Management Accounting
(Lecture 6): Potential problems in implementation of Target Costing
1 Lack of understanding of the target costing concept 2 Poor implementation of the teamwork concept 3 Employee burnout 4 Overly-long development time
(Lecture 6): What should total cost assessment take into account and what is the diff between *total COSTING approaches* and *total ASSESSMENT approaches*?
A total costs assessment should take into account 1) costs incurred by the producer 2) costs incurred by the user 3) costs for other stakeholders (society) However, total COSTING approaches generally *only consider* *costs* incurred *by producers and customers*. In contrast, total ASSESSMENT approaches also take into account *social* and *environmental* (monetary and non-monetary) *costs*. *** More recently, COSTING approaches also aim to take into account environmental costs (in case their monetary value can be determined).
(Lecture 4): How do enterprises generate profits - and sustain profitability? What explains high profit margins? + three steps to understand customer management
A firm *generates revenues* by *convincing consumers to buy* its products. Two economic rationales can explain high profit margins: - limited cometition - customer loyalty E.g: customer loyaly of Apple. Customer loyalty, is not the result of a coincidence, but of strong managerial focus on customers and in particular creating and serving customer needs. Three steps to understand customer management: 1. customer profitability (understand it, measure it and manage it) 2. customer lifetime value (understand it, measure it and manage it) 3. Beyond financial indicators (Estimating the CLV is difficult, nonfinancial indicators may provide practical proxies for the CLV)
(Lecture 1): What is the role of management accountant?
In general, management accountants should ensure (i) goal-oriented and (ii) rational management They act as 1. forward-looking PLANNERS (by PROVIDING INFO and METHODS FOR PLANNING PROCESS; by managing the planning process (strategic planning, capital budgeting, etc.) 2. backward-looking CONTROLLERS (by collecting information and comparing "actual vs. plan"; by communicating deviations and suggesting adjustments) 3. ...internal consultants (single- or project-based tasks; management topics, e.g. market analysis, implementation of new business processes) Following the PDCA cycle, management accountants are faced with various tasks (figure 4): management accountants design and support the management process of defining targets, planning and managing; they're liable for achieving org's targets *Key tasks*: planning, reporting and performance measurement *Related tasks*: design of IT systems; organize the work within the firm
(Lecture 6): Explain what is life-cycle costing LCC
Life-cycle costing (LCC) is a costing approach that registers and evaluates the costs arising throughout the expected life-cycle of the product, i.e. the costs to purchase, own, operate, maintain, and finally dispose of the product, in a structured manner. Generally, LCC DOESN'T consider (nonmonetary) environmental and other costs, while life-cycle assessment does. *** LCC was invented, because costs to own, operate, maintain, and dispose can be large.
(Lecture 8): Learning and growth perspective: Explain the importance of this perspective
learning and growth perspective *provides the foundation for the strategy. This perspective identifies the objectives for the people, information technology and organizational alignment that will drive improvements. HR: Skills, training, knowledge IT: Systems, databases, networks Org culture and alignment: Culture, goal alignment, Knowledge-sharing
(Lecture 8): Give an overview of strategy map
strategy map describes the "value creation narrative" of the organization. Together with the performance measures it provides the "value creation and performance measurement narrative" 1. Financial perspective = measures the tangible outcomes from the strategy - productivity - revenue growth 2. Customer perspective = customer value proposition defines the source of value - price, quality, time, function, service 3. Processes perspective = Strategic processes create value for customers and shareholders - Operations management process - customer management process - innovation process - regulatory and social process 4. Learning and growth = Aligned intangible assets -people, systems, and culture - drive improvement in the strategic processes and future performance - HR - IT - org culture and alignment
(Lecture 1): What is the role of Management Accounting for strategy development
Management accounting is the process of supplying managers and employees with relevant information (both financial and nonfinancial), for making decisions, allocating resources, monitoring, evaluating and rewarding performance. MA is a discipline that helps an enterprise to develop and implement its strategy MA structures info that enables informed strategy development by managers consistent with firm's mission and vision
(Lecture 7) Define the term "performance of the business". How can it be measured + formulas of ROI, WACC, and EVA
Performance of the business is the ability to generate operating profit with the least amount of capital ROI = Profit/ investment or ROI = Sales margin * Asset turnover, where - sales margin = profit/ sales - asset turnover = sales/ investment WACC (weighted average cost of capital) = (re x Ve/Vf)+ (rd x Vd/Vf) x (1- tax rate) re = cost of equity aka interest rare on equity Ve = value of equity Vd = value of debt Vf = value of firm aka total value rd = cost of debt aka interes rate on debt EVA = NOPAT (net operating income after taxes) - $ cost of capital, where $ cost of capital = amount of financial capital (investment) * WACC *!!! Please note that „Economic Profit", residual income, value creation, value added and EVA refer to the same concept!!!* Residual Income = operating income (EBIT) *after taxes* less the economic cost of the investment used to generate that income - Like ROI, residual income evaluates operating income after taxes relative to the level of investment required to earn that income - Unlike ROI, residual income does not motivate managers to turn down investments that are expected to earn more than their cost of capital
(Lecture 5): Name productivity improvements in the production that can ultimately make an impact on successful strategy implementation
Productivity improvements: 1. streamline/ optimize processes (design the production process to be as efficient as possible) - useful tools: carefully choosing process layout; measure cycle time, time spent on value-add activities and finally process cycle efficiency 2. managing bottlenecks and reducing inventory costs 3. improving quality and cycle times - useful tool: benchmarking
(Lecture 5): Quality issues and the cost of failure in the value chain: what is rule of 10?
Rule of ten: Every undetected source of failure in a value chain step costs ten times more to correct in the next value chain step
(Lecture 1) Figure 1 (pyramid of mission, values, vision, strategy) What defines a successful org?
Successful organizations are characterized by guard rails and guidelines that enable it to (i) access resources, (ii) implement efficient processes, and (iii) produce and deliver valuable products. In order to do so, an org must define a clear strategy to achieve its vision, which will in turn allow to access the right resources, implement efficient processes and produce/deliver valuable products. In order to reach success a company need to: 1. define the playing field within which it wants to operate 2. define it long-term goals 3. define the path, the plan how the org may develop from status-quo to its vision
(Lecture 5): What is the theory of constraints? Name and explain 3 measures of TOC
THe theory of constriants is a methodology for identifying the most importat limiting factor (i.e. constraint) that stands in the way of achieving a goal and then systematically improving that constraint until it is no longer the limiting factor. In manufacturing, the constraint is often referref to as a *bottleneck* Three measures on which TOC relies: 1. throughput contribution (difference between *revenue* and *cogs*) 2. investment (= material costs contained in raw materials, work-in-progress and finished goods inventories) 3. operation costs (all other costs, excluding direct materials that are needed to obtain throughput contribution) examples of op costs: depreciation, wages, utility costs, rent, etc.
