Cost driver analysis in purchasing

With over 20 years of supply management experience in the private and public sector. As an example to calculate the per unit cost for the purchasing department, the total costs of the purchasing department are divided by the number of purchase orders. Just like a driver drives the car, cost driver drives the cost. In its basic form, cost analysis involves breaking down the components costs of goods and services. Cost driver analysis technique to reduce costs youtube.

A method of costing in which all fixed and variable production costs are charged to products or services using an allocation base. Each department store makes its own purchasing decisions. Question 15 which would be an appropriate cost driver for. Man y previous studies of total cost analysis in both the purchasing and logistics literature have been broad and conceptual4,5,15,16,23, or limited to one or two case studies2,6,8. Exploring supply chain cost drivers apics magazine.

Procurement teams currently have less than half of the desired level of cost visibility across buys, leaving money on the table. Begin with the cost drivers, a buzz word meaning either the greater or more volatile cost elements. There may be more than one activity cost driver that initiates the incurrence of a variable expense. An empirical analysis of manufacturing overhead cost drivers. Documenting drivers also highlights tradeoffs because the same driver can affect different cost elements in different ways. Documenting drivers also highlights tradeoffs because the same driver can.

In other words, its a factor associated with a production process or activity that can cause volatility in the cost of production or activity time. The research develops a new structured guide for variance analysis, insights from a new application field purchasing for a cost and variance driver analysis which is derived by the dmaic method and a new kpi the variance share. A cost driver causes variable expenses to be incurred. Aug 29, 2011 learn about cost driver analysis, a cost reduction technique. You can calculate the annual cost by taking your annual count of purchase orders cost of a po. The purchasing department functions as a filter system for existing internal variance and complexity.

Fashion flair operates a chain of 10 retail department stores. An activity can have more than one cost driver attached to it. Material receiving costs these costs vary based on the number of parts handled. Simply defined, cost analysis is a breakdown and examination of constituent costs. Purchasing department cost drivers, activitybased costing. Meeting speaker sharon hauht is the manager of purchasing and contracts for the regional transportation commission of southern nevada. Machine setup costs these costs vary based on the time required to setup the machines for a particular board.

When a management team has a comprehensive knowledge of activit. One major focus of most manufacturing companies is the deep analysis of. Due to sophisticated manufacturing and increased demands from customers, direct labor is no longer the main cost driver of. The reason to make a cost driver analysis is to create a foundation. Recent literature in manufacturing strategy and management accounting has argued that production and support activities other than direct labor drive manufacturing overhead costs. This is the most common case where operations can find out a way to reduce the consumption of the product. A variable costs activity base is a cost driver, which is a measure of effort that influences what causes the cost to change. Jun 25, 2019 on a smaller scale, individuals also use the total cost of ownership when making purchasing decisions. Your key starting points for cost and price analysis. Barry lee, assistant to the president of designer wear, is interested in better understanding the drivers of purchasing department costs. Price analysis looks purely at the unit price from a vendor, while cost analysis incorporates the reasonable cost to the vendor of producing the item to determine the fairness and appropriateness. Cost driver know the significance of cost drivers in.

For a cost to be variable, it must be variable with something which happens to be its activity base. The result of this thesis was a process chart stating the stages of a purchase, analysis using the theory of six steps of purchasing and presentation of a couple of purchasing models that could. It makes sense to initially differentiate between categories from indirect purchasing and direct purchasing when conducting cost driver analyses. Understanding the key cost drivers in procurement when negotiating, it is important to understandc what exactly drives the costs of an overall product or service. For example, if you are to determine the amount of electricity consumed in a particular period, the number of units consumed determines the total bill for electricity. Route 3 supplier cost drivers example document procurement. Cost drivers in purchasing describe which factors influence the purchase price for parts and services.

