AACE CCT Primer exam with complete solutions

The sum of the practices and processes that an enterprise uses to manage the total life cycle cost investment in its portfolio of strategic assets is called _________ Total Cost Management ______ is the application of scientific principles and techniques to problems of : - estimation - cost control - business planning & management science - profitability analysis - project management - planning & scheduling Cost Engineering _______ Is the value of an activity or asset. Generally, this value is determined by the cost of the resources that are expended to complete the activity or produce the asset. An example would be the facilities needed to produce an activity or asset, which would include the tooling, electricity, taxes, and maintenance, etc., necessary to keep the facility available for use. Other costs might be office supplies, communication costs, travel costs, and security costs Cost Any consumable, except time, required to accomplish an activity are considered _______. From a total cost and asset management perspective, _______ may include any real or potential investment in strategic assets including time, monetary, human, and physical. Resources, Resources A resource becomes a cost when it is ______ or consumed in an _____or project invested, project Material, labor, and "other" are categories of _________. Resources The product lifecycle is the complete history of a product through its ______, definition, production, operation, and obsolescence /______ phases. concept, disposal The distinction between product life cycle and project life cycle is that the latter does not include the ______ and ______. operation, disposal ___________ is the systematic numeric method of classifying various categories of costs for accounting purposes Code of Accounts ______ is used used in situations where each job is different and is performed to the customer's specifications. ______ involves keeping an account of direct costs (labor, machine time, raw materials) and indirect costs (overheads) Job Costing, Job Costing A process is a sequence or independent & linked procedures which ___________ to convert inputs into outputs. These outputs then serve as inputs for the next stage until a known goal or end result is reached consume resources A _____ is a good, idea, method, information, object, service, etc, that is the end result of a process & serves as a need or want satisfierProduct Product Product manufactured along with a different product, in a process in which both are required in the production of another product are considered _____ Co-products A key feature of a ____ is that it has low value in comparison with the principal product(s) & may be discarded or sold by-product Types of Manufacturing Operations include _____, ______ run and _____ shop Process, Batch, Job This manufacturing operation runs almost continuously making the same thing. Examples are refining and chemical plants, and very long run assembly operations. Process A ______ characterized by setting up for one product, producing a set quantity of product, and then shutting down to change over to producing another product. Batch Run A _______ Similar to a batch run operation, except that you only produce 1 of the item. Each job results in a customized product. Examples are metal fabrication, prototype, fabrication. job shop Roles such as executive/senior management, legal, HR, business development, etc. These roles are the farthest removed from the actual production of discrete product at the various facilities. They are shared across many production locations and considered ______. overhead ______ are field/plant support personnel, located at the site. These resources help the operation run smoothly. These are people like local payroll, facility maintenance, site project controls, site senior (office-based) supervisors and management who are shared across the various products the particular location produces. Indirects _______are the remote location people directly involved in producing the product. These are the easiest to correlate their effort to a particular product. First line supervisors are also normally considered ______. Directs The owner approaches cost from a _____ point of view. Owners not only consider the cost of the construction, or process, but ______ supervision and overhead, implementation costs, cost of money, furniture, fixtures, equipment( FFE) and other considerations holistic, internal Contractors, subcontractors, suppliers only consider their part of the _______ and are responsible for that alone. Project costs Appraising or estimating the worth of something having economic or monetary value is the general description of ________. valuation Valuation in _______ is the determination of the worth of the asset or that which has been damaged or lost insurance, insured Valuation in ________ is the determination of the dutiable value of imports by the customs authorities. International Trade A(n) _________ represents the foregone benefit by choosing one alternative over another Opportunity cost There is a relationship between time and the opportunity to influence a projects cost. The more time that has elapsed, the ____ the chance to alter the cost. It is important to make the cost effective decisions ______ in a project or process to have the most influence on cost. less, early ________focuses on external reporting. Maintain the balance sheet (assets and liabilities) and generate income (revenues less expenses) and tax statements for the organization _________. Only look at indirects costs as a whole, not broken out to individual products