1. COST ANALYSIS AND BEHAVIOUR

2. CONTENT Introduction Meaning & Definition
Analysis and Classification of Costs
Methods and Techniques of Costing
Cost sheet
Cost Behavior
Advantages of Classifying costs
Activity Based Costing
Quality Costing
Value Chain Analysis
Target Costing
Life Cycle Costing

3. INTRODUCTION
The term cost has a wide variety of meaning. Different people use this term in different scenes for different purposes. In common use, the word cost means price. But for our purpose cost is not the same as price. In management terminology, the term cost refers to expenditures and not the price. It also refers to something that must be sacrificed to obtain a particular thing.

4. DEFINITIONS
1. According to terminology of BRITISH INSTITUTE OF COST AND WORKS ACCOUNTANTS, “cost is the amount of expenditure (actual or notional) incurred on or attributable to a given thing” 2. W. M. HARPER says, “cost is the value of economic resources used as a result of producing or doing the thing costed.” 3. In words of CHATFIELD AND NEILSON, “Business cost represents the value of economic resources that are sacrificed to obtain more desirable resources.”

5. MEANING
We now know that meaning and concepts of costs is very broad and flexible. However, there are certain point which need consideration. The cost have also to be distinguished from expenses and losses. Cost refers that portion of the acquisition price of good, property or services which has been deferred or not yet utilized in connection with realization of revenue. Purchase price of fixed assets, material, supplies, etc. are such deferred cost.

6. ANALYSIS & CLASSIFICATION OF COSTS
In simple words we can say that costing is to ascertain the cost of each product, process, department, service or operation. The ascertainment of cost involves further the study, analysis and classification of costs such as prime cost, works cost, production cost, etc. Cost analysis refers to the break up of total cost into certain elements or sub-divisions. Such analysis is essential for the purpose of accounting and control over costs. Costs may be classified into different categories depending upon the purpose of their classification.

7. Some of the important basis of cost classification are as follow :
Classification by nature or element.
Functional Classification.
Classification on the basis of behavior.
Classification for managerial decisions and control.

8. A. Classification by Nature or Element

9. DIRECT COST :
Direct costs are the costs which can be conveniently identified with and allocated to a particular unit of final product. Such costs are treated as the cost of the unit produced.
DIRECT COSTS
Direct Material
Direct Labour
Direct Expenses

10. Direct materials include all materials specifically purchased or requisitioned for specific cost unit. All material which become an integral part of the finished product and which can be conveniently assigned to specific physical units are called direct material.
Direct Labour cost consists of wages paid to worker directly engaged in manufacturing or handling a product, job or process. It includes payment of wages to worker engaged in actual production or an operation or an process; or helping such production by way of supervision, maintenance, etc.
All expenses other than the direct material or direct Labour that are specifically incurred for a particular job, product or process are called direct expenses.

11. INDIRECT COSTS :
These are those costs which cannot b assigned to any particular cost unit, i.e., job product or process. Indirect costs are usually, incurred for the business as a whole and are, therefore, apportioned among the various cost units.
Indirect Material
Indirect Labour
Indirect Expenses
Indirect Costs included in Production
Factory Overheads
Office and Administration Overheads
Selling and Distribution Overheads.
Other then Production (overheads)

