BMT1009

Production and Operations

Management
Unit-II

Dr. I.S.Stephan Thangaiah

Professor, VIT Business School
VIT University
Vellore 632014

611C

Cabin: SJT

Product
A Product is something sold by an enterprise to its
customers
Product
beginning

Development
with

the

is

the

set

perception

of

activities

of

market

opportunities and ending in the production, sale, and

delivery of product
The Economic success of

Manufacturing

firms

depends on their ability to identify the needs of

customer and to quickly create products that meet
these needs and can be produced at low cost.
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Characteristics of Successful
Product Development
Product Quality
Product Cost
Development Time
Development Cost
Development Capability

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Variants of generic development process

Market Pull: The firm begins with a market opportunity, then
finds an appropriate technology to meet customer needs
Example: Sporting goods, furniture
Technology Push : The firm begins with a new technology,
then finds an appropriate market
Example: Consumer electronics - watches
Platform Products :The
firm assumes that the new product
:
will be built around the same technological sub-system as an
existing product
Example: Computers & printers
Process Intensive Characteristics of the product are highly
constrained by the production process.
Example: Packaged beverage products
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Customized products : New products

variations of existing configuration
Contd/-

are

slight

Example: Switches, Motors, Batteries

High Risk products: Technical or market uncertainties

create high risks of failure
Example: Pharmaceuticals, Space systems
Quick-Build products: Rapid modeling and prototyping
enables many design-build-test cycles
Example: Software, Cellular phones
Complex Systems: System must be decomposed into
several subsystems and many components
Example: Airplanes, Automobiles
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Types of Product Development

Projects
1. New product platforms
2. Derivatives of existing product platforms
3. Incremental improvements to existing
products

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Process Types
There are four basic process types:
Job shop process A job shop usually operates on a relatively small
scale. It is used when a low volume of high variety goods or services
will be needed.
Batch process Batch processing is used when a moderate volume
of goods or services is desired, and it can handle a moderate variety
in products or services.
Assembly process When higher volumes of more standardized
goods or services are needed, repetitive processing is used.
Continuous process When a very high volumes of non-discrete,
highly standardized output is desired, a continuous system is used.

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Volume, variety and flexibility of

operations processes
Volume/
Variety

Low or very
low volume

Moderate
volume

High
volume

High

Job shop:
Ship construction
Repair shop

Moderate

Low

Very low

Batch process:
Commercial bakery
Classroom lecture
Assembly/
Repetitive:
Mobile assembly
Automatic car wash

Very high
volume

Continuous flow:
Petroleum refining
Water treatment

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Process Selection
Three primary questions bear on choice of
process selection based on demand:
1.How much variety in products or services
will the system need to handle?
2.What degree of equipment flexibility will
be needed?
3.What is the expected volume of output?

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Process Decisions
Process strategy is an organizations overall approach for
physically producing goods and providing services. Process
decisions should reflects how the firm has chosen to
compete in the marketplace, reinforce product decisions,
and facilitate the achievement of corporate goals.
A firms process strategy defines its:
Capital intensity: The mix of capital (i.e equipment,
automation) and labour resources used in the production
process.
Process flexibility: The ease with which resources can be
adjusted in response to changes in demand, technology,
products or services, and resource availability.

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Advantages and Limitations

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Process choice affects numerous

activities/ functions

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Characteristics of Various Process types

Types of
Processes

Job shop/ Project Batch Production

Type of product Unique

Made to order

(Customized)

Type of customer One-at-a-time

Few individual

Product demand
Infrequent
Fluctuates

Demand volume
Very low
Low to medium

No. of different
Infinite variety
Many, varied
products

Production system

Equipment

Primary type of
work

Long-term project Discrete

Varied
General-purpose

Specialized
Fabrication
contracts

Assembly/ Mass
Production

Continuous Production

Made to stock
(Standardized)

Mass market

Stable

High

Commodity

Mass market

Very stable

Very high

Few

Repetitive, assembly
lines

Special-purpose

Very few

Continuous, process
industries

Highly automated

Mixing, treating,
refining

Assembly

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Cost Concept
Cost refers to the expenditure incurred to produce a
particular product or service.
Costs may be monetary or non-monetary; tangible or
intangible;
or/and
determined
subjectively
or
objectively.
Social costs such as pollution, noise or traffic
congestion add another dimension to the concept of
cost.

