Chapter 2 – Target Costing

Cost reduction – process which leads to the achievement of real and permanent reductions in the unit costs of
goods manufactured or services rendered without impairing their suitability for the use intended.

Cost control – aims simply to achieve the target costs originally accepted.

Conditions for cost reduction programme

 Clear purpose – eg. Reduce labour by 20% or material costs by 15%

 A good reason – economic survival or compete with competitors
 Commitment and involvement by senior managers
 Excellent and positive communication with workforce
 Gradual introduction

Market price – profit = target cost

If target costs cannot be met, the product may be abandoned.

Steps:

1. Market based target price is set, based on customer perceived value of product
2. Target profit per unit is calculated – based on return on sales or return on investment
3. Target cost per unit is calculated target price – target profit
4. Cost gap is calculated estimated product cost per unit – target cost
5. If there is a cost gap, attempts made to close it

Closing the gap

“Difference between what an organisation thinks it can currently make a product for, and what it needs to
make it for, in order to make a required profit.”

 Can materials be eliminated or cheaper alternatives?

 Can labour savings be make without compromising quality?
 Can productivity be improved?
 Can production volume be increased?
 Can part-assembled components be bought to save assembly time?
 Can cost drivers be reduced?

Value engineering – philosophy of designing products which meet customer needs at lowest cost while
assuring standards of quality and reliability. Idea is to see what customers want and eliminate items that do not
add value to product in customers eyes.

Value analysis – Similar to engineering, but for products that already exist. Taking away features that add no
value, in which there are cost advantages eg. Economies of scale, experience of workers, product design
innovative, ‘no frills’ product offerings

Value enhancing – Opposite of cost reduction, getting best value from resources that are used in organisation.
Value added = revenue – cost of bought in materials. Provides comparative measures to assess value
enhancement before and after an active ‘value for money’ programme.

Benchmarking – establishment of targets and comparators, through relative levels of performance can be
identified.

Life cycle costing

Tracks and accumulates costs and revenue attributable to each product over its entire life cycle.
Lifecycle cost of Product A = Total costs of Product A over entire life/Total number of units of A

Total profitability of any given product can be determined.

Advantages:

 Forecast profitability of product over entire life before production begins

 Accumulated costs at any stage and be compared with life cycle budgeted costs – purposes of
planning and control
 Recognition of commitment over life cycle leads to more effective resource allocation

Implications:

 Design costs – 90% products costs are incurred at design and development stage, decision is made to
commit the organisation to these costs.
 Minimise time to market – vital to get product to market as quick as possible as competitors will
launch rival products
 Maximise length of life cycle – Longer the life cycle, larger the profit
 Pricing – pricing decisions can be based on total lifecycle costs
 Decision making – timetable of lifecycle costs helps show what costs need to be allocated. If costs cant
be recovered, would not be wise to produce the product or service
 Performance management – lifecycle costing reinforces importance of control over locked-in costs and
implicated improved reporting.

Development stage – likely to be a large amount of cost incurred on research and development but no revenue
generated

Launch stage – sales volume at low level whilst product establishes itself in market. Advertising costs high as
will production costs building inventory

Growth stage – likely to show a large increase in revenue, although unlikely to continue indefinitely. Production
costs increase to match demand.

Maturity stage – demand starts to slow or become more constant. Advertising costs low and economies of
scale have been achieved. Profits probably maximised in this stage. Modification may be required to prevent
product from going into final stage.

Decline stage – products eventually reach end of life and revenues begin to decline. Product may have become
outdated or unfashionable. Costs will fall as production stops and remaining inventory is sold. Profits reduce
considerably and possibly to a loss.
Chapter 4 – Linear Programming
Technique for decision making in context of two or more scarce resources.

Optimum solutions – maximise contribution or minimise costs

Graphical approach – Steps:

1. Define the variables – For an organisation that produces 2 products, each will be represented on the
graph. 1 unit of Product A would be X, 1 unit of Product B would be Y.
2. Define and formulate the objective – objective will be financial and would be to either maximise
contribution or minimise costs. Cost or contribution would be denoted as C in the objective function.
3. Formulate the constraints – Constraints will represent the limitations the organisation face. Eg.
Labour time, material requirements, machine time, financial resources, plant capacity or factory
space. A linear equation is written to express each limitation. Lowest amount of anything that can be
made is 0 so there is always a constraint of x, y >= 0.
Example: A company makes 2 musical instruments across 3 departments, below shows time per unit
in each department, available hours in each department and contribution per unit. There is a limit on
number of Yuèqín's that was be demanded with the maximum of 600.

Xylophone Yuèqín's Available hours

Dept A 8 10 11,000
Dept B 4 10 9,000
Dept C 12 6 12,000
Contribution £4 £8
Step 1 : The variables is how many units of the two different instruments the company will make.
Xylophone is X, Yueqin is Y.
Step 2: As given no cost data, the aim must be to maximise the contribution.
Contribution = C
Each unit of X gives £4 of contribution, and each unit of Y gives £8 of contribution.
Maximise C = 4x + 8y
Step 3: Three things limiting us in the question, amount of labour time in each department
Dept A: 8x + 10y <= 11,000
Dept B: 4x + 10y <= 9,000
Dept C: 12x + 6y <= 12,000
Demand: y <= 600
Non negativity: x, y >= 0
4. Draw a graph to identify the feasible region – Draw the lines of constraint on the graph and look at
the feasible region where all constraints are met.
To draw line 8x + 10y = 11,000
Substitute x for 0, 10y = 11,000 – y = 1,100 on the graph
Substitute y for 0, 8x = 11,000 – x = 1,375 on the graph
5. Solve for the optimal production plan – Two approaches – Using iso-contribution line –
drawing an iso-contribution line shows all the combinations of and y that provide the same
total value for the objective function. Using simultaneous equations – maximum
contribution will lie on one of the corners of the feasible region. Then calculate the
contribution at each vertex.
Iso-contribution line – To draw an iso-contribution line, we take the objective formula of C =
4x + 8y and substitute a figure as C. For example, if C = 4000, x = 1000 and y = 500. Then do
the same with C as another figure, eg. 8000, x = 2000 and y = 1000. Look at which way these
parallel lines are moving. ‘Move’ the Iso contribution line across and the optimal point will
be at the final vertex which the iso-contribution like passes before it leaves the feasible
 region. The coordinates of x and y at the vertex provide the solution to the linear
programming problem.
Simultaneous equations – For the example from earlier, the optimal vertex crosses the
constraints of Dept A line and Dept C line.
(1) Dept A: 8x + 10y = 11,000
(2) Dept C: 12x + 6y = 12,000

(1) X 6 48x + 60y = 66,000

(2) X 10 120x + 60y = 120,000
72x = 54,000
X = 750

(750*8) + 10y = 11,000

6000 + 10y = 11,000
10y = 5,000
y = 500

Substitute these figures into the objective function of C = 4x + 8y

C = (4*750) + (8*500)

C = £7000 – the maximum contribution

Minimising costs – If we had a question to find the optimal solution minimising costs, we would look
for a vertex in the feasible region as close to the origin as possible.
Chapter 6 – Calculating forecasts
Time Series – Set of values for some variables which varies with time. The set of observations will be taken at
specific times, usually at regular intervals. Eg. Monthly rainfall in London, daily closing price of a share on Stock
Exchange or monthly revenues of an online retailer.

Time Series Analysis takes historic data and breaks it down into component parts that are easier to extrapolate.
In particular, it isolates the underlying trend.

Plotting the graph of a time series

Pattern of time series can be identified by plotting

points of the values on a graph. Time is always on x
axis.

Characteristics – Basic trend (long-term), Cyclical

variations (medium-term), Seasonal variations
(short-term) and Random variations (short-term).

Basic Trend – Refers to general direction in which the graph of a time series goes over a long interval
of time once short-term variations have been smoothed out. Represented by basic trend line.