12. B. FUNCTIONAL CLASSIFICATION
Prime Cost
Factory Cost
Cost Of Production
Total Cost or Cost of Sales

13. PRIME COST FACTORY COST
It consists of the costs of direct materials that go into the product, the costs of direct labour and direct expenses. It is also known as direct cost or first cost.
FACTORY COST
It consists of prime cost plus factory overhead or work expenses or factory on cost. Factory cost is also known as works cost, production cost or manufacturing cost.
Prime Cost = Direct Material + Direct Labour + Direct Expenses
𝐹𝑎𝑐𝑡𝑜𝑟𝑦, 𝑊𝑜𝑟𝑘 𝑐𝑜𝑠𝑡 𝑜𝑟 𝐹𝑎𝑐𝑡𝑜𝑟𝑦 𝐸𝑥𝑝𝑒𝑛𝑠𝑒𝑠=𝑃𝑟𝑖𝑚𝑒 𝐶𝑜𝑠𝑡+𝑊𝑜𝑟𝑘 𝐸𝑥𝑝𝑒𝑛𝑠𝑒𝑠 𝑜𝑟 𝐹𝑎𝑐𝑡𝑜𝑟𝑦 𝐸𝑥𝑝𝑒𝑛𝑠𝑒𝑠 𝐹𝑎𝑐𝑡𝑜𝑟𝑦, 𝑊𝑜𝑟𝑘 𝑐𝑜𝑠𝑡 𝑜𝑟 𝐹𝑎𝑐𝑡𝑜𝑟𝑦 𝐸𝑥𝑝𝑒𝑛𝑠𝑒𝑠=𝑃𝑟𝑖𝑚𝑒 𝐶𝑜𝑠𝑡+𝑊𝑜𝑟𝑘 𝐸𝑥𝑝𝑒𝑛𝑠𝑒𝑠 𝑜𝑟 𝐹𝑎𝑐𝑡𝑜𝑟𝑦 𝐸𝑥𝑝𝑒𝑛𝑠𝑒𝑠

14. COST OF PRODUCTION
Also called office cost, administration cost or gross cost of production, it consists of factory cost plus office and administrative expenses.
Office Cost Or Gross Cost Of Production = Factory Cost + Administrative And Office Overheads

15. TOTAL COST OR COST OF SALES
It comprises cost of production plus selling and distribution overheads.
Total Cost Or Cost Of Sales = Office Cost + Selling And Distribution Overheads

16. C. CLASSIFICATION ON THE BASIS OF BEHAVIOUR

17. I. FIXED COSTS
A fixed cost is a cost that does not change with an increase or decrease in the amount of goods or services produced or sold. Fixed costs are expenses that have to be paid by a company, independent of any business activity. It is one of the components of the total cost of running a business, along with variable cost.

18. II. VARIABLE COSTS
A variable cost is a corporate expense that varies with production output. Variable costs are those costs that vary depending on a company's production volume; they rise as production increases and fall as production decreases. Variable costs differ from fixed costs such as rent, advertising, insurance and office supplies, which tend to remain the same regardless of production output. Fixed costs and variable costs comprise total cost.

19. III. SEMI-VARIABLE COSTS (MIXED COST)
Those costs which are partly fixed and partly variable are called semi-variable costs. These costs vary with the level of production but not in direct proportion to level of production. The examples of such costs are depreciation of machinery, maintenance of equipment, administrative costs, etc.

20. D. CLASSIFICATION OF COST FOR MANAGERIAL DECISIONS AND CONTROL
COST ON BASIS OF MANAGERIAL DECISION
Controllable & Uncontrollable costs
Normal & Abnormal Cost
Avoidable And Unavoidable Cost
Shut Down And Sunk Costs
Product Costs And Period Cost
Differential, Incremental And Decremented Cost
Out Of Pocket Cost
Marginal Costs
Opportunity Costs
Conversion Costs
Budget Cost And Standard Cost
Imputed Or Hypothetical Cost

21. METHODS & TECHNIQUES OF COSTING
Several methods or systems of costing have been developed to suit the needs of individual business conditions. The general fundamental principles of ascertaining costs are the same in every system of costing but the methods of analysis and presentation of costs differ from industry to industry. The main consideration which applies to the choice of a particular method of costing is the nature and type of products or service rendered by the enterprise.
Methods & Techniques of
Costing
Job Costing
Process Costing

22. JOB COSTING
Job costing is system of costing in which costs are ascertained in terms of specific job or order which are not comparable with each other. The unit of costing in this method is a job or a special work order.
SUITABLITY - Industries engaged in printing, ship building, engineering, automobile garages, repair shops, made to order articles, building and construction, machine tools, locomotives, etc.
Job costing includes the following methods of costing.
Batch Costing
Contract Costing or Terminal Costing
Departmental Costing

23. A. BATCH COSTING
This method of costing is applied to industries where production is carried on in batches. Under this method, a batch of similar products is regarded as one job and the cost of this complete batch is ascertained. The total cost of the batch is then divided by the total number of units in the batch in order to determine the cost per unit. SUITABILITY – Confectionery, Toy Making, Medicines, Readymade Garments, Spare Parts, Processed food, Components manufacture, hardware articles like bolts, nuts, cycle parts, etc.

