COURSE: COST ACCOUNTING

COURSE CODE: ACC 303

LECTURER: MR CALEB YASHIM
TOPIC: CONTEMPORARY ISSUES IN COST
ACCOUNTING
GROUP MEMBERS

1. JOY WUSHIRI KAYINU BHU/19/03/01/0018

2. WASA JEDIDIAH SHEKWOYEYE BHU/20/03/01/0046
3. ESEAGWU PRAISE CHUKWUNWEKENE BHU/20/03/01/0073
4. ABUKA MIRA-EUNICIA BHU/19/03/02/0009
5. YEIPYENG JOHN CHUWANG BHU/19/03/02/0010
6. CLINTON ALFRED BHU/19/03/02/0032
7. DAVID NIRAT DAVOU BHU/19/03/02/0024
8. ONIGBOGI OLUWAFISAYO ISAAC BHU/19/03/01/0038
9. SAMUEL EMMANUEL JOEL BHU/19/03/01/0015
10. AUDU DINAH OJONUGWA BHU/19/03/01/0002
11. HOPE CHUKWUDI CHIDERA BHU/19/03/02/0026
12. OKONMAH ISIOMA RACHEAL BHU/19/03/01/0021
13. ALHERI LEVI GOFWEN BHU/19/03/01/0023
14. DAVID VICTORIA CHINEDUM BHU/19/03/01/0014
15. BINGHAM TRICIA HYELLACHARDAT BHU/19/03/01/0033
16. ADZER FAITH SEDOO BHU/19/03/01/0024
17. JOEL EMMANUEL RIMS BHU/19/0301/0043
18. WUKANGHA JETHRO BHU/19/03/02/0030
19. UNUGWU OTSE DAVID BHU/19/03/01/0029
20. FANIYAN EMMANUEL ADEWALE BHU/19/03/01/0005
21. ATOYEBI TEMILADE SMITH BHU/19/03/02/0028
22. NKEMDI CHINONSO BHU/17/03/02/0008
23. AKOR DAVID OJONUGWA BHU/19/03/01/0040
24.FAKOLADE WONDERFUL BHU/19/03/01/0010
TABLE OF CONTENT

1.0 INTRODUCTION

2.0 BALANCED SCORECARD AND STRATEGIC

ACCOUNTING

3.0 BACK-FLUSH ACCOUNTING

4.0 THROUGH-PUT ACCOUNTING

5.0 JUST IN TIME COSTING

6.0 TOTAL QUALITY MANAGEMET

7.0 KAIZEN COSTING

8.0 LIFE CYCLE COSTING

9.0 VALUE ENGINEERING

10.0 CONCLUSION

11.0 REFERENCES
1.0 INTRODUCTION: Cost and Management Accounting practice helps an
organization to survive in the competitive, ever-changing world, because it
provides an important competitive advantage for an organization that guides
managerial action, motivates behaviors, supports and creates the cultural values
necessary to achieve an organization’s strategic objectives. Management
accounting has several contemporary issues as present in this concurrent world.

1.1 What is a contemporary issue: A contemporary issue refers to an issue that is
currently affecting people or places and that is unresolved. A geographic issue refers
to a topic, concern or problem, debate, or controversy related to a natural and/or
cultural environment, which includes a spatial dimension.

1.2 What Is Cost Accounting?

Cost accounting is a form of managerial accounting that aims to capture a company's
total cost of production by assessing the variable costs of each step of production as
well as fixed costs.

1.3 What is Managerial Accounting?

Managerial accounting (also known as cost accounting or management accounting) is

a branch of accounting that is concerned with the identification, measurement,
analysis, and interpretation of accounting information so that it can be used to help
managers make informed operational decisions.

 
2.0 BALANCED SCORECARD AND STRATEGIC MANAGEMENT
2.1 WHAT IS A BALANCED SCORECARD (BSC)?
The term balanced scorecard (BSC) refers to a strategic management
performance metric used to identify and improve various internal business functions
and their resulting external outcomes. Used to measure and provide feedback to
organizations, balanced scorecards are common among companies in the United
States, the United Kingdom, Japan, and Europe. Data collection is crucial to providing
quantitative results as managers and executives gather and interpret the information.
Company personnel can use this information to make better decisions for the future of
their organizations.
A balanced scorecard is a strategy performance management tool – a well-
structured report that can be used by managers to keep track of the execution of
activities by the staff within their control and to monitor the consequences arising
from these actions. The phrase 'balanced scorecard' primarily refers to a performance
management report used by a management team, and typically this team is focused on
managing the implementation of a strategy or operational activities
Accounting academic Dr. Robert Kaplan and business executive and theorist Dr.
David Norton first introduced the balanced scorecard. The Harvard Business Review
first published it in the 1992 article "The Balanced Scorecard—Measures That Drive
Performance." Both Kaplan and Norton worked on a year-long project involving 12
top-performing companies. Their study took previous performance measures and
adapted them to include nonfinancial information. Companies can easily identify
factors hindering business performance and outline strategic changes tracked by
future scorecards.
The scorecard can provide information about the firm as a whole when viewing
company objectives. An organization may use the balanced scorecard model to
implement strategy mapping to see where value is added within an organization. A
company may also use a BSC to develop strategic initiatives and strategic objectives.
This can be done by assigning tasks and projects to different areas of the company in
order to boost financial and operational efficiencies, thus improving the company's
bottom line.
The Balanced Scorecard was introduced as one of the newest management tools.
The purpose was to allow organizations to be better able to use their intangible assets.
The balanced scorecard is to be used as a supplement to traditional financial
measures. It measures performance from three additional perspectives; customers,
internal business processes, and learning and growth. The scorecard can help top-level
management link the long-term strategy with the short-term actions. Managers using a
balanced scorecard do not only have to rely on the short-term financial results as
indicators of the company’s progress. It brings in other indicators that provide
information about how the short-term results have affected the long-term strategy.

2.2 PROCESSES SCORE CARD ALLOWS MANAGERS INTRODUCE

The scorecard allows managers to introduce four new processes;

1. Translating the vision,

2. Communicating and linking,
3. Business planning, and
4. Feedback and learning.

1. Translating the vision is a means of expressing the mission/vision statements

with an integrated set of objectives and measures. This forces the top
management to develop operational measures, which requires them to discuss,
and eventually agree on, a means of achieving the goals of the company.

2. Communicating and linking is a process that facilitates the communication of

strategies throughout the entire organization. Departmental and individual
objectives must be aligned with the strategy through evaluation procedures
and incentives. To have goal congruence between the individual employees
 and the company, scorecard users engage in three activities: communicating
and educating, setting goals, and linking rewards to performance measures
which are in turn linked to the overall strategy.

3. Business planning is the third process used by managers with the balanced
scorecard. By using the scorecard, businesses will integrate their strategic
planning and budgeting processes. This makes sure that the budgets support
the strategies of the company. The users of the scorecard pick measures that
represent each of the four perspectives, and then set targets for each. Then they
will decide which specific actions will help them in reaching those targets.
Using short-term milestones to evaluate the progress toward the strategic goal
is what results from using the balanced scorecard.

