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  • Published: 16 September 2021

Implementation of strategic cost management in manufacturing companies: overcoming costs stickiness and increasing corporate sustainability

  • Mohammad Mahdi Rounaghi   ORCID: orcid.org/0000-0002-9640-678X 1 ,
  • Hajer Jarrar 2 &
  • Leo-Paul Dana 3  

Future Business Journal volume  7 , Article number:  31 ( 2021 ) Cite this article

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In today's competitive world, three factors: price, quality and time have critical roles in the success of the companies to achieve success in the competition. For this purpose, the companies have to also adapt themselves to changes in technology and environment. Strategic cost management is the best way to improve the sustainable management models in the manufacturing companies. Strategic cost management has solved many of the problems and shortcomings of traditional accounting system and by accurate determination of costs, their proper allocation to products and elimination of waste, tries to create value for shareholders by using continuous improvement. The objective of this paper was to develop a management model called strategic cost management that reduced costs stickiness and increased corporate sustainability. Using strategic cost management approach can create competitive advantage for the companies, because it provides accurate cost price information so that the users can easily understand the information. The aim of the paper by introducing strategic cost management was to contribute toward accurate pricing, which could result in the increased profitability and competitiveness of the manufacturing companies in a highly competitive global market and at a market‐based price. Also, due to the growing competition among companies in providing high quality products with reasonable prices, a precise system of measurement of the cost of the product is necessary.

Introduction

In recent years, economic analysis in the planning process and in the monitoring process of the production process shows that three factors: price, quality and time have critical roles in the success of the companies to achieve success in the competition. The world faces the problem of integration between sustained business functions. The sustainability data are not sufficiently integrated. To solve this problem, organizations need information systems to facilitate their sustainability initiatives [ 1 , 2 ]. Also, businesses and academics worldwide agree regarding the benefits of sustainable development (SD). Improving reputation and branding and increasing revenues by reducing costs are the primary strategic objectives of any entity [ 3 , 4 ]. In this paper, we introduce the strategic cost management approach that helps manufacturing companies for overcoming the costs stickiness and monitoring the life cycle of products and it introduces integrated sustainable development system for manufacturing companies.

Strategic cost management is a process connecting financial management, cost management and strategic management. It involves cost optimization and financial resources preparation which are needed to achieve desired strategic market position in cost effective manner. The importance of managing costs and aligning them with the business strategy of an entity is critical especially in the midst of challenging economic times faced by businesses today. Traditionally companies have been under pressure to cut cost in the short-term without really thinking about sustainable change, impact on the people and integration with the overall business strategy. In the current business environment of increased global competition, new markets, increasing regulation and changing demographics, successful companies are changing their approach to cost structuring and control.

Over the last decade, research in management accounting has challenged the fundamental assumption that cost behavior is symmetric for activity increases and decreases. Cost behavior is an important issue in cost accounting and management accounting, as it widely affects decision-making processes. Moreover, several techniques generally used by managerial accountants and financial analysts depend mainly on cost behavior, such as conventional ABC, cost estimation and cost-volume-profit analysis. Quality management (QM) has been widely viewed as a management paradigm that enables firms to gain a competitive. Therefore, overcoming on cost stickiness is a critical issue for mangers of manufacturing companies. Also, understanding cost behavior is an essential element of cost and management accounting [ 5 – 8 ].

Cost stickiness, also referred to as asymmetric cost behavior, is a well-documented result of managerial discretion underlying the development of corporate cost compared to changes in firm activity. Managers’ decisions to maintain the resource allocations due to product market competition can be costly, especially during periods of sales decreases. Under the traditional model of cost behavior, costs are assumed to be either fixed or move proportionately and symmetrically with sales changes. The traditional model of cost behavior distinguishes between fixed and variable costs and posits a proportional relation between variable costs and underlying activity levels. Understanding sticky cost behavior is important and has direct benefits for the economy as it provides useful information to managers making decisions on cost control and to external stakeholders (e.g., financial analysts) assessing firm performance. As the global economy integrates and competes, strengthening cost management and operational efficiency becomes increasingly important to firms’ survival and development [ 9 – 14 ].

Cost management is an important part of business management in the manufacturing industry. The degree of cost management implementation is a comprehensive index to measure the level of enterprise management. In particular, firms with limited access to capital have higher costs of securing external financing during the capacity expansion periods, which increases the upward adjustment costs. When activity decreases, firms with limited access to capital may suffer more decrease in the present value of revenue generated by a marginal capacity, as these firms have higher opportunity cost of capital and thus higher discount rates compared to firms with better access to capital. Therefore, we hypothesize that limited access to capital not only reduces contemporary capacity expansions associated with sales increases, but also weakens the degree of cost stickiness when sales decrease [ 15 , 16 ].

On the other hand, cost management is an important part of business management in the manufacturing industry. The degree of cost management implementation is a comprehensive index to measure the level of enterprise management. From investors’ perspective, investors depend on the published financial statements prepared by the management that are based on available information regarding the determinants of cost behavior. From financial analysts’ perspective, predicting cost behavior is an essential part of earnings prediction [ 16 – 18 ].

