Transcript 19 COSTING AND THE VALUE CHAIN Chapter

19-1
Chapter
19
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COSTING AND THE
VALUE CHAIN
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The Value Chain—Focus
on Core Operations
19-2
The value chain is the set of activities and
resources necessary to create and deliver
products and services valued by customers.
R&D
and
Design
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Suppliers
and
Production
Distribution
and
Marketing
Customer
Service
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Value and Non-value-Added Activities
Value-added activities add to product or service
desirability in customers’ eyes.
Identify
Non-valueadded
activities
Eliminate
Non-value-added activities add cost without
additional desirability, and can be eliminated
without reducing quality or performance.
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Value and Non-value-Added Activities
Activities
Analysis and
Classification
Non-valueAdded
Activities
ValueAdded
Activities
Reduce or
Eliminate
Continually Evaluate
and Improve
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19-5
Non-value-Added Activities
Examples of non-valueadded activities are:

Storage of materials,
work-in-process, or
finished goods.

Moving parts and
materials in the factory.

Waiting for work.

Inspection.
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Get rid
of them!
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Activity-Based Management — Drive
Out Costs
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What’s the difference between
activity-based costing and
activity-based management?
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Activity-Based Management — Drive
Out Costs
Activity-based costing
establishes relationships
between overhead
costs and activities.
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Activity-based management
focuses on managing
activities to reduce costs.
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ABC: a Subset of
Activity-Based Management
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Activity-Based Management
Identify
activities
Create
cost
pools
Identify
activity
measures
Determine
cost per unit
of activity
ABC
A
Collect external
benchmark
information
Analyze activities
for non-value
added activities
Manage activities
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Activity-Based Management
and the Value Chain
19-9
Chart activities needed
to meet customer
expectations.
Use ABC to determine
cost of activities.
Classify all activities
as value-added
or non-value-added.
Improve value-added
activities and eliminate
non-value-added activities.
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The Target Costing Process —
Creating Customer Satisfaction
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Let’s move
along to a
new topic.
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The Target Costing Process —
Creating Customer Satisfaction
Driven by the
customer.
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Focused
on design.
Target costing is aimed at the earliest stages
of new product and service development.
Focused
simultaneously
on profit and
cost planning.
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Consideration
given to the
entire
value chain.
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The Target Costing Process
Attaining the
Target Cost
Establishing the
Target Price
Production
design and
value
engineering
Concept
development
Target
price
Planning
and market
analysis
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Profit
margin
Target
cost
Production
and
continuous
improvement
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Major Influences on Target Pricing
Price
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Components of the
Target Costing Process
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Developing target prices and target
costs requires four steps:
Develop products
that satisfy
customer needs.
 Target price
– Profit margin
= Target cost
Set target price using
Use value engineering
competitors’ prices and
customers’ perceived
value for product.
to find least costly
combination of resources
to meet customer needs.
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Life-Cycle Product
Costing and Pricing
Product
discontinued
and customer
support ends
Marketing
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Research,
design, and
development
Lifecycle
costing
Production
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Life-Cycle Product
Costing and Pricing
Product
discontinued
and customer
support ends
Marketing
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19-16
Research,
Pricing must
generate revenue
to cover costs
of all phases
of product
life cycle.
design, and
development
Production
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Characteristics of
Target Costing Processes
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Involve entire value
An understanding of
chain in reducing
costs while satisfying
customer needs.
relationships between
process components
and costs is critical.
A product’s functional characteristics to the
customer are emphasized.
A primary
ABC is used to
objective is reducing
development time.
determine changes
that will reduce costs.
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Just-in-time (JIT)
Inventory Procedures
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Let’s move
along to
another
topic.
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Just-In-Time (JIT) Inventory
Receive
customer
orders.
Complete products
just in time to
ship to customers.
Schedule
production.
Receive materials
just in time for
production.
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Complete parts
just in time for
assembly into products.
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Relationship Between JIT and
Total Quality Management (TQM)
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Less warehouse
space needed
Reduced
inventory
carrying costs
Reduced risk
of obsolete
inventory
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With reduced inventories, quality must
be emphasized to avoid production
delays and late deliveries.
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Relationship Between JIT and
Total Quality Management (TQM)
Less warehouse
space needed
More rapid
response to
customer orders
Reduced
inventory
carrying costs
Reduced risk
of obsolete
inventory
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Higher quality
products
Greater
customer
satisfaction
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JIT, Supplier Relationships,
and Product Quality
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Successful implementation of a JIT system requires:
 A limited number of suppliers who will
make on-time deliveries of quality
materials.
 Quality that is “designed-in” and
“manufactured-in” rather than
“inspected-out”.
 A well-trained flexible work force.
 An efficient plant layout.
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Measures of Efficiency
in a JIT System
ProductionS
tarted
19-23
Goods
Shipped
Process Time + Inspection Time +
Storage and Waiting Time + Move Time
Manufacturing Cycle Time
Only the process time is value-added time.
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Measures of Efficiency
in a JIT System
ProductionS
tarted
19-24
Goods
Shipped
Process Time + Inspection Time +
Storage and Waiting Time + Move Time
Manufacturing Cycle Time
Manufacturing
Efficiency =
Ratio
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Value-added time
Manufacturing cycle time
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Measures of Efficiency
in a JIT System
If cycle
time
goes up,
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costs may
go up, and
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service and
quality may
go down.
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Total Quality Management
and the Value Chain
19-26
Let’s move
to the last
topic in
the chapter.
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Why is Quality Important?
Quality
products
and
services
Increased
business
volume
Greater
customer
satisfaction
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Components of the Cost of Quality
 Prevention costs

Inspection of materials upon delivery

Inspection of production process

Equipment inspection

Employee training
 Appraisal costs

Finished goods inspection

Field testing of products
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Components of the Cost of Quality
 Internal failure costs – defects discovered
before delivery to customers

Scrap materials

Rework

Reinspection of rework

Lost sales resulting
from late deliveries
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Cost
Report
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Components of the Cost of Quality
 External failure costs – defects discovered
after delivery to customers

Warranty repairs

Product liability

Marketing costs to
improve product image

Lost sales due to poor
product quality
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Components of the Cost of Quality
Cost of
prevention
and appraisal
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Internal
and external
failure costs
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Components of the Cost of Quality
Ultimate Objective:
Cost of
prevention
and appraisal
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Zero defects
while minimizing
all four quality
cost categories.
Internal
and external
failure costs
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Components of the Cost of Quality
Cost of Quality
External and
Internal Failure
Total Cost
of Quality
Direction of
recent trend
in industry.
Prevention
and Appraisal
Low Quality
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High Quality
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Measuring and Reporting the Cost of Quality
Prevention Costs:
Training
Maintenance
Quality planning
Appraisal Costs:
Material inspections
Equipment inspections
Supplier relations
Testing
Internal Failure Costs:
Rework
Downtime
Scrap
External Failure Costs
Warranty
Lost sales
Repairs
Total
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Amount
Total
$ 12,000
10,000
8,000
$ 30,000
3.2%
6,000
2,000
4,000
5,000
17,000
1.8%
5,000
7,000
8,000
20,000
2.1%
31,000
$ 98,000
3.3%
10.4%
4,500
20,000
6,500
% of Sales
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19-35
Productivity and Quality

Traditional managerial
accounting systems may
emphasize production
quotas and cost
minimization.

Managers often find that
emphasis on quality also
increases productivity.
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End of Chapter 19
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