Page 286 - DCOM206_COST_ACCOUNTING_II

Unit 14: Emerging Concepts in Cost Management

 When a company wants to introduce a new product, it must determine the price to be Notes
charged based on products already on the market of similar function and quality.

 Target costing is a system under which a company plans in advance for the product price
points, product costs, and margins that it wants to achieve.
 The idea of a value chain was first suggested by Michael Porter (1985) to depict how
customer value accumulation along a chain of activities, that lead to an end product or
service.
 Kaizen Costing creates a dialog and respect for those whose task is to cut costs, which can
often be viewed as reactionary and not value adding.
 Life cycle costing as its name implies, costs the cost object i.e. product, project, etc. over its
projected life. It is used to describe a system that tracks and accumulates the costs and
revenues and attributes to cost object from its inception to its abandonment.

 Life cycle costing is different from traditional cost accounting system which report cost
object profitability on a calendar basis i.e. monthly, quarterly and annually. In contrast,
life cycle costing involves tracing cost and revenue on a product to product basis over
several calendar periods.

14.9 Keywords

Differentiation: It enhances profitability whenever the extra price the product commands
outweighs the added costs of achieving the differentiation.
Economies or Diseconomies of Scale: Economies of scale arise whenever activities can be
performed more cheaply in larger volumes than smaller volumes and from the ability to spread
out certain costs like R&D and advertising over a greater sales volume.
Kaizen Costing: It is a cost reduction system. Yashihuro Moden defines kaizen costing as “the
maintenance of present cost levels for products currently being manufactured via systematic
efforts to achieve the desired cost level.”
Life Cycle Costing: Life cycle costing as its name implies, costs the cost object i.e., product,
project, etc. over its projected life. It is used to describe a system that tracks and accumulates the
costs and revenues attributes to cost object from its inception to its abandonment.
Target Costing: Target costing is a market-driven design methodology and involves estimating
a cost for a product and then designing the product to match the cost.

Tooling: Tooling up for production can mean building a production line costing several lakhs of
rupees, building expensive jigs, buying special purpose machine tools or, in some other say,
making a very large investment.

Traditional Cost Accounting System: It which reports cost object profitability on a calendar
basis i.e. monthly, quarterly and annually.
Value Chain Analysis: The value chain can be described as the internal processes or activities a
company perform “to design, produce, market, deliver and support its product”.

14.10 Review Questions

1. Briefly describe the primary difference between a job-order cost system and a process cost
system.
2. What are the factors that led to the emergence of target costing system?

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