Cyclical Variations – Refer to long term swings around the basic trend. May or may not be periodic;
don’t have to follow exact similar patterns after equal intervals of time. They are cyclical if they recur
at time intervals of more than one year.

Seasonal Variations – Are identical or almost identical patterns which time series follows during
corresponding intervals of successive periods. Due to recurring events eg. Rise in sales at department
stores before Christmas. After isolating such trend, it is dealt through 2 model – additive model and
multiplicative model.

Random Variations – Sporadic motions of time series due to chance events such as floods, strikes or
elections. Unpredictable and cannot play a large part in forecasting. Possible to isolate by calculating
other types of variation and removing them from time series data.

Isolating the trend:

 Using line of best fit

 Using moving averages
 Using linear regression

Line of best fit – Sketching in a line of trend which manages to echo the overall long-term trend of
the time series. Advantages include: Quick and easy, Allows to interpolate easily – if there was data
for every other month, sketching a line of best fit would allow you to see what the likely value for
missing months are, also possible to extrapolate a figure past the end of the data available.
Moving Averages – By using moving averages, the effect of seasonal variation in a time series can be
eliminated to show the basic trend. Elimination process only worked in the average is calculated
across the values in one complete cycle.

Example:

The following time series shows a set of revenue figures for 8 quarters which seem to be increasing
erratically. We can produce the trend by the use of moving averages.

Year Quarter Revenues

£000’s
20X4 1 3
2 5
3 5
4 5
20X5 1 7
2 9
3 9
4 9

Year Quarter Revenues 4-Quarter moving

average
£000s £000
20X4 1 3
2 5
3 5
4 5 4.5
20X5 1 7 5.5
2 9 6.5
3 9 7.5
4 9 8.5

Workings: 20X4 Q1 – 20X4 Q4 = 3+5+5+5/4 = 4.5

20X4 Q2 – 20X5 Q1 = 5+5+5+7/4 = 5.5 and so on.

Disadvantages-

 Values at the beginning and end of series are lost- therefore moving average doesn’t cover
whole period
 Moving averages may generate cycles or other variations that were not present in the
original data
 Averages are strongly affected by extreme values. To overcome this, a ‘weighted’ moving
average is something used giving the largest weighted to central items and small weights to
extreme values.

Seasonal Variation – To find the seasonal variation either Original time series – underlying trend OR
if variation is expressed as %, trend +/- (trend*variation %)

Problems with forecasting –

  Weakness of extrapolation.
 Seasonal adjustments for forecasting future are based on historic figures that may be out of
date.

Linear Regression- Technique used for estimating line of best fit.

Y = a + bx

X = independent variable

Y = dependent variable

A = fixed element

B = variable element

Example: A regression line has been calculated a y = 192 + 2.40x, where x is the output and y is the
total cost. Use it to predict the total cost for 500 and 1500 units

i) Y = 192 + (2.40*500) y = £1,392

ii) Y = 192 + (2.40*1500) y = £3,792

Indexing – A method of ascertaining a trend – choose a base period and allocate an index of 100

Convert other periods into an index number – Current period figure/ Base figure x 100

Price reflecting to RPI –

Current price adjusted figure = Actual rev * (RPI in current year/RPI in year of sales)

Expected values – Weighted average of all possible outcomes. Calculates average return that will be
made if a decision is repeated. Multiplying the value of outcome by probability of outcome and
summing results.

EV = px

Advantage –

 Takes uncertainty into account

 Info is reduced to single number
 Calcs are relatively simple

Disadvantages –

 Probabilities are subjective

 EV merely a weighted average and has little meaning to one off project
 EV give no indication of the dispersion of outcomes
 EV may not correspond to any of possible outcomes
Chapter 8 – Budgeting processes
Sales budget – sales volume x forecast sales

Production budget - forecast sales + closing inventory – opening inventory

Material usage budget – useage per unit x units produced

Inventory adjustment for materials - forecast materials useage + closing inventory – opening inventory

Example: Toys Ltd budgets to sell 10,000 cubes at £10 per cube in July. Inventory of finished cubes was 3000
cubes at the start of the month and budgeted 4000 at the end of the month.

