Economic techniques for MCS
 External accounting and Ratio analysis
 Cost accounting
Raffaella Manzini e Valentina Lazzarotti
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17/05/2004
Il calcolo dei costi
External accounting and ratio analysis
Ratio analysis: ROE analysis
Main indicators of profitability analysis:
 ROE = return on equity = earning/equity
 ROE represents the return on the total shareholder capital
 Financial leverage formula to analyze ROE:
 ROE = [ ROI + D/E (ROI - r)] s
 ROI = return on investment = net operating margin / total
assets
 ROI represent the return on all the company’s assets (either
financed by shareholder or by other investors, such as
banks) of the operating activities
 Sometimes referred to as RONA = Return on net assets
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17/05/2004
Il calcolo dei costi
External accounting and ratio analysis
Ratio analysis: ROE analysis
 r = average cost of liabilities=financial expenses/total liabilities
 s = net income/income before taxes and extra-ordinary costs
and revenues
 L = leverage ratio = D / E = Liabilities / Equity
Raffaella Manzini e Valentina Lazzarotti
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17/05/2004
Il calcolo dei costi
External accounting and ratio analysis
Ratio analysis: ROI and ROS analysis
Main indicators to analyze ROI:
 ROS = return on sales = net operating margin / sales
 ROS represents the margin achieved for each € (or $ or
whatever …) of sales
 ROS can be analyzed in terms of different components:
sales – material consumption – services – employee expenses –
amortisation
where:
 material consumption=purchases + opening inventories –
ending inventories;
 Sales – material consumption – services=Gross Value Added
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17/05/2004
Il calcolo dei costi
External accounting and ratio analysis
Ratio analysis: ROI and Asset Rotation analysis
 Asset Rotation: sales / total assets
Represents the capability of the company in the efficient use of invested
resources (i.e. inventories, receivables, machinery) in the short period
 Asset Rotation can be analyzed in terms of: inventories rotation, plant
rotation; average time of receivables payment (in days)
Raffaella Manzini e Valentina Lazzarotti
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17/05/2004
Il calcolo dei costi
External accounting and ratio analysis
Ratio analysis
Main indicators of liquidity analysis in the short period:
 Current Ratio: Current Assets/Current Liabilities
 Acid Test: (Current Assets – Inventories)/Current Liabilities
In the long period: Operating Cash Flow/Financial Liabilities
where Operating Cash Flow=net operating income + amortisation
and depreciation
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17/05/2004
Il calcolo dei costi
Cost accounting techniques





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COST CLASSIFICATION
direct costs: can be directly associated, in a univocal way, to a definite product/service
indirect: cannot be ...
variable costs: related to a variation of the productive volume (they increase when the
volume increases)
fixed costs: not related to ....
manufacturing costs: associated to the acquisition and conversion of materials and all other
manufacturing inputs into output, i.e. relating to all the activities connected with
manufacturing
non manufacturing costs: all the others

overhead costs: all indirect, manufacturing costs, i.e. costs related to manufacturing but
non directly connected to a specific product.
conversion costs= direct labor costs + overhead costs

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standard costs: defined ‘a priori’, with hypotesis of normal, regular and efficient activity
actual costs: actually incurred by the company

Raffaella Manzini e Valentina Lazzarotti
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17/05/2004
Il calcolo dei costi
full manufacturing cost and full cost
Direct labour
Conversion
costs
+
=
Indirect
manufacturing
costs
(overhead)
+
Full
manufacturing
costs
=
Direct
material
costs
+
Full cost
=
Non
manufacturing
costs
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17/05/2004
Il calcolo dei costi
Variable costs
Direct labour
costs
+
Total variable
manufacturing
costs
Direct
material
costs
=
+
Energy costs
+
=
+
Non
manufacturing
variable costs
Other variable
manufacturing costs
Raffaella Manzini e Valentina Lazzarotti
Total
Variable
costs
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17/05/2004
Il calcolo dei costi
Full costing and direct costing
 Full costing
 Direct costing
revenues Cost of sales =
------------------------------------------Gross margin -
revenues Variable costs of products sold =
----------------------------------------------Total contribution margin -
Non manufacturing costs =
----------------------------------Net operating margin
Fixed costs =
----------------------------------Net operating margin
Cost of sales = full manufactring costs of
products actually sold
Raffaella Manzini e Valentina Lazzarotti
Variable costs of products sold = total variable
cost of products actually sold
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17/05/2004
Il calcolo dei costi
Cost allocation
 many different methodologies can be used to calculate the cost
of a definite product / function. The main difference among
them refers to the allocation of the indirect costs, i.e. the
criterium used to allocate a part of an indirect cost, to a specific
product/function.
Allocation of indirect costs:
 1. identify the indirect cost to be allocated to the specific ‘cost
object’
 2. select the cost allocation base to be used in assigning the
indirect cost to the object cost
 3. calculate the coefficient of allocation as total indirect cost /
Total quantity of cost allocation base
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Il calcolo dei costi
Indirect cost allocation
 Q = indirect cost
 S =  Si total value of the allocation base (total consumption of the allocation
base made by all products)
 Qi = indirect cost allocated to the specific product i
 K = coefficient of allocation
K = Q/S
Raffaella Manzini e Valentina Lazzarotti
Q i = K * Si
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Il calcolo dei costi