CHAPTER 19
COSTING AND THE VALUE CHAIN
Brief Learning
Exercises Topic Objectives Skills
B. Ex. 19.1 Value chain components 19-1
Analysis
B. Ex. 19.2 Capturing market share with target prices 19-4
Analysis
B. Ex. 19.3 Cost of quality 19-7
Analysis, judgment
B. Ex. 19.4 Cost reduction non-value-added activities 19-2
Analysis, judgment
B. Ex. 19.5 Manufacturing efficiency in a JIT system 19-6
Analysis
B. Ex. 19.6 Activity-based management cost savings
19-2, 19-3,
19-7
Analysis, judgment
B. Ex. 19.7 Target costing 19-4
Analysis
B. Ex. 19.8 Cost of quality 19-7
Analysis
B. Ex. 19.9 Characteristics of quality 19-8
Analysis
B. Ex. 19.10 Target costing and cash flows 19-5
Analysis
Learning
Exercises Topic Objectives Skills
19.1 Accounting terminology
19-2–19–6 Analysis
19.2 Value chain activities 19-1
Analysis, communication,
judgment
19.3 Value-added vs. non-value-added activities 19-2, 19-3
Analysis
19.4 Activity-based management 19-3
Analysis
19.5 Target costing 19-4, 19-5
Analysis
19.6 Just-in-time manufacturing 19-6
Analysis, judgment
19.7 Cost of quality 19-7, 19-8
Analysis
19.8
Value-added and non-value-added activity
costs
19-2, 19-7
Analysis, judgment
19.9 Activity-based management at First Bank 19-3
Analysis
19.10 Quality costs and value chain decisions
19-1, 19-2,
19-7
Analysis, communication,
judgment
19.11 Just-in-time efficiency measures 19-6
Analysis, judgment
19.12 Target costing at Pizza Pies Limited 19-4, 19-5
Analysis, judgment
19.13 Classifying activities 19-2, 19-7
Analysis
19.14 Quality cost tradeoffs 19-7
Analysis, judgment
19.15 Real World: Home Depot 19-3
Analysis, research
Non-value-added costs
OVERVIEW OF BRIEF EXERCISES, EXERCISES, PROBLEMS, AND CRITICAL
THINKING CASES
Topic Skills
19.1 A,B
Identifying value-added and non-value-
19-2, 19-6
Analysis, communication,
activities judgment
19.2 A,B
Activity-based management and target
costing
19-2–19-5 Analysis
19.3 A,B
Target costing 19-4, 19-5 Analysis
19.4 A,B
Cost of quality 19-7, 19-8 Analysis, judgment
19.5 A
Real World: Home Depot 19-1–19-7 Analysis, communication,
Value chain judgment, research
19.6 A
Kare Company’s quality improvement
19-7, 19-8
Analysis, communication,
judgment
19.7 A
Activity-based management at
BookWeb, Inc.
19-2, 19-3
Analysis, judgment
19.8 A
Real World: Kimberly-Clark 19-1–19-8 Analysis,
Value chain, quality, and efficiency communication, judgment
Critical Thinking Cases
19.1 Activity-based management and target 19-2–19-7 Analysis, communication,
costing judgment
19.2 Just-in-time frozen dinners Analysis, communication,
judgment
19.3 Real World: Manufacturing 19-1–19–7
Engineering, Inc. (Internet) technology
19. 4
Sarbanes-Oxley and non-value-added
activities (Ethics, fraud & corporate
governance)
19-1–19-3
Problems
Sets A, B
Learning
Objectives
19-1, 19-2,
19-6
DESCRIPTIONS OF PROBLEMS AND CRITICAL THINKING CASES
Problems (Sets A and B)
19.1 A,B
Castner Corporation/Quartex Corporation 30 Medium
Identifying how value-adding activities can improve efficiency. The
problem also has an ethical component that requires students to decide
if a company should attempt to improve efficiency by downsizing. This
is a good group discussion problem.
19.2 A,B
The Kallapur Company/Bitmore Company 60 Strong
Comprehensive target costing problem that illustrates how the method
used to allocate fixed overhead affects the manufacturing cost per unit
assigned to different products. Activity-based management is also used
in making decisions on how to reach a target cost.
19.3 A,B
Meiger Mining/Oro Mining 30 Medium
A target costing problem that requires the student to analyze an
alternative offered for reaching the desired target cost.
19.4 A,B Arusetta, Inc./Nazu, Inc. 40 Medium
A cost of quality problem that requires the construction of a categorical
cost of quality report. The student is also asked to analyze changes in
specific quality costs in light of the implementation of a total quality
management program.
19.5 A Home Depot 30 Medium
Students read Note 1 from Home Depot’s annual report to find
references to Home Depot’s value chain.
19.6 A Kare Company 40 Medium
Students identify quality costs and calculate quality costs as a percent of
sales over two years. Students prepare a graph illustrating the trade-off
between prevention and failure costs.
