FINANCIAL PERFORMANCE MEASUREMENT

Performance measure can be divided into two groups.

– Financial performance measures

– Non-financial performance measures

Financial performance measures include profit, revenue, costs, share price and cash flow.

Non-financial performance measures include product quality, reliability and customer

satisfaction.

Performance measures can be quantitative or qualitative.

FINANCIAL PERFORMANCE MEASURES

Financial performance is fundamental to businesses.

Note that the monetary amounts stated are only given meaning in relation to something else.

Financial results should be compared against a yardstick, such as the following.

(a) Budgeted sales, costs and profits

(b) Standards in a standard costing system

(c) The trend over time (last year/this year, say)

(d) The results of other parts of the business

(e) The results of other businesses

(f) The economy in general

MEASURING PROFITABILITY AND PRODUCTIVITY

Profitability can be measured by return on investment (ROI) / return on capital employed

(ROCE), return on equity (ROE), profit margin, gross profit margin or cost/sales ratios.
RETURN ON INVESTMENT (ROI)

Return on investment (ROI) (also called return on capital employed (ROCE)) is calculated as

(profit/capital employed) * 100% and shows how much profit has been made in relation to the

amount of resources invested.

𝑷𝒓𝒐𝒇𝒊𝒕 𝒃𝒆𝒇𝒐𝒓𝒆 𝒊𝒏𝒕𝒆𝒓𝒆𝒔𝒕 𝒂𝒏𝒅 𝒕𝒂𝒙

𝑹𝑶𝑪𝑬 =
𝒄𝒂𝒑𝒊𝒕𝒂𝒍 𝒆𝒎𝒑𝒍𝒐𝒚𝒆𝒅

Where: shareholder capital employed= funds plus long-term liabilities for

Note:

Profit before interest and tax is often used.

Similarly all assets of a non-operational nature (for example, trade investments and intangible

assets such as goodwill) should be excluded from capital employed.

Unless you are told otherwise, use earning before interest and tax (EBIT) as profit, and shareholder

funds plus long-term liabilities for capital employed. Please note that EBIT is the same as profit

before interest and tax (PBIT).

Illustration
Solution

ROI using controllable profit

If the performance of the investment centre manager is being assessed, it should seem reasonable

to base profit on the revenues and costs controllable by the manager and exclude service and head

office costs, except those costs specifically attributable to the investment centre.

If it is the performance of the investment centre that is being assessed, however, the inclusion of

general service and head office costs would seem reasonable.

Residual income (RI)

(RI is calculated as follows.

RI = Controllable (traceable) profit – imputed interest charge on controllable (traceable)

investment
Example: Calculation of ROI and RI

Solution
Return on Equity (ROE)

The return on equity ratio (ROE) measures the ability of a firm to generate profits from its

shareholders' investment in the company. It shows how much profit each unit of shareholders'

equity generates.

ROE is also an indicator of how effectively management is using equity financing to fund

operations and grow the company. It is expressed as a percentage and calculated by dividing net

income by shareholder's equity.

ROE = Net income / Shareholder's equity

NOTE:

1. Net income is for the full year (before dividends paid to ordinary shareholders but after

preference dividends.) Shareholder's equity does not include preference shares.

2. Return on equity may also be calculated by dividing net income by the average

shareholders' equity:

ROE = Net income / Average shareholder's equity

Where:

Average shareholders' equity is calculated by adding the shareholders' equity at the

beginning of a period to the shareholders' equity at the period's end, and dividing the result

by two.
Illustration

XYZ is a retail store that sells tools to construction companies across the country. XYZ reported

net income of $100,000 during the year, before preference dividends of $10,000. XYZ had 100,000

$4.50 ordinary shares in issue during the year. XYZ would calculate ROE as follows:

$100,000-$10,000 / $450,000 = 20%

Profit margin

The profit margin (profit to sales ratio) is calculated as (profit / revenue) * 100%.

Illustration

Gross profit margin

The profit margin (profit to sales ratio) is calculated as (gross profit / revenue) * 100%.

