Reality 101: Profit Planning with Spreadsheets

Article excerpt

USING MICROSOFT EXCEL'S SCENARIO MANAGER AND GOAL SEEK, STUDENTS LEARN HOW TO SOLVE REAL-WORLD MANAGEMENT ACCOUNTING PROBLEMS.

EXECUTIVE SUMMARY In a project developed for introductory management accounting classes and used in seven courses at two universities, students create a spreadsheet program to conduct "what-if" and goal-seeking analyses using the built-in financial functions of Microsoft® Excel. When asked about the program, 310 students responded with a strong belief that: (1) the instructions are sufficient for students to create the program without any prerequisite spreadsheet knowledge, (2) knowing how to create this program is an important "real-world" management accounting skill needed by all business majors, and (3) building the program should be a required component in both undergraduate and MBA introductory management accounting courses. Supplementary evidence shows students also believe creating this program aided them in their course exams.

(ProQuest Information and Learning: ... denotes formula omitted.)

In keeping with the theme from the 2003 IMA Annual Conference, "Creating Business Knowledge for Strategic Leadership," a project was developed for introductory management accounting classes that requires students to create a spreadsheet program similar to the real-world programs they will be expected to use in strategic profit planning decisions. The program contains a simple contribution margin income statement and uses Excel's Scenario Manager and Goal Seek functions to assess the change in projected profits from various what-if and profit-goal scenarios. This project provides at least five benefits:

* A better understanding of the role for, and importance of, cost-volume-profit (CVP) analysis in strategic planning,

* A strong, direct linkage illustrating how the profit equation and the contribution margin income statement are the same tool,

* A practical spreadsheet skill of building template programs that are documented with formulas using cell names,

* Students are exposed to two important spreadsheet profit modeling tools not usually covered in introductory computer-related courses or found in the usual business degree curriculum, and

* Most important, students gain an appreciation for how CVP analysis (the profit equation) is an important real-world tool they will be expected to know upon graduation and is not just another formula to be memorized for an exam.

Most introductory management accounting texts and courses require students to manually solve the profit equation for target profit given the sales price, variable costs, volume, and fixed costs. Too often, students view this as another exercise in linear algebra, solving the equation: Profit = (CMU × Volume) - Fixed costs. Whether solving the equation given a target profit (for example, setting profit equal to zero and solving for break-even volume, which is goal seeking) or solving for a new profit when given values for the other equation variables (what-if analysis), students fail to realize how important CVP analysis is as a strategic planning tool and how they will be expected to use it for strategic planning decisions.

For example, consider the normal strategic planning process. Upper management begins by creating or revising its vision statement and mission. The mission statement sets the objectives for the annual strategic plan, which includes a preliminary pro forma income statement. The pro forma statement is then subjected to a series of "profit planning games," in which the profit effects of various scenarios are considered. After the decision is made as to which scenarios will be incorporated into the strategic plan, a final pro forma income statement is agreed upon, and a cash budget is prepared. When analyzing the profit effects from various scenarios, upper management does not expect the business graduate to repeatedly solve the profit equation manually while they wait. …

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