The Controlling Function After devising Business Plans & Ogzn structure to attain firm's goals, mgers must measure firm’s progress toward its goals. This requires controlling function. The fields of economics & accounting concepts are used in controlling process. Of cousre mgers do not have to be professional economists or CPA,but it is important that they understand the basic principles used in each profession.

Cost Controls & Break-Even Analysis Objective = show how to manage costs & determine most profitable level of pdn & sales that satisfies consumer needs Cost assists mger to assess how bus. has performed in past & to plan for the future This requires a good mgmt info system that will provide (1) acctg info that allows mgmt to determine cost in various ways (2) a means for effectively monitoring & controlling costs of the business.

Mger use costs in decision making, thus need to know how costs will respond to changes in business activities. Mgmt Info:Acctg records are sources of mgmt info as they summarize transactions like inventory turnover, eqpt purchases etc Mgmt Info as Control Function: Mgmt info is used in controlling resources obtained & used by firm. Defining Costs A firm's info system must provide data needed for cost control to ensure that costs are being allocated properly & that all relevant costs are being considered.

Implicit and Explicit Costs Explicit Cost: Costs that are directly traceable to the end product – e.g. cost of input purchased at open market for which explicit payments are made. Implicit Cost: Are costs that firms incur that do not involve explicit payments. They relate to firm's use of its own assets – e.g. cost for using building, eqpt, labor, dep. interest must be added to determining final cost of producing pdts.

Controllable and Non-controllable Costs Uncontrollable costs: Costs firms cannot easily influence – e.g. implicit costs that mgers have limited control. Controllable cost:Those regulated totally by mgers – e.g. explicit costs Fixed & Variable Costs Costs vary according to two concepts: –(1) the passage of time, and – (2) the level of activity. Fixed Costs:Stay same over time regardless of the level of output -e.g. rent Variable Costs: change with the level of activity (materials, labor, shipping).

The figure shows that TC = TVC + TFC. The Contribution Concept Price & profit are determined on per unit basis that shld cover FC & VC. SP per unit = TC per unit + Profit per unit SP per unit =FC/unit +VC/unit+ Profit/unit TC TFC TVC Output Cost Fixed cost

Fixed costs are usually referred as overhead cost. SP/unit = Overhead cost/unit + VC/unit + Profit/unit SP/unit - VC/unit = Overhead cost/unit + Profit/unit

e.g. if a rice producer has the ff cost –Materials $55/bag; Direct labor $20/bagThen TVC is $75/bag If SP/bag is $125, then $50 is left after paying for TVC to contribute to overhead (TFC) & profit –Selling Price $125/bag100% - TVC $75/bag-60% Contribution $50/bag 40% (profit & overhead)

Contribution covers profit & overhead SP/unit - TVC/unit = Contribution = Overhead/unit + Profit/unit If a firm know its contribution margin to be 40%, its SP for any item can easily be computed, once its VC/unit is known If a firm’s contribution is 60%, its VC is $200/unit then its SP = 100% = VC + Con = 40% + 60% If VC 40% = $200 then SP 100% = 100%/40% x $200 = $500

Break Even Analysis Helps to find sales/output level that yields no profits or losses - i.e. where TR =TC Calculation:Profit = 0 = Revenue – TC Profit = 0 = (P x Q) – (VC x Q) – FC 0 =Q(P-VC) – FC Q(P-VC) = FC Q =FC/(P-VC)

If rice SP is $200/bag with $120 VC, & $1mil FC then how many can be sold to break even? Calculation: Break-Even = Q =FC/(P-VC) Q =100,000/( ) = /80 = 12,500 bags