JIT, Target Costing and Life Cycle Costing

Learning Outcomes
Demonstrate relevance of JIT production
and purchasing systems
Explain target costing process
Manage costs using target costing ideas
Analyse life cycle costs and revenues
Understand the complications associated
with life cycle costing
Introduction
Recap lecture 4 Activity-Based Costing
Newer developments after relevance lost
concerns
Revisit the notion of value chain analysis
Retain value-added activities, remove non-
value added activities to enhance customer
and shareholder value
If cost leadership strategy management
costs using innovative ideas ABC, target
costing and life cycle costing
Just-in-time (JIT) systems
JIT inventory and production system
A comprehensive system for controlling the flow of
manufacturing in a multi-stage production
environment
The underlying philosophy is the simplifying of the
production process by removing non-value-added
activities
JIT can cover all aspects of the production process
Inventory management is crucial
Inventory is a major cause of non-value-added
activities and cost
Key features of JIT production
A pull method of coordinating production processes
Simplified production processes - cells
Purchase of materials, and manufacture of sub-
assemblies and products in small lots
Quick and inexpensive setups of production
machinery
High-quality levels for raw materials, components
and finished products
Effective preventative maintenance of equipment
Multi-skilled and Flexible work teams
JIT purchasing
JIT involves both production and purchasing
Reduces the number of suppliers
Long-term contracts with suppliers
Specifies quality standards in supplier contracts
to reduce need for inspection
Use of e-commerce to place orders, and
provide supplier on-line access to inventory
files ERP systems SAP, Oracle
Role of trust (read Tomkins paper in AOS,
2001
Costs and benefits of JIT
Costs of JIT
Substantial investment to change production facilities to minimise
non-value-added activities
An increase in the risk of inventory shortages and the associated loss
of production and sales
Benefits of JIT
Savings in inventory-carrying and insurance costs
Fewer losses due to spoilage, obsolescence and theft
No opportunity costs of high inventory
Eliminates non-value-added activities
Meets customers needs more effectively customer satisfaction
Reduction in inventory, not necessarily elimination
Sustainable supply chain
Simplified Accounting backflush costing

See handout - Example

Target Costing
A system of profit planning and cost
management that determines the life cycle cost
at which a proposed product must be produced
to generate the desired level of profit
It is cost management and profit planning
technique, not a costing technique
The cost target for a product is driven by the
need to sell the product at a certain market
price and to achieve a target profit margin
Focus on continuous improvement
Target Costing
Target Costing Process
Estimate the target selling
Determine target profit margin
Identify the cost reduction objective difference
between the current product cost and target
cost
Reduce cost and enhance customer value
Value engineering to eliminate non-value adding
elements in product design
Value analysis of manufacturing processes
Work with suppliers to reduce component/material
costs
Target Costing for Cost Management
It is price led
Focuses on customer expectations
Based on principles of life cycle
management, placing primary emphasis
on managing downstream and
manufacturing costs
Cross-functional involving managers
from across the value chain

See handout - Example

Life Cycle Costing (LCC)
Accumulate and manage costs and
revenues over the life cycle of the product
Broader LCC recognises social and
environmental impact
Four stages of the product life cycle
1. Product planning and initial concept design
2. Product design and development
3. Production
4. Distribution and customer (logistic) support
5. End of life- project/product
Life Cycle Budgeting
Involves estimating the expected costs
and revenues for each year of the
expected life of a product
Comparison between budgeted cost and
revenue with actual costs and revenues
Considers all relevant costs over the
value chain
Useful in product mix or pricing decisions
Managenig Costs Through LCC
Concepts of life cycle costing not widely
used because
There is a lack of awareness, or uncertainty
about how to calculate life cycle costs
Not easy for products with longer lives as it is
more difficult to assess
Changes in consumer tastes
Impact of competitors actions
Effects of inflation

See handout - Example

Life Cycle Costs and Cost
Commitment
Summary and Conclusion
JIT pull system, remove non-value added
costs
Target costing profit planning and cost
management
Life-cycle cost to generate desired profit
Value engineering to arrive at target cost
Life-cycle from inception to abandonment,
budgeted costs, revenue and profits
Impediments of LCC
Questions?

Thank you for your attention