In many production firms, it is common practice to financially reward managers for firm performance improvement. For decades, firms have devoted to improving the speed and efficiency of material and information flows in the supply chain, acknowledging the importance of time-based competitive advantage in the dynamic business environment. As one of the key factors in decision-making process, the evolution of product price passes critical information. Managing costs by utilizing resources effectively is regarded as fundamental to success in today's competitive environment. Cost behavior as “sticky” if costs increase more for activity increases than they decrease for an equivalent activity decrease. Sticky behavior is the result of decisions made by managers when activity decreases. When activity drops, the manager must decide whether to (a) maintain committed resources and bear the cost of unutilized capacity at least in the short-term or (b) immediately reduce committed resources and incur potentially large retrenching costs in the current period and, if activity increases in the future, incur further costs to replace resources. Traditional accounting cost models assume that fixed costs are independent of the level of activity and variable costs change proportionately with changes in the level of activity. In the common traditional model of the behavior of costs, which is generally accepted in accounting literature, costs are usually divided into two categories of fixed and variable ones in terms of changes in activity level: fixed occupants are variable. Most management accounting texts assume that unit variable costs are linear and proportional to changes in activity and that fixed costs are fixed. The proportionality and symmetry between costs and activity implies that a 1% increase in activity results in a 1% increase in costs, and a 1% decrease in activity results in a 1% decrease in costs. Stickiness might also be conditioned by existing capacity [ 5 , 19 – 26 ].

Notions of cost behavior are a key element in management accounting [ 27 ]. There are two main views about the existence of expense stickiness: rational decision-making and motivational. The rational decision-making view treats expense stickiness as a consequence of management rationally choosing between alternatives after comprehensively weighting costs and benefits. The second view is motivation-based and relates expense stickiness to managerial incentives, suggesting that managers are not expected to behave as if they were in an ideal world. Among their dysfunctional behavior, perks and earnings management reflecting different contracting stimulations are often observed [ 28 ].

Planning and control are of the important tasks of management. Cost related information that managers need them to perform these tasks may be received from classified information reflected in the financial statements. The required information in this regard cannot be easily extracted from the financial statements [ 29 ]. A business entity expenses can show different behaviors suitable to the level of activity. In traditional cost model it is often assumed that administration, general and selling costs varies according to activity level. However, recent experimental studies have revealed evidence that shows that administration, general and selling costs behave asymmetrically [ 30 ]. An asymmetric behavior is a behavior in which cost increase more rapidly. In other words, the reduction in costs at the time of declining sales is lower than when the cost increases at the time of the same level of sales. This cost behavior is called cost stickiness. Expanding researches show that economic factors such as increase in assets and uncertainty about the future can have an impact on the asymmetric behavior of cost.

Costs stickiness

Cost behavior is defined as cost reaction in response to changes in activity level. Managers who understand how costs behave, have better circumstances for predicting spending trends in various operational positions. This position allows them to plan their activities and thus plan their operating revenues better. The traditional view related to costs indicates that changes in costs have a proper relationship with increased and decreased activity level. However, recent researches about costs behaviors indicate costs stickiness. Thus the degree of increase in costs level as a result of increase in activity level is higher than the degree of reduction in costs level as a result of decrease in activity level.

According to the idea of Anderson et al. [ 31 ], there are many reasons for costs stickiness. Some of these reasons include natural reluctance to lay off employees when downsizing, firm costs and the need for time to approve a reduction in the volume of activity and management decisions for maintaining used resources which could be the result of individual consideration and leads to imposing cost to the firm. By determining the stickiness of cost, the company owners can analyze whether managers incur costs to the firm or not [ 32 ].

Managers of manufacturing companies must consider the relationship of costs with income and the effect of income changes on the costs rate when planning and budgeting the company activities for predicting the future costs and thus offer a more comprehensive budget [ 33 ]. The ultimate goal of any business unit is maximizing profits and consequently, an increase in equity. Management of each profit-oriented enterprise tries to gain maximum benefit and efficiency from using the fewest resources and one of the simplest ways to reduce consumption of resources is cost control. But this requires complete knowledge of how costs behave and the factors influencing the behavior of the cost. One of the items that should be considered in the analysis of cost behavior is the phenomenon of cost stickiness. The public and dominant view is that with declining sales, costs should also be changed accordingly. But in fact, it does not happen [ 34 ].

Today, increasing competition in domestic and international markets has forced managers to better understand their cost structure and become aware of cost orientations means how the costs change. The meaning of cost orientation is a model according which costs react to changes in activity level [ 35 ]. Therefore, it is suggested that managers calculate their costs stickiness and consider all aspects of this important issue in their decisions. Orientation or the concept of cost stickiness gives a great help to investors and shareholders. Because in companies with strong stickiness, by reduced selling, costs will change more than the time when selling increases and this will be considered as a weakness of management by the investors and shareholders; while one of the main reasons of cost stickiness is bearing the current costs to avoid more losses in the future and or more profit in the future and it depends on management decisions [ 36 ].

Review of literature

Sustainable development refers to an economic, environmental and social development that meets the needs of the present and does not prevent future generations from fulfilling their needs. In manufacturing companies, collaboration between supply chain members is important for the sustainability and competitive advantage of a supply chain. The collaborative activities in a supply chain include various joint activities for cost reduction, research and development (R&D), product development, manufacturing, marketing, distribution, and service. The commitment of companies to corporate sustainability has been frequently discussed in theory and practice. Such a commitment to corporate sustainability demands a strategic approach to ensure that corporate sustainability is an integrated part of the business strategy and processes. Also, the effective adoption of continuously developing new technologies is a critical determinant of organizational competitiveness [ 37 – 41 ].

