ACCA P3 flashcards – set 4

Decision trees are diagrammatical representations of the various alternatives and outcomes. They are relevant when using an expected value approach and where there are several decisions to be made.

* costs
* competitors
* customers

Total factory costs = all production costs except materials

* Financial
* Customer
* Internal
* Innovation and Learning

The price elasticity of demand is the % change in demand divided by the % change in price.

The projects are ranked on the basis of their profitability index ( = NPV of the project divided by the amount of the initial investment)

Soft capital rationing is when the company itself limits the amount that it is prepared to borrow.

Hard capital rationing is when capital availability is limited by the amount that lenders are prepared to lend.

Capital rationing is the situation where there is a limit on the amount of capital available for investment.

The equivalent annual cost is the present value of the first replacement cycle divided by the annuity discount factor for the replacement period.

The real cost of capital is the cost of capital ignoring any inflation. (The actual (or nominal) cost of capital is the real cost of capital as adjusted for inflation.)

The nominal cash flows are the actual cash flows after adjusting for inflation.

A perpetuity is an equal cash flow each year for ever.

An annuity is an equal cash flow each year.

* Economy
* Efficiency
* Effectiveness

The maximum transfer price is the lower of:
* the selling price less the marginal costs of the receiving division
* the price for which the receiving division could buy the goods externally

The minimum transfer price is the marginal cost of the transferring division plus any lost contribution.

The RI is the division profit (before interest and tax) less a notional interest charge on the capital invested in the division.

The ROI is the divisional profit (before interest and tax) as a percentage of the capital invested in the division.

An investment centre is a division for which the divisional manager has control over costs, revenues, and investment in non-current assets and net current assets.

A division is an area of the business over which the divisional manager has a degree of autonomy (power to make decisions).

A transfer price is the price at which one division charges another division for goods or services provided.

Non-financial performance measures (such as quality) and important for achieving future growth. Financial measures concentrate on the past rather than the future.

TQM is a strategy aimed as creating an awareness of quality in all aspects of a business, thus reducing wastage and inefficiencies.

JIT involves keeping minimum inventories – producing goods when they are needed and eliminating large inventories of raw materials and finished goods.

The decision maker is said to be a risk avoider.

The decision maker is a risk seeker.

What is the attitude to risk of a decision maker who uses the expected value approach?

The decision maker is a risk avoider

For each course of action, the best outcome is identified (maximum)
The chosen course of action is the one that gives the best (maximum) of the best outcomes.

For each course of action, the worst outcome is identified (minimum)
The chosen course of action is the one that gives the best (maximum) of the worst outcomes

1 It is usually impossible for the probabilities to be estimated accurately
2 For a one-off decision, the actual outcome will not be the expected value
3 Expected values ignore the risk and the decision makers attitude to risk

The expected value is the weighted average of the possible outcomes, weighted by their respective probabilities.

Risk is measurable – several outcomes are possible and the probability of each outcome is known.

Uncertainty is not measurable – there are several possible outcomes, but the probabilities of the outcomes are not known.

A sunk cost is a cost that has already been incurred (and is therefore not affected by any future decision).

Price discrimination is when the same product or service is sold at different prices in different markets.

Volume discounting is the strategy of offering a discount to customers who purchase a large quantity

Penetration pricing is the strategy of charging a low price when a product is first launched in order to gain market share, with the intention of increasing the price later.

Market skimming is the strategy of charging a high price when a product is first launched, with the intention of reducing the price over time. (A popular strategy for new technology – rich people are prepared to pay higher prices to be the first to own the new technology)

1 Increase the selling price
2 Reduce material cost per unit
3 Reduce the operating expenses
4 Reduce the time required per unit

TPAR = throughput contribution per hour / factory cost per hour

The bottleneck is the operation that is limited the rate of production

1 Design costs out of the product
2 Minimise the time to market
3 Maximise the length of the life cycle

* Development phase
* Introduction / launch phase
* Growth phase
* Maturity phase
* Decline phase

The idea of lifecycle costing is to include all costs over the entire life of a product (and hence the estimated profitability) as opposed to costing over one year at a time.

Steps to be considered would include:
1) Value analysis – change the design so as to eliminate costs that do not add value in the perception of the customer
2) Cut material costs by reducing wastage
3) Cut labour costs by finding ways of working faster
4) The use of technology to make production more efficient

The cost gap is the excess of the estimated cost of production over the target cost

In order to calculate a target cost:
1 Determine a realistic selling price
2 Decide on what profit is required
3 Subtract the profit from the selling price to arrive at the target cost.

The cost driver is the unit of an activity that causes the activity cost to change.

The interest cover = profit before interest and tax / interest

The quick ratio = (current assets – inventory) / current liabilities

The current ratio = current assets / current liabilities

The IRR is the rate of interest at which the Net Present Value of the project is zero.

The payback period is the number of years it takes to get back the original investment, in cash terms.

Prevention costs (the costs of improving the quality of the production process)

Appraisal costs (the costs of quality control checks)

Internal failure costs (the costs of re-working; the costs of rejects)

External failure costs ( the costs of delivering poor quality to the customer – e.g. replacements, repair work)