196 Chapter 7 ; Internal Business Process Performance Most of the performance measures are self-explanatory. However, three are not ~ delivery cycle time, throughput time, and manufacturing cycle efficiency (MCE). These three important performance measures are discussed below. Figure 7-3: Delivery Cycle Time and Throughput (Manufacturing Cycle) Time Customers . } Order Production eu Received Started pection Time + Move | +—— Throughput (Manufacturing Cycle) Time ———» | + eelvery Cycle Time i Value-Added Time __Nun-Value-Added Time Process Wait Time” um Inspection Time Move Tima Queue Time Delivery Cycle Time. The amount of time from when an order is received from a Customer to when the completed order is shipped is called delivery time cycle. ‘This time is clearly a key concer to many Customers, who would like the delivery cycle time to be as short as pessible, Cutting the delivery cycle time may give a company a key competitive advauitage ~ and may be necessary for survival, Consequently, many companies would include this performance measure on their balanced scorecard. Throughput (Manufacturing Cycle) Time. The amount of time required to turn ‘avs materials into completed products is called throughput time, or manufacturing cycle time. The relation between the delivery cycle time and the throughput (manufacturing Cycle) time is illustrated in the diagram above,‘The Balanced Scorecard: A Tool to Implement Strategy 197 ‘As shown in the diagram, the throughput time, or manufacturing cycle time, is made up of process time, inspection time, move time, and queue time. Process time is the amount of time work is actually done on. the product. Inspection time is the amoui oF Time spent ensuring that the product is not defective, Move time is the time required to move materials or partially completed products. from workstation to. workstation. Queue Time is the amount of time a product spends waitifig to be worked on, to be moved, to be inspected, or to be shipped , * # ~ : As shown at the bottom of the diagram, only one of these four activities adds value to the product — process time. The other three activities — inspecting, moving, and * queuing — add no value and should be eliminated as much as possible. Manufacturing Cycle Efficiency (MCE). Through concerted efforts to eliminate the non-value-added activities of inspecting, inoving, and queuing, some ies haye reduced their throughffut time to only a fraction of previous levels. is has helped to reduce the delivery cycle time from tiionths to only weeks or hours. Throughput time, which is considered to be a key measure in delivery performance, can be put into better perspective by computing the manufacturing cycle efficiency (MCE). The MCE is computed by relating the value-added time to the throughput time. The formula is: ‘ { Ks : ; A MCE = an Valle ailded time. io 6d Throughput (manufacturing cycle) time Ifthe MCE is less than 1, then non-value-added time is present in the production process. An MCE of C.5, for example, would mean that half of the tota! production time consisted of inspection, moving, and similar non-value-added activities. In many manufacturing companies, the MCE is less than 0.1 (10%), which means that 90% of the time a unit is in process is spent on activities that do not add value to the product. By monitoring the MCE, companies are able to reduce non-value- added activities and thus get products into the hands of customers more quickly and at a lower cost. ‘198 Chapler 7 Illustrative Problem 7-2: Measures of Internal Business Process Performance Southwest Company keeps careful track of the time relating to orders and their production. During the most recent quarter, the following average times were ea for each unit or order: Deys ~ Wait time 170. Inspection time"; 04/7 Process time | 2.0 ” Move time | 06 - Queue time 5.0 Goods are shipped as soon as production is completed. REQUIRED: 1. Compute the throughput time, or velocity of production. 2. Compute the manufacturing cycle efficiency (MCE), 3. What percentage of the production time is spent in non-value-added activities? 4. Compute the delivery cycle time. Solution: * |. Throughput time = Process time + Inspection time + Move time-+ Queue time 2.0 days + 0.4 days + 0.6 days + 5.0 days 8.0 days 2. Only process time is sale aed ine oe the computation of the MCE would be as pores MCE s Value-added time = 20 days _ 025 Throughput time 8.0 days Thus, once put into production, a typical unit is actually being worked on only 25% of the time. Since the MCE is 25%, the complement of this fi igure, or 75% of the total production time, is spent in non-value-: added activities. 4. Delivery cycle time =" Wait time + ‘Throughput time 17.0 days + 8.0 days 25.0 days‘The Balanced Scorecard: A Tool to Implement Strategy 199 REVIEW QUESTIONS AND PROBLEMS Questions ‘ ; He |. Give the major weakness of eacl a leadership, (2) differentiation, ard? What is the primary objective when using of the three competitive strategies: (1) and (3) focus. 2, What isa balanced Scorec a balanced scorecard? Contrast using the balanced scorecard with using only financial measures of success. 4, How can an analyst incorporate the industry-market-size factor and the interrelationships between the growth, price-recovery, and productivity components into a stratégic analysis of operating income? 5. Why does balanced scorecard differ from company to company? 6. What is the difference between the delivery cycle time and the throughput time? What four elements make up. the throughput time? Into what two classes can these four elements be placed? 7. Why does the balanced scorecard include financial performance measures as well as measures of how well internal business processes are doing? _ : 8. Ifa company has a manufacturing cycle efficiency (MCE) of less than 1, what does it mean? How would you interpret an MCE of 0.40? Problem (Measures of Internal Business Process Performance) Melody Fabrications, Ltd., of Dasmarifias, Cavite, has recently begun a continuous improvement campaign in conjunction with a move toward JIT production and purchasing. Management has developed new performance measures as part of this campaign. The following operating data have been gathered over the last four months:Month Poe le ‘oughput time, or velocity ” 9 9 5 Manufacturing cycle efficiency q 2 9 7 Delivery cycle time 2 9 9 9 Percentage of on-time y deliveries, 2% BY 78% 85% a sales (units)... 1 ‘ ‘ 10,540 10,570 10,550 19,490 Management would like to know the company’s throughput time, manufacturing cycle efficiency, and delivery cycle time. The data to compute these measures have been gathered and appear below: Month 1 2 3 4 05 05° «(04 OS ns Move time per unit, in days. Process time per unit, in days.. Wait time per order before start of production, in day: Queue time per unit, in days Inspection time per unit, in days 9.6 8.7 53 47 3.6 3.6 26 17 07 07 0.4 03 As part of its continuous improvement program, the company is planning to move toward 4 JIT purchasing and production system. Required: ; 1. For each month, compute the following operating performance measures: a. The throughput time, or velocity of production. b. The manufacturing cycle efficiency (MCE). c. The delivery cycle time. 2. Using the performance measures given in the problem and those vou computed in (1) above, identify whether the trend over the four months is generally favorable, generally unfavorable, or mixed. What areas apparently require improvement and how might they be improved? 3. Refer to the move time, process time, and so forth, given above for month 4, a. Assume that in month 5 the move time, process time, and so forth, are the same as for month 4, except that through the implementation of JIT, the company is able to completely eliminate the queue time during production. Compute the new throughput time and MCE.The Balanced Scorecard: A Tool to Implement Strategy _201 b. Assume that in month 6 the move time, process time, and so forth, are the same as for month 4, except that the company is able to completely eliminate both the queue time during production and the inspection time. Compute the new throughput time and MCE, Multiple Choice 1. Which of the following represents value-added time in the manufacturing cycle? a. Inspection time. b. Queue time. c. Move time. ¥ Process time. ‘Throughput time consists of: a. process time: - b. inspection time and move time. ¢. process time, inspection time, and move time. 4, process time, inspection time, move time, and queue time. Manufacturing Cycle Efficiency (MCE) is computed as: a. Throughput Time + Delivery Cycle Time. é b. Process Time + Delivery Cycle Time. = Value-Added Time + Throughput Time. d. Value-Added Time + Deiivery Cycle Time. Lorenzo Corporation has provided the following data for one of its products: . 3 days - 4days , 07 aa 6 0.3 days | Tgs | ‘The manufacturing cycle efficiency for this operation would be closest to: : Process time . a, 0375, b. 0.45. . c. 0.18. d. 0.33.202, Chapter 7 : Use the following information to answer questions 5 through 8. Rainee Manufacturing Corporation has the, followin hp : Moving time 8 days Inspection time 2 days Processing time 10 days-— Storage time i 5. Whatis the total.amount of value-added time? a. 10 days b. 30 days c. 40 days d. 50 days 6. What is the total amount of nonvalue-added time? 10 days b: 30 days _ 6 40days - d. 50 days 7. Whatis the product’s cycle time? a. i0days b. 30 days c. 40 days d. 50 daysy 8. What is the manufacturing cycle efficiency? a 25.0% 5 b. 80.0% c. 20.0% d. 60.0% Use the following information to answer questions 9 and 10, ‘Nicole Corporation has the following information: Moving time 10 days Inspection time 5 days Processing time 15 days Storage time 20 dayser The Balanced Scorecard: A Too! to Implement Strategy ae ae : 10. What is the manufacturing cycle efficiency? a 30.0% b. 20.0% \ c. 50.0% d- 70.0%a CHAPTER COST PLANNING FOR PRODUCT LIFE CYCLE: LIFE-CYCLE COSTING AND LONG-TERM PRICING; TARGET COSTING AND THEORY OF CONSTRAINTS EXPECTED LEARNING ea After studying this chapter, you should be able to... 1. Describe the concepts of the cost life cycle and sales life concept 2. Explain and apply the methods in analyzing strategic cost management issues of the cost-iife cycle such as «Life-cycle costing +” Target costing * Theory of constraints 3. Distinguish between upstream costs, manufacturing and dowfistream costs of a product's life cycle 4, Realize the importance of decision making at the design stage of a product 5. Describe ‘the characteristics of the common design models 6. Explain the strategic cost management over the product's sales life cycle 7. Describe Target Costing and how it is applied in the Cost-life cycle 8 hed the techniques in reducing costs fo 0 target cost level Explain the steps in implementing a target cost approach 10. Describe the Concept of theory of Constraints and how itis applied to improve the speed in improving speed in the Manufacturing process teee —<<< $$CHAPTER 8. COST MANAGEMENT FOR PRODUCT LIFE CYCLE: LIFE-CYCLE COSTING AND LONG-TERM PRICING; TARGET COSTING AND THEORY OF CONSTRAINTS COST MANAGEMENT FOR PRODUCT LIFE CYCLE Life Cycle Costing This chapter focuses on the time dimension of cost management. Consideration is given both to (1) the effect of ‘the timeliness of operations on total costs and (2) the way in which costs change over the life cycle of the product. Product life cycle is consideration in each of two aspects a) The cost life cycle *b) The sales life cycle et lifecule is the sequence of activities within the firm that begins with research and development, followed by design, manufacturing, marketing / distribution and customer service. . ies li is the sequence of phases in the product’s or service’s life in the market — from the introduction of the product or service to growth in sales and finally maturity, decline and withdrawal from the market. eed See 2 eee Important strategic cost management issues arise in each activity of the cost life cycle. The methods helpfut in analyzing the cost life cycle are A. Life-Cycle Costing “ B. Target Costing and ~ C. Theory of Constraints206_ Chapter 8 Life-Cycle Costing is used throughout the cost life cycle to minimize overall cost. Target Costing is used for managing costs primarily in the design activity. Theory of Constraints is a method for managing manufacturing costs. Two of the methods, target costing and the theory of constraints are particularly applicable to manufacturing firms because they deal primarily with product design and manufacture. However, each method also can be applied to service firm, to improve the efficiency and speed of the processes invoived in providing the service. A. COST MANAGEMENT FOR THE PRODUCT LIFE-CYCLE Life-Cycle Costing is a management technique used to identify and monitor the costs of product or service throughout its life cycle. It provides a long-term perspective of product costs and product or service profitability. For instance, a product that is designed quickly and carelessly, with little investment in design costs, may have significantly higher marketing and service costs later in the life cycle. Managers are interested in the total cost, over the entire life cycle, and not manufacturing costs only. Total cost over the product’s life cycle often is broken down into three components — upstream costs, manufacturing cost and downstream costs. See Figure 8-1. Figure 8-1: Life-Cycle Costing R&D\ Desh \ Pot moh Can my, yy Osten > ee Upstream Activities Downstream Activities ad t LIFE-CYCLE COSTING‘Cost Planning for Product Life “The sub-components of these costs follow: Upstream'costs : Pier and development Sagi enginecring and quality Design: prototyping, testing, opment wa upstream costs include computer_software, tries with high ; ; eer industrial and medical equipment ‘Manufacturing costs Purchasing Direct manufacturifig costs - Indirect manufacturing costs Downstream costs ; jth : Marketing and distribution - packaging, shipping, samples, promotion, advertising ieee Service and warranty — recalls, service, product liability, customer support Industries with high downstream - costs include pharmacratic, performer, cosmetics and toiletries Why Design is Important Decision making at the design stage is critical. Although the costs incurred at the design stage may be very small in relation to the total costs over the entire life cycle the decision stage decisions are important because they iock in most of the remaining life-cycle costs. 5 The critical success factors at the design stage include: 1. Reduced time-to-1 t. 2. Reduced expecied service costs. 3. Improved ease-of-manufacture. 4. Process planning and design. Reduced time-to-market The speed of product:development and the speed of delivery and efforts to reduce time-to-market are critical for a business firm to sustain its competitiveness,Fa . 