INTEGRATED COST MANAGEMENT IN THE INTERNAL VALUE CHAIN

SUMMARY
Aspiration of a company to achieve a competitive position at the segmented market through efficient
production, cost management and successful implementation of cost leading strategy within the value
chain is a stimulus for integrated application of modern concept of cost management, i.e. for
application of two or more systems and concepts of costing throughout entire value chain aimed at
achieving the effect of synergy. Application of TC, ABC and Kaizen concept, individually, and,
particularly, integrated can provide adequate results in achieving more competitive internal chain that
will create the conditions for achieving competitive advantage of total value chain and create the value
for all stakeholders. By integrated application of the three concepts one achieves better cost
management and more efficient control in the entire value chain.

KEY WORDS: management, costs, integrated approach

INTRODUCTION

In business environment characterized by uncertainty and turbulence, cost management becomes the
crucial factor of a company’s success and keeping and upgrading of its competitiveness. In an effort to
create a successful business strategy that might respond to all challenges of modern environment,
company management has to possess a quality database that could generate various information upon
request.
The fact is that costs are the basic factor impacting the final price of a product, i.e. cost price.
Minimizing costs while keeping the required quality or higher value offer for the same price is the
aspiration of each company under modern business conditions since it is the condition to achieve
competitive advantage.
Competitive advantage, and therefore generating value for stakeholders, is possible to achieve by
efficient application of well-formulated business strategy, adequate value chain analysis directed
towards identification of activities creating value and establishing relations between them, which
should contribute to the increased product competitiveness – either by reduction of costs or
improvement of quality and functionality.
Michael Porter, creator of the concept of generic strategies emphasizes that the competitive advantage
is the essence of all strategies and the selection of a strategy is actually the selection of type and size of
competitiveness that a company wants to achieve. 1 Among generic strategies, costs leadership strategy
deserves special attention; by selecting it a company aspires to achieve the most favorable costs
position in an industry which enables it to achieve price competition.
However, with the change in business conditions, where the change is the only constant, there appears
a new strategy being more compatible to new business conditions and is called confrontation strategy.
Radical changes in modern business environment forced companies to realize that generating value is
no longer the question of one company but the entire value chain since today it is no longer enough to
be the best in an industry but it is necessary to be part of the most successful value chain. 2 In other
words, an internal value chain of a company is part of the total value chain including supply chain and
distribution chain. (Figure 1)

Supply of raw Research and development, design,

production in progress, storage, g.p., sale of Wholesale and retail,
materials, materials, transportation and
1 components and final products.
M. Porter, 1996 „What is Strategy“, Harvard Business Review, November December, p. 68 distribution
shipping,
services
2
V. Sekerez “Virtual Supply Chains as a Framework for Integrated Costs Management in Supply Chain”
 Pre-production Production Post-
phase phase production Distributors -
Suppliers buyers
phase

Company
Supply chain Internal value chain Distribution chain

Figure 1: Integrated value chain of a company

Source: S.Malinic, D. Jovanovic, 2011., Implementation of Integrated Concepts of Cost Management
in Value Chain – Strategic Approach TC and ABC, Accounting 11-12, Association of Auditors and
Accountants of Serbia, Belgrade, p. 31
Therefore, companies, in today’s business conditions, must strategically manage costs in the entire
value chain which creates the need for integrated application of two or more systems and concepts of
costing throughout the entire value chain. Aspiration of a company to achieve competitive position at
the segmented market through efficient production, cost management and successful implementation
of costs leadership strategy within the value chain, and, above all within internal chain, is a stimulus
for integrated application of modern concepts of cost management.
The need to consider costs incurred in the process of design and development of the product, as well
as the costs in post-production phases requires finding new concepts of calculation and management of
costs such as, among others, activity-based costing, target costing and Kaizen costing. Application of
modern systems of costing and their integration in the process of cost management would provide a
quality database that would be the basis for making business decisions.
Researches in the area of management accounting confirmed that the greatest savings in costs can be
achieved in pre-production phase, i.e. in product design phase and target costing as market-oriented
system of costing is characteristic for pre-production phase and is directed towards achieving of the
target costing of product production.
Activity based costing is characteristic for production phase and part of pre-production phase related
to the phase of achieving of target cost. Significance of application of ABC lies in providing precise
information on the product price cost and on global costs that take over 60% in the structure of product
costs.
Kaizen costing is a modern concept of cost management located in the production phase and is the
upgrading of Target costing. The essence of Kaizen costing is small but constant incremental
improvements contributing to the desired cost reduction.
The objective of this paper is an effort to view the possibilities of integrated use of target costing,
activity based costing and Kaizen concept in the internal value chain as the central link of the entire
chain. The idea is to stimulate the company management to think about the costs, position they take in
the structure of price cost and their influence on forming the sales price since it is very important to
produce right product for the consumer, of desired quality and functionality but along with as low
production costs as possible. It is therefore needed to construct the right design of a product and
provide its production at the shortest possible time along with as low costs as possible which will
impact the efficiency of the entire value chain.
1. ABC – ESSENTIAL DEFINITION AND INFORMATION SUPPORT TO INTERNAL
VALUE CHAIN
ABC is the new method of costing whose conceptual basis is made of activities performed at the
company. The method appeared in the USA in the 80-ies as a consequence of criticism and perceived
deficiencies of classic systems of costing with the aim to more efficiently manage costs of products.
Today, the idea of ABC is widely spread and present in most of literature and references on
management accounting. Courses and seminars on ABC are very frequent nowadays.
The concept of activity based costing was developed by American professors Robert Kaplan and
Robin Cooper. However, the concepts of activity-based costing calculation in their original form
appeared earlier: in 1975 in Siemens AG Company and at the beginning of the 80-ies in Schlafhorst 3
Company. During 1988 Kaplan and Cooper published a series of articles on ABC method. Between
1990-1992 Kaplan and Cooper published new theoretical achievements related to ABC. This costing
method can be defined as the ‘method of measuring costs and performances of activities and objects of
spending“.4
From the above stated definitions one might conclude that ABC:
- Provides information for decision-making
- Focuses on activities causing operating costs
- Is useful for precise definition of product price
General structure of ABS model is shown in Figure 2.

