Part 1: Section D

TOC and JIT

- Both have the same view on inventory, that it has 3 problems = cost, quality, and timeliness - Both focuses on HORIZONTAL process view. Emphasizes optimizing each operation as a coordinated systems to produce what is only needed. Differ TOC identifies that bottleneck in the organization and uses it as the focus to coordinate the whole system. - For TOC, optimizing the system is a function of optimizing the bottleneck

Types of Cost Drivers

1. Activity-based Cost Drivers: focus on operations that involve manufacturing or service activity, such as machine set-up. 2. Volume-based Cost Drivers: focus on input/output volume and involves aggregate measures such as units produced or labor hours. 3. Structural Cost Drivers: focus on company strategy and involves long-term plans for the scale, complexity, amount of experience in an area of level of technical expertise. 4. Executional Cost Drivers: focus on the short-term operations and involves reducing costs through attention to workforce commitment and involvement, production design and supplier relationship.

Basic Principles in the TOC

1. Inventory: Inventory refers to all the cost of materials throughout the system in direct materials, work in process, and finished good inventories intended for sale. Depending on how certain costs are allocated to cost of inventory, it may also include the cost of R&D along with buildings and equipment. 2. Operational Expenses: It refer to the money the system spends to convert inventory into throughput. Operational expenses include expenditures on direct and indirect labor, supplies, outside contractors, inter-est payments, and depreciation. [clearly, all costs of operations, except direct materials] !: TOC assumes labor is a fixed cost. 3. Throughput contribution: Throughput contribution, also known as throughput margin or simply throughput, is a TOC measure of product profitability. It is the rate at which the entire system generates money through product and/or service sales. 4. Drum-buffer-rope system: a TOC method for balancing the flow of production through the constraint. The drum connotes the constraint, the rope is the sequence of processes prior to and including the constraint, and the buffer is the minimum amount of work-in-process input needed to keep the drum busy. The TOC attempts to maximize throughput contribution while decreasing inventory, operational expenses, and other investments. T, I, and OE measurements enable a company to under-stand how much money it is making and how to best leverage capabilities to improve profitability.

Benefits and Limitations of ABC

A 1. Provides more accurate measures of costs of products, customers, business units, market regions, and other cost objects 2. Can be used to identify value-added and non-value added activities and costs. 3. Support a more strategic view of cost management and product mix decisions 4. Can be used with either job/process costing system 5. Can review involve activities and assess whether it is value-adding or not DA 1. Costly and time intensive to design, implement and maintain 2. ABC cost consumptions relationships are based on a linger time horizon than traditional systems, 3. P&L reports based on ABC method may or may not conform to external reporting. [this needs the company to maintain more than one version of their cost system to keep track the different requirement] 4. Produces a lot of information and can be overwhelming 5. Not all overhead costs can be related to a particular cost driver. It may do so but not so economically feasiable.

Strategic Value of Cost Information

A clear and confident view of costs will enable an organization to 1. Efficiently MANAGE costs and INCENTIVIZE employees in order to reduce costs and improve quality 2. Effectively MANAGE their market position by emphasizing and deemphasizing certain products or customers available in the organization's portfolio in order to establish the most strategically successful market position.

Operation Costing

A hybrid costing system used when products have some common characteristics and some individual characteristics. It is a costing system that combines job costing with process costing. NOTE: Direct Materials = Job Order Labor = Process Costing OH = Process Costing Examples: Clothing company, textiles, metalworking, shoes, and electronic equipment.

Material Resource Planning [MRP I]

A subset of ERP is material requirements planning (MRP), which is a planning and control system for inventory, production, and scheduling. It involves: {3} - Master Production Scheduling[MPS] = which provides the INDEPENDENT product demand. It is a plan for individual products to be manufactured in each individual time period (scheduling) - Bill of Materials: combines the components to produce a unit of product, the standardized quantities to use and their parent-child relationships. (production) - Inventory Tracking = the amount of raw materials, WIP and finished goods available (inventory) These systems are described as "push" systems that are based on anticipating inventory needs and then scheduling inventory arrivals to satisfy needs. MRP requires production management to plan for what is needed, then "push" the product through production to reach a market. NOTE: The true objective, similar to JIT systems, is to improve quality, increase speed, and grow output. It is important for an MRP system to consider both types of demands - dependent and independent - or else manufacturing activities (internally or externally) could be scheduled without a plan to ensure sufficient stock for parts which can lead to negative consequences. Demand can be independent or dependent. An independent demand is usually a demand coming from customers (external and internal), such as a sales order or a sales forecast. A dependent demand is generated by an independent demand through a bill of materials. For example, if I'm selling cupcakes, a sales orders for 200 cupcakes will generate an independent demand for a quantity of 200 units of the item 'cupcake'. My cupcakes' bill of materials (the ingredients in the recipe) would need 1 bag of ready-to-bake mix and 0.5 L of water for each batch of 20 cupcakes. So in this case, my sales order of 200 cupcakes is generating dependent demands for 200/20=10 bags of ready-to-bake mix and 200/20*0.5L=5L of water.

Throughput Costing

A.k.a. Super-variable costing. It is a costing method where the only costs included in inventory are the costs of direct materials. All other costs are classified as period costs.

Benefit and Limitation of Variable Costing and Absorption Cositng

AC: A: - managers have a more complete measure of the full costs (i.e., full value) of inventory - necessary for external financial reporting. DA: - troubling incentive in managers to overproduce and build inventory VC: A: - avoid the troubling incentive to overproduce and build inventory by not building fixed cost rates and subsequently accounting for fixed production costs as if they behave like variable costs DA: - expensing all fixed cost spending to the income statement, inventory is undervalued on the balance sheet - do not comply with external financial reporting standards

ABC

Activity-based costing (ABC) is focused on breaking down and identifying how costs are actually consumed in an organization, and then fully costing product lines or customer lines using activities as the cost assignment base. The major contribution of activity-based costing is an approach to breaking down fixed overhead costs into cost pools that relate to product or customer lines using activities other than volumes of units. appropriate for companies that have expanded to multiple products and/or products that use varying amounts of resources ABC uses a hierarchy of types of activities to identify the variable nature of cost consumption. ABC Hierarchy: - Unit-Level Activities - Batch-Level Activities: machine set-ups, movement of materials for production and production scheduling, quality - Product Line Activities: engineering product design and support, training production personnel, and product marketing campaigns - Facility Support Activities NOTE: • Poor cost assignment of batch-level and product line activity costs are the cause of CROSS-SUBSIDIZATION ERROR in the organization • Poor allocation of facility support costs that leads to DEATH SPIRAL EFFECTS. !: For decisions involving profitability analysis = facility support costs should NOT be allocated.

