Chapter 13 Joint Management of Revenues and Costs

1
Chapter 13Joint Management of Revenues and Costs

• Key Topics
• Value chain
• Target costing
• Kaizen costing
• Life cycle costing
• Pricing
• Cost based versus market based methods
• Other pricing influences

2
Why and How Do Accountants Analyze Production and
Service Systems?

• Continuously Improve Costs Over the Long Term by
• Enhancing efficiency
• Reducing costs
• Improving interactions with suppliers and
  customers

3
Manufacturer Value Chain
4

• Value-added activities
• Tasks or procedures that increase customer value
  (improve quality and reduce cost)
• Examples
• Non-value added activities
• Examples

5
Target Costing

• Traditional costing
• Price Cost Contribution Margin
• Target costing
• Target Cost Target Price Target CM

6
Target Costing Design Cycle
7
What Trade-Offs Are Made in Target Costing?

• Price
• Quality
• Functionality
• Automobile manufacturing examples

8
Organizations That Use Target Costing

• Komatsu/Caterpillar
• Lowest price at highest reliability
• Toyota
• First 4X4 at relatively high quality and low
  price
• Topcon Optical
• Highest price but cutting edge technology

9
Kaizen Costing
10
Life Cycle Costing

• Considers changes in price and costs over the
  entire life cycle of a good or service, from the
  time the product is introduced until it is
  dropped
• Allows the initial sales at a loss or large
  decommissioning costs at the end
• Expect a combination of continued sales volumes
  and cost reductions over time leading to overall
  profitability

11
Product Examples

• Upfront losses
• High decommissioning costs

12
Comparing Target, Kaizen, and Life Cycle

• Similarities
• Differences

13
Pricing

• Cost Based Price
• Price Cost x (1 Markup )
• Choose
• Measure of cost (variable, fixed and variable,
  etc.)
• Markup

14
Market-Based Pricing
15
Profit Maximizing Price
16
Pricing Problem
17
Other Market-Based Pricing Methods

• Match competitors prices using information from
• Competitor retail stores
• Competitor Web sites
• Internet auction sites

18
Other Influences on Price

• Peak load pricing
• Price skimming
• Penetration pricing
• Price gouging
• Transfer prices

19
Pricing in Not-for-Profit Organizations

• Prices need not cover costs
• Different prices can be set for different
  customers
• Prices are often based on ability to pay
• Organizational goals influence prices

20
Governmental Regulations

• Price discrimination
• Predatory pricing
• Collusive pricing
• Dumping