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31 Cards in this Set
- Front
- Back
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Decision Models – Define
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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. |
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Decision models – List 7 major components
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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 |
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Cost accounting approach to uncertainty – Define Certainty
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A situation implying the existence of one event for each course of action available to managers in a given situation.
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Cost accounting approach to uncertainty – Define Uncertainty
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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.
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Cost accounting approach to uncertainty – Impact of Certainty and Uncertainty on decision models (3)
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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. |
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Utility Value – Define & Broad Concept
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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. |
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Managers attitudes towards Utility Value (3)
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Risk Neutral
Risk Averse Risk Seeking |
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Risk Neutral
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Utility (Good Feeling) from gaining a given $ amt.
= Disutility (Bad Feeling) from a loss of the same dollar amount. |
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Risk Averse
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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 |
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Risk Seeking
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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 |
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Preparation of decision models – List Steps
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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 |
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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 |
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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. |
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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. |
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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 |
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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 |
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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 |
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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. |
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Decision models presentation methods
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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. |
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Capital Budgets – Define
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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. |
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Major Roles of Capital Budgets (5)
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Goals Setting Role
Planning Role Directing Role Evaluating Role Controlling Role |
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Capital Budgeting – Goals (5)
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-Provide expansion plans
-Wise-guide mgmt decisions -Exercise control -Improve the OE -Eliminate the probability of having idle capital. |
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Capital Budgeting – Importance (3)
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-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. |
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Capital Budgeting – Preparatory Functions (10)
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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 |
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Capital Budgeting – Implementational Functions (10)
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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 |
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Administration of Capital Budgets
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Board of Directors
Chief Executive Capital Budgeting Committee Budgeting Manager Budget Controller Cost Accounting Manager Respective Managers Consultants |
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Capital Budgets – Factors setting the evaluating criteria
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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 |
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Discounted cash flow (DCF) – Define
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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 |
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Required rate of return (RRR) – Define
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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. |
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Internal rate of return (IRR) – Define
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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. |
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Net present value (NPV) – Define
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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.
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