Each cube requires .5kg of raw material that costs £1 p/kg. Opening inventory of material was 1000kg at the
start of the month and budgeted to be 750kg at the end.

Each cube requires .25 hours of direct labour that is paid £12 p/hour.

Production overheads are absorbed into production at the rate of £15 p/hour.

Sales budget - 10,000 * £10 = £100,000

Production budget –

Sales budget – 10,000

Closing inventory – 4,000

Less opening inv – 3,000

Production of finished goods = 11,000

Raw materials budget –

For production (11,000 * 0.5kg) – 5,500kg

Closing inventory – 750kg

Less opening inv – 1,000

Purchases of raw material = 5,250kg * £1p/kg = £5,250

Labour budget –

11,000 CUBES * .25 hours = 2,750 hours

2,750*£12 = £33,000

Overhead budget –

Overhead absorption is based on labour hours.

2,750 * £15 = £41,250

Budgeting for activity levels - If we know the overhead absorption rate (OAR) and the budgeted fixed
overhead then the budgeted activity level can be found (for over/under absorption questions).

Budgeted activity level = Budgeted fixed overhead/Overhead absorption rate

Under/over absorption = overhead absorbed – overhead incurred

Losses-

Raw material with loss-

Example: If a company requires production of 99,000 units but 4% of production fails the quality check, then
the required units produced to allow for waste would be (99,000/96)*100 = 103,125 units.

Production with loss –

Same as above

The Master Budget – Overall budget in which subsidiary budgets are consolidated. Comprises of a budgeted
income statement and a budgeted balance sheet. And possibly a budget cash flow statement.

Cash flow budgets –

 Ensures various items of income and expenditure in different departments will result in cash flows
which enable the company to pay its way at all times.
 When cash flow has periods of difficulty in financing, it gives a basis of when things can be paid off
 When cash flow proves inadequate, it gives the financial controller and opportunity to seek sources of
additional capital
 Provides a basis for control during the forth-coming year.
 Cash is business most important asset, and these budgets are prepared on a month by month basis so
fluctuations can be anticipated
Chapter 10 – Standard costing and variations
Standard cost – A predetermined cost which is calculated from managements standards of efficient operation
and the relevant necessary expenditure. Used as a basis for fixing selling prices, valuing inventory and WIP, and
provides control over actual costs

Standard costing – preparation and use of standard costs, their comparison with actual costs and analysis of
variances to their causes

Basic standards – Not revised with changing conditions, but remains in force for a long period of time. Often
out of date but shows performance overtime.

Normal standards – Often referred as current standards. More recent than basic and based on what the
company manages to achieve in a regular basis. Doesn’t attempt to improve current levels of efficiency.

Target standards – Often referred to as retainable standards. Gives consideration to the state of efficiency
which can be achieved from existing facilities. Target set will be stretching and a positive effort will be made to
achieve standards. Based on improved level of activity and cost- allowances for waste and inefficiencies.
Realistic but challenging.

Ideal standards – Based on assumption that machines and employees will work with optimal efficiency at all
times, with no stoppage or losses. Standards would represent an ideal state and therefore objectives are never
achieved. Can be demotivating for managers as they can never attain this standard.

Advantages –

Planning – makes preparation of forecasts and budgets much easier. If standards are to be used for operational
decisions, they must be as accurate as possible meaning they should be revised frequently.

Control – control is exercised through comparison of standard and actual results. This highlights areas of
efficiency and inefficiency so corrective action can be taken.

Disadvantages – Costly to set up and maintain, and standards must be revised on a regular basis to maintain
effectiveness. Better for well-established and repetitive processes.

Sales variances – Either a difference in selling price or a difference in sales volume.

