Page 285 - DCOM206_COST_ACCOUNTING_II

Cost Accounting – II

Notes “inside-out” approach and argue the cost of the product cannot be established until the
final product is ready to be launched. In addition to greater understanding of target
costing, the authors urge for implementation in the initial stages of new product
development where modifications can be made cheaper and easier.
II. Team and Cross-Functional Barriers

The logic of target costing is easy to understand, yet a number of automakers continue to
use the prevailing cost-plus approach. This may be due in part to lack of understanding of
costs throughout the supply chain and not having tightly linked, communicating supply
chain partners. Workers will learn faster and better understand costs and the organisation
as a whole will adopt target costing as information flows faster and with a greater frequency
of reporting. Zsidisin, Ellram, and Ogden (2003) agree the ability for all individuals to
fully participate in cost management activities can lead to the development of valuable
knowledge. They urge, however, the process takes an extensive degree of time and
commitment. Target costing, implemented correctly, will engage all the key functions in
the organisation. They further assert the cross-functional teams formed between purchasing
and supplier organisations can help reduce supply chain costs. When using target costing
within the supply chain, the importance of trust and cooperation is crucial. Transferring
previous in-house functions to partners or outsourcing can be a risk due to the inability to
monitor or control the output of the desired function. When functions are performed at
the manufacturer’s plant, expectations and standards are communicated and understood,
but these communications are often lost when the function is transferred to one of the
partners in the chain. One way to control this problem is by the placement of one of the
manufacturer’s employees within the supplier’s plant to monitor and aid the activities of
the supplier.
III. Irrelevance or Fear of the Effects
For many automakers, target costing sounds like another buzz word or accounting term
with little relevance to manufacturing or marketing. Yet, the concept of target costing is
identical to the lean concepts implemented in manufacturing to reduce non-value added,
irrelevant activities that do not contribute to a new product’s value. These terms, in practice,
are attempting to reach a similar end. Quality, sole sourcing, and reducing wastes are part
of a life cycle of continuous improvement of which target costing is an important component.
On the fear side, cost setting negotiations must take place and often one or more groups
feel that they are shouldering too much of the cost reduction pressure, particularly smaller
partners with less power within the chain. Design changes and cost cutting measures may
even cause employees to fear for their jobs and work against the target costing process.
This is overcome through training and ongoing education about the process and its
importance and working to ensure job security as possible.
Question:
Discuss the various problems faced in Automotive Industry.
Source: http://www.mairec.org/IJRIM/June2012/2.pdf

14.8 Summary

 The unit discusses in detail the new concepts for decision making—Kaizen costing, Value
chain Analysis, Target costing and Life Cycle Costing.
 A strategic tool to measure the importance of the customer’s perceived value is value
chain analysis.

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