Professional Documents
Culture Documents
Unit Content
1. Cost Concepts
2. Forecasting Techniques
3. Budgeting
4. Cost Management
5. Strategic Investments
6. Financial Analysis
Assessment
For this unit, learners should
focus on the preparation of a
business plan, for a proposed
business venture (new business,
expansion of an existing
business, or real estate).
Assessment
Requirements:
Executive Summary
Business Description
Financial Plan showing budgets,
projected financial statements,
financial analysis, and a
justification of the investment
Assessment
The project should be about 10
pages in length. Your response
should incorporateterminology
and concepts presented in the
course as well as supplementary
resources. Each paragraph
should be written in complete
sentences with attention to good
Assessment
Using the APA format, please
double-space, use 12 point font,
with one inch margins.Be sure to
cite your resources and provide
the references. Be sure to
include the URL or link to the
sites you researched.
1 COST CONCEPTS
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COST SYSTEMS
Opportunity cost is a type of implicit
cost. Opportunity cost is an economics
term, and opportunity cost is considered
an economic cost. It is the contribution
to income that is lost by not using a
limited resource in its best alternative
use. When calculating the opportunity
cost, it includes only the expenditures
that would not be made in the other
available alternatives and/or the
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COST SYSTEMS
Process costing is used when many
identical or similar units of a product or
service are being manufactured, such as
on an assembly line. Costs are
accumulated by department or by
process.
Job order costing is used when units of
a product or service are distinct and
separately identifiable. Costs are
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COST SYSTEMS
Operation costing is a hybrid, or
combination, of job-order costing
and process costing. In this method of
costing, a company applies the basic
operation of process costing to a
production process that produces
batches of items. These different
batches all follow a similar process, but
the direct materials that are input to
each batch are different.
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COST SYSTEMS
Standard cost system assigns
standard, or planned, costs to units
produced. The standard cost of
producing one unit of output is based on
the standard cost for one unit of each of
the inputs required to produce that
output unit, with each input multiplied
by the number of units of that input
allowed for one unit of output. The
inputs include direct materials, direct
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2 FORECASTING TECHNIQUES
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MATHEMATICAL MODELS
Are commonly used in forecasting. A
mathematical model is an equation that
attempts to represent an actual situation.
For example, if a company has a product
that it sells for $1,000 each, and if we use
R to represent total revenue, the total
revenue that the company will earn by
selling x units can be represented by the
following equation or mathematical model:
R = 1,000x For a model to be useful, it
must be a good representation of the real
2 FORECASTING TECHNIQUES
2 FORECASTING TECHNIQUES
FORECASTING METHODS
1) Time series methods, which look only
at the historical pattern of one variable
and generate a forecast by extrapolating
the pattern using one or more of the
components (or patterns) of the time
series, and
2) Causal forecasting methods, which
look for a cause-and-effect relationship
between the variable we are trying to
forecast (the dependent variable) and
one or more other variables (the
2 FORECASTING TECHNIQUES
FORECASTING METHODS
1) Time series methods, which look only
at the historical pattern of one variable
and generate a forecast by extrapolating
the pattern using one or more of the
components (or patterns) of the time
series, and
2) Causal forecasting methods, which
look for a cause-and-effect relationship
between the variable we are trying to
forecast (the dependent variable) and
one or more other variables (the
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LIMITATIONS OF REGRESSION
ANALYSIS
To use regression analysis, historical data
is required for the variable that is being
forecast or for the variables that are causal
to this variable. If historical data is not
available, regression analysis cannot be
used.
Even when historical data is available, its
use is questionable for predicting the
future if a significant change has taken
place in the conditions surrounding that
2 FORECASTING TECHNIQUES
LIMITATIONS OF REGRESSION
ANALYSIS
In causal forecasting, the usefulness of
the data generated by regression analysis
depends upon the choice of independent
variable(s). If the choice of independent
variable(s) is inappropriate, the results can
be misleading.
The statistical relationships that can be
developed using regression analysis are
valid only for the range of data in the
sample.
