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Flashcards in Operations Mgmt Deck (92):

Six Sigma

A statistical measure expressing how close a product comes to its quality goal. One-sigma means 68% of products are acceptable; three-sigma means 99.7% of products are acceptable. Six-sigma is 99.999997% perfect: 3.4 defects per million parts.


The expected value of an action

is the weighted-average of the payoffs for that action, where the weights are the probabilities of the various mutually exclusive events that may occur.


Cost-volume-profit analysis.

is used to predict profits at all levels of production in the relevant range.


Program evaluation and review technique (PERT)

is used to estimate, schedule, and manage a network of interdependent project activities. It is useful for managing large-scale, complex projects.


The purpose of the just-in-time (JIT) production system

is to decrease the size of production runs (and therefore inventory levels) by decreasing setup costs. Lot sizes would decrease as the number of lots processed during the year increases. Since inventory levels would decrease with JIT, relevant costs would also drop (i.e., capital invested in inventory could be invested in other assets—a cost savings). The fixed facility and administrative costs are irrelevant as fixed costs would remain the same regardless of changes for JIT. The unit costs will increase because fixed costs will be spread over fewer inventory units produced from JIT's eliminating effect on excess inventory production.


Cause-and-effect (fishbone or Ishikawa) diagrams:

Identify the potential causes of defects. Four categories of potential causes of failure are: human factors, methods and design factors, machine-related factors, and materials and components factors. Cause-and-effect diagrams are used to systematically list the different causes that can be attributed to a problem (or an effect). Such diagrams can aid in identifying the reasons why a process goes out of control.


Pareto chart:

A bar graph that ranks causes of process variations by the degree of impact on quality. The Pareto chart is a specialized version of a histogram that ranks the categories in the chart from most frequent to least frequent. A related concept, the Pareto Principle,states that 80% of the problems come from 20% of the causes. The Pareto Principle states: “Not all of the causes of a particular phenomenon occur with the same frequency or with the same impact.”


Control charts:

Statistical plots derived from measuring factory processes; they help detect “process drift,” or deviation, before it generates defects. Control charts also help spot inherent variations in manufacturing processes that designers must account for to achieve “robust design.”


Robust design:

A discipline for making designs “production-proof” by building in tolerances for manufacturing variables that are known to be unavoidable.


Poka-yoke (mistake-proofing):

involves making the workplace mistake-proof. For example, a machine fitted with guide rails permits a part to be worked on in just one way.


Quality of Conformance:

Refers to the degree to which a product meets its design specifications and/or customer expectations.


Quality of design

refers to the degree to which a product meets its needs and wants of customers.


Prevention cost

The cost of prevention is the cost of any quality activity designed to help do the job right the first time.


Appraisal cost

The cost of quality control including testing and inspection. It involves any activity designed to appraise, test, or check for defective products.


Internal failure cost

The costs incurred when substandard products are produced but discovered before shipment to the customer. Examples: Rework, spoilage, scrap, and breakdown maintenance.


External failure cost.

The cost incurred for products that do not meet requirements of the customer and have reached the customer.


List the four evaluation perspectives for a balanced scorecard.

Internal Business perspective
Learning, innovative, and growth


Define "benchmarking."

A process in which organizations compare their own processes and performance with the processes and performances of business leaders within or across competing industries


List four features of a good balanced scorecard.

Articulates a company's strategy
Assists in communicating the strategy
Limits the number of measures
Highlights suboptimal trade-offs that managers may make


What is the most important purpose of a balanced scorecard?

measure performance


Financial - performance measure of a BSC

Gross profit margin, sales growth, profitability per job or product, stock price, achievement of cash flow goals, and any of the standard financial ratios (inventory turnover, return on investment, current ratio, etc.)


Customer - performance measure of a BSC

Market share, product returns as a percentage of sales, number of new customers, percentage of repeat customers, customer satisfaction as measured by customer surveys, customer complaints, sales trends, etc.


Internal Business Processes - performance measure of a BSC

Percentage of production downtime, delivery cycle time (time between order and delivery), manufacturing cycle time/throughput (the time required to turn raw materials into completed products), manufacturing cycle efficiency (ratio of time required for nonvalue-adding activities to the total manufacturing cycle time), standard cost variances, product defect rate, amount of scrap and rework


Learning, Innovation, and Growth - performance measure of a BSC

Percentage of employees with professional certifications, hours of training per employee, number of new products developed, employee turnover, number of customer requests for specific designers, percentage of project proposals accepted, and employee satisfaction levels.


