IE 475 Advanced Manufacturing Costing Techniques

1
IE 475Advanced Manufacturing Costing
Techniques

• Lecture Notes 1
• Course Overview
• Introduction

2
Course Overview

• Personnel
• Course Objective
• Textbook
• Grading Criteria
• Homework Exams
• Lecture Format
• Classroom Rules
• Tentative Schedule

3
Personnel

• Instructor Dr. David Porter
• Office 420 Rogers Hall
• Phone [phone]
• Email david.porter_at_oregonstate.edu
• Office hours M W 400 530 PM
• By appointment
• Courses URL
• http//classes.engr.oregonstate.edu/mime/fall2009/
  ie475

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Personnel (cont.)

• GTA Leticia Cavazos
• Office 001 Covell Hall
• Email cavazosm_at_onid.orst.edu
• Office hours M W 100 200 PM
• By appointment
• Courses URL
• http//classes.engr.oregonstate.edu/mime/fall2009/
  ie475

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Course Objective

• This course will explore several costing
  techniques applicable in advanced manufacturing
  enterprises
• Some of the topics covered will include
• Activity based costing
• Life cycle costing
• Theory of constraints
• Japanese cost management techniques
• Cost of quality
• Economic value added

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Textbook

• Blocher, E.J., D.E. Stout, G. Cokins, K.H. Chen.
  Cost Management A Strategic Emphasis, 4th
  Edition, McGraw-Hill/Irwin, 2008.

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Grading Criteria

• Homework 10
• Project 1 Journal Paper Review Project 15
• Project 2 Research Project 15
• Midterm Exam 30
• Final Exam (Comprehensive) 30

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Homework Exams

• Homework
• Several homework assignments will be given
• Solutions will be provided after the due date
• Group study is encouraged but splitting up or
  copying assignments is not
• Exams
• Closed book and closed notes exams
• Based on homework, lecture material, reading
  assignments

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Lecture Format

• The first part of class will be devoted to
  questions
• Unreasonably long questions will be handled one
  on one
• If I do not know the answer, I will get it for
  the class by the next lecture
• Lecture
• Ask questions
• End of Class Will try to leave time for
  questions
• You may as well ask

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Lecture Format (cont.)

• Material will be delivered on PowerPoint slides
  using a Tablet PC
• Material will be added to slides during class
• There will be periodic in-class exercises
• Minor changes to the slides may be made just
  before class
• All added (hand written) material is your
  responsibility
• Hand written material added by instructor will
  NOT be available on the website

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Classroom Rules

• Turn off cell phones and other communication
  devices
• No web surfing
• No newspapers
• No completing homework or other assignments
• No sleeping
• Use common sense and be considerate of others
• Notify instructor when absent from class as soon
  as possible
• Before or after the fact
• Justifiable reason

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Tentative Schedule

• Week 1
• Course Introduction
• Week 2
• Cost Concepts
• Week 3
• Cost Concepts (cont.)
• Activity Based Costing
• Week 4
• Activity Based Costing (cont.)
• Week 5
• Activity Based Costing (cont.)
• Life Cycle Costing
• Midterm Examination

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Tentative Schedule (cont.)

• Week 6
• Life Cycle Costing (cont.)
• Theory of Constraints
• PROJECT 2 PROPOSAL DUE
• Week 7
• Theory of Constraints (cont.)
• Japanese Cost Management Techniques
• Week 8
• Japanese Cost Management Techniques (cont.)
• Cost of Quality

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Tentative Schedule (cont.)

• Week 9
• Cost of Quality
• Thanksgiving Break
• Week 10
• Economic Value Added
• Course Evaluation
• PROJECT 2 FINAL REPORTS DUE
• Week 11
• Final Exam Thursday, Dec 10th _at_ 600pm

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Projects

• In this course, two projects will be completed
• Projects provide an opportunity to conduct
  independent research and promote life-long
  learning
• Help to fulfill learning outcome 8
• Demonstrate the ability to communicate and
  document technical information in a professional,
  structured, timely, and effective manner

