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COST MANAGEMENT PDF

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Cost Management Pdf

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Cost Accounting A Managerial Emphasis Fourteenth Edition Charles T. Horngren Stanford University Srikant M. Datar Harvard University Madhav V. Rajan. 𝗣𝗗𝗙 | This document presents the basics of construction cost management as a comprehensive baseline needed by the construction engineer. The engineer. 𝗣𝗗𝗙 | The objective of this paper is to investigate the project cost management practices adopted by public owners and contractors in the Gaza Strip. The paper .

Capital deployment.

Managerial Cost Accounting Resources

In screening capital in- vestments and allocating resources, the sys- tems may be more quantitative and financial for harvest units. Different Strategic Missions: Hence, the required earnings rate for such a business unit ma ' be set relatively high to motivate managers to search for projects with truly exceptional returns.

Since harvest units tend to experience stable environments with predictable products, technologies, competitors, and customers , discounted cash flow DCF analysis often can be used with confidence. The required information used to evaluate investments from harvest units is primarily financial.

Cost management planning: How to save on project expenses

A build unit, on the other hand, is positioned on the growth stage of the product life cycle. The corporate office wants to take advantage of the opportunities in a growing market, so the corporate officers may set a relatively low discount rate to motivate managers to for- ward more investment ideas to the corporate office. Given the product and market uncer- tainties, the financial analysis of some proj- ects from build units may be unreliable.

For such projects, nonfinancial data are more important. Budgeting Implications for designing budgeting systems to support varied missions are contained in Exhibit 2. A key issue is how much importance should be attached to meeting the budget in evalua- tions of a business unit manager's perfor- mance. The greater the uncertainty, the more difficult it is for superiors to regard subordi- nates' budget targets as firm commitments and to consider unfavorable budget variances as clear indicators of poor performance.

Predictability of profit targets.

First, perfor- mance evaluation presupposes establishment of accurate profit targets. Targets that can serve as valid standards for subsequent per- formance appraisal require the ability to pre- dict the conditions that will exist during the coming year. If these predictions are incor- rect, the profit objective will also be incor- rect. Obviously, these conditions can be predicted more accurately under stable condi- tions than under changing conditions.

The basic effect of uncertainty is to limit the abil- ity of managers to plan or make decisions about activities in advance of their occur- rence. Thus, the greater the uncertainty, the more difficult it is to prepare targets that can become the basis for performance evaluation.

L Tailoring Controls to Strategies Exhibit 2. Implications for Budgeting Build Hold Harvest Role of the budget Business unit manager's influence in preparing the annual budget Revisions to the budget during the year Roles of standard costs in assessing performance Importance of such concepts as flexible budgeting for manufacturing cost control Frequency of informal reporting and contacts with superiors Frequency of feedback from superiors on actual performance versus the budget "Control limit" used in periodic evaluation against the budget Importance attached to" meeting the budget Output versus behavior control More a short-term planning tool Relatively high Relatively easy Relatively low Relatively low More frequent on policy issues; less frequent on operating issues Less often Relatively high i.

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Second, since efficiency refers to the amount of output per unit of input, evaluations of a manager's efficiency depend on a detailed knowledge of the outcomes associated with given management actions—that is, knowl- edge about cause-effect relationships. Better knowledge about cause-effect relationships exists under stable conditions than under uncertain conditions.

Therefore, judgments about efficiency are more difficult under un- certain conditions. Use of financial performance indicators. Third, the emphasis of financial performance indicators is on outcomes rather than on pro- cess.

Managers control their own actions, but they cannot control the states of nature that combine with their actions to produce out- comes. In a situation with high uncertainty, therefore, financial information does not ade- quately reflect managerial performance. Less reliance on budgets in build units Since build units tend to face higher uncer- tainty than harvest units, less reliance is usu- ally placed on budgets in build units than in harvest units. In the late s, the SCM Corpo- ration adopted a two-dimensional yardstick to evaluate business units: The ratios of the two were made to vary according to the mission of the busi- ness unit.

