Term
|
Definition
• Profit Margin= Contribution Margin – Allocated Capacity Costs
- Profit margin is the appropriate measure of value for long-term decisions |
|
|
Term
|
Definition
| Gross Margin=Revenue – Product Costs |
|
|
Term
|
Definition
| • Contribution Margin= Revenue- Variable Costs |
|
|
Term
|
Definition
• Decision Making
• Reporting Income
• Reimbursement & Cost Justification
• Influence Behavior |
|
|
Term
| Direct or Variable Costing |
|
Definition
| A format of costing that groups variable costs and fixed costs separately- Fixed manufacturing is entirely expensed- no inventory remains |
|
|
Term
| Biggest criticism regarding absorption costing |
|
Definition
| that is provides incentives to produce more than what is necessary to satisfy demand- a firm can report higher income by increasing production (less fixed costs, same variable) |
|
|
Term
| How do you reconcile the difference between variable and absorption incomes |
|
Definition
Income reported under variable costing
+ Fixed Manufacturing costs in ending inventory
- Fixed Manufacturing costs in beginning inventory
= Income reported under absorption Costing |
|
|
Term
| What is not needed in variable costing? |
|
Definition
|
|
Term
|
Definition
| Refers to the set of tools companies use to evaluate large expenditures |
|
|
Term
| 4 Important elements of a capital expenditure |
|
Definition
- Initial Outlay- The costs associated with acquiring the resources and getting it ready for use
- Estimate Life and Salvage Value- How long can you keep the resource, are there costs associated with disposing of the resource and can the resource be sold when done with it
- Timing and Amounts of Operating Cash flows- What are expected operating expenses every year, what are the expected revenues or cost savings
- Cost of Capital- Opportunity cost of capital required for the proposed investment |
|
|
Term
|
Definition
• NPV- The total present value of all of its cash flows
• Can compute this by using the present value tables
• An investment is desirable if its NPV is positive |
|
|
Term
|
Definition
• IRR- The discount Rate at which a project has zero NPV
• A project is profitable if its IRR exceeds it opportunity cost of capital |
|
|
Term
|
Definition
| Computes the payback period using discounted cash flows, meaning that the method accounts for the time value of money |
|
|
Term
|
Definition
| • Under this method, we compute how long it takes to recoup the initial investment using undiscounted cash flows |
|
|
Term
| Accounting Rate of Return |
|
Definition
ARR= Average Annual income for the project/ Average annual investment
• Must subtract annual depreciate expense from net cash flows
• First, decrease the book value of the MRI equipment by the depreciation amount
• Next, Calculate the average investment balance for each year as the average of the beginning and ending book values
• Final step is to compute ARR as the ratio of average income/average investment |
|
|
Term
|
Definition
| • Depreciation Tax Shield= Tax Rate x Depreciation deduction in that year |
|
|
Term
| After-Tax operating cash inflow |
|
Definition
| After Tax Net Inflow + Depreciation shield |
|
|
Term
|
Definition
• Profit/Investment
• Profit results from operations
• Most firms use the average operating assets as a measure of invested capital |
|
|
Term
|
Definition
| • ROI= Profit/Sales X Sales/Investment = Profit Margin X Asset Turnover |
|
|
Term
|
Definition
The amount an investment generates above and beyond the required rate of return on operating assets, or the residual after subtracting the expected return
• RI= Profit - (Required Rate of Return X Investment) |
|
|
Term
|
Definition
| The key source of customer value for a firm |
|
|
Term
| Core Competencies and Capabilities |
|
Definition
• Core competency- Term used to refer to the skill set and expertise that characterizes a firm and its employees, and advantages the firm relative to its competitors
• A strategy not anchored firmly in core competencies is destined to fail |
|
|
Term
| 3 Determinants of Business Strategy |
|
Definition
1. Core Competencies and Capabilities
2. Competitive Landscape
3. Sustainability |
|
|
Term
| 5 competitive forces firms must pay attention to |
|
Definition
- Industry Competitors: Who are the major competitors? What are their core competencies? How much market share do they command? What is their cost structure? Do they have high or low operating leverage?
- New Entrants: Does the chose business segment offer enough potential to new entrants? Are there barriers to entry?
- Substitute Products: Is there a threat from substitute products? How well do these substitutes perform relative to the company’s products? Do they offer a price advantage?
- Supplier Power: Will the company have to rely excessively on a few key suppliers? How important is the company’s business to it’s suppliers? Will the company have some negotiating power with its suppliers?
- Customer Power: How dispersed or concentrated is the target market? Is the market composed of a few large consumers? How much flexibility does a firm have? |
|
|
Term
|
Definition
| • A sustainable strategy is difficult to imitate by competitors because of the unique resource capabilities and market power it brings |
|
|
Term
|
Definition
| A strategy that finds innovative ways to improve their business processes and cut costs |
|
|
Term
|
Definition
Focus on R and D and product innovations
• Firms stay ahead by being quicker to develop and market the next generation of products |
|
|
Term
|
Definition
| A set of logically sequenced, value-adding activities that convert input resources into products or services in a manner consistent with the chosen business strategy |
|
|
Term
| 5 generic sequences of value chain |
|
Definition
| 1. Inbound logistics 2. Production operations 3. Outbound logistics 4. Marketing and Sales and 5. Service Activities |
|
|
Term
| 4 stages of a products life cycle |
|
Definition
| 1. Development 2. Introduction and growth 3. Maturity 4. Decline |
|
|
Term
|
Definition
• Target Costing- A structured approach to cost planning and management
• The premise for target costing is that the firm is the price taker and that there is intense competition to acquire, retain, and grow customers
• Determines cost by working backwards from the customer’s value |
|
|
Term
|
Definition
| the difference between the current cost and the allowable cost |
|
|
Term
|
Definition
| A computation that reflects past performance- contain limited info about an organization’s potential for future performance |
|
|
Term
|
Definition
| A measure such as customer satisfaction and product return raters which are the drivers of future performance |
|
|
Term
|
Definition
| Also known as key performance indicators, are performance measures that must go right for an organization to implement its strategy successfully and achieve its mission |
|
|
Term
| What are operational CSF's |
|
Definition
| short-term metrics- focus on the efficiency with which an organization is utilizing its resources |
|
|
Term
|
Definition
| long-term, firm specific measures- Help companies monitor the success of their unique corporate and business strategies |
|
|
Term
| 4 characteristics of good CSFs |
|
Definition
- Simple and easy to understand
- Readily quantifiable
- Easy to monitor
- Linked to strategy |
|
|
Term
|
Definition
| • A performance measurement system that includes a systematic approach for linking strategy to planning and control |
|
|
Term
| Dimensions of the balanced scorecard |
|
Definition
- Financial and nonfinancial measures of performance
- Short-term and long-term objectives
- Past outcome and forward looking measures of performance
- “Hard” objective and “short” subjective measures of performance
- External and internal measures of performance |
|
|
Term
| 4 different perspectives by which managers look at their firms |
|
Definition
1. Financial perspective- How does the company look from a shareholder’s perspective?
2. Customer Perspective- How does the company look from a customer perspective?
3. Internal Business Perspective- What are the areas in which the company must excel?
4. Innovation and Learning Perspective- What must we do to continue to improve? |
|
|
