To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com CHAPTER 16 LEAN ACCOUNTING, TARGET COSTING, AND THE BALANCED SCORECARD QUESTIONS FOR WRITING AND DISCUSSION Lean manufacturing is an approach designed to eliminate waste and maximize customer value It is characterized by delivering the right product, in the right quantity, with the right quality (zero-defect) at the exact time the customer needs it and at the lowest possible cost needed; (3) Inventories of goods awaiting further processing or consumption; (4) Unnecessary processing; (5) Unnecessary movement of people; (6) Unnecessary transport of goods; (7) Waiting; and, (8) The design of goods and services that not meet the needs of the customer The five principles of lean thinking are: (1) Precisely specify value by each particular product; (2) Identify the "value stream" for each product; (3) Make value flow without interruption; (4) Let the customer pull value from the producer; and (5) Pursue perfection A focused value stream is dedicated to one product It includes all the activities and steps necessary to produce, deliver, and service the product after it is sold The resources, people, and equipment to accomplish this are all exclusive to the value stream, making all the costs directly traceable to the product produced by the value stream Two types of value streams are the order fulfillment value stream and the new product value stream The order fulfillment value stream focuses on providing current products to current customers The new product value stream focuses on developing new products for new customers Facility costs are assigned using a fixed cost per square foot( (total cost/total square feet) If a value stream uses less square feet, it receives less cost Thus, the purpose of this assignment is to motivate value stream mangers to find ways to occupy less space As space is made available, it can be used for new product lines or to accommodate increased sales A value stream may be created for every product; however, it is more common to group products that use common processes into the same value stream One way to identify the value streams is to use a simple two-dimensional matrix, where the activities/processes are listed on one dimension and the products on a second dimension The key factors in being able to produce low volume products with great variety are lower setup times and cellular manufacturing Reducing setup times and using manufacturing cells eliminates considerable wait and move time so that cycle time is dramatically reduced Demand-pull means producing only the products when needed and in the quantities needed Demand-pull systems reduce/eliminate WIP and finished goods inventories Inventories are the most significant source of waste in a manufacturing firm Eight sources of waste are: (1) Defective products; (2) Overproduction of goods not 547 10 Units shipped are used to discourage the production of excess inventories It also encourages the reduction and elimination of existing finished goods inventories The unit cost increases if more units are produced than sold The unit cost decreases if are shipped than units produced 11 If the products in the value stream are quite similar, then the average cost will approximate the actual unit product cost If the product mix is relatively stable over time, then the average unit cost can be a good signal of overall changes in efficiency within the value stream 12 Value streams often have excess capacity In certain decisions, such as make or buy or accept or reject special orders, the change in profitability is the key factor in assessing which way to go In these cases, knowledge To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com needed for the process, customer, and financial objectives of individual product cost is not needed and, in fact, may be misleading 13 14 15 16 17 The lean control system uses a Box Scorecard that compares operational, capacity, and financial metrics with prior week performances and with a future desired state Trends over time coupled with the expectation of achieving some desired state in the near future is the means used to motivate constant performance improvement Thus, the lean control approach uses a mixture of financial and nonfinancial measures for the value steam The future desired state reflects targets for the various measures Operational, nonfinancial measures are also used at the cell level Life-cycle costing is measuring the costs associated with a product for its entire life cycle Life-cycle management is managing the activities during the development stage to ensure the lowest total life-cycle cost Budgeting life-cycle costs can help managers adjust the activities during the development stage; furthermore, comparing actual lifecycle costs with budgeted costs should enable managers to improve life-cycle cost management in the future using the feedback from actual results Target costing is a cost management method that is used to reduce costs to a level that reflects a product’s functions and market demands and management’s return requirements Costs are reduced to target by