Unit 13 Managing Financial Principles

8/10/2019 Unit 13 Managing Financial Principles

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Graduate School of

Governance and Leadership

EXTENDED DIPLOMA INSTRATEGI MANAGEMENTAND LEADERS!IP

"nit #$% Mana&in& 'inancial

Principles


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p

S/LLA*"S AND GENERAL G"IDE

Unit introduction will be sentseperately

Learning outcomes andassessment criteria will besent seperately

Recommended Textbook willbe sent seperately


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"nit ontent1. Cost Concepts2. Forecasting Tecni!ues

". #udgeting$. Cost %anagement&. 'trategic (n)estments

*. Financial +nalysis


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Assess-entFor tis unit, learners sould-ocus on te preparation o- a

business plan, -or a proposedbusiness )enture new business,expansion o- an existing

business, or real estate/.


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Assess-entRe!uirements0xecuti)e 'ummary

#usiness escriptionFinancial 3lan sowing budgets,pro4ected 5nancial statements,

5nancial analysis, and a4usti5cation o- te in)estment


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Assess-entTe pro4ect sould be about 16pages in lengt. 8our response

sould incorporate terminologyand concepts presented in tecourse as well as supplementary

resources. ac paragrapsould be written in complete

sentences wit attention to good


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Assess-entUsing te +3+ -ormat, pleasedouble9space, use 12 point -ont,

wit one inc margins. #e sure tocite your resources and pro)idete re-erences. #e sure to

include te URL or link to tesites you researced.


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# 0 OST ONEPTS

OSTS AND PRIES(n absorption costing, all o)eread costsassociated wit manu-acturing a product

become a part o- te product:s cost basealong wit te direct costs. Tere-ore, allmanu-acturing o)eread costs must beallocated to te units produced.


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# 0 OST ONEPTS

OSTS AND PRIESUnder )ariable costing also calleddirect costin&/, 5xed -actory o)ereadsare a

period costtat are expensed in

te period wen tey are incurred. Tismeans tat no matter wat te le)el o-sales, all o- te 5xed -actory o)ereads

will be expensed in te period wenincurred.


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# 0 OST ONEPTS

OSTS AND PRIES1aria2le costin& is not GAAP+ Forexternal reporting purposes, GAAP

re3uires the use of a2sorptioncostin& -or 5xed manu-acturing costallocation, and tere-ore )ariable costingcannot be used -or external 5nancial

reporting. ;owe)er, many accountants-eel tat )ariable costing is a better toolto use -or internal analysis, and

tere-ore )ariable costing is o-ten used


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# 0 OST ONEPTS

OST S/STEMSOpportunit4 cost is a type o- implicitcost. or te


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# 0 OST ONEPTS

OST S/STEMSProcess costin& is used wen manyidentical or similar units o- a product orser)ice are being manu-actured, suc ason an assembly line. Costs areaccumulated by department or byprocess.

5o2 order costin& is used wen units o-a product or ser)ice are distinct and

separately identi5able. Costs are


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# 0 OST ONEPTS

OST S/STEMSOperation costin& is a h42rid) orco-2ination) of 6o27order costin&and process costin&. (n tis metod o-costing, a company applies te basicoperation o- process costing to aproduction process tat produces

batces o- items. Tese di?erentbatces all -ollow a similar process, butte direct materials tat are input to

eac batc are di?erent.


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# 0 OST ONEPTS

OST S/STEMSStandard cost system assignsstandard, or planned, costs to unitsproduced. Te standard cost o-producing one unit o- output is based onte standard cost -or one unit o- eac o-te inputs re!uired to produce tat

output unit, wit eac input multipliedby te number o- units o- tat inputallo8ed -or one unit o- output. Te

inputs include direct materials, direct


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RESPONSI*ILIT/ AND ONTROL O'S/STEMS

+ responsibility center is any part,segment, or subunit o- an organi@ation.+ segment may be a product line, ageograpical area, or any otermeaning-ul unit. Companies will a)e

di?erent segments based on teiracti)ities. Responsi2ilit4 accountin&is an accounting system tat measures

accounting results o- eac responsibility


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+ responsibility center:s plans areexpressed in its budget, and te actualresults -or tat responsibility center areten compared against its budget todetermine ow well it is acie)ing its

plans. Te budget is de)eloped by teresponsibility center and appro)ed bytop management. +ll o- te responsibil9

ity centers combined make up te


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For instance, a 'ales #udget isde)eloped -or eac indi)idualresponsibility center and all teresponsibility centers: budgets togetermake up te consolidated 'ales #udget.

Consolidating all te di?erent budgets-or all te di?erent responsibility centersis part o- te process o- de)eloping te

%aster #udget.


