ch11 - Cost Management ACCOUNTING AND CONTROL HANSEN...

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Unformatted text preview: Cost Management ACCOUNTING AND CONTROL HANSEN & MOWEN 11-1 11 Strategic Cost Management Strategic 11-2 Strategic Cost Management: Basic Concepts 1 There are three general strategies that have been identified: cost leadership product differentiation focusing 11-3 Strategic Cost Management: Basic Concepts A cost leadership strategy happens when the same or better value is provided to customers at a lower cost than a company’s competitors. 1 Example: A company might redesign a product so that fewer parts are needed, lowering production costs and the costs of maintaining the product after purchase. 11-4 Strategic Cost Management: Basic Concepts 1 A differentiation strategy strives to increase customer value by increasing what the customer receives (customer realization). Example: A retailer of computers might offer on-site repair service, a feature not offered by other rivals in the local market. 11-5 Strategic Cost Management: Basic Concepts 1 A focusing strategy happens when a firm selects or emphasizes a market or customer segment in which to compete. Example: Paging Network, Inc., a paging services provider, has targeted particular kinds of customers and is in the process of weeding out the nontargeted customers. 11-6 Strategic Cost Management: Basic Concepts 1 The industrial value chain is the linked set of valuecreating activities from basic raw materials to the Fundamental to a valuedisposal of the finished chain framework is the product by end-use recognition that there exist customers. complex linkages and interrelationships among activities both within and external to the firm. 11-7 Strategic Cost Management: Basic Concepts 1 There are two types of linkages that must be analyzed and understood: internal and external linkages. Internal linkages are relationships among activities that are performed within a firm’s portion of the value chain. External linkages describe the relationship of a firm’s value-chain activities that are performed with its suppliers and customers. There are two types: supplier linkages and customer linkages. 11-8 Strategic Cost Management: Basic Concepts Value Chain for the Petroleum Industry 1 11-9 Strategic Cost Management: Basic Concepts 1 Organizational activities are of two types: structural and executional. Structural activities are activities that determine the underlying economic structure of the organization. Executional activities are activities that define the processes and capabilities of an organization and thus are directly related to the ability of an organization to execute successfully. 11-10 Strategic Cost Management: Basic Concepts Organizational Activities and Drivers 1 11-11 Strategic Cost Management: Basic Concepts Operational Activities and Drivers 1 11-12 Strategic Cost Management: Basic Concepts Organization and Operational Activity Relationships 1 11-13 Value-Chain Analysis Internal Value Chain 2 11-14 Value-Chain Analysis Internal Linkage Analysis Example Activity Capacity 200,000 10,000 15,000 1,000 Current Activity Demand 200,000 10,000 12,500 800 2 Activities Material usage Assembling parts Purchasing parts Warranty repair Activity Driver Number of parts Direct labor hours Number of orders Number of defective products Expected Activity Demand 80,000 5,000 6,500 500 11-15 Value-Chain Analysis Internal Linkage Analysis Example Additionally, the following activity cost data are provided: 2 Material usage: $3 per part used; no fixed activity cost. Assembly: $12 per direct labor hour; no fixed activity cost Purchasing: Three salaried clerks, each earning a $30,000 annual salary; each clerk is capable of processing 5,000 purchase orders annually. Variable activity costs: $0.50 per purchase order processed for forms, postage, etc. Warranty: Two repair agents, each paid a salary of $28,000 per year; each repair agent is capable of repairing 500 units per year. Variable activity costs: $20 per product repaired. 11-16 Value-Chain Analysis Cost Reduction from Exploiting Internal Linkages 2 (200,000 - 80,000)$3. 11-17 Value-Chain Analysis Step-Cost Behavior: Purchasing Activity 2 11-18 Value-Chain Analysis Data for Supplier Costing Example 2 11-19 Value-Chain Analysis Internal Linkage Analysis Example Reworking rate = $200,000/1,000 Reworking rate = $200 per failed component 800 + 190 + 5 + 5 2 Expediting rate = $50,000/50 Expediting rate = $1,000 per late delivery 30 + 20 11-20 Value-Chain Analysis Supplier Costing 2 11-21 Value-Chain Analysis One Large Customer Customers Ten Smaller 2 Units purchased Orders placed Manufacturing cost Order-filling cost allocated* Order cost per unit 500,000 500,000 2 200 $3,000,000 $3,000,000 $303,000 $303,000 $0.606 $0.606 *Order-filling capacity is purchased in blocks of 45 (225 capacity), each block costing $40,400; variable order-filling activity costs are $2,000 per order; thus, the cost is [(5 x $40,400) + ($2,000 x 202)] 11-22 Life-Cycle Cost Management There are three basic views of the product life cycle: Marketing viewpoint Production viewpoint Consumable