6 Other Strategic Cost Management Systems Flashcards
What are the benefits of Strategic Cost Management
- Helps increase efficiency
- Streamlines workflows
- Gives greater clarity on cost drivers
What is Total Quality Management
- TQM is achieved when this approach to continuous improvement is applied to everything a business does
- TQM is an approach to improving the effectiveness and flexibility
- It is essentially a way of organising and involving the whole organisation - every department, every activity/system and every single person
What does TQM ensure
TQM ensures that the management adopts a strategic overview of quality and focuses on prevention rather than inspection.
What are the objectives of TQM
- Meeting the customer’s requirements is the primary objective and the key to organisational survival and growth.
- The second objective of TQM is continuous improvement of quality. The management should stimulate the employees in becoming increasingly competent and creative.
- Third, TQM aims at developing relationships of openness and trust among employees at all levels in the organisation
What is the significance of TQM
- The importance of TQM lies in the fact that it encourages innovation, makes the organisation adaptable to change, motivates people for better quality, and integrates the business arising out of a common purpose.
- All these provide the organisation with a valuable and distinctive competitive edge
- Technological advances – electronically detecting failures is now easy and inexpensive, and can be done earlier in the production process
- Competition has expanded beyond price – now includes delivery schedules, quality, service etc.
What are the reasons that TQM might fail
- Top management sees no reason for change.
- Top management is not concerned for its staff.
- Top management is not committed to the TQM programme.
- The company loses interest in the programme after six months.
- The workforce and the management do not agree on what needs to happen.
- Urgent problems intervene.
- TQM is imposed on the workforce, which does not inwardly accept it.
- No performance measure or targets are set, so progress cannot be measured.
- Processes are not analysed, systems are weak and procedures are not written down
Outline traditional cost control
- Comparison of actual results against a pre-set standard
- Identifying and analysing variances between actual and budgeted costs
- Taking action to ensure that future results are in line with the budget
Outline strategic cost management
- Cost management focuses on cost reduction, and continuous improvement and change (rather than just on cost containment).
- Strategic cost management (SCM) focuses on long-term cost management NOT just short-term cost reduction.
- Traditional management accounting has focused primarily on the manufacturing stage of a product’s life cycle
What is the value chain
- Sequence of activities that should contribute more to the ultimate value of the product than to its cost (CIMA)
- All products flow through the value chain
What are the parts of the cost life cycle
- R&D
- Design
- Manufacturing
- Marketing and Distribution
- Customer service
What are the objectives of the cost life cycle
- Focuses on the costs incurred over the whole life and not just the manufacturing process
- A lot of costs are locked in in the R&D stage and therefore it is material to include consideration for this step in product costing
- This is called Total-life-cycle costing (TLCC)
What are the three stages of the RD&E cycle
Market research
* Emerging customer needs are assessed, and ideas are generated for new products
Product design
* Scientists and engineers develop the technical aspects of products
Product development
* The company creates features critical to customer satisfaction and designs prototypes, production processes, and any special tooling required
What are committed or locked in costs
- Committed costs are those that a company knows it will have to incur at a future date
- These are those costs that have not yet been incurred but which, based on decisions that have already been made, will be incurred in the future (designed-in costs).
- It is difficult to alter or reduce costs that are already locked
What is target costing
Target costing focuses on managing costs during a product’s planning and design phase.
What are the stages of target costing
a. Determine the target price which customers will be prepared to pay for the product;
b. Deduct a target profit margin from the target price to determine the target cost;
c. Estimate the actual cost of the product;
d. If the estimated actual cost of the product exceeds the target cost, investigate ways of driving down the actual cost until it is equal to (or below) the target cost.
What to do if costs exceed target costs
If the estimated actual cost of making the product is higher than the target, then the company can make use of one of two techniques to drive the price down
1. Tear down costing
2. Value engineering
What is tear down costing
Tear-down analysis (or reverse engineering) involves the dismantling of a competitor’s product to identify its functionality (what functions it has), and to provide insights about the processes used to manufacture the product, and the cost to make the product.
What is value engineering
- Analyse trade-offs between product functionality (features) and total product cost
- Perform a consumer analysis during the design stage of the new or revised product to identify critical consumer preferences
What is functional analysis
Functional analysis involves breaking down a product into its many elements or attributes, e.g. in the case of cars, functions might consist of style, comfort, operability, reliability, quality, attractiveness and many others
What are the benefits of target costing
- Increased customer satisfaction (design is focused on customer value)
- Reduced costs (more effective and efficient design)
- Helps the firm achieve desired profitability on new and redesigned products
- Decreased total time required for product development through improved coordination of design, manufacturing, and marketing
- Increased communication and cooperation among departments
- Improved overall product quality
What is Just In Time
- A JIT system is intended to reduce non-value adding and long-run costs.
- A major reason for the early success of Japanese firms in international markets was their use of JIT production methods. The JIT approach involves a continuous commitment to the pursuit of excellence in all phases of manufacturing systems design and operations
What are the aims of JIT
- The aims of JIT are to produce the required items, at the required quality and in the required quantities, at the precise time they are required. Although these goals represent perfection and are not likely to be achieved in practice, they do represent targets and create a climate for continuous improvement and excellence.
- Throughput accounting is most appropriate to use in a just-in-time (JIT) environment because of the emphasis on throughput and inventory minimisation.
What are the goals of JIT
- Elimination of non-value-added activities
- Zero inventory
- Zero defects
- Batch sizes of one
- Zero breakdowns
- A 100% on-time delivery service
What is the theory of constraints
- The theory of constraints is a production system where the key financial concept is the maximisation of throughput while keeping conversion and investment costs to a minimum.
- TOC focuses on bottlenecks in the production process which act as a barrier to throughput maximisation. TOC focuses on improving speed at the constraints, to decrease overall cycle time
