Review of Cost Management Approaches - Assignment Example

Cost Management Approaches Name Course Lecturer Date Cost Management Approaches The work by Ferrara gives an inclusive view on the way Management Accounting benefits organizations and companies by outlining the changes that can be effected using different paradigms in the description. The first paradigm of the paradigms used is Paradigm A. this paradigm consists of the era between the 20th century and the 1940’s. During this era there was Industrial revolution. The era thus represented an early day’s image of industrial engineering. Consequently, the involved costs were manufacturing overhead, direct labor, , direct materials, and administrative costs and marketing. Joining these costs constituted a total cost for every unit of output. In different respects, marketing and administrative costs were excluded in the total costs, and instead, taken as the desired profit’s factor. Out of this, the product’s selling price for every unit, which was targeted, was generated by totaling the desired profit and the total cost (Ferrara, 1995 p.30-36). . Between 1940’s and 1980’s was the era for the second paradigm. What characterized this era was direct costing and the profit analysis based on cost-volume. The era came because of the distinction between variable and fixed costs. The labour requirements and the material’s engineering specifications were used to determine the variable costs for every unit for direct labour and direct materials. Therefore, the derivation of product’s variable cost for every unit was done using analytical techniques and engineering techniques, lead to the division of fixed cost that ought to be considered during the determination of volume activity by the derivation of the costs per-unit. In this way, the amount of variable costs was diminishing while the fixed costs’ amount was increasing (Ferrara, 1995 p.30-36). Between the late 1980’s and early 1990’s, there was the era of paradigm. During this era, there was the introduction of activity-based costing in which it was characterized by three aspects of variable manufacturing costs. These three elements include the variation of costs with product units, variation of costs with the complexity of product, and variation of costs with diversity of product The fourth paradigm came during 1990’s and beyond. This era was that of market driven standard, in other words target or allowable costs contrary to the standard costs driven by engineering. For desired profits to be achieved the standard cost that is market-driven and must be met in this case is the target or allowable cost. The 21st century paradigm is eventually believed by Ferrara as capable to take management accounting into a completely new era. In this case, there is the need to continuously improve the management accounting along the changing times. The best combination for determining the pricing strategies and product promotion is the utilization of activity-based costing in combination with paradigms C and D. this will create room for alternative cost structures (Ferrara, 1995). Besides, Ferrara asserts that with the combination of paradigms B and D, the role of the activity based costing in management accounting will be large in 21st century. Consequently, various cost management approaches are relevant at different life cycle stages of the product. Consequently, during the development and initial concept stage, it is the effective cost management approach is purchasing since it can act proactively and well to create cost targets. At this stage, technology sharing, quality function deployment and target pricing form the effective approaches that can help in cost reduction (Cousins, 2006). Following the entry of the service or product to the design and launching stage, the cost management approaches that come along include standardization, supplier integration, and design for manufacturing helps in providing the opportunity of using standard techniques and parts, cost savings and advantage volumes. Most companies base their competitive advantage to large extent on the abilities of the suppliers (Wadhwa et al. 2008 p.1373-1404). On the other hand, during the stage of service or product launch, the cost –reduction approaches adopted in purchasing include negotiation, volume leveraging, bidding, and value analysis. Finally, when the product comes to the end of its lifecycle, purchasing cannot disregard the prospective value emerging from the environmental initiatives, and advocating for remanufacturing, refurbishing, and recycling the programs that are edging towards becoming obsolete (Handfield and Nichols 2002 p.211). Along the different life cycle stages of a product or a service, when purchasing is employed early in the service development or new product cycle, the organization will receive great benefits from its efforts of cost-reduction. At the same time, when the manager ensures that the organization makes sourcing decisions early in the lifecycle of the product, it will be possible to consider the exact full effects of the sourcing decision over the life of the product . high quality services and products achieved with reliability and speed and produced at a low cost can only be possible through better supply chains (Shannon and Henri 2009 p.289-305). On the other hand, involving purchasing later in the development cycle of the product, implies that there will be a minimal impact realized from the cost-reduction effort since the major decisions concerning the choice of suppliers, the types of materials and labor rates have already been done. The organizations therefore, in future will be obliged to devise more effective cost reduction methods. For the purpose of this discussion, five of the many cost-reduction management approaches will be described and in the end, the most suitable cost management approach will be identified. Therefore, the five cost management approaches highlighted in this case as pertinent to the small and medium sized companies are value analysis, technology sharing, target pricing, volume leverage and supplier integration. Value analysis is one of the cost management approaches that play a significant role in cost reduction. The operation of value