Jagannath University

Faculty of Business Studies

Department of Accounting & Information Systems

Course Name: Strategic Management Accounting

Course Code: ACCT 5202
Assignment (Questions 1-15)
__________________ _________________________________________________

Q. a) Define management accounting. Compare and contrast between traditional and

No- strategic management accounting.
1 Management accounting involves the process of collecting, analyzing, and interpreting
financial information for internal decision-making within organizations. It's focused on
providing relevant and timely data to managers to support planning, controlling, and
decision-making activities.

OR Here's a comparison between traditional and strategic management accounting:

1. Focus:
 Traditional Management Accounting: Primarily focuses on historical
financial data and performance measurement. It looks at past financial records
to assess performance and make decisions based on that information.
 Strategic Management Accounting: Shifts the focus towards future-oriented

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 information and analysis. It emphasizes the identification and evaluation of
strategic opportunities and risks, and it aligns financial information with long-
term organizational goals.
2. Time Horizon:
 Traditional Management Accounting: Typically short-term oriented,
focusing on day-to-day operations and short-term financial performance.
 Strategic Management Accounting: Takes a longer-term perspective,
considering the strategic direction of the organization and planning for the
future. It looks beyond immediate financial results to assess the impact of
decisions on the organization's long-term success.
3. Scope:
 Traditional Management Accounting: Often limited to financial metrics
and operational performance indicators. It may not fully consider non-
financial factors that are critical for strategic decision-making.
 Strategic Management Accounting: Broadens the scope to include both
financial and non-financial measures. It incorporates factors such as customer
satisfaction, market share, innovation capabilities, and competitive
positioning to provide a more comprehensive view of performance.
4. Decision-Making Approach:
 Traditional Management Accounting: Typically follows a top-down
approach to decision-making, where decisions are based on historical data
and preset budgets.
 Strategic Management Accounting: Encourages a more proactive and
strategic approach to decision-making. It involves scenario analysis, risk
assessment, and sensitivity analysis to evaluate various strategic options and
their potential outcomes.
5. Use of Information:
 Traditional Management Accounting: Uses financial information mainly
for performance evaluation, cost control, and budgeting purposes.
 Strategic Management Accounting: Utilizes financial and non-financial
information to support strategic planning, competitive analysis, resource
allocation, and value creation initiatives.
In essence, while traditional management accounting focuses on historical performance and
operational efficiency, strategic management accounting takes a broader and forward-
looking approach, integrating financial and non-financial data to support strategic decision-
making and value creation

b) What does it mean to obtain a competitive advantage? What role does the cost
management system play in helping to achieve this goal?
A competitive advantage is providing better customer value for the same or lower
cost or equivalent value for lower cost. The cost management system must provide
information that helps identify strategies that will create a cost leadership position

Obtaining a competitive advantage means that a company has achieved a favorable

position relative to its competitors in the market, enabling it to outperform them and
sustain superior performance over time. Competitive advantage can stem from various
factors, including cost leadership, differentiation, innovation, customer focus, and
operational excellence.
Cost management systems play a crucial role in helping companies achieve
competitive advantage, particularly through cost leadership strategy. Here's how:
1. Cost Reduction: Effective cost management systems help identify areas of

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 inefficiency and waste within the organization, allowing for cost reduction
initiatives. By minimizing expenses while maintaining product or service
quality, a company can offer lower prices to customers, gaining a competitive
edge in the market.
2. Cost Control: Cost management systems provide tools and techniques for
monitoring and controlling costs throughout the organization. This ensures that
costs remain in line with budgets and targets, preventing cost overruns and
maintaining competitiveness in pricing.
3. Value Chain Analysis: Cost management systems facilitate value chain
analysis, which involves identifying activities that add value to products or
services and those that incur costs. By optimizing value-adding activities and
minimizing costs in non-value-adding areas, companies can enhance their cost
efficiency and competitive position.
4. Strategic Pricing: A well-designed cost management system provides accurate
cost information that enables companies to establish pricing strategies based on
cost structures, market dynamics, and competitive positioning. This helps in
setting competitive prices that attract customers while still ensuring
profitability.
5. Investment Decisions: Cost management systems aid in evaluating investment
decisions by providing insights into the costs and benefits associated with
various projects, initiatives, or investments. This enables companies to make
informed decisions that align with their strategic objectives and contribute to
competitive advantage.
6. Continuous Improvement: Cost management systems support continuous
improvement efforts by tracking performance metrics, identifying areas for
improvement, and implementing cost-saving measures over time. This iterative
process of cost optimization contributes to sustained competitive advantage by
enhancing operational efficiency and profitability.
In summary, a robust cost management system enables companies to achieve
competitive advantage by reducing costs, maintaining cost competitiveness in pricing,
optimizing value chain activities, making strategic investment decisions, and fostering
a culture of continuous improvement. By effectively managing costs, companies can
strengthen their market position and outperform competitors in the long run.

c) What is customer value? How is customer value related to a cost leadership

strategy?
Customer value is the difference between what a customer receives and what the
customer gives up (customer realization less customer sacrifice). Cost leadership
focuses on minimizing customer sacrifice. A differentiation strategy, on the other
hand, focuses on increasing customer realization, with the goal of ensuring that
the value added exceeds the costs of providing the differentiation. Focusing selects
the customers to which value is to be delivered. Strategic positioning is the choice
of the mix of cost leadership, differentiation, and focusing that a company will
emphasize
Customer value refers to the perceived benefits that customers receive from a product
or service relative to its cost. It's essentially what customers perceive as the worth or
utility of a product or service based on their needs, preferences, and the price they pay.
Customer value encompasses not only the product's functional attributes but also
emotional, social, and experiential benefits.
In the context of a cost leadership strategy, customer value is closely related as follows:
1. Affordability: Cost leadership strategy aims to offer products or services at

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 lower prices than competitors while maintaining acceptable levels of quality.
By providing products at a lower cost, companies can offer better value
propositions to customers, making their offerings more attractive and
affordable.
2. Quality-Price Ratio: While cost leadership emphasizes cost reduction, it's
essential to maintain a certain level of quality to ensure that customers perceive
value in the products or services. The goal is to achieve the optimal balance
between quality and price, where customers perceive the product's quality as
satisfactory relative to the price paid.
3. Value Proposition: Cost leadership strategy relies on providing value to
customers through cost-efficient operations and streamlined processes. The
value proposition lies in offering products or services that meet customers'
needs at a lower price point compared to competitors, thereby delivering
superior value in terms of affordability and cost-effectiveness.
4. Customer Satisfaction: Despite focusing on cost reduction, cost leadership
strategy should not compromise customer satisfaction. Providing good value for
money ensures that customers are satisfied with their purchases, leading to
repeat business, positive word-of-mouth referrals, and enhanced customer
loyalty.
5. Market Share: By offering lower-priced products or services with comparable
quality, companies employing a cost leadership strategy can attract price-
sensitive customers and gain market share from competitors. The perceived
value of getting a quality product at a lower cost can drive customer acquisition
and retention, contributing to market dominance.
In essence, customer value in the context of a cost leadership strategy revolves around
providing products or services that meet customers' needs and expectations at a lower
cost than competitors, thereby offering superior value propositions in terms of
affordability, quality-price ratio, and customer satisfaction. By focusing on delivering
value through cost efficiency and competitive pricing, companies can effectively
differentiate themselves in the market and gain a sustainable competitive advantage.

d) What are the four stages of the consumption life cycle? What are post-purchase
costs? Explain why a producer may want to know post-purchase costs.
The four stages of the consumption life cycle are purchasing, operating,
maintaining, and disposal. Post-purchase costs are those costs associated with
operating, maintaining, and disposing of a product. Knowing these costs is
important because a producer can create a competitive advantage by offering
products with lower post-purchase costs than products offered by competitors

The four stages of the consumption life cycle are:

1. Introduction: This stage occurs when a new product is launched into the
market. Sales are typically low as consumers become aware of the product and
its features. Marketing efforts focus on creating awareness and generating
initial demand.
2. Growth: In this stage, sales begin to increase as more consumers adopt the
product. Positive word-of-mouth, effective marketing campaigns, and
distribution expansion contribute to accelerated sales growth. Competitors may
enter the market, leading to increased competition.
3. Maturity: Sales growth slows down as the market becomes saturated, and most
potential customers have already adopted the product. Competition intensifies,
leading to price competition and margin pressure. Companies may focus on

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 product differentiation, cost reduction, or entering new market segments to
maintain sales levels.
4. Decline: Sales start to decline in this stage due to market saturation, changes in
consumer preferences, or the introduction of newer and better products.
Companies may choose to discontinue the product or maintain it for loyal
customers while focusing resources on other products or innovations.
Post-purchase costs refer to the expenses incurred by consumers after purchasing a
product. These costs can include maintenance, repairs, upgrades, accessories,
consumables, disposal, and any additional services associated with the product's usage
over its lifetime.
Producers may want to know post-purchase costs for several reasons:
1. Customer Satisfaction: Understanding post-purchase costs allows producers to
assess whether customers are satisfied with the overall ownership experience.
High post-purchase costs, such as frequent repairs or maintenance, may indicate
product quality issues or poor design, leading to dissatisfaction and potential
loss of customers.
2. Product Improvement: Knowledge of post-purchase costs provides insights
into areas where product improvements or enhancements may be needed.
Producers can use this information to design products that require fewer post-
purchase expenses, improving customer satisfaction and loyalty.
3. Value Proposition: Post-purchase costs impact the perceived value of a product.
By minimizing post-purchase expenses, producers can enhance the perceived
value proposition, making their products more attractive to consumers and
potentially commanding higher prices in the market.
4. Customer Lifetime Value: Understanding post-purchase costs enables
producers to estimate the lifetime value of customers. By factoring in post-
purchase expenses, producers can assess the profitability of acquiring and
retaining customers over the long term, guiding marketing and customer
retention strategies.
5. Competitive Advantage: Producers who effectively manage post-purchase
costs can gain a competitive advantage by offering products with lower total
ownership costs compared to competitors. This can attract price-sensitive
customers and differentiate the product in the market.
In summary, knowledge of post-purchase costs is essential for producers to ensure
customer satisfaction, drive product improvements, enhance value propositions,
maximize customer lifetime value, and gain a competitive advantage in the market.

