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Cost Accounting Exam 3
Terms in this set (111)
Strategy specifies how an organization matches its own capabilities with the opportunities in the marketplace to accomplish its objectives.
Five Aspects of Industry Analysis
Number and strength of competitors
Potential entrants to the market
Availability of equivalent products
Bargaining power of customers
Bargaining power of input suppliers
an organization's ability to offer products or services perceived by its customers to be superior and unique relative to the products or services of its competitors
-Leads to brand loyalty and the willingness of customers to pay high prices
an organization's ability to achieve lower costs relative to competitors through productivity and efficiency improvements, elimination of waste, and tight cost control
-Leads to lower selling prices
Implementation of Strategy
Many companies have introduced a balanced scorecard to manage the implementation of their strategies.
The Balanced Scorecard
-translates an organization's mission and strategy into a set of performance measures that provides the framework for implementing its strategy.
-it balances the use of FINANCIAL and NONFINANCIAL performance measures to evaluate performance.
Balanced Scorecard Perspectives
-Internal business perspective
-Learning and growth
The Financial Perspective
-Evaluates the profitability of the strategy
-Uses the most objective measures in the scorecard
-The other three perspectives eventually feed back into this dimension
The Customer Perspective
-Identifies targeted customer and market segments and measures the company's success in these segments
The Internal Business Prospective
-Focuses on internal operations that create value for customers that, in turn, furthers the financial perspective by increasing shareholder value
-Includes three subprocesses:
The Learning and Growth Perspective
-Identifies the capabilities the organization must excel at to achieve superior internal processes that create VALUE for CUSTOMERS and SHAREHOLDERS
Features of a Good Balanced Scorecard
-Tells the story of a firms strategy, articulating a sequence of cause-and-effect relationships—the links among the various perspectives that describe how strategy will be implemented
-Helps communicate the strategy to all members of the organization by translating the strategy into a coherent and linked set of understandable and measurable operational targets
-Must motivate managers to take actions that eventually result in improvements in financial performance
Predominately applies to for-profit entities, but has some application to not-for-profit entities as well
-Limits the number of measures, identifying only the most critical ones
-Highlights less-than-optimal trade-offs that managers may make when they fail to consider operational and financial measures together
Balanced Scorecard Implementation Pitfalls
-Managers should not assume the cause-and-effect linkages are precise: they are merely hypotheses.
-Managers should not seek improvements across all of the measures all of the time.
-Managers should not use only objective measures: subjective measures are important as well.
-Managers must include both costs and benefits of initiatives placed in the balanced scorecard: costs are often overlooked.
-Managers should not ignore nonfinancial measures when evaluating employees.
-Managers should not use too many measures.
measures the change in operating income attributable solely to the change in the quantity of output sold between the current and prior periods
measures the change in operating income attributable solely to changes in prices of inputs and outputs between the current and prior periods
measures the change in costs attributable to a change in the quantity of inputs between the current and prior periods
The Management of Capacity
-Managers can reduce capacity-based fixed costs by measuring and managing unused capacity.
-Unused capacity is the amount of productive capacity available over and above the productive capacity employed to meet consumer demand in the current period.
Managing Unused Capacity
Downsizing (rightsizing) is an integrated approach of configuring processes, products, and people to match costs to the activities that need to be performed to operate effectively and efficiently in the present and future.
the total features and characteristics of a product or a service made or performed according to specifications to satisfy customers at the time of purchase and during use.
-A quality focus reduces costs and increases customer satisfaction.
-Focusing on the quality of a product will generally build expertise in producing it, lower the costs of making it, create customer satisfaction for customers using it, and generate higher future revenues for the company selling it.
Two Basic Aspects of Quality
—refers to how closely the characteristics of a product or service meet the needs and wants of customers
refers to the performance of a product or service relative to its design and product specifications
Four categories of quality costs:
Internal failure costs
External failure costs
Prevention costs BEST
—incurred to PRECLUDE the production of products that do not conform to specifications
incurred to detect which of the individual units of products do not conform to specifications
Internal failure costs
—incurred on defective products BEFORE they are SHIPPED to customers
External failure costs
incurred on defective products AFTER they are shipped to customers DISCOVERED
costs having direct, observable, quantifiable cause and effect relationship between the level of output and the quantity of resources consumed. i.e. tasty donuts: direct material costs rise as more donuts are produced. (You can't produce more donuts without more food ingredients.)
-cause and effect
arises as a result of a management decision to spend a particular amount of money for some purpose. Examples: amounts spent on R+D, advertising and promotion, management development programs, and contributions to charitable organizations
-hard to measure
Primary Purpose of balanced scorecard?
-implementing a strategy
- translates mission into objectives
Determining COQ using Activity-Based Costing
1)Identify the chosen product.
