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

2. 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. 3-3 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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 $

10. 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 $

11. 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 $

12. 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

13. 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

14. 3-14 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)

15. 3-15 Linear 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)