10Costing methods

acca f2 第十章Costing methods，内容有： Job and batch costing Service costing Joint and by-products Activity-based costing (ABC) Total quality management(TQM) Life cycle costing Target costing

Costing methods

• Job and batch costing
  • Characteristics of job and batch costing
    • Cost cards
    • Pricing a job
      • A selling price based on a 20%margin means that profit is 20%of cost.
        • Cost of job 80+Profit 20=Selling price 100 求价格可列方程式：cost+price(?)*percentage=price
      • A selling price based on a 20%mark-up means that profit is 20%of cost.
        • Cost of job 100+Profit 20=Selling price 120
• Service costing
  • Characteristics of service organisations
    • Composite cost units
      • 综合成本单位
    • Charging customers for services
      • similar to that which applies in job costing
    • Simultaneous
      • The production and consumption of a service are simultaneous, and therefore it cannot be inspected for quality in advance.
    • Heterogeneous
      • A service is heterogeneous. The service received will vary each time. Services are more reliant on people.
    • Intangible
      • A service is intangible. The actual benefit being bought cannot be touched.
    • Perishable
      • Services are perishable, that is, they cannot be stored.
  • Service department costing
    • The bases for charging service costs to user departments
      • No charge at all
      • Total actual cost
      • Standard absorption cost
      • Variable cost
      • Opportunity cost
      • Cost plus a margin for profit
    • ·To control the costs and efficiency in the service department.
    • ·To control the costs of the user departments, and prevent the unnecessary use of services.
• Joint and by-products
  • Joint products:Joint products are two or more products which are output from the same processing operation, but which are indistinguishable from each other up to their point of separation. By-products:A by-product is a supplementary or secondary product (arising as the result of a process) whose value is small relative to that of the principal product.
  • Distinguishing between joint and by-products
    • (a)A joint product is regarded as an important saleable item, and so it should be separately costed. The profitability of each joint product should be assessed in the cost accounts.
    • (b)A by-product is not important as a saleable item, and whatever revenue it earns is a ‘bonus’for the organisation. Because of their relative insignificance, by-products are not separately costed.
  • Valuing joint and by-products
    • • pay attention to the split-off point or separation point
    • Do not allocate joint costs to By-products
    • ·If usual occurrence then calculate net proceeds of by-products and reduce process costs by this amount.
    • If one-off then calculate net proceeds and treat as miscellaneous income.
  • Dealing with common costs
    • Physical measurement
      • (1) Allocate the joint costs on a physical units basis.
      • (2) Assuming P1 sells at $2/unit and P2 sells at $5/unit, what is the profit for each product?
    • Sales value at split-off point
      • most widely used
        • because the assumption that some profit margin should be attained for all products under normal marketing conditions is satisfied.
      • the cost is allocated according to the product's ability to produce income
    • comparison
      • physical measurement
        • is useful where
          • ·The joint products are in the same form eg both solids or both liquids
          • ·The joint products are components in another product and therefore have no relevant sales value.
      • sales value
        • is useful where:
          • •Products are to be sold immediately with no further costs being incurred (such as selling costs);
          • ·Joint products are not in the same form of output
  • Joint products in process accounts
    • 14.4
• Activity-based costing (ABC)
  • Theory of ABC
  • Steps in ABC
    • (a) Group overheads into activities, according to how they are driven. These groups are known as cost pools
    • (b) Identify the cost drivers for each activity, ie what causes the activity cost to be incurred.
    • (c) Calculate a cost per unit of cost driver.
    • d) Absorb activity costs into production based on usage of cost drivers.
  • ABC vs traditional absorption costing
    • uses many cost drivers as absorption bases
    • linked more closely to the causes of the overheads
    • recognises that overhead costs arise out of diversity and complexity of operations
• Total quality management(TQM)
  • Total quality management (TQM) is the process of applying a zero defect philosophy to the management of all resources and relationships within the firm as a means of developing and sustaining a culture of continuous improvement that focuses on meeting customers'expectations.
  • process
    • (a)建立一个产品/服务的质量标准 (b)建立程序或生产方法，以确保在适当的较高比例的情况下达到这些标准 (c)监控实际质量 (d)在实际质量低于标准时采取控制措施
    • (a) Establishing standards of quality for a product/service
    • (b) Establishing procedures or production methods to ensure these standards are met in a suitably high proportion of cases
    • (c) Monitoring actual quality;and
    • (d) Taking control action when actual quality is below standard.
  • two key philosophies
    • Get it right, first time
      • -The cost of preventing mistakes is less than the cost of correcting them if they occur.
    • Continuous improvement
      • -Never be satisfied with current achievement. It is always possible to improve performance.
  • Performance measures
    • Measures should also cover the work of the sales, distribution and administration departments
• Life cycle costing
  • Product life cycle
    • • be divided into five stages
  • considers all the costs that will be incurred from design to abandonment of a new product and compares these to the revenues that can be generated from selling this product at different target prices throughout the product's life.
• Target costing
  • Deriving a target cost
    • comparison
      • (a) Define product specification and estimate anticipated sales volume. (b) Set a target selling price at which the company will be able to achieve the desired market share. (c) Required profit is estimated based on profit margins or return on investment. (d) Target cost is calculated as:Target selling price -target profit =Target cost (e) The estimated cost of the product is calculated based on the product specification and current cost levels. (f) Estimated Product Cost-Target Cost=Cost Gap (g) Efforts are made to close the cost gap. Aim to 'design out'costs before production starts.
  • Target costing involves setting a target cost by subtracting a desired profit margin from a competitive market price.
    • ‘cost plus pricing’
      • calculate the cost of manufacturing and selling a product, and then add mark up
        • do not consider any external factors