BEC 6 - Planning, Control, Analysis, & Risk Management

Question 1

Strategic Planning

What are the 4 steps?

Answer 1

Strategic Planning - An organization’s efforts to identify their long-term goals & to determine how to allocate resources to the best reach those goals.

1. Often begins with a mission statement identifying the org’s purpose & highest values.
2. Identifying the goals & objectives.
3. Specific performance measures are associated w. each of the goals & objectives.
4. Finally, the organization will design tactics, i.e., the specific actions to be used to meet those goals.

Question 2

Tactical Planning

Answer 2

Tactical Planning - An organization’s focus on short term objectives & temporary techniques.

Question 3

Master & Static Budgets

Master Budget

Operating Budget

Financial Budget

Static Budget

Answer 3

Master Budget - A static budget for the company as a whole. Summarizes various individual budgets. The two major budgets that the master budget summarizes are:

• Operating Budget - a projected I/S with its various supporting schedules.
• Financial Budget - a projected Capital, Cash, B/S, & Cash Flow budgets.

Static Budget - serves to analyze conditions for a specific level of activity (i.e. what would our labor costs be if our level of sales were X?). Thus, static budgets DO NOT change each time some volume changes. Static budgets are normally set up for an extended period of time & large companies may set up static budgets for

• A division of within the company
• The company as a whole

Question 4

Flexible Budget

Answer 4

Flexible Budget - A budget that segregates Variable & Fixed costs enabling it to show results at various levels of activity.

TC = F + V(x)

NOTE: The advantage of flexible budgets is that they can redily adapt to changes in variable costs that results from changes in sales levels.

NOTE: Correct! A flexible budget is actually a formula in which total costs within a relevant range are measured as total fixed costs plus the variable cost per unit of volume multiplied by the volume. As a result, it provides budgeted numbers for various levels of activity.

Question 5

Coefficient of Correlation

What are the 4 relationships?

Answer 5

A measurement of the degree of relationship between two variables to determine if a relationship exists between 2 variable, the independent variable & the dependent variable and if there is a relationship, the strength of it.

• The closer P is to -1 or 1, the stronger the relationship between the two variables
• A P closer to -1, signals a strong inverse relationship
• A P closer to 1, signals a strong direct relationship
• A P close to 0, signals likely no reliable relationship

Question 6

Regression Analysis

Answer 6

A means of measuring the relationship between an independent & dependent variable so that knowledge of a change in one can be used to predict the anticipated change in the other.

(Which one should be Y or X on a graph?)

Multiple Regression = More than one independent variable.

Question 7

Responsibility Accounting

What are the 3 types?

_{(Cost, Profit,Investment Center)}

Answer 7

Used to identify which parties within their organization are responsible for what tasks & seek to establish mechanisms to evaluate their performance.

• Cost Center - Manager is responsible for the cost incurred
• Profit Center - Manager is responsible for revenues & costs, and therefore profitability
• Investment Center - Manager is responsible for revenues & costs as well as capital expenditures to be made by segment

Question 8

Activity Based Costing

(ABC)

Answer 8

ABC - A cost accounting system that identifies non-value-added costs & allocates tem to producing departments, providing a means for analysis with the goal of reducing or eliminating non-value added costs.

Question 9

What are the two methods used to allocate Service Department overhead costs?

(Direct & Step)

Answer 9

Service Departments - overhead costs providing support to the production departments (like cafeteria, maint dept). There are two methods to allocate the costs of the service departments:

1. Direct Allocation - Firm allocates costs from each service department directly to & only to the production departments.
2. Step Allocation - A method of allocating service department costs to producing departments by allocating costs to both other service departements & producing departments, starting with the most significant serice departments & without allocating costs to a service dpearment whose casts have already been allocated.

Question 10

Probability Theory

Answer 10

A process for predicting the outcome of random events, usually involving the analysis of past events, by measuring the probability that certain outcomes will result & weighing each of those outcomes by their estimated probability occurence. (Like WACC)

Question 11

Standard Deviation

Answer 11

A measure of the volatility of an investment.

Question 12

Portfolio

What is the Modern Portfolio Theory?

Answer 12

Portfolio are a group of investments where the expected return is a weighted average of the expected return of the individual investments.

MPT - The theory that the standard deviation of a portfolio will be smaller than that of the individual investments since investments in the portfolio will not necessary fluctuate in the same direction.