Cost and price analysis are two interdependent methods of projecting project and program costs. We will use a basic model for convenience here, but in practice, your breakdown will have a greater or lesser degree of sophistication, depending upon the importance of the purchase. A cost driver triggers a change in the cost of an activity. The analysis can be based on statistical measures of the relationship between each attribute and an overall measure of the. Route 3 develop strategy profiling the commodityservice supply market analysis. Apr 07, 2009 the reason to make a cost driver analysis is to create a foundation. This blind spot is a thorn in the side of many sourcing leaders. Procurement cost savings measure, report and increase cost. The output of a spend analysis is a summary of purchases by various variables, such as category, supplier, andor business unit. Product costs using the activitybased costing approach at sailrite. Company profits were up despite the huge july fourth fire in las vegas, nevada, that shut down the store for four months and required replacements. To carry out abc, it is necessary that cost drivers are. To carry out a value chain analysis, abc is a necessary tool.

Inflation dictates that the current purchasing power of. The cost drivers in purchasing vary greatly depending on the product group as well as the type of product group. The drivers of operationsrelated cost have to do with daytoday management, including plant productivity, number of shifts, efficiency, scrap rates, etc. Oct 30, 2018 an activity cost driver is an action that triggers the incurrence of a cost. Cost driver analysis is the key to utilize the concept of cost driver to its full potential. Cost driver has a great relevance especially in abc costing system. Cost drivers are used to allocate variable and indirect costs to production activities or output. Purchase order cost benchmarks and how to calculate your own. It is used to assign activity costs to cost objects. This new online purchasing class, applied cost and price analysis, results from the demand of american purchasing society members and the purchasing community at large for an education and skills solution to one of the most vexing problems in the purchasing profession, how to manage, apply, and benefit from cost and price analysis. Cost driver analysis is the key to utilize the concept of cost driver to its. The identification and assessment of the factors that are involved in the costing of goods and services. Most supply chain and operations management professionals probably have their own definitions and examples. Using activitybased costing to allocate overhead costs.

A cost model should capture the drivers of cost such as labor productivity or hourly wage rates. Why the fascination of purchasing with cost drivers. Jul, 2019 a cost driver triggers a change in the cost of an activity. Such determining factors were discussed in the presentation performing price and cost analyses, held by ismnevada, inc. An empirical analysis of manufacturing overhead cost drivers 1. In portfolio analysis, the goal when purchasing strategic goods or services is to assure continuous supply at lowest total cost of ownership. A cost driver is the direct cause of a cost, and its effect is on the total cost incurred. Understanding consolidator cost drivers and ways to optimize business in the united states october 2008 5 introduction market overview the us consolidator market is. Download our new insight, proactive cost driver analysis in procurement to understand how to manage costs and minimize risks faster and more effectively. Examination, quantification, and explanation of the monetary effects of cost drivers associated with an activity. These cost categories are called activity cost pools. How to use pareto analysis in procurement to reduce costs. Benefit cost analysis bca benefit cost analysis bca is a decisionmaking tool used to determine the feasibility of a project or investment, or the probability of its success.

Capturing drivers produces models that support what if analysis, not just what is. Sophisticated purchasing organizations continuously engage in cost analysis. Should cost analysis a key tool for sourcing and product. In the apics dictionary, 14th edition, cost driver is synonymous with driver and is defined as, in activitybased costing, an operation that influences the quantity of work required and cost of an activity. Hauht cited how to use price analysis on a hypothetical product purchase. We will define the term, look at examples, and learn the steps a company might take when analyzing a cost driver. Activity cost driver is measure of frequency and intensity of demand placed on activities by cost object. With such a focus on cost reduction, using techniques such as pareto analysis can really assist in achieving this goal.

