3 Characteristics about new environment:
Capital intensive and machine based production
High level of indirect costs relative to direct
highly competitive international market - pricing more important
Why isnt traditional costing as useful?
Now overheads are 10x larger than size of wages, so small change in direct labour hours can have massive affect on total cost
Overhead rates much larger than they were
What is essential to ABC?
identifying a cost driver
3 Steps to attribute overheads via ABC
- Establish overhead cost pool for each activity
- Allocate total cost associated with each support activity to relevant cost pool
- charge output with total costs for each pool using relevant driver
Benefits of ABC
- direct tracing of overhead established more accurate cost for each unit
- managers find cost drivers to have to understand business better
- helps with controlling overheads and efficiency
Difference in philosophy of ABC and traditional costing?
ABC views overheads as things caused by activities, rather than rendering a service to a cost unit
ABC analyses overheads into cost pools rather than cost centres
ABC very relevant to service sector
Criticism of ABC (7)
- Time consuming and costly
- if complex, very high updating costs
- if business sells similar products at similar output levels, fine measurements of ABC wasted
- not all cost drivers easily identified, leads to arbitrary cost allocation
- identifying cause and effect relationship difficult
- does not provide relevant information for decision making
- some costs may apply to more than one cost pool, some pools may have more than one driver etc
5 Stages of ABC
- Identify activities of business
- create cost pools by calculating total cost of each activity
- identify cost driver
- calculate cost driver rate
- attach activity costs to products
3 phases of total lifecycle costing
- pre production (R+D, marketing, preprodcution setup)
- production (manufacturing, marketing
- post production - after sales service, repairing faults
What percentage of car manufacturer costs incurred before production?
80 %
Target costing steps (6)
- determine target price form market
- decide on target profit
- determine target cost.
- calculate estimated cost of product
- compare target cost to estimated cost.
- bridge gap when necessary through increasing efficiency, redesign etc.
What does Kaizen costing ensure?
long term competitiveness by constantly making small improvements
6 bullet points on Kaizen costing
- search for improvement done in multi-area teams
- aims to reduce cost of manufacturing process period from before
- targets percentage cuts for periods created
- part of wider business philosophy
- associated with lean manufacturing
- needs long term commitment from management
What is value chain analysis?
analyses various activities across product lifecycle, removes ones which do not add value.
each chain represents activity that gives rise to cost
What is benchmarking?
attempts to emulate success of other business or department.
normally aimed at increasing efficiency and competitive advantage over continuous period
identify benchmark, collect and analyse info, identify measures
What is Total Quality Management
philosophy concerned with providing products that meet and exceed customer expectations.
employee involvment required at all levels,
by increasing quality and incurring quality costs, lower costs elsewhere
continuous effort
Alternative view to costing 5 steps (Hopwood 2002)
- shared responsibility for managing costs
- discussion of costs become everyday activity
- costs are managed locally
- benchmarking used at regular intervals
- focus is on managing rather than reducing costs