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Te main purposes -or responsibilitycenters and responsibility accounting arete e)aluation o- subunits: per-ormanceand to contribute to measuring teper-ormance o- te subunits: managers.

%anager per-ormance measurementpro)ides moti)ation -or managers o- tesubunits, wic in turn bene5ts te

company as a wole.


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Te manager o- a responsibility centersould a)e te ability to control, or atleast signi5cantly inAuence, te resultso- te center o)er wic e or se ascontrol. For example, a person

responsible -or training in a companysould not be granted or denied a bonusbased on te world price o- oil because

te training manager as no control o)er


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# 0 OST ONEPTS


Te main classi5cations o- centers, listedin order o- te most -undamental orbasic/ to te most complex, are01/ + ost enter is responsi2le onl4for the incurrence of costs. + cost

center does not earn any re)enue andtere-ore generates no pro5t. +ne!uipment maintenance department or

an internal ac9counting department is


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+ cost center is te least co-ple9 t4peof center since it as no re)enue orpro5t. %anagers o- cost centers are beste)aluated by )ariance analysis o- teirincurred costs. Te key standard -or

e)aluating a cost center is its e:cienc4of operations, wic measures weteror not te center as pro)ided te

re!uired ser)ices witin te budget.


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# 0 OST ONEPTS


+ Revenue enter is te opposite o- acost center in tat it is responsible only-or re)enues. For example, a salesdepartment is a re)enue center. Touge)ery department will incur some costs,

te costs incurred by a re)enue centerare generally immaterial and may note)en be controllable by te center.


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For example, a re)enue center:s costsmay simply be allocated to tem by tecentral company. %anagers in re)enuecenters are e)aluated according to tele)el o- re)enue tat te center

generates. E;ectiveness is te key -orteir e)aluation.


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# 0 OST ONEPTS


+ Pro


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# 0 OST ONEPTS


(n a pro5t center, 2oth e:cienc4 ande;ectiveness are assessed, butpriority is gi)en to e?ecti)eness. (n -act,te pro5t can be treated as te goal tobe acie)ed.


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# 0 OST ONEPTS


+n Invest-ent enter is responsible -orpro5t re)enues and costs/ and -or

pro)iding a return on te capital tat asbeen in)ested into it by te largerorgani@ation to wic it belongs. #ecause it

is responsible -or a return9on9in)estment,tis type o- department is te most like aregular and complete business by itsel-.

;owe)er, it is still part o- a larger


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= 0 'OREASTING TE!NI>"ES

'OREASTING AND *"DGETING


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'OREASTING AND *"DGETING =en identi-ying premises, it is

essential tat management -ocus onlyon tose tat will actually impact tepotential success o- te business

Focusing on premises tat are not acritical part o- te organi@ation:s

success wastes )aluable time andresources

'ome premises will a?ect te wole

company, wereas some premises will


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'OREASTING AND *"DGETING i?erent departments will a)e di?erent

premises because o- te uni!ue tasksand circumstances tey -ace

Te 5nance department may beconcerned about te expected interestrate, but te interest rate will not impact

te production department in te-ul5llment o- its ob4ecti)es Te rate o- growt in te economy and

te rate o- inAation expected during tebud et eriod will robabl im act


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MAT!EMATIAL MODELS

+re commonly used in -orecasting. +matematical model is an e!uation tatattempts to represent an actual situation.

For example, i- a company as a producttat it sells -or 1,666 eac, and i- we useR to represent total re)enue, te total

re)enue tat te company will earn bysellingx units can be represented by te-ollowing e!uation or matematical model0R ? #)@@@x For a model to be use-ul, itmust be a ood re resentation o- te real


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OLLETING DATA 'OR A 'OREAST

(n -orecasting, istorical data is used in)arious ways. =e may look at te past todisco)er a pattern -or use in predicting te

-uture or we may look at te pastrelationsip between two -actors todetermine i- tere as been a cause9and9

e?ect relationsip tat can be used topredict -uture results. Collecting te data isusually te most diBcult step in analysis.


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'OREASTING MET!ODS

1/ Ti-e series -ethods, wic look onlyat te istorical pattern o- one )ariableand generate a -orecast by extrapolating

te pattern using one or more o- teco-ponents or patterns/ o- te timeseries, and

2/ ausal forecastin& -ethods, wiclook -or a cause9and9e?ect relationsipbetween te )ariable we are trying to-orecast te dependent varia2le/ andone or more oter )ariables te


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'OREASTING MET!ODS

1/ Ti-e series -ethods, wic look onlyat te istorical pattern o- one )ariableand generate a -orecast by extrapolating

te pattern using one or more o- teco-ponents or patterns/ o- te timeseries, and

2/ ausal forecastin& -ethods, wiclook -or a cause9and9e?ect relationsipbetween te )ariable we are trying to-orecast te dependent varia2le/ andone or more oter )ariables te