For the first time [ 5 ] tested the hypothesis that costs are sticky and approved the presence of stickiness in the costs behavior. They established a model with administration, general and sales costs as a function of sales, and found that costs increase by an average of 55% in response to a 1% increase in net income, but decrease only by 35% against 1% reduced income. In other words, a 1% increase in net sales, costs increase by 55% but by 1% decrease in net sales, costs decrease only by 35%. Due to the lack of public information about costs related drivers, they used data of administration, general and sales costs and net income of sales for the analysis of cost stickiness, and stated that they can analyze the behavior of administration, general and sales costs based on sales net income because sales volume stimulates many parts of this cost. Subramaniam and Weidenmier Watson [ 25 ] tested the presence of behavior of stickiness in the cost price of goods sold, and the results showed a positive relationship. They also tested the effect of different economic conditions, such as rates of GDP and the different characteristics of companies, such as total assets and number of employees of companies on costs stickiness. Their results showed that in periods of economic growth, the severity of stickiness is more and in the periods that income decrease happened in its previous periods, severity of stickiness decreases. Also, by increasing the ratio of total assets to sales and an increase in the number of personnel of companies, severity of cost stickiness increases. Stickiness of sales and distribution and general and administration costs has been studied in another study by Anderson et al. [ 31 ]. The main hypothesis of this study is public sale and administration costs. After collecting data related to cost of general sales and administration and sales revenue costs of 7629 American companies in a 20-year period (1979–1998), the relationship between costs and sales was examined by multi-varibale regression relationship. The results of this study did not confirm the main hypothesis of the research and announce the general sale and administration costs of companies in the statistical population of the research, sticky.

The results obtained by Weiss [ 18 ] from a sample of 2520 out of 44,931 industrial companies from 1986 to 2005 show the issue that the sticky behavior of costs increased the accuracy of analysts in predicting revenue in total, considering the fact that prediction horizon and especial effects of industry have put this analysis under control. With regard to the classification of costs into sticky and non-sticky costs, the results of Weiss's research [ 18 ] show that the accuracy of analysts in forecasting revenues for firms with sticky cost behavior is on average 25 percent less than that of people who analyze for companies with non-sticky cost behavior. Obviously, the behavior of cost has a considerable influence on the accuracy of analysts' prediction.

In Kordestani and Mortazavi, research [ 30 ], the power of profit prediction was compared with other models by the model based on variability and stickiness of cost. The study showed that the accuracy of prediction of the model based on the variability of costs and stickiness of cost is significantly higher than the other models. In several domestic researches, stickiness of various costs has been studied. According to the results of Ghaemi and Nematollahi's research, the cost price of the sold goods and selling and distribution and general and administration costs are sticky. Another study from the same researcher showed that overhead costs are sticky, but the costs of raw materials, direct wages and financial costs are not sticky.

In other study, Khani and Shafiei [ 42 ] examined cost stickiness and its relationship with sales and the results of their research indicate an undeniable relationship between the amount of sales and company earnings with the level of company's costs. Although their findings indicate that costs do not increase in proportion to profit increase, but there is a significant relationship between them.

In other study, Banker et al. [ 43 ] examined the relationship between uncertainty and sticky behavior of cost. By examining administration, general and sales costs, number of employees and their working hours, they evaluated cost stickiness. The results indicate the presence of cost stickiness in the sample under investigation. Sepasi et al. [ 44 ] examined the characteristics of management behavior toward costs stickiness. Their studied a sample consisting 14,568 year-company and examined administration, general and sales costs for the years 1992–2011. The results showed behavioral changes in managers about cost stickiness so that the occurrence of cost stickiness phenomenon increases the confidence of managers.

Management of strategy and strategic cost management

Effective strategic management, plays an important role in the success of the company or organization. Increase in competition in the international arena, new technologies and changes in business processes, caused management to become more dynamic and important than before. Managers should always have a competitive attitude and for this purpose the company's competitive strategy is essential. Strategic attitude leads the manager to anticipate changes and products and their production process will be designed based on anticipated changes in demand and customer's needs. In this situation, flexibility is important.

In developed countries, most organizations use data of cost management. But the extent of their reliance on this information depends on the nature of the competitive strategy of the company. Many companies compete on the basis of the provision of goods and services at the lowest cost price. Some companies compete on the basis of being a leader in production and offering superior and differentiated products. The role of cost management is supporting corporate strategy by providing the information through which one can be successful in products development and their marketing. For achieving corporate sustainability, we suggest to use the instruments of strategic cost management in manufacturing companies . Today, managers use strategic cost management tools to accomplish strategies and achieve main success producer factors.

Instruments of strategic cost management are as below:

The most common system that used in many companies is activity-based costing system. Activity-based costing system which is specifies the resources consumed by each activity during the relevant period; and thus the cost of each activity is precisely calculated. Then the aggregated costs of any activity are assigned to the considered product or customer, depending on the product consumption or the customer use of that activity [ 45 ]. The other instrument is bench-marking. Bench-marking is a process that the companies try to choose the best practice as of the right activity in comparison with the leading companies, then given the success-builder factors, the company processes are improved to the level of performance of its competitors or even reach to a better level. For identification of internal and external failure factors in the companies, we suggest to use total quality management technique. Total quality management a new concept that emphasizes on precise measurement of the costs and identification of internal and external failure factors, through which a way to lower production (lean production) by continuous improvement in company processes is created [ 46 ].

For finding the precise systems of measurement of the cost, in-time production system and kaizen costing are useful tools for manufacturing companies. In-time production system is a system based on the volume of demand. In this system, a piece of product will be purchased or produced only when a sign of its consumer is received. This prevents the accumulation of inventory in workstations. Among the main objectives of this system we can mention improvement of quality and increase in productivity with an emphasis on the kaizen concept. Kaizen costing is a managerial technique through which managers and employees of the company become committed to perform continuous improvement program in the quality and other key factors of success. In the path of continuous improvement, the processes are re-engineered and non-value activities in the manufacturing process are removed or left behind [ 47 ].

