Monday, June 30, 2008
Sunday, June 29, 2008
Assignments July 3, 2008
1) Review the concept of Efficiency and Effectiveness
2) Review the concepts of variable costs and fixed costs
3) Be ready for a learning assessment (examination)
2) Review the concepts of variable costs and fixed costs
3) Be ready for a learning assessment (examination)
Friday, June 27, 2008
Variable costs or direct costs are expenses that change in direct proportion to the activity of a business. Along with fixed costs, variable costs make up one of the two components of total cost.
Explanation
For example, a manufacturing firm pays for raw materials. When activity is decreased, less raw material is used, and so the spending for raw materials falls. When activity is increased, more raw material is used and spending therefore rises. Note that the changes in expenses happen with little or no need for managerial intervention.
There are many expense categories in business that consist of both fixed and variable components, like electricity. A company will pay for line rental and maintenance fees each period regardless of how much power gets used. And some electrical equipment (air conditioning or lighting) may be kept running even in periods of low activity. These expenses can be regarded as fixed. But beyond this, the company will use electricity to run plant and machinery as required. The busier the company, the more the plant will be run, and so the more electricity gets used. This extra spending can therefore be regarded as variable.
In retail the cost of goods is almost entirely a variable cost; this is not true of manufacturing where many fixed costs, such as depreciation, are included in the cost of goods.
Although taxation usually varies with profit, which in turn varies with sales volume, it is not normally considered a variable cost.
-----------
Variable costs are expenses that change in proportion to the activity of a business. In other words, variable cost is the sum of marginal costs. It can also be considered normal costs. Along with fixed costs, variable costs make up the two components of total cost. Direct Costs, however, are costs that can be associated with a particular cost object. Not all variable costs are direct costs, however; for example, variable manufacturing overhead costs are variable costs that are not a direct costs, but indirect costs.Variable costs are sometimes called unit-level costs as they vary with the number of units produced.
For example, a manufacturing firm pays for raw materials. When activity is decreased, less raw material is used, and so the spending for raw materials falls. When activity is increased, more raw material is used and spending therefore rises. Note that the changes in expenses happen with little or no need for managerial intervention.
A company will pay for line rental and maintenance fees each period regardless of how much power gets used. And some electrical equipment (air conditioning or lighting) may be kept running even in periods of low activity. These expenses can be regarded as fixed. But beyond this, the company will use electricity to run plant and machinery as required. The busier the company, the more the plant will be run, and so the more electricity gets used. This extra spending can therefore be regarded as variable.
In retail the cost of goods is almost entirely a variable cost; this is not true of manufacturing where many fixed costs, such as depreciation, are included in the cost of goods.
Although taxation usually varies with profit, which in turn varies with sales volume, it is not normally considered a variable cost.
In most of the concerns, salary is paid on monthly rates. Though there may exist a labour work norm based on which the direct cost (labour) can be absorbed in to cost of the product, salary cannot be termed as variable in this case.
-------------
In cost accounting, a part of management accounting, fixed costs are expenses that do not change in proportion to the activity of a business, within the relevant period or scale of production. For example, a retailer must pay rent and utility bills irrespective of sales. Unit fixed costs, called average fixed costs (AFC), decline with volume, following a rectangular hyperbola as the inverse of the volume of production: AFC = FC/N.
Variable costs by contrast change in relation to the activity of a business such as sales or production volume. In the example of the retailer, variable costs may primarily be composed of inventory (goods purchased for sale), and the cost of goods is therefore almost entirely variable. In manufacturing, direct material costs are an example of a variable cost. An example of variable costs are the prices of the supplies needed to produce a product.
Along with variable costs, fixed costs make up one of the two components of total cost. In the most simple production function, total cost is equal to fixed costs plus variable costs.
In microeconomics and business, the difference between fixed costs and variable costs (and the related terms average cost and marginal cost) is crucial, as each will influence production decisions for profit maximization differently. In the most simple cases, fixed costs do not affect production decisions, because they cannot be changed, and management will choose to produce if sales prices are above the cost of each additional unit (marginal cost).
