Chapter 8

• Life Cycle Costing


  Used throughout cost life cycle to minimize overall cost, provides long-term perspective of product cost and product or service profitability
• Cost Life Cycle


  Sequence of activities within firm that begins with R&D, Design, manufacturing, marketing, distribution and customer service
• Focus of Cost Life Cycle

  Focus on cost produce -> distribution to customer
• Life Cycle Costing


  • Provides long term perspective of product cost and product or service profitability
• Activities in Cost Life Cycle

  • R&D
  • Actual production (Purchasing, Direct & indirect Mc)
  • Production
  • Design
  • Marketing
  • Upstream Activities
  • Downstream Activities
• Target Costing


  Process used for managing cost primarily in design activity, technique where firm determined desired cost of product/services
• Target Costing


  • Careful manage needed tradeoff between increased functionality & high cost, focus on design
• Steps in Implementing Target Cost Approach

  1. Determine market price

  2. Desired profit

  3. Calculate target cost

  4. Use value engineering - Identify ways to reduce cost

  5. Use kaizen & operational control for further reduce to cost
• Value Engineering


  Reduce cost by analyzing tradeoff between different types & level of product functionality and total product cost
• customer analysis to identify critical consumer preferences and define desired functionality of new products
• Functional Analysis


  Common type of value engineering which examines performance cost of each major function/feature of product
• Benchmarking


  Used to determine which features give firm a competitive advantage, objective is to come up with overall bundle of features that achieve desired balance of meeting consumer preference while keeping cost below targeted level
• Cost Tables


  Computer based database include comprehensive information about firm cost drivers, used by manufacturer to show different cost for parts of different size & type of materials
• Group Technology


  Method of identifying similarities in parts of product firm manufacturers, point of concern as manufacturing cost reduced, service and (warranty) cost increased with part spread on different models leading to product recall
• Kaizen Costing


  Ongoing search for new ways to reduce cost in manufacturing process of product given design of functionality, role is to develop new manufacturing methods & use new management techniques
• Theory of Constraints


  Method for managing manufacturing cost, process of identifying and managing constraints in making of products or in providing of services, maximize operating income faced bottleneck & non-bottleneck operations
• Steps in TOC Analysis


  1. Identify binding constraints

  2. Determine most efficient utilization for each binding constraint

  3. Manage flows through binding constraints
• DRUM BUFFER ROPE LOAD system


  System for balancing flow of production through binding constraint, add capacity to the constraint by adding new or improved machines and labor
• Sales Life Cycle


  • Sequence of phases in product or service life in market from introduction of product or service to growth in sales, finally maturing phase, decline and withdrawal from market
• Phases of Sales Life Cycle

  • Introduction
  • Growth
  • Maturity
  • Decline
• Phase 1: Introduction


  Little competition and sale arise slowly as customer become aware of new product or services, cost is relatively high, price is relatively high to recover from development cost, focus is on design, differentiation & marketing
• Phase 2: Growth


  Sales begin to increase rapidly and product variety increases, increase in competition and prices begin to soften, need for value chain analysis and master budget
• Phase 3: Maturity


  Sales continue to increase but at decreasing rate, reduction in number of competitors and product variety, reason is there must be same product as you produce or reach maximum of market, pricing strategy, cost control, quality & service as market continue to become more competitive
• Phase 4: Decline


  Survivors are able to differentiate their product, control cost, delivery quality and excellent service
• Continuous function/feature improvement is needed throughout the product life cycle
• CSF at design stage include

  1. Reduced time to market
  2. Reduced expected service cost
  3. Improve ease of manufacture
  4. Process planning & Design
• Design Method

  1. Basic Engineering
  2. Prototyping
  3. Templating
  4. Concurrent engineering
• Steps implementing target cost approach

  1. Determined market price
  2. Determined desired profit
  3. Calculate Target Cost
  4. Use volume engineering
  5. Use kaizen & operational control
• Upstream Activities

  • A starting point and require to look on nature of business 


  Includes:

  • R&D
  • Design
• Downstream Activities

  • Ending point and show how we sell our product 


  Includes:

  • Marketing and Distributing
  • Customer Services
• Actual production included purchasing, direct and indirect material cost
• Speed product development and delivery to sustain it's competitiveness

  Reduced time to Market
• Includes careful simple design and use of interchangeable or modular components

  Reduced Expected Service Cost
• Process Planning & Design 


  It should be flexible, fast set ups & product change over
• Network Diagram

  • Flowchart of work done show sequence of process and amount time required each.
• Task Analysis

  • Describe activity of each process in detail