Return on Investment (ROI) (normal approach not DuPont)

Net Income / Total Assets


ROI - DuPont Formula

Return on Sales (ROS or profit margin) × Asset Turnover
(Net Income/Sales) x (Sales/Avg Total Assets)


Return on Sales

Net Income / Sales


Asset Turnover

Sales / Total Assets


Residual Income

Operating Income – Required Rate of Return (Invested Capital)


economic value added (EVA) formula

NOPAT − WACC (Total Assets − Current Liabilities)



is an economic profit (EP) metric and a specific form of residual income. Stated in dollars. Is often used for incentive compensation and investor relations. This is likely due to the emphasis on the use of income (first part of the equation) exceeding the cost of capital (second part of the equation) in measuring wealth creation.


Gross Margin

Revenue - COGS


Contribution Margin

Revenue - Variable Expenses


Operating Profit Margin

Operating Income / Sales


Return on Sales (Profit Margin)

Net Income / Sales


Return on Equity or Return on Common Equity

Net Income / Common SHE


AR Receivables Turnover

Sales on Account / Avg AR


Days Sales in Receivables or Average Collection Period

Avg AR / Avg Sales per Day


Inventory Turnover

COGS / Avg Inventory


Fixed Asset Turnover

Sales / Avg Net Fixed Assets


Times Interest Earned

Operating Income / Interest Expense


PE (Price Earnings) Ratio

Market Price per Share / Earnings per Share


Market to Book ratio

Market value per share / book value per share


Return on C/S Equity

Net Income - (Preferred dividend / avg Common stockholders equity)



Net Income − Preferred Dividends (obligation for the period only) / Weighted Average Number of Shares Outstanding


C/S Dividend Payout Rate Total basis:

Cash Dividends to Common Shareholders / Net Income to Common Shareholder


C/S Dividend Payout Rate per share basis:

cash dividends per common share / earnings per common share


Common stock yield

Dividend per Common Share / Market Price per Common Share


Acid Test ratio

Cash + Net Receivables + marketable securities / current liabilities


value engineering.

Systematic evaluation of the trade-offs between product functionality and product cost while still satisfying customer needs



any resource or operation where the capacity is less than the demand placed upon it.


Multiple regression analysis.

Regression analysis determines the functional relationship between variables and provides a measure of probable error. Multiple regression analysis involves the use of two or more independent variables (such as the number of shipments and the weight of materials handled) to predict one dependent variable (inventory warehouse costs).


Lean manufacturing

using small batches of a high variety of unique products with highly skilled, cross-trained labor.


What is the objective of the demand flow approach?

To link process flows and manage them based on customer demand.


What tools does Six Sigma commonly use to achieve quality control?

Six Sigma is very similar to total quality management (TQM) and uses TQM tools such as control charts, run charts, pareto histograms, and Isikawa (fish-bone) diagrams.


For short-run profit maximization, Jago should manufacture the product with the

Greater contribution margin per hour of manufacturing capacity.


Absorption Costing

Assigns DL, DM, and both fixed and variable MOH costs to inventory (as a product cost)


Direct (variable) costing

Assign DL, DM, but only variable MOH to inventory (NOT fixed MOH)


When do absorption and variable costing produce the same incomes?

When the number of units sold equals the number of units produced


whats the advantage to using variable costing?

it makes cost volume relationships more apparent


In calculating the breakeven point for a multiproduct company, what assumptions are commonly made?

I. Sales volume equals production volume.
II. Variable costs are constant per unit.
III. A given sales mix is maintained for all volume changes.


Predetermined OH rate

Estimated Total OH costs / Estimated activity volume
(using currently attainable capacity)


Usually there are differences between the amount of applied OH and the amount of actual OH. If the difference is material it is....

prorated to WIP, finished goods, and COGS based on their respective ending balances.


Describe how job order costing is used.

It is used to accumulate costs related to the production of often large, relatively expensive, heterogeneous (custom-ordered) items.


Process costing

Process costing is used to accumulate costs for mass-produced, continuous, homogeneous items, which are often small and inexpensive.


Define "master budget."

A comprehensive plan for all activities of a company (sales, production, cash management, etc.); this is a static budget. It provides a basis for comparison at a planned level of sales and production and is not usually changed to conform to actual events.


Production budget

The production budget establishes how many units must be produced to achieve projected sales volume and inventory level targets.


Strategic budgeting

Strategic budgeting is a top-down process, starting with the goals and mission the organization wants to achieve and allocating resources in proportion to priorities.


