McGraw-Hill OnlineMcGraw-Hill Higher EducationLearning Center
Student Center | Instructor Center | Information Center | Home
Sample Study Guide Chapter
Sample Working Papers Chapter
Links to Resources
Download GLAS
Text Updates
Chapter Summary
Multiple Choice Quiz
True or False Quiz
Online Tutorial Quiz
Downloadable Definitions
Internet Exercises
PowerPoint Presentations
Alternate Problems
Check Figures
Tootsie Roll Exercises
Help Center

Book Cover
Financial and Managerial Accounting: The Basis for Business Decisions, 12/e
Jan R. Williams, University of Tennessee
Susan F. Haka, Michigan State University
Mark S. Bettner, Bucknell University
Robert F. Meigs

Costing and the Value Chain

Chapter Summary

Chapter 18 - Summary

LO 1

Define the value chain and describe its basic components.

We define the value chain as the set of activities and resources necessary to create and deliver the product or service valued by customers. Its basic components include research and development, production and supplier relations, marketing and distribution, and customer service activities.

LO 2

Distinguish between non-value-added and value-added activities.

Value-added activities add to the product's or service's desirability in the eyes of the consumer. Non-value-added activities do not add to the product's desirability.

LO 3

Explain how activity-based management is related to activity-based costing (ABC).

Activity-based management requires an understanding of the link between activities that consume resources and the costs associated with those resources. The objective of ABC is to create the cost per unit of measured cost driver. The objective of activity-based management is to manage the activities that drive those costs.

LO 4

Describe the target costing process and list its components.

Target costing is a business process aimed at the earliest stages of new product and service development. The components of target costing consist of concept development through planning and market analysis; product development using value engineering; and production with continuous improvement goals.

LO 5

Identify the relationship between target costing and the value chain.

The entire value chain is involved in the target costing process to identify activities that drive cost out while satisfying customer needs. A primary objective of the target costing process is to reduce development time. The cross-functional, cross-organizational value chain approach allows for simultaneous, rather than sequential, consideration of possible solutions, speeding up new product development time.

LO 6

Explain the nature and goals of a just-in-time (JIT) manufacturing system.

In a JIT system, materials are acquired and goods are produced just in time to meet sales requirements. Thus production is pulled by customer demand, rather than pushed by an effort to produce inventory. The goals of a JIT system are to eliminate (minimize) non-value-added activities and to increase the focus on product quality throughout the production process.

LO 7

Identify the components of the cost of quality.

Quality costs are classified into four groups: (1) costs associated with preventing poor quality from occurring, (2) costs of appraising and inspecting quality into the product, (3) internal failure costs that are incurred to correct quality problems before the customer receives the good or service, and (4) external failure costs that happen when an unsatisfactory good or service is delivered to a customer.

LO 8

Describe the characteristics of quality measures.

Quality measures must be customer focused because quality failures can be identified only by customers. These measures should be multidimensional, including both financial and nonfinancial components to help management focus on activities that drive quality costs.


Accounting methods and techniques that help decision makers manage the value chain were the focus of this chapter. We discussed how managing the value chain's core operations by driving costs out, and as a result creating customer satisfaction, improves company value. Using target costing, activity-based management, just-in-time inventory methods, and total quality management, managers can identify and reduce or eliminate non-value-added activities. In the remaining chapters we discuss other management accounting methods that help to identify decision-making authority, provide information to aid decision making, and evaluate decision-making performance.