Accountancy is a subject, which many managers feel to be just an art of matching numbers. Therefore, managers need not be concerned about accounting ,after all the caricatured old faithful employee is always the accountant in popular fiction. Today very few of these old managerial types exist and they are about to be extinct, if they do not change their ways of thinking. The successful manager today knows all about managerial accounts and the meanings of such acronyms as ROI, ROCE, and BEP. Moreover, they can even carry out analyses of accounting heads in the corporate rat-race and they frequently do so to prove the ability of their respective departments to the top management. Here, these are just two ways of looking at a question and both are correct.
Accounting tools range from specialist-sophisticated software like Tally, Intact (http://tinyurl.com/7qt7uf4) to hand calculations, simple graphs etc.
One of the most helpful managerial accounting tools is the HBS (Harvard Business School) Toolkit which is available up to a limited extent in the net. URL: http://hbswk.hbs.edu/archive/1262.html
. Let us consider Exhibit II, which is the Summary Results of Operations in the first Qtr. 2004 of Salem Data Services. From a study of the same we have that the variable expense heads in the case of Salem Data Services (here the unit is revenue-hour)are
(a) Power costs
(b) Operations: Hourly personnel salary costs.
We therefore have only two variable expenses since it is presumed that Sales Promotion Expenses will be same as that of March. Corporate services is also to be assumed as constant per revenue share, or Fixed.
2. We now try to find out the variable cost of these two heads using both Exhibit I and Exhibit-II.
© Let us now try to find out the breakeven point (BEP) for Sales Data Services,
In April, Fixed costs are(from Appendix II)
1. Space costs =$ 9240.00
2. Equipment Costs –power costs=$ 126,580.00
3. Wages & salaries – hourly personnel = $53800.00
4. Sales Promotion and Corporate Services = $ 23,319.00
Therefore total fixed costs=$ 212,939
Assured Revenue =Intercompany Fixed hours = 205 which is billed at a revenue of $400/hr=82,000$ which is assured revenue. We can consider fixed costs as less this amount.
Fixed costs can be taken as $ 130939
Let x be the no of commercial revenue hours
Then, revenue generated for break-even equals the fixed and variable costs
800x=130939 + 28.7x
Or 771.3x=330920
Or, x=169.76
Or x= 170 hours
Now, the contribution margin is the amount of money a company has to cover its fixed costs after it pays all of its variable expenses.
Or contributing margin-variable costs = 130939
Alternatively, CM=28.7*138+130939=134899.6 = or rounding off. CM=$134,900.00
4. From the BEP analysis, we already have 170 hrs. as the required commercial usage for BEP.
5 (a) from here onwards, we take $130,939 as fixed costs and also do not
Consider intercompany billing which will be 205 hrs. /month at $400 hour.
The condition is billing of commercial hours will go up to $ 1000 per hour.
But demand goes down by 30%,
Hence no of commercial hours = 70% of 138=96.6 or 97hrs.
Revenue=97,000$
CM=28.7x97+130939=133,722.9 rounding off=133,723
Therefore, loss=$36,723
(b)Scenario 2:-
Cost reduces to $600
Demand or no of hours go up=130% x 138=179.4
Or, 179.5 hours
Revenue =179.5x600=107,700
Variable Cost= 179.5x28.7=5151.65
Or, CM=5151.65+130939 approx.=136,091$
Therefore loss=28,391$
© Keeping Sales cost at same level, let us consider increase of commercial sales by 30%
This gives us a commercial sale of =130% x 138 or 179.5 hours
We have earlier calculated that at bep, sales should be 170 hrs
Therefore, we have a surplus of 9.5 hrs, which gives us
Revenue of $5700.00
Sales promotion expenses=$ 8083
Therefore, there remains the provision of increasing sales promotion expenditure by (8083-5700)/5700 or 41.8%
CONCLUSION:
We see that a 30% increase in the sales promotion costs will still result in SDS not making a loss. Another two facts are very important here
1. SDS has a surplus of 223 revenue hours to sell. It can be noted here that out of these Wu only has to sell 32 revenue hours to come out of the red. After this figure of 32, every extra hour sold will be profitable.
2. Intercompany billing is being done at 205 hours only because of the Public Service Commission’s restriction. If STC had availed of the service through a third party, then the expenses will be higher.
3. Peter Flores should ask Cynthia Wu to develop a more result oriented sales approach. There can be different ways of doing this. Services can be divided into two types each charging different tariff/hr with the end result of higher tariffs
being charged.
4. The first step for Wu would be to increase the sales promotion and be in the safe position of a 10% profit. That the market exists is known since Wu could achieve a 30% increase in sale at a reduced revenue of $ 200/revenue-hour.
There is also the fact that every year of a company’s existence, it’s reliability
factor keeps increasing which is another positive development like brand equity.
Salem Data Services should be comfortably in profit after another two years and therefore Peter Flores should not close SDS down.
He should keep the sales performance of the company under constant perusal for any warning signals for if SDS was to fail, it can only happen due to the following two reasons
(1) Adverse and unforeseen statutory regulations affecting the market or other force majeure conditions.
(2) Incompetency on the part of SDS’ Operation Head.
References:
Basu A.K & Saha.M;2011; Studies in Accounting & Finance; Pearson Education Asia, ND
Brock H.R., 1989, Cost Accounting, McGraw Hill Education Inc., NYC
Dale E.& Michelton L.C.,1980, Modern Management Methods, Penguin Books, Middlesex
Hampton J.J.(1989);Financial Decision Making: Concepts, Problems and Cases, Prentice-Hall International Inc. London,UK.
The PC Magazine 26 Feb 2002; page 30.
The HBS Archives; Working knowledge for business leaders (Available at http://hbswk.hbs.edu/archive/1262.html dated 25th January 2000); Accessed on
28th May 2012
