Jam limited is introducing life cycle costing to enable it profile the cost of its product through the life cycle, including the pre-production stage. The CEO of the firm has discussed this with you for advice.
Required:
As the Management Accountant, state and explain TWO cost reduction strategies which the CEO of Jam limited should adopt to reduce the cost throughout the life cycle of its product. (4 marks)
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Life cycle costing is the profiling of cost over a products life, including the pre-production stage. Cost reduction may be achieved through the following means:
Target costing
The target cost is a product cost estimate derived by subtracting a desired profit margin from a competitive market price. The target cost may be less than the planned initial product cost, but will be expected to be achieved by the time the product reaches the mature production stage. At the maturity stage. The target cost may be higher than planned, hence management will want to put in place measures to target cost to an acceptable level as a one off measure. For instance, each stage in the supply chain may be reviewed, possibly with the aid of staff questionnaires, to identify areas of likely cost savings.
Value analysis
Value analysis is systematic inter-disciplinary examination of factors affecting the cost of a product or service, in order to devise means of achieving the specified purpose most economically at the required standard of quality and reliability. Value analysis will aim to eliminate non- value added activities– those that do not add value to the product in the eyes of its customers. Example goods returns and order correction, by so doing, cost associated with each stage of the product, would have been contained to an acceptable level.