成本预算英文版课件
成本造价方案英文
Cost Estimating SchemeIntroductionCost estimating is an essential aspect of project management that involves predicting and calculating the expenses associated with a particular project or task. This is an important process as it helps in the efficient allocation of avlable resources and assists in making informed decisions regarding the feasibility and profitability of the project. In this document, we will discuss a comprehensive cost estimating scheme in English, outlining the various factors to consider and methods to determine the accurate cost estimates.Factors Influencing Cost Estimatesbor Costs: Labor costs are one of the significant factors indetermining the overall project cost. This includes wages, salaries,benefits, and any additional expenses related to the workforce involved in the project.2.Material Costs: The cost of materials required for the project is another significant factor. This includes the cost of raw materials, equipment, machinery, and other supplies essential for project completion.3.Subcontractor Costs: If subcontractors are hired for specialized tasks, their costs should be considered separately. This includes the costs associated with hiring, managing, and supervising subcontractors.4.Overhead Costs: Overhead costs such as utilities, rent, insurance, and office supplies should be taken into account. These costs are not directly related to a specific project but contribute to the overall expenses.5.Inflation and Currency Fluctuations: Inflation and currency fluctuations can impact the cost estimates significantly. Thesefactors should be considered, especially for projects that span over an extended period or involve international transactions.6.Market Conditions: The current market conditions, including supply and demand, can influence the cost of materials and labor. Staying updated with market trends and conditions is crucial for accurate cost estimating.7.Contingency Budget: It is vital to include a contingency budget to account for unforeseen events or risks that may arise during project execution. This ensures that any unexpected costs can be managed without adversely affecting the project.8.Timeframe: The timeframe of a project can also impact the cost estimates. Longer project durations may incur additional expenses such as increased labor costs or inflation.Methods for Cost Estimation1.Analogous Estimating: This method involves using historical data from similar past projects to estimate the costs of the current project. This is a quick and strghtforward method but may not be accurate if the projects differ significantly.2.Parametric Estimating: In this method, mathematical models are used to estimate project costs based on specific parameters such as size, complexity, or volume. It provides more accuracy than analogous estimating and is commonly used for repetitive tasks.3.Bottom-Up Estimating: Bottom-up estimating involves estimating the cost of individual project components and then combining them to determine the overall project cost. This method is time-consuming but provides a detled and accurate cost estimate.4.Three-Points Estimating: Three-points estimating is a technique that uses three estimates: the most optimistic, mostpessimistic, and most likely scenario. The average of these estimates is then used to determine the cost estimate. This method is useful for projects with a high level of uncertnty.5.Vendor Quotes and Bids: Obtning quotes and bids fromvendors and suppliers can provide accurate cost estimates formaterial and equipment costs. This method is particularly usefulwhen dealing with external parties.Documentation and ReportingDocumenting and reporting the cost estimates is crucial for effective project management. The following points should be considered when documenting cost estimates:1.Cost Breakdown Structure: A cost breakdown structureprovides a detled breakdown of all the cost elements involved in the project. It helps in understanding the sources of costs and facilitates better cost control.2.Cost Estimating Worksheet: A cost estimating worksheet should be prepared, documenting the estimated cost for each component of the project. This includes labor, material, subcontractor, and overhead costs.3.Assumptions and Constrnts: Clearly stating the assumptions and constrnts considered while estimating the costs is essential for transparency and avoiding misunderstandings. This ensures that everyone involved in the project is aware of the underlying assumptions.4.Risk Assessment: Identifying and assessing potential risks and their impact on the cost estimates should be documented. This helps in proactive risk management and better decision-making.5.Cost Variance Tracking: Tracking the actual costs incurred during the project execution and comparing them with the estimated costs is crucial. Any variations from the estimated costsshould be documented and analyzed to identify the reasons behind the deviations.6.Regular Reporting: Regular reporting of cost estimates andactual costs to the project stakeholders is essential. This helps in mntning transparency and enables informed decision-making.ConclusionA well-defined and accurate cost estimating scheme is essential for successful project management. Considering the various factors influencing cost estimates, using appropriate estimation methods, and effectively documenting and reporting cost estimates contribute to better resource allocation, cost control, and decision-making. By following the guidelines outlined in this document, project managers can enhance their ability to estimate costs accurately and improve project outcomes.。
成本分析英文PPT课件
Period cost
Is also called the period expense . It associated directly from the enterprise current sales revenue to deduct the cost in certain period.
Such as : Raw material ,Packaging material and direct production salaries.
Indirect cost
The expenses can’t account directly to a particular function or product.
