1. Target Costing Formula Expected Selling Price - Required Profit 2. Cost Gap Current/estimated cost - target cost 3. Addressing cost gap?
... [Show More] 4. Life Cycle Cost- ing (LCC) 5. Product Life Cy- cle (PLC) 6. Product Life Cy- cle - Introductory Stage 7. price penetration strategy 8. price skimming strategy How to reduce cost/identify where excess cost coming from? One way to do this may be to mechanize the pro- duction process to reduce wastage accumulation of costs for activities that occur over the en- tire life cycle of a product, from inception to abandonment. Life-cycle costing includes development cost, design cost, manufacturing cost, marketing cost and distribution cost. When recognising the importance of life-cycle costing, one realises that design cost should be managed, the time before the product goes to market has to be reduced and the life-cycle of the product has to be maximised Check folder for own image. 4 Stages- introductory, growth, maturity and decline stage Low demand to start. Require additional marketing expen- diture and a pricing strategy to achieve sales volumes. Can use Price Skimming Strategy or Price Penetration Strategy a pricing strategy that aims to attract customers away from competitors by offering a lower price (this can help to build market share) A technique that sets very high prices for a limited period before reducing them to more competitive levels. In order to maximize profit for early adopters 9. Product Life Cy- cle - Growth Stage 10. Product Life Cy- cle - Maturity stage 11. Product Life Cy- cle - Decline Stage Sales volume starts to grow when product being estab- lished in market. Economies of scale are improving and the price per prod- uct is reducing. Even though competing products will be introduced into the growing market, it is usually the most profitable stage for the initial supplier and prices will stabilise based on the demand Demand for the product will slow done as it starts to mature in the market. Profits will start to decline unless innovative ways can be found, so that buyers can continue to differentiate the product from newer more innovative alternatives or the sales price may need to be reduced. Profits will be lower than during the growth stage. Sales curve begins to decline. Profit can still be made during the onset of the decline stage, but companies may face having to stop producing a product if sales volumes continue to reduce. 12. Price elasticity of a measure of how much the quantity demanded of a good demand responds to a change in the price of that good 13. Price elasticity of % change in quantity demanded / % change in price demand formula 14. Profit maximisa- tion model If price elasticity is more than 1, price cuts are recom- mended. If price elasticity is less than 1, price increases are recom- mended. model is based on the idea that profit is maximised where marginal revenue (MR) = marginal cost (MC) 15. Marginal Rev- enue (MR) formu- la 16. Optimum sales price of a product 17. Demand Equa- tion 18. Profit maximiza- tion limitations 19. Pricing strate- gies based on cost 20. Non-financial performance indicators + examples ”TR/Q” Also MR = a - 2bx (textbook) where b = change in price/change in quantity and x = quantity demanded. a= ??? optimal sales price is where marginal cost = marginal revenue p = a - bx, where p is the selling price and x is the quantity demanded at price p difficult to determine the demand for a product with accu- racy and many companies aim to achieve a target profit instead of a theoretical maximum profit. Hence, other pric- ing strategies based on cost are often adopted Cost-plus pricing means the company adds a mark-up to the total cost to achieve a selling price Cost-based pricing is very common. - Most frequently used cost-based is cost-plus pricing. -Easy to calculate - Relatively risk free But not without drawbacks ... - Cost-based approaches do not factor in key considera- tions, such as nature of target market and competitors. non-financial performance indicators are measures of per- formance based on non-financial information that may originate in, and be used by, operating departments to monitor and control their activities without any accounting input. These could include: - • Competitive including: o Sales growth by product o Market share of the product • Activity levels such as: o Number of units sold o Labour and machine hours worked • Productivity o Capacity utilisation of the factory o Average number of products produced per day • Quality of service • Number of units rejected by quality control during manu- facturing • Number of repeat customers • Customer satisfaction o Average time taken to respond to a customer enquiry o Number of customer complaints • Quality of the staff experience • Staff turn-over rate • Feedback from staff satisfaction surveys • Innovation o Number of new products introduced in recent times o How much of the company's total sales relate to new products? 21. Benchmarking "the establishment, through data gathering, of targets and comparators, that permit relative levels of performance (and areas of underperformance) to be identified. The adoption of identified best practices should improve per- formance" 22. Balanced Score- card (BSC) 23. REMEMBER TO LOOK AT CIMA P2 ACOWTANCY EQUATION FOR PROFIT MAXI- MASATION 24. Earnings Per Share (EPS) de- scription comparison to best in class! A measurement framework that helps managers translate strategic goals into operational objectives. See steps! regarded as one of the primary indicators of a company's performance EPS is also required in the calculation of a company's PE Ratio (Market price per share/ Earnings per share), which is a widely used ratio for valuing a company 25. PE ratio formula market price per share/earnings per share 26. EPS formula net income - preference share dividends / weighted aver- age common shares outstanding earnings/shares = most basic Earnings in the abovementioned formula is calculated as the profit after tax less preference share dividends. Num- ber of shares is the average number of shares calculated on a time weighted basis. 