Chapter 4: Specialist cost & management accounting techniques

Question 1

Why is activity based costing developed

Answer 1

Absorption costing was good for orgs with 1 product/ simple products
Now OH are a larger proportion of total costs
It used to be more labour intensive than machine so direct costs were higher than indirect
Now use more machines so production OH have increased
Diversity & complexity of products has increased

Question 2

What is the difference between traditional costing methods and ABC?

Answer 2

1) OH allocation - ABC= separate cost pools so assigned directly to products rather than using cost driver rates & reapportioning

2) OH absorption = traditional is a volume based (machine/ labour hrs) measure to charge OH to products. ABC uses cost drivers (no. of orders/ dispatches)

3) Cost-drivers- used in ABC to show what causes cost increases - OH not varying with output can be traced directly which can’t be done in traditional

Question 3

How to calculate ABC

Answer 3

1) Identify major activities- Group into cost pools

2) Identify cost drivers for each activity - what causes the cost of the activity to occur

Question 4

What is a cost pool

Answer 4

Collection of OH costs associated with specific activities identified

Question 5

Advantages of ABC

Answer 5

1) More accurate cost per unit- improved pricing. sales, strategy, PM & decisions

2) Better insight into what drives OH costs

3) Recognises not all OH costs are related to production& sales volumes

4) OHs are a sig proportion of total costs - need to understand drivers

5) Derive realistic costs

6) Can be applied to all OH costs - mostly used in manufacturing

7) Can used in service costing

Question 6

Disadvantages of ABC

Answer 6

1) Limited benefit if OH are mostly volume related/ small proportion of total cost

2) Impossible to allocate all OH costs to specific activities

3) Choice of activities & cost drivers may be inaccurate

4) More complex to explain to stakeholders

5) Benefits of ABC may not justify costs - more time-consuming

Question 7

Why is ABC introduced into the public sector?

Answer 7

1) Public responsibility- tight control of running costs when resources from central Gov are limited

2) Public accountability- taxpayer money spent wisely ?

3) Resource allocation within orgs- concerns whether the services had equitable distribution or scarce distribution

4) Helping managers manage- Better awareness of what activities actually cost to provide before deciding what to cut

Question 8

Why is the public sector resisting ABC

Answer 8

Need to measure resources/ cost of service- usually time spent (time sheets) which is a challenge

Question 9

What are the 2 types of throughput accounting?

Answer 9

Total Quality Management (TQM)
Just in Time (JIT)

Question 10

What is total quality management (TQM)

Answer 10

management technique which seeks to ensure goods are produced, service supplied of highest quality

Mainly in Japanese organisations

Question 11

What are fundamental features of TQM?

Answer 11

1) prevent errors before they occur
2) Importance of total quality in the design of systems & products
3) Real participation of all employees
4) Commitment of senior management to the cause
5) Recognition of vital role of customers & suppliers
6) Recognition of the need for continual improvement

Question 12

What is just in time

Answer 12

pull-based system of production
Pulling through the system in response to customer demand
Goods only produced when needed- eliminates large inventories or materials & finished goods

Question 13

What are key characteristics of JIT?

Answer 13

1) High quality
2) Speed - meet customer needs
3) Reliability
4) Flexibility
5) Low costs

Question 14

What are key features of companies operating in a JIT & TQM environment?

Answer 14

1) High automation
2) High levels of OH and low direct labour costs
3) Customised products in small batches
4) High quality & continuous improvements

Question 15

What is throughput accounting

Answer 15

Make best use of scarce resources

Question 16

What are the 3 main assumptions of throughput accounting?

Answer 16

1) Only totally variable cost ST is buying raw materials from external suppliers

2) Direct labour costs aren’t variable ST - normally salaried/ guaranteed weekly wage

3) Same as contribution

Question 17

Throughput calculation

Answer 17

Throughput= sales revenue- direct material cost

Question 18

What is the aim of throughput accounting?

Answer 18

Max measure of profitability while reducing operating expenses and inventory
Determine what factors prevent the throughput from being aka bottleneck

ST = best use of bottleneck –> idle time in nonbottleneck resources-> small inventory hold up so doesn’t delay production

LT= bottleneck eliminated - more efficient machine

Question 19

What is the theory of constraint and steps?

