Performance Management Flashcards
(39 cards)
What is Absorption Costing?
Budgeted overheads / budgeted activity levels
What is the implication of absorption costing
It is reliant on the budget being accurate
What are the 4 steps of ABC
- Analyse overheads in to cost pools
- Eatablish cost drivers for each cost pool
- Work out the OAR for each cost driver
- Use the OAR to absorb costs from each pool into units to work out overhead cost per unit
What are the 4 associated issues with ABC
- Time consuming to implement
- Requires data to be available quickly in order to be accurate
- Not fully understood by managers
- Difficult to identify cost drivers
4 ways to close the cost gap?
- Cheaper staff
- Negotiate better supplier prices
- Redesign product
- Improve production efficiency
Principles of target costing ?
- Price is derived from market research
- Profit aims are deducted from price to leave the desired cost
What is cost gap?
Cost gap is the difference between current cost and desired cost
Name the benefits of target costing
- External focus
- Reduces time to manage
- Product design will only include features customers value
- Cost control starts sooner
What is SHIP? (Target costing in service industries)
Spontaneity service doesn’t exist until customer experiences it
Heterogeneity Each staff member is different therefore provides a different service. Cannot be standardised
Intangibility Not physical
Perishability Unused capacity cannot be stored
What does lifestyle costing involve?
Tracing all costs and revenues over its complete life cycle
What is the 1 stage of lifecycle costing?
- Research and development - market, research, testing and training
What is the 2nd stage of lifecycle costing?
Introduction - advertising, production and distribution
What is the 3rd stage of lifecycle costing?
Growth - Heavy advertising, storage costs and customer support
What is the 4th stage of lifecycle costing?
Maturity - brand awareness and promotions
What is the 5th stage of lifecycle costing?
Decline - decommissioning and scrapping costs
What are the 3 benefits of lifecycle costing?
- Better idea on profits and selling price at each stage
- Assists long term planning
- Avoids focusing on production costs only
What is throughout accounting used for ?
To assess internal performance
What is the theory of constraints?
There will be always be a function or resource that is stopping the business from increasing returns
What are the five steps of throughput accounting?
- Identify bottlenecks
- Maximise bottleneck
- Match other departments to maximised bottlenecks
- Obtain more bottlenecks resources
- Find next bottleneck & repeat until market demand is the constraint
What is the throughput contribution?
Revenue less variable costs
What is the throughput accounting ratio (TPAR)
Throughput contribution divided by conversions costs (labour & fixed)
What does TPAR stand for?
Throughput accounting ratio
What does a TPAR ratio of greater than 1 signify?
Money is being earnt faster than it is being spent
Name three ways you can improve TPAR?
- Reduce bottlenecks
- Increase selling price
- Reduce costs
