Joe Hepworth Kenneth Holmes Beygum Kahn Peter Kelleher Professor Jason Cade Applied Management Accounting Colorado Technical University EEC Potential Costing Methods Full Costing Absorption Costing ID: 1029489
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1. Costing ConceptsLaura HamrickJoe HepworthKenneth HolmesBeygum KahnPeter KelleherProfessor Jason CadeApplied Management AccountingColorado Technical University
2. EEC Potential Costing MethodsFull Costing/ Absorption CostingVariable CostingTarget CostingLife-Cycle CostingActivity-Based Costing
3. Full Costing/Absorption CostingAccumulates fixed and variable costs associated with a production process and portions them out to individual products in inventory. Used to record the value of inventory in financial statements.
4. Full Costing/Absorption Costing BenefitsAllows the product to absorb the full range of fixed and variable costs into the overhead. Costs are not seen as expenses, and they remain in inventory as assets until the inventory is sold; at that point, they are charged to the cost of goods sold. Allows overhead accounts to absorb heavy or unexpected production costs until the volume ratchets up.
5. How EEC Would Apply Full CostingProject and Forecast EEC’s allocation of funds to cover the variable and fixed costs that comprise the manufacturing overhead. The costs’ valuation will remain in the inventory until the products are sold. Over absorb materials’ rising cost during peak demand periods and under absorb ebbing material cost during low demand periods.
6. Variable CostingSeparates the fixed costs from variable costs. Fixed costs are expensed as a period cost.Only the variable manufacturing costs are captured in the product cost.
7. Variable Costing Potential BenefitsEase of use for managementAide in decision making for production levelProvides contribution marginAssists with management performance.
8. How EEC Would Apply Variable CostingUse this method for high volume productionUse the contribution ratio as decision making toolAdjust production levels based on contributionFocus on sales of products to match the production levels
9. Target CostingTarget costing Determines the market price requirement, then subtracts the target profit to arrive at the target cost, then develops a prototype that can be profitably made for the maximum target cost.Formula for Target CostingAnticipated selling price – Mandated profitIndustries most applicable forCompanies that compete by continually issuing a stream of new or upgraded products into the market place (consumer goods). Target costing is an excellent tool for planning a suite of products that have high levels of profitability.
10. Target Costing Potential BenefitsAchieve greater cost efficiencyProactive approach to cost managementOrients ECC toward its customersBreaks down department barriersFoster’s employee awareness and empowermentFoster partnerships with suppliersEncourages production of cost effective productsReduced time to marketImproves global competitiveness
11. How EEC Would Apply Target CostingConduct researchCalculate maximum costDetermine target costEngineer the productOngoing activitiesShelf if necessaryMore precise review approach
12. Life-Cycle CostingTracks, analyzes, and interprets the costs occurred over a product’s life timeProducts tend to have -High costs in their earlier phases (Development, Intro, Growth)Low costs as product nears end of life-cycle (Maturity & Decline)Phases of Life-Cycle CostingDevelopmentIntroductionGrowthMaturityDecline
13. Life-Cycle Costing Potential BenefitsPlanning / ForesightBetter grasp of product expectationAware that new product development will be neededKeeps companies relevant in the market & industryIncreased advertisingBetter budgetingIncrease in research and development
14. How EEC Would Apply Life-Cycle CostingDevelop new products while previous products are in early introduction phaseModifications to current products in order to increase sales revenues and profitBudget for product advertisementConduct consumer surveys of popularity of productUnderstand when life-cycle begins to dropUnderstand need for new innovation in timely manner
15. Activity-Based CostingAssigns costs to activities based on the resources used in the production processDirect approach to allocating overhead costs in the production processTwo Stages of AllocationAllocation to ActivitiesAllocation to Production
16. Activity-Based Costing BenefitsMore accurate costing of products/services, customers, SKUs, distribution channels.Better understanding overhead.Easier to understand for everyone.Utilizes unit cost rather than just total cost.Integrates well with Six Sigma and other continuous improvement programs.Makes visible waste and non-value added activities.Supports performance management and scorecardsEnables costing of processes, supply chains, and value streamsActivity Based Costing mirrors way work is doneFacilitates benchmarking”
17. Identify activities in the production processClassify each activity according to the cost hierarchyIdentify and accumulate total costs of each activityIdentify most appropriate cost driver or each activityCalculate total units of the cost driver relevant to each activityCalculate the activity rate Apply the cost of each activity to product baseHow EEC Would Apply Activity-Based Costing
18. CONCLUSIONBased on the five costing methods target costing is the best approach:Target costing is most appropriateEach product assigned a team and continually reduces cost and updates the product.Price, profit and cost are fixed.Requires all aspect of production to be cost efficient.Makes all departments part of the process by breaking down department barriers.EEC would use market research to develop product line, making them more competitive.
19. ReferencesActivity-Based Costing - ABC. (2015). Retrieved from Investopedia: http://www.investopedia.com/terms/a/abc.aspAdvantages and disadvantages of variable costing. (2014). Retrieved from Accounting For Management : http://www.accountingformanagement.org/advantages-and-disadvantages-of-variable-costing/Ahmed, S. (2014). Advantages, Disadvantages and Limitations of Activity Based Costing (ABC) System. Retrieved from http://www.accounting4management.com/limitations_of_activity_based_costing.htmCade, J. (2015, January 23). Applied Managerial Accounting [live chat]. Retrieved from Colorado Technical University, ACCT614-1501A-04 : Applied Managerial Accounting: https://campus.ctuonline.edu Colorado Technical University. (2015). Cost Behavior Patterns and Concepts.{Presentation}Retrieved February 2nd, 2015. From: https://campus.ctuonline.edu/courses/ACCT614/p2/hub1/7376.pdfCromwell, J. (2015). What Are the Two Stages of Allocation in Activity-Based Costing? Retrieved from http://smallbusiness.chron.com/two-stages-allocation-activitybased-costing-34760.htmlFarid, S. (2015). Target Costing Approach To Pricing. Retrieved from Accounting4Management.com: www.accounting4management.com>Costing
20. ReferencesJohnson, R. (2015). Traditional Costing Vs. Activity-Based Costing. Retrieved from http://smallbusiness.chron.com/traditional-costing-vs-activitybased-costing-33724.html Leahy, T. (1998, January 1). The Target Costing Bull's-eye, Part One of a Series/ BPM. Retrieved from www.businessfinancemag.com./bpm/target-costing-bullseye-part-one-series Malonis, J. A. (Ed.). (2000). Encyclopedia of Business (2nd ed.). Farmington Hills, MI: Gale Group, Inc. http://skillport.books24x7.com/toc.aspx?bookid=50321Management Accounting. (n.d.) What is Life Cycle Costing? Retrieved February 2nd, 2015. From: http://managerial-accounting.blogspot.com/2012/06/what-is-life-cycle-costing.htmlN.A. (2015). Target Costing. Retrieved from AccountingTools.com: www.accountingtools.com/target-costing Variable costing versus absorption costing. (2014). Retrieved from Accounting For Management : http://www.accountingformanagement.org/variable-vs-absorption-costing/