A cost-benefit analysis is the process of comparing the projected or estimated costs and benefits (or opportunities) associated with a project decision to determine whether it makes sense from a business perspective.
cost management strategies for business decisions 4e pdf
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If total benefits outnumber total costs, then there is a business case for you to proceed with the project or decision. If total costs outnumber total benefits, then you may want to reconsider the proposal.
There are many positive reasons a business or organization might choose to leverage cost-benefit analysis as a part of their decision-making process. There are also several potential disadvantages and limitations that should be considered before relying entirely on a cost-benefit analysis.
In recent years, economic analysis in the planning process and in the monitoring process of the production process shows that three factors: price, quality and time have critical roles in the success of the companies to achieve success in the competition. The world faces the problem of integration between sustained business functions. The sustainability data are not sufficiently integrated. To solve this problem, organizations need information systems to facilitate their sustainability initiatives [1, 2]. Also, businesses and academics worldwide agree regarding the benefits of sustainable development (SD). Improving reputation and branding and increasing revenues by reducing costs are the primary strategic objectives of any entity [3, 4]. In this paper, we introduce the strategic cost management approach that helps manufacturing companies for overcoming the costs stickiness and monitoring the life cycle of products and it introduces integrated sustainable development system for manufacturing companies.
Strategic cost management is a process connecting financial management, cost management and strategic management. It involves cost optimization and financial resources preparation which are needed to achieve desired strategic market position in cost effective manner. The importance of managing costs and aligning them with the business strategy of an entity is critical especially in the midst of challenging economic times faced by businesses today. Traditionally companies have been under pressure to cut cost in the short-term without really thinking about sustainable change, impact on the people and integration with the overall business strategy. In the current business environment of increased global competition, new markets, increasing regulation and changing demographics, successful companies are changing their approach to cost structuring and control.
Cost management is an important part of business management in the manufacturing industry. The degree of cost management implementation is a comprehensive index to measure the level of enterprise management. In particular, firms with limited access to capital have higher costs of securing external financing during the capacity expansion periods, which increases the upward adjustment costs. When activity decreases, firms with limited access to capital may suffer more decrease in the present value of revenue generated by a marginal capacity, as these firms have higher opportunity cost of capital and thus higher discount rates compared to firms with better access to capital. Therefore, we hypothesize that limited access to capital not only reduces contemporary capacity expansions associated with sales increases, but also weakens the degree of cost stickiness when sales decrease [15, 16].
Notions of cost behavior are a key element in management accounting [27]. There are two main views about the existence of expense stickiness: rational decision-making and motivational. The rational decision-making view treats expense stickiness as a consequence of management rationally choosing between alternatives after comprehensively weighting costs and benefits. The second view is motivation-based and relates expense stickiness to managerial incentives, suggesting that managers are not expected to behave as if they were in an ideal world. Among their dysfunctional behavior, perks and earnings management reflecting different contracting stimulations are often observed [28].
Planning and control are of the important tasks of management. Cost related information that managers need them to perform these tasks may be received from classified information reflected in the financial statements. The required information in this regard cannot be easily extracted from the financial statements [29]. A business entity expenses can show different behaviors suitable to the level of activity. In traditional cost model it is often assumed that administration, general and selling costs varies according to activity level. However, recent experimental studies have revealed evidence that shows that administration, general and selling costs behave asymmetrically [30]. An asymmetric behavior is a behavior in which cost increase more rapidly. In other words, the reduction in costs at the time of declining sales is lower than when the cost increases at the time of the same level of sales. This cost behavior is called cost stickiness. Expanding researches show that economic factors such as increase in assets and uncertainty about the future can have an impact on the asymmetric behavior of cost.
According to the idea of Anderson et al. [31], there are many reasons for costs stickiness. Some of these reasons include natural reluctance to lay off employees when downsizing, firm costs and the need for time to approve a reduction in the volume of activity and management decisions for maintaining used resources which could be the result of individual consideration and leads to imposing cost to the firm. By determining the stickiness of cost, the company owners can analyze whether managers incur costs to the firm or not [32].
Managers of manufacturing companies must consider the relationship of costs with income and the effect of income changes on the costs rate when planning and budgeting the company activities for predicting the future costs and thus offer a more comprehensive budget [33]. The ultimate goal of any business unit is maximizing profits and consequently, an increase in equity. Management of each profit-oriented enterprise tries to gain maximum benefit and efficiency from using the fewest resources and one of the simplest ways to reduce consumption of resources is cost control. But this requires complete knowledge of how costs behave and the factors influencing the behavior of the cost. One of the items that should be considered in the analysis of cost behavior is the phenomenon of cost stickiness. The public and dominant view is that with declining sales, costs should also be changed accordingly. But in fact, it does not happen [34].
Today, increasing competition in domestic and international markets has forced managers to better understand their cost structure and become aware of cost orientations means how the costs change. The meaning of cost orientation is a model according which costs react to changes in activity level [35]. Therefore, it is suggested that managers calculate their costs stickiness and consider all aspects of this important issue in their decisions. Orientation or the concept of cost stickiness gives a great help to investors and shareholders. Because in companies with strong stickiness, by reduced selling, costs will change more than the time when selling increases and this will be considered as a weakness of management by the investors and shareholders; while one of the main reasons of cost stickiness is bearing the current costs to avoid more losses in the future and or more profit in the future and it depends on management decisions [36].
Effective strategic management, plays an important role in the success of the company or organization. Increase in competition in the international arena, new technologies and changes in business processes, caused management to become more dynamic and important than before. Managers should always have a competitive attitude and for this purpose the company's competitive strategy is essential. Strategic attitude leads the manager to anticipate changes and products and their production process will be designed based on anticipated changes in demand and customer's needs. In this situation, flexibility is important.
In developed countries, most organizations use data of cost management. But the extent of their reliance on this information depends on the nature of the competitive strategy of the company. Many companies compete on the basis of the provision of goods and services at the lowest cost price. Some companies compete on the basis of being a leader in production and offering superior and differentiated products. The role of cost management is supporting corporate strategy by providing the information through which one can be successful in products development and their marketing. For achieving corporate sustainability, we suggest to use the instruments of strategic cost management in manufacturing companies. Today, managers use strategic cost management tools to accomplish strategies and achieve main success producer factors.
The most common system that used in many companies is activity-based costing system. Activity-based costing system which is specifies the resources consumed by each activity during the relevant period; and thus the cost of each activity is precisely calculated. Then the aggregated costs of any activity are assigned to the considered product or customer, depending on the product consumption or the customer use of that activity [45]. The other instrument is bench-marking. Bench-marking is a process that the companies try to choose the best practice as of the right activity in comparison with the leading companies, then given the success-builder factors, the company processes are improved to the level of performance of its competitors or even reach to a better level. For identification of internal and external failure factors in the companies, we suggest to use total quality management technique. Total quality management a new concept that emphasizes on precise measurement of the costs and identification of internal and external failure factors, through which a way to lower production (lean production) by continuous improvement in company processes is created [46]. 2ff7e9595c
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