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EMBA 802 - Session 4

EMBA 802 - Session 4. William F. Bentz October 4, 1999. Fisher College of Business. Today’s Quote. The real voyage of discovery consists not in seeking new landscapes, but in having new eyes. Marcel Proust. Cost Behavior.

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EMBA 802 - Session 4

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  1. EMBA 802 - Session 4 William F. Bentz October 4, 1999 Fisher College of Business EMBA 802

  2. Today’s Quote The real voyage of discovery consists not in seeking new landscapes, but in having new eyes. Marcel Proust EMBA 802

  3. 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 802

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  7. OSU Bumper Stickers I am not lost, I am exploring EMBA 802

  8. 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. Further Observations EMBA 802

  9. 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 802

  10. 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 802

  11. 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 802

  12. 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 802

  13. 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 802

  14. Questions? EMBA 802

  15. 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 802

  16. 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 802

  17. 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 802

  18. 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 802

  19. Traceability of Costs • Directly traceable to a cost object • Not directly traceable to a cost object (Really a continuum of traceability) EMBA 802

  20. Types of Production Activities • Unit driven costs • Batch driven costs • Product sustaining costs • Facility sustaining EMBA 802

  21. 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 802

  22. Traditional Classifications • Direct materials • Direct labor • Indirect manufacturing costs • Overhead or burden • Support costs EMBA 802

  23. 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 802

  24. ABKY Problem 3-45 (Part a) EMBA 802

  25. ABKY Prob. 3-45 (Parts b & c) EMBA 802

  26. Break for it! EMBA 802

  27. Problem 3-30 EMBA 802

  28. Problem 3-30 EMBA 802

  29. Problem 3-30 • The budget equation for the five support activities would be: EMBA 802

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