This post is aimed at making studying SCMPE slightly easier for you by highlighting a few notes about Cost Management Techniques for the SCMPE exam for CA Final Exam. CA Exam Series has decided to help you through and through on your journey. From our CA Final Test Series to these short notes, we will make sure we get you to the other side in this attempt.
Target Costing: It can be defined as “a structured approach to 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”.
In Target costing, we first determine what price we think the consumer will pay for our product. We then determine how much of a profit margin we expect and subtract that from the final price. The remaining amount left is what is available as a budget to be used to create the product.
Value Analysis is a planned, scientific approach to cost reduction which reviews the material composition of a product and production design so that modifications and improvements can be made which do not reduce the value of the product to the customer or to the user.
Value Engineering is the application of value analysis to new products. Value engineering relates closely to target costing as it is cost. Value Engineering relates closely to target costing as it is cost avoidance or cost reduction before production.
The initial value engineering may not uncover all possible cost savings. Thus, Kaizen Costing is designed to repeat many of the value engineering steps for as long as a product is produced, constantly refining the process and thereby stripping out extra costs.
Further, Target Costing System is based on involving representatives of all the Value Chain such as suppliers, agents, distributors, and existing after-sales services in target costing system.
Controlling Environmental Costs
After the Identification and Allocation of Environmental Costs, the task of controlling starts. An organization may try to control these costs as mentioned below-
Waste: ‘Mass balance’ approach can be used to determine how much material is wasted in production, whereby the weight of materials bought is compared to the product yield.
Water: Businesses pay for water twice – first, to buy it and second, to dispose of it. If savings are to be made in terms of reduced water bills, it is important for organizations to identify where water is used and how the consumption can be decreased.
Energy: Often, energy costs can be reduced significantly at very little cost. Environmental management accounts may help to identify inefficiencies and wasteful practices and, therefore, opportunities for cost savings.
Transport and Travel: Again, EMA techniques may be used to identify savings in terms of travel and transport of goods and materials. At a simple level, a business can invest in more fuel-efficient vehicles.
Role of EMA in Product/ Process Related Decision Making
The correct costing of products is a pre-condition for making sound business decisions. Accurate product pricing is needed for strategic decisions regarding the volume and choices of products to be produced. EMA converts many environmental overhead costs into direct costs and allocates them to the products that are responsible for their incurrence. The results of improved costing by EMA may include: