© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 16: Managing Costs and Uncertainty Raiborn ● Kinney Cost Accounting Principles, 9e

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. Learning Objectives What are the functions of a cost control system? What factors cause costs to change from period to period or to deviate from expectations? What are the generic approaches to cost control? What are the two primary types of fixed costs, and what are the characteristics of each? What are the typical approaches to controlling discretionary fixed costs? What are the objectives managers strive to accomplish in managing cash? How is technology reducing costs of supply-chain transactions? Why is uncertainty greater in dealing with future events than with past events? What are the four generic approaches to managing uncertainty?

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. Cost Control Systems Set of formal and informal tools and methods designed to manage organizational costs Provide information for planning and for determining the efficiency of activities while they are being planned and after they are performed

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. Planning and Control Model Plan  Where do we want to go?  How do we compare to peers?  What is the impact of these decisions? Execute  What do we have to do?  Can we achieve the targets?  How do we allocate resources?

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. Planning and Control Model Evaluate  Where are we?  How are we doing compared to plan?  What actually happened? Respond  What decisions do we make?  What are the alternatives?  Why did it happen?

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. Cost Consciousness A company-wide employee attitude toward the topics of  understanding cost changes  cost containment  cost avoidance  cost reduction

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. Why Costs Change Cost behavior Inflation/deflation Supply/supplier cost adjustments Quantity purchased Higher taxes Additional regulations

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. Cost Containment Cannot contain  Inflation  Tax  Regulatory changes  Supply and demand adjustments Use cost containment for  Reduced supplier competition  Seasonality  Quantities purchased Develop interorganizational arrangements Arrange long-term or single-source contracts An approach to minimize cost increases

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. Cost Avoidance and Reduction Avoidance — finding acceptable alternatives; substituting lower cost inputs Reduction — lowering current costs  Benchmarks  Outsourcing  Consultants  Operation redesign

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. Fixed Costs Discretionary Costs important but optional activities  employee travel  repairs and maintenance  advertising  research and development  employee training and development Committed Costs plant assets and personnel structure  depreciation  lease rentals  property taxes  staff salaries Cannot be easily reduced Can be reduced

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. Cash Management Issues Cash level  sufficient to cover all needs  low enough to allow for alternative uses of cash

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. Banking Relationships Accurate, conservative accounting and cash flow information affect  Loan eligibility  Loan limits  Credit terms Banks assess  Credit history  Ability to generate cash flow  Quality of collateral  Character of senior officers  Operational plans and strategies

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. Uncertainty Uncertainty — doubt or lack of precision in specifying future outcomes Causes of cost management uncertainty  Lack of identification or understanding of cost drivers Random — some portion of the cost is not predictable based on the cost driver  Unforeseen events

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. Dealing with Uncertainty Explicitly factor uncertainty into estimates of future costs Structure costs to automatically adjust to uncertain outcomes Use options and forward contracts to mitigate uncertainty Purchase insurance to cover unexpected occurrences

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. Questions What are committed costs and discretionary costs? What are three approaches to cost control? How can a firm reduce uncertainties associated with business activities?

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. Potential Ethical Issues Refusing to grant sales price decreases when costs decline Artificially contracting with suppliers to force price increases to customers Acquiring excessive quantities of inputs to generate favorable price variances Acquiring counterfeit goods to obtain lower prices Outsourcing production or procurement to companies with unacceptable labor or environmental practices Slowing payments to creditors to generate more investment returns Manipulating or falsifying financial statements to obtain credit or lower interest rates on borrowed funds