MSE608C – Engineering and Financial
Cost Analysis
Controlling Expenses
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
Committed and Deterministic
Fixed Costs
• Discretionary
– Can be changed for short periods
• Advertising
• Training
• R&D
• Deterministic (Committed)
– Cannot be reduced
• Rent
• Salaries of key employees
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
Assessment
What type of Expenses directly correlate with
changes in business activity?
• Which type of Expenses can be changed in
the near-term?