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  • 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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