Other Approaches

Question 1

What is lifecycle costing and what are its benefits?

Answer 1

Aims to record revenues and costs attributable to products over their whole lifecylce.

Makes all costs visible

Gives a better view of product profitability

Allows managers to focus on maximising returns over a product’s life

Question 2

What are the steps to target costing?

Answer 2

1 Determine target price that customers are willing to pay
2 Deduct target profit to give target cost
3 Estimate the actual cost of the product
4 Calculate the cost gap (Actual - target cost)
5 Find ways of closing the cost gap
6 If the gap is closed, launch the product

Question 3

What are features of target costing?

Answer 3

Use of cross functional teams
It is an iterative process
Target cost should be achieved over the lifecycle
Use of value analysis (reduce cost value and increase exchange value)

Question 4

What are the issues in keeping high inventory?

Answer 4

Large amounts of capital
Lack of flexibility
Warehousing and storage costs
Hides problems in production process
Increases time taken to produce an item

Question 5

What are features of JIT production?

Answer 5

Rearrangement of production in to production cells
Reduced set-up times
Increased emphasis on quality
Training workers to allow multi-tasking
Adoption of JIT purchasing
Modification of MA systems

Question 6

What is JIT purchasing, and what does it require?

Answer 6

Delivery of materials immediately precedes their use in production.

It requires:
Long-term relationship with few suppliers
Frequent, small deliveries
Suppliers must guarantee no defects

Question 7

What are benefits of JIT?

Answer 7

Reduced investment in inventory
Saving in factory expense
Builds supplier relationships

Question 8

What are problems with JIT?

Answer 8

Company is very reliant on suppliers

Question 9

What is backflush costing?

Answer 9

Simplified system to track value of products in production process

It focuses on the output of the process and ‘flushes’ the entries back through the system

There is no separate WIP account

Entries are made at standard cost

Question 10

When is backflush costing not suitable?

Answer 10

There is loss of control as there is no record of raw material and WIP inventory, therefore not suitable for companies with high inventory or long production processes.