Chapter 4: Specialist cost and management accounting techniques

Vocabulary flashcards covering key terms and concepts from Chapter 4: Specialist cost and management accounting techniques (ABC, throughput accounting, TOC, target costing, lifecycle costing, EMA, and sustainability-related topics).

Activity-Based Costing (ABC)

A costing method that groups overheads into cost pools driven by activities and assigns costs to products using cost drivers, providing more accurate cost per unit than traditional absorption costing.

Cost pool

A collection of overhead costs accumulated for a specific activity, used as the basis for allocation via a cost driver rate.

Cost driver

A factor that influences the level of cost for a cost pool (e.g., number of set-ups, inspection hours) and is used to assign overhead to products.

Cost driver rate (CDR)

Overhead cost per unit of a cost driver, calculated for each activity in ABC.

Overhead absorption rate (OAR)

Traditional rate used to allocate overheads, typically based on units, labour hours or machine hours.

ABC steps

Identify activities and cost pools; identify cost drivers; calculate CDRs; absorb costs into products; determine full cost per unit and profit.

Advantages of ABC

Improved understanding of what drives costs, more accurate cost per unit, better pricing, cost control and decision making.

Disadvantages of ABC

High cost and time to implement, limited benefit if overheads are minimal or mostly driven by volume, and difficulty in identifying cost pools and drivers.

Throughput accounting

A management approach focusing on maximizing throughput (sales minus direct materials) while reducing inventory and operating expenses, often via bottlenecks.

Throughput

Sales revenue minus the direct material cost; the totally variable short-term cost in throughput accounting.

Return per factory hour

Throughput per unit divided by the bottleneck time per unit (i.e., the profitability earned per hour of bottleneck resource used).

Cost per factory hour

Total factory costs divided by the total bottleneck resource time available.

Throughput accounting ratio (TPAR)

Return per factory hour divided by cost per factory hour; a value greater than 1 indicates profitability per bottleneck hour.

Bottleneck

A constraint or resource that limits overall throughput and determines the rate at which products are produced.

Theory of Constraints (TOC)

A management philosophy to identify and address bottlenecks to improve throughput, using a structured five-step process.

TOC steps

1) Identify bottlenecks; 2) Exploit bottlenecks; 3) Subordinate other decisions to the bottleneck; 4) Elevate bottlenecks; 5) If a bottleneck is broken, return to step 1.

Target costing

A pricing approach where target price is market-based, target profit per unit is established, and target cost = target price − target profit; gaps are closed through design and process improvements.

Target price

Market-based price determined by customer perceived value; forms the basis for target costing.

Target profit per unit

The profit per unit that a firm aims to achieve, used to calculate the target cost.

Target cost

The maximum allowable cost to produce a product to achieve the target price and target profit.

Target cost gap

Difference between estimated product cost and target cost; a positive gap requires cost reductions or design changes to close.

Value analysis / value engineering

Techniques to reduce costs while maintaining customer value; value analysis applies to existing products, value engineering to new designs.

Functional analysis

Evaluates the relationships between product functions, perceived customer value, and cost to identify essential features and potential savings.

Lifecycle costing

Tracking costs and revenues for a product over its entire life cycle, not just a single accounting period.

Lifecycle cost per unit

Total lifecycle costs divided by total units produced/sold; used to assess long-term profitability.

Lifecycle stages

Pre-production (R&D/design), Launch, Growth, Maturity, Decline; each stage has different cost and revenue characteristics.

Environmental Management Accounting (EMA)

An approach to identify, estimate, and manage environment-related costs; supports sustainable decision making and performance measurement.

EMA cost types

Environmental costs such as prevention costs, detection costs, internal and external failure costs; plus relationship and reputational costs; traditional systems may hide these in overhead.

Triple bottom line (TBL)

A reporting framework that includes Planet (environment), People (social), and Profit (economic) alongside traditional financial performance.

Sustainability

Meeting present needs without compromising the ability of future generations to meet theirs; balancing inputs and outputs to minimize long-term environmental impact.

SHlP mnemonic

Service characteristics: Simultaneity of production and consumption, Heterogeneity, Intangibility, Perishability, which affect costing and measurement in services.

Input/Output analysis

Tracking material inflows and outflows to understand usage and losses and to identify opportunities for waste reduction.

Flow cost accounting

A costing approach focusing on material flows and losses to reduce wastage and improve process efficiency.