1. MSE608C – Engineering and Financial Cost Analysis
Controlling Expenses

2. 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

3. 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

4. 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

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