Accounting Systems

Actual cost accounting systems are the simplest cost accounting approach, yet these kinds of cost accounting systems are rarely used. Actual cost accounting systems are based on using actual cost inputs coming into the work-in-process inventory account. The problem with actual cost systems is the challenge that actual overhead costs don't "flow" very well. A: Precision DA: Timeliness Normal cost accounting use actual costs to account for direct material and direct labor flowing into work-in-process accounts and (unlike actual cost systems) use budgeted costs to account for overhead flowing into work-in-process accounts. [Most OG costs like utilities, training, taxes, security demonstrate a period spending pattern compared to the flow of production] Normal cost systems address the fact that spending on overhead costs is not a constant (daily) flow throughout the year. At the end of the year, the spending on actual overhead costs is compared to the overhead costs applied to production. The difference between these two numbers is an underapplied or overapplied amount of overhead costs. That difference must then be reconciled across the accounting system in order to adjust the amount of cost of goods sold on the income statement to represent actual overhead costs. Normal cost accounting systems are quite common in smaller and newer companies that have yet to make a serious investment in using cost systems to plan, control, and evaluate operational processes. Standard cost accounting systems use budgeted costs for all three cost flows (direct materials, direct labor, and overhead) going into work-in-process accounts. Organizations with standard cost accounting systems recognize the value of using budget cost flows throughout the accounting system while separately tracking spending on actual costs. The reconciliation of budgeted to actual costs in the process of building income statements generates valuable cost variance data for all product costs. Standard cost accounting systems are quite common in large, advanced organizations that have made significant investments in planning, control, and evaluation processes.

Support Department Allocation Methods

Assign Support Cost >> by Tracking[variable] / allocating[fixed] Direct Method: - Simplest Approach - Avoids the reality of support departments serving each other - Directly assigns costs to the production department Step-Down - Pays some attention to the fact the support departments provide support to each other - Popular cost assignment - the key characteristic and limitation of this method is the choice by management to order the support departments for the computation [usually from the most support to the least support] - The choice of ranking is very subjective and unstable as its cost allocation fluctuates the result as the ranks changes. Reciprocal Method - It simultaneously assign costs between support departments and directly assign costs to the production department. - "the substitution method for two unknowns" Dual Rates - splits costs into fixed and variable. - then allocates the fixed costs using a fixed cost rates and tracks variable costs using variable cost rate. note !: For fixed cost allocation rates = basis established on the NORMAL capacity of the activity !: For variable cost tracking rates = basis is established on the BUDGETED use of the capacity

Costing Systems

Costing systems are used to accumulate costs and assign the to a particular cost object. > Job Order Costing Model: This model is used when the customer or client receiving the product can be identified BEFORE the process begins and the job with its associated costs are tracked to gather throughout the process. > Process Costing Model: This model is used when an organization building similar products without separately identifying each product during the process and the organization can only identify the buyer DURING the selling process. > ABC > Operations Costing > Backflush Costing

Describe the Drum-Buffer-Rope System

Drum Buffer Rope (DBR) is a planning and scheduling solution derived from the Theory of Constraints (ToC). Understanding the drum-buffer-rope system requires first conceptualizing every non-bottleneck operation as being either an upstream operation (i.e., sending production to the bottleneck) or a downstream operation (i.e., receiving production from the bottleneck and moving it forward). DRUM - is a scheduling and signaling process for downstream operations. The drum indicates to downstream processes the current pace of the bottleneck so that output from the bottleneck is absolutely anticipated and handled as perfectly as possible. It sets the rhythm of the operation. It is like the slowest soldier determine the speed of the march. BUFFER - represents the one place in the organization where work-in-process inventory is valuable, which is directly in front of the bottleneck operation. The objective of buffer inventory is never to let the bottleneck "starve." This ensures that the bottleneck operations is operating at full capacity. ROPE -represents constraints placed on upstream operations to not overwhelm the bottleneck operation with so much inventory that cost, quality, and timeliness problems start becoming an issue. Upstream operations need to deliver just enough in-process inventory.

Fixed Costs

Fixed costs are the portion of total costs that do not change when the quantity of a cost driver changes over a relevant range and duration. Classification: 1. Discretionary - which are also known as managed or budgeted fixed costs, can be included or excluded from the budget at the discretion of the managers. Examples of discretionary costs include advertising, training, or internships. 2. Committed - are those costs that cannot be omitted due to strategic or operational priorities in the short run. An example is depreciation on equip-ment previously purchased. Committed fixed costs tend to be facilities related and result from prior capacity-related decisions.

Cost v.s Expenses

It is important to understand that costs are not the same thing as expenses. Costs represent spending made by the organization. These costs may initially represent investments in assets or spending on other resources made available for the organization to When the purpose of the spending is used up, only then do the costs become expenses So, for example, when the product is sold, the cost transforms from an asset (an unexpired cost) to an expense (an expired cost).

Economies of "SCOPE"

It is the economic principle that can help an ERP system to integrate financial systems and nonfinancial systems. Economies of scope refers to gaining efficiencies with the integration of the number of products, services, systems, functions, and activities in an organization. For example, integrating financial systems with nonfinancial systems is an example of economies of scope. Similarly, integrating all business functions such as manufacturing, marketing, accounting, finance, and human resources is another example of economies of scope. Basically, economies of scope refers to the ability of a firm to produce multiple products or render multiple services more inexpensively in combination than separately.

Horizontal Process meaning

Organisations are moving from managing vertically to managing horizontally. It is a move from a function orientation to a process orientation. Total quality man- agement (TQM), just-in-time (JIT), benchmarking and business process reengineering (BPR) are all examples of horizontal management improvement initiatives. These initiatives are designed to improve an organisation's work processes and activities to effectively and efficiently meet or exceed changing customer requirements.

Spoilage, Rework and Scrap

Spoilage = any material/good that is considered unacceptable and is discarded/sold for its disposal value. It can be normal/abnormal. Rework = any finished product that must have additional work performed on it before it can be sold. Scrap = portion of a product or leftover material that has little or no economic value

ABC Hierarchy "Customer"

The ABC hierarchy can also be used to evaluate the profitability of customers and customer categories. 1. Customer unit-level activities are tied to the resources consumed for each unit sold to a customer. Examples: shipping costs, restocking costs, and sales commissions. 2. Customer batch-level activities represent the resources required to support a sales transaction to a customer. Example: order processing, invoicing, and recording product returns. 3. Customer-sustaining activities are similar to product-line activities and represent the resources consumed to service a customer relationship regardless of the number of units sold to or the volume of sales transactions handled for the customer. Examples: onthly statement processing, travel expense by sales personnel, and customer training and support.

Value added v.s. Non-value added activities

The concept of value added refers to activities that convert resources into products and services consistent with external customer requirements. Non-value-added activities can be eliminated with no deterioration in product or service func-tionality, performance, or quality in the eyes of the end user.

Capacity Denominator

This is an important consideration. For example, when a cost of a particular product/service is high compared to the market price, the organization may either seek to RAISE PRICE or REDUCE PROMOTION on the product. [to save cost] Either way, the likely result is to reduce the expected budgeted volume with the price higher than the market or the lower promotion. The reduction of volume will result the organization in a type of product pricing death spiral - due to the increase predetermine cost allocation rate.

Throughput

Throughput accounting establishes the accounting systems, reports, and performance measures needed to implement TOC in the organization. Simply, it is the TOC method of accounting, which emphasize on increasing the throughput. Throughput accounting supports a very specific and extremely short-term managerial view of an operation—the incremental value from a more effective employment of a constrained resource.

Reconciling Variable Costing Income Statement and Absorption Costing Income Statement

- Fixed Cost released [BB inv x previous FC rate] + Fixed Cost absorbed [EE inv x current FC rate] = Net Effect on operating income FC rate = Annual FC / Annual Production Note: Production > Sale Absorbtion > Variable

Contemporary Productivity Approaches

1. Automation/Robots: Uses reprogrammable, multifunctional robots to perform variety of repetitive tasks 2. Capacity Management and Analysis[Capacity Planning]: 3. Computer-aided design(CAD): uses computers in product development, analysis, and design modification to improve quality and performance of the product. 4. Computer-aided manufacturing: applies the computer to the planning, control and operation of a production facility 5. Concurrent Engineering(/Simultaneous engineering): INTEGRATES, rather than sequential process of, product/service design with input from all business unit and functions throughout a product's/service's life cycle. 6. Flexible Manufacturing System: Uses a computerized network of automated equipment that produces one/more groups of parts/variations of a product in a flexible manner.

Types of Capacity Denominator

1. Budgeted Challenges: Budgeted volume could lead to product pricing death spiral [when product cost is used to establish/evaluate prices ] 2. Practical/Normal Capacity: - represents the level of output that can be realistically achieved based on current management policies, as well as based on machine and labor scheduling expectations. - Practical capacity also allows for unavoidable productivity losses due to machine breakdowns, production errors, employee vacations, maintenance, and so on - advantage of using practical capacity to set the predetermined allocation rate is costs assigned during the year are unaffected by expected increases or decreases in the denominator used to set the allocation rate If the Actual Units < Practical Unit = Under applied If the Actual Units > Practical Units = Over Applied Benefits: avoiding increases in allocated per-unit costs when expected production and sales volumes decline and cause death spiral effects in management pricing decisions Disadvantage: -practical capacity can be a "moving target." A change in production policies or processes will shift practical capacity levels. 3. Theoretical/Ideal - assumes that all policy constraints and scheduling limitations are removed; - it also assumes that no productivity is ever lost due to breakdowns, errors, etc. Benefits - never adjusting - highlight to the organization what is possible in terms of achieving a higher level of practical capacity Challenges: - significant amount of capacity costs will not be allocated to products during the year, resulting in capacity costs being SIGNIFICANTLY under-applied by the end of the year. [actual < actual] - If pricing decisions are based on product costs, the organization may let prices slip too low to cover the under-applied costs that are adjusted back into the accounting system at the end of the year

Why is it under the TOC and JIT has this perspective: "Inventory is often a barrier to achieving the organization's main goals"? Simply, what are the 3 problems with inventory?

1. COST.Unneeded inventory is a costly investment as it creates out-of-pocket costs to move, store, and secure AND shrinkage costs as it is lost, damage, or becomes obsolete. 2. QUALITY. Inventory HIDES problems with quality. As the inventory piles up, the quality problems becomes hidden. And until discovered, the quality problems continue leading to needless rework and scrap. Moreover, a delivered less-quality product/service reduces future revenue. 3. TIMELINESS. An unneeded inventory slows down the production process, leading to delayed, or even lost sales.[More inventory represents longer line]

Competitive Advantage Types

1. Cost Advantage 2. Differentiation Advantage Cost Advantage: - This approach is used when organizations try to compete on costs and want to understand the sources of their cost advantage or disadvantage and what factors drive those costs. Example: Wal-Mart, McDonald's Toyota 5 Analysis Steps: 1. Identify the firm's primary and support activities. 2. Establish the relative importance of each activity to the total cost of the product 3. Identify cost drivers for each activity. 4. Identify links between activities 5. Identify opportunities for reducing costs [outsourcing jobs, installing automated processes] Differentiation Advantage: The firms that strive to create superior products or services use differentiation advantage approach. Example: Apple, Starbucks, Samsung 3 Analysis Steps 1. Identify the customers' value-creating activities. [managers then focus on those activities that contribute most to creating value] 2. Evaluate the differentiation strategies for improving customer value. [differentiation features: - add more product features - focus on customer services and responsiveness - increase customization - offer complementary products 3. Identify the best sustainable differentiation.

Strategy and business success can largely boiled down to two fundamental challenges:

1. Creating Value And then 2. Capturing Value A. Create: Organizations need to identify what is valued in the marketplace in terms of what customers or potential customers are willing to pay (i.e., give value) to receive. 3 basic strategic approaches organizations can take to create value that customers are will to pay: 1. Low-cost products 2. Differentiated products 3. Target a nice market [and provide with low-cost or differentiated product] 2. Capture and Retain: the price on the product must be high enough and the cost to provide the product must be low enough for the organization to sustain profits.

Estimating variable and Fixed OH costs

1. High-low method - this focuses solely on the highest and lowest activity[production volume] - Major limitation: it is strictly focused on using just two data points and essentially ignores the rest of the data 2. Regression Analysis - Much more comprehensive approach to analyzing cost patterns in order to identify variable and fixed costs. Y = a + bX + e Y - dependent variable a - y-intercept/total fixed costs b - slope coefficient/unit variable costs X -independent variable e - random error term Confidence interval - describes the uncertainty surrounding the cost estimates. Example, with 80% confidence, the "actual" costs is actually expected to be between this amount and this amount.

Five Steps of TOC

1. IDENTIFY the Constraint 2. Determine how to EXPLOIT the constraint 3. SUBORDINATE all other operations to the constraints 4. ELEVATE the constraint 5. When the constraint is broken, go back to Step 1. 1. Constraints can be either internal within the organization or external to the organization. Internal process constraints occur when a given process or operation has insufficient capacity to meet market demand. External material constraints represent a restricted supplier source of materials or other needed resources. External market constraints are the bottleneck when there is inadequate market demand to fully utilize the organization's capacity. 2. Once the bottleneck is identified, the organization must maximize the moneymaking capacity of the bottleneck. In TOC, value is defined as throughput. Organization must emphasizes the product(s) with the highest throughput per bottleneck unit. 3. Once the organization determines how the constraint is to be exploited to maximize throughput for the organization, all other operations and their capacities are coordinated to the needs of the bottleneck. The purpose of the drum-buffer-rope TOC system is to support this step of the TOC process, which is a coordinated effort to keep the constraint operating at full capacity. 4. The organization begin exploring the means to increase the capacity of the constraint. Typical methods of elevating the constraint (i.e., the bottleneck) include adding more shifts or employees to the bottleneck operation, scheduling overtime, acquiring more equipment for the bottleneck, outsourcing some of the bottleneck work, scheduling longer bottleneck production runs to reduce time spent with setups, etc. An organization should not prioritize elevating non-bottleneck operations as it is a waste of organization's resource and effort. 5. As the organization works on elevating the capacity of the constraint, eventually the bottleneck will shift to a new constraint, which can be either internal or external to the organization. [continuous improvement]

Steps in ABC

1. Managers should identify and remove any facility support common fixed costs that are unaffected by activity taking place with each product line[Administrative salaries and occupancy costs]. (death spiral effect is removed) 2. Separate the manufacturing overhead costs into different "activity cost pools." 3. Identify an appropriate activity driver for each cost pools. [unit-level/batch-level/product-level] 4. Compute the activity cost rate [2/3] 5. Track the cost with cost object's activity performance.

