STRACOSMAN: STRATEGIC COST MANAGEMENT
CHAPTER 2: Management Accounting Concepts and Techniques for Planning and Control
SUMMARY NOTES BY: Mary Joy C. Nala, CB
BS ACCOUNTANCY 3B | 2nd SEMESTER A.Y. 2022-2023
COST TERMS, CONCEPTS, AND BEHAVIOR
TERM
Cost
Cost Pool
Cost Object
Cost Driver
DEFINITION
Expenditures incurred by the business to carry on it
investing, operating, and financing activities.
An account in which variety of similar costs are
accumulated prior to allocation to cost objects (e.g.,
overhead account)
Intermediate and final disposition of cost pools for a
particular activity
A factor that causes a change in the cost pool for a
particular activity and basis for cost allocation. Any factor or
activity that has direct cause-effect relationship
Cost Classification
A.
B.
C.
Accountant’s Perspective
1. As to function
a. Product – DM, DL, VOH, and FxOH
b. Period – Administrative, Marketing, Distribution
2. As to product
a. Direct – directly attributable: DM & DL
b. Indirect – factory overhead: VOH & FxOH
3. As to process
a. Common – all departments: salaries, depreciation,
electricity
b. Joint – for 2 or more products; not directly traced
DIFFERENT TYPES OF COST ACCUMULATION METHODS
Job order
costing method
Process costing
Activity-based
costing (ABC)
Is the accumulation of costs by specific jobs (i.e., physical
units, distinct batches, or job lots). This costing method is
appropriate if a product can be produced separately, distinct
from the other jobs which require different number of materials,
labor, and overhead.
Accumulates all the costs of operating a process for a period
of time and then divides the cost by the number of units of
product that passed through that process during the period; the
result is a unit cost. If the product of one process becomes the
material of the next, a unit cost is computed for each process.
Has been popularized because of the rapid increase in the
automation of manufacturing process, which has led to a
significant increase in the incurrence of indirect costs and a
consequent need for more accurate cost allocation.
ANALYSIS OF COST BEHAVIOR
(Variable, Fixed, Semi-Variable/Mixed, Step-Cost)
A range of activity that reflects the company’s normal
operating range. Within this relevant range, the cost behavior
to be discussed is valid.
The total amount varies directly with cost driver, and the per
cost driver remains constant.
The total amount remains constant, and the per cost driver
varies inversely with cost driver.
Mixed costs or Total Costs have variable and fixed costs
components.
When activity changes, a step cost shifts upward or
downward by a certain interval or step.
Relevant Range
Variable
Fixed
Semi-Variable /
Mixed
Step Cost
Manager’s Perspective
1. As to segment: Direct, Indirect
2. As to control: Controllable, Uncontrollable
3. As to incurrence: Avoidable, Unavoidable
Relevant Range
Linear and valid relationships
Y = a + bx
Usually based on capacity
*Operational capacity
Proprietor’s Perspective
1. Out of the pocket
2. Noncash Costs
Time Period
Valid for specific time period
In short run, fixed costs is constant
In long run, fixed cost variable
Slope-intercept form
Y=a+bx
NATURE AND CLASSIFICATION OF COST
Direct costs
Indirect costs
Variable costs
Fixed costs
Inventoriable
(Product) costs
Period costs
Opportunity costs
Sunk/Past or
Historical costs
TYPE
FIXED
VARIABLE
Are costs that are related to a particular cost object and can
economically and effectively be traced to that cost object
Costs that are related to a cost object, but cannot practically,
economically, and effectively be traced to such cost object.
Cost assignment is done by allocating the indirect cost to the
related cost objects
Are within the relevant range and time period under
consideration, the total amount varies directly to the change
in activity level or cost driver, and the per unit amount is
constant.
Are within the relevant range and time period under
consideration, the total amount remains unchanged, and the
per unit amount varies inversely or indirectly with the change
in the cost driver. Fixed costs may be committed or
discretionary (managed)
Are costs incurred to manufacture a product.
