1. Controlling Noninventory Costs
Chapter 12
Controlling Noninventory Costs

2. 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

3. 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

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

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

6. 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

7. 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

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

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

10. 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

11. 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

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

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

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

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

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

17. Committed Fixed Costs
Name
Title
Personnel
Structure
Plant Assets

18. 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

19. 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

20. 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

21. 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

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

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

24. 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

25. 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