Total Cost Management Philosophy: Target costing and Kaizen costing in the Modern Manufacturing Systems

Transcription

1 ARAB ACADEMY for SCIENCE. TECHNOLOGY &. MARITIME TRANSPORT ADVANCED MANAGEMENT INSTITUTE MBA PROGRAM _ ALEXANDRIA Total Cost Management Philosophy: Target costing and Kaizen costing in the Modern Manufacturing Systems A Thesis Submitted in partial fulfillment of the requirements for the MBA Degree Supervised by Prof. Dr- Ahmed Hussein Aly Hussein Professor of Accounting Alexandria University Departmenet of Accounting & Auditing Submitted By : Ramadan Abd EI Ghany Habiba 1999

2 Acknowledgment The researcher would like to acknowledge the many contributions of all those how helped in make this research possible. First of all, my sincerest thanks to my advisor, Prof Dr. Ahmed Hussein Ali for his guidance and invaluable insight during all phases of this research. Thanks to all members of the Advanced Management Institute, Arab Academy for Science, Technology & Maritime Transport for their generous help and cooperation, (specially the Dean Prof Dr. Mohammed El Hennawi, and Academy Head Prof Dr. Gamal Mokhtar ). Thanks to all the Chairmen and managers of all companies which helped and cooperated me by their responses. But, most of all, I want to recognize and acknowledge the contribution of my big and small family (father, mother, brothers, sisters, wife, sons and daughters) for their patience. Last, but certainly not least, I would like to thank all members of the thesis committee for their time and efforts.

3 Introduction: The business environment has been changed significantly in the last decades of the twentieth century. An obvious and observable aspect of this change has been in the technology and the complexity of the manufacturing operations. Furthermore, competition in many industries has becoming worldwide in scope, and the pace of innovation in products and services has accelerated. Adding to this, customers are becoming more sophisticated. The manufacturers in attempt to improve their competitive advantage, found that competitive advantages are realized by satisfying customers through introducing higher quality products, with lower prices, and delivery on time. These objectives are realized by using many new approaches such as, just-in - time, total quality management, flexible manufacturing systems, and activity-based costing. According to the Japanese view all of these approaches are belong to the downstream (after the production stage) of the manufacturing cycle. They realized that the upstream (in the R&D stage and designing stage) of the manufacturing cycle is treasure island of cost reduction opportunities. The idea of going upstream to achieve cost reduction, together with its supporting system and procedure, they called it Target Costing. Target Costing is not a form of costing, but it is a comprehensive program to reduce costs, which begins even before there are any plans for new products. It is a management technique, which is aimed at reducing the life- cycle costs of new products, while ensuring quality, reliability, and other consumer requirements, by examining all possible ideas for cost reduction at the product planning, research and development, and prototyping phases of production.

4 II Japanese are using in addition to the target costing another approach called it Kaizen Costing. They argued that kaizen costing improves the production process and reducing the cost of the current products. U sed with target costing, kaizen costing helps reducing the cost throughout the entire product design - development - production cycle. By relating target costing and kaizen costing, companies are better able to implement what is called total cost management during the entire life of a product or a service. The objective of this research is to clarify the effectiveness of using target costing and kaizen costing as a total cost management in the manufacturing companies. More specifically, the objective of this research is :,) To define the target costing, and the kaizen costing compared with the traditional approaches for reducing the costs. '\') To explain how to apply target costing and kaizen costing.,..) To explain the effectiveness of applying target costing and kaizen costing together in improving quality and reducing costs. :) To explore the possibility of applying target costing and kaizen costing in some manufacturing companies in Alexandria. The importance of the research is emerged from the need of the Egyptian manufacturing companies nowadays to face the sever competition of the foreign industrial companies under the rules of the GATT agreement and the open market and free trade policy, that are dominating in Egypt now. The Egyptian industrial companies are needing a total cost management system to compete in the global market. The total cost management system makes all people in

