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.