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3
Fixed cost VS. Variable
cost
The cost that mostly affect by the technology. It’s always represented as the direct material.
The cost that depended by the management’s strategic.
commo n
Incremental and common
The same cost between different items.
divided into committed variable cost and discretionary fixed cost.
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Direct cost VS. Indirect
成本预算课程英文版
❖ Return is the increased future cash inflows11-7 attributable to the long-term asset
❖ Capital assets create these capacityrelated costs
11-2
❖ NOregeandizatotioCnsohnavtreodleCvealoppeitdasl pAescisficets
tools to control the acquisition and use of long-term assets because:
❖ Capital budgeting has three phases:
Identifying potential investments, Choosing which investments to make, and Follow-up monitoring of the investments. 11-4
The amount of money committed to the acquisition of capital assets is usually quite large
The long-term nature of capital assets creates11-3 technological risk
We need an equivalent basis to compare the cash flows that occur at different points in time
成本预算课程英文版)
Quick Check
How much would you have to put in the bank today to have $100 at the end of five years if the interest rate is 10%? a. $62.10
b. $56.70 $100 0.621 = $62.10
a
Annuity, or equal amount, received or paid at the end of each
period for n periods
r
Rate of return required, or expected, from an investment
opportunity; the rate of interest earned on an investment
We need an equivalent basis to compare the cash flows that occur at different points in time
11-11
Time Value of Money (2 of 2)
• The critical idea underlying capital budgeting is:
0
5
6%
PV0
Hale Waihona Puke 10$4,00011-16
Quick Check
How much would you have to put in the bank today to have $100 at the end of five years if the interest rate is 10%? PV or FV? Table: ____ a. $62.10 b. $56.70 c. $90.90 d. $51.90
成本预算英文版课件
§ The long-term nature of capital assets creates technological risk
a
Annuity, or equal amount, received or paid at the end of each
period for n periods
r
Rate of return required, or expected, from an investment
opportunity; the rate of interest earned on an investment
§ Calculator, tables, or spreadsheet software
成本预算英文版课件
Present Value (Graphic)
Assume that you need to have exactly $4,000 saved 10 years from now. How much must you deposit today in an account that pays 6% interest, compounded annually, so that you reach your goal of $4,000?
now.
成本预算英文版课件
Time Value of Money (1 of 2)
• Time value of money (TVM) is a central concept in capital budgeting
成本管理会计课件(英文版)
Chapter 1An Introduction to Managerial Accounting and Cost Concepts Work of ManagementPlanning Planning ControllingControlling Directing and MotivatingDirecting and Motivating PlanningIdentifyalternatives.Identify alternatives.Select alternative that does the best job of furthering organization’s objectives.Select alternative that does the best job of furthering organization’s objectives.Develop budgets to guide progress toward the selected alternative.Develop budgets to guide progress toward the selected alternative.Directing and MotivatingDirecting and motivating involves managing day-to-day activities to keep the organization running smoothly.n Employee work assignments.n Routine problem solving.n Conflict resolution.n Effective communications.ControllingThe control function ensuresthat plans are being followed.The control function ensures that plans are being followed. Feedback in the form of performance reports that compare actual results with the budget are an essential part of the control function.Feedback in the form of performance reports that compare actual results with the budget are an essential part of the control function.Planning and Control CycleDecision Making Formulating long-and short-termplans (Planning)Formulating long-and short-term plans (Planning)Measuringperformance(Controlling)Measuringperformance (Controlling)Implementing plans (Directingand Motivating)Implementing plans (Directing and Motivating)Comparing actual to planned performance(Controlling)Comparing actual to planned performance (Controlling)BeginComparison of Financial and Managerial AccountingFinancial Accounting Managerial Accounting1. Users External persons who Managers who plan formake financial decisions and control an organization2. Time focus Historical perspective Future emphasis3. Verifiability Emphasis on Emphasis on relevance versus relevance verifiability for planning and control4. Precision versus Emphasis on Emphasis on timeliness precision timeliness5. Subject Primary focus is on Focuses on segmentsthe whole organization of an organization6. GAAP Must follow GAAP Need not follow GAAPand prescribed formats or any prescribed format7. Requirement Mandatory for Notexternal reports MandatoryLearning Objective 1Identify and give examples ofeach of the three basicmanufacturing cost categories.The Product DirectMaterials Direct Materials Direct Labor Direct Labor Manufacturing