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AMIS 525

• Welcome to AMIS 525
• Session 1

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AGENDA for September 23rd

• Talk about why we are here

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AGENDA

• Talk about why we are here
• Provide an overview of the course and my
  expectations

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AGENDA

• Talk about why we are here
• Provide an overview of the course and my
  expectations
• Answer questions about the syllabus, etc.

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AGENDA

• Talk about why we are here
• Provide an overview of the operation of the
  course and my expectations
• Answer questions about the syllabus, etc.
• Lecture on the modeling of cost behavior

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So why are we here?

• College is about independent thinking, but it
  also is about values like
• learning to think logically

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So why are we here?

• College is about independent thinking, but it
  also is about values like
• learning to think logically
• communicating clearly

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So why are we here?

• College is about independent thinking, but it
  also is about values like
• learning to think logically
• communicating clearly
• learning methods of academic study and practice

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So why are we here?

• College is about
• appreciating the role and contributions of
  different disciplines

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So why are we here?

• College is about
• appreciating the role and contributions of
  different disciplines
• learning how seemingly different disciplines are
  interrelated (e.g., the scientific method)

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Our hope is that we will

• Develop an ever more comprehensive world view

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Our hope is that we will

• Develop a more comprehensive world view
• Learn about other cultures and the perspectives
  of others

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Our hope is that we will

• Develop a more comprehensive world view
• Learn about other cultures, other world views
• Develop a value system appropriate to an educated
  person

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Our hope is that we will

• Make better, more informed choices in life

The difference between success and even greater
success is a thin line.
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Our hope is that we will

• Make better, more informed choices in life
• Build a firm foundation for a life-time of growth
  and learning

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525 Coverage -- Theme 1

• Learn the methods, principles, and issues
  involved in the costing of inputs to activities,
  the activities themselves, as well as the outputs
  of those activities.

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525 Coverage Theme 2

• To learn, implement, and evaluate the concepts,
  terminology, and methods needed to analyze the
  impact of decision options on revenues, costs,
  profitability, investment, and cash flows

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525 Coverage Theme 3

• To learn, implement, and critique the key methods
  and processes used in management planning and
  control systems.

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525 Coverage -- Theme 4

• Consider some ethical issues and incentives
  inherent in the balance between compliance
  reporting requirements and the information needs
  of management.

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Features of My Sections

• Use of more comprehensive cases to integrate sets
  of topics. Whenever appropriate, new topics build
  on previous topics.

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Features of This Section

• Use of technology to reflect recent developments
  in the accounting professions, in education, and
  of course, in business
• WebCT Course management system and official
  source of info.
• Testing online and in computer labs
• Assignments in Excel and Word

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Features of This Section

• More emphasis on business issues, professional
  judgment, financial analysis, and communication.
  This means less emphasis on calculations and
  journal entries. Calculations and journal
  entries are a means to an end, not the end!

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Features of This Section

• More emphasis is placed on the quality of your
  thinking, the integration of topics and class
  participation. Thus, more judgment is required
  on my part.

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Features of This Section

• Greater opportunity to be rewarded for knowing
  the material and preparing for tests as you go.

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The Major Themes - Review

• Costing inputs, activities outputs
• Analyzing the impact of decisions on entity
  performance
• Design and operate management control systems

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My Audacious Goals

• Help you become more independent thinkers.

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My Audacious Goals

• Help you become more independent thinkers.
• Help you improve your financial analysis skills
  and tools.

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My Audacious Goals

• Help you become more independent thinkers.
• Help you improve your financial analysis skills
  and tools.
• Help you improve your Excel and Internet skills
  and tools

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Suggestions

• As always in accounting, working problems and
  studying cases is key to understanding the issues
  under consideration.
• Communicating the results of your analyses and
  evaluation is the objective of your preparation.

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Suggestions

• Class discussions and participation are the key
  to an enjoyable quarter and our staying in sync.
• Utilize my office time, work together, and use
  our TA

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Workload

• The University standard is to work two hours per
  credit hour per week outside class to get an
  average grade. That means a minimum of 15
  concentrated hours on 525.

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Syllabus Work Schedule

• Official source WebCT
• http//class.osu.edu/
• Backup in case of WebCT failure only
• http//fisher.osu.edu/bentz_1/525

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Basis of Grades

• Final exam during regularly scheduled period (2
  parts) 300
• Test (1 scheduled) 250
• Quizzes 100
• Major assignments 200
• Minor assignments 100
• Participation and involvement 50
• Total points 1,000

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Questions?
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Moving On...

• Next, let us consider a conceptual framework that
  we will use to organize how we think about
  management accounting. The FASB developed a
  framework for financial reporting, and we need
  one for managerial accounting.

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Who Needs a Framework?

• Provides a more holistic view of organizations
• Provides a way of organizing knowledge based on
  useful concepts terminology
• Provides a way of thinking about management and
  accounting activities
• Provides a basis for understanding both current
  and past business thinking

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• Whats up with this management stuff?

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Prof. Shanks Framework
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Elaborating on the Framework

• Strategy provides the long-term, comprehensive
  guiding principle to define how that firm plans
  to compete for customers and business
• Product or service quality
• Product or service cost
• Product or service functionality

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The Strategic Triangle
Functionality
Cost
Quality
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The Strategic Triangle

• Think about a simple product like aspirin
• High quality (purity) a given requirement to be
  in the market in USA, but more risk might be
  acceptable in a developing country.
• Given acceptable quality, low cost is a dominant
  factor

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The Strategic Triangle

• Functionality has been increased to expand the
  market
• Buffered aspirin to ease stomach problems
• Small dosages for children and heart-attack
  prevention
• Tamper-proof packaging for safety

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Management Accountant

• The management accountants role (CFO) is to
  develop and communicate cost/benefit information
  to those groups and executives who must approve
  both strategies and the tactics developed to
  achieve objectives.

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Elaborating on the Framework

• I like the emphasis on strategy communication as
  an ongoing activity. Components of the
  management accounting system must be aligned to
  support walking-the-walk, both by various
  components of the management structure and
  stakeholders.

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Stakeholders

• Owners
• Customers
• Employeespast and present
• Suppliers
• Communities
• Governments
• Charities

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Decisions Involving Tactics

• Developing and executing tactics is where many
  mangers spend their time. In particular, we are
  going to focus on evaluating the costs and
  benefits of decision options. While other
  factors will influence decisions, they need to
  know the financial impact of proposed actions.

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Prof. Shanks Framework
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Development Execution

• Analysis and study of proposed tactics with
  regard to their financial consequences. This
  involves
• Identifying alternatives
• Proposing possible alternatives
• Evaluating alternatives
• Planning the implementation of the selected
  alternative

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Developing Systems

• Control systems include the periodic reporting of
  performance in absolute terms and relative to
  plans. Control involves measuring and reporting
  performance to interested parties. Both
  financial and non-financial measures are used to
  monitor performance, to provide periodic
  feedback, and to direct managerial attention to
  problem areas.

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Our Framework
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And the point is

• The managerial accounting tools and methods that
  are useful for one activity area are not for
  another.
• The goal is to use the right tool for the job.
  You are going to learn a bag full of tools in
  525, and I want you need to have some idea about
  when to use each of them.

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3 Important Roles of MAs

• Problem-solving Finding and evaluating
  solutions to problems and opportunities
• Scorekeeping Internal reporting of periodic
  results
• Attention-directing Helping managers and
  associates focus their attention on things that
  matter financially

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Organizational Setting

• Manufacturing firms
• Not-for-profit and for-profit service
  organizations use many of the same methods, tools
  and techniquesparticularly for cost/benefit
  analyses.

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Organizational Setting-II

• Adaptable internationally
• Control is primarily a medium or large firm view,
  but tactics apply to all kinds of organizations.

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For Tuesday, Sept. 28th

• Come to class prepared to discuss Go Trailer
  Company and the problems assigned for Monday.
• Read Igo Trailer Co. so you can ask questions
  (see assignments on WebCT)
• Do the assigned reading

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For Wednesday, Sept. 29th

• Get from the web, download the assignment Go
  Trailer Company and submit it through WebCT
  before 900 a.m.

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Using WebCT

• Our server http//class.osu.edu
• When will slides be available?
• What about projected grades?
• Other statistics?
• Practice quizzes?
• Review materials?

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Using WebCT

• Whats the deal on the final exam?

