Costing & Value Chain, Lcc,ABC

7/23/2019 Costing & Value Chain, Lcc,ABC

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© The McGraw-Hill Companies, IncMcGraw-Hill/Irwin

Costing and theValue Chain

Chapter

18




R & D

andDesign

Suppliers

andProduction

Distribution

andMarketing

Customer Service

The value chain is the set of activities and

resources necessary to create and deliver

products and services valued by customers.

The value chain is the set of activities and

resources necessary to create and deliver

products and services valued by customers.

The Value Chain—Focuson Core Operations

The Value Chain—Focuson Core Operations




Non-value-added activities add cost without

additional desirability, and can be eliminated

without reducing quality or performance.

Value-added activities add to product or service

desirability in customers’ eyes.

Identify Eliminateon!value!

added

activities

Value and Non-value-AddedActivities





Analysis and

lassification

Activities



Non-value-

AddedActivities

!educe or

"liminate

Value-

AddedActivities

ontinually "valuate

and #mprove




E"amples of non!value!added activities are#

Storage of materials$%ork!in!process$ orfinished goods

Moving parts and

materials in the factory'aiting for %ork

Inspection

$et rid

of them%

Non-value-Added Activities

Non-value-Added Activities




&hat’s the difference between

activity-based costing and

activity-based management'

Activity-Based Manageent —!rive Out Costs



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Activity-based managementfocuses on managing

activities to reduce costs.

Activity-based costingestablishes relationships

between overheadcosts and activities.





(naly)eactivities

Collectbenchmarkinformation

Determinecost per unit

of activity

Identifyactivity

measures

Createcost

pools

Identifyactivities

A c t i v i t y - b a s e d c o s t i n g

A c t i v i t y - b a s e d m a n a g e m e n t

ABC" a #u$set o% Activity-Based Manageent

ABC" a #u$set o% Activity-Based Manageent



Chart activities needed

to meet customer

e"pectations*se (+C 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

Activity-Based Manageentand the Value Chain

Activity-Based Manageentand the Value Chain



(et’s movealong to a

new topic.

The Target Costing &rocess —Creating Custoer #atis%action




)ocused

on design.

onsideration

given to the

entire

value chain.

)ocused

simultaneously

on profit and

cost planning.

*riven by the

customer.

Target costing is aimed at the earliest stages

of new product and service development.





Concept

development

Planningand market

analysis

Production

design andvalue

engineering

Production

and

continuous

improvement

,arget

price

Profit

margin

,arget

cost

"stablishing the

Target +rice

Attaining the

Target ost

The Target Costing &rocessThe Target Costing &rocess



+rice

Ma'or (n%luences on Target &ricingMa'or (n%luences on Target &ricing



Develop products

that satisfy

customer needs

Set target price using

competitors- prices and

customers- perceived

value for product

,arget price

. Profit margin

/ ,arget cost

*se value engineering

to find least costly

combination of resources

to meet customer needs

Developing target prices and targetcosts re0uires four steps#

Developing target prices and targetcosts re0uires four steps#

Coponents o% theTarget Costing &rocess

Coponents o% theTarget Costing &rocess



(ife-

cycle

costing

!esearch,

design, and

development

+roductionareting

+roduct

discontinued

and customer

support ends

)i%e-Cycle &roductCosting and &ricing





+ricing mustgenerate revenue

to cover costs

of all phases

of product

life cycle.

!esearch,

design, and

development

+roductionareting

+roduct

discontinued

and customer

support ends






Involve entire valuechain in reducing

costs %hile satisfying

customer needs

(n understanding of relationships bet%eenprocess components

and costs is critical

( product-s functional characteristics to thecustomer are emphasi)ed

( primaryob1ective is reducingdevelopment time

(+C is used todetermine changes

that %ill reduce costs

Characteristics o% Target Costing &rocesses

Characteristics o% Target Costing &rocesses




(et’s movealong to

another topic.

*ust-in-tie +*(T,(nventory &rocedures

*ust-in-tie +*(T,(nventory &rocedures




omplete products

ust in time to

ship to customers.

omplete parts

ust in time for

assembly into products.

/chedule

production.

!eceive

customer

orders.

!eceive materials

ust in time for

production.

*ust-(n-Tie +*(T, (nventory*ust-(n-Tie +*(T, (nventory




(ess warehouse

space needed

!educed

inventory

carrying costs

!educed ris

of obsolete

inventory

&ith reduced inventories, quality must

be emphasi0ed to avoid production

delays and late deliveries.

elationship Bet.een *(T andTotal /uality Manageent +T/M,





ore rapid

response tocustomer orders

$reater

customer

satisfaction

1igher quality

products

(ess warehouse

space needed

!educed

inventory

carrying costs

!educed ris

of obsolete

inventory






( limited number of suppliers %ho %ill

make on!time deliveries of 0ualitymaterials

2uality that is 3designed!in4 and3manufactured!in4 rather than

3inspected!out4 ( %ell!trained fle"ible %ork force

(n efficient plant layout

/uccessful implementation of a 2#T system requires3

*(T0 #upplier elationships0and &roduct /uality

*(T0 #upplier elationships0and &roduct /uality




Manufacturing Cycle ,ime

Process ,ime 5 Inspection ,ime 5Storage and 'aiting ,ime 5 Move ,ime

ProductionStarted

6oodsShipped

7nly the process time is value!added time

Measures o% %%iciency in a *(T #yste





Manufacturing Cycle ,ime

Process ,ime 5 Inspection ,ime 5Storage and 'aiting ,ime 5 Move ,ime

ProductionStarted

6oodsShipped

anufacturing

"fficiency

!atio

Value-added time

anufacturing cycle time4






#f cycle

timegoes up,

costs may

go up, and

service and

quality maygo down.






(et’s move

to the last

topic in

the chapter.

Total /uality Manageentand the Value Chain

Total /uality Manageentand the Value Chain




$reater

customer

satisfaction

5uality

products

and

services

#ncreased

business

volume

2hy is /uality (portant32hy is /uality (portant3




Prevention costs Inspection of materials upon delivery

Inspection of production process E0uipment inspection

Employee training

(ppraisal costs 8inished goods inspection

8ield testing of products

Prevention costs Inspection of materials upon delivery

Inspection of production process E0uipment inspection

Employee training

(ppraisal costs 8inished goods inspection

8ield testing of products

Coponents o% the Cost o% /ualityCoponents o% the Cost o% /uality




Internal failure costs . defects discovered

before delivery to customers

Scrap materialsRe%ork

Reinspection of re%ork

9ost sales resultingfrom late deliveries

Internal failure costs . defects discovered

before delivery to customers Scrap materials

Re%ork

Reinspection of re%ork

9ost sales resulting

from late deliveries

ost!eport





E"ternal failure costs . defects discovered

after delivery to customers

'arranty repairs Product liability

Marketing costs to

improve product image

9ost sales due to poor

product 0uality

E"ternal failure costs . defects discovered

after delivery to customers'arranty repairs

Product liability

Marketing costs to

improve product image

9ost sales due to poor

product 0uality





ost of

prevention

and appraisal

#nternal

and e6ternal

failure costs





ost of

prevention

and appraisal

#nternal

and e6ternal

failure costs

7ltimate 8bective3

9ero defects

while minimi0ing

all four quality

cost categories.





+reventionand Appraisal

"6ternal and#nternal )ailure Total ost

of 5uality

(ow 5uality 1igh 5uality

o s t o f 5 u a l i t y

*irection of recent trend

in industry.





easuring and !eporting the ost of 5uality

Amount Total : of /ales

+revention osts3

Training ;<,===>

aintenance ;=,=== 5uality planning ?,=== @=,===> @.<:

Appraisal osts3

aterial inspections ,===

"quipment inspections <,===

/upplier relations B,=== Testing C,=== ;D,=== ;.?:

#nternal )ailure osts3

!ewor- C,===

*owntime D,===

/crap ?,=== <=,=== <.;:

"6ternal )ailure osts

&arranty B,C==

(ost sales <=,===

!epairs ,C== @;,=== @.@:

Total E?,===> ;=.B:




,raditional managerialaccounting systems may

emphasi)e production0uotas and costminimi)ation

Managers often find thatemphasis on 0uality alsoincreases productivity

&roductivity and /uality&roductivity and /uality



#’m managing some

quality time in a

value-added activity.

nd o% Chapter 18nd o% Chapter 18

Costing & Value Chain, Lcc,ABC

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