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

Managing Costs and Revenues--MBA I--Spring Session 1 Strategic Management Accounting Management Accountants as Business Partners Barbary Pirates Case – The role of “spin”

Managing Costs and Revenues--MBA I--Spring 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

Managing Costs and Revenues--MBA I--Spring 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

Managing Costs and Revenues--MBA I--Spring SMA, cont. QCT Triangle Self evident TBC Triangle Provides Technical insight Encourages Behavioral changes Supports Cultural beliefs

Managing Costs and Revenues--MBA I--Spring The Analysis “Trifecta” Quantitative Strategic Tactical Let’s consider the HP-Compaq Deal

Managing Costs and Revenues--MBA I--Spring 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.

Managing Costs and Revenues--MBA I--Spring 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

Managing Costs and Revenues--MBA I--Spring 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

Managing Costs and Revenues--MBA I--Spring Accounting Business Skills “The What” Business Perspective Organizational Focus Bias for Action Communication Excellence People Proficiency

Managing Costs and Revenues--MBA I--Spring Financial Management Guidelines “The How” Cc KTT MBWA R ƒ R 3 responsiveness reliability relevance

Managing Costs and Revenues--MBA I--Spring 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.

Managing Costs and Revenues--MBA I--Spring Mgt. Acctg.--Attribute Implications M/A’s must be culturally ethical and develop the mindset of a participant.

Managing Costs and Revenues--MBA I--Spring Session 1 - Appendix Cost Accounting Review

Managing Costs and Revenues--MBA I--Spring 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)

Managing Costs and Revenues--MBA I--Spring Cost Drivers and Final Cost Objectives Cost Drivers Activity Volume Other Structural Executional Final Cost Objective (FCO)

Managing Costs and Revenues--MBA I--Spring Manufacturing Cost Flows BOH I O EOH RAW MATERIAL WORK-IN-PROCESS FINISHED GOODS B O/H R/M B O/H WIP B O/H F/G R/M PURCHASES TRANSFERS TO WIP E O/H R/M 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 P&L

Managing Costs and Revenues--MBA I--Spring CVP Analysis Uses Revenue planning Cost classification Commission analysis Volume and mix determination ABC modifications

Managing Costs and Revenues--MBA I--Spring 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

Managing Costs and Revenues--MBA I--Spring Margin of Safety Actual sales - B/E sales Margin of safety percentage Margin of safety/actual sales

Managing Costs and Revenues--MBA I--Spring 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

Managing Costs and Revenues--MBA I--Spring Multiple Product Line Format

Managing Costs and Revenues--MBA I--Spring 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

Managing Costs and Revenues--MBA I--Spring CVP Limitations Relevant range assumption Difficulty in cost determination Allocations The “Scarlet Letter” of accounting

Managing Costs and Revenues--MBA I--Spring Scarlet Letter of Accounting Lacks Cost Mgt. Error Prone Distraction

Managing Costs and Revenues--MBA I--Spring Risk and Cost Mgt. Risk plays a role Risk-prone vs. risk adverse Systems are designed to mitigate the negative aspects of risk preference