Complications of Cost Assignment Systems:

1. Many are NOT strictly varaible or fixed but exhibit both variable and fixed characteristics. Methods like high-low method, visual fit method, and regression analysis provide best in appromiximating the variable and fixed cost component BUT not precisely splitting it. 2. Outside of tbe relevant range of volume, total costs and and variable costs start shifting. Fixed cost can shift in total as the organization moves between significant cost structures. As the volume of business change, there are step-up/step-down points when a fixed cost is dramatically increased/decreased. 3. Time Horizon for the performance report or decision analysis. In very short horizon, most costs are fixed. In contrast, over very long horizons, most costs are variable. So, for example, if the reprotis focused on the next week, few costs will actually behave as variable. But if there performance report is focused on the next five years of business, it can be expected that many, if not most, costs will behave as variable costs across a wide span of time. 4. !!! the distinction on cost behavior as variable or fixed is based on the cost object. Traditionally, variable costs are defined as the cost that shift as gthe volume of production output change. what if the cost object was the headcount of employees, or the square footage of building spaces? A change of basis on cost object will determine the behavior costs.

Cost allocations methods of Joint Costs:

1. Physical Units Method:and is based on a simple logic that as more of a product is produced, it should bear more of the joint process costs. 2. Sales Value at Split-Off Method: and is based on a simple logic that as more of a product is produced, it should bear more of the joint process costs. 3. Net Realizable Value Method: The logic of the NRV method is that joint costs should be allocated based on the product's ability to pay the costs, defined as the product's NRV. In this method we assume that the organization makes an optimal decision for each product in order to maximize its total value. In short, the NRV method is based on allocating joint costs using the highest value that each product can provide the organization. 4. Constant Gross Profit Method: is an effort to neutralize the effects of the joint cost allocation decision on managers' profit-based performance measures. Like the NRV method, first determine the most optimal profit solution for the main products. Steps: 1. With the optimal profit solution, compute the gross profit percentage. 2. Compute the individual optimal revenue and multiply it with cost rate. The result the ALLOWABLE Cost. 3. Remove any DIRECT processing cost that are used to optimize company profit. Allowance cost - processing cost = ALLOCATED cost

TOC vs. ABC

1. TOC takes a short-term approach with an emphasis on materials-related costs; ABC examines long-term costing, including product costs. 2. TOC considers how to improve short-term profitability by focusing on constraints and how to exploit it. 3. ABC does NOT consider resource constraint and process capability; rather, it focus on accurate unit costs for long-term strategic pricing and planning decisions. 4. ABC is generally used as a tool for planning and control.

3 Capacity Levels

1. Theoretical 2. Practical 3. Budgeted 4. Actual Theoretical - Practical = Potential Idle Capacity Theoretical /Practical - Budgeted = Planned Idle Capacity Budgeted - Actual = Unplanned Idle Capacity Actual = Actual Capacity NOTE: The Unplanned Idle Capacity = will be ADJUSTED to the COGS The planned ideal capacity = NOT be reported in the COGS[but separately tracked, reported LOWER on the income statement so that it can be observed and consciously managed]

How to treat the under-applied or over-applied by some amount

1. To proportionally adjust the ending balance in all "downstream" accounts[WIP, FG, COGS] - this is the most accurate approach, and - more particularly important to use when the under-/over-applied amount is significant 2. To directly apply to the COGS account - often acceptable for external financial reporting - this over-adjust the COGS - this will leave inaccuracies in the ending balance of the inventory accounts.

3 Phases of a Product Life Cycle

1. Upstream Costs: Costs that are prior to the manufacturing of the product/sale of the service [such as R&D, design, tests, prototypes] 2. Manufacturing Cost: costs involved in producing a product/service 3. Downstream Cost: Costs subsequent to manufacturing costs such as marketing, distribution, advertising, service costs, and warrant costs. Life-cycle costing attempts to make managers proactive in the earlier phases so they do not have to be reactive later

Process Analysis

A process is an activity or a group of interrelated activities that takes an input of materials and/or resources, adds value to it, and provides an output to internal or external customers Process analysis refers to a collection of analytic methods that can be used to examine and measure the basic elements for a process to operate. It can also iden-tify those processes with the greatest need for improvement. Characteristics of a good process: 1. Effectiveness [meets the customer's requirements] 2. Efficiency [achieves result with minimal waste] 3. Adaptability [can adopt to environmental changes]

Value Chain Analysis

A systematic way of examining all of the activities a firm performs and determining how they interact to form a source of competitive advantage, and assess its importance of their customer's value perceptions/ Purpose: implement business decisions to gain and sustain competitive advantage. Steps of Value Chain Approach for Assessing Competitive Advantage Step 1: Internal Cost Analysis Step 2: Internal Differentiation Analysis Step 3: Vertical linkage analysis Vertical linkage can identify which activities are the most/least critical to competitive advantage or disadvantage

Life-Cycle Costing

ABC methods tend to be focused only on measuring and reporting costs involved in production and service processes. A more complete view of the costs of establishing and sustaining a product or customer is called life-cycle costing. Life cycle for a product begins in the research and development stage. While most external reporting requirements require R&D costs to be expensed in the period in which they are spent, the life-cycle costing method seeks to track those costs forward as part of a product's life cycle in the organization.[UPstream costs] At the other end of the product's life cycle are the costs required to support the product after it has been manufactured. These costs include delivery, customer training, support and service, product warranty, and potential product liability costs.[DOWNstream costs] Tracking these two costs, organizations are able to establish a more strategic view of managing all three core product stages: R&D, production, and post-sale support. For example, an investment in R&D would in return result to production savings, and avoid unnecessary post-sale support.

Variable Costing Income Statement v.s. Variable Costing Income Statement

Absorption costing income statement is the traditional statement required for external financial reporting. This approach tracks the full production cost of inventory to the balance sheet and onto the income statement. As a result, this approach results in a "full cost" valuation of inventory on the balance sheet, which is essential for accurate balance sheet presentation. But absorption costing income statements create a troublesome incentive in the management system. Variable costing income statements are often referred to as contribution margin income statements. The variable costing income statement approach is used to separate fixed costs from variable costs, and does not use cost rates to assign fixed production costs to each unit of the organization's production and sales output. Instead, total fixed production costs are fully expensed to the variable costing income statement in the period in which they occurAs a result, variable costing income statements are not allowed for external financial reporting, but they avoid the troublesome incentive. The issue on income is simply a matter of timing from year to year, and troubling incentive: performance signal coming from the absorption costing income statement doesn't appear to align management with the best interests of the organization. How: > Management will produce more inventory than the company sold in to resulting a higher income ceteris paribus [if absorption costing is prepared]. To increase income there are ways" - increase sales price - increase sales volume - decrease cost. But under absorption costing, there is another way that is to increase production.

Activity Based Management

Activity-based management (ABM) focuses on the management of activi-ties as the way of improving the value received by the customer and the profit achieved by providing this value. REMEMBER: management of operations emphasizes a balanced view of costs, quality, and timeliness.[the 3 performance measures] The vertical ABM view captures the main factors that drive costs up or down on an activity. While ABC designates and uses cost drivers for each activity, ABM analyzes these cost drivers for their effectiveness in defining the root causes of activ-ity costs. To explain the effects of cost drivers, ABM uses internal interviews, observation, and quality control tools such as theory of constraints, bench-marking, and other analytical tools.

