Ideas, Reflections and Reactions to reading Study Guide #6!!

Chapter #6: Understanding Key Cost Relationships!

·         My thoughts and feelings when first reading over this chapter was a mixture of: confusion, anxiety with the overwhelming feeling of ‘I just don’t get it!’ After slowly reading and note taking I feel I am starting to wrap my head around it – however there are still a few things that I am really struggling to understand.

·         To be sustainable the value exchange between parties (being the business and the customer) must both be beneficial. In my thoughts, this is a very fine line and in a perfect world this may happen but the reality is not everyone is always going to feel satisfied.

 

·         Making Sense of Costs - It is of high importance for managers to understand how costs behave in a firm. Absolutely!! This is something that really interests me – linking the nasty figures, and other bits and pieces to the realities of a business. As stated in chapter 6, understanding the relationships of a firms cost to various aspects of a firm’s activities is critical for managers – not optional, CRITICAL!

My thoughts – Definitely!! I mean if the manager doesn’t really have a clue where the money is coming from, as well as being spent – then it is really the blind leading the blind. This is where I stand firmly by accounting systems helping businesses not hindering them. To run a successful business I believe that costs should be delegated appropriately, giving a clearer breakdown of what is going on! This way we can determine what is working and what isn’t working, and in turn create new ideas, solutions that will improve business.

 

·         Cost Objects – Engaging with the costs of a firm, I feel ultimately allows us to see what is working and what isn’t (what is contributing to a company’s profitability and what isn’t). I am familiar with different account numbers as well as job numbers. The previous company that I worked for we really broke down our costs. For Example when we had an event – one that sticks out to me was the Cops and Robbers Bowls day we allocated the expenses as well as the income to that job number (Cops and Robbers Bowls Day). So the expenses that we incurred were costs such as the wages, food and alcohol supplied as well as decorations etc). When entering these expenses they were allocated to this event. The incomes (Daily Takings) were also allocated to this event. At the end of that month when we looked at the profit and loss report – we could see whether or not the function/event made a profit or a loss – Did the expenses outweigh the income? Ok so from memory we made a loss, not by much but a loss is a loss. The event is held annually and is a great community event that promotes the club positively whilst showing our support for our local police team – so we can’t can it! Instead we simply look at the expenses and determine what costs were necessary and what were unnecessary. For example we can now deconstruct the cost of wages. Was there too many staff on that day? Did we have the staff on with the highest pay rate? Our company did not manufacture products – it offered a service.

The service should ideally be beneficial for both parties and I believe that understanding the costs of a firm enables us to do that by assisting managers in recognizing costs and why they have incurred, and from this plan and set a way forward. This process provides the managers to ask themselves so many vital questions. Are these costs necessary? Can we achieve the same result whilst spending less money? Will these costs help or hinder my company’s profitability, or our company’s goals?

·         How might numbers create reality, rather than ‘merely’ reflect it? I am quite interested by this question. So rather than just voice my thoughts I asked a few different people what they thought of this question:

-          My thoughts: looking at numbers provides us with the opportunity to create reality – why, well because we have the chance to make changes. We can choose to just ‘look’ at the numbers or use them to evaluate what is working and what isn’t and from this move forward with a new action plan.

-          Mikaela: She feels it “sets a numerical goal that you can work towards, that leads you to produce results”.

-          Jason: “Wow this made me think. I would think numbers creating reality would be something like the certainty of numbers in mathematical equations that we live by such as those in physics and those that we know and use in everyday living”.

-          Joanne: “Numbers are facts. They do not lie. Therefore they have the potential to tell a story. How successful or unsuccessful something is. Looking at the numbers can spark an idea, a way to sustain or even improve what goes on in a business”.

 

·         “Past costs in a firm can be a starting point for managers to forecast expected costs” – I would have to agree, and this brings me back to why I think it is important to keep track of our finances. Past figures are really the foundation for our company, providing us with what is working and what needs improvement.

