management accounting prof. dr. filip roodhooft prof. dr. filip roodhooft
TRANSCRIPT
Management Accounting
Prof. Dr. Filip Roodhooft
CONTENT
I. Management Accounting
II. Traditional costing systems
III. Activity Based Costing
IV. Total Cost of Ownership
V. Customer Profitability Analysis
VI. Target Costing
I. MANAGEMENT ACCOUNTING
1. Content2. Major purposes3. Framework4. Cost drivers5. Stages6. Innovations
1. ContentManagement accounting= system of reporting that enables managers at
different levels of the organization to make better decisions
- Measurement- Analysis- Interpretation- Communication- Planning and control
Different from financial accounting.Important interaction with strategy.
2. Major purposes
Inventory valuationShort term decision makingPlanningControlStrategic decision making
3. Framework
Key success factors• Cost• Quality• Time• Innovation
Total value chain analysis
Customersatisfaction
Dual internal/externalfocus
Continuous improvement
3. Framework
Value chain
Support functions
Research Planning Production Marketing Distributionand and development design
Core activities
4. Cost driversStructural and executional cost drivers Structural cost drivers:
– Scale – Scope– Experience– Technology– Complexity
Executional cost drivers: – Employee participation– Total quality management– Excess capacity– Plant lay-out– Product configuration– Supplier relationships
Value Chain activities and cost driversStructural activityManage locationIntegrate verticallyIntegrate horizontallyManage technologyManage complexity of productsManage institutional structureGain experience, learn and manage skill sets
Possible cost driversFavorable locations, number of locationsNumber of industry segments in which the company is presentSales volume in units or dollars, number of different customersTypes of process technologiesNumber of different models
Debt level, debt capacity, favorable tax status
Cumulative number of units sold, cumulative number of individual sales
Procedural activity Providing quality
Managing employees
Managing capacity
Manage efficiency
Manage product complexityManaging plant layout
Possible cost driversEmployee training level, return merchandise rates, customer satisfaction ratingsEmployee morale level, turnover rates, a measure of the span of commandPercentage of capacity utilization, number of production or service facilitiesLead time from product concept to production, R&D cost compared to competitorNumber of parts per product, number of separate operations, flexibility of the production processThroughput time, ability to convert from one product/service to another
Operational activitiesProductionInbound logisticsQuality
Possible cost driversDirect labor hours, set-ups, machine hoursPurchase orders, number of partsNumber of inspections
5. Stages
Stage 1– Inadequate for financial reporting
Stage 2– Financial reporting-driven
Stage 3– Managerial relevant - stand-alone
Stage 4– Integrated system
5. Stages
6. Innovations Activity Based Costing en Management Customer Profitability Analysis Total Cost of Ownership Vertical (de)integration Quality costs Balanced Scorecard Benchmarking Target Costing Life cycle costing Economic value added
II.TRADITIONAL COSTING
SYSTEMS
1. Procedure
2. Example 1
3. Example 2
1. Procedure
Direct costs– identify direct costs– estimate price per unit– estimate quantity used–multiply price by quantity– sum up direct costs
1. Procedure Indirect costs
– identify indirect costs and cost pools– identify appropriate first and second stage
cost drivers– estimate cost driver rate– estimate quantity of cost driver used–multiply cost driver rates by quantity– sum up indirect costs
2. Example 1 Cost objects
– Big tables: 800»sold 650 (price per unit 540)» inventory 150
– Medium tables: 1,500»sold 1,300 (price per unit 520)» inventory 200
– Small tables: 2,000»sold 1,750 (price per unit 500)» inventory 250
