Managing Costs & Revenues

Managing Costs & Revenues Professor William F. O’Brien, MBA, CPA Summer 2003

Critical Cost Terms • Fixed vs. Variable • Product vs. Period • Manufacturing vs. Non-manufacturing • Direct vs. Indirect • Controllable vs. Uncontrollable • Opportunity and Sunk Costs • Differential Cost and Revenue • Critical Success Factors (CSF’s)

Cost Drivers and Final Cost Objectives • Cost Drivers • Activity • Volume • Other • Structural • Executional • Final Cost Objective (FCO)

Manufacturing Cost Flows RAW MATERIAL WORK-IN-PROCESS FINISHED GOODS BOH I O EOH B O/H R/M B O/H WIP B O/H F/G R/M TRANSFERS DIR. LABOR MFG OVERHEAD MANUFACTURING COSTS COST OF GOODS MANUFACTURED (COGM) E O/H WIP COGM COST OF GOODS SOLD (COGS) E O/H F/G R/M PURCHASES TRANSFERS TO WIP E O/H R/M P&L

CVP Analysis • Uses • Revenue planning • Cost classification • Commission analysis • Volume and mix determination • ABC modifications

Break-even Analysis • Sales - variable costs = fixed costs • Contribution Margin Approach • FC/contribution margin ratio ($) • FC/unit contribution margin (units) • Equation Approach • (Unit SP)x - (unit VC)x = FC (units) • X - (VC%)x = FC ($) • CM approach is the easier to apply

Margin of Safety • Actual sales - B/E sales • Margin of safety percentage • Margin of safety/actual sales

Operating Leverage • CM/NI • Reflects the percentage increase in sales compared to the percentage increase in net income • High OL reflects high opportunity and high risk

Multiple Product Line Format

Contribution Margin Format • Also known as “Direct Costing” • Direct costing  direct costs • P&L format: Sales xxx Variable costs -xxx Contribution margin xxx Fixed costs -xxx Net income xxx

CVP Limitations • Relevant range assumption • Difficulty in cost determination • Allocations • The “Scarlet Letter” of accounting

Scarlet Letter of Accounting • Lacks Cost Mgt. • Error Prone • Distraction

Risk and Cost Mgt. • Risk plays a role • Risk-prone vs. risk adverse • Systems are designed to mitigate the negative aspects of risk preference

Ansari: SMA • Strategic Triangle (QCT) • Competition based on quality, cost & Time • Mgt. Acctg. Triangle (TBC) • Impacts technical, behavioral & cultural aspects • Mgt. Acctg. Links Strategy with Action • It is not an end unto itself • It is an integrating tool

SMA, cont. • The two triangles are dependent upon each other • This process is a framework to ensure that our management accounting tools possess the attributes necessary to achieve our strategic goals

SMA, cont. • QCT Triangle • Self evident • TBC Triangle • Provides Technical insight • Encourages Behavioral changes • Supports Cultural beliefs

Mgt. Acctg.--Strategic Implications • M/A’s must use KTT in their business decisions to meet “customer” needs. • M/A’s must be cost efficient and cost effective. • M/A’s must promote the economics of time and excel at their own time mgt.

IMA’s M/A Roles • Business and strategic partner • Provider of strategic business understanding • Participant in problem solving • Team member • Provider of information • Process facilitator

From Scorekeeper to Player • Role change driven by: • Information technology • Global competition • Two models for M/A’s • Corporate cop--evaluator • Business advocate--enabler • Dual accountability & org. structure • Solid vs dotted-line relationship

Accounting Business Skills“The What” • Business Perspective • Organizational Focus • Bias for Action • Communication Excellence • People Proficiency

Financial Management Guidelines“The How” • Cc • KTT • MBWA • R ƒ R3 • responsiveness • reliability • relevance

Mgt. Acctg.--Attribute Implications • M/A’s must possess broad business oriented technical skills. • M/A’s must possess the behavioral attributes of a team member, be tolerant with ambiguity and be comfortable with “soft” future-oriented numbers.

Mgt. Acctg.--Attribute Implications • M/A’s must be culturally ethical and develop the mindset of a participant.

Managing Costs & Revenues