4. The fourth, and final, process is feedback and learning. With the balanced
scorecard in place managers can monitor feedback and relate this to the
strategy. The first three processes are very important, but they demand a
constant objective. Any deviation from the plan is considered a defect. By
adding the feedback and learning process, the scorecard becomes balanced by
providing real time information to enhance strategic learning.

2.3 EXAMPLES OF A BALANCED SCORECARD (BSC)

Corporations can use their own, internal versions of BSCs, For example, banks often
contact customers and conduct surveys to gauge how well they do in their customer
service. These surveys include rating recent banking visits, with questions ranging
from wait times, interactions with bank staff, and overall satisfaction. They may also
ask customers to make suggestions for improvement. Bank managers can use this
information to help retrain staff if there are problems with service or to identify any
issues customers have with products, procedures, and services.

In other cases, companies may use external firms to develop reports for them. For
instance, the J.D. Power survey is one of the most common examples of a balanced
scorecard. This firm provides data, insights, and advisory services to help companies
identify problems in their operations and make improvements for the future. J.D.
Power does this through surveys in various industries, including the financial services
and automotive industries. Results are compiled and reported back to the hiring firm.

2.4 ESSENTIAL ELEMENTS FOR STRATEGIC PLANNING

The balanced scorecard supplies three essential items to strategic learning.

1. It articulates the vision. The holistic vision is communicated to the entire

organization, and the individual efforts are linked to business unit objectives.

2. The scorecard supplies a strategic feedback system. This system views the
strategies as hypotheses, and should be able to test, validate, and modify these
hypotheses.

3. The balanced scorecard facilitates strategy review. Instead of using periodic

meetings to evaluate past performances as the traditional financial review process
does, scorecard user’s review the feedback in a way to gain a better understanding of
if the strategy is being reached, how is it being reached, and should the strategy be
modified based on new information. This gives the organization a forward focus.

2.5 PERSPECTIVES OF THE BALANCED SCORECARD MODEL (BSC)

Information is collected and analyzed from four aspects of a business:

1. Learning and growth are analyzed through the investigation of training and
knowledge resources. This first leg handles how well information is captured
and how effectively employees use that information to convert it to a
competitive advantage within the industry.
 2. Business processes are evaluated by investigating how well products are
manufactured. Operational management is analyzed to track any gaps, delays,
bottlenecks, shortages, or waste.
3. Customer perspectives are collected to gauge customer satisfaction with the
quality, price, and availability of products or services. Customers provide
feedback about their satisfaction with current products.
4. Financial data, such as sales, expenditures, and income are used to understand
financial performance. These financial metrics may include dollar amounts,
financial ratios, budget variances, or income targets.1

These four legs encompass the vision and strategy of an organization and require
active management to analyze the data collected. The balanced scorecard analyzes is
often referred to as a management tool rather than a measurement tool because of its
application by a company's key personnel.

2.6 CHARACTERISTICS THAT DEFINE A BALANCED SCORECARD

Characteristics that define a Balanced Scorecard are

a. its focus on the strategic agenda of the organization/coalition concerned;

b. a focused set of measurements to monitor performance against objectives;
c. a mix of financial and non-financial data items (originally divided into four
"perspectives" - Financial, Customer, Internal Process, and Learning &
Growth); and,
d. a portfolio of initiatives designed to impact performance of the
measures/objectives.[3] this is just for information

2.7 Advantages of a balanced scorecard:

Overall, a balanced scorecard helps companies focus on performance measurement in
more than one area. It takes into account items that can sometimes get overlooked in a
company such as internal processes and current customer satisfaction. Here are some
of the biggest advantages of using this method in your business: 

1. Brings structure to business strategy

Different departments within an organization may have their own way of

measuring performance and what they consider to be important in terms of
metrics. With a balanced scorecard, different leaders and departments can still
individualize their performance measurement, but it all falls within a set structure
that can be understood across the organization. It gives a common place to
everyone in the company to measure success.

2. Makes communication easier

Communication across team members and departments becomes easier when

everyone is speaking the same language. In other words, having a streamlined
performance measurement system means that it’s easier to talk about strategy and
progress within the organization.

3. Facilitates better alignment

With a balanced scorecard, members of the organization can easily link their
objectives and goals at different levels of the company. It takes the guesswork out of
trying to understand everyone’s responsibilities and it gets teams and departments
synced up under one structure. This also leads to having a much clearer picture over
projects and initiatives, which hopefully turns into a shorter turnaround time with
more optimal results.
 4. Connects the individual worker to organizational goals

A balanced scorecard helps employees “keep their eyes on the prize” so-to-speak in
terms of goals. Individual workers may find it helps their own performance when they
can see the greater purpose behind the goals and objectives they’re aiming to hit. It
also has the added benefit of helping employees find purpose in the organization, thus
keeping them engaged in their work. 

2.8 Disadvantages of a balanced scorecard

While there are so many advantages to implementing a balanced scorecard system

into your workplace, there are also potential roadblocks and disadvantages to
balanced scorecards. 

1. It must be tailored to the organization

A balanced scorecard is supposed to provide a framework from which to work from,

however, it will still need to be customized to every organization using this system.
This can take up a lot of time, and while examples are helpful, they can’t be copied
exactly due to the unique needs of every business.

2. It needs buy-in from leadership to be successful

For the balanced scorecard system to be fully effective, it must be implemented from
the bottom all the way to the top of the organization. This means getting buy-in from
leaders, which can sometimes take some convincing, not to mention the learning
curve involved with getting the whole organization to use the new system.

3. It can get complicated

The framework itself of balanced scorecards takes some time and dedication to
understand. There are countless resources and case studies to read from and it’s easy
to get bogged down with the many different ways of using this method.
 4. It requires a lot of data

Most of the time balanced scorecards require managers and team members to report
information, which means logging data. Many don’t like this because they find it
tedious and also, it can get in the way of doing the work required to meet objectives.

It is important to note that:

 A balanced scorecard is a performance metric used to identify, improve, and
control a business's various functions and resulting outcomes.
 The concept of BSCs was first introduced in 1992 by David Norton and
Robert Kaplan, who took previous metric performance measures and adapted
them to include nonfinancial information.
 BSCs were originally developed for for-profit companies but were later
adapted for use by nonprofits and government agencies.
 The balanced scorecard involves measuring four main aspects of a business:
Learning and growth, business processes, customers, and finance.
 BSCs allow companies to pool information in a single report, to provide
information into service and quality in addition to financial performance, and
to help improve efficiencies.
In conclusion, Companies have a number of options available to help identify
and resolve issues with their internal processes so they can improve their financial
success. Balanced scorecards allow companies to collect and study data from four key
areas, including learning and growth, business processes, customers, and finance. By
pooling together information in just one report. Companies can save time, money, and
resources to better train staff, communicate with stakeholders, and improve their
financial position in the market.

