FIN 073: Strategic Cost

Management Student
Activity Sheet #23
Lesson Objectives:
At the end of this module, you should be able to:
Name:_______________________________ 1. Differentiate a traditional cost management
_________________ Section: ____________ system and a strategic cost management system.
Schedule: _______________________ 2. Describe the business process reengineering,
target costing, product life cycle costing and
just-in-time system.
Lesson title: Strategic Cost Management Materials:
Class number: _______ Date: Pen and non-scientific calculator Strategic Cost
______________ Management by Mowen and Hansen

References:
globalcma.in
sigc.edu

UCATION

Productivity Tip:
ED
Sleep well. Having at least 8 hours of sleep a night is the best way to help you wake up feeling
refreshed and ready to start your study during the day.

A. LESSON PREVIEW/REVIEW
Y OF PHINMA
1) Introduction
Decision making that affects the long-term competitive position of a firm must explicitly consider the
strategic elements of a decision. The most important strategic elements for a firm are its long term
growth and survival. Thus, strategic decision making is choosing among alternative strategies with
the goal of selecting a strategy or strategies that provides a company with reasonable assurance of
long term growth and survival. The key to achieving this goal is to gain a competitive advantage.
Strategic cost management is the use of cost data to develop and identify superior strategies that
will produce a sustainable competitive advantage.

2) Activity 1: What I Know Chart, part 1

 Questions: What I Learned (Activity 4)
What I Know
T
1. What is target costing?

ER
2. What is product life cycle
costing?

ROP
3. What is a just-in-time

P production system?

B.MAIN LESSON
1) Activity 2: Content Notes

Lesson Objectives 1
Cost Management – identifying, collecting, measuring, classifying, and reporting information that is

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FIN 073: Strategic Cost
Management Student
Activity Sheet #23
Schedule: _______________________
Class number: _______ Date:
Name:_______________________________ ______________
_________________ Section: ____________

useful to managers and other internal users in cost ascertainment, planning, controlling and decision
making.

UCATION
Traditional Cost Management – depends on conventional cost accounting and data generated in this
system.

Strategic Cost Management – cost analysis in a broader context, where the strategic elements
become more conscious, explicit and formal. Here, cost data is used to develop superior strategies
enroute to gaining sustainable competitive advantage.

Traditional Cost Management Vs Strategic Cost Management

Traditional Cost Management Strategic Cost Management

1. Standard cost system with normal

allowance for scrap, waste, rework; zero

ED
defect standard is not practical

1. No allowance for scrap, waste, rework;

zero defect is the concept

2. Overhead variance analysis;

maximize production volume (not

MA
quality) to absorb overhead

2. Overhead absorption is not the key;

standard costs and variance analysis are
deemphasized, in general

3. Variance analysis on raw material price;

procurement from multiple suppliers to avoid

HIN
unfavorable price variance; low
price/low-quality raw materials

3. No control on raw material price; certify

vendors who can deliver right quantity,
right quality, and on time.

4. Heavy use of nonfinancial measures

(parts per-million defects, percentage

OF P
yields, scrap, unscheduled machine down
times, first-pass yields, number of
employee suggestions)
4. No emphasis on nonfinancial
performance measures

5. Systematic tracking of customer

acceptance (customer complaints, order
lead time, on-time delivery, incidence of

TY
failures in customers’ locations)

5. No tracking of customer acceptance

 6. Quality costing as a diagnostic and
management control tool

6. No cost of quality analysis

ER
7. The goal is kaizen
reference group
P
7. The goal is to be in the top tier of the

8. The annual target is to meet the standards 8. Industry norms set the floor

9. Standards are to be met, not exceeded 9. The annual target is to beat last
year’s performance achievement

RO
10. Try to beat this year’s target
10. Standards are tough but attainable
P (continual improvements)

11. A regularly exceeded standard is not 11. Each achievement level sets a new floor
tough enough for future

Lesson Objectives 2
Business Process Re-engineering (BPR)

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FIN 073: Strategic Cost
Management Student
Activity Sheet #23
Schedule: _______________________
Class number: _______ Date:
Name:_______________________________ ______________
_________________ Section: ____________

Business process re-engineering involves examining business processes, current operations of

PROPERTY OF PHINMA
 EDUCATION
organization and if possible, making substantial changes to current organizational operations. It means
that apart from segregating all the activities into Value Added and Non Value Added Activities, and
eliminating all Non Value added activities from the process, one should also consider, whether there is
any better way of doing all the value added activities.

