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Costs Are Mainly a Reflection of our Choices

CHINYERE NWOKOLO Written by CHINYERE · 2 min read >

We finally got introduced to the Cost & Management Accounting Course by Prof. Owolabi yesterday after a series of pre-modular activities.

Excited to share some of the key take-aways from yesterday’s class as well as learnings from activities leading to our 1st class engagement on this course.

  • Every rational person desires profit

Profit= Revenue-Expenses

  • The Management of a firm have better control over Costs than Revenue

Revenue= Price X Quantity

  • Except a business has an advantage of monopoly, tinkering with price will most likely impact on volumes sold.

Back to the subject of the conversation and in the words of Prof. Owolabi, “Costs are mainly reflections of our choices”. To drive this statement closer home, the costs a business incurs is dependent on how the firm chooses to run e.g., the caliber of its staff, office location etc.

Management Accounting aids internal managers in planning, decision making and controlling

  • Planning: “The how” – what we need to do to achieve a set objective. E.g., to improve quality, we could conduct supplier evaluation to ensure items supplied for use in the Plant meet the required specification and quality.
  • Controlling: The managerial activity of cost control. This involves budgeting and budget control. This is explained in the 5-column model of control as shown below:

The 5-Column Model of Control

ItemStandard/Budgeted costActual CostVarianceManagerial decision Intervention
  • Decision Making: This involves making a choice from competing alternatives.

         Other learnings from the pre-modular activities include:

  • Cost driver analysis: This process identifies what the actual costs are.
  • Value Chain Analysis: Identification and evaluation of all processes and actions that influence results (i.e., processes involved in constructing and generating value).
  • SWOT analysis: opportunities and threats in the external competitive market; strengths and weaknesses within the firm.
  • Financial Position analysis: A company’s value is determined by looking at its financial position in light of its financial statements and computing specific ratios. A company’s market value determines how valuable it is. The financial ratios of a firm are compared to those of its rivals and benchmarks in the industry to calculate market value.
  • Cost Object: Any item for which expenses are being determined independently. It is a cornerstone of business cost management.

Strategic cost management (SCM) is a cost-management strategy intended to lower costs and strengthen an organization’s strategic position.

  • Life cycle costing: Takes into account a product’s cost over the course of its whole life. The cost of planning, production, R&D, replacement costs, and disposal are all considered in the analysis.
  • Total Quality Management (TQM): To continually meet or exceed customer expectations, Total Quality Management (TQM) places a strong emphasis on setting the highest standards. Process controls for ongoing improvement are the main focus.

Elements of Cost analysis are basically material, Labour and expenses and overheads

Overhead = Indirect materials + Indirect labour + Indirect expenses.

The Break-even point is the point at which revenue is equal to costs

Break-even point = Fixed cost/(Sales Price per unit – Variable cost)

  • Margin of Safety: A financial ratio called the margin of safety calculates the amount of sales that have exceeded the break-even point. This financial ratio shows the company’s actual profit after all fixed and variable costs have been covered.
  • Fixed Costs: These expenses are constant regardless of how many units you sell. Rent, software subscriptions, insurance, and labor might be examples.
  • Variable Costs: These expenses change according to the volume of the goods you sell. Materials, commissions, payment processing, and labor may all fall under this category.

#MEMBA 11

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