1. A-B-C strategic tool, not an accounting system Vaidya--UBS

2. TODAY’S CUSTOMER WANTS VFM

3. The Importance Of Customer Value Activities Create outcomes and consume resources VALUE-ADDED ACTIVITIES enhance the value of products and services in the eyes of the customer while meeting the goals of the organization NON-VALUE-ADDED ACTIVITIES do not contribute to customer perceived value

5. Waiting time for processing

6. Time and effort to move to processing

9. The breakneck pace of technological innovation

10. Startling advances in computerized system Created a new playing field where some have emerged as World-class producers, while others have fallen by the wayside Vaidya--UBS

12. What decisions or actions can a manager take based on this information ? Vaidya--UBS

13. COST DRIVER ANALYSIS Cost Department: Purchasing ACTIVITIES COST DRIVERS Process Requisitions Numbers of requisitions Expedite Orders Number of urgent orders Process Receipts Paper work required Vaidya--UBS

14. ABCM provides a much clearer picture of how time is spent and opportunities for improvement Activity Based Costing Method Purchasing Activities %of Annual Cost time (Rs.’000) Process requisitions Clarify details 13% 16,430 Prepare Specifications 2% 2,530 Obtain quotations 1% 1,265 Vender queries 3% 3,790 Negotiate &select vender 1% 1,265 Generate orders 5% 6,320 Generate change orders 11% 13,900 36% 45,500 13% of time is spent on clarifying requisition and 11% time is spent on processing changed orders.How much time and money could be saved if they were right at first time? Only 1% time is spent on negotiating and selecting vendors .Could quality delivery and cost of materials be improved by spending more time here. Vender queries 6% 7,590 Chase late orders 4% 5,055 Amend for changed quantities 9% 11,375 Process urgent supplies/ stockouts 10% 12,640 29% 36,660 10% of time is spent on urgent orders. Would better planning reduce time here and enable smother operations? Vaidya--UBS

15. Process Receipts Checking goods received 1% 1,265 Follow -up of short deliveries 8% 10,110 Follow -up backorders 2% 2,530 Cancel orders no longer required 1% 1,265 Prepare reports and administration 23% 29,070 35% 44,240 100% 126,400 23% of time is spent on reports and administration Is this all necessary? Can this time be spent more productively? Vaidya--UBS

16. a case study in Cost management ATALE OF TWO CITIES Aerotech corporation: (Phoenix and Bakersfield Plants)

17. AEROTECH CORPORATION ---a case in point Aerotech corporation: a tale of two cities PRODUCT: printed circuit boards used in aircraft radar and LOCATION: Phoenix plant (more than 20 years) Bakersfield plant (recently added) TWO DIFFERENT SCENARIOS : Phoenix plant utilizes a traditional plant layout and production processes where as Bakersfield employs the latest in advanced manufacturing technology Vaidya--UBS

18. Forecast Sales Order components Store Inventory Prepare Production Schedule Make sales from finished goods inventory Begin Production in Anticipation of Sales Traditional “Push” Manufacturing Computer Manufacturer

19. Customer places an order Create Production Order Generate component requirements Goods delivered just in time Production begins as parts arrive Components are ordered JIT “Pull” Manufacturing Computer Manufacturer

20. PRODUCTION PROCES 1. SEQUENCING 2. AUTO-INSERTION 3. HAND-INSERTION 4.WAVE SOLDERING 5. WASH/DRY 6.HAND-INSERTION 7. BED NAILS 8.BURN-IN 9. PACKAGING Vaidya--UBS

22. Aerotech Corporation’s Bakerfield Plant Shipping Receiving Inspection Raw Material & Parts Storage Purchasing And Inventory Control Sales And Marketing Finished Goods Storage Packaging Work Center Burn-in Testing Work Center Maintenance And Custodial Quality Control Engineering Design Computer Center Accounting Production Scheduling Personnel Plant Manager and Staff

23. TRADITIONAL , VOLUME-BASED PRODUCT COSTING SYSTEM Basic production and cost data: Mode I Mode II Mode III Boards Boards Boards Production unit 10,000 20,000 4,000 Production runs 1 run of 10000 4 runs of 5000 each 10 runs of 400 each Direct material 50 90 20 (raw boards and components) Direct labour* 3 hours per board 4 hours per board 2 hours per board Setup time* 10 hours per run 10 hours per run 10 hours per run Machine time 1 hour per board 1.25 hours per board 2 hours per board * direct labour and setup labour cost 20 per hour, including fringe benefits Vaidya--UBS