2)Identify the product's direct costs of quality.
3)Select the cost-allocation bases to use for allocating indirect costs of quality to the product.
4)Identify the indirect costs of quality associated with each cost-allocation base.
5)Compute the rate per unit of each cost-allocation base used to allocate indirect costs of quality to the product.
6)Compute the indirect costs of quality allocated to the product.
7)Compute the total costs of quality by adding all direct and indirect costs of quality assigned to the product.
Cost of Quality Exclusions
-Opportunity costs as a result from poor quality:
1)Contribution margin and income foregone from lost sales
-These opportunity costs are not recorded in the financial accounting systems.
The Customer Perspective COQ
Nonfinancial measures of customer satisfaction include:
Surveys on satisfaction
Number of defective units shipped to customers
Number of customer complaints
Product fail rates
Delivery delays/On-time deliveries
The Internal Business Process Perspective
Three techniques for identifying and analyzing quality problems:
-Statistical quality control (SQC) is a formal means of distinguishing between random and nonrandom variations in an operating process.
-Control charts are a part of SQC.
-Only those observations outside the control limits are ordinarily regarded as nonrandom and worth investigating.
-Observations outside control limits serve as inputs for Pareto diagrams.
-Pareto diagram—a chart that indicates how frequently each type of defect occurs, ordered from the most frequent to the least frequent.
-Identifies potential causes of defects
-Problems identified by the Pareto diagram are analyzed using cause-and-effect diagrams
-Also called fishbone diagrams because they resemble the bone structure of a fish
Nonfinancial Measures of Internal Business Process Quality
Percentage of defective products
Percentage of reworked products
Number of different types of defects found
Number of design and process changes made
The Learning and Growth Perspective for Quality
Experience and qualifications of design engineers
Employee turnover ratio
Employee empowerment—number of processes in which employees have the right to make decisions without consulting supervisors
Advantages of COQ (Financial) Measures
-COQ focuses managers' attention on the costs of poor quality.
-COQ measures assist in problem solving by comparing costs and benefits of different quality-improvement programs and setting priorities for cost reduction.
-COQ provides a single, summary measure of quality performance for evaluating trade-offs among the costs of prevention, appraisal, internal failure, and external failure.
Advantages of Nonfinancial Measures of Quality
-often easy to quantify and understand.
-direct attention to physical processes and to areas that need improvement.
-provide immediate short-run feedback on whether quality-improvement efforts have succeeded.
-useful indicators of future long-run performance.
Time as a Competitive Tool
-Companies view time as a driver of strategy.
-Operational measures of time: how quickly firms respond to customers' demand for their products and services, and their reliability in meeting scheduled delivery dates.
Two Operational Measures of Time
how long it takes from the time a customer places an order for a product or service is delivered to the customer
-receipt time+wait time+manu time+delivery time
delivering a product or service by the time it was scheduled to be delivered
Manufacturing Cycle Time AKA manu. lead time
wait time + manufacturing time
Time driver is any factor in which a change in the factor causes a change in the speed of an activity.
Two time drivers:
1)Uncertainty about when customers will order products and services.
2) Bottlenecks due to limited capacity.
-A bottleneck occurs in an operation when the work to be performed approaches or exceeds the capacity available to do it.
Simple Time Presumptions
-When demand uncertainty is high, some unused capacity it desirable.
-Increasing the capacity of a bottleneck resource reduces manufacturing lead times and delays.
-Reduce set-up times.
-Invest in new equipment to increase capacity.
-Careful scheduling of production.
Theory of Constraints and Throughput- Contribution Analysis
-The theory of constraints (TOC) describes methods to maximize operating income when faced with some bottleneck and some nonbottleneck operations.
-TOC focuses on a short-run time horizon and assumes that operating costs are fixed costs.
-Throughput margin = revenues - DM cogs
Objective of theory of constraints
Increase Throughput contribution while Decreasing investments & operating costs
shortening delivery times is a _____ part of the quality improvement process
meet the needs and wants of customers
Quality of design measures how closely the characteristics of products or services ___________
in the banking industry, depositing a customer's check into the wrong bank account is an example of ______
_____ reports usually do not consider opportunity costs
cause & effect
a _____ identifies potential causes of failures or defects
What is used to help identify potential causes of defects?
