2. Cost accounting
Cost Accounting is a branch of accounting and has
been developed due to limitations of financial
accounting.
Acc. to CIMA, “cost accounting is classification,
accumulation, assignment and control of costs.”
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3. Cost Control Techniques
Cost Control; The process or
activity on controlling costs
associated with an activity, process,
or company.
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4. Target Costing
The concept of target costing had its origin in Japan in
1960s as a result of difficult market conditions.
Target costing can be defined as a cost management
tool for reducing the overall cost of the product over its
products life cycle.
Target cost is the target price less target profit from the
product.
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5. According to Copper:
Target Costing is “a
disciplined process for
determining and realising a
total cost at which a proposed
product with specified
functionality must be
produced to generate the
desired profitability at its
anticipated selling price in
the future.”
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6. Objectives of target costing
Downsizing the cost
Making new products compatible to market needs
Motivating the employees to attain target profit.
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7. Principals of target costing
Price-led costing
Focus on customers
Focus on design
Cross-functional product and process teams
Value-chain involvement
A life-cycle orientation
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8. Stages in Target Costing Process
Define the Product:
‘What you are selling and to whom?’ “What do they
want it to do?”
Set the Target:
“ What will they pay for it” and “What should I cost to
produce?”
Achieve the Target:
“How can we get there?” and “Are we getting there?”
Maintain competitive cost:
“How can we stay ahead?”
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9. 9
Define the Product
Set the Target
Achieve the target
Maintain
competitive cost
Steps in Target
costing Process
10. Advantages of Target Costing
Induces for innovations
Reduces cost
Increase spirit of team work
Development of right products
Enhances the probability of market success
Alings the cost of futures with customer’s willingness
to pay for them
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11. Kaizen costing
Kaizen costing is a cost reduction system.
Yashihuro Monden defines kaizen costing as "the
maintenance of present cost levels for products
currently being manufactured via systematic efforts to
achieve the desired cost level."
The word kaizen is a Japanese word meaning
continuous improvement.
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‘KAI’ means ‘Change or the action to correct’.
‘ZEN’ means ‘Good’.
that means “ change for the better”.
Kaizen is small incremental changes made for
improving productivity and minimizing wastes.
Kaizen costing is applied to products that are already
in production phase. Prior to kaizen costing, when
the products are under development phase, target
costing is applied.
17. Advantages of Kaizen Costing
Kaizen reduces waste - like inventory waste, time
waste and workers motion.
Kaizen improves space utilization and product quality.
Results in higher employee moral and job satisfaction.
Teaches workers how to solve everyday problems.
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18. Activity Based Costing
The concepts of ABC were
developed in the manufacturing
sector of the United States during
the 1970s and 1980s.
ABC often identifies areas of high
overhead costs per unit and so
directs attention to finding ways to
reduce the costs or to charge more
for costly products.
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19. 19
Activity-based costing was first clearly defined in 1987
by Robert S. Kaplan and W. Bruns.
They initially focused on manufacturing industry
where: proportion of the direct costs = dec.
relative proportion of indirect costs= increased
Activity-based costing was later explained in 1999 by
Peter F. Drucker.
He states that traditional cost accounting focuses on
what it costs to do something, activity-based costing
also records the cost of not doing.
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Cooper and Kaplan described ABC as an approach to
solve the problems of traditional cost management
systems.
“Is the process of accounting for costs from the point at which expenditure is incurred or committed to the establishment of its ultimate relationship with cost centers and cost units. In its widest usage, it embraces the preparation of statistical data, the application of cost control methods and the ascertainment of profitability of activities carried out or planned”.
This pricing technique is utilised to meet the demand of the customers on one hand and organisation’s profit goals on the other.
1. Price-led costing. Market prices are used to determine target-costs. Target costs are calculated using a formula similar to the following: market price - required profit margin = target cost.
2. Focus on customers. Customer requirements for quality, cost, and time are simultaneously incorporated in product and process decisions and guide cost analysis. The value (to the customer) of any features and functionality built into the product must be greater than the cost of providing those features and functionality
3. Focus on design. Cost control is emphasized at the product and process design stage. Therefore, engineering changes must occur before production begins, resulting in lower costs and reduced "time-to-market" for new products.
4.Cross-functional product and process teams are responsible for the entire product from initial concept through final production.
5. Value-chain involvement. All members of the value chain--e.g., suppliers, distributors, service providers, and customers--are included in the target costing process.
6. A life-cycle orientation. Total life-cycle costs are minimized for both the producer and the customer. Life-cycle costs include purchase price, operating costs, maintenance, and distribution costs.
Cost control is emphasized at the product and process design stage. Therefore, engineering changes must occur before production begins, resulting in lower costs and reduced "time-to-market" for new productsKaizen costing is applied to products that are already in production phase. Prior to kaizen costing, when the products are under development phase, target costing is applied.
These traditional costing systems are often unable to determine accurately the actual costs of production and of the costs of related services.
For example, increased automation has reduced labor, which is a direct cost, but has increased depreciation, which is an indirect cost.
- reduced the relative proportion of the direct costs of labor and materials, but have increased relative proportion of indirect costs.