Exam (elaborations)
mn30469 in-class test: suggested answer: Cost Management Essay
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In a rapidly changing manufacturing environment, organisations need to adoptalternative cost management techniques to enhance their competitive
position.
With reference to your reading of the literature, critically appraise this
statement.
Your answer should include reference to Target Costing, Kaizen Costing and
Lifecycle
Costing.
ESSAY:
Intro:
In the recent modern dynamic business environment, cost as a competitive weapon
is declining in importance. Other dimensions of competitions which have become
increasing importance includes product innovation and reliability, new technology,
shortened time to market and flexibility of response to customer demand. In order to
support these, companies need new management mechanisms.
Cost management is the process of planning and controlling the budget of a
business. Many businesses employ cost management techniques in order to reduce
costs at design stage. While traditional techniques are routinely applied on a
continuous basis, cost management tends to be applied on an ad hoc basis, focuses
on continual improvement. Many of the approaches that fall within the area of cost
management do not rely exclusively on accounting techniques. Three of the most
popular techniques are Target Costing (TC), Kaizen Costing (KC) and Lifecycle
Costing (LCC). There are several perspectives on the applications of these methods.
Target Costing is a cost reduction exercise that involves setting a selling price by
reference to the market. Cost reduction must be considered during planning,
development, design stages as opposed to during production. Kaizen Costing is a
philosophy which highlights the importance of constant improvement - a
component of lean manufacturing. KC is applied during the manufacturing stage and
it aims to reduce non-value added activities and costs, eliminates waste and improve
production cycles times. Life Cycle Costing is the process of compiling all costs that
the owner of producer of an asset will incur over its lifespan. It is heavily used by
businesses that emphasise on long-term planning.
Body:
General: application:
The use of advanced management accounting techniques may provide firms an
opportunity to realise a competitive advantage. According to data collected from 165
New Zealand manufacturers, the advanced management accounting techniques are
associated with a wide range of uses (Alder, Everett and Waldron, 2000). TC and KC
are used for cost reduction, whereas, LCC is used for product profitability
improvement. LCC may also assist management in allocating resources to non-
production activities.
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