Class Feb 23

When there are new conditions, you must decide whether to pursue the new situation/offer.

Separate the decision making into two parts:

qualitative analysis

- long term

- short term

- do you have the excess capacity?

example: you can go to Harvard if you make a large donation. But do you have that excess capacity.

P, N, V, F and $ are the managerial variables. Also, opportunity costs.

Now we are discussing decisions based on qualitative analysis. make a go/no-go decision.

After you make a go decision, then you make a quantitative analysis.

- sorting between variable and fixed costs. variable: unit level and batch level. fixed costs: product level costs and facility costs.

variable level costs at unit level are multiplied by N, the number of units. batch level costs are multiplied by N/batch, the number of batches.

fixed costs: product costs - decide if they affect or don't affect and what proportion. facility costs, just determine if they affect or don't.

avoidable/unavoidable categorization is in quantitative analysis.

Special Orders

P is lower, but N is higher. V (both unit and batch) is avoidable, because by not taking the special order, you can avoid these costs.

P-old = $200

P-new = $130

unit = $50

batch = 20,000/1000 = $20

so it's ok.

Class 8

Chapter 4 - What does it cost? How do you divide the cost?

Use of cost drivers to accumulate costs.

Estimated vs. Actual Costs

Managers use estimated costs to make decisions about the future.

Timely

Potential Inaccuracies

Relevant

Identifying Direct and Indirect Costs

Indirect Costs cannot be traced. Harder to identify.

Don't give ppl incentives to cheat. Anything you don't reward, people won't do.

Costs that can be traced to departments in a cost-effective manner care called direct costs.

Costs that cannot be traced to departments in a cost-effective manner care called indirect costs.

Allocate indirect costs to cost objects.

Identify the most appropriate costs driver for each indirect cost. (politics!)

Indirect costs should be allocated to reflect how the departments consume resources.

Two step process:

Allocation rate = total cost / cost driver activity

Allocated cost = allocation rate x weight of the cost driver activity

When you put it together with a statement and present it nicely with good format - you're a managerial accountant!

Using Volume Measures to Allocate Variable Overhead Costs

variable overhead costs are direct costs.

Allocating Fixed Overhead Costs.

Objective:

There are no volume based cost drivers for fixed overhead.

Fixed Cost / N(Volume) = unit fixed cost

When volume goes up, the unit fixed cost goes down. KNOW THIS FOR THE DEPARTMENTAL FINAL!!

Allocating Costs to Solve Timing Problems

Allocating fixed costs can be complicated when the volume of production varies from month to month.

If prices are based on these costs, units produced in Jan will be priced higher than those produced in Feb.

Very IMPORTANT TERMINOLOGY

Predetermined Overhead Rate (POHR) = estimated overhead for the year / estimated allocation base for the year.

Ex: POHR = $36,000 / 18,000 units = $2.00 per unit

$2 allocated to each unit produced for all months during the year.

Benefits and detriments of allocating pooled costs.

Frequently, companies accumulate many individual costs into a single cost pool.

Pooling should be limited to costs with common cost drivers.

Allocating Joint Costs

Only allocate the joint costs, which are indirect. they are from processes with a common input.

Use the most objective, relevant and reasonable data (often sales value) to divide the costs.

Class 7

Each time you practice the material, the book shrinks. To master a subject, you need to practice it until the knowledge becomes a point.

Did homework exercises 2-16a and 2-27a. 3-3 and 3-6.

Class 6

We did the following exercises together:

1-1A

1-2A

1-17A

1-20A

2-6A

2-13, parts a and b

Class 5

Chapter 4 (briefly) - Cost Accumulation, Tracing and Allocation

How to divide. If you go out for lunch with friends and the bill is equally divided, people will eat and drink more expensive items. People wonder "how is the billing going to be paid?" They become strategically oriented.

This chapter discusses "how to divide".

Start with a nasty example. Pg 165-6

Cost allocations may significantly affect individuals at a very personal level.

One factor in cost allocation is traceability.

One guiding principle: "Never get angry"

A cost driver is the factor that affects that cost.

Is it the number of faculty?

Or the number of students?

Allocation Rate = total cost to be allocated / cost driver

If it's traceable, there can be a direct allocation. This is not problematic.

If it's not traceable, you have to calculate the allocation based on some cost driver. Here, there can be a difference of opinion of how to decide on the cost driver.

Steps:

a. decide on the determination factor (cost driver). politics come in here.

b. find out total (accumulated cost). calculate the rate.

c. assign cost by usage x rate

Now, go back to the chapter objectives...

Identify cost objects and cost drivers

cost object

cost driver - it's what drives the cost: volume, complexity, rarity/scarcity

social object - if you dress well, ppl will respect you

social driver - dignity in the way you present yourself

emotional object

emotional driver - if your boss likes you or doesn't like you

NY Times: 3 ppl had a heart attack. one had no problem, one had eye problem, one was paralyzed. the first one had the best insurance and the ambulance knew that he could pay. 2nd guy had a state insurance card. 3rd one had no insurance card.

Distinguishing direct from indirect costs.

Direct costs are traceable. These go into COGS. No one can argue that these are costs.

Rent and utilities are examples of indirect costs. Here, you can divide these costs in many ways: number of transactions, sales, amount of floor space used, etc. As above, here you come up with a unit rate by calculating:

unit rate = total rent / factor

then allocate the costs by multiplying unit rate x departmental usage

Selecting appropriate cost-determining factors

Timing problems: you need to use consistent factors over time

Now... starting the actual chapter...

Accumulate the costs of a cost object. Think of everything that goes into the product or service or cost object. Divide and conquer! The example in the book includes 3 components of a free hat giveaway promotion: cost of the item, cost of advertising, cost of employee to work the promotion.