•
Product costs of the units sold during the period are
recognized as expenses (cost of goods sold) in the
income statement.
•
Product costs of the unsold units become the costs
of inventory and treated as asset in the balance
sheet.
Non-manufacturing costs that include selling, administrative,
and research and development costs. These costs are
expensed in the period of incurrence and do not become part
of the cost of inventory.
Are income or benefits given up when one alternative is
selected over another.
Are already incurred and cannot be changed by any decision
made now or to be made in the future.
COST AS TO BEHAVIOR
Per Unit
Varies
K
Total
K
Varies
Dependent Variable
Total Cost
Assumed Constants
a – fixed cost (y - intercept)
b – variable cost per unit
or slope
Independent
Variable
Level of
Activity
Cost Segregation Approaches
Scatter Graph
Engineering
Method
Least – Square
Method
High – Low
Method
Making use of a scatter diagram to determine the visual fit line
Account Classification
Incorporating time and motion studies fixed and variable cost
segregation
This method’s objective is to minimize the sum of the squared
deviations of all the relevant points in a given data set in order
to arrive at a cost function that represents the data set
Use of slope formula in identifying the fixed and variable cost
portion of the total mixed cost
High – Low Method Formula:
𝑏=
𝑌2 (𝐻𝑖𝑔ℎ𝑒𝑠𝑡) − 𝑌1 (𝐿𝑜𝑤𝑒𝑠𝑡)
𝑋2 (𝐻𝑖𝑔ℎ𝑒𝑠𝑡) − 𝑋1 (𝐿𝑜𝑤𝑒𝑠𝑡)
Δ𝑦
or Δ𝑥
1. Remove the outliers (anomalous data)
a. Given/Stated in the problem
b. Hints
2. Identify the highest and lowest X (i.e., work
orders, output, etc.)
3. Find the value of “b”
4. Find “a” (Re: Y = a + bx)
SUMMARY NOTES
Prof. Rica M. Quitoriano
BSA 3B
STRACOSMAN: STRATEGIC COST MANAGEMENT
CHAPTER 2: Management Accounting Concepts and Techniques for Planning and Control
SUMMARY NOTES BY: Mary Joy C. Nala, CB
BS ACCOUNTANCY 3B | 2nd SEMESTER A.Y. 2022-2023
COST VOLUME PROFIT (CVP) ANALYSIS
Cost Concepts
FIXED
VARIABLE
Varies
K
What is CVP Analysis?
Analyzing cost, volume and profit
Factors affecting Profit (FUSUN)
Fixed Cost
COST
Inverse
Unit Variable Cost
Sales Mix
Multiple Products
Unit Selling Price
VOLUME
Direct
No. of units sold
Assumptions in CVP (CULETS)
Cost
Variable & Fixed
Unit Selling Price; VC; Constant
CM; and Total Fixed Cost
Linear Relationship
Relevant Range
Ending Inventory
= Beg. Inventory; Production = Sales
Time Value of Money
Ignored
Sales Mix
Constant
Variables of Profit
Sales Volume
Unit Sales Price
Unit Variable Costs
Total Fixed Costs
Sales Mix
Basic
Changes
Constant*
Constant
Constant
Constant
Assumptions
Sensitivity
Changes
Changes
Changes
Changes
Changes
BREAKEVEN ANALYSIS
Level of Sales
(units/peso)
Revenue = Cost
Profit/Loss = 0
Methods
1. Break even Chart
a. Graphical Method
2. Profit Volume Chart
Profit = Sales – Chart
b. Equation Approach Let x be the breakeven point
0 = SP (x) – VC (x) – TFC
BEP (units) = Total Mixed Cost
c. Contribution Margin
CM/unit
Approach
BEP (peso) = Total Fixed Cost
CM ratio
Target Profit
How many units?
To achieve target profit
How many sales?
