Please enable JavaScript.
Coggle requires JavaScript to display documents.
Cost Management Techniques (Target Costing (Advantage (Implementation of…
Cost Management Techniques
Life Cycle Costing
Characteristics of Product Life Cycle
Profit per unit varies as products move through their life cycles
Each stage of the product life-cycle poses different threats and opportunities that give rise to different strategic actions
Product cost, revenue and profit patterns tend to follow predictable courses through the product life cycle
Products require different functional emphasis in each stage-such as R & D emphasis in the development stage and a cost control emphasis in the decline stage
The products have finite lives and pass through the cycle of development, introduction, growth, maturity, decline and deletion at varying speeds
Finding new uses or new users or getting the present users to increase their consumption may extend the life of the product
Benefits of Product Life Cycle Costing
It provides an overall framework for considering total incremental costs over the entire life span of a product, which in turn facilitates analysis of parts of the whole where cost effectiveness might be improved
It is an approach used to provide a long-term picture of product line profitability, feedback on the effectiveness of life cycle planning and cost data to clarify the economic impact of alternatives chosen in the design, engineering phase etc.
Product life cycle thinking can promote long-term rewarding in contrast to short-term profitability rewarding
It is also considered as a way to enhance the control of manufacturing costs
Better decisions should follow from a more accurate and realistic assessment of revenues and costs, at least within a particular life cycle stage
Product life cycle costing traces research and design and development costs etc., incurred to individual products over their entire life cycles, so that the total magnitude of these costs for each individual product can be reported and compared with product revenues generated in later periods
The product life cycle costing results in earlier actions to generate revenue or to lower costs than otherwise might be considered. There are a number of factors that need to be managed in order to maximise return on a product
Product Life Cycle_Stages
Growth Stage
Characteristics
Overall strategy for traded-off between high profits and high market share
Improving and/or adding features or strategic lowering of prices to attract more buyers
Shift of emphasis from product awareness to product conviction
Same promotional spending or slightly higher
New channels to handle additional volumes and new markets
Educating market is main goal
Sales increase at an increased rate in early grown stage
The length of the growth stage varies according to the nature of the product and competitive reactions
High volume of business and increase in competition
Strategy
Find the ideal balance between price and demand as per price elasticity
Overall strategy shifts from acquisition to retention of customers, from motivating product trial to generating repeat purchases and building brand loyalty
Maximise availability of the product through strong distribution channel
Development of long-term relationships with customers and partners for the maturity stage
Maintain control over product quality to assure customer satisfaction
Value-based pricing strategies may be considered
Establish a clear brand identity through promotional campaigns
Leverage the product's perceived differential advantages to secure a strong market position
Maturity Stage
Characterstics
Profits start to decling
No new distribution channels to fill
Some laggard buyers still enter the market
Customers start moving towards other products and substitutes
Population growth and replacement demand govern future sales
Strong marketing challenges
Intensified competition
High R & D budgets
Overcapacity in the industry
Strategy
Prices may have to be reduced to attract the price-sensitive consumers
Various sales promotion incentives are necessary for the consumers as well as dealers to maintain their interest in the product
Product features may be improved or enhanced to differentiate product from that of the competitors
Distribution becomes more intensive and incentives may be offered to encourage product over competing products
Strong marketing efforts are needed to win over the competitor's customers
Introduction Stage
Characterisics
Huge efforts to attract various channels
Aggressive promotional efforts to increase awareness
Pricing may be low-penetration or high-skimming pricing
Product refinements are not possible
Profits are low or negative due to low initial volume
Few competitors produce basic version of products
High distribution and promotional expenses
Focus on those buyers who are the most ready to buy
Decision about the product branding, packaging and labelling
Strategy
Strengthening or expanding channel and supply chain relationships
Building on the availability and visibility of the product that boost channel intermediaries to support the product
Inducing customers to try and buy the product
Setting price in alignment with the competitive realities of the market
Attracting customers by raising awareness of the product through promotion activities
Decline Stage
Characterstics
Sales decline for a number of reasons, including technological advances, consumer's shift in taste, etc
Profits start declining and at times become negative
Sales of most product forms drop to zero or may remain at a low level
Number of organisations producing the products drops
Strategy
Firm can even discontinue the product
Use the product as replacement product for launching another new product successfully in the market
The firm can continue to offer the product to its loyal customers (niche segment) at a reduced price
The various marketing decisions in the decline stage will depend on the fact that, whether, it is being revived, or given a new lease of file, or left unchanged if it is being liquidated
The product can be maintained in the market by differentiation, keeping low cost for some more time by adding certain new features and finding new uses
The price may be maintained or reduced drastically if liquidated
Uses of Product Life Cycle
Controlling Tool
Planning Tool
Forecasting Tool
Parteto Analysis
Usefulness of Pareto Analysis
Allocate physical, financial and human resources
Select and define key performance improvement programs
Select key employee relations programs
Select key customer relations and service programs
Select and define key quality improvement programs
