Managing Costs & RevenuesSession 1Ansari: SMASMA, cont.Slide 5The Analysis “Trifecta”Session 1-AppendixCritical Cost TermsCost Drivers and Final Cost ObjectivesManufacturing Cost FlowsCVP AnalysisBreak-even AnalysisMargin of SafetyOperating LeverageMultiple Product Line FormatContribution Margin FormatCVP LimitationsScarlet Letter of AccountingRisk and Cost Mgt.5 Families of Cost AnalysisMANAGING COSTS AND REVENUES-20121-1Managing Costs & RevenuesProfessor William F. O’Brien, MBA, CPASpring 2012MANAGING COSTS AND REVENUES-20121-2Session 1Strategic Management AccountingCost Accounting ReviewBarbary Pirates Case – The role of “spin”MANAGING COSTS AND REVENUES-20121-3Ansari: SMAStrategic Triangle (QCT)Competition based on quality, cost & TimeMgt. Attribute Triangle (TBC)Relates to information system and strategic cost management toolsImpacts technical, behavioral & cultural aspectsMgt. Actg. Links Strategy with ActionIt is not an end unto itselfIt is an integrating toolMANAGING COSTS AND REVENUES-20121-4SMA, cont.The two triangles are dependent upon each otherThis process is a framework to ensure that our management accounting tools possess the attributes necessary to achieve our strategic goalsMANAGING COSTS AND REVENUES-20121-5SMA, cont.QCT TriangleQuality relates to customer needsLong-term cost implicationsTimeliness of deliveryTBC TriangleProvides Technical insightEncourages Behavioral changesSupports Cultural beliefsMANAGING COSTS AND REVENUES-20121-6The Analysis “Trifecta”Impact of actions/decisions/proposalsQuantitativeStrategicTacticalLet’s consider the HP-Compaq DealMANAGING COSTS AND REVENUES-20121-7Session 1-AppendixCost Accounting ReviewMANAGING COSTS AND REVENUES-20121-8Critical Cost TermsFixed vs. Variable Product vs. PeriodManufacturing vs. Non-manufacturingDirect vs. IndirectControllable vs. UncontrollableOpportunity and Sunk CostsDifferential Cost and RevenueCritical Success Factors (CSF’s)MANAGING COSTS AND REVENUES-20121-9Cost Drivers and Final Cost ObjectivesCost DriversActivityVolumeOtherStructuralExecutional Final Cost Objective (FCO)MANAGING COSTS AND REVENUES-20121-10Manufacturing Cost FlowsBOHIOEOHRAW MATERIAL WORK-IN-PROCESS FINISHED GOODSB O/H R/M B O/H WIP B O/H F/GR/M PURCHASESTRANSFERS TOWIPE O/H R/MR/M TRANSFERSDIR. LABORMFG OVERHEADMANUFACTURINGCOSTSCOST OF GOODSMANUFACTURED(COGM)E O/H WIPCOGMCOST OF GOODSSOLD(COGS)E O/H F/GP&LMANAGING COSTS AND REVENUES-20121-11CVP AnalysisUsesRevenue planningCost classificationCommission analysisVolume and mix determinationABC modificationsMANAGING COSTS AND REVENUES-20121-12Break-even AnalysisSales - variable costs = fixed costsContribution Margin ApproachFC/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 applyMANAGING COSTS AND REVENUES-20121-13Margin of SafetyActual sales - B/E salesMargin of safety percentageMargin of safety/actual salesMANAGING COSTS AND REVENUES-20121-14Operating LeverageCM/NIReflects the percentage increase in sales compared to the percentage increase in net incomeHigh OL reflects high opportunity and high riskMANAGING COSTS AND REVENUES-20121-15Multiple Product Line FormatMANAGING COSTS AND REVENUES-20121-16Contribution Margin FormatAlso known as “Direct Costing”Direct costing direct costsP&L format:Sales xxxVariable costs -xxxContribution margin xxxFixed costs -xxxNet income xxxMANAGING COSTS AND REVENUES-20121-17CVP LimitationsRelevant range assumptionDifficulty in cost determinationAllocationsThe “Scarlet Letter” of accountingMANAGING COSTS AND REVENUES-20121-18Scarlet Letter of Accounting• Lacks Cost Mgt.• Error Prone• DistractionMANAGING COSTS AND REVENUES-20121-19Risk and Cost Mgt.Risk plays a roleRisk-prone vs. risk adverseSystems are designed to mitigate the negative aspects of risk preferenceMANAGING COSTS AND REVENUES-20121-205 Families of Cost AnalysisMake versus buy (outsourcing)Continue or discontinue a businessSell now or process furtherScarce resourcesPricing
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