Chapter 4 Other costing techniques Chapter Content Other

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Chapter 4 Other costing techniques

Chapter 4 Other costing techniques

Chapter Content Other costing techniques Joint product costing Throughput accounting Costing Digital Products

Chapter Content Other costing techniques Joint product costing Throughput accounting Costing Digital Products

Joint Used product costing when more than one product is produced in the same

Joint Used product costing when more than one product is produced in the same process at the same time

Basis of apportionment Cost of each joint product is a share of the common

Basis of apportionment Cost of each joint product is a share of the common processing costs up to the split-off point using: • sales value of production (also known as market value) • production units • net realisable value

Accounting for by-products • The by-products do not pick up a share of the

Accounting for by-products • The by-products do not pick up a share of the costs. • The sales value of the by-product at the split-off point is treated as a reduction in costs instead of an income. • If the by-product has no known value at the split-off point but does have a value after further processing, the net income of the byproduct is used to reduce the costs of the process

Example

Example

Theory of Constraints Bottlenecks prevent throughput from being maximised Throughput accounting is concerned with

Theory of Constraints Bottlenecks prevent throughput from being maximised Throughput accounting is concerned with identifying and removing bottlenecks Prioritise production on the basis of throughput per usage of the scarce resou. Rce

Throughput accounting • Throughput accounting is very similar to marginal costing, but it can

Throughput accounting • Throughput accounting is very similar to marginal costing, but it can be used to make longer term decisions about capacity/production equipment. • Throughput accounting is based on three concepts: throughput, inventory (or investment) and operating expenses. • Managers should aim to increase throughput while simultaneously reducing inventory and operational expense.

Throughput accounting Throughput = Sales Revenues – Direct Material Cost

Throughput accounting Throughput = Sales Revenues – Direct Material Cost

Inventory valuation using throughput • Inventory should be valued at the purchase cost of

Inventory valuation using throughput • Inventory should be valued at the purchase cost of its raw materials and bought in parts. • It should not include any other costs, not even labour costs. No value is added by the production process, not even by labour, until the item is sold.

Example 1

Example 1

Example 1 cont…

Example 1 cont…

Maximising throughput • If the business has more capacity than there is customer demand,

Maximising throughput • If the business has more capacity than there is customer demand, it should produce to meet the demand in full. • If the business has a constraint that prevents it from meeting customer demand in full, it should make the most profitable use that it can of the constraining resource. This means giving priority to those products earning the highest throughput for each unit of the constraining resource that it requires.

Throughput Formulae Return Per Factory Hour = Cost Per Factory Hour = Throughput/unit Time

Throughput Formulae Return Per Factory Hour = Cost Per Factory Hour = Throughput/unit Time on Bottleneck Resources Total Factory Cost Total Time on Bottleneck Resources Throughput Accounting = Ratio Return Per Factory Hour Cost Per Factory Hour

Costing Digital Products A digital products typically refers to a product that is stored,

Costing Digital Products A digital products typically refers to a product that is stored, delivered and consumed in an electronic format, The product can be delivered in many ways such as through a website, a mobile phone application or Email.

The differences between Traditional costing systems and digital costing Marginal costs can be virtually

The differences between Traditional costing systems and digital costing Marginal costs can be virtually be zero for many digital products and most cost are likely to be fixed in nature. This means digital products are expensive to produce but cheaper to reproduce. There is often no standard time or cost that can be attributed to digital products, making the use of standard costing inappropriate Drivers for overheard can be very difficult to determine in digital costing The timing of the cost can be difficult to estimate and can be extended over a number of accounting periods. The lifespan of digital products can vary greatly. Some products may take a longer period than the other products. Many product features or functions might be shared amongst a number of products

Benefits of bedigital systems These can classifiedcosting as: v. The system allows the organisation

Benefits of bedigital systems These can classifiedcosting as: v. The system allows the organisation to automatically compare prices and suppliers giving the organisation access to the cheapest, this results in cost savings to the organisation v. The organisation will be continuously updated and reflecting current information, this will allow the organisation to change and adapt to changes. v. The organisation will have access to more suppliers and this can bring benefits such as quicker lead times and access to more variety of resources. v. Digital costing systems have built in analytics and intelligence capabilities. They can analyse changes over

v. Digital systems have built in analytics and Benefits ofcosting digital costing intelligence capabilities.

v. Digital systems have built in analytics and Benefits ofcosting digital costing intelligence capabilities. they can analyse changes over time and supplier flexibility v. Digital costing systems have the ability to accurately cope with hundreds of purchasing decisions at one time. They are also easy to use and quickly understood by decision makers v. The organisation will receive better, more upto date information on the cost of its product. This will includes better knowledge of drivers and absorption of costs of products. v. It allows for a more detailed breakdown of overheards with more personalised cost drivers.

CONTINU……. . • This can help in cost control • Digital costing systems make

CONTINU……. . • This can help in cost control • Digital costing systems make cost behavior much easier to understand. There is clearer information on the split of semi variable costs so that organizations has a better understanding of the costs which are purely variable.