(Lecture 6): what is target costing?
Target Costing - aims to enable a *customer-centric product design* that produces products with two characteristics: (1) products can be sold to the market for a given selling price with a given margin (price is derived from the market) and (2) products that provide the best 'customer value' for the given price - as such, it helps engineers design new products that meet customer's expectations and that can be manufactured at a desired cost Selling price (market price) = profit + direct/indirect costs AKA allowable costs Target costing has 5-step process: 1. Markt Research (aims to identify (1) drivers of customer use and a (2) potential market price) 2. Defining target costs (target costs are determined by the target price less the target profit) 3. Analyzing components (identify all relevant product components and link drivers of the customer's use to them) 4. Cost-benefit analysis (Comparing the relative costs identified in step 2 to the relative appreciation of a potential customer. Valuation of the suggested implementation option and graphical examination via a corresponding target costing graph) 5. Final assessment (approval of the project and initially suggested implementation option is based on the examination analysis for "consistency" and "completeness".) - Examine analyses for "consistency": Are all previous and basic analyses consistent with the underlying assumptions? - Examine analyses for "completeness": Did we consider all opportunities for cost reductions?
(Lecture 1): The PDCA-framework: define and explain (recall figure 3)
The PDCA-cycle is a simple but powerful framework to define, implement, monitor and control the strategy process 1. Plan = Identify objectives; Choose a course of action to achieve the desired objectives 2. Do = Implement the chosen course of action 3. Check = Monitor (measure) the results of the implemented course of action; Evaluate the results by comparing them with plans 4. Act = Maintain the current direction IF RESULTS ARE ACCEPTABLE. Otherwise, return to the plan stage and adjust plans ***In order to successfully develope a corporate strategy, there should be CONTINUOUS UPDATE of the inputs (essentially cont applying the PDCA approach). Thereby, it is IMPORTANT TO CRITICALLY CHALLENGE AND DEVELOP THE VISION and to carefully analyze the environment - and not just "review" the strategy. A pure "strategy review" is often not enough, even when current performance is good. INSTEAD firms should do BUSINESS TRANSFORMATION- revision of goals, adapting to new market developments, seizing opportunities, etc.
(Lecture 9): the classical agency view: incentive to mitigate agency problem
The classical agency view assumes "optimal contracting" between the board and the CEO aiming to align interests - Optimal contracting view: Powerful boards aims to align interests of managers with interests of shareholders and *set pay in a way that maximizes outcome for shareholders* (i.e., shareholder) value. [Executive remuneration mitigates agency conflicts, thus contributes to good governance] *** Performance-based compensation is one way that is used to achieve a balance between principal and agent. --------------------------------------------------------------------- refer to slide 25 in lecture 9
(Lecture 6): What is total cost of ownership and how does it extend LCC?
The total cost of ownership concept *extends LCC* for *pre-acquisition* and *'hidden' costs* LCC ignores pre-acquisition costs (e.g. research supplier analysis and selection, contracting) as well as costs for 'hidden' supporting activities. However, for some projects, products, or services pre-acquisition or 'hidden' costs might be substantial. The total cost of ownership (TCO) concept complements the LCC concept with any additional costs, i.e. preacquisition costs as well as 'hidden' costs not reflected in a LCC. ---------------------------------------------------------------------- Generally speaking: - LCC seems MORE APPROPRIATE when it comes to CAPITAL GOODS (where pre-acquisition and 'hidden' costs are considered less relevant), - TOC seems MORE APPROPRIATE for CONSUMER GOODS (e.g., IT equipment), and provided detailed information is available. Example: IT hardware (PC) LCC considers: Acquisition costs, shipping and installment, service and maintenance, operation costs (electricity), fees/taxes/other, salvage value and disposal costs TOC additionally considers: pre-acquisition costs, employee trainings, cost of IT service and support hotline
(Lecture 7): What are the implications of delegating decision-making?
- So far, we assumed a single (and omnipresent) decision-maker - We mostly were concerned with task control However, real-world organizations are characterized by multiple layers of management (decision-makers) Implications for managerial control within the firm: - Delegated decision-making is based on trust, incentives, and control. The latter two, need management accounting information - Management accounting information should no longer focus on tasks *but on outcomes* - for-profit organizations, outcome is mostly measured in terms of financial results --> financial performance measures
(Lecture 9): Who sets executive remuneration?
- The CEO and other C-level executives are hired (and fired) by the board (supervisory board). - The board (supervisory board) also decides on the remuneration policy for the CEO and C-level executives. - In some countries (e.g. Germany), the annual general meeting must approve the remuneration policy ('say-on-pay')
(Lecture 3): What is a cost management system?
A Cost Management System is a system consisting of [i] a cost accounting system that allows for a systematic evaluation of cost flows and cost implications (consequences) of managerial decisions and [ii] a set of managerial procedures that allow to optimize based on the information from the cost accounting system. ***cost accounting system is a framework that follows cost flows in the organization and assigns costs to cost objects
(Lecture 9): What are the three dimensions of executive incentives?
