Drury Managerial Finance

by (1st)
ISBN-13 9781473734760
172 Flashcards & Notes
2 Students
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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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Example questions in this summary

What are relevant costs?
2
What are qualitative/non-financial factors?
2
What does differential/incremental mean?
2
What are special pricing decisions?
2
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