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TABLE OF CONTENTS
Note: click the cross-reference below for easy navigation. Click
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TABLE OF CONTENTS ........................................................................................................... 1

KEY TERMS ................................................................................................................................ 3
AUTHORS PROFILE ............................................................................................................... 6
IMPORTANT!............................................................................................................................. 7
Chapter 1: ACTIVITY BASED COSTING .......................................................................... 9
Chapter 2: LIFE CYCLE COSTING ................................................................................... 37
Chapter 3: TARGET COSTING .......................................................................................... 42
Chapter 4: THROUGHPUT ACCOUNTING ................................................................... 49
Chapter 5: ENVIRONMENTAL ACCOUNTING ........................................................... 58
Chapter 6: RELEVANT COSTING .................................................................................... 60
Chapter 7: SHORT-TERM DECISION-MAKING ......................................................... 64
Chapter 8: COST VOLUME PROFIT ANALYSIS.......................................................... 67
Chapter 9: PRICING DECISIONS...................................................................................... 69
Chapter 10: LINEAR PROGRAMING .............................................................................. 72
Chapter 11: RISK & UNCERTAINTY IN DECISION-MAKING ............................... 74
Chapter 12: LEARNING CURVE THEORY .................................................................... 76
Chapter 13: FORECASTING............................................................................................... 78
Chapter 14: BUDGETING SYSTEMS............................................................................... 81
Chapter 15: TYPES OF BUDGETING .............................................................................. 83
Chapter 16: BASIC VARIANCE ANALYSIS ................................................................... 85
Chapter 17: MIX & YIELD VARIANCES ........................................................................ 88
Chapter 18: PLANNING & OPERATIONAL VARIANCE .......................................... 90
Chapter 19: FINANCIAL PERFORMANCE MEASUREMENT ................................ 92
Chapter 20: NON FINANCIAL PERFORMANCE MEASUREMENT ..................... 96
Chapter 21: TRANSFER PRICING ................................................................................ 100
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Chapter 22: BEHAVIOURAL ASPECTS OF PERFORMANCE MEASUREMENT

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KEY TERMS
A
Absorption Costing 40
Acid Test Ratio 129
Additive Model 114
B
Benchmarking 133
Blanket Rate or Single Factory Wide
Rate 41
C
Capacity Ratio 133
Cash Budgets 119
Clear 132
Coefficient of Correlation 114
Coefficient of Determination 114
Competitive Performance 133
Consumer Price Index (CPI) 114
Contribution 47
Controllability 132
Critical Success Factors (CSF) 132
Current Asset Ratio 129
Cyclical Variations 114
Direct Labour Budget 119

Dividend Cover 129
Dividends Yield 129
E
Earnings per Share (EPS) 129
Earnings Yield 129
Economy 133
Effectiveness 133
Efficiency 133
Efficiency Ratio 133
Equity 132
F
Financial Gearing 129
Financial Performance 133
Fixed Production Overhead Capacity
Variance 121
Fixed Production Overhead
Variance 121
Flexibility 133
Functional Budgets 119
G
Gross Profit Margin 128
D
Departmental Overhead Absorption
Rate 42
Deseasonalisation 115
Determinants 132
Dimensions 132
I
Innovation 133
Interest Cover 129
Inventory Turnover 129

Key Performance Indicators (KPI)

132
Quality 132
Quick Ratio 129
Labour Cost Variance 121
Random Variations 114

Raw Materials Budget 119
Regression Analysis 114
Residual Income (RI) 130
Resource Utilization 133
Results 133
Retail Price Index (RPI) 114
Return on Capital Employed (ROCE)
129
Return on Equity (ROE) 130
Return on Investment (ROI) 129
Rewards 132
M
Marginal Costing 47
Master Budgets 119
Material Cost Variance 121
Motivation 132
Multiplicative Model 115
O
Operating Profit Margin 128
Operational Gearing 129
Overhead Budget 119
Ownership 132
P
Payout Ratio 129
Pre-determined Overhead
Absorption Rate 40
Pre-Determined Overhead
Absorption Rate 40
Price Earnings (P/E) Ratio 129
Principle Budget Factor 119
Production Budget 119
Production Volume Ratio 133
S
Sales Budget 119
Seasonal Variations 114
Share Options 139
Standards 132
T
Trade Payable Turnover 129
Trade Receivable Turnover 129
Trend 114
V
Value for Money 133

Variable Production Overhead
Variance 121

AUTHORS PROFILE
Name: Murtaza Lanewala.
Career Status:
Freelance writer & tutor for
professional accountancy
qualifications. Professional bodies
include ACCA, CIMA and ICAEW.
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E-mail:
kabuli_52@hotmail.com or
murtaza@accasupport.com

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Chapter 1: ACTIVITY BASED COSTING
Chapter 1:
ACTIVITY BASED COSTING

Sub Headings
S.no
Headings (click the Cross-ref below for easy navigation)
1
Absorption Costing
2
Pre-Determined Overhead Absorption Rate
3
Calculating Products Cost Using Absorption Costing
4
Marginal Costing
5
Contribution
6
Activity Based Costing
7
Commenting On Results under ABC & Absorption Costing
8
Implications for Pricing & Profitability
9
Increasing Popularity of ABC
10
Benefits & Limitations of ABC
11
ABC Vs Absorption Costing Vs Marginal Costing
12
Practice Question & Solution

1 Absorption Costing
Absorption costing is the traditional technique for recovering (absorbing)
overheads (indirect costs) via including it in products cost on some fair basis.
It is due to overhead costs, which form, significant part of the product cost
cannot be identified directly and allocated, like direct material & direct Labour.
Need for absorbing overhead arises when organization manufactures more
than one type of product. Each product may consume different amount
resources and therefore consumes different amount of overhead cost.
In service industries, absorption costing is used to absorb overheads cost
incurred into services provided.
In retail organizations, there are no or little overheads, such as packaging and
labelling. These overhead costs are unlikely to be significant and therefore,
cost incurred in absorbing overhead cost into products may not exceed
revenue. Therefore, overheads are treated as period cost rather than included
into product cost.
2 Pre-Determined Overhead Absorption Rate

Pre-determined overhead absorption rate is calculated on budgeted amount
and budgeted activity level. It is calculated at the beginning of the period
before actual overhead costs are incurred in manufacturing products.
This allows including share of overheads in the product cost and setting selling
price in advance.
2.1 Blanket Rate or Single Factory Wide Rate
Formula:
It is used were organization have single department or multiple departments

having similar kind of activities (labour intensive or machine intensive), which
each department performs for manufacturing good or providing services.
Example:
A laundry shop, where cloths are washed and dried using washing machines.
An organization selling handmade biscuits, in which every work from making
dough to rolling and cooking are all Labour intensive operations.
2.1.1 Calculating Blanket Rate
Formula:
Illustration:
Organization has following detail for overhead cost in the upcoming period.
Expenses
$
Factory rent
50,000
Power cost
15,000
Machine & tools depreciation
10,000
Machine maintenance cost
6,000
Cleaning & hygiene
4,000
Subsidized canteen
5,000
Total allocated overheads
328,000
Total reapportioned overheads 418,000
Machine hours
Labour hours
Production cost centres

Cutting Assembling Finishing
8,000
4,000
3,200
5,000
8,000
5,000
Service cost centres

Cleaning Canteen
2,000
1,000
1000
1000
Total
18,200
20,000
Organization wishes to absorb overheads on machine hour basis.

Required:
Calculate factory wide absorption overhead rate.
Solution:

2.2 Departmental Overhead Absorption Rate

Department overhead absorption rate is the rate used for each department
specifically based on kind of activities (manual or automated) it performs for
manufacturing goods or providing services.
Example:
A clothes manufacturing company, where yarns of cloth are manufactured
using machines; and cutting and sewing is done manually by Labours.
2.2.1 Calculating Departmental Overhead Absorption Rates
Calculation of departmental overheads requires allocation and apportionment
of overheads.
Formula:
Illustration:
Organization has following detail for overhead cost in the upcoming period.
Expenses
Factory rent
Power cost
Machine & tools depreciation
Machine maintenance cost
Cleaning & hygiene
Subsidized canteen
Total allocated overheads

Machine hours
Floor area
Factory volume
No of Labours (direct &
indirect)
Labour hours
$
50,000
15,000
10,000
6,000
4,000
5,000

Cutting
Assembling Finishing Cleaning Canteen
Total
$106,000
$108,000 $114,000
$328,000
8,000
4,000
3,200
2,000
1,000
18,200
5,000
5,000
5,000
500
2,000
17,500
8,000
8,000
8,000
800
1,000
25,800
30
5,000
30
8,000
30
5,000
5
1000
5
1000
100
20,000
Organization wishes to absorb overheads on machine hour basis for cutting

cost centre and on labour hour basis for assembling and finishing cost centre.
Required:
Calculate departmental overhead absorption rate for each production cost
centre.
Solution:
Factory rent
Power cost
Machine & tool
depreciation
Machine maintenance
cost
Cleaning and hygiene
Subsidized canteen
Total overhead costs
Cleaning cost
Canteen cost
Cleaning cost
Canteen cost
Total allocated
overheads

Cutting
Assembling
Finishing
$
$
$
14,286
14,286
14,286
4,651
4,651
4,651
4,396
2,198
1,758

Cleaning
Canteen
$
$
1,429
5,714
465
581
1,099
550
2,637
1,319
1,055
659
0
0
25,970
2,449
28,419
3,941
32,360
210
32,570
8.2
32,578.2
0
0
22,454
2,449
24,903
3,941
28,844
210
29,054
8.2
29,062.2
0
0
21,750
2,449
24,199
3,941
28,140
210
28,350
8.2
28,358.2
4,000
0
7,652
(7,652)
0
657
657
(657)
0
1.37
1.37
106,000
138,578.2
108,000
137,062.2
114,000
142,358.2
1.37
Total
$
50,000
15,000
10,000
330
6,000
5,000
12,175
306
12,481
(12,481)
0
26
26
(26)
0
4,000
5,000
90,000
0
90,000
0
90,000
0
90,000
0
90,000
328,000
418,000
Explanation
To determine cutting department overheads based on machine hours as
cutting department seems to be machine intensive.

