FINAL MIDTERM - Managerial Accounting Concepts

Seite 1

CHAPTER 25 AND CHAPTER 26

What are the Decision Making Process?

1, Relevant 2, Accurate 3, Timely

@ Clarify the Decision Problem

@ Specify Criteria

@ Identify the alternatives

@ Develop a Decision Model

@ Collect Managerial Data

@ Make a Decision

Relevant

- Bearing Future Information

- Differ among Alternatives

When to Accept Special Order

- Accepting a Special order at one time reduced sales price for customer

Self Questions by Manager?

1, Do i have enough capacity to produce special order

2, Is reduced sales price is High enough to cover my variable and fixed cost ( Incremental Costs )

3, Does reduced sales price affect my long-run

Incremental Analysis

1, Find Relevant Information with costs ( Affecting our Revenue and Costs on additional unit of production at change price )

2, Special Order sales revenue -

Variable Cost ( VC per unit x special order quantity ) - Additional FIXED COST for Special Order = Incremental Profit for Special Order

If POSITIVE = Accept the Special Order

If NEGATIVE = Reject the Special Order

How to do Outsourcing?

* If the incremental costs making exceeds outsourcing than costs of outsourcing = OUTSOURCE

* If the incremental costs making lesser than outsourcing costs = Do not Outsource

-If Fixed Cost changes Relevant , if Fixed Cost same Irrelevant

* Fixed Overhead sometimes is unavoidable , so you need consider only variable cost

What are the List of Benefits and Costs of Outsourcing?

- Save Cost ( If expense in making )

- Focus on competitivness ( new designs )

- Don't know how good is outsourcing for longrun

- Dependence on supplier's cost ( If supplier charges more than expected on making, then it's better not to outsource )

When to accept Make a Sell or Process further

* If Extra revenue from processing exceeds your extra cost = Process further

* If extra revenue from processing lesser than your extra cost = Make a sell

Example : Calculate Regular gasoline revenue ( Price x units )

Calculate Premium/Special/Processed Gasoline revenue ( New Price x units )

Additional cost for Premium ( Subtract from premium revenue )

If Net revenue is more than regular then Process further

CAPITAL BUDGETING

- Capital Budgeting is a process of planning for investment in long term assets

When a capital asset is acquired, by purchase or construction, the company is

making a capital investment.

Capital Budgeting

The process of planning to invest in

long-term assets in a way that returns

the most profitability to the company.

Capital Budgeting is for capital investments.

It includes 4 methods to analyze capital budgeting

1, Payback - Easy and short life of Span

2, Rate of Return - Easy and short life of span

3, Net Present Value - Time value of money

4, Internal Rate of Return - Time value of money

Using Payback and Rate of Return How can I make a CAPITAL INVESTMENT Decision?

PAYBACK PERIOD

The initial invest-

ment is also called the capital outlay.

- Screen on my capital Investment Choices ( What are my different Choices ? )

- Length of Time it takes to recover Capital Outlay ( Initial invested amount )

- The shorter the payback period, the more attractive the asset

- Payback highlights Risky Investments

example : If i invested 1,000,000 Billion Dollars for a Solar Equipment, it is good investment if it PAYBACK ( Net Cash Inflow ) in less than 5yrs.

Payback Period = Amount Invested / Expected Annual Net Cash Inflow

### What is my Annual Net Cash Inflow? It is the denominator value.

How do you Calculate Payback Period for EQUAL NET CASH INFLOW ?

Same as Above formula. Here annual cash inflow is same.

How do you calculate Payback Period for UNEQUAL NET CASH INFLOW?

Annual Cash inflow is different. So you need to calculate Payback period with the remaining cash that you need to receive during last period.

Payback period = 3 yrs + (10,000 ) * Amount needed to recover cash inflow * / 50,000 * Net cash inflow in year

What are major critics of PAYBACK PERIOD?

1, Focuses only time but not Profitability

2, Ignores Cash flow after payback period ( As they focus on year but not the cash that they receive after cash inflow )

3, Shorter period is more desirable

What is Accounting RATE OF RETURN?

*The accounting rate of return shows the effect of the investment on the company's accrual-based income

* ARR Accounting Rate of Return used to screen Potential Investments

Rate of Return = Average Operating Income from an Asset / Average amount invested in an asset

@ Total Operating Income / Lifespan

@ Book value at beginning of an asset + Book value at End of an asset / 2

Remember How to calculate Average Amount invested in an asset

$$$ If expected Rate of return exceeds required Rate of return - Invest

$$$ If less than required rate of return - Reject

##%%Example

From Given Problem Data , You can first calculate Annual Net Cash Inflow ( From subtracting cost/expenses )

Next, You Calculate Annual Net Operating Income ( From subtracting any Depreciations )

From above you can calculate Payback Period and ARR ( Annual Rate of Return )

Which Capital Investment Method do you require Financial Statements?