2. Example 1
Costs (actual costing)
– Materials cost 740,000– Glue and nails 2,150– Direct labour 966,000– Supervision 120,000– Depreciation 70,000– Electricity 4,000– Fuel 4,800
2. Example 1 Costing system
– direct costs» materials cost» direct labour
– materials (kilogram)» BT 3,600» MT 4,500» ST 3,000
– direct labour (hours)» BT 3,200» MT 9,000» ST 20,000
2. Example 1 Costing system
– indirect costs»cost pool 1:
glue and nails/ depreciationallocation base: materials in kilogram
»cost pool 2: supervision/ electricity/ fuelallocation base: direct labour hours
2. Example 1COSTS TOTAL COST POOLS COST OBJECTS
CP1 CP2 BT MT ST
materials cost 740.000 240.000 300.000 200.000
glue and nails 2.150 2.150
wages 96.000 270.000 600.000
direct labor 966.000
supervision 120000 120.000
depreciation 70.000 70.000
electricity 4.000 4.000
fuel 4.800 ________ 4.80072.150 23.400 29.250 19.500
________128.800 12.800 36.000 80.000
372.200 635.250 899.500
COSTS PER UNIT
BIG TABLE 372.200 / 800 = 465,25
MEDIUM TABLE 635.250 / 1.500 = 423,5
SMALL TABLE 899.500 / 2.000 = 449,75
2. Example 1
Results– cost per unit
»BT 465.25»MT 423.5»ST 449.75
– profitability cost objects»BT 48,587.5»MT 125,450»ST 87,937.5» total 261,975
3. Example 2 Cost objects
– product 1: 20 units– product 2: 40 units
Costs (standards)– direct materials (£15 per kilogram)– direct labor (£10 per hour)– supervision– cooling fluid– electricity– rags
3. Example 2 Costs
3. Example 2 Costs
3. Example 2 Costing system
3. Example 2
Results– direct costs
»P1 125»P2 145
– indirect costs»P1 75»P2 80
– total costs»P1 200»P2 225
III. ACTIVITY BASED COSTING
1. Introduction2. Cost structure3. Example4. Need for a new system5. Usage versus Spending6. Activity hierarchy7. Implementation8. Optimal costing systems9. Activity Based Management
1. Introduction ABC
A BBlue pens 1.000.000 100.000Other pens 0 900.000Direct Labor 0,1 0,1Direct Material 0,3 0,3Overhead 75.000 250.000
Cost blue A = 0,475 EURCost blue B = 0,65 EUR
(allocation base = number of pieces)
2. Cost structure
Overhead
Direct costs
Overhead
Direct costs
3. Example Activity Based Costing
DC COIC CP
AB AB
DC COIC ACT
RD AD
- Activities (ACT)
- Resource drivers (RD) - Activity drivers (AD)
- Cost objects (CO)
Other indirect costs (IC)Indirect wages 330,000Depreciation 850,000Indirect materials 170,000
1,350,000
3. Example A B C
Units 20,000 15,000 5,000 Direct Material/ unit 25 23 20 Direct Labour/ unit 70 105 35
Labor hours 2 3 1 Machine hours 1 2 5
Batches 2 4 6 Sales orders 10 18 20
Purchase orders 20 15 25
Cost price per unit
a) Traditional system
b) ABCActivities Activity driver
Reception purchase orders
Set-ups number of set-ups
Assembly machine-hours
Packing sales orders
A B C Direct material + direct labour 25 + 70 23 + 105 20 + 35 Indirect Costs 30 45 15 TOTAL 125 173 70
The ABC-system
Purchase orders
Set-ups Machine-hours
Sales orders
Indirect wages Depreciation Indirect materials
Reception Set-up Assembly Packing
PRODUCTS
Direct materials Direct labor
A B C Direct material + direct labour
25 + 70 23 + 105 20 + 35
Reception 2 2 10 Set-up 2 5.33 24 Assembly 10 20 50 Packing 2.5 6 20 TOTAL 111.5 161.33 159
Indirect wages
Depreciation Indirect materials
Total
Reception 90,000 20,000 10,000 120,000 Set-up 60,000 150,000 30,000 240,000 Assembly 20,000 580,000 50,000 750,000 Packing 60,000 100,000 80,000 240,000 TOTAL 330,000 850,000 170,000 1,350,000
Distribution of indirect costs over activities using resource drivers
Distribution of cost of activities over cost objects using activity drivers
4. Need for a new costing system1. Products that are very difficult to produce are
reported to be very profitable even though they are not premium priced.
2. Profit margins cannot be easily explained.3. Some products that are not sold by competitors have
high reported margins. 4. The results of bids are difficult to explain.
