For-Profit manufacturing firms
Performance Measures
2.008
• Ownership:
Cost
Market value = PV (Earning) + PV (Growth Opportunity)
• Management:
Performance Targets
2.008 - Spring 2004
1
2.008 - Spring 2004
2
Automotive Market Share in the U.S.
GM Financials
$ billions
35%
30%
25%
20%
15%
10%
0%
Jul-00
Apr-01
GM (w/S aab)
DaimlerChrysler (w/Mercedes)
Honda
Dec-01
Oct-02
Ford (w/Volvo, Jaguar, & Land Rover)
Toyota
Nissan
2.008 - Spring 2004
Dec-00
184.6
28.4%
9.1%
4.5
2.4%
Dec-99
167.4
21.0%
5.6%
6.0
3.6%
Dec-98
154.0
23.4%
4.2%
3.0
1.9%
Dec-97
166.4
21.9%
2.2%
6.7
4.0%
Balance She e t
Cash
Net Receivables
Inventories
Other Current Assets
Total Current Assets
Net Fixed Assets
Other Noncurrent Assets
Total Assets
De c-02
18.6
141.4
10.0
23.9
193.8
34.9
95.2
324.0
Dec-00
10.3
100.2
10.9
24.8
146.3
34.0
122.8
303.1
Dec-99
10.4
123.1
10.6
19.8
164.0
32.8
77.9
274.7
Dec-98
10.9
76.9
12.2
37.4
137.3
37.2
82.9
257.4
Dec-97
11.3
66.4
12.1
11.7
101.4
34.6
92.9
228.9
26.2
2.4
35.6
64.2
163.9
75.4
304.3
25.7
2.2
35.2
63.2
142.4
66.5
272.9
21.5
2.0
33.9
57.4
129.7
59.6
254.1
20.0
0.0
0.0
20.0
114.2
97.7
242.4
15.8
0.0
0.0
15.8
93.0
98.7
211.4
0.0
19.7
19.7
0.0
30.2
30.2
0.0
20.6
20.6
0.0
15.0
15.0
0.0
17.5
17.5
Preferred Stock Equity
Common Stock Equity
Total Equity
3
2.008 - Spring 2004
4
Financial Comparison
Toyota Financials
2.008 - Spring 2004
Dec-02
177.3
26.1%
5.7%
0.6
0.3%
Accounts Payable
Short-Term Debt
Other Current Liabilities
Total Current Liabilities
Long-Term Debt
Other Noncurrent Liabilities
Total Liabilities
5%
Oct-99
Income Statement
Revenue
Gross Profit Margin
Operating Margin
Total Net Income
Net Profit Margin
$ billions
Income Statement
Revenue
Gross Profit Margin
Operating Margin
Total Net Income
Net Profit Margin
Mar-02
107.4
26.5%
7.6%
4.2
3.9%
Mar-02
106.0
24.9%
6.0%
5.4
5.1%
Mar-00
119.7
27.4%
5.5%
4.5
3.8%
Mar-99
105.8
27.8%
5.9%
3.7
3.5%
Mar-98
88.5
27.0%
6.4%
3.4
3.9%
Balance Sheet
Cash
Net Receivables
Inventories
Other Current Assets
Total Current Assets
Net Fixed Assets
Other Noncurrent Assets
Total Assets
Mar-02
12.4
29.9
7.2
11.0
60.6
38.3
46.0
144.9
Mar-02
12.2
26.3
7.1
9.8
55.4
36.0
46.0
137.4
Mar-00
14.4
26.2
7.4
11.2
59.2
43.9
51.7
154.9
Mar-99
11.1
21.8
6.3
8.0
47.3
41.2
43.0
131.5
Mar-98
9.3
8.9
5.6
24.6
48.3
34.9
21.7
105.0
Accounts Payable
Short-Term Debt
Other Current Liabilities
Total Current Liabilities
Long-Term Debt
Other Noncurrent Liabilities
Total Liabilities
10.7
22.4
17.0
50.1
27.9
6.7
90.4
10.4
17.6
16.8
44.8
24.9
4.6
80.2
12.2
20.5
15.9
48.6
27.5
6.2
89.8
10.3
14.8
17.4
42.5
24.9
5.5
76.2
8.0
11.5
14.6
34.1
21.1
3.5
59.3
Preferred Stock Equity
Common Stock Equity
Total Equity
0.0
54.5
54.5
0.0
57.1
57.1
0.0
65.1
65.1
0.0
55.2
55.2
0.0
45.6
45.6
GM
2000
1999
2001
2000
1999
Current Ratio
3.02
2.32
2.86
1.21
1.24
1.22
Days Receivable
291
198
269
102
91
80
Asset Turnover
0.57
