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Accounting for managers

Prof. Dr. Mohamed Youssef

Chapter 1 Introduction:

 Accounting System  Cost Concept  Cost Driver

Chapter 2 Cost Behavior: (L.O 1-2-4-5)

 Variable And Fixed Costs  Cost Volume Analysis  Sales Mix

Chapter 5 Relevant Information with Focus on Pricing: (L.O 1-3-4-7-8)

 Special Sales Orders  Limiting Factor  Delete Or Continue  Pricing Discussion (Cost Plus – Target Cost)

Chapter 6 Relevant Information with Focus on Operational: (L.O 3-4)

 Limiting Factor  Delete Or Continue

Chapter 3 Cost Function: (L.O 2-4)

 Variable Cost  Fixed Cost  Mixed Cost

Chapter 7 Master Budget: (L.O All)

 Budgetary Income Statement  Operating Budget  Financial Budget (Budgetary Balance Sheet).

Chapter 11 Capital Budget: (L.O All)

 Accounting Rate Of Return  Payback  Net Present Value  Internal Rate Of Return

Chapter 2 Cost Behavior: (L.O 1-5)

Variable Cost and Fixed Cost: Variable Cost (V.C) Direct Material Direct Labor Total variable cost change in direct portion with change in cost drive activity while V.C per unit remain constant unless there is increase or decrease in cost per unit.

Example: Units Cost Drive Total Variable Cost Variable Cost Per Unit 1 5$ 5$ 2 10$ 5$ 3 15$ 5$ 4 20$ 5$ 5 25$ 5$ 100 500$ 5$ 0 0 0

Fixed Cost (F.C) Overhead (Rent, Salary, Dep.,…). Total F.C unchanged regardless change in cost drive activity while F.C per unit changes as volume change.

Example: rent per month 1000$ Units Cost Drive Total Fixed Cost Variable Cost Per Unit 1 1000$ 1000$ 2 1000$ 500$ 3 1000$ 333.31$ 4 1000$ 250$ 5 1000$ 200$ 1000 1000$ 1$ 0 1000$ 1000$

Cost Behavior Cost Category Total $ Per Unit Variable Cost - VC Change when unit change *Constant Fixed Cost - FC *Constant Change when unit change

• We use this figure for estimated and budget Actual Budget Notes Year 2014 2015 UNITS 2000 *5000 *MAX Units DM 5$ 5$ VC DL 6$ 6$ RENT 7$ 2.8$ Cost Saving FC DEP. 4$ 1.6$ Cost Saving Total cost per unit 22$ 15.6$ Cost Saving

TOTAL RENT @2014 =20007$=14000$ TOTAL Dep. @2014 =20004$=8000$

Units

Total V.C

V.C per unit

Units

F.C per unit

FC

Depreciation vs. Amortization

Tangible assets in-Tangible assets

Cost Behavior Cost Category Total $ Per Unit Variable Cost - VC Change when unit change *Constant Fixed Cost - FC *Constant Change when unit change

• We use this figure for estimated and budget

Example for Relevant Range: Cost drive Cost behavior 100 units 2000 units 4000 units (MAX) Notes TOTAL VC 5000$ ?(5000/100)=52000=10000$ ?(5000/100)=54000=20000$ Change when unit change TOTAL FC 4000$ ?4000$ ?4000$ Constant TOTAL COST ?(5000$+4000)=9000$ ?(10000$+4000$)=14000$ ?(20000$+4000$)=24000$ Change when unit change VC PER UNIT ?(5000$/100)=5$ ?(10000$/2000)=5$ ?(20000$/4000)=5$ Constant FC PER UNIT ?(4000$/100)=4$ ?(4000$/2000)=2$ ?(4000$/4000)=1$ Change when unit change TOTAL COST PER UNIT ?(5$+4$)=9$(MAX) ?(5$+2$)=7$ ?(5$+1$)=6$(MIN) Change when unit change

 Revenue (R)  Net interest income (NII)  Net banking income (NBI)

$

Emp. / Bus

130000

260000

Numbers of Works

130000

260000

Supervisor Salary

Step cost

VC

FC

Mixed Cost

300000

1000

Relevant Range

$

Emp. / Salary

Contribution Approach Contribution Margin – Income Statement

Sales (3-Q??* Unit Selling Price) (500unit *20$)?? 10000$ Less All Variable Cost of sales  Manufacturing Cost 9$  Marketing and admin Cost 3$ 1-Unit Variable Cost (UVC) (9$+3$)=12$ 2-Unit Contribution Margin (UCM) (20$-12$)=8$

---

______

4-Contribution Margin (CM)(Q* U CM) 500unit *8$(UCM)?? Less All Fixed cost  Market Cost 2500$  Admin Cost 1500$

---

5-Operating Income (OI)??

