Organizational Structure Running A Successful Business
ACCA
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