Kaizen is a daily process, the purpose of which goes beyond simple productivity improvement. It is also a process that, when done correctly,

xIn The Name Of Allah The Compassionate The Merciful

MANAGEMENT ACCOUNTING

Lecturer : Dr.Ramezani

Present By :

Ali Amouzad KhaliliRouzbahan University, Accounting College, Grade M.A

Winter 1391

Contents :

1.Kaizen (Continuous Improvement) Costing2.Target Costing3.Life-Cycle Costing (LCC)4.Lean Accounting

Management Accounting


Kaizen (Continuous Improvement)

Costing


Contents :

1.A Brief review of Kaizen2.Definition of Kaizen Costing3.Type of Kaizen Costing4.Key Feature of Kaizen Costing5.Two important Concept6.Kaizen Costing in One View


Improvement can be broken down between Innovation and Kaizen .

Innovation : involves a drastic improvement in the existing process and requires large investments.

Kaizen : signifies small improvements as a result of coordinated continuous efforts by all employees.

Kaizen Kai

Zen

Change

GoodImprovement

=

=

A Brief Review Of Kaizen


So what is Kaizen ?

Kaizen refers to philosophy or practices that focus upon continuous improvement of processes in manufacturing, engineering, supporting business processes, and management.

By improving standardized activities and processes, kaizen aims to eliminate waste as in lean manufacturing ( Toyota Production System ).

Key Features of Kaizen :

• Kaizen is a daily process, the purpose of which goes beyond simple productivity improvement.• It is also a process that, when done correctly, humanizes the workplace, eliminates overly hard work (" muri "), and teaches people how to perform experiments on their work using the scientific method and how to learn to spot and eliminate waste in business processes.


Kaizen and Management Levels:


So What is Kaizen Costing ?

“the maintenance of present cost levels for products currently being manufactured via systematic efforts to

achieve the desired cost level.”

Kaizen Costing is a cost reduction system.

Yashihuro Moden defines kaizen costing as :

Moden, Developed Kaizen Costing which can be translated as “enhancement estimation “


Type Of Kaizen Costing :

Moden has described two types of kaizen costing:

1. Asset and organisation specific kaizen costing : activities planned according to the exigencies of each deal

2. Product model specific costing : activities carried out in special projects with added emphasis on value analysis Key features of Kaizen Costing

1. Is a Cost reduction system whose Goal is to reduce final estimations to a level that is lower than standard costs.2. Checks that costing targets have been reached.3. Continuous review existing production conditions in order to reduce costs.


Two Important Concept of Costing :

1. The Concept of Kaizen, meaning “improvements in small steps” was developed within quality assurance technology. Based on this Concept, Moden developed kaizen Costing , which can be translate as “enhancement estimation “. Kaizen costing is applied to a product that is already under production.

2. The time prior to kaizen costing is to called “ Target Costing” which involves searching for atarget cost for a product before it reaches the market.

Together , these two concepts make up Life Cycle Costing.


Two Important Concept of Costing :


Kaizen Costing in One View :


Any Questions

The End of This Chapter


Target Costing


Contents :

1.Introduction2.The Origin of Target Costing3.The Definition of Target Costing4.The Development of Target Costing5.The Process of Target Costing6.Procedure of Determining Target Costs


Target costing originated in Japan in the 1960s, though it remained a secret for years.

Since the 1980s, however, when target costing was widely recognized as a major factorfor the superior competitive position of Japanese companies, extensive efforts have been made to convey target costing to Western companies.

Many large companies in North America and Europe have tried to adopt target costing to enhance their cost management and, thus, increase their competitiveness.

Consequently, many variations of target costing have been developed and are being used in different countries.

INTRODUCTION


THE ORIGIN OF TARGET COSTING

The first use of value engineering in Japan—known as “Genka Kikaku”—occurred atToyota in 1963, though it wasn’t mentioned in Japanese literature until 1978 (Tani et al.,1996).

