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International Management Accounting - Case Study Example

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Summary
Select TWO techniques and using e-journals find two companies for each technique, and explain and analyse how the techniques was employed by the business, and discuss any problems were experienced with own thoughts and criticisms.
Target costing is a pricing method, defined as "a cost management tool for reducing the overall cost of a product over its entire life-cycle with the help of production, engineering, research and design"…
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International Management Accounting
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Extract of sample "International Management Accounting"

International Management Accounting To critically evaluate 4 real companies have used any two of the following techniques: Target costing Kaizen costing
Throughput accounting
Benchmarking
Business process re-engineering
Select TWO techniques and using e-journals find two companies for each technique, and explain and analyse how the techniques was employed by the business, and discuss any problems were experienced with own thoughts and criticisms.
Solution
Target costing:
Target costing is a pricing method, defined as "a cost management tool for reducing the overall cost of a product over its entire life-cycle with the help of production, engineering, research and design". A target cost is the maximum amount of cost that can be incurred on a product and with it the firm can still earn the required profit margin from that product at a particular selling price.
Japanese companies have developed target costing as a response to the problem of controlling and reducing costs over the product life cycle.
Source: http://en.wikipedia.org/wiki/Target_costing
Toyota Co
Reasons for adopting target costing
Toyota uses cost planning to generally reduce costs at the design stage. By using this technique, Toyota sets goals for cost reduction, and then tries to achieve these new targets through design changes that will accomplish the cost reduction goal. Toyota goes through a vigorous testing phase to judge the costs of the new design in comparison with the old one, in order to guarantee a cost reduction after implementation of the new technique. This is the main idea that Toyota uses to achieve their company wide goals.
Product planning
Toyota Co made changes to existing automobiles and not the design of new ones.There are several steps in the sequence of price, production, and cost decisions.Toyota first decides what the new retail price of the automobile is going to be by taking the old price and adding the value of any new functions.The sales division comes up with the suggested production volume, by taking past numbers and indexing them to market trends and the state of competitors.After all these figures have been set, the focus switches to cost planning.This cost plan is based on the product plan and the targets for retail price and production volume.Toyota establishes a profit target that is subtracted to determine their target cost. These cost planning decisions are made three years before they release the model.
Estimating Differential Costs
When Toyota estimates the approximate costs of a new model it does not simply add up all the costs of the upgraded model, but instead it sums the cost variations of the new model and the old one.Toyota finds this technique to be very beneficial, because it tends to be less work and provides more accurate results. In addition it helps the specific divisions comprehend the cost fluctuations.By using this technique Toyota removes variable costs both models incur, such as wages and indirect costs, and then they can base their decisions only on costs that change between the two models in relation to design and production volume.
Promoting Cost Planning
"The purpose of cost planning is to determine the amount by which costs can be reduced through better design of the new model."Cost reduction targets are not rationed off to the appropriate divisions by using a standard percentage to spread the reduction evenly over the entire process, but instead the reduction is efficiently passed to each division based on their capability.This capability is determined by the cost manager meeting with each division manager to agree on an appropriate cost reduction for that specific division, and then it is the responsibility of each division to carryout those reductions their own way.
Conclusion
The main point in this article is to show how cost planning at Toyota is focused on the design phase.Toyota does this by setting goals for cost reductions through design changes solely, excluding all other factors.Toyota takes these goals and then assesses them to different divisions, to make the necessary changes.Toyota believes that by changing product design and production design to produce lower priced and more efficient products, they will achieve a higher level of profitability.
Source: http://maaw.info/ArticleSummaries/ArtSumTanaka93.htm
Kaizen costing and Target costing in Toyota
Toyota uses both target and kaizen costing to maintain its strong competitive position. Cost planning at Toyota is mainly an effort to reduce cost at design stage. Toyota sets goals for cost reduction and then seeks to achieve those goals through design changes. To correctly assess the gains made, the exact amount of cost reduction is measured. Setting goals and assessing the results based on cost differences between old and new models constitute the essence of cost control at Toyota.
Toyota has also achieved a significant cost reduction through redesigning production process, e.g. over a five year period, Toyota reduced set up time for its 800 ton stamping presses from more than one hour to under 12 minutes. Time savings such as this significantly reduces cost.
In addition to the cost savings realised on the design phase, Toyota aggressively pursues kaizen costing to reduce costs in the manufacturing phase. In July and January, plant managers submit 6 month plans for attaining their kaizen goals. Methods for achieving these goals include cutting material costs per unit and improvements in standard operating procedures. These are pursued based on employee suggestions. For improvements involving industrial engineering or value engineering, employees often receive support from the technical staff. To draw up a kaizen plan after kaizen goals have been set up by top management, employees look for ways to contribute to kaizen in their daily work. About two million suggestions were received from Toyota employees in one recent year alone (roughly 35 suggestions per employee). Ninety seven % of them were adopted. This is also a prime eg of the concept of employee empowerment, in which workers are encouraged to take their own initiative to improve operations, reduce costs and improveproduct quality and customer service.
In India, Kaizen costing has been adopted by
ICICI bank
Taj group of hotels
Patel on board courier
BHEL
Trichy
Vivekananda hospital
Raymonds ltd
Britannia industries
Asian paints etc. Read More
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