Chapter 6: Activity Based Management and the New Manufacturing Environment Identify the true costs of resources consumed in performing the organization’s significant activities. Identify and eliminate non-value added activities. Measure efficiency of people, products, and activities performed in the facility. Identify and evaluate new activities that can improve future performance of the organization. Note: Products do not consume resources. They consume activities, which in turn consume resources.

JIT Manufacturing Control System Just-in-Time (JIT) inventory and production management system: a comprehensive inventory and manufacturing control system that does not purchase or manufacture a part or product until it is needed. Key Features of JIT: –Smooth, uniform production rate. –“Pulls” product through the production process. –Purchase and manufacture products in small lot sizes. –Quick and inexpensive production machine setup. –Effective preventative maintenance of equipment. –Cultivates atmosphere of teamwork in the production shop. –Necessitates multiskilled workers and flexible facilities.

Cost Management is Critical in the Current Manufacturing Environment New Products Changing Work Force New Competitors New Technologies Manufacturing Excellence Demanding Customers Global Competition All Contribute to Decreased Margins

The Target Costing Management System Target Costing Extended to Improvement Target Costing as a Technical Exercise Market Research Strategic Planning Component Research Profit Planning Product Planning Cost Planning Product Concept and Development Product Extension Continuous Improvement Product Logistics & Support Value Change Management Be sure to include the Standard Cost Accounting vs. Activity Based Costing Handout from the Course Packet,

Cost Management is Critical in the Current Service Industry Environment New Services Changing Work Force New Competitors New Technologies Service Excellence Demanding Customers Global Competition and Consolidation All Contribute to Decreased Margins

Cost Management - Managerial Implications Increase Volume If the variable costs of production are less than 50% of sales revenue, then push the Sales and Marketing Departments to sell more products. Decrease Costs If the variable costs of production are greater than 50% of sales revenue, then push the Production and Marketing Departments to cut costs. A manager must evaluate the effects of cost on the final product: Focus your efforts on what will give you the most BANG for your BUCK. Vs. Bala’s 4Ms M1 - Measure both revenue and cost correctly (using ABC) M2 - Monitor movement of both revenue and costs (benchmarking) M3 - Manage towards identifying areas which will have the greatest effect M4 - Maximize profitability