·         Chapter #6 discusses (profit = revenue less expenses). So applying this to something I know would be alcohol. Buying the product = expense incurred and then selling it would be the revenue received? So when the alcohol doesn’t sell it becomes inventory? I am a little confused but from my understanding this still equal’s money on the bottom line and by not including this inventory of products we will understate our firm’s bottom line (profit or loss)? What is this inventory? Does this mean until a product is sold it is an asset?

 

·         The difference between Direct and Indirect Costs: This really has and still is taking me a little to get my head wrapped around. So I have been doing some research and I am trying to provide examples that I can understand or have had experiences with and this is what I could find:

Direct costs: This makes a little sense to me. Direct costs for an event would obviously be the materials/equipment needed/used as well as the wages needs to pay for the staff required to run the event.

Indirect costs: This confused me at first but from what I can gather is that indirect costs can’t be directly linked to a certain project as they benefit multiple ones. Examples would include electricity, phone charges, office supplies etc. These are all necessary and contribute to various different things however it can be very difficult to specifically say how much electricity cost for that specific event.

·         Process-costing: Allocating costs to products by allocating them to a manufacturing process rather than a specific product/group of products. So in my understanding this process is monitoring the costs, making sure that possible implemented budgets are being followed and everything is going according to plan. I am not too sure this is just my interpretation.

·         Period and Product Costs: Period costs are costs of a business not directly linked to our products and product costs are those that are directly attached to products and are only seen as an expense once the products they are attached to is sold.

My thoughts/understanding – is that product costs are those that are required/vital to making the product. Examples include direct labour and material – very similar to direct costs. Period costs on the other hand are no about of the ‘manufacturing’ process but are vital to perhaps the selling process? Examples would possibly include advertising, shipping costs etc – very similar to indirect costs.

·         “Managers can decide to use whatever accounting approach they wish to help them understand the key cost relationships in their firm”. I think it is important for managers to use different approaches. Everyone is different – and I think individuality enables a manager to understand properly and in turn may find an easier way of doing things. Chapter #6 also mentions that they must conform to certain rules and accounting standards when measuring, allocating and apportioning costs. This intrigues me – I want to know what rules and accounting standards must be followed and why? Is this just for the final profit and loss statement? Or are the rules followed daily when entering data into an accounting system?

·         Overhead costs and overhead absorption rates: THIS CONFUSES ME!! From what I can gather it is a process designed for companies/business owners to ‘forecast’ how much they need to put aside to afford/pay for the production of a product or a particular service. I am assuming this because later on in the chapter it says that the ‘actual’ overhead costs of production and ‘actual’ production volumes are properly known at the end of the year. Due to this it makes sense to look at overhead costs and absorption rates to predict how much something is going to cost. This may not always go to plan as many assumptions have to be taken into consideration as well as uncontrollable factors arising. This is a process I am thinking would get better with practice and experience. What procedures could be put in place or followed to make this process easier?

·         Absorption and Variable Costing: I feel comfortable with this concept – something I understand

·         How Costs Change: This is something that managers would have no choice but to constantly consider. They would have to ask themselves several questions before making decisions as it is impossible to forecast the future. How do managers make the right or most appropriate choices? Are there any guidelines that they look at before making choices? Or is it all about the ‘risk’?

·         Cost-Volume-Profit Analysis: Understanding the costs and level of activity in a firm is vital for managers. However in saying this it can be extremely difficult as it is all about assumptions. When organising an event there are obviously expenses that will have to be paid regardless of how many people show up, how many people don’t and how successful/unsuccessful the event was. As said in chapter #6 this is critical information that no one can know for sure in advance. This ultimately means the manager must take a RISK – ‘you have to risk it to get the biscuit’. Having previous experience in organising events it is a real shame when things don’t go to plan particularly when a loss is made. My thoughts on breaking-even in an event are good. When you break even and no loss is made, although it is not an ideal outcome you are still providing a service that could further promote your company/business for future events. And sometimes it is all about putting a smile on a customer’s face.

·         After reading this chapter, not once, not twice but about three times, I finally feel a little more at ease with the concepts discussed. Some of the content I felt was too overwhelming and I felt I had to research more into the topics and look at examples that made sense to me.