Lice cycle costing and kaizen free essay sample

Life cycle costing is a cost management approach which includes all costs and ensures that all those costs are managed over the life cycle of the product. Product life cycle begins from conception of the product until its abandonment which can be referred as ‘from cradle to grave‘. Product life cycle has four stages: 1) Product planning and initial concept design It involves process of identifying any underlying conditions, assumption, limitations and constraints such as minimum asset performance, maximum capital costs that might restrict the range of acceptable options to be evaluated. It is a valuable reference for better decision whether the plan should be carried on. This includes the research and development cost market research costs. 2) Product design and development Starting from preparation of development contract until equipment is ready to be introduced to the business. It is also a stage where the factory trials take place. Cost of product design, prototyping, and market testing costs. We will write a custom essay sample on Lice cycle costing and kaizen or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page 3) Production All the manufacturing costs related to producing the products such as direct material, labor, overhead and administrative costs will be incurred. 4) Distribution and customer (or logistical) support This stage is where product are sent to customers and ready to be used. All marketing, selling and distribution costs are incurred at this stage. As for logical support cost, it involves delivery and transportation costs, warehousing costs, dismantling cost and costs for abandonment of the project and some equipment might need to be disposed of or recycled. All expenditure for resources that are likely to arise must be addressed. Future costs are also taken into consideration and will be discounted to the present value. LCC includes all the upstream costs and downstream costs. Upstream costs involved in producing a good include research and development costs, such as salaries paid to research engineers. Downstream costs, on the other hand, are incurred later in the product lifecycle. These include marketing and advertising costs. All costs and savings can then be directly compared and fully-informed decisions can be made. The reasons why companies adopt LCC are because it enables the management to make assessment of the profitability of a product over its life cycle. This helps managers to decide and choose on which products to produce and can increase company’s sales revenue. LCC also could prevent losses from project abandonment or suspension in work in progress due to insufficient funds. By using LCC, all expenditure will be taken into account hence, all the expenditures will be fully disbursed as and when the product life cycle ends. The graph below illustrates life cycle costs and cost commitment for a typical product. 1. 2 Elements of Life Cycle Costing The purpose of calculating this technique is to analyze all the costs that have to be borne by the company in acquiring a new asset. According to Nijhar Charavorti (2009), this technique serves as the decision making tool in which it combines the conflicts by emphasizing on the facts, money and time. For example, to compute the ’cradle to grave’ costs of an equipment, the company should include not only the purchase price (money), but also the any costs afterwards which will be incurred (facts) throughout its lifespan (time). The ‘costs afterwards’ which are inclusive of operation costs, maintenance costs, and disposal cost, are calculated using Net Present Value at discounted factor. There are three elements in Life Cycle Costing which are: a) Initial costs This element represents the acquisition cost, construction cost, installation cost and/or design cost of equipment. These one-off initial costs will only be incurred by the company at the beginning of the acquisition of the assets. b) Operation and maintenance costs Meanwhile, operation and maintenance costs which also include labor and training costs will be repeatedly incurred by the company throughout the lifespan of the acquired assets. Maintaining of the assets is necessarily required so that the asset will perform at its best level and the company could fully utilize it. On top of that, training costs refer to the cost incurred by the company to equip its employees with the required skill and knowledge pertaining to the usage of the newly acquired asset. If the asset needs to be updated regularly, thus the employees’ knowledge also needs to be up-to-date so that the company could make the full use of the asset. c) Disposal costs At the end of the economic life of the asset, there are certain costs that need to be borne by the company, such as recycling costs and/or dismantling costs. These costs also will be incurred once by the company. However, if the company has decided to sell off the asset, the company will obtain gain in disposal provided that the proceeds obtained from disposing the asset exceeds the salvage value of the asset. 1. 