- Total Amount; per unit, or in terms of %
TP (units) = Total Fixed Cost + Target NIBTx
CM/unit
TP (peso) = Total Fixed Cost+ Target NIBTx
CM ratio
Formula:
-
PRO
FORMA
Contribution Margin Income Statement
Direct costing
Cost if classified according to behavior (variable/fixed)
For internal reporting purposes only
UNITS
Sales
Variable cost
Contribution margin
Fixed cost
NIBTx
Tax
NIATx
TOTAL
xx
(xx)
xx
(xx)
xx
(xx)
XX
Per Unit
SP/u
VC/u
CM/u
FC/u
NIBTx/u
Tx/u
NIATx/u
% of Sales
100%
VCRatio
CMRatio
FCRatio
NIBTx Ratio
Tx Ratio
NIATx Ratio
THE CONTRIBUTION MARGIN INCOME STATEMENT
The costs and expenses in the Contribution Margin Income Statement
are classified as to behavior (variable and fixed). The amount of
contribution margin, which is the difference between sales and
variable costs, is shown. The format is as follows:
CONTRIBUTION MARGIN INCOME STATEMENT
Sales (units x selling price)
Less variable costs
(units x variable cost per unit)
Contribution margin
Less total fixed costs
Income before tax
xx
xx
xx
xx
xx
MARGIN OF SAFETY
Definition
-
Margin where you are safe
Level of sales that contributes to profit
Level of sales that can be lost without a loss
The amount of peso sales or the number of
units by which actual or budgeted sales may be
decreased without resulting into a loss.
Margin of Safety (MOS) = Total Sales – Breakeven Sales
FORMULA
Other
formulas
UNITS
%
Total Sales
xx
100%
Breakeven Sales
(xx)
BE Ratio
MOS
XX
MOS Ratio
MOS Ratio x CM Ratio = Profit Ratio
BE Ratio x CM Ratio = Fixed Cost Ratio
The amount of peso sales or the number of units by which
actual or budgeted sales may be decreased without resulting
into a loss.
MSp = Sp – BEPp or MSp / SP
MSu = Su – BEPu or MSu / SU
MSR = MSp / Sp or MSu / Su
Where: MSp = Margin of safety in pesos
MSu = Margin of safety in units
MSR = Margin of safety ratio
Sp = Sales in pesos
Su = Sales in units
BEPp = Break-even point in pesos
BEPu = Break-even point in units
SP = Selling price
Degree of Operating Leverage or Operating Leverage Factor
FORMULA
Measures
(w/
Direct
Relationship to
DOL)
DOL = CM
or
1
or
% ∆ in Net Income
NIBTx
MOS Ratio
% ∆ in Sales
1.
Operating Risk = Risk of Loss
2.
Fixed Cost Use
3.
Earnings Potential
% ∆ in Sales x DOL = % ∆ in Profit (+/-)
Contribution Margin – residual amount from Selling Price that
contributes to Profit
SUMMARY NOTES
Prof. Rica M. Quitoriano
BSA 3B
STRACOSMAN: STRATEGIC COST MANAGEMENT
CHAPTER 2: Management Accounting Concepts and Techniques for Planning and Control
SUMMARY NOTES BY: Mary Joy C. Nala, CB
BS ACCOUNTANCY 3B | 2nd SEMESTER A.Y. 2022-2023
Standard Costing and Variance Analysis
DIRECT MATERIALS VARIANCE
Actual DM Cost
AQu x AP
Budgeted DM Cost
AQu x SP
Standard DM Cost
SQ X SP
If AQu is given: MQV = (AQu - SQ) x SP
DIRECT LABOR VARIANCE
Actual DL Cost
AH x AR
Budgeted DL Cost
AH x SR
Standard DL Cost
SH x SR
Actual FOH Cost
Budgeted FOH Cost
Standard FOH Cost
Price
Quantity
Efficiency
-
Budget/
Spending
Efficiency
VARIABLE OH VARIANCE
Actual VOH Cost
AH x AVOR
Budgeted VOH Cost AH x SVOR
Standard VOH Cost
SH x SVOR
Spending
(x)
x
(x)
x
Actual Input
Standard Input (AO + SO x SI)
Difference F (UF)
Weighted Ave. SP – Std Combination
DM YIELD VARIANCE
X
(x)
x
(x)
x
x
x
ABSORPTION
DM, DL, VOH, FOH
SE, AE
x
x
(x)
x
x
x
DM Mix Variance + DM Yield Variance = DM Qty Var.
