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Summary Notes Chap 5 Cost Management in a Competitive Environment (McLeaney Book)
HULT international business school london UG, Managerial Accounting Notes (ACC220) Notes on Chapter 5 of the Book
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HULT International Business SchoolManagerial Accounting (ACC220)
Outline of the Required Book
Chapter 5 - Cost and cost management in a competitive environment.
1. Cost determination in the changed business environment
1.1. Costing and pricing the traditional way
➔ Direct-labour intensive & direct-labour paced production> The speed of production was dictated by
direct labour.
➔ A low level of indirect cost relative to direct cost. Little was spent on pozer, heat and light, and
machinery (depreciation charges) and other areas of typical indirect cost (overheads) of modern
business.
➔ A relatively uncompetitive market.
1.2. Costing and pricing in the new environment
➔ Capital intensive and machine paced production
➔ A high level of indirect cost relative to direct cost.
➔ A highly competitive international market: businesses needs to have a greater accuracy and be
more careful in taking more informed decisions.
➔ Shorter product life cycles. Technological advancement, greater competition and more demanding
customer ha fasten the pace of production for businesses, as a standard.
2. Cost management systems - The problem of overheads.
➔ IC which cannot be linked to products in the same way are allocated or apportioned to product cost
centers and then charged to individual jobs using appropriate overhead recovery rates.
➔ We have now however reached the position where overheads are often far more significant. It is
not unusual for overhead recovery rates to be between 5 and 10 times more than the hourly wage
rate.
➔ This can result in arbitrary product costing. Even small change in the amount of direct labour
worked can have a huge effect on the total cost calculated for a job.
3. ABC = Activity based costing
➔ ABC aims to overcome the kind of problem in the methods directly tracing the cost of all activities
supporting the production processes.
➔ The purpose of ABC is to provide a more realistic and ,ore finely measured account of the overhead
cost element for a particular unit of output.
➔ ABC takes into account:
- each of the various support activities
- cost to be assigned
- the cost driver = factors that cause a change in the costs of each support activity.
➔ Assigning overheads:
- [1] establishing the overhead cost pool for each support activity, There will be just one cost
for each separate cost driver.
- [2] assigning the total cost associated with each support activity to the relevant cost pool
- [3] charging the units of output with the total cost within each pool using the relevant cost
driver.
➔ Activity drivers; reccources drivers
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