Later “Genka Kikaku” was translated into “Target Costing,” the term now usedthroughout the world.


THE DEFINITIONS OF TARGET COSTING

Target costing in a General term is a pricing method used by firms.

It is defined as "a cost management tool for reducing the overall cost of a product over its entire life-cycle with the help of production, engineering, research and design".

A target cost is the maximum amount of cost that can be incurred on a product and with it the firm can still earn the required profit margin from that product at a particular selling price.

Target costing uses a variety of techniques and methodologies to manage product design and cost. One of the primary techniques, value engineering, is utilized to identify the primary and secondary functions of a product.

Target costing involves setting a target cost by subtracting a desired profit margin from a competitive market price.

Target Costing = Competitive Market Price – Desired Profit Margin



A lengthy but Complete Definition :

“ Target Costing is a disciplined process for determining and achieving a full-stream cost at which a proposed product with specified functionality, performance, and quality must be produced in order to generate the desired profitability at the product’s anticipated selling price over a specified period of time in the future."



This definition encompasses the principal concepts: products should be based on an accurate assessment of the wants and needs of customers in different market segments, and cost targets should be what result after a sustainable profit margin is subtracted from what customers are willing to pay at the time of product introduction and afterwards.

These concepts are supported by the 4 basic steps of Target Costing:

(1) Define the Product (2) Set the Price and Cost Targets (3) Achieve the Targets (4) Maintain Competitive Costs.


Clearly , Target Costing has evolved from a relatively simple instrument for controlling the cost of purchases to a comprehensive profit management instrument (Hasegawa, 1994). Its goal is now generally understood to be to minimize life-cycle costs so that long-term profit is maximized. To achieve this objective, target costing takes into account not only production costs, but also the costs incurred in the entire product life cycle. The objective of minimizing life-cycle costs is also achieved throughout the value chain bydeveloping a collaborative relationship with all members of the extended enterprise, suchas suppliers, customers, and distributors.

Japanese companies have developed target costing as a response to the problem of controlling and reducing costs over the product life cycle.

THE DEVELOPMENT OF TARGET COSTING


THE PROCESS OF TARGET COSTING

The uniqueness of Japanese target costing comes into play when strategic productpositioning is completed in coordination with the company’s general strategy.

This is also the point in time when the product-market mix has been determined and Information about what product attributes and what related prices consumers desire are collected through a market analysis.

Up to that point, the Japanese way is similar to the traditional Western cost management.

However, there are important differences between these two approaches in the way the market information is gathered and converted into an actual product.


Western and Japanese Cost Management


“Kaizen Costing” focuses on decreasing costs in the production phase, whereas “Target Costing” is designed to help reach product cost goal determined by the market. Kaizen is an instrument for realizing a short-term profit goal, whereas target costing is focused on realizing long-term profits.

Kaizen costing means the complete utilization of cost reduction potentials. Thisutilization is realized by matching, little by little, innovative leaps that are initiatedby target costing with continuous improvement.

Monden and Hamada (1991) write that target costing and kaizen costing should be inseparable. Both approaches serve the overall goal of orienting a company toward the demands of the market. Yet they differ regarding the application in the various process components of product development and the respective periods of operation.

The most important similarity is probably their focus on feed-forward control as opposed to the Western feedback control (Hasegawa, 1997).

COMPARISON & CONNECTION BETWEEN TARGET COSTING & KAIZEN COSTING :


Target Costing and Kaizen Costing


Target costing is an iterative process. The multidisciplinary team continues to redesign a product and apply value engineering until either its estimated cost is less than or equal to its allowable cost or further cost reductions are no longer feasible. In cases where a product’s estimated cost continues to exceed its allowable cost, the product is not developed further.