24. B. CONTRACT COSTING OR TERMINAL COSTING
This method is mostly used in case of big jobs spread over a period of time. A contract is a big job and hence the principles of job costing are applied to contract costing. A separate account is kept for each individual contract. This method is also known as terminal costing as the cost can be terminated at some point and related to a particular job. SUITABILITY - Undertaking Engaged In Building Construction, Ship Building Construction Engineering, Civil Engineering, Mechanical Engineering etc.

25. C. DEPARTMENTAL COSTING
When it is desired to ascertain the cost of operating a department or the cost of products turned out by a department, the method of departmental costing is used. SUITABILTY - Large undertakings that ascertain the cost of a department so as to allocate it among the various jobs turned out by that department.

26. PROCESS COSTING
Process costing is an accounting methodology that traces and accumulates direct costs, and allocates indirect costs of a manufacturing process. Costs are assigned to products, usually in a large batch, which might include an entire month's production. Eventually, costs have to be allocated to individual units of product. It assigns average costs to each unit, and is the opposite extreme of Job costing which attempts to measure individual costs of production of each unit. It is a method of assigning costs to units of production in companies producing large quantities of homogeneous products. Process costing is a type of operation costing which is used to ascertain the cost of a product at each process or stage of manufacture.

27. CIMA defines process costing as "The costing method applicable where goods or services result from a sequence of continuous or repetitive operations or processes. Costs are averaged over the units produced during the period". Process costing is suitable for industries producing homogeneous products and where production is a continuous flow. Process costing is appropriate when one order does not affect the production process and a standardization of the process and product exists. However, if there are significant differences among the costs of various products, a process costing system would not provide adequate product-cost information. SUITABILITY - Petroleum, Coal Mining, Chemicals, Textiles, Paper, Plastic, Glass, Food, Banks, Courier, Cement, And Soap.

28. METHODS OF PROCESS COSTING
Single output or unit costing
Operating Costing
Operation Costing

29. SINGLE OUTPUT or UNIT COSTING :
This method is of costing is applied where production is continuous and uniform and the industry is engaged in the production of single product or a few grades of same product. Total cost is divided by number of units in order to ascertain cost per unit.
SUITABILITY - Brick Works, Oil Drilling, Paper Mills, Flour Mills, Cement Manufacturing, Textile Mills, etc.
OPERATING COSTING :
This method is suitable for service sector which are indulged in providing services instead of production or manufacturing.
SUITABILITY - Railways, Airways, Roadways, Hotels Power Supply, Water Supply.

30. OPERATION COSTING :
Operating costing is a system of costing which is used in industries engaged in repetitive mass production. If the manufacture of a product involves a number of operations and not processes, the cost is ascertained for each operation.
SUITABILITY - Engineering Industries, Toy Making, etc.

31. TYPES OF COSTING TYPES OF COSTING Marginal costing Absorption costing
Direct costing
Uniform costing
Standard costing
Historical costing

32. COST SHEET

33. Cost sheet is a document which provides for the assembly of the estimated detailed cost in respect of a cost unit. It is a detailed statement of the elements of costs arranged in logical order under different heads. It is prepared to show the detailed cost of the total output for a certain period. It is only a memorandum statement and does not form part of the double entry system.

34. ADVANTAGES OF COST SHEET
Indicates the break-up of the total cost by elements, i.e. material, labour, overheads, etc.
Discloses the total cost and cost per unit of the units produced.
Facilitates comparison.
Helps in fixing selling prices.
Guide to the management and helps in formulating production policy.
Enables to keep control over cost of production.
Helps the management in submitting quotations or preparing estimates for tenders.
Simple and useful medium of communication of costs at various levels of management.

