MSE608C – Engineering and Financial Cost Analysis 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 VARIABLE COSTS

The Cost-Price-Volume (CPV) Curve REVENUES TOTAL COSTS FIXED COSTS $$$ SALES VOLUME BREAKEVEN VOLUME BREAKEVEN REVENUES VARIABLE COSTS

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 BREAKEVEN VOLUME VARIABLE COSTS PRICE INCREASE NEW BREAKEVEN

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 ORIGINAL BREAKEVEN NEW VARIABLE COST CURVE NEW 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 Contribution Margin Ratio Shows the percentage of sales revenues required to cover variable costs. Calculate the Breakeven Point Revenues = Fixed Expenses / CM Ratio

Operating Leverage BREAKEVEN VOLUME TC REVENUES $ V BREAKEVEN VOLUME TC REVENUES $ V HIGH LEVERAGE (HIGH FIXED COSTS) LOW LEVERAGE (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

Cash Budget Format (for Problem 16 – Chapter 15)

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?