© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Costing and the Value Chain Chapte r 18
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© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Costing and theValue Chain
Chapter
18
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
R & Dand
Design
Suppliersand
Production
Distributionand
Marketing
CustomerService
The value chain is the set of activities andresources necessary to create and deliver
products and services valued by customers.
The value chain is the set of activities andresources necessary to create and deliver
products and services valued by customers.
The Value Chain—Focuson Core Operations
The Value Chain—Focuson Core Operations
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Non-value-added activities add cost withoutadditional desirability, and can be eliminated
without reducing quality or performance.
Value-added activities add to product or service desirability in customers’ eyes.
Identify EliminateNon-value-
addedactivities
Value and Non-value-Added Activities
Value and Non-value-Added Activities
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Analysis andClassification
Activities
Value and Non-value-Added Activities
Value and Non-value-Added Activities
Non-value-Added
Activities
Reduce orEliminate
Value-Added
Activities
Continually Evaluate
and Improve
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Examples of non-value-added activities are:
Storage of materials, work-in-process, or finished goods.
Moving parts and materials in the factory.
Waiting for work.
Inspection.
Get ridof them!
Non-value-Added ActivitiesNon-value-Added Activities
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What’s the difference between activity-based costing and
activity-based management?
Activity-Based Management — Drive Out Costs
Activity-Based Management — Drive Out Costs
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Activity-based managementfocuses on managing
activities to reduce costs.
Activity-based costingestablishes relationships
between overheadcosts and activities.
Activity-Based Management — Drive Out Costs
Activity-Based Management — Drive Out Costs
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Analyzeactivities
Collectbenchmarkinformation
Determinecost per unit
of activity
Identifyactivity
measures
Createcostpools
Identifyactivities
Activity-based costing
Activity-based management
ABC: a Subset ofActivity-Based Management
ABC: a Subset ofActivity-Based Management
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Chart activities neededto meet customer
expectations.Use ABC to determine
cost of activities.
Classify all activitiesas value-added
or non-value-added.
Improve value-addedactivities and eliminate
non-value-added activities.
Activity-Based Managementand the Value Chain
Activity-Based Managementand the Value Chain
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Let’s movealong to anew topic.
The Target Costing Process — Creating Customer SatisfactionThe Target Costing Process — Creating Customer Satisfaction
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Focusedon design.
Considerationgiven to the
entirevalue chain.
Focusedsimultaneously
on profit andcost planning.
Driven by the customer.
Target costing is aimed at the earliest stagesof new product and service development.
The Target Costing Process — Creating Customer SatisfactionThe Target Costing Process — Creating Customer Satisfaction
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Conceptdevelopment
Planningand market
analysis
Productiondesign and
valueengineering
Productionand
continuousimprovement
Targetprice
Profitmargin
Targetcost
Establishing theTarget Price
Attaining theTarget Cost
The Target Costing ProcessThe Target Costing Process
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Price
Major Influences on Target PricingMajor Influences on Target Pricing
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Develop productsthat satisfy
customer needs.
Set target price usingcompetitors’ prices andcustomers’ perceived
value for product.
Target price – Profit margin = Target cost
Use value engineeringto find least costly
combination of resourcesto meet customer needs.
Developing target prices and targetcosts requires four steps:
Developing target prices and targetcosts requires four steps:
Components of theTarget Costing Process
Components of theTarget Costing Process
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Life-cycle
costing
Research,design, and
development
ProductionMarketing
Product discontinued and customer support ends
Life-Cycle ProductCosting and PricingLife-Cycle ProductCosting and Pricing
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Pricing must generate revenue
to cover costsof all phases
of productlife cycle.
Research,design, and
development
ProductionMarketing
Product discontinued and customer support ends
Life-Cycle ProductCosting and PricingLife-Cycle ProductCosting and Pricing
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Involve entire valuechain in reducing
costs while satisfyingcustomer needs.
An understanding ofrelationships betweenprocess componentsand costs is critical.
A product’s functional characteristics to thecustomer are emphasized.
A primary objective is reducingdevelopment time.
ABC is used todetermine changes
that will reduce costs.
Characteristics ofTarget Costing Processes
Characteristics ofTarget Costing Processes
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Let’s movealong toanothertopic.
Just-in-time (JIT)Inventory Procedures
Just-in-time (JIT)Inventory Procedures
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Complete productsjust in time to
ship to customers.
Complete partsjust in time for
assembly into products.
Scheduleproduction.
Receivecustomer
orders.
Receive materialsjust in time for
production.
Just-In-Time (JIT) Inventory Just-In-Time (JIT) Inventory
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Less warehousespace needed
Reducedinventory
carrying costs
Reduced riskof obsoleteinventory
With reduced inventories, quality mustbe emphasized to avoid production
delays and late deliveries.
Relationship Between JIT andTotal Quality Management (TQM)
Relationship Between JIT andTotal Quality Management (TQM)
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
More rapidresponse to
customer orders
Greatercustomer
satisfaction
Higher qualityproducts
Less warehousespace needed
Reducedinventory
carrying costs
Reduced riskof obsoleteinventory
Relationship Between JIT andTotal Quality Management (TQM)
Relationship Between JIT andTotal Quality Management (TQM)
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
A limited number of suppliers who willmake on-time deliveries of qualitymaterials.
Quality that is “designed-in” and“manufactured-in” rather than“inspected-out”.
A well-trained flexible work force. An efficient plant layout.
Successful implementation of a JIT system requires:
JIT, Supplier Relationships,and Product Quality
JIT, Supplier Relationships,and Product Quality
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Manufacturing Cycle Time
Process Time + Inspection Time + Storage and Waiting Time + Move Time
ProductionStarted
Goods Shipped
Only the process time is value-added time.
Measures of Efficiency in a JIT System
Measures of Efficiency in a JIT System
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Manufacturing Cycle Time
Process Time + Inspection Time + Storage and Waiting Time + Move Time
ProductionStarted
Goods Shipped
ManufacturingEfficiency
Ratio
Value-added time
Manufacturing cycle time=
Measures of Efficiency in a JIT System
Measures of Efficiency in a JIT System
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
If cycletime goes up,
costs maygo up, and
service andquality maygo down.
Measures of Efficiency in a JIT System
Measures of Efficiency in a JIT System
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Let’s moveto the last
topic inthe chapter.
Total Quality Managementand the Value Chain
Total Quality Managementand the Value Chain
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Greatercustomer
satisfaction
Qualityproducts
andservices
Increasedbusinessvolume
Why is Quality Important?Why is Quality Important?
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Prevention costs Inspection of materials upon delivery Inspection of production process Equipment inspection Employee training
Appraisal costs Finished goods inspection Field testing of products
Prevention costs Inspection of materials upon delivery Inspection of production process Equipment inspection Employee training
Appraisal costs Finished goods inspection Field testing of products
Components of the Cost of QualityComponents of the Cost of Quality
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Internal failure costs – defects discovered before delivery to customers Scrap materials Rework Reinspection of rework Lost sales resulting
from late deliveries
Internal failure costs – defects discovered before delivery to customers Scrap materials Rework Reinspection of rework Lost sales resulting
from late deliveries
CostReport
Components of the Cost of QualityComponents of the Cost of Quality
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
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
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
Components of the Cost of QualityComponents of the Cost of Quality
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Cost of prevention
and appraisal
Internaland external failure costs
Components of the Cost of QualityComponents of the Cost of Quality
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Cost of prevention
and appraisal
Internaland external failure costs
Ultimate Objective:
Zero defectswhile minimizing
all four qualitycost categories.
Components of the Cost of QualityComponents of the Cost of Quality
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Preventionand Appraisal
External andInternal Failure Total Cost
of Quality
Low Quality High Quality
Co
st o
f Q
ual
ity
Direction ofrecent trendin industry.
Components of the Cost of QualityComponents of the Cost of Quality
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Measuring and Reporting the Cost of Quality
Amount Total % of SalesPrevention Costs:
Training 12,000$ Maintenance 10,000 Quality planning 8,000 30,000$ 3.2%
Appraisal Costs:Material inspections 6,000 Equipment inspections 2,000 Supplier relations 4,000 Testing 5,000 17,000 1.8%
Internal Failure Costs:Rework 5,000 Downtime 7,000 Scrap 8,000 20,000 2.1%
External Failure CostsWarranty 4,500 Lost sales 20,000 Repairs 6,500 31,000 3.3%
Total 98,000$ 10.4%
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Traditional managerial accounting systems may emphasize production quotas and cost minimization.
Managers often find that emphasis on quality also increases productivity.
Productivity and QualityProductivity and Quality
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I’m managing somequality time in a
value-added activity.
End of Chapter 18End of Chapter 18