COSTING AND THE VALUE CHAINCHAPTER 18PAGE# 794

Faisalfaisal.faisal@neu.edu.tr

Costing and Value Chain

Value chainComponents of value chainActivity based managementTarget costing processComponent of target costing processJust in time inventory system

Value chain

Value chain is a set of activities and resources necessary to create and deliver the products and services to the customers.

Value chain has componentsThe value chain consists of four components

Research & development and design Activities

It includes idea, production process and product sample.

It includes the creation of idea and the development of prototype products, process and services.

Prototypes (Sample Product to get feed back of customers)

Supplier & production related activities

Supplier related activities Procurement of raw material.

Production related activities Methods of manufacturing

It includes the procurement of raw material and the supplies and the activities needed to convert raw material into finished goods.

3)Marketing & Distribution activities

It includes the provision of information to the customer and make the products and services accessible to the customers.

4)Customer services activities:Customer services activities are those

resources consumed by supporting the products or services after it is not sold to the customer.

Value added & Non- value added activities

Value added: Includes manufacturing process, product design etc..

Non-value added: time used in manufacturing process, breakdown of electricity, setup mechanism.

Value added activities: Desirability of product or services in the eyes of customers.

Value-added activities

VAA add to the product and services desirability (acceptable) in the eyes of customers.

E.g. Product design, manufacturing process, convenient channels of distribution.

Non- value added activities:NVAA does not add to the product and

services desirability in the eyes of customers.

E.g. Setting of machinery, storing direct material, time during which machinery or employees spend idle.

Activity based management

Activity based management are used in activity based costing to eliminate the non value added activities.

AB management is the process of using activity based cost to help reduce and eliminate the non value added activities.

Target Costing ProcessIs a business process aimed at the earliest

stages of a new product and service development before creation and design of product method.

Target cost

Cost of resources amount spent on resources.Components of target costing:1) Significant resources are consumed in

planning and market analysis.2) concept development This component focuses on product feasibility

studies.Development involves a cycle of testing and

manufacturing again reformulating the product to understand the customer’s requirement.

Production design

Follow the establishment of the product concept in the development phase.

Value engineeringCombination of resources which yields less

cost.V.E determines the least combination of

resources to create a product desire by the customer.

Life cycle costing

Is the combination of all potential resources consume by the product over its entire life.

E.g.. Mobile Phones (X mobile is Reliable then Y in North Cyprus, because it includes all potential resources.

Finally production begins and continuous improvement process is used to attain the target cost.

Just in Time inventory procedure (JIT)

In it time is examined and manufacturing efficiency ratio is calculated and equality is examined.

JIT system refers to acquiring material and manufacturing goods only as needed to fill the demand of the customers or orders.

Eliminating the non value added activities and inculcate the quality of product through out the manufacturing process.

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Products are manufactured instantly ads the customer places the order.

Measuring of efficiency in JIT system.Time is of critical importance in JIT systemTherefore time measurement are essential for

scheduling production activities in a manner that avoids constraints and ensure that jobs are completed just in time.

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The length of the time required for a product to pass completely through a manufacturing process is called time cycle.

Time starts from the first step of manufacturing process to the time when finished products are achieved, called time cycle.

Elements of time cycle

Consists of four elements1) Processing time2) storage and waiting time3) movement time 4) inspection timeOnly during processing time however is value

added activities to the product.The other elements of the product cycle time

should reduced as much as possible.

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A widely use measure of efficiency in JIT system is the manufacturing efficiency ratio.

Manufacturing efficiency ratioMER express the time spend in value added

activities (Processing time) as percentage of the total cycle time

MER= value added activities Total cycle time

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The primary function of manufacturing efficiency ratio is to highlight the percentage of time spend in non value added activities.

Measuring QualityAccording to the system in JIT companies

measures quality, as well as costs and cycle time.

One widely used measure of productive quality is deficits per million units produced.

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In some companies defect rate have been reduced less then defective part per million units of production.

Other method of quality include merchandize returns, number of warranty claims, customer complaints, and the result of customer satisfaction survey.

A JIT does not itself ensured quality, rather it establishes striving for quality as basic goal of organization.

Total quality management

Companies that enable to compute globally on quality and cost develop TQM process.

TQM includes assigning responsibilities for managing quality, providing good quality measure of decision making process, & evaluating rewarding quality performances.

Accountant participate in this measurement and reporting process by designing the system that can track quality and assign cost to the quality failure.

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Four components of the cost of quality are considered when designing a measurement system to track the quality cost.

Prevention cost:Are the cost of resources consumed in

activities that prevents defects from occurring.E.g.. Prevention costs includes employees training, quality process audits, quality concerned issues.

Appraisal Cost (improve Quality)

Are incurred to ensure that the product confirm to the quality standards.

E.g. it includes inspection of raw materials, inventories and finished goods, inspection and monitoring of production process and equipment, inspection and maintenance programs to ensure quality.

Internal failure Cost

Internal failure cost includes additional production related costs incurred to correct low quality out . E.g. It includes re-work downtime, re-testing and re-inspections etc.,

External failure Cost:EF costs are the largest and most difficult to

measure.These costs are incurred because quality

failure are allowed to enter the market.

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External failure cost includes cost sales, cost due to return and allowances, and loss good –will, warranty.