Archive for the ‘Cost Management’ Category


Beware Unit Cost Traps

Recently in an online cost management forum, someone contributed a story to show the danger of a particular costing methodology. However, his conclusion was misdirected. The story went something like this: There was an old baker who became ill and had to go to the hospital. His son came home from the university to keep […]

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Customer Profitability: A One Way Street

Accountants love to tick and tie numbers, and sometimes become insanely excited when their numbers balance. This insanity is to their advantage when they are providing their “Control” function. In case others reading this article don’t know, accountants have multiple roles or functions in business. One is “Control” – Make sure money and assets are […]

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Activity-Based Cost: More Than Numbers

Activity-Based Cost or ABC has gained wide acceptance as a modern cost methodology incorporating cause and effect and cost visibility. ABC provides relevant information for management decision making. However, some have criticized ABC for a singular focus on cost and profits. This criticism is misguided. While Activity-Based Cost does have a strong cost base, it […]

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Three Cost Allocation Myths

Cost allocation is used in all sorts of business and government enterprises to distribute the money the entity spends to those that “deserve it”. For some, this means that cost incurred by one department should be spread between other departments that benefited from the expense. For others, this means that cost must be distributed to […]

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Fake Cost Drivers for Administrative Overhead

A recent discussion in an online cost modeling forum related to “Which cost drivers can you use to assign administration overheads to a wide product range in a manufacturing concern.” As the discussion evolved, one response said “it is best done through the driver of turnover of the product produced. … because the efforts of […]

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Fixed and Variable Costs — The Dilemma

Back in my college days, the university required two courses in economics: Macro Economics and Micro Economics. It was hard to reconcile the two courses. What is hard fact in one was flakey in the other – and vice-versa. As a student it drove me crazy.

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Production Control: Nothing So Useless?

According to Peter Drucker “There is nothing so useless as doing efficiently that which should not be done at all.” With developments in technology, we now have the ability to automate more processes than ever before. While I am an advocate of applied technology, another rule applies, “Don’t automate what you don’t need to do.” […]

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Standard Costs: Why Do Standard Costs At All?

After the completion of my recent series on standard costs, a colleague complemented the series “except for the fact that it begs the question – Why do standard costs at all?” So, we’re not finished yet. This is actually a very good question. If we go back to the beginning of this series, I observed […]

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Standard Cost: Setting Stretch Performance Targets

When setting performance targets, is it best to stretch the target so that everyone has a lofty, almost unattainable goal. Many would say that this is the best way to drive quantum leaps in performance management.

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Standard Cost: Setting Overhead Cost Standards

When it comes to setting cost standards, overhead is the biggest problem. Why? Today, aside from material costs, overhead is the largest component of product cost and the least understood. Historically, overhead cost averaged 20% to 40% of labor cost. It was a minor consideration to product cost and was not significant in management decisions. […]

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