multidisciplinary cost management with emphasis on target costing

Multidisciplinary Cost Management with Emphasis on

Target Costing

Dr. Elijah EzenduFIMC, FCCM, FIIAN, FBDI, FAAFM, FSSM, MIMIS, MIAP, MITD, ACIArb, ACIPM,

PhD, DocM, MBA, CWM, CBDA, CMA, MPM, PME, CSOL, CCIP, CMC, CMgr

“Like Quality, Cost Management has to become a discipline practiced by virtually every person in the firm.”

- Robin Cooper, Professor in Practice of Cost Management, Goizueta Business School, Emory University, Georgia.

“Multidisciplinary cost management involves deployment of strategies and techniques that engage every component of value chain so as to provide greater value in the standard offering at lower cost .”

- Elijah Ezendu

Functional Silos

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Traditional Cost ManagementFocusProhibition

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Multidisciplinary Cost ManagementFocus

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Multidisciplinary cost management provides opportunity so that all hands would be on deck for maximization of the bottom-line.

The Essence of Cost Management

It’s the process of ensuring that just commensurate cost is incurred while providing utmost service value to clients in order to increase corporate performance and boost business continuity.

Cost cutting is a reactive short term action for temporary gains that can’t be sustained. While cost management is a strategic process for maximizing the bottom-line without jeopardizing business continuity.

Cost Management versus Cost Cutting

“Strategic cost management not only leads to incremental performance improvement but also to transformational change across the value chain.”

Source: Institute of Management Accountants, USA

Cost Management Strategy

“This refers to plan, philosophy, system or scheme adoptable for resolving business competitiveness and corporate profitability through cost effectiveness.”

- Elijah Ezendu

The Concept of Cost Effectiveness

It focuses on modifying comparative coordinates of cost and quality in a strategic triangle, such that lower cost would be achieved at higher quality standard.

Strategic TriangleCos

t Quality

Time

Standard Objectives:

Decrease in costEnhancement of qualityReduction of service delivery time

Plurality of PurposeIn ecological development, a constricted game-

plan that fail to slot in the whole ecosystem would end up cutting swathe through flora and fauna. Therefore, every relevant cost management strategy must factor-in ‘composite value deliverables’ while structuring cost.

Cost Management Techniques• Activity Based Cost Management• Lean Enterprise • Capacity Management• Process Management• Customer Value Preference Analysis• Target Costing

The Quintessence of Target Costing

It’s an advanced model for apposite positioning of a firm’s competitive quotient as first-rate to facilitate sustained profitability, customer loyalty and business continuity.

The advent of globalization, easy importation and increased local competitors have impinged on freedom for tactless costing and provided opportunity for local firms to either reposition or shrink.

Target Costing

It’s a technique of cost management that accentuates profit planning through price-led, customer focused, design centered, cross-functional value assessment with the aim of providing state of the market product at customer-centric price.

Dimensions of Target CostingThis should be driven by identification of target

cost as the permissible cost incurable on a product in order to obtain a desired profit.

C = P – Ω Where C = Target Cost

P = Competitive Market Price Ω = Target Profit

Key Principles of Target CostingPrice-led costingCustomer-centricityCompetitiveManaging design of products and processesCross-functional teamsLife-cycle cost managementValue chain involvement

Target Costing Traditional Costing1. Competitive market considerations drive

cost planning.2. Price determine costs.3. Design is focus for reducing cost.4. Customer input guides cost reduction.5. Cross-functional teams manage costs.6. Suppliers are involved during product

design.7. Minimizes cost of ownership to

customers.8. Involves the whole value chain in cost

planning.

1. Market considerations not part of cost planning.

2. Costs determine price.3. Inefficiency is focus for reducing cost.4. Cost reduction is not customer driven.5. Cost Accountants are responsible.

6. Suppliers are involved only after product design.

7. Minimizes initial price paid by customers.

8. Little or no involvement of value chain in cost planning.

Using Target CostingMethod 1

1. Customer/Prospect Intelligence2. Establishment of Allowable Target Cost3. Ascertain Standard Traditional Cost4. Computation of cost-gap5. Conduct cost-gap analysis.6. Transform customer features into functional cost targets.7. Conduct Input Analysis8. Determine achievable target cost.

Using Target CostingMethod 2

1. Customer/Prospect Intelligence2. Establishment of Prospect-Centered Target Cost3. Identify Input Requirements4. Conduct Input Analysis Using Pool of Alternatives5. Ascertain exactitude of input6. Determine Achievable Target Cost

Four Forms of Revenue

• Revenue Received• Revenue Lost• Revenue Forgone• Escape Revenue Source: John Cleary, Revenue Trail To Hidden Profit in Your Business

Revenue Received

• Reported• Invested• Banked• Audited• Consumed

Revenue Lost• Unprofitable customers• Selling at a loss• Buying in wrong market• Investing in non-revenue generating activities• Proposals tendering with little chance of success• Profligate consumption

Revenue Foregone• Failure to develop client relationship• Losing valuable customers• Failure to adopt systems approach• Failure to position for the future• Failure to receive rebates or commission• Opportunity cost of rework & waste• Inability to prioritize tasks

Escape Revenue (Fraud)

• Misappropriation of funds• Misuse of expense account• Conflict of interest• Purchases for personal use• Using firm’s assets for personal gain

“Researchers claim most organizations have a minimum of 30% waste in their cost structure, yet typically accountants have not seen waste elimination as a major source of profit improvement”

- Jim Rigby

What is Waste?

Waste is anything that does not add value to a defined product or service in a firm.

Taiichi Ohno’s 7 Categories of Waste• Transport• Inventory• Motion• Waiting• Overproduction• Over-processing• Defects

Other Types of Wastes• The Waste of Untapped Human Potential • The Waste of Inappropriate Systems • Wasted Energy and Water • Wasted Materials • Service and Office Wastes • Waste of Customer Time • Waste of Defecting Customers

Benefits of Multidisciplinary Cost Management

i. Enhances esprit de corpsii. Develops organizational-wide cost management cultureiii. Increases value-deliverablesiv. Optimization of available resourcesv. Increase in profitabilityvi. Enhances business competitivenessvii. Provision of lucid dataviii. Enhances corporate evolutionix. Reduction of waste

Steps for Implementation of Multidisciplinary Cost Management

Top management buy-in Establishment of cost management project team Development of cost management strategy Appraisal of organizational cost-consciousness Identification of proficiency gap Organization-wide training Establishment of process-based teams Evaluation Review

Dr. Elijah Ezendu is Award-Winning Business Expert & Certified Management Consultant with expertise in HR, OD, Competitive Intelligence, Strategy, Restructuring, Business Development, Sales & Marketing, Interim Management, CSR, Leadership, Project & Programme Management, Cost Management, Outsourcing, Franchising, Intellectual Capital, eBusiness, Social Media, Software Architecture, Cloud Computing, eLearning & International Business. He holds proprietary rights of various systems. He is currently CEO, Rubiini (UAE); Hon. President, Worldwide Independent Inventors Association; Special Advisor, RTEAN; Director, MMNA Investments Limited. He had functioned as Chair, International Board of GCC Business Council (UAE); Senior Partner, Shevach Consulting; Chairman (Certification & Training), Coordinator (Board of Fellows), Lead Assessor & Governing Council Member, Institute of Management Consultants, Nigeria; Lead Resource, Centre for Competitive Intelligence Development; Turnaround Project Director, Consolidated Business Holdings Limited; Lead Consultant/ Partner, JK Michaels; Technical Director, Gestalt; Chief Operating Officer, Rohan Group; Executive Director (Various Roles), Fortuna, Gambia & Malta; Director, The Greens; Chief Advisor/Partner, D & E; Vice Chairman, Refined Shipping; Director of Programmes & Governing Council Member, Institute of Business Development, Nigeria; Member of TDD Committee, International Association of Software Architects, USA; Member of Strategic Planning and Implementation Committee, Chartered Institute of Personnel Management of Nigeria; Adjunct Faculty, Regent Business School, South Africa; Adjunct Faculty, Ladoke Akintola University of Technology, Nigeria; Editor-in-Chief & Chairman of Editorial Board, Cost Management Journal; National Executive Council Member, Institute of Internal Auditors of Nigeria; Member, Board of Directors (Several Organizations). He holds Doctoral Degree in Management, Master of Business Administration and Fellowship of Several Professional Institutes in North America, UK & Nigeria. He is an author & widely featured speaker in workshops, conferences & retreats. He was involved in developing Specialist Master’s Degree Course Content for Ladoke Akintola University of Technology (Nigeria) and Jones International University (USA). He holds Interim Management Assignments on Boards of Companies as Non-Executive Director.

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