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ALTERNATIVE COSTING PRINCIPLE (Total Quality Management (TQM) (TQM is the…
ALTERNATIVE COSTING PRINCIPLE
Activity Based Costing (ABC)
Activity based costing (ABC)
is an alternative costing method which involves the identification of the factors which cause the costs of an organisation's major activities and support overheads are charged to products on the basis of their usage of the factor causing the overheads.
ABC systems assign overheads to each major activity (costs pools).
Traditional absorption costing allocates overheads to production department (costs centres).
Advantages
ABC focuses on the nature of cost behaviour and attempts to provide meaningful product costs.
ABC recognises that many overheads arise out of the diversity and complexity of operations.
ABC recognises the complexity of manufacturing increasing with its multiple cost drivers.
Disadvantages
ABC may be more complicated than traditional absorption costing method for business operation . The bigger the cost pools, the bigger the amount of apportionment needed.
Life Cycle Costing
Life cycle costing
is the accumulation of costs over a product's entire life
Traditional cost accumulation systems
are based on the financial accounting year and tend to dissect a product's life into a series of 12 months period. This means it does not accumulate costs over a product's entire life cycle and therefore does not assess a product's profitability over its entire life, instead they do it on a periodic basis.
Life cycle costing
tracks and accumulates actual costs and revenues attributable to each product over the entire product life cycle so total profitability of the product can be determined.
Development ; At this stage, costs are accumulating with no corresponding revenue. Some products require years and large capital investment to develop and then test their effectiveness.
Introduction ; introduction of the product to the market , will cost the company to advertise its product
Growth ; the product gained bigger market as the demand builds up and the begins to make profit
Maturity ; the growth in demand for the product will slow down but still remain profitable
Decline ; the market will have bought enough of the product and it will therefore reach 'saturation point'. Demand will start to fall and become a loss-maker then it will stop the operation.
Total Quality Management (TQM)
TQM
is the process of applying zero defects philosophy to the management of all resources and relationships within an organisation as a means of developing and sustaining a culture of continuous improvement which focuses on meeting customer expectations.
Cost of quality
is the cost business have to occur in order good quality product is produced .
For example, cost of prevention and appraisal to achieve targeted quality standard and cost of internal failure where the inadequate quality was discovered before it was transferred from supplier to purchaser.
How business analyse cost of quality
Cost of conformance ; cost of achieving specified quality standard
Cost of non-conformance ; cost of failure to deliver the required standard quality
Measuring incoming supplies
Monitoring work done as it proceeds
Measuring customer satisfaction
'eight requirements of quality' by Mark Lee Inman
Only customer matters.
Recognise the importance of the customer-supplier relationship.
Prevent the cause of the defect in the first place.
Every employee must be personally responsible for defect-free production or service in their domain.
Any level of defects is unacceptable.
Get things right the first time.
Quality certification programmes should be introduced.
The cost of poor quality should be emphasised: good quality generates saving.
Target Costing
Target costing
is setting a target cost by subtracting a desired profit margin from a competitive market price.
Target costing approach is to develop a product and determine the market selling price and desired profit margin, with a resulting cost which must be achieved.
Traditionally costing approach is to develop a product, determine the production cost of that product and set a selling price, with a resulting profit or loss.
steps in the implementation of the target costing process
Determine a product specification of which an adequate sales volume is estimated.
Set a selling price at which the organisation will able to achieve the desired market share.
Estimate the required profit based on return on sales or return on investment.
Calculate the target cost = target selling price - target profit
Compile an estimated cost for the product based on the anticipated design specification and current cost levels
Calculate cost gap = estimated cost - target cost
Make efforts to close the gap
Negotiate with the customer before making the decision about whether to go ahead with the project