Lecture 6 - Strategic cost management Flashcards
Traditional management accounting control systems
Applied on a routine basis
Emphasis on cost containment rather than cost reduction
Focus on comparing actuals against pre-set standards, identifying variances and taking remedial action
Strategic cost management
Focus on cost reduction, added value and continuous improvement
Applied n an ad hoc basis when an opportunity for cost reduction arises
Do not necessarily involve accounting techniques
Process improvements on efficiency, quality, cost reduction
Cost management techniques
Life cycle costing
Just in time systems
ABC management
Taget costing
The value chain
Benchmarking
Life cycle costing
Focusing on costs over the products entire life cycle rather than just manufacturing stage
Aim is to see whether profits earned in manufacturing stage will cover all costs pre and post manufacturing
Example of life cycle costing
A car
4 stages
pre production: Research, design, engineering research
Production
Post sales: Advertising, warranty, customer care
Abandonment: Factory closure, Labour costs, disposal costs
Target costing
Focuses on managing costs during a products planning and design phase
4 stages
1. Determine the target price which customers will be prepared to pay for the product
2. Deduct a target profit margin from target price to determine target cost
3. Estimate actual cost of the product
4. If estimated actual cost exceeds the target cost investigate ways of driving down the actual cost to target cost
Target costing in practice
Involves team work givers through to management accounting personnel to concentrate on function ad required quality
Must be supported by An accurate costing system using appropriate cause and effect cost drivers
Activity based management
Identifying the major activities that take place in an organisation
assigning costs to cost pool for each activity
Determining the cost driver for each activity
Kaizen costing
Making small incremental improvements in the manufacturing stage
Aiming to reduce costs of processes by a pre specified amount relying on employee empowerment
Examples of kaizen costing
British cycling
Toyota manufacturing
Just in time systems
Philosophy of management dedicated to the elimination of waste
What does JIT systems seek to achieve?
Elimination of non value added activities
Zero inventory
Batch sizes of one
100% on time delivery service
Just in time system in practice
Change from batch production to cellular flow lines of dissimilar machines
Production does not begin until required
Material movements minimised
JIT purchasing arrangements are more frequent deliveries of materials and arrival immediately precedes use
Total quality management
Managing quality with the aim of zero defects
All business functions are involved in a process of continuous quality improvement with non financial measures playing a key role
E.g booking.com
The value chain
Value chain is the linked set of value creating activities from supplier to customer
objective is to perform value chain activities more efficiently and at a lower cost than competitors
