4.2 Costing digital products

Question 1

A digital product typically refers to a

Answer 1

• Product that is stored, delivered and consumed in an electronic format (eg: eBooks)
• Or digital media that will be distributed (eg: music album)
• Products can be delivered in many ways (eg: website) and one digital product may be offered in various forms

Question 2

Digital products can be more difficult to cost for a number of reasons:

Answer 2

• Marginal costs can be virtually zero (most costs fixed in nature), this makes them expensive to produce but cheap to reproduce
• There is often no standard time or cost that can be attributed to digital products making standard costing inappropriate
• Drivers for overheads can be difficult to determine
• The timing of costs can be difficult to estimate and can extend over a number of accounting periods
• The lifespan of digital products can vary greatly. Need to establish total costs over lifetime and then compare to expected benefits in terms of increased revenue (determining lifetime can be difficult)
• Many product features or functions might be shared amongst a number of products and bus will need to determine how to absorb these costs into each individual product

Question 3

The timing of digital product costs:

Answer 3

• Some will be upfront and pre-launch such as design and development
• Some will be post-launch such as royalties and marketing costs
• And some will be incurred over both periods such as testing and platform costs

Question 4

A digital costing system is

Answer 4

• Dynamic and links internal digital systems with those of suppliers, customers and external market
• Data is gathered from all of these resources and the internet in real time, to give up to date costing info which reflects current info on components and product parts

Question 5

Digital costing systems provide

Answer 5

• More detailed info on marginal, total and average product costs
• The info is obtained more quickly and product costs are more accurate

Question 6

Digital costing systems use technology to

Answer 6

• Allow them to understand and read product designs and plans in order to find the best components to achieve product goals
• They can gather and feed info into manufacturing times to make the entire operation more efficient, flexible and effective

Question 7

Features and benefits of digital costing systems:

Answer 7

• Real time / up-to-date info
• Access to a wider variety of resources
• Reduced operational costs
• Better understanding of costs
• More accurate costing
• Improved communication / faster decision making
• Improved cost control

Question 8

DCS - Real time / up-to-date info

Answer 8

• Info is gathered in real time through linked systems
• This allows system to automatically compare prices and suppliers and give the cheapest component available which will bring significant cost savings
• System will be constantly up to date and reflect current info which allows the org to change and adapt to changes in supply chain environment

Question 9

DCS - Access to a wider variety of resources

Answer 9

• Org will have access to more suppliers, this can bring benefits such as cost savings, quicker lead times and access to more variety of resources
• It can also help alleviate scarcity problems

Question 10

DCS - Reduced operational costs

Answer 10

• They are expensive to implement but when up and running they are low operational costs
• They are fully automated so not time burden for cost accountants (saving can outweigh cost to implement in long term)

Question 11

DCS - Better understanding of costs

Answer 11

• They have built in analytics and intelligence capabilities and can analyze changes over time, supplier flexibility, etc which can give org a better understanding of changing nature of costs and which costs are truly variable
• Allows for calculation of cost per customer / location, etc which allows for better customer profitability evaluation which can lead to better decision making (offering discount to particular customer)
• Allows for granular decisions, if the org is dealing with large volumes changing to a component supplier that gives a fraction of a saving this can lead to significant overall cost savings
• Some can make suggestions to buying behaviour or newly available types of components, which can improve product design (constantly evolving)
• Can accurately cope with hundreds of purchasing decisions at one time, easy to use and quickly understood my decision makers

Question 12

DCS - More accurate costing

Answer 12

• Org will receive better, more up-to-date info on cost of products, cost drivers and absorption costs and this will be automated which should result in more accurate and useful products costs
• Allows for more detailed break down of overheads with more personalised cost drivers which can help in cost control and pricing decisions

Question 13

DCS - Target costing

Answer 13

• Target costing is used when selling price is less controllable and profit is dependent on meeting a target cost rather than adjusting selling prices
• A DCS can determine whether (and how) a target cost can be achieved in order to reach a target level of profit

Question 14

DCS - Improved communication / faster decision making

Answer 14

• They are fully integrated systems and make use of many micro services
• This all happens digitally so there is much less bureaucracy and the entire system is quicker, easier and cheaper to operate

Question 15

DCS - Improved cost control

Answer 15

• Standards are being regularly updated
• Where stds are being used to calculate variances and measure performance it is important that they reflect current market conditions
• As a result of the stds being real time there should be no planning variances and any operational variances will be due to the manager not acting in accordance with current environment