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Appointment fixed Bill is generated and money is collected Procudure Flow Appointment Fixation Patient check in Provision of care & testing in lab Patient check-out Film process time Report writing Billing and administration COST COST COST ACCOUNTING ACCOUNTING Exhibit 1 Activity Design Entry of Provision of care → patient → Check-in → and testing in → Check-out the laboratory Process report Process film Exhibit 2 Indicative Activity Cost Detail Cost Driver Volume of Cost Driver Labour time/ receptionist XX minutes Labour time/ receptionist XX minutes Ultrasound technician time Doctors’ time* Materials** Equipment Labour time/ receptionist Ultrasound technician time Physician/ radiologist time Labour time/ Bill clerk XX minutes XX minutes Procedure Life of equipment XX years XX minutes XX minutes Time XX minutes XX minutes * Physician time is needed approximately for every patient’s expressed minutes ** Materials during procedure include linen, condom (for covering probe), gel, printer paper and film At The Helm of the Affairs Congratulations Check-out Cost Per Unit → Patient exits Shri P K Bajpai, an Associate Member of the Institute, has been appointed as Director (Finance) of Bharat Heavy Electricals Ltd (BHEL). Prior to this, he has been heading company’s Financial Services Division as Executive Director. 762 The Management Accountant |September 2011 XX XX XX XX XX XX XX XX XX XX Total Cost Per Procedure → → → → Cost/ Procedure XX XX XX XX XX XX XX XX XX XX XX
Target Cost COST COST ACCOUNTING ACCOUNTING ACCOUNTING The long term financial success of any business depends on whether its prices exceed its costs by enough to finance growth, provide for reinvestment, and yield a satisfactory return to its stakeholders. As competition increases, and supply exceeds demand, market forces influence prices significantly more. To achieve a sufficient margin over its costs, a company must manage those costs relative to the prices the market allows or the price the firm sets to achieve certain market penetration objectives. The problem that firms face is that the prices are set by the market forces and the shareholders decide profits. Therefore firms have no other option but to set the cost and have to achieve that cost. In the context of these characteristics, the practice of target costing has evolved. Target costing is a fundamentally different way to look at the relationship of prices and costs. The basic target equation of “Price—Profit Margin = Cost” means that prices are driven and set either by competitive market forces or by the firm as it aggressively lowers its prices to increase market penetration; that profit margins are established such that the firm can make money; and that allowable costs are derived from price and margin. <strong>This</strong> method was pioneered by Toyota in the 1960s to achieve high quality and desirable features at a competitive price. Target costing is a design approach in which a company designs a product to achieve a desired profit while satisfying the customers expectations for quality and product features. The target costing (TC) practice (genka-kikaku in Japanese) seeks to bridge the gap between the cost determined through market research (i.e., what the customer is willing to pay) and the cost at which the firm can supply its product, given the firm’s technology and the state of its accumulated knowledge, without compromising its profitability. The balancing of costs, features and quality takes place throughout the design, manufacturing, sale and service though it target costing has the strongest influence during the design phase as the cost consequences of manufacturing method and features selected are mostly determined during the design phase of the product. Integrating Target Costing with Supply Chain Management : A Strategic Perspective Rajat Gera* Barnali Chaklader** The Target Costing approach is illustrated in Equation I. The allowable cost is the total product cost which the firm has to achieve and is dictated by consumer willingness to pay and market competition. (Target Cost) = (Selling Price) — (Profit Margin) Equation I The desired profit margin is driven by corporate strategic profit planning. In reality, the allowable cost might not be achievable in the short run, and the target cost is revised upward. The target cost estimate is first determined based on the best estimate of the future product’s costs and compared with the target cost, and the gap constitutes the subject of the costreduction program. The excess of the estimated cost over the target cost is reduced by management tools like value engineering. For example, the current cost estimates of the final product may be INR 100,000 while the target cost determined through market research and strategic analysis may be INR 80,000 which leads to a target cost reduction of Rs 20,000 ie 20%. The same is achieved by decomposing the gap into cost reduction targets for various business functions. Each function then redesigns its component of the product or re-engineers the manufacturing and/ or logistics process (i.e., JIT = just-in-time) to achieve the desired target cost estimate. The redesigning process is called value engineering, which is basically concerned with looking for alternatives to designing product with the same or greater level of quality/ functionality while reducing the cost. The process undergoes numerous iterations before the final product can be produced within the targeted cost. Supply Chain Management (SCM) : is a logistics network which consists of suppliers, manufacturing centers, warehouses, distribution centers and retail outlets as well as raw materials, work-in-process inventory and finished goods that flow between the facilities. SCM is also defined as a set of approaches utilized to efficiently integrate suppliers, manufac- * Associate Professor (Marketing), Institute of Management Technology, Ghaziabad ** Associate Professor (Finance and Accounting), Institute of Management Technology, Ghaziabad The Management Accountant |September 2011 763
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