1. BPP LEARNING MEDIA CIMA P2 Advanced Management Accounting 熊家财 xiongjc-p@163.com

2. BPP LEARNING MEDIA Chapter 3 Cost Planning —Learning curve —Life cycle costing

3. BPP LEARNING MEDIA 迎评工作 一 Section 1 Learning Curves 3

4. BPP LEARNING MEDIA Theory —As cumulative output doubles, the cumulative average time per unit produced falls to a fixed percentage of the previous cumulative average time per unit Learning curve

5. BPP LEARNING MEDIA Theory —As cumulative output doubles, the cumulative average time per unit produced falls to a fixed percentage of the previous cumulative average time per unit When does learning curve theory apply? —Product made largely by labour effort —Brand new or relativity short-lived product —Complex product made in small quantities for special orders Learning curve

6. BPP LEARNING MEDIA —Note that cumulative average time = average time per unit for all units produced so far, back to and including the first unit made Learning curve

7. BPP LEARNING MEDIA Formula for the learning curve —The learning effect can be shown as a learning curve Learning curve

8. BPP LEARNING MEDIA —This formula will be provided in the exam if it is needed —To derive the learning rate you need to use the learning curve formula 'in reverse‘ - given cost and product data, derive the learning rate Learning curve Example in page 153 Question 3.3 in page 154 Question 3.5 in page 155

9. BPP LEARNING MEDIA Costs affected by the learning curve affect —Only labour costs and other variable costs directly dependent on labour are affected —Materials should not be affected unless early on in the learning process they are used inefficiently —Fixed overhead expenditure should be unaffected —However some problems might be caused in an organisation that uses absorption costing Learning curve

10. BPP LEARNING MEDIA Where learning curve theory can be used —To calculate the marginal (incremental) cost of making extra units of a product —To quote selling prices for a contract, where prices are calculated at a cost plus a percentage mark-up for profit —To prepare realistic production budgets and more efficient production schedules —To prepare realistic standard costs for cost control purposes Learning curve

11. BPP LEARNING MEDIA Where the learning curve might impact —Sales projections, advertising expenditure, delivery date commitments —Recruitment of new labour —Calculation of productivity bonus —Work scheduling and overtime decisions —Budgeting with standard costs —Cash flow projections (reducing unit variable costs) —Market share Learning curve

12. BPP LEARNING MEDIA —The learning effect might cease due to: - Limitations in machine efficiency - Workforce capacity - “Go slow” agreements — Problem with applying learning curve theory Learning curve

13. BPP LEARNING MEDIA Limitations of learning curve theory —The effect is not always present —It assumes stable conditions which allow learning to take place —It assumes a certain degree of motivation amongst employees —Breaks between repeating production of an item must not be too long or workers will forget and learning will have to begin again — It may be difficult to obtain enough accurate data to decide what the learning factor is —Learning will eventually cease Learning curve

14. BPP LEARNING MEDIA 迎评工作 一 Section 2 Life cycle costing 14

15. BPP LEARNING MEDIA —Product life cycle costs are incurred from the design stage through development to market launch, production, sales, and their withdrawal from the market. - Research & development (R&D) costs - Technical data cost - Training costs - Production - Distribution costs - Marketing cost - Inventory costs - Retirement and disposal costs Life cycle costing Definition

16. BPP LEARNING MEDIA Life cycle costing —The profiling of cost over a product’s life, including the pre-production stage Life cycle costing 5

17. 17 Life Cycle Costing Cost of a product over its entire lifecycle, with the aim of maximising return over the total life Relates costs and revenues to time periods, hence difficult to see total profitability Life Cycle Costing (LCC) Traditional Accounting

18. BPP LEARNING MEDIA Traditional management accounting systems v life cycle costing Traditional management accounting systems —Based on the financial year and so dissect the product life cycle into a series of annual sections —Profitability is thus assessed on an annual basis —Such systems total all non-production costs and record them as a period expense —They write off R&D expenditure against revenue from existing products —Therefore existing products seem less profitable and are scrapped too quickly Life cycle costing

19. BPP LEARNING MEDIA Traditional management accounting systems v life cycle costing continued Life cycle costing —This approach tracks and accumulates a product’s actual costs and revenues over the entire product life cycle —This means that a product’s total profitability can be determined —It traces non-production costs to individual products over complete life cycles Life cycle costing

20. BPP LEARNING MEDIA Stages in the life cycle — Introduction — Growth — Maturity — Decline —The stage a product is at in its life cycle will affect the returns expected Life cycle costing

21. BPP LEARNING MEDIA Life cycle costing

22. BPP LEARNING MEDIA Life cycle costing

23. BPP LEARNING MEDIA Life cycle costing

24. BPP LEARNING MEDIA How to maximise the return over the product life cycle —Design costs out of products —Minimise the time to market —Minimise breakeven time —Maximise the length of the life span —Minimise product proliferation Life cycle costing

25. BPP LEARNING MEDIA Impact on marketing strategies —As a product progresses through its life cycle, it faces different challenges and opportunities —These will require changes in the marketing mix and alternative marketing strategies —Example: During the maturity stage, incentives should be given to entice competitors’ customers to switch Life cycle costing

26. BPP LEARNING MEDIA Benefits of life cycle costing —Full understanding of individual product profitability —More accurate feedback information —Cost reduction/minimisation and revenue expansion opportunities more apparent —Increased visibility of non-production costs Life cycle costing

27. BPP LEARNING MEDIA Customer life cycle —Aim is to extend the life cycle of a particular customer —Do this by encouraging loyalty (e.g. loyalty cards) —Customers become more profitable over their life cycle (e.g. bank customers) Life cycle costing