MDC ONE PAGE SUMMARIES
SS Summaries
, MANACC – GENERAL KEY POINTS
Perfectly competitive market Highly competitive industry Company has a low profit margin on their products
perfectly competitive market exists when the product need highly accurate costing assignment (eg: ABC) \ the cost of errors will be high
/ service is homogenous & no individual buyer / seller errors – eg: inaccurate OH cost assignment
can influence the market price
Other ways to improve profitability Good supply chain management
MISSDOERA
• detailed cost analysis
• capacity utilization M mitigate risks monitor, limit over-exposure of one producer
• training direct labour I share information expectations à optimize production, reduce target cost
*monitor target cost
INCREASE REVENUE I internal keep key functions internal
◦ sell new product S suppliers relationships & reduce costs
◦ discounts on current products D different suppliers if cannot build relationships / 1 supplier has bargaining power
◦ increase volume of sales
◦ special offers O outsourcing outsurce support functions à strive for quality & satisfaction
◦ marketing / advertising E maximise efficiency info and relationships
◦ increase selling price (sensitivity issues) R supplier relationships ensure good relationships
◦ increase customer base
◦ obtain better customer information and data (S PLIT) P collaboration to maximize profit
◦ increase number of income streams L local suppliers
eg: have a cinema \ open coffee shop outside I competitive industry
T \ negotiate favourable terms
DECREASE COSTS
◦ don’t sell through 3rd party
A activities inspect those which do not add value
◦ negotiate input prices with suppliers
◦ negotiate rental according to revenue
◦ negotiate with unions on wages
◦ incentive pay to increase efficiency
◦ consider renting older equipment to reduce costs
6 capitals: FIRM HN
• Financial
• Intellectual
• Relationship & Social
• Manufactured
• Human
• Natural
, MANACC – POSSIBLE LINKS
Relevant information + Costing Budgeting & High-Low Method
allocation of costs: criticism of using it:
Special order à use VCM • only accounts for the highest and lowest readings for a time period
• incorporates extreme values which don’t account for the level of operations under normal
(provides more useful information for decision making, conditions
where a company has fixed and variable costs which are • this method does not test if a strong correlation exists between the selected cost driver & cost
easily identifiable) item
• cause & effect criteria should be used when identifying cost drivers
especially if a company has spare capacity & could accept
special orders to contribute to covering fixed costs eg: does not account for:
annual price increases
highest/lowest could be due to:
larger order
overtime worked
staff retrenched
STANDARD COSTING setting of standards à CHORES
*decision-making / budgets / performance management
C Learning Curve new product = learning curve included in
USE: operations general and repetitive nature & require standard inputs standards for first few months
repetitive activities
H Usage: historic inefficiencies à NOT innovative, does not
info aim to save costs
advantage: represents targets à more appropriate than historical cost
O Normal operating must be taken into account eg: normal losses
types: conditions
Basic uses historical info R Research market research for RM price
standards but is unavailable if the company makes new or different
E Engineering determine the optimal consumption of RM,
products
labour and machinery
*after manufacturing begins = less space for
Ideal what is achieved under 100% normal ideal circumstances:
cost savings
standards demotivating for labourers
• Leads to many negative variances
S Standards currently unachievable in current
circumstances (type of standard to set)
Standard costing system must be used: Setting Standards
• If the operations in the manufacturing process are of a
general and repetitive nature and require standard Figures that are used as standards (and then in the budget) can be arrived at in two ways:
inputs • Can use historical figures as basis – average values of historical performance
• In order to determine and manage costs (monitor) - Disadvantage: historical records can be affected by incidental elements or inefficient
activities
• Standard costs are appropriate for repetitive (routine)
activities where specific inputs are required for a given • Engineering studies can indicate what standards should be
output - Advantages: independent of the past, and can incorporate expected changes
• Qualitative factors should be considered in the setting of standards, e.g. the quality of materials
• If selling and distribution activities are of a repetitive and the reliability of a supplier
nature, standard costing can also be applied to it
(otherwise the actual expense should merely be Types of standards:
compared with the budget) • Basic standards: derived from historical information. Shows trends in actual results compared to
cost standard if analysed over a long period of time. Little use when inputs have changed
• Can also be used in service or retail organisations where significantly
repetition occurs • Ideal standards: ideal performance under ideal circumstances. Can be de-motivating. Can be used
as long-term targets
• Currently attainable standards: based on current conditions taking into account the fact that
machines could break, etc. Frequently used in practice. Usually difficult to achieve, but not
impossible. Can, however, set different degrees of difficulty (more easily attainable standards can
for example be used for planning and control, and slightly stricter standards for motivation)
• Usage of historic information
• Request the performance of engineering studies
• Market research for prices of raw materials
• Currently achievable standards
, MANACC – INVENTORY MANAGEMENT
Reasons to keep inventory: ECONOMIC ORDER QUANTITY (EOQ)
TPS
