Last Updated 08 May 2020

Value based costing

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Value based costing is the latest form of costing under which not only the figures are taken into account but also the qualitative factors are considered. This idea of value based costing is suitable for the 21st century entities as most of the attributes of the value costing are as per the needs and requirements of the entities in this era of globalization and technology. Like all other changes emerging in this fast moving world of today, this change of approach in costing is also very different from that used few years back. Following are the reason due to which I believe that the concept of value based costing is well suited to 21st century.

Integration:

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The idea of value costing is not only about the number of one department it takes together all the departments and the activities of all the departments. The bases for costing under this approach are not only the costs of one business but it integrates all the entities related to the business. Thus, it can be said that the approach is best suited in the cases where supply chain management is done specially through the software as it integrates all the entities in the supply chain from the supplier till the final consumer. Thus, the attribute of integration makes this approach valid for the entities of 21st century which are all going for supply chain management these days.

Real Time:

This world is now based on automation. In this era of automation where everything is possible at a click anything which cannot be updated within seconds is not feasible for the businesses these days. The concept of value costing is much more suitable for the entities in the current era than the volume based or activity based costing. The idea of value costing is real time. It takes into account very change within seconds and therefore the costing of anything remains up to date whenever we check it.

Not only the above mentioned two attributes but many other attributes of value based costing which make it possible for the idea of value costing to serve the needs of the current era. The facts that the value costing is forward focused, relies upon exact allocation of cost as well as the attribution of cots, it even supports the decomposition of value based management make it adaptable to the new century.

Moreover, its quality of supporting the improvements to be made in the process by external as well as internal standardization and estimating the profits of the company by way of customer, product and means of distribution makes this approach even more reliable.  Moreover, in order to enable target costing it decomposes the costs of future products.  Unlike traditional costing methods which used to rely on the traditional cost centers it provides a basis for financial control by process. All the above mentioned qualities of this approach make it different from the traditional approach. Thus, it is suitable for the companies in the 21st century.

Answer to Question # 2

The traditional methods of costing were much different from those followed these days. The methods used those days were not suitable for a complex situation. They were well suited to the environment where all the elements to be included in the cost of a product are straight forward. This means that the attribution of cost to various different factors like the IT department which makes the allocation of costs difficult.

Moreover, the traditional methods of costing are effective only if they are used to concentrate on any one element of costing or on any one department in an entity. They cannot be used in a situation where from the supplier to the consumer are all linked up and an integrated system is used.

The costing methods used previously were not customized as per the needs of a particular industry or a particular firm. This is the reason why the costing methods for various types of inventories and finished goods could not be customized as per the needs of the specific industry. Moreover, the costing methods were followed as a benchmark for the entire inventory as well as the finished goods. The attributes of real time updating and that of forward focusing are not built in the traditional approaches.

Answer to Question # 3

Definition: Cost Volume Profit Analysis

Cost volume business analysis is the study of the costs and revenue of a business at the point where the costs of the business are exactly equal to the revenue that is at the breakeven point. This concept is an extension of the breakeven analysis and can be performed by using the details which are used for the break even analysis. In order to perform this analysis a few assumptions are to be taken. Following are the assumptions taken for a successful cost volume profit analysis.

  • There is a linear relationship between the revenue and the costs of the business.
  • All the units are sold
  • Accurate division of costs into fixed and variable category is possible.
  • The only factor that affects the costs is the change in the activity of the business.

The cost volume profit analysis is an approach which is not suitable for the organization in the 21st century. The assumptions of the approach make this approach unsuitable for this era.  In this dynamic world it is not possible that the linear relationship exist between the revenue and the cost because the prices of costs keep on increasing. Moreover, the competition has increased so much that if the producers increase the prices of their goods the consumers may switch to some other brand. Thus, sometimes it so happens that the costs are increased but the price is not.

Secondly it is not always possible to sell out all the units produced. After the emergence of this world as a global village the competition has increased immensely. So in this global village when the consumers have so many options their choices and tastes change very frequently. As a result they may not be willing to buy something they were willing to buy yesterday. Moreover, the technology is now so advance that a good produced today may become obsolete tomorrow because some new technology has replaced it. Thus, the assumption that all the units may be sold is not reasonable in this era.

Next what we will discuss is the division of costs. Although many tools and software are now available it is not easily possible to divide the costs into fixed and variable ones. It is because the structures of the organizations have become so complex that dividing what costs will remain fixed and what costs will change with the number of units is now a little difficult.

Lastly, the assumption related to the change in cost is also playing a role in making this approach unsuitable for this century. Today, especially after the economic recession that hit the world some time back, the costs of the raw material, labor and other costs keep on changing due to various factors like change in demand for labor in the labor markets, change in the global economic situation, change in the political conditions worldwide, inflation, interest costs etc.

After considering various different points and all the above mentioned discussion it will be correct to conclude that the cost volume profit analysis is not relevant any more in the 21st century due to the changing business and accounting environment.

Part 2

Definition: Breakeven Analysis

The breakeven analysis is a method used by the cost accountants to analyse their costs. This technique is used to divide the total costs between fixed and variable costs which are then compare with the sales. This comparison is used to determine the production level at which the costs and sales will be equal that is the point at which the company will make neither profit nor any loss It can be said that breakeven analysis can be used as a base for cost volume profit analysis.

Introduction

If we take Coca Cola for the purpose of our study we will have a vast range of activities and product available to us when it comes to picking a subject. This is because coca cola not only deals in a larger range of sparkling beverages like energy drinks and sport drinks but has a wide range of still beverages such as water and fruit juices. Although the company’s main concern is the manufacture and marketing of drinks the company, from time to time takes over the bottling and packaging operations also.

Most of the time the company gets its drinks packaged by its authorized bottling partners but some time it takes over the bottling and packaging operation in underperforming markets where the company believes that the performance can be improved if it will perform this activity itself. Thus the company is trying its best to improve its performance by adopting various different ways and strategies. This effort of the company has made it stay in the global markets as one of the biggest beverage manufacturer for so many decades.

Activity for the Break even Analysis

 The bottling and packaging operations are not a regular activity of the company therefore they can be used for the break even analysis. This activity is identified because the company relies on authorized bottling and packaging partners and the purpose for taking over the bottling and packaging is not earning profit but to make sure that the standards are met. Thus, the company will focus on breakeven rather than putting extra efforts on this side activity knowing that this activity is taken up only for a limited period of time.

Unit of Measurement for the Bottling and Packaging

The unit of measurement for the activity of bottling and packaging is the number of bottles or cans packaged by the company is the price which is borne when this activity is performed by the authorized bottling partners. That is the excess number of bottles which the company is able to pack in the same amount which the company pays to its bottling partners for a fewer number of bottles.

Revenue per unit for the Bottling and Packaging

The revenue per unit for the bottling and packaging of the bottles and cans is the amount per unit which is saved incase the same service was to be obtained from the bottling partners.

Variable Costs for the Bottling and Packaging

The variable costs for the activity of bottling and packaging will be the costs of the bottle caps, the cost of the bottle stickers, the cost of labour, the cost of the bottles and the cost of power consumed.

Fixed Costs for the Bottling and Packaging

The fixed costs for the bottling and packaging will be the depreciation charged on the plant and machinery used for the bottling and packaging. Moreover the cost of the area used for the factory wing established for the bottling and packaging.

 References

http://tutor2u.net/business/production/break_even.htm. (n.d.). Retrieved July 22, 2010, from tutor2u: www.tutor2u.com

http://www.corporateinformation.com/Company-Snapshot.aspx?cusip=191216100. (n.d.). Retrieved July 22, 2010, from Corporate Information Snapshots: www.corporateinformation.com

http://www.thecoca-colacompany.com/investors/form_10K_2009.html. (2010). Retrieved July 22, 2010, from Coca-Cola: www.coca-cola.com

Lynch, F. a. (2009). Management Accounting. Lahore: Business Books Publishers.

Samuels, A. (1998). Introduction to Cost Accounting. Auckland: Universal Publishers.

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Value based costing. (2018, Apr 03). Retrieved from https://phdessay.com/value-based-costing/

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