managing costs and revenues-2011 1-1 managing costs & revenues professor william f. o’brien,...
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MANAGING COSTS AND REVENUES-2011 1-1
Managing Costs & Revenues
Professor William F. O’Brien, MBA, CPA
Spring 2011
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Session 1
Strategic Management Accounting Management Accountants as Business
Partners Barbary Pirates Case – The role of “spin”
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Ansari: SMA
Strategic Triangle (QCT) Competition based on quality, cost & Time
Mgt. Attribute Triangle (TBC) 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
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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
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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
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The Analysis “Trifecta”
Impact of actions/decisions/proposals Quantitative Strategic Tactical
Let’s consider the HP-Compaq Deal
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Mgt. Actg.--Strategic Implications
Business partners must use KTT in their business decisions to meet “customer” needs.
Business partners must be cost efficient and cost effective. Achieved by knowing what the customers want
Business partners must promote the economics of time and excel at their own time management. Achieved by knowing what the customers want
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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
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From Scorekeeper to Player
Role change driven by: Information technology Global competition
Two models for Management Accountants Corporate cop--evaluator Business partner-enabler
Dual accountability & org. structure Solid vs dotted-line relationship
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Accounting Business Skills
“The What” Business Perspective Organizational Focus Bias for Action Communication Excellence People Proficiency
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Financial Management Guidelines“The How”
Cc KTT MBWA R ƒ R3
responsiveness reliability relevance
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Mgt. Actg.--Attribute Implications
Business partners must possess broad business oriented technical skills.
Business partners use these skills to develop the behavioral attributes of a team member, tolerance with ambiguity and comfort with “soft” future-oriented numbers.
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Mgt. Acctg.--Attribute Implications
Business partners must be culturally aware and adjust their mindset to that of a participant.
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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)
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Cost Drivers and Final Cost Objectives
Cost Drivers Activity Volume Other
Structural Executional
Final Cost Objective (FCO)
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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 TOWIP
E O/H R/M
R/M TRANSFERSDIR. LABORMFG OVERHEADMANUFACTURINGCOSTS
COST OF GOODSMANUFACTURED(COGM)
E O/H WIP
COGM
COST OF GOODSSOLD(COGS)
E O/H F/GP&L
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CVP Analysis
Uses Revenue planning Cost classification Commission analysis Volume and mix determination ABC modifications
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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
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Margin of Safety
Actual sales - B/E sales Margin of safety percentage
Margin of safety/actual sales
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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
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Multiple Product Line Format
Multiple Product Line Example
Product Line APruduct Line BPruduct Line CTotal Company$ % $ % $ % $ %
SalesVariable CostsContribution Mar.Fixed CostsNet Income
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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
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CVP Limitations
Relevant range assumption Difficulty in cost determination Allocations
The “Scarlet Letter” of accounting
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Scarlet Letter of Accounting
• Lacks Cost Mgt.
• Error Prone
• Distraction