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PM > Chapter 4 - Advanced costing methods > Flashcards

Chapter 4 - Advanced costing methods Flashcards

1
Q

Give some reasons for the development of ABC.

A
  1. Size/proportion of overheads
  2. Modern manufacturing
  3. complexity/diversity
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2
Q

What are the stages of traditional costing (absorption costing)

A

Stage 1: Assigning costs using measures of service usage
Stage 2: Absorbing costs using a measure of volume

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3
Q

What are the stages of ABC

A

Stage 1: Identify the organisation’s major activities.
Stage 2: Identify cost drivers for each activity.
Stage 3: Calculate a cost driver rate (CDR) for each activity.
Stage 4: Absorb activity costs into products
Stage 5: Calculate the full production cost/unit and profit/(loss) (if required)

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4
Q

What are some advantages of ABC?

A

An understanding of what drives costs should improve cost control.
More accurate cost per unit = better pricing, cost control and decision making

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5
Q

What are some disadvantages of ABC?

A
  • Cost and time involved
  • Limited benefit if production o/h are minimal or mainly driven by level of production
  • difficult to identify cost pools and drivers
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6
Q

What are the main drivers for introducing ABC in the public sector?

A
  • Public responsibility
  • Public accountability
  • Resource allocation within organizations
  • Helping managers to manage
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7
Q

What does ABC allow for public responsibility?

A

Allows a better understanding of what is driving overhead costs, allowing tighter control

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8
Q

What is total quality management?

A

a management technique which seeks to ensure that goods are produced, and services supplied, of the highest quality.

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9
Q

What are some fundamental features of TQM?

A
  • prevention of errors
  • importance of total quality in the design of systems and products
  • real participation of all employees
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10
Q

What is Just-in-time?

A

a pull-based system of production, pulling work through the system in response to customer demand.
Goods only produced when needed, eliminating large stocks

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11
Q

What are some key characteristics of JIT?

A

-High quality
- Speed
- reliability
- Flexibility
- low costs

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12
Q

What are some key features of companies operating JIT and TQM?

A
  • high level of automation
  • high levels of o/h and low levels of direct labour costs
  • customised products produced in small batches
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13
Q

What is throughput accounting?

A

aims to make the best use of a scarce resource.

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14
Q

What is throughput accounting based on?

A
  • the only totally variable cost in the short-term is the purchase cost of raw materials that are bought from external suppliers
  • Direct labour not variable in the short term
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15
Q

Throughput is effectively the same as what?

A

contribution

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16
Q

What is the calculation for throughput?

A

sales revenue - direct material cost

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17
Q

What is the aim of throughput?

A

to maximise this measure of profitability, whilst simultaneously reducing operating expenses and inventory.

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18
Q

How is the goal of throughput achieved?

A

by determining what factors prevent the throughput from being higher.

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19
Q

What is the constraint called in throughput accounting?

A

a bottleneck

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20
Q

What are the steps in the theory of constraints?

A

Step 1: Identify the system’s bottlenecks
Step 2: Identify how to exploit the bottlenecks
Step 3: Subordinate everything else to the decision in Step 2
Step 4: Elevate the system’s bottlenecks
Step 5: If in previous steps, a bottleneck has been broken go back to step 1

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21
Q

What is the throughput (return) per factory hour?

A

Throughput per unit/ product’s time on the bottleneck resource

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22
Q

What is the cost per factory hour?

A

total factory cost/ total bottleneck resource time available

23
Q

What is the throughput accounting ratio (TPAR)

A

Return per factory hr / cost per factory hr

24
Q

What would a TPAR of <1 suggest?

A

that throughput is insufficient to cover operating costs, resulting in a loss

25
Q

What would a TPAR of >1 suggest?

A

that throughput exceeds operating costs so the product should make a profit.

26
Q

Give some suggestions on how to increase the TPAR?

A
  • increase the sales price for each unit sold
  • reduce material costs per unit
  • reduce operating expenses
  • improve productivity of bottleneck
27
Q

What are the steps for maximising profit with a multi-product decision making?