Objects of spending

Activities

Spending of resources

Cost

Figure 2: General structure of ABC model

Source: Hons B C., (2009), Magister Dissertation “The Estimation and Management of Cost Over the Life
Cycle of Metallurgical Research Projects” University of Pretoria, p.p. 103
In order to obtain better insight into the activities implemented by the company it is necessary to break
down company system into elementary activities that are understandable and easy to be managed. This
enables better insight into the activities implemented by the company as well as perceiving the way the
resources are being utilized. Analysis of activities that is the critical step in formulating activity-based
costing calculation assumes the following:5
 primarily define a specific problem or business decision to be analyzed,
 consider all activities that are implemented and are aimed at defining activities,
 rationalize activities since defining activities makes sense only when as a result it has the list
of activities providing sufficient but not too much detail
 classify activities into primary and secondary ones,
3
Antic Lj, Georgijevski M.,(2010) „Cost Calculation of Time-driven Activity-based Costing“, Economic Issues
No. 4, Faculty of Economics, Nis, ps. 499-513
4
Tourney, P.B., (1992) Stratton, A.J., Using ABC to Support Continuous Improvement, Management
Accounting, p. 47
5
Brimson, J., 1991, “Activity Accounting”, John Weley & Sons, INC, New York, p. 54.
  map the activities that identify relationship between functions, business processes and
activities, and
 create a combined list of activities supporting the needs of the organization through final work
on documenting activities.

The main novelty brought by ABC is the fact that this system of costing recognizes that the majority
of resources in companies has not been utilized in direct production of products but in providing
activities that support production and sale of products and services. 6 It is the application of the causes
of costs related to the volume of production and the ones not related to the volume of production that
is considered an advantage of activity based costing compared to the traditional methods of costing in
terms of more reliable calculation of product price cost and other objects of spending.
When selecting the causes of costs at both levels of allocation the attention should be paid to the
connection existing between spending of resources and spending of the causes of spending resources,
i.e. between spending activities and spending the causes of activities. 7 One should also take into
account that the selection of larger number of causes of costs means, at the same time, higher precision
of allocation of costs but also higher costs of adoption and maintenance of the system.
The original activity-based costing model was created with the idea to provide relevant and reliable
information on products cost. This model is called model of decomposition 8 since it provides
information for making strategic decisions on company operations. The model focuses the attention on
allocation of costs in the way that the costs of resources are first allocated through keys to the
activities and then the activities are allocated on the objects of spending.
The basic role of ABC system was providing information on product cost and the managers needed
information required for internal improvements that existed but were not systematized in adequate
manner. Actually, there was no information on costs and performances of specific activities while, at
the same time, the costs were not identified for each activity individually which is considered the basic
deficiency of the original ABC model.

Finally, the original ABC could not provide the answers to the questions how much time it takes to
perform the key activities, or what factors impact increasing the time and effort needed for performing
activities, etc.
Two-dimensional model of activity-based costing or the so-called cross ABC model generated from
the need to respond to the requirements ofResources
managers for information on activities and their costs
necessary for internal and external improvements. This model is considered second generation of
activity-based costing model and with this model we can see horizontal and vertical dimension of
model as shown at Figure 4.

Allocation of costs Causes of costs of

of resources resources

Process

Causes of costs Performance

Activities measures
6
Malinic S., Jovanovic D., 2011 “Implementation of Integrated Concepts of Costs Management in Supply Chain
– Strategic Approach TC and ABC”, Accounting11-12, Association of Accountants and Auditors of Serbia,
Belgrade, p.36
7
Antić, Lj., Bonić Lj., (2009) “Activity-based Costing Calculation and Management Aimed at Generating Value
Cause of
for Owners”, Economic Issues No. 3, Faculty of Economics,
Allocation of causesNis, ps. 57-71
8
of activities activities
Lj.Antić, M.Geogijevski, 2010 “Time-driven Activity-based Costing Calculation” Economic Issues No. 4, ps.
499-513, p. 501

