《xx资本财务分析》ppt课件

1、Agenda1 Importance of cost allocationClient exampleDefinitionsdirect vs. indirect, fixed vs. variablebreakeven volumeExercisescost allocationbreakeven volumeKey takeawaysAgendaCost Accounting2 Importance of cost allocationClient exampleDefinitionsdirect vs. indirect, fixed vs. variablebreakeven volu

2、meExercisescost allocationbreakeven volumeKey takeawaysWhy Allocate Costs?Cost Accounting3 Which products are profitable?What is the breakeven volume by product?Which products require cost reduction efforts?How should we price our products?Which customer segments are most profitable?It is critical t

3、o have accurate and complete cost data to make sound strategic and tactical management decisions.Why Costs Are Often Not Allocated CorrectlyCost Accounting4 Historically, only 20% of manufacturing costs were “shared” across product lines. Today, typically 50% of costs are “shared” across products. S

4、hared costs might include rent, freight, and administrative costs.For simplicity, accounting tracks costs by function (e.g., materials, salaries, benefits) rather than by the activity devoted to product lines (e.g., maintenance of product A, freight for product B)For costs that are not easily assign

5、ed to individual product lines, companies normally select the most convenient way to assign them, not necessarily the best wayfor example, companies tend to allocate rent costs based on something that is easy to measure, such as direct labor dollars for each product line. A better allocation method,

6、 however, might be the actual space resource demands of each product lineMost companies lack accurate cost data by product.AgendaCost Accounting5 Importance of cost allocationClient exampleDefinitionsdirect vs. indirect, fixed vs. variablebreakeven volumeExercisescost allocationbreakeven volumeKey t

7、akeawaysMiddle America Manufacturing - Estimated ProfitabilityCost Accounting6 Riding mowersBicyclesWalking mowers$25.0MM$2.4MM$1.2MM$0$5$10$15$20$25$30Pretax Operating Profit (Millions of Dollars)Middle America Manufacturing, a Bain client, believed that all three of its product lines were profitab

8、le.Return on sales:10.0%2.4%1.6%Sales:$250MM$100MM$75MMMiddle America Manufacturing - Cost AllocationCost Accounting7 Walking mowersBicyclesRiding mowersWalking mowersBicyclesRiding mowersOriginal allocationRevised allocation$8.0MM$8.0MM$0$2$4$6$8$10Cost (Millions of Dollars)After a thorough evaluat

9、ion, the Bain team found that $8.0MM in costs had been allocated incorrectly among the three products.Middle America Manufacturing - Additional CostsCost Accounting8 Generaladministative expensesSystems costsInventory carrying costsWalking mowersBicyclesRiding mowersAdditional unallocated costsAddit

10、ional costs reallocated$18.8MM$18.8MM$0$5$10$15$20Cost (Millions of Dollars)The Bain team also determined that an additional $18.8MM in costs should be allocated to the three products.Middle America Manufacturing - Actual ProfitabilityCost Accounting9 Riding mowersBicyclesWalking mowers$18.0MM($3.0M

11、M)($5.2MM)($10)($5)$0$5$10$15$20Product Line Profitability (Millions of Dollars)Bains analysis indicated that both bicycles and walking mowers were unprofitable. Middle America then began to investigate whether to exit or fix these two businesses.Return on sales:7.2%(3.0%)(6.9%)Sales:$250MM$100MM$75

12、MMAgendaCost Accounting10 Importance of cost allocationClient exampleDefinitionsdirect vs. indirect, fixed vs. variablebreakeven volumeExercisescost allocationbreakeven volumeKey takeawaysTypes of CostsCost Accounting11 Definitions:Costs that do not vary directly with changes in outputCosts that var

13、y directly with changes in outputCosts incurred directly in the production or delivery of a firms product or service. These costs can easily be identified with, or assigned to, a particular productCosts generally incurred by the firm outside of the production process. These costs cannot easily be id

14、entified with, or assigned to, a particular productAll costs can be broken down along two dimensions.FixedVariableDirectIndirectvs.vs.Examples:Equipment depreciationRentAdvertisingRaw materialsProduction laborDelivery costsDirect laborDedicated equipmentRaw materialsSG&AOffice suppliesPlant mana

15、gerRule of thumb:If a particular cost changes when production increases or decreases, the cost is variable.If a particular cost “goes away” when a product is dropped from the product line, the cost is direct.Fixed vs. VariableCost Accounting12 All costs are variable over a very long time horizon (i.

