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301 > Week 4 Managing Cost, Quality and Capacity > Flashcards

Week 4 Managing Cost, Quality and Capacity Flashcards

1
Q

what does contemporary cost management systems include?

A

a range of tools and techniques that provide information for cost management.

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2
Q

cost management involves?

A

✓ Improvement of an organisation’s cost effectiveness through understanding and managing the real causes of cost
✓ Main focus is on cost reduction, but also on improving other aspects of performance such as quality and delivery

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3
Q

what are the 4 approaches to managing costs?

A

Activity- based Management (ABM)
Business Process Re- engineering (BPR)
Life Cycle Costing (LCC)
Target Costing (TC)

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4
Q

How are Costs are Treated Under Activity–Based COSTING

A

Activity - An event that causes the consumption of overhead resources.

Activity cost pool - A “cost bucket” in which costs related to a single activity measure are accumulated

Activity rate - Total cost of activity cost pool is divided by the quantity of its activity driver.

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5
Q

Activity-based MANAGEMENT (ABM)

A

Process of using information from activity-based costing to analyse activities, cost drivers and performance so that customer value (price & quality) and shareholder value (profitability) are improved.
✓ Activities are identified at a greater level of detail
✓ The total cost of each activity including DL
✓ The cost of non-manufacturing activities

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6
Q

Using Activity-based MANAGEMENT (ABM) to reduce costs involve what 4 steps?

A

Step 1 - Identify the major opportunities for cost reduction
Step 2 - Determine the real causes of the costs
Step 3 - Develop a program to eliminate the causes (and therefore, the costs)
Step 4 -Introduce performance measures to monitor the effectiveness of cost reduction efforts

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7
Q

ABM - Step 1 Identifying the major opportunities for cost reduction = involves what analysis?

A

value analysis - classification of activities on whether value-added or non-value-added activity

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8
Q

ABM - Step 1 = Value added means?

A

Provide essential value to the customer, or are essential to the functioning of the business (production and administrative activities)

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9
Q

ABM - step 1- non value added means/.

A

Do not add value to a product or service from the customers’ perspective or for the business and, therefore, can be eliminated

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10
Q

ABM - step 1 - value added examples

A 
Basic production activities 
✓ Operating machines
✓ Administrative activities
✓ Managing business
✓ Preparing annual accounts ✓ Processing invoices
✓ Payroll
✓ Machine setup
✓ Material ordering
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11
Q

ABM - step 1 - non value added examples

A 
Moving materials
Waiting/expediting
Inspecting
Storage
Breakdown repairs
Removing or welding defects Resolving queries (supplier/debtor) Rework
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12
Q

ABM - Step 2: Determining the real causes of non-value-added costs involves 2 analysis

A

1) Building activities into processes
✓ Need to understand processes (using value engineering): A series of activities that are linked together to achieve a specific objective
✓ Processes may cross the boundaries of responsibility centres, such as functional departments.
2) Cost Driver Analysis
Identification of root cause cost drivers for non-value-added activities. Root cause cost drivers are factors that cause activities

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13
Q

ABM - Step 2 - e.g. non value added activity weld defects and move material = possible root cause cost driver are?

A

weld defects - Complexity of the casting; Defects in mould;
Metal impurities

Move material - Plant layout; Supplier delivery arrangements

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14
Q

ABM - Step 3: Developing a program for reducing costs involves?

A

✓ Involve managers across the organisation
✓ Restructuring of process may be introduced
e.g. buy better quality, deliver material to production plant

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15
Q

ABM - Step 4: Measuring performance in cost reduction? how? effect?

A

✓ Activity-based performance measures can be used to monitor the effectiveness of cost reduction efforts
✓ Performance measures can improve costs,quality and delivery time
✓ Targets could be set
✓ Performance monitored over time

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16
Q

Business Process Re-engineering (BPR) is?

A
  • The fundamental rethinking and radical redesign of business processes to achieve improvements in critical areas of performance such as cost, quality and delivery
  • Focus on strategic processes to achieve objective
  • Reorganise way work done by identifying and eliminating non-value-added activities
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17
Q

Business Process Re-engineering (BPR) steps?

A
  1. prepare business process map (flowchart)
  2. establish goals - customer value, quality, cost, delivery performance
  3. reorganise work flow - enable goals achieve
  4. implement program - involve change so carefully done to minimise resistance and disruption
18
Q

difference of BPR and ABM

A
  1. ABM focuses on processes improvement and use of cost driver analysis
  2. BPR focuses on major business processes and involves fundamental changes to the way processes are structured
  3. Both use activity analysis to identify processes and activities
19
Q

Life Cycle Costing (LCC) is/

A

Accumulate and manage costs over the life cycle of the product

20
Q

Four stages of the product life cycle (production view)?

