1. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Costing and the Value Chain Lecture 19

2. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin R & D and Design Suppliers and Production Distribution and Marketing Customer Service The value chain is the set of activities and resources necessary to create and deliver products and services valued by customers. The Value Chain—Focus on Core Operations

3. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Non-value-added activities add cost without additional desirability, and can be eliminated without reducing quality or performance. Value-added activities add to product or service desirability in customers’ eyes. IdentifyEliminate Non-value- added activities Value and Non-value-Added Activities

4. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Analysis and Classification Activities Value and Non-value-Added Activities Non-value- Added Activities Reduce or Eliminate Value- Added Activities Continually Evaluate and Improve

5. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Examples of non-value- added activities are: Storage of materials, work-in-process, or finished goods. Moving parts and materials in the factory. Waiting for work. Inspection. Get rid of them! Non-value-Added Activities

6. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin What’s the difference between activity-based costing and activity-based management? Activity-Based Management — Drive Out Costs

7. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Activity-based management focuses on managing activities to reduce costs. Activity-based costing establishes relationships between overhead costs and activities. Activity-Based Management — Drive Out Costs

8. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Analyze activities Collect benchmark information Determine cost per unit of activity Identify activity measures Create cost pools Identify activities Activity-based costing Activity-based management ABC: a Subset of Activity-Based Management

9. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin  Chart activities needed to meet customer expectations.  Use ABC to determine cost of activities.  Classify all activities as value-added or non-value-added.  Improve value-added activities and eliminate non-value-added activities. Activity-Based Management and the Value Chain

10. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Let’s move along to a new topic. The Target Costing Process — Creating Customer Satisfaction

11. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Focused on design. Consideration given to the entire value chain. Focused simultaneously on profit and cost planning. Driven by the customer. Target costing is aimed at the earliest stages of new product and service development. The Target Costing Process — Creating Customer Satisfaction

12. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Concept development Planning and market analysis Production design and value engineering Production and continuous improvement Target price Profit margin Target cost Establishing the Target Price Attaining the Target Cost The Target Costing Process

13. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Price Major Influences on Target Pricing

14. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin  Develop products that satisfy customer needs.  Set target price using competitors’ prices and customers’ perceived value for product.  Target price – Profit margin = Target cost  Use value engineering to find least costly combination of resources to meet customer needs. Developing target prices and target costs requires four steps: Components of the Target Costing Process

15. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Life- cycle costing  Research, design, and development  Production  Marketing  Product discontinued and customer support ends Life-Cycle Product Costing and Pricing

16. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Source: Adopted from McGraw-Hill/Irvin