Chapter 4 - Advanced costing methods Flashcards
Give some reasons for the development of ABC.
- Size/proportion of overheads
- Modern manufacturing
- complexity/diversity
What are the stages of traditional costing (absorption costing)
Stage 1: Assigning costs using measures of service usage
Stage 2: Absorbing costs using a measure of volume
What are the stages of ABC
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)
What are some advantages of ABC?
An understanding of what drives costs should improve cost control.
More accurate cost per unit = better pricing, cost control and decision making
What are some disadvantages of ABC?
- 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
What are the main drivers for introducing ABC in the public sector?
- Public responsibility
- Public accountability
- Resource allocation within organizations
- Helping managers to manage
What does ABC allow for public responsibility?
Allows a better understanding of what is driving overhead costs, allowing tighter control
What is total quality management?
a management technique which seeks to ensure that goods are produced, and services supplied, of the highest quality.
What are some fundamental features of TQM?
- prevention of errors
- importance of total quality in the design of systems and products
- real participation of all employees
What is Just-in-time?
a pull-based system of production, pulling work through the system in response to customer demand.
Goods only produced when needed, eliminating large stocks
What are some key characteristics of JIT?
-High quality
- Speed
- reliability
- Flexibility
- low costs
What are some key features of companies operating JIT and TQM?
- high level of automation
- high levels of o/h and low levels of direct labour costs
- customised products produced in small batches
What is throughput accounting?
aims to make the best use of a scarce resource.
What is throughput accounting based on?
- 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
Throughput is effectively the same as what?
contribution
What is the calculation for throughput?
sales revenue - direct material cost
What is the aim of throughput?
to maximise this measure of profitability, whilst simultaneously reducing operating expenses and inventory.
How is the goal of throughput achieved?
by determining what factors prevent the throughput from being higher.
What is the constraint called in throughput accounting?
a bottleneck
What are the steps in the theory of constraints?
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
What is the throughput (return) per factory hour?
Throughput per unit/ product’s time on the bottleneck resource
What is the cost per factory hour?
total factory cost/ total bottleneck resource time available
What is the throughput accounting ratio (TPAR)
Return per factory hr / cost per factory hr
What would a TPAR of <1 suggest?
that throughput is insufficient to cover operating costs, resulting in a loss
What would a TPAR of >1 suggest?
that throughput exceeds operating costs so the product should make a profit.
Give some suggestions on how to increase the TPAR?
- increase the sales price for each unit sold
- reduce material costs per unit
- reduce operating expenses
- improve productivity of bottleneck
What are the steps for maximising profit with a multi-product decision making?
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
What is target costing?
involves setting a target cost by subtracting a desired profit from a competitive market price.
What are the steps involved in target costing?
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
What is the calculation for the target cost gap?
Estimated product cost - target cost
How do we understand what is essential to customer-perceived quality and which are not?
- Value analysis/ engineering
- Functional analysis
What is value analysis?
relates to existing products
What is value engineering?
relates to products that have not yet been produced.
What is functional analysis?
analysis of the relationship between product functions, their perceived value to the customer and their cost of provision.
What are some of the benefits of adopting target costing?
- 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
What is the calculation for lifecycle costing?
Total costs of Product A over its entire lifecycle / total number of units
What are the stages in the lifecycle?
Product development
Market development
Growth
Maturity
Decline
What are the costs associated with the pre-production/product development stage?
- a high level of setup costs
- research and development
- product design
what are the costs associated with the launch/market development stage?
- production costs
- marketing and promotion costs
what are the costs associated with the growth stage?
- marketing and promotion will continue
- sales volume increases and variable production cost per unit falls
what are the costs associated with the maturity stage?
- initial set up costs and fixed costs recovered
- marketing may increase
- variable costs fall
what are the costs associated with the decline stage?
- marketing costs are cut
what are the benefits of life-cycle costing?
- draws management attention to all costs
- measures product costs from concept to withdrawl
- long-term focus
- better decisions
What is EMA?
Environmental management accounting. Concerned with the accounting info identifying and estimating the costs of environment-related activities and seeking control of these costs
What are some types of environmental costs?
- 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
What are environmental prevention costs?
the costs of activities undertaken to prevent or reduce production of waste
what are environmental detection costs?
costs incurred to ensure that the organisation complies with regulations and voluntary standards
what are environmental internal failure costs?
costs incurred from performing activities that have produced contaminants and waste that have been discharged to the environment
what are environmental external failure costs?
costs incurred on activities performed after discharging waste into the environment
What are some EMA techniques for ABC?
- cost driver identified
- product costs more realistic
What are some EMA techniques for lifecycle costing?
- considers whole cost of product over its whole life rather than single AP
- considers how environmental costs can be reduced
What are some EMA techniques for flow cost accounting?
- 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
What are some EMA techniques for input/outflow analysis?
- ## records material inflows and balances this within outflows on the basis that what comes in must go out
