A. Managing the costs of creating value Flashcards
What is the CGMA cost transformation model designed to help businesses achieve and maintain?
cost competetiveness
What are the 6 suggested changes in the CGMA cost transformation model?
- Endangering a cost conscious culture
- Managing the risks that come from a cost conscious culture
- Connecting products with profitability
- Generating maximum value through new products
- Incorporating sustainability to optimise profits
- Understanding cost drivers: Cost accounting systems and processes
What is ‘Engendering a cost conscious culture’?
- aim to be cost leader: have lower costs than rivals and set competitive benchmark
- everyone should be motivated and enabled to reduce costs however possible
- technology can play a key role in reducing costs
What changes take place in ‘Managing the risks that come from a cost conscious culture’?
e.g reducing costs may result in reduce quality and customer satisfaction
org should have clear risk management process in place to identify, assess and manage such risks
What changes take place in ‘Connecting products with profitability’?
- important that every product/service makes a positive contribution to overall organisational profits
- will involve understanding what dices costs for each individual product and allocating shared costs to products as accurately as possible
What changes take place in ‘Generating maximum value through new products’?
- assess potential profitability before production begins
- during product design process, product/service should be made to be as flexible as possible so that it appeals or can adapt to as many customer segments as possible
What changes take place in ‘Incorporating sustainability to optimise profits’?
- consider environmental impact of products
- negative impacts can add costs as well as damage reputation and sales
What changes take place in ‘Understanding cost drivers’?
investigating costs to determine why they change and how different variable impact on the cost
plan should be implemented to reduce the drivers of costs as well as the costs themselves
In traditional absorption costing, how are overheads charged?
charged per product
OAR = OH/volume of activity
Why are full product costs, using financial accounting principles, not suitable for decision making?
need to base decisions on decision-relevant approach incorporating relevant/incremental cash flows
What is Activity Based Costing?
an approach to the costing and monitoring of activities which involves tracing resource consumption and costing final outputs
resources are assigned to activities, and activities to cost objects based on consumption estimates
the latter utilise cost drivers to attach activity costs to outputs
what are some volume related reources?
direct labour
materials
energy
machine related costs
what non-volume related activities?
materials handling material procurement set ups production scheduling first-item inspection activities
why do traditional product cost systems report distorted product costs?
they assume that products consume all activities in proportion to their production volumes
what is the 3 step philosophy developed by Cooper and Kaplan for the ABC procedure?
- support activities cause cost
- the products consume these activities
- costs should, therefore, be charges on the basis of consumption of the activities
What are is the ABC method in 5 steps?
1: Identify activities (20/80 rule)
2: Estimate cost pools
3. Identify cost drivers
4. Calculate cost driver rate
5. Charge overhead to products
What is a cost pool?
costs associated with performing each activity
what are cost drivers?
factors that influence the cost pools
how is the cost driver rate calculated?
cost driver rate = cost pool / level of cost drivers
when is ABC analysis likely to differ from AB, thus providing favourable conditions for ABC?
- when productions overheads are high relative to direct costs, particularly direct labour
- where there is great diversity in product range
- where there is considerable diversity of overhead resource input to products
- when consumption of overhead resources is not driven primarily by volume
What are tje tiers of the ABC hierarchy?
unit level activities
batch level activities
product sustaining activities
facility sustaining activities
what is a unit level activity?
performed each time a unit of product is produced
consumed in direct proportion to the number of units produced
- direct labour
- direct materials
- energy costs
- machine maintenance
what are batch related acitivites?
performed each time a batch is produced
cost varies with number of batches made
what is a product-sustaining activity?
performed to support different products in the product line
performed to enable different products to be produced and sold, but the resources consumed are independent of the number of units included in the purchase order
- product deign costs
- advertising costs
what is a facility-sustaining activity?
some costs cannot be related to a particular product line, instead they are related to maintaining buildings and the facilities
- maintenance of the building
- plant security
- business rated
what are the benefits of ABC?
- more accurate product-line costings particularly where non-volume related overheads are significant and a diverse product line is manufactured
- flexible enough to analyse costs by COST OBJECTS other than products such as processes, areas of managerial responsibility and customers
- provides a RELIABLE INDICATION OF LONG_RUN VARIABLE PRODUCT COSTS which is particularly relevant to managerial decision making at a strategic level
- provides meaningful FINANCIAL (periodic cost driver rates) and NON FINANCIAL (periodic cost driver volumes) MEASURES which are relevant for cost management and performance assessment at an operational level
- aids identification and understanding of COST BEHAVIOUR and thus has the potential to improv COST ESTIMATION
- provides a more logical, acceptable and comprehensible basis for COSTING WORK
what are the limitations of ABC?
