11-1 hansen & mowen cost management accounting and control

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HANSEN & MOWENHANSEN & MOWEN

Cost ManagementCost ManagementACCOUNTING AND CONTROLACCOUNTING AND CONTROL

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Strategic Cost ManagementStrategic Cost Management

11

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There are three general strategies that have been identified:

cost leadership product differentiation focusing

Strategic Cost Management: Basic Strategic Cost Management: Basic ConceptsConcepts 1

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A cost leadership strategy happens when the same or better value is provided to customers at a lower cost than a company’s competitors.

Example: A company might redesign a product so that fewer parts are needed, lowering production costs and the costs of maintaining the product after purchase.


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A differentiation strategy strives to increase customer value by increasing what the customer receives (customer realization).

Example: A retailer of computers might offer on-site repair service, a feature not offered by other rivals in the local market.


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A focusing strategy happens when a firm selects or emphasizes a market or customer segment in which to compete.

Example: Paging Network, Inc., a paging services provider, has targeted particular kinds of customers and is in the process of weeding out the nontargeted customers.


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The industrial value chain is the linked set of value-creating activities from

basic raw materials to the disposal of the finished

product by end-use customers.

The industrial value chain is the linked set of value-creating activities from

basic raw materials to the disposal of the finished

product by end-use customers.

Fundamental to a value-chain framework is the

recognition that there exist complex linkages and

interrelationships among activities both within and

external to the firm.

Fundamental to a value-chain framework is the

recognition that there exist complex linkages and

interrelationships among activities both within and

external to the firm.


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There are two types of linkages that must be analyzed and understood: internal and external linkages.

Internal linkages are relationships among activities that are performed within a firm’s portion of the value chain.External linkages describe the relationship of a firm’s value-chain activities that are performed with its suppliers and customers. There are two types: supplier linkages and customer linkages.


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Value Chain for the Petroleum IndustryValue Chain for the Petroleum IndustryValue Chain for the Petroleum IndustryValue Chain for the Petroleum Industry

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Organizational activities are of two types: structural and executional.

Structural activities are activities that determine the underlying economic structure of the organization.

Executional activities are activities that define the processes and capabilities of an organization and thus are directly related to the ability of an organization to execute successfully.


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Organizational Activities and DriversOrganizational Activities and DriversOrganizational Activities and DriversOrganizational Activities and Drivers

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Operational Activities and DriversOperational Activities and DriversOperational Activities and DriversOperational Activities and Drivers

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Organization and Operational Activity Organization and Operational Activity RelationshipsRelationships

Organization and Operational Activity Organization and Operational Activity RelationshipsRelationships

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Internal Value ChainInternal Value ChainInternal Value ChainInternal Value Chain

2Value-Chain AnalysisValue-Chain Analysis

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Internal Linkage Analysis Example

Activities Activity DriverActivity

Capacity

Current Activity Demand

Expected Activity Demand

Material usage Number of parts 200,000 200,000 80,000Assembling parts Direct labor hours 10,000 10,000 5,000Purchasing parts Number of orders 15,000 12,500 6,500Warranty repair Number of defective products 1,000 800 500

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Additionally, the following activity cost data are provided:

Material usage: $3 per part used; no fixed activity cost.Assembly: $12 per direct labor hour; no fixed activity costPurchasing: Three salaried clerks, each earning a $30,000

annual salary; each clerk is capable of processing 5,000 purchase orders annually. Variable activity costs: $0.50 per purchase order processed for forms, postage, etc.

Warranty: Two repair agents, each paid a salary of $28,000 per year; each repair agent is capable of repairing 500 units per year. Variable activity costs: $20 per product repaired.

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Cost Reduction from Exploiting Internal LinkagesCost Reduction from Exploiting Internal LinkagesCost Reduction from Exploiting Internal LinkagesCost Reduction from Exploiting Internal Linkages


a(200,000 - 80,000)$3.

b(10,000 - 5,000)$12.

c[$30,000 + $0.50(12,500 * 6,500)].

d[$28,000 + $20(800 * 500)].

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Step-Cost Behavior: Purchasing ActivityStep-Cost Behavior: Purchasing ActivityStep-Cost Behavior: Purchasing ActivityStep-Cost Behavior: Purchasing Activity

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Data for Supplier Costing ExampleData for Supplier Costing ExampleData for Supplier Costing ExampleData for Supplier Costing Example

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Reworking rate = $200,000/1,000

Reworking rate = $200 per failed component

800 + 190 + 5 + 5800 + 190 + 5 + 5

Expediting rate = $50,000/50

30 + 2030 + 20Expediting rate = $1,000 per late delivery



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Supplier CostingSupplier CostingSupplier CostingSupplier Costing

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Units purchased 500,000 500,000Orders placed 2 200Manufacturing cost $3,000,000 $3,000,000Order-filling cost allocated* $303,000 $303,000Order cost per unit $0.606 $0.606*Order-filling capacity is purchased in blocks of 45 (225 capacity), each block costing $40,400; variable order-filling activity costs are $2,000 per order; thus, the cost is [(5 x $40,400) + ($2,000 x 202)]

One Large TenCustomer Smaller Customers


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There are three basic views of the product life cycle: Marketing viewpoint Production viewpoint Consumable life viewpoint

3Life-Cycle Cost ManagementLife-Cycle Cost Management

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General Pattern of Product Life General Pattern of Product Life Cycle: Marketing ViewpointCycle: Marketing Viewpoint