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Project 1 Description

• The objective is to complete a journal article
  review covering a particular class topic area
• Worth 15 of final grade
• The article should be from the archival journal
  literature
• Preference should be given to journal articles
• Conference papers are accepted if they meet
  certain criteria for rigor and completeness
• Articles from trade magazines or random reports
  published on the Internet are NOT acceptable
• Critical Due Dates
• Oct 8th Executive summaries for three candidate
  articles due
• Oct 13th Electronic copy of article selected
  (via email) due

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Project 1 Presentation Schedule
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Project 2 Description

• Research project to survey some of the current
  topics in cost management and provide a specific
  level of breadth
• Research project should focus on a topic of
  relevance to cost management in an advanced
  manufacturing environment
• Alternatively, the project may focus on a
  work-related topic
• In this case, the project will be more
  quantitative in nature
• Critical Due Dates
• Oct 27th One-page project proposal
• Dec 3rd Final reports due (last lecture
  session)

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Introduction
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Learning Objectives

• Justify the need for advanced cost management in
  manufacturing
• Explain the use of cost management information in
  each of the four functions of management
• Explain the contemporary management techniques
  and how they have influenced cost management
• Explain the different types of competitive
  strategies
• Explain the different techniques available to
  implement a competitive strategy

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Deficiencies in Cost Management Systems

• Recent surveys in the United States indicate
  dissatisfaction with todays product cost
  systems. Allocation of overhead is the primary
  concern (Drury, 1989).
• Products are regularly overcosted or undercosted
  by 20 or more (Flentov and Shuman, 1991). And
  complex products could be undercosted by as much
  as 500 (OGuin, 1990).
• A survey published in Accounting Today indicates
  that 50 of the corporate controllers in the
  United States believe that their cost systems are
  obsolete, and 78 believe that their costs are
  misstated on some products (Farmer, 1991).

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Cost Management Challenges

• What factors make it difficult to manage costs in
  a modern manufacturing environment?
• Increased global competition
• Increased Product/Services Complexity

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Cost Management Challenges

• What factors make it difficult to manage costs in
  a modern manufacturing environment (cont.)?
• Advances in Manufacturing Technologies
• Advances in Information Technologies

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Cost Management Challenges

• What factors make it difficult to manage costs in
  a modern manufacturing environment (cont.)?
• Greater Focus on the Customer
• Changes in Management Organization

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Four Functions of Management

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Four Functions of Management
Development of a sustainable competitive position

Involves budgeting and profit planning, cash flow
mgmt and operations (i.e., recurring) related
decisions
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Four Functions of Management

Mgmt control evaluation of mid-level mgrs by
upper-level mgrs Ops control mid-level mgrs
monitor op-level mgrs and employees
Requires management to comply with financial
reporting requirements of regulatory agencies
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Strategic Management

• Strategic management requires

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Strategic Cost Management

• Strategic cost management
• Involves the development of cost management
  information to facilitate strategic management
• What is cost management information?
• Information that the manager needs to effectively
  manage the firm or not-for-profit organization
  and includes both

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Critical Success Factors

• Critical Success Factors (CFSs)
• Measures of those aspects of the firms
  performance essential to its competitive
  advantage and therefore to its success
• Many of these CSFs are financial but many are
  non-financial
• The CSFs for any given firm depend on the nature
  of the competition it faces

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Critical Success Factors

• Examples

Source http//rapidbi.com/created/criticalsuccess
factors.htmlExamplesCSF
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Types of Organizations

Merchandisers
Manufacturers
Servicefirms
Government and Not-for-profit
Wholesalers
Retailers
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Contemporary Cost Management Techniques A Sample

• Activity Based Costing (ABC)
• Parametric Cost Analysis (PCA)
• Price-led Design (PLD)
• Design-to-Cost (DTC)
• Target Costing (TC)
• Cost as Independent Variable (CAIV)
• Strategic Management Accounting (SMA)
• Functional Cost Analysis

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Contemporary Management Techniques Our Focus

• Activity Based Costing (ABC)
• Life Cycle Costing (LCC)
• Theory of Constraints (TOC)
• Japanese Cost Management Techniques (JCMT)
• Cost of Quality (CoQ)
• Economic Value Added (EVA)

