IE 475 Advanced Manufacturing Costing Techniques Lecture Notes #1 Course Overview & Introduction.

IE 475

Advanced Manufacturing Costing Techniques

Lecture Notes #1

Course Overview

&

Introduction

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Course Overview

Instructor Information GTA Information Course Website Course Description Course Learning Outcomes Reference Material Grading Criteria Reading Assignments Homework

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Course Overview (cont.)

Examinations Attendance & Electronic Devices Classroom Conduct Challenging Grades Academic Integrity Lecture Format Tentative Schedule Term Project

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Instructor Information

Instructor: Dr. J. David Porter Office: 420 Rogers Hall Phone: (541) 737-2446 Email: [email protected] Office hours: M W 3:00 – 4:30pm

By appointment

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GTA Information

GTA name:Ehsan Teymourian Office: 349 Batcheller Hall Email: [email protected] Office hours: Fridays 10:00am – 12:00pm

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Course Website

Course website: http://classes.engr.oregonstate.edu/mime/fall2015/ie475 Syllabus Handouts

Lecture material Homework assignments

Check the page daily for course information and announcements

Review course policies from syllabus!!

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Course Description

This course will explore several costing techniques applicable in advanced manufacturing enterprises

Some of the topics covered will include Activity based costing Japanese cost management techniques Cost of quality Others…

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Course Learning Outcomes

All students successfully completing IE 475 should be able to:1. Explain and distinguish relevant costing terminology in the

context of advanced manufacturing. Examples include (but are not limited to) direct cost, indirect cost, cost assignment, cost allocation, cost driver, opportunity cost, and sunk cost.

2. Explain and distinguish the cost estimation methods high-low and regression analysis.

3. Explain the approach followed in activity based costing (ABC) and time-driven ABC and compare them to traditional volume-based costing systems.

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Course Learning Outcomes (cont.)

All students successfully completing IE 475 should be able to (cont.):4. Explain the philosophy followed in Japanese cost

management techniques (JCMT) and describe how market price, desired profit, and value engineering are used to determine and achieve the target cost.

5. Explain the impact of costs of quality in the long term profitability of an organization.

6. Demonstrate the ability to communicate and document technical information in a professional, structured, timely, and effective manner.

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Reference Material

No textbook required Reference textbook

Blocher, E.J., D.E. Stout, G. Cokins, K.H. Chen. Cost Management: A Strategic Emphasis, 4th Edition, McGraw-Hill/Irwin, 2008

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Grading Criteria

Homework 15% Term Project 25% Midterm Exam 25% Final Exam (Comprehensive) 35%

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Reading Assignments

Reading material has been assigned for each topic Industry report or academic journal article

Reading assignments provide an introduction to basic concepts related to the class as well as to the cost management techniques to be discussed

Reading assignments are available through the course’s web site

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Homework

Homework Several homework assignments will be given A random selection of problems will be graded Each assignment is worth a total of 10 pts Late assignments will not be allowed

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Examinations

Exams Exams are closed notes Based on homework, lecture material, reading

assignments Midterm

Tuesday, November 3rd during class time

Final Exam (comprehensive) Thursday, Dec 10th @ 12:00pm

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Attendance & Electronic Devices

Attendance Students are responsible for the material covered

during class and are expected to attend lectures regularly

Attendance will be taken on a random basis during the term

Electronic Devices Set cell phones to silent mode; no texting in class The use of electronic devices is prohibited Bring a calculator

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Classroom Conduct

Students are expected to Arrive to class on time Be attentive throughout the class meeting Refrain from rude or distracting behavior, and Stay in class until dismissed by the instructor

The bottom line is use common sense Notify instructor when absent from class as soon as

possible Before or immediately after the fact Proper documentation may be requested to justify absence

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Challenging Grades

Students have 72 hours to challenge a grade Not including weekends and holidays

The 72-hour clock begins from the time any graded deliverable (e.g., homework assignment or an exam) is returned in class by the instructor Regardless of whether or not the student was present to receive

it

When challenging a grade, a student must submit to the instructor a word-processed description of the grading error attached to the graded homework assignment or exam

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Academic Integrity

I take academic integrity very seriously Therefore, there is a zero tolerance policy in effect for cheating

in this class All work must be the student’s own, unless collaboration is

specifically and explicitly permitted

Any unauthorized collaboration or copying will at a minimum result in no credit for the affected assignment/exam and may be subject to further action as described in the Academic Dishonesty section of OSU’s Student Conduct and Community Standards (SCCS) web page http://oregonstate.edu/studentconduct/

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Lecture Format

The first part of class will be devoted to questions Unreasonably long questions will be handled one on one If I do not know the answer, I will get it for the class by the next

lecture

Lecture Ask questions

End of Class Will try to leave time for questions You may as well ask

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Lecture Format (cont.)

