The Defining Business Needs (L4M2)

Explanation

The difference between the standard cost of direct materials specified for production and the actual cost of direct materials used in production is known as Direct Material Cost Variance. Material Cost Variance gives an idea of how much more or less cost has been incurred when compared with the standard cost. Thus, Variance Analysis is an important tool to keep a tab on the deviations from the standard set by a company.

Material Cost Variance can be due to less purchase price being paid than the standard or because of change in the quantity of material used. Thus, Material Cost Variance is made up of two components namely; Material Price Variance and Material Usage Variance.

Among the 4 options:

- ' The buyer updates purchase-to-pay system to track payment and delivery ' : The use of e-procurement system can increase the productivity and create labour cost variance, not material cost variance.

- ' An unprocessed goods received note is missing ' : If a goods received note is missing, the buyer won ' t pay for that batch, which create quantity variance.

- ' The employees must work overtime to catch up with the customers ' orders ' : Overtime salary can cause labour variance, not material cost variance.

- ' The purchase is made in emergency ' : Normally, the price in emergency situation is higher than usual. This can cause price variance.

Explanation

There are 4 steps to risk managing process:

Step 1: Identify hazards

Step 2: Assess the risk

Once a risk has been identified, a risk assessment should be conducted.

You should carry out a risk assessment for any manual tasks identified as being hazardous, unless the risk is well known and you know how to control it. A risk assessment can help you determine, which postures, movements and forces of the task pose a risk, where during the task they pose a risk, why they are occurring and what needs to be fixed.

Step 3: Control the risk

The ways of controlling risks are ranked from the highest level of protection and reliability to the lowest, which is known as the hierarchy of control. You must always aim to eliminate the hazard, which is the most effective control.

Step 4: Review risk control

Control measures that have been implemented must be reviewed, and, if necessary, revised to make sure they work as planned and to maintain a work environment that is without risks to health and safety.

Source: WorkCover Queensland

Explanation

Life cycle costing is a key asset management tool that takes into account the whole of life implications of planning, acquiring, operating, maintaining and disposing of an asset.

The process is an evaluation method that considers all ownership and management costs. These include;

- Concept and definition;

- Design and development;

- Manufacturing and installation;

- Maintenance;

- Support services; and

- Retirement, remediation and disposal costs.

End of life costs often comprise of decommissioning, removing and disposal costs. In the copier scenario, the end of life costs equal to removal cost, which is $150.

Explanation

Break even point = Fixed costs/(Price-variable cost). In this case, break even point = 20,000/(100-60) = 500

Explanation

" Standards are often produced by professional bodies (maybe national or international bodies). Standards tend to be stable for a period of time, therefore, they are likely to be static and discourage innovation. "

Explanation

The scenario is very long with many distracting data. Students need to read carefully and use their experience to solve this problem.

The company is developing a new component which requires different type of material. But this component will not be available for mass production in 1.5 years. This means the company still needs to produce the current components with current materials until the development is finished. They must continue purchase the materials from current supplier through call-off orders. This situation is an example of straight re-buy.

When developing a business case, procurement professionals must consider the costs associated with changing suppliers, known as switching costs.

The CIPS L4M2 Study Guide, Chapter 4 (Developing the business case), explains:

“Switching costs arise when an organisation changes from one supplier, product or service to another. These costs may include retraining staff, modifying systems or processes, and integration costs.”

Assessment of each item:

Inflation cost relates to general economic price increases and is not caused by switching suppliers.

Historical cost refers to past expenditure and does not affect the decision to switch.

Retraining cost is incurred when staff must learn new systems, processes or products due to a change in supplier.

Modification cost arises when equipment, processes or systems need to be altered to accommodate a new supplier or product.

The correct combination of switching costs is 3 and 4, making Option C correct.

CIPS Reference:

CIPS L4M2 Defining Business Needs

Chapter 4: Developing the business case and evaluating sourcing options