2. Strategy
 Identify (if applicable):
 Mission (implied)
 Stakeholder preferences
 Organizational Targets (Sales, ROI, GM, Net Income, etc)
 Constraints (covenants, etc)
 Key Success Factors and Key Risks
 SWOT:
 Strengths & Weaknesses (internal ONLY)
 Opportunities & Threats (external ONLY)
 No need to call it out as a SWOT analysis
 Stick to relevant points

3. Strategy
 Financial Analysis
 Recent financial performance (ratios, trends)
 Financial Position (Liquidity, Solvency)
 Analysis of Alternatives
 Qualitative Analysis (Pros and Cons)


Link back to SWOT and targets/constraints
Mitigate/avoid key risks and threats
 Quantitative Analysis


Investment decision
Product decision
 Available financing

4. Strategy
 Recommendation
 Make sure you have one and it’s clear
 Again: Linkages
 If you have a target/constraint, is it met?
 Implementation
 Don’t go crazy but it’s usually good to have a few points
 Balanced Scorecard is always useful in gauging success
 Forecast
 If you have targets or constraints, always good to show
forecast

5. Investment Decision - NPV
 NPV is used to evaluate investments
 Very useful in cases where you have:
 Large initial investment
 Future cash inflows/outflows
 Duration of several years
 Less useful when:
 Highly risky forecasts
 Very short term (1-2 years)
 Must use cash basis (exclude noncash items) and ignore
financing costs (already considered in discount rate)

6. Example: NPV
Initial Year 1
Initial Investment
Year 2
Year 3
Year 4
Year 5
Year 15
(7,600)
Working Capital
(400)
(800)
(1,150)
Profit (Loss) Before Taxes
(400)
(800)
(600)
(386)
(670)
615
1,975
2,920
6,580
540
540
Depreciation
540
540
540
540
Income Tax (excl CCA)
211
45
(400)
(870)
Finance Costs
640
640
640
640
640
650
(159)
155
595
1,485
2,303
4,921
Net Cash Flow
Net Present Value
Net Present Value:
(7,600)
6,640
6,640
(1,197)
(2,464)

7. Balanced Scorecard
 Performance management tool
 Track execution of activities and monitor
consequences
 Strategy execution tool
 Translate mission/vision into objectives
 Measure performance vs. objectives
 Can be used for incentive-based pay

8. Balanced Scorecard
 4 Perspectives
 Financial


Financial performance (e.g. Gross Margin, Net Income, ROI, ROE)
How can we show our strategy is succeeding financially?
 Customer


Nonfinancial measures of customer satisfaction (retention,
market share, customer surveys)
How can we show we’re delivering to customers the value they
expect?

9. Balanced Scorecard
 4 Perspectives
 Internal Business Processes


Operating effectiveness & efficiency (including financial
measures) such as variances, defects, on-time delivery
What processes must we excel at to deliver value to our
customers?
 Learning and Growth


Measures of employee satisfaction, training and advancement
What action must the company take to prepare the people and
organization for the future?

10. Balanced Scorecard
 Components
 Strategic objectives: Goals, KSF’s, Key Risks
 Performance measures: Quantitative metrics to track
success in achieving objectives
 Baseline performance: Current level of performance
 Target: New level of performance being sought
 Initiatives: Enablers to help achieve targets

11. Transfer Pricing
 Price at which goods or services are charged between
LOB’s/BU’s/Departments
 Objective is to achieve goal congruency (i.e. consistent
with organizational goals)
 Market Value (best)
 Standard Cost (cost center to profit center)
 Negotiated Amount
 Cost + profit
 Actual cost

12. Product Cost Flows
Direct Materials
Direct Labour
Manufacturing OH
Cost of Goods
Manufactured
Finished Goods
Inventory

13. Product Cost Flows
Beginning WIP
+ Direct Materials
+ Direct Labour
+ Manufacturing OH
(Ending WIP)
Beginning Finished Goods
+ Cost of Goods Manufactured
(Ending Finished Goods)
Cost of Goods
Manufactured
Cost of Goods Sold
Period Costs: Expenses in current period

14. Cost Volume Profit (CVP)
Single Product
Unit Breakeven
Total FC
Unit CM
$ Breakeven
Total FC
CM %
Multiple Products
Unit Breakeven Point
Total FC
(Total CM/Total Unit Sales)
$ Breakeven Point
Total FC
(Total CM/Total $ Sales)

