Target Costing

 It is not very difficult to understand the meaning of the target costing. As a layman, we can easily guess what the target costing is? So far as the meaning of target costing, it is a cost  where target is already set . But it’s not sufficient enough for it. We need to dig down even more deeply.

It was originated in Japan in late 1960s and remained secret for many years. But later in 1980s, it was started gaining popularity among the Japanese companies. And gradually, it then found the way to western countries. Since then many large companies adopted the target costing method and enhanced their cost and management system.

Akio Morita is the first person who has been credited with pioneering this cost approach when he led the development of Walkman as portable, pocket able and affordable musical gadget.

 Target costing is actually based on a philosophy that what customer wants and how much he is willing to pay for. Therefore, the price of the product is found from the market and then deducts the desired profit margin out from it and arrives at the target cost. For example Rattan Tata’s NANO for which a initial price was fixed Rs. 1, 00,000. Then the engineers were worked back on this targeted cost and launched the dream car NANO. It is a “price-led costing” called by Peter Drucker.

Target cost = target price (price customer willing to pay for) - profit margin

Above it was understood that what target costing is. But the real question is that how it is developed? Basically, there are some steps involved in developing the target cost. Here we go,

·         customer requirements

·         product planning

·         Concept design

·         Basic design

·         Detailed design

·         Manufacturing preparation

Customer requirements: At this first step, we try to find out the perception of the customer for the product characteristics and his expectations about the quality, price, performance and technology of the product.

Product Planning: At this step, we try to discover and plan that how the product is marketed, manufactured and what would be the primary performance specifications. We also plan that what would be the cost target, profitability, and volume of the product.

Concept design: At this stage, we design the basic concept of the product and assign the cost targets accordingly. We also evaluate whether the basic concept of the product which has been drawn fit the cost target or not.

Basic design: At this step, we construct the general design of the product keeping in mind the cost targets and evaluate whether this general design is fit with the cost target or not on the basis of some rough cost estimation.

Detailed design: At this step, we would move little bit manufacturing specification of the product on the basis of above concept design and basic design. The emphasis is given for the most to the cost targets. Then the drawing of manufacturing specification comes under its way.

Manufacturing preparation: At this final stage, we design the manufacturing system for the product which include tools, production methods to be adopted and processes for the product while cost targets are kept in mind and compared at every bit of additional workings.

Therefore, the target costing is a new way of understanding the customer demands and translates them into products. It has opened new doors for manufacturing companies to combat the competitiveness. Not even companies, but also customers are getting the products according to their specification that they really looking for. Thus,  Target costing has left the traditional method of manufacturing far behind.

Kaizen Costing (Kai-change, Zen-better; Change for better)

It is said that “Nothing is perfect, so chances of improvement in every system are desirable”. This is how the concept of CONTINOUS IMPROVEMENT pioneered. Now the question is what the continuous improvement is all about? A continuous improvement is a system where a management put his continual effort to reduce the cost of the products. Under this, they simplify the design of the products and processes, eliminate the wastage, and improve the quality and performance of the activities .although they must be adhering to the satisfaction of the customers. Then later on, it was identified by the Japanese manufacturer, two approaches of continuous improvement, i.e. KAIZEN COSTING and TARGET COSTING.

Linguistically, kaizen is a Japanese word. Which means (kai-change and zen-better) change for better. It is a system based on the psychology of improvements through small incremental amounts rather than through large innovations. It looks forward for every smaller area which needs improvement.

Basically, kaizen focuses more on increasing the efficiency of production process through improving the responsibility of every worker in every activity in the process. Through this continual effort, a management definitely leads toward reducing the cost of the products over time. But one cannot achieve this continuously unless they set some standards. Once they set some standards of reducing the cost so called kaizen standards, on coming of actual results, they can then compare these results with kaizen standards and evaluate the performance of the work done. . And it could be broken down in year, month and week as well.  Further, they can make base for actual results which has been achieved so far to evaluate the performance of following years.

But now it brings us at the state of shock that kaizen costing does the same thing as the target costing does. However, target costing reduces the cost at the stage of designing the product where 90% cost of the product is locked. Once designing has been finished and finalised. Then they move to production from where the kaizen costing really starts working.

Additionally, kaizen costing is a very proactive approach which helps in rectifying the criticism of standard costing as well. In standard costing, as long as the adverse variances are rectified or avoided, no further improvement is possible at all. However in kaizen costing, it claims that improvement can be made continuously. it improves even though standard costing stops improving. This is how it goes beyond the standard costing loopholes and keeps improving continuously.

Strategy

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n our daily life , we don’t  even go without strategy. So, how can businesses run without strategies? Being an entrepreneur, you would have a number of questions in mind to flourish your business. Even planning keeps going on in your mind.  But it sometime baffles me and makes me stuck at a question that what the strategy is? Linguistically, it comes from the Greek word STRATEGOS which means ‘leading an army’.






Having kept the above meaning in mind, we can derive some features of strategy,

• ·         It has direction and objective towards its goal.
• ·         It envisages ways to achieve the goals.
• ·         It focuses on longer period objectives than shorter one.
• ·         It deals with totality rather than with individuality.

So after concluding these points above, one can assess that strategies are tool through which businesses can see themselves where would be they? How would they compete in the market? What are the activities they have to take up to be in market? How they make themselves better performer in such cut-throat competition? What are the resources required to compete the market? What external and internal factors affecting business ability to compete?

Hence, strategy is a direction and scope of the business over longer period. It lays the path for a business to get availed advantages into competitive environment through configuring the available resources. This is how the business meets the demand of the market and fulfils the expectation of the shareholders.

Cost & Management Accounting: OPERATION STRATEGY

Cost & Management Accounting: OPERATION STRATEGY

OPERATION STRATEGY

Operation strategy which, sometimes, makes us confuse that operation and strategy are two different words, Even they have two different meanings separately. But, however, it cannot be proclaimed as it is true. So first we try to understand that what the operation is? From its name it isn’t very difficult to understand, Operation is an activity which manages resources and processes to manufacture goods and services. Secondly, what do we need to understand is the strategy? Strategy is a kind of planning and direction or pretaken actions to foresee the future so that competitive markets can be understood and goods and services can be delivered at right time and right place.

Now it would be easy for us to understand the operation strategy. Operation strategy more or less related to long term and development of operation resources and processes. So that, they can sustain themselves in a competitive market. Definition given by Slack and Lewis,

“Operation strategy is a total pattern of decisions which shape the long term capabilities of any type of operation and their contribution to the overall strategy, through the reconciliation of market requirements with operation resources”.

In above definition, it is explained that operation strategy is an activity of balancing the market requirements with the available resources with the firm or company. Here, one can clearly understand why the development and appreciation are required for the resources and processes. If management doesn’t appreciate the strategy impact on the resources and processes what have with itself, they definitely miss an opportunity.

In addition, any type of operation can be affected with two available major factors which are market requirements and the available resources with the management. These are the only factors which make the operation strategy tailored. This is because management cannot match its operation with market requirements until unless they study the market. Then, the management can match their resources with market requirements. Therefore, market prospective on operation strategy is an outside-in.

        Finally, it is concluded that operation strategy contributes not only particular strategy but also whole of the business. It manages and develops the resources and process to meet the competitiveness of the market. And it makes the capabilities of operation resources exploited where it actually requires.