1. Managing Costs and Revenues--MBA I--Spring 2008 1 Managing Costs & Revenues Professor William F. O’Brien, MBA, CPA Spring 2008

2. Managing Costs and Revenues--MBA I--Spring 2008 2 Session 1 Strategic Management Accounting Management Accountants as Business Partners Barbary Pirates Case – The role of “spin”

3. Managing Costs and Revenues--MBA I--Spring 2008 3 Ansari: SMA Strategic Triangle (QCT) Competition based on quality, cost & Time Mgt. Acctg. Triangle (TBC) Impacts technical, behavioral & cultural aspects Mgt. Acctg. Links Strategy with Action It is not an end unto itself It is an integrating tool

4. Managing Costs and Revenues--MBA I--Spring 2008 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

5. Managing Costs and Revenues--MBA I--Spring 2008 5 SMA, cont. QCT Triangle Self evident TBC Triangle Provides Technical insight Encourages Behavioral changes Supports Cultural beliefs

6. Managing Costs and Revenues--MBA I--Spring 2008 6 The Analysis “Trifecta” Quantitative Strategic Tactical Let’s consider the HP-Compaq Deal

7. Managing Costs and Revenues--MBA I--Spring 2008 7 Mgt. Acctg.--Strategic Implications M/A’s must use KTT in their business decisions to meet “customer” needs. M/A’s must be cost efficient and cost effective. M/A’s must promote the economics of time and excel at their own time mgt.

8. Managing Costs and Revenues--MBA I--Spring 2008 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

9. Managing Costs and Revenues--MBA I--Spring 2008 9 From Scorekeeper to Player Role change driven by: Information technology Global competition Two models for M/A’s Corporate cop--evaluator Business advocate--enabler Dual accountability & org. structure Solid vs dotted-line relationship

10. Managing Costs and Revenues--MBA I--Spring 2008 10 Accounting Business Skills “The What” Business Perspective Organizational Focus Bias for Action Communication Excellence People Proficiency

11. Managing Costs and Revenues--MBA I--Spring 2008 11 Financial Management Guidelines “The How” Cc KTT MBWA R ƒ R 3 responsiveness reliability relevance

12. Managing Costs and Revenues--MBA I--Spring 2008 12 Mgt. Acctg.--Attribute Implications M/A’s must possess broad business oriented technical skills. M/A’s must possess the behavioral attributes of a team member, be tolerant with ambiguity and be comfortable with “soft” future- oriented numbers.

13. Managing Costs and Revenues--MBA I--Spring 2008 13 Mgt. Acctg.--Attribute Implications M/A’s must be culturally ethical and develop the mindset of a participant.

14. Managing Costs and Revenues--MBA I--Spring 2008 14 Session 1 - Appendix Cost Accounting Review

15. Managing Costs and Revenues--MBA I--Spring 2008 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)

16. Managing Costs and Revenues--MBA I--Spring 2008 16 Cost Drivers and Final Cost Objectives Cost Drivers Activity Volume Other Structural Executional Final Cost Objective (FCO)

17. Managing Costs and Revenues--MBA I--Spring 2008 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--MBA I--Spring 2008 18 CVP Analysis Uses Revenue planning Cost classification Commission analysis Volume and mix determination ABC modifications

19. Managing Costs and Revenues--MBA I--Spring 2008 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

20. Managing Costs and Revenues--MBA I--Spring 2008 20 Margin of Safety Actual sales - B/E sales Margin of safety percentage Margin of safety/actual sales

21. Managing Costs and Revenues--MBA I--Spring 2008 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

22. Managing Costs and Revenues--MBA I--Spring 2008 22 Multiple Product Line Format

23. Managing Costs and Revenues--MBA I--Spring 2008 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

24. Managing Costs and Revenues--MBA I--Spring 2008 24 CVP Limitations Relevant range assumption Difficulty in cost determination Allocations The “Scarlet Letter” of accounting

25. Managing Costs and Revenues--MBA I--Spring 2008 25 Scarlet Letter of Accounting Lacks Cost Mgt. Error Prone Distraction

26. Managing Costs and Revenues--MBA I--Spring 2008 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