Value Engineering (VE)

In value engineering process, we try to find out better ways of doing all the activities so that cost
control and cost reduction can be done effectively. For example, purchase of materials is a business
process consisting of activities such as purchase requisition, identifying suppliers, preparing purchase
orders, mailing purchase orders and follow up. The process can be re-engineered by sending the
production schedule direct to the suppliers and entering into contractual agreement to deliver materials
according to the production schedule.

Some issues analyzed during VE review are

1. Elimination of unnecessary functions from the production process
➢ This involves a detailed review of the entire manufacturing process to see if there are any steps that
add no value to the product, e.g. interim quality review before further processing and final quality
check.
➢ By eliminating unnecessary or duplicate functions, the firm can reduce their associated direct or
overhead costs from the total product cost.
➢ The possible repercussions of elimination of any intermediate production function should be
carefully analyzed. The engineering team must be careful to develop work-around steps that
eliminate the need for the original functions.

2. Elimination of unnecessary product qualities

➢ The product quality should be studied with reference to the nature of its use, longevity of product’s
useful life.
➢ If some unnecessary quality e.g. excessive degree of sturdiness in consumable item(as opposed to
a durable item) can be eliminated, it should be done in order to save significant material and other
product costs.
➢ However, visible reduction in durability or reliability cannot be stretched too far. Hence any designs
that have had their structural integrity reduced must be thoroughly tested to ensure that they meet
all design standards.

3. Design minimization
➢ This involves the creation of a design that uses fewer parts or has fewer features. ➢ This approach
is based on the assumption that a minimal design is easier to manufacture and assemble Also, with
fewer parts to purchase, less procurement expenses is associated with the product.
➢ However, sometimes it would be less expensive to settle for a few extra standard parts that are
more easily and cheaply obtained, rather than customized pre-fabricated parts, which complicate
the assembly process.

4. Better product design to suit manufacturing process

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FIN 073: Strategic Cost
Management Student
Activity Sheet #23
Schedule: _______________________
Class number: _______ Date:
Name:_______________________________ ______________
_________________ Section: ____________

➢ This is also known as Design for Manufacture and Assembly (DFMA) and involves the creation of a

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product design that can be created in only a specific manner. For example, a toner cartridge for a
laser printer is designed so that it can be successfully inserted into the printer only when the sides
of the cartridge are correctly aligned with the printer opening; all other attempts to insert the
cartridge will fail.
➢ When used for the assembly of an entire product, this approach ensures that a product is not
incorrectly manufactured or assembled, which would call for a costly disassembly or product recalls
from customers who have received defective goods

5. Substitution of parts
➢ This is also called as Component Parts Analysis. This approach encourages the search for less
expensive components or materials that can replace more expensive parts currently used in a
product design.
➢ Substitution of new parts is encouraged since new materials are being developed every year.
However, parts substitution must be accompanied by a review of related changes elsewhere in the
design and the consequent impact on total costs
➢ This also involves allied analysis on tracking the intentions of suppliers to continue production of
parts in the future. If parts are not available, they must be eliminated from the product design.

6. Combination of steps
➢ Sometimes, a careful review of all processes associated with a product reveals that some steps can
be eliminated, other steps can be consolidated, or that several can be accomplished by one person
rather than having different people in widely different parts of the production process to perform
them. This is also known as Process Centering.
➢ By combining steps, transfer and queue time can be eliminated from the production process, which
in turn reduces the chances of damage during transfers.

7. Search for better way of doing things

➢ This seeks to answer a basic question–is there a better way?
Target Costing – a structured approach to determine the cost at which a proposed product with
specified functionality and quality must be produced, to generate a desired level of profitability at its
anticipated-selling-price

Steps in Target Costing approach to pricing

1. Setting of target selling price – The setting of target selling price of a product which customers are
prepared to pay, depend on many factors like design specifications of the product, competitive
conditions, customer’s demand for increased functionality and higher quality projected production
volume, sales forecasts, etc.

