Chapter 4 - Advanced costing methods

Question 1

Give some reasons for the development of ABC.

Answer 1

1. Size/proportion of overheads
2. Modern manufacturing
3. complexity/diversity

Question 2

What are the stages of traditional costing (absorption costing)

Answer 2

Stage 1: Assigning costs using measures of service usage
Stage 2: Absorbing costs using a measure of volume

Question 3

What are the stages of ABC

Answer 3

Stage 1: Identify the organisation’s major activities.
Stage 2: Identify cost drivers for each activity.
Stage 3: Calculate a cost driver rate (CDR) for each activity.
Stage 4: Absorb activity costs into products
Stage 5: Calculate the full production cost/unit and profit/(loss) (if required)

Question 4

What are some advantages of ABC?

Answer 4

An understanding of what drives costs should improve cost control.
More accurate cost per unit = better pricing, cost control and decision making

Question 5

What are some disadvantages of ABC?

Answer 5

• Cost and time involved
• Limited benefit if production o/h are minimal or mainly driven by level of production
• difficult to identify cost pools and drivers

Question 6

What are the main drivers for introducing ABC in the public sector?

Answer 6

• Public responsibility
• Public accountability
• Resource allocation within organizations
• Helping managers to manage

Question 7

What does ABC allow for public responsibility?

Answer 7

Allows a better understanding of what is driving overhead costs, allowing tighter control

Question 8

What is total quality management?

Answer 8

a management technique which seeks to ensure that goods are produced, and services supplied, of the highest quality.

Question 9

What are some fundamental features of TQM?

Answer 9

• prevention of errors
• importance of total quality in the design of systems and products
• real participation of all employees

Question 10

What is Just-in-time?

Answer 10

a pull-based system of production, pulling work through the system in response to customer demand.
Goods only produced when needed, eliminating large stocks

Question 11

What are some key characteristics of JIT?

Answer 11

-High quality
- Speed
- reliability
- Flexibility
- low costs

Question 12

What are some key features of companies operating JIT and TQM?

Answer 12

• high level of automation
• high levels of o/h and low levels of direct labour costs
• customised products produced in small batches

Question 13

What is throughput accounting?

Answer 13

aims to make the best use of a scarce resource.

Question 14

What is throughput accounting based on?

Answer 14

• the only totally variable cost in the short-term is the purchase cost of raw materials that are bought from external suppliers
• Direct labour not variable in the short term

Question 15

Throughput is effectively the same as what?

Answer 15

contribution

Question 16

What is the calculation for throughput?

Answer 16

sales revenue - direct material cost

Question 17

What is the aim of throughput?

Answer 17

to maximise this measure of profitability, whilst simultaneously reducing operating expenses and inventory.

Question 18

How is the goal of throughput achieved?

Answer 18

by determining what factors prevent the throughput from being higher.

Question 19

What is the constraint called in throughput accounting?

Answer 19

a bottleneck

Question 20

What are the steps in the theory of constraints?

Answer 20

Step 1: Identify the system’s bottlenecks
Step 2: Identify how to exploit the bottlenecks
Step 3: Subordinate everything else to the decision in Step 2
Step 4: Elevate the system’s bottlenecks
Step 5: If in previous steps, a bottleneck has been broken go back to step 1

Question 21

What is the throughput (return) per factory hour?

Answer 21

Throughput per unit/ product’s time on the bottleneck resource

Question 22

What is the cost per factory hour?

Answer 22

total factory cost/ total bottleneck resource time available

Question 23

What is the throughput accounting ratio (TPAR)

Answer 23

Return per factory hr / cost per factory hr

Question 24

What would a TPAR of <1 suggest?

Answer 24

that throughput is insufficient to cover operating costs, resulting in a loss

Question 25

What would a TPAR of >1 suggest?

Answer 25

that throughput exceeds operating costs so the product should make a profit.

Question 26

Give some suggestions on how to increase the TPAR?

Answer 26

- increase the sales price for each unit sold - reduce material costs per unit - reduce operating expenses - improve productivity of bottleneck

Question 27

What are the steps for maximising profit with a multi-product decision making?

Answer 27

Step 1: Identify the bottleneck constraint Step 2: Calculate the throughput per unit for each product Step 3: calculate the throughput per unit of the bottleneck resource for each product Step 4: Rank the products in order of the throughput per unit of the bottleneck resource. Step 5: Allocate resources using this ranking

Question 28

What is target costing?

Answer 28

involves setting a target cost by subtracting a desired profit from a competitive market price.

Question 29

What are the steps involved in target costing?

Answer 29

Step 1: A target price is set, based on customer perceived value. Market-based price Step 2: required target operating profit per unit is then calculated. This may be based on return on sales, or return on investment Step 3: The target cost is derived by subtracting the target profit from the target price Step 4: The cost gap is calculated Step 5: if there is a cost gap, attempts will be made to close the gap

Question 30

What is the calculation for the target cost gap?

Answer 30

Estimated product cost - target cost

Question 31

How do we understand what is essential to customer-perceived quality and which are not?

Answer 31

- Value analysis/ engineering - Functional analysis

Question 32

What is value analysis?

Answer 32

relates to existing products

Question 33

What is value engineering?

Answer 33

relates to products that have not yet been produced.

Question 34

What is functional analysis?

Answer 34

analysis of the relationship between product functions, their perceived value to the customer and their cost of provision.

Question 35

What are some of the benefits of adopting target costing?

Answer 35

- External focus to drive cost savings - focus on customer value - focus on cost gap can drive design decisions - motivation to reduce costs and increase efficiency

Question 36

What is the calculation for lifecycle costing?

Answer 36

Total costs of Product A over its entire lifecycle / total number of units

Question 37

What are the stages in the lifecycle?

Answer 37

Product development Market development Growth Maturity Decline

Question 38

What are the costs associated with the pre-production/product development stage?

Answer 38

- a high level of setup costs - research and development - product design

Question 39

what are the costs associated with the launch/market development stage?

Answer 39

- production costs - marketing and promotion costs

Question 40

what are the costs associated with the growth stage?

Answer 40

- marketing and promotion will continue - sales volume increases and variable production cost per unit falls

Question 41

what are the costs associated with the maturity stage?

Answer 41

- initial set up costs and fixed costs recovered - marketing may increase - variable costs fall

Question 42

what are the costs associated with the decline stage?

Answer 42

- marketing costs are cut

Question 43

what are the benefits of life-cycle costing?

Answer 43

- draws management attention to all costs - measures product costs from concept to withdrawl - long-term focus - better decisions

Question 44

What is EMA?

Answer 44

Environmental management accounting. Concerned with the accounting info identifying and estimating the costs of environment-related activities and seeking control of these costs

Question 45

What are some types of environmental costs?

Answer 45

- Conventional costs e.g., energy and raw material - Contingent costs e.g, future compliance or decommissioning costs - Relationship costs - Reputational costs e.g., lost sales due to failure to address environmental issues

Question 46

What are environmental prevention costs?

Answer 46

the costs of activities undertaken to prevent or reduce production of waste

Question 47

what are environmental detection costs?

Answer 47

costs incurred to ensure that the organisation complies with regulations and voluntary standards

Question 48

what are environmental internal failure costs?

Answer 48

costs incurred from performing activities that have produced contaminants and waste that have been discharged to the environment

Question 49

what are environmental external failure costs?

Answer 49

costs incurred on activities performed after discharging waste into the environment

Question 50

What are some EMA techniques for ABC?

Answer 50

- cost driver identified - product costs more realistic

Question 51

What are some EMA techniques for lifecycle costing?

Answer 51

- considers whole cost of product over its whole life rather than single AP - considers how environmental costs can be reduced

Question 52

What are some EMA techniques for flow cost accounting?

Answer 52

- looks at material flows and losses at different stages of the production process - aims to reduce material quantities and wastage - related to input/output analysis which focuses on waste in processes

Question 53

What are some EMA techniques for input/outflow analysis?

Answer 53

- records material inflows and balances this within outflows on the basis that what comes in must go out -