36. COST BEHAVIOUR

37. An analytical study of the behaviour of costs in relation to changes in volume of output reveals that there are some items of cost which tend to vary directly with the volume of output whereas, there are others which remain unaffected by variations in the volume of output. The former class of costs represents the variable cost and the later fixed cost. Besides, there are certain items of cost which are partly fixed and partly variable and are known as semi-variable or semi-fixed cost.

38. Fixed Cost
Fixed costs are non-variable costs, stand-by costs, period costs or capacity cost and are those costs which do not vary with changes in volume of output over a given period of time and within a relevant range of activity. Fixed cost, thus, remain constant in total amount whether there is any increase or decrease in the level of activity or output. There is an inverse relationship between volume of output and fixed cost per unit. When there is decrease in volume of output, the fixed price cost per unit increases. Conversely, fixed cost per unit decreases with increase in volume of output.

39. RELATIONSHIP BETWEEN VOLUME OF PRODUCTION/OUTPUT AND FIXED COST
Total Fixed Cost (Rs)
Volume of Production/Output (In Unit)
Fixed Cost per Unit (Rs)
10000
1000
10.00
2000
5.00
4000
2.50
5000
2.00
1.00

41. Fixed cost can be divided into two categories from the profit planning and control point of view: COMMITTED FIXED COSTS : Committed costs are those fixed costs which are caused by investments in fixed assets, such as building plant or equipment, for providing production facilities. These costs are called committed costs because the firm has committed itself to incur such costs for a long period. Depreciation, insurance, rent, property tax etc. are some examples. Once a firm purchases building, plant or equipment, it commits itself to depreciation charge, insurance charge, property tax, etc. for fairly long period.

42. DISCRETIONARY FIXED COST : Discretionary costs, also referred to as programmed or managed costs, are those fixed costs, the amount of which is decided by the management. Such costs can be reduced substantially at any period of time at the discretion of the management. Some examples of Discretionary Fixed Cost are Research & Development cost, Advertising costs, expenses incurred on human resource development, public relations, etc. Generally, the benefits of such costs does not accrue in the same period when these are incurred.

43. Variable Costs
Variable costs are those costs which fluctuate, in total, in direct proportion to the volume of output. Such costs increase in aggregate as the output increases and decrease in the same proportion when the output falls. A variable cost, thus, in total, changes in the same direction and in direct proportion to changes in production activity, sales activity or some other measures of volume. The cost of direct material, direct labour, supplies and direct expenses like sales commission are some examples of variable cost.

44. RELATIONSHIP BETWEEN VOLUME OF PRODUCTION AND VARIABLE COSTS
Volume of production (units)
Direct Material Cost (Rs)
Direct Labour cost (Rs)
Direct Expenses (Rs)
Total Variable Cost (Rs)
Variable cost per unit (Rs) 1 10 7 3 20
100
1000
700
300
2000
10000
7000
3000
20000
5000
50000
35000
15000
100000
70000
30000
200000

46. Semi-Variable cost (Mixed Cost)
Semi-Variable costs are a combination of fixed and variable cost and are, thus, also known as mixed costs. Such costs are neither perfectly variable nor absolutely fixed in relation to changes in volume of output. The fixed component of such costs represents the cost of providing capacity and the variable component is caused by using the capacity. Semi variable costs fluctuate in the same direction but not in direct proportion to the changes in volume of output. They go up with volume but not in the same proportion as volume. Hence, these costs should be plotted on a graph as a curved line.

47. Utility bills, such as power costs, telephone charges, repair and maintenance costs, etc. are some examples of semi-variable costs. For example power costs include a fixed portion of minimum charge that will be charged even if you do not consume power and variable charge based on consumption of power. Thus, power cost increases with increase in production activity but not in the same proportion.

