Reading...
Play button
Play button
Use LEFT and RIGHT arrow keys to navigate between flashcards;
Use UP and DOWN arrow keys to flip the card;
H to show hint;
A reads text to speech;
41 Cards in this Set
- Front
- Back
|
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 |