3.0 BACK FLUSH ACCOUNTING

3.1 MEANING OF BACK FLUSH ACCOUNTING
Back flush accounting is when you wait until the manufacture of a product has been
completed, and then record all of the related issuances of inventory from stock that
were required to create the product. This approach has the advantage of avoiding all
manual assignments of costs to products during the various production stages, thereby
eliminating a large number of transactions and the associated clerical labor. Back
flush accounting is a certain type of "postproduction issuing", it is a product costing
approach, used in a JUST-IN-TIME (JIT) operating environment, in which costing is
delayed until goods are finished i.e. the cost of producing goods and services like raw
material cost, labor cost and various other direct, indirect cost, overheads are
determined, calculated and recorded only after they have been produced, completed or
sold by using a standard cost per unit multiplied by the quantity of goods produced.
3.2 FEAUTURES OF BACK FLUSH ACCOUNTING
A. In back flush costing, the cost of materials is not separately calculated, but it is
transferred directly to the finished product account.
B. Tracking work in the process is not possible, and no other work account is
separately maintained during the process.
C. Journal entries in inventory accounts get delayed until the time of production or
sale, and the standard costing mechanism is used to assign to units when journal
entries are passed.
D. The cost of conversion is shared with finished goods inventory account based on
the operating time of labor.
E. If the product manufactured involves not only one single product but also many
parts along with it with high or low variable consumption, backflush costing becomes
inappropriate.
F. When the units of goods are completed, the material cost is deducted from
inventory, and finished goods are transferred to the material account.

3.3 BENEFITS OF BACK FLUSH ACCOUNTING

i. Simplified accounting process as only single journal entry needs to be made when
the back flush costing method is used and that too at the end of the production
process, which makes it an easier choice.
ii. It allows companies to easily assign costs to correspond to inventory.
iii. It saves time for the companies to record each and every data during the
production process, which in turn saves the accounting cost.
iv. It simplifies the bookkeeping process and administrative duties without losing
much detailed information.

3.4 LIMITATIONS OF BACK FLUSH ACCOUNTING

a. It is not useful for companies with slow inventory turnover as the cost recorded will
be too long after incurred.
b. This method of accounting does not conform to the principle of GAAP and
therefore is not ideal for use always.
c. The standard cost used in this method may vary with time and thus do not provide
accurate accounting entries in the future.
d. It is not useful for the businesses of the customized product as it would require the
creation of a unique bill for each product, making it a cumbersome process.

3.5 WHEN IS BACKFLUSH COSTING USED?

Back flush costing is generally used by companies that keep low levels of inventory
and experience high turnover in inventory. It is because costs are still recorded
relatively close to the day they are incurred. Companies with slow inventory turnover
tend to record costs as they are incurred, as the product may remain unsold for a
longer duration of time.
The back flush costing method works particularly well, where many different costs go
into the production of a good. In such an instance, it can simplify the accounting
process significantly. As a result, many manufacturing companies with complex
production processes use back flush costing. However, companies that sell more
customized products are less suited to a back flush costing method, as the unit cost
will vary.
Back flush accounting formula
Back flush accounting is entirely automated, with a computer handling all
transactions. The formula for it is:
(Number of units produced) x (unit count listed in the bills of material for each
component)
= Number of raw materials units removed from stock

4.0 THROUGHPUT ACCOUNTING (TA)

4.1 THROUGHPUT ACCOUNTING: Throughput accounting (TA) is a principle-
based and simplified management accounting approach that provides managers with
decision support information for enterprise profitability improvement.
TA is relatively new in management accounting, It is an approach that identifies
factors that limit an organization from reaching its goal, and then focuses on simple
measures that drive behavior in key areas towards reaching organizational goals.
TA was proposed by Eliyahu M. Goldratt as an alternative to traditional cost
accounting. As such, Throughput Accounting is neither cost accounting nor costing
because it is cash focused and does not allocate all costs (variable and fixed expenses,
including overheads) to products and services sold or provided by an enterprise.
Throughput Accounting is a management accounting technique used as the
performance measure in the Theory of Constraints, It is the business intelligence used
for maximizing profits, however, unlike cost accounting that primarily focuses on
'cutting costs' and reducing expenses to make a profit, Throughput Accounting
primarily focuses on generating more throughput. Conceptually, Throughput
Accounting seeks to increase the speed or rate at which throughput t is generated by
products and services with respect to an organization's constraint, whether the
constraint is internal or external to the organization. Throughput Accounting is the
only management accounting methodology that considers constraints as factors
limiting the performance of organizations.
Management accounting is an organization's internal set of techniques and
methods used to maximize shareholder wealth. Throughput Accounting is thus part of
the management accountants' toolkit, ensuring efficiency where it matters as well as
the overall effectiveness of the organization. It is an internal reporting tool. Outside or
external parties to a business depend on accounting reports prepared by financial
accountants who apply Generally Accepted Accounting Principles (GAAP) issued by
the Financial Accounting Standards Board (FASB) and enforced by the U.S.
Securities and Exchange Commission (SEC) and other local and international
regulatory agencies and bodies such as International Financial Reporting Standards
(IFRS).

4.2 What is Throughput Accounting?

“Throughput” is the rate at which a corporation converts its goods, services, and other
offerings into sales and makes money out of it. “Throughput Accounting” is a modern
technique of management accounting and presents an alternative to conventional
forms of accounting. Its main goal is to identify the limitations and constraints that
can delay the production and related processes that can eventually lead to a delay in
sales. The delayed sale will mean a delay in money realization.
Throughput Accounting improves profit performance with better management
decisions by using measurements that more closely reflect the effect of decisions on
three critical monetary variables
One of the most important aspects of Throughput Accounting is the relevance of
the information it produces. Throughput Accounting reports what currently happens in
business functions such as operations, distribution and marketing. It does not rely
solely on GAAP's financial accounting reports and is thus relevant to current
decisions made by management that affect the business now and in the future.
Throughput Accounting is used in Critical Chain Project Management (CCPM), in
businesses that are externally constrained (particularly where the lack of customer
orders denotes a market constraint), as well as in strategy, planning and tactics, etc.
Throughput Accounting also pays particular attention to the concept of 'bottleneck'
(referred to as constraint in the Theory of Constraints) in the manufacturing or
servicing processes.

4.3 Throughput Accounting uses three measures of income and expense:

• Throughput (T) is the rate at which the system produces "goal units." When the
goal units are money [6] (in for-profit businesses), throughput is net sales (S) less
totally variable cost (TVC), generally the cost of the raw materials (T = S – TVC).
Note that T only exists when there is a sale of the product or service. Producing
materials that sit in a warehouse does not form part of throughput but rather
investment. ("Throughput" is sometimes referred to as "throughput contribution" and
has similarities to the concept of "contribution" in marginal costing which is sales
revenues less "variable" costs – "variable" being defined according to the marginal
costing philosophy.)
• Investment (I) is the money tied up in the system. This is money associated with
inventory, machinery, buildings, and other assets and liabilities. In earlier Theory of
Constraints (TOC) documentation, the "I" was interchanged between "inventory" and
"investment." The preferred term is now only "investment." Note that TOC
recommends inventory be valued strictly on totally variable cost associated with
creating the inventory, not with additional cost allocations from overhead.
• Operating expense (OE) is the money the system spends in generating "goal
units." For physical products, OE is all expenses except the cost of the raw materials.
OE includes maintenance, utilities, rent, taxes and payroll.