3 BUDGETING
3 - BUDGETING
Budget
A budget is a detailed plan for
acquiring and using financial and
other resources over a specified
time period. A budget is the
monetary plan of operation over a
specified period of time, showing
types and amounts of proposed
expenditures, the purpose of
3 - BUDGETING
Budget
It is a future plan expressed in
monetary terms. The act of
preparing a budget is called the
budgeting process, and is a
means of allocating scarce
resources to unlimited demands.
3 - BUDGETING
Personal Budgets
Nearly everyone budgets to some
extent, even though many of the
people who use budgets do not
recognize what they are doing as
budgeting.
3 - BUDGETING
Personal Budgets
For example, making estimates of
income, plan expenditures for
food, clothing, housing, and
restrict spending. Eventhough
theses plans exist in the mind,
they still constitute a budget and
formalized by documentation.
3 - BUDGETING
3 - BUDGETING
Importance of Budgeting
Budgeting is very important to
the organization especially in
monitoring cash flows
Because of high fixed costs,
changes in revenues and
expenses can be monitored by
Budgets
When actual figures fall short of
Importance of Budgeting
Importance of Budgeting
Importance of Budgeting
Importance of Budgeting
Importance of Budgeting
Importance of Budgeting
3 - BUDGETING
3 - BUDGETING
Methods of Developing a
Budget
Budget development can be done
using a participative process, an
authoritative process, or a
consultative process.
A participative budget is
developed from the bottom up. All
the people affected by the budget
3 - BUDGETING
Methods of Developing a
Budget
This type of budget development
involves negotiation between
lower-level managers and senior
managers.
An authoritative budget is
developed from the top down.
Senior management prepares all
3 - BUDGETING
Methods of Developing a
Budget
A consultative budget is a
combination of authoritative and
participative budget development
methods. Senior management
asks for input from lower-level
managers but then develops the
budget with no joint decision-
4 COST MANAGEMENT
Cost classifications
In managerial accounting, cost is
used in many ways because there
are different types of cost
depending on the immediate
needs of management. For
example, external financial report
requires historical cost, whereas
decision making may require
4 COST MANAGEMENT
Manufacturing Costs
Most manufacturing companies
divide manufacturing costs into
three broad categories:
Direct materials
Direct labor
Manufacturing overhead
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Direct materials
Are those materials that become
an integral part of the finished
product, and can be physically
and conveniently traced to it. For
example, the seats that Toyota
will purchase from subcontractors,
and install in vehicles.
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Direct labor
Is reserved for those labor cost
that can be physically and
conveniently traced to individual
units of product. For example,
labor cost of carpenters, and
masons in building a house.
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Manufacturing Overhead
Manufacturing overhead includes
items such as indirect materials,
indirect labor, maintenance and
repairs on production equipment.
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Nonmanufacturing Costs
Nonmanufacturing costs into two
broad categories:
Marketing or selling costs
Administrative costs
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Administrative costs
Include all executive,
organizational, and clerical costs
associated with the general
management of the organization.
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Product Costs
Include all the cost that are
involved in the acquiring or
making a product, for example
direct materials, direct labor, and
manufacturing overhead.
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Period Costs
Are all the costs that are not
included in the product costs.
These costs are expensed in the
income statement in the period it
occurs. All selling and
administrative expenses are
considered period costs.
4 COST MANAGEMENT
Overview of Quality Management
To be an effective manager and leader
at any level in an organization:
private, public or mixed sectors of the
economy, one must have a clear
understanding of QM, and its central
role. There is a fulfillment when after
several unsuccessful efforts to solve a
problem, and everything comes
together.
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Why is quality important
Customers expect quality
Organizations function in a
competitive global environment
Cost is lowered when work is
done right the first time
From a personal point of view
Employee responsibility
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Why is quality important
Reduce frustration for
others
Retain job and be rewarded
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Why is quality important
Buzzell and Gale (1987), have
documented the relationship
between excellent quality and
profitability.
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Why is quality important
Quality leads to stronger
customer loyalty
Repeat purchases
Less vulnerability to price wars
Higher relative prices/ market
share
Improvement in share prices
Lower marketing cost
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Why is quality important
To avoid these costs, control is an
important issue in quality
management:
Rules and procedures
Hierarchy of authority
Inspections at end of line
Quality control department
Formal training in quality tools
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Why is quality important
Technology to define work
processes
Productivity reporting
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Activity Based Costing
Activity-based costing (ABC) is
another way of allocating overhead
costs to products, and in ABC the
method of allocation is based on
cost drivers. As with the other
methods, ABC is a mathematical
process of allocation and requires
identification of the costs to be
allocated.