ARR is the only one which you require Annual OPERATING INCOME and Annual Average amount Invested

Which two methods uses Discounted Cash Flow Models? and Understand Time VALUE of MONEY?

NPV and IRR whereas Payback and Rate of Return do not understand Value of money

What is NPV

The Net Present Value of the investment's cash inflow minus the investment's cost ( cash outflow )

Discount rate - reduces interest rate

*** If net investment cash inflow exceeds investment cost then it's a good investment

NPV With EQUAL NET CASH INFLOW ( Annuity )

Net cash inflow x Annuity PV Factor i = % , n = period = Present Value

* As net cash inflow value does not changes PV Factor is same

NPV with UNEQUAL NET CASH INFLOW ( Annuity )

Net cash inflow x PV Factor i , n

* Here Both cash inflow and Pv factor changes

* Complete Total Present Value of Net cash inflow is subtracted from Investment amount = NET Present Value. If Positive Yes its good to invest

NOTE : If the investment is expected to bring in even cash flows, use Present Value of Annuity table

• If amounts are unequal Present value of each individual cash flow is computed. Use Present Value of $1 (PV) table.

NPV is higher if cash inflows are larger or if they come sooner or if the discount rate is lower

INTERNAL RATE OF RETURN

-IRR is also called as Actual Rate of Return

If NPV > 0 means Actual Rate of return > required rate of return

NPV = 0 Actual rate of return = required

* Internal Rate of return is the interest rate that makes NPV = 0

Present value of investment cash inflows - investment cost = 0

Higher the IRR = Stronger Growth

IRR exceeds Rate of return = Invest / IRR less Rate of Return = Don't invest

Using same formula Calculate

** Investment Cost = Amount of equal cash inflow x ordinary annuity PV factor

From above you know initial investment, next amount of equal cash inflow values for next n years. Now from Annuity PV Table you need to check IRR at what % your receive your Rate of Return

Is IRR Depended on NPV? or PV factor ? YES because

If IRR exceeds Required Rate of Return (RRR), then the project has a positive NPV (favoring acceptance)

–If IRR equals RRR, NPV = $0, so project acceptance and rejection yield the same value

–If IRR is less than RRR, NPV is negative (favoring rejection)

NPV analysis is generally regarded as the preferred method•NPV expresses the computations in dollars,not in percentages

•NPV method can be used when the discount rates varies over the life of the project

Seite 2

CHAPTER 16

Identify Difference Between Financial and Managerial Accounting?

Managerial Accounting :

- Accounting system the provides both Financial and Non Financial information to the managers

- Helps to plan and control

- Helps for future

- Internal Decision makers

To whom do you share Managerial Information ?

- Managers,

Seite 3

Chapter 23

* Cost Variance = Actual Cost - Standard Cost x Actual Quantity

* Efficiency Variance = Actual Quantity - Standard Quantity x Standard Cost

Seite 4

ACCOUNTING EXAM = JUST LIKE GMAT SUCCESS

I CAN ACHIEVE because I have no doubt within me.

Because my focus only on revision GMAT

Because pyshcologically I fixed, Imagined and dreamed what am I gonna do for GMAT and I'm practicing Daily in next 5 mock tests and review it.

LIKE

1. Used for 2 entities

2. Meaning

3. Like + Noun/Pronoun

- Like CAN NEVER be followed by a CLAUSE

4. Like can never be followed by a clause

5. Like is never used for examples - As only used for comparision. For examples it is used SUCH AS

6. Like is always used for same logical entities or list

7. subject ,like subject - compare it correctly

- Like + their Noun - Is also correct - Because you are seeing a noun entity

- Meaning Analysis within a Sentence

1. Whenever I see LIKE use - WHO within a sentence

2. Whenever I see LIKE use - AS within a sentence

AS roles

- Comparision

@ As + Clause

@ As + prepositional Phrase

@ As can also be followed by noun when noun is playing as a ROLE - When there is no comparision

- When you compare using 'as' I need to use a clause

- 'As' when presents as a comparision then i WILL USE a clause

- 'AS' when presents as a function or a role then I will use a 'AS + NOUN'

- Action that takes place simultaneous

@ Same meaning of simultaneous action can be used with 'WHILE' 'DURING'

- Reason

@ For reason meaning ' as ' can be replaced with 'Since' or 'Because'

- Role or function of a thing or person

@ 'As' should be followed by a noun when it is playing an action or function of a thing

- Like + Noun or As + clause conves a same meaning

- ' that in 1982 ' also makes a huge difference - Be a world class just at few things - Become a master in GMAT. Robin sharma - I will achieve my GMAT in my first attempt because I knew the answer paper and i'm focusing on what I do on pace time with practice and relentlessly at same time - study so much

- 'JUST LIKE' is not the right IDIOM

- 'JUST AS -- SO' is the right IDIOM