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Overview
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Monden &Hamada
Bhimani &Neike
Chp 11 Chp 12 Chp 13
Activity Based
Costing
Capital
Investment
Decisions
Target
Costing
Kaizen
Costing
Total cost
management
Product Re-
design by target
costing design
Continous
improvement
during
production
Radical redesign of
products or
processes (prior to
production)
-Reduce usage of cost drivers
-Reduce cost per unit of the
driver
-Discover & eliminate
unprofitable business
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Article:
Target Costing and Kaizen
Costing in Japanese Automobile
Companies.- Monden, Y. and Hamada, K. (1991), Target costing and kaizen costing in Japanese automobile
companies, Journal of Management Accounting Research, Fall91, Vol. 3, pp. 16-34
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Target Costing
The system to support the cost reduction
process in the developing and designing phase
of a new model, full model change or a minor
model change. Target Costing can be devided in five steps.
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1. Corporate Planning
2. Developping specificnew product
3. Determining the basicplan for the new product
4. Product Design.
5. Product Transfer Plan
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Two processes of Target Costing
1)The process of planning a specific product that
satisifies Customers needs and establishes the target
cost from the target profit and targeted sales price.
(Selling price Desired Profit = Target cost)
2)The process of realizing the target cost by using value
engineering and a comparison of target cost with
achieved cost.
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Target Cost Cycle
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Establish a target profit for the product
Determine the target costs
Perform functional cost analysis (value engeneering)
Determine the cost estimate
yes Is the target reached? NO
Make the final decisison
Send to manufacturing
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Target Costing in Dutch Firms
A Case study of dutch firm who uses Target Costing.
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Source: Dekker, H. Smidt, P. A survey of the
adoption and use of target costing in Dutch firms.
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Kaizen & Kaizen Costing
Kaizen: Japanese for "improvement", or "change forthe better" refers to philosophy or practices that focus
upon continuous improvement of processes in
manufacturing, engineering, game development, and
business management. (Manos, 2007) -> supports the cost reduction process in the
manufacturing phase of existing products.
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Kaizen & Kaizen Costing
formulas:1) Amount of actual cost per car in last period = Actual cost last
period + Actual production
2) Estimated cost for all plants in coming period = Actual costper car in last period + Estimated production.
-> Target of Kaizen cost for the coming period = Estimated cost
for all plants in coming period + Target ratio of cost decreaseamount to the estimated cost.
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Kaizen, Kaizen Events & Traditional
Improvements.
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Kaizen in practice
Management by Objectives: Cost meetings are held at severalorganizational levels. the amount of the reduction targetisassigned through "management by objectives" at thatorganizational level.
The Kaizen cost target is achieved by daily Kaizen activities. TheJIT production system also intends to reduce various wastes in the
plant by these daily activities. -> Kaizen costing and the JITproduction system are closely related with each other.
Six elements of kaizen:
Teamwork
Personal discipline
Improved morale Quality circles
Suggestions for improvement
Reducing Wastes
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Conclusion so far:
Target costing and Kaizen costing, when linked
together, constitute the total cost management system
of Japanese companies, and thus are a highly effective
way of increasing efficiency.
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Article:
How siemens designed its
target costing system toredesign its products
Bhimani,A. and Neike,C. (1999), How Siemens designed its target
costing system to redesign its products,Journal of Cost
Management, July/August, pp.29-34
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Fiber Optics business unit
(HLFO)
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Semi-conductors group
Change electrical impulses within computer into light
impulse, which are transmitted to other transceivers
Among first players in the customized products market
Business Unit Problems:
1- Growing number of new intrants into industry in mid 90s
2- Increasing complexity of HLFO products
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->Cost reduction target for transceivers: 70%
(of entire life-cycle)
Project Proposal:
Alterations to the actual design of the transceiver
Changes in production processes
Concluded:-> Reengineering exercise to alter the product
->Restructuring the manufacturing processone automated
line prior to Mass-customization
Required:
Need for more extensive accounting information
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Old situation:direct material and direct labor both served as a basis for theapplication of different overhead costs using predefinedoverhead rates.
Resultdifficult for the design engineers to relate changes in
components to changes in production (costs)
Important for new situation:
Overhead cost have to be allocated to a smaller base,
doubling the allocation ratio.Cost inputs were analyzed
A causal linkage between the decicions at the design stageand the resulting effects on the production costs was made!
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With help of ABC analysis:
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The cornerstone of the project was to applytarget-costing concepts to set market-definedparameters affecting production cost, timingand quality factors.
They drew up on two engineering andaccounting techniques which lead to processbased target costing:
1.Functional analysis
2.FPRM (function-process relationship
marketfactors
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Functional analysis
First strip down to their product functions using
value-engineering techniques (h12)
Value-engineering techniques: systematic evaluation of
all the aspects of the value-chain business functions in
which usefulness is added tot the products or services
of an organisation.
Two functional analysis
1.Engineering driven
2.Customer driven
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FPRM
Activity based costing(h11) concepts and value engineering are bothcombined and depicted within the FPRM to produce a modularfunction-proces relationship, whereby market factors are tied todesign changes via cost, quality and timing issues
Activitiy based costing systems refine costing systems by focusing on
individual activities as the fundamental cost objects. Shows the fixed and variable cost distribution for each process.
Enables customer requirements to be identified alongside companycosts, time and quality factors
Production process and product material costs can be linked to
specific customer requirements to achieve enhanced productdesigns
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ConventionalCosting
Expenses
Cost Objects
ActivityBasedCosting
Resources
Activities
Cost Objects
EconomicElement
WorkPerformed
Product orservice
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->ABC or ABM: Refines costing system by focusing onindividual activities as the fundamental cost objects
(MACA h12)
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Process based target costing
Target costing(h12):the estimated long-run cost ofa product, that when sold the company achieve thetarget operating profit per unit
Relate product function areas to the productionprocesses.
Enables the quality of the production output ateach process stage to be monitored.
The allocation costs proceeds from the processesto the functions.
meet market value expectations.
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