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Quality Management
Tools Cost of Quality
Process Innovation
Target Costing
Strategic Cost Management and Performance Evaluation
Throughput Accounting
Standard Costing
Cost Control & Beyond Budgeting
Analysis
Budgetary Control
Behavioural Aspects
Strategic Analysis;
Profitability Analysis Analysis Through ABC
Planning and
Forecasting Tools ABB & ABM
Limitations of
Traditional Cost Strategic Cost Vision, Mission Strategic cost
Management and Objectives It also involves
Management management is integrating cost
the application of information with
cost management the decision-making
Components of Strategic techniques so that they
Cost Management framework to
improve the strategic support the overall
• Strategic Positioning position of a business as organisational strategy.
well as control costs.
• Cost Driver Analysis Value Shop
• Value Chain Analysis Model
The basic aim of
Strategic Cost
It is not limited to Management is to help
controlling costs but the organisation to
The Value Chain Approach using cost information achieve the sustainable
Strategic Frameworks for for Assessing Competitive for management competitive advantage
Value Chain Analysis Advantage decision making. through product
differentiation and cost
leadership.
Ignores Strategic
Competition, Positioning
Market Growth,
and Customer Analysis
Requirement
Excessive
Short-term Focus on Cost
Outlook Reduction
Cost
Limitations of Driver
Traditional Cost Analysis
Management
Ignores
Reactive Dynamics of Value
Approach Marketing and Chain
Economics Analysis
Limited Focus
on Review and
Improvisation
External
Enviroment
to imitate
Procurement
(Purchasing of Raw Materials, Machines, Supplies)
Quality Management • Theory of Constraints Supply Chain Management • Gain Sharing Arrangement
• Throughput Accounting • Outsourcing
Cost of Quality Total Quality Management Business Excellence Model • Key Process
• Push/Pull Model
• Components • 6 Cs • EFQM
• Upstream-flow Management
• Optimal COQ • Deming’s 14 points • Baldrige Criteria
• Downstream-flow Management
• PDCA Cycle • Organisation Culture
• Service Level Agreements
• Criticism
• Prevention Costs
• Apprisal Costs • Concepts of Excellence • Relationship with Suppliers • Relationship Marketing
• Internal Failure Costs • Conceptual Framework • Use of Information • Customer Relationship
• External Failure Costs • Logic Assessment Framework Technology Management
• Use of Information Technology
• Brand Strategy
Appraisal Costs
♦ The need of control in product and services to ensure high 6C’s
quality level in all stages, conformance to quality standards and
performance requirements is Appraisal Costs.
Continuous
♦ Appraisal Cost incurred to determine the degree of conformance Customer Focus Improvement
to quality requirements (measuring, evaluating or auditing).
Baldrige Criteria for Performance Excellence Goldratt’s Five-Step Method for Improving
This model provides the foundation for most of the business excellence Performance
models adopted around the world. The framework is built round the
seven categories i.e., The key steps in managing bottleneck resources are as follows:
♦ Leadership,
♦ Strategic planning,
♦ Customer and market focus, Identify the
Constraints
♦ Measurement analysis and knowledge management,
♦ Workforce,
♦ Process management and
Repeat the Exploit the
♦ Business results. Process Constraints
Customers Account
Types of Supply Chain- Push and Pull Profitability (CAP)
Push Model
Customers Lifetime
Supplier Manufacturer Distributor Retailer Customer Value (CLV)
E-Payment The six markets model suggests that a firm must regulate its actions
towards developing appropriate relationships with each of the market
Relationship with Suppliers areas as the management of relationships in each of the six markets is
Supplier capabilities of innovation, quality, reliability and costs/ critical for the attainment of customer retention objective.
price reductions and agility to reduce risk factors all have witnessed The growing interest in relationship marketing suggests a shift in
significant changes when aligned with key suppliers. Greater value can the nature of marketplace transactions from discrete to relational
TPM Goals
Zero Defects, Zero Breakdowns, Define the problem,
Zero Accidents the project goals
and customer
requirements.
Autonomous Maintenance
Management
Control means
Measure the process maintaining the
to determine current improved process
performance. and future process
performance.