2. Determination of target costs – Target profit margin may be established after taking into account
long term profit objectives and projected volume of sales. On deducting target profit margin from target
selling price, target cost is determined.

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FIN 073: Strategic Cost
Management Student
Activity Sheet #23
Schedule: _______________________
Class number: _______ Date:
Name:_______________________________ ______________
_________________ Section: ____________

3. Estimate the actual cost of the product – Actual cost of the product may be determined after

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taking into account the design specifications, material cost and other costs required to produce the
product.

4. Comparison of estimated cost with actual cost – In case the estimated cost of the product is
higher than that of the target cost of the product then the concern should resort to cost reduction
methods involving the use of Value Engineering / Value Analysis tools.

Steps involved in implementing a Target Costing System

1. Create a Project Charter – Project Charter is a document, approved by top management that
describes its goals and what it is authorized to do. This Charter is based on the corporate mission
statement and related goals. Written approval of Project Charter by the top management provides the
target costing effort with a strong basis of support and direction in all subsequent efforts.
2. Obtain a Management Sponsor – Management Sponsor is an individual belonging to top
management. His role will be to support the initiative in all respects, to obtain funding, to coordinate
with other members of top management, to eliminate problems in a timely manner.

3. Obtain a Budget – The funding should be based on a formal allocation of money through the
corporate budget. The fund should be given unreservedly to the target costing effort.

4. Assign a Strong Team Manager – The Target Costing Team involves the active participation of
many members with diverse backgrounds. A strong Team Manager is required to bring the group
together as a smooth functioning team focused on key objectives. He should be skilled in dealing with
management, the use of project tools and working with a diverse group of people. This manager should
be a full-time employee, so that his or her complete attention can be directed towards the welfare of the
project.

5. Enroll Full-time Participants – It is essential that the members of the team be devoted to it full-time
rather than trying to fulfill other commitment elsewhere in the company at the same time. They should
have a single focus on ensuring the success of the target-costing program.

6. Use Project Management Tools – Target costing can be a highly complex effort especially for high
cost products with many features and components. The team should use all available project
management tools, such as Microsoft Project (for tracking the completion of specific tasks), a company
database containing various types of costing information and a variety of product design tools.

Advantages of Target Costing

1. Innovation – It reinforces top-to-bottom commitment to process and product innovation and is aimed
at identifying issues to be resolved.
2. Competitive Advantage – It enables a firm to achieve competitive advantage over other firms in the
industry. The firm, which achieves cost reduction targets realistically, stands to gain in the long run.

3. Market Driven Management – It helps to create a company’s competitive future with market driven
management for designing and manufacturing products that meet the price required for market

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FIN 073: Strategic Cost
Management Student
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Name:_______________________________

Y OF PHINMA
_________________ Section: ____________
Schedule: _______________________
Class number: _______ Date:
______________

EDUCATION
success.

4. Real Cost Reduction – It uses management control systems to support and reinforce manufacturing
strategies and to identify market opportunities that can be converted into real savings to achieve the
best value rather than simply the lowest cost.

Problems with Target Costing

1. The development process can be lengthened to a considerable extent since the design team may
require a number of design iterations before it can devise a sufficiently low-cost product that meets the
target cost and margin criteria.

2. A large amount of mandatory cost cutting can result in finger-pointing in various parts of the
company, especially if employees in one area feel they are being called on to provide a
disproportionately large part of the savings.

3. Representatives from number of departments on the design team can sometimes make it more
difficult to reach a consensus on the proper design.

Product Life Cycle – a pattern of expenditure, sale level, revenue and profit over the period from new
idea generation to the deletion of product from product range. Product life cycle spans the time from
initial R&D on a product to when customer servicing and support is no longer offered for the product.

Phases in Product Life Cycle

The four identifiable phases in the Product Life Cycle are (a) Introduction (b) Growth (c)Maturity and (d)
Decline. A comparative analysis of these phases is given below:
Phase II III IV
I
T
Particulars Introduction Growth Maturity Decline

Sales Rise in sales Rise in sales Sales levels off

Volume levels at levels at and then start

PER
increasing rates. decreasing decreasing.
rates.

