kaizen costing (2)

7/29/2019 Kaizen Costing (2)

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Kaizen Costing


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Meaning

Kaizen is a Japanese term meaning, Change for

better. It is a concept that focus on continuous

improvement. Some of the key objective of Kaizen

are: elimination of waste, quality control, just in time

delivery , standardized work and use of efficientequipment.

Kaizen Costing: is the reduction of present cost levelfor products being manufactured by systematic

efforts to achieve the desired cost level.


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Continue.. Thus, it is a continual cost reduction system that

occurs after a product design has been completedand is now in production phase.

The time prior to kaizen costing is called TargetCosting which involves searching of a target cost fora product before it reaches the market.

Both these two concepts make life-cycle costing,which involves all costs associated with the productduring its life span.


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Kaizen estimates in practice

In Kaizen Costing,standards are revisedeach month by whichthe existing gapbetween target andcurrent cost is to beclosed.

Kaizen activities arecarried throughout theyear to achieve costactivities.


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Advantages

Kaizen costing results into following advantages:

1. Focus on customers

2. Make improvement continuously.

3. Acknowledge problem openly.4. Promote Openness

5. Create work-teams: Each individual in a Kaizen

organization belongs to a work-team headed bya leader. Working in various teams bring

employees much closer to each-other.


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Backflush Costing

Backflush Costing omits recording some or all of thejournal entries relating to the stages from the purchaseof direct materials to the sale of finished goods.

Since some stages are omitted, the journal entries

for a subsequent stage use normal or standard coststo work backward to flush out the costs in thecycle for which journal entries were not made.


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Life Cycle Costing

The accumulation of costs for activities that

occur over the entire life cycle of a product,

from inception to abandonment, by the

manufacturer and the customer are known aslife cycle costing.


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Life-cycle stages

Products can be evaluated through each stage of theirlife-cycle:

Extraction or acquisition of raw materials

Manufacturing and processing Distribution and transportation

Use and reuse

Recycling

Disposal


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Activity Based Costing

Cost of a product is the sum of the costs of all activities required to

manufacture and deliver the product.

Products do not consume costs directly.

Money is spent on activities.

Activities are consumed by product/services.

ABC assigns Costs to Products by tracing expenses to activities. Each

product is charged based on the extent to which it used an activity.


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Identify Activities

In developing an ABC system, the

organization identifies the activities being

performed:

Move material

Schedule

productionPurchase material

Inspect items

Respond to customers

Improve products

Introduce new products

Explore new markets

Activity Dictionary


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Map resource costs to activities

Financial accounting categorizes expenses by

spending code; salaries, fringe benefits, utilities,

travel, communication, computing, depreciation

etc. ABC collects expenses from this financial system and

drive them to the activities performed.


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Salaries 313,000

Depreciation 155,000

Electric ity 132,000

Supplies 25,000

Travel 100,000

Total 725,000

Accounting Records Activities Salaries Depreciation Electricity Supplies Travel Total

Business Development 20,000 25000 5000 5000 55,000

Maint ianing Present Bus iness 80,000 60000 50000 5000 10000 2,05,00

Purhcasing Material 1,25,000 50000 20000 20000 60000 2,75,00

Set up Machines 25,000 10000 2000 37,000

Running Machines 50,000 10000 50000 1,10,00

Resolve Quality Problems 13,000 5000 25000 43,000

Total 3,13,000 155000 132000 25000 100000 7,25,00

ABC Records

Mapping


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Throughput Costing

Variable Costing Also called Direct

Costing

Focuses on Contri-bution Margin

This isnt GAAP

Throughput Costing

Also called Super-Variable Costing

Focuses on Through-put Contribution

This also isnt GAAP


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Example of Throughput Costing

10,000 units are made, 9,000 are sold.

Each unit sells for $350.

Variable mfg costs are $150 per unit, consisting of $90in materials, $40 in direct labor, and $20 in variable

mfg overhead.

Fixed mfg costs are $700,000.Variable non-mfg costs: $50 per unit sold.

Fixed non-mfg costs are $400,000.


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Throughput Costing

Total inventoriable cost per unit:

Only the $90 in direct materials

Th h t C t ib ti


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Throughput ContributionIncome Statement

Sales (9,000 x $350) $3,150,000

D.M. COGS (9K x $90) 810,000

Throughput Contribution 2,340,000

Mfg costs other than d.m.:

($40 + $20) x 10,000 units 600,000

Fixed Mfg Overhead 700,000Non-mfg costs* 850,000

Income $ 190,000*The same as under Absorption and Variable Costing


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Advantages

1. Improves speed of financial reporting.2. Brings accuracy in the data.

3. Provide true measures of overall productivity

on a day to day basis.


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Quality Costing

Involves quantifying the total cost of quality-related efforts and deficiencies.

Shows the importance of quality-related activities to management; demonstratethe cost of non-quality to an organization; track the causes and effects of theproblem, enabling the working out of solutions using quality improvement teams,

and then monitoring progress.

Its a powerful tool for enhancing a company's effectiveness as it is used as atechnique in the introduction and development of Total Quality Management(TMQ).

Provides practical advice on how to set about introducing and developing aquality costing system and using the data that emerges.


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Approaches to Measure Cost of Quality

The Quality costs are categorised into Prevention-Appraisal-Failure(PAF). This approach is most widely accepted for quality costing.The failure costs in this approach can be further classified into 2subcategories-Internal failure & External failure. The 3 categoriesof costs can be described as:

Prevention costs Appraisal costs

Failure Costs

Internal failure costs

External failure costs

Total Cost of Quality= Prevention Costs +Appraisal Costs + InternalFailure Costs + External Failure Costs

kaizen costing (2)

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