Financial Analysis in Operations Management

Topic: Financial Analysis in Operations Management

Subject: BM 208 A Productions and Operations Management and Development

Schedule: Block 1 Sunday 12:01 – 4:30 PM

Professor: Eddie E. Llamedo, D.M., Ph.D.

Reporter: Mara Shaira A. Siega, CPA

I. COST DEFINITIONS

        A. Relevant Costs – costs that are useful in decision making

                Characteristics:

1. Differs from one alternative to another (Differential Cost)
2. Deals about the future (Future Cost)

B. Controllable Costs – costs are those which incurrence or non-incurrence, can be influenced or decided upon by a manager. This cost relates to the degree of authority given to a manager.

C. Opportunity Costs – costs given up in favor of another choice. They are not recorded in the accounting system.

        D. Out-of-pocket Costs – costs that are incurred and are paid in cash.

E. Sunk Costs – costs that have been incurred in the past and can no longer be changed. They are constant and not differential. They are historical and irrelevant.

F. Fixed Costs – costs that remain constant regardless of the change in production and sales, but changes on a per unit basis.

G. Variable Costs – costs that changes in total in direct proportion to changes in production and sales but is constant on a per unit basis.

II. ACTIVITY-BASED COSTING

- Costs are accumulated not with their relationship with the product but based on their relationship with the process and the activities in the process.

- This is an overhead allocation system that allocates overhead cost. It is observed that overhead costs are incurred or not incurred based on activity drivers.

A. Activity Drivers – also called cost driver, causes costs to change or not to change. These can be grouped into different processing levels.