Notesale: Turn your study into money

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HULT International Business School
Managerial Accounting (ACC220)
Outline of the Required Book

Chapter 5 - Cost and cost management in a competitive environment
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Cost determination in the changed business environment
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Costing and pricing the traditional way
➔ Direct-labour intensive & direct-labour paced production> The speed of production was dictated by
direct labour
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Little was spent on pozer, heat and light, and
machinery (depreciation charges) and other areas of typical indirect cost (overheads) of modern
business
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Costing and pricing in the new environment

➔ Capital intensive and machine paced production
➔ A high level of indirect cost relative to direct cost
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➔ Shorter product life cycles
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➔ IC which cannot be linked to products in the same way are allocated or apportioned to product cost
centers and then charged to individual jobs using appropriate overhead recovery rates
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It is
not unusual for overhead recovery rates to be between 5 and 10 times more than the hourly wage
rate
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Even small change in the amount of direct labour
worked can have a huge effect on the total cost calculated for a job
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ABC = Activity based costing
➔ ABC aims to overcome the kind of problem in the methods directly tracing the cost of all activities
supporting the production processes
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➔ ABC takes into account:
- each of the various support activities
- cost to be assigned
- the ​cost driver​ = factors that cause a change in the costs of each support activity
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- [2] assigning the total cost associated with each support activity to the relevant cost pool
- [3] charging the units of output with the total cost within each pool using the relevant cost
driver
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Costs indeed begin to accumulate at an earlier point and
continue to accumulate water production
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With the revenues generated over the life cycle being also tracked, the
profitability can be assessed
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- research and development on the P/S and also on the market it serves,
- design of the P/S and so the means of production,
- the setup of the necessary production facilities,
- advertising for marketing and promotion
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- traditional or ABC costing ​makes its contribution at this stage
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- costs may also be incurred to close the production → if environmental damage will
be taken on, the costs can become a considerable proportion (ie
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- TLCC can be used to manage the costs
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By dividing all the phases of the products
life and determining the costs part by part, hedging methods against cost hazards can be
taken in planning scenarios (alternative designs)
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TC was developed by a Japanese business during the 1970s in response to an increasingly
competitive environment
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- [1] determine the target price of the product
- [2] decide on the target profit required
- [3] Determine the target cost by deducing the target profit from the target price
- [4] Calculate the estimated cost of the product
- [5] Compare the target cost with the estimated cost
- [6] Where necessary, reduce the estimated cost in line with the target cost
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- used at the ​production phase, a continuous improvement is used at the quest of cost
savings, which can be accomplished through many small steps
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- The majority of the production phase cost saving have been made by Target Costing, the
incremental savings are achieved with Kaisen (the production process is closely examined in
the search for improvements)
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- [2] set cost reduction target for the next period
- [3] determine actual cost reduction achieved
- [4] compare target cost reduction with the actual cost achieved
- [5] where significant deviation occurs, take appropriate action
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It can also help to create a more committed and motivated
workforce team working and employee involvement
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➔ The business must either:
- obtain some cost advantage over its competitors
- differentiate itself away from them
➔ The ​value chain analysis is necessary to identify in which way the competitive advantage can be
achieved
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Benchmarking

➔ Benchmarking is an activity usually a continuing one where a business seeks to emulate a business
that is best in class in order to achieve greater success
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➔ The steps of benchmarking are the following
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➔ The benchmarking process is similar to Kaizen but usually carried out with a team of members
drawn from the various functional areas of the business and will usually continue over time
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➔ Products should be of the best quality when they reach the brands of the customers and be of the
standard that they expect according to what they are willing to pay
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➔ It aims to create a virtuous sequence of events where quality improvements lead to reduced
production problems, increase customer satisfaction and increased profits
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Managing quality costs

➔ Business must ensure that their products are of the right quality
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➔ They include:
- prevention costs → involved with the procedures to try to prevent products being
produced that are not up to the required quality
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- internal failure costs ​→ costs of rectifying substandard products before their reach the
customer as well as the costs of scrap raising from quality failures
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An alternative view

➔ Spread the responsibility; Spread the word; Think local; Benchmark continually; Focus on managing
costs rather than reducing them
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