YTDM Part 2: Precision Molding, Inc.
Solutions to extended assignments
These are assignments that extend the analyses on the PMI websites. Instructors might assign these semi-structured exercises to individuals or small groups. Solutions will vary, but Instructors have access to the following suggested solutions.
Short Assignments
1. Prepare a 2-page report (including a table or chart) or a 10-minute visual presentation of:
a. PMI’s goals and objectives
Sources of data include the company’s homepage, the overheard conversation among PMI executives, and the consultant’s interviews with selected executives. The overheard conversation and interviews indicate that the CEO and CFO are cautious but eager to find and exploit long-term, profitable, growth opportunities. They are concerned about managing risks and the effects of changes on employees and current customers.
The interviews also reveal desire to change and improve by growing wisely. Manufacturing and logistics managers are worried about adopting a faddish approach to management and want to be assured that the methods of change are sound. Their interviews also reveal a common tension between accounting & finance personnel, who are perceived to be concerned with short-term efficiency, and operations personnel, who might be more concerned with quality, safety, and design – all of which have long-term impacts on efficiency. The interview with the marketing executive reinforces the importance of PMI’s customer orientation, which seems to be the key to its long-term success. All of these qualitative data indicate that the MegaBurger business is desirable and feasible if it can be profitable. Furthermore, the MegaBurger business could be doubly attractive if it leads to more profitable business from other customers drawn by PMI’s enhanced reputation.
From the data on the homepage, one can identify the following goals:
i. PMI should be the supplier of choice to consumer-products companies
ii. PMI should provide superior design, products, and services
Explicit objectives:
i. PMI contributes observably to customer growth
ii. PMI grows profitably
iii. PMI exceeds customer expectations
iv. PMI innovates products and processes
v. PMI creates quality products and processes
vi. PMI hires, motivates, and retains quality personnel
b. PMI’s employee, team, and facility activity worksheets
Reports and presentations should explain how these activity worksheets could be used to collect data about activities, uses of resources, and costs of activities. Management-level employees first identify the activities relevant to themselves and their teams. Next they record their and their team’s efforts spent on each activity. Multiplying average hourly rates by the time spent by each employee on each activity. Summing the individual costs yields the cost per activity for each individual or team. Aggregating across all individuals and teams forms the total cost of each activity. Note that only a few individuals and teams are represented in the worksheets shown in the text or the website.
A sample calculation from the container team worksheet follows:
Activity / Kirk / Spock / Uhuru / Scott / Sulu / PicardNumber / Labor activity description / Cost / $ 25.00 / $ 16.00 / $12.00 / $10.00 / $10.00 / $ 8.00 / Totals
2.1.6 / Place good pieces in inventory / 504.00 / 18.0 / 18.0 / 18.0 / 54.0
$504 = $25/hr x 0 hr + $16/hr x 0 hr + $12/hr x 0 hr + $10/hr x 18 hr + $10/hr x 18 hr + $8/hr x 18 hr
c. Limitations of analyses based on data collected on this type of worksheet
Interesting issues about the limits of the data include:
Is the original activity list complete; that is, does it include both value-added and all non-value added activities?
Will employees identify all the activities that they perform – even those that they know are non-value added?
Will employees make the effort to honestly and accurately record (or recall) how they spend their time?
For how many time periods (e.g., weeks) should employees record their activities? Note that in many professional firms, employees record their detailed activities daily to support the costing and billing of jobs to customers.
Are some activities seasonal? If so, how can one accommodate them in the analysis?
If employees are salaried (e.g., guaranteed 40 hrs per week), does tracing efforts to activities measure spending for or use of resources? Thus, does ABC measure throughput or variable costs? Does it matter?