Element of Costs
Costs of Production can be broadly classified into following
elements:
Material Cost
Labour Cost
Expenses
The cost of production normally includes the cost of
raw materials, labour and other expenses. This cost is known
as the total cost (TC). This is compared with the total
revenue (TR) realized on the sale of the products
manufactured. The difference between the TR and TC is
termed as Profit (TR-TC=Profit).

Element of Costs (Contd.)

Cost

MaterialLabourExpenses
DirectDirectDirect
IndirectIndirectIndirect

Direct Material
Direct material cost are those cost of materials that
are used to produce the product. All material which
becomes an integral part of the finished product and
which can be conveniently assigned to specific physical
units is termed as Direct Material. For example, All
materials/ components specifically purchased, produced
or requisitioned from stores;
primary packing
materials (boxes, wrapping..etc), and partly produced
or purchased components.

Indirect Material
All material which is used for purposes ancillary
to the business and which cannot conveniently be
assigned to specific physical units, is termed as

Indirect material.
For example: Consumable stores, Cooling Oil and
Waste cloths, Printing and Stationery materials,
etc.

Direct Labour
Direct labour cost is the amount of wages paid to
the

direct

labour

involved

in

the

production

activities. Labour which takes an active and direct

part in the production of the particular commodity is
called Direct Labour.
Direct labour costs are, therefore, specifically and
conveniently traceable to specific products.

Indirect Labour
Labour employed for the purpose of carrying
out tasks incidental to goods produced or
services provided is Indirect labour.
Labour does not alter the construction,
composition or condition of the product.
Ex: Wages of store-keepers, foremen, time
keepers, directors fees, salaries of salesmen.

Direct Expenses

Direct expenses are those expense that vary in

relation to the production volume, other than the
direct material cost and labour cost. These are
expenses which can be directly, conveniently
and
wholly allocated to specific cost centers or cost units.

For example, Hire of some special machinery required

for a particular contract, cost of defective work
incurred in connection with a particular job or
contract, etc.

Indirect Expenses
These are expenses which cannot be directly,
conveniently

and

wholly

allocated

to

cost

centers or cost units.

For

example

such

as

expenses

Lighting, Insurance charges, etc.

are

Rent,

Overheads
A manufacturing organization can be broadly be
divided into three division:
Factory or Works, where production is done
Office and administration, where routine as well
as policy matters are decided
Selling and distribution, where products are sold
and finally despatched to the customers.

Factory Overheads
Indirect material used in the factory such as
lubricants, oil, consumable stores etc.
Indirect labour such as gate keepers salary,
time keepers salary, works managers etc.
Indirect expenses such as factory rent, factory
insurance, factory lighting, etc.

Office and Administration

Overheads
Indirect material used in the office such as
printing and stationery material, brooms and dusters,
etc.
Indirect labour such as salaries payable to office
manager, office accountant, clerks, etc.
Indirect expenses such as rent, insurance, lighting
of the office.

Selling and Distribution

Overheads
Indirect

material used such as packing

material, printing and stationery material, etc.

Indirect labour such as salaries of salesmen
and Sales manager, etc.
Indirect expenses such as rent, insurance,
advertising expenses, etc.

Components of Total Cost

Prime Cost: It consists of costs of direct material, direct labour, and
direct expenses. It is also known as basic, first or flat cost.
Factory Cost :
It comprises prime cost and in addition, works or
factory overheads which include costs of indirect material, indirect
labour and indirect factory expenses. This cost is also known as works
cost, production or manufacturing cost.
Office Cost: It comprises of factory cost and office and administration
overheads. This is also termed as total cost of production.
Total Cost :
It comprises of cost of production and selling and
distribution overheads. It is also termed as Cost of Sales.

Classification of Costs
Costs can be classified into different categories
depending upon the purpose of which information is
required. The costs can broadly be classified into
Fixed Cost
Variable Cost,
Semi variable Cost, and
Step Costs.

