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Group 5 Question 2 Management Accounting
Group 5 Question 2 Management Accounting
FACULTY OF COMMERCE
DEPARTMENT OF STRATEGIC MANAGEMENT AND CORPORATE
GOVERNANCE
NAME REGISTRATION NUMBER
Mellisa T Nyangani R173102H
Lovemore Haisa R219491Z
Esther T. Nkhoma R2214112P
Nyasha Murape R146503J
Locardia Mundandi R222551W
Lorita Kanengoni R2213667N
Masimba Mapfuva R2215663M
Chidochashe Depute R2215134N
Josiah Dhliwayo R113918A
Edina Mudzinganyama R222155X
Dzingai Chazarira R169294P
Tendai R. Bwanya R2215367R
MEMO
Subject: Use of Target Costing, Kaizen Costing and Product life Cycle Costing to
control costs and determine profitability of new products.
As a startup firm, it is imperative to reduce costs, as business startup is cognizant with high
costs. There is a lot of money needed to set things up and get the business rolling. The
business incurs costs first and profits later. In some instances, it is difficult to record a profit
in the preliminary stages of the business and can actually record losses. If lucky, a business
can break even. Maintaining tight control over costs is an essential part of maximizing cash
flow, profits and staying competitive. There are a variety of tactics entrepreneurs can employ
to rein in expenses and prepare for unforeseen costs that crop up for a startup.
Cost reduction
Cost reduction is the process of reducing unnecessary expenses to increase profitability. Cost
reduction is the achievement of real and permanent reduction in unit cost of products
manufactured. It, therefore, continuously attempts to achieve genuine savings in cost of
production distributing, selling and administration. It does not accept a standard or budget as
Target Costing
Target Costing is a cost management tool that planners use during product and process design
to drive improvement efforts aimed at reducing the product’s future manufacturing costs
(Kaplan and Atkinson, 1998). Target Costing is price-led and customer oriented - it begins
with price, quality, and functionality requirements as defined by the customers. The target
costing process is a system of profit planning and cost management that is price led, customer
focused, design centred, and cross functional. Target costing initiates cost management at the
earliest stages of product development and apply it throughout the product life cycle by
actively involving the entire value chain. Target costing process consists of two phases
known as establishment phase and implementation phase. The establishment phase defines
goals for product concepts based on strategic plans and the implementation phase achieves
the set goals. The process of target costing is based on the cardinal rule, "If we cannot make
the desired profit we should not launch the product".
The target costing process requires top management to ensure that every product should be
designed to help the company to achieve set goals. This process involves conducting
thorough market analysis and customer surveys to determine what the customer’s needs and
demands are for a given product. This step must result in the design specification of the
product upon which the target price is determined. The target price is the price a customer is
willing to pay for the new product. Thorough market analysis must be conducted to
determine the target price. Target cost, also known as the allowable manufacturing cost, must
The feasibility of the product should be determined by finding the actual cost of
manufacturing, using the activity-based costing approach. If the new product does not yield
the required profit, the product needs to be re-designed or the process of manufacturing
should be improved to yield the required profit. The components/functions that are cost
inefficient should be re designed to reduce costs. If the products are found not to meet the
financial profit requirements, they should be abandoned. It is essential to make sure that the
new product will yield the required profits through its complete life and the product mix must
be regularly adjusted to meet the strategic goals of the company. Target Costing is better
suited to meet the needs of organizations in today’s competitive environment. Target costing
is a strategic tool for planning that takes a holistic view of products and their sub-assemblies
and identifies the opportunities for cost reduction and product improvement. Target costing
also uses various techniques to set and achieve the goals based on the strategic plans of a
company.
The major advantages of target costing as mentioned in, P. Horvath, (1994), are that target
costing will provide management techniques for developing products whose costs support
strategic objectives for profitability. It ensures that profitability targets for a product portfolio
are achievable. It improves sales prospects and revenues since product development is
focused on customer needs and wants. It also reduces the reliance on costly post production
product revisions to meet customer needs and wants. It is a costing approach that is market
and customer led rather than business capacity led. the company’s approach to designing and
manufacturing of products becomes market driven. The product is created from the
expectation of the customer and hence, the customer feels more valued is delivered. It
extends customer centricity beyond sales to all functions of the department.
Customers are no longer the priority of the sales and marketing team, but they become the
concern of the whole organization. It shows management’s commitment to process
improvements and product innovation to gain competitive advantage. New opportunities can
be converted into real savings to achieve the best value for the money. However, the
Kaizen Costing
Kaizen costing can be used by the firm to continuously reduce variable costs of the new
products in the computer peripherals to reduce costs and increase profitability. Kaizen is a
term that has its origins in Japan (Sani & Allahverdizadeh, 2012) which was popularized by
Masaaki Imai and it is a concept of two Japanese words, KAI means change and ZEN means
better, meaning continuous improvement (Rof, 2012). Kaizen costing is the process of
strategic management accounting that is a forward approach and outlook in search of
competitive advantage for firms (Guilding, et al., 2000). Point of strength in kaizen costing is
its close relationship with the company’s planning process and hence the company can
evaluate its plans, progresses and long-term goals. Kaizen costing activities include
incremental improvements, continuous reduction of production cost, and constant imprudent
in designing and developing products.
