Why targeting costing is difficult to implement in service organisations?

Query:

Why targeting costing is difficult to implement in service organisations? 

Solution:

Because services are different in nature such as banking, transport parcel delivery, energy, supply, entertainment, education, hotels, car repair and so on.

A feature of labour content may be high in the service industry but as per material content it is often very low.

Following can be difficulties to implement target costing in the service organisations as below:

• Lack of substance due to its nature of intangibility. There is no material substance or physical aspect in the services. For example, No taste, no visible presence of the substance and so on. When services are provided by a human it is not possible to reduce cost to a targeted level by reducing material cost.
• Many services are created at the same time as they are consumed such as thinking of medical treatment as there is no service exists until it is actually being experienced.
• Services are naturally perishable. Such as The service of a hair treatment is purchased for a particular period of time.
• There is no transfer of ownership in the business services. It does not result in the transfer of property or ownership.

How to achieve your desired profit in a manufacturing industry?

Query no.1: 

What is target costing?

Solution: 

Target costing is a cost reduction technique and its real essence exists at the design stage because major cost can only be reduced at this point of time. This is not just a costing technique but also an evolution to achieve your desired profitability.

Query no.2: 

What is the aim of target costing?

Solution: 

Target costing is the cost at which product must be produced and sold in order to achieve required profit at the targeted selling price. When product is planned then its estimated cost is often higher than its targeted cost. The aim of target costing is to find ways of closing this target cost gap and producing & selling the product at targeted cost.

Query no.3: 

Why target costing is a better place as compare to the traditional costing techniques (cost plus pricing)?

Solution: 

In the past, Product cost is based on its cost which includes non-value added activities. At that time, Effective utilization of resources, Competition among manufacturers, Short life cycle products, High range of products and Use of high tech & Complex manufacturing system was not common and potential customers was not allowed to participate with manufactures regarding the specification of a new products i.e. Customer relationship management (CRM) system. In these days, trend has been changed and it might be due to the customer relationship management where manufacturers & consumers are equally important to consider the importance of values. What they should buy? And why they should buy? Target costing has become a need of modern environment due to shorting product life cycle. Organisations should redesign their products to achieve their desired profit. 

Query no.4: 

How to implement target cost?

Solution: 

In a bullets below:

•  Define product specification and estimated sales volume.
• Set target selling price at which company will be able to achieve desired market share.
• Estimate required profit based on profit margin or Return on Investment (ROI).
• Calculate target cost.

Query no.5: How to calculate target cost?

Solution in the table below:

Details	$
Targeted selling price	X
Less: Desired profit	X
Targeted cost	X

 

Query no.6: How to calculate cost gap?

Solution in the table below:

Details	$
Targeted cost	X
Less: Projected cost	X
Cost gap	X

 

Query no.7: How to implement Reengineering Business Process in order to remove cost gap?

Solution: 

This is the time to take benefits from target costing since Re-engineering process (Value engineering or value analysis) can help to remove cost gap. After redesigning the product structure, if cost gap still exists then renegotiation will be explored with the customer. And if re-negotiations are successful and cost gap has been removed then product will be started to produce otherwise product would not be able to launch in the market.

Query no.8: 

What are other techniques to remove cost gap?

Solution: 

The following below bullets can be used to remove cost gap:

• Remove non-value added activities.
• Reducing unnecessary no. of components.
• Using cheaper staff but it should not affect quality.

• Using standard components wherever possible.
• Acquire new or more efficient technology.

• Training of the staff with more efficient techniques.
• Use different material but no compromise over quality.
• Remove unnecessary costs. 

Why organisations' production overheads costs differ under Activity Based Costing (ABC)?

Query no.1: 

Why Traditional Absorption Costing (TAC) has been replaced by Activity Based Costing (ABC)? 

Solution:

ABC is an extension of TAC since it consider the reasons of changes in Production Overheads (POH) related to each product when organisations produce a large range of products with similar costs.

Query no.2:

What opportunities can be created by the use of ABC?

Solution in the bullets below:

• To control cost as well as reduce cost by efficient management of cost drivers. 
• To better understand costing information for reasonable pricing decisions.
• To re-analyse product mix decisions in relation to production.
• To create realistic estimate of costs & profits related to products.

Query no.3:

Why ABC has become a need of current economic environment?

Solution:

ABC has become a need of current economic system due to large range of products produced along with dissimilar costs. In the past, only single product produced along with similar costs but now situation has been changed. For example, In the earlier age, Businesses were labour or machine intensive so POH are likely to be absorbed on the bases of direct labour hours or direct machine hours because at that time POH were small portion of product unit cost. 

In the same way, Modern business environment facing many challenges in relation to POH because now we have multiple options in every product. Now we have variety of products means one product produce in different colours, tastes, sizes, along with different techniques according to the customer specifications. And this situation create complexity in the current production process in relation to POH. So these factors become a need to implement ABC.

Query no.4:

What is the important role of ABC in this current economic system?

Solution:

ABC play a vital role to simplify the complexity of POH considerably since it is based on cause & effect relationship. ABC identify cost of main supporting activities & factors that drive the cost of each activity.

Query no.5:

What are the main ideas behind ABC?

Solution in the bullets below:

• Activities cause costs i.e. ordering, material handling, machining, assembling, production scheduling & dispatching.
• Manufacturing products creates demand for support activities.
• Costs are assigned to the product on the basis of product's consumption of these activities.

 

 

Overheads	Cost drivers
Production setup costs	No. of production set us
Machine oil & repairs costs	No. of machine hours
Supervisory salary costs	No. of labour hours
ordering cost handling customer orders	No. of customer orders
Material handling costs	No. of production runs

 

Query no.6:

What are the steps to implement ABC?

 

Solution in the steps below:

• Identify organisation major activities.
• Cost pool (Group overheads into activities according to how they are driven).
• identify cost drivers for each activity.
• calculate cost per unit of cost driver
• Absorb activity costs into production based on usage of cost drivers.

Query no.7:

What are the problems to implement ABC?

 

Solution:

Although ABC is very helpful to control POH costs but some responders has addresses their concerns in relation to ABC:

• It is time consuming & expensive.
• It will be limited helpful if POH are mainly related to volume.
• The benefits of ABC is limited if company produce single product or a range of products with similar costs.
• some arbitrary apportionment still exist i.e. General overheads.

What challenges may face by small conglomerate organisations during an upgradation of an existing information system?

 

Query: 

What challenges may face by small conglomerate organisations during an up-gradation of an existing information system?

Solution:

The following challenges may include in achieving the potential advantages at minimum cost & managing necessary challenges during an up-gradation of an existing information system as below:

A networked system may allow transmission of information in the business units & head office. And it is likely that  performance indicators, financial statistics & similar information can rapidly gathered, processed & disseminated. Improved communication between business units & head office should lead to quick changes with in the organisation & outside the organisation. And this should result in an evolution, progressiveness & capable of meeting the market challenges. And this may also help to remove out-dated information related to products & prices where some countries may face such challenges.

In addition to this, The cost of future training & maintenance of fully networked computer system must be evaluated & budgeted for. The development & implementation of security measure prevent the misuse of corporate  data & prevent unauthorized users should be considered & costed. Similarly, there may be need to recruit specialist staff to implement the changes in the existing system. All these coasts are foreseeable & can be planned.

In the same way, Upgrading corporate information system usually result in unforeseen changes to the culture of the organisation & working conditions. For example, Is that greater efficiency can be achieved by allowing staff to flexible working hours? Is that cost can be reduced by allowing staff to work from home on regular basis or allowing hot-desking to take place? Is that morale of the staff would be adversely on deploying a new technology?