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Engineering Economic Engineering Economic AnalysisAnalysis

Chapter 18 Accounting and Engineering Economy

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Accounting Management Engineering Economy

About past About past and future About future

Analyzing Capital budgeting Feasibility of alternatives

Summarizing Decision making Collect/analyze data

Reporting Setting goals Estimate

Financial indicators Assessing impacts Evaluate projects

Economic trends Analyzing risks Recommend

Cost acquisitions Planning Audit

Controlling Identity needs

Record keeping Trade-offs/constraints

Data and Communications Data and Communications

Budgeting Data and Communications Estimating

Accounting, managerial, and engineering economy Accounting, managerial, and engineering economy functionsfunctions

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Controller

Costs Taxes Budgets

General Accounting

Auditing Systems

Six Principal Specializations of Private Six Principal Specializations of Private AccountingAccounting

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AssetsAssets

Properties that are owned and have monetary value

e.g. Cash, inventory, buildings, equipment.

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LiabilitiesLiabilities

Accounts owned to outsidersAccounts owned to outsiders

e.g., notes payable, accounts payable, e.g., notes payable, accounts payable, bonds payable, income taxesbonds payable, income taxes

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EquityEquity

The owner's interest The owner's interest (assets minus liabilities) (assets minus liabilities)

in an enterprise.in an enterprise.

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Accounting EquationAccounting Equation

Assets = liabilities + equity

This accounting identity is always maintained.

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TransactionsTransactions

• Events that result in change of assets, liabilities, or equity.

• Business papers – original documents• Journals – books of original entries• Ledgers – complete set of accounts

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Summarizing InformationSummarizing Information

• Posting• Ledger (classify the data in summary)

provide the basis for preparing financial statements

• Income Statement• Balance Sheet

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Income StatementIncome Statement

• Summary of revenue, expense, and net income over a specified period of time.

• Accrual basis – revenue when earned and expense when incurred

• Cash basis –revenue and expense with receipt and payment of cash.

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Income StatementIncome Statement

Revenue from sales

Cost of goods sold

Gross profit on sales

Operating expenses

Selling expenses, G & A, other

Net income

(Gross profit – Operating expenses)

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Income Statement vs. Balance SheetIncome Statement vs. Balance Sheet

Enter asset, liability, capital, income, and expenseEnter asset, liability, capital, income, and expense Income Statement Balance Sheet

Accts payable Liability

Accts receivable Asset

Cash Asset

Equipment Asset

Equity Capital

Fees income Income

Machinery Asset

Notes payable Liability

Other Income Income

Salary Expense Expense

Supplies Asset

Supply Expense Expense

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Balance SheetBalance Sheet

• Assets: Resources the business ownsarranged in order of liquidity

• Liabilities: Claims against those resourcesarranged in order of expected payment

• Equity: The difference between assets and liabilities; often called capital or stockholders' equity

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Classify as current asset, long-term asset, Classify as current asset, long-term asset, current liability, or long-term liability.current liability, or long-term liability.

1. Accounts Receivable 6. Supplies1. Accounts Receivable 6. Supplies

2.2. Accounts payable Accounts payable 7. Salaries 7. Salaries payablepayable

3.3. Notes payableNotes payable 8. Bonds 8. Bonds payablepayable

4.4. Mortgage PayableMortgage Payable 9. Equipment9. Equipment

5.5. CashCash 10. Land 10. Land

Current assets: Current assets: 1, 5, 61, 5, 6Long-term assets: Long-term assets: 9, 109, 10Current liabilities: Current liabilities: 2, 3, 82, 3, 8Long-term liabilities:Long-term liabilities: 4, 8 4, 8

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Balance SheetBalance SheetBalance Sheet: Owners’ Equity

Stockholders' EquityThe residual interest in the assets that remain after deducting the liabilities.Contributed CapitalA measure of the capital contributed to the company by its owners.Contribution can be through cash, noncashassets, or valuable services.Different classes of capital: Common stock and Preferred stockRetained earnings

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18-9 Annual sales of $500K and a daily profit of $1K 6 days a week, find total yearly before tax business expense.

6 * 52 = 312 days of $1K profit or $312K profit/yearRevenues - Profit = Expense or 500K - 312K = $188K.

18-10 A firm has $5M in current assets (CA) and $2M in current liabilities (CL). Find the working capital and current ratio.

Working capital = current assets - current liabilities = $5M - $2M = $3M

Current ratio = CA/CL = 5/2 = 2.5

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18-13 Admin expense $2,750K Subcontract services 18,000K Development expense 900K Interest expense 200K Sales revenue 30,000K Selling expense 4,500K Develop the income statement

Operating Revenue and expensesRevenue

Sales 30,000K Total 30,000K

Expenses Admin 2,750K Cost of goods sold 18,000K Development 900K Selling 45,00K Total 26,150KTotal operating income 3,850KNon-operating revenues & expenses Interest paid 200KIncome before taxes 3,650KTaxes (@27%) 985.5K Net profit (loss) 2,664.5K

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18-24 Indirect annual manufacturing costs $60M for 12,000 machine-hours

a) Compute predetermined indirect cost application rate using machine hours as the burden vehicle.

60M/12K = $5,000/hour

b) Determine the total cost of production with direct material costs of $1M, direct labor costs of $600K and 200 machine hours.

Total cost = $1M + 0.6M + 200*5K = $2.6M.

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18-25 Using traditional costing; categorize the following as direct or indirect:Machine run costs I Costs to market the product IMachine depreciation I Cost of storage IMaterials handling costs I Insurance costs ICost of materials D Cost of product sales force IOvertime expenses D Engineering drawings IMachine operator wages D Machine labor DUtility costs I Cost of tooling and fixtures ISupport (admin staff salaries) I