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Flashcards in BEC 1 Operations management Deck (102)
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Financial performance measures

1. Profit
2. Return on investment
3. Variance analysis
4. Balance scorecard


Nonfinancial measures

1. External benchmarking - Productivity measures
a. total productivity ratios
b. partial productivity ratios
2. Internal benchmarking - Techniques to find and analyze problems
a. Control charts
b. Pareto diagrams
c. Cause and effect Fishbone diagram


Characteristics of effective performance measures

- relate to the goals of the organization
- balance long and short term issues
- reflect mgt of key activities sometimes referred to as critical success factors in the balanced scorecard
- are under the control or influence of the employee
- are understood by employee
- are used to evaluate and reward the employee or influence behavior
- objective and easily measured
- used consistently


Marketing practices and methods

1. Transaction marketing
2. Interaction based relationship marketing
3. Database marketing
4. E-marketing
5. Network marketing - referrals



1. Marketing methods are aligned with products
2. Performance and performance incentives


Incentive compensation

1. Fixed salary
2. Bonuses - based on profit or stock performance
3. Other perks


Design choices for management compensation

1. Time horizon
2. Fixed and variable bonuses
3. Stock vs accounting based performance evaluation
4. Local vs company wide performance
5. Cooperative vs competitive incentive plans


Total productivity ratios

Total productivity ratios reflect the value of all output relative to the value of all input.


Partial productivity ratios

Partial productivity ratios reflect the value of all outputs as compared to the value of major categories of input.


Effective performance measure

- balances both long and short term issues
- relates to the goals of organization
- be objective and easily measured
- under the control of the employee
- understood by the employee


Cost objects

Cost objects are defined as resources or activities that serve as the basis for management decisions. They require separate cost measurement and may be products, product line, departments, geographic territories or any other classification that aids in decision making.


Focus of cost objectives

integration of product costing with cost control measurement and assignment objectives maximizes the effectiveness of management accounting systems. Cost measurement and assignment may focus on valuation of product or inventory or cost control.


Product costs

All costs related to the manufacturing of the product.
1. Inventory and cost of goods manufactured and sold
2. Components


Inventory and cost of goods manufactured and sold

Product costs are inventoriable and attached to units of output



Consist of direct materials, direct labor, and manufacturing overhead applied


Period costs

Expensed in the period in which they are incurred and are NOT inventoriable.
1. Expenses - selling and administrative expenses, interest expenses.
2. Components - selling the product and administering and managing the operations of the firm.


Manufacturing costs

Treated as product costs.
Include costs associated with the manufacture of a product:
- Inventory and cost of goods manufactured and sold
- components- direct and indirect costs


Nonmanufactuing costs

Treated as period costs.
Costs not related to the manufacturing of a product. These costs are expensed in the period incurred.


Costs accounting systems measure costs objects

1. Product costing - inventory and cost of goods manufactured and sold
2. Efficiency measurements - comparisons to standards
3. Income determination - profitability


Direct costs

A. Directs costs - easily traced to a cost pool or object
1. Direct raw materials = used in production + freight-in - discounts + scrap
2. Direct labor = used in production + service + expected "down town" (training, set up)


Indirect Cost

Incurred to benefit two or more cost pools or objects. The specific benefit each cost gives to the cost pool or object cant be determined without making some sort of reasonable estimate or suing an allocation methodology.
1. Indirect materials
2. Indirect labor
3. other indirect costs


Indirect materials

Not used specifically or could not be traced to the completed product with ease


Indirect labor

Not easily traceable to a specific product, service etc


Other indirect costs

indirect costs other than materials or labor


Prime cost

Direct cost + Direct material


Conversion cost

Direct labor + Manufacturing overhead


Overhead allocation using cost drivers

Indirect costs are allocated to benefiting cost pools or cost objectives using cost drivers that are considered to have a strong relationship to the incurrence of these costs.


Allocation bases

The cost drivers that are used to allocate indirect costs.


Accounting for overhead

When traditional costing is used, all indirect costs are allocated to a single cost pool called "overhead" and allocated as a single pool. Overhead may also be allocated using activity based costing.


Traditional costing

Step 1: Calculated overhead rate = budgeted overhead costs / Estimated cost driver
Step 2: Applied overhead = Actual cost driver x Overhead rate