Selling an Idea or a Product

1
AUTONOMOUS GROUP LEARNING
Boland1
Dr. Bob Boland
2
Mini AGL 2 - Cost Control

• PART I - EARLY MORNING
• WITH A PARTNER
• Geneva, September 2005
• Note The program works
  best with a 17 screen!

3
Program for Part I - Early Morning
08.30 - 08.50 Sect. 1 - Introduction
page 4 08.50 - 09.00
Sect. 2 - Objectives
17 09.00 - 09.20 Sect. 3 - Key
Learning Points 20 09.20 -
09.40 Sect. 4 - Study - Basic Cost Control
36 09.40 - 10.00 Sect. 5 - Study
- Direct Indirect Costs 59 10.00 -
10.30 Sect. 6 - Review of Part I
97 10.30 - 11.00 at
last ... a coffee break and then Part II
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4
1. Introduction (Total time -
20 Minutes)
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5
1.1 Printing Glossary

• A print-out of the Learning Maintenance Workpack
  
• puts the whole program into text form, from the
  Word
• file LM.doc (Arial 12 point) in Part II of the
  program.
• But first click ONCE on GLOSSARY below and
  use
• the ARROW keys and the RETURN key to get
  very
• simple definitions of some key words . ready
  go ...
• and explore for two minutes please and
  then use
• ESCAPE to exit and come back here ...

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6
1.2 AGL

• AGL (Autonomous Group Learning) programs are
  group-based 2/3 day management training seminars
  designed by ex-professors from
  INSEAD/IMD/Cranfield/GSB and used in over 20
  countries around the world in several languages
  for over 50,000 managers, as a six part series
• AGL 1 Accounting Reportss
• AGL 2 Cost Control
• AGL 3 Planning and Budgetary Control
• AGL 4 Capital Investment Analysis
• AGL 10 EVA and Financial Management of
  Working Capital
• AGL 20 Communication for Effective
  Management
• This Mini-AGL in just four hours, is based on AGL
  2 ... hopefully it should be fun!

7
1.3 Good morning ....
This diskette of the short management training
was specially prepared for the MBA and Exectuve
Programs of a major international business
school. A customized version for a client
company with local cases usually takes a week of
research.
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8
1.4 Learning Environment

• To use the program THREE "learning aids" are
  helpful for the morning
• 1. A partner to learn with.
• 2. A pre-learning audio tape (available on
  demand).
• 3. A text book to provide learning maintenance.
• ... have we got everything? ... audio ...
  partner? ... text? ... off we go together .

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9
1.5 Help Available
Any difficulties? Please call the "hot line" for
help Dr. Bob Boland Tele
33-450-40-89-82 Email robertboland_at_wanadoo.f
r ... 24 hour service ... and in return ...
FEEDBACK TODAY please
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10
1.6 Pre-test - just for fun
WELCOME ... FIRST A LITTLE PRETEST TO SEE HOW
MUCH YOU KNOW ABOUT THE AREA BEFORE WE BEGIN THE
PROGRAM ... CHOOSE ABOUT 20 QUESTIONS ... AT
RANDOM ... Click ONCE on QUIZ below press
RETURN to get the file press RETURN again to
confirm it then type 20 ... press RETURN then
type R and press RETURN use the ARROWS to
choose each answer a, b, c or d and press
RETURN on we go for only eight minutes please
then press RETURN to come back here ...
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11
1.7 A New Way of Learning
Now ... do you want to get the most out of this
program then please study very carefully the
next three slides ... quite difficult ... but
very rewarding ... Take just five minutes to
prepare your mind to learn 1. Efficiently -
doing things right, an 2. Effectively - doing
the right things by reflecting very seriously on
how you can adapt yourself ... just for a
morning ... to a very new way of learning ... you
may surprise yourself ...
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12
1.8 A New Way of Learning (continued)
Recognize - that most of what we do in life, we
do without special awareness ... almost ...
non-consciously rather than consciously ...
responding to our environment which communicates
with us all the time ... e.g. driving the
car. Recognize - that our non-conscious mind is
very powerful ... it has an almost unlimited
capacity to learn ... and much much faster than
our conscious mind ... if ... we can make the
emotional investment to allow the learning
process to operate freely and not be blocked ...
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13
1.8 A New Way of Learning
(continued)
Convince - our non-conscious mind, that we really
must and can understand, use and remember,
everything in this short learning process... and
for this we must get ... emotionally invested
Develop - the confidence to relax and let our
powerful non-conscious mind guide us through a
very rewarding and yet highly emotional ...
learning experience ...... we can do it .. just
for the morning together ... OK?
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14
1.9 CLE
Now print out and do a five minute CLE (Creative
Learning Exericse) 1. Relax, close the eyes
and take three deep breaths. 2. Pretend that you
cannot open the eyes for five minutes. 3. Relax
every part of the body from head to toes. 4.
Count slowly down from 10 to 1 saying deeper
relaxed each time. 5. Feel deeply
relaxed and comfortable 6. Tell yourself that
you will highly motivated to learn and
easily remember everything in the course. 7.
Repeat this slowly to yourself several times
positively 8. Relax and feel well and happy
and content .. 9. Tell yourself that as you
count 1-5 you will awake and feel
active, alert, motivated and happy to learn. 10.
Count up 1-5 very loudly and come back to the
course ...
15
Question
Now ... choose the "most correct" answer ... If
we buy a whole pig for 100 ECU, the cost of one
of the pig's ears a. may be computed
scientifically b. is related to the
selling price of the pig c. depends upon
why we buy the pig d. is impossible to
compute Now write down your answer and then
click for ours c
16
1.10 Remember Please
1. This is a four hour learning experience
using new learning theories to achieve
both conscious and non-conscious
learning. 2. The LEARNING is achieved by
studying and speaking ... so try to
speak ... all the time ... to
reinforce your learning as if you were ...
continually ... explaining ... to someone else
... 3. The PARTNER continually encourages you
to ... complete the whole program on
time ...
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17
2. Objectives (Total time - 10
Minutes)
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18
2.1 Objectives - Cost Control

