities used and multiplying by standard rates) - (Quantity Variance = (AQ-SQ)SP))
EU-SP

32
Q

What is the goal of Business Process Management (BPM)? What is the lifecycle of BPM?

A

having processes in place to continuously improve existing processes in order to deliver more value both inside organization and outside to customers

lifecycle: (DMEMO)
1 - design
2 - model
3 - execute
4 - monitor
5 - optimize
33
Q

What is outsourcing?
What is shared services?
What is offshore operations?

A
  • OUTSOURCING:
    contracting business process to external service provider
  • SHARED SERVICES:
    one department provides a service previously performed in multiple departments - creating efficiencies by consolidating activity into one department
  • OFFSHORE OPERATIONS:
    business process moved to another country with aim of reducing costs

two of the biggest risk with moving operations offshore - cultural and language issues

34
Q

What is Six Sigma?

A

quality improvement approach that focuses on reducing defects and reducing costs

closely related to total quality management (TQM) - uses similar tools - control charts, run charts, pareto histograms, fish bone diagrams

main theme is 6 standard deviations - which covers 99.99% of products, hence the name - idea is goal to have greater than 99% of products meet quality guidelines and have no defects

35
Q

What are some other performance improvement techniques?

A
  • QUALITY AUDITS:
    assessment of quality practices of entity, results in identifying strengths/weaknesses, and a quality improvement plan to produce greater short-term and long-term returns
  • GAP ANALYSIS:
    assessment of any gaps between entity’s practices and best practices industry operated in - identifies areas for improvement and a common objectives database entity will use to develop strategic improvements
  • THEORY OF CONSTRAINTS:
    set of strategies to maximize income when entity facing one or more constraints or bottlenecks in its processes - basic idea, when faced with this in production of some kind, should focus on producing product with highest contribution margin involving constrained resource (labor hours, specific raw material, machine hours)
36
Q

What is a budget?

What are the two main types of a budget?

A

budget process always starts with a sales forecast, then everything else is budgeted based on level of sales

  • MASTER BUDGET/STATIC BUDGET:
    comprehensive plan for all activities of company, based on budgeted costs based on budgeted output - top down approach, starts with goals/mission and allocates resources accordingly
  • FLEXIBLE BUDGET:
    budget adjusted during year based on actual output

LEFT = Actual
MIDDLE = Flexible
RIGHT = Static
IN BETWEEN = variances (favorable or unfavorable)

37
Q

What are some other types of budgets?

A
  • INCREMENTAL budget:
    rolling budget, adds current period and drops oldest period
  • PRODUCTION budget:
    outlines how many units need to be produced to achieve sales goals, done before purchasing budget
  • PARTICIPATING budget:
    managers prepare own budgets, then are reviewed by supervisors
38
Q

What is the COGS formula?

A 
\+ Beg Inventory
\+ Purchases
= Goods Available for Sale
- End Inventory
= Cost of Goods Sold
39
Q

What is the Cash Formula?

A 
\+ Beg Cash Balance
\+ Cash Sales
- Cash Expenditures
\+/- Change in AR
\+/- Change in AP
= End Cash Balance
40
Q

What are the cause and effects of AR/AP Changes on Cash?

A
  • if AR increases, Cash decreases (A-opposite)
  • if AR decreases, Cash increases (A-opposite)
  • if AP increases, Cash increases (L-same)
  • if AP decreases, Cash decreases (L-same)
41
Q

Why do organizations use a number of forecasting and projection techniques?

A

attempt to see into future as much as possible to make more informed decisions on organizational objectives, goals, processes, systems, products to put in place to achieve those objectives

use a combination of quantitative and qualitative methods

  • QUANTITATIVE- use historical data (forecast)
  • QUALITITATIVE- use judgement to create assumptions (projection)
42
Q

What is difference between a forecast and a projection?

A

FORECAST - based on historical data and actual expectations instead of hypothetical scenarios

PROJECTION - based on hypothetical scenario or course of action that business could take, usually used internally

43
Q

What does the master budget consist of?

A

financial budget & operating budget

financial budget (BS) - cash and capital expenditures

operating budget (IS) - revenues and expenses

44
Q

What is involved with creating the operating budget (IS) before coming to the master budget?

A

1) sales budget prepared (based on sales forecast)
2) production budget prepared (to meet sales expectations)
3) direct materials purchases budget prepared
4) direct labor budget prepared
5) overhead budget prepared
6) ending finished goods inventory budget prepared
7) COGS budget prepared (after knowing beginning finished goods in inventory)
8) nonmanufacturing budget prepared (selling, general and administrative expenses)

use all above data to create budgeted income statement

0-SFCPA-BEC (5 decks)

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