Explanation
To determine assembling department overheads based on Labour hours as
assembling department seems to be Labour intensive.
Explanation
To determine finishing department overheads based on Labour hours as
finishing department seems to be Labour intensive.
2.3 Selection of Basis for Overhead Absorption Rates
The following bases for absorption of overheads are usually used but other
methods are also possible. Organization may choose any other method as it
consider appropriate. These are:
No of units produced.
No of labour hours.
No of machine hours.
Total direct material cost.
Total direct Labour cost.
Prime cost (Direct material + Direct Labour + Direct expenses). It is the sum
of all direct costs.
Conversion cost (Direct Labour + Factory Overheads). It is the cost of
converting material into finished goods.
3 Calculating Products Cost Using Absorption Costing

Diagram:
Costs
Direct material
Details
$
X

Costs
Details
Direct Labour
Direct expense
Prime cost
Production overheads (Based on absorption rate)
Product cost
Admin overheads
(Period cost)
Selling & distribution (Period cost)
$
X
X
X
X
X
X
X
X
X
Full cost
Illustration:
An organization has following data for calculating product cost in upcoming
period.
Direct Material
$300,000
Direct Labour
$250,000
Direct Expenses
$100,000
Production overheads are absorbed on basis of factory wide rate of

$22.967/machine hour.
There will be 18,200 machine hour (estimated) during the period.
Selling cost for the period is estimated at $5/ unit.
Sales and production volume for the period is 10,000 units and there was no
closing inventory in the previous period.
Administration cost for the period is $ 50,000.
Required:
Calculate the product cost and product cost per unit and full cost.
Solution:
Costs
Direct material
Direct Labour
Direct expense
Prime cost
Production
overheads
Product cost
Workings
(Budgeted)
$
Workings
300,000 ($300,000/10,000)
250,000 ($250,000/10,000)
100,000 ($100,000/10,000)
650,000
($22.967 x
418,000
18,200hrs/10,000units)
$/unit
30
25
10
65
41.80
1,068,000 ($1,068,000/10,000)
106.8
Workings
Product cost
Admin overheads
Selling &
distribution
Full cost
$
1,068,000
(Period cost)
50,000
($5 x 10,000)
50,000
1,168,000
Administration, Selling and distribution overheads are only included when

specifically instructed to do so.
Finance overheads are never included in product cost.
Illustration (Extract 06/10: Q1, a):
BBB has a policy to price all jobs at budgeted total cost plus 50% mark up.
Overheads are currently absorbed on labour hour basis.
Total overheads Labour hours
$400,000
40,000
Product Materials Labour hours

GC $3,500
300
EX $8,000
500
Labour is paid $15 per hour.

Required:
Calculate the cost and quoted price of a GC and of an EX using labour hours to
absorb the overheads.
Solution:
Details
Materials
Labour
Overheads
Total cost
Quoted price
Workings
300hrs x $15/hr
300hrs x $10/hr (W1)
11,000 x 150%
GC
3,500
4,500
3,000
11,000
16,500
Workings
500hrs x $15/hr
500hrs x $10/hr (W1)
20,500 x 150%
EX
8,000
7,500
5,000
20,500
30,750
Workings:

4 Marginal Costing
Marginal costing is the technique used to determine product cost and used for
other short-term decision-making purpose.
Examples:
Whether to manufacture in-house or buy from external supplier.
How much of each product should be manufactured.
Whether to accept or reject offer made by customer or supplier.
Whether to continue or discontinue an operation.
Marginal costing only considers variable costs as relevant for decision-making.
It considers all fixed costs as irrelevant and so it is not taken into account for
short-term decision-making.
Marginal costing recognizes fixed costs as irrelevant because in short-term,
fixed cost remains constant (unchanged) with change in activity level.
Marginal costing not only considers production costs (Material, Labour and
Overheads) as variable; it also considers non-production variable costs (Selling
& distribution, administration and finance overheads) as relevant for product
costing. Marginal costing leads to all variable costs being considered in
decision-making process.
5 Contribution
Contribution is figure obtained after deducting all variable costs from sales.
Marginal costing considers only contribution as relevant for decision-making
rather than profit.
5.1 Calculating Contribution & Profit in Marginal Costing
Formula:

$
Sales revenue
Variable costs (Product Cost)
Direct material
Direct Labour
Variable production overheads
Variable selling & distribution overheads
Variable administration overheads
Total variable cost
Contribution
Fixed costs (Period Cost)
Fixed production overheads
Fixed selling & distribution overheads
Fixed administration overheads
Total fixed cost
Net Profit
$
X
(X)
(X)
(X)
(X)
(X)
(X)
X
(X)
(X)
(X)
(X)
X
Illustration:
An organization has sales revenue of $1,000,000 and following costs:
Direct materials
Direct Labours
Variable production overheads (indirect material + indirect Labour)
Selling & distribution overheads (60% fixed cost)
Administration overheads (80% fixed cost)
Finance overheads (100% fixed cost)
$(000)
100
150
100
150
150
120
50
Required:
Calculate contribution and profit. Comment on the results.
Solution:
$(000)
Sales revenue
Variable costs (Product Cost)
Direct materials
Direct Labours
Variable production overheads
Selling & distribution overheads ($150 x 40%)
Administration overheads ($120 x 20%)
Total variable costs
Contribution
Fixed costs (Period Cost)
$(000)
1,000
100
150
100
60
24
434
566
150

Selling & distribution overheads ($150 x 60%)

Administration overheads
Total fixed cost (excluding finance overheads)
Net Profit/Operating Profit
$(000)
90
96
$(000)
336
230
Contribution indicates how each product will contribute towards recovery of

fixed cost.
As i said earlier that fixed cost is irrelevant. However, if organization has to
survive, then it has to recover its total cost (Variable + Fixed) to break even (no
profit/no loss) and earn profits in the long term.
5.2 Uses of Contribution
Contribution is used for decision-making regarding one off opportunity such
as bidding for tender.
Contribution indicates impact of management decision on liquidity (cash
flows), which is vital for survival of the organization. Variable costs involve
cash outflows whereas fixed cost contains both cash as well as non-cash
expenses such as depreciation.
Contribution allows determining profit-maximizing combination of selling
price and demand.
Contribution allows evaluating proposals such as outsourcing; buying
materials from outside supplier; discontinuing activities, products,
departments, branches etc.
Contribution helps in determining the optimal production mix. Products can
be ranked according to the level of contribution per limiting factor provided
by each product.
5.3 Contribution Vs Profit
Contribution
Contribution is relevant in the
short-term.
Contribution is objective indicator
of organizational performance.
Profit
Profit is relevant in the long-term.
Profit is subjective indicator of
organizational performance, as it
requires absorption of fixed costs on
some fair basis.

Contribution
Contribution is more useful for
management accounting purpose.
Management accountants have to
assist managers in their day-to-day
decision-making.
Contribution is only useful for shortterm planning and control as it
ignores fixed costs.
Contribution can be used fairly as

an indicator of cash flow
movements.
Profit
Profit is more useful for financial
accounting purpose so that
management can be held accountable
for total cost (variable + fixed) incurred.
Profit is useful for long-term planning
and control as it takes account of
variable as well as fixed costs. In longterm, all fixed costs are considered as
variable.
Profit reflects both cash & non-cash
income/expenditures such as interest
receivable, depreciation respectively.
6 Activity Based Costing

ABC is modern costing technique. It is used as an alternative to absorption
costing technique.
It also absorbs production, selling, and admin overheads to find full cost of the
product(s).
ABC considers all cost (variable + fixed) as variable in the long term.
In addition to product cost, it is also used to determine the cost of activity(s)
such as delivering customer order.
6.1 Understanding Key Terms
6.1.1 Activity
Activity is the series of tasks performed in harmony for which customers are
willing to pay.
Example:
Selling goods is an activity. It requires performing individual tasks such as credit
rating analysis, raising sales order, dispatching goods etc. Customers are
willing to pay for these activities in order to buy goods from the organization.
Without these activities, customers will not be able to buy goods.

