Accounting Final
NVAA costs equation
(AQ - SQ) * SP For flexible resources (variable costs), NVA costs are equal to standard price per activity driver unit multiplied by the difference between the actual quantity used and the VA standard quantity of the activity drive **flexible costs
NVAA costs equation for committed resources
(AQ acquired - value added SQ) * SP For committed resources (i.e. fixed costs), NVA costs are equal to the standard price per activity driver unit multiplied by the difference between the activity driver capacity acquired (i.e. practical capacity) and the VA standard quantity of the activity driver. **AQ acquired is the "practical capacity"
Theoretical cycle time (hours per unit) =
1 hour (or 60 mins) / velocity
Two dimensions to ABM
1) Cost 2) Process
How can a company use activity analysis to reduce costs?
1. Activity elimination (stop activity or work to reduce significantly) 2. Activity selection (choose the strategy with lower cost outcomes) 3. Activity reduction (decrease time and resources used) 4. Activity sharing (economies of scale)
Traditional measures focus on (Non ABM)
1. Controllable costs 2. Actual vs. standard 3. Financial measures
Four types of costs are considered as life-cycle costs:
1. Design and development costs 2. Production costs 3. Logistics and distribution costs 4. Post purchase costs *These all represent real cost for company*
Process value analysis includes
1. Driver analysis 2. Performance measurement 3. Activity analysis
Major differences between financial based and AB responsibility systems
1. Financial based responsibility systems assign responsibility accounting systems units such as departments while AB systems assign responsibility to processes. 2. Financial based systems measure performance using financial measures while ABM systems use both financial and operational measures 3. Performance measures are based on organizational units in financial systems but they are process oriented in AB systems 4. Rewards are often individual rewards in a financial based system, but they are group rewards with an activity based systems.
The balance scorecard measures performance using four perspectives:
1. Financial perspective (P/L) 2. Customer perspective 3. Process perspective (internally) 4. Learning and growth perspective These are essential for creating a competitive advantage and allowing managers to communicate the organizations strategy. **table on notes verbatim NTK
The process perspective is made up of three processes:
1. Innovation process 2. Operations process 3. Postsales process
Types of benchmarking
1. Internal is benchmarking against internal operations outcomes 2. External is benchmarking with outside entities -Competitive is benchmarking with DIRECT competitors -Functional is benchmarking with industry participants NOT in the same market -Generic is benchmarking with best practices used by businesses, industry, and non-competitors
The measures used in the balanced scorecard:
1. Lead and lag measures 2. Subjective and objective 3. Financial and non-financial measures 4. Internal and external measures
Three topics in strategic cost management
1. Life cycle costing 2. Target costing 3. Just-in-time costing and backlash accounting (involves JE)
What happens to inventories in a JIT environment?
1. Lower levels of inventory (RM) 2. Lower levels of FG inventory 3. Purchases delivered on time (good superior relationship) 4. Company may not qualify for quantity discount 5. Cost savings come from reduced storage and inventory management costs 6. Use of long-term contracts w/suppliers
A JIT production system requires that the company
1. Purchase high quality materials 2. Maintain good relationship w/ suppliers 3. Often redesign the manufacturing process into cells
Methods used during target costing to reduce estimated costs (if initial est. suggests target cost nor probable):
1. Reverse engineering or tear down analysis 2. Value analysis 3. Process analysis
Three conditions to turn discretionary to VAA
1. The activity produces a state of change 2. The change of state was not achievable by preceding activities 3. The activity enables other activities to be performed
Three performance measure for activities (ABM)
1. Time measures (How long does it take to complete an activity?) 2. Quality measures (Did we get it right the firs time? If yes, then NO reworking necessary) 3. Efficiency measures (Concerned w/ relationship between outputs to inputs and evidence is based on a DOWNWARD TREND OF COSTS)
Often redesign the manufacturing process into cells
A manufacturing cell is a configuration where all machines needed to produce a specific product are clustered together. This layout avoids the need to move materials and parts to machines located in different parts of the plant. It should also allow more costs to be traced directly to products.
Activity-Based Management (ABM) is
A system wide, integrated approach, to goals of improving customer value and cost reduction
What is a value chain?
A value chain is a set of inked operations and processes that begins with obtaining resources and ends with providing products or services that customers value. Understanding the value chain is important because the profitability and success of the organization depends on relationships with others in the value chain
The balance scorecard ties strategy to ... ?
Action
What is activity analysis?
Activity analysis is an examination of activities and processes to identify and asses their value content. Often, activities are classified as value-added (VAA) or non-value added (NVAA)
How does activity-based management (ABM) differ from activity-based costing (ABC)?