Illustration
the gross profit margin would be:

= 2,469,265/3,527,508 *100%=

Cost/sales ratios

There are three principal ratios for analysing statement of profit or loss information.

(a) Production cost of sales * sales

(b) Distribution and marketing costs *sales

(c) Administrative costs * sales

When particular areas of weakness are found, subsidiary ratios are used to examine them in greater

depth. For example, for production costs the following ratios might be used.

(a) Material costs * sales value of production

(b) Works labour costs * sales value of production

(c) Production overheads* sales value of production

Illustration

Using example above:

Direct materials to sales ratio would be

40,000/160,000 *100% = 25%

Direct labor to sales ratio ratio would be:

40,000/160,000 *100%= 25%

PERFORMANCE MEASURES BASED ON THE STATEMENT OF FINANCIAL

POSITION

Asset turnover

Asset turnover is a measure of how well the assets of a business are being used to generate sales.

It is calculated as

𝑠𝑎𝑙𝑒𝑠
𝐴𝑠𝑠𝑒𝑡 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 =
𝑐𝑎𝑝𝑖𝑡𝑎𝑙 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑

Asset turnover is expressed as 'x times' so that assets generate x times their value in annual

turnover.

Illustration

For example, suppose two companies each have capital employed of $100,000 and Company A

makes sales of $400,000 per annum whereas Company B makes sales of only $200,000 per annum.

Company A is making a higher turnover from the same amount of assets; in other words, twice as

much asset turnover as Company B, and this will help A to make a higher return on capital

employed than B.

Interrelationship between profit margin, asset turnover and ROI

Profit margin and asset turnover together explain the ROI. The relationship between the three ratios

is as follows.
LIQUIDITY RATIOS: CURRENT RATIO AND QUICK RATIO

The current ratio is the 'standard' test of liquidity and is the ratio of current assets to current

liabilities.

Obviously, a ratio in excess of 1 should be expected. Otherwise, there would be the prospect that

the company might be unable to pay its debts on time. In practice, a ratio comfortably in excess of

1 should be expected, but what is 'comfortable' varies between different types of businesses.

The quick ratio, or acid test ratio, is the ratio of current assets less inventories to current

liabilities.

This ratio should ideally be at least 1 for companies with a slow inventory turnover. For companies

with a fast inventory turnover, a quick ratio can be comfortably less than 1 without suggesting that

the company is in cash flow trouble.

Different firms will have different current ratio requirements. What is important is the trend

of these ratios, which will show whether liquidity is improving or deteriorating.

Illustration
Solution

EFFICIENCY RATIOS: CONTROL OF RECEIVABLES, PAYABLES AND

INVENTORY

Accounts receivable collection period

The estimated average accounts receivable collection period is a rough measure of the average

length of time it takes for a company's receivables to pay what they owe and is calculated as

𝑡𝑟𝑎𝑑𝑒 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠
𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠 𝑐𝑜𝑙𝑙𝑒𝑐𝑡𝑖𝑜𝑛 𝑝𝑒𝑟𝑖𝑜𝑑 = ∗ 365 𝑑𝑎𝑦𝑠
𝑠𝑎𝑙𝑒𝑠

Or
 𝑡𝑟𝑎𝑑𝑒 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠
𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠 𝑐𝑜𝑙𝑙𝑒𝑐𝑡𝑖𝑜𝑛 𝑝𝑒𝑟𝑖𝑜𝑑 = ∗ 12 𝑚𝑜𝑛𝑡ℎ𝑠
𝑠𝑎𝑙𝑒𝑠

The trend of the collection period over time is probably the best guide. If the period is

increasing yea on year, this is indicative of a poorly managed credit control function (and

potentially therefore a poorly managed company).

