SISTEM MANAJEMEN BIAYA

ACHIEVING FULL CYCLE COST MANAGEMENT

ROBIN COOPER AND REGINE SLAGMULDER

SUMMARY

NAMA :
AULYA AGUSTIN DWI ANDHINI
CLASS : AKM/2013-2S

(1306498241)

MAGISTER AKUNTANSI FAKULTAS EKONOMI

UNIVERSITAS INDONESIA

Universitas Indonesia
Fakultas Ekonomi
Program Studi Magister Akuntansi Pendidikan Profesi Akuntansi

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adalah murni hasil pekerjaan saya/kami sendiri. Tidak ada pekerjaan orang lain yang
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Nama Mahasiswa

: AULYA AGUSTIN DWI ANDHINI (1306498241)

Kelas

: AKM/2013-2S

Mata Ajar

: SISTEM MANAJEMEN BIAYA

Judul Makalah/Tugas

: ESTIMATING HIDDEN QUALITY COST WITH

QUALITY LOSS FUNCTION (SUMMARY)

Hari, Tanggal

: SABTU, 9 MEI 2015

Nama Pengajar

: THOMAS H. SECOKUSUMO, MBA. CMA

Tandatangan

AULYA AGUSTIN DWI ANDHINI

Achieving Full-Cycle Cost Management

Robin Cooper and Regine Slagmulder
Companies tend to assume that a large percentage of a products costs are locked in by design
that little can be done to reduce costs once the design is set. This belief has shaped many
cost-management programs across diverse products life cycles. Because of it, firms will
often focus on cost reduction during the design phase and cost containment during
manufacturing. But are much of a products costs truly locked in during design?
To answer that, Researchers studied the consumer-products division of Olympus Optical Co.
Ltd. in Tokyo, Japan. In-depth field observations of the life cycle of the new Stylus Zoom
camera helped provide a detailed understanding of how the company applies various costmanagement techniques across a products life cycle. In particular, Researchers investigated
the level of costs that are designed in because that shapes the way a company manages costs
across the product life cycle. If a significant portion of costs is designed in, they would expect
to observe aggressive cost management predominantly in the design (and not the
manufacturing) phase of the life cycle.
About the Research
To test the assumption that a large percentage of a products costs are locked in during the
design stage, Researchers conducted in-depth observations at the consumer-products division
of Olympus Optical Co. Ltd. They chose that research site for four reasons, they are:
a. First, Olympus Optical was known to operate in a highly competitive market that
demanded aggressive cost management. Researchers chose such an environment to
ensure that the cost-management systems documented were a critical aspect of company
survival.
b. Second, Olympus Optical was reputed to have a mature and sophisticated costmanagement program.
c. Third, the consumer-products division was known to operate as a lean enterprise. The
adoption of lean design principles increases the effectiveness of cost management during
the product-development process, such as through the application of target costing.
d. Finally, the Olympus Optical division produced high technology products with a short life
cycle, which favors a high level of designed-in costs and implies that there are fewer
opportunities for cost management during the manufacturing phase.
See more
Instead, Researchers found that Olympus Optical achieves significant cost reductions in
manufacturing, contradicting the widely held assumption that a large percentage of costs are
locked in during design. Indeed, their research demonstrates that costs can be aggressively
managed throughout the product life cycle. Furthermore, they found that Olympus Optical
applies various cost-management techniques in an integrated manner, with the outputs of
some techniques acting as inputs to others, thereby increasing the programs overall
effectiveness. Their observations suggest that companies competing aggressively on cost
might consider the adoption of some form of an integrated cost-management program that
spans the entire product life cycle.

