COSTING CONCEPTS
Laura Hamrick
Joe Hepworth
Kenneth Holmes
Beygum Kahn
Peter Kelleher
Professor Jason Cade
Applied Management Accounting
Colorado Technical University
EEC Potential Costing Methods
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Full Costing/ Absorption Costing
Variable Costing
Target Costing
Life-Cycle Costing
Activity-Based Costing
Full Costing/Absorption Costing
Accumulates fixed and variable costs associated
with a production process and portions them
out to individual products in inventory.
 Used to record the value of inventory in
financial statements.
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Full Costing/Absorption Costing Benefits
Allows the product to absorb the full range of
fixed and variable costs into the overhead.
 Costs are not seen as expenses, and they
remain in inventory as assets until the inventory
is sold; at that point, they are charged to the
cost of goods sold.
 Allows overhead accounts to absorb heavy or
unexpected production costs until the volume
ratchets up.
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How EEC Would Apply Full Costing
Project and Forecast EEC’s allocation of funds
to cover the variable and fixed costs that
comprise the manufacturing overhead. The
costs’ valuation will remain in the inventory
until the products are sold.
 Over absorb materials’ rising cost during peak
demand periods and under absorb ebbing
material cost during low demand periods.
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Variable Costing
Separates the fixed costs from variable costs.
 Fixed costs are expensed as a period cost.
 Only the variable manufacturing costs are
captured in the product cost.
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Variable Costing Potential Benefits
Ease of use for management
 Aide in decision making for production level
 Provides contribution margin
 Assists with management performance.
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How EEC Would Apply Variable Costing
Use this method for high volume production
 Use the contribution ratio as decision making
tool
 Adjust production levels based on contribution
 Focus on sales of products to match the
production levels
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Target Costing
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Target costing
◦ Determines the market price requirement, then
subtracts the target profit to arrive at the target cost,
then develops a prototype that can be profitably
made for the maximum target cost.
◦ Formula for Target Costing
 Anticipated selling price – Mandated profit
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Industries most applicable for
◦ Companies that compete by continually issuing a
stream of new or upgraded products into the market
place (consumer goods).
◦ Target costing is an excellent tool for planning a suite
of products that have high levels of profitability.
Target Costing Potential Benefits
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Achieve greater cost efficiency
Proactive approach to cost management
Orients ECC toward its customers
Breaks down department barriers
Foster’s employee awareness and
empowerment
Foster partnerships with suppliers
Encourages production of cost effective
products
Reduced time to market
Improves global competitiveness
How EEC Would Apply Target Costing
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Conduct research
Calculate maximum cost
Determine target cost
Engineer the product
Ongoing activities
Shelf if necessary
More precise review approach
Life-Cycle Costing
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Tracks, analyzes, and interprets the costs occurred over a
product’s life time
Products tend to have ◦ High costs in their earlier phases (Development, Intro,
Growth)
◦ Low costs as product nears end of life-cycle (Maturity &
Decline)
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Phases of Life-Cycle Costing
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Development
Introduction
Growth
Maturity
Decline
Life-Cycle Costing Potential Benefits
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Planning / Foresight
Better grasp of product expectation
Aware that new product development will be
needed
Keeps companies relevant in the market &
industry
Increased advertising
Better budgeting
Increase in research and development
How EEC Would Apply Life-Cycle Costing
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Develop new products while previous products
are in early introduction phase
Modifications to current products in order to
increase sales revenues and profit
Budget for product advertisement
Conduct consumer surveys of popularity of
product
Understand when life-cycle begins to drop
Understand need for new innovation in timely
manner
Activity-Based Costing
Assigns costs to activities based on the
resources used in the production process
 Direct approach to allocating overhead costs in
the production process
 Two Stages of Allocation
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◦ Allocation to Activities
◦ Allocation to Production
Activity-Based Costing Benefits
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More accurate costing of products/services, customers,
SKUs, distribution channels.
Better understanding overhead.
Easier to understand for everyone.
Utilizes unit cost rather than just total cost.
Integrates well with Six Sigma and other continuous
improvement programs.
Makes visible waste and non-value added activities.
Supports performance management and scorecards
Enables costing of processes, supply chains, and value
streams
Activity Based Costing mirrors way work is done
Facilitates benchmarking”
How EEC Would Apply Activity-Based
Costing
Identify activities in the production process
 Classify each activity according to the cost hierarchy
 Identify and accumulate total costs of each activity
 Identify most appropriate cost driver or each activity
 Calculate total units of the cost driver relevant to each
activity
 Calculate the activity rate
 Apply the cost of each activity to product base
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CONCLUSION
Based on the five costing methods target
costing is the best approach:
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Target costing is most appropriate
Each product assigned a team and continually
reduces cost and updates the product.
Price, profit and cost are fixed.
Requires all aspect of production to be cost
efficient.
Makes all departments part of the process by
breaking down department barriers.
EEC would use market research to develop
product line, making them more competitive.
References
Activity-Based Costing - ABC. (2015). Retrieved from Investopedia: http://www.investopedia.com/terms/a/abc.asp
Advantages and disadvantages of variable costing. (2014). Retrieved from Accounting For Management :
http://www.accountingformanagement.org/advantages-and-disadvantages-of-variable-costing/
Ahmed, S. (2014). Advantages, Disadvantages and Limitations of Activity Based Costing (ABC) System. Retrieved from
http://www.accounting4management.com/limitations_of_activity_based_costing.htm
Cade, J. (2015, January 23). Applied Managerial Accounting [live chat]. Retrieved from Colorado Technical University,
ACCT614-1501A-04 : Applied Managerial Accounting: https://campus.ctuonline.edu
Colorado Technical University. (2015). Cost Behavior Patterns and Concepts.{Presentation}Retrieved February 2nd,
2015. From: https://campus.ctuonline.edu/courses/ACCT614/p2/hub1/7376.pdf
Cromwell, J. (2015). What Are the Two Stages of Allocation in Activity-Based Costing? Retrieved from
http://smallbusiness.chron.com/two-stages-allocation-activitybased-costing-34760.html
Farid, S. (2015). Target Costing Approach To Pricing. Retrieved from Accounting4Management.com:
www.accounting4management.com>Costing
References
Johnson, R. (2015). Traditional Costing Vs. Activity-Based Costing. Retrieved from
http://smallbusiness.chron.com/traditional-costing-vs-activitybased-costing-33724.html
Leahy, T. (1998, January 1). The Target Costing Bull's-eye, Part One of a Series/ BPM. Retrieved from
www.businessfinancemag.com./bpm/target-costing-bullseye-part-one-series
Malonis, J. A. (Ed.). (2000). Encyclopedia of Business (2nd ed.). Farmington Hills, MI: Gale Group, Inc.
http://skillport.books24x7.com/toc.aspx?bookid=50321
Management Accounting. (n.d.) What is Life Cycle Costing? Retrieved February 2nd, 2015. From: http://managerialaccounting.blogspot.com/2012/06/what-is-life-cycle-costing.html
N.A. (2015). Target Costing. Retrieved from AccountingTools.com: www.accountingtools.com/target-costing
Variable costing versus absorption costing. (2014). Retrieved from Accounting For Management :
http://www.accountingformanagement.org/variable-vs-absorption-costing/