Page 264 - DMGT202_COST_AND_MANAGEMENT_ACCOUNTING

Unit 14: Introduction to Recent Development in Cost Management

element. Comparing those costs with current or projected costs (again, ABC helps substantially) Notes
you can discover which elements need the most attention in cost-reduction efforts – based on an
understanding of their relative importance to the customer.

Example: If 35% of the value to the customer is derived from a single feature, this feature
is allocated 35% of the cost of the product. Actual mapping of the product features to product
cost if a bit more complicated in practice but this is the basic point.

14.2.6 Finding Paths to the Targets
At this point, you have a clear idea of what the customers want and what they are willing to pay,
a target for the price, and cost targets for the signifi cant elements that are part of the product’s
cost structure. Frequently it becomes evident that the cost of the product will be too high to

sustain a healthy profit. In that case it is necessary to find ways to take cost out of the product

without sacrificing capability or quality.
In such case, a cross-functional team approach is best. It is best to use individuals from all
the stakeholder organizations – product management, marketing, sales, engineering, design,
manufacturing, installation, etc. It is also very benefi cial to include subject-matter experts from
outside the organizations directly involved in the specifi c product – they bring fresh ideas and
outlooks to the table. Such individuals could even come from suppliers. Once the business
needs and target-setting has been laid out before the team, we recommend that it use proper
brainstorming techniques to generate cost-reducing ideas. We also recommend that sub-teams,
each focused on a specific major product element, have separate brainstorming sessions.

At this point, for fairly complex products, we find that we typically have 100-150 cost-reducing
ideas. Then the sub-teams must evaluate the ideas – that is, eliminate redundant and clearly
infeasible ones, determine the cost impact of the remainder, and estimate how much incremental
effort (if any) it will take to implement them. This usually takes a few weeks. At the end of the
evaluation phase, the teams should report to the management their target-cost goals, the ideas to
close the cost gaps, and the plan to implement the ideas.

14.2.7 Maintaining Cost

Through the rest of the product-development phase the cross-functional teams are responsible for
implementing the cost-reduction ideas, and seeing that the product stays within its cost targets.
It is especially important to resist “feature creep” – the temptation to add incremental features to
the product. It is one thing if a customer wants a new feature and is willing to pay for it. But if it
is deemed necessary to add a feature without increasing the price, then the team has to accept the

challenge of finding further cost reductions in order to still achieve the target cost.

Task Analyse your most favourite products in the FMCG industry. What do you think
is the better way to go for their accounting and why?

Self Assessment

Fill in the blanks:
6. When you have determined the price for the time when the product will be sold, you can
set the ....................... .
7. Once you have established the high-level product requirements, the next step is to establish
the ....................... for the time at which the product is going to be ....................... .

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