贝恩资本财务分析研究报告

Author:CollinsQianReviewer:BobArmacost

bcCostAccountingMarch1998Copyright©1998Bain&Company,Inc.1CU7030298IMB贝恩资本财务分析研究报告第1页

ImportanceofcostallocationClientexampleDefinitionsdirectvs.indirect,fixedvs.variablebreakevenvolumeExercisescostallocationbreakevenvolumeKeytakeawaysAgenda2CU7122397ECA贝恩资本财务分析研究报告第2页

ImportanceofcostallocationClientexampleDefinitionsdirectvs.indirect,fixedvs.variablebreakevenvolumeExercisescostallocationbreakevenvolumeKeytakeawaysAgenda3CU7122397ECA贝恩资本财务分析研究报告第3页

Whichproductsareprofitable?Whatisthebreakevenvolumebyproduct?Whichproductsrequirecostreductionefforts?Howshouldwepriceourproducts?Whichcustomersegmentsaremostprofitable?Itiscriticaltohaveaccurateandcompletecostdatatomakesoundstrategicandtacticalmanagementdecisions.WhyAllocateCosts?4CU7122397ECA贝恩资本财务分析研究报告第4页

Historically,only20%ofmanufacturingcostswere“shared”acrossproductlines.Today,typically50%ofcostsare“shared”acrossproducts.Sharedcostsmightincluderent,freight,andadministrativecosts.Forsimplicity,accountingtrackscostsbyfunction(e.g.,materials,salaries,benefits)ratherthanbytheactivitydevotedtoproductlines(e.g.,maintenanceofproductA,freightforproductB)Forcoststhatarenoteasilyassignedtoindividualproductlines,companiesnormallyselectthemostconvenientwaytoassignthem,notnecessarilythebestwayforexample,companiestendtoallocaterentcostsbasedonsomethingthatiseasytomeasure,suchasdirectlabordollarsforeachproductline.Abetterallocationmethod,however,mightbetheactualspaceresourcedemandsofeachproductlineMostcompanieslackaccuratecostdatabyproduct.WhyCostsAreOftenNotAllocatedCorrectly5CU7122397ECA贝恩资本财务分析研究报告第5页

ImportanceofcostallocationClientexampleDefinitionsdirectvs.indirect,fixedvs.variablebreakevenvolumeExercisescostallocationbreakevenvolumeKeytakeawaysAgenda6CU7122397ECA贝恩资本财务分析研究报告第6页

MiddleAmericaManufacturing,aBainclient,believedthatallthreeofitsproductlineswereprofitable.Returnonsales:10.0%2.4%1.6%Sales:$250MM$100MM$75MMMiddleAmericaManufacturing-EstimatedProfitability7CU7122397ECA贝恩资本财务分析研究报告第7页

Afterathoroughevaluation,theBainteamfoundthat$8.0MMincostshadbeenallocatedincorrectlyamongthethreeproducts.MiddleAmericaManufacturing-CostAllocation8CU7122397ECA贝恩资本财务分析研究报告第8页

TheBainteamalsodeterminedthatanadditional$18.8MMincostsshouldbeallocatedtothethreeproducts.MiddleAmericaManufacturing-AdditionalCosts9CU7122397ECA贝恩资本财务分析研究报告第9页

Bain’sanalysisindicatedthatbothbicyclesandwalkingmowerswereunprofitable.MiddleAmericathenbegantoinvestigatewhethertoexitorfixthesetwobusinesses.Returnonsales:7.2%(3.0%)(6.9%)Sales:$250MM$100MM$75MMMiddleAmericaManufacturing-ActualProfitability10CU7122397ECA贝恩资本财务分析研究报告第10页

ImportanceofcostallocationClientexampleDefinitionsdirectvs.indirect,fixedvs.variablebreakevenvolumeExercisescostallocationbreakevenvolumeKeytakeawaysAgenda11CU7122397ECA贝恩资本财务分析研究报告第11页

