AFC

Question 1

Explain what are transfer prices.

Answer 1

BUs are responsible for revenues and costs in their own unit, which means they have a high level of autonomy. In this sense, BUs are independent and can do transactions among each other: there
could be a BU selling one product or service to another one (which belongs to the same corporation). In other words, transfer pricing is a transaction that occur between two BU of the same company.

The transfer price is a “fictitious” price for evaluating intra-company exchanges, it is not a real price, but it is the fictitious price applied to a product or service of an internal transaction between two BUs belonging to the same corporation.

The transfer price is a cost to the receiving (downstream) division and a revenue to the supplying (upstream) division.

The transfer prices impact the performances of the division since it represents a cost and a revenue.
Once defined, transfer prices affect:

– Divisions performances
– Divisions decisions
– Company results

It affects the decisions of the business units, since they can decide to make the internal transaction or to buy the product from an external supplier, for this reason it affects the corporate overall results.

Question 2

Talk about the CAPM.

Answer 2

The Capital Asset Pricing Model is a model that describes the relationship between the expected return and risk of investing in a security. It shows that the expected return of a security is equal to the risk free rate plus a risk premium which is based on a component of the equation called beta.

The equation that describes the CAPM model is composed basically of three elements:

1. the risk free rate, which is typically a very safe government bond such as the German 10 year bond.
2. the market return, which is the expected return of a fictitious portfolio containing all the stocks of a Stock Exchange.
3. Finally, the levered beta, which defines the volatility of that of that security with respect to the movements of the market. This component is personal for the security and is affected by the capital structure of the firm. This way, the beta can define the risk level of the security.

CAPM = r.f. + bl * (r.m. - r.f.)
Moreover, the Beta, compared with the equity risk premium, shows the amount of compensation equity investors need for taking on additional risk.

Question 3

What is Financial Leverage?

Answer 3

Leverage is an investment strategy of using borrowed money —specifically, the use of various financial instruments or borrowed capital—to increase the potential return of an investment.

Leverage can also refer to the amount of debt a firm uses to finance assets.

The use of leverage can multiply the potential returns from a project but, at the same time, leverage will also multiply the potential downside risk in case the investment does not pan out. When one refers to a company, property, or investment as “highly leveraged,” it means that item has more debt than equity.

Leverage amplifies the good or bad effects of the income generation and productivity of the assets in which we invest. Through this index we can understand if financial liabilities prevail over equity and resources. If it is higher than 1 the company uses more debt to finance assets and operations.
It indicates that the company is using motor debt to finance its asses and operations.

Question 4

Talk about factoring.

Answer 4

It is a form of financing by which we engage with a company who buys our receivables.
The factor (a financial institution) pays a percentage to the counter party as soon as it receives an assignment or the receivable. Receivables are good since we leave the client the possibility to pay in future moment, but in terms of cash this might be problematic, especially if we cannot manage the networking cycle with our clients.
We have a debtor, a creditor and the factor. As a company, we have the right to have a credit which is related to the revenue we have postponed.

Sometimes we can decide to take the credit and ask to a factor to take charge of the receivables, the factor gives the amount of money to the company and goes to the debtor to ask for the money. However, there is a difference: the factor asks for a reduction of the credit (which is the fee), it actually gives 800 to the company which has to pay 200 for the fee, on the other side, the factor will receive the full amount of 1k by the debtor. The factoring agreement could be:
- with recourse: When the credit’s risk remain on the creditor (the company). The credit risk is on the creditor firm under reserve - i.e. the factor requires the return of anticipated amounts to the party who sells the credit in case the debtor does not fulfil its duties at maturity
- without recourse: the factor assumes all the risk. The factor assumes the credit risk. In this case, the factoring cost for the creditor is comprehensive of this risk analysis, and in the case of insolvency, the factor cannot recoup costs from the client who gives the credit. This arrangement is a protection against bad debt quality, even if it is not costless. In case of “recourse”, if our clients are not capable to give back the money the company has the risk; on the other side, “without recourse” implicates that the factor takes all the risk, if the client does not pay it is not a matter of the company anymore.
The factoring is a B2B contract. Why should I give my receivable to a factor in the first option? So that the risks remains to the company: We can have cash in the short term, but also, factors are better at getting receivables, they have more strategies into doing that; the factor is pushy in getting back the receivable.
Factoring is defined by a contract; it requires a lot of transparency. The cost is related to an advanced payment; we have cash but at the same time we have transaction cost and a reduction of the amount of money that we would receive with a normal receivable.

