explain the changes in the business environment during the last 10 years that have prompted the development of life cycle costing.
A. The selling price of product Z is set at £250 for each unit and sales for the coming
year are expected to be 500 units.
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Order Paper NowIf the company requires a return of 15% in the coming year on its investment of
£250,000 in product Z, the target cost for each unit for the coming year is
(A) £145
(B) £155
(C) £165
(D) £175
(E) £185.
‘Many of the topics that come under the heading of modern management philosophies and
which appear in CIMA examination syllabuses, once the veneer is removed there is either
nothing underneath or else one finds an old friend with a new name. One can become sceptical
of all new ideas since some add little to the fount of management accounting knowledge.’
(Extract from a journal article on ‘modern’ management accounting technique.)
(a) EC Flow Ltd manufactures a product which requires to pass through the cutting department.
Owing to lack of cutting machines this is seen as the bottleneck resource. Each
unit of the product requires 0.75 cutting machine hours and 200 of these hours are
available each week.
Other data relating to the product are:
£
Selling price per unit 6.00
Direct material cost per unit 3.00
Other factory costs per week 500
Calculate the product’s return per factory hour and the throughput accounting ratio.
(b) Explain the term ‘throughput accounting’; compare and contrast throughput accounting with ‘limiting factor analysis’; explain the circumstances (if any) in which throughput accounting is an effective management accounting technique.
(c) Explain the term ‘life cycle costing’; explain the changes in the business environment during the last 10 years that have prompted the development of life cycle costing.
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