Tail of two cities only

843 views

Published on

Published in: Business, Technology
0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total views
843
On SlideShare
0
From Embeds
0
Number of Embeds
2
Actions
Shares
0
Downloads
25
Comments
0
Likes
0
Embeds 0
No embeds

No notes for slide

Tail of two cities only

  1. 1. A-B-C<br />strategic tool, not an accounting system<br />Vaidya--UBS<br />
  2. 2. TODAY’S CUSTOMER WANTS<br />VFM<br />
  3. 3. The Importance Of Customer Value<br />Activities<br />Create outcomes <br />and<br />consume resources<br />VALUE-ADDED ACTIVITIES<br />enhance the value of products<br />and services in the eyes of <br />the customer while meeting<br />the goals of the organization<br />NON-VALUE-ADDED <br />ACTIVITIES<br />do not contribute to customer<br />perceived value<br />
  4. 4. Non-Value Added Activities <br />Most likely<br />sources of non-<br />value-added<br />activity<br /><ul><li>Producing to build up inventory
  5. 5. Waiting time for processing
  6. 6. Time and effort to move to processing
  7. 7. Producing defective products of services</li></li></ul><li>Identifying Value-Added Activities<br />The test for value added activities<br />“Would the organization<br /> be more likely to<br /> reach its goal by <br />performing that activity?”<br />“Would an external <br />customer encourage <br />the organization to do <br />more of the activity?”<br />
  8. 8. A-B-C<br />A revolution is transforming the manufacturing industry<br /><ul><li>The growth of international competition
  9. 9. The breakneck pace of technological innovation
  10. 10. Startling advances in computerized system</li></ul> Created a new playing field where some have emerged<br />as World-class producers, while others have fallen by the wayside<br />Vaidya--UBS<br />
  11. 11. Conventional Vs Activity Based Costing<br />Material PurchasingDepartment<br />A case in point:<br />Conventional Accounting based information:<br />Cost Categories Annual Cost (Rs. ‘000)<br />Employees’ Remuneration 94,200<br />Telephone 4,400<br />Travel & Entertaining 7,100<br />Computer Cost 6,200<br />Rent 8,300<br />Administrative Overheads 6,200<br />TOTAL 126,400<br /><ul><li>What does information tell us about purchasing function?
  12. 12. What decisions or actions can a manager take based on</li></ul> this information ?<br />Vaidya--UBS<br />
  13. 13. COST DRIVER ANALYSIS<br />Cost Department: Purchasing <br />ACTIVITIES COST DRIVERS <br />Process Requisitions Numbers of requisitions<br />Expedite Orders Number of urgent orders<br />Process Receipts Paper work required<br />Vaidya--UBS<br />
  14. 14. ABCM provides a much clearer picture of how time is spent and opportunities for improvement<br />Activity Based Costing Method<br />Purchasing Activities %of Annual Cost<br /> time (Rs.’000) <br />Process requisitions<br />Clarify details 13% 16,430<br />Prepare Specifications 2% 2,530<br />Obtain quotations 1% 1,265<br />Vender queries 3% 3,790<br />Negotiate &select vender 1% 1,265<br />Generate orders 5% 6,320<br />Generate change orders 11% 13,900<br /> 36% 45,500 <br />13% of time is spent on clarifying requisition and 11% time is spent on processing changed orders.How much time and money could be saved if they were right at first time?<br />Only 1% time is spent on negotiating and selecting vendors .Could quality delivery and cost of materials be improved by spending more time here.<br />Vender queries 6% 7,590<br />Chase late orders 4% 5,055<br />Amend for changed quantities 9% 11,375<br />Process urgent supplies/ <br />stockouts 10% 12,640 <br /> 29% 36,660<br />10% of time is spent on urgent orders.<br />Would better planning reduce time here and enable smother operations? <br />Vaidya--UBS<br />
