3. Profit Enhancement Techniques Flashcards
What is a target cost?
A product cost estimate derived by subtracting a desired profit margin from a competitive market price
What is target costing?
An activity which is aimed at reducing the life-cycle costs of new products while ensuring quality, reliability and other consumer requirements
What stages of the life cycle are the target for target cost reduction?
Product planning, research and development and prototyping
What are the 3 main issues with using target costing in service industries?
- Difficult to determine likely sales volume and price at concept stage
- Often predominantly labour costs, reducing which will reduce quality of service
- Often each service is unique
What are the 5 main ways to close a target cost gap?
- Redesign the product
- Redesign the production process
- Renegotiate with suppliers
- Improve staff efficiency
- Use cheaper staff
What is life cycle costing?
Monitoring/recording costs by product over the different phases of its life (rather than per accounting period), in order to determine the total profitability of a product
What are the 3 main uses of life cycle costing?
- Provides better information as to the success of new product development
- Gives focus on where the majority of costs are incurred in relation to a product
- Emphasises importance of short lead time between R&D spend and launch, and focus on trying to extend the life cycle of a product
What are the 2 main limitations of life cycle costing?
- Very time consuming/costly
2. Not sufficient for financial reporting
What are the 5 stages in the product lifecycle?
- New product development
- Market introduction
- Growth
- Mature or stability
- Decline
What is the trend in product price from introduction to decline stage?
- Depending on strategy (penetration, skimming etc)
- Reduced to prevent competition or attract a wider customer base
- Stable, some sales promotions
- Reduce to sell off
What is the trend in production costs from introduction to decline stage?
- High (low volume, unfamiliar staff)
- Reduce (economies of scale, bulk buying discounts, experienced staff)
- Fairly constant
- Increase (lower volumes)
What is the trend in sales and marketing costs from introduction to decline stage?
- Low - medium (build awareness)
- Increase (reach wider base)
- Reduce (word of mouth and established brand)
- Reduce further (redirected to new products)
What is the trend in profitability from introduction to decline stage?
- Loss making
- Approaching break even
- Steady profits
- Reduced/losses (prices lower, decommissioning costs)
What is the value chain?
The sequence of business activities by which, from the perspective of the end user, value is added to the products and services produced by an entity
What are primary activities in the value chain?
Those directly related with the input of materials through to the after sales service of the finished goods
