A. Managing the costs of creating value Flashcards
What is the CGMA cost transformation model designed to help businesses achieve and maintain?
cost competetiveness
What are the 6 suggested changes in the CGMA cost transformation model?
- Endangering a cost conscious culture
- Managing the risks that come from a cost conscious culture
- Connecting products with profitability
- Generating maximum value through new products
- Incorporating sustainability to optimise profits
- Understanding cost drivers: Cost accounting systems and processes
What is ‘Engendering a cost conscious culture’?
- aim to be cost leader: have lower costs than rivals and set competitive benchmark
- everyone should be motivated and enabled to reduce costs however possible
- technology can play a key role in reducing costs
What changes take place in ‘Managing the risks that come from a cost conscious culture’?
e.g reducing costs may result in reduce quality and customer satisfaction
org should have clear risk management process in place to identify, assess and manage such risks
What changes take place in ‘Connecting products with profitability’?
- important that every product/service makes a positive contribution to overall organisational profits
- will involve understanding what dices costs for each individual product and allocating shared costs to products as accurately as possible
What changes take place in ‘Generating maximum value through new products’?
- assess potential profitability before production begins
- during product design process, product/service should be made to be as flexible as possible so that it appeals or can adapt to as many customer segments as possible
What changes take place in ‘Incorporating sustainability to optimise profits’?
- consider environmental impact of products
- negative impacts can add costs as well as damage reputation and sales
What changes take place in ‘Understanding cost drivers’?
investigating costs to determine why they change and how different variable impact on the cost
plan should be implemented to reduce the drivers of costs as well as the costs themselves
In traditional absorption costing, how are overheads charged?
charged per product
OAR = OH/volume of activity
Why are full product costs, using financial accounting principles, not suitable for decision making?
need to base decisions on decision-relevant approach incorporating relevant/incremental cash flows
What is Activity Based Costing?
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 some volume related reources?
direct labour
materials
energy
machine related costs
what non-volume related activities?
materials handling material procurement set ups production scheduling first-item inspection activities
why do traditional product cost systems report distorted product costs?
they assume that products consume all activities in proportion to their production volumes
what is the 3 step philosophy developed by Cooper and Kaplan for the ABC procedure?
- support activities cause cost
- the products consume these activities
- costs should, therefore, be charges on the basis of consumption of the activities
What are is the ABC method in 5 steps?
1: Identify activities (20/80 rule)
2: Estimate cost pools
3. Identify cost drivers
4. Calculate cost driver rate
5. Charge overhead to products
What is a cost pool?
costs associated with performing each activity
what are cost drivers?
factors that influence the cost pools
how is the cost driver rate calculated?
cost driver rate = cost pool / level of cost drivers
when is ABC analysis likely to differ from AB, thus providing favourable conditions for ABC?
- when productions overheads are high relative to direct costs, particularly direct labour
- where there is great diversity in product range
- where there is considerable diversity of overhead resource input to products
- when consumption of overhead resources is not driven primarily by volume
What are tje tiers of the ABC hierarchy?
unit level activities
batch level activities
product sustaining activities
facility sustaining activities
what is a unit level activity?
performed each time a unit of product is produced
consumed in direct proportion to the number of units produced
- direct labour
- direct materials
- energy costs
- machine maintenance
what are batch related acitivites?
performed each time a batch is produced
cost varies with number of batches made
what is a product-sustaining activity?
performed to support different products in the product line
performed to enable different products to be produced and sold, but the resources consumed are independent of the number of units included in the purchase order
- product deign costs
- advertising costs