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Behavioral aspects of Management ing
Submitted by:
Date:
Florian Huesmann Mahima Virmani Anita Bakkar Moeen Akhtar Ankit Singh 03.11.09
Table of content General characteristics of Management ing - Aims of MA - Differences between Management ing & Financial ing
Behavioral aspects of Management ing -Motivational theories in Management ing -Behavioral implecations of MA
Ethics Conclusion
Management ing • Definition: • A value-adding continuous improvement process of planning, deg, measuring and operating both nonfinancial information systems and financial information systems that guides management action, motivates behavior, and s and creates the cultural values necessary to achieve an organization’s strategic, tactical and operating objectives
Aims of management ing
Acting
Planning
Controlling
Aims of management ing • Formulating strategies • Planning and constructing business activities • Helps in making decisions • ing financial reports preparation • Safeguarding asset
Aims of management ing • Distinguish between financial ing and management ing • Information of management ing is used for internal purposes only, not for external reports • Management ing has a future perspective and helps managers in making decisions.
Differences between Financial Acc. and Management ing Primary s Financial ing
Management ing
External
Internal
Investors, Creditors, Government authorities
Mangers of the business
Differences between Financial Acc. and Management ing Purpose of Information Financial ing Help investors, creditors, and others make investment, credit, and other decisions
Management ing Help managers plan and control business operations
Differences between Financial Acc. and Management ing Behavioral Implications Financial ing Concern about adequacy of disclosure
Management ing Concern about how reports will affect employees behavior
Role of MA within the Corporation • Cost ing became the major role in management ing • Linkage between the management team and the financial department • Management ing is important for nearly every part of the company, as well as for the overall success of a company
Behavioral aspect & implications of management ing
~ Behavior is a mirror in which every one displays his own image. ~ Behavioral aspect of management ing is that which influences the decision of the people concerned with decision making in the management ing system. J. Wolfgang von Goethe
Behavioral Implications • As measurements are made on operations and especially on individuals and groups, their behavior changes ▫ People react when they are being measured, and they react to the measurements ▫ They focus on the variables and behavior being measured and spend less attention on those not measured • Two old sayings recognize these phenomena:
▫ “What gets measured gets managed” ▫ “If I can’t measure it, I can’t manage it.”
Behavioral Implications • People familiar with the current system may resist as managers attempt to introduce or redesign cost and performance measurement systems • They have acquired expertise in the use (and, perhaps, misuse) of the old system and wonder whether their experience and expertise will apply to the new system • People also may feel committed to the decisions based on the information the old system produced ▫ Actions taken may no longer seem valid based on the information produced by a newly installed management ing system ▫ A new management system can be a threat or lead to embarrassment and may lead to a resistance to change.
Behavioral Implications • Management ants must understand and anticipate the reactions of individuals to information and measurements • An analysis of the behavioral and organizational reactions to the measurements must accompany the design and introduction of new measurements and systems
• More importantly, when the measurements are used not only for information, planning, and decision-making but also for control, evaluation, and reward, employees and managers place great pressure on the measurements themselves
Subjective representation of objective phenomena • Behavior depends on individuals’ mental representations, which can differ in important ways from objective indicators. • Effects of MA practice on individuals’ behavior can depend not only on how objectively informative the MA practice is about factors that affect their welfare. • But also on how understandable the MA practice is how well individuals can form usable mental representations of it and connect it to their other mental representations • and how it stimulates individuals’ attention, cognition, and/or motivation
Subfields of psychology in MA research • Cognitive: Psychological processes that influence human thinking ▫ Attention, memory, comprehension, learning, judgments, decisions • Motivation: Psychological processes that influence behavior ▫ Direction, intensity, and persistence of effort • Social: How other people influence individuals’ minds and behavior ▫ Understanding people (attribution, person impression, social cognition), attitudes and social influence, social interaction and relationships
