What is overhead?
A general term referring to indirect costs that cannot be traced to individual products or other cost objectives
What is activity-based costing (ACB)
A costing method that provides management with an understanding of how costs are accumulated within an organization. Helps guide strategic decisions like pricing and capacity management
What is cross-subsidization?
Improper assignment of costs across products, causing profitably across products to be distorted; products that are assigned artificially low (high) costs appear to be more (less) profitable than they are actually are.
ACB helps to prevent this.
Activity-based costing breakdown (five steps)
- Identify the cost objective
- Identify activities and cost drivers
- Sign indirect cost to cost pools
- Calculate activity rates
- Assign cost to cost objective
Cash Budget Assumptions
Budgeted Income Statement Cash Budget
Major Assumptions:
When Earned
Quantity
Price
Bad Debts, Discounts
Sales Revenue Major Assumptions:
When Earned
Receivables
Cash From Sales Major Assumptions:
Variable and Fixed Product Costs Incurred
Match Cost Against Revenue
Cost of Goods Sold Major Assumptions:
When Paid
Payables
Inventories
Noncash (e.g., Depreciation)
Product Costs Paid Major Assumptions:
Variable and Fixed Period Costs Incurred
Match to Period Incurred
General and Administrative Expenses Major Assumptions:
When Paid
Payables
Prepaid Expenses
Noncash (e.g., Depreciation)
General and Administrative Costs Paid Major Assumptions:
Tax rate(s)
Differences Between Financial Reporting and Tax Treatment (e.g., CCA)
Tax Loss Carryforwards
Income Tax Expense Major Assumptions:
When Paid/Refunded
Taxes Payable
Deferred Tax Assets and Liabilities
Income Tax Paid Capital Assets (Linked to Capital Budget) Major Assumptions:
New Assets Capitalized and Depreciated
Gain/Loss on Sale of Assets
Gain/Loss on Sale of Capital Assets Major Assumptions:
Cash Paid for New Assets
Cash Received from Sale of Assets
Cash Paid and Received for Capital Assets Financing (Linked to Financing Budget) Major Assumptions:
Short-Term and Long-Term Investments Purchased and Sold
Interest and Dividends Earned
Gain/Loss on Sale of Investments
Investment Earnings; Gain/Loss on Sale of Investments Major Assumptions:
Cash Paid to Purchase Investments (Including Investment of Idle Cash)
Cash Received to Sell Investments
Interest and Dividends Received
Cash Paid and Received for Investments Major Assumptions:
Short-Term and Long-Term Borrowing and Repayments
Interest Incurred
Equity Financing
Dividends Declared
Interest Expense Incurred Major Assumptions:
Cash from New Debt and Equity Financing
Cash Paid to Retire Debt
Cash Paid for Interest on Debt
Cash Dividends Paid
Cash Paid and Received for Debt and EquityProcess Costing
Absorption Costing is typically used in process costing, with costs assigned to one or more processes (often departments). Direct costs are traced to a process, while indirect costs are allocated.
In a typical production process,direct materials are added at the beginning of the process, while conversion costs (that is, Direct Labour,variable manufacturing overhead and fixed manufacturing overhead) are incurred throughout the process. Therefore, for work-in-process, the equivalent units for direct materials are not the same as for conversion costs. To accommodate this difference, direct materials are usually pooled separately from conversion costs
Weighted Average Cost per Unit
Under the weighted average method, all costs are accumulated and divided by all units finished and equivalent units in ending work-in-process, as shown in the following equations:
DM cost per unit= Tot. DM/ Finished Units for DM
Conversion cost per unit= Tot. Conversion Cost/ finished or equivalent units for conversion costs
Tot. Cost per unit= DM costs per unit + conversion cost per unit
First-In, First-Out Cost per Unit
Under the first-in, first-out method, costs incurred during the current period (including costs transferred in) are used to calculate the cost of work performed during the current period.
PESTEL Analysis
The PESTEL Analysis evaluates the external macro-economic forces impacting a firm or the environment it operates in. PESTEL is an acronym for the broad categories of relevant external factors:
Political
Economic
Social
Technological
Environmental
LegislativeIt is a useful strategic tool for understanding market growth or decline, business position, and potential risks and opportunities confronting the organization.
PESTEL analysis differs from Strengths, Weaknesses, Opportunities, Threats (SWOT) Analysis (see Get Briefed on SWOT Analysis) in that it only considers external factors, while the SWOT analysis also considers internal factors. In fact, you may perform a PESTEL Analysis to complement the opportunities and threats section of the SWOT Analysis.
Keep in mind that the whole point of this type of analysis is to identify key risks and opportunities for the organization so that the organization can ultimately do something about these items.
Political Factors
The political component of your analysis involves identifying the key politically driven factors that could have an impact on an organization. Some examples of potential opportunities or threats may pertain to:
Tax policy
International trade regulation
Changes in the political environment
Government policy and stability
Environmental regulation and protectionEconomic Factors
Macro-economic factors can have a pervasive effect on the future of the organization. When an entire country is in recession, the entire industry suffers. Monitoring economic factors can help identify the direction of the overall economy. Consider and analyze such factors as:
Economic growth
Industry growth
Interest rates
Exchange rates
Taxes and consumer disposable income
Corporate tax rates
Labour costsSocial Factors
Social factors often have a direct correlation to trends emerging in the end-user market. By monitoring social factors, the organization can position itself to capture opportunity or avoid threats. Some common factors to monitor include:
Income distribution across the population
Demographics
Labour mobility
Lifestyle trends
Attitudes toward work and leisure
Level of education of the workforce
Population growth rateTechnological Factors
Technology trends can impact an organization’s future prospects, particularly in industries where technology advancement is crucial to competitive advantage. Consider the automotive industry, the pharmaceutical industry, or even the semi-conductor industry. Technological advancement can provide as much opportunity to one firm as it threatens another. The factors that you may consider include:
Government spending on research Level of invention and innovation happening in the industry Energy usage, energy sources, and fuel switching capabilities Rates of obsolescence Manufacturing advances
Environmental Factors
In certain types of business, environmental factors have the potential to impact the business in a pervasive way. Consider a coal generated plant and the emissions and discharge of water from the generating station. You might also have a pulp and paper manufacturer who is able to use recycled paper as feedstock. In either of these cases, environmental factors may turn out to be significant strategic drivers for the business.
Some examples of environmental factors to consider include:
Pollution footprint of the business in the context of the industry, societal norms, and government regulations The degree to which the product can be recycled Compliance with current and future environmental legislation
Legal Factors
Legal issues play such an important role in all forms of decision making within a company. In the context of a PESTEL Analysis, the various laws that exist present constraints around what is and is not permissible for a company to do.
Typically, the following points could be analyzed where there is relevance:
Discrimination law
Consumer law
Antitrust law
Employment law
Health and safety lawSWOT
When formulating strategy, one of the most common tools used to assess the situation is the SWOT Analysis (Strengths Weaknesses, Opportunities, and Threats). SWOT Analysis scans the internal and external environments to provide a comprehensive understanding of the business context.
Porter’s Five Forces
Porter’s Five Forces is used in analyzing both industry structure and corporate strategy development in the competitive environment. The framework was developed as a reaction to the Strengths, Weaknesses, Opportunities, Threats (SWOT) analysis, though in many respects it is a complementary analysis that helps flush out opportunities and threats presenting themselves to an organization.
The key considerations in Porter’s Five Forces include:
Bargaining power of buyers;
Bargaining power of suppliers;
Threat of substitution;
Threat of new entrants;
Competitive rivalry.Threat of New Entry:
Time and cost of entry
Specialist knowledge
Economies of scale
Cost advantages
Technology protection
Barriers to entry
etc.Competitive Rivalry:
Number of competitors
Quality differences
Other differences
Switching costs
Customer loyalty
Costs of leaving market
etc.Supplier Power:
Number of suppliers
Size of suppliers
Uniqueness of service
Your ability to substitute
Cost of changing
etc.Threat of Substitution:
Substitute performance Cost of change
Buyer Power:
Number of customers
Size of each order
Differences between competitors
Price sensitivity
Ability to substitute
Cost of changing
etc.corporate governance
a set of relationships between a company’s management, its board, its shareholders, and other stakeholders. Corporate governance also provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined.
The purpose of governance is:
To reduce ambiguity and confusion in the organization;
To enhance the effectiveness of strategy, risk management, resource allocation, monitoring, and overall organizational effectiveness;
To enhance relationships between management and principals (owners and other stakeholders, including communities and society);
To reduce the risk of organizational failure.
Elements of governance plans include:
strategic plans, risk tolerances, and resource allocations that have been agreed to by directors and executive management. Governance policies include the organizational processes of oversight controls, measures, monitoring, audit, and disclosure practices.