ABM Advantages and Disadvantages

Advantages: 1. It allocates more resources to activities, products, and customers that add more value, strategically redirecting management focus. 2. It eliminates non-value-added activities 3. It works well with just-in-time processes 4. It measures process effectiveness and identifies areas to reduce costs or increase customer value. Disadvantages: 1. ABC/ABM is not used for external financial reporting 2. Implementing ABC/ABM is expensive and time-consuming 3. Changing to ABC/ABM will result in different product design, process design, manufacturing technology, and pricing decisions.

ERP v.s. EPM

An ERP system focuses on automating TRANSACTIONAL processes, while EPM systems focus on automating MANAGEMENT processes. An EPM system integrates and analyzes data from many sources, including, but not limited to, e-commerce systems, front-office and back-office applications, data warehouses and external data sources.

Benchmarking

Benchmarking is a strategy tool used to compare the performance of the business processes and products with the best performances of other companies inside and outside the industry. Benchmarking is the search for industry best practices that lead to superior performance.[it may be internal/external or financial/nonfinancial] Steps: 1. SELECT project to prioritize and improve, and ORGANIZE the benchmarking team. 2. Gap Analysis. DOCUMENT the current process or product 3. Identify and research the benchmarking TARGET 4. ANALYZE benchmarking data and identify improvement 5. IMPLEMENT the recommendations and recalibrate as needed. !: Benchmarking targets do not have to be competitors or even organizations within the same industry. Alternatively, benchmarking targets do not have to be found in other organizations. Generally, there are three possible areas for improvement: costs, quality, and timeliness.

Outsourcing Benefits and Limitations

Benefits : - Freeing internal resources to focus on the core business - Flexibility to expand to contract the outsources needed - Better process quality and efficiency assuming the third-party vendor has comparatively more expertise - Risk reductions if the risk is shifted to the vendors based on the contract [risk of obsolescence is removed] - Significant cost reductions Limitations - Can reduce process control and control over quality - May cost more to go for specific expertise - Share of sensitive proprietary information - The failure of the vendors affects dramatically the organization [bankruptcy/legal]

Best Practice Analysis

Best practice analysis refers to the col-lective steps in a gap analysis. A gap analysis is generally described as the difference between the current state and a desired state. Best practice analysis involves assessing how a firm's given performance level measures up to a best practice and then defining the logical next steps in transitioning to the desired performance level. Typical activities: - Defining the gap - Determining the reasons for the gap - Examining the factors that contribute the existence of the best practice - Developing recommendations and an approach to implement the best practices.

Business Process Re-engineering

Business process re-engineering is the "radical" redesign of business processes to achieve "dramatic" improvements in critical aspects like quality, output, cost, service, and speed. The focus in BPR is to obliterate unproductive management layers, wipe out redundancies, and radically remodel processes BPR involves changes that are: - Fundamental - Radical[it is reinvention] - Dramatic - Process BPR Cycle: A. Needs to first clearly determine its strategic approach to creating and capturing value. Fundamental questions to ask in the assessment might include: "Does our mission need to be redefined? Are our strategic goals aligned with our mission? Who are our customers? How do we add value?". Next,... 1. Identify process. Current Process is identified for evaluation and restructuring 2. Review and Analyze. The process is carefully reviewed and analyzed for alignment with the organization's strategy and for efficiency. 3. Design New Process .The process is then updated, redesigned, or entirely updated. 4. Testing and Implementation of the updated or new process.

Cost Pool v.s. Cost Drivers v.s. Cost Objects

Cost Pools >> Cost drivers >> Cost Objects Cost pools are sets of costs that are related together, both functionally and behaviorally. Cost objects are the target of the cost assignment system. Typically, cost objects are tied to the organization's income statement and often also represent the revenue objects (i.e., what creates revenue) for the organization. Cost objects include production output, headcount of employees, square footage of building space, number of customers, frequency of internal training events, along with many others in the organization Cost drivers that establish a relationship between cost pools and cost objects. >If the cost is VARIABLE with respect to the cost object, the cost driver represents a CONSUMPTION relationship, which is to say the cost driver is how the cost object consumes the resources for which the cost pool is being spent. > If the cost is FIXED with respect to the cost object, the cost driver represents an ALLOCATION method that is used to assign a burden of costs to a cost object. If there is a DIRECT consumption relationship, the cost driver is TRACKING direct costs to the cost object. If there is NOT a direct consumption relationship, the cost driver rate is ALLOCATING indirect costs to the cost object. Cost Driver Rate = Cost Pool Total / Cost Driver Volume Cost Driver Rate x Cost Object Activity = Assigned Cost

ERP

Enterprise resource planning is an extended version of MRP II, but a lot more comprehensive as it includes all core business functions and processes. ERP also includes sales, CRM, HR, service and support, financial and accounting management and more. It offers: - Real-time visibility, and collaboration - single and consolidated database - integration across functions, departments Enterprise resource planning (ERP) systems are evolving to manage core business processes needed to effectively run a supply management solution for the organization. Core business processes include finance, HR, manufacturing, supply chain, services, procurement, and others. The goal of an ERP system is to integrate these core processes into a single system solution in order to provide the organization with the intelligence, visibility, analytics, and efficiency needed to run the business well. ERP systems require significant investments in design, implementation, and maintenance in order to successfully support the organization.

Supply Chain Management

It is the planning and coordinating the movement of products along the supply chain, from the raw materials to the final consumers[the movement and storage of raw materials, WIP and FG from the point of origin to the point of consumption] Different Production Methodologies: 1. Lean Resource Management 2. Materials Requirement Planning 3. Manufacturing Resource Planning 4. Enterprise Resource Planning SCM is an expansive and complex management approach to understanding and establishing partnerships involving suppliers, distributors, other producers, wholesale/retail merchants, and even the consumer across a network of relationships.

Capacity Utilization

It is when capacity is defined by the expected demand for output or budgeted demand. > Theoretical Capacity > Practical Capacity > Normal Capacity Utilization: is the LEVEL of capacity utilization that satisfies "average" customer demand over a period that includes seasonal, cyclical, and trend factors. > Master Budget Capacity Utilization: normal capacity utilization for the current budget period, that is usually one year ! It is important to use the normal capacity utilization for long-term planning and the master budget capacity utilization for shorter-term plan-ning. If not done this way, the end costs can be inaccurate.

JIT

Just-in-time (JIT) systems have similar management objectives as MRP systems. Like MRP, JIT bases the management solution on the finished goods inventory needed to support sales. However, JIT does not preplan the inventory needs to design a purchase and release schedule. Instead, JIT establishes a carefully coordinated system based on signals (called a KANBAN) from downstream processes to initiate the release of inventory from upstream processes. Kanban system that is a visual record or card to signal the need for a specified quantity of materials or parts to move from one workcell to another, in sequence. The initial objective of JIT systems is to reduce all inventory in the organization to extreme low or zero levels. Because inventory serves as a buffer against breakdowns and disruptions in the production system, JIT subsequently demands well-controlled processes with high-quality parts and a very low tolerance for errors. This is down by partnering high level trusted suppliers. NOTE: The true objective, similar to MRP systems, is to improve quality, increase speed, and grow output.