6.1.2 Cost Driver

Cost driver is the reason for performing an activity and therefore, reason for
cost associated with activity.
Example:
Number of orders received can be a cost driver for selling goods. Sales are
made, whenever customer places an order. Increase in number of orders
received will lead to increase in selling cost.
6.1.3 Cost Pool
Cost pool is the group of all costs related to particular activity.
Example:
Selling cost is the cost pool for all cost associated with selling goods such as
computer depreciation, computer operator salaries and printing cost etc.
6.2 Steps for Calculating Product Cost under ABC
6.2.1 Step1
Identify cost driver (one or more) for each cost pool.
Example:
Number of deliveries for delivery cost.
6.2.2 Step2
Apportion cost pools in the ratio of total number of activity performed by each
cost driver.
Example:
Delivery cost by number of long distance deliveries (60%) and number of short
distance deliveries (40%). Hence, apportionment of delivery cost will take place
in the ratio of 6:4
6.2.3 Step3
Determine ABC absorption rate by dividing cost pool with total number of
activity performed by respective cost driver.
Formula:
Example:
Long distance delivery cost with number of long distance deliveries.
Short distance delivery cost with number of short distance deliveries.
6.2.4 Step4
Absorb (allocate) overhead cost using ABC absorption rate to products.
Multiply the ABC absorption rate with total number of activity consumed by
each product.
Formula:
Example:
Product A has consumed 400 long distance deliveries and 1,000 short distance
deliveries.
Product B has consumed 500 long distance deliveries and 400 short distance
deliveries.
6.2.5 Step5
Total all the allocated overhead costs for each product and also add direct
material and direct labour cost to determine full cost of product.
To determine unit cost of a product by dividing full product cost with total
activity level of a product.
Activity level can be either production volume or sales volume. Production
volume should be used when costing for product or production related
activities. Sales volume should be used when costing for sales related activity
such as customer order deliveries.
To determine selling price add mark-up percentage. Mark-up percentage will
be given in the question.
Example:
Organization wishes to earn 20% profit margin on a product.
If you are given profit margin, then covert margin into mark-up, using following
formula:
Formula:
6.3 Calculating Product Costing Using ABC

Illustration:
Brick by Brick (BBB) is a building business that provides a range of building
services to the public. Recently they have been asked to quote for garage
conversions (GC) and extensions to properties (DC) and have found that they
are winning fewer GC contracts than expected.
BBB has a policy to price all jobs at budgeted total cost plus 50%. Overheads
are currently absorbed on a labour hour basis. BBB thinks that a switch to
activity based costing (ABC) to absorb overheads would reduce the cost
associated to GC and hence make them more competitive.
You are provided with the following data:
Annual overheads
Overhead category
$
Supervisors
90,000
Planners
70,000
Property related
240,000
Activity driver
Site visits
Planning documents
Labour hours
Total number
of activities per year
500
250
40,000

Annual overheads
Overhead category
$
Total
400,000
Activity driver
Total number
of activities per year
A typical GC costs $3,500 in materials and takes 300 labour hours to complete.
A GC requires only one site visit by a supervisor and needs only one planning
document to be raised. The typical DC costs $8,000 in materials and takes 500
hours to complete. An EX requires six site visits and five planning documents.
In all cases, labour is paid $15 per hour.
Required:
Calculate the cost and the quoted price of a GC and of an EX using ABC to
absorb the overheads.
Solution:
Quoted Price Using ABC
Workings
Materials
Labour
(300 x $15/hr)
(500 x $15/hr)
Overheads (step3)
Supervisor
Planners
Property
Full Cost
Mark up 50% on cost
Quoted Price
GC $
3,500
4,500
EX $
8,000
7,500
180
280
1,800
10,260
5,130
15,390
1,080
1,400
3,000
20,980
10,490
31,470
Workings:
Step1 (optional)
Cost Pool
Cost Driver
Supervisors
Site visits
Planners
Property
related
Planning
documents
Labour hours
Reason
Monitoring sites incurred supervisors
cost
Planning documents incurred planners
cost
Labours are used to complete property
contracts.
Step2
In this question, there is one cost driver for each cost pool, so there no need
for cost pool apportionment.
Step3
Cost pool
Annual overheads in $ Total number of activities ABC absorption rate
Supervisors
90,000
500
180
Planners
70,000
250
280
Property related 240,000
40,000
6
Step4
Cost Pool
Activities consumed
Supervisors
1:6
Planners
1:5
Property related
6:6
GC
(1 x 180)180
280
1,800
EX
(6 x 180)1,080
1,400
3,000
7 Commenting On Results under ABC & Absorption Costing

Absorption costing allocates more overheads to high volume (labour, machine
hours) products and allocates lesser overheads to low volume products.
Example:
If product A consumes 400 labour hours and product B consumes 800 labour
hours then product B will consume double overheads than product A.
Allocation of overheads based on volume not may be representative of the
way in which actual overheads are incurred by each product.
Example:
Product A (low volume) may be produced in smaller batches than product B
(high volume). Smaller batches will incur more setup cost than larger batches.
Machines may have to be frequently organized in different way and needs to
be adjusted. This will result in increased idle time cost for labour.
Therefore, product A will incur more setup cost than product B.
Absorption costing does not take account of this fact.
Activity based costing allocates more overheads to product consuming more
activities (setup, material handling etc) and allocates lesser overheads to
products consuming less activities.
Example:
If product A consumes 6 setups and product B consumes 3 setups, then product
A will consume double overheads than product B.
Some products may require more setups because of production in smaller and
more frequent batches. These may be slow moving products or products of
perishable nature, which will become obsolete if stored for longer time.
Conversely, some products may require fewer setups because of production in
larger batches. These may be fast moving products or products having
unpredictable demand, which needs to be stored to meet unexpected demand.
Activity based costing differentiates cost drivers between activity based cost
drivers and volume based cost drivers.
Activity based cost drivers change with changes in number of activities (setup,
invoicing, deliveries etc).
Volume based cost drivers change with changes in volume (labour or machine
hours, units etc). Some overhead costs are still change with volume such as
machine depreciation.
Activity based costing takes account of the fact that it is number of activities
which incurs majority of the costs rather volume (labour or machine hours) of
the product.
In todays manufacturing environment, responsiveness to customer is
considered as the key to success. It gives rise to number of supporting activities
and related costs. It makes activity-based cost drivers significant part of
overheads cost rather than volume based cost drivers.
Activity based costing closely allocates each type of overhead cost to
respective activities which incur cost rather than allocating all types of
overhead costs on single factory wide or departmental overhead rate (labour
or machine hours). Therefore, ABC costing makes use of greater number of
overhead absorption rates rather than two or three overhead absorption rates
used in absorption costing.
Activity based costing gives fairer reflection of actual overheads incurred by
each product.

8 Implications for Pricing & Profitability

Activity based costing enable more accurate pricing of products. Products
consuming more activities and cost can be charged higher to customers.
Products consuming fewer activities and cost can be charged fairly to
customers.
Absorption costing allocates lesser overhead cost to low volume products and
more overhead cost to high volume products. Mark up % on less costly product
results in lower selling and more costly product results in higher selling price.
Absorption costing results in under-pricing of low volume and high activity
products and over pricing of high volume and low activity products.
Example:
Product A (low volume & high activity product) will be under-priced which
would otherwise be priced using ABC.
Product B (high volume & low activity product) will be over priced which would
otherwise be priced using ABC.
Under priced products will probably result in lower selling price than market
price provided competitors allocating cost to their products using ABC.
Therefore, profitability of low volume and high activity product will suffer due
to not having sufficient gross profit margin. Eventually, organization will decide
to discontinue that product which is actually profitable. This will result in
dysfunctional decision-making.
Over priced products will probably result in higher selling price than market
price. Therefore, this will result in high gross profit margin. However,
profitability of high volume and low activity product will suffer due to not
having sufficient sales demand. Organization will be motivated to produce
more units of that product because of higher gross profit margin.
Activity based costing can be used to prevent this problem. Benefits of
switching to ABC need to be evaluated against the cost of implementing and
maintaining ABC.

9 Increasing Popularity of ABC

Information technology has reduced information management cost, making
ABC feasible to implement and operate.
Focus shift from product to customer resulting in smaller production runs
(batches) and increased production setup cost (overheads).
Just in time inventory management philosophy resulting in increased inventory
ordering cost (overheads), as inventory is purchase or produced only when
demanded by customer.
Shorter product life due to rapidly changing technology resulting in increased
marketing and development expenditure (overheads).
Internet leading to increased customer awareness on prices creating a need for
more competitive product pricing to achieve advantage over competitors.
Government legislation being stricter regarding customer protection to
prevent violation of customer rights. This will result in more inspection and
material handling overhead costs.
10 Benefits & Limitations of ABC

10.1 Benefits
ABC gives more accurate product cost.
ABC gives full cost of product as it includes selling and admin overheads in
addition to production overheads.
ABC gives long-term product cost as it recognizes all the cost as variable,
changing with changing activity levels.
ABC is realistic approach to product costing.
ABC encourages long-term decision-making approach by managers. Thus,
avoiding adverse impact of short-term decision making on long-term
growth and stability.
Cost of sales and inventory value calculated based on ABC can be used for
financial reporting purpose. ABC gives full product cost and provides
accurate information on financial performance and position of the

organization.
It recognize that difference between volume based cost drivers (for cost
which increases with volume such as machine maintenance cost) and
transaction based cost drivers (for cost which increases with transactions
such as delivery cost)
ABC directs relates costs to the reasons for incurring costs in the form of
cost drivers. Costs are incurred due to activities in any organization rather
than number of departments.
Due to extensive information on activities is available, ABC costing can form
the basis of ABC budgeting. This resulting in more realistic budgeting.
It gives information for cost control and reduction purpose.
Example:
Information that production in larger batches will decrease production setup
costs.
10.2 Limitations
ABC is expensive to implement and operate because of such detailed
information is needed on cost drivers and cost pools.
Organization may not have sufficient resources and time to implement ABC.
Managers may not understand the importance of ABC costing information
for product costing and pricing purpose as it is too technical.
ABC information gathering process can consume a lot of managerial time in
meeting and discussion, which can be used elsewhere to generate
revenues. However, information technology has greatly reduced
information-management costs. Thus, ABC is getting more affordable.
It may not deliver same benefits to smaller organization who have few
activities, similar production processes and few products as compared to
larger organization having many activities, complex production process and
too many products.
Cost of implementing an ABC might not exceed benefits obtained from

getting more accurate information.
Hence, benefits of ABC costing are more than its limitations. That is why; ABC
is increasingly being adopted by many organizations.
11 ABC Vs Absorption Costing Vs Marginal Costing

ABC
ABC absorbs product +
selling + admin
overheads in product
cost
Absorption Costing
Absorption costing
conventionally absorbs
only production
cost.
ABC gives more realistic Absorption costing
and detailed information makes use of subjective
for product costing and
basis for allocation,
long-term decisionapportionment and
making purpose such as absorption of overheads
product pricing.
Example:
Floor area for rent
As it considers all the
costs as variable in long- apportionment and
machine or labour hours
term. ABC focuses on
for absorption.
activities and includes
most of the
Therefore, it is of little
organizational cost in
use in decision-making,
product cost.
and product costing
based on absorption
However, there is still
costing can be
subjective grouping of
costs into cost pools and misleading.
identification of cost
drivers.
ABC can be used for
Absorption costing can
financial reporting
be used for financial
purpose
reporting purpose.
Marginal Costing
Marginal costing does
not include fixed costs,
even fixed production
cost.
Marginal costing is
suitable for short-term
decision-making.
Example:
Decisions for accepting
or rejecting customer
order.
As it only considers
variable costs and
ignores fixed costs. It
does not ensure full
recovery of fixed cost in
long-term.
Marginal costing is not

allowed for financial
reporting purpose by
IAS 2 inventory.

