Strategic Management Accounting (JM1R24) Lesson 3 + 4 PDF

Strategic Management Accounting (JM1R24) Lesson 3 + 4 Dr Jan Alpenberg, Associate Professor 9/10/2024 Today´s agenda Value management Target costing Value engineering QFD-matrix Customer value attribute  Value Management By: Jerry Kaufma...

Strategic Management Accounting (JM1R24) Lesson 3 + 4 Dr Jan Alpenberg, Associate Professor 9/10/2024 Today´s agenda Value management Target costing Value engineering QFD-matrix Customer value attribute  Value Management By: Jerry Kaufman The concept of Value Management (VM) VM is more than a tool or technique for reducing product cost. VM is a set of disciplines proven to solve a broad range of management issues successfully and dramatically to create competitive advantage for the company. Value = a fair return or equivalent in goods or services or money for something exchanged. VM is a marketing term. It is the price assigned to goods or services at a level to attract customers and profit from their sale. ”Improving value” Refer to improvements in the product or service that increase the buyer’s sense of its worth, as well as reduce production cost. History of VM Began during World War II. General Electric (GE) concerned with the difficulty of obtaining critical listed materials to produce war equipment. Electrical engineer L.D. Miles was assigned to find adequate material and component substitutes to manufacture war equipment. He found that each material has unique properties that could enhance the product if he modified the design to take advantage of those properties. Value Management components The method Value Management Value Criteria Value Value Analysis Engineering The product The process The objective of VM ”To take deliberate action to improve cost effectiveness” Deliberate action requires education and training, planning, organizational identity and accountability. Cost effectiveness not only includes cost reduction, but also encompasses the effort to avoid cost, increase sales and improve profits. Relationship between Function and Value Focusing on function as the way to improve value, he expressed value in the following relationship: Value = Function / Cost or Function/Price This relationship is the cornerstone of VM. Funtion is the intent or purpose of a system, product or process operating in its normally prescribed manner. Functional family tree A logical diagram of each function of the product or service, not each part of the product. Help to determine the success of a product in the market. Functional family tree Function 1.1 Function 1 Function 1.2 Product Function 2.1 Function 2.2.1 or Function 2 Function 2.2 service Function 2.2.2 Function 2.3 Function 3 Functions Each function is defined in terms of a verb and a noun. Matrix can be useful with the following parts: Part number Name of part Transitive verb Noun Cost The principal value elements used in VM studies are classified as: Esteem Value = Want, The buyer’s desire to own for the sake of ownership Exchange Value = Worth, Describes the buyer’s perception, not the seller’s. Utility Value = Need, Is the primary value element the design engineer must address. Value relationship Value = Esteem * Exchange * Utility Cost Good value options Cost Function Poor value options Cost Function Value Management and the problem The Value Management process begins with identifying a problem or an opportunity that needs resolution. How to identify the real problem? Miles expressed a list of five questions to use: What is it? What does it do? What does it cost? What else will do the job? What does that cost? ➔ the process called Job Plan The Job Plan The Job Plan is key to the VM method. Step 1: Information and translation into function terms. Step 2: Speculation – developing a large quantity of ideas (not solutions) that address unique and creative ways to achieve those functions that relate to the problem definition. Step 3: Planning (or Analysis) – evaluation of the ideas previously generated, using weighted guidelines, performance, and other requirements, to sift and sort for the ”BEST” ideas. Step 4: Execution (or Evaluation) – clustering of selected ideas into proposal scenarios and the evaluation of those scenarios. Step 5: Reporting (or Presentation) – preparation and presentation of recommended VM team proposals to a management board. Function analysis Function is the end result desired by the customer, it is what the customer pays for. It is the goal, not an action. But it is the result of an action. Function analysis separates the intent or purpose of something from its description, then improves its value by manipulating its functions. Examples of describing functions are: A spring does not move parts, it ”stores energy” A screwdriver does not turn screws, it ”transmits torque” An oilfilter does not clean oil, it ”traps particles” Describing Functions When identifying the functions of components, products or processes, it is important to use active, rather than passive verbs. The verb describes the action and the noun defines the object of action. Functions are intended to be taken literally. Avoid the verbs ”provide”, ”review”, ”attend”, and verbs ending in ”-ize”. Illustration of passive and active verbs: Passive Active Provide support Support weight Seek approaval Approve budget Develop exhibits Exhibit products Submit budget Budget expenses Determine resolutions Resolve problem Measurable nouns Measurable nouns are easier to determine when the study is a hardware