ACCA
F5: PERFORMANCE MANAGEMENT
CONTENT PAGE
1. ADVANCE COSTING
2. INFORMATION AND TECHNOLOGY SYSTEM FOR ORGANIZATION
PERFORMANCE
3. BIG DATA ANALYSIS
4. BREAKEVEN POINT (CVP ANALYSIS)
5. PLANNING WITH LIMITING FACTORS
6. PRICING
7. MAKE OR BUY AND OTHER SHORT-TERM DECISIONS
8. RISK AND UNCERTAINTY
9. BUDGETING
10. QUANTITATIVE ANALYSIS
11. STANDARD COSTING AND BASIC VARIANCES
12. PERFORMANCE MEASUREMENT
,CH1 ADVANCE COSTING
1 Life Cycle Costing
2 Target Costing
3 Environmental Management Costing (EMC)
4 Activity Based Costing (ABC)
5 Throughput Accounting
Life Cycle Costing
> It's an approach to costing that assumes that a product goes through a series of 5 stages in its life cycle i.e
a Developement Stage
involves making a product and at this point only costs are being incurred
b Introduction Stage
involves launching a product into the market and at this stage the company is hardly breaking even
c Growth Stage
at this point there is rapid increase in the volume of sales due to the product gaining popularity in the market hence generating profits
d Maturity Stage
point at which no further growth in sales is expected but the company is still generating high volume of sales
e Decline Stage
Where the product begins to lose popularity due to other products which have better features being launched in the market.
The sales begin to drop and company reports losses
Maximising the product's return over it's life cycle:
1 Design cost out of the product
2 Minimise the time to market
3 Minimise the breakeven point
4 Maximise the length of life cycle itself
Advantages and Disadvantages of life cycle costing:
Target Costing
An approach to costing that begins by identifying the competitive price in the market and then the profit margin is deducted inorder to arrive at the target cost.
Target cost is therefore the cost that must be incurred if the product is to be sold at the competitive price in the market
Example
Estimated Cost: $15
Competitive price: $22
Profit Margin: $8
Target Cost: $14
Target cost gap = Estimated cost - Target Cost
= $15 - $14
= $1
If the estimated cost ismore than the target cost, then there is a target cost gap and it must be closed using the following approaches:
a Change the design of the product
,b Improve the learning curve
c Search for alternative suppliers
d Search for alternative materials
e Employ cheap labour
When reducing the cost of a product the value must not change.
The different types of values are:
1 Use Value
its the ability of a product to perform its intended product
2 Esteem Value
It is the status according to the product
3 Exchange Value
amount of money the consumers are willing to pay on order to own the product
Why is it difficult to apply target costing in the service industry?
1 Intangibility
2 Perishability
3 Heterogeneity
4 Inseparability
5 No transfer of ownership
Environmental Management Account (EMA)
It's an approach to costing that focuses on identifying the environmentally related activities and the associated cost
It includes:
a Identifying and estimating the environmental related activities
b Monitoring the usage of the resources e.g water, electricity and fuel that are related to environmental issues with the
aim of reducing the costs
c Undertaking the environmentally related capital expenditure appraisal
d Assessing the impact of the environmental risks
e Developing environmental related performance indicators
f Benchmarking activities against environmental best practices
Environmental Cost Classification
a Contingent Costs
Its a cost to be incurred at a future date e.g clean up costs
b Conventional Costs
These are costs related to the buying of environmentally related raw materials and equipments as well as energy costs
c Images and reputation/relationship costs:
These are costs incurred in generating reports related to environmental issues for customers and other business partners
d Hidden Costs
These are the costs captured by the accounting systems but losing their identity as 'general overheads'
Other classifications of costs:
a Internal and External costs
b Hensen and Mendoza Classifications:
i Environmental prevention costs
ii Environmental detection costs
iii Environmental internal failure costs
iv Environmental external failure costs
EMA Techniques
1 Input/Output Analysis
2 Life cycle costing
, 3 Activity Based costing
it tracks down the activities related to the environmental costs and uses suitable cost drivers to allocate the costs to specific cost drivers
4 Flow Cost accounting
it aims at reducing the quantity of materials which should have a positive effect on the business total cost.
it divides material flows into three categories:
> material
> system and delivery
> disposal
Advantages and Disadvantages of EMA
Activity Based Costing
It's an approach to costing that aims at tracking down each activity that gives rise to the cost.
