Download - Managerial accounting
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Managerial Accounting
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The difference
FinancialFinancial accounting accounting provides information
to shareholders, gov’t, creditors (a/c pay) and people outsideoutside the business.
ManagerialManagerial accounting accounting provides information for
managers insideinside a business for planning, directing, monitoring and controlling operations.
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The difference
FinancialFinancial accounting accounting reports for an
arbitrary time period, e.g. financial year
ManagerialManagerial accounting accounting day-to-day reporting reports can be run at
anytime, any date
What are the benefits?
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The difference
FinancialFinancial accounting accounting Information is based
on historicalhistorical data
ManagerialManagerial accounting accounting Decisions project into
the futurefuture
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The difference
FinancialFinancial accounting accounting Measures:
– Performance– Stability– Liquidity
ManagerialManagerial accounting accounting Answers questions:
– Increase selling price?– Remove product line?– How many units must
be sold to break even?
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The difference
FinancialFinancial accounting accounting Reports conform to
prescribed rules set by governing bodies.
ManagerialManagerial accounting accounting Reports can be more
descriptive and explanatory catering to different audiences.
Make recommendations
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Decision-making tools
Contribution margin Break-even point
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Contribution margin
Tells us how much $$ each product is contributing to expenses
Calculate for each product line
Contribution = Sales – VariableContribution = Sales – Variable margin margin costs costs
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Contribution margin
Compare different product lines Is this product line worth keeping? Should we delete it?
Contribution = Sales – VariableContribution = Sales – Variable margin margin costs costs
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Contribution margin
Express as $ per unit Businesses can set a minimum contribution margin
per item Variable costs = associated with selling that item
Contribution = Sales – VariableContribution = Sales – Variable margin margin costs costs
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Contribution margin ratio
Contribution Margin = Contribution Margin = (Sales – Variable costs)(Sales – Variable costs) Ratio Ratio Sales Sales
Tells us what portion of Sales goes towards fixed costs.
Express as %
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Calculating contribution margin
You sell CDs on the internet for $25 each (inc. postage)
Your variable costs per CD are:– COGS: $18.75– Packaging: $1.00– Postage: $2.00
Calculate contribution margin & ratioCalculate contribution margin & ratio
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Contribution margin
Contribution margin = $3.25 Cont. margin ratio = 13% of selling price
What does this mean?What does this mean?
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.
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Contribution Margin
Work out the contribution margin & ratio for the following business:
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.
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Multiple product lines
Work out the contribution margin & ratio of each Plasma TV brands sold at a hi-fi retailer:
Sony TV Toshiba TV LG TVSelling price $1400 $1100 $1200COGS $750 $610 $620Delivery expense $23 $23 $23
Cont margin627
467 557
CM ratio 44% 42% 46%
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Contribution margin
Which product line is contributing the most to fixed costs? The least?
What would you recommend…
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Break-even analysisAlso known as Cost-Volume-Profit (CVP)
The break-even point is the point at which:– Total Sales = Total Costs
Profit is $0 Until break-even is reached business
operates at a loss Calculated in product units or $$
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Purpose of break-even point
Know what level of sales (volume) is needed to cover costs
Evaluate current price structure
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Calculating Break-even-point
Units = Fixed Costs Contribution Margin
Dollars = Break-even x Selling price
in units per unit
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Spreadsheets
Using spreadsheet for break-even analysis Variables required:
– Variable cost per unit– Fixed costs– Expected sales– Price per unit