• a. To use the language and concepts of cost
  control
• and to recognize the potential of out-
  sourcing for
• continuous cost reduction.
• b. To compute the cost of products, services and
  
• organizational units.
• c. To interpret cost data and cost accounting
  reports.
• d. To identify CCI's (Cost Control Initiatives)
  in the
• current operations of the organization.
• e. To motivate further study in the future.

19
Question
8. For effective control of costs, we need
a. accurate costs b. scientific
standards c. good accountants d.
something else now write your answer and then
click for ours ... d
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20
3. Key Learning Points (Total time
- 20 Minutes)
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21
3.1 Instructions
Relax ... but study carefully. Read each note
with your partner ... with emotion ... use a
variety of tones to try to convince your the
partner (do it alternately) ... show how each
point is ... valid ... practical ... related by
example to you your own experiences ... Review
the glossary as necessary.
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22
Question
If we buy goods for ECU 4 and sell half of them
immediately for ECU 6, retaining the remainder
for sale later, our profit to date is a.
ECU 2 b. ECU 4 c. ECU 8 d.
impossible to compute now write your answer
and then click for ours ... b
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3.2 Cost Reduction and Cost Control Initiatives
Cost reduction is a key objective of cost
accounting and control, with new CCI's (Cost
Control Initiatives) becoming continually
evident. Every cost can be reduced over time by
economy, technological advance, cutting
operations and planning. Every cost can be
reduced over time by technology, creativity,
motivation and the INTERNET.
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24
3.3 Opportunities
Compare operations five years ago with today,
to indicate the past potential for cost
savings. Then treat cost saving as a normal part
of management. Costs grow naturally unless
controlled. Managers should not be "happy" but
motivated towards cost reduction.
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25
3.4 Internet as a Motivator
The successful e-manager welcomes the impact of
the INTERNET on business for cost control in
terms of speed (of data and decision-making) fl
exibility (for continuous learning),
collaboration (new company alliances) discipline
(with new standard protocols communication (
internal and external) data skills (for the mass
of data available) customer focus (from
recruitment to retention) knowledge management
(ability to share), and leadership (huge
investment in organisation to create an
e-business).
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26
3.4 Internet as a Motivator
The major cost of e-business is not hardware
and software, but rather CONTINUOUS MANGER AND
STAFF TRAINING at every level, throughout the
organisation.
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27
3.5 Team Work Out-sourcing as a Motivator
Set up cost reduction teams with INERNET and IT
skills, for creative problem-solving and
out-sourcing. Use the INTERNET and such tools
as O M, operations research, ABC, JIT,
standard cost accounting, strategic cost
management etc.
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28
3.6 ABC as a Motivator
Activity based costing (ABC) recognizes that
with increasing automation, direct labour may be
only 10 of manufacturing cost. Thus other
"cost drivers" should be used to
allocate overhead, to get a more useful product
cost, which motivates managers ...
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29
Question
7. The system of cost accounting chosen for a
particular business should a. be
the same as that for other firms in the
same
industry b. relate to the product c.
relate to the organization of the business
d. relate to the product and organization of
the business now write your answer
and then click for ours ... d
30
3.6 ABC as a Motivator
(continued)
ABC motivates managers to reduce
"non-value-added" activities in design,
purchasing, receiving, storage, handling,
inspection, processing etc. using INTERNET for
"bench-marking" and re-engineering
techniques. ABC is justified when management is
not motivated by other cost control systems and
there is significant variation in product
volume, mix, size, complexity, materials, set-up,
parts etc. such that direct labor or machine
hours are not good "cost drivers". Now check
"cost drivers" I, II and III in the glossary.
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3.7 JIT as a Motivator
Just In Time (JIT) inventory control by major
companies reduces inventory holding and handling
charges, through managed supplier relationships,
INTERNET sourcing and auctions with proven
suppliers, sharing of production and scheduling
data, inventory reduction to "hours" instead of
months etc.
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32
3.8 Standard Costing as a Motivator
Standard cost accounting (SCA) provides
engineering standards of product cost and allows
variances with actual cost to be associated with
price, efficiency and volume analysis. Standards
used to be set by engineers ... now the market
and INTERNET research tells the engineers what
the standard must be!! "Backflush accounting"
uses standards to simplify accounting forwork in
process and finished goods, and relies heavily on
physical controls of efficiency e.g. number of
defective parts, waste quantities etc.
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3.9 Waste Reduction Audit as a Motivator
Waste reduction audit (WRA) investigates
material inputs and outputs for each process, to
identify waste and achieve cost savings by waste
reduction, re-use and recycling. WRA is
profitable - since waste inefficiency! Waste
is a resource ... in the wrong place! INTERNET
research on alternative uses of waste.
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34
3.10 Strategic Cost Control as a Motivator
Strategic cost control (SCC) starts with the
cost structure of the enterprise in terms of
fixed and variable costs to reinforce only those
activities that "add value" to the operations of
the enterprise. EVA!!!
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35
3.10 Strategic Cost Control as a Motivator
It creates environmental motivation within
the organization which motivates managers to seek
higher levels of cost efficiency (doing things
right) and effectiveness (doing the right
things). INTERNET research of technology
alternatives in terms of creating different
company units for high volume and low volume
products.
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36
3.11 Internet Marketing Operations as a
Motivator

