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Non-value-added activities add cost without
additional desirability, and can be eliminated
without reducing quality or performance.
Value-added activities add to products or
services desirability in customers eyes.
Identify EliminateNon-value-
added
activities
Value- and Non-Value-AddedValue- and Non-Value-Added
ActivitiesActivities
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Non-value-added activitiesuse resources withoutproviding value to customers.
Material and other inventory
storage.Moving parts and materials
in the factory.
Waiting for work.
Inspection.
Creating scrap and rework.
Product design withoutcustomer input.
Get rid
of them!
Non-Value-Added ActivitiesNon-Value-Added Activities
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Chart activities needed
to meet customer
expectations.Use ABC to determine
cost of activities.
Classify all activities
as value-added
or non-value-added.
Improve value-added
activities and eliminate
non-value-added activities.
Activity-Based ManagementActivity-Based Management
Across the Value ChainAcross the Value Chain
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A
: a u se o:Activity-BasedActivity-Based
ManagementManagement
Analyze activitiesfor non-value
added activities
Collect externalbenchmarkinformation
Manage activities
Determinecost per unit
of activity
Identifyactivity
measures
Createcost
pools
Identifyactivities
ABC
Activity-Based Management
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Concept
development
Planningand market
analysis
Production
design andvalue
engineering
Production
and
continuous
improvement
Target
price
Profit
margin
Target
cost
Establishing the
Target Price
Attaining the
Target Cost
Components of the TargetComponents of the Target
Costing ProcessCosting Process
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Develop products
that satisfy
customer needs.
Set target price using
competitors prices and
customers perceived
value for product.
Target price
Profit margin
= Target cost
Use value engineering
to find least costly
combination of resources
to meet customer needs.
Developing target prices and targetcosts requires four steps:
Developing target prices and targetcosts requires four steps:
Components of the TargetComponents of the Target
Costing ProcessCosting Process
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Involve entire valuechain in reducing
costs while satisfyingcustomer needs.
An understanding ofrelationships betweenprocess componentsand costs is critical.
A products functional characteristics to thecustomer are emphasized.
A primaryobjective is reducingdevelopment time.
ABC is used todetermine changes
that will reduce costs.
Characteristics of theCharacteristics of the
Target Costing ProcessTarget Costing Process
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Complete products
just in time to
ship to customers
Schedule
production
Receive
customer
orders
Receive materials
just in time for
production
Just-In-Time InventoryJust-In-Time Inventory
ProceduresProcedures
Complete parts
just in time for
assembly into products
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Demand-Pull
Production driven by
customerorders and
customer
quality
expectations
On-time
delivery to
customers
Factory Goals
Continuously Reduce: inventory
wait time downtime customer delivery time defects
Continuously Increase quality
employee cross
training teamwork process design
efficiencies
equipment reliability
Supplier
Relations on time delivery
high qualityinputs strong
partnership few suppliers long-term
contracts minimize
paperwork
JIT Characteristics Across the Value Chain
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Prevention costs
Inspection of materials upon delivery
Inspection of production processEquipment inspection
Employee training
Appraisal costs
Finished goods inspection
Field testing of products
Prevention costs
Inspection of materials upon delivery
Inspection of production process Equipment inspection
Employee training
Appraisal costs Finished goods inspection
Field testing of products
Components of the Cost ofComponents of the Cost of
QualityQuality
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Internal failure costs defects
discovered before delivery to
customers
Scrap materials
Rework
Reinspection of rework Lost sales resulting
from late deliveries
Internal failure costs defects
discovered before delivery to
customers
Scrap materials
Rework
Reinspection of rework
Lost sales resulting
from late deliveries
Cost
Report
Components of the Cost ofComponents of the Cost of
QualityQuality
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External failure costs defects
discovered
after delivery to customers
Warranty repairs
Product liability
Marketing costs toimprove product image
Lost sales due to poor
product quality
External failure costs defects
discovered
after delivery to customers
Warranty repairs
Product liability
Marketing costs to
improve product image
Lost sales due to poor
product quality
Components of the Cost ofComponents of the Cost of
QualityQuality
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Preventionand Appraisal
External andInternal Failure Total Cost
of Quality
Low Quality High Quality
C
osto
fQua l
ity
Direction ofrecent trend
in industry.
Components of the Cost ofComponents of the Cost of
QualityQuality
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End of Chapter 19End of Chapter 19
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