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Todays Homework

• E1-18
• E1-18 (Alternative)
• E1-19

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New Topic

• One of the key issues in managerial accounting is
  to determine the factors that drive the cost of
  an activity. Business processes are composed of
  many activities that result in the creation of
  products and services.

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Significance

• Determining the factors that drive the cost of
  activities is important to the tasks of
• Forecasting costs to develop activity cost rates
• Forecasting costs to develop unit standard costs
• Forecasting costs for decision-making purposes

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Significance

• Forecasting costs to budget operations
• Analyzing cost to evaluate the profitability of
  customers, products, services, markets, or other
  entities.
• Analyzing costs to understand and evaluate the
  overall performance of organizational units

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Cost Drivers

• The time-rate-of-activity (volume) is one of
  seven primary cost drivers at the macro level.
  Because a change in volume can have a dramatic
  impact on short-run profitability, the effect of
  volume on total cost is the subject of much
  attention in accounting.

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Cost Driver -- Volume

• The issue is How should we expect costs to
  behave (vary) with respect to changes in the
  time-rate-of-activity, all else being equal. Or,
  in more traditional accounting terms How do
  costs behave with respect to changes in activity
  volume?

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What We Study

• Models of cost behavior
• Assumptions reflected in the models we use
• Evidence regarding the validity of the models
• Application of the models to cases, exercises,
  and problems

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Cost Models

• For the most part, we are going to look at linear
  cost functions, linear approximations to other
  cost functions, and learning curves. In all
  cases, we are modeling, as best we can, the
  true behavior of these costs.

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Linear Costs 5 Types

• Fixed
• Variable
• Semi-variable (mixed)
• Segmented variable
• Step-fixed (semi-fixed)

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Model for Total Cost

• Of course, the total of any combination of these
  costs also can be modeled by a linear cost
  function, which is what we will be doing
  throughout the quarter.

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Explanation of Terms

• TC total cost incurred, or total expected cost
  during a period
• Amount of a fixed cost during a period F
• Variable cost per unit v
• Volume per period Q

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Cost Drivers

• The issue is How should we expect total costs to
  behave (vary) with respect to changes in the
  time-rate- of-activity all else being equal.

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Total Fixed Cost

• Fixed costs are those costs that do not vary in
  total with respect to modest changes in activity
  volume. Such costs are represented by
• TC F (1)
• where TC represents total cost, and F represents
  total fixed cost per period.

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Total Fixed Cost

• Fixed costs do change over time, due to price
  changes and as a result of decisions, but they
  are relatively constant with respect to changes
  in activity volume, all else being equal, over
  some interval of volume.

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Graph of Total Fixed Cost
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Total Variable Cost

• Variable costs are those costs that vary in total
  in direct proportion to changes in driver
  activity volume.

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Total Variable Cost

• Such costs are normally represented by a simple
  affine linear equation,
• TC vQ (2)
• where TC represents the total variable cost, v
  represents the variable cost per unit of activity
  and Q represents the volume of activity during a
  period.

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Graph of Total Variable Cost
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Total Mixed Cost

• Semi-variable (mixed) costs contain both a fixed
  component and a variable component that may be
  represented by a simple linear equation of the
  form
• TC F vQ (3)
• where TC represents total cost, F represents
  total fixed cost, and v represents the variable
  cost per unit of activity, and Q is the volume of
  activity during a period.

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Graph of Total Mixed Cost
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Total Mixed Cost
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Separating Mixed Costs

• Separation of fixed variable components
• TC2 F vQ2 (A)
• TC1 F vQ1 (B)
• TC2 TC1 (F F) v(Q2 Q1) (C) (A)-(B)
• Solving for v and F
• v (TC2 TC1 ) / (Q2 Q1)
• From (1), F TC2 - vQ2

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Separating Mixed Costs

• Suppose TC1 900 for 50 units
• TC2 1,000 for 60 units
• v (1,000 - 900) / (60 50 units)
• 100 / 10 units
• 10 per unit
• F 1,000 - 10(60) 1,000 - 600
• 400

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Predicting Mixed Costs

• From the previous slide,
• TC F vQ
• TC 400 10Q
• For 45 units,
• TC 400 10(45)
• TC 850

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Next Class

• Get started of the Go problem based on todays
  slides.
• Read Igo and note any problems you encounter.
  Ask questions next Tuesday.
• Do the other assignments