Strategic Management of Price, Cost, and Quality

1
Strategic Management of Price, Cost, and Quality
2
TRADITIONAL APPROACH
The absorption costing approach to cost-plus
pricing takes cost as given and marks it up. The
company hopes consumers will be willing to pay
the resulting price.



3
TRADITIONAL APPROACH
By 1925, US manufacturing had developed
substantially all the tools available now. One
can say that management accounting had stopped
its development since then. Academic efforts to
reorganize management accounting as a powerful
tool of decision-making resulted in failure.

Relevance Lost The Rise and Fall of Managerial
Accounting--Johnson and Kaplan Professors of
Managerial Accounting



4
TRADITIONAL APPROACH

• The two most critical work activities for
  management accountants today are
• Strategic Planning
• and Process Improvement
• NEITHER is taught in the accounting curriculum.

(Counting More, Counting Less Transformations
in the Management Accounting Profession,
1999) Institute of Managerial Accounting



5
TRADITIONAL APPROACH

• The practitioner world has made major changes
  to stay ahead of the curve. The Big 4 call
  themselves professional or consulting firms
  rather than accounting firms. The primary
  professional journal for accountants in private
  industry recently changed its name from
  Management Accounting to Strategic Finance and
  the IMA no longer refers to its members as
  management accountants but instead as finance
  professionals.

6
TARGET COSTING APPROACH

• In the target costing approach, the selling price
  is taken as a given and the company strives to
  design and manufacture the product so that its
  cost is low enough to yield a satisfactory
  profit.
• Target costing is a market-driven approach that
  puts the emphasis on managing processes inside
  the company, rather than hoping that consumers
  will accept a price high enough to cover all of
  the costs the company has incurred.

7
Target Costing
Determine customer wants and price sensitivity.
8
Target Costing
9
TRADITIONAL APPROACH

• Most American companies arrive at their
  prices by
• adding up cost
• and then putting a profit margin on top.
• And then, as soon as they have introduced the
  product, they have to start cutting
  the price,
• have to redesign the product at enormous
  expense,
• have to take losses
• and often have to drop a perfectly good
  product because it is priced incorrectly.
• Peter Drucker, 1992

10
Target Costing
Once target cost is achieved, manufacturing
begins and product is sold.
11
Understanding target costing requires market
knowledge. Managers must understand that target
costing is not just about setting cost targets.
12
Target costing first involves translating
customer value expectations into an acceptable
product price. Next, the profit that
shareholders expect to make is determined.
13
Netting these two items result in the target
cost. Then, management must determine the proper
mix of costs that will result in a quality
product desired by the customer.
14
Target costing reduces the time to introduce new
products.
Target costing requires coordination.
Target costing can be applied to components.
Short product life cycles increase the importance
of target costing.
Target costing requires detailed cost information.
15
Advantages of Target Costing

• Proactive approach to cost management
• Orients organization toward customer
• Breaks down barriers between departments
• Enhances employee awareness and empowerment

Continued
16
Advantages of Target Costing

• Fosters partnerships with suppliers
• Minimize nonvalue-added activities
• Encourages selection of lowest cost value-added
  activities
• Reduced time to market

17
Disadvantages of Target Costing

• Effective use requires the development of
  detailed cost data
• Requires willingness to cooperate
• Requires many meetings for coordination

18
Continuous Improvement Costing
It is continuous improvement costing. It calls
for establishing cost reduction targets for
products or services.
Successful world-class companies use Kaizen to
avoid complacency.
What is Kaizen costing?
19
Quality Costs
Quality is conformance to customer expectations.
Successful companies know they must meet
customers quality and price expectations.
Quality is an essential element of the JIT
approach to inventory management.
Productivity is the relationship between output
and inputs Productivity Output/Inputs
20
A Real Life Example

• Since the 1980s both American and Japanese
  firms have known that a green car priced at an
  inflation adjusted 20,000 would conquer the
  automobile market. After working with hydrogen
  fuel cell technology in the 80s most engineers
  concluded that such a car would be the size of a
  bus and cost over 20,000,000. In the late
  1990s, this hydrogen fuel cell technology could
  fit in a Ford Taurus and cost over 200,000.

21
A Real Life Example

• In 2001 both Ford and Chrysler realized
  that they could not advance further in house so
  they went to an outside company and transferred
  their hydrogen fuel cell RD to Ballard Power
  Systems of Canada. In return both received major
  shareholder ownership of Ballard. Ballards
  mandate is to produce a hydrogen fuel propulsion
  system that fits a rigorous standard regarding
  size, weight, range, speed, horsepower, and
  price. Ballard must do this between 2004 and
  2010 or both Ford and Chrysler take back their
  RD.

22
Success Requires Quality of Design and Conformance
High
Do Right Things Right
Do Right Things Wrong (Failure)
(Winner!)
Quality of Design
Do Wrong Things Wrong (Failure)
Do Wrong Things Right (Failure)
Low
Low
High
Quality of Conformance
23
Quality Managerial Accounting
Internal failure costs occur when materials,
components, products, or services are identified
as defective before delivery to customers.
Preventive costs are incurred to prevent
nonconforming products from being produced or
nonconforming services from being performed.
External failure costs occur when nonconforming
products are services are delivered to customers.
Appraisal costs are incurred to identify
nonconforming products or services before they
are delivered to customers.
24
Types of Quality Costs
Appraisal and internal failure costs are better
than external failure costs.
But, the way to reduce total quality costs is to
spend money on prevention.
25
Quality Trend Analysis
20 - 18 - 16 - 14 - 12 - 10 - 8 - 6 - 4 - 2 - 0 -
Percent of Sales
1 2 3
4 5 6
Period
26
The End
27
(No Transcript)