48. ADVANTAGES OF CLASSIFYING COSTS INTO FIXED AND VARIABLE
PROFIT PLANNING : The primary objective of doing any business is to earn profit. Hence, it is very important to make profit planning. It is concerned with taking series of decisions making and selecting amongst the various alternatives available. Thus, it is very important to study the behaviour of cost and profit in relation to change in volume of output.
EFFECTIVE COST CONTROL : Profits can also be increased through effective cost control and cost reduction. Classification of costs into fixed and variable elements helps management to control costs effectively as fixed costs are incurred by management decisions and can be controlled only by the top management. Further, variable cost may be controlled even at the lower levels of management.

49. FIXATION OF SELING PRICES : Profits could be maximized either by reduction and control over costs or by increasing the sales value through increase in sales volume or prices. Fixation of proper selling price is thus important for management. Segregation of costs into fixed and variable elements enables to adopt most appropriate selling price policy as sometimes one may have to sell even below total cost. However, it should not be below variable cost.
PROPER ABSORPTION OF OVERHEADS : The analytical study of the behaviour of costs also helps in proper absorption of overheads as the method to be adopted for the absorption depends upon the nature of overheads.

50. HELPFUL IN DECISION-MAKING : The classification of cost into fixed and variable elements helps management in taking many decisions such as make or buy decisions, selection of a product mix, capacity decision, operate or close down decisions, etc.
BUDGETARY CONTROL : For the preparation of flexible budgets and effective budgetary control, this classification is a pre-requisite. The flexible budget is designed to change in accordance with the level of activity and hence the cost behaviour is very important.
MARGINAL COSTING & BREAK-EVEN ANALYSIS : Basic assumption for marginal costing and breakeven analysis is that all elements of cost can be segregated into fixed and variable. Hence, for the use of marginal costing and breakeven techniques, the classification of cost is very essential.

51. CONTEMPORARY ISSUES

52. The globalization of industry has brought intense competition in every country. The multinationals are competing to sell their products in every market. The cost reduction and competitive pricing are used as tools to capture markets. Every firm is trying to stay in the market by offering goods and service at competitive prices. Since prices are dictated by competitors, a firm can use price control measures for surviving in the market. A number of methods may be used to control costs.

53. ACTIVITY BASED COSTING (ABC)

54. ABC is a new term used for finding out cost
ABC is a new term used for finding out cost. Its focus is on activities as the fundamental cost objects. It uses activities as the basis for calculating cost of goods and services. ABC attempts to absorb overheads into product costs on a more realistic basis. In traditional costing system, direct costs are allocated through cost centers. The direct costs will be in proportion to the volume of production and indirect cost like production, administration, selling and distribution overheads etc. are apportioned depending upon the method used and absorbed to the individual product. The apportionment may be based on machine hours, labour hours, direct cost, input, output, etc. ABC emphasizes more on indirect costs in the manufacturing operations. The idea behind ABC is that costs are grouped according to what drives them or causes them to be incurred. The cost drivers are then used as an absorption base.

55. CHARACTERISTICS OF ABC
The traditional system of classifying overheads into fixed and variable cost is not enough to design a cost system.
The cost behaviour patterns are related to volume (scale), diversity (scope), events (decisions) and time.
There is a need to identify cost drivers. A cost driver is a structural determinant of cost related activity. In tracing overheads cost to product, cost behaviour pattern must be understood so that appropriate cost driver is identified.

56. STEPS IN IMPLEMENTING ABC
ABSORB OVERHEAD EXPENSES ON BASIS OF RATE/COST DRIVER.
ESTABLISH DEMANDS MADE BY PARTICULAR PRODUCTS ON ACTIVITIES, USING THE COST DRIVERS AS A MEASURE OF DEMAND
IDENTIFY THE MOST SUITABLE COST DRIVER IN EACH ACTIVITY
ALLOCATE THE COMMON EXPENDITURE TO VARIOUS ACTIVITIES IN FUNCTIONAL AND SUPPORT AREAS
COLLECT ACCURATE DATA ON LABOUR, MATERIAL AND OVERHEAD COSTS
IDENTIFYING RELATIVE ACTIVITIES INVOLVED IN EACH AREA
IDENTIFYING AREAS SUCH AS MANUFACTURING, ASSEMBLING ETC. AS WELL AS SUPPORT ACTIVITIES LIKE PURCHASING, PACKING AND DISPATCHING.

