Achieving Full-Cycle Cost Management

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Companies tend to assume that a large percentage of a product’s costs are locked in by design — that little can be done to reduce costs once the design is set. This belief has shaped many cost-management programs across diverse products’ life cycles. Because of it, firms will often focus on cost reduction during the design phase and cost containment during manufacturing. But are much of a product’s costs truly locked in during design?

To answer that, we studied the consumer-products division of Olympus Optical Co. Ltd. in Tokyo, Japan. In-depth field observations of the life cycle of the new Stylus Zoom camera helped provide a detailed understanding of how the company applies various cost-management techniques across a product’s life cycle. (See “About the Research.”) In particular, we investigated the level of costs that are designed in because that shapes the way a company manages costs across the product life cycle. If a significant portion of costs is designed in, we would expect to observe aggressive cost management predominantly in the design (and not the manufacturing) phase of the life cycle.

About the Research »



1. The origin of this statistic is difficult to identify but it appears to derive from B.S. Blanchard, “Design and Manage to Life Cycle Cost” (Portland, Oregon: M/A Press, 1978).

2. R.S. Kaplan and A.A. Atkinson, “Advanced Management Accounting,” 3rd ed. (Upper Saddle River, NJ: Prentice Hall, 1998), 223; and C.T. Horngren, S.M. Datar and G. Foster, “Cost Accounting: A Managerial Emphasis,” 11th ed. (Upper Saddle River, New Jersey: Prentice Hall, 2002), 417–418.

3. R.H. Garrison and E.W. Noreen, “Managerial Accounting,” 9th ed. (Chicago: Irwin McGraw Hill, 2000), 814.

4. See, for example, J.M. Brausch, “Beyond ABC: Target Costing for Profit Enhancement,” Management Accounting 76 (November 1994): 45–49; R. Henkoff, “New Management Secrets From Japan — Really,” Fortune, Nov. 27, 1995, 135–146; G. Böer and J. Ettlie, “Target Costing Can Boost Your Bottom Line,” Strategic Finance 81 (July 1999): 49–52; G. Schmelze, R. Geier and T.E. Buttross, “Target Costing at ITT Automotive,” Management Accounting 78 (December 1996): 26–30; J.H. Hertenstein and M.B. Platt, “Why Product Development Teams Need Management Accountants,” Management Accounting 79 (April 1998): 50–55; and S. Ottosson, “Dynamic Product Development —DPD,” Technovation 24 (March 2004): 207–217.

5. For a thorough description of target costing, see R. Cooper and R. Slagmulder, “Target Costing and Value Engineering” (Portland, Oregon: Productivity Press, 1997).

6. Other firms have introduced similar systems for the same reason. For example, Kirin Brewery Company, Ltd. used its Kyoto Brewery System and Higashimaru Shoyu Co. Ltd., a soy sauce manufacturer in Japan, introduced its price control system to motivate cost reductions in their production processes; see R. Cooper, “When Lean Enterprises Collide: Competing Through Confrontation” (Boston: Harvard Business School Press, 1995).

7. P.N. Khandwalla, “The Effect of Different Types of Competition on the Use of Management Controls,” Journal of Accounting Research 10 (autumn 1972): 275–285.

8. R.S. Kaplan and R. Cooper, “Cost and Effect: Using Integrated Cost Systems To Drive Profitability and Performance” (Boston: Harvard Business School Press, 1997).

9. Ibid.

10. Y. Monden, “Cost Reduction Systems: Target Costing and Kaizen Costing” (Portland, Oregon: Productivity Press, 1995); and R.S. Kaplan and A.A. Atkinson, “Advanced Management Accounting,” 3rd ed. (Upper Saddle River, New Jersey: Prentice Hall, 1998).


The authors would like to thank the participants at the European Institute for Advanced Studies in Management (EIASM) conference on New Directions in Management Accounting in Brussels which took place in 2000. They also wish to thank the referee and participants at the 2001 American Accounting Association conference in Savannah, Georgia, as well as three anonymous reviewers for their comments. Financial support received from the Chartered Institute of Management Accountants (CIMA) is gratefully acknowledged.

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