The other instruments are target costing and value engineering. In target costing method, the costs are determined according to the product price. It means that first the companies determine the product selling prices, by analyzes of the market and then according to their expected profit, determine the cost price of the product. In other words, goal-oriented costing system is profit planning and cost management system that in that base it was the price, and the essential emphasis is on customers. Goal-oriented costing system focuses on the design stage and requires the participation of all specialized units [ 48 ]. Value engineering is suggested with the aim of examination of all activities of a project, from the formation of the first thought to the design and implementation and then setting up and utilization, is known as one of the most efficient and the most important economic methods in the field of engineering activities [ 49 ]. The purpose of value engineering is eliminating or modifying any factor that leads to the imposition of unnecessary costs, without hurting the core and essential functions of the system. Value engineering is the continuous improvement of design and implementation and it is not merely a program to reduce costs, but is a way to maximize the value of designs [ 50 ].

Implementation stages of strategic cost management

Implementation stages of strategic cost management include value chain analysis, strategic situation analysis and analysis of structural and administrative costs drivers.

Analysis of the value chain

Value chain analysis is an instrument for strategic analysis that helps companies to better understand the competitive advantage. Value chain analysis focuses on the whole value chain of the product from design to production and after-sales service. The basic concept of analysis is that by a thorough examination of each of the activities in the value chain, one can reveal the activities that the companies have the highest or lowest success in them from competition perspective, and plan accordingly.

Analysis of strategic situation

At this stage, the company determines its potential and current competitive advantage by examining valued activities and cost drivers which have been specified in the previous stage. Companies which have competitive strategy of cost leadership are strongly trying to reduce their costs to the level of cost of cost leadership. Cost leadership focuses on cost reduction only as far as it makes sure that it is the leader in price and the holder of the lowest cost in the market. Reduction of costs is usually done by increasing productivity in the production process, distribution or general and administrative expenses. In this management strategy, maintaining stability is a priority and the company is not looking for innovation and risk-taking, but is looking for offering products and services at competitive prices. In contrast, competitive strategy of differentiation, allows the companies to raise the price of products higher than that of their competitors and without significant reduction in costs, have high profitability. These companies, by creating differentiation between the products and creating new features, make customers willing to pay a reasonable price as a result of this differentiation. Using the product differentiation strategy, one can reduce the intensity of competition and no threat of product substitution happens for the manufacturer, because all customers become loyal to the brand of the product [ 51 , 52 , 53 ].

Analysis of drivers of structural and executory cost

Strategic Analysis of cost drivers helps companies in improvement of their competitive situation. Drivers of structural and executory cost are used to facilitate operational and strategic decision-making.

Driver of structural cost, has strategic nature because it includes programs and decisions which have long-term effects. In this regard, the following items are necessary to be noted:

Scale: For example, a retail company shall determine the number of new stores it opens during the year in order to achieve the strategic goals and competitive success.

Technology: New technologies can significantly reduce the company costs. For example, some manufacturing companies in developed countries use computer technology to show number of products that their customers use (especially large retailers), so that whenever the customers run out of the inventory in the warehouse, they send for them quickly.

Complexity of products: companies that produce a high variety of products, have high cost of planning and management of production and also high distribution costs and after-sales service. Such companies usually use activity-based costing to determine the degree of profitability of their products.

Administrative cost drivers, are the factors that companies can manage them in the short term through operational decisions to reduce costs. These factors include:

Work commitment: work commitment causes reduction in costs. The companies in which there is a strong correlation between the employees, can significantly reduce their operating costs.

Design of Production process: the sequence arrangement of equipment and the frequency of processes lead to accelerating the production process in the company. Production technology innovations can significantly reduce costs.

Relationships with suppliers of raw materials of the company: the companies can reduce their costs significantly through agreements with suppliers of raw materials on quality, delivery time and other characteristics of their required raw materials.

Conclusions

Today, sustainability emphasizes various aspects of the organization in economic, social and environmental terms, so the importance of this issue is very important for current and future generations. Most companies have come to the conclusion that in order to improve the efficiency and effectiveness of production sustainability, they need to monitor, measure and control the characteristics of sustainable production. Therefore, measuring the sustainability of production has become an important issue in production and operations.

The purpose of this paper is to design a model for achieving a sustainable development index in order to integrate the economic, social and environmental performance data of manufacturing industries. By understanding the limitations and shortages of resources, the approach of the manufacturing companies includes the acquisition of new production mechanisms and technologies. To achieve newer and more innovative technologies tailored to their production processes in order to reduce production costs and increase their market share, these companies have conducted costly research. One way to deal with a shortage of resource for companies is reduce their costs. Companies regardless of sizes and operational scales must take economic opportunities into account in the long run, limiting opportunities, and incorporating innovative solutions, sustainable development, and positive social and environmental impact into their business activities.

Small-business owners face an ongoing challenge in trying to balance the need to serve customers and meet long-term business objectives while at the same time controlling the cost of doing business. A strategic cost management strategy in which cost decisions are made according to the value they add to both the business and the customer is often the most effective strategy a small business can adopt. Good financial decisions come from an effective cost management strategy designed to maximize value and minimize both initial and ongoing costs. Although a great many of a business’s cost-based decisions involve purchasing, pricing and inventory management, it’s also important for every small-business owner to consider costs involved inside the business.

In a competitive world, paying attention to cost management to reduce costs and increase customer satisfaction are priorities. Today, noting the proper role of the choosing quality and quantity of production factors, choosing between user processes or capital in the production process and selection of appropriate technology, in determining the cost price and producing products that meet the price reasonable in accordance with the customer' purchasing power appear more than before.

Providing the required information of cost management is possible only by establishing a modern system of management accounting including the design and use of various management accounting tools within the organization. Among these tools, there are activity-based costing, target costing, Kaizen costing, product life cycle costing. Strategic cost management is effective by accurate evaluation and identification of costs in the creation of income, profitability and value creation for companies.

By a correct understanding of their competitive situation and by using instruments of cost management, companies can reduce unnecessary costs. Also strategic cost management, by providing more accurate data for the managers, helps them in the short and long-term decision-making to achieve their strategic goals.

