Cost management revolves around reducing, estimating, containing and avoiding costs using various different methods (Drury, 2008) (Groth and Kinney, 1994). Reducing costs is done through seeking to lower both fixed and variable costs associated with an activity. Containing costs is achieved by constraining or avoiding future increases to costs and cost avoidance revolves around eliminating unnecessary activities (Groth and Kinney, 1994). Cost management starts at identifying how costs arise and the events associated with them, only once activities have been identified can they start to be managed successfully. Cost management is often ignored by managers instead they are in ...view middle of the document...
Target costing emerged from life-cycle costing as it was a way of controlling costs at these early stages.
Target costing is a cost management system that takes part in market analysis to determine the final cost customers will pay for a product, deducting a margin and then works on getting all costs to that amount (BusinessDictionary.com, 2014). Target costing is most useful during the planning/design phase (Bayou & Reinstein, 1998) (Drury, 2008). This is beneficial as it manages to control and reduce the amount of costs that are committed to at the start of product development. This costing system motivates managers to control costs as only the projects in which target costs can be achieved or enhanced will be put into production (Bayou & Reinstein, 1998). However, it must be noted that a key weakness of target costing is if the costs and cost drivers used during target costing process are not accurate there may be a negative impact on profits. This negative impact would result from an increasing fixed cost per unit e.g. administration costs of €20,000 spread out over 20,000 units, gives a fixed cost per unit of €1, however spread out over 5,000 units gives a fixed cost per unit of €4, this could drastically affect the bottom line profit and although achieving the target sales price, costs may not be fully managed (Drury, 2008).
Kaizen costing is a Japanese method of continuous cost improvement. Its focus is on the production process and the cost reductions through utilising/ increasing efficiencies in production process. Potential cost reductions are smaller with Kaizen costing as their aim is to achieve pre-set reductions and the majority of costs have already been locked in (Drury, 2008). Kaizen costing is most useful in the manufacturing stage as its focus is on continual improvements, engaging front line staff may be a useful way to achieve Kaizen costing targets as they are dealing with the processes daily and may see efficiencies that are not obvious to people in the office.
All of the above are methods used in cost management. Each leading on from each other helps creating better efficiencies in the firms and shows managers where costs can be controlled, avoided or contained. Implementing these systems will help keep cost management at an optimal level.
Controversy may arise concerning which costs are necessary and which aren’t e.g. the financial manager may not see the point in spending €X amount on marketing, however the marketing manager may argue that it’s necessary and sales increased so much as a result of it. The above methods do not show clearly with costs are associated with which activities. Activity Based Management is useful for this as it shows costs by activities and in turn shows why costs are incurred and to why activity they relate. Activity based management is based on a different premise from the others previously mentioned. Life-cycle costing, target costing and Kaizen costing are...