Question 5

What is Relative Valuation?

Answer 5

Is used to determine a company’s value based on the market observation, by comparing a firm value to that of its competitors.
The company value depends on future returns (cash flows). The value is put in relation to some parameters which represent the proxies of future returns.

This method is also referred to as multiples methods: we compare our target company with another one with the same characteristics and the same value.

Steps for the relative valuation:

1st. - Identify the comparable companies:
Companies w/ cashflow, growth potential and risk similar to the firm being evaluated - not necessarily in the same industry/sector. Analysts however, usually define comparable company to be other firms in the same business - implicit assumption: firms in the same sector have similar ris, growth and cashflow profile.

Define the possible multiples:
Depends on which side we take - equity or asset side.

Question 6

What is the WACC and what is the tax shield effect?

Answer 6

The WACC is composed of the cost of equity AND the cost of debt. The weighted average cost of capital is the cost of equity multiplied by the percentage that equity represents in the structure of the company plus the cost of debt multiplied by 1 minus the tc multiplied by the percentage of debt in the overall assets:
o WACC = KeE/D+E + KdD/D+E *(1-tc)
• (1-tc) is the tax shield effect: We use it in the part of debt of the company since the firm pays interests before paying taxes, so the financial interests are “diminishing” the amount of taxes; in this sense, the tax shield effect reduces the overall cost of debt that a company needs to carry, since by paying taxes we reduce the amount of money related.
➡️ If you have debt you don’t have to pay the taxes over them, so we need to reduce the amount of taxes we have.

Question 7

What is the EVA?

Answer 7

EVA (Economic Value Added) represents the extra-profit from invested capital, measured with respect to the cost of capital required by investor

The formula of the EVA is:
EVA = after tax op. income - [WACC* (total asset - current liabilities)]

In general cases, the application of the EVA methodology to projects evaluation provides the same result as the NPV method

EVA highlights how a value-based management should be oriented to:

1) improve the operating margin, by reducing costs and increasing revenues;
2) reduce the invested capital, and improving its productivity;
3) reduce the cost of capital, through financial management

The amended EVA:
⏩ Like the R.I, the EVA is based on the assumption that absolute indicators are better than relative ones.
⏩ With this rationale, EVA should result in a more precise and reliable measure of a company’s profitability in the log run.
⏩ The EVA charges managers for the cost of their investment (like the RI).
⏩ Value is created only if after-tax operating income > cost of invested capital.

To improve EVA:
🟢 earn more after-tax income (w/ the same capital)
🟢 use less capital to earn the same after tax op. income
🟢 invest additional capital in high return projects with ROI or IRR > WACC).

Question 8

What is the difference between bank debt and syndicated bank debt?

Answer 8

A bank loan is a debt provided by a bank to the company, it can be both long and short term, the capital provided is in return of an interest. The interests can be fixed or can be floating (variable). The maturity expresses the number of periods of duration of the bank loan, which is agreed between the company and the bank. The repayment scheme (repayment of the capital) can be bullet, that is, that we give back the money at the maturity day or amortized, for which the repayment is spread across years. Of course, debtholders have priority over equity holders.

A syndicated loan is provided by a group of lenders. It is structured, arranged, and administered by one or several commercial or investment banks known as arrangers. The aim is to lend money to a borrower with a unique contract. This allows the partition of credit that a stand-alone bank could not disburse. The syndicated bank loan is a specific type of bank loan, the company asks money to financial institutions but the amount of money we ask is so big that we need a pool of banks: We need more than one bank that provides altogether the required amount.
These loans are usually related to big merger and acquisition. In the case of syndicated bank loan we need a more complicated and more complex arrangement since we need more banks to lend the money, because of this, we need an intermediary institution which becomes an aggregator between the banks and the company.

Question 9

What are dual transfer prices?

