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Performance Management
ACCA - F5
Performance Management 1
ACCA - F5
Performance Management 2
1.Direct costs were the dominant costs 2.Indirect costs were relatively small 3.Information costs were high 4.There was a lack of intense global competition 5.A limited range of products was produced.
ACCA - F5 Performance Management 4
ACCA - F5
Performance Management 5
ACCA - F5
Performance Management 8
ACCA - F5
Performance Management 9
ACCA - F5
Performance Management 11
ACCA - F5
Performance Management 12
ACCA - F5
Performance Management 13
absorption costing systems: 1. Assign indirect cost to cost unit 2. Use unsophisticated methods to assign indirect costs.
ABC systems: 1. Assign indirect cost to cost unit 2. Use sophisticated methods to assign indirect costs
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drivers usually known as allocation basis; OH allocation rates Normally use direct labour hours or machine hours Normally allocate service /production costs to production centres Merged with production centre costs cost pools Then allocate to cost objects based on OAR
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ACCA - F5
Performance Management 19
ACCA - F5
Performance Management 20
Cost pool for sales order handling Cost driver = no of orders processed Total in cost pool = $300,000 Total orders in the year = 1,000 orders Cost per Driver = $300 per order
Product A with 200 orders for the year Order processing cost to charge to Product A = $60,000 ($300 x 200)
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4 departments use purchasing function Total purchasing dept costs = $10,000,000 per year Usage of purchasing function: Department A (10M/300x200K) B (10M/300x50K) C (10M/300x40K) D (10M.300x10K) No of orders 200,000 50,000 40,000 10,000 300,000 Cost allocation 6,666,667 1,666,667 1,333,333 333,333 10,000,000
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ACCA - F5
cost driver
Rate $ / unit
Std product cost: Unit material 0.50 Unit labour 0.40 Total production for coming year 1,000,000 units No of production runs 50 (inspect once at end of each production run) No of PO required 50 No of customer order 10 Unit machine time3 minutes ACCA - F5 Performance Management 23
Allocated cost per unit = 130,850 / 1,000,000 units = $0.14 Std unit cost for Product B: Material $0.50 Labour 0.40 Ohead 0.14 $1.04 ACCA - F5 Performance Management 24
ABC Advantages
Allows company to assess product profitability realistically competitive market Cost behaviour is better understood Facilitates cost control enable ultimate cost reduction Enhances better decisions Recognises the current complexity in manufacturing with multiple cost drivers (wider product range, shorter life cycles, complex processes)
ACCA - F5 Performance Management 25
ABC Limitation
ACCA - F5
Performance Management 26
Product strategy encourages focus on products with higher profit margin Helps in identifying value added and non-value added items/activities with a view to elimination Forces managers to evaluate drivers that effect costs and what these drivers contribute to the final product
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Decision making Accurate cost enhances management decisions such as make-or- buy, expansion or discontinuing business line
ACCA - F5
Performance Management 28
ACCA - F5
Performance Management 29