Creation of "dot.com" subsidiaries which compete
and collaborate with the normal organisation to
achieve cost savings in advertising, customer
order processing, production to order,
purchasing staff, inventory levels, customer
disputes, billing, rapid cash flow, lower bad
debts, easier expense approval, budgetary
control, accounting systems etc.
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37
3.12 Overall
THE KEY TO COST REDUCTION IN BOTH MATERIALS AMND
SERVICES IS MANAGEMENT MOTIVATION ... EVERY COST
CAN BE REDUCED ... WITH TECHNOLOGY ... WITH TIME
... AND ... WITH ... CREATIVE MANAGEMENT ... IN
2000 THE INTERNET AND E-BUSINESS ARE THE KEYS
TO COST CONTROL.
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38
3.12 Overall
IN 2000 E-BUSINESS AND THE INTERNET ARE
THE KEYS TO COST CONTROL. SEE THE ECONOMIST,
NOVEMBER 11-17,2000 FOR A DETAILED REPORT ON
COST SAVINGS ACHIEVED BY MAJOR COMPANIES USING
INTERNET RESOURCES AND INITIATIVES HOW TO
BRING E-BUSINESS INTO YOUR BUSINESS.
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39
Question
Cost reduction can usually be achieved by all of
the following except a.
elimination b. direct costing c.
combination d. simplification now
write your answer and then click for ours ... b
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40
Question
10. Continuous cost reduction programs are
necessary because a. we need more
profit b. managers are careless c.
costs grow naturally over time d. taxes
are increasing now write your answer and then
click for ours ... c
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41
... just one more thing ... if
you feel like it .... start the
program again ... you can do so
fairly quickly ... thus you can absorb ...
indirectly ... ... and then ...
on we go to ... section 4 ...
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42
4. Study - Basic Cost Control (Total
time - 20 Minutes)
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43

