MSE608C – Engineering and Financial Cost Analysis

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MSE608C – Engineering and Financial Cost Analysis Controlling Expenses

Mixed Expenses Fixed Expenses Semi-variable Expenses Variable Expenses Little correlation with changing levels of business activity. Examples would include building space; managers and technical staff; utilities; depreciation and amortization; Semi-variable Expenses Some correlation with incremental changes in business activity Examples would include Supplies; office space; Variable Expenses Direct correlation with each unit of business activity Examples would include direct materials; direct labor; sales commission

Committed and Deterministic Fixed Costs Discretionary Can be changed for short periods Advertising Training R&D Deterministic (Committed) Cannot be reduced Rent Salaries of key employees

Which Variances to Address? Materiality The magnitude and importance of the variance Consistency of Occurrence The magnitude and consistency of a variance over several periods. Ability to control Is the variance within the control of management Deterministic expenses are ones that management has little control over in the short term. Discretionary expenses are ones that are flexible in the short term. Nature of the item. The importance of the variance to the organization

Assessment What type of Expenses directly correlate with changes in business activity? Which type of Expenses can be changed in the near-term?