MANAGEMENT DYNAMICS Merging Constraints Accounting to Drive Improvement phần 6.pdf (kỹ thuật PR)

150 Pricing The constraint selected is resource #2 and has 2,000 hours available for the year. Dividing $720,000 of OE by 2,000 constraint hours available, we arrive at $360 per constraint hour. Finally, the allocated cost is associated with individual units of product, charging $360 of OE for each hour of constraint time required by a product. Product A, which requires one hour of resource #2 in its production, is assigned $360 of OE. In similar fashion, costs are allocated to products B, C, and D. In Exhibit 6.20, the full constraint-time-based unit cost of each of the products is calculated by adding the allocated portion of OE to the cost of raw materials. A markup of 10.19% was added to arrive at initial target prices. In selecting the 10.19% markup on total cost, two factors were considered. First, it was necessary to establish an assumed physical sales volume. Since the market potential exceeds the available capacity, it was necessary to decide what products will not be sold. The accepted constraint management way of making such a decision is to rank the products in terms of their throughput per constraint unit (t/cu). However, this technique is not useful in this case because throughput cannot be calculated until a price is known, and our task here is to set the prices initially. Even if the prices had already been set using a constraint-time-based pricing technique, the effect of the technique would have been to price products in such a way that they all had approximately equal throughputs per constraint unit.21 Therefore, the assumed volume levels were arbitrarily set at about 87% of the market potential (2,000 resource #2 hours available divided by 2,300 resource #2 hours required for market potential), resulting in assumed sales of 173, 174, 261, and 348 units of products A, B, C, and D, respectively. Having established the assumed volumes, we could then select a markup percentage that would yield approximately the same $84,000 overall proﬁt as was the result of the traditional GAAP and activity-based examples in the previous section. The proof of this proﬁt is shown in Exhibit 6.21. Exhibit 6.20 Constraint-Time-Based Price: Resource #2 Product Raw materials Allocated OE (from Exhibit 6.19) Total constraint-time-based cost Markup (selected to yield same $84,000 profit as Exhibits 6.9 and 6.11) Target price per unit based on constrainttime based product cost (110.19% of cost) A $200.00 360.00 $560.00 B $150.00 540.00 $690.00 C $ 100.00 720.00 $820.00 D $ 50.00 1,080.00 $1,130.00 10.19% 10.19% 10.19% 10.19% $617.06 $760.31 $903.56 $1,245.15 Constraint-Based Pricing 151 Exhibit 6.21 Proof of Proﬁt If All Products Sold (Constraint Is Resource #2) Product Price per unit Raw materials Unit throughput Sales quantity (units) Throughput Operational expense Profit A $617.06 200.00 $417.06 173 $72,151 B $760.31 150.00 $610.31 174 $106,19 4 C $903.56 100.00 $803.56 261 $209,729 D $1,245.15 50.00 $1,195.15 348 $415,912 Total $803,986 720,000 $ 83,986 But, what if we used the “wrong” constraint for pricing our products? Exhibit 6.22 again calculates the OE allocation but this time using resource #1 as the constraint. The ﬁrst three steps in Exhibit 6.22 are almost the same as were calculated for resource #2 (Exhibit 6.19). The allocation method chosen does not change the reality of operational expense incurred (at least not in the short run), so OE still totals $720.000. Since there are 2,000 hours available for resource #1, the quantity of the allocation base (2,000 hours) remains the same. Of course, these are hours of resource #1 rather than resource #2. Once again, the allocated OE cost of a constraint hour is $360. However, the allocation of OE to individual units based on resource #1 is notably different. These OE allocations to individual products using resource #1 hours as the base are shown in Exhibit 6.22. The different allocation to products results in a signiﬁcantly different set of prices. Constraint-time-based prices for the four products are shown in Exhibit 6.23. Exhibit 6.22 Constraint-Time-Based Allocation of OE to Products: Resource #1 Determine the total cost to be allocated. Determine the allocation base. Make the unit cost calculation. Put the unit cost with the elements of the base. Direct Labor = Mfg Overhead = SG&A = Total Operational Expense = Annual hours of resource #2 available $720,000 / 2,000 constraint hours Product Allocation A: 2.0 hour @ $360 B: 4.0 hours @ $360 C: 2.0 hours @ $360 D: 1.0 hours @ $360 $160,000 320,000 240,000 $720,000 2,000 constraint hours $360.00 per constraint hour OE per unit $ 720.00 $ 1,440.00 $ 720.00 $ 360.00 152 Pricing Exhibit 6.23 Constraint-Time-Based Price: Resource #1 Product Raw materials Allocated OE (from Exhibit 6.19) Total constraint-time-based cost Markup (selected to yield same $84,000 profit as Exhibits 6.9 and 6.11) Target price per unit based on constrainttime based product cost (110.13% of cost) A $200.00 720.00 $920.00 B $ 150.00 1,440.00 $1,590.00 C $ 100.00 720.00 $820.00 D $ 50.00 360.00 $410.00 10.13% 10.13% 10.13% 10.13% $1,013.20 $ 1,751.07 $903.07 $451.53 The prices that were established using resource #1 as the constraint will also allow a proﬁt of about $84,000 to be earned if all budgeted products are sold (see Exhibit 6.24). The sales volumes reﬂected in Exhibit 6.24 are set at approximately 91% (2,000/2,200) of the full market potential. The target prices calculated using constraint-time bases are compared in Exhibit 6.25 along with the more traditional GAAP cost and activity-based costing prices. When constraint resource usage is not uniform across products as is the case in this example, the constraint-time-based target price varies signiﬁcantly. This effect magniﬁes an often cited criticism of product costing based on traditional labor—as direct labor becomes a smaller portion of total cost, a small distortion (inaccuracy in computation or assumption) is overstated in the product cost.22 But this avoids the question. If the objective is to determine the true cost of a product, then the search will prove to be fruitless. However, if the purpose is to establish prices for products such that a target proﬁt may be achieved, then all three of the cost-based methods (GAAP, activity-based, and constraint-time-based), if applied consistently, work. Exhibit 6.24 Proof of Proﬁt If All Products Sold (Constraint Is Resource #1) Product Price per unit Raw materials Unit throughput Sales quantity (units) Throughput Operational expense Profit A $1,013.20 200.00 $ 813.20 181 $ 147,189 B $ 1,751.07 150.00 $ 1,601.07 182 $ 291,395 C $903.07 100.00 $803.07 273 $219,238 D $451.53 50.00 $401.53 364 $146,157 Total $803,979 720,000 $ 83,979 Constraint-Based Pricing 153 Exhibit 6.25 Summary of GAAP, Activity-Based, and Constraint-TimeBased Target Prices Price based on: A B C D Traditional GAAP $770.0 0 $1,155.00 $1,078.0 0 $539.00 Activity-based costing $715.00 $1,155.00 $1,100.00 $550.00 Constraint resource #2 $617.06 $760.31 $903.56 $1,245.15 Constraint resource # 1 $1,013.20 $1,751.07 $903.07 $451.53 Price customer is willing to pay $600.00 $2,000.00 $1,700.00 $2,000.00 If the organization were to elevate its internal physical constraint sufﬁciently, or if demand fell sufﬁciently, the constraint would shift to the market. In that case, the constraint-based price would be based on materials cost only since there would be no internal constraint on which to base the price.23 When we consider the use of these data, we realize that the constraint-time-based cost may not be so different from the more traditional product-costing methods. Recall that our purpose of establishing a cost-based price is to set a price that will allow a target proﬁt level to be achieved. Comparing the prices in Exhibit 6.25 to the prices that customers are willing to pay, we see that, in this example, the same effect— that customers do not purchase product A—exists regardless of the pricing method used. But note that the magnitudes of the opportunity gaps are different. Constraints Accounting Evaluation of Constraint-Time-Based Pricing The constraint-time-based pricing technique could not be useful unless either price stability were of no consequence in the market or an internal constraint were ﬁrmly and strategically positioned. Beyond that, this technique shares all the characteristics of other cost-based pricing techniques. The constraint-time-based pricing technique meets the ﬁrst attribute of constraints accounting but does not satisfy the second and third characteristics. By basing the price on constraint time required for the product, there is explicit consideration of the role of constraints. However, throughput contribution effects of alternative prices are not measured. Instead, the pricing scheme largely equalizes the throughput contributions of the various products. Finally, rather than decouple throughput from operational expense, pricing based on constraint time closely links the two. In fact, this linkage is the objective of cost-based pricing schemes. 