1. (external) market for managerial talent = individuals have the opportunity to be promoted to better positions Current trends: - in the last decade the period of CEO holding his position decreased from an average of 8 years to 6-7 years - simultaneously, there's been an increase of hiring CEO from outside the company rather than from inside. 2. awards - potentially interesting for the CEO, but may be detrimental for the firm (studies have found out that award-winning CEOs subsequently underperform, whilst extract more compensation following the award; They also spend more time on public and private activities outside their companies; etc.) 3. remuneration (reward) contract = example of CEOs receiving monetary bonuses of substantial size
(Lecture 1): Define and explain the structure of strategy process? (recall figure 2)
1. *Strategic Analysis or Strategic planning* Beginning with status quo, an organization should analyze its environment, resources, define its mission, vision and values ***Useful tools at this stage are: SWOT, Porter 5 forces model, PEST (Politics, Economy, Society, Technology) !!! strategic planning involves choosing a strategy that provides the best fit between the org's environment and its internal resources in order to achieve the objectives 2. *Strategy Development and Selection* - what are the fundamental objectives of the strategy: It should create a competitive advantage by positioning the company in its external environment where its INTERNAL RESOURCES and CAPABILITIES deliver something to its customers BETTER THAN or DIFFERENT FROM competitors It PROVIDES CLEAR GUIDANCE for where internal resources should be allocated and ENABLE ALL organizational units and EMPLOYEES TO MAKE DECISIONS and implement policies that are CONSISTENT WITH *achieving and sustaining the company´s competitive advantage* in the marketplace - what makes a good strategy?: A CLEAR STATEMENT OF COMPANY'S ADVANTAGE in the competitive market-place, what it does or intends to do differently, better, or uniquely compared to competitors ...a SCOPE WHERE the company INTENDS TO COMPETE MOST AGGRESSIVELY, either for targeted customer segments, technologies employed, geographic locations served, or product line breadth ***Useful tools at this stage are: GE McKinsey Nine-Box Matrix (aims to identify a clear strategy based on both industry attractiveness and competitive strength) or BCG-Matrix (guides fim's strategic portfolio choice based on rel market share and market growth) 3. *Strategy implementation* - means to define a strategic path and TRANSLATE IT INTO A LIST OF STRATEGIC INCENTIVES
(Lecture 7): What 3 perspectives should be acknowledged by organizational design? + desribe the term "responsibility center (RC)"
1. Accountability perspective (It needs someone accountable for each activity within the organization) 2. Responsibility perspective (It needs someone responsible for each planned activity) 3. Controllability perspective (Individuals should be judged only based on activities that are under their control) Organizations organize themselves in small entities, often referred to as "Responsibility centers" - The manager of a responsibility center (RC) is asked to run the business of the RC to achieve the objectives of the larger organization - Senior management *acts as supervisors* and *establishes goals for the RC management* - These goals should be: (i) specific and measurable so as to provide subordinated managers with focus (ii) promote the long-term interests of the larger organization, and (iii) promote the coordination of each responsibility center's activities with the efforts of all the others
(Lecture 2): BEV formula, CM(x) (contribution margin function), sensitivity analysis of BEV, minimum sales volume that allows for a specific profit (pre-tax and after-tax), determining min price, deciding on prod method
1. BEV means Profit= 0. BEV (x*) = Cf/ p-cv, where p-cv = cm 2. CM(x) = (p-cv)* x. Point in which CM(x) and Cf cross is the BEV point, because at that point cm offsets fixed costs, meaning they have been fully covered and onward profits are going to be made 3. *** sensitvity analysis of BEV: - when price p increases, then BEV decreases, shortens (will happen sooner) - when cf increases, BEV increases, extends (more x should be sold to reach profit of 0) - when cv increases, BEV increases, extends (because cm is smaller and therefore more products should be sold) - when cm increases, BEV decreases, shortens (less products should be sold to cover fixed costs) 4. minimum sales volume that allows for a specific profit (PRE-tax) Essentially we have to find x** to be sold to generate a cm which would cover both cf and a certain profit *** pre-tax profit = revenue - total costs x**= (cf+ prof before taxes) / (p- cv) (AFTER-tax): cm contributes to profit BEFORE-tax. This means to find x** we have to determine profit BEFORE-tax by discounting after-tax profit BEFORE-tax profit = AFTER-tax profit / (1-r) x**= (cf+ (prof after-taxes)/ (1-r)) / (p-cv) 5. determining min price: differentiate between short- and long-run - short-run: p min = cv, therefore cm = 0 in the short run, fixed costs have been committed, so we can't influence or change them. Therefore p min must cover relevant costs, meaning variable costs - long-run: p min = C (total costs) 6. choosing prod method Usually opt for prod mehtod with higher cm. Higher cm allows to earn more on every add. item sold. !!! however if there's high uncertainty of how sales are going to go, opt for prod method with lower cm. This is because in lower cm the volatility of profit is lower, meaning your profit won't react as sensibly to output variations
(Lecture 1) What is corporate objective and corporate strategy?
1. Corp objective- specific, realistic, measurable goal which an org plans to achieve withing a given period of time. 2. Corp strategy is a unique plan or framework that is long-term in nature, designed with an objective to gain a competitive advantage over other market participant while delivering both on customer-client and stakeholder promises (shareholder value) Corp strategy is a prerequisite (обов'язкова умова) for corp success Corp strategy is a manual on how to approach and achieve company's vision
(Lecture 7): Name four different archetypes of responsibility centers
1. Cost center - Controlled by center management = Costs - Not controlled by center management = Revenues, investment in inventory, and fixed assets - Measured by the accounting system = Costs relative to some target (usually a budget) - Not measured by the accounting system = Performance on critical success factors other than cost 2. Revenue center - Controlled = Revenues - NOT controlled = Costs, investment in inventory, and fixed assets - Measured = Revenue relative to some target (usually a budget) - NOT measured = Performance on critical success factors other than revenue 3. Profit center - Controlled = Costs and revenues - NOT controlled = Investment in inventory and fixed assets - Measured = Profit relative to some target (usually a budget) - NOT measured = Performance on critical success factors other than profit 4. Investment center - Controlled = Costs, revenues, and significant control over investment - NOT controlled = Sources of financing - Measured = Return on investment (ROI) relative to some target - NOT measured = Performance on critical success factors other than ROI **5. Stand-alone entity - Controlled = Costs, revenues, investments, and financing decisions - NOT controlled = --- - Measured = Economic Profit (or 'Value creation') aka EVA - NOT measured = ---
(Lecture 5): Describe how production proceses have evolved over the time
1. Craft manufacturing = Combination of man and machine - Tailored - Quality according to craftsman skill - High costs and prices - Long delivery times - Low volume 2. Mass manufacturing (Ford) = Mass production achieved through specialization of equipment and labor - Low customization - Good quality - Dramatic cost reduction and delivery time reduction - High volumes 3. Lean manufacturing (Toyota) = Just-in-time manufacturing, Lean production - Optimization of all resources - Focusing on the elimination of waste to ensure complete customer satisfaction - High flexibility - Low volume per type, high total volume - Low costs
(Lecture 8): Describe 3 steps to develop BSC framework
1. Define strategy = Starting from the status quo, mission, vision, and values, the management should define a strategy with high level strategic objectives 2. Develop strategy map of strategic objectives = The strategy map translates the strategy (incl. the high-level strategic objectives) into specific strategic objectives for the four dimensions of the BSC framework and ensures (hypotheses-based) causal relationships among the strategic objectives. The *specific strategic objectives* are *'action-phrase'-style* *concise statements* of 3-5 sentences articulating *what the organization hopes to accomplish*. 3. Define performance measures and targets = For each of the strategic objectives it needs one or more quantitative indicators of how performance on the objective shall be assessed. Also, it needs targets indicating the level of performance or rate of improvement expected for a measure. *** Also a simple graphical "achievement indicator", e.g. a traffic light, might help to read and interpret the framework Red- action needed Yellow- caution Green- on track
(Lecture 8): Having realized potential barriers, how to correctly design BSC?