ABC
ABC allocates cost
according to the activity
and volume consumed
by each product.
As it recognizes the
difference between cost
increasing with volume
(volume based cost
drivers) and cost
increasing with activities
(activity based cost
drivers)
Absorption Costing
Absorption costing
allocates more overhead
costs to high volume
products and low activity
products.
Marginal Costing
Conversely, it allocates
less overhead costs to
low volume high activity
products.
It leads to dysfunctional
(misleading) decisionmaking.
It leads to more accurate

product costing and
pricing.
12 Practice Question & Solution

12.1 Question
Triple Limited makes three types of 8old watch the Diva (D), the Classic (C)
and the Poser (P). A traditional product costing system is used at present;
although an activity based costing (ABC) system is being considered. Details of
the three products for a typical period are:
Hours per unit

Materials
Production
Labour hours Machine hours Cost per unit ($)
Units
Product D
1
20
750
Product C
1
1
12
1,250
Product P
1
3
25
7,000
Direct labour costs $6 per hour and production overheads are absorbed on a
machine hour basis. The overhead absorption rate for the period is $28 per
machine hour.
Total production overheads are $654,500 and further show that the total
production overheads can be divided as follows.
%
Costs relating to setups
35

%
Costs relating to machinery
Cost relating to materials handling
Costs relating to inspection
Total production overhead
20
15
30
100
The following total activity volumes are associated with each product line for
the period as a whole.
Number of Number of movements
Product D
Product C
Product P
set ups
75
115
480
670
of materials
12
21
87
120
Number of
inspections
150
180
670
1,000
Required:
a) Calculate the cost per unit for each product using traditional methods,
absorbing overheads based on machine hours.
b) Calculate the cost per unit for each product using ABC principles (work to
two decimal places).
c) Explain why cost per unit calculated under ABC are often very different to
costs per unit calculated under more traditional methods. Use the information
for triple limited to illustrate.
d) Discuss the implications of a switch to ABC on pricing and profitability.
Solution
(a)
Material
Labour
Production overhead
Cost per unit
Diva
Classic
Poser
20
($6 x hr) 3
($28 x 1.5hrs) 42
65
12
($6 x 1.5hrs) 9
($28 x 1hr) 28
49
25
($6 x 1hr) 6
($28 x 3) 84
115

Marking Scheme
For each product 1 mark
Total
3 marks
(b)
Let use step-by-step procedure to solve this question (this representation is for
tutorial purpose and lengthier than you would be expected to fulfil
requirement. Past paper is more useful for planning your representation for
exam purpose).
Cost Per Unit
Workings
Material
Labour
Overhead
($77,213/750)
Diva ($)
20
3
94.95
($98,843/1,250)
Classic ($)
12
9
79.07
($484,444/7,000)
Cost per unit
Poser ($)
25
6
117.95
100.07
69.21
100.21
Workings:
Examiners Note:
Each step required has been given its own sub-heading to make the procedure
clear. The basic principle is to find an overhead cost per unit of activity for each
element of overhead cost. In some cases, it might be possible to find an
overhead cost per unit directly; here it is probably easier to split overhead
between each product type first and then find a cost per unit as shown.
(Optional)
Cost Pool
Set up cost
Cost driver
Number of setups
Machining cost
Machine hours
Material handling cost
Material movement
Reasons
Set up cost arises each
time new batch of
production in launched.
It rises due to
depreciation and
maintenance of machine.
It arises each time
material is moved
around the factory.

Cost Pool
Inspection cost
Cost driver
Number of inspections
Reasons
Inspection cost arises
each time inspection is
made.
Calculating Total Machine Hours

Products
Diva
Classic
Poser
Machine hour/unit
1
3
Total number of units

750
1,250
7,000
Total machine hours

1,125
1,250
21,000
23,375
Cost Per Driver Calculation

Cost Pools
Set-ups
Machining
Materials handling
Inspection
Apportioned
cost ($)
35 229,075
20 130,900
15 98,175
30 196,350
Cost Driver
Number of set ups
Machine hours
Material
movements
Number of
inspections
Activity level
670
23,375
120
Cost per driver

($)
341.90
5.60
818.13
1,000
196.35
100 654,500
Overhead Split by Product Table

Set-ups
Machining
Material Handling
Inspection
Total Overheads
Cost per
driver ($)
341.90
5.60
818.13
196.35
Respective activities
75 : 115 : 408
1,125 :1,250 :21,000
12 :21 : 87
150 : 180 : 670
Marking Scheme
Total machine hours
Cost per driver calculation
Overheads split by product table
Cost per unit calculation
Total
Diva
($)
25,643
6,300
9,817
29,453
77,213
Classic
($)
39,319
7,000
17,181
35,343
98,843
Poser
($)
164,113
117,600
71,177
131,554
484,444
Total ($)
229,075
130,900
98,175
196,350
654,500
2 marks
3 marks
4 marks
3 marks
12 marks
Exam Support
Use tabular approach to save time and enhance representation and
understanding.
(C)
Volume in units
Absorption costing
Activity based costing
Diva
(1,125 Mac hrs) 750
$42
$95
Classic
(1,250 Mac hrs) 1,250
$28
$79
Poser
(21,000 Mac hrs) 7,000
$84
$69
Absorption costing allocates more overheads to high volume (machine hours)

products such as poser and allocates less overheads to low volume products
such as diva and classic.
Activity based costing allocates more overheads to product consuming more
activities such as Diva and allocates less overheads to products consuming less
activities such as classic and poser.
In this case machining cost is (130,900/654,500) 20% of total overheads
incurred due to machine hours (volume) while the rest of the overheads 80%
related to above activities.
It would be unfair to absorb all the overheads on basis of volume (machine
hours). ABC costing recognizes this flaw, and absorbs overheads using variety
of activity based cost drivers (number of setups) and volume related cost
driver (machine hours) giving true reflection of cost incurred in production of
each product.
Product Diva (D) has incurred (75/670) 11% setup cost while amounting to only
(750/23000) 3.26% of total production volume. Therefore, ABC gives more
weight based on activity when allocating setup cost to products as it should be,
while absorption gives less weight based on volume when allocating setup cost
to products.
Marking Scheme
Explanation
4 marks
Total
4 marks
Solution to Requirement (D)

Volume in units
Absorption costing
Activity based costing
Diva
(1,125 mac hrs) 750
$42
$95
Classic
(1,250 mac hrs)1,250
$28
$79
Poser
(21,000 mac hrs) 7,000
$84
$69
Exam Support
Do not reproduce same comments repeatedly in exams. Doing so will not earn
you marks instead it will consume time.
If triple ltd is using full cost plus pricing without considering market conditions,
then it would be selling its lower cost products Diva and Classic at lower selling
price and higher cost products at higher selling price.
On the basis absorption costing, product Diva and Classic would be sold at
lower price and poser at higher prices. It might lead to losses on lower cost
products (Diva and Classic) seems to be profitable to triple ltd and higher cost
product might be discontinued as it seems uneconomical to customers in
comparison with its Quality due to lower activity consumption such as number
of inspections.
Therefore, absorption costing would encourage managers to produce more
and more units of lower cost products and reducing or eliminating the
production of higher cost products. It results in dysfunctional (misleading)
decision-making.
Under ABC manager will have true information related to cost of each product,
so competitive selling price can be charged to customers to competitive
advantage in the market.
In price sensitive market, product Poser should be given first priority and
product Diva should be given least priority. This will increase overall
profitability of triple ltd.

Chapter 2: LIFE CYCLE COSTING
Chapter 2:
LIFE CYCLE COSTING

Sub Headings
S.no
1
What Is Life Cycle Costing
2
Stages of Product Life Cycle
3
Benefits of Product Life Cycle Costing

1 What Is Life Cycle Costing

Life cycle costing is the cost management approach for managing products,
functions, division and organization as a whole.
For now, we will discuss it for products only.
2 Stages of Product Life Cycle

Diagram:
2.1 Design or Development Stage

Product is being planned.
Costs are being incurred resulting in negative cash flows.
There is no revenue at this stage.
2.2 Introduction
Product is first launched in the market.
Marketing expenditure is high due to the need for increasing demand for
the new product, as customers are unaware of the product and its features.
Product cost per unit is high because of:
Greater material wastages due to labour are learning production process.
Labours working are less efficiently on new product than on existing

products.
Overhead cost is also high because of lower production volume, production
in small batches and ordering materials in small quantities.
Costs are still greater revenues resulting in negative cash balance.
2.3 Growth
Product starts to gain popularity as more and more customers are being
aware of product and its features.
Marketing expenditure is slightly lower than that at introduction stage.
Product cost per unit gradually reducing because of:
Lower material wastages due to labours are learning the production
process.
Labours are increasing being efficient and labour cost per unit in
decreasing.
Overhead cost is decreasing due to lower production volume, production in
large batches and obtaining bulk purchase discounts for ordering large
quantities of material.
Revenue is increasing gradually resulting in positive cash balance.
New competitors are entering the market or developing the similar
products.
2.4 Maturity
Product has achieved its full growth potential and product is well known
amongst customers.
Marketing expenditure is at minimum at this stage, just to maintain and
gain market share. Further expansion of market itself is not possible.
Product cost per unit is lowest at this stage because of:
Economies of scale (bulk purchase discounts) are achieved due to mass
(bulk) production volumes.
Labour efficiency is increased to its full potential. Labours are making more
products per hour resulting in reduced labour cost.
Overhead cost low due to economies of scales.
Products are of high quality and reduce warranty claim cost.
Minimal training and supervision cost than above stages.
Revenues are at peak and product is generating high cash flow balance
ever.
Competitor try to penetrate (enter) the market reducing their selling price.
This puts increased demand for product quality to maintain selling price.
2.5 Decline
Customers are getting bored of the product and looking for other products
offered by competitor or newer version of existing product.
Marketing expenditure can generate some interest in product particularly in
lower income group.
Product cost begin to rise because of
Production volume is reduced due to reduction in demand, resulting in loss
of economies of scale.
Changes in product design can increase the life of products perhaps at some
costs. Cost should only be incurred if expected benefits are greater than
cost.
Product can still be profitable (cash generating) because of competitors
leaving the market. As a result price pressures are decreased and
organization can enjoy monopoly position in the market.
Competitor may leave because find the market unattractive and want to
pursue other interests.
Finally, at the end of life cycle product is discontinued.

3 Benefits of Product Life Cycle Costing

Product life cycle enables managers to take better strategic decisions regarding
development and discontinuation of products.
Product life cycle recognizes the profitability over the whole life of the product.
As you have noticed that products tend to make loss (negative cash balance) in
early stages of life cycle, then it would be more wise to look at product
profitability over it whole life.
Other costing techniques (ABC, Absorption costing and marginal costing)
excluding target costing do not recognizes this fact and tend to focus on
profitability in short-term (1 year). It leads to dysfunctional (misleading)
decision-making. It drops product, which are profitable during its whole life but
loss making in earlier stages of its life cycle.
Product life cycle demonstrate the importance of timing to be considered in
developing and introducing to the market. Earlier the organization launches its
product more time it will have as a monopolist. This will result in more
profitability from the product over its life cycle.
Conversely, voidable delays in developing and introducing the product can
erode profitability of the product. Hence, time management and scheduling is
important for product profitability.

Chapter 3: TARGET COSTING
Chapter 3:
TARGET COSTING
Sub Headings
S.no
1
What Is Target Costing?
2
Steps Involved In Target Costing
3
Calculating Target Cost/Unit & Cost Gap
4
Strategies to Reduce Cost
5
Benefits of Target Costing
6
Target Costing In Service Industries

1 What Is Target Costing?

Target costing is the market (customer) focused cost reduction and control
technique for potential and existing products.
Target recommends cost should be incurred for those product features, which
add value (benefit) to the customer from customers viewpoint. All other costs
should be eliminated or reduced to minimum.
Target costing is the continuous activity to improve product features and
minimizes cost without losing value of the product in the eyes of the customer.
Improvement is sought over the whole product life cycle.
2 Steps Involved In Target Costing

2.1 Step1
Identify the market selling price for same or similar product.
2.2 Step2
Decide the desired profit margin that should be obtained.
2.3 Step3
Deduct the desired profit margin from market selling price of the product to
arrive at Target cost (expected cost).
2.4 Step4
Estimate cost of product based on internal data on material, labour and
overhead to be applied to the product.
2.5 Step5
Expected cost (step4) is then compared with estimated or budgeted cost
(step5). The resulting difference is called target cost gap.
2.6 Step6
Aim to reduce target cost gap by using cost reduction strategies.
2.7 Step7
Once the target cost gap is filled, expected cost should be lowered further to
achieve future improvements in the product and production process to
reduced cost.
These steps will be continuously repeated until the end of product life cycle.
Diagram:
Estimated cost
Target cost gap
Target
cost
3 Calculating Target Cost/Unit & Cost Gap

Illustration:
Edward Co assembles and sells many types of radio. It is considering extending
its product range to include digital radios. These radios produce a better sound
quality than traditional radios and have a large number of potential additional
features not possible with the previous technologies (station scanning, more
choice, one touch tuning, station identification text and song identification text
etc).
A radio is produced by assembly workers assembling a variety of components.
Production overheads are currently absorbed into product costs on an
assembly labour hour basis.
Edward Co is considering a target costing approach for its new digital radio
product.
A selling price of $44 has been set in order to compete with a similar radio on
the market that has comparable features to Edward Cos intended product.
The board have agreed that the acceptable margin (after allowing for all
production costs) should be 20%.
Cost information for the new radio is as follows:

Component 1 (Circuit board) these are bought in and cost $410 each. They
are bought in batches of 4,000 and additional delivery costs are $2,400 per
batch.
Component 2 (Wiring) in an ideal situation 25 cm of wiring is needed for
each completed radio. However, there is some waste involved in the process
as wire is occasionally cut to the wrong length or is damaged in the assembly
process. Edward Co estimates that 2% of the purchased wire is lost in the
assembly process. Wire costs $050 per metre to buy.
Other material - other materials cost $8 10 per radio.
Assembly labour these skilled people are difficult to recruit and retain.
Edward Co has more staff of this type than needed but is prepared to carry this
extra cost in return for the security it gives the business. It takes 30 minutes to
assemble a radio and the assembly workers are paid $1260 per hour. It is
estimated that 10% of hours paid to the assembly workers is for idle time.
Production Overheads recent historic cost analysis has revealed the following
production overhead data:
Total production Total assembly
overhead
labour hours
$
Month 1 620,000
19,000
Month 2 700,000
23,000
Fixed production overheads are absorbed on an assembly hour basis based on
normal annual activity levels. In a typical year 240,000 assembly hours will be
worked by Edward Co.
Required:
Calculate the expected cost per unit for the radio and identify any cost gap that
might exist.
Solution:
Component 1
Workings
4.10+($2,400/4,000)
$/unit
Explanation
470 Material cost + delivery
cost

Component 2
Other material
Labour cost
Variable
production
overhead (W1)
Fixed production
overhead (W1)
Estimated or
budgeted cost
Expected or
desired cost
Cost gap
Workings
25/100 x 100/98 x
$0.5
30/60 x 100/90 x
$12.60
30/60 x $20
30/60 x $12
$44 x(100-20)%
$/unit
Explanation
0128 Centimetre to metre x
gross up for wastages x
material cost
8.10
7
0.5 hours x gross up for idle
time x labour rate
10
Variable overhead incurred
during labour making
products.
6
Fixed overhead absorbed
on the basis of labour
hours
35928 Based on management
accounting information
35.20 Market selling price less
desired profit margin.
0.728 Cost reduction required.
Workings
High low method to variable and fixed components of overhead cost.
At 23,000 labour hours (highest activity level)
4 Strategies to Reduce Cost

Product features can be changed to reduce non-value adding features.
Providing training to labours to become more efficiency provided benefit
exceeds cost.
Providing better working conditions to labours to improve motivation and
so efficiency.
Re-design production process to reduce non-value adding activities.

Outsourcing supporting (non-core) activities and automating perhaps by
using information technology.
Change the type of material used without compromising quality.
Employee more unskilled labour by replacing them with existing skilled
labours, if doing so will not deteriorate quality of the product.
Reduce labour turnover to benefit from labour learning and experience.
Points you make should be justified with reference to relevant information
given in the scenario.
5 Benefits of Target Costing

Target costing attempts to manage costs at an early stage (development) of
the product life cycle.
Most of the cost relating to product (high tech) incurs at development stage
and it more beneficial to control and reduce cost at this stage.
In today modern environment product life cycle is getting shorter due to
technological advancement rendering products obsolete, such as mobile
phones.
Target costing determines the suitability of product for organization from
market view point. If product is not suitable (desired profit margin cannot
achieved) than product can be discontinued before investing resources in
further development and production.
Target costing enables organization to achieve advantage over competitors
by seeking continuous improvement over the whole product life cycle.
6 Target Costing In Service Industries

In service industries, it is difficult to find same or similar services to identify the
market price for service being provided or to be provided by the organization.

Even if the comparable services can be found it is still difficult to apply its price
to the services of the organization.
It is due to the characteristics of services (intangible, perishable,
heterogeneous, simultaneous and no transfer of ownership).
There can be more than one organization charging different prices for their
same or similar services. Then it becomes a subjective (biased) matter of
judgement.
In service industries person incurring the cost is not the person responsible for
costs. It adds difficulty in managing costs.
Example:
In hospital, costs are incurred because of decision taken by doctors and the
responsibility to manage costs relies on administration staff.
Also in service industries cost managers has no control over process of
providing the service. It is because of services are of technical in nature and
cost manager may not have such technical skills.
Example:
If you are assumed as cost controller then may not control the way mechanic
repairs your car.
Each time service is provided, it results in different cost and quality.
Example:
Hairdresser takes different amount of time each time you visit saloon.
Sometimes haircutting may not result as you wished.

Chapter 4: THROUGHTPUT ACCOUNTING
Chapter 4:
THROUGHPUT ACCOUNTING
Sub Headings
S.no
1
What Is Throughput Accounting
2
Principle Resource Factor
3
Calculating Throughput Accounting Ratio (TPAR)
4
Calculating Optimal Product or Process Mix

1 What Is Throughput Accounting

1.1 Throughput Definition
Throughput is profit achieved after deducting direct material cost from selling
price of product.
All remaining conversion costs (labour + overhead) are assumed as fixed for
the whole period i.e. short-term.
Reason:
Labours are increasingly becoming fixed cost due salaries and minimum wage
rate requirements imposed by legislation.
Overhead cost are increasing become fixed due to outsourcing of various
supporting business activities (internal audit) for a fixed monthly or yearly fee.
Managers trying to make longer term (long-term loan) agreements (contracts)
to reduce risk and uncertainty in decision-making.
It means the only cost, which is variable in short-term, is direct material cost.
Throughput (profitability) can be maximized by using material more efficiently.
Examples:
Throughput can be maximized using just in time (JIT) inventory management
system to save inventory ordering cost.
Total quality management (TQM) to reduce material wastage, ideally
eliminate.
2 Principle Resource Factor

Principal resource is the resource (Labour or Machine) restricting the
production volume of the products.
Other name for principal resource is principal factor, limiting resource or
factor, constraint and bottleneck.
However, terminology used in F2 paper is principal resource.
2.1 Identifying Principal Resource Factor

Formula:
This formula is applied for each process or resource over number of products
given in question.
Process or resource giving lowest number of units for products in total is the
principal resource factor.
Illustration:
The factory has 50 production lines each of which contain the three processes:
Raw material for the sheet metal is first pressed then stretched and finally
rolled. The processing capacity varies for each process and the factory manager
has provided the following data:
Processing time per metre in hours
Product A
Product B
Product C
Pressing
0.50
0.50
0.40
Stretching
0.25
0.40
0.25
Rolling
0.40
0.25
0.25
The factory operates for 18 hours each day for five days per week. It is closed
for only two weeks of the year for holidays when maintenance is carried out.
On average one hour of labour is needed for each of the 225,000 hours of
factory time. Labour is paid $10 per hour.
Required:
Identify the bottleneck process and briefly explain why this process is
described as a bottleneck.
Solution:
Products
Total
Pressing (W1) 450,000 450,000 562,500 1,462,500

Stretching
900,000 562,500 900,000 2,362,500
Rolling
562,500 900,000 900,000 2,362,500

Pressing process has the ability to make lowest number of units is the
bottleneck process. Hence, it is limiting the capacity of Yam co to make more
than 1,462,500 units during factory hours.
Workings
Budgeted factory hours given is 225,000 hrs. It can also be calculated as
follows
Pressing Process
3 Calculating Throughput Accounting Ratio (TPAR)

Formulae:
It is assumed that material will always available in full supply.

Above formula gives throughput generating ability of a product in each scarce
hour.
It enables managers to take short-term decisions on deciding which product
will be made more and which product will be made less.
Product generating greater throughput will be given higher rank in resource
allocation.

Where
Factory hours are the number of hours for which factory gate remains open
Example:
5 workers work 5,000 hours per year during the same timings. Factory hours
will be 5,000 hrs because it does not matter how many hours are paid per year,
what matter is how long factory remained open per year.
This formula compares throughput on principal resource with conversion cost
incurred for whole factory during factory hours.
If TPAR is greater than 1, it means product is generating more cash
(throughput) than cash spent on running the factory.
If TPAR is lesser than 1, it means product is losing cash in each hour product is
made in the factory. It is due to cash generated from product is less than cash
spent on running the factory.
That product should be discontinued unless needed for other strategic
purpose.
Illustration:
Thin Co is a private hospital offering three types of surgical procedures known
as A, B and C. Each of them uses a pre-operative injection given by a nurse
before the surgery. Thin Co currently rent an operating theatre from a
neighbouring government hospital. Thin Co does have an operating theatre on
its premises, but it has never been put into use since it would cost $750,000 to
equip. The Managing Director of Thin Co is keen to maximise profits and has
heard of something called throughput accounting, which may help him to do
this. The following information is available:
All patients go through a five step process, irrespective of which procedure
they are having:
step 1: consultation with the advisor;

step 2: pre-operative injection given by the nurse;
step 3: anaesthetic given by anaesthetist;
step 4: procedure performed in theatre by the surgeon;
step 5: recovery with the recovery specialist.
The price of each of procedures A, B and C is $2,700, $3,500 and $4,250
respectively.
The only materials costs relating to the procedures are for the preoperative injections given by the nurse, the anaesthetic and the dressings.
These are as follows:
Procedure A Procedure B Procedure C
$ per
$ per
$ per
procedure
procedure
procedure
Pre-operative nurses injections
700
800
1,000
Anaesthetic
35
40
45
Dressings
5.60
5.60
5.60
There are five members of staff employed by Thin Co. Each works a
standard 40-hour week for 47 weeks of the year, a total of 1,880 hours each
per annum. Their salaries are as follows:
Advisor: $45,000 per annum;
Nurse: $38,000 per annum;
Anaesthetist: $75,000 per annum;
Surgeon: $90,000 per annum;
Recovery specialist: $50,000 per annum.
The only other hospital costs (comparable to factory costs in a traditional
manufacturing environment) are general overheads, which include the theatre
rental costs, and amount to $250,000 per annum.
Maximum annual demand for A, B and C is 600, 800 and 1,200 procedures
respectively. Time spent by each procedure is as follows:
Procedure A
Procedure B
Procedure C
Hours
Hours
Hours
per procedure per procedure per procedure
Advisor
0.24
0.24
0.24
Nurse
0.27
0.28
0.30
Anaesthetist
0.25
0.28
0.33
Surgeon
0.75
1
1.25
Recovery specialist
0.60
0.70
0.74
Part hours are shown as decimals e.g. 024 hours = 144 minutes (024 x 60).
Surgeons hours have been correctly identified as the bottleneck resource.
Required:
a) Calculate the throughput accounting ratio for procedure C.
Note: It is recommended that you work in hours as provided in the table rather
than minutes.
b) The return per factory hour for products A and B has been calculated
and is $2,61253 and $2,65440 respectively. The throughput accounting
ratio for A and B has also been calculated and is 896 and
911respectively.
Calculate the optimum product mix and the maximum profit per annum.
Solution to Requirement (a)
Therefore conversion cost per hospital hour = $548,000/1,880 = $29149.

Selling price
Material cost
Pre-operative nurses injections
Anaesthetic
Dressings
Throughput
$/unit
4,250
1,000
45
560
1,050.60
3,19940

Procedure C generates more throughput than costs incurred during operation

of hospital.
Solution to Requirement (b)
A
TPAR
896
RANK
2
Optimal Production Mix
Procedure
(product)
Demand Hrs/unit
A
800
1
B
600
0.75
C
504
1.25
Total
Maximum Profit Per Annum
Throughput
per bottleneck
Hours taken
hour
800
2,65440
450
2,61253
630
2,55952
1,880
B
911
1
C
878
3
Hours taken
800
450
630
1,880
Total
throughput
2,123,520
1,175,6385
1,612,4976
4,911,6561
4 Calculating Optimal Product or Process Mix

This is the second stage in throughput accounting after deciding whether to
produce a product at all or not. Now, we will consider:
What product should be made first to make sure it gets sufficient resources to
meet the demand with respect to it.
How much of each product should be made taking account of any principle
factor associate with product (government restriction to make above certain
level) or production process (availability of resources such as labour hours and
machinery condition).
Illustration:
The return per factory hour for products A and B has been calculated and is
$2,61253 and $2,65440 respectively. The throughput accounting ratio for A
and B has also been calculated and is 896 and 911respectively.
Required:
Calculate the optimum product mix and the maximum profit per annum.
Solution to Requirement (b)
A
TPAR
896
RANK
2
B
911
1
C
878
3
Optimal Production Mix

Procedure (product) Demand Hrs/unit Hours taken
A
800
1
800
B
600
0.75
450
C
504
1.25
630
Total
1,880
Maximum Profit Per Annum
Hours taken Throughput per bottleneck hour
800
2,65440
450
2,61253
630
2,55952
1,880
Total throughput
2,123,520
1,175,6385
1,612,4976
4,911,6561

Chapter 5: ENVIRONMENTAL ACCOUNTING
Chapter 5:
ENVIRONMENTAL ACCOUNTING
Sub Headings
S.no
1
Environmental Management Accounting
2
Benefits of Environmental Management Accounting
3
Methods of Environmental Accounting

Chapter 5: ENVIRONMENTAL ACCOUNTING
1 Environmental Management Accounting

2 Benefits of Environmental Management Accounting
3 Methods of Environmental Accounting
3.1 Activity Based Costing
3.2 Life Cycle Costing
4 Types of Environmental Cost

4.1 Prevention Cost
4.2 Detection Cost
4.3 Internal Failure Cost
4.4 External Failure Cost

Chapter 6: RELEVANT COSTING
Chapter 6:
RELEVANT COSTING
Sub Headings
S.no
1
Relevant Cost Vs Irrelevant Cost
2
Materials
3
Labour
4
Overheads

1 Relevant Cost Vs Irrelevant Cost

1.1 Types of Relevant Cost
1.1.1 Future Cost
1.1.2 Avoidable Cost
1.1.3 Controllable Cost
1.1.4 Replacement Cost
1.1.5 Net Realisable Value
1.1.6 Variable Cost
1.1.7 Opportunity Cost
1.1.8 Directly Attributable Fixed Cost
1.2 Types of Irrelevant Costs
1.2.1 Past or Sunk Cost
1.2.2 Committed Cost
1.2.3 Fixed Cost
1.2.4 Original Purchase Cost
1.2.5 Non-Cash Expenses
2 Materials
2.1 Spare Materials
2.2 Material in Use
3 Labour
3.1 Spare Labour
3.2 Labour in Use
4 Overheads
4.1 Variable Overhead

4.2 Fixed Overhead


Chapter 7: SHORT TERM DECISION-MAKING
Chapter 7:
SHORT-TERM DECISION-MAKING
Sub Headings
S.no
1
Outsourcing Benefits & Limitations
2
Incremental Costs & Revenues
3
Make or Buy Decision
4
Continue or Discontinue Decision
5
Further Processing Decisions
6
Non-Financial Factors Involved In Further Processing Decision