- LITTLE EVIDENCE to date that ABC improves corporate profitability
- ABC information is historic and internally orientated and THEREFORE LACKS DIRECT RELEVANCE for future strategic decisions
- practical problems such as COST DRIVER SELECTION
- its novelty is questionable. It may be viewed as simply a rigorous application of conventional costing procedures
which areas of strategic decision making does ABC support?
- decisions concerning product pricing strategy
- changes to the range and mix of products via the promotion and discontinuance of current lines
- new product development
what is the end product of an ABC system?
historical cost of each of an organisation’s products
why are the conventional notions of fixed and variable costs ignored in ABC?
for the purpose of product cost analysis, the time period is long enough to warrant treatment of virtually all costs as variable
what are the Dos of Implementing ABC?
- get BUY-IN from rest of the business. Provides info for value-based decisions
- USE ABC for pricing and product prioritisation decisions
- ABC should be implemented by MANAGEMENT ACCOUNTANT as they are best placed to manage the process and to ensure benefits of its realisation
Don’ts of implementing ABC?
- do not get caught up in too much attention to detail and control
- it is important not to fall into the trap of thinking ABC costs are relevant for all decisions. Not all costs will disappear if a product is discontinued, e.g. building occupancy costs
What does ABM achieve?
enabling orgs to manage and possibly transform their costs
What is ABM?
system of management which uses activity-based cost information for a variety of purposes including cost reduction, cost modelling and customer profitability analysis
everyone must co-operated in defining which activities in ABM?
- cost pools
- cost drivers
- KPIs
must be trained, empowered to act, treated fairly and success recognised
What are the 5 basic outputs of ABM?
- cost of activities and business processes
- cost of non value-added activities
- activity based performance measures
- accurate product/service cost
- cost drivers
what are the ‘cost of activities and business processes’?
basic output of ABM system must be to provide relevant cost information about what a business does
-costs are assigned to activities, not what is spent and by whom
what are the ‘costs of non value-added activities’?
identification of wasteful activities to be eliminated as it provides a crucial focal point for management
what are the ‘activity based performance measures’?
knowing total cost of activity is insufficient to measure activity performance
need measured of quality, cycle time, productivity and customer service to judge
measurement of performance of activities provides a scorecard to report how well improvement efforts are working and is an integral part of continuous improvement
what is the ‘accurate product/service cost’ information output?
many distribution channels to customers and markets
as products consume resources at different rates and require different levels of support, costs must be accurately determined
what can be understood from ‘cost drivers’ of the ABM system?
- whether to continue a particular activity
- how cost structures measure up to those of competitors
- how changes in activities and components affect the suppliers and value chain
will ABM help to reduce costs?
no, only helps the manager understand the costs better
What are non value added activities caused by?
inadequacies within the existing processes and cannot be eliminated unless the inadequacy is addressed
what is strategic activity management?
more than just eliminating non value-added activities
can develop both the activities and linkages between them so better to differentiate the firm from its competitors
understanding factors can influence the costs of each activity, so firm can take action to minimise those costs in the medium term
what is the value chain?
simply a large activity map for the organisation and its position in the industry chain
what are some of the reasons that ABC/ABM isn’t implemented?
- where it was devised for a single project that was not taken up, the system got dropped as well. Due to difficulty in communicating in a large organisation, the work was not developed further by other units
- finance department opposed implementation. Often finance staff appear less than dynamic and unable to perceive the needs of the production staff
- general ledger information too poor to provide reliable ABC information. The resulting figures would have been no better than traditional absorption methods
can you use ABM without ABC?
no as ABC provides the building blocks of activities
what is the cause-effect relationship?
the cost driver has to be linked to the changes of costs in the activity centre
what did the progression to ABM from the original ABC involve?
a shift in focus from producing information on activity-based product costs to producing information to improve management of processes
What are some tips for ABM?
- get the support of senior management
- recognise that ABM requires a major investment in time and resources
- know what ABM can achieve and what information you want form the system
- decide which model to use
- choose the model approach that emphasises the operational understanding of all activities in the business
- involve people in the field
- transfer ownership of cost management form the accounts department tot the departments and processes where costs are incurred
- don’t underestimate the need to manage the change process
- link ABM to corporate objectives in the form of increased product profitability an added value for customers
why is traditional absorption costing rarely suitable for service and retail organisations?
normally uses labour hours as a basis for absorption
where id DPP popular?
in retail organisations, especially grocery trade
- primary sector organisations
what is the definition of DPP?
attribution of both the purchase price and other indirect costs to each product line
thus a net profit, as opposed to a gross profit, can be identified for each product.
the cost attribution process utilises a variety of measures to reflect the resource consumption of individual products
where was DPP first used?
