Table of Contents

Chapter 1 - Overview of Cost Management 1

The Economics of Cost Management 1

How Costs Increase. 2

Advantages of Cost Management 3

The Cost Management Environment 4

The Customer Service Conundrum.. 5

The Effects of Cutting Too Deep. 6

A Note of Caution. 6

Chapter 2 - Types of Costs. 9

Fixed Costs. 9

Variable Costs. 10

Mixed Costs. 10

Step Costs. 12

Marginal Costs. 12

Differential Costs. 13

Discretionary Costs. 13

Committed Costs. 13

Sunk Costs. 14

Chapter 3 - Direct Costing as an Analysis Tool 16

Overview of Direct Costing. 16

Contribution Margin versus Gross Margin. 17

Direct Costing as an Analysis Tool 18

Automation Investments. 18

Cost Reporting. 19

Customer Profitability. 20

Profit-Volume Relationship. 21

Outsourcing. 23

Direct Costing Pitfalls. 24

Increasing Costs. 24

Indirect Costs. 25

Relevant Range. 25

Chapter 4 - Cost-Volume-Profit Analysis. 28

Contribution Margin. 28

Contribution Margin Income Statement 29

Breakeven Point 30

Margin of Safety. 33

Cost-Volume-Profit Analysis. 34

Sales Mix. 36

Chapter 5 - Target Costing. 39

The Basic Steps of Target Costing. 39

Value Engineering Considerations. 40

The Cost Reduction Program.. 41

The Milestone Review Process. 42

Problems with Target Costing. 42

The Members of a Design Team.. 43

The Role of the Accountant in Target Costing. 43

Data Sources for Target Costing. 44

The Product Life Cycle and Target Costing. 45

Chapter 6 - Cost Object Analysis. 48

Factors in Cost Object Analysis. 48

The Assignability of Costs. 49

The Customer Cost Object 50

The Employee Cost Object 51

The Product Cost Object 52

The Product Line Cost Object 54

The Sales Channel Cost Object 55

Cost Object Termination Issues. 55

Which Cost Objects to Track. 56

Chapter 7 - Constraint Analysis. 58

Constraint Analysis Operational Terminology. 58

Overview of Constraint Analysis. 59

The Cost of the Bottleneck. 60

Local Optimization. 61

Constraint Analysis Financial Terminology. 62

Constraint Analysis from a Financial Perspective. 62

The Constraint Analysis Model 63

The Decision to Sell at a Lower Price. 65

The Decision to Outsource Production. 66

The Capital Investment Decision. 67

The Decision to Cancel a Product 69

Chapter 8 - Process Analysis. 73

Process Analysis Tools. 73

Value Stream Mapping. 73

Flowcharts. 75

Run Charts. 76

Check Sheets. 77

Root Cause Analysis. 77

Traffic Analysis. 78

Chapter 9 - Zero-Base Budgeting. 81

Overview of Zero-Base Budgeting. 81

The Zero-Base Budgeting Process. 82

Advantages of Zero-Base Budgeting. 88

Problems with Zero-Base Budgeting. 89

Conditional Budgeting. 90

Chapter 10 - Cost Reduction Strategy. 93

Failing Business Scenarios. 93

Dealing with Unrelated Business Segments. 93

Failing Business Model: Remain in the Same Business. 95

Failing Business Model: Shift to New Model 95

Dealing with Expense Drift 98

Incorrect Cost Reduction Strategies. 99

Chapter 11 - Compensation Cost Reduction. 103

Proactive Hiring Solutions. 103

Temporary Cost Reductions. 104

Permanent Cost Reductions. 106

Productivity-Based Solutions. 109

Total Labor Cost Analysis. 110

Timing of Compensation Changes. 110

The Downsizing Process. 110

Chapter 12 - Benefits Cost Reduction. 114

Benefit Cost Sharing. 114

Benefit Reductions. 115

Benefit Limitations. 116

Benefit Exclusions. 117

Benefit Swaps. 117

Benefit Aggregation Concepts. 117

Benefit Terminations. 118

Workers’ Compensation Issues. 118

Corporate Wellness Programs. 119

Training Benefits. 120

Eligibility Audits. 121

Benefit Cost Administration. 121

Other Cost Management Concepts. 122

Chapter 13 - Sales and Marketing Effectiveness. 125

Sales Effectiveness Improvements. 125

Marketing Effectiveness Improvements. 128

Customer Service Issues. 130

Raise Prices. 130

Chapter 14 - Production and Maintenance Cost Reduction. 133

Production Cost Reduction. 133

Complexity Reduction. 133

Manufacturing Systems. 134

Production Cells. 135

Production Line Issues. 136

Shift Issues. 137

Quality Issues. 138

Bottleneck Analysis. 138

Outsourcing Issues. 139

Inventory Reduction. 139

Administrative Issues. 140

