P1 - The Modern Environment Flashcards
What are the 3 modern changes that have moved companies away from high efficiency, high volume, high inventory production?
And what 2 changes have they led to?
- Globalisation (breaking barriers)
- Technology (better decisions)
- Fast changing consumer tastes (less loyal)
- Shorter product life cycles
- Greater competitive pressure
What is the cost of quality?
The difference between the actual cost of services vs the equivalent costs if there were no failures
What are the 2 broad categories of quality costs?
- Costs of conformance (achieving quality)
2. Costs of non-conformance (failure to achieve quality)
What are the 4 specific categories of quality cost?
- Prevention (Design, training)
- Appraisal (Performance/process testing)
- Internal failure (Re-inspection, rework)
- External failure (Liability claims, complaints)
What are the 2 views on quality costs?
- There is a trade off between conformance and non conformance costs, and there will be an optimum level that minimises total quality costs
- Target errors should be zero and no level of errors are acceptable
What is the Just in Time philosophy?
That filling a warehouse with goods is a non-value adding activity
What is Just in Time Purchasing?
Resources should be acquired just as they are needed to be used in production
What is Just in Time Production?
Finished goods should roll off the production line just as the customer arrives to purchase them
What is the difference between a pull and a push inventory system?
A pull system (JIT) responds to demand, a push system uses inventories to act as a buffer
What are the 4 key characteristics of JIT purchasing?
- Local suppliers
- Long term relationships with multiple suppliers
- Reducing the number of suppliers
- Helping suppliers to increase quality
What are the 4 key characteristics of JIT production?
- Short production set up and cycle times
- Flexible staff
- Efficient quality control
- Reduced levels of inventory throughout the process
What are the 2 impacts of JIT on cost accounting?
- Zero inventories of raw materials, WIP or finished goods (so no separate ledger accounts)
- Zero variances for price and usage (close relationships and high quality)
What is a constraint/bottleneck?
An activity, resource or policy that limits the ability to achieve an objective
What does eliminating a bottleneck allow?
The business to get more goods through the production process in any given period, with increased sales and lower inventories
What does the throughput measure?
How fast revenue is being earned compared to how fast costs are being incurred, so can monitor how well bottlenecks are being reduced or eliminated
What is another term for throughput accounting?
Super variable costing
What is regarded as variable in throughput accounting?
Materials only
What is the throughput contribution?
Sales revenue - direct materials
What is the conversion cost?
All operating costs except direct materials
What is the Theory of Constraints? (5 steps)
A production concept aimed at identifying and cutting out constraints:
- identifying bottlenecks
- maximising their use
- subordinating other facilities to their demand
- alleviating the bottleneck
- re-evaluating the whole system.
When exploiting a bottleneck in the production process, what product should we prioritise?
That which has the highest throughput contribution per unit of time in the bottleneck department
What is the throughput accounting ratio?
(TP contribution/time period) / (Conversion costs/time period)
What does a TP ratio of more than 1 show?
The business is generating return faster than it is incurring costs
What is a digital product?
One which is stored and used electronically
What level does most costing take place at in digital products?
The feature level (often they are a collection of different features)
What category of costs are most digital costs?
Fixed costs (very little marginal cost)
What are the 5 key types of digital cost?
- Design and development (can be shared between products if there are shared features)
- Platform infrastructure
- Payment method - increases with each type
- Licence (fixed) and royalty (variable)
- Support (maintenance and fixing)
What are the 4 main problems with digital costing?
- Standard time difficult to determine
- Drivers of overheads are difficult to assess
- Many up front, and many long term costs
- Product lifetimes are difficult to estimate
What are digital costing systems?
They use information generated from the internet and internal sources on individual products to provide cost information that is used for purchasing, production and sales decisions
What are the 3 main benefits of digital costing?
- More detailed (more accurate costing)
- More up to date (dynamic costing)
- Enable better customer and location cost analysis
What are the cost trade offs of setting up digital costing?
Expensive set up vs lower operational cost (automation)
What are considerations to be made when setting up digital costing?
- Expensive set up
- Skillset and data capture structure required
- Reliability of data
What are 3 main features of digital costing?
- Real time market information for rapid purchase decisions
- Real time cost driver information for better absorption of costs
- Intelligent decision software to support best purchase options