life viewpoint 3 11-23 Life-Cycle Cost Management General Pattern of Product Life General Cycle: Marketing Viewpoint Cycle: 3 11-24 Life-Cycle Cost Management Product Life Cycle: Production Viewpoint 3 11-25 Life-Cycle Cost Management Typical Relationships of Product Life-Cycle View points 3 11-26 Life-Cycle Cost Management Typical Relationships of Product Life-Cycle Viewpoints 3 11-27 Life-Cycle Cost Management Cost Reduction Example Cost Behavior Functional-based system: Variable conversion activity rate: Material usage rate: ABC system: Labor usage Material usage: Machining: Purchasing activity: Setup activity: Warranty activity: Customer repair cost: 3 $40 per direct labor hour $8 per part $10 per direct labor hour $8 per part $28 per machine hour $60 per purchase order $1,000 per setup hour $200 per returned unit $10 per hour 11-28 Life-Cycle Cost Management 3 Activity and Resource Information (annual estimates) Design A Units produced Direct material usage Labor usage Machine hours Purchase orders Setup hours Returned units Repair time (customer) 10,000 100,000 parts 50,000 hours 25,000 300 200 400 800 Design B 10,000 60,000 parts 80,000 hours 20,000 200 100 75 150 11-29 Life-Cycle Cost Management Cost Analysis: Competing Product Designs A. Traditional Costing System 3 $8 × 100,000; $8 × 60,000. 11-30 Life-Cycle Cost Management Cost Analysis: Competing Product Designs B. ABC System 3 $10 × 50,000; $10 × 80,000. 11-31 Life-Cycle Cost Management Three cost reduction methods: reverse engineering value analysis process improvement 3 11-32 Life-Cycle Cost Management Target-Costing Model 3 11-33 Just-in-Time (JIT) Manufacturing and Purchasing Plant Layout Pattern: Traditional versus JIT 4 11-34 JIT and Its Effect on the Cost JIT Management System Management Comparison of JIT Approached with Traditional Comparison Manufacturing and Purchasing Manufacturing JIT 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. Pull-through system Insignificant inventories Small supplier base Long-term supplier contracts Cellular structure Multiskilled labor Decentralized services High employee involvement Facilitating management style Total quality control Buyers’ market Value-chain focus 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 5 Traditional Push-through system Significant inventories Large supplier base Short-term supplier contracts Departmental structure Specialized labor Centralized services Low employee involvement Supervisory management style Acceptable quality level Sellers’ market Value-added focus 11-35 JIT and Its Effect on the Cost JIT Management System Management Cost Flows: Traditional Compared with JIT Transaction 1: Purchase of raw materials. Traditional Journal Entry Materials Inventory Accounts Payable 160,000 Back-Flush Journal Entry Raw Materials and In-Process Inventory Accounts Payable 160,000 160,000 160,000 5 11-36 JIT and Its Effect on the Cost JIT Management System Management Cost Flows: Traditional Compared with JIT Transaction 2: Materials issued to production. Traditional Journal Entry Work-in-Process Inventory Materials Inventory 160,000 Back-Flush Journal Entry No entry 160,000 5 11-37 JIT and Its Effect on the Cost JIT Management System Management Cost Flows: Traditional Compared with JIT Transaction 3: Direct labor cost incurred. Traditional Journal Entry Work-in-Process Inventory Wages Payable 25,000 Back-Flush Journal Entry Combined with overhead: See next entry. 25,000 5 11-38 JIT and Its Effect on the Cost JIT Management System Management Cost Flows: Traditional Compared with JIT Transaction 4: Overhead cost incurred. Traditional Journal ntry Overhead Control Accounts Payable 225,000 Back-Flush Journal Entry Conversion Cost Control Wages Payable 25,000 Accounts Payable 225,000 250,000 225,000 5 11-39 JIT and Its Effect on the Cost JIT Management System Management Cost Flows: Traditional Compared with JIT Transaction 5: Application of overhead. Traditional Journal Entry Work-in-Process Inventory Overhead Control 210,000 Back-Flush Journal Entry No entry. 210,000 5 11-40 JIT and Its Effect on the Cost JIT Management System Management Cost Flows: Traditional Compared with JIT Transaction 6: Completion of goods. Traditional Journal Entry Finished Goods Inventory Work-in-Process Inventory 395,000 Back-Flush Journal Entry Finished Goods Inventory Raw Materials and in-Process Inventory 160,000 Conversion Cost Control 235,000 395,000 395,000 5 11-41 JIT and Its Effect on the Cost JIT Management System Management Cost Flows: Traditional Compared with JIT Transaction 7: Goods are sold. Traditional Journal Entry Cost of Goods Sold Finished Goods Inventory 395,000 Back-Flush Journal Entry Cost of Goods Sold Finished Goods Inventory 395,000 395,000 395,000 5 11-42 JIT and Its Effect on the Cost JIT Management System Management Cost Flows: Traditional Compared with JIT Transaction 8: Variance is recognized. Traditional Journal Entry Cost of Goods Sold Overhead Control 15,000 Back-Flush Journal Entry Cost of Goods Sold Conversion Cost Control 15,000 15,000 15,000 5 11-43 End of Chapter 11 Chapter 11-44 ...
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