1. Develop a causal model Develop a causal model based on the hypotheses in the strategic plan. *** In the absence of strategic clarity and concrete detail, test a couple of different causal models 2. Pull together the data Avoid going to the trouble of collecting data that already exists; take careful inventory of all databases; don't limit this inventory to performance measurement systems, but extent it to any information systems that may contain useful data on key performance drivers 3. Turn data into information using statistical methods for testing the causal model; Focus groups and one-on-one interviews to test management´s hunches about what's important to customers, suppliers, investors, and other stakeholders 4. Continually refine the model Reassessment of results should be ongoing and regular 5. Base actions on findings Conclusions drawn from data analyses must be used in decision making 6. Assess outcomes Whether the action plans and the investments that support them actually produced the desired results
(Lecture 8): Name 4 different views that BSC combines
1. Financial (Shareholders' perception and expectation of the organization) 2. Customer (Customers' perception of and interaction with the organization) 3. Internal processes (The organization's internal productive process) 4. Learning and growth (Development of culture and competencies) The structure (1,2,3,4) is top-down, but value creation is reversed and goes bottom-up (4,3,2,1) BSC framewrk is suitable only for large organizations with a big number of employees.
(Lecture 4): Name 4 ways to increase customer profitability
1. Improve the processes used to produce, sell, deliver, and service the customer (If customers have a preference for suppliers offering a high variety, manufacturing companies can customize their products *at the latest possible stage* *use information technology* to enhance the linkages from design to manufacturing so that greater variety and customization can be offered at lower prices) 2. Deploy *menu-based pricing* to allow customers to select features and services they need and are willing to pay for (Activity-based pricing establishes a base price for producing and delivering a standard quantity for each standard product; Menu of options, with associated prices for any special services requested by the customer, allowing to choose from the menu the features and services it wishes while also allowing the company to recover its cost of providing those features and services; Earn a margin on special services by pricing such services above the costs of providing it; Pricing surcharges could be imposed when designing and producing special variants for a customer's particular needs; Discounts offered when a customer's ordering pattern lowers the company's cost of supplying it) 3.Enhance the customer relationship to improve margins and lower the cost to serve that customer (Persuading customers to use a greater scope of the company's products and services) 4.Use more discipline in granting discounts and allowances (four-part solution aiming to improve the overall promotion performance: - Craft a winning promotion strategy to guide category-level decisions - Deploy big data analytics to produce actionable recommendations - Design a promotion process to embed the discipline - Build up organizational capabilities to execute promotions
(Lecture 3): Name implementation issues of ABC-method
1. Lack of clear business purpose 2. Lack of senior management commitment (when the project is undertaken without gaining senior management support and buy-in) 3. Delegating the project to consultants (although they have considerable experience with ABC, they are not familiar with company´s operations and business problems. Therefore, management consensus and support within the firm cannot be built 4. Poor ABC model design (too complicated or detailed) 5. Individual and organizational resistance to change 6. People feel threatened (threat that their work could be improved, which leads to individual and organizational resistance)
(Lecture 1): Define mission, values, vision and give examples of each
1. Mission is a short, 1-sentence statement that communicates fundamental purpose of the organization Description: should include what the organization provides to its clients and inform executives and employees about the overall goal they have come together to pursue Example: (apple) To bringe the best user experience to customers through innovative hardware, software, and services. 2. Values: Value statement reflects organization's core principles, ethics and desired behaivor. It describes the guiding principles by which a company navigates Description: core values of a company prescribe its desired behavior, character, and culture. They require no external justification Example: (Sony) encourage individual ability and creativity 3. Vision: provides insight into what the company hopes to achieve or become in the future. It is a concise statement that defines the mid-to long-term (3-10 year) goals of an org Description: should be external and market-oriented and should express - preferably in aspirational terms - how the organization wants to be perceived by the world Example: (Boeing) Become the dominant player in commercial aircraft and bring the world into the jet age ***strategy is the path how the company can develop from its status quo to its vision !!! In defining mission, values and vision lays the FOUNDATION FOR A SUCCESSFUL STRATEGY
(Lecture 3): 3 steps to plan and assign indirect costs + formula of cost rate
1. Plan overall indirect costs 2. Define cost driver and plan capacity of cost driver 3. Determine an indirect cost rate to assign costs to products and services cost rate = planned inidrect costs / planned capacity of cost driver !!! Problem: Can we make full use of the theoretical capacity? What about downtimes? --> Better approach: Use practical capacity (around 80% of theoretical capacity). Set practical capacity equal to some 80% of theoretical capacity, meaning, 20% of theoretical capacity time is allowed for activities such as maintenance, setup, and repair
(Lecture 6): name 6 principles of Target Costing
1. Price-led costing Market prices are used to determine allowable costs (market price - required profit margin = target cost) 2. Customer Focus Customer requirements for quality, costs, and time are simultaneously incorporated in product and process decisions and guide cost analysis. (*improtant: Ui > Ci, meaning customer's use should always be greater than cost) 3. Design Focus Cost control is emphasized at the product and process design stage (RD&E stage) --> engineering changes must occur before production begins, resulting in lower costs and reduced "time-to-market" for new products 4. Cross-functional involvement Cross-functional product and process teams are responsible for the entire product from initial concept through final production 5. Value-chain involvement All members of the value chain - e.g. suppliers, distributors, service providers, and customers- are included in the target costing process 6. Life-Cycle orientation Total life-cycle costs are minimized for both the product and the customer. Life-cycle costs include purchase price, operating costs, maintenance, and distribution (*use and disposal are not considered by target costing*)
(Lecture 6): - Name 3 perspectives of products; - From what perspective should companies think about their products; - how do customers evaluate products? how to optimize cost of ownership? - name stage of product's total cost life cycle + 80-20 rule
1. Producer perspective 2. Customer perspective 3. Stakeholder perspective (taking into account environmental and social impact) *** Organizations should think about their products 'from the perspective of the customer' Many customers go beyond the 'purchasing price' and evaluate the 'cost of ownership'. ---> To 'optimize' the cost of ownership of products (or its 'total costs' more generally), it is important to understand when costs for production, use, and disposal are committed To assess and evaluate a product's total costs, we may look at a product's total cost life-cycle process: 1. RD&E 2. Manufacturing 3. USe and disposal *** 80-20 rule: 80% of all costs are committed in the first 20% of total cost life-cycle process, meaning in R&D. Clearly, decisions made during the research, development & engineering (RD&E) phase may have a huge impact on the costs incurred in later stages
(Lecture 4): Describe 5-stage hierarchy of customer satisfaction and loyalty
1. Satisfied customers (measured by how well a customer's expectation have been met or exceeded in an individual transaction or long-term relationship) 2. Loyal customers (measured by customer devoting an increasing "share of the wallet" for repeat purchases from the same supplier) 3. Committed customers (Those who not only purchase frequently from the supplier but also tell others about products and services) 4. Apostle customers (Committed customers *who have credibility and authority* when they recommend the supplier to friends, neighbours, colleagues) 5. Customer "owners" (Who take responsibility for the continuing success of the supplier's product or service)
(Lecture 9): Name a couple of facts about what we know about executive remuneration
1. There is considerable skewness (assymetry) between renumeration size of top largest firms and firms whose size is smaller. E.g. companies with market value of 104 million $ pay around 14 million $ of renumeration, whereas company with value of 144 000 $- only some 900 000$ 2. pay is linked to company's size Possible reasons: - larger fims are more complex and need more managerial talent to run the company. Since the demand on managerial talent is high and demand is scarce, prices on managerial talent tend to get higher - large fims have big hierarchies, which require incentives to bridge the gap between one level and another. As a resulf of those incentives piling up (say there are 10 levels and the bonus of going from one level to another is 1%, 2%, 5%, etc.), the pay ends up being big = effect of compounding 3. managerial pay in the US is higher than in the rest of the world
(Lecture 2): Define and explain different types of costs
1. Total costs consist of variable "cv" and fixed "cf" costs - A variable cost is one that increases proportionally with changes in the activity level of some variable- a cost driver (e.g. a product) Cv= cv * x (total variable cost = variable cost per unit of cost driver * number of cost driver units) - A fixed cost is a cost that does not vary IN THE SHORT RUN with a specified activity There are also: - mixed costs (fixed and variable component) - step variable costs (increases in steps as quantity increases) - incremental costs (linear approx of step variable cost) - sunk costs (costs that were committed in the past and cannot be changed/recovered in the present moment) - relevant costs (costs that will change as a result of some decision) - avoidable costs (costs that can be avoided by undertaking some course of action) most obvious- variable costs
(Lecture 3): What is the main difference between traditional costing method and ABC-method?