Activity based costing (ABC) refers to determining the cost of products, projects, or other cost objects. Activity-based management (ABM) focuses on using information about activities to manage activities and reduce costs.
Actual velocity =
Actual production / actual time
What are value-added activities? (VAA)
Anything necessary to increase customer value. -Mandated activities include anything the company must do/perform/complete (i.e. form 10-k or 10-Q with SEC for public company -Discretionary activities mean it is done but only classified VAA IF it meets three conditions
Target costing is used when?
At the design stage of a product to determine if the product can be sold at a price that will earn the company a target profit. This approach differs from the traditional method of setting a sales price. Also used at the development stage because it is during this stage when most of the products life cycle costs become committed (before manufacturing).
Benefits of JIT include
Better quality, increased productivity, reduced lead times
Capacity variances
Can be calculated to show the cost of excess volume available in each activity and the amount of unused capacity. The NVA cost calculated for each activity is the same as the activity volume variance calculated.
What is a strategy?
Choosing the market and customer segments the business unit intends to serve, identifying the critical internal and business processes that the unit must excel at to deliver the value propositions to customers in the targeted market segments, and selecting the individual and organizational capabilities required for the internal, customer, and financial objectives.
The production life cycle emphasizes _________?
Cost management. This emphasis is different than the marketing life cycle emphasis. The marketing view of life cycles focuses on revenues rather than costs.
What is the postsales process?
Critical and responsive services to customers AFTER purchase. Consists of the activities that provide services to the customer after the sale and delivery of the product
Customer perspective
Defines the customer and market segments where the business will compete, and it describes the way value is created for the customers.
Process perspective
Describes the internal processes needed to provide value for customers and owners. Processes are the means by which strategies are executed.
Life cycle cost management focuses on ______
Designing, producing, marketing, servicing, and disposing of products so that the life-cycle profits are maximized (*THE GOAL*)
What does driver analysis refer to?
Determining why specific activities are performed "the why"
Life cycle costing is used when?
During the design stage of new product development. The intent is to consider more than just manufacturing costs during the design process. Many costs incurred over the life cycle including production, logistics, and post purchase costs are affected by the design of the product so all of these costs need to be taken into account during the design stage.
The financial perspective ...
Establishes the long-term and short-term financial objectives. Usually focuses on these strategic objectives: 1. Revenue growth (increase) 2. Cost reduction (decrease) 3. Asset utilization (increase) 4. Risk mgmt. (decrease)
When AU < AQ it is
Favorable variance
Value analysis
Focuses on the value provided by the product to customers to determine what features and functions the customers value. If another product design can provide the same functions at a lower cost or if some functions are not valued by the customer, then the product should be redesigned to try to reduce the estimated cost of the product.
Life cycle cost concepts
For cost management purposes, a product's life cycle is defined from the production viewpoint (vs. marketing viewpoints). The three major types of activities in the production viewpoint are: 1. Research and development activities 2. Production activities 3. Logistical activities
Purchase high quality materials
If materials are of poor quality, manufacturing processes will be interrupted when the poor quality materials are discovered, and because there are no back-up inventories, the result is that the production system must shut down.
Process analysis
Involves looking at the manufacturing processes to determine if the process can be performed more efficiently. If it can, then the estimated cost can be reduced.
Benchmarking
Is used in ABM to identify goals for improving activities and processes. It uses best practices found inside and outside the organization as the standard for evaluating and improving activity performance.
Implementing ABM concepts in...
Mot organization requires more information than is needed for traditional financial based system. If the implementation is to be successful, operating personnel must understand the objectives of the system and the value that can be obtained from the system.
The goal is to eliminate what?
NVAA
What are non-value added activities? ("unnecessary")
NVAA are those that are not necessary and can be identified by their failure to satisfy any one of the three defining conditions. Examples include scheduling, moving, waiting, inspecting, and storing.
What causes NVA costs and where are they incurred?
NVAA result in NVA costs, but value added activities can also have NVA costs if they are performed inefficiently or if they are caused by a NVA.
When AU > AQ it is
Non favorable variance
Operations process *Decrease inventory (consider JIT)
Performance measure *# of days sales in inventory
Operations process *Improve quality
Performance measure *% of defective units
Core objectives *Increase customer retention
Performance measure *% of returning customers
Customer value objectives *Improve product quality
Performance measure *% of returns
Operation objective *Develop new customers
Performance measure *% of revenues from new customers (increase)
Operation objective *Increase total revenues
Performance measure *Change in total revenues (increase)
Operation objective *Reduce product cost
Performance measure *Cost per unit (decrease)
Postsales process *Increase service quality
Performance measure *Customer satisfaction
Operations process *Decrease process time
Performance measure *Cycle time, velocity, MCE
Operation objective *Reduce distribution channel cost
Performance measure *Distribution channel cost (decrease)
Operation objective *Strategies to reduce risk of failure
Performance measure *Diversification of: customers types, product lines, and suppliers.
Customer value objectives *Increase product functionality
Performance measure *Feature satisfaction rating
Core objectives *Increase market share
Performance measure *Market share
Innovation process *Increase the number of new products
Performance measure *Number of new products, how many?
Customer value objectives *Increase delivery reliability
Performance measure *On-time delivery %'s
Operations process *Increase process efficiency
Performance measure *Outputs/inputs
Operation objective *Increase the number of new products
Performance measure *Percentage of revenues from new products (increase)
Customer value objectives *Decrease price
Performance measure *Price -> customers want to pay less
Customer value objectives *Improve product image and reputation
Performance measure *Product recognition rating
Core objectives *Increase customer profitability
Performance measure *Profits per customer
Operation objective *Improve asset utilization
Performance measure *ROI, RVA (increase)
Core objectives *Increase customer satisfaction
Performance measure *Ratings from customer surveys
Postsales process * Decrease service time
Performance measure *Service cycle time
Innovation process *Decrease product development time
Performance measure *Time to market from start to finish
Customer value objectives *Decrease purchase cost
Performance measure *Warranty costs, repair costs, etc.
What are post purchase costs?
Post purchase costs are costs incurred after the product has been sold and delivered to a customer. Examples include warranty costs, costs of returning the product for repairs, cost of repairing products at the customer's location, costs of providing technical support, etc.
What is the operations process?
Produces and delivers existing products and services to customers. Consists of the activities that occur during the manufacture and delivery of existing products and services to customers
Often JIT simplifies...
Production processes, and it is used to justify simplifying cost accounting. One type of system that has been developed to simplify cost accounting in a JIT environment is called backflush costing or backflush accounting.
Activity-based costing model
Resources -> Activities -> Cost Objects
VA costs equation
SQ X SP VA costs for a specific activity are equal to the VA standard quantity for the activity driver multiplied by the standard price per activity driver unit **costs if perfect efficiency is attained
Why are these three activities classified as NVAA?
Setups? Need to reduce as close as possible to 0. Does NOT increase customer value. Inspections? "State of detection" -> If you get it right, inspections are not needed. Rework? "State of correction" -> If you get it right the first time, no need to rework.
Change in organizations requires what?
Support from higher levels of management, and if this support is not present, the change is likely to fail. ABM is a major change in most organizations, and higher levels of management need to support the change.
What is generally the source of the revenue component in the financial perspective?
The customer perspective
Customer value objectives is what matters to who?
The customers
What is innovation process?
The emerging and potential needs of customers. Studies needs and wants of customers and the creation of new products and services to satisfy those needs and wants
The target cost is...
The maximum amount the company wants the product to cost. If the estimated cost is more then the target cost, the product is not produced unless ways can be found to reduce the estimated cost.
Theoretical velocity per hour =
Theoretical output / cell time
Maintain good relationships with suppliers
These relationships are needed because there are usually only a limited number of suppliers for each part or component
Reverse engineering or tear down analysis
This method is used to determine how a competitor's product functions and how it is manufactured by taking the product apart component by component. This process will help show how the product was made and may provide information useful in designing competing products.
Objective of Just-in-time (JIT) is...
To eliminate waste by acquiring materials only when needed for manufacturing and by producing a product only when it is needed and only in the quantities demanded by customers.
Backflush accounting is based on using what?
Trigger points
The process view of the ABC framework is
Used for activity-based management. The view is: Driver analysis -> Activities -> Performance Measures
Process value analysis is...
Used to implement activity-based management concepts
Driver analysis should answer the question
What is the root cause of the activity?
Trigger points identify
When a JE should be made
Gainsharing
Where all employees share from gains in profitability, may be used in an AB system
Financial and non-financial measures
a) Financial measures are those that are expressed in monetary terms b) Non-financial measures are non-monetary units
Internal and external measures
a) Internal measures are those that relate to internal processes and capabilities b) External measures relate to customers and shareholders
Lead and lag measures
a) Lag measures are outcome measures of results of past efforts b) Lead measures are factors that drive future performance
Subjective and objective measures
a) Objective measures are those that can be readily quantified and verified b) Subjective measures are less quantifiable and more judgmental in nature