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Subject:  Chapter 18 Date:  9/15/2013  9:24 PM
Author:  onecandream Number:  2168 of 2180

For the past 17 weeks we have been looking at external financial statements reported by a business. We now turn an eye towards internal or Managerial accounting, which a process to help managers make sound business decisions, develop plans and budgets. Managerial accounting, more than anything else, involves providing useful information to managers and helping them use this information in the most effective manner.

Managers need detailed information on expenses and they also need to know how expenses behave relative to changes in sales prices and sales just name a couple examples.

Take a look at exhibits 18.1 and 18.2 ...same numbers, but different wording and sub-groups. The different wording helps management see and judge how well they are controlling expenses. The author gives us:
1)Sales revenue sensitive expenses...operating costs that depend on total sales revenue. Sales commissions equal to a certain percent of sales and credit card discounts paid by a retailer to a credit card company.
2)Sales volume sensitive expenses...packaging and transportation are both expenses that will vary with total sales volume.
3)Fixed selling and operating expenses...costs that are fixed and cannot be changed over the short run. Rent, salaries are both examples.

Next the author talks about comparing equal percent changes in sales prices and sales volume. Which would be better, increase the price by 5%
or increase sales volume by 5%?

Take a look at a 5% higher sales volume... if you increase sales volume by 5%, you also need to increase COGS by the sale 5%. You would also need to increase each of the other sub-categories by the same 5%, except the fixed costs. Doing so, would increase earnings before interest and tax by 10.8%. Not bad, but...

Increase the price by 5% and this DOES NOT increase the COGS, so gross margins increases by 14%. Look at the other expenses to see the changes, if any. The bottom line is that earnings increase by 48.2%.

Now take a look at exhibit 18.4...decreasing sales price or sales volume will kill the business.

***Wife begins chemo this week, would someone mind taking chapter 19?

To answer a question from last week about WFM not having debt (while it has liabilities) or interest expense. Debt or better stated, interest bearing debt, is long-term debt, which WFM does not have. Liabilities can be thought of as short-term (non interest bearing) debt.

Interest bearing debt would be bonds the company sold to fund its business or bank loans.

Debt, such as accounts payable does not carry interest costs.

All of WFM's liabilities are short-term debts...thus no interest.
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