PRODUCT COSTING
1. Absorption Costing
- Assigns all manufacturing costs to the product
- DM, DL, VOH & FOH define the cost of a
product
- Fixed OH is viewed as a product cost, not a
period cost
- Fixed OH is assigned to the product through the
use of a predetermined fixed OH rate and is not
expected until the product is sold
2. Variable Costing
- Stresses the difference between fixed and
variable manufacturing costs
VARIABLE
DM, DL, VOH
FOH, SE, AE
GAAP requires AC for external reporting
VC can supply a vital cost information for decision
making and control
For internal application, VC is an important
managerial tool
Product Cost
Inventoriable cost – Asset
Includes raw materials, labor
and overhead
Efficiency
MIXED & YIELD VARIANCE
Weighted Average – Std. Combination
(Std. Units x Std. Price) + Total Std Units
Weighted Average – Actual Combination
(Actual Units x Std. Price) + Total Actual Units
Difference F (UF)
Actual Input or Total Actual Units
x
DM MIX VARIANCE
Actual Input
Standard Input (AO + SI x SO)
Difference F (UF)
Std Price per Unit (Std Units x Std Price + SO)
DM YIELD VARIANCE
COMPARISON OF ABSORPTION AND VARIABLE
Product Costs
Period Costs
Rate
FIXED OH VARIANCE
AH x AFOR
AH x SFOR
SH x SFOR
Assigns only manufacturing costs to the product
Fixed OH is treated as period expense
(rationale: cost of capacity or staying in
business)
For Unit Cost
Direct Material
Direct Labor
Variable FOH
Fixed FOH
Period Cost
Expired cost – expense
General, selling, and
administrative expense
ABSORPTION
COSTING
✓
✓
✓
✓
VARIABLE
COSTING
✓
✓
✓
x
THROUGHPUT
COSTING
✓
x
x
x
Variable Conversion Cost
INCOME STATEMENT
Sales
Less: COGS
Gross Profit or Margin
Less: Selling & Admin
Expense
Net income – AC
ABSORPTION COSTING
SP x units SOLD
xxx
Unit
Cost
AC x units SOLD
xxx
xxx
Fixed Commercial/OpEx +
xxx
Variable Commercial/OpEx
xxx
+/- Noncontrollable Variance
NET INCOME – AC
Sales
Less: Variable Cost
Contribution Margin
Less: Fixed Cost
xxx / (xxx)
Xxx
+/- Controllable Variance
NET INCOME – VC
ACTUAL Net Income
VARIABLE COSTING
SP x units SOLD
xxx
Unit Cost VC x units SOLD
xxx
CM/u x units SOLD
xxx
Fixed Commercial/OpEx + Fixed
xxx
FOH
Fixed OH (on units produced)
Fixed Selling & Admin Expense
Net income – VC
If there is Noncontrollable
Variance, this NI is @ std. value
Favorable (+); Unfavorable (-)
xxx
xxx / (xxx)
Xxx
If there is controllable Variance,
this NI is @ std. value
Favorable (+); Unfavorable (-)
ACTUAL Net Income
ABSORPTION (FULL) COSTING
• A product costing method that includes all the
manufacturing costs (direct materials, direct labor,
and both the variable and fixed factory overhead) in
the cost of a unit of product.
• Under the absorption costing method, fixed factory
overhead is treated as a product cost.
SUMMARY NOTES
Prof. Rica M. Quitoriano
BSA 3B
STRACOSMAN: STRATEGIC COST MANAGEMENT
CHAPTER 2: Management Accounting Concepts and Techniques for Planning and Control
SUMMARY NOTES BY: Mary Joy C. Nala, CB
BS ACCOUNTANCY 3B | 2nd SEMESTER A.Y. 2022-2023
VARIABLE COSTING
• A product costing method that includes only the
variable manufacturing costs (direct materials, direct
labor, and variable overhead) in the cost of a unit of
product.