product and process redesign activities Product redesign is aided by reverse engineering and value analysis The Balanced Scorecard translates an organization’s vision and strategy into operational objectives and measures for four perspectives: financial, customer, process, and learning and growth A strategy is the process of choosing the market and customer segments, identifying the critical internal processes, and selecting the individual and organizational capabilities 548 18 Lag measures reflect what has happened Lead measures reflect what may happen 19 A testable strategy is a set of linked objectives aimed at an overall goal that can be restated into a sequence of cause-and-effect hypotheses 20 Double-loop feedback is information that deals with both the effectiveness of strategy implementation and the validity of the assumptions underlying the strategy 21 The three strategic themes of the financial perspective are revenue growth, cost reduction, and asset utilization 22 The five core objectives of the customer perspective are market share, customer retention, customer acquisition, customer satisfaction, and customer profitability 23 The long-wave of value creation means anticipating the emerging and potential needs of customers and creating new products and processes to satisfy those needs The short-wave of value creation is producing and delivering existing products to customers 24 Cycle time is the length of time required to produce one product; velocity is the number of units that can be produced in a given period of time 25 Manufacturing cycle efficiency is a ratio computed by dividing the processing time by the sum of processing time, move time, inspection time, and waiting time The ideal is to increase efficiency by reducing the nonvalue-added times of moving, inspection, and waiting 26 Three objectives of the learning and growth perspective are increase employee capabilities; increase motivation, empowerment, and alignment; and increase information systems capabilities To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com EXERCISES 16–1 a e d b e b c e 16–2 Value Streams: A&D: All common processes B&E: All common processes C: Different from all other products 16–3 Departmental times: Processing time (10 × 30*) Wait and move time Total time 300 minutes 53 minutes 353 minutes *The sum of the unit production times for each department Cellular times: Unit First Second Third Tenth Elapsed time 30 minutes 40 50 120 minutes If the cell is continuously producing then the time is 100 minutes (10 × 10) 549 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 16–3 Continued Time saved = 353 – 120 = 233 minutes (253 minutes for the continuous case) = 233/10 = 23.3 minutes per unit (25.3 for continuous) 16–4 60 minutes/10 = units per hour is the current production rate (10 minutes is the bottleneck time—for the first department 10 minutes; the bottleneck sets the production rate The minimum unit production time for any process within the cell must be minutes Thus, ways must be found to reduce the processing time for Mixing, Heating, and Tableting to minutes Process redesign and product redesign are possible ways to reduce the times 16–5 Materials, people, equipment and other resources are dedicated to value streams as far as possible In some case, there may not be enough specialized resources for each value stream For example, the quality engineer is spread out over several value streams A portion of his salary (0.40 × $75,000 = $30,000) would be assigned to the value stream Facility costs are assigned by obtaining a cost per square for the entire facility ($900,000/100,000 = $9.00 per square foot) and then multiplying this by the square feet occupied by the value stream: $9.00 × 10,000 = $90,000 This amount would be added to the $1,800,000, to bring the total value stream cost to $1,890,000 If the MP3 value stream could find a way to occupy less space (say 7,000 square feet) and the same tasks, they would receive an cost assigned of $63,000 ($9 × 7,000).Thus, there is an incentive to use no more space than necessary Thus, the purpose of this assignment is to motivate value stream mangers to find ways to occupy less space As space is made available, it can be used for new product lines or to accommodate increased sales The recommended size of a value stream is between 25 and 150 employees The most likely option to be exercised is to cross-train Mary so that she can function in quality control, eliminating the need for the quality engineer to share time with more than one value stream It also allows productive use of available capacity and will not increase the cost of the MP3 value stream, and in fact, may decrease the cost when the partial services of the value engineer are eliminated 550 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Unit cost = $1,890,000/20,000 units = $94.50 per unit This cost is very accurate because virtually all of the costs are assigned using direct tracing Causal tracing is used for facility costs and quality engineering Thus, this cost is a good efficiency measure for the MP3 value stream and tracking it over