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TIME SERIES ANAL/SIS

Time series analysis looks at patterns o-te desired )ariable o)er time. Tesepatterns -rom te past are ten used to

-orecast a -uture result. + time series maya)e one or more o- -our patterns alsocalled co-ponents/ tat inAuence its

bea)ior o)er time01/ Trend2/ Cyclical"/ 'easonal$ (rre ular


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Trend Pattern


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4clical Pattern+ long9term trend line can still beestablised e)en i- te se!uential data

Auctuates greatly -rom year to year due tocyclical -actors. +ny recurring Auctuationtat lasts longer tan one year is

attributable to te c4clical co-ponent o-te time series. Te cyclical component isusually due to te cyclical nature o- teeconomy.


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Seasonal PatternTime series can Auctuate witin te yeardue to seasonality in te business. For

example, a swimsuit company:s saleswould be igest during te warm summermonts, wereas a retailer o- skis would

experience its peak sales in tewintertime.


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Seasonal PatternTime series can Auctuate witin te yeardue to seasonality in te business. For

example, a swimsuit company:s saleswould be igest during te warm summermonts, wereas a retailer o- skis would

experience its peak sales in tewintertime.


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Irre&ular Pattern+ time series can also )ary in a randompattern, not repeating itsel- in any regular

pattern. Tis is called te irre&ularpattern. (t is caused by sort9term,nonrecurring -actors, and its impact on te

time series cannot be predicted.


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"SING TIME SERIES IN 'OREASTING

ANAL/SISTe ob4ecti)e o- time series analysis is tode)elop a -orecast -or -uture results. =e

need to someow take te pastin-ormation and pro4ect it into te -uture. (norder to do tis, we need to make

decisions about wat weigt amount o-importance/ we will gi)e to te past data.=e can understand tat a result -rom 12years ago is o- less )alue in pro4ecting te

next eriod tan te re)ious eriod is.


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"SING TIME SERIES IN 'OREASTING

ANAL/SISTime series metods are used in-orecasting in two ways tat try to take

past in-ormation and -orecast it into te-uture.1/ S-oothin& mo)ing a)erages,

weigted mo)ing a)erages andexponential smooting/, and2/ Trend pro6ection including trendsad4usted -or seasonal inAuence/.


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TREND PRO5ETION AND REGRESSION

ANAL/SIS=en a time series is consistentlyincreasing or decreasing, smooting

metods are not appropriate -or-orecasting. (nstead, a time series tat asa long9term upward or downward trend can

be -orecasted by means o- trendpro6ection. + trend pro4ection is done witsi-ple re&ression anal4sis) wic-orecasts )alues using istorical

in-ormation -rom all a)ailable ast


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ANAL/SIS'imple linear regression analysis relies ontwo assumptions0

Gariations in te dependent )ariable i.e.,wat we are -orecasting/ are e9plained24 variations in one sin&le

independent varia2le i.e., te passageo- time, i- a time series is wat we are -ore9casting/. Te relationsip between te

inde endent )ariable time or a s eci5c


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ANAL/SIS+ linear relationsip is one in wic terelationsip between te independent

)ariable and te dependent )ariable canbe approximated by a straigt line on agrap. Te regression e!uation, wic

approximates te relationsip, will grapas a straigt line.


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ANAL/SISTe e!uation o- a linear regression line is0 ? a9 2

=ere0 H te predicted )alue o-y on teregression line corresponding to eac

)alue o-xa H te slope o- te lineb H tey-intercept, or te )alue o-y wenx is @ero 6/

x H te )alue o-x on te x9axis tat


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ANAL/SIS#e-ore relying on regression analysis tode)elop a -orecast, a correlation

anal4sis sould be per-ormed. Correlationanalysis determines te stren&th of thelinear relationship 2et8een thex

values and their related y values+Teresults o- te correlation analysis tell te-orecaster weter te relationsipbetween te dependent )ariable sales, -or

exam le and te inde endent )ariable


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ANAL/SISTe coe:cient of correlation measureste relationsip between two )ariables.

Te coeBcient o- correlation is a numbertat expresses ow closely connected, orcorrelated, te two )ariables are and te

extent to wic a cange in one )ariableas istorically resulted in a cange in teoter.Te coe:cient of correlation,

re resented b r or R , is a numerical


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ANAL/SIS(- r is a positi)e number close to # sucas 6.I"/, tis indicates tat te data points

-ollow a linear pattern -airly closely and tepattern is upsloping -or example, in a timeseries sales are in9creasing as te time

mo)es -orward/. + -orecast made -rom tisdata using simple regression analysissould be -airly accurate.