4.1 Instructions


a. Study and read the materials with the
same ... convincing emotion ... try to
understand ... everything!
b Use the glossary as you need to ...
c. Note special points as needed ...
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44
4.2 Financial and cost Accounting
Financial accounting uses "accounting concepts"
to produce balance sheets and income statements
for the whole business. Cost accounting is
accounting specially for Management and has
several objectives. It seeks to relate to
specific segments of the business, estimate the
cost of products or operations or departments,
and to always relate actual cost against a
standard of performance. NOTE Cost is exactly
what we define it to be,
nothing more. There is no true cost of
anything.
45
Question
2. Cost Accounting is a technique for
calculating the a. overall profit or
loss of business b. price at which a
business could be bought c. selling price
of a product d. cost of a unit of
production d
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46
4.3 Specific Cost accounting Objectives
a. Estimate product cost as an aid to
pricing. b. Compute the cost of work in
process for profit computation.
c. Control costs by associating them with
centers of responsibility. d.
Compare actual against planned cost and
motivate responsible managers
to take corrective action.
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47
4.4 Cost and Tentative Selling Price
Product cost and tentative selling price simply
computed
Amount Comment Direct
labor 6
definite Direct material
18 definite Prime
cost 24
Manufacturing overhead (say 50 of prime
cost) 12 estimate
Manufacturing cost 36
estimate Selling and administrative
12 estimate Total cost
48
estimate Profit (say 50 of cost)
24 estimate Tentative
selling price 72 estimate
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48
4.5 Contribution
Selling price depends upon the market - not
merely the cost. Excess of selling price
over variable cost is the CONTRIBUTION not the
profit.
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49
Question
4. Strategic cost control (SCC) starts with
the a. Activities that do not add-value
b. Cost structure of the enterprise c.
Relevant costs d. Cutting of fixed
overheads. b
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50
4.6. Types of Costs - Nature (continued)
Cost may be analyzed into direct and
indirect costs a. Direct
costs Direct labor -
conveniently associated with a
unit of production. Direct
material - conveniently associated with
a unit of production.
Direct expenses - conveniently associated with
a unit of production.
51
4.6. Types of Costs - Nature (continued)
b. Indirect costs (overheads)
Manufacturing overhead - labor, materials and
services NOT conveniently associated
with a unit of production.
Selling, administrative and general
expenses Note Overhead may be allocated to
compute full cost of each product.
Separate overhead rates may be used
for each type of overhead. However, all costs are
estimates based upon assumptions -
there is no "true cost" of anything!
52
4.7 Types of Costs - Activity
Cost may be analyzed into a. Direct or
indirect cost. b. Variable or fixed
cost - varying in total (not per
unit) with the volume of production.
c. Relevant or non-relevant cost - to a
particular management decision to be
taken.
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53
4.7 Types of Costs - Activity (continued)
d. Book or opportunity cost (value) - book cost
as opposed to the real value of an
opportunity missed or foregone. e.
Controllable or non-controllable cost - at the
particular level of management. f.
Engineered, managed or committed cost -
engineered (increasing automatically with
the volume of production) or managed
(discretion of management) of committed
(management can do nothing about
them). g. Manufacturing, selling and
administrative cost.
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54
4.8 Types of Costs - By Results
Cost may also be analyzed into a. Product
cost - including labor, material and
overhead (either direct or full cost) b.
Departmental cost - running an operation. c.
Standard cost - engineering standards of labor,
materials and overhead for efficient
production. d. Actual cost - labor,
material and overhead actually incurred
(compared against a standard or an
estimate).
55
Question
11. Strategic cost management seeks
increased a. EVA b. cost of
capital c. PFD d. cash flow a
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56
4.8 Types of Costs - By Results (continued)
e. Past cost - operations completed. f.
Future cost - estimates for future periods.
g. Factory (manufacturing) cost - labor, material
and factory overhead only (not selling
and administrative). h. Selling and
administrative expense. NOTE The accountant
cannot give you the cost,
unless he knows which cost you need. Most
costing systems produce actual cost
which is an estimate of full
cost, based upon assumptions.
57
4.9 Types of Costs - By System
Cost systems involve cost analysis
into job, batch, contract, output, process,
standard, direct cost etc. systems.
When overheads are very high (over 300 of direct
labor), then ABC (Activity based Costing)
systems are often used.
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58
4.10 Relevant Costs Analysis
There is no true cost, only a cost relevant for a
particular purpose. For each purpose determine
the relevant cost. Variable costs are usually
relevant, whereas fixed cost (which do not change
with the decision) are usually not relevant. In
the long run all costs are variable!!! Unit
costs are deceptive because they are based on
assumptions of the volume which may not be
relevant so try to work on total cost. Use
future not past costs for future decisions. Use
opportunity costs rather than book costs.
Remember all costs are based upon assumptions.
59
4.11 Approach to Cost Control Problems
For practical management decision-making we need
a systematic approach 1. Define carefully the
problem and key relevant factors. 2. Think
creatively about alternatives there are
ALWAYS seven alternatives for every cost control
problem, 3. Compute quantitative data for
each relevant alternative. 4. Evaluate
each alternative in quantitative and non-
quantitative terms (Q plus NQ D (decision). 5.
Decide and justify your decision, and do a PFD
(provision for disaster) decide what to
do if assumptions invalid.
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4.12 Out-sourcing - Make or Buy Decisions
a. A key area for cost control is effective
purchasing (out- sourcing). In 2000
almost any RD, marketing, accounting,
production, training, materials and services
etc. can be out-sourced. Management must
decide what to make (do in-house) and
what to buy. b. Relevant costs are normally
only variable costs since fixed costs may
not change in the defined HORIZON (time
period).
61
4.12 Out-sourcing - Make or Buy Decisions
c. Estimate FUTURE RELEVANT OPPORTUNITY
costs, rather than past historical book
costs. d. The difference between the variable
cost to make and the purchase price to buy
is sometimes called the "contribution from
making or buying out".
62
4.12 Out-sourcing - Make or Buy Decisions
(continued)
e. Decide the relative attractiveness of make
v buy for a series of items/services.
Tend to make those that provide the higher
contributions. f. Be sure to include "global
cost to buy" including all relevant costs
which may involve RD, production,
transport, storage etc. g. Non-quantitative
factors of strategy, core competence,
secrecy, quality, delivery, out-of-stock
damage etc are always relevant. Strategy and long
term effects are particularly important.
63
Question
12. Waste reduction audit is a.
envaironmentally necessary b. technical
c. usually profitable d. only
applicable to manufacturing c
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64
4.13 General
... and that completes the study ...
except for a little CLE ... say five
minutes please ... and then ... on we go

