A 14907 - Strategic Management Accoun6ng (2018-2019) Session 11 - PowerPoint PPT Presentation

A 14907 - Strategic Management Accoun6ng (2018-2019) Session 11 Opera6onal Decisions Paul G. Smith B.A., F.C.A

Course Overview 1. Financial Vs Management Accoun4ng 10. Investment Decisions 2. Accoun4ng Principles and Valua4on Criteria – 11. Opera4onal Decisions PGS Current and Fixed Assets 3. Accoun4ng Principles and Valua4on Criteria – 12. Exam Current and Fixed Assets ..Cont’d PT 4. Financial Statement Analysis 13. Target Cos4ng and Life Cycle Cos4ng 5. Performance Measurement and Cost 14. Servi4za4on and Cost Management Accoun4ng 6. Exam 15. Performance Measurement, Sustainability and CSR LS 7. Strategic Management Accoun4ng 16. Voluntary Disclosure and Balanced Scorecard – Case Study 8. Budgets and Performance Management 17. Presenta4on and Discussion of Case Study PGS 9. Pricing Decisions 18. Exam A 14907 Strategic Management Accoun6ng 2

Overview Session 11 • SeJng sales targets • Predic6ng the impact of price changes • Outsourcing vs in-house opera6on/produc6on • Opera6onal restructuring/automa6on of business processes • Closing a business segment • Dropping a product/service line A 14907 Strategic Management Accoun6ng 3

RECAP PREVIOUS SESSION A 14907 Strategic Management Accoun6ng 4

Summary Session 10 • Tradi6onal investment appraisal techniques. • The strengths and weaknesses of individual appraisal techniques. • The use and abuse of investment appraisal techniques. • Financial analysis within the overall context of investment planning. • Non-financial factors in investment appraisal. • Alterna6ve strategic approaches to investment appraisal. A 14907 Strategic Management Accoun6ng 5

Session 11 Objec4ves • At the end of this session, students will be able to: – Assess the financial consequences of a range of decision- making situa6ons. – Define the scope and limita6ons of the financial techniques applied. A 14907 Strategic Management Accoun6ng 6

OPERATIONAL DECISION MAKING A 14907 Strategic Management Accoun6ng 7

Opera4onal decision-making A 14907 Strategic Management Accoun6ng 8

COST-VOLUME-PROFIT ANALYSIS (CVP) A 14907 Strategic Management Accoun6ng 9

Cost–volume–profit analysis (CVP) • Cost –volume–profit analysis is the study of the interrela6onship between costs and revenues (and therefore profit ) at various levels of ac6vity. A 14907 Strategic Management Accoun6ng 10

Revenue behaviour A 14907 Strategic Management Accoun6ng 11

Fixed costs A 14907 Strategic Management Accoun6ng 12

Variable costs A 14907 Strategic Management Accoun6ng 13

Total costs A 14907 Strategic Management Accoun6ng 14

Total revenue and total costs A 14907 Strategic Management Accoun6ng 15

Break-even Point Profit = PQ – (F + VQ) Where: Q = Quan6ty of units sold P = Selling price V = Variable cost of units sold F = Fixed costs Can be rearranged as: Total Revenue = Total Costs where Profit = Q (P-V) – F PQ = F + VQ P – V = Contribu6on A 14907 Strategic Management Accoun6ng 16

Break-even point Break-even point (in units) = Fixed costs . Contribu6on per unit Q = F P - V A 14907 Strategic Management Accoun6ng 17

Margin of safety A 14907 Strategic Management Accoun6ng 18

Evalua4on of the CVP technique CVP analysis ignores price elas6city of demand and economies of scale. • CVP analysis focuses on the short term. • CVP analysis usually assumes a single product. • CVP analysis assumes simple, single-stage manufacturing • CVP analysis assumes that costs can be categorized into either variable or • fixed. CVP analysis assumes that the forces influencing a business are sta6c • rather than dynamic. A 14907 Strategic Management Accoun6ng 19

RELEVANT COSTING A 14907 Strategic Management Accoun6ng 20

Relevant cos4ng • The relevant costs for decision-making are those future costs that will be affected by the decision. Costs that are independent of the decision are not relevant and should not be considered when making that decision. A 14907 Strategic Management Accoun6ng 21

Relevant cos4ng A 14907 Strategic Management Accoun6ng 22

OPPORTUNITY COST A 14907 Strategic Management Accoun6ng 23

Opportunity cost • A measure of the opportunity that is lost or sacrificed when the choice of one course of ac6on requires that an alterna6ve course of ac6on be given up. • An opportunity cost is always measured financially in terms of lost contribu6on. (Contribu4on = Sales revenue − Variable costs) A 14907 Strategic Management Accoun6ng 24

OUTSOURCING CONSIDERATIONS A 14907 Strategic Management Accoun6ng 25

The considera4on of qualita4ve factors in outsourcing Redundancies • Employee morale • Reliance on suppliers • Produc6on flexibility • Ability to meet customer requirements • Control over quality • A 14907 Strategic Management Accoun6ng 26

THE SHUTDOWN DECISION A 14907 Strategic Management Accoun6ng 27

The shutdown decision: dele4ng a business segment A business ‘segment’ could be a: • product; • type of customer; • geographic region; • distribu6on channel; or • any other iden6fiable part of a business. A 14907 Strategic Management Accoun6ng 28

Relevant cos4ng: summary • When decision-making, only relevant costs should be considered. Any costs deemed not to be relevant should be ignored. • Relevant costs are those future costs that will be changed by a par6cular decision. This may include opportunity costs. • Whether any given cost is relevant will depend upon the situa6on. • The 6me horizon chosen will impact upon what costs become relevant for a given situa6on. A 14907 Strategic Management Accoun6ng 29

REQUIRED READING AND RESEARCH A 14907 Strategic Management Accoun6ng 30

Required reading and research • Reading – required – Accoun6ng and Finance for Managers – Chapter 11 Opera6onal Decisions • Reading – Op6onal – None • Exercises – Comprehension ques6ons 1 – 8 – Exercises 9.1 - 9.3 – Addi6onal Instructor Ques6ons 1 - 4 A 14907 Strategic Management Accoun6ng 31

SESSION SUMMARY, VALIDATION AND OVERVIEW SESSION 11 A 14907 Strategic Management Accoun6ng 32

Summary Session 11 • SeJng sales targets • Predic6ng the impact of price changes • Outsourcing vs in-house opera6on/produc6on • Opera6onal restructuring/automa6on of business processes • Closing a business segment • Dropping a product/service line A 14907 Strategic Management Accoun6ng 33

Session 11 Valida6on • What is a CVP Analysis? • What is it useful for? • What are some of CVP analysis’s drawbacks? • What are the relevant costs to consider in decisions making? • What do we mean by opportunity cost? • What issues arise from outsourcing or off- shoring? A 14907 Strategic Management Accoun6ng 34