Managerial Accounting

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.

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?

The difference

FinancialFinancial accounting accounting Information is based

on historicalhistorical data

ManagerialManagerial accounting accounting Decisions project into

the futurefuture

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?

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

Decision-making tools

Contribution margin Break-even point

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

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

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

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 %

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

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.

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.

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%

Contribution margin

Which product line is contributing the most to fixed costs? The least?

What would you recommend…

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 $$

Purpose of break-even point

Know what level of sales (volume) is needed to cover costs

Evaluate current price structure

Calculating Break-even-point

Units = Fixed Costs Contribution Margin

Dollars = Break-even x Selling price

in units per unit

Spreadsheets

Using spreadsheet for break-even analysis Variables required:

– Variable cost per unit– Fixed costs– Expected sales– Price per unit