Fixed costs should not be confused with sunk costs. From a pure economics perspective, fixed costs may not be fixed in the sense of invariate; they may change, but are fixed in relation to the quantity of production for the relevant period. For example, a company may have unexpected and unpredictable expenses unrelated to production, and these would not be considered part of variable costs.
It is important to understand that fixed costs are "fixed" only within a certain range of activity or over a certain period of time. If enough time passes, all costs become variable. Similarly, not all indirect costs are fixed costs; for example, advertising expenses or labour costs are indirect costs that are variable over a slightly longer time frame, as they may not be subject to change in the short term, but may be easily adjustable over a longer time frame. For example, a firm may not be able to vary the number of employees (and hence labour costs) in the short term due to contract obligations, but be able to lay employees off or otherwise change these costs.
In accounting terminology, fixed costs will broadly include all costs (expenses) which are not included in cost of goods sold, and variable costs are those captured in costs of goods sold. The implicit assumption required to make the equivalence between the accounting and economics terminology is that the accounting period is equal to the period in which fixed costs do not vary in relation to production. In practice, this equivalence does not always hold, and depending on the period under consideration by management, some overhead expenses (such as sales, general and administrative expenses) can be adjusted by management, and the specific allocation of each expense to each category will be decided under cost accounting.
In business planning and management accounting, usage of the terms fixed costs, variable costs and others will often differ from usage in economics, and may depend on the intended use. For example, costs may be segregated into per unit costs (costs of goods sold), fixed costs per period, and variable costs as a proportion of revenue. Capital expenditures will usually be allocated separately, and depending on the purpose, a portion may be regularly allocated to expenses as depreciation and amortization and seen as a fixed cost per period, or the entire amount may be considered upfront fixed costs.
Semi variable cost is an expense which contains both a fixed cost component and a variable cost component. The fixed cost element shall be a part of the cost that needs to be paid irrespective of the level of activity achieved by the entity. On the other hand the variable component of the cost is payable proportionate to the level of activity.
It shows similarities to telephone bills. One must pay line rental and on top of that a price that depends on how heavy one is using the service. So it changes with output. Another example is satellite television. A price for the box must be paid monthly and to get additional movies, more money has to be given.
Cost of energy, such as electricity, is a good example as it is integral to production of goods and services. This component straddles both the fixed and variable universe because electrical power is essential for the basic operation of the business in lighting and heating - this portion is a sunk cost that is foregone regardless of production. As demand ramps up, more energy is required to ramp up the production process in the use of machinery or large banks of computers for instance. Cost of electrical energy will then rise accordingly as production activities increase. Therefore, the cost electricity can be viewed as semi variable.
Another example is salaried employees who are also compensated by commissions. This group is paid on a fixed salary plus they are also rewarded based on the volume of sales they can generate, or, other forms of quantitative measures based on revenues to the firm.
--------------
In economics, and cost accounting, total cost (or total costs) describes the total economic cost of production and is made up of variable costs, which vary according to quantity produced such as raw materials, plus fixed costs, which are independent of quantity produced such as expenses for assets like buildings.
The rate at which total cost changes as the amount produced changes is called marginal cost; this is the marginal unit variable cost. If one assumes that the unit variable cost is constant, as in cost-volume-profit analysis, then total cost is linear in volume, and given by TC = FC + unit VC * N.
Explanation
For example, a manufacturing firm pays for raw materials. When activity is decreased, less raw material is used, and so the spending for raw materials falls. When activity is increased, more raw material is used and spending therefore rises. Note that the changes in expenses happen with little or no need for managerial intervention.
There are many expense categories in business that consist of both fixed and variable components, like electricity. A company will pay for line rental and maintenance fees each period regardless of how much power gets used. And some electrical equipment (air conditioning or lighting) may be kept running even in periods of low activity. These expenses can be regarded as fixed. But beyond this, the company will use electricity to run plant and machinery as required. The busier the company, the more the plant will be run, and so the more electricity gets used. This extra spending can therefore be regarded as variable.
