Friday, January 27, 2017

Variable and Absorption Costing

This week in Managerial Accounting, I learned about Variable and Absorption costing.

Variable costing is when you only take into account the manufacturing costs that vary with output. This includes direct materials, direct labor, and the variable portions of manufacturing overhead. Under this method, fixed manufacturing overhead is not treated as a product cost but rather is incurred the period that a product is produced.

Absorption costing is when you treat all manufacturing costs as product costs, regardless of whether they are variable or fixed. This includes direct materials, direct labor, and both the variable and fixed portions of manufacturing overhead. Because absorption costs includes all manufacturing costs in product costs, it is frequently referred to as the full cost method. Sometimes, the net income under absorption costing can be higher than that calculated by variable because the product costs is capitalized in the inventory until sold.

An example of setting up an income statement for the two cost methods:

From what I can gather, both methods have their benefits and drawbacks.

The advantage of absorption costing is that: 
  • It hides details when you need to report to external investors.
  • It takes into account indirect costs. 
  • And some argue that it paints a more accurate picture of a company's economic health. 
The disadvantage of absorption costs is that: 
  • Because it bundles fixed and variable costs into the same product, it can be difficult to truly discern what is a product "cost." 
  • You can also hide costs in the inventory to make net income larger.
  • If fixed overhead costs vastly exceed variable costs, it can be hard to see the effects of production decisions.
The advantage of variable costing is that:
  • Fixed cost effect is transparent on the income statement.
  • Takes into account total cost of investments. When you finally sell your products, you may experience surplus net income.
  • Enables cost volume profit analysis.
  • Clear income statement
  • Correctly identifies variable cost effects
The disadvantage of variable costing is that:
  • Difficulty separating fixed and variable costs
  • Loads costs heavily early on. Even if you don’t sell all the products you make, you must deduct the full cost of fixed overhead.
  • Not GAAP.

Climbing at Echo Cliffs, Santa Monica Mountains, CA

On Friday, we all packed ourselves into one car and made our way towards the Santa Monica Mountains. Our destination: Echo Cliffs. To get to Echo Cliffs, you park at the Backbone Trailhead. The address is:

Backbone Trail
Malibu, CA 90265
Coordinates: 34.114173, -118.918171

Mountain Project Link: Echo Cliffs

Park at any of the two gravel parking lots and begin on the trail head. For about 2 miles, hike on the Backbone Trail until you can see Echo Cliffs. Then, you take the river shortcut down to the base of the cliffs. I can't really describe the river shortcut, and you may need someone whose been there to point it out, but you can try to get an idea from my pictures.

Once you find yourself at Echo Cliffs, have fun. There are an abundance of routes for you to try that caters to all levels. During our time there, we managed to play on Left Flank and Java Wall. In particular: Bushed Coyote (5.10c), The Sumac Route (5.8), Morning Glory (5.8), Bushwacked (5.8), B-Line (5.10a), Black Tide (5.9), Espresso (5.11a), and Americano (5.11a).

Great time climbing. Was there from 9am til sunset.

Debt vs No Debt (AKA good MBA versus cheaper MBA)

During the decision process, some applicants will have to decide whether to go to a better ranked school with limited financial aid or go to a lower ranked school with a very attractive scholarship package.

So what is the right choice to make? The answer is: it depends.

If you're an incredibly ambitious finance person and the MBA is the natural next step in your career, then it's almost a no-brainer to go to the best ranked school you can get into. Especially if you're making around 100k or lower.

However, if you're a career changer, that's when things get complicated. There are simply too many variables that can determine your success or failure during your journey. Regardless, at minimum you need to fully explore both possibilities before pressing forward. Only when you have a pretty good objective idea of the pros and cons of either decision, can your choice be vindicated.

Some pros of going to a high ranking MBA program with little/no scholarship:

1. Connections will help you get an interview
2. Name brand will help you get an interview
3. Access to top education resources and career center
4. Alumni network will help you get an interview
5. If you get the job, you can leverage your education for a high or higher salary.
6. Recruiters

Some cons of going to a high ranking MBA program with little/no scholarship:

1. Debt. Perhaps around 100-140k debt.
2. No guarantee of getting high paying job.

Some pros of going to a lower ranking MBA program with full/large scholarship:

1. No debt.
2. Smaller class size, potentially higher quality education experience for you.

Some cons of going to a lower ranking MBA program with full/large scholarship:

1. No brand recognition, perhaps the brand will even hurt you when people see your resume.
2. Lack of connections and alumni network.
3. Limited access to educational resources like a good career center.
4. Lack of companies during recruitment

In essence, the main con of going to a high ranking MBA program with no scholarship is the danger of graduating with a lot of debt and no job or a low paying job. Debt is no joke and you absolutely need to devote time into deciding whether you're capable of dealing with it. At the end of the day, the people who advise you will not have to pay the banks back, you will, so think carefully. You may even end up taking a job you don't like in order to pay off your loans quickly. On the flip side, if you fully take advantage of the resources available to you at an amazing program and leverage it correctly, the experience can pay dividends almost instantly. So, high risk, high reward for career changers.