4.4 Advantages of Throughput Accounting over other conventional forms of

accounting
Throughput Accounting has numerous advantages over other forms of accounting
such as cost accounting, financial accounting, etc.
 A. Throughput Accounting helps in the generation of the best possible short-term
incremental profits by taking care of the bottlenecks and eliminating them. It
is simple to understand and easy to implement for management with respect to
other forms of accounting. It is not completely bound by financial accounting
reports generated under GAAP and hence, provides flexibility to the
management. Also, they can act on the information without having to wait for
formalities such as an audit as in the case of other forms of accounting. This
means quicker decision-making and implementation.

B. It facilitates daily and weekly report generation and hence helps in continuous
evaluation and control. Also, this method has a realistic approach in
ascertaining the effectiveness of the control systems in place and achieving the
company objectives of making maximum possible money in minimum time.

4.5 ILLUSTRATION
A company, ABC Ltd., produces a product that has a selling price of $50. The direct
material cost for each product manufactured is $20. Each unit of product
manufactured takes two factory hours to produce. ABC Co. has a limited amount of
factory hours for production, which is only 10,000 hours. ABC Co.’s operating
expenses for each month is $100,000.
SOLUTION
Before assessing the throughput accounting ratio, it is crucial to calculate the
product’s throughput.
Throughput = Sale revenue from the product – Direct material costs
Throughput = $50 – $20
Therefore, Throughput = $30
Then is necessary to calculate the return per factory hour, which is as follows.
Return per factory hour = Throughput per unit / Product’s time taken for the limited
resource
Return per factory hour = $30 / 2
Therefore, Return per factory hour = $15/hour
Lastly, it is critical to calculating the cost per factory hour.
Cost per factory hour = Total factory cost / Total limited resource time available
Cost per factory hour = $100,000 / 10,000 hours
Therefore, Cost per factory hour = $10/hour
Now, we can calculate the throughput accounting ratio as follows.
Throughput Accounting Ratio (TPAR) = Return per factory hour / Cost per factory
hour
Throughput Accounting Ratio = $15 per hour / $10 hour
Therefore, Throughput Accounting Ratio = 1.5
Therefore, producing the product will be overall profitable.

When a company’s throughput accounting ratio is 1, it means that the company

generates the same return as it incurs costs. However, companies prefer for the ratio to
be greater than 1. The higher the ratio is for a company, the better. It signifies that the
company is generating more income than its costs for a unit of factor hour.
When a company’s throughput accounting ratio is greater than 1, meaning that its
throughput is profitable. In that case, it is beneficial for the company to continue with
the process as it will help cover the fixed costs while also making profits. A TPAR
ratio of below 1, on the other hand, means that the company cannot recover its fixed
costs from the throughput.
In Conclusion Throughput accounting is a process companies use to maximize
profitability and reduce costs when there are bottlenecks involved. The throughput
accounting ratio looks at the returns from a product in comparison to its costs.
Companies prefer products that have a throughput accounting.

5.0 Just In Time Costing (JIT)

5.1 JUST IN TIME COSTING: It is an inventory management method in which
goods are received as they are needed. Just in time is a technique for the organization
of work flow to allow rapid, high quality, flexible production while minimizing
manufacturing waste and stock level. JIT purchasing is a cost accounting strategy
where you purchase the minimum amount of goods to meet customer’s demand i.e.
you request a price quote based on new, different levels of purchasing activity. For
example, a company that markets office furniture from the manufacturer only when a
customer makes a purchase. The manufacturer delivers it directly to the customer .The
retailer has saved the cost of saving inventory.

The main objective of this method is to reduce inventory holding costs and increase
inventory turnover. Most companies create and hold inventory in excess, meaning
they create goods in anticipation of other orders. The JIT method involves creating,
storing and keeping track of only enough orders to supply the actual demand for the
company’s products.

For example, a company that markets office furniture, but does not manufacture it
may order the furniture from the manufacturer only when a customer makes a
purchase. The manufacturer delivers it directly to the customer.

5.2 Just In Time Background and History

JIT is a Japanese management philosophy which has been applied in practice since the
early 1970s in many Japanese manufacturing organizations. It was first developed and
perfected within the Toyota manufacturing plants as a means of meeting customer
demands with minimum delays. Taiichi Ohno is referred to as the father of JIT. The
system is said to have contributed mainly to the Japanese manufacturing success.

5.3 Importance/Advantages of Just In Time

1. Reduces inventory waste

A JIT strategy eliminates over production, which happens when the supply of an item
in the market exceeds the demand and leads to an accumulation of unsalable
inventories. These unsalable products turn to into inventory dead stock, which
increases waste and consumes inventory space. In a JIT system you only order what
you need so, there is no risk of accumulating unusable inventory.

2. Decreases warehouse holding cost

Warehousing is expensive and excess inventory can double your holding costs. In a
JIT system, the warehousing holding costs are kept to a minimum, because you only
order when your customer places an order so, your item is already sold before it
reaches you therefore eliminating the need to store your products for long. Companies
that operate the JIT system will be able to reduce number of items in their warehouses
or eliminate warehouses altogether.

3. Local sourcing

Since Just in Time requires you to start manufacturing only when an order is placed
you need to source your raw materials locally as it will be delivered to you run it
much earlier. Also, local sourcing reduces the transportation time and costs which is
involved. This in turn provides the need for many complementary businesses to run in
parallel thereby improving the employment rates in the demographic.

4. gives the manufacture more control

In a JIT system the manufacturer has complete control over the process, which works
on a demand-pull basis. They can respond to customers' needs quickly by increasing
the production for an in-demand product and reducing the production for slow-
moving items. For example, Toyota does not purchase raw material until an order is
received. This has allowed the company keep minimal inventory, thereby reducing its
costs and enabling it to quickly adapt to changes in demand without having to worry
about existing inventory.
5.4 Drawbacks/disadvantages of Just in Time

Even though the JIT model saves a lot of costs for businesses that use it, it also has a
few drawbacks:

1. JIT makes it very difficult to re-work orders, as the inventory is kept to a bare
minimum and only based on the customer’s original orders.

2. The model is dependent on suppliers' performance and timelines which are hard to
ensure. Additionally the manufacturer/seller needs to be able to cover any sudden
increases in the price of raw materials, since they cannot wait to order during better
pricing.

3. Since the JIT model requires a lot of shipping back and forth between the supplier
and manufacturer and customer, it can have detrimental effects on the environment
due to over consumption of fossil fuels and packaging.

4. In case of disruptions, a JIT model can have a major impact on the business. Since
there is no excess stock to fall back on sales may come to a halt.

5. A Just in Time system needs to be carefully tracked and organized which will be
hard if done manually. Software should be adopted as it makes the whole process
more manageable. Even though a good software system can be helpful it can be tricky
or expensive to operate and train your personal accordingly to use the same.

