Magazine article The CPA Journal

New Product Costing, Japanese Style

Magazine article The CPA Journal

New Product Costing, Japanese Style

Article excerpt

Clearly there are shortcomings with traditional cost-accounting approaches due to the changing nature of today's manufacturing environment. Traditional cost accounting has served manufacturers well for a long time. But as factories change, its conventions and premises have become less defensible. Consequently, the internal management accounting system currently provides less than optimal information for helping American manufacturing companies compete in a global environment of rapid technological change and intense competition.

In the late 1960s and early 1970s, Japanese firms in assembly-oriented industries. such as electronics and automobile manufacturing, began producing high quality products at very competitive prices. These products had short life cycles and were produced in a wide variety of models and sizes. They were the result of a manufacturing environment that used new methods and concepts such as just-in-time (JIT), total quality management (TQM), continuous improvement (CI), and employee involvement (EI). The emphasized customer service by providing quality. timely delivery, and low-cost production.

In the U.S., there is an increasing awareness of the role played by the Japanese approaches to world class manufacturing, including JIT and CI. The number of American companies adopting these methods is growing rapidly. However. as these new techniques are implemented, it has become necessary to re-examine the management accounting systems currently in use. A way of doing this is to contrast U.S. management systems with the Japanese methods of cost accounting which include such concepts as target costing, value engineering, and functional analysis.

In Japan, the purpose of the management accounting system is to influence the behavior of a manufacturing facility's employees to achieve corporate goals. Accounting policies are subservient to corporate strategy' and aid managers in answering questions such as: How do our products compare with those of our competitors? What must we do to prepare for the future? The answers to such questions determine the nature of the management accounting system.

Japanese cost-management departments take a team-oriented approach and include members from other fields (e.g., engineering, purchasing, and manufacturing) as well as accountants. These individuals are typically specialists who have rotated through several departments before taking on a cost-planning job. These people have broad perspectives that give them a unique ability to discover ways to reduce product costs.

In addition to the teamwork approach, Japanese companies use direct performance indicators extensively, including production set-up times, number of times materials are moved, or number of units scrapped. These quantitative, nonfinancial measures allow employees to monitor their performance and interpret the results of their efforts. With relevant training and frequent reports on the company's financial health, companies ensure employees understand how their work directly affects the company's performance.


When developing a new product in the U.S., the typical approach is to design it first and then compute the cost using a standard cost approach. Direct material, direct labor, and overhead standard costs are summed, and the resulting total is the new product cost. If the cost is too high, de product goes hack to design or the company accepts a smaller profit. The essentials of this approach are shown in Figure 1. (Figure 1 omitted)

In Japan, because of the highly competitive nature of assembly-oriented manufacturing, cost reduction in the planning and design stages is an important management issue. Japanese cost accountants must compute 100% of product cost in the planning and design stages. This is how the concept of target costing evolved.

Target costing is a Japanese management accounting technique used to manage costs during a products planning and design stages and has been used b some Japanese firms for over twenty years. …

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