Managerial Accounting Concepts

Cost Accounting

• Fixed Costs:

  • Costs that change with the quantity produced/sold.

  • Examples: Raw materials, commission.

• Variable Costs:

  • Costs incurred regardless of the quantity produced/sold.

  • Examples: Rent, salaries, utilities.

• Direct Costs: Essential costs directly involved in the product/service/process.

• Indirect Costs: Costs not directly tied to the product/service/process.

Budget Planning Cycle

• Steps:

  1. Forecast Revenues and Expenditures.

  2. Review Strategic Plan and Establish Budget Priorities by City Council.

  3. Establish Base Budget Guidelines.

  4. Prepare Operational Plans by Departments.

  5. Submit Base Budget and Funding Requests by Departments.

  6. Review Budgets and Performance Plans by OMB/City Manager.

  7. Seek Public Input.

  8. Establish Tentative Budget by City Council.

  9. Submit Final Budget.

  10. Review Progress Towards Outputs by Departments.

Analyzing Variances in Budgeting

• Variance: Difference between budgeted and actual costs/revenues.

• Favorable Variance: Actual performance exceeds expectations.

• Unfavorable Variance: Actual performance falls short of expectations.

• Regular Measures:

  • Measure variances

  • Explain variances.

  • Update budget forecasts.

  • Adjust future spending as necessary.

The Role of the CFO

• Responsibilities:

  • Balance between debt/equity/internal financing.

  • Ensure financial stability.

  • Provide accurate and timely financial reporting.

  • Decide where and when to invest company funds.

  • Work with the CEO on mergers and acquisitions.

Financing a Business

Two Main Types:

1. Debt Financing:

   • Bank loans, credit cards, payables, bonds.

   • Pros: Non-dilutive; fixed repayment; tax-deductible interest; quicker funding.

   • Cons: Must repay; fixed costs; budget for repayments; asset pledging required.

2. Equity Financing:

   • Retained earnings, angel investors, venture capital, private equity.

   • Pros: No repayment obligation; access to business networks; easier follow-up funding.

   • Cons: Dilutes ownership; demands high reporting standards; ongoing legal compliance.

Major Types of Securities

• Debt: Bonds, notes.

• Equities: Stocks, shares.

• Commodities: Raw materials, energy.

• Derivatives: Options, futures.

• Forex: Foreign currencies.

Major Stock Indices

• Dow Jones Industrial Average: Tracks 30 large-cap stocks.

• S&P 500: Covers 500 large-cap stocks across various industries.

• NASDAQ: Primarily technology-focused, includes ~3,100 companies.

Fund Management Strategies

• Evaluate performance and decide to buy, hold, or sell assets based on market conditions.