4 Advantages and disadvantages The advantages of LCC are as follows: A management tool. LCC assists managers to select the best project option among several alternatives which ensures effective planning and prospective benefit. Facilitate effective procurement decision. LCC assess and anticipate future resources requirement for production. Therefore, it helps management in determining what to purchase. As a result, managers can make effective and efficient decision and redundant purchasing can be avoided. Assist management to identify factors that increase costs. LCC requires detail research on cost on each product stage involved hence, this helps in identifying hidden cost. Managers can identify costs that can reduce costs in other stages of product life cycle. For example, by focusing cost on designing stage, the company can reduce after sales cost such as warranty. However, there are several drawbacks of LCC which are: Challenging. It needs more effort from management and critical decisions have to be made in order to obtain accurate data. This is because there is lack of awareness in the management on how to calculate life cycle costs. Time consuming. It is time consuming to gather information on the actual costs involved in the product life cycle from all the related departments. Not easy to design products that have longer lives. This is due to the difficulty in predicting the changes in external internal environment. (E. g. customers’ needs and preferences, inflation effect, impact of competitors’ action) Difficult to estimate operational maintenance cost. It is difficult to determine the discount rate as management need to compare the nominal value and discounted value. Hence, it will incur more cost and be more time consuming. 1. 4 Implementation of Life Cycle Costing in Malaysia It is observed that Life Cycle Costing (LCC) management system is actively being used by the construction industry in Malaysia compared with other type of industries. The industry is developing rapidly and become one sector that contributes to the economic growth in Malaysia currently. Through this LCC method, all the factors, maintenance and demolishing cost for a building projects is accounted at the designing stage to obtain a more accurate projection of the cost of construction. The construction industry must implement the LCC method to construct the structure and infrastructure projects as to avoid any losses to the industry itself and also to the government because of the cost of failure that might arise before, during or after the completing the projects. An example of Life Cycle Costing (LCC) implementation system is by Willmott Dixon Construction Company. It is a well-known privately owned construction, housing and property development and maintenance business, around United Kingdom and has created since 1852. The company implements the LCC methods as they can accurately quantify the embodied environmental and cost impacts of a building throughout the project design. They will design cost effective alternative of the projects as they concern with the overall monetary cost of ownership of a building across operation, maintenance and demolition. With this would help them to reduce and avoid any extra cost of failure in the future, thus to maximize the company profits on the projects assigned. In conclusion, LCC management method can be used to provide the tools to managers maintenance budgets, ownership costs, and present decision making scenarios in financial perspective to achieve the lowest long term cost of ownership. The LCC includes not only the operational costs but also other costs that would involve throughout the project life. 2. 0 Kaizen costing 2. 1 Definition and Background Kaizen costing is implying the concept of Kaizen which means continuous improvement in every aspect. It was derived from Japanese philosophy that originally comes from Japanese culture and Japanese practice of management. ‘Kai’ means change and ‘Zen’ means better. It was developed by Masaaki Imai and was first implemented in several businesses after the Second World War II. Kaizen has been applied in general practice as a guide for doing things in daily life as what have been practiced by Japanese. For instance, the practice of reverse parking leads to time saving and providing shutter buses to solve parking problem. The Kaizen concept practices top down as well as bottom up communication. It assumes that person that deals with the job will be more expert in their area and they could provide more accurate information relating to their field of expertise. Suggestions and ideas that came from each employee will be taken into consideration and goal compatible ideas will be selected and applied. Kaizen costing focuses on lowering the cost of the product by implementing cost reducing strategy in any level possible. It applies the principle of continuous improvement by doing little things better and setting and achieving increasingly higher standards. It encourages continual cost reduction which occurs after a product design has been completed and for products that are now in production stage. For instance, working with suppliers to reduce the costs in their processes, or implementing less costly product re-designs of the product, or reducing waste costs. Cost-reduction target are set and applied monthly continuous improvement are applied to meet those target. It also focuses on teams (quality circles), promotes team work and team spirit in the same time recognizes the individual contribution. By applying this concept, it also implies that the firm needs to strive towards perfection by eliminating waste in the work place. 2. 2 Elements of Kaizen Costing Steven Stephenson (n. d.  ) points out that there are five elements in Kaizen costing which is the basic, fundamental, systematic approach for productivity, quality and safety improvement in all types of business. Kaizen costing even includes social activities where the five elements are applied in every aspect of a person’s life. Each element is equally important and acts as a continuous process or cycle in busin ess. Those five elements are: a) Seiri – Sort out This technique suggests the firm to differentiate between necessary things with those is unnecessary and subsequently, discard all the unnecessary things accordingly. This sort out activity should cover all parts of work stations. For infrequently used items, the company should attach tags and put it away in one place so that it then can be reassigned when the company intends to use it. This activity would ensure efficiency can be improved which will then increase quality of work, and one of simpler way to spot problems. b) Seiton – Set in order Kaizen promotes a productive and effective workflow in the working environment. As