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Managerial Accounting: The Net Present Value (NPV) Method

Managerial accountants understand that net present value (NPV) techniques use time value of money tools to estimate the current value of a series of future cash flows. Over time, the value of money changes [more…]

How to Calculate Time Value of Money with One Payment for One Year

Net present value techniques use time value of money tools to estimate the current value of a series of future cash flows. Consider a company that has [more…]

Find Time Value of Money with One Payment Held for Two Periods or More

Obviously, companies hold most long-term investments for longer than one year. To determine the future value of this investment for longer periods of time, just multiply the interest factor by itself for [more…]

Calculate NPV with a Series of Future Cash Flows

Most capital projects are expected to provide a series of cash flows over a period of time. Following are the individual steps necessary for calculating NPV when you have a series of future cash flows: [more…]

How to Measure the Rate of Return (IRR)

When evaluating a capital project, internal rate of return (IRR) measures the estimated percentage return from the project. It uses the initial cost of the project and estimates of the future cash flows [more…]

How to Prepare a Break-Even Analysis with More Than One Product

Managers often want to know how much they need to sell in order to break even or in order to earn a target level of profit. To get this information, managers derive something called a break-even point [more…]

When to Outsource Products

Sometimes paying another company to make the product — outsourcing — is more profitable for a company than making the product in its own factory is. Although news reports tend to focus on outsourcing to [more…]

How to Eliminate Unprofitable Products

Managers sometimes must decide whether to eliminate certain products or even a segment of their operations. For example, Keebler discontinued Hydrox Cookies a few years ago, ending the Oreo versus Hydrox [more…]

Take All Costs into Account with Absorption Costing

Absorption costing (sometimes also called full costing) is the predominant method for costing goods the companies manufacture and sell. United States Generally Accepted Accounting Principles [more…]

How to Set Pricing at Cost-Plus

Many retailers and manufacturers set their prices at cost-plus by adding a fixed markup to their absorption cost. Cost-plus pricing ensures that prices are high enough to meet profit goals. The figure [more…]

Extreme Accounting: Variable-Cost Pricing

Variable-cost pricing offers an adventurous variation on cost-plus pricing. Instead of adding a markup on total cost, variable-cost pricing adds a markup on just the variable cost. It disregards fixed [more…]

Managerial Accounting: The Importance of Transfer Pricing

Most larger companies decentralize, treating each division as its own business earning its own net income. As these different divisions do business with each other, buying and selling different products [more…]

How to Negotiate a Transfer Price

To negotiate a transfer price between two divisions, lock the managers of the selling and purchasing divisions into a room and don’t let them out until they agree on a number or discover that no mutually [more…]

How to Set the Transfer Price at Variable Cost

One simple approach to setting a transfer price is to use the item’s variable cost. After all, in a negotiation, this amount would have been the seller’s minimum price anyway. [more…]

How to Establish the Transfer Price at Variable Cost Plus a Markup

In order for both divisions to share profits more equally, managers may prefer to set the transfer price at variable cost plus a markup. At Ernie’s Western Dairy, President Ernie Hill decides to set the [more…]

Base Transfer Price on Full Cost

A company may set the transfer price at full cost (also known as absorption cost), which is the sum of variable and fixed costs per unit. In order to ensure that the selling division earns a profit, they [more…]

Position Transfer Price at Market Value

Setting the transfer price at market value solves many of the problems that crop up with the other methods of setting transfer price. If an outside market exists for the transferred goods, managers can [more…]

Managerial Accounting: Link Strategy with an Organization's Structure

Companies and other organizations establish goals that they plan to meet, such as benchmarks for sales, profitability, new products, and even employee satisfaction. Ideally, all employees know the organization’s [more…]

Managerial Accounting: What Is Decentralizing?

Decentralization is the process of moving decision-making powers down the chain of command. In a highly decentralized organization, frontline managers and staff often make important decisions. On the other [more…]

How to Distinguish Controllable Costs from Noncontrollable Costs

In the realm of budgets and costs, the budget should carefully designate which departments have authority over and are responsible for which costs. If a department has authority and responsibility for [more…]

Managerial Accounting: Types of Responsibility Centers

Responsibility centers are identifiable segments within a company for which individual managers have accepted authority and accountability. Responsibility centers define exactly what assets and activities [more…]

Strategizing for Success: The Balanced Scorecard

Following the balanced scorecard, management accountants do much more than predict profits (as part of budgets) or provide information for decisions about pricing products or buying new equipment; they [more…]

Managerial Accounting and Constraints

Constraints are anything that limits a system from achieving higher performance. On the highway, accidents that prevent you from driving 65 miles per hour to work in the morning are constraints. Constraints [more…]

Managerial Accounting: How to Cope with Limited Capacity

Companies usually have limited resources, such as limits on space, on the number of workers, or even on the machine capacity needed to produce goods. This reality means that in order to best use limited [more…]

Five Lease Renewal Myths

Many tenants have preconceived notions regarding a lease renewal or how they typically work, and quite often these ideas are inaccurate or completely wrong. Some commons misconceptions include: [more…]

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