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MSE608C – Engineering and Financial Cost Analysis. Managerial Accounting. Managerial Accounting. Managerial Accounting Providing information to management within an organization The role of the Manager Planning; Organizing; Controlling; Decision Making Features of Managerial Accounting

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managerial accounting
Managerial Accounting
  • Managerial Accounting
    • Providing information to management within an organization
  • The role of the Manager
    • Planning; Organizing; Controlling; Decision Making
  • Features of Managerial Accounting
    • It places emphasis on the future
    • It is not governed by GAAP and is not required
    • Emphasizes only relevant data
    • Precision is not critical
the total costs curve
The Total Costs Curve

$$$

TOTAL COSTS

VARIABLE COSTS

FIXED COSTS

SALES VOLUME

BREAKEVEN VOLUME

the cost price volume cpv curve
The Cost-Price-Volume (CPV) Curve

$$$

REVENUES

TOTAL COSTS

VARIABLE COSTS

BREAKEVEN

REVENUES

FIXED COSTS

SALES VOLUME

BREAKEVEN VOLUME

the cpv curve for profit planning
The CPV Curve for Profit Planning
  • To make a profit sales Revenues must exceed the sum of Fixed and Variable Expenses.

Revenues > Fixed Expenses + Variable Expenses

$$$

REVENUES

PRICE INCREASE

TOTAL COSTS

VARIABLE COSTS

FIXED COSTS

SALES VOLUME

NEW BREAKEVEN

BREAKEVEN VOLUME

the cpv curve for profit planning1
The CPV Curve for Profit Planning
  • To make a profit sales Revenues must exceed the sum of Fixed and Variable Expenses.

$$$

REVENUES

TOTAL COSTS

NEW VARIABLE COST CURVE

FIXED COSTS

SALES VOLUME

NEW BREAKEVEN

ORIGINAL BREAKEVEN

the contribution margin
The Contribution Margin
  • The Gross Margin format
    • Separates costs by function
  • The Contribution Margin format
    • Separates Costs into Variable Expenses and Fixed Expenses.
    • The Contribution Margin shows how much revenue is left to contribute to Fixed Expenses.
    • This is a useful analytical tool for managerial accounting.
the contribution margin ratio
The Contribution Margin Ratio
  • Shows the percentage of sales revenues required to cover variable costs.
  • Calculate the Breakeven Point

Revenues = Fixed Expenses / CM Ratio

operating leverage
Operating Leverage

$

$

REVENUES

REVENUES

TC

TC

V

V

BREAKEVEN

VOLUME

BREAKEVEN

VOLUME

HIGH LEVERAGE

(HIGH FIXED COSTS)

LOW LEVERAGE

(LOW FIXED COSTS)

business decisions and costing analysis
Business Decisions and Costing Analysis
  • Costing information is used to make a wide range of business decisions.
    • Make-or-Buy
    • Production decisions
    • Capital Investment Alternatives
    • Equipment Replacement
    • Product Design (new and redesigns)
    • Inventory levels
assessment
Assessment
  • How can you change the Breakeven Point by modifying Costs?
  • How can you change the Breakeven Point by modifying Revenues?
  • What is the difference between the Gross Margin and the Contribution Margin?
  • What is the significance of a company with Low Operating Leverage?
what is budgeting
What is Budgeting?
  • Profit Planning.
  • A road map for decision making and performance evaluation.
  • Creates a detailed, integrated business plan for upcoming accounting period(s).
  • Consists of a number of budgets that, when combined, create a Master Budget.
some elements of budgeting
Some Elements of Budgeting
  • Senior management sets the Strategic Objectives:
      • Overall profit growth for the business;
      • Development of new markets or products;
      • Increases in market share for products lines or retreat from certain markets;
      • Stock price and dividend payments;
      • Financing and investment strategies.
  • Line managers must develop the detailed budgets; Operating Objectives.
some elements of budgeting1
Some Elements of Budgeting
  • The Budget Cycle
    • Most commonly a fiscal year, divided into quarters and the most current quarter subdivided into months. Other cycles are used when practical.
    • Perpetual budget cycles are a twelve month continuous cycle. As one month ends, another is added.
  • Historical data vs. Zero-based Budgeting
    • Historical data for the last budget period is used to establish a baseline; increases, steady-state or decreases are based on future expectations.
    • Zero-based Budgeting uses zero dollars as the baseline. Each line item must be budgeted irrespective of last year’s figure.
      • Zero-based budgets take more time to prepare but require managers to consider the most efficient use of resources.
assessment1
Assessment
  • Name key differences between Managerial Accounting versus Financial Accounting?
  • Budgeting is _____ planning and a _______ ____ for decision making?
  • What are the differences between Senior and Line managers for budgeting?
  • Which budget is the heart of the budgeting process?