Summary Drury Managerial Finance

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ISBN-13 9781473734760
172 Flashcards & Notes
2 Students
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This is the summary of the book "Drury Managerial Finance". The author(s) of the book is/are Eugene F Brigham, Joel F Houston, Colin Drury. The ISBN of the book is 9781473734760. This summary is written by students who study efficient with the Study Tool of Study Smart With Chris.

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Summary - Drury Managerial Finance

  • 4.1 Identifying relevant cost and revenues

  • What is decision making?
    Decision-making involves choosing between alternatives.
    Making decisions requires that only those costs and revenues that are relevant to the alternatives are considered.
  • Business decisions can be grouped in two main groups. Name them
    1. One time decisions
    2. Recurring or continuous decisions
  • What does a one time decision entail?
    The management team is presented with the problem, makes a decision, implements it, and then cannot or will not change it anymore.
    Reversing is usually impossible or can be done only with great effort and/or cost
  • What does recurring or continuous decisions entail?
    Decisions made about a series or flow of actions instead of one action.
    Management will decide on the expected activities, expenses, revenues and other outcomes and continuously monitor the progress of achievement of the goals and where necessary decide on corrective action or adjustment of the expectations.
  • What is another general principle of business decisions?
    They need to be based on a clear, correct and complete overview of the positive and negative impact of the decision
  • Some decisions are not routine. What needs to be taken under consideration?
    Special studies.
    These focus on whatever planning time horizon the decision-maker considers appropriate for a given situation. However it is important not to focus excessively on the short term, because the objective is to maximize long-term benefits.
  • What are relevant costs?
    The relevant costs and revenues required for decision-making are only those that will be affected by the decision.
    Future cash flows, which will differ between the various alternatives being considered. In other words, only differential (or incremental) cash flows should be taken into account.
  • What does differential/incremental mean?
    The cash flows that will be affected by a decision that is to be taken.
  • What are irrelevant costs? (3)
    1. Sunk costs (past costs) have already been incurred and cannot be avoided regardless of the alternatives being considered.
    2. Fixed costs: they are incurred to support the organization as a whole an generally will not change whichever alternative is chosen.
    3. Future costs that will be the same for all alternatives.
  • For what special studies are relevant costs and revenues required? (5)
    1. Special selling price decisions
    2. Product-mix decisions when capacity constrains exist
    3. Decisions on replacement of equipment
    4. Outsourcing (make or buy) decisions
    5. Discontinuation decisions
  • 4.2 Importance of qualitative/non-financial factors

  • What are qualitative/non-financial factors?
    Those factors that cannot be expressed in monetary terms.
  • 4.3 Special pricing decisions

  • What are special pricing decisions?
    Pricing decisions outside the main market. Typically they involve one-time only orders at a price below the prevailing market price.
  • 4.3.1 Evaluation of a longer-term order

  • What are opportunity costs?
    Costs that measure the opportunity that is sacrificed when the choice of one course of action requires that an alternative is given up.
  • 4.4 Product mix decisions when capacity constraints exist

  • What are limiting factors?
    Scarce resources that constrain the level of output.
  • How do limiting factors affect the short term and long term?
    Within a short term time period it is unlikely that constraints can be removed and additional resources acquired. Where limiting factors apply, profit is maximized when the greatest possible contribution to profit is obtained each time the scarce or limiting factor is used.
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Latest added flashcards

What are the stages if target costing? (4)
1. Determine the target price that customers will be prepared to pay for the product.
2. Deduct a target profit margin from the target price to determine the target cost.
3. Estimate the actual cost of the product.
4. If estimated actual cost exceeds the target cost investigate ways of driving down the actual cost to the target cost.
Why should cost-based pricing formula be used when the final price is likely to be altered by management?
Because is provides an initial approximation of the selling price.
What is decision making?
Decision-making involves choosing between alternatives.
Making decisions requires that only those costs and revenues that are relevant to the alternatives are considered.
Business decisions can be grouped in two main groups. Name them
1. One time decisions
2. Recurring or continuous decisions
What does a one time decision entail?
The management team is presented with the problem, makes a decision, implements it, and then cannot or will not change it anymore.
Reversing is usually impossible or can be done only with great effort and/or cost
What does recurring or continuous decisions entail?
Decisions made about a series or flow of actions instead of one action.
Management will decide on the expected activities, expenses, revenues and other outcomes and continuously monitor the progress of achievement of the goals and where necessary decide on corrective action or adjustment of the expectations.
What is another general principle of business decisions?
They need to be based on a clear, correct and complete overview of the positive and negative impact of the decision
Some decisions are not routine. What needs to be taken under consideration?
Special studies.
These focus on whatever planning time horizon the decision-maker considers appropriate for a given situation. However it is important not to focus excessively on the short term, because the objective is to maximize long-term benefits.
What criticisms are there of budgeting?
1. encouraging rigid planing and incremental thinking whereby budgets are derived from last year's activities plus an adjustment for the current year rather than adopting a zero-based budgeting approach
2. being time-consuming taking up an enormous amount of management time
3. ignoring key drivers of shareholder value by focusing too much attention on short-term financial numbers
4. being yearly rigid ritual that impedes firms form being flexible and adaptive in the increasingly unpredictable fast-changing environment facing contemporary organizations
5. tying the company to a 12-month commitment, which is risky since it is based on uncertain forecasts derived from a fast-changing environment
6. meeting only the lowest targets and not attempting to beat the targets
7. spending what is in the budget even if this is not necessary in order to guard against next year's budget being reduced
8. achieving the budget even if this results in undesirable actions
9. being disconnected from strategy
What are the advantages of computerized budgeting? (4)
1. It is simply altered
2. Management can evaluate many different options before the budget is finally agreed.
3. Computerized models can incorporate actual results, period by period, and carry out the necessary calculations to produce the budgetary control reports.
4. It is also possible to adjust the budgets for the remainder of the year when it is clear that the circumstances on which the budget was originally set have changed.