costing & value chain, lcc,abc
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Costing and theValue Chain
Chapter
18
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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
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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
Value and Non-value-AddedActivities
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Analysis and
lassification
Activities
Value and Non-value-AddedActivities
Value and Non-value-AddedActivities
Non-value-
AddedActivities
!educe or
"liminate
Value-
AddedActivities
ontinually "valuate
and #mprove
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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
$et rid
of them%
Non-value-Added Activities
Non-value-Added Activities
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&hat’s the difference between
activity-based costing and
activity-based management'
Activity-Based Manageent —!rive Out Costs
Activity-Based Manageent —!rive Out Costs
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Activity-based managementfocuses on managing
activities to reduce costs.
Activity-based costingestablishes relationships
between overheadcosts and activities.
Activity-Based Manageent —!rive Out Costs
Activity-Based Manageent —!rive Out Costs
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(naly)eactivities
Collectbenchmarkinformation
Determinecost per unit
of activity
Identifyactivity
measures
Createcost
pools
Identifyactivities
A c t i v i t y - b a s e d c o s t i n g
A c t i v i t y - b a s e d m a n a g e m e n t
ABC" a #u$set o% Activity-Based Manageent
ABC" a #u$set o% Activity-Based Manageent
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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
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(et’s movealong to a
new topic.
The Target Costing &rocess —Creating Custoer #atis%action
The Target Costing &rocess —Creating Custoer #atis%action
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)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.
The Target Costing &rocess —Creating Custoer #atis%action
The Target Costing &rocess —Creating Custoer #atis%action
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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
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+rice
Ma'or (n%luences on Target &ricingMa'or (n%luences on Target &ricing
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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
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(ife-
cycle
costing
!esearch,
design, and
development
+roductionareting
+roduct
discontinued
and customer
support ends
)i%e-Cycle &roductCosting and &ricing
)i%e-Cycle &roductCosting and &ricing
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+ricing mustgenerate revenue
to cover costs
of all phases
of product
life cycle.
!esearch,
design, and
development
+roductionareting
+roduct
discontinued
and customer
support ends
)i%e-Cycle &roductCosting and &ricing
)i%e-Cycle &roductCosting and &ricing
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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
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(et’s movealong to
another topic.
*ust-in-tie +*(T,(nventory &rocedures
*ust-in-tie +*(T,(nventory &rocedures
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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
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(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,
elationship Bet.een *(T andTotal /uality Manageent +T/M,
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ore rapid
response tocustomer orders
$reater
customer
satisfaction
1igher quality
products
(ess warehouse
space needed
!educed
inventory
carrying costs
!educed ris
of obsolete
inventory
elationship Bet.een *(T andTotal /uality Manageent +T/M,
elationship Bet.een *(T andTotal /uality Manageent +T/M,
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( limited number of suppliers %ho %ill
make on!time deliveries of 0ualitymaterials
2uality that is 3designed!in4 and3manufactured!in4 rather than
3inspected!out4 ( %ell!trained fle"ible %ork force
(n efficient plant layout
/uccessful implementation of a 2#T system requires3
*(T0 #upplier elationships0and &roduct /uality
*(T0 #upplier elationships0and &roduct /uality
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Manufacturing Cycle ,ime
Process ,ime 5 Inspection ,ime 5Storage and 'aiting ,ime 5 Move ,ime
ProductionStarted
6oodsShipped
7nly the process time is value!added time
Measures o% %%iciency in a *(T #yste
Measures o% %%iciency in a *(T #yste
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Manufacturing Cycle ,ime
Process ,ime 5 Inspection ,ime 5Storage and 'aiting ,ime 5 Move ,ime
ProductionStarted
6oodsShipped
anufacturing
"fficiency
!atio
Value-added time
anufacturing cycle time4
Measures o% %%iciency in a *(T #yste
Measures o% %%iciency in a *(T #yste
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#f cycle
timegoes up,
costs may
go up, and
service and
quality maygo down.
Measures o% %%iciency in a *(T #yste
Measures o% %%iciency in a *(T #yste
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(et’s move
to the last
topic in
the chapter.
Total /uality Manageentand the Value Chain
Total /uality Manageentand the Value Chain
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$reater
customer
satisfaction
5uality
products
and
services
#ncreased
business
volume
2hy is /uality (portant32hy is /uality (portant3
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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
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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
Coponents o% the Cost o% /ualityCoponents o% the Cost o% /uality
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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
Coponents o% the Cost o% /ualityCoponents o% the Cost o% /uality
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ost of
prevention
and appraisal
#nternal
and e6ternal
failure costs
Coponents o% the Cost o% /ualityCoponents o% the Cost o% /uality
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ost of
prevention
and appraisal
#nternal
and e6ternal
failure costs
7ltimate 8bective3
9ero defects
while minimi0ing
all four quality
cost categories.
Coponents o% the Cost o% /ualityCoponents o% the Cost o% /uality
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+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.
Coponents o% the Cost o% /ualityCoponents o% the Cost o% /uality
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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:
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,raditional managerialaccounting systems may
emphasi)e production0uotas and costminimi)ation
Managers often find thatemphasis on 0uality alsoincreases productivity
&roductivity and /uality&roductivity and /uality
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#’m managing some
quality time in a
value-added activity.
nd o% Chapter 18nd o% Chapter 18
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