  15. 15. Process Receipts<br />Checking goods received 1% 1,265<br />Follow -up of short deliveries 8% 10,110<br />Follow -up backorders 2% 2,530<br />Cancel orders no longer required 1% 1,265<br />Prepare reports and administration 23% 29,070 <br /> 35% 44,240<br /> 100% 126,400 <br />23% of time is spent on reports and administration Is this all necessary? Can this time be spent more productively?<br />Vaidya--UBS<br />
  16. 16. a case study in Cost management<br />ATALE OF TWO CITIES<br /> Aerotech corporation:<br />(Phoenix and Bakersfield Plants)<br />
  17. 17. AEROTECH CORPORATION ---a case in point<br />Aerotech corporation: a tale of two cities<br />PRODUCT: printed circuit boards used in aircraft radar and<br />LOCATION: Phoenix plant (more than 20 years)<br /> Bakersfield plant (recently added)<br />TWO DIFFERENT SCENARIOS : Phoenix plant utilizes a <br />traditional plant layout and production processes where as<br /> Bakersfield employs the latest in advanced manufacturing<br /> technology<br />Vaidya--UBS<br />
  18. 18. Forecast Sales<br />Order components<br />Store Inventory<br />Prepare Production Schedule<br />Make sales from finished goods inventory<br />Begin Production in Anticipation of Sales<br />Traditional “Push” Manufacturing<br />Computer Manufacturer<br />
  19. 19. Customer places an order<br />Create Production Order<br />Generate component requirements<br />Goods delivered just in time<br />Production begins as parts arrive<br />Components are ordered<br />JIT “Pull” Manufacturing<br />Computer Manufacturer<br />
  20. 20. PRODUCTION PROCES <br />1. SEQUENCING<br />2. AUTO-INSERTION<br />3. HAND-INSERTION<br />4.WAVE SOLDERING<br />5. WASH/DRY<br />6.HAND-INSERTION<br />7. BED NAILS<br />8.BURN-IN<br />9. PACKAGING<br />Vaidya--UBS<br />
  21. 21.
  22. 22. Aerotech Corporation’s Bakerfield Plant<br />Shipping <br />Receiving<br />Inspection<br />Raw Material <br />& Parts <br />Storage<br />Purchasing<br />And <br />Inventory<br />Control<br />Sales<br />And <br />Marketing<br />Finished Goods Storage<br />Packaging<br />Work<br />Center<br />Burn-in<br />Testing<br />Work<br />Center<br />Maintenance<br />And Custodial<br />Quality<br />Control<br />Engineering<br />Design<br />Computer<br />Center<br />Accounting<br />Production<br />Scheduling <br />Personnel<br />Plant Manager <br />and <br />Staff<br />
  23. 23. TRADITIONAL , VOLUME-BASED PRODUCT COSTING SYSTEM<br />Basic production and cost data:<br />Mode I Mode II Mode III<br />Boards Boards Boards <br />Production unit 10,000 20,000 4,000<br />Production runs 1 run of 10000 4 runs of 5000 each 10 runs of 400 each<br />Direct material 50 90 20 <br />(raw boards and components) <br />Direct labour* 3 hours per board 4 hours per board 2 hours per board <br />Setup time* 10 hours per run 10 hours per run 10 hours per run<br />Machine time 1 hour per board 1.25 hours per board 2 hours per board<br />* direct labour and setup labour cost 20 per hour, including fringe benefits <br />Vaidya--UBS<br />
