Chapter 08 Atkinson, Kaplan, Matsumura & Young Management Accounting 6th ed Powerpoint

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Measuring and ManagingMeasuring and ManagingMeasuring and ManagingMeasuring and Managing
Life-Cycle CostsLife-Cycle CostsLife-Cycle CostsLife-Cycle Costs
Chapter 8Chapter 8

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TTootal-Lital-Life-Cyclfe-Cyclee CostinCostinggTTootal-Lital-Life-Cyclfe-Cyclee CostinCostingg

TTootal-life-cycle costingtal-life-cycle costing (TLCC) is(TLCC) is the approachthe approach
companies use to understand and manage all costscompanies use to understand and manage all costs
incurred in:incurred in:
– – Research, developmeResearch, development andnt and engineering cycleengineering cycle
– – anufacturing cycleanufacturing cycle
– – !ost-sale service and disposal cycle!ost-sale service and disposal cycle

"lso #no$n as managing costs %from the cradle to"lso #no$n as managing costs %from the cradle to
the grave&the grave&

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Total-Life-Cycle CostingTotal-Life-Cycle Costing

'ach part of a companys value chain is typically
managed y a different organi*ational function

Companies need a total-life-cycle perspective that
integrates the tradeoffs and performance over time
and across functional units

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esearch! "evelo#$ent! andesearch! "evelo#$ent! and
%ngineering &"'%( )tage%ngineering &"'%( )tage

The R+' tage has three sustages:
– ar#et research
– !roduct design
– !roduct development

.y some estimates, 8/0 to 810 of a products
total life costs are committed y decisions made in
the R+' stage of a products life

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Manufacturing )tageManufacturing )tage

This stage offers little opportunity for engineering
decisions to reduce costs since most costs have
already een determined during the R+' stage

ethods to help improve product costs include:
– !roduct and process costing
– 2acilities layout
– 3ai*en
– .enchmar#ing
– 4ust-in-time manufacturing

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Post-)ale )ervice andPost-)ale )ervice and
"is#osal )tage"is#osal )tage

The service stage egins once the first unit of a
product is in the hands of the customer

+isposal occurs at the end of a products life and
lasts until the customer retires the final unit of a
product

The costs for service and disposal are committed
in the R+' stage

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The )ervice )tageThe )ervice )tage

The service stage typically consists of three
sustages:
– Rapid gro$th

2rom the first time the product is shipped through the
gro$th stage of its sales
– Transition

2rom the pea# of sales to the pea# in the service
stage
– aturity

2rom the pea# in the service stage to the time the last
shipment is made to a customer

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The "is#osal )tageThe "is#osal )tage

+isposal occurs at the end of a products life and
lasts until the customer retires the final unit of a
product

+isposal costs often include those associated $ith
eliminating any harmful effects associated $ith
the end of a products useful life

!roducts $hose disposal could involve harmful
effects to the environment, such as nuclear $aste
or to5ic chemicals, often incur very high costs

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Life-Cycle CostsLife-Cycle Costs

The follo$ing tale illustrates four types of
products and the percentage of life-cycle costs
incurred in each cycle
Combat
Jets
Commercial
Aircraft
Nuclear
Missiles
Computer
Software
R+'
anufacturing
ervice and +isposal
"verage 6ears in Life
Cycle
70
910
90
/
7/0
9/0
9/0
71
7/0
;/0
7/0
7 to 71
<10=
=
710
1

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Target CostingTarget Costing

"n approach that considers manufacturing costs
early in the design decisions

>elps engineers design ne$ products that meet
customers e5pectations and that can e
manufactured at a desired cost

"n important management accounting method for
cost reduction during the design stage that helps
manage total-life-cycle costs

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The Traditional MethodThe Traditional Method

.egins $ith mar#et research into customer
re?uirements follo$ed y product specification

Companies engage in product design and
engineering and otain prices from suppliers

"fter the engineers and designers have determined
product design, cost is estimated

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Target Costing MethodTarget Costing Method

"lthough the initial steps appear similar to
traditional costing, there are some notale
differences:
– ar#eting research is customer-driven
– !ro@ect engineers attempt to design costs out of the
product efore design and development end and
manufacturing egins
– The total-life-cycle concept is used y ma#ing it a
#ey goal to minimi*e the cost of o$nership of a
product over its useful life

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Target Costing MethodTarget Costing Method

'ngineers set an allo$ale cost that enales the
targeted product profit margin to e achieved at a
price customers are $illing to pay

The target profit margin results from a long-run
profit analysis, often ased on return on sales

The target cost is the difference et$een the target
selling price and the target profit margin

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Target Costing MethodTarget Costing Method

Ance the total target cost has een set, the
company must determine target costs for each
component

The value engineering process includes
e5amination of each component of a product to
determine $hether it is possile to reduce costs
$hile maintaining functionality and performance

everal iterations of value engineering are usually
needed efore the final target cost is achieved

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Target Costing MethodTarget Costing Method

T$o other differences characteri*e the process:
– Throughout the entire process, cross-functional
product teams made up of individuals representing
the entire value chain guide the process
– uppliers play a critical role in ma#ing target
costing $or#

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Cost AnalysisCost Analysis

Cost analysis re?uires five su-activities:
B +evelop a list of product components and
functions
7B !erform a functional cost rea#do$n
B +etermine the relative importance of customers
re?uirements
9B Relate features to functions
1B +evelop relative functional ran#ings

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Conduct *alue %ngineeringConduct *alue %ngineering

alue engineeringDorgani*ed effort directed at
the various components for the purpose of
achieving these functions at the lo$est overall cost
$ithout reductions in re?uired performance,
reliaility, maintainaility, ?uality, safety,
recyclaility, and usaility

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Conduct *alue %ngineeringConduct *alue %ngineering

T$o su-activities:
– Edentify components for cost reduction y
computing a value inde5 (ratio of the value to the
customer and the percentage of total cost devoted
to each component)
– Fenerate cost reduction and function enhancement
ideas

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Concerns a+out Target CostingConcerns a+out Target Costing

Lac# of understanding of the target costing
concept

!oor implementation of the team$or# concept

'mployee urnout

Averly long development time

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,rea-%ven Ti$e &,%T(,rea-%ven Ti$e &,%T(

.'T measures the length of time from the
pro@ects eginning until the product has een
introduced and generates enough profit to pay
ac# the investment originally made in its
development

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,rea-%ven Ti$e &,%T(,rea-%ven Ti$e &,%T(

.'T rings together in a single measurement three
critical elements in an effective and efficient
product development process:
– .'T re?uires trac#ing the entire cost of the design
and development process so that the company can
recover its total investment
– .'T stresses profitaility and encourages cross
functional team$or# to meet the customer needs
– .'T is denominated in time and encourages the
launch of ne$ products faster than the competition
so that higher sales can e earned sooner to repay
the product development investment

22. nnovation Measures on thennovation Measures on the
,alanced )corecard,alanced )corecard

'5amples of financial measures:
– Target cost
– !ercentage of sales from recently launched
products
– Fross margins from ne$ products
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23. nnovation Measures on thennovation Measures on the
,alanced )corecard,alanced )corecard

'5amples of nonfinancial measures:
– ar#et Research and Feneration of Ge$ !roduct
Edeas

Gumer of ne$ pro@ects launched ased on
customer input

Gumer of ne$ value-added services identified
– +esign, +evelopment, and Launch of Ge$
!roducts

Gumer of patents

Total R+' time: from idea to mar#et
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%nviron$ental Costing%nviron$ental Costing

'nvironmental remediation, compliance, and
management have ecome critical aspects of
enlightened usiness practice

'nvironmental costing involves:
– electing suppliers $hose philosophy and practices
in dealing $ith the environment match the uyers
– +isposing of $aste products during the production
process
– Encorporating post-sale service and disposal issues
into management accounting systems

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Controlling %nviron$entalControlling %nviron$ental
CostsCosts

"ctivity-ased costing can e easily applied to the
measurement, management, and reduction of
environmental costs
– Edentify the processes that cause environmental
costs
– "ssign the organi*ational costs associated $ith
these processes
– "ssign those costs to individual products,
distriution channels, and customers

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Controlling %nviron$entalControlling %nviron$ental
CostsCosts

Anly $hen managers and employees ecome
a$are of ho$ the activities in $hich they engage
create environmental costs $ill they e ale to
control and reduce them

'nvironmental costs fall into t$o categories:
– '5plicit costs
– Emplicit costs

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