International Managerial Accounting: Target Costing and Balanced Scorecard

This article discusses target costing and balanced scorecard in international managerial accounting. It explains the advantages and disadvantages of target costing and life cycle costing. It also explores the benefits and drawbacks of balanced scorecard and the challenges a company can face while implementing it. The article provides a detailed calculation of cost gap and expected cost of an Autumn Jacket based on cost allocation. It also includes a table of contents and references.

INTERNATIONAL
MANAGERIAL
ACCOUNTING

Table of Contents
SECTION A.....................................................................................................................................3
Question A2.................................................................................................................................3
(a).................................................................................................................................................3
(b).................................................................................................................................................4
(c).................................................................................................................................................4
SECTION B.....................................................................................................................................6
Question B3.................................................................................................................................6
REFERENCES................................................................................................................................1

SECTION A
Question A2
(a)
Selling price of Autumn Jacket = £175 per Jacket
Desired profit margin = 20%
Expected Cost of Autumn Jacket based on target costing = £175 / 120 * 100 = £146 approx.
Calculation of Cost Gap
Particulars Details Amount (£)
Cost of Material £15 * 2 30
Expected cost of wastage of
material
Notes 3.225
Special threat cost £0.80 * 14 11.2
Special threat wastage cost (11.2) * 12% 1.344
Zipper and button Costs:
Long £2.50 * 2 5
Short £1.70 * 7 11.9
Small decorative button £0.60 * 5 3
Large Button £0.70 * 2 1.4
Delivery Cost of Long Zipper £5 / 50 * 2 0.2
Delivery Cost of short Zipper £4 / 80 * 7 0.35
Special Reflective sensor cost £12 * 4 48
Delivery cost of reflective
sensor
£15 / 75 * 4 0.8
Labour cost for Cutting
workers
(£11 * 1.5 hours) * 110% 18.15
Labour cost for sewing
workers
(£9 * 2) * 107% 19.26
Labour cost for Ironing
workers
(£9.50 *0.5) *104% 4.94
Production Overhead cost £30000 / 600000 * 4 hours 0.2
Fixed overhead cost £900000 / 600000 * 4 hours 6

Total expected cost of an
Autumn Jacket based on cost
allocation.
164.969 or 165 approx.
Working notes:
40%
case 0.4 1.5 0.6
50%
case 0.5 3 1.5
25%
case 0.25 4.5 1.125
3.225
Cost Gap = Expected cost based on target costing – Expected Cost based as per ABC
= £165 - £146
= £19
(b)
On the basis of above calculation, it is identified that the gap between expected cost of both
scenario is 19. It means the cost as per ABC is higher than the cost as per target costing by £19.
However, on the other hand, it is also analysed that the actual cost is lower than the selling price
where actual cost is £165 while selling price is £175 per Jacket. It means with the sale of one
Jacket, the company will earn the profit of £10. On this basis, it is advisable to Abercrombie
Fashion plc. That they should proceed with the launching with new clothing line of autumn
jacket (Ahn, Clermont and Schwetschke, 2018).
(c)
Advantage of Target costing:
 It helps the management to process improvement and product innovation to further gain
competitive advantage.

 The product is created as per customer expectation thus customer feels more value is
delivered.
 The company’s approach to designing and manufacturing products becomes market-
driven (Gonçalves, Gaio and Silva, 2018).
 New market opportunities can be converted into real savings to achieve the best value for
money rather than to simply realize the lowest cost.
Disadvantage of Target costing:
 Adopting of this costing is required permanent change of management system which is
one of the disadvantages.
 It does not produce required result as it results is based on target profit margin.
 Difficult to convince people to buy products at targeted selling price (Aladwan,
Alsinglawi and Alhawatmeh, 2018).
Advantage of Life cycle costing:
 The application of life cycle costing is helps in improving the forecasting technique of
company.
 Another advantage of life cycle costing is such that it improves awareness of the factors
that drive cost and the resources required by the purchase.
 It is not only focus on cost but also consider other factors such as quality of goods, level
of services etc the impact of which performance can be trade-off against cost (De Menna
and et.al., 2018).
Disadvantage of life cycle costing:
 Life cycle costing analysis is basically one of the time consuming because it required too
many changes in technology.
 It is also costly because the longer the project life time, the more operating cost will be
incurred.
 Another disadvantage is such that technology changes day to day (Naves and et.al.,
2019).