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ANAL/SIS(- r is a negati)e number close to B#suc as J6.KK/, tis indicates tat in a

time series te data points -ollow a linearpattern and downsloping instead o-upsloping -or example, sales are

decreasing as te time mo)es -orward/. +-orecast made -rom tis data using simpleregression analysis would also be -airlyaccurate, toug not as accurate as te

re)ious exam le o- an u slo in attern,


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ANAL/SIS+ -oderate correlation coeBcient, r,generally de5ned as M6."6 to M6.$N/

indicates a lower amount o- correlation and!uestionable )alue o- te istorical data-or -orecasting.

+ lo8 correlation coe:cient, r, aroundM6.16/ indicates tat a -orecast made -romtis data using simple regression analysis

would not be use-ul.


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ANAL/SISTe coeBcient o- correlation, r, doesnoting to tell us ho8 -uch o- te

)ariation in te dependent )ariable isexplained by canges in te independent)ariable. (t tells us only weter tere is a

direct upsloping/ or in)erse downsloping/relationsip between te )ariables and testrengt o- tat relationsip.


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ANAL/SIS(n a simple linear regression wit only oneindependent )ariable, te coe:cient of

deter-ination is the s3uare of thecoe:cient of correlation. TecoeBcient o- determination is represented

by te term r2 or R2/ and it is tepercenta&e of the total a-ount ofchan&e in the dependent varia2le ,y.that can 2e e9plained 24 chan&es in

the inde endent varia2le x ..


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ANAL/SISR2 is expressed as a number between 6and 1. (n a regression wit a ig

coeBcient o- determination r2/, te datapoints will all lie close to te trend line. (n aregression wit a low r2, te data points

will be scattered at some distance abo)eand below te trend line. Te iger ter2, te better te predicti)e ability o- telinear regression. +n r2 abo)e 6.&6 &6O/

indicates tat te -orecast ielded b


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M"LTIPLE REGRESSION AND A"SAL

'OREASTING(- only one independent )ariable suc asad)ertising expenditures/ is a?ecting te

dependent )ariable suc as sales/ and i-te relationsip between tem is linear,regression analysis is called simple linear

regression. ;owe)er, it is also possible -orte dependent )ariable suc as sales to bea?ected by -ore than one independent)ariable. +d)ertising expenditures, te si@e

o- te sales sta?, com etition, te


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'OREASTING=en more tan one independent )ariableis known to impact sales and eac one can

be expressed numerically, regressionanalysis using all o- te independent)ariables to -orecast te dependent

)ariable is called -ultiple re&ressionanal4sis. %ultiple regression analysis isanoter type o- causal -orecasting.


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'OREASTINGTe e!uation o- tis tree9dimensionalmultiple regression -unction is0 = a1x1

+ a2x2 + b =ere0 H te predicted )alue o-y on teregression line corresponding to eac

)alue o-x1 andx2a1, a2 H )ariable coeBcients, similar tote slope o- te lineb H te constant coeBcient, tey9

interce t, and te )alue o- wenx1 and


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*ENE'ITS O' REGRESSION ANAL/SIS

Regression analysis is a !uantitati)emetod and as suc it is ob4ecti)e. + gi)endata set generates speci5c results. Te

results can be used to draw conclusionsand make -orecasts. Regression analysis is an important tool

-or budgeting and cost accounting. (nbudgeting, it is )irtual9ly te only way tocompute 5xed and )ariable portions o-costs tat contain bot 5xed and )ariable

com onents -i9ed costs . Te use o-


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LIMITATIONS O' REGRESSION

ANAL/SIS To use regression analysis, istorical datais re!uired -or te )ariable tat is being

-orecast or -or te )ariables tat are causalto tis )ariable. (- istorical data is nota)ailable, regression analysis cannot be

used. )en wen istorical data is a)ailable, itsuse is !uestionable -or predicting te-uture i- a signi5cant cange as taken

lace in te conditions surroundin tat


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LIMITATIONS O' REGRESSION

ANAL/SIS (n causal -orecasting, te use-ulness o-te data generated by regression analysis

depends upon te coice o- independent)ariables/. (- te coice o- independent)ariables/ is inappropriate, te results can

be misleading. Te statistical relationsips tat can bede)eloped using regression analysis are)alid only -or te range o- data in te

sam le.


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$ 0 *"DGETING

PLANNING AND *"DGETING

ONEPTS Te budget is de)eloped in ad)ance o-

te period tat it co)ers

(t is based on -orecasts and assumptions #udget is not someting tat is primarily

-or te purpose o- restricting wat can

be done (t is intended as a planning tool and is aguideline to -ollow in order to acie)ete company:s planned goals and

ob ecti)es


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*ud&et

+ budget is a detailed plan -orac!uiring and using 5nancial andoter resources o)er a speci5edtime period. + budget is temonetary plan o- operation o)er a

speci5ed period o- time, sowingtypes and amounts o- proposedexpenditures, te purpose o-

$ 7 *"DGETING


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*ud&et

(t is a -uture plan expressed inmonetary terms. Te act o-

preparing a budget is called tebudgeting process, and is ameans o- allocating scarce

resources to unlimited demands.