Question 13

Types of Portfolio Risk

Systematic Risk

vs.

Unsystematic Risk (Unique)

Answer 13

Systematic Risk - Risks that relates to the market factors such as interest & inflation that CAN NOT BE reduced or eliminated by diversification. (Eg. Wars)

Unsystematic Risk - Risks associated with a particular investment or group of investments that CAN BE reduced or eliminated through diversifiction.

Question 14

Portfolio Risk

What is Beta Risk?

&

What is the CAPM? Formula?

Answer 14

Beta Risk - measures how changes in the value of an individual investment compares with changes in the value of an overall or market-wide portfolio. Thus, Beta measures (or compares) the volatility of an individual investment relative to that of the portfolio (or the market) as a whole.

Capital Asset Pricing Model (CAPM) - investments with higher Betas have higher expected rate of returns to compensate for the extra voatility. One implication of CAPM is that the asset allocation (% stocks vs. bonds) is overwhelmingly the most important factor in determining the returns an investor can expect.

CAPM = Risk Free Rate + ((Expected Mkt Rate - Risk Free Rate)) x Beta

Question 15

What are 4 common Risks that Lenders/Investors may consider?

TESTED

(Credit,Concentration,Market,Interest)

Answer 15

Credit (default) Risk - risk that borrowers will not abide by the terms of their contracts (e.g. fail to make payments)

Concentration Risk - credit risk resulting from lending to only few borrowers in related industries

Market Risk - risk that worsening economy-wide conditions will depress the value of all pre-existing assets.

Interest Rate Risk - the risk that rising interest rates will depress the resale value of pre-existing bonds or loans.

Question 16

The Yield Curve

What are the three theories that describes the reasons for differences in the yields that are associated with interest rates?

_{(Expectations,Market Segmentation,Liquidity Preference)}

Answer 16

1. Expectations Theory
2. Market Segmentation Theory
3. Liquidity Preference Theory

Question 17

Project Management

What are the 5 processes?

(TESTED)

_{(Project Initiation,Planning,Execution,Monitor/Control,Closure)}

Answer 17

The defining of a set of objectives & the management of resources & activities to achieve that objective, which may involve various techniques such as PERT, CPM, GERT, & ABC Analysis.

Project Mgmt - 5 Processes:

1. Project Initiation - selecting the project, identifying the goals, getting approval, selecting project manager.
2. Planning - firm determines what tasks are to be carried out.
   
   • SOW - describes the work to be carried out
   • PERT
   • CPM
   • GERT
   • ABC Analysis
   • Project Crashing
3. Execution - managers secure resources, direct activities to be performed, manage personnel allocation.
4. Monitor & Control - measure how well the project is doing
5. Closure - firm establishes that all task has been accomplished & completion of contract.

Question 18

Project Management

What are the 4 basic elements a project leader must manage?

Answer 18

To be effective, the 4 basic elements that a project leader must manage are:

1. Resources
2. Time
3. Money
4. Scope - project size & goals

Question 19

Program Evaluation & Review Technique (PERT)

What is critical path & slack time?

Answer 19

PERT - The development of a diagram to visually represent all interrelated & unrelated activities required to be completed in a project so that the longest path can be identified as well as those with slack time.

Key Points of PERT:

• Used for projects whose completion time is difficult to forecast
• Identifies Critical Path, the shortest time in which a project may be finished.
  
  • Critical Path identifies the longest path of activities in a project.
• Computes three Time Estimates
  
  • Optimistic
  • Most Likely
  • Pessimistic
• Identifies Slack Time, the difference between its expected time & and latest the task can be finished without delaying the overall project.

Question 20

Critical Path Method

Answer 20

Similar to PERT, CPM is a method for managing a project that involves determining the longest path of activities in a project, referred to as critical path, & using it to determine the latest point at which an activity may be begun without delaying the completion of the project.

CPM uses only one time estimate representing how long it normally takes to finish a task. Managers use CPM in projects whose times to completion are easier to forecast.

Question 21

Graphical Evaluation & Review Technique (GERT)

Answer 21

An approach similar to PERT that is useful when there are alternate approaches for completion of a project allowing for changes in the process during the course of completing the project.

Managers often find GERT useful with projects where many approaches may be used to accomplish tasks.