For instance, evaluations of pure harvest units were based percent on budget performance.

Evaluations of ' pure hold" units were based 50 percent on budget performance and 50 percent on completion of objectives. Finally, evaluations of pure build units were based percent on completion of objectives.

The following additional differences in the budget process are likely to exist between build and harvest units: This occurs because build managers operate in rapidly changing environments and have better knowledge of these changes than senior management. The stable envi- ronments of harvest units make the knowl- edge of the manager less important.

Incentive compensation system In designing an incentive compensation pack- age for business unit managers, questions such as these need to be resolved: What should the size of incentive bonus payments be relative to the base salary of general managers? Should the incentive bonus payments have upper limits? What measures of performance e. If multiple perfor- mance measures are employed, how should they be weighted? How much reliance should be placed on subjective judgments in deciding on the bonus amount?

How often e. Decisions about these design variables are influenced by the mission of the business unit see Exhibit 3. Bonus-to-base salary ratio. They maintain that since managers in charge of more uncertain situations should be willing to take greater risks, those managers should receive a higher percentage of their remuneration in the form of incentive bonuses.

Thus, reliance on bo- nuses is likely to be higher for build man- agers than for harvest managers. Which performance measures to use. As for the second question, when an individual's rewards are tied to performance according to L Tailoring Controls to Strategies certain criteria, his behavior is influenced by the desire to optimize performance with re- spect to those criteria.

Some performance criteria e. Thus, linking incentive bonus to the former set of criteria tends to promote a short-term focus on the part of general man- agers, whereas linking incentive bonus to the latter set of performance criteria is likely to promote a long-term focus.

Given the differences in the time horizons of build and harvest managers, it may be inap- propriate to use a single, uniform financial criterion such as return on investment to evaluate the performance of every business unit. Rather, it may be preferable to use mul- tiple performance criteria, with differential weights applied for each criterion depending on the mission of the business unit.

Both GE and Westinghouse have mature as well as young businesses. In the mature busi- nesses, short-term incentives might dominate the compensation packages of managers, who are charged with maximizing cash flow, achieving high profit margins, and retaining market share. In the younger businesses, where developing products and establishing marketing strategies are most important, non- financial measures geared to the execution of long-term performance might dictate the ma- jor portion of managers' remuneration.

As for the third question, in addition to varying the impor- tance of different criteria, superiors must also decide on the approach to take in determin- ing a specific bonus amount. At one extreme, a manager's bonus might be a strict formula-based plan with the bonus tied to performance on quantifiable criteria e.

At the other ex- treme, a manager's incentive bonus might be based solely on the superior's subjective judg- ment or discretion. Alternatively, incentive bonuses might be based on a combination of formula-based and subjective approaches.

Performance on most long-run criteria e. Since, as already noted, build managers—in contrast to harvest managers—should focus more on the long run than on the short run, build managers are typically evaluated more subjectively than harvest managers.

Frequency of bonuses. Finally, the frequency with which bonuses are paid influences the time horizon of managers. More frequent bonus awards encourage concentration on short-term performance, since they have the effect of motivating managers to focus on those facets of the business that they can af- fect in the short run.

Less frequent calcula- tion and payment of bonuses encourage managers to take a long-term perspective. Thus, build managers tend to receive bonuses less frequently than harvest managers.

Then the fran- chise starts to go to hell.

If you're shooting for an award after three years, there's less tendency to do things short term. The choice of a differentiation ap- proach rather than a low-cost approach in- creases uncertainty in a business unit's task environment for three reasons.

This is partly because of the fact that a low-cost business unit, with its primary emphasis on cost re- duction, typically prefers to keep its product offerings stable over time, whereas a differen- tiation business unit, with its primary focus on uniqueness and exclusivity, is likely to engage in greater product innovation.

Ch 679_Summary Strategic Cost Management.pdf - Managerial...

A busi- ness unit with greater emphasis on new prod- uct activities tends to face greater uncertainty since the business unit is betting on un- proven products. Second, low-cost business units tend to have narrow product lines to minimize inventory carrying costs and to benefit from economies of scale.

Differentiation business units, on the other hand, tend to have a broader set of products to create uniqueness. Product breadth creates high environmental complex- ity and consequently, higher uncertainty. Third, low-cost business units typically pro- duce no-frill, commodity products—these products succeed primarily because they have lower prices than competing products.

By contrast, products of differentiation business units succeed if customers perceive that the products have advantages over competing products.

Since customer perception is diffi- cult to learn about and since customer loyalty is subject to change because of actions by competitors or for other reasons, the demand for differentiated products is typically more difficult to predict than the demand for com- modities.

The specifics of the control systems for low- cost and differentiation business units are similar to the ones described earlier for har- vest and build business units. This is so be- cause the uncertainty facing low-cost and differentiation business units is similar to the uncertainty facing harvest and build business units. The control systems in these compa- nies differed accordingly. DEC's product man- agers were evaluated primarily on the basis of the quality of their interaction with their cus- tomers a subjective measure , whereas Data General's product managers were evaluated on the basis of results, or profits.

Further, DEC's sales representatives were on straight salary, while Data General's salesmen received 50 percent of their pay on a commission ba- sis. Salaried compensation indicates behavior control, and commission compensation, out- come control.

The per- formance of the manager in charge of yellow dye was evaluated closely according to theo- retical standard costs rather than currently achievable standard costs. The results of this tight financial control were remarkable: Repeat Competitors Competitors are not permitted to compete in an event more than once at the NLC unless one of the following circumstances applies: Modified Events: A competitor may compete in the same event when the event is modified.

Note, if the only modification is a name change, competitors may not compete in the renamed event. Team Events: One 1 competitor of the team may have competed in the same event at one 1 previous NLC; however, they may not compete more than twice in the event at the national level.

Individual Entry: A competitor who competed as an individual entry in a team event at the national level may compete in the same event a second time as part of a team, but not a second time as an individual.

Parliamentary Procedure: Two 2 competitors of the team may have competed in this event at a previous NLC; however, they may not compete more than twice at the national level. Pilot Event: Competition in a pilot event does not disqualify a competitor from competing in the same event if it becomes an official competitive event.

Cost Management and Contributions

The participant may compete in another event as well as a pilot event. Breaking Ties Objective Tests: Ties are broken by comparing the correct number of answers to the last 10 questions on the exam. If a tie remains, the competitor who completed the test in a shorter amount of time will place higher. If this does not break the tie, answers to the last 20 questions will be reviewed and determine the winner.

Objective and Production Tests: The production test scores will be used to break a tie. Objective Tests and Performances: The objective test score will be used to break a tie based on the tie-breaking criteria of objective tests. All prejudged components reports, websites, projects, statement of assurance must be received by p.

All prejudged projects and reports must be submitted electronically. All Statements of Assurance must be submitted online. All production tests must be uploaded online. Eastern Time on the first Friday in June. Competitor drops are the only changes allowed after this date and onsite. National Awards The number of competitors will determine the number of winners.

The maximum number of winners for each competitive event is Certain events may allow the use of additional materials. Please refer to event guidelines. Consider hours, supplies, space, and any other specifications you can think of for your projects. A good cost management plan always has a cost estimation classification system.

If you do, use it.

See how much similar projects and their resources cost, how long they took, and how hard it was to stay on budget.

Hunting down redundancies and eliminating them is the mark of a well-managed project. Companies that are constantly monitoring, tinkering with, and adapting to data are ultimately more profitable and innovative than competitors.

When it comes to cost management plans, knowing how you will measure your success is crucial.Tom MacAvoy," in F. The required information used to evaluate investments from harvest units is primarily financial. Thus, reliance on bo- nuses is likely to be higher for build man- agers than for harvest managers.

The ratios of the two were made to vary according to the mission of the busi- ness unit. If you're shooting for an award after three years, there's less tendency to do things short term.

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