5S
Analyze the process Improve the process
to determine root by addressing and
Performance Measurement in TPM causes of variation eliminating the root
and poor performance causes.
The most important approach to the measurement of TPM (defects).
performance is known as Overall Equipment Effectiveness (OEE)
measure.
Performance × Availability × Quality = OEE % DMADV: The application of these methods is aimed at creating a
high-quality product keeping in mind customer requirements at
OEE may be applied to any individual assets or to a process. It is every stage of the product. It is an improvement system which is
unlikely that any manufacturing process can run at 100% OEE. used to develop new processes or products at Six Sigma quality levels.
According to Dal et al (2000), Nakajima (1998) suggested that ideal Phases are described in diagram:
values for the OEE component measures are:
Strategies
Introduction Growth Maturity Decline
Product Offer basic product Offer product extensions, Diversify brands and Phase out weak items
service & warranty models
Price Cost plus profit Price to penetrate market Price to match or beat Price cutting
competitors
Advertising Build product awareness Build awareness & interest Stress on brand Reduce level to keep hard
amongst early adopters in mass market differences and benefits core loyalty
& dealers
Distribution Build selective Build Intensive Build more intensive Go selective: Phase out
distribution distribution distribution unprofitable outlets
Sales Promotion Use heavy sales Reduce to take advantage Increase to encourage Reduce to minimal level
promotion to entice trial of heavy consumer brand switching
demand
Controlling Environmental Costs First, a ‘carbon footprint’ (as defined by the Carbon Trust) measures
the total greenhouse gas emissions caused directly and indirectly by
After Identification and Allocation of Environmental Costs, task of
a person, organization, event or product.
controlling starts. An organization may try to control these costs as
mentioned below-
Second, environmental costs are becoming huge for some companies,
particularly those operating in highly industrialized sectors such as
Waste
oil production. Such significant cossts need to be managed.
‘Mass balance’ approach can be used to determine how much
material is wasted in production, whereby the weight of materials Third, regulation is increasing worldwide at a rapid pace, with
bought is compared to the product yield. penalties for non-compliance also increasing accordingly.
PRICING DECISION
Competition-
Based Cost-Based Value- Based
A product introduces
upgraded version with few The evolutionary products may
Pricing of New Product Evolutionary Product additional characteristics be priced taking cost-benefit,
of the product is known as competitor, and demand for
evolutionary product. the product into account.
Mid Company
The change of high price
Evolutionary The demand is likely to in the initial periods
Low Company be inelastic in the earlier serves to skim the cream
stages till the product is of the market that is
established in the market. relatively insensitive to
Me-too price.
Perceived Benefits
The demand for the High initial capital
product is not known the outlays, needed for
Existing Offerings New Offerings price covers the initial manufacture, results in
cost of production. high cost of production.
While preparing to enter the market with a new product, management
must decide whether to adopt a skimming or penetration pricing
strategy.
Performance
Measurement
Benchmarking and Evaluation
Responsibility Centre
• Cost Centre Performance
• Revenue Centre Measurement in
• Profit Centre the Not for Profit
Performance Reports Sector
• Investment Centre
• VFM
• Adapted Balanced
Divisional Scorecard
Performance
Measures
Economic
Shareholder Value
Added (SVA)
Divisional
Performance Balanced Scorecard
Measures Social
The Performance
Pyramid
Environmental
The Performance
Prism
♦ Environmental- measures the impact on resources, such as air,
water, ground and waste emissions (Baumgartner & Ebner, 2010,
Triple Bottom Line p.79).
(TBL)
♦ Social- relates to corporate governance, motivation, incentives,
health and safety, human capital development, human rights and
Return on Investment (ROI) ethical behaviour.
♦ ROI expresses divisional profit as a percentage of the assets ♦ Economic- refers to measures maintaining or improving the
employed in the division. company’s success.
♦ ROI is a common measure and thus is ideal for comparison across
corporate divisions for companies of similar size and in similar Linking CSFs to KPIs and Corporate Strategy
sectors. ROI can therefore lead to a lack of goal congruence.