Five Techniques
A commonly quoted statistic is that 80% to 95% of the cost of a product is determined by its
design and is therefore set before the item enters manufacturing. That assumption has been
used to suggest that the dominant focus of cost management should be during product
development, not manufacturing. In fact, as one textbook state, Once a product has been
designed and gone into production, not much can be done to significantly reduce its cost.
Similar assumptions also appear in the practitioner literature.
But their research suggests otherwise. Specifically, they found that Olympus Optical is able
to manage costs throughout a products life cycle. To do so, the company deploys five major
techniques, they are:
a. Target costing;
b. Product-specific kaizen costing;
c. General kaizen costing;
d. Functional group management;
e. Product costing.
Five Techniques for Managing Costs

Target Costing
This technique is applied during the design stage as a feed-forward mechanism through
which engineers retool the design of a new product to reduce costs while maintaining a
desired level of product functionality and quality. At Olympus Optical, the first step is to
identify the price point at which a new camera model would sell and from that to determine
the free-on-board price the amount the company would receive on the sale of the product.
Target costs are then established by subtracting the products desired profit margin from its
free-on-board price. Next, product engineers look for creative ways to attain the desired level
of functionality and quality at the target costs.
For major cost reductions, the company applies value engineering in four different areas, they
are:
a. First, it tries to reduce the number of parts in the product.
b. Second, it eliminates expensive, labor-intensive and mechanical-adjustment processes
whenever possible.
c. Third, it replaces metal and glass components with cheaper plastic ones when appropriate.
d. Lastly, it pressures suppliers (both internal and external) to reduce costs more
aggressively.

Olympus Opticals senior management places particular importance on target costing because
the manufacturing phase of the life cycle of modern point-and-shoot compact cameras is
short. (The typical product is on the market for only 12 to 18 months.) A short manufacturing
phase makes it difficult for product engineers to correct any design problems (including those
that result in high manufacturing costs) after an item has entered production. Thus the
company encourages people to solve as many cost problems as they can during the design
phase.
Product-Specific Kaizen Costing
This technique enables the rapid redesign of a new product during the early stages of
manufacturing to correct for any cost overruns. During the trial production of the Stylus
Zoom, for example, management discovered that costs were about 10% above target.
Furthermore, when the product entered mass production at Tatsuno, Japan, the costs were
found to be even higher. Overall, the production costs were an additional 5% more than the
trial costs, making the total cost overrun 15%. Normally, the earlier 10% cost overrun would
have led to either the postponement or cancellation of the project. But Olympus Optical
proceeded with the Stylus Zoom because the company considered it to be a flagship product.
For the new camera, the window of opportunity for product-specific kaizen costing was just
11 months after product launch shorter than might first be anticipated for such a highvolume product with a multiyear manufacturing life. During that time, Olympus Optical
reduced costs in four major ways: by decreasing the number of parts in the product, by
replacing certain materials with cheaper ones, by managing supplier costs and by transferring
production overseas where overall costs were lower. The primary rule was that the products
functionality and quality had to remain constant. From the customers perspective, the last
Stylus Zoom off the production line had to be identical to the first.
General Kaizen Costing
This technique focuses on the way a product is manufactured; the assumption here is that the
products design is already set. (This contrasts with target and product-specific kaizen
costing, which do not treat a products design as a given.) General Kaizen costing can be
particularly effective when it addresses manufacturing processes that are used across several
product generations. In such cases, savings achieved during the manufacturing cycle of a
particular product could continue long after its withdrawal from the market.
In general kaizen costing, management sets cost-reduction goals for production processes and
empowers the workforce to find ways to achieve them. Olympus Opticals approach focuses
primarily on reducing material, labor and some overhead costs. For example, sales, general
and administrative costs associated with the control and procurement departments are
included in the analysis. At Tatsuno, the company set individual cost-reduction goals for each
assembly line and thus for each internally produced component of the Stylus Zoom. To
achieve those goals, which were designed to be challenging but attainable, workers undertook
a variety of actions, including finding ways to speed up manufacturing processes by
integrating certain steps so that the same person could perform them.
Functional Group Management
This technique consists of breaking the production process into autonomous groups and
treating each as a profit (instead of a cost) center. There are two reasons for doing so. First,
the switch to profit as opposed to cost centers allows the groups to increase the throughput of