Given the importance of understanding the costs for those inside and outside the organization, such as managers, capital market analysts, investors and auditors recommendations for future research are presented as follows:

Examination of the effect of the changes in sales on costs stickiness.

Study of the relationship between management optimism with cost stickiness in various industries.

Examination of the relationship between the cost structure with behavior of each expense.

Availability of data and materials

This paper has no associated data.

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Acknowledgements

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Rounaghi, M.M., Jarrar, H. & Dana, LP. Implementation of strategic cost management in manufacturing companies: overcoming costs stickiness and increasing corporate sustainability. Futur Bus J 7 , 31 (2021). https://doi.org/10.1186/s43093-021-00079-4

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DOI : https://doi.org/10.1186/s43093-021-00079-4

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  • Strategic cost management
  • Manufacturing companies
  • Cost stickiness
  • Corporate sustainability
  • Continuous improvement

research paper on process costing

Research on target costing: past, present and future

  • Published: 16 April 2018
  • Volume 68 , pages 321–354, ( 2018 )

Cite this article

  • Heinz Ahn 1 ,
  • Marcel Clermont   ORCID: orcid.org/0000-0003-0383-4935 1 &
  • Stephan Schwetschke 2  

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Although target costing is an extensively studied topic in the management accounting literature, a holistic investigation into its methodological development is missing. Therefore, an extensive state-of-the-art analysis is conducted that focuses on articles in highly rated journals. We determine nine distinct research streams that encompass further developments of the traditional target costing methodology. By grouping these streams into three research scopes, we outline the achieved progress as well as remaining tasks for further enhancements. Due to the abundance of these tasks, we align them with six future themes of management accounting that we identified as being particularly influential to target costing. As a result, six promising topics for researchers to advance target costing are determined. Additionally, our findings reveal to managers of which issues they should be particularly aware with respect to the performance of their target costing processes.

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Standard costs are costs that would arise at a particular moment for the future product, given an organisation’s current manufacturing capabilities, standards and cost structures (Flik et al. 1998 ; Krapp and Wotschofsky 2000 ; Kremin-Buch 2007 ). These costs are not fixed but can be influenced by cost management activities. Accordingly, the term standard costs is used to describe current costs that are determined at any point in time throughout the product development process for a future product.

Cooper and Slagmulder ( 1999 , p. 30) characterise value engineering as “a multidisciplinary approach to product design that maximizes customer value; it increases functionality and quality while reducing cost.” Related to the understanding of early cost commitment, value engineering activities begin in parallel with the first stages of a product development process (Kato 1993 ). Here, the potentially high cost influencing capacity represents a great opportunity to align functionality and cost objectives (Newman and McKeller 1995 ). The intensity of value engineering activities should be particularly high before design drawings are fixed (Yasukata et al. 2013 ).

In addition to this focus on methodological developments, there are other streams of research concerning target costing. For instance, Cinquini et al. ( 2015 ) as well as Yazdifar and Askarany ( 2012 ) explore target costing’s diffusion in different companies or between countries. Other authors analyse changes necessary for adapting target costing to other industries, such as the assembly business (see, e.g., Everaert et al. 2006 ; Jack and Jones 2008 ), or in the context of the globalisation of companies and their supply chains (see Seidenschwarz 2008 ). Additionally, Cadez and Guilding ( 2008 ) as well as Chenhall ( 2003 ) examine factors that influence the application of target costing in companies.

We follow Atkinson et al.’s ( 2012 ) distinction here. As such, a product’s life-cycle consists of three phases: (1) development phase, (2) market phase and (3) post-sale phase.

For a discussion of possibilities of target costing for start-ups in regard to a lean start-up management, see Seidenschwarz ( 2015 ).

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Ahn, H., Clermont, M. & Schwetschke, S. Research on target costing: past, present and future. Manag Rev Q 68 , 321–354 (2018). https://doi.org/10.1007/s11301-018-0141-y

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Process Costing

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Graham Partington

research paper on process costing

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This paper will investigate the controversy that is innate between the two costing techniques; Absorption Costing and Marginal Costing and would throw light on which costing technique better serves its purpose in helping management for decision making process and if Marginal Costing technique is concluded as better technique then why it should not be used for external reporting purpose. This paper will only crystallize and highlight the issues descriptively and will not resolve the issues that are inherent between the two costing techniques. The unique thing about this paper is that it is in favor of treating fixed cost as product cost that is it is supporting the advocates of Absorption Costing Technique but it is against to consider profit as a function of production rather it believes that profit should only be considered as function of sales for stock valuation and to help management in decision making process that is, regarding this point it is supporting advocates of Marginal Costing. Introduction Accounting figures just show current scenario of an organization. But if we want to understand the basics of these accounting figures we still need to understand Management Accounting Techniques. The intention of accounting by and large portrayed the course of providing information to owners, creditors, governmental regulatory agencies, and operating management. In an extensive sense, accounting helps in assistance of the economic resources management (Seiler, 1959). So, accounting encompasses collection and measurement of financial data and presents this to relevant parties who are engage in decision making process. (Chandra and Paperman, 1976) Despite having knowledge of all these techniques we still left at a place where we need to think which technique in a more excellent manner gratifies our need, help management in decision making process and also more importantly; fulfills the constraints, demands and needs of International Accounting Standards as well as regulatory agencies and tax authorities. Marginal Costing and Absorption Costing (the subject under discussion) are two such accounting practices and there is an innate controversy that born with the birth of Marginal costing technique that which technique better fulfills the purpose of management in decision making process. (Chandra and Paperman, 1976) For external reporting purpose, the difference between the techniques is very critical and important. The profit reported by two techniques is altogether different in many cases and so it affects critically decision making process of management (Ijiri et al., 1965; fremgen, 1962). The controversy is the valuation of stock either by including fixed overhead cost or not and if the stock is valued exclusive of fixed overhead cost whether it should be presented externally? (Chandra and Paperman, 1976) The objective of this paper is to throw light on the usage of two accounting techniques and to determine which technique better serves its purpose to aid management in decision making

rupesh tembhare

Modern methods of overheads allocations

charles sewerani

The paper looks at the modern methods of overheads apportionment which are Material Flow Cost Accounting and Activity Based Costing. It looks at the benefits these methods bring to organisations compared to the use of traditional methods of overheads allocations.

