cost analysis techniques

43
1 Cost Analysis Cost Analysis Techniques Techniques

Upload: ova

Post on 10-Jan-2016

37 views

Category:

Documents


0 download

DESCRIPTION

Cost Analysis Techniques. Project. something related to purchasing how the purchasing function affects a company? how can a company improve its purchasing functions? possible forms a case study on a company literature review on a topic related to purchasing methodology - PowerPoint PPT Presentation

TRANSCRIPT

Page 1: Cost Analysis Techniques

1

Cost Analysis TechniquesCost Analysis Techniques

Page 2: Cost Analysis Techniques

2

ProjectProject

something related to purchasing something related to purchasing how the purchasing function affects a company? how the purchasing function affects a company? how can a company improve its purchasing how can a company improve its purchasing

functions?functions?

possible formspossible forms a case study on a companya case study on a company literature review on a topic related to purchasingliterature review on a topic related to purchasing

methodologymethodology management principlemanagement principle

Page 3: Cost Analysis Techniques

3

Project ProposalProject Proposal

a 15-minute presentation a 15-minute presentation what is it about?what is it about? why is the project important? Useful? why is the project important? Useful?

Interesting? Interesting? how will you proceed?how will you proceed? what are the expected results? Expected what are the expected results? Expected

challenges? challenges? examplesexamples

Page 4: Cost Analysis Techniques

4

OutlineOutline

collaborative cost management collaborative cost management total cost ownership modeltotal cost ownership model Kazuo Inamori’s idea on pricing and costing activity-based costingactivity-based costing value analysis and value engineerinvalue analysis and value engineering process mappingprocess mapping learning curvelearning curve quantity discountquantity discount

Page 5: Cost Analysis Techniques

5

Collaborative Cost ManagementCollaborative Cost Management

Page 6: Cost Analysis Techniques

6

Collaborative Approaches Collaborative Approaches to Cost Managementto Cost Management

target pricing: price acceptable by market, or price for competition searching for design methods, material, and production process to

match the target price reducing the gap between the target price and the actual price

provided by suppliers

cost-saving sharing: incentive offered to a vendor for cost saving

pre-requisites information sharing

vendor to buyer: details of production process, cost structure buyer to vendor: quantity, quality requirements, plan from near to

intermediate term agreement on cost saving sharing

example: data setting and calculation

Page 7: Cost Analysis Techniques

7

Total Cost Ownership ModelTotal Cost Ownership Model

Page 8: Cost Analysis Techniques

8

Total Cost Ownership ModelTotal Cost Ownership Model

costs throughout the life cycle of an item hidden cost in purchasing#1

payment method, inflation, life, salvage value, auxiliary charge, packaging, transportation, installation, service support, training, maintenance, service parts, etc.

example: cost structure and calculation

#1 Zeger Degraeve and Filip Roodhooft (2001) A Smarter Way to Buy, Harvard Business Review.

Page 9: Cost Analysis Techniques

9

『『稲盛和夫の実学 経営と会計稲盛和夫の実学 経営と会計』』稻盛和夫的實學 稻盛和夫的實學 :: 會計與經營會計與經營

Kazuo Inamori's Pragmatic Studies: Management and Accounting

いなもり かずお稲盛 和夫Kazuo InamoriKazuo Inamori

Page 10: Cost Analysis Techniques

10

Some Ideas in the BookSome Ideas in the Book

core of business: divine doctrine (天道)、 self-evident truth (公理)、 consensus and concord (人心)

cash-basis management: a grip on true cash flow of company

fair accounting: one-to-one correspondence between orders and items

muscular management: the cheapest method for a given task

perfectionism transparency amoeba management double-checking system with shared responsibility

Page 11: Cost Analysis Techniques

11

Some Glimpses ofSome Glimpses ofPragmatic Studies: Management and Accounting

the difference between reality and accounting rules standard accounting rules for depreciation of

machines

difference between actual working life of a machine and its depreciation life by rules

Page 12: Cost Analysis Techniques

12

Some Glimpses ofSome Glimpses ofPragmatic Studies: Management and Accounting

asset or cost? would equipment for production an asset or cost? example: a stall selling banana

a box of ¥300; a table cloth of ¥1,000; a stick of ¥200 buying 20 hands of banana, ¥50 per hand, selling at ¥150

per hand all sold out how much profit ¥2,000 or ¥500? TAX!!!

getting rid of excess production with small probability of future use

Page 13: Cost Analysis Techniques

13

Some Glimpses ofSome Glimpses ofPragmatic Studies: Management and Accounting

difference among book profit, actual profit, and cash flow distortion of actual profit by accounting rules,

classification of asset cost, account payable and account receivable at different dates, etc.