ZERO

Sales – Total Cost = ZERO (Unit* Unit Selling Price) - (Variable cost +Fixed Cost) =ZERO (Q* Unit Selling Price (USP)) – ((Q* Unit Variable Cost (UVC)) + Total Fixed Cost) = ZERO (Q20$) – ((Q(3$+9$)) + (2500+1500) =ZERO Q = 500 unit. OR We can calculate the unit using this formula Q = Fixed Cost (FC)/ Unit Contribution Margin (UCM) Q=4000$/(20$-12$)=500unit In this case it called Brake Even Point (BEP) which is mean by using this number of units no profit or loss.

MAX CAP – Best Case Scenario Brake Even Point (BEP) = Fixed Cost (FC)/ Unit Contribution Margin (UCM) MIN FLOOR – Worst Case Scenario

Example: Brake Even Point (BEP) = Fixed Cost (FC)/ Unit Contribution Margin (UCM) = Fixed Cost (FC)/( Unit Selling Price (USP)- Unit Variable Cost (UVC)) =9000$/ (10$-7$) =3000 unit. -- Brake Even Point If increase 20% in Unit Selling Price (USP) and fixed cost 1000$. =9000$+1000$/ ((10$+2%)-7$) =5000 unit. -- Best case scenario

Brake Even Point roles:  @ Brake Even Point (BEP) Contribution Margin (CM) is Variable = Fixed Cost (FC) is Constant  @ Brake Even Point (BEP) Unit Contribution Margin (UCM) is Constant=Unit Fixed Cost (UFC) is Variable  Above the level of Brake Even Point (BEP)  Contribution Margin (CM) = Operating Income (OI)

You have this information:  Unit Selling Price (USP) 20$.  Manufacturing Cost per unit sales 9$.  Marketing and admin cost per unit sales 3$  Market Cost 2500$.  Admin Cost 1500$.

C

oino BEP)) F F

oinntnt (B((B BEP) =

You have this information:  Unit Selling Price (USP) 10$.  Unit Variable Cost (UVC)7$.  Fixed cost 9000$ Calculate how many units we can reach the Brake Even Point (BEP)?? And what if increase 20% in Unit Selling Price (USP) and fixed cost 1000$.

Brake Even Point $:

 Unit Contribution Margin (UCM)=Unit Sales Price (USP)-Unit Variable Cost (UVC)  Contribution Margin (UCM %) = Unit Contribution Margin (UCM)/Unit Sales Price(USP).  Brake Even Point (BEP) = Fixed Cost (FC)/ Unit Contribution Margin (UCM)  Brake Even Point $(BEP$) = Fixed Cost (FC)/ Contribution Margin (UCM%)  =4000$/40%=1000$

A=SALES

B=FIXED COST

C=VARIABLE COST

D=BREAK EVEN POINT

Unit Sales Price (USP)

20$

Per 1$ of Sales

Per Unit

UVC%=12$/20$=60% UCM%=8$/20$=40%

UVC=12$ UCM=8$

Target Operating Income: Target Net Income (TNI) =Target Sales –Variable Cost – Fixed Cost Unites Target Sales (UTS) = ( Fixed Cost + Target net income (TNI))/Unit Contribution Margin (UCM)

Example 1: Contribution Approach Contribution Margin – Income Statement

Sales (Q* Unit Selling Price) (500unit *20$) 10000$ Less All Variable Cost of sales  Manufacturing Cost 9$  Marketing and admin Cost 3$ Unit Variable Cost (UVC) (9$+3$)=12$ Unit Contribution Margin (UCM) (20$-12$)=8$

Contribution Margin (CM)(Q* Unit Contribution Margin) 500unit *8$(UCM) Less All Fixed cost  Market Cost 2500$  Admin Cost 1500$

---

Target Operating Income (TOI) Less TAX 20%

---

Target Net Income (TNI)

_______

ZERO

ZERO

_______

ZERO

Example 2:

Contribution Approach Contribution Margin – Income Statement 500 unit 200 unit

Sales (Q* Unit Selling Price) (500unit *20$) 10000$ Zero Less All Variable Cost of sales  Manufacturing Cost 9$  Marketing and admin Cost 3$ Unit Variable Cost (UVC) (9$+3$)=12$ Unit Contribution Margin (UCM) (20$-12$)=8$

---

_______

Zero

_______

Contribution Margin (CM)(Q* UCM) 500unit *8$ Less All Fixed cost  Market Cost 2500$  Admin Cost 1500$

---

Target Operating Income (TOI)= (200)8$ Less TAX 20%=1600$.