optimum order size à minimize the ordering and holding costs
T – transaction keep inventory to maintain normal
manufacturing / sales quantities if the order size increases then:
P– keep inventory in case ordering cost decreases
preventative manufacturing or sales is higher holding cost increases
than expected
S – speculative inventory levels impacted by the DO NOT USE: when the cost per unit changes due to number of units ordered
changes in prices eg: scarcity of
materials à purchase additional assumptions:
RM ◦ same quantity ordered each time
◦ certain: demand, ordering costs, carrying costs & lead-time
EOQ does not take the expected ◦ carrying costs = constant
changes into account ◦ no stock outs
Inventory costs JUST IN TIME (JIT)
cost of quality
ordering cost eliminates waste à pull system (only manufacture according to demand)
out of stock cost only order raw material when required \ more frequent but smaller orders
purchasing cost
carrying cost DEMAND STRIVES AUTOMATION
◦ accurate demand estimates ◦ no defects / breakages ◦ reduce set-up
opportunity cost à obsolescence (increases if larger ◦ 100% on time delivery costs and time
inventory order) ◦ produce too much = on hand ◦ no inventory on hand ◦ reduce lead-time
◦ produce too little = not enough sales ◦ à arrange manufacturing floor ◦ preventative
◦ *important – supplier relationships in a management cell maintenance
Constant production level (need delivery on time)
advantages:
◦ no stock-out occurs
ADVANTAGES DISADVANTAGES
disadvantages: • no storage costs • variable production costs differ
◦ perishable goods (stock goes off) • stock does not go -off • no completed stock on hand (out of stock situations)
◦ surplus goods • less insurance costs ◦ suppliers cannot provide materials – break-down issues:
◦ storage costs delay in delivery = losses / reputation
◦ insurance cost • overtime
◦ variable production costs increase à decreases profit
◦ labourers = unhappy à strike / make mistakes
TARGET COSTING
planning & design phase Good supply chain management
major innovations MISSDOERA
target cost = target profit % - target selling price M mitigate risks monitor, limit over-exposure of one producer
I share information expectations à optimize production, reduce target cost
if the estimated cost > target cost: *monitor target cost
I internal keep key functions internal
ACTION FOR E > T: S suppliers relationships & reduce costs
◦ reverse engineering
D different suppliers if cannot build relationships / 1 supplier has bargaining power
◦ value engineering
O outsourcing outsurce support functions à strive for quality & satisfaction
◦ process improvement
E maximise efficiency info and relationships
for cost savings R supplier relationships ensure good relationships
(S PLIT) P collaboration to maximize profit
L local suppliers
I competitive industry
KAIZEN COSTING
T \ negotiate favourable terms
manufacturing phase
continuous, incremental improvements
cost reduction improves efficiency A activities inspect those which do not add value
SS Summaries
, MANACC – GENERAL KEY POINTS
Perfectly competitive market Highly competitive industry Company has a low profit margin on their products
perfectly competitive market exists when the product need highly accurate costing assignment (eg: ABC) \ the cost of errors will be high
/ service is homogenous & no individual buyer / seller errors – eg: inaccurate OH cost assignment
can influence the market price
Other ways to improve profitability Good supply chain management
MISSDOERA
• detailed cost analysis
• capacity utilization M mitigate risks monitor, limit over-exposure of one producer
• training direct labour I share information expectations à optimize production, reduce target cost
*monitor target cost
INCREASE REVENUE I internal keep key functions internal
◦ sell new product S suppliers relationships & reduce costs
◦ discounts on current products D different suppliers if cannot build relationships / 1 supplier has bargaining power
◦ increase volume of sales
◦ special offers O outsourcing outsurce support functions à strive for quality & satisfaction
◦ marketing / advertising E maximise efficiency info and relationships
◦ increase selling price (sensitivity issues) R supplier relationships ensure good relationships
◦ increase customer base
◦ obtain better customer information and data (S PLIT) P collaboration to maximize profit
◦ increase number of income streams L local suppliers
eg: have a cinema \ open coffee shop outside I competitive industry
T \ negotiate favourable terms
DECREASE COSTS
◦ don’t sell through 3rd party
A activities inspect those which do not add value
◦ negotiate input prices with suppliers
◦ negotiate rental according to revenue
◦ negotiate with unions on wages
◦ incentive pay to increase efficiency
◦ consider renting older equipment to reduce costs
6 capitals: FIRM HN
• Financial
• Intellectual
• Relationship & Social
• Manufactured
• Human
• Natural
, MANACC – POSSIBLE LINKS
Relevant information + Costing Budgeting & High-Low Method
allocation of costs: criticism of using it:
Special order à use VCM • only accounts for the highest and lowest readings for a time period
• incorporates extreme values which don’t account for the level of operations under normal
(provides more useful information for decision making, conditions
where a company has fixed and variable costs which are • this method does not test if a strong correlation exists between the selected cost driver & cost
easily identifiable) item
• cause & effect criteria should be used when identifying cost drivers
especially if a company has spare capacity & could accept
special orders to contribute to covering fixed costs eg: does not account for:
annual price increases
highest/lowest could be due to:
larger order
overtime worked
staff retrenched
STANDARD COSTING setting of standards à CHORES
*decision-making / budgets / performance management
C Learning Curve new product = learning curve included in
