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PM 15 DAYS REVISION CRASH

COURSE
Specialist Cost &
Management Accounting
Techniques1
BY SABI AKTHER
 What to focus on?

• Activity Based Costing (ABC).

• Target costing.

• Value analysis.

• Lifecycle costing.

• Throughput.

• Environmental cost accounting.

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 Activity Based Costing (ABC)

This is a key costing method. Comparisons of ABC with traditional methods of

overhead absorption are particularly important. Approach calculations by using
the methodical step by step approach.

The written elements of ABC are also important. Be prepared to explain the
reasons for the development of ABC, its advantages and disadvantages, and the
implications of ABC.

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 Activity Based Costing (ABC)

Steps

1) Group production overheads into activities, according to how they are driven.

2) Identify cost drivers for each activity.

3) Calculate a CDR for each activity cost.

4) Absorb the activity costs into each product.

5) Calculate the production cost and the profit/(loss) if required.

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 Activity Based Costing (ABC)
Advantages

• More realistic costs.

• Better insight into cost drivers, resulting in better cost control.

• Particularly useful where overhead costs are a significant proportion of total

costs.

• ABC recognises that overhead costs are not all related to production and sales
volume.

• ABC can be applied to all overhead costs, not just production overheads.

• ABC can be used just as easily in service costing as in product costing. 5

 Activity Based Costing (ABC)

Criticisms

• It is impossible to allocate all overhead costs to specific activities.

• The choice of both activities and cost drivers might be inappropriate.

• ABC can be more complex to explain to the stakeholders of the costing exercise.

• The benefits obtained from ABC might not justify the costs.

• ABC will be of limited benefit if overhead costs are primarily volume related or
are a small proportion of the total cost.

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 Activity Based Costing (ABC)

Implications

• Pricing – more realistic costs improve cost plus pricing.

• Sales strategy – more realistic margins can help focus sales strategy.

• Decision making – e.g. research and development can be directed at products

with better margins.

• Performance management can be improved due to the settings of more realistic

budgets and improved cost control.

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 Target Costing
Estimate a market driven selling price for a new
product, e.g. to capture a required market share

Reduce this figure by the company’s required level of

profit

Produce a target cost figure for product designers to

meet

Calculate the cost gap:

Target cost gap = Estimated product cost – Target cost

Close the cost gap. This may be done through value

analysis, functional analysis or value engineering
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 Target Costing

Closing the target cost gap

• “Value analysis” looks at identifying which product features contribute to

customer perceived value and which do not.

• Focus is on reducing cost without compromising perceived value.

• Can labour savings be made, e.g. by using lower skilled workers?

• Can productivity be improved, e.g. by improving motivation?

• What production volume is needed to achieve economies of scale?

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 Target Costing

Closing the target cost gap

• Could cost savings be made by reviewing the supply chain?

• Can any materials be eliminated, e.g. cut down on packing materials?

• Can a cheaper material be substituted without affecting quality?

• Can part-assembled components be bought in to save on assembly time?

• Can the incidence of the cost drivers be reduced?

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 Target Costing

Implications

• Pricing – will be more realistic since customer demand is considered.

• Cost control – target cost motivates managers to find new ways of saving costs.

• Performance management – enhanced because the business finds ways to

reduce costs.

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 Value Analysis
To ensure target costs can be achieved, value analysis is used. Value Analysis
identifies any unnecessary cost elements within the components of goods and
services.

Cost Value Exchange Value

Use Value Esteem Value

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 Lifecycle Costing

A common mistake in questions is that candidates confuse lifecycle costing with

the product lifecycle.

Lifecycle costing

• Is the profiling of cost over a product’s life, including the pre-production stage.

• Tracks and accumulates the actual costs and revenues attributable to each
product from inception to abandonment.

• Enables a product’s true profitability to be determined at the end of its

economic life.

Lifecycle cost of a product = 13

 Lifecycle Costing

Background

• The commitment of a high level of costs at the earlier stages of the product
lifecycle (especially pre-production) has led to the need for accounting systems
that compare revenues with all costs incurred throughout the lifecycle.

• Traditional costing systems based around annual periods may give a misleading
impression of costs and profitability.

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 Lifecycle Costing
Implications

• Pricing decisions can be based on total lifecycle costs rather than simply the costs for
the current period.

• Decision making – In deciding to produce or purchase a product or service, a timetable

of life cycle costs helps show what costs need to be allocated to a product so that an
organization can recover its costs. If all costs cannot be recovered, it would not be wise
to produce the product or service

• Performance Management (Control) – Lifecycle costing thus reinforces the

importance of tight control over locked-in costs, such as R&D in the development stage.

• Performance Management (Reporting) – Lifecycle costing traces R&D, design,

production set-up, marketing and customer service costs to products over their entire
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life cycles, to aid comparison with product revenues generated in later periods
 Lifecycle Costing

Benefits of lifecycle costing

• Draws management attention too all costs (production and non-production).

• Measures all costs from concept to withdrawal.

• Drives cost focused decisions at the design stage – focus on long-term

sustainable products rather than short-term unsustainable gains.

• Management can make better decisions re: pricing, designs, products.

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 Throughput
Work through the methodical step by step approach for multi product decisions.

Background

• Application of key factor analysis to production bottlenecks.

• The only totally variable cost is the purchase cost of raw materials and
components that are bought from external suppliers.

• Direct labour costs are not wholly variable.

Criticisms

• It concentrates on the short term. More difficult to apply to the longer term, when
all costs are variable.

• In the longer term as activity based costing might be more appropriate for 17
measuring and controlling performance.
 Throughput
Multi-product decisions

Steps:

1) Determine the limiting factor (bottleneck resource).

2) For each product calculate the throughput per unit (revenue – raw material
cost).

3) For each product calculate the throughput per unit of the limiting factor.

4) Rank in order.

5) Production plan – using the ranking allocate the scarce resources in the
optimum way. 18
 Throughput

Throughput accounting ratio =

How to improve the TPAR

• Increase the sales price for each unit sold, to increase the throughput per unit.

• Reduce total operating expenses, to reduce the cost per assembly hour.

• Improve productivity, reducing the time required to make each unit of product

Throughput accounting and the Theory of Constraints is the subject of two

technical articles published by the examiner on the ACCA website.

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 Throughput
Theory of constraints

Identify the
System constraint

Exploit the
Return to step 1 constraint

Elevate the Subordinate

constraint everything else
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 Environmental Cost Accounting

Environmental costs

Internal costs directly impact on the income statement of a company

• Improved systems

• Waste disposal costs

• Product take back costs

• Regulatory costs

• Upfront costs

• Backend costs
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 Environmental Cost Accounting

Environmental costs

External costs are imposed on society at large but not borne by the
company that generates the cost in the first instance

• carbon emissions

• usage of energy and water

• forest degradation

• health care costs

• social welfare costs

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 Environmental Cost Accounting

EMA

• The identification, collection, analysis and use of two types of information for
internal decision making:

– Physical information on the use, flows and destinies of energy, water and
materials (including wastes).

– Monetary information on environment-related costs, earnings and

savings.

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 Environmental Cost Accounting

Environmental costs

• Waste.

• Water.

• Energy.

• Transport and travel.

• Consumables and raw materials.

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 Environmental Cost Accounting
Internal Reporting
Categories of
costs (Hansen + US EPA UNDSN
Mendoza)

Costs incurred to
Environmental
Conventional costs protect the
prevention costs
environment

Environmental Potentially hidden Costs of wasted

detection costs costs material

Environmental
internal failure Contingent costs
costs

Environmental
Image and 25
external failure
relationship costs
costs
 Environmental Cost Accounting
Environmental management accounting techniques

Input / outflow
analysis

Lifecycle costing Flow cost

Techniques
accounting

ABC

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 Environmental Cost Accounting

Enviromental and sustainability factors

Sustainability can be thought of as an attempt to provide the best outcomes for

the human and natural environments, both now and into the indefinite future:

• Inputs (resources) must only be consumed at a rate at which they can be

reproduced, offset or in some other way not irreplaceably depleted.

• Outputs (such as waste and products) must not pollute the environment at a
rate greater than can be cleared or offset.

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 Environmental Cost Accounting
The role of a management accountant

They will apply their skills and competencies to help develop sustainable
strategies that are more forward looking, about value creation and risk mitigation
and are not focused on unsustainable behaviour such as short-termism or adverse
resource usage.

This can include:

• Creating an ethics-based culture

• Championing sustainability

• Risk management around sustainable and environmental factors

• Performance management focused on sustainable and environmental 28

measures.
 Environmental Cost Accounting

Triple bottom line reporting

TBL reporting expands the traditional company reporting framework to take into
account environmental and social performance in addition to financial (economic)
performance, by looking at the following 3 headings

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 Environmental Cost Accounting
Triple bottom line reporting

Focus Typical measures

Planet reduce ‘ecological footprint’ by • Electricity/fuel

managing resource consumption
consumption, energy usage & • Water usage
limiting environmental damage • Pollutants produced
• % of resources recycled
Profit ‘economic performance’
balanced with the other two • Profitability
objectives. • Taxes paid
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 Environmental Cost Accounting
Triple bottom line reporting

Focus Typical measures

People ‘social performance’ for workers • Jobs created

and surrounding community. • Average pay levels
• Health & Safety
measures
• Equality/diversity
measures

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 Exam Focus
Questions to attempt from revision kit

Constructed Response
Objective Case Questions
Questions

Duff Co (June 2014)

Beckley Hill (June 2015)
Abkaber Plc
Chemical Free Clean Co (Dec 2015)
Darask Co (Sept/Dec 2021)
Midhurst (Sept/Dec 2020)
Yam Co
Brick By Brick
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Thank You for Watching!!

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