Costing and the Value

Chain
Chapter 19

McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights

The Value Chain

The
The value
value chain
chain is
is the
the set
set of
of activities
activities and
and
resources
resources necessary
necessary to to create
create and
and deliver
deliver
products
products and
and services
services valued
valued byby customers.
customers.

R&D Suppliers Distribution

Customer
and and and
Service
Design Production Marketing

19-2
Value- and Non-Value-Added
Activities
Value-added activities add to product’s or
service’s desirability in customers’ eyes.

Non-value-
Identify added Eliminate
activities

Non-value-added activities add cost without

additional desirability, and can be eliminated
without reducing quality or performance.
19-3
Value-Added Activities
Value-added activities
enhance the value of products
and services in the eyes of
I love them!
the customer while meeting
goals of the business.
 Designing to customer
specification.
 Processing for just-in-time
delivery to customers.
 Competent customer
service.

19-4
Non-Value-Added Activities
Non-value-added activities
use resources without
providing value to customers.
 Material and other inventory Get rid
storage.
 Moving
of them!
parts and materials
in the factory.
 Waiting for work.
 Inspection.
 Creating scrap and rework.
 Productdesign without
customer input.
19-5
Activity-Based Management
Across the Value Chain
Chart activities needed
to meet customer
expectations.
Use ABC 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.
19-6
ABC: a Subset of
Activity-Based
Management
Activity-Based Management

Create Identify Determine

Identify
cost activity cost per unit
activities
pools measures of activity

ABC
A

Collect external Analyze activities

benchmark for non-value
information added activities

Manage activities
19-7
Components of the Target
Costing Process
Attaining the
Target Cost
Establishing the
Target Price
Production
design and
Concept value
development engineering
Target Profit Target
price margin cost
Planning Production
and market and
analysis continuous
improvement

19-8
Components of the Target
Costing Process
Developing
Developing target
target prices
prices and
and target
target
costs
costs requires
requires four
four steps:
steps:

Develop products  Target price

that satisfy – Profit margin
customer needs. = Target cost

Set target price using Use value engineering

competitors’ prices and to find least costly
customers’ perceived combination of resources
value for product. to meet customer needs.
19-9
Characteristics of the
Target Costing Process
Involve entire value An understanding of
chain in reducing relationships between
costs while satisfying process components
customer needs. and costs is critical.

A product’s functional characteristics to the

customer are emphasized.

A primary ABC is used to

objective is reducing determine changes
development time. that will reduce costs.
19-10
Just-In-Time Inventory
Procedures
Receive
customer Complete products
orders just in time to
ship to customers

Schedule
production

Receive materials Complete parts

just in time for just in time for
production assembly into products

19-11
 JIT Characteristics Across the Value Chain

On-time Factory Goals Supplier

Demand-Pull
delivery to Continuously Reduce: Relations
Production  inventory
• driven by customers  on time delivery
 wait time  high quality
customer  downtime
orders and inputs
 customer delivery time  strong
customer  defects partnership
quality
Continuously Increase  few suppliers
expectations  quality  long-term
 employee cross contracts
training  minimize
 teamwork paperwork
 process design
efficiencies
 equipment reliability
19-12
Components of the Cost of
Quality

 Prevention
Prevention costs
costs
Inspection
Inspection of
of materials
materials upon
upon delivery
delivery
Inspection
Inspection of
of production
production process
process
Equipment
Equipment inspection
inspection
Employee
Employee training
training

 Appraisal
Appraisal costs
costs
Finished
Finished goods
goods inspection
inspection
Field
Field testing
testing of
of products
products
19-13
Components of the Cost of
Quality

 Internal
Internal failure
failure costs
costs –– defects
defects
discovered
discovered before
before delivery
delivery to
to
customers
customers
Scrap
Scrap materials
materials
Rework
Rework
Reinspection Cost
Reinspection of
of rework
rework Report
Lost
Lost sales
sales resulting
resulting
from
from late
late deliveries
deliveries

19-14
Components of the Cost of
Quality

 External
External failure
failure costs
costs –– defects
defects
discovered
discovered
after
after delivery
delivery to
to customers
customers
Warranty
Warranty repairs
repairs
Product
Product liability
liability
Marketing
Marketing costs
costs toto
improve
improve product
product image
image
Lost
Lost sales
sales due
due to to poor
poor
product
product quality
quality
19-15
 Components of the Cost of
Quality
External and
Internal Failure Total Cost
of Quality
Cost of Quality

Direction of
Prevention recent trend
and Appraisal
in industry.

Low Quality High Quality

19-16
End of Chapter 19

19-17