Costing techniques


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CIMA-P2-Costing Techniques

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Costing techniques

  1. 1. PERFORMANCEMANAGEMENTCosting Techniques
  2. 2. Topics CoveredThroughput AccountingTheory of constraints-TOCTarget Costing
  3. 3. ThroughputThroughput: The rate at which the system generates money through sales.Throughput =Sales revenue- Direct material costObjective of this accounting is to increase the throughput and reduce the inventory and operational expenses.
  4. 4. Theory of constraints-TOCBottleneck-the factors which prevents the throughput being higher. For example-inadequately trained staff, unreliable supply of material etc.Goldratt and Cox describe the process of identifying and taking steps to remove constraints as TOC.
  5. 5. Steps of TOC• The Five Focusing Steps of On going Improvement Identify the system’s constraint Decide how to exploit the system’s constraint Subordinate everything else to the prior decisions Elevate the system’s constraint If, in the prior steps, the constraint has been broken, go back to step one.
  6. 6. Measures of Throughput1. Return per Factory Hour= Throughput per unit Product time on bottleneck resources2. Cost per factory Hour= Total Factory Cost Product time on bottleneck resources3. Throughput accounting ratio=Return per factory Hour cost per factory hour
  7. 7. Target Costing Target costing is the process of determining the maximum allowable cost for a new product and then developing a prototype that can be profitably made for that maximum target cost figure. Target Cost = Anticipated selling price – Desired profit
  8. 8. Steps of Target Costing  Planning  Concept design  Basic design  Detailed design  Manufacturing Preparation
  9. 9. How it Works – Overview Perform Market Research & Identify Customer Needs Determine Target Price & Desired Profit Margin Develop Cost Projections for Each Component Explore Different Product Design Alternatives Perform Value Engineering / Value Analysis Approved final product design Production Continuous Cost Reduction
  10. 10. Target costing and Standard Costing Standard Costing Target Costing  It is Push System.  It is Pull System. Standard cost is the Requires market basis of price research and market Determination. understanding.  It an internal tool.  Driven by external market prices.  Cost control technique.  Cost reduction activity.  Reactive Technique.  Proactive technique. It Margin is added in the starts from the design of standard cost. the product.
  11. 11. Life –Cycle CostingIt is accumulation of costs for activities that occur over the entire life cycle of the product.Factors: Design costs out of the product. Minimize the time to market. Maximize the length of the life cycle itself.
  12. 12. Back flush Accounting Suitable for JIT environment. The product cost is calculated retrospectively- at the end of the accounting period. This eliminates the detailed tracking of costs throughout the production process, which is a feature of traditional costing systems. Example Accounting procedure when raw materials & components are purchased on credit: Dr RIP account Cr Payable account (Purchase of raw materials & component on credit) Labor and production overheads are directly charged to the cost of goods sold.
  14. 14. Life Cycle CostsDevelopment costDesign costManufacturing costMarketing costDistribution cost
  15. 15. Backflush Costing Method of costing a product that works backwards. Backflush costing is the reversal of traditional costing, where traditional costing flow from accounting of inputs to outputs but backflush starts accounting only from outputs and then works back to apply manufacturing costs to units sold and to inventories. In this, cost of inventories are at the time of sale only. Costs are then flushed back through the accounting system. It is attractive for low inventory companies which results from JIT. It eliminates WIP account. There are reason for justification, they are as follows. i)To remove incentive for managers to produce for inventory. ii)To increase the focus of the managers on plant-wide goal rather than on individual sub-unit goals.
  16. 16. Thanks
  17. 17. Difficulties of Backflush costing:i)It does not strictly adhere to generally accepted accounting principles ofexternal reporting.ii)Absence of audit trails leads to critics.iii)It does not pinpoint the use of resources at each step of the productionprocess.iv)It is suitable only for JIT production system with virtually no direct materialinventory and minimum WIP inventories. It is less feasible otherwise.