The Controlling Function

1
The Controlling Function

• After devising Business Plans Ogzn structure to
  attain firm's goals, mgers must measure firms
  progress toward its goals. This requires
  controlling function.
• The fields of economics accounting concepts
  are used in controlling process.
• Of cousre mgers do not have to be professional
  economists or CPA,but it is important that they
  understand the basic principles used in each
  profession.

2

• Cost Controls Break-Even Analysis
• Objective show how to manage costs
  determine most profitable level of pdn sales
  that satisfies consumer needs
• Cost assists mger to assess how bus. has
  performed in past to plan for the future
• This requires a good mgmt info system that will
  provide
• (1) acctg info that allows mgmt to determine cost
  in various ways
• (2) a means for effectively monitoring
  controlling costs of the business.

3

• Mger use costs in decision making, thus need to
  know how costs will respond to changes in
  business activities.
• Mgmt InfoAcctg records are sources of mgmt info
  as they summarize transactions like inventory
  turnover, eqpt purchases etc
• Mgmt Info as Control Function Mgmt info is used
  in controlling resources obtained used by firm.
  
• Defining Costs
• A firm's info system must provide data needed for
  cost control to ensure that costs are being
  allocated properly that all relevant costs are
  being considered.

4

• Implicit and Explicit Costs
• Explicit Cost Costs that are directly traceable
  to the end product e.g. cost of input purchased
  at open market for which explicit payments are
  made.
• Implicit Cost Are costs that firms incur that do
  not involve explicit payments. They relate to
  firm's use of its own assets e.g. cost for
  using building, eqpt, labor, dep. interest must
  be added to determining final cost of producing
  pdts.

5

• Controllable and Non-controllable Costs
• Uncontrollable costs Costs firms cannot easily
  influence e.g. implicit costs that mgers have
  limited control.
• Controllable costThose regulated totally by
  mgers e.g. explicit costs
• Fixed Variable Costs
• Costs vary according to two concepts
• (1) the passage of time, and
• (2) the level of activity.
• Fixed CostsStay same over time regardless of the
  level of output -e.g. rent
• Variable Costs change with the level of activity
  (materials, labor, shipping).

6

• The figure shows that TC TVC TFC.
• The Contribution Concept
• Price profit are determined on per unit basis
  that shld cover FC VC.
• SP per unit TC per unit Profit per unit
• SP per unit FC/unit VC/unitProfit/unit

TC
Cost
TVC
Fixed cost
TFC
Output
7

• Fixed costs are usually referred as overhead
  cost.
• SP/unitOverhead cost/unitVC/unit Profit/unit
• SP/unit - VC/unit Overhead cost/unit
  Profit/unit

8

• e.g. if a rice producer has the ff cost
• Materials 55/bag Direct labor 20/bag Then TVC
  is 75/bag
• If SP/bag is 125, then 50 is left after paying
  for TVC to contribute to overhead (TFC) profit
• Selling Price 125/bag 100 - TVC
  75/bag -60 Contribution 50/bag 40
  (profit overhead)

9

• Contribution covers profit overhead
• SP/unit - TVC/unit Contribution Overhead/unit
  Profit/unit
• If a firm know its contribution margin to be 40,
  its SP for any item can easily be computed, once
  its VC/unit is known
• If a firms contribution is 60, its VC is
  200/unit then its
• SP 100 VC Con 40 60
• If VC 40 200 then
  SP 100
  100/40 x 200 500

10

• Break Even Analysis
• Helps to find sales/output level that yields no
  profits or losses - i.e. where TR TC
• CalculationProfit 0 Revenue TC
• Profit 0 (P x Q) (VC x Q) FC
• 0 Q(P-VC) FC
• Q(P-VC) FC
• Q FC/(P-VC)

11

• If rice SP is 200/bag with 120 VC, 1mil FC
  then how many can be sold to break even?
• Calculation
• Break-Even
• Q FC/(P-VC)
• Q 100,000/(200-120) 1000000/80
  12,500 bags