208 _ Chapter § Reduced expected service costs By careful simple design and the use of interchangeable or modular components can reduce expected service costs, Improved ease-of-manufacture ‘The design must be easy to manufacture in order to reduce production costs and speed production, Process planning and design The plan for the manufacturing process should be flexible, allowing for fast setups and product changeovers, using computer-integrated manufacturing computer assisted design and concurrent engineering, Common Design Models \ The four common design methods are ‘\ a. Basic engineering - b. Prototyping c. Templating and 4d. Concutrent engineering Basic engineering This is a method in which product designers. work independently from marketing and manufacturing to develop a design from specific plans and specifications. Prototyping This is a method in which functional models of the product are developed and tested by engineers and trial customers. Templating This is a design method in which an existing product is scaled up or down to fit the specifications of the desired new product. Concurrent engineering Concurrent engineering or simultaneous engineering, is an important new approach in which product design is integrated with manufacturing and marketing throughout the product’s life cycle. aepi i Cost Planning for Product Life Cycle ... 209 Figure 8-2 summarizes the characteristics of the Four Design Methods. Figure 8-2: Characteristics of the Four Design Methods i i Cost Effect on Design Method | Design Speed Design Cost Downstreara Coste, i st Depends on desired | Can be very high; as ae a complexity and marketing and functionality; should be | production are not relatively low integral to the design Potentially a significant i significant; materials, a signi irae ao a and time reduction in downsteam costs i Modest Unknown; can have nt = costly unexpected results if the scaling does not work in the market or in production Concurrent Continuous Significant; design is | The best method for engheating an integral, ongoing | reducing downstream process [costs Mlustrative Case I: Life-Cycle Costing ard Pricing Star Communications Techiiologies, Inc., has introduced a new phone so small that itcan be carried in a wallet, Star invested P400,000 in research and development for the technology, and another P800,000 to design and test the prototypes. Star Predicts a four-year life cycle for this model and gathered this cost data for the wallet phone: Monthly Fixed Cost Variable Costs Manufacturing costs P25,000 P20 Marketing costs 20,000 5 Customer costs 3,000 | 8 | Distribution costs 5000 | 5 Sales prediction: For price of P150- average annual sales of P80,000 units For price of P10 — avetage annual sales of 60,000 unit. For price of P225 — average annual sales of 48,000 units210 _ Chapter 8 If the price of a wallet phone is P225, Star will have to increase the research and developinent costs by P100,000 and the prototyping costs by P400,000 to improve the model for the higher price. Fixed customer service costs also would increase by 500 per month and variable distribution costs would increase by PS per unit to improve the customer service and distribution at the P225 level. At the lowest price level of P150, fixed marketing costs would be reduced by P5,000 per month because the low price would be the principal selling feature. Required: 1. Determine the life-cycle costs for each pricing decision. 2. What price will produce the most profit for Star for the wallet phone’s life cycle? Solution to Mlustrative Case I: Life-Cycle Costing and Pricing Requirement 1: Life-Cyole costs for each decision Price P00 T P1000 T P7500 Units Sold 80,000 60,000 48.000 | Revenues 2,000,000 | P10/00,000 | PY0/00,000 i Costs oes R&D 400,000 | P _400/000. | P 500000 | more ai P25 Protolypes P 000,000 | “P _800,000 | P 1,200,000 | more at P225 Manufacturing | Fired P 1,200,000 |” 1,200,000 | P #,200,000 | = 25,000. 12 months x4 years Variable P 4,600,000 | 4,200,000°| P _ 960,000 | = 20 per unit Marketing Fired P 720,000 | P 960,000 | ~P. 960,000 | = 20000 x 12 x 4 (15,000 at Variable PA900 | PCO | P_POOOD | = 5 peru Customer Service Fixed p ‘4400 | P 144000 | P 168,000 | =3000x 12x 4 (600 a PZ) Variable | P640,000 | P _480,000 | P_ 384,000 | = 8 per unit Distribution Fired P 000 | P 240,000 | P 240}000 | = 5000x Tx Variable P 4,200,000 | P 900,000 [P 960,000 | = 15 per unt (20 at P225 price) LTotal Cost 1 27344000 | P4i76000 |? 5.988.000 | | Requirement 2 The P150 price renders the highest expected profit.Tt Cost Planning for Product Life Cycle... 21 OVER THE SALES LIFE CYCLE is in the product’s or service’s life in ife cycle is the sequence of phases in o ; ea the introduction of the product or service to growth in sales and i it et. Sales are at first small, turity, decline and ‘withdrawal from the market. ‘ Fer ite ‘maturity phase and decline thereafter. Figure §-3 illustrates the sales life cycle of a product. COST MANAGEMENT Figure 8-3: The Sales Life Cycle of a Product Time Phases of The Sales Life Cycle Phase 1: Product Introduction In the first phase there is little competition, and sales rise slowly as customers become aware of the new product or service. Costs are relatively high because of high R&D expenditures and capital costs for setting up production facilities and marketing efforts. Process are relatively high because of product differentiation and the high costs at this phase. Product variety is limited. Phase 2: Growth Sales begin to grow rapidly and product variety increases. The product continues to enjoy the benefits of differentiation. There is increasing competition and prices begin to soften.212 Chapter 8 Phase 3: Maturity Sales continue to increase but at a decreasing rate. there is a Teduction in the number of competitors and of Product variety. Prices soften further, and differentiation is no longer important. Competition is based on cost, given competitive quality and functionality. Phase 4: Decline Sales begin to decline, as do the number of competitors. Prices stabilize. «Emphasis on differentiation returns, Survivors are able to differentiate their product, controi costs, and deliver quality and excellent service. Contro! of Costs and an effective distribution network are key to continued survival. Monagement Focus In the first phase, the focus of management is on design, dif fer ntiation, and. marketing. The focus shifts to new product development and pricing strategy as competition develops in the secoud phase. In the third and fourth phases, management’s attention turns to cost control, quality and service as the market continues to become more competitive. Thus, the firm’s strategy for the product or service changes over the sales life cycle, from differentiation in the early phases to cost leadership in the final phases. Strategic Pricing Strategy The strategic pricing approach changes over the life cycle of the produci or service. In the first phase, pricing is set relatively high to recover development costs and to take advantage of product differentiation and the new demand for the product. In the second phase, pricing is likely to stay relatively high as the firm attempts to build profitability in the growing market. Alternatively, to maintain or increase market share at this time, relatively low Prices (penetration pricing) might be used. Inthe latter phases, pricing becomes more Competitive, and target costing and life- cycle costing methods are used, as the firm becomes more of a price taker rather than a price setter and makes efforts to reduce upstream (for product enhancement) and downstream costs,Cost Planning for Product Life Cycle ..._ 243 Cost Management System ef, it i icing, there is a change in the cost Together with the change in strategy and pricing, eas ent system, At the introduction and into the growth phases, the primary oad eevee to guide the design of products in a cost-efficient need is for value chain analysis, t manner, Master budgets aiso are used in these early phases to manage cash flows; i still relatively there are large developmental costs ata time when sales revenues are small. As the strategy shifts to cost leadership in the Jaiter phases, the goal of the cost management system is to provide the detailed budgets and activity-based costing tools for accurate-cost-information. Ilustrative Case II: Sales Life-Cycle Analysis The management accotintant at the Aeron Manufacturing Company has collected these data in preparation for a sales life-cycle analysis on one of its products, a leaf blower: | Average Anniial | Change over | Change over the tem This Year Last Year Last Four Years _| Annual sales 2,000,000 1.5% 19.6% Unt sles price 400 20 59| Unit profit P180 (08) 25 : Required: Determine what stage of the sales life cycle the leaf blower is in. Solution to Iiiustrative Case II: Sales Life-Cycle Analysis It seems that sales are stabilizing since they only grew 1.5% over the past year and the average annual growth over the past four years was 19.6%. The unit sales price has also slowed, and the unit profit is beginning decline. As a result, total profit is Starting to level off. Because of these signs, it seems that the leaf blower is in the early maturity stage.214 Chapter 8 Illustrative Case III: Strategic Costing and Pricing Optic Care Inc. (OCI) manufactures specialized equipment for polishing optical lenses. There are two models — one principaily used for fine eyewear (L-25) and another for lenses used in binoculars, cameras and similar equipment (BL-10). ‘The manufacturing cost of each unit is calculated by activity-based costing*, using these manufacturing cost pools: Cost Pools. Allocation Base Costing Rate 1. Materials handling Number of parts 1.85 per part 2. Manufacturing supervision Hours of machine time P 11.40 per hour 3._Assembly_ Number of parts P2.55 per part, 4.__ Machine setup Each setup 43.30 per setup 5.__Inspecton and testing Logged hours P35 per hour 8. Packaging Logged hours P15 per hour OCI currently sells the BL-10 model for P1,050 and the L-25 model for P725, Manufacturing costs and activity usage for the two products are: ~BL1 me Direct materials 126.50 58.19 Number of parts 124 88 Machine hours 64 32 _| Inspection time 13 06 Packing time 07 04 «Setups 2 1 Required: 1, Calculate the product cost and product margin for each product. 2. A new competitor has entered the market for lens polishing equipment with @ superior product at significantly lower prices - P750 for the BL-10 model and P550 for the L-25 model. To try to compete, OCI has made some radical improvements in the design and manufacturing of its two products. While the costing rates have stayed the same, the materials costs and activity usage Tates have been decreased significantly: BL-10 | Direct materials 111.50 48.30 Number of parts % 7 | Machine hours a7 | 29. | Inspection time 10 05 Packing time 07 04 Setups di 1Cost Planning for Product Life Cycle .._ 245 Tarp ase ening i cscs in crap @—-ct Arn ard Coo, 2416 Feition, EB. CABRERA Calculate the total product cost with # Can OCI make a profit with the new c ice set by the new competitor? Pee 3 Te ea pinieial method might be useful to OCI at this time and why? Solution to Iustrative Case ILI: Strategic Costing the new activity usage data. costs, assuming hat OCT must meet Requirements 1 and 2 Cost Pool T Allocation Bas | Costing Rate Meleras Handing | Number of parts 185 Mig supenison | Machine hours 11.40 ‘Assembly Number of pais 255 Setups 4350 Inspection and Test} Hours 35.00 | Packoging Hours 150 Costs and Activity Usage for Each Product Current Revised B40 | Le | alto | 1% Dred malerias 150 | 5819; 115] 483 Number of pats 12.00} 8800] 96.00} 77.00 Machine hours 610} 32] 570} 290 Inspection time 130] 060) 100} 050 Packing time 07} 040] 070] 040 Setups 200 | 4.00 | 1.00 |. _1.00 ‘elvity based costs | Reie Maes 10 | S19] 11150 | 4830 Melts handing 185 7385 | 10280) 177.60 | 14245 ig supervision 1140 6054 | 3648) 64.98 | 3306 Assembly 255 30855 | 22440) 244.80 | 195.35 Setups 350 8700] 4350) 4350] 4350 laspection and Test 35.00 4550| 2100) 35.00] 1750 Packaging 1050] 600] 1050] 600 e7ias | 55237 | 68788} 487.16 Pre 4050.00 | 72600 | 750.00} $80.00 gin 17856 | 17263 | 6212 | 6284 Profit will stl! be eared even if prices are reduced as shown in the above schedule, Requirement 3 Target costing should be useful to OCI to assist the firm in meeting the new competition by finding new ways to cut costs without reducing product quality or functionality.gains and target costing to ea men 216 i. B. TARGET COSTING Target costing is a technique in which the firm determ: ines the desired cost for the product or service, given a competitive market Price so the firm can earn a desired fit, ie Target Cost = Competitive Price - Desired Profit Target costing is a very useful way to manage the needed trade-off between increased functionality and higher cost., Figure 8-4 shows the target costing in the cost life cycle, Figure 8-4: Target Costing ia the Cost Life Cycle 0 ‘i Marketing & Customer’ ° R&D\ Desian> Manufacturing Dstibion, > Seni TARGET COSTING With its positioning in the early, Upstream phases of the cost life cycie, Target Costing can clearly help a firm reduce total costs, How to Reduce Costs to a Target Cost Level 1. Integrate new manufacturing technology using advanced cost management techniques such as activity-based costing and seeking higher productivity through improved organization and labor relations. 2. Redesign the product or servi one because it Tecognizes tI product life cycle costs, ice. This approach is more common than the first hat design decisions account for mush of the Many firms employ both methods-operational control to achieve productivity determine low-cost designCost Planning for Product Life Cycle... 247 ‘Steps in Implementing a Target Cost Approach / 1, Determine the market price. / / Determine the desired profit. Calculate the target cost at market price less desired profit. 4, Use value engincering to identify ways to reduce product cost. 5. Use kaizen costing and operational control to further reduce costs. 2. 2 The first three steps do nct require additional explanation. The following sections explain the fourth and the fifth steps: a. The role of value engineering *b. Kaizen costing and operational control a. Role of Value Engineering Valve ng is used in target costing to reduce product cost by a re tale off between (1) different types and levels of products functionality and (2) total product cost. An important first step in value engineering is a consumer analysis performed during the design stage of the new or revised product. The consumer analysis identifies critical consumer preferences that define the desired functionality for the new product. The type of value engineering used depends on the functionality of the product. For one group of products including camera, video equipment, functionality can be added or deleted relatively easily. These are products that. have frequent new models or updates and customer preferences change frequently. On the other hand, for another group of products such as construction equipment and heavy trucks, the functionality of the product must be designed into the product rather than added on, In contract to the first group customer preferences here are rather stable, Target costing is more useful for products in the first group because there are a large number of features about which the firm has some discretion, A common type of value engineering employed in these firms is functional analysis in which the performance and cost of each major function or feature of the product is examined.218 _ Chapter 8 ‘An overall desired level of achievement of performance for each function is obtained while keeping the cost of ail functions below the target cost. ‘Another technique is benchmarking which is used to determine which features give the firm a competitive advantage. Its objective is to cone up with an overall bundle of features for the product that achieve the desired balance of meeting consumer preferences while keeping the costs below targeted level. Design Analysis is the common form of value engineering for products in group two, industrial and specialized products. The design team prepare several possible designs of the product, each having similar features that have different levels of performance and different levels of perforrnance and different costs. The design team works with cost management personnel to select the one design that best meets customer preferences while not exceeding the target cost. e Other cost reduction approaches inclade cost tables and group technology. Cost tables are computer-based databases that include comprehensive information about the firm’s drivers. Cost drivers include, for example, the size of the product, the materials used in its manufacture, and the number of features. Firms that manufacture different sized parts from the same design (pipe fittings, tools and so on) use cost tables to show the difference in cost for parts of different sizes and different types of materials. Group technology is a method of identifying similarities in the parts of products a firm manufactures, so the same parts can be used in two or more - products, thereby reducing costs. Large manufacturers of diverse product fines, such as in the automobile, industry, use group technology in this way. A point of concern in the use of group technology is that, while manufacturing costs are reduced, service and warranty costs might be increased if a failed part is spread over many different models, with the result that a product recall will affect many more customers.Cost Planning for Product Life Cycl 219. Kaizen Costing it seating is to use kaizen-costing and operational ee ais eee cote ‘occurs at the manufacturing eer Sth the effects of value engineering and improved design are ely if place; the role for cost reduction at this phase is to sere ey manufacturing methods (such as flexible manufacturing systems) use new management techniques such as operational control, Gs oe management and the theory of constraints to further reduce costs. means “continual improvement,” that is, the ongoing search for new ways to reduce costs in the manufacturing process of a product with a given design and functionality. b. Target Costing and Illustrative Case IV: Target Costing MotoDrive manufactures a wide variety of parts for recreational boating, including part a and part b component for high-powered outboard boat engines. The component is purchased by original equipment manufacturers such as Mercury and Honda, for use in large, more powerful outboards. The units sell for P510, and sales volume averages 25,000 units per year. Recently, MotoDrive’s major competitor reduced the price of its equivalent part to P450. The market is very competitive, and MotoDrive realizes it-must meet the new price or lose significant market share. The controller has assembled these cost and usage data for the most recent year for MotoDrive’s production of 25,000 units: “ i Standard Cost _| Actual Quantity | Actual Cost Materials 5,125,000 7 5,500,000 Direct: labor 1,750,000 1,670,000 'ndirect labor 2,500,000 2,359,000 Inspection (hours and cost) c 2,000 350,000 por handling (number of : jases and cost) - 56,000 Machine setups (number and : ae cos) : Returns and rework (number of | oe eae — i : 500} 65,000 | | P11,169,000 |Required: : 1, Calculate the target cost for maintaining current market share and profitability. : 2. Can the target cost be achieved? How? Solution to Illustrative Case IV: Target Costing Requirement | Current uit cost ( seu) P46 76 é Curent profit per item: Current selling price P510 Current unit cost 446.76 | Profit per item 63.24 e Target cost to meet the competitive price: ; Competitors price 450 pel Less: Desired Profit — 63.24 Target cost 386.76 Requirement 2 The target cost can probably be achieved by efforts iri two areas: | a. The standard cost analysis shows an unfavorable materials variance of | sent 375,000 P5,500,000 — P5,125,000) or P15 per unit, a very significant variance. Efforts to reduce or eliminate this variance will make the firm much more competitive. Notice that the labor usage variances, both for direct and indirect labor, are favorable, so it appears no additional work is needed here, assuming the standards are properly set. b. The manufacturing Costs except for direct materials and direct labor can be Considered non-value adding costs, since they do not add to the functionality or quality of the product. Efforts can be made to reduce the total cost of these manufacturing costs, which now total a significant P3,999,000 or P159.96 per unit.Cost Planning for Product Life Cycle... 224” C. THEORY OF CONTRAINTS pare fea Most strategic initiatives undertaken by firm today focus on improving speed of their elas throughout the cost life cycle. For many companies speed isa competitive edge. Shorter sales life cycle in many industries mean that manufacturers are working to reduce product development time. Theory of constraints is a process of identifying and managing constraint in the making of products or in the providing of services. It also describes methods to maximize operating income when faced with some bottleneck and some nonbottleneck operations. This section presents one of the methods to improve speed, Theory of Constraints (TOC) a technique used to improve speed in the manufacturing process and thus speed. In contrast to target costing, which focuses on the early phases of the cost life cycle, the Theory of Constraints focuses on manufacturing activity. This theory focuses the manager’s attention on the constraints, or bottlenecks that slow the production process. TOC emphasis the improvement of throughput (overall all rate of manufacturing output) by removing or reducing the bottlenecks in the production Process that slow 'the rate of output. Manufacturing and distribution processes that do not affect throughout are nonbinding constraints that receive less attention that bottlenecks ‘or binding constraints. Fast throughput enables firms to be better prepared for quick product changeovers and changes in customer preferences, ‘The Theory of Constraints defines three measurements. 