Initial stages,
hence low

Prices of High levels to Retention of Prices fall closer Gap between

high level prices to cost, due to price and cost is

RO except in
certain cases*
effect of
competition
further reduced.

Products cover initial

costs and
promotional
expenses.
 Highest, due to Total expenses Ratio reaches a Reduced sales

P effort needed
to inform
potential
remain the
same, while
ratio is
normal % of
sales. Such
normal %
promotional efforts
as the product is
no
Ratio of
promotion customers, reduced due to becomes the longer in demand.
expenses launch products, increase in sales. industry standard.
to Sales distribute to
customers etc.

Competition Negligible and Entry of a large Fierce Competition Starts

insignificant number of disappearing due
to withdrawal of

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FIN 073: Strategic Cost
Management Student
Activity Sheet #23
Schedule: _______________________
Class number: _______ Date:
Name:_______________________________ ______________
_________________ Section: ____________

competitors products
Profits NIL due to Increase at a Normal rate of
heavy initial rapid pace. profits since

TION
costs. costs and
prices are
normalized.
Declining profits
due to price
competition, entry
of new
products, etc.

PROPERTY OF PHINMA
 EDUCA
* In the growth stage, the firm will maintain the prices at the high levels, in order to realize maximum
profits. Price reduction will not be undertaken unless the low prices will lead rise in demand resulting in
high profits.

Product Life Cycle Costing – an approach used to provide a long term picture of product line
profitability, feedback on the effectiveness of life cycle planning cost data to clarify the economic impact
of alternatives chose in the design, engineering phase etc. It is also considered as a way to enhance
the control of manufacturing costs. The thrust of product life cycle costing is on the distribution of costs
among categories changes over the life of the product, as does the potential profitability of a product.
Hence it is important to track and measure costs during each stage of a product’s life cycle.

Features / Characteristics of Product Life Cycle Costing

1. Product life cycle costing involves tracing of costs and revenues of each product over several
calendar periods throughout their entire life cycle. Costs and revenues can be analyzed by time
periods, but the emphasis is on costs and revenue accumulation over the entire life cycle for each
product.
2. Product life cycle costing traces research and design and development costs, incurred to individual
products over their entire life cycles, so that the total magnitude of these costs for each individual
product can be reported and compared with product revenues generated in later periods.
3. Life cycle costing therefore ensures that costs for each individual product can be reported and
compared with product revenues generated in later periods. Hence, the costs are made more
visible.
Benefits of Product Life Cycle Costing
1. The product life cycle costing results in earlier actions to generate revenue or to lower costs than
otherwise might be considered. There are a number of factors that need to the managed in order to
maximize return on a product.
2. Better decisions should follow from a more accurate and realistic assessment of revenues and costs
at least within a particular life cycle stage
3. Product life cycle thinking can promote long-term rewarding in contract to short-term profitability
rewarding.

Importance of Product Life Cycle Costing

1. Time based analysis – Life cycle costing involves tracing of costs and revenues of each product
over several calendar periods throughout their life cycle. Costs and revenues can be analyzed by
time periods. The total magnitude of costs for each individual product can be reported and
compared with product revenues generated in later periods.
2. Overall Cost Analysis – Production costs are accounted and recognized by the routine accounting
system. However non-production costs like R&D, design, marketing, distribution, customer service
etc. are less visible on a product-by-product basis. Product Life Cycle Costing focuses on

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FIN 073: Strategic Cost
Management Student
Activity Sheet #23
 recognizing both production and non-production
Name:_______________________________ cost.
_________________ Section: ____________ Class number: _______ Date:
Schedule: _______________________ ______________

PROPERTY OF PHINMA
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3. Pre-production Costs analysis – The development period for R&D and design is long and costly. A
high percentage of total product costs may be incurred before commercial production begins.
Hence, the company needs accurate information on such costs for deciding whether to continue
with the R&D or not.
4. Effective Pricing Decisions – Pricing Decisions, in order to be effective, should include market
consideration on the one hand and cost considerations on the other. Product Life Cycle Costing and
Target Costing help analyze both these considerations and arrive at optimal price decisions.
5. Better Decision Making – Better decisions should follow from a more accurate and realistic
assessment of revenues and costs, at least within a particular life cycle stage.
6. Long Run Holistic view – Product life cycle thinking can promote long-term rewarding in contrast to
short-term profitability rewarding. It provides an overall framework for considering total incremental
costs over the entire life span of a product, which in turn facilitates analysis of parts of the whole
where cost effectiveness might be improved.
7. Life Cycle Budgeting – Life Cycle Budgeting, i.e. Life Cycle Costing with Target Costing principles,
facilitates scope for cost reduction at the design stage itself. The Company stands to benefit since
costs are avoided before they are committed or locked in.
8. Review – Life Cycle Costing provides scope for analysis of long term picture of product line
profitability, feedback on the effectiveness of life cycle planning and cost data to clarify the
economic impact of alternatives chosen in the design, engineering phase etc.

Just in Time (JIT)

A JIT approach is a collection of ideas and philosophy that streamline a company’s production process
activities to such an extent that waste of all kinds such as material and labor is systematically driven out
of the process. Just in Time technique enables a company to ensure that it receives products / spare
parts / materials from its suppliers on the exact date and at the exact time when they are needed. The
steps involved are:

a. Supplier Evaluation – The Purchasing Department must evaluate and investigate every supplier
and eliminate those who could not keep up with the delivery dates.
b. Supplier Assistance – The engineering staff must visit supplier sites and examine their processes,
not only to see if they can reliably ship high-quality parts but also to provide them with engineering
assistance to bring them up to a higher standard of product.
c. Supplier Information System – The firm must install a system, which is as simple as a fax machine
or as advanced as an electronic data interchange system or linked computer systems, that
 communicates with suppliers as to exactly how much of specified parts are to be sent to the
company.
d. Direct Delivery – Deliveries should be sent straight to the production floor for immediate use in
manufactured products, so that no time spent in inspecting the parts for defects. Drivers, who bring
supplies of materials, drop them off at the specific machines that will use the materials first.

Benefits associated with JIT system

1. Reduction in Inventory levels – Unnecessary piling up of Raw Materials, WIP and finished goods
are avoided. The focus is on production and purchase asper the firm’s requirements. Under a JIT
system, the amount of inventory retained in a company drops continuously as under:

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FIN 073: Strategic Cost
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Schedule: _______________________
Class number: _______ Date:
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_________________ Section: ____________

➢ Raw materials inventory is reduced because suppliers deliver only small quantities of parts as and

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when they are needed.

EDUCATION
➢ Work-in-progress inventory drops because the conversion to machine cells and the use of Kanban
cards greatly reduces the need to pile up inventory between machines.
➢ Finished goods inventory drops because inventories are allowed to build up only if a company
experiences high seasonal sales.

2. Reduction in Wastage of Time – The key focus of any JIT system is on reducing various kinds of
wastage of time, so that the entire production process is concentrated on the time spent in actually
producing products. By reducing wastage of time, the firm effectively eliminates activities that do not
contribute to the value of a product which in turn reduces the costs associated with them. Time
reduction can be achieved in the following manager.
➢ Inspection Time – All inspection time is eliminated from the system as operators conduct their own
quality cheeks. Suppliers’ assistance and quality checks at supplier’s factory eliminate the need for
separate inspection or QC department in the firm.
➢ Handling Time – All movement, which involves shifting inventory and work in process throughout
the various parts of the plant, can be eliminated by clustering machines together in logical
groupings called Working Cells
➢ Queue Time – Queue time is eliminated by not allowing inventory to build up in front of machines.
Kanban cards serve this purpose.
➢ Storage Time – Clearing out excessive stocks of inventory and having suppliers deliver parts only
as and when needed eliminates Storage time.

3. Reduction in Scrap Rates – There will be sharp reductions in the rates of defectives or scrapped
units. The workers themselves identify defects and take prompt action to avoid their recurrence.

