Nature of Costs I

1
Nature of Costs I
15

• Accountancy 503
• Fall 2006
• Professor Clifton Brown

2
Organizational perspective Molar vs. Molecular
3
Molecular view of Ford
Ford Motor Company
Automotive Sector
North American Operations
Norfolk (VA) Assembly Plant
Ford F-Series Pickup Truck
Engine Assembly Unit
Engine Assembly Team
4
Economic Activity
In management accounting, we are interested in
relationships between elements of economic
activity. That is, we are interested in
relationships between productive activities and
the costs and benefits (and associated risks) of
such activities.
Inputs (Costs)
Productive Activities
Outputs (Benefits)
5
The variety of costs
Variable Cost
Fixed Cost
Direct Cost
Opportunity Cost
Cost
?
Average Cost
Indirect Cost
Sunk Cost
6
Alan Bender
Investment opportunities in a fast food
franchise ? Pizza Hut ? Taco Bell

• Opportunity cost of Alan Benders restaurant
  project
• Prior to his deciding to make an investment

?

• After making the investment in and opening, say,
  a Taco Bell franchise.

?
7
Alan Bender Economic analyses
Revenues Variable operating costs
Contribution margin Contribution margin fixed
operating costs Operating profit
8
Alan Bender Economic analyses
239
202
87
77
9
Measurement of economic activity

• Revenues Expenses Net Income
• (Sales price/unit Units sold) (Variable
  cost/unit Units sold) Fixed costs Net
  Income
• Units sold (Sales price/unit Variable
  cost/unit) Fixed costs Net Income
• Units sold (CM/unit) Fixed costs Net Income

10
Breakeven sales
At breakeven, net income 0

• Units sold (CM/unit) Fixed costs 0
• Units sold (CM/unit) Fixed Costs
• Units sold Fixed Costs / CM/unit

11
Alan Bender Breakeven sales
Breakeven sales in units Total Fixed Costs /
CM/unit
Breakeven sales in Total Fixed Costs / CM
?
12
Alan Bender Target Profit
Target sales in units (Total Fixed Costs
Target Profit) / UCM
Target sales in (Total Fixed Costs Target
Profit) / CM
?
615.31
526.21
13
Harlands Bookstore
Incremental Sales of Display Table
Incremental sales
14
Harlands Bookstore
16.00 13.97 10.97 16.60
15
Harlands Bookstore
Safe Landing publishers representative offered
to give Harland two free copies of the book if
Harland places it on the special display table.
Does this change your earlier response?
16
Turn-in a case write-up
The following individuals should e-mail a
write-up of Alan Bender to the instructor no
later than 24-hours from now
Abenov, Nurzhan Avci, Ozcan Chen,
Kuo-Liang Chung, Hee Yong Ha, Seung-Hyup Jinsiriva
nich, Napaporn
Kusaka, Hiroyuki Law, Pi-Cheng Lee,
Jun-hee Michaels, Jonathan Phitakburanapath,
Krit Wright, Nathan
17
Turn-in a case write-up
The following individuals should e-mail a
write-up of Harlands Bookstore to the instructor
no later than 24-hours from now
Ates, Nuri Chen, Jeffrey Choi, Hong Joo Gundogan,
Gurol Jeong, Doo Hwan Kim, Tae Bum
Lee, Szu-Hsien Pali, Gulali Park, Seong
Wan Parli, Benjamin Wei, Baisong Zhang, Yinan