$ 7 *"DGETING


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Personal *ud&etsPearly e)eryone budgets to someextent, e)en toug many o- te

people wo use budgets do notrecogni@e wat tey are doing asbudgeting.

$ 7 *"DGETING


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Personal *ud&etsFor example, making estimates o-income, plan expenditures -or

-ood, cloting, ousing, andrestrict spending. )entougteses plans exist in te mind,

tey still constitute a budget and-ormali@ed by documentation.

$ 7 *"DGETING


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Not 0 for Pro


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I-portance of *ud&etin& #udgeting is )ery important to

te organi@ation especially in

monitoring cas Aows #ecause o- ig 5xed costs,

canges in re)enues and

expenses can be monitored by#udgets

=en actual 5gures -all sort o-

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I-portance of *ud&etin&


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#udgets pro)ide a means o-

communicating management:splans trougout teorgani@ation wen monetarystandards are set -or all to )eri-yand work witin te budget

limits #udgets -orce managers to tink

about and plan -or te -uture. (n

te absence o- bud ets man




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Te process pro)ides a means o-

allocating resources eBcientlyand e?ecti)ely to units o- teorgani@ation tat will producemaximum bene5ts. +dditionally,ma4or bottlenecks can be

unco)ered be-ore tey occur




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#udgets coordinate te

acti)ities o- te entireorgani@ation by integrating teplans o- )arious parts. Tus,ensuring tat e)eryone in teorgani@ation is pulling in te

same direction



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#udgeting is a tool used by

internal managers in -ormulatingstrategy and directing. 'incebudgets pro)ide direction -or teorgani@ation, it will not beprudent to place it witin te

reac o- tose outside teorgani@ation, includingcompetitors wo can make )ery

im ortant business decision tat

p & &



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Financial accounting uses

istorical data to prepare 5nancialstatements, wic lacks te abilityto predict -uture e)ents. #udgetsare based on 5nancial statementbut wit an added -eature to

-orecast e)ents.


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Ti-e fra-es for *ud&ets

#udgets can also be prepared on acontinuous basis. +t all times, te

budget co)ers a set number o-monts, !uarters, or years into te-uture. ac mont or !uarter, te

mont or !uarter 4ust completed isdropped and a new montly or!uarterly budget is added to te

$ 7 *"DGETING


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Methods of Developin& a

*ud&et#udget de)elopment can be done

using a participati)e process, anautoritati)e process, or aconsultati)e process.

+ participative budget isde)eloped -rom te bottom up. +llte people a?ected by te budget

$ 7 *"DGETING


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*ud&etTis type o- budget de)elopment

in)ol)es negotiation betweenlower9le)el managers and seniormanagers.

+n authoritative budget isde)eloped -rom te top down.'enior management prepares all

$ 7 *"DGETING


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*ud&et+ consultative budget is a

combination o- autoritati)e andparticipati)e budget de)elopmentmetods. 'enior management

asks -or input -rom lower9le)elmanagers but ten de)elops tebudget wit no 4oint decision9

$ 7 *"DGETING

C OST MANAGEMENT


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C 0 OST MANAGEMENT

ost classi


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C 0 OST MANAGEMENT

Manufacturin& osts%ost manu-acturing companiesdi)ide manu-acturing costs intotree broad categories0 irect materials

irect labor %anu-acturing o)eread

C OST MANAGEMENT


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C 0 OST MANAGEMENT

Direct -aterials+re tose materials tat becomean integral part o- te 5nisedproduct, and can be pysicallyand con)eniently traced to it. For

example, te seats tat Toyotawill purcase -rom subcontractors,and install in )eicles.

C OST MANAGEMENT


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C 0 OST MANAGEMENT

Direct la2or(s reser)ed -or tose labor costtat can be pysically and

con)eniently traced to indi)idualunits o- product. For example,

labor cost o- carpenters, andmasons in building a ouse.

C OST MANAGEMENT


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C 0 OST MANAGEMENT

Manufacturin& Overhead%anu-acturing o)eread includesitems suc as indirect materials,

indirect labor, maintenance andrepairs on production e!uipment.

C 0 OST MANAGEMENT


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C 0 OST MANAGEMENT

Non-anufacturin& ostsPonmanu-acturing costs into twobroad categories0 %arketing or selling costs +dministrati)e costs

C 0 OST MANAGEMENT


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C 0 OST MANAGEMENT

Mar(etin& or sellin& costs(nclude all costs necessary tosecure customer orders and get

te 5nised product into teands o- te customer. For

example ad)ertising, sipping,sales tra)el, sales commission,and sales salaries.

