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.
