Completion of Accounting Chapter Summaries

ACC 201: Essentials of Accounting

Your Name _ Please write extra notes in red Ink.

Chapter 4: How Do You Manage the Costs of your Organization?

1. Why do firms incur Costs?

It is impossible for organizations to offer products and services without incurring various costs.

cost adds value

2. Should firms seek to Minimize their Costs?

Seeking to minimize costs is not a good idea because it will lead to Lowering the value (example quality) of the products or services to the customers. Accordingly, firms seek to manage the relationship between organizational costs and customer valuation. They seek to minimize or eliminate only the non added costs.

It is important to keep in mind what the costumer values, not just yourself (as the vender)

Be value AND cost conscious!

3. How are Costs Classified?

Variable Costs Operational Costs Fixed Costs Costs Initial Expenses Start-up Costs Long-term Assets

4. What is the Difference between Start-up Costs and Operational Costs?

Start-up costs are one-time only costs that a firm has to incur to begin operations. In contrast, operational costs repeat themselves every year (or operating cycle).

5. Why are some Start-up costs Capitalized (Long-Term Assets) while others Expensed?

Only the start-up costs that brings future cash flows and can be sold are allowed to be treated as assets. Conservatism principle requires that other start-up costs be treated as an operational expense in the first year.

Although there are some that may generate future cash flow, but still accounting rules say unless you can sell and make money, it is one time only.

Need more than just the initial costs.

6. Why are some Operational Costs considered Variable while others Fixed?

Some operational costs per year will vary year to year as demand varies . Example: Material costs

Costs=demands.

While some other costs remain fixed when demand varies over the years. Example: Rent

No matter how business is doing, must pay rent!!

7. What are some examples of Variable and Fixed Costs?

A: Variable costs per unit

Material / Inventory costs and Supplies

Direct labor costs – you put tshirt and packaging together, we give you 25 cents! (Directly working on the product). The more tshirts sold, the more direct labor.

Credit charges and selling commissions – commission motivates worker to do maximum selling in their time

Discounts – giving worker a discount, again to motivate as well as reward.

B: Fixed costs per year

Staff salary

Rent

Routine promotional costs

Insurance – depends on units

IT related costs

Accounting fees

Interest charges

Development charges

C: Mixed costs per year

Utility

D: Step fixed costs

Example: 1 trophy for every 10 participants in a tournament

8. What is Operating Leverage?

· Operating Leverage is the percentage of fixed costs (FC) in the overall costs (FC + VC).

· OL = FC/ (FC + VC).

= 0 no fixed costs; all variable costs

= 1 all fixed costs; no variable costs

Greater the operating leverage, the greater the percentage of fixed costs.

9A: What are some examples of Long-term Assets?

A: Long-term Assets

Land: Land almost always appreciates in value , as such, it is never depreciated. However, due to conservatism the value appreciation is not recognized unless it is sold.

Building: Buildings can be costly, as such, it is better to rent a space initially than construct one.

Equipment: This is what every business is almost certain to require but care must be exercised not to spend more than necessary (production equipment, office equipment, furniture, vehicles etc.)

assests depreciate

9B: What are some examples of Initial Expenses Start up cost!!

Initial promotional costs – something you have to spend a lot of money on when you are new to the market

Research and development costs

Remodeling costs

Legal costs – lawyer?

Training costs – may have to train workers (part of start up expense)

Travel costs

Other start-up costs: _________________________________________________________________

10. What is the Connection between Operations Management and Operational Costs?

· Managing operations well will maximize customer value and minimize non-value added costs.

· The total operational costs per se may not always be lower.

· Operations management analyzes and improves the organizational processes that converts inputs (resources) into outputs (goods and services).

· It seeks to enhance productivity, quality and customer satisfaction.

· It includes topics such bottlenecks, flow rates, inventory levels, lean operations, six-sigma and Toyota production system.

11. What is the Connection between Supply Chain Management and Operational Costs?

· Managing the supply chain well also will maximize customer value and minimize non-value added costs.

· Supply chain management analyzes and improves the upstream flow of inputs from suppliers and the downstream flow of outputs to customers.

· Like Operations Management, Supply Chain Management also seeks to enhance productivity, quality and customer satisfaction.

SUPPLIERS CUSTOMERS Supply Chain Management OPERATIONS Inputs Product or Service Operations Management

Managing this table is important

12. What is a Production Flow chart

· A Production Flow Chart is a pictorial description of what and how supplies are received, what and how LT assets are used to process the supplies, how the products and services are delivered to final customers, and finally how money is collected from consumers, advertisers or donors.

· This Flow Chart will help identify many costs as possible.

· When you listen to the video on supply chain management, visualize your production flow chart.

· Also try and list as many costs that are applicable to your organization.

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