A: costing information Flashcards
What are the main elements of MA?
planning
control
decision making
What are the six suggested changes the cost transformation model recommend to maintain cost competitiveness?
creating a COST CONSCIOUS culture:cost leader so cost is lower than rivals, staff motivated to reduce costs
- understanding COST DRIVERs: investigating variables, reduction
- managing the RISKs that come from a cost conscious culture:eg reduction in quality or customer satisfaction, management should manage risks
- ensuring products and services are PROFITABLE:important that every product/service makes a positive contribution to overall organisational profits
- MAXIMISING VALUE from new products: potential probability predetermined, flexible production to adapt to needs
- consider the environmental IMPACT of products-negative impacts can add costs, damage reputation and sales
RIPVCC
What is a cost object?
a product, service, centre, activity, customer or distribution channel in relation to which costs are ascertained
e.g cost units or cost centres
What are the different types of classifying costs according to their nature?
direct costs:can be traced to cost object (prime cost)
vs
indirect costs:can’t be directly traced to a single cost e.g overheads
product costs:costs only incurred if production takes place
vs
period costs:incurred due to passage of time
What is the aim of traditional absorption costing?
determine the full production cost per unit
-focus on production costs only
How is total cost calculated?
production costs + non-production costs
How is absorption rate calculated? (OAR)
total budgeted overhead costs (allocated and apportioned) divided by budgeted production volume
=total overheads/production volume
How is over-or-under absorption calculated?
(budgeted overhead rate per unit x actual units) - actual overheads incurred
difference between premeditated and actual
What are the advantages of absorption costing?
- take fixed production costs into account which are excluded from product costs usually
- follows matching/ACCRUAL concept as inv items are matched against sales value when items are sold
- fixed production overheads should be included in financial statements
- analysis of over/under absorbed overheads may be useful in identifying inefficient utilisation of production resources
- argument that in the longer term, all costs are variable and it is appropriate to try to identify overhead costs with the products or services that cause them
What are the disadvantages of absorption costing?
- apportionment and absorption of overhead costs is arbitrary
- profits vary with changes in production volume
What is marginal costing?
costing method which changes products or services with variable costs alone
-fixed costs are treated as period costs and are written off in total against contribution of the period
What is marginal cost?
extra cost arising as a result of producing one more unit or the cost saved as a result of producing one less unit
-good way to provide short term decision making activity
What are the advantages of marginal costing?
- simpler costing system as costs don’t need to be apportioned and absorbed overhead
- marginal costing reflects the behaviour of costs in relation to activity, useful in SR decision making
What are the disadvantages of marginal costing?
- when FIXED costs are HIGH relative to variable costs and when overheads are high relative to direct costs, marginal cost of production and sales is only a small proportion of total costs. not useful for LT decision making
- treatment of direct labour costs as a variable cost item is often UNREALISTIC
Profit differences in short term vs long term?
short term:depends on inv increase or reduction. Marginal and absorption systems give same profit when there is no change in inventories
long term: total reported profit will be the same whichever method is used
What are the 4 key factors of pricing decisions?
costs-ensure price is sufficient to cover the cost of producing the product or providing the service
competitors-monitor, set in line with goals
customers-value placed on product, price they are willing to pay
corporate objectives-link to strategic decisions
4Cs
What is cost-plus pricing?
adding a markup to the cost of the product or service in order to arrive at selling price
What factors can affect the mark-up pricing?
- amount customers are willing to pay
- level of competition i.e substitutes, competitors
- organisation’s objectives
- may be fixed mark up for company can make a specific return
Advantages of using full cost plus pricing?
- required profit will be made if budgeted sales volumes are achieved
- particularly useful method in CONTRACT COSTING industries such as building where a few large individual contracts can consume majority of the annual fixed costs and the fixed costs are low in relation to the variable costs
- Assuming the organisation knows its cost structures, full cost-plus is QUICK & CHEAP to employ, saving management time
- Full cost-plus pricing can be useful in JUSTIFYING selling prices to customers; if costs can be shown to have increase, this strengthens the case for an increase in the selling price
Problems with full cost plus pricing?
