principles of accounting chapter 19 ppt
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Costing and the Value ChainChapter 19PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPAMcGraw-Hill/Irwin Copyright © 2012 The McGraw-Hill Companies, Inc.The Value ChainThe value chain is the set of activities and resources necessary to create and deliver products and services valued by customers.R&D and DesignSuppliers and ProductionDistribution and MarketingCustomer Service19-2TRANSCRIPT
Copyright © 2012 The McGraw-Hill Companies, Inc.
PowerPoint Authors:Susan Coomer Galbreath, Ph.D., CPACharles W. Caldwell, D.B.A., CMAJon A. Booker, Ph.D., CPA, CIACynthia J. Rooney, Ph.D., CPA
McGraw-Hill/Irwin
Costing and the Value Costing and the Value ChainChainChapter 19
19-2
R & Dand
Design
Suppliersand
Production
Distributionand
Marketing
CustomerService
The value chain is the set of activities andresources necessary to create and deliver
products and services valued by customers.
The Value ChainThe Value Chain
19-3
International Financial International Financial Reporting Standards and the Reporting Standards and the Value ChainValue Chain
Differences between U.S. Generally Accepted AccountingPrinciples (GAAP) and International Financial Reporting
Standards (IFRS) may be value chain related. Examples:
IFRS requires some R&D activities to be capitalized IFRS requires some R&D activities to be capitalized while GAAP requires them to be expensed.while GAAP requires them to be expensed.
Companies, operating in both the U.S. and in countries Companies, operating in both the U.S. and in countries where IFRS is the accepted standard, may need to file where IFRS is the accepted standard, may need to file
financial reports that meet both IFRS and GAAP financial reports that meet both IFRS and GAAP standards.standards.
19-4
Non-value-added activities add cost withoutadditional desirability, and can be eliminated
without reducing quality or performance.
Value-added activities add to product’s or service’s desirability in customers’ eyes.
Identify EliminateNon-value-
addedactivities
Value- and Non-Value-Added Value- and Non-Value-Added ActivitiesActivities
19-5
Value-Added
Activities
ContinuallyEvaluate
and Improve
Non-value-Added
Activities
Reduce orEliminate
Analysis andClassification
Activities
Value- and Non-Value-Added Value- and Non-Value-Added ActivitiesActivities
19-6
I love them!
Value-Added ActivitiesValue-Added ActivitiesValue-added activitiesenhance the value of productsand services in the eyes of the customer while meetinggoals of the business.
Designing to customer specification
Processing for just-in-time delivery to customers
Competent customer service
19-7
Non-value-added activitiesuse resources withoutproviding value to customers.Material and other inventory
storageMoving parts and materials
in the factoryWaiting for work InspectionCreating scrap and reworkProduct design without
customer input
Get ridof them!
Non-Value-Added ActivitiesNon-Value-Added Activities
19-8
What’s the difference between activity-based costing and
activity-based management?
Activity-Based Activity-Based ManagementManagement
19-9
Activity-basedmanagementfocuses on
managing the activities to
reduce costs.
We use Activity-based costing to:1. Identify activities.2. Create associated activity cost
pools.3. Identify an activity measure.4. Create the cost per unit of
activity.
Activity-Based Activity-Based ManagementManagement
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Chart activities neededto meet customer
expectations.Use ABC to determine
cost of activities.
Classify all activitiesas value-added
or non-value-added.
Improve value-addedactivities and eliminate
non-value-added activities.
Activity-Based Management Activity-Based Management Across the Value ChainAcross the Value Chain
19-11
A
ABC: a Subset ofABC: a Subset ofActivity-Based Activity-Based ManagementManagement
Analyze activitiesfor non-value
added activities
Collect externalbenchmarkinformation
Manage activities
Determinecost per unit
of activity
Identifyactivity
measures
Createcost
poolsIdentify
activities
ABC
Activity-Based Management
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Focusedon design.
Considerationgiven to the
entirevalue chain.
Focusedsimultaneously
on profit andcost planning.
Driven by the customer.
Target costing is aimed at the earliest stagesof new product and service development.
The Target Costing ProcessThe Target Costing Process
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Conceptdevelopment
Planningand market
analysis
Productiondesign and
valueengineering
Productionand
continuousimprovement
Targetprice
Profitmargin
Targetcost
Establishing theTarget Price
Attaining theTarget Cost
Components of the Target Components of the Target Costing ProcessCosting Process
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Price
Components of the Target Components of the Target Costing ProcessCosting Process
19-15
Develop productsthat satisfy
customer needs.
Set target price usingcompetitors’ prices andcustomers’ perceived
value for product.
Target price – Profit margin = Target cost
Use value engineeringto find least costly
combination of resourcesto meet customer needs.
Developing target prices and targetcosts requires four steps:
Components of the Target Components of the Target Costing ProcessCosting Process
19-16
Life-cycle
costing
Research,design, and
development
ProductionMarketing
Product discontinued and customer support ends
Life-Cycle Product Target Life-Cycle Product Target Costing and PricingCosting and Pricing
19-17
Research,design, and
development
ProductionMarketing
Product discontinued and customer support ends Pricing must
generate revenue to cover costsof all phases
of productlife cycle.
Life-Cycle Product Target Life-Cycle Product Target Costing and PricingCosting and Pricing
19-18
Involve entire valuechain in reducing
costs while satisfyingcustomer needs.