6.0 Total Quality Management (TQM)

Total Quality Management consists of organization-wide efforts to install and
make permanent climate where employees continuously improve their ability to
provide on demand products and services that customers will find to particular value.
Total emphasizes that departments in addition to production are obligated to improve
their operations. Management emphasizes that executives are obligated to actively
manage quality through funding, training, staffing and goal setting. While there is no
widely agreed-upon approach, TQM efforts typically draw heavily on the previously
developed tools and techniques of quality control.
TQM was developed by William Deming, a management consultant whose work
had a great impact on Japanese manufacturing. While TQM shares much in common
with the Six Sigma improvement process, it is not the same as Six Sigma. TQM
focuses on ensuring that internal guidelines and process standards reduce errors while
Six Sigma looks reduce defects.
6.1 What is TQM?
Total quality management is the continual process of detecting and reducing or
eliminating errors in manufacturing, streamlining supply chain management,
improving the customer experience, and ensuring that employees are up to speed with
training. Total quality management aims to hold all parties involved in the production
process accountable for the overall quality to the final product or service.
6.2 Understanding Total Quality Management (TQM)
Total quality management is a structured approach to overall organizational
management. The focus of the process is to improve the quality of an organization’s
outputs, including goods and services, through the continual improvement of internal
practices. The standards set as part of the TQM approach can reflect both internal
priorities and any industry standards currently in place.
6.3 Principles of Total Quality Management
TQM is considered a customer-focused process that focuses on consistently
improving business operations. It strives to ensure all associated employees work
toward the common goals of improving product or service quality, as well as
improving the procedures that are in place for production. The principles of total
quality management are:
1. Customer Focus
The first and prime principle of total quality management is to focus on the customers
who are buying the products and services as well as potential customers. Customers
are the people who justify the quality of the products and services. Customers will
feel that they have spent their money on a quality product if it can last long to fulfill
demands. You can exceed customer satisfaction only when you know their demands,
so align company objectives with the client’s needs.
2. Leadership
Leadership is essential in maintaining unity among employees to achieve
interdependent goals. Although there are mainly three types of leadership in the
industry, the democratic leadership style is the best to perform well. Leaders can form
a convenient environment to work effectively inside the organization, in which all
employees work to achieve the organization’s goal.
3. Involvement of people
People from every level in the organization give their all-out efforts, dedication to the
organization’s profits. The total employee commitment enables the industry to
develop productivity, process and raise sales growth. So, all the employees in the
organization have to be well-trained, committed and dedicated to achieving an
interdependent goal on time. The industry needs to create a responsive environment
where every employee will be motivated to complete the task properly.
4. Process approach
The company needs to improve the process consistently to yield good output. A good
result of the business from the processes approach can bring customer satisfaction.
Hence, TQM focus on the process approach strongly to assure the quality of the
product or service.
5. System approach to management
The total quality management highlights executing the strategy in a systematic
approach. The industry makes a plan of implementation, and they collect data while
applying those processes.
The International Organization for Standardization (ISO) describes the principle as
“Identifying, understanding and managing interrelated processes as a system
contributes to the organization’s effectiveness and efficiency in achieving its
objectives.
6. Continual improvement
Continual improvement of the process is an essential step for every industry to make
sure their customers are satisfied. Therefore, TQM assists the company in keep
watching the constant improvement of the systems to improve the service and product
of the industry.
7. Factual approach to decision-making
It eases the way of taking the decision based on the information collected from data.
Making a decision based on the fact is an effective way to customer satisfaction. The
principle uses the actual method to collect and analyze data.
8. Mutual beneficial supplier relationship
The total quality management process helps all sections works combined to achieve
and interdependent objective. The company uses visual aids and flowcharts to
understand how employees perform perfectly. TQM represents a significant cultural
shift, so the company needs to implement it slowly and accurately.

6.4 Advantages of TQM

i. Emphasizing the needs of the market: TQM helps in highlighting the needs of the
market. Its application is universal and helps the organization to identify and meet the
needs the market in a better way.
ii. Assures better quality performance in every sphere of activity: Adverse and non-
participative attitudes of the employees are the biggest obstacles in the organizations
success, growth and advancement. TQM stresses on bringing attitudinal changes and
improvements in the performance of employees by promoting proper work culture
and effective team work
iii. Helps in checking non-productive activities and waste: Every organization aims at
improving productivity as well as reduction in cost so as to result in increase in
profitability. Under TQM, quality improvement teams are constituted to reduce waste
and inefficiency of every king by introducing systematic approach.
iv. Helpful in meeting the competition: TQM techniques are greatly helpful in
understanding the competition and also developing an effective combating strategy.
Due to the cut throat competition, the very survival of many organizations has become
very vital issue.
v. It helps in developing an adequate system of communication: Faulty and inadequate
communication and improper procedures act as stumbling blocks in the way of proper
development of an organization. It results in misunderstanding, low- productivity,
poor quality, duplication of efforts and low morale. QM techniques bind together
members of various related sections, departments and levels of management for
effective communication and interaction.

6.5 Disadvantages of TQM

a. Production Disruption: Implementing a Total Quality Management system in a
company requires extensive training of employees and these requires them to take
some time of their day to day work duties. While the improvements do reduce lead
time, eliminate waste and improve productivity, the beginning stages of implementing
Total Quality Management in an organization can reduce worker output.
b. Employee Resistance: Total Quality Management requires change in mindset,
attitude and methods for performing their jobs. When management does not
effectively communicate the team approach of Total Quality Management, workers
may become fearful, which leads to employee resistance. When workers resist the
program, it can lower employee morale and productivity for the business.
c. Quality is Expensive: TQM is expensive to implement. Implementation often
comes with additional training costs, team-development costs, infrastructural
improvement costs, consultant fees and the like.
d. Discourages Creativity: TQM focus on task standardization to ensure consistency
discourages creativity and innovation. It also discourages new ideas that can possibly
improve productivity.

6.6 Total Quality Management Tools

There are many tools of the TQM that help the industry to operate smoothly with
profit. These tools can help the industry in many approaches. The most essential
approaches are:
Identify difficulties with quality
Analyze data
Collect information
Identify the leading causes of the problems
Asses the results

7.0 KAIZEN COSTING

Kaizen costing is a system of cost reduction via continuous improvement. It tries
to maintain present cost levels for products currently being manufactured via
systematic efforts to achieve the desired cost level. The word kaizen is a Japanese
word meaning continuous improvement. It has two dimensions. One dimension
considers product (narrow perspective) and another dimension covers asset and
organization (broader perspective). Asset and organization specific kaizen costing
activities planned according to the exigencies of each deal. Kaizen costing is applied
to products that are already in production phase. Prior to kaizen costing, when the
products are under development phase, target costing is applied.

7.1 Kaizen Costing Definition: Kaizen is a Japanese term which means “continuous
improvement” on which Lean Manufacturing System is based. It refers to the
continuous improvement and examination program constantly going on in the
organization that stresses on the effective waste management, during the
manufacturing process, as a result of which costs is further reduced below the initial
standards stipulated at the time of designing the product.
In this technique, incremental improvements are made to the product undergoing
production process, continuous reduction in production cost and constant
improvement in designing and developing the product.
In finer terms, the Kaizen Costing is the sustenance of existing cost levels for the
products under the manufacturing process by way of collective efforts to attain the
intended cost level.
Kaizen Costing aims at eliminating wastes and losses in the process of
production, assembly and distribution, along with removing the unnecessary steps
during these processes and implementing economic re-designs for the product. Thus,
it reduces extra costs at each stage.

7.2 Kaizen Costing Principles

i. Continuous improvements in the present situation, at an agreeable cost.
ii. No limits to the improvement level that has to be implemented.
iii. Advocates collective decision making and knowledge application.
iv. Concentrates on waste or loss elimination, system and productivity improvement.
v. Establishing standards and then continually working on improving them.
vi. Participating all employees and covering every business area, i.e. all the levels,
departments and units.
The primary assumption behind Kaizen Costing is that nothing is perfect, so
there is always a room for improvements and reductions in the variable costs. So,
slight, additional changes are regularly applied and maintained during the production
stage of the product life cycle, over a long period, leading to substantial
improvements.
7.3 Types of Kaizen Costing
A. Asset-Oriented or Organization-oriented: Kaizen costing activities are planned and
directed as per the requirement of the firm or deal.
B. Product-Oriented: Kaizen costing activities are undertaken in specialized projects
with great focus on value analysis.
Kaizen Costing is still essential for the organization as competitive pressures will
force the firms to reduce the price of the product over time and any possible savings
in the costs facilitate in achieving the intended profit margins while continually
working on reducing cost.
Hence, in Kaizen Costing method ensures production of a product while meeting
the desired quality, usability, customer satisfaction and reasonable price, to maintain
its competitiveness.
7.4 Kaizen cost targets
Targets for kaizen costs are set monthly based on following procedure:
Per product actual cost in the previous year = total actual cost of last year / actual
production in last year
Estimated amount of total current year actual cost = Per product actual cost in the
previous year * Estimated production for the current year
Kaizen cost target for the current year = Estimated amount of total current year actual
cost * Ratio of cost reduction target
Assignment cost to each plant = Cost directly controlled in single plant / cost directly
controlled in all plants
Kaizen cost target for each plant = Kaizen cost target for the current year /
Assignment ratio

7.5 5S in Kaizen Costing

1. Sort (Seiri)
The first step in the 5S approach is categorizing the items based on their necessity.
The unnecessary items should be labelled red and needs to be moved out of the
organization. These items can be sold to the staff or as scrap else can be dumped by
the organization.
2. Straighten (Seiton)
Now, the organization is left with essential items. These have to be arranged in an
orderly manner for simplifying the operations. This step improves the visibility,
availability and accessibility of all the tools and items.
3. Shine (Seiso)
Shine here refers to maintaining cleanliness in the workplace. It creates a positive
work environment for the employees.
4. Standardize (Seiketsu)
One of the most vital tasks is to establish standards for cleanliness, usability and
maintaining the placement of items in day to day business operations.
5. Sustain (Shitsuke)
The final step is to communicate and educate the employees about the changes made.
Thus, developing a sense of self-control and discipline among them to maintain and
follow the set standards.
7.6 Kaizen Costing Process
Involve Your Employees: The involvement of employees plays a vital role in
implementing any change. The participation of employees and their feedback helps in
generating ideas and information. It also eliminates the resistance to change from their
side.
A. Find Problems: The organization together with its employees of all the
departments (such as customer support, finance, human resource, production,
design, etc.), needs to find out the various problems in the organization with
the help of techniques like 360-degree feedback.
B. Think and Find Solutions: The next step is solving the identified problems.
This step needs a lot of brainstorming and tactical approach; therefore,
managers form a team of ingenious employees to find out a practical solution
to each question.
C. Implement: Implementing any change involves cost and risk simultaneously.
Therefore to be on a safer side, the new idea must be testified on a small part
of the organization.
D. Check: The managers need to look after the proper implementation of the
kaizen costing. That is, a new idea should not just remain in words; instead, it
should be practically applied to the business process.
E. Standardize: After being satisfied with the results, the organization needs to set
this change as a standard procedure for all the departments and across the
whole organization.
F. Repeat: A standardized procedure becomes the organizational culture when
continuously practised over a period.
7.7 Advantages of Kaizen Costing
a) Customer Satisfaction: The kaizen costing is a customer-oriented technique
which focusses on providing better service to the consumers.
b) Forming Work Teams: Every employee involved in the implementation of the
 kaizen practice needs to perform in a work team with a common aim of
improvement.
c) Continuous Improvement: Kaizen costing is a technique which emphasizes on
improvement and betterment of the product, process, project and the
organization.
d) Creates Better Work Environment: It also promotes a positive work
environment for the employees and the management. Like, sharing canteen
and the dress code, is a part of work culture in many organizations.
e) Problem Solving: One of the crucial functions of kaizen costing is to solve the
identified problem to achieve perfection in business operations.
f) Promotes Cross-Functional Teams: The teams so formed include employees
with different skills and knowledge; thus, this technique encourages the
formation of a cross-functional team.
g) Widely Applicable: Kaizen costing is universally applicable to all kinds of
organizations, whether it is service industry or manufacturing industry.

7.8 Disadvantages of Kaizen Costing

Kaizen costing is a positive change process though there are some severe
disadvantages of it which makes it a risky affair.
I) The burden on Lower Level Management: It becomes confusing and
tedious for the bottom level management to adopt the change in process or
product so implemented through kaizen costing.
II) Lack of Training: Kaizen costing requires a lot of expertise and training,
and if not implemented strategically, it may even lead to adverse effects.
III) Permanent Change System: The change so implemented through kaizen
costing is irreversible, and it requires a lot of efforts and cost in
withdrawing such decisions.
8.0 LIFE CYCLE COSTING
Life cycle costing is sometimes called ‘whole life costing’ or ‘whole life cycle
costing’. It is a technique that attempts to identify the total cost associated with the
ownership of an asset so that decisions can be made about asset acquisitions. It
recognizes that decisions made at the initial acquisition have the effect of locking in
certain costs in the future. Conducting a life cycle cost assessment helps you better
predict how much your business will pay when you acquire a new asset.

8.1 Life Cycle costing methodology

A proper purchasing decision requires that the costs of all available options should be
taken into account. This involves cost identification and estimation and discounting.
(Discounting is a technique that takes into account the time value of money. That is to
say it recognizes that ₦1 today is worth more than ₦1 in the future).

8.2 Life Cycle Costs of an Asset

The life cycle cost of an asset can be defined as the total cost throughout its life
including planning, design, acquisition and support costs and any other costs directly
attributable to owning or using the asset. Life Cycle Cost (LCC) of an item represents
the total cost of its ownership, and includes all the cots that will be incurred during the
life of the item to acquire it, operate it, support it and finally dispose it. Life Cycle
Costing adds all the costs over their life period and enables an evaluation on a
common basis for the specified period (usually discounted costs are used). This
enables decisions on acquisition, maintenance, refurbishment or disposal to be made
in the light of full cost implications. 
The costs of a product or asset over its life cycle could be divided into three
categories:

(a) Acquisition costs, set-up costs or market entry costs: These are costs incurred
initially to bring the product into production and to start selling it, or the costs
incurred to complete the construction of a building or other major construction
asset. Acquisition costs or set-up costs are usually ‘one-off’ capital expenditures and
other once-only costs, such as the costs of training staff and establishing systems of
documentation and performance reporting.