---

Target Net Income (TNI)

_______

Zero Zero

---

Zero

Zero

---

1600$ (320$)

---

1280$

You have this information:  Unit Selling Price (USP) 20$.  Manufacturing Cost per unit sales 9$.  Marketing and admin cost per unit sales 3$  Market Cost 2500$.  Admin Cost 1500$.  TAX 20% Calculate the target operating income and target net income.

You have this information:  Unit Selling Price (USP) 20$.  Manufacturing Cost per unit sales 9$.  Marketing and admin cost per unit sales 3$  Market Cost 2500$.  Admin Cost 1500$.  TAX 20% If the unit increase to 700 unit calculate the (TNI)

Example 3:

If we need to know how many units we need to achieve target operating income:

Target Operating Income (TOI) = Target Net Income (TNI) / (1-Tax %)

TOI=1280$/ (1-.2) =1600$

Target Operating Income per Units (Q) = (All Fixed cost + Target Operating Income (TOI))/ Unit Contribution Margin (UCM) Target Operating Income per Units (Q) = (4000$+1600$)/8$=700unit

Unit Contribution Margin %(UCM%)= Unit Contribution Margin (UCM)/Unit sales price (USP)

Unit Contribution Margin %(UCM%)=8$/20$=40%

Target Operating Income per $=(All Fixed cost + Target Operating Income (TOI))/ Contribution Margin% (CM%) Target Operating Income per $=(4000$+1600$)/.

Target Operating Income per $=14000$

Type of taxes:

 Corporate income tax  Personal income tax  Sales tax  Salary tax  Federal income tax

Operating leverage: Firm ration of fixed cost to variable cost Highly leverage firms have high fixed costs and low variable costs. a small change in sales volume = a large change in net income.

Example 1: Company X Company Y Monthly salary 10000$ 10000$ Less monthly expenses Fixed cost (6000$) (2000$) Variable cost (1000$) (5000$) Monthly saving cash 3000$ 3000$

Operating leverage (FC/VC)

High Risk Low Risk

Example 2: Good year Poor year Company A Company B Company A Company B Sales(10010$) 1000$ 1000$ Sales(8010$) 800$ 800$ Less variable cost Less variable cost Variable Cost for A 3$ (300$) Variable Cost for A 3$ (300$) Variable Cost for B 6$ (600$) Variable Cost for B 6$ (600$) Less Fixed cost Less Fixed cost Fixed Cost for A 6$ (600$) Fixed Cost for A 6$ (600$) Fixed Cost for B 3$ (300$) Fixed Cost for B 3$ (300$) Operating Income (OI) 100$ 100$ Operating Income (OI) (40$) 20$

Operating leverage (OL)

Operating leverage (OL) High Risk Low Risk High Risk Low Risk

Operating Risk: Risk High Low

Operating leverage (OL) + - (MIN)

Margin Of Safety (MOS) - + (MAX)

Margin Of Safety (MOS) =Unit sales – break even sales

Contribution Margin and Gross Margin: The Gross Margin (GM) uses the division on the production or acquisition cost versus selling and administrative cost dimension. The Contribution Margin (CM) uses the division based on the variable-cost versus fixed-cost dimension.

Example 1: Contribution Approach Contribution Margin – Income Statement

Sales (3-Q??* Unit Selling Price) (500unit *20$)?? 10000$ Less All Variable Cost of sales  Manufacturing Cost 9$  Marketing and admin Cost 3$ 1-Unit Variable Cost (UVC) (9$+3$)=12$ 2-Unit Contribution Margin (UCM) (20$-12$)=8$

---

______

4-Contribution Margin (CM)(Q* U CM) 500unit *8$(UCM)?? Less All Fixed cost  Market Cost 2500$  Admin Cost 1500$

---

5-Operating Income (OI)??

ZERO

Gross Margin (GM) OR Gross Profit (GP) = Sales Price (SP) - Cost of Goods Sold (COGS) = Sales Price (SP) – (Variable Cost + Fixed Cost)= = Sales Price (SP) – ((Manufacturing Cost unit Sold)+ Market Cost)) Gross Margin (GM) OR Gross Profit (GP) = 10000$-(9$500unit+2500$)=3000$

Contribution Margin (CM) = Sales Price (SP) –Variable Cost (VC) =10000$-((9$500unit)+(3$500unit)) Contribution Margin (CM) =10000$-6000$=4000$ Example 2: Unit Contribution Margin

Unit Gross Margin Sales 1.5$ 1.50$ Less Total Variable Cost Cost Of Unit Sold (1.20$) (1.20$) Unit Contribution Margin .30$ Unit Gross Margin .30$ Example 3: Unit Contribution Margin

Unit Gross Margin Sales 1.5$ 1.50$ Less Total Variable Cost Cost Of Unit Sold (1.20$) (1.20$) Variable Cost (.12$) Unit Contribution Margin .18$ Unit Gross Margin .30$

You have this information:  Unit Selling Price (USP) 20$.  Manufacturing Cost per unit sales 9$.  Marketing and admin cost per unit sales 3$  Market Cost 2500$.  Admin Cost 1500$.

Page

Example2: Which line of this sales mix high profit mix??

Product A Product B Product C Product D Product E Unit Price 3$ 2$ 9$ 5$ 4$ Sales Mix A 1 2 1 3 3 Sales Mix B 2 5 0 2 1 Sales Mix C 1 0 9 0 0 Sales Mix D 2 5 1 0 2 Sales Mix E 1 3 2 1 3 Total Sales MIX 7 15 13 6 9 Profit MIX 21 30 117 30 36

Example3:

Break-even point for a constant sales mix of 4 units of W for every unit of K. Need Total unit in package and what if company sells only key cases or sells only wallets??

Product W Product K Q 300000/75000=4 75000/75000= UCM 300000/300000=1 300000/150000= CMPM=6$ 41=4$ 12=2$ BEPP=FC/ CMPM=180000$/6$=30000unit Product W Product K =430000=120000 =130000= Total unit in package =120000+30000=150000 unit Or Break-even point for a constant sales mix of 4 units of W for every unit of K. Sales – variable expense – fixed expenses = zero net income [$8(4K) + $5(K)] – [$7(4K) + $3(K)] – $180,000 = 0 32K + 5K - 28K - 3K - 180,000 = 0 6K = 180,000  K = 30,000 and W = 4K = 120, Total unit in package = 30,000K + 120,000W = 150,000 total units (K + W).

If the company sells only key cases: Break-even point = fixed expenses/contribution margin per unit =$180,000 / $2 = 90,000 key cases If the company sells only wallets: Break-even point = fixed expenses/contribution margin per unit =$180,000 / $1 = 180,000 wallets

Example4: Suppose total sales were equal to the budget of 375,000 units. However, Ramos sold only 50,000 key cases And 325,000 wallets. What is net income?

Product Wallets (W) Key Cases (K) Total Sales in units 300,000 75,000 375, Sales @ $8 and $5 $2,400,000 $375,000 $2,775, Less Variable expenses@ $7 and $3 ($2,100,000) ($225,000) ($2,325,000) Contribution margins @ $1 and $2 $ 300,000 $150,000 $ 450, Less Fixed expenses ($ 180,000) Net income $ 270,

Product Wallets (W) Key Cases (K) Total Sales in units 325,000 50,000 375,

Sales @ $8 and $5 $2,600,000 $250,000 $2,850, Less Variable expenses@ $7 and $3 ($2,275,000) ($150,000) ($2,425,000) Contribution margins@ $1 and $2 $325,000 $100,000 $425, Less Fixed expenses ($180,000) Net income $245,

Impact of Income Taxes: Income taxes do not affect the break-even point. There is no income tax at a level of zero income. Income taxes affect the calculation of the volume required to achieve a specified after-tax target profit.

Target Operating Income (TOI) = TNI/ (1-TAX RATE) Target Net Income (TNI) = TOI*(1-TAX RATE)

Example:

Contribution Approach Contribution Margin – Income Statement 500 unit 200 unit

Sales (Q* Unit Selling Price) (500unit *20$) 10000$ Zero Less All Variable Cost of sales  Manufacturing Cost 9$  Marketing and admin Cost 3$ Unit Variable Cost (UVC) (9$+3$)=12$ Unit Contribution Margin (UCM) (20$-12$)=8$

---

_______

Zero

_______

Contribution Margin (CM)(Q* UCM) 500unit *8$ Less All Fixed cost  Market Cost 2500$  Admin Cost 1500$

---

Target Operating Income (TOI)= (200)8$ Less TAX 20%=1600$.

