HADM 2210 Final Exam

HADM 2210 Final Exam When are ratios useful? When comparing... - ✔✔1. across firms (cross-sectional analysis) 2. once firm across time (time-series analysis) 3. against a benchmark or standard EP (i.e., RI) tells us. ...

HADM 2210 Final Exam When are ratios useful? When comparing... - ✔✔1. across firms (cross-sectional analysis) 2. once firm across time (time-series analysis) 3. against a benchmark or standard EP (i.e., RI) tells us... - ✔✔the true economic earning of a project, leading to correct project selection (if pos. then move forward, if neg. then reject) EBIT - ✔✔not cash based; a traditional measure used by many industries EBITDA - ✔✔pseudo-cash based; used by restaurants and capital intensive firms (e.g., hotels, telecom, restaurants) b/c they have a high amount of fixed assets and want to show their cash generating potential by adding back non-cash expenses FREECFBIT - ✔✔fully cash based and volatile; used by big, stable firms to signal having ample CFs to fund future dividends ROI - ✔✔quantifies the actual profit achieved from making an investment Why do companies not reward employees solely on shareholder value? - ✔✔value is difficult to measure, value measures are volatile, an unclear link b/t actions and value How do nonfinancial performance measures supplement financial ones? - ✔✔1. help provide a roadmap to creating value 2. measures important info. that relates to value creation How do performance measures influence managerial decision making? - ✔✔incentivizes and motivates; may motivate managers to make decisions that aren't in the best interest of the company How are nonfinancial performance measures selected? - ✔✔1. based on firm strategy and context 2. strategy is then implemented through firm initiatives 4 elements of a BSC? - ✔✔customer, L&G, IBP, and finance cost allocation - ✔✔the process of assigning costs to cost objects the allocation base is a cost driver (i.e., any factor that drives costs) marginal cost - ✔✔the cost of obtaining an additional unit average cost - ✔✔the mean cost spread across all units mixed costs - ✔✔have both a variable and a fixed component (e.g., utilities, insurance, leases) `direct costs - ✔✔easily traceable to cost objects (e.g., the beans used to make coffee) indirect costs - ✔✔relevant costs that are not easily traceable to cost objects (e.g., the rent for the coffee shop) product costs - ✔✔any cost incurred to produce a product for sale (e.g., DM, DL, OH) period costs - ✔✔not directly related to production and not typically allocated to the costs (e.g., SG&A) COGS - ✔✔cost of sales, cost of revenue Why use a POHR? - ✔✔planning ahead, control costs during the period, assign costs to products before actual costs are known Why allocate costs to objects? - ✔✔decision making, planning budgeting, cost control How would you account for underapplied OH at the end of the period? - ✔✔add underapplied OH to COGS at the end of the process consumption ratio - ✔✔the proportion of OH used by a product How does an ABC system add error to estimates? - ✔✔errors can come from: 1. errors in selecting drivers 2. errors in aggregating costs together which don't behave identically Which companies benefit from an ABC system? - ✔✔those that have high proportions of OH, wide discrepancies in product volume across product lines Why do we allocated service department costs? - ✔✔to learn more about the complete costs of activities Service department allocations: Linear Algebra method - ✔✔service department costs are allocated to both service and production departments simultaneously relevant range - ✔✔the range at which we expect costs to behave linearly use the mins and maxes of activity to predict relevant range economies of scope - ✔✔resources are reused to produce additional products and save on costs; therefore, multiple products are produced at a lower cost than if they were produced separately congestion costs - ✔✔occur in diseconomies of scale, driving cost up at output rises discretionary costs - ✔✔are much more flexible in the short run (e.g., advertising, training) committed costs - ✔✔necessary incurred costs for providing a good/service (e.g., machinery, building) engineered costs - ✔✔bear a direct relationship to the cost object (e.g., DM) cost stickiness - ✔✔when managers are reluctant to cut costs when sales decline cost structure - ✔✔the relative proportion of FC and VC in an organization visual fit method: pros and cons - ✔✔+ intuitive and easy - subjective and not defendible high-lo method: pros and cons - ✔✔+ objective and uses a small sample - only uses 2, extreme data points regression method: pros and cons - ✔✔+ objective, well-defined, and uses all of the data - outliers have a large impact what are the attributes of a reliable cost model? - ✔✔1) the relationship b/t cost and activity is causal 2) estimates of FC and VC are reasonable 3) the model proposed should fit all of the available data what are the various assumptions underlying cost estimation models? - ✔✔1. costs and activities are measured without error 2. production technology is stable across time 3. planned activity approx. actual activity DOL defined - ✔✔DOL is the sensitivity of profit to changes in sales (e.g., a DOL of 1.70 means that a 1% changes in sales will yield a 1.70% change in profit) what is the relationship b/t cost structure and firm risk? - ✔✔companies with high FCs will have a higher income in good years :) but a lower income in bad years :( The Master budget: Sales - ✔✔all other parts of the master budget are dependent on the sales budget what are the two primary functions of budgets? - ✔✔planning: setting targets, coordinating activities, deciding on resource allocation control: evaluating performance at the end of the period, motivating employees via goal-setting variance - ✔✔the difference b/t actual and budgeted figures. used to evaluate how well the manager controlled operations and determine whether the plan needs to be revised. practical versus ideal standards - ✔✔practical: consist of attainable goals which can be achieved with reasonable and efficient effort ideal standards: when companies set their goals too high and require "perfect" effort to achieve why do companies use standard costing practices? - ✔✔1. develop a benchmark by which to judge actual costs 2. increase employee motivation by setting reasonable goals 3. simplify bookkeeping and create the master budget allocating common fixed costs: pros and cons - ✔✔pro: appropriate for product costing con: not appropriate for making product discontinuation decisions what are the 4 types of responsibility centers? - ✔✔1. cost center (e.g., a call center) 2. revenue center (e.g., sales) 3. profit center (e.g., a single hotel) 4. investment center (e.g., an entire region of hotels what is a relevant cost? - ✔✔if it is not affected by the decision being made, then it is not a relevant cost. CSR - ✔✔a self-regulating business model that helps to keep companies held socially accountable what is the triple bottom line? - ✔✔3 Ps: planet, people, and profit what are factors that influence *pricing decisions*? - ✔✔competition: cartels demand elasticity: inelastic (e.g., tobacco) v. elastic (e.g., leisure travel strategy: predatory pricing regulation: drug laws Prefer to consider markups on VCs versus FCs? - ✔✔VCs: consistent w/ cost behavior, useful for s-t pricing FCs: useful for l-t pricing, fairness which types of firms use cost-based pricing? - ✔✔regulated firms: utility determining charge for energy feasibility studies: determining room rate for a new hotel non-competitive bids: US govt contracts