Principles of financial accounting 12e by needles crosson chapter 20

– They focus on eliminating waste as companies produce and deliver quality products and services.– Managers can use value-based information reliably to compare the value created by produ

Concepts Underlying Value-Based Systems

 Value-bas ed s ys tems provide

customer-related, activity-based information.

– They focus on eliminating waste as companies

produce and deliver quality products and services.– Managers can use value-based information

reliably to compare the value created by products

or services with the full pro duct co s t, which includes not only the costs of direct materials and direct labor, but also the costs of all production and nonproduction activities required to satisfy the customer

Value Chain Analysis

 Each step in making a product or delivering a service is a link in a chain that adds value to the product or service This sequence of

activities inside the organization that adds

value to a company’s product or service is

known as the value chain

– The steps that add value to a product or service—which range from research and development to customer service—are known as primary

pro c e s s e s

Value Chain Analysis

– The value chain also includes s uppo rt s e rvice s ,

such as legal services, human resources,

information technology, and accounting, which

facilitate the primary processes by providing

business infrastructure but do not add value to the

final product or service

– Value chain analysis allows a company to focus on its core competencies A co re co mpe te nc y is the

activity that a company does best and that gives it an advantage over its competitors

 A common result of value chain analysis is outsourcing

a process or service in the value chain that is not among an organization’s core competencies.

Supply Chains

 Managers see their organization’s internal

value chain as part of a larger system This larger system is the s upply c hain (or the

supply ne twork )—the path that leads from

the suppliers of the materials from which a

product is made to the final customer.

– The supply chain includes both suppliers and

suppliers’ suppliers, and customers and customers’ customers

– Each organization in the supply chain is a

customer of an earlier supplier, and each has its own value chain

Process Value Analysis

 Managers use pro ce s s value analys is (PVA) to

identify and link all the activities involved in the value chain

or service as perceived by the customer In other words, if customers are willing to pay for the activity, it adds value to the product or service.

product or service but does not increase its market value.

 Managers eliminate non-value-adding activities that are not essential and reduce the costs of those that are, such as legal services, management accounting, machine repair, materials handling, and building maintenance.

Activity-Based Management

 Ac tivity-bas e d manag e me nt (ABM) identifies all

major operating activities, determines the resources consumed by each activity and the cause of the

resource usage, and categorizes the activities as

adding value to a product or service or not adding

value

– ABM focuses on reducing or eliminating non-value-adding activities It helps managers eliminate waste and redirect resources to activities that add value to the product or service.

environment to assign activity costs to cost objects.

 It categorizes all indirect costs by activity, traces the indirect costs to those activities, and assigns those costs to products or services using a cost driver related to the cause of the cost.

Cost Hierarchy

 A cos t hierarchy is a framework for

classifying activities according to the level at which their costs are incurred.

– In a manufacturing company, the cost hierarchy typically has four levels

 Unit-le ve l ac tivitie s are performed each time a unit is produced and are generally considered variable costs.

or production run of goods is produced

 Pro duc t-le ve l ac tivitie s are performed to support a particular product line.

 Fac ility-le ve l ac tivitie s are performed to support a facility’s general manufacturing process and are generally fixed costs.

Bill of Activities

 A bill of activities is a list of activities and

related costs that is used to compute the

costs assigned to activities and the product unit cost.

The New Operating Environment and

Lean Operations

 A le an o pe ratio n focuses on eliminating waste in an organization and on what a customer is willing to pay for

– To achieve lean operations, a company must redesign its operating systems, plant layout, and basic management methods to conform to several basic concepts that

emphasize simplicity, quality, continuous improvement, minimum inventories, multiskilled workers, and eliminating waste and non-value-adding activities.

– Piecemeal attempts at lean operations have proved

disastrous when the implementation focused on a few lean tools and methodologies instead of understanding how to think lean throughout the organization.

Just-in-Time (JIT)

 In a lean operation, the jus t-in-time (JIT)

operating philos ophy requires that all

resources—materials, personnel, and

facilities—be acquired and used only as

needed to create value for customers.

Minimum Inventory Levels

 In a J IT environment, materials and parts are purchased and received only when they are needed.

– The J IT approach lowers costs by reducing the

space needed for inventory storage, the amount

of materials handling, and the amount of inventory obsolescence

– It reduces the need for inventory control facilities, personnel, and recordkeeping

– It significantly decreases the amount of work in

process inventory and the amount of working capital tied up in all inventories

Pull-Through Production

 In pull-throug h production , a customer’s

order triggers the purchase of materials and the scheduling of production for the products that have been order.

