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Contemporary issues in management accounting - Target costing,Life cycle costing andQuality Costing

Extracts from this document...

Introduction

Management Accounting PROJECT REPORT INDEX * ACKNOWLEDGEMENTS.............................................................3 * TARGET COSTING PRINCIPLES................................................4 * TARGET COSTING VS STANDARD COSTINING.......................5 * PROCESS OF TARGET COSTING..............................................6 * TARGET COSTING CASE STUDY...............................................11 * LIFECYCLE COSING: CONCEPT................................................13 * APPLICATIONS OF LIFECYCLE COSTING................................14 * COMPONENTS AND TYPES OF COSTS....................................14 * STEPS OF LCCA..........................................................................15 * CASE STUDY FOR LCCA.............................................................17 * QUALITY COSTING: CONCEPT...................................................19 * MEASURES TO APPROACH COST OF QUALITY........................20 * CASE STUDY FOR QUALITY COSTING.......................................27 * RELATIONSHIP BETWEEN QUALITY, TARGET & LIFECYCLE COSTING........................................................................................31 ACKNOWLEDGEMENTS We would like to express our sincere gratitude to those who have helped us in this project by means of this acknowledgment. We thank Ms. Achint Arora for providing her support and guidance in helping with the project. Right from choosing the topic to moulding it into its final shape, her supervision has seen us through. TARGET-COSTING PRINCIPLES Target costing can best be described as a systematic process of cost management and profit planning. The six key principles of target costing are: BASIC-market price - required profit margin = target cost. Target Costing vs. Standard Costing Characteristic Target Costing Traditional Standard Costing When applied During the Planning and Design Stage of the product's life cycle. Applied during the Production Stage of the product's life cycle. Approach Involves a proactive Cost Planning Approach where pricing is considered prior to production Involves a reactive Cost Control Approach during production Type of Industry Best-Suited Assembly Oriented Industries (Variety, medium to small volume production) Process-Oriented Industries (Continuous production) Target costing, in particular, emphasizes the reduction of costs during the planning and design stage of the product life cycle since the majority of product cost is determined at this stage. In comparison to traditional product costing methods, target costing allocates more of the total cost to the development stage, simultaneously reducing costs during the production stage. A number of cost-engineering techniques are used in the cost reduction process. Just-in-Time, Total Quality Control, Material Requirements Planning and Value Engineering are among such methods promoted by target costing. ...read more.

Middle

costs for each alternative: LCC= I + Repl - Res + M1 + K + OM&R + O LCC=Total LCC in present-value (PV) amount of a given alternative I=PV investment costs (if incurred at base date, they need not be discounted), including the initial and the develpmental costs. Repl=PV capital replacement costs Res=PV residual value (resale value, salvage value) less disposal costs M1=PV of marketing costs K=PV of financial costs OM&R=PV of non-fuel operating, maintenance and repair costs O=PV of other costs (e.g., contract costs for ESPCs or UESCs) the lowest of the lifecycle costs may be selected for adopting a particular project, proposal or acquiring a particular asset out of the given alternatives. 4. Other important characteristics of LCCA ? it facilitates break even analysis, whic helps to determine the highest cost of input that is possible for a particular project to break even. ? It facilitates sensitivity analysis as well, i.e., different values of inputs can be inserted and thus, the variations can be seen thereof due to incorrect measurement of input costs. ? It helps to decide the pricing of a product during different stages of its life. ? It is unique in nature as other accounting systems follow a year on year basis but it can help to monitor the costs over a lifetime of a proposition and help to identify the areas which are to be targetted to manage costs. Case study Case problem- the case problem requires to establish the cost effectiveness of material used in construction of bridges in corrosive environments. The decision is to be made whether FRP(fibre reinforced polymer) or PC (pre-stresssed concrete) shall be used in the construction.The main jist lies in the fact that the initial cost of the FRP bridges is higher than that of PC bridges and thus the question : why should then the bridges be constructed using fibre reinforced polymer at all?. ...read more.

Conclusion

We have seen that life cycle cost model analyses the product cost over its life and target costing sets the limits for the costs. Thus we can use life cycle costing to determine the level of target costs. If we use the quality cost components in the life cycle cost model and distribute them throughout the life of the product just as we did for other components such as operational costs, it becomes easier to identify the total costs related with the product. Although we may argue that the quality costs may not be determined exactly but this is a systematic approach trying to factor in the components that may go unaccounted for in the conventional management accounting techniques like budgeting. Thus it can help the organisations to leverage their capacities once they get an idea of the life cost of their products and services. As an example if we know the life cycle and the target cost for a particular input product say iron ore in steel manufacturing then it becomes easier to employ the finance functions. Suppose a firm estimates that it cannot spend more that $1000 for 10 tonnes of iron ore at a particulat point in time then by seeing the relative forecast and the current prices, it may help to determine the inventory levels. Say the price of future contracts rules at around $950 for 10 tonnes then we may book it given our target cost report and the current price (say $1025 for 10 tonnes). The sole point is that it can largely help the management to take financial decisions given that in the absence of these techniques those may have been a little more chance and uncertainty based. Thus to conclude the study we say that if proper systems are in place then the aforesaid techniques can very well help to optimize a firm's resources. ?? ?? ?? ?? 1 31 ...read more.

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