5. The competition’s high-volume products are priced at apparently unrealistically low levels.
6. Vendor bids for parts are considerably lower than expected.
4. Need for a new costing system
7. Customers ignore price increases, even when there is no corresponding increase in costs.
8. Only direct labor hours (or dollars) are used to allocate overhead from cost pools to the product.
9. Only volume-related allocation bases are used to allocate overhead from cost pools to products
10. Cost pools are too large and contain machines that have very different overhead cost structures.
11. The cost of marketing and delivering the product varies dramatically by distribution channel, and yet the cost accounting system effectively ignores marketing costs.
5. Usage versus SpendingCost of resources supplied
=Cost of resources used
+Cost of unused capacity
activity = handle customer order
budgeted cost = 280,000
driver = number of orders
expected number = 4,000 practical capacity = 5,000
cost per order = 56
6. Activity hierarchy
Product-Line Channel Sustaining Sustaining
Brand Sustaining Customer Sustaining
Product Sustaining Order Related
Batch
Unit
Source: Kaplan & Cooper (1997), ‘Cost and Effect’, Harvard Business School Press, p.89
7. Implementation Steps1. Develop activity dictionary2. Determine how much the organization is spending
on each of its activities– resource drivers– activity attributes – hierarchy of activities
3. Identify cost objects4. Determine cost of cost objects using activity drivers
transaction drivers duration drivers
intensity drivers
Implementation: Pitfalls1. Individual resistance due to fear2. Departmental resistance to change3. People’s resistance to changing their beliefs and value
systems4. Environmental barriers to change5. Failure to formalize plans to act on the data provided by
the ABM system6. Lack of clear, concise, and easily understandable reports7. Problems with reporting frequency8. ABM is not implemented in a profit centre9. Company is too profitable10. System is too costly to maintain
Implementation: Chrysler
Turning to ABC Internal resistance Getting acceptance Training the workforce The rollout Final integration
8. Optimal costing systems
High
Low
Cos
t
Costof errors
Cost ofMeasurement
Total Cost
Optimal CostSystem(Stage III ABC system)
Accuracy
Low High(Stage II cost system)
Source: Kaplan & Cooper (1997), ‘Cost and Effect’, Harvard Business School Press, p.104
9. Activity based ManagementActivity Based Costing
Operational ABM Strategic ABM Doing Things Right Doing the Right Things Performing activities Choosing the activities more efficiently we should perform
• Activity management• Business process
reengineering• Total quality• Performance
measurement
• Product design• Product-line and customer mix• Supplier relationships• Customer relationships
Pricing, Order size, Delivery, Packaging• Market segmentation• Distribution channels
Source: Kaplan & Cooper (1997), ‘Cost and Effect’, Harvard Business School Press, p.4
Activity Based ManagementDayton: Value-Added decision rankings
Value-added
VA1: Is the activity of value to external customer?
VA2: Is the activity required to meet corporate requirements?
Nonvalue-added
VA3: Is the activity required for sound business practices?
VA4: Is the activity of value to internal customer?
VA5: Is the activity a waste?
Dayton: Activity-Based Cost reduction decision model
Activity based onimpact upon main (magnitude frequency)
No immediate opportunity, but review during the next
Is the activity VA1 or VA2?
Can activity be improved
Improve by combination, training, scheduling, integration
Can the frequency be reduced?
Reduce frequency/eliminate
Eliminate
Is the activity VA3 or VA4?
