MSE608C – Engineering and Financial
Cost Analysis
Managerial Accounting
Managerial Accounting
• Managerial Accounting
– Providing information to management within an organization
• The role of the Manager
– Planning; Organizing; Controlling; Decision Making
• Features of Managerial Accounting
• It places emphasis on the future
• It is not governed by GAAP and is not required
• Emphasizes only relevant data
• Precision is not critical
The Total Costs Curve
$$$
TOTAL COSTS
FIXED COSTS
SALES VOLUME
BREAKEVEN VOLUME
The Cost-Price-Volume (CPV)
Curve
$$$
REVENUES
TOTAL COSTS
BREAKEVEN
REVENUES
FIXED COSTS
SALES VOLUME
BREAKEVEN VOLUME
The CPV Curve for Profit Planning
• To make a profit sales Revenues must exceed the
sum of Fixed and Variable Expenses.
$$$
Revenues > Fixed Expenses + Variable Expenses
REVENUES
TOTAL COSTS
FIXED COSTS
SALES VOLUME
NEW BREAKEVEN
BREAKEVEN VOLUME
The CPV Curve for Profit Planning
• To make a profit sales Revenues must exceed the
sum of Fixed and Variable Expenses.
$$$
REVENUES
TOTAL COSTS
FIXED COSTS
SALES VOLUME
NEW BREAKEVEN
ORIGINAL BREAKEVEN
The Contribution Margin
•
•
The Gross Margin format
– Separates costs by function
The Contribution Margin format
– Separates Costs into Variable
Expenses and Fixed
Expenses.
– The Contribution Margin
shows how much revenue is
left to contribute to Fixed
Expenses.
– This is a useful analytical
tool for managerial
accounting.
The Gross Margin Format
Sales
Less: Cost of Goods Sold
Gross Profit:
Less Operating Expenses
Selling
Administration
Net Operating Income
$12,000
6,000
6,000
$3,100
1,900
5,000
$1,000
The Contribution Margin Format
Sales
Less: Variable Expenses
Variable Production
Variable Selling
Variable Administration
Contribution Margin:
Less: Fixed Expenses
Fixed Production
Fixed Selling
Fixed Administration
Net Operating Income
$12,000
$2,000
600
400
$4,000
2,500
1,500
3,000
9,000
8,000
$1,000
The Contribution Margin Ratio
• Shows the percentage of sales revenues required
to cover variable costs.
The Contribution Margin Ratio
Sales
Less: Variable Expenses
Variable Production
Variable Selling
Variable Administration
Contribution Margin:
Less: Fixed Expenses
Fixed Production
Fixed Selling
Fixed Administration
Net Operating Income
$12,000
$2,000
600
400
$4,000
2,500
1,500
3,000
9,000
8,000
$1,000
• Calculate the Breakeven Point
Revenues = Fixed Expenses / CM Ratio
Percent
100.0%
25.0%
75.0% (CM Ratio)
Operating Leverage
$
$
TC
TC
V
BREAKEVEN
VOLUME
V
BREAKEVEN
VOLUME
HIGH LEVERAGE
LOW LEVERAGE
(HIGH FIXED COSTS)
(LOW FIXED COSTS)
Business Decisions and Costing
Analysis
• Costing information is used to make a wide
range of business decisions.
–
–
–
–
–
–
Make-or-Buy
Production decisions
Capital Investment Alternatives
Equipment Replacement
Product Design (new and redesigns)
Inventory levels
Assessment
• How can you change the Breakeven Point
by modifying Costs?
• How can you change the Breakeven Point
by modifying Revenues?
• What is the difference between the Gross
Margin and the Contribution Margin?
• What is the significance of a company with
Low Operating Leverage?
What is Budgeting?
• Profit Planning.
• A road map for decision making and
performance evaluation.
• Creates a detailed, integrated business plan for
upcoming accounting period(s).
• Consists of a number of budgets that, when
combined, create a Master Budget.
Some Elements of Budgeting
• Senior management sets the Strategic
Objectives:
• Overall profit growth for the business;
• Development of new markets or products;
• Increases in market share for products lines or retreat from
certain markets;
• Stock price and dividend payments;
• Financing and investment strategies.
• Line managers must develop the detailed
budgets; Operating Objectives.
Some Elements of Budgeting
• The Budget Cycle
– Most commonly a fiscal year, divided into quarters and the most current
quarter subdivided into months. Other cycles are used when practical.
– Perpetual budget cycles are a twelve month continuous cycle. As one
month ends, another is added.
• Historical data vs. Zero-based Budgeting
– Historical data for the last budget period is used to establish a baseline;
increases, steady-state or decreases are based on future expectations.
– Zero-based Budgeting uses zero dollars as the baseline. Each line item
must be budgeted irrespective of last year’s figure.
• Zero-based budgets take more time to prepare but require managers to
consider the most efficient use of resources.
The Master Budget
SALES BUDGET
CAPITAL
BUDGET
PRODUCTION
BUDGET
DIRECT MATERIAL
DIRECT LABOR
INVENTORY
MFG. OVERHEAD
SELLING AND
ADMINISTRATIVE
BUDGET
CASH BUDGET
PRO-FORMA
INCOME
STATEMENT
PRO-FORMA
BALANCE
SHEET
PRO-FORMA
CASH FLOW
STATEMENT
Cash Budget Format
(for Problem 16 – Chapter 15)
July
Beginning Cash
Credit Sales
Cash from July
Cash from Aug
Cash from Sept
Cash from Oct
Cash from Nov
Cash from Dec
Total Cash Receipts
Credit Purchases
Payment for July
Payment for Aug
Payments for Sept
Payments for Oct
Payments for Nov
Payments for Dec
Total Credit Payments
Payment for Salaries
Payment for Other Expenses
Ending Cash
Aug
Sept
Oct
Nov
Dec
Jan
Assessment
• Name key differences between Managerial
Accounting versus Financial Accounting?
• Budgeting is _____ planning and a
_______ ____ for decision making?
• What are the differences between Senior
and Line managers for budgeting?
• Which budget is the heart of the budgeting
process?