USA in 1960s at General Electric then taken up by Procter and gamble in the 1980s
what is the gross margin retail organisations used to calculate?
deduct brought in cost of the good from selling price
why is the gross margin a useless measure when it comes to controlling costs?
none of the costs generated by the business are included in the caluclation
what are the 3 categories directly attributable costs are grouped into?
warehouse, transport and store costs
what are the benefits of DPP?
-better cost analysis
-better pricing decisions
-better management of store and warehouse space
the rationalisation of product ranges
-better merchandising decisions
what is EPOS and EFTPOS?
electronic point of sale and electronic funds transfer point of sale
How did EPOS and EFTPOS development help DPP in the 1990s?
enabled access to the detailed data needed for direct product cost and profitability calculations
what basic categories are used to analyse indirect costs in DPP?
overhead costs
volume-related cost: space occupied, transport, store
product batch cost:tame based usually
inventory financing costs: cost of tying up money in inventory and is the cost of the product multiplied by the company’s cost of capital per day or per week
DPP software systems can be purchased to model costs. What key variables are required to analyse different situations?
- buying and selling prices:higher price, slower inv movement
- rate of sale
- inventory-holding size
- product size
- pallet configuration
- ordering costs
- distribution routes
what are the risks of higher selling prices?
slower inventory movement
how does ABC make costing customers possible?
creates cost pools for activities, which can be tied to a groups of customers through ‘activity profiles’
what is Customer Profitability Analysis?
the analysis of revenue streams and service costs associated with specific customers or customer groups
what type of organisations need to cost customers?
service organisations such as bank or hotel
-manufacturing can benefit too
What is the shape of the customer profitability curve?
Pareto curve
What does the customer profitability curve show?
- that 20% of customers provide 80% of the profit
- last 80% do not all generate profit: last 50% reduce
- -turn them into profitable customers
why is it usually small volume/order customers who are unprofitable?
high production batch costs and order processing
- could introduce a 3rd party wholesaled into supply chain for cost reduction of smaller customers
- -could improve service or product range
what is a distribution channel?
the means of transacting with customers
in a distribution channel, where is the point of purchase?
the channel
how should the company decide what channel to use?
consider the needs of the customer
ensure products are still profitable
What are ‘People Data Centres?’
physical spaces coming from CRMs, social media harvesting, contact with customer service, any other info from marketing initiatives
How did Ben and Jerrys use DCP and digital tech to optimise profits?
through social media, realised ice cream is consumed on Saturdays and spoken about on Thursdays and Fridays so did ads on Thursday and Friday
-usually a point of purchase sale but research showed otherwise
how does ABC make costing channels possible?
able to allocate ‘activity profiles’ to different channels
what does a higher ABC than traditional cost mean about a product?
more complex item using specific parts and materials
what does a marginally higher ABC than traditional cost suggest?
use of mostly ready available components
what does a lower ABC cost than traditional cost suggest?
standard product using few if any specific or complex components
what are the characteristics of the modern business environment?
global environment
flexibility
employee empowerment
what is the ‘global environment’?
- companies operate in a world economy
- customers and competitors come from all over the world
- products are made from components from around the world
- firms have to be world class to compete
- international regulations
what is the flexibility aspect of the modern business environment?
- in global environment, customers have far greater choice than ever before
- there has been a huge increase in demand for new, cutting-edge innovative products
- customers are demanding ever-improving levels of service in cost, quality, reliability and delivery
- customers demand flexibility. Companies need to respond to this in order to survive
what has the flexibility aspect of the modern business changes in terms of products and their life cycles?
- diverse product range:high level of tailor-made products and services
- product life cycles have dramatically reduced, often from several years to just a few months
why are mass production techniques dedundant?
move away from standardised units of production towards individual customised units
-production designed to accommodate flexibility of production rather than just throughput
why should firms empower employees?
will be able to respond faster to customers, increase process flexibility, reduce cycle times and improve morale
how has the information provided by management accounting systems shitfted?
from providing information to managers to monitor employees to providing information to employees to empower them to focus on continuous improvement
what is the World Class Manufacturing approach?
primary emphasis is placed on the resolution of the problems that cause poor quality, rather than merely detecting it
- more proactive than traditional
- prevention rather than resolution
What is the definition of JIT?
a system whose objective is to produce or procure products or components as they are required by a customer or for use, rather than for inventory
-pull system:responds to DEMAND
what is a push system?
inventory acts as a buffer between the different elements of the system, such as purchasing, production and sales
i.e supplier triggers production instead of customer
what is JIT production?
a production system which is driven by demand for finished products whereby each component on a production line is produced only when needed for the next stage
what is JIT purchasing?
material purchases are contracted so that the receipt and usage of materials, to the maximum extent possible, coincide
What is JIT best described as?
more than a production management system: PHILOSOPHY that shows commitment to continuous improvement and pursuit of excellence
What type of system do organisations e.g Toyota usually use?
push flow system
- buy materials and Put in inventory
- produce a production schedule based on sales forecasts
- withdraw goods from inventory and make products according to the production schedule
- put completed units into finished goods store
- sell from finished goods store when customers request products
what is an unavoidable feature in ‘push’ production flow system?
work in progress
when are products and parts made in the JIT system?
products: when customer demands
parts: when next stage of production demands
what should the lead time be equal to in JIT?
processing time i.e immediate use
why is the lead time usually not optimal?
due to WIP goods that are an unavoidable feature
what are the characteristics of JIT purchasing?
- demand based ordering: a pull system
- use of few, high quality suppliers
- focus on quality rather than price
- frequent deliveries
- suppliers are geographically close
- develop long term relationships with supplier
what are the characteristics of JIT production characteristics?
-demand based production, pull system. Do not make for stock
-small batches, specific to customer order
-reduce set up times
focus on quality
-cellular manufacturing
-multi-tasking staff
How does JIT positively impact profits?
cost savings
- stock holding costs
- quality failure costs
other benefits :
- more diverse product range
- improved quality
- flexible manufacturing:ability to respond quickly to demands
- improved supply chain relationships
- improved customer satisfaction
How does JIT negatively impact profits?
cost increases
- labour costs:higher skills, training, overtime due to fluctuating demand and zero inventory
- material costs due to high quality materials
- set up costs ( more batches produced)
what organisations are suitable for JIT?
- short setup times and low setup costs
- short lead times and low ordering costs for buying raw materials from suppliers
- work flow is fairly constant over time and customer demand is not unseen and unpredictable
- production throughput time is very short
- no downtimes due to poor quality or stockouts
what does JIT require from an organisation?
- versatile labour force
- grouped by product line
- infallible IT system
- ‘get it right first time’
- strong supplier relationships
why must production processes be grouped by product line in JIT?
in order to eliminate inventory movement between workstations and to speed flow
What is Kanban?
an old Japanese system based on cards
-card left in place of a pile of WIP goods between stations acts as a trigger for the previous workstation to produce another container of that component
what is an important consequence of the pull system?
an issue in the production line will cause a halt so it forces management to address the problems quickly and rectify them
Whats is TQM?
name given to programmes which seek to ensure goods are produces and services to the highest quality
what are the 2 basic principles of TQM?
get it right, first time
continuous improvement
what target does TQM set for defects and quality
0 defects, 100% quality
what are the 2 approaches to continuous improvement?
Kaizen Costing
Target Costing
what is the difference between TQM and traditional?
- continuous improvement
- take responsibility: bottom up approach
- waste is unacceptable
- quality cost focused, not production cost
what are the 2 types of quality costs and what are they further divided up into?
compliance/conformance cost:
- prevention costs
- appraisal costs
costs of failure to comply/ non-conformance costs
- internal failure costs
- external failure costs
what are prevention costs?
costs of ensuring that defects do not occur in the first place
routine preventative repairs, quality training, building quality into the design and manufacturing processes, product design are examples of what type of cost?
prevention
what are appraisal costs?
measuring conformity with requirements
incoming inspections, set-up inspections and of acquiring and operating process control machinery are known as what type of costs?
appraisal
what is a internal failure cost?
occur when unit produced fails to reach set standard
what is an external failure cost?
arise when the faulty product is not detected until after it reaches the customer
costs of scrap, reworking costs, manufacturing and process engineering to correct failed process are examples of what cost?
internal failure cost
why does the expression ‘quality is free’ apply?
in many companies, the costs of internal failure are so great that the savings can entirely finance TQM
marketing costs for failed products, manufacturing or process engineering costs relating to failed products, compensation, replacement, repair costs, travel costs and liability claims are examples of what cost?
external failure costs
investing in which cost will result in saving on total quality costs in TQM?
prevention
-reduce failure costs too
how do businesses recognise the importance of quality in TQM?
- accept that the only thing that matters is the customer
- all-pervasive nature of the customer/supplier relationship
- move from relying on inspecting to a predefined level of quality, to actually preventing the cause of the defect in the first place
- each operative or team of operatives must be personally responsible for defect-free production or service in their domain
- in production there should be a move away from acceptable quality levels (AQL) to defect levels measured in parts per million
- enforce zero defect programmes
- quality certification programmes should be introduced
- the total cost of quality should be emphasised
what should an organisation undertake to ensure successful implementation of TQM?
