Cost Management II (W7)

What is target costing

A contemporary cost management model that focuses on reducing costs during a product’s design/planning phase.

• It aims to reduce life cycle costs whilst ensuring quality, functionality and other customer requirements

How is target costing a customer oriented approach?

It aims to produce products at selling prices that customers are willing to pay.

What are the 3 steps of target costing?

1. Determine the price that customers are willing to pay

2. Target cost ( Selling price - target profit margin)

3. Compare estimated actual cost with target cost

What happens if estimated actual cost> target cost?

Tear down analysis or value engineering will be carried out

• to reduce the estimated actual cost to target cost or lower

Explain what tear down analysis is.

Identify opportunities for product improvement and/or cost reduction by examining the competitors product. The product is dismantled to identify its:

• Functionality

• Design

• Materials

• Processes/Production techniques

Explain what value engineering is.

It involves a systematic examination of factors affecting the cost of a product or service in order to devise means of achieving the specified purpose at the required standard of quality, functionality and reliability at the target cost.

What are the benefits of target costing?

• Maximum impact on cost management as carried out planning and design stage

• Promotes cost consciousness and strengthens a company’s competitive position- ensures products are sold at a price customers are willing to pay.

What is kaizen costing?

It is a contemporary cost management model that focuses on improving production processes during the manufacturing stage.

• Aims to reduce process costs by small incremental amounts ( continuous improvement)

• Process-oriented thinking

What are the differences between target costing and kaizen costing?

• Target costing is carried out at the design and planning stage, whereas kaizen costing is carried out at the manufacturing stage.

• Target costing focuses on improving product design, whereas kaizen costing is about improving production processes.

• Target costing works towards a target cost, whereas kaizen costing is about continuous improvement

What is the learning curve in comparison to kaizen costing?

• Cost reduction is automatic and natural for the learning curve

• Improvements are not possible at high levels of cumulative production

• FOR KAIZEN COSTING improvements are actively sought by everyone and are always small but possible

What is the main focus of kaizen costing?

• Cost reduction by small incremental amounts (continuous)

What are the organisational considerations required by kaizen costing?

• Continuous improvement by staff from all functions and levels

• Demands rapid implementation of improvements with follow up to ensure improvements are sustained

• Investigation required if target reductions are not achieved even if improvements are made

What does target costing focus on?

Improving product design

What sort of approach does target costing adopt?

A multidisciplinary team approach

What is the business process re-engineering model?

A contemporary cost management model that involves examining business processes and radically redesigning these processes to achieve cost reduction, improved quality and customer satisfaction.

• It is about making major changes to how business processes operate.

• Organisations should fundamentally question the assumptions and beliefs underlying business processes

What is the main focus of the business process re-engineering model?

To radically redesign business processes to achieve cost reduction

What is the process and enterprise maturity model?

It is a contemporary cost management model that is less radical compared to the business process re-engineering model.

• It focuses on process redesign but taking place over time.

• 5 process enablers and 4 enterprise capabilities

How do we know if an organisation is ready to change?

• Through 5 process enablers and 4 enterprise capabilities

What are process enablers?

Characteristics essential for any process to perform well.

They are interdependent

what are the 5 process enablers?

1. The process must have well specified design

2. The people who execute the process must have the appropriate skills and knowledge

3. Must be a process owner with necessary level of authority

4. Infrastructure must be aligned to support the process

5. Must have metrics to assess performance over time

What are the 4 enterprise capabilities?

1. Leadership- senior executives who support the creation of processes

2. Culture- the value of customer focus, teamwork, personal accountability, and a willingness to change

3. Expertise- skills in, and methodology for, process redesign

4. Governance- mechanisms for managing complex projects and change initiatives

What are the benefits of the process and enterprise maturity model?

• It provides a comprehensive framework to evaluate the maturity of business processes and receptiveness of organisations to process based change

• Can be applied to companies in any industries

• Easy to administer and understand

What is benchmarking?

It is a contemporary cost management model that compares key activities with best practices found within and outside the organisation.

What are the advantages of benchmarking?

• Cost beneficial

• Avoids mistakes that other companies have made

• Avoids duplication of effort

• The benchmark company need not be in the same industry

What are the limitations of benchmarking?

• Challenge of finding the right organisation- organisations have different cultures so what works for one may not for another

• Difficulty gaining access to the organisation

Can benchmarking be carried out with both internal and external organisations?

YES

Benchmarking is where companies challenge each other, true or false?

FALSE, it is the comparison of key activities with best practices found within and outside the organisation.

Summarise target costing in 5 points

• Manages costs during a products design and planning phase

• Customer oriented approach

• Approach aimed at reducing the life cycle costs

• Iterative, multidisciplinary team approach

• Target costing processes: Determine the price customers are willing to pay, Determine target cost, Compare estimated actual cost> target cost

Summarise Kaizen costing in 4 points.

• Focuses on production processes and is applied during the manufacturing stage

• Promotes process-oriented thinking aimed at reducing process costs by small incremental amounts (continuous improvement)

• Continuous improvement achieved through employee empowerment

• Cost reduction targets are set and measured in terms of the ratio of target reduction to the standard cost base and applied monthly