154 Pricing DECOUPLING THROUGHPUT FROM OPERATIONAL EXPENSE Constraint-time-based pricing, as well as the other cost-based target pricing methods discussed, result in T that is closely linked to OE. If we are to implement the third aspect of constraints accounting, decoupling T from OE, in the pricing function, then it will be necessary to ﬁnd a different mechanism—perhaps even in a different paradigm—for pricing. Previously, we presented the results of a Monte Carlo simulation of the bottom-line effects of basing prices on a full cost measurement such as activity-based costing. These simulation effects were contrasted with traditional GAAP product cost, which includes manufacturing costs only. The results, summarized in Exhibit 6.16, showed that the traditional GAAP model produced greater average (mean) proﬁts than the activity-based model. The GAAP model also produced proﬁts more frequently. The simulation model had two-thirds of the operational expense in manufacturing costs and one-third as SGA expense. If using only two-thirds of the operational expense as the basis for costing were better than using all of it, perhaps using even less operational expense would be better yet. The simulator was modiﬁed to create a target price by adding a randomly generated target throughput amount to the variable cost (raw materials) of the products. No operational expense was included as an element of the target throughput. The results of this revised simulation run, as well as the previous runs are shown in Exhibit 6.26. The random pricing resulted in average simulated proﬁts of $363,184. This was 46% greater than the average proﬁt when prices were based on traditional GAAP costing and 133% greater than the average proﬁt using activity-based-costing. Exhibit 6.26 also shows that the random target pricing technique incurred losses more frequently than either the GAAP or the activity-based methods. The implication of the greater average proﬁtability combined with the more frequent losses is that the totally random method resulted in signiﬁcantly greater variability in proﬁtability Exhibit 6.26 Simulation Results: Random Pricing Cost Technique Average (mean) profit Iterations showing profits rather than losses Average capacity utilization Iterations for which GAAP profit is more than ABC profit Iterations for which random profit is more than ABC profit Traditional (GAAP) $288,231 68% 62% Activity Based $155,635 67% 71% Random $363,184 60% 56% 61% 54% Constraints Accounting Approach to Pricing 155 than the other methods.24 The simulation also showed that the random pricing method resulted in using less capacity of the organization than did the other methods. Using a randomly generated markup can break the linkage between operational expense and throughput. Breaking the linkage produces signiﬁcant beneﬁts through a combination of increased margins for some products and ﬁlling otherwise unused capacity for others. CONSTRAINTS ACCOUNTING APPROACH TO PRICING The ﬁrst part of this chapter dealt with historical cost pricing models appropriate for use when the overall organizational objective is to have stable and satisfactory proﬁts. For historical cost pricing models to be successful in achieving stable and satisfactory proﬁts, it is also necessary that there be a large opportunity gap. Then the constraints accounting concepts of explicit consideration of constraints and decoupling T from OE were added to the pricing model. Specifying throughput contribution effects adds the ﬁnal attribute of constraints accounting. The constraints accounting target pricing analysis has two components: 1. Determination of a springboard base. 2. Selection of a target amount of throughput premium above any throughput provided by the springboard base. The ultimate target price is the sum of these two components. For instance, if the springboard base were $2 and the target throughput premium $3, then the target price would be $5. Let us continue the Example Company case, presented in Chapter 5, to compute some target prices. We will pick up at the updated forecast (Exhibit 5.27) based on selling all three products (Atex, 2,080 units; Detron, 2,651 units; and Fonic, 2,080 units). Assume that a new product, Haton, is being considered. Each unit of Haton will need 2 units of material CRM at $35 per unit and will require 23 minutes of time on the welder. Recall that the welder is an internal physical constraint and that products Detron and Fonic use the welder. The required times on the other production resources are: Assembler, 10 minutes; Cutter, 12 minutes; Grinder, 15 minutes; and Polisher, 16 minutes. Determination of the Springboard Base A mechanical calculation determines the springboard base. The question answered by this portion of the pricing analysis is, “What is the lowest price that would allow the product to be sold without reducing the overall proﬁtability of the organization?” 