Cost Management

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COST MANAGEMENT
 COST MANAGEMENT focuses on
cost reduction and continues
improvement and cjange reather
than cost containment indeed ,the
term cost reduction could be used
instead of management but the
former is immotive term
 Cost management is preferred
where as traditional cost control
systems are routinely applied on a
continue basis, cost management
tends to be applied on a adhock
basis when an opportunity on cost
reduction is identified
 Also many of the approaches that
are incorporated with in the area of
cost management do not involve
necessary the use of the

accounting techniques. In contrast
cost control realize heavily on
accounting technique
 Cost management consist of those
actions that are taken by managers
to rduce cost other actions are
under taken with out the use of the
accounting information
 They involve process improvement
where an opportunity is been
identified to perform processes
more efficiently and which have
cost reduction out comes
 Cost management seaks to reduce
cost it should not be at the
expense of the customers
satisfaction
 Ideally the aim is to take actions
that will both reduce costs and
enhance customer satisfaction

LIFE CYCLE COSTING
 TRADITIONAL MANAGEMENT
accounting control procedures have
focuse primarily on the
manufacturing stage of the
products life cycke
 Pre manufacturing cost such as
research and development and
design and post manufacturing
abandonment and disposal cost are
treated as period cost
 Life cycle costing estimates and
accumulates cost over a product
entire life cycle to determine
whether the profit earned during
the manufacturing phase will cover

the cost incurred during the pre
and post manufacturing stages
 Identifying cost incurred during
different stages of a product life
cycle provides an under standing
and managing the total cost in cost
incurred throughout its life cycle
 Life cycle costing helps
management to understand the
cost consequences of making and
developing a product and to
identify areas where cost reduction
efforts are likely to be more
effective
 Accounting report on a period by
period basis and product profits are
not monitored over their life cycles
 In contrast product life cycle
reporting involves cost and
revenue on a product by product

basis over several calendar periods
throughout their life cycles
 Without tracing cost of product
over their life cycles hinders
management understanding of
product profitability because
products actual life cycle is un
known
 Consequently in adequate
information is available on the
success or failure in developing
new products
 There are 3 stages of a products
life cycle
1- The planning and designing
stage
2- The manufacturing stage
3- Service and abandonment stage

 Committed or loged in costs are
those costs that have not been
incurred but that will be incurred in
the future on the bases of the
decisions that have already been
made
 For example, the product design
specifications determine a products
material and labour inputs and the
production processes. At this stage
cost become committed and brodly
determine the future cost that will
be incurred during the
manufacturing stage
 Cost management can be most
effectedly excercise during the
planning and designing stage and
not at the manufacturing stage
when the product design and
processes have already been

determine and cost have been
committed. At this stage the focus
is more on cost containment than
cost management

TARGET COSTING
 Target costing is a mechanism for
determing the selling prices
 Target costing involves the
following stages
1- Determine the target price
which customer will be prepared
to pay for the products
2- Deduct a target profit margin
from the target price to
determine the target cost
3- Estimate the actual cost of the
product

4- If estimated actual cost exceeds
the target cost investigate the
ways of reducing the actual cost
to the target cost
 Target costing is a customer
oriented technique that is widely
used by Japanese companies and
which has recently been adopted
by the companies USA and Europe
 The first stage requires market
research to determine the
customers perceived value of the
product based on its functions and
its attributes i.e functionally its
differential value relative to
competating products and the price
of the competating products
 The target profit margin depends
on planned return on investment
for the company.

 The target profit is deducted from
the targe price to give the target
cost. The target cost is compared
with the predicted actual cost. If
the predicted actual cost is above
the target cost intensive efforts are
made to predicted cost equals the
targeted cost
 Target costing is made through a
team approach these members
include designers, engineers,
purchasing , Manufacturing
marketing and financial personnel.
 The objective is to achieve the
target cost for a product both
functionally and qualitatively
 The deciplian of a team approach
ensures that the no particular
department is able to impose their
functional preferences

 For example, design engineer may
design product that increase cost
but which customer do not value or
features that require the use of
unique parts although alternative
design requiring the standardized
parts may meet customer
requirements
 Similarly, a marketing official
emphasizing introduction of
product features that customer find
attractive but not essential so they
are not prepared to pay
 Therefore the aim during the
product designing process is to
eliminate those functions that add
cost but which do not increase the
market price
 The major advantage of target
costing is that it is deployed during

product design and planning stage
so that it can have a maximum
impact in determining the locked in
cost
 If target cost can not be attend
than the product should not be
launched
 The aim is to design a product with
an expected cost that does not
exceed target cost and that also
meet the functionality level

TEAR DOWN ANALYSIS
 ALSO KNOWN AS reverse
engineering involves examining
the competitors product to identify
the opportunities for product
improvement and ; or cost
reduction

 The competitiors product is dis
mented to identify its functionality
and design and to provide in sight
about the processes that are used
and the cost to make the product
 The aim is to bench mark
provisional product designs with
the designs of competitors and to
incorporate any observed relative
advantages of competitiors
approach

VALUE ENGINEERING
 ALSO known as value analysis
 The aim of value engineering is to
achieve the assigned target cost by
identifying improved product
design that reduce products costs
with sacrifysing product

functionality and eliminating un
necessary functions that increase
the products cost and for which
customers are not prepared to pay
additional price

KAIZEN COSTING
 Kaizen costing is widely used by
Japanese companies has a
mechanism reducing and
managing cost
 Kaizen is the Japanese term for
making improvements to a process
through small incremental amounts
,rather than through large
innovations. This is applied during
the manufacturing stage of the
product life cycle
 The kaizen costing focuses on
production processes and cost

reductions are made through the
increased efficiency of production
processes
 Consequently cost reductions are
smaller with the kaizen costing
because the products are already
in the manufacturing stage of their
life cycles and a significant
proportion of the cost will have
become locked in
 Kaizen costing relies heavily on
employee empowerment. They are
assumed to have superior
knowledge about how to improve
processes because they are closest
to the manufacturing processes
and are likely to have greater
insights into how cost can be
reduced

 A major feature of kaizen costing is
that the workers are given
responsibility to improve processes
and reduce cost

QUALITY COST REPORT
 FOUR categories of cost should be
reported
1- Prevention cost:
Are cost incurred in preventing
the production of products that
donot confirm to specification,
they inclide the cost of
preventive maintanance ,quality
planning and training and the
xtra cost of acquiring high
quality raw materials
2- Appraisal cost :
Are costs incurred to ensure that
materials and products meet

quality conformance standards
they include cost of inspecting
purchased parts ,working process
and finished goods, quality audits
and field test
3- Internal failure cost:
Are the cost associated with
materials and products that fail
to meet quality standards.they
include cost incurred before the
product is dispatched to the
customer such as repair ,down
time ,work stoppages and cost
by defect
4- External failure cost:
Are the cost incurred when
products or services fail to
confirm to requirements of r
satisfycustomer needs after
they have been deliverd. They

include the costs of handling
customers complains, warranty
replacement ,repairs of return
products and the cost arising
from a damaged company
reputation. Cost with in this
category can have a dramatic
impact on future sales.

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