ACCA - P5 Study text - Emile Woolf INT - 2010
Подождите немного. Документ загружается.
Chapter 18: Developments in management accounting and performance management
© EWP Go to www.emilewoolfpublishing.com for Q/As, Notes & Study Guides 425
the sales volumes that it will be able to achieve for the product over its expected
life.
There may also be estimates of the capital investment required, and any incremental
fixed costs (such as marketing costs or costs of additional salaried staff).
Taking estimates of sales volumes, capital investment requirements and incremental
fixed costs over the life cycle of the product, it should be possible to calculate a
target cost. The target cost for the product is the maximum variable cost for the
product, that will provide at least the minimum required return on investment.
There will be a gap between the cost at which the product can be made now and the
target cost. The aim should be to close the gap, and reduce the cost of making the
product to the target cost level. The most effective way of closing the gap is to re-
design the product, so that it can be produced at less cost.
The steps in a target costing exercise are therefore as follows:
Decide the type of product required
Decide what the required sales volume should be (and market share)
Decide what price the product must have in order to achieve the target sales
volume
Estimate the amount of investment required to develop and market the product
Estimate the required profit, measured as a return on the investment (ROI, NPV
or IRR measurements are possible)
Measure the target cost for the product: the target cost per unit of product is
estimated total revenue minus target profit, divided by the expected sales
volume in unit.
The target cost should be compared with the estimated cost of making the product
to the current specification. The current cost of the product is likely to be much
higher than the target cost, and the challenge is therefore to reduce costs from the
current estimated level to the target cost level. Usually, this will require a re-design
of the product, to new (and cheaper) specifications.
The elements in the target costing process are shown in the diagram below.
Target costing
Paper P5: Advanced performance management
426 Go to www.emilewoolfpublishing.com for Q/As, Notes & Study Guides © EWP
Example
A company has designed a new product. It currently estimates that to make the
product, an investment of $1,000,000 in machinery would be required. The residual
value of this investment would be $300,000 at the end of year 4, when the product is
expected to reach the end of its marketable life.
After studying potential demand in the market, the company has set a target selling
price of $20. It has been estimated that at this price, the annual sales volume in units
would be:
Year Sales volume
units
1 20,000
2 30,000
3 40,000
4 10,000
The current estimate of costs is that it would cost $14 to make each unit of the
product, but that there would be no incremental fixed costs. The company has a cost
of capital of 10% for this type of project.
This data can be used to calculate a target cost for the new product, and to identify
the current size of the cost gap.
In the table below, the variable cost per unit of product is shown as V.
Year
Capital cost/
residual value
Revenue
Variable
costs
Discount
factor at
10%
PV of
variable
costs
PV of other
cash flows
$ $ $ $ $
0 (1,000,000)
1.000
(1,000,000)
1 400,000
20,000V
0.909
18,180V 363,600
2 600,000
30,000V
0.826
24,780V 495,600
3 800,000
40,000V
0.751
30,040V 600,800
4 300,000 200,000
10,000V
0.683
6,810V 340,500
79,810V 800,500
In order to make a return of at least 10% on the investment in the project, the
maximum variable cost per unit that can be permitted is $800,500/79,810 = $10.03.
The target cost for the product should therefore be $10.03, say $10 per unit. The
current estimated cost is $14 per unit; therefore the cost gap is $4.
The company needs to identify ways of closing this cost gap.
4.3 Techniques for achieving the target cost
Techniques used by project teams to achieve the target cost include value
engineering (VE) and functional analysis.
Chapter 18: Developments in management accounting and performance management
© EWP Go to www.emilewoolfpublishing.com for Q/As, Notes & Study Guides 427
Value engineering (VE)
Value engineering is an approach to designing new products in a way that achieves
the target amount of value. The target cost is analysed into:
cost elements for each department (such as direct material costs, direct labour
costs and depreciation costs), and
functional components (for example, in a motor car functional components
include the engine, the transmission system, the braking system, the chassis and
so on).
Value engineering then begins with an investigation into the functions of the
materials and parts purchased, with a view to either reducing costs or improving
the product’s performance and quality. For each material or component, the VE
team might ask questions such as:
What is the function of this material or component?
Is it necessary?
Can it be simplified?
Are all the features of the product or component necessary?
Can a standard part or component be used, instead of the part or component
that is currently in the product specification. Using standard components will
reduce costs, because standard components are purchased in larger quantities at
lower costs.
A VE project makes extensive use of cost tables. These provide a detailed analysis of
the costs of the product, and help the VE project team to identify the major factors
that drive the costs of the product. The team can identify areas of product design
where cost reductions of the required magnitude can be made.
The cost tables can be used to provide information about how the costs of the
product would be affected by:
using different production resources
using different materials, different manufacturing methods
changing the functions of the product, and
changing the product design.
Functional analysis
Functional analysis looks at each function of a product, with the aim of deciding:
whether the functions performed by the product can be modified
whether the product functions can be reduced
whether the product functions can be increased (increasing the functions of a
product may increase the cost of the product, but add to its value to the
customer by even more), or
whether two or more functions can be combined.
Paper P5: Advanced performance management
428 Go to www.emilewoolfpublishing.com for Q/As, Notes & Study Guides © EWP
To carry out functional analysis, cost tables are needed. These should provide
detailed costs of each product function, so that the implications for cost of altering
the product’s functions can be considered.
4.4 Kaizen costing
For companies that practice TQM and continuous improvement methods, Kaizen
costing takes over where target costing ends.
Target costing is used in the design and development stage for a new product.
Kaizen costing is applied from the time that a product goes into full production
until the end of the product’s life.
Taken together, target costing and Kaizen costing are systems for life cycle costing.
The philosophy of continuous improvement (Kaizen) is based on the view that
markets are highly competitive and industry must try to keep reducing costs in
order to reduce selling prices in order to maintain a competitive advantage. Kaizen
costing is a management accounting system that provides cost information to help
with achieving improvements without loss of product quality or value.
Most of the costs of a product over its entire life cycle are committed during the
design and development stage. This is why target costing is a valuable technique for
the control of costs (without loss of value). However, there is still some scope for
further cost reduction after commercial production and marketing of the product
has begun.
A Kaizen costing system is therefore a costing system that is designed to help a
company to reduce product costs.
A target for cost reductions is set. This target is below the current cost. The cost
reduction must be achieved without any loss of value for the customer. For
example, a target might be set to reduce unit costs of production by 5% within
two years.
Teams are established to identify methods of making improvements.
Kaizen focuses on making small improvements, and it is unlikely that a single
improvement will be sufficient to achieve the target cost reductions. Many
different improvements might be needed, over a period of time.
Actual costs are continually compared with the target costs, and progress
towards achieving the target cost is monitored through regular reporting.
The project teams must continually review production conditions to find ways
of making more improvements and more cost reductions.
Normally, teams are rewarded with bonuses if they achieve their cost reduction
targets.
When one cost reduction target is met, another cost reduction target takes its
place. With Kaizen, the process of seeking improvements never ends.
Chapter 18: Developments in management accounting and performance management
© EWP Go to www.emilewoolfpublishing.com for Q/As, Notes & Study Guides 429
Techniques for continuous improvement
Teams that are given the responsibility for making improvements might use value
analysis (VA) methods. VA is similar to value engineering, except that VA is
applied to existing products and VE to products during their design and
development stage.
The types of questions that might be asked are as follows:
Can common materials and parts be used? The same part might be used in two
or more parts of the product, or the same part might be used for several different
products that the company manufactures.
How much of the cost consists of purchased materials and components? Can
major suppliers be persuaded to reduce their own costs and prices?
Can improvements be made in logistics (distribution) or packaging?
Can the investment in the product (for example, working capital) be reduced?
Can improvements be made in production systems or maintenance methods?
Can the work be organised in a different way?
A system of value analysis must be supported by a management accounting system
that provides relevant cost data.
Kaizen costing compared with standard costing
It is useful to compare Kaizen costing with traditional standard costing.
With standard costing, expected costs are established based on current
production methods. Variances between actual and standard costs are
calculated, and variance reports focus on significant variations between actual
costs and the current standard. There is no motivation to make improvements
and reduce costs below the existing standard.
With Kaizen costing, actual costs are compared with the target, not an existing
standard. The variance reporting system is used to monitor progress towards the
target cost.
With standard costing, managers are encouraged to prevent adverse variances.
For example, if there is an adverse material price variance, the manager
responsible might decide to buy materials at a lower price from a different
supplier. The result could be a loss of quality, a fall in value and a reduction in
customer satisfaction. With Kaizen costing, reductions in cost must be achieved
without any loss of value.
Target costing and Kaizen costing are examples of management techniques that call
for a different management accounting system. In particular, project teams need
cost tables to assist them with identifying ways in which cost reductions might be
achieved and they need information to monitor progress towards targets.
A 1993 article on Kaizen and Kaizen costing concluded: ‘In the US, changes in the
focus and methods of production need to be accompanied by changes in
management accounting systems. The Japanese have provided guidance on how
management accounting can play a significant role in creating sustainable
competitive advantage for a firm. The more organisations rid themselves of
Paper P5: Advanced performance management
430 Go to www.emilewoolfpublishing.com for Q/As, Notes & Study Guides © EWP
traditional management accounting practices, the better is the chance that the new
ideas about manufacturing can take over and really show their worth. Old ways of
product costing blunt a firm’s ability to compete effectively and hinder their ability
to focus on world-class performance.’
(‘New product costing, Japanese style’: Margaret Lgagne and Richard Discenza.
CPA Journal May 1993).
Chapter 18: Developments in management accounting and performance management
© EWP Go to www.emilewoolfpublishing.com for Q/As, Notes & Study Guides 431
Environmental management accounting
The purpose of environmental management accounting
A framework for environmental management accounting
EMA techniques
5 Environmental management accounting
5.1 The purpose of environmental management accounting
For some companies, environmental issues are significant, in terms of both strategy
and cost.
Poor environmental behaviour can result in significant costs or losses, such as
fines for excessive pollution, environmental taxes, loss of land values, the cost of
law suits, and so on.
Environmental behaviour can affect the perception of customers, and their
attitudes to a company and its products. Increasingly, consumers take
environmental factors into consideration when they make their buying
decisions.
Environmental management accounting can be used to provide information to
management to help with the management of environmental issues. Traditional
management accounting techniques:
Under-estimate or even ignore the cost of poor environmental behaviour
over-estimate the costs of improving environmental practices, and
under-estimate the benefits of improving environmental practices.
Environmental management accounting (EMA) provides managers with financial
and non-financial information to support their environmental management
decision-making. EMA complements other ‘conventional’ management accounting
methods, and does not replace them.
The main applications of EMA are for:
estimating annual environmental costs (for example, costs of waste control)
budgeting
product pricing
investment appraisal (for example, estimating clean-up costs at the end of a
project life and assessing the environmental costs of a project)
estimating savings from environmental projects.
Paper P5: Advanced performance management
432 Go to www.emilewoolfpublishing.com for Q/As, Notes & Study Guides © EWP
5.2 A framework for environmental management accounting
Burritt et al (2001) suggested a framework for EMA based on providing information
to management:
from internal or external sources
as monetary or physical measurements
as historical or forward-looking information
where the focus is short-term or longer-term
that consists of routine reports or ad hoc information.
Four of these elements of EMA are shown in the following table:
Environmental management accounting (EMA)
Monetary EMA Physical EMA
Short-term focus Long-term focus Short-term focus Long-term focus
Historical
orientation
Routine
reporting
Environmental cost
accounting
Analysis of
environmentally-
induced capital
expenditures
Material and
energy flow
accounting
Accounting for
environmental
capital impacts
Ad hoc (one-
off)
information
Historical
assessment of
environmental
decisions
Environmental
life cycle costing,
environmental
target costing
Historical
assessment of
short-term
environmental
impacts, e.g. of a
site or product
Post-investment
assessment of
environmental
impacts of capital
expenditures
Future
orientation
Routine
reporting
Environmental
operational budgets
and capital budgets
(monetary
reporting)
Environmental
long-term
financial
planning
Environmental
long-term physical
planning
Ad hoc (one-
off)
information
Relevant
environmental
costing (e.g. special
orders)
Environmental
life cycle
budgeting and
target costing
Assessment of
environmental
impacts
Physical
environmental
investment
appraisal. Specific
project life cycle
analysis
Chapter 18: Developments in management accounting and performance management
©
EWP Go to www.emilewoolfpublishing.com for Q/As, Notes & Study Guides
433
Paper P5: Advanced performance management
434 Go to www.emilewoolfpublishing.com for Q/As, Notes & Study Guides © EWP
5.3 EMA techniques
Environmental management accounting techniques include:
re-defining costs
input-output analysis
environmental activity based accounting
environmental life cycle costing
Re-defining costs
The US Environmental Protection Agency (1998) suggested terminology for
environmental costing that distinguishes between:
conventional costs: these are environmental costs of materials and energy that
have environmental relevance and that can be ‘captured’ in costing systems
potentially hidden costs: these are environmental costs that might get lost within
the general heading of ‘overheads’
contingent costs: these are costs that might be incurred at a future date, such as
clean-up costs
image and relationship costs: these are costs associated with promoting an
environmental image, such as the cost of producing environmental reports.
There are also costs of behaving in an environmentally irresponsible way, such
as the costs of lost sales as a result of causing a major environmental disaster.
In traditional management accounting systems, environmental costs (and benefits)
are often hidden. EMA attempts to identify these costs and bring them to the
attention of management.
Input-output analysis
Input-output analysis is a method of analysing what goes into a process and what
comes out. It is based on the concept that what goes into a process must come out or
be stored. Any difference is residual, which is regarded as waste.
Inputs and outputs are measured initially in physical quantities, including
quantities of energy and water. They are then given a monetary value.
Inputs
100%
Output product 60%
Scrap sold for re-cycling 20%
Disposed of as waste 15%
Unaccounted for 5%
Environmental activity based accounting
Environmental activity based accounting is the application of environmental costs
to activity based accounting. A distinction is made between: