F2 Management In Accounting
Sir Ahmed Shafi
ALTERNATIVE COSTING PRINCIPLES
1) Life Cycle Costing
Most products have life cycle which consists of several stages like development stage, introduction
stage, growth stage, maturity stage, and finally decline stage.
1. Development:
At this stage product is being developed. Only cost are incurred at this stage but no revenue are
generated.
2. Introduction:
The product is launched in the market. Potential customers are unaware of the product and the
company may have to spend heavily on advertisement to bring the product in attention of
customers.
3. Growth:
In this stage sales volume shoot up and units cost fall as fixed cost are recovered over greater
volumes. In this stage more competitors enter the market and the company needs to focus on
cost control
4. Maturity:
Eventually the growth in demand slows down and the product enters the period of maturity. Initially
profit continuous to increase, but the price competition starts to lower down profitability as firms
start competing for limited new customers remaining.
5. Decline:
At some stage, the product will move towards obsolescence as new and better alternatives arrive.
The product therefore reaches ‘saturation point’, where demand starts to fall. When profits fall to an
unacceptable level, the organization will remove the product from the market. In the meantime a
replacement product will need to have been developed. Therefore again creating a development
stage.
2) Total quality Management (TOM):
In the context of TOM, quality means getting it right first time and improving continuously.
What is TOM?
Tom is a process of applying a zero defect philosophy to the management of all resources within the
organization as a means of developing and sustaining a culture of continuous improvement which
focuses on meeting customers’ expectations.
65 | P a g e
F2 Management In Accounting
Sir Ahmed Shafi
Characteristics of a TQM programme:
Following are the requirements of the quality, or characteristics of a TOM programme:
1) Organization wide acceptance that the only thing that matter is quality
2) There should be strong customer supplier relationship, including internal customer, passing
sub -standard material to another division is not satisfactory.
3) Instead of relying on inspection for quality, the cause of defect in the first place shall
remove.
4) Each employee shall be personally responsible for defect free production in there domain.
5) There should be move away from acceptable quality level. Any level of defects must be
unacceptable.
6) All departments should try to get things right first time. This even applies to misdirected
phone calls and typing errors.
7) Quality certification programs should be introduced.
8) The cost of poor quality should be emphasized, good quality generates saving.
9)
1) Prevention costs(Supervisors)
2) Appraisal cost (Quality inspector)
3) Internal failure cost (rework)
4) External failure cost (Goodwill reputation, warranty)
These 4 costs above are costs of poor quality
Alternative Costing Principles MCQ’s
Which of the following statements is not correct?
a)
b)
c)
d)
Activity based costing ls an alternative to traditional volume-based costing methods
Activity based costs provide an approximation of tons-run variable unit costs
Activity based costing cannot be used to cost services
Activity based costing is a form of absorption costing
A product is in the stage of its life cycle which is typified by falling prices but good profit
margins due to high sales volumes. What stage is it in?
a)
b)
c)
d)
Growth
Maturity
Introduction
Decline
In what stage of the Product life cycle are initial costs of the Investment in the product
typically recovered?
a)
b)
c)
d)
Introduction
Decline
Growth
Maturity
66 | P a g e
F2 Management In Accounting
Sir Ahmed Shafi
How is target cost calculated?
a)
b)
c)
d)
Desired selling price-actual profit margin
Market price-desired profit margin
Desired selling price-desired profit margin
Market price-standard profit margin
Which stage of the product life cycle do the following characteristics refer to?New
competitors
Customer feedback received
New distribution outlets being found
Product quality Improvements made
a)
b)
c)
d)
Introduction
Decline
Growth
Maturity
Anew product is being developed. The development will take one year and the product is
expected to have a life cycle of two years before it is replaced.
Which of the following statements are true of life cycle costing?
Statement 1: It is useful for assessing whether new products have been successful.
Statement 2: The individual profitability for products is less accurate.
a)
b)
c)
d)
Both statements are true
Both statements are false
Statement 1 is true and statement 2 is false
Statement 2 is true and statement 1 is false (2 marks)
A chain of coffee shops has implemented a Total Quality Management system to ensure highquality
and consistency across all outlets. As part of the scheme, the chain offers a free replacement drink
to any customer not completely satisfied with their purchase.
Which, of the following BEST describes the cost of providing replacement drinks?
a)
b)
c)
d)
An external failure cost
An internal failure cost
A prevention cost
An appraisal cost
Which costing method ls based around a calculation involving a desired profit mar8ln and a
competitive market price?
a)
b)
c)
d)
Activity Based Costing
Total Quality Management
Target costing
Life cycle costing
148) which one of the following is an advantage of activity based costing?
a) It provides more accurate product cost
b) It is simple to apply
c) It is a form of marginal costing and so is relevant to decision making
d) It is particularly useful when fixed overheads are very low.
67 | P a g e
F2 Management In Accounting
Sir Ahmed Shafi
149) Quality control costs can be categorized into internal and external failure costs, inspection cost
and prevention costs. In which of these four classification would the following cost be included?
1) The cost of a customer service
2) The cost of equipment maintenance
3) The cost of operating test equipment
Customer service team
Equipment maintenance
A) Prevention costs
B) Prevention costs
C) External failure costs
D) External failure costs
Inspection cost
Internal failure costs
Internal failure costs
prevention costs
Test equipment
Internal failure costs
Inspection cost
Prevention costs
Inspection costs
150) In the context of quality costs, customer compensation cost and test equipment running cost
would be classified as:
Customer compensation costs
A)
B)
C)
D)
Internal failure costs
Internal failure costs
External failure costs
External failure costs
Test equipment running cost
Prevention costs
Appraisal costs
Appraisal costs
Prevention costs
151) The selling price of product K is set at $450 for each unit
If the company requires a return of 20% in the company year on product K, the target cost for each
unit for the company year is:
A) $300
B) $360
C) $400
D) $450
152) In calculating life cycle cost of a product, which of the following items would be excluded?
1) Planning and concept design costs
2) Preliminary and detailed designed costs
3) Testing costs
4) Production costs
5) Distribution and customer service costs
A) (iii)
B) (iv)
C) (v)
D) None of them
68 | P a g e
F2 Management In Accounting
Sir Ahmed Shafi
54) A customer returns a faulty product to a firm repair under a warranty scheme. The firm operates
a total quality management system.
Which of the following best describes the cost of repair?
A)
B)
C)
D)
An internal failure cost
An external failure cost
An appraisal cost
A prevention cost
69 | P a g e