C 0 OST MANAGEMENT


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C 0 OST MANAGEMENT

Ad-inistrative costs(nclude all executi)e,organi@ational, and clerical costs

associated wit te generalmanagement o- te organi@ation.

C 0 OST MANAGEMENT


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C 0 OST MANAGEMENT

Product osts versus Periodosts(n addition to manu-acturing and

nonmanu-acturing cost, anoterway to look at costs is te

categori@ation o-0 3roduct Costs 3eriod Costs

C 0 OST MANAGEMENT


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C 0 OST MANAGEMENT

Product osts(nclude all te cost tat arein)ol)ed in te ac!uiring or

making a product, -or exampledirect materials, direct labor, and

manu-acturing o)eread.

C 0 OST MANAGEMENT


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C OST MANAGEMENT

Period osts+re all te costs tat are notincluded in te product costs.

Tese costs are expensed in teincome statement in te period it

occurs. +ll selling andadministrati)e expenses areconsidered period costs.

C OST MANAGEMENT


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C 0 OST MANAGEMENTOvervie8 of >ualit4 Mana&e-ent

To be an e?ecti)e manager and leaderat any le)el in an organi@ation0pri)ate, public or mixed sectors o- te

economy, one must a)e a clearunderstanding o- Q%, and its centralrole. Tere is a -ul5llment wen a-ter

se)eral unsuccess-ul e?orts to sol)e aproblem, and e)eryting comestogeter.

C 0 OST MANAGEMENT


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C OST MANAGEMENT

h4 is 3ualit4 i-portant

Customers expect !uality


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C OST MANAGEMENT

h4 is 3ualit4 i-portant Reduce -rustration -oroters

Retain 4ob and be rewarded

C 0 OST MANAGEMENT


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C OST MANAGEMENT


#u@@ell and ale 1NIK/, a)edocumented te relationsip

between excellent !uality andpro5tability.

C 0 OST MANAGEMENT


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C OST MANAGEMENT


Quality leads to strongercustomer loyalty

Repeat purcases Less )ulnerability to price wars

;iger relati)e prices> market

sare (mpro)ement in sare prices

Lower marketing cost

C 0 OST MANAGEMENT


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C OST MANAGEMENT


To a)oid tese costs, control is animportant issue in !ualitymanagement0

Rules and procedures

;ierarcy o- autority

(nspections at end o- line Quality control department

Formal training in !uality tools

C 0 OST MANAGEMENT


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C OST MANAGEMENT


Tecnology to de5ne workprocesses

3roducti)ity reporting

C 0 OST MANAGEMENT


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The ost of Lac( of >ualit4

(nternal0 re9work, scrap, re9test, etc/

xternal -ailures0 warranty

cost, recalls, loss o- goodwill,returns/

+ppraisal costs0 independent o-repair cost 3re)ention costs0 trial and

ex erimentation

C 0 OST MANAGEMENT


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OS G

Activit4 *ased ostin&

+cti)ity9based costing +#C/ isanoter way o- allocating o)ereadcosts to products, and in +#C temetod o- allocation is based oncost dri)ers. +s wit te otermetods, +#C is a matematicalprocess o- allocation and re!uiresidenti5cation o- te costs to beallocated.

C 0 OST MANAGEMENT


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Followed by some manner o-allocating tem to te produced

products. =e can use +#C in a)ariety o- situations and apply itto bot manu-acturing and

nonmanu-acturing o)ereads. (tcan also be used in ser)icebusinesses.

C 0 OST MANAGEMENT


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+n activit4 is an e)ent, task orunit o- work wit a speci5ed

purpose. xamples o- acti)itiesare designing products, settingup macines, operatingmacines, making orders ordistributing products

C 0 OST MANAGEMENT


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+ cost o26ect is anyting -orwic costs are accumulated

-or managerial purposes.xamples o- cost ob4ects are aspeci5c 4ob, a product line, amarket or certain customers.

C 0 OST MANAGEMENT


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+ cost driver is anyting it canbe an acti)ity, an e)ent or a

)olume o- someting/ tatcauses costs to be incurred eactime te dri)er occurs. xamples

o- cost dri)ers are set9ups,mo)ing, number o- parts,casting, packaging or andling.

