 Hello and welcome to the session. This is Professor Farhad in which we would look at trends in cost accounting throughout the value chain. This topic is covered in cost accounting. As always, I'm gonna remind you to connect with me on LinkedIn and subscribe to my YouTube where I have over 1,800 plus accounting, auditing, tax, finance, as well as Excel tutorials. If you like my lectures, please like them and share them, connect with me on Instagram and Facebook. On my website, farhadlectures.com, you will find additional resources to complement and supplement this course as well as other accounting courses. In the prior session, we looked at the value chain or the value creation and we identified those steps, R&D, design, purchasing, production, marketing and sales distribution and customer service. In this session, we're gonna be looking at some trends, at some recent trends and how cost accounting helps in this value chain. Starting with research and development, R&D, research and development is where everything starts. What does that mean? It means this is where the idea is born, the idea of a product or a process or a service. So it's very important to start with the best possible product at the lowest price. So that's the first thing we have to think about. How to accomplish this? How to accomplish this? One way to do it is to partner with your suppliers. Think in advance. What would your production looks like? And when you think about your supplier, you're really thinking about the development stage to ensure cost effective design for product, especially if you have to rely on a third party. Think about what is your relationship with them? What do you know about them? How can you coordinate at the stage with them? So product engineers, they will need cost accounting information to make decision about alternative material. Should I use if I design this product? I'm gonna be using supplier X versus if I design the product differently, I'm gonna have to use supplier Y. What is the cost for me if I used X versus Y? So this is why it's important. Cost accounting and design, that's also important when you start the design itself. So basically R and D is the idea. When you start the design, well, now you're gonna go back, go into specification of the product. How many product, how many units am I gonna be using within this product? So that influence the production cost. And a case in point is IKEA. I just wanna let you know, IKEA for some product, it takes them five years to properly design it, to minimize and to make it easy for them and for their customers as well because if you buy a IKEA product, at the end of the day, you put the product together. So they take their time in designing the product so because it's gonna influence the cost. They want it to be at the lowest cost possible, well, take your time and make sure your design is as good. So there's something called DFM, the design for manufacturing is a concept that manufacturing cost and complexity need to be considered in the design of the product. Remember, there's a cost and there's complexity. You don't want it to be complex and you want to reduce the cost because that's gonna serve the customer. So cost accountant help designers understand the trade-off between complex design for a more desirable product and a difficult and expensive manufacturing. See, once you have the information, once you know how much the cost is, basically cost is accounting number, complexity is an engineering. As long as you have both of these units or both of these concepts making trade-offs and as long as you have enough information about cost and enough information about your product, you can create a product that's not too expensive and not too complex for the customers. But there is a trade-off here. You might have to do some trade-off. If you want it to be simple, you might have, you know, your cost could be higher or lower, it depends. But as long as you have the information, you can make the decision. Also, when it comes to a purchasing, there is cost accounting plays a role in purchasing. One thing is you have to eliminate any necessary step in the purchasing process. The purchasing process could be a really complex process. You could have many suppliers. I know, for example, a company like Johnson & Johnson, obviously they buy supplies from other companies. And the reason I know this because my wife works at Johnson & Johnson. And guess what? To manage their purchasing, to manage their purchasing, they outsource this process. So they don't handle the purchasing themselves. So think about it. I'm buying from a third party. It's not only I'm buying from a third party. I'm hiring a third party to buy the product on my behalf. So purchasing, and obviously J&J believes that's the most efficient, this is the lowest, this is the best way to do it. But the point is you have to eliminate any unnecessary steps. Usually in purchasing, you have to do what's called performance measure to know how well is your purchasing going on and what are performance measures? Those are metrics that indicate how well individual business unit firm or so on is working. What do you mean by working? Look, you're gonna be buying supplies. You're gonna be buying material. What is the waste? What is the, how many defective product are you having? What's the direct material usage? So one way to determine how efficient is your purchasing is to monitor this process through performance measures. Also you can do benchmarking. What's benchmarking is basically looking at a standard or setting a standard and trying to meet those standards as a continuous process of measuring a company's own product, surface and activities against competitors or against the company's itself from prior period. So benchmarking is basically say, this is what I need to do. Am I reaching it? Or this is the standard for the industry. Am I reaching those standards? Also cost accounting could help in production. Well, think about it when you are producing, you have to measure the production output and how well your team is working. So the measure could be done at a work cell or production level. And the reason that we use the word work cell it's more modern versus the production line. When you think of the production line, you think of Ford, Henry Ford, producing cars, each individual is repeatedly performing the same step. Well, research shows that employees or production workers are not, they don't have a lot of satisfaction in doing the same thing all day long. So what you do is you create work cells and if you create work cells, the employee is happy. If the employee is happy, they'll have a better production. If it's a better production, the employee is happy. You'll have a better product. A better product would lead to a happy customer. So operation managers and financial accountant use cost information in the production stage to understand and report the cost of multiple product produced. Once you know how much something is costing you, then maybe you wanna change the work cells. Maybe it's cheaper if you put, don't let those four individual work together, maybe only three individual or mix and match skills between individuals. And how would you know this? Just looking at the production cost. If you know what each individual is producing, how long it's taking them, then you can make those decisions. Also in the production, you could use what's called a just-in-time method rather than buying inventory. So one of the most important development in production is associated with lean manufacturing. It's the use of just-in-time method, which