In retail the cost of goods is almost entirely a variable cost; this is not true of manufacturing where many fixed costs, such as depreciation, are included in the cost of goods.
Although taxation usually varies with profit, which in turn varies with sales volume, it is not normally considered a variable cost.
-----------
Variable costs are expenses that change in proportion to the activity of a business. In other words, variable cost is the sum of marginal costs. It can also be considered normal costs. Along with fixed costs, variable costs make up the two components of total cost. Direct Costs, however, are costs that can be associated with a particular cost object. Not all variable costs are direct costs, however; for example, variable manufacturing overhead costs are variable costs that are not a direct costs, but indirect costs.Variable costs are sometimes called unit-level costs as they vary with the number of units produced.
For example, a manufacturing firm pays for raw materials. When activity is decreased, less raw material is used, and so the spending for raw materials falls. When activity is increased, more raw material is used and spending therefore rises. Note that the changes in expenses happen with little or no need for managerial intervention.
A company will pay for line rental and maintenance fees each period regardless of how much power gets used. And some electrical equipment (air conditioning or lighting) may be kept running even in periods of low activity. These expenses can be regarded as fixed. But beyond this, the company will use electricity to run plant and machinery as required. The busier the company, the more the plant will be run, and so the more electricity gets used. This extra spending can therefore be regarded as variable.
In retail the cost of goods is almost entirely a variable cost; this is not true of manufacturing where many fixed costs, such as depreciation, are included in the cost of goods.
Although taxation usually varies with profit, which in turn varies with sales volume, it is not normally considered a variable cost.
In most of the concerns, salary is paid on monthly rates. Though there may exist a labour work norm based on which the direct cost (labour) can be absorbed in to cost of the product, salary cannot be termed as variable in this case.
-------------
In cost accounting, a part of management accounting, fixed costs are expenses that do not change in proportion to the activity of a business, within the relevant period or scale of production. For example, a retailer must pay rent and utility bills irrespective of sales. Unit fixed costs, called average fixed costs (AFC), decline with volume, following a rectangular hyperbola as the inverse of the volume of production: AFC = FC/N.
Variable costs by contrast change in relation to the activity of a business such as sales or production volume. In the example of the retailer, variable costs may primarily be composed of inventory (goods purchased for sale), and the cost of goods is therefore almost entirely variable. In manufacturing, direct material costs are an example of a variable cost. An example of variable costs are the prices of the supplies needed to produce a product.
Along with variable costs, fixed costs make up one of the two components of total cost. In the most simple production function, total cost is equal to fixed costs plus variable costs.
In microeconomics and business, the difference between fixed costs and variable costs (and the related terms average cost and marginal cost) is crucial, as each will influence production decisions for profit maximization differently. In the most simple cases, fixed costs do not affect production decisions, because they cannot be changed, and management will choose to produce if sales prices are above the cost of each additional unit (marginal cost).
Fixed costs should not be confused with sunk costs. From a pure economics perspective, fixed costs may not be fixed in the sense of invariate; they may change, but are fixed in relation to the quantity of production for the relevant period. For example, a company may have unexpected and unpredictable expenses unrelated to production, and these would not be considered part of variable costs.
It is important to understand that fixed costs are "fixed" only within a certain range of activity or over a certain period of time. If enough time passes, all costs become variable. Similarly, not all indirect costs are fixed costs; for example, advertising expenses or labour costs are indirect costs that are variable over a slightly longer time frame, as they may not be subject to change in the short term, but may be easily adjustable over a longer time frame. For example, a firm may not be able to vary the number of employees (and hence labour costs) in the short term due to contract obligations, but be able to lay employees off or otherwise change these costs.
In accounting terminology, fixed costs will broadly include all costs (expenses) which are not included in cost of goods sold, and variable costs are those captured in costs of goods sold. The implicit assumption required to make the equivalence between the accounting and economics terminology is that the accounting period is equal to the period in which fixed costs do not vary in relation to production. In practice, this equivalence does not always hold, and depending on the period under consideration by management, some overhead expenses (such as sales, general and administrative expenses) can be adjusted by management, and the specific allocation of each expense to each category will be decided under cost accounting.