19.7 A BookWeb, Inc. 50 Strong
Students use activity-based management tools to manage the value
chain of a book warehousing operation. Students must identify activities
that give rise to non-value-added costs at the company.
Below are brief descriptions of each problem, case, and the Internet assignments. These descriptions
are accompanied by the estimated time (in minutes) required for completion and by a difficulty rating.
The time estimates assume use of the partially filled-in working papers.
19.8 A Kimberly-Clark Corporation 30 Medium
Recent areas of focus for Kimberly-Clark as identified in their
annual report are matched with the concepts introduced in the
chapter. Students consider how the concepts will help Kimberly-
Clark achieve their goals.
Critical Thinking Cases
19.1 Mays Electronics 50
Medium
A target costing and activity-based management problem that requires
students to analyze the effects of several actions. Also illustrates how
suggestions for cost reductions can be elicited from numerous sources,
such as suppliers, customers, and employees.
19.2 Healthy Times Frozen Dinners 40 Strong
Determining inefficiencies of a company by isolating value-added and
non–value-added activities.
Manufacturing Engineering, Inc.
19.3 Internet 30 Medium
Students are asked to access a sample reengineering project and assess the
usefulness of cost information.
Sarbanes-Oxley and Non-Value-Added Activities
19.4 Ethics, Fraud, and Corporate Governance 25 Medium
Students are asked to identify the costs and benefits of SOX and, in
particular, economy-wide benefits.
SUGGESTED ANSWERS TO DISCUSSION QUESTIONS
2.
The R&D and design component of the value chain would include all activities pertaining to the
type, location, menu, and service characteristics of the new restaurant. Examples include (but
3.
The marketing component of a fire department’s value chain would include all activities
designed to educate citizens on how to reach the department and for which types of emergencies
4.
Value-added activities add to the product’s or service’s desirability in the eyes of the consumer.
Customers would conceivably be willing to pay more for a product where such activities have
5.
The storage of the stereos results in explicit costs such as the cost of renting/owning the
6.
Target costing is better applied at the earliest stages of the value chain because it is estimated
7.
The objective of activity-based management is to use activity-based information, including
8.
In a JIT system, goods are produced only in sufficient quantity to meet customer demand.
Therefore, the goods must be “defect-free,” or the company will be unable to meet demand.
9.
The idea behind JIT is to minimize not only inventory but also all non-value-added activities.
Also, with minimal inventories to serve as a reserve, a JIT system requires a high degree of
10.
Prevention costs consist of the costs incurred by an organization to prevent defects from
occurring. Examples of prevention costs include employee training, efforts to design quality
into the product or production process, process quality audits, and the costs of evaluating
supplier quality. Appraisal costs are incurred to ensure that products conform to quality
standards. The most common appraisal costs are associated with product or raw materials
11.
Life-cycle costing consists of estimating the total costs incurred by a customer from the time
12.
Until management has a clear understanding of the activities that drive costs, they will not be
13.
Agree:
•A break down of machines in a JIT environment has the potential to halt production.
•
Disruptions in production are more serious in a JIT environment because it is
demand driven.
•
Any break down in the flow of operations, whether machine related or non-machine
related is likely to cause a serious disruption in a JIT environment.
15.
The four target costing components are 1) planning and market analysis, 2) concept
development, 3) production design and value engineering, and 4) production and continuous
improvement. Planning and market analysis would be critical to determine competitors prices
and the value they deliver customers at that price. Also, determining customer views of value-
Student answers may vary, but the arguments on both sides should include the following:
•
The cost of carrying inventory for non JIT firms may be equal to the opportunity
cost associated with disrupted sales in the JIT firm.
SOLUTIONS TO BRIEF EXERCISES
B. Ex. 19.1
B. Ex. 19.3
B. Ex. 19.4
B. Ex. 19.5
B. Ex. 19.6
Time savings with new mix and knead time = 50% × 50% =25%.
Cost savings with new mix and knead time = .25 × $850,000 = $212,500.
Design Phase—activities include designing new sailboats, market analysis of
Old mix and knead time = 50%.
Student answers will vary.
Student answers will vary.
B. Ex. 19.9
B. Ex. 19.10
The consulting firm should be focusing on customers perceptions of quality.
Current year cash flow implication of the proposed purchase of new
SOLUTIONS TO EXERCISES
Ex. 19.1 a. Non-value-added activity
Ex. 19.2 a.
Research and development activities of a management accountant might
include asking managers what types of information they need to make decisions
Ex. 19.3 1. Value-added.
2.
Non-value-added. Although the materials must be unloaded, it would be more
efficient if they were delivered straight to the Cutting Department as they were
needed.
Ex. 19.4 a.
Labor
Category
Billing and
Recording
Payments
Customer
Service
Financial
Reporting
& Analysis
Delinquent
Accounts
Total Labor
Resources
¼ time ¼ time ¼ time ¼ time
$ 16,250 $ 16,250 $ 16,250 $ 16,250 $ 65,000
b.
