CIMA P2 Advanced Management Accounting First Intro slide – change details to your own For exams in 2016 江西财经大学会计学院 吉伟莉 499159596@qq.com

Chapter 2 Techniques for enhancing long term profits Target costing Value analysis Value chain Supply chain management First Intro slide – change details to your own

Chapter Overview Enhancing long-term profits Target costing Value analysis Functional analysis Value chain Supply chain management Outsourcing Other techniques

Target costing 1 Cost Price

Target costing 2

Target costing 3 Target cost When a product is first manufactured, the target cost may be well below currently achievable cost target cost gap=estimated cost - target cost But management will set benchmarks for improvement towards the target cost by specified dates These will be incorporated into the budgeting process Value analysis can be used to reduce costs if and when targets are missed (see next section)

Target costing 4 Example: Given the following information, what is the target cost gap for product X? Product X target selling price per unit $10 Target profit 25% on cost Current cost $8.40 per unit $0.40 $0.60 $0.90 $1.60

Target costing 5 Options available to reduce cost Develop the product in an atmosphere of continuous improvement Apply value engineering techniques Collaborate closely with suppliers Change production methods Improve technologies/processes Cut out non-value added activities

Target costing 6 Example: The following statements have been made about target costing. Which of the statements is/are true? A risk with target costing is that cost reduction may affect the perceived value of the product. An effective way of reducing the estimated cost of a new product is to simplify the design. A cost gap is the difference between the target price and the target cost. Even if the product can be produced within the target cost, cost saving must be made continuously. √ √

Target costing 7

Value analysis 1 Value analysis (VA) is a planned, scientific approach to cost reduction Value analysis VS Value engineering during production before production VA reviews the material composition of a product and the production design Modifications and improvements can be made which do not reduce the value of the product to the customer/user

Value analysis 2 Benefits Lower costs Better products Higher profits These benefits are achieved by: Cost elimination/prevention Cost reduction Improving product quality and so selling more at the same price Improving product quality and so increasing selling price

Value analysis 3 Aspects of a product’s value to consider Cost value – cost of producing / selling it Exchange value – its market value Use value – what it does Esteem value – prestige customer attaches to it Example: P114-question 2.2

Value analysis 4 Conventional cost reduction techniques v value analysis Conventional cost reduction techniques – to achieve the lowest production cost for a specific product design Value analysis – tries to find the least cost method of making a product that achieves its desired function

Value analysis 5 Typical consideration in VA Can a cheaper (but as good or better) substitute material be found? Can unnecessary weight or embellishments be removed without reducing the product’s attractiveness/desirability? Is it possible to use standardised or fewer components?

Value analysis 6 8 Steps in a VA study Select a product/service for investigation Obtain and record information about it Analyse this information and evaluate the product, considering each aspect of value in turn Consider alternatives Select the least-cost alternative for recommending to management Make a recommendation If accepted, implement the recommendation After a period, evaluate the outcome and measure the cost savings

Value analysis 7 Functional analysis This is most commonly applied during the development stage of products It uses the functions of a product/service (such as ‘to make a mark’ for a pen) as the basis for cost management The steps in functional analysis are similar to those in VA Value engineering The application of similar techniques to those of VA to new products The aim is to design and develop new products of a given value at minimum cost

Value analysis 8 Example: which one of the following statements is correct? Value engineering is the application to existing products Functional analysis is applied during the maturity stage of a product’s lifecycle Quality function deployment identifies customer requirement and ensure that these drive product design and process planning Value analysis aims to improve quality even if it increases costs √