MSE608C

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MSE608C Engineering and Financial Cost Analysis

• Managerial Accounting

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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

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The Total Costs Curve

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

REVENUES
TOTAL COSTS
VARIABLE COSTS
BREAKEVEN REVENUES
FIXED COSTS
SALES VOLUME
BREAKEVEN VOLUME
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The CPV Curve for Profit Planning

• To make a profit sales Revenues must exceed the
  sum of Fixed and Variable Expenses.
• Revenues gt Fixed Expenses Variable Expenses

REVENUES
PRICE INCREASE
TOTAL COSTS
VARIABLE COSTS
FIXED COSTS
SALES VOLUME
BREAKEVEN VOLUME
NEW BREAKEVEN
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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
ORIGINAL BREAKEVEN
NEW BREAKEVEN
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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.

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The Contribution Margin Ratio

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

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Operating Leverage


REVENUES
REVENUES
TC
TC
V
V
BREAKEVEN VOLUME
BREAKEVEN VOLUME
HIGH LEVERAGE (HIGH FIXED COSTS)
LOW LEVERAGE (LOW FIXED COSTS)
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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

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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?

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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.

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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.

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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 years figure.
• Zero-based budgets take more time to prepare but
  require managers to consider the most efficient
  use of resources.

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The Master Budget
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Cash Budget Format(for Problem 16 Chapter 15)
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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?