27. Factors affecting EPS calculation following changes in share capital will influence the calcu- lation: 28. Rights issue of shares (also see 14.1/2 for de- tailed calcula- tion) 29. Diluted earnings per share (DEPS) 30. Conversion of bonds or prefer- ence shares 31. Diluted earnings per share (DEPS) FORMULA 32. Share options or warrants formula + description Issue of shares to the market at full market price Bonus issue Rights issue (see other flash card) the privilege granted to shareholders to buy new shares in the same company requires an adjustment for the "free or bonus element" and the calculation of a "fraction". Fraction = Actual cum rights price / Theoretical ex rights price (TERP) Only after you have calculated the TERP, will you be able to continue with the calculation of the weighted average capital a diluted EPS figure attempts to alert shareholders to the potential impact of these changes on the EPS figure. If debt instruments or preference shares are converted into ordinary shares, there will be two implications on the EPS. Firstly, the company's profit will increase by the "sav- ing" on debt repayments or preference share dividends that will no longer be payable, because the holder of the debt or preference shares now holds ordinary shares. Secondly, the number of shares in issue will change. (Earnings + Notional Extra Earnings) / (Number of Shares + Notional Extra Shares). See activity. An option or a warrant provides someone with the right to buy a share at a certain price in the future. The option will only be exercised if the option price is less than the market price and, therefore, it will have a diluting effect for the other shareholders. The number of "free shares" needs to be added to the weighted average number of shares. The "free shares" are equal to: No. of options = (Fair value of the share price + exercise price of the shares) / Fair value of the share price 33. IFRS Financial In- formation Conceptual Framework for Financial Reporting of the In- ternational Financial Reporting Standards (IFRS) states that the objective of financial reporting is to "provide finan- cial information that is useful to users in making decisions relating to providing resources to the entity" (IFRS, 2018:5). Users of financial reports include "existing and potential investors, lenders and other creditors" Financial statements "provide historic financial informa- tion, but they do not provide the full picture of how the entity is performing 34. Triple Bottom Line recognition of the need for organizations to improve the state of people, the planet, and profit simultaneously if they are to achieve sustainable, long-term growth 35. Integrated Re- porting Frame- work International Integrated Reporting Council (IIRC) has pro- duced a revolutionary framework known as the Integrated Reporting Framework ( framework). The pro- poses a new way of reporting financial and non-financial capitals to users of financial information, to make more informed decisions about a company's ability to achieve sustainable value in the future. intends to promote integrated thinking throughout the company by connecting information between manage- ment reporting, analysis and decision-making 36. Integrated Re- porting An integrated report is a concise communication about how an organisation's strategy, governance, performance and prospects, in the context of its external environment, lead to the creation, preservation or erosion of value over the short, medium and long term 37. Integrated think- ing Active consideration by an organisation of the relationships between its various oper- ating and functional units and the capitals that the organ- isation uses or affects. e.g. Capitals used ability of company to respond to stakeholder needs/de- mands company's performance How company strategies respond to external environment and risks/opportunities it faces. 38. Categories of Capital Financial - funds available by company through obtaining such funds through various mediums Manufactured - buildings, equipment, infrastructure Intellectual Capital - intellectual property and organisation- al knowledge (employees/experience etc.) Human Capital - staff member competencies, experience etc. Social and Relationship Capital - Share information with stakeholders and networks to enhance well-being Natural capital - nonrenewable environmental resources 39. Preparing inte- grated report guiding princi- ples - Strategic focus and strategically orientation - Connectivity of information - Stakeholder relationships - Materiality - Conciseness - Reliability and Completeness - Consistency and Comparability Need to be applied for each content element 40. Content Table of Integrated Re- port 41. Benefits of Inte- grated Reporting 42. Limitations of In- tegrated Report- ing 43. Benefits of IR Framework 44. Limitations of IR Framework - Organisational overview and external environment - Governance - Business Model - Risks and Opportunities - Strategy and Resource Allocation - Performance - Outlook - Basis of Preparation and Presentation - More forward-looking information provided to users - Greater transparency improved disclosing company's reputation - Integrated thinking may improve efficiency of company - Potential bias because the information in the integrated report does not have to be audited or independently veri- fied - Primarily prepared for investors and other financial stake- holders - implementers of integrated reporting may not perceive the benefits of integrated reporting and only view it as a "tick box" - exercise without exploring the benefits of integrated thinking - company may be reluctant to disclose information that may reduce their competitive advantage - May provide too much information for users who may lose interest - Provides guidance for the preparation of integrated re- ports - Could be applied by all companies in any industry - Provides a more standardized structure for the report - Principle based and not rules based, so preparers of integrated reports could decide what they want to include and exclude. - Difficult to compare integrated reports of different com- panies, especially if they are in different industries - Need competent and experienced staff to draft the re- ports [Show Less]