Executional Cost Drivers Examples 4,6/5 389votes
The most basic cost driver is customer demand. Without customer demand for products or services, the organization cannot exist. To serve customers, managers and employees make a variety of decisions and take numerous actions. These decisions and actions—undertaken to satisfy customer demand—drives costs. An activity is a unit of work.
To serve a customer at a restaurant, for example, a waiter or waitress might perform the following units of work: seat customer and offer menu, take customer order, send order to kitchen, bring food to customer, serve and replenish beverages, determine and bring bill to customer, collect money and give change, clear and reset table. Each of these is an activity, and the performance of each activity consumes resources that cost money. To manage activities and their costs, it is necessary to understand how costs respond to cost drivers, which are the factors that cause or influence costs. While these cost drivers may be classified in a variety of ways, I believe that dividing them into the three categories of structural, organizational, and activity cost drivers, as I am going to present in this post, provides a useful foundation for the study of managerial accounting. The 3 Fundamental Cost Drivers • Structural Cost Driver – Fundamental choices about the size and scope of operations and Structural technologies employed in delivering products or services to customers. For example: Apple Computer’s decision to enter the online music distribution business.
• Organizational Cost Drivers – Choices concerning the organization of activities and the involvement of persons inside and outside the organization in decision making. Authorizing lower-level employees to make decisions to solve problems is an example of an organizational cost driver. • Activity Cost Drivers – Specific units of work (activities) performed to serve customer needs that consume costly resources. Assembling a product is an example of an activity cost driver. How can you use information about structural, organizational, and activity cost drivers to help you in implementing the organization’s strategy? It is important that an organization’s cost structure be aligned with its strategy. If your goal is to be a cost leader (such as Wal-Mart or Costco), you will want to make sure that the structural cost drivers, such as the type of buildings acquired and the displays used are consistent with this strategy.
Follow on Structural Cost Drivers The types of activities and the costs of activities performed to satisfy customer needs are influenced by an organization’s size, its location, the scope of its operations, and the technologies used. Decisions affecting structural cost drivers are made infrequently, and once made, the organization is committed to a course of action that will be difficult to change.
For a “ chain of discount stores“, as an example, possible structural cost drivers include: • Determining the size of stores – This affects the variety of merchandise that can be carried and operating costs. • Determining the type of construction – While a lean warehouse type of construction is less expensive, it is not an appropriate setting for selling high-fashion clothing.
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• Determining the location of stores – Locating in a shopping mall can cost more and subject the store to mall regulations but provides for more customer traffic and shared advertising. • Determining types of technology to employ in stores – A computerized system for maintaining all inventory and sales data requires a large initial investment and fixed annual operating costs while providing more current information. However, the computerized inventory and sales systems can be less expensive at high sales volumes than a less costly system relying more on clerks taking physical inventory.
Organizational Cost Drivers Like structural cost drivers, organizational cost drivers influence costs by affecting the types of activities and the costs of activities performed to satisfy customer needs. Decisions that affect organizational cost drivers are made within the context of previous decisions affecting structural cost drivers.
In a manufacturing organization, previous decisions about plant, equipment, and location are taken as a given when decisions impacting organizational cost drivers are made. Examples of organizational cost drivers at a manufacturing organization include making decisions regarding: • Working closely with a limited number of suppliers – This can help achieve proper materials in the proper quantities at the optimal time. Developing linkages with suppliers can also result in suppliers’ initiatives that improve the profitability of both organizations. • Providing employees with cost information and authorizing them to make decisions – This helps improve decision speed and reduce costs while making employees more customer oriented.
Production employees may, for example, offer product design suggestions that reduce manufacturing costs or reduce defects. Quick Heal Total Security 2013 Renewal Code Free Download more. • Reorganizing the existing equipment in the plant so that sequential operations are closer – This more efficient layout reduces the cost of moving inventory between workstations. • Designing components of a product so they can fit together only in the correct manner – This can reduce defects as well as assembly time and cost.
• Manufacturing a low-volume product on low-speed, general-purpose equipment rather than highspeed, special-purpose equipment – Assuming the special-purpose equipment is more difficult and costly to set up for a new job, this decision can increase operating time and operating cost while reducing setup time and setup cost. Activity Cost Drivers Activity cost drivers are specific units of work (activities) performed to serve customer needs that consume costly resources. Several examples of activities in a restaurant were mentioned on the preface.
The customer may be outside the organization, such as a client of an advertising firm, or inside the organization, such as an accounting office that receives maintenance services. Because the performance of activities consumes resources and resources cost money, the performance of activities drives costs. The basic decisions concerning which available activities will be used to respond to customer requests precede the actual performance of activities. At the activity level, execution of previous plans and following prescribed activities are important. All of the examples of structural and organizational cost drivers involved making decisions. Author: Lie Dharma Putra Putra is a CPA.
His last position, in the corporate world, was a controller for a corporation in Costa Mesa, CA. After spending 15 years as a nine-to-five employee, he decided to serve more companies, families and even individuals, as a trusted business advisor. He blogs about accounting, finance and tax, during his spare time, and helps accounting students (around the globe) to understand the subject matter easier, faster.
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