Q. a) What is strategic management accounting? Discuss the most commonly used

No- strategy used in business.
2 Strategic management accounting (SMA) is an approach to management accounting
that focuses on providing financial information and analysis to support strategic
decision-making within an organization. Unlike traditional management accounting,
which primarily focuses on historical financial data and performance measurement,
strategic management accounting takes a forward-looking perspective, aligning
financial information with the organization's long-term strategic goals and objectives.
Key features of strategic management accounting include:
1. Focus on Strategic Decision-Making: SMA emphasizes the integration of
financial and non-financial information to support strategic decision-making
processes such as strategic planning, resource allocation, performance
evaluation, and risk management.
2. Long-Term Perspective: It takes a longer-term view of the organization,

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 considering both internal and external factors that may impact its
competitiveness and sustainability in the future. SMA aims to identify strategic
opportunities and risks and develop proactive responses to capitalize on or
mitigate them.
3. Cross-Functional Collaboration: SMA encourages collaboration and
communication across different functional areas within the organization, such
as finance, marketing, operations, and human resources. This collaboration
ensures that financial information is integrated into strategic decision-making
processes across the organization.
4. Value Creation: SMA focuses on creating value for stakeholders, including
shareholders, customers, employees, and society at large. It seeks to identify
value drivers within the organization and optimize resources to maximize value
creation over the long term.
5. Performance Measurement: SMA develops performance metrics and key
performance indicators (KPIs) aligned with the organization's strategic
objectives. These metrics go beyond traditional financial measures to include
non-financial indicators such as customer satisfaction, employee engagement,
innovation capabilities, and environmental sustainability.
6. Scenario Analysis and Sensitivity Testing: SMA utilizes scenario analysis and
sensitivity testing to evaluate the potential impact of different strategic options
and external factors on the organization's financial performance and
sustainability. This helps management make informed decisions and develop
robust strategic plans.
The most commonly used strategy in business is the cost leadership strategy. This
strategy aims to achieve a competitive advantage by becoming the lowest-cost
producer in the industry or market segment. Key elements of the cost leadership
strategy include:
1. Cost Efficiency: The primary focus is on minimizing costs throughout the value
chain, including production, distribution, marketing, and administrative
expenses. This allows the company to offer products or services at lower prices
than competitors while maintaining acceptable levels of quality.
2. Economies of Scale: Cost leadership often relies on economies of scale, where
larger production volumes lead to lower per-unit costs. Companies may invest
in large-scale production facilities, efficient supply chain management, and
standardized processes to achieve economies of scale.
3. Operational Excellence: Cost leaders emphasize operational efficiency and
continuous improvement to streamline processes, eliminate waste, and reduce
costs. Lean manufacturing principles, just-in-time inventory management, and
process optimization are commonly used to enhance operational excellence.
4. Price Competitiveness: By offering products or services at lower prices than
competitors, cost leaders can attract price-sensitive customers and gain market
share. Price competitiveness is essential for maintaining customer loyalty and
driving sales volume.
5. Cost Control: Cost leadership requires rigorous cost control measures to ensure
that expenses remain in line with budgets and targets. This includes monitoring
and analyzing costs, identifying areas for cost reduction, and implementing
cost-saving initiatives across the organization.
Overall, the cost leadership strategy is a widely adopted approach in business due to its
potential to generate competitive advantage through cost efficiency, price
competitiveness, and enhanced profitability. However, successful implementation
requires careful consideration of market dynamics, competitive pressures, and the

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 ability to sustain cost leadership over the long term.

b) Briefly explain the internal and external value chain analysis.

External linkages describe the relationship between a firm’s value chain and the
value chain of its suppliers and customers. Internal linkages are relationships
among the activities within a firm’s value chain
Value-chain analysis involves identifying those internal and external linkages that
result in a firm achieving either a cost leadership or differentiation strategy.
Managing organizational and operational cost drivers to create long-term cost
reductions is a key element in the analysis. Value-chain analysis is a form of
strategic cost management. It shares the same goal of creating a long-term
competitive advantage by using cost information
Internal and external value chain analysis are strategic management tools used to
evaluate the activities and processes within and outside an organization, respectively,
to identify opportunities for cost reduction, differentiation, and value creation. Here's a
brief explanation of each:
1. Internal Value Chain Analysis:
Internal value chain analysis focuses on identifying the primary and support activities
within an organization that add value to the products or services it delivers. These
activities are categorized into primary and support activities:
 Primary Activities: These are directly involved in the creation and
delivery of the product or service. They include inbound logistics
(receiving and storing inputs), operations (transforming inputs into
finished products), outbound logistics (storing and distributing products
to customers), marketing and sales (promoting and selling products),
and service (providing customer support after the sale).
 Support Activities: These activities support the primary activities by
facilitating their smooth operation. They include procurement (sourcing
and purchasing inputs), technology development (research and
development), human resource management (recruiting, training, and
development), and infrastructure (administrative functions, facilities,
and systems).
By analyzing each activity in the internal value chain, organizations can identify areas
where they have a competitive advantage, areas for improvement, and opportunities for
cost reduction or differentiation.
2. External Value Chain Analysis:
External value chain analysis focuses on understanding the activities and processes that
occur outside the organization but still have an impact on its operations and
competitiveness. This includes analyzing the value chains of suppliers, distributors,
partners, and other stakeholders in the industry ecosystem.
 Supplier Value Chain: Analyzing the value chains of suppliers helps
identify opportunities for collaboration, cost reduction, and supply chain
optimization. It involves assessing supplier capabilities, reliability, and
efficiency in delivering inputs or components.
 Distribution Value Chain: Understanding the value chain of
distributors and partners helps identify opportunities for improving
distribution channels, expanding market reach, and enhancing customer
service. It involves analyzing distribution networks, logistics
capabilities, and customer satisfaction levels.
By examining the external value chain, organizations can identify potential risks,
dependencies, and opportunities for collaboration or vertical integration to enhance

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 competitiveness and value creation.
In summary, internal and external value chain analyses are valuable tools for
organizations to assess their internal operations and external relationships, identify
areas of strength and weakness, and develop strategies to improve efficiency, reduce
costs, and create value for customers and stakeholders.

c) What are organizational and operational activities? Organizational cost drivers?

Operational cost drivers? Explain.
Organizational activities are activities that determine the structure and business
processes of an organization. Operational activities are the day-to-day activities
that result from the structure and processes chosen by an organization.
Organizational cost drivers are the structural and procedural factors that
determine a firm’s long-term cost structure. Operational cost drivers are the
factors that drive the cost of the day-to-day activities
Organizational and operational activities, along with their associated cost drivers, are
fundamental concepts in cost management and strategic analysis within organizations.
1. Organizational Activities:
Organizational activities refer to the broader functions and processes within an
organization that are necessary for its operation and management. These activities
typically encompass strategic planning, administration, and governance functions.
Examples of organizational activities include:
 Strategic planning and decision-making
 Corporate governance and oversight
 Legal and regulatory compliance
 Financial management and reporting
 Human resource management and development
 Corporate communication and public relations
2. Operational Activities:
Operational activities refer to the day-to-day functions and processes directly related to
producing goods or delivering services. These activities are typically core to the
organization's primary operations and revenue generation. Examples of operational
activities include:
 Procurement and inventory management
 Production or service delivery
 Quality control and assurance
 Sales and marketing
 Customer service and support
 Research and development
Now, let's discuss cost drivers associated with both organizational and operational
activities:
1. Organizational Cost Drivers:
Organizational cost drivers are factors that influence the costs associated with
managing and operating the organization as a whole. These drivers often contribute to
overhead costs and are not directly tied to the production of goods or services.
Examples of organizational cost drivers include:
 Size and complexity of the organization
 Corporate structure and hierarchy
 Administrative overhead (e.g., salaries of top management, legal and
accounting fees)
 Regulatory compliance costs
 Information technology infrastructure and support

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  Corporate governance expenses (e.g., board of directors' compensation)
Effective management of organizational cost drivers is essential for optimizing overall
cost efficiency and ensuring that resources are allocated efficiently across the
organization.
2. Operational Cost Drivers:
Operational cost drivers are factors that directly influence the costs incurred in
producing goods or delivering services. These drivers are typically associated with
specific operational activities and processes. Examples of operational cost drivers
include:
 Raw material costs
 Labor costs (e.g., wages, benefits)
 Equipment and machinery usage costs
 Energy and utilities expenses
 Maintenance and repair costs
 Production volume or output
Identifying and managing operational cost drivers is critical for controlling production
costs, optimizing efficiency, and maximizing profitability. By understanding the
factors that impact operational costs, organizations can implement strategies to
minimize waste, improve productivity, and enhance competitiveness.
In summary, organizational activities encompass the broader functions and processes
within an organization, while operational activities are directly related to producing
goods or delivering services. Both types of activities have associated cost drivers that
influence overall cost structure and profitability, making it essential for organizations
to manage these drivers effectively to achieve their strategic and financial objectives.

d) Define backflush costing. Explain how backflush costing works.

Backflush costing is a simplified approach to accounting for manufacturing cost
flows. It uses trigger points to determine when costs are assigned to inventory or
temporary accounts. In the purest form, the only trigger point is when the goods
are sold. In this variation, the manufacturing costs are flushed out of the system
by debiting Cost of Goods Sold and crediting Accounts Payable and Conversion
Cost Control. Other trigger points are possible but entail more journal entry
activity and involve some inventory accounts.
Backflush costing is a simplified and streamlined method of costing that delays the
allocation of costs until products are completed or sold. This approach is often used in
just-in-time (JIT) production environments and lean manufacturing systems where
inventory levels are minimized, and production processes are highly efficient.
Here's how backflush costing works:
1. Delay in Cost Allocation:
Unlike traditional costing methods that allocate costs to products as they are incurred
(e.g., direct materials, direct labor, and overheads), backflush costing delays cost
allocation until the completion or sale of finished products. This delay in cost
allocation simplifies the costing process and reduces administrative overhead.
2. Cost Pools:
In backflush costing, costs are accumulated in cost pools rather than being assigned to
individual products or production orders. These cost pools typically include:
 Raw materials
 Work-in-progress (WIP)
 Finished goods
3. Trigger Points:
Backflush costing relies on predetermined trigger points or events to release costs from

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 the respective cost pools. These trigger points are often associated with key milestones
in the production process, such as the completion of a production run, the sale of
finished products, or the depletion of raw material inventory.
4. Cost Release:
When a trigger point is reached, the accumulated costs associated with the relevant cost
pool are released and allocated to the appropriate products or cost centers. For
example, upon the completion of a production run, the costs of direct materials, direct
labor, and overheads incurred during that run are released from the WIP cost pool and
allocated to the finished products.
5. Simplified Costing:
By delaying cost allocation until specific trigger points are reached, backflush costing
simplifies the costing process and reduces the need for detailed tracking of costs at
each stage of production. This streamlined approach is particularly beneficial in
environments characterized by high-volume production, standardized processes, and
minimal inventory.
6. Accuracy and Control:
While backflush costing offers simplicity and efficiency, it may sacrifice some level of
accuracy and precision compared to more detailed costing methods. However,
organizations can still exercise control and ensure accuracy by carefully defining
trigger points, accurately estimating costs, and regularly reconciling actual costs with
allocated costs.
Overall, backflush costing is a cost-effective and practical approach to costing,
particularly suited for JIT production environments and lean manufacturing systems
where efficiency and simplicity are paramount. It allows organizations to streamline
their costing processes, reduce administrative overhead, and focus on core business
activities.

