Cmt Flashcards
Cost control and prerequisite for cost control
Cost control involves continuous comparison of actual with the standard or budgets to regulate the former
Prerequisites of ct
ED MTTREs vennam
1: effective delegation of authority and assignment of responsibility for cost
2: motivation to encourage the individuals
3: timely and efficient reporting
4: clearly define the target
5: recommendation should follow through action
6: effective system to judge the effective implementation of recommendation
Cost reduction
What is the scope of cost reduction
Cost reduction is real and permanent reduction
Cost reduction is the continuous effort to reduce the cost through economic and saving in cost of manufacturing, administration and distribution
Scope of cost reduction
A): product design
High possibility for cost reduction because 80% of the production cost is committed at design phase only
Reduce of cost in following manner
1: cheaper substitute
2: reduceded time of operation and increased productivity
3: standardization and simplification in variety
B): organisation
DAS CoRE
1: definition of each function and responsibilities
2: proper assignment of task and delegation of responsibility to avoid overlapping
3: suitable channel of communication between various mgmt level
4: cooperation between various executive
5: removal of doubt and fiction
6: encouragement to employees for cost reduction suggestions
C): factory layout and equipment
Study the factory layouts and the utilisation of the existing equipment to determine whether there is any scope of cost reduction by eliminating of wastage of men, material and maximum utilisation of the facilities available
D): production plan programme and methods
Proper planning by installing an effective procedure and programme ordering correct machine and proper utilisation of material manpower and resources
Standardization of components means and benefits
Using same type of components for more than one product or all the product which are manufacturing is producing
Benefits
1: economies of scale
2: ease in inventory control
3: ease for an operator who use this component for various purposes
Difference between cost reduction and cost control
D R U G U
Dynamic
Real
Universally
Garantee in quality
Yardstick
Target costing
“a structured approach to determining the cost at which a proposed product with specified functionality and quality must be produced, to generate a desired level of profitability at its anticipated selling price
helps an organization to survive, even in an increasingly competitive environment
what price we think the consumer will pay for our product. We
then determine how much of a profit margin we expect and subtract that from the final price. The
remaining amount left is what is available as a budget to be used to create the product
Limitation of traditional cost plus pricing model
1:ignorance of the price charged by competitor,
2: The ignorance to the price which customer ready to pay
3: Cost control.
Steps of Target costing or
Following steps to be performed while target costing applied
RIE DED E3 CRM
1: reorient the culture of thinking and attitude
2: identify the market requirements
3: establish a market driven target price
4: Determine the volume of product
5: establish the target profit margin
6: determine the target cost
7: Establish a balance between Target cost and requirements
8: establish a target costing process
9: establish a product cost model
10: closing down the gap
11: reduce the indirect cost application
12: measure the results and maintain management Focus
Principles of Target costing
FUL FRA
1: focusing on customer
2: using and development of team work
3: leadership of Target selling price
4: focus on stages of product design
5: reduce the cost of product life cycle
6: attention to all stages of the value chain
Prons and cons of Target costing
Prons:
TOP E3 m
1: it reinforce the top to bottom commitment to process and product innovation
2: opportunity that can be converted into real savings
3: proactive approach to cost management
4: enhance the employee awareness and empowerment
5: encourage the adoption of value added activity
6: enhance product life by reducing the time to market
7: Market driven approach towards cost
Cons of Target costing
D3 SFR
1: development process can be lengthened to a considerable extent only
2: difficult to reach a consensus on the proper design
3: required a development of detailed cost data
4: stubborn people on the design team who are holding out for specific product features
5: may reduce the quality of product
6: involve the great amount of forecasting and estimation
Impact of Target cost on profitability
1:continuous emphasis on product costs throughout the life cycle of every product
2: improves profitability through precise targeting of the correct prices at which company feels it can field a profitable product in the marketplace
Companies that use targets costing to gain maximum
1 : Assembly-oriented industries
2:heavily with the diversification of the product lines
3: Use technologies of factory automation
4:Have experienced shorter product life cycles
Components of Target costing system
Value analysis
Value engineering
Value Analysis is a scientific approach to cost reduction which reviews the material composition of a product and production design, so that modifications and improvements can be made which do not reduce the value of the product to the customer or to the user (ie already in production)
Value Engineering is the application of value analysis to new products(ie before production)
issues that are dealt with during a Value Analysis/ Value Engineering
FB DMD SCS
1: Can we eliminate functions from the production process
2:Is there a better way
3:Can we eliminate some durability or reliability?
4:Can we minimize the design?
5: Can we design the product better for the manufacturing process?
6: Can we substitute parts?
7:Can we combine steps?
8: Can we take supplier’s assistance?
Life cycle costing
Life cycle costing is a system that identifles and accumulates, the actual costs and corresponding revenues
4 phases
Introduction phase
Growth
Maturity
Decline