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Activity Based Costing

• Activity Based Costing focuses on indirect costs
  (overhead).
• It tries to trace the significant activities of
  the business process to the product, service or
  customer that generates the activity
• Basic assumption is that activities consume
  resources and that products (or services or
  customers) consume activities
• Understanding this relationship is paramount
  towards controlling and ultimately reducing
  overhead

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Life Cycle Costing

• Cost considerations and strategic implications
  throughout the products life cycle
• Often times 80 of a products cost is
  locked-in once it is designed
• Accounting for recurring and non-recurring costs

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Theory of Constraints

• Developed by Goldratt
• In the cost management literature, sometimes
  referred to as throughput accounting
• Primary focus is on throughput and secondary
  focus is on cost
• Examines the demand that various products place
  on bottleneck resources

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Japanese Cost Management Techniques

• Cost systems used to influence activities which
  support the strategic plan such as quality,
  on-time delivery and low cost production
• Not just numbers for senior management
• Should be an indicator of long term competitive
  position, not just a quantification of present
  performance
• Many of the Japanese cost management systems are
  actually quite simplified
• Approaches - target costing, cost tables and
  decision support systems

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Cost of Quality

• Typically costs associated with making, finding,
  repairing, or preventing defects (Juran and
  Gyrna)
• Internal failure costs
• External failure costs
• Appraisal Costs
• Prevention Costs
• Quality is Free (Crosby)
• Taguchi Loss Function (Taguchi)

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Economic Value Added

• A tool to manage capital investments
• Periodic financial value-based performance
  measure
• Used to maximize shareholder wealth
• Focuses on capital cost by introducing a capital
  charge
• Known as EVA, a registered trademark of Stern
  Stewart Co.

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Strategies

• A strategy is a set of policies or procedures to
  business that produce long-term success
• Finding a strategy begins with determining the
  purpose and long-range direction, and therefore
  the mission, of the company
• The mission is developed into specific
  performance objectives, which are then
  implemented by specific corporate strategies, to
  achieve the objectives that will fulfill the
  mission

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Strategic Positioning

• Firms arrive at one of two competitive
  strategies
• Cost leadership
• Differentiation

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Distinctive Aspects of the Two Competition
Strategies
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Implementing Competitive Strategies

• There are various means for implementing
  competitive strategies
• The firm might also choose to expand its
  competitive strategy to the broader social and
  environmental settings in which the firm operates

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Value Chain Analysis

• Strategic analysis tool used to
• Better understand the firms competitive
  advantage
• Identify where value to customers can be
  increased or costs reduced
• Better understand the firms linkages
• with suppliers, customers, and
• other firms in the industry

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Value Chain Analysis

• Focuses on the products total value chain
• From its design to its manufacture to its service
  after the sale
• The underlying concept of the analysis is that
  each individual firm occupies a selected part (or
  parts) of this entire value chain
• The determination of which part (or parts) of the
  value chain to occupy is a strategic analysis
  based on the consideration of comparative
  advantage for the individual firm

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The Balanced Scorecard

• The balanced scorecard is an accounting report
  that includes the firms critical success factors
  (CSFs) in four areas
• Financial performance
• Customer satisfaction
• Internal business processes
• Innovation and learning

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The Balanced Scorecard
Learning improvesbusiness processes
Improved businessprocesses improvecustomer
satisfaction
Improving customersatisfaction
improvesfinancial results
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The Balanced Scorecard

• Provides four key benefits
• A means for implementing strategy
• A framework firms can use to achieve a desired
  organizational change in strategy
• A fair and objective basis for firms to use in
  determining each managers compensation and
  advancement
• A framework that coordinates efforts within the
  firm to achieve critical success factors

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Strategies Summary

• SWOT analysis helps to implement a strategy by
  providing a system and structure in which to
  identify the firms CSFs
• Value-chain analysis builds on the CSFs
  developed in the first step by breaking them down
  into detailed activities
• The balanced scorecard provides a way to
  implement the detailed strategy developed through
  SWOT analysis and value-chain analysis by
  providing the processes for evaluating the firms
  achievement of the CSFs needed for success