4. Reduction in Overhead Costs – Overhead Costs are greatly reduced with JIT operation. This is
because of the following reasons:
➢ Elimination of non-value-added activities and improvement in value-added activities.
➢ Reduction of time
➢ Reduction in Inventory levels and associated costs
➢ Reduction / Elimination of unnecessary cost drivers
➢ Introduction of “Machine Cells” to identify direct costs than overhead expenses

The effect of JIT philosophy on overhead is three-fold:

➢ Thorough reduction in Overhead Costs
➢ Shift between Overhead Costs and Direct Costs, due to introduction of Machine Cells
➢ Scientific Allocation of common overheads based on Machine Cells and Cost Drivers

By reducing unnecessary (non-value-added) activities and the associated time and cost-drivers,
overheads can be greatly reduced e.g. material handling costs, rework costs, facility costs etc.

JIT approach for reducing WIP inventory

At times, there may be huge differences between the operating speeds of different machines. This
affects cost in following manner:

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FIN 073: Strategic Cost
Management Student
Activity Sheet #23

1. Work-in-process inventory builds up in front of

Name:_______________________________ the slowest machines.
_________________ Section: ____________ Class number: _______ Date:
Schedule: _______________________ ______________

PROPERTY OF PHINMA
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2. Defective parts produced by an upstream machine may not be discovered until the next downstream
machine operator finds them later. By that time, the upstream machine may have created more
defective parts, all of which must now be destroyed or reworked.

In JIT philosophy, there are two ways to resolve the above problems.
1. Kanban Card – It is a notification card that a downstream machine sends to each upstream machine
that feeds it with parts, authorizing the production of just enough components to fulfill the production
requirements. This is also known as “pull” system, since these cards are initiated at the end of the
production process pulling work authorizations through the production system. WIP cannot pile up since
it can be created only with Kanban authorization.
2. Working Cells – A Working cell is a small cluster of machines, which can be run by a single
machine operator. The establishment of working cells has the following advantages: ➢ The individual
machine operator takes each output part from machine to machine within the cell; and thus there is no
way for WIP to build up between machines.
➢ The operator can immediately identify defective output which otherwise is difficult for each machine
of the cell. The smaller machines used in a machine cell are generally much simpler than the large
automated machinery they replace. Hence maintenance costs are reduced.
➢ It is much easier to reconfigure the production facility when it is necessary to produce different
products, avoiding the large expense of carefully repositioning and aligning equipment.

What are the performance measures in JIT?

1. Inventory turnover – One of the primary objectives of JIT systems is the reduction of
unnecessary inventory. Hence inventory turnover is a suitable performance measure in JIT. This
measure can be subdivided into separate ratios for raw materials, work in process, and finished
goods.
2. Set up time reduction – The average setup time per machine can be measured periodically and
plotted on a trend line. The shortest possible set intervals are crucial for the success of short
production runs, so this is a major JIT measurement. It is best to measure it by machine, rather
than in the aggregate for all machines.
3. Customer complaints – JIT presumes optimum product quality. Hence customer complaints on
product problems should be investigated immediately. The accumulation of customer
complaints and their dissemination to management should be considered a major JIT measure.
4. Scrap – JIT aims to drive materials scrap rates down to exceedingly low level. The cost of scrap
(especially when supported by a detailed list of items that were scrapped) is of particular
concern as a JIT system is being implemented, since it helps to identify problem areas requiring
further management attention.
5. Cost of quality – One focus of JIT is on creating high-quality products, so it is reasonable to
keep track of the full cost of quality (which comprises defect control costs, failure costs, and the
cost of lost sales) on a trend line. Managers want to see the details behind this measure so that
they know where the largest quality costs still reside in the company and can then work to
reduce them.
6. Customer service – This measure really has several components like delivering products on the
dates required by customers shipping full orders to customers, and not having products
returned because of poor quality. This measure can be summarized in a variety of ways or

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 Schedule: _______________________
Class number: _______ Date:
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_________________ Section: ____________

reported at the component level, but the main issue is to measure and post the information for

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all to see, so that the company focuses strongly on providing the highest possible degree of
customer service.
7. Ideas generated – JIT system works best when employees provide suggestions for
improvements that, when taken in total result in a vastly improved efficient operation. The
amount of idea generation going on can be measured by the number of ideas per worker, the
number of ideas suggested in total, the number of ideas implemented, or the proportion of ideas
suggested that are implemented.

