Managerial accounting

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  • Contribution Margin = Sales – Variable Costs 25.00 – 21.75 = 3.25 Contribution Margin Ratio = (Sales – Variable Costs) / Sales 3.25/25.00 = 13%
  • Sales – Variable Costs 50 – 9.30 = 40.70 40.70/50 = 81.4%
  • EXPECTED RESPONSE Detete line? Add line? Accept contract? 1 Calculate the contribution margin 2 Define the contribution margin and explain its purpose 3 re-state the issue eg: the business is considering deleting a line … 4 Explain result - compare line under consideration with existing lines Make a recommendation and justify; use figures, plus any additional considerations which the manager should keep in mind eg turnover, impact of deleting a line on existing sales
  • Managerial accounting

    1. 1. Managerial Accounting
    2. 2. The difference <ul><li>Financial accounting </li></ul><ul><li>provides information to shareholders, gov’t, creditors (a/c pay) and people outside the business. </li></ul><ul><li>Managerial accounting </li></ul><ul><li>provides information for managers inside a business for planning, directing, monitoring and controlling operations. </li></ul>
    3. 3. The difference <ul><li>Financial accounting </li></ul><ul><li>reports for an arbitrary time period, e.g. financial year </li></ul><ul><li>Managerial accounting </li></ul><ul><li>day-to-day reporting </li></ul><ul><li>reports can be run at anytime, any date </li></ul><ul><ul><li>What are the benefits? </li></ul></ul>
    4. 4. The difference <ul><li>Financial accounting </li></ul><ul><li>Information is based on historical data </li></ul><ul><li>Managerial accounting </li></ul><ul><li>Decisions project into the future </li></ul>
    5. 5. The difference <ul><li>Financial accounting </li></ul><ul><li>Measures: </li></ul><ul><ul><li>Performance </li></ul></ul><ul><ul><li>Stability </li></ul></ul><ul><ul><li>Liquidity </li></ul></ul><ul><li>Managerial accounting </li></ul><ul><li>Answers questions: </li></ul><ul><ul><li>Increase selling price? </li></ul></ul><ul><ul><li>Remove product line? </li></ul></ul><ul><ul><li>How many units must be sold to break even? </li></ul></ul>
    6. 6. The difference <ul><li>Financial accounting </li></ul><ul><li>Reports conform to prescribed rules set by governing bodies. </li></ul><ul><li>Managerial accounting </li></ul><ul><li>Reports can be more descriptive and explanatory catering to different audiences. </li></ul><ul><li>Make recommendations </li></ul>
    7. 7. Decision-making tools <ul><li>Contribution margin </li></ul><ul><li>Break-even point </li></ul>
    8. 8. Contribution margin <ul><li>Tells us how much $$ each product is contributing to expenses </li></ul><ul><li>Calculate for each product line </li></ul>Contribution = Sales – Variable margin costs
    9. 9. Contribution margin <ul><li>Compare different product lines </li></ul><ul><li>Is this product line worth keeping? </li></ul><ul><li>Should we delete it? </li></ul>Contribution = Sales – Variable margin costs
    10. 10. Contribution margin <ul><li>Express as $ per unit </li></ul><ul><li>Businesses can set a minimum contribution margin per item </li></ul><ul><li>Variable costs = associated with selling that item </li></ul>Contribution = Sales – Variable margin costs
    11. 11. Contribution margin ratio <ul><li>Contribution Margin = (Sales – Variable costs) Ratio Sales </li></ul><ul><li>Tells us what portion of Sales goes towards fixed costs. </li></ul><ul><li>Express as % </li></ul>
    12. 12. Calculating contribution margin <ul><li>You sell CDs on the internet for $25 each (inc. postage) </li></ul><ul><li>Your variable costs per CD are: </li></ul><ul><ul><li>COGS: $18.75 </li></ul></ul><ul><ul><li>Packaging: $1.00 </li></ul></ul><ul><ul><li>Postage: $2.00 </li></ul></ul><ul><ul><li>Calculate contribution margin & ratio </li></ul></ul>
    13. 13. Contribution margin <ul><li>Contribution margin = $3.25 </li></ul><ul><li>Cont. margin ratio = 13% of selling price </li></ul><ul><li>What does this mean? </li></ul>Each time you sell a CD at $25, you have $3.25 left over to cover all of your fixed expenses. Or 13% of your sale price contributes to your fixed expenses.
    14. 14. Contribution Margin <ul><li>Work out the contribution margin & ratio for the following business: </li></ul><ul><li>You sell concert T-shirts for $50 each. Each t-shirt costs $9 from the manufacturer. Your other variable costs are freight at 30c per t-shirt. </li></ul>
    15. 15. Multiple product lines <ul><li>Work out the contribution margin & ratio of each Plasma TV brands sold at a hi-fi retailer: </li></ul>Sony TV Toshiba TV LG TV Selling price $1400 $1100 $1200 COGS $750 $610 $620 Delivery expense $23 $23 $23 Cont margin 627 467 557 CM ratio 44% 42% 46%
    16. 16. Contribution margin <ul><li>Which product line is contributing the most to fixed costs? The least? </li></ul><ul><li>What would you recommend… </li></ul>
    17. 17. Break-even analysis Also known as Cost-Volume-Profit (CVP) <ul><li>The break-even point is the point at which: </li></ul><ul><ul><li>Total Sales = Total Costs </li></ul></ul><ul><li>Profit is $0 </li></ul><ul><li>Until break-even is reached business operates at a loss </li></ul><ul><li>Calculated in product units or $$ </li></ul>
    18. 18. Purpose of break-even point <ul><li>Know what level of sales (volume) is needed to cover costs </li></ul><ul><li>Evaluate current price structure </li></ul>
    19. 19. Calculating Break-even-point <ul><li>Units = Fixed Costs </li></ul><ul><li> Contribution Margin </li></ul><ul><li>Dollars = Break-even x Selling price in units per unit </li></ul>
    20. 20. Spreadsheets <ul><li>Using spreadsheet for break-even analysis </li></ul><ul><li>Variables required: </li></ul><ul><ul><li>Variable cost per unit </li></ul></ul><ul><ul><li>Fixed costs </li></ul></ul><ul><ul><li>Expected sales </li></ul></ul><ul><ul><li>Price per unit </li></ul></ul>

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