  24. 24. PRODUCT COST FROM TRADITIONAL, VOLUME-BASED PRODUCT-COSTING<br /> SYSTEM<br />Mode I Mode II Mode III<br />Boards Boards Boards <br />Direct material 50 90 20 <br />(raw boards and components) <br />Direct labour* 60 (3hr.@20 ) 80 (4hr.@20 ) 40 (2hr.@20)<br />Manufacturing overhead* 99 (3 hrs. @33 ) 132 (4 hrs. @33) 66 (2 hrs. @33)<br />TOTAL 209 302126<br />Calculation of predetermined- overhead rate: <br />Budgeted manufacturing overhead----------------------------------------------------- 3894000<br />Direct Labou, budgeted hours :<br /> Mode I : 10000 units*3 hours 30000<br /> ModeI I : 20000 units*4 hours 80000<br /> Mode III : 4000 units*2 hours 8000<br /> TOTAL HOURS 118000<br />Predetermined overhead rate:<br />Budgeted overhead/Budgeted direct labour hours = 3894000/118000 =<br />33 Per Hour<br />Vaidya--UBS<br />
  25. 25. Target and Actual Selling Prices :<br />Mode I Mode II Mode III<br />Boards Boards Boards<br />Production Cost under Traditional 209 302 126<br />volume-based System<br />Target selling Price 261.25 377.50 157.50<br /> (cost* 125%)<br />Actual selling price 261.25 328.00 250.00<br />2<br />1<br />3<br />Vaidya--UBS<br />
  26. 26. Stage one of A-B-C : Identification of Activity Cost Pool<br />OVERHEAD COSTS<br />Total budgeted cost = 3894000<br />ACTIVITY<br />COST<br />POOL<br />BATCH<br />LEVEL<br />PRODUCTION-SUSTAINING<br />LEVEL<br />FACILITY<br />LEVEL<br />UNIT<br />LEVEL<br />Machinery<br />Cost Pool <br />1212600<br />Setup<br />Cost Pool<br />3000<br />Engineering <br />Cost Pool<br />700000<br />Facility<br />Cost Pool<br />507400<br />Receiving and Inspection Cost Pool<br />200000<br />Material-Handling Cost Pool<br />600000<br />Quality-Assurance Cost Pool<br />421000<br />Packing and Shipping Cost Pool <br />250000<br />Vaidya--UBS<br />
  27. 27. 1.A-B-C : Machinery Cost Pool<br />Maintenance<br />Lubrication<br />Various Overhead Costs<br />related to machinery<br />Depreciation<br />Electricity<br />Computer Support<br />Calibration<br />STAGE<br />ONE<br />Activity cost<br />pool<br />Machinery Cost Pool<br />Total budgeted cost =1212600<br />Total budgeted machinery cost/<br />Total budgeted machine hours = 1212600/43000 machine hours<br />= 28.20 per machine hour<br />Calculation of<br />pool rate<br />STAGE <br />TWO<br />Mode I<br />28.20*1<br />=28.20<br />Mode II<br />28.20*1.25<br />=35.25<br />Mode III<br />28.20*2<br />= 56.40 <br />Cost assignment :<br />pool rate per machine hour*<br />machine hours per unit<br />Vaidya--UBS<br />
  28. 28. 2. A-B-C : Setup Cost Pool<br />Calculation of total<br />setup cost<br />Total budgeted setup cost<br />= (10 hrs. per setup) (20 per hour) (15 production runs)<br />STAGE<br />ONE<br />Activity cost<br />pool<br />Setup cost pool<br />Total budgeted cost = 3000<br />Total budgeted setup cost/<br />Total planned production runs = 3000/15 runs = 200 per run<br />Calculation of<br />pool rate<br />STAGE <br />TWO<br />Mode I <br />200 per run/10000<br />units per run<br />=.02 per run<br />Mode II<br />200 per run/5000 <br />units per run<br />=.04 per unit<br />Mode III<br />200 per run/400 units <br />per run<br />=.50 per unit<br />Cost assignment :<br />pool rate per setup/<br />units per production run<br />Vaidya--UBS<br />