Motivational Theories in management ing • Goal setting theory • Performance is a positive function of goal difficulty • Specific goals reduce variation in performance • Incentives indirectly influence performance via its effect on goal commitment • Goal-performance relation is influenced by goal commitment, goal importance, , task complexity, self-efficacy
Organizational justice theory • Individuals are motivated to maintain a balance in exchange relations by comparing their and others’ ratio of inputs to outcomes (e.g., pay) ▫ If individuals believe their ratio is inequitable, then they experience negative emotions, which they minimize by changing their inputs and/or outcomes
Human Resource Model Of Motivation (HRMM) • Perhaps the most contemporary management view of motivation • Based on initiatives to improve the quality of working life and the strong influence of Japanese management practices • Introduces a high level of employee responsibility for and participation in decisions in the work environment 2003 Prentice Hall Business Publishing, PowerPoint supplement to Management ing, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., A, Sonoma State University
Central Assumptions of the HRMM • Organizations operate under a system of beliefs about the values, purpose, and direction of their organization • People find work enjoyable and desire to participate in:
▫ Developing objectives ▫ Making decisions ▫ Attaining goals in their work environment
• Individuals are motivated by both financial and nonfinancial means of compensation 2003 Prentice Hall Business Publishing, PowerPoint supplement to Management ing, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., A, Sonoma State University
Central Assumptions of the HRMM • Employees have a great deal of knowledge and information about their jobs, the application of which will improve the way they perform tasks and benefit the organization as a whole • Individuals are highly creative, ethical, and responsible • They desire opportunities to effect change in their organizations 2003 Prentice Hall Business Publishing, PowerPoint supplement to Management ing, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., A, Sonoma State University
COST BEHAVIOUR ANALYSIS
Types of Cost Behavior Patterns Summary of Variable and Fixed Cost Behavior Cost
In Total
Per Unit
Variable
Total variable cost is proportional to the activity level within the relevant range.
Variable cost per unit remains the same over wide ranges of activity.
Fixed
Total fixed cost remains the same even when the activity level changes within the relevant range.
Fixed cost per unit goes down as activity level goes up.
The Activity Base Units produce d
Machine hours A measure of the event that causes the incurrence of a variable cost – a cost driver
Miles driven
Labor hours
True Variable Cost Example Total Long Distance Telephone Bill
Your total long distance telephone bill is based on how many minutes you talk.
Minutes Talked
Total Fixed Cost Example
Monthly Basic Telephone Bill
Your monthly basic telephone bill is probably fixed and does not change when you make more local calls.
Number of Local Calls
Step-Variable Costs
Cost
Total cost remains constant within a narrow range of activity.
Activity
Step-Variable Costs
Cost
Total cost increases to a new higher cost for the next higher range of activity.
Activity
The Linearity Assumption and the Relevant Range A straight line Economist’s closely
Total Cost
Curvilinear Cost approximates a Function curvilinear Relevant Range
variable cost line within the relevant range.
ant’s Straight-Line Approximation (constant unit variable cost) Activity
Cost Behavior Examples of normally variable costs Merchandisers
Service Organizations
Cost of Goods Sold
Supplies and travel
Manufacturers
Merchandisers and Manufacturers
Direct Material, Direct Labor, and Variable Manufacturing Overhead
Sales commissions and shipping costs
Examples of normally fixed costs Merchandisers, manufacturers, and service organizations PBB taxes, Insurance, Sales salaries Depreciation, Advertising
Types of Fixed Costs Committed
Discretionary
Long-term, cannot be reduced in the short term.
May be altered in the short-term by current managerial decisions
Examples
Examples
Depreciation on Buildings and Equipment
Advertising and Research and Development
Rent Cost in Thousands of Dollars
Fixed Costs and Relevant Range 90
60
30
00
Relevant Range
Total cost doesn’t change for a wide range of activity, and then jumps to a new higher cost for the next higher range of activity.
1,000 2,000 3,000 Rented Area (Square Feet)
Semivariable Costs A semivariable cost has both fixed and variable components. Consider the example of utility cost.
Total Utility Cost
Y
Variable Cost per KW
X Activity (Kilowatt Hours)
Fixed Monthly Utility Charge
Semivariable Costs
The total semivariable cost line can be expresse as an equation: Y = a + bX Where:
Y = the total mixed cost a = the total fixed cost (the vertical intercept of the line) b = the variable cost per unit of activity (the slope of the line) X = the level of activity
Total Utility Cost
Y
Variable Cost per KW Activity (Kilowatt Hours)
X
Fixed Monthly Utility Charge
The Analysis of Semivariable Costs 1. High-Low Method
2. Scattergraph Method
3. Least-Square Regression Method
The Scattergraph Method Plot the data points on a graph (total cost vs. activity).
