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

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

3. MANAGING COSTS AND REVENUES-2011 1-3 Ansari: SMA n Strategic Triangle (QCT) n Competition based on quality, cost & Time n Mgt. Attribute Triangle (TBC) n Relates to information system and strategic cost management tools n Impacts technical, behavioral & cultural aspects n Mgt. Actg. Links Strategy with Action n It is not an end unto itself n It is an integrating tool

4. MANAGING COSTS AND REVENUES-2011 1-4 SMA, cont. n The two triangles are dependent upon each other n This process is a framework to ensure that our management accounting tools possess the attributes necessary to achieve our strategic goals

5. MANAGING COSTS AND REVENUES-2011 1-5 SMA, cont. n QCT Triangle n Quality relates to customer needs n Long-term cost implications n Timeliness of delivery n TBC Triangle n Provides Technical insight n Encourages Behavioral changes n Supports Cultural beliefs

6. MANAGING COSTS AND REVENUES-2011 1-6 The Analysis “Trifecta” n Impact of actions/decisions/proposals n Quantitative n Strategic n Tactical n Let’s consider the HP-Compaq Deal

7. MANAGING COSTS AND REVENUES-2011 1-7 Mgt. Actg.--Strategic Implications n Business partners must use KTT in their business decisions to meet “customer” needs. n Business partners must be cost efficient and cost effective. n Achieved by knowing what the customers want n Business partners must promote the economics of time and excel at their own time management. n Achieved by knowing what the customers want

8. MANAGING COSTS AND REVENUES-2011 1-8 IMA’s M/A Roles n Business and strategic partner n Provider of strategic business understanding n Participant in problem solving n Team member n Provider of information n Process facilitator

9. MANAGING COSTS AND REVENUES-2011 1-9 From Scorekeeper to Player n Role change driven by: n Information technology n Global competition n Two models for Management Accountants n Corporate cop--evaluator n Business partner-enabler n Dual accountability & org. structure n Solid vs dotted-line relationship

10. MANAGING COSTS AND REVENUES-2011 1-10 Accounting Business Skills “The What” n Business Perspective n Organizational Focus n Bias for Action n Communication Excellence n People Proficiency

11. MANAGING COSTS AND REVENUES-2011 1-11 Financial Management Guidelines “The How” n Cc n KTT n MBWA n R ƒ R 3 n responsiveness n reliability n relevance

12. MANAGING COSTS AND REVENUES-2011 1-12 Mgt. Actg.--Attribute Implications n Business partners must possess broad business oriented technical skills. n Business partners use these skills to develop the behavioral attributes of a team member, tolerance with ambiguity and comfort with “soft” future-oriented numbers.

13. MANAGING COSTS AND REVENUES-2011 1-13 Mgt. Acctg.--Attribute Implications n Business partners must be culturally aware and adjust their mindset to that of a participant.

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

15. MANAGING COSTS AND REVENUES-2011 1-15 Critical Cost Terms n Fixed vs. Variable n Product vs. Period n Manufacturing vs. Non-manufacturing n Direct vs. Indirect n Controllable vs. Uncontrollable n Opportunity and Sunk Costs n Differential Cost and Revenue n Critical Success Factors (CSF’s)

16. MANAGING COSTS AND REVENUES-2011 1-16 Cost Drivers and Final Cost Objectives n Cost Drivers n Activity n Volume n Other n Structural n Executional n Final Cost Objective (FCO)

17. MANAGING COSTS AND REVENUES-2011 1-17 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 TO WIP E O/H R/M 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 P&L

18. MANAGING COSTS AND REVENUES-2011 1-18 CVP Analysis n Uses n Revenue planning n Cost classification n Commission analysis n Volume and mix determination n ABC modifications

19. MANAGING COSTS AND REVENUES-2011 1-19 Break-even Analysis n Sales - variable costs = fixed costs n Contribution Margin Approach n FC/contribution margin ratio ($) n FC/unit contribution margin (units) n Equation Approach n (Unit SP)x - (unit VC)x = FC (units) n X - (VC%)x = FC ($) n CM approach is the easier to apply

20. MANAGING COSTS AND REVENUES-2011 1-20 Margin of Safety n Actual sales - B/E sales n Margin of safety percentage n Margin of safety/actual sales

21. MANAGING COSTS AND REVENUES-2011 1-21 Operating Leverage n CM/NI n Reflects the percentage increase in sales compared to the percentage increase in net income n High OL reflects high opportunity and high risk

22. MANAGING COSTS AND REVENUES-2011 1-22 Multiple Product Line Format

23. MANAGING COSTS AND REVENUES-2011 1-23 Contribution Margin Format n Also known as “Direct Costing” n Direct costing  direct costs n P&L format: Sales xxx Variable costs -xxx Contribution margin xxx Fixed costs -xxx Net income xxx

24. MANAGING COSTS AND REVENUES-2011 1-24 CVP Limitations n Relevant range assumption n Difficulty in cost determination n Allocations n The “Scarlet Letter” of accounting

25. MANAGING COSTS AND REVENUES-2011 1-25 Scarlet Letter of Accounting Lacks Cost Mgt. Error Prone Distraction

26. MANAGING COSTS AND REVENUES-2011 1-26 Risk and Cost Mgt. n Risk plays a role n Risk-prone vs. risk adverse n Systems are designed to mitigate the negative aspects of risk preference