or departments. Managerial Accounting, as a whole In cost accounting the focus is on ___________, and their product is often proprietary. Determine how much it is costing the organization to produce a particular product. Looks at appropriate allocation of overhead and indirect costs to only include those ______ to the product. internal reporting, directly applicable Impact of "One Size Fits All" Allocation Easy to come up with and ensure 100% allocation of the overhead costs, usually don't reflect what is truly needed to produce that organizational deliverable. In the "one size fits all" approach, overhead and indirect costs and forced DOWN onto the product. Activity Based Costing A production process is broken down into ACTIVITIES. Typical nomenclature is an "action verb-adjective-noun" grammar convention(inspect defective products, open new customer accounts). Operating Costs Expenses incurred during the normal operation of a facility including labor, materials, utilities, and other related costs. Examples: fuel, lubricants, scheduled part changes, building maintenance, cleaning services, taxes Manufacturing Costs Variable & fixed, direct & indirect costs chargeable to the production of a given product, usually expressed in cents or dollars per unit of production, or dollars per year Maintenance Costs Labor, material, & other related costs incurred in conducting corrective and preventative maintenance and repair on a facility Fixed Capital Includes plant equipment, building, furniture and fixtures,and transportation equipment used directly in the production of a product or service Depreciation Form of capital recovery for property with a life span of more than 1 year; a portion of the asset's value is periodically charged to current operations. Decreases book value on the balance sheet, added depreciation expense to income statement. Managerial rather than cost accounting concern. Amortization form of capital recovery for property with indefinite life; distribution of the initial cost by periodic charges to operations as in depreciation Accrual Accounting method that records revenues and expenses when they are incurred, regardless of when cash is exchanged Expense Expenditures of short-term value, including depreciation, as opposed to land and other fixed capital Fixed Cost Costs that must be provided independent of short term variations volume of work activity. These can be either direct or indirect costs Variable Cost costs that are a function of production, e.g., raw materials costs, by-product credits, and those processing costs that vary with plant output (such as raw materials, utilities, catalysts and chemical, packaging, and labor for batch operations) Unit Cost = [(fixed costs) + (qty * variable cost)] / (qty) Incremental (or marginal) Cost How much the total cost increases if you increase production by one more unit. As the fixed costs have been recouped in the original production run pricing, the incremental cost is usually just the variable cost. Order-specific costing technique used in situations where each job is different and is performed to the customer's specifications. Job costing involves keeping an account of direct costs (labor, machine time, raw materials) and indirect costs (overheads) Material Types Raw, Bulk, Fabricated, Engineered, Consumables Materials - Raw Raw materials are those materials used in a production or fabrication process that require a minimum amount of processing to be useful [S&K 5th Ed., 3.2]. Materials - Bulk Material bought in lots. These items can be purchased from a standard catalog description and are bought in quantity for distribution as required. Examples are pipe, conduit, fittings and wire [RP 10S-90]. Materials - Fabricated Fabricated materials are bulk materials transformed into custom-fit items for a particular product or project [S&K 5th Ed., 3.3]. Materials - Engineered or Designed Engineered or designed materials constitute a category requiring substantial working in order to attain their final form. Design or engineered materials are also based on shop drawings [S&K 5th Ed., 3.3]. Materials - Consumables Supplies and materials used up during construction. Includes utilities, fuels and lubricants, welding supplies, worker's supplies, medical supplies, etc. Items that can affect purchase cost of materials a. market pricing (pre-negotiated vs. competitively bid, etc.) b. order quantity c. taxes and duties d. carrying charges e. cancellation charges f. demurrage g. hazardous material regulations h. warranties, maintenance and service Items that can affect the management cost of materials a. delivery schedule b. packing c. shipping and freight d. freight forwarding e. handling f. storage and inventory g. agent cost h. surveillance or inspection i. expediting j. losses (shrinkage, waste, theft, damage) k. spare parts (inventory or start-up) l. surplus materials Advantages of leasing capital equipment over renting Minimal upfront cash outlay Not a loan so it does not tie up your line of credit Maintenance agreement, service by others Possible tax advantage as the lease is an expense and may be able to reduce overall tax liability May include a purchase option Advantages of renting capital equipment Keep work progressing when there is an equipment breakdown Meet specialty job requirements Very efficient for low-percentage utilization Short-term peak or seasonal use Considered to evaluate equipment for purchase Fill in for equipment being repaired Can be returned at any time, not a guaranteed amount of time Maintenance is usually handled by dealer or rental yard Can conserve company capital Can have an option