---

Target Net Income (TNI)

_______

Zero Zero

---

Zero

Zero

---

1600$ (320$)

---

1280$

Example 2:

If we need to know how many units we need to achieve target operating income:

Target Operating Income (TOI) = Target Net Income (TNI) / (1-Tax %) TOI=1280$/ (1-.2) =1600$

Target Operating Income per Units (Q) = (All Fixed cost + Target Operating Income (TOI))/ Unit Contribution Margin (UCM) Target Operating Income per Units (Q) = (4000$+1600$)/8$=700unit

Unit Contribution Margin %(UCM%)= Unit Contribution Margin (UCM)/Unit sales price (USP) Unit Contribution Margin %(UCM%)=8$/20$=40%

Target Operating Income per $=(All Fixed cost + Target Operating Income (TOI))/ Contribution Margin% (CM%) Target Operating Income per $=(4000$+1600$)/. Target Operating Income per $=14000$

You have this information:  Unit Selling Price (USP) 20$.  Manufacturing Cost per unit sales 9$.  Marketing and admin cost per unit sales 3$  Market Cost 2500$.  Admin Cost 1500$.  TAX 20% If the unit increase to 700 unit calculate the (TNI)

Spesial Sales Order Work: The special sales order work only when use: 1-Total variable cost 2-manafactoring cost

Example 1: Contribution Approach Contribution Margin – Income Statement JUN 500 1000 Sales (3-Q??* Unit Selling Price) (500unit *20$)?? 10000$ 15000$ 25000$ Less All Variable Cost of sales  Manufacturing Cost 9$  Marketing and admin Cost 3$ 1-Unit Variable Cost (UVC) @500 (9$+3$)=12$ 2-Unit Contribution Margin (UCM)  @500(20$-12$)=8$@1000(15$-12$)=3$

---

______

______

______

4-Contribution Margin (CM)(Q* U CM) @500unit *8$ @1000unit *3$ Less All Fixed cost  Market Cost 1500$  Admin Cost 1500$

---

5-Operating Income (OI)??

Zero 3000 =======

1- If the special sales price greater than or equal the UVC then we accept. 2- Change on OI or change on CM (15-12)*1000=3000$. 3- New OI 1000+3000=4000$

Example 2: 1- If the special sales price 10.5$ (greater than or equal ) the UVC 9$ then we accept. 2- Change on OI or change on CM (10.5-9)*1000=1500$. 3- New OI 1000+1500=2250$

Example 3: 1- If the special sales price 9$ (greater than or equal ) the UVC 12$ then we reject.

Deletion and addation: Example: Product A Product B Sales 5000 7000 Less VC (3000) (4000) CM 2000 3000 Less FC  Avoidable Cost (1500)^ (1000)  Unavoidable Cost (1000) (500) OI (500) 1500 1000

You have this information:  Unit Selling Price (USP) 20$.  Manufacturing Cost per unit sales 9$.  Marketing and admin cost per unit sales 3$  Market Cost 1500$.  Admin Cost 1500$. IF special sales order for 1000 unit @ 15$ did we accept or

You have this information:  Assume the special order sales order price 10.5$ this dissection has no effect on Marketing & admin variable cost IF special sales order for 1000 unit @ 10.5$ did we accept or not??

You have this information:  Assume the special order sales order price 9$ IF special sales order for 1000 unit @ 9$ did we accept or not??

You have this information: If CM greater than or equal the Avoidable Cost then continue. And If CM less the Avoidable Cost then delete.

If we to delete product A. So the Unavoidable Cost Will Cary up for product B.

Le CM LeLe

Limiting Factor:

Macro Level Micro Level

Demand Side Supply Side

Demand Unlimited Demand Limited Supply Limited

700 unit 200unit 500 unit

Example: Product A Product B Demand type Limited Unlimited Demand unit 200 unit 1000 unit UCM 20$ 5$ Time per unit 2 hour=120 minute 5 Minute Unit per hour .5 unit 12 unit Calculate the limited and unlimited demand max profit CM per hour .520=10$ 125$=60$ Limited demand max profit =20010$=2000$ Unlimited demand max profit=1000unit60$=60000$

Example: Time 1 Hour 3 Minute 10 Minute 20 Minute 30 Minute Product A B C D E UCM 3$ 2$ 10$ 5$ 4$ Which product is limited demand and which is unlimited demand?? Product C

Machine

capacity 1000

Hour.

el M

mand ply S

ma

d Side

d Unlimited Demand L

and

and

p

Limit

p y