- total commitment throughout the organisation
- get close to their customers to fully understand their needs and expectations
- plan to do all jobs right first time
- agree expected performance standards with each employee and customer
- implement a company-wide improvement process
- continually measure performance levels achieved
- measure the cost of quality mismanagement and the level of firefighting
- demand continuous improvement in everything you and your employees do
- recognise achievements
- make quality a way of life
what is a quality circle?
a team of 4-12 people coming from the same area who VOLUNTARILY meet on a regular basis to solve work-related problems
- present solns to management
- involved in implementation and QC
what are the key features of a quality circle?
voluntary approach
process of issue selection and solution
what type of issues does a quality circle solve?
anything
- not exclusive to quality of product or service
- can include anything e.g. environment
- excludes HR/conditions at work
how can management accounting reports help in TQM?
provide reports that motivate and evaluate managerial efforts to improve quality
-financial and non-financial
what are some non-financial measures from MA reports useful to TQM?
- number of defects as a % of completed items
- number of reworked units as % of total sales value
- number of defective units delivered to customers as a % of total units delivered
- number of customer complaints
- number of defective units supplied by suppliers
- time taken to respond to customer request
how is throughout calculated?
TP= SR-DM
what is the aim of TP accounting?
maximise the measure of throughput
-while reducing inventory and operational expense
what is the theory of constraints?
the process of identifying and taking steps to remove the constraints that restrict output
-continuous improvement
What are the 5 steps of theory of constraints?
- Identify the bottlenecks
- How to exploit the bottlenecks
- Subordinate everything else to the decision in Step 2
- Elevate the system’s bottlenecks
- If a bottleneck has broken, repeat from step 1
What are the 5 steps of maximising throughput?
- Identify the bottleneck constraint
- Calculate the Tp contribution per unit for each product
- Calculate the TP contribution per unit for bottleneck resource for each product
- Rank the products
- Allocate resources using this ranking
What are the disadvantages of TP accounting?
Short term measure as in the long run all costs are variable
What measure of TPAR is satisfactory?
anything over 1
Why doesn’t TP accounting affect external accounts?
only used in management accounting
what happens if a non-bottleneck activity supplies more than the bottleneck activity can consume?
WIP inventories with no increased sales volume
what are some examples of constraints on TP?
- inadequately trained sales force
- poor reputation for meeting delivery dates
- poor physical distribution system
- unreliability of material supplies, delivery and/or quality
- inadequate production resources
- inappropriate management accounting system
how are fixed and variable costs split in TP accounting?
- DM costs accounted for in TP as they vary with volume
- other costs (including labour) included are fixed and included in total factory costs (TFC)
what role do accountants play in TP environment?
devise measures which will help production staff achieve a greater volume of throughput
how is return per factory hour? what does it tell us?
TP per unit/ product time on the bottleneck resource
how much return is generated by each product at the bottleneck point
how is cost per factory hour? what does it tell us?
total factory costs/total time on the bottleneck resource
-costs that don’t contribute to throughput
how is the throughput accounting ratio?
return per factory hour/cost per factory hour
what does Kaizen mean?
continuous improvement through small, incremental steps rather than through large innovations -integral to JIT QCD improvement (quality, cost, delivery)
what is the target cost reduction rate of Kaizen?
ratio of the target reduction amount to the cost base
what are the characteristics of standard costing concepts?
- cost CONTROL system
- assume current manufacturing conditions
- meet cost performance standards
what are the characteristics of Kaizen Costing concepts?
- cost REDUCTION system
- assume continuous improvement in manufacturing
- achieve cost reduction targets
what are the characteristics of standard costing techniques?
- standards are set annually or semi-annually
- cost variance analysis involving standard costs and actual costs
- investigate and respond when standards are not met
what are the characteristics of Kaizen costing techniques?
- continuous improvement (Kaizen) is implemented during the year to attain target profits or to reduce the gap between target profit and estimated profit
- cost variance analysis involving target Kaizen costs and actual costs reduction amounts
- investigate and respond when target Kaizen amounts are not attained
what are the 3 areas of improvement in Kaizen?
housekeeping
waste reduction
standardisation
how does a bottom up approach help in Kaizen?
person most knowledgeable about taste is best qualified to improve it
how are staff motivated in Kaizen?
- individuals should be rewarded for contributions and results celebrated
- part of strategy
What are the steps of a Kaizen activity?
standardise an operation/activity
measure the operation
compare measurements against requirements
innovate to meet requirements and increase productivity
standardise the new, improved operation
repeat on a continuous basis
what is housekeeping in Kaizen?
focus on housekeeping aims to enhance an employee’s workplace by continuously improving cleanliness, ergonomics and safety, which in turn should improve morale and motivation
ho is standardisation useful in Kaizen?
- standard to compare against
- knowledge management:best practice, learning material for new staff
what are the Do’s of Kaizen?
ensure management is seen to be enacting Kaizen in workspaces
- make Kaizen a strategy
- provide a budget for Kaizen activity
- measure the effectiveness of Kaizens
- celebrate small improvements
- align recognition and award frameworks to the business’ Kaizen philosophy
- empower employees to implement Kaizens autonomously
- train all employees in the business’ Kaizen philosophy
- compile baseline data to enable future comparison
What are the Dont’s of Kaizne?
don’t try to expert management control over Kaizen activities
- avoid bureaucracy in Kaizen activities
- don’t tie Kaizen to short term KPIs
what is BPR?
