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31 Cards in this Set

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Decision Models – Define
Means by which managers can take appropriate decisions in given situations
BROAD CONCEPT
Provide the focal point in the decision making process.
Backed up by, and based upon administrative, accounting, technical, marketing, and professional information and efforts.
ROLE
Measure the predicted effects of alternative courses of action available to managers in given situations.
Endow the planning process by enabling managers to select the best available alternative.
Provide professional protection to different types of managerial practices.
Decision models – List 7 major components
The Choice Criterion
Set of alternative actions
Set of alternative events
Set of probabilities
Set of possible outcomes
The expected value (EV)
The objective function
Cost accounting approach to uncertainty – Define Certainty
A situation implying the existence of one event for each course of action available to managers in a given situation.
Cost accounting approach to uncertainty – Define Uncertainty
A situation implying the existence of two or more events for each course of action available to managers in a given situation, each with its probability of occurrence.
Cost accounting approach to uncertainty – Impact of Certainty and Uncertainty on decision models (3)
1-Certainty eases the implementation of dec. models as only one event exists for each alternative course of action to managers in a given situation.
2-Uncertainty complicated the implementation of decision models as several events exist for each alternative course of action available to managers in a given situation.
3-Uncertainty implies the existence of a higher possibility of having actual amounts deviation from estimated amounts.
Utility Value – Define & Broad Concept
A term referring to the value of the outcome of a specific decision to a particular decision maker.
BROAD CONCEPT
Reflects the personal opinion of a particular decision maker
Does not provide a generalized formula that could be applicable to all managers
Depends entirely on the individual attitudes of managers towards risks involved in the decision making process.
Managers attitudes towards Utility Value (3)
Risk Neutral
Risk Averse
Risk Seeking
Risk Neutral
Utility (Good Feeling) from gaining a given $ amt.
=
Disutility (Bad Feeling) from a loss of the same dollar amount.
Risk Averse
Utility (Good Feeling) from a gain of a given dollar amount
<
Disutility (Bad Feeling) from a loss of the dame dollar amount
OR
Disutility (Bad Feeling) from a loss of a given dollar amount
>
Utility (Good Feeling) from a gain of the dame dollar amount
Risk Seeking
Utility (Good Feeling) from a gain of a given dollar amount
>
Disutility (Bad Feeling) from a loss of the same dollar amount
OR
Disutility (Bad Feeling) from a loss of a given dollar amount
<
Utility (Good Feeling) from a gain of the same dollar amount
Preparation of decision models – List Steps
Setting the Choice Criterion
Determination of Alternative Actions
Identification of Alternative Events
Setting the events probabilities
Computation of the possible outcomes
Computation of the EV
Performing the objective function
Preparation of decision models – Step One
Setting the Choice Criterion

A-Define Choice Criterion
B-Two Examples
C-Three Sources of Information
Setting the Choice Criterion
A- Quantified objectives (goals)
B- Max. profits & Min. costs
C- Govt. Authorities, Board of Directors & Managers
Preparation of decision models – Step Two
Determination of Alternative Actions

A-Define Alternative Actions
B-Eight examples
C-Four Sources of Information
Determination of Alternative Actions
A-Determination of alternative courses of action available to managers in a given situation.
B-Buy or Lease, Buy A, B, or C, Lease, A, B, or C, Selling or Keeping, Continuing or Discontinuing, Whether or not to manufacturer a new product, accepting or rejecting new product, whether or not to hire a new employee.
C-Managers, consultants, researchers, surveys.
Preparation of decision models – Step Three
Identification of Alternative Events

A-Define Alternative Events
B-Two examples
C-Five Sources of Information
Identification of Alternative Events
A-Identification of alternative occurrences or consequences attributed to the implementation of alternative actions.
B-Identification of possible SALES levels which may be achieved because of the implementation of each alternative action.
Identification of possible COST levels which may be incurred because of the implementation of each alternative action.
C-Marketing managers, production managers, surveys, researches, manufacturers manuals.
Preparation of decision models – Step Four Setting the events probabilities

