Final Exam Review

Chapter 11, 13-14, Data Analytics

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Final Exam Logistics

• Date: Saturday, August 10, 2024

• Time: 7-10PM
• Location: ACW 109
• Coverage: All chapters, with emphasis on chapters learned after
M2
• Review materials:
• Feel free to use the previous M1 & M2 review slides posted, as well as
this slide deck
 Ch11 Review
Decision Making – Relevant Cost Analysis

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 Relevant Cost Analysis

• A relevant cost is a future cost that differs between/among

decision alternatives
– A sunk cost is a cost that has been incurred in the past or
committed for the future and is therefore irrelevant for decision-
making
– Opportunity cost is the benefit lost when option is chosen over
another
• Often comes up in situations with no excess capacity
 Strategic Analysis

Strategic information keeps the decision maker’s attention

focused on the firm’s strategic goals
– By only identifying relevant costs, the decision maker might fail
to link the decision to the firm’s strategy
– Consider alignment to long term goals
 Relevant Cost Analysis
versus Strategic Analysis
Relevant Cost Analysis Strategic Analysis
Short-term focus Long-term focus
Not necessarily linked to Linked to the firm's
strategy strategy
Product-cost focus Customer focus
Integrative; considers all
Focused on individual customer-related factors
product or decision
situation
 Management Decisions
• The special-order decision
– One time opportunity to sell a specified quantity of product
– Consider excess capacity, analyze incremental profit
• The make-vs.-lease and make-vs.-buy decision
– Which parts should be made internally, and which should be purchased/leased from
outside supplier?
– Determine indifference point, see if current state is above/below
– Compare profits under both alternatives, pick the one that is higher
• The decision to sell a product before or after additional processing
– Process a product more (additional costs) or sell as is?
– Analyze incremental profit from processing further
• Profitability analysis (i.e., whether to keep or drop products or services)
– Determine if the product has positive CM/are there any avoidable costs?
• Short Term Product Mix Decision (with production constraints)
– Prioritize production of the product with higher CM/constrained resource
Ch13 Cost Planning for Product Life Cycle: Target
Costing, Theory of Constraints, Strategic Pricing

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 The Product Life Cycle

Four management methods discussed in this chapter:

– Target costing
– Theory of constraints (TOC)
– Life-cycle costing
– Strategic pricing

All involve the entire product life cycle:

– Managers now need to look at costs upstream (before manufacturing) and
downstream (after manufacturing)
 Cost Life Cycle

Marketing
Marketing
R&D Customer
Customer
R&D Design
Design Manufacturing
Manufacturing and
and Service
Service
Distribution
Distribution

Upstream Activities Downstream Activities

Design decisions account for much of total life-cycle costs

 Target Costing

Target cost = Competitive price ‒ Desired profit

 Determine the market price

 Determine the desired profit
– Profit per unit
– Profit as a % of revenue or cost
 Calculate the target cost as market price less desired profit
 Use “value engineering” to reduce cost
 Use kaizen costing and operational control to further reduce costs
 Quality Function Deployment (QFD)
QFD: The integration of value engineering, marketing analysis, and target
costing to assist in determining which components of the product should
be targeted for redesign or cost reduction.
Four steps in QFD:
 Identify and rank customers’ purchasing criteria for the product
 Identify the components of the product and the cost of each component
 Determine how the product’s components contribute to customer
satisfaction
 Determine the importance index of each component
 Theory of Constraints
TOC focuses on improving speed at the constraints, to decrease
overall cycle time
Five steps in TOC:
 Identify the constraint
 Determine the most profitable product mix given the constraint
• Prioritize the product with highest throughput margin/constrained resource
 Maximize the flow through the constraint
 Add capacity to the constraint
 Redesign the manufacturing process for flexibility and fast cycle time
 Strategic Pricing Formulas
Full manufacturing cost plus markup
Price = Full manufacturing cost x (1 + Markup)

Life-cycle cost plus markup

Price = Total life-cycle costs x (1+ Markup)