In order to truly achieve effective measurement of business
Residual Income (RI) performance, the KPIs must be selected and designed in
a way that ensures that the CSF is delivered if the KPI meets
♦ To overcome some of the dysfunctional consequences of ROI, the threshold, and the CSFs in turn must be designed and
the residual income approach can be used. constructed in a way that ensures that the company’s strategic
♦ For evaluating the economic performance of the division, residual vision is delivered if the CSFs are met.
income can be defined as divisional contribution less a cost of
capital charge on the total investment in assets employed by the
division. Balanced Scorecard
♦ Residual income suffers from the disadvantages of being an The balanced scorecard is a method which displays organisation’s
absolute measure, which means that it is difficult to compare performance into four dimensions namely financial, customer,
the performance of a division with that of other divisions or internal and innovation. The four dimensions acknowledge the
companies of a different size. interest of shareholders, customers and employees taking into
account of both long-term and short-term goals. Kaplan and Norton
classified performance measures into four business ‘perspectives’
Economic Value Added (EVA)
♦ Economic Value Added is a measure of economic profit.
Economic Value Added is calculated as the difference between the Financial Perspective Customer Perspective
Financial performance measures In this stage, companies identify
Net Operating Profit After Tax (NOPAT) and the Opportunity indicate whether the company’s customers and market segments in
Cost of Invested Capital. This opportunity cost is determined strategy implementation and which they compete and also the
execution are contributing to its means by which they provide value
by multiplying the Weighted Average Cost of Debt and Equity revenue and earnings. to these customers and markets.
Capital (WACC) and the amount of Capital Employed.
EVA = NOPAT – WACC × Capital
Internal Business Perspective
Shareholder Value Added (SVA) In this stage companies identify processes Learning and Growth Perspective
and activities which are necessary to In the learning and growth
A variation along the same concept as EVA. Rappaport suggested achieve the objectives as identified at perspective, Companies determine
the activities and infrastructure that
that future cash flows should be discounted at a suitable cost of capital financial perspectives and customer
the company must build to create
perspective stage. These objectives may
and that shareholder value would be increased if this measure were be achieved by reassessing the value chain long term growth, which are necessary
to achieve the objectives set in the
to increase. According to Rappaport, the following seven factors- he and making necessary changes to the
previous three perspectives.
existing operating activities.
calls them “value driver”- affect shareholder value:
♦ Rate of Sales Growth
Performance Pyramid
♦ Operating Profit Margin
The Performance Pyramid is also known as Strategic Measurement
♦ Income Tax Rate and Reporting Technique by Cross and Lynch 1991. They viewed
♦ Investment in Working Capital businesses as performance pyramids. The attractiveness of this
The Building Block Model Benefits cannot be quantified Benefits may accrue over a
Fitzgerald and Moon proposed a Building Block Model which longer term
suggests the solution of performance measurement problems in
service industries. But it can be applied to other manufacturing and
Key Challenges
retail businesses to evaluate business performance.
Equity
Motivation
Economic
Ownership Quality Controllability
Financial
Performance
Flexibility
Efficiency
Innovation
Effectiveness
Comperative
Performance
Resource
Utilization
Satisfaction of
Customer beneficiary and
Perspective other stakeholder’s
interest
Fund raising, funds The performance measures/ The actual outcome is measured
Financial growth and funds key performance indicators and evaluated against the
Perspective distribution of each of the perspectives is performance measures defined.
defined.
Adapted Balanced
Scorecard
Internal Internal efficiency,
Processes volunteer
development and
Perspective quality
Behavioral Consequences
Marginal Cost Standard Cost Full Cost Cost Plus In such a setup, profit evaluation is centralized at the entity level.
Based Based Based Markup Based
Therefore, the supplying division may have little incentive to
find measures for making cost efficient. Non-recovery of fixed
Market Based Transfer Price costs would demotivate the supplying division. It may oppose
certain decisions like capacity expansion or further infusion of
Transfer price is based on market price of goods or services similar to
the ones transferred internally within divisions. The transfer can be investment, that lead to higher fixed costs.
recorded at the external market price, adjusted for any costs that can
be saved by internal transfer e.g. selling and distribution expenses,
Standard Cost Based Transfer Price
packaging cost.