Backflush Costing
Traditional, normal and standard costing systems use the sequential tracking method for
accounting costs. This involves recording journal entries in the same order as transactions occur, i.e.
purchase, issue of materials, production, overheads absorption etc. Such systems are required in those
manufacturing environment where inventory / WIP values are large.
Since JIT systems operate in modern manufacturing environment characterized by low
inventory and WIP values, usually also associated with low cost variances, the use of backflush costing
is ideal when compared to sequential tracking method.

However, the following issues must be corrected before effective implementation of Backflush Costing:
1. Accurate Production reporting – The total production figure entered into the system must be
absolutely correct, or else the wrong component types and quantities will be subtracted from stock. This
is a particular problem when there is high turnover or a low level of training to the production staff that
records this information.
2. Proper Scrap reporting – All abnormal scrap must be diligently tracked and recorded. Otherwise,
these materials will fall outside the backflushing system and will not be charged to inventory. Since
scrap can occur anywhere in a production process, lack of attention by any of the production staff can
result in an inaccurate inventory.
3. Lot tracing – Lot tracing is impossible under backflushing system. It is required when a
manufacturer need to keep records of which production lots were used to create a product, in case all
the items in a lot must be recalled. Only a picking system can adequately record this information. Some
computer systems allow picking and backflushing system to coexist.
4. Inventory accuracy – The inventory balance may be too high at all times because the backflushing
transaction that relieves inventory usually does so only once a day, during which time other inventory is
sent to the production process. This makes it difficult to maintain an accurate set of inventory records in
the warehouse. The success of backflushing system is directly related to a company’s willingness to
invest in a well-paid, experienced well-educated production staff that undergoes little turnover.
 1) Activity 3: Skill-building Activities
Exercise 1
Why should a company engage in business process reengineering?

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Exercise 2
Name:_______________________________ Class number: _______ Date:
_________________ Section: ____________ ______________
Schedule: _______________________

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What are the benefits of product life cycle costing?

Check your answers against the Key to Corrections found at the end of this SAS. Be sure to complete
each activity before looking. Write your score on your paper.

2) Activity 4: What I Know Chart, part 2

Let us see how your knowledge changed by reviewing the questions in the What I Know Chart

from Activity 1. Write your answers to the questions based on what you now know in the third
column of the chart.

3) Activity 5: Check for Understanding

How does backflush costing works?

C. LESSON WRAP-UP
Congratulations for finishing this module! Shade the number of this module that you just have finished.

1. What part of the topic did you find difficult?

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2. Some question/s I want to ask my teacher about this module is/are:

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FAQs
Question 1: Does business process reengineering suit every business?
Answer: No. Application of business process reengineering depends on factors like size and
availability of resources.

Question 2: Are there companies in the Philippines that employ JIT system?
Answer: Yes. Example of these are companies are:
1. Toyota – one of the first to implement JIT strategy effectively
2. Dell – they accomplished the strategy by negotiating with suppliers to carry inventory instead of

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FIN 073: Strategic Cost
Management Student
Activity Sheet #23

carrying it themselves
Name:_______________________________ Class number: _______ Date:
_________________ Section: ____________ ______________
Schedule: _______________________

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3.McDonal’s – usually have everything they need to assemble and don’t do so until the order has been
taken, except for a few finished products

KEY TO CORRECTIONS
Skill Building Activities
Exercise 1
The suggested answer to the question is, but not limited to:
Business process reengineering reduces costs and cycle times by eliminating unproductive activities. It
could also lead to increase revenue, improved customer service, and faster processing time through
leaner and more productive processes.

Exercise 2
1. The product life cycle costing results in earlier actions to generate revenue or to lower costs than
otherwise might be considered. There are a number of factors that need to the managed in order to
maximize return on a product.
2. Better decisions should follow from a more accurate and realistic assessment of revenues and costs
at least within a particular life cycle stage
3. Product life cycle thinking can promote long-term rewarding in contract to short-term profitability
rewarding.

Check for Understanding

Backflush costing is a product costing system generally used in JIT inventory environment. In short, it is
an accounting method that records the costs associated with producing a good or service only after
they are produced, completed, or sold. Flushing costs to the end of the production run eliminates the
detailed tracking of expenses, such as raw materials and labor costs, throughout the manufacturing
process.
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