to buy clause Types of Valuation Reproduction, Replacement Costs, Fair Value, Market Value, Book Value, Residual/Economic Value, Operating Cost Reproduction Costs The cost of reproducing substantially the identical item or facility at a price level as of the date specified Replacement Costs Is the cost new of an item having the same or similar utility [S&K 5th Ed., 6.1]. Fair Value Is the adjusted cost new of an item, giving consideration for the cost of similar items, and taking into account utility and all standard adjustments and discounts to list price [S&K 5th Ed., 6.1]. Types of Market Value Fair Market Value-in-Place, Fair Market Value-in-Exchange, Orderly Liquidation Value, Forced Liquidation Value, Salvage Value/Part-Out Value, Scrap Value Fair Market Value-in-Place amount expressed in terms of money that may reasonably be expected to exchange between a willing buyer and a willing seller with equity to both, neither under any compulsion to buy or sell, and both fully aware of all relevant facts as of a certain date, and taking into account installation and the contribution of the item to the operating facility [S&K 5th Ed.,6.1]. Fair Market Value-in-Exchange value of equipment in terms of the money that can be expected to be exchanged in a thirdparty transaction between a willing buyer, who is under no compulsion to buy, and a willing seller, who is under no compulsion to sell, both being fully aware of all relevant facts (also referred to as retail value) [S&K 5th Ed., 6.1]. Orderly Liquidation Value probable price for all capital assets and equipment in terms of money that could be realized from a properly executed orderly liquidation type of sale, given a maximum time of six months to conduct such sale and adequate funds available for the remarketing campaign. (also referred to as wholesale value) [S&K 5th Ed., 6.1]. Forced Liquidation Value value of equipment in terms of money that can be derived from a properly advertised and conducted auction where time is of the essence (also referred to as "under the hammer" or "blow-out" value) [S&K 5th Ed.] Salvage Value/Part-Out Value value of equipment in terms of money that a buyer will pay to a seller, recognizing the component value of parts of the equipment that can be used or resold to end-users, usually for repair or replacement purposes [S&K 5th Ed., 6.2]. Scrap Value is the value of equipment in terms of money that relates to the equipment's basic commodity value [S&K 5th Ed.,6.2]. Book Value (NET) (1) Current investment value on the books calculated as original value less depreciated accruals. (2) New asset value for accounting use. (3) The value of an outstanding share of stock of a corporation at any one time, determined by the number of shares of that class outstanding [RP10S-90]. Residual or Economic Value The value of property in view of all its expected economic uses, as distinct from its value in view of any particular use. Also, economic value reflects the importance of a property as an economic means to an end, rather than as an end in itself [RP10S-90]. Operating Cost The expenses incurred during the normal operation of a facility, or component, including labor, materials, utilities, and other related costs. Includes all fuel, lubricants, and normally scheduled part changes in order to keep a subsystem, system, particular item, or entire project functioning. Operating costs may also include general building maintenance, cleaning services, taxes, and similar items [RP10S-90]. Temporary Equipment: expensed items for construction, maintenance, etc) Labor Burden Taxes and insurances the employer is required to pay by law based on labor payroll, on behalf of or for the benefit of labor. (In the US these are federal old age benefits, federal unemployment insurance tax, state unemployment tax, and worker's compensation) [RP10S-90]. Bare Labor Gross direct wages paid to the worker Burdened Labor Gross direct wages paid to the worker, plus labor burden All in Labor Gross direct wages paid to the worker, plus labor burden, plus field indirects, plus general & administrative costs, plus profit [RP10S-90]. Exempt Employees Employees exempt from overtime compensation by federal wage and hours guidelines [RP10S-90]. Non-Exempt Employees Employees not exempt from overtime compensation by US federal wage and hours guidelines [RP10S-90]. General and Administrative Costs (G&A) The fixed cost incurred in the operation of a business. G&A costs are also associated with office, plant, equipment, staffing, and expenses thereof, maintained by a contractor for general business operations. G&A costs are not specifically applicable to any given job or project [RP10S-90]. Gross Profit Earnings from an on-going business after direct and project indirect costs of goods sold have been deducted from sales revenue for a given period. Net Profit Earnings or income after subtracting miscellaneous income and expenses (patent royalties, interest, capital gains) and federal income tax from operating profit. Operating Profit Earnings or income after all expenses (selling, administrative, depreciation) have been deducted from gross profit Indirect Labor The labor needed for activities that do not become part of the final installation, product or goods produced, but that are required to complete the project. Small Tools and Consumables Small tools and consumables are required to perform the work but not part of the final installation. Generally derived by a percentage of the material cost. Performance Bond essentially an insurance policy that the work will be completed. The rates offered to a contractor are based on how