Transfer price is recorded at a predetermined cost, which is based
Advantages Disadvantages on budgets and certain assumptions regarding factors of productions
like capacity utilization, labor hours etc.
♦ Since demand and supply ♦ Market price may not be completely
determine market price, it is unbiased, if a competitive
likely to be unbiased. environment does not exist. Advantages Disadvantages
♦ Market prices are less ambiguous ♦ May not be suitable when market
compared to cost-based pricing. prices can fluctuate widely or ♦ Performance evaluation can ♦ Profit performance measurement
quickly. be done against budgeted cost is centralized and cannot
♦ Since the pricing is competitive, targets. be measured for individual
divisional performance can be ♦ Goods that are transferred may divisions.
linked more objectively to its be at an intermediate stage in the
contribution to the company’s production process. At times market
overall profits. price may not be available for such
intermediate goods.
Behavioral Consequences
Budgeted costs are generally based on historic records.
Shared Profit Relative to Cost Based Transfer Price Therefore, little incentive exists to make costs more efficient to
Shared profit relative to cost method is an alternative to market price improve profitability.
method. Cost incurred by each division indicates the value it has
added to the product cost, that is finally used to arrive at the selling Full Cost Based Transfer Price
price of the final product. The primary advantage of this method is
Transfer price is based on full product cost. It includes cost of
that it allocates profit based on the proportion of value addition to the production plus a share of other costs of the value chain like selling
product in terms of cost. and distribution, general administrative expense, research and
development etc.
Cost Based Transfer Price
Cost based pricing models are based on the internal cost records Advantages Disadvantages
Feed-forward Control
Budgetary Control In certain cases, we may be able to measure the amount of error
Budget is an estimation of revenues and expenses over a specified before it has actually taken place. We may thus be able to place a
future period of time which needs to be compiled and re-evaluated control mechanism before the error takes place. Feed-forward
on a periodic basis based on the needs of the organisation. Control is one such Controlling system.
Budgetary Control is the process by which budgets are prepared
for the future period and are compared with the actual performance According to the CIMA’s Official Terminology, It is defined as the
for finding out variances, if any. In other words, Budgetary Control ‘forecasting of differences between actual and planned outcomes
is a process with the help of which, managers set financial and and the implementation of actions before the event, to avoid such
performance goals, compare the actual results with the budgets, and differences.’
adjust performance, as it is needed.
Feedback and Feed-Forward Control A feed-forward control system operates by comparing budgeted
results against a forecast. Control action is triggered by differences
Feedback and Feed-forward are two types of control schemes between budgeted and forecasted results.
for systems that react automatically to changing environmental
Any manager who ignores feed-forward control will contribute to the
dynamics.
downfall of a company.
Performance Levels, System Objectives etc. Limitations
Feedforward Information
Controlled Variables Feedback Information )
(System Inputs) (Outcome Measurement)
Note:
Not all topics of SCMPE have been covered in this capsule. However, our selection doesn’t attach more importance to some topics and less
to others.
The Commerce Wizard will be conducted in two levels in English language for Students studying in
Class X/XI/XII and B.Com./BBA/BMS/Allied Subjects Part I, Part II & Part III Examination separately.
Important Date & Timings for Level I Test: On line & Level II Test: Online/Pen & Pencil Mode:
Class X/XI/XII Level-I (Online test) Level-II Test : Online or Pen Pencil
7th January, 2018 (Sunday) Mode in the designated test centre
21st January, 2018 (Sunday)
Class X /B. Com./BBA/BMS/ 11.45 AM to 1.00 PM
Allied Subjects Part I For Class X/XI/XII
10:30 am. To 11.45 a.m.
Class XI /B. Com./BBA/BMS/ 2.00 PM to 3.15 PM
Allied Subjects Part II For B.Com./BBA/BMS/Allied Sub-
Class XII/B. Com./BBA/BMS/ 4.15 PM to 5.30 PM jects Part I/Part II/Part III
Allied Subjects Part II
3.00 p.m. to 4.15 p.m.