57. MAIN ACTIVITIES MAIN COST DRIVERS
Customer Order Processing
Order value , order source (New/old Customer), Order source (customer location)
Maintenance
No. of machines breakdowns, maintenance schedule, capital expenditure, activity levels.
Material planning/ acquisition
Number of material transactions, volume of material receipt/orders
System
Number of system operational, number of system devices, adequacy of existing systems
Inspection
Inspection plans, Number of problem suppliers, Lack of good quality
Control quality
Inspection plan
Production control
Engineering changes, Supplies performance, number of parts operational, make versus buy policy, number of machine changes
Financial accounting
No of accounting transactions, no of times accounts produced, volume of activity
Production
Number to be supervised, shift patterns, industrial relation issues, flow of product from assembly, volume of service parts.
personnel
Recruitment activity, industrial relations climate, training requirements.

58. BENEFITS OF ABC Determination of cost Helps improving performance
Helpful in strategic decision
Make or buy decisions.
Rationalizing product mix.
Formulating budgets.
Helpful in target costing.

59. QUALITY COSTING
There is a new awareness about quality in industry. The opening of Indian markets to multinationals since 1990 has forced a sense of competition in Indian producers. Since independence the industrial policy statements have been restricting the scope for private entrepreneurs and major areas of growth were earmarked for public sector. It is at this stage that Indian producers started thinking of product or service quality. The organization which will maintain productivity and quality on a continuous basis will be able to stay in market for long. The impact of poor quality on an organization leads to low customer satisfaction and low market share, low productivity, revenue and profit, low morale of workforce etc.

61. Classification of Quality Cost
Cost of Conformance
Cost of Prevention
Cost of Appraisal
Cost of Non-Conformance
Cost of Internal Failure
Cost of External Failure
Cost of Lost opportunities

62. COST OF CONFORMANCE : The cost of conformance can be studied under following two sub heads :
Cost of prevention : cost of prevention refers to the cost of those activities which prevent failure firm occurring such as cost of training employees, cost of quality awareness and quality maintenance programmes, cost of providing quality reports, quality circles, etc.
Cost of Appraisal : Cost of appraisal is the cost incurred to determine conformance with quality standards such as cost of inspection, testing, quality audit etc.

63. COST OF NON-CONFORMANCE : Cost of non-conformance includes
Cost of Internal Failure : It is the cost incurred on correcting defects in products or services which do not meet quality standards. Such defects are discovered prior to delivery of products o the customers. These costs include costs of scrap, spoilage, reworked costs, etc.
Cost of External Failure : The cost incurred on correcting products or services after delivery to the customer are included in the costs of external failure. Such costs include warranty costs, installation costs, cost of replacement of defectives, after sale services

64. COST OF LOST OPPORTUNITIES :
If the products or services are not delivered according to the required quality standards, it will result into loss of existing as well as potential customers. This loss of revenue resulting from loss of customers is called cost of lost opportunities.
The quality cost constitutes a significant percentage of total sales in the present days. Thus, it is very important to reduce quality cost so as to increase the profitability of a concern.

65. VALUE CHAIN ANALYSIS
A value chain is a high-level model developed by Michael Porter used to describe the process by which businesses receive raw materials, add value to the raw materials through various processes to create a finished product, and then sell that end product to customers. Companies conduct value-chain analysis by looking at every production step required to create a product and identifying ways to increase the efficiency of the chain. The overall goal is to deliver maximum value for the least possible total cost and create a competitive advantage.

66. BREAKING DOWN 'Value Chain'
A value chain is a company model that breaks down the flow of production activities into five categories. Each one of these categories is an opportunity for a company to maximize efficiency and create a competitive advantage. The aim of the value chain is to increase profits by creating value at each of the five product touchpoints so the value exceeds the cost associated with the product.

67. Primary Activities of the Value Chain
Primary activities are :
Inbound Logistics :The first activity in the value chain is inbound logistics, which includes all receiving, warehousing and inventory management of raw material ready for production
Operations : activities associated with transforming inputs into the final products by operating on them.
Outbound Logistics : activities associated with collecting, storing and physically distributing the final products to buyers, such as finished goods warehousing, delivery vehicle operations, order processing and scheduling etc.

68. Marketing and Sales : Activities associated with providing a means by which buyers can purchase the product and inducing them to do so, such as advertising, promotion, sales force, channel selection, pricing etc.
Service : Activities related to providing service to customers to enhance or maintain the value of product, such as installation, after sale services, repair, adjustment etc.

69. TARGET COSTING
Target costing can be defined as “a structured approach for determining the cost at which a proposed product with specified functionality and quality must be produced to generate a desired level of profitability at its anticipated selling price”. Target costing is an approach to determine a product’s life-cycle cost which should be sufficient to develop specified functionality and quality, while ensuring its desired profit. It involves setting a target cost by subtracting a desired profit margin from a competitive market price. A target cost is the maximum amount of cost that can be incurred on a product and with it the firm can still earn the required profit margin from that product.

70. Target costing is a formal process that attempts to match a proposed product’s features (benefits) with a viable market price that achieves the company’s profitability goals by:
(a) Determining a price point (or range of prices) for an approximate combination of features and benefits.
(b) Subtracting a desired profit from the market price to determine the maximum bearable level of costs.
(c) Iterating the product design—eliminating or reducing unnecessary attributes with costs that can’t be recovered in higher prices—until the cost target is met.
(d) Revising the market price for the redesigned product in view of changed market conditions.

71. Steps in Target Costing
Following are the main steps (or stages) involved in target costing:
(i) To conduct market research in order to see what products are in the market place, what new products the competitors are trying to bring in the market, to ascertain customers’ requirement and the price they can afford for the product.
(ii) Determining the price, margin and cost feasibility. Target price is determined on the basis of market survey, at which the product can be sold. On the selling price a standard margin is determined to finally come to the cost figure (Target Price − Target Profit = Target Cost).
(iii) To meet margin target by design improvement. If the product designed cannot be produced in the cost range decided, value engineering is used to drive down the product cost to a level, at which target price and margin can be attained.
(iv) To implement continuous improvement. This is needed to ensure that targeted cost levels are maintained.

72. Advantages
Products meet the levels of quality and price required by the market.
Assures that products are better matched to their customers’ needs.
 Increases the teamwork among all internal organizations associated with conceiving, marketing, planning, developing, manufacturing, selling, and distributing a product.

73. LIFE CYCLE COSTING
The product life cycle is a conceptual representation. It is a product aging process. Just as human beings have a typical life cycle going from childhood, adolescence, youth and old age, so also products follow different phases in their life cycle. The cycle begins with the identification of new customer need and the expansion and growth in its sales, maturity, decline and finally withdrawal of the product from the market. Thus, product life cycle is simply a graphic portrayal of the sales history of a product from the time it is introduced to the time when it is withdrawn.

75. CHARACTERISTICS OF PRODUCT LIFE CYCLE :
The products have definite lives and move through the cycle of development, introduction, growth, maturity, decline and deletion at different speeds.
Product cost, sales revenue and profit patterns follow definite predictable courses through the product life cycle. Both sales volume and unit profits rise corresponding till the growth stage. However, in the period of maturity stage, sales volume rises but profits fall.
Profits rise fall at the different stages of the product life cycle.
Different threats and opportunities are created at each phase of product life cycle which requires dynamic functional approach to met the unique situations.

76. A different concept of life cycle costing is customer _ life cycle cost wherein the buyer tries to estimate the life cycle cost which is the product’s purchase cost plus the discounted cost of its maintenance and repair less the discounted salvage value, if any. Thus, a product having low maintenance and operating cost without reducing its value to the customer can be sold at a higher profit.

77. THANK YOU 