Cost Planning for The Product Life Cycle: Target Costing, Theory of Constraints, And Strategic Pricing
|13-1 |California-Illini Manufacturing (The Theory of Constraints) | |13-2 |Blue Ridge Manufacturing (B) | |13-3 |Nebraska Toaster Company (Target Costing) | |13-4 |Mercedes-Benz All Activity Vehicle (Target Costing) |
13-1: “Target Costing at a Consumer Products Company” by Mohan Gopalakrishnan; Janet Samuels, CPA; and Dan Swenson, CMA, Strategic Finance, December 2007, pp. 37-41
This article looks at target costing, a process driven by the market. It goes through the five main steps in target costing and then applies these steps through a consumer products example. Target costing works best when fully integrated into the pre-existing product development process.
1. How does target costing differ from cost plus pricing and what key elements does it incorporate? 2. Explain how fixed costs are handled in the calculation of a target cost. 3. Where do opportunities to reduce costs occur?
13-2: “Integrating Activity-Based Costing and The Theory of Constraints” by Robin Cooper and Regine Slagmulder, Management Accounting (February 1999).
The authors of this article show how ABC costing and the Theory of Constraints (TOC) methods can be compared and used in a complementary fashion.
Discussion Question: Explain how ABC and TOC can be viewed as complementary methods.
13-3: “Is TOC for You?” by Linda E. Holmes CMA, Ann B. Hendricks CMA, CPA, Strategic Finance (April 2005).
This article gives a good introduction to the objectives and techniques of the theory of constraints (TOC). There is also a discussion of key performance measures related to to the application of TOC in management accounting.
1. What is meant by throughput?
2. What are the five steps of TOC?
3. List some ways to increase the capacity on a constraint.
4. What are the five management accounting truths related to TOC?
13-4: “Environmental Considerations in Product Mix”, by Julie Lockhart, CMA, CPA, and Audrey Taylor, Ph.D., CPA, Management Accounting Quarterly, (Fall 2007), Vol. 9, No. 1
With pressures from stakeholders, government and the public, companies often feel the pressure to balance making profits with achieving environmental responsibility as well. This article looks at two different methods to account for environmental costs: ABC costing method and TOC. It shows calculations of both while also offering the positives and negatives to each method.
1. What are some of the main differences between TOC and ABC? 2. What are the common internal environmental costs companies face, according to the article? 3. Explain several scenarios where using TOC is always the best choice.
13-1 California-Illini Manufacturing
The California-Illini Manufacturing Company's (CI) plant operates in the rural central valley of California. It is family-owned and run. CI's plant manager, a grandson of the founder, went to school with many of the employees. Despite this family atmosphere, CI is the largest producer of plain and hard-faced replacement tillage tools in the United States. It averages annual sales of $13 million. Farmers use tillage tools to cultivate the land. Hard-facing, the application of brazed chromium carbide to leading edges, increases a tool's durability.
The Production Process
Historically, CI grew from the founders' original blacksmith shop, and today the production process is still relatively simple. The plant manager described the process as "You simply take a piece of...