Motivators - Introduction to recent development in Cost Management - 36 Jai Prabha(A) , 97 Pankaj Chanana(B)

INTRODUCTION (By Pankaj Chanana)

After decade’s relative stability in cost accounting, the increasingly competitive environment through the 1980s and 1990s has been the prime stimulus for a range of new developments in cost identification, cost management and possibly to a lesser extent in broader aspects of financial control concerned with responsibility accounting. These developments were mainly initiated in companies related to the motor industry and high tech companies in industries like computing and electronics.

DISCUSSION (By Jai Prabha)

Recent developments that have taken place in cost management:-

TARGET COSTING;

Target Costing has been given much more attention in Japan, but increasingly being taken up in the west. It is linked with both functional Cost Analysis and Value Engineering in order to design products and services which have the attributes that the market requires at the price that is prepared to pay. The initial step is to study the market place to identify the attributes that the next generation of products must have and the maximum selling price. This does not mean that the company simply provides what the market says it wants. The company may have superior knowledge of what can be provided.

The next stage of the target costing process is to identify what activities the company must embark upon in order to deliver those product attributes. These activities are then costed and total cost compared to the cost level likely to be consistent with selling at the acceptable market price after deducting a desired profit.

The distinguishing feature of target costing is its ex ante nature. Target costing says more of the detailed costing should take place at the design stage, after all most major cost elements of many manufactured products are committed at that stage and there is limited scope for reduction thereafter.

KAIZEN COSTING:

Kaizen costing also has a Japanese heritage. Kaizen refers to the process of seeking continuous improvement. Some Japanese Companies link a target costing planning process with a kaizen process once the products are in production. Other companies, for example those with short to medium product life cycles, place more focus upon target costing. Other companies, in more mature markets with longer product life cycles, place more emphasis on kaizen during operations.

Kaizen essentially tries to ensure that everyone in the company continually reconsiders how the task is undertaken and whether there is a better way of doing it.

THROUGHPUT ACCOUNTING:

Throughput accounting arose from Goldratt’s thinking in developing his theory of Constraints. In developing his theory, Goldratt was initially trying to maximise the profitability of the firm by maximising the amount that could be produced given existing production configuration and constraints. Throughput accounting as defined by Goldratt is not really a new form of accounting. It is merely an extreme form of variable costing. If the only costs which are truly variable are direct material costs, there will be no difference between throughput accounting and variable costing.

CONCLUSION: - ( By Pankaj Chanana and Jai Prabha)

Some of the developments in cost accounting are discussed here. These developments like target costing, kaizen costing and throughput accounting have enlarged the scope for cost accounting. Target costing helps designing the products and services as it is linked with both functional cost analysis and value engineering. Kaizen costing ensures that everyone in a company reconsiders how the task is undertaken or whether there is a better way of doing it. Throughput accounting may well approximate the true value costs if the focus of discussion making is on maximising throughput in short-term.