2015ACCA F5业绩管理精选讲义(1)
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Advanced costing method
Chapter learning objectives
Upon completion of this chapter you will be able to:
§ explain what is meant by the term cost driver
§ identify appropriate cost drivers under activity-based costing (ABC)
§ calculate costs per driver and per unit using (ABC)
§ compare ABC and traditional methods of overhead absorption based on production units, labour hours or machine hours.
§ explain the implications of switching to ABC on pricing, performance management and decision making.
§ explain what is meant by the term ‘target cost’ in both manufacturing and service industries.
§ derive a target cost in both manufacturing and service industries.
§ explain the difficulties of using target costing in service industries
§ explain the implications of using target costing on pricing, cost control and performance management.
§ describe the target cost gap.
§ suggest how a target cost gap might be closed.
§ explain what is meant by the term ‘life-cycle costing’ in a manufacturing industry
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§ identify the costs involved at different stages of the life-cycle.
§ explain the implications of life-cycle costing on pricing, performance management and decision making.
§ describe the process of back-flush accounting and contrast with traditional process accounting.
§ explain, for a manufacturing business, the implications of back-flush accounting on performance management
§ evaluate the decision to switch to back-flush accounting from traditional process control for a manufacturing business.
§ explain throughput accounting and the throughput accounting ratio (TPAR), and calculate and interpret, a TPAR.
§ suggest how a TPAR could be improved.
1 Activity based costing
1.1 Introduction – absorption cost
In F2 we saw how to determine a cost per unit for a product. Key issues of relevance here are the following:
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Firms have the choice of two basic costing methods – marginal costing and absorption costing.
To enable this, all overheads must first be allocated/apportioned/reapportioned into production departments, again using a suitable basis (e.g. rent on the basis of floor area).
Overhead expenses incurred/budgeted
Step 1: Overheads allocated or apportioned to cost centres using suitable bases Cost centres (usually departments)
Step 2: Service centre costs reapportioned to production centres
Step 3: Overheads absorbed into units of production using an OAR (usually on the basis of direct labour hours) output
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The assumption underlying the traditional method of costing is that overhead expenditure is connected to the volume of production activity.
§ This assumption was probably valid many years ago, when production system were based on labour-intensive or machine-intensive mass production of fairly standard items. Overhead costs were also fairly small relative to direct materials and direct labour costs; therefore any inaccuracy in the charging of overheads to products costs was not significant.
§ The assumption is not valid in a complex manufacturing environment, where production is based on smaller customised batches of products, indirect costs are high in relation to direct costs, and a high proportion of overhead activities – such as production scheduling, order handling and quality control – are not related to production volume.
§ For similar reasons, traditional absorption costing is not well-suited to the costing of many services.
1.2 ABC and cost drivers
ABC is an alternative approach to the traditional method of absorption costing outlined above.
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The traditional method of overhead absorption effectively absorbs on a production volume basis and may be misleading for costs where the behaviour is not directly related to production volume.
For example, the cost of quality control may be driven more by the number of inspections made rather than the overall volume of units manufactured.
The ABC approach is to link overhead costs to the products or services that cause them by absorbing overhead costs on the basis of activities that ‘drive’ costs (costs drivers) rather than on the basis of production volume.
§ A cost pool is an activity that consumes resources and for which overhead costs are identified and allocated. For each cost pool, there should be a cost driver.
§ A cost driver is a unit of activity that consumes resources. An alternative definition of a cost driver is a factor influencing the level of cost.
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The concepts or assumptions underlying ABC are:
§ In the long run, all overhead costs are variable. Some overheads are variable in the short run. However, overhead costs do not necessarily vary with production volume or service level.
§ Activities consume resources.
§ The consumption of resources drives cost.
Products incur overhead costs because of the activities that go into providing the products or services, and these activities are not necessarily related to the volumes of the product that are manufactured. Direct labour hours and machine hours are not the drivers of cost in many modern business environments.
Understanding the relationship between overhead costs, activities and products (or services) is essential for managing overhead costs and product or service profitability.
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Absorption of overheads into unit costs on a volume basis may be misleading, particularly in a modern manufacturing environment where overhead costs are influenced by the diversity and complexity of output rather than volume.
Illustration 1 – ABC
A company manufactures two products, X and Y. The company uses absorption costing and fixed production costs and absorbed into production costs on a direct labour hour basis.