Answer 9

Dual transfer refers to the fact that we have two different prices whose difference is compensated by a cost sustained by the corporation accounted in the balance sheet as a reserve (namely, in the risk reserve). This means that the difference between the two prices is compensated by an investment the corporate made. So, under a dual transfer pricing scheme:
• the selling price received by the upstream division differs from the purchase price paid by the downstream division.
• the difference between the two values is compensated by corporate account.
➡️ It highlights the cost for the corporate to have a strategic BU.

Question 10

Explain how to do Consolidation of Financial Statements and the Line by Line method.

Answer 10

Line by line method:
Applied on subsidiaries, the implemention has 3 steps:
1️⃣ We have to combine all the items of the Balance Sheet and the Income Statement
2️⃣ We eliminate all the intra-group transactions (transactions between the companies the compose the group)
3️⃣ Finally, we eliminate the parent’s investment in the subsidiaries, the parent’s portion or equity, which may cause the goodwill to arise.

🟠 Goodwill is the difference between the book value of the investment and the fair value.

Question 11

Explain the procedure for the consolidation method in the case of Associated companies.

Answer 11

In this case, the Equity method is used, not the line by line method, as these equities are considered an asset for the company. The associate company’s net income increases the value of the investment pro quota and the dividends decreases the investor’s value pro quota.

Question 12

Talk about the Net Financial Position.

Answer 12

The NFP is expressed by the financial liabilities minus the cash and cash equivalent. It summarises the level of indebtedness towards borrowers of financial resource to the firm.

Question 13

What is the NWC?

Answer 13

The NWC is equal to the difference between the company’s current assets and liabilities. It can indicate its ability of he firm to pay short term debt. The problem with the NWC is that it can be a positive or a negative valued preliminary observation may appear positive as the unity is able to meet short term obligation by liquidation operating assets. However, we should pay attention on the assets included in the NWC.
We can improve the NWC without actually using cash by:
reducing the DSO, increasing DPO, enhancing the production lead time.

Question 14

What are the rules for consolidated financial statements

Answer 14

We must start by defining the relation between the parent company and the controlled companies. In the case of subsidiaries, the parent company must simultaneously meet 3 criteria:
1️⃣ regards the power over the controlled company - the parent company must own at least 50% of the shares of the subsidiary or even less in some cases if the other half is owned my a minority that owns shares and that does not constitute power over the parent.ù
2️⃣ The parent company must be exposed to the risks of the subsidiary
3️⃣ The parent company must have the power over strategic decisions of the subsidiary, being able to influence the possible returns of it.
After having identified the subsidiary, the p net step is to adjust the financial statements of the subsidiar to the standard equipped by the parent company, which includes:
1️⃣ The report date - subsidiaries have to produce an interim report at the parents fiscal closing date.
2️⃣ The accounting standard should be harmonised - If the parent uses US GAAP, the controlled company should apply the same accounting standard
3️⃣ Finally, the currency of the controlled company should be adjusted to he one used by the parent company.

Question 15

What are the contrasts between Residual Income X ROI?

Answer 15

First, the Residual Income can be expressed as:
Operating Profit - k*Invested Capital

Th ROI can be expressed as:
Operating Profit / Total Assets - Non Financial Liabilities

The problem with the ROI is that you can act both on the numerator and the denominator to manipulate it and this may lead to wrong interpretations of financial results especially in the short term. For example, an increase the ROI without an effective increase in revenue or operating profit might suggest that a firm is actually getting rid of assets, which can be a positive or a negative thing.
It is a positive thing if you are eliminating redundant or useless assets, but a bad thing if you end up eliminating an asset that that could be better exploited. Redundant assets can also be important to run activities in an effective and resilient way and its disposal may lead to a reduction of safety stocks, redundant capacity or sale of backup machinery and equipment.
In order to solve this so-called “denominator issue” and also take into account the cost os capital, innovative financial accounting indicators were developed such as the Residual Income.
Differently from the ROI, the Residual Income is an absolute indicator. It can be calculated by subtracting the cost of capital multiplied by the invested capital from the operating profit. Through this indicator we try to understand what is the return that I need to guarantee to the shareholders. Through this indicator we try to understand what is the return that I need to guarantee to the shareholders. The Residual income, takes into consideration the cost of capital.

Question 16

What are the FCFF and the FCFE?

