Planning, Control & Analysis and Risk Management Flashcards
Strategic Planning
Strategic planning refers to setting long-term overall goals and policies which help guide the organization’s long run operations
1. Tactical planning
Tactical planning focuses on short term objectives and temporary techniques
2. Mission statement
The mission statement identifies the organization’s purpose and highest values
3. The next step in strategic planning is to identify goals and objectives.
4. Performance measures
Performance measures are associated with each of the goals and objectives so that the organization may measure its performance
Master Budget
Companies using master budget (a static budget for the company as a whole) to summarize various individual budgets
Operating Budget
An operating budget or a projected (or budgeted or future) income statement with its various supporting schedules
Financial Budget
A financial budget, comprising projected (or budgeted or future) capital budget, cash budget, balance sheet, and statement of cash flows. This budget is usually for one year, but could be a rolling budget as well.
Kaizen Budgeting
Kaizen Budgeting managers make cost projections that incorporate their expectations for future improvements.The term Kaizen generally refers to an (original Japanese) management approach that focuses on continually identifying and implementing small improvements (instead of focusing on major breakthroughs or large structural changes).
Preparing a Master Budget
1) estimate (future) sales volume (this is the first step in budgeting)
2) use sales volumes to estimate (future) revenue
3) use collection histories to estimate (future) collections
4) estimate the cost of sales based on the number of units sold
5) use current finished goods inventorying, budgeted ending inventory & cost of sales to estimate the number of units to be manufactured
6) use units manufactured estimate the organization’s (future) material needs, labor costs, & overhead costs
7) use material needs, current raw materials inventory, & budgeted ending inventory to budget (future) purchases
8) use purchase terms to estimate (future) payments
9) analyze the expense & payment patterns to complete the operating & cash flow budgets
Flexible Budgeting
Flexible budgets may be adjusted for changes in volumes. When organizations prepare budgets for internal use they often use the direct costing method, since variable and fixed costs behave differently
Sales - variable costs = contribution margin - fixed costs = operating profit
Flexible budgeting Linear Formula
Y = a + (b * X)
The capital letter “Y” is referred to as the dependent variable or the item whose variable is being an estimated
The lowercase “a” is refer two hands “the constant” (or the intercept) or fixed costs
The capital letter “X” is referred to as the independent variable, or the item whose changes may have an impact of the value of the dependent variable (Y).
Independent variables often called cost drivers.
The lower case b is referred to as “the slope” and the variable rate or the multiplier that reflects the effect of change in one unit of X on Y.
Correlation Analysis
Using the correlation analysis one can calculate correlation coefficient (or coefficient of coronation, p, or the lowercase Greek letter Rho) between (only) two variables at a time (i.e. Ones dependent variable in only one independent variable at the time). Values range between -1.0 and +1.0.
The closer p is to -1 or to +1 the strong the relationship between the two variables.
A p close to -1 signals a very strong inverse relationship
A p close to +1 signals a very strong direct relationship (line of best fit)
A p close to 0 signals a negligible relationship, and likely no reliable relationship, between other variables.
Regression Analysis
Regression analysis (i.e., A mathematical or statistical technique) that may test the relationship between one dependent variable and several independent variables
Responsibility Accounting
The manager of the cost center is responsible for the costs incurred by that center
The manager for a profit center is responsible for both (1) the revenues earned and (2) the costs incurred by the center
The manager of an investment center is responsible for all of (1) the revenues earned, (2) the costs incurred and (3) Capital Investments from each center.
Ideally, a manager should not be held responsible for costs that the manager can not affect.
Activity based costing
Activity based costing seeks to group together costs that are affected by common factors. For example depreciation, repairs, and maintenance might be grouped together as activities affected by machine hours. Activity based costing segregates manufacturing overhead into numerous overhead cost pools. Each pool will include costs that have common elements, usually the particular activity that will result in an increase and the costs included in that pool. The activity is the cost driver or allocation base.
Service Department Costs
Service department costs (direct allocation and Step allocation)
Under the direct allocation method, the firm allocates cost from each service department directly to, and only to, the production departments
Under the step allocation method, the firm may allocate costs from a service department code to production departments and “temporary or as a step” to the other service departments
Step Allocation Method
Under the step allocation method, the costs of individual service departments are allocated
1) the service departments are ranked, from the one performing services for the most others service departments to the one that performs the least
2) the cost of the first service department are allocated to the remaining service departments and production departments using appropriate allocation bases. Once the costs of a service department are allocated that department is eliminated from the process.
3) the costs of the next service department are allocated to the remaining service and production departments. This process is repeated until the costs of the last (and those of all) service departments have been allocated to production departments.
High – Low Method
High – Low Method
a series of values of an independent and dependent variable (e.g., the monthly observations for one year) are reduced to the two data points associated with the high and low value periods for the cost driver (or independent variables).
Normal Yield Curve (upward sloping)
Normal Yield Curve (upward sloping)
interest rates are higher for longer terms
according to the liquidity preference theory, interest rates would normally be higher for longer terms than for shorter terms since investors demand more compensation for long-term investments that are more subjects to various risks (such as inflation or interest rate risks)
Inverted Yield Curve
Inverted yield curve
interest rates are lower for longer terms
according to the expectations theory, long-term interest rates reflect future expected short-term interest rates. An inverted yield curve usually reflects investors expectations of upcoming declines in economy wide interest rates, usually because investors expect falling inflation rates and/or worsening economy wide conditions (e.g., a recession)
Pacific
Flat Yield Curve
Flat Yield Curve
interest rates are similar across terms. Normal yield curves typically flattened before becoming inverted, and inverted yield curves typically flattened before returning to normal.
A project
A project may be defined as a set of activities that:
1) have specific goals and objectives (e.g., the launch of a new product, a company wide reduction in costs, etc.)
2) have a specific beginning and end dates
3) operate within budgetary constraints
4) require various human and physical resources (e.g., personnel, machinery, etc.)
5) may operate across multiple subdivisions within a firm
The Four Basic Elements of a Project Leader (must have)
The four basic elements of a project leader must manage are:
1) resources: personnel, materials, and equipment
2) time: how long each task should take, and in what order should tasks be arranged, accounting for the risk that some tasks will take more or less long than initially expected
3) money: revenues, costs, profits, adopting to the fact that some revenues and costs will deviate from what was initially planned, and that unexpected costs and revenue opportunities may also arise
4) scope: what are the project’s size and goals, and how much authority do the project’s leaders have to adjust the projects size and goals as new developments surface?
The Five Separate Processes of a Project
The five separate processes of a project Project initiation Project planning Project execution Project monitoring and control Project closure
Project Initiation
Project Initiation
a. ) Selecting the most promising project within the firm’s overall resource constraints (budget, personnel, capacity to grow, etc.)
b. ) Identifying the goals (benefits or gains) that the project should accomplish
c. ) Approval of (and support for) the project from the organization’s overall management
d. ) Selecting a project manager (leader).
Project Planning
a. ) Determining what the tasks seek to accomplish
b. ) Setting forth expected quantity and quality production parameters
c. ) Budgeting the required funds, personnel, materials, equipment, etc.
d. ) Determining the dates when tasks are expected to begin and end
e. ) Considering when risks are likely to affect the overall performance of the project, and setting forth possible responses should negative outcomes materialize.
Project Execution
Project Execution-Managers
a. ) Negotiate with other parts of arm to secure the ongoing resources and operations required for the project’s success
b. ) direct activities to be performed
c. ) manage the personnel allocated to the project to maximize their performance
Project Monitoring and Control
project monitoring and control
a. ) Measures how well the project is proceeding
b. ) Compare actual and predicted outcomes
c. ) Analyze how very sexual outcomes differ from predicted ones, and how that affects the overall project
d. ) Adjusts the project as needed to improve it
Project Closure
project closure
a. ) Establishes that all tasks have been accomplished
b. ) Completion (closure) of the contract, paperwork, and all project- related financial expenses
Derivatives
remember NUNS No net investment (very little) An Underlying and a Notional amount Net Settlement (There is an underlying price to be used to settle the contract and a notional amount to calculate settlement. Little or no payment takes place at origination and the derivative can be settled in a net amount)
Derivatives may be used for Two Purposes
Derivatives may be used for two purposes
Speculation: businesses may use derivatives to raise revenue by shouldering other parties risks, hoping that the losses, and investment intended to profit from price changes in the underlying
Hedging: businesses may use derivatives to reduce their risks, e.g. an American company with costs in the US but and expected future stream of revenue in Japanese Yen may use currency derivatives to lock in those future revenues as dollars using current exchange rates, thus eliminating its exchange rate risk.
