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Managing Costs Revenues Professor William F O Brien MBA CPA Spring 2012 MANAGING COSTS AND REVENUES 2012 1 1 Session 1 Strategic Management Accounting Cost Accounting Review Barbary Pirates Case The role of spin MANAGING COSTS AND REVENUES 2012 1 2 Ansari SMA Strategic Triangle QCT Mgt Attribute Triangle TBC Competition based on quality cost Time Relates to information system and strategic cost management tools Impacts technical behavioral cultural aspects Mgt Actg Links Strategy with Action It is not an end unto itself It is an integrating tool MANAGING COSTS AND REVENUES 2012 1 3 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 2012 1 4 SMA cont QCT Triangle Quality relates to customer needs Long term cost implications Timeliness of delivery TBC Triangle Provides Technical insight Encourages Behavioral changes Supports Cultural beliefs MANAGING COSTS AND REVENUES 2012 1 5 The Analysis Trifecta Impact of actions decisions proposals Quantitative Strategic Tactical Let s consider the HP Compaq Deal MANAGING COSTS AND REVENUES 2012 1 6 Session 1 Appendix Cost Accounting Review MANAGING COSTS AND REVENUES 2012 1 7 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 2012 1 8 Cost Drivers and Final Cost Objectives Cost Drivers Activity Volume Other Structural Executional Final Cost Objective FCO MANAGING COSTS AND REVENUES 2012 1 9 Manufacturing Cost Flows RAW MATERIAL BOH B O H R M WORK IN PROCESS B O H WIP R M TRANSFERS DIR LABOR MFG OVERHEAD MANUFACTURING COSTS FINISHED GOODS B O H F G COGM I R M PURCHASES O TRANSFERS TO WIP COST OF GOODS MANUFACTURED COGM COST OF GOODS SOLD COGS E O H R M E O H WIP E O H F G EOH MANAGING COSTS AND REVENUES 2012 P L 1 10 CVP Analysis Uses Revenue planning Cost classification Commission analysis Volume and mix determination ABC modifications MANAGING COSTS AND REVENUES 2012 1 11 Break even Analysis Sales variable costs fixed costs Contribution Margin Approach Equation Approach FC contribution margin ratio FC unit contribution margin units Unit SP x unit VC x FC units X VC x FC CM approach is the easier to apply MANAGING COSTS AND REVENUES 2012 1 12 Margin of Safety Actual sales B E sales Margin of safety percentage Margin of safety actual sales MANAGING COSTS AND REVENUES 2012 1 13 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 2012 1 14 Multiple Product Line Format MANAGING COSTS AND REVENUES 2012 1 15 Contribution Margin Format Also known as Direct Costing Direct costing direct costs P L format Sales Variable costs Contribution margin Fixed costs Net income MANAGING COSTS AND REVENUES 2012 xxx xxx xxx xxx xxx 1 16 CVP Limitations Relevant range assumption Difficulty in cost determination Allocations The Scarlet Letter of accounting MANAGING COSTS AND REVENUES 2012 1 17 Scarlet Letter of Accounting Lacks Cost Mgt Error Prone Distraction MANAGING COSTS AND REVENUES 2012 1 18 Risk and Cost Mgt Risk plays a role Risk prone vs risk adverse Systems are designed to mitigate the negative aspects of risk preference MANAGING COSTS AND REVENUES 2012 1 19 5 Families of Cost Analysis Make versus buy outsourcing Continue or discontinue a business Sell now or process further Scarce resources Pricing issues MANAGING COSTS AND REVENUES 2012 1 20


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