Costing and pricing for the long run

Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5
th
Edition, Instructor’s Manual
© Pearson Education Limited 2012 categories. Most manufacturing firms have more categories. If the other five elements of the value chain each have three direct and indirect costs, then Astel has (3 + 3 = 6 costs/value-chain element) × (6 value-chain elements) = 36 cost categories to allocate to products. Traditional cost-accounting systems do not classify costs as VA or NVA. To obtain this information, management usually orders a special study. Management accountants can work closely with production and marketing to classify costs as VA or NVA. Students usually erroneously believe that employees candidly reveal information. However, employees are unlikely to forthrightly reveal information regarding VA/NVA activities. Employees sometimes tend to overestimate the proportion of their time spent on VA tasks, out of concern for job security. A large proportion of costs (often the majority of costs) are locked in by the design stage – see Exhibit 12.4. Target costing and value engineering help control costs before they are locked in – within the constraints of satisfying customer needs. Traditional cost accounting has not recognised the opportunity for this sort of ex ante cost control and has instead focused on ex
post
comparisons of costs actually incurred with planned or budgeted costs (e.g. variance analysis. Both kinds of cost control are important. However, in many cases there is greater potential for cost reduction in the design stage because (1) a large proportion of the costs are locked in at the design stage and (2) design has (historically) received less cost cutting attention than manufacturing (to use an agricultural analogy, you get the biggest potatoes in the first pass through the field. As mentioned earlier, management accountants have along history of providing data for controlling manufacturing costs in the design stage. This is one area where we expect future developments in cost accounting. This is a good opportunity to emphasise that the world is changing so fast that much of what students learn on their course will be outdated within 10 years. It is imperative that they keep abreast of new techniques and developments if they are to remain competent professionals. To achieve target costs, many companies use kaizen, a process of continuous improvement. For example, Hewlett–Packard cut costs of its DeskJet printers by 50% over a year period. In some companies, every worker makes suggestions for improvement. Much of the cost reduction occurs gradually via these many small improvements. Also, since DM are often significant cost manufacturers, often works closely with their suppliers to achieve target DM costs. For example, Toyota has sent its own engineers to help suppliers produce more efficiently – with the proviso that much of the cost saving is passed back to Toyota. To improve product quality, many manufacturers redesign their products to be more tolerant of minor variations in the production process. This is often more cost effective than striving for perfect-quality manufacturing within very tight tolerances. ABC makes explicit how product costs can be reduced by lowering the per unit usage of resources in each activity area. ABC therefore assists in cost management, in addition to providing more accurate product-cost data for pricing and product emphasis decisions.

Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5
th
Edition, Instructor’s Manual
© Pearson Education Limited 2012

Download 1.72 Mb.

Share with your friends: