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Management control and costing
Knowing the real cost of a product or a service changes decisions on pricing, discontinuation and investment. Management control builds that figure, then confronts it with the budget to explain variances.
Three ways to compute a cost
Full costing allocates all charges, indirect ones included, which suits setting a selling price. Marginal costing keeps only variable charges and reveals the contribution margin, which suits short-term decisions: accepting an extra order, choosing between two products. Activity-based costing refines the allocation of indirect charges by following the activities that genuinely consume them, and corrects the distortions of flat allocation keys.
- Full costing, to set a price covering the whole structure
- Marginal costing, to decide on a short-term trade-off
- Activity-based costing, to allocate indirect charges accurately
- The budget, which turns strategy into a quantified commitment
- Variance analysis, which explains actuals and directs correction
Which method for which decision
The choice of method follows from the decision, never from habit. That sequence is what the management control block installs, on real organisational cases.
| Decision to take | Suitable method | What it reveals |
|---|---|---|
| Set a list price | Full costing | The floor below which the structure is no longer covered |
| Accept an extra order | Marginal costing | The contribution margin the order generates |
| Compare two ranges | Activity-based costing | The indirect charges each one genuinely consumes |
| Explain a monthly result | Variance analysis | The share due to volume, price and unit cost |
| Steer continuously | Dashboard | The leading indicators that precede the result |
The hours devoted to costing
- hours in the management programme
- 260
- hours in advanced management control
- 120
- hours on building indicators
- 160
Cost accounting, budgets, variances, dashboards.
Activity-based costing, indicator-based steering.
Building an indicator and balancing several measures.
Management control questions
How should indirect charges be allocated?
Through the activities that genuinely consume them, which is what activity-based costing does. A single flat key remains useful to start with, provided you know it favours high-volume products and penalises complex ones.
How often should a cost be recomputed?
At every significant change in volume, purchase price or structure. A cost computed once a year mostly describes last year, whereas a quarterly recomputation accompanies decisions as they are taken.
Does management control require dedicated software?
A well-built spreadsheet carries management control for a mid-sized organisation, and the catalogue offers a short format devoted to advanced command of it. Specialised tools bring automation, on principles already understood.
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