Specification-Based Costing and Lean Production as Drivers of Cost Reduction Evidence from the Iraqi Cement Industry
Keywords:
Specification-Based Costing; Lean Production; Cost Reduction; Unit Manufacturing Cost; Cement IndustryAbstract
This study examines the effect of Specification-Based Costing (SBC) and Lean Production (LP) on cost reduction at Karbala Cement Manufacturing Limited in Karbala, Iraq. The analysis is based on objective monthly data covering 60 observations from 2021M01 to 2025M12. Cost reduction is measured by unit manufacturing cost (CR), calculated as total manufacturing cost divided by monthly output. SBC is measured by the share of products with documented and costed specifications, while LP is proxied by the scrap and defect rate as a percentage of output. Descriptive statistics show noticeable monthly variation in costs and operational indicators, which supports the use of high-frequency data to examine cost behavior. Stationarity is confirmed for CR, LP, and SBC using Augmented Dickey–Fuller tests, allowing the model to be estimated in levels. The baseline OLS results indicate a strong positive and statistically significant effect of LP on CR, suggesting that higher scrap and defect rates increase unit manufacturing cost through quality-loss mechanisms. To address serial dependence in monthly costs, the model is further estimated using an AR(1) error structure with maximum likelihood estimation. This specification improves the diagnostic adequacy of the model and shows a statistically significant negative effect of SBC. This indicates that broader specification coverage supports cost control once cost persistence is considered. Residual diagnostics also support the reliability of the results, with acceptable normality and no evidence of heteroskedasticity. The findings suggest that cost reduction in cement manufacturing is strengthened when lean practices reduce quality losses and when specification-based costing improves cost traceability, documentation, and standardization. The study also highlights the importance of using monthly operational and accounting data to support timely cost-control decisions in industrial production.
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