Question

What are some managerial accounting tools for coping with excessively large amounts of selling and administrative expenses?

Answer 1

Selling and Administrative expenses can be curtailed to a reasonable extent by employing some of the following methods:

Discretionary Cost

Discretionary Cost includes every expense that can be eliminated without having any sudden impact on the conduct of business. In simpler terms, they are the expenditure that are not time-sensitive and can be postponed to a later date. However, avoiding them for a prolonged period will affect the business.

Some examples of Discretionary Costs are Advertising, Reasearch & Development, Preventive Repairs & Maintenance, Quality Control, Training of Personnel, etc.

Trend Analysis of Revenue and Cost

Trend Analysis uses data collected from several past financial years and analyses the growth or decline of the figures over time. Bar diagrams or graphs are generally used for ease of reference. It helps to detect any abnormal increase or decrease in cost and can divert attention to it for further analysis. If the reasons for the drastic changes are found, it can be avoided or replicated to steer the course of the business.

Zero-Based Budgeting

Zero-Based Budgeting (ZBB) assumes that every expense or cost should be justifiable. The traditional systems of budgeting take a few expenses for granted (For eg: Basic Advertising). But ZBB starts from zero in every new period. It makes the management justify every expense, which would make it easier to identify any expense that is no longer required.

The above methods are popularly used by businesses to limit and if possible, reduce costs.