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Chapter 8 Summary

This document discusses strategic cost management over the product life cycle and various cost management techniques. It covers (1) the cost life cycle from R&D to customer service and the sales life cycle from introduction to withdrawal, (2) life-cycle costing to identify and monitor costs over the product lifetime, and (3) target costing and theory of constraints to manage costs during design, manufacturing, and other stages.

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123 views

Chapter 8 Summary

This document discusses strategic cost management over the product life cycle and various cost management techniques. It covers (1) the cost life cycle from R&D to customer service and the sales life cycle from introduction to withdrawal, (2) life-cycle costing to identify and monitor costs over the product lifetime, and (3) target costing and theory of constraints to manage costs during design, manufacturing, and other stages.

Uploaded by

luistrosamaralaine
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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STRATEGIC COST MANAGEMENT

CHAPTER 8 COST PLANNING FOR PRODUCT LIFE CYCLE

Life Cycle Costing


focuses on the time dimension of cost management. Consideration is given to (1) the effect of
the timeliness of operations on total cost and (2) the way in which costs change over the life
cycle of the product. The product life cycle is consideration in each of the two aspects.
● Cost life cycle - is the sequence of activities within the firm that begins with research and
development, followed by design, manufacturing, marketing, distribution, and customer
service.
● Sales life cycle- is the sequence of phases in the products or service’s life in the market
from the introduction of the product or services to growth in sales and finally maturity,
decline, and withdrawal from the market.
Important strategic cost management issues arise in each activity of the cost life cycle. The
methods helpful in analyzing the cost life cycle are.
A. Life-Cycle Costing- is used throughout the cost life cycle to minimize overall cost.
B. Target Costing - is used for managing costs primarily in the design activity.
C. Theory of Constraints - is a method for managing manufacturing costs.

A. life-Cycle Costing- is a management technique used to identify and monitor the costs of
a product or service throughout its life cycle. It provides a long-term perspective of
product costs and product or service profitability.

1
The subcomponents of these costs follow:
Upstream costs
Research and Development
Design: prototyping, testing, concurrent engineering and quality development
Industries with high upstream costs include computer software, specialized and medical
equipment
Manufacturing costs
Purchasing
Direct manufacturing costs
Indirect manufacturing costs
Downstream costs
Marketing and distribution- packaging, shipping, simple, promotion, advertising
Service and warranty- recalls, service, product liability, customer support
Industries with high downstream costs include pharmacratic, performer, cosmetics and toiletries
Why Design is Important
Decision-making at the design stage is critical. Although the costs incurred at the design stage
may be very small in relation to the total costs of the entire life cycle the decision stage decisions
are important because they lock in most of the remaining life-cycle costs.
The critical success factors at the design stage include:
1. Reduced time-to-market
2. Reduced expected service costs
3. Improved ease-of-manufacture
4. Process planning and design
Common Design Models
a. Basic engineering
b. Prototyping
c. Templating.
d. Concurrent engineering

2
Characteristics of the four design methods

COST MANAGEMENT OVER THE SALES LIFE CYCLE


The sales life cycle is the sequence of phases in the product’s or service's life in the market from
the introduction of the product or service to growth in sales and finally, maturity , decline and
withdrawal from the market.

B. TARGET COSTING
Target costing is a technique in which the firm determines the desired cost for the product or
service ,given a competitive market price so the firm can earn a desired profit.
Target Cost= Competitive Price-Desired Profit

↑
TARGET COSTING

How to Reduce Costs to a Target Cost Level

3
1. Integrate new manufacturing technology using advanced cost management techniques such as
activity -based costing and seeking higher productivity through improved organization and labor
relations.
2. Redesign the product or service. This approach is more common than the first one because it
recognizes that design decisions account for much of the product life cycle costs.
Steps in Implementing a Target Cost Approach
1. Determine the market price.
2. Determine the desired profit.
3. Calculate the target cost at market price less desired profit.
4. Use value engineering to identify ways to reduce product cost.
5. Use kaizen costing and operational control to further reduce cost.
C. THEORY OF CONSTRAINTS
The theory of constraints is a process of identifying and managing constraints in the making of products
or in the providing of services.
-This section presents one of the methods to improve speed, Theory of Constraints (TOC) is a technique
used to improve speed in the manufacturing process and thus speed

The Theory of Constraints defines three measurements.


1. Throughput Contribution:
Direct Materials
Revenue - ↗
↘
Cost of goods sold.

2. Investments: Sum of material costs in direct material, work-in-process, and finished goods
inventories; R&D costs; and costs of equipment and buildings.
Steps in Theory of Constraints Analysis
Step 1: Identify the Binding Constraint
Step2: Determine the Most Efficient Utilization for Each Binding Constraint
Step 3: Manage the Flows Through the Binding Constraint
Step 4: Add Capacity to the Constraint
Step 5: Redesign the Manufacturing Process for Flexibility and Fast Cycle Time

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