Professional Documents
Culture Documents
Costs of Production
Direct Costs
Labor
Material
Overheads
Indirect Costs
Fixed Costs
Variable Costs
Semi-Variable Costs
Marginal Costs
Break-Even Analysis
The Graphical Method [Book]
The Equation Method
F.C + V.C (Q) = S.P (Q)
Margin of Safety – the difference between the revenue earned at
the break-even point and the current level of production
Uses
Marketing Decisions – effect of price changes on the break-even
Operations Management Decisions – whether or not new
equipment with lower VC should be bought
Location Decisions – Effects of FC and VC on the respective
break-evens
Costing Methods – help the managers in deciding whether or not
production should be stopped, stepped up or switched to newer better
methods.
Cost Centers – area of responsibility to which the costs can be
charged, e.g. assembly department
Profit Centers – a section of the business in which both the costs
and the profits can be easily identified. E.g. a branch of a chain of shops
Uses of Profit and Cost Centers:
Mangers can have targets towards these centers, like reducing
cost
Individual performance of everyone involved in the center can
be evaluated
Helps in making future decisions
Overheads
Production
Selling and Distribution
Administration
Finance
Unit Cost = (Total Cos of Production) / (number of Units Produced)
Full Costing
In this method the costs are allocated to their respective Cost
Centers
Then the overheads are apportioned on the basis of, e.g. area of the
department, labor employed etc.
Then the total cost of each department is calculated
Good for pricing Decisions
Marginal or Contribution Costing
Marginal Cost in the cost of producing one more unit
The contribution of a product is the revenue gained from selling a
product less its marginal (direct) cost
How Contribution or Marginal Cost helps in making Decisions
Make or buy decisions
Offer large contract at below full price
22: Improving Operational Efficiency: 1 Capacity, Scale of Operation and Work Study
Buffer Stocks: These are minimum stocks that are to be held at all
times
Max Stock Levels
Re-order Quantity
Lead Time: The time between ordering the stock and the time when
it is delivered
Re-order Stock Level: This is the quantity of Stick that will trigger
the order to be placed with the supplier
JIT (Just-in-Time) Stock Management
Order the stock when needed
In order to have JIT the following are needed
Excellent relations with the supplier
Multi-Skilled production staff
Equipment has to be flexible
Accurate demands and forecast have to be made
Latest equipment will make JIT more suitable
Excellent employee-employer relations a necessary
Quality has to be maintained
Lean Production
Lean production approach suggests that the prime objective should
be to produce the highest quality output in the fewest possible resources.
It suggests cutting on the complexities, costs and time that does not add
value for the customer.
Lean Production can be achieved by:
Simultaneous Engineering
This is a method of developing new products simultaneously
and not one after the other
Flexible Specialism
Lean production suggests that instead of making the same
product for many years, the product should evolve with the
technological advances
To do this a company need to have:
Flexible employment contract for non-core workers
Flexible and adaptive machinery
Flexible and multi-skilled workers
Kaizen – Continuous Improvement
Kaizen suggests that the work methods/practices should be
improved continuously rather than making some changes after a while
Also the it follows Theory Y of management. It suggests that the
workers know more about how to improve production methods than the
managers, so the workers need to be given to opportunity to suggest
newer better ways to do the job.
Conditions necessary for Kaizen are:
Management Culture should follow Theory Y
Team working
Empowerment of the Workers
All the Staff has to be Involved
Appropriateness of JIT and Lean Production for Businesses
Whether the above mentioned techniques of improving operation
efficiency are suitable for a business depend on the following:
Finances
Capital Costs
High cost of stock for JIT
Management of Change
If change is being brought into the company, then it is very
important that the change is monitored carefully or there can be
other problems that can further hinder the operations of the
business
Lean Production is Not Suitable when
Forecasting the demand is hard
Production process is very expensive to start up after a break
If firms use it as a devise for making redundancies
Business depend on customer services as their unique selling
point
Cost of technology is too high
The activities that are not path of the Critical Path have some extra
time to finish. This is termed as float time.
Example form book
Earliest Start Time – this is the earliest possible time an activity can
begin. All the preceding activities have to be taken into account and then
the EST can be figured out
Latest Finish Time – This is the time when the job can be completed
without affecting the total duration of the CP.
Dummy Activities – it is not strictly an activity. It shows a logical
dependency of an activity on others.
Advantages of Network Analysis (CPA)
Allows the business to calculate the delivery date etc. accurately.
Calculating the EST tells the Operations Manager when the
necessary resources are needed to be ready
Makes following JIT easier
Calculating LST will mean that some complex process can be given
some extra time to finish in a better manner
If there is a delay in a critical activity, the operations manager can
see what activities can be speeded up to still be able to finish the project
in time