Q. a) What role does Value Chain Analysis (VCA) play in strategic cost analysis?
No- Explain.
3 Value Chain Analysis (VCA) plays a crucial role in strategic cost analysis by providing
a systematic framework for identifying and analyzing the activities and processes that
create value within an organization. It helps organizations understand the cost structure
of their operations, identify cost drivers, and pinpoint areas for cost reduction or
efficiency improvement. Here's how VCA contributes to strategic cost analysis:
1. Identification of Cost Drivers:
VCA helps organizations identify the primary activities and support activities that
contribute to their overall cost structure. By analyzing each activity within the value
chain, organizations can identify the specific cost drivers that influence the costs
incurred in producing goods or delivering services. This allows them to focus their cost
analysis efforts on the most significant drivers of cost.
2. Differentiation of Cost Components:
VCA enables organizations to differentiate between costs that add value to products or
services and costs that do not. By categorizing costs based on their contribution to
value creation, organizations can prioritize cost reduction efforts to eliminate or
minimize non-value-adding costs while preserving or enhancing activities that
contribute to competitive advantage.
3. Identification of Value-Adding and Non-Value-Adding Activities:
VCA helps organizations distinguish between value-adding activities, which directly
contribute to meeting customer needs and preferences, and non-value-adding activities,
which do not. By identifying and eliminating non-value-adding activities, organizations
can streamline their processes, reduce waste, and improve efficiency, ultimately

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 lowering costs and enhancing competitiveness.
4. Evaluation of Cost Efficiency:
VCA allows organizations to assess the efficiency of their value chain activities
relative to industry benchmarks or best practices. By benchmarking their cost
performance against peers or competitors, organizations can identify areas where they
are overperforming or underperforming in terms of cost efficiency. This insight enables
them to target specific areas for improvement and adopt cost-saving measures
accordingly.
5. Identification of Strategic Opportunities:
VCA helps organizations identify strategic opportunities for cost reduction,
differentiation, and value creation throughout the value chain. By understanding the
interdependencies and relationships between different activities within the value chain,
organizations can identify opportunities to reconfigure or optimize their value chain to
enhance cost competitiveness and strategic positioning.
6. Alignment with Business Strategy:
VCA aligns cost analysis efforts with broader strategic objectives and business
priorities. By focusing on value-adding activities that are aligned with the
organization's strategic goals and competitive positioning, organizations can ensure
that their cost analysis efforts contribute to the overall success and sustainability of the
business.
In summary, Value Chain Analysis (VCA) plays a critical role in strategic cost analysis
by providing a systematic framework for identifying, analyzing, and optimizing the
activities and processes that create value within an organization. It enables
organizations to understand their cost structure, identify cost drivers, differentiate
value-adding and non-value-adding activities, evaluate cost efficiency, identify
strategic opportunities, and align cost analysis efforts with business strategy.

b) What is life-cycle costs? Explain how these costs relate to the production life cycle.
Life-cycle costs are all costs associated with the product for its entire life cycle.
These costs correspond to the costs of the activities associated with the production
life cycle: research and development, production, and logistics.
Life-cycle costs refer to the total costs associated with a product or asset over its entire
life cycle, from inception to disposal. This includes not only the initial purchase or
production costs but also costs incurred throughout the life cycle, such as operating
costs, maintenance costs, and disposal costs. Life-cycle costing takes a comprehensive
approach to cost analysis, considering both short-term and long-term costs to make
informed decisions about investments, purchases, or projects.
In the context of the production life cycle, life-cycle costs relate to the various stages of
the product's life, from development and production to distribution, utilization, and
disposal. Here's how life-cycle costs are associated with each stage of the production
life cycle:
1. Development and Design Stage:
During the development and design stage, life-cycle costs include expenses related to
research and development, design engineering, prototyping, and testing. These costs
are incurred upfront but can have a significant impact on the product's performance,
reliability, and long-term costs. Investing in quality design and engineering at this stage
can help minimize life-cycle costs by reducing maintenance, repair, and replacement
costs later on.
2. Production and Manufacturing Stage:
In the production and manufacturing stage, life-cycle costs encompass the costs of raw
materials, labor, equipment, energy, and overheads incurred in producing the product.

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 Efficient production processes, quality control measures, and economies of scale can
help minimize production costs and optimize the product's life-cycle cost performance.
3. Distribution and Logistics Stage:
During the distribution and logistics stage, life-cycle costs include transportation,
warehousing, inventory management, and distribution costs associated with getting the
product to customers. Efficient supply chain management practices and logistics
optimization can help reduce distribution costs and improve overall life-cycle cost
efficiency.
4. Utilization and Operation Stage:
Throughout the product's utilization and operation stage, life-cycle costs include
ongoing expenses such as energy consumption, maintenance, repair, and consumables.
Proper maintenance practices, preventive maintenance programs, and asset
management strategies can help minimize operational costs and extend the product's
useful life, thereby reducing life-cycle costs.
5. End-of-Life and Disposal Stage:
At the end of the product's life cycle, life-cycle costs include disposal costs,
environmental remediation costs, and any associated liabilities. Implementing
sustainable design principles, recycling initiatives, and environmentally responsible
disposal practices can help minimize end-of-life costs and mitigate environmental
impacts, contributing to overall life-cycle cost efficiency.
In summary, life-cycle costs encompass all costs associated with a product or asset
over its entire life cycle, from inception to disposal. By considering these costs at each
stage of the production life cycle, organizations can make informed decisions to
optimize cost performance, enhance value, and improve overall profitability.

c) What are value-added and non-value-added activities? Identify and define four
different ways to manage activities to reduce costs.
Value-added activities are necessary activities. Activities are necessary if they are
mandated or if they are not mandated and satisfy three conditions: (1) they cause a
change of state, (2) the change of state is not achievable by preceding activities, and (3)
they enable other activities to be performed.
Value-added costs are costs caused by activities that are necessary and efficiently
executed activities. An example is the cost of materials handling.
(1) Activity elimination: the identification and elimination of activities that fail to add
value. (2) Activity selection: the process of choosing among different sets of activities
caused by competing strategies. (3) Activity reduction: the process of decreasing the time
and resources required by an activity. (4) Activity sharing: increasing the efficiency of
necessary activities using economies of scale
Value-added activities are activities that directly contribute to meeting customer needs
and requirements or enhance the value of a product or service. These activities are
essential for the production process and are perceived as valuable by the customer.
Examples of value-added activities include design, manufacturing, assembly, testing,
and customer service.
Non-value-added activities, on the other hand, are activities that do not add value to the
product or service from the customer's perspective. These activities consume resources
but do not contribute to meeting customer needs or enhancing product quality.
Examples of non-value-added activities include rework, inspection, waiting, excess
inventory, and unnecessary movement or transportation.
To reduce costs and improve efficiency, organizations can employ various strategies to
manage activities effectively. Here are four different ways to manage activities to
reduce costs:
1. Elimination of Non-Value-Added Activities:

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 One approach to cost reduction is to identify and eliminate non-value-added activities
from the production process. By streamlining operations and removing activities that
do not contribute to customer value, organizations can reduce waste, improve
productivity, and lower overall costs. Techniques such as value stream mapping,
process reengineering, and lean manufacturing can help identify and eliminate non-
value-added activities.
2. Automation and Technology Adoption:
Another way to reduce costs is to automate repetitive tasks and adopt technology
solutions that improve efficiency and productivity. Automation reduces labor costs,
minimizes errors, and speeds up processes, resulting in cost savings over time.
Technologies such as robotics, artificial intelligence, and advanced manufacturing
systems can automate tasks, streamline operations, and enhance overall cost efficiency.
3. Standardization and Simplification:
Standardizing processes and simplifying operations can help reduce complexity,
minimize variation, and improve efficiency. By standardizing procedures,
specifications, and workflows, organizations can streamline operations, reduce errors,
and enhance consistency, resulting in cost savings and improved quality. Simplification
involves eliminating unnecessary steps, components, or features from products or
processes to reduce costs without sacrificing functionality or performance.
4. Supplier Collaboration and Supply Chain Optimization:
Collaborating with suppliers and optimizing the supply chain can help reduce costs by
improving sourcing, procurement, and logistics processes. By working closely with
suppliers to negotiate favorable terms, consolidate orders, and optimize inventory
levels, organizations can lower purchasing costs and reduce supply chain expenses.
Supply chain optimization techniques such as just-in-time (JIT) inventory
management, vendor-managed inventory (VMI), and strategic sourcing can help
streamline operations and reduce costs throughout the supply chain.
In summary, managing activities effectively is essential for reducing costs and
improving efficiency in organizations. By eliminating non-value-added activities,
adopting automation and technology solutions, standardizing and simplifying
processes, and optimizing the supply chain, organizations can enhance cost efficiency,
improve competitiveness, and achieve sustainable growth.

d) Explain how benchmarking can be used to improve activity performance.

Benchmarking identifies the best practices of comparable internal and external
units. For internal units, information can be gathered that reveals how the best
unit achieves its results; these procedures can then be adopted by other
comparable units. For external units, the performance standard provides an
incentive to find ways to match the performance. (It may sometimes be possible to
determine the ways the performance is achieved.
Benchmarking is a strategic management tool used to compare an organization's
performance, processes, and practices against those of its competitors or industry
leaders to identify areas for improvement and best practices. When applied to activity
performance, benchmarking can be a powerful method to drive continuous
improvement and enhance efficiency. Here's how benchmarking can be used to
improve activity performance:
1. Identification of Performance Gaps:
Benchmarking allows organizations to assess their activity performance against
industry standards or best practices. By comparing key performance metrics such as
cycle time, cost per unit, quality levels, and productivity with those of competitors or
industry leaders, organizations can identify performance gaps and areas where they are

13
 underperforming. This identification of performance gaps provides a clear
understanding of where improvements are needed.
2. Learning from Best Practices:
Benchmarking enables organizations to learn from the best practices of industry leaders
or top performers in their field. By studying how other organizations achieve superior
performance in specific activities, processes, or functions, organizations can gain
insights into innovative approaches, techniques, and strategies for improving their own
activity performance. This learning from best practices helps organizations adopt
proven methods and apply them to their operations to drive performance improvement.
3. Setting Performance Targets:
Benchmarking provides organizations with benchmarks or performance targets to
strive for based on industry standards or the performance of top performers. By setting
ambitious yet achievable performance targets derived from benchmarking data,
organizations can establish clear goals for improving activity performance. These
performance targets serve as benchmarks for measuring progress and driving
continuous improvement efforts.
4. Process Optimization and Redesign:
Benchmarking encourages organizations to critically evaluate their processes and
practices to identify opportunities for optimization and redesign. By analyzing the
processes and practices of top performers, organizations can identify inefficiencies,
bottlenecks, and areas for improvement in their own activities. This process
optimization and redesign involve streamlining workflows, eliminating waste,
standardizing procedures, and adopting best-in-class practices to enhance efficiency
and effectiveness.
5. Continuous Improvement Culture:
Benchmarking fosters a culture of continuous improvement within organizations by
promoting a mindset of learning, adaptation, and innovation. By regularly
benchmarking performance against industry standards and best practices, organizations
instill a sense of urgency and commitment to ongoing improvement in their activities.
This continuous improvement culture encourages employees to seek out opportunities
for enhancement, experiment with new ideas, and drive incremental improvements in
activity performance over time.
In summary, benchmarking is a valuable tool for improving activity performance by
identifying performance gaps, learning from best practices, setting performance targets,
optimizing processes, and fostering a culture of continuous improvement. By
leveraging benchmarking insights and implementing targeted improvement initiatives,
organizations can enhance efficiency, effectiveness, and competitiveness in their
activities.

