Strategic Cost Management 
ACCT90009 
Seminar 12 
Review Lecture 
1 
Dr. Chung-Yu Hung 
First… 
• In lecture 1, we set up the expectation of problem solving. 
• In lecture 2, we discuss the terminology of costs and cost behaviour, i.e., 
variable and fixed costs. 
• In lectures 3-5, we discuss how to calculate product costs and emphasize the 
difference in assigning direct and indirect costs to product. 
− Manufacturing costs: Job costing/ Activity-based costing/ Process Costing 
− Non-Manufacturing costs: different allocation method/ ABC 
− For internal reporting purposes, cost allocation is not always necessary. 
2 
Direct Indirect 
Variable DM+DL VOH 
Fixed FOH 
A map of costing system choices 
Two major, independent choices: 
1. How to determine product cost (for internal management purposes)? 
− Variable manufacturing costs only? (variable costing) 
− Variable and fixed manufacturing costs? (absorption costing; typically using a single  
cost driver for overheads) 
− All manufacturing (and possibly non-manufacturing costs) via homogenous cost  
pools and multiple cost drivers? (activity-based costing) 
2. What costing system to use to accumulate product costs (largely depends  
on the nature of the production process) 
− Job costing 
− Process costing 
− Hybrid costing 
3 
Production process 
generates costs 
Direct  
materials 
Direct  
labour 
Variable  
overhead 
Fixed  
overhead 
Non- 
manufacturing  
costs 
What costs  
to assign to  
products,  
and how to  
assign  
them? 
Variable costing*: 
Direct costs + single variable o/h rate  
(pre-determined or actual) 
Absorption costing: 
(Direct costs + all mfg o/hs; predetermined or  
actual o/h rate; generally single allocation base) 
Activity-based costing*: 
Direct costs + all mfg o/hs + non-mfg costs; pre-determined rates  
per cost driver for each activity pool 
Systems for  
gathering  
product costs 
• Job 
• Process 
• Hybrid 
Management  
choice 
Largely  
prescribed by  
production  
process 
4 
*Note that VC, and including non-mfg costs in ABC are not generally permitted for external reporting 
Next… 
• As of lecture 6, we discuss how to use cost information in various decisions. 
• In lectures 6-10, we emphasize the importance of keeping the distinction 
between variable and fixed costs. 
− Understanding how managers’ actions affect costs is crucial 
− This requires the knowledge of how costs behave. 
5 
Summary of Lectures 6-10 
6 
Direct Indirect 
Variable DM+DL VOH 
Fixed FOH 
Strategic production  
decisions 
Break-even-point 
Business decisions 
Pricing decisions 
Control purposes 
Summary of Lectures 6-10 
7 
Direct Indirect 
Variable DM+DL VOH 
Fixed FOH 
Strategic production  
decisions 
Break-even-point 
Business decisions 
Pricing decisions 
Control purposes 
• Absorption and variable costing 
• Profit differences between the two  
methodsoverproduction incentives 
• Opportunity and sunk costs 
• Relevance of information 
• It varies across scenarios 
• A price range 
• Time horizon/ market structure matters 
• Different pricing approaches 
• The proportion of fixed cost 
• Estimate the financial impact 
• Operating leverage 
• The role of flexible budget 
• Variance analyses 
• Interpretation of different variances 
Summary of Lectures 6-10 
8 
Direct Indirect 
Variable DM+DL VOH 
Fixed FOH 
Strategic production  
decisions 
Break-even-point 
Business decisions 
Pricing decisions 
Control purposes 
• Absorption and variable costing 
• Profit differences between the two  
methodsoverproduction incentives 
• Opportunity and sunk costs 
• Relevance of information 
• It varies across scenarios 
• A price range 
• Time horizon/ market structure matters 
• Different pricing approaches 
• The proportion of fixed cost 
• Estimate the financial impact 
• Operating leverage 
• The role of flexible budget 
• Variance analyses 
• Interpretation of different variances 
Summary of Lectures 6-10 
9 
Direct Indirect 
Variable DM+DL VOH 
Fixed FOH 
Strategic production  
decisions 
Break-even-point 
Business decisions 
Pricing decisions 
Control purposes 
• Absorption and variable costing 
• Profit differences between the two  
methodsoverproduction incentives 
• Opportunity and sunk costs 
• Relevance of information 
• It varies across scenarios 
• A price range 
• Time horizon/ market structure matters 
• Different pricing approaches 
• The proportion of fixed cost 
• Estimate the financial impact 
• Operating leverage 
• The role of flexible budget 
• Variance analyses 
• Interpretation of different variances 
Summary of Lectures 6-10 
10 
Direct Indirect 
Variable DM+DL VOH 
Fixed FOH 
Strategic production  
decisions 
Break-even-point 
Business decisions 
Pricing decisions 
Control purposes 
• Absorption and variable costing 
• Profit differences between the two  
methodsoverproduction incentives 
• Opportunity and sunk costs 
• Relevance of information 
• It varies across scenarios 
• A price range 
• Time horizon/ market structure matters 
• Different pricing approaches 
• The proportion of fixed cost 
• Estimate the financial impact 
• Operating leverage 
• The role of flexible budget 
• Variance analyses 
• Interpretation of different variances 
Summary of Lectures 6-10 
11 
Direct Indirect 
Variable DM+DL VOH 
Fixed FOH 
Strategic production  
decisions 
Break-even-point 
Business decisions 
Pricing decisions 
Control purposes 
• Absorption and variable costing 
• Profit differences between the two  
methodsoverproduction incentives 
• Opportunity and sunk costs 
• Relevance of information 
• It varies across scenarios 
• A price range 
• Time horizon/ market structure matters 
• Different pricing approaches 
• The proportion of fixed cost 
• Estimate the financial impact 
• Operating leverage 
• The role of flexible budget 
• Variance analyses 
• Interpretation of different variances 
Conclusion 
• How to collect information (Job/Process/Hybrid costing) 
• How to reorganize information (ABC) 
• How to use information for various purposes 
− Cost accounting information is useful in many conditions but how it is used  
depending on the scenarios.  
− We use different cases to illustrate the importance of identifying the management  
issue and accordingly decide on how to apply the appropriate knowledge to solve the  
problem.  
• The effective way to review the materials 
− Grasp the key points of each lecture 
− Reflect on how the workshop question relates to the key points of each lecture 
− By doing so, you match what you learn with the real management issue 
12 
Good luck with the exam!