Understanding cost behavior patterns
Understanding cost behavior patterns will allow the managers of BlueScope Steel Limited to budget accordingly. There are three manufacturing cost budgets that the managers of BlueScope Steel Limited should perform. These are direct material costs, direct labor costs, and factory overhead costs, usually based on standard or predetermined rates. Proper budgeting will make the company reduce costs and maximize profits (Novák et al., 2017). Secondly, understanding the cost behavior patterns will help the managers of BlueScope Steel Limited set realistic production and sales goals. During this process, managers from each department are required to submit the anticipated costs of their planned activities to the overall manager (Okunbor, 2013). By making sales and production projections, the company can determine the amount of resources that it will allocate to such activities in line with their budgets.
According to Walther & Skousen (2016), cost behavior patters will help managers of BlueScope Steel Limited know how the costs of the company are changing with the level of activity. As I mentioned earlier, understanding the variance of costs is essential for organizations in decision making. If managers of BlueScope Steel Limited understand how the costs are changing, they will be able to monitor and control the production of steel. They will realize how fixed costs will remain constant despite the level of output and how variable costs changes with the change in the production, as explained by Lepadatu (2012). For the case of BlueScope Steel Limited, fixed costs include insurance, rental payments, leases, and interest payments, while the variable costs include the cost of labor and raw materials. If managers understand these costs, they will identify profitable price levels for their manufactured products. Again, such patterns will enable the managers of the company to determine their break-even point where their revenues and losses equalize.
Cost behavior patterns enables managers to undertake financial planning and make cost control decisions. According to Novák & Popesko (2014), cost behavior patterns play an essential role in guiding managers to plan, control, and make decisions. By understanding these cost behavior patterns, the managers of BlueScope Steel Limited will be able to access the changes in costs that result in changes in the activity levels. This is because for any change to occur in the variable costs of the company, there must be a change in the activity that produces the change (Okunbor, 2013). Through this, managers will understand those costs that have fixed and variable components in them. Okunbor (2013) adds that relevant prices are the ones that enable the managers to make financial decisions while the unnecessary costs do not form part of the decision-making process of the managers.
Understanding cost behaviors will help the managers of BlueScope Steel Limited to undertake operations planning. In the modern globalized world, companies are seeking new operation strategies to ensure their success in the corporate world (Bradbury & Scott, 2014). The managers of BlueScope Steel Limited are therefore required to come up with cost management models aligned to their competitive strategy. The managers should evaluate the nature of their competition and then define the necessary and sufficient dependence on information from the cost patterns. Through activity-based costing, managers can make viable decisions regarding how various business operations should be undertaken. Cost behavior patterns will thus help managers of BlueScope Steel Limited to administer their business practices to create the highest level of efficiency (Lepadatu, 2012). Through proper analysis of cost these patterns, the managers will attain high economies of scale, especially by improving their production volume.
In conclusion, understanding cost behavior patters indeed has far-reaching advantages to managers is it can help them make ethical and sound business decisions for their companies. The managers are required to implements accounting reporting systems to either prevent or minimize fraud and promote ethical decision making. For example, in the case of BlueScope Steel Limited, tracking changes in their activities of costing and maintaining them in a relevant range enables them to determine the amount of expenses associated with such activities. If they exceed the minimum or maximum range of costs, then this is a clear indicator that the management of the company is engaging in fraud, or it is taking part in activities that are not authorized. In case the company incur high costs during production processes, this should be a red flag to the management that a particular form of fraud is occurring in a specific cost center. Understanding cost behavior patterns and general cost accounting principles, therefore, ensures that the financial costs of any company are within an acceptable range, and this enables the organizations to make forward-looking decisions.