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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Session 1-Appendix

Cost Accounting Review

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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

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Risk and Cost Mgt.

Risk plays a role Risk-prone vs. risk adverse Systems are designed to mitigate the negative

aspects of risk preference