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Chapter 12

Chapter 12. Controlling Noninventory Costs. 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. Continuing . . . Learning Objectives.

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Chapter 12

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  1. 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 • COST CONTROL METHODS • Periodic monitoring of ongoing activities • Comparison of activities and costs against budgets and standards • Avoidance of excessive expenditures • REASON • Corrective • Ensures that the event is being pursued according to plans • Allows managers to correct problems as they occur

  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

  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

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

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

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

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

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

  17. Name Title Name Title Name Title Name Title Name Title Committed Fixed Costs 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

  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

  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

  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 Outputs Objectives Inputs Efficiency Yield Actual Outputs Planned Outputs Actual Inputs Planned Inputs

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

  24. Measuring Benefitsfrom Discretionary Costs • 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 Is difficult because

  25. Program Budgeting Program budgetingis 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.

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