Why the retail method? – Philosophy “Profitability improvement 5･６ Amoeba and retail method ” –

This time, Inamori* spoke about the above motto in his book : Practical Accounting -Business Administration and Accounting -. What Inamori said is quoted with “”.

 “Amoeba Management assumes that the costs vary depending on the economic circumstances and therefore we have always found ways to reduce costs. In order to ensure profitability, no matter how much the selling price in the market falls, Kyocera has constantly reduced expenses and improved productivity.”

 Here, Mr. Inamori explained how the Amoeba system and retail method to determine the cost are interrelated with each other. He highlighted the following three points.

Let me elaborate one by one.

1  Consider the market value of the goods and services

 “If inventory is evaluated at the end of the fiscal year using standard cost accounting methods, top leaders sometimes are misled about the actual financial state of the company. In other words, the price of some items in inventory is already higher than the selling price, and which would cause a loss when they are sold. For example, think about a well -sold product that has been sold to a wholesaler for 300 yen each, and the production cost price was 250 yen. So you can get a 50 yen margin for each. However, when similar products are released in the market, the retail price drops rapidly. In that case, the manufacturer may decide to lower the price and sell it to the wholesaler for 200 yen in order to maintain market share, even though the wholesalers should accept loss until the next new product is launched. In this case, the remaining inventory at the end of the fiscal period is recorded at the original cost of 250 yen in the financial statements, and taxes are normally imposed on that basis. ”

→One of our principal businesses is to analyze the market value of real estate. We must always think about what the market value is. First of all, we must understand the market and the differences among market prices to understand profitability as well as the cost structure of major players. For our company, we have to be very much sensitive to the market price and flexibly revise our cost structure based on our business philosophy, so that we would be able to take immediate action to keep ourselves profitable.

 2  Understand how managerial accounting works

 “In this sense, the retail cost method is based on the correlation between the sales price of a product in the market and its actual manufacturing costs. It also allows automatic incorporation of the price declines occurred in the market into the inventory valuation. No matter how accurate the cost accounting method is, evaluating inventory based on the past costs would mislead the management. The retail method, which reflects the market price in retail, can be an appropriate method for managers to accurately evaluate inventory.”

→In our industry, even if we work on a project assuming to sign off the retaining contract,  we sometimes lose that assignment for several reasons. In that case, the time and money we spent on the project becomes a sunk cost. It is important to consider these sunk costs  when we consider resource allocation. To ensure profitability, we need to set up benchmarks or guidelines to screen assignments to work on.

3  Be creative

 “We must target the highest price, at which our customers are willing to buy. However, given various expenses incurred, our profits are reduced. Therefore, we must thoroughly consider how much we can reduce the production costs. However, under common sense, most people believe that costs are determined by accumulation. But this is not always the case. We should spend our time and efforts to find the vendor who provides us with raw materials cheaply, and if the cost reduction is not sufficient, we consider VA (value analysis). We then review the design itself and change the specifications so that we can make a profit even if we make it for, say 1,000 yen. Now a days, technology and design must be adjusted so that the product can be profitable at the selling price determined by the market. ”

 →Furthermore, we will try our best to find ways to reduce costs in all areas. Apart from so-called common sense, `this is the cost and expense to be considered‘, I would like to value originality and ingenuity by carefully reviewing the service processes, with the belief that it is possible to lower the cost.

* Mr. Kazuo Inamori, the founder of Kyocera, KDDI (one of the top tele communication companies in Japan) and the top of revitalization project of JAL. As a well-known Japanese entrepreneur, he has been sharing his experiences and management know-how with managements of small to middle companies in Japan.

Further queries or doubts, please email to ytomizuka@abrilsjp.com

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