In business planning and management accounting, usage of the terms fixed costs, variable costs and others will often differ from usage in economics, and may depend on the intended use. For example, costs may be segregated into per unit costs (costs of goods sold), fixed costs per period, and variable costs as a proportion of revenue. Capital expenditures will usually be allocated separately, and depending on the purpose, a portion may be regularly allocated to expenses as depreciation and amortization and seen as a fixed cost per period, or the entire amount may be considered upfront fixed costs.
Semi variable cost is an expense which contains both a fixed cost component and a variable cost component. The fixed cost element shall be a part of the cost that needs to be paid irrespective of the level of activity achieved by the entity. On the other hand the variable component of the cost is payable proportionate to the level of activity.
It shows similarities to telephone bills. One must pay line rental and on top of that a price that depends on how heavy one is using the service. So it changes with output. Another example is satellite television. A price for the box must be paid monthly and to get additional movies, more money has to be given.
Cost of energy, such as electricity, is a good example as it is integral to production of goods and services. This component straddles both the fixed and variable universe because electrical power is essential for the basic operation of the business in lighting and heating - this portion is a sunk cost that is foregone regardless of production. As demand ramps up, more energy is required to ramp up the production process in the use of machinery or large banks of computers for instance. Cost of electrical energy will then rise accordingly as production activities increase. Therefore, the cost electricity can be viewed as semi variable.
Another example is salaried employees who are also compensated by commissions. This group is paid on a fixed salary plus they are also rewarded based on the volume of sales they can generate, or, other forms of quantitative measures based on revenues to the firm.
--------------
In economics, and cost accounting, total cost (or total costs) describes the total economic cost of production and is made up of variable costs, which vary according to quantity produced such as raw materials, plus fixed costs, which are independent of quantity produced such as expenses for assets like buildings.
The rate at which total cost changes as the amount produced changes is called marginal cost; this is the marginal unit variable cost. If one assumes that the unit variable cost is constant, as in cost-volume-profit analysis, then total cost is linear in volume, and given by TC = FC + unit VC * N.
Flowcharting
What is a flowchart? --
A flowchart is an organized combination of shapes, lines, and text that graphically illustrates a process or structure.
For example, you might need to tell a co-worker how to complete a simple task. To you, it may seem simple, but to your co-worker, it may not. If you describe the task in words, it might sound both complicated and confusing: "If you don't need to do step 4, skip to step 7. When you finish step 7, you can go back to step 2..."
Pretty simple, isn't it?
Putting these same instructions in a flowchart takes the confusion out and makes the complicated look simple. Using flowcharts to describe this very same flow of tasks can dramatically reduce the learning curve.
Here's an example of how you could use shapes, lines, and text to build a chart:
The shapes (such as rectangles, circles, or diamonds) represent each step or decision point in the process.
The lines show the continuity of the process, demonstrating the paths the user should follow.
The text briefly describes each part of the process. Follow along on this simple flowchart:
Basic flowchart Symbols
We get a lot of calls requesting definitions for flowcharting symbols. In the past, we have hesitated to define them because flowcharting symbols are dynamic and their meanings continue to grow and change depending on who uses them. Although standards have been established (i.e. ISO, ANSI), people deviate form these standards to suit their own needs. In many cases, individual companies develop standards for their internal use.
Remember, the key to flowcharting is consistency! If you choose to use a symbol in a non-standard fashion, make sure you do it consistently so the reader of the chart knows your meaning for that symbol every time they see it.
In the end, there is no "one" definition for flowcharting symbols. We can, however, provide you with some guidelines for commonly used symbols. The following represents the most commonly used symbols are their generally accepted meanings:
The Process Symbol represents any process, function, or action and is the most frequently used symbol in flowcharting.
The Document Symbol is used to represent any type of hard copy input or output (i.e. reports).
