Faisal
faisal.faisal@neu.edu.tr
COSTING AND THE VALUE CHAIN
CHAPTER 18
PAGE# 794
Costing and Value Chain
 Value chain
 Components of value chain
 Activity based management
 Target costing process
 Component of target costing process
 Just in time inventory system
Value chain
 Value chain is a set of activities and resources
necessary to create and deliver the products and
services to the customers.
 Value chain has components
 The value chain consists of four components
Research & development and design
Activities
 It includes idea, production process and product
sample.
 It includes the creation of idea and the development
of prototype products, process and services.
 Prototypes (Sample Product to get feed back of
customers)
Supplier & production related activities
 Supplier related activities Procurement of raw
material.
 Production related activities Methods of
manufacturing
 It includes the procurement of raw material and the
supplies and the activities needed to convert raw
material into finished goods.
3)Marketing & Distribution activities
 It includes the provision of information to the
customer and make the products and services
accessible to the customers.
4)Customer services activities:
 Customer services activities are those resources
consumed by supporting the products or services
after it is not sold to the customer.
Value added & Non- value added activities
 Value added: Includes manufacturing process,
product design etc..
 Non-value added: time used in manufacturing
process, breakdown of electricity, setup mechanism.
 Value added activities: Desirability of product or
services in the eyes of customers.
Value-added activities
 VAA add to the product and services desirability
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(acceptable) in the eyes of customers.
E.g. Product design, manufacturing process,
convenient channels of distribution.
Non- value added activities:
NVAA does not add to the product and services
desirability in the eyes of customers.
E.g. Setting of machinery, storing direct material,
time during which machinery or employees spend
idle.
Activity based management
 Activity based management are used in activity
based costing to eliminate the non value added
activities.
 AB management is the process of using activity
based cost to help reduce and eliminate the non
value added activities.
 Target Costing Process
 Is a business process aimed at the earliest stages of a
new product and service development before
creation and design of product method.
Target cost
 Cost of resources amount spent on resources.
 Components of target costing:
 1) Significant resources are consumed in planning
and market analysis.
 2) concept development
 This component focuses on product feasibility
studies.
 Development involves a cycle of testing and
manufacturing again reformulating the product to
understand the customer’s requirement.
Production design
 Follow the establishment of the product concept in
the development phase.
 Value engineering
 Combination of resources which yields less cost.
 V.E determines the least combination of resources to
create a product desire by the customer.
Life cycle costing
 Is the combination of all potential resources
consume by the product over its entire life.
 E.g.. Mobile Phones (X mobile is Reliable then Y in
North Cyprus, because it includes all potential
resources.
 Finally production begins and continuous
improvement process is used to attain the target
cost.
Just in Time inventory procedure (JIT)
 In it time is examined and manufacturing efficiency
ratio is calculated and equality is examined.
 JIT system refers to acquiring material and
manufacturing goods only as needed to fill the
demand of the customers or orders.
 Eliminating the non value added activities and
inculcate the quality of product through out the
manufacturing process.
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 Products are manufactured instantly ads the
customer places the order.
 Measuring of efficiency in JIT system.
 Time is of critical importance in JIT system
 Therefore time measurement are essential for
scheduling production activities in a manner that
avoids constraints and ensure that jobs are
completed just in time.
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 The length of the time required for a product to pass
completely through a manufacturing process is
called time cycle.
 Time starts from the first step of manufacturing
process to the time when finished products are
achieved, called time cycle.
Elements of time cycle
 Consists of four elements
 1) Processing time
 2) storage and waiting time
 3) movement time
 4) inspection time
 Only during processing time however is value added
activities to the product.
 The other elements of the product cycle time should
reduced as much as possible.
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 A widely use measure of efficiency in JIT system is
the manufacturing efficiency ratio.
 Manufacturing efficiency ratio
 MER express the time spend in value added
activities (Processing time) as percentage of the total
cycle time
 MER=

value added activities
Total cycle time
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 The primary function of manufacturing efficiency
ratio is to highlight the percentage of time spend in
non value added activities.
 Measuring Quality
 According to the system in JIT companies measures
quality, as well as costs and cycle time.
 One widely used measure of productive quality is
deficits per million units produced.
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 In some companies defect rate have been reduced
less then defective part per million units of
production.
 Other method of quality include merchandize
returns, number of warranty claims, customer
complaints, and the result of customer satisfaction
survey.
 A JIT does not itself ensured quality, rather it
establishes striving for quality as basic goal of
organization.
Total quality management
 Companies that enable to compute globally on
quality and cost develop TQM process.
 TQM includes assigning responsibilities for
managing quality, providing good quality measure of
decision making process, & evaluating rewarding
quality performances.
 Accountant participate in this measurement and
reporting process by designing the system that can
track quality and assign cost to the quality failure.
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 Four components of the cost of quality are
considered when designing a measurement system to
track the quality cost.
Prevention cost:
 Are the cost of resources consumed in activities that
prevents defects from occurring.
E.g.. Prevention costs includes employees training,
quality process audits, quality concerned issues.
Appraisal Cost (improve Quality)
 Are incurred to ensure that the product confirm to
the quality standards.
 E.g. it includes inspection of raw materials,
inventories and finished goods, inspection and
monitoring of production process and equipment,
inspection and maintenance programs to ensure
quality.
Internal failure Cost
 Internal failure cost includes additional production
related costs incurred to correct low quality out . E.g.
It includes re-work downtime, re-testing and reinspections etc.,
 External failure Cost:
 EF costs are the largest and most difficult to
measure.
 These costs are incurred because quality failure are
allowed to enter the market.
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 External failure cost includes cost sales, cost due to
return and allowances, and loss good –will,
warranty.