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4.2 Management Accounting: Decision & Control > 7. Cost management > Flashcards

7. Cost management Flashcards

1
Q

Discretionery fixed costs are

A

ones which can be changed by managers:

eg
advertising
non-essential training and staff development
R&D

May increase profit short term but be damaging long term

loss of market share
less skilled w/f … higher staff turnover

remember goal congruence

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2
Q

Three MAIN methods of assessing possible cost reductions

A
  1. Work study (Manufacturing)
  2. Organisation and Methods (Admin)
  3. Variety Reduction
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3
Q

Other methods of cost reduction (5)

A
  1. Finance costs
  2. Energy costs
  3. Staffing
  4. Consumables
  5. Authorisation of Expenditure
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4
Q

Other methods of cost reduction (5)

A
  1. Finance costs: Interest payable on loans, forex, cost of capital tied up in inventory & timing of capex may offer scope for savings
  2. Energy costs
  3. Staffing - number and skills level
  4. Consumables - control of stocks and purchases of items like stationery may be tightened.
  5. Authorisation of Expenditure
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5
Q

Cost reduction detail

2. Organisation and Methods (Admin)

A

Improve methods & procedures in Admin

  • Form design, office layout, wrkflows & communications
  • Benefits of computerisation
  • Eliminaton of unnecessary procedures & paperwork
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6
Q

Cost reduction detail

3. Variety Reduction

A

May involve

  • Reducing product range
  • Standardising the components used in different products
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7
Q

Cost reduction detail

3. Variety Reduction

A

May involve

  • Reducing product range (needs balanced with customer needs)
  • Standardising the components used in different products (can be very cost-effective, allowing greater use of automation and bulk-buying economies)
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8
Q

Cost reduction programmes should involve all staff, drawing on each persons specialist knowledge of their own job.

Additional specialists may be brought in

A

.

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9
Q

VALUE ENGINEERING

VALUE ANALYSIS

A
  • VE (Before production starts)
    Ensuring new products or svs are designed for quality but at low cost, by analysing how every part of the design enhances value.
  • VA (When product/sv is already on the market)
    Analysing the value of every part of the design and questioning whether its function can be achieved some other way at lower cost.

Aim of both is to build quality into the design while kkeeping costs down.

Relevant specialists in Engineering, Design & Technology will be used.

Example colour in disposable razor & sofa … does it matter if the material used has coulour variations ?

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10
Q

What does the term ‘Value added’ describe

A

Activities or manufacturing processes that create an aspect of te product that customers are willing to pay for.

Some writers describe value added activities as those that change the ‘Form, Fit or Function’ of a product.

VA / VE attempt to eliminate activities that are ‘non-value added’. They are wasteful activities that do not contribute to the value of the product. (Idle time; inspection if it doesnt contribute)

Businesses that have mainly eliminated non-value added activities may be said to be ‘lean’ organisations.

Ethical values should also be considered. (Packaging, recycling)

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11
Q

TARGET COSTING

  • Can only be used in situations where there is sufficient info available about the market for the product or service.
  • It must be possible to link selling prices with market share.
  • Org must also have a specific target for contribution or profit as a % of sales
  • Can be used with ABC costing. Required cost reductions would be concentrated on the Activities most used by the product in question. This method should result in real cost savings for that product. (In contrast charging OHs to products using apportionment and absorption does not give a realistic view of how the costs (and therefore reductions) relate to a particular product.

Steps are..

A
  1. Decide desired MARKET SHARE and PROFIT level.
  2. Estimate target SELLING PRICE at which product would be expected to achieve desired market share.
  3. Subtract the organisations required level of profit from the target selling price to gice TARGET COST
  4. Compare actual costs with target. VA / VE may be used.
  5. If costs cannot be reduced to target level without affecting quality then product is not VIABLE at the chosen selling price and profit level.
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12
Q

Advantages of TARGET COSTING

A

To producer:

  • Improved sales volumes and market share through competitive pricing.
  • Good relationships with customers through consultation, team based approach
  • Achievement of planned level of profit
  • More efficient use of resources
  • Improvments in production methods
  • Involvement all sections of org resulting in better coordination of functions.

To Customer:

  • The required product at the right price
  • More reliable service from the supplier resulting from better relationships.
  • Prices reduced without loss of quality
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13
Q

Target Costing and Value engineering in combo

VE is cearly a useful tool if target costng is being used

A

Success is achieved if

  • The product satisfies the user’s requirments
  • The selling price is at a level that custs will pay.
  • The SP attracts sufficient custs to achieve target MS
  • Costs are reduced to target so target profit is ach.
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14
Q

Quality and Total Quality Management

‘Total quality Management’ became popular in the 80s
Starts from understanding that the quality of a poduct or service can be defined as:
‘It’s fitness for the customer’s purpose’

Not necessarily expensive or needing skilled staff to produce. What is important is that it satisfys the customer. This means the product or service must:

A
  1. Be fit for the purpose for which it is purchased,
  2. Represent value for money to the customer.

with increased competition businesses need to pay more attention to customer requirement. Eg if similar product/price then quality of service becomes important eg. queue length at till.

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15
Q

Total Quality Management (TQM) means that quality management becomes the aim of every part of an organisation..

Basic principle is continuous improvement, in order to eliminate faulty work and prevent mistakes..

examples of costs ?

A
  1. Wastage of Materials
  2. Idle time
  3. Cost of reworking
  4. Loss of customer goodwill resulting in loss of sales
  5. Cost of replacements
  6. Cost of dealing with customer complaints

The concept of continuous imprvement ‘right first time’ will reduce these costs.
(Other costs will be incurred in quality management but the intention is that in the long term the organisation will benefit.)

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16
Q

Implementing TQM

A
  1. Must be philosophy of everone in org and apply to every activity incl Admin, Purchasing, Sales etc as well as Production.
  2. Training and motivating staff is essential so that an attitude of seeking improvment is encouraged.
    Everyone should be able to put forward ideas. Groups of employees may form ‘quality circles’ and have meetings to discuss ideas.
  3. Each person in an org has customers… may be internal. If the quality of the work for the next immediate user is monitored mistakes will be reduced throughout the organisation.
  4. Involveent of all staff means diff types of knowledge and skills are used. Eg engineering design, IT, materials handling, etc.
  5. pecialist consultants may also be needed
17
Q

The costs of quality are:

A
  1. Prevention costs
    Costs to prevent faulty output. eg training employees in QC.
  2. Appraisal costs:
    Costs of checking quality like inspection costs
  3. Internal failure costs:
    The costs of rectifying problems within the org eg. having to scrap sub-standard products
  4. External failure costs
    The costs incurred when sub-standard products reach the customer, including repairs and loss of goodwill.
18
Q

Benefits of TQM

Irgs which develop a culture of TQM and CI expect that the costs will be outweighed by the benefits.

Benefits include?

A
  1. Reduction of Internal failure costs
  2. Reduction of External failure costs
  3. Improvd reputation and goodwill of customers.
  4. Increased sales
  5. Better motivated staff due to increased job satisfaction.
  6. Reduction in staffing costs in some areas (typically in middle management as senior management develops closer links to the operational workforce)
  7. Improve ethical standards or behaviour.
19
Q

Cost of Quality example

A

Osborne TOGS

Current: Product var cost £48
No inspection of fabric before production

COSTS of QUALITY and TYPES of COST
Inspection finds 20 to scrap:
cost 20*48 - Type - internal failure

Inspection finds further 100 to discount as seconds.
cost 100*15 - Type: internal failure

Further 40 returned and discounted
cost 40*15 - External failure
cost ??? goodwill/future orders - Type: External failure

IMPROVEMENTS and TYPE:
1. Inspect fabric on receipt. - Type: Appraisal Cost
2. Improve inspection of FG - Type appraisal cost
This would not reduce no. of faulty goods but would avoid the £??? cost of lost goodwill/future custom

20
Q

LIFE CYCLE COSTING

The lifecycle of a product is a sequence of stages through which it passes, from the start of its development to the point at which it is no longer sold or supported by Customer services

What are the stages?

(Can also apply to services)

A
  1. Development
  2. Launch
  3. Growth
  4. Maturity
  5. Decline
21
Q

LIFE CYCLE COSTING

LCC involves considering costs for the whole life cycle instead of the usual short time periods. Same for LC Budgeting … plan for whole cycle.

TARGET Selling prices and target costs may result from a planning process covering the life cycle of the product.

During the LC costs are accumulated in: ?

A
  1. R&D and design
  2. Production
  3. S&D
  4. Customer services

For many products the Production cost is a small proportion of the total.

R&D / Design may build up a large part of the costs. (Cars; software; medicines)
In some cases heavy costs are at the end (Decommissioning powerstation, oilrig)

22
Q

LIFE CYCLE COSTING

Interdependence:

(Main argument in favour of looking at total cost of all stages, rather than just production)

A

EG. Money spent on Value Engineering (VE) at design stage can reduce production, marketing and customer service costs.

23
Q

LIFE CYCLE COSTING

Pricing Decisions 1:

A

Demand will vary over life cyce.

Total Rev must cover Total LC Costs.

Forecasts of sales demand at different possible SPs and expected costs for several years in advance are ecessary for carrying out calculations to decide best SP.

Chosen SP together with requuired profit % may be used for ‘Target Costing’

On the other side, LC budget calculations may show product will not be profitable and therefore expensive R&D should not be carried out.

24
Q

LIFE CYCLE COSTING

Pricing Decisions 2

A

Alongside pricing decisions Economies of Scale need considered (low price : high sales).
High sales vol means Fixed costs being shared over greater number of units and sometimes var costs can be reduced by bulk discounts.

Also consider:
Learning effect
Mechanisation - depends on volume

Proportion of costs that are Fixed and Variable will change over the Product Life cycle. (Lots of fixed at beginning)

25
Q

LIFE CYCLE COSTING

Pricing Decisions 3.

A

If Life cycle costing and budgeting is used accounting systems must be designed to collect relevant information.

*Must be separate for each product**

  1. R&D and Design
  2. Production
  3. S&D
  4. Customer services

ABC costing is likely to be most appropriate.
It can be seen that the 4 stages represent groups of activities.Each could e broken down into a number of seperated Activities each with appropriate cost driver. A partucular product could then be charged for it’s usage of each activity.

Once life cycle is completed compare actial with budget to obtain info to help with future planning & decision making

26
Q

LIFE CYCLE COSTING and DISCOUNTED CASH FLOW

When we use DCF to make decisions we are usually making comparions between 2 situations. In order to make valid comparisons we must bring the appropriate cost figures into our calculations.

These are often called ‘Relevant Costs’
Remember they are:
‘Future Incremental Cash Flows’

This means:

A

The costs are:

  1. FUTURE
    Not costs that have already been incurred and cannot be changed by our decision (Sunk costs)
  2. INCREMENTAL
    They are just the Extra costs or savings resulting from the decision
  3. CASH FLOWS
    Always ignore non-cash items like depreciation

(NB not 100% clear here because I think have seen example which uses the change in depreciation)

27
Q

Life Cycle Costing and Discounted Cash Flows

Using in decision making 2 ways

A

Might just use one DCF calculation to make a decision.
- Often situations when deciding to do or not do something.

Alternatively might use two DCF calculations.
- Useful if want to compare doing something in one of two ways.

28
Q

Cost of Quality - what category?

Investigation of faults

A

Internal Failure Cost

29
Q

Cost of Quality - what category?

Training Production staff new machinery

A

Prevention Cost

30
Q

Cost of Quality - what category?

Loss of customer loyalty due to poor quality goods

A

External Failure Cost

31
Q

Cost of Quality - what category?

Cost resulting from loss of production due to machine breakdown

A

Internal Failure cost

32
Q

Cost of Quality - what category?

Inspection of Raw Materials when received

A

Appraisal Cost

not prevention

33
Q

Cost of Quality - what category?

The cost of scrapping output

A

Internal Failure Cost

34
Q

Cost of Quality - what category?

Claims from customers relating to defective products

A

External failure cost

35
Q

Cost of Quality - what category?

From Osborne examples a rule seems to be that if something is RE-tested or RE-inspected …

A

…Its not an Appraisal Cost but a Failure caost

4.2 Management Accounting: Decision & Control (15 decks)

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