their production processes even if those changes result in higher costs. That is, functional
group management supports actions that increase both costs and profits through greater
revenues something that general kaizen costing, which focuses solely on reducing costs,
does not. The second motivation is the change in mind-set that functional group management
induces. Converting the production lines to profit centers helps the groups to better
understand their contribution to the companys overall profitability.
The production process at Tatsuno was broken into 10 autonomous groups. By finding ways
to increase their output levels, those groups were able to generate additional revenues and
greater profits. The capacity of the factory increased as a result, leading to real performance
improvements. For example, in the first three years of functional group management, about
80% of the profit improvements were from changes that increased output, with the remaining
20% from cost-reduction initiatives.
Product Costing
This technique helps coordinate the efforts of the other four techniques by providing them
with important, up-to-date information. The process consists of three major functions. The
first is to determine if new products are indeed being manufactured at their target costs. The
second is to ensure that the production processes are operating at the expected level of
efficiency. And the third is to identify unprofitable products for further action, such as
replacement or aggressive cost reductions.

Application of Techniques
At Olympus Optical, the total amount of resources dedicated to cost management is high, as
is expected for any company in an intensely competitive environment. The important point,
though, is that the organization does not assume that the majority of costs are locked in
during the design phase. In fact, Olympus Optical applies cost-management techniques
throughout the product life cycle, with just one technique (target costing) taking place during
product design and the rest during manufacturing. And there are other important aspects of
how the company deploys the five cost-management techniques.
Cost Reduction versus Containment
Four of the techniques reduce costs, while the other (product costing) contains them. In cost
reduction, people actively try to lower costs to pre-established levels. Cost containment is a
more passive process that tries to sustain previously achieved cost-reduction objectives.
During the design phase, target costing helps reduce the anticipated manufacturing cost of a
product to a pre-established level, namely the target cost. Of the four techniques applied
during the manufacturing phase, three (product-specific kaizen costing, general kaizen
costing and functional group management) are used for cost reduction and the other (product
costing) for containment.
Olympus Optical relies on product costing to monitor the actual costs during the
manufacturing phase. When those costs rise to unacceptable levels due, for example, to
increases in component prices general kaizen costing is applied to bring those numbers
back in line with the previously established objectives. This limited role for product costing
might seem surprising given the recent popularity of activity-based costing, but it reflects the
way that Olympus Optical has designed its cost-management program. In the companys
approach, the primary role of product costing is monitoring specifically, ensuring the

maintenance of previously achieved cost-reduction objectives. Thus the firm dedicates just
one technique to such a passive activity. In contrast, Olympus Optical deploys multiple
techniques and greater resources to cost reduction, which is a more open-ended and active
objective for achieving significant savings.
Product Design versus Process Improvement
Cost management during the design phase consists solely of target costing, which necessarily
focuses on improvements to the product design. In contrast, cost management in the
manufacturing phase includes three techniques (product-specific kaizen costing, general
kaizen costing and functional group management), of which only one (product-specific
kaizen costing) is targeted toward product redesign. The other two techniques focus on
making the production processes more efficient, and they each play different but reinforcing
roles. General Kaizen costing helps reduce the cost of performing production processes,
whereas functional group management tries to increase output either by speeding up those
processes or by increasing their yields. Lastly, product costing focuses on product costs
because of the techniques role of cost containment.
Ad Hoc versus Systematic Application
Of the five techniques, only one (product-specific kaizen costing) is applied in an ad hoc
manner. Specifically, it is used only for products that fail to achieve their target costs but for
strategic reasons is launched anyway. The goal is to find any savings that people might have
missed during the design phase. (Management at Olympus Optical views both productspecific kaizen and target costing as part of a continuous process for achieving the target cost
through innovative product design.) Olympus Optical has a reason for limiting the use of
product-specific kaizen costing. According to management, changing a products design (and
hence the associated production processes) during the manufacturing phase can be highly
disruptive, and in most cases the anticipated savings for products that have already achieved
their target costs is not sufficient to justify the effort. Consequently, the company deploys
product-specific kaizen costing just for high-volume products that have been launched above
their target costs. Furthermore, the technique is applied immediately after the product is
launched and only in the early stages of manufacturing to ensure that an adequate number of
units are sold after the intervention to justify the upfront investment.
One interpretation of those policies is that management believes there is a limit to the level of
cost reduction that Olympus Optical can achieve through product design and that the
companys target costs are close to that level. Many managers described the target-costing
objectives as stretch or tiptoe in nature. The objectives were specifically set so they could
be achieved only 80% of the time. According to management, that tactic resulted in the
optimum amount of pressure: The objectives were difficult to achieve but reasonable enough
for the engineers to take seriously. Consequently, trying to attain additional savings when a
product is launched at its target cost is not worth the effort. But when a product is launched
above its target cost, the benefits can outweigh the costs, as was the case with Stylus Zoom.
Olympus Optical deploys the four other cost-management techniques systematically for all of
the companys products. Their application, though, might be delayed to some extent when
product-specific kaizen costing is also being used.