• Under the variable costing method, fixed factory
overhead is treated as a period cost.
Accountin
g
Principles
Income
statement
COSTING METHOD
Absorption
Distinguishes
between
production and other costs
S
xx
- CGS (production
xx
cost)
PRODUCT COST COMPONENTS
COSTING METHOD
Absorption
Direct materials
Direct labor
Variable FOH
Fixed FOH
Product Cost
Variable
Direct materials
Direct labor
Variable FOH
Product Cost
Distinction Between Product Cost And Period Cost
COST
Product
Period
Cost that is charged against
Cost that is included in the current revenue during a
computation of product cost time period regardless of
that is apportioned between the difference between
the sold and unsold units.
production and sales
volume.
An inventoriable cost. The
portion of the cost that has
Does not form part of the
been allocated to the
cost of inventory.
unsold units becomes part
of the cost of inventory.
Reduces current income by
the portion allocated to the
Reduces income for the
sold units; the portion
current period by its full
allocated to unsold units is
amount.
treated as an asset; being
part of the cost of inventory.
Inventory Costs Between Variable Costing and
Absorption Costing
Accountin
g
Principles
Cost
segregation
Cost of
inventory
Treatment
of fixed
factory
overhead
COSTING METHOD
Absorption
Seldom segregates costs
into variable and fixed
costs
Variable
Costs are segregated
into variable and fixed
Cost of inventory includes
all the manufacturing costs:
materials, labor, variable
factory overhead and fixed
factory overhead
Cost of inventory
includes only the
variable
manufacturing costs:
materials, labor, and
variable
factory
overhead
Fixed factory overhead is
treated as product cost
Fixed
factory
overhead is treated as
period cost
Net income
Variable
Distinguishes
between variable and
fixed costs
S
xx
- VC
xx
Gross profit
xx
CM
xx
- S&A Costs
xx
- FC
xx
Profit
xx
Profit
xx
Net income between the two methods may differ from
each other because of the difference in the amount
of fixed overhead costs recognized as expense
during an accounting period. This is due to variations
between sales and production. In the long run,
however, both methods give substantially the same
results since sales cannot continuously exceed
production, nor production can continually exceed
sales.
RECONCILIATION OF ABSORPTION AND VARIABLE
COSTING INCOME FIGURES
Absorption costing income
xx
Add
xx
: Fixed overhead in the beginning inventory
Total
Less
xx
: Fixed overhead in the ending inventory
xx
Variable costing income
xx
Variable costing income
xx
Add
xx
: Fixed overhead in the ending inventory
Total
Less
xx
: Fixed overhead in the beginning inventory
Absorption costing income
xx
xx
ACCOUNTING FOR DIFFERENCE IN INCOME
xx
Change in inventory (production less sales)
xx
Multiply by Fixed FOH cost per unit
xx
Difference in income
DIFFERENCE IN INCOME UNDER ABSORPTION AND
VARIABLE COSTING
COMPARISON OF
Production And
Sales
P=S
P>S
P<S
Net Income
AC = VC
AC > VC
AC < VC
Fixed FOH
Expensed
AC = VC
AC < VC
AC > VC
SUMMARY NOTES
Prof. Rica M. Quitoriano
BSA 3B
STRACOSMAN: STRATEGIC COST MANAGEMENT
CHAPTER 2: Management Accounting Concepts and Techniques for Planning and Control
SUMMARY NOTES BY: Mary Joy C. Nala, CB
BS ACCOUNTANCY 3B | 2nd SEMESTER A.Y. 2022-2023
Financial Planning and Budgets
BUDGET
• Is a detailed plan, expressed in quantitative terms,
about business operations for a specific period; a
budget is a useful tool for planning and controlling
company expenses, cash flows, and earnings. The
term budgeting is used to denote the process of
coming up with budgets.
• A realistic plan, expressed in quantitative terms, for
a certain future period of time.