Answer 19

By Goldratt & Cox
Step 1: Identify bottleneck
Step 2: Decide how to exploit the bottleneck
Step 3: subordinate everything else to the decision in step 2
Step 4: Elevate the system’s bottleneck
Step 5: If bottleneck has been broken go back to step 1

Question 20

What are the 3 Throughput accounting ratios (TPAR)?

Answer 20

1) Throughput (return) per factory hour= throughput per unit/ product’s time on the bottleneck resource

2) Cost per factory hour= Total factory cost/ Total bottleneck resource time available

3) TPAR= Return per factory hour/ cost per factory hour

Total factory cost= fixed production cost (excluding labour, marketing) aka operating expense

Question 21

What does TPAR>1 mean?

Answer 21

throughput> operating costs
Products should make profit
Priority given to products generating best ratios

Question 22

What does TPAR < 1 mean?

Answer 22

throughput is insufficient to cover operating costs
Loss

Question 23

Decision making in throughput accounting environment

Answer 23

when ranking products it’s sufficient to look at their respective return per hour
But ranking across products/ divisions it’s suitable to look at TPAR figures to reflect differences in costs between factories

Question 24

What are the criticisms of the TPAR?

Answer 24

1) Focus on ST, with fixed supply of resources and expenses –> not realistic ST

2) Difficult to apply in the LT when costs are variable & vary with sales/ cost drivers –> ABC may be more appropriate

Question 25

How to improve TPAR

Answer 25

1) Increase the sales price for each unit sold
2) Reduce material costs per unit (change material/ supplier)
3) Reduce total operating expenses to reduce cost per factory hour
4) Improve productivity of bottleneck- decreases time required to make each unit

Question 26

Calculation steps for throughput multi-product decision making

Answer 26

Step 1: Identify bottleneck

Step 2: Calculate throughput per unit for each product

Step 3: Calculate throughput per unit of the bottleneck resource for each product

Step 4: Rank products in order of throughput per unit of bottleneck resource
If all made in the same production line - ranking done on return/ hour if not use TPAR

Step 5: Allocate resources using the ranking & answer the question

Question 27

What is target costing

Answer 27

Setting a target cost by subtracting a desired profit from a competitive market price
E.g Sony, Toyota, Swatch

Opposite of conventional cost plus pricing

Question 28

Steps to derive a target cost

Answer 28

Step 1: Target price set, based on customers perceived value of product- market based price

Step 2: Required target operating profit per unit is calculated. Based on return on sales or investment

Step 3: Target cost= target price- target profit

Step 4: Calculate cost gap

Step 5: Value analysis, value engineering, functional analysis- can reduce costs while satisfying customer needs

Negotiating with customers may go ahead before deciding whether to go ahead with project

Question 29

What is the target cost gap

Answer 29

Estimated product cost - target cost

Diff between what an org thinks it can currently make a product for and what it needs to make it for for a required profit

Question 30

Examples for closing the target cost gap

Answer 30

Eliminating materials/ cheaper materials
Labour saving w/o quality compromise
increased productivity

CAN’T BE DONE BY INCREASING SELLING PRICE- it’s determined by the market

Use value analysis to work out what features are essential to the customer

Question 31

What are the benefits of target costing

Answer 31

1) Focuses on what consumers are prepared to pay

2) Incorporates only features customers want

3) Cost control is considered earlier in the process

4) motivation to reduce costs and be more efficient

5) improve competitiveness

Question 32

What is value analysis

Answer 32

Relates to existing products
Adds value to product as perceived by customer & identify unnecessary costs within goods
Examines purpose/ function of product

Question 33

What is value engineering

Answer 33

relates to not yet produced products
Adds value to product as perceived by customer & identify unnecessary costs within goods
Examines purpose/ function of product

Question 34

What is cost value

Answer 34

cost incurred by the firm incurring the product

Question 35

What is exchange value

Answer 35

amount of money consumers want to pay

Question 36

What is use value

Answer 36

relates to its function
The product performs the way it’s intended to do

Question 37

What is esteem value

Answer 37

relates to the regard associated with ownership e.g paying a premium or price-skimming prices