5 III all departments throughout the company involve in managing the cost in all phases of product life, by using target costing and kaizen costing. To achieve the objective of this research the study contains four chapters as follow: Chapter one : Contains a background information about the developments in the modern manufacturing environment and the need for improvement. This chapter is assigned for discussing the features of the new manufacturing environment and the other continuos improvements techniques and philosophies that are considered as a prerequisite background for applying the target costing approach. Chapter two: Introduces the two approaches of the total cost management philosophy. The chapter starts with Target Costing approach, then the Kaizen Costing approach. Chapter three: Contains the results of an exploratory study for exploring the applicability of Target Costing and Kaizen Costing in some manufacturing companies in Alexandria. Chapter four: Is assigned for the results and the recommendations of the research.

6 IV Contents Page no. 1- Chapter One : Introduction development in the modern manufacturing environment and the need for improvement 1 Introduction Just- In- Time(JIT) Definition Key elements in a llt system Benefits of a llt system Limitation of llt system The effect of the llt system on the cost accounting llt, Target costing and kaizen costing relationship Total quality management (TQM) Traditional quality management Total quality control Total quality management (TQM) TQM, Target costing and kaizen costing relationship Activity- Based Costing Benefits of activity- based costing Activity- based costing, target costing and kaizen costing relationship summery 2- Chapter Two: Target costing and kaizen costing Target costing

7 v Page No Target costing properties The structure of the target costing Target costing support systems The relationship between target costing and just- intime system The relationship between target costing and total quality management (TQM) The relationship between target costing and activitybased costing (ABC) Target costing and standard costing Kaizen costing Features ofkaizen costing The aim ofkaizen costing Computation of the target amount ofkaizen cost Determination of cost reduction targets Changes in target rates Kaizen costing and just- in- time system Kaizen costing and total quality management (TQM) Kaizen costing and activity- based costing (ABC) Kaizen costing compared with standard costing Kaizen costing through management by objectives Target costing and kaizen costing Comparison between target costing and kaizen costing 72

8 VI Page No Total cost management philosophy Summery and conclusion Chapter Three: Questionnaire Designing and Results Analysis Introduction Questionnaire Designing The sample Methods of collecting the data Questionnaire structure Questionnaire Results Analysis The type of industry and the sectors of the companies in the sample The knowledge of target costing and kaizen costing, its application, the suitableness to apply in the future and reasons that limit the application The suitableness of the environment of the companies to apply target costing The suitableness of the environment of the companies to apply kaizen costing The extent of applying target costing structure in the companies which are applying the approach Conclusion of the study 92 95

9 VII Page No. 4- Chapter Four: Summery, Results and recommendations The Summery The results of the Research The results of the theoretical study_ The results of the exploratory study_ The Recommendations of the research. 103 References 104

10 VIII Figures Page No. 1-1 Jurans Model of Optimum Quality Costs or the Economic Conformance level Model 1-2 Conventional and Taguchi Loss Functions 1-3 The Plan- Do- Check- Act Cycle (PDCA) 1-4 Graphic Example of Activity- Based costing 1-5 Activity- Based Costing Model 2-1 Target Cost Computation 2-2 General Summery of the Target costing Process 2-3 Process Management Functional Family Tree 2-4 Example of kaizen cost Decomposition in machining Department 3-1 The reasons for not applying target costing 3-2 The reasons for not applying kaizen costing 3-3 The new systems and programs for manufacturing and management 3-4 Elements of quality cost 3-5 Time of comparing the actual performance with the planning performance 3-6 The applying of some supporting systems and target costing 3-7 The kinds of measures which are implemented

11 IX Tables Page No. 2-1 Comparison between target costing and TIT production 2-2 Target reduction rate for each cost element 2-3 Calculation of the converted quantity in labor hours table 2-4 Standard vs. kaizen costing 3-1 Type of industries and sectors the companies belong to it The knowledge about target costing and kaizen costing approaches The implement of target costing and kaizen costing approaches The intention of applying target costing and kaizen costing approaches 84