CIMA P2 Advanced Management Accounting First Intro slide – change details to your own 熊家财 xiongjc-p@163.com

Chapter 2 Techniques for enhancing long term profits Target costing Value analysis Functional analysis Value chain Supply Chain Management Outsourcing Partnering First Intro slide – change details to your own

Section 1 Target Costing 迎评工作 一 Section 1 Target Costing

Target costing Traditional approach to product costing Develop a product Determine the expected standard production cost Set a selling price (probably based on cost) Resulting profit Costs are controlled through variance analysis at monthly intervals Predetermined product design Cost Price Profit

Target costing Target costing approach Develop a product concept and primary specification Determine the price customer willing to pay Set a selling price (probably based on cost) Deducting design profit Leaving total cost (target cost) product concept Selling Price Target cost Profit Margin

Target costing Target costing approach Setting target price - Set according to what the competition is charging - If the product is new, use market research or functional analysis/pricing by function Desired profit margin - Determined by the organisation’s strategic profit plans - Target cost = Competitive market price - desired profit margin - This is the resulting cost that must be achieved

Target costing Target costing process Analyse the external environment, and determine the product concept, price and target cost Split total target cost into broad cost categories, such as development, marketing, manufacturing - split manufacturing costing per unit across different functional areas of the product - continuous improvement using value engineering techniques and close collaboration with suppliers Detailed cost sheet and processes formalised

Target costing Cost table - They are high volume, computerised database of detailed cost information based on various manufacturing variables - Provide a source of information about the effect on product costs of using different resources, production methods ,design and so on.

Target costing Product design - The no. of different components - whether the components are standard or not - the no. of extra feature - type of packaging

Target costing Target cost gap When a product is first manufactured, the target cost may be well below currently achievable 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 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 Training staff and using Cheap staff Using different materials

Target costing Target costing v standard costing (1) How costs are controlled — Standard costing - Costs must be kept within predetermined standard costs - Variances are calculated to check that this has happened Target costing no cost slashing but continual pressure to ensure costs are kept to a minimum

Target costing Target costing v standard costing continued (2)Relationship between product concept, cost and price Standard costing Predetermined product design - cost - profit Target costing Product design concept - selling price - the target cost - profit margin

Target costing Target costing v standard costing continued (3) Link with strategic plans Standard costing – - None. The approach is short-term cost control through variance analysis Target costing - The product concept and target profit margin take into account medium-term strategic plans

Target costing Target costing v standard costing continued (4)Time frame for cost control Standard costing – Standards are usually revised annually Target costing – Continual cost reduction. Target costs are revised monthly

Section 2 Value analysis 迎评工作 一 Section 2 Value analysis

Value analysis Definition A systematic inter-disciplinary examination of factors affecting the cost of a product or service, in order to devise means of achieving the specified purpose most economically Modifications and improvements can be made which do not reduce the value of the product to the customer/user Cost reduction during production - Value analysis before production – Value engineering

Value analysis Definition Value engineering - Redesign of an activity, product or service so that value to the customer is enhanced - or at least increase by less than the resulting price increase 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 Features distinguished from Conventional cost reduction techniques - It encourage innovation and a more radical outlook for way of reducing costs and it isn’t constrained by the exiting product design - It recognized the various types of value, analyse this value and them seeks ways of improving of maintaining aspects of this value, but at a lower cost.

Value analysis Conventional cost reduction techniques v value analysis – 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 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 These benefits are achieved by (continued): Area Method Product design Value engineering Cost conscious Avoid unnecessary complication Components and material cost Procure the desired quality material at the lowest price Production methods Review continually

Value analysis 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, the purposes it fulfils Esteem value – prestige customer attaches to it Question 2.2 in page 114

Value analysis 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 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

Value analysis Steps in a VA study continued Make a recommendation If accepted, implement the recommendation After a period, evaluate the outcome and measure the cost savings

VA and FA: An Example Steps: Identify and prioritize functions -Identify the item to be analysed and the customers for whom it is produced. - List the basic functions (the things for which the customer is paying). Note that there are usually very few basic functions. -Identify the secondary functions by asking ‘How is this achieved?’ or ‘What other functions support the basic functions?’. - Determine the relative importance of each function, preferably by asking a representative sample of customers (who will always surprise you with what they prefer).

Analyze contributing functions VA and FA: An Example Steps: Analyze contributing functions - Find the components of the item being analyzed that are used to provide the key functions. Again, the question ‘How’ can come in very useful here. - Measure the cost of each component as accurately as possible, including all material and production costs.