  29. 29. 3. A-B-C : Machinery Cost Pool<br />Maintenance<br />Lubrication<br />Various Overhead Costs<br />related to machinery<br />Depreciation<br />Electricity<br />Computer Support<br />Calibration<br />STAGE<br />ONE<br />Activity cost<br />pool<br />Machinery Cost Pool<br />Total budgeted cost =1212600<br />Total budgeted machinery cost/<br />Total budgeted machine hours = 1212600/43000 machine hours<br />= 28.20 per machine hour<br />Calculation of<br />pool rate<br />STAGE <br />TWO<br />Mode I<br />28.20*1<br />=28.20<br />Mode II<br />28.20*1.25<br />=35.25<br />Mode III<br />28.20*2<br />= 56.40 <br />Cost assignment :<br />pool rate per machine hour*<br />machine hours per unit<br />Vaidya--UBS<br />
  30. 30. 4. A-B-C : Engineering Cost Pool<br />Engineer’s salary<br />Engineering software<br />Various Overhead Costs<br />related to engineering<br />Engineering supplies<br />Depreciation on<br />engineering equipment<br />STAGE<br />ONE<br />Engineering Cost Pool<br />Total budgeted cost =700000<br />Activity cost<br />pool<br />Total budgeted engineering cost = 700000<br />Allocation to product <br />lines based on <br />proportion of engineering<br />transactions <br />25% of<br />transactions<br />45% of<br />transactions<br />30% of<br />transactions<br />STAGE <br />TWO<br />Mode I<br />25%*700000/10000<br />units <br />=17.50 per unit<br />Mode II<br />45%*700000/20000<br />units<br />=15.75 per unit<br />Mode III<br />30%*700000/4000<br />units<br />=52.50 per unit<br />Cost assignment :<br />cost allocated to each product<br />line / no. of units of each product<br />Vaidya--UBS<br />
  31. 31. 5.A-B-C : Facility Cost Pool<br />Plant depreciation<br />Property taxes<br />Various Overhead Costs<br />related to facilities and<br />and general operations<br />Plant management<br />Insurance<br />Plant maintenance<br />Security<br />STAGE<br />ONE<br />Activity cost<br />pool<br />Facility Cost Pool<br />Total budgeted cost =507400<br />Total budgeted facility cost/<br />Total budgeted direct labour hours 507400 / 118000 <br />= 4.30 per direct labour hour<br />Calculation of<br />pool rate<br />STAGE <br />TWO<br />Mode I<br />4.30 per direct labour<br />hour * 3 hr. per unit<br />=12.90 per unit<br />Mode II<br />4.30per direct<br /> labour hour * 4 hr.<br />=17.20 per unit<br />Mode III<br />4.30 per direct labour<br />hour * 2 hr. per unit<br />=8.60 per unit<br />Cost assignment :<br />pool rate per direct labour<br /> hour * direct labour per unit<br />Vaidya--UBS<br />
  32. 32. PRODUCT COST FROM ACTIVITY-BASED-COSTING SYSTEM :<br />Mode I Mode II Mode III<br />Boards Boards Boards<br />DIRECT MATERIAL 50.00 90.00 20.00<br />DIRECT LABOUR 60.00 80.00 40.00<br />MACHINERY--(a) 28.20 35.25 56.40<br />SETUP --(b) .02 .04 .50<br />ENGINEERING --© 17.50 15.75 52.50<br />FACILITY --(d) 12.90 17.20 8.60<br />RECEIVING AND INSPECTION--(e) 1.20 2.40 35.00<br />MATERIAL HANDLING--(f) 4.20 9.00 94.50<br />QUALITY ASSURANCE--(g) 8.42 8.42 42.10<br />PACKAGING AND SHIPPING--(h) 1.003.7541.25<br />TOTAL 183.44261.81390.85<br />Vaidya--UBS<br />
  33. 33. COMPARISON OF PRODUCT COSTS FROM ALTERNATIVE PRODUCT COSTING SYSTEMS :<br />Mode I Mode II Mode III<br />Boards Boards Boards<br />REPORTED PRODUCT COSTS : <br />TRADITIONAL COSTING SYSTEM 209.00 302.00 126.00<br />ACTIVITY-BASED COSTING SYSTEM 183.44 261.81 390.85<br />SALES PRICE DATA:<br />ORIGINAL TARGET PRICE 261.25 377.50 157.50<br /> (based on traditional system)<br />NEW TARGET PRICE 229.30 327.26 488.56<br />(based on A-B-C)<br />ACTUAL SELLING PRICE 261.25 328.0 250.00<br />Vaidya--UBS<br />
