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.
Three Types of Derivative Hedges
Fair Value Hedge – a hedge against a recognized asset, liability or a firm’s purchase or sale commitment
Cash Flow Hedge – a hedge against possible variations in future expected cash flows.
Foreign Currency Hedge – a hedge against the effects of fluctuations in the value of a foreign currency. Most of these are forms of a fair value or cash flow hedge, but could also be a hedge of a net investment in a foreign operation.
Value-Based Management (VBM)
Value-Based Management seeks to examine all aspects of the company (as in a financial scorecard) to identify economic value added (EVA) that different activities contribute. VBM seeks to determine each activities a natural value (or contribution) to the firm.
Economic Value Added (EVA)
EVA(economic value added)
is the Net Operating Profits after taxes minus the cost of capital.
Value Chain
a Value Chain is a sequence of business processes through which a product or service becomes more valuable (or useful), by converting inputs into outputs
Return On Investment (based on assets)
return on investment (based on assets) = net income/total assets or average invested capital
DuPont ROI Analysis
DuPont ROI analysis: ROI = return on sales X asset turnover
Residual Income
Residual Income = operating profit - interest on investment
Cost of Financing
Cost of Financing = (total assets – current liabilities) X weighted average cost of capital (WACC)
Free Cash Flow
Free Cash Flow= NOPAT+ DEPR + AMORT – capital expenditures – Net increase in working capital
Asset Turnover
Asset Turnover = Sales / Total assets
Return on Assets
Return on Assets = Net income / Sales
Theory of Constraints
Theory of Constraints
under the TOC, if demand exceeds capacity for a resource, the resources defined as a bottleneck resource. If capacity exceeds demand, the resource is defined as a non-bottleneck resource.
Throughput Contribution
Throughput Contribution = Revenues – the direct material cost of goods sold (COGS)
Investment
Investment = the cost of materials, work in process, inventories; research and development expenses; and (upfront) expenses on equipment and buildings.
Operating Costs
Operating Costs = employee compensation, rent’s paid, utilities (electricity, garbage collection, etc.) and depreciation (e.g., of equipment and buildings).
Cost of Quality
Cost of Quality – this philosophy argues that failures have costs, that preventing failures is cheaper than having to address failures after they take place, and that means confirms performance in implementing the cost of quality philosophy can be achieved and will help the firm. The costs related to addressing quality issues rise the later in the production process of the firm deals with the quality problems.
Prevention Costs
seeking to prevent failures
a. ) Using high-quality material
b. ) Inspecting a product process
c. ) Focusing engineering and design to improve quality
d. ) Providing training to employees that focuses on improving quality
e. ) Quality circles
f. ) Maintenance of equipment (machines, etc.)
Appraisal (or detection costs)
Appraisal (or detection costs) – expenses on detecting quality failures
a. ) inspecting samples of materials in-process, and finished goods
b. ) obtaining information from customers
Internal Failure Costs
Internal Failure Costs-expenses addressing quality. That were detected after production but for they were shipped to customers
a. ) Disposing of scrap resulting from wasted materials
b. ) Reworking units to correct defects
c. ) Re-inspecting &retesting after rework
External Failure Costs
External Failure Costs-expenses addressing defective products that reach customers
a. ) Warranty costs
b. ) expenses addressing customers complaints
c. ) Cost of product returns
d. ) Marketing to help maintain and/or improve the firm’s image
e. ) Losses of future sales
Costs of Quality Controls
Costs of Quality Controls are called Conformance Costs= prevention + appraisal costs
Costs of Failure Of Quality Controls
Costs of Failure Of Quality Controls are called non-conformance costs= internal + external failure costs
Business Process Management (BPM)
Business Process Management (BPM) seeks to align all aspects of an organization with the wants and needs of its clients. BPM is often called a “process optimization process.” BPM promotes business effectiveness and efficiency while striving for innovation, flexibility, and integration with technology.
Life-cycle of Business Process Management
Life-cycle of Business Process Management
- ) Design – this first phase identifies current processes and designs improvements for them. Proper designs may prevent problems later.
- ) Modeling – during this second phase, processes are tested under various quote “what if” scenarios before rolling them out to full production so that issues may be identified and addressed (i.e., redesigned).
- ) Execution-During the third phase, equipment and software are installed, employees are trained, and the new processes are implemented at full-production levels.
- ) Monitoring-once new processes are implemented, they continue to be monitored (tested) yielding performance data.
- ) Optimization -performance data (from the marketing or monitoring cases) is analyzed to identify areas for improvement (i.e., bottlenecks) that may be redesigned further.
Derivative Speculation (non–hedge)
Derivative Speculation (non–hedge)
– acquired to take on risk, hoping for profit
– gain or loss in income from continuing operations (I/S)
Fair Value Hedge
Fair Value Hedge
– acquired to hedge against recognized assets or liabilities or a firm purchase
– game or loss in income from continuing operations. (I/S) should be offset by loss or gain on hedge item.
Cash Flow Hedge
Cash Flow Hedge
– required to hedge against currency risk from a major investment in a company with a local currency (currency in which books are maintain) other than US dollar.
– gain or loss in other comprehensive income (OCI) (B/S) D in Dent.
– nothing included in net income until forecasted activity occurs
Foreign Currency Hedge
Foreign Currency Hedge against an investment in: operations
– acquired to hedge against currency risks from a major investment in a company with a local currency (currency in which books are maintained)space other than US dollar.
– gain or loss in other comprehensive income (OCI) (B/S) T in Dent.
– offsets translation losses or gains from investments in foreign operations.
Strategic objective
Strategic objective
a statement of the firm’s goals and what is needed to achieve them
Performance measures
Performance measures
the quantitative methods to be used to determine how much the strategic objectives are being reached
Baseline performance
Baseline performance
how well the firm is doing under performance measures (past)
Targets
Targets
the amount of improvement in socks for each performance (future)
Strategic Initiatives
Strategic Initiatives
what specific changes the firm will undertake to achieve its objectives (and targets)
Transaction Processing Systems
computer operations and focus on relieving humans of peace working the in general record-keeping and reporting
Management Reporting Systems
Management Reporting Systems
computers used to assist in decision-making processes within the organization
Management Information Systems (MIS)
Management Information Systems (MIS)
an organized assembly of resources and procedures required to collect, process, and distribute data for use in decision-making.
Decision support system (DSS)
Decision support system (DSS)
an interactive system that provides the user with easy access to decision models and data, to support semi structured decision-making tasks
Expert System
Expert System
the most prevalent type of computer system that arises from research of artificial intelligence. An expert system has a built in hierarchy of rules which are acquired from human experts in the appropriate field. Once input is provided, the system should be able to define the nature of the problem and provide recommendations to solve the problem.
Executive Support Information System
executive support information system
systems designed specifically to support executive work (non–routine decisions, helps answer questions regarding competitors and I.D. new acquisitions)
Analytical Processing System
analytical processing system
software technology that enables the user to query (ask), retrieve data and conduct analysis
System Development Life-Cycle Approach (SDLC)
System Development Life-Cycle Approach (SDLC)
- ) Feasibility study (does it make sense)
- ) Requirements definition(define the problem or need that requires resolution and defined the functional and qualitative requirements of the solution system
- ) Software selection and acquisition (purchased systems) or software design (system developed in-house)
a. ) Purchases systems-based on the requirements defined, prepare a request for proposal (RFP) from suppliers of purchased systems
b. ) Systems developed in house-based on the requirements defined, establish a baseline of system and subsystem specifications that describe the parts of the system, how the interface, and how the system will be implemented using the chosen hardware, software, and network facilitates. - ) Configuration (purchased system) or development (systems developed in-house)
a. ) Configure the system, if it is a packaged system, to tailor it to the organization’s requirements
b. ) System developed in-house-use the design specifications to begin programming and formalizing supporting operational processes of the system. - ) Final testing and implementation
- ) Post-implementation
- ) The maintenance face (some interpretations do not include this face) monitoring and support of the new system including: ongoing training, help desk resources, and a system for making authorized and tested changes system
Online Transaction Process (OLTP), real-time (OLRT)
Online Transaction Process (OLTP), real-time (OLRT)
OLTP-means that the database is updated as soon as a transaction is received (perpetual)
keeps business records up to date the moment their key or transmitted into the system. (This is a good method for retail businesses)
Batch Processing
Batch Processing
involves gathering information and then entering the transaction in a group to the computer periodically. This allows greater control over the input process including more possibility for verifying data each week with control totals and authorization before input. (Delay), (periodic)
