What are the two approaches for pricing decisions?
Cost based and market based approach
What are the steps for implementing a target costing system?
1. Develop a product that satisfies a niche and customers
2.Choose a target price
3.Derive a target cost per unit by subtracting target operating income per unit from the target price
4. perform value engineering to achieve target cost
What is value engineering? What are value added costs?
Value engineering is a systematic evaluation of all aspects of the value chain, with the objective of reducing costs (design/materials/process) and achieving a quality level that satisfies customers. ?
?" A value-added cost is a cost that, if eliminated,
Calculate target cost and determine if a company will meet that target if they make the stated changes to their manufacturing process
PRACTICE ON PAPER
Determine pricing under a Cost-plus -time and materials pricing system
PRACTICE ON PAPER
What methods are available for determining transfer pricing, what are advantages/disadvantages of each?
Market based transfer pricing(requires market to be perfect
Cost based transfer pricing
Hybrid
How can companies use pricing to impact tax liability?
The reason is that parent companies can save large
sums of money in taxes depending on the transfer
pricing methods they use
Transfer prices affect not just income taxes, but also
payroll taxes, customs duties, tariffs, sales taxes, value-
added taxes, en
Calculate a minimum transfer price that a selling manager would be willing to sell a product for if at full capacity and what if not at full capacity. What is the Maximum transfer price a buying manager would be willing to purchase a product at?
PRACTICE ON PAPER
What are the three influences on demand and supply
customers, competition, costs
these all effect demand and supply which effects pricing
Market-based approach
Given what our customers want and how competitors will react to what we do, what price should we charge?
Cost-based approach
Given what it costs us to make this product, what price should we charge that will recoup our costs and achieve a target return on investment?
transfer price
the price one subunit charges for a product or service supplied to another subunit of the same organization
To help a company achieve its goals transfer prices should meet 4 criteria:
1. Promote goal congruence
2. Induce high levels of exerted effort
3. Help top managers evaluate performance of individual sub units
4.Preserve autonomy of sub units if top management favors a high degree of decentralization
What are the costs of quality categories, give examples of each
Prevention costs- quality training
Appraisal costs- product testing
Internal failure costs- scrap or rework
External failure costs- liability claims
When reporting quality costs, what is included in the calculation and what are possible non-financial measures?
1.estimated incremental costs for each alternative
2.cost savings from less rework
3. incremental contribution margin as a result of higher sales from a good reputation for quality
(% of highly satisfied customers
Market share)
Understand the breakdown of customer response time.
(On time performance is if we delivered it when we said we would)
The time the order is placed to when the customer gets the product
It is broken down into receipt time (how long it takes the mrktg dept to specify to the mfg dept exact requirements of the order), the marketing cycle time (time it is received by mfg to t
Calculate average wait time if 1 product, average wait time if 2 products, and manufacturing cycle time
PRACTICE ON PAPER
FORMULA WILL BE ON EXAM
What is involved in breaking bottlenecks?
1. understand that the bottleneck operation determines contribution margin of the entire system.
2.Identify the bottleneck operation by identifying operations with large quantities of inventory waiting to be worked on.
3.Keep the bottleneck operation busy
Be able to calculate if a change in manufacturing process should be made, or does the cost exceed the benefit and the
change should not be made. How can throughput contribution be used to make this decision
PRACTICE ON PAPER
increase the throughput contribution while decreasing investment and operating costs
Control chart
a time-ordered diagram that is used to determine whether observed variations are abnormal
only observations outside of control limits are investigated as nonrandom
Things outside the + or - 2 would be investigated
Pareto Diagram
a chart that indicates how frequently each each type of defect occurs, and orders them from most frequent to least frequent
cause and effect diagram
identifies potential causes of defects using a diagram that resembles the bone structure of a fish
What are costs of holding inventory and why does a company hold inventory?
The costs include, purchasing, ordering,carrying, stock out,quality and shrinkage.
Calculate ordering costs and carrying costs
ORDERING COSTS: (annual demand / order quantity) x Order cost
CARRYING COSTS: (Order quantity x carrying costs)/2
Calculate Economic Order Quantity (EOQ)
It minimizes carrying and order costs
EOQ= the square root of (2 x demand x purchasing cost/carrying cost)
ON EXAM
If a company changes their order quantities to comply with the EOQ (either increase or decrease), what happens to
average inventory dollars, cost of good sold, number of orders placed per year, annual carrying costs, ordering costs,
annual demand, lead ti
If the order quantity increases..
Average inventory dollars increase
COGS does not change
# of orders placed goes down
Carrying costs goes up
Ordering costs goes down
Annual Demand does not change
Lead Time does not change
Stock out costs goes down
Shrink
Calculate reorder point, calculate safety stock
REORDER POINT: # units solder per day(total units / days worked in a year) x PO lead time days + safety stock if required
SAFETY STOCK: (maximum demand per day- ave demand per day) x lead time
Calculate when it is in a company's best interest to go to a Just in Time System (JIT) What are the
benefits/disadvantages of JIT
(TO SET UP FOR A JIT YOU SET UP THE WORK AREAS LIKE LITTLE CELLS IT CREATES A SKILLED WORKER BECAUSE THEY KNOW HOW TO WORK AL
1. fewer stock outs because producing to meet customer needs
2. reduced manufacture of product not immediately needed
3. Fewer expedited orders
4. Lower inventory held/ defects eliminated because we cant have defects or it wont work
5. STRONG SUPPLIER REL