Engineering Economic Analysis

1. Engineering Economic Analysis Chapter 18  Accounting and Engineering Economy rd

2. Accounting, managerial, and engineering economy functions Accounting Management Engineering Economy About past About past and future About future Analyzing Capital budgeting Feasibility of alternatives Summarizing Decision making Collect/analyze data Reporting Setting goals Estimate Financial indicators Assessing impacts Evaluate projects Economic trends Analyzing risks Recommend Cost acquisitions Planning Audit Controlling Identity needs Record keeping Trade-offs/constraints Data and Communications Data and Communications Budgeting Data and Communications Estimating rd

3. Six Principal Specializations of Private Accounting Controller Costs Taxes Budgets General Accounting Auditing Systems rd

4. Assets Properties that are owned and have monetary value e.g. Cash, inventory, buildings, equipment. rd

5. Liabilities Accounts owned to outsiders e.g., notes payable, accounts payable, bonds payable, income taxes

6. Equity The owner's interest (assets minus liabilities) in an enterprise.

7. Accounting Equation Assets = liabilities + equity This accounting identity is always maintained. rd

8. Transactions • Events that result in change of assets, liabilities, or equity. • Business papers – original documents • Journals – books of original entries • Ledgers – complete set of accounts rd

9. Summarizing Information • Posting • Ledger (classify the data in summary) provide the basis for preparing financial statements • Income Statement • Balance Sheet rd

10. Income Statement • Summary of revenue, expense, and net income over a specified period of time. • Accrual basis – revenue when earned and expense when incurred • Cash basis –revenue and expense with receipt and payment of cash. rd

11. Income Statement Revenue from sales Cost of goods sold Gross profit on sales Operating expenses Selling expenses, G & A, other Net income (Gross profit – Operating expenses) rd

12. Income Statement vs. Balance Sheet Enter asset, liability, capital, income, and expense rd

13. Balance Sheet • Assets: Resources the business ownsarranged in order of liquidity • Liabilities: Claims against those resourcesarranged in order of expected payment • Equity: The difference between assets and liabilities; often called capital or stockholders' equity rd

14. Classify as current asset, long-term asset, current liability, or long-term liability. • 1. Accounts Receivable 6. Supplies • Accounts payable 7. Salaries payable • Notes payable 8. Bonds payable • Mortgage Payable 9. Equipment • Cash 10. Land • Current assets: 1, 5, 6Long-term assets: 9, 10Current liabilities: 2, 3, 8Long-term liabilities: 4, 8 rd

15. Balance Sheet Balance Sheet: Owners’ Equity Stockholders' Equity The residual interest in the assets that remain after deducting the liabilities. Contributed Capital A measure of the capital contributed to the company by its owners. Contribution can be through cash, noncashassets, or valuable services. Different classes of capital: Common stock and Preferred stock Retained earnings rd

16. 18-9 Annual sales of $500K and a daily profit of $1K 6 days a week, find total yearly before tax business expense. 6 * 52 = 312 days of $1K profit or $312K profit/year Revenues - Profit = Expense or 500K - 312K = $188K. 18-10 A firm has $5M in current assets (CA) and $2M in current liabilities (CL). Find the working capital and current ratio. Working capital = current assets - current liabilities = $5M - $2M = $3M Current ratio = CA/CL = 5/2 = 2.5 rd

17. 18-13 Admin expense $2,750K Subcontract services 18,000K Development expense 900K Interest expense 200K Sales revenue 30,000K Selling expense 4,500K Develop the income statement Operating Revenue and expenses Revenue Sales 30,000K Total 30,000K Expenses Admin 2,750K Cost of goods sold 18,000K Development 900K Selling 45,00K Total 26,150K Total operating income 3,850K Non-operating revenues & expenses Interest paid 200K Income before taxes 3,650K Taxes (@27%) 985.5K Net profit (loss) 2,664.5K rd

18. 18-24 Indirect annual manufacturing costs $60M for 12,000 machine-hours a) Compute predetermined indirect cost application rate using machine hours as the burden vehicle. 60M/12K = $5,000/hour b) Determine the total cost of production with direct material costs of $1M, direct labor costs of $600K and 200 machine hours. Total cost = $1M + 0.6M + 200*5K = $2.6M. rd

19. 18-25 Using traditional costing; categorize the following as direct or indirect: Machine run costs I Costs to market the product I Machine depreciation I Cost of storage I Materials handling costs I Insurance costs I Cost of materials D Cost of product sales force I Overtime expenses D Engineering drawings I Machine operator wages D Machine labor D Utility costs I Cost of tooling and fixtures I Support (admin staff salaries) I rd