1. 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

2. 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

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

4. Target costing 1
Cost
Price

5. Target costing 2

6. 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)

7. 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 % on cost
Current cost $8.40 per unit
$0.40
$0.60
$0.90
$1.60

8. 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

9. 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. √ √

10. Target costing 7

11. 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

12. 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

13. 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

14. 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

15. 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?

16. 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

17. 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

18. 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 √