C 0 OST MANAGEMENT


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Activit4 *ased ostin& 7 *ene


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Activit4 *ased ostin& 7 Li-itations

Pot e)eryting can be allocated strictly ona cost dri)er basis. Tis is particularly truein respect to -acility9sustaining costs

+#C is expensi)e and time consuming toimplement and maintain. (nclusion o-administrati)e o)eread in product costs isnot in compliance wit any generally

accepted accounting principles

0 STRATEGI IN1ESTMENT


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apital *ud&etin&

Capital budgeting metods include0

3ayback %etod

iscounted 3ayback %etodiscounted Cas Aow

Pet 3resent Galue

(nternal Rate o- Return



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Pa42ac( PeriodF Pa42ac( Method

(n using te 3ayback %etod, a companyusually cooses a period o- time in wicit wants its in)estments to Spay back

teir initial in)estments 3ro4ects wit payback periods o- lesstan tat amount o- time are candidates

-or -urter analysis wile pro4ects wit payback periods inexcess o- tat amount o- time are

re4ected witout -urter consideration



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Discounted Pa42ac( Method

Te iscounted 3ayback %etod alsocalled te 2rea(even ti-e/ is anattempt to deal wit te 3ayback

%etod:s weakness o- not consideringtime )alue o- money concepts

Te iscounted 3ayback %etod uses

te present )alue o- cas Aowsinstead o- undiscounted cas Aows tocalculate te payback period



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Discounted Pa42ac( Method

ac year:s cas Aow isdiscounted using an

appropriate interest rate,usually te company:s cost o-capital, and ten tose

discounted cas Aows are usedto calculate te payback period.


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Discounted ash 'lo8

iscounted cas Aow metods -ocuson te actual cas inAows andoutAows -rom te pro4ect rater tanusing income as te measurementbasis, as in accrual accounting

Cas Aow is used because we aremost interested in te cas returntat we can obtain in te -uture -or a

cas outlay now



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Discounted ash 'lo8

Te two main CF metods tatwe will look at in more detail

below are te0 Pet 3resent Galue metod and

Te (nternal Rate o- Returnmetod.



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Net Present 1alue Method

Te Pet 3resent Galue P3G/ metodcalculates te present )alue o- teexpected monetary gain or loss -rom a

pro4ect by discounting all expected-uture cas inAows and outAows to tepresent point in time

Using te re!uired rate o- return+ pro4ect:s P3G is te present )alue o-te pro4ect:s -uture expected cas Aows

minus te proposal:s initial cas outAow



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The Internal Rate of Return

Method

Te (RR is te discount rate at wicte P3G o- an in)estment will bee!ual to 6

(t is te discount rate at wic te

present )alue o- te expected casinAows -rom a pro4ect e!uals tepresent )alue o- te expected cas

outAows



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The Internal Rate of ReturnMethod

(- te (RR is iger tan te

5rm:s re!uired rate o- return,te in)estment is acceptable. (-te (RR is lower tan te

re!uired rate o- return, tein)estment sould not be made.



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apital *ud&etin& and

Ination +n in)estment o- 1,666 units o- a

product eac year -or -our years,will yield a net cas inAow o- 16per unit 8ith no ination. Tus,

we would expect a net casinAow o- 16,666 per year -or teli-e o- te pro4ect


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apital *ud&etin& and Ination

(t is te no-inal expected cas Aowstat will be recorded in te accountingsystem. Te net expected cas inAows

o- 16,666 are te real expected casAows, wic are not recorded in teaccounting system.


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H 0 'INANIAL STATEMENT ANAL/SIS


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Lia2ilitiesLiabilities occur wen a 5rmmay a)e to borrow money tobuy more assets. Tis meanste 5rm is buying assets on

account buy now, pay later/.xamples include loans andmortgages.



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E3uities!uities are te rigts or5nancial claims to te assets.

Tey belong to tose wosupply te assets. (- you are te

only person to supply assets tote 5rm, you a)e te sole rigtor 5nancial claim to tem.



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Revenue+ ser)ice company earnsre)enue wen it pro)ides

ser)ices to its clients. =enre)enue is earned, owner:s

e!uity is increased. (n e?ect,re)enue is a subdi)ision o-owner:s e!uity.



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Revenue(ncreases assets. Te increaseis in te -orm o- cas i- te

client pays rigt away. (- teclient promises to pay in te

-uture, te increase is calledaccounts recei)able.



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E9pensesxpenses are te costs incurredin carrying on te operations o-

an entity in te e?ort to createre)enue. xpenses are also a

subdi)ision o- owner:s e!uityEwen expenses are incurred,tey decrease owner:s e!uity.



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E9pensesxpenses can be paid -or incas or tey can be carged.

xamples o- expenses include0ydro, gas, telepone, salaries,

and oBce supplies.



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Net Inco-eFNet loss=en re)enue totals more tan

expenses, net income is teresultE wen expenses totalmore tan re)enue, net loss iste result.