Offpage Connector Symbols are used to indicate the flowchart continues on another page. Often, the page number is placed in the shape for easy reference.
The Input/Output Symbol represents data that is available for input or resulting from processing (i.e. customer database records).
Comment Symbols are used when additional explanation or comment is required. This symbol is usually connected to the symbol it is explaining by a dashed line.
The Decision Symbol is a junction where a decision must be made. A single entry may have any number of alternative solutions, but only one can be chosen.
The Connector Symbol represents the exit to, or entry from, another part of the same flowchart. It is usually used to break a flow line that will be continued elsewhere. It's a good idea to reference page numbers for easy location of connectors.
A flowchart is an organized combination of shapes, lines, and text that graphically illustrates a process or structure.
For example, you might need to tell a co-worker how to complete a simple task. To you, it may seem simple, but to your co-worker, it may not. If you describe the task in words, it might sound both complicated and confusing: "If you don't need to do step 4, skip to step 7. When you finish step 7, you can go back to step 2..."
Pretty simple, isn't it?
Putting these same instructions in a flowchart takes the confusion out and makes the complicated look simple. Using flowcharts to describe this very same flow of tasks can dramatically reduce the learning curve.
Here's an example of how you could use shapes, lines, and text to build a chart:
The shapes (such as rectangles, circles, or diamonds) represent each step or decision point in the process.
The lines show the continuity of the process, demonstrating the paths the user should follow.
The text briefly describes each part of the process. Follow along on this simple flowchart:
Basic flowchart Symbols
We get a lot of calls requesting definitions for flowcharting symbols. In the past, we have hesitated to define them because flowcharting symbols are dynamic and their meanings continue to grow and change depending on who uses them. Although standards have been established (i.e. ISO, ANSI), people deviate form these standards to suit their own needs. In many cases, individual companies develop standards for their internal use.
Remember, the key to flowcharting is consistency! If you choose to use a symbol in a non-standard fashion, make sure you do it consistently so the reader of the chart knows your meaning for that symbol every time they see it.
In the end, there is no "one" definition for flowcharting symbols. We can, however, provide you with some guidelines for commonly used symbols. The following represents the most commonly used symbols are their generally accepted meanings:
The Process Symbol represents any process, function, or action and is the most frequently used symbol in flowcharting.
The Document Symbol is used to represent any type of hard copy input or output (i.e. reports).
Offpage Connector Symbols are used to indicate the flowchart continues on another page. Often, the page number is placed in the shape for easy reference.
The Input/Output Symbol represents data that is available for input or resulting from processing (i.e. customer database records).
Comment Symbols are used when additional explanation or comment is required. This symbol is usually connected to the symbol it is explaining by a dashed line.
The Decision Symbol is a junction where a decision must be made. A single entry may have any number of alternative solutions, but only one can be chosen.
The Connector Symbol represents the exit to, or entry from, another part of the same flowchart. It is usually used to break a flow line that will be continued elsewhere. It's a good idea to reference page numbers for easy location of connectors.
Sunday, June 22, 2008
June 28 Assignment
1)Review the past lessons taken during the Firts and Second Sessions
2)Be ready for a quiz
3)Read and Study Production Flow Charting - What are its uses. How are they done. Manualization of Production Processes
4)Understanding the concepts in PRODUCTION COSTS
Direct Production Costs, Variable Costs, Fixed Production Overhead Costs, Computation Formulas
Happy Learning
PS
Send to me you email addresses as well as your CP number if you have at:
rmi@up-alumni.com
2)Be ready for a quiz
3)Read and Study Production Flow Charting - What are its uses. How are they done. Manualization of Production Processes
4)Understanding the concepts in PRODUCTION COSTS
Direct Production Costs, Variable Costs, Fixed Production Overhead Costs, Computation Formulas
Happy Learning
PS
Send to me you email addresses as well as your CP number if you have at:
rmi@up-alumni.com
Production Management Notes - Session 1 and 2
Production is one of the functions of business. It is responsible for the development and credation of products and services that will be sold to the market. Production function is as equally important with the business functions of marketing, administration and finance.
Production is the processes of converting raw materials into semi-finished and finished products.
Production Management - the management of those resources and activities of a business that are required to produce goods for sale to consumers or to other organizations. Production management is concerned with the manufacturing industry. The growing interest in the production management task in service industries has led to the use of operations management as a more general term.
The level of production activities is dependent on what products or services that are being produced, how they are produced and when they are needed by the marketing function.
Two Guiding Principles in Production
1) Efficiency
2) Effectiveness
INPUT COSTs/OUTPUT
Efficiency involves the measurement of the cost of inputs relative to outputs.
Example - If an enterprise A spends P1,000.00 to produce 100 pairs of slippers, then the cost to produce one pair is P10.00. If enterprise B spends PP750.00 to produce 100 pairs of slippers, then the cost per unit is P7.50. Under this scenario, enterprise be is more cost efficient. The lower the cost to produce one unit of production volume, the higher its cost efficiency. It is the inverse of cost of inputs/volume of outputs.
This gives the cost per unit of production, and so one measure of efficiency. Another measure would be to look at how much each particular factor of production (labour / capital / land) manages to produce. In this way we can measure productivity. For example to calculate labour productivity: In a garment factory, the following are:
Sewer A = Can finish "edging sewing" 20 pieces per day
Sewer B = can finish "edging sewing" 25 pieces per day
Obviously Sewer B has higher productivity and is more cost efficient, because he/she produces 25 pieces, 5 pieces more than Sewer A.
But supposing Sewer A is paid P200.00 per day and Sewer B is paid P300.00 per day. How will labor efficency and productivity be affected ? In this scenario, the labor efficiency of Sewer A is P200.00/20 while Sewer B has P P300.00/25 resulting in Sewer A's P10.00 cost to produce one unit while Sewer B has a per unit prodution cost of P12.00. Under this circumstances, Sewer A is more labor efficient and productive.
Effectiveness - is when you achieve the purpose or objective of the task or activities. Examples. Company A has the objective of producing 10,000 units of baseball caps for its customers who will attend the independence day parade and is able to do so but the cost to produce the 10,000 caps is P500,000. Company B is only able to produce 6,000 caps but incurring a cost of P180,000.00. Under this scenarios Company A has a per unit production cost of P50.00 per baseball cap while company B has a production cost of P30.00. per unit. Which company is more effective? The answer is Company A. Although it produced baseball caps at a higher costs, it was able to achieve its purpose of producing the 10,000 baseball caps. So, effectiveness is not about costs but rather the achievement of the production goal.
In production managemet, these two concepts should always serve as a guide. What is more important? Cost Efficiency or Effectiveness. There is no right or wrong answers depending on the expected outcomes of what management wants to achieve. It is prudent though that minimization of costs and the maximization of effectiveness should be the proper options.
Effective production management involves understanding of the characteristics of various types of production systems, identification of the dynamics of the different phases of the management process, realizing the potential of different analytical tools, learning the nuances of the implementation of these tools, visualizing the impact of various uncertain situations and developing the ability to react under various scenarios to achieve consistently excellent business results. There are evidences to show how a number of organizations achieved world class status by effective management of their production systems. These organizations achieved superior quality, higher productivity, perfect delivery performance, overall customer satisfaction and enterprise excellence all with lower cost.
Types of Production Systems
Job production (Craft) - this is a method of production where companies use all their factors of production to complete one job at a time. This will usually happen where products are all unique or they are being produced on a very small scale. Examples. Artists painting, basket weaving, sculptor pieces, jewelry making
Batch production - this is a method of production where one operation is completed on a number of units of the product, before they are then passed on to the next stage of the process. Examples: Food Processing like tocino,ham, balut making, softdrinks,
Flow production (assembly line) - this is where production takes place as a continuous process. The product flows from one process onto the next. This will usually happen where the product is standardised, and can be made using a production line automotive assembly, computer assembly
Combination of Batch and Assembly line - this is the type of production system that uses both batch and assemblyline systems. Examples. Fashion garments,
Production is the processes of converting raw materials into semi-finished and finished products.
