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Lecture No. 8: Cost and Productivity (1)
Takahiro FujimotoDepartment of Economics, University of Tokyo
Business Administration
１. Cost Control
２. Concept of Productivity and Method of Its Modification
The figures, photos and moving images with ‡marks attached belong to their copyright holders. Reusing or reproducing them is prohibited unless permission is obtained directly from such copyright holders.
Main Factors of Product Competitiveness
price cost (product cost)
selling expenses &administrative expenses
operating income
laborcost
material cost
equipment/ tool depreciation
product development cost
other expenses
material productivity
material price
labor productivity
wage, etc.
equipment productivity
equipment price
development productivity
R&D investment price
delivery / quantityproduction capacity
delivery period/ date
quality (total quality)manufacturing quality (conformity quality)
design quality
flexibility
planning/development period
production/ procurement time
distribution period
gross profit
１．Cost Control
Cost Control = activity to control cost of products
Cost Accounting provides cost information as premise for the above.
Average Cost = “In standard capacity utilization, the Cost that iscomputed by applying standard efficiency (productivity) and standard cost rate (factor price)against standard work method.” (Namiki, “Basic knowledge on Factory Management”)
Concept of average cost was established by Emerson (promoter of scientific control movement)
（１）Cost Maintenance (Cost Control in narrow sense)= Measure variance between standard cost and actual cost
→ cause analysis → corrective actionBy this process, maintain actual cost in vicinity of standard cost.
（２）Cost Improvement= Revise target cost per se
→ efforts on cost reduction (VA = value analysis, etc.
（３） Target Costing= Implemented at stages of product planning/development
Toyoda Automobile (since 1960s)Target sales price → target costing → allocation of target cost →efforts on achieving target (VE, etc.)
pric
e—
dete
rmin
ed b
y marke
t
pro
fit require
ment
target c
ost
estim
ate c
ost
VE, etc.stan
dard
cost
target costing
cost maintenance
cost improvement
Target Costing/Cost Maintenance/Cost Improvement
History of Cost Accounting (narrow sense)
Developed in USA (fiber, railroad). Outline completed in 1920s.
Until 1880s:Direct costing (direct cost accounting) = direct expense only
Early 20th century (era of scientific control):Full costing (full cost accounting)
= allocation of indirect cost to each sector/product
Cost Control Process by Standard Cost Calculation
1．Standardize cost factors
2．Set up cost standards (standard cost cards)
3．Instruct on standard cost to cost center unit (participation
and motivation)
4．Calculate actual (track record) cost
5．Calculate variation from standard cost
6．Analyze cost variance (analysis on causes of incurring variance)
7．Examine and execute cost improvement measures
(Source) Miyamoto [1990, page 58]
Calculation of Standard Production Cost by Product
----- Traditionally conducted in 2 steps
（１）From the total to each cost center (e.g., process)
Select appropriate first allocation base by each cost item
→ thereby allocate to cost center, and calculate
（２）From cost center to product
burden rate by process = cost by cost center / direct labor hours
burden rate x required labor hours by product/process = cost by product/process
calculate by product (First allocation base in 2nd Step is direct labor hours. Is there a problem here?)
Standard 2 Steps of Standard Cost Accounting System
Takahiro Fujimoto 'Introduction to Production Management' Nihon Keizai Shimbun, Inc. 2001 (Ⅰp111 figure.5.1) ‡
Variance Analysis
Manufacturing cost variance
= variance between actual manufacturing cost and standard manufacturing cost
Measure by cost factor (labor cost, material cost, etc.)
Further, resolve into variance in factor price, and variance in productivity (basic unit price)
Verify location of responsibility
Three Approaches to Improve Cost Accounting System
Is the conventional system of 1920s’ model inappropriate as means to enhance competitiveness?
Three approaches, in contrast (enhancing accuracy of standard cost, denying allocation base, or denying standard cost)
（１）ABC (Activity Based Costing)Accurate allocation base
→ accuracy enhancement in standard cost
（２）Throughput accounting: throughput = sales revenue – direct material cost
（３）Target cost system (target costing):Backward nature of Standard Cost → control by Target Cost
Basic Concept of ABC
Resourcesoverhead Ｘ
(personnel cost)
resourcedriver
Activities
costdriver
Products/Services
overhead Y(depreciation cost)
cost pool1 (order)
cost pool2 (inspection)
cost pool3 (transportation)
productA
productB
floor spacehead-count
number oforders
number oftransportations
number ofinspections
Andersen Consulting ” Mechanism of Strategic Accounting”, Toyokeizai Shinpo Sha
Figure removed
due to copyright restrictions
Cost Accounting by ABC
Resources ¥1mill.