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65
5. Study - Direct and Indirect Costs (Total time
- 20 Minutes)
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66
5.1 Instructions
a. Study and read the materials with the
same ... convincing emotion ... try to
understand ... everything!
b Use the glossary as you need to ...
c. Note special points as needed ...
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67
5.2 Direct Cost
Cost conveniently associated with a unit of
production. a. Direct labor - which is
direct operating labor.
Normally excludes storemen, foremen, transport
drivers, office clerks, salesmen,
inspectors, managers, and other indirect
labor etc. b. Direct material - which forms
part of the product sold. Normally
excludes oil, grease, machine repairs,
rags and other indirect materials.
c. Direct services which are special costs for
particular jobs e.g. hire of machines
68
Question
19. A cost driver is a. An activity
based method of allocating overhead b. A
fully qualified chauffeur. c. Anything
except direct labour d. A part number. a
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69
5.2 Indirect Cost
Cost not conveniently associated with a unit of
production a. Manufacturing cost - factory
overhead expenses. b. Selling cost -
marketing, selling and distribution cost. c.
Administrative cost - general cost of
administering the business which are not
selling or manufacturing.
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70
Question
14. What is most important in actually running a
business? a) love b) cash c)
profit d) security b
71
5.3 Cost Structure
For cost control study the structure of cost, in
terms of both full and direct costing a.
Full costing
Cost Comment
Direct labor 10
definite Direct material
20 definite Prime
cost 30
Manufacturing overhead 30 poor
estimate Manufacturing cost
60 Selling and administrative
Overhead 40
poor estimate Total cost
100
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72
5.3 Cost Structure (continued)
NOTE Inventory is valued at manufacturing
cost only. Selling and administrative
overhead is charged as expense in the
income statement.
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73
5.3 Cost Structure (cont.)
b. Direct cost
Cost Comment
Direct labor 10
definite Direct material
20 definite Direct
manufacturing variable overhead
5 definite Direct
selling and admin. var. overhead.
8 definite Total
direct cost 43
Note Manufacturing, selling and
administrative
overhead only associated with each product
by special studies. Inventory valued at
direct cost only.
74
Question
20. To determine what is direct as opposed to
"indirect" labor, we must ask the question
a. Does the labor work regularly? b.
Is the labor employed in the machine shop?
c. Can the labor be conveniently associated
with a unit of production? d.
Is the labor done by a worker or an
engineer? c.
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75
5.4 Inventory Effects on Cost
Cost must be adjusted for inventory changes. The
material cost is therefore Opening
inventory 100, plus purchases 50, less closing
inventory 20, giving material actually
used in production (100 50 - 20)
130. Value of inventory of raw materials, work
in process and finished goods, must be adjusted
in the income statement to compute the cost of
manufacturing. Selling and administrative
expenses are never charged to inventory but
charged direct to income statement for the period.
76
Question
21. In computing the cost of a unit of
production, normally a. direct costs are
fairly definite and overhead costs
depend upon allocations an assumptions b. all
costs depend upon broad assumptions c. the
indirect costs are more definite than the
direct costs d. once the overhead rate is
fixed, the direct costs may be
calculated a
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5.5 Cost, Profit and Investment Centers
a. Cost centers may be either productive
or service centers. Productive
centers are concerned with operations. Service
centers provide services to productive
centers. The costs of service centers
are allocated to productive cost centers.
b. Allocation of cost is always possible using
some basis i.e. number of workers,
floor areas, units produced, estimates,
activity etc. However allocated costs are rough
estimates which are less definite than
specific direct costs.
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78
5.5 Cost, Profit and Investment Centers
(continued)
c. For control, associate each activity with a
manager responsible. Centers of
responsibility may be Cost centers
- cost against standard or budget
Profit centers - profit against standard or
budget Investment centers - profit
against assets employed (return
must exceed cost of capital to achieve EVA)
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79
Question
22. Management control is usually a.
continuous and rhythmic b. intermittent
c. the controllers main job d.
easier as time goes by a
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80
Question
The cost of the foreman's salary is normally
a. direct labour b. manufacturing
overhead c. administrative overhead
d. indirect overhead b
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81
5.6 Overhead Rates
a. No rate is scientific - merely an estimate
on assumptions. b. Key management
decisions in overhead rates are
Number of cost centers - not many with similar
rates Choice of measure -
labor rate, machine rate, prime
cost, sales volume etc. (labor rates
over 300 are probably suspect - use
machine rates or ABC systems). c. To
determine the overhead rate, estimate three
things overhead amount, measure of
activity, and the forecast volume of that
measure.
82
5.6 Overhead Rates (continued)
d. Under or over-allocated overhead results
when the actual overhead is more or less
than the amount allocated to the products. e.
The difference is due to either cost or
volume and results in a loss or profit because
product costs do not contain enough
overhead. f. Do not change product costs -
merely take a profit or loss from over- or
under-allocated overhead in the income
statement of the period.
83
5.7 Overhead Rate for Each Cost Center
a. Determine specific cost for the particular
cost center. b. Allocate the non-specific
costs on some assumed basis (number of
people, floor area, units produced etc.)
to the cost center. c. Set a volume of
activity.
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84
5.7 Overhead Rate for Each Cost Center
d. Compute an allocation rate as follows
Overhead 100/ direct labor 50 hours 2.00
per hour. Overhead 100/ machine 100 hours
1.00 per machine hour Overhead 100/
labor cost 200.00 50 of labor cost
85
5.8 Control of Fixed and Variable Overhead
a. Study the STRUCTURE of cost - how much is
variable and how much fixed? b.
Fixed cost does not change in the short term and
is often not relevant to short term
decisions. c. We may ALLOCATE the fixed cost
on the basis of a variable cost (say
direct labor) but this does NOT change its
nature as a FIXED cost. NOTE ALLOCATION
SPREADS COST - IT DOES NOT
CONTROL IT!!
