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3.3 留学生Cost Management论文 Technique 2: Target Costing
3.3.1 Literature Review
3.3.1.1 Introduction
Target Costing (TC) was created by Toyota in the 1960s (Kato, 1993; Carr and Ng, 1995), which emerged as a cost management technique used by Japanese accountants to enable better decision-making, stimulating employees to follow long-term strategies (Gagne and Discenza, 1995, p.16-22). ‘…target costing is a profit planning, not a cost system, to satisfy customer and the profit generation to the company given the market requirements’ (Yoshikawa et al., 1994, p.53-64).
In addition, Target Costing must be viewed as a broader concept that includes TC as well as other techniques such as Kaizen and FCA (Yoshikawa et al., 1995, p.415-432). Rabino (2001, p.76) stated that in TC systems:
‘Costs are managed in three distinct ways…. Firstly, the mix of products that are manufactured and sold is strictly controlled by upper level management through the efforts of a multi-disciplinary team. Secondly, the costs of new products are reduced through the techniques of target costing and value engineering [which implies FCA]. Finally, the costs of existing products are reduced through the Kaizen system.’
It should be highlighted that these techniques associated with TC are examples of continuous improvement. According to Kato (1993), Ewert and Ernst (1999, p.23-49), ‘…target costing is a technique for managing costs during the design stage, little can be done to improve these elements once product design has been set…’. However, Kaizen, which follows TC procedures, means cost reductions in the manufacturing and delivery processes (McMann and Nanni, 1995; Lee and Monden, 1996). Dekker and Smidt (2003) and Tani et al. (1994) show that the product development and design departments are major users of target costing.
Furthermore, Cooper and Slagmulder (1999) define target costing as a technique to manage future profits in the organization, as ‘Target cost = Target price – target margin’ (Cooper and Slagmulder, 1997). If estimated actual cost is in excess of target cost, managers should investigate ways of driving down the actual cost to target. Of which, the iterative process involves Value engineering (VE) and Functional cost analysis (FCA) (Cooper and Slagmulder, 1997; Ansari et al., 1997; Yoshikawa et al., 1994).
3.3.1.2 Background
In the US, the Institute of Management Accountants (IMA) (2003) found that 26% of its member firms employed TC. Likewise, 38% of Australia’s largest manufacturing firms (Chenhall and L.Smith, 1998), 50% of Danish firms (Israelsen et al., 1996), and 59.4% of firms listed on the Amsterdam Stock Exchange (Dekker and Smidt, 2003) had adopted TC. The Research Group of Nanjing University (2001) report that there are nearly 51.4% enterprises adopting target costing in China currently.
According to Horngren (2005, p.381), ‘…target cost per unit is often lower than the existing full product cost per unit…. to achieve the target cost per unit and the target profit per unit, the organization must improve products and processes…’.
Based on the research of Crow (1999), reducing indirect cost is the most essential for reducing overall cost. Since a significant portion is indirect cost in the catering industry, the company should also address it by examining these costs, re-engineering indirect business processes and minimizing non-value-added costs.
3.3.1.3 Value Engineering (VE)
Value engineering is a systematic evaluation of all aspects of the value-chain, with the objective of reducing costs while satisfying customer needs. Incorporation of VE and target costing would have a direct impact on the economic result of a company. VE and target-costing are complementary processes, because while one allows the identification of where cost reduction could be achieved, the other shows the target to be achieved to guarantee the long-term profitability plan of a company.
The work flow of Validation-VE should follow a cycle of five stages, according to Figure 3-3-1 (Ibusuki and Kaminski, 2003), functional analysis/target-cost – initial project – prototype construction – quality and cost estimation – VE study, which is repeated until quality and target-cost have been achieved. However, unless managed properly, value engineering and target costing can have undesired consequences (Cooper and Slagmulder, 1997).
Figure 3-3-1，Flow chart for Validation-VE
3.3.1.4 Functional Cost Analysis (FCA) and Kaizen
FCA is well explained in Yoshikawa et al. (1994, p.63) which is used to help designers to find feasible technical solutions that fit the target cost: ‘functional cost analysis … [is] … a powerful technique to cost management.’
FCA uses cost tables to identify product costs according to their specifications because different product requirements imply different process times and changes in components. Cost tables represent the firm’s cost experience, ‘… cover a wide range of design possibilities and include cost information both internal and external to the organization.’ (Yoshikawa et al., 1995, p.417)
Furthermore, Kaizen involves several procedures that allow reducing costs via continuous improvements during the production phase of the product life cycle. Kaizen asks for the involvement of everyone. Imai introduced the term Kaizen in the 1980s, defining it as an ongoing improvement involving everyone from top management to operators.
3.3.1.5 Role of Target costing
TC requires formal procedures to determine target prices and assess customer requirements. This forces firms to be specific about what customers want and the prices they are willing to pay (CIMA, 2005). ‘A competitive product must address factors such as cost, performance, schedule and quality’(Lynn et al., 1999, p.319-326). http://www.ukassignment.org/cwgllw/2012/0223/19282.html Furthermore, managing costs during the development stage is usually easier and cheaper than after the product is introduced (Ulrich and Eppinger, 2000).
Dekker and Smidt (2003) emphasize that ‘TC plays an important role in realizing conflicting objectives which need to be balanced, optimizing the relationships between material, parts, and the production process, and balancing quality, functionality, and cost’. In fact, TC represents a valuable tool to guide the development of new products enhancing their success when introduced in the market. TC allows companies to design products competitively, guides and disciplines the development of new products and augments the probability of success. It always focuses on price, quality and functionality which are the three elements comprising the ‘survival triplet’ (Cooper, 1996) (Figure 3-3-2). In addition, the use of TC represents a strong commitment that results in continuous efforts on cost-reduction initiatives.
Figure 3-3-2, Survival Triplet
3.3.2 Application of Target costing
3.3.2.1 Set target cost for Chain Q
For calculating conveniently, in this paper, Chain Q apply traditional costing to categorize cost into three parts: fixed cost, variable cost, and semi-variable cost. However, the Chain Q’s cost report of 2008 can be simplified into the form below (Table 3-3-1). Raw material cost which means variable cost, salary cost and other dimensions equals to fixed cost, and energy cost is semi-variable cost.
Table 3-3-1, Simplified Cost Report for 2008
Expenses ($,000)
Revenue 86500
Cost Raw material cost 31462.02
Salary & welfare 16378.68
Energy cost 2216.764
Other 16712.536 66770
Profit 19730
Now, Chain Q set the target for 2009: revenue increase by 10% and profit improve by 25%. Therefore, the target cost of operation in 2009 would be:
$86500000*(1+10%) – $19730000*(1+25%) = $70487500
Combined with the actual condition of Chinese catering, there are numerous kinds of dishes for serving, different hierarchy dishes have different profit margins per unit as well, that are overwhelmingly difficult to gain an average data per unit for calculating and analyzing. To be more direct and clear, the research set ‘number of tables consumed’ as the unit for calculating.
As known from the report of Chain Q, they had served 1252680 tables in 2008, and so the average cost per table is $53.30. By contrast, the target average cost per table for 2009 should be:
$70487500 / [1252680*(1+10%)] = $51.15
After identifying the target cost for 2009, which is lower than the average cost per table in 2008 ($51.15 < $53.30), it is essential for managers to optimize each stage of the operation process.
Semi-variable cost is the cost that is part variable and part fixed. In Chain Q, the energy expense which includes fuel, water and electric expenses is the classic semi-variable cost, its fixed part should be absorbed into fixed cost and the other should be categorized to variable cost. Therefore, we can get a formula below:
Y = a + bx
(y= semi-variable cost; a=fixed cost; x=sales (tables consumed); b=variable index)
List table for 2008 (Table 3-3-2)：
Therefore, b= = = 1.034
a = y – bx = 184730 – 1.034*104390 = 76790.74
Above, the table has indicated that, in the total cost of energy:
Variable cost=1.034*1252680=$1295271.12;
Fixed cost=2216764-1295271.12=$921492.88 (or 76790.74*12).
Summarizing this: (Table 3-3-3)
Based on the data from 2006 to 2008, a similar calculation had been done for 2007 and 2008; the table indicates some kind of tendency about cost. Applying the Top-bottom methods, this could estimate the tendency of cost for 2009. (Table 3-3-4)
Variable cost per unit would be changed per year:
= (26.150-26.119)/(2 years)= $ 0.0155#p#分页标题#e#
Therefore, it can estimate the variable cost per unit (table) of 2009 to be:
26.15+0.0155=$ 26.1655
Fixed cost per unit would be changed every year:
(34012792.5-30217523.01) / (2 years) = $ 1897634.745
That can be used to predict the total fixed cost for 2009:
1897634.745+34012792.50=$ 35910427.25
The predicted sales volume is 1252680*(1+10%) = 1377948 tables; and the cost report for 2009 is shown below (Table 3-3-5):
Gap between actual cost and target cost is: 71950000-70487500=$ 1462500
Conclusion: it is obviously urgent to implement necessary conduct in order to reduce the cost.
3.3.2.2 Conduct implementation briefly
Although known for operating in a highly competitive market, Chain Q must keep its prices comparatively low. Because keeping costs low is the key to keeping prices low, Chain Q establishes target costs for its products. It forms cross-functional teams drawn from the marketing, design, cooking, serving, HR and accounting functions, to evaluate and monitor its progress in achieving target costs.
Focus on reducing the complexity of its operation and weakness of its process:
1) Process design
Applying value engineering techniques, Chain Q’s operating teams work with procuring, storing, processing, serving to introduce design that uses cost-effective operation processes. For example, one dish produces the needs process below: purchasing → acceptance → storing → issuing → processing → serving → cost accounting. Each stage consists of numerous steps. Designers could work together to redesign the operation process in the whole line.指导留学生财务管理论文 They can reduce the number of parts required to make the product, thereby reducing the costs of ordering, material handling, coordination and inspection and so on.
2) Just-In-Time Production
In the catering industry, purchasing excessive stock may cause food storage difficulty, increasing the chance of wastage, especially to the fresh food and seafood; however, insufficient procurement could lead to demand exceeding supply, and unit price would increase as well. Chain Q has implemented JIT production methods to reduce costs of materials and work-in-progress inventories, as well as materials-handling costs.
3) Standardization
This aims to reduce costs in the process that mainly by reducing the raw material wastage, Chain Q applies standard cost method to standardization. (See discussion in chapter ‘standard costing’.)
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