Week 6 - Just-In-Time, Target and Kaizan costing, and value chain Flashcards
Define value chain and aspects of value chain analysis.
Value chain - the process or activities by which a company adds value to an article
Aims to improve the ration of value adding to non value adding activities.
Aims to improve communication and relationships within the value chain.
Name the strategic cost reduction methods discussed in the topic.
Just in time costing
Target costing
Kaizen costing
Life cycle costing
Discuss just in time costing.
Materials and resources delivers in the production process as needed.
With close cooperation, inventory levels can be managed to reduce quantitative costs eg: insurance and storage and the qualitative costs of quality changes and timeliness of delivery.
Requires suppliers be:
Reliable
small in number
capable of accurate and reliable logistics
Discuss target costing
Sets a limit on the value of resources allowed to be used
Variables of production, engineering & reverse engineering, R&D are changed to stay within the cost threshold
Occurs before a production cycle.
Discuss Kaizen costing
Confronts costs in an iterative manner with new targets set at the end of each production cycle.
Similar to target costing, other variables are worked to stay under the threshold:
- Process improvments
- Supplier savings
- Team based operations
- Bottom up ideas
- Trade offs between cost / quality / price
- Continuous improvement.
Discuss profitability analysis
Treats the customer as a cost object to reveal insights for improving organisational performance.
For many organisations, a relatively small number of customers or clients will generate most of the profitability, recognising this allow decisions to be made to maximise this.
• Profitability is a function of 2 aspects:
o The buying of profitable products and/or services.
o The consumption of resources (costs) in the sales/service delivery process.
Discuss life cycle costing
A decision making method that considers changes in price and costs over the entire life cycle of a good or service, from the time the product is introduced through a number of years
- Used where we anticipate anticipate that a combination of continued sales volumes and cost reductions over time will lead to profits in the long term and;
- Products that may not be profitable when the costs of decommissioning the operation are included as part of total product costs,
Discuss different methods of determining prices.
Cost-based prices
Selling prices determined by adding a mark-up to some calculation of the product’s cost
Market-based pricing
Prices selling prices determined using some measure of customer demand; what customers are willing to pay or what competitors are charging.
Market based pricing allows an org to work toward maximsiing profit. Discuss price elasticity and the idea of a profit maximising price..
Price elasticity of demand is the sensitivity of sales to price increases
• Elastic demand – where changes in price have a substantial effect on sales.
• Inelastic demand – where changes in price have little effect on sales.
Calculating the elasticity allows us to determine an estimate of price providing maximum profit.
What 3 phenomena are responsible for revenue variance ie the difference between budgeted and actual revenues.
.
• The market size variance -unexpected changes in market size
• Market share variance - changes in the market share.
• Product mix variance - selling in a different mix from the planned mix of products.
Suggest situations where target and kaizen costing are most appropriate:
- Product development and design phases are long and complex.
- The production process is complex.
- The market is willing to pay for differences in quality or function.
- The manufacturer can push some cost reductions onto suppliers and subcontractors.
- The manufacturer can influence the design of subparts.
List the stages of target costing
Target costing process:
- Determine target price
- Determine target cost
- Design the product
- Pilot scheme to confirm
- Make the production decision
List common advantages and disadvantages of target & kaizen costing.
Common Advantages:
• use of goal setting encourages better performance
• team approach motivates employee cooperation
• allows a competitive price advantage for a short period of time.
Common Disadvantages:
• stress of cost reduction environment can impair employee wellbeing
• encourages organisations to forego some products having long term profit potential that are not profitable in the beginning.