yes
yes yes
no
no
no
no
yes
Activity Based Management
TOTAL COST OF OWNERSHIP APPROACH
IN PURCHASING MANAGEMENT
IV. TOTAL COST OF OWNERSHIP
1. Facts and issues
2. Possible improvements
3. Shell’s vision
4. Value Chain
5. Criteria of supplier selection
6. Existing models for supplier selection
7. Definition of the Total Cost of Ownership
8. Examples of Cost Elements
9. Approach
10. Flexible vs. committed resources
11. Hierarchy of activities
12. Use
Content
1. Facts and issuesFACTS
External purchases are a substantial expenditure: 50%-60% of total costs
Outsourcing is important
THEORY AND PRACTICE Simple and inaccurate decision models in purchasing Major improvements are possible
ISSUESMinimise total cost of ownership
Supplier rationalisation Selection of suppliers Improvements: at supplier (external) and purchasing (internal)
company Dynamic perspective Purchasing strategy
2. Possible improvements5% DECREASE IN TCO
10% INCREASE IN SALES
Sales 100 100External purchases 60 57Other variable costs 10 10Fixed costs 20 20Profit 10 13
Sales 100 110External purchases 60 66Other variable costs 10 11Fixed costs 20 20Profit 10 13
3. Shell’s vision“For many years procurement has been an undervalued activity in its contribution to
corporate performance improvement and value for money management. Inadequate planning, poor communication between departments involved in the procurement of materials and equipment and weak performance measurement have resulted in delays and compromise on requested specifications. The acceptance of total procurement as a business process that embraces all disciplines involved in the activities of the operating companies directly addresses these issues.…
Procurement covers the series of activities which need to be performed to acquire and deliver to a user an item or a material or a service. It covers the whole cycle of activities from conception of the need, through designing, purchasing, storage and delivery to the user, monitoring and feeding back operational experience and ultimately disposal…
It therefore follows that procurement does not lie within the domain of one department or discipline but is a process which requires inter-disciplinary co-ordination....”
Source: Procurement Business Strategy, Shell International Oil Company 1991
4. Value chain
The supplier’s performance influences the activities in the value chain of the company
Transactions Financial Mgmt. Business Plan. Treasury/Risk Processing & Reporting &Analysis Mgmt. (Production/ MIS Sales) Technology Research, Development and Design Human Resource Management and Development Purchasing Production Warehousing Sales/ Customer Inventory & Distribution Marketing Service Holding, Materials Handling
INFRASTRUCTURE ACTIVITIES M
AR
GIN
PR
IMA
RY
AC
TIV
ITIE
S
S
UPP
OR
T A
CT
IVIT
IES
5. Criteria of supplier selection Net price Quality Customer services Delivery Geographic location Financial position Production facilities Amount of past business Technical capability Management Future purchases Communication systems
Operational controls Position in the industry Labor relations record Attitude Desire for your business Warranties and claims policies Packaging Impression Aids to the purchasing function Compliance with your procedures Performance history
6. Existing models for supplier selection
S1 S2 S3quality 35% price 25%on time delivery 15%delivered amount 15%administration 10%
= weighted point plan+ other models
price onlyeven more subjective
7. Definition of the Total Cost of Ownership
True cost of buying a particular good or service from a given internal or external supplier
Goes beyond price to consider all other cost elements using Activity Based Costing
8. Examples of cost elementsQUALITYCost of inspectionsCost of returns (labour, paperwork,
logistics, etc.)Cost of line falloutCost to train supplier in quality methodsCost of reworksTaguchi cost function
DELIVERYCost of early or late ordersTransportation costsCost of expeditingOpen/back orders due to partial
shipment
CUSTOMER SERVICESDelays due to slow response to
problemsCost of adapting company system to
supplierCost of extra inventory due to
unreliabilitySavings from supplier engineering
supportTime spent straightening out problem
PRICE OR COSTPrice paidTerms like quantity discountsCost reduction due to process
improvements
TOTAL COST OF OWNERSHIP MATRIXThe concept of the TCO was merged with the ABC cost drivers
concept and the cash/non cash aspects of the cost elements.
