A1258689906bewlv

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Chapter19
COSTING AND THE VALUE CHAIN
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The Value ChainFocuson Core Operations
The value chain is the set of activities
andresources necessary to create and
deliverproducts and services valued by customers.
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Value and Non-value-Added Activities
Value-added activities add to product or service
desirability in customers eyes.
Non-value-added activities add cost
withoutadditional desirability, and can be
eliminatedwithout reducing quality or
performance.
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Value and Non-value-Added Activities
Activities
Analysis andClassification
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Non-value-Added Activities

• 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!
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Activity-Based Management Drive Out Costs
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Activity-Based Management Drive Out Costs
Activity-based managementfocuses on
managingactivities to reduce costs.
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ABC a Subset ofActivity-Based Management
Activity-Based Management
A
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Activity-Based Managementand the Value Chain

• Chart activities neededto meet
  customerexpectations.

• Use ABC to determinecost of activities.

• Classify all activitiesas value-addedor
  non-value-added.

• Improve value-addedactivities and
  eliminatenon-value-added activities.

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The Target Costing Process Creating Customer
Satisfaction
Lets movealong to anew topic.
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The Target Costing Process Creating Customer
Satisfaction
Target costing is aimed at the earliest stagesof
new product and service development.
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The Target Costing Process
Attaining theTarget Cost
Establishing theTarget Price
Productiondesign andvalueengineering
Conceptdevelopment
Targetprice
Profitmargin
Targetcost
Planningand marketanalysis
Productionandcontinuousimprovement
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Major Influences on Target Pricing
Price
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Components of theTarget Costing Process

• Developing target prices and targetcosts
  requires four steps

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Life-Cycle ProductCosting and Pricing

• Product discontinued and customer support ends

• Research,design, anddevelopment

• Marketing

• Production

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Life-Cycle ProductCosting and Pricing

• Product discontinued and customer support ends

• Research,design, anddevelopment

Pricing must generate revenue to cover costsof
all phasesof productlife cycle.

• Marketing

• Production

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Characteristics ofTarget Costing Processes

• Involve entire valuechain in reducingcosts
  while satisfyingcustomer needs.

• An understanding ofrelationships betweenprocess
  componentsand costs is critical.

• A products functional characteristics to
  thecustomer are emphasized.

• A primary objective is reducingdevelopment time.

• ABC is used todetermine changesthat will reduce
  costs.

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Just-in-time (JIT)Inventory Procedures
Lets movealong toanothertopic.
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Just-In-Time (JIT) Inventory
Receivecustomerorders.
Complete productsjust in time toship to
customers.
Scheduleproduction.
Complete partsjust in time forassembly into
products.
Receive materialsjust in time forproduction.
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Relationship Between JIT andTotal Quality
Management (TQM)
Less warehousespace needed
Reducedinventorycarrying costs
With reduced inventories, quality mustbe
emphasized to avoid production delays and late
deliveries.
Reduced riskof obsoleteinventory
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Relationship Between JIT andTotal Quality
Management (TQM)
Less warehousespace needed
More rapidresponse tocustomer orders
Reducedinventorycarrying costs
Greatercustomersatisfaction
Higher qualityproducts
Reduced riskof obsoleteinventory
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JIT, Supplier Relationships,and Product Quality
Successful implementation of a JIT system
requires

• A limited number of suppliers who willmake
  on-time deliveries of qualitymaterials.
• Quality that is designed-in andmanufactured-in
  rather thaninspected-out.
• A well-trained flexible work force.
• An efficient plant layout.

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Measures of Efficiency in a JIT System
Only the process time is value-added time.
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Measures of Efficiency in a JIT System
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Measures of Efficiency in a JIT System
If cycle time goes up,
costs may go up, and
service and quality may go down.
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Total Quality Managementand the Value Chain
Lets moveto the lasttopic inthe chapter.
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Why is Quality Important?
Qualityproductsandservices
Increasedbusinessvolume
Greatercustomersatisfaction
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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 resultingfrom late deliveries

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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 toimprove product image
• Lost sales due to poorproduct quality

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Components of the Cost of Quality
Internaland external failure costs
Cost of preventionand appraisal
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Components of the Cost of Quality
Ultimate Objective Zero defectswhile
minimizingall four qualitycost categories.
Internaland external failure costs
Cost of preventionand appraisal
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Components of the Cost of Quality
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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