16、e., for very large increases in volume)Costs to run and maintain a computer system that tracks product orders are clearly fixed for a small change in volume, such as that associated with a slightly busy month. However, they are variable for a large change in volume, such as that associated with a ne

17、w plant.Most costs are semi-variable (i.e., they tend to be added in lumps as volume increases)Supervisory labor tends to be considered fixed because it is unlikely that additional supervisors would have to be added to handle a small increase, say 10%, in volume. But the workforce can only increase

18、so much before an additional supervisor is needed.In theory, production labor is variable. However, in many client situations, restraints placed by unions and difficulty in hiring and firing people in response to short-term volume fluctuations make it, in practice, semi-variable.Defining the appropr

19、iate time horizon for the analysis is important.A meaningful analysis will isolate the fixed cost and variable components of a particular costFixed vs. Variable - IllustrationCost Accounting13 The following is an illustration of cost behavior for fixed, semi-variable, and variable costs:Cost (Dollar

20、s)Volume (Units)Variable costsSemi-variable costsFixed costsIncome Statement TermsCost Accounting14 It is useful to know the following terms when doing cost analysis:Simplified income statement:- Variable Cost Gross Margin- Fixed Cost Operating MarginRevenue = Price per Unit x VolumeGross margin is

21、also called “Gross Profit,” or “Contribution Margin”Operating Margin is also called “Operating Profit” RevenueBreakeven VolumeCost Accounting15 Breakeven volume is the volume at which the company covers its fixed costs. At breakeven volume, the operating profit is zero.VolumeContribution margin (i.e

22、., revenue less variable costs)Fixed costsBreakeven volume$Operating LossFixed costsUnit contributionPrice per unit - Variable cost per unitBreakeven volume =Fixed costs=Operating Profit Contribution MarginBackup for Breakeven FormulaCost Accounting16 Operating Profit = Revenue - Costs =Revenue - Va

23、riable Costs - Fixed costs =(Price per unit x Volume) - (Variable cost per unit x Volume) - Fixed costs =Volume x (Price per unit - Variable cost per unit) - Fixed costs =Volume x Unit contribution - Fixed costsThe breakeven volume is the volume for which operating profit = 0 0 =Breakeven volume x U

24、nit contribution - Fixed costsFixed costsUnit contributionPrice per unit - Variable cost per unitBreakeven volume =Fixed costs=AgendaCost Accounting17 Importance of cost allocationClient exampleDefinitionsdirect vs. indirect, fixed vs. variablebreakeven volumeExercisescost allocationbreakeven volume

25、Key takeawaysCost Allocation Exercise - BackgroundCost Accounting18 All products are made using the same equipment and machineryPlant supervisors oversee production of all three productsEquipment capacity exists to increase production by 50%Sales people sell all three productsSales people are paid a

26、 base salary, plus a commission which is a percentage of the selling priceMost advertising is product specificThe company uses a trucking company to deliver products to customers (costs are based on the length of trip and weight)Maple Leaf Company wants to allocate costs to the three products it mak

27、es and sells.Cost Allocation Exercise - QuestionCost Accounting19 How would you characterize the following costs over a time horizon in which the company plans to increase sales volume by 10%?FixedVariableDirectIndirectCEOs salaryRaw materialsSupervisory laborProduction floor laborRentEquipment depr

28、eciationOffice suppliesFreight to customerElectricity to run machinesInterest expense to finance inventoryAdvertisingGoodwill amortizationSales commissionsSales peoples salariesSales travel and expensesCosts:Cost Allocation Exercise - AnswerCost Accounting20 Most costs are fixed indirect or variable

29、 direct.FixedVariableDirectIndirectAdvertisingRaw materialsProduction floor laborFreight to customerInterest expense to finance inventorySales commissionsEquipment depreciationCEOs salarySupervisory laborRentOffice suppliesGoodwill amortizationSales peoples salariesSales travel and expensesElectrici

30、ty to run machinesCost Allocation Exercise - Detailed Answer (1 of 3)Cost Accounting21 Cost ComponentsFixed vs. VariableDirect vs. IndirectAdvertisingFixed, because advertising is usually not tied directly to volumeDirect, because, in this case, most of it is product specificEquipment depreciationFi

31、xed, because excess capacity exists for a 10% increase in volumeIndirect, because all products are made on the same machinesCEOs salaryFixed, assuming his/her salary does not change with 10% sales increaseIndirect, because CEO oversees the whole companySupervisory laborFixed, because it is unlikely

32、that additional supervisors will be needed to handle a 10% increase in volumeIndirect, because supervisors oversee production of all three productsIndirect, because all three products are produced at the same siteRentFixed, assuming current facility has excess capacityCost Allocation Exercise - Deta

33、iled Answer (2 of 3)Cost Accounting22 Cost ComponentsFixed vs. VariableDirect vs. IndirectOffice suppliesFixed, because it is unlikely that additional office supplies will be needed to handle 10% increase in volumeIndirect, because the office supplies are used to support all three productsGoodwill a