Supplier level costs
Sales discount
Other ASP
Payment delay
Other AOP
Price Price
evolution Product
discounts
Service cost
Testing cost
Other AUP
Supplier quotation cost
Contract cost
Supplier follow-up cost
Supplier change cost
Other ASO
Order cost
Other AOO
Other AUO
Cash
Non cash
Other
Cash
Non cash
Other
Cash
Non cash
Other
Other RSP
Transporta-tion cost
Other ROP
Other RUP
Other RSO
Invoicing cost
Quantitative reception cost
Qualitative reception cost
Litigation cost
Other ROO
Other RUO
Order level costs
Inventory cost
Other PUP
Other PUO
Other USP
Other UOP
Consumption
Intrinsic efficiency
Replacement cost
Costs linked to production failure
Costs linked to product failure
Maintenance
Installation cost
Other UUP
Other USO
Other UOO
Cost of quality control
Cost of personnel training
Cost of adaptations
Other UUO
Reception Possession UtilizationAcquisitionCosts linked to
P/SCosts linked to
the OCosts linked to
P/SCosts linked to
the OCosts linked to
P/SCosts linked to
the OCosts linked to
P/SCosts linked to
the O
Other ESP
Other EOP
Waste valorisation
Other EUP
Other ESO
Other EOO
Other EUO
Costs linked to P/S
Elimination
Unit level costs
Costs linked to the O
Othercosts
Other general supplier level costs
Other general order level cost
Other general unit level costs
9. Approach
Current Resources
Current Activities
Current Suppliers
Model
Future Resources
Future Activities
Future Suppliers
10. Flexible vs. committed resourcesFLEXIBLE RESOURCES lead to flexible costs= resources for which no capacity is defined since adjustment is always
possible– external purchases– temporary labour– electricity
no capacity problem
COMMITTED RESOURCES lead to committed costs= resources for which capacity is defined since they are acquired in
advance of when the activity is done– buildings and machinery– personnel– computer and telecommunication
capacity problem reduction only after reengineering exercise
11. Hierarchy of activitiesSUPPLIER LEVEL
cost of dedicated purchasing manager for suppliersadditional R&D cost due to using suppliers
ORDER LEVELreception cost per orderinvoice cost per ordertransportation cost per orderorder cost per order
UNIT LEVELset up costinventory holding costsprice
12. Use= PURCHASING STRATEGY ON THE BASIS OF ALL TCO ELEMENTS
Supplier selection (mostly reduction) + evaluation NegotiationsProcess improvements
buying firmselling firm
between organisations (cfr. partnerships)Budgets + budget controlBuyers work following the same philosophySensitivityThinking process on current decisionsMakes purchasing objective
situation of purchaserTeamwork
throughout the whole company
SUPPLIER SELECTION MODEL FOR
STRATEGIC SOURCING
Content1. Strategic and Operational Aspects
2. Essentials
3. Mathematical decision model
4. Total Cost of Ownership Matrix
5. Methodology
6. Heating Electrode Case
7. Ball Bearings Case
8. Conclusion
1. Strategic and operational aspects
STRATEGIC ASPECT
Supplier choice is strategic, long term
OPERATIONAL ASPECT
Costs are incurred by working with suppliers day to day
CONSEQUENTLY
For supplier selection, we need a tool that models the operational aspect of the problem to yield the strategic insights
2. EssentialsJanuary February … December
1 2 3 4 5 6 7 8 K 49 50 51 52
59 62 12 8 82 36 33 68
48
31 17 5 7
Supplier IProduct JPeriod K
1JKS
IJKX
Inventory
Amount purchased
JKD
KJJKJK
KJIIJKIJK
KIIKIK
III
IKIJIJK
JKJKI
IJKJK
SHXCYFZGMIN
levelupplierslevelorderYMX
levelunitSDXS
,,,,
IIK
1
ZY
3. Mathematical decision modelObjective: Minimisation of the Total Cost of Ownership under constraints
Min (slc + olc + ulc)
Quality auditFollow-upR&DServiceEtc.
SUPPLIER LEVEL COSTS
When a supplier is used
ORDER LEVEL COSTS
When an order is placed
ReceiptInvoiceTransportOrderEtc.
PriceInventoryEfficiencyWaste valorisationEtc.
UNIT LEVEL COST CONSTRAINTSLot SizeSafety stockMaximum stockNumber of suppliersMarket sharesProduction capacityEtc.
Selection of a combination of suppliersMinimisation of the Total Cost of OwnershipDynamic processProblem mainly:
Multi suppliers Multi products Multi periods
Description of the problemDescription of theTotal Cost of Ownership
Ordering over Time
Differentiation among Suppliers
4. TOTAL COST OF OWNERSHIP MATRIXThe concept of the TCO was merged with the ABC cost drivers
concept and the cash/non cash aspects of the cost elements.