Y
Total Cost in 1,000’s of Rs
20
10
0
* * * *
* ** * ** X
0 1 2 3 4 Activity, 1,000’s of Units Produced
The Scattergraph Method (2) Draw a line through the data points with about an equal numbers of points above and below the line. Y
Total Cost in 1,000’s of Rs
20
10
* ** * **
* * * * Intercept is the estimated fixed cost (a) = Rs10,000
0
X
0 1 2 3 4 Activity, 1,000’s of Units Produced
The slope is the estimated variable cost per unit. Slope = Change in cost ÷ Change in units
The Scattergraph Method (3) Y
Total Cost in 1,000’s of Rs
20
10
0
* * * *Horizontal distance is the change in activity.
* ** * ** Vertical distance is the change in cost.
X
0 1 2 3 4 Activity, 1,000’s of Units Produced
The High-Low Method WiseCo recorded the following production activity and maintenance costs for two months:
High activity level Low activity level Change
Units 8,000 5,000 3,000
Cost $ 9,800 7,400 $ 2,400
Using these two levels of activity, compute: the variable cost per unit; the fixed cost; and then express the costs in equation form Y = a + bX.
The High-Low Method High activity level Low activity level Change
Units 8,000 5,000 3,000
Cost $ 9,800 7,400 $ 2,400
Changein costin units Variable cost per unit = Change in cost ÷ change Change in units
The High-Low Method High activity level Low activity level Change
Units 8,000 5,000 3,000
Cost $ 9,800 7,400 $ 2,400
Variable cost per unit = $2,400 ÷ 3,000 units = $0.80 per unit
The High-Low Method High activity level Low activity level Change
Units 8,000 5,000 3,000
Cost $ 9,800 7,400 $ 2,400
Variable cost = $2,400 ÷ 3,000 units = $0.80 per unit Fixed cost = Total cost – Total variable cost Fixed cost = $9,800 – ($0.80 per unit × 8,000 units)
Fixed cost = $9,800 – $6,400 = $3,400
The High-Low Method High activity level Low activity level Change
Units 8,000 5,000 3,000
Cost $ 9,800 7,400 $ 2,400
Variable cost = $2,400 ÷ 3,000 units = $0.80 per unit Fixed cost = Total cost – Total variable cost Fixed cost = $9,800 – ($0.80 per unit × 8,000 units)
Fixed cost = $9,800 – $6,400 = $3,400 Total cost = Fixed cost + Variable cost (Y = a + bX) Y = $3,400 + $0.80X
Least-Squares Regression Method • Software can be used to fit a regression line through the data points. • The cost analysis objective is the same: Y = a + bx
Least-squares regression also provides a statistic, called the R2, that is a measure of the goodness of fit of the regression line to the data points.
Least-Squares Regression Method R2 is the percentage of the variation in total cost explained by the activity. Y Total Cost
20
* ** * **
* * * * R2 for this relationship is near
10
100% since the data points are very close to the regression line. 0 0
1
2 3 Activity
4
X
Cost Estimation Methods Regression A set of dataAnalysis can be regressed using several techniques: •Manual computations •SPSS or SAS Statistical Software •Excel or other spreadsheet The result of the regression process is a regression model:
TC = F + VX
Each regression model has an R-square (R2) measure of how good the model is. Range of R2 = 0 to 1.0
Simple Regression Analysis Example Fasco wants to know its average fixed cost and variable cost per unit. Using the data to the right, let’s see how to do a regression using Excel.
Month January February March April May June July August September October November December January February March April
Total Costs $6,720 7,260 7,270 11,060 12,580 8,660 8,580 9,550 13,050 11,060 7,320 7,370 6,790 7,480 6,990 11,400
Units (Meals) 1,280 1,810 1,620 2,830 3,630 2,610 2,460 2,640 3,620 2,840 1,820 1,650 1,260 1,850 1,710 2,940
Simple Regression Analysis Month You will need three pieces Example January of information from your regression analysis: 1. Estimated Variable Cost per Unit (line slope) 2. Estimated Fixed Costs (line intercept) 3. Goodness of fit, or R2
To get these three pieces of information we will need to use THREE different excel functions. LINEST, INTERCEPT, & RSQ
February March April May June July August September October November December January February March April
Total Costs $6,720 7,260 7,270 11,060 12,580 8,660 8,580 9,550 13,050 11,060 7,320 7,370 6,790 7,480 6,990 11,400
Units (Meals) 1,280 1,810 1,620 2,830 3,630 2,610 2,460 2,640 3,620 2,840 1,820 1,650 1,260 1,850 1,710 2,940
Ethics With Conclusion ~ Ethics is the activity of man directed to secure the inner perfection of his own personality. ~ Albert Schweizer
Ethics • When management ing information is used for control, management ants may find themselves in complex situations, fraught with conflict ▫ Especially when it is used for performance evaluation
• Pressure may be exerted to influence the numbers to make a favored product, customer, or line of business appear more profitable than it actually is
• Department managers may distort information so that unfavorable factors are not revealed in a management ing report ▫ The cost of inefficient processes ▫ The existence of substantial amounts of excess capacity
Ethics • Senior executives whose incentive compensation is based on the reported financial numbers may put pressure on ants ▫ To recognize revenue from a customer early ▫ To defer until subsequent periods the recognition of an expense ▫ In some circumstances, to recognize certain expenses early so that much higher earnings may be reported in future periods • All of these behaviors were evident in the frauds dominating the financial news in recent years • Organizational leadership plays a critical role in fostering a culture of high ethical standards
Ethics • Professional organizations usually establish ethical norms and codes of professional conduct for their • The professional association can monitor and police its norms and codes through peer reviews
▫ They have procedures for disciplinary action when violations are detected
• Many of the guidelines are phrased in of what management ants should not do, consistent with how boundary systems operate
Ethics • The way an individual responds to pressure derives from inner values and beliefs, but individuals are strongly influenced by their view of organizational standards • If individuals see unethical or illegal behavior practiced by the organization’s leaders and superiors or coworkers, they may feel that such behavior is accepted and sanctioned • An individual without a strong set of personal beliefs and values may find it difficult to withstand the pressure to “go along with the flow” and participate in this behavior when a difficult or conflicting situation arises ▫ Such as being asked to misrepresent an organization unit’s performance potential when the unit is being offered for sale
THANK YOU
Submitted by:
Date:
Florian Huesmann Mahima Virmani Anita Bakkar Moeen Akhtar Ankit Singh 03.11.09
Table of content General characteristics of Management ing - Aims of MA - Differences between Management ing & Financial ing
Behavioral aspects of Management ing -Motivational theories in Management ing -Behavioral implecations of MA
Ethics Conclusion
Management ing • Definition: • A value-adding continuous improvement process of planning, deg, measuring and operating both nonfinancial information systems and financial information systems that guides management action, motivates behavior, and s and creates the cultural values necessary to achieve an organization’s strategic, tactical and operating objectives
Aims of management ing
Acting
Planning
Controlling
Aims of management ing • Formulating strategies • Planning and constructing business activities • Helps in making decisions • ing financial reports preparation • Safeguarding asset
Aims of management ing • Distinguish between financial ing and management ing • Information of management ing is used for internal purposes only, not for external reports • Management ing has a future perspective and helps managers in making decisions.
Differences between Financial Acc. and Management ing Primary s Financial ing
Management ing
External
Internal
Investors, Creditors, Government authorities
Mangers of the business
Differences between Financial Acc. and Management ing Purpose of Information Financial ing Help investors, creditors, and others make investment, credit, and other decisions
Management ing Help managers plan and control business operations
Differences between Financial Acc. and Management ing Behavioral Implications Financial ing Concern about adequacy of disclosure
Management ing Concern about how reports will affect employees behavior
Role of MA within the Corporation • Cost ing became the major role in management ing • Linkage between the management team and the financial department • Management ing is important for nearly every part of the company, as well as for the overall success of a company
Behavioral aspect & implications of management ing
~ Behavior is a mirror in which every one displays his own image. ~ Behavioral aspect of management ing is that which influences the decision of the people concerned with decision making in the management ing system. J. Wolfgang von Goethe
Behavioral Implications • As measurements are made on operations and especially on individuals and groups, their behavior changes ▫ People react when they are being measured, and they react to the measurements ▫ They focus on the variables and behavior being measured and spend less attention on those not measured • Two old sayings recognize these phenomena:
▫ “What gets measured gets managed” ▫ “If I can’t measure it, I can’t manage it.”