Fixed Cost (FC)

These

are

the

costs

which

remain

constants

irrespective of the quantum of output within and up to

the capacity that has been built up. This costs will
exist even if no output is produced.
Examples of such costs are: Rent, Insurance charges,
Management salary, etc.
Fixed costs remain constant for unit of time. Fixed
costs sometimes are also referred to as Period costs.

Variable Costs (v)

These are the costs which vary in direct proportion to
output.

They

increase

or

decrease

in

the

same

proportion in which the output increases or decreases.

The examples of such costs are: Raw material, Wages,
Power, etc.
Variable cost can be further classified into direct
material cost, direct labour cost, and direct expenses.

Semi Variable Costs

These are the costs which do vary but not in direct
proportion to output. They are made up of both fixed
and variable cost elements such as depreciation,
repair, lighting, telephones, etc.
Identification of fixed and variable elements of semivariable costs is important for the management for
planning their business activities.

Step Costs
Fixed costs in general remain fixed over a range of
activity and then jump to a new level as activity
changes. For example, a foreman can supervise a
given number of workers. Beyond this number, it is
necessary to hire a second foreman, then a third and
so on. Similarly, the rental cost of delivery vehicles
also follows the same pattern.

Break - Even Analysis

The term Break Even Analysis refers to a
system of determination of that level of
activity where total cost equals total selling
price.
However, in the broader sense, it refers to
that system of analysis which determines the
Probable profit at any level of activity.
The relationship between cost of production,
volume of production, profit and sales value is
established by break even analysis.

Break-Even Analysis: Contd. 1.

Themainobjectivesofbreakevenanalysisistofindthecutoffproduction
volumefromwhereafirmwillmakeprofit,Let
s=sellingpriceperunit
v=variablecostperunit
FC=fixedcostperperiod
Q=volumeofproduction
Thetotalsalesrevenue(S)ofthefirmisgivenbyfollowingformula:
Thetotalcostofthefirmforagivenproductionvolumeisgivenas:

TC=Totalvariablecost+Fixedcost

Break-Even Analysis: Contd. 2.

Profit=Sales-(Fixedcost+Variablecosts)

The formulae to find the break even quantity (BEQ) and break even sales (BES):
Fixedcost
BreakEvenQuantity=
Sellingprice/unitVariablecost/unit
FC
=(inunits)
s-v

Break-Even Analysis: Contd. 3.

BEP
(Sales)
The contribution is the difference between the sales and the variable costs. The margin of
safety (M.S) is the sales over and above the break - even sales (BES). The formulae to
compute these values are:

Break Even Chart

Sales

Profit
TotalCost(TC)
Breakeven
Sales

VariableCost(VC)

FixedCost(FC)
Loss

BEP(Q*))
Productionquantity

Break Even Point

It refers to that level of activity where the income of the
business exactly equals its expenditure. In other words, it
is a no profit, no loss point. If production is increased
beyond this level, profit shall accrue to the business and if
it is decreased below this level, loss shall be suffered.

Illustration-1
A factory manufacturing fans has the capacity to
produce 250 fans per annum. The variable cost of a
fan is Rs.400 which is sold for Rs. 500. Fixed
overheads, are Rs 12,000 per annum. Let us calculate
the break even points for output and sales. Also
show what profit will result if output is 90 % of
capacity?

Solution:
Contribution per fan is Rs 500 Rs 400 = Rs 100

Contd.1.
Break-even Point for Output
We know, Fixed costs = Rs.12,000 and Contribution per unit = Rs.100

Break-Even Point for Sales

BEP (for sales)

= Output x Selling price per unit

= 120 x Rs. 500 = Rs. 60,000

Contd.1
Profit at 90% of the capacity has been calculated as follows:
Factory Capacity = 250 fans
Output at 90% capacity = 225 fans
Break-even point = 120 fans
Profit on 225 fans = Rs.100 x (225-120) = Rs.10,500/Since fixed over heads will be recovered in full at the break-even
point; the entire contribution beyond the break even point will be
profit.

Zeroth Review on 10.08.2016

1.
2.
3.
4.
5.
6.
7.
8.

Team members
Company name
Nature of Business
Products/ Services
Productivity measures
Process type advantages and limitations
Break even analysis
Facility location decision affecting factors
selection of region, community and site.
9. Site locational analysis

Thank You and All the

Very Best!