Definitions:CoststhatdonotvarydirectlywithchangesinoutputCoststhatvarydirectlywithchangesinoutputCostsincurreddirectlyintheproductionordeliveryofafirm’sproductorservice.Thesecostscaneasilybeidentifiedwith,orassignedto,aparticularproductCostsgenerallyincurredbythefirmoutsideoftheproductionprocess.Thesecostscannoteasilybeidentifiedwith,orassignedto,aparticularproductAllcostscanbebrokendownalongtwodimensions.FixedVariableDirectIndirectvs.vs.Examples:EquipmentdepreciationRentAdvertisingRawmaterialsProductionlaborDeliverycostsDirectlaborDedicatedequipmentRawmaterialsSG&AOfficesuppliesPlantmanagerRuleofthumb:Ifaparticularcostchangeswhenproductionincreasesordecreases,thecostisvariable.Ifaparticularcost“goesaway”whenaproductisdroppedfromtheproductline,thecostisdirect.TypesofCosts12CU7122397ECA贝恩资本财务分析研究报告第12页

Allcostsarevariableoveraverylongtimehorizon(i.e.,forverylargeincreasesinvolume)Coststorunandmaintainacomputersystemthattracksproductordersareclearlyfixedforasmallchangeinvolume,suchasthatassociatedwithaslightlybusymonth.However,theyarevariableforalargechangeinvolume,suchasthatassociatedwithanewplant.Mostcostsaresemi-variable(i.e.,theytendtobeaddedinlumpsasvolumeincreases)Supervisorylabortendstobeconsideredfixedbecauseitisunlikelythatadditionalsupervisorswouldhavetobeaddedtohandleasmallincrease,say10%,involume.Buttheworkforcecanonlyincreasesomuchbeforeanadditionalsupervisorisneeded.Intheory,productionlaborisvariable.However,inmanyclientsituations,restraintsplacedbyunionsanddifficultyinhiringandfiringpeopleinresponsetoshort-termvolumefluctuationsmakeit,inpractice,semi-variable.Definingtheappropriatetimehorizonfortheanalysisisimportant.AmeaningfulanalysiswillisolatethefixedcostandvariablecomponentsofaparticularcostFixedvs.Variable13CU7122397ECA贝恩资本财务分析研究报告第13页

Thefollowingisanillustrationofcostbehaviorforfixed,semi-variable,andvariablecosts:Cost(Dollars)Volume(Units)VariablecostsSemi-variablecostsFixedcostsFixedvs.Variable-Illustration14CU7122397ECA贝恩资本财务分析研究报告第14页

Itisusefultoknowthefollowingtermswhendoingcostanalysis:Simplifiedincomestatement:-VariableCost

GrossMargin-FixedCost

OperatingMarginRevenue=PriceperUnitxVolumeGrossmarginisalsocalled“GrossProfit,”or“ContributionMargin”OperatingMarginisalsocalled“OperatingProfit”

RevenueIncomeStatementTerms15CU7122397ECA贝恩资本财务分析研究报告第15页

Breakevenvolumeisthevolumeatwhichthecompanycoversitsfixedcosts.Atbreakevenvolume,theoperatingprofitiszero.VolumeContributionmargin(i.e.,revenuelessvariablecosts)FixedcostsBreakevenvolume$Operating

LossFixedcostsUnitcontributionPriceperunit-VariablecostperunitBreakevenvolume=Fixedcosts=Operating

ProfitContributionMarginBreakevenVolume16CU7122397ECA贝恩资本财务分析研究报告第16页

OperatingProfit=Revenue-Costs = Revenue-VariableCosts-Fixedcosts = (PriceperunitxVolume)-(VariablecostperunitxVolume)-Fixedcosts = Volumex(Priceperunit-Variablecostperunit)-Fixedcosts = VolumexUnitcontribution-FixedcostsThebreakevenvolumeisthevolumeforwhichoperatingprofit=0 0 = BreakevenvolumexUnitcontribution-FixedcostsFixedcostsUnitcontributionPriceperunit-VariablecostperunitBreakevenvolume=Fixedcosts=BackupforBreakevenFormula17CU7122397ECA贝恩资本财务分析研究报告第17页

ImportanceofcostallocationClientexampleDefinitionsdirectvs.indirect,fixedvs.variablebreakevenvolumeExercisescostallocationbreakevenvolumeKeytakeawaysAgenda18CU7122397ECA贝恩资本财务分析研究报告第18页

AllproductsaremadeusingthesameequipmentandmachineryPlantsupervisorsoverseeproductionofallthreeproductsEquipmentcapacityexiststoincreaseproductionby50%SalespeoplesellallthreeproductsSalespeoplearepaidabasesalary,plusacommissionwhichisapercentageofthesellingpriceMostadvertisingisproductspecificThecompanyusesatruckingcompanytodeliverproductstocustomers(costsarebasedonthelengthoftripandweight)MapleLeafCompanywantstoallocatecoststothethreeproductsitmakesandsells.CostAllocationExercise-Background19CU7122397ECA贝恩资本财务分析研究报告第19页

