Strategic Costing

Though product and standard costing systems have traditionally played a significant role in expense manage, certain Japanese providers have introduced price concepts that reinforce their worldwide manufacturing strategies.

In undertaking so they have enhanced the price manage approach, and far more importantly, have established a direct link amongst management accounting practices and corporate objectives.

In controlling costs in the manufacturing stage, quite a few firms about the globe employ common costing systems that essentially estimate what expenses of creating a product need to be as a basis for arriving at a reasonable selling cost. Actual costs of production are then compared with estimated costs. Resulting variances in between common and actual costs are examined as a basis for corrective actions in the production or procurement method. This method can be thought of as a costbased pricing model. In contrast, lots of Japanese firms employ a price-based costing model. Also referred to as target costing, this strategic costing methodology is premised on designing and constructing items at prices intended to ensure market place achievement. Consider the Daihatsu Motor Enterprise. Its product development cycle (which usually lasts three years) begins using the production manager instructing Daihatsu’s departments to submit style and efficiency specifications that they think the auto must meet. This is fo lowed by a expense estimate based not on what it will cost to create the vehicle, but on an allowable cost per car. This allowable expense is according to subtracting a target profit margin that reflects the company’s strategic plans and financial projections from a target sales cost the firm believes the market place will accept. While used as a target, the allowable expense will not be static. Through production, allowable expense is reduced each and every month by a cost reduction rate according to short-term profit objectives.

In later years, actual fees from the earlier year are the beginning point for further reductions, thus assuring ongoing price cutting for provided that the vehicle is in production. This market-driven system, generally known as Kaizen costing, drastically reduces the reliance on classic normal costing systems. Standard costing systems seek to reduce variances amongst budgeted and actual expenses. Kaizen costing emphasizes doing what's vital to obtain a desired performance level below competitive marketplace conditions. 

The key differences among common and kaizen costing concepts. A different strategic costing concept introduced by the Japanese is behavioral costing. Inside a method costing method, overhead is applied to goods or routine services utilizing an overhead application rate. From a regular cost accounting perspective, manufacturing overhead is allocated to merchandise on a cause-and-effect basis. In spite of the capital intensity of many Japanese manufacturers, the use of direct labor as an allocation base for assigning overhead fees has continued. This practice encourages production managers to minimize as an alternative to just accumulate costs (i.e., encourage automation). Aproduction manager wishing to minimize his overhead burden is motivated to substitute capital for labor.