PM flashcards

In order to calculate a target cost: 1 Determine a realistic selling price 2 Decide on what profit is required 3 Subtract the profit from the selling price to arrive at the target cost.

The cost gap is the excess of the estimated cost of production over the target cost

The idea of lifecycle costing is to include all costs over the entire life of a product (and hence the estimated profitability) as opposed to costing over one year at a time.

* Development phase * Introduction / launch phase * Growth phase * Maturity phase * Decline phase

1) That the company operates following just-in-time principles (i.e. keeping minimum levels of inventory) 2) That in the short term, all costs are fixed other than the cost of materials (i.e. that the only variable cost is materials)

The bottleneck is the operation that is limited the rate of production

TPAR = throughput contribution per hour / factory cost per hour

1 Increase the selling price 2 Reduce material cost per unit 3 Reduce the operating expenses 4 Reduce the time required per unit

1 Inout / output analysis 2 Flow cost accounting 3 Life cycle costing 4 Activity based costing

The number of units sold at which the profit is zero (i.e. no profit / no loss)

The sales revenue at which the profit is zero (i.e. no profit / no loss)

The vertical axis shows the costs and revenues in $’s. The horizontal axis shows the volume in units.

The vertical axis shows the profit (or loss) in $’s. The horizontal axis either shows the volume in units, or the sales revenue in $’s

The margin of safety is the difference between the budgeted sales volume and the breakeven sales volume. It can be expressed in units, or in $’s of revenue. or as a percentage of the budgeted sales volume.

The CS ratio = contribution / sales

The shadow cost of a resource is the most extra (i.e. the premium) that the business would be prepared to pay for one extra unit of the resource. (calculated as the extra contribution that would be generated by having one extra unit of the resource at its original cost).

Market skimming is the strategy of charging a high price when a product is first launched, with the intention of reducing the price over time. (A popular strategy for new technology - rich people are prepared to pay higher prices to be the first to own the new technology)

Penetration pricing is the strategy of charging a low price when a product is first launched in order to gain market share, with the intention of increasing the price later.

Volume discounting is the strategy of offering a discount to customers who purchase a large quantity

Price discrimination is when the same product or service is sold at different prices in different markets.

A sunk cost is a cost that has already been incurred (and is therefore not affected by any future decision).

Risk is measurable - several outcomes are possible and the probability of each outcome is known. Uncertainty is not measurable - there are several possible outcomes, but the probabilities of the outcomes are not known.

1 It is usually impossible for the probabilities to be estimated accurately 2 For a one-off decision, the actual outcome will not be the expected value 3 Expected values ignore the risk and the decision makers attitude to risk

For each course of action, the worst outcome is identified (minimum) The chosen course of action is the one that gives the best (maximum) of the worst outcomes

For each course of action, the best outcome is identified (maximum) The chosen course of action is the one that gives the best (maximum) of the best outcomes.

The decision maker is a risk avoider

The decision maker is a risk seeker.

What is the attitude to risk of a decision maker who uses the expected value approach?

The decision maker is said to be risk neutral.

Sensitivity analysis looks at the effect of changes in just one variable at a time. Simulation attempts to look at the effect of all possible combinations of variables.

* Planning * Control * Communication * Co-ordination * Evaluation * Motivation * Authorisation and delegation

Incremental budgeting involves taking the results for the previous period and adjusting for inflation and changes in the expected level of activity.

Rolling budgets involve always having a budget for the following twelve months, which involves updating the existing budget and adding an additional period (usually month).

Feedback control compares actual results with budget. Feedforward control compares budget results with forecast.

Learning curve theory allows the average labour time per unit to be estimated and is therefore useful when budgeting costs that vary with the labour time per unit (the cost of labour, and possibly variable overheads if these are incurred on an hourly basis).

The main uses are the valuation of inventory, and to act as control (comparing actual with standard costs).

A flexed budget is where the original budget is re-written for the actual level of activity.

The purpose of a flexed budget is control - the actual results can be compared with the flexed budget results.

A higher or lower selling price A change in market share A change in the size of the overall market

A change in the price charged by the supplier A change of supplier The deliberate purchase of better/worse quality material

The purchase of better or worse quality materials (resulting in less or more wastage) Greater or lesser efficiency of the production department in controlling waste A change in the mix of materials

An operating statement is a statement reconciling the actual profit to the budgeted profit, and explaining the reasons for the difference.

Planning variances are comparing the revised standards with the original standards.

Operational variances are comparing the actual results with the revised standard.

JIT involves keeping minimum inventories - producing goods when they are needed and eliminating large inventories of raw materials and finished goods.

TQM is a strategy aimed as creating an awareness of quality in all aspects of a business, thus reducing wastage and inefficiencies.

Internal (employees, management) Connected (shareholders, suppliers, customers, lenders) External (government, community etc..)

A transfer price is the price at which one division charges another division for goods or services provided.

In the context of divisionalisation, what is meant by a division?

A division is an area of the business over which the divisional manager has a degree of autonomy (power to make decisions).

An investment centre is a division for which the divisional manager has control over costs, revenues, and investment in non-current assets and net current assets.

The ROI is the divisional profit (before interest and tax) as a percentage of the capital invested in the division.

The RI is the division profit (before interest and tax) less a notional interest charge on the capital invested in the division.

The minimum transfer price is the marginal cost of the transferring division plus any lost contribution.

The maximum transfer price is the lower of: * the selling price less the marginal costs of the receiving division * the price for which the receiving division could buy the goods externally

Slack occurs when the optimum solution uses less of a resource than the maximum that is available.

Mark-up is the gross profit as a percent of cost. Margin is the gross profit as a percent of sales.

The price elasticity of demand is the % change in demand divided by the % change in price.

Critical success factors are those areas that the business must focus on if it wishes to succeed.

Key performance indicators are the measures used to determine whether or not the critical success factors are being achieved.

* Financial * Customer * Internal * Innovation and Learning

* Financial performance * Competitive performance * Quality * Flexibility * Resource Utilisation * Innovation

* Strategic * Tactical * Operational

Total factory costs = all production costs except materials

* costs * competitors * customers

Decision trees are diagrammatical representations of the various alternatives and outcomes. They are relevant when using an expected value approach and where there are several decisions to be made.

Trend: is the underlying pattern of a time series when the short term fluctuations have been smoothed out.

Cyclical Variations are the wave-like appearance of a number of time series graph when taken over a number of years. Generally this correspondents to the influence of booms and slumps in the industry.

Seasonal variations is the regular rise and fall over shorter periods of time. For example, winter hats sales are likely to be higher than average every winter and lower than average every summer

Practical reasons for the learning effect to cease are: (a) When machine efficiency restricts any further improvement (b) The workforce reach their physical limits (c) If there is a ‘go-slow’ agreement among the workforce

Standard costing is a system of accounting based on pre-determined costs and revenue per unit which are used as a benchmark to assess actual performance and therefore provide useful feedback information to management.

Uses of standard costing are: * inventory valuation * as a basis for pricing decisions * for budget preparation * for budgetary control * for performance measurement * for motivating staff using standards as targets

Limitations of standard costing are: • accurate preparation of standards can be difficult • it may be necessary to use different standards for different purposes • less useful if not mass production of standard units * traditional standards are based on company’s own costs where the practices of other organisations are taken into account • can lead to an over-emphasis on quantitative measures of performance at the expense of qualitative measures

* Ideal standard * Basic standard * Expected standard * Current standard