CIMA P3 Syllabus C. Internal controls - Developments in Management Accounting - Notes ^{5 / 10}

Target costing

Instead of setting a price that covers cost and mark-up once production has occurred, a target price that customers would be willing to pay is set instead: once a required rate of return is deducted, it leaves a target cost that the product should not exceed, otherwise it will not be made.

Kaizen

A Japanese term used to describe 'continuous improvement in all aspects of an entity's performance at every level'. Workers involved in production are encouraged by management to identify incremental improvements to the process which can help reduce costs.

Economic value added (EVA)

This technique focuses on long-term shareholder wealth by recognising the organisations' cost of capital but may direct managers within an organisation to reject projects which require large initial investment and thus deliver low EVA measures.

Just-in-time (JIT) and backflush accounting

This is a system of continuous improvement where demand 'pulls' production through a system, rather than supply pushing it through regardless of demand.

Throughput accounting

This system requires three conditions: in the short term, all costs except for materials are treated as fixed; inventory should not be created until a sale is made, valuing it using material costs only; and profitability is determined by sales, not production. Such efficiency requires attention to bottlenecks to maximise throughput, although quality, customer and supply issues can also influence its success.

Lean management accounting

The emphasis here is on continuous improvement and eliminating waste and unnecessary cost. The value provided to customers is reflected in the price and the business is managed through processes, or 'value streams', rather than the traditional divisional structure, prompting the organisation to consider eliminating all activities that do not add value.

Life cycle costing

This approach accumulates all relevant costs and revenues across the product's entire life cycle, allowing better understanding of its likely profitability.