Download - Chapter 15 Financial Management Cost Accounting Traditions and Innovations Barfield, Raiborn, Kinney
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Chapter 15
Financial Management
Cost AccountingTraditions and Innovations
Barfield, Raiborn, Kinney
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Learning Objectives (1 of 2)
• Explain why cost consciousness is important to all members of the organization
• Define committed costs and discretionary costs
• Describe how the benefits of discretionary cost expenditures are measured
• Identify when standards are applicable to discretionary costs
• Explain how a budget helps control discretionary costs
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Learning Objectives (2 of 2)
• Describe how an activity-based budget differs from traditional budgets
• List the objectives of cash management
• (Appendix) Explain how program budgeting is used in not-for-profit entities
• (Appendix) Describe how zero-base budgeting is useful in cost control
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Cost Control Systems
Provide information for planning and for determining the efficiency of activities
while they are being planned and after they are performed
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Planning and Control ModelPLAN
EXECUTE
EVALUATE
RESPOND
PLANNING
CONTROL
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Budgeting,Standard setting
Monitoring,Correcting
Providingfeedback
Costunderstanding
Cost containment,Cost avoidance
Costreduction
Before During After
ACTIVITY
COST CONSCIOUSNESS ATTITUDE
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Why Costs Change• Cost Behavior
– Reaction of variable and mixed costs to changes in activity level
• Inflation/Deflation• Supply/Supplier Cost Adjustments
– Supply/demand adjustments
• Taxes• Regulatory Requirements• Quantity Purchased
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Cost ContainmentCannot contain• inflation• tax• regulatory changes• supply and demand
adjustments
Use cost containment for • reduced competition• seasonality• quantities purchased
Interorganizational arrangements
Long-term or single-source contracts
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Cost Avoidance and Reduction
• Avoidance - finding acceptable alternatives
• Reduction - lowering current costs– Benchmarks – Outsourcing– Consultants– Redesign operations
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Implement Cost Control System
Investigate/understand types of costs
Communicate need for cost containment
Motivate employees (education/incentives)
Review results and consider improvements
View as long-run process
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Fixed Costs
• Committed Costs plant assets and personnel structure– depreciation
– lease rentals
– property taxes
Cannot be reduced easily
• Discretionary Costs important but optional activities– employee travel– repairs and maintenance– advertising– research and development– employee training and
development
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Controlling Committed Costs
• Compare expected benefits to expected costs
• Analyze operating leverage
• Perform postinvestment audit; compare actual to expected results
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Discretionary Costs
• Vary in type and magnitude
• Vary in quality of performance
• Not easy to measure benefits in terms of money
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Budgeting Discretionary Costs
• Perceived significance to the achievement of objectives and goals
• Expected level of operations
• Managerial negotiations
• Spend all of the appropriation, or
• Spend less than the appropriation
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Measuring Benefits from Discretionary Costs
• Use surrogate measures– Reduction in unplanned downtime– Number of coupons clipped from ads– Reduction in number of customer complaints
• Compare discretionary costs to benefits to measure efficiency and effectiveness
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Actual Result
Compared to
DesiredResult
Efficiency =Actual Output
Actual InputPlanned Output
Planned Input
Efficiency =Actual Input
Actual OutputPlanned Input
Planned Output
Effectiveness = Actual OutputPlanned Output
PreestablishedStandard
Discretionary Cost Measures
OR
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Controlling Discretionary Costs
• To determine variances, compare actual to standards or budgeted amounts
• Use engineered costs – Costs that bear observable and known
relationship to a quantifiable activity base– Compute fixed or variable variances
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Activity-Based Budgeting
Apply activity drivers to estimate the levels and costs of activities necessary to provide
the budgeted quantity and quality of production
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Activity-Based Budgeting Steps
SelectFunction
IdentifyActivities
IdentifyActivityDrivers
EstimateDriver
Volume
IdentifyResources
EstimateCosts
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Cash Management Issues
• Cash level– sufficient to cover all needs– low enough to allow for alternative uses of cash
• What variables influence the optimal level of cash?
• What are the sources of cash?
• What variables influence the cost of carrying cash?
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Cash Management Issues
What variables influence the optimal level of cash?
• Uncertainty of timing of cash inflows and outflows
• Variability in cash requirements throughout the year
• Ability to arrange short-term financing
• Bond and loan covenants
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Cash Management Issues
What are the sources of cash?
• Sale of equity or debt instruments
• Sale of unneeded or unproductive assets
• Normal operations– Reduce inventory – Increase A/R turnover– Decelerate payments
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Cash Collection Cycle
Cash
Materials Inventory
Work in Process Inventory
Finished Goods Inventory
Accounts Receivable
Balance SheetCurrent Assets
Outflow
Inflow
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Cash Management Issues
What variables influence the cost of carrying cash?
• Cost of borrowing and cost of issuing equity capital
• Opportunity costs of holding cash
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Program Budgeting
• Use in government, not-for-profits, and service activities in for-profits
• Relates resource inputs to service outputs
• Define objectives in terms of output results, not quantity of input activities
• Analyze alternative activities that may achieve the objectives
• Use surrogate measures of output
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?• When should results be measured?
• What results should be used as output measures? – Are all results equally important?
• What program actually caused the result?
• Did the program actually affect the target population?
Program Budgeting Questions
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Zero-Base Budgeting
• Considers the priorities and alternatives for current and proposed activities in relation to organizational objectives
• Reevaluates activities– continue– eliminate– adjust funding
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Questions
• What are committed costs and discretionary costs?
• How does a budget help to control discretionary costs?
• How does an activity-based budget differ from traditional budgets?