Focus on cost can only be achieved if the procurement process can identify where the costs exist and having procurement strategies to manage and reduce them. Purchasing materials and equipment, operating the production and assembly and. The key to understanding the cost drivers in terms of a service is to understand the suppliers process. Study 20 terms purchasing chapter 11 mc flashcards. It is used to assign cost of a resource to activity or cost pool. It is difficult to apply appropriate sourcing tools when facts on cost drivers are absent a cost driver analysis does not need to be 100% accurate. In simple terms, cost driver can be defined as the driver of cost. Activity driver analysis is part of activitybased costing, and. Cost drivers are the individual activities associated with production that must. Identify cost drivers cost drivers have been determined for each activity cost pool.

Correct cost driver determination is extremely important for effective management decision making. Definition of purchasing cost definitions of financial. Procurement leaders are working on bringing the level of cost driver analysis we can see in physical products into servicebuying. While the total cost of ownership can be overlooked, its analysis is essential in preventing.

Bca allows the manager to compare the ultimate cost s and benefits of a proposed business activity or investment, prior to committing time and resources. Designer wear operates a chain of 10 retail department stores. An activity cost driver is a component of a business process. Purchasing department cost drivers, activitybased costing, simple regression analysis. In the past century, the root cause of indirect manufacturing costs has changed from a single cost driver such as direct labor hours to several cost drivers. In such a scenario, the units of electricity consumed. A factor that can causes a change in the cost of an activity.

The cost driver definition is a factor that incurs cost. Limited visibility into these cost drivers and the overall production process. Learn vocabulary, terms, and more with flashcards, games, and other study tools. The primary reason for conducting spend analysis is to identify opportunities for cost. Cost analysis provides the raw material for cost drivers. Barry lee, assistant to the president of fashion flair, is interested in better understanding the drivers of purchasing department costs. A per unit cost is calculated by dividing the total dollars in each activity cost pool by the number of units of the activity cost drivers. Solved purchasing department cost drivers, activitybased. Scm421 exam 2 eot questions 712 flashcards quizlet. An activity cost driver is an action that triggers the incurrence of a cost.

An activity cost driver, also called a casual factor, is an element that causes the cost of an activity to increase or decrease. Company profits were up despite the huge july fourth fire in las vegas, nevada, that shut down the store for four months and. Well also look at cost driver examples and choosing cost drivers. Procurement is an important part of your business so you need to undertake regular procurement analysis to ensure that you are making the best use of your hard earned money. Ideally, a cost driver is an activity that is the root cause of why a cost occurs. Understanding what the key cost drivers are and which can be manipulated to reduce cost andor improve quality will aid the negation process. Understanding cost drivers and ways to optimize business. Learn about cost driver analysis, a cost reduction technique.

For example, a production activity may have the following associated costdrivers. The cost breakdown analysis is a popular cost reduction strategy and a viable opportunity for businesses. Purchasing demand management is focused on internal stakeholders and looks into better demand management and cost reduction. In business economics cost breakdown analysis is a method of cost analysis, which itemizes the cost of a certain product or service into its various components, the socalled cost drivers. The research develops a new structured guide for variance analysis, insights from a new application field purchasing for a cost and variancedriver analysis which is derived by the dmaic method and a new kpi the variance share. This article explains the difference between cost and price analysis and gives key. Activity cost drivers are used in activitybased costing, and they give a more accurate determination of the true cost of business. Gep smart procurement software features advanced shouldcost analysis and. A cost analysis focuses on the cost of any given decision, project, or action without considering what the total outcome will be. Each overhead cost, whether variable or fixed, is assigned to a category of costs. Lets explore how these concepts are related because they are at the heart of our profession. For example, a production activity may have the following associated cost drivers.

The concept is most commonly used to assign overhead costs to the number of produced units. Question 15 which would be an appropriate cost driver for the purchasing from accounting 201 at university of san jose recoletos main campus magallanes st. Key driver analysis is used by businesses to understand which brand, product, or service components or attributes have the greatest influence on the customers purchase decision or a physicians prescribing decision. This type of analysis is the first step you would take before doing the other 3 economic evaluations to see if it is feasible or suitable for the company. Jan 23, 2020 an activity cost driver is a component of a business process.