- Issues with SELECTION of ‘suitable’ basis on which to charge fixed costs to individual products or services
- Prices set on the basis of NORMAL VOLUME, and actual volume turns out to be considerable lower, overheads will not be fully recovered from sales and predicted profits may not be attainable
- Mark up can be very ARBITRARY and may not properly account for factors such as competition levels, how much customers are willing to pay etc
Benefits of using marginal cost pricing?
- Just as accurate as total cost-plus pricing
- Knowledge of marginal cost gives management the option of pricing below total cost when times are bad, to fill total capacity
- Particularly useful in pricing specific one-off contracts because it only account for costs which are likely to change because of the new contract
- recognises the existence of scarce or limiting resources
Problems of marginal cost pricing?
- Like any cost based pricing method, ignores EXTERNAL factors such as levels of competition, customer attitudes
- Mark-up becomes even MORE ARBITRARY than that used in full cost plus as now it must also include subjective element which allows for the selling price to cover fixed costs
How is profit mark-up calculated?
targeted return on investment in the product/budgeted level of production
What impact does modern production methods have on production costs?
Automation means:
-more indirect overheads (insurance, dep)
-less direct labour costs
-absoption rate is not volume based anymore (AC)
=> traditional methods of costing are less useful
Why are traditional methods of costing less useful?
- indirect OH is largest cost of production in one figure that lacks detail and is not useful in management
- management does not know what the components are of the largest production cost (indirect OHs) they cannot implement proper cost control
- costs are often allocated between products on the basis of direct labour hours-despite the fact that direct labour becomes smaller proportion of costs and doesn’t fairly reflect the relationship between the products and the indirect overheads
- because costs are inappropriately or inaccurately shared between products it means that the total production cost can be wrong which can lead to poor pricing and production decisions
Problems with traditional absorption costing?
cannot calculate a ‘true’ product cost that has any valid meaning
What is activity based costing?
- alternative approach to product costing
- rather than absorbing OHs on a production volume basis, it firstly allocates them to cost pools before absorbing them into units using cost drivers
- originally developed for manufacturing companies
What is a cost pool?
an activity that consumes resources and for which overhead costs are identified and allocated.
-each cost pool has a cost driver
What is a cost driver?
unit of activity that consumes resources
-factor influencing level of cost
How to identify cost drivers?
must be:
- relevant:connection between the cost driver and consumption of resources for the activity
- easy to measure:measuring the units of cost driver and identifying the products or services to which they relate needs to be a fairly easy and straightforward process
What are the 3 types of cost drivers?
TRANSACTION drivers:cost of an activity is affected by the number of times a particular action is undertaken
DURATION driver:cost of activity is not much affected by the number of times the action is taken
INTENSITY driver: efforts would be directed at determining what resources were used in the making of a product/service
What are the 5 steps to calculating an ABC?
- Group production OHs into activities, according to how they re driven
- Identify cost drivers for each activity i.e what causes these activity costs to be incurred
- Calculate a cost driver rate for each activity
- Absorb the activity costs into the product
- Calculate the full production cost and/or P&L
When is ABC appropriate?
- indirect costs are high relative to direct costs
- products or services are complex
- products or services are tailored to customer specifications
- come products or services are sold in large numbers but others are sold in small numbers
What is the difference in ABC and traditional costing dependent on?
the proportion of overhead costs that falls into each of the four categories
- if OH is primarily unit or facility level, cost will be similar
- if OH cost falls into batch level or product level, difference would be significant
What is the CIMA definition of ABC?
‘an approach to the costing and monitoring of activities which involves
-tracing resource consumption and costing final outputs.
Resources are assigned to activities, and activities to cost objects based on consumption estimates.
The latter utilise cost drivers to attach activity costs to outputs’
What are the advantages of ABC?
