Lecture 2 - Elements of cost management Flashcards
(!!!!!!) Describe a cost in general
General:
- Monetary resource directly or indirectly utilized to produce item for sale
- Representation of sacrifices made
- Info has decision relevance
- Occur when we response to it
- Manageable: Due to reversibility
- Adjust- & changeable: Local practice, firm & obj.
- Depend on reaction & decision
- Multifaceted concept
- Important part of organizational functioning
- Link to profit, revenue, investment & funding
(!!) Describe the four levers for cost management
General:
- Often interrelated
- Regulates costs
- Ref. Gutenbergs time, intensity & quality dim.
- (Also relate to eg. marketing department)
__________
Levers:
- Volume
- Efficiency
- Purchase price for input factors
- Capacity utilisation
- (Product functionality: Ref. Japan)
__________
Examples:
- Low price –> Low quality –> Low efficiency
- Burger example: Increased price on raw materials –> Burgers sold cheaper –> Increase volume
(!!!!!!!!!) Describe the difference between the accounting and economic perspective on costs
Accounting perspective:
Citation:
- Sacrifice ressource for purpose
- “A sacrifice or giving up of resources for a particular purpose”
- Horngren
General:
- Factual
- Look backward: Inspire + learn
- High validity since traceable
- High reliability: Calculations
- Require stability
- Quantitative terms: Price
- Realized costs
- Info from accounting system
- Easy to record & systematize
- External control
- Quarterly or yearly
- Data for financial records
- Public due to funding opportunities
- Sunk costs
Purposes of CA standards:
- Price setting
- Prepare financial statements
- Cost management
- Budgeting & control
- Set plans & make decision
___________
___________
Economic perspective:
Citation:
- Cost = Consequence of decision
-“A cost is a cash transaction that is effectuated as a consequence of a specific decision”
- Paul Riebel
General:
- Look forward: Past irrelevant
- Relevant cost: Variability / reversibility
- Opportunity costs
- More than 1 year
- Hidden from competitors
- No sunk costs
- Numbers not at face value
- Less reliability: Estimates
- Possibilities decide future
- Focus on DM
- Internal control
- Weekly or monthly
- Important time dimension
- Records as basis for DM
- Communication is key
- “Different costs for different purposes”
- Expected costs
- Constant stress test
- Proactive vs. pragmatic truth
___________
Costs:
Relevant cost:
- CF change as direct cons. of certain decision
- Reversibility & variability
Differential costs:
- Vary with decision
Sunk costs:
- Irrecoverable
- No decision relevance
- Reversibility
- Incurred expenditures which cannot be escaped
Opportunity costs:
- Forgone benefit by resource commitment
- Used to discover activity profitability
- Additional costs
- Imputed costs
___________
Topics:
- Capital budgeting
- Product mix
- Product profitability
- Transfer pricing
- Cost control
- Divisional control
- Evaluation
Which considerations will an accountant versus a controller have on an investments?
Accountant:
- Calculate ROI
Controller:
- Cost structure: Eg. VC –> FC
- Risk types
- Life-cycle
(!!!!!) When does a cost, an expense and a payment occur?
General:
- Schmalenbach
Cost:
- At point of decision making
- Managerial accounting
- Resource quantity into prod. proces, not money
- Eg. Someone decide to spend
Expense:
- At payment commitment
- Financial accounting
- Eg. We call supplier
Payment:
- At physical payment
- Eg. Invoice approved = Payment
- Cash flow accounting
- Neutral expenditures: Eg. WAT never an expense. Investment an expense sooner or later
Which costs can be a response to a problem?
Depreciation:
- Cost divided over period
Capacity cost:
- All costs right away
Variable cost:
- Outsourcing
Strategic cost management:
- Change technology
(?) What is important to manage costs?
Understand context
Understand cost concept:
- Relevant: Reversibility / Variability
- VC / FC: Activity level
- Direct / indirect: Cost object
- Cost drivers: Activity, action, department
Construct financial model corresponding to peoples perception of reality
Communicate results enabling people to act
What is important to remember on numbers?
- What does number represent?
- What is their limitation?
- Cannot be trusted at face value
- More careful if low certainty
- Humans trust numbers
(!) Describe the interplay between accounting & economic perspectives
(!) Describe the difference between the pro-active & pragmatic truth