Supplier level costs
Sales discount
Other ASP
Payment delay
Other AOP
Price Price
evolution Product
discounts
Service cost
Testing cost
Other AUP
Supplier quotation cost
Contract cost
Supplier follow-up cost
Supplier change cost
Other ASO
Order cost
Other AOO
Other AUO
Cash
Non cash
Other
Cash
Non cash
Other
Cash
Non cash
Other
Other RSP
Transporta-tion cost
Other ROP
Other RUP
Other RSO
Invoicing cost
Quantitative reception cost
Qualitative reception cost
Litigation cost
Other ROO
Other RUO
Order level costs
Inventory cost
Other PUP
Other PUO
Other USP
Other UOP
Consumption
Intrinsic efficiency
Replacement cost
Costs linked to production failure
Costs linked to product failure
Maintenance
Installation cost
Other UUP
Other USO
Other UOO
Cost of quality control
Cost of personnel training
Cost of adaptations
Other UUO
Reception Possession UtilizationAcquisitionCosts linked to
P/SCosts linked to
the OCosts linked to
P/SCosts linked to
the OCosts linked to
P/SCosts linked to
the OCosts linked to
P/SCosts linked to
the O
Other ESP
Other EOP
Waste valorisation
Other EUP
Other ESO
Other EOO
Other EUO
Costs linked to P/S
Elimination
Unit level costs
Costs linked to the O
Othercosts
Other general supplier level costs
Other general order level cost
Other general unit level costs
5. Methodology
· Determination of the objectives of the business case
· Determination of the optimisation scenarios
· Determination of the cost structure of the product group
· Preparation of the input data· Validation of the data
Lindo
Access(runtime)
Preparation of the business case
Analysis of the results
Phase 1 Phase 3Mercury
Phase 2
For each optimisation scenario :· Formatting of the business case· Input of the data· Solving
For each optimisation scenario :· Analysis of the output · Determination of a new
purchase strategy· File management
6. Heating electrodes case
DESCRIPTIONAfter steel has been produced in the blast furnaces it is collected in a recipient and
circulated in vacuum reducing its carbon content, homogenising its compositionHeating electrodes provides constant high temperature, the steel is not cooled off too
much too quicklyLong cylindrical carbon rods of 2 M length, 80 mm diameterLooses its carbon content during useWhen fully consumed it is replaced by a new one
ISSUE Usage duration and failure rate are key determinants of the electrodes’ quality and
varies among suppliers
LiquidSteel
HeatingElectrode
Carbon
Vacuum
6. Heating electrodes case (cont’d)
DIFFERENCES AMONG SUPPLIERS
QualityPrice per unitBatch sizeSafety timePayment delayPurchasing manager
COMMENTS
Quality differential causes extra set-upsLarge batch :
Reduces inventory flexibility Decreases reception costs per unit
Payment delay modelled as a discount of 1% per periodReception and invoicing costs are internal costs, affect
order quantities not supplier choice
LiquidSteel
HeatingElectrode
Carbon
Vacuum
6. Heating electrodes case (cont’d)
CURRENT POLICY OPTIMAL POLICY PREFERRED POLICY
Supplier selected S1
S2
S3
S1 S1S2
Ordering Policy Supplier Month Batches Supplier Month Batches Supplier Month Batches
S1 2 - 4 - 9 2 - 1 - 2 S1 1 - 2 - 3 - 4 1 - 1 - 1 - 1 - 1 S1 0 - 3 - 4 - 5 - 8 1 - 1 - 1 - 1 - 1
S2 0 - 5 - 6 - 10 1 - 2 - 1 - 2 5 - 6 - 8 - 9 1 - 1 - 1 - 1 9 - 10 - 11 -12 1 - 1 - 1 - 1
S3 0 2 10 - 11 - 12 1 - 1 - 1 S2 1 - 2 - 6 1 - 1 - 1
Supplier level costs 35,000 10,000 20,000
Order level costs 12,608 18,912 18,912
Batch level costs 9,750 9,000 9,000
Unit level costs 7,127,439 6,107,386 6,464,162
Purchasing costs 7,077,418 6,825,988 6,874,891
Additional costs 452,500 450,000 450,000
Inventory holding costs 110,643 62,890 62,890
Additional revenue 513,122 1,231,492 923,619
Total cost of ownership 7,184,797 6,145,298 14.5% savings 6,512,074 9.4% savings
7. Ball bearings case
DESCRIPTION