In my opinion, for career changers whose previous work experience is a complete 180 degree shift from their new MBA concentration, going to a great school guarantees you the interview, but it doesn't guarantee you the job. I worry that previous work experience will be an important final determining factor in the end.

Now, on the other hand, the main cons of going to a lower ranked MBA program is typically connections and name brand. Once you graduate, or even during recruiting, you may need to work a bit harder at getting your name out there to companies that interest you. Your campus may not attract that many companies, or it may, it depends. But there lies the beauty of a heavily subsidized education; worst case scenario is that you lost time and a little bit of money to this MBA endeavor. You could always fall back to your previous occupation. More attractively, you're free to explore what job interests you without the shadow of debt on your back (depending on the size of your scholarship that is).

Ultimately, the choice is up to you. Ask people their opinions, try to get a good mix, not just people who echo what you want to hear. Gather everything you can find, and try and objectively identify the drawbacks and benefits of each decision as it pertains to you. Then make a decision. As long as you make an effort to really flesh out each possibility, I think whatever choice you make is correct. After all, this is your future not that of other people.

My Thoughts on Volunteering

Of all the organizations available to me at ASU, joining the volunteer council was the most obvious.

Ever since Key Club at Westmont High School, I have been volunteering my time when possible. Like many kids at the time, I initially saw volunteering as a means of padding my college application. But as time went on, I genuinely found myself enjoying the experience. In particular, I really enjoyed events where I was physically active (planting trees, preparing lunches, moving books, cleaning...etc). I found it all very therapeutic.

To me, there were many attractive elements to volunteering aside from helping people. For one, volunteering was a time where I could be alone with my thoughts and reflect on the week's events. For another, I found the quality of people at the events to be typically high. Regardless of age, gender, or ethnicity, the people I met at volunteering events, especially the "mundane" events (weeding, planting trees, trash pickup), were often nice individuals who had many stories to share and advice to give.

These days however, I find myself volunteering less and less. Most of it of course, has to do with the intensity of the program and how much time it demands of you. However, once I have the time, I would like to look into becoming a Big Brother or foster animals.

 Helping with weeding at the local non-profit farm

 Helping move books into the new building for the non-profit "10 Books A Home," an organization designed to offer less fortunate children an opportunity to read and interact with someone.

In front of the new building for the non-profit "10 Books A Home."

Clearing invasive species from the bay

Prepping hotdogs for the Backpack Distribution Fair for the Salvation Army. The week prior, we filled backpacks with essential school supplies for less fortunate children. We then gave them out.


Suzuki and Miyaura Reaction

Suzuki and Miyaura reactions are really useful in chemistry.

Combined, you can create almost any C-C bond and avoid the sometimes unpredictable behavior of Buchwald reactions. All you need is the brominated version of your two reactants or even better, one brominated and one boronated. If you don't have the boronic ester of your starting material, chances are, there is probably a brominated version of it somewhere, in which case, you could then easily convert to the boronic ester via the Miyaura. Although Suzuki don't necessarily work 100% of the time, the yields are typically still decent and the predictability of whether it'll work between different reactions is less random than Buchwalds.

Simple ROI Calculations on MBA

The return on investment (ROI) of getting an MBA is a calculation that roughly predicts how many years it will take to pay off getting a MBA.

ROI Calculation: ((2-year opportunity cost) + (Full program cost)) / ((Theoretical Post MBA Salary-Original Salary))**

**This equation is an extremely basic predictor that leaves out many important variables, such as additional costs of living, and aims to primarily gives you an idea of who should and who shouldn't pursue an MBA from a salary point of view.

