Chapter5Costingandcostmanagement

inacompetitiveenvironmentManagementAccountingforDecisionMakersTenthEditionLEARNINGOUTCOMESYoushouldbeableto:Discusstheprinciplesandpracticalaspectsofactivity-basedcostingExplaintheroleofvaluechainanalysisandbenchmarkinginmanagingcostsDescribethemethodsthatmaybeusedtomanagecostsoverthelifecycleofaproductDescribethenatureofthemodernproductcostingandpricingenvironmentExplaintheimportanceoftotalqualitymanagementinthemodernenvironmentandidentifythemaintypesofqualitycoststhatmaybeincurredCostingandpricingproductsinthetraditionalwayArelativelyuncompetitivemarketAlowlevelofindirectcostrelativetodirectcostDirectlabour-intensiveanddirectlabour-pacedproductionCostingandpricingproductsinthemodernenvironmentAhighlycompetitiveinternationalmarketAhighlevelofoverheadsrelativetodirectcostCapital-intensiveandmachine-pacedproductionShortproductionlifecyclesIdentifysupportactivitiesfortheproduct/

serviceIdentifycosttobeattributedtoeach

supportactivityIdentifycostdriverforeachsupportactivityEstablishcostpoolforeachsupportactivityAllocatetotalcoststorelevantcostpoolsChargetheproduct/

servicewiththecostineachpoolusingcostdriverFigure5.1KeystepsintheABCprocessBenefitsofABCProvidesmanagerswithabetterunderstandingofthebusinessProvidesmoreaccuratecostforeachunitofproductorserviceSource:AdaptedfromInnes,J.andMitchell,F.(1990)ActivityBasedCosting:AReviewwithCaseStudies,CIMAPublishing.WithkindpermissionofElsevier.Figure5.2Traditionalversusactivity-basedcostingSource:AdaptedfromInnes,J.andMitchell,F.(1990)ActivityBasedCosting:AReviewwithCaseStudies,CIMAPublishing.WithkindpermissionofElsevier.Figure5.2

Traditionalversusactivity-basedcosting(Continued)CriticismsofABCTime-consumingandcostlyABCreportsmaybedifficulttounderstandFewbenefitswhereproductsorservicesprovidedhavesimilaroutputandprocessesNotallcostscanbeidentifiedeasilywithparticularactivitiesLackofinformationconcerningcostscanleadtoarbitraryallocationsIdentifyingcostdriversmaybedifficultUsespastcostsandignoresopportunitycostsFigure5.3IllustrationofRoyalMail’scostingsystemSource:RoyalMailGroupLtd(2015)ABCCostingManual2015–16,November.DiagramadaptedfromOfcom(2018)ReviewofRegulatoryFinancialReportingforRoyalMail,19December,.uk,p.23.Figure5.4ThepercentageofbusinessesindifferentsectorsthatuseABCManufacturingRetailServiceFinancial

andcommercial0102060504030%70Figure5.5ThetotallifecycleofaproductorserviceTotallifecycle

ofaproductorservicePost-productionphaseProduction

phasePre-productionphaseResearchanddevelopment,

productionset-up,

pre-productionmarketingcostsManufacturingand

marketingcostsAfter-salesserviceandproductionfacility

decommissioningcostsTargetcostingminusTargetprofitSellingprice

TargetcostequalsFigure5.6ThetargetcostingprocessDeterminethetargetpriceoftheproductDecideonthetargetprofitrequiredDeterminethetargetcostbydeductingthetargetprofitfromthetargetpriceCalculatetheestimatedcostoftheproductComparethetargetcostwiththeestimatedcostWherenecessary,reducetheestimatedcostinlinewiththetargetcostSource:AdaptedfromCIMA(2009)ManagementAccountingToolsforTodayandTomorrow,p.12.Figure5.7Theuseoftargetcosting1510

5200%SmallMediumLargeVerylarge<50employees50–250employees250–10,000employees>10,000employeesFigure5.8ThekaizencostingprocessDeterminethecurrentcostoftheproductSetcostreductiontargetforthenextperiodDetermineactualcostreductionachievedComparetargetcostreductionswiththeactualcostreductionsachievedWhereasignificantdeviationoccurstakeappropriateactionFigure5.9TherelationshipbetweenthethreetypesofcostingPre-productionTargetcostingKaizencostingTotallife-cyclecostingProductionPost-productionSource:AdaptedfromPorter,M.(1985)CompetitiveAdvantage:CreatingandSustainingSuperiorPerformance,TheFreePress.1998byMichaelE.PorterReceivingandstoringrawmaterialsanddistributingtoproductionPrimaryactivitiesInputOperationsOutputsMarketingandsalesServicesTransforming

rawmaterials

into

finishedgoodsCollecting,storinganddistributingfinishedgoodsIdentifyingcustomerneedsandgeneratingsalesEnsuringthegoodsoperateeffectivelyaftersaleSecondaryactivitiesManaginghumanresources,forexamplehiringtraininganddevelopingstaff

Technologicaldevelopment,forexampleR&Dandproductdesign

Procuringsuppliesandresources

Infrastructure,forexampleadministrationfinanceandqualityassurance

Figure5.10Themainlinksinthevaluechainofamanufacturingbusiness302010400%SmallMediumLargeVerylarge50orfeweremployees51to250employees251to10,000employeesMorethan10,000employeesSource:AdaptedfromfigureinCIMA(2009)ManagementAccountingToolsforTodayandTomorrow,p.19.Figure5.11UseofvaluechainanalysisSource:BasedoninformationinRigby,D.(2018)ManagementTools,.Figure5.12ThebenchmarkingprocessDecideontheproduct,processorfunctiontobebenchmarkedIdentifyasuitablebenchmarkSelectsuitablemeasuresforthebenchmarkingprocessCollectandanalyseinformationrelatingtothemeasuresselectedIdentifyareasforimprovementbasedontheinformationanalysedIntroducenewpracticesandsetappropriatetargetsFigure5.13Theuseof,andsatisfactionwith,benchmarkingSource:Rigby,D.(2018)InsightsManagementTools,Benchmarking,Bain&Company,2April,.Source:BasedoninformationinRigby,D.ManagementTools,Bain&Company,/publications/articles/management-tools-benchmarking.aspx.Figure5.14DeliveringimprovementsinqualityImplementnewprocessesandcollectinformationrelatingtoqualitymeasuresAnalyseinformationcollectedandtakeactiontoensurequalityimprovementDevelopstafftrainingandincentiveschemesaimedatqualityimprovementDesignnewprocessestoachievezerodefectsIdentifyareasforqualityimprovementDevelopsuitable