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What are decision trees?
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.
What are the main factors influencing the selling price decision?
What is meant by the return per factory hour in throughput accounting?
What is meant by total factory costs for throughput accounting?
Total factory costs = all production costs except materials
What are the four perspectives that the Balanced Scorecard focuses on?
* Innovation and Learning
In pricing, how is the price elasticity of demand calculated?
The price elasticity of demand is the % change in demand divided by the % change in price.
In the situation of single period capital rationing, when the projects are divisible, on what basis are the available projects ranked?
The projects are ranked on the basis of their profitability index ( = NPV of the project divided by the amount of the initial investment)
What is ‘soft’ capital rationing?
Soft capital rationing is when the company itself limits the amount that it is prepared to borrow.
What is ‘hard’ capital rationing?
Hard capital rationing is when capital availability is limited by the amount that lenders are prepared to lend.
What is meant by the term ‘capital rationing’?
Capital rationing is the situation where there is a limit on the amount of capital available for investment.
In asset replacement questions, how is the equivalent annual cost calculated?
The equivalent annual cost is the present value of the first replacement cycle divided by the annuity discount factor for the replacement period.
What is meant by the term ‘real cost of capital’?
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.)
What is meant by the term ‘nominal cash flows’?
The nominal cash flows are the actual cash flows after adjusting for inflation.
What is meant by the term ‘perpetuity’?
A perpetuity is an equal cash flow each year for ever.
What is meant by the term ‘annuity’?
An annuity is an equal cash flow each year.
When measuring Value for Money for a not-for-profit organisation, what are the three E’s?
For theoretical transfer pricing, how is the maximum transfer price calculated?
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
For theoretical transfer pricing, how is the minimum transfer price calculated?
The minimum transfer price is the marginal cost of the transferring division plus any lost contribution.
How is the RI (residual income) of a division calculated?
The RI is the division profit (before interest and tax) less a notional interest charge on the capital invested in the division.
How is the ROI (return on investment) of a division calculated?
The ROI is the divisional profit (before interest and tax) as a percentage of the capital invested in the division.
In the context of divisionalisation, what is meant by an ‘investment centre’?
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.
In the context of divisionalisation, what is meant by a division?
A division is an area of the business over which the divisional manager has a degree of autonomy (power to make decisions).
What is mean by the term ‘transfer price’?
A transfer price is the price at which one division charges another division for goods or services provided.
Why is important that non-financial performance is measured rather than concentrating solely on financial performance?
Non-financial performance measures (such as quality) and important for achieving future growth. Financial measures concentrate on the past rather than the future.
What is meant by TQM (total quality management)?
TQM is a strategy aimed as creating an awareness of quality in all aspects of a business, thus reducing wastage and inefficiencies.
What is meant by the JIT (just in time) inventory strategy?
JIT involves keeping minimum inventories – producing goods when they are needed and eliminating large inventories of raw materials and finished goods.
What is the attitude to risk of a decision maker who uses the minimax regret approach?
The decision maker is said to be a risk avoider.
What is the attitude to risk of a decision maker who uses the maximax approach?
The decision maker is a risk seeker.
What is the attitude to risk of a decision maker who uses the expected value approach?
What is the attitude to risk of a decision maker who uses the maximin approach?
The decision maker is a risk avoider
What is the maximax decision rule?
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.
What is the maximin decision rule?
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
What are the limitations of using expected values for decision making?
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
What is meant by the term ‘expected value’ in the context of decision making under uncertainty?
The expected value is the weighted average of the possible outcomes, weighted by their respective probabilities.
What is the difference between risk and uncertainty?
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.
What is meant by the term ‘sunk cost’?
A sunk cost is a cost that has already been incurred (and is therefore not affected by any future decision).
What is meant by price discrimination?
Price discrimination is when the same product or service is sold at different prices in different markets.
What is meant by volume discounting pricing strategy?
Volume discounting is the strategy of offering a discount to customers who purchase a large quantity
What is meant by the penetration pricing strategy?
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.
What is meant by the market skimming pricing strategy?
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)
In what ways can the throughput accounting ratio of a product be improved?
1 Increase the selling price
2 Reduce material cost per unit
3 Reduce the operating expenses
4 Reduce the time required per unit
What is the definition of the throughput accounting ratio (TPAR) for a product?
TPAR = throughput contribution per hour / factory cost per hour
What is meant by the term ‘bottleneck’ in the context of throughput accounting?
The bottleneck is the operation that is limited the rate of production
What are the main steps that should be considered in order to maximise the return over the life cycle of a product?
1 Design costs out of the product
2 Minimise the time to market
3 Maximise the length of the life cycle
What are the phases in a product’s life cycle?
* Development phase
* Introduction / launch phase
* Growth phase
* Maturity phase
* Decline phase
What is the basic idea of lifecycle costing?
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.
What steps might be taken in order to reduce the ‘cost gap’ in the context of target costing?
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
What is meant by a ‘cost gap’ in the context of target costing?
The cost gap is the excess of the estimated cost of production over the target cost
What are steps involved in calculating a ‘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.
What is meant by the term ‘cost driver’ in the context of activity based costing?
The cost driver is the unit of an activity that causes the activity cost to change.
How is the Interest Cover calculated?
The interest cover = profit before interest and tax / interest
What is the Quick Ratio (or Acid-test Ratio)?
The quick ratio = (current assets – inventory) / current liabilities
What is the Current Ratio?
The current ratio = current assets / current liabilities
What is the definition of the Internal Rate of Return (IRR)?
The IRR is the rate of interest at which the Net Present Value of the project is zero.
What is meant by the ‘payback period’?
The payback period is the number of years it takes to get back the original investment, in cash terms.
What are the four types of cost relating to quality?
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)
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