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Contents
Value versus Supply Chain Costs Associated with Goods for Sale Cost of Quality Target Costing Lean Accounting
Stockout costs
Purchasing costs
Costs of Quality
Shrinkage Costs
Cost of Quality
Quality meets/exceeds customer expectations: Performance, Aesthetics, Serviceability, Features, Reliability, Durability, Quality of conformance & Fitness for use Zero defects versus defective product Cost of quality Costs of conformance (control activities) : the costs incurred to produce a quality product or service Costs of nonconformance (failure activities): the costs incurred to correct defects in a product or service.
Cost of Quality
Control Activities
Failure Activities Hidden CQ -Multiplier Method -Market Research Method -Taguchi Quality Loss Function
Case 1
Internal reports on quality at the EMCAP Publishing Company generated the following information for the Trade Division for the first three months of the year: Total sales $60,000,000
Costs of quality: Prevention Appraisal Internal failure External failure a. b. c. d. $ 523,000 477,000 1,360,000 640,000
Case 2
1. 2. 3.
Which company is most likely to succeed in the competitive marketplace? Which company has serious problems with its products quality? What do you think will happen to the total costs of quality for each company over the next five years? Why
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Target Costing
Pricing method designed to enhance a companys ability to compete, especially in markets for new or emerging products, Procedures: 1. identifies the price at which a product will be competitive in the marketplace 2. defines the desired profit to be made on the product 3. computes the target cost for the product by subtracting the desired profit from the competitive market price.
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Why?
1. gives managers the ability to control or dictate the costs of a new product at the planning stage of the products life cycle. 2. enables managers to analyze a products potential before they commit resources to its production.
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1.30 per dollar of direct material and purchased 3.50 per machine hour 24 (R) 30 (T) 26,000 18,000 25 65 15 45
2.6 12 4.8 15
Assembly labor
Hours Hourly labor rate ($) 3.4 14 8.2 16
Machine hours
12.8 16
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Questions
1. Find the target cost per unit 2. Find the projected unit cost 3. Make a decision
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Lean Manufacturing
Competitive environment:
Needed to exercise better control, reduce costs, and become more efficient. Successful firm: preservation of market share, stable growth, and continuation of efficient production
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1. 2. 3. 4. 5. 6. 7. 8.
Simple is better. The quality of the product or service is critical to customer satisfaction. The work environment must emphasize continuous improvement. Maintaining large inventories wastes resources and may hide poor work. Activities or functions that do not add value to a product or service should be eliminated or reduced. Goods should be produced only when needed. Workers must be multiskilled and must participate in eliminating waste. Building and maintaining long-term relationships with suppliers is important.
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JIT
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Why?
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Backflush Costing
Track cost flows through the production process as the product is made.
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La-Z-Boy
1. Purchased $20,000 of direct materials on account. 2. Used all of the direct materials in production during the month. 3. Incurred direct labor costs of $8,000. 4. Applied $24,000 of overhead to production. 5. Completed units costing $51,600 during the month. 6. Sold units costing $51,500 during the month.
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Backflush Costing
Track cost flows through the production process as the product is made.
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Case 5
For work done during August, Plush Furniture Company, incurred direct materials costs of $123,450 and conversion costs of $265,200. The company employs a just-in-time operating environment and backflush costing. At the end of August, it was determined that the Work in Process Inventory account had been assigned $980 of costs, and the ending balance of the Finished Goods Inventory account was $1,290. There were no beginning inventory balances. How much was charged to the Cost of Goods Sold account during August? What was the ending balance of the Cost of Goods Sold account?
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Practical Insight
Toyota Production System (Shigeo Shingo and Taaichi Ohno)
World-class manufacturing Just-in-time (JIT) manufacturing and purchasing
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Case 6
Couch Potato, Inc., produces futon mattresses. The company recently changed from a traditional production environment to just-in-time work cells. Would you recommend the use of ABM/ABC or backflush costing for tracking product costs? Explain your choice.
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Value Streams
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LOGO
Case 7
A company manufactures pottery products. One of its value streams produces three prod-ucts: X, Y, and Z. Each pottery product goes through two cells sequentially: shaping and firing. Each cell has implemented lean manufacturing and has a team of people and equipment fully dedicated to the cell. The time the products spend in each cell is as follows: The cost of materials for each product is $5. Total conversion cost (labor and overhead) of the value stream is $22 per production hour.
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Case 7
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Is all activities, both value-added & non-value-added, required to bring product group or service from starting point to finished product in hands of customer.
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VALUE STREAM
Types of value streams
Order fulfillment New product
Value added
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Contains all operations in close proximity that are needed to produce a family of products.
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Traditional cost management systems may not be compatible with Lean Accounting. Lean Accounting makes product costs more simple & direct. More labor and overhead costs are assigned to products through direct tracing rather than allocation.
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PERFORMANCE MEASUREMENT: A
Comparison
Lean accounting replaces standard cost system measurements with a Box Scorecard that compares a) operational, b) capacity, & c) financial metrics with prior week performances. A mixture of financial & nonfinancial measures are used.
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Product life cycle is the time a product exists from conception to abandonment. Life cycle costs are all costs associated with a product for its life cycle.
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Is the set of activities required to design, develop, produce, market, and service a product.
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During the development stage. stage This is also the time costs should best be managed.
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TARGET COSTING
Uses 1 of 3 methods
Reverse engineering
Tearing down a competitors product to discover design features that create cost reductions
Value analysis
Attempting to assess the value placed on product functions by customers
Process improvement
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