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The Controlling Function. After devising Business Plans & Ogzn structure to attain firm's goals, mgers must measure firm’s progress toward its goals. This requires controlling function . The fields of economics & accounting concepts are used in controlling process.

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The Controlling Function

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The controlling function l.jpg

The Controlling Function

  • After devising Business Plans &Ogzn structure to attain firm's goals, mgers must measure firm’s progress toward its goals. This requires controlling function.

  • The fields of economics & accounting concepts are used in controlling process.

  • Of cousre mgers do not have to be professional economists or CPA,but it is important that they understand the basic principles used in each profession.


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  • Cost Controls & Break-Even Analysis

  • Objective = show how to manage costs & determine most profitable level of pdn & sales that satisfies consumer needs

  • Cost assists mger to assess how bus. has performed in past & to plan for the future

  • This requires a good mgmt info system that will provide

  • (1) acctg info that allows mgmt to determine cost in various ways

  • (2) a means for effectively monitoring & controlling costs of the business.


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  • Mger use costs in decision making, thus need to know how costs will respond to changes in business activities.

  • Mgmt Info:Acctg records are sources of mgmt info as they summarize transactions like inventory turnover, eqpt purchases etc

  • Mgmt Info as Control Function: Mgmt info is used in controlling resources obtained & used by firm.

  • Defining Costs

  • A firm's info system must provide data needed for cost control to ensure that costs are being allocated properly & that all relevant costs are being considered.


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  • Implicit and Explicit Costs

  • Explicit Cost: Costs that are directly traceable to the end product – e.g. cost of input purchased at open market for which explicit payments are made.

  • Implicit Cost: Are costs that firms incur that do not involve explicit payments. They relate to firm's use of its own assets – e.g. cost for using building, eqpt, labor, dep. interest must be added to determining final cost of producing pdts.


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  • Controllable and Non-controllable Costs

  • Uncontrollable costs: Costs firms cannot easily influence – e.g. implicit costs that mgers have limited control.

  • Controllable cost:Those regulated totally by mgers – e.g. explicit costs

  • Fixed & Variable Costs

  • Costs vary according to two concepts:

    • (1) the passage of time, and

    • (2) the level of activity.

  • Fixed Costs:Stay same over time regardless of the level of output -e.g. rent

  • Variable Costs: change with the level of activity (materials, labor, shipping).


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TC

Cost

Fixed cost

TVC

TFC

  • The figure shows that TC = TVC + TFC.

  • The Contribution Concept

  • Price & profit are determined on per unit basis that shld cover FC & VC.

  • SP per unit = TC per unit + Profit per unit

  • SP per unit =FC/unit +VC/unit+Profit/unit

Output


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  • Fixed costs are usually referred as overhead cost.

  • SP/unit=Overhead cost/unit+VC/unit+ Profit/unit

  • SP/unit - VC/unit = Overhead cost/unit + Profit/unit


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  • e.g. if a rice producer has the ff cost

    • Materials $55/bag; Direct labor $20/bagThen TVC is $75/bag

  • If SP/bag is $125, then $50 is left after paying for TVC to contribute to overhead (TFC) & profit

    • Selling Price $125/bag100% - TVC $75/bag-60% Contribution $50/bag 40% (profit & overhead)


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  • Contribution covers profit & overhead

  • SP/unit - TVC/unit = Contribution = Overhead/unit + Profit/unit

  • If a firm know its contribution margin to be 40%, its SP for any item can easily be computed, once its VC/unit is known

  • If a firm’s contribution is 60%, its VC is $200/unit then its

  • SP = 100% = VC + Con = 40% + 60%

  • If VC 40% = $200 then SP100% = 100%/40% x $200 = $500


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  • Break Even Analysis

  • Helps to find sales/output level that yields no profits or losses - i.e. where TR =TC

  • Calculation:Profit = 0 = Revenue – TC

  • Profit = 0 = (P x Q) – (VC x Q) – FC

  • 0 =Q(P-VC) – FC

  • Q(P-VC) = FC

  • Q =FC/(P-VC)


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    • If rice SP is $200/bag with $120 VC, & $1mil FC then how many can be sold to break even?

    • Calculation:

    • Break-Even =

    • Q =FC/(P-VC)

    • Q =100,000/(200-120) = 1000000/80 =12,500 bags


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