Answer 16

The NCFs from an investments can be classified in terms of the financiers to which they are available:
The Free Cash Flow to Firm is the cash flow over which shareholders and stakeholders have rights (asset side approach):
- The amount of cash that is generated for the firm, after expenses, taxes,
investments and change in Net Working Capital;
- Cash available for both shareholders and debtholders;
- Asset-side approach.

The Free Cash Flow to Equity is the cash flow available to shareholders (equity side approach):
The focus is only on shareholders, on the capital provided by them and the money that goes to shareholders we have a different logic since the FCFE takes away the interests and payments which goes to the debt holders.
Free cash flow to equity (FCFE):
- The amount of cash that can be paid to the equity shareholders of the company after all expenses, reinvestment and debt repayment;
- Only shareholders are taken as reference (to be remunerated);
- Equity-side approach.

Question 17

What is the Balanced Score Card? How is it done?

Answer 17

The BSC is a type of Performance Measurement System. I was proposed to facilitate the translation of strategy into action. This framework is a short document that summarises a set of leading and lagging performance indicators grouped into four different perspectives: financial, customer, internal processes, and learning and growth.

The BSC is a smart way to operationalise and execute the business strategy - the starting point of the BSC are not the KPI’s but the strategic goals underneath it. According to the rationale, if strategy is not well designed and described, it is too complex and becomes unmanageable . Secondly, the strategy is not well executes, in other words, operationalised and communicated all across the organisation.

⏩ The starting point of the BSC is the strategy map: it identifies and rationalises the critical success factors within different areas and sets causal linkages among them.
⏩ Then, on the BSC, the critical success factors are operationalised with the use of metrics like performance measures, targets and initiatives.
⏩ Then, the strategy is implemented, controlled and communicate properly across the Organization.

To frame the strategy and develop the strategy map we can refer to the “focus and choice” cascade technique (top down approach):

FINANCIAL PERSPECTIVE
What do you want to achieve financially?
⬇️
CUSTOMER PERSPECTIVE
What are the few things we have to provide to our customers, delight them and earn their money?
⬇️
INTERNAL PROCESSES PERSPECTIVE
What are the few things we have to excel internally to provide recognized value to our customers and earn consequently?
⬇️
LEARNING AND GROWTH PERSPECTIVE
What are the few capabilities we should learn and empower (grow)to achieve best internal results?

Once identified the set of critical success factors, we define the causal links among them, applying a bottom-up logic.
When the critical success factors are linked within each other and to the high level strategic goals the strategy map has been built.

Example:

Financial Perspective
It describes the tangible outcomes of the strategy in traditional financial terms - If we manage to perform well financially, the strategy is sustainable under an economic perspective and we create shareholder value

Customer Perspective
Value proposition for targeted customer segments - If we increase the value perceived by our customers segments, we will earn more money and improve our financial performance while achieving top level strategic goals

Internal Processes Perspective
The critical few processes that are expected to have the greatest impact on strategy - If we improve the efficiency and effectiveness of key internal processes, we can increase the value for our customers or directly achieve an improvement in financial indicators

Learning & Growth Perspective
The critical few intangible assets that are most important to the strategy - If we improve these intangible capabilities, we can improve the way we manage them.

Main Benefits of Implementing Such a Tool

🟢 The Balanced Scorecard summarizes four different perspectives on the company’s performance in a single, succinct document.

🟢 Balanced Scorecards and Tableaux de Bord group a small set of selected indicators into one concise document.

🟢 The four perspectives also allow managers to keep an eye on the way performance is achieved. The Balanced Scorecard in particular highlights trade-offs between measures.

🟢 The Balanced Scorecard is a way for a company to communicate and reinforce its strategy through its ranks.

🟢 A firm’s Balanced Scorecard can be translated into localized scorecards for lower-level units, thus cascading the strategy and creating a set of nested performance management systems.

🟢 Quantitative data are not used as an end in themselves but rather as a means to understand and improve the underlying activities. The Balanced Scorecard contributes to learning by structuring the agenda for meetings and discussions about this data.

🟢 The process of developing a Balanced Scorecard is beneficial in itself. Many companies realize through this process that they lack a clear view of the strategy they are pursuing or of its key success factors. In addition, if too many views of the firm’s strategy exists, the process of developing a Balanced Scorecard can help to work out a clear and shared view of what the company is trying to achieve.

Question 18

What’s the Value Tree?

Answer 18

Value Tree is a practical paths improve businesses. It is designed to accelerate the connection between actions and dependencies i.e. value, performance, measurement, owner, CSF and KPI, to name a few. Providing the much needed clarity what to focus on, and who is accountability to deliver impact. Not so easy to make it influence the decisions that are made every day: where to spend time and resources, how best to get things done, and, ultimately, how to win in the competitive marketplace. It is not rocket science and it is not complete, but it can jump-start the process of focusing on the things that matter most and then choosing practical ways to get them done.

Question 19

What are Cost based Transfer Prices and what is the problem of Full actual cost?

Answer 19

This policy-based transfer price on the cost for the seller (upstream BU), adding a mark-up to provide a positive operational margin
The transfer price is based on the cost sustained by the seller to produce or deliver the product of the internal transaction, to which it is added a markup, in order to recognize an operational margin.
The full actual cost Sum of the costs of all resources used to produce a product or deliver a service, it refers to the real/current cost of the resources used to produce that product.

Method for the full actual cost:
We should start from the fact that this method is composed of a cost + the markup, in this case, the first one will be constituted by the actual variable and fixed costs.
Transfer price increases when Variable Costs and Fixed Costs increase, so with inefficiencies: The higher the cost the higher the price, thus, the price increases with the increasing of inefficiencies. For this reason, the upstream BU has incentive to increase the cost of the production in order to increase the transfer price and sell the product at a higher price.

In fact, the inefficiencies of Upstream BU are translated into:
• Improved performance for Upstream BU
• Worsened performance for downstream BU
Of course, this method cannot work for the corporation, since it would think the other way around, thus, there is A PROBLEM OF RESPONSIBILITY OF BUS.

In order to solve this problem we can introduce the full standard cost transfer price; under this configuration, the transfer price is expressed as before, but inside there are the standard variable costs and the standard fixed costs.

Question 20

Talk about corporate costs allocation.

Answer 20

With the corporate costs allocation we will deal with the second problem faced by BUs, that is, resources managed at a corporate level but dealt in the BU: companies need to decide whether
these resources are going to be allocated to the BU, in doing so, we need to understand the specific responsibility to each BU and how to split the corporate costs among them.

There are four essential purposes of corporate cost allocation:
1. To provide information for economic decisions: Corporate cost allocation helps to get relevant
information for decisions and to perform organisational decentralisation in order to assign responsibility to each organisational unit. The decision might be related to whether to create one product more or to make or buy (manufacture one product inside the company or outside).
2. To motivate managers and other employees: In case, for example, in which the production
process that has to be done by the operators is really repetitive, motivation is fundamental.
3. To justify costs or compute reimbursement
4. To measure income and assets for reporting to external parties: Such as tax authorities.

Examples of corporate costs: legal offices expenses, R&D costs, administrative expenses

In order to allocate costs we have 3 alternatives:

No allocation:
it is the least used, in this case the corporate avoids the allocation of costs, BUs do not receive any portion of corporate cost
> Disadvantage: Risk of uncontrolled use of resources.

Complete allocation:
In this case the corporate split all the costs among the business unit, for this
reason, BUs will have more costs in their structure.
> A portion of cost was not managed by them since it came on an upper level but at the end is
included in their corporate cost.
This method reduces responsibility at a corporate level and increases responsibility at a BU level.
> Advantage: avoid the proliferation of corporate costs
> Disadvantage: problem for specific responsibilities

Partial allocation (direct costs are allocated): 
The corporate assign to the BU only the cost directly
traced to them, in this case we have different possibilities since we can assign these costs on a basis of a consumption driver or we can introduce a fee.

Example in partial allocation: R&D can be divided in 2 categories: basic research for the entire company and applied research carried out only for a specific BU. -> With a partial allocation we split costs referred to research for the entire company to all the different business units, while on the other side we just account specific research costs to those BUs for which the specific research was done; in this way, we assign to each BU the portion of cost used by everyone and to the specific BU only the cost in charge of applied resources.
>Allocation on the basis of consumption drivers;
> Definition of fees.

