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41 Cards in this Set

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opportunity cost
the benefit forgone as a result of choosing one course of action rather than another
opportunity set
comprised of alternative actions
sunk costs
expenditures incurred in the past that cannot be recovered
fixed costs
costs incurred when there is no production (property taxes, insurance, plant mgmt, security)
variable costs
additional costs incurred when output is expanded
cost driver
measure of physical activity most highly associated with variations in cost
contribution margin
=Price-Variable cost per unit

net receipts per copy that are contributred toward covering fixed costs and providing profits
break-even point
=Fixed Costs/Contribution Margin

the number of units that must be sold to recover costs
target output=
Profit/ (1-t)*CM + FC/CM
operating leverage
measures the sensitivity of profits to changes in sales, the higher the operating leverage, the greater the firm's risk, firms with high operating leverage tend to have greater variability in cash flows
product costs
include all those accoutning costs incurred to manufacture a product, these costs and inventoried and expensed only when the product is sold
period costs
those costs that are expensed in the period in which they are incurred, they include all nommanufacturing accounting costs incurred to sell the product
direct costs
those items that are easily traced to the product or service (direct labor and material), direct costs are product costs
capital budgeting
the analysis of investment alternatives involving cash flows received or paid over time
payback method
method of evaluating a project by measuring hte time until the investment is recovered, easy to compute, ignores time value of money and cash flows after payback
net present value
discounted value of future cash flows less initial investment, method for evaluting capital investment projects
Return on Investment (ROI)
=Average annual income from the project/Average annual investment in the project
Internal Rate of Return
interest rate that equates the present value of future cash flows to the current outlay, or the discount rate that produces a zero net present value
principal-agent problem or agency problem
agents' pursuit of their self-interest instead of hte principal's
agency costs
the decline in firm value that results from agents pursuing their own interests to the detriment of the principal's interest, caused by differences among employees' risk tolerances, working horizons, and desired levels of job perks, arise because of information assymmetries
horizon problem
if the agent expects to leave the organization before the principal, the agent will tend to focus on short-run actions
goal incongruence
individual agents have different goals from their principal
management
the process by which the decision rights over the firm's assets are assigned to various people within the firm who are then held accountable for the results
decision rights
when an individual is given decision-making authority over some decision
employee empowerment
assigning more decision rights to employees (decentralization)
three things markets do automatically that firms can accomplish only through elaborate adminstrative devices (organizational architecture)
1. measure performance
2. reward performance
3. partition rights to their highest-valued use
decision management
refers to those aspects of the decision process in which the manager either intiaites or implements a decision
decision control
refers to those aspects of the decision process whereby managers either ratify or monitor decisions
responsibility accounting
begins with formal recognition of these subunits as responsibility centers

process of recognizing subunits within the organization, assigning decisions rights to managers in thoes subunits, and evaluating the performance of those managers
cost centers
subunit is assigned the decision rights to product some stipulated level of output and the unit's efficiency in achieving this objective is to be measured and rewarded
profit centers
often composed of several cost centers, centers are given a fixed capital budget and have decision rights for input mix, product mix, and selling prices, evaluted on the difference between actualand budgeted accounting profits
investment centers
similar to profit centers but have additional decision rights for capital expenditures and are evaluted on measures such as ROI
measures of investment center performance
net income, return on investment, residual income
net income
revenues minus expenses, creates dysfunctional incentives in investment centers to overinvest
return on investment
=accounting net income/total assets invested

creates an underinvestment problem
residual income
measures divisional performance by subtracting hte opportunity cost of capital employed from division profits

absolute number, making comparison difficult
economic value added
=adjusted accounting earnings - (weighted aerage cost of capital *Total capital)
how EVA differs from RI
1. different accounting procedures are often used to calculate adjusted accounting earnings than are used in reporting to shareholders
2. EVA uses a weighted average cost of capital which reflects the cost of equity and debt
3. many companies link compensation to performance measured by EVA
controllability principle
holding managers responsible for only those decisions for which they authority
transfer price
internal price assigned to units transferred from one profit center to another
two reasons for transfer pricing within firms
1. international taxation
2. performance measurement of profit and investment centers