Cost Management

Experience of Kaizen Costing in Toyota.

Toyota’s Experience of Kaizen Costing: Toyota aggressively pursued Kaizen Costing to reduce costs in the
manufacturing phase. In July and January, Plant Managers submit six months plan for attaining their kaizen
goal. Methods for achieving these goals include cutting material costs per unit and improvement in standard
operating procedures. These are pursued based on employee’s suggestions. For improvements involving industrial
engineering and value engineering, employees often receive support from technical staff. To draw up a Kaizen
plan after Kaizen goals have been set by top management, employees look for ways to contribute to Kaizen in
their daily work. About two million suggestion were received from Toyota employees in t\one recent year alone
roughly thirty-five per employee. Ninety-seven percent of them were adopted. This is really a prime example of
concept of employee empowerment in which workers are encouraged to take their own initiatives to improve
operations, reduce costs, and improve product quality and customer service.
Kaizen Costing and Standard Costing
Standard Costing is used in conjunction with management by exception (management’s attention is directed
towards situations where actual results differ from expected results). The expected results are based on standards,
which have been derived from the capability of current organizational processes. Standard costing, therefore,
reflects current level of performance and fails to provide any motivation to improve. A table given below set out
principal differences between Kaizen Costing and Standard Costing:

Basis of Difference Standard Costing Kaizen Costing

Concepts It is used for cost control It is used for cost reduction.
It is assumed that current It assumes continuous improvement.
manufacturing conditions remain
unchanged.
The cost focus is on standard costs The cost focus is on actual costs assuming dynamic
based on static conditions conditions
The aim is to meet cost The aim is to achieve cost reduction targets.
performance standards
Techniques Standards are set every six or Cost reduction targets are set and applied monthly
twelve months
Costs are controlled using Costs are reduced by implementing continuous
variance analysis based on improvement (kaizen) to attain the target profit or to
standard and actual costs. reduce the gap between target and estimated profit.
Management should investigate Management should investigate and respond when
and respond when standards are target kaizen amount are not attained.
not met.
Employees They are often viewed as the They are viewed as the source of, and are empowered
cause of problems to find, the solutions.

1.4 VALUE ANALYSIS AND VALUE ENGINEERING

Value Analysis
The Value Analysis (VA) technique was developed after the Second World War in America at General Electric
during the late 1940s. Since this time the basic VA approach has evolved and been supplemented with new
techniques that have become available and have been integrated with the formal VA process. Today, VA is
enjoying a renewed popularity as competitive pressures are forcing companies to re-examine their product
ranges in an attempt to offer higher levels of customization without incurring high cost penalties. In parallel, many
major corporations are using the VA process with their suppliers to extend the benefits of the approach throughout
the supply chain. Businesses, big and small, will therefore benefit from understanding and applying the VA process.

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It is likely that those companies that do not take the time to develop this capability will face an uncertain future as
the lessons and problems of the past are redesigned into the products of the future.

Definition of Value Analysis

Value Analysis (VA) or Value Engineering (VE) is a function-oriented, structured, multi-disciplinary team approach
to solving problems or identifying improvements. The goal of any VA Study is to:

-Improve value by sustaining or improving performance attributes

(of the project, product, and/or service being studied)

-while at the same time reducing overall cost

(including lifecycle operations and maintenance expenses).
Value Analysis can be defined as a process of systematic review that is applied to existing product designs in order
to compare the function of the product required by a customer to meet their requirements at the lowest cost
consistent with the specified performance and reliability needed.
This is a rather complicated definition and it is worth reducing the definition to key points and elements:
(i) Value Analysis (and Value Engineering) is a systematic, formal and organized process of analysis and
evaluation. It is not haphazard or informal and it is a management activity that requires planning, control
and co-ordination.
(ii) The analysis concerns the function of a product to meet the demands or application needed by a customer.
To meet this functional requirement the review process must include an understanding of the purpose to
which the product is used.
(iii) Understanding the use of a product implies that specifications can be established to assess the level of fit
between the product and the value derived by the customer or consumer.
(iv) To succeed, the formal management process must meet these functional specification and performance
criteria consistently in order to give value to the customer.
(v) In order to yield a benefit to the company, the formal review process must result in a process of design
improvements that serve to lower the production costs of that product whilst maintaining this level of value
through function.

Defining Cost and Value

Any attempt to improve the value of a product must consider two elements, the first concerns the use of the
product (known as Use value) and the second source of value comes from ownership (Esteem value). This can
be shown as the difference between a luxury car and a basic small car that each has the same engine. From a
use point of view both cars conduct the same function – they both offer safe economical travel (Use value) – but
the luxury car has a greater esteem value. The difference between a gold-plated ball pen and a disposable pen
is another example. However, use value and the price paid for a product are rarely the same, the difference is
actually the esteem value, so even though the disposable pen is priced at X the use value may be far less.
It is important for all managers to understand the nature of costs in the factory and for any given product. Whilst
there is no direct relationship between ‘Cost’ (for the factory) and customer ‘Value’ in use and esteem, this
education process is important. A shocking figure, that is often used as a general measure, is that typically 80%
of the manufacturing costs of a product will be determined once the design drawing has been released for
manufacturing.
The costs of production are therefore ‘frozen’ and determined at this point. These costs include the materials used,
the technology employed, the time required to manufacture the product and such like. Therefore, the design
process creates many constraints for the business and fixes a high degree of the total product cost. It is therefore a
process that demands periodic review in order to recover any ‘avoidable’ costs that can be removed throughout

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the life of the product (by correcting weaknesses or exploiting new processes, materials or methods) and lowering
the costs of production whilst maintaining its Use value to the customer.
Basically, there are three key costs of a product:
• Cost of the parts purchased: These are costs associated with the supply of parts and materials.
• Cost of direct labour used to convert products.
• Cost of factory overheads that recover the expenses of production.
Although there are three elements of total cost accumulation it is traditionally the case that cost reduction
activities have focused on the labour element of a product. Activities such as work-study, incentive payments
and automation have compressed labour costs and as a result there is little to be gained, for most companies, in
attempting to reduce this further. Instead, comparatively greater gains and opportunities lie in the redesign and
review of the products themselves to remove unnecessary materials and overhead costs. This approach to the
‘total costs’ of a product involves taking a much broader look at the way costs in the factory accumulate and the
relationship between costs and value generation. These new sources of costs and evaluations would therefore
include such sources as:
• Cost of manufacture
• Cost of assembly
• Cost of poor quality
• Cost of warranty

A detailed understanding of how costs are rapidly accumulated throughout the process of design to the despatch
of the product is key to exploiting the process of VA. All VA activities are aimed at the reduction of avoidable and
unnecessary costs, without compromising customer value, and therefore the VA process should target the largest
sources of potential cost reduction rather being and indiscriminate or unsystematic process (such as focusing
on labour alone). It is therefore preferable to take the holistic approach to understanding costs and losses in
the ‘entire system’ of design and conversion of value in order to determine how to achieve customer service
‘functionality’ at a minimal cost per unit.

The Focus of Value Analysis

The key focus of the VA approach is therefore the management of ‘functionality’ to yield value for the customer.
Let us emphasize this point a little. Not that long ago, consumers of electric kettles were offered a variety of
different types of metal-based boiling device. The value of a kettle is derived through heating water and therefore
its functionality can be determined (temperature, capacity, reliability, safety etc.). Now faced with the same
functionality (to boil water), designers would probably look towards a kettle made of plastic.
Plastic has the same functionality as metal in terms of containing and boiling water. The action to boil water is
conducted by the same part - known as the element. However the switch from metal to plastic does not impair
this value and functionality with the customer – they still want to boil water - but it does result in a cost saving for
the manufacturing company. If a company that traditionally made metal kettles did not review its design process
then it would be severely disadvantaged when attempting to compete against the lower cost plastic alternative.
This is a simple example used only to provide an illustration of the VA concept but it does demonstrate the point
of maintaining value whilst reducing costs.
If a company seeks to reduce the costs of producing a product then it must seek out costs that are unnecessary
or items of the product that provide no functional value to the customer. If you adopt this approach then the
VA process is concerned with removing a specific type of cost. This cost is one that can be removed without
negatively affecting the function, quality, reliability, maintainability or benefit required by the customer. As such,
the target for all VA activities is to find these costs as opposed to simply re-engineering a product design with no
real purpose to the re-engineering exercise. The VA approach is therefore formal and systematic because it is
directed towards highlighting and dealing with these ‘recoverable costs’ of production. The objective is to create

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value for money as opposed to creating new products that do not provide customer satisfaction but are relatively
inexpensive.
The rules governing the application of the VA approach are therefore simple:
• No cost can be removed if it compromises the quality of the product or its reliability, as this would lower
customer value, create complaints and inevitably lead to the withdrawal of the product or lost sales.
• Saleability is another issue that cannot be compromised, as this is an aspect of the product that makes it
attractive to the market and gives it appeal value.
• Any activity that reduces the maintainability of the product increases the cost of ownership to the customer
and can lower the value attached to the product.