1. Traditional costing allocates indirect expenses to products (and to any cost object) based on characteristics of a SINGLE ALLOCATION FACTOR (e.g., direct labor hours) that is *typically not causally related* to the type and level of work consumed 2. ABC focuses on the work activities of people and equipment required to produce each product or provide each service, and their consumption of each of those activities. !!! ABC *aims to provide a cause-and-effect based framework for the allocation of costs*.
(Lecture 1): Which 2 questions does a corp strategy have to answer?
1. WHERE to compete (what is the product market that i want to target? what markets are most profitable to be present in? what customers should I address? In which geog regions should I operate?) 2. HOW to compete (what is my competitive advantage? how can i deliver value to customers?) ***Strategy not only describes a path from status quo to it vision, but also answers the questions : WHAT TO DO and WHAT NOT TO DO?
(Lecture 1): what two challenges do management accountants face to support efficient management and strategy execution?
1. defining a structured way to collect information and aggregating the information to support management in (at least) four challenges: planning, coordination, ex-post control, providing incentives to support strategic objectives 2. understanding the environment, behavior, motives, and incentives of employees: do they understand the strategy?, will they work hard?, are they capable enough?, etc.
(Lecture 5): Describe different facility layout systems and how to manage inventory costs and process time (+formula of process cycle efficiency)
3 types of faclity designs: 1. Process layout (example: big production cities with big distances between production building 1 and 12) 2. Product layout (facility layout tailored to the production of a specific product) 3. Group technology (one room/ small prod facility divided into different working stations: diff prod departments are under the same roof = very close to one another) GOAL of choosing the apropriate layout: Streamline operations and increase operating income of the system ---------------------------------------------------------------------- *Manufacturing cycle time (or total processing time)* is measured as the time from the receipt of the raw materials from the supplier to the delivery of the finished goods to the distributors and customers To evaluate the efficiency of the process, the process cycle efficiency (PCE) relates the time spent on value-adding activities to the total processing time --> PCE = (time spent on value-add act) / (total processing time) *** Benefits resulting from the plant reorganization: - Increase in sales due to a decrease in production cycle time - Reduction in inventory-related costs because of the decrease in amount and handling of work-in-process inventory - Improvement in quality since defective processes are detected much faster (at the processing stage) before many defective items have been produced After reorg the prod process, there can be new costs but also increase in sales. We subtract increase in costs from increase in revenues and add up all of cost savings to determine money value of benefits. Then we can apply *"pay back period" formula* (Amortizationsperiode) to calculate the time it will take for process improvements to repay the add incurred costs: E.g. add costs = 1 000 000$; total benefits from process improvements = 829 620$ --> pay back perio
(Lecture 4): Explain 80-20 rule and whale curve
80-20 rule: - 20% of most profitable customers generate 80% of sales Interestingly the 80-20 curve also produces a 40-1 rule: - 40% of least profitable customers generate 1% of sales !!! 80-20 rule APPLIES WELL TO SALES revenues, *it does not apply to profits* A graph of cumulative % of profits (y-axis) versus cumulative % of customers (x-axis), constructed from an ABC customer profitability analysis, generally has a very different shape - a *whale curve* Figure 6: - 20% most profitable generate 180% of profits (top-selling customers can generate more than 100% of profits. The hump (maximum) of a cumulative profitability curve generally hits 150% to 250% of total profits, and this height is usually achieved by the most profitable 20% to 40% of customers) - middle 60% of customers are about break even - 20% least profitable *lose* 80% of net profits
(Lecture 9): Explain fundamentals of agency theory (info assymetry, divergence of interests) and define "moral hazard"
Agency theory explores the relationship between two cooperative parties: a principal and their agent, to whom they delegate work. Hypothesis: - Principal has funds(resources) and wants to invest them - Agent is specialized in pursuing some value creating task but needs resources to do so. The fundamental feature of such relationship is that information is divided unevenly between parties (info assymetry) and that usually parties chase different goals (divergence of interest). As a result, P-A problem arises. - Contracts between P and A will not solve the problem, as they will be incomplete. - "[Moral hazard] is used to describe situations in which the incentives of principal and agent diverge" Solution: specific initiatives (rules, regulation, institutions, etc.) are needed to mitigate the moral hazard problem by reducing information asymmetries (screening and monitoring activities) aligning interests (incentives) -------------------------------------------------------------------- Internet: Principals delegate decision-making authority to agents. Because many decisions that affect the principal financially are made by the agent, *differences in interests can arise*. Furthermore, the *principal may be less informed about the details of decision-making process than the manager*, which results in *info assymetry*. P-A-problem occurs when interests of a principal and an agent are not in alignment. By definition, an agent is using the resources of a principal. The principal has entrusted money but has little or no day-to-day input. The agent is the decision-maker but is incurring little or no risk because any losses will be borne by the principal. --> *moral hazard*. - In economics, moral hazard occurs when one person takes more risks because someone else bears the cost of those risks.
(Lecture 4): Explain different incentives that manager and salesperson have regarding profitability of customers
An alternative approach is to avoid unprofitable customers in the first place. That's why it is important to understand that many breakeven or unprofitable customer relationships occur because salespeople have *incentives to generate sales, NOT profits*. Why do companies base salespeople's compensations and rewards on revenues? - A simple measure, generally easy to calculate, and consistent with the salesperson's mission to generate sales - Lacking a valid, calculable measure of customer profitability, such as activity-based costing What can firms do to set incentives with fewer unintended consequences? - Use time-driven activity-based costing systems to create customer-specific profit and loss statements to base salesperson incentives on order and customer profits - Incorporate ERP and CRM systems to electronically capture all of the features of sales and production orders and therefore handle customer relationships more efficiently
(Lecture 3): What is an indirect cost triangle?
As plans do not always materialize, we have the indirect cost triangle: 1. planned indirect costs (theorectical) 2. applied indirect costs (practical) 3. incurred indirect costs (actually used) In effect, for ex-post control we need two types of cost accounts: ▪Applied indirect cost: cost account that accumulates the indirect costs that have been *applied to production* ▪Incurred indirect cost: cost account that accumulates the *actual* indirect costs *that have been incurred*
(Lecture 9): Fundamentals of Incentive Contracts: What are incentives and why do we need incentives?
Background: - Individuals are expected to behave and act in a way that maximizes their utility and "rewards" are assumed to increase utility. - In case of multiple (and mutually exclusive) options, individuals are expected to choose the option that (they expect to) provide the most desirable reward. - Oftentimes, we assume "money" to be a good proxy for utility, thus, we assume that individuals act to optimize their "pay (in €)" Organizations hire individuals, which comes with two problems: - Problem 1: The objectives of the organization may differ from the objective (utility function) of the individual. - Problem 2: In general, people *have to exert effort* to perform the tasks necessary from the perspective of the organization. Organizations want individuals to act in a way *that advances the organization's objectives*, and thus *might want to offer incentive schemes*. - Optimal Incentive Schemes = contracts, which reward behavior that advances the organization's objectives and mitigate problem (1) and (2).
(Lecture 8): To orchestrate large organizations and align each part of the organization with the organization's strategy, it needs a holistic approach. What framework can be used here?
Balanced scorecard (BSC) refers to a multi-layer strategic management and control framework *building on managerial cause-and-effect hypotheses* and *aiming to operationalize the organization's strategy*, to manage and improve the outcome of internal business functions and processes. The Balanced Scorecard framework looks at organizations from different angels and *aims to provide a holistic performance management framework* that *can be used to measure and provide feedback to organizations.* Refer to figure on slide 9: Mission, Vision, Value <--> Financial perspective (What financial performance should we deliver for our shareholders?) <---> Customer perspective (To achieve our vision and financial objectives, how must we deliver value to customers?) <---> processes perspective (To meet our financial and customer objectives, at which processes must we excel?) <---> Learning and growth (How do we align and enhance our intangible assets to improve the critical processes?)
(Lecture 5): What is benchmarking and what stages does it consist of?
Benchmarking is a way for organizations to gather information regarding the best practices of other organizations (from the same sector, but also from other sectors) It is often highly cost-effective, because organizations can save time and money by avoiding the mistakes that other companies have made or by not reinventing a process or method that other companies have already developed and tested !!! Selecting *appropriate* benchmarking partners is a critical aspect of the process 5 stages: 1. Internal study and preliminary competitive analyses 2. Developing long-term commitment to the benchmarking project and coalescing (uniting) the benchmarking team 3. Identifying benchmark partners 4. Information gathering and -sharing methods 5. Taking action to meet or exceed the benchmark
(Lecture 9): The alternative view to the classical agency view: how "CEOs can capture the board" and thus can influence their own remuneration
CEO power / skimming view: - Powerful CEOs capture the board and influence remuneration to his or her interest. Considerable evidence that CEO's can influence their remuneration [Executive remuneration contribute to agency conflicts]
(Lecture 3): Define cost objects, direct and indirect costs, cost pools and cost drivers (look at figure 5) + what to consider when designing cost management system
Cost objects are items for which management would like to quantify cost. E.g: products, customers, departments, geographic territories, etc. DIRECT cost is a cost of a resource or activity that is USED BY A SINGLE COST OBJECT - almost all variable costs are DIRECT costs INDIRECT cost is a cost of a resource that was acquired to be USED BY MORE THAN ONE COST OBJECT - almost all fixed costs are INDIRECT costs Cost pools *(Kostenstelle)* are specific accounts in the management accounting framework that accumulate specific indirect costs Cost drivers *(Kostentreiber)* are factors which consumption is (hopefully) cause-and-effect related to the output of the cost objective and which are used in the cost accounting system to allocate costs to cost objects (a typical example is labor hours) *** Since business models differ between industries/companies, it's important to understand the cost flow to design an efficient cost man system
(Lecture 2): what is cost-volume-profit analysis and what important formulas can be derived from this framework?
Cost-volume-profit (CVP) analysis is a powerful tool that builds on a very simple framework that linking costs, sales, and profits in a linear manner Profit P= Revenue R - Costs C, where: Revenue R = price p * sales volume x Costs C = production volume x * cv + cf ** contribution margin (cm) or "deckungsbeitrag" per unit = p- cv Total contribution margin = Revenue R - Variable Costs Cv or (p*x - cv*x) contribution margin is a measure of the amount of revenue left over after subtracting variable costs associated with a product or service. This measure is used to determine how much of each sale contributes to covering fixed costs and ultimately the profit of the business. cm per unit is the selling price of the unit minus the variable cost of making that unit. cm per unit is the amout of money EACH SALE CONTRIBUTES TOWARDS PAYING FIXED COSTS. Once fixed costs are paid, it will indicate how much profit is earned per unit sold
(Lecture 9): what is the structure of remuneration
Executive renumeration = pay + benefits, where - pay is closely related to the actual activity as a board member. - benefits = e.g. pension plans, special payments pay = fixed + incentives - fixed: contractual fixed pay that is provided regularly, regardless of the firms' performance. It comprises of fixed compensation and perks - incentives: remuneration schemes that provide claims sensitive to certain (performance) events. It comprises of 1. Short-term incentives (STI) = Cash bonus, etc. 2. Long-term incentives (LTI) Stock-based remuneration, etc --------------------------------------------------------------------- Incentive pays can have different pay off structures For example: - linear structure (increase of principals wealth also increases manager's wealth) such structure is seen in *stock compensation* - non- linear structure ( only after some certain level of principal's wealth is achieved can manager's wealth be increased. Furthermore there is a limit to what extent manager's wealth can grow = often referref to as "pay cap"
(Lecture 6): What is product's life cycle + how company's success is connected to products?
Firms can only be successful, if they offer valuable products or services to their customers However, most products and services mature as time goes by, a development, which is represented in a product's life-cycle Product's life cycle: Introduction- Growth- Maturity- Decline --> That's why, firms must constantly develop new products and services in order to be successful.