Maintenance Cost Reduction. 140

Equipment Maintenance. 140

Maintenance, Repair, and Operations Procurement 141

Chapter 15 - Procurement Cost Reduction. 145

Purchase Requisition Procedure. 145

Purchasing Procedure. 148

Procurement Process Changes. 153

Procurement Centralization. 153

Supplier Relations. 154

Consolidation Activities. 154

Standardize Supplier Dealings. 155

Integrate with Suppliers. 155

Other Cost Management Opportunities. 156

Total Cost Concept 157

Outsourcing Concepts. 157

Spend Management 159

Chapter 16 - Administration Cost Reduction. 164

General Administration Cost Reduction. 164

Energy Cost Reduction. 165

Accounting Cost Reduction. 165

Accounts Payable. 165

Auditing. 167

Collections. 167

Cost Accounting. 168

Customer Billing. 168

Fixed Assets. 169

Payroll 170

Reporting. 171

Systems. 171

Human Resources Cost Reduction. 172

If Human Resources is Supported. 172

If Human Resources is Not Supported. 173

Legal Services Cost Reduction. 173

Information Technology Cost Reduction. 175

Travel and Entertainment Cost Reduction. 176

Chapter 17 - Facilities Cost Reduction. 179

Facility Location. 179

Lease Rates. 179

Facility Costs. 180

Facility Usage. 181

Furniture and Office Equipment 182

Projecting Future Usage. 182

Chapter 18 - Finance Cost Reduction. 185

Banking Cost Management 185

Debt Management 186

Cash Management Cost Reduction. 187

Investment Strategy. 188

Leasing Cost Reduction. 191

Insurance Cost Reduction. 192

How to Operate with Zero Working Capital 192

Chapter 19 - Accounts Receivable Reduction. 195

Credit Risk Reduction. 195

Payment Guarantees. 195

Title Retention. 196

Credit Insurance. 196

Factoring. 197

Letters of Credit 197

Export-Import Guarantees. 198

Outside Financing. 198

Distributor Sales. 198

Adjustment of Days to Pay. 198

Collection Tactics. 198

Dunning Letters. 199

Take Back Merchandise. 199

Hold Orders. 199

Split Payments. 200

Postdated Checks. 200

Promissory Note. 200

Arbitration. 200

Attorney Letters. 200

Issue Small Claims Court Complaint 201

Collection Agency. 201

Money Judgment Collection Activities. 201

Chapter 20 - Inventory Reduction. 204

The Cost of Inventory. 204

Product Planning. 205

Purchasing and Receiving. 206

Inventory Storage. 207

Production. 208

Fulfillment 208

Distribution. 209

Inventory Disposition. 210

Inventory Management Practices. 210

Chapter 21 - Capital Budgeting Decisions. 213

Overview of Capital Budgeting. 213

Bottleneck Analysis. 214

Net Present Value Analysis. 214

The Payback Method. 216

Capital Budget Proposal Analysis. 217

The Outsourcing Decision. 218

The Post Installation Review.. 219

The Lease or Buy Decision. 220

Chapter 22 - Cost Management Reports. 223

Expense Reporting. 223

Payroll Reporting. 224

Margin Reporting. 225

Spend Reporting. 227

Responsibility Reporting. 229

Cost Reduction Opportunity Reporting. 229

Chapter 23 - Cost Management Measurements. 232

Compensation Measurements. 232

Profit per Person. 232

Proportion of Pay at Risk. 233

Employee Turnover 234

Benefits Measurements. 234

Benefits to Base Pay Ratio. 235

Employee Cost Sharing as Percent of Pay. 236

Days Away from Work. 236

Sales Measurements. 237

Sales Productivity. 237

Sales Effectiveness. 238

Quote to Close Ratio. 238

Production and Maintenance Measurements. 239

Manufacturing Effectiveness. 239

Throughput of Post-Bottleneck Scrap. 240

Order Cycle Time. 241

Procurement Measurements. 242

Procurement Card Usage Percentage. 242

Proportion of Spend Managed. 242

Proportion of Spend with Preferred Suppliers. 243

Administration Measurements. 244

Administration FTEs per $1,000,000 Revenue. 244

Administration Cost as Percent of Revenue. 245

Transaction Error Rate. 246

Facilities Measurements. 246

Square Feet per Person. 246

Cost per Square Foot 247

Finance Measurements. 248

Proportion of Cash Invested. 248

Average Interest Rate Paid in Excess of Prime Rate. 249

Asset Measurements. 250

Receivables Turnover 250

Inventory Turnover 251

Fixed Asset Turnover 251

Answers to Chapter Questions. 254

Glossary. 284

Index. 288

Final Examination…………………………………………………………………………………………………294