Material will be delivered on PowerPoint slides using a Tablet PC Material will be added to slides during class There will be periodic in-class exercises Minor changes to the slides may be made just before class

All added (hand written) material is your responsibility Hand written material added by instructor will NOT be

available on the website

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Tentative Schedule Week 0 & 1

Course Introduction Cost Concepts

Week 2 Cost Concepts (cont.)

Week 3 Cost Concepts (cont.) Cost Estimation

Week 4 Cost Estimation (cont.)

Week 5 Activity Based Costing

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Tentative Schedule (cont.)

Week 6 Midterm Examination Activity Based Costing (cont.)

Week 7 Activity Based Costing (cont.) Japanese Cost Management Techniques

Week 8 Japanese Cost Management Techniques (cont.)

Week 9 Japanese Cost Management Techniques (cont.) Happy Thanksgiving!

Week 10 Cost of Quality

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Term Project

Objectives The term project provides an opportunity to conduct

independent research/analysis and promote life-long learning

Helps to fulfill learning outcome # 6: Demonstrate the ability to communicate and document

technical information in a professional, structured, timely, and effective manner

A student must attend at least 85% of the lecture sessions to be eligible to receive credit for the term project

Introduction

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Module Learning Objectives

After completing this module, IE 475 students should be able to:Explain the need for advanced cost management in manufacturingRecognize the relevance of cost management information in each of the four functions of managementIdentify contemporary management techniques and explain how they have influenced cost managementExplain the different types of competitive strategiesDescribe different techniques available to implement a competitive strategy

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Deficiencies in Cost Management Systems – Historical Perspectives

A keen interest in cost management originated in the U.S. in the late 1980s and early 1990s Surveys indicated dissatisfaction with product cost systems used

at the time (Drury, 1989) Allocation of overhead was the primary concern

Products were regularly overcosted or undercosted by 20% or more (Flentov and Shuman, 1991)

Complex products could be undercosted by as much as 500% (O’Guin, 1990)

50% of the corporate controllers in the U.S. believed that their cost systems were obsolete, and 78% believed that their costs were misstated on some products (Farmer, 1991)

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Cost Management Trends

2012 survey of 153 senior executives of Fortune 100 companies directly involved with cost management

“Save to grow” trend Significant shift in business strategy and

mindset

Main barrier to effective cost management/reduction

Lack of understanding of the need for cost management/reduction and how proposed cost improvements can help the business

Source: Deloitte Touche Tohmatsu Limited (2013), Deloitte’s third biennial cost survey: cost-improvement practices and trends in Fortune 1000

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Cost Management Challenges

What factors make it difficult to manage costs in a modern manufacturing environment? Increased global competition

Increased Product/Services Complexity

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Cost Management Challenges (cont.)

What factors make it difficult to manage costs in a modern manufacturing environment (cont.)? Advances in Manufacturing Technologies

Advances in Information Technologies

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Cost Management Challenges (cont.)

What factors make it difficult to manage costs in a modern manufacturing environment (cont.)? Greater Focus on the Customer

Changes in Management Organization

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Four Functions of Management

Strategicmanagement

Strategicmanagement

Planning anddecision makingPlanning and

decision making

Management and operational controlManagement and

operational controlPreparation of

financial statementsPreparation of

financial statements

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Four Functions of Management (cont.)

Strategic

managementStrategic

managementPlanning and

decision makingPlanning and

decision making

Management andoperational controlManagement andoperational control

Preparation offinancial statements


Strategicmanagement

Strategicmanagement


decision making




Strategicmanagement

Strategicmanagement


decision making




Strategicmanagement

Strategicmanagement


decision making




Development of a sustainable competitive position

Involves budgeting and profit planning, cash flow mgmt and operations (i.e., recurring) related decisions

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Four Functions of Management (cont.)

Strategicmanagement

Strategicmanagement


decision making




Strategicmanagement

Strategicmanagement


decision making




Strategicmanagement

Strategicmanagement


decision making




Strategicmanagement

Strategicmanagement


decision making




Mgmt control: evaluation of mid-level mgrs by upper-level mgrsOps control: mid-level mgrs monitor op-level mgrs and employees

Requires management to comply with financial reporting requirements of regulatory agencies

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Strategic Management

Strategic management requires: Understanding the business and competitive

environment Anticipating changes Ability to make changes quickly Ability to identify and solve problems from a cross-

functional view

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Strategic Cost Management

Strategic cost management Involves the development of cost management

information to facilitate strategic management

What is “cost management information”? Information that the manager needs to effectively

manage the firm or not-for-profit organization and includes both Financial information

Relevant non-financial information

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Critical Success Factors

Critical Success Factors (CSFs) Measures of those aspects of the firm’s performance

essential to its competitive advantage and therefore to its success

Many of these CSFs are financial but many are non-financial

The CSFs for any given firm depend on the nature of the competition it faces

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Critical Success Factors (cont.)

Examples

Source: http://rapidbi.com/created/criticalsuccessfactors.html#ExamplesCSF

People Availability, skills and attitude.

Resources People, equipment, etc.

Innovation Ideas and development.

Marketing Supplier relation, customer satisfaction, etc.

Operations Continuous improvement, quality.

Finance Cash flow, available investment, etc.

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Types of Organizations

MerchandisersMerchandisersManufacturersManufacturers Service

firms

Servicefirms

Government and Not-for-profit

Government and Not-for-profit

WholesalersWholesalers RetailersRetailers

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Contemporary Cost Management Techniques – A Sample

Activity Based Costing (ABC) Parametric Cost Analysis (PCA) Price-led Design (PLD) Design-to-Cost (DTC) Target Costing (TC) Cost as Independent Variable (CAIV) Strategic Management Accounting (SMA) Functional Cost Analysis

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Contemporary Management Techniques – Our Focus

Activity Based Costing (ABC) Japanese Cost Management Techniques (JCMT) Cost of Quality (CoQ) Others (if time permits)

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Activity Based Costing Activity Based Costing focuses on indirect costs

(overhead) It tries to trace the significant activities of the business

process to the product, service or customer that generates the activity

Basic assumption is that activities consume resources and that products (or services or customers) consume activities Understanding this relationship is paramount towards controlling

and ultimately reducing overhead

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Japanese Cost Management Techniques

Cost systems used to influence activities which support the strategic plan such as quality, on-time delivery and low cost production Not just “numbers” for senior management

Should be an indicator of long term competitive position, not just a quantification of present performance

Many of the Japanese cost management systems are actually quite simplified

Approaches - target costing, cost tables and decision support systems

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Cost of Quality

Typically costs associated with making, finding, repairing, or preventing defects (Juran and Gyrna) Internal failure costs External failure costs Appraisal Costs Prevention Costs

“Quality is Free” (Crosby) Taguchi Loss Function (Taguchi)

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Strategies

A strategy is a set of policies or procedures to business that produce long-term success

Finding a strategy begins with determining the purpose and long-range direction, and therefore the mission, of the company

The mission is developed into specific performance objectives, which are then implemented by specific corporate strategies, to achieve the objectives that will fulfill the mission

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Strategic Positioning

Firms arrive at one of two competitive strategies: Cost leadership

Differentiation

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Distinctive Aspects of the Two Competition Strategies


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Implementing Competitive Strategies

There are various means for implementing competitive strategies

Techniques that facilitate strategic analysis Strengths-Weaknesses-Opportunities-Threats (SWOT)

Analysis Value Chain Analysis Balance Scorecard

The firm might also choose to expand its competitive strategy to the broader social and environmental settings in which the firm operates

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Value Chain Analysis

Strategic analysis tool used to Better understand the firm’s competitive

advantage Identify where value to customers can be

increased or costs reduced Better understand the firm’s linkages

with suppliers, customers, andother firms in the industry

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Value Chain Analysis (cont.)

Focuses on the product’s total value chain From its design to its manufacture to its service

after the sale The underlying concept of the analysis is that each

individual firm occupies a selected part (or parts) of this entire value chain

The determination of which part (or parts) of the value chain to occupy is a strategic analysis based on the consideration of comparative advantage for the individual firm

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Steps in Value Chain Analysis

1. Identify the value-chain activities The firm identifies the specific value activities that

firms in the industry must perform in the processes of designing, manufacturing, and providing customer service

2. Develop a competitive advantage by reducing cost or adding value The firm determines the nature of its current and

potential competitive advantage by studying the value activities and cost drivers identified earlier

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Value-Chain for the Computer-Manufacturing Industry


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Value-Chain Analysis for CIC Manufacturing Company


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The Balanced Scorecard

Performance report based on a broad set of both financial and nonfinancial measures

Provides a comprehensive performance measurement tool that reflects all the measures critical for the success of the firm’s strategy

Enables the firm to employ a strategy-centered performance measurement system that focuses managers’ attention on CSFs and rewards them for achieving these critical factors

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The Balanced Scorecard (cont.)

Consists of four perspectives (groupings of CSFs): Financial performance Customer satisfaction Internal business processes Innovation and learning

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The Balanced Scorecard for an Electronics Firm


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Strategies Summary SWOT analysis helps to implement a strategy by

providing a system and structure in which to identify the firm’s CSFs

Value-chain analysis builds on the CSF’s developed in the first step by breaking them down into detailed activities

The balanced scorecard provides a way to implement the detailed strategy developed through SWOT analysis and value-chain analysis by providing the processes for evaluating the firm’s achievement of the CSFs needed for success

IE 475 Advanced Manufacturing Costing Techniques Lecture Notes #1 Course Overview & Introduction.

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