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Management Accounting (Fach) / Definitions (Lektion)
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- Gross Margin The ‘Gross Margin’ is a measure of the product’s contribution to cover non-manufacturing costs and generate profit. -> Full Costing
- Contribution Margin The ‘Contribution Margin’ is a measure of the product’s contribution to cover ALL FC = manufacturing and non-manufacturing costs and generate profit. -> Variable Costing
- Operational Gearing Effect of FC on the relationship between sales and operating profits. High Operating leverage = high % of PC compared to VC -> Operating profit will change at a faster rate relative to sales Use for: Company risk profile: Good times: Operating Leverage can supercharge profits Downturn: losses as they cannot adjust well
- BE Point point where total sales cover just fixed costs, leaving neither profit nor loss. For every unit sold in excess of the BE point, profit will increase by its unit CM
- Cross-Subsidisation Occurs when there is both Product diversity [ different resource consumption patterns of products differ] Over-aggregation [cost system consists of cost pools that are too broadly defined and do not move in the same proportion with the cost driver] Result: Cost of more special, low volume product is under-estimated Over-estimated product subsidizes the other product and seems to be less profitably Risk: May lead to inadequate choices, i.e. Price increases on those products where an increase is not necessary Over-charged products: Bad customer reaction & switch to a competitor Under-charged products: Price is inadequate to cover all true costs to produce and sell the products, risk of making a loss on products.
- Cases of Cross-Subsidisation Problems from Product Diversity Production Volume [Low vol. specialty vs. high vol Basic product] -> under-charge speciality Product Complexity [Complex vs. Simple Design] -> Under-charge complex Design Materials requirement [Many unique vs. common parts] -> Under-charge unique Product Machine setup [complex vs. few simple setups] -> Under-charge complex
- Cons: Traditional OH Allocation Methods Con: Based on assumption that more expensive products are related to 1 specific driver Risk of cross-subsidization&mistakes in estimating our cost: Sales for profitable product may increase, but profit might decline
- Pros of Two-Stage OH Allocation Method Pro: - Allows for different drivers to be used for different pools of more homogenous OH If diversity exists, then the different cost pool will represent the different resource consumption pattern across products - Reduce the cross-subsidization problem (e.g., Siemens pre-ABC)
- Pro & Cons: ABC Costing Use for: Diversified products of services where indirect and support cost are large or differ significantly Assumption: Not the fact that products are produced cause firms to incur costs, but rather that the fact that firm engages in specific activities for producing products ===> Use activities should as cost pools Advantages from ABC: Better information about cost drivers (another pooling stage) Much more precise cost estimates Improved information for decision-making Precise estimates of the full product costs (e.g., Siemens) Drawbacks: System complexity High implementation costs Cost prohibitive & often easier to use standard costing techniques for machine and labor costs that to come with an effective ABC system
- Customer Analysis: Cost drivers Order-level cost: directly traceable to processing and delivering individual customer order, i.e. discounts, cost triggered every time an order is placed (entry, picking, shipping, invoicing) Customer-level cost: costs associated with maintaining a customer, i.e. making sales calls, evaluate a customers credit, sending samples, catalogues and mailings, managing collections Channel-level costs: costs associated with maintaining a specific distribution channel, such as sales force salary, commission, managing the channel, advertising, marketing Market-level costs: costs associated with those activities and investments aimed at developing and maintaining a presence in the marketplace, attracting new customers: corporate level advertising, promoting, trade shows, R&D
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- Insights from using ABC for customer profitability analysis 1. Which customers or segments are profitable: Whale-curve pattern; only 10-20% of customers provide most of the profits, and 10-20% are unprofitable 2. Underlying drivers of unprofitability: Customer behavior (loyal vs. non-loyal) Customer order media: (internet vs. high-cost mail or phone) Inefficient processes: (manual and inefficient vs. automated)
- ROS Sales margin Information about contribution of one unit of sales towards profits If low = High cost level
- CTR Information about turnover-generating power of a division's assets Turnover / Investment If high = productive assets
- ROI Profits / Investment Sales Margin * CTR
- Examples of Integrated measurement systems - Tableau de Board- Key Performance Indicators (KPIs)- Integrated Performance Measurement Systems- Balanced Scorecard (Kaplan-Norton, 1996)