analysis in cost reduction strategies is like that of a catalyst. Value analysis is comparable to performance analysis. Therefore, while we analyze performance in order to know more about it and hence improve it, we can also do the same with value analysis. In value analysis, the key focus is that of managing functionality of the product in order to ensure that the customer obtains value from the product. For instance if the customers of the small and medium sized companies that produce electric kettles get a variety of unique types of boiling devices that are metal faced, it is clear that to these customers, the value of the kettle is determined by the kettle’s ability to boil water. The functionality in this case can be obtained based on safety, temperature, reliability, and capacity. With the same functionality of heating water in mind, the designers, in a bid to save cost, would opt to plastic kettles knowing that by retaining the same functionality in the kettles, the value of the kettle would have not been impaired in any way. Therefore, small and medium sized companies can encourage their designers to bring designs in their products, which can reduce cost of production without affecting the value (Hitt et al. 2010, p.833). Technology sharing as a cost management approach for cost reduction plays a significant role. Consequently, the essence of small and medium sized companies’ project management is knowledge sharing. The projects in the small and medium sized companies, with technology sharing can set their bases principally from scratch. The incorporation of the modern latest technology is thus very suitable in this case. Completely new designs can also be set up, but without restricting the development team. At the same time, the concurrent technology transfer allows a new project established by the companies to make use of a platform in the preceding project upon the preceding project completing its design work. An increasingly valuable strategic tool in cost management is technology outsourcing (Cha and Pingry 2008, p.281-306). On the other hand, sequential technology transfer allows a project to inherit a platform from a preceding project that has accomplished its design work. This implies that an already existing platform is used by the second project. Finally, concerning technology transfer, design modification involves the replacement of an existing product by a project without the borrowing of a platform or creation of a new platform. In essence, design modification just reuses or inherits the platform from preceding model with some minor changes, if any. Studies reveal that compared with grass root projects, add-on projects have better cost management performance (Zou and Lee 2008 p.387-393). Target pricing or target costing on the other hand, came into being when costs and markets were recognized as two important characteristics of cost management. The reason for this was the fact that the control over the prices of their products in different companies is very limited while the same companies had wished to control the prices. This is because, the supply and demand, in other words, the market forces does much of the determination of the prices. The expected market price in this case comes from target costing. Another reason is that the design stage dominates the determination of the cost of the good or product. This means that little will be achieved in trying to significantly reduce the cost of the product at the point when the design of the product has been completed and the product has been taken to the production unit. Therefore, most of the chances of reducing cost emanates from the design stage of the product in which the design is made in such a way that as simple as possible, inexpensive materials are utilized and the product is made to be reliable and robust (Taylor and Brunt, 2001 p.197). It is thus a common understanding that, given the limitation of the companies to exercise their control over either the market price of the product or the cost after the product has entered the production unit, they will opt to capitalize on the design stage. In this case, they will use all efforts to ensure that the consumers are enticed to buy their products through the addition of valuable features at the design stage to the same products, which will make them more competitive. In target costing therefore, it is quite distinct from other cost management approaches since the target cost is set for the product first so that while the product is being designed, it is ensured that the target cost is met. In volume leveraging, it goes that by having knowledge on the total purchase expenditure, using commodity families to classify expenditure and bringing together the needs purchase volume leveraging, the company will have employed a simple but efficient cost reduction approach. The use of volume leveraging is an uncomplicated strategy goes hand in hand with commodity strategy development of process of the company or organization. In this case, a commodity refers to the general family or category of purchased products or services. Consequently, the purchasing strategies are formed and implemented for products and services that belong to the same family, classification, or category. There are different examples of important commodity classifications that can be traced across the various industries. These include the automotive for body side moldings, computer for microprocessors, metalworking for steel, apparel for cotton, pulp, and paper for wood and chemicals for petroleum products. In order to make sourcing strategy decisions, companies in most cases, make use of commodity teams that constitute the personnel from product design, operations, purchasing, marketing , process engineering and finance. It is therefore, a responsibility of the personnel involve in this case to demonstrate familiarity with the commodity that is under evaluation. If the commodity team is tasked, for instance, with purchasing computer appliances, it would be prudent to include experts from the information systems in the evaluation. On the other hand, if the commodity team is charged with purchasing of vehicle parts and vehicles, it will be thoughtful to engage the