Klausur Flashcards
describe: discretionary expense center
1 resource consumption depends on management judgment
2 input measured as cost (monetary)
3 output not objectively measurable
4 discretion about：service levels，marketing activities， R&D activities
5 key driver for cost: set of activities
describe: revenue center
1 Revenues are the amounts earned from providing these outputs
2 Measure revenue : In monetary terms
3 no association between revenue and resource consumption
describe: investment center
1 profit = earnings − expenses
2 profit should be »appropriate« given the resources provided
3 managerial tasks
* generate adequate profits from resources
* invest in resources if profitable
* disinvest if resources are unprofitable
4 Return on Investment (RoI)
5 Economic Value Added (EVA)
3.1 Explain what budget is and name and describe at least 5 of its characteristics
- Budgets are an important tool for effective short-term planing and control in organization.
- Budget characteristics:
* Plan
* in monetary terms
* for a responsibility center
* management commitment
* enforced
3.2 what are the functions of a budget?
- fine-tune the strategic plan
a. strategic plan
b. budget
c. budget may indicate inappropriate strategic planning - coordination
- inconsistencies revealed during budgeting process
- assign responsibilities
- decisions that do not require further authorization
- basis for performance evaluation
- (mutual) commitment
- 3 Explain how the following budgets are arranged: (explain and discuss the following budgets)
a) . Revenue budget
b) . Production budget
c) .General and administrative budget
d) .R&D Budget
a) . Revenue budget
* unit sales prognosis · expected selling price
* relatively high uncertainty because of many influencing factors
b) . Production budget * standard unit cost · standard volume (at standard mix) * procurement budget might be derived * production schedule might be derived * adjusted for changes in inventory → cost of goods sold c) .General and administrative budget * usually discretionary expenses d) .R&D Budget * often: highly persistent, e.g. percentage of long-term average sales
- task about KPI calculation (similiar to the task in additional exercises not done) including statement of respective formulas (21 Points)
EBIT: Earnings before interest and taxes. EBIT = Revenue - Operating Expenses = Net Income + Interest + Taxes
WC: working capital. WC = current assets - current liabilities
AE/CE: capital employed. CE = total assets - current liabilities.
RoI: Return on investment. ROI = (Gain from Investment - Cost of Investment) / Cost of Investment
EVA：economic value added. EVA = (ROCE - WACC)*CE
ROE：Return on Equity. Return on Equity = Net Income/Shareholder’s Equity
EBIT Margin = EBIT / revenue.
Profit Margin = Net Income / revenue
ROCE = EBIT / CE
Name three main budget issues
- Top-Down
- Bottom-Up
- Top-Down and Bottom-Up
Explain Management Compensation Scheme
- Compensation
- salary
- benefits (e.g. health care and other perquisites)
- incentive compensation
2 »say-on-pay«
3 Short-term incentives plans - current year’s performance
- usually paid in cash
4 Long-term incentive plans - long-term performance
- often paid in stock (options)
Explain what Transfer Pricing is
Transfer price is the price at which divisions of a company transact with each other, such as the trade of supplies or labor between departments.
explain the three possibilities and how to use them:a) Market Price
1 market price exists
* quantity
* quality
* Delivery time
2 freedom to source and sell = access to the market
* – technical: possible for unlimited quantities
* – opportunity cost concept
3 full information
* – available alternatives
* – relevant costs
* – relevant revenues
4 spot-market (small quantities) vs. long-term sourcingexplain the three possibilities and how to use them: b) Competitive Price
second best: derive competitive price
* derive from similar product
* – e.g. 10 per cent margin above cost
* management intervention
* – e.g. for asymmetric market access
* – e.g. for asymmetric market capacity
explain the three possibilities and how to use them: c) Lost plus price
- third best: cost plus price
- standard cost not actual cost
- profit margin
- – percentage of cost
- – cover return on investment
- – assignment of investment to products?
- – affects profitability of centers
What is the basic idea of the agency theory?
- components
- agent, e.g. CEO
- principal, e.g. shareholder
- task to be performed by the agent(s)
- principal(s) assign(s) task(s) to agent(s)
- delegation of decision making authority
- missing knowledge and skills
- co-ordination between principals
- all players are (only) self-interested
- principal and agent differ in their
- objectives
- risk attitude
- level of information (information asymmetry)
Name also three costs linked to the agency problem
- agency relation induces agency cost
- monitoring cost
- risk premium
- opportunity cost