financially sound and capable a contractor has demonstrated themselves to be. Actual rates vary from contractor to contractor, and from bonding company to bonding company. Care should be taken to ascertain the bonding capacity of a contractor prior to award. Bid Bonds A bond that guarantees the bidder will enter into a contract on the basis of the bid Payment Bond bond that is executed in connection with a contract and which secures the payment of all persons supplying labor and materials in the prosecution of the work provided for in the contract Retention (Retainage) Usually refers to a percent of contract value retained by the purchaser until work is finished and testing of equipment is satisfactorily completed Liquidated Damages An amount of money stated in the contract as being the liability of a contractor for failure to complete the work by the designated time(s). Liquidated damages ordinarily stop at the point of substantial completion of the project or beneficial occupancy by the owner. Also can apply to contract defined output performance Escalation The provision in actual or estimated costs for an increase in the cost of equipment, material, labor, etc., over that specified in the purchase order or contract due to continuing price level changes over time. Inflation may be a component of escalation, but non-monetary policy influences, such as supplyand-demanded, are often components Inflation Inflation is a rise in the price level of a good or service or market basket of goods and/or services. Inflation does not occur by itself but must have a driving force behind it. Driving forces of Inflation 1) Money Supply - is influenced by the central bank of a country. 2) Exchange Rate - can impact inflation by influencing the price of imported goods and services. 3) Demand-Pull Inflation -is when excessive quantities of money are chasing a limited amount of goods and services resulting in what is essentially a "seller's market" as sellers receive premium prices. 4) Cost-Push Inflation - takes place when product producers encounter higher costs and then push these costs along to others in the production chain through higher prices. These higher costs may be for labor, material, or any other item with a significant cost element [S&K 5th Ed., 7.2]. Contingency An amount added to an estimate to allow for items, conditions, or events for which the state, occurrence, or effect is uncertain and that experience shows will likely result, in aggregate, in adding costs. Typically estimated using statistical analysis or judgment based on past asset or project experience. Contingency usually excludes: 1) Major scope changes such as changes in end product specification, capacities, building sizes, and location of the asset or project; 2) Extraordinary events such as major strikes and natural disasters; 3) Management reserves; and 4) Escalation and currency effects. Allowance Resources included in estimates to cover the cost of known but undefined requirements for an individual activity, work item, account or sub-account. Allowances are often included in the estimate as a percentage of some detailed cost component. Some typical examples of allowances that may be included in a detailed construction estimate are: Design allowance for engineering equipment Material take-off allowance Overbuy allowance Unrecoverable shipping damage allowance Allowance for undefined major items Reserve An amount added to an estimate to allow for discretionary management purposes outside of the defined scope of the project, as otherwise estimated. Use of management reserve requires a change to the project scope and the cost baseline, while the use of contingency reserve funds is within the project's approved budget and schedule baseline Price The amount of money asked or given for a product (e.g., exchange value). The chief function of price is rationing the existing supply among prospective buyers [RP10S-90]. Price Strategy Type 1 The objective is to win the project and execute it profitably and satisfactorily according to contractual agreements Price Strategy Type 2 example of a "must win" situation where the price is determined by the market forces. This case refers to a company that is trying to get a foothold into and industry. In such cases the profit may not be as important as obtaining the new business acquisition [S&K 5th Ed., 2.2]. Pricing Method adopted by a firm to set its selling price. It usually depends on the firm's average costs, and on the customer's perceived value of the product in comparison to his or her perceived value of the competing products. Different pricing methods place varying degree of emphasis on selection, estimation, and valuation of costs, comparative analysis, and market situation Pricing Strategy Price planning that takes into view factors such as a firm's overall marketing objectives, consumer demand, product attributes, competitor's pricing, and market and economic trends Market Pricing Worth of a job based on the current (going) compensation rate for comparable benchmark jobs in the labor market Market Penetration Pricing Strategy adopted for quick achieving a high volume of sales and deep market-penetration of a new product. Under this approach, a product is widely promoted and its introductory-price is kept comparatively lower. This strategy is based on the assumption that (1) the product does not have an identifiable price-market segment, (2) it has elasticity of demand (buyers are price sensitive), (3) the market is large enough to sustain relatively low profit margins, and (4) the competitors too will soon lower their prices See 150 more Add or remove terms