Quality Costing
Q. a) Define quality costs. Identify and discuss the four kinds of quality costs
No- The costs of performing these activities are referred to as costs of quality. Thus,
4 costs of quality are the costs that exist because poor quality may or does exist.
This definition implies that quality costs are associated with two subcategories of
quality-related activities:
Prevention costs are incurred to prevent defects in products; appraisal costs are
costs incurred to determine whether products are conforming to specifications;
internal failure costs are incurred when nonconforming products are detected
prior to shipment; external failure costs are incurred because nonconforming
products are delivered to customers.

14
Quality costs refer to the costs incurred by an organization as a result of producing
goods or delivering services that do not meet customer expectations or quality
standards. These costs encompass expenses associated with preventing, detecting, and
correcting defects or errors in products or processes. Quality costs are categorized into
four main types:
1. Prevention Costs:
Prevention costs are incurred to prevent defects or errors from occurring in the first
place. These costs are invested in activities and initiatives aimed at identifying and
eliminating the root causes of quality problems. Prevention costs typically include:
 Quality planning and design
 Process and product quality training
 Quality management system development and implementation
 Supplier quality assurance activities
 Process and product improvement initiatives
 Design of experiments and statistical process control
By investing in prevention activities, organizations aim to minimize the occurrence of
defects, reduce rework and scrap, and improve overall quality performance.
2. Appraisal Costs:
Appraisal costs are incurred to assess and evaluate the quality of products or services to
ensure they meet established standards and specifications. These costs are associated
with inspection, testing, and quality assurance activities conducted throughout the
production process. Appraisal costs typically include:
 Inspection and testing of raw materials, components, and finished
products
 Quality audits and assessments
 Calibration and maintenance of inspection equipment
 Supplier evaluation and performance monitoring
 Customer feedback and satisfaction surveys
While appraisal activities do not add value to the product itself, they are necessary to
ensure that quality standards are met and to identify defects early in the production
process.
3. Internal Failure Costs:
Internal failure costs are incurred as a result of defects or errors discovered before
products are delivered to customers. These costs arise from the detection and correction
of defects within the organization's operations. Internal failure costs typically include:
 Rework, repair, and reprocessing of defective products
 Scrap and waste disposal
 Downtime and disruption to production
 Loss of labor and materials associated with defective products
 Product redesign or process redesign to address quality issues
Internal failure costs represent the costs of poor quality that are incurred internally
within the organization and can significantly impact profitability and operational
efficiency.
4. External Failure Costs:
External failure costs are incurred as a result of defects or errors discovered after
products have been delivered to customers. These costs arise from customer
complaints, returns, warranty claims, and the loss of goodwill and reputation associated
with quality problems. External failure costs typically include:
 Warranty repairs and replacements
 Product recalls and liability claims
 Customer returns and allowances

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  Lost sales and market share due to dissatisfaction
 Damage to the organization's reputation and brand image
External failure costs can have far-reaching consequences for organizations, including
financial losses, damage to customer relationships, and long-term harm to the
organization's competitiveness and viability.
In summary, quality costs encompass the expenses incurred by organizations as a result
of producing goods or delivering services that do not meet quality standards. These
costs are categorized into prevention costs, appraisal costs, internal failure costs, and
external failure costs, each representing different aspects of the cost of poor quality. By
understanding and managing quality costs effectively, organizations can improve
quality performance, enhance customer satisfaction, and achieve sustainable business
success.
.
b) Explain why external failure costs can be more devastating to a firm than internal
failure costs.
External failure costs can be more devastating because of warranty costs,
lawsuits, and damage to the reputation of a company, all of which may greatly
exceed the costs of rework or scrap incurred from internal failure costs
External failure costs, incurred as a result of defects or errors discovered after products
have been delivered to customers, can be more devastating to a firm than internal
failure costs due to several critical factors:
1. Impact on Customer Relationships: External failure costs can severely
damage customer relationships and erode trust and confidence in the
organization's products or services. Customer dissatisfaction resulting from
quality problems can lead to loss of loyalty, negative word-of-mouth publicity,
and reputational damage, which can be difficult to repair. Once trust is lost,
regaining customer confidence becomes challenging, and customers may switch
to competitors, resulting in long-term revenue losses.
2. Financial Consequences: External failure costs often entail significant financial
implications for the firm, including warranty repairs, replacements, recalls, and
liability claims. These costs can escalate rapidly, especially in cases of
widespread quality issues or product recalls, leading to substantial financial
losses that impact profitability and shareholder value. Additionally, the legal
expenses associated with defending against lawsuits or settling claims can
further strain financial resources.
3. Loss of Market Share and Competitive Positioning: Persistent quality
problems resulting in external failures can undermine the firm's competitive
positioning and market share. Negative publicity surrounding quality issues can
deter potential customers from choosing the firm's products or services, leading
to declining sales and market share. Competitors may capitalize on the firm's
weaknesses by offering superior-quality alternatives, further eroding its market
position and competitiveness.
4. Reputational Damage: External failure costs can cause lasting reputational
damage to the firm's brand and image. Negative media coverage, social media
backlash, and consumer reviews highlighting quality problems can tarnish the
firm's reputation, making it difficult to attract new customers and retain existing
ones. Rebuilding a damaged reputation requires significant time, effort, and
investment in marketing and public relations initiatives.
5. Regulatory Scrutiny and Legal Compliance: Quality problems resulting in
external failures may attract regulatory scrutiny and legal compliance issues,
particularly in industries with stringent quality and safety regulations.

16
 Regulatory fines, penalties, and sanctions for non-compliance can further
exacerbate the financial and reputational impact on the firm. Compliance
failures may also lead to additional costs associated with implementing
corrective actions and monitoring systems to ensure ongoing compliance.
In summary, external failure costs can be more devastating to a firm than internal
failure costs due to their significant impact on customer relationships, financial
stability, market share, reputation, and regulatory compliance. Organizations must
prioritize quality management and invest in proactive measures to prevent external
failures, mitigate risks, and safeguard their long-term viability and competitiveness in
the marketplace.

c) Gaston Company manufactures furniture. One of its product lines is an economy-

line kitchen table. Last year, Gaston produced and sold 100,000 units for $100 per
unit. Sales of the table are on a bid-basis, but Gaston has always been able to win
sufficient bids using the $100 price. This year, however, Gaston was losing more
than its share of bids. Concerned, Larry Franklin, owner and president of the
company, called a meeting of his executive committee (Megan Johnson, marketing
manager; Fred Davis, quality manager; Kevin Jones, production manager; and
Helen Jackson, controller).
Larry: I don’t understand why we’re losing bids. Megan, do you have an
explanation?
Megan: Yes. Two competitors have lowered their price to $92 per unit. That’s too
big a difference for most of our buyers to ignore. If we want to keep selling our
100,000 units annually, we must lower our price to $92. Otherwise, our sales will
drop to about 20,000 to 25,000 per year.
Helen: The unit contribution margin on the table is $10. Lowering the price to $92
will cost us $8 per unit. Based on a sales volume 100,000, we’d make $200,000 in
contribution margin. If we keep the price at $100, our contribution margin would
be $200,000 to $250,000. If we have to lose, let’s take the lower market share. It’s
better than lowering our prices.
Megan: Perhaps. But the same thing could happen to some of our other product
lines. My sources tell me that these two companies are on the tail-end of a major
quality improvement program that allows them significant savings. We must
rethink our competitive strategy—at least if we want to stay in business. Ideally,
we should match the price reduction and work to reduce the costs to recapture the
lost contribution margin.
Fred: I think I have something to offer. We are about to embark on a new quality
improvement program. I have brought the following estimates of the current
quality costs for this economy line. As you can see, these costs run about 16
percent of current sales. That’s excessive, and we believe that they can be reduced
to about 4 percent of sales over time.
Scrap $ 700,000
Rework 300,000
Rejects (sold as seconds to discount houses) 250,000
Returns (due to poor artistry) 350,000
Total $1,600,000

Larry: This sounds good. Fred, how long will it take for you to achieve this
reduction?

17
Fred: All these costs vary with sales level, so I’ll express their reduction rate in
those terms. Our best guess is that we can reduce these costs by about 1 percent of
sales per quarter. So it should take about 12 quarters, or three years, to achieve
the full benefit. Keep in mind that this is with a quality improvement.
Megan: This offers us some hope. If we meet the price immediately, we can
maintain our market share. Furthermore, if we can ever reduce the price below
the $92 level, then we can increase our market share. I estimate we can increase
sales by about 10,000 units for every $1 price reduction beyond the $92 level.
Kevin, how much extra capacity for this line do we have?
Kevin: We can handle an extra 30,000 or 40,000 tables per year.

Required:
1) Assume that Gaston immediately reduces the bid price to $92. How long will
it be before the unit contribution margin is restored to $10, assuming quality
costs are reduced as expected, and sales are maintained at 100,000 units per
year (25,000 per quarter)?
2) Assume that Gaston holds the price at $92 until the 4 percent target is
achieved. At this new level of quality costs, should the price be reduced? If so,
how much should the price be diminished, and what would the contribution
margin increase be? Assume that the price can be reduced only in $1
increments.
3) Now assume that Gaston begins the quality improvement program but does
not immediately reduce the bid price. Instead, prices will be reduced when it
is profitable to do so. Assume that prices can be reduced only by $1
increments. Identify when the first future price change (if any) should occur.
4) Discuss the differences in viewpoints concerning the decision to decrease
prices and the short-run contribution margin analysis done by Helen, the
controller. Did quality cost information play an essential role in the strategic
decision-making illustrated by the problem?

18
 Balanced Scorecard
Q. a) What is a Balanced Scorecard? Discuss in brief the four perspectives of the
No- balanced scorecard.
5 A strategic performance management system can assume different forms; the

19
 most common is the Balanced Scorecard. The Balanced Scorecard is a strategic-
based performance management system that typically identifies objectives and
measures for four different perspectives: the financial perspective, the customer
perspective, the process perspective, and the learning and growth perspective

The Balanced Scorecard is a strategic management framework that translates an

organization's strategic objectives into a set of performance measures across four
perspectives. It provides a balanced view of the organization's performance by
considering financial and non-financial metrics related to various aspects of its
operations. The four perspectives of the Balanced Scorecard are:
1. Financial Perspective:
The financial perspective focuses on financial objectives and measures that indicate the
organization's financial performance and success in achieving its financial goals. Key
financial metrics may include revenue growth, profitability, return on investment
(ROI), cash flow, cost reduction, and shareholder value. The financial perspective
helps stakeholders assess the organization's financial health and its ability to generate
value for shareholders.
2. Customer Perspective:
The customer perspective emphasizes customer-related objectives and measures that
reflect the organization's ability to meet customer needs, expectations, and satisfaction
levels. Key customer metrics may include customer satisfaction scores, customer
retention rates, market share, brand loyalty, and customer acquisition costs. The
customer perspective helps organizations understand their competitive position in the
market and identify opportunities for growth and differentiation based on customer
feedback and preferences.
3. Internal Business Processes Perspective:
The internal business processes perspective focuses on internal operational objectives
and measures that drive efficiency, quality, and productivity within the organization.
Key process metrics may include cycle time, defect rates, process efficiency, capacity
utilization, innovation rates, and process costs. This perspective helps organizations
identify areas for process improvement, streamline operations, and enhance overall
performance to deliver value to customers and stakeholders.
4. Learning and Growth Perspective:
The learning and growth perspective emphasizes organizational capabilities and
resources that support long-term success and sustainability. Key learning and growth
metrics may include employee training and development, employee satisfaction and
engagement, innovation and knowledge management, organizational culture, and
employee turnover rates. This perspective highlights the importance of investing in
human capital, technology, and organizational culture to drive innovation, adaptability,
and continuous learning.
In summary, the Balanced Scorecard provides a comprehensive framework for
evaluating organizational performance from four distinct perspectives: financial,
customer, internal business processes, and learning and growth. By considering both
financial and non-financial metrics across these perspectives, the Balanced Scorecard
helps organizations align their strategic objectives with key performance indicators and
monitor progress towards achieving strategic goals in a balanced and holistic manner.

b) At the end of 2020, Activo Company implemented a low-cost strategy to improve

its competitive position. Its objective was to become the low-cost producer in its
industry. A Balanced Scorecard was developed to guide the company toward this
objective. To lower costs, Activo undertook several improvement activities, such

20
as JIT production, total quality management, and activity-based management.
Now, after two years of operation, the president of Activo wants some assessment
of the achievements. To help provide this assessment, the following information on
one product has been gathered:
2020 2022
Theoretical annual capacity* 124,800 124,800
Actual production** 104,000 117,000
Market size (in units sold) 650,000 650,000
Production hours available (20 workers) 52,000 52,000
Very satisfied customers 41,600 70,200
Actual cost per unit $162.50 $130
Days of inventory 7.8 3.9
Number of defective units 6,500 2,600
Total worker suggestions 52 156
Hours of training 130 520
Selling price per unit $192 $195
Number of new customers 2,600 13,000
*Amount that could be produced given the available
production hours; everything produced is sold.
**Amount that was produced given the available production
hours.
Required:
1) Compute the following measures for 2020 and 2022 (except for e. and f., which
are for the two years):
a) Actual velocity and cycle time
b) Percentage of total revenue from new customers (assume each customer
purchases one unit)
c) Percentage of total revenue from delighted customers (assume each
customer purchases one unit)
d) Market share
e) Percentage change in actual product cost over the period
f) Percentage change in days of inventory over the period
g) Defective units as a percentage of total units produced
h) Total hours of training
i) Suggestions per production worker
j) Total revenue
k) Number of new customers

21
 2) For the measures listed in Requirement 1, list likely strategic objectives,
classified according to the four Balance Scorecard perspectives. Assume there is
one measure per objective.

Value Chain Analysis

Q. a) What is an industrial value chain? Explain why a firm’s strategies are tied to
No- what happens in the rest of the value chain.
6 An industrial value chain is the linked set of value-creating activities from basic
raw materials to end-use customers. Knowing an activity’s relative position in the
value chain is vital for strategic analysis. For example, knowing the relative
economic position in the industrial chain may reveal a need to backward or
forward integrate in the chain. A total quality control strategy also reveals the
importance of external linkages. Suppliers, for example, create parts that are used
in products downstream in the value chain. Producing defect-free parts depends
strongly on the quality of parts provided by suppliers.

22
 An industrial value chain refers to the interconnected network of activities and
processes involved in the production, distribution, and sale of goods or services within
a specific industry. It encompasses all stages of the product lifecycle, from raw
material extraction and manufacturing to distribution, retail, and after-sales service.
Each stage of the industrial value chain adds value to the product or service,
contributing to its overall quality, functionality, and customer satisfaction.
Firms operate within a larger industrial value chain, where they interact with suppliers,
customers, competitors, and other stakeholders. The strategies adopted by a firm are
closely tied to what happens in the rest of the value chain for several reasons:
1. Interdependence of Activities: Activities within the industrial value chain are
often interdependent, with the output of one stage serving as the input for the
next stage. A firm's strategies must align with the activities and processes of
upstream suppliers and downstream customers to ensure smooth coordination
and integration across the value chain. For example, a manufacturer's
production schedule must align with suppliers' delivery schedules to avoid
disruptions in the supply of raw materials or components.
2. Value Creation and Differentiation: Value is created at each stage of the
industrial value chain through the performance of specific activities that
contribute to product quality, features, and functionality. A firm's strategies are
tied to the rest of the value chain as they seek to differentiate themselves by
offering unique value propositions that resonate with customers. For example, a
firm may collaborate with suppliers to source high-quality materials or invest in
innovation to develop new products that meet customer needs and preferences.
3. Cost Efficiency and Optimization: The efficiency and effectiveness of
activities within the industrial value chain directly impact a firm's cost structure
and profitability. Firms must adopt strategies that optimize costs and enhance
efficiency across the value chain to remain competitive in the marketplace. This
may involve implementing lean manufacturing practices, improving supply
chain management, or outsourcing non-core activities to specialized partners.
4. Risk Management and Resilience: Risks and uncertainties within the industrial
value chain, such as supply chain disruptions, market fluctuations, or regulatory
changes, can affect a firm's performance and competitiveness. Firms must
develop strategies to mitigate risks and build resilience by collaborating with
partners, diversifying suppliers, and adapting to changing market conditions.
This requires a deep understanding of the dynamics and interdependencies
within the value chain.
In summary, a firm's strategies are closely tied to what happens in the rest of the
industrial value chain due to the interdependence of activities, the need for value
creation and differentiation, the importance of cost efficiency and optimization, and the
imperative for risk management and resilience. By aligning their strategies with the
broader value chain dynamics, firms can enhance their competitiveness, create value
for customers, and achieve sustainable growth in the marketplace.

b) Zavner Company manufactures dental equipment. Zavner produces all the

components necessary for producing its product except for one. This component is
purchased from two local suppliers: Grayson Machining and Lambert, Inc.
Grayson sells the component for $144 per unit, while Lambert sells the same
element for $129. Because of the lower price, Zavner purchases 80 percent of its
components from Lambert. Zavner purchases the remaining 20 percent from
Grayson to ensure an alternative source. The total annual demand is 1,000,000
components.

23
Grayson’s sales manager is pushing Zavner to purchase more of its units, arguing
that its component is of much higher quality and should prove less costly than
Lambert’s lower-quality component. Grayson has sufficient capacity to supply all
the components needed and is asking for a long-term contract. With a five-year
contract for 800,000 or more units, Grayson will sell the element for $135 per unit.
Zavner’s purchasing manager is intrigued by the offer and wonders if the higher-
quality component costs less than the lower-quality Lambert component. To help
assess the cost effect of the two components, the following data were collected for
quality-related activities and suppliers:
I. Activity data:
Activity Cost
Inspecting components (sampling only) $ 1,200,000
Expediting work (due to late delivery) 960,000
Reworking products (due to failed 6,844,500
components)
Warranty work (due to failed component) 21,600,000
II. Supplier data:
Grayson Lambert
Unit purchase price $144 $129
Units purchased 200,000 800,000
Sampling hours* 20 980
Expediting orders 10 90
Rework hours 90 1,410
Warranty hours 200 3,800
*The quality control department indicates that sampling
inspection for the Grayson component has been reduced
because the reject rate is so low.

Required:
1) Calculate the cost per component for each supplier, considering the costs of
the quality-related activities and using the current prices and sales volume.
Given this information, what do you think the purchasing manager ought to
do? Explain.
2) Suppose the quality control department estimates that the company loses
$4,500,000 in sales annually because of the reputation effect of defective units
attributable to failed components. What information would you like to have
to assign this cost to each supplier? Suppose you had to assign the cost of lost
sales to each supplier using one of the already listed drivers. Which would
you choose? Using this driver, calculate the change in the cost of the Lambert
component attributable to lost sales.

24
 Activity Based Management
Q. a) What do you mean by ABM? Differentiate between ABM and ABC. Show in the
No- diagram the ABM model.
7 ABM stands for Activity-Based Management, which is a strategic management
approach that focuses on improving performance and efficiency by managing activities
within an organization. ABM builds upon the principles of Activity-Based Costing
(ABC) but extends beyond cost allocation to incorporate broader aspects of activity
analysis, performance measurement, decision support, and continuous improvement.
Here's a differentiation between ABM and ABC:

25
 1. Focus:
 ABC primarily focuses on allocating costs to products, services, or
customers based on the activities that consume resources. It aims to
provide more accurate cost information for decision-making, such as
pricing, product mix optimization, and cost reduction efforts.
 ABM, on the other hand, goes beyond cost allocation to focus on
managing activities to improve performance, efficiency, and value
creation. It integrates cost information with operational and performance
data to inform decision-making, resource allocation, and process
improvement initiatives.
2. Purpose:
 ABC is primarily concerned with cost accounting and cost allocation,
focusing on understanding the cost structure of products, services, or
activities.
 ABM aims to drive continuous improvement and strategic alignment by
linking activity-based cost information with performance metrics,
decision support tools, and resource allocation processes.
3. Scope:
 ABC is often used by organizations to enhance cost transparency,
improve pricing decisions, and identify opportunities for cost reduction
or process improvement.
 ABM encompasses a broader scope of activities, including activity
analysis, performance measurement, budgeting, strategic planning, and
performance management.
In the ABM model:
 Activity Analysis: Identifies and analyzes activities within the organization.
 Performance Measurement: Measures the efficiency and effectiveness of
activities using key performance indicators (KPIs).
 Decision Support & Analysis: Provides decision support tools and analysis to
inform strategic decisions and improvement initiatives.
 Resource Allocation: Allocates resources based on activity levels, performance
metrics, and strategic priorities.
 Continuous Improvement: Drives ongoing improvement and innovation
through a culture of continuous learning and adaptation.

b) Karebien, Inc., has two plants that manufacture a line of hospital beds. One plant
is in St. Louis, and the other is in Oklahoma City. Each plant is set up as a profit
center. During the past year, both plants sold the regular model for $810. Sales
volume averages 20,000 units per year in each plant. Recently, the St. Louis plant
reduced the price of the regular model to $720. Discussion with the St. Louis
manager revealed that the price reduction was possible because the plant reduced
manufacturing and selling costs by reducing “non-value-added costs.” The St.
Louis plant’s manufacturing and selling costs for the regular model were $630 per
unit. The St. Louis manager offered to lend the Oklahoma City plant his cost
accounting manager to help it achieve similar results. The Oklahoma City plant
manager readily agreed, knowing that his plant must keep pace—not only with
the St. Louis plant but also with competitors. A local competitor had also reduced
its price on a similar model, and Oklahoma City’s marketing manager had
indicated that the price must be matched or sales would drop dramatically. The
marketing manager suggested that if the price dropped to $702 by the end of the
year, the plant could expand its market share by 20 percent. The plant manager

26
agreed but insisted that the current profit per unit must be maintained. He also
wants to know if the plant can at least match the $630-per-unit cost of the St.
Louis plant and if the plant can reduce the cost using the approach of the St.
Louis plant.
The plant controller and the St. Louis cost accounting manager have assembled
the following data for the most recent year. The actual cost of inputs, their value-
added (ideal) quantity levels, and the exact quantity levels are provided (for
production of 20,000 units). Assume there is no difference between actual prices of
activity units and standard prices.
SQ AQ Actual Cost
Materials (lbs.) 427,500 450,000 $ 9,450,000
Labor (hrs.) 102,600 108,000 1,350,000
Setups (hrs.) — 7,200 540,000
Materials handling — 18,000 1,260,000
(moves)
Warranties (no. repaired) — 18,000 1,800,000
Total $14,400,000
Required:
1) Calculate the target cost for expanding the Oklahoma City market share by
20 percent, assuming that the per-unit profitability is maintained as
requested by the plant manager.
2) Calculate the non-value-added cost per unit. Assuming that non-value-added
costs can be reduced to zero, can the Oklahoma City plant match the St.
Louis plant’s per-unit cost? Can the target cost for expanding market share
be achieved? What actions would you take if you were the plant manager?
3) Describe the role benchmarking played in the Oklahoma City plant's effort
to protect and improve its competitive position.