Business Process Re-engineering is concerned with making far-reaching one-off changes to improve operations or processes
what do Hammer and Champy define BPR as?
the fundamental rethinking and radical redesign of business processes to achieve dramatic improvements in critical contemporary measures of performance such as cost, quality, service and speed
what are the 5 stages of BPR?
- Develop business vision and process objectives
- Identify the processes to be re-designed
- Measure existing processes (baseline)
- Identify ‘IT levers’ to be used to apply change
- design a prototype to show which changes are possible
what is a business process?
a collection of activities that are linked together in a co-ordinated manner to achieve a specific objective
from what perspective does the BPR re-engineering pattern look at the process?
from a customer’s perspective
what criteria must an activity meet to be ‘value-adding’?
- customer is willing to pay for the output
- the activity physically changes the output in some way
- the activity is performed correctly at the first attempt
what are some examples of non-value-adding activities?
do not increase the worth of the product to the customer:
- preparations and setup
- control and inspection
- simply moving a product from one place to another without physically changing it
- activities that result from delays or failures of any kind
hat is a value-enabling activity?
support activity to value-adding e.g setup
- cannot be eliminated
- should be as cost-effective as possible
what is a supply chain?
a network of customers and suppliers that a business deals with
why are supply chains longer and more complex now?
- globalisation
- parts made across the world and come together
what does supply cain management consider?
logistics and relationships between members of the supply chain, identification of end-customer benefit and the organisational consequences of greater inter-firm integrations to form ‘network organisations’
what are the areas of supply chain management that is can be broken down into?
purchasing
inventories
customer ordering
delivery and logistics
how can purchasing costs be reduced?
when customer and supplier IT systems are linked
-day to day purchasing, progress chasing and stock control can all be eliminated
what does efficient inventory control rely on?
accurate customer records
well managed customer information
effective inventory-control information systems
working closely with supply chain partners will help
what is RFID?
radio frequency identification enables tracking progress of customer order
why do some companies outsource distribution?
becoming more complex and sophistication
what functions are now coming under the outsourcing spotlight?
sales, design and development, IT and distribution
what are the advantages of insourcing?
- higher degree of control over inputs
- increases visibility over the process
- economies of scale/scope to use integration
what are the disadvantages of insourcing?
- requires high volumes
- high investment
- dedicated equipment has limited flexibility
- not a core competence
what are the advantages and disadvantages of outsourcing?
- greater flexibility
- lower investment risk
- improved cash flow
- concentrates on core competence
- enables more advances technologies to be used without making investment
what are the disadvantages of outsourcing?
- possibility of choosing wrong supplier
- loss of visibility and control over process
- possibility of increased lead times
what is target costing?
a proactive cost control system
driven by external market factors
calculated by deducting target profit from a pre determined selling price based on customers’ views
what is the method of target costing?
- Determine market price
- Work out required profit per unit
- Subtract profit from price
- Calculate cost gap
- Close gap
why did inaccuracies in overheads not distort total costs during the absorption process of total costs?
overheads were such a small part so inaccuracies had small and insignificant effect
-low overhead costs and higher labour costs
which costing should be used for short term decisions?
marginal costing (variable costing) never use traditional absorption costing for this, only long term
what procedures are used to derive target profit?
- consider medium-term plans
- use science, rational and agreed upon by staff
when is the target cost approach most powerful?
during the design stage as decisions are made at this stage which have leverage to affect long-run costs
- much harder to change once manufacturing costs are locked in
- 90% costs are built in at design stage
what are the 5 stages of pre-production in target costing?
- Planning
- Concept design
- Basic design
- Detailed design
- Manufactured preparation
how is target cost calculated
planned selling price - required profit
what is involved in the planning stage of target costing pre-production?
- includes fixing the product concept and the primary specifications for performance and design
- use value engineering and analysis to identify new and innovative yet cost-effective product features that would be valued by customers and meet their requirements
- once concept has been developed a planned sales volume and selling price, which are interdependent, will be set as well as target profit
what is involved in the concept design pre-production stage of target costing?
- basic product is designed
- target cost divided into smaller parts reflecting manufacturing process:
- -allowance for development costs and manufacturing equipment costs deducted from total
- -remainder split up into unit costs
what is involved in the basic design pre-production stage of target costing?
components are designed in detail so they do not exceed the functional target costs
- value engineering used to keep costs in line
- if one function can’t meet target, the targets for the others must be reduced or the product redesigned
what is involved in the detailed design pre-production stage of target costing?
detailed specifications and cost estimates are set down from the basic design stage
what is involved in the manufacturing preparation pre-production stage of target costing?
manufacturing process, including new machines, is designed in keeping with the target cost
- standards for the materials and labour hours set
- targets presented to staff for approval
- purchasing department negotiates prices fro brought in components
why is manufacturing performance measured to see if the target is being achieved?
- to see who is responsible for any cost excess and to offer them help
- to judge whether the cost-planning activities were effective
what happens if after 3 months the target cost is missed on existing products by a large margin?
improvement team is organised which will conduct a thorough value analysis (VA) and will stay in existence for about six months
why do the Japanese not consider standard costing to be suitable for ongoing cost control?
it is a part of budget accounting where same value is maintained throughout the budget period, but target costing is revised monthly
how is technology eliminating cost as a barrier to entry?
- CAD software has become a commodity, with some basic versions free to download
- 3D printing is making the printing of components that previously needed costly machining processes
- digital technology has made it technically possible to produce a film at a fraction of the fixed cost before
what are the features of standard costing?
- PUSH system: standard cost per unit is the basis for calculating selling price
- INTERNAL tool in mass production environments that do not emphasise continual improvement
- COT CONTROL technique
- REACTIVE technique:selling price of a new product will be determined by estimating its standard cost and adding the required profit margin to the cost
what are the features of target costing?
- PULL system that requires understanding of market demand and competition so price required to achieve target market share/sales can be set
- EXTERNAL market price drivers not attainable in short term
- COST REDUCTION activity
- PROACTIVE technique that starts before the design of the product is formalised
how do target costs and standard costs differ even though they both provide unit cost targets?
- focus upon what a product should cost in the long term:price based vs cost based
- market oriented approach vs internal
- focus on continuous improvement
- team approach: target involves all departments, standard are production costs only
- target cost set in pre-development, standard cost set when production commences
when is Kaizen costing applied?
during the manufacturing stage of the life cycle
what is Kaizen costing?
focuses on achieving COST REDUCTIONS through the INCREASED EFFICIENCY of the production process
- cost goal established and all efforts made to achieve it
- current actual cost becomes baseline for new goal
which cost savings are larger between Kaizen costing and target costing?
Kaizen as the product is already at the production stage
-cost reductions for target costing are achieved at the design stage
what is value analysis?
systematic interdisciplinary examination of factors affecting the cost of a product, in order to devise means of achieving the specified purpose most economically at the required standard of quality and reliability
-related to existing products
what is value engineering?
redesign of an activity, product or service so that value to the customer is enhances, while costs are reduced or at least increased by less than the resulting price increase
-relates to products that are not yet produced
what do value analysis and engineering have in common?
help design products that meet customer needs at a lower cost, while assuming the required standard of quality and reliability
-value add as perceived by customer
why is value analysis more comprehensive than simple cost reduction?
- examines the purposes or functions of product
- concerned with establishing the means whereby these cost reductions are achieved
- any cost data that do not add value to the product or service should be eliminated
what are the types of value?
cost
exchange
use
esteem
what is cost value?
incurred by firm producing good
what is exchange value?
amount of money that customer is willing to exchange to obtain ownership i.e price
what is use value?
related entirely to function i.e perform intended purpose
what is esteem value?
status or regard associated with ownership-high-end might have premium or even price skimming prices
what is value a function of?
both use and esteem
what is the result of value analysis?
to achieve an improved value/cost relationship
what is the value analysis method?
- determine the function of the product and each component that is used within the product
- determine the existing costs associated with individual components
- develop alternative solutions to the needs met by the components. This may involve design changes, manufacturing method, materials used
- when analysing a component, a questioning attitude should be adopted
- evaluate the alternatives and their anticipated effect
- implement the recommendations
what is functional analysis?
an analysis of the relationships between product functions, their perceived value to the customer and their cost of provision
value analysis:
when is it used?
focus on?
involves?
- during production
- process to reduce costs
- reducing costs without reducing value
value engineering:
when is it used?
focus on?
involves?
- prior to production
- process to avoid costs
- enhance value of product to customer
functional analysis:
when is it used in the production cycle?
focus on?
involves?
- prior to production
- customer value
- adding features to improve profits
how does functional analysis ensure added customer value?
do research to see which features are important and price:
- past purchasing patterns
- customer interviews
- questionnaires
what is Porter’s value chain?
linked set of value creating activities starting from basic raw material sources or component suppliers through to the ultimate end-use product or service delivered to the customer
what are the 4 support activities in porter’s value chain?
firm infrastructure
technology development
human resource management
procurement
FTHP
what are the 5 primary activities of the value chain?
inbound logistics operations outbound logistics marketing and sales service
IOOMS
how do firms create a competitive advantage through the Value Chain?
performing all activities efficiently at a lower cost than competitors
what does Inbound Logistics in PVC entail?