USE: operations general and repetitive nature & require standard inputs standards for first few months
repetitive activities
H Usage: historic inefficiencies à NOT innovative, does not
info aim to save costs
advantage: represents targets à more appropriate than historical cost
O Normal operating must be taken into account eg: normal losses
types: conditions
Basic uses historical info R Research market research for RM price
standards but is unavailable if the company makes new or different
E Engineering determine the optimal consumption of RM,
products
labour and machinery
*after manufacturing begins = less space for
Ideal what is achieved under 100% normal ideal circumstances:
cost savings
standards demotivating for labourers
• Leads to many negative variances
S Standards currently unachievable in current
circumstances (type of standard to set)
Standard costing system must be used: Setting Standards
• If the operations in the manufacturing process are of a
general and repetitive nature and require standard Figures that are used as standards (and then in the budget) can be arrived at in two ways:
inputs • Can use historical figures as basis – average values of historical performance
• In order to determine and manage costs (monitor) - Disadvantage: historical records can be affected by incidental elements or inefficient
activities
• Standard costs are appropriate for repetitive (routine)
activities where specific inputs are required for a given • Engineering studies can indicate what standards should be
output - Advantages: independent of the past, and can incorporate expected changes
• Qualitative factors should be considered in the setting of standards, e.g. the quality of materials
• If selling and distribution activities are of a repetitive and the reliability of a supplier
nature, standard costing can also be applied to it
(otherwise the actual expense should merely be Types of standards:
compared with the budget) • Basic standards: derived from historical information. Shows trends in actual results compared to
cost standard if analysed over a long period of time. Little use when inputs have changed
• Can also be used in service or retail organisations where significantly
repetition occurs • Ideal standards: ideal performance under ideal circumstances. Can be de-motivating. Can be used
as long-term targets
• Currently attainable standards: based on current conditions taking into account the fact that
machines could break, etc. Frequently used in practice. Usually difficult to achieve, but not
impossible. Can, however, set different degrees of difficulty (more easily attainable standards can
for example be used for planning and control, and slightly stricter standards for motivation)
• Usage of historic information
• Request the performance of engineering studies
• Market research for prices of raw materials
• Currently achievable standards
, MANACC – INVENTORY MANAGEMENT
Reasons to keep inventory: ECONOMIC ORDER QUANTITY (EOQ)
TPS
optimum order size à minimize the ordering and holding costs
T – transaction keep inventory to maintain normal
manufacturing / sales quantities if the order size increases then:
P– keep inventory in case ordering cost decreases
preventative manufacturing or sales is higher holding cost increases
than expected
S – speculative inventory levels impacted by the DO NOT USE: when the cost per unit changes due to number of units ordered
changes in prices eg: scarcity of
materials à purchase additional assumptions:
RM ◦ same quantity ordered each time
◦ certain: demand, ordering costs, carrying costs & lead-time
EOQ does not take the expected ◦ carrying costs = constant
changes into account ◦ no stock outs
Inventory costs JUST IN TIME (JIT)
cost of quality
ordering cost eliminates waste à pull system (only manufacture according to demand)
out of stock cost only order raw material when required \ more frequent but smaller orders
purchasing cost
carrying cost DEMAND STRIVES AUTOMATION
◦ accurate demand estimates ◦ no defects / breakages ◦ reduce set-up
opportunity cost à obsolescence (increases if larger ◦ 100% on time delivery costs and time
inventory order) ◦ produce too much = on hand ◦ no inventory on hand ◦ reduce lead-time
◦ produce too little = not enough sales ◦ à arrange manufacturing floor ◦ preventative
◦ *important – supplier relationships in a management cell maintenance
Constant production level (need delivery on time)
advantages:
◦ no stock-out occurs
ADVANTAGES DISADVANTAGES
disadvantages: • no storage costs • variable production costs differ
◦ perishable goods (stock goes off) • stock does not go -off • no completed stock on hand (out of stock situations)
◦ surplus goods • less insurance costs ◦ suppliers cannot provide materials – break-down issues:
◦ storage costs delay in delivery = losses / reputation
◦ insurance cost • overtime
◦ variable production costs increase à decreases profit
◦ labourers = unhappy à strike / make mistakes
TARGET COSTING
planning & design phase Good supply chain management
major innovations MISSDOERA
target cost = target profit % - target selling price M mitigate risks monitor, limit over-exposure of one producer
I share information expectations à optimize production, reduce target cost
if the estimated cost > target cost: *monitor target cost
I internal keep key functions internal
ACTION FOR E > T: S suppliers relationships & reduce costs
◦ reverse engineering
D different suppliers if cannot build relationships / 1 supplier has bargaining power
◦ value engineering
O outsourcing outsurce support functions à strive for quality & satisfaction
◦ process improvement
E maximise efficiency info and relationships
for cost savings R supplier relationships ensure good relationships
(S PLIT) P collaboration to maximize profit
L local suppliers
I competitive industry
KAIZEN COSTING
T \ negotiate favourable terms
manufacturing phase
continuous, incremental improvements
cost reduction improves efficiency A activities inspect those which do not add value