156 Pricing In the constraint management environment, analyses differ depending on the relationship to the constraint. Therefore, the starting point in a constraints accounting pricing analysis always is to determine the relationship of the product (or order) being priced to the constraint. Two possibilities exist: 1. The product or order requires use of an internal physical constraint resource, 2. The product or order does not require use of an internal physical constraint resource. Springboard Base with Internal Physical Constraint When the product under consideration requires use of an internal physical constraint resource, the objective of the pricing analysis is to decide how to make the best use of the constraint (i.e., decide how to exploit it). A new product (or variant of an existing product for sale in a segmented market) will necessarily supplant, or reduce, the sales of an existing product. In this case, the objective of the springboard base portion of the target price is to ensure that the throughput of the new product is at least sufﬁcient to replace the lost throughput (an opportunity cost) of the products or orders being replaced. The method of estimating lost throughput opportunity cost depends on whether the replacement is made in an incremental or steptype market. In the incremental market, the assumption is one of many customers, each being asked the same price and each having a relatively small share of the overall throughput mix (Detron and Haton) using the constraint. In this case we do the analysis on a unit of product basis. A step-type market is characterized by changes that take place in lump-sum amounts relating to a relatively broad range of activity and typically occur when a relatively few customers account for the major portion of our business. Incremental Market. We will look at the springboard base for the incremental market ﬁrst. The minimum costs that must be recovered by Haton may be divided into two types: unit-coupled costs and value-coupled costs. Unit-coupled costs are truly variable costs that vary in total with the number of units that are sold (or produced). Value-coupled costs are costs that are expressed and calculated as a percentage of sales value. Since the welder is an active constraint, producing Haton will necessitate the reduction in output of either Detron or Fonic.25 In Exhibit 5.26 we have seen that Fonic has a higher throughput per constraint minute than Detron ($7.57 per welder minute versus $4.89 per welder minute); the organization should therefore maintain its production of Fonic and reduce output of Detron in order to produce Haton. The relevant oppor- Constraints Accounting Approach to Pricing 157 tunity cost for the springboard base is the lost throughput of Detron that would not be sold to make way for the Haton. The springboard base for Haton would be calculated as shown in Exhibit 6.27. The unit-coupled costs associated with the introduction of Haton are raw materials (2 CRM for each unit of Haton) and the opportunity cost of the Detron that will not be sold if Haton were to be introduced. Each unit of Haton requires two units of raw material CRM at $35, or a total of $70 per unit of Haton. Each unit of Haton produced will require 23 minutes on the welder, which is an internal physical constraint. The decision has been made to reduce production of Detron as necessary if Haton is introduced. Therefore, 23 minutes of Detron production will be lost for each unit of Haton produced. Existing throughput is reduced by $4.89 for each minute of welder time used to produce Haton. Twenty-three minutes @ $4.89 is $112.47 of lost throughput from reduced sales of Detron for each unit of Haton produced. The total unit-coupled costs of producing Haton, then, are $182.47. The only value-coupled cost in this case is the sales commission of 5% of the selling price. The value-coupled cost presents us with a bit of a problem in that we have not yet calculated a price. However, if we divide the price-coupled cost rate by 1 minus the rate, we will arrive at an equivalent rate that we can apply to the unit-coupled costs to arrive at the total value-coupled costs. For this example the calculation is [0.05/(1.00 − 0.05) * $182.47 = $9.60]. Adding the unit-coupled and value-coupled costs, we arrive at the springboard base of $192.07. This springboard base is a breakeven amount that leaves the organization equally well off, other things being the same, whether the new product is sold at a price equal to the springboard base or existing prod- Exhibit 6.27 Springboard Base for Haton with Internal Constraint and Incremental Market Unit-coupled costs to be recovered in the springboard base: Raw material CRM (2 CRM @ $35.00) Lost throughput of Detron (23 minutes of constraint time (welder) used for each unit of Haton @ $4.89, the throughput rate of Detron as calculated in Exhibit 5.26) Total unit-coupled costs $ 70.00 112.47 $182.47 Value-coupled costs to be recovered in the springboard base: Sales commission @ 5.00% [(commission rate) / (1 - (commission rate)] * (unit-coupled costs) Springboard base per unit for Haton (total costs to be recovered) 9.60 $192.07 158 Pricing ucts are retained. The composition of the springboard base is shown in a graphical format in Exhibit 6.28. This $192.07 springboard base for Haton will recoup the out-ofpocket and opportunity costs of selling Haton but will not change the overall throughput of the organization. The springboard base sets a lower bound on the target price. The actual target price selected will be higher than the springboard base; how much higher is the question of the throughput premium. If the market for Haton will not support a price greater than $192.07, then Haton should not be introduced. However, any price above $192.07 may be expected to enhance the throughput mix and increase the proﬁts of the Example Company. In calculating the anticipated throughput effects of alternative target prices, the unit-coupled costs will remain the same per unit, but the valuecoupled costs will change for each different price examined. If the projected volume of Haton required more time on the constraint than is currently used for production of Detron, then the analysis must be expanded to include the effect on the other products using the constraint (Fonic). Step-Type Market Let us change our assumption about our customers to that of a step-type market rather than an incremental market. The step-type market calls for a somewhat different approach to the calculation of the throughput effect. We will continue with the assumption that the current throughput mix is as previously shown in Exhibit 5.28 and repeated here as Exhibit 6.29. Customer 03, a relatively new customer that the Example Company has been cultivating, has asked the Example Company to bid on supplying Exhibit 6.28 Composition of Springboard Base ($) Commission on springboard base 182.47 * (5/95) = 9.60 Raw materials 2 CRM @ 35.00 =70.00 $0 Lost throughput on Detron 23 min @ 4.89 = 112.47 70.00 182.47 192.07 Springboard Base Constraints Accounting Approach to Pricing Exhibit 6.29 Customer Cust 01 Cust 02 Cust 03 Cust 04 Cust 05 159 Sales by Customer Product Quantity Price Throughput Throughput pe r Constraint Unit Customer (t/cu a ) t/cu a Atex Detron 416 530 $ 180.00 $ 322.86 $ 44,096 112,210 Fonic Atex Detron Fonic Atex Detron Fonic Atex 416 270 162 241 369 48 109 145 $ 180.71 $ 189.05 $ 337.65 $ 211.00 $ 180.96 $ 256.14 $ 208.07 $ 194.16 44,377 30,941 36,574 32,643 39,451 7,120 14,461 17,321 $7.23 $8.04 $6.36 $9.18 $10.76 $4.18 $8.99 $18.43 Detron Fonic Atex Detron Fonic 80 599 880 1,831 715 $ 209.57 $ 186.67 $ 162.67 $ 258.96 $ 159.27 8,327 67,290 78,792 276,497 61,710 $2.93 $7.62 $7.96 $4.25 $5.85 $5.52 Total $5.96 $871,810 a Constraint unit (cu) is welder minutes. their ongoing need of about 550 units of Haton as well as their current volumes of Atex, Detron, and Fonic. The welder is an active constraint, and each unit of Haton requires the use of 23 welder minutes. Therefore, if Haton is supplied to customer 03, it will be necessary to cut back on orders of Detron or Fonic somewhere else. The customers want the entire quantities of their orders, or none of that product at all, from the Example Company. Management has made the policy decisions that such cuts will come neither from customer 03, who is viewed as a growth customer consistent with the strategic plan, nor from customer 05, who receives special consideration by virtue of being the largest customer. After eliminating the orders for customers 03 and 05 and for Atex, which does not conﬂict with production of Haton, six orders remain from which the volume reduction must come if Haton is to be produced for customer 03. These six orders are shown in Exhibit 6.30. In order to produce 550 units of Haton, each requiring 23 minutes on the welder, it will be necessary to free up at least 12,650 minutes of welding time (550 units * 23 minutes per unit = 12,650 minutes). This time could be obtained in a number of ways. For example, eliminating order number 1, Detron for customer 01, would release 18,020 minutes and would reduce throughput by $112,210. Other combinations of orders that would provide the necessary time are shown in Exhibit 6.31.

MANAGEMENT DYNAMICS Merging Constraints Accounting to Drive Improvement phần 6

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