Bulend Terzioglu

In the early 1920s, direct labour comprised most of the total cost of manufacturing, and allocating overheads using direct labour hours or direct labour cost was sufficient for inventory valuation purposes, which was then the primary object of cost accounting. However, the upsurge of manufacturing overhead as a percentage of manufacturing cost at the expense of direct labour and proliferation of product lines complicated the otherwise relatively straightforward process of overhead cost allocation. Empirical evidence demonstrates that our understanding of how best to allocate overheads is at a nascent stage, and surprisingly most managers still do not know their costs. Moreover, managers have grave concerns about the current practice that allocates overheads to products in an arbitrary fashion. These concerns stem from the fact that managerial decisions are based on cost information furnished by management accountants, which is ostensibly inaccurate. This conceptual discussion paper ...

Amanuel Workineh

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Product costs are a significant determinant of both short-term and long-term decisions of businesses in terms of goal achievement. In determining the costs, businesses are expected to consider both the characteristics of the market (demand) and the business itself. Product costs are calculated by cost calculation methods. Cost calculation methods are normal costing method, full costing, variable costing. Full costing treats the costs of all manufacturing components (direct material, direct labor, variable factory overhead and fixed factory overhead) as inventoriable, or product, costs. Variable costing is a cost accumalition method that includes only variable production costs (direct materal, direct labor and variable factory overhead) as inventoriable, or product, cost. Normal costing method takes into account all the variable parts of production costs. The method handles fixed operating costs according to the rate of capacity utilization. In this study, the effects of choosing either full costing , variable costing or normal costing on costs in terms of varying amounts of production are analyzed

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This article has aimed to show such theoretical cost approach in accounting thought. The article has divided the cost approach into two groups, the traditional approach that includes the Volume Based Costing, French Cost Accounting approach and Grenzplankosterechuning approach and Contemporary Cost Approaches which include four approaches Activity-Based Costing, Time-Driven Activity-Based Costing, Resources Consumption Accounting and Lean Accounting. As result of the debate that led to the existence of pros and cons of each approach and no one can declare to say preferential approach on the last absolute.

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Application of cost accounting systems in an enterprise The Article discusses the issue of allocation of costs in the normal and actual cost accounting systems. A procedure of dump (conversion) of the normal into actual costs using data flows has been presented. The Article presents an example of applying the designed procedure illustrating the links between cost centre, cost objects and income objects accounting.

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Process Costing Research Paper Examples

Type of paper: Research Paper

Topic: Management , Finance , Company , Business , Products , Organization , Accounting , Information

Words: 1400

Published: 01/12/2020

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The cost accounting system that an organization chooses to use is determined by many factors. Key among the determining factors is the business the organization carries out. For instance, an organization offering services and having distinct jobs for its workforce will elect to go by the job order costing system of accounting (Shim & Siegel, 2009). On the other hand, an organization dealing in the production of goods, especially identical units, will opt to use the process costing system of accounting. In simple terms, the products of the organization are the determinants of the system since costs relate directly to the products. This is to say that the costs are incurred for the sole purpose of producing the final product. Cost accounting concerns itself with the estimation and appropriation of costs. This paper seeks to explain process costing in the context of the company in which I work.

Process costing

Process costing is a costing system that is used in large organizations that deal in the production of identical units of goods (Bhar, 2005). Our company deals in the production of automobiles. The automobile production takes place in mass processes that have multiple steps. As such, the process costs are applied according to the number of departments. Our company has six departments that work on various parts of the process of making the finished vehicles. The first department concerns itself with the assembly of the basic parts of the body of the automobiles. This is a process that entails the use of metallic materials, as well as, the employment of highly skilled labor as far as mechanical know-how is concerned. The second part of the process is the assembly and advanced fixing of the engines. The third process or department is concerned with the wiring process. This employs the expertise of electronics experts. The fourth department concerns itself with the spraying of paint. The fifth and the sixth departments are concerned with fixing of internal accessories and fitting of seats respectively. Proponents of this system argue that it is most appropriate where the products are made in bulk, but sold in small quantities and are identical (Gupta et al, 2010). From the above explanation, it is notable that our company’s products, automobiles are produced in mass numbers, but sold in small quantities; in most cases a unit is sold at a time. Process costing is a method of ascertaining costs and allocating such costs to the various departments and processes. The ultimate aim of the process costing system is to settle on the standard cost per product. The per-unit cost concept is not always accurate as it is subjected to many inconsistencies such as undervaluation and overvaluation. The process costing process allocates such direct costs as the cost of labor, materials and variable overheads to units and departments. This system traces the movement of raw materials through the various stages of the process. In simple terms, the costs are monitored as the raw materials get transformed into partially finished goods and finally into the consumable finished product. The major problem that our company accountants encounter in the process costing system is the manner in which to handle partially finished products. Such unfinished pieces of work are referred to as work-in-progress. Valuation of the work-in-progress can be subjective since allocating costs to goods that are not complete can be allocated exact amounts of costs. The second drawback of this technique is the fact that it is linked to cost control (Bhar, 2005). Cost control by senior managers may be adverse on the flexibility of the system.

