BPP LEARNING MEDIA CIMA P2 Advanced Management Accounting For exams in 2016 江西财经大学会计学院 吉伟莉

BPP LEARNING MEDIA Chapter 1 Analysing and managing costs —Activity based costing (ABC) —Activity based management (ABM) —Customer profitability analysis (CPA) —Activity based profitability analysis —TQM —Other important techniques

Analysing and managing costs Activity based costing Total quality management techniques Activity based management Chapter Overview TQM Just in time Theory of constraints Continuous improvement Kaizen costing Cost of quality reporting Process re-engineering

Cost analysis in the modern business environment —Short-term variable costs that vary with production volume —Long-term variable costs that vary according to the complexity and diversity of production(fixed in the short term).These are often costs of support activities. Activity based costing (ABC) 1

Activity based costing (ABC) 2  Traditional manufacturing philosophy Full capacity production Resulting inventory not needed Large batch sizes and production runs Balancing production run cost and inventory holding cost  Modern manufacturing philosophy Smooth, steady production flow Flexibility Volume VS variety JIT

BPP LEARNING MEDIA Activity based costing (ABC) 3

—The modern philosophy of manufacturing in variety leads to an increase in the costs of support services —Cost control requires that costs of support activities are related to products via their casual factors —The ABC approach is to relate the cost of support activities to cost drivers Activity based costing (ABC) 4

Cost drivers —Any factor which causes a change in the cost of an activity Short-term variable costs —Cost driver = volume of activity (e.g. labour hrs) Long-term variable costs —These are related to the transactions/activities in support departments where the costs are incurred. — ∴ Cost driver = transaction/activity in support department Activity based costing (ABC) 5

—The ABC process Activity based costing (ABC) 6 Example: P34

Activity based costing (ABC) 7

ABC and decision-making —Many supporters of ABC claim it can assist with strategic decisions such as: —Pricing strategy —Make or buy decisions —Promoting or discontinuing products or parts of the business —Developing and designing products Activity based costing (ABC) 8

BPP LEARNING MEDIA Activity based management (ABM)1

Activity analysis —Value-added and non-value-added —Core/primary, support and diversionary/discretionary —Design decisions providing cost driver information to ensure production of low cost products meeting customers’ requirements Processing time is made up of: —Production / performance time —Inspection time —Transfer time —Idle time Only production time is value added —Sometimes non-value-added activities arise because of inadequacies in existing processes —They cannot be eliminated unless these inadequacies are addressed Activity based management (ABM) 2

Activity based management (ABM) 3 Which of the following is an example of a non-value- added manufacturing activity? Which of the following is a value-added activity? a.assembly b.scheduling c.finishing d.All of these are value-added activities. a.moving b.inspection c.processing d.waiting

Activity based management (ABM) 4 Cost driver analysis

Activity based management (ABM) 5 Unit level activity-1,4,6 Batch related activity-5,7 Product activity-2,8 Facility sustaining activity-3

BPP LEARNING MEDIA Activity based management (ABM) 6 VolumeTimeQualityCost  Activity volume  An indication  Response time  Customer satisfaction  Quality of the service  Value chain analysis  Cost reduction  Cost driver rates Performance evaluation ABM is better able to provide more appropriated measures of performance

Activity based management (ABM) 7

—DPP is used primarily within the retail sector. —DPP involves the attribution of both the purchase price and other indirect costs (for example distribution, warehousing and retailing) to each product line. Direct Product Profitability (DPP) 1 Warehouse direct cost Transport direct cost Store/supermarket direct cost Direct product cost

Direct Product Profitability (DPP) 2

Example: A supermarket wholesaler sells over 40,000 product lines to retailers who visit the store. It has 45,000 m 3 of general storage including 100 m 3 of cold storage. General overheads are $90,000 and additional cold storage costs are $5,000. Two of the products are single frozen desserts(FD) and trays of 48 cans of soft drink (SD). The wholesaler pays $0.4 for a FD, which is 0.03m 3 and sells for $4. The tray of SD are 0.3 m 3 and are bought for $5 and sold for $30. Calculated to two decimal places, the net profit per FD is $, and per SD is $. Direct Product Profitability (DPP) 3

Answers: Direct Product Profitability (DPP) 4

BPP LEARNING MEDIA Customer profitability analysis (CPA)1

Customer profitability analysis (CPA) 2 —P52 Question1.4

Distribution channels are the means of transacting with customers. Distribution channel profitability Direct channels  Sales teams  Telephone  Shops  Internet Indirect channels  Retailers  Wholesalers  Resellers  Agents

(1)Traditional approach: Product cost—based on standard cost and the product mix Period cost—based on sales volume or net revenue for each channel (2)ABC approach Material costs and activity products related costs channel(based of the mix of products sold in each channel) (3)A refined ABC approach Distribution channel profitability Activity related Not related Step1 Trace to products, customers and channels Step 3 All link to channels Step 4 Step2 Product related Customer related Channel related

Activity based profitability analysis 1

Applying the concept of the manufacturing cost hierarchy: —The costs of products, customers and distribution channels can be compared with their revenues —Then a tier of contribution levels established Activity based profitability analysis 2

—Pareto’s rule(80/20 rule) —Analysing products Example: P57 —Analysing customers P60 —Other applications Pareto analysis