PROCEDURE OF DETERMINING TARGET COSTS


PROCEDURE OF DETERMINING TARGET COSTS


Any Questions



Life-Cycle

Costing


Contents :

1. Primary Glossary of LCC2. Life Cycle Cost Definitions3. Life Cycle Concepts4. The Life of an Asset5. Why Use Life Cycle Costing ?6. Using Life-Cycle Costing7. Life-Cycle Costing Process8. Applying LCC9. The Operating Principle & Usage of LCC


PRIMARY GLOSSARY OF LIFE CYCLE COSTING:

life cycle – the time interval between a product’s recognition of need or opportunity and its disposallife-cycle costing – an assessment of design alternatives considering all the significant costs of ownership (NPWC), or an assessment of the cost of a product over its life cycle.life-cycle cost – the total cost of providing, owning, operating and maintaining a building or component over its useful life (NPWC), or the sum of acquisition cost and ownership cost of a product over its life cycle.disposal cost – the cost of removing a product after its usefulness has ended, including costs to decommission, dismantle, make environmentally safe, transport and dump. If the products are sold and the proceeds from the sale exceed the other costs of disposal, the product will have a disposalvalue that reduces the life-cycle cost.


LIFE CYCLE COST DEFINITIONS :Life cycle costs are summations of cost estimates from inception to disposal for both equipment and projects as determined by an analytical study and estimate of total costs experienced during their life. The objective of LCC analysis is to choose the most cost effective approach from a series of alternatives so the least long term cost of ownership is achieved.

LCC analysis helps engineers justify equipment and process selection based on total costs rather than the initial purchase price. Usually the cost of operation, maintenance, and disposal costs exceed all other costs many times over. Life cycle costs are the total costs estimated to be incurred in the design, development,production, operation, maintenance, support, and final disposition of a major system over its anticipated useful life span (DOE 1995). The best balance among cost elements is achieved when the total LCC is minimized (Landers 1996).

As with most engineering tools, LCC provides best results when both art and science are merged with good judgment.


LIFE CYCLE CONCEPTS :

The process of life-cycle costing (LCC) fundamentally involves:

• assessing costs arising from an asset over its life cycle; and

• evaluating alternatives that have an impact on this cost of ownership.

An asset can be any item that has a value to an organisation over time. Items such as buildings ,physical plant and equipment and computer software are normally regarded as assets.


The life cycle of an asset is characterised by a number of key stages:

• initial concept definition;

• development of the detailed requirements, specification or documentation;

• construction, manufacture or purchase;

• defects liability period and early stages of usage or occupation;

• prime period of usage and functional support, with the associated series of upgrades and renewal processes; and

• the situation at the end of the asset’s useful life.

THE LIFE OF AN ASSET :


The diagram shows a typical life cycle cost profile for an asset, from its design to its disposal. The diagram is not drawn to a consistent time scale. The middle operational period is generally much longer than shown in the diagram.



The life-cycle cost of an asset can be expressed by the simple formula:

LCC = capital cost + life-time operating costs + life-time maintenance costs + disposal cost-residual value.

However, ascertaining a measure of each variable in the formula can be difficult. Future costs are usually subject to a level of uncertainty that arises from a variety of factors, including:• the prediction of the pattern of use of the asset over time;• the nature and scale of operating costs;• the need for and cost of maintenance activities;• the impact of inflation on individual and aggregate costs;• the prediction of the length of the asset's useful life; and• the significance of future expenditure compared with present day expenditure.

ESTIMATING LIFE-CYCLE COSTS :



To estimate the total life-cycle costs of an asset, it is necessary to identify the key cost elements. The choice of an appropriate set of elements will reflect three specific issues:

1. The element must be a clearly defined activity that generates costs.• As far as possible, elements should be independent.

2. The time line for the element's costs must be known.• The significance of a cost generally depends on its position in time within the life of the asset.

3. The relationship between the resources used by the element and the resulting cost must be known.• Changes in market conditions and price movements are more easily reflected through costchanges in specific resource types.

THE LIFE OF AN ASSET :COST ELEMENTS :


The information generated by a life-cycle cost analysis can assist managers at various stages in the life of an asset:

• planning and analysis of alternative solutions;

• selection of preferred options;

• securing funding; and

• review of predicted and actual outcomes.

THE LIFE OF AN ASSET :BENEFITS AVAILABLE FROM LCC IN ASSET:


WHY USE LCC ?LCC helps change provincial perspectives for business issues with emphasis on enhancing economic competitiveness by working for the lowest long term cost of ownership. Consider these typical events observed in most companies:

· Engineering avoids specifying cost effective, redundant equipment needed to accommodateexpected costly failures so as to meet capital budgets,· Purchasing buys lower grade equipment to get favorable purchase price variances,· Project engineering builds plants with a 6 month view of successfully running the plant onlyduring start-ups rather than the long term view of low cost operation,· Process engineering requires operating equipment in race car driver fashion using aphilosophy that all equipment is capable of operating at 150% of its rated condition withoutfailure and they have other departments to clean-up equipment abuse,· Maintenance defers required corrective/preventive actions to reduce budgets, and thus longterm costs increase because of neglect for meeting short term management gains.· Reliability engineering is assigned improvement tasks with no budgets for accomplishing thegoals.


USING LIFE-CYCLE COSTING :

There are broadly three stages at which LCC should be applied. These are:

• the conceptual stage - when initial proposals for investment are being considered;

• the acquisition stage - when tenders for the supply of equipment, facilities or software are being assessed; and

• the in-service stage - when decisions are being made on whether to maintain, improve or dispose of the asset.

WHEN SHOULD IT BE USED?


LIFE-CYCLE COSTING PROCESS :


LCC analysis should begin by developing a plan that addresses the purpose and scope of the analysis. The plan should be to:

• define the objectives;

• identify the cost drivers and establish their parameters;

• apply the formula, and choose the appropriate discount rate; and

• analyse the results.

APPLYING LCC:


“It’s unwise to pay too much, but it’s foolish to spend too little”

The adage attributed to John Ruston:

THE OPERATING PRINCIPLE & USAGE OF LCC :

End users and suppliers of equipment can use life-cycle costs for:

· Affordability studies- measure the impact of a system or project’s LCC on long termbudgets and operating results.

· Source selection studies-compare estimated LCC among competing systems or suppliers ofgoods and services.

· Design trade-offs- influence design aspects of plants and equipment that directly impactLCC.

USAGE OF LCC :


· Repair level analysis- quantify maintenance demands and costs rather than using rules ofthumb such as “…maintenance costs ought to be less than _ ? _% of the capital cost of theequipment”.

· Warranty and repair costs- supplier’s of goods and services along with end-users need tounderstand the cost of early failures in equipment selection and use.

· Suppliers sales strategies- can merge specific equipment grades with general operatingexperience and end-user failure rates using LCC to sell for best benefits rather than just sellingon the attributes of low, first cost.

USAGE OF LCC :


Any Questions



Lean

Accounting


Contents :

1.Vision for Lean Accounting2.Lean Accounting Principles , Practices , Tools3.Extra Studying about Lean Accounting


VISION FOR LEAN ACCOUNTINGLean Accounting will:

1. Provide accurate, timely, and understandable information to motivate the lean transformation throughout the organization, and for decision-making leading to increased customer value, growth, profitability, and cash flow.

2. Use lean tools to eliminate waste from the accounting processes while maintaining thorough financial control.

3. Fully comply with generally accepted accounting principles (GAAP), external reporting regulations, and internal reporting requirements.

4. Support the lean culture by motivating investment in people, providing information that is relevant and actionable, and empowering continuous improvement at every level of the organization.


LEAN ACCOUNTING PRINCIPLES, PRACTICES, AND TOOLS


LEAN ACCOUNTING PRINCIPLES, PRACTICES, AND TOOLS


Extra Studying about Lean Accounting

It is Not for the Test !!


A. Lean and Simple BusinessAccountingThis can also be stated as "applyinglean methods to the accounting processes.“

Some accounting processes contain muda type 1 (waste that can not be eliminated at the moment) but most accounting processes are muda type 2 (waste that can be eliminated).The tools of lean must be rigorouslyapplied to our accounting, control,and measurement processes so that waste is relentlessly driven out.

B. Accounting Processes thatSupport the Lean TransformationLean accounting reports and methodsactively support the lean transformation.

This information drives continuousimprovement. The financial and nonfinancialreporting reflects the overall valuestream flow, not individual products, jobs,or processes.

Lean accounting focuses on measuring and understanding the value created for the customers, and uses this information to enhance customer relationships, product design, product pricing, and lean improvement.


Value Stream CostingCost and profitability reporting is doneusing value stream costing, a simple Summary direct costing of the value streams.The value stream costs are typically collectedweekly and there is little or no allocationof "overheads." This provides financialinformation that can be clearly understoodby everybody in the value streamwhich in turn leads to good decisions,motivation to lean improvement across theentire value stream, and clear accountabilityfor cost and profitability. Weekly reportingalso provides excellent control andmanagement of costs because they can bereviewed by the value stream managerwhile the information is still current.

Target CostingTarget Costing is the tool for understandinghow the company creates value forthe customer and what must be done to createmore value. Target Costing is used whennew products are being designed and/or when the value stream team needs to understandthe changes required to increase value for the customers. The outcome of this highlycross-functional and cooperative processis a series of initiatives to create more valuefor the customer and to bring the productcosts into line with the company's need forshort-term and long-term financial stability.These improvement initiatives encompasssales and marketing, product design, operations, logistics, and administrative processes within the company.


C. Clear and Timely Communicationof InformationLean accounting provides financialreports that are readily understandable toanyone in the company. The income statementsare in "plain English" and the informationis presented in a way that is no morecomplicated than a household budget. PlainEnglish income statements are easy to usebecause they do not include misleading andconfusing data relating to standard coststogether with hosts of incomprehensiblevariance figures. When used in meetings,plain English financial statements changethe question from "What does this mean?"to, "What should we do?"

Visual ManagementVisual management is a cornerstoneof lean management. Lean accountingrequires visual presentation of both financialand non-financial measurements. The"Box Score" format commonly used in leanaccounting provides a one-sheet summaryfor a value stream showing the operationalperformance, the financial performance,and how well the capacity is being used.Figure 2 shows an example of box scoreused for weekly performance reporting.


E. Strengthen InternalAccounting Controls

Accounting controls have alwaysbeen important, and it is essential thatLean Accounting enhance these controls,and does not weaken them.

It is important to bring the company's auditors into the Lean Accounting process at the earliest stages.

A primary tool to ensure that LeanAccounting changes are made prudently isthe Transaction Elimination Matrix.

Using the transaction elimination matrix we candetermine what lean methods must be inplace to enable us to eliminate traditional,transaction-based processes without Jeopardizing financial (or operational) control.

These decisions are made ahead of timeand become a part of the overall lean transformation; in some cases driving the lean changes and improvements.


Conclusion

While Lean Accounting is still a workin-process, there is now an agreed body ofknowledge that is becoming the standardapproach to accounting, control, andmeasurement. These principles, practices,and tools of Lean Accounting have beenimplemented in a wide range of companiesat various stages on the journey to leantransformation. These methods can bereadily adjusted to meet your company'sspecific needs and they rigorously maintainadherence to GAAP and external reportingrequirements and regulations.

Lean Accounting is itself lean, low-waste, andvisual, and frees up finance and accountingpeople's time so they can become activelyinvolved in lean change instead of beingmerely "bean counters."Companies using Lean Accounting have better information for decision-making, have simple and timely reports that are clearly understood by everyone in the company, they understand the true financial impact of lean changes, they focus the business around the value created for the customers, and Lean Accounting actively drives the lean transformation. This helps the company to grow, to add more value for the customers, and to increase cash flow and value for the stock-holders and owners.


Any Questions


THE END

Documents

Kaizen is a daily process, the purpose of which goes beyond simple productivity improvement. It is also a process that, when done correctly,