Relationship between Value Chain and Supply Chain

Linking the output of one organization's value chain to the input of another organization's value chain creates a single link in a supply chain. Linking separate value chains can create a larger system involving multiple organizations, called a supply chain. Value Chain = in an organization Supply Chain = between organization through linking value chains

MRP I v.s. MRP II

MRP I is a material management system - plans the needs for materials. It calculates when purchasing orders must be made to supplier and the work orders released. It will provide the amount of materials needed. MRP II is a manufacturing system - plans the needs for resources.

Cost Accounting

Objectives: Assigning costs to the organization's products[goods and services] in order to plan, control, and evaluate profitability. This is done by allocating and tracking costs to cost objects. Four-stage approach: Stage 1: Direct Cost within each business unit Stage 2: Direct allocation of Executive-level administrative costs[common facility costs](Direct Method) to each business unit Stage 3: Assigning costs in Support departments (Direct Method, Step-down, Reciprocal) to each business unit Stage 4: Assigning costs individually to the products sold into the marketplace(Job-Order/Process Costing/ABC)

Distinguishing the Activities in Value Chain Analysis

Primary Activities: focused on low-cost advantages. 1. Inbound Logistics: Distribution facilities, Transport, Storage 2. Operations: Design and Development, Production Processes, and Quality Control 3. Outbound Logistics: Order Processing, Delivery and Collection. 4. Marketing and Sales: Pricing, Promotion, Placement 5. Service: Installation, Training, Repair, Support Support Activities: source of the organization's differentiation strategy 1. Procurement: Inventory and Supplier Relationship 2. Technology: ERP systems, inventory/production system 3. HR Management: Recruiting, development, and compensation 4. Firm Infrastructure: Management, Finance, Legal and Planning. !: Activities that are identified as central to the organization's strategy (whether it be a low cost, differentiation, or niche strategy) become the focus of the organization's investment and improvement efforts. !: Activities that are secondary to the organization's strategy are candidates for outsourcing to a third-party vendor.

Methods of Reporting of its by-product.

Purpose why Joint Cost is NOT allocated to by-product: It is not the purpose of the joint process to produce by-product . 1st Reporting Choice: To establish a separate product line in the organization's profit report. 2nd Reporting Choice: Offset the joint process cost with the by-product revenue before computing the joint cost.

Business Process Improvement Techniques

Purpose: To address the constantly challenging and risk customer expectations Techniques: 1. Value Chain Analysis 2. Process Analysis 3. Process Reengineering 4. Benchmarking 5. Activity-based Management 6. Continuous Improvement 7. Best Practice Analysis 8. Cost-of-quality Analysis

Finding the Optimal Quality

Quality could be: Low, Average or Premium The most optimal quality is the level of quality that yields the least amount of cost. Cost of Quality = Sum of P,A,I,E Costs !: if there if probability[e.g. 1 out of 10 will result a bad product], compute the expected value[cost of internal failure x 1/10].

Quality and Accounting

Remember the 3 performance measures: Cost, Quality and Timeliness. The objective of improving processes is to decrease costs while increasing quality and timeliness. Cost: Applying the lean concept to accounting includes eliminating reports that have little management use, eliminating the time a report waits for another accounting operation before it's ready for managers, and eliminating the effort and process required for managers to request or receive accounting reports (typically by facilitating managers with direct access to accounting data). Eliminating waste in accounting can significantly reduce the cost and increase the value of accounting processes Timeliness: Performance measure on timeliness that is often applied to accounting is the speed of the accounting cycle at the end of a reporting period. The issue is how fast the accounting team is able to close out the books at the end of each period and provide a report on operations Quality = Relevance. One performance measure of quality in accounting is focused on reducing errors in reports. Applying the kaizen management process to accounting involves setting an ideal standard of zero errors. Continual improvements in accounting processes must then become a constant and well-structured process. One specific tool of kaizen and quality management involves identifying the root cause of errors using a series of five why questions

ABC assignment model

Resources/Costs >> "Resource-based Cost Rates" >> Activity Cost Pools >> "Activity-Based Cost Rate" >> Cost Objects[Customers/Products]

Example steps in TOC:

STEP 1: How to determine a bottleneck operation? Machine Hours needed to satisfy Sales per period of time ÷ Machine hours available per period of time If the machine hours needed to satisfy the market demand exceed to available capacity use, that machine is a bottleneck. This is an example of external constraint. STEP 2: Under the machine with a bottleneck constraint, determine the units passing through this bottleneck. Identify which product has the highest throughput margin per unit of constraint. Utilize the constraint with the highest throughput until the market demand is satisfied. Use the remaining capacity to produce the next highest throughput per constraint. STEP 3: all other operations need to be subordinated to bottleneck operation using the drum-buffer-rope system. - Downstream operations[those Machines/activities after the BN] should know how to pace themselves to move forward the BN output as quickly as possible using the established scheduled and signaling system - Upstream Operations [Machine/activities/materials before the BN] should provide buffer inventory in to allow the BN to wait for the material or part - Upstream Operations must not overwhelm the BN operating with unnecessary inventory to prevent cost, quality, and timeliness problems. The rope system will signal the needed inventory to produce enough for buffer and next production. STEP 4: After utilizing the BN with the drum-buffer-ROU system, and when the organization is ready, they can start lifting the BN operation. STEP 5: When the constraint is bromine, another constrain is identified.

Single-Rate Cost Allocation Method vs. Dual-rate Cost Allocation Method

Single-rate cost allocation method creates a single allocation base for a pro-duction department's combined fixed and variable costs, resulting in a single rate per unit for cost allocation to products. [Single driver for both the variable and fixed costs]. Dual-rate cost allocation method, also called the contribution margin cost allo-cation method, creates separate fixed and variable cost pools for allocation of pro-duction department costs to products. This method should lead to more precise allocation of costs and allow for better mana-gerial decision making.

