Chapter 5 - Cost: The price of value creation. The main goals of this chapter are to: Describe the relationship between cost and value, understand how costs affect the three profitability measures, describe why costs are important in operations, state the dangers of using average costs, explain why it is important to be able to assign operations costs,. | Chapter 5 Cost: The Price of Value Creation Learning Objectives Describe the relationship between cost and value. Understand how costs affect the three profitability measures. Describe why costs are important in operations. State the dangers of using average costs. Explain why it is important to be able to assign operations costs. Explain the concepts of tracing and allocating costs. Define the components of product cost. Describe how cost reduction relates to productivity improvement. Explain the concepts of standards and variances. Compute usage, price, and total variances. Understand the difference between total cost and cost per unit. Conduct a breakeven analysis. 5- Cost versus Price Cost Tieiness Cost – A scarce resource given up in order to obtain a current or future benefit. Price – Amount of money a seller agrees to accept in return for something, like a product or service. 5- Paying for Value Cost includes all resource outlays over the life of the product or service | Chapter 5 Cost: The Price of Value Creation Learning Objectives Describe the relationship between cost and value. Understand how costs affect the three profitability measures. Describe why costs are important in operations. State the dangers of using average costs. Explain why it is important to be able to assign operations costs. Explain the concepts of tracing and allocating costs. Define the components of product cost. Describe how cost reduction relates to productivity improvement. Explain the concepts of standards and variances. Compute usage, price, and total variances. Understand the difference between total cost and cost per unit. Conduct a breakeven analysis. 5- Cost versus Price Cost Tieiness Cost – A scarce resource given up in order to obtain a current or future benefit. Price – Amount of money a seller agrees to accept in return for something, like a product or service. 5- Paying for Value Cost includes all resource outlays over the life of the product or service The cost is not necessarily monetary Increasing cost detracts from value Cost includes all resource outlays over the life of the product or service. While most value attributes enhance value, cost is almost always viewed as an overriding negative factor. 5- Price vs. Total Cost: Customer Perspective Non-Price dimensions of Cost Shipping/Distribution Repairs and maintenance Related expenditures (insurance, supplies, etc.) 5- Price vs. Total Cost: Customer Perspective Non-financial costs Quality, flexibility, response time Non-financial costs are difficult to include in decision-making They are difficult to quantify In tradeoffs, quantifiable measures often win Firms struggle to incorporate non-monetary costs (and benefits) into decision-making Ignoring them implicitly says they are zero The balanced scorecard (coming later) is an approach to include non-financial issues. 5- Profitability and Cost Net income is in the numerator of Profit Margin, Return on Assets, and Return .