The budgeted information for the next financial year is as follows:
Product XProduct YTotal
Production and sales2,000 units5,000 units
Direct labour hours per unit32
Budgeted direct labour hours6,00010,00016,000
Fixed production costs$48,000
Absorption rate per direct labour hour
Fixed overheads absorbed$18,000$30,000
Using ABC
A review of the incidence of costs has established that the number of setups is the driver of the fixed production costs. Using ABC the fixed production costs would be allocated as follows:
No. of setups per 1,000 units81.6
Budgeted setups16824
Cost per setup$2,000
Fixed overheads allocated$32,000$16,000
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This difference in costing could have significant implications for pricing, especially if a cost-based approach is used for profit calculation. These, and other implications are discussed in more detail below.
Activity-based costing could provide much more meaningful information about product costs and profits when:
§ indirect costs are high relative to direct costs
§ products or services are complex
§ products or services are tailored to customer specifications
§ some products are sold in large numbers and others in small numbers.
1.3 Identifying appropriate cost drivers under ABC
Under ABC costs are driven by activities and not production volume. Typical overheads which are NOT driven by production include the following:
§ Setup costs – driven by the number of manufacturing setups.
§ Order processing costs – driven by the number of orders.
§ Packing department costs – driven by the number of packing orders.
§ Engineering department costs – driven by the number of production orders.
§ Air conditioning maintenance – number of air conditioning units
1.4 calculating costs per driver and per unit using ABC
There are five basic steps in establishing and applying a system of ABC:
Step 1 Identify activities that consume resources and incur overhead costs.
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Step 2 Allocate overhead costs to the activities that incur them. In this way, each identified activity becomes a cost pool for overhead costs. It is important that overhead costs should be directly allocated to a cost pool. There should not be any arbitrary apportionment of overhead costs.
Step 3 Determine the cost driver for each activity or cost pool.
Step 4 Collect data about actual activity for the cost driver in each cost pool.
Step 5 Calculate the overhead cost of products or services. This is done by calculating an overhead cost per unit of the cost driver (a cost per unit of activity). Overhead costs are then charged to products or services on the basis of activities used for each product or service.
1.5 Comparing costs per driver and per unit using traditional methods and ABC
Traditional absorption costing charges overhead costs to products (or services) in an arbitrary way.
The assumption that overhead expenditure is related to direct labour hours or machine hours in the production departments is no longer realistic for the vast majority of companies.
This will lead to very different values of overheads absorbed per unit.
1.6 Advantages and disadvantages of ABC
ABC has a number of advantages:
§ It provides much better insight into what drives overhead costs.
§ ABC recognises that overhead costs are not all related to production and sales volume.
§ In many businesses, overhead costs are a significant proportion of total costs, and management needs to understand the drivers of overhead costs in order to manage the business properly. Overhead costs can be controlled by managing cost drivers.
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§ It can be applied to derive realistic costs in a complex business environment.
§ 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.
§ Criticisms of ABC:
§ It is impossible to allocate all overhead costs to specific activities.
ABC costs are based on assumptions and simplifications. The choice of both activities and costs 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.
1.7 The implications of switching to ABC
The use of ABC has potentially significant commercial implications:
§ Pricing can be based on more realistic costs data.
- The traditional method of absorption of overheads into unit costs on a volume basis may be misleading, with the result that product costs can, potentially, be materially under/overstated.
- Thus, where cost plus pricing is in use, products that have been materially under-costed may be priced at levels that generate a loss whilst products that have been materially over-costed many be priced at levels that are uncompetitive.
§ Sales strategy can be more soundly based.
- More realistic product costs as a result of the use of ABC may enable sales staff to:
- target customers that appeared unprofitable using absorption costing but may be profitable under ABC
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- stop targeting customers or market segments that are now shown to offer low or negative sales margins.
- Front line sales staff will be able to negotiate prices with greater confidence
- ABC can be used to review the profitability of products and services with a view to focussing the efforts of sales staff upon those products and services which offer the highest sales margins.
§ Performance management and decision making can be improved
- Research, production and sales effort can be directed towards those products and services which ABC has identified as offering the highest sales margins.
- ABC can influence decisions as to which:
- new products/services to develop
- existing products/services to curtail or drop
- products/services should be promoted
- overhead costs to target.
Test your understanding 1
Identify for a hospital x-ray department possible cost drivers for the following activities:
§ equipment preparation
§ patient preparation
§ patient aftercare
§ film processing
§ film reporting
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2015ACCA F5业绩管理精选讲义(1)