A
  1. Product planning and initial concept design
  2. product design and development
  3. production
  4. distribution and customer support
21
Q

Life Cycle BUDGETING involves?

A
  • Involves estimating the expected costs and revenues for each year of the expected life of a product
  • Comparison between budgeted cost and revenue with actual costs and revenues
  • Considers all relevant costs over the value chain
22
Q

Managing costs through a life cycle perspective:

Concepts of life cycle costing not widely used because…

A

There is a lack of awareness, or uncertainty about how to calculate life cycle costs Not easy for products with longer lives as it is more difficult to assess
✓ CHANGES IN CONSUMER TASTES
✓ IMPACT OF COMPETITORS’ ACTIONS ✓ EFFECTS OF INFLATION

23
Q

Target costing (TC) is? Cost target for product driven by?

A

✓A system of profit planning and cost management that determines the cost at which a proposed product must be produced to generate the desired level of profit
✓It is cost management technique, not a costing technique
✓The cost target for a product is driven by the need to sell the product at a certain market price and to achieve a target profit margin

24
Q

Target Costing (TC) Process 4 steps? TC formula involved

A

✓Estimate the target selling price based on market considerations, customer needs and expectations and competitor behaviour
✓ Determine target profit margin
✓ the target cost
Target cost = Target selling price – Target profit margin
✓Identify the cost reduction objective – difference between the current product cost and target cost

25
Q

How to achieve target cost ?

A

Reduce cost and enhance customer value
✓ Value engineering to eliminate non-value adding elements in product design
✓ Value analysis of manufacturing processes
✓ Work with suppliers to reduce component/material costs

26
Q

Cost of quality 2 categories?

A

cost of poor quality

cost of achieving good quality

27
Q

Cost of poor quality involves 2?

A
  1. internal failure - Costs incurred to fix problems that are detected before the product/service is delivered to the customer
  2. external failure - costs detected after the product/service is delivered to the customer
28
Q

cost of achieving good quality involves 2?

A
  1. appraisal cost - Costs of activities designed to ensure quality or uncover defects
  2. prevention cost - Incurred to prevent internal or external failures & to minimise appraisal activities
29
Q

Cost of Quality - Internal failure cost example

A 
Downtime 
Scrap 
Rework
Lost contribution from scrapped products
Material disposal
30
Q

Cost of Quality - external failure cost examples

A 
• Legal fees
• Warranty claims
• Processing Customer
Complaints
• Defective products
recalled
• Service after sale
• Lost contribution margin (current and future)
31
Q

Cost of Quality - Appraisal costs examples

A
  • Inspecting materials
  • Finished product inspection
  • Supplier surveillance
  • Packaging inspection
  • Monitoring
  • Inspecting work in process
32
Q

Cost of Quality - Prevention Costs

A
  • Quality Engineering
  • Training of employees
  • Quality Planning
  • Quality Reporting
  • Preventative maintenance
  • Quality improvement plans
33
Q

examples of cost of quality analysis statements?

A
  • The failure costs appear too high. The company needs to spend more on prevention and appraisal.
  • Increased appraisal should bring down external failure costs, as more failures will be detected internally.
  • Increased prevention costs should help to bring down both the internal and external failure costs and, in the longer term, reduce the need for appraisal.
34
Q

Theory of Constraints (TOC) what is it?

A

management philosophy about focusing attention on the constraints (bottlenecks) that limit organisational achievements (such as maximization of profits) so that throughput can be maximized.

35
Q

Theory of Constraints (TOC): Constraint/bottleneck?

A
  • Constraint is a restriction/bottleneck on the running of an operation with respect to available resources (of any kind)
  • Capacity is always constrained by the slowest or smallest capacity task in a process
  • Constraint is a limiting factor
36
Q

Theory of Constraints - what are the 3 types?

A
  1. physical constraints
  2. market constraints
  3. policy constraints
37
Q

Theory of Constraints

Physical Constraints example

A

(capacity, material and logistic)
▪ Physical, tangible; easy to recognise as constraint. Machine capacity, space availability, lack of people, material availability, material movement, etc.

38
Q

Theory of Constraints

Market constraints example

A

(demographic and socio-
economic factors)
▪ Demand for company’s products and services is less than capacity of organisation, or not in desired proportion.

39
Q

Theory of Constraints

Policy constraints example

A

(managerial)
▪ Not physical in nature. Includes entire system of measures and methods and even mindset that governs the strategic and tactical decisions of the organisation.

40
Q

Theory of Constraints: Ways to increase the capacity of a constraint

A
  • Working overtime
  • Subcontracting
  • Investing in additional machines
  • Shifting workers
  • Focusing business process improvements
  • Reducing defective units

301 (12 decks)

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