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Managing Costs & Revenues

Managing Costs & Revenues. Professor William F. O’Brien, MBA, CPA. Spring 2008. Session 1. Strategic Management Accounting Management Accountants as Business Partners Barbary Pirates Case – The role of “spin”. Ansari: SMA. Strategic Triangle (QCT)

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Managing Costs & Revenues

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  1. Managing Costs & Revenues Professor William F. O’Brien, MBA, CPA Spring 2008

  2. Session 1 Strategic Management Accounting Management Accountants as Business Partners Barbary Pirates Case – The role of “spin”

  3. 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

  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

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

  6. The Analysis “Trifecta” • Quantitative • Strategic • Tactical • Let’s consider the HP-Compaq Deal

  7. 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.

  8. 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

  9. 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

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

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

  12. 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.

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

  14. Session 1 - Appendix Cost Accounting Review

  15. 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)

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

  17. 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

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

  19. 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

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

  21. 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

  22. Multiple Product Line Format

  23. 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

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

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

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

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