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Cost Management, Second Canadian Edition
LO1 Explain how value chain analysis, supply
chain, and JIT are used to improve operations
LO2 Explain target costing and calculate target
costs
LO3 Explain kaizen costing and compare it to
target costing
LO4 Explain life cycle costing
LO5 Explain lean accounting and discuss how it is
used
© John Wiley & Sons, 2012
Eldenburg, Cost Management, 2ce,
Chapter 14
Slide 3
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A value chain is the sequence of business
processes in which value is added to a product
or service.
Value chains explicitly recognize that no
organization operates in isolation from
suppliers and customers.
© John Wiley & Sons, 2012
Eldenburg, Cost Management, 2ce,
Chapter 14
Slide 5
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Value-added activities are tasks or functions that increase
the worth of an organization’s products and services to
customers and include the manufacturing process and
other operations that allow the organization to perform
processes essential for attracting new and retaining old
customers.
Non-value-added activities do not directly affect
customers, such as accounting, while essential and
related to daily operations, are not usually related to
customer value.
Before activities in the value chain can be improved or
eliminated, they must be identified and then categorized
as value-added or non-value-added activities.
© John Wiley & Sons, 2012
Eldenburg, Cost Management, 2ce,
Chapter 14
Slide 6
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The supply chain is the flow of resources from
the initial suppliers through the delivery of
goods and services to customers and clients.
Accountants analyze supply chains by
determining inventory level requirements.
Opportunities to reduce costs and improve
quality are identified through tracking and
analyzing usage patterns of raw materials,
supplies, finished goods, and shipped goods.
© John Wiley & Sons, 2012
Eldenburg, Cost Management, 2ce,
Chapter 14
Slide 7
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With Just-in-time (JIT) production, materials
are purchased and units are produced at the
time customers demand them.
Successful implementation of JIT systems
requires that organizations do the following:
Find high-quality suppliers
 Choose a manageable number of suppliers
 Locate suppliers with short transit times for
materials being delivered
 Develop efficient and reliable materials handling
processes
 Develop management commitment to the JIT
process
Eldenburg, Cost Management, 2ce,

© John Wiley & Sons, 2012
Chapter 14
Slide 8
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Target costing uses market-based prices to
determine whether products and services can
be delivered at costs low enough to make an
acceptable profit.
Target costing is the process of researching
consumer markets to estimate an appropriate
market price, and then subtracting the desired
return to determine a maximum allowable cost.
© John Wiley & Sons, 2012
Eldenburg, Cost Management, 2ce,
Chapter 14
Slide 10
The steps in a target costing design cycle
© John Wiley & Sons, 2012
Eldenburg, Cost Management, 2ce,
Chapter 14
Slide 11
Target Costing is most likely to be successful when:
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Product development and design phases are long and
complex
The production process is complex
The market is willing to pay for differences in quality
or function
The manufacturer can push some cost reductions onto
suppliers and subcontractors
The manufacturer can influence the design of subparts
© John Wiley & Sons, 2012
Eldenburg, Cost Management, 2ce,
Chapter 14
Slide 12
Ted’s Trailers is considering the design, production, and distribution of a new
motorcycle trailer. The selling price of similar trailers is $1,200. Ted believes
he can sell 10,000 trailers at this price, and he demands a margin of 25% of
selling price on all products. Compute the target cost of the trailers.
Target cost = $1,200 – ($1,200 x 25%) = $900
© John Wiley & Sons, 2012
Eldenburg, Cost Management, 2ce,
Chapter 14
Slide 13
The estimated production costs for the new trailer are shown below. List the
types of issues that Ted should investigate as he seeks to reduce these
estimated costs to meet the target cost.
Direct materials
Direct labour
Variable mfg overhead
Fixed mfg overhead
Variable selling expenses
Fixed selling & admin expenses
$500
210
50
70
40
70
$940
• Can the product be redesigned so that the
quantity of materials and/or labour can be
reduced?
• Can the purchase price of any of the
materials be re-negotiated with the
supplier(s)?
• Can the production process be redesigned so
that the quantity of materials and/or labour
can be reduced?
• Can the design of the product be changed to incorporate features that the
customer would be willing to pay for?
• Can variable selling expenses, for example, commissions, be reduced on this new
product?
• Can more than 10,000 units be produced and sold so that the allocation of fixed
costs per unit decreases?
© John Wiley & Sons, 2012
Eldenburg, Cost Management, 2ce,
Chapter 14
Slide 14
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Kaizen costing is continuous improvement in
product cost, quality, and functionality.
Cost targets (goals) are set based on price
predictions.
Kaizen Planning Process for Revenues and Costs
© John Wiley & Sons, 2012
Eldenburg, Cost Management, 2ce,
Chapter 14
Slide 16
© John Wiley & Sons, 2012
Eldenburg, Cost Management, 2ce,
Chapter 14
Slide 17
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Life cycle costing takes the product’s selling
prices and costs over its entire life cycle into
consideration.
Under life cycle costing, managers consider the
profitability of the product over a number of
years.
It is useful in industries with products that are
expected to produce losses when first
introduced, but rapid technological changes and
increased volume are expected in future years.
Initial production and process design costs will
be viewed as costs to be matched against the
revenues generated over the product’s entire life.
© John Wiley & Sons, 2012
Eldenburg, Cost Management, 2ce,
Chapter 14
Slide 19
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Lean accounting is a set of accounting principles and
methods to support lean business practices and
motivate continuous improvement.
Lean accounting combines the methods and concepts
of value chain analysis, cellular manufacturing, just-intime inventory systems, operational performance
measurements, activity based management, and target
and kaizen costing.
Continuous improvement efforts are motivated and
tracked using value stream analysis and visual control
procedures.
© John Wiley & Sons, 2012
Eldenburg, Cost Management, 2ce,
Chapter 14
Slide 21
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Value stream analysis is the process of
analyzing business processes to identify the
cost of individual value-added activities.
A demand-pull system is where the customer
demand “pulls” production through the
manufacturing process.
© John Wiley & Sons, 2012
Eldenburg, Cost Management, 2ce,
Chapter 14
Slide 22
Copyright © 2012 John Wiley & Sons Canada, Ltd. All rights
reserved. Reproduction or translation of this work beyond that
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or damages caused by the use of these programs or from the use
of the information contained herein.
© John Wiley & Sons, 2012
Eldenburg, Cost Management, 2ce,
Chapter 14
Slide 23