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§ 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:

 

　　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