VA and FA: An Example Steps: Seek improvements - Eliminate or reduce the cost of components that add little value, especially high-cost components. - Enhance the value added by components that contribute significantly to functions that are particularly important to customers.

VA and FA: An Example Example: In analyzing a pen, the following table is used to connect components with the functions to which they contribute and hence identify areas of focus.

Section 3 Functional analysis 迎评工作 一 Section 3 Functional analysis

Functional analysis Definition An analysis of the relationship between product functions, their perceived value to the customer, and their cost of provision. - most 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 FA is concerned with improving profits by attempting to reduce costs and/or by improving products by adding new feature in a cost-effective way that are so attractive to customers that profit actually increase.

Functional analysis Functional analysis The steps in functional analysis are similar to those in VA

Comparison of Value and Functional Analysis Value Analysis Functional Analysis When Used During production Prior production Focus on Process to reduce cost Customer value Involves Reducing cost without reducing value Adding features to improve profits

Section 4 The value chain 迎评工作 一 Section 4 The value chain

Value chain The value chain “The sequence of business activity by which, from the perspective of the end user, value is added to the products and services produced by an entry” It is a model of the nine organisational activities and the relationships between them These are to procure outputs, process them and add value to them in some way, to generate outputs for customers

Value chain Activities - Activities are the means by which an organization creates value in its products. Difference between activities and business fuctions - organization structure - A single activity can be performed by a number of functions in sequence.

Porter’s Value Chain Firm Infrastructure Human Resource Management Inbound Logistics Operations Service Marketing and Sales Outbound Procurement Technology Development Human Resource Management Firm Infrastructure Support Activities Primary Activities

Value chain An alternative value chain may be considered in non-manufacturing environments

Value chain 5 Components of this value chain R + D - new ideas for products and services Design - planning and engineering Production - assembly of resources to produce a product Marketing - persuading customers to purchase Distribution - delivering to customers Customer service - support to customers The value chain asserts that whilst excellence in manufacturing is essential for success it is not sufficient to guarantee success

Value chain Focus of the value chain Traditional management accounting, in contrast, has an internal focus The focus is external, not only in relation to competitors but also back to suppliers and forward to customers

Value chain The value chain and competitive advantage — Low-cost strategy — Differential strategy Competitive advantage is gained either from providing better customer value for equivalent cost or equivalent customer value for lower cost Value chain analysis is therefore essential to determine where in an organisation’s value chain costs can be lowered or value enhanced

Value chain Strategic cost management and the value chain Build up the industry’s value chain to determine the various activities in the value chain, and to allocate operating costs ,revenues and assets to individual value activities. Establish the cost driver of the costs of each value activity

Value chain Structural cost drivers scale of operation, scope, experience, technology, complexity Executional cost drivers employee participation, TQM, Capacity utilization, plant layout efficiency, product configuration, linkage with supplier and customer

Value chain Strategic cost management and the value chain Developing sustainable competitive advantage by controlling these drivers better than competitors or by configuring the value chain - cost reduction - increasing value

Section 5 Supply chain management 迎评工作 一 Section 5 Supply chain management

Supply chain management Definition - A network of facilities and distribution options that performs the function of procurement of material , transformation of these material into intermediate and finished products and the distribution of these products to customers.

Supply chain management

Supply chain management -The concept of supply chain management - Traditional view It is necessary to get the lowest price form supplier and to obtain the best prices from the customer - Supply chain management view It looks at the supply chain as a whole, and starts with the view that all organization in the supply chain collaborate to produce something of value for the end consumers

Supply chain management -The advantage - By adding value within the supply chain, customer satisfaction will be improved and customers will pay more for what they buy - Organization can benefit collectively by reducing waste and inefficiency.

Supply chain management Developing relationship Power balancing 1 Codependency 2 Target Costing 3 Personal ties 4

Supply chain management -Elements of supply chain management - Look for ways of improving the supply chain structure - Switching to different supplier - Selling output through new channel

Supply chain management - Issues facing supply chain management - production - supply - inventory - location - transportation - information - overall management customer demand pattern, service level requirement, distance consideration, cost

Supply chain and Value chain 联系： 价值链是从供应商的供应商到顾客的顾客的扩展，即价值链 是由真正的顾客需求拉动的，不是制造商对需求预测和希望的构 想。一个价值链是制造一个产品从开始到结束的整个生产过程， 而不管哪个企业拥有任何特殊的增值步骤。供应链是企业价值系 统的子系统， 在这个子系统中，生产商和供应商通过网络不断地 交流关于原材料需求、生产、计划和库存信息。价值链和供应链 涉及的活动范围相同，但价值链集中在价值的创造，供应链注重 产品的供应。 - 第一， 供应链也是一条价值链。 - 第二， 价值链是实施供应链管理的前提。 - 第三， 供应链和价值链共同存在于企业的价值系统中。 - 第四， 价值链与供应链都强调以客户为中心，以市场为导向。

Supply chain and Value chain 区别： - 第一， 价值链管理是一种战略管理方法，强调协调价值链上诸多联系。 价值链管理不仅仅局限传统的客户供应商联系，目前已经发展到包括分 享计划、库存、人力资源信息技术系统，甚至公司文化，形成网络覆盖的多 渠道沟通。 - 第二， 价值链管理与供应链管理的侧重点不同。 供应链重点是面向效率，即降低成本和提高生产力方面。而价值链的重 点是面向效益。当企业强调效益时，没有必要努力降低成本，而是致力于为 顾客创造更多的价值。 - 第三， 价值链更确切地说是一种战略决策方法，最初提出主要是用于企 业竞争优势的研究，着眼点是企业的价值增值过程，目标是企业如何从价值 链各个环节寻找自己的竞争优势根源，从而达到成本、产品歧异化或目标集 聚的竞争战略。 - 第四， 价值链管理的基本问题是：价值是如何创造的？如何改进的效益 降低了对最终克服的成本，是否会增加价值的百分比？由于价值链管理包括 对各种水平的顾客的管理，使生产过程中曾经孤立的活动开始与顾客需求相 联系，因此为更好地服务于顾客带来许多机会。

迎评工作 一 Section6 Outsourcing

Outsourcing Definition - The use of external suppliers as a source of finished products, components or services. - This is also know as contract manufacturing or sub- contracting.

Outsourcing Reason - specialist contractors can offer superior quality and efficiency - Contracting out manufacturing free capital and time that can be then invested in core activities - contractors have the capacity and flexibility to start production very quickly to meet sudden variation in demand - lower risk particular when organization is attempting to expand in a time of uncertainty

Outsourcing Choose activities? Not outsourcing: - the activities cannot be contract out - the organization must control it to maintain its competitive position - the activities that can deliver on a level comparable with the best organization in the world

Outsourcing Disadvantage - there is no guarantee that the service will be performed to the organization’s satisfaction - contracting maybe more expensive - performing itself , the organization retain or develop skills that maybe needed in the future - commercially sensitive data will get into wrong hands - ethical reservation

迎评工作 一 Section7 Partnering

Partnering Definition - The term “Partnering” is used about a type of collaboration in a construction projects based on dialogue, trust, openness and with early participation form all actors. - The project is carried out under a mutual agreement expressed by mutual activities and based on mutual economic interests. - Partnering is a structured management approach to facilitate team working across the boundaries of contracts.

Partnering Definition Construction Industry Institute (CII): Partnering模式是“在两个或两个以上的组织之间为了 获取特定的商业利益．最大化地利用各组织的资源而作出的 一种长期承诺。 这一承诺要求使传统组织问孤立的关系转变成一种不 受组织边界约束，能够共享组织资源、利益的融洽关系。 这种关系建立在信任、追求共同目标和理解各组织的 期望和价值观的基础之上。期望获取的利益包括提高工作效 率、降低成本、增加创新机遇和不断提高产品和服务的质 量。”

Partnering Definition

Comparison of partnering and traditional

Comparison of partnering and traditional

Comparison of partnering and traditional

Comparison of partnering and traditional

Comparison of partnering and traditional

Comparison of partnering and traditional

Claimed benefits of partnering - cost saving - improve profit margin - reduction in project times - more predictability costs and quality - increased customer satisfaction - improved quality and safety

Partnering When to use partnering - if significant input is required from specialist contracts - if there is a rapid expansion of a programme of construction - if time is critical factor - if projects are repetitive and based on a set of standard design - if there a particular construction problem which is best solved by a team of expert

Partnering Type of partnering - strategic partnering: more than one project - project specific partnering

Incentivisation - incentives should encourage the parties to work together to eliminate wasteful activities that do not add value to client - identify and implement process improvement, alternative design, working method and other activities that result in added value

Feature that can be considered for incentivisation - cost - time - quality - operational efficiency - productivity - value for the customer - safety

Gain sharing arrangement - All cost overruns and cost saving are shared between the customer and the contractors