Normal Spoilage v.s. Abnormal Spoliage

Spoilage in the production process is unavoidable for many manufacturing organizations, and managers work hard to minimize the costs of spoilage. Normal spoilage is an accepted cost of production while abnormal spoilage represents an unacceptable loss in the production process. Treatment: > costs of normal spoilage actually are transferred forward to the finished goods inventory account (or to the next department's work-in-process inventory account). > costs of abnormal spoilage are transferred into a loss account that is immediately recognized on the income statement. Any spoilage over the amount considered normal is allocated to a loss from abnormal spoilage account, DR: Abnormal Spoilage CR: WIP Job #xx

ABC Two-stage Approach to allocate costs:

Stage 1: Resource cost assignment of overhead costs to activity cost pool USING relevant resource cost drivers*. Stage 2: Assignment of activity cost pools to cost objects using relevant activity cost drivers**. This measures an a cost object's use of an activity. Total OH >[Resource Cost Driver]> Activity Cost Pool[e.g. Assembly, Painting, Finishing] >[Activity Cost Drivers]> Cost objects *Resource cost drivers = measures the amount of resources consumed by an activity. **Activity Cost Driver =measurement of the amount of activity used by a cost object. It assigns costs in cos t pools to cost object

Steps for Designing ABC System

Step 1: Identify Activities and Resource Costs [Activities: Unit-level, Batch-level, Product-sustaining, Facility-sustaining(depreciation, property taxes, insurance), AND Customer-level (customer service, phone banks, custom order)] Step 2: Assign Resource Costs to Activity [example: Square feet:Cleaning Activity] Step 3: Assign Activity Costs to Cost Objects

Determining an allocation base for OH costs

Step: 1. Identify the OH cost pool and establish a budgeted cost for the upcoming period 2. Identify the basis on which to assign the costs and establish an expected activity level for the upcoming period, 3. Divide the established budgeted costs by expected activity to form the cost assignment rate. It is difficult to establish a clear relationship between fixed cost pools and cost objects. Traditionally, these fixed costs are allocated using the production output, direct labors hours, machine hours, etc. Activity-based Costing method can be used to break down some fixed OH costs to identify consumption relationship.

Value chain v.s. Supply Chain

Supply chain is the extended network of suppliers, transporters, storage facil-ities, and distributors that participate in the design, production, sale, delivery, and use of a company's product or service. Value chain is a system of interdependent activities, each of which is intended to add value to the final product or service from the customer's perspec-tive.

Cost of Quality

TQM is an investment of management effort, and it is often evaluated in terms of costs versus benefits. 4 types: Conformance Cost 1. Prevention - to ensure that tasks are performed correctly the first time and that the product or service meets customer requirements Examples: costs of process or product design, employee training, education of suppliers, preventive maintenance, and quality improvement meetings and projects, market research. 2. Appraisal - represent what the organization spends on inspection, testing, and sampling of raw materials, work in process, and finished goods and services Examples: quality inspectors, costs to adjust measuring and test equipment, and costs of associated supplies and materials. Nonconformance Cost 3. Internal Failure - are all the scrap and rework costs that are incurred to dispose of or fix defective products before they are shipped to the customer Examples: Costs of downtime or reduced yield due to production of defective parts or services, reinspection 4. External Failure Examples: costs of processing complaints, customer returns, warranty claims, product recalls, field service, and product liability A Cost of Quality (COQ) chart that represents trade-off and optimization of quality costs is presented below. The goal in measuring and managing costs of quality is to determine the optimal level of quality performance where the total costs of quality are minimized 6 sigma - quality level 1Ó = 31% yield 2Ó = 69% yield 3Ó = 99.3% yield 4Ó = 99.38% yield 5Ó = 99.9977% yield 6Ó = 99.99966% yield

ABC v.s. ABM

The ABC model is a horizontal relationship with activities in the organization. Activities function as a vehicle to accurately carry costs spent on resources in the organization and assign those costs to the organization's cost objects. [just like TOC and JIT] The ABM model is demonstrated to have a vertical relationship with activities. ABM goes beyond using activities as a cost assignment vehicle by establishing activities as the focus of management. ABM is focused on reporting cost drivers and performance measures to help manage each activity. ABM is forward-looking and change-oriented. ABC provides the data used by ABM for cost driver analysis, activity analysis, and performance measurement

TOC:

The core concept in the TOC management model is to OPTIMIZE the bottleneck's capacity, which then optimizes the organization's actual capacity. The TOC model is described as a drum-buffer-rope system. Understanding the drum-buffer-rope system requires first conceptualizing every non-bottleneck operation as being either an upstream. Constraint is a limiting fac-tor, bottleneck, or barrier that slows down a product's total cycle time. Cycle time is the time it takes to complete a process from beginning to end NOTE: Not only should non-bottleneck operations be controlled to produce only at the capacity level of the bottleneck, non-bottleneck operations should use their excess capacity to do everything possible to facilitate the bottleneck's ability to always operate at its full capacity. Simply,: > Non-bottleneck operations = Operating at bottleneck operation's capacity > Bottleneck Operation = should always operate at full capacity

Lean Manufacturing

The core idea of Lean is to maximize customer value while minimizing waste. Hence, lean simply means creating more value for customers using fewer resources. It has a HORIZONTAL perspective, that is optimizing the flow of products and services through the entire organization. Not only is Lean focused on eliminating excess inventory and production scrap and spoilage, it is also about reducing time spent waiting in the production process, eliminating unnecessary movement of inventory and people, and reducing processing that isn't desired by the customer NOTE here it is all about CUSTOMER value, not company value

Kaizen

The management process to increase quality in an organization is often described using a single Japanese word, kaizen, which means "improvement" or "good improvement." This continual process of improvement by small steps is in contrast to more radical business process improvement concepts such as business process reengineering (BPR), which is an approach that seeks for large, dramatic, and often painful transformations in the organization. The key kaizen concept in using ideal standards is to not focus on measuring the variance (i.e., the distance) from the standard as the performance measure. Rather, the kaizen performance measure is based on tracking progress toward the ideal standard. The management objective is to keep progressing forward in a focused and disciplined manner. The expectation in kaizen is continual small improvements targeting ideal standards that will eventually yield large results in terms of overall improvement in productivity Plan >> Do >> Check >> Act

Manufacturing Resource Planning [MRP II]

The purpose was to offer a broader planning and control tool to its predecessor, the MRP 1. MRP 2 is a computer-based system that creates production schedules including the arrival of materials, machine and labor. companies. It is an "integrated" method of OPERATIONAL and FINANCIAL planning for manufacturing companies It includes the - MRP [MPS, Inventory Control, bill of material] - Shop Floor Control - Capacity planning and demand management

Value Chain

The value chain is the sequence of customer value-added activities. The sequence is as follows: Research and Development Product Design Procurement Production Marketing Distribution Customer Service. The Statement on Management Accounting recommends that internal cost analysis, internal differentiation analysis, and vertical linkage analysis be used to conduct value chain analysis

Capacity Costs

These are the fixed costs required to increase the organization's capacity to produce products/services. as capacity limits are approached, operations lose efficiency and increase in cost Impact: - Increase in CC = Increase Operational Leverage = Reduce the relative proportion of variable costs in the organization. !!!! MAIN Issue: The main issue with fixed capacity costs is determining how to HANLDE costs of IDLE capacity (sometimes called unused or excess capacity) as part of the management process of planning, controlling, and evaluating costs in the organization. Effect: - When unused capacity costs are not clearly identified and managed, product costs are unintentionally inflated, leading to pricing decisions that can damage the organization's market share - without an accounting system that transparently reports capacity costs, it becomes difficult to effectively plan, control, and evaluate excess capacity in the organization.

Throughput Margin and Contribution Margin

This choice is based on the timeline view. Contribution margin computations tend to take a three-to-twelve-month perspective in defining variable costs while throughput margin computations are based on an operating perspective that is closer to one-to-four weeks.

