robert uberman, financial management, ka im frycza modrzewskiego 2

Robert Uberman, Financial Management, KA im Frycza ModrzewskiegoRobert Uberman, Financial Management, KA im Frycza Modrzewskiego

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Session Session TwoTwo Topics Topics

RevenuesRevenues Management accounting Management accounting Relevant costsRelevant costs


A concept of A concept of revenuerevenue – – definition and trapsdefinition and traps

Revenue definedRevenue defined as as an increase in assets or decrease an increase in assets or decrease in liabilities that is caused by the provision of services in liabilities that is caused by the provision of services or products to customers.or products to customers.

Under the Under the accrual basis of accounting, revenue is of accounting, revenue is usually recognized usually recognized when goods are shipped or when goods are shipped or services delivered to the customerservices delivered to the customer. Under the . Under the cash basis of accounting, revenue is usually of accounting, revenue is usually recognized when recognized when cash is received from the the customer following its receipt of goods or services.customer following its receipt of goods or services.

Revenue vs cash inflowRevenue vs cash inflow Revenue vs price (rebates, discounts other provisions)Revenue vs price (rebates, discounts other provisions)


A concept of cost – definition A concept of cost – definition and useand use

Cost defined 1 = monetary value of economic Cost defined 1 = monetary value of economic resources used in performing an activityresources used in performing an activity

Cost defined (measured) 2 = the amount of cash or Cost defined (measured) 2 = the amount of cash or cash equivalents paid or the fair value of the other cash equivalents paid or the fair value of the other consideration given to acquire an asset at the time of consideration given to acquire an asset at the time of its acquisition (IAS 16)its acquisition (IAS 16)

Cost vs expense Cost vs expense (very close to the second definition of a cost)(very close to the second definition of a cost) Cost vs price Cost vs price (quantity of payment or compensation given by (quantity of payment or compensation given by

one party to another in return for goods or services)one party to another in return for goods or services) Cost vs investment Cost vs investment (money committed or property acquired (money committed or property acquired

for future income)for future income)


Financial vs Managerial Financial vs Managerial Accounting Accounting

Financial Financial Accounting:Accounting: highly regulatedhighly regulated independent check independent check

of statementsof statements accuracy orientedaccuracy oriented backward backward

perspectiveperspective generally external generally external

useuse

Managerial Managerial AccountingAccounting company company

dependentdependent no direct no direct

independent controlindependent control speed orientedspeed oriented onward perspectiveonward perspective generally internal generally internal

useuse


Financial vs Managerial AccountingFinancial vs Managerial AccountingFAQ FAQ

Financial Financial Accounting:Accounting: what was the A’s what was the A’s

equity at the date equity at the date of?of?

What was the profit What was the profit made over a period made over a period of?of?

Was the Company Was the Company solvent at the solvent at the closing date?closing date?

Managerial Managerial AccountingAccounting shall we buy/sell a shall we buy/sell a

business business segment?segment?

shall we launch a shall we launch a new product line?new product line?

shall we shall we increase/decrease increase/decrease prices?prices?

is our cost level is our cost level still competitive?still competitive?


Financial vs Managerial AccountingFinancial vs Managerial Accountingrelevant costs (items) relevant costs (items)

Financial Financial Accounting:Accounting: only costs incurred only costs incurred

mattermatter almost no estimates almost no estimates

allowedallowed full absorption full absorption

approachapproach no scenario no scenario

analysesanalyses

Managerial Managerial AccountingAccounting only future costs only future costs

matter (sunk matter (sunk costs!!!)costs!!!)

estimates widely estimates widely usedused

marginal costs marginal costs approachapproach

scenario analysis scenario analysis and hybrids and hybrids (opportunity (opportunity costs)costs)


Typical costs items by originTypical costs items by origin

Remuneration (salaries, wages, fringe benefits)Remuneration (salaries, wages, fringe benefits) Raw materialsRaw materials EnergyEnergy External servicesExternal services Taxes and duties allocated to costs (real estates Taxes and duties allocated to costs (real estates

tax, stamp duties but tax, stamp duties but neither neither VAT VAT nor nor excise taxexcise tax Depreciation, Depletion & AmortisationDepreciation, Depletion & Amortisation


Cost absorptionCost absorption

Cost of goods soldCost of goods sold General costs (period costs)General costs (period costs)

Logically there should be no costs left after Logically there should be no costs left after allocation (orphan costs) since ultimately every allocation (orphan costs) since ultimately every dollar spent has to be covereddollar spent has to be covered

The problem is that share of direct costs The problem is that share of direct costs (naturally allocated) decreases while the one of (naturally allocated) decreases while the one of general costs growths rapidly and in some most general costs growths rapidly and in some most advanced and valuable businesses gets advanced and valuable businesses gets dominancedominance


Cost absorptionCost absorption

Profit = Revenues – costsProfit = Revenues – costs Revenues (excl. bounded sales) are always direct Revenues (excl. bounded sales) are always direct

and objectiveand objective Costs must be fully allocated to products & Costs must be fully allocated to products &

services soldservices sold Cost allocation is always to some extend Cost allocation is always to some extend

subjectivesubjective According to various studies indirect costs According to various studies indirect costs

account between 30-42 % of the total costs account between 30-42 % of the total costs (Laney, Atrill, p. 316)(Laney, Atrill, p. 316)


Use of the full absorption Use of the full absorption approachapproach

Long -term pricingLong -term pricing Long-term resource allocationLong-term resource allocation Financial accountingFinancial accounting


Cost allocation – types of costsCost allocation – types of costs

Direct vs indirect costsDirect vs indirect costs Direct vs variable costsDirect vs variable costs

raw materialraw material wageswages

Indirect vs fixed costsIndirect vs fixed costs office rentoffice rent


Cost allocation – targetsCost allocation – targets

Products (individual, group)Products (individual, group) Business segmentsBusiness segments Customers (individual, segments, markets)Customers (individual, segments, markets)


Typical manufacturing Typical manufacturing processesprocesses

Job orderJob order orderorder batchbatch assemblyassembly

ProcessProcess processprocess

(often with joint products issue)(often with joint products issue)


Cost allocation – job orderCost allocation – job order

Cost poolsCost pools Overheads Overheads For one-factory firm: typically two levels: factory shared For one-factory firm: typically two levels: factory shared

services + supporting activitiesservices + supporting activities For international corporations: multilayer structureFor international corporations: multilayer structure

robert uberman, financial management, ka im frycza modrzewskiego 2

Documents

cost cost vs expense

financial management

cash basis of accounting

activity cost

concept of cost definition

traps revenue

accrual basis of accounting

concept of revenue definition