Behavioral Implications • People familiar with the current system may resist as managers attempt to introduce or redesign cost and performance measurement systems • They have acquired expertise in the use (and, perhaps, misuse) of the old system and wonder whether their experience and expertise will apply to the new system • People also may feel committed to the decisions based on the information the old system produced ▫ Actions taken may no longer seem valid based on the information produced by a newly installed management ing system ▫ A new management system can be a threat or lead to embarrassment and may lead to a resistance to change.
Behavioral Implications • Management ants must understand and anticipate the reactions of individuals to information and measurements • An analysis of the behavioral and organizational reactions to the measurements must accompany the design and introduction of new measurements and systems
• More importantly, when the measurements are used not only for information, planning, and decision-making but also for control, evaluation, and reward, employees and managers place great pressure on the measurements themselves
Subjective representation of objective phenomena • Behavior depends on individuals’ mental representations, which can differ in important ways from objective indicators. • Effects of MA practice on individuals’ behavior can depend not only on how objectively informative the MA practice is about factors that affect their welfare. • But also on how understandable the MA practice is how well individuals can form usable mental representations of it and connect it to their other mental representations • and how it stimulates individuals’ attention, cognition, and/or motivation
Subfields of psychology in MA research • Cognitive: Psychological processes that influence human thinking ▫ Attention, memory, comprehension, learning, judgments, decisions • Motivation: Psychological processes that influence behavior ▫ Direction, intensity, and persistence of effort • Social: How other people influence individuals’ minds and behavior ▫ Understanding people (attribution, person impression, social cognition), attitudes and social influence, social interaction and relationships
Motivational Theories in management ing • Goal setting theory • Performance is a positive function of goal difficulty • Specific goals reduce variation in performance • Incentives indirectly influence performance via its effect on goal commitment • Goal-performance relation is influenced by goal commitment, goal importance, , task complexity, self-efficacy
Organizational justice theory • Individuals are motivated to maintain a balance in exchange relations by comparing their and others’ ratio of inputs to outcomes (e.g., pay) ▫ If individuals believe their ratio is inequitable, then they experience negative emotions, which they minimize by changing their inputs and/or outcomes
Human Resource Model Of Motivation (HRMM) • Perhaps the most contemporary management view of motivation • Based on initiatives to improve the quality of working life and the strong influence of Japanese management practices • Introduces a high level of employee responsibility for and participation in decisions in the work environment 2003 Prentice Hall Business Publishing, PowerPoint supplement to Management ing, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., A, Sonoma State University
Central Assumptions of the HRMM • Organizations operate under a system of beliefs about the values, purpose, and direction of their organization • People find work enjoyable and desire to participate in:
▫ Developing objectives ▫ Making decisions ▫ Attaining goals in their work environment
• Individuals are motivated by both financial and nonfinancial means of compensation 2003 Prentice Hall Business Publishing, PowerPoint supplement to Management ing, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., A, Sonoma State University
Central Assumptions of the HRMM • Employees have a great deal of knowledge and information about their jobs, the application of which will improve the way they perform tasks and benefit the organization as a whole • Individuals are highly creative, ethical, and responsible • They desire opportunities to effect change in their organizations 2003 Prentice Hall Business Publishing, PowerPoint supplement to Management ing, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., A, Sonoma State University
COST BEHAVIOUR ANALYSIS
Types of Cost Behavior Patterns Summary of Variable and Fixed Cost Behavior Cost
In Total
Per Unit
Variable
Total variable cost is proportional to the activity level within the relevant range.
Variable cost per unit remains the same over wide ranges of activity.
Fixed
Total fixed cost remains the same even when the activity level changes within the relevant range.
Fixed cost per unit goes down as activity level goes up.
The Activity Base Units produce d
Machine hours A measure of the event that causes the incurrence of a variable cost – a cost driver
Miles driven
Labor hours
True Variable Cost Example Total Long Distance Telephone Bill
Your total long distance telephone bill is based on how many minutes you talk.
Minutes Talked
Total Fixed Cost Example
Monthly Basic Telephone Bill
Your monthly basic telephone bill is probably fixed and does not change when you make more local calls.
Number of Local Calls
Step-Variable Costs
Cost
Total cost remains constant within a narrow range of activity.
Activity
Step-Variable Costs
Cost
Total cost increases to a new higher cost for the next higher range of activity.
Activity
The Linearity Assumption and the Relevant Range A straight line Economist’s closely
Total Cost
Curvilinear Cost approximates a Function curvilinear Relevant Range
variable cost line within the relevant range.
ant’s Straight-Line Approximation (constant unit variable cost) Activity
Cost Behavior Examples of normally variable costs Merchandisers
Service Organizations
Cost of Goods Sold
Supplies and travel
Manufacturers
Merchandisers and Manufacturers
Direct Material, Direct Labor, and Variable Manufacturing Overhead
Sales commissions and shipping costs
Examples of normally fixed costs Merchandisers, manufacturers, and service organizations PBB taxes, Insurance, Sales salaries Depreciation, Advertising
Types of Fixed Costs Committed
Discretionary
Long-term, cannot be reduced in the short term.
May be altered in the short-term by current managerial decisions
Examples
Examples
Depreciation on Buildings and Equipment
Advertising and Research and Development
Rent Cost in Thousands of Dollars
Fixed Costs and Relevant Range 90
60
30
00
Relevant Range
Total cost doesn’t change for a wide range of activity, and then jumps to a new higher cost for the next higher range of activity.
1,000 2,000 3,000 Rented Area (Square Feet)
Semivariable Costs A semivariable cost has both fixed and variable components. Consider the example of utility cost.
Total Utility Cost
Y
Variable Cost per KW
X Activity (Kilowatt Hours)
Fixed Monthly Utility Charge
Semivariable Costs
The total semivariable cost line can be expresse as an equation: Y = a + bX Where:
Y = the total mixed cost a = the total fixed cost (the vertical intercept of the line) b = the variable cost per unit of activity (the slope of the line) X = the level of activity
Total Utility Cost
Y
Variable Cost per KW Activity (Kilowatt Hours)
X
Fixed Monthly Utility Charge
The Analysis of Semivariable Costs 1. High-Low Method
2. Scattergraph Method
3. Least-Square Regression Method
The Scattergraph Method Plot the data points on a graph (total cost vs. activity).
Y
Total Cost in 1,000’s of Rs
20
10
0
* * * *
* ** * ** X
0 1 2 3 4 Activity, 1,000’s of Units Produced
The Scattergraph Method (2) Draw a line through the data points with about an equal numbers of points above and below the line. Y
Total Cost in 1,000’s of Rs
20
10
* ** * **
* * * * Intercept is the estimated fixed cost (a) = Rs10,000
0
X
0 1 2 3 4 Activity, 1,000’s of Units Produced
The slope is the estimated variable cost per unit. Slope = Change in cost ÷ Change in units
The Scattergraph Method (3) Y
Total Cost in 1,000’s of Rs
20
10
0
* * * *Horizontal distance is the change in activity.
* ** * ** Vertical distance is the change in cost.
X
0 1 2 3 4 Activity, 1,000’s of Units Produced
The High-Low Method WiseCo recorded the following production activity and maintenance costs for two months:
High activity level Low activity level Change
Units 8,000 5,000 3,000
Cost $ 9,800 7,400 $ 2,400
Using these two levels of activity, compute: the variable cost per unit; the fixed cost; and then express the costs in equation form Y = a + bX.
The High-Low Method High activity level Low activity level Change
Units 8,000 5,000 3,000
Cost $ 9,800 7,400 $ 2,400
Changein costin units Variable cost per unit = Change in cost ÷ change Change in units
The High-Low Method High activity level Low activity level Change
Units 8,000 5,000 3,000
Cost $ 9,800 7,400 $ 2,400
Variable cost per unit = $2,400 ÷ 3,000 units = $0.80 per unit
The High-Low Method High activity level Low activity level Change
Units 8,000 5,000 3,000
Cost $ 9,800 7,400 $ 2,400
Variable cost = $2,400 ÷ 3,000 units = $0.80 per unit Fixed cost = Total cost – Total variable cost Fixed cost = $9,800 – ($0.80 per unit × 8,000 units)
Fixed cost = $9,800 – $6,400 = $3,400
The High-Low Method High activity level Low activity level Change
Units 8,000 5,000 3,000
Cost $ 9,800 7,400 $ 2,400
Variable cost = $2,400 ÷ 3,000 units = $0.80 per unit Fixed cost = Total cost – Total variable cost Fixed cost = $9,800 – ($0.80 per unit × 8,000 units)
Fixed cost = $9,800 – $6,400 = $3,400 Total cost = Fixed cost + Variable cost (Y = a + bX) Y = $3,400 + $0.80X
Least-Squares Regression Method • Software can be used to fit a regression line through the data points. • The cost analysis objective is the same: Y = a + bx
Least-squares regression also provides a statistic, called the R2, that is a measure of the goodness of fit of the regression line to the data points.
Least-Squares Regression Method R2 is the percentage of the variation in total cost explained by the activity. Y Total Cost
20
* ** * **
* * * * R2 for this relationship is near
10
100% since the data points are very close to the regression line. 0 0
1
2 3 Activity
4
X
Cost Estimation Methods Regression A set of dataAnalysis can be regressed using several techniques: •Manual computations •SPSS or SAS Statistical Software •Excel or other spreadsheet The result of the regression process is a regression model:
TC = F + VX
Each regression model has an R-square (R2) measure of how good the model is. Range of R2 = 0 to 1.0
Simple Regression Analysis Example Fasco wants to know its average fixed cost and variable cost per unit. Using the data to the right, let’s see how to do a regression using Excel.
Month January February March April May June July August September October November December January February March April
Total Costs $6,720 7,260 7,270 11,060 12,580 8,660 8,580 9,550 13,050 11,060 7,320 7,370 6,790 7,480 6,990 11,400
Units (Meals) 1,280 1,810 1,620 2,830 3,630 2,610 2,460 2,640 3,620 2,840 1,820 1,650 1,260 1,850 1,710 2,940
Simple Regression Analysis Month You will need three pieces Example January of information from your regression analysis: 1. Estimated Variable Cost per Unit (line slope) 2. Estimated Fixed Costs (line intercept) 3. Goodness of fit, or R2
To get these three pieces of information we will need to use THREE different excel functions. LINEST, INTERCEPT, & RSQ
February March April May June July August September October November December January February March April
Total Costs $6,720 7,260 7,270 11,060 12,580 8,660 8,580 9,550 13,050 11,060 7,320 7,370 6,790 7,480 6,990 11,400
Units (Meals) 1,280 1,810 1,620 2,830 3,630 2,610 2,460 2,640 3,620 2,840 1,820 1,650 1,260 1,850 1,710 2,940
Ethics With Conclusion ~ Ethics is the activity of man directed to secure the inner perfection of his own personality. ~ Albert Schweizer
Ethics • When management ing information is used for control, management ants may find themselves in complex situations, fraught with conflict ▫ Especially when it is used for performance evaluation
• Pressure may be exerted to influence the numbers to make a favored product, customer, or line of business appear more profitable than it actually is
• Department managers may distort information so that unfavorable factors are not revealed in a management ing report ▫ The cost of inefficient processes ▫ The existence of substantial amounts of excess capacity
Ethics • Senior executives whose incentive compensation is based on the reported financial numbers may put pressure on ants ▫ To recognize revenue from a customer early ▫ To defer until subsequent periods the recognition of an expense ▫ In some circumstances, to recognize certain expenses early so that much higher earnings may be reported in future periods • All of these behaviors were evident in the frauds dominating the financial news in recent years • Organizational leadership plays a critical role in fostering a culture of high ethical standards
Ethics • Professional organizations usually establish ethical norms and codes of professional conduct for their • The professional association can monitor and police its norms and codes through peer reviews
▫ They have procedures for disciplinary action when violations are detected
• Many of the guidelines are phrased in of what management ants should not do, consistent with how boundary systems operate
Ethics • The way an individual responds to pressure derives from inner values and beliefs, but individuals are strongly influenced by their view of organizational standards • If individuals see unethical or illegal behavior practiced by the organization’s leaders and superiors or coworkers, they may feel that such behavior is accepted and sanctioned • An individual without a strong set of personal beliefs and values may find it difficult to withstand the pressure to “go along with the flow” and participate in this behavior when a difficult or conflicting situation arises ▫ Such as being asked to misrepresent an organization unit’s performance potential when the unit is being offered for sale
THANK YOU
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