Activities
allocation
machineadjustment works
Andersen Consulting ” Mechanism of Strategic Accounting”, Toyokeizai Shinpo Sha
personnel cost
others
¥500,000 ¥500,000
allocation
product A product B
¥400,000 ¥100,000
Cost Accounting by Traditional Method
¥1mill.
allocation
manufacturingsector
personnel cost
others
¥500,000 ¥500,000
allocation
product A product B
¥100,000 ¥400,000
resource driver: time, ・machine adjustment works 50%・other works 50%
allocation・manufacturing sector:50%・others 50%
cost driver :number of machine adjustments・product A
(customized products) 20 times・product B
(standardized products) 5 times
allocation standard :direct machine work hours・product A
(customized products) 20 hours・product B
(standardized products) 80 hours
Cost center
Figure removed
due to copyright restrictions
sales volume
selling price(sales amount per 1 product)
- direct material cost per unit
to be grasped per 1 product
to be tabulated at total company level
- variable manufacturing cost (except direct material cost)
- fixed manufacturing cost
throughput
― operating cost
operatingprofit
selling price (sales amount per 1 product)
to be grasped per 1 product
variance inmanufacturing cost
- fixed manufacturing cost per unit (allocation)
- variable manufacturing cost per unit
productionvolume
(plus, if sales volume increases)
(plus, if sales volume increases)
Throughputaccounting
Conventionalmethod
(full cost accounting)
Basic Logic of Throughput Accounting
Σ
sales volume
throughput operatingprofit
(plus, if sales volume increases)
Σ
Σ
‡Takahiro Fujimoto 'Introduction to Production Management‘Nihon Keizai Shimbun, Inc. 2001 (Ⅰp114 figure.5.2)
２．Concept of Productivity and Method of Its Modification
Enhancement in cost competitiveness ← (1) increase in productivity← (2) decrease in factor cost
Productivity is ---
“ratio of input and output”
“level of efficient utilization of various production factors”
“transmission efficiency at the time of transcribing product design information from process to product”
（１）Classification by Output
Physical productivity --- unit of material volume
Value productivity ----- unit of monetary sum (added value, revenue, etc.)
（２）Classification by Input
Total factor productivity, TFP
Partial productivity, or individual factor productivity
Labor productivity (head count or man-hour = man/time)
Capital productivity
Material productivity (basic unit)
Measurement of material labor productivity(example of numerical value)
・ “production quantity per one person” or “productionquantity per one man-hour”
・ scheduled working hours, or actual working hours
・ handling of “unpaid overtime”
・ dealing of difference in degree of proficiency
・ concept of “man-hour” (person/hour per unit)
Factory
Annual outputDirect workers Scheduled working hours
Actual working hours (recorded)
Actual working hours(unrecorded, estimate)
A Factory
900,000 units 100 men 1,800 hours
/year- number 1,800 hours
/year- number1,800 hours
/year- number
B Factory
1,200,000 units 100 men 2,000 hours
/year- number 2,400 hours
/year- number 2,500 hours
/year- number
Case
Way of measurements decides either A Factory or B Factory in terms of higher productivity.
Capital Productivity
Problem lies in heterogeneity of facilities.
Tally in the form of actual tangible fixed asset?
In case of same kind of machines, “lifecycle cumulative production quantity per equipment”?
Material Productivity
Case of assembly-industry type:Data and yield rate of bill of materials
Case of apparatus-industry type:More important (yield rate of semiconductor, rate of
coke(s) in making pig iron)
Labor Productivity at Individual Level (Efficiency in Information Transcription)
actual working hours = net operating hours + other hours
net operating hours = hours used to transcribe information (added value)
other hours = waste in waiting, work insert and pull, walking,preparation, set-up change, etc.
Physical productivity of individual
= actual working hours / output
= (net operating hours/output) ÷ (net operating hours/actual working hours)
(↓: speed up) (↑: decrease in waste and setup)
workers’movements
waste
operations
net operations
can be saved immediately
・ waiting・ wasteful transportation・ stacking up semi-
manufactured products・ changing hands・ duplicated transportation
under current working condition
・ go get parts・ unpack subcontract parts・ to take out parts little by
little from large pallet・ operating hand-push
cutter button
non-value-addingoperations
Yasuhiro Monden 'Field Management of Toyota' Japan Management Association (p.179) ‡
Factor Productivity and Production Leadtime (concept diagram)
productivity of second process( man-hour per 1 unit)
productivity of first process(man-hour per 1 unit)
cycle timeworkers
materials in-process products finished products
first process second process
Inventory time
Inventory time
Inventory time
Inventorytime
transportation time
cycle time cycle timeproduction leadtime
Receiving party(lead time)
Transmitting party(productivity)
cycle timeworkers
legends： net operating hours(information transmission hours)
net operating hours(information receiving hours)
hours without information
transmission/receiving (inventory, hand-carry , transportation, etc.)
production resources
（Labor productivity）
man-hour requirement
per unit
total actual working hours per day total net operating hours per day total net operating hours per day＝ ÷
production units per day production units per day total actual working hours per day＝
＝ gross net operating hours per day ÷ rate of average net operating hours
Productivity and Net Operating Hours (density approach and speed approach)
（Speed of informationtranscription）
（Density of informationtranscription）
