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Managing Costs Across The Value Chain Notes

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This is an extract of our Managing Costs Across The Value Chain document, which we sell as part of our Managerial Accounting Notes collection written by the top tier of LSE students.

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Lecture 2: Managing Costs Across the Value Chain 11 October 2010

Topics

* Emerging performance measurement concerns

* Quality costing

* Life cycle costing

Reading

* Required Reading:
* Bhimani (2008) chapter 3 (pp. 50-76) on quality
* Bhimani (2008) chapter 7 on life cycle costing (pp. 211-219)

* Further Reading:
* BHDF chapter 20

Emerging Performance Measurement Concerns

* Changing information flows
* Porter's Value Chain Concept

Quality Costing
* The biggest mistake of US companies was not improving their quality once Japanese quality was surpassing theirs

* Statistical process controls can be used to test quality

* Quality costs can be as much as 10-20% of sales revenue What is Quality?
* "The Pride of workmanship", Deming
* "Conformance to requirements", Crosby
* "Fitness for use", Juran
* "What the customer says it is", Feigenbaum
* Conformance quality = The performance of a product or service according to design and production specifications The Traditional View of Quality:
* Improving quality drives up time and costs
* Defects and failures of less than 10% are acceptable
* Quality should be inspected ex post.
* Quality control should be a specialised function The Emerging View of Quality:
* Improving quality reduces times and costs
* The goal is zero defects and failures
* Quality should be designed and built in
* Quality control should be integral to production The Relationship Between Voluntary and Non-Voluntary Costs

Comparison of Quality Costs in the West and Japan

? Note that Prevention Costs for Western Companies should be 10% not 0%
Traditional Cost of Quality

Course Notes Page 4

Key Points

* Porter's value chain concept

* US vs. Japanese quality

* Traditional quality view vs. emerging view

* Voluntary vs. non-voluntary costs

* Total quality management (TQM)

* BCG matrix

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