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Cost Accounting
Foundations and Evolutions
Kinney and Raiborn
Seventh Edition
Chapter 16
Managing Costs and Uncertainty
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Learning Objectives (1 of 3)
• Explain the functions of an effective cost
control system
• Describe the generic approaches to cost
control
• List factors that cause costs to change from
period to period or to deviate from
expectations
Learning Objectives (2 of 3)
• List the two primary types of fixed costs
and describe the characteristics of each type
• Describe typical approaches to controlling
discretionary fixed costs
• List the objectives of cash management
Learning Objectives (3 of 3)
• Explain how technology is reducing the
costs of supply chain transactions
• Contrast the uncertainty of dealing with
future events and past events
• List the four generic approaches to
managing uncertainty
Cost Control Systems
Provide information for planning and for
determining the efficiency of activities
while they are being planned and after they
are performed
Planning and Control Model
• Plan
– Where do we want to go?
– How do we compare to peers?
– What is the impact of these
decisions?
Planning and Control Model
• Execute
– What do we have to do?
– Can we achieve the targets?
– How do we allocate resources?
Planning and Control Model
• Evaluate
– Where are we?
– How are we doing compared to
plan?
– What actually happened?
Planning and Control Model
• Respond
– What decisions do we make?
– What are the alternatives?
– Why did it happen?
Cost Consciousness
• A companywide employee attitude
toward the topics of
– understanding cost changes
– cost containment
– cost avoidance
– cost reduction
Why Costs Change
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Cost behavior
Inflation/deflation
Supply/supplier cost adjustments
Quantity purchased
Higher taxes
Additional regulations
Cost Containment
An approach to minimize cost increases
Use cost containment for
Cannot contain
• reduced supplier
• inflation
competition
• tax
• seasonality
• regulatory changes • quantities purchased
• supply and demand Develop interorganizational
adjustments
arrangements
Arrange long-term or
single-source contracts
Cost Avoidance and Reduction
• Avoidance - finding acceptable
alternatives; substituting lower cost inputs
• Reduction - lowering current costs
– Benchmarks
– Outsourcing
– Consultants
– Operation redesign
Cannot be
easily reduced
Can be reduced
Fixed Costs
• Committed Costs • Discretionary Costs
important but optional
plant assets and
activities
personnel structure
– employee travel
– depreciation
– repairs and maintenance
– lease rentals
– advertising
– property taxes
– research and
development
– Staff salaries
– employee training and
development
Cash Management Issues
• Cash level
– sufficient to cover all needs
– low enough to allow for alternative
uses of cash
Banking Relationships
• Accurate, conservative accounting
and cash flow information affects
– Loan eligibility
– Loan limits
– Credit terms
Banking Relationships
• Banks assess
– Credit history
– Ability to generate cash flow
– Quality of collateral
– Character of senior officers
– Operational plans and strategies
Supply Chain Management
A set of processes that convert inputs
into products and services for the
firm’s customers
Uncertainty
• Uncertainty - doubt or lack of precision in
specifying future outcomes
• Causes of cost management uncertainty
– Lack of identification or understanding of
cost drivers
• Random – some portion of the cost is
not predictable based on the cost driver
– Unforeseen events
Dealing with Uncertainty
• Explicitly factor uncertainty into
estimates of future costs
• Structure costs to automatically adjust
to uncertain outcomes
• Use options and forward contracts to
mitigate uncertainty
• Purchase insurance to cover
unexpected occurrences
Questions
• What are committed costs and discretionary
costs?
• What are three approaches to cost control?
• How can a firm reduce uncertainties
associated with business activities?
Potential Ethical Issues
• Refusing to grant sales price decreases
when costs decline
• Artificially contracting with suppliers to
force price increases to customers
• Acquiring excessive quantities of inputs
to generate favorable price variances
• Acquiring counterfeit goods to obtain
lower prices
Potential Ethical Issues
• Outsourcing production or procurement
to companies with unacceptable labor or
environmental practices
• Slowing payments to creditors to
generate more investment returns
• Manipulating or falsifying financial
statements to obtain credit or lower
interest rates on borrowed funds