Types of Value Analysis Exercises

VA for Existing Products
One of the best approaches to VA is simply to select an existing product that is sold in relatively large volumes. This
product, or product family, will tend to have a great deal of the basic information, and documented history, which
can be used quickly as opposed to a newly introduced product where such a history is not available. An existing
product unites all the different managers in a business, each with an opinion and list of complaints concerning
the ability to convert the design into a ‘saleable’ product. Therefore any team that is created for the purpose of
VA will understand their own problems but not necessarily the cause of these problems across the entire business.
These opinions regarding poor performance (and documented evidence of failures) are vital to the discussions
and understanding of how the product attracts costs as it is converted from a drawing to a finished product. These
discussions therefore allow learning to take place and allow all managers to understand the limitations to the
scope of product redesign and re-engineering activities. These issues include:
• The inability to change existing product designs due to the need to redesign tooling and the expense of such
an initiative.
• The project team may have a finite duration before the project is concluded and therefore time will dictate
what can be achieved.
• The high levels of purchased costs may imply a need to engage with suppliers in the VA process. This initiative
will be constrained by a number of issues such as the timing of the project, the availability of resources from
the supplier, the location of the suppliers, and other constraints.

VA for New Products – Value Engineering

For new products, the team will need to modify the VA approach and will operate in an environment that is less
certain and has poor levels of available information upon which to make decisions. In this case, the analysis and
systematic process of review for new products is known as Value Engineering (VE). The VE approach is similar to
that of Value Analysis but requires a much greater level of investment by the organization in terms of the skilled,
experienced and proficient human resources seconded to the group.

VA for Product Families- Horizontal Deployment

The final form of VA is results when there is scope for the ‘horizontal deployment’ of the results of a VA exercise with
a single product or family of products. Under conditions where the value analysis project team finds commonalties
with many products manufactured by the company, then it is possible to extend the benefits to all these other
products concurrently. In this manner, all affected products can be changed quickly to bring major commercial
benefits and to introduce the improvement on a ‘factory-wide basis’. This is particularly the case when supplying
companies offer improvements that affect all the products to which their materials or parts are used. The horizontal
deployment activity has many advantages both in terms of financial savings and also the relatively short amount
of time required to introduce the required changes to the product design.

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Competitive VA
VA techniques are not simply the prerogative of the business that designed the product. Instead VA is often used
as a competitive weapon and applied to the analysis of competitor products in order to calculate the costs of
other company’s products. This is often termed ‘strip down’ but is effectively the reverse value analysis. Here the
VA team are applied to understanding the design and conversion costs of a competitor product. The results
of the analysis is to understand how competitor products are made, what weaknesses exist, and at what costs
of production together with an understanding of what innovations have been incorporated by the competitor
company.
It is recommended that the best initial approach, for companies with no real experience of VA, is to select a
single product that is currently in production and has a long life ahead. This approach offers the ability to gain
experience, to learn as a team, and to test the tools and techniques with a product that has known characteristics
and failings. In the short term it is most important to develop the skills of VA, including understanding the right
questions to ask, and finally to develop a skeleton but formal process for all VA groups to follow and refine.
How to use Value Analysis
Keys to Success
There are many keys to the success of a VA programme and it is wise to consider these issues before commencing
the project, as errors in the project plan are difficult to correct, without causing frustration, once the VA project
has started. One of the most important initial steps in developing the VA process is to create a formal team of
individuals to conduct the exercise. These individuals must be drawn from different parts of the business that affect
the costs associated with design, manufacturing, supply and other relevant functions. In addition, the team must
be focused on a product or product family in order to begin the exercise. Further key success factors include:
• Gain approval of senior management to conduct a Value Analysis exercise. Senior management support,
endorsement and mandate for the VA project provides legitimacy and importance to the project within the
business. This approval process also removes many of the obstacles that can prevent progress from being
made by the team.
• Enlist a senior manager as a champion of the project to report back directly to the board of directors and
also to act as the programme leader.
• Once a programme team has been developed it is important to select an operational leader to co-ordinate
the efforts, monitor progress and to support the project champion.
This leader will remain with the VA team throughout the life of the project and will be the central linking pin
between the team and the senior management champion.
• Establish the reporting procedure for the team and the timing of the project. This project plan needs to be
formal and displayed as a means of controlling and evaluating achievements against time.
• Present the VA concept and objectives of the team to all the middle and senior managers in the business.
Widespread communication of the VA project is important so that other employees, particularly managers
(who may not be involved directly with the process) understand the need to support the project either
directly by assigning staff or indirectly through the provision of data.
• Maintain a list of those business functions that should receive a regular communication of progress even
though they may not be directly involved with the project. This process allows other individuals in the business
to be informed about the progress and findings of the group. This form of promotion is important as it maintains
a momentum and communicates the findings of the team as widely as possible.
• Provide an office space and co-locate the team members where practical and possible to do so. The ability
to locate a VA improvement group in one area of the business is important and assists the communication
within the group. A convenient area can also be used to dismantle the product and also the walls of the
area can be used to record, on paper charts, the issues that have been discovered by the team (and the
associated actions that must be undertaken).

