The High Competitive Environment - Assignment Example

Name: Lecturer: Course name: Course code: Date Question 1 What was the competitive environment for power generation equipment in the early 1990s? Early in the 1990’s the PSI’s experience a very stiff market competition worldwide on power generation equipment and the main issues that raised the high competitive environment include: (i) Quality of products and services The market in the 1990’s could only reward those suppliers who were able to bring into the market high quality products and services that actually met the exact desires (satisfied) of its customers fully and that is why the PSI’s East Rivers’ service related replacements parts and equipment has increased from just under 40% of revenues to approximately 70%. (ii)Product turnaround and product cost For any company supplier to be successful in the competitive environment of power generation equipment there was need that the products be manufactured within the lead time stipulated and those products were required to be with reasonable costs so as to win a large market share for any company to survive. They were also intending to reduce the lead time by 50% or more in the near future. (iv) Contract quotations The market often complained that the contract costs proposals were excessively quoted thus there were uncompetitive quotes since tendering is mostly subjected to the highest bidder. This required them to device some other mechanism to consider in tendering according to the contract proposals. (v) Labour availability Early there was inadequacy of labour in the market to efficiently and effectively discharge the accounting operations in time thus the organizations were required to result into automated systems that was labour-based to be in particular they adopted the CIM system that could speed up the operations and could also provide reliable cost information for the management to make better decisions. Question 2 What factor led to the need for an ABC system? (i)Desire to improve quality of decision making The operational personnel wanted to ensure that all decisions that were made concerning the product design, product process and market strategy since they were producing low quality products they made the company loss customers to the competitors. ABC system was perceived to help in that activity of making quality decisions so as to promote the continuous growth of the organization through production of quality products in different designs to suit the desires of all customers and increase its market share. (ii)Cost reduction The psi east river was incurring high costs in some activities and hence wanted to identify all the high- cost activities of the organization and try to reduce their need in the day to day activities of the organization ( e.g by reducing the moves )and reducing the time to perform an activity and therefore a throughput. (iii)Cost estimation The psi east river used to experience overruns in its contracts due to poor quotations in those projects. Thus the estimating personnel needed to be provided with accurate data to use in ABC system so as to quote projects with better, and more reliable cost numbers. (iv)Cost control The PSI’s East Rivers could at times not incur costs as per their budgets hence becoming unfavorable throughout .thus the operations required the ABC system so as to be able to work within the budget framework by being an attention- directing system. This system in conjunction with automated CIM system could help the operational personnel to have a favorable variance in all costs hence controlling costs. (v)Cost elimination Due to the high costs incurred there was need to eliminate some of the costs .the operational personnel were to use the ABC system to identify the low –value activities and waste activities and then establish priorities of the costs for the purpose of improvement if there may be need or elimination if the activities that are insignificant to the operations of the organization so as to eliminate the costs of those activities. Question3 What are the objectives of the plant’s activity-based costing system? The plant decided to adopt the ABC system with the following objectives at hand: (i) The system was required to be able to identify the high-cost activities from all activities associated with the manufacturing process. (ii) Highlight those manufacturing activities whose costs can be reduced by either: by reducing the need for that activity and reducing the time to perform an activity therefore increasing throughput. (iii) ABC system was to provide more accurate cost data to Dallas marketing /estimating personnel so that they can be able to quote projects better with more reliable cost numbers. (iv) To create a file of historical data to load into a stimulation for scheduling and manpower forecasting. (v) Use the activity reports as a basis for establishing ongoing cost reduction programmes in engineering purchasing and manufacturing. (vi) Identify the costs of low-value and waste activities and establish priorities for improvement and elimination. (vii) To expand the study to include plant support costs not included in the phase. (viii) Improve the quality of decisions with respect to product design, production process and market strategy Question4 How are cost drivers determined? Cost drivers are the events of activities that cause an organization to incur a cost and the cost that will be at issue is called a cost object. These cost drivers can be determined through the following steps: (i) Identify the cost object For one know the cost driver, he/she must first identify a cost object. It’s essential to have a cost driver for one to carry out a better distribution of the cost of a target cost object among its cost beneficiaries available. Like for instance in a manufacturing industry like the PSI’s East Rivers’ one of cost objects can be material- handling costs incurred in the production of tubes. (ii) Investigate the potential cost drivers In order for any cost driver to be valid it must show the specific cost and the cost related to it. For example in material-handling costs there can be two potential cost drivers namely; number of boxes of materials related to each unit cost and secondly the total weight of materials handled during the processing of the products. (iii) Determine the cost driver correlation. In some situations like material-handling, management might identify two cost drivers that may appear potential. In material handling costs the working units can be measured either by the number of boxes of materials moved or the weight of materials handled by a unit. If one looks at the scenario keenly, in comparison of the two potentials materials weight will be more ideal to be used as a cost driver since it has a higher correlation with the cost object. (iv) Analyze the control effect of the management In selecting the correct cost driver for any cost object, there can be a positive impact on the management control of any organization. For example in the case material-handling costs if the cost driver is the weight of the material boxes there can be an equally and fairly distributed costs to all units that are associated with the material handling costs. (v) Conclude on the cost measurement The management must always consider whether the cost drivers can provided potential cost measurements in a manner that is accurate and easy for use. In relation to the material handling costs where our cost driver was material weight is much more an accurate cost driver it may further be redefined. At times, some materials may require care on handling than others, even if the materials might be of same weight, the costs incurred cannot be the same and trying to specify the types of materials will make cost measurements more complex for the management. Question 5 Nine of the ten different cost driver refers to the number of times an activity or operation is performed. Only one of the ten cost drivers relates to processing or machine time. Discuss the advantages and disadvantages of selecting the quantity of a cost driver to assign costs as opposed to utilizing the time used to perform an activity when assigning costs. Advantages (i)The use of quantity of a cost driver to assign costs promotes accuracy in measurement of product costs, helping the management to make better decisions in relation to product design, marketing strategy and also promoting high- value enhanced projects for the east river’s organization as opposed to utilizing the time of a cost driver to assign costs (ii) It promotes process improvement: The use quantity of a cost driver helps one to identify the activities in production process where improvement may be needed as opposed to utilizing time to assign costs. (iii) Costs estimations: The use of quantity of cost driver to assign costs leads to improved product costs hence better estimates of job costs for pricing decisions, budgeting and also planning. Thus reduced overruns in the projects undertaken by the organization due to better project quotations. (iv)Use of quantity of a cost driver to assign a cost promotes better profitability measurements since it promotes accurate information in relation to have quality strategic decisions for the organization, pricing decision and marketing strategy. (v)The use of quantity cost driver to assign costs helps in the assigning of costs of unused capacity that may have arisen in the organization during its operations so as to satisfy the various customers’ needs unlike the use of time of cost drivers to assign costs. Disadvantages (i)Not all costs can be allocated appropriately to the quantity of cost drivers thus some costs will require to be arrived at by the use of time of cost drivers. (ii) The use of quantity of cost driver to allocate costs is expensive and at the same time its time consuming thus the time of cost drivers used to assign costs should be put into consideration in the assigning of the costs. (iii)The use of quantity of cost drivers to assign costs at times omits some costs that are related to the activities of products and services of that organization .Such cost of activities may include the research and development marketing and advertising. Read More