Olympus Opticals Cost-Management Philosophy

All products at Olympus Optical undergo the same cost-management program, although
some products under prespecified conditions might be subject to additional efforts. The
Stylus Zoom camera, for example, underwent product-specific kaizen costing because it was
a high-volume, strategic product launched above its target cost, not because it was
fundamentally different in its cost-management requirements. In other words, Olympus
Optical does not have two types of products, those with high locked-in costs and those
without.
More importantly, this observation did not support the expectation that a high level of product
costs at Olympus Optical would be locked in during design. Instead, researchers found that
cost reduction in the manufacturing phase was a significant source of savings even when
aggressive cost management had occurred in product design. The philosophy at Olympus was
that costs can be reduced throughout the product life cycle and that savings can be achieved
through a mix of low-cost product design and improvements to the production process. This
philosophy was so ingrained that the team leaders and foremen in manufacturing met daily to
discuss their progress in achieving their production-process objectives for reducing costs.
Weekly meetings were also held to keep people on track. If a group did not meet its weekly
objectives, its leader had to explain the reasons for the failure and then present a plan of
corrective actions, which might include a request to engineering for help. When a group
repeatedly failed to meet its objectives, management would occasionally send in engineering
assistance an action viewed as a serious blow to the reputation of that group.
If a high level of costs had been designed in, Researchers would expect the application of
target and product-specific kaizen costing (since both are design-related techniques) in
combination with product costing for cost containment. And they might also expect some
minor level of cost reduction in the manufacturing phase that was not related to product
design. Instead, they observed the aggressive use of both general kaizen costing and
functional group management in the manufacturing phase. Moreover, Olympus Optical
products do not appear to fall into the other dichotomous category of having costs that can be
lowered only through improved operating efficiency and productivity (as opposed to better
design).
This observation suggests that Olympus Optical has spent considerable time thinking through
the design of its integrated cost-management program. According to management, the
program has evolved purposefully with the goal of integration: When a new technique such
as functional group management is adopted, the other techniques are modified to take
advantage of it. The resulting integration demonstrates a significant level of sophistication.
For example, the way that product-specific kaizen costing is applied demonstrates how
carefully the company manages the cost-benefit trade-offs, with cost-management techniques
deployed only when the expected benefits outweigh the costs. With Stylus Zoom, the high
level of cost overrun required dramatic intervention from product-specific kaizen costing.
The lens assembly, for example, was redesigned to significantly reduce the number of
separate integrated circuits (and hence the products cost). Similarly, Olympus Opticals
recent addition of function-group management to the companys suite of cost-management
techniques indicates an active, ongoing effort to improve the program. Furthermore, it
suggests that management believes that significant savings are possible via improvements in
the production process, even given the presence of general kaizen costing.
Because Researchers carefully selected Olympus Optical as their research site to favor the
assumption that a significant portion of costs are designed in, their observations place

considerable doubt on the validity of that assumption. Of course, they cannot dismiss the
possibility that other products have a high level of costs that are locked in by design, but their
findings suggest that for manufactured goods like those at Olympus Optical those types of
products are the exception and not the rule. And they would expect that many manufactured
products share the same characteristic of costs that are manageable across the entire life
cycle.