27
 Traditional Vs. Backflush Costing
Q. a) Explain why JIT with dedicated cellular manufacturing increases product costing
No- accuracy.
8 Cells act as a “factory within a factory.” Each cell is dedicated to the production
of a single product or subassembly. Costs associated with the cell belong to the
cell’s output. By decentralizing services and redeploying equipment and
employees to the cell level, the quantity of directly attributable costs increases
dramatically
Just-in-Time (JIT) manufacturing, combined with dedicated cellular manufacturing,
can significantly improve product costing accuracy due to several key factors:
1. Reduced Inventory Holding Costs:
JIT manufacturing aims to minimize inventory levels by producing goods in response
to customer demand, rather than building up large inventories of finished goods. By
adopting dedicated cellular manufacturing, where production processes are organized
into self-contained cells, material flow is streamlined, and inventory levels are
minimized. This reduction in inventory holding costs leads to more accurate product
costing, as there are fewer overhead costs associated with storing and managing excess
inventory.
2. Elimination of Waste:
JIT manufacturing emphasizes the elimination of waste throughout the production
process, including overproduction, excess inventory, and unnecessary motion.
Dedicated cellular manufacturing further supports this goal by organizing production
processes into efficient, compact work cells that minimize unnecessary movement and
transportation of materials. By reducing waste and inefficiency, product costing

28
 becomes more accurate as costs are allocated only to value-adding activities.
3. Improved Cost Traceability:
With dedicated cellular manufacturing, each work cell is responsible for producing a
specific product or component, leading to clearer cost traceability. Costs incurred
within each cell can be directly attributed to the products or components being
produced, making it easier to accurately allocate costs to individual products. This
improves product costing accuracy by providing a more precise understanding of the
resources consumed and the activities performed for each product.
4. Enhanced Quality Control:
JIT manufacturing and dedicated cellular manufacturing emphasize quality control and
defect prevention throughout the production process. By focusing on producing small
batches of high-quality products, defects and errors are detected and addressed
promptly, reducing the likelihood of rework, scrap, or warranty claims. Improved
product quality leads to more accurate product costing, as costs associated with rework,
scrap, and warranty repairs are minimized.
5. Real-Time Cost Visibility:
JIT manufacturing relies on real-time information and communication to coordinate
production activities and respond quickly to changes in customer demand. With
dedicated cellular manufacturing, real-time monitoring and control of production
processes are facilitated within each work cell. This enables managers to have
immediate visibility into production costs, labor utilization, and equipment efficiency,
allowing for more accurate and timely product costing analysis.
Overall, the combination of JIT manufacturing with dedicated cellular manufacturing
enhances product costing accuracy by reducing inventory holding costs, eliminating
waste, improving cost traceability, enhancing quality control, and providing real-time
cost visibility. This enables organizations to allocate costs more accurately to
individual products, identify cost-saving opportunities, and make informed decisions to
improve profitability and competitiveness.

b) Jackson Company has installed a JIT purchasing and manufacturing system and is
using backflush accounting for its cost flows. It currently uses the purchase of
materials as the first trigger point and the completion of goods as the second trigger
point. During August, Jackson had the following transactions:

Raw materials purchased $810,000

Direct labor cost 135,000
Overhead cost 675,000
Conversion cost applied 877,500*
*$135,000 labor plus $742,500 overhead.

There was no beginning or ending inventories. All goods produced were sold with a 60
percent markup. Any variance is close to the Cost of Goods Sold. (Variances are
recognized monthly.)
Required:
1) Prepare the journal entries that would have been made using a traditional
accounting approach for cost flows.
2) Prepare the journal entries for the month using variations 1 and 3 of the backflush
costing.

29
 Life Cycle Costing
Q. a) What is life-cycle costs? How do these costs relate to the production life cycle?
No- Life-cycle costs are all costs associated with the product for its entire life cycle.
9 These costs correspond to the costs of the activities associated with the production
life cycle: research and development, production, and logistics.
Life-cycle costs refer to the total costs associated with a product or asset over its entire
life cycle, from inception to disposal. These costs encompass all expenses incurred

30
 throughout the life cycle of the product or asset, including initial acquisition costs,
operating costs, maintenance costs, and disposal costs. Life-cycle costing takes a
comprehensive approach to cost analysis, considering both short-term and long-term
costs to make informed decisions about investments, purchases, or projects.
The concept of life-cycle costs is closely related to the production life cycle, which
consists of different stages a product goes through from its development to its eventual
disposal. These stages typically include:
1. Development and Design Stage:
This stage involves conceptualizing, designing, and engineering the product. Life-cycle
costs during this stage include research and development costs, design costs,
prototyping expenses, and testing costs. Investments made during this stage impact the
product's performance, quality, and cost structure throughout its life cycle.
2. Production and Manufacturing Stage:
In this stage, the product is manufactured, assembled, and prepared for distribution.
Life-cycle costs during this stage include raw material costs, labor costs, equipment
costs, overhead costs, and quality control expenses. Efficient production processes,
quality control measures, and economies of scale can help minimize production costs
and optimize life-cycle cost performance.
3. Distribution and Logistics Stage:
During this stage, the product is transported, warehoused, and distributed to customers.
Life-cycle costs during this stage include transportation costs, inventory carrying costs,
warehousing expenses, and distribution costs. Effective supply chain management
practices and logistics optimization can help minimize distribution costs and improve
overall life-cycle cost efficiency.
4. Utilization and Operation Stage:
This stage involves the use of the product by customers throughout its operational life.
Life-cycle costs during this stage include operating costs, maintenance costs, repair
costs, energy costs, and consumable costs. Proper maintenance practices, preventive
maintenance programs, and asset management strategies can help minimize operational
costs and extend the product's useful life.
5. End-of-Life and Disposal Stage:
At the end of its life cycle, the product is disposed of or recycled. Life-cycle costs
during this stage include disposal costs, environmental remediation costs, and any
associated liabilities. Implementing sustainable disposal practices and recycling
initiatives can help minimize end-of-life costs and mitigate environmental impacts.
In summary, life-cycle costs encompass all costs associated with a product or asset
over its entire life cycle, from development to disposal. Understanding these costs in
relation to the production life cycle enables organizations to make informed decisions
about investments, purchases, and resource allocation to optimize cost performance and
maximize value throughout the product's life cycle.

b) “Life-cycle cost reduction is best achieved during the development stage of the
production life cycle.” Do you agree or disagree? Explain.
Agree. According to evidence, ninety percent of a product’s costs are committed
during the development stage. Furthermore, $1 spent during this stage on
preproduction activities can save $8–$10 on production and post-production
activities. Clearly, the time to manage activities is during the development stage
I agree that life-cycle cost reduction is best achieved during the development stage of
the production life cycle. There are several reasons why focusing on cost reduction
during the development stage is advantageous:
1. Design Influence: During the development stage, decisions regarding product

31
 design, materials, and manufacturing processes have the most significant
impact on the product's overall cost structure. By designing products with cost
considerations in mind, such as selecting cost-effective materials, simplifying
manufacturing processes, and minimizing the number of components,
organizations can significantly reduce production and operating costs over the
product's life cycle.
2. Cost Avoidance: Addressing cost-related issues early in the development stage
allows organizations to identify and address potential cost drivers and
inefficiencies before they become embedded in the product's design or
manufacturing processes. By proactively identifying and addressing cost drivers
during the development stage, organizations can avoid costly redesigns, rework,
and retrofitting efforts later in the production life cycle.
3. Long-Term Savings: Cost reductions achieved during the development stage
have a compounding effect on overall life-cycle costs. Even small
improvements in design, materials selection, or manufacturing processes can
lead to significant long-term savings in production, operating, and maintenance
costs over the product's life cycle. By investing in cost reduction efforts during
the development stage, organizations can realize substantial savings and
improve overall cost performance over time.
4. Risk Mitigation: Focusing on cost reduction during the development stage
helps organizations mitigate risks associated with cost overruns, budget
constraints, and competitive pressures. By addressing cost-related challenges
early in the development process, organizations can better manage project
budgets, timelines, and resource allocation, reducing the likelihood of costly
delays, disputes, or budget overruns during subsequent stages of the production
life cycle.
5. Enhanced Competitiveness: Cost-competitive products are more likely to
succeed in the marketplace, especially in industries characterized by intense
competition and price sensitivity. By optimizing costs during the development
stage, organizations can position their products more competitively, offering
customers superior value at a lower cost. This can lead to increased market
share, higher profitability, and improved competitiveness in the long run.
In summary, focusing on cost reduction during the development stage of the production
life cycle offers several advantages, including the ability to influence design decisions,
avoid costly mistakes, achieve long-term savings, mitigate risks, and enhance
competitiveness. By prioritizing cost reduction efforts early in the development
process, organizations can optimize cost performance and maximize value throughout
the product's life cycle.

c) Assume that a firm has the following activities and associated cost behaviors.
Activities Cost Behavior
Assembling components $10 per direct labor hour
Setting up equipment Variable: $100 per setup
Step-fixed: $30,000 per step
1 step = 10 setups
Receiving goods Step-fixed: $40,000 per step
1 step= 2,000 hours

Existing products are fully utilizing activities with step-cost behavior. Thus, any
new product demands will increase resource spending on these activities.

32
Two designs are being considered for a new product: Design I and Design II. The
following information is provided about each design (1,000 units of the product
will be produced):

Activity Driver Design I Design II

Direct labor hours 3,000 2,000
Number of setups 10 20
Receiving hours 2,000 4,000

The company has recently developed a cost equation for manufacturing costs
using direct labor hours as the driver. The equation has R2 0.60 and is as
follows:

Y= $150,000 +$20X
Required:
1) Suppose that Design Engineering is told that only direct labor hours drive
manufacturing costs (based on the direct labor cost equation). Compute the
cost of each design. Which design would be chosen based on this unit-based
cost assumption?
2) Now compute the cost of each design using all driver and activity information.
Which design will now be chosen? Are there other implications associated with
using the more complete activity information set?
3) Consider the following statement: “Strategic cost analysis should exploit
internal linkages.” What does this mean? Explain, using the results of
Requirements 1 and 2.
4) An outside consultant indicated that target costing should be used in the design
stage. Explain target costing and how it requires understanding supplier and
customer linkages.
5) What other information would be helpful concerning the two designs? Explain.

