TacticalDecisions_6perPage_Wk6_2010

TacticalDecisions_6perPage_Wk6_2010 - Learning objectives...

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1 Week 6: Costing and Tactical Decisions 1 Linda Chang Lecturer [email protected] Learning objectives Part I: Managing costs LO1. Extension of costing to: a. Life-cycle costing b. Target costing Part II: Tactical Decisions LO2. Understand the decision-making process 2 LO3. Recognise what is “relevant information” LO4. Ability to analyse three types of tactical decisions a. Whether to reject/accept a special order b. To make or buy a product/service c. Add or delete a product, service or department LO5. Recognise the pitfalls in using accounting data for tactical decisions Readings LS: Chapter 19 Exclude: Joint product: sell or process further 3 Appendix LS: Chapter 16, p.804-810 (Life-cycle costing and target costing) Lecture Outline Part I: Managing costs Life-cycle costing Target costing Part II: Tactical Decisions Recognise “relevant information” Application to three types of tactical decisions 1. Whether to reject/accept a special order 2. To make or buy a product/service 3. Add or delete a product, service or department Recognise the pitfalls in using accounting data for tactical decisions 4 Life Cycle Costing Accumulate and manage costs over the “life cycle” of the product (from the cradle to the grave). Covers 4 stages LO1a 1. Product planning & initial concept 2. Product design and development 3. Production, and 4. Distribution and customer support 5 Life cycle costing Exhibit 16.7 6 Principle for Cost Management purposes!
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2 Life Cycle Perspective Recognises a trade-off between costs incurred prior to production and costs incurred once production begins Conventional systems focuses on Conventional systems focuses on controlling production costs. Greater cost reductions can be achieved during the design and development stage 7 2006 2007 2008 2009 2010 Total Units sold 0 10,000 25,000 75,000 30,000 140,000 Price 100 100 90 88 Revenue - 1,000,000 2,500,000 6,750,000 2,640,000 12,890,000 Costs: Product planning/concept design 2,500,000 2,500,000 Design and development 1,500,000 1,050,000 2,550,000 Production 400,000 950,000 2,025,000 792,000 4,167,000 Distribution & customer support 50,000 175,000 462,500 469,500 1,157,000 Total costs 4,000,000 1,500,000 1,125,000 2,487,500 1,261,500 10,374,000 Profit (loss) 4,000,000 - 500,000 - 1,375,000 4,262,500 1,378,500 2,516,000 Pt % f t t l t 39% 14% 11% 24% 12% 100% Cool-it Co. – Life-cycle budget for desktop fan 8 Per year cost as a % of total cost 2007 2008 2009 2010 Per unit production cost (production cost/volume) $40.0 $38.0 $27.0 $26.4 Per unit cost during "production years" (total cost/volume) $150.0 $45.0 $33.2 $42.1 Lifecycle cost per unit $74.10 (Lifecycle cost/total volume) Can be used as a basis of setting an appropriate price! So far we have ignored time value of money, but we can easily incorporate this….more about NPV when we get to the capital expenditure week 2006 2007 2008 2009 2010 Total Units sold 0 10,000 25,000 75,000 30,000 140,000 Price 100 100 90 88 Revenue - 1,000,000 2,500,000 6,750,000 2,640,000 12,890,000 Costs: Product planning/concept design 2,500,000 2,500,000 Design and development 1,500,000 1,050,000 2,550,000 Production 400,000 950,000 2,025,000 792,000 4,167,000 Distribution & customer support 50,000 175,000 462,500 469,500 1,157,000 Total costs 4,000,000 1,500,000 1,125,000 2,487,500 1,261,500 10,374,000 Net Cash Flow (ignore tax) 4,000,000 - 500,000 - 1,375,000 4,262,500 1,378,500 PV factor (12%) 1.000 0.893 0.797 0.712 0.636 NPV 4,000,000 - 446,500 - 1,095,875 3,034,900 876,726 561,001 Target costing After reviewing its life-cycle budget, Cool- it decides to sell its desktop fans at $100 in 2007.
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This note was uploaded on 09/14/2011 for the course ACCT 1001 taught by Professor John during the Spring '11 term at Renmin University of China.

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TacticalDecisions_6perPage_Wk6_2010 - Learning objectives...

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