Howwouldyoucharacterizethefollowingcostsoveratimehorizoninwhichthecompanyplanstoincreasesalesvolumeby10%?FixedVariableDirectIndirectCEO’ssalaryRawmaterialsSupervisorylaborProductionfloorlaborRentEquipmentdepreciationOfficesuppliesFreighttocustomerElectricitytorunmachinesInterestexpensetofinanceinventoryAdvertisingGoodwillamortizationSalescommissionsSalespeoples’salariesSalestravelandexpensesCosts:CostAllocationExercise-Question20CU7122397ECA贝恩资本财务分析研究报告第20页CostAllocationExercise-Answer

Mostcostsarefixedindirectorvariabledirect.FixedVariableDirectIndirectAdvertisingRawmaterialsProductionfloorlaborFreighttocustomerInterestexpensetofinanceinventorySalescommissionsEquipmentdepreciationCEO’ssalarySupervisorylaborRentOfficesuppliesGoodwillamortizationSalespeople'ssalariesSalestravelandexpensesElectricitytorunmachines21CU7122397ECA贝恩资本财务分析研究报告第21页

CostComponentsFixedvs.VariableDirectvs.IndirectAdvertisingFixed,becauseadvertisingisusuallynottieddirectlytovolumeDirect,because,inthiscase,mostofitisproductspecificEquipmentdepreciationFixed,becauseexcesscapacityexistsfora10%increaseinvolumeIndirect,becauseallproductsaremadeonthesamemachinesCEO’ssalaryFixed,assuminghis/hersalarydoesnotchangewith10%salesincreaseIndirect,becauseCEOoverseesthewholecompanySupervisorylaborFixed,becauseitisunlikelythatadditionalsupervisorswillbeneededtohandlea10%increaseinvolumeIndirect,becausesupervisorsoverseeproductionofallthreeproductsIndirect,becauseallthreeproductsareproducedatthesamesiteRentFixed,assumingcurrentfacilityhasexcesscapacityCostAllocationExercise-DetailedAnswer(1of3)22CU7122397ECA贝恩资本财务分析研究报告第22页

CostComponentsFixedvs.VariableDirectvs.IndirectOfficesuppliesFixed,becauseitisunlikelythatadditionalofficesupplieswillbeneededtohandle10%increaseinvolumeIndirect,becausetheofficesuppliesareusedtosupportallthreeproductsGoodwillamortizationFixed,becausegoodwillisnotdirectlyrelatedtovolumeIndirect,assumingthegoodwillisincurredtosupportthewholecompanySalespeople'ssalariesFixed,assumingthatcurrentsalesforcecanhandle10%additionalvolumeIndirect,becauseeachsalesmansellsallthreeproductsSalestravelandexpensesFixed,assumingthat10%volumeincreasewillnotrequiresignificantincreaseinsalesactivitiesIndirect,becausesales-forcehandlesallthreeproductsRawmaterialVariable,becausea10%increaseinvolumewouldrequire10%morerawmaterialsDirect,becauserawmaterialsaredirectlytraceabletoindividualproductsCostAllocationExercise-DetailedAnswer(2of3)23CU7122397ECA贝恩资本财务分析研究报告第23页

CostComponentsFixedvs.VariableDirectvs.IndirectDirect,becauseeventhoughtheproductsaremadeonthesamemachine,thehoursspentworkingoneachoftheproductsaredirectlytraceableProductionfloorlaborVariable,becausemoreproductionlaborwillbeneededtohandletheincreaseinvolumeFreighttocustomersVariable,becausethefreightcostclearlyincreaseswiththevolumeincreaseDirect,becauseweightanddistancecanbedirectlytracedtoindividualproductsInterestexpensetofinanceinventoryVariable,becausemoreinventorymeansmoreinventoryfinancingandhencemoreinterestexpenseDirect,becauseinventoryisproductspecificSalescommissionsVariable,becausesalescommissionsarepaidbasedonapercentageofsalesDirect,becausecommissionsarebasedonindividualproductsalesElectricitytorunmachinesVariable,becauseitclearlyvarieswithvolumeIndirect,becauseallproductsaremadeonthesamemachinesCostAllocationExercise-DetailedAnswer(3of3)24CU7122397ECA贝恩资本财务分析研究报告第24页

LaborInmanyclientsituations,restraintsplacedbyunionsanddifficultyinhiringandfiringpeopleinresponsetoshorttermvolumefluctuationsmakeaportionoflaborcostsbehaveasfixedcostsElectricitytorunmachinesIntheorythisisdirect,butinpracticeitisconsideredindirectbecauseitisdifficulttotraceelectricitycosttoproductsAlso,the80/20ruleapplieshere.Electricityisusuallyasmallcostitem,and,forsimplicity,couldbeallocatedusingmachinehoursspentonproductionAdvertisingUsually,advertisingisnottiedtovolume.Forexample,advertisingtosupportacorporatebrandisnottiedtothevolumeoftheproductsunderthatbrand.Ifadvertisingisnottiedtovolume,itisfixedandindirect.Therearefewcaveats:CostAllocationExercise-Caveats25CU7122397ECA贝恩资本财务分析研究报告第25页

Adeanofabusinessschoolisconsideringstartinganexecutiveprogram.Sheestimatestherevenuesandcostsasfollows:Question:Howmanystudentsdoestheprogramneedtobreakeven?Costs:Revenue:Advertising

Classroomrental(Eachclassroomcanaccommodate15students)

Programadministration

Programdirector’ssalary

Facultysalaries(Theprogramwillbestaffedwith1facultymemberforevery5students)

Guestlecturer

Roomandboardperstudent

TextandsuppliesperstudentTuitionperstudent$3,000$13,500$500$30,000perclassroom$15,000$20,000$20,000perfacultymember$12,000$3,200BreakevenExercise-Background26CU7122397ECA贝恩资本财务分析研究报告第26页

Step1:Categorizecosts

Advertising Classroomrental Programadministration Programdirector’ssalary Facultysalaries Guestlectures Roomandboardperstudent Textandsuppliesperstudent FixedVariableStep2:CalculatefixedcostsFixedcosts:

$3,000 Advertising $15,000 Programadministration $20,000 Programdirector’ssalary

$12,000 Guestlectures $50,000Semi-VariableFirst,youmustcategorizecostsandcalculatefixedcosts.BreakevenExercise-Answer(1of3)27CU7122397ECA贝恩资本财务分析研究报告第27页

Step4:Calculateunitcontribution Unitcontribution =Priceperunit-Variablecostperunit =$13,500 tuition -3,200 roomandboard -500 textandsupplies $9,800Step3:Calculatesemi-variablecosts

Classroom

Faculty 10students $30,000 $40,000 15students $30,000 $60,000 20students $60,000 $80,000Thenyoumustcalculatesemi-variablecostsandtheunitcontribution.BreakevenExercise-Answer(2of3)28CU7122397ECA贝恩资本财务分析研究报告第28页*ThemosteffectivewaytocalculatethebreakevenvolumeistowriteasimpleformulainExcelStep5:Calculatebreakevenvolume Breakevenvolume =

For10students:

=12.2studentswith10studentstheprogramdoesnot Ifyoukeepincreasingthenumberofstudentsbyoneandredoingthecalculation*,youwillfindthatthebusinessschoolneedstohave15studentstobreakevenontheexecutiveprogramFixedcostsUnitcontribution$140,000$9,800Nowyouarereadycalculatethebreakevenvolume.For15students:$120,000$9,800=14.3studentsbreakevenBreakevenExercise-Answer(3of3)29CU7122397ECA贝恩资本财务分析研究报告第29页

ImportanceofcostallocationClientexampleDefinitionsdirectvs.indirect,fixedvs.variablebreakevenvolumeExercisescostallocationbreakevenvolumeKeytakeawaysAgenda30CU7122397ECA贝恩资本财务分析研究报告第30页

AcompanymustknowthetotalcostassociatedwiththeproductionanddeliveryofitsgoodandservicesinordertomaketherightstrategicandtacticaldecisionsMostcompanieslackaccuratecostdatabyproduct

Allcostscanbebrokendownalongtwodimensions:fixedversusvariableanddirectversusindirectDefiningtheappropriatetimehorizonforcostsisimportantbecausefixedcostsare“fixed”onlyforacertaintimeframe

Breakeven