All of these concerns can affect the reliability and acceptance of the analyses that result from using the data. ABC/ABM users face a fundamental issue: Is relevant but potentially inaccurate ABC data more useful than irrelevant, accurate data (e.g., from the traditional, functional accounting system)? That is, traditional accounting data can identify the magnitude of the needed cost reduction, but does identify sources of improvement. Many analysts argue that careful ABC/ABM analysis is far more effective than implementing across-the-board cuts, which often cut value-added and non-value added activities alike and which often spark budget games and political lobbying to protect favorite activities.
2. Prepare a 2-page report (including a table or chart) or a 10-minute visual presentation of:
a. PMI’s goals and objectives
See the solution to 1a.
b. Value-added and non-value added activities
The Student Guide and Chapter 5 of the text discuss how organizations can label and score activities as value-added or non-value added. The information on the website shows the result of summing the costs of all activities by ratings of 1 to 5 (and omitting activities related to acquiring and using materials, which are the bulk of activities rated “5”). The spreadsheet, which can be downloaded, provides the details of the accumulation process. The following table is taken from the website and spreadsheet:
Summary of activity costs
Summary of activity costs / Activity value / All activities / Percentage / Materials omitted / PercentageActivities rated highest in customer value, 5 / 5 / $ 41,026 / 54.9% / $ 10,814 / 24.3%
Activities rated 4 / 4 / 1,747 / 2.3% / 1,747 / 3.9%
Activities rated 3 / 3 / 14,774 / 19.8% / 14,774 / 33.2%
Activities rated 2 / 2 / 14,106 / 18.9% / 14,106 / 31.7%
Activities rated lowest in customer value, 1 / 1 / 3,067 / 4.1% / 3,067 / 6.9%
Total activity costs / $ 74,720 / 100.0% / $ 44,508 / 100.0%
The following graphs also are from the website and spreadsheet:
This information shows that a rather large proportion of PMI’s total cost is rated a “5,” but note that the majority of this cost is the result of acquiring and using the highest quality materials. Omitting the material costs from the analysis shows that nearly 72% of other costs are used on activities rated 3 to 5. This result indicates considerable opportunities to improve processes by eliminating or reducing non-value added activities. Also note that some of the activities rated as “2” might more objectively be rated as “1,” but the politics of organizations often works against rating any activities as “1.”
c. Examples of how PMI might reduce or eliminate non-value added activities
The most examples are available on the downloadable spreadsheet (see the Activities worksheet). However, reviewing the ABC worksheets on the website also can yield examples of non-value added activities that should be reviewed. For example, the activity “Place good pieces in inventory” is rated as a “2” which means it is non-value added. In the week reported on the website, this activity cost the container manufacturing team $504 and used 54 labor hours, which could be applied to more highly rated activities. Another example in Elizabeth Forney’s worksheet are the precious 4 hours she spends on “Expedite customer orders” and “Resolve customer problems” – time that represents fixing problems that should not exist and that would be better spent on market research or strategic planning.
3. Prepare a 2-page report (including a table or chart) or a 10-minute visual presentation of:
a. PMI’s goals and objectives
See the solution to 1a.
b. Customer/product profitability of existing and proposed MegaBurger products given current processes.
Refer to the information in Exhibits 5.1 and 5.2 in Chapter 5 of the text (or on the downloadable spreadsheet), which indicate that current processes applied to MegaBurger products would generate a 6.9% return on sales (ROS), which is below the target ROS of 20%. Achieving the 20% ROS at proposed prices will require a process cost reduction of 14.08% per month on an estimated currently feasible cost of $83,800. Is such a large cost reduction possible or feasible given PMI’s goals of quality and customer service? Where could the company make such large cuts while protecting quality and service? This is a strong motivation for ABC/ABM analysis.
c. Implications for accepting MegaBurger business given current processes.
