Cost Analysis & Management Control

Background

Cost management generally describes the approaches and activities of managers in short run and long run planning and control decisions that increase value for customers and lower costs of products and services.

Features of cost management It focuses on cost reduction and

continuous improvement and change rather than cost containment

The planning and control of costs is usually inextricably linked with revenue and profit planning

Cost management is not practiced in isolation

Nature of element Material: physical or tangible inputs

which go into manufacture of any product or rendering of services

Labor: human effort that goes into the production of goods

Overheads: all other items other than material and labor come under this class

Planning Acting

Feedback

Controlling

The Functions of Management

Distinguish between financial accounting and management accounting.

Objective 1

FinancialInvestorsCreditorsGovernment authorities (IRS, SEC, etc.)

ManagementInternal managers of the business

Primary Users

FinancialHelp investors, creditors, and others make investment, credit, and other decisions

Management Help managers plan and control business operations

Purpose of Information

FinancialReliability, objectivity, and focus on the past

Management Relevance

Focus and Time Dimension

FinancialFinancial statements restricted by GAAP

FASS

Management Internal reports not restricted by GAAP; determined by cost-benefit analysis

Type of Report

FinancialAnnual independent audit by CPAs

Management No independent audit

Verification

FinancialSummary reports primarily on the company as a whole

Management Detailed reports on parts of the company

Scope of Information

FinancialConcern about adequacy of disclosure

Management Concern about how reports will affect employees behavior

Behavioral Implications

Objective 2

Distinguish direct costs

from indirect costs.

Cost drivers are any factors that affect cost.

Direct Costs and Indirect Costs

What are direct costs?Direct costs are those costs that can be specifically traced to the cost object.

What are indirect costs? Indirect costs are costs that cannot be specifically traced to the cost object.

Cost Drivers Include - Direct Costsand Indirect Costs

DirectMaterials

DirectLabor

IndirectLabor

IndirectMaterials

Other

Overhead Costs

Product Costs

Product Costs

DirectMaterials

DirectLabor

Prime Costs = Direct Materials + Direct Labor

Overhead

Objective 3

Distinguish among fixed costs and variable costs.

Variability

Fixed cost: remain fixed irrespective of the level of activity

Variable cost: vary in direct proportion to the volume of output

Controllability Controllable cost

Uncontrollable cost

NormalityNormal cost

Abnormal cost

Objective 4

Determine PHA costs for

Lease-up.

Treatment in financial accounting

Capital cost: benefits can be derived by the business for more than one accounting period

Revenue cost: benefits are exhausted in the same period in which they are incurred

Revenues – Expenses = Operating income

Inventorial costs. The income statement does not have cost

of goods sold.

Financial Statements forService Companies

First determine the number of turn over units in a year:

3 units per month. 36 per year Direct materials used were $200,000. Direct labor was $88,000. Overhead Costs (Do not include for this example).

Lease-up Costs Example

What is the cost per unit to lease-up?

Manufacturing Company Example

Determine the Cost per Unit:# of Turn over units 36Direct materials 200,000Direct labor 100,000Overhead Costs 0 288,000Divided by 36 units 36Cost per unit to lease-up $8,000

Copy Machine Paper & Toner Salaries Vehicle Lease vs. buying Fuel Any items or costs broken down by line item

can be analyzed

What are other Samples of Costs

Objective 5

Identify major trends in the

Financials and usecost-benefit analysis to

makebusiness decisions.

Trend Analysis – Used to compare actual costs from month to month.

FASS Scoring – Used to determine the strength of your financials.

YTD Comparison – Used to compare a month with the same month of the prior year.

Budget vs. Actuals - Used to determine if your costs are within your budgeted costs.

Different Types of Analysis

Compare with other PHAs within reason

Your PHA Other

To compare your PHA with another PHA, your PHA must be similar in size and locality.

Planning and control Budgeted cost: cost that represents an

estimate of expenditure

Actual cost: An actual amount paid or incurred, as opposed to estimated cost or standard cost. In a cost for leasing up a unit, actual costs include direct labor, direct material, and other direct charges.

Objective 6

Use reasonable standards tomake ethical judgments.

In many situations the ethical path is not so clear.

Follow all HUD regulations. Follow all internal policies and procedures.

Professional Ethics for Management

Standards of Ethical Conduct for Management

Confidentiality

Integrity

Objectivity

Competence

Questions???