Production Management - the management of those resources and activities of a business that are required to produce goods for sale to consumers or to other organizations. Production management is concerned with the manufacturing industry. The growing interest in the production management task in service industries has led to the use of operations management as a more general term.
The level of production activities is dependent on what products or services that are being produced, how they are produced and when they are needed by the marketing function.
Two Guiding Principles in Production
1) Efficiency
2) Effectiveness
INPUT COSTs/OUTPUT
Efficiency involves the measurement of the cost of inputs relative to outputs.
Example - If an enterprise A spends P1,000.00 to produce 100 pairs of slippers, then the cost to produce one pair is P10.00. If enterprise B spends PP750.00 to produce 100 pairs of slippers, then the cost per unit is P7.50. Under this scenario, enterprise be is more cost efficient. The lower the cost to produce one unit of production volume, the higher its cost efficiency. It is the inverse of cost of inputs/volume of outputs.
This gives the cost per unit of production, and so one measure of efficiency. Another measure would be to look at how much each particular factor of production (labour / capital / land) manages to produce. In this way we can measure productivity. For example to calculate labour productivity: In a garment factory, the following are:
Sewer A = Can finish "edging sewing" 20 pieces per day
Sewer B = can finish "edging sewing" 25 pieces per day
Obviously Sewer B has higher productivity and is more cost efficient, because he/she produces 25 pieces, 5 pieces more than Sewer A.
But supposing Sewer A is paid P200.00 per day and Sewer B is paid P300.00 per day. How will labor efficency and productivity be affected ? In this scenario, the labor efficiency of Sewer A is P200.00/20 while Sewer B has P P300.00/25 resulting in Sewer A's P10.00 cost to produce one unit while Sewer B has a per unit prodution cost of P12.00. Under this circumstances, Sewer A is more labor efficient and productive.
Effectiveness - is when you achieve the purpose or objective of the task or activities. Examples. Company A has the objective of producing 10,000 units of baseball caps for its customers who will attend the independence day parade and is able to do so but the cost to produce the 10,000 caps is P500,000. Company B is only able to produce 6,000 caps but incurring a cost of P180,000.00. Under this scenarios Company A has a per unit production cost of P50.00 per baseball cap while company B has a production cost of P30.00. per unit. Which company is more effective? The answer is Company A. Although it produced baseball caps at a higher costs, it was able to achieve its purpose of producing the 10,000 baseball caps. So, effectiveness is not about costs but rather the achievement of the production goal.
In production managemet, these two concepts should always serve as a guide. What is more important? Cost Efficiency or Effectiveness. There is no right or wrong answers depending on the expected outcomes of what management wants to achieve. It is prudent though that minimization of costs and the maximization of effectiveness should be the proper options.
Effective production management involves understanding of the characteristics of various types of production systems, identification of the dynamics of the different phases of the management process, realizing the potential of different analytical tools, learning the nuances of the implementation of these tools, visualizing the impact of various uncertain situations and developing the ability to react under various scenarios to achieve consistently excellent business results. There are evidences to show how a number of organizations achieved world class status by effective management of their production systems. These organizations achieved superior quality, higher productivity, perfect delivery performance, overall customer satisfaction and enterprise excellence all with lower cost.
Types of Production Systems
Job production (Craft) - this is a method of production where companies use all their factors of production to complete one job at a time. This will usually happen where products are all unique or they are being produced on a very small scale. Examples. Artists painting, basket weaving, sculptor pieces, jewelry making
Batch production - this is a method of production where one operation is completed on a number of units of the product, before they are then passed on to the next stage of the process. Examples: Food Processing like tocino,ham, balut making, softdrinks,
Flow production (assembly line) - this is where production takes place as a continuous process. The product flows from one process onto the next. This will usually happen where the product is standardised, and can be made using a production line automotive assembly, computer assembly
Combination of Batch and Assembly line - this is the type of production system that uses both batch and assemblyline systems. Examples. Fashion garments,
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