In recent years, rising global competition due to globalization and revolutionary technology has pressured firms to introduce cost reduction strategies in order to remain relevant and make profits (Maher, 2005). This has also led to introduction of strategic cost management techniques. This study aims at analyzing and discussing the impact of each technique on organizational strategy.
Target Costing
It is a cost reduction method applied during product design and involves designing a product at reduced costs while keeping quality and functionality high. Selling price of the product in the market minus the profit gives the target price wherefrom the engineers creatively design a product that meets the target cost (Drury, 2007). Target costing realizes that companies have less power over prices and presence of many opportunities in reducing costs at the design stage of a product (Clinton, 2003). The impact of target costing on organizational strategy is that the organizational strategy becomes market driven due to reliance on market forces to determine product target costs. It determines an organization’s strategy on meeting the long-term profit goals of an organization and requires close cooperation between various departments.
Product-specific kaizen costing
The practice involves redesigning of a product at the early production stages to trim down overrun costs (Cooper, 2004). It is mainly the creative alteration of product design during the manufacturing phase in an aim to reduce total costs. It entails the use of the most efficient ways, optimum location or resources in the manufacture of a product (Mondeni, 2000). The main impact of Product-specific Kaizen costing to an organization’s strategy is that it focuses on cost reduction on a specific product. Another impact is that it requires flexibility of manufacturing strategy for its efficiency and success.
General Kaizen Costing
This cost reduction method applies at the manufacturing phase of a subsisting product as opposed to target costing where cost reduction is at the design phase of a product (Lal, 2009). It mainly entails unremitting improvement of a product at the manufacturing stage to produce a quality product at a reduced cost (Maher and Weil, 2005). This happens through setting of targets for cost reduction and integrating all employees and manufacturing departments to achieve the target. The main impact of General Kaizen costing is continuous improvement, where all departments and employees contribute in saving time and costs. Therefore, it focuses on developing human resource and improving manufacturing and departmental efficiency.
Functional management costing
This cost reduction technique entails breaking down the production process into distinct independent units and treating them as profit centers. This gives the centers a leeway to increase profit generation due to increased revenue rather than only focusing on reducing costs. It also improves efficiency and dedication due to the realization of each unit’s input to the organization’s profitability. The main impact of Functional management costing on organization strategy is that it influences the general perception and competitiveness of the organization due to the participation of all the departments. The organizational strategy, therefore, focuses on the development of ways to improve efficiency of the functional areas as a way to improve overall organization competency and efficiency (Thukaram, 2007).
Product costing
This technique mainly focuses on the product and entails ensuring production occurs at target costs, ensure efficient production and reevaluating strategies for dealing with unprofitable products. The efficiency of the process impacts on the organization strategy through; ensuring high product quality and earlier realization of the need to discard or innovate on new products to replace unprofitable product lines (Smith, 2007).
In conclusion, the five cost management techniques impact differently on an organization’s strategy due to their different areas of focus. Successful implementation of more than one cost management technique ensures reduced costs and increased profitability in an organization. The cost management technique chosen by a company determines the organization’s strategy due to its impact on management, product development, design and production.
References
Clinton, B. (2003). Target Costing: Market-driven Product Design. London: CRC Press.
Cooper, R., and Slagmulder, R. (2004). Achieving Full-Cycle Cost Management. MIT Sloan Management Review. Cambridge: Fall 2004.
Drury, C. (2007). Management and Cost Accounting. New York, NY: Cengage Learning.
Lal, J. (2009). Cost Accounting. New Delhi: Tata McGraw-Hill Education.
Maher, M. and Weil, R. (2005). Handbook of Cost Management. New Jersey, NJ: John Wiley & Sons.
Mondeni, Y. (2000). Japanese Cost Management. New Jersey, NJ: World Scientific.
Smith, J. (2007). Handbook of Management Accounting. London: Elsevier.
Thukaram, R. (2007). Management Accounting. New Delhi: New Age International.