time will provide a measure of changes in efficiency 16–6 First, calculate activity rates: Cell: Driver is conversion time (in minutes): $9,600/(600+1800) = $4 per minute Engineering: Driver is Engineering hours: $3,400/80 = $42.50 per eng hr Testing: Driver is testing hours: $3,000/80 = $37.50 per test hour Next, calculate product costs: Model A Cell: $4 × 600 $4 × 1,800 Engineering: $42.50 × 15 $42.50 × 65 Testing: $37.50 × 25 $37.50 × 55 Total Units Unit cost (cost/units) Model B $ 2,400.00 $ 7,200.00 637.50 2,762.50 937.50 $3,975.00 50 $79.50 2,062.50 $12,025.00 150 80.17 Average cost = $16,000/200 = $80 The average cost approximates the ABC costs with very little error, suggesting that the two value stream products are quite similar 551 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 16–7 Sales (90 @ $40) Cost of goods sold (90 @$20) Gross profit Week $3,600 (1,800) $1,800 Sales (100 @ $40) Cost of goods sold (100 @$20) Gross profit Week $4,000 (2,000) $2,000 Sales (90 @ $40) Cost of goods sold (90 @$20) Gross profit Week $3,600 (1,800) $1,800 Week 1: Average cost = Value stream cost/units shipped = $1,800/90 = $20 Week 2: Average cost = Value stream cost/units shipped = $1,800/100 = $18 Week 3: Average cost = Value stream cost/units shipped = $1,800/90 = $20 The average cost decreased with a drop in inventories and increased with an increase in inventories The signal is consistent with the objective of reducing inventories Week1: Sales (90 @ $40) Materials Conversion cost Value stream profit Change in inventory Gross profit $3,600 (450) (1,350) $1,800 $1,800 Week 2: 552 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Sales (100 @ $40) Materials Conversion cost Value stream profit Change in inventory Gross profit $4,000 (450) (1,350) $2,200 (200) $2,000 Week 3: Sales (90 @ $40) Materials Conversion costs Value stream profit Change in inventory Gross profit $3,600 (500) (1,500) $1,600 200 $1,800 The value stream profit is highest in week and lowest in week The profit variability is directly tied to the ability of the stream to produce on demand In weeks and 2, inventories are stable or decreasing In week 3, the stream slipped and produced more than demanded and so profits decreased The change in inventory adjustment brings the value stream to the traditional measurement When the value stream achieves the ability to produce on demand, the two incomes will be the same and any changes income will be from reductions in waste other than inventories 16–8 Seven nonfinancial measures (4 operational and three capacity) Time-based: on-time delivery and dock to dock days; quality-based: firsttime through; efficiency: units sold per person and average cost Lean firms compete on the basis of these three dimensions They strive to supply the right quantity at the right price at the right quality at the time the customer wants the product To supply the quantity needed at the time needed mandates shorter cycle times Quality mandates zero defects and lower prices mean that a lean firm must reduce its costs and become more efficient The planned state sets targets for the various financial and nonfinancial measures and thus encourages continuous and innovative improvements The value stream (processes within the value stream) possess a certain amount of capacity based on resources employed Value-added us of the resources is productive use; using resources to produce waste is nonproductive use Thus, all nonvalue-added activities are non-productive use of 553 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com value-stream capacity As waste is reduced, resources become available for other productive uses As quality, time, and efficiency increase, we would eventually expect all of this to convert into financial gains Typically, what happens is that elimination of waste is first expressed as available capacity Financial gains are realized when the available capacity is either reduced by reducing resources needed or they are used elsewhere for other productive purposes 16–9 Desired profit = $50 × 1,500,000 = $75,000,000 Projected profit = ($150 × 1,500,000) $225,000,000 − $180,000,000 = $45,000,000 Target cost = $150 – $50 = $100 Need to reduce costs by $20 per unit ($180,000,000 ÷ 1,500,000 = $120/unit; $120 – $100 = $20/unit) or $30,000,000 ($20 × 1,500,000) for the target to be met Three methods are available: reverse engineering, value analysis, and process improvement The first two methods are concerned with reducing costs by improving product design Reverse engineering may reveal more efficient design features that can be exploited, while value analysis should show which product functions are worth keeping and which ones are worth dropping or changing Process improvement puts the company into the realm of process value analysis where the emphasis is selecting only those activities that add value and eliminating the ones that not It would be wise to include postpurchase costs in design decisions Reducing postpurchase costs reduces customer sacrifice and, therefore, increases customer value, creating a potential competitive advantage for a company