B4: Operations Management: Planning Techniques

Question 1

How do you estimate fixed and variable costs using the High / Low method?

Answer 1

Variable cost per unit = difference in total costs / difference in volume (units)

1. Find the variable cost per unit
2. Mulitply volume X units
3. Subtract variable costs from total costs to obtain fixed costs

Question 2

How do you calculate learning curve rate?

Answer 2

• As workers become more familar with the specific task, the per-unit labor hours will decline.
• Activity must be repetitive, involve intense labor, and little labor force turnover
• As cumulative quantities double, average cost per unit decreases by a specified percentage of the previous cost
• Cumulative labor time at base divided by cumulative labor time on first units.

Question 3

What is regression analysis?

Answer 3

Separating costs into fixed and variable components to estimate dependent costs.

Total costs = Fixed costs + variable costs X # of units

Intercept value is fixed costs - what is on the Y axis when units produced is 0.

The coefficient of determination (R²) is the proportion of the total variation in the dependent variable, explained by the independent variable. In other words, how closely correlated? 1 or -1 is direct relationship

Question 4

What’s the difference between Absorption Approach vs. Contribution Approach?

Answer 4

Treatment of fixed overhead costs

Contribution - fixed factory OH is treated as period cost. Expensed, and not part of contribution margin.

Absorption - GAAP - fixed factory OH is a product cost, included in inventory values.

Question 5

What is the effect on Net Income under Absorption vs. Contribution?

Answer 5

No change in inventory - same net income

Increase in inventory - absorption net income is GREATER than contribution. This is because some of the fixed OH costs are still in inventory, so recognized expense is less. Under absorbtion all factory OH is recognized as period cost, so expenses are higher.

Question 6

What are period specific or product costs under variable or absorption methods?

Answer 6

Variable seling and administrive are included as part of contribution margin, but are NOT considered product costs (variable)

Fixed factory OH is a period cost under variable, product (inventory) cost under absorption.

Question 7

What is margin of safety?

Answer 7

Sales in excess of break even point

Question 8

What is the order in which a budget must be prepared?

Answer 8

• Sales
• Production
• Direct materials purchase
• Cash disbursements

Financial statements come at the end of the process. Income statement before balance sheet.

Question 9

What is the inventory technique that focuses on a set of procedures to determine inventory levels for demand dependent inventory types, such as work in process and raw materials?

Answer 9

Materials requirement planning (MRP).

System for effectively managing material requirements in a manufacturing process, typically computerized.

Question 10

How do you calculate an VOH rate (Spending) Difference?

Answer 10

Actual hours x (Actual Rate - Standard rate)

Question 11

How do you calculate rate / price / spending variances ?

Answer 11

Actual Quantity X Price Variance

AQ x (AP - SP)

This works for DM price variance, DL rate variance, VOH rate (spending) variance

Question 12

How do you calculate efficiency / quantity variance ?

Answer 12

Quantity Variance X Standard Price

(AQ - SP) X SP

This works for DM Quantity usage, DL efficiency, VOH efficiency