It uses cost drivers as the basis of apportioning the costs
ABC involves the following strategies:
a Group the activities and identify the overheads related to those activities
b Identify the cost drivers for each activity
c Calculate the cost driver rate for each activity
d Absorb the activity cost into product
e Calculate the full production cost and/or profit or loss
Terminologies
Activity: anything that adds value and consumes resources
Cost pool: an activity which consumes resources and for which
the overheads are identified and allocated
Cost Driver: factor that influences the level of an activity/cost
Advantages and Disadvantages of ABC
Example:
A company sells 2 products. The direct costs are: $12 for one unit of product P and $24 for one unit of product D
The following information is available:
P D
Annual production and sales 24,000 units 24,000 units
Direct labour hours per unit 1 1.5
Number of orders 10 140
Number of batches 12 240
Number of setups per batch 1 3
Special parts per unit 1 4
Cost driver Annual Cost ($)
Setup cost no of steps 73,200
Special parts handling special parts 60,000
Other material handling no of batches 63,000
Other handling no of orders 19,800
Other overheads Direct labour 216,000
Required:
a Calculate the production cost per unit using absorption
costing assuming that overheads are absorbed on the basis of labour
b Calculate the production cost per unit using ABC
Solution
F5: PERFORMANCE MANAGEMENT
CONTENT PAGE
1. ADVANCE COSTING
2. INFORMATION AND TECHNOLOGY SYSTEM FOR ORGANIZATION
PERFORMANCE
3. BIG DATA ANALYSIS
4. BREAKEVEN POINT (CVP ANALYSIS)
5. PLANNING WITH LIMITING FACTORS
6. PRICING
7. MAKE OR BUY AND OTHER SHORT-TERM DECISIONS
8. RISK AND UNCERTAINTY
9. BUDGETING
10. QUANTITATIVE ANALYSIS
11. STANDARD COSTING AND BASIC VARIANCES
12. PERFORMANCE MEASUREMENT
,CH1 ADVANCE COSTING
1 Life Cycle Costing
2 Target Costing
3 Environmental Management Costing (EMC)
4 Activity Based Costing (ABC)
5 Throughput Accounting
Life Cycle Costing
> It's an approach to costing that assumes that a product goes through a series of 5 stages in its life cycle i.e
a Developement Stage
involves making a product and at this point only costs are being incurred
b Introduction Stage
involves launching a product into the market and at this stage the company is hardly breaking even
c Growth Stage
at this point there is rapid increase in the volume of sales due to the product gaining popularity in the market hence generating profits
d Maturity Stage
point at which no further growth in sales is expected but the company is still generating high volume of sales
e Decline Stage
Where the product begins to lose popularity due to other products which have better features being launched in the market.
The sales begin to drop and company reports losses
Maximising the product's return over it's life cycle:
1 Design cost out of the product
2 Minimise the time to market
3 Minimise the breakeven point
4 Maximise the length of life cycle itself
Advantages and Disadvantages of life cycle costing:
Target Costing
An approach to costing that begins by identifying the competitive price in the market and then the profit margin is deducted inorder to arrive at the target cost.
Target cost is therefore the cost that must be incurred if the product is to be sold at the competitive price in the market
Example
Estimated Cost: $15
Competitive price: $22
Profit Margin: $8
Target Cost: $14
Target cost gap = Estimated cost - Target Cost
= $15 - $14
= $1
If the estimated cost ismore than the target cost, then there is a target cost gap and it must be closed using the following approaches:
a Change the design of the product
,b Improve the learning curve
c Search for alternative suppliers
d Search for alternative materials
e Employ cheap labour
When reducing the cost of a product the value must not change.
The different types of values are:
1 Use Value
its the ability of a product to perform its intended product
2 Esteem Value
It is the status according to the product
3 Exchange Value
amount of money the consumers are willing to pay on order to own the product
Why is it difficult to apply target costing in the service industry?
1 Intangibility
2 Perishability
3 Heterogeneity
4 Inseparability
5 No transfer of ownership
Environmental Management Account (EMA)
It's an approach to costing that focuses on identifying the environmentally related activities and the associated cost
It includes:
a Identifying and estimating the environmental related activities
b Monitoring the usage of the resources e.g water, electricity and fuel that are related to environmental issues with the
aim of reducing the costs
c Undertaking the environmentally related capital expenditure appraisal
d Assessing the impact of the environmental risks
e Developing environmental related performance indicators
f Benchmarking activities against environmental best practices
Environmental Cost Classification
a Contingent Costs
Its a cost to be incurred at a future date e.g clean up costs
b Conventional Costs
These are costs related to the buying of environmentally related raw materials and equipments as well as energy costs
c Images and reputation/relationship costs:
These are costs incurred in generating reports related to environmental issues for customers and other business partners
d Hidden Costs
These are the costs captured by the accounting systems but losing their identity as 'general overheads'
Other classifications of costs:
a Internal and External costs
b Hensen and Mendoza Classifications:
i Environmental prevention costs
ii Environmental detection costs
iii Environmental internal failure costs
iv Environmental external failure costs
EMA Techniques
1 Input/Output Analysis
2 Life cycle costing
, 3 Activity Based costing
it tracks down the activities related to the environmental costs and uses suitable cost drivers to allocate the costs to specific cost drivers
4 Flow Cost accounting
it aims at reducing the quantity of materials which should have a positive effect on the business total cost.
it divides material flows into three categories:
> material
> system and delivery
> disposal
Advantages and Disadvantages of EMA
Activity Based Costing
It's an approach to costing that aims at tracking down each activity that gives rise to the cost.
It uses cost drivers as the basis of apportioning the costs
ABC involves the following strategies:
a Group the activities and identify the overheads related to those activities
b Identify the cost drivers for each activity
c Calculate the cost driver rate for each activity
d Absorb the activity cost into product
e Calculate the full production cost and/or profit or loss
Terminologies
Activity: anything that adds value and consumes resources
Cost pool: an activity which consumes resources and for which
the overheads are identified and allocated
Cost Driver: factor that influences the level of an activity/cost
Advantages and Disadvantages of ABC
Example:
A company sells 2 products. The direct costs are: $12 for one unit of product P and $24 for one unit of product D
The following information is available:
P D
Annual production and sales 24,000 units 24,000 units
Direct labour hours per unit 1 1.5
Number of orders 10 140
Number of batches 12 240
Number of setups per batch 1 3
Special parts per unit 1 4
Cost driver Annual Cost ($)
Setup cost no of steps 73,200
Special parts handling special parts 60,000
Other material handling no of batches 63,000
Other handling no of orders 19,800
Other overheads Direct labour 216,000
Required:
a Calculate the production cost per unit using absorption
costing assuming that overheads are absorbed on the basis of labour
b Calculate the production cost per unit using ABC
Solution