(b) Operational costs or running costs: These are regular and recurring annual costs

throughout the life of the product or asset. However, these may vary over time: for
example maintenance costs for an item of equipment, such as the maintenance costs
of elevators in a building, are likely to increase over time as the asset gets older.

(c) End-of-life costs: These are the costs incurred to withdraw a product from the
market or to demolish the asset at the end of its life.

8.3 Elements of Products Life cycle cost

A product's life cycle costs are incurred from its design stage through development to
market launch, production and sales, and finally to its eventual withdrawal from the
market. The component elements of a product's cost over its life cycle could therefore
include the following:

 (a) Research & development costs

  – Design

  – Testing

  – Production process and equipment

(b) The cost of purchasing any technical data required

(c) Training costs (including initial operator training and skills updating)

(d) Production costs

(e) Distribution costs. Transportation and handling costs

(f) Marketing costs

  – Customer service

  – Field maintenance

  – Brand promotion

8.4 Characteristics of Life Cycle Costing

The characteristics of Life cycle costing include the following:

(a) Product life cycle costing involves tracing of costs and revenues of a product over
several calendar periods throughout its life cycle. 

(b) Product life cycle costing traces research and design and development costs and
total magnitude of these costs for each individual product and compared with product
revenue.

(c) Each phase of the product life-cycle poses different threats and opportunities that
may require different strategic actions.

(d) Product life cycle may be extended by finding new uses or users or by increasing
the consumption of the present users.

8.5 The Product Life Cycle

Most products made in large quantities for selling to customers go through a life cycle
which consists of several stages:

(a) Product development stage

(b) Product introduction to the market

(c) A period of growth in sales and market size

(d) A period of maturity

(e) A period of decline.

 

(a) Development: The product has a research and development stage where costs are
incurred but no revenue is generated.

(b) Introduction: The product is introduced to the market. Potential customers will be

unaware of the product or service, and the organisation may have to spend further on
advertising to bring the product or service to the attention of the market.

(c) Growth: The product gains a bigger market as demand builds up. Sales revenues
increase and the product begins to make a profit.

(d) Maturity: Eventually, the growth in demand for the product will slow down and it
will enter a period of relative maturity. It will continue to be profitable. The product
may be modified or improved, as a means of sustaining its demand.

(e) Decline: At some stage, the market will have bought enough of the product and it
will therefore reach 'saturation point'. Demand will start to fall. Eventually it will
become a loss-maker and this is the time when the organisation should decide to stop
selling the product or service.

The diagram below indicates typical characteristics of sales revenue and profit at each
stage.
 

The horizontal axis measures the duration of the life cycle, which can last from, say,
18 months to several hundred years. Children's crazes or fad products have very short
lives while some products, such as binoculars (invented in the eighteenth century) can
last a very long time.

8.6 Purposes of the life cycle cost analysis

Life cycle cost analysis has a number of purposes. Some of which are to:

1. Choose between two or more assets

You can make better purchase decisions by using life cycle costing. 

You may end up spending more in the long run if you simply consider the initial cost 
of an object. 
Buying a used asset, for example, may have a lower purchase price, but it may cost yo
u more in repairs and utility bills than a newer one. 

ability to make wise investments is essential for life cycle cost management. 

When deciding between two or more assets, consider their total costs rather than just t
he price tag in front of you.

2. Create accurate budgets

A budget is made up of expenses, revenue, and profits. If you underestimate an asset’s

cost on your budget, you are overestimating your profits. Failing to account for
expenses can result in overspending and negative cash flow.

When you know how much an asset’s total price is, you can create budgets that
represent your business’s actual expenses. That way, you won’t underestimate your
business’s costs.

3. Determine the asset’s benefits

By using life cycle costing, you can more accurately predict if the asset’s return on
investment (ROI) is worth the expense. If you only look at the asset’s current
purchase cost and don’t factor in future costs, you will overestimate the Return on
investment. You ought to weigh the pros and cons of your purchase.

8.7 Life Cycle Costing Process

Life cycle costing is a three-staged process. The first stage is life cost planning stage
which includes planning LCC Analysis, Selecting and Developing LCC Model,
applying LCC Model and finally recording and reviewing the LCC Results. The
Second Stage is Life Cost Analysis Preparation Stage followed by third stage
Implementation and Monitoring Life Cost Analysis.

The three stages are:

Life Cycle Costing Process

LCC Analysis is a multi-disciplinary activity. An analyst, involved in life cycle

costing, should be fully familiar with unique cost elements involved in the life cycle
of asset, sources of cost data to be collected and financial principles to be applied.

He should also have clear understanding of methods of assessing the uncertainties

associated with cost estimation. Number of iteration may be required to perform to
finally achieve the result. All these iterations should be documented in detail to
facilitate the interpretations of final result.

Stage 1: LCC Analysis Planning

The Life Cycle Costing process begins with development of a plan, which addresses
the purpose, and scope of the analysis.

The plan should: 

(a) Define the analysis objectives in terms of outputs required to assist a management
decision.

(b) Make the detailed schedule with regard to planning of time period for each phase,
the operating, technical and maintenance support required for the asset.

(c) Identify any underlying conditions, assumptions, limitations and constraints (such
as minimum asset performance, availability requirements or maximum capital cost
limitations) that might restrict the range of acceptable options to be evaluated.
Identify alternative courses of action to be evaluated.

(d) Identify alternative courses of action to be evaluated. The list of proposed

alternatives may be refined as new options are identified or as existing options are
found to violate the problem constraints.
(e) Provide an estimate of resources required and a reporting schedule for the analysis
to ensure that the LCC results will be available to support the decision-making
process for which they are required.

Next step in LCC Analysis planning is the selection or development of an LCC model
that will satisfy the objectives of the analysis. LCC Model is basically an accounting
structure which enables the estimation of an asset components cost.

Stage 2: Life Cost Analysis Preparation

The Life Cost Analysis is essentially a tool, which can be used to control and manage
the ongoing costs of an asset or part thereof. It is based on the LCC Model developed
and applied during the Life Cost Planning phase with one important difference; it uses
data on real costs.

The preparation of the Life Cost Analysis involves review and development of the
LCC Model as a “real-time” or actual cost control mechanism. Estimates of capital
costs will be replaced by the actual prices paid. Changes may also be required to the
cost breakdown structure and cost elements to reflect the asset components to be
monitored and the level of detail required.

Targets are set for the operating costs and their frequency of occurrence based
initially on the estimates used in the Life Cost Planning phase. However, these targets
may change with time as more accurate data is obtained, from the actual asset
operating costs or from the operating cost of similar other asset.

Stage 3: Implementing and Monitoring

Implementation of the Life Cost Analysis involves the continuous monitoring of the
actual performance of an asset during its operation and maintenance to identify areas
in which cost savings may be made and to provide feedback for future life cost
planning activities.

For example, it may be better to replace an expensive building component with a

more efficient solution prior to the end of its useful life than to continue with a poor
initial decision.

8.8 Benefits of Life Cycle Costing

Life cycle costing compares the revenues and costs of the product over its entire life.
This has many benefits which include:
(a) It results in earlier action to generate revenue or lower costs than otherwise might
be considered. There are a number of factors that need to be managed in order to
maximise return in a product.

(b) The potential profitability of products can be assessed before major development
of the product is carried out and costs incurred. Non-profit- making products can be
abandoned at an early stage before costs are committed.

(c)  It provides an overall framework for considering total incremental costs over the
entire span of a product.

(d) By monitoring the actual performance of products against plans, lessons can be
learnt to improve the performance of future products. It may also be possible to
improve the estimating techniques used.
(e) Better decision should follow from a more accurate and realistic assessment of
revenues and costs within a particular life cycle stage.

(f) Pricing strategy can be determined before the product enters production. This may
lead to better control of marketing and distribution costs.

8.9 Problems of Life cycle costing

The problems of using life cycle costing include the following:

(a) Data Quality and Capture: Raw data alone can be misleading, since it doesn’t
typically account for nuances and specifics that should be factored into the data.
Downtime and all capital costs need to be identified, and your data’s quality is also
contingent upon labor rates and salvage history.

(b) Life cycle costing tends to be difficult and time consuming.

(c) Often, organizations are structured in a way that different managers are

responsible for the purchase decision and the future operation of the asset. Thus, even
though the purchase decision locks in future costs the manager making the acquisition
has no incentive to consider Life cycle costing.

9.0 Value and Value Engineering

9.1 Meaning of Value

 According to the Society of American Value Engineering (SAVE) 1998, the
concept of value can be defined “as the lowest possible cost to reliably provide
required functions at the desired time and place with the essential quality and other
performance factors to meet user requirements.”

Therefore, if a product meets the requirements of the users at the lowest price,
then that product is considered valuable. “Functionality and cost thus define what
value can be placed on a product,” (Sperling, 2001). “Clearly a value-added activity is
an activity that customers perceive as adding usefulness to the product or service they
purchase,”

9.2 Meaning of Value Engineering

Value engineering is defined by the Chartered Institute of Management

Accountants (CIMA) as the functional analysis and redesign of products and services
to provide value to the customer. Value engineering helps businesses achieve cost
efficiencies and meet their cost and profitability targets.

According to West Virginia division of highway (2004), “Value engineering is

the systematic application of recognized technique by multi- discipline team that
identifies the function of a product or service, establishes a worth for that function;
generates alternative through the use of creative thinking, and provides the needed
functions, reliability at the lowest overall cost.” This approach requires that in the
process of minimizing cost, the required quality and performance should not be
sacrifice. Value engineering as a technique involves the identification of new
alternatives to product design at a reduced cost (Celestine, 2016).

Currently, business organizations are in constant search for skilled employees

that can constitute a multi-disciplinary to solve complex problems like the value
engineering team. Value engineering is a productivity improvement approach that
increases the value derived from a product by a customer at a lower price with the
same functionality. It is defined as “a complete system for identifying and dealing
with factors that cause un-contributing cost or effort in products, process, or services.
This system uses all existing technologies, knowledge and skills to efficiently identify
cost or efforts that do not contribute to the customer’s need and wants” (Miles,1989).

Drury (2000) asserted that “The aim of Value Engineering is also to achieve an
assigned target product cost by (i) identifying improved product designs that reduce
the product’s cost without sacrificing functionality and/or (ii) eliminating unnecessary
functions that increase the product’s costs and for which customers are not prepared
to pay extra for.” According to Sivaloganathan, Kermode and Shahin (2000), “Value
Engineering is a form of cost /benefit analysis where functions are viewed as the
beneficial characteristics of the product.” Value Engineering technique is centered on
value concept and it show whether a cost is worth incurring or not.

9.3 Phases of Value Engineering

Value engineering encourages creativity so as to ascertain the alternative choices for

development of the product/ project. It is divided into eight (8) phases which must be
carried out sequentially. They are as follows namely:

1. Orientation Phase: This is the first phase in VE job plan and it is carried out in
preparation for the value analysis by refining observed problem and preparing for the
value study proper. This phase is characterized by problem refining, data collection
about the problem and organizing strategies to follow up the problem.

2. Information Phase: At this phase, project information is gathered and reviewed

among the team members and questions such as ‘’What is it’? ‘What does it do’? And
‘what does it cost’? are answered. It is critical that correct information be obtained at
this stage otherwise alternatives developed later will not suitably accomplish the
required functions.
3. Function Analysis Phase: This phase has to do with identifying the most beneficial
areas for study. This phase is considered the soul of the Value Engineering process as
it involves looking back to the previous component so as to ascertain its functional
value. The aim of the VE job plan is to remove unnecessary functions that increases
cost and provides an alternative and cheaper means to perform the functions without
sacrificing the value to be derived by customers. And this must be brainstorm and
deemed acceptable by the design team. According to Oludimu (2008), “this phase
challenges the VE team to relate their functional findings to the product hardware in
order for the redesigning recommendations to be properly planned.” Also, Stocks and
Singh (1999), Tucson (1992); SAVE (1998); opined that “during this phase function
models should also be developed especially the FAST (Function Analysis System
Technique) model combined with Programme Evaluation and Review technique
(PERT) and FACD (Function Analysis Concept Design) which would allow for the
clarification of product functions and the assignment of costs to these functions in
order to highlight areas that need improvement and redesigning.”

4. Creative Phase: According to Sperling, (2001) as cited by Oludimu (2008),

describe this phase as the “brainstorming” session. In this phase, alternative designs
are provided through creative thinking i.e. brainstorming by team members.

5. Evaluation Phase: This phase involves refining and selection of the most suitable
alternative for value-improvement recommendations by value engineering team
members. In this phase the alternatives are ranked in order of relevance and
importance so as to choose the best out all alternatives.

6. Development Phase: At this phase, the most ranked out of the alternatives are
chosen and presented to managers for decision-making in the organization. According
to Hauser (1997), “The objective of the Development phase is to expand the best
ideas generated into workable solutions.”
7. Presentation Phase: This phase involves presenting the developed proposals in a
formal presentation to decision makers. The strategies and outcome of value
engineering job plan will be explained in details by a representative of the group.

8. Implementation Phase: in the implementation phase final approval of the proposal

are obtained in order to facilitate implementation. This Phase takes place when
conclusive decision has been taken by management. After which, authorization will
be obtained after the completion of follow-up actions such as providing more data and
meeting with others. Implementation as soon as the final authorization is granted.

10.0 CONCLUSION: Over the past decade, cost and management accounting has
seen changes not just within existing domains of the field but has also witnessed
extensions outside its established realms of activity. Wider systemic transformations
including changes in political regimes, novel conceptions of management controls, the
impact of globalizing forces on commercial affairs, shifts in notions of effective
knowledge management, governance and ethics, and technological advances,
including the rise of broadband, have all impacted cost and management accounting
endeavours. The field is as fast changing as it has ever been. With this presentation
we have captured key facets of current thoughts, concerns, and issues in cost and
management accounting.
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