- more accuracy
- better cost understanding
- fairer allocation of costs
- better cost control
- can be used in complex situations
- can be applied beyond production
- can be used in service industries
What are the disadvantages of ABC?
- not always relevant
- still need arbitrary cost allocations
- need to choose appropriate drivers and activities
- complex
- expensive to operate
What are the implications of switching to ABC?
- pricing can be based on more realistic cost data:better pricing decisions
- sales strategy can be more soundly based:better at targeting
- improved decision making:research, production and sales effort can be directed to those offering the highest sales margin
- performance management can be improved:enhanced due to focus and can be used as basis of budgeting and longer term forward planning of oh costs
What is continuous costing?
- where a series of similar products or services are produced i.e costs are averaged over the number of products or services
e. g joint product costing
What is a joint product?
products produced at same time in same process before being separated for sale or further use
- main products
e. g carbonated drinks using common start before syrup, sweetener and malt added
What costs make up joint costs?
total of the raw material, labour and OH costs incurred up to the initial split-off point
What is a by-product?
incidental to main product, low saleable value
What are the 3 methods used to apportion joint costs?
- physical measurement
- market value at point of separation
- net realisable value
What is physical measurement of joint products?
costs apportioned to units of output of each product
What is market value of joint products?
costs apportioned on the basis of the market value of each joint product at the point of separation
What is the NRV of joint products?
further costs after separation are deducted from the market value before costs are apportioned
What is throughput accounting and what is it based on?
premise: managers should aim to increase throughout while simultaneously reducing inventory and operational expense
concepts: throughput, inventory and operating expenses
What is conversion costs?
non-material costs
-direct labour, rent, equipment depreciation
What are the operating expenses of throughput?
all the money a business spends to produce the throughput
i. e converting inventory into throughput
- not fixed costs, semi-variable
What makes throughput costing different to traditional costing (absorption and marginal) and ABC?
no attempt to charge operating expenses to products
-contribution from whole product is calculated
What is the aim of throughput accounting?
to maximise throughput contribution earned
- operating expenses are fixed annually
- to identify bottlenecks and improve performance
What are the 5 steps to resolving the bottleneck problem?
- identify the bottleneck constraint
- calculate the throughout contribution per unit for each product
- calculate the throughput contribution per unit for each bottleneck resource for each product
- rank the products in order of the throughput contribution per unit of the bottleneck resource
- allocate resources using this ranking and answer the question
How is return per factory hour calculated?
TP contribution/product’s time on the bottleneck resource
How is cost per factory hour calculated?
total factory cost/total time on the bottleneck resource
How is throughput accounting ratio calculated?
return per factory hour/cost per factory hour
What does the cost per factory show?
the cost of operating the factory in terms of OHs, labour costs etc
What does the TPAR show?
return from product against cost of running factory
- aim for more than one
- however can’t focus on return of one product vs cost of factory as a whole
What are the criticisms of TP accounting?
- concentrates on short term:resources and operating expenses are fixed in ST
- more difficult to apply TPA to longer term where costs are variable
- more suitable for profit and performance in short term
- ABC more appropriate for measuring and controlling performance from a longer-term perspective
What is a digital product?
product that is stored, delivered and consumed in an electronic format
- games, apps, music
- could be made of a bundle of features, which need to be costed separately
Why are digital products difficult to cost?
- 0 marginal costs and most costs are likely fixed:expensive to make but cheap to reproduce
- no standard time or cost attributed to product
- difficult to determine OH divers
- timing of costs hard to pinpoint, can span over many acc periods
- lifespan of products can vary:hard to determine cost over lifespan
- features/functions might be shared amongst a number of products
What is the cost structure of digital media?
- high fixed, upfront (sunk)
- low marginal, cheap to reproduce
What are some typical costs and cost patterns of digital products?