Inventory turnover period

Inventory turnover period is a calculation of the number of days that inventory is held for and is

calculated as

𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦
𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 𝑝𝑒𝑟𝑖𝑜𝑑 = ∗ 12 𝑚𝑜𝑛𝑡ℎ𝑠
𝑐𝑜𝑠𝑡 𝑜𝑓 𝑠𝑎𝑙𝑒𝑠

Or

𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦
𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 𝑝𝑒𝑟𝑖𝑜𝑑 = ∗ 365 𝑑𝑎𝑦𝑠
𝑐𝑜𝑠𝑡 𝑜𝑓 𝑠𝑎𝑙𝑒𝑠

A lengthening inventory turnover period from one year to the next indicates either a slowdown

in

trading or a build-up in inventory levels, perhaps suggesting that the investment in inventories

is becoming excessive.

Inventory turnover

'Cost of sales ÷ inventory' is termed inventory turnover, and is a measure of how vigorously a

business is trading.

Accounts payable payment period

Accounts payable payment period or days provides a rough measure of the average length of

time it takes a company to pay what it owes.

It is ideally calculated by the formula:

𝑃𝑎𝑦𝑎𝑏𝑙𝑒𝑠
𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑃𝑎𝑦𝑎𝑏𝑙𝑒 𝑃𝑎𝑦𝑚𝑒𝑛𝑡 𝑃𝑒𝑟𝑖𝑜𝑑 = ∗ 12 𝑚𝑜𝑛𝑡ℎ𝑠
𝑝𝑢𝑟𝑐ℎ𝑎𝑠𝑒𝑠

Or

𝑃𝑎𝑦𝑎𝑏𝑙𝑒𝑠
𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑃𝑎𝑦𝑎𝑏𝑙𝑒 𝑃𝑎𝑦𝑚𝑒𝑛𝑡 𝑃𝑒𝑟𝑖𝑜𝑑 = ∗ 365 𝑑𝑎𝑦𝑠
𝑝𝑢𝑟𝑐ℎ𝑎𝑠𝑒𝑠

Cost of sales can be used as an approximation for purchases.

This ratio often helps to assess a company's liquidity. An increase is often a sign of a lack of

long-term finance or poor management of current assets, resulting in the use of extended credit

from suppliers, an increased bank overdraft and so on.

Working capital period

Working capital control is concerned with minimising funds tied up in net current assets while

ensuring that sufficient inventory, cash and credit facilities are in place to enable trading to take

place. Calculation of the ratio provides some insight into working capital control.

The working capital period (or average age of working capital) identifies how long it takes to

convert the purchase of inventories into cash from sales and is calculated as:

𝑊𝑜𝑟𝑘𝑖𝑛𝑔 𝐶𝑎𝑝𝑖𝑡𝑎𝑙
𝑊𝑜𝑟𝑘𝑖𝑛𝑔 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝑃𝑒𝑟𝑖𝑜𝑑 = ∗ 365 𝑑𝑎𝑦𝑠
𝑐𝑜𝑠𝑡 𝑜𝑓 𝑠𝑎𝑙𝑒𝑠

The ratio can also be calculated as:

𝑊𝑜𝑟𝑘𝑖𝑛𝑔 𝐶𝑎𝑝𝑖𝑡𝑎𝑙
𝑊𝑜𝑟𝑘𝑖𝑛𝑔 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝑃𝑒𝑟𝑖𝑜𝑑 = ∗ 365 𝑑𝑎𝑦𝑠
𝑜𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑐𝑜𝑠𝑡𝑠

The ratio has two principal limitations.

(a) It is based on the working capital level on one particular day, which may not be representative

of working capital levels throughout the entire period.

(b) Working capital includes a figure for inventory which may be a very subjective valuation.

Illustration

Calculate liquidity and working capital ratios from the accounts of the DOG Group, a manufacturer

of products for the construction industry. Discuss your results.

Solution
b. DOG is a manufacturing group serving the construction industry, and so would be expected to

have a comparatively lengthy accounts receivables' turnover period, because of the relatively poor

cash flow in the construction industry. It is clear that management compensates for this by ensuring

that they do not pay for raw materials and so on before they have sold their inventories of finished

goods (hence the similarity of receivables and payables turnover periods).

DOG's current ratio is a little lower than average but its quick ratio is better than average and very

little less than the current ratio. This suggests that inventory levels are strictly controlled, which is

reinforced by the low inventory turnover period. It would seem that working capital is tightly

managed, to avoid the poor liquidity which could be caused by a high accounts receivables

payment period and comparatively high payables period.

PRACTICE QUESTIONS
SOLUTION
PRACTICE QUESTION 2
Solution
DEBT AND GEARING/LEVERAGE RATIOS

Debt ratios are concerned with how much the company owes in relation to its size and whether

it is getting into heavier debt or improving its situation.

(a) When a company is heavily in debt, and seems to be getting even more heavily into debt, banks

and other would-be lenders are very soon likely to refuse further borrowing and the company might

well find itself in trouble.

(b) When a company is earning only a modest profit before interest and tax, and has a heavy debt

burden, there will be very little profit left over for shareholders after the interest charges have been

paid.

Leverage is an alternative term for gearing and the words have the same meaning.

Capital gearing or leverage

Capital gearing is concerned with the amount of debt in a company's long-term capital structure.

Gearing ratios provide a long-term measure of liquidity.

Prior charge capital is long-term loans and preference shares (if any). It does not include loans

repayable within one year and bank overdraft, unless overdraft finance is a permanent part of the

business' capital

Interest cover

The interest cover ratio shows whether a company is earning enough profits before interest and

tax to pay its interest costs comfortably, or whether its interest costs are high in relation to the size
of its profits, so that a fall in profit before interest and tax (PBIT) would then have a significant

effect on profits available for ordinary shareholders.

An interest cover of two times or less would be low, and it should really exceed three times

before the company's interest costs can be considered to be within acceptable limits. Note that it is

usual to exclude preference dividends from 'interest' charges.

Limitations of statement of profit or loss and statement of financial position measures

(a) On their own, they do not provide information to enable managers to gauge performance

or make control decisions. Yardsticks are needed for comparison purposes.

(b) The measures used must be carefully defined. For example, should 'return' equal profit before

interest and taxation, profit after taxation, or profit before interest, taxation and investment

income?

(c) Measures compared over a period of time at historical cost will not be properly comparable

where inflation in prices has occurred during the period, unless an adjustment is made to the

measures to make allowance for price level differences.

(d) The measures of different companies cannot be properly compared where each company uses

a different method to do the following.

(i) Value closing inventories (for example first in, first out, last in, first out, or marginal/

absorbed cost)

(ii) Apportion overheads in absorption costing

(iii) Value non-current assets (for example at net book value and replacement cost)
 (iv) Estimate the life of assets in order to calculate depreciation

(v) Account for research and development costs

(vi) Account for goodwill

(e) Remember that measures calculated using historical costs may not be a guide to the future.

MANAGEMENT PERFORMANCE MEASURES

It is important to distinguish between measures of performance of individual managers and

measures of performance of what it is they manage.

In responsibility accounting we mentioned that it is necessary to consider a manager in relation to

their area of responsibility.

It is unreasonable to assess managers' performance in relation to matters that are beyond their

control. Management performance measures should therefore only include those items that are

directly controllable by the manager in question.

Possible management performance measures include the following.

– Subjective measures

– Judgement of outsiders

– Upward appraisal

– Accounting measures
 COST CONTROL AND COST REDUCTION

Cost reduction is a planned and positive approach to reducing expenditure.

Cost reduction should not be confused with cost control.

Cost control is concerned with regulating the costs of operating a business and keeping costs

within acceptable limits.

The limits will usually be the standard cost or target cost limits set out in the formal operational

plan or budget. If actual costs differ from planned costs by a significant amount, cost control action

will be necessary.

Cost reduction, in contrast, starts with an assumption that current cost levels, or planned cost

levels, are too high, even though cost control might be good and efficiency levels high.
Cost control action ought to lead to a reduction in excessive spending. A cost reduction

programme, on the other hand, aims to reduce expected cost levels to below current budgeted

or standard levels by changing methods of working.

Cost control aims to reduce costs to budget or standard level. Cost reduction aims to reduce costs

to below budget or standard level, as budgets and standards do not necessarily reflect the cost and

conditions which minimise costs.

Planning for cost reduction

Cost reduction measures ought to be planned programmes to reduce costs rather than crash

programmes to cut spending levels.