An understanding ofrelationships betweenprocess componentsand costs is critical.
A product’s functional characteristics to thecustomer are emphasized.
A primary objective is reducingdevelopment time.
ABC is used todetermine changes
that will reduce costs.
Characteristics of the Characteristics of the Target Costing ProcessTarget Costing Process
19-19
Complete productsjust in time to
ship to customers
Scheduleproduction
Receivecustomer
orders
Receive materialsjust in time for
production
Just-In-Time Inventory Just-In-Time Inventory ProceduresProcedures
Complete partsjust in time for
assembly into products
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Less warehousespace needed
Reducedinventory
carrying costs
Reduced riskof obsoleteinventory
With reduced inventories, quality must be emphasized to avoid
production delays and late deliveries.
Just-In-Time Inventory Just-In-Time Inventory ProceduresProcedures
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More rapidresponse to
customer orders
Greatercustomer
satisfactionHigher quality
products
Just-In-Time Inventory Just-In-Time Inventory ProceduresProcedures
Less warehousespace needed
Reducedinventory
carrying costs
Reduced riskof obsoleteinventory
19-22
Demand-PullProduction
Driven by customer orders and customer quality expectations
On-time delivery to customers
Factory GoalsContinuously Reduce: Inventory Wait time Downtime Customer delivery time DefectsContinuously Increase Quality Employee cross training Teamwork Process design efficiencies Equipment reliability
Supplier Relations
On time delivery High quality inputs Strong partnership Few suppliers Long-term contracts Minimize paperwork
JIT Characteristics Across the Value Chain
19-23
A limited number of suppliers who willmake on-time deliveries of qualitymaterials.
Quality that is “designed-in” and“manufactured-in” rather than“inspected-out”.
A well-trained flexible work force. An efficient plant layout.
Successful implementation of aJIT system requires:
JIT, Supplier Relationships,JIT, Supplier Relationships,and Product Qualityand Product Quality
19-24
Cycle Time
Process Time + Inspection Time + Storage and Waiting Time + Move Time
ProductionStarted
Goods Shipped
Only the process time is value-added time.
Measures of Efficiency in aMeasures of Efficiency in aJIT SystemJIT System
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ManufacturingEfficiency
Ratio
Value-added time Cycle time
=
Cycle Time
Process Time + Inspection Time + Storage and Waiting Time + Move Time
ProductionStarted
Goods Shipped
Measures of Efficiency in aMeasures of Efficiency in aJIT SystemJIT System
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If cycletime goes up,
costs maygo up,
and delivery time maygo down.
Measures of Efficiency in aMeasures of Efficiency in aJIT SystemJIT System
19-27
Qualityproducts
andservices
Increasedbusinessvolume
Total Quality ManagementTotal Quality Managementand the Value Chainand the Value Chain
Greatercustomer
satisfaction
19-28
Prevention costs Inspection of materials upon delivery Inspection of production process Equipment inspection Employee training
Appraisal costs Finished goods inspection Field testing of products
Components of the Cost of Components of the Cost of QualityQuality
19-29
Internal failure costs – defects discovered before delivery to customers Scrap materials Rework Reinspection of rework Lost sales resulting
from late deliveries
CostReport
Components of the Cost of Components of the Cost of QualityQuality
19-30
External failure costs – defects discovered after delivery to customers Warranty repairs Product liability Marketing costs to
improve product image Lost sales due to poor
product quality
Components of the Cost of Components of the Cost of QualityQuality
19-31
Cost of prevention
and appraisal
Internaland external failure costs
Components of the Cost of Components of the Cost of QualityQuality
19-32
Cost of prevention
and appraisal
Internaland external failure costs
Components of the Cost of Components of the Cost of QualityQuality
Ultimate Objective:
Zero defectswhile minimizing
all four qualitycost categories
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Preventionand Appraisal
External andInternal Failure Total Cost
of Quality
Low Quality High Quality
Cos
t of Q
ualit
y
Direction ofrecent trendin industry
Components of the Cost of Components of the Cost of QualityQuality
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Quality Cost ReportFor The Quarter Ended September 30, 2011
Amount Total % of SalesPrevention Costs:
Training 12,000$ Maintenance 10,000 Quality planning 8,000 30,000$ 3.2%
Appraisal Costs:Material inspections 6,000 Equipment inspections 2,000 Supplier relations 4,000 Testing 5,000 17,000 1.8%
Internal Failure Costs:Rework 5,000 Downtime 7,000 Scrap 8,000 20,000 2.1%
External Failure CostsWarranty 4,500 Lost sales 20,000 Repairs 6,500 31,000 3.3%
Total 98,000$ 10.4%
BOARDS AND MORE, INC
19-35
Traditional managerial accounting systems may emphasize production quotas and cost minimization.
Managers often find that emphasis on quality also increases productivity.
Productivity and QualityProductivity and Quality
19-36
Ethics, Fraud, andEthics, Fraud, andCorporate GovernanceCorporate Governance
To increase the accuracy and reliability of financial statements, the Sarbanes-Oxley Act requires public companies, and separately their auditors, to issue a report on the effectiveness of their internal control
structures.
Because a company’s value chain typically engages in transactions recorded in accounting records, the internal control structure must take into account the
reliability of the entire value chain.
19-37
End of Chapter 19End of Chapter 19