BUSI 730 - Strategic Allocation of Financial Resources

Question 1

Describe the 4 perspectives of the Balanced Scorecard (BSC).

Answer 1

1. FINANCIAL - how do we measure success in productivity and revenue?
2. CUSTOMER - how do we create value for our customers? how do we attract, retain, & deepen customer relationships? (ex: low-cost, product leadership, customer solutions, etc.)
3. PROCESS - what do we need to be good at? operations, customer management, innovation, regulations, social/environment processes, etc.
4. LEARNING & GROWTH - what do we need to do to continually improve our processes and customer relationships? HR (skills, training, knowledge), IT (systems, databases, networks), Organizational (goal alignment, culture/climate, knowledge-sharing, etc.)

Question 2

Strategies accomplish which 2 principle functions?

Answer 2

1. Creates a COMPETITIVE ADVANTAGE

2. Provides guidance on where RESOURCES should be allocated

Question 3

Two essential components of strategy:

Answer 3

1. Clear statement on company’s intentions - how is it going to use it’s advantage to be better than the competition?
2. Define a scope for the intended strategy - certain customer segment? geographic locations? product line breadth? where will they compete most aggressively?

Question 4

Describe a Strategy Map

Answer 4

A STRATEGY MAP puts the strategy into a graphic form based on the BSC perspectives. Arrows show the relationships among the strategic objectives. Learning & Growth provide the foundation for the strategy based on organizational capabilities.

Question 5

ABC Costing System vs. Standard/Traditional Costing System

Answer 5

ABC system allocates overhead (indirect expenses) directly to products based on the proportion that each product demands of the expense/activity.

Standard system allocates overhead based on the proportion of quantities produced. Very simple but not accurate.

Question 6

Describe 2 fundamental parameters of ABC costing.

Answer 6

1. Estimate the COST RATE for each resource/expense. Divide the cost by the capacity it supplies. usually expressed as cost per hour or cost per square foot.
2. Estimate how much of each resource/expense is used for each activity.

Question 7

Benefits of ABC costing:

Answer 7

1. Improved profitability due to the identification of high cost and inefficient processes
2. Increased accuracy and relevance to managerial decision making

Question 8

BSC: Customer

Name some customer metrics that serve as leading indicators of future revenue and profit performance.

Answer 8

customer satisfaction
customer loyalty
willingness to recommend (aka Net Promoter Score)

NOTE: Service companies must focus on customer costs and profitability more than manufacturing companies because they are much more customer driven.

Question 9

BSC: Customer

Describe the WHALE CURVE

Answer 9

A whale curve is used to measure customer profitability.

It graphs cumulative profits versus customers. A typical whale curve shows that 20% of the most profitable customers generate 180% of profits (should aim to penetrate them) while the 20% least profitable lose 80% of the net profits (should aim to transform them).

Large companies are usually on either end of the spectrum (rarely in the middle).

Question 10

BSC: Customer

Name ways to increase customer profitability.

Answer 10

1. Process improvements - ex: customer service improvements
2. ABC costing and pricing
3. Managing relationships - providing more than one service to a customer
4. Pricing Waterfall - special allowances and discounts given to increase customer loyalty
5. Salesperson Incentives - encourage salespeople to close deals and generate revenues from profitable customers and avoid the unprofitable ones.
6. Life-Cycle Profitability - tracking costs throughout the duration of the relationship with the customer

Question 11

BSC: Process

Define the THEORY OF CONSTRAINTS

Answer 11

The Theory of Constraints focuses on managing bottlenecks in order to increase operating income (contributions, investments, and operating income)

Question 12

BSC: Process

Describe 3 different types of Facility Designs

Answer 12

Process Layout (aka job shop or functional layout)

Product Layout (aka flow shop layout)

Group Technology (aka cellular manufacturing)

Question 13

BSC: Process

Basics of Process Layouts

Answer 13

All similar equipment or functions are grouped together.

Reduces costs related to moving, storing, and other non-value-added costs.

Ex: Bank or Office setting

Question 14

BSC: Process

Basics of Product Layout

Answer 14

Assembly line, high-volume products

Product moves to the place beside where the parts are stored.

Ex: Auto manufacturing

Question 15

BSC: Process

Basics of Group Technology

Answer 15

Grouping machines together in one place to reduce waiting time and increase visual control

Generally U-shaped so that workers can observe each other.

Question 16

BSC: Process

Inventory Costs and Processing Time:
Processing Cycle Efficiency Formula

Answer 16

PCE =

Processing Time/(Processing+Moving+Storage+Inspection Times)

Question 17

BSC: Process

JIT Manufacturing

Answer 17

Requires making a product or service only when the customer, internal or external, requires it.

It uses a product layout with a continuous flow - one with no delays once production starts.

Must be substantial reduction in set-up costs in order to eliminate the need to produce in batches. Processing systems must be reliable.

Minimum to no WIP inventory kept so a problem can stop all production.

Requires highly trained workforce.

Question 18

BSC: Process

Lean Manufacturing

Answer 18

Elimination of any spending that does not add value for the end customer.

Value is anything that the customer would be willing to pay for.

Question 19

BSC: Process

Cost of Nonconformance and Quality Issues

4 Categories

Answer 19

1. Prevention - training employees, quality engineering
2. Appraisal - inspection, maintenance of equipment, process control
3. Internal Failure - detecting a defect before it ships & reworking the product
4. External Failure - correcting a problem after the customer received the product (costs include shipping, service calls, reputation, customer satisfaction)

Summary Chart page 158

Question 20

BSC: Process

Basics of Kaizen Costing

Answer 20

Focuses on reducing costs during the manufacturing stage of a product in small, incremental amounts rather than large innovations.

Opposed to focusing on variances of budgeted cost amounts, Kaizen focuses on cost reduction target that are CONTINUALLY ADJUSTED DOWNWARD.

Cost reductions are the responsibility of the workers, not engineers and managers.

Must be careful to not forget the “big picture” while focusing on small, incremental cost details.

Question 21

BSC: Process

Five Stages of BENCHMARKING

Answer 21

1. Internal Study & Preliminary Competitive Analysis
2. Commitment to the benchmarking process and development of a team
3. Identify benchmarking partners
4. Information gathering and sharing
5. taking action to meet or exceed the benchmark

Question 22

BUDGETS

Basics of Budgeting

Answer 22

Budgeting includes forecasting for the amount of resources (4 different types) that will be needed during a period of time with certain assumptions.

Budgeting promotes the coordination of the organization’s activities and helps identify coordination problems.

Question 23

BUDGETS

4 Different Types of Resources

Answer 23

1. Flexible Resources that create variable costs (WIP, materials)
2. Intermediate-term capacity resources that create fixed costs (rental storage space)
3. Potential-enhancing resources - short and long term (R&D, training, advertising)
4. Long-term capacity resources that create fixed costs (new facility)

Question 24

BUDGETS

Basics of the Master Budget

Answer 24

The MASTER BUDGET includes operating and financial budgets.

Operating Budgets - sales plan, capital spending, production, materials purchasing, labor, admin/discretionary spending, etc.

Financial Budgets - pro forma financial statements, Cash Flow

Question 25

What-If Analysis

Answer 25

Allows for the calculation of many different scenarios based on different strategies

Question 26

Sensitivity Analysis

Answer 26

Process of selectively varying a plan’s or a budget’s key estimates for the purpose of identifying over what range a decision option is preferred.

Question 27

Variance Analysis

Answer 27

Compares actual costs or revenue figures with the target/budgeted amount.

First-level variance - the difference between actual and budgeted costs (favorable or unfavorable)

Second-level variance = Flexible budget variance or planning variance

Examples and Calculations on pages 223-226.

Question 28

BUDGETS

Types of Budgets

Answer 28

Periodic - budgeting process done once per period
Continuous - when one month ends, it drops off and another month is added to the end of the budget period.

Incremental - increasing or decreasing by a %
Zero-based - justification is needed for every expenditure
Project Funding - a hybrid of incremental and zero-based where some spending is based on a % and other is based on a project’s life.

Question 29

Cost of Capital

Answer 29

The rate of return that financial managers use to evaluate all possible investment opportunities to determine which ones to invest in on behalf of the firm’s shareholders.

The COC represents the firm’s cost of financing and is the minimum rate of return that a project must earn to increase firm value.

Question 30

CAPM

Answer 30

The Capital Asset Pricing Model describes the relationship between the required return and the nondiversifiable risk of the firm as measured by the beta coefficient.

Question 31

WACC

Answer 31

The Weighted Average Cost of Capital reflects the expected average future cost of capital over the long-run by weighing the cost of each specific type of capital by its proportion in the firm’s capital structure.

Question 32

Capital Budgeting

Answer 32

The process of evaluating and selecting long-term investments that are consistent with the firm’s goal of maximizing owner’s wealth.

Question 33

Steps in the Capital Budgeting Process

Answer 33

1. Proposal Generation
2. Review and Analysis
3. Decision Making
4. Implementation
5. Follow-up

Question 34

NPV vs IRR

Answer 34

NPV measures how much wealth a project creates (or destroys, if NPV negative) for shareholders. It does not measure benefits relative to the amount invested.

IRR provides a rate of return or actual dollar amount that is easily related to by financial managers.

Question 35

Major Cash-Flows of a Project

Answer 35

1. Initial Investment
2. Operating Cash Flows
3. Terminal Cash Flow (liquidation)

Question 36

Assessing Project Risk

Answer 36

1. Scenario Analysis - uses possible outcomes to create various scenarios
2. Simulation - statistics-based approach that applies predetermined probability distributions and random numbers to estimate risky outcomes.
3. Exchange-Rate Risk - the risk that an unexpected change in exchange rates will reduce the market value of a project’s cash flow.

Question 37

Biblical Integration

Answer 37

Stewardship

Value Creation

Measuring Success - businesses measure in financial terms but we must also remember the qualitative measures as well.

Ethical Decision Making

Business Strategy