34、mortizationFixed, because goodwill is not directly related to volumeIndirect, assuming the goodwill is incurred to support the whole companySalespeoples salariesFixed, assuming that current sales force can handle 10% additional volumeIndirect, because each salesman sells all three productsSales trav

35、el and expensesFixed, assuming that 10% volume increase will not require significant increase in sales activitiesIndirect, because sales-force handles all three productsRaw materialVariable, because a 10% increase in volume would require 10% more raw materialsDirect, because raw materials are direct

36、ly traceable to individual productsCost Allocation Exercise - Detailed Answer (3 of 3)Cost Accounting23 Cost ComponentsFixed vs. VariableDirect vs. IndirectDirect, because even though the products are made on the same machine, the hours spent working on each of the products are directly traceablePro

37、duction floor laborVariable, because more production labor will be needed to handle the increase in volumeFreight to customersVariable, because the freight cost clearly increases with the volume increaseDirect, because weight and distance can be directly traced to individual productsInterest expense

38、 to finance inventoryVariable, because more inventory means more inventory financing and hence more interest expenseDirect, because inventory is product specificSales commissionsVariable, because sales commissions are paid based on a percentage of salesDirect, because commissions are based on indivi

39、dual product salesElectricity to run machinesVariable, because it clearly varies with volumeIndirect, because all products are made on the same machinesCost Allocation Exercise - CaveatsCost Accounting24 LaborIn many client situations, restraints placed by unions and difficulty in hiring and firing

40、people in response to short term volume fluctuations make a portion of labor costs behave as fixed costsElectricity to run machinesIn theory this is direct, but in practice it is considered indirect because it is difficult to trace electricity cost to productsAlso, the 80/20 rule applies here. Elect

41、ricity is usually a small cost item, and, for simplicity, could be allocated using machine hours spent on productionAdvertisingUsually, advertising is not tied to volume. For example, advertising to support a corporate brand is not tied to the volume of the products under that brand. If advertising

42、is not tied to volume, it is fixed and indirect. There are few caveats:Breakeven Exercise - BackgroundCost Accounting25 A dean of a business school is considering starting an executive program. She estimates the revenues and costs as follows:Question: How many students does the program need to break

43、 even?Costs:Revenue:AdvertisingClassroom rental (Each classroom can accommodate 15 students)Program administrationProgram directors salaryFaculty salaries(The program will be staffed with 1 faculty member for every 5 students)Guest lecturerRoom and board per studentText and supplies per studentTuiti

44、on per student$3,000$13,500$500$30,000 per classroom$15,000$20,000$20,000 per faculty member$12,000$3,200Breakeven Exercise - Answer (1 of 3)Cost Accounting26 Step 1: Categorize costsAdvertisingClassroom rentalProgram administrationProgram directors salaryFaculty salariesGuest lecturesRoom and board

45、 per studentText and supplies per studentFixedVariableStep 2: Calculate fixed costsFixed costs:$3,000Advertising$15,000Program administration$20,000Program directors salary$12,000Guest lectures$50,000Semi-VariableFirst, you must categorize costs and calculate fixed costs.Breakeven Exercise - Answer

46、(2 of 3)Cost Accounting27 Step 4: Calculate unit contributionUnit contribution = Price per unit - Variable cost per unit= $13,500tuition - 3,200room and board- 500text and supplies $9,800Step 3: Calculate semi-variable costsClassroomFaculty10 students$30,000$40,00015 students$30,000$60,00020 student

47、s$60,000$80,000Then you must calculate semi-variable costs and the unit contribution.Breakeven Exercise - Answer (3 of 3)Cost Accounting28 *The most effective way to calculate the breakeven volume is to write a simple formula in ExcelStep 5: Calculate breakeven volumeBreakeven volume = For 10 studen

48、ts: = 12.2 students with 10 students the program does not If you keep increasing the number of students by one and redoing the calculation*, you will find that the business school needs to have 15 students to break even on the executive programFixed costsUnit contribution$140,000$9,800Now you are re

49、ady calculate the breakeven volume.For 15 students:$120,000$9,800= 14.3 studentsbreak evenAgendaCost Accounting29 Importance of cost allocationClient exampleDefinitionsdirect vs. indirect, fixed vs. variablebreakeven volumeExercisescost allocationbreakeven volumeKey takeawaysKey TakeawaysCost Accoun

50、ting30 A company must know the total cost associated with the production and delivery of its good and services in order to make the right strategic and tactical decisionsMost companies lack accurate cost data by productAll costs can be broken down along two dimensions: fixed versus variable and direct versus indirectDefining the appropriate time horizon for costs is important because fi