Procurement Planning & Cost Analysis Flashcards

A multi-year contract ties price adjustments to a published Producer Price Index. This clause is called:

Answer: Economic price adjustment (escalation) clause

Economic price adjustment clauses adjust prices based on objective indices to share market-driven cost risk.

Which costing method assigns overhead to products based on the activities that actually drive those costs?

Answer: Activity-based costing

Activity-based costing allocates overhead using cost drivers tied to specific activities.

A buyer tests how a sourcing decision changes if freight costs rise by 15%. This technique is:

Answer: Sensitivity analysis

Sensitivity analysis measures how changes in key assumptions affect the outcome of a decision.

Value analysis in procurement primarily seeks to:

Answer: Achieve required function at the lowest total cost

Value analysis examines function versus cost to remove unnecessary cost without sacrificing required performance.

A machine costs $40,000 and generates $10,000 in annual savings. Ignoring the time value of money, what is the payback period?

Answer: 4 years

Payback = 40,000 / 10,000 = 4 years.

Life-cycle costing differs from simple acquisition costing because it includes:

Answer: Costs from acquisition through operation, maintenance, and disposal

Life-cycle costing accounts for all costs over an asset's entire useful life.

Pareto (ABC) analysis of purchased items typically shows that:

Answer: A small percentage of items accounts for a large percentage of spend

Roughly 20% of items (A items) often account for about 80% of spend, so they merit the most attention.