The ball bearings are mainly used for transportation of the hot steel slabs after steel has been produced in the blast furnaces and collected to form the slabs
The transportation lines consist of several rows of steel cylindersThe steel cylinders and the ball bearings are used in very rough conditions
under extremely high temperatures. This causes the surface of the steel cylinders to deteriorate quickly such that they have to be replaced frequently and brought to a maintenance department for remodelling
At the time of replacement of the steel cylinders, the ball bearings are also replaced in anticipation of potential problems and thus before they have been used for their full useful live
BALLBEARINGS
7. Ball bearings case (cont’d)
DIFFERENCES AMONG SUPPLIERS
Prices differences for 33 itemsService levels for suppliers
S1 and S2 highest levelS5 lowest level
S1 and S2: ordering and invoicing with EDI
COMMENTS
Payment delay modelled as a discount of 1% per period
BALLBEARINGS
7. Ball bearings case (cont’d)CASE 1 :
CURRENT POLICYS1 S2 S3 S4 S5 S6
Supplier Level -1,818,160 Sales Volume
38,706,206
5,861,042 31,918,164 0.0 0.0 0.0 927,000
Order Level 438,504 Market Share 15.1% 82.5% 0.0% 0.0% 0.0% 2.4%
Unit Level 53,624,630
Total 52,244,974 Total Savings 0.0% Sales Savings 0.0%
CASE 2 :OPTIMAL POLICY
S1 S2 S3 S4 S5 S6
Supplier Level -889,383 Sales Volume31,451,
322
0 16,178,339 563,496 0 11,039,618 3,669,869
Order Level 609,312 Market Share 0.0% 51.4% 1.8% 0.0% 35.1% 11.7%
Unit Level 46,489,100
Total 46,209,029 Total Savings 11.5% Sales Savings 18.7%
CASE 3 :3 SUPPLIERS NOT S5
S1 S2 S3 S4 S5 S6
Supplier Level -1,287,870 Sales Volume
33,109,034
0 17,091,794 1,133,736 0 0 14,883,504
Order Level 609,312 Market Share 0.0% 51.6% 3.4% 0.0% 0.0% 44.9%Unit Level 48,081,740
Total 47,403,182 Total Savings 9.3% Sales Savings 14.5%
7. Ball bearings case (cont’d)CASE 4:2 SUPPLIERS
S1 S2 S3 S4 S5 S6
Supplier Level -1,007,515Sales Volume
33,166,937
0 20,650,300 0 0 12,516,637 0
Order Level 505,296 Market Share 0.0% 62.3% 0.0% 0.0% 37.7% 0.0%
Unit Level 48,015,910
Total 47,513,691Total Savings 9.1% Sales Savings 14.3%
CASE 5 :
SINGLE SOURCING S2
S1 S2 S3 S4 S5 S6
Supplier Level -1,954,976Sales Volume
39,499,519
0 39,499,519 0 0 0 0
Order Level 193,248 Market Share 0.0% 100.0% 0.0% 0.0% 0.0% 0.0%
Unit Level 54,347,010
Total 52,585,282Total Savings -0.7% Sales Savings -2.0%
8.Conclusion KEY ADVANTAGES
Substantial proposition of savingsGeneration of negotiation argumentsIdentification of key productsSensitivity analysis (scenario building)Developement of a unique and standard
approach of the TCOFlexibilityChallenge the current decisions and
strategiesQuantification of intangible elementsOblige the buyers to define the cost
structure of a market
DECISION TOOLMarket strategySelection of suppliersDetermination of market sharesDetermination of ordering policy
MANAGEMENT TOOLBudgetReportingStrategy follow-up
CHANGE MANAGEMENT TOOLPratice of the TCOTraining of the BuyersDay to day practice of theoritical conceptsDevelopment of a TCO history/market and
of a knowledge database
TCO Objective
ResourcesUsed
Reduction of
PurchasingCosts
PurchasingProcesses
SupplierManagement
PurchasingStrategy
Supply ChainManagement
PURCHASINGMANAGEMENT
V. CUSTOMER PROFITABILITY ANALYSIS
Customer profitability analysis
= identification and analysis of the costs and revenues for a customer or group of customers
– Based on ABC-system – Cost object = customer
also include customer related acitivities– To know the profitability so that actions can be based on it
Information
– Revenues per (group of) customers– Costs directly assignable to (group of) customers– Indirect costs that are linked with activities
Based on this, the actual contribution of the different (groups of) customers can be determined.
