Question

Company xyz i engaged in the production of engineered products that move through five different process steps. The company uses a cost accounting system and has accurate data with respect to the unit cost of each process per unit of finished goods manufactured The process owners are responsible for wokking the process steps efficiently and driver year-on-year reductions in process cost per unit. The accurate cost accounting system shows that any reduction in run lime or set-up time at any of the process steps will resume in an improvement of a lower cost product. The process owners are therefore clearly focused on reducing cycle times for their process areas. However. years of focusing on this area while delivering some improvements always talked to achieve the savings or prints calculated at the beginning of the projects. Explain why this happens?

Answer 1

Although company XYZ has made efforts to reduce production costs by improving process cycle times, they have seen diminishing returns due to factors like not fully realizing economies of scale, hitting diseconomies of scale, and lack of inter-process coordination affecting the overall cost savings.

Step-by-step explanation:

When company XYZ focuses on reducing process cycle times, they are attempting to improve efficiency and reduce costs in the production of engineered products. However, despite accurate cost accounting systems indicating potential savings from reductions in run time or set-up time, these savings often fall short of projections. This can happen due to a few reasons.

Firstly, there can be an overestimation of the benefits of efficiency gains without considering economies of scale, where increases in production volume can lead to lower unit costs. While improving individual process efficiencies is beneficial, it may not match the cost savings that come from expanding the scale of production overall.

Secondly, a concept known as diseconomies of scale can also play a role. As a company grows and scales up, it can reach a point where management becomes complex and communication issues lead to inefficiencies, resulting in higher average costs. This illustrates a balance must be struck between scaling up and maintaining manageability.

Lastly, process improvements may not be integrated across the entire production technology or coordinated with other process owners, limiting the overall impact on the cost per unit. In some cases, coordination between different production steps can lead to greater overall efficiency than focusing on individual process improvements.