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• Select the product for the first study. Ideally the existing product, or family of products, will be one that is
established, sells in volume and has a relatively long life expectancy.
As such any improvement in the cost performance of the product will provide a large financial saving to the
business.
• Write down the objectives of the project and the key project review points. Estimate the targets to be
achieved by the project. These objectives provide a reference point and framework for the exercise. The
objectives also focus attention on the outputs and achievements required by the company.
• Select and inform any personnel who will act in a part time or temporary role during the project. This process
is used to schedule the availability of key specialist human resources to support the team throughout the
duration of the project.
• Train the team in both the process of VA and also in basic team building activities. It is important that all
members understand the nature of the project and its importance. The initial team building exercises are also
a good way of understanding the attitude of all members to the project – especially those with reservations
or a negative attitude to what can be achieved. As with most team exercises there is a requirement to allow
the team to build and bond as a unit. It is often difficult for individuals, drawn from throughout the factory, to
understand the language that is used throughout the business and also to understand the ‘design to market’
process when their own role impacts on a small section of this large and complex process.
Value Engineering
Value Engineering is an organized/systematic approach directed at analyzing the function of systems, equipment,
facilities, services, and supplies for the purpose of achieving their essential functions at the lowest life-cycle cost
consistent with required performance, reliability, quality, and safety. Society of Japanese Value Engineering
defines VE as:
“A systematic approach to analyzing functional requirements of products or services for the purposes of achieving
the essential functions at the lowest total cost”.
Value Engineering is an effective problem solving technique. Value engineering is essentially a process which uses
function analysis, team- work and creativity to improve value. Value Engineering is not just “good engineering.”
It is not a suggestion program and it is not routine project or plan review. It is not typical cost reduction in that it
doesn’t “cheapen” the product or service, nor does it “cut corners.”
Value Engineering simply answers the question “what else will accomplish the purpose of the product, service, or
process we are studying?”. VE technique is applicable to all type of sectors. Initially, VE technique was introduced
in manufacturing industries. This technique is then expanded to all type of business or economic sector, which
includes construction, service, government, agriculture, education and healthcare.
Aadarsh Instruments, located in Ambala, is a medical instrument manufacturing company considered to apply
Value Engineering in to the Focus Adjustment Knob in one of their model SL 250 for Slit Lamp in microscope.
This microscope has found application in the field of eye inspection. The value engineering analysis may help
company in running its export business of medical microscope. This firm is producing different types of microscopes
which they export to various countries around the globe. All of the products manufactured here are conforming
to the international standards. It is an ISO certified company.
The total savings after the implementation of value engineering are as given below:
• Cost before analysis — ` 29.99
• Total Cost of Nylon Knob — ` 18.40
• Saving per product — ` 11.59
• Percentage saving per product — 38.64%
• Annual Demand of the product — 8,000

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• Total Annual Saving — ` 92,720

• Value Improvement — ` 62.98%
What are the steps to be followed for doing Value Engineering? How can you conclude the decision on the basis
of the above Value Engineering?
Answer:
The following are the steps to be used for carrying out the Value Engineering exercise by Aadarsh Instruments in
their model SL 250 for Slit Lamp in Microscope for the Focus Adjustment Knob:
(i) Selection of the Product Plan.
(ii) Gathering Product Information
(iii) Functional Analysis
(iv) Creativity Phase and preparing the work-sheet
(v) Evaluation Sheet
(vi) Cost Analysis
(vii) Result and Conclusion
(viii) Implementation.
Conclusion: Value Engineering methodology is a powerful tool for resolving system failures and designing
improvements in performance of any process, product, service or organization. In the Case Study discussed under
the question, we have used the concept of Value Engineering to analyze the Focus Adjustment Knob of SL 250 Slit
Lamp Microscope. With a critical evaluation of this study, we have been able to increase the value of the product
by substituting another material in place of the one currently in use. The% value improvement is to the tune of
62.98% and the total annual saving has been ` 92,720.
The various advantages have been observed in terms of:
� Cost Reduction
� Increase in overall production
� Reduction in man-power
� Reduction in scrap.
Thus the cost has been brought down by a substantial margin and thereby the value of the product has been
increased.

1.5 THROUGHPUT COSTING

Throughput Accounting is a management accounting technique used as a performance measure in the theory
of constraints. It is the business intelligence used for maximizing profits. It focuses importance on generating more
throughput. It seeks to increase the velocity or speed of production of products and services keeping in view of
constraints. It is based on the concept that a company must determine its overriding goal and then it should create
a system that clearly defines the main capacity constraint that allows it to maximize that goal. The changes that
this concept causes are startling.
Throughput accounting is a system of performance measurement and costing which traces costs to throughput
time. It is claimed that it complements JIT principles and forces attention to the true determinants of profitability.
Throughput accounting is defined as follows:
“A management accounting system which focuses on ways by which the maximum return per unit of bottleneck
activity can be achieved” – CIMA Terminology.

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