Michael Kinney

Cost Management and Value Creation

The value of a company is a function of many variables. Costs are of special importance since managers can influence costs. Success at cost management has a phenomenal effect on value because of the relationships between costs, business risk, financial risk, and valuation. These relationships are non‐linear. Consequently, success in cost management yields amplified benefits in terms of value creation. In a counter sense, shortcomings in cost management result in an intensified eradication of value. Last, improved profits derived from cost management are “higher quality” increments to profits. Interestingly, the same non‐linear phenomenon holds: an increment to profits that results from costs management will have a greater addition to company value than an equal increment in profits that results from higher sales or higher sales price per unit. These reasons attest to the importance of attention to costs in value creation. Focuses on benefits of cost management in terms of: the reduction of business risk; ...

Managing Earnings by Manipulating Inventory: The Effects of Cost Structure and Valuation Method

Using absorption costing, manufacturing firms can manipulate production (relative to sales) to shift fixed costs between cost of goods sold and inventory accounts, thereby managing earnings either upward or downward. Considering two earnings targets (avoiding losses and consensus analyst forecasts), we use a large sample of manufacturing firms to study how production cost structure and inventory valuation method affect this strategy. We report the following results: Firms with high fixed-cost ratios are more likely to manipulate inventory but make smaller abnormal inventory changes than companies with low fixed-cost ratios. Because LIFO firms in the manufacturing sector may also manage earnings by liquidating LIFO layers and releasing the LIFO reserve, LIFO firms are less likely than other companies to manage earnings by shifting fixed costs between COGS and inventory.