33
 Just in Time Accounting
Q. a) What do you mean by JIT? Explain why JIT with dedicated cellular
No- manufacturing increases product costing accuracy.
10 Cells act as a “factory within a factory.” Each cell is dedicated to the production
of a single product or subassembly. Costs associated with the cell belong to the
cell’s output. By decentralizing services and redeploying equipment and
employees to the cell level, the quantity of directly attributable costs increases
dramatically.
JIT stands for Just-in-Time, a production strategy aimed at producing goods only as
needed, in the right quantity, and at the right time. The JIT approach seeks to minimize
inventory levels by synchronizing production with customer demand, thereby reducing
waste, minimizing storage costs, and improving efficiency. Key principles of JIT
include:
1. Pull System: JIT operates on a pull-based system, where production is triggered
by customer demand rather than forecasted estimates. This ensures that
production is aligned with actual customer orders, reducing the risk of
overproduction and excess inventory.
2. Continuous Improvement: JIT emphasizes continuous improvement and waste
reduction through practices such as Kaizen (continuous improvement), Kanban
(visual management), and Total Quality Management (TQM). By identifying

34
 and eliminating waste in all forms, including excess inventory, waiting times,
and defects, JIT aims to optimize efficiency and quality.
3. Supplier Partnerships: JIT fosters close relationships with suppliers to ensure
timely delivery of materials and components in small, frequent batches. This
reduces lead times, minimizes inventory holding costs, and improves supply
chain responsiveness.
4. Flexibility and Adaptability: JIT promotes flexibility and adaptability in
production processes to respond quickly to changes in customer demand,
market conditions, or production requirements. This enables organizations to
adjust production schedules, change product configurations, and introduce new
products more efficiently.
When combined with dedicated cellular manufacturing, JIT further enhances product
costing accuracy through several mechanisms:
1. Streamlined Workflow: Dedicated cellular manufacturing organizes production
processes into self-contained work cells, each dedicated to producing a specific
product or component. This streamlines workflow, reduces material handling,
and minimizes setup times, leading to more efficient and cost-effective
production.
2. Reduced Waste: JIT and dedicated cellular manufacturing both focus on
eliminating waste throughout the production process. By synchronizing
production with customer demand and organizing production processes into
efficient work cells, waste such as overproduction, excess inventory, and
unnecessary movement is minimized, leading to lower costs and improved
costing accuracy.
3. Improved Quality Control: JIT and dedicated cellular manufacturing
emphasize quality control and defect prevention through practices such as error-
proofing, preventive maintenance, and employee training. By producing goods
in small batches and implementing rigorous quality control measures at each
work cell, defects and errors are detected and addressed early, reducing the
need for costly rework or scrap.
4. Real-Time Cost Visibility: JIT and dedicated cellular manufacturing provide
real-time visibility into production costs, labor utilization, and equipment
efficiency. By monitoring production performance at each work cell, managers
can accurately track costs, identify cost-saving opportunities, and make
informed decisions to improve costing accuracy.
Overall, JIT with dedicated cellular manufacturing enhances product costing accuracy
by reducing waste, improving quality, streamlining workflow, and providing real-time
cost visibility. By aligning production processes with customer demand and optimizing
resource utilization, organizations can achieve greater efficiency, lower costs, and
improved competitiveness in the marketplace.

b) Menotti Company produces two types of space heaters (regular and super). Both
pass through two producing departments: fabrication and assembly. It also has a
materials handling department responsible for moving materials and goods to and
between departments. Budgeted data for the three departments are as follows:
Materials Handling Fabricatio Assembly
n
Overhead $160,000 $240,000 $68,000

Number of moves — 30,000 10,000

Direct labor hours — 24,000 12,000

35
 In the fabrication department, the regular model requires one hour of direct labor
and two hours for the supermodel. In the assembly department, the regular model
requires 0.5 hours of direct labor, and the supermodel requires one hour.
Expected production: regular model, 8,000 units; supermodel, 8,000 units.
Immediately after preparing the budgeted data, a consultant suggests that two
manufacturing cells be created: one for the manufacture of the regular model and
the other for the manufacture of the supermodel. Raw materials would be
delivered to each cell, and goods would be shipped immediately to customers upon
completion. The total direct overhead costs estimated for each cell would be
$76,000 for the regular cell and $240,000 for the supercell.
Required:
1) Allocate the materials handling costs to each department using the number
of moves and compute each heater's overhead cost per unit. (Overhead rates
for fabrication and assembly departments are based on direct labor hours.)
2) Compute the overhead cost per unit if manufacturing cells are created.
Which unit overhead cost is more accurate—the one computed with a
departmental structure or calculated using a cell structure? Explain.
3) Note that the total overhead costs for the cell structure are lower. Explain
why.

Activity Based Management

Q. a) Briefly discuss the Activity Based Management (ABM) model.
No- Activity-Based Management (ABM) is a strategic management approach that focuses
11 on identifying and managing activities within an organization to improve performance,
enhance efficiency, and drive value creation. ABM builds upon the principles of
Activity-Based Costing (ABC) by integrating cost information with operational and
performance data to inform decision-making and resource allocation. Here's a brief
overview of the ABM model:
1. Activity Analysis:

36
 The first step in the ABM model involves analyzing the activities performed within the
organization. Activities are identified and categorized based on their contribution to
value creation, cost drivers, and resource consumption. This analysis helps
organizations understand the activities that drive costs, consume resources, and add
value to products or services.
2. Costing and Cost Drivers:
ABM utilizes Activity-Based Costing (ABC) principles to assign costs to activities
based on their consumption of resources. Cost drivers, such as volume-based drivers,
transaction-based drivers, and duration-based drivers, are identified to allocate costs
more accurately to activities. This enables organizations to understand the true cost of
performing each activity and identify opportunities for cost reduction or optimization.
3. Performance Measurement:
ABM incorporates performance metrics and key performance indicators (KPIs) to
measure the efficiency and effectiveness of activities. Performance metrics may
include cycle time, throughput, defect rates, resource utilization, and customer
satisfaction. By monitoring performance metrics, organizations can identify areas for
improvement, benchmark performance against targets or industry standards, and track
progress over time.
4. Activity-Based Budgeting:
ABM utilizes activity-based budgeting techniques to allocate resources and set budgets
based on activity levels and resource requirements. Rather than relying solely on
historical data or arbitrary allocation methods, ABM aligns budgeting decisions with
strategic priorities and activity drivers. This enables organizations to allocate resources
more efficiently, prioritize investments, and optimize resource utilization to achieve
strategic objectives.
5. Decision Support and Continuous Improvement:
ABM provides decision support tools and techniques to help organizations make
informed decisions about resource allocation, process improvement, product pricing,
and strategic initiatives. By linking cost information with operational data and
performance metrics, ABM enables organizations to evaluate the impact of different
scenarios, identify trade-offs, and prioritize initiatives that deliver the greatest value.
This facilitates a culture of continuous improvement and innovation within the
organization.
In summary, Activity-Based Management (ABM) is a strategic management approach
that leverages activity-based costing principles to improve performance, enhance
efficiency, and drive value creation. By analyzing activities, identifying cost drivers,
measuring performance, implementing activity-based budgeting, and providing
decision support, ABM helps organizations optimize resource allocation, prioritize
investments, and achieve strategic objectives in a dynamic and competitive business
environment.

b) Jerry Goff, president of Harmony Electronics, was concerned about the end-of-
the-year marketing report that he had just received. According to Emily Hagood,
marketing manager, a price decrease for the coming year was again needed to
maintain the company’s annual sales volume of integrated circuit boards. This
would make a bad situation worse.
The current $18 per unit selling price produced a $2-per-unit profit—half the
customary $4-per-unit profit. Foreign competitors keep reducing their prices. We
would reduce the price from $18 to $14 to match the latest reduction. This would
put the price below the cost to produce and sell it. How could the foreign firms sell
for such a low price? Determined to find out if there were problems with the

37
company’s operations, Jerry decided to hire Jan Booth, a well-known consultant
specializing in continuous improvement methods. Jan indicated that she felt an
activity-based management system needed to be implemented. After three weeks,
Jan had identified the following activities and costs:
Batch-level activities:
Setting up equipment $ 125,000
Materials handling 180,000
Inspecting products 122,000
Product-sustaining activities:
Engineering support 120,000
Handling customer complaints 100,000
Filling warranties 170,000
Storing goods 80,000
Expediting goods 75,000
Unit-level activities:
Using materials 500,000
Using power 48,000
Manual insertion labor* 250,000
Other direct labor 150,000
Total costs $1,920,000*
*
*Diodes, resistors, and integrated circuits are inserted
manually into the circuit board.
**This total cost produces a unit cost of $16 for last
year’s sales volume.
Jan reported that some preliminary activity analysis shows that per-unit costs can
be reduced by at least $7. Since Emily had indicated that the board's market
share (sales volume) could be increased by 50 percent if the price could be
reduced to $12, Jerry became quite excited.
Required:
1) do you have any connection between ABM and continuous improvement?
2) Identify as many non-value-added costs as possible. Compute the cost
savings per unit realized if these costs were eliminated. Was Jan correct in
her preliminary cost reduction assessment? Discuss actions that the company
can take to reduce or eliminate the non-value-added activities.
3) Compute the target cost required to maintain current market share while
earning a profit of $4 per unit. Now, compute the target cost needed to
expand sales by 50 percent. How much cost reduction would be required to
achieve each target?
4) Assume that Jan suggested that kaizen costing be used to help reduce costs.
The first suggested kaizen initiative is described as follows: Switching to
automated insertion would save $60,000 of engineering support and $90,000
of direct labor. Now, what is the total potential cost reduction per unit
available? Can Harmony Electronics achieve the target cost to maintain
current sales with these additional reductions? To increase it by 50 percent?
What form of activity analysis is this kaizen initiative: reduction, sharing,
elimination, or selection?
5) Calculate income based on current sales, prices, and costs. Now, calculate the
income using a $14 price and a $12 price, assuming that the maximum cost
reduction possible is achieved (including Requirement 4’s kaizen reduction).
What price should be selected?
38
39
 Backflush Costing
Q. a) Define ‘Backflush costing’ and ‘trigger point.’ State the four variations of trigger
No- points in backflush costing.
12 Backflush costing is a simplified approach to accounting for manufacturing cost
flows. It uses trigger points to determine when costs are assigned to inventory or
temporary accounts. In the purest form, the only trigger point is when the goods
are sold. In this variation, the manufacturing costs are flushed out of the system
by debiting Cost of Goods Sold and crediting Accounts Payable and Conversion
Cost Control. Other trigger points are possible but entail more journal entry
activity and involve some inventory accounts.
Backflush costing is a simplified costing method used in Just-in-Time (JIT)
manufacturing environments to assign costs to products only when they are completed
or sold, rather than tracking costs at each stage of production. This approach simplifies
cost accounting by eliminating the need to track individual costs for materials, labor,
and overhead at each production step. Instead, costs are "flushed back" into the system
at predetermined trigger points, typically at the completion of a production batch or the
sale of finished goods.
A trigger point is a predefined event or milestone in the production process that
initiates the assignment of costs to products in backflush costing. Trigger points serve
as checkpoints where costs are allocated to products based on predefined standard costs
or cost rates. The four variations of trigger points commonly used in backflush costing
are:
1. Production Completion:
This trigger point occurs when a production batch is completed or a specific number of
units are produced. Costs are assigned to the finished products based on standard costs
or predetermined cost rates for materials, labor, and overhead.
2. Component Issuance:

40
 In this variation, costs are assigned to products when components or materials are
issued from inventory to the production line. The cost of the components issued is used
to calculate the total cost of the finished products, based on predetermined cost rates
for materials, labor, and overhead.
3. Subassembly Completion:
This trigger point occurs when subassemblies or intermediate products are completed
and ready for further processing or assembly. Costs are allocated to the finished
products based on the cost of the completed subassemblies, using predetermined cost
rates or standard costs.
4. Sales or Shipment:
In this variation, costs are assigned to products when they are sold or shipped to
customers. The total cost of the products sold is calculated based on standard costs or
predetermined cost rates for materials, labor, and overhead, and recorded as cost of
goods sold.
These trigger points provide flexibility in backflush costing, allowing organizations to
choose the most appropriate event or milestone for cost allocation based on their
specific production processes and business requirements. By using trigger points,
organizations can streamline cost accounting, reduce administrative overhead, and
improve efficiency in JIT manufacturing environments.

b) What is target costing? What role does it have in life-cycle cost management?
Explain.
Target costing is the setting of a cost goal needed to capture a given market share
and earn a certain level of profits. Actions are then taken to achieve this goal—
usually by seeking ways to reduce costs to the point where the plan becomes
feasible (often by seeking better product designs). This is consistent with the cost
reduction emphasis found in life-cycle cost management
Target costing is a strategic cost management technique used by organizations to
manage costs throughout the product life cycle by setting target costs based on
customer requirements and market conditions. The primary objective of target costing
is to ensure that products are designed, developed, and produced at a cost that allows
the organization to achieve its desired profit margins while remaining competitive in
the marketplace.
In target costing, the target cost is determined by subtracting the desired profit margin
from the target selling price. The target cost represents the maximum allowable cost to
produce the product while still achieving the desired profit margin. By setting target
costs early in the product development process, organizations can align their cost
management efforts with customer expectations and market realities.
Target costing plays a crucial role in life-cycle cost management by influencing
decisions and actions at each stage of the product life cycle:
1. Product Design and Development: During the design and development stage,
target costing guides design decisions aimed at achieving the desired cost
structure while meeting customer needs and quality standards. Design engineers
work to identify cost drivers, optimize product features, and select cost-
effective materials and processes to meet the target cost.
2. Supplier Collaboration: Target costing encourages collaboration with suppliers
to achieve cost reduction goals and improve cost efficiency throughout the
supply chain. Suppliers play a critical role in helping organizations achieve
target costs by providing cost-effective materials, components, and services that
meet quality and performance requirements.
3. Value Engineering: Target costing promotes value engineering efforts aimed at

41
 identifying and eliminating non-value-added costs while preserving or
enhancing product functionality and quality. Value engineering involves
analyzing product features, specifications, and processes to identify
opportunities for cost reduction without compromising customer value.
4. Cost Monitoring and Control: Throughout the product life cycle, target costing
serves as a benchmark for monitoring and controlling costs to ensure that actual
costs align with target costs. Organizations track actual costs against target
costs, identify variances, and take corrective actions to address cost overruns or
deviations from the target cost.
5. Price Management: Target costing influences pricing decisions by providing
insights into the relationship between product costs, market demand, and
competitive pricing. Organizations use target costing to determine pricing
strategies that allow them to achieve desired profit margins while remaining
competitive in the marketplace.
Overall, target costing is an essential tool in life-cycle cost management, as it guides
decision-making, fosters collaboration, promotes value creation, and enables
organizations to achieve their cost reduction and profit objectives throughout the
product life cycle. By integrating target costing into their strategic planning and
management processes, organizations can enhance cost competitiveness, improve
profitability, and drive sustainable growth in the marketplace.

c) Midland Company has implemented a JIT system and is considering the use of
backflush costing. Midland had the following transactions for the first quarter of
the current fiscal year. (Conversion cost variances are recognized quarterly.)
 Purchased raw materials on account for $400,000.
 Placed all materials received into production.
 Incurred actual direct labor costs of $60,000.
 Incurred actual overhead costs of $400,000.
 Applied conversion costs of $470,000.
 Completed all work for the month.
 Sold all completed work.
 Computed the difference between actual and applied costs.
Required:
Prepare journal entries for Variations 1, 2, and 3 of backflush costing.

42
Sure, I'll prepare journal entries for Variations 1, 2, and 3 of backflush costing based on
the provided transactions:
Variation 1: Production Completion
1. Purchased raw materials on account for $400,000.
Raw Materials Inventory $400,000
Accounts Payable $400,000
2. Placed all materials received into production.
Work in Process Inventory $400,000
Raw Materials Inventory $400,000
3. Incurred actual direct labor costs of $60,000.
Work in Process Inventory $60,000
Wages Payable $60,000
4. Incurred actual overhead costs of $400,000.
Work in Process Inventory $400,000
Overhead Expense $400,000
5. Applied conversion costs of $470,000.
Work in Process Inventory $470,000
Conversion Costs Applied $470,000
6. Completed all work for the month.
Finished Goods Inventory $930,000
Work in Process Inventory $930,000
7. Sold all completed work.
Accounts Receivable $930,000
Sales Revenue $930,000
8. Computed the difference between actual and applied costs.
Cost of Goods Sold $930,000
Work in Process Inventory $930,000
Variation 2: Component Issuance
This variation assumes that costs are assigned when components or materials are issued
from inventory to the production line. As all materials are placed into production in this
scenario, journal entries remain the same as Variation 1.
Variation 3: Sales or Shipment

43
 This variation assumes that costs are assigned when products are sold or shipped to
customers. As all completed work is sold in this scenario, journal entries remain the
same as Variation 1.
Please note that the journal entries for Variations 2 and 3 remain the same as Variation
1 because all materials are placed into production, and all completed work is sold in the
given transactions. If there were variations in the timing of material issuance or product
sales, the journal entries would differ accordingly.

Balanced Scorecard
Q. a) What do you mean by responsibility accounting? Discuss the model of
No- responsibility accounting.
13 Responsibility accounting is a fundamental tool of managerial control and is defined by
four essential elements: (1) assigning responsibility, (2) establishing performance
measures or benchmarks, (3) evaluating performance, and (4) assigning rewards. The
objective of responsibility accounting is to influence behavior in such a way that
individual and organizational initiatives are aligned to achieve a common goal or goals
b) Garvey Company has a JIT system in place. Each manufacturing cell is dedicated to
producing a single product or significant subassembly. One cell, devoted to the
production of snowmobiles, has four operations: machining, finishing, assembly, and
qualifying (testing). The machining process is automated using computers. In this
process, the model’s frame and engine are constructed. In finishing, the frame is
sandblasted, buffed, and painted. In assembly, the frame and engine are assembled.
Finally, each model is tested to ensure operational capability.
For the coming year, the snowmobile cell has the following budgeted costs and cell
time (both at theoretical capacity):
Budgeted conversion costs $7,750,000
Budgeted materials $9,300,000
Cell time 12,400 hours
Theoretical output 9,300 models
During the year, the following actual results were obtained:
Actual conversion costs $7,750,000
Actual materials $8,060,000
Actual cell time 12,400 hours
Actual output 7,750 models
Required:
1) Compute the velocity (number of models per hour) the cell can theoretically
achieve. Now, compute the theoretical cycle time (number of hours or minutes per
model) required to produce one model.
2) Compute the actual velocity and the actual cycle time.
3) Compute MCE. Comment on the efficiency of the operation.
4) Compute the budgeted conversion cost per minute. Using this rate, compute the
conversion cost per model if theoretical output is achieved. Using this measure,
compute the conversion cost per model for actual output. Does this product costing
approach incentivize the cell manager to reduce cycle time? Explain.

44
 Environmental Accounting
Q. a) What is an environmental cost? What are the four categories of environmental
No- costs? Define each category.
14 An environmental cost is a cost incurred because poor environmental quality
exists or may exist.
The four categories of environmental costs are prevention, detection, internal
failure, and external failure. Prevention costs are costs incurred to prevent
degradation to the environment. Detection costs are incurred to determine if the
firm is complying with environmental standards. Internal failure costs are costs
incurred to prevent emission of contaminants to the environment after they have
been produced. External failure costs are costs incurred after contaminants have
been emitted to the environment.
b) What is the difference between a realized external failure cost (environmental)
and an unrealized external failure (societal) cost?
Realized external failure costs are environmental costs paid for by the firm.
Unrealized or societal costs are costs caused by the firm but paid for by third
parties (e.g., members of society bear these costs)
c) At the end of 2023, Hender Chemicals began implementing an environmental quality
management program. As a first step, it identified the following costs in its accounting
records as environmentally related for the year just ended:

2023
Settling personal injury claims $1,200,000
Treating and disposing of toxic waste 4,800,000
Cleanup of chemically contaminated soil 1,800,000
Inspecting products and processes 600,000
Operating pollution control equipment 840,000
Licensing facilities for producing contaminants 360,000
Evaluating and selecting suppliers 120,000
Developing performance measures 60,000
Recycling products 75,000

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 Required:
1) Prepare an environmental cost report by category. Assume that total operating
costs are $60,000,000.
2) Create a pie chart to illustrate the relative distribution percentages for each
environmental cost category. Comment on what this distribution communicates to
a manager.

Responsibility Accounting & Transfer Pricing

Q. a) Discuss the advantages and disadvantages of calculating ROI. Explain how each
No- can lead to improved and decreased profitability.
15 Three advantages of ROI include: (1) ROI encourages managers to pay attention
to the relationships among sales, expenses, and investment. (2) ROI encourages
cost efficiency. (3) ROI discourages excessive investment in operating assets.
Increased profitability can be achieved (all other things being equal) by increasing
revenues, decreasing expenses, or lowering investment
Two disadvantages of ROI are: (1) ROI may discourage managers from investing
in projects that would increase the profitability of the firm but decrease the
division’s ROI. (2) It also may encourage managers to focus on short-run
profitability and to take actions that may harm long-run profitability
b) What is residual income? Explain how residual income overcomes one of ROI’s
disadvantages.
Residual income is the difference between net income and the minimum dollar return
required on an investment. Residual income encourages investment in all projects that

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 earn at least the minimum rate of return.
c) What is a transfer price? What is the transfer pricing problem?
A transfer price is the price charged for goods that are transferred from one
division to another division of the same company The transfer pricing problem is
finding a transfer price that simultaneously satisfies three objectives: accurate
performance evaluation, goal congruence, and preservation of divisional
autonomy.
d) Review Problem-2; Exercise 10: 10-1; 10-2;10-6;

Problems for solution

Chapter-10: Review Problem-1&2; 10-1; 10-2;10-6; 10-11; 10-12; 10-14; 10-16
Chapter-11: Exhibit Page 386 & 393; Review Problems-1 & 2; 11-3; 11-4; 11-7; 11-16;
11-17
Chapter-12: Review Problem-2; 12-1; 12-9; 12-10; 12-16; 12-18
Chapter-13: Review Problem-2; 13-5; 13-6; 13-13; 13-16; 13-18
Chapter-14: Review Problem; 14-3; 14-9; 14-11; 14-13

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