Business Administration
Lecture No. 8: Cost and Productivity (1)
１. Cost Control
２. Concept of Productivity and Method of Its
Modification
Takahiro Fujimoto
Department of Economics, University of Tokyo
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Main Factors of Product Competitiveness
operating income
gross profit
price
selling expenses &
administrative expenses
cost (product cost)
material productivity
material
cost
labor
cost
material price
labor productivity
wage, etc.
equipment productivity
equipment/ tool depreciation
equipment price
product
development cost
development productivity
R&D investment price
other expenses
planning/development period
delivery period/ date
production/ procurement time
delivery / quantity
production capacity
distribution period
design quality
quality (total quality)
manufacturing quality (conformity quality)
flexibility
１．Cost Control
Cost Control = activity to control cost of products
Cost Accounting provides cost information as premise for the
above.
Average Cost = “In standard capacity utilization, the Cost that is
computed by applying standard efficiency
(productivity) and standard cost rate (factor price)
against standard work method.” (Namiki, “Basic
knowledge on Factory Management”)
Concept of average cost was established by Emerson (promoter of
scientific control movement)
（１）Cost Maintenance (Cost Control in narrow sense)
= Measure variance between standard cost and actual cost
→ cause analysis → corrective action
By this process, maintain actual cost in vicinity of standard cost.
（２）Cost Improvement
= Revise target cost per se
→ efforts on cost reduction (VA = value analysis, etc.
（３） Target Costing
= Implemented at stages of product planning/development
Toyoda Automobile (since 1960s)
Target sales price → target costing → allocation of
target cost →efforts on achieving target (VE, etc.)
Target Costing/Cost Maintenance/Cost Improvement
target costing
profit requirement
VE, etc.
standard cost
estimate cost
target cost
price—determined by market
cost maintenance
cost improvement
History of Cost Accounting (narrow sense)
Developed in USA (fiber, railroad). Outline completed in 1920s.
Until 1880s:
Direct costing (direct cost accounting) = direct expense only
Early 20th century (era of scientific control):
Full costing (full cost accounting)
= allocation of indirect cost to each sector/product
Cost Control Process by Standard Cost Calculation
1．Standardize cost factors
2．Set up cost standards (standard cost cards)
3．Instruct on standard cost to cost center unit (participation
and motivation)
4．Calculate actual (track record) cost
5．Calculate variation from standard cost
6．Analyze cost variance (analysis on causes of incurring
variance)
7．Examine and execute cost improvement measures
(Source) Miyamoto [1990, page 58]
Calculation of Standard Production Cost by Product
----- Traditionally conducted in 2 steps
（１）From the total to each cost center (e.g., process)
Select appropriate first allocation base by each cost item
→ thereby allocate to cost center, and calculate
（２）From cost center to product
burden rate by process = cost by cost center / direct labor hours
burden rate x required labor hours by product/process = cost by
product/process
calculate by product (First allocation base in 2nd Step is direct labor hours.
Is there a problem here?)
Standard 2 Steps of Standard Cost Accounting System
Takahiro Fujimoto
'Introduction to Production Management'
Nihon Keizai Shimbun, Inc. 2001
(Ⅰp111 figure.5.1)
‡
Variance Analysis
Manufacturing cost variance
= variance between actual manufacturing cost and
standard manufacturing cost
Measure by cost factor (labor cost, material cost, etc.)
Further, resolve into variance in factor price, and variance in
productivity (basic unit price)
Verify location of responsibility
Three Approaches to Improve Cost Accounting System
Is the conventional system of 1920s’ model inappropriate as means
to enhance competitiveness?
Three approaches, in contrast (enhancing accuracy of standard cost,
denying allocation base, or denying standard cost)
（１）ABC (Activity Based Costing)
Accurate allocation base
→ accuracy enhancement in standard cost
（２）Throughput accounting:
throughput = sales revenue – direct material cost
（３）Target cost system (target costing):
Backward nature of Standard Cost → control by Target Cost
Basic Concept of ABC
Resources
overhead Ｘ
(personnel cost)
overhead Y
(depreciation cost)
floor space
head-count
resource
driver
Figure removed
Activities
cost pool
1 (order)
due
to
cost pool
cost pool
3 (transportation)
2 (inspection)
copyright
restrictions
number of
inspections
number of
transportations
number of
orders
Products/Services
product
A
cost
driver
product
B
Andersen Consulting ” Mechanism of Strategic Accounting”, Toyokeizai Shinpo Sha
Cost Accounting by ABC
Cost Accounting by Traditional Method
personnel cost
personnel cost
¥1mill.
¥1mill.
