Life Studying ACCA

Advantages:

When a department or a product is unprofitable, decisions must be taken whether 2 shut-down that area or not.

The Quantifiable Cost or Benefits of closure.

• lost of contribution
• savings in specific FC
• penanlties n other costs resulting 4m closure:-redundancy, compensation 2 customers
• additional contribution of alternative use of resource.

Non-quantifiable Costs and Benefits of Closure(value unknown)

• penalties n other costs
• additional contribution alternative
• reorganisation costs
  

A product must be made in house if the relevant costs of making the product in house is less that the cost of buying the product.

Mangament also should consider ather issues in making the decision of wheather 2 buy or make:-

• realibilty of external supplier:-quantity, quality, delivery time, & price stability.
• specialist skills-available outside but not in house
• alternative use of resource
• social:- will redundancy occur if outsource
• customer reaction
• confidentiality.
  

A relevent cash flow is a future incremental cash flow. Relevant cash flow that arice from the following decisions must be considered in making a short-term decision.

FUTURE

• only future CF that that occur as a result of the decisions should be considered.
• sunk and commited costs should be ignored.

INCREMENTAL

• only extra cash flow that inccur as a result of the decision must be considered.
• FC must be ignored unless there is a increment cost attached 2 it.
• Oppurtunity costs should be included.

CASH FLOW

• Only cash items are relevent to the decision
• depreciation is not relevent.
  

COST PLUS PRICING

• suited in business that sell products in large volumes; operate in markets dominated by price.
• Advantages:- simple 2 calculate; widely used and accepeted; justification 4 price increases; SP decisions can be taken by junior managment.
• Disadvantages:- ingnores relationship between price and demand; does not guarantee profit;no attempt 2 establish optimum price; diff absobtion methods are used, diff SP.

MARKET SKIMING PRICING

• charging high price when product is first launced in order 2 maximise short-term profitability.
• condition suitable:- product is new and diffand has little direct competition; product has a short life cycle; demand is uncertain; need high cash flow to increase liquidity.

PENETRATION PRICING

• charging low prices when the product is launced, in order 2 get rapid acceptence.
• conditions suitable:- if the firm wishes 2 increase market price; dicourages competitors 4m entering in the market; demand is high elastic.

COMPLEMENTARY PRODUCT PRICING

• selling complementary product, one at a low price (single purchase), low profit margin, another at higher profit margin (multile).
  
• ex:- printer and cartridges.

PRODUCT LINE PRICING

• selling a line of products which are related, in diff size, colour, quantities and price.
• make the staring line or cheaper products...then increase the price or the other products so that the cunsumer has 2 still buy them 2 ccomplete the set.

VOLUME-DISCOUNTING PRICING

• quantity discounts and cummulatitive quantity discounts
• benefits 2 business:-increase customr's loyalty; attracting new customer; lower sales processing costs; clearance of stock.

PRICE-DISCRIMINATION PRICING

• company sells the same product at diff prices at diff markets.
• condition:- seller must hav some defree of monopoly power; customers can be divided into diff markets.
• dangers:- black market may develope; competitors sell at lower prices.

COST BASED PRICING- accountant's approach

• calculating unit cost and adding mark-up or margin 2 provide profit.
• unit cost may reflect full, production or variable costs only.
• profits may reflect risk involved in the product; competitor's mark up; desired profit; type of costs; type of product.

CUSTOMER BASED PRICING- marketer's approach

• reflects customer's percepyiyionof the benefits they will enjoy 4m the product.
• greater the understanding that you have of ur customer, the better placed you are to price the product.

COMPETITION BASED PRICING

• setting a price based upon the prices of competing product.

Key factor Analysis:-

1. identify the bottleneck constraint.
2. calculate contribution per unit 4 each product.
3. calculate contri per unit divided by the bottleneck resource 4 each unit.
4. rank the products.
5. allocate resources using the ranking/

Linear Programming:-
LP can be used 2 solve profit maximising and cost minimising problems in a limiting factor situation.

Assumptions 4 LP factor analysis:-

• each product always use the same quantity of the scarce source per unit.
• contribution per unit is constant (constant SP and VC)
  
• scenario is short term - ignore fixed costs.

Slack:-
Amount of resource is under-utilised. Max available resource is not used.

Shadow/Dual Price:-
calculating the extra contributin (increase in value) of one extra unit of the scarce resource at its original price. company can use shadow price to calculate the maximum premium that the company is willing to pay 2 get one more unit of the limiting factor. only critical contraints have zero shodow price.

VARIANCES	FAVORABLE	ADVERSE
Material Price	Unforeseen discount received Greater care in purchasing Change in material std	Price increase careless purchasing change in material std
Material Usage	DM used of higher quality Effective use of DM	Defective material Waste; theft
Labour Rate	Pay lower	Wages increase
Idle Time	Always adverse	Mac breakdown; illness
Labour Efficiency	High motivation Better quality of DM and Mac	Lack of training Low motivation
Overhead Expenditure	Saving in cost More economical use of service	Increase in service costs Excessive use of services
Overhead volume	Production greater than budgeted	Production less than budgeted
Selling Price	Unplanned price – increase in market demand, decrease in market supplies	Vice-versa
Sales Volume	Additional demand	Fall in demand, production difficulties.

Inter-relationship between variances:-

• Material Price and Usage - cheaper materials, adverse usage, lower labour efficience.
• Labour rate and efficiency - high labour rate (high skill), high efficiency, favorable usage.
• Selling Price and volume - lower price, higher sales demand
  

A standard cost for a product or sevice is a predetermined unit cost set under pecific working conditions.

Procedures for the preparation of Standards:-

♥Materials - can be reprensented by quantity standards or value standards

• By striping a finished product 2 its basic components : appropriate 4 non-complex finished goods; time consuming and expensive
• By ad hoc trials : may not provide normal production conditions; lots of wastage.
• By investigation of specification
  
• By interview or observation : interviews ; require the exercise of inter-personal skills and judgement.

♥Direct Labour - the approach outlined 4 materials may be applicable 2 labour with suitable adjustments; wages can be determined with existing records.

Uses:

• Planning : plans relate 2 future period of time - used in preparation of budget
  
• Control : SC can be compared to actual cost and any differences can be investigated.
• performance measurement : any diff between SC and AC can be used as a basis to assesing the performance of cost centre managers.
• decision making : decisons relate 2 future period of time - suitable decisions can be taken
  
• an alternative 2 methods such as lifo fifo in measuring value of inventory.
• to simplify accounting.

SC is suitable 2 organisation with mass production of homogenoues products and repetitive assembly work.

Advantages :

• makes preparation of forecast and budgets easier since it is predetermined standards.

• highlight areas of efficiency and inefficiency - variances - investigation can be taken

• since they are attainable. it will motivate employees.

Diadvantages:-

• SC must be revised on a regular basis to retain effectiveness.
  

Types of standard:-

1. Attainable Standards : based upon efficient operating conditions; allowances are made for idle, loss, breakdown; motivate employees 2 work harder cause it is challenging but achiveable target.
2. Basic Standards : long-term standard which remain unchanged over a period of time; helps to compare variances over a period; no suitable for today's fast changing world; employees demotivated cause it is too easy and they feel bored and unchalleged.
3. Currents Standards : based on current working conditions;useful when current conditions are abnormal and other standards would provide meaningless information; this do not motivate employees, feel unchalleged.
4. Ideal Standards : based on perfect working conditions; no wastage, loss, braekdown, idle; demotivate employees, standard is impossible 2 achive.
   

TC involves subtracting a desired profit margin from the competitive market price.TC may be less than the initial product cost but will be achived in the mature stage.

Steps:-

1. determine the adequate sales volume.
2. set the selling price 2 achive the desired market share.
3. estimate the required profit margin.
4. TC= target selling price - target profit.
5. estimate the cost based on the current design and the cost level
6. TC Gap = estimated cost - target cost
7. Close Gap
8. negotiate with the customer before making the final decision.

Implications:-

• considers competitors price and how much is the customer willing 2 pay.
• design focus.
• reduces cost
• generate new idea of working, cost saving

Difficulties in using TC in Sevice Industries:-

• Due 2 characteristics of service and information requirements which is different, TC is hard 2 use.
• charcteristics are: intangiblity, simultanity, heteroginity, perishability, no transfer of ownership.
  

• traces all cost 2 a product over its complete life-cycle.
• recognises, 4 many products, significant costs sre incurred at the early stages of its life cycle.
• protibility will be more accurate if all costs are taken into account.

5 stages:-

1. Pre-production/ product developement stage: high level of cost will be incurred: r & d.....
2. Launch / Market Development stage : extensive marketing & promotion costs.
3. Growth stage : marketing n promotion will continue, sales volume will increase dramatically, units costs fall as fixed costs are recovered at a greater volume.
4. Maturity Stage : profits will continue 2 increase as costs are recovered, growth of sales slow down, competitive.
5. Decline Stage : Sales drop, replacement product will need 2 have been developed.

Implications:

• pricing : based on life-cycle costs rather than simply the costs for the current period.
• recognise the early stage importance of costs. better assesment of profit.
• helps minimise breakeven time, improve liquidity.
• recognise the imp of not delaying the launching of product which will affect the long run market share.
• better managment of products cash flow.
• max the lenght of life span.
  

Throughput Accounting makes best use of limited resource (bottleneck) in a JIT enviroment. TA is a way 2 measure profitability.

Back-flush accounting is a simpler method of costing and gets rid or unnecessary costing records. It is suitable for Just-In-Time (JIT) enviroment. JIT company holds minimal amout of stock and have the finished goods delivered immediately so that the amount of finished goods held are minimal.

Advantages:
1. simple
2. reduce cost

Disadvantages:
1. only suitable in JIT enviroment
2. need more trainning
3. Records are minimal, very hard 2 compare variance information