Question 22

ABC Analysis

Answer 22

Under ABC Analysis, managers rank tasks by how urgent & important they are:

• A - Urget & Important
• B - Important but not Urgent
• C - Neither urget nor important

Question 23

Project Crashing

Answer 23

Managers occasionally find it advantageous to engage in “Project Crashing” or adding more resources than usual to a task to speed it up on a project’s critical path.

Question 24

Derivatives

What are the 4 common types?

Answer 24

Derivatives - are financial instruments that derive their falue from other underlying assets or prices. It havs the following three categories: (NUNS)

• No net investment
• An Underlying & a Notional amount
• Net Settlement

The 4 common types of derivatives are:

1. Options - allows holders to buy or sell
2. Forwards - are negotiated contracts
3. Futures - exchanges for forwards
4. Swaps - agreement to swap certain stream of payments

Question 25

What are 4 valuation models of Derivatives?

Answer 25

• Black-Sholes - used to estimate the value of stock options
• Monte Carlo Simulations
• Binomial Trees
• Zero-Coupon Rate

Question 26

Three common uses of Derivatives to Hedge are?

(FVH,CFH,FCH)

Answer 26

1. Fair Value Hedges - to hedge against changes in the vallue of an asset or liability that the firm has or expects to have.
2. Cash Flow Hedges - to hedge against fluctuations of future cash flows.
3. Foreign Currency Hedges - to hedge against the effects of fluctuations in the value of foreign currencies.

Question 27

Performance Measures

What are 4 types?

_{(Balanced Score Card,Benchmarking,ISO Quality Standards,Pareto Principle)}

Answer 27

Organizations use Performance Measures to monitor & manage various aspects of their performance for the organization as a whole & across its various subparts. Examples are:

1. Balanced Scorecard
2. Benchmarking
3. ISO Quality Standards
4. Pareto Principle

Question 28

Balanced Score Card

What are the 4 evaluating factors?

_{(Financial,Customer,Internal Business,Learning/Growth)}

Answer 28

A performance measurement used by entities to evaluate whether or not they are achieveing their mission & following their strategic plan. Evaluating factors include:

• Financial Perspective - Involves measure of profitability, revenue, profit & asset growth
• Customer Perspective - customer satisfaction
• Internal Business Process Perspective - measuring averages & variances in cost (i.e cycle times)
• Learning & Growth - Sometimes referred to as “Innovation” - tracks employees’ satisfaction, training & advancement

Question 29

A Balanced Score Card commonly includes what 5 elements?

_{(Strategic Objs,Performance Measure,Baseline Performance,Targets,Strategic Initiatives)}

Answer 29

1. Strategic Objectives - A statement of the firm’s goals & what it needs to achieve
2. Performance Measures - the quantitative methods to be used to determine how much the strategic objectives are being reached
3. Baseline Performance - how well the firm is doing under each performance
4. Targets - the amount of improvement being sought for each performance measure
5. Strategic Initiatives - What specific changes the firm will undertake to achieve its objectives

Question 30

Benchmarking

What are the 4 common types of Benchmarking?

_{(Internal,Competitive,Industry,Generic)}

Answer 30

Benchmarking involves evaluating performance on an ongoing basis across subdivisions within an organization & relative to historical & current performance within & outside the organization. The 4 common types of Benchmarking are:

1. Internal Benchmarks - used to evaluate how divisions or segments are performing
2. Competitive Benchmarks - used to compare performance with that of direct competition
3. Industry Benchmarks - compares performance to standards for the industry as a whole
4. Generic Benchmarks - comparing the entity’s ratio to general standards that may be applied to any entity, used as a means of evaluating performance

Question 31

Quality Control

ISO Quality Standards (2)

Six Sigma Quality (2)

Cost of Quality (4)

Answer 31

ISO Quality Standards - A set of standards used to evaluate a firm’s performance.

• ISO 9000 Series - Focuses on the quality of products & services provided by the firm.
• ISO 14000 Series - Focuses on the environmental goals.

Six Sigma Quality - A statistical measure of the percentage of products that are in acceptable form based on standard deviation measures.

• One Sigma - 68% of products must be acceptible
• Six Sigma - 99.97% of products must be aceptible

Cost of Quality - The cost of achieving an acceptable level of quantity at various stages in an entity’s earings process. Philosophy is that preventing failures is cheaper than having to address failures after they have taken place.