OverheadManufacturing Overhead Manufacturing CostsDirect MaterialsRaw materials that become an integral part of the product and that can be conveniently traced directly to it.Example: A radio installed in an automobile Example: A radio installed in an automobile Direct LaborThose labor costs that can be easily traced to individual units of product.Example:Wages paid to automobile assembly workers Example:Wages paid to automobile assembly workers Manufacturing OverheadManufacturing costs cannot be traced directly to specific units produced.Examples:Indirect materials and indirect labor Examples:Indirect materials and indirect labor Wages paid to employees who are not directlyinvolved in productionwork.Examples:Maintenanceworkers, janitors andsecurity guards.Materials used to support the production process. Examples:Lubricants andcleaning supplies used in the automobile assembly plant.Classifications of Nonmanufacturing CostsSelling Costs Costs necessary to get the order and deliverthe product.AdministrativeCostsAll executive, organizational, and clerical costs.Learning Objective 2Distinguish betweenproduct costs and periodcosts and give examplesof each.Product Costs Versus Period CostsInventoryCost of Goods SoldBalance SheetIncomeStatement SaleProduct costs include direct materials, directlabor, andmanufacturingoverhead.Period costs are not included in product costs. They are expensed on the income statement.ExpenseIncomeStatementQuick Check üWhich of the following costs would beconsidered a period rather than a product cost in a manufacturing company?A. Manufacturing equipment depreciation.B. Property taxes on corporate headquarters.C. Direct materials costs.D. Electrical costs to light the production facility.E. Sales commissions.Which of the following costs would beconsidered a period rather than a product cost in a manufacturing company?A. Manufacturing equipment depreciation.B. Property taxes on corporate headquarters.C. Direct materials costs.D. Electrical costs to light the production facility.E. Sales commissions.Quick Check üPrime Cost and Conversion Cost Direct Material Direct Material Direct Labor Direct Labor Manufacturing OverheadManufacturing Overhead Prime Cost ConversionCost Manufacturing costs are oftenclassified as follows:Comparing Merchandising and Manufacturing ActivitiesMerchandisers . . .n Buy finished goods.n Sell finished goods.Manufacturers . . .n Buy raw materials.n Produce and sell finished goods.MegaLoMartBalance SheetMerchandiser Current Assets v Cash v Receivables v Prepaid Expenses v Merchandise Inventory Manufacturer Current Assets v Cashv Receivables v Prepaid Expenses v Inventories:1.Raw Materials2.Work in Process3.Finished GoodsMerchandiser Current Assets v Cash v Receivablesv Prepaid Expenses v Merchandise Inventory Manufacturer Current Assets v Cashv Receivables v Prepaid Expenses v Inventories:1.Raw Materials2.Work in Process3.Finished GoodsBalance SheetPartially complete products –some material, labor, oroverhead has been added. Completed productsawaiting sale. Materials waiting to be processed.Learning Objective 3Prepare an incomestatement includingcalculation of the cost ofgoods sold.The Income StatementCost of goods sold for manufacturers differs only slightly from cost of goodssold for merchandisers.Manufacturing Company Cost of goods sold: Beg. finished goods inv.14,200$ + Cost of goods manufactured 234,150 Goods available for sale 248,350$ - Endingfinished goods inventory (12,100)= Cost of goodssold 236,250$ Merchandising Company Cost of goods sold: Beg. merchandise inventory 14,200$ + Purchases 234,150 Goods available for sale 248,350$ - Ending merchandise inventory (12,100) = Cost of goodssold 236,250$ Inventory Flows Beginning balance Beginning balance Additions to inventory Additions to inventory +=Ending balance Endingbalance Withdrawals frominventory Withdrawalsfrom inventory +Quick Check üIf your inventory balance at the beginning of the month was $1,000, you bought $100 during the month, and sold $300 during the month, what would be the balance at the end of the month?A. $1,000.B. $ 800.C. $1,200.D. $ 200.If your inventory balance at the beginning of the month was $1,000, you bought $100 during the month, and sold $300 during the month, what would be the balance at the end of the month?A. $1,000.B. $ 800.C. $1,200.D. $ 200.Quick Check ü$1,000 + $100 = $1,100$1,100 -$300 = $800Learning Objective 4Prepare a schedule of cost of goods manufactured.Schedule of Cost of Goods Manufactured Calculates the cost of rawmaterial, direct labor andmanufacturing overheadused in production.Calculates the manufacturingcosts associated with goodsthat were finished during the period.ManufacturingWorkRaw Materials Costs In ProcessBeginning rawmaterials inventory +Raw materialspurchased =Raw materials available for usein production–Ending raw materialsinventory=Raw materials usedin productionAs items are removed from raw materials inventory and placed into the production process, they are called directmaterials.As