Difference between what something should have cost or sold for and what is actually did cost or sell for.

Sales Price variance -

Actual sales units DID sell for – Actual sales units @ actual sales price = X

They SHOULD have sold for – Actual sales units @ standard sales price = Y

Price variance = X – Y

Sales Volume variance –

Actual sales volume – DID sell = X

Budgeted sales volume – SHOULD have sold = y

Volume variance = x- y

If using absorption costing – variance of standard profit per unit

If using marginal costing – variance of standard contribution per unit

Cost variances –

A cost variance is the difference between the standard cost of a product and its actual cost

Total variance is comprised of the price variance and the useage variance.

Price variance –

Quantity purchased * DID £ = x

Quantity purchased * SHOULD HAVE £ = y

Y - X = variance

Useage variance –

Actual quantity * budget £ = x

Budget quantity * budget £ = y

Y - X = variance

Add the variances together to get total variance

Total labour cost variance –

Standard direct labour cost of actual production

Actual cost of direct labour

Labour rate variance –

Standard rate p/hour and

Actual rate p/hour

Multiplied by the actual hours that were paid for

Labour efficiency -

Standard hours specified for actual production and

Actual hours worked

multiplied by the standard hourly rate

Labour ratios –

Labour activity = standard hours for actual prod / budget hours x 100

Labour efficiency = standard hours for actual prod / actual hours worked x 100

Idle time = idle hours / total hours x 100

Total variable overhead variance –

Standard variable overhead cost of actual production

Actual cost of variable production overheads

Variable overhead expenditure variance –

Actual number of hours worked

DID cost

SHOULD cost/hr (standard depending on labour or machine hours)

Variable overhead efficiency –

Actual hours

Standard hours

Multiplied by standard overhead rate p/hour

Fixed overhead –

Total cost variance –

Actual fixed overhead incurred

Overheads absorbed (actual output x standard fixed production over head absorption rate)

Fixed overhead expenditure variance –

Actual total cost

Budgeted cost

Fixed overhead volume variance –

Budgeted output at OAR p/unit

Actual output at OAR p/unit

Variance reasons –

 Planning errors – lead to the setting of inappropriate standards or budgets. Due to carelessness on
part of setter or due to unexpected external changes
 Measurement errors – caused by inaccurate completion of timesheets or job cards, inaccurate
measurement of quantities issued from stores.
 Random factors – uncontrollable, although need monitoring to ensure that that are not one of the
other types of variance eg. Fire or flood causing excess wastage.
Chapter 12 – Divisional performance
Type of division Description Typical measures to assess
performance
Cost centre Division only incurs costs – no  Total cost and cost p/unit
revenue eg. IT department  Cost variances
Revenue centre Division is only responsible for the  Total revenue and rev
generation of revenue p/unit
 Revenue variances
Profit centre Both costs and revenue but no  All of above plus total
power to alter investment sales and market share
 Profit
Investment centre Both costs and revenue and  All of above plus ROI
power to invest in new assets or  RI
dispose of existing ones

Return on Investment (ROI) –

Return on investment = Controllable profit / Capital employed x 100

Controllable profit is taken after depreciation but before tax

Capital employed is total assets less current liabilities OR total equity plus long term debt

Decision making –

If investment ROI > target ROI = accept

If investment ROI < target ROI = reject

Advantages –

 Widely used and accepted since it is in line with ROCE

 As a relative measure it enables comparisons to be made with divisions or companies of different sizes
 Can be broken down into secondary ratios for a more detailed analysis eg. Profit margin and asset
turnover

Disadvantages –

 Can lead to dysfunctional decision making – a division with a current ROI of 30% wont want to take on
a project offering 25% as it would lower the current figure, however the 25% may be above the whole
company’s target.
 ROI increases with age of the asset if NBVs are used, so company may have an incentive to hold onto
older, obsolete assets
 May encourage manipulation of profit and capital employed to improve results

Residual income (RI) –

Is the amount that the division is contributing to the wealth of the shareholders. Also used to measure the
performance of a division and help make investment decisions

