Transcript BAF2 Powerpoint presentation

Cost Management
Session Summary (1)
learning objectives
cost/volume/profit (CVP) relationships and break-even
analysis
break-even chart – low fixed costs, high variable costs
break-even chart – high fixed costs, low variable costs
contribution break-even chart
profit volume (PV) chart
Session Summary (2)
CVP and break-even analysis
limitations of CVP and break-even analysis
multiple product break-even analysis
estimated UK labour costs % of manufacturing costs
activity based costing (ABC)
framework of activity based costing (ABC)
throughput accounting (TA)
Session Summary (3)
throughput report
life cycle costing
target costing
benchmarking
kaizen
cost of quality (COQ)
non financial indicators
balanced scorecard
Learning Objectives (1)
explain cost/volume/profit (CVP) relationships and
break-even analysis
identify the limitations of CVP analysis
outline the more recently developed techniques of activity
based costing (ABC), and throughput accounting (TA)
identify the conditions appropriate to the use of life
cycle costing
Learning Objectives (2)
apply the principles of target costing
consider benchmarking as a technique to identify best
practice and enable the introduction of appropriate
performance improvement targets
outline kaizen as technique for continuous improvement
of all aspects of business performance
explain the types of information and measurements used
in lean accounting
Learning Objectives (3)
use cost of quality (COQ) to identify areas for
improvement and cost reduction within each of the
processes throughout the business
appreciate the importance of, and consider the use of both
financial and non-financial indicators in the evaluation of
business performance
consider the use of both financial and non-financial
measures incorporated into performance measurement
systems such as the balanced scorecard
Economist’s Cost and
Revenue Curves
Cost/Volume/Profit (CVP)
Relationships and
Break-Even Analysis (1)
Cost/volume/profit (CVP) analysis may be used
to determine the break-even position of a business
to provide sensitivity analyses on the impact on the
business of changes to any of the variables used to
calculate break-even
the break-even point is the level of activity at which
there is neither profit nor loss
Cost/Volume/Profit (CVP)
Relationships and
Break-Even Analysis (2)
There are three fundamental cost/revenue relationships
that form the basis of CVP analysis
total costs = variable costs + fixed costs
contribution = total revenue - variable costs
profit (or operating income) = total revenue - total costs
the slopes of the total cost lines in the following two
charts represent the unit variable costs
Break-Even Chart – Low Fixed Costs,
High Variable Costs
Break-Even Chart – High Fixed Costs,
Low Variable Costs
Contribution Break-Even Chart
Profit Volume (PV) Chart
The Break-Even Point (1)
profit = contribution – fixed costs
and at the break-even point profit is zero and so
profit = contribution – fixed costs = zero
or
contribution = fixed costs
it follows therefore that the
number of units at the break-even point
x contribution per unit = fixed costs
or
number of units at break-even =
fixed costs
contribution per unit
The Break-Even Point (2)
The number of units at the break-even point x selling
price per unit is the break-even £ sales value, so
£ sales value at break-even point
=
fixed costs
x selling price per unit
contribution per unit
selling price per unit = total sales revenue
contribution per unit
total contribution
which is the reciprocal of the contribution to sales ratio %,
so
£ sales value at break-even point
=
fixed costs
contribution to sales ratio %
The Break-Even Point (3)
the term ‘margin of safety’ is used to define the
difference between the break-even point and an
anticipated or existing level of activity above that point
the margin of safety measures the extent to which
anticipated or existing activity can fall before a profitable
operation turns into a loss-making one
Limitations of CVP Analysis
the many limitations to CVP analysis are related to the
assumptions on which it is based to consider break-even,
decision-making, or sales pricing
the main assumptions are:
output is the only factor affecting costs
cost and revenue behaviour is linear
there is a single product
costs are easily split into variable and fixed, which are
constant within a given range
Multiple Product BreakEven Analysis
where a business offers a range of products or services,
the weighted average contribution may be used to
calculate the selling prices required to achieve targeted
profit levels, and revised break-even volumes and sales
values resulting from changes to variable costs and fixed
costs
Estimated UK Labour Costs
% of Manufacturing Costs
Activity Based Costing (ABC)
the more recently-developed techniques of activity based
costing (ABC) and throughput accounting (TA) are
approaches that attempt to overcome the problem of
allocation and apportionment of overheads
Framework of
Activity Based Costing (ABC)
Unit Costs for the Rouge and the
Rose
Throughput Accounting (TA)
TA is similar to the approach of contribution per unit of
scarce resource, but whereas
contribution = sales revenue - total variable costs
throughput is defined as
throughput = sales revenue - direct materials cost
Throughput Report
Life Cycle Costing
life cycle costing uses maintenance of cost records over
entire asset lives so that decisions regarding acquisition
or disposal may be made in a way that optimises asset
usage at the lowest cost to the business
Target Costing (1)
a target cost is a product cost estimate that may be less
than the planned initial product cost
the target cost will be expected to be achieved by the time
the product reaches the mature production stage through
continuous improvement, and
replacement of technologies and processes
Target Costing (2)
a target cost is derived by subtracting a desired profit
margin from a competitive market price, determined
through
customer analysis
market research
Benchmarking
benchmarking processes of the best performing
organisations within the industry, or within any other
industry, can identify best practice, the adoption of
which may improve performance
Kaizen
kaizen, an “umbrella” concept covering most of the
“uniquely Japanese” practices, is a technique used for
continuous improvement of all aspects of business
performance
Lean Accounting
lean accounting provides the relevant information and
measurements to support an organisation’s use of less
resources to provide more output and in greater
variety, and to encourage lean thinking throughout
the organisation
lean accounting includes the use of target costing and
value stream cost analysis
the strategic emphasis of lean accounting is on
performance measurement that focuses on the
elimination of waste and creation of capacity
Cost of Quality (COQ)
cost of quality (COQ) is used to identify areas for
improvement and cost reduction within each of the
processes throughout the business
The Traditional View of
Quality Costs
The Total Quality View of
Quality Costs
Non-Financial
Performance Indicators (1)
quality
% of repeat orders
customer waiting time
number of on time deliveries
% customer satisfaction index
number of cut orders
Non-Financial
Performance Indicators (2)
manufacturing performance
% waste
number of rejects
set up times
output per employee
material yield %
adherence to production schedules
% of rework
manufacturing lead times
Non-Financial
Performance Indicators (3)
purchasing/ logistics
number of suppliers
number of days stock held
purchase price index
Non-Financial
Performance Indicators (4)
customer development
number of new accounts
number of new orders
% annual sales increase
% level of promotional activity
% level of product awareness within
company
Non-Financial
Performance Indicators (5)
marketing
market share trends
growth in sales volume
number of customer visits per salesman
client contact hours per salesman
sales volume actual v forecast
number of customers
customer survey response information
Non-Financial
Performance Indicators (6)
new product development
number of new products developed
number of on time new product launches
% new product order fulfilment
Non-Financial
Performance Indicators (7)
human resources/communications/employee
involvement
staff turnover
absenteeism days and % accident/sickness
days lost
training days per employee
training spend % to sales
% of employees having multi-competence
% of employees attending daily team briefings
Non-Financial
Performance Indicators (8)
information technology
number of PC breakdowns
number of IT training days per employee
% system availability
number of hours lead time for problem solving
Non-Financial
Performance Indicators (9)
the use of non-financial indicators is important in the
evaluation of business performance
both financial and non-financial measures are now
incorporated into performance measurement systems such
as the balanced scorecard
An Example of the
Balanced Scorecard