mentioned by Aiden S. (n. d. ), ‘a place for everything, and everything in its place’ best be defined as the place for each item should be clearly labeled or tagged and arranged in the manner which promotes efficient workflow. The employees also are reminded to keep the important materials nearby so that efficiency and effectiveness can be maintained or improved. c) Seiso – Shine The company is suggested to keep the workplace tidy and organized. It is also recommended for the employees to identify the sources of contamination such as malfunction of equipment or leakages, which might dangerously, affected the safety of the employees of the company. Thus, in order to keep workplace systematically clean and to maintain the way they were, regular cleaning could be done. d) Seiketsu – Standardise This healthy and productive work practices should be consistent and standardized. Meaning that, everyone in the company should know his responsibilities by creating schedule and assign tasks accordingly. Hence, it is suggested that the company should put the standard into black and white in order for the employees to follow the same rules to keep them in the right track. e) Shitsuke – Sustain All the positive work practices need to be sustained, and to ensure that it serves on the long-term basis, the company may regularly review the standards established and keep updating them. These 5S elements should be set as one of the goal of the company. In addition to ensure sustaining the positive workflow in healthy working environment, the management may analyze the result of the implementation of these 5S, and train the workers as well as emphasize the importance of having 5S in the company. It should be noted that this Kaizen theory is applicable to all as it is not only focusing on reducing the costs or wastages, but it is also promoting a healthy working environment. It covers all aspects of life as it is understandable that if the employees are happy with their working environment, they will become more productive and hence, this will reflect the good reputation of the company. 2. 3 Advantages and Disadvantages The following are the advantages of Kaizen: Higher employee morale and job satisfaction The employees will find work to be easier and more enjoyable since Kaizen encourages group and individual contribution when seeking idea for improvement. Being able to speak their mind, they will find the job as more satisfying and result in higher employee morale. Thus, it will also lead to lower turnover rate. Widely applicable. The Kaizen concept can be used in both manufacturing and non-manufacturing company. For instance, it can be used in production stage in manufacturing company and also in hospitality services. Provide immediate results By continually solving large number of small problems, immediate results can be achieved. Reduce waste and inefficiencies By eliminating activities that does not add value and unproductive in practice, Kaizen assists management in managing the inventory well, helps to reduce waiting time, and transportation cost, efficiently manage worker motion, enhances employee skills and solves overproduction issues. Meanwhile, the disadvantages of Kaizen are as follows: Resistance to change The Kaizen practice is difficult to be implemented in management due to reluctance to accept changes which is because of difference in culture and difficulty in understanding concept of Kaizen Too much suggestion The managers will receive a lot of suggestions and ideas when discussing the problem together with the employees. This will lead to confusion and waste of time when choosing the best suggestion and ideas. Time consuming The managers will need to spend certain amount of time to select the best ideas which are compatible with organization’s goals 2. 4 Implementation of Kaizen Costing in Malaysia Kaizen Costing has been accepted by most of the manufacturers in Malaysia, which it is the second most popular modern management accounting technique that being practice among the manufacturers in small medium industries in Malaysia. (Refer to appendixes, Table 1. ) Besides that, based on research made, in Malaysia, Kaizen system is being used by majority of the manufacturers in the automobiles and transportation components industry as compared with the other type of industry. This may be due to the nature of the automobiles and transportation industry, in which it has short products life cycles. Hence, new and improvised products are always needed as to keep the businesses sustain in the industry. Therefore, to cope with this need, manufacturers have to be alert and continuously improve the productivity through Kaizen management system. An example of the Kaizen implementation system is the Toyota Production System (TPS) by Toyota Company, in which it is a system for thorough waste elimination, as to minimize cost of production and increase the products quality, yet take upon the humanization of work after the modification of the cost management system. (Shimizu, 2000. ) In factories around the world, Toyota Company consistently makes the highest-quality cars with the fewest defects of any competing manufacturer, while using fewer man-hours, less on-hand inventory, as they are using the Kaizen system in their production activity. (Shimizu, 2000.  ) In conclusion, the implementation of Kaizen Costing helps to improve the company performance in terms of production capacity, cost efficiency and product quality continually. Thus, would achieve the cost reduction target. Other than that, with the good corporation between the management and employees through the Kaizen strategies would help to empower and motivates the w orker in order to develop better improvement in their job performance. It also provides highest customer satisfaction because companies which apply continuous improvement approach will always produce better products and services for their valuable customer.