Including postpurchase costs in target costs makes less sense because postpurchase costs are incurred by the customer and not by the company 554 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 16–10 If (a) employees are trained to improve their soldering capabilities, (b) the manufacturing process is redesigned, and (c) the right suppliers are selected, then the number of defective units produced will decrease; if the number of defective units produced decreases, then customer satisfaction will increase; if customer satisfaction increases, then market share will increase; if market share increases then sales will increase; if sales increase, then profits will increase Profits Increase FINANCIAL CUSTOMER PROCESS Supplier Selection Customer Satisfaction Increases Market Share Increases Defects Decrease Redesign Process Soldering Training INFRASTRUCTURE 555 Revenues Increase To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 16–10 Concluded Each consequence of the if-then sequence (the “then” outcome) can be tested to see if the outcome is as expected For example, if workers are trained to solder better, defects actually decrease? If defects decrease, we observe an increase in customer satisfaction? Does market share then increase? Thus, the consequences are observable but only if they are measured Of course, it should be mentioned that not only must outcomes be measured but also those factors that lead to the outcomes (the performance drivers) Was the process redesigned? How many hours of soldering training are needed, and were they provided? Were suppliers selected so that we now have a higher-quality circuit board? Note also that the number of defects acts as both a lag measure and a lead measure First, it measures the outcome for training, supplier selection, and process redesign Second, it also drives customer satisfaction (which must be measured by surveys) Targets indicate the amount of performance driver input and the improvement expected For example, the company may budget 100 hours of soldering training, 300 hours of supplier evaluation, and two new process changes, and then expect a 50 percent reduction in the number of defects (the outcome) Suppose that the outcome is only a 10 percent reduction in defects Comparing the 50 percent to the 10 percent reduction achieved reveals a problem Double-loop feedback provides information regarding both the validity of the strategy and the effectiveness of implementation If the targeted levels were not achieved for the performance drivers, then it is possible that the outcome was not achieved because of an implementation problem If, however, the targeted levels of the performance drivers were achieved, then the problem could lie with the strategy itself Maybe training to solder better has little to with reducing defects (it may not be as much of a problem as thought) Or, perhaps the current suppliers are not really a root cause for the production of defects 556 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 16–18 Setup Materials handling Inspection Customer complaints Warranties Storing Expediting Total $125,000 180,000 122,000 100,000 170,000 80,000 75,000 $852,000 Units produced and sold ÷120,000* Potential unit cost reduction $ 7.10 *$1,920,000/$16 (total cost divided by unit cost) The consultant’s estimate of cost reduction was on target Per-unit costs can be reduced by at least $7, and further reductions may be possible if improvements in value-added activities are possible Target cost to maintain sales = $14 – $4 = $10 Target cost to expand sales = $12 – $4 = $8 Current cost = $16 Cost reduction to maintain = $16 – $10 = $6 Cost reduction to expand = $16 – $8 = $8 Total potential reduction: $ 852,000 (from Requirement 1) 150,000 (by automating) $1,002,000 Units ÷ 120,000 Unit savings $ 8.35 Costs can be reduced by at least $7, enabling the company to maintain current market share Further, if all the nonvalue-added costs are eliminated, then the cost reduction needed to increase market share is also possible Current: Sales Costs Income $ 2,160,000 ($18 × 120,000 units) (1,920,000) $ 240,000 566 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 16–18 Concluded $14 price (assumes that current market share is maintained): Sales Costs Income $1,680,000 ($14 × 120,000 units) (918,000) ($7.65* × 120,000 units) $ 762,000 $12 price: Sales Costs Income $ 2,160,000 ($12 × 180,000 units) (1,377,000) ($7.65* × 180,000 units) $ 783,000 *$16 – $8.35 = $7.65 The $12 price produces the greatest benefit 16–19 Current cost per unit = $12,800,000/20,000 = $640 Current profit per unit = $720 – $640 = $80 Target cost (C) to maintain current profit and expand market share: $624 – C = $80 C = $544 Nonvalue-added costs: Materials (400,000 – 380,000)$21 Labor (96,000 – 91,200)$12.50 Setups (6,400 – 0)$75 Materials handling (16,000 – 0)$70 Warranties (16,000 – 0)$100 Total Units produced and sold Unit nonvalue-added cost $ 420,000 60,000 480,000 1,120,000 1,600,000 $3,680,000 ÷ 20,000 $ 184 Current cost less nonvalue-added cost: $640 – $184 = $456 This is much less than the target cost of $544 