Managing Costs & Revenues

1. Managing Costs & Revenues Professor William F. O’Brien, MBA, CPA Spring 2011 MANAGING COSTS AND REVENUES-2011

2. Session 1 • Strategic Management Accounting • Management Accountants as Business Partners • Barbary Pirates Case – The role of “spin” MANAGING COSTS AND REVENUES-2011

3. 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 MANAGING COSTS AND REVENUES-2011

4. 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-2011

5. 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-2011

6. The Analysis “Trifecta” • Impact of actions/decisions/proposals • Quantitative • Strategic • Tactical • Let’s consider the HP-Compaq Deal MANAGING COSTS AND REVENUES-2011

7. 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 MANAGING COSTS AND REVENUES-2011

8. 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 MANAGING COSTS AND REVENUES-2011

9. 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 MANAGING COSTS AND REVENUES-2011

10. Accounting Business Skills“The What” • Business Perspective • Organizational Focus • Bias for Action • Communication Excellence • People Proficiency MANAGING COSTS AND REVENUES-2011

11. Financial Management Guidelines“The How” • Cc • KTT • MBWA • R ƒ R3 • responsiveness • reliability • relevance MANAGING COSTS AND REVENUES-2011

12. 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. MANAGING COSTS AND REVENUES-2011

13. Mgt. Acctg.--Attribute Implications • Business partners must be culturally aware and adjust their mindset to that of a participant. MANAGING COSTS AND REVENUES-2011

14. Session 1-Appendix Cost Accounting Review MANAGING COSTS AND REVENUES-2011

15. 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-2011

16. Cost Drivers and Final Cost Objectives • Cost Drivers • Activity • Volume • Other • Structural • Executional • Final Cost Objective (FCO) MANAGING COSTS AND REVENUES-2011

17. Manufacturing Cost Flows RAW MATERIAL WORK-IN-PROCESS FINISHED GOODS BOH I O EOH B O/H R/M B O/H WIP B O/H F/G R/M TRANSFERS DIR. LABOR MFG OVERHEAD MANUFACTURING COSTS COST OF GOODS MANUFACTURED (COGM) E O/H WIP COGM COST OF GOODS SOLD (COGS) E O/H F/G R/M PURCHASES TRANSFERS TO WIP E O/H R/M P&L MANAGING COSTS AND REVENUES-2011

18. CVP Analysis • Uses • Revenue planning • Cost classification • Commission analysis • Volume and mix determination • ABC modifications MANAGING COSTS AND REVENUES-2011

19. 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 MANAGING COSTS AND REVENUES-2011

20. Margin of Safety • Actual sales - B/E sales • Margin of safety percentage • Margin of safety/actual sales MANAGING COSTS AND REVENUES-2011

21. 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-2011

22. Multiple Product Line Format MANAGING COSTS AND REVENUES-2011

23. 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 MANAGING COSTS AND REVENUES-2011

24. CVP Limitations • Relevant range assumption • Difficulty in cost determination • Allocations • The “Scarlet Letter” of accounting MANAGING COSTS AND REVENUES-2011

25. Scarlet Letter of Accounting • Lacks Cost Mgt. • Error Prone • Distraction MANAGING COSTS AND REVENUES-2011

26. 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-2011