RI = controllable profit – notional interest costs

Notional interest costs are calculated by taking the capital employed in the division and multiplying it by the
cost of capital or interest rate.
Decision making –

If RI > 0 = accept

If RI < 0 = reject

Advantages –

 Encourages investment centres to make new investments to add to RI

 Making a charge for interest helps the make centres aware of the cost of the assets under their control
 Risk can be incorporated

Disadvantages –

 Does not facilitate comparisons between divisions since RI is driven by size of divisions and their
investments
 Based on accounting measures of profit and capital employed which can be subject to manipulation

Transfer Pricing-
Price at which goods or services are transferred from one division to another within the same organisation.

 Goal congruence – the decisions made by each profit centre should be consistent with objectives of
organisation as a whole.
 Performance measurement – the buying and selling divisions will be treated as profit centres. Transfer
price should allow the performance of each division to be assessed fairly.
 Autonomy – ability of a person to make their own decision. System used to set transfer prices should
seek to allow profit centre managers to make their own decision about where they buy their products
or services from.

The transfer price influences the contribution per unit for each division and therefore the profitability of each
division, but the overall contribution per unit for the organisation is unaffected. Fixed overhead costs per unit
are not relevant are they are a period related cost and do not vary with production levels.

Example

Division A is the supplying division and makes a component that costs £4 in terms of direct material, £5 for
labour and £1 variable overheads.

Division B is the receiving division and buys this component from A, modifies it and then sells it on to the
external market. The costs B incurs to modify the component are £1.50 for materials, £3 for labour and £0.50
for overheads.

Division B can then sell this product to the external market for £40.

a) What is the minimum transfer price charge by A that could be set.

Division A
Direct material 4
Direct labour 5
Variable overhead 1
Variable cost p/unit = £10 – minimum transfer price for A would be the price that coveres the cost that
are incurred.
b) What is the maximum transfer price at which division B would still cover all of its costs?
Division B
Direct material 1.50
Direct labour 3
 Variable overhead 0.50
Variable cost p/unit = £5
c) What is the range of acceptable transfer prices for A and B?
Acceptable range is between the lowest price at A will accept and highest price that B with accept.
£10-£35.

Capacity levels –
If supplying division can sell their output internal and externally then we need to apply relevant coting
principles to the calculation of transfer price.

If there is spare capacity in supplying division then they would not be doing anything else with the product and
they would be willing to transfer the spare units to the internal division

If there is no spare capacity- they would have to forego external sales to fulfil the internal transfer and so we
would need to consider the opportunity cost

Example

Division A is supplying division and has variable cost of £10 p/unit. Can sell output externally for £25 p/unit.
Has capacity to manufacture 100,000 units p/year.

Division B is receiving division and has variable modifying costs of £5 p/unit. Can sell externally for £40 p/unit.
Demand is 40,000 p/year and has the capacity to do so.

a) If the external demand for A product is 60,000 units p/year what would be the transfer price?
As A has spare capacity, they only need to sell for a price that covers the costs. Transfer price would be
£10 p/unit
b) If the external demand for A product is 100,000 p/year, what would the transfer price be?
A has no spare capacity and could sell all output externally for £25 p/unit. The contribution
(opportunity cost) would be £15 p/unit (25-10=15).
Transfer price = variable costs + opportunity costs
Transfer price would be £25.

Sometimes you can save money by transferring internally as there could be distribution and packing costs
incurred when selling externally.

Using the example above and taking question b, but there is £0.75 cost p/unit on packing to sell externally, the
internal transfer price to B would be £24.25 (£10 less saving on materials + opportunity cost).

Advantages –

 Deemed fair by the supplying and receiving managers

 Company’s performance will not be impacted negatively

Disadvantages –

 May not be an external market price

 Market price may not be stable
 Savings may be made from transferring the goods internally
Chapter 14 – Impact of technology
Benefits of technological advancements –

 Speed – use of technologies often enables an organisation to carry out processes more quickly
 Automation – allows management to replace a process that was time consuming.
 Efficiency – can be used to improve efficiency, reduction in time taken and reduced waste
 Focus – allows management time to focus on core activities of the organisation.