0.64
0.63
0.76
0.73
0.84
Inventory Turnover
16.90
17.11
14.65
15.04
14.61
17.35
ROA
0.2%
1.5%
2.2%
2.9%
4.0%
2.9%
ROE
3.0%
14.8%
29.1%
7.7%
9.5%
7.0%
Gross Margin
5
TOYOTA
2001
26.1%
28.4%
21.0%
26.5%
24.9%
27.4%
Operating Margin
5.7%
9.1%
5.6%
7.6%
6.0%
5.5%
Profit Margin
0.3%
2.4%
3.6%
3.9%
5.1%
3.8%
2.008 - Spring 2004
6
1
Time Value of Money
Manufacturing Investment Decision
• $1 today is worth more than $1 tomorrow
•
•
•
•
•
NPV
Payback Period
Average Return on Book
Internal Rate of Return
Profitability Index
Discount rate:
Return foregone by investing in the project
rather than in other opportunities
2.008 - Spring 2004
7
2.008 - Spring 2004
8
Cash Flow During Product Cycle
Mfg Cost Example
Percent of
Total
Hobbed Gear
Material:
Material:
SAE 1045, including 2% setup
scrap and 46% chips
Cash Flow
NPV
2
3
4
5
6
7
8
n
Bar chuck, cut off and bore
8.49
Broach keyway
3.17
Hob teeth
47.50
Harden
1.92
Grind ends perpendicular to pitch
diameter
Deburr
Inspect
Perishable tools and gages, per
piece
Total
2.008 - Spring 2004
9
Direct
Material
Cost
Prime
Cost
MPIF FC-0208-S (7.0 g/cm3
density) 5% scrap
9.97
Direct
Labor
Cost
+
Compact (100-ton press)
2.37
Sinter
2.56
Harden
1.92
Grind ends perpendicular to
pitch diameter
5.93
0.53
Deburr
0.53
0.26
Inspect
0.26
17.10
Perishable tools and gages,
per piece
8.19
Total
31.73
10
Full cost (cont’d)
Engineering
15%
Plant &
machinery,
depreciation, energy
12%
R&D
5%
Full
Cost
=
Overhead
Cost
Operations:
2.008 - Spring 2004
Full
Production
Cost (or
Inventory
Cost)
=
5.93
100.00
Elements of Product Cost
+
Manufacturing
40%
Adm in.,
sales,
marketing
25%
=
Distribution
Cost
Manufacturing
40%
Profit
15%
+
Selling Price
General &
Administrative
Cost
2.008 - Spring 2004
15.10
Operations:
1
+
Percent of Hobbed
Total
P/M Gear
11
2.008 - Spring 2004
Indirect
Labor
26%
Direct Labor
12%
Manufacturing Costs
12
2
Production Cost Relative to Volume
Direct/Indirect vs. Fixed/Variable
Relative cost per part ($)
1000
• Traceability: Accountant
• Volume-dependence: Economist
100
10
1
One of
a kind
1
Batch
production
102
10
103
103
Mass
production
104
105
106
Relative Production Rate (parts/time)
2.008 - Spring 2004
13
2.008 - Spring 2004
14
How Man, Machine, and Material
Spend Time in the Factory
Fixed and Variable Cost
People
Materials
Cost per unit, $
Machines
Value adde d
Valu e adde d
Value adde d
Total Cost (TC)
Variable Cost (VC)
Waste
Waste
Waste
Fixed Cost (FC)
“Waste”: waiting for materials,
watching machine running,
producing defects, looking for
tools, fixing machine
breakdowns, producing
unnecessary items, etc.
Volume, n
TC = FC + n∗VC
2.008 - Spring 2004
15
“Waste”: transportation, storage,
inspection and rework
“Waste”: unnecessary
movement of machine, setup
time, machine breakdown,
unproductive maintenance,
producing defective products,
producing products when not
needed, etc.
2.008 - Spring 2004
16
Product cost by industry
Industry
Aerospace
Direct Materials
Direct Labor
Manufacturing
overhead
51.7
19.3
29.0
Computers
69.9
7.5
22.5
Electronics
48.6
15.1
36.3
Industrial and farm equipment
46.0
12.8
41.2
Metal products
52.0
15.7
32.3
Motor vehicles and parts
63.8
7.8
28.4
Scientific and photographic
equipment
52.3
11.3
36.5
Average for seven industries
54.4
12.9
32.6
2.008 - Spring 2004
Allocation Bases of Overhead
•
•
•
•
17
2.008 - Spring 2004
Labor hours
Machine hours
Total direct cost
Activity based
18
3
ABC: Cost Accuracy Target
Allocation Bases of Overhead (cont’d)
Actual Cost
Final
product
Raw
material
Station 1
Station 2
Unit Level Activity
Station 3
Station 4
Cost Driver
Quantity of Driver
Cost per Unit Driver
Total Cost
1 Person direct labor
8 hours per day
$8.00 / hour
$64.00 per day
Value-added Activities:
Extensive ABC System
- Assembly
Non-value Added Activities:
Simple ABC System
1 hour per day
$8.00 / hour
$8.00 per day
- Tool Load/Unload
Machine time
2 hours per day
$60.00 / hour
$120.00 per day
- Part Load/Unload
- Machine setup
1 Person Direct labor
45 hours per day
$8.00 / hour
$6.00 per day
CMM Time
3 hours per day
$35.00 / hour
$105.00 per day
- Inspection
1 Person Direct labor
Total
2.008 - Spring 2004
19
$303.00
2.008 - Spring 2004
Traditional Costing
20
Process Oriented Costing
Overhead Costs
Production Overhead
600 Machine Classes
Production Overhead
600 Machine Classes
Materials
Overhead
Support
Overhead
DM Direct
Material
Cost to date
Materials
Overhead
Support
Overhead
Order
Processing Cost
Special
Components Cost
DM Direct
Material
Cost to date
Per order
# of special components
Overhead Cost Pools
Allocation Bases
Products
Products
Products
2.008 - Spring 2004
21
2.008 - Spring 2004
Traditional and Activity-Based Costing
($ 000’s)
Traditional
Transferred
22
Distribution of Orders
3%
Process Oriented
630,000
Manufacturing cost1
Engineering costs
Tooling costs
Administrative costs
Support related cost
$105,000
6,000
36,000
120,000
$105,000
6,000
36,000
120,000
267,000 (74%)
267,000 (74%)
12,000
22,500
60,000
6,300
0
27,000
5,700
22,500
33,000
94,500 (26%)
33,300 (9%)
61,200 (17%)
13,800
19,500
13,800
19,500
0
$361,500
Order processing cost
Special components cost
Total cost
$361,500
> 99 Motors
Number of motors
Material
Material re lated overhead
Labor
Production related overhead
14%
31%
157,500
26%
5–19 Motors 13%
75,600
Percent of Total Cost
2.008 - Spring 2004
44%
20 – 99 Motors
31,500
1
9%
352,800
48%
1 Motor
2 – 4 Motors
Number of orders
23
2.008 - Spring 2004
7%
5%
65,625
24
4
Traditional Systems Distort
Product and Customer Costs
Cost Estimate: Example
Pre-Support Related Overhead Cost
Base Motor
Components
Total
A
B
C
D
E
247.0
32.2
279.2
1.35
247.0
64.4
311.4
x 1.35
247.0
96.6
343.6
x1.35
247.0
161.0
408.0
x1.35
247.0
322.0
569.0
x1.35
376.9
420.4
463.9
550.8
768.2
1.62
1.69
1.75
1.83
1.96
Low
High
Volume
Total
Ratio to Traditional
Complexity
Traditional
Costs
Low
Revised Cost per Unit
1 unit
10 units
20 units
100 units
2.008 - Spring 2004
A
B
C
613.6
370.6
357.1
346.3
713.2
416.2
399.7
386.5
812.8
461.8
442.3
426.7
D
1,012.0
553.0
527.5
507.1
High
Overcosted
Undercosted
E
Product Complexity
• Small batch sizes
• Long set-up times
• Unique components
• Special inspection and tests
• Extensive material handling
• Special vendors
1,510.0
781.0
740.5
708.1
25
2.008 - Spring 2004
Customer Complexity
• Customized products
• Short lead times
• Unpredictable orders
• Extensive technical support
• Extensive post-sales support
• Special test and requirements
26
5