ACCA MA Course - Chapter 10: Alternative Costing Methods

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In Chapter 10, the discussion focuses on alternative cost accounting methods, which are seen as simpler than traditional costing methods like marginal and absorption costing. The alternative method discussed is Activity-Based Costing (ABC), which is a simpler form of absorption costing. ABC tracks the overheads attributed to activities involved in producing goods or services. It recognizes that manufacturing has evolved, and now overheads are more significant compared to direct costs like labor and materials. This method helps in understanding costs related to various activities driving those costs instead of just labor time or material quantity.

The chapter introduces three key steps in ABC. First, identify cost pools where costs accumulate. Second, determine what activities drive the costs of these pools. Finally, calculate a cost per cost driver. This approach leads to more accurate cost tracking by focusing on the activities causing costs.

Next, target costing is discussed. This method flips traditional costing on its head by starting with the selling price and desired profit margin to establish a maximum allowable cost for a product. It works backward from the market price to find this target cost. The difference between the target cost and the budgeted cost identifies a gap that the business must address, leading to adjustments in suppliers or improvements in production efficiency to meet cost targets.

The chapter also covers life cycle costing, which considers all costs incurred throughout a product’s life from research and development to decline. It outlines the stages of a product's life cycle: development, introduction, growth, maturity, and decline. Each stage has different cash flow, profitability, and costs. This method helps in understanding the full cost implications of a product over its entire life rather than just specific units.

Overall, this chapter is viewed as straightforward and easy to grasp, especially compared to traditional methods. Although it may not be the highest priority for study, it’s essential for understanding alternative costing methods like ABC, target costing, and life cycle costing. These concepts are considered important, and the audience is encouraged to be confident in them to avoid mistakes in assessments.

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