A flexible budget

A flexible budget is simply a static budget adjusted for various possible volume levels within the relevant range. A flexible budget may be prepared for any unit for which costs vary with changes in activity level. Flexible budgets provide as much cost control as do master budgets because they are based on costs allowable at different activity levels. In fact, flexible budgets may offer an even greater degree of control because valid guidelines are available to managers even if output deviates from expectations, whereas static budgets supply information regarding only the planned volume.


Operating Budget

Part of the master budget. The operating budget forecasts the results of operations: sales, production expenses, and selling and administrative expenses. The principal budgets found within the operating budget are:
Sales budget
Production budget
Production cost budgets (direct materials, labor, and overhead budgets)
Selling and administrative expense budget


Financial Budget

The financial budget forecasts cash flows and projects the financial statements that will result from operations. The financial budget consists of the:
Cash budget
Budgeted (or pro-forma) income statement
Budgeted (or pro-forma) balance sheet


Sales budget

The sales budget forecasts planned sales in dollars and in units, usually on a monthly or quarterly basis. The production budget and many of the items in the selling and administrative expenses budget are based on information from the sales budget.


The production budget

The production budget projects the production quantities needed to support sales and provide for the specified quantity of ending inventory. Its projections are based on unit sales information from the sales budget, current inventory levels, and desired ending inventory levels. The data from the production budget flows forward to the production costs budgets.


The percentage of sales method

determines the expense amount by expressing the expense as a “percentage of sales.” The percentage of sales method is also used in the cash budget to estimate the amount of cash sales.


Strategic Budgeting

Implies a long-range view to planning based on the identification of action plans to achieve the company's goals and, ultimately, its mission. Many issues are considered, including a comprehensive internal and external analysis, competitive and economic analysis, and an assessment of various types of risk. Note that strategic budgets are easy to detect since terminology is always oriented to the “big-picture” (e.g., long-range, inside and outside the organization, large investments, economics, competitive opportunities/threats, assessment of distinctive competencies, and market risks).


flexible budget

Unlike the master budget, a flexible budget adjusts revenues and some costs when actual sales volume is different from planned sales volume. This makes it easier to analyze actual performance because the actual revenues and costs can be compared to the expected revenues and costs at the actual level of sales activity.


Differences between the flexible budget and the master budget are known as

sales activity variances or volume variances.


The correlation coefficient (R)

measures the strength of the relationship between the dependent and independent variables. The correlation coefficient can have values from −1 to 1 where:
1 indicates perfect positive correlation (as x increases, so does y).
−1 indicates perfect negative correlation (as x increases, y decreases).
0 indicates no correlation (you cannot predict the value of y from the value of x).


The coefficient of determination, identified as R2 (R-squared)

The coefficient of determination, identified as R2 (R-squared), indicates the degree to which the behavior of the independent variable predicts the dependent variable. The coefficient of determination is calculated by squaring the correlation coefficient. R2 can take on values from 0 to 1.
The closer R2 is to 1, the better the independent variable predicts the behavior of the dependent variable.


Joint probability

measures the likelihood of an event occurring, given that another event has already occurred.


Incremental costs

difference between two decision alternatives


Goal congruence

Goal congruence occurs when the department and division managers make decisions that are consistent with the goals and objectives of the organization as a whole.


Goal incongruence

Goal incongruence exists when actions encouraged by the reward structure of a department conflict with goals for other departments or the organization as a whole.


Because of the way activity-based costing identifies and allocates costs, organizations that adopt activity-based costing tend to have:

More precise measures of cost
More cost pools
More allocation bases (e.g., multiple causes for costs to occur)


Activity-based costing can be used:

With job order and process costing systems
With standard costing and variance analysis
For service businesses as well as manufacturers


In general, compared to traditional, volume-based costing, activity- based costing tends to shift costs away from

In general, compared to traditional, volume-based costing, activity- based costing tends to shift costs away from high volume, simple products to lower volume, complex products.


Process management

Process management increases manager understanding of the cause-and-effect relationships involved between processes and the resources they consume and promotes the elimination of waste.


Joint products

two or more products of significant sales value are said to be joint products when they are made from the same set of raw materials and are not separately identifiable until a split off point


Joint costs

costs incurred prior to split off must be allocated to the joint products


Which of the following standard costing variances would be least controllable by a production supervisor?

Overhead volume


Back up procedures of an ERP are ___, ___, and ___

Full, incremental, and differential


Batch approach to back up are ___, ____, and ___

Grandfather, father, son