Part 1 - Quality Management (2) Flashcards
Target costing - Overall information
- The target cost is calculated as the estimate of a competitive product price less the desired profit margin.
- The difference between the estimated cost for the product and the target cost is the cost gap.
- Where the estimated costs exceed the target cost, steps are taken to reduce the cost gap
Steps in target costing
(1) Determine a selling price for the product consider how much customers will pay and how much
competitors charge for similar products.
(2) Deduct the required profit.
(3) Produce a target cost figure.
(4) Reduce cost gap, i.e the difference between the current cost and the target cost.
Khi đề bài yêu cầu: Advise on the extent to which TARGET COSTING would help Pitlane to achieve the FINANCIAL PERFORMANCE OBJECTIVES set by the shareholders
- Nêu lí thuyết về Target Costing
- Đi từng bước và đánh giá việc áp dụng Target costing có chính xác không? Nêu sai thì suggest hướng xử lý đúng
Determining the market price - Target Costing
The estimates are based on the success of a similar scheme in Veeland, and the assumptions used could be incorrect.
The domestic solar energy market is new in Deeland, and Pitlane has no experience in estimating market share or price for this type of product
Calculating the target cost using the required profit margin
For its existing products, Pitlane can set a selling price based on its own costs, whereas the Booster’s price must reflect external market conditions more closely.
Target costing will focus Pitlane on the external environment by considering prices and relative benefits of competitors’ products.
Estimating total costs of Booster
Pitlane has no recent experience of developing new products or of estimating costs and sales volumes for them
Reducing the cost gap
- A big advantage for Pitlane of using target costing is that it is often easier to reduce costs of a product at the design stage rather than after it has entered production.
- Consumers may not value these two features or be prepared to pay more for them
- By providing additional training, lower paid labour could be used to produce the Booster, and hence reduce the cost gap.
- Consolidating suppliers, or using suppliers in lower cost countries, could help reduce the cost gap by reducing purchase costs.
- Moving to a just-in-time production system, rather than buying supplies in bulk, would help reduce costs of holding inventory
- Another source of waste is due to internal transport and handling, which forms over 5% of the total direct cost of the Booster
Fundamental features of TQM:
• Prevention of errors before they occur: The aim of TQM is to get things right first time => increase in prevention costs, e.g. quality design of systems and products,
• Continual improvement: is the continuous examination and improvement of processes.
• Real participation by all:
- Employees – identify and correct the quality problems.
- Suppliers – quality and reliability of suppliers
- Customers –identify and meet the needs of customers.
• Management commitment: Managers must be committed and encourage everyone else to be quality conscious.
Just - in - time
(JIT) is a demandpull system of ordering from suppliers which aims to reduce inventory
levels to zero.
JIT purchasing
JIT purchasing is a method of purchasing that involves ordering materials only when customers
place an order. => Inventory go straight into production.
JIT production
JIT production is a production system that is driven by demand for the finished products
(a ‘pull’ system), whereby each component on a production line is produced only when needed for the next stage.
Requirements for successful operation of a JIT system
- High quality and reliability – disruptions cause hold ups in the entire system and must be avoided.
- Elimination of nonvalue added activities
- Speed of throughput
- Flexibility: flexible production system and workforce
- Lower costs: another objective of JIT is to reduce costs
