Week 6 Everything

Question 1

How companies price a product or service ultimately depends

Answer 1

on the demand and supply for it

Question 2

Three influences on demand and supply:

Answer 2

customers

competitors

costs

Question 3

Market-based

Answer 3

Price charged is based on what customers want and how competitors react

Question 4

Cost-based

Answer 4

Price charged is based on what it costs to produce, coupled with the ability to recoup the costs and still achieve a required rate of return

Question 5

Market-based pricing starts with a target price:

Answer 5

Estimated price for a product or service that potential customers will pay. It is estimated on customers’ perceived value for a product or service and how competitors will price competing products or services.

Question 6

Implementing target pricing and target costing:

Answer 6

Planning and concept design

Choose a planned sales volume and target price

Derive a target cost per unit
= planned selling price - required profit

Breakdown and analyse the costs

Apply value engineering to achieve target cost

Question 7

A company requires a return of 12% in the coming year on its investment of $1,000,000 in product ‘Jocky’. The selling price of product ‘Jocky’ is set at $52.00 for each unit, and sales for the coming year are expected to reach 5,000 units. What is the target cost for each unit for the coming year?

Answer 7

Sales Revenue, 5000*52
=260000

Return on investment required
1000000*12%
=120000

Total cost allowed
=140000

Target cost per unit
140000/5000
=

$28

Question 8

Planning and concept design:

Answer 8

Fix the product concept and the primary specifications for performance and design. The planned product must satisfy the needs of potential customers. E.g., A small, town car for two people with a large amount of luggage easily-accessible luggage space and low fuel consumption – aimed at those in their mid-twenties and so style is important.

Question 9

Illustration of breakdown and analysis of target cost

Answer 9

10/4/19

Question 10

Value analysis / Value engineering

Answer 10

“Value analysis / Value engineering is an activity which helps to design products which meet customer needs at a lower cost while assuming the required standard of quality and reliability” (CIMA).

Question 11

Value engineering

Answer 11

Value engineering is “the redesign of an activity, product, or service so that value to the customer is enhanced while costs are reduced or at least increased by less than the resulting price increase. It involves a systematic evaluation of all aspects of the value-chain. Managers must distinguish value-added activities and costs from non-value-added activities and costs.

Question 12

Value-added costs

Answer 12

A cost that, if eliminated, would reduce the actual or perceived value or utility (usefulness) customers obtain from using the product or service. Examples as applicable to Hellovalue: Adequate memory, Pre-loaded software, Easy-to-use keyboards, etc.

Question 13

Non-value-added costs

Answer 13

A cost that, if eliminated, would not reduce the actual or perceived value or utility customers obtain from using the product or service. It is a cost the customer is unwilling to pay for. E.g., Cost of machine breakdowns, cost of rework or repair, etc.

Question 14

Method of value analysis (1/2)

Answer 14

Determine the function of the product and each component that is used within the product

Determine the existing costs associated with individual components.

Develop alternative solutions to the needs met by the components. This may involve design changes, manufacturing methods, materials used, among others.

Ask questions:

Question 15

Ask questions:

Answer 15

How does this component contribute to the value of the product?

How much does it cost?

Are all features and specifications absolutely necessary?

Is there another similar part that may be used?

Can an alternative part be used?

Will an alternative design perform the same function?

Question 16

Method of value analysis (2/2)

Answer 16

Evaluate the alternatives and their anticipated effect/

Implement the recommendations.

Question 17

Target costing and target pricing is widely used among different industries in different countries:

Answer 17

National Health Service (NHS) in United Kingdom.

Mercedes, Toyota, Nissan, and Daihatsu in the car industry.

Panasonic and Sharp in the electronics industry.

Apple, Compaq (Now part of HP) and Toshiba in the personal computer market.

Question 18

Cost incurrence

Answer 18

Cost incurrence describes a resource consumed (or benefit foregone) to meet a specific objective.

Question 19

locked-in costs

Answer 19

Locked-in costs (designed-in costs) are costs that have not yet been incurred but, based on decisions that have already been made, will be incurred in the future.

Question 20

Cost incurrence and locked-in costs

Answer 20

To manage activities (costs) well, a company must identify how design choices lock in costs before the costs are incurred. For e.g., scrap and rework costs incurred during manufacturing are often locked in much earlier by faulty design.