Objects of spending
spending
 Figure 4. Two-dimensional ABC model
Source: Antic, LJ., 2005, “Activity-based Costing Company Management”, XXXVI Symposium,
Zlatibor, Zbornik radova, Association of Accountants and Auditors of Serbia, Belgrade, p. 134,
adjusted according to: Turney, P., 1997, “Activity Based Costing: The Performance Breakthrough”,
Kogan Page Limited, London, p.96.
Vertical dimension illustrates allocation of costs and provides information on the amount of costs of
particular activities, possibilities to reduce costs of certain activities, analysis of profitability of
consumers and products and possibilities to move focus from non-profitable to profitable products,
services or consumers. Key terms of vertical dimension of ABC model are resources, activities and
objects of spending, as well as the causes of spending of resources and causes of activities.
Horizontal dimension of ABC model illustrates the process which enables providing information on
bases for allocation of costs and performance measures of each activity or series of activities within
the process.9 Activities are part of the “consumer chain” and are performed to achieve the value for
external consumers. This means that each activity in the chain should be viewed as the relation
supplier-consumer, i.e. each activity is the consumer of another activity and, at the same time, it has its
own consumers. If, through links of the “consumption chain” each supplier tends to maximally satisfy
his “consumer” then the satisfaction of the end consumer is guaranteed. 10
In the beginning of the 90-es ABC method outgrew into a new philosophy of company management
that was called activity based management – ABM. Activity based management is the process of
identification of value-adding activities and non-value adding activities, re-engineering companies,
benchmarking of value-adding activities and development the system of performance measurement
that will contribute to constant development. The objective of the entire process is to eliminate non-
value adding activities and, at the same time, to more efficiently perform the value-adding activities, to
reduce the production process time, reduce costs and increase quality, which will, ultimately, result in
greater profit of the company.
Empirical data on degree of acceptance and implementation of activity-based costing showed that
small percentage of companies worldwide use this method of costing although it looks like an
excellent way to manage the limited company resources.

9
Yilmaz, R., 2008, Creating The Profit Focused Organization Using Time-Driven Activity Based Costing,
EABR&TLC Conferences Proceedings, str.4
10
Antic, LJ., 2005, “Activity-based Costing Company Management”, XXXVI Symposium, Zlatibor, Zbornik
radova, Association of Accountants and Auditors of Serbia, Belgrade, p. 137
However, many managers having tried to introduce and apply ABC in their organizations to some
significant extent soon gave up trying that since they were faced with the increased costs and
dissatisfaction of the employees.11
Researches conducted in the service sector showed that this model is applied in: 12
 10 – 20% companies in the USA, Great Britain and other countries of Western Europe,
 about 7% companies in Japan,
 only a few companies in Poland.
Problems in implementation of ABC concept can be summarized in the following manner 13:
- conducting interviews and questionnaires with the employees aimed at providing information
needed for functioning of the model required much time and caused high costs,
- the data contained within ABC model were subjective and difficult to evaluate,
- it was expensive to keep, process and report on the data,
- most of ABC models was applicable locally and did not provide an opportunity for perceiving
the integral profitability of business,
- ABC models could not be easily updated and adapt to the changing circumstances (changes in
used resources and processes that are carried out, adding new activities, increase of
diversification and complexity of individual orders, channels and consumers, etc.),
- the model was theoretically incorrect due to the ignoring of potential existence of unused
capacities.
To overcome the noticed deficiencies, ABC model was advanced into time-driven activity-based
costing or TD ABC that is “simpler, less expensive, more rapidly implemented and provides that cost
allocation rates is based on practical capacity of the provided resources” 14.
TD ABC simplifies the first phase in cost allocation – activity-based resources allocation since it
allocates resource costs directly to the cost carriers, using the framework requiring simple assessment
of two parameters. First, one calculates total cost of all resources needed for implementation of
concrete business activities and then, the costs calculated in this way are divided by available
capacity shown in time of all employees effectively working on implementation of concrete business
activities to obtain cost capacity rate. Cost capacity rate obtained in that way is used for transfer of
resource costs to the cost carriers on the basis of demand for certain resource capacity. 15
With ABC model variants of activities are treated as separate activities resulting in great complexity of
ABC system used in medium and big companies. To avoid defining various activities for all
possibilities of implementation of activities TDABC introduces calculation of time equations which
are based on mathematical calculation.
Application of time equations is very useful if the company uses integrated information system (ERP)
since one can easily calculate time for performing various activities since, in a changing business
conditions activities almost never spend the same volume of resources. Time equations also provide
possibilities for managers to make simulation of future business flows. Equations imply main factors

