Value-Based Systems: ABM and Lean 22

Value-Based Systems and Management OBJECTIVE 1: Explain why managers use value-based systems and discuss their relationship to the supply chain and the value chain.

Figure 1: The Supply Chain and Value Chain in a Furniture Company

Value-Based Systems and Management Managers create value and satisfy customers five ways. –Work with suppliers and customers –View the organization as a collection of value- adding activities –Use resources for value-adding activities –Reduce or eliminate non-value-adding activities –Know the total cost of creating value for a customer

Value-Based Systems and Management Value chains and supply chains give managers a better understanding of their company’s internal and external operations. –A value chain is a sequence of activities that add value to a company’s product or service. –A supply chain is the path that leads from the suppliers of the materials from which a product is made to the final customer; it includes both suppliers and suppliers’ suppliers, and customers and customers’ customers.

Value-Based Systems and Management Process value analysis helps managers reduce costs by identifying and eliminating non-value-adding activities.

Value-Based Systems and Management Compare value-adding and non-value- adding activities. –A value-adding activity adds market value to a product or service. –A non-value-adding activity adds cost to a product or service but does not increase its market value.

Value-Based Systems and Management Value-based systems –Create opportunities to improve nonfinancial performance measures and cost information supplied to managers –Help managers view their organization as a collection of activities

Value-Based Systems and Management Activity-based management (ABM) –Provides financial and performance information at key operational activity levels. –Eliminates waste and inefficiencies.

Value-Based Systems and Management A lean operation eliminates waste three ways –Good planning and design –Smart production scheduling and standardized product and processing plans –Analysis of worker and machine actions

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Activity-Based Costing OBJECTIVE 2: Define activity-based costing and explain how a cost hierarchy and a bill of activities are used.

Table 1: Sample Activities in Cost Hierarchies

Activity-Based Costing Activity-based costing (ABC) calculates a more accurate product cost than traditional methods.

Activity-Based Costing A cost hierarchy is a framework for classifying activities according to the level at which their costs are incurred; in a manufacturing organization, the cost hierarchy typically has four levels: –Unit level –Batch level –Product level –Facility level

Activity-Based Costing A bill of activities is used to compute the following: –Costs assigned to activities –Product unit cost

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The New Operating Environment and Lean Operations OBJECTIVE 3: Define the elements of a lean operation and identify the changes in inventory management that result when a firm adopts its just-in-time operating philosophy.

Table 2: Direct and Indirect Costs in Traditional and JIT Environments

The New Operating Environment and Lean Operations Lean operations philosophy –Simple is better –Quality of product or service critical –Work environment emphasizes continuous improvement

The New Operating Environment and Lean Operations Lean operations philosophy (cont.) –Large inventories was resources and might hide poor work –Reduce or eliminate activities or functions that do not add value –Goods should be produced only when needed

The New Operating Environment and Lean Operations Lean operations philosophy (cont.) –Workers must be multiskilled and help eliminate waste –Long-term relationships with suppliers is important

The New Operating Environment and Lean Operations Just-in-time (JIT) operating environment eliminates waste through 6 principles. –Minimum inventory levels –Pull-through production –Quick setup and flexible work cells

The New Operating Environment and Lean Operations Just-in-time (JIT) operating environment eliminates waste through 6 principles. (cont.) –A multiskilled work force –High levels of product quality –Effective preventive maintenance

The New Operating Environment and Lean Operations Continuous improvement of the work environment

The New Operating Environment and Lean Operations Accounting for product costs in a JIT Operating Environment –Classifying costs Processing time Inspection time Moving time Queue time Storage time

The New Operating Environment and Lean Operations Accounting for product costs in a JIT Operating Environment (cont.) –Assigning costs Managers focus on throughput time. Several costs that are treated as indirect costs in a traditional environment are treated as direct costs of a JIT work cell.

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Backflush Costing OBJECTIVE 4: Define and apply backflush costing, and compare the cost flows in traditional and backflush costing.

Figure 2: Comparison of Cost Flows in Traditional and Backflush Costing

Figure 3: Cost Flows Through T Accounts in Traditional and Backflush Costing

Backflush Costing A JIT operating environment simplifies cost flows through the accounting system. –Conversion costs –Elimination of Materials Inventory account

Backflush Costing Backflush costing saves time and cuts costs.

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Comparison of ABM and Lean OBJECTIVE 5: Compare ABM and lean operations as value-based systems.

Table 3: Comparison of ABM and Lean Value-Based Systems

Comparison of ABM and Lean Both ABM and lean seek to eliminate waste, reduce non-value-adding activities, and improve allocation of resources.

Comparison of ABM and Lean The two systems differ in their methods of costing and cost assignment: –ABM uses cost drivers to assign indirect costs. –The overhead costs incurred in a JIT work cell become direct costs of the products made in that cell.

Comparison of ABM and Lean The two systems differ in their methods of costing and cost assignment: (cont.) –ABM uses job order or process costing to calculate product costs. –Lean may use backflush costing.

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