ch16 - Chapter 16 Managing Costs and Uncertainty Questions...

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Chapter 16 Managing Costs and Uncertainty Questions 1. The cost control system is an integral part of the cost management system. The cost control system provides information for planning purposes and, subsequently, for evaluation of actual performance. 2. Without first establishing performance targets and benchmarks, control systems cannot function. The purpose of establishing control systems is to guide the organization toward its established objectives. Accordingly, the control cycle must begin with the establishment of plans that define where the organization is headed and what its managers want to accomplish. 3. Cost control for any specific event is exerted before, during, and after the event. Cost control is exerted before the event to determine the expected cost and to provide a plan to achieve the expected cost. During an event, control is exerted to maintain the cost being incurred at the planned level. After an event, actual performance is compared to planned performance and explanations of differences are developed. By understanding why differences exist, managers can take actions to minimize future differences between the actual and planned amounts. 4. Factors potentially causing a cost to change include: (1) changes in activity level; (2) change in inflation/deflation; (3) technology changes; (4) changes in supply and demand; (5) quantity of competition; (6) seasonality and other timing phenomena; and (7) quantity purchased. Factors 1 and 5-7 are most subject to cost containment. The difference in controllability is the extent to which the factor can be influenced by actions of managers. The factors that are external to the firm are less subject to control than (e.g., inflation) internal factors (e.g., activity levels). 5. Total fixed costs can be dichotomized into two groups, committed and discretionary. The committed fixed costs are ones that are less susceptible to cost control efforts, at least during the short run. These costs consist of costs associated with basic plant assets and organizational infrastructure. Discretionary fixed costs are more susceptible to short-run cost control efforts. Discretionary fixed costs are incurred as a result of managerial judgment. Examples of such costs are research and development and advertising. Costs considered as committed by one firm may be considered discretionary by other firms. For example, a firm that competes on the basis of products containing the latest functionality and technology would consider research and development to be 75
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76 Chapter 16 committed. A firm that competes on the basis of price might consider research and development to be discretionary. 6. Many types of discretionary costs do not have outputs for which there is a precisely explainable and predictable technical relationship with inputs. When an output measure is devised, it is normally available only in nonmonetary, surrogate terms.
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ch16 - Chapter 16 Managing Costs and Uncertainty Questions...

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