McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 3 Operating Processes: Planning and Control

3-2 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? Determine marketing and distribution channels Receive and accept orders  Sales discounts Deliver goods/services  FOB shipping versus FOB destination Receive payment from customers Provide customer support  Sales returns and allowances

3-4 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? 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? 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? 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? 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? 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? 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? 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? Determine highest and lowest levels of activity Determine the costs (revenues) associated with those levels of activity

3-13 High/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

Lecture Example Data PointsActivity LevelDollars 135,000$50, ,000$50, ,500$50, ,000$50, ,000$50, ,500$50,000 Data PointsActivity LevelDollars 110,000$20, ,000$24, ,000$30, ,000$22, ,500$27, ,500$33,000 Data PointsActivity LevelDollars 15,000$17, ,000$20,000 35,500$18,500 47,500$24,500 58,000$26,000 66,500$21,500 1.What type of cost/revenue is represented by each of the following data sets? Fixed, Variable, or Mixed?

Lecture Example Data PointsActivity LevelDollars 112,700$13,000 28,300$8, ,500$10, ,600$15,800 59,200$9, ,700$12, A company experienced the following activity levels and associated revenues: Use the high/low method to determine the total revenue equation.

Lecture Example cont. The high activity level is 15,600 with an associated revenue of $15,800. The low activity level is 8,300 with an associated revenue of $8,500. ($15,800 - $8,500)=$7,300 =$1 (15,600 – 8,300) 7,300 $8,500 = a + 8,300 * $1 OR $15,800 = a + 15,600 * $1$200 = a The revenue equation is: Total revenue = $200 + $1 * activity