Full cost and desired gross margin percent

Full manufacturing cost
Price =
(1 – Desired gross margin percentage)
Full cost plus desired return on assets
Desired before-tax profit
Markup rate =
Life-cycle cost of expected sales
Price = Life-cycle cost x (1 + Markup rate)
 Ch14 Review
Operational Performance Measurement: Variance
Analysis

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 Short-Term Financial Control
• Short-Term Financial Control:
– Comparison between actual and budgeted financial results

• Variances:
– Differences between budgeted amounts (e.g., budgeted operating
income) and actual financial results (e.g., actual operating income)
 Master Budget
• Prepared before the start of the period
• Contains the following items:
– Budgeted sales volume
– Budgeted sales price per unit
– Budgeted variable cost per unit
– Budgeted total fixed costs

• Master (static) budget variance = master budget operating income –

actual operating income
– Divides into Flexible Budget variance & Sales Volume variance
 Flexible Budget

• Prepared at the end of the period (after actual activity

is known)
• Actual sales volume is used, but with budgeted selling
price per unit, budgeted variable cost per unit, and
budgeted total fixed costs
– Divides into Selling Price variance, Variable cost variance,
Fixed cost variance
 Standard Costs
Standard Costs versus a Standard Cost System?
• Standard Costs = costs that should be incurred under efficient
operating conditions
• Standard Cost System = an accounting system in which standard, not
actual, cost flow through the formal accounting records
• Regardless of whether a standard cost system is used, standard costs
can be useful at the end of the period for financial control purposes
(i.e., conducting variance analysis)
 Variable Cost Variances
• Variable Cost Variance = Actual Variable Costs – Flexible Budget
Variable Costs
= (AQ × AP) – (SQ × SP)
• Breakdown of above total variance:
– Price (Rate) Variance = AQ × (AP – SP)
– Quantity (Efficiency) Variance = SP × (AQ – SQ)
Example: Direct Materials (DM) Standard Cost Variance
Decomposition─Example:
Hanson Inc.

Hanson Inc. has the following direct material standard to manufacture

one unit of “Jerf”:
1.5 pounds per unit of Jerf at $4.00 per pound
Last month 1,700 pounds of material were purchased and used to
make 1,000 Jerfs. The material cost a total of $6,630.
Price (Rate) Variance =
AQ × (AP – SP)
Quantity (Efficiency) Variance =
SP × (AQ – SQ)
 Variance Summary:
Hanson

Total Flexible Budget Variance = $6,630 - $6,000 = $630U

Data Analytics Review
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 Data Analytics

• Process of evaluating data to draw conclusions to address business

questions
• Transform raw data into knowledge to create value
• Culminates in an action plan to generate profit or non-financial
value
• Useful data should be:
– Complete
– Reliable
– Valid
 5Vs of Data
• Volume
– Size/amount of data
• Velocity
– Speed of processing
– Speed of generation of data points
• Variety
– Types of data consumed
• Veracity
– Quality/accuracy of data
• Value
– What the organization can do with the data (value that it brings)
 Types of Data Analysis
• Financial Data Analysis
– Use of technology to analyze financial data (accounting/inventory
management software, etc.)
• Trend Analysis
– Finding patterns or trends in data that allows for predictions about future
performance to be made
• Drill Down Analysis
– Allows you to drill down a large variance to find the real reason behind
differences
• Financial Ratio Analysis
– Calculating ratios using financial information to evaluate performance
 IMPACT Cycle
• Approach to implementation of data analytics
– 1. Identify the question – What do you want to figure out?
– 2. Master the Data – Is the data reliable, reasonable?
– 3. Perform the Test Plan – Identify variables and analysis methodologies
to use.
– 4. Address and Refine Results – Review results to determine if
reasonable & how they should be presented.
– 5&6. Communicate Insights and Track Outcomes – Present insights
and outcomes through a data visualization.
 Data Visualisations
• Elements of Bad Graphing
– Scale does not begin at 0 or is inverted
– Too much detail
– Cluttered
– Visual cues do not correspond to actual scale
– Colour scheme used is too confusing
What went wrong here?
What went wrong here?
 Practice Questions
• What data were we analyzing during the excel demo last
class?
• Name one tool we used to analyze the data.
• What was something we were able to calculate after
analyzing the data?
Questions?