- staff costs:project/product specific, upfront
- infrastructure, platform & payment types:where app is hosted and cost of that and cost of collecting payment
- functionality:reusable, shared
- design & development:shareable design elements
- marketing:fixed market budget, pre-launch
- IT support services & testing:for infrastructure, updates to API and fix bugs, post launch costs
- royalty and license costs:hard to budget as sales dependent, license fees are fixed
- inventory costs:no inv, avoids need for holding and valuation of inv
- administrative services:good dashboard to effectively administer app, expensive to implement
Why is the CBA for launching new products complicated?
- timing and FREQUENCY of costs will be difficult to estimate:some upfront, some ongoing and some one-off
- some costs for SHARED functions e.g payments, digital images
- determining BENEFITS will be complicated due to unknown lifespan of the product
What is digital costing?
systems that use product designs and specifications alongside web connections to markets and suppliers to provide real time cost information on components and product parts
- used for products with large amount of parts
- more details on marginal, total and average product costs
Features of digital costing systems?
- gather info in real time from suppliers and marketplaces
- built in analytics and intelligence capabilities
- more advanced systems can make suggestions on buying behaviour
- cope with hundreds of purchasing decisions at one time
- more detailed breakdown of OHs and personalised cost drivers
- can make granular decisions
Benefits of digital costing systems?
- automatic, quick and cheap comparisons lead to cost savings
- quicker lead times and low operational costs
- no human labour to calculate
- better understanding of flexibility and nature of costs
- use suggestions to achieve improves, cheaper and more efficient operations
- easy to used and quickly understood by users
- better knowledge of drivers and absorption of costs
- detailed breakdowns help cost control and pricing decisions
- better customer profitability evaluation
What is standard costing?
compare predetermined costs of products/services to actual costs incurred
What is a standard cost?
the predetermined cost of a product/service
-based on either absorption costing or marginal costing
What is a standard?
‘benchmark measurement of resource usage or revenue or profit generation, set in defined conditions’
What are the 4 main types of standard?
ideal: 100% perfect condition 100% of the time, no waste
basic: long term standards, unchanged over years, shows trends
current: based on current working conditions, useful when anomalies arise
attainable: based on efficient but not perfect operating conditions, includes allowances, most popular
Which standards motivate workers and which do not?
ideal: demotivate, standards may seem too perfect
basic: demotivate if they become too easy to achieve, boring
current: demotivate, not challenging as based on current
attainable: motivate as it provides realistic target
What four structural changes make up various phases of the business?
Entrepreneurial structure
Functional structure
Divisional structure
Matrix structure
What does the entrepreneurial structure and who makes all the decisions?
Built around on a data manager
All key decisions made by a strategic leader who is often the owner/entrepreneur
What are the advantages and disadvantages of the entrepreneurial structure?
Advs – quick decision-making – responsive to market – good control – close bond to work
Disads
-Lack of career structure
– dependent on owner capabilities
– cannot cope with diversification/
What is the functional structure?
Who is the most appropriate for?
Common folks that have outgrown the entrepreneurial structure, therefore need to group together employees to undertake similar tasks into departments
Board of directors and below them different departments
Most appropriate to smaller companies with a few products and locations which exist in a relatively stable environment
What are some advantages and disadvantages of the functional structure?
Advantages – economies of scale thanks – standardisation/efficiency -specialist more comfortable – career opportunities
Disadvantages -Empire building i.e. managers working on their own interest – Slow to adapt market changes – conflict between functions – cannot cope with diversification
What is the divisional structure?
Who takes leadership?
Because when an organisation is split into different divisions – each one autonomously overseeing a product line/brand or geographical location
Board of directors leading divisions which lead to different functions
The general managers take responsibility for their own resources
What are some advantages and disadvantages of the divisional structure?
Advantages
– enables product or geographical growth
– clear responsibility for divisions
– training of general managers
– easily adapted for further diversification
– top management free to concentrate on strategic matters
Disadvantages – duplication of business functions – lack of goal congruence – potential loss of control – allocation of central costs can be a problem - specialists may feel isolated
What is the matrix structure?
Which organisations are usually use it
Structure aims to combine the benefits of a divisional structure and a functional structure
Senior management leads the functional structure
Who lead the different departments for different products
Found in multiproduct and multifunctional organisations with significant interrelationships and interdependencies
What are the advantages and disadvantages of the matrix structure?
Advantages
– same advantages as functional and divisional structures
– flexibility to focus on customers, projects as less rigid than div structure
– encourages teamwork and the exchange of opinions and expertise
Disadvantages
– dual command
– dilution of functional authority I.e who to report to
– time-consuming meetings
What factors affect the amount of (de)centralisation?
Management style – how much control management want to retain
Ability of management/employees – more able, greater level of decentralisation
Geographical spread – central control more difficult
Size of organisation -small organisations can retain the level of central control easily
AdVantages of decentralisation
Senior management free to concentrate on strategy
Better local decisions due to local expertise
Better motivation due to increased empowerment of employees and a more defined career path
Quicker responses/flexibility due to reduce bureaucracy and increased autonomy
Disadvantages of deCentralisation
Loss of control by senior management and lack of standardisation
Dysfunctional decisions due to a lack of goal congruence
Poor decisions made by an experienced managers
,
Training costs
Duplication of roles within organisation
Extra costs in obtaining information since it stored in several locations
What are the disadvantages of tall organisations?
More bureaucratic
Takes longer to make decisions
What are the disadvantages of a flat organisation?
Weaker control
Fewer chances for employees to progress
What is RPA and how is it used in the finance function?
RPA: software based approach that replicates user actions to reduce human intervention in repetitive tasks
Previously used in manufacturing
Now used for data entry, formatting, recs
Finance can refocus on value creation
How has the shape of the finance function changed over the past few decades?
Hierarchical triangle
- traditional shape
- broad base of finance workers
- reporting up to narrower levels
Segregated triangle
- last 20 years
- globalisation/tech meant use of SSC
- bottom half represents service carried out at SSC
Diamond shape
- today’s digital age
- eroded base due to automation
What is outsourcing?
Contracting out aspects of the work of the organisation previously done in house, to specialist providers
Often non-core service outsourced e.g HR, cleaning, catering
What is a Shared service centre I.e internal outsourcing ?
Established for a particular activity of the organisation
A usually large, multinational organisation with processing centres in several countries chooses to consolidate these activities at one site
What are the advantages of outsourcing?
Cost advantages Quality advantages Supplier has specialist knowledge Can focus on core business activities exercise buying power Greater flexibility to switch supplier
Disadvantages of outsourcing?
Cost issues Loss of core competence Transaction costs Finality of decision Risk of loss of confidential info Supplier continuity Agreeing/negotiating terms Damaging to morale if redundancies happen
What is a Service level agreement?
An SLA is a negotiated agreement between the supplier and customer and is a legal agreement regarding level of service
Can help control outsourcing disadvantages
What factors should the SLA include?
A detailed explanation of the service supplies offering
Targets/benchmarks and consequences of failing them
Expected response time to queries
Expected time to recover operations in the event of a disaster
Procedure for dealing with complaints
Information and reporting procedures
Procedures for cancelling the contract
Are the three main types of transaction costs?
Search and information costs
– e.g. cost of determining which supply is cheapest
Bargaining costs
– cost of agreeing on acceptable SLA
Policing and enforcement costs
– cost of making sure the other party stick to the terms of the condition
What are the two methods of obtaining control over resources that organisations need to choose between?
What is the decision based on a comparison of?
The ownership of assets i.e. hierarchy solutions
buying in the use of assets i.e. the market solution
Make vs buy
The decision is based on a comparison of the transaction costs of the two approaches
What is asset specificity?
An asset is said to be transaction specific if its value to a given transaction is greater than its value to its best alternative use
The greater the gap, the greater the degree of specificity
I.e. the degree to which it can be adapted for other purposes
What are some benefits of outsourcing the finance functions activities?