Partial allocation but even complete allocation benefit from the use of Activity Based
Management.

Question 21

What is the budget of non-engineering cost centers .

Answer 21

Expense centers are characterized by:
– Output not easily identifiable with money;
– Difficulties in defining an input/output relations using standard coefficients.

Example of expenses units: supporting/administrative activities or human resource management.

Traditionally:
➡️ Expense centers are assigned a predetermined budget;
➡️ Control on performance is not always possible

Innovation:
➡️ Activity based methods:

This methodology implies that we know which are the activities done in the expense center. The activity based method can be used for budgeting and, also, evaluating performances of an expense center:

The most important task to do in the expense center is the identification of the activities, we have, e.g., repetitive, project-oriented, effectiveness-oriented and efficiency-oriented activities.
This method is related to the fact that in the expense center the important aspect is not only about the collection of the information on the single output, since we can even use average data in order to assess the overall performance of the activity.

1) Repetitive efficiency-oriented activities:
In this case the quantitative element is predominant, the output is quantitatively defined, the objective can be measured with efficiency indicator.
➡️ Performance analysis is focused on comparing budgeted drivers and costs with actual results
➡️ A traditional approach can be followed in this case highlighting volume and efficiency variances

2) Repetitive effectiveness-oriented activities:
In this case the qualitative element is prevalent, the critical variable is the way in which the output is delivered; in repetitive and effective oriented activities it is more important to understand how the output has been delivered and not the volume. In terms of indicators we might have customer satisfaction survey, or customer perception.
– Performances can be measured using these indicators:
• overall cost of activities,
• the quality perceived by internal or external customers (customer satisfaction survey)
• The internal quality indicators
• Time

3) Expense centers - Project activities:
Project activities are usually characterized by a significant amount of resources and long duration.
Each project should be defined, during the planning stage, in terms of:
– A set of objectives to achieve (defined both in quantitative and qualitative terms, according to the
activity orientation – efficiency or effectiveness);
– A timetable definition coherent with the objectives achievement;
– The allocation of resources for each phase of the project

Question 22

What are the types of performance measurement of BUs.

Answer 22

The most common financial indicators to assess the performance of BUs are: ROI/ROA, EBIT, EBITDA, EVA and CFROI. The ROE cannot be used because usually it is not possible to draft a complete P&L of a BU due to conceptual issues linked to the allocation of financial revenues/costs to the different BUs and allocating taxes on profit. The P&L of a BU usually ends at the EBIT. The BS of a BU is also incomplete for similar reasons like assets shared among other BUs and managed at corporate level.

Question 23

What are the Productivity indicators?

Answer 23

Productivity measures are ratios: they compare the output vs the corresponding amount of resources used to produce it. The lower the resources, the better.

The most important aspect is to find the best output and input measures to
assess to a specific factor; in this sense, we have different methods for measuring the output and
the input:

MEASURING OUTPUTS
Production Type x Output indicator:
- One product: quantity
- Different but homogeneous products: quantity w/ physical weights
- Diversified products: “standard” sales.

What if the company has different levels of integration? An example might be a company with two different subsidiaries: Subsidiary 1, in Italy, buys the raw material by Company A and produced the product, while subsidiary 2, in France, produces the raw material in-house and then makes the final product with it. In this case subsidiary 2 has a higher amount of inputs since they process the raw material and also
the product. When we have different levels of integration, the best approach could be that of the value added.

MEASURING INPUTS:

Partial productivity:
– Output produced is confronted against each production factor (work productivity or material
efficiency). In this case, we take one factor and we assess the total number of final products
produced as output over the number of employees.
– They are strongly dependent on variations in the production mix

Global productivity:
– Output produced is confronted against a weighted average of production factors, measured through production costs; in this case the only solution is to use standard costs.
– When using monetary weights, usually also output is translated into sales.

Question 24

What are the Flexibility indicators?