1. Throughput Contribution: Revenues - { Direct Materials Cost of Goods Sold 2. Investments: Sum of materials costs in finished goods inventories; buildings. direct materials, work-in-process, and R&D costs; and costs of equipment and222_Chapter$ 3. Operating Costs: All costs of operations (other than direct materials) incurred to earn throughput contribution. Operating costs include salaries and wages, rent, utilities and depreciation. ' Steps in Theory of Constraints Analysis Step 1: Identify the Binding Constraint{s) In the first step in the management accounts works with manufacturing managers and engineers to identify binding coristraints by developing a network diagram of the flow of production. A network diagram is a flowchart of the work done that shows the sequence of processes and the amount of the time required for each. The purpose of the network diagram is to help the management accountant look for signs of a bottleneck. A bottleneck often is indicated by a process with relatively large amounts of inventory accumulating, or where there are long lead times. Task analysis, which describes the activity of each process in detail, aiso could be used to identify binding constraints. Step 2: Determine the Most Efficient Utilization for Each Binding Constraint In this step, the management accountant determines how to most effectively utilize the firm’s resources. The approach differs somewhat depending on whether there is one product, or two or more (as SPI has). If there is one product, the management accountant looks for ways to maximize the flow of production through the constraint. Step 3: Manage the Flows Through the Binding Constraint In step 3, the objective is to manage the flow of production in and out of the binding constraint to smooth the flow of production throughout the plant. The orderly scheduling of production prevents the building of materials or work-in-process inventory at various processes. An important tool for managing product flow in this context is the drum-buffer-rope (DBR) system, which is a system for balancing the flow of production through a binding constraint.Cost Planning for Product Life Cyc Step 4: Add ‘Capacity to the Constraint the constraint and improve cycle time, i lieve } ) vein pacity t6 the constraints by adding new or ‘As a longer-term measure [0 1 management should consider adding < improved machines and/or additional labor. ‘Step 5: Redesign the Manufacturing Process. s for Flexibility and Fast Cycle Time nse to the constraint is to redesign the the ‘introduction of new manufacturing technology, deletion of some hard-to-manufacture products, and redesign of some products for greater ease of manufacturing. Simply removing one or more minor features on a given product might speed up the production process significantly. The use of value engineering as described earlier might help at this point. The most complete strategic respot manufacturing process, including The problems requiring the application of “Theory of Constraints” may also be resolved using Linear Programming technique. Ilustrative Problem 8-1: Theory of Constraints, Throughput Contribution, Quality, Relevant Costs Basic data on Columbia industries follow: Columbia Industries manufactures electronic testing equipment. Columbia also installs the equipment at customer's sites and ensures that it functions smoothly. Additional informatjon on the Manufacturing and installation departments is as follows (capacities are expressed in terms of the number of units of electronic testing equipment): Equipment Equipment Installed Manufactured Annual capacity 400 units per year 300 units per year Equipment manufactured aiid installed + 300 unitsperyear 300 units per year J Columbia manufactures only 300 units per year because the Installation Department has only enough capacity to install 300 units. The equipment sells for . 40,000 per unit (installed) and has direct materials costs of P15,000. All costs other than direct materials costs are fixed.224 Chapter 8 Case I. Columbia’s engineers have found a waytoreduce equipment manufacturing time. The new method would cost an additional P50 per unit and would allow Columbia to manufacture 20 additional units a year. Should Columbia implement the new method? Answer: It will cost Columbia P50 per unit to reduce’ manufacturing time. But manufacturing is not a bottleneck operation; installation is. ‘Therefore, manufacturing more equipment will not increase sales and throughput contribution. Columbia Industries should not implement the new manufacturing method. Case II. Columbia’s designers have proposed a change in direci materials that would increase direct materials costs by P2,000 per unit. This change woutd enable Columbia to instalt 320 units of equipment each year. If Columbia makes the change, it wll implement thie new design on all equipment sold. Should Columbia use the new design? Answer: ‘Additional relevant costs of new direct. materials, 2,000 x 320 units : 640,000 Increase in throughput contribution, P25,000 x 20 units 500,000 The additional incremental costs exceed the benefits from higher throughput contribution by P140,000, so Columbia Industries should not implement the new design. Alternatively, compare throughput contribution under each alternative. Current throughput contribution is P25 000 x 300 P7,500,000 With the modification, throughput contribution is P23,000 x 320 P7,360,000 The current throughput contribution is greater than the throughput contribution resulting from the proposed change in direct materials. Hence, Columbia Industries should not implement the-new design.Cost Planning for Product Life Cycle... 225 Case I. A new installation technique has been “developed that will enable Columbia’s tall 10 additional units of equipment a year. The new method will engineers to ins nev teats installation costs by P50,000 each year. Should Columbia implement the new technique? Answer: Increase in throughput contribution, P25,000 x 10 units 250,000 Increase in relevant costs z P 50,000 The additional throughput contribution exceeds incremental costs by P200,000, so Columbia Industries should implement the new installation technique. Case IV, Columbia is considering how to motivate workers to improve their productivity (output per hour). One proposal is to evaluate and compensate workers in the Manufacturing and Installation departments on the basis of their productivities. Is the new proposal a good idea? Answer: Motivating instaliation workers to increase productivity is worthwhile because installation is a bottleneck operation, and any increase in productivity at the bottleneck will increase throughput contribution. On the other hand, motivating workers in the manufacturing department to increase productivity is not worthwhile, Manufacturing is not a bottleneck operation, so any increase in output . Will result only in extra inventory of equipment. Columbia Industries should encourage manufacturing to produce only as much equipment as the installation department needs, nct to produce as much as it can. Under these circumstances, it would not be a good idea to evaluate and compensate manufacturing workers on the basis of their productivity,226 _ Chapter 8 4llustrative Case V: Theory. of.Constraints Kable Inc. manufactures a part, XX3, used in automobilés. Three processes are involved in the production of XX3: drilling, inserting and packaging. Each process performed at a separate workstation and has these performance characteristics: ¢ Thedrilling function can drill 30,000 parts per hour. The inserting function can insert 3,000 parts per 5 minutes. 'e The packaging function can package 10,000 parts per half hour. Required: How many units of XX3 can be manufactured in a week, and which process is the binding constraint? ‘Solution to Mlustrative Case V: Theory of Constraints The packaging function is the constraint because only 20,000 parts can be packaged an hour whereas 30,000 can be drilled and 36,000 can be inserted. Assuming a 40-hour work week, the number manufactured / Week _ = 20,000 x 40hours = 800,000 / weekCost Planning for Product Life Cycle... REVIEW QUESTIONS AND PROBLEMS * Quest . What is life- Do cost management practices ch Explain how. : le costing most appropriate and why? For what types of firms is life-cycl H Explain the difference in intended application between sales life-cycle analysis and life-cycle costing.” 5, What are the different methods o} design and life-cycle costing? 6. What is meant by the sales life cycle? What are the phases of the sales life cycle? How does it differ from the cost life cycle? the different phases of the sales life sed? cycle costing, and why is it us ; the product’s sales life cycle? ange ovel ne BY f product engineering used in product 7. Do pricing strategies change over cycle? Explain how. 8, What is target costing, and what type of firms use it? 9. For what types of firms is target costing most appropriate and why? = 10. What is meant by the concept of value: engineering? How is it used in target costing? II. Explain the two methods for reducing total product costs to achieve a desired target cost. Which is most common in the consumer electronics industries? In the specialized equipment manufacturing industries? 12, What is the main difference between activity-based costing and the theory of constraints? When it is appropriate to use each one? 13, What is the role of the network diagram in the theory of constraints analysis? 14. What is meant hy a binding constraint in the theory of constraint analysis? A nonbinding constraint? s 15. Name the five steps of the theory of constraints and explain the purpose of each, Which is the most important step and why? 16. For what types of firms is the theory of constraints analysis most appropriate and why?hee 228 _Chapter 8 Problems Problem 1 (Matching Market Characteristics with Sales Life-Cycle Stages) Activities and Market Characteristics Sales Life-Cycle Stage Decline in sales Advertising Boost in production Stabilized profits Competitor's entrance into market Market research Market saturation Start production” Product testing Termination of product Large increase in sales Required: Insert the appropriate life-cycle stage in the space provided after each activity. Problem 2 (Life-Cycle Costing) The following revenue and the cost data are for Round Manufacturing’s to radial saws. The RM 200 is for the commercial market and the RM 800 is for industrial customers. Both products are expected to have three-year life cycles: n! ; M200 | Year 4 Year 2 Year 3 Revenue Costs P 500,000 | 2,000,000 | P2,500,000 Research and development 1,000,000 + o Prototypes 300,000 50,000 + Marketing NK 60,000 320,000} 475,000 Distbution 80,000 | 120,900 | 130,090 rar | 20,000 800,00 | $000,000 tomer service - 60,000 35,000 : | __60,900 Income |__P(960,000) | P_ 650,000 | F 810,000 |Cost Planning for Product Life Cycle... “92 RM800 Year 1 Year 2 Year 3 Revenue Costs P__ 900,000 | P1,800,000 | P2,000,000 Research and development 1,150,000 0- O- Prototypes 550,000 30,000 40,000 Marketing 124,000 200,000 260,000 Distribution 170,000 300,000 410,000 Manufacturing 85,000 | 600,000 700,000 Customer service L 20,000 10,000 _ income | P(4,179,000) | _P_ 650,000; P 610,000; Required: 1. How woulda product life-cycle income statement differ from this calendar- year income statement? 2. Prepare a three-year life-cycle income statement for both products. Which product appears tc be more profitable? 3. Prepare a schedule showing each, cost category’ as a percentage of total annual costs, Pay particular attention to the research and development and customer service categories. What do you think this indicates about the profitability of each product over the three-year life cycle? Problem 3 (Target Costing in a Service Firm) TARA Alarm Systems installs home security systems. Two of TARA’S systems, the MCU 100 and'the MCU 900, have these characteristics: Design Specifications MCU 100 MCU 900 Video cameras 1 3 Video monitors 1 : 1 Motion detsctors 5 8 Floodlights 3 7 Alarms 1 2 | Wiring 700 ft 1100" Installation ‘hs. | 26h. |230 Chapter 8 Cost Data for Both Systems Video cameras P150/ea. ‘Video monitors P 75/ea. Motion detectors P_45lea. Floodlights P_8lea. Alarms P 15lea. Wiring P_0.10/ea, Installation P20ihr. The MCU 109 sells for P810 installed and the MCU 900 sells for P1,520 installed. Required: 1, What are the current profit margins on both systems? 2. TARA’s management believes it must drop the price on the MCU 100 to P750 and the MCU 900 to P!,390 to remain competitive in the market. Recalculate profit margins for both products at these price levels. 3. Describe two ways that TARA could cut its costs to get the profit margins back to their original levels. Problem 4 (Target Costing, Strategy) Benchmark Industries manufactures large workbenches for industrial use. Wally Garcia, the vice president for marketing at Benchmark, has concluded from his market analysis that sales are dwindling for Benchmark’s standard table because of aggressive pricing by competitors. Benchmark’s table sells for P875 whereas the competition’s comparable table is selling in the P80. range. Garcia has determined that dropping price to P800 is necessary to regain the firm’s annual merket share of 16,000 tables. Cost data based on sales of 10,000 tables are: Budgeted Amount _| Actual Amount | Actual Cost Direct materials 400,000 sq. ft. 425,000 sq. ft._| P2,700,000 Direct labor 85,000 hrs. 100,000 hrs. 1,000,000 Machine setups 30,000 hrs. {30,000 hrs. 300,000 Mechanical assembly | 320,000 hrs. {320,000 hrs. 4,000,000Cost Planning for Product Life Cycle. eg 1, Calculate the current cost er 2, How much of the current cost per unit 1s activities? ; 3, Calculate the new target cost per unit for a sales price of ‘800 if the profit unit is maintained. vi iggest for Benchmark to attain the target cost 4, What strategy do you sui calculated in requirement 3? and profit per unit. ' attributable to non-value-added Problem 5 (Target Costing; Warehousirg) has determined that its operations have three Yanny Ceramic, a wholesaler, its OF housing and distributing. The firm reports primary activities: purchasing, ware the following pertinent operating data for the year just completed: Activity Cost Driver Quantity of |-Cost per Unit of Cost Driver_| Cost Driver Purchasing | Number of purchasing orders | 1,000 P100 per order Warehousing _| Number of moves 8,000 20 per move Distributing | Number of shipments {500 80 pér order * Yanny buys 100,000 units at an average cost of PS per unit and sells them at an average unit price of P10. The firm also has a fixed operating cost of 100,000 for the year. Yanny’s customers are demanding a 5 percent discount for the coming year. Yanny expects to sell the same quantity if the demand for price reduction can be met. Yanny’s suppliers, however, are willing to give only a 4 percent’ discount. Required: Yanny has estimated that the number of purchasing orders can be reduced to 800 and a PS decrease in the cost of each shipment can be achieved with minor changes in operations. Any further cost saving has to come from reengineering the warehousing process. What is the maximum cost {i¢., target cost) for warehousing if the firm desires to eam the same amount of profit next year?