example. Examples of measurable nouns include: Weight, force, load, heat, light, radiation, current, flow and energy Functions such as ”control flow”, ”reduce weight” have nouns that can be universally measured. Defining and Classifying Functions: A function is is defined as ”an intent or purpose that a product or service is expected to perform.” The two operative words in this definition are ”intent” and ”expected”. How a product or service is used does not identify its functions. Miles classified and defined funtions to assist in separating them from their design descriptions. Functions are analyzed to determine their contribution to the value equation. Two functions: Basic function: the principal reason for the existence of the product or service, operating in its normally prescribed manner. Secondary function: the methods selected to carry out the basic functions or those functions and features supporting the basic functions. Rules governing basic functions: 1.Once defined, a basic function cannot change. 2.The cost to satisfy a basic function is usually less than 5 percent of the total product cost. 3.You cannot sell basic functions alone, but the supporting (secondary) functions cannot be sold without first satisfying the basic function. 4.The loss of the basic functions causes the loss of the market value and worth of the product or service. Illustration - functions of a pencil: Description Function B S Pencil Make marks Eraser Remove marks X Body Support lead X Transmit force X Accommodate grip X Display information X Lead Make marks X Your own example: Description Function B S Function Cost Matrix Functions Comp Cost Remove Transmit Support etc (cs) marks force lead % Cost % Cost % Cost Eraser 0.43 100 0.43 Band 0.25 25 0.06 Body 0.94 40 0.38 40 0.38 Paint 0.10 Lead 1.20 30 0.36 Total 2.92 0.43 0.80 0.38 Function Analysis System Technique (FAST) A powerful analysis process that permits people with different technical backgrounds to interact, communicate and resolve issues that require multi disciplined considerations. FAST translates goals and objectives of the management initiatives into action. Two questions: How? The answer is the method to perform that function. Why? The answer is the goal of that function. Function logic How Why Function Function Function Goal Method Illustration FAST: How Why Make Contrast Mark Color Build Test Value analysis – an example Activity Value adding Non-value adding Necessary ? Target Costing and Value Engineering Different ways to set prices Market based pricing Cost-based pricing Value based pricing  Price charged is based on what customers want and how competitors react Pricing starts with a target price Estimated price for a product or service that Market potential customers will be willing to pay Estimated on customers’ perceived value Based for a product or service and how competitors will price competing products Pricing or services Target cost per unit is the estimated long- run cost per unit of product or service that, when sold at the target price, enables the company to achieve its target income Copyright © 2007 Pearson Education Canada 12-12 Cost-based (or cost-plus) What price should we charge to cover our costs and earn a profit? Profit margins in long-run pricing decisions are set to earn a reasonable return on investment Prices are decreased when demand is weak and increased when demand is strong Price charged is based on what it costs to produce, coupled with the ability to recoup the costs and still achieve a required rate of return 12-19 Value based costing Pricing based on the value attributes/functions. What is the product worth for the customer? Identify the attributes/functions? Evaluate the importance for the customers Weigh their importance and decide how it would influence the price level… Target Costing Is a cost management method for reducing the overall cost of a product or service over its entire life cycle by employing better specifications and design procedures at the lowest possible cost. It is not a method for day-to-day cost management. Rather a cost planning method. Three components to TC Target price - the prevailing market price. Target margin - the margin the owners demand. Target cost = Target price - Target margin  Target Cost Has to be broken down into the different components and activities used to produce the product and thereafter used as a target… Functional analysis used to focus on various functions and design costs of the product. Functional analysis can be used during the life cycle but particular useful during the pre-introductory stage.  Price led costing; TP-TM=TC Customer driven Target The design phase determines the cost structure Costing – key ideas Cross-functional product teams in working with cutting the cost Life cycle costing Value chain is the foundation. Committed versus Incurred Costs Percentage of total costs Product or service Committed costs development Incurred costs Production starts Time Committed costs Between 80-90 percent of the life cycle costs of a new product or service are committed during the development period. The best time to influence the life cycle cost structure is during the development period. Different view on engineering and how the cost is attached to the object. Linear vs simultaneous approach. Analyzing and managing activities Can lead to: Activity reduction (reduce time or efforts) Activity elimination (eliminate entriely) Activity selection (select the low-cost alternative) Activity sharing (economy of