Cause & Effect diagram
The number of defects shipped to customers as a percentage of total unit shipped are a type of what?
nonfinancial quality measure
Quality measures serve as a common denominator for evaluating trade-offs among what?
prevention costs and failure costs
______ are often easy to quantify easy-to-understand
Non financial measures of quality
Two common operational measures of time
customer response time and On time performance
Sum of waiting time and manu time for an order?
manu lead time
2 important drivers of time?
uncertainty & bottlenecks
average waiting time is average amount of time an order wil wait ______ before it is _____
in line; processed
Throughput contribution =
revenues - dm
Cost of poor quality at a nonbottleneck operation is the
cost of materials wasted
examples prevention costs
-technical support provided to suppliers
-testing new materials
examples appraisal costs
-Depreciation of test equipment
-Plant utilities in the inspection area
-audit of the effectiveness of the quality system
examples internal failure costs
-retesting of reworked products
-analysis of defects
example of external failure costs
-warranty repairs costs
Financial measures of quality
-measured in $ terms
-focus short term (in nature)
nonfinancial measures of quality
-indicators of longterm performance
-useful in terms of estimating trends
Inventory Management in Retail Organizations
Inventory management is planning, coordinating, and controlling activities related to the flow of inventory into, through, and out of an organization.
Costs Associated with Goods for Sale
Managing inventories to increase net income requires effectively managing costs that fall into these six categories:
the cost of goods acquired from suppliers, including freight
the costs of preparing and issuing purchase orders, receiving and inspecting the items included in the orders, and matching invoices received, purchase orders, and delivery records to make payments
the costs that arise while holding inventory of goods for sale. This includes the opportunity cost of the investment tied up in inventory, and costs associated with storage.
the costs that result when a company runs out of a particular item for which there is customer demand (stockout) and the company must act quickly to meet the demand or suffer the costs of not meeting it.
—the costs that result when features and characteristics of a product or service are not in conformance with customer specifications. These costs include:
—costs that result from theft, embezzlement, and clerical errors
Economic order quality (EOQ)
decision model that calculates the optimal quantity of inventory to order under a given set of assumptions.
—the quantity level of inventory on hand that triggers a new purchase order
-Number of units sold
Relevant opportunity cost of capital—the return foregone by investing capital in inventory rather than elsewhere. This cost equals the required rate of return multiplied by the unit costs that vary with the number of units purchased and are incurred at the time the units are received.
-the purchase of materials or goods so they are delivered just as needed for production or sales.
-popular because carrying costs are actually much greater than estimated because warehousing, handing, shrinkage, and investment costs have not been correctly estimated.
-describes the flow of goods, services, and information from the initial sources of materials and services to the delivery of products to consumers (both inside and outside the firm).
-Supply chain members share information and plan/coordinate activities.
-Supplier evaluations are critical to JIT purchasing implementation.
- DELAYS recording some or all of the journal entries relating to the stages from the purchase of direct materials to the sale of finished goods.
-recording journal entries at each trigger point in the production process.
-does not necessarily comply with GAAP.
-does not leave a good audit trail—the ability of the accounting system to pinpoint the uses of resources at each step of the production process.
-USED IN JIT
a costing method that supports creating value for the customer by costing the entire VALUE STREAM, not individual products or departments, thereby eliminating waste in the accounting process.
-All direct costs are traced to the value streams
What perspective addresses which processes we must excel at to meet our customer and shareholder expectations?
Learning & Growth
Learning & Growth Perspective addresses:
employee capabilities, info systems, and organizational capabilities we need to improve
What focuses on excellence in processes which satisfy customers?
internal business process perspective
return on investmentment =
important financial metric in BSC
Percentage of repeat customers and growth in sales to existing customers?
important to customer perspective
The use of multiple-performance measures in the BSC would be expected to lead to all of the following EXCEPT:
more extensive use of fin. measures such as cost and prof.
How is success measured by our shareholders?
creating value for customers?
A chain of Cause and Effect relationships that appropriately link the 4 balanced scorecard perspectives is:
skilled production workers help to produce process quality that results in customer loyalty that helps to increase return on investment
defect rates for products and yield percentages in manufacturing are measures of quality included in the
If a performance measure in the customer perspective of the BSC was customer loyalty, then a driver from the process perspective would MOST likely be:
High quality production processes
If process perspective measure from the BSC was shorter cycle time, then a driver from the learning & growth perspective would MOST likely be:
Achieve JIT supplier capability
Vision and mission set the
general direction for the organization
First step in developing strategic objectives for BSC is:
defining Long Run financial objectives
Once company selects and defines objectives for BSC perspectives it can...
select measures for each objective
operations managements processes
day to day processes that produce products and services and deliver them to customers
best description of Customer Perspective?
How does the company intend to attract, retain, and deepen relationships
All related to learning and growth EXCEPT
How do we increase profits and returns on capita?
Best learning and growth description?
how do we identify objectives for people, info tech, and org alignment that will drive improvement?
manufacturing cycle efficiency is an example of
managers for learning and growth perspective must invest in all EXCEPT
improve asset utilization
___ describe specifically how success in acheiving objectives in a BSC is determined
____ establish the level of performance or rate of improvement required for a measure in BSC
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