management accounting for value Flashcards
what is life cycle costing
the planning, accumulation and management of costs associated with a product over its lifetime
why is technology advances a current issue for product life cycles
they are becoming shorter so the window of opportunity to make a profit from a product is becoming narrower
what are some ways we can maximise return over PLC
planning for pricing
design costs out
minimise time to market
what are some techniques of pricing
market skimming = high price to start followed by lower prices as the PLC progresses
penetration pricing = introducing products to the market with low prices, the increasing price
differentiation pricing = if customer segmentation is possible it may be possible to charge different types of customer different prices for the same product
what do I mean by design cost outs
70-90% of a products life cycle are determined at the design stage. when a product id designed many of the costs are committed. take steps to reduce these costs to maximise the products overall return
there is a ink between target costing and PLC costing here
what are some advantages of life cycle costing
holistic cost assessment - considers costs across the entire life cycle of a product, helps identify cost drives and areas for improvement
improving pricing strategies
enhanced budgeting and planning
sustainability focus
informed decision making
competitive advantage
what is Target costing
strategic management accounting technique that helps business control costs during the product development phases.
by focusing on cost management from the very beginning, target costing enables companies to align their pricing strategies with customer expectations and market conditions
what are the steps involved in target costing
determine target price and revenue
determine the target profit
target cost
cost gap
close the gap
benefits of target costing
- most useful at the start of the design process when designs can change
- proactive cost management
- aligns design with market and customer
- requires cross - functional collaboration to plan and manage costs
challenges of target costing
- still a lot of guess work
- conflicts within and between teams
- targets used are not necessarily reasonable
- need to co ordinate with order stakeholders
- coping with changing markets can make the exercise redundant
what is the theory of constraints
an approach to production management which optimises production performance of bottleneck resources
what does the rate of throughput measure
how quickly rainouts are converted into sales
calculation of throughput contribution
sales revenue less direct material cost
what is throughput accounting
approach to production management which aims to maximise throughput contribution given bottle necks
what is the difference between throughput accounting and limiting factor
- only direct materials cost is variable
- all other production costs are fixed
how do u calculate return per factory hour
(revenue less materials purchases)/time on bottleneck
how do u calculate cost per factor hour
other production costs/ time on bottleneck
how do u calculate throughput accounting ratio TAR
return per factory hour / cost per factory hour
how can you use TAR
to assess the relative earning capabilities of different products, use it to rank the products to find which ones use the bottleneck resource to maximise throughput
