4.1 Other costing techniques

Question 1

There are two main types of costing systems:

Answer 1

• Specific order costing - where work done by org consists of separately identifiable jobs or batches
• Continuous costing - where a series of similar products are produced as a direct result of a sequence of continuous operations or processes

Question 2

Joint products are

Answer 2

Two or more products separated in the course of processing, each having a sufficiently high saleable value to merit recognition as a main product

Question 3

By-products are

Answer 3

Outputs of some value produced incidentally in manufacturing the main product

Question 4

Joint product costing involves

Answer 4

• Processes which incur joint costs
• Joint process costs (aka common costs) occur before the split off point (total material, labour & overhead costs before this point)
• The joint costs cannot normally be directly attributable to individual joint products or by-products, therefore arbitrary allocations may have to be used

Question 5

Methods of joint cost apportionment

Answer 5

• Physical measurement
• Market value at point of separation
• Net realisable value / net relative sales value

(These methods will result in different inventory valuations and therefore different recorded profits)

Question 6

Throughput accounting is a

Answer 6

• Modern management accounting technique where the primary goal is to maximise throughput while simultaneously maintaining or decreasing inventory and operating costs

Question 7

Throughput is a

Answer 7

Measure of profitability

Throughput = Sales revenue - Direct material costs

Question 8

The main assumptions of throughput are

Answer 8

• The only cost that is deemed to relate to volume of output in the short term, and is totally variable, is the purchase cost of raw materials (all other costs including labour are not deemed variable)
• Direct labour costs are not variable in the short term (most employees are salaried or guaranteed a minimum weekly wage)
• The total of all other costs (everything excluding direct materials) may be called total factory costs (TF) or operating expenses
• Given these assumptions, throughput is effectively the same as contribution

Question 9

Throughput accounting - Investment is all

Answer 9

• The money the bus invests to buy the things that it intends to sell and all the money tied up in assets so that the bus make make the throughput
• Includes unused raw materials, work in progress and unsold finished goods
• Can also include non-current assets if these are used for buying or creating materials (equipment & buildings)

Question 10

Throughput accounting - Operating expenses are all

Answer 10

• The money a bus spends to produce the throughput (ie. turn inventory into throughput)
• These are costs that are not totally variable
• aka total factory costs or conversion costs

Question 11

Throughput accounting - Profit reported as follows

Answer 11

Revenue
Less: Raw material cost (totally variable cost)
= Throughput contribution
Less: Operating expenses
= Net profit

Question 12

Throughput accounting has two key impacts on the management accounting system:

Answer 12

• Inventory valuation
• Decision making

Question 13

Impact of throughput accounting on - Inventory valuation

Answer 13

• Inventory should be valued only at the purchase cost of its raw materials and bought-in parts
• It should not include any other costs, not even labour costs
• No value is added by the production process until the item is sold

Question 14

Throughput accounting and multi-product decision making

Answer 14

• If the bus has more capacity than there is customer demand, it should produce to meet the demand in full
• If the bus has a constraint (bottleneck) that prevents it from meeting customer demand in full, it should make the most profitable use that it can of the constraining resource
• This means giving priority to those products earning the highest throughput contribution for each unit of the constraining resource that it requires

Question 15

Step by step technique used to resolve multi-product decision making problems

Answer 15

Step 1 - Identify the bottleneck constraint
Step 2 - Calculate the throughput contribution per unit for each product
Step 3 - Calculate the throughput contribution per unit of the bottleneck resource for each product (aka return per factory hour)
- Step 4 - Rank the products in order of the throughput contribution per unit of the bottleneck resource (highest to lowest)
Step 5 - Allocate resources using this ranking

Question 16

Throughput accounting measures

Answer 16

When there is a bottleneck resource, performance can be measured by comparing the returns generated by a product (= return per factory hour) against the costs incurred during production (= cost per factory hour)

Throughput accounting ratio (TPAR) = Return per factory hour / Cost per factory hour
(TPAR > 1 = Profit; TPAR <1 = Loss)

Return per factory hour = Throughput contribution / Products time on the bottleneck resource
(shows value added by org and should be maximised)

Cost per factory hour = Total factory cost / Total time on the bottleneck resource

Question 17

Criticism of throughput accounting

Answer 17

• It concentrates on the short term, when a bus has a fixed supply of resources and operating expenses are largely fixed
• It is more difficult to apply to longer term, when all costs are variable, and vary with volume of production and sales or another cost driver
• Therefore it may be suitable for measuring profit and performance in short term but an alternative such as ABC might be more suitable for a longer term perspective