Relevant costing Flashcards
1
Q
Factors to consider: Relevancy
A
- Enough capacity?
- Impact on xx reputation/credibility of closing down?
- Impact on staff morale
- Other fixed costs no longer incurred?
2
Q
Deciding if something is a relevant cost
A
- Would i still incur cost if i didn’t accept the order?_Change
- Do i still need to incur the cost or i have already?_Future
- Is it an additional cost?_Incremental
3
Q
Relevancy and strategy (Pricing strategy)
A
- Consider if cost leader or differentiator first
- Product life cycle
- Penetration pricing
- Discrimination pricing
- Peak load pricing
- Price skimming
Other pricing models:
- Markup_A fixed markup would need to be justified as to the scale of the markup, it is not clear how this has been done
- LIFE CYCLE: Consider where the company is in their life cycle. They appear to have been growing for some time and therefore could consider premium pricing.
- PENETRATE: They are however only in 3 countries, and could then rather consider lowering prices to penetrate the markets.
- COMPETITORS: The prices of competitors should be considered to assess what market prices are at present
- DISCRIM: There could be an attempt to use discrimination pricing, where during peak prices they charge a premium in line with increased demands, such as Christmas or holidays.
- STANDBY: Could consider a standby model, where lower prices are offered at certain times based on open space in vehicles where is no opportunity cost.
- SKIMMING: Price skimming could be used by creating a perception of quality, uncompromising service etc, and then charging a premium
- URGENT: Value based pricing could be used for urgent orders, where the value to the client of the immediate service is higher. Such as legal documents in a large litigation claim, where the courier costs are insignificant.
- VALUE: Value based pricing could also be used with high value items, or items that cannot be replaced, where a personalised service with no risk is premium priced
-Consider if nature of pricing is sufficient to cover FC+VC
4
Q
Allocation of costs
A
- Allocation of support division’s costs based on gross revenue is arbitrary and counter-productive.
- The fixed portion of expenses (rates and taxes, fixed service fees) are unavoidable and should arguably not be allocated to operating divisions as this is not under their control.
- Some form of ABC costing analysis may result in a more accurate.
- The costs allocated should exclude any bonus payments received by the manager.
- Allocations should be based on budgeted data, not actual data to avoid the inefficiencies of this division being passed onto the other divisions.
5
Q
Absorption costing vs. Variable costing
A
Absorption costing:
- Manufacturing costs treated as product costs
- FMOH are absorbed
- Used for financial reporting
- Profits are higher when there are rising stock levels
Variable costing:
- Only manufacturing VC are treated as product cost
- All fixed costs are expensed
- For decision making
- Profits are higher when there are declining stock levels
Influence of fluctuations in sales volume on profit or losses under both methods
- Profit for a VC system is a function of sales volume only
- Profit for absorption costing system is a function of both sales volume and production volume
- VC P/L will increase or decrease with fluctuating sales volume, absorption costing may show different levels because of changing stock levels
6
Q
How to achieve budgeted profit of x
A
- Pass cost increases to clients FMOH will increase by same x (profit of x)
- V/OH are high, negotiate price with suppliers
- Decrease admin cost
- Increase sales volumes by selling x more units
- High volume of sales may result in high marketing costs
- Aggressive marketing to fill gaps
- Competitive industry
- Mergers lead to high profits over long term
- Success depends on availability of resources
7
Q
Standard deviation
A
-The higher the SD, the greater the spread of outcomes around expected value and higher the risk