Integrated Cost Management

Another crucial aspect of Olympus Opticals cost-management program is that it is more than
just five independent techniques. Instead it is an integrated system, with the outcomes from
some of the techniques used as inputs for others. Management asserts that such integration is
necessary to achieve the companys profit objectives. The belief is that integration provides
additional savings above and beyond those associated with the individual techniques.
Integrated Cost-management Program

According to Olympus management, there are three major benefits to integrated cost
management, they are:
a. First, it leads to overall lower costs throughout the product life cycle. Not only do
products cost less at launch, but the ongoing activities also ensure that they have steadily
decreasing costs all the way through to discontinuance. Typically, the annual cost
reduction during the manufacturing phase (including savings from suppliers) is about
17%. So for a product with a two-year life, the savings during manufacturing could
exceed 30%, and the designed-in cost would thus be below 70%. Products with a longer
life would potentially have even greater cost reductions during manufacturing.
b. Second, Olympus experience has shown that more products are launched on time.
Without an integrated program (and, in particular, without the discipline of both target
and product-specific kaizen costing), a greater number of product launches would have to
be delayed to bring their costs in line with their selling prices.
c. Finally, fewer product introductions are cancelled. The tight discipline of target costing
with its emphasis on target prices forces the design process to be cost-sensitive from the
very beginning.
Reduction of Production Cost over Time

To attain those benefits, the five cost-management techniques at Olympus Optical are linked
in various ways. For example, integration between target and product-specific kaizen costing
enables the continual redesign of products. Target costing also reinforces the effectiveness of
product-specific kaizen costing by identifying those products with cost overruns before they
enter production. Thus, target costing provides an early warning of the need for intervention.
The major difference between the design activities under the two techniques is that target
costing has the ability to change product functionality, whereas product-specific kaizen
costing does not, due to managements decree that the functionality of the first product off the
manufacturing line must be identical to the last. When a product is launched, its design is
frozen for the first few months of production until workers have learned to manufacture it
efficiently. During that period, though, engineers are busy identifying ways to reduce costs by
redesigning the product.
Target costing also reinforces general kaizen costing by identifying the savings that the
company should achieve during manufacturing and by isolating that amount from the cost
reductions that could reasonably be anticipated during product development. By setting the
appropriate target costs for new products, Olympus Optical can ensure that the cost-reduction
objectives for general kaizen costing and functional group management are attainable. In
other words, target costing helps avoid the application of excessive cost-reduction pressures
during manufacturing. This is important because general kaizen costing (and any costreduction technique, for that matter) is most effective when the objectives are considered
achievable, even if they require considerable effort.
Product-specific kaizen costing also helps ensure that general kaizen costing isnt subjected
to undue pressures. It achieves this by continually decreasing costs through product redesign
during manufacturing. If a products costs can be reduced as close as possible to the target
level, then the pressure on general kaizen costing wont be excessive.
Typically, Olympus Optical does not include the anticipated savings from general kaizen
costing in the companys target-costing analysis. However, if the life cycle profitability
analysis indicates that a product wont achieve its target profit margin, the anticipated general
kaizen savings are included. If those savings enable the product to achieve its target margin,
the product-development process continues. On the other hand, if the savings arent sufficient
and the product is not considered strategic, the project is cancelled. The general practice of
excluding the anticipated general kaizen savings (unless their inclusion is necessary to
support the launch decision) reflects Olympus Opticals conservative approach to cost
management.
The interaction between target and product costing is subtler. In companies that lack a
sophisticated target-costing system, one of the roles of product costing is to determine