In fact, Kaizen costing is continuous improvement and recovery by eliminating waste and
reducing the cost (Kennedy and Widener, 2008) and it is related to the reduction of
production cost and existing processes (Hansen & Mowen, 2003). This costing is a method to
ensure manufacturing of products that meet the required quality, customer satisfaction,
usability and affordable price to maintain the competitiveness of products (Ellram, 2000) and
focuses on continuous cost reduction of products that are really manufactured in the company
(Cooper, 1995). Kaizen costing is a method including product design and improvement teams
after the establishment and implementation of product and designing production process, and
it focuses on operational characteristics of processes and production in an efficient manner.
The most important principle when using Kaizen cost accounting is to ensure that reducing
costs does not entail a reduction of the final quality and value of the product for the customer.
In fact, kaizen includes processes, systems, products and services that takes them apart and
then rebuild in a better way. Actually, kaizen is along and hand in hand with comprehensive
Kaizen costing has been developed to support the continued cost reduction of existing
components and products. One of the main ways to reduce costs is through the elimination of
wasteful processes such as over-production, producing more than customers have ordered,
holding or purchasing unnecessary inventory, production delays/idle time when value is not
added to the product, production of defective units, actions of people/equipment that do not
add value, unnecessary transportation of materials/work-in-progress due to poor planning and
unnecessary production steps that do not add value to the final product. Kaizen costing
efforts may be directed to the assets or resources, i.e. all improvement activities are related to
reduction of use of chosen asset or resource. It can also be directed to the product, that is the
improvement activities are targeted at the product itself. The achievement of kaizen costing
and its impact on bottom line should be analysed and a formal appraisal process should be
done to see if the continuous small steps of reduction of costs and waste have been
successful.
There are low change costs involved in the continuous improvements and low risks involved.
Whilst the organization strives for low costs, it does not compromise the quality of the
product itself. Among the weaknesses of the Kaizen Costing application, is that there no
visible effects in the short term. Small changes will often take time for the effects to be
realized in the bottom line. It is also difficult to determine the effectiveness of implemented
activities in areas other than costs. Other qualitative benefits of Kaizen Costing are difficult to
quantify such as employee motivation, organizational culture and unity and decentralization
of decision making.
It helps management to understand the cost consequence of developing and making a product
and to identify areas which cost reduction efforts are likely to be most effective. The product
life cycle has three stages that is the planning and design stage, manufacturing stage and the
service and abandonment stage. The planning and design stage consist of research and
development and the costs of product design. The manufacturing stage involves the growth
and maturity in sales of the product. All the manufacturing, marketing, selling and
distribution costs are incurred at this stage. The actual cost of production is built up mostly in
the growth and maturity stage. The service and abandonment stage is characterised by the
Life cycle costing assists management to smartly manage total cost throughout product’s life
cycle. It helps to identify areas in which cost reduction efforts are likely to more effective. It
also assists to estimate the cost impact of various designs and support options. 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 the managed in
order to maximize return on a product. Better decision making should follow from a more
accurate and realistic assessment of revenues and costs, within a particular life cycle stage.
Product life cycle thinking can promote long-term rewarding in contrast to short-term
profitability rewarding.
It assists management with an improved awareness of factors that drive the costs and the
resources required per product. It helps managers to be able to forecast costs more accurately
throughout the course of the product life cycle. It doesn’t focus on costs only like Kaizen
Costing, it also considers other qualitative factors that can be used to drive or increase sales
during the growth stage. It can also be used to device pricing strategies throughout the
product life cycle. Penetration pricing can be used when the product is still new to the market.
As the product begins to gain market share, the price can go up and as the product nears
maturity and decline stage, the price can be lowered and promotions can be run on the
product, to enable disposal of the product from the market. Life cycle assist in performance
management. It highlights the areas in which cost reduction efforts are likely to be effective.
It also provides premises for decision making regarding product introduction, product mix or
discontinuation of products.
It also helps to determine the profits earned, through the estimation of life cycle costs across
all stages of the life cycle. It provides a long-term picture of product profitability, feedback
on the effectiveness of initial planning and cost data to clarify the economic impact of
alternatives like design. It is a guaranteed way of controlling manufacturing costs to increase
the scope of profitability and revenue extension of the product. However, the product life
cycle costing is a lengthy process. A lot of unforeseen changes can happen during the lifetime
Conclusion
To ensure that the proposed products will be profitable, it is wise for the company to adopt
the target costing approach. Target costing enables the company to invest in a product that is
market driven, that customers will like. The company will be making the products according
to the needs and wants of the customers. The profit level that the company wants will be
predetermined and the project team will work towards cost reduction to ensure that profit
level is attained. Thus, profitability will be ensured. On the same note, the business can also
employ life cycle costing to determine the cost levels for the entire product life cycle of the
product. This will enable the company to plan for future costs and maximize revenues. The
business should also use kaizen costing. Kaizen costing is a continuous cost reduction
approach. It can also be used by the company to cut costs whenever possible, without
compromising the quality of the product. The company can employ all three approaches to
get a handle on costs, increase profitability and gain competitive advantage.
Dobi, S., 2007. The Kaizen and the Productivity, 5th International Conference on
Management, Enterprise and Benchmarking. June 1-2, Budapest, Hungary.
Ellram, L. M., 2000. Purchasing and Supply Management’s Participation in the Target
Costing Process. Journal of Supply Chain Management, 36(2), 39-51.
Hansen, R. and Mowen, M. 2003. Cost Management: Accounting and Control. 4th Edition,
Ohio Thomson.
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GROUP 5 MANAGEMENT ACCOUNTING
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