Observe that the largest component of currently feasible cost is “use of main building,” which closely resembles an arbitrary cost allocation, rather than a precise ABC measurement of resource use. Perhaps this cost is irrelevant to the decision, but PMI must keep in mind the opportunity cost of that space. If PMI does not accept the MegaBurger business, does it have more profitable uses of the main building available? If the ABC costs are reasonable measures of the uses of resources, the MegaBurger currently does not offer a sufficient rate of return (ROS). This ambiguity of the ABC cost is at the heart of debates about the usefulness of ABC information for short-term or long-term decision making. ABC proponents might argue that if the MegaBurger business is intended to be long-term, it should promise the required ROS, after considering all ABC costs. Others (e.g., proponents of throughput costing) might argue that disregarding ABC costs, such as allocations of committed capacity costs, are irrelevant in the short-term.
4. Prepare a 2-page report (including a table or chart) or a 10-minute visual presentation of:
a. PMI’s goals and objectives
See the solution to 1a.
b. Costs of quality
The student guide to this website and Chapter 7 of the text discuss measurement and reporting of the costs of quality, which can be important signals of quality problems – the highest percentage of quality cost should be spent on prevention activities. The following table and graph are taken from the website and the downloadable spreadsheet, which has the details of scoring quality activities. Note that not all activities are easily categorized into prevention, assessment, internal failure, or external failure costs. From the information available, PMI appears to be managing its quality costs well, which indicates that the company is meeting its quality goals and objectives.
Costs of quality
Summary of costs of quality / COQ / Total cost / Percentage / Materials omitted / PercentagePrevention costs / P / $ 42,992 / 87.5% / $ 12,780 / 67.6%
Appraisal (Inspection) costs / A / 2,971 / 6.0% / 2,971 / 15.7%
Internal failure costs / I / 2,684 / 5.5% / 2,684 / 14.2%
External failure costs / E / 475 / 1.0% / 475 / 2.5%
Total quality costs / $ 49,121 / 100.0% / $ 18,910 / 100.0%
c. Examples of how PMI might reduce or eliminate costs of poor quality
The previous analysis does not indicate major problems. However, a review of the Employee and Team worksheets (and the downloadable spreadsheet) uncovers some opportunities for improving quality costs. For example, Elizabeth Forney’s shows 4 precious hours spent on “Expedite customer orders” and “Resolve customer problems” – time that represents fixing quality problems that should not exist and that would be better spent on preventive activities. The Team worksheet shows that the container team spent 16 hours on appraisal activities and 12 hours expediting customer orders (internal failure) – more than half an employee’s time. Although eliminating all quality problems might not be feasible, perhaps PMI could redesign processes to eliminate these costs of poor quality (e.g., by asking “Why?” these costs occur sufficient times to identify the root causes).
Extended Assignments
5. Prepare a 4-page report (including tables or charts) or a 20-minute visual presentation that analyzes:
a. PMI’s goals and objectives
See the solution to 1a.
b. Value-added and non-value added activities
See the solution to 2b.
c. Costs of quality
See the solution to 4b.
d. Examples of how PMI might reduce or eliminate non-value added activities and costs of poor quality
See the solutions to 2c and 4c.
6. Prepare a 4-page report (including tables or charts) or a 15 minute PowerPoint presentation of:
a. PMI’s goals and objectives
See the solution to 1a.
b. Customer/product profitability of existing and proposed MegaBurger products given current processes
See the solutions to 3b and 3c.
c. Customer/product profitability of existing and proposed MegaBurger products given improved processes. (Hints: Make assumptions about how PMI can improve its processes by eliminating non-value added activities. Download and modify PMI’s ABC analysis.)
The instructor should anticipate a wide range of solutions to this ambiguous, open-ended assignment. Good solutions, however, should describe:
i. Assumptions about which non-value added activities can be eliminated (e.g., using Exhibit 5-3 from the text as an example)
ii. Assumptions about the costs (short and long-term) of eliminating non-value added activities
iii. Total cost savings necessary to meet the target ROS (20%) including costs of making improvements
iv. Distribution of reconfigured/reduced activity (and perhaps quality) costs by customer value (and COQ category).