Value-Based Systems: ABM and Lean

1. Value-Based Systems: ABM and Lean 5

2. Value-Based Systems and Management OBJECTIVE 1: Explain why managers use value-based systems and discuss their relationship to the supply chain and the value chain.

3. Figure 1: The Supply Chain and Value Chain in a Furniture Company

4. Value-Based Systems and Management • Managers create value and satisfy customers five ways. • Work with suppliers and customers • View the organization as a collection of value-adding activities • Use resources for value-adding activities • Reduce or eliminate non-value-adding activities • Know the total cost of creating value for a customer

5. Value-Based Systems and Management • Value chains and supply chains give managers a better understanding of their company’s internal and external operations. • A value chain is a sequence of activities that add value to a company’s product or service. • A supply chain is the path that leads from the suppliers of the materials from which a product is made to the final customer; it includes both suppliers and suppliers’ suppliers, and customers and customers’ customers.

6. Value-Based Systems and Management • Process value analysis helps managers reduce costs by identifying and eliminating non-value-adding activities.

7. Value-Based Systems and Management • Compare value-adding and non-value-adding activities. • A value-adding activity adds market value to a product or service. • A non-value-adding activity adds cost to a product or service but does not increase its market value.

8. Value-Based Systems and Management • Value-based systems • Create opportunities to improve nonfinancial performance measures and cost information supplied to managers • Help managers view their organization as a collection of activities

9. Value-Based Systems and Management • Activity-based management (ABM) • Provides financial and performance information at key operational activity levels. • Eliminates waste and inefficiencies.

10. Value-Based Systems and Management • A lean operation eliminates waste three ways • Good planning and design • Smart production scheduling and standardized product and processing plans • Analysis of worker and machine actions

12. Activity-Based Costing OBJECTIVE 2: Define activity-based costing and explain how a cost hierarchy and a bill of activities are used.

13. Table 1: Sample Activities in Cost Hierarchies

14. Activity-Based Costing • Activity-based costing (ABC) calculates a more accurate product cost than traditional methods.

15. Activity-Based Costing • A cost hierarchy is a framework for classifying activities according to the level at which their costs are incurred; in a manufacturing organization, the cost hierarchy typically has four levels: • Unit level • Batch level • Product level • Facility level

16. Activity-Based Costing • A bill of activities is used to compute the following: • Costs assigned to activities • Product unit cost

18. The New Operating Environment and Lean Operations OBJECTIVE 3: Define the elements of a lean operation and identify the changes in inventory management that result when a firm adopts its just-in-time operating philosophy.

19. Table 2: Direct and Indirect Costs in Traditional and JIT Environments

20. The New Operating Environment and Lean Operations • Lean operations philosophy • Simple is better • Quality of product or service critical • Work environment emphasizes continuous improvement

21. The New Operating Environment and Lean Operations • Lean operations philosophy (cont.) • Large inventories was resources and might hide poor work • Reduce or eliminate activities or functions that do not add value • Goods should be produced only when needed

22. The New Operating Environment and Lean Operations • Lean operations philosophy (cont.) • Workers must be multiskilled and help eliminate waste • Long-term relationships with suppliers is important

23. The New Operating Environment and Lean Operations • Just-in-time (JIT) operating environment eliminates waste through 6 principles. • Minimum inventory levels • Pull-through production • Quick setup and flexible work cells

24. The New Operating Environment and Lean Operations • Just-in-time (JIT) operating environment eliminates waste through 6 principles. (cont.) • A multiskilled work force • High levels of product quality • Effective preventive maintenance

25. The New Operating Environment and Lean Operations • Continuous improvement of the work environment

26. The New Operating Environment and Lean Operations • Accounting for product costs in a JIT Operating Environment • Classifying costs • Processing time • Inspection time • Moving time • Queue time • Storage time

27. The New Operating Environment and Lean Operations • Accounting for product costs in a JIT Operating Environment (cont.) • Assigning costs • Managers focus on throughput time. • Several costs that are treated as indirect costs in a traditional environment are treated as direct costs of a JIT work cell.

29. Backflush Costing OBJECTIVE 4: Define and apply backflush costing, and compare the cost flows in traditional and backflush costing.

30. Figure 2: Comparison of Cost Flows in Traditional and Backflush Costing

31. Figure 3: Cost Flows Through T Accounts in Traditional and Backflush Costing

32. Backflush Costing • A JIT operating environment simplifies cost flows through the accounting system. • Conversion costs • Elimination of Materials Inventory account

33. Backflush Costing • Backflush costing saves time and cuts costs.

35. Comparison of ABM and Lean OBJECTIVE 5: Compare ABM and lean operations as value-based systems.

36. Table 3: Comparison of ABM and Lean Value-Based Systems

37. Comparison of ABM and Lean • Both ABM and lean seek to eliminate waste, reduce non-value-adding activities, and improve allocation of resources.

38. Comparison of ABM and Lean • The two systems differ in their methods of costing and cost assignment: • ABM uses cost drivers to assign indirect costs. • The overhead costs incurred in a JIT work cell become direct costs of the products made in that cell.

39. Comparison of ABM and Lean • The two systems differ in their methods of costing and cost assignment: (cont.) • ABM uses job order or process costing to calculate product costs. • Lean may use backflush costing.