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ithdra8al=itdrawal is wen te owner o-a business witdraws cas or

oter assets -rom te businessto pay li)ing or oter personal

expenses tat do not relate tote business. =itdrawalsdecrease owner:s e!uity.



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The Inco-e State-ent+n income statement is anaccounting report tat sows

results in terms o- re)enue andexpenses. (- re)enues are

greater tan expenses, tereport sows net income. (-expenses are greater tan



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The Inco-e State-ent(ncome statement is prepared-or a period, usually on montly

basis up to 12 monts or a 5scalyear. (t does not usually co)er

more tan a year. Te report isbased on all re)enues andexpenses trougout te entire

The Inco-e State-ent


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%+R8 '%(T; R


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The State-ent of O8nerJsE3uit4

Te statement o- owner:s e!uity

sows te canges tat a)eoccurred in te capital position

-or a certain period o- time.



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The State-ent of O8nerJsE3uit4

Te statement o- owner:s e!uity

summari@es te e?ects o- all tesubdi)isions o- owner:s e!uity

re)enue, expenses, andwitdrawals/ on beginningcapital. Te ending capital will

The State-ent of O8nerJs E3uit4


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%+R8 '%(T; R


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The *alance SheetTe balance seet reports teassets, liabilities, and owner:s

e!uity at a speci5c date. Tebalance seet is like a snapsot

o- te company:s 5nancialcondition at a speci5c momentin time. Total assets must e!ual

:

The *alance Sheet


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%+R8 '%(T; R


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State-ent of ash o8Te statement o- cas Aowssummari@es te sources and

uses o- -unds -or operating,in)esting, and 5nancing

acti)ities.



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Operatin& Activities


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Investin& Activities

(n)esting acti)ities are tosetat relate to lending moneyand collecting on loans,

ac!uiring and sellingin)estments and long9term

assets. xamples include tepurcase and sale o- plant ande!uipment, sares, bonds, and

STATEMENT O' AS! 'LO


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'inancin& ActivitiesFinancing acti)ities include casinAows and outAows relating to

liability and owners: e!uity.Tese are acti)ities relating toraising money -rom in)estors

and creditors suc as issuanceo- bonds and sares, retiringbonds, and paying di)idends.



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Direct and Indirect Methodsof ash o8s

Te operating acti)ities sectiono- te cas Aows statement ispresented using eiter a direct

or an indirect metod.


Direct and Indirect Methods


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Direct and Indirect Methods

of ash o8sTe direct metod presents teincome statement on cas9basis. Te indirect metodin)ol)es con)erting te accrual9

basis net income o- te incomestatement to te cas9 basis o-te net income.

" f 'i i l ti



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"sers of 'inancial ratios

Users o- 5nancial ratios includecommercial loan departments,corporate controllers, certi5edpublic accountants, and cartered5nancial analysts.

T f 'i i l ti



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T4pes of 'inancial ratios

Financial ratios are organi@ed into-our building blocks o- 5nancialstatement analysis0 Li!uidityratios, long9term debt payingability, pro5tability ratios, and

in)estor analysis.

Li idit ti



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Li3uidit4 ratios

Li!uidity re-ers to te a)ailabilityo- cas to meet sort9term casre!uirements and debtobligations. + company:s li!uidityposition is a?ected by cas

inAows and outAows and teability to sustain its -utureper-ormance.

Li idit ti



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Li3uidit4 ratios

Li!uidity analysis include0 Casratio, Current ratio, ays sales inin)entory, (n)entory turno)er, Current%aturities o- Long term debt and

current Potes 3ayable, 'ales toworking capital, and =orkingcapital.

Li idit ti



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Li3uidit4 ratios

ash ratio ? ash divided 24urrent lia2ilities,K$@)@@@F@)@@@ ? ##+K.urrent ratio ? urrent assetsdivided 24 urrent lia2ilities

,#)#H@)@@@F@)@@@ ? #H+.or(in& capital ? urrentassets -inus urrent

Lon&7ter- de2t pa4in& a2ilit4



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ratiosLong9term debt paying abilityratios or 'ol)ency re-ers to te

long9run 5nancial )iability o- anentity and its ability to co)er long9

term obligations.


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ratiosebt ratio, total debt, ebt>e!uity, and

Times interest earned.De2t ratio ? Total lia2ilities

divided 24 Total assets,@)@@@F#)$@)@@@ ? +##.De2tFe3uit4 ratio ? Total

Pro


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Pro


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Pro


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Investor anal4sis



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4

(n)estor analysis or %arket ratiomeasures are use-ul wenanaly@ing corporations: wit

publicly traded stocks and te useo- stock prices in )ariouscomputations. Ratios rele)ant toin)estor analysis include0 degree

Unit 13 Managing Financial Principles

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Transcript of Unit 13 Managing Financial Principles