Problems of traditional costing methods

Traditional costing methods can lead to dangerous management decisions based on two potential errors in the cost accounting system. 1. Cross-subsidization error. This happens when costs in one part of the organization are being effectively subsidized by another part of the organization. Take for example, if costs being consumed by one type of customer are being allocated in error to another type of customer, the organization is led to believe that the first customer type is more profitable and the second customer type is less profitable than in fact they are. Problem: A. Managers are prone to overpromote certain products or customers who actually earnings false profits. B. Managers will underemphasize or drop other products or customers, which in fact are actually profitable. 2. The second type of error due to poor cost accounting is the allocation of common fixed costs that are not actually consumed by any customer or product lines within the organization. Example: Taxes, insurances, executive salaries, depreciation on administrative buildings. these costs are unrelated to any activities taking place at the level of customers or product lines. Problem: A. Allocating will result overall cost burden pulling the performance of business units to loss B. The decision on dropping these units with false "loss" will actually result to a death spiral effect - the elimination of product/customers without reducing fixed costs. !: Poor allocations of FIXED costs are the source of cross-subsidization errors and death spiral effects in most companies

Four Management Objectives in the assignment of support department cost to production department [TERA]

Transparency, Equity, Relevancy, Accountability 1. Transparency. Cost assignment process needs to be transparent to all department involved in to preventing confusion and frustration by managers. 2. Equity. Cost assignment process should emphasize equity in results of the cost assignment. It does not means that the share should equally divided but the share should represent the consumption of a variable cost or the use the fixed cost. 3. Relevant. Allocation methods to assign support department costs should be relevant to the types of decisions being made based on the those costs. For example, the decision of dropping a product line should exclude the allocation of fixed cost that are unaffected. 4. Accountability. Cost assignment systems are most effective when they establish accountability within the organization. If the costs are tracked to production departments based on consumption of variable cost resources, then production departments are effectively held accountable for their impact on support department. When fixed costs of support department are allocated to production departments, it provides an opportunity for support departments to be held accountable to production departments for spending decisions on the costs being allocated.

Value Chain Analysis, Benchmarking and BPR

VCA First: The company must clearly determine its strategic approach to creating and capturing value. [does it provide low-cost products, or their products are differientiated from other; is this a niche market approach] Next, the organization must IDENTIFY its primary and support activities. Each of these primary and support activities is then carefully EVALUATED to determine its relationship to the company's strategy. Investments are made to IMPROVE and strengthen activities deemed crucial to the strategy. Secondary activities are evaluated to ascertain how to streamline them for efficiency and identify which secondary activities to OUTSOURCE. Benchmarking. The organization can use benchmarking studies to target other successful organizations and learn what the company can do to improve SPECIFIC activities in order to create more value for customers or capture more value through efficiencies. BPR If the company determines that DRAMATIC/RADICAL change is required across the whole organization in order to survive and be successful in the future, BPR could be considered as the means to AGGRESIVELY review and restructure every activity and employee role in the organization. However, the organization should not enter into a BPR approach without carefully considering the time and cost required in this process.

Value Chain Analysis

Value chain analysis is an approach used by an organization to evaluate its internal activities and identify how each is involved in creating and capturing value in the marketplace.[focus on whether it has (1) align the company's strategy or (2) contribute to the profit margin] Value chain analysis (VCA) is a process where a firm identifies its primary and support activities that add value to its final product and then analyze these activities to reduce costs or increase differentiation. VCA adopts a "process perspective" Primary Activities: Inbound Logistics >> Operations >> Outbound Logistics >> Marketing & Sales >> Service Support Activities: - Firm Infrastructure - Procurement - Human Resource Management - Technology These activities are equally important to achieve the profits company needed and wanted. Support Activities as 'information systems', 'R&D' or 'general management' are usually the most important source of "differentiation advantage". On the other hand, primary activities are usually the source of cost advantage, where costs can be easily identified for each activity and properly managed.

How to prepare variable costing and absorption costing income statement?

Variable Costing = highlights cost behavior Absorption Costing = highlights distinction between manufacturing and non-manufacturing costs

Fixed Costs and Inventory Productions

While it is appropriate to include fixed production costs in the value of inventory on the balance sheet, these fixed production costs present a particular problem on the income statement Shifts in production volume or sales volume result in changing inventory levels. As inventory levels adjust, prior period fixed costs are released from the balance sheet and current period fixed costs are retained (absorbed) onto the balance sheet. This release and retention of fixed production costs creates income effects that can lead to confusion in the organization when income is used as a performance measure. !: the "fixed cost absorption" issue happens in both service organizations and manufacturing organizations. The fixed cost absorption issue on the income statement can be represented as a set of computations involving beginning and ending inventory levels as well as prior period and current period fixed production cost rates. The combined effect of released fixed costs and absorbed fixed costs results in a net increase or a net decrease in operating profits and net income. Be sure to note that whether income goes up or down is a function of the size of beginning versus ending inventory and the size of the prior period fixed product cost rate versus the current period rate. Released Costs = BB x Prior Period Fixed Production Cost Rate : Decrease to Income Absorbed Costs = EE x Current Period Fixed Production Cost Rate : Increase to Income So, for example, when sales price and volume, variable cost per unit and the total fixed costs are constant, the operating income should remain unchanged provided there NO change in the production volume and the inventory.

Backflush Costing

a costing system tailored to just-in-time production systems In addition, any industry that has short manufacturing lead times and/or very stable inventory levels can use backflush costing. Backflush costing skips the journal entry for WIP inventory, because JIT systems reduce the time that materials remain in this stage. Normally, the traditional method of record, the sequential tracking, goes through a four-stage cycle. S1: Purchase of Materials S2: WIP S3: FG S4: Sale

Structural Cost Drivers

are long-term cost drivers based on the overall strategy of the company. The information from the use of this type of cost driver aids manage-ment to make plans and decisions that will have long-term effects on the company's costs 4 types of structural cost drivers: 1. Scale: - The scale of an investment project or the speed at which a company grows affects all of the costs to be incurred by the company. [the number of stores to open, the number of employees to hire] 2. Experience Level: - The experience level of the company for a particular strategic goal will affect the overall cost of achieving that goal. 3. Technology: Changing the level of technology for a process can make that process more effi-cient and therefore less costly 4. Complexity: The more complex a firm gets by virtue of the product lines and the more levels of hierarchy, the more it costs to sustain that complexity

Executional Cost Drivers

are the short-term decisions that can be made to reduce operational costs. 3 Types 1. Workforce Involvement The greater the commitment of the workforce, the lower the labor costs are in pro-portion to the amount of work that gets done. [improved employee morale] 2. Product Process Design: Analyzing and redesigning production processes and incorporating software appli-cations to streamline workflow have been key factors in reducing production costs. 3. Supplier Relationship: Close relationships with suppliers can reduce overall costs, especially inventory costs. With electronic data interchange (EDI) and similar applications, a firm can allow its supplier to view the company's inventory levels directly and automatically ship items as needed.

Outsourcing

describes a company's decision to purchase a product or service from an outside supplier, rather than producing it in house. This allows an organization to concentrate resources on its core business competencies while capitalizing on the expertise of other firms that are more efficient, effective, or knowledgeable at specialized tasks that are peripheral to those core busi-ness competencies.

Conformance Quality

measures... - the degree to which the product or service design specifications are met - how close the manfucatured product is to the design specifications Clue phrase: "design specification"