MSE608C

1
MSE608C Engineering and Financial Cost Analysis

• Controlling Expenses

2
Mixed Expenses

• Fixed Expenses
• Little correlation with changing levels of
  business activity.
• Examples would include building space managers
  and technical staff utilities depreciation and
  amortization
• Semi-variable Expenses
• Some correlation with incremental changes in
  business activity
• Examples would include Supplies office space
• Variable Expenses
• Direct correlation with each unit of business
  activity
• Examples would include direct materials direct
  labor sales commission

3
Committed and Deterministic Fixed Costs

• Discretionary
• Can be changed for short periods
• Advertising
• Training
• RD
• Deterministic (Committed)
• Cannot be reduced
• Rent
• Salaries of key employees

4
Which Variances to Address?

• Materiality
• The magnitude and importance of the variance
• Consistency of Occurrence
• The magnitude and consistency of a variance over
  several periods.
• Ability to control
• Is the variance within the control of management
• Deterministic expenses are ones that management
  has little control over in the short term.
• Discretionary expenses are ones that are flexible
  in the short term.
• Nature of the item.
• The importance of the variance to the organization

5
Assessment

• What type of Expenses directly correlate with
  changes in business activity?
• Which type of Expenses can be changed in the
  near-term?