BUDGET MANUAL – describes how a budget is to be
prepared. It usually includes:
•
•
BUDGET PLANNING CALENDAR – the schedule
of activities for the development and adoption of
the budget. It includes a list of dates indicating
when specific information is to be provided by / to
those who are involved in the budgeting process.
DISTRIBUTION INSTRUCTIONS – for all budget
schedules, so that those segments involved in the
budget preparation would know to whom / from
whom a computed budget schedule is to be given
/ acquired.
BUDGET REPORT – shows a comparison of the actual
and budget performance. The budget variances, which are
properly described as either favorable or unfavorable, are
also shown on the report.
THE MASTER BUDGET
The master budget is a comprehensive budget that
consolidates the overall plan of the organization for a
specified period. The master budget is mainly composed
of: (1) operating budgets and (2) financial budgets. The
master budget, in some organizations, is also referred to as
pro forma budget, forecast budget, master profit plan.
MASTER
BUDGET
OPERATING
BUDGET
Sales Budget
Production
Budget
Budgeted Cost
of Goods Sold
Budgeted
Operating
Expenses
FINANCIAL
BUDGET
Budgeted Net
Income
Budgeted
Income
Statement
Cash Budget
Direct Materials
Budget
Budgeted
Balance Sheet
Direct Labor
Budget
Budgeted Cash
Flow Statement
Factory
Overhead
Budget
Capital
Expenditure
Budget
Flexible
budgeting
Fixed
or
static
budgeting
Continuous
or rolling
budgeting
Zero-based
budgeting
Incremental
budgeting
STATIC BUDGET VARIANCE ANALYSIS
ACTUAL
BUDGET
VARIANCE
Level of activity
(sales
or
production
volume)
Cost 1
500
200
300
2,000
3,000
( 1,000) F
Cost 2
Total
5,500
7,500
5,000
8,000
500 U
500) F
(
FLEXIBLE BUDGET VARIANCE ANALYSIS
ACTUAL
BUDGET
VARIANCE
Level of activity
(sales
or
production
volume)
Variable Costs
500
500
-
3,500
2,500
1,000 U
Fixed Costs
Total
5,000
8,500
5,000
7,500
1,000 U
Activity-Based Costing (ABC) And Activity-Based
Management (ABM)
ACTIVITY BASED COSTING (ABC) SYSTEM allocates
overhead to multiple activity cost pools and assigns the
activity cost pools to products by means of cost drivers.
a. Activity Levels (Unit-Level, Batch-Level, ProductLevel and Facility-Level), Cost Pools and Activity
Drivers
- An activity is any event, action, transaction, or
work sequence that incurs costs when
producing a product or providing a service.
Working
Capital Budget
Preparing a Master Budget by
Analyzing the Behavior of Revenues and Costs
BUDGETING MODELS
A series of budgets prepare for many levels of activity. It makes
possible the adjustment of the budget to the actual level of activity
before comparing the budget figures with the actual results.
Does not segregate costs into fixed and variable components. Costs
are estimated only at a single level of activity. Actual costs are
compared with the budgeted costs regardless of the actual level of
production and costs variances are obtained and analyzed
accordingly. A budget based on only one level of activity (sales or
production volume)
Maintains a particular time frame (or period) covered in budgeting
(say 12 months). When a time segment (e.g., month) had passed, it
is dropped from the budget frame and a new month is added to
maintain a given time covered by the budget.
Does not consider the past performances in anticipating the future.
Incoming costs should be classified and packaged based on
activities which must be prioritized and justified as to their
incurrence. The objective is to encourage objective examination of
all costs in the hope that costs could be better controlled. ZBB starts
from the lowest budgetary units of the organization.
A budgeting process wherein the current period’s budget is simply
adjusted to allow for changes planned for the coming period.
Unit-Level
ACTIVITY LEVELS
The unit-level activities are performed each time a unit of a
product is produced. The number of times unit-level
activities (such as drilling holes and inspecting every part)
SUMMARY NOTES
Prof. Rica M. Quitoriano
BSA 3B
STRACOSMAN: STRATEGIC COST MANAGEMENT
CHAPTER 2: Management Accounting Concepts and Techniques for Planning and Control
SUMMARY NOTES BY: Mary Joy C. Nala, CB
BS ACCOUNTANCY 3B | 2nd SEMESTER A.Y. 2022-2023
Batch-Level
Product-Level
Facility-Level
are performed varies according to the number of units
produced.