Thus, achieving target cost is possible How quickly the cost reductions can be achieved is another matter As CEO, I would attempt to reduce the nonvalue-added costs quickly by implementing lean manufacturing methodologies I would also lower the price to 567 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com $624 by year end and seek to take advantage of the increased market share— even if it meant a short-term reduction in profits 16–20 Good life-cycle costing and life-cycle management require tracing development and logistics costs to individual products The company should abandon the traditional distinction of product and period costs While this distinction may work well for external reporting, a more comprehensive view is needed for managerial product costing Also, because most of the costs are committed during the development stage, it is critical that the design engineers know what drives product costs An activity-based management system is essential for life-cycle cost management Revised income statements: Sales Cost of goods sold Gross margin Traceable expenses: R&D Marketing Life-cycle income Return on sales Product A $ 4,000,000 2,000,000 $ 2,000,000 Product B $5,000,000 2,500,000 $2,500,000 Total $ 9,000,000 4,500,000 $ 4,500,000 (1,200,000) (575,000) $ 225,000 5.6% (800,000) (575,000) $1,125,000 22.5% (2,000,000) (1,150,000) $ 1,350,000 15% Based on the revised income statements, Product B is an attractive investment according to the 20 percent criterion 568 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 16–20 Concluded The target cost for A is $3,200,000 ($4,000,000 – $800,000); for B it is $4,000,000 ($5,000,000 – $1,000,000) There is no need to reduce costs for Product B—it already meets the target cost criterion ($3,875,000 is less than $4,000,000) Product A, however, does not Its costs are $3,775,000 Thus, costs must be reduced by $575,000 ($3,775,000 – $3,200,000) Activity analysis can help by identifying the activities associated with Product A and the cost drivers that are associated with these activities This information may help design engineers to redesign Product A so that it does not consume as many resources over its life cycle The information may also be useful in helping redesign the processes used for producing and selling Product A The ability to influence life-cycle costs is primarily available during the development stage More than 90 percent of a product’s costs are committed during this stage, and very little can be done to alter the total cost by the time production begins Thus, it makes sense to focus on managing activities during the development stage Postpurchase costs can be large and play a significant role in a customer’s product purchase decision Boyce Products strives to create a long-term competitive advantage Managing activities so that whole-life costs are reduced can help achieve this objective Managers must balance whole-life costs with other factors such as product performance, reliability, innovativeness, and durability 569 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 16–21 Velocity (theoretical) = 180,000/60,000 = heaters per hour Cycle time (theoretical) = 60 minutes/3 heaters = 20 minutes per heater Conversion cost rate = $1,800,000/(60,000 × 60) = $0.50 per minute Assignment per unit (theoretically) = $0.50 × 20 minutes = $10.00, or $1,800,000/180,000 = $10.00 Applied conversion cost = $0.50 × 30 minutes = $15.00 If cell managers are rewarded for lowering product cost, then one way product cost can be lowered is by decreasing the time to produce one unit of product For example, if the time is decreased from 30 minutes to 25 minutes, then the conversion cost assigned would be $12.50 ($0.50 × 25), saving $2.50 per unit Of course as cycle time decreases, delivering on time should also improve MCE = Theoretical time/Actual time = 20/30 = 0.67 Wasted time = 30 – 20 = 10 minutes; Cost = $0.50 × 10 minutes = $5.00 In the advanced manufacturing environment, firms need to compete on the basis of time and cost These measures support these objectives The goal is to decrease cycle time (increase velocity) by eliminating nonvalue-added time As nonvalue-added time is reduced, MCE increases, and the conversion cost assigned per unit decreases Also, as MCE increases, nonvalue-added time drops, and nonvalue-added costs decrease, yielding a lower-cost product 570 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 16–22 MCE = 45.0/(45.0 + 3.0 + 7.5 + 12.0 + 36.0 + 46.5) = 0.30 Lean improvements improve the manufacturing process by changing the way things are done—by improving time, quality, and efficiency This is done by incremental or dramatic improvements in processes Rearranging work flow, reducing scrap and defective units, implementing cellular manufacturing, and JIT purchasing, are among the approaches taken Process improvement and innovation require a thorough understanding of the activities that define the processes Identifying the root causes (driver analysis) helps a manager understand how processes can be improved Activity analysis adds to this understanding by identifying activities