MANAGING COSTS AND

UNCERTAINTY
JBCG
 COST CONTROL SYSTEMS
• THE SET OF FORMAL AND INFORMAL TOOLS AND
METHODS DESIGNED TO MANAGE
ORGANIZATIONAL COSTS.
 COST CONTROL SYSTEMS
Control Point Reason Cost Control Method

Before an Event Preventive Budgets

During an Event Corrective Periodic monitoring of

ongoing activities

After an Event Diagnostic Feedback

 COST CONSCIOUSNESS
• REFERS TO A COMPANYWIDE EMPLOYEE ATTITUDE
TOWARD THE TOPICS OF UNDERSTANDING COST
CHANGES, COST CONTAINMENT, COST AVOIDANCE
AND COST REDUCTION.
 COST CONTAINMENT
• CAN BE USED TO MINIMIZE PERIOD-BY-PERIOD
INCREASES IN PER-UNIT VARIABLE AND TOTAL
FIXED COSTS.
• NOT POSSIBLE FOR INFLATION EFFECTS, TAX AND
REGULATORY CHANGES, AND SUPPLY AND
DEMAND ADJUSTMENTS BECAUSE THERE FORCES
OCCUR OUTSIDE THE ORGANIZATION.
 COST AVOIDANCE AND COST
REDUCTION
• COST AVOIDANCE INVOLVES FINDING
ACCEPTABLE ALTERNATIVES TO HIGH-COST ITEMS
AND/OR NOT SPENDING MONEY FOR
UNNECESSARY GOODS AND SERVICES.
• COST REDUCTION IS THE INTENTION TO LOWER
COSTS. COMPANIES CAN REDUCE COSTS BY
BENCHMARKING OR OUTSOURCING.
CATEGORIES OF FIXED COSTS
• COMMITTED FIXED COSTS
• DISCRETIONARY COSTS
 COMMITTED FIXED COSTS
• COSTS ASSOCIATED WITH PLANT ASSETS AND
HUMAN RESOURCES.
• THE AMOUNT OF COMMITTED COSTS IS NORMALLY
DICTATED BY LONG-RUN MANAGEMENT DECISIONS
INVOLVING THE DESIRED SCALE AND SCOPE OF
OPERATIONS
 DISCRETIONARY COSTS
• ONE “THAT A DECISION MAKER MUST
PERIODICALLY REVIEW TO DETERMINE IF IT
CONTINUES TO BE IN ACCORD WITH ONGOING
POLICIES.”
• RELATE TO COMPANY ACTIVITIES THAT ARE
IMPORTANT, BUT THE LEVEL OF FUNDING IS
SUBJECT TO JUDGMENT.
 DISCRETIONARY COSTS
• DISCRETIONARY COST ACTIVITIES ARE USUALLY
SERVICE-ORIENTED AND INCLUDE:
• EMPLOYEE TRAVEL
• REPAIRS AND MAINTENANCE
• ADVERTISING
• RESEARCH AND DEVELOPMENT
• EMPLOYEE TRAINING AND DEVELOPMENT
 BUDGETING DISCRETIONARY
COSTS
• THE RELATED ACTIVITY’S PERCEIVED
SIGNIFICANCE TO ACHIEVING GOALS AND
OBJECTIVES.
• THE NEXT PERIOD’S EXPECTED LEVEL OF
OPERATIONS.
• THE ABILITY OF MANAGERS TO EFFECTIVELY
NEGOTIATE DURING THE BUDGETARY PROCESS.
 EFFECTIVENESS
• DETERMINED FOR A PARTICULAR PERIOD BY
COMPARING RESULTS ACHIEVED WITH RESULTS
DESIRED.
 EFFICIENCY
• THE DEGREE OF WHICH A SATISFACTORY
RELATIONSHIP OCCURS WHEN COMPARING
OUTPUTS TO INPUTS.
• EFFICIENCY IS A YIELD CONCEPT AND IS USUALLY
MEASURED BY A RATIO OF OUTPUT TO INPUT.
 ENGINEERED COSTS
• SOME DISCRETIONARY ACTIVITIES ARE REPETITIVE
ENOUGH TO ALLOW THE DEVELOPMENT OF
STANDARDS SIMILAR TO THOSE FOR
MANUFACTURING COSTS.
• ENGINEERED COSTS ARE COSTS THAT HAVE BEEN
FOUND TO BAR OBSERVABLE AND KNOWN
RELATIONSHIPS TO A QUANTIFIABLE ACTIVITY
BASE.
 CASH MANAGEMENT
• WHAT VARIABLES INFLUENCE THE OPTIMAL LEVEL
OF CASH?
• WHAT ARE THE SOURCES OF CASH?
• WHAT VARIABLES INFLUENCE THE COST OF
CARRYING CASH?
• BANKING RELATIONSHIPS
WHAT VARIABLES INFLUENCE THE OPTIMAL
LEVEL OF CASH?

• THE CASH BUDGET AND PRO FORMA CASH FLOW

STATEMENT.
• THE LEVEL OF CONFIDENCE THE MANAGERS HAVE
IN THE CASH BUDGET.
• SECURITIES RATINGS.
WHAT ARE THE SOURCES OF CASH?
• SALES OF GOODS AND SERVICES.
• SALE OF EQUITY OR DEBT SECURITIES AND OTHER
SHORTER-TERM INSTRUMENTS.
• SALE OF ASSETS THAT ARE NO LONGER
NECESSARY OR PRODUCTIVE.
WHAT VARIABLES INFLUENCE THE COST OF
CARRYING CASH?

• COST OF BORROWING
• COST OF ISSUING EQUITY CAPITAL
 BANKING RELATIONSHIPS
• TO ASSESS CREDIT RISK:
• THE BORROWER’S CREDIT HISTORY
• THE BORROWER’S ABILITY TO GENERATE CASH FLOW
• QUALITY OF COLLATERAL OFFERED BY THE BORROWER
• CHARACTER OF SENIOR OFFICERS OF THE BORROWER
• THE BORROWER’S OPERATIONAL PLANS AND STRATEGIES
 UNCERTAINTY
• REFLECTS THE DOUBT OR IMPRECISION IN
SPECIFYING FUTURE OUTCOMES.
• A STATE OF LIMITED KNOWLEDGE WHERE IT IS
IMPOSSIBLE TO EXACTLY DESCRIBE THE EXISTING
STATE, A FUTURE OUTCOME, OR MORE THAN ONE
POSSIBLE OUTCOME.
 UNDERSTANDING COST
CHANGES
• COST CHANGES BECAUSE OF VOLUME CHANGES
• COST CHANGES BECAUSE OF INFLATION/DEFLATION
• COST CHANGES BECAUSE OF SUPPLY/SUPPLIER COST
ADJUSTMENTS
• COST CHANGES BECAUSE OF QUANTITY PURCHASED
CREATING A BETTER
LEARNING EXPERIENCE
JBCG

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