Chapter 9
Planning and controlling expenses:
Manufacturing Overhead, Product and Quality Costs, and
Distribution and Administration Expenses


Companies must consciously plan to control expenses of:
    MO, Product Quality,    and Distribution and Administration


The focus of companies should be on better utilizing resources
    (not on decreasing expenses).
This is a LT approach to controlling expenses. Companies need to spend money, but they need to do a better job of spending.

Cost Behavior
    -There should be an understanding of the response of costs to different volume changes. (Costs change as volume changes).
-This is imperative
-A company can review this cost    behavior from an entire enterprise point of view or from a responsibility center     point of view.

Three expense categories:
1. Fixed expenses
    -Constant
    -There is no regard for
        Volume changes
    -Examples- Salaries, real estate taxes, rent, etc.

2. Variable expenses.
    -Directly related to volume (or output)
    -Variable expenses are measured against some
    activity base (DLH, DMH, Sales, etc.)
    -Examples- Direct materials, direct labor, power usage.
3. Semi-variable
    -These expenses are neither fixed or variable because
    -Indirect labor, sales people, utilities, etc.

Controllable vs. Non-controllable Controllable expenses are subject to the authority of the specific manager.
    All costs within the responsibility center must be identified as controllable or uncontrollable.
    Performance reports must distinguish b/w Controllable and
non-controllable.

ALL EXPENSES ARE CONTROLLABLE IN THE LT.

Cost reduction vs. cost control:

Cost reduction- This is the     process of cutting costs
    (reducing costs). This is usually a reaction to cash problems or systems that run out of control.
Cost Control- This is the process of monitoring costs. It can
    include cost reduction, but more specifically, it is the
    process of monitoring costs (and making sure that they are within budget).
Planning expenses
The expense planning should be
performed with all levels of management. Participation
is the key to having the budget properly implemented.

To develop the manufacturing plans, the following schedules should be completed:
    1. DM
    2. DL
    3. Manufacturing Overhead
    4. Distribution Expenses
    5. Administrative expenses
These schedules are necessary :
-To develop and implement a planned income stated
-To develop cash requirements
-To develop and set Objectives
-To create standards

Manufacturing Overhead- These are the items that are not exactly traceable to (specific to) the specific product. Typically, the following expenses are part of MO:


-Indirect materials
-Indirect labor
-All other miscellaneous exp.
(utilities, supplies, insurance

The MO should be further separated:
1. Producing departments-
2. Service departments- Support departments - Repairs,
    power, purchasing, etc.


Control of MO:
Managers must only be accountable for controllable expenses.
    Example: The production     manager cannot be held      accountable for the costs of     the power plant. He can only     be accountable for the units      of power used.

Product Costing
In determining MO, the basic concept dictates that the indirect costs must be allocated to production.

Selecting the activity base- To determine allocation of MO, the departments must select an activity base     that can used as a common measure.
If the department only produces one item or service, the base is usually that product (in terms of output).
However, if the department     produces many different
    product, the department may     chose machine hours,     direct     labor, etc. as its basis
Review the example Page 309


Product Quality Costing
Higher quality usually means     high costs.   
Total Quality Management (TQM)- This is an upper level
management decisions (and corporate culture issue).        
Prevention Costs- Training, repair and maintenance, eng.
Appraisal Cost- Testing standards for Raw materials
Internal Failure Cost- samples
External Costs- warrantees,     returns, repairs on returns

The highest cost of quality is the loss of customer loyalty (and the loss of a customer)

Planning Distr. and selling
    Distribution, generally speaking, is logistics.
Logistics are:
1. Materials Handling
2. Transportation
    There are 5 modes                 
    A. Rail
    B. Truck
    C. Air
    D. Ship
    E. Pipe line
3. Warehousing
4. Packaging
    A. Protection for the product
    B. To assist in marketing
    C. To provide space for labels    
    D. To be economic
The concept of logistics must be discussed with the sales and marketing department.
       
The mode of transportation (Speed) is necessary to meet
    the needs of customers. The packaging is obviously an issue with marketing (The production line people have a different     agenda with regards to packaging then the marketing people). The warehousing issues are concerned with inventories.
       
There are other marketing issues that must be budgeted:
1. Promotions
2. Advertising
    How are advertising budgets created:
    -Available funds
    -Arbitrary appropriation
    -Competitive parity
    -Percentage of sales
    -Return on investment
Planning Admin. Expenses       
These are expenses that are incurred as a service to all functions of the enterprise. They are not identifiable to any         one function. Usually based on historical data.
    Examples of admin. costs are:
        -Top level Salaries
        -Legal
        -Office expenses

Chapter 9
Key Points


1. Cost behavior
2. Controllable vs. Non-Controllable
3. Manufacturing Overhead
4. Example Page 309-311
5. Cost of Quality
6. Business Logistics
7. Administrative Overhead