scale)  Target costing, TC Market Price* 19.900 Target margin 16% - 3.184 Target Cost 16.716 * Or Target Price  Target costing in TD-ABC Market Price 19900 margin 16% - 3184 Target Cost 16716 Adm time 1700 1h * 0,9 1530 R&D time 600 8h 4800 HRM time 750 2h 1500 sourcing time 1100 2h 2200 production time (DL) 900 4h 3600 marketing time 800 1h 800 out log time 350 4h 1400 service time 700 1h 700 in log time 150 2h 300 Total Cost 16830 (if we don’t reach target – continue Kaizen) Five Steps in Developing Target Prices and Target Costs 1. Develop a product that satisfies the needs of potential customers 2. Choose a target price and target operating income per unit 3. Derive a target cost per unit: Target Price per unit minus Target Operating Income per unit 4. Perform cost analysis for cost reductions 5. Perform value engineering to achieve target cost Copyright © 2007 Pearson Education Canada 12-13 Life Cycle Analysis The products life cycle is the time length for the analysis. Two aspects: Market life cycle Cost life cycle Analyzing the Cost Life Cycle Cost Development Reseraching, Designing, Production Testing, Target costing Marketing, sales, logistics and services Time Point at which new product or service is introduced The Market Life Cycle Includes five stages: Pre-introductory stage (in which the product concept is developed) Introduction stage (in which the product is launched into the market) Growth stage (which is typified by consumer acceptance) Maturity stage (market saturation, strong brand loyalty and stabilized sales volume and profits). Decline stage (sales drop and abandonment of the product). Demand Time Product Life Cycle At one time the average market life cycle was about 15 years. Today, it can be less than 3 years and in some cases less than 1 year. Activity Value Chain analysis Research and development Inbound logistics Production Outbound logistics Marketing and logistics Service Value Creation per Unit 3 - 53 Value Engineering A systematic evaluation of all aspects of the value chain, with the objective of reducing costs while improving quality and satisfying customer needs Managers must distinguish value-added activities and costs from non-value-added activities and costs Copyright © 2007 Pearson Education Canada 12-14 Value Engineering Terminology Value-Added Costs A cost that, if eliminated, would reduce the actual or perceived value or utility (usefulness) customers obtain from using the product or service Non-Value-Added Costs A cost that, if eliminated, would not reduce the actual or perceived value or utility customers obtain from using the product or service. It is a cost the customer is unwilling to pay for Copyright © 2007 Pearson Education Canada 12-15  Value Engineering 01 02 03 ID E N TIFYING TE STI NG A N D GE N E RATING COST COM PONENTS FOR I M PL EMENTI NG RE D U CTI ON I D E A S COST RE D U CTION IDEAS It requires computing a W hat can be reduced, Promising ideas are val ue index which is combined, el iminated, eval uated to ensure degree of importance to substituted, arranged to that they are the customer and provide the same l evel technical l y feasibl e and percentage of total cost of functional ity from a acceptabl e to component at l ess cost customers Quality Function Deployment Quality Function Deployment A method that assures quality while the product or service is still at the development stage. Determining customer requirements and then developing the product or service to meet or exceed those requirements. Requirements are determined from ideas, complaints, characteristics and so forth.  The Quality Function Deployment Process 1. Identify the Customer(s) 2. Determine Customer Requirements/Constraints 3. Prioritize each requirement 4. Competitive Benchmarking 5. Translate Customer Requirements into Measurable Engineering specifications 6. Set Target values for each Engineering Specification OK, Let’s Walk Through A Simple Example QFD Example An Automobile Bumper Customer Request: There is too much damage to bumpers in low-speed collisions. Customer wants a better bumper. QFD Example An Automobile Bumper Step 1: Identify Customer(s) Repair Department Automobile Owner Manufacturing Plant Sales Force  QFD Example An Automobile Bumper Step 2: Determine Customer Requirements/Constraints I want something that looks nice (basic) It must hold my license plate (performance) I want it strong enough not to dent (excitement) It must protect my tail-lights and head-lights (performance) I don’t want to pay too much (basic) QFD Example An Automobile Bumper Step 3: Prioritize Customer Requirements QFD Example An Automobile Bumper Put prioritized Customer Requirements into a House of Quality Chart QFD Example An Automobile Bumper Step 4: Competition Benchmarking Identify Competitors Test and Analyze Competitor Products Reverse Engineer Competitor Products Rate Competitor Products against customer requirements/constraints QFD Example An Automobile Bumper Put competitive benchmarking information into House of Quality Chart QFD Example An Automobile Bumper Steps 5 and 6: Translate Customer Requirements into Measurable Engineering Specifications and define target values Specify how license plate will be held Specify how to resist dents through material yield strength, young's modulus, etc. Specify with a dollar amount the term ‘inexpensive’ QFD Example An Automobile Bumper Matching capacity with demand One way to reduce the life cycle cost is to match production capability with the product or service demand.