©. wv 332 Chapter 8 Problem 6 (Theory of Constraints, Throughput Contribution, Relevaut Costs) The Zashi Corporation manufactures filing cabinets in two operations — machining and finishing. It provides the following information. Machining Finishing Annual capacity 100,000 units 80,000 units Annual production’ 80,000 units 80,000 units Fixed operating costs (excluding direct materials) P6,400,000 4,600,000 Fixed operating costs per unit preduced (P6,400,000 = 80,000, P4,000,000 ; + 80,000) P80 per unit P50 per unit Each cabinet sells for P720 and has direct materiats costs of P320 incurred at the start of the machining operation. Zashi has no other variable costs. Zashi can sell whatever output it produces. The following requirements refer only to the preceding data. There is no connection between the requirements. Required: 1. Zashi is considering using some modem jigs and toois in the finishing operation that would increase annual finishing output by:1,000 units. The annual cost of these jigs and tool is P300,000. Should Zashi acquire these tools? Show your calculations. 2. The production manager of the Machining Department has submitted a proposal to do faster setups that would increase the annual capacity of the Machining Department by 10,000 units and cost P50,000 per year. Should Zashi implement the change? Show your calculations.Cost Planning for Product Life Cycle ...__ 233 Problem 7 (Theory of Constraints, Throughput Contribution, Relevant Costs) ‘ ; ; a Refer to the information “in Problem 6, in answering the following requirements. There is no connection between the requirements. ired: 7 P re outside contractor offers to do the finishing operation for 12,000 units at P100 per unit, double the P50 per unit that it costs Zashi to do the finishing in-house. Should Zashi accept the subcontractor’s offer? Show your calculations. : 2. The Rainee Corporation offers to machine 4,000 units at } 40 per unit, half the P80 per unit that it costs Zashi to do the machining in-house. Should Zashi accept the subcontractor’s offer? Show your calculations. Problem 8 (Theory of Constraints, Throughput Contribution, Quality) Refer to the information in Problem 6 in answering the following requirements. There is no connection between the requirements. a Required: R £ 1. Zashi produces 2,000 defective units at the machining operation. What is the cost to Zashi of the defective items produced? Explain your answer briefly. y 2. Zashi produces 2,000 defective units at the finishing operation. What is the cost to Zashi of the defective items produced? Explain your answer briefly.f 234 Chapter 8 “Multiple Choice 1. P = a The critical success factors for a business today are all: a. planning-oriented. c. sales-oriented, b. production-oriented. d, customer-oriented. The Theory of Constraints (TOC) focuses on improving cycle time, the rate at which raw materials are converted to finished product. This strategic management technique is primarily concemed with the critical success factor of: « a. energy. " ¢. originality. b. quality. _d. speed. The key concept in TOC is: a. benchmarking. c. the bottleneck. b. throughout. d. reengineering. Which of the following determines the desired cost for a product based upon a given competitive price? 4 a. benchmarking. c. reengineering. b. target costing. d. life-cycle costing. Target costing forces the firm to become more competitive, like: a. reengineering. ©, activity-based costing b. life-cycle costing. d. benchmarking. Which of the following is not one of the steps in the life cycle of a product? . manufacturing, inspecting, packaging and warehousing b. research and development ¢. purchasing and receiving ~ 4. marketing, promotion and distribution In comparison to the Cost Life Cycle of. @ product, the Sales Life Cycle of a product is: : a. much shorter 6. much longer exactly narailel, excepr that it expressed in sales sifferent because it represents a Sequence of phases relating to sales, not production. vi anCost Planning for Product Life Cycle... _ 238 8. Ineach of the phases of a product’s sales life cycle, management's focus re er different a. parallel diferent b. onthe next phase as well as the current one. . undifferentiated generally, firms Will price a product more competitively at which stage of 9. the products sates life cycle? / a. Product Introduction c. Maturity b. Growth d. Decline 10, Because of the four stages of a product’s sales life cycle has a different emphasis, the cost management system will be expected to provide data that is: : : a. “different at each stage. c. lesser in amount in the later stages. b. common to ail stages. d. lesser in amount in the early stages. II. The sequence of activities within the firm which begins with research and development, followed by design, and manufacturing, marketing / distribution, and customer service is the: a a. sales life cycle c. market life cycie b. target life cycle d. critical life cycle 12. The sequence of phases in the product or service’s life in the market - from the introduction of the product or service to the growth in sales and finally maturity, decline, and withdrawal from the market is the: a._sales life cycle c. market life cycle b. target life cycle d. cost life cycle 13. When a firm determines the desired cost for a product or service, given a competitive market price, in order to ear a desired profit, the firm is exercising: a. target co: ¢. variable costing b. life cycle costing d. absorption costing = . Which one of the following is used in target costing to reduce product cost by analyzing the wradeoffs between (1) different types and levels of product functionality and «2, total product cast? a benchmarking ©. productivity analysis b. functional analysis d._ value engineering236 Chapter 8 15. Which one ofthe following isa common type of value engineering in which each major function or feature of the product is examined in terms of its performance and cost? a. benchmarking b. functional analysis ¢ productivity analysis 4. functional engineering 16. Which one of the following, is a common form of value engineering in which the designing team prepares several possible designs ofthe product? a._ benchmarking ¢. productivity analysis b._ functional analysis d. design analysis 17. Which one of the following is nor one of the five steps in TOC analysis? a. Identify the binding constraint(s). b. Determine the most efficient utilization for each binding constraint. c. Manage the flow through the binding constraint. d. Deduct capacity from the constraint. 18. Which one of the following is true conceming TOC? Short-Term Focus Long-Term Focus. Cost Drivers a No No Yes b. No Yes No ce. Yes No No a. No Yes Yes 19. Which one of the following is a downstream cost? a, research and development ¢. purchasing b. packaging d. prototyping 20.’ which one of the following industries has high upstream costs? a. retail c. cosmetics b. perfumes d. computer software 21. Which of the following is wot a critical success factor at the design stage? a. improved ease-of-manufacture b. reduced time-to-market c. reduced expected service costs i enhanced qual't: =<. Which one of the following is not a commot a. concurrent engineering. “¢> templating b. design engineering d. prototypingCost Planning for Product Life Cycle .. _ 237 23, Sales begin to grow rapidly nd product variety increases in: t a, phase three c, phase five b. - phase two d, phase four 24, Sales continue to increase but at a decreasing rate is: _ac phase three c. phase five b. phase two d. phase four 25. Sales begin to decline, as does the number of competitors, in: a. phase three c. phase five © b. phase two d. phase four