Kaizen Costing (2)
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Transcript of 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