Challenges –

 Change management – needs employees to adopt new processes, can be difficult

 Skills and expertise – mat require new staff with appropriate skills to operate it
 Integration issues – not always compatible with current systems
 Legislation – holding too much data could lead to issues with adherence to GDPR
 Cost benefit – need to consider if the advancements will outweigh the costs
 Cyber security – more risk involved is there is a fault or if someone tries to hack the system
 Staying up to date – constantly changing, need to stay up to date or relate to further technology
advancements that mean a previous advancement is no longer best option

Cloud Accounting –
Avoids need for software, applications, servers and services being stored on physical computers. Instead hosted
on remote servers.

 Store and share data – can hold more data than tradition, local drives and can be share more easily
 On-demand self-service – users can gain access to techologu on demand
 Flexibility – work can be done more flexibly as don’t need to be plugged into work networks
 Collaboration – facilitates better workforce collabs – documents can be worked on by more than one
person simultaneously
 Competitive – allows smaller organisations to be more competitive with larger companies
 Easier scaling – flexible in terms of size, number of authorised users etc. Service can grow as business
does
 Reduced maintenance – no need o part of organisation for regular maintenance
 Back-ups
 Disaster recovery
 Better security

AI –
Area of computer science that emphasises the creation of intelligent machines that work and react like human
beings.

‘Systems ability to correctly interpret external data, to learn from such data, and to use those learnings to
achieve specific goals and tasks through flexible adaptation.’

Machine learning – subset of AI where AI computer code is built to mimic how the human brain works. Uses
probability based on past experiences through data, events and connections between events. Then applies said
learning to a given situation to give a fact driven, plausible outcome. If it ends up being incorrect, this further
drives its learning. The algorithm (process or set of rules to be followed in calculations or other problem solving
operations) adapt themselves to new data to improve function overtime.

Benefits –

Cost saving – saves costs of employing new staff to understake low level, routine tasks.
Competitive advantage - the detection of patterns that enables predictions and recommendations can lead to
improved targeting of customers and therefore more sale opportunities.

Data analytics –
Process of collecting, organising and analysing large sets of data to discover patterns and other information an
organisation can find useful.

Collection of data –

Organisation of data –

Analysis of data –

Big data – data sets so large and varied that they are beyond the capability of traditional data-processing
 Volume – considers amount of data fed into organisation
 Velocity – speed that data feeds in and how quickly it changes
 Variety – considers various formats
 Veracity – considers reliability of data

Benefits –

 Drives innovation – reducing the time taken to answer key questions and therefore make decision
 Gaining competitive advantage – identifying trends for info that has not been identified by rivals
 Improving productivity – identifying waste and inefficiency, or improvements to procedures

How data analytics improve effectiveness of company-

 Aids cost management and control through improved information

 Can enhance inventory management leading to lower costs
 Data from purchases can improve purchasing processes
 Building customer profiles can lead to improved personalisation and increase profits
 Proposed changes can be assed in terms of predicted benefits by using data from previous changes

Visualisation –
Allows large volumes of complex data to be displayed in a visually appealing way that facilitates the
understanding of underlying data. Removes the need for complex extraction, analysis and presentation of data
by finance, IT and data scientists. Should include the following features:

 Decision making ability – results focused

 Effective infrastructure – output is reliant on sufficient quantity and quality of data
 Integration capability – with existing systems and overall business
 Prompt discovery of rules and insights – live data is vital and delay can render insight useless
 Real time collaboration – users must interact with each other and the data

Benefits –

 Understanding and ease of use – makes it user friendly

 Reduces the need for complex an time consuming extraction analysis and display work – allows
intuitive and user friendly extraction of key data
 Improving performance – key performance indicators are more accessible and updated constantly