Ex. 19.5 a.
b.
Since the competitor is selling essentially the same product for $28.00, On
Point should set its target price at that level to remain competitive.
BLAKE FURNITURE, INC.
Accounts Receivable Department
Manager
Activity Category
In addition to handling delinquent account activities, the account specialists
perform customer service activities and analysis activities that are not
½ time ¼ time ¼ time 0
$ 75,000 $ 37,500 $ 37,500 $ 0 $ 150,000
$ 91,250 $ 72,750 $ 72,750 $ 54,250 $ 291,000
Clerks
Ex. 19.5
(continued)
c.
d.
JIT and TQM implementation would allow for the elimination of inspection
and storage time, which would reduce cycle time to 11 days (18 – 4 – 3). Cart’s
The original estimated selling price of $30 would yield a profit of $7.50 per
unit once the target cost had been achieved. Total yearly profits would be:
Ex. 19.7 a.
11,000$
13.2%
Internal and External
Failure Costs as a
=
=
=
b. ($11,000 + $15,000) $26,000
$500,000 $500,000
Ex. 19.8
a.
b.
c.
Purchasing large quantities of materials to obtain a discount can be a value-
Low quality materials entering the production process can create downtime for
=
Transferring employees out of inspection to help with production can lower
NOGAIN MANUFACTURING
Quality Cost Report
For the Current Year Ended December 31
=
5.2%
Prevention and
Appraisal Costs as a
=
Foundry & Bellows, Inc. value-added and non-value-added activities are:
Prevention costs:
Machine maintenance ……………………………………………………………..
Total quality costs ………………………………………………………………….
External failure costs:
Inspections …………………………………………………………………………
Internal failure costs:
Lost sales …………………………………………………………….
Machine breakdown ……………………………………………………
Appraisal costs:
Scrap and rework …………………………………………………
Warranties …………………………………………………………
Defect returns ………………………………………………………….
Ex. 19.9
Ex. 19.10
Heavy Duty as
a Percentage of
Total
Regular as a
Percentage of
Total
Total
Activity
Costs
Activity
Cost to
Heavy Duty
Activity
Cost to
Regular
33% 67%
60% 40% $ 130,000 $ 78,000 $ 52,000
If each cashier spends five percent of his/her time on helping customers organize
their purchases, then a total of 5 cashiers × 5% = 25% of total cashier time per store
is consumed with organizing customer’s purchases. The clerks have enough capacity
to undertake assisting the customer because 10% idle time per clerk × 6 clerks =
Activities:
Production
Warranty
80% 20% 120,000 96,000 24,000
75% 25% 70,000 52,500 17,500
55% 45% 32,000 17,600 14,400
90% 10% 50,000 45,000 5,000
Recalls
Rework
Ex. 19.10
(continued)
Ex. 19.11
Ex. 19.12 a. Target cost = $6.50/1.10 = $5.91.
Ex. 19.13 a. Internal failure, non-valued added.
Internal failure, non-value-added (Kimberly-Clark would prefer no waste
Clearly, the Heavy Duty vacuum has the highest quality cost per unit (five times
the quality cost per unit of Regular). The manager might want to consider the
Items a., b., c., e., and f. might be considered non-value-added activities in a JIT
system. If that is the case, then:
c.
d.
Home Depot measures shrink by undertaking regular physical inventories
and comparing those inventories to its records. Between physical
Home Depot accrues estimated losses for shrink until a physical inventory
SOLUTIONS TO PROBLEMS SET A
PROBLEM 19.1A
CASTNER CORPORATION
a.
b.
c.
Production Activity
2
30 Minutes, Medium
Total cycle time:
Inspecting materials
Storing materials
Moving materials into production
Setting up production equipment
Assembling finished products
Painting finished products
Bending materials
Value-added production activities:
Inspecting materials ………………………………………………………………
Number of Days
Non-value-added production activities:
Cutting materials
2
3
Setting up production equipment ……………………………………………….
Moving materials into production …………………………………………………
PROBLEM 19.1A
CASTNER CORPORATION (concluded)
d.
e.
f.
There is no simple answer to this question. It may be argued that Castner does indeed
have a responsibility to those employees who have devoted their careers to the company.
Castner’s total cycle time was computed in part c above. Its value-added time is shown
below:
The following activities might be reduced or eliminated if Castner implements a JIT
system:
Manufacturing efficiency ratio: Value-Added Time ÷ Total Cycle Time
PROBLEM 19.2A
THE KALLAPUR COMPANY
a.
b.
Target Cost = $220 – $33 = $187
Target Cost = $120 – $18 = $102
Target Cost: QUIN
Target Cost = Target Price – Target Profit
Target Cost = Target Price – Target Profit
If fixed overhead is allocated based on units of production, the fixed overhead cost per unit
is equal to $50 calculated as follows:
60 Minutes, Strong
Target Cost: KAP1
Total manufacturing cost per unit: