McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 3Chapter 3

Operating Processes: Planning and Control

3-2

What are the Goals of the Revenue Process?What are the Goals of the Revenue Process?

• Provide customers with products/services they want at a price they are willing to pay

• Receive payment from customers in a timely manner

• Provide customer support before and after the sale to ensure future sales

3-3

What are the 5 Primary Activities in the Revenue Process?What are the 5 Primary Activities in the Revenue Process?

• Determine marketing and distribution channels

• Receive and accept orders

• Deliver goods/services FOB shipping versus FOB destination

• Receive payment from customers Sales discounts

• Provide customer support Sales returns and allowances

3-4

What are the Goals of the Expenditure Process?What are the Goals of the Expenditure Process?

• Receive the highest quality goods/services at the lowest cost when needed

• Pay for goods/services in a timely manner

• Develop good relationships with suppliers of goods/services

3-5

What are the 4 Primary Activities in the Expenditure Process?What are the 4 Primary Activities in the Expenditure Process?

• Determine the need for goods/services

• Select suppliers and order goods/services

• Receive the goods Purchase returns and allowances

• Pay for goods/services Purchase discounts

3-6

What are the Goals of the Conversion Process?What are the Goals of the Conversion Process?

• Manufacture the highest quality products

• Utilize labor and other manufacturing resources in an efficient and effective manner

3-7

What are the 4 Primary Activities in the Conversion Process?What are the 4 Primary Activities in the Conversion Process?

• Schedule production

• Obtain raw materials

• Use labor and other manufacturing resources Manufacturing overhead

• Store finished goods until sold

3-8

What are the Basic Concepts in Determining Cost/Revenue Behavior?What are the Basic Concepts in Determining Cost/Revenue Behavior?

• Behavior pattern Relationship between X (activity) and Y (cost or

revenue)

• Relevant range Normal range of activity

• Activity driver Activity that is assumed to cause changes in

revenues or costs

3-9

What is a Fixed Cost or Revenue?What is a Fixed Cost or Revenue?

• Constant in total over the relevant range

• Changes per “unit” of activity over the relevant range

Activity

$

3-10

What is a Variable Cost or Revenue?What is a Variable Cost or Revenue?

• Changes in total (proportionately) over the relevant range

• Constant per “unit” of activity over the relevant range

Activity

$

3-11

What is a Mixed Cost or Revenue?What is a Mixed Cost or Revenue?

• Changes in total (but not proportionately) over the relevant range

• Changes per “unit” over the relevant range

• Includes a fixed and a variable component

Activity

$

3-12

How do we Use the High/low Method to Determine the Components of a Mixed Cost or Revenue?

How do we Use the High/low Method to Determine the Components of a Mixed Cost or Revenue?

• Determine highest and lowest levels of activity

• Determine the costs (revenues) associated with those levels of activity

3-13

High/Low Method ContinuedHigh/Low Method Continued

• Determine the variable component by dividing the change in cost (revenue) by the change in activity (rise over run)

• Determine the fixed component by using the variable component determined in the total cost (revenue) formula at either the highest or lowest level of activity

3-14

How do we Use Linear Regression to Determine the Components of a Mixed Cost or Revenue?

How do we Use Linear Regression to Determine the Components of a Mixed Cost or Revenue?

• Activity = X = independent variable (input)

• Cost/Revenue = Y = dependent variable (input)

• Coefficients = values of fixed and variable components (determined statistically)

3-15

Linear Regression ContinuedLinear Regression Continued

• Intercept = fixed component

• Slope = X coefficient = variable component

• R square = measure of strength of relationship between X and Y

• T statistic = measure of strength of independent variable (slope)