Supply Chain Chapter 11 - Short Answer Test 2

What is activity based costing (ABC), and how is it determined?

*ABC - an attempt to turn indirect costs into direct costs by tracking cost drivers behind indirect costs* *Reduces costs by* *Eliminating non-value items* *Reducing Activity Occurances* *Reducing Cost driver rate* biggest hurdle of ABC - tracking interact costs and translating them into direct costs, compared with the benefits of being able to assign these costs to specific products more accurately. Overhead is divided into costs that change in response to unit-level activities (in proportion to the number of units produced), batch-level activities (in proportion to the number batches produced) and the product level activities (that benefit all units produced) the remainder are true fixed costs and are allocated the same way a s in tradition cost accounting

What is the difference between "managing costs" as opposed to "managing prices"?

*Managing costs:* Means keeping costs low through efficient processes, reduction of waste, improvements in productivity, innovations in product design, correct choice of materials, and so on. *managing price:* Process of deciding the price of a product in order to maximize tangible or nontangible profits

What is cost-based pricing? How and why is it used?

-When pricing decisions are based off of supplier cost cost analysis can be used to measure and improve cost performance by focusing attention on specific cost elements

What are the major cost categories that you would include when estimating a supplier's cost for a service? How would you estimate the cost if the supplier was either unwilling or unable to provide a detailed cost breakdown?

1. *overhead costs*: Buyers operation should provide data on processing costs 2. *general and administrative expenses* 3. *transportation costs* - in the form of travel and entertainment 4. *direct labor* - services mix, length of service contract, location of service provision, and labor turnover may affect labor costs

What are the major cost categories that you would include when estimating a supplier's cost for manufacturing item? How would you estimate such costs if the supplier was either unwilling or unable to provide a detailed cost breakdown?

1. *raw materials:* Knowing the weight of the component and the normal prices of said materials. 2. *Component parts Costs:*Reference to catalogs and standard price lists *overhead costs:*knowing the premisise and equipment used; know depreicaition, lease/rentals. *Transportation Costs:*Estimated knowing the distance and the methods of bundling . *tooling and engineering costs* - Talk to engineering and manufacturing personnel. *general and administrative expenses* - expenses verified using industry norms. *direct labor* -Approximation regarding the labor content and costs of supplied items help estimate.

Comment on the statement: Target costing can only be used for manufactured items and cant be applied to services.

I would disagree with this statement, for target costing can be applied to both services and manufactured items. Often used for the introduction of a new service product or introduction of a service product in a new market.

What is the total cost of ownership (TCO), and how is it determined?

Total Cost of Ownership - For non-capital goods acquisition, *the acquisition price plus all other associated costs becomes the total cost of ownership*; this includes all relevant costs, such as administration, follow-up, expediting, inbound transportation, inspecting and testing, rework, storage, scrap, warranty and service You can determine this by going to differnt departments (logistics, finance, marketing, supply) and see their costs *how its determined* -You can break it down into three cost components *(Pretransaction costs, transaction costs, post transaction costs)* -If close relationship, seller and buyer can share data -Work with people from other departments to determine estimated costs

Why do firms use target costing? How are target costs established?

a management team establishes a price at which it plans to sell its final product, then subtracts out its normal operating profit leaving the target cost that the organization seeks. *Target Cost=Selling price-Desired Profit* then it is further divided into appropriate cost sectors (such as overhead or manufacturing costs *typically used in new product development, focuses the attention on eliminating costs before the production has begun* Target pricing results in company wide reductions in 1. design to cost, on the part of design engineering 2. manufacture to cost, on the part of production 3. purchase to cost, on the part of supply

When and how is negotiation used, and what can be negotiated?

negotiation is the most sophisticated and most expensive means of price determination, an attempt to find an agreement that allows both parties to realize their objectives it must be used when: *-The buyer is in a single or sole source situation*; *-Both parties know that a purchase contract will be issued and their task is to define a set of terms and conditions acceptable to both * true negotiations will only be used if the dollar amount is quite large any aspects of the purchase/sale agreement is subject to negotiation

What is a learning curve and how can it be used?

the learning curve provides an analytical framework for quantifying the commonly recognized *principle that one becomes more proficient with experience* the learning curve implies that improvement never stops, no matter how large the volume becomes *Can be used by buyers to understand long term cost structure of supplier.* *Could lead to suppliers giving progressive discounts* learning curve factors: 1. the learning rate of labor 2. the motivation of labor and management to increase output 3. the development of improved methods, procedures, and support systems 4. the substitution of better materials, tools, and equipment, or more effective use of materials, tools & equipment 5. the flexibility of the job and people associated with it 6. The ratio of labor versus machine time in the task 7. The amount of preplanning done in advance of the task 8. The turnover of labor in the unit 9. The pressure of competition to do tasks better, faster & cheaper