Use
– Relation between activities and customers– Understanding how activities are driven by customers– Possibilities for
» generation of revenues» reduction of costs
– Emphasis on the right customers– Emphasis on the profit and not on the turnover– Information to give discounts– Information to fire customers
Profitable versus non-profitable customers
10020
Cumulative % of customers
100
150
Cum
ulat
i ve
% o
f pr
ofits
CustomerA
CustomerB
Traditional Costing Activity-Based Costing
Customer Customer A B
ApparentProfits
Hiddencosts
Hidden Profits
Costs
Revenues
Source: Kaplan & Cooper (1997), ‘Cost and Effect’, Harvard Business School Press, p.191
Hidden profits and hidden costs of customers
High cost-to-serve customers Low cost-to-serve customers1. Order custom products 1. Order standard products2. Small order quantities 2. High order quantities3. Unpredictable order arrivals 3. Predictable order arrivals4. Customised delivery 4. Standard delivery5. Change delivery requirements 5. No changes in delivery
requirements6. Manual processing 6. Electronic processing (EDI)7. Large amounts of presales support 7. Little to no presales support (marketing, technical and sales (standard pricing and ordering) resources)8. Large amounts of postsales support 8. No postsales support (installation, training, warranty, field service)9. Require company to hold inventory 9. Replenish as produced10. Pay slowly (high accounts 10. Pay on time receivable)
Source: Kaplan & Cooper (1997), ‘Cost and Effect’, Harvard Business School Press, p.191
Characteristics of customers with high and low service costs
Market potential
High
LowLow High
Compatibility
Life cycle of a customer
VI. TARGET COSTING
1. Introduction
2. Definition
3. Methodology
4. Target costing versus traditional techniques
5. Characteristics
6. Role ABC in Target Costing
1. Introduction
Cost commitment %
Product and ProcessPlanning and DesignPhase
Product Manufacturingand product salesand service phase
Cost incidence %
ProductAbandonmentPhase
Perc
ent c
omm
itte
d
100%
0%
Product Life Cycle Phase
Percent Committed Life Cycle Costs
Source: Cooper & Kaplan (1998),’The design of Cost Management Systems’, pg.396, Exhibit 8-1, Cost Commitment vs Incidence
1. Introduction
2. Definition
Definition 1Target Costing represents a set of management tools and methods designed to direct design and planning activities for new products, provide a basis for controlling subsequent operational phases and ensure that products achieve given profitability targets throughout their life cycle
2. Definition
Definition 2The purpose of Target Costing is to identify the production cost for a proposed product such that the product, when sold, generates the desired profit margin. The focus of Target Costing is to reduce the cost of a product through changes in its design. It is therefore applied during the design phase of a product’s life cycle
3. Methodology
Methodology target costing
Product characteristics
Estimated Allowed cost cost
Target cost
Production
Market research and competition analysis
3. Methodology
4. Target Costing versus traditional techniques
Target costing Traditional
Step 1 Target price Product design
Step 2 Target profit Estimated cost
Step 3 Target cost Target profit
Step 4 Product design Price
5. Characteristics Advantages
– flexibility– market orientation– cost savings– future oriented– attention for design
Disadvantages– longer time of development– burn-out of employees– confusion on the market– organizational conflicts
6. Role of ABC in Target Costing
Traditional : Japan Unit level -material
-labour-assembly
ABC Also non-unit level activities
Unit LevelBatch LevelProduct Level