General Pattern of Product Life General Pattern of Product Life Cycle: Marketing ViewpointCycle: Marketing Viewpoint

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Product Life Cycle: Production ViewpointProduct Life Cycle: Production ViewpointProduct Life Cycle: Production ViewpointProduct Life Cycle: Production Viewpoint

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Typical Relationships of Product Life-Cycle View Typical Relationships of Product Life-Cycle View pointspoints

Typical Relationships of Product Life-Cycle View Typical Relationships of Product Life-Cycle View pointspoints

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Typical Relationships of Product Life-Cycle ViewpointsTypical Relationships of Product Life-Cycle ViewpointsTypical Relationships of Product Life-Cycle ViewpointsTypical Relationships of Product Life-Cycle Viewpoints

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Functional-based system:

Variable conversion activity rate: $40 per direct labor hour

Material usage rate: $8 per part

ABC system:

Labor usage $10 per direct labor hour

Material usage: $8 per part

Machining: $28 per machine hour

Purchasing activity: $60 per purchase order

Setup activity: $1,000 per setup hour

Warranty activity: $200 per returned unit

Customer repair cost: $10 per hour

Cost Behavior

Cost Reduction Example


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Activity and Resource Information (annual estimates)

Units produced 10,000 10,000Direct material usage 100,000 parts 60,000 partsLabor usage 50,000 hours 80,000 hoursMachine hours 25,000 20,000Purchase orders 300 200Setup hours 200 100Returned units 400 75Repair time (customer) 800 150

Design BDesign A

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Cost Analysis: Competing Product DesignsCost Analysis: Competing Product DesignsCost Analysis: Competing Product DesignsCost Analysis: Competing Product Designs

A. Traditional Costing System

a$8 100,000; $8 60,000.

b$40 50,000; $40 80,000.

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Cost Analysis: Competing Product DesignsCost Analysis: Competing Product DesignsCost Analysis: Competing Product DesignsCost Analysis: Competing Product Designs

B. ABC System

a$10 50,000; $10 80,000.

b$28 25,000; $28 20,000.

c$60 300; $60 200; $1,000 200; $1,000 100; $200 400; $200 75.

*Rounded to the nearest dollar.

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Three cost reduction methods: reverse engineering value analysis process improvement


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Target-Costing ModelTarget-Costing ModelTarget-Costing ModelTarget-Costing Model

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Just-in-Time (JIT) Manufacturing and PurchasingJust-in-Time (JIT) Manufacturing and Purchasing 4

Plant Layout Pattern: Traditional versus JITPlant Layout Pattern: Traditional versus JITPlant Layout Pattern: Traditional versus JITPlant Layout Pattern: Traditional versus JIT

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5JIT and Its Effect on the JIT and Its Effect on the Cost Management Cost Management SystemSystem

Comparison of JIT Approached with Traditional Comparison of JIT Approached with Traditional Manufacturing and PurchasingManufacturing and Purchasing

Comparison of JIT Approached with Traditional Comparison of JIT Approached with Traditional Manufacturing and PurchasingManufacturing and Purchasing

JIT Traditional

1. Pull-through system2. Insignificant inventories3. Small supplier base4. Long-term supplier contracts5. Cellular structure6. Multiskilled labor7. Decentralized services8. High employee involvement9. Facilitating management style10. Total quality control11. Buyers’ market12. Value-chain focus

1. Push-through system2. Significant inventories3. Large supplier base4. Short-term supplier contracts5. Departmental structure6. Specialized labor7. Centralized services8. Low employee involvement9. Supervisory management style10. Acceptable quality level11. Sellers’ market12. Value-added focus

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Transaction 1: Purchase of raw materials.

Back-FlushBack-Flush Journal Entry Journal Entry

Raw Materials and In-Process Inventory 160,000Accounts Payable160,000


Cost Flows: Traditional Compared with JITCost Flows: Traditional Compared with JITCost Flows: Traditional Compared with JITCost Flows: Traditional Compared with JIT

Traditional Journal EntryTraditional Journal Entry

Materials Inventory 160,000Accounts Payable160,000

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Transaction 2: Materials issued to production.


Work-in-Process Inventory 160,000Materials Inventory160,000


No entry



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Transaction 3: Direct labor cost incurred.


Work-in-Process Inventory 25,000Wages Payable25,000


Combined with overhead: See next entry.



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Transaction 4: Overhead cost incurred.

Traditional Journal ntryTraditional Journal ntry

Overhead Control 225,000Accounts Payable225,000


Conversion Cost Control 250,000Wages Payable25,000Accounts Payable225,000



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Transaction 5: Application of overhead.


Work-in-Process Inventory 210,000Overhead Control210,000


No entry.



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Transaction 6: Completion of goods.


Finished Goods Inventory 395,000Work-in-Process Inventory395,000


Finished Goods Inventory 395,000Raw Materials and in-Process Inventory160,000Conversion Cost Control235,000



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Transaction 7: Goods are sold.


Cost of Goods Sold 395,000Finished Goods Inventory395,000


Cost of Goods Sold 395,000Finished Goods Inventory395,000



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Transaction 8: Variance is recognized.


Cost of Goods Sold 15,000Overhead Control15,000


Cost of Goods Sold 15,000Conversion Cost Control15,000



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End of End of Chapter 11Chapter 11

11-1 hansen & mowen cost management accounting and control

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