19-1

Chapter

19 COSTING AND THE

VALUE CHAIN

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 The
The Value
Value ChainFocus
ChainFocus
19-2

on
on Core
Core Operations
Operations

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

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 19-3

Value
Value and
and Non-value-Added
Non-value-Added Activities
Activities
Value-added activities add to product or service
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.
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 19-4

Value
Value and
and Non-value-Added
Non-value-Added Activities
Activities

Activities

Analysis and
Classification
Non-value- Value-
Added Added
Activities Activities
Reduce or Continually Evaluate
Eliminate
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The McGraw-Hill Companies, Inc.
 19-5

Non-value-Added
Non-value-Added Activities
Activities

Examples
Examples of
of non-value-
non-value-
added
added activities
activities are:
are: Get rid
Storage

Storage of
of materials,
materials, of them!
work-in-process,
work-in-process, or
or
finished
finished goods.
goods.
Moving

Moving parts
parts and
and
materials
materials in
in the
the factory.
factory.
Waiting

Waiting for
for work.
work.
Inspection.

Inspection.

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 Activity-Based
Activity-Based Management
Management
Drive
Drive
19-6

Out
Out Costs
Costs

Whats the difference between

activity-based costing and
activity-based management?

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 Activity-Based
Activity-Based Management
Management
Drive
Drive
19-7

Out
Out Costs
Costs

Activity-based costing
establishes relationships Activity-based management
between overhead focuses on managing
costs and activities. activities to reduce costs.

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc.

 ABC:
ABC: aa Subset
Subset of
of
19-8

Activity-Based
Activity-Based Management
Management
Activity-Based Management

Create
Create Identify
Identify Determine
Determine
Identify
Identify cost
cost activity
activity cost
cost per
per unit
unit
activities
activities pools
pools measures
measures of
of activity
activity

ABC
A

Collect
Collect external
external Analyze
Analyze activities
activities
benchmark
benchmark for
for non-value
non-value
information
information added
added activities
activities

Manage
Manage activities
activities
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 Activity-Based
Activity-Based Management
Management
19-9

and
and the
the Value
Value Chain
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.
McGraw-Hill/Irwin The McGraw-Hill Companies, Inc.
 The
The Target
Target Costing
Costing Process
Process
19-10

Creating
Creating Customer
Customer Satisfaction
Satisfaction

Lets move
along to a
new topic.

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 The
The Target
Target Costing
Costing Process
Process
19-11

Creating
Creating Customer
Customer Satisfaction
Satisfaction

Driven by the Focused

customer. on design.

Target costing is aimed at the earliest stages

of new product and service development.

Focused Consideration
simultaneously given to the
on profit and entire
cost planning. value chain.
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 19-12

The
The Target
Target Costing
Costing Process
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

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 19-13

Major
Major Influences
Influences on
on Target
Target Pricing
Pricing

Price

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 Components
Components ofof the
the
19-14

Target
Target Costing
Costing Process
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.
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 Life-Cycle
Life-Cycle Product
Product
19-15

Costing
Costing and
and Pricing
Pricing

Product Research,
discontinued design, and
and customer development
support ends
Life-
cycle
costing
Marketing Production

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 Life-Cycle
Life-Cycle Product
Product
19-16

Costing
Costing and
and Pricing
Pricing

Product Research,
discontinued design, and
and customer development
support ends Pricing must
generate revenue
to cover costs
of all phases
of product
life cycle.
Marketing Production

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc.

 Characteristics
Characteristics of
of
19-17

Target
Target Costing
Costing Processes
Processes

Involve entire value An understanding of

chain in reducing relationships between
costs while satisfying process components
customer needs. and costs is critical.

A products functional characteristics to the

customer are emphasized.

A primary ABC is used to

objective is reducing determine changes
development time. that will reduce costs.
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 Just-in-time
Just-in-time (JIT)
(JIT)
19-18

Inventory
Inventory Procedures
Procedures

Lets move
along to
another
topic.

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 19-19

Just-In-Time
Just-In-Time (JIT)
(JIT) Inventory
Inventory
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.