• Prevention Costs - Avoid failure before occurs
• Appraisal or Detection Costs - detecting failure
• Internal Failure Costs - after production, before shipped out
  
  • Disposing of scrap resulting from wasted materials
  • Reworking units to correct defects
  • Re-inspecting & retesting after rework
• External Failure Costs - Already delivered, under warranty

Question 32

Pareto Principle

Answer 32

A theory that 80% of an entity’s problems emanate from 20% of possible causes stimulating entities to concentrate on their most significant risks.

Question 33

Business Process Management (BPM)

What are the 5 steps in the life-cycle of a BPM?

(Design,Modeling,Execution,Monitoring,Optimization)

Answer 33

BPM - The analysis of various processes used by an entity with the goal of finding improvements to optimize processes and align all aspects of the organization with the wants & needs of its customers.

The life-cycle of a BPM inludes a 5 step process:

1. Design - Identifying processes that might be improved & designing improvements
2. Modeling - testing processes under various “what if” scenarios
3. Execution - implementing processes or revisions to them including acquiring necessary related resources & training employees
4. Monitoring - observing the revised processes and their effects to ascertain if the desired effect has been achieved
5. Optimazation - evaluating processes to identify bottlenecks or design flaws that may be subject of improvemnt.

Question 34

Profitability Ratios

ROI***

DuPont ROI Analysis

Residual Income***

Economic Value Added (EVA)***

Free Cash Flow

Answer 34

ROI = Net Income / Total Assses (or Avg Invested Capital)

DuPont ROI = (NI/Sales) x (Sales/Total Assets)

DuPont ROI = Return on Sales x Asset Turnover

Residual Income = Operating Profit - Interest on Investment*

*Interest on Investment = Invested Capital x Req’d Rate of Return

EVA = Net Operating Profit After Taxes - Cost of Financing

Free Cash Flow = NOPAT + Depr + Amort - Capital Expenditures - Net increase in Working Capital.

Question 35

Which of the following listings correctly describes the order in which the four types of budgets must be prepared?

Answer 35

Sales, production, direct materials purchases, cash disbursements.

Question 36

Which of the following is not a theory that describes the reasons for differences in the yields that are associated with interest rates?

a. Expectations.
b. Market segmentation.
c. Behavioral finance theory.
d. Liquidity preference.

Answer 36

You answered correctly

Correct! Liquidity preference, market segmentation, and expectations are three theories on the reason for differences in yields. Behavioral finance theory relates to the behavior of stocks, not interest rates.

Question 37

Which of the following options lists the correct sequence for preparing budgets?

a. Cost of goods sold budget, sales budget, budgeted income statement, budgeted balance sheet.
b. Material purchases budget, production budget, cost of goods sold budget, cash receipts budget.
c. Sales budget, production budget, budgeted balance sheet, budgeted income statement.
d. Production budget, material purchases budget, budgeted income statement, budgeted balance sheet.

Answer 37

You answered correctly

Correct! The sales budget begins the budget preparation process, and the budgeted balance sheet ends it. Because none of the choices provides both the correct first step and the correct final step, a correct sequence must be found. Because material purchases flow from budgeted production, and the budgeted income statement partially flows from cash disbursements required for material purchases, the choice beginning with production budget and ending with budgeted balance sheet is correct.

Budgets are prepared in the following order:

• Sales budget
• Production budget
• Direct/Raw materials budget
• Cash disbursement budget
• Budgeted FS (IS,FS,BS)

Question 38

Which tool would most likely be used to determine the best course of action under conditions of uncertainty?

a. Cost-volume-profit analysis
b. Expected value (EV)
c. Program evaluation and review technique (PERT)
d. Scattergraph method

Answer 38

You answered correctly

Correct! Under conditions of uncertainty, decisions regarding the best course of action should take into account the probability of various possible outcomes and the related financial results. Expected value considers the financial results of all reasonably feasible alternatives, weighing each result according to the probability of occurrence to determine the long-term average outcome that would be achieved if such a decision were applied to numerous transactions, taking into consideration conditions of uncertainty.

Question 39

Limitations of an activity-based costing system include which of the following?

a. Control of overhead costs is enhanced.
b. Activity-based costing systems are less reliable.
c. The expense of obtaining cost data is relatively high.
d. It eliminates arbitrary assignment of overhead costs.

Answer 39

You answered correctly

Correct! Activity-based costing involves identifying the costs associated with specific activities with the intention of reducing costs. It is applied, however, by allocating costs of nonproducing departments to production departments using an appropriate cost driver for each cost. As a result, the cost of obtaining cost data is increased.