Original Salary (USD)40,000.00
2-year opportunity cost (USD)80,000.00
Theoretical Post MBA Salary (USD)90,000.00110,000.00120,000.00140,000.00
Salary difference (USD)50,000.0070,000.0080,000.00100,000.00

Program Cost Annual (USD)Full Program Cost (USD)Full Opportunity cost (USD)ROI on 90,000 (years)ROI on 110,000 (years)ROI on 120,000 (years)ROI on 140,000 (years)
Debt Payback on 90,000 (years)Debt Payback on 110,000 (years)Debt Payback on 120,000 (years)Debt Payback on 140,000 (years)

Original Salary (USD)50,000.00
2-year opportunity cost (USD)100,000.00
Theoretical Post MBA Salary (USD)90,000.00110,000.00120,000.00140,000.00
Salary difference (USD)40,000.0060,000.0070,000.0090,000.00

Program Cost Annual (USD)Full Program Cost (USD)Full Opportunity cost (USD)ROI on 90,000 (years)ROI on 110,000 (years)ROI on 120,000 (years)ROI on 140,000 (years)
Debt Payback on 90,000 (years)Debt Payback on 110,000 (years)Debt Payback on 120,000 (years)Debt Payback on 140,000 (years)

Original Salary (USD)60,000.00
2-year opportunity cost (USD)120,000.00
Theoretical Post MBA Salary (USD)90,000.00110,000.00120,000.00140,000.00
Salary difference (USD)30,000.0050,000.0060,000.0080,000.00

Program Cost Annual (USD)Full Program Cost (USD)Full Opportunity cost (USD)ROI on 90,000 (years)ROI on 110,000 (years)ROI on 120,000 (years)ROI on 140,000 (years)
Debt Payback on 90,000 (years)Debt Payback on 110,000 (years)Debt Payback on 120,000 (years)Debt Payback on 140,000 (years)

Original Salary (USD)70,000.00
2-year opportunity cost (USD)140,000.00
Theoretical Post MBA Salary (USD)90,000.00110,000.00120,000.00140,000.00
Salary difference (USD)20,000.0040,000.0050,000.0070,000.00

Program Cost Annual (USD)Full Program Cost (USD)Full Opportunity cost (USD)ROI on 90,000 (years)ROI on 110,000 (years)ROI on 120,000 (years)ROI on 140,000 (years)
Debt Payback on 90,000 (years)Debt Payback on 110,000 (years)Debt Payback on 120,000 (years)Debt Payback on 140,000 (years)

So what do these tables mean? Lets look at the 70k table for example.

First, Original Salary is how much you are making now. 

Original Salary (USD)70,000.00

2-year opportunity cost is the cost of going to school for two years without pay (ignoring paid internships).  

2-year opportunity cost (USD)140,000.00

Theoretical Post MBA Salary is just a reasonable salary range that a freshly graduated MBA student might expect, depending on their profile and prior experience.

Theoretical Post MBA Salary (USD)90,000.00110,000.00120,000.00140,000.00

Salary difference is the difference between their post MBA salary and their original salary. 

Salary difference (USD)20,000.0040,000.0050,000.0070,000.00

Full opportunity costs is the sum of the cost of the entire program and the two years of lost salary. The cell values descend according to different program costs.

Full Opportunity cost (USD)

And the ROI portion of the table details how long it would take at various post-MBA salaries to pay back your education when you take into consideration the full opportunity costs.

ROI on 90,000 (years)ROI on 110,000 (years)ROI on 120,000 (years)ROI on 140,000 (years)

However, if you're mainly interested in how long it'll take to pay back the MBA and want to ignore opportunity costs, Debt Payback would be how long it would take for you to pay your loan back.

Debt Payback on 90,000 (years)Debt Payback on 110,000 (years)Debt Payback on 120,000 (years)Debt Payback on 140,000 (years)


Take-aways from the chart.

It's hard to write down any defining, all-encompassing, rules to take away from this exercise because there are so many variables to consider beyond just how much you're making now and how much you might make later.

Just take a good look at yourself and be honest with your abilities. That's the first step to getting any value from these charts. For instance, if you're all around just an unspectacular, but not bad, average applicant, making 70k, and expect to make 90k coming out, it'll take you anywhere from 4-7 years to pay off your education. 7-13 years if you want to consider those two years of not working as money lost as well.

However, if you're making 40k only and can land a full scholarship cause you're amazing, it's essentially a no-brainer to pursue an MBA, especially if it adds value to your career. In almost every case you'll be making money instantly after your first year graduating.

Just remember that most applicants are around 28-29 when they enter and 30-31 when they leave. How old will you be when you finally pay off your loan?

As a reminder, the sheet doesn't take into account whether or not an MBA actually advances your career, whether or not it can actually benefit you, or even the type of job you will get coming out, it simply plays around with salary numbers. It doesn't fully embody the cost of living as well. 
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