Sma techniques of costing
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Transcript of Sma techniques of costing
What is a Technique?
Technique refers to the manner of ascertaining costs of a
product, job or activity.
These are strategies which can be adopted to ensure that the
cost of product is reduced.
The following are the techniques adopted by the strategic
management accountant.
Types of techniques
Marginal costing
Budgetary control
Standard costing
Activity base costing
Responsibility accounting
MARGINAL COSTING
Marginal cost – cost of producing an
additional unit or output or service
Marginal costing differentiates the
fixed and variable costs
Marginal cost is defined as the
amount at any given volume of
output by which aggregate costs are
changed if the volume of output is
increased or decreased by one unit.
Features Of Marginal Costing
Semi-variable costs are included in comparison of
cost
Only variable costs are considered
Fixed costs are written off
Prices are based on variable and marginal
contribution
Basic equation of Marginal Costing
Profit = Sales – Total cost
Profit = Sales – (Variable cost + Fixed cost)
Profit + Fixed cost = Sales – Variable cost
Sales – Variable cost = Contribution = Fixed cost +
Profit
Contribution – Fixed cost = Profit
BUDGETARY CONTROL
Budget: Budget is a financial and /or
quantitative statement, prepared and
approved prior to a defined period of
time of the policy to be pursued
during that period for the purpose of
attaining a given objective.
BUDGETARY CONTROL
Budgetary Control: A control technique whereby actual results are compared with budgets.
A strategy to control the expenditure of a firm.
Advantages
Definition of goals
Defining Responsibilities
Basis for performance evaluation
Optimum use of resources
Co-ordination
Planned Action
STANDARD COST
The word standard means a norm or criterion.
Standard cost is used to measure the efficiency with
which actual cost has been incurred.
Steps in standard costing
Setting of standard costs for different elements of costs.
Ascertaining actual costs. Comparing standard with actual costs to determine
the differences between the two, known as ‘variances’.
Analyzing variances for ascertaining reasons thereof. Reporting of these variances and analysis thereof to
management for appropriate action, where necessary.
Advantages
• Effective cost control : The most important
advantage of standard costing is that it facilitates the
control of costs.
• Help in planning : Establishing standards is a very
useful exercise in business planning with instills in
the management a habit of thinking in advance.
Disadvantages
• The system may not be appropriate to the business.
• The staff may not be capable of operating the
system.
• These are expensive and unsuitable in job order
industries.
ACTIVITY BASED COSTING
Activity based costing is that costing in which costs are first traced to activities and then to products.
Activities become the focal points for cost accumulation.
The factors which determine the costs of activities are called Cost Drivers
Possible Cost Drivers
Machine hours
Direct labor hours
Number of setups
Number of products
Number of purchase orders
Number of employees
Number of square feet
Common Classification System
Unit-level activities. Activities performed for each unit of
production.
Batch-level activities. Activities performed for each of
batch of products.
Product-level activities. Activities performed in support of
an entire product line.
Facility-level activities. Activities required to sustain an
entire production process.
When is ABC Most Useful?
High amounts of overhead cost Multiple products Complex products Complex production system Significant variation in volume between high and low
volume products Different products place different demands on resources Problems with current cost allocations due to changes in
products or processes Better cost information is needed
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RESPONSIBILITY ACCOUNTING
Responsibility accounting is based on the assumption that every cost incurred must be the responsibility of one person somewhere in the company.
Example
The cost of rent can be assigned to the person who negotiates and signs the lease, while the cost of an employee’s salary is the responsibility of that person’s direct manager.
This concept also applies to the cost of products, for each component part has a standard cost (as listed in the item master and bill of materials), which it is the responsibility of the purchasing manager to obtain at the correct price.
Similarly, scrap costs incurred at a machine are the responsibility of the shift manager.
By using this approach, cost reports can be tailored for each recipient.