Marginal Costing
Fixed overheads are not included in unit costs but are treated as a period cost
Inventory valuation includes only the variable costs of production
Absorption and ABC
Traditional absorption costing uses one method of apportioning all overhead costs between products, typically labour hours or machine hours
Activity-based costingaims to identify the activities that cause overhead costs to be incurred and to apportion the overhead costs to each product based on the use of the activities by each product
Advantages of ABC
Better decision-making. Companies will have a more accurate knowledge of cost and profit per unit
Control of overheads is more straightforward, as responsibility for incoming costs must be established before ABC can be implemented
More accurate performance measurement leads to better performance management
Disadvantages of ABC
ABC is still based on budgeted overheads in the current period, which may be unsuitable for future strategic decisions
Additional time and cost will be incurred to set up and administer the system
Growth of Service Industries Characteristics
Simultaneity(also called inseparability): The service is consumed simultaneously as it is performed, so there is usually more emphasis on getting it right the first time, as there may be no second chances
Heterogeneity(also called variability): The standard of services will vary from service to service
Intangibility:Tangible products have a physical aspect; customers can point to the specific features/ physical characteristics they value
Perishability:Services cannot be stored. Businesses, therefore, need to strike a careful balance between the need for sufficient resources to meet demand at peak times and the need for efficiency
Adding Value and Avoiding Waste (TQM and JIT)
Total Quality Managementconsists of continuous improvement in activities involving everyone in the organisation, managers and workers,
JIT purchasingmeans that raw materials are received when needed for production, so raw material inventory is reduced to near-zero levels
JIT: A “pull through philosophy” − customer demand drives production
JIT: Requires careful planning of demand and production requirements
Steps in Target Costing
Step 1: Determine the price the market will accept for the product based on market research. This may take into account the market share required.
Step 2: Deduct a required profit margin from this price − this gives the target cost.
Step 3: Estimate the actual cost of the product. If it is a new product, this will be an estimate
Step 4: Identify ways to narrow the gap between the actual cost of the product and the target cost
Target Costing Service Industries
The “products” are non-standard and customised. It is difficult to define a target cost when there is no standard product.
A higher portion of the expenses in service industries are indirect (overheads). It is harder to reduce these on a product-by-product basis.
Reducing costs in a service industry may be at the expense of customer service or quality
Narrowing the Target Cost Gap
Reconsider the design to eliminate non-value-added elements
Use less expensive materials
Employ a lower grade of staff on production
Outsource elements of the production or support activities
Functional Analysis
Identifying the attributes/ functions of a product that customers value. The price the customer is prepared to pay for each function is then determined
Businesses should ensure that any steps taken to reduce product costs do not lead to a lower perceived (or actual) quality
Product Lifecycle
Introduction phase/launch – Special pricing strategies may be used during the launch of a new product, such as market skimming or market penetration
Growth– Competition may rise due to new suppliers entering the market. This may force lower prices
Maturity– Most profits are made during this phase. Prices may be stable. The company’s price strategy during this phase is more likely to focus on maximising short-term profits, unlike in theintroductionphase
Decline– Prices may fall with demandunless a niche market can be found
Costs Changes in Manufacturing and Design Phase Lifecycle Costing
Marketing and advertising costs will initially be high when the product is first launched and for some time after this, in which the manufacturer will want to raise market awareness
Fixed production costs may also be higher in the initial manufacturing stages. Later, the manufacturing experience gained may enable cost savings to be made
Strategies to Extend Product Maturity Lifecycle Costing
Issuing updated versions of the product, which include new features
Repackaging the product to give it a new image. This way, established products can be relaunched as if they were new
Benefits of Life-cycle Costing
Life-cycle costing encourages management to plan the pricing strategy for the whole product life rather than on a short-term basis
Identifying the costs incurred throughout the product’s life means that management understands them better, enabling management to control them better
Decisions about whether to continue developing and manufacturing products will be based on complete information when the product lifecycle is considered
The Theory of Constraints
Identify the system’s bottlenecks
Decide how to exploit the bottlenecks identified in
Subordinate everything else to the decisions made in
Elevate the system’s bottlenecks
TPAR
If TPAR > 1, the product is profitable, as the throughput contribution exceeds the fixed costs
If TPAR = 1, the product breaks even
If TPAR < 1, the product is loss-making. The throughput contribution generated does not cover the fixed costs required to make it
TPAR Eliminate bottlenecks or reduce the time spent on bottleneck resources. Reduce other factory costs
Signs of Bad Environmental Performance
Poor environmental behaviour can harm an organisation’s image, which may lead to a loss of sales as customers boycott the organisation’s products.
Many governments may impose heavy fines on companies which harm the environment. Companies also may have to pay hefty amounts to clean up any pollution for which they are responsible.
Increasing government regulations on environmental issues such as pollution has increased business compliance costs
Achieving Envrionmental Benefits
Taking account of environmental effects in making capital expenditure decisions
Better understanding of environmental costs otherwise hidden in other overheads that management is unaware of
Reducing waste and saving energy
Defining Environmental Costs Traditional
Conventionalcosts: conventional environmental costs are costs that most clearly have environmental relevance
Potentially hiddencosts: environmental costs that are recorded but lose their identity as they become grouped with other costs
Contingentcosts: environmental costs that may be incurred in the future
Image and relationshipcosts: incurred producing environmental reports and promoting the company’s environmental activities and credentials
Defining Environmental Costs To Remember
Environmentalpreventioncosts are incurred by activities undertaken to prevent waste production
Environmentaldetectioncosts are incurred to ensure that the organisation complies with regulations and voluntary standards
Environmentalinternal failurecosts are incurred to clean up environmental waste and pollution before it has been released into the environment
Environmentalexternal failurecosts are incurred on activities performed after discharging waste into the environment
Environmental-related costs vs environment driven costs
Environment-related costs are attributed to joint environmental cost centres such as sewage plants or incinerators
Environment-driven costs, on the other hand, are hidden in general overheads (although they vary with the amount of throughput) and do not relate directly to a joint environmental cost centre.
Input-Output Analysis
Management may use input-output analysis of “mass balance” to clarify how much waste their activities generate
The aim is to compare the output of a production process (in physical units) with the input on the basis that “what comes in must go out”. What is not included in the output must, therefore, be waste
Flow Cost Accounting
Flow cost accounting is a more detailed version of input-output analysis
Flow cost accounting examines the physical quantities of material and the costs and values of output and waste for each process
Material costs
System costs - incurred within the various processes that add value to the product (e.g. wages and overheads)
Delivery and disposal costs - are incurred in delivering goods to customers or disposing of waste
Sustainability Strategy Perspectives
Value creation from capitals
Stakeholder perspectives
Megatrends affecting opportunities and threats
Customer preferences
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B Formulas23
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B Spreadsheet24
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B Theory125
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C Theory119
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C Theory 2 (ACCA Study Hub)132
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C Section C Theory63
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C Spreadsheet59
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C Formulas73
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D Theory203
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D Formulas63
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D Spreadsheet99
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D Theory (Variance Intepretation)127
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D Section C Theory90
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E Theory154
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E Theory 2128
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E Formulas65
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E Spreadsheet63
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E Section C Theory77
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How to Pass Exam11
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Annoying stuff37
