Chapter 8 Lecture Slides Flashcards
1
Q
Total-Life-Cycle Costing
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- The process of managing all costs along the value chain, “cradle to grave”
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2
Q
Target Costing
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3
Q
Computing Target Costs
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4
Q
Calculating the breakeven time for a new product development project
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5
Q
Selecting nonfinancial measures for product development processes
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6
Q
Identifying Environmental Costing Issues
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7
Q
The Organization’s Value Chain
A
- The value chain may be divided into stages, which correspond to different cost control approaches
- Total-Life-Cycle Costing, Environmental Costing
- Target Costing and Value Engineering
- Research, Development,& Engineering Stage
- ABC, Kaizen Costing
- Manufacturing Stage
- Post-Sale Service and Disposal Stage
- Target Costing and Value Engineering
8
Q
Life-Cycle Revenues
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9
Q
Stages of the Total Life Cycle
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- Percentage of Costs on y axis, time on x axis
- RD&E account for 80% of costs committed; 10% of costs incurred
- Manufacturing
10
Q
Total-Life-Cycle-Costing: RD&E
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- Market research: customer needs, ideas
- Product design: technical aspects
- Product development: prototypes, processes
- 80% to 85% of a product’s total life costs are committed by decisions made int he RD&E cycle
- An additional dollar spent on activities that occur during this cycle can save at least $8 to $10 on manufacturing and post-manufacturing activities
11
Q
RD&E: Target Costing
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- Tradeoffs in the RD&E stages
- design products that meet customers’ expectations
- products that achieve desired profitability
12
Q
Traditional Method
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- begins w/ market research into customer requirements followed by product specification
- companies engage in product design and engineering and obtain prices from suppliers
- after the engineers and designers have determined product design, cost is estimated
- if cost is deemed too high, may modify the product design
- otherwise, often try to set price at cost plus markup
13
Q
Contrast with Target Costing
A
- Marketing research is customer-driven, w/ customer input obtained continually throughout the process (as in the MB case study)
- Costs are driven down during the design process
- Cross-functional product teams (individuals representing the entire value chain; interorganizational)
- Suppliers pay a critical role in role in making target costing work
- Total-life-cycle concept: cost of ownership
14
Q
Traditional Pricing vs. Target Costing
A
- Estimated Cost vs. Target Selling Price
- Plus: Desired Profit Margin vs. Less: Target Profit
- Expected Selling Price vs. Equals: Target Cost
15
Q
Price-led Costing
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16
Q
Target Profit Margin
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17
Q
Target Cost
A
- Difference between the target selling price and the target profit margin
- = Price - Target Profit Margin
18
Q
Cost-Quality-Functionality Chart
A
- Low-cost, high-quality products, desired functionality
- Functionality: Specifications of the product to meet customer’s wants; quality of design
- Quality: Performance to specifications; quality of conformance
19
Q
Target Costing: Target Selling Price
A
- Market Conditions
- Customers’ perceived value of the product
- Relative functionality and quality
- Competitor’s selling price
- Strategic Objects
- example: penetration pricing strategy or skimming pricing strategy
20
Q
Target Costing: Target Profit Margin
A
- for example:
- historical profit margins on existing products
- adjustments for R&D costs
- Salvage or disposal costs
21
Q
Target Costing: Prodcut Target Cost
A
- Target selling price - Target profit margin =
- allowable cost -> target cost
22
Q
Product-Level Target Costing
A
- Cardinal Rule
- target cost must never be exceeded (do not launch if cost > target cost)
- “Apollo 13 Rule”
- Failure is not an option
23
Q
Target cost-reduction obejctive
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- value engineering
- quality function deployment
- design for manufacturing/ assembly
24
Q
Target Costing: Components
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25
Q
Value Engineering
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- analyze the functions of the various components and attempt to improve the components’ and product’s design to lower overall cost without reduction in required performance, reliability, maintainability, quality, safety, recyclability, and usability
26
Q
Value Index Chart
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- Relative Cost on y axis
- Relative Importance on x axis
- Reduce costs if (cost > benefit)
- Enhance if (benefit > cost)
27
Q
Target Costing
Implementation Concerns
A
- Lack of understanding of the target costing concept
- Poor implementation of teamwork concept
- Employee burnout (Cardinal Rule)
- **Overly-long development time **
28
Q
Breakeven Time
(BET)
A
29
Q
Illustration of Breakeven Time
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30
Q
BET Continued
A
- days (months, years) from a project’s beginning until it is profitable
- tracks the following
- all design & development (RD&E) costs
- Focuses everyone on PROFIT
- Measures everything in TIME
- One tool of may others to analyze projects
31
Q
BET Steps
A
- Get estimates from various departments:
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32
Q
Other Measures of Innovation
A
- Finanical
- Percentage of revenues from products launched in the past “x” months
- Better measure: gross margins from new products
- Nonfinancial and other financial measures
- Market Research and Generation of New Product Ideas
- Design, Development, and Lauch of New Products
33
Q
Environmental Costing
A
- Suppliers’ effects
- Disposal of waste products during production
- End-of-product-life disposal issues (and possible refurbishing)
- Include future disposal, recycling, and remediation costs in analysis of product costs (TLCC)
- Pollution control (environmental) costs often “hidden” in overhead -use ABC
34
Q
Environmental Costing for ABC
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- Step 1: Remove all environmentally related costs from cost pools
- Step 2: Trace costs trace or allocate environentally related costs to products or services using ABC system
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35
Q
Environmental Costs Hidden in Overhead
A
- move costs from overhead and assign to a product
36
Q
Environmental Costing
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- Explicit Costs
- cleanup, disposal, permits, fines, litigation fees)
- Implicit Costs
- monitoring costs, legal counsel, employee education/health
37
Q
Sustainability
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38
Q
Why is Sustainability Important ?
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39
Q
Sustainability “Stakeholders”
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40
Q
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