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203b: Managerial Accounting
Session 1 Compass Box Whisky Costs for Decision Making:
Fixed and Variable Costs, Relevant Costs
January 18, 2008
Compass Box Whisky
Financial Accounting Review
Accrual accounting – try to match numbers to economics, when economic activity takes multiple periods
• Accounting depends on economics of business
• I sell whisky in year 10. What was the “cost” of that whisky? Depends on costs in years 1-10 (e.g. costs to age whisky). In order to match expenses to revenues, need to capitalize the right costs into inventory. Need numbers to be reliable Need to manage conflicts of interest (managers vs. investors) Need numbers to be comparable across companies Need some rules or guidelines on what’s allowed
•
BUT also constrained
• • • •
GAAP
Compass Box Whisky
Managerial Accounting Introduction
• Accounting depends on economics of business
• I sell whisky in year 10. What was the “cost” of that whisky? Depends on costs in years 1-10 (e.g. costs to age whisky). In order to match expenses to revenues, need to capitalize the right costs into inventory. Need numbers to be reliable Don’t need to manage same conflicts of interest (all internal) Don’t need numbers to be comparable across companies Don’t need same level of rules or guidelines on what’s allowed
•
BUT less constrained
• • • •
NO GAAP
Compass Box Whisky
Financial Accounting vs. Managerial Accounting
Product and Period Costs
Direct Manufacturing Financial Accounting Costs Perspective: • Cost of input whisky • Cost of bottle • Cost of “scrap” (angels Product share) • Warehouse, if rented per barrel Trace … Period: Non-Manufacturing Costs • Cost of financing, if not traceable • John Glazer’s salary (administrative May Try overhead) to • “Headquarters” office Allocate building or Trace • Marketing manager’s salary • Costs to travel to trade shows • Cost of advertising …
Indirect Manufacturing Product Costs • Warehouse, if owned •...