1 Outsourcing Benefits & Limitations

1.1 Benefits of Outsourcing
1.1.1 Economies of Scale
1.1.2 Planning & Budgeting
1.1.3 Realization of Surplus Assets
1.1.4 Elimination of Limiting Resources
1.1.5 Reduced Overhead Costs
1.1.6 Experience & Expertise
1.1.7 Focus On Core Activities
1.2 Limitations of Outsourcing
1.2.1 Cost May Exceed Benefits
1.2.2 Employee Morale
1.2.3 Reaction of Stakeholders
1.2.4 Legislation
1.2.5 Lack of Autonomy
1.2.6 Loss of Control
2 Incremental Costs & Revenues

3 Make or Buy Decision
4 Continue or Discontinue Decision
5 Further Processing Decisions
6 Non-Financial Factors Involved In Further Processing Decision
6.1 Financial Basis
6.2 Non-Financial Basis

Chapter 8: COST VOLUME PROFIT ANALYSIS
Chapter 8:
COST VOLUME PROFIT ANALYSIS

Sub Headings
S.no
1
Single Product Situation
2
Basic Terms
3
Multi Product Situation
4
Limitations of CVP Analysis

Chapter 8: COST VOLUME PROFIT ANALYSIS
1 Single Product Situation

1.1 Calculating Contribution to Sales (C/S) Ratio
2 Basic Terms
2.1 Breakeven Point (BEP)
2.2 Margin of Safety (MOS)
2.3 Calculating Breakeven Point
2.4 Calculating Margin of Safety
2.5 Calculating Target Profit or Revenue
3 Multi Product Situation

3.1 Calculating C/S Ratio
3.2 Calculating Breakeven Point
3.3 Calculating Target Profit or Revenue
4 Limitations of CVP Analysis

Chapter 9: PRICING DECISIONS
Chapter 9:
PRICING DECISIONS
Sub Headings
S.no
1
Pricing Strategies
2
Calculating Prices for Different Pricing Strategies
3
Price Demand Relationship
4
Price Elasticity of Demand
5
Calculating Price Elasticity of Demand
6
Determining Optimal Selling Price, Sales Volume & Profit
7
Non-Financial Aspects of Pricing Decision

Chapter 10: LINEAR PROGRAMING
1 Pricing Strategies
1.1 Price Penetration
1.2
Discounted-Pricing
1.3 Volume Discounting

1.4 Price Skimming
1.5 Premium Pricing
1.6 Market Segmentation or Price Discrimination
1.7 Complementary Product Pricing
1.8 Product Line Pricing
1.9 Captive Product Pricing
1.10 Full Cost Plus Pricing
1.11 Marginal Cost Plus Pricing
1.12 Relevant Cost Pricing
2 Calculating Prices for Different Pricing Strategies
3 Price Demand Relationship

4 Price Elasticity of Demand
5 Calculating Price Elasticity of Demand
6 Determining Optimal Selling Price, Sales Volume & Profit
6.1 Straight Line Demand Equation
6.2 MC=MR (Marginal Cost Is Equal to Marginal Revenue)

7 Non-Financial Aspects of Pricing Decision

Chapter 10:
LINEAR PROGRAMING
Sub Headings
S.no
1
Calculating Contribution
2
Calculating Optimal Production Plan for Maximizing Contribution
3
Calculating Shadow Price (Dual Price) & Slack
4
Extending Production beyond Existing Capacity
5
Revising Optimal Production Plan

1 Optimial Production Plan in Single Limiting Factor Situation

1.1 Calculating Contribution
2 Calculating Optimal Production Plan for Maximizing

Contribution
3 Calculating Shadow Price (Dual Price) & Slack

4 Extending Production beyond Existing Capacity
5 Revising Optimal Production Plan

Chapter 11: RISK & UNCERTAINITY IN DECISION-MAKING
Chapter 11:
RISK & UNCERTAINTY IN DECISIONMAKING

Sub Headings
S.no
1
Basic Terms
2
Construct Payoff Tables
3
Decision Rules
4
Sensitivity Analysis
5
Decision Tree

Chapter 11: RISK & UNCERTAINITY IN DECISION-MAKING
1 Basic Terms
1.1 Risk Vs Uncertainty
1.2 Decision-making
1.3 Outcome
1.4 Variables
1.5 Pay Off
1.6 Circumstances
2 Construct Payoff Tables

3 Decision Rules
3.1 Expected Value
3.2 Calculating Expected Value
3.3 Maximin Decision Rule
3.4 Maximax
3.5 Minimax Regret Rule
4 Sensitivity Analysis
4.1 Performing Sensitivity Analysis
5 Decision Tree

Chapter 12: LEARNING CURVE THEORY
Chapter 12:
LEARNING CURVE THEORY

Sub Headings
S.no
1
Learning Curve
2
Calculating Product Cost/Unit (Tabular Approach)
3
Calculating Product Cost per Unit (Statistical Approach)
4
Ways to Improve Learning Rate

Chapter 12: LEARNING CURVE THEORY
1 Learning Curve
2 Calculating Product Cost/Unit (Tabular Approach)
3 Calculating Product Cost per Unit (Statistical Approach)

4 Ways to Improve Learning Rate


Chapter 13: FORECASTING
Chapter 13:
FORECASTING
Sub Headings
S.no
1
Scatter Graph Diagrams & Line of Best Fit
2
Coefficient Of Correlation
3
Regression Analysis
4
Calculating Regression Line Analysis
5
Adjustment for Inflation or Deflation
6
Advantages & Disadvantages of Regression Line Analysis
7
Time Series Analysis
8
Moving Averages
9
Seasonal Variations
10
Advantages & Disadvantages of Time Series Analysis


1 Scatter Graph Diagrams & Line of Best Fit

2 Coefficient Of Correlation
2.1 Calculating Co-Efficient Of Correlation
2.2 Coefficient of Determination
3 Regression Analysis
4 Calculating Regression Line Analysis
4.1 Assumptions of Regression Line Analysis
5 Adjustment for Inflation or Deflation

5.1 Consumer Price Index (CPI) or Retail Price Index (RPI)
5.2 Industry Specific Price Index
6 Advantages & Disadvantages of Regression Line Analysis

7 Time Series Analysis
7.1 Components of Time Series
7.1.1 Trend
7.1.2 Seasonal Variations
7.1.3 Cyclical Variations
7.1.4 Random Variations
8 Moving Averages
9 Seasonal Variations
9.1 Additive Model

9.1.1 Assumption
9.2 Multiplicative Model
9.2.1 Assumption
9.3 Deseasonalisation
10 Advantages & Disadvantages of Time Series Analysis

Chapter 14: BUDGETING SYSTEMS
Chapter 14:
BUDGETING SYSTEMS
Sub Headings
S.no
1
Uses of Budgeting
2
Preparing Flexible Budgets
3
Incremental Budgeting
4
Advantages & Disadvantages of Incremental Budgeting
5
Zero Based Budgeting (ZBB)
6
Process of Zero Based Budgeting
7
Advantages & Disadvantages of Zero Based Budgeting
8
Budgeting In Private Vs Public
9

Chapter 14: BUDGETING SYSTEMS
1 Uses of Budgeting
2 Preparing Flexible Budgets
3 Incremental Budgeting
4 Advantages & Disadvantages of Incremental Budgeting

5 Zero Based Budgeting (ZBB)
6 Process of Zero Based Budgeting
7 Advantages & Disadvantages of Zero Based Budgeting
8 Budgeting In Private Vs Public

9 Behavioural Aspects of Budgeting

Chapter 15: TYPES OF BUDGETING
Chapter 15:
TYPES OF BUDGETING
Sub Headings
S.no
1
Importance of Principle Budget Factor
2
Sales Budget
3
Functional Budgets
4
Cash Budgets
5
Master Budgets

Chapter 15: TYPES OF BUDGETING
1 Importance of Principle Budget Factor

2 Sales Budget
3 Functional Budgets
3.1 Production Budget
3.1.1 Raw Materials Budget
3.1.2 Direct Labour Budget
3.1.3 Variable & Fixed Production Overhead Budget
4 Cash Budgets
5 Master Budgets
6 Behavioural Aspects of Budgeting
6.1 Advantages & Disadvantages of Participative Style of Budgeting
6.2 Top down Vs Bottom up Approach to Budgeting

Chapter 16: BASIC VARIANCE ANALYSIS
Chapter 16:
BASIC VARIANCE ANALYSIS

Sub Headings
S.no
1
Total Sales Variance
2
Total Material Cost Variance
3
Total Labour Cost Variance
4
Total Variable Production Overhead Variance
5
Total Fixed Production Overhead Variance
6
Interpreting Variances
7
Investigating Variances
8
Reasons for Variances
9
Interrelationship between Variances
10
Reconciling Budgeted & Actual Profits
11
Total Quality Management

1 Total Sales Variance

1.1 Sales Price Variance
1.2 Sales Volume Profit or Contribution Variance
2 Total Material Cost Variance

2.1 Material Price Variance
2.2 Material Usage Variance
3 Total Labour Cost Variance

3.1 Labour Rate Variance
3.2 Labour Efficiency Variance
3.3 Idle Time Variance
4 Total Variable Production Overhead Variance

4.1 Variable Production Overhead Expenditure Variance
4.2 Variable Production Overhead Efficiency Variance
5 Total Fixed Production Overhead Variance

5.1 Fixed Production Overhead Expenditure Variance
5.2 Fixed Production Overhead Volume Variance
5.2.1 Fixed Production Overhead Efficiency Variance
5.2.2 Fixed Production Overhead Capacity Variance
6 Interpreting Variances

7 Investigating Variances
8 Reasons for Variances
9 Interrelationship between Variances
10 Reconciling Budgeted & Actual Profits

10.1 Under Absorption Costing
10.2 Under Marginal Costing
11 Total Quality Management

Exam Topic 17: MIX & YIELD VARIANCES
Chapter 17:
MIX & YIELD VARIANCES

Sub Headings
S.no
1
Material Mix & Yield Variance
2
Sales Mix & Yield Variance

Exam Topic 17: MIX & YIELD VARIANCES
1 Material Mix & Yield Variance

1.1 Material Mix Variance
1.2 Calculating Material Mix Variance
1.3 Material Yield Variance
1.4 Calculating Material Yield Variance
1.5 Interrelationship b/w Material Price, Mix & Yield Variance
2 Sales Mix & Yield Variance

2.1 Sales Mix Variance
2.2 Calculating Sales Mix Variance
2.3 Sales Yield Variance
2.4 Calculating Sales Yield Variance
2.5 Interrelation b/w Sales Price, Mix & Yield Variance

Chapter 18: PLANNING & OPERATIONAL VARIANCE
Chapter 18:
PLANNING & OPERATIONAL VARIANCE

Sub Headings
S.no
1
Controllable Vs Non Controllable Costs
2
Revision of Budget
3
Planning & Operational Variances
4
Sales Planning & Operational Variance
5
Material Planning & Operational Variance
6
Labour Planning & Operational Variances

Chapter 18: PLANNING & OPERATIONAL VARIANCE
1 Controllable Vs Non Controllable Costs

2 Revision of Budget
3 Planning & Operational Variances
3.1 Planning Variance
3.2 Operational Variance
4 Sales Planning & Operational Variance

5 Material Planning & Operational Variance
5.1 Summary:
6 Labour Planning & Operational Variances

6.1 Summary:
7 Activity Based Variances

Chapter 19: FINANCIAL PERFORMANCE MEASUREMENT
Chapter 19:
FINANCIAL PERFORMANCE
MEASUREMENT
Sub Headings
S.no
1
Assessing Financial Performance Based On Ratio Analysis
2
Divisional Performance Measures
3
Advantages & Disadvantages of Both ROE & RI

1 Assessing Financial Performance Based On Ratio Analysis

1.1 Profitability Ratios
1.1.1 Gross Profit Margin
1.1.2 Net/Operating Profit Margin
1.1.3 Cost of Sales Percentage
1.1.4 Operating Cost Percentage

1.1.5 Sales Growth or Decline Percentage

1.2 Working Capital or Liquidity Ratios
1.2.1 Trade Receivable Turnover
1.2.2 Inventory Turnover
1.2.3 Trade Payable Turnover
1.2.4 Current Asset Ratio
1.2.5 Quick Ratio or Acid Test Ratio
1.3 Gearing Ratios
1.3.1 Financial Gearing Ratios
1.3.1.1 Debt to Equity Ratio
1.3.1.2 Debt to Debt plus Equity Ratio
1.3.2 Operational Gearing Ratio
1.3.2.1 Contribution to Profit before Interest & Tax (PBIT)
1.3.3 Interest Cover (Times)
1.4 Investor Ratios
1.4.1 Earnings Per Share (EPS)
1.4.2 Price Earnings (P/E) Ratio
1.4.3 Earnings Yield
1.4.4 Dividends Yield
1.4.5 Dividend Cover
1.4.6 Payout Ratio
1.5 Evaluating Performance Using Ratios
2 Divisional Performance Measures

2.1 Return on Capital Employed (ROCE) or Return On Investment (ROI)
2.2 Calculating ROCE or ROI
2.3 Return on Equity (ROE)

2.4 Calculating ROE
2.5 Residual Income (RI)
2.6 Calculating RI
3 Advantages & Disadvantages of Both ROE & RI

Chapter 20: NON FINANCIAL PERFORMANCE MEASUREMENT
Chapter 20:
NON FINANCIAL PERFORMANCE

MEASUREMENT
Sub Headings
S.no
1
Financial Vs Non-Financial Performance Measures
2
Critical Success Factors & Key Performance Indicators
3
Balance Score Card
4
Benefits & Limitations of Balance Score Card
5
Characteristics of Services
Performance Measurement in Service Industries
6
Performance Measurement in Non Profit & Public
7
Benchmarking
8
Value for Money

1 Financial Vs Non-Financial Performance Measures

2 Critical Success Factors & Key Performance Indicators
2.1 Critical Success Factors (CSF)
2.2 Key Performance Indicators (KPI)
3 Balance Score Card

3.1 Financial Perspective
3.2 Customer Satisfaction Perspective
3.3 Internal Business Perspective
3.4 Innovation & Learning Perspective
4 Benefits & Limitations of Balance Score Card

5 Characteristics of Services
6 Performance Measurement in Service Industries
6.1 Standards
6.1.1 Equity
6.1.2 Ownership
6.2 Rewards
6.2.1 Motivation
6.2.2 Clear
6.2.3 Controllability
6.3 Dimensions
6.3.1 Determinants
6.3.1.1 Quality of Service
6.3.1.2 Flexibility
6.3.1.3 Innovation
6.3.1.4 Resource Utilization
6.3.2 Results
6.3.2.1 Financial Performance
6.3.2.2 Competitive Performance
7 Performance Measurement in Non Profit & Public

8 Benchmarking
8.1 Explanation of Benchmarking
8.2 Role of Benchmarking In Performance Measurement
9 Value for Money

9.1 Economy
9.2 Efficiency
9.3 Effectiveness
9.4 Performance Indicators
9.4.1 Economy
9.4.2 Efficiency
9.4.3 Effectiveness
9.5 Efficiency, Capacity & Activity Ratios
9.5.1 Efficiency Ratio
9.5.1.1 Limitation of Efficiency Ratio
9.5.2 Capacity Ratio
9.5.3 Activity Ratio
9.5.4 Calculate Efficiency, Capacity & Production Volume Ratios

Chapter 21: TRANSFER PRICING
Chapter 21:
TRANSFER PRICING
Sub Headings
S.no
1
Need for Transfer Pricing
2
Objectives of Transfer Pricing
3
Evaluating Transfer Price
4
Setting Transfer Price
5
Volume, Cost & Quality

1 Need for Transfer Pricing

2 Objectives of Transfer Pricing
2.1 Benefits of Internal Transfer
2.2 Limitations of Internal Transfer
3 Evaluating Transfer Price

3.1 Market Based Transfer Pricing
3.2 Cost Based Transfer Pricing
3.2.1 Full Cost Plus Pricing
3.2.2 Marginal Cost Plus Pricing
3.2.3 Marginal + Opportunity Cost Plus Pricing
3.3 Dual Transfer Pricing
3.4 Two Part Tariff Pricing
4 Setting Transfer Price

4.1 Lack of Spare Capacity (Unsatisfied Market Demand)
4.1.1 Maximum Transfer Price
4.1.2 Minimum Transfer Price
4.1.3 External Selling & Buying
4.2 Presence of Spare Capacity (Lack of Market Demand)
4.2.1 Maximum Transfer Price
4.2.2 Minimum Transfer Price
4.2.3 External Selling & Buying
5 Volume, Cost & Quality

2. Preparing Income Statement for Divisions

Chapter 22:
BEHAVIOURAL ASPECTS OF
PERFORMANCE MEASUREMENT
Sub Headings
S.no
1
Performance Measurement & Human Resource
2
Manipulation of Performance Measures
3
Managerial Incentive Schemes
4
Rewarding Performance

6 Performance Measurement & Human Resource

7 Manipulation of Performance Measures
7.1 Cut Off
7.2 Lagging Payments
7.3 Deferring Capital Expenditures
7.4 Early Settlement Discounts
7.5 Price Reduction
8 Managerial Incentive Schemes

8.1 Salary
8.2 Bonus
8.3 Shares
8.4 Share Options
8.5 Pension
8.6 Benefits
9 Rewarding Performance

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Ecommerce/Ebusiness/Make Money Online Tutorial, Implementation Guide, Training, Ebook Free Download & Buy.

Ecommerce/Ebusiness/Make Money Online

TABLE OF CONTENTS ........................................................................................................... 1

Chapter 22: BEHAVIOURAL ASPECTS OF PERFORMANCE MEASUREMENT

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Direct Labour Budget 119

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Key Performance Indicators (KPI)

Labour Cost Variance 121

Random Variations 114

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Variable Production Overhead

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ACTIVITY BASED COSTING

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2 Pre-Determined Overhead Absorption Rate

It is used were organization have single department or multiple departments

Production cost centres

Service cost centres

Organization wishes to absorb overheads on machine hour basis.

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2.2 Departmental Overhead Absorption Rate

Total allocated overheads

Production cost centres

Organization wishes to absorb overheads on machine hour basis for cutting

Production cost centres

Service cost centres

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3 Calculating Products Cost Using Absorption Costing

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Production overheads are absorbed on basis of factory wide rate of

Administration, Selling and distribution overheads are only included when

Product Materials Labour hours

Labour is paid $15 per hour.

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Selling & distribution overheads ($150 x 60%)

Contribution indicates how each product will contribute towards recovery of

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Contribution can be used fairly as

6 Activity Based Costing

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6.1.2 Cost Driver

Short distance delivery cost with number of short distance deliveries.

6.3 Calculating Product Costing Using ABC

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7 Commenting On Results under ABC & Absorption Costing

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8 Implications for Pricing & Profitability

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9 Increasing Popularity of ABC

10 Benefits & Limitations of ABC

accurate information on financial performance and position of the

Cost of implementing an ABC might not exceed benefits obtained from

11 ABC Vs Absorption Costing Vs Marginal Costing

Marginal costing is not

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It leads to more accurate

12 Practice Question & Solution

Hours per unit

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