Lecture 16 - Target costing & Kaizen costing Flashcards
(!!!!) Describe Target costing in general
General:
- Cost reduction guideline
- Big changes: No price squeezing
- Open for all alternatives
- Before product set in production
- Also for just being more effective
- CM practice on expected costs
- Reduce costs to certain level
- CM tool to reduce cost over PLC
- Need standard costing or budget
- VE essential for implementation
- Assembly > process-industries
- Can be used for software
- Popular due to automation
- Most suitable for multi product small production run firms
- Cost planning > cost control
- In product design & development
- Require fair cost allocation
- Has a holistic approach
- Promote engineering techniques
Procedure:
- Determine product cost
- Determine target price
- Determine target profit
- Determine allowable cost
- Determine target costs
Engineering tools:
- Just in time / JIT
- Total quality control / TQC
- Mat. requirement planning / MRP
- Value engineering / VE
(!!!!!!!!!) Describe the elements of target costing
General:
- CALC: Pr. unit basis
- Product launch if justified gap between allowable & target cost
Target price:
- Price expected able to charge
- Based on knowledge of market
- Based on customer requirements
- Competitive market price
- Approved by TM
- Also expected volume sold
Target profit:
- What we want to earn
- Deducted from target price
- Approved by TM
- Should consider risk, market condition & marketing strategy
- ROS > ROI: Easier comparing
- ROS = CALC: Profit / Revenue
- ROI = CALC: Profit / Investment
- Consider product specific risk
Allowable costs:
- CALC: Target price - Target profit
- Market expectation
- Not the accepted: Target cost
- Max cost for target profit
- Dont consider technology
- Dont consider process standard
- Approved by TM
- If target cost is compromised
- Sales profit - target costs
- Desired cost
- Market driven
- Often lower than expected cost: Since current prod. methods & design
Drifting cost:
- Diff. Between current cost & allowable cost
- Those we manage
- Current conditions cost level
- Must be reduced until allowable cost
- Our starting point
- Forecastet standard costs
- Based on actual knowledge
- Based on actual technology
- Target cost previous processes
- People maybe tired of retrying
- Approved by people on floor
- Require substantial change: Not squeezing
- Changed since above target cost
- Eg. Change design, content or technology
Target costs:
- The achieved cost
- The production expectation
- When changes made
- May be lower than allowable if succes in cost reduction
- Cost level accepted: Opposite allowable cost
- CALC: Sell price - Target profit
- Kaizen Costing when in progress
- Outcome of optimization process
- Strive to attain at least allowable costs
- Allowable & drifting costs affect it
- Approved by TM: Input from floor
- By profit planning (top-down), engineering planning (bottom-up) or both
- After review each drifting cost & reduce it toward allowable cost
- Eg. Production or R&D costs
- Should be attainable with effort: Improvements
- Decomposed into each cost element, functional element & parts
- VE analysis if gap between target cost & estimated cost
Target product:
- Specified product with qualitative
criteria that has to be met
__________
Product-level target costing:
- Cost reductions by firm itself
Component level target costing:
- Cost reductions in collaboration w. supplier
Describe two different approaches of handling costs & their problems
General:
- How process is approached
The Function method:
General:
- Customer valuation to assign cost
- Estimated by marketing department
- Eg. 25% cust. value in safety, 25% cost allocated to safety item
Problems:
- Assume direct relationship between perceived value & costs
- Components often contribute to several functions
__________
The component method:
General:
- Divide cost according to products main parts/components
- Engineer reduce cost for each component group to meet TC
- Not functionality analysis
- Inside-out approach
- % often just starting point
- Eg. Electrics in car
Problems:
- Customer decoupled
- May meet allowable cost but not perceived worth price
- “An idea without a price tag is never acceptable”
How is target costing presented during processes
Cost tables:
- Pre-calculated cost consequences of set limited scenario
- Old approach
CAD-CAM:
- Computer aided design & computer aided manufacturing
- Cost consequence of design
- Bill-of-Material combined with standard unit costs can show total unit cost consequences of design
- When engineers sit & make drawings in computer program. Each component links to standard unit cost
Dynamic cost accounting:
- MA part of target costing process
- Make queries from ERP system based on requests
Describe the considerations on employee involvement
- Involve people that walk the talk
- Create reliability check
- Control meeting cost reduction
- Commitment to numbers
(!!!) Describe Kaizen costing, its focuses & its consequences
General:
- Used for achieving target cost
- Continuous improvement: Japan
- Customers top priority
- Organizational culture important
- Open many poss. cost reductions
- Accumulate small improvement
- Market driven approach
- Further cost reduction
- Closely related to JIT
- People involvement important
- Instead of squeezing supplier
- Cost amount to be eliminated in following period
The two focuses:
Meet cost targets:
- If above allowable costs
- Price reduction threat profit
Improve production processes:
- Benefit existing & new products
Consequences:
- Product can change
- People can be worn out: Stress
- Eg. health sector running faster due to % set up for reduction
(!) Compare standard & Kaizen costing
General:
- Kaizen costing implemented outside standard cost system
__________
Standard costing:
General:
- Less agile
Concepts:
- System: Cost control
- Assumption: Current manufacturing condition
- Goal: Meet cost performance standard
Techniques:
- Frequency: Annual or semiannual
- Investigate & respond when standard not met
- Cost variance: Incl. Standard & actual cost
__________
Kaizen costing:
General:
- More agile
Concepts:
- System: Cost reduction
- Assumption: Continue to improve
- Goal: Meet cost reduction target
Techniques:
- Frequency: Monthly
- Cost variance: Incl. Target Kaizen costs & actual cost reduction
- Investigate & respond: When targets not attained
Describe the importance of culture by Wakamatsu
- Challenging yet achievable target
- Solve problem by 5 times “why”
- Seek transparency & visibility
- Employees must be trained to respect human nature
- Learning without arrogance
- Cherish teamwork
- Include safety, quality & environment while additional value to customers
Compare standard costing & target costing
Standard costing:
- At production stage
- Cost control
- In process-oriented industries
- Oriented toward accounting
Target costing:
- At planning & design stage: As VE
- Cost planning/reduction
- In assembly oriented industries
- Oriented toward management & engineering
(!) Describe the considerations for JIT
General:
- Production pulled by actual customer demand
- Minimal inventory levels
- Capacity > inventory buffer
- EOQ: No inventory
- Popular
- Often combined w. target costing
- Closely related to Kaizen costing
Reasons to not adopt it:
- Many products
- Many parts
- Low production volume
- Low inventory holdning costs
- No required subcontractors
- Assembly oriented industry
(!) Describe the difference between target costing & kaizen costing
General
- Should not be separate
- Same process, method & philosophy: Different PLC stage
____________
Target costing:
Cost reduction:
- In development & design phase
- Before production & selling
Model:
- New, fully or minor changes
____________
Kaizen costing:
Cost reduction:
- In manufacturing phase
- During production & selling
Model:
- Existing
(?) Describe the calculation of Kaizen costs
- Kaizen cost in this period for all plants = Estimated amount of actual costs for all plants this period x Target ratio of cost decrease amount to the estimated cost
- Total Kaizen cost amount for each plant = Target of kaizen cost in this period for all plants x Assignment ratio
- Assignment ratio = Cost directly controlled by each plant / Total amount of costs directly controlled by plant (Not fixed & depreciation costs)
(!) Describe incremental costs
- Only added costs. Eg. Not design cost
