Pricing and Costing Lesson 2

COST CONTROL

is the identification of business expenses and taking steps to reduce them.

• Look for a lower-cost vendor

• Outsource certain functions

• Take corrective action

If actual costs exceed the budget, management may:

Planning

Employee’s role

Monitoring

Assessment

Taking Decisions

FIVE STEPS OF COST CONTROL

 PLANNING

___establishes what the organization expects to achieve.

• Be informed about the plans

• Understand their responsibilities

• Know how their roles contribute to cost control

Employees role in cost control

• Record actual costs

• Collect relevant information

• Evaluate actual performance

Management should monitor

Actual Results

Projected Results

what results should be compared in assessment

Precise Responsibility Centers

Different Cost Standards

Relevance of Controllable Costs

Prescribed Authority

Cost Reduction

Cost Reporting

CHARACTERISTICS OF GOOD COST CONTROL

Precise Responsibility Centers

Responsibility for costs should be clearly assigned.

Different Cost Standards

Standards should be established for evaluating performance.

 Relevance of Controllable Costs

The system should focus on costs that responsible managers can influence.

Prescribed Authority

Employees/managers should have clearly defined authority.

Cost Reduction

The system should help identify ways to reduce unnecessary costs.

Cost Reporting

Cost information should be properly reported for evaluation and action.

COST STANDARDS

provide a basis for evaluating performance.

EXTERNAL STANDARDS

INTERNAL STANDARDS

2 TYPES OF COST STANDARDS

EXTERNAL STANDARDS

Performance is compared with outside organizations or companies in the same industry.

INTERNAL STANDARDS

Performance is compared within the organization.

BUDGETARY CONTROL

 involves the creation and use of budgets to plan, execute, and regulate operations.

• Plan operations

• Execute operations

• Regulate operations

• Monitor expenses

• Compare estimated and actual costs

• Identify differences

• Take corrective action

PURPOSES OF BUDGETARY CONTROL

Planning

Distribution

Information Sharing

Day-to-Day Record Keeping

Control

STEPS IN BUDGETARY CONTROL

STANDARD COSTING

uses predetermined costs or standards under certain working conditions.

• Establish expected levels of performance

• Measure actual performance

• Compare actual performance with standards

• Identify variances

• Determine the causes of variances

• Take corrective action

PURPOSE OF STANDARD COSTING

Performance Measurement System

Comparison Tool

REQUIREMENTS OF STANDARD COSTING

Sales − Fixed Costs − Variable Costs = Target Net Income

Target Net Income Formula

Provides a Yardstick for Performance

Allows Comparison

Decreases Debt

Reduces Replacement and Repair Costs

Frees Money for Other Avenues

Provides Competitive Advantage

ADVANTAGES OF COST CONTROL