Chapter 1 - Specialist Cost & Management Accounting Techniques Flashcards
What is the calculation for overhead absorption rate?
Budgeted overhead / Budgeted activity level
What is traditional absorption costing?
Where the overheads of a particular cost centre are all absorbed on the same basis
What is activity based costing?
The overheads of a particular cost centre are split into their component parts or cost pools and then absorbed using a number of different absorption bases or cost drivers.
What are cost drivers?
Factors which cause the overheads to rise or fall
When does ABC give more accurate product costs?
- overheads are a large proportion of product costs
- overheads are caused by a wide range of diverse and complex processes
- products are tailor made to individual customer needs.
What may the organisation decide to do if the implications of switching to ABC result in a significant change in the cost per unit?
- Charge more for some products or less for others
- Stop producing some products as they are no longer profitable at market price
- Change it’s marketing strategy to push a more profitable product
What are the problems with ABC?
- Lack of understanding
- Difficulty in identifying appropriate cost drivers
- Lack of appropriate accounting records
What are the steps for ABC analysis?
- Analyse overhead costs into cost pools
- Establish cost driver basis for each cost pools
- Work out the OAR for each cost drivers
- Use the OAR calculated to absorb costs from each pool into cost units to work out the overhead cost per unit
What is the definition of target costing?
A market driven approach to pricing that seeks to derive an acceptable level of costs based on a selling price that have been researched in the external market.
How do you derive a target cost?
- Define the product specification
- Complete market research
- Deduct a reasonable profit margin (SP-PM=TC)
- Forecast the costs
- FC-TC= Cost Gap
How do you close the target cost gap?
- Redesign the product or service
- Redesign the production process
- Renegotiate with suppliers
- Improve staff efficiencies through training
- Use cheaper staff
What are the benefits of target costing?
- Businesses will have an external focus to its product development, reducing the time to market
- Useful where the business does not dominate the market and competition means it is forced to accept the selling price
- Product design will include features that customers value
- Force the business to examine its internal processes
- Cost control will begin earlier in the products life cycle
What is the anagram for the characteristics of service industries?
SHIP
What are the characteristics of service industries?
- Spontaneity (Consumed at the same time as they are made available)
- Heterogeneity/Variability (Difficult to be consistent and standardise services)
- Intangibility ( Cannot be physically touched)
- Perishability (Capacity cannot be stored for future use)
- No transfer of ownership takes place
- Relies heavily on staff
What are the difficulties of using target costing in service industries?
- Difficulties to define exactly the services being provided
- Hard to determine the sales volume and the price that customers will be willing to pay
- Costs are almost all labour, this will be hard to cut
- Services will be tailored to suit the particular customers requirements
What is life cycle costing?
Tracing all costs and revenues to a product or service over its complete life cycle
What are the stages of the products life cycle?
- Research and development
- Introduction
- Growth
- Maturity
- Decline
What happens in the research and development stage of the product life cycle?
Market research, product design, testing, training, plant and equipment
What happens in the introduction stage of the products life cycle?
Marketing, advertising, promotion, production and distribution costs
What happens in the growth stage of the products life cycle?
Heavy advertising to drive market share, inventory costs, unit costs should start to fall through economies of scale, customer support costs will increase
What happens in the maturity stage of the products life cycle?
Advertising and marketing to maintain brand awareness, some discounts/promotions, unit costs should now be low and good profits generated. Will still have high customer service costs to try and keep ahead of competitors.
What happens in the decline stage of the life cycle?
Decommissioning costs and product retirement costs, equipment scrapping, final sales promotional costs
What are the benefits of life cycle costing?
- Better idea of profitability
- Better pricing strategy over the different stages of the life cycle
- Assists long-term planning
- Avoids focus on production costs only
What is throughput accounting?
It helps assess performance of internal functions/processes where there are limitations and efficient use of these scarce resources is considered important.
What is the theory of constraints?
It works on the principle that there will always be a function or resource in a business that is stopping the business from increasing returns.
What are Goldratt’s five focusing steps?
- Identify the bottle neck
- Decide how to exploit the systems bottlenecks
- Subordinate everything else to the decisions made in step 2
- Elevate the systems bottlenecks
- If a new constraint is broken in step 4, go back to step 3, but do not let inertia become the systems new bottleneck
What is the definition of throughput contribution?
Revenue less material purchases only
Labour is not a variable cost here!
What is the throughput accounting ratio?
Throughput contribution per time period / conversion cost per time period
E.g. (Sales revenue - materials)/(labour + overheads)
What does the throughput accounting ratio compare?
How fast you are generating money with how fast you are spending money.
What does it mean if the TPAR is greater than 1?
Money is being earned faster than being spent
How do you improve the TPAR?
- Reduce the bottleneck
- Increase the selling price
- Reduce the materials cost
- Reduce the conversion cost
What are the steps for tackling a TPAR question?
- Identify the limiting factor (bottleneck)
- Rank products according to throughput contribution per unit of bottleneck resource
- Identify optimum plan based on order of ranking until all the bottleneck is used up
What does environmental management accounting focus on?
Information required for decision making on environmental issues within an organisation
What is information on environmental costs used to help?
- Cost reduction and cost control schemes
- Pricing decisions
What does environmental cost management include?
- Identification (there are a range of cost definitions)
- Measurement (some costs may be hidden or difficult to separate)
- Control (this can only happen if costs have been correctly identified)
What are the environment cost classifications provided by the US Environment Protection Agency?
- Conventional costs
- Potentially hidden costs (hidden in general overheads)
- Contingent costs
- Image and relationship costs
What are conventional costs?
Raw materials and energy costs
What are contingent costs?
Future costs such as clean-up costs
What are image and relationship costs?
Costs of preparing environmental reports
What are the environmental cost classifications provided by the United Nations Division for Sustainable Development?
- Environmental protection costs (pollution prevention)
- Wasted material, capital and labour costs (product inefficiencies)
Which environmental costs do you need to consider controlling?
- Waste
- Water
- Energy
- Transport and travel
- Consumables and raw materials
What accountancy techniques can you use to identify, analyse and attempt to reduce environmental costs?
- Input/output analysis
- Flow cost accounting
- Environmental ABC
- Life cycle costing
What is input/output analysis?
All inputs into the process must be traced to outputs. (What goes in must come out)
What is flow cost accounting?
It monitors the flow of material through a business into three categories and aims to reduce the quantity of material in each category.
What are the categories for flow cost accounting?
- Material
- System and delivery
- Disposal
What is environmental ABC?
Identify drivers for environmental costs and distinguish between environment-related costs and environment-driven costs
