Page 275 - DCOM206_COST_ACCOUNTING_II

Cost Accounting – II

Notes Therefore, the question is what suppliers can do to continuously lower prices. They can, of
course, cut prices by cutting profit margins or by lowering costs. Stockholders, however, are
unlikely to want to cut profit margins. Instead they want higher profits, higher dividends and a
more attractive stock. So in addition to demands for a decrease in costs, suppliers are also
confronted with stockholders’ demands for greater profit.
Because of this, the challenge facing suppliers is to get better results at lower costs to enable
price cuts and higher profit. There are numerous possibilities here. These include the introduction
of new technology, organisational changes, competence development, marketing measures,
product development, logistics, costs, etc. Realising all these possibilities requires sound
methodology and knowledge of how to implement them because changes don’t always produce
the results that were envisioned.

In concrete terms, there is already a product, a customer, an agreement, and an infrastructure
related to the component that the supplier makes its living from. How then is the supplier to
realise the required cost trend without changing anything? It’s not certain that the detailed
specification that forms the basis for the supplier’s component cannot be altered despite the
demand for price cuts. A major complication arises; the supplier should lower costs without
changing the conditions.
Let us look at how product costs build up throughout the lifecycle. According to experts, as much
as 80% of lifecycle costs are determined when production begins. Therefore, Kaizen Costing can
be a suitable method for achieving cost reductions.

Figure 14.4: Product Life Cycle

14.6.1 Kaizen Estimates in Practice

When planning, a cost target is set and a gap occurs. Then it’s a matter of trying to establish why
the goal was set and what the possibilities are of reaching the target. Major cost reductions can
be broken down into smaller reductions and form their own activities where they are easier to
handle. The activity is planned for a particular day when the change should be made and the new
cost applies. Individual activities have a status in that the activity is either initiated, preliminary,
final, verified, or rejected. Each activity bears its own investment and contribution according to
an investment estimate. The activity does not commence until the investment estimate has been
approved and resources with the appropriate competence have been allocated and planned.

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