Prioritise problems, goals and objectives to identify root causes
Application of Pareto Analysis
ABC Analysis- Stock Control
Application of activity based costing
Customer profitability analysis
Quality control
Pricing of a product
Target Costing
Management Accountant's Role
The management accountant should work with the design team to help it understand the nature of various costs as well as the cost-benefit trade-offs of using different design or cost operations in the new product
The management accountant is responsible for tracking the gap between the current cost of a product design and the cost that is design team' goal
The management accountant should also be responsible for any capital budgeting requests generated by the design team since he or she has the knowledge of the capital budgeting process
The management accountant must continue to compare a product's actual cost to the target cost after the design is completed
The management accountant should be able to provide for the other members of the design team a running series of cost estimates based on initial designs sketch, activities based costing reviews of production processes, and "best guess" costing information from suppliers based on estimated production volumes
Problems
Representatives from number of departments on the design team can sometimes make it more difficult to reach a consensus on the proper design because there are too many opinions regarding design issues
Effective implementation and use requires the development of detailed cost data
A larger amount of mandatory cost cutting can result in finger-pointing in various parts of the comapny
Use of target costing may reduce the quality of products due to the use of cheap components which may be of inferior quality
The development process can be lengthened to a considerable extent since the design team may require a number of design iterations before it can devise a sufficiently low-cost product that meets the target and margin criteria
For every problem area outlined have the dominant solution is retaining strong control over the design teams, which calls for a good team leader.
Impact on Profitability
It improves profitability through precise targeting of the correct prices at which the company feels it can field a profitable product inn the marketplace that will sell in a robust manner
Product Costing vs Traditional Costing
Target Costing
Target Proft
Target Cost
Target Price and Volume
Product Design
Production Sepcification
Traditional Costing
Estimated Cost
Target Profit
2.Product Design
Target Price
Product Specification
It places such a detailed continuing emphasis on product costs throughout the life cycle of every product that it is unlikely that a company will experience runaway costs
Components
Value Analysis and Value Engineering
Can we design the product better for the manufacturing process?
Can we substitute parts
Can we minimise the design?
Can we combine steps?
Can we eliminate some durability or reliability?
Can we take supplier's assistance?
Can we eliminate functions from the production process?
Is there a better way?
Target Costing Data Flow
Data can also be obtained from competitor's information collected by the marketing staff or an outside research agency
Sometimes information is compiled by a combined effort of the marketing and engineering staffs through a process called reverse engineering
The cost accountant may include the best estimate and additional estimate of the highest possible cost that will be encountered
Engineering staff also compiles their own cost data relating to different designs/components
In initial stages of product design, the cost accountant must make the best possible guesses regarding the cost of proposed designs
The final database available to the cost accounting member of a design team contains information regarding the previous quality, cost and on-time delivery performance of all key suppliers, as well as the production capacity of each one.
Data can be obtained from central accounting data base
Main Features
Integral to setting the target selling price is the establishment of target production volumes, given the relationship between price and volume
Establishing cost reduction targets
For any given product, a target selling price is determined using various sales forecasting techniques
It should be noted that a fair degree of judgement is needed where the allowable cost and the target cost differ.
Target costing is viewed as an integral part of the design and introduction of new products
Having achieved consensus about the product-level target cost, a series of intense activities commence to translate the cost challenge into reality
Most Useful Situations
Use technologies of factory automation, including computer-aided design, flexible manufacturing systems, office automation, and computer-aided manufacturing
Have experienced shorter product life cycles where the pay-back for factory automation typically must be achieved in less than eight years
Involved heavily with the diversification of the product lines
Must develop systems for reducing costs during the planning, design and development phases of a product's life cycle
Assembly-oriented industries, as opposed to repetitive-process industries that produce homogeneous products
Are implementing management methods such as just-in-time, value engineering
Advantage
Implementation of Target Costing enhances employee awareness and empowerment
Foster Partnership with suppliers
Target costing ensures proper planning well ahead of actual production and marketing
Minimise non-value-added actities
Encourage selection of lowest cost value added activities
It uses management control systems to support and reinforce manufacturing strategies
Target costing starts with customer's study or market study
It reinforces top-to-bottom commitment to process and product development
Proactive Approach to cost manangement
Reduced time to market
Target costing takes a market driven approach towards cost
Control Points
Identification of Principal Control Point
Point of Go/No Go Decision
Milestone can be in terms of Timer or Points
Introduction
Implementation
Obtain a budget
Assign a strong team manager
Obtain a management sposor
Enrol full-time participants
Create a project charter
Use project management tools
Environmental Management Accounting
Controlling Environmental Costs
Reasons for Controlling Environmental Costs
Identification of Environmental Costs
Role of EMA in Product/Process Related Decision Making
Environmental Costs
Advantages/ Disadvantages of EMA
Introduction
EMA in Practice