Chapter 22

22

Value-Based Systems: ABM and Lean

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 valueadding 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-valueadding 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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