O.M.

In a multiproduct firm,each product is likely to contribute something towards the payment of fixed and indirect costs.

Profit=Total contribution-(TFC+Overheads)

In general any product that makes a positive contribution is worth producing since it will help towards the payment of the firm’s fixed costs and hence profits.Uses for a b.:

-Contribution analysis allows a b.to identify the amount of profit it makes on an individual sale.This can help the firm in setting prices to ensure that contribution is made towards payment of fixed and indirect costs

-The analysis can help firms decide which products should be given investment priority.

-Can help managers decide whether it should produce the products or purchase them from suppliers

-These occur when a customer places an order at a price that differs from the normal price charged by the firm.The price could be higher(although the customer will request added benefits from offering a higher price,such as shorter delivery times)or lower(probably because the customer is buying a significant amount of the product).Whether the b.takes on this special order will largely depend on the total contribution made from such a deal.

CONTRIBUTION ANALYSIS FOR MULTIPRODUCT FIRMS

O.M

COST AND PROFIT CENTRES

As a b.grows in size,it becomes more difficult to manage its finances.Costs and revenues from different areas of the b.become harder to account for.Hence,different sections of the b.are divided up into either cost or profit centres with a manger being held responsible for the costs and/or revenues incurred for each department or centre.

COST CENTRES

A c.c. is a department or unit of a b.that incurs costs but is not involved in making any profit.These costs are clearly attributed to the activities of that department.Making these different sections of a b. aware and accountable for their contribution towards the firm’s costs may help managers to have better cost control.This will allow the b.to identify which departments are costing the firm the most money

PROFIT CENTRES

A p.c. is a department or unit of a b.that incurs both costs and revenues.A manager is appointed to be responsible for the profit centre.Each profit centre is responsible for contributing to the overall profits of the b.Having profit centres allows an org.to identify the areas that generate the most(least)revenue.

O.M.

+ of operating cost and profit centres:

-it forces mangers to be more accountable for their department’s contribution towards the firm’s costs

-the b.can identify areas of financial weakness.Using cost and profit c.allows a b.to identify sections or products of the org.that are loss-making

-delegating power to those in charge of cost and profit centres can be a form of motivating these people

-benchmarking with the most efficient cost and profit centres within the org.can take place to improve its overall efficiency

-departments and smaller teams tend to work much better than larger ones which may suffer from disorganization and a lack of effective communication.This promotes better team spirit within the different areas of an org.

O.M.

Drawbacks:

-allocating indirect costs such as rent,interest,insurance and administrative costs is a subjective task.This means that it can be difficult to accurately calculate the overheads attributable to each cost centre

-allocating a greater proportion of costs to a particular centre will reduce its profits,although this does not represent its underlying trading position

-the performance of a cost or profit centre can be changed by external factors beyond its control,such as higher raw material prices

-data collection in order to accurately account for costs and revenues of each centre is likely to be expensive and time consuming

-may promote unnecessary internal competition to cut costs and/or raise revenues.This can create tension and conflict between the various sections of an org.

-managing cost and profit centres can add to the pressure and stress on staff.This may therefore lead to motivational problems

-centres are less likely to consider social responsibilities and ethical objectives if they are run as profit centres.This is because the compliance costs of being ethical and socially responsible will raise the profit centre’s costs,thereby lowering its profit level

O.M.

APPORTIONING OVERHEADS TO COST AND PROFIT CENTRES

2 main ways of apportioning costs:

-full costing allocates the total indirect costs to each centre based on a single predetermined criterion

-absorption costing allocates both the direct and indirect production costs to appropriate cost and profit centres.The direct costs are easy to allocate since they are generated by and specific to each cost centre.Overheads are more difficult to allocate since they are not unique to a particular cost or profit centre.Absorption costing divides indirect costs based on several or all of the above criteria.This may be a more representative account of their contribution to the costs of the b.,although it is not a simple to calculate as using full costing

O.M.

The concept of kaizen-a process of productivity and efficiency gains within a firm that comes from small and continuous improvements being made by the workforce,rather than a large one-off improvement.This is partly because people tend to be resistant to change,especially those changes that are large scale and disruptive to the org.This is often much easier to do when there are (continuous) improvements in the org.since job losses or pay cuts are unlikely to surface in such situations.Kaizen groups do not tend to directly look at cost cutting:the focus remains on continual improvements in quality.Kaizen groups have decision-making power.Many of the best suggestions for improvement often come from shop floor employees who have direct contact with customers.They are the ones best positioned to understand the benefits of changes to certain operations or processes.This has the added benefit of motivating staff since they are able to use their initiative and to have some input into the decision-making of the org.

QUALITY CIRCLES

Refer to small groups of people who are organized together to examine issues relating to the quality of output and to make recommendations for improvement to management.Unlike Kaizen,members of the quality circle are also directly involved in the execution and management of the solution.

A huge limitation to Kaizen and quality circles is that many individuals remain unmotivated by teamworking,extra responsibility or empowerment.They prefer to be told what to do and only see work as a means to an end.

KAIZEN-CONTINUOUS IMPROVEMENT

O.M

BENCHMARKING

Refers to a b. comparing its products,operations and processes to those used by others in the same industry,especially market leaders.

• Historical benchmarking involves comparing the same performance data over time.Sales turnover,market share,profits and staff turnover can all be benchmarked this way

• Inter-firm benchmarking involves comparing the same performance data of different bus.

BENEFITS:

-dealing with problems of quality by using external benchmarking can be quite fast and is more effective than simple guesswork

-it looks at comparisons from the perception of customers and therefore this should help the firm to take appropriate action to meet their customers’ needs and wants

-the successful implementation can help to lower production costs and to improve a firm’s overall competitiveness

LIMITATIONS:

-the cost and time implications of collecting relevant and up-to-date information from other firms in the industry can be a major constraint to effective benchmarking

To be effective,benc.has to be a continuous process that involves the commitment and involvement of every employee.This allows the firm to gain lasting improvements in both

O.M.

quality and productivity

NATIONAL AND INTERNATIONAL QUALITY STANDARDS

Nat. and inter. quality awards are used to show that certain quality standards have been met.B.that meet or exceed these standards are permitted to include the quality award symbols or logos on their products.This helps to assure customers that the product is of high quality.Quality awards help to :

-promote quality awareness within the org.

-improve org.performance

-recognize quality achievements(which can have motivational effects on the workforce)

-strengthen the competitiveness of an org.

The ISO’s goal is to facilitate international trade by providing a single set of quality standards that consumers and b. throughout the world would recognize and respect.The ISO is one of the most powerful non-governmental org.in the world because it is influential in affecting government legislation surrounding quality assurance.

Perhaps the most widely recognized ISO Standard for quality management is the ISO 9000.It is awarded by independent auditors who certify that the ISO Standards have been met.