A-Define Events Probabilities
B-Three examples
C-Three Sources of Information
Setting the events probabilities
A-The concept of probabilities involves the process of assessing the likelihood (probability) of facing alternative events or consequences of managerial decisions.
B-the probability of getting heads in a coin toss is 1:2; the probability of obtaining a 6 in tossing a dice is 1:6; the probability of obtaining X volume of sales is 20% or the probability of incurring X level of costs is 80%.
Marketing experts, technical experts, consultants
Preparation of decision models – Step Five Computation of the possible outcomes

A-Define
Computation of the possible outcomes
A-Multiplying the quantified criteria of the event by its contribution margin and deducting relevant fixed costs
Preparation of decision models – Step Six
Computation of the EV
A-Define Computation of the EV
B-Examples
Computation of the EV
A- The expected value is defined as the arithmetic mean (weighted average) of the possible outcomes of each course of action taken by managers, with related probabilities serving as the weights.
B- EV=01xP1 + 02xP2 + 03xP3
Preparation of decision models – Step Seven
Performing the objective function

A-Define Computation of the EV
Performing the objective function
A-providing a comprehensive basis for selecting the best decision among alternative decisions available to managers in a given situation.
This is achieved by comparing the EV’s of alternative decisions and selecting the one with the highest EV.
Decision models presentation methods
Decision Tree Method
-tree-shaped diagram that enables its users to easily understand the decision model contents at a glance.
-most commonly used by US corporations

Decision Table Method
-comprehensive table that conveys the decision model contents to the users in a concise style.
*both methods are fully endorsed by respective professional bodies.
Capital Budgets – Define
Short, medium and long-rage plans depicting a projection of the sources and application of funds to be allocated by an enterprise for diversified investment purposes in the current and future accounting periods.

Broad concept
-Internal and external sources of financing investment projects
-The implementation costs for each investment project
-The projected operating profitability of each investment project
-The projected impact of each investment project on future financial statements.
Major Roles of Capital Budgets (5)
Goals Setting Role
Planning Role
Directing Role
Evaluating Role
Controlling Role
Capital Budgeting – Goals (5)
-Provide expansion plans
-Wise-guide mgmt decisions
-Exercise control
-Improve the OE
-Eliminate the probability of having idle capital.
Capital Budgeting – Importance (3)
-Safe-guarding the financial resources of a business enterprise
-Strengthening the financial position of the company
-Protecting the implementation of expansion plans as to ensure the successful achievement of its goals.
Capital Budgeting – Preparatory Functions (10)
Setting goals
Determine premises
Determine costs
Processing the est processing costs
Projecting the internal and external sources of financing
Valuation of capital budgets
Elimination of unjustified capital budgets
Final review of capital budgets
Preparation of the master capital budget
Obtainment of the divisional managers approval
Capital Budgeting – Implementational Functions (10)
Obtain mgmt approval
Circulate it
Determine responsibility
Segregation
Processing procedures
Periodic meetings
Implement long term plans
Major means of financial & admin. control
Follow-up and reporting
Administration of Capital Budgets
Board of Directors
Chief Executive
Capital Budgeting Committee
Budgeting Manager
Budget Controller
Cost Accounting Manager
Respective Managers
Consultants
Capital Budgets – Factors setting the evaluating criteria
Discounted cash flow
Requires rate of return
The internal rate of return
The net present value
Future disposal value
Impact on productivity
Impact on quality of production
Impact on sales
Impact on cash flow
Impact on operating costs
Impact on non-cash cost elements
Impact on operating efficiency
Impact on taxes payable
Impact on overall strategy
Impact on profitability
Discounted cash flow (DCF) – Define
DCF factor recognizes the importance of taking the cost of using money into consideration in evaluating capital budgets.
Accordingly, it weighs the time value of money by taking into consideration the following factors in evaluating capital budgets:
1-Amount of investment
2-interest rate
3-period of investment
Required rate of return (RRR) – Define
The RRR factor recognizes the importance of taking the

minimum desired rate of return on an investment as set by the board of directors

into consideration in evaluating capital budgets.
Internal rate of return (IRR) – Define
The IRR factor sets the interest rate at which
the PV of expected cash inflows from a project
=’s
the PV of expected cash outflows of the project.
Net present value (NPV) – Define
This factor provides the method of calculating the present value of the expected net monetary gain or loss from a project using the predetermined IRR.