Answer 24

Flexibility can be defined as “the capability by a company to implement a change with the lowest possible cost and in the shortest possible time”

➡️ Flexibility indicators can be classified according to the nature and the magnitude of the change into “small” and “large” flex measures:

➡️ Small flex measures the cost (or time) to implement a change which does not affect the structure of a firm (i.e. NO impact on n. of employees, installed capacity, production technologies, Information systems used, etc)
➡️ Large flex mesures the cost (or time) to implement a change which requires a modification in the structure of the company

There is a third type of flexibility, which is conceptually different: it measures the maximum magnitude of a change the company can cope with without being forced to make structural changes (ex: the number of additional products–i.e. «on top» in respect the «standard» or budgeted production level -that can be produced in a period with the installed capacity)
➡️ A second dimension of classification looks at the nature of the change (qualitative vs. quantitative)
As a result, six possible cases:

Nature of change: Qualitative / Quantitative
Magnitude of change:
Small Flex - Product / Volume
Range Flex - Production / Mix
Large Flex - Operation / Expansion

Question 25

Talk about the engineering account department.

Answer 25

The cost center are organisational its hat ar responsible for the use of resources. They do not determine the output level (sales) and their performance is measured through the total cost, which is equal to the sum of all variable costs, multiplied by the quantity plus he fixed costs.
The performance of a cost center can then be measured using the variance analysis.
The variance analysis is composed by 3 levels:
on the first level, we calculate the total cost variance, which is the difference between the actual and budgeted costs.
On the second level, we analyse the volume and efficiency variance, which contains the direct material, labour, variable overheads and fixed overheads.
The third level, we analyse the price variance of the direct material and the use variance of the direct labour.
The problem with the traditional approach for evaluating cost centres is that they cannot control these variances, and the traditional approach does not consider two important aspects: the quality of the components and the feasibility of the production. One possible solution for this issue isto add other information o the traditional measures such as value drivers where we could apply soem non financial indicators or use cross coordination mechanisms.

Revenue centres are also part of the engineered accounting department. It is responsible for revenues in the market and their performance is measures through the amount of revenues in a specific center.
Their responsibility is limited to the output, where revenues is equal to price multiplied by quantity. The variance between actual and budgeted revenues helps us analyse the impact of several parameters to take into account.
So, on the first level, we analyse the difference between actual and budgeted revenues, on the second level, we analyse the volume variance and the price variance. Finally, on the third level, the analyse the market share and market size variance. In regards to this las step, e have to take into consideration that the market hare is an endogenous factor while the market size is an exogenous factor.
A problem with the revenues centres is that they cannot always control variations in price and quantity sold because revenue centres influence variables the are not directly included n the sales, for example> comical units should manage clients support which in the short term are not taken into consideration. In the long term, we are not taking care of the claims from the clients, we own-t consider the client support services.
Also, yearly revenues are not a long-term oriented indicator.
Possible solutions for these matters include the use of a wider se of indicators in value drivers, not financial indicator for examples, the number of claims. Also, make use of cross/unit teams for managing interdependencies> use someone that manages the interdependencies between the different units.

Question 26

Explain the Tableau de Bord approach.

Answer 26

A tableau de bord is a dashboard on which top management level, giving senior managers a way to monitor the progress of business, compare it to the goals that had been set, and take corrective action.

The first step to design it if to identify the strategic objectives of the overall business strategy.
Then, we translate it into key success factors, which should be: measurable, controllable and sufficient to achieve strategic goals.
Finally, one or more KPIs are then associated to each KSF.
For each KPI:
⏩ a target value must be identified (benchmarking)
⏩ responsibility should be attributed to someone

Question 27

What are then/financial indicators?

Answer 27

Non financial indicators are types of indicators that are qualitative in nature (not only qualitative) and that are expressed in numbers but not quantified by money.
They use value drivers such as time, quality, productivity, flexibility and environmental and social responsibility.
They arise from the assumption that financial indictors are great but they are late> value drivers instead can provide possible signals of increase or decrease of the revenues and costs.
The non financial indicators are the essence of he chose of the competitive factors as they become central measures of performance.

Some types of value drivers are:

• Time: Delivery time, time to market (revenue drivers), throughput time (cost driver);
• Quality: claim numbers (revenue driver), % spoilage (cost driver);
• Productivity: labour productivity (cost driver);
• Flexibility: product range (revenue driver), time of change (cost driver);
• Environmental and social responsibility: emission level, product compliance (revenue driver), energy conservation (cost driver);