Managing Costs and Uncertainty

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 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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 Plan
◦ Where do we want to go?
◦ How do we compare to peers?
◦ What is the impact of these
decisions?

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 Planning and Control Model
• Execute
– What do we have to do?
– Can we achieve the targets?
– How do we allocate resources?

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 Planning and Control Model
• Evaluate
– Where are we?
– How are we doing compared to
plan?
– What actually happened?

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 Planning and Control Model
• Respond
– What decisions do we make?
– What are the alternatives?
– Why did it happen?

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 Cost Consciousness
• A companywide employee attitude
toward the topics of
– understanding cost changes
– cost containment
– cost avoidance
– cost reduction

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 Cost behavior
 Inflation/deflation
 Supply/supplier cost
adjustments
 Quantity purchased
 Higher taxes
 Additional regulations

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 Cost Containment
An approach to minimize cost increases
Cannot contain Use cost containment
 inflation
for
 reduced supplier
 tax
competition
 regulatory  seasonality
changes  quantities purchased
 supply and Develop
demand interorganizational
adjustments arrangements
Arrange long-term or
single-source
contracts 10
 Avoidance - finding acceptable
alternatives; substituting lower
cost inputs
 Reduction - lowering current costs
◦ Benchmarks
◦ Outsourcing
◦ Consultants
◦ Operation redesign

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 Can be reduced
Cannot be
easily reduced

 Discretionary Costs
• Committed Costs important but
plant assets and optional activities
personnel structure ◦ employee travel
– depreciation ◦ repairs and
maintenance
– lease rentals ◦ advertising
– property taxes ◦ research and
development
– Staff salaries ◦ employee training
and development
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 Cash level
◦ sufficient to cover all needs
◦ low enough to allow for
alternative uses of cash

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 Accurate, conservative
accounting and cash flow
information affects
◦ Loan eligibility
◦ Loan limits
◦ Credit terms

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 Banking Relationships
• Banks assess
– Credit history
– Ability to generate cash flow
– Quality of collateral
– Character of senior officers
– Operational plans and strategies

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 A set of processes that convert inputs into
products and services for the firm’s customers

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 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
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 Explicitlyfactor 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
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 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

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 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

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