– In contrast, with the pus h-thro ug h pro ductio n

method used in traditional manufacturing operations, products are manufactured in long production runs and stored in anticipation of customers’ orders

– With pull-through production, the size of a

customer’s order determines the size of a production run, and the company purchases materials and parts as needed

Quick Setup and Flexible Work Cells

 By placing machines in more efficient

locations and standardizing setups, setup

time can be minimized in a J IT environment.

– By changing the factory layout so that all the

machines needed for sequential processing are placed together, J IT may cut the manufacturing time significantly

– The new cluster of machinery forms a flexible

wo rk ce ll, an autonomous production line that can perform all required operations efficiently and continuously

– The more flexible the work cell is, the greater its potential to minimize total production time

A Multiskilled Workforce

 In flexible work cells, one worker may be

required to operate several types of

machines simultaneously.

– The worker may have to set up and retool the

machines and even perform routine maintenance

on them

– Under a J IT operating philosophy, multiskilled

workers have been very effective in contributing

to high levels of productivity

High Levels of Product Quality

 A J IT environment results in high-quality

products, since high-quality direct materials are used and inspections are made

throughout the production process.

– In a J IT environment, inspection as a separate

step does not add value to a product, so inspection is incorporated into ongoing operations

– A J IT machine operator inspects the products as they pass through the manufacturing process and, if he or she detects a flaw, shuts down the work cell until the problem can be determined and corrected

Effective Preventive Maintenance

 Continuous J IT operations require an

effective system of preventive maintenance.

– In a flexible work cell, if one machine breaks

down, the entire work cell stops functioning, and the product cannot easily be routed to another machine

– Preventing machine breakdowns is considered

more important than keeping machines running continuously

– Machine operators are trained to perform minor repairs when they detect problems

– Machines are serviced regularly to help guarantee continued operation

Continuous Improvement of the

Work Environment

 A J IT operating philosophy fosters loyalty

among workers, who are likely to see

themselves as part of a team that is deeply involved in the production process.

 Each worker is encouraged to suggest

improvements to the production process

– In J apanese, this is called kaize n, meaning “good change.”

– Workers are rewarded for suggestions that

improve the process

Classifying and Assigning Costs

(slide 1 of 2)

 The traditional production process includes:

– Pro ce s s ing time—the actual amount of time

spent working on a product– Ins pe ctio n time—the time spent looking for

product flaws or reworking defective units– Mo ving time—the time spent moving a product from one operation or department to another

– Que ue time—the time a product spends waiting

to be worked on once it arrives at the next operation

– Sto rage time—the time a product spends in

materials, work in process, or finished goods inventory

Classifying and Assigning Costs

(slide 2 of 2)

 In product costing under J IT, costs

associated with processing time are relevant, but costs associated with inspection, moving, queue, and storage time should be reduced

or eliminated because they do not add value

to the product.

– In a J IT operating environment, managers focus

on thro ug hput time, the time it takes to move a product through the entire production process

– Sophisticated computer monitoring of the work

cells allows many costs to be traced directly to the cells in which products are manufactured

Backflush Costing

 A lean organization can also streamline its

accounting process by using backflus h

cos ting

– In backflush costing, direct materials costs and

c o nve rs io n co s ts (direct labor and overhead) are immediately charged to the Cost of Goods Sold account

– At the end of the period, they are “flushed back,”

or worked backward, into appropriate inventory accounts

– This method saves recording time by eliminating the need to record several transactions that must

be recorded in traditional operating environments

Management Tools for

Continuous Improvement

 Organizations that adhere to co ntinuo us

impro ve me nt are never satisfied with what is

– They continuously seek improved quality and lower cost

through better methods, products, services, processes, or resources.

– In response to this concept, several important management

tools have emerged, including the theory of constraints and

total quality m anage me nt.

– According to the the o ry o f c o ns traints (TOC), limiting

factors, or bottlenecks, occur during the production of any product or service.

 Once managers identify such a constraint, they can focus their attention and resources on it and achieve significant

improvements.

 TOC helps managers set priorities for how they spend their time and resources.

Total Quality Management

 Total quality manag ement (TQM) requires that all parts of a business focus on quality.

– Workers are tasked to spot possible causes of

poor quality, use resources efficiently and effectively to improve quality, and reduce the time needed to complete a task or provide a service

– To determine the impact of poor quality on profits, TQM managers use information about the co s ts

o f quality

 The costs of quality include both the costs of achieving quality (such as training costs and inspection costs) and the costs of poor quality (such as the costs of rework and of handling customer complaints).

Managing for Value and Controlling Costs

 The steps managers take during the

management process to manage for value

and control costs are:

– Plan

– Perform

– Evaluate

– Communicate