Managing Costs & Revenues

1. Managing Costs & Revenues Professor William F. O’Brien, MBA, CPA Spring 2012 MANAGING COSTS AND REVENUES-2012

2. Session 1 • Strategic Management Accounting • Cost Accounting Review • Barbary Pirates Case – The role of “spin” MANAGING COSTS AND REVENUES-2012

3. Ansari: SMA • Strategic Triangle (QCT) • Competition based on quality, cost & Time • Mgt. Attribute Triangle (TBC) • Relates to information system and strategic cost management tools • Impacts technical, behavioral & cultural aspects • Mgt. Actg. Links Strategy with Action • It is not an end unto itself • It is an integrating tool MANAGING COSTS AND REVENUES-2012

4. 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 MANAGING COSTS AND REVENUES-2012

5. SMA, cont. • QCT Triangle • Quality relates to customer needs • Long-term cost implications • Timeliness of delivery • TBC Triangle • Provides Technical insight • Encourages Behavioral changes • Supports Cultural beliefs MANAGING COSTS AND REVENUES-2012

6. The Analysis “Trifecta” • Impact of actions/decisions/proposals • Quantitative • Strategic • Tactical • Let’s consider the HP-Compaq Deal MANAGING COSTS AND REVENUES-2012

7. Session 1-Appendix Cost Accounting Review MANAGING COSTS AND REVENUES-2012

8. 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) MANAGING COSTS AND REVENUES-2012

9. Cost Drivers and Final Cost Objectives • Cost Drivers • Activity • Volume • Other • Structural • Executional • Final Cost Objective (FCO) MANAGING COSTS AND REVENUES-2012

10. 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 MANAGING COSTS AND REVENUES-2012

11. CVP Analysis • Uses • Revenue planning • Cost classification • Commission analysis • Volume and mix determination • ABC modifications MANAGING COSTS AND REVENUES-2012

12. 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 MANAGING COSTS AND REVENUES-2012

13. Margin of Safety • Actual sales - B/E sales • Margin of safety percentage • Margin of safety/actual sales MANAGING COSTS AND REVENUES-2012

14. 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 MANAGING COSTS AND REVENUES-2012

15. Multiple Product Line Format MANAGING COSTS AND REVENUES-2012

16. 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 MANAGING COSTS AND REVENUES-2012

17. CVP Limitations • Relevant range assumption • Difficulty in cost determination • Allocations • The “Scarlet Letter” of accounting MANAGING COSTS AND REVENUES-2012

18. Scarlet Letter of Accounting • Lacks Cost Mgt. • Error Prone • Distraction MANAGING COSTS AND REVENUES-2012

19. Risk and Cost Mgt. • Risk plays a role • Risk-prone vs. risk adverse • Systems are designed to mitigate the negative aspects of risk preference MANAGING COSTS AND REVENUES-2012

20. 5 Families of Cost Analysis • Make versus buy (outsourcing) • Continue or discontinue a business • Sell now or process further • Scarce resources • Pricing issues MANAGING COSTS AND REVENUES-2012