items are removed from raw materials inventory and placed into the productionprocess, they are called direct materials.Schedule of Cost of Goods ManufacturedManufacturingWorkRaw Materials Costs In ProcessBeginning raw Direct materials materials inventory +Direct labor+Raw materials +Mfg. overhead purchased =Total manufacturing =Raw materials costs available for use in production –Ending raw materialsinventory=Raw materials used in production Conversion costs are costs incurred toconvert the direct material into a finishedproduct.Conversion costs are costs incurred to convert the direct material into a finished product.As items are removed from rawmaterials inventory and placed into the production process, they are called direct materials. As items are removed from raw materials inventory and placed into the production process, they are called direct materials. Schedule of Cost of Goods ManufacturedManufacturing WorkRaw Materials Costs In Process Beginning raw Direct materials Beginning work in materials inventory +Direct labor process inventory +Raw materials +Mfg. overhead +Total manufacturing purchased =Total manufacturing costs =Raw materials costs =Total work in available for use process for the in production period –Ending raw materials–Ending work in inventory process inventory=Raw materials used =Cost of goodsin production manufactured.All manufacturing costs incurred during the period are added to the beginning balance of work in process.All manufacturing costs incurred during the period are added to the beginning balance of work in process. Schedule of Cost of Goods Manufactured Manufacturing WorkRaw Materials Costs In Process Beginning raw Direct materials Beginning work in materials inventory +Direct labor process inventory +Raw materials +Mfg. overhead +Total manufacturing purchased =Total manufacturing costs =Raw materials costs =Total work in available for use process for the in production period –Ending raw materials –Ending work in inventory process inventory =Raw materials used =Cost of goods in production manufactured.Costs associated with the goods that are completed during the period are transferred to finished goods inventory.Costs associated with the goods that are completed during the period are transferred to finished goods inventory.Schedule of Cost of Goods ManufacturedWorkIn Process Finished GoodsBeginning work in Beginning finishedprocess inventory goods inventory+Manufacturing costs +Cost of goodsfor the period manufactured=Total work in process =Cost of goodsfor the period available for sale–Ending work in -Ending finishedprocess inventory goods inventory=Cost of goods Cost of goodsmanufactured sold Cost of Goods SoldManufacturing Cost FlowsSelling and Administrative Period Costs Finished Goods Cost ofGoodsSoldSelling and Administrative Manufacturing Overhead Work inProcessDirect Labor Balance Sheet Costs Inventories IncomeStatement Expenses Material Purchases Raw Materials Quick Check üBeginning raw materials inventory was $32,000. During the month, $276,000 of raw material was purchased. A count at the end of the month revealed that $28,000 of raw material was still present. What is the cost of direct material used?A.$276,000B.$272,000C.$280,000D.$ 2,000Beginning raw materials inventory was $32,000. During the month, $276,000 of raw material was purchased. A count at the end of the month revealed that $28,000 of raw material was still present. What is the cost of direct material used?A.$276,000B.$272,000C.$280,000D.$ 2,000Quick Check üBeg. raw materials 32,000$ +Raw materialspurchased 276,000=Raw materials availablefor use in production 308,000$ –Ending raw materialsinventory 28,000=Raw materials usedin production 280,000$Quick Check üDirect materials used in production totaled $280,000. Direct labor was $375,000 and factory overhead was $180,000. What were total manufacturing costs incurred for the month?A.$555,000B.$835,000C.$655,000D.Cannot be determined.Direct materials used in production totaled $280,000. Direct labor was $375,000 and factory overhead was $180,000. What were total manufacturing costs incurred for the month?A.$555,000B.$835,000C.$655,000D.Cannot be determined.Quick Check üDirect Materials 280,000$ +Direct Labor 375,000 +Mfg. Overhead 180,000=Mfg. Costs Incurredfor the Month 835,000$ Quick Check üBeginning work in process was $125,000. Manufacturing costs incurred for the month were $835,000. There were $200,000 of partially finished goods remaining in work in process inventory at the end of the month. What was the cost of goods manufactured during the month?A.$1,160,000B.$ 910,000C.$ 760,000D.Cannot be determined.Beginning work in process was $125,000. Manufacturing costs incurred for the month were $835,000. There were $200,000 of partially finished goods remaining in work in process inventory at the end of the month. What was the cost of goods manufactured during the month?A.$1,160,000B.$ 910,000C.$ 760,000D.Cannot be determined.Quick Check üBeginning work inprocess inventory 125,000$ +Mfg