Question 21

Value chain analysis and cross-functional teams

There are five key aspects to the target pricing, target costing, and value-engineering process:

Answer 21

understanding customer requirements and competitor actions

selecting a target price and determining a target cost

anticipating how costs are locked in before they are incurred

improving product and process designs and efficiency to achieve target costs and better quality

using cross-functional teams to coordinate actions that need to be taken throughout the value chain.

Question 22

To achieve target costing objectives, target-costing efforts should always:

Answer 22

Encourage employee participation and celebrate small improvements towards achieving the target

Focus on the customer

Pay attention to schedules,

Set cost-cutting targets for all value-chain functions to encourage a culture of teamwork and cooperation.

Question 23

If it is not properly managed, value engineering and target costing can have undesirable effects:

Answer 23

Employees may feel frustrated if they fail to attain targets.

A cross-functional team may add too many features just to accommodate the wishes of team members.

A product may be in development for a long time as alternative designs are repeatedly evaluated.

Organisational conflicts may develop as the burden of cutting costs falls unequally on different business functions in the firm’s value chain.

Question 24

The product life cycle

Answer 24

10/4/19

Question 25

Life-cycle product budgeting and costing

Answer 25

Product life cycle spans the time from initial R&D on a product to when customer service and support are no long offered on that product. For car companies, the product life-cycle for different models may range from 12-15 years. For mobile phone manufacturers, the product life-cycle for different models may range from 3-5 years.

Question 26

The sales part of the product life cycle has four stages:

Answer 26

When a product is introduced to the market

When sales grow

When sales stabilize as the product matures

When sales decline as the product loses acceptance in the market.

Question 27

Life-cycle budgeting

Answer 27

Life-cycle budgeting involves estimating the revenues and business function costs of the value chain attributable to each product from its initial R&D to its final customer service and support.

Question 28

Life-cycle costing

Answer 28

Life-cycle costing tracks and accumulates business function costs of the value chain attributable to each product from initial R&D to final customer service and support.

Question 29

Budgeted life-cycle costs can provide useful information for pricing decisions.

Answer 29

For e.g., companies may realize that non-production costs (such as design and R&D) are large.

Question 30

Life cycle costs (1/2)

Answer 30

Research & development costs

cost of purchasing any technical data

Training costs

Production costs

Question 31

Research & development costs

Answer 31

Design costs

Cost of making a prototype

Testing costs

Production process and equipment: development and investment

Question 32

cost of purchasing any technical data

Answer 32

The cost of purchasing any technical data required (for example purchasing the right from another organisation to use a patent)

Question 33

Training costs

Answer 33

Training costs (including initial operator training and skills updating)

Question 34

Production costs

Answer 34

Production costs, when the product is eventually launched in the market

Question 35

Life cycle costs (2/2)

Answer 35

Distribution costs

Marketing and advertising costs

Inventory costs

Retirement and disposal costs.

Question 36

Distribution costs

Answer 36

Transportation and handling costs

Question 37

Marketing and advertising costs

Answer 37

– Customer service
– Field maintenance
– Brand promotion

Question 38

Inventory costs

Answer 38

(holding spare parts, warehousing and so on)

Question 39

Retirement and disposal costs.

Answer 39

Costs occurring at the end of a product’s life. These may include the costs of cleaning up a contaminated site

Question 40

Customer life-cycle costing

Answer 40

Customer life-cycle costs focus on the total costs incurred by a customer to:

acquire a product or service

use a product or service

maintain a product or service,

dispose of a product or service.

Question 41

For example: The customer life-cycle cost for a car include:

Answer 41

Cost of the car (+) Cost of operating and maintaining the car (–) Disposal value of the car

Question 42

Traditional cost accumulation systems

Answer 42

Traditional cost accumulation systems are based on the financial accounting year and tend to dissect a product’s life cycle into a series of 12-month periods. This means that traditional management accounting systems do not accumulate costs over a product’s entire life cycle and do not therefore assess a product’s profitability over its entire life. Instead they do it on a periodic basis.

Question 43

Life cycle costing

Answer 43

Life cycle costing, on the other hand, tracks and accumulates actual costs and revenues attributable to each product over the entire product life cycle. Hence the total profitability of any given product can be determined

Question 44

How to maximise return over the product life cycle

Answer 44

1. Design costs out of products
2. Minimise the time to market
3. Minimise breakeven time (BET)
4. Maximise the length of the life span