Here are two basic approaches to cost reduction.

(a) Crash programmes to cut spending levels

If an organisation is having problems with its profitability or cash flow, the management might

decide on an immediate programme to reduce spending. Some current projects might be

abandoned, capital expenditures deferred, employees made redundant or new recruitment stopped.

The absence of careful planning might make such crash programmes look like panic measures.

Poorly planned crash programmes to reduce costs could result in reductions in operational

efficiency. For example, decisions by a company to reduce the size of its legal department or its

internal audit section might cut staff costs in the short term but increase costs in the longer term.

(b) Planned programmes to reduce costs

Many companies tend to introduce crash programmes for cost reduction in times of crisis and

ignore the problem completely in times of prosperity. A far better approach is to have continual
assessments of the organisation's products, production methods, services, internal administration

systems and so on.

Difficulties introducing cost reduction programmes

(a) There may be resistance from employees to the pressure to reduce costs. They may feel

threatened by the change. The purpose and scope of the campaign should be fully explained to

employees to reduce uncertainty and (hopefully) resistance.

(b) The programme may be limited to a small area of the business with the result that costs are

reduced in one cost centre, only to reappear as an extra cost in another cost centre.

(c) Cost reduction campaigns are often introduced as a rushed, desperate measure instead of a

carefully organised, well thought out exercise.

Cost reduction does not happen of its own accord. Managers must make positive decisions to

reduce costs.

(a) A planned programme of cost reduction must begin with the assumption that some costs can

be significantly reduced. The benefits of cost savings must be worthwhile, and should exceed the

costs of achieving them.

(b) Areas for potential cost reduction should be investigated, and unnecessary costs identified.

(c) Cost reduction measures should be proposed, agreed, implemented and then monitored.

The scope of cost reduction campaigns

The scope of a cost reduction campaign should embrace the activities of the entire company.

In a manufacturing company this would span purchasing and distribution levels within the
organisation from the shop floor upwards. Non-manufacturing industries and public sector

organisations should equally look at all areas of their activities.

A cost reduction campaign should have a long-term aim as well as short-term objectives.

(a) In the short term only variable costs, for the most part, are susceptible to cost reduction efforts.

Many fixed costs (for example rent) are not easily changed.

(b) Some fixed costs are avoidable in the short term (for example advertising and sales promotion

expenditure). These are called discretionary fixed costs.

(c) In the long term most costs can be either reduced or avoided. This includes fixed cost as well

as variable cost expenditure items.

Methods of cost reduction: improving efficiency

One way of reducing costs is to improve the efficiency of material usage, the productivity of

labour, or the efficiency of machinery or other equipment. There are several ways in which this

might be done.

Improved materials usage might be achieved by reducing levels of wastage, where wastage is

currently high.

How can wastage be reduced?

Here are some suggestions.

(a) Changing the specifications for cutting solid materials

(b) Introducing new equipment that reduces wastage in processing or handling materials

(c) Identifying poor quality output at an earlier stage in the operational processes
(d) Using better quality materials; even though more expensive, better quality materials might save

costs because they are less likely to tear or might last longer.

Improving labour productivity

(a) Giving pay incentives for better productivity.

(b) Changing work methods to eliminate unnecessary procedures and make better use of labour

time.

(c) Improving the methods for achieving co-operation between groups or departments.

(d) Setting more challenging standards of efficiency. Standards should be tight but achievable. If

efficiency standards are too lax, it is likely that the work force will put in the minimum effort

needed to achieve the required standard. Given the right motivation among the workforce, more

challenging standards will encourage greater effort.

(e) Introducing standards where they did not exist before.

Improving the efficiency of equipment usage

(a) Making better use of equipment resources. For example, if an office PC is only in use for 50%

of its available time, it might be possible to put another application onto it, and so improve office

productivity.

(b) Achieving a better balance between preventive maintenance and machine 'down time' for

repairs.
ILLUSTRATION

Required

Determine which level of maintenance should be chosen.