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 Relationship
Relationship Between
Between JIT
JIT and
and
19-20

Total
Total Quality
Quality Management
Management (TQM)
(TQM)

Less warehouse
space needed

Reduced
inventory
carrying costs

Reduced risk With reduced inventories, quality must

of obsolete be emphasized to avoid production
inventory delays and late deliveries.

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 Relationship
Relationship Between
Between JIT
JIT and
and
19-21

Total
Total Quality
Quality Management
Management (TQM)
(TQM)

Less warehouse
space needed More rapid
response to
customer orders
Reduced
inventory
carrying costs

Greater
Reduced risk Higher quality
customer
of obsolete products
satisfaction
inventory
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 JIT,
JIT, Supplier
Supplier Relationships,
Relationships,
19-22

and
and Product
Product Quality
Quality

Successful implementation of a JIT system requires:

A limited number of suppliers who will
make on-time deliveries of quality
materials.
Quality that is designed-in and
manufactured-in rather than
inspected-out.
A well-trained flexible work force.
An efficient plant layout.

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc.

 Measures
Measures ofof Efficiency
Efficiency
19-23

in
in aa JIT
JIT System
System

ProductionS Goods
tarted Shipped

Process Time + Inspection Time +

Storage and Waiting Time + Move Time

Manufacturing Cycle Time

Only the process time is value-added time.

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 Measures
Measures ofof Efficiency
Efficiency
19-24

in
in aa JIT
JIT System
System

ProductionS Goods
tarted Shipped

Process Time + Inspection Time +

Storage and Waiting Time + Move Time

Manufacturing Cycle Time

Manufacturing Value-added time

Efficiency =
Manufacturing cycle time
Ratio
McGraw-Hill/Irwin The McGraw-Hill Companies, Inc.
 Measures
Measures ofof Efficiency
Efficiency
19-25

in
in aa JIT
JIT System
System

If cycle costs may service and

time go up, and quality may
goes up, go down.

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 Total
Total Quality
Quality Management
Management
19-26

and
and the
the Value
Value Chain
Chain

Lets move
to the last
topic in
the chapter.

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 19-27

Why
Why is
is Quality
Quality Important?
Important?

Quality
Increased
products
business
and
volume
services

Greater
customer
satisfaction
McGraw-Hill/Irwin The McGraw-Hill Companies, Inc.
 19-28

Components
Components of
of the
the Cost
Cost of
of Quality
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
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 19-29

Components
Components of
of the
the Cost
Cost of
of Quality
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

Reinspection of
of rework
rework
Cost
Lost

Lost sales
sales resulting
resulting Report
from
from late
late deliveries
deliveries

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 19-30

Components
Components of
of the
the Cost
Cost of
of Quality
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 to
to
improve
improve product
product image
image
Lost

Lost sales
sales due
due toto poor
poor
product
product quality
quality

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 19-31

Components
Components of
of the
the Cost
Cost of
of Quality
Quality

Cost of Internal
prevention and external
and appraisal failure costs

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc.

 19-32

Components
Components of
of the
the Cost
Cost of
of Quality
Quality

Ultimate Objective:

Zero defects
Cost of while minimizing Internal
prevention all four quality and external
and appraisal cost categories. failure costs

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 19-33

Components
Components of
of the
the Cost
Cost of
of Quality
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

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 Measuring and Reporting the Cost of Quality 19-34

Amount Total % of Sales

Prevention Costs:
Training $ 12,000
Maintenance 10,000
Quality planning 8,000 $ 30,000 3.2%
Appraisal Costs:
Material inspections 6,000
Equipment inspections 2,000
Supplier relations 4,000
Testing 5,000 17,000 1.8%
Internal Failure Costs:
Rework 5,000
Downtime 7,000
Scrap 8,000 20,000 2.1%
External Failure Costs
Warranty 4,500
Lost sales 20,000
Repairs 6,500 31,000 3.3%
Total $ 98,000 10.4%

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 19-35

Productivity
Productivity and
and Quality
Quality

Traditional managerial
accounting systems may
emphasize production
quotas and cost
minimization.
Managers often find that
emphasis on quality also
increases productivity.

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 19-36

End
End of
of Chapter
Chapter 19
19

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