These are costs incurred every time a group (batch) of units
is produced or a series of steps is performed. Purchase
orders, machine setup, and quality tests are examples of
batch‐level activities.
Also known as the product sustaining level, these are
activities that are needed to support the entire product line
regardless of the number of units and batches produced.
Examples: engineering costs, product development costs.
Also called business (organization) sustaining activity, is an
activity that supports business operations in general and
cannot be traced to individual units, batches, or products.
COST POOLS
•
•
A “bucket” in which costs are accumulated that relate to a
single activity measure in the ABC system
It is a group of costs usually associated with a common cost
driver.
ACTIVITY DRIVERS
•
•
A factor that causes a change in the cost pool for a particular
activity. It is used as a basis for cost allocation; any factor or
activity that has a direct cause-effect relationship.
Cost drivers are the actual activities that cause the total cost
in an activity cost pool to increase.
Traditional Costing
Traditional costing assigns
manufacturing overhead based
on the volume of a cost driver,
such as the amount of direct
labor hours needed to produce
an item. A cost driver is a factor
that causes cost to incur, such
as machine hours, direct labor
hours and direct material hours
An advantage of using
traditional-based costing is that
it aligns with Generally Accepted
Accounting Principles, or GAAP.
Easy
implementation
for
companies that provide one
product also is a plus
Activity-based costing
Activity-based costing allocates
the costs of manufacturing a
product according to the
activities needed to produce the
item.
Managers
should
understand the advantages and
disadvantages of both systems
to meet the needs of their
business.
Activity-based costing provides
a more accurate view of product
cost, but companies typically
use it as a supplemental costing
system.
STRATEGIC COSTS MANAGEMENT
A core definition of total quality management (TQM)
describes a management approach to long–term success
through customer satisfaction. In a TQM effort, all members
of an organization participate in improving processes,
products, services, and the culture in which they work.
8 Principles of TQM:
1. Customer-focused
2. Total employee involvement
3. Process-centered
4. Integrated system
5. Strategic and systematic approach
6. Continual improvement
7. Fact-based decision making
8. Communications
Just-In-Time Production System
Just-in-time (JIT) is an inventory strategy companies employ to increase efficiency and
decrease waste by receiving goods only as they are needed in the production process,
thereby reducing inventory costs. This method requires producers to forecast demand
accurately.
Continuous improvement, sometimes called continual improvement, is the ongoing
improvement of products, services or processes through incremental and breakthrough
improvements.
Kaizen costing is applied to products that are already in production phase. Prior to
kaizen costing, when the products are under development phase, target costing is
applied.
Product Life Cycle
PRODUCT
LIFE CYCLE
Early Stages
Later Stages
PROCESS VALUE ANALYSIS
A strategy that businesses use to determine whether all of
their operational expenses are necessary and if they could
be operating more efficiently. Process value analysis looks
at what the customer wants and then asks if each aspect of
operations is necessary to achieve that result. The goal of
process value analysis is to eliminate unnecessary
expenses incurred in the process of creating a good or
service without sacrificing customer satisfaction.
Value-Added Activities
Non-Value-Added
Activities
Value added to customers: Non-value-added: steps that
steps that directly impact could be eliminated or
customer satisfaction
changed without harming
service levels or the
organization
Introduction
Maturity
Growth
Decline
A series of stages that products pass through in their lifetime, characterized by changing
product demands over time.
Target costing
Target costing is defined as "a disciplined process for determining and achieving a fullstream cost at which a proposed product with specified functionality, performance, and
quality must be produced in order to generate the desired profitability at the product’s
anticipated selling price over a specified period of time in the future."
Target costing process
SUMMARY NOTES
Prof. Rica M. Quitoriano
BSA 3B