24. PRODUCT COST FROM TRADITIONAL, VOLUME-BASED PRODUCT-COSTING SYSTEM Mode I Mode II Mode III Boards Boards Boards Direct material 50 90 20 (raw boards and components) Direct labour* 60 (3hr.@20 ) 80 (4hr.@20 ) 40 (2hr.@20) Manufacturing overhead* 99 (3 hrs. @33 ) 132 (4 hrs. @33) 66 (2 hrs. @33) TOTAL 209 302126 Calculation of predetermined- overhead rate: Budgeted manufacturing overhead----------------------------------------------------- 3894000 Direct Labou, budgeted hours : Mode I : 10000 units*3 hours 30000 ModeI I : 20000 units*4 hours 80000 Mode III : 4000 units*2 hours 8000 TOTAL HOURS 118000 Predetermined overhead rate: Budgeted overhead/Budgeted direct labour hours = 3894000/118000 = 33 Per Hour Vaidya--UBS

25. Target and Actual Selling Prices : Mode I Mode II Mode III Boards Boards Boards Production Cost under Traditional 209 302 126 volume-based System Target selling Price 261.25 377.50 157.50 (cost* 125%) Actual selling price 261.25 328.00 250.00 2 1 3 Vaidya--UBS

26. Stage one of A-B-C : Identification of Activity Cost Pool OVERHEAD COSTS Total budgeted cost = 3894000 ACTIVITY COST POOL BATCH LEVEL PRODUCTION-SUSTAINING LEVEL FACILITY LEVEL UNIT LEVEL Machinery Cost Pool 1212600 Setup Cost Pool 3000 Engineering Cost Pool 700000 Facility Cost Pool 507400 Receiving and Inspection Cost Pool 200000 Material-Handling Cost Pool 600000 Quality-Assurance Cost Pool 421000 Packing and Shipping Cost Pool 250000 Vaidya--UBS

27. 1.A-B-C : Machinery Cost Pool Maintenance Lubrication Various Overhead Costs related to machinery Depreciation Electricity Computer Support Calibration STAGE ONE Activity cost pool Machinery Cost Pool Total budgeted cost =1212600 Total budgeted machinery cost/ Total budgeted machine hours = 1212600/43000 machine hours = 28.20 per machine hour Calculation of pool rate STAGE TWO Mode I 28.20*1 =28.20 Mode II 28.20*1.25 =35.25 Mode III 28.20*2 = 56.40 Cost assignment : pool rate per machine hour* machine hours per unit Vaidya--UBS

28. 2. A-B-C : Setup Cost Pool Calculation of total setup cost Total budgeted setup cost = (10 hrs. per setup) (20 per hour) (15 production runs) STAGE ONE Activity cost pool Setup cost pool Total budgeted cost = 3000 Total budgeted setup cost/ Total planned production runs = 3000/15 runs = 200 per run Calculation of pool rate STAGE TWO Mode I 200 per run/10000 units per run =.02 per run Mode II 200 per run/5000 units per run =.04 per unit Mode III 200 per run/400 units per run =.50 per unit Cost assignment : pool rate per setup/ units per production run Vaidya--UBS

29. 3. A-B-C : Machinery Cost Pool Maintenance Lubrication Various Overhead Costs related to machinery Depreciation Electricity Computer Support Calibration STAGE ONE Activity cost pool Machinery Cost Pool Total budgeted cost =1212600 Total budgeted machinery cost/ Total budgeted machine hours = 1212600/43000 machine hours = 28.20 per machine hour Calculation of pool rate STAGE TWO Mode I 28.20*1 =28.20 Mode II 28.20*1.25 =35.25 Mode III 28.20*2 = 56.40 Cost assignment : pool rate per machine hour* machine hours per unit Vaidya--UBS