maintenance managers who are familiar with the same commodities in the evaluation process. This means that the commodity that is more valuable call for intensive cross- functional involvement during the sourcing of decision. In supplier integration, the suppliers and the procurement team in the company can have a chance to give views in manufacturing processes and methods and new technologies to the product if they are involved early in the product lifecycle. Their views at this stage will add competitive advantage and joint value while the product design has not been locked down. Besides, the participation of procurement in the product design will also advance the initiatives that would help in meeting and beating the target cost models, apart from ensuring that adequate supply quantity and quality is put in place to aid the proposed designs at leveraging volumes. Responding to the ever changing business settings requires the supply management chain to be effective What ought to be established during the early stages of the development process of the product is the kind of relationships between the suppliers, manufacturers and customers. Apart from the establishment of the nature of these relationships, the making of the critical decisions on the product’s functionality for the consumer, logistical channels, packaging process technology, source of materials and selection of products also take place. If the small and medium sized companies employ supplier integration at the early stages in the development process of the product, it has been obtained that different the company would realize benefits. The examples of these benefits realized by the companies from supplier integration are many. Consequently, because of supplier integration there would be the reduction of material costs of the new product by almost eighteen percent. The improvement of the access to more reliable and stable supply and innovation in the new products and the improvement in product costing accuracy also form some of the benefits of supplier integration. Finally, arising from supplier integration will be the increase in the quality of the initial product by more than twenty percent, and a ten to twenty percent reduction in the new product’s time-to-market cycles, which allows companies to win higher profit margins and greater market share for its privilege of becoming an early mover. Owing to the many benefits from supplier integration, different lessons have been directed to the managers of the small and medium sized companies. The first lesson is that prior to the commencement of the project, the managers are advised to carry out an intensive assessment of the supplier to ensure that the effectiveness of their project team is enhanced. Secondly, the managers are called upon to ensure that the suppliers are involved in the setting of technical goals so that the organization realizes a project that is smoother with realistic targets and expectations. On the other hand, the managers should be made to understand that there is no effect seen when the suppliers will have on the effectiveness of the project team if they are involved in the setting up of business goals. This means that the input of suppliers on technical issues of the organization is more significant than their input on business issues. Besides, another lesson for the managers is that the quality of product design is improved by a greater effectiveness of New Product Development team. Apart from influencing the product’s design quality, a greater New Product Development Team is the key to an improved financial performance of the organization In addition, the manager should learn that the involvement of the supplier in the technical assessment of the project requires timing. In this case, between the early-stage involvement and the late stage development, the appropriate time to integrate supplier efforts in the project assessment is the early-stage. Lastly, the managers ought to learn the degree to which the suppliers execute their responsibility. In this case, for effective decision-making, the suppliers held with greater responsibility during the product design efforts should also contributed their efforts in the technical assessment of the project. In conclusion, therefore, the discussion reveals that, with proper implementation of each of the cost management approaches, the small-to- medium sized manufacturing company will be in a better position in reducing cost if it employs the supplier integration approach. However, the combination of the different approaches with activity-based costing as a result is the ideal approach for the small to medium sized companies (Ferrara, 1995 p.30-36). References: Andreas, H., Sebastian, L., & Anja, K. (2011). Cost Transparency in Supply Chains: Demystification of the Cooperation Tenet. Schmalenbach Business Review (SBR). 2011, 63 (3): 230-251 Cha, H. and Pingry, D. (2008). Managing The Knowledge Supply Chain: An Organizational Learning Model of Information Technology Offshore Outsourcing. MIS Quarterly, 2008, 32 (2): 281-306 Cousins P. (2006).Supply chain management theory and practice: the emergence of an academic discipline?. Emerald Group Publishing. Ferrara, W.L. (1995). Cost/Management Accounting: The Twenty-first Century Paradigm, Management Accounting (December 1995), pp. 30-36. New York, NY: John Wiley and Sons. Handfield R.B. and Nichols E.L. (2002). Supply chain redesign: transforming supply chains into integrated value systems. FT Press. Hitt M., Ireland D. and Hoskisson R.E. (2010). Strategic Management: Competitiveness & Globalization, Concepts. New York, NY: Cengage Learning. Shannon W., Henri C. (2009). Strategic Cost Management in Supply Chains. Accounting Horizons, 2009, 23 (3): 289-305 Taylor, D. and Brunt, D. (2001). Manufacturing operations and supply chain management: the lean approach. New York, NY: Cengage Learning EMEA. Wadhwa, S., Saxena, A., & Chan, F. (2008). Framework for flexibility in dynamic supply chain management. International Journal of Production Research. 2008, 46 (6): 1373-1404 Zou, Y. and Lee, S. (2008). The impacts of change management practices on project change cost performance. Construction Management & Economics. 2008, 26 (4):387-393 Read More