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whether new (as well as existing) products are profitable. But that responsibility often
conflicts with the other primary purpose of product costing, which is operational control.
Olympus Optical frees product costing to focus solely on cost containment because the
company also deploys target costing and operational control through kaizen costing and
functional group management. Thus, Olympus Optical does not consider product costing to
be a source of cost savings. Instead, the primary role of product costing is to support the other
techniques and to help maintain the cost savings that they achieve.
General Kaizen costing and functional group management are integrated in that the role of
the latter is to enhance the former by giving workers a new way to think about cost reduction.
In particular, functional group management shifts the task from cost reduction to profit
enhancement. This change expands the type of activities that people can consider to include
ways for increasing throughput (thereby enhancing revenues) without incurring undue costs
(thereby generating additional profits). In addition, Olympus Optical management believes
that the shift to profit enhancement has led to workers being more motivated toward cost
reduction. In fact, the cost-reduction objectives set by the individual groups have been
consistently more aggressive than those established by divisional management.
Functional group management relies on product costing for information necessary to generate
profit-and-loss statements for the different groups. Those reports then enable Olympus
Optical to make better decisions for increasing the companys profitability by pursuing
different ideas for generating additional revenues.
Finally, general kaizen and product costing work in tandem to contain costs that have climbed
above previously achieved levels. When that happens, new cost-reduction targets are
established for general kaizen costing to bring those numbers back in line. The cause of the
increase is irrelevant; the objective is to keep costs at previously achieved levels so that the
company can sustain the budgeted profits.

Implications
This research at Olympus Optical has three major implications, they are:
a. First, even in an environment of products with short life cycles and aggressive cost
management focused on product design, a company can still achieve significant savings
through efforts targeted at making the production process more efficient. That is, the costs
of products can be aggressively managed throughout their life cycle.
b. Second, companies should consider using multiple cost-management techniques across
the entire product life cycle.
c. Third, the stand-alone use of those techniques might limit their effectiveness. Integrating
them can lead to even higher levels of cost reduction and superior overall performance as
measured by on-time launches of profitable products.
One critical aspect that companies need to consider is the length of the manufacturing phase
of their products life cycle. As its duration increases, so does the opportunity for cost
reduction in that phase. Therefore, firms that have products with a long manufacturing phase
should be especially active in exploring the value of integrating multiple cost-management
techniques during manufacturing. The same holds true for organizations that rely on
production processes that are stable over time even though the product mix varies.

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Obviously, field research at a single site will not always be applicable to other locations. But
because this study investigated a widely held assumption at a site where that assumption was
likely to apply, Researcher could reasonably argue that the preponderance of costs is not
designed in at many other settings. Thus they recommend that companies that compete
aggressively on cost should consider adopting a cost-management program consisting of
multiple techniques applied in an integrated manner to different phases of the product life
cycle. The techniques might have different objectives (for example, cost reduction versus
containment) and a different focus (product design versus production processes).
Furthermore, some of the techniques might be applied systematically to all products, while
others might be used in an ad hoc manner on just those products that require special attention.
Those recommendations aside, the exact nature of the program, the techniques that are
deployed and the way that they are both applied and integrated will no doubt vary at different
companies. Olympus Optical, for example, does not use activity-based costing, possibly due
in part to two factors related to cost management. First, Olympus may not need an activitybased costing system to obtain accurate product costs because the company only performs
high-volume manufacturing. Second, the cost-reduction insights that activity-based costing
provides might be redundant because of Olympus use of general kaizen costing and
functional group management. Information from those two techniques might substitute to
some extent for an activity analysis of the firms production process.
But many companies, especially those with a highly diverse production volume and product
complexity, might want to include an activity-based system in their integrated costmanagement program. Still other organizations might decide against adopting target costing
because their products are too innovative. (Target costing works best when information about
previous generations of products is highly predictive of the costs of future generations.)
Finally, some companies might want to integrate their Six Sigma efforts into their costmanagement program. Because of such differences, Olympus Opticals program might best
be used as a model of general concepts for other organizations to consider.
Reference
Cooper, Robin and Slagmulder, Regine, Achieving Full Cycle Cost Management, MIT Sloan
Management Review, Vol 46, Fall 2004

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