30. 4. A-B-C : Engineering Cost Pool Engineer’s salary Engineering software Various Overhead Costs related to engineering Engineering supplies Depreciation on engineering equipment STAGE ONE Engineering Cost Pool Total budgeted cost =700000 Activity cost pool Total budgeted engineering cost = 700000 Allocation to product lines based on proportion of engineering transactions 25% of transactions 45% of transactions 30% of transactions STAGE TWO Mode I 25%*700000/10000 units =17.50 per unit Mode II 45%*700000/20000 units =15.75 per unit Mode III 30%*700000/4000 units =52.50 per unit Cost assignment : cost allocated to each product line / no. of units of each product Vaidya--UBS

31. 5.A-B-C : Facility Cost Pool Plant depreciation Property taxes Various Overhead Costs related to facilities and and general operations Plant management Insurance Plant maintenance Security STAGE ONE Activity cost pool Facility Cost Pool Total budgeted cost =507400 Total budgeted facility cost/ Total budgeted direct labour hours 507400 / 118000 = 4.30 per direct labour hour Calculation of pool rate STAGE TWO Mode I 4.30 per direct labour hour * 3 hr. per unit =12.90 per unit Mode II 4.30per direct labour hour * 4 hr. =17.20 per unit Mode III 4.30 per direct labour hour * 2 hr. per unit =8.60 per unit Cost assignment : pool rate per direct labour hour * direct labour per unit Vaidya--UBS

32. PRODUCT COST FROM ACTIVITY-BASED-COSTING SYSTEM : Mode I Mode II Mode III Boards Boards Boards DIRECT MATERIAL 50.00 90.00 20.00 DIRECT LABOUR 60.00 80.00 40.00 MACHINERY--(a) 28.20 35.25 56.40 SETUP --(b) .02 .04 .50 ENGINEERING --© 17.50 15.75 52.50 FACILITY --(d) 12.90 17.20 8.60 RECEIVING AND INSPECTION--(e) 1.20 2.40 35.00 MATERIAL HANDLING--(f) 4.20 9.00 94.50 QUALITY ASSURANCE--(g) 8.42 8.42 42.10 PACKAGING AND SHIPPING--(h) 1.003.7541.25 TOTAL 183.44261.81390.85 Vaidya--UBS

33. COMPARISON OF PRODUCT COSTS FROM ALTERNATIVE PRODUCT COSTING SYSTEMS : Mode I Mode II Mode III Boards Boards Boards REPORTED PRODUCT COSTS : TRADITIONAL COSTING SYSTEM 209.00 302.00 126.00 ACTIVITY-BASED COSTING SYSTEM 183.44 261.81 390.85 SALES PRICE DATA: ORIGINAL TARGET PRICE 261.25 377.50 157.50 (based on traditional system) NEW TARGET PRICE 229.30 327.26 488.56 (based on A-B-C) ACTUAL SELLING PRICE 261.25 328.0 250.00 Vaidya--UBS

34. COST DISTORTION UNDER TRADITIONAL PRODUCT-COSTING SYSTEM Mode Mode II Mode III Board Boards Boards PRODUCT COST UNDER TRADITIONAL SYSTEM 209.00 302.00 126.00 PRODUCT COST UNDER A-B-C SYSTEM 183.44 261.81 390.85 AMOUNT OF COST DISTORTION PER UNIT 25.56 40.19 (264.85) Traditiona system overcosts Mode I by 25.56 Traditiona system overcosts Mode II by 40.19 Traditiona system undercosts Mode III by (264.85) * PRODUCTION VOLUME 10000 20000 4000 TOTAL AMOUNT OF COST DISTORTION 255600 803800 (1059400) SOME OF THESE THREE AMOUNTS IS ZERO Vaidya--UBS

35. This traditional material handling operation depicts the non-value-added activities of move time, waiting time, and storage time In Phoenix

38. COMPARISON OF PRODUCT COST IN PHOENIX AND BAKERSFIELD PLANTS : Mode I Mode II Mode III Boards Boards Boards PHOENIX 183.44261.81390.85 (A-B-C S YSTEM) BAKERSFIELD 170.60232.70341.35 (A-B-C SYSTEM) Vaidya--UBS

39. THANK YOU Contacts: Prof.SUBHASH C.VAIDYA UNIVERSITY BUSINESS SCHOOL PANJAB UNIVERSITY, CHANDIGARH E-MAIL:scvaidya@indiatimes.com Vaidya--UBS