Page 149 - Finance for Non-Financial Managers

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Finance for Non-Financial Managers
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modified in a much shorter timeframe, even those we call fixed.
By contrast, even the most variable of costs, such as the
labor that goes directly into making a product that will be sold
immediately (like the amazing Wonder Widget in Chapter 5),
cannot be changed instantly. Labor reductions typically require
giving reasonable notice, providing termination pay, overcoming
resistance to losing skilled workers, and perhaps other factors
that effectively stretch out
the time it will take to
Don’t Get Stuck
reduce the net cost to the
on Labels
An effective manager thinks company.
outside of the categories of “fixed” So, the terms “fixed”
costs and “variable” costs. Don’t and “variable” are not
assume that you can’t reduce fixed entirely accurate.
costs or that variable costs will be However, financial man-
easy to reduce. For example, some- agers and the users of
times it’s possible to reduce costs by their information, as well
converting fixed costs to variable as production planners
costs through outsourcing services or
renting equipment as needed. Or you and managers, adopted
may think that you can reduce the the terms in order to cre-
time it takes to assemble a unit, only ate a framework for
to find that you’re spending more approximating how these
time inspecting and correcting. costs will act. Why? To
enable them to predict
future cost relationships and thereby manage the bottom-line
outcomes of their actions at various sales volumes.

Controllable and Uncontrollable Expenses
Now let’s look at costs from another angle: our ability to control
their movement.
Costs that responsible managers can readily control are
called, logically enough, controllable costs. Some examples are
travel expenses, nonproduction labor costs, most marketing
expenses, the amount of inventory purchased, and long-dis-
tance telephone charges. Notice that I didn’t say that these