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MSE608C – Engineering and Financial Cost Analysis

MSE608C – Engineering and Financial Cost Analysis. Managerial Accounting. Managerial Accounting. Managerial Accounting Providing information to management within an organization The role of the Manager Planning; Organizing; Controlling; Decision Making Features of Managerial Accounting

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MSE608C – Engineering and Financial Cost Analysis

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  1. MSE608C – Engineering and Financial Cost Analysis Managerial Accounting

  2. Managerial Accounting • Managerial Accounting • Providing information to management within an organization • The role of the Manager • Planning; Organizing; Controlling; Decision Making • Features of Managerial Accounting • It places emphasis on the future • It is not governed by GAAP and is not required • Emphasizes only relevant data • Precision is not critical

  3. The Total Costs Curve $$$ TOTAL COSTS VARIABLE COSTS FIXED COSTS SALES VOLUME BREAKEVEN VOLUME

  4. The Cost-Price-Volume (CPV) Curve $$$ REVENUES TOTAL COSTS VARIABLE COSTS BREAKEVEN REVENUES FIXED COSTS SALES VOLUME BREAKEVEN VOLUME

  5. The CPV Curve for Profit Planning • To make a profit sales Revenues must exceed the sum of Fixed and Variable Expenses. Revenues > Fixed Expenses + Variable Expenses $$$ REVENUES PRICE INCREASE TOTAL COSTS VARIABLE COSTS FIXED COSTS SALES VOLUME NEW BREAKEVEN BREAKEVEN VOLUME

  6. The CPV Curve for Profit Planning • To make a profit sales Revenues must exceed the sum of Fixed and Variable Expenses. $$$ REVENUES TOTAL COSTS NEW VARIABLE COST CURVE FIXED COSTS SALES VOLUME NEW BREAKEVEN ORIGINAL BREAKEVEN

  7. The Contribution Margin • The Gross Margin format • Separates costs by function • The Contribution Margin format • Separates Costs into Variable Expenses and Fixed Expenses. • The Contribution Margin shows how much revenue is left to contribute to Fixed Expenses. • This is a useful analytical tool for managerial accounting.

  8. The Contribution Margin Ratio • Shows the percentage of sales revenues required to cover variable costs. • Calculate the Breakeven Point Revenues = Fixed Expenses / CM Ratio

  9. Operating Leverage $ $ REVENUES REVENUES TC TC V V BREAKEVEN VOLUME BREAKEVEN VOLUME HIGH LEVERAGE (HIGH FIXED COSTS) LOW LEVERAGE (LOW FIXED COSTS)

  10. Business Decisions and Costing Analysis • Costing information is used to make a wide range of business decisions. • Make-or-Buy • Production decisions • Capital Investment Alternatives • Equipment Replacement • Product Design (new and redesigns) • Inventory levels

  11. Assessment • How can you change the Breakeven Point by modifying Costs? • How can you change the Breakeven Point by modifying Revenues? • What is the difference between the Gross Margin and the Contribution Margin? • What is the significance of a company with Low Operating Leverage?

  12. What is Budgeting? • Profit Planning. • A road map for decision making and performance evaluation. • Creates a detailed, integrated business plan for upcoming accounting period(s). • Consists of a number of budgets that, when combined, create a Master Budget.

  13. Some Elements of Budgeting • Senior management sets the Strategic Objectives: • Overall profit growth for the business; • Development of new markets or products; • Increases in market share for products lines or retreat from certain markets; • Stock price and dividend payments; • Financing and investment strategies. • Line managers must develop the detailed budgets; Operating Objectives.

  14. Some Elements of Budgeting • The Budget Cycle • Most commonly a fiscal year, divided into quarters and the most current quarter subdivided into months. Other cycles are used when practical. • Perpetual budget cycles are a twelve month continuous cycle. As one month ends, another is added. • Historical data vs. Zero-based Budgeting • Historical data for the last budget period is used to establish a baseline; increases, steady-state or decreases are based on future expectations. • Zero-based Budgeting uses zero dollars as the baseline. Each line item must be budgeted irrespective of last year’s figure. • Zero-based budgets take more time to prepare but require managers to consider the most efficient use of resources.

  15. The Master Budget

  16. Cash Budget Format(for Problem 16 – Chapter 15)

  17. Assessment • Name key differences between Managerial Accounting versus Financial Accounting? • Budgeting is _____ planning and a _______ ____ for decision making? • What are the differences between Senior and Line managers for budgeting? • Which budget is the heart of the budgeting process?

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