Emerging issues in cost and

management accounting
Management & Cost Accounting:
Management accounting or Cost accounting is a
managerial accounting is managerial accounting
concerned with the provisions
and use of accounting
activity designed to help
information to managers managers identify,
within organizations, to measure and control
provide them with the basis to operating costs.
make informed business
decisions that will allow them
to be better equipped in their
management and control
functions.
Emerging Concepts:
Some of the emerging concepts in cost and
management accounting are as follows:
Activity Based Costing
Target Costing
Life Cycle Costing
Environmental Management
Activity-Based Costing
Activity Based Costing: Meaning
Activity-based costing (ABC) may be defined as a
technique which involves identification of costs with
each cost driving activity and making it the basis for
absorption of costs over different products or jobs.
In this way, an organization can precisely estimate the
cost of individual products and services so they can
identify and eliminate those that are unprofitable and
lower the prices of those that are overpriced.
USES:
It helps to identify inefficient products, departments
and activities
It helps to allocate more resources on profitable
products, departments and activities
It helps to control the costs at an individual level and
on a departmental level
It helps to find unnecessary costs
It helps fixing price of product or service scientifically
DISADVANTAGES:
It may be difficult to set up and establish, particularly
if an organisation is using more traditional accounting
methodologies. (barriers to change)
Can be time consuming if all activities are to be costed
.
May provide too much detail – obscuring the bigger
picture.
EXAMPLE of Activity Based Costing:
Let's discuss activity based costing by looking at two products manufactured
by the same company. Product A is a low volume item which requires
certain activities such as special engineering, additional testing, and many
machine setups because it is ordered in small quantities. A similar product,
Product B, is a high volume product—running continuously—and requires
little attention and no special activities. If this company used traditional
costing, it might allocate or "spread" all of its overhead to products based on
the number of machine hours. This will result in little overhead cost
allocated to Product A, because it did not have many machine hours.
However, it did demand lots of engineering, testing, and setup activities. In
contrast, Product B will be allocated an enormous amount of overhead (due
to all those machine hours), but it demanded little overhead activity. The
result will be a miscalculation of each product's true cost of manufacturing
overhead. Activity based costing will overcome this shortcoming by
assigning overhead on more than the one activity, running the machine.
Target Costing:

Target costing is the process of determining the

maximum allowable cost for a new product and then
developing a prototype that can be profitably made for
that maximum target cost figure. A number of
companies--primarily in Japan--use target costing,
including Compaq, Ford, Toyota etc.
Equation of Target Costing:
The target costing for a product is calculated by
starting with the product's anticipated selling price and
then deducting the desired profit. Following formula
or equation further explains this concept:
[Target Cost = Anticipated selling price – Desired
profit]
The product development team is then given the
responsibility of designing the product so that it can be
made for no more than the target cost.
Example of Target Costing:

ABC Company feels that there is a market niche for a hand mixer with certain
new features. Surveying the features and prices of hand mixers already in the
market, the marketing department believes that a price of $30 would be about
right for the new mixer. At that price, marketing estimates that 40,000 of new
mixers could be sold annually. To design, develop, and produce these new
mixers, an investment of $2,000,000 would be required. The company desires a
15% return on investment (ROI). Given these data, the target cost to
manufacture, sell, distribute, and service one mixer is $22.50 as calculated below:
  Projected sales (40,000 mixers  $30 per mixer ) $1,200,000  
Less desired profit (15%  $2,000,000) $300,000    
  Target cost for 40,000 mixers $9,00,000    
  Target cost per mixer ($9,00,000 / 40,000 mixer) $22.50
This $22.5 target cost would be broken into target cost for the various functions:
manufacturing, marketing, distribution, after-sales service, and so on. Each
functional area would be responsible for keeping its actual costs within target.
Life Cycle Costing:
Life-cycle costing is a method of costing that looks at
a product’s entire value chain from a cost perspective.
Other types of costing generally look only at the
production process, whereas life-cycle costing tracks
and evaluates costing from the research and
development phase of a product’s life, through to the
decline and eventual conclusion of a product’s life.
Advantages:
This approach to costing makes sense for several
reasons. First of all, most of a product’s costs are
committed before the product is in the production phase.
This means that the majority of control management can
exert over production and other costs is during the design
phase of the product’s life-cycle.
Provides you with a more complete financial picture by
considering first cost, and all costs and benefits over
the entire lifetime of the project.
Reduces your investment risk by projecting a more
complete picture of the future.
Disadvantages:
Is harder to learn and apply.
Getting input data can be challenging.
Environmental Management Accounting:
Social accounting is the process of communicating
the social and environmental effects of
organizations' economic actions to particular interest
groups within society and to society at large.
Environmental accounting (also known as Green
accounting), is a subset of social accounting, focuses
on the cost structure and environmental
performance of a company. It principally describes
the preparation, presentation, and communication of
information related to an organisation’s interaction
with the natural environment.
Environmental Costs:
Environmental costs can include costs to clean up or
remediate contaminated sites, environmental fines,
penalties and taxes, purchase of pollution prevention
technologies and waste management costs.
Reasons for Adopting Environmental
Accounting:
There are several reasons why businesses may
consider adopting environmental accounting as part of
their accounting system:

Possible significant reduction or elimination of

environmental costs.

Environmental costs and benefits may be overlooked

or hidden in overhead accounts.
Reasons Continued…
Possible competitive advantages as customers may
prefer environmentally friendly products and services.

It may be required for regulation of some types of

businesses.

May result in more accurate costing or pricing of

products and more environmentally desired processes.
Thank You
Throughput Costing:

Throughput World
We want to maximize
the use of capacity
Lean Accounting

Method of costing a product where only the unit-level

direct costs are assigned to the product.
Lean Costing:

COST WORLD
We want to minimize
the cost of capacity