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Financial performance

Transcript: Module Content The unit looks at 3 areas of Financial Performance Understanding the internal and external factors that affect organisations. Cost accounting techniques needed in monitoring financial performance. Techniques necessary for measuring performance and managing costs. ABC works by identifying indirect activities and then group costs into ‘Cost Pools’, one for each activity. For each cost pool there must be something which drives the cost to change. This is known as the ‘Cost Driver’. Once the driver has been identified a rate can then be calculated. The rate is then used to charge the output with the cost according to activity. General Approaches Include Absorption Costing Absorption costing is a method of determining the cost of a product by including in the total cost of a product an appropriate share of an organisations overheads. Marginal Costing Marginal costing determine the price of a product depending upon if that cost is fixed or a variable cost Activity Based Costing This determines the price of a product or service depending on what causes the cost. It uses ‘cost pools’ and ‘cost drivers’ to allocate costs. List sources of information, both internal and external that might be used by a Management Accountant Introduction To Budgeting Marginal Cost: the part of the cost of a unit that would not be incurred if that unit was not produced. The marginal production cost = direct materials, direct labour and variable production overheads. Variable Costs Contribution: The difference between sales value and marginal cost of sales, (the extra income generated by the product towards covering fixed overheads and making a profit). Unit Contribution: Selling Price per unit-variable cost per unit Total Contribution : Sales Income – Total Variable Costs How may methods of costing do you know? Complete the Absorption cost exercise Marginal costing Costing Methods Variable Fixed Semi-Variable Stepped AIMS The ‘Principles of Managing Financial Performance unit is about understanding the principles of managing financial performance. Learners will have the knowledge to be able to use a range of techniques to analyse information on expenditure. They will be able to make judgements to support decision making, planning and control by managers. Learners will have the skills to collect and analyse information, monitor performance, and present reports to management. Learners need to be able to explain, define, describe, calculate and analyse a range of fundamental concepts and techniques. Many of the concepts and techniques are interrelated and learners will need to understand how the concepts and techniques interrelate. They may also be required to explain and describe these relationships. How may methods of costing do you know? Please complete the Marginal Costing Company Exercise Aims: Introduction to unit Confirm understanding of various costing techniques Objectives You will be able to use absorption costing to calculate costs and profits. You will be able to use marginal costing to calculate costs and profits You will be able to use Activity Based Costing to calculate costs Financial Performance Activity Based Costing This is a development of Absorption Costing, but uses a more sophisticated system to deal with indirect costs, (overheads). It involves examining costs to see what causes them and using this information then charge costs accordingly. It came about because: Management accountants thought simple absorption on one basis e.g. direct labours hours, did not reflect the complexity of costs. Production methods and batch sizes have a major impact on production costs, yet are largely ignored in absorption costing. For example, the setting up costs for a small production run, are greater than those of a large production quantity. Modern production methods do not lend themselves to using absorption costing. There are 4 basic types of cost, do you know what they are? This accepts that there are 3 basic differences between costs. The differences are based purely on their behaviour when applied to a companies activity. List the differences between Management Accounting and Financial Accounting: Financial Accounts Prepared on a Historical Cost basis may not be suitable for planning. Provides data about the whole organisation and to external stakeholders. Prepared according to external regulations, e.g. ISSAP’s, IFRS’s, the Companies Act. Management Accounts Incorporates modified Historical data and/or data from outside the rigid framework of double entry. Focuses on individual businesses or segments of a business, providing information to help managers manage. Format of reports and information contained within are at the managements discretion. Management accounts are driven by their usefulness. There is no right or wrong approach. It all depends on the question being asked. Aims and Objectives Absorption Costing Absorption costing is a method of determining the cost of a product by including in the total cost

Financial performance

Transcript: Financial performance Thank you for your attention! Marketing ethics Financial and comparing performance Marketing ethics Social marketing - marketing technique leads to change people behaviour for their good or benefits for society Corporate social responsibility (CSR): advantages for company of being socially responsible cause related marketing CRM - company donates money to a charity, a non-profit organization -> brand is associated with the charity -> good image green marketing - development and distribution of eco-friendly/enviromentally friendly goods responsible purchasing - company can refuseto buy material or good made using child labour, or have been tested on animals Comparing performance - subjective measure - how well a company can use assets and generate revenues - measure of financial health - finance - how money is made - financing - the way that something is paid for - financial reporting - information about company´s finances - annual report : P&L account, balance sheet, cashflow statement - ways how to borrow money : shareholders, bonds, banks - EBIDTA - earnings before interest, tax, depreciation, amortization - if a company is good at generating cash or cashflow Three ways of comparing companies: 1. Return on assets (ROA): how well is company using capacity -> full capacity/spare capacity 2. Return on equity (ROE): how well is company using shareholder´s equity 3. Leverage: amount of company´s borrowings -> leveraged, over- leveraged

Financial Performance

Transcript: --> firms might be able to reduce their cost of capital by promoting certain ESG concerns governance performance - Average of 639 firms 1. Does ESG-performance of a company affects its stock price at all? --> not all ESG dimensions are equally relevant for stock returns Coclusion Part II The End data of the company "Kinder, Lydenberg and Domini" on seven ESG dimensions since 1991 if a company meets an ESG dimension --> score 1 if not --> score 0 Weak employee relations --> carrying non-sustainability risk premium Financial Performance 2. The mispricing scenario impact on company´s cash-flow streams lack of information --> ineffective reflection in stock price Sources: http://www.epaw.co.uk/EPT/glossary.html; http://www.sptf.info/how-do-i-start/faqs#8; http://www.progressoutofpoverty.org/ppi-social-performance Source for definition: https://www.nachhaltigkeit.info/artikel/sri_socially_responsible_investment_1610.htm Incorporating social and environmental criteria into the investment process that might affect the future financial performance Some Definitions Socially responsible investing calculating the final score by aggregating The three scenarios 1. No-effect-scenario no difference in returns The requirements: how well an organization is achieving it´s social goals - Ethical beliefs of investors (discriminatory-tastes argument) - and/or (non-) sustainability risk factors (risk-factor-scenario) 2. If so, why? --> change from positive effect of employee relations from 1992 to 2003 to negative effect from 2003 to 2008 could be due to compensation for risk Sooooo.... Brings us back to the core question: Is it mispricing or compensation for risk why ESG-performing firms have positive or negative abnormal returns? information on ESG-performance available enough investors who care --> only community-relations had a positive effect on stock returns 1. Economic argument costs and benefits have to be associated to the ESG concerns Problem: How to reflect this in the stock price efficiently? environmental performance - the environmental impact of a company´s resources consumed and it´s products and services produced also called: values-based SRI SRI is an evolving notion (sich entwickelnde Idee) --> still unclear why investors should take any of the criteria into consideration How ESG was measured here Stock returns in relation to social, environmental and governance performance But: this may not have been efficiently reflected into stock prices 2. Discriminatory-tastes-argument benefit-cost relation is secondary investors target non-financial utility moral or ethical reasons --> firms with low scores in employee relations had higher expected stock returns than firms with high scores in employee relations Mispricing or compensation for risk? social performance - how much a company is connected to social strenghts Period: July 1992 to June 2008 --> together: ESG-performance 3. The risk-factor scenario low ESG performance = higher returns due to higher risk Conclusion of Christiana Manescu´s study Academic Explanations According to the author.... might be the central reasons

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