12/14/2015rd1 Engineering Economic Analysis Chapter 18  Accounting and Engineering Economy

12/14/2015rd2 AccountingManagementEngineering Economy About pastAbout past and futureAbout future AnalyzingCapital budgetingFeasibility of alternatives SummarizingDecision makingCollect/analyze data ReportingSetting goalsEstimate Financial indicatorsAssessing impactsEvaluate projects Economic trendsAnalyzing risksRecommend Cost acquisitionsPlanningAudit ControllingIdentity needs Record keepingTrade-offs/constraints Data and Communications Budgeting Data and CommunicationsEstimating Accounting, managerial, and engineering economy functions

12/14/2015rd3 Controller CostsTaxesBudgetsGeneral Accounting Auditing Systems Six Principal Specializations of Private Accounting

12/14/2015rd4 Assets Properties that are owned and have monetary value e.g. Cash, inventory, buildings, equipment.

12/14/20155 Liabilities Accounts owned to outsiders e.g., notes payable, accounts payable, bonds payable, income taxes e.g., notes payable, accounts payable, bonds payable, income taxes

12/14/20156 Equity The owner's interest (assets minus liabilities) in an enterprise.

12/14/2015rd7 Accounting Equation Assets = liabilities + equity This accounting identity is always maintained.

12/14/2015rd8 Transactions Events that result in change of assets, liabilities, or equity. Business papers – original documents Journals – books of original entries Ledgers – complete set of accounts

12/14/2015rd9 Summarizing Information Posting Ledger (classify the data in summary) provide the basis for preparing financial statements Income Statement Balance Sheet

12/14/2015rd10 Income Statement Summary of revenue, expense, and net income over a specified period of time. Accrual basis – revenue when earned and expense when incurred Cash basis –revenue and expense with receipt and payment of cash.

12/14/2015rd11 Income Statement Revenue from sales Cost of goods sold Gross profit on sales Operating expenses Selling expenses, G & A, other Net income (Gross profit – Operating expenses)

12/14/2015rd12 Income Statement vs. Balance Sheet Enter asset, liability, capital, income, and expense Enter asset, liability, capital, income, and expense Income StatementBalance Sheet Accts payableLiability Accts receivableAsset CashAsset EquipmentAsset EquityCapital Fees incomeIncome MachineryAsset Notes payableLiability Other IncomeIncome Salary ExpenseExpense SuppliesAsset Supply ExpenseExpense

12/14/2015rd13 Balance Sheet Assets: Resources the business owns arranged in order of liquidity Liabilities: Claims against those resources arranged in order of expected payment Equity: The difference between assets and liabilities; often called capital or stockholders' equity

12/14/2015rd14 Classify as current asset, long-term asset, current liability, or long-term liability. 1. Accounts Receivable 6. Supplies 2. Accounts payable 7. Salaries payable 3. Notes payable8. Bonds payable 4. Mortgage Payable9. Equipment 5. Cash 10. Land Current assets: 1, 5, 6 Long-term assets: 9, 10 Current liabilities: 2, 3, 8 Long-term liabilities: 4, 8

12/14/2015rd15 Balance Sheet Balance Sheet: Owners’ Equity Stockholders' Equity The residual interest in the assets that remain after deducting the liabilities. Contributed Capital A measure of the capital contributed to the company by its owners. Contribution can be through cash, noncashassets, or valuable services. Different classes of capital: Common stock and Preferred stock Retained earnings

12/14/2015rd Annual sales of $500K and a daily profit of $1K 6 days a week, find total yearly before tax business expense. 6 * 52 = 312 days of $1K profit or $312K profit/year Revenues - Profit = Expense or 500K - 312K = $188K A firm has $5M in current assets (CA) and $2M in current liabilities (CL). Find the working capital and current ratio. Working capital = current assets - current liabilities = $5M - $2M = $3M Current ratio = CA/CL = 5/2 = 2.5

12/14/2015rd Admin expense $2,750K Subcontract services 18,000K Development expense 900K Interest expense 200K Sales revenue 30,000K Selling expense 4,500K Develop the income statement Operating Revenue and expenses Revenue Sales30,000K Total30,000K Expenses Admin 2,750K Cost of goods sold18,000K Development 900K Selling 45,00K Total 26,150K Total operating income 3,850K Non-operating revenues & expenses Interest paid 200K Income before taxes 3,650K Taxes 985.5K Net profit (loss) 2,664.5K

12/14/2015rd Indirect annual manufacturing costs $60M for 12,000 machine-hours a) Compute predetermined indirect cost application rate using machine hours as the burden vehicle. 60M/12K = $5,000/hour b) Determine the total cost of production with direct material costs of $1M, direct labor costs of $600K and 200 machine hours. Total cost = $1M + 0.6M + 200*5K = $2.6M.

12/14/2015rd Using traditional costing; categorize the following as direct or indirect: Machine run costs I Costs to market the product I Machine depreciation I Cost of storage I Materials handling costs I Insurance costs I Cost of materials D Cost of product sales force I Overtime expenses D Engineering drawings I Machine operator wages D Machine labor D Utility costs I Cost of tooling and fixtures I Support (admin staff salaries) I