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    Ch15 Management Costs and Uncertainty

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    Zaira Pangesfan
    This document discusses managing costs and uncertainty. It defines committed and discretionary fixed costs, and describes typical approaches to controlling discretionary fixed costs. It also lists four generic approaches to managing uncertainty: explicitly factoring uncertainty into future cost estimates, structuring costs to automatically adjust to uncertain outcomes, using options/contracts to mitigate uncertainty, and purchasing insurance. The document provides learning objectives and describes planning and control models, cost consciousness, reasons for cost changes, and cash management issues.

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    Ch15 Management Costs and Uncertainty

    Uploaded by

    Zaira Pangesfan
    236 views21 pages
    This document discusses managing costs and uncertainty. It defines committed and discretionary fixed costs, and describes typical approaches to controlling discretionary fixed costs. It also lists four generic approaches to managing uncertainty: explicitly factoring uncertainty into future cost estimates, structuring costs to automatically adjust to uncertain outcomes, using options/contracts to mitigate uncertainty, and purchasing insurance. The document provides learning objectives and describes planning and control models, cost consciousness, reasons for cost changes, and cash management issues.

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    COST ACT

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    This document discusses managing costs and uncertainty. It defines committed and discretionary fixed costs, and describes typical approaches to controlling discretionary fixed costs. It also lists four generic approaches to managing uncertainty: explicitly factoring uncertainty into future cost estimates, structuring costs to automatically adjust to uncertain outcomes, using options/contracts to mitigate uncertainty, and purchasing insurance. The document provides learning objectives and describes planning and control models, cost consciousness, reasons for cost changes, and cash management issues.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    236 views21 pages

    Ch15 Management Costs and Uncertainty

    Uploaded by

    Zaira Pangesfan
    This document discusses managing costs and uncertainty. It defines committed and discretionary fixed costs, and describes typical approaches to controlling discretionary fixed costs. It also lists four generic approaches to managing uncertainty: explicitly factoring uncertainty into future cost estimates, structuring costs to automatically adjust to uncertain outcomes, using options/contracts to mitigate uncertainty, and purchasing insurance. The document provides learning objectives and describes planning and control models, cost consciousness, reasons for cost changes, and cash management issues.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    of 21

    Cost Accounting

    Foundations and Evolutions


    Kinney, Prather, Raiborn

    Chapter 15
    Managing Costs
    and Uncertainty
    Learning Objectives (1 of 3)
    • Explain the functions of an effective cost co
    ntrol system
    • Describe the generic approaches to cost cont
    rol
    • List factors that cause costs to change from
    period to period or to deviate from expectati
    ons
    Learning Objectives (2 of 3)
    • List the two primary types of fixed costs an
    d describe the characteristics of each type
    • Describe typical approaches to controlling d
    iscretionary fixed costs
    • List the objectives of cash management
    Learning Objectives (3 of 3)
    • Explain how technology is reducing the cost
    s of supply chain transactions
    • Contrast the uncertainty of dealing with futu
    re events and past events
    • List the four generic approaches to managin
    g uncertainty
    Cost Control Systems

    Provide information for planning and for deter


    mining the efficiency of activities while the
    y are being planned and after they are perfor
    med
    Planning and Control Model

    • Plan
    – Where do we want to go?
    – How do we compare to peers?
    – What is the impact of these decisions?
    Planning and Control Model
    • Execute
    – What do we have to do?
    – Can we achieve the targets?
    – How do we allocate resources?
    Planning and Control Model
    • Evaluate
    – Where are we?
    – How are we doing compared to plan?
    – What actually happened?
    Planning and Control Model
    • Respond
    – What decisions do we make?
    – What are the alternatives?
    – Why did it happen?
    Cost Consciousness
    • A companywide employee attitude toward t
    he topics of
    – understanding cost changes
    – cost containment
    – cost avoidance
    – cost reduction
    Why Costs Change

    • Cost behavior
    • Inflation/deflation
    • Supply/supplier cost adjustments
    • Quantity purchased
    • Higher taxes
    • Additional regulations
    Cost Containment
    An approach to minimize cost increases
    Cannot contain Use cost containment for
    • inflation • reduced supplier competit
    • tax ion
    • regulatory changes • seasonality
    • supply and demand ad • quantities purchased
    justments Develop interorganizational
    arrangements
    Arrange long-term or single
    -source contracts
    Cost Avoidance and Reduction
    • Avoidance - finding acceptable alternatives;
    substituting lower cost inputs
    • Reduction - lowering current costs
    – Benchmarks
    – Outsourcing
    – Consultants
    – Operation redesign
    Can be reduced
    Cannot be easil
    y reduced Fixed Costs

    • Committed Costs plan • Discretionary Costs imp


    t assets and personnel ortant but optional activit
    structure ies
    – depreciation – employee travel
    – lease rentals – repairs and maintenance
    – property taxes – advertising
    – staff – research and developme
    nt
    – employee training and d
    evelopment
    Cash Management Issues
    • Cash level
    – sufficient to cover all needs
    – low enough to allow for alternative uses of cash
    Banking Relationships

    • Accurate, conservative accounting and


    cash flow information affects
    – Loan eligibility
    – Loan limits
    – Credit terms
    Banking Relationships
    • Banks assess
    – Credit history
    – Ability to generate cash flow
    – Quality of collateral
    – Character of senior officers
    – Operational plans and strategies
    Supply Chain Management

    A set of processes that convert inputs


    into products and services for the fir
    m’s customers
    Uncertainty
    • Uncertainty - doubt or lack of precision in s
    pecifying future outcomes
    • Causes of cost management uncertainty
    – Lack of identification or understanding of cost
    drivers
    • Random – some portion of the cost is not predictabl
    e based on the cost driver
    – Unforeseen events
    Dealing with Uncertainty

    • Explicitly factor uncertainty into estimates o


    f future costs
    • Structure costs to automatically adjust to un
    certain outcomes
    • Use options and forward contracts to mitiga
    te uncertainty
    • Purchase insurance to cover unexpected occ
    urrences
    Questions
    • What are committed costs and discretionary
    costs?
    • What are three approaches to cost control?
    • How can a firm reduce uncertainties associa
    ted with business activities?

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