and assessing their value content Finally, performance measures that reflect quality, time, and efficiency are used to measure progress in improving processes For example, MCE is a measure of the value-added content as a percentage of total activity performance As the value-added content increases, MCE should increase MCE is a lag measure To reduce MCE, as indicated in Requirement 2, the process must be improved Performance drivers would include hours of quality training (this should reduce inspection and rework time), suggestions per employee (this could reveal ways to reduce wait time, for example), and realtime feedback capabilities (this could decrease wait and storage time) 571 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 16–23 a Standard-costing-based Materials price variances may encourage buying in quantity to take advantage of discounts and thus work against the objective of zero inventories (storage is a nonvalue-added activity) Also, in an effort to achieve a favorable variance, a purchasing agent may buy lower-priced, lower-quality materials, thus working against the objective of total quality control (competing on the basis of quality is critical for the advanced manufacturing environment) b Lean-based Cycle time encourages reduction of the time it takes to produce products This is compatible with the pull-through philosophy of JIT and the objective of on-time delivery It supports the objective of delivering goods quickly to customers (time-based competition) c Lean-based This comparison encourages managers to reduce actual costs to the targeted level This is compatible with the objective of continuous improvement It is also compatible with the objective of delivering a low-priced, high-quality product to customers, especially since cost reduction is achieved by eliminating nonvalue-added activities d Standard-costing-based Materials usage variances may encourage poor quality or excessive inventory These outcomes conflict with the objectives of total quality and zero inventory Also, usage standards allow a certain amount of inefficiency and tend to support the status quo, working against the principle of continuous improvement e Lean-based Trend reports emphasize the objective of continuous improvement The objective is to encourage managers to produce favorable trends f Standard-costing-based Traditional performance reports can encourage excessive inventory, lack of preventive maintenance, and poor quality, all of which conflict with the objectives of zero inventories, total preventive maintenance, and total quality Overreliance on budgetary performance creates an internal focus, ignoring the very critical external relationships g Lean-based Benchmarking helps foster change By identifying the best practices of competitors, opportunities, as well as the need for increased efficiency, are noted This supports the principle of continuous improvement 572 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 16–23 Continued h Lean-based Improving delivery performance is compatible with the objectives of continuous improvement, service quality, and pull-through production It also supports the time-based, competitive dimension that is so important for the advanced environment i Lean-based Quality measures are virtually ignored by a standard costing system Yet, knowing quality performance is fundamental to measuring and improving quality j Lean-based Highlighting value-added and nonvalue-added costs is compatible with the objectives of absolute efficiency and continuous improvement Costs not reported are costs ignored Highlighting nonvalueadded costs encourages managers to reduce and eliminate these costs k Standard-costing-based Labor efficiency variances can encourage poor quality and inventories, both of which conflict with the objectives of total quality and zero inventories Moreover, with labor becoming a smaller percentage of total costs, it is easy to fall into the trap of overemphasizing direct labor, often at the expense of more important areas l Lean-based If the objective is to reduce days of inventory, then this measure is compatible with the objective of zero inventories In this case, the trend in the measure is important and should be declining m Lean-based Reducing downtime is compatible with total preventive maintenance, zero inventories, and the pull-through philosophy of JIT As downtime is reduced, one of the major reasons for carrying inventory is eliminated n Lean-based Manufacturing cycle efficiency is compatible with continuous improvement and elimination of nonvalue-added activities As nonvalueadded activities are eliminated, product cost decreases, and cycle time tends to decrease o Lean-based The unused capacity measure focuses on activity utilization The objective is to increase the unused capacity for nonvalue-added activities and to reduce or redeploy resource spending to more productive outcomes For value-added activities, increasing activity efficiency should also bring about an increase in activity capacity 573 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 16–23 Concluded p Standard-costing-based This variance often occurs because of using different mixes of skilled laborers Thus, it discourages the use of skilled laborers in unskilled tasks Yet, in a JIT environment, for example, one of the objectives is to be able to use laborers in a variety of tasks Producing on demand may mean that highly skilled production workers should not be producing—in this case, they could be used for such things as cleaning up and preventive maintenance This makes the labor rate variance less useful q Lean-based Adopting the best practices of other units within the organization fosters change and continuous improvement Operational: b, h, i, l, m, n, and sometimes q Financial: a, c, d, e, f, g, j, k, o, p, and q Operational measures use physical measures of performance, thus providing operational workers feedback in terms that they know and understand This allows them to relate to the performance measures in a more meaningful way Even so, it is probably a good idea to communicate from time to time the dollar effect of changes in performance In this way, workers know that their performance can significantly affect the financial well-being of the firm (and, as a result, their own financial well-being) Strategic-based accounting derives its measures from the mission and strategy of the organization Thus, the set of measures is strategically linked The set of measures expands to cover customer and learning and growth perspectives The measures are also balanced with particular emphasis on including both lead and lag measures Lead measures are performance drivers and are the factors that enable improvement of outcome measures Additional measures would include such things as customer satisfaction, customer retention, market share, customer acquisition, customer profitability, employee satisfaction, employee productivity, and availability of real-time information 574 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 16–24 Theoretical velocity = 30,000/4,000 = 7.5 guns per hour Theoretical cycle time = 60/7.5 = minutes per gun Actual velocity = 25,000/4,000 = 6.25 guns per hour Actual cycle time = 60/6.25 = 9.6 minutes per gun MCE = 6.25/7.5 = 0.83 The efficiency of the operation is very high Budgeted conversion costs = $2,500,000/(4,000 × 60) = $10.42 per minute* *Rounded Theoretical conversion costs per gun = $10.42 × = $83.36 Actual conversion costs per gun = $10.42 × 9.6 = $100.03 Yes By reducing cycle time, the cost per unit can be reduced The potential reduction is as follows: $100.03 – $83.36 = $16.67 per gun 16–25 Strategic Objective Lag Measure Lead Measure Financial: Increase profitability ROI — Increase new customers and markets Percentage of revenue from new sources — Unit cost — Increase customer acquisition New customers — Increase customer satisfaction Survey ratings — Increase market share Market share — Increase product quality Returns — Reduce unit cost Customer: Improve product image and reputation — 575 Survey ratings To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 16–25 Continued Strategic Objective Lag Measure Lead Measure Process: Improve process quality Increase quality of purchased components Quality costs Percentage of defective units — Redesign time Percentage of defective units Engineering hours Learning and Growth: Increase employee capabilities — — Increase motivation and alignment Suggestions implemented Increase information system capabilities — Training hours Job coverage ratio Suggestions per employee On-time report percentage The if-then sequence strategy representation: If training and strategic job coverage are improved and if information systems capability is improved, then employees will increase the number of suggested improvements; if the number of suggested improvements increases, then the number implemented will increase; if the number of suggestions implemented increases, then process quality will increase; if process quality increases and if the percentage of defective components decreases, then the number of defective units will decrease; if the number of defective units decreases, then product quality will increase; if product quality increases, then product image and reputation will improve and then the costs of quality will decrease; if product image and reputation improve, then customer satisfaction will improve; if customer satisfaction improves then the number of new customers will increase; if the number of new customers increases, then market share will increase; if market share increases, then revenues will increase; if revenues increase and if costs of quality are reduced, then profitability will increase 576 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 16–25 Continued FINANCIAL Reduce Costs Increase Profits Market Share New Customers Increase Revenues Customer Satisfaction CUSTOMER Product Quality Product Image PROCESS LEARNING AND GROWTH Employee Capabilities 577 Process Quality Component Quality Suggestions Information Capabilities To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 16–25 Concluded Evaluation entails or should entail double-loop feedback Double-loop feedback requires information both on the implementation of the strategy and the viability of the strategy Implementation effectiveness involves comparing the actual values of the measures with the targeted values If the actual values meet or beat the targeted values for both outcome (lag) measures and performance drivers (lead measures), then effective implementation has occurred If the actual outcome measures are less than the targeted measures and the actual lead measures are equal to or greater than the targeted values, then the viability of the strategy can be questioned Thus, knowing the explicit targets and actual values would be useful information However, it is indicated several times that the expected improvements were being realized, indicating both implementation success and strategy viability The financial outcomes were also in the right direction The Balanced Scorecard provides a means for directed continuous improvement It also links performance measures to the strategy itself and, thus, articulates and communicates the strategy to employees, increasing the chances of obtaining an alignment of employees’ goals with organizational goals Using percent, the targeted goal for rework costs was $1,560,000 Since the actual costs were $1,500,000, the target was met All but supplier evaluation and training are nonvalue-added activities (inspection, rework, scrapping units, warranty, sales returns, and customer complaints) The potential savings are $3,410,000 (the total minus the costs of evaluation and training) 578 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com MANAGERIAL DECISION CASE 16–26 A more fundamental question is: Is it ethical for management to not undertake actions to eliminate waste? Should an ethical leader produce a quality product? To knowingly produce a product that is not able to perform its intended functions seems wrong To allow resources knowingly to be wasted seems wrong These resources are provided by investors and creditors who expect them to be used productively so that they can be returned along with an acceptable profit Thus, an ethical manager would strive to produce quality products and eliminate waste and to serve customers well These actions are compatible with lean manufacturing objectives If there are ways (and there are probably other approaches that would work) to accomplish the same objectives, then it would be hard to say that it is unethical to not use lean manufacturing—unless lean manufacturing is defined as all methodologies that will lead to a quality product, minimal waste, and timely service to customers Ethical communication is covered by objectivity standards, IV-1 and IV-2 and the competence standard, I-3 Ethical quality is covered by competence standards I-I and I-2, and Integrity standards, III-4 Ethical collaboration is covered to some extent by integrity standards III-1 and II-4 Ethical succession is also covered to some extent by Competence standard I-1 and Integrity standard III4 Ethical tenure is trust-based and in reality requires the full gamut of ethical standards: competence, confidentiality, integrity, and objectivity Confidentiality is especially important The qualities mentioned cover a lot of territory In fact, the notion of fostering and developing leadership and surrounding oneself with capable advisors is an interesting insight into ethical behavior—going beyond the normal view of ethics Ethical tenure is the catch-all quality It might be better labeled as ethical trust since that seems to be the core element Trust centers on the entire spectrum of ethical behavior: competence, integrity, confidentiality, and objectivity How long someone serves seems to only be an ethical issue if loss of trust occurs—which seems to mean that the leader is violating some ethical norm Ethical quality might be better labeled as ethical stewardship Managers are entrusted with the resources of others and are expected to use them wisely and productively This could be expanded to include products and processes that are pollution free One possible addition to the list of ethical leadership qualities is something that deals with social responsibility For example, ethical sustainability may be something many would view as important Using renewable resources instead of nonrenewable resources in producing the products arguably is an ethical choice so that future generations may have access to scarce resources 579 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com RESEARCH ASSIGNMENT 10–27 Answers will vary 580 ... Including postpurchase costs in target costs makes less sense because postpurchase costs are incurred by the customer and not by the company 554 To download more slides, ebook, solutions and test... $8 Current cost = $16 Cost reduction to maintain = $16 – $10 = $6 Cost reduction to expand = $16 – $8 = $8 Total potential reduction: $ 852,000 (from Requirement 1) 150,000 (by automating) $1,002,000... ebook, solutions and test bank, visit http://downloadslide.blogspot.com 16 22 MCE = 45.0/(45.0 + 3.0 + 7.5 + 12.0 + 36.0 + 46.5) = 0.30 Lean improvements improve the manufacturing process by changing