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86
5.8 Control of Fixed and Variable Overhead
(cont.)
d. Fixed cost is normally indirect and remains
unchanged for volume within limits. e.
Fixed cost per unit decreases with additional
volume - but is still FIXED. Variable
cost per unit does not decrease (normally)
with additional volume (within f. Variable cost
is normally DIRECT cost - clearly associated
with a product such that each additional a unit
produced always involves the same additional
a variable cost per unit.
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87
Question
24. The cost of factory heat and power is
normally a. direct labour b.
manufacturing overhead c. selling and
administrative overhead d. indirect
material b
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88
5.9 Contribution Concept
Contribution is selling price less variable
cost only a. Contribution not
calculated Selling price
2.00 Total cost
1.98
Profit 0.02
b. Contribution calculated
Selling price 2.00
Variable cost .68
Contribution
1.32 Fixed cost
1.30 Profit
0.02
89
5.10 Breakeven Concept
a. Useful tool for understanding and
communicating the effect on profit
of volume, costs and prices. Sales and
costs computed at different sales volumes.
Distinguish fixed and variable costs.
Breakeven point where sales equal total
cost - with no profit. b. Breakeven
analysis aids understanding of cost and profit
targets 1. Shows profit (loss)
at different sales volumes. 2. For any
volume indicates what must be changed to
achieve profit target.
90
5.10 Breakeven Concept (cont.)
c. Not accurate - only an estimate for a
limited known range of volumes. d.
Conceals real difficulty of changing assumptions
i.e. it may be more difficult to reduce
cost by 2 than increase selling price by
4. e. In the longer horizon, all costs are
VARIABLE. f. At higher volumes fixed costs may
not be a straight line i.e. they may
increase in steps.
91
5.11 Standards
Cost must be related to a standard i.e.
engineering target or estimate or previous year
or past job or competitive company. OLD BEST
standard to measure efficiency was "standard
cost" based on engineering studies NEW BEST
standard is the MARKET ... and the policy of
CONTINUOUS COST REDUCTION 8 EVERY YEAR ...
Measure actual against standard to determine a
variance associate the variance with a
responsible manager or team. DON'T REVISE
STANDARDS TOO EASILY ... KEEP THEM TOUGH BUT
ACHIEVABLE.
92
5.12 Measurement ofPerfomance
Management wants to know a. How much was
done? b. How well was it done? c.
What was the cost? d. Are the competitors
doing better? To measure performance, therefore
we must have standards against which to compare
actual performance.
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93
5.12 Measurement ofPerfomance (continued)
Consider performance now - and in tho future -
don't cut today and destroy the market volume
tomorrow. A bigger contribution may provide more
profit than a lower cost. Use total cost and
profit figures, not just per unit figures. Perfor
mance also relates to working capital management
of inventory and receivables which may achieve
significant overhead cost-reduction. See Exhibit
A for JIT.
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94
Question
Just In Time (JIT) inventory control a.
Is appropriate for all companies. b. Leads
to selection of local suppliers. c.
Reduces materials handling costs d. Usually
forces suppliers to hold high
inventories. b
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95
5.13 JIT - Just in Time Inventory Control
JIT inventory control seeks to reduces
inventory holding and material handling charges,
through managed supplier relationships. Inventory
levels of four weeks supply are often been
reduced to the level of four hours, with
sub-contracted parts moving from transport
directly to production lines, with cost reduction
for less handling and storage and working capital
investment!
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96
5.13 JIT (cont.)
JIT systems require stable suppliers and delivery
systems to avoid shut-downs due to lack of parts.
This involves special selection of major and
back-up suppliers and quality control
arrangements, to enable delivery within
hours. Thus distant suppliers unable to deliver
within fixed time limits (say 48 hours) may be
excluded, unless they set up local facilities.
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97
5.10 JIT (cont.)
JIT may well force suppliers to hold the
inventory levels formerly held by their major
client companies. JIT usually leads to
simplification of parts, materials handling,
packaging and quality control procedures as well
as cutting inventory levels.
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98
5.10 JIT (cont.)
Write down and justify the answers to the
following questions (true/false) 1. In 2000
every company should adopt some JIT systems. 2.
The major cost reduction of JIT systems is
savings in interest on inventory
levels. 3. The major cost reduction of JIT
systems is savings in material
handling. 4. JIT requires a new costing
system. 5. The major risk of JIT is shut-down
due to lack of parts.
99
5.10 JIT (cont.)
Answers F F T F T
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100
Question
16. Cost reports may be more useful in
controlling costs if such reports are
submitted a. annually with absolute
accuracy b. semi-annually c.
monthly with absolute accuracy d. rapidly
with reasonable accuracy d
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101
Question
2. Cost Accounting is a technique for
calculating the a. overall profit or
loss of business b. price at which a
business could be bought c. selling price
of a product d. cost of a unit of
production now write your answer and then
click for ours ... d
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102
5.11 Overall
so much for the study ... and now canm
you do a little CLE before the review
and the coffee ...
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103
6. Review of Part I (Total time -
30 Minutes)
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104
6.1 Instructions
1. Study each mini-case study which follows.
2. Respond intuitively ... in ONLY three
minutes ... in writing ... 3. Then check with
our answer after three minutes ... make
SPECIFIC NOTES of what you missed ... and think
about ... WHY ... VERY IMPORTANT ...
WHY ... you just did not think about it
although you really knew it ... 4.
Then try the next minicase ... and do better
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105
6.2 Minicase Eliza Manufacturing Company
Your proposed budget for the year 2000 indicates
a doubling of sales but a stable (unchanged)
inventory and a gross profit increase from 32
to 40. Why do you feel that budget is probably
not reasonable? How can you quickly check out
what is reasonable in your industry in 2000?
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106
6.2 Minicase Eliza Manufacturing (cont,)
OUR ANSWER a. The underlying assumptions do
not seem to be consistent with
"normal" financial expectations. When you double
