Controlling Noninventory Costs Chapter 12 Controlling Noninventory Costs

Learning Objectives 1. Why is cost consciousness of great importance to all members of an organization? 2. How are committed and discretionary costs differentiated? C12

Continuing . . . Learning Objectives 3. How can the benefits from discretionary cost expenditures be measured? 4. How does a budget help in controlling discretionary costs? C12

Continuing . . . Learning Objectives 5. How is program budgeting used for cost control in not-for-profit entities? (Appendix) C12

Why Have A Cost Control System? To analyze and evaluate how well expenditures are managed during a period

Effective Cost Control System: Control Before an Event REASON Preventive Reflects planning COST CONTROL METHODS Budgets Standards Policies concerning approval for deviations Expressions of quantitative and qualitative objectives

Effective Cost Control System: Control During an Event REASON Corrective Ensures that the event is being pursued according to plans Allows managers to correct problems as they occur COST CONTROL METHODS Periodic monitoring of ongoing activities Comparison of activities and costs against budgets and standards Avoidance of excessive expenditures

Effective Cost Control System: Control After an Event REASON Diagnostic Guides future actions COST CONTROL METHODS Feedback Variance analysis Responsibility reports

Cost Consciousness Cost Consciousness refers to a companywide employee attitude toward the topics of cost understanding cost containment cost avoidance cost reduction Page 363

Cost Control System TIME FRAME Before During After Budgeting, Standard setting Monitoring, Correcting Providing feedback Activity: Cost Consciousness Attitude: Cost understanding Cost containment, Cost avoidance Cost reduction

Cost Understanding Cost differences related to cost behavior Cost differences related to quantity purchased Cost differences related to inflation/deflation Cost differences related to supply/supplier cost adjustments Supply and demand Number of suppliers Advances in technology Taxes or regulatory requirements Page 364

Implementing a Cost Control System What are the types of costs? Fixed/variable costs Product/period costs Committed/discretionary costs

Continuing . . . Implementing a Cost Control System Employees need to help control costs!

Continuing . . . Implementing a Cost Control System Encourage employees to share ideas! Motivation

Continuing . . . Implementing a Cost Control System Reports must be generated that indicate actual results, budget-to-actual comparisons, and variances

Continuing . . . Implementing a Cost Control System View as long-run process!

Committed Fixed Costs Name Title Personnel Structure Plant Assets

Control of Committed Costs Compare expected benefits with expected costs of investment Activities needed to attain company objectives Assets needed to support activities Compare actual and expected results Post-investment audit Page 374

Discretionary Cost A fixed cost that reflects a management decision to fund a particular activity at a specified amount for a specified period of time Relates to company activities that are important but viewed as optional Page 375

Budgeting Discretionary Costs Translate company goals into specific objectives and policies Decide which discretionary activities will help accomplish the chosen objectives and to what degree Prioritize discretionary cost activities Review cash flow and income expectations for the upcoming period Page 376

Funding for Discretionary Costs Generally based on Activity’s perceived significance to the achievement of objectives and goals Upcoming period’s expected level of operations Managerial negotiations in the budgetary process

Measuring Benefits from Discretionary Costs: Efficiency Inputs Outputs Objectives Efficiency Yield Actual Outputs Planned Outputs Actual Inputs Planned Inputs

Measuring Benefits from Discretionary Costs: Effectiveness Inputs Outputs Objectives Effectiveness Actual Output Preestablished Standard Planned Output

Measuring Benefits from Discretionary Costs Is difficult because there may be a long time before output results from discretionary cost expenditures there may be no clear cause-effect relationship between discretionary cost inputs and particular outputs the company may use nonmonetary surrogate measures to estimate success of discretionary expenditures

Program Budgeting Program budgeting is useful for cost control because it allows resource inputs to be related to service outputs so that managers can focus on the relevant cost/benefit relationships. Page 389