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Activity Based Costing
Followed by some manner of
allocating them to the produced
products. We can use ABC in a
variety of situations and apply it
to both manufacturing and
nonmanufacturing overheads. It
can also be used in service
businesses.
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Activity Based Costing
An activity is an event, task or
unit of work with a specified
purpose. Examples of activities
are designing products, setting
up machines, operating
machines, making orders or
distributing products
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Activity Based Costing
A cost object is anything for
which costs are accumulated
for managerial purposes.
Examples of cost objects are a
specific job, a product line, a
market or certain customers.
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Activity Based Costing
A cost driver is anything (it can
be an activity, an event or a
volume of something) that
causes costs to be incurred each
time the driver occurs. Examples
of cost drivers are set-ups,
moving, number of parts,
casting, packaging or handling.
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Activity Based Costing - Benefits
ABC provides a more accurate
product cost for use in pricing and
strategic decisions
By identifying the activities that
cause costs to be incurred, ABC
enables management to identify
activities that do not add value to
the final product
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Activity Based Costing - Limitations
Not everything can be allocated strictly on
a cost driver basis. This is particularly true
in respect to facility-sustaining costs
ABC is expensive and time consuming to
implement and maintain. Inclusion of
administrative overhead in product costs is
not in compliance with any generally
accepted accounting principles
5 STRATEGIC INVESTMENT
Capital Budgeting
Capital budgeting methods include:
Payback Method
Discounted Payback Method
Discounted Cash flow
Net Present Value
Internal Rate of Return
5 STRATEGIC INVESTMENT
Payback Period/ Payback Method
In using the Payback Method, a company
usually chooses a period of time in which
it wants its investments to pay back
their initial investments
Projects with payback periods of less
than that amount of time are candidates
for further analysis
while projects with payback periods in
excess of that amount of time are
rejected without further consideration.
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Discounted Payback Method
The Discounted Payback Method (also
called the breakeven time) is an
attempt to deal with the Payback
Methods weakness of not considering
time value of money concepts
The Discounted Payback Method uses
the present value of cash flows
instead of undiscounted cash flows to
calculate the payback period
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Discounted Cash Flow
Discounted cash flow (DCF) methods measure
all of the expected future cash inflows and
outflows of a project using time value of
money concepts
Which is that money received today is worth
more than money received in any future
period
In a discounted cash flow analysis, the earlier
that a project is able to generate cash inflows
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Discounted Cash Flow
Discounted cash flow methods focus
on the actual cash inflows and
outflows from the project rather than
using income as the measurement
basis, as in accrual accounting
Cash flow is used because we are
most interested in the cash return
that we can obtain in the future for a
cash outlay now
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Net Present Value Method
The Net Present Value (NPV) method
calculates the present value of the
expected monetary gain or loss from a
project by discounting all expected
future cash inflows and outflows to the
present point in time
Using the required rate of return
A projects NPV is the present value of
the projects future expected cash flows
minus the proposals initial cash outflow
5 STRATEGIC INVESTMENT
The Internal Rate of Return
Method
The IRR is the discount rate at which
the NPV of an investment will be
equal to 0
It is the discount rate at which the
present value of the expected cash
inflows from a project equals the
present value of the expected cash
outflows
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Capital Budgeting and
Inflation
An investment of 1,000 units of a
product each year for four years,
will yield a net cash inflow of $10
per unit with no inflation. Thus,
we would expect a net cash
inflow of $10,000 per year for the
life of the project
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Capital Budgeting and
Inflation
However, if we are expecting
inflation during that period, we
need to recognize that we should
instead expect higher cash
inflows in each year. The higher
expected cash inflows are
nominal expected cash flows,
5 STRATEGIC INVESTMENT
Capital Budgeting and Inflation
It is the nominal expected cash flows
that will be recorded in the accounting
system. The net expected cash inflows
of $10,000 are the real expected cash
flows, which are not recorded in the
accounting system.
Often, the real expected cash flows will
need to be converted to nominal
expected cash flows for capital
budgeting purposes.
Assets
Assets are things of value
owned by individuals or
corporations. Example include,
cash, land, supplies, equipment,
machinery, tools, buildings,
furniture, and jewelry.
Liabilities
Liabilities occur when a firm
may have to borrow money to
buy more assets. This means
the firm is buying assets on
account (buy now, pay later).
Examples include loans and
mortgages.
Equities
Equities are the rights or
financial claims to the assets.
They belong to those who
supply the assets. If you are the
only person to supply assets to
the firm, you have the sole right
or financial claim to them.
Revenue
A service company earns
revenue when it provides
services to its clients. When
revenue is earned, owners
equity is increased. In effect,
revenue is a subdivision of
owners equity.
Revenue
Increases assets. The increase
is in the form of cash if the
client pays right away. If the
client promises to pay in the
future, the increase is called
accounts receivable.
Expenses
Expenses are the costs incurred
in carrying on the operations of
an entity in the effort to create
revenue. Expenses are also a
subdivision of owners equity;
when expenses are incurred,
they decrease owners equity.
Expenses
Expenses can be paid for in
cash or they can be charged.
Examples of expenses include:
hydro, gas, telephone, salaries,
and office supplies.
Withdrawal
Withdrawal is when the owner of
a business withdraws cash or
other assets from the business
to pay living or other personal
expenses that do not relate to
the business. Withdrawals
decrease owners equity.
INCOME STATEMENT
Revenue:
Sales
700,000
Operating Expenses:
Wages
60,000
Rent
70,000
Utilities
30,000
160,000
540,000
Net Income
780,000
Net Income
540,000
20,000
Increase in Capital
520,000
1,300,000
BALANCE SHEET
Assets
Cash
830,000
Accounts Receivable
330,000
Office Equipment
210,000
Total Assets
1,370,000
Liabilities
Accounts Payable
45,000
Loans Payable
25,000
Owner's Equity
1,300,000
1,370,000
Operating Activities
Operating activities are closely
related to conducting the
business for which an entity was
established. For example selling
merchandise and services to
customers, paying salaries, and
other expenses needed to
continue earning operating
Investing Activities
Investing activities are those
that relate to lending money
and collecting on loans,
acquiring and selling
investments and long-term
assets. Examples include the
purchase and sale of plant and
equipment, shares, bonds, and
Financing Activities
Financing activities include cash
inflows and outflows relating to
liability and owners equity.
These are activities relating to
raising money from investors
and creditors such as issuance
of bonds and shares, retiring
bonds, and paying dividends.
Liquidity ratios
Liquidity refers to the availability
of cash to meet short-term cash
requirements and debt
obligations. A companys liquidity
position is affected by cash
inflows and outflows and the
ability to sustain its future
performance.
Liquidity ratios
Liquidity analysis include: Cash
ratio, Current ratio, Days' sales in
inventory, Inventory turnover,
Operating cash-flow/ Current
Maturities of Long term debt and
current Notes Payable, Sales to
working capital, and Working
capital.
Liquidity ratios
Cash ratio = Cash divided by
Current liabilities
(830,000/70,000 = 11.85)
Current ratio = Current assets
divided by Current liabilities
(1,160,000/70,000 = 16.57)
Working capital = Current
assets minus Current
Profitability ratios
Profitability ratio analysis relates
to a companys ability to utilize
assets efficiently to produce
profits. The analysis should
include only the income arising
from normal operations of the
business. Thus, discontinued and
extraordinary items are excluded.
Profitability ratios
net profit margin, total asset
turnover, return on assets,
operating income margin,
operating asset turnover, return
on operating assets, sales to fixed
assets, return on investments,
return on total equity, net profit
margins and gross profit margins.
Profitability ratios
Return on assets = Net
income divided by Total
assets (540,000/1,370,000 =
39.41%)
Net profit margin = Net
income divided by Net sales
(540,000/700,000 = 77.14%)
Investor analysis
Investor analysis or Market ratio
measures are useful when
analyzing corporations with
publicly traded stocks and the use
of stock prices in various
computations. Ratios relevant to
investor analysis include: degree
of financial leverage,
price/earnings ratio, percentage