sales in one year, you normally need the
support of a higher inventory
investment. Has this already been made?
Can the unchanged inventory levels be justified
by special studies? b. Similarly
receivable levels would be higher unless sales
are mainly for cash. With a competitive
market, it would seem that doubling
sales and increasing the gross profit increase
by 3 would be difficult e. Overall the
budget seems to be over-optimistic check it
out with the industry averages to see if other
companies are achieving similar rults?
107
6.3 Minicase Allan Solo Co.
Contract completed at far above the estimate, and
the manager held the foreman responsible.
Foreman blamed material prices - responsibility
of purchasing. Purchasing blamed production
control for high overhead rates due to low
capacity working. Production control blamed
marketing due to lack of orders and low prices.
Marketing blamed the Controller for the new
costing system. To what extent can we hold the
foreman responsible?
108
6.3 Minicase Allan Solo Co.
OUR ANSWER Failure to reach target may be due
to poor estimating, price variances, volume
variances, efficiency variances, poor reporting,
poor selling of products. Foreman has only
lmited responsibility for efficiency - unless he
operates as a profit center.
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109
6.3 Minicase - Keith Co.
Accountant refuses to release the monthly cost
reports until four weeks after the month end, to
ensure that they are "absolutely accurate", on
the ground of previous criticism that his
"inaccurate costs" are a dangerous. Is he
right?
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110
6.3 Minicase - Keith Co.
OUR ANSWER Fast rough cost figures on time
within four days of the month end, are far more
useful to management than "so called accurate
cost reports" later. Manager must decide what
he needs in terms of accuracy not the accountant
- manager is the "customer" of the accountant!!
There are no absolutely accurate costs only
costs that are useful for a purpose based upon
assumptions.
111
6.4 Minicase - Leemac
Accountant insists that controller department
salaries are "fixed costs" and will always be
fixed costs. How could you best convince him
that he may not be right?
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112
6.4 Minicase - Leemac
OUR ANSWER Fire him!! Note In
the long run every cost is variable ...
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113
6.5 Minicase - Oparko
The CEO is anxious to make a major cost reduction
and organizational change that will affect three
key departments in the organization. Department
A is the largest in the organization. Department
B while smaller than A is also a larger
department. Department C is the smallest and acts
as a coordinating and operational department
between A and B. The employees in the Department
are young with broad operational
responsibility. Question How should the CEO
bring about change? Which department will be the
most resistant? What win-win solution?
114
6.5 Minicase - Oparko
OUR ANSWER The small department with liaison
authority is likely to be the most influential.
These are the people that would normally act as
change agents and would be most helpful in
bringing about change. The large department with
many employees will have vested interest in the
existing system and will resist change. The
success of the change will depend largely on the
small influential departments's ability to win
over the other two departments.
115
6.6 Summary Lecture
... and so end the minicases ... on to a
summary lecture for Part 1 ...
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116
6.6 Summary Lecture
1. Cost reduction is a key objective of cost
accounting and control, with new CI's
(Cost Control Initiatives) becoming
continually evident. 2. Every cost can be
reduced over time by economy, technological
advance, cutting operations and planning. 3.
Compare activity five years ago with today, to
indicate the past potential for cost
savings. 4. Then treat cost saving as a normal
part of management.
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117
6.6 Summary Lecture
5. Costs grow "naturally" unless controlled.
Managers should not be "happy" but
"motivated towards increasing
efficiency. 6. Set up cost reduction teams
using such tools as O M, operations
research, ABC, JIT, standard cost
accounting, strategic cost management etc. 7.
Activity based costing (ABC) recognizes that with
increasing automation, direct labor may be
only 10 of manufacturing cost and thus
other "cost drivers" should be used to
allocate overhead cost to products.
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118
6.6 Summary Lecture
8. Just In Time (JIT) inventory control by
major companies reduces inventory holding
and handling charges, through managed
supplier relationships. 9. Standard cost
accounting (SCA) provides engineering
standards of product cost and allows variances
with actual cost to be associated with
price, efficiency and volume
analysis. 10. Now such standards are strongly
influenced by the MARKET e.g. you have to
find a way to make part XXX for 25 or
else!!!
119
6.6 Summary Lecture
11. Backflush Accounting uses standards to
simplify accounting for work in progress
and finished goods, and relies heavily on
physical controls of efficiency e.g.
number of defective parts, waste quantities
etc. 12. Waste reduction audits (WRA)
investigate material inputs and outputs
for each process, to identify waste and
achieve cost savings by reduction, re-use and
recycling.
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120
6.6 Summary Lecture
13. Strategic cost control (SCC) starts with the
cost structure of the enterprise in terms
of fixed and variable costs to reinforce
only those activities that "add value" to
the operations of the enterprise. 14. It
creates "environmental motivation" within the
organization which motivates managers to seek
higher levels of cost efficiency and
effectiveness. Locate and reduce those
"non-value-added" activities ... with
bench-marking and re-engineering ...
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121
6.6 Summary Lecture
The key to cost control is management and
employee motivation ... at every level in the
organization ... not a technical ... but a
human problem!!
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122
Question
4. Strategic cost control (SCC) starts with
the a. Activities that do not add-value
b. Cost structure of the enterprise c.
Relevant costs d. Cutting of fixed
overheads. now write your answer and then
click for ours ... b
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123
6.6 Summary Lecture
And ... so ends our summary lecture for Part I of
the program ... time for a coffee ... and then on
to Part II ... Note If you find the program to
be valuable for you and do not yet have Part II
please email us today
124
Help For any help needed in the program,
contact Dr. Bob Boland 33 450 40 89 82
or boland_at_misc.hautesavoie.net 24 hour service
on we go ...
125
AUTONOMOUS GROUP LEARNING
Boland1
Dr. Bob Boland
126
Mini AGL 102 - Cost Control

