Cost information for activity

and process decisions

Case Analysis-Sunk/Relevant Cost
• Relevant cost:
• 35 monthly installments of $6000 and $
50,000 are relevant as the decision will
affect labor, materials and machine
maintenance cost
• Sunk cost
• $ 30,000 and $ 5200
 Case analysis
• Cost increases : • Cost savings
• Down payment on • Disposal of new
new machine-50000 machines-50000
• Monthly payment on • Savings in Mat, Lab
new machine- 6000 and maintainence-
6200
 Case Analysis
• Technically- sell old machine and replace
it
• But, reputation of manager and his
decision making skills are questioned
• Old machine- made error
• Don’t take new machine- working sub
optimal
 Make or Buy- Case Analysis
• Identify avoidable • Cost increase
costs: • Lowest : 82X36000
• If Anne decides to • Cost savings
outsource Mat: 36X36000
Lab: 22X36000
Unit:10X36000
Batch:6X36000
Product:6X 36000
 Case Analysis

• Facility costs cannot be ruled out as it

represents common facilities.
• Unavoidable costs
• What will happen when production is
shifted to own plant?
• What other qualitative factors are to be
considered?
Reputation of suppliers
 Case analysis of Facility Layout
Systems- Theory of Constraints
• Process Layouts
Bank Process
Batch processing leads to waste of time as
designated employee should finish batch
before it can move to next station
Loan application will move only when there
are 10 nos. WIP will be at loan officers
desk, regional supervisors desk and bank
teller desk.
 Continued
• This results in unbalanced work load at work
stations
• This can be eliminated by innovative approaches
to reduce non value added costs like moving and
storing
Electronic communication reducing physical
movement of WIP and reducing cycle time and
cost
 product Layout
• Automobile assembly line/ Packaging Line
for milk.
• Product layout suitable for high volume
production
• Example: Cooking process
 Theory of Constraints
• The central theme of systems design is to
stream line operations and thus increase
operating income
• The method that can guide this process is
theory of constraints
• TOC states that operating income can be
increased by carefully managing
bottlenecks in a process
 TOC
• Uses three measures
• 1. Throughput Contribution (Revenues-Direct
material costs for units sold)
• 2. investments ( =Material cost of RM, WIP,
FG)
• 3. Operating costs (other costs except direct
material cost like depreciation, salaries, other
utility costs)
Inventory cost and processing time
• Batch production creates inventory costs
but also causes delays
• Delays increase cycle time thereby
reducing service to customers
• The inventory related costs apart from
normal RM, WIP and FG are cost of
moving, handling and storing inventory,
costs due to damage or obsolescence,
costs of rework of upstream work.
 Inventory costs can be controlled
by change in layout
• Case Analysis
• Given as assignment
 Cost of non conformance and
Quality issues
• Quality depends on 2 factors
Satisfying customer expectations regarding
attributes and performance
Ensure the technical aspects of product
design and performance
• There are global standards for conformity
 Costs of quality control
• Prevention cost- Cost of quality engineering,
cost of training employees and suppliers and
giving them certification.
• Appraisal cost- inspecting goods for internal
and external customers like maintenance of
equipment, process control monitoring
• Internal failure cost: detection of defective and
cost of rework, waste, net cost of scrap
• External failure cost: customer detects defects
then
 Costs of quality control
• Repair of product, warranty cost, service
cost, product liability lawsuits.
All the costs are compiled in Cost of Quality
report to understand the financial
implications.
 Just in Time Manufacturing
• Comprehensive and effective
manufacturing system allowing no failures
Makes only when internal or external
customer requires
• Uses product layout with continuous flow
i.e. no delays once production starts
 Just in Time Manufacturing
• Requires reliable processing systems as it
has to reduce the WIP, highly trained
workforce, preventive maintenance
• Management accountants must
communicate regarding
Defect rates
Cycle times
Percent of time deliveries are on time
Order accuracy
 Just in Time Manufacturing
Actual production as a percent of planned
production
Actual machine time available compared
with planned machine time available.
• Difficulty in implementations because
requires change in culture, teamwork,
work discipline, structural changes in shop
floor
 Tobor toys
• Guidelines for case analysis
Production flows
Effects on WIP
Effects on production costs
Cost of rework
Benefits from increased sales
CBA