Page 14: Cost Analysis Techniques

14

QuestionsQuestions

Pricing and costing of an item are always important issues in purchasing. Discuss what you have learnt about these two issues from the book “Kazuo Inamori's Pragmatic Studies: Management and Accounting” by Dr. 稻盛和夫 .

Page 15: Cost Analysis Techniques

15

Pricing and Costing Issues in Pragmatic Studies: Management & Accounting

overhead cost depreciation: difference in law and in reality

inventory and equipment as resource or liability obsolete inventory and equipment, especially for small

production lot

price setting first item price acceptable to market

then (material and production) cost matching with the price

Page 16: Cost Analysis Techniques

16

Activity-Based Costing Activity-Based Costing

Page 17: Cost Analysis Techniques

17

Activity-Based Costing (ABC)Activity-Based Costing (ABC)

assigning overhead of a product or service traditional cost accounting

based on fixed percentage of direct labor, direct material, or both direct labor and material

more overhead for high volume items

ABC trace the cause and effect of overhead

cost drivers: activities in the overhead for the product or service

Page 18: Cost Analysis Techniques

18

Example#1

a factory producing only 2 products, L & S

1,500 pieces of L & 150 pieces of S

setups: 2 for each product, each of $900

direct material cost: L $2 and S $3 ignoring labor cost for simplicity

#1 許振邦( 2007)採購與供應管理

(originally from Raedels (2000)

Page 19: Cost Analysis Techniques

19

Product L Product S Total

Production Qty 1,500 150 1,650

Direct Material $2 $3

Direct Labor

Total Direct Cost $3,000 $450 $3,450

Overhead

Setup 2 2 4

Cost/Setup $900 $900 $3600

Traditional Costing Method

Overhead cost/item $2.08 $3.14

Cost/Item $4.08 $6.14

ABC Method

ABC $1.2 $12

Cost/Item $3.2 $15

Page 20: Cost Analysis Techniques

20

A Single-Item ExampleTraditional Costing (TC)

Cost per unit

Direct Material $21.00

Direct Labor $4.00

Manufacturing Overhead

Overhead Component

Burden Rate

Activity per Unit

Fixed $64.50/DLH × 0.4 DLH/unit $25.80

Variable $11.90/DLH × 0.4 DLH/unit $4.76

Manufacturing Overhead per Unit $30.56

Manufacturing Cost per Unit $55.56

Fixed Burden Rate (TC) = Estimated Annual Factory Fixed Manufacturing Overhead/Estimated Annual Factory DLH

= $967,500/15,000 DLH  = $64.50/DLH

DLH = Direct Labor Hours

Page 21: Cost Analysis Techniques

21

Activity-Based Costing (ABC)

Direct Material $21.00

Direct Labor $4.00

Manufacturing Overhead:

Activity Cost Driver Rate

Units of Cost Driver

# of Units

Fixed ($12.50/MH ×

9,800 MH) /10,000 $12.25

Inspection ($0.69/Insp. × 20,000 Insp.) /10,000 $1.38

Materials Handling ($0.60/lb. ×

45,000 lbs.) /10,000 $2.70

Machine Setup ($625.00/Setup × 8 Setups) /10,000 $0.50

Engineering Changes ($3,500.00/ECO× 3 ECOs) /10,000 $1.05

Manufacturing Overhead per Unit $17.88

Manufacturing Cost per Unit $42.88MH = Machine Hours; Insp. = Inspections; ECO = Engineering Change Orders

Fixed Rate (ABC) = Estimated Annual Factory Fixed Manufacturing Overhead / Estimated

Annual Factory MH = $500,000/40,000 MH = $12.50/MH

Page 22: Cost Analysis Techniques

22

Value Analysis Value Analysis and Value Engineerinand Value Engineering

Page 23: Cost Analysis Techniques

23

Value Analysis Value Analysis and Value Engineeringand Value Engineering

value analysis: examining all elements of a component, assembly, end product, or service to make sure it fulfills its intended function at the lowest total cost

value engineering: application of value analysis principles during product or service design

value = function/cost

Page 24: Cost Analysis Techniques

24

Personnel in Value AnalysisPersonnel in Value Analysis

everyone: executive management, suppliers, everyone: executive management, suppliers, supply management, design engineering, supply management, design engineering, marketing, production, industrial/process, marketing, production, industrial/process, engineering, quality controlengineering, quality control

Page 25: Cost Analysis Techniques

25

Typical Questions to Ask in VATypical Questions to Ask in VA

Does the use of this product contribute value to our customers?Does the use of this product contribute value to our customers?

Is the cost of the final product proportionate to its usefulness?Is the cost of the final product proportionate to its usefulness?

Are there additional uses for this product?Are there additional uses for this product?

Does the product need all its features or internal parts?Does the product need all its features or internal parts?

Are product weight reductions possible?Are product weight reductions possible?

Is there anything else available to our customers given the intended Is there anything else available to our customers given the intended use of the product?use of the product?

Is there a better production method to produce the item or product?Is there a better production method to produce the item or product?

Can a lower cost standard part replace a customized part?Can a lower cost standard part replace a customized part?

Are we using the proper tooling considering the quantities required?Are we using the proper tooling considering the quantities required?

Page 26: Cost Analysis Techniques

26

Typical Questions to Ask in VATypical Questions to Ask in VA

Will another dependable supplier provide materials, components, or Will another dependable supplier provide materials, components, or subassemblies for less?subassemblies for less?

Is anyone currently purchasing required materials, components, or Is anyone currently purchasing required materials, components, or subassemblies for less?subassemblies for less?

Are there equally effective but lower cost materials available?Are there equally effective but lower cost materials available?

Do material, labor, overhead, and profit equal the product’s cost?Do material, labor, overhead, and profit equal the product’s cost?

Are packaging reductions possible?Are packaging reductions possible?

Is the item properly classified for shipping purposes to receive the Is the item properly classified for shipping purposes to receive the lowest transportation rates?lowest transportation rates?

Are design or quality specification too tight given customer Are design or quality specification too tight given customer requirements?requirements?

If we are making the item now, can we buy it for less? Or vice versa?If we are making the item now, can we buy it for less? Or vice versa?

Page 27: Cost Analysis Techniques

27

Value Analysis ProcessValue Analysis Process

gather information

speculate

analyze

recommend and execute

summarize and follow up

Page 28: Cost Analysis Techniques

28

Value Analysis ProcessValue Analysis Process

gather information what does this product do for the customer?what does this product do for the customer? why does a customer buy this product?why does a customer buy this product? primary vs. secondary functionsprimary vs. secondary functions name each function with a noun and a verbname each function with a noun and a verb collect detailed product informationcollect detailed product information

speculate wide-open, creative thinkingwide-open, creative thinking use brainstorming or other idea creating techniquesuse brainstorming or other idea creating techniques develop as many improvement ideas as possible without develop as many improvement ideas as possible without

judgmentjudgment

Page 29: Cost Analysis Techniques

29

Value Analysis ProcessValue Analysis Process

analyze perform critical evaluation of ideas created in speculate stageperform critical evaluation of ideas created in speculate stage cost/benefit analysescost/benefit analyses feasibility assessmentfeasibility assessment do ideas address the original goals and objectives?do ideas address the original goals and objectives? general general specific specific

recommend and execute determine prioritiesdetermine priorities make proposal to management for approvalmake proposal to management for approval requires: requires:

motivation and creativitymotivation and creativity good communication skillsgood communication skills analytical thinking and product knowledgeanalytical thinking and product knowledge commitment and salesmanshipcommitment and salesmanship

Page 30: Cost Analysis Techniques

30

Value Analysis ProcessValue Analysis Process

summarize and follow up implement implement

timing timing

budget budget

responsibilitiesresponsibilities

generate support from outside the teamgenerate support from outside the team

Page 31: Cost Analysis Techniques

31

Example of Value AnalysisExample of Value Analysis

rescue of Nissan by Carlos Ghosn reduction of design cost by eliminating special parts or reduction of design cost by eliminating special parts or

componentscomponents

condition: without compromising quality, service, or condition: without compromising quality, service, or bothboth

headlightheadlight some components better than competitorssome components better than competitors

minor differences not picked up by eyesminor differences not picked up by eyes

reducing cost by 2.5% by changing reflectors and illuminatorsreducing cost by 2.5% by changing reflectors and illuminators

Page 32: Cost Analysis Techniques

32

Example of Value AnalysisExample of Value Analysis

rescue of Chrysler by Lee Iacocca design of design of KK-car: no more than 176” to pack -car: no more than 176” to pack

more car in transportationmore car in transportation

Page 33: Cost Analysis Techniques

33

Example of Value AnalysisExample of Value Analysis

experience of 4 first-tier suppliers of automobiles benefits and challenges to leverage their

suppliers’ expertise in collaborative VA

process

benefits and barriers

Hartley, J.L. (2000) Collaborative Value Analysis: Experiences from the

Automotive Industry, The Journal of Supply Chain Management, Fall, 27-32.

Page 34: Cost Analysis Techniques

34

Process MappingProcess Mapping

Page 35: Cost Analysis Techniques

35

Process Mapping Process Mapping

process: an outcome of a set of tasks, process: an outcome of a set of tasks, activities, or steps activities, or steps

expressing processes as their component expressing processes as their component parts or activities by a cross-functional parts or activities by a cross-functional teamteam

identifying and eliminating non-value-identifying and eliminating non-value-added activitiesadded activities

Page 36: Cost Analysis Techniques

Process Mapping ExampleProcess Mapping Example

3636

Step # Activity Average Time Required1 Employee 1 physically places trailer at receiving dock 15 minutes

2 Employee 2 unloads the trailer with material handling equipment 30 minutes

3 Employee 3 checks load quantity from the trailer against shipping documents for accuracy 30 minutes

4Employee 4 acknowledges receipt of the material on the computer and prints control tickets to move material to required warehouse

locations60 minutes

5 Employee 5 attaches control tickets to individual loads 20 minutes

6 Employee 6 inspects inbound material 30 minutes

7 Employee 7 moves material to required warehouse location, freeing up the receipt line for another trailer 30 minutes

8Employee 4 files copy of shipping documents and forwards copies to

Accounts Payable at the end of the day (no physical movement required)

15 minutes

Total Average Time to Unload Trailer (excludes Step # 8) 215 minutes

Non-value-adding Value-adding

Page 37: Cost Analysis Techniques

Process Mapping ExampleProcess Mapping Example

3737

Step #1 Step #2 Step #3 Step #4 Step #5 Step #6 Step #7

Hour 1 Hour 2 Hour 3 Hour 4

Non-value-adding Value-adding

• Remove non-value-adding steps

• Seek to combine other steps

Page 38: Cost Analysis Techniques

38

Learning CurveLearning Curve

Page 39: Cost Analysis Techniques

39

Learning CurveLearning Curve

reduction of production time due to repetition of task empirical evidence: learning rate as production

double

e.g., 85% learning rate: reduction of 15% direct labor as production double

Page 40: Cost Analysis Techniques

40

Example on Learning CurveExample on Learning Curve

first order 200 pieces at $228/unit first order 200 pieces at $228/unit material $90; direct labor $50 (5 hours per material $90; direct labor $50 (5 hours per

unit, at $10 per hour)unit, at $10 per hour)

overhead at 100% of direct labor overhead at 100% of direct labor

profit margin 20%profit margin 20%

total cost per unit = ($90+$50+$50) = $190total cost per unit = ($90+$50+$50) = $190 price per unit = ($190)(120%) = $228price per unit = ($190)(120%) = $228

Page 41: Cost Analysis Techniques

41

Example on Learning CurveExample on Learning Curve

price for another 600 pcs for 80% learning rate price for another 600 pcs for 80% learning rate

average time for 800 units = 5(0.8)average time for 800 units = 5(0.8)22 = 3.2 hr = 3.2 hr

total time for 800 units = (3.2)(800) = 2,560 hrtotal time for 800 units = (3.2)(800) = 2,560 hr

total time for the additional 600 units = total time for the additional 600 units = 2,5602,5601,000 = 1,560 hr1,000 = 1,560 hr

direct labor cost per unit = $(10)(1560)/600 = $26 direct labor cost per unit = $(10)(1560)/600 = $26

total cost per unit = ($90+$26+$26) = $142total cost per unit = ($90+$26+$26) = $142

price per unit = ($142)(120%) = $170.4price per unit = ($142)(120%) = $170.4

Page 42: Cost Analysis Techniques

42

Quantity Discount AnalysisQuantity Discount Analysis

is a discount scheme reasonable? for better understanding of incremental price two types of quantity discount: prices at specific prices at specific

quantities vs. prices at quantity ranges quantities vs. prices at quantity ranges

quantity discount analysis for price breaks at quantity discount analysis for price breaks at specific quantitiesspecific quantities 1 unit @ $85 each 1 unit @ $85 each 3 units @ $80 each 3 units @ $80 each 6 units @ $70 each 6 units @ $70 each 10 units @ $69 each10 units @ $69 each

Page 43: Cost Analysis Techniques

$85.00 $77.50 $60.00 $67.50

$85.00 $240.00 $420.00 $690.00

43

Quantity Discount AnalysisQuantity Discount Analysis

1 2 3 4

Number of units/order

1 3 6 10

Price/unit (quoted) $85.00 $80.00 $70.00 $69.00

Total price/order

Price difference between orders

Quantity difference/order

Price/unit/order quantity difference

$85.00 $155.00 $180.00 $270.00