Overview

• Introductions
• Overview of managerial accounting
• Overview of class
• Course requirements
• Introduction to managerial accounting
• The Bryce Jordan Center
• Summary
 Introduction

• Undergraduate degree from Bucknell

University
• 2 years at Price Waterhouse (CPA)
• 4 years at the Equitable
• Ph’d from Penn State
• Married with two children
• Research Interests
– Accounting for Mergers and Acquisitions
– Role of accounting information in financial
contracts.
• Experience with Managerial accounting
 Managerial Accounting

What is managerial accounting and why

should you be interested in learning more
about it?

To answer these questions we must first

address two important questions:

What is accounting information?

What is the manager’s responsibility

in the firm?
Manager’s Responsibilities

For the purposes of this class the manager

has two jobs:

1. Make Decisions

2. Motivate Employees

We will ignore the manager’s need to

negotiate, facilitate, supervise, instruct,
nurture, develop etc…
 Accounting Information

Managerial accounting information is the

information that the manager uses to help
them make decisions and motivate
employees.

- Marketing (prices and quantities)

- Budget (future costs and revenues)
- Production (costs, volume, cycle time)
- Financial (cost of capital, labor)
 Managerial Accounting

So managerial accounting is the process of

collecting and summarizing accounting
information that will be useful to managers
in decision making and helpful in
motivating employees.
 Why should you care?

Are you going to be a manager?

Are you going to be a consultant?

Are you going to be an entrepreneur?

 Course Overview
Throughout the course we will develop an
understanding of three basic concepts:

• How costs behave

• The nature of the firm

3. How accounting systems report costs

These building blocks will be used to gain

insights on the role of accounting
information in a variety of settings.
 Objectives

1. Become familiar with what accounting

information is typically used by firms and
to identify the strategic implications and
limitations of this information.

2. Develop an understanding of how

accounting information is used by
managers in the decision making process.

3. Consider how accounting information

can be used to motivate members of the
firm or as a mechanism to control their
behavior.
 Course Requirements

This class is designed to allow you to develop an

understanding of the concepts by applying the
material covered to real life problems and cases. I
have designed the grading system for this class to
meet this objective.

Your grade will be computed as follows:

Homework (choose 2 out of 8) 20%

Group Case 20%
Individual Case 20%
Take home Final 40%
 Course Requirements

A significant component of your future success will

depend upon your ability to communicate your
ideas.

To improve your ability to communicate verbally, I

have designed the class to encourage class
participation.

Your homework and case grades will depend on the

quality of your written answers as well as the
quality of your discussion of these problems during
class.

You should consider this aspect of the class when

selecting the problem sets you submit to be graded.
 Bryce Jordan Center
In 1992 Penn State committed to building the Bryce
Jordan Center (A 15,000 seat basketball Arena).
The following projected financial information was
available to the University prior to engaging in the
project:

Bryce Jordan Center

Costs:
Building $54 million
Parking $ 2 million

Funding:
Private Contributions $23 million
State Funding $33 million
 Bryce Jordan Center
Bryce Jordan Center (BJC) (Annual Projections)

Revenue:
Basketball Ticket Revenue $2 million
Parking $.5 million
Donations to Basketball program $1 million
Television Revenue $2.2 million
Allocated shared revenue $.2 million

Costs
Utilities $1 million
Cost of supporting a
basketball player (per year) $54,000
Number of players on the team 15
Cost of supporting coaches
and administrators: $700,000
Payroll Costs BJC $200,000
Allocation of shared expenses $1 million
 Bryce Jordan Center

What factors should Penn State

consider when deciding whether
to build BJC?

How profitable will the BJC be?

Should Penn State undertake the

project?
 Bryce Jordan Center –
Alternative Venue
Rec Hall

Revenue:
Basketball Ticket Revenue $.5 million
Parking $0
Donations to Basketball program $.5 million
Television Revenue $.2 million
Allocated shared revenue $.1 million

Costs
Utilities $.2 million
Cost of supporting a
basketball player (per year) $54,000
Number of players on the team 15
Cost of supporting coaches
and administrators: $700,000
Payroll Costs Rec Hall $50,000
Allocation of shared expenses $1 million
Bryce Jordan Center - Factors

What will happen to Rec Hall when BJC

opens?