receiving, storing, materials handling, warehousing, inventory control, vehicle scheduling, returns to suppliers
what does Operation in PVC entail?
transferring inputs into final product
machining, packaging, assembly, equipment maintenance, testing, printing and facility operations
what does Outbound Logistics in PVC entail?
distributing the finished product
finished goods warehousing, material handling, operation of delivery vehicles, order processing and scheduling
what does Marketing and Sales in PVC entail?
inducing and facilitating buyers to purchase the product
advertising, activities of sales personnel, preparation of quotations, channel selection, channel relations, pricing of goods and services
what does Service in PVC entail?
maintaining or enhancing the value of the product after the sale has taken place
installing, commissioning, repair, training, parts supply and product adjustment
what does procurement entail in PVC?
purchasing of raw materials, consumable items, capital items such as buildings
what does Technology Development in PVC entail?
use of know-how procedures to be applied and the technological inputs required in every activity which forms part of the value chain
what does Human resource management in PVC entail?
selection, retention and promotion of staff, the appraisal of staff and performance-rewards linkage, management development and employee relations
what does Firm infrastructure in PVC entail?
general management, accounting and finance, quality management and planning activities
According to Porter, what are the 2 strategies an organisation can use to develop sustainable competitive advantage?
Low-cost strategy
Differentiation strategy
how does the low-cost strategy differ form the differentiation strategy?
cost leadership strategy: involves achieving a lower cost than competitors e.g economise of scale or strict cost control
vs
creating a unique product via brand loyalty, superior customer service, product design and features
Shank and Govindarajan suggest companies should evaluate their value chain relative to value chain of competitors or industry. What methodology do they suggest?
- Identify the industry’s value chain and then assign costs, revenues and assets to the value activities. These activities are the building blocks with which firms in the industry created a product that buyers find valuable
- Diagnose the cost driver regulating each value activity
- Develop sustainable cost advantage, either through controlling cost divers better than competitors or by revenues and assets in each activity, a firm can achieve low cost. This is achieved by comparing the firm’s value chain with value chains of a few major competitors, and identifying actions needed to manage the firm’s value chain better than competitors manage their value chains
what is life-cycle costing?
the accumulation of costs for activities that occur over the entire life of a product, from inception to abandonment
what are the 3 factors that can be managed to maximise a product’s return over it’s life cycle?
DESIGN COST: reduce to increase NPV
TIME TO MARKET: beat competition but might compromise quality
MAXIMISE LENGTH of life cycle:longer life cycle=greater profit
what are the factors of the introductory phase of a product?
- low demand
- heavy advertising expenditure
AIM: establish the product in the market which means achieving a certain critical mass within a certain period of time
-critical mass is sales volume in order to make product viable in medium term
what are the factors of the growth stage in life cycle costing?
- demand shows a steady and rapid increase
- unit cost falls as EOS kicks in
AIM: establish a large market share and to perhaps become the market leader
what is the maturity stage of the life-cycle?
- demand slows down as product reaches mass market
- flattens and eventually begins to fall
what is the decline stage of the life-cycle?
- more competitors
- price wars erupt on elastic demand products
how can the length of the life cycle be maximised?
- get the product to market as quickly as possible
- find other uses or markets for product
- stagger entry into different markets at planning stage
e. g releasing film in USA then UK to build enthusiasm and build revenues - one area’s revenue can be used to to fund the launch in another market
how can the decision to serve and retain customers be a capital budgeting decision?
may be an initial outlay: credit card company or insurance company doing admin, credit check, registering customer
- will take time before these costs are recouped
- the longer a customer stays with the customer, the more profitable they become
what is customer life cycle costing?
usually for services
-a point arises where profit no longer grows per customer so need to find strategy to meet their needs better and to retain them
how do UK banks analyse customers even though it cannot be done easily?
categorise them in terms of fruits
- move up to different category depending on financial habits
- less valuable if they have low income and need to borrow money
what is the life cycle budget?
something to compare actual costs to
-aim for all products to be in different parts of the cycle
how can life cycle costs be classified?
development costs design costs manufacturing costs marketing costs distribution costs
what is an asset lifecycle cost?
different costs of an asset, not just initial purchase price:
maintenance, repair, downtime, energy consumption, consumables, environmental costs
what are the actions to take/Dos of asset lifecycle costing?
involve people from all relevant functions in product development decision making:
- encourage a whole-life product profitability mindset among multidisciplinary teams
- take the customer perspective:minimise the total cost of ownership, not just the acquisition cost
- consider the consumption and transformation of natural capital in creating products and managing product portfolios, not just financial costs
- think about the societal impact of product development and management, and asset acquisition, operation and disposal
what are the actions to actions/Don’ts of asset lifecycle costing?
avoid rushing development to be fast to market-80% of costs are locked in at the design phase
-avoid treating natural capital as costless