A

Step 1: Identify the bottleneck constraint
Step 2: Calculate the throughput per unit for each product
Step 3: calculate the throughput per unit of the bottleneck resource for each product
Step 4: Rank the products in order of the throughput per unit of the bottleneck resource.
Step 5: Allocate resources using this ranking

28
Q

What is target costing?

A

involves setting a target cost by subtracting a desired profit from a competitive market price.

29
Q

What are the steps involved in target costing?

A

Step 1: A target price is set, based on customer perceived value. Market-based price
Step 2: required target operating profit per unit is then calculated. This may be based on return on sales, or return on investment
Step 3: The target cost is derived by subtracting the target profit from the target price
Step 4: The cost gap is calculated
Step 5: if there is a cost gap, attempts will be made to close the gap

30
Q

What is the calculation for the target cost gap?

A

Estimated product cost - target cost

31
Q

How do we understand what is essential to customer-perceived quality and which are not?

A
  • Value analysis/ engineering
  • Functional analysis
32
Q

What is value analysis?

A

relates to existing products

33
Q

What is value engineering?

A

relates to products that have not yet been produced.

34
Q

What is functional analysis?

A

analysis of the relationship between product functions, their perceived value to the customer and their cost of provision.

35
Q

What are some of the benefits of adopting target costing?

A
  • External focus to drive cost savings
  • focus on customer value
  • focus on cost gap can drive design decisions
  • motivation to reduce costs and increase efficiency
36
Q

What is the calculation for lifecycle costing?

A

Total costs of Product A over its entire lifecycle / total number of units

37
Q

What are the stages in the lifecycle?

A

Product development
Market development
Growth
Maturity
Decline

38
Q

What are the costs associated with the pre-production/product development stage?

A
  • a high level of setup costs
  • research and development
  • product design
39
Q

what are the costs associated with the launch/market development stage?

A
  • production costs
  • marketing and promotion costs
40
Q

what are the costs associated with the growth stage?

A
  • marketing and promotion will continue
  • sales volume increases and variable production cost per unit falls
41
Q

what are the costs associated with the maturity stage?

A
  • initial set up costs and fixed costs recovered
  • marketing may increase
  • variable costs fall
42
Q

what are the costs associated with the decline stage?

A
  • marketing costs are cut
43
Q

what are the benefits of life-cycle costing?

A
  • draws management attention to all costs
  • measures product costs from concept to withdrawl
  • long-term focus
  • better decisions
44
Q

What is EMA?

A

Environmental management accounting. Concerned with the accounting info identifying and estimating the costs of environment-related activities and seeking control of these costs

45
Q

What are some types of environmental costs?

A
  • Conventional costs e.g., energy and raw material
  • Contingent costs e.g, future compliance or decommissioning costs
  • Relationship costs
  • Reputational costs e.g., lost sales due to failure to address environmental issues
46
Q

What are environmental prevention costs?

A

the costs of activities undertaken to prevent or reduce production of waste

47
Q

what are environmental detection costs?

A

costs incurred to ensure that the organisation complies with regulations and voluntary standards

48
Q

what are environmental internal failure costs?

A

costs incurred from performing activities that have produced contaminants and waste that have been discharged to the environment

49
Q

what are environmental external failure costs?

A

costs incurred on activities performed after discharging waste into the environment

50
Q

What are some EMA techniques for ABC?

A
  • cost driver identified
  • product costs more realistic
51
Q

What are some EMA techniques for lifecycle costing?

A
  • considers whole cost of product over its whole life rather than single AP
  • considers how environmental costs can be reduced
52
Q

What are some EMA techniques for flow cost accounting?

A
  • looks at material flows and losses at different stages of the production process
  • aims to reduce material quantities and wastage
  • related to input/output analysis which focuses on waste in processes
53
Q

What are some EMA techniques for input/outflow analysis?

A
  • ## records material inflows and balances this within outflows on the basis that what comes in must go out

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