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ACCA F5: Performance Management > Costing > Flashcards

Costing Flashcards

1
Q

What is the formula for Activity Based Costing (ABC)?

A

OAR = Cost Pool/Cost Driver

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2
Q

What are the four benefits of ABC?

A
  1. Cost Control
  2. Production Decisions
  3. Pricing Decisions
  4. Profitability Analysis
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3
Q

What are the four criticisms of ABC?

A
  1. Time Consuming
  2. Costly
  3. Some Arbitrary Apportionment May Still Exist
  4. Limited Benefit if Products Have Similar Cost Structures
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4
Q

Explain why ABC differs from traditional absorption costing.

A

Costs are more closely linked with the causes of the overhead which makes a more reliable allocation of cost thus better decision making.

This is appropriate where:

  1. Overheads are high vs. Prime costs
  2. Product ranges are diverse (customisation)
  3. Resources are not merely driven by volume
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5
Q

What are the main steps for ABC?

A
  1. Identify cost pools
  2. Identify cost driver
  3. Calculate cost per unit for each cost driver
  4. Absorb costs into production based on actual usage of cost drivers.
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6
Q

How do we derive a target cost?

A

Target Cost = Selling Price - Desired Profit Margin

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7
Q

How do we derive the cost gap?

A

Cost Gap = Target Cost - Estimated Cost

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8
Q

How do we generally close a cost gap?

A

Through product design and processing improvements

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9
Q

Give 5 specific examples of how we can close a cost gap?

A
  • Reduce material costs
  • Redesign product (smaller)
  • Reduce quality of parts
  • Remove non value adding elements
  • Manufacturing process savings.
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10
Q

What is the Target Costing Process?

A
  • Design Product
  • Find appropriate sell price (competitive/market)
  • Work out target cost
  • Calculate expected cost
  • Calculate cost gap
  • Close cost gap
  • Decide if product is viable
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11
Q

Is Target Costing an internally or externally focused approach?

A

Externally focused - looks at market and margins

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12
Q

Why is target costing good for performance management?

A

It focuses on:

  • Sales targets and selling price
  • Improves processes to drive down cost
  • Cost control considered upfront during product development stage.
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13
Q

True of False: Target costing is easier to implement in service industries?

A

False - Cost measurement is more difficult and price is set based on qualitative information.

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14
Q

SHIP is the pneumonic for characteristics of the service industry. Name these.

A

Simultaneity
Hetrogenity
Intangibility
Perishability

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15
Q

How do we calculate the lifecycle cost of a product?

A

Lifecycle Cost = All Costs Over Lifetime of Product / Total Number of Units

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16
Q

What are the 5 stages of the product life cycle?

DIGMD

A
  • Development
  • Introduction
  • Growth
  • Maturity
  • Decline
17
Q

How do costs differ at different stages of the life cycle?

A
  • Development = R&D costs
  • Introduction = High Fixed Costs
  • Growth = Increasing Variable Costs
  • Maturity = Mainly Variable Costs
  • Decline = Mainly Variable Costs
18
Q

What are the benefits of lifecycle costing?

A

1 - Promotes maximisation of return over the product lifecycle
2 - Considers ALL costs leading to cost reduction
3 - Suitable for modern environment with short lifecycles
4 - Considers external factors throughout product’s life

19
Q

What is the theory of constraints?

A

Theory of Constraints focuses on the bottlenecks in production that stop throughput maximisation.

In the short term all production should be at the pace of the bottleneck.

20
Q

What are Goldratt’s 5 Steps of Bottlenecks

A
  1. Identify
  2. Exploit
  3. Subordinate (Slow Pace)
  4. Evaluate (i.e train more staff)
  5. Return to step 1
21
Q

What are the 4 key elements of Throughput Accounting?

A
  1. Material cost is the ONLY variable cost
  2. Operates in a JIT environment
  3. Only inventory is a small buffer before the bottleneck
  4. WIP valued at material cost only
22
Q

What is the benefit of Just in Time (JIT)?

A

JIT stops us predicting what isn’t going to sell - thus only a small inventory buffer as to not lose profit.

23
Q

What is the aim of the Throughput Accounting Ratio (TPAR)?

A

To identify the bottleneck within a production line.

24
Q

How do we calculate the TPAR?

A

TPAR = Return per hour / Cost per hour

25
Q

How do we calculate Return per hour?

A

Return per hour = Sales - material purchases / Time on Key Resource

26
Q

How do we calculate Cost per hour?

A

Cost per hour = Total Factory Costs (incl labour) / Time on Key Resource

27
Q

How is TPAR used in decision making?

A

Viable products/divisions should have a TPAR > 1

28
Q

True or False: Products within the same factory are ranked on return per hour

A

True

29
Q

True or False: Divisions are ranked on highest grossing?

A

False - They are ranked on TPAR

30
Q

If limiting factor exists, how are products ranked?

A

From highest to lowest return/limiting factor.

31
Q

How is contribution calculated in TPA?

A

Selling Price - Material Cost

As Material cost is the only Variable cost in TPA

32
Q

Traditional Costing or Throughput Accounting?

Labour costs and variable overheads are treated as variable costs

A

Traditional Costing

33
Q

Traditional Costing or Throughput Accounting?

Inventory is valued at total production cost.

A

Traditional Costing

34
Q

Traditional Costing or Throughput Accounting?

Value is added as an item in produced.

A

Traditional Costing

35
Q

Traditional Costing or Throughput Accounting?

Product profitability can be determined by deducting a product cost from its selling price

A

Traditional Costing

36
Q

Traditional Costing or Throughput Accounting?

All costs other than material costs are seen as fixed in the short term

A

Throughput Accounting

37
Q

Traditional Costing or Throughput Accounting?

Inventory (WIP) is valued at material cost only

A

Throughput Accounting

38
Q

Traditional Costing or Throughput Accounting?

Value is added when an item is sold

A

Throughput Accounting

39
Q

Traditional Costing or Throughput Accounting?

Profitability is determined by the rate at which money is earned.

A

Throughput Accounting.

ACCA F5: Performance Management (10 decks)

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