Cost Management, Second Canadian Edition

LO1 Explain how value chain analysis, supply chain, and JIT are used to improve operations LO2 Explain target costing and calculate target costs LO3 Explain kaizen costing and compare it to target costing LO4 Explain life cycle costing LO5 Explain lean accounting and discuss how it is used © John Wiley & Sons, 2012 Eldenburg, Cost Management, 2ce, Chapter 14Slide 3

 A value chain is the sequence of business processes in which value is added to a product or service.  Value chains explicitly recognize that no organization operates in isolation from suppliers and customers. © John Wiley & Sons, 2012 Eldenburg, Cost Management, 2ce, Chapter 14Slide 5

 Value-added activities are tasks or functions that increase the worth of an organization’s products and services to customers and include the manufacturing process and other operations that allow the organization to perform processes essential for attracting new and retaining old customers.  Non-value-added activities do not directly affect customers, such as accounting, while essential and related to daily operations, are not usually related to customer value.  Before activities in the value chain can be improved or eliminated, they must be identified and then categorized as value-added or non-value-added activities. © John Wiley & Sons, 2012 Eldenburg, Cost Management, 2ce, Chapter 14Slide 6

 The supply chain is the flow of resources from the initial suppliers through the delivery of goods and services to customers and clients.  Accountants analyze supply chains by determining inventory level requirements.  Opportunities to reduce costs and improve quality are identified through tracking and analyzing usage patterns of raw materials, supplies, finished goods, and shipped goods. © John Wiley & Sons, 2012 Eldenburg, Cost Management, 2ce, Chapter 14Slide 7

 With Just-in-time (JIT) production, materials are purchased and units are produced at the time customers demand them.  Successful implementation of JIT systems requires that organizations do the following:  Find high-quality suppliers  Choose a manageable number of suppliers  Locate suppliers with short transit times for materials being delivered  Develop efficient and reliable materials handling processes  Develop management commitment to the JIT process © John Wiley & Sons, 2012 Eldenburg, Cost Management, 2ce, Chapter 14Slide 8

 Target costing uses market-based prices to determine whether products and services can be delivered at costs low enough to make an acceptable profit.  Target costing is the process of researching consumer markets to estimate an appropriate market price, and then subtracting the desired return to determine a maximum allowable cost. © John Wiley & Sons, 2012 Eldenburg, Cost Management, 2ce, Chapter 14Slide 10

The steps in a target costing design cycle © John Wiley & Sons, 2012 Eldenburg, Cost Management, 2ce, Chapter 14Slide 11

© John Wiley & Sons, 2012 Eldenburg, Cost Management, 2ce, Chapter 14 Slide 12 Target Costing is most likely to be successful when:  Product development and design phases are long and complex  The production process is complex  The market is willing to pay for differences in quality or function  The manufacturer can push some cost reductions onto suppliers and subcontractors  The manufacturer can influence the design of subparts

Ted’s Trailers is considering the design, production, and distribution of a new motorcycle trailer. The selling price of similar trailers is $1,200. Ted believes he can sell 10,000 trailers at this price, and he demands a margin of 25% of selling price on all products. Compute the target cost of the trailers. © John Wiley & Sons, 2012 Eldenburg, Cost Management, 2ce, Chapter 14Slide 13 Target cost = $1,200 – ($1,200 x 25%) = $900

The estimated production costs for the new trailer are shown below. List the types of issues that Ted should investigate as he seeks to reduce these estimated costs to meet the target cost. © John Wiley & Sons, 2012 Eldenburg, Cost Management, 2ce, Chapter 14Slide 14 Can the product be redesigned so that the quantity of materials and/or labour can be reduced? Can the purchase price of any of the materials be re-negotiated with the supplier(s)? Can the production process be redesigned so that the quantity of materials and/or labour can be reduced? Can the design of the product be changed to incorporate features that the customer would be willing to pay for? Can variable selling expenses, for example, commissions, be reduced on this new product? Can more than 10,000 units be produced and sold so that the allocation of fixed costs per unit decreases?

 Kaizen costing is continuous improvement in product cost, quality, and functionality.  Cost targets (goals) are set based on price predictions. Kaizen Planning Process for Revenues and Costs © John Wiley & Sons, 2012 Eldenburg, Cost Management, 2ce, Chapter 14 Slide 16

© John Wiley & Sons, 2012 Eldenburg, Cost Management, 2ce, Chapter 14Slide 17

© John Wiley & Sons, 2012 Eldenburg, Cost Management, 2ce, Chapter 14 Slide 19  Life cycle costing takes the product’s selling prices and costs over its entire life cycle into consideration.  Under life cycle costing, managers consider the profitability of the product over a number of years.  It is useful in industries with products that are expected to produce losses when first introduced, but rapid technological changes and increased volume are expected in future years.  Initial production and process design costs will be viewed as costs to be matched against the revenues generated over the product’s entire life.

 Lean accounting is a set of accounting principles and methods to support lean business practices and motivate continuous improvement.  Lean accounting combines the methods and concepts of value chain analysis, cellular manufacturing, just-in- time inventory systems, operational performance measurements, activity based management, and target and kaizen costing.  Continuous improvement efforts are motivated and tracked using value stream analysis and visual control procedures. © John Wiley & Sons, 2012 Eldenburg, Cost Management, 2ce, Chapter 14Slide 21

 Value stream analysis is the process of analyzing business processes to identify the cost of individual value-added activities.  A demand-pull system is where the customer demand “pulls” production through the manufacturing process. © John Wiley & Sons, 2012 Eldenburg, Cost Management, 2ce, Chapter 14Slide 22

Copyright © 2012 John Wiley & Sons Canada, Ltd. All rights reserved. Reproduction or translation of this work beyond that permitted by Access Copyright (The Canadian Copyright Licensing Agency) is unlawful. Requests for further information should be addressed to the Permissions Department, John Wiley & Sons Canada, Ltd. The purchaser may make back-up copies for his or her own use only and not for distribution or resale. The author and the publisher assume no responsibility for errors, omissions, or damages caused by the use of these programs or from the use of the information contained herein. © John Wiley & Sons, 2012 Eldenburg, Cost Management, 2ce, Chapter 14Slide 23