Decoding Costs: Key Tools for Decision Making

1. It Costs WHAT??? Tools for Effective Decision Making

2. Learning Objectives • Concept of Activities Based Costing • Value of accurate allocations in decision making • How management decisions effect costs • Understand the difference between price and cost • Pricing considerations • How we can become more competitive in the marketplace

3. Current Challenges • Cost scrutiny in the government market • Competition in the commercial market • Numbers can lie – garbage in, garbage out

4. Sample P&L Statement

5. P&L StatementAllocation by Direct Labor

6. P&L StatementAllocation by Activities

7. Activities Based Costing • Traditional costing methodologies are intended for external reporting • Management decisions and metrics need costs based upon economic reality • Assigns costs of activities only to the products that are demanding those activities • Assigns costs in a logical manner, rather than a one factor model, such as direct labor

8. Allocation by Activities

9. Allocation by Activities

10. P&L StatementAllocation by Activities

11. Significance of Activities Based Costing • Manufacturing overhead costs have increased significantly • Manufacturing costs no longer correlate to a single factor, such as direct labor • Diversity of products generates diverse processes, which leads to a variety of costs and allocation methods

12. Caveats to Activities Based Costing • Get over measuring to a micrometer • Close is good enough • There will be unassigned costs, this is normal • Purpose of ABC is to provide strategic and operational guidance to decision making and not for pricing products and services

13. Expense Breakdown

14. Effects of Decision Making on Overhead • Supervision/Indirect Labor – focus on value added functions • Benefits/Taxes – health and safety • Building/Depreciation – Balance maintenance with new equipment • Professional Services – what does the customer value • Get lean and efficient – focus on value added, eliminate non-value added

15. Quality vs. Cost • Does the customer want it? • Are they willing to pay for it? • What is the appropriate level of quality to offer our customers?

16. Costing vs. Pricing • Costs – the expenses of the activities used to produce the product • Based on a production plan – make it efficient • Fixed costs – need to be paid by the products that consume them • Price – the amount paid by the customer • Costs are a factor, not a determinate of price • Rooted in external, market forces

17. Developing Price • Starts with our costs • Develop an effective production plan • Honesty in the numbers – avoid conservative and aggressive estimates • Understand the competition and marketplace • What are the risks involved? • What future opportunities are available? • Why do we want this job? • Mission, margin, future relationships, meeting customer need

18. Pricing Considerations • Repetitiveness of work • Volume of work • Potential for future work • What does our customer value in the product? • Educate the customer on what we bring to the table • Customer Profile • Sales and credit history, ease of relationship, understanding what they need

19. Pricing Considerations • Reductions below cost • Generally not sustainable • Costs cannot be eliminated if we’re not willing to charge for them • If costs are not covered by one job, another job will require higher margins • Loss leaders • Sets the stage for future work, including price expectations • Anyone can sell on price!

20. Becoming More Competitive • INNOVATE to improve efficiencies and remove constraints • Focus on customer values and activities that support those values • Understand the product concept and how it fits into our diverse product mix • Understand VisionCorps strategy and VVM

21. Questions? Jodie Reinhart, CPA jreinhart@visioncorps.net