Cost reduction:Economies of scale
Radical transformation: allowing shift of internal resources
Access to superior capabilities, expertise and resources
Business partnering: balance can focus on business partnering and decision-making
What are some drawbacks of outsourcing the finance functions activities?
Loss of control Managing the outsourced services Cause disruption Risk of intellectual property theft and data breaches Erosion of internal knowledge and skills
What are the 3 different levels of decision making in a business?
Strategic:long term, complex, strategic direction
Tactical:medium term, involve strategic plan
Operational:day to day, junior mgmt level
What technologies are the 3 main sources of big data?
internet, mobile technologies and IoT
-facilitate software, apps and websites that generate vast amounts of data each day
What are the benefits of collecting data for decision makers?
Enhanced data transparency-improved methods of finding meaning
Enhanced performance-live monitoring, summarised
Market segmentation and customisation-new segments identified and targeted
Improved decision making-better insight so can attract
New products and services-understanding drivers that prompt purchase
Operational gains-insight into business operations
Data use in pricing?
pricing is a critical decision
- too low and potential revenue is missed out
- too high and volumes are too low
- live market data allows accurate benchmark prices and right price point i.e optimal price point
Data use in products?
data used to analyse market and monitor what trends are selling, shorter lead times allow products to be sourced almost immediately
Data use in targeted marketing?
by analysing market trends and seeing products that are on trend/sold out elsewhere, business can push specific items to front page and target specific customers
What are some features of a DAM system?
- database designed to manage digital assets
- single central location for storage and access
- facilitated by cloud based software
- access levels built into system
- assets categorised by format with metadata describing content to facilitate search functionality
What are some benefits of a DAM system?
- strengthen inter-team relos by sharing assets
- improve customer and partner service through easy asset sharing
- standardised approach to metadata to eliminate time waste and duplication
- cost and space saving
- version control, watermarking and embargo dates increase security
- valuable data provided on usage and access to assets
- copyrighting and contact info automatically attached to every digital asset held
What type of feedback and data needs would a sales stakeholder need?
feedback: selling prices, sales volumes, customer feedback
data: live data, metrics on key customers about products and services
What type of feedback and data would a production stakeholder need?
feedback:order levels, lead times, approved suppliers, unit cost info
data needs:support collecting cost data to enable more accurate understanding of costs and drivers, live systems such as smart shelves that automatically restock
What is ETL?
Extraction, transformation and loading are the three stages in transferring data (harvesting, transforming and uploading)
combined into a single tool to automatically bring data from various sources into a destination system
What is a Data Warehouse?
store of data that has been loaded in the ETL process
held in a systematic and logical way ready for further interrogation and analysis
What is business intelligence?
tech driven process of analysing business data to create insightful and actionable info to help improve the operations or products of a business
What are some advantages of data modelling?
- foundation of handling data
- enforces business rules and helps meet regulatory compliance
- consistency of naming conventions and values underpin a good database
- quality of data enhanced
What is data manipulation?
changing data to make it easier to read
involves adding, deleting, querying and modifying data in a data-store using a data manipulation language (DML)
What must a data strategy be able to cope with? (4 Vs of big data)
Volume
Velocity
Variety
Veracity-reliability
How does data visualisation facilitate the presentation of key data?
Information:providing info is core finance responsibility
Users:many users, highlights key pieces
Simplicity:intuitive and practical presentation
Why are management accountant uniquely positioned to act as the interface between business functions and data specialists?
- all activities have a financial consequence so finance function is central to business
- info produced is already trusted and audited
- mgmt accounting provides basis of performance mgmt across business
- finance based on rational and measurable info with credible and ethical guidelines to underpin decision making
How are excess overheads treated?
as an expense
-fixed prod overheads should be based on normal capacity of the business
What are the 2 approximations for cost?
FIFO:valued at latest purchases’ price i.e old sold first
AVCO:weighted average of cost of purchases in period by number of units purchased in period (better for continuous goods e.g oil)