The pros of process costing

Arguably, process costing is the easiest method of ascertaining and allocating costs to the processes, departments and units of a manufacturing concern. The system identifies the nonperforming departments as well as those processes that are not necessary Hansen et al, 2012). This helps the organization save costs and improve efficiency by scraping off the unnecessary and loss-generating departments. All departments, which do not generate a positive contribution, should be done away with since they increase costs without correspondingly affecting the profits or contributions. Similarly, process costing identifies the most efficient departments and cost effective processes. The management then invests more resources into such departments after scrapping off the redundant departments and processes. The second advantage of this method is that it is flexible. Gurus in the field of accounting have identified this system as one that is capable of manipulation and reasonable adjustment (Mowen, 2011). This is an immensely fundamental characteristic since it determines the pricing needs of the organization. The flexibility of this system can as well be explained by the fact that it enables the organization to do away with redundant activities and departments. Apart from being flexible, the system provides a wide array of financially useful information. Such information can be employed in making such decisions as the make or buy decisions. Decisions concerning the introduction of a new product, so as to maximize the production capacity of a department, are the most difficult investment choices (Dosch & Wilson, 2010). However, if process costing is applied appropriately, it can provide information that can make such decisions simpler.

The cons of process costing systems

Debatably, this system of cost accounting is the one that is most prone to such errors as cost errors. Cost errors are those errors that entail the inclusion of non production costs. The inclusion of such costs translates to unnecessarily high prices on the side of the consumer. Similarly, there is a lofty likelihood that the cost accountants will fail to include production costs. This may cause undervaluation or underestimation of the cost per unit (Bhar, 2005). In turn, there will be chances of undercharging during the pricing process. As such, the organization may fail to recover the costs of production. The second demerit of this system of costing is the fact that handling such things as work-in-progress and equivalent units may be quite an uphill task. It may be subject to inconsistencies and subjectivity since the values attached to equivalent units are mere estimations. This may translate to an exaggerated value of final products.

Process costing information in financial management

Financial management is a branch of business planning that borrows from both economics and accounting. The essence of the discipline is to make long-term financial decisions. In our company, just like in all other companies, financial management concerns itself with the making of long-term decisions of non-routine nature (Shim & Siegel, 2009). The information provided by process costing contributes to the information used in making such decisions. Notably, without the process costing information, removal of non performing departments would not have been possible. This is for the simple reason that it is only the process costing systems that can provide information relevant to the process of identifying the performers and nonperformers (Stelling et al, 2010). It is worth noting that removal of a line of production and introduction of another are examples of financial management decisions.

Recommendations to our cost accounting system

Our cost accounting system is in such a way that it makes absolute decisions. These decisions are those that rely on the results of a single process. For instance, the fact that a department is not performing well does not mean that such a department should be banned. Rather, the organization’s management should seek to understand the impact of such removal on the morale of the employees, as well as, consumers. A line of production or a department handling a process could be considered unnecessary, but removal of such line may have negative impacts on the morale of the employee. In simple terms, our cost accounting system should consider human aspects of the organization.

Bhar, B. K. (2005). Cost Accounting Methods and Problems. Kolkata: Academic Publishers Dosch, J & Wilson, J. (2010). Process Costing and Management Accounting in Todays Business Environment .Strategic Finance. 92(2), 37-43. 7. Gupta, S., Sharma, A & Ahuja, S. (2010). Cost Accounting. New Delhi: V. K (India) Enterprises Hansen, A., Mowen, H., Heitger, A & Gekkas, B. (2012). Cornerstones of Managerial Accounting. New York: Nelson Education Mowen, H. (2011). Cornerstone of Cost Accounting. Boulevard: South Western Cengage Shim, J & Siegel, J. (2009). Modern Cost Management and Analysis (3rd Edition). New Delhi: Barros’s Publishers Library Stelling, M., Roy, R., Tiwari, A & Majeed, B.(2010). Evaluation of Business Processes Using Probability-Driven Activity-Based Costing. Service Industries Journal. Nov2010, Vol. 30 Issue 13, p2239-2260. 22p

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Apple researchers unveil ‘Keyframer’: An AI tool that animates still images using LLMs

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Apple researchers have unveiled a new AI tool called “ Keyframer ,” which harnesses the power of large language models (LLMs) to animate static images through natural language prompts.

This novel application, detailed in a new research paper published on arxiv.org, represents a giant leap in the integration of artificial intelligence into the creative process — and it may also hint at what’s to come in newer generations of Apple products such as the iPad Pro and Vision Pro.

The research paper, titled “ Keyframer: Empowering Animation Design using Large Language Models ,” explores uncharted territory in the application of LLMs to the animation industry, presenting unique challenges such as how to effectively describe motion in natural language.

Imagine this: You’re an animator with an idea that you want to explore. You’ve got static images and a story to tell, but the thought of countless hours bending over an iPad to breathe life into your creations is, well, exhausting. Enter Keyframer. With just a few sentences, those images can begin to dance across the screen, as if they’ve read your mind. Or rather, as if Apple’s large language models (LLMs) have.

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research paper on process costing

How ‘Keyframer’ enhances the animation process through user feedback

Keyframer is powered by a large language model (in the study, they use GPT-4 ) that can generate CSS animation code from a static SVG image and prompt. “Large language models have the potential to impact a wide range of creative domains, but the application of LLMs to animation is under-explored and presents novel challenges such as how users might effectively describe motion in natural language,” the researchers explain. 

To create an animation, a user uploads an SVG image, types a text prompt like “Make the clouds drift slowly to the left,” and Keyframer will generate the code to make that animation happen. Users can then refine the animation by editing the CSS code directly or by adding new prompts in natural language. 

According to the paper, “Keyframer supports exploration and refinement of animations through the combination of prompting and direct editing of generated output.” This user-centered approach was informed by several interviews with professional animation designers and engineers who provided feedback on the research tool, all of whom emphasized iterative design and creativity.

“I think this was much faster than a lot of things I’ve done… I think doing something like this before would have just taken hours to do,” said one study participant interviewed for the paper.

Expanding the horizons of large language models

The researchers found that most users took an iterative, “decomposed” approach to prompt designs, adding new prompts to animate individual elements one by one. This allowed them to adapt their goals gradually in response to the AI’s output. 

“Keyframer enabled users to iteratively refine their designs through sequential prompting, rather than having to consider their entire design upfront,” the researchers explain in the paper. Direct code editing features also enabled granular creative control.

While AI animation tools have the potential to democratize design, researchers acknowledge concerns about losing creative control and satisfaction. But by combining prompting with editing, Keyframer aims to provide accessible prototyping while maintaining user agency.

“Through this work, we hope to inspire future animation design tools that combine the powerful generative capabilities of LLMs to expedite design prototyping with dynamic editors that enable creators to maintain creative control,” the researchers conclude.

The broader impact of ‘Keyframer’ on creative industries

Keyframer promises to transform the animation landscape, making it more accessible to a broad spectrum of creators. In what is seen as a significant leveling of the playing field, Keyframer offers non-experts the capacity to bring stories to life through animation—a task that once required considerable technical skill and resources. It is a testament to AI’s growing role as a collaborative force in the creative process, suggesting a shift in how technology is wielded across various sectors.

The implications of Keyframer extend to an anticipated cultural shift, where AI becomes a more intuitive and integral part of the human creative experience. It is not merely a technological leap, but a potential catalyst for reimagining the very fabric of our interaction with the digital realm. Apple’s move with Keyframer could well be a precursor to a new era where the boundaries between creator and creation become increasingly fluid, guided by the invisible hand of artificial intelligence.

VentureBeat's mission is to be a digital town square for technical decision-makers to gain knowledge about transformative enterprise technology and transact. Discover our Briefings.

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  1. PDF Analysis of Production Cost Calculations Using Process Costing ...

    This research took place at Suli Tofu Factory which aims to (1) to know the method of collecting raw materials, direct labor, and factory overhead cost, (2) to know the factory overhead method of imposition cost in determining the basic price of production, (3) calculation of business profit.

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    The Journal of Corporate Accounting & Finance is an international corporate finance journal aiming to advance the field through academic research and real-world practice. Process Costing: The Most Important Subject in the Management Accountant's Curriculum - Vercio - 2018 - Journal of Corporate Accounting & Finance - Wiley Online Library

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    Process costing is a method of costing used mainly in manufacturing where units are continuously mass-produced through one or more processes. Examples of this include the manufacture of erasers, chemicals or processed food. In process costing it is the process that is costed (unlike job costing where each job is costed separately).

  7. A Case Study on Inventory Costing Methods

    Background research on common costing methods including traditional, process, job, activity-based, and variable is used to analyze the Company's costing method. This background research includes each costing method's advantages and disadvantages along with circumstances that help dictate the use of each method.

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    Introduction In recent years, economic analysis in the planning process and in the monitoring process of the production process shows that three factors: price, quality and time have critical roles in the success of the companies to achieve success in the competition. The world faces the problem of integration between sustained business functions.

  10. Research on target costing: past, present and future

    Although a great variety of characteristics is subscribed to target costing, it is widely agreed that (1) market orientation, (2) early cost management and (3) cooperative efforts are its main characteristics (see, e.g., Chen et al. 1997; Everaert and Swenson 2014; Ewert and Ernst 1999 ).

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    Valuation of WIP is the distinctive feature of process costing. It is done on the basis of equivalent Production. 2. Equivalent Production = No. of Units in the process * % of work completed 3. Weighted Average Method. Procedure Step 1 Summarise the flow of physical units.

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    Date Written: March 27, 2014 Abstract Purpose - Management requires adequate, systematic and useful cost data and reports to manage a business enterprise and to achieve its business objectives. The useful information provided by cost records and reports in cost accounting assist management in making their decisions.

  13. (PDF) ACTIVITY BASED COSTING SYSTEM

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    Process costing is an important product costing method for manufacturing companies that mass produce a large volume of similar products or units of output. Process costing is widely used in industries such as oil refining, food production, chemical processing, textiles, glass, cement and paint manufacture.

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    Process costing is defined by Kohler as: "A method of accounting whereby costs are charged to processes or operations and averaged over units produced; it is employed principally where a finished product is the result of a more or less continuous operation, as in paper mills, refineries, canneries

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    2.2. Technical view. Based on the extensive review of the literature, we can deduce that existing research only partially addresses the technical view of MASs, as illustrated in the Table 1 and the text below.. Hassan's study (Citation 2005) of Egyptian hospitals showed that the hospitals offer most health services at a high cost and that some clinics had little profit while others had big ...

  18. (DOC) Process Costing

    This paper will investigate the controversy that is innate between the two costing techniques; Absorption Costing and Marginal Costing and would throw light on which costing technique better serves its purpose in helping management for decision making process and if Marginal Costing technique is concluded as better technique then why it should not be used for external reporting purpose.

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    Process costing is a method of ascertaining costs and allocating such costs to the various departments and processes. The ultimate aim of the process costing system is to settle on the standard cost per product. The per-unit cost concept is not always accurate as it is subjected to many inconsistencies such as undervaluation and overvaluation.

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    63 Customer reviews. Earl M. Kinkade. #10 in Global Rating. ID 1580252. Finished paper. We are quite confident to write and maintain the originality of our work as it is being checked thoroughly for plagiarism. Thus, no copy-pasting is entertained by the writers and they can easily 'write an essay for me'. Research Paper On Process Costing -.