(Lecture 7): How to design a management control system for a large organization with delegated decision making?
For organizations with delegated decision-making, the management and control system should (1)measure outcomes of interest and (2)bear in mind the incentives. Thus, the management of an organization must *clearly define* its *performance objectives*, *understand* the *value generation process*, and the *potential agency conflicts* within the organization. !!!Probably the most important rule for performance measurement: *What gets measured, gets done.* Or: *You get what you measure!* Therefore, performance measures should provide objective and easy-to-understand evaluations of performance, where managers understand the clear connection between their action choices and the performance metric
(Lecture 2): In what ways is cost information useful for internal and external decision making?
Internal decision-making: 1. Pricing: Using cost information in two ways, depending on the market where a firm operates: - Price is market-determined: Decide whether cost structure allows to compete profitably - Price can be set: Set a price that optimizes the firm's profitability (taking into account the market's demand function) 2. Product-planning and production: Using cost information to determine which products to offer to the market: In most cases firms have to take into account some constraints (e.g. limited capacity of some machine) and thus have to carefully plan their production plan 3. Budgeting: !!! Most widespread use of cost information Projecting or forecasting costs for various levels of production and sales activity. Important for planning, which sets the organization's direction for the budget period. Budgets provide basis for earnings forecasts External decision-making: 1. Contracting: Reimbursement contracts (Organizations are reimbursed their cost plus an increment for the goods and services they provide under the contract- frequently used by governments) Both int and ex: 1. Performance evaluation: Comparing the actual results from the budget period with expectations that were reflected in the budget- assess how well the organization did in light of its expectation
(Lecture 5): Explain what issue do engineers overlook when developing new product + what is lean maangement
Issue: Engineers, product developers usually are more focused on creating the best product possible rather than focusing on satisfying customer's needs Lean management, invented by Toyota, is a method of organizing production that aims to serve/cater for customers' needs instead of producing the best possible product
(Lecture 5): Describe JIT manufacturing
Just-in-time manufacturing is a manufacturing approach using a *product layout* with a continuous flow, where (i) products or services are *only produced once a customer orders it* and (ii) the supply chain provides vendor parts and upstream products *just when needed* In other words: (i) instead of aimlessly producing 1000 products which would create additional inventory costs, a company produces exactly the amount that customer has ordered. (ii) e.g: as work-in-progress reaches stage 4 a train delivers required parts just in time, gets them assembled and then the product moves onto the next stage. - JIT manufacturing must eliminate all sources of failure. That's why preventative maintenance is employed. - Production process is redesigned to reduce the distance over which work-in-progress has to travel. - At the core of JIT process is highly trained workforce whose task is to carry out activities using the highest standards of quality
(Lecture 5): explain Kaizen costing and how it is diff to traditional costing
Kaizen is the Japanese term for making *improvements* to a process *through small, incremental amounts* rather than through large innovations - focuses on reducing costs during the manufacturing stage of the total life cycle of a product - Kaizen costing's goal is to ensure that a product meets or exceeds customer requirements for quality, functionality, and prices in order to effectively compete How it works: Kaizen costing aims to ensure that actual production costs are less than the prior year's cost Comparison to traditional costing: 1. Kaizen costing = Incremental rather than radical process improvements; Pressure on employees to reduce every conceivable cost - Goal: to achieve cost reduction targets that are continually adjusted downward - Variance analysis compares the *target costs* with *actual cost reduction* amounts - Assumes that *workers have superior knowledge* about how to improve processes because they actually work with the manufacturing processes. Thus, workers should be given responsibility and control to improve processes and reduce costs 2. Traditional costing: - Typical goal: to meet the cost standard while avoiding unfavorable variances - Variance analysis compares *actual* to *standard costs* - Assumes that *engineers and managers know best* to improve processes and reduce costs because they have the technical expertise and can determine procedures that workers are required to perform according to preset standards.
(Lecture 5): what is lean manufacturing
Lean manufacturing is a manufacturing approach with "lean philosophy": Any resource spending that does not create value for the end customer is wasteful and must be eliminated, where "value" is defined as any action or process for which a customer would be willing to pay Becoming lean requires "lean thinking", which is characterized by the following five principles: 1. Precisely specify value by each particular product 2. Identify the "value stream" 3. Make value flow without interruption 4. Let the customer pull value for the producer 5. Pursue perfection
(Lecture 4): How can customer performance be measured with non-financial metrics
One way to mitigate the limitations of the CLV concept (and to support managerial decision-making regarding customer relationships) is to examine non-financial indicators One approach to gather such information is to conduct customer surveys (three approaches to conduct a survey: mail surveys, telephone interviews, and personal interviews. These techniques range in cost from low to high, respectively, but response rates and valuable insights also range from low to high across them. - low correlation between customer satisfaction scores and future revenue growth --> firms have started measuring customer loyalty Loyal customers are valuable for several reasons: Loyal customers... - have a greater likelihood to repurchase, - can persuade others, - are less likely to defect - are often willing to pay a price premium - are willing to collaborate with the supplier Tool: Net promoter score NPS = % of customers who are promoters - % of who are detractors *** detractors (1-6) *** passively satisfied (7-8) *** promoters (9-10)
(Lecture 5): How can operating income be increased and what is bottleneck of production?
Operating income can be *increased by carefully managing the bottlenecks in a process* A *bottleneck* is any condition that impedes or constraints the efficient flow of a process; it can be *identified by* determining *points* at which *excessive amounts of work-in-process inventories are accumulating*
(Lecture 8): Customer perspective: Describe 3 different value propositions
Overall: customer perspective describes how a company intends to attract, retain, and deepen relationships with customers by differentiating itself from competitors. Value propositions: 1. Low-Total-Cost Value Proposition = "Deliver a combination of quality, price and ease of purchase that *no one else can match*." - Be a low cost supplier - Deliver consistent high quality - Provide a speedy, easy purchase - Offer appropriate selection 2. Product Leadership Value Proposition = "Continually develop products that *offer superior performance* for customers." - Offer high performance products - Be first to market 3. Customer Solutions Value Proposition = "Build bonds with customers; provide them with the complete bundle of products and services they need." - Provide customized solutions - Sell multiple products and services to customers - Deliver excellent post-sale services - Develop personalized relationships
(Lecture 8): Financial perspective: What is the ultimate objective for for-profit organizations and how to achieve it?
