Specialist cost and management accounting techniques - TONTUF Money

1. Appropriate Cost Drivers under ABC (Activity-Based Costing)

Cost drivers are factors that cause changes in the cost of an activity. Under ABC, appropriate cost drivers are:

• Production Units: Number of units produced.
• Labour Hours: Time spent by employees on various activities.
• Machine Hours: Time machines are in use.
• Number of Setups: Frequency of equipment setups.
• Inspection Hours: Time spent on inspecting products.
• Order Size: Number of orders processed.
• Number of Customer Orders: Frequency of customer orders.

2. Calculating Costs per Driver and per Unit Using ABC

Steps:

1. Identify Activities: List all activities and their associated costs.
2. Assign Costs to Activities: Allocate overhead costs to each activity.
3. Determine Cost Drivers: Identify cost drivers for each activity.
4. Calculate Activity Rates: Divide the total cost of each activity by the total units of its cost driver.
5. Calculate Costs per Unit: Multiply the activity rates by the amount of cost driver units consumed by each product.

Example: If the cost of setup activities is $10,000 and there are 500 setups, the rate per setup is $20. If a product requires 3 setups, its setup cost is $60.

3. Comparing ABC and Traditional Methods of Overhead Absorption

ABC Method:

• Accurate Costing: Costs are allocated based on actual consumption of activities.
• Driver-based: Costs are assigned to products based on activities.

Traditional Method:

• Simpler: Overheads are allocated based on a single factor like direct labour hours or machine hours.
• Less accurate: May not reflect the true cost of activities.

Comparison:

• ABC provides more accurate cost allocation, especially for complex environments with diverse products.
• Traditional methods may be simpler but can lead to distortion in cost allocation.

4. Deriving a Target Cost in Manufacturing and Service Industries

Target Costing involves setting a target cost based on the competitive market price and desired profit margin.

Steps:

1. Determine Competitive Price: Establish the price at which the product or service will be sold.
2. Set Desired Profit Margin: Decide on the profit margin you want to achieve.
3. Calculate Target Cost: Subtract the desired profit margin from the competitive price.

Example: If a product is to be sold for $100 and the desired profit margin is $20, the target cost would be $80.

5. Difficulties of Using Target Costing in Service Industries

• Intangibility: Services are intangible, making it hard to define and measure costs accurately.
• Variability: Service quality can vary significantly, affecting cost control.
• Customer Interaction: High customer interaction can complicate cost estimation and control.

6. Suggesting How a Target Cost Gap Might be Closed

• Process Improvement: Enhance efficiency through lean methods.
• Supplier Negotiations: Work on reducing material costs through better supplier terms.
• Design Changes: Modify designs to reduce production costs.
• Technology Upgrades: Invest in technology to lower costs.

7. Costs Involved at Different Stages of the Life-Cycle

Stages:

1. R&D: Costs of research, design, and development.
2. Production: Costs of manufacturing and assembly.
3. Marketing: Costs of promoting and selling.
4. Distribution: Costs of logistics and delivery.
5. Service: Costs of after-sales service and support.

8. Deriving Life-Cycle Cost or Profit in Manufacturing and Service Industries

Life-Cycle Costing involves summing up all costs over the product or service life cycle.

Example: If a product's R&D costs are $50,000, production costs are $200,000, marketing is $30,000, and distribution is $20,000, then the total life-cycle cost is $300,000. If the revenue over the life cycle is $500,000, the life-cycle profit is $200,000.

9. Benefits of Life-Cycle Costing

• Better Decision Making: Provides a comprehensive view of costs and profits over the product’s life.
• Cost Control: Helps in identifying and managing costs throughout the life cycle.
• Pricing Strategy: Assists in setting prices that cover all costs and desired profit.

10. Discuss and Apply the Theory of Constraints

Theory of Constraints (TOC) focuses on identifying and managing bottlenecks or constraints that limit overall system performance.

Steps:

1. Identify the Constraint: Determine the process or resource that is limiting output.
2. Exploit the Constraint: Optimize the use of the constraint.
3. Subordinate Everything Else: Align other processes to support the constraint.
4. Elevate the Constraint: Invest in improving or eliminating the constraint.
5. Repeat the Process: Once the constraint is resolved, identify new constraints.

11. Calculating and Interpreting a Throughput Accounting Ratio (TPAR)

Throughput Accounting focuses on maximizing the throughput (rate at which money is generated) while minimizing inventory and operating expenses.

TPAR Formula: [ \text{TPAR} = \frac{\text{Throughput}}{\text{Operating Expenses}} ]

Example: If throughput is $500,000 and operating expenses are $300,000, TPAR is ( \frac{500,000}{300,000} = 1.67 ). A higher TPAR indicates better performance.

12. Suggesting How a TPAR Could Be Improved

• Increase Throughput: Enhance production efficiency and sales.
• Reduce Operating Expenses: Cut unnecessary costs and optimize resource use.
• Improve Product Mix: Focus on high-margin products.

13. Applying Throughput Accounting to a Multi-Product Decision-Making Problem

• Calculate Throughput per Product: Determine the contribution margin per product.
• Rank Products: Based on their throughput contribution.
• Optimize Resource Allocation: Allocate resources to products with the highest throughput per unit of constraint.