SECTION B
Question B3
Benefits of Balance Scorecard
There are various benefits that balanced score card offers to the company. There are
various approaches that the balanced scorecard provides to the management for planning
strategically. The logical and well structured format of balanced scorecard enable the managers
of the company for ensuring the areas of the management are easily understandable to them. The
management have the advantage of focusing on the goal, and creating out the particular means in
order to manage and keep a track on the progress of the overall organizational activities. It
provides with the proper initiatives that can be followed for tracking the actions.
The management through effective preparation of balanced scorecard ensures that the
formulated strategic plans are easily communicated to the company and other concerned people.
A balanced scorecard is clear and easily interpret able that ensures that the activities of every
department are easily aligned to each of the other department that exists in the company. Clarity
regarding the goals on the end of employees exists (Quesado, Aibar Guzmán and Lima
Rodrigues, 2018)
. So the employees find it easy to work and make efforts that lead to achievement of the goals.
Employees can clearly visualize how one objective affects the other.
With the correct and proper implementation of the balanced scorecard common strategy
receives aligned actions from each department with the company. The BSC structure further
enables the connecting link between the objectives that are of critical nature and are by the parent
company. The employees can clearly see that their personal goals are how effectively connected
with the overall organizational strategy of the company.
Drawbacks of Balance Scorecard
There are certain disadvantages too that are attached with the balanced scorecard. The
balanced scorecard when used by the company makes the company to expect a framework for
itself. The balanced scorecard however requires customization as per the needs of the
organization. This customization process takes a lot of time (Quesado, Aibar Guzmán and Lima
Rodrigues, 2018). The examples for previously utilization of balanced scorecard are helpful no
doubt but they can not be used without being tailored. The reason being the needs are different
for every organization. So the drawback is the time consumption.

The full effectiveness of balanced scorecard requires the need to implemented right from
the lowest level of the organization to the top level, meaning for effective implementation the
implementing approach must down to top approach. This requires effective leadership mind set
and also requires that the management agrees to the approach. So the drawback is the tendency
of the managers to disagree with the approach.
The framework of the balanced scorecard is such that it inclines towards becoming or
getting highly complicated. As the framework requires the providence of time and utmost
dedication to be understood by the user. There number of case studies and resources related to
the reading of the concerned tool are very vast. The reader gets twisted as there exists multiple
number of ways for the methods of the balanced scorecard.
Challenges a company can face
The first challenge that the company can face is regarding the defining of metrics. For
example: If the metrics are not clearly or poorly defined by the firm then the depiction of the
indicators will get difficult to be understood later on affecting the performance of the company.
The frequency of the metrics also plays an important role if the company collects the metrics
regarding information in the wrong frequency then the possible challenges will be regarding the
consistency in the achievement of the planned goals.
The next challenge with the approach implementation is that the lack of availability of
collection of data that is efficient and relevant reporting challenge. The companies for example
tend to overemphasize on the metrics financial aspects and neglects that the system already
provides the framework for the data collection and reporting (Deghash, 2019). Thus the attempt
by the company results in the automation of data regarding its collection and faces challenge in
achievement of the expected results. The companies should make the key performance indicators
(kips) as the priority.
The another challenge is regarding the lack of review structure that is formalized. The approach
does not provide the formal structure regarding the review mechanism. For the best working of
the balanced scorecard there must be a proper review structure. The change in the data on regular
basis requires the reviewing on the regular basis too. The further challenge that the organization
is likely to face is that the system leads to over focus on the internal processes of the company.

REFERENCES
Books and journals
Ahn, H., Clermont, M. and Schwetschke, S., 2018. Research on target costing: past, present and
future. Management Review Quarterly, 68(3), pp.321-354.
Gonçalves, T., Gaio, C. and Silva, M., 2018. Target costing and innovation-exploratory
configurations: A comparison of fsQCA, multivariate regression, and variable cluster
analysis. Journal of Business Research, 89, pp.378-384.
Aladwan, M., Alsinglawi, O. and Alhawatmeh, O., 2018. The applicability of target costing in
Jordanian hotels industry. Academy of Accounting and Financial Studies Journal, 22(3),
pp.1-13.
De Menna, F. and et.al., 2018. Life cycle costing of food waste: A review of methodological
approaches. Waste Management, 73, pp.1-13.
Naves, A.X. and et.al., 2019. Life cycle costing as a bottom line for the life cycle sustainability
assessment in the solar energy sector: A review. Solar Energy, 192, pp.238-262.
Fatima, T. and Elbanna, S., 2020. Balanced scorecard in the hospitality and tourism industry:
Past, present and future. International Journal of Hospitality Management. 91. p.102656.
Quesado, P. R., Aibar Guzmán, B. and Lima Rodrigues, L., 2018. Advantages and contributions
in the balanced scorecard implementation. Intangible capital. 14(1). pp.186-201.
Deghash, A., 2019. Balanced scorecard application and its challenges. International Journal of
Business Ethics and Governance. 2(1). pp.33-58.
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