11
Tool K., 2004.,Time-Driven Activity-Based Costing by Robert S. Kaplan and Steven R. Anderson, Harvard
Business Review, p. 1
12
Szyhta, A., 2010, “Time-Driven Activity Based Costing in Service Industries“, Social Science Nr.1.
13
Kaplan R., Anderson S., (2007) Time-Driven Activity-based costing: A Simpler and More Powerful Path to
Higher Profits, Harvard Business School Press, p. 8
14
. Kaplan R., Anderson S., 2004,Time-Driven Activity-Based Costing, Harvard Business Review, p.3
15
Malinic S., Todorovic M., 2011, “Conceptual Basis of Cost Calculation and Time-Driven Activity-Based
Costing Management”, Economics of the Company, Association of Economists of Serbia, Belgrade, ps. 206-213
of capacity demand including changes in the efficiency of the process, volume and mix of production,
distribution channels, consumers and forms of study. 16 In this sense, they contribute to upgrading of
budgeting process since by change of parameters in equations one can make the so-called “what if”
analysis of future demand and its impact on costs and quantity of resources to be provided for
performance of certain activity.
As basic advantages of TD ABC model, Kaplan and Anderson, being the creators of this model, state
the following:17
- fast and simple implementation and up-to-datedness of the model
- dynamism and lower level of dependence on human interpretation since it is well-integrated
with the data already available to ERP system,
- enables more successful overview of process efficiency and capacity utilization,
- costs are allocated to orders according to the specific characteristics of the orders, process,
suppliers and consumers,
- it can be implemented on a monthly basis,
- It can be used for planning demand enabling companies to perform resource capacity
budgeting according to predicting the volume and complexity of sale,
- Software application and technology of database can be created covering the entire business
operations,
- Enables rapid and simple maintenance of the model,
- Provides detailed information providing the users with the possibility to identify the causes of
the problems,
- It can be used within the industry and within the companies having large number of different
consumers, products, sale channels, segments and processes and high costs of capital and
earnings
However, apart from numerous advantages, TD ABC model has certain deficiencies that might
seriously threaten the quality of TDABC database. As basic weaknesses of the model we can state the
following ones:
1. Wrong assessment of time needed for performance of the activity for each product in the sense
that even small deviations can bring about significantly wrong defined costs and results which
will threaten the quality of TDABC database.
2. Fluctuation of rate of cost causes can bring about wrong assessment of the efficiency of
products and consumers and therefore the calculation should not incorporate the fluctuations
in business that are not connected to the basic efficiency and productivity of work since that
can bring about creation of a bad reporting model for company management.
3. One has to define clear causes of different time needed for performance of various activities
so that there would not be any significant mistakes in time equations and in the model itself.
4. Focus on reduction of time needed for providing information on time for performance of
certain activities conditions neglecting of other cost-related factors and search for alternative
methods for cost reduction.

16
Barrett R., Activity – Based Costing: Innovative methods to decrease costs and increase profitability, Journal
of Insurance Operations, Volume 1, Number 2, Perr & Knight, 2007, p. 3.
17
Kaplan R., Anderson S., (2007) Time-Driven Activity-based costing: A Simpler and More Powerful Path to
Higher Profits, Harvard Business School Press, str.14-15
 5. For keeping large quantity of data produced by TD ABC particularly if applied on a monthly
basis, it takes large database and powerful software tools for producing the needed reports.
Although TD ABC enables obtaining of detailed data on each product, consumer or process,
in order not to have any diffusion of organizational resources it is necessary to define
information priorities and determine which data are the key ones for making strategic and
operational decisions of the management, as well as the forecast of future business
operations.18
According to the above stated it could be said that TD ABC overcomes the deficiencies of the
traditional ABC model in terms of achievement of the set up goal but, however, it does not drastically
simplify the process of creation and management of the model. Therefore, one should think about TD
ABC model rather as a supplement to the traditional ABC model than its sole replacement since both
can be applied under different conditions according to their purpose. 19

2. TARGET COSTING – ESSENTIAL DEFINITION AND INFORMATION SUPPORT TO

INTERNAL VALUE CHAIN

Classic method of costs management having taken into account only one phase of product life cycle
was questioned in what way one observed the tendency of increasing the costs generated before the
production process began, while, in the other hand, the phase of product maturity showed the tendency
of shortening. All these brought about the need to expand the scope of cost management over the
entire product life cycle.20 Product life cycle becomes shorter so the focus of costs management moves
from production phase to the phases of research, planning and design of product. Therefore there
appeared the need to revise the traditional systems of costing that pointed to the need to create new
modern systems of calculation characterized by significantly wider horizon of the scope and vision of
achievement.21
The key to successful business and competitiveness of the company is to focus on consumer and his
needs. Modern consumer requires high quality, functionality and design of the product along with as
low price as possible. In order that the company could meet the demands of consumers and, at the
same time, survive at the market competition, it has to have lower business costs compared to the
competition. Solution for such companies is the application of target costing that, in time, has become
recognizable as dynamic, comprehensive system of reducing costs and strategic planning of profit. As
the system of costing, target costing implies the phases of product development cycle directing them,
to the greatest extent, to the phases of product design, at the same time, attempting to create optimal
combination of the most important components of the product so that the demands of consumers
would be met.
According to numerous definitions one might conclude that target costing is a significant concept of
costs and profit management having generated as the result of the changed business conditions.
Companies using this concept can timely “listen” to the market demands and participate in the market
battle directing their activities to the reduction of costs in the initial phase of product development
contributing to their reduction in other phases of the product life cycle.

18
Antic Lj., Georgijevski M., 2010, Time-Driven Activity-Based Costing, Economic Issues No. 4, Faculty of
Economy Nis, p. 510.
19
Malinic S., Todorovic M., 2011, “Conceptual Basis of Cost Calculation and Time-Driven Activity-Based
Costing”, Economics of the Company No. 3-4, Association of economists of Serbia, Belgrade, ps. 206-213 213
20
Novicevic B., Antic LJ., 2000, “New Concept of Cost Management – Target Costing Calculation”, Accounting
9, Association of Accountants of Serbia, Belgrade, ps. 13-20
21
Lalevic-Filipovic A., 2012, Possibility of Information Support to Target Costing by Generic Strategies of the
Company”, Accounting 1-2, Association of Accountants of Serbia, Belgrade, ps. 21-30
New practices of management accounting today put higher emphasis on the target costing-based
calculation that should provide the answer to the question what costs should be.22 As basic principles
underlying target costing, Ansari and Bell state the following: 23
1. price-driven calculation
2. focus on consumers
3. focus on design
4. participation of inter-functional team
5. involvement of all stakeholders in the value chain
6. orientation to reduce the cost of the product life cycle,
indicating that it is a system of profit planning and cost management.
Unlike the conventional method of determining the selling price of new products the concept of target
costing uses the reverse approach. Actually, target costing initiates the process in the manner that,
according to market research and consumer needs it determines the target sales price and plans the
product profit margins rate representing the main components in the process of determining the target
costs. Determining target profit starts with the global strategy of the company while respecting the
desired pace of growth, methods of financing the planned strategies, etc. The difference that is
obtained by the presented components determines the allowed amount of the target cost. These are the
costs at which a product must be manufactured so that it achieves the required profit at the given
selling prices. If it is expected that the costs are higher than the set up ones the company initiates the
activities directed towards cost reduction during the phase of product design cycle which is considered
the central phase in the Target Costing system since in this phase there are most possibilities to reduce
costs (diagram). Since over 80% of product costs are generated in the phase of its design by applying
modern instruments of costing we try to finalize the product design completely before its production
starts.