The financial perspective determines whether the company's strategy and its implementation are *increasing shareholder value* How to increase hsareholder value: 1. by achieving productivity improvements - Improve cost structure (lower costs, reduce G&A (general and admin) expenses - Increase asset utilization (achieve higher capacity utilization; reduce working capital requirements) 2. by generating revenue growth - Enhance existing customer value (grow sales with existing customers; improve customer profitability) - Expand revenue opportunities (generate sales from new products, new customers, and new markets)
(Lecture 4): Customer Lifetime Value formula
The idea of customer lifetime value (CLV) When thinking about customer relations, it is important to think about all costs and benefits of the relation. Most importantly, a customer relation may not only generate current profits but also future profits. The net present value concept allows to aggregate these costs and benefits into one measure CLV = (((M-c)* (retention rate r )^t-1) / (1+k)^t) - Initial acq cost M- margin (revenue - cost) from customer in year t c- additional cost-to-serve customer in year t k- cost of capital ***If M , c and r are about the same each year, and N(duration of relationship) is large: CLV = ((M-c) / k + (1-r))- Initial acq cost
(Lecture 8): How can BSC framework be adapted to NON-profit organizations?
The idea of the Balanced Scorecard is also well-suited for nonprofit and government organizations (NPGOs) However, the organization must answer a number of questions: - Who are the constituents? The "success" of such organizations is measured by their effectiveness in providing benefits to constituents - How to measure "success"? Success will mostly be measured in terms of non-financial measures - What is their "strategy"? Many NPGOs encountered difficulties in developing their initial BSC, finding that they didn't have a clear strategy !!! Clearly, such organizations *cannot use the standard BSC architecture* where financial objectives are the ultimate, high-level outcomes to be achieved Instead a review versio of BSC: 1. Outcome perspective (Reflecting financial, environmental and social performance) 2. Stakeholder perspective (Reflecting interest of multiple interest groups) 3. Internal processes (The organization's internal productive process) 4. Enablers perspective (Including drivers for successful collaboration and alignment)
(Lecture 6): What is total life-cycle assessment? + name 4-stage framework
Total life-cycle asessement: - is a costing approach that aims to register, assess, and evaluate *all product-related costs* "from the cradle to grave" This means social and environmental costs. In this case total life-cycle refers to the fact, that such an assessment takes into account the RD&E manufacturing, AS WELL AS *use and disposal*. 4-stage framework: 1. Goal & scope (Defines scope of each product life cycle will be within the assessment and the purpose each assessment serves.) 2. Inventory analysis (Modeling, data collection*, description, and valuation of the system. Data collection is the most chalenging part in life-cycle assessments) 3. Impact assessment (evaluation of potential impact categories regarding environmental issues) 4. Interpretation (Using sensitivity and uncertainty analysis to conclude whether expectations from the goal and scope stage can be met.) !!! While Target Costing mostly deals with customers' acquisition costs, Total Life-Cycle Assessment also considers environmental costs, as well as other customer-related costs
(Lecture 3): What are the limitations of traditional cost man systems?
Traditional cost management systems seem reasonable as long as DIRECT COSTS DOMINATE overhead costs Traditional process of allocating direct and indirect costs (Kalkulationsverfahren, bei dem Zuschlagskalkulationen verwendet werden): 1. Define cost object; identify all of its costs; differentiate those costs between direct and indirect 2. For direct costs: determine the quantity and cost of material/ labour for a unit of cost object 3. Calculate direct material and direct labour costs 4. add them up to obtain total direct costs 5. allocate all indirect costs based on quantity of labor hours per unit of output However, with increasing indirect costs the approach becomes more and more unbalanced. --> This becomes particularly relevant, in cases where indirect costs are important, and production of products differs with respect to the consumption of capacities contributing to indirect costs
(Lecture 2): extending our case with a two-product setting (chaged formulas); what is important to remember in relevant cost analysis (+ make sure to revise Simplex-algorithm for solving cases for a multi-product firm firm under multiple constraints
Two approaches to expand CVP analysis to a multi-product firm setting: 1. Individual contribution approach (each product must contribute certain contribution Aj with sum of Aj = Cf). Then BEV= Aj/ cm j 2. Bundle approach cm per bundle = sum of average x * (p-cv) then our bundle essentially becomes a single product BEV bundle= Cf/ cm of average x) [in units of bundles] *Relevant cost analysis* suggests that only costs that will change as a result of changing from the existing product to the proposed product should be considered in this decision *These are DIRECT costs and VARIABLE OVERHEAD costs, which are basically VARIABLE COSTS.* !!!Fixed costs have already been committed and are irrelevant when making a decision, thus should not be taken into account
(Lecture 5): Inventory costs (types of them), TC (total cost) function + EOQ formula (economic order quantity) based on TC-equation
Types of inventory costs: 1. Setup costs = the cost of acquiring inventory 2. Carrying cost = the cost of holding inventory 3. Stock-out costs = the cost of not having inventory on hand when needed Total cost function (TC (Q)) = P * (D/Q) + C *(Q/2) TC(Q) = ordering (or setup costs) + carrying costs P = cost of placing and receiving an order (cost of setting up a product run) Q = number of units ordered D = known annual demand C = cost of carrying one unit of stock Objective of inventory management is to identify the order quantity (or lot size) that minimizes this total cost (TC). EOQ formula is determined by finding 1st derivative of TC(Q) function and finding min of it. EOQ = Q* min = sqr root of (2DP/ C)
(Lecture 8): What are the barriers to effective use of BSC?
Typically management accounting initiatives face two types of challenges: - Organizational barriers - Technical barriers 1. Organizational barriers: - Senior management is not committed to the BSC framework - BSC measures do not filter down to employees - The BSC is treated as a one-time event or as a series of consulting projects 2. Technical barriers: Poor design of the BSC framework - Strategy map and its "value creation and performance measurement narrative" NOT ALIGNED WITH THE STRATEGY - Too FEW performance measures in the scorecard providing an incomplete picture - Too MANY measures diffusing employees' attention *** a poor design of the Balanced Scorecard is not the biggest threat to a successful implementation!
(Lecture 5): How does working capital impact firm's performance
Working capital optimization may help to ensure and maintain financial liquidity, and facilitate growth and financial stability. Working capital can be reduced in several ways: - Efficient use and identification of available resources - Implementation of liquidity - Improvement of payment conditions - Reduction of excess inventories - Reduction of tied-up capital
(Lecture 8): Processes perspective: describe 4 main management process and their objectives
process perspective identifies the critical operations management, customer management, innovation, and regulatory and social processes in which the organization must excel to achieve its customer, revenue growth, and profitability objectives 1. Operation management process = produce products and services and deliver them to customer Objectives: - Achieve superior supplier capability - Improve asset utilization - Deliver goods and services responsively to customers 2. Customer management process = Expand and deepen relationships with targeted customers Objectives: - Acquire new customers - Satisfy and retain existing customers - Generate growth with customers 3. Innovation process = develop new products, processes, and services Objectives: - Develop innovative products and services - Achieve excellence in R&D processes 4. Regulatory and social processes = earn the right to operate in the communities and countries Objectives: - Environment - Health and safety - Employment practices - Community investment