Question 38

What is functional analysis

Answer 38

uses the functions of a product as the cost objective
Initial designs/ review of existing products
services/ company strategy/ OHs
Identify alternative ways of achieving functions consumers value

Question 39

What are the problems with target costing in the service industry

Answer 39

SHIP
Simultaneity
Heterogeneity
Intangibility
Perishability

Question 40

What is simultaneity (inseparability)

Answer 40

inseparability of production & consumption
Customers are often present during the production of a service- no transfer of ownership

No service exists until it’s actually experienced/ consumed by the person who brought it

Question 41

What is heterogeneity

Answer 41

Quality & consistency varies
not all services are performed the same each time

Question 42

What is intangibility

Answer 42

difficult to define the service & attribute costs
services include high levels of indirect costs

consistent methods of cost attributes are needed- not always easy
direct charges not always possible

Question 43

What is perishability

Answer 43

unused service capacity from 1 time period can’t be stored to the next
Can’t handle supply- demand through production/ scheduling

Question 44

What is lifecycle cost

Answer 44

Tracks & accumulate costs and revenues attributable to each product over its entire lifecycle
product costs aren’t evenly spread across its life- approx 90% of its life cycle costs determined in early cycle ( prototyping/ designs etc) - need most control over early days

Question 45

What is the lifecycle cost calculation

Answer 45

Total cost of the product over its entire lifecycle/ total number of units of that product

Question 46

What does a sunk cost fall under

Answer 46

R&D
Irrecoverable but built into cost regimes

Question 47

What are the 5 product life cycle phases

Answer 47

1) Product development
2) Market development & launch
3) Growth
4) Maturity
5) Decline / revitalisation

Question 48

What costs are associated with the 5 lifecycle phases

Answer 48

1) Product development: set up costs, R&D, product design, building facilities

2) Market development & launch: marketing & promo costs, production costs per unit = high –> low volumes

3) Growth: marketing & promo, sales increase so unit costs decrease- more to spread fixed costs around

4) Maturity: initially profits will increase as set up & fixed costs are recovered, Marketing & distribution may increase to respond to increased competition, variable production costs fall (economies of scale), price competition/ differentiation erodes profitability as firms compete with limited remaining customers

5) Decline: marketing costs cut, production economies lost, replacement product developed (R&D), additional development to refine model/ product

Question 49

How to maximise a product’s return over its lifecycle

Answer 49

1) Design costs out of the product
2) Minimise the time to market
3) Minimise the break-even point
4) Maximise the length of the life cycle itself

Question 50

How does the design cost maximise return over its lifecycle

Answer 50

90% of costs incurred in the design stage
Affects the future components needed to build it
Minimise costs overall and not work in isolation

Question 51

How does minimising the time to market maximise return over its life cycle

Answer 51

Competitors monitor eachother closely
Get into market ASAP to maintain profitability
Gets to establish the market before other competitors

Question 52

How does minimising the breakeven point maximise return over its life cycle

Answer 52

Low price at launch boosts sales more rapidly- lower contribution per unit
but high price may lower sales and increase contribution

Weigh up between establishing market share vs good quality product

Question 53

How does maximising the length of the life cycle maximise return over its life cycle

Answer 53

Get to market ASAP- longer to generate profit
Find other uses for the product or staggered entry into different markets- reduces costs, increases revenue , prolong product life, skimming the market

Question 54

Benefits of life cycle costing

Answer 54

1) Draws management attention to all costs (including marketing, design, R&D- normally treated a period costs

2) Focuses on measuring a product’s cost from concept to withdrawal (not period by period)

3) Understanding the relationship between decisions at the design stage & cost of other functions e.g marketing

4) LT return of product- more sustainable

5) Better decisions - more accurate info on costs & revenues of each product

Question 55

Why are organisations starting to be more environmentally conscious?
Environmental Management Accounting (EMA)

Answer 55

1) Legal & regulatory requirements to environmental management
2) Meet customers’ needs & concerns relating to environment
3) maintain a good public image
4) Manage risk & impact of environmental disasters
5) Cost savings with improved use of resources
6) sustainable development - meet current needs without compromising ability of future gen

Question 56

What is Environmental Management Accounting (EMA)?

Answer 56

accounting info needs of managers in relation to corp activities affecting environment& environment related impacts on the corporation

Question 57

What does EMA include?

Answer 57

1) Identify & estimate costs of environment- related activities
2) Identify & Monitor use & cost of resources
3) Environmental considerations as part of capital investment decisions
4) Assessing likelihood & impact of environmental risks
5) Include environment indicators as part of monitoring
6) Benchmark activities against environment best practice

Question 58

According to Bennett & James- how does a company’s concern for the environment impact its performance?

Answer 58

1) ST savings via waste minimisation & energy efficiency
2) Less environmental performance= higher cost- investors demand higher risk premium
3) Energy & environmental taxes e.g landfill tax
4) Pressure groups- reputation
5) Legislation- sunsets some products. Sunrises others
6) Cost of processing input which becomes waste= 5-10% of some revenue
7) Phasing out CFCs= markets for alternative products

Question 59

According to Bennet & James- how can environmental & business benefits be achieved?

Answer 59

1) Integrate environment into capital expenditure decisions
2) Manage & understand environmental costs- normally hidden in OH, environmental & energy aren’t allocated to relevant budgets
3) Waste minimisation schemes
4) Environmental life cycle cost- impact of mining materials through to operating equipment and disposal
5) measure environmental performance- statutory disclose & customer demand
6) Involve MA in strategic approaches - identify practical initiatives

Question 60

What actions could the green team of MAs put forward in strategic approaches?

Answer 60

1) ‘Environment Champion’ - within planning/ accounting to ensure environmental considerations are taken into account

2) Assessing if new data sources are needed - more & better data

3) Comparisons between sites/ offices to highlight poor performance & peer pressure for action

4) Checklists for internal auditors

Question 61

How can environmental management impact financial performance

Answer 61

1) Improves revenue - can sell premium & reach customer needs/ wants. More sales & better reputation. Poor management= losses

2) Cost reductions- efficient processes

3) Increase in costs - legal & regulatory requirements & improve image- could be offset by gov grants. Save LT money

4) Cost of failure- clean- up & fines from an environmental disaster

Question 62

What are internal costs of environmental costs?

Answer 62

1) Improved systems & checks to avoid fines

2) waste disposal costs

3) product take back costs (e.g customers to return items for recycling e.g batteries)

4) Regulatory cots e.g taxes

5) Upfront costs e.g obtaining permits

6) Back-end costs e.g decommissioning

Question 63

What are external costs of environmental costs?

Answer 63

Imposed on society but not from the company that generates the cost in the first place
e.g carbon emissions, energy & water, forest degradation, health care, social welfare

Some ways to get around this are planting trees if the company deforests

Question 64

What are 3 other classifications of environmental costs ?

Answer 64

1) Hansen & Mendoza
2) The US Environmental Protection Agency
3) The United Nations Division for sustainable development

Question 65

What are the 4 aspects of Hansen & Mendoza?

Answer 65

1) Environmental prevention costs - prevent production of waste e.g insulation, training, CO2 filters

2) Environmental Detection costs - ensure they comply with regulation & standards e.g contamination tests

3) Environmental internal failure costs - costs from activities that have produced contaminates that haven’t been discharged into the environment e.g recycling scrap

4) Environmental external failure costs - costs on activities performed after discharging waste into environment e.g oil spills

Question 66

What is the US environmental protection agency 4 types of costs?

Answer 66

1) Conventional costs - raw materials & energy are relevant

2) Potentially hidden costs - costs that lose their identity in general OH

3) Contingent costs- incurred at a future date e.g clean up

4) Image & relationship costs - intangible e.g preparing environmental reports

Question 67

What is the UN division for sustainable development

Answer 67

costs incurred to protect environment e.g prevent pollution, wasted materials, capital & labour (inefficiencies)

Question 68

What is regulatory environmental costs?

Answer 68

Notification
Reporting, monitoring, testing
training, protective equipment
insurance, taxes
waste management, pollution control

Question 69

What are upfront environmental costs

Answer 69

Site studies & prep
R&D, installation, labour, supplies, capital equipment

Question 70

What are back-end environmental costs?

Answer 70

Closure/ decommissioning
Disposing inventory
Site survey

Question 71

What is voluntary (beyond compliance) environmental costs

Answer 71

Community outreach/ training/ reports
Planning/ feasibility/ recycling
R&D/ insurance
Habitat & wetland protection, landscaping

Question 72

What are the 4 EMA techniques recognised by the UN

Answer 72

1) Input/ output analysis
2) Flow cost accounting
3) Activity based costing
4) Lifecycle costing

Question 73

What is input/ output analysis

Answer 73

Records flows of materials

Question 74

What is flow cost accounting

Answer 74

uses material flows & organisational structure
Looks at costs & value of quantities involved
Materials flows divided into 3 categories : material, system, delivery & disposal
Reducing quantity of materials to have a positive effect on LT total costs

Question 75

What is activity based costing

Answer 75

allocates internal costs to cost centres/ drivers based on what drives the cost
Between environmental-related costs (can go to a joint cost centre) & environment driven costs (hidden or general OH)

Question 76

What is lifecycle costing?

Answer 76

requires full environmental consequences/ costs from production to be taken across its whole life cycle

Question 77

Advantages of environmental costing

Answer 77

1) Better/ fairer product costs
2) Improved pricing - products with higher environ cost= higher price
3) better environ cost control
4) facilitates quantification of cost savings from environmentally friendly measures
5) integrate environ costs into strategic management
6) reduces potential for cross- subsidisation of environ damaging products

Question 78

What are the disadvantages of EMA?

Answer 78

1) time consuming
2) expensive to implement
3) difficult to determine accurate & appropriate costs
4) external costs not experienced by the company may be ignored (carbon footprint)
5) some internal environ costs are intangible (employee health)
6) company that incorporates external costs= competitive disadvantage if they don’t do this

Question 79

What is sustainable development

Answer 79

development that meets the needs of today without compromising needs of the future

Question 80

What are the inputs and outputs of sustainable development?

Answer 80

Input (resources) only consumed at rate they can be reproduced or offset

Output (waste & products) mustn’t pollute the environment at a rate greater than can be cleared or offset

Question 81

Key issues in accounting for sustainability factors

Answer 81

1) no globally accepted framework for sustainability reporting- no consistent guidance

2) insufficient skills or resources in orgs to identify & report on sustainability issues

3) reluctant to focus on factors that detriment maximising shareholders wealth

Question 82

What is triple bottom line reporting

Answer 82

Extends traditional reporting frameworks to include environmental, social & economic performance

Full cost of any plans/ developments for measurement & decision making

Uses triple ps

Question 83

What are the triple Ps

Answer 83

Planet
People
Profit

Question 84

What does the planet in triple P stand for

Answer 84

Environmental performance
Manage resource consumption, energy usage & limiting environmental damage
Less resource depletion e.g not over fishing

Normally measure:
Electricity/ fossil fuel consumption
water usage
GHG & pollutants
% of resources recycled vs landfill

Question 85

What does the people in triple P stand for

Answer 85

Social performance
Respect workers rights
Promote community it operates in

Normally measure:
Job created/ unemployment rates
average pay level
H&S e.g accident rates
Equality e.g diversity

Question 86

What does the profit in triple P stand for

Answer 86

Economic performance
Balance profit with planet & people

Normal measures:
Profitability of individual businesses/ divisions
Taxes paid

Question 87

What is the role of management accountants?

Answer 87

develop sustainable strategies that are forward looking about value creation & risk mitigation

Question 88

What is culture

Answer 88

sum total of all beliefs, attitudes, norms & customs within an org

Question 89

How can finance professionals promote an ethics based culture

Answer 89

Discourage unethical/ illegal practices
Money laundering
terrorist financing
fraud/ theft/ bribery
bullying
st decision making

Question 90

How can you promote sustainable practices in an organisation

Answer 90

1) Products & services - from renewable sources only & are they replenished & look after animal welfare? Expected life of product & can it be recycled? Excessive packaging?

2) Customers- recycling programme & incentives to do so? Help them reduce carbon footprint?

3) Supply chain- environmental suppliers & close by & fair prices paid? Encourage them to reduce carbon footprint and help reduce landfill waste?

4) The workplace- measurable targets for energy water usage, energy efficiency, safe

5) Employees- working conditions, rights, job security, community projects, equality

6) Other functions- take into consideration environmental impact of decisions and measure impact of social initiatives