120%

100% 100%
95%
85%
80%

66%
60%

40%

20%

0%
Product
planiranje prelimiranarni
Preliminary detaljni dizajn
Detailed proizvodanja
Production Logistics
logistička
planning
proizvoda dizajn
design design support
podrška

Series1

22
Lalevic-Filipovic A., 2012, Possibility of Information Support to Target Costing by Generic Strategies of the
Company”, Accounting 1-2, Association of Accountants of Serbia, Belgrade, ps. 21-30
23
Ansari, S., L., Bell, J., 1997., Target Costing: The Next Frontier in Strategic Cost Management, the CAM-I,
Target Cost Core Group, Irwin, Professional Press, Chicago, p.p. 12
 Figure 6: Product Life Cycle
Source: Cooper, R., Slagmulder, R.,(1997) Target Costing and Value Engineering, Productivity Press,
Portland, Oregon (USA), p.p.73
As market-oriented concept and company management support instrument target costing represents
more superior and reliable mechanism of cost reduction and control. Early involvement of all
members of value chain into the process of generating its idea and their diffusion throughout entire
product development process stimulates motivation mechanism in the field of achievement of the
desired profit of individual products and, in that way, at the same time, achievement of the strategic
goal of profit management as the initiating phase of target costing process. 24
Significance of target costing is that its application enables companies to timely observe the needed
level and degree of improvement of particular product variables that create strategic frame of its
“triangle of survival” by means of which the target goals are achieved. “Triangle of survival” is
graphically shown in Figure No. 7.

Cost/price

Functionality Quality

Figure 7. Triangle of survival

Source: Lalevic A., (2007) “Target Costing and Company Confrontation Strategy”, 37 Symposium
Accounting and Business Finance under Modern Business Conditions, Challenges of Business-
Financial Reporting in Function of Company and Banks Management, Zlatibor, 24 th – 26th May,
Association of Accountant and Auditors of Serbia, Belgrade, ps. 45-63
Success in the triangle of survival is predetermined by the capacities of the company whereby, in a
careful and systematic manner, the existing cost management systems are integrated within quality and
development of the product since they exist within its own limits and use aggressive approaches to
cost management through all phases of their generation both inside and outside the company. 25
The prevailing opinion is that target cost management concept (TCM) as the strategic cost and profit
management concept that found its place both within the process of long-term planning at the level of
the company and within particular products development process, 26 takes place in three phases:
Phase One, market conditions-based costing implies defining target costs at which the product can be
manufactured by meeting the set up standards in terms of quality and functionality and, at the same
time by gaining target profit margins by its sale. Therefore, the goal of this phase is to offer the

24
Lalevic A., (2007) “Target Costing and Company Confrontation Strategy”, 37 Symposium Accounting and Business
Finance under Modern Business Conditions, Challenges of Business-Financial Reporting in function of Company and Bank
Management, Zlatibor, 24-26 May, Association of Accountants and Auditors of Serbia, Belgrade, ps.45-63
25
Nemcevic Z. 2012. Certain Aspects of Target Costing Implementation – Experiences and Results in the World
and in our Companies, Accounting 3-4, Association of Economists of Serbia, Belgrade, ps. 35-45
26
V. Sekerez 2005 Target Costing Management Concept, 36 Symposium, Zbornik radova Accounting and
Business Finance under Modern Business Conditions – State and Perspective, Zlatibor, 26-28 May, ps. 151-173
product that is acceptable in terms of meeting the needs of consumers and that can be manufactured at
the set up target costs.
Phase Two, product target costs management. In this phase, predefined target costs are transferred to
real and achievable dimensions so that the pressure is made on design engineers to try to find the way
to bridge the potential cost gap by obeying the set up standards in terms of functionality and quality.
In Phase Three, target costs management at the component level, product target costs are divided into
target costs of its integral parts, components along with the transferring pressure on suppliers to try to
reduce their costs and deliver products at the required prices.

Market level Product level Component level

Company long-term Product design Designing

plan according to target components
costs according to target
Target price
Defining components costs
Target profit
Managing suppliers
Target cost

Figure 8.: The functioning of the TCM process

Source: R. Cooper, R. Slagmulder, 1997., Target Costing and Value Engineering, Productivity Press,
Portland OR, available at: http:/www.tx.ncsu.edu/jtatm/volume2issue4/articles/hergeth/39 02 full.pdf
Defining long-term product target costs is part of long-term profit plans of the company. To make
these plans achievable the company must, by a detailed analysis of clients and competition as well as
by careful market segmentation, develop production mix which will, in the best way, contribute to the
achievement of long-term plans of the company. Each product within the production mix is expected
to be profitable and to contribute to the improvement of the total company profitability. After defining
the company’s production mix, the next step is defining development strategy of each product from
production mix or assortment. Planning of each individual product from production mix implies
precision when defining its functionality and quality, then the price at which the product will be sold
and the time when it will appear at the market.
The process of achieving product target costs is internally oriented mechanism which, in one part,
takes part in the phase of conceptualization and preliminary design and, in greater part during the
detailed development of product design. The basic idea of TCM is based on the fact that the possible
change of product design represents the means for efficient reduction of costs. Therefore, target costs
do not represent just a simple difference between the target sales price and target profit margin but to
the obtained value one should add strategic challenge for reduction of costs.

Current costs gap Strategic challenge of cost reduction

current target allowed benchmarking waste-free

troškovi troškovi troškovi troškovi troškovi
troškovi
 Figure 9. Long-term cost reduction path
Source: V. Sekerez 2005 The Concept of Target Costing Management, 36 Symposium, Zbornik
radova Accounting and Business Finance under Modern Business Conditions – State and Perspective,
Zlatibor, 26-28 May, ps. 151-173
The basis for determining target costs is the estimated running costs at which the new product might
be produced having in mind the existing conditions in the company. They are a bit higher than the
allowable costs since, in that phase, they are an impossible task for the company. The difference
between running and allowable costs represents current costs gap, whose elimination represents the
basic task of design teams engaged in product development. In this context, the allowable costs
represent the market demand for the price of the product, target costs reflect the current capacities of
the company on that plan, while waste-free costs show “how long the company should follow the cost
reduction path”.27

3. KAIZEN COSTING – ESSENTIAL DETERMINATION AND INFORMATION SUPPORT

TO INTERNAL VALUE CHAIN

Kaizen costing is market-oriented and internally based accounting system of costing and performances
directed towards costs reduction in all phases of production and operations of the company in general
with further implications on company profitability and, leastways, on the company’s competitiveness.
Despite the name, which tells of the Japanese origin, Kaizen concept was originally applied in the
USA but without much success. After abandoning this concept in the USA, W.E. Deming, considered
the creator of Kaizen costing, continued his work in Japan applying Kaizen concept in Japanese
companies. Unlike the USA, Kaizen concept has been very successfully applied in Japan, and, today it
is part of Japanese culture and mentality.
The significance of the concept of cost-based continuous savings is in observing possibilities for
improvement of the product and process based on readiness of all employees starting from managers,
experts, supervisors to direct executives to take part in its implementation. It represents small, tiny
changes taking part in small steps and small savings that are happening with the continuous effort.
The idea of this concept implies monitoring, control and management of costs in all stages of the
production phase and, by joining the function and the tasks of the management with the activities of
management accounting as its most reliable information basis, the company aims to achieve leadership
in costs.
The effects of application of Kaizen concept are manifested in reducing the cost of business
operations, lower cost prices, increase in product quality, increase in sale volume and consequently
increase in company profit.28
As a business philosophy in the field of business, Kaizen concept together with the set of relevant
components directed towards satisfying consumers make a “unique Japanese approach” known by the
name “the umbrella concept”. Kaizen as “the umbrella concept” includes several components such
as:29 customer orientation, total quality control, automation and robotics, system of internal proposals,
ideas and suggestions, workplace discipline, quality system, Kanban system, just-in-time, zero defects,

27
R., Cooper, R., Slagmulder, (1997) Target Costing and Value Engineering, productivity Press, Portland. p.p.
115
28
V. Janjic 2011 Implementation of the Costs Leadership Strategy by Applying Kaizen Costing, Zbornik radova:
42 Symposium Accounting and Business Finance under Modern Business Conditions Quality of Financial
Reporting – Challenges, Perspectives and Limitations. Association of Auditors and Accountants of Serbia,
Zlatibor, 26-28 May, ps. 359-377.
29
Masaaki, I., 1986 “Kaizen (The Key to Japan's Competitive Success)” USA – New York, p.5
small group activities, cooperative work, production improvement and new products development,
adequate monitoring and maintenance of overall production activities.
In the very act of operations, the above stated components of “the umbrella concept” are aimed at
meeting the needs of consumers through the offer of the products with the desired performances. The
holistic view of Kaizen could be expressed in words “penny and penny laid up will be many” since its
essence is reduced to that only by performing constant and continuously small, incremental changes
for better, making small steps from day to day, life of people could be much better and much
meaningful and companies could achieve and maintain competitive advantage. 30
The role of Kaizen costing as costing system is to create adequate multipurpose data bases that will
serve as information support to the company management, experts and executive staff structures in
implementation of cost reduction strategy. Kaizen costing is directed towards the production phase
therefore meaning that it builds on target costing and has the role to permanently reduce the costs
defined in the previous phase through small improvements of already designed products and
processes. Therefore, the purpose of calculation is the costs that could not be affected during the
design phase since in that phase the cost drivers were not visible so, by application of this calculation
system with incremental improvements we try to reduce costs to the allowable minimum along with
keeping the existing quality and functionality. Since the product is already in the production phase,
cost reduction through Kaizen costing is small since the space for cost reduction is small. Therefore
we can say that the purpose of Kaizen costing and cost management is fulfilled if the production costs
are lower compared to the previous period.
In terms of methodology, the first step of this costing method is defining the costs basis which is made
up of the real production costs of the concrete product in the previous period, then one defines the
desired amount of reducing costs within the particular period (monthly or annually) whose
achievement should enable that running production costs are lower compared to the costs basis.
During the production phase Kaizen costing is implemented through three phases that are compatible
with the principle of Demin’s circle.31
Phase One includes planning activity implying improvements in terms of defining the amount of target
costs reduction or Kaizen costing to achieve the desired amount of the company’s profit. When
considering the possibilities for costs reduction one takes into account, above all, variable costs but
one should also take into account the fixed costs.
Phase Two includes the implementation of the planned activity, i.e. implementation of costs reduction
or implementation of Kaizen costing activity. According to Yasuhiro Monden, during implementation
of Kaizen Costing there actually are two types of Kaizen activities 32: activities originating from
accounting and activities being implemented at the concrete working places. Activities originating
from accounting are aimed at defining the costs that will be the subject to reduction. As for the
activities being implemented at the working place these are the activities aimed at eliminating losses
occurring during the production when the resources are being inefficiently used.
Phase Three refers to the control that is being implemented through the analysis of discrepancy
between real costs and the costs predicted by Kaizen costing. In this phase, managers of particular
departments make and submit monthly reports on the achieved results of Kaizen activity to the
management. As the basis for the reports from all department s for the total accounting period one can
observe total effects of implementation of Kaizen activities for the company as a whole.
Successful application of Kaizen costing in internal value chain (production chain) requires that some
of the numerous techniques for continuous costs reduction should be applied on particular activities.

30
S. Malinic, M. Jankovic, 2011., Integrated Costs Management in Distribution Chain – Strategic Approach and
Management – Accounting Information Support, Accounting 7-8, Association of Auditors and Accountants of
Serbia, Belgrade, ps. 11-24
31
PDCA: Plan-Do-Check-Action or SDCA: Standardize-Do-Check-Action.
32
Monden Y., 1995 Cost Reduction Systems – Target Costing and Kaizen Costing, Productivity Press, Portland,
Oregon USA, ps. 295-307
Since production chain is the internal chain on which the company can have the greatest influence,
reduction of costs in this chain is the greatest one and one should only identify where and how to
reduce the costs so that the improvements can make the best results.

4. COSTS MANAGEMENT IN INTERNAL VALUE CHAIN BY INTEGRATED

APPLICATION OF ABC, KAIZEN CONCEPT AND TARGET COSTING

Internal value chain is the central link of the total value chain whose functioning is impossible without
it. Classical costing systems included only production phase of internal value chain which, with the
change of business conditions created the problem for managers when making business decisions
since classical costing systems did not provide the adequate accounting-information support to the
decision-making system. In other words, managers and management accountants timely observed that
the basic characteristic of classical costing systems was that accounting monitoring and informing
“start too late and end too early”.33 New solutions in terms of achieving and keeping of the costs
competitiveness were sought for in conceptualizing new organizational-accounting solutions
compatible with the information requirements of the modern concepts of costs management that
extend their focus from production to both pre-production and post-production phase, which,
graphically can be illustrated in the following manner:

Figure 14. Modern concepts of costing systems classified by stages of the production cycle at the
company level
Source: S. Malinic, M. Jankovic, 2011, Integrated Costs Management in Distribution Chain –
Strategic Approach and Managing –Accounting Information Support, Accounting 7-8, Association of
Auditors and Accountants of Serbia, Belgrade, ps. 11-24
However, application of a single costing concept and cost management does not enable identification
of the main costs drivers in the internal value chain or the effective measurement and control of costs
out the limits of internal value chain. Achieving of synergy effects, not only of internal but the entire
value chain, requires integrated use of different concepts that would certainly advance the process of
costs evaluation and contribute to the increase of their visibility in the chain. 34
We think that the visible results will be achieved in the domain of costs reduction in the production
phase by integrated application of ABC, TC and Kaizen concept that would provide synergy effect on
the reduction of production costs.

33
S. Malinic, 2008, “Management Accounting“, Faculty of Economics, Kragujevac, p. 239.
34
S. Malinic, D. Jovanovic, 2011, Implementation of Integrated Concepts of Costs Management in Distribution
Chain – Strategic Approach TC and ABC, Accounting 11-12, Association of Auditors and Accountants of
Serbia, Belgrade, ps. 29-44.
TC, in the field of integration, should serve as a means of involving market-related information into
the internal value chain. This primarily refers to the information on concrete products and their prices,
suppliers, perception of consumers related to the product. TC, taking into account all the
circumstances that prevail at the market, tries to find the optimal difference between the target selling
price and target profit to define the target cost on the basis of which the product must be manufactured
for the company to achieve the target profit.
The purpose of integrated application of ABC concept is to provide accurate information on individual
costs based on the activities of consumers and suppliers so that the managers could eliminate the
activities not creating value and redesign operational processes aimed at achieving or reducing total
target costs. In the production process of the concrete product, application of ABC is also directed
towards identification of the costs activities generated in the production process and costs drivers by
which accurate allocation of costs to products is provided. It is also very important to make proper
differentiation of the activities into the ones that add value and the ones that do not add value to the
product so that the management can make proper assessment of the activities generating value in the
internal value chain and the ones not generating value.
Unlike the traditional global costs allocation methods that proved as disadvantageous for financial
result of the company, ABC system proved very efficient when allocating global costs, which is very
significant from the point of view of cost management having in mind that under modern business
conditions indirect costs participate in the product cost structure with over 60%.
The significance of the integrated application of Kaizen costing in the internal value chain derives
from the very essence of Kaizen concept. It is evident that Kaizen is directed towards the activities
identified in the internal value chain. By application of Kaizen concept on such identified and
differentiated activities by incremental changes, i.e. small savings in costs, in the long-term,
significant effect in the cost reduction process35 would be provided.
Determining Kaizen costs per activity, particularly the activities not adding value and application of
Kaizen concept per activity by applying techniques for continuous cost reduction, costs of internal
value chain would gradually reduce which would enable achievement and reduction of the target costs.
The technique that should be mentioned and, which is particularly significant for the internal value
chain, is Quality Control, since, by application of this technique there are savings in costs occurring
due to keeping in mind that deviation of quality and testing are minimized. Beside savings in costs this
technique provides quality control of each activity performed in operations of the internal value chain.
Integrated application of TC, KC and ABC provides the company management with information on
possible sources of cost reduction. To get theses information one needs the analysis and evaluation of
performances of each activity separately since only in this way one can achieve reduction and
achievement of the desired costs.
This means that the initiating step of the integrated application of ABC, TC and KC, is defining the
target selling price through information obtained by market research. The next step is defining the
target cost which is, later on, decomposed to cost of material, components and business processes. It is
followed by application of ABC method for costs calculation whereby the real costs of activities,
material, components, functions and suppliers should be within previously defined target costs. Within
this step, Kaizen concept is applied on the activities identified when applying ABC concept to observe
the activities that spend too much resources and that represent potential field of cost reduction. If it is
observed that there is a current cost gap the company management has to take steps to eliminate
differences between current and target costs having in mind that if the company wants to keep to the
idea of achieving profit the target costs must be achieved. Therefore, it is needed to do the analysis of
all activities in the internal value chain, discover the causes of deviation and take the necessary steps
for reducing costs to the desired level. The measures available to the company in this stage are the
following: Value Engineering – VE, Business Process Reengineering – BRP, functional analysis, etc.

35
S. Malinic, M. Jankovic, 2011., Integrated Costs Management in Distribution Chain – Strategic Approach and
Management – Accounting Information Support, Accounting 7-8, Association of Auditors and Accountants of
Serbia, Belgrade, ps. 11-24
In this way, one forms the model of feedback costs control in the closed loop form that enables better
costs management along the entire value chain. 36
By integration of the three modern concepts of cost management one achieves more efficient use of
the advantages that each system individually offers, more efficient cost management since it provides
greater savings in costs and certainly creating of adequate accounting-information basis that will help
managers in making decisions.
Finally, we should say that despite great significance of integrated application of modern systems of
costing in achieving of the synergy effect in the domain of reduction of operating costs, it is not
“ideal” but, in terms of information it is better than individual application of some of the modern
costing systems. These systems are not equally suitable for use in all companies and in all condit6ions.
Therefore companies having the conditions and knowledge should use its advantages and also work on
its further improvement and development and, at the same time, elimination of the observed
deficiencies.

CONCLUSION

Key to integrated cost management is achievement of synergy effect, i.e. achievement of higher value
than the value of simple sum of parts. To achieve competitive advantage generating value for the key
stakeholders it is necessary to have cooperation between all links in the value chain since each link
individually is very important for successful operation of the value chain. Therefore it is needed to
have cooperation and exchange of information between all links in the value chain.
Without denying the value and importance of other links in the entire chain, internal value chain is yet
the central link of the entire chain since, without it, it is not possible to create the product of the
desired quality and functionality that will be competitive at the market. This means that the basic
objective of the internal value chain is to find the optimal balance between costs and quality, i.e. to
find the way to create superior value for consumer but with the lowest possible costs.
Application of TC, ABC and Kaizen concept, individually and particularly integrated can provide
adequate results in achieving of more competitive internal chain which will create conditions for
achievement of competitive advantage of the entire value chain and create value for all stakeholders.
By integrated application of all three concepts cost management and more efficient control in the
entire value chain are achieved. Detailed analysis of all costs of activities enables observing material,
components and employees that are not efficient, i.e. it increases the transparency of costs so that the
managers have clearer picture on what activities should be more efficiently managed and what
activities should be eliminated with the purpose to achieve the target product costs. Application of
Kaizen activities increases motivation of all participants in the internal value chain and their
interactive cooperation which influences creation of creative ideas as the result of integration of
different expertise. Application of Kaizen techniques for reduction of costs for each identified activity
would provide savings in production costs without violation of the desired quality and functionality of
the product and delays in the finalization of production.
Finally, a conclusion can be made that integrated application of TC, ABC and KC integrate strategic
advantages of TC and operative advantages of ABC that, together with the techniques for the costs
reduction and quality control create synergy effect in the area of cost management, and the managers
are provided with the information basis for proper decision-making.

36
MA Fei, YANG Hua, SUN Bao-feng 2008., WU Meng-na Remanufacturing System Cost Management Based
on Integration of Target Costing and Activity-Based Costing, International Conference on Information
Management, Innovation Management and Industrial Engineering, p.164.
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