15. Spoilage and Scrap
 Normal spoilage  Added to cost of good units
 Abnormal spoilage  Period cost
 Proceeds from sale of scrap
→ Reduce Cost of Goods Sold
→Additional Income
→Reduce Overhead

16. Job Costing
 Costing system that tracks costs at a job level
 Used when units are expensive and costs can be
traced to individual job
 DM, DL and MOH are tracked to a job via WIP
 Charged to Finished Goods upon completion
 Charged to COGS upon sale

17. Process Costing
 Inexpensive units for which individual costs cannot be
identified
 Average cost per equivalent unit produced during the
period
 Average cost used to transfer from WIP to FG & COGS

18. Activity-Based Costing
 Allocation of indirect costs based on causal activities
 Attempts to identify direct link between cost and cost
object (ie Cost Driver)
 Results in better allocation using multiple activity rates
 Reduces cross-subsidization

19. Activity-Based Costing
Costs
Activities
Products

20. Overview of ABC
 Identifies activities required to produce product or





service
Direct costs can be directly allocated to products
Indirect costs more difficult to assign
Minimizes costs related to non-value adding activities
Determines the costs of the activities
Allocates cost to cost objects based on the objects
consumption of activities

21. Allocation of OH to Cost Pools
Payroll taxes
Machine maintenance
1,000
Direct Labour
500
Purchasing Dept labour
4,000
Fringe benefits
2,000
Purchasing dept supply
250
Equipment depreciation
Machine Hours
750
Electricity
1,250
Unemployment Insurance
1,500
# of Purchase
Orders

22. Allocation of OH to Cost Pools
Payroll taxes
Machine maintenance
1,000
500
Purchasing Dept labour
4,000
Fringe benefits
2,000
Direct Labour
$4,500
Purchasing dept supply
250
Equipment depreciation
Machine Hours
$2,500
750
Electricity
1,250
Unemployment Insurance
1,500
# of Purchase
Orders
$4,250

23. Calculation of OH rates
 Assuming:
 1,000 Direct Labour hours
 250 Machine hours
 100 Purchase Orders
 ABC Rates:
 4,500/1000 = $4.50 per Direct Labour Hour
 2,500/250 = $10 per Machine Hour
 4,250/100 = $42.50 per Purchase Order

24. Establishing an ABC system
 Determine main activities performed
 Determine best cost driver for each activity
 Determine cost of each activity
 Determine rate per unit of activity
 Assign costs to products based on consumption of activity

25. Standard Costs & Variance Analysis
Material & Labour
 Price Variance
 (AP-SP) x AQ
 Efficiency Variance
 SP X (AQ – SQ)
 Yield variance + Mix variance
 Yield variance
 (Total AQ – Total SQ) x BAPPU
 Mix variance
 (Actual Mix % - Std Mix %) x Total AQ x (Std PPU – BAPPU)

26. Standard Costs & Variance Analysis
Variable Overhead
 Overhead Spending Variance
 (SR – AR) x AU
 AU  Actual units of allocation base
 Overhead Efficiency Variance
 (SH – AH) x SR

27. Standard Costs & Variance Analysis
Fixed Overhead
 Overhead Spending Variance
 Budgeted FOH - Actual FOH
 Production Volume Variance
 Applied FOH – Budgeted FOH

28. Revenue Variances Snapshot

29. Revenue
 Sales Price Variance
 AQ X (AP – SP)
 Sales Volume Variance
 (AQ – BQ) X Individual CPU
 Sales Quantity Variance
 (AQ – BQ) X BACPU
 Sales Mix variance
 (ASM% - BSM%) X Total AQ x (Budg Ind CPU – BACPU)

30. Revenue Variances Snapshot

31. Revenue
 Sales Volume variance
 Sales Quantity Variance + Sales Mix Variance
 Market Size Variance
 (Act Size – Budg Size) X Budg Share X BACPU
 Market Share Variance
 (Act Share – Budg Share) x Act Size - BACPU
 Sales Mix variance
 (ASM% - BSM%) X Total AQ x (Budg Ind CPU – BACPU)

32. Short-term decision-making
 Special Order
 If idle capacity exists, taker order if

Incremental CM – Incremental FC > 0
 If no idle capacity, take order if

Incremental CM – Incremental FC – Opp Cost > 0
 Add or drop product


If incremental CM – Incremental FC > 0, add product
If lost CM – FC savings < 0, drop product