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Economic techniques for MCS

Economic techniques for MCS. External accounting and Ratio analysis Cost accounting. External accounting and ratio analysis. Ratio analysis: ROE analysis Main indicators of profitability analysis: ROE = return on equity = earning/equity

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Economic techniques for MCS

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  1. Economic techniques for MCS • External accounting and Ratio analysis • Cost accounting

  2. External accounting and ratio analysis Ratio analysis: ROE analysis Main indicators of profitability analysis: • ROE = return on equity = earning/equity • ROE represents the return on the total shareholder capital • Financial leverage formula to analyze ROE: • ROE = [ ROI + D/E (ROI - r)] s • ROI = return on investment = net operating margin / total assets • ROI represent the return on all the company’s assets (either financed by shareholder or by other investors, such as banks) of the operating activities • Sometimes referred to as RONA = Return on net assets

  3. External accounting and ratio analysis Ratio analysis: ROE analysis • r = average cost of liabilities=financial expenses/total liabilities • s = net income/income before taxes and extra-ordinary costs and revenues • L = leverage ratio = D / E = Liabilities / Equity

  4. External accounting and ratio analysis Ratio analysis: ROI and ROS analysis Main indicators to analyze ROI: • ROS = return on sales = net operating margin / sales • ROS represents the margin achieved for each € (or $ or whatever …) of sales • ROS can be analyzed in terms of different components: sales – material consumption – services – employee expenses – amortisation where: • material consumption=purchases + opening inventories – ending inventories; • Sales – material consumption – services=Gross Value Added

  5. External accounting and ratio analysis Ratio analysis: ROI and Asset Rotation analysis • Asset Rotation: sales / total assets Represents the capability of the company in the efficient use of invested resources (i.e. inventories, receivables, machinery) in the short period • Asset Rotation can be analyzed in terms of: inventories rotation, plant rotation; average time of receivables payment (in days)

  6. External accounting and ratio analysis Ratio analysis Main indicators of liquidity analysis in the short period: • Current Ratio: Current Assets/Current Liabilities • Acid Test: (Current Assets – Inventories)/Current Liabilities In the long period: Operating Cash Flow/Financial Liabilities where Operating Cash Flow=net operating income + amortisation and depreciation

  7. Cost accounting techniques COST CLASSIFICATION • direct costs: can be directly associated, in a univocal way, to a definite product/service • indirect: cannot be ... • variable costs: related to a variation of the productive volume (they increase when the volume increases) • fixed costs: not related to .... • manufacturing costs: associated to the acquisition and conversion of materials and all other manufacturing inputs into output, i.e. relating to all the activities connected with manufacturing • non manufacturing costs: all the others • overhead costs: all indirect, manufacturing costs, i.e. costs related to manufacturing but non directly connected to a specific product. • conversion costs= direct labor costs + overhead costs • standard costs: defined ‘a priori’, with hypotesis of normal, regular and efficient activity • actual costs: actually incurred by the company

  8. full manufacturing cost and full cost Direct labour Conversion costs + = Full manufacturing costs + = Indirect manufacturing costs (overhead) Direct material costs Full cost + = Non manufacturing costs

  9. Variable costs Direct labour costs + Total variable manufacturing costs Direct material costs = + Energy costs + = Total Variable costs + Non manufacturing variable costs Other variable manufacturing costs

  10. Direct costing revenues - Variable costs of products sold = ----------------------------------------------- Total contribution margin - Fixed costs = ----------------------------------- Net operating margin Full costing revenues - Cost of sales = ------------------------------------------- Gross margin - Non manufacturing costs = ----------------------------------- Net operating margin Full costing and direct costing Cost of sales = full manufactring costs of products actually sold Variable costs of products sold = total variable cost of products actually sold

  11. Cost allocation • many different methodologies can be used to calculate the cost of a definite product / function. The main difference among them refers to the allocation of the indirect costs, i.e. the criterium used to allocate a part of an indirect cost, to a specific product/function. Allocation of indirect costs: • 1. identify the indirect cost to be allocated to the specific ‘cost object’ • 2. select the cost allocation base to be used in assigning the indirect cost to the object cost • 3. calculate the coefficient of allocation as total indirect cost / Total quantity of cost allocation base

  12. Indirect cost allocation • Q = indirect cost • S =  Si total value of the allocation base (total consumption of the allocation base made by all products) • Qi = indirect cost allocated to the specific product i • K = coefficient of allocation K = Q/SQi = K * Si

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