This book covers many topics on the use of cost data for managers. The following sections provide examples of these topics.
We refer to the costs and revenues that appear in Column 3 as differential costs and differential revenues These are the costs and revenues, respectively, that change in response to a particular course of action. The costs in Column 3 of Exhibit 1.3 are differential costs because they differ if Carmen decides to sell cookies through the wholesale channel. The analysis shows a $405 increase in operating profits if Carmen sells to the other stores. Based on this analysis, Carmen decides to expand her distribution channels. Note that only differential costs and revenues affect the decision. For example, rent does not change, so it is irrelevant to the decision.
In Chapters 2 through 10, we discuss methods to estimate and analyze costs, as well as how accounting systems record and report cost information.
Exhibit 1.4 also includes the company income statement, along with the statements for the two centers. Each manager is responsible for the revenues and costs of his or her center. The Total column is for the entire company. Note that the costs at the bottom of the income statement are not assigned to the centers; they are the costs of running the company. These costs are not the particular responsibility of either Ray or Cathy. Consider the other (administrative) costs. Carmen, not Ray or Cathy, is responsible for designing the administrative systems (e.g., accounting and payroll), so she manages this cost as part of her responsibility to run the entire organization. Ray and Cathy, on the other hand, focus on managing food and labor costs (other than their own salaries) and responsibility center revenues. Budgeting You have probably had to budgetfor college, a vacation, or living expenses. Even the wealthiest people should budget to get the best use of their resources. (For some, budgeting could be one reason for their wealth.) Budgeting is very important to the financial success of individuals and organizations. Each responsibility center in an organization typically has a budget that is its financial plan for the revenues and resources needed to carry out its tasks and meet its financial goals. Budgeting helps managers decide whether their goals can be achieved and, if not, what modifications are necessary. Managers are responsible for achieving the targets set in the budget. The resources that a manager actually uses are compared with the amount budgeted to assess the responsibility centers and the managers performance. For example, managers in an automobile dealership compare the daily sales to a budget every day. (Sometimes that budget is the sales achieved
on a comparable day in the previous year.) Every day, managers of United Airlines compare the percentage of their airplanes seats filled (theload factor) to a budget. Every day, managers of hotels and hospitals compare their occupancy rates to their budgets. By comparing actual results with the budgets, managers can do things to change their activities or revise their goals and plans. As part of the planning and control process, managers prepare budgets containing expectations about revenues and costs for the coming period. At the end of the period, they compare actual results with the budget. This allows them to see whether changes can be made to improve future operations. See Exhibit 1.5 for the type of statement used to compare actual results with the planning budget for Carmens Cookies. Exhibit 1.5 Budget versus Actual Data
For instance, Ray observes that the retail responsibility center sold 32,000 cookies as budgeted but that actual costs were higher than budgeted. Costs that appear to need followup are those for eggs, chocolate, and nuts. Should Ray inquire whether there was waste in using eggs? Did the cost of nuts per pound rise unexpectedly? Was the company buying chocolate from the best source? Was there theft of the chocolate? As we will see, even costs that are lower than expected (like flour) should be evaluated. For example, is lower quality flour being purchased? These are just a few questions that the information in Exhibit 1.5 would prompt. We discuss developing budgets and measuring the performance of managers and responsibility centers in Chapters 12 through 18.