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?