SOLUTION

Methods of cost reduction: material costs

Costs of materials can be reduced by lowering the costs of wastage. Other ways of reducing

materials costs are as follows.

(a) A company could obtain lower prices for purchases of materials and components. Bulk

purchase discounts might be obtainable. Alternatively, a more cost-conscious approach to buying,

with a system of putting all major purchase contracts out to tender, might help to reduce prices.

(b) A company could improve stores control and cut stores costs. The economic ordering

quantity will minimise the combined costs of ordering items for inventory and stockholding costs.

Stockholding costs might be reduced by dealing with problems of obsolescence, deterioration of

items in store or theft.

(c) It might be possible to use alternative materials. Cheaper substitute materials might be

available.

METHODS OF COST REDUCTION: LABOUR COSTS

Work study is a means of raising the productivity of an operating unit by the reorganisation of

work.

There are two main parts to work study: method study and work measurement.

1. Method study is the systematic recording and critical examination of existing and

proposed ways of doing work in order to develop and apply easier and more effective

methods, and reduce costs.

2. Work measurement involves establishing the time for a qualified worker to carry out a

specified job at a specified level of performance.

3.

Organisation and methods (O&M)

Organisation and methods (O&M) is a term for techniques, including method study and work

measurement, that are used to examine clerical, administrative and management procedures in

order to make improvements.

O&M is primarily concerned with office work and looks in particular at such areas as the

following.

(a) Organisation

(b) Duties

(c) Staffing

(d) Office layout

(e) Methods of procedure and documentation and the design of forms

(f) Office mechanization

The real aim of Work study and O&M is to decide the most efficient methods of getting work

done, as well as establishing standard times for work done by this method.

More efficient methods and tighter standards will improve efficiency and productivity, and so

reduce costs.

VALUE ANALYSIS

An approach to cost reduction, which embraces many of the techniques already mentioned, is

value analysis (VA) and value engineering.

Value analysis is a planned, scientific approach to cost reduction, which reviews the material

composition of a product and the product's design so that modifications and improvements can be

made which do not reduce the value of the product to the customer or the user.

The value of the product must therefore be kept the same or else improved, at a reduced cost.

The administration of a VA exercise should perhaps be the responsibility of a cost reduction

committee.
Value engineering is the application of VA techniques to new products, so that new products are

designed and developed to a given value at minimum cost.

What is different about VA?

Two features of VA distinguish it from other approaches to cost reduction.

(a) It encourages innovation and a more radical outlook for ways of reducing costs.

(b) It recognises the various types of value which a product or service provides, analyses this

value, and then seeks ways of improving or maintaining aspects of this value at a lower cost. Other

techniques often ignore this value aspect.

Not every exercise in VA results in suggestions for radically different ways of making a product

Conventional cost reduction techniques try to achieve the lowest production costs for a

specific product design whereas VA recognises that the real goal should be the least-cost

method of making a product that achieves its desired function, not the least-cost method of

accomplishing a product design to a mandatory and detailed specification.

Value

Four aspects of 'value' should be considered.

1. Cost value is the cost of producing and selling an item.

2. Exchange value is the market value of the product or service.

3. Use value is what the article does; the purposes it fulfils.

4. Esteem value is the prestige the customer attaches to the product.

Illustration

Classify the following features of a product, using the types of value set out above.

(a) The product can be sold for $27.50.

(b) The product is available in six colours to suit customers' tastes.

(c) The product will last for at least ten years.

Solution

(a) Exchange value

(b) Esteem value

(c) Use value

Note:

(a) VA seeks to reduce unit costs, and so cost value is the one aspect of value to be reduced.

(b) VA attempts to provide the same (or a better) use value at the lowest cost. Use value therefore

involves considerations of the performance and reliability of the product or service.

(c) VA attempts to maintain or enhance the esteem value of a product at the lowest cost.

VA involves the systematic investigation of every source of cost and technique of production

with the aim of cutting all unnecessary costs. An unnecessary cost is an additional cost incurred

without adding use, exchange or esteem value to a product.

The scope of VA

Value analysis concentrates on product design, components, material costs and production

methods.
Three areas of special importance are as follows.