• PART II - LATE MORNING
• WITH A PARTNER
• Geneva, March 2005

127
Program for Part II - Late Morning
11.00 - 11.20 Sect. 1 - Study - Systems
Standards 5 11.20 - 12.00 Sect. 2 -
Case Studies 42 12.00 - 12.20
Sect. 3 - Study - Control Reporting
60 12.20 - 12.40 Sect. 4 - Key
Learning Points 91
12.40 - 13.00 Sect. 5 - Learning Maintenance
106 ... and at the end ...
a well earned lunch ...
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128
CLE - Creative Learning Exercise (1 Minutes)

• Please take just one minute to relax ... feel
  well and
• confident ... to make the best use of the program
  ...
• to enjoy it ... and to remember everything!
  OK ...?

129
1. Study - Systems and
Standards (Total time - 20 Minutes)
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130
1.1 Introduction
Study carefully to relate each point to your own
practical experience ... Review the glossary
for a minute ...
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131
Question
33. The wages of an inspector of production in
a factory should usually be treated as a.
direct labour b. part of material cost
c. indirect labour, unless conveniently
associated with a unit of production
d. manufacturing overhead, even if it can be
conveniently associated with a unit of
production c
132
1.2 Cost System Objectives
It is difficult for a single cost system to
achieve all these objectives equally
effectively a. Compute product cost as
an aid to pricing b. Value work in
process c. Control costs by
responsibility Determine the volume of activity
and management requirements before deciding upon
the appropriate system. Relate the cost of the
system (or systems) to their value to management.
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133
1.3 Product Cost
Product cost is exactly what we define it to be.
Computed in terms of labor, material and
overhead. Direct costing defines product cost
as direct cost clearly associated with the
product. Definite but fails to include all
overhead costs. Full costing defines profit cost
as both direct and indirect (allocated) overhead
cost. Appears to be definite but in reality
includes many estimates and assumptions. Always
question the assumptions underlying product cost.
134
Question
The total cost of a new machine purchased during
the year is normally a. direct material
b. manufacturing overhead c. selling
and administrative overhead d. something
else d
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135
1. 4 Contract, Job Batch Costing
a. In contract costing, the unit of cost is
one contract. labor, material
and some other costs are direct contract
costs. General overhead ,may be
allocated on some basis. Profit on
contracts may be taken during or at the
end of the contract. b. In job and batch
costing the unit of cost is one job or
batch of jobs. Direct and indirect costs
are charged. Sometimes selling
and administrative overhead charges are
allocated as a percentage of manufacturing
cost.
136
1. 4 Contract, Job Batch Costing
NOTE Allocation of overhead costs on the
basis of sales or previously accumulated costs is
adding one estimate to an other and may not
produce a useful result. Such total costs
should be treated with considerable skepticism.
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137
1. 4 Contract, Job Batch Costing
c. Control of costs in contract, job and batch
costing is by comparison of estimated
cost against actual cost to indicate
1. Profitability 2.
Efficiency 3. Accuracy of estimating
procedures
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138
1. 4 Contract, Job Batch Costing
d. Try to use standard costs and rates in
computing contract, job and batch
costs. Standard rates are simpler and
standard costs are a better measure of
efficiency. Analyze the variance between
actual and standard cost into price,
efficiency and volume variances.
Avoid actual or average rates they are not more
useful than standard rates.
139
1. 5 Output Costing
With only one product we have output costing.
Divide each cost by the volume of output for
the period. To measure efficiency compare
actual against standard.
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140
Question
The depreciation of the chief executive's motor
car is normally a. direct material
b. manufacturing overhead c. selling and
administrative overhead d. indirect
material c
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141
1. 6 Process Costing
Suitable for continuous production flow with
final products resulting from a sequence of
operations or processes. Output of one process is
the input of the next. Cost collected by period
for each process and the unit of cost of each
process computed by dividing the total process
cost by the output (like output costing). System
is in effect output costing for each process in a
series which together form a production cycle.
142
1. 6 Process Costing
The measure of efficiency in process costs is the
same as for output costing actual against
previous cost, standard or budget. use standard
as much as possible.
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143
1. 7 Standard Costing
The best performance target is the standard cost
computed by engineering studies on a standard
cost sheet - BUT DRIVEN BY MARKET FORCES TO
ACHIEVE CONTINUOUS COST REDUCTION EVERY YEAR!!

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144
1. 7 Standard Costing (Continued)
Standard cost accounting provides engineering
standards of product cost and allows variances
with actual cost to be associated with price,
efficiency and volume analysis. "Backflush"
accounting uses standards to simplify accounting
for work in progress and finished goods. The
best performance target should be the standard
cost from engineering studies on a "Standard Cost
Sheet" indicating 1. standard hours at
standard labour rate 2. standard material
quantities at standard costs 3. standard
overhead allocations
145
1. 7 Standard Costing (Continued)
The standard cost system is only as good as the
standards set each year. Product cost is
standard cost. Standards are set by the
engineering department together with purchasing,
personnel and operating managers. They are not
normally changed during the year.
146
1. 7 Standard Costing (Continued)
Variances are developed not by products but by
departments responsible for operations, in terms
of 1. price - difference in actual and
standard price for the actual quantity
purchased 2. efficiency - difference between
a