Resources
resource driver: time,
allocation
・manufacturing sector:50%
・others 50%
・machine adjustment works 50%
・other works 50%
allocation
allocation
Cost center
Activities
machine
adjustment works
others
others
sector
due to copyright restrictions
¥500,000
¥500,000
allocation
manufacturing
Figure removed
¥500,000
cost driver :
number of machine adjustments
・product A
(customized products) 20 times
・product B
(standardized products) 5 times
allocation
¥500,000
allocation standard :
direct machine work hours
product A
product B
product A
product B
¥400,000
¥100,000
¥100,000
¥400,000
・product A
(customized products) 20 hours
・product B
(standardized products) 80 hours
Andersen Consulting ” Mechanism of Strategic Accounting”, Toyokeizai Shinpo Sha
Basic Logic of Throughput Accounting
sales volume
to be grasped per 1 product
Throughput
accounting
selling price
(sales amount per 1 product)
- direct material cost per unit
(plus, if sales volume increases)
Σ
throughput
operating
profit
to be tabulated at total company level
― operating cost
- variable manufacturing cost
(except direct material cost)
- fixed manufacturing cost
sales volume
(plus, if sales volume increases)
to be grasped per 1 product
Conventional
method
(full cost accounting)
selling price (sales amount per 1 product)
- variable manufacturing cost per unit
- fixed manufacturing cost per unit
(allocation)
Takahiro Fujimoto 'Introduction to Production Management‘
Nihon Keizai Shimbun, Inc. 2001 (Ⅰp114 figure.5.2)
‡
Σ
Σ
production
volume
throughput
operating
profit
variance in
manufacturing cost
(plus, if sales volume increases)
２．Concept of Productivity and Method of Its Modification
Enhancement in cost competitiveness
← (1) increase in productivity
← (2) decrease in factor cost
Productivity is --“ratio of input and output”
“level of efficient utilization of various production factors”
“transmission efficiency at the time of transcribing product
design information from process to product”
（１）Classification by Output
Physical productivity --- unit of material volume
Value productivity ----- unit of monetary sum (added value,
revenue, etc.)
（２）Classification by Input
Total factor productivity, TFP
Partial productivity, or individual factor productivity
Labor productivity (head count or man-hour = man/time)
Capital productivity
Material productivity (basic unit)
Measurement of material labor productivity
(example of numerical value)
・ “production quantity per one person” or “production
quantity per one man-hour”
・ scheduled working hours, or actual working hours
・ handling of “unpaid overtime”
・ dealing of difference in degree of proficiency
・ concept of “man-hour” (person/hour per unit)
Case
Factory
A Factory
B Factory
Annual output
Direct workers
Scheduled working hours
900,000 units
100 men
1,800 hours
/year- number
1,800 hours
/year- number
1,800 hours
/year- number
1,200,000 units
100 men
2,000 hours
/year- number
2,400 hours
/year- number
2,500 hours
/year- number
Actual working hours
(recorded)
Actual working hours
(unrecorded, estimate)
Way of measurements decides either A Factory or B Factory
in terms of higher productivity.
Capital Productivity
Problem lies in heterogeneity of facilities.
Tally in the form of actual tangible fixed asset?
In case of same kind of machines, “lifecycle cumulative
production quantity per equipment”?
Material Productivity
Case of assembly-industry type:
Data and yield rate of bill of materials
Case of apparatus-industry type:
More important (yield rate of semiconductor, rate of
coke(s) in making pig iron)
Labor Productivity at Individual Level
(Efficiency in Information Transcription)
actual working hours = net operating hours + other hours
net operating hours = hours used to transcribe information (added value)
other hours
= waste in waiting, work insert and pull, walking,
preparation, set-up change, etc.
Physical productivity of individual
= actual working hours / output
= (net operating hours/output) ÷ (net operating hours/actual working hours)
(↓: speed up)
(↑: decrease in waste and setup)
can be saved
immediately
net operations
waste
workers’
movements
operations
non-value-adding
operations
Yasuhiro Monden 'Field Management of Toyota' Japan Management Association (p.179)
‡
・ waiting
・ wasteful transportation
・ stacking up semimanufactured products
・ changing hands
・ duplicated transportation
under current working
condition
・ go get parts
・ unpack subcontract parts
・ to take out parts little by
little from large pallet
・ operating hand-push
cutter button
Factor Productivity and Production Leadtime (concept diagram)
legends：
net operating hours
(information transmission hours)
net operating hours
(information receiving hours)
hours without information
productivity of first process productivity of second process
( man-hour per 1 unit)
(man-hour per 1 unit)
transmission/receiving (inventory,
hand-carry , transportation, etc.)
production resources
cycle time
cycle time
workers
workers
Transmitting party
(productivity)
in-process products
materials
second process
first process
Receiving party
(lead time)
Inventory
time
finished products
Invento
ry time
transport Invento
ation
ry time
time
cycle time
Inventory
time
cycle time
production leadtime
Productivity and Net Operating Hours
(density approach and speed approach)
（Labor productivity）
（Speed of information
transcription）
man-hour
total actual working hours per day
total net operating hours per day
requirement ＝
＝
production units per day
production units per day
per unit
＝ gross net operating hours per day
（Density of information
transcription）
÷
total net operating hours per day
total actual working hours per day
÷ rate of average net operating hours