  34. 34. COST DISTORTION UNDER TRADITIONAL PRODUCT-COSTING SYSTEM<br /> Mode Mode II Mode III<br /> Board Boards Boards<br /> PRODUCT COST UNDER TRADITIONAL SYSTEM 209.00 302.00 126.00<br /> PRODUCT COST UNDER A-B-C SYSTEM 183.44 261.81 390.85<br />AMOUNT OF COST DISTORTION PER UNIT 25.56 40.19 (264.85)<br />Traditiona <br />system <br />overcosts<br />Mode I<br />by <br />25.56<br />Traditiona <br />system <br />overcosts<br />Mode II<br />by <br />40.19<br />Traditiona <br />system <br />undercosts<br />Mode III<br />by<br />(264.85)<br />* PRODUCTION VOLUME 10000 20000 4000<br />TOTAL AMOUNT OF COST DISTORTION 255600 803800 (1059400)<br />SOME OF THESE THREE<br />AMOUNTS IS ZERO<br />Vaidya--UBS<br />
  35. 35. This traditional material handling operation depicts the non-value-added<br />activities of move time, waiting time, and storage time In Phoenix<br />
  36. 36. Identifying non- value added costs in the Phoenix Plant<br />(as suggested by the President of the company)<br /><ul><li>Storage :a considerable reduction in storage space and time is </li></ul>both possible and essential<br /><ul><li>Waiting : circuit boards should be processed through each operation</li></ul>only as they are required in the subsequent operation. Thus, the amount<br />of time products spend waiting for the next operation should be virtually<br />eliminated<br /><ul><li>Moving :The time devoted to moving raw material and work in process</li></ul>is excessive. Ways must be found to reduce the cost of these material<br />handling activities<br /><ul><li>Inspection : The bed- of- nails and burn-in tests appear to be necessary</li></ul>and efficiently conducted. Nevertheless, management should continually <br />reassess the need for these inspection operations<br /><ul><li>Processing : The manual insertion of components in department 3 and 6
  37. 37. can be performed by robots. The desirability of this change be explored</li></li></ul><li>JIT PRODUCTION AND INVENTORY SYSTEM<br />( BABERSFIELD PLANT )<br />PURCHASING<br />DEMAND FOR RAW MATERIALS AND PARTS IS SIGNALED<br />WHEN THERE IS A NEED IN STAGE I FOR MORE INPUTS<br />PRODUCTION<br />STAGE I<br />DEMAND FOR PRODUCTION ACTIVITY IN STAGE I SIGNALED<br />WHEN THERE IS A NEED IN STAGE II FOR MORE INPUTS<br />PRODUCTION<br />STAGE II<br />DEMAND FOR PRODUCTION ACTIVITY IN STAGE II IS SIGNALED<br />WHEN THERE IS A NEED IN STAGE III FOR MORE INPUTS<br />PRODUCTION<br />STAGE III<br />DEMAND FOR FINISHED GOODS IS SIGNALED WHEN SALES<br />ACTIVITY WARRANTS MORE FINISHED UNITS. THIS TRIGGERS<br />MANUFACTURING ACTIVITY IN THE FINAL STAGE OF PRODUCTION<br />SALES<br />Denotes flow of material, parts, partially finished goods, and finished goods,<br />Denotes a signal that more goods are needed at the next stage of production<br />
  38. 38. COMPARISON OF PRODUCT COST IN PHOENIX AND BAKERSFIELD PLANTS :<br />Mode I Mode II Mode III<br />Boards Boards Boards<br />PHOENIX 183.44261.81390.85<br />(A-B-C S YSTEM)<br />BAKERSFIELD 170.60232.70341.35<br />(A-B-C SYSTEM)<br />Vaidya--UBS<br />
  39. 39. THANK YOU<br />Contacts:<br />Prof.SUBHASH C.VAIDYA<br />UNIVERSITY BUSINESS SCHOOL<br />PANJAB UNIVERSITY, CHANDIGARH<br />E-MAIL:scvaidya@indiatimes.com<br />Vaidya--UBS<br />

×