Cost Management and Decision Making Chapter 13

Decision making process  Step 1: Goal setting  Provides guidance  Goals  Tangible  Quantifiable  Target profit, market share, enrollment, etc.

Decision making process  Step 2: Gather information  Relevant information  Capable of influencing a decision  Differs among alternatives  Occurs now or in the future  Sunk costs are never relevant

Decision making process  Tradeoffs  Qualitative vs. quantitative  Objective vs. subjective  Accuracy vs. timeliness  Quality vs. cost

Decision making process  Step 3: Identify and evaluate alternatives  Stay as is or change?  Consider the domino effect  What other changes will this alternative necessitate?

Decision making process  Costs and benefits of each  Qualitative vs. quantitative  Numbers may not tell the whole story  The past may be a guide  Prototype or pilot project may be appropriate

Common decisions  Make or buy?  Retain or drop?  Keep or replace?  Accept or reject?

Make or buy?  Make  Qualitative factors  Control  Worker morale  Reputation  Reduced risk  Buy  Qualitative factors  Dependence  Time and distance  Greater risk  Cultural differences

Make or buy?

Retain or drop?  Retain  Profitable?  Support other products, locations?  Maintain image?  Drop  Revenue lost  Costs avoided  Shift to other products, locations  Impact on remaining workers, community

Retain or drop?

Keep or replace?  Keep  Serviceability  Operating costs  Capacity  Obsolescence  Replace  Cost  Available financing  Operating costs  Capacity  Useful life  Market value of old asset

Keep or replace?

Accept or reject?  Accept  Does incremental revenue exceed incremental cost?  Unit/batch  Product/facility  Impact on other products  Impact on other customers  Reject  Not profitable  Negative impact on current sales  Discriminatory  Negative impact on image

Accept or reject?

Life cycle costing  At some point, all costs must be recovered  Previous examples only considered incremental costs  Life cycle costing considers all of the costs related to owning and using the asset  Costs are then charged to customers

Life cycle costing  Ownership costs  Net cost consumed (cost – salvage value)  Opportunity cost or cost of capital  Ongoing fixed costs (insurance, taxes, etc.)  Operating costs  Utilities, repairs, maintenance, etc. related to using the asset