Management Accounting:

Presentation on:

Target costingProduct lifecycle costingValue chain analysisTransfer pricingResponsibility centers

Presented By:

JAYDIPTA DEYJITENDER SINGH

KOMAL GOYALKRITIKA GUPTA

MD. TAUQUEER ALAM

PRODUCT LIFE CYCLE

RESPONSIBILITY CENTER

What is Responsibility

center Entity within an organization that holds responsibility for

the management of revenue, expenses, and investment funds.

This center is controlled by a responsibility manager that works with other individuals in the organization to establish procedures and accounting practices to ensure that the necessary expense and revenue information is reported accurately.

The responsibility center will also work with accountants to make sure that the organization is meeting requirements set by the Internal Revenue Service.

4 Types of Responsibility Centres

Cost Centre

Revenue centre

Profit centre

Investment centre

TARGET COSTING

Target Costing• A target cost is the allowable amount of cost that can be incurred on

a product and still earn the required profit from that product

Target cost is the cost that can be incurred while still earning the desired profit Selling price – desired profit = target cost

The customer sets the priceProfit must be achieved through cost control

Application Of Target Costing• Industrial units having assembly orientation.• Firms largely involved in diversified product lines.• Firms using Technology for automation of production

process.• Firms using modern techniques such as value engineering,

just-in-time approach, Total quality management.

OBJECTIVES OF TARGET COSTING

• It enables firms to manage business in profitable manner and in Competitive Environment.• Target costing is a very comprehensive cost planning therefore

firms are very conscious in fixing cost of various components.• It emphasizes in understanding the market and competition

both.• Target costing help to meet customer need according to

preference. It helps in increasing the value of firm.

Limitation Of Target Costing• To achieve the target cost, there remains much work

pressure on workers to achieve production targets.• It does not work very effectively in long run as new

products and upgraded technology will prevail• Future environment is uncertain in terms of demand, if

demand increases it will be difficult to get efficiencies.

VALUE CHAIN ANALYSIS

Value chain analysis is a strategy tool used to analyze internal firm activities. Its goal is to

recognize, which activities are the most valuable (i.e. are the source of cost or differentiation advantage) to the firm and which ones could be improved to provide

competitive advantage.

PORTER’S VALUE CHAIN MODEL

COMPETITIVE ADVANTAGE TYPECOST ADVANTAGE

• This approach is used when organizations try to compete on costs and want to understand the sources of their cost advantage or disadvantage and what factors drive those costs.

• Step 1. Identify the firm’s primary and support activities.

• Step 2. Establish the relative importance of each activity in the total cost of the product.

• Step 3. Identify cost drivers for each activity.• Step 4. Identify links between activities.• Step 5. Identify opportunities for reducing costs.

DIFFERENTIATION ADVANTAGE

• The firms that strive to create superior products or services use differentiation advantage approach. • Step 1. Identify the customers’ value-

creating activities.• Step 2. Evaluate the differentiation

strategies for improving customer value.• Step 3. Identify the best sustainable

differentiation.

What is Transfer Pricing ?

It’s a term used to describe aspects of intercompany pricing & arrangements between related business entities & commonly applies to intercompany transfers tangible

property, intangible property services & finance transfers.

Objectives of Transfer Pricing• Reduction of taxes and tarrifs.

• Management of cash flows.

• Minimization of foreign exchange risks.

• Competitiveness in the international marketplace.

Transfer Pricing• The price that is assumed to have been charged by one part of the

company for products & services it provides to another part of the company . In order to calculate each division’s profit & loss separately.