Chapter 18 - Summary
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.
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
Explain how activity-based management is related to activity-based costing
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.
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.
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
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.
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.
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.