- A few people in the Ticket office were

laid off, otherwise the facility is used for
gymnastics, volleyball and other sports.
Bryce Jordan Center - Factors

What are allocated Costs?

- Orthopedic Surgeon
- Team Physicians
- Trainers
- Athlete medical Expenses
- Sports Information Department
- Academic Support Center

These cost total $23 million and are allocated

equitably over the 23 varsity programs.

What would happen if the allocation were changed

to a per athlete basis?

Does it matter for the purposes of this problem?

Bryce Jordan Center - Factors

What are allocated revenues?

Penn State has a 4.2 million dollar endorsement

contract with Pepsi. This revenue is also allocated
equitably over the 23 Varsity programs.

Does an equitable allocation make sense?

What happens if the allocation is changed to sports

which are broadcast to a national audience, or the
number of national appearances?

Does it matter for the purposes of this problem?

Bryce Jordan Center - Factors

What are the opportunity costs of providing $56

million of financing for the BJC?

Develop a school of information technology.

Expand the library.

Expand the football stadium

Bryce Jordan Center - Factors

How are utility costs assigned to the team?

In BJC there are only 3 teams that use the facility,

men’s and women’s basketball and wrestling. In
Rec Hall 15 teams use the facilities.

Basketball and wrestling are winter sports, how are

utility costs for the rest of the year assigned?
Bryce Jordan Center - Factors

Can Penn State generate additional revenue at the

BJC?

- Concerts
- WWF
- Product Expo

Will Penn State use the facility for other purposes?

- Commencement
- Job Fair
- Tail gates etc…
Bryce Jordan Center - Factors

How do you allocate the costs of the 56 million

dollars raised since there is no interest associated
with raising these funds?

- Cost of Debt?

- Cost of Equity?

- Cost of next best available alternative?

 Bryce Jordan Center -
Profitability
Will the BJC be profitable?

The depends on the assumptions underlying the

various allocations being made. Consider the
following:

BJC Incremental Revenue

BJC Rec hall Incremental

Tickets 2 .5 1.5
Parking .5 0 .5
Television 2.2 .2 2.0
Donations 1.0 .5 0.5
Shared Revenue .2 .1 .1
Concerts 2.0 0 2.0
Total Incremental Revenue 6.6
 Bryce Jordan Center -
Profitability

BJC Incremental Costs

BJC Rec hall Incremental

Utilities 1.0 0.2 1.0
Payroll 0.2 .05 .2
Coaches 0.7 0.7 0
Shared Expenses 1.0 1.0 0
Players .81 .81 0.0
Other Events 1.2 0.0 1.2
Cost of Building 1.9* 0.0 1.9
Total Incremental Costs 4.3

*Building costs estimated using depreciation

expense assuming a 30 year life.
 Bryce Jordan Center -
Profitability

Will the BJC be profitable?

Incremental profits $2.3 million

However, this profitability depends upon the ability

to bring in outside concerts and television revenues
for the basketball program, as well as the allocation
of costs for the building.

Depending on the assumptions the profitability

could range from a $1.2 million loss to over $4.2
million of profits.
 Bryce Jordan Center

Should Penn State open the BJC?

Important considerations:

• What is the opportunity cost of the BJC?

• Does PSU want to be in the concert
business?
• Does having a higher profile basketball
team fit with the school’s mission?
• Does the BJC improve the schools
reputation or student base?
Bryce Jordan Center – Other
thoughts

What happens if the players or coaches are

paid based on the profitability of the
basketball program?

How does the Jordan Center price a

concert?

How do they determine the cost of using

the facility?

Are they at an advantage over other

competing facilities?
 Summary

Important Concepts to take away from this

class:

1. Opportunity Costs

2. Cost allocations are important in a wide

variety of contexts.

3. Incremental cost analysis.