The cost driver for the object (or any component of it) has a cause and effect relationship with the cost object.

Determine direct and indirect costs.

For indirect, determine the cost drivers.

Estimated vs. Actual Costs (pg. 150)

Costs are estimated for many reasons. Costs are accumulated in estimations also.

Identifying Direct and Indirect Costs

Don't subdivide too much. Don't go down to the last staple. You need to trace the costs in a cost-effective manner.

What drivers the target?

What is the total cost of the target?

Direct and Indirect costs are not the same as Fixed and Variable costs. There is overlap among them. It all depends on the context.

Summary:

Step 1: allocation rate = total cost to be allocated / cost driver (allocation base)

Step 2: multiply the allocation rate by

Class 3 - Analysis of Cost, Volume and Price to Increase Profitability

P - unit price

V - unit variable cost

F - total fixed cost

N - volume

Learning objective:

Use the equation method to determine the break-even point.

Break-even point is when profit = $0.

Revenue-Expense = NI/NL (net income/loss)

Financial approach:

Revenue-COGS = Gross margin

Gross margin - operating expenses = NI/NL

The managerial approach:

Revenue - Total Variable Cost = Contribution Margin

Contribution Margin - fixed cost = NI/NL

P*N = revenue

V*N = Total variable cost

F = Total fixed cost

Therefore,

Total contribution margin is (P-V)*N

and

Unit contribution margin is (P-V)

Contribution Margin Ratio = (P-V)/P

Example:

Price=$10

Variable costs=$15

Fixed costs=$20,000

Contribution Margin Ratio = 10-5/10 = 5/10 = 50%

Now, what is the break-even point (break-even volume)?

$10xNBE - $5xNBE = $5xNBE

so,

$5xNBE - $20,000 = 0

and

NBE = 4,000 units

Unit fixed costs is F/N.

Up to this point, we have been using column methods.

Equation method

Sales - Total Variable cost - Fixed costs = Profit

(PxN) - (VxN) - F = $0, for break-even point

Solving for N(b-e), we get:

NBE = F / (P-V) = break-even volume

Break-even point for sales = NBE * P

Unit contribution margin = P-V

Contribution margin ration = (P-V)/P

Break even sales = NBExP = F / [(P-V)/P]

See "check yourself 3.1"

NBE = F/(P-V) = 5400/(8-2) = 900

Determining Sales Volume Necessary to Reach a Desired Profit

Sales - Total Variable Costs - Fixed Costs = Profit

PxN - VxN - F = $$

Solving for N,

N_$ = (F+$) / (P-V)

First exam is on chapters 1-3, which we've just about covered now.

Assessing the Price Strategy

See book page 112

Assessing the Effects of Changes in Variable Costs

Cost-Volume-Profit Graph

See pg 116.

Plot $ vs. units

Draw lines for Fixed cost (horizontal), total sales (high slope), total cost (low slope)

Class 2

The model:

Mgmt - determines - Input - formulate - Business Model - execute - Output - risk reward - back to Mgmt

P = price

V = variable costs

F = fixed costs

X = volume

Everyone has a business model.

To be a doctor, there are high fixed costs. But the pay is high and the variable costs are low. These are the decision variables.

The class's business model:

3 exams and a final. Each exam is 150 points. You choose the best 2.

Final: 150 points a modification of the previous 3 exams. 100 points from the departmental final.

You get to keep the exams to study for the final.

There's a review session before the exams with a pretest.

10 multiple choice (30 points)

3-4 computations (120 points)

One page of cheat sheet is allowed for exams, but not the final.

Homework answers will be posted on Blackboard.

There will be an outline for the quiz.

Then we have the quiz (20 points).

Then the quiz questions and answers will be on Blackboard.

The brain is not run by gasoline, but by questions!

China has 2200 per capita GNP, higher than India's 800. But China is easier to start a business. Not as many delays as India.

Homework and quizzes are 150 points

Two midterms 300 points

No team assignments!

90% = A

80% = B

70% = C

All points will be posted on Blackboard.

Lectures are inspirational.

Exams are very mechanical.

Chapter 2 - Cost Behavior

4 key factors:

P = price

V = variable costs

F = fixed costs

X = volume

How does the business model affect the outputs and present reward or risk to the manager?

Budgeted/estimated - before the event

Real outcome - after the event

Compare the two and you have the discrepancy, technical term called variance.

Why budget?

You have data to reflect on. If you don't think beforehand, you may fail. To reflect is to learn.

First business model: see page 54. You need to construct the budget and decide how comfortable you need to be on your vacation.

Fixed costs aren't always really fixed. They may change with the situation. More people may change the fixed cost. The fixed cost per unit is actually what changes in many cases. See pg 56.

Operating leverage. It's related to F, V and X.

For each word problem, summarize the key factors, then write down formula in the chapter, then plug in the number and produce the output. You need to do it again and again until it's instinctive. That's the process of how to learn.

Risk and reward assessment

See page 58.

Variable cost behavior

Total variable cost = unit variable cost (v) times volume (X) = vX

High Low Method

(this will be on the test and the departmental final)

See page 68. Want to estimate the Fixed Cost (F) and Variable Cost (V).

You're given a list of data (units sold and total cost) for each month.

First step: Summarize key elements. High and Low. Find the high and low units sold and total cost in the list.

Total High = F + vXhigh

Total Low = F + vXlow

Thigh-Tlow = vXhigh - vXlow = v(Xhigh-Xlow)

Therefore,

v = Thigh-Tlow / Xhigh-Xlow = 540k-180k / 34k-10k = 360k/24k = 15