just-in-time method. Try to minimize your inventory on hand. Inventory is cost. When you buy inventory, you have to store it. You have to go through it. You have to maybe buy insurance. It takes a space. So try to have lean manufacturing and part of lean manufacturing is just in-time inventory, just a jit. And we'll talk about this later on in future chapters. Also cost accounting can help in marketing in something called CRM, or Customer Relationship Management. It's a system that allow firms to target customers by assessing the customer's revenue and cost. So for every customer, you should have basically a P&L. How much is that customer cost to you and what's the potential profit? Now, I'm not saying you should treat customers based on that, but if a customer is really profitable, you wanna give that customer more time, more attention than a customer that may not be as profitable. And that's important. That's talking from a numbers perspective. CRM allows firms to target more precisely those customers who are profitable. And this makes sense. If they are profitable, they may buy more product. They may expand their business. And you really wanna know who these customers are to use your resources in an optimal way, to serve the customers along the way. So basically what we're looking at here is a cost information system should give you a P&L per customer. I want to know per customer how much money I am making. So this way I'll focus on the one that are producing profit. And I need to work on the one that I'm not generating revenues from them. Maybe I can increase the revenue. Maybe they need more marketing. Maybe they need to learn more about the product. I also wanna identify those, not to not to take care of them on the contrary. Maybe customers with low profit, I will need to work little bit harder on them to basically show them our product and the value of our product. Also cost accounting help in the distribution process. What's the distribution is basically when you sell it. So basically what you have to do sometime is find the most efficient way. And what's the most efficient way? It's the least costly. When something is efficient, it's least costly. To perform an activity in the firm or have another firm produce the product or perform the service. Look, if we cannot produce it at the lowest cost, we have a solution, outsource the process. What's outsourcing is having one or more of the firm's activities performed by another firm or individual in the supply chain or distribution chain. A case in point, many companies do that. Now, for example, for their shipping, they hire UPS or DHL for consulting or they help or for them to help them handle the distribution channel. Why? Because that's their job. That's what they do day in and day out. So frequently firms consider activities in this distribution's chase for outsourcing. The more you can outsource, as long as it's cost effective, the better off you are. Especially if you can outsource to someone that they really know what they're doing. Focus on what you do, on your specialty, on your product and anything else that's not extracurricular, anything else that you can outsource, that's not something that you specialize and maybe distribution is not, management is not familiar with it. Let somebody else take care of it. Maybe you will have better quality, better quality and at a lower cost. Because the other company, they might be doing this day in and day out and they may find ways to save money which in turn it's cheaper for you, cheaper for them because they do it on a larger scale because that's their specialty. Also cost accounting can help in customer service and that's extremely important. In what comes to customer service, do we have something called TQM which is a management method by which the organization seeks to excel in all dimensions with the customer, ultimately defining quality. So basically we need to take a look at the customer's need. What features the customer is looking for and improve on those features? We also have something called cost of quality. That's a system of identifying the costs associated with low quality items including reworks, return and lost sales. Cost of quality is important. So the question is, do you want to spend more time inspecting the product and incur more cost? Do preventive work or would you like to the customer return the product to you for rework? So basically you have to basically evaluate which one is most cost efficient for me. Maybe if your reputation is important, if the quality of your product is important, then you should do a lot of inspection upfront before you deliver the product or if you think you are selling a lot of product and it doesn't matter if your customers did return some product, then you may not spend more time on inspection upfront. Inspection upfront, it's cost of quality because you need to allocate someone, one or two individual to inspect the product which it takes time. So also cost accounting will help us determine what's the best cost of quality. And obviously with customer service, we need to talk about something called ERP or enterprise resource planning. It's basically think of a software or a system that integrate everything together, link various activities in an organization into a single comprehensive information system. Simply put, what you do is you have one computer system. Think of a one computer system that integrate purchasing, production, HR, accounting, finance, and this way it helps manager avoid lost orders to location of effort, costly studies to determine what's the current state of the enterprise. Simply put, an ERP. So a manager will be able to in one system know everything that's going on within the company from the purchasing side, how much purchases are we having? How much do we have in our inventory? What's our need for our production? How many employees do we need to allocate? And how many employees are available to be allocated to the production? So having one system, having one system, it will improve our production. It will improve also our customer service. And think about it, you don't want to have, for example, just another simple example of ERP. Let's assume you input an address for a customer. Once that address is imported in the system, you don't have to duplicate that address. For example, the production people, if they're producing for X, Y, Z company, let's assume they need their address. Well, that address is already inputted once. Then the shipping department will need that address. That address is in the same address. So let's assume the customer moved. We only have to change the address only in one place. And this is what ERP, an example of ERP. It's an integrated system. You change the information in one place. It flows through to all the other places, including billing. Also, when we build a client, we wanna make sure we have their most updated address. We don't want to be updating the address in account receivable department, in the production department, and in the shipping department. Once we have an integrated system, you update that address once. It's updated everywhere. So this is basically the trends in the value chain, throughout the value chain and how cost accounting helps in that trend. Once again, I'm gonna ask you to like this recording, share it, and don't forget to visit my website, farhatlectures.com. If you are taking cost accounting, I will have a lot of resources, such as multiple choice, true, false, and exercises that's gonna help you improve your knowledge and do a better job. Good luck, study hard, and most importantly, Stacy.