EMBA 8021 EMBA Session 4 William F. Bentz October 4, 1999 Fisher College of Business

EMBA 8022 The real voyage of discovery consists not in seeking new landscapes, but in having new eyes. Marcel Proust Today’s Quote

EMBA 8023 Cost Behavior When talking about cost behavior, it is important to distinguish the behavior of total cost from the behavior of average unit costs (weighted mean). To do this, let us consider an illustration using arbitrary equation parameters that serve our purpose.

EMBA 8024

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7 OSU Bumper Stickers I am not lost, I am exploring

EMBA 8028 Further Observations The level of analysis will influence how a cost is modeled. For strategic analyses, most costs will be considered variable. For tactical analyses, the same costs might be modeled as part fixed and part variable.

EMBA 8029 Another, Different View A somewhat different view is more meaningful, but cannot easily be modeled as a general case. In this view, scarcity over the decision time frame affects the behavior of costs. Thus scarcity is the issue, not short- or long-run distinctions. (Staubus)

EMBA Plentiful Resources (SR) Starting from a plentiful supply of constant-flow resources, –a small increment in activity will cause no increment in the total cost of these resources –a small decrement in activity will cause no decrement in the total cost of these resources

EMBA Plentiful Resources (LR) In the “long run”, increments in volume will ultimately require cost increments. –small increments in activity will cause existing resources to be replaced and new resources acquired –small decrements in activity will cause fewer existing resources to be replaced and thus fewer resources acquired

EMBA Scarce Resources (SR) Starting with a shortage of supply of constant-flow resources –even small increments in activity will cause substantial (above average cost) increases in cost –small decrements in activity may reduce the scarcity of resources and actually reduce total and average cost

EMBA Scarce Resources (LR) Starting with a shortage of supply of constant-flow resources –increments in activity will cause increases in cost as resources adjust to the demand for production –decrements in activity will cause decrements in total cost as resources are adjusted downward due to sale or reduced replacements

EMBA Questions?

EMBA Cost Incurred Cost incurred during a period: asset is increased, or cost is deducted from revenue of the period as an expense, cost is deducted as a loss of the period Assets = Liabilities + Owners Equity Owners’ Equity = Contributed + Earned Capital

EMBA Functional Classification Manufacturing function costs: asset (Raw Material, Work in Process, or Finished Goods inventories), expense (Cost of Goods Sold, cost of idle capacity, etc.) loss (unusual spoilage, loss of materials, abnormal waste)

EMBA Functional Classification Non-manufacturing costs: Distribution costs - expense (no asset*) Selling costs - expense (no asset*) Marketing costs - expense (no asset*) R&D costs - expense of period until one moves into the late development stage G&A costs - expense of period (no asset*)

EMBA Product Costs Fin. Acct. - inventoriable mfg. Cost Mgt. Acct. - all costs, past and future, associated with a product or service from design through warranty and service costs.

EMBA Traceability of Costs Directly traceable to a cost object Not directly traceable to a cost object (Really a continuum of traceability)

EMBA Types of Production Activities Unit driven costs Batch driven costs Product sustaining costs Facility sustaining

EMBA Importance of Purpose Cost management - identify many individual activities for review and possible elimination or change. Cost measurement - group the costs driven by the same factors to simplify the system and reduce the number of drivers.

EMBA Traditional Classifications Direct materials Direct labor Indirect manufacturing costs –Overhead or burden –Support costs

EMBA Project Suggestions Paragraph framing the issues Relate to what has been covered in text Think in terms of pro or cons, not just what you see at work Answer the question asked regardless of your inventory of answers Consider the important issues to avoid going on a tear about minor or narrow issues

EMBA ABKY Problem 3-45 (Part a)

EMBA ABKY Prob (Parts b & c)

EMBA Break for it!

EMBA Problem 3-30

EMBA Problem 3-30

EMBA Problem 3-30 The budget equation for the five support activities would be: