Management Acc Week 7

19 flashcards · Other · by Daniel F.

1. Differential analysis

   a method to compute the short-term net economic impact of alternative courses of actions so that decision-makers can make the best possible use of available resources (!no changes in resources) simplifies the definition of outcomes of interest from the perspective of the sole decision-maker; only relevant costs and benefits are presented a focus on short-term decisions; only adjustable costs are part a well-defined problem, assuming most of the capacity costs and the time-value of money to be c…

2. net economic impact

   the sum of all the actual or potential differences in future cash flows resulting from the chosen course of action

3. Steps of short term decision making

   Formulate a problem Classify costs and benefits based on relevance Identify the most profitable course of action Review non-financial and qualitative impacts Make a decision

4. How do you formulate a decision problem

   based on demand and available capacity e.g. Launch an advertising campaign or not; Increase or decrease temporarily selling prices; Improve productivity; Maintain or replace an old equipment; Take or leave special orders; Allocate productive capacity; Sell or process further a product; Make or buy a component; Keep or drop a segment. if decision are additive, consider them separately if multiplicative consider them toghether

5. when is costs or benefits relevant

   Costs or benefits are relevant to a decision if they are future, actual or potential, cash flows affected by this decision irrelevant should be should be systematically ignored

6. Relevant costs and benefits

   differ between alternatives Avoidable costs - economic losses which can be avoided by choosing one decision alternative instead of another Opportunity costs - future economic gains foregone as a result of pursuing one course of action instead of another.

7. irrelevant costs and benefits

   costs which do not differ between decision alternatives Unavoidable costs - future economic losses which will be incurred whichever course of action is chosen: they remain the same across decision alternatives. Sunk costs - economic losses which were incurred in the past and which therefore cannot be affected by the decision. past cashflows should be ignored e.g. use market value instead of book value when making a decision

8. Linear programming

   optimization technique used to maximize an outcome given multiple constraints build function and optimize variables, usually max CM specifiy constraints from the limitation of available resources and valid volumes of UCM identify feasible alternatives, i.e., the combinations of quantities which satisfy all the constraints previously identified identify the specific combination or mix which maximizes profit

9. how to compute net economic impact

   like variance analysis but instead of actual and budgeted its before and after a decision effect on volumes Q effect on selling price P effect on UCM effect on FC if + it shoud be A against B if - it can be improved

10. extra effect of a decision can go beyond net economic impact

    some impacts are mechanical and certain some impacts are easy to obtain through managerial actions and thus are likely but not certain some impacts rely on a difficult managerial action, which makes them less likely. some impacts imply the contribution of an external agent, making them even more uncertain because they are less controllable

11. how to account for uncertainty of each impact

    give less weight to the least certain gains or losses using odds or indifference point

12. indifference point

    value of an estimate (volume, price, unit variable cost or fixed costs) for which the net economic impact is null, taking the other estimates as given for each change in Q, P, UVC and FC take one as a varables and compute the rest resulting in 0 to see the minimal change to not have an economical effect. as percentage changes we can see the leeway

13. Non-financial indicators

    non-monetary indicators on what decision to make quantifyable outcomes that cannot be easily valued and therefore expressed in monetary terms

14. Qualitative factors

    outcomes that cannot reliably and validly be quantified, i.e., measured in numerical terms difficult to integrate

15. strategic factors relevant to short-term decision making

    company may treat the losses on some products or services as investments captive pricing product is prestigious and contributes to improve a brand image If a component is crucial to set the company apart from its competitors, outsourcing its production does not make sense

16. operating risks relevant to short-term decision making

    decisions also affect the cost structure and therefore the degree of operating leverage supplier should be financially sound decisions can have large impact on morale

17. How is Corporate Social and Environmental Responsibility relevant to short-term decision making

    the best price offered by some suppliers may be obtained at the expense of people or the planet It is the duty of a responsible manager to make sure that their local gain does not result in a greater global loss use sustainability accounting

18. Variance analysis vs. Differential analysis

19. To establish priorities in capacity allocation

    you need to compute the unit contribution margin per unit of constrained resource