Developments in Costing and Strategic Approaches to Cost Management

Question 1

What is the traditional western philosophy regarding labour and manufacturing equipment?

Answer 1

Labour and manufacturing equipment should always be kept working and not idle.
If products are not needed immediately, they should be stored.
Production runs should be as long as possible.

Question 2

What is the downside of long production runs in traditional manufacturing?

Answer 2

Build-up of inventories.
Money and goods are wasted, hiding inefficiencies.
Inventories cope with inefficient and uneven production methods.

Question 3

What is the Theory of Constraints (TOC)?

Answer 3

Developed by Goldratt and Cox in 1986 (from The Goal).
Optimized production technology (OPT).
Profit increases by increasing throughput.
Focuses on managing bottlenecks.

Question 4

What are the 5 steps in managing bottlenecks according to TOC?

Answer 4

1. Identify the system’s bottlenecks.
2. Decide how to exploit the bottlenecks.
3. Subordinate everything to the decision.
4. Elevate the system’s bottlenecks.
5. Return to step 1.

Question 5

What are the three key measures in TOC?

Answer 5

1. Throughput contribution.
2. Investments (inventory).
3. Other operational expenses (total factory cost).

Question 6

What is Throughput Accounting (TA)?

Answer 6

Developed from TOC by Galloway and Waldron (1988/89).
Focuses on throughput, inventory minimization, and control.
Concerned with the rate at which a business generates profit.

Question 7

How is Throughput Contribution calculated?

Answer 7

Throughput Contribution = Sales - Direct Materials

Question 8

How does Throughput Accounting (TA) differ from Conventional Cost Accounting?

Answer 8

TA: Value is added when an item is sold; inventory is not an asset.
Conventional: Value is added when an item is produced; inventory is an asset.

Question 9

How is Return per factory hour calculated?

Answer 9

Return per factory hour = (Sales Revenue - Material Purchases) / (Time on key resources in hours)

Question 10

How is Cost per factory hour calculated?

Answer 10

Cost per factory hour = Total fixed costs / Total time available on key resource (hours)

Question 11

How is TA Ratio calculated?

Answer 11

TA Ratio = Return per factory hour / Cost per factory hour

Question 12

What are the focus areas for decision-making in Throughput Accounting (TA)?

Answer 12

Focus on return per hour.
Prioritize highest ratio products.
Short-term decisions with scarce resources.

Question 13

What are some features of the modern business environment?

Answer 13

Use of Advanced Manufacturing Technologies (AMT’s).
Global competition and focus on quality.
Just-in-Time (JIT) inventory and shorter product life-cycles.

Question 14

What is the difference between cost control and cost reduction?

Answer 14

Cost Control: Regulates and maintains operating costs within limits.
Cost Reduction: Planned approach to reducing current cost levels

Question 15

What is the main focus of Target Costing?

Answer 15

Planning, development, and design stages, focusing on cost reduction before production, with up to 90% of costs built in during the design stage.

Question 16

How does Target Costing set the selling price?

Answer 16

By referencing the market and determining what customers are willing to pay

Question 17

What process is involved in reducing the cost gap in Target Costing?

Answer 17

Tear-down analysis, reverse engineering, and value analysis/engineering

Question 18

What type of system is Target Costing?

Answer 18

A cost-pull system, in contrast to traditional cost-push systems like absorption costing and ABC

Question 19

In Standard Costing, how are costs determined?

Answer 19

A standard cost per unit is calculated, and a mark-up is added to determine the selling price.

Question 20

What is the key difference between Standard Costing and Target Costing?

Answer 20

Standard Costing is reactive and based on standard costs with mark-ups, while target costing is proactive and market-driven with continual cost reduction

Question 21

What is Life Cycle Costing (LCC) focused on?

Answer 21

Managing costs over the long term, including developing, making and maintaining a product.

Question 22

How does Life Cycle Costing (LCC) relate to cost reduction?

Answer 22

It involves managing costs throughout the entire life cycle of a product, including design, production, and post-production stages.

Question 23

What is the goal of Kaizen Costing?

Answer 23

Achieving small, incremental cost reductions through continuous improvements during the manufacturing stage

Question 24

What differentiates Kaizen Costing from Standard Costing?

Answer 24

Kaizen focuses on cost reduction with dynamic conditions and continual improvements, while standard costing focuses on cost control under static conditions.

Question 25

What is a concern regarding Target Costing?

Answer 25

Poor team collaboration and employee burnout, especially in Japan, and the potential for longer development times

Question 26

How are employees viewed in Kaizen Costing?

Answer 26

They are empowered to find solutions and are viewed as the source of improvements, unlike in standard costing, where they may be seen as causing problems.

Question 27

What strategic factor is considered in Target Costing?

Answer 27

Medium-term strategic plans, integrating the product concept and target profit margin with cost goals.

Question 28

How often are target costs revised in Target Costing?

Answer 28

Target costs are revised monthly for continual cost reduction

Question 29

What techniques are used in Standard Costing to control costs

Answer 29

Variance analysis (standard vs. actual costs), with investigations when standards are not met.