1. Robert Uberman, Financial Management, KA im Frycza Modrzewskiego 2

2. Session Two Topics Revenues Revenues Management accounting Management accounting Relevant costs Relevant costs

3. Robert Uberman, Financial Management, KA im Frycza Modrzewskiego A concept of revenue – definition and traps Revenue defined as an increase in assets or decrease in liabilities that is caused by the provision of services or products to customers. Revenue defined as an increase in assets or decrease in liabilities that is caused by the provision of services or products to customers. Under the of accounting, revenue is usually recognized when goods are shipped or services delivered to the customer. Under the of accounting, revenue is usually recognized when the customer following its receipt of goods or services. Under the accrual basis of accounting, revenue is usually recognized when goods are shipped or services delivered to the customer. Under the cash basis of accounting, revenue is usually recognized when cash is received from the customer following its receipt of goods or services. Revenue vs cash inflow Revenue vs cash inflow Revenue vs price (rebates, discounts other provisions) Revenue vs price (rebates, discounts other provisions)

4. Robert Uberman, Financial Management, KA im Frycza Modrzewskiego A concept of cost – definition and use Cost defined 1 = monetary value of economic resources used in performing an activity Cost defined 1 = monetary value of economic resources used in performing an activity Cost defined (measured) 2 = the amount of cash or cash equivalents paid or the fair value of the other consideration given to acquire an asset at the time of its acquisition (IAS 16) Cost defined (measured) 2 = the amount of cash or cash equivalents paid or the fair value of the other consideration given to acquire an asset at the time of its acquisition (IAS 16) Cost vs expense (very close to the second definition of a cost) Cost vs expense (very close to the second definition of a cost) Cost vs price (quantity of payment or compensation given by one party to another in return for goods or services) Cost vs price (quantity of payment or compensation given by one party to another in return for goods or services) Cost vs investment (money committed or property acquired for future income) Cost vs investment (money committed or property acquired for future income)

5. Robert Uberman, Financial Management, KA im Frycza Modrzewskiego Financial vs Managerial Accounting Financial Accounting: Financial Accounting: highly regulated highly regulated independent check of statements independent check of statements accuracy oriented accuracy oriented backward perspective backward perspective generally external use generally external use Managerial Accounting Managerial Accounting company dependent company dependent no direct independent control no direct independent control speed oriented speed oriented onward perspective onward perspective generally internal use generally internal use

6. Robert Uberman, Financial Management, KA im Frycza Modrzewskiego Financial vs Managerial Accounting FAQ Financial Accounting: Financial Accounting: what was the A’s equity at the date of? what was the A’s equity at the date of? What was the profit made over a period of? What was the profit made over a period of? Was the Company solvent at the closing date? Was the Company solvent at the closing date? Managerial Accounting Managerial Accounting shall we buy/sell a business segment? shall we buy/sell a business segment? shall we launch a new product line? shall we launch a new product line? shall we increase/decrease prices? shall we increase/decrease prices? is our cost level still competitive? is our cost level still competitive?

7. Robert Uberman, Financial Management, KA im Frycza Modrzewskiego Financial vs Managerial Accounting relevant costs (items) Financial Accounting: Financial Accounting: only costs incurred matter only costs incurred matter almost no estimates allowed almost no estimates allowed full absorption approach full absorption approach no scenario analyses no scenario analyses Managerial Accounting Managerial Accounting only future costs matter (sunk costs!!!) only future costs matter (sunk costs!!!) estimates widely used estimates widely used marginal costs approach marginal costs approach scenario analysis and hybrids (opportunity costs) scenario analysis and hybrids (opportunity costs)

8. Robert Uberman, Financial Management, KA im Frycza Modrzewskiego Typical costs items by origin Remuneration (salaries, wages, fringe benefits) Remuneration (salaries, wages, fringe benefits) Raw materials Raw materials Energy Energy External services External services Taxes and duties allocated to costs (real estates tax, stamp duties but neither VAT nor excise tax Taxes and duties allocated to costs (real estates tax, stamp duties but neither VAT nor excise tax Depreciation, Depletion & Amortisation Depreciation, Depletion & Amortisation

9. Robert Uberman, Financial Management, KA im Frycza Modrzewskiego Cost absorption Cost of goods sold Cost of goods sold General costs (period costs) General costs (period costs) Logically there should be no costs left after allocation (orphan costs) since ultimately every dollar spent has to be covered Logically there should be no costs left after allocation (orphan costs) since ultimately every dollar spent has to be covered The problem is that share of direct costs (naturally allocated) decreases while the one of general costs growths rapidly and in some most advanced and valuable businesses gets dominance The problem is that share of direct costs (naturally allocated) decreases while the one of general costs growths rapidly and in some most advanced and valuable businesses gets dominance

10. Robert Uberman, Financial Management, KA im Frycza Modrzewskiego Cost absorption Profit = Revenues – costs Profit = Revenues – costs Revenues (excl. bounded sales) are always direct and objective Revenues (excl. bounded sales) are always direct and objective Costs must be fully allocated to products & services sold Costs must be fully allocated to products & services sold Cost allocation is always to some extend subjective Cost allocation is always to some extend subjective According to various studies indirect costs account between 30-42 % of the total costs (Laney, Atrill, p. 316) According to various studies indirect costs account between 30-42 % of the total costs (Laney, Atrill, p. 316)

11. Robert Uberman, Financial Management, KA im Frycza Modrzewskiego Use of the full absorption approach Long -term pricing Long -term pricing Long-term resource allocation Long-term resource allocation Financial accounting Financial accounting

12. Robert Uberman, Financial Management, KA im Frycza Modrzewskiego Cost allocation – types of costs Direct vs indirect costs Direct vs indirect costs Direct vs variable costs Direct vs variable costs raw material raw material wages wages Indirect vs fixed costs Indirect vs fixed costs office rent office rent

13. Robert Uberman, Financial Management, KA im Frycza Modrzewskiego Cost allocation – targets Products (individual, group) Products (individual, group) Business segments Business segments Customers (individual, segments, markets) Customers (individual, segments, markets)

14. Robert Uberman, Financial Management, KA im Frycza Modrzewskiego Typical manufacturing processes Job order Job order order order batch batch assembly assembly Process Process process process (often with joint products issue)

15. Robert Uberman, Financial Management, KA im Frycza Modrzewskiego Cost allocation – job order Cost pools Cost pools Overheads Overheads For one-factory firm: typically two levels: factory shared services + supporting activities For one-factory firm: typically two levels: factory shared services + supporting activities For international corporations: multilayer structure For international corporations: multilayer structure