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  1. 1. Specialist Cost Accounting Techniques (Target Costing) • Used mainly for new product development • Company identifies a target price and a target profit • Company then establishes its target cost, at which the product must be manufactured in order to achieve the target price • There is a focus on price-led costing, customer requirements and design
  2. 2. Target costing process Determine currently Achievable cost Establish target price Establish desired Profit margin Set target cost Calculate cost gap Try to close the gap Determine product concept
  3. 3. Closing the cost gap (TC) • Reducing the number of components • Using standard components wherever possible • Training staff in more efficient technique • Using different materials • Using cheaper staff • Acquiring new, more efficient technology • Cutting out non-value added activities
  4. 4. Implications (TC) • Penetration pricing may be used to deter competitors from entering the market • High sales volume can lead to economies of scale and savings from the learning / experience curve • Continuous cost reduction over the life of the product • All departments share the responsibility for delivering cost forecasts
  5. 5. Product Life Cycle Costing • Tracks and accumulates costs and revenues over a product’s entire life • It has five phases: 1. Development 2. Introduction 3. Growth 4. Maturity 5. Decline
  6. 6. PLCC • Sales volume, sales revenue, profitability, investment and cash flow will all vary • Appropriate strategy depends on which phase the product is at • Helps a company to understand likely cost changes at different stages of its life
  7. 7. Implications (PLCC) • The profitability of new product before large scale production • Appropriate pricing and sales strategy is easier to select • Attention can be focused on getting the product to market as quickly as possible • Efforts can be made to extend the life of the product • Lessons can be learnt which can be used to improve the profitability of future products
  8. 8. Advantages (PLCC) • Cost visibility is increased • Individual product profitability is better understood • More accurate feedback information is provided on success or failure of new products
  9. 9. Maximising the return over the product life cycle • Design costs out of products • Minimise the time to market • Minimise the breakeven time • Maximise the length of the life span • Minimise product proliferation • Manage the product’s cashflows
  10. 10. Backflush Accounting • Complete opposite to traditional method • Focuses on output • Works backwards to allocate costs (cogs & inventories) • Ideally suited to a JIT philosophy • Transfers between processes are at standard costs (total variance taken directly to P&L) • It has one or two trigger points (when costs are recorded – The purchase of raw materials – The manufacture of completed products
  11. 11. Throughput accounting and the theory of constraints • TA is based on theory of constraints • Every system: – Has a goal (e.g. to make profits) – Has inputs which are processed into outputs – Consists of sub-systems that inter-react with each other – Has constraint (anything that limits output)
  12. 12. Throughput accounting • Aim of a business is to make money by: – Increasing throughput – Reducing operating expenses – Reduce inventory • Throughput can be increased by identifying the bottlenecks in the system and taking action to remove them or ease them
  13. 13. Throughput accounting ratios • Performance can be measured using three ratios: • Return per factory hour = Throughput (sales – direct material cost) / usage of bottleneck resource in hours (factory hours) • Total conversion cost (operating expenses ) per factory hour • TA ratio = Return per factory hour / total conversion cost per factory hour
  14. 14. Example (TA) Z ltd manufactures Product X • Selling price = $20 • Material costs = $8 per unit • Total monthly operating expenses = $120,000 • Key constraint – Machine capacity (600 mh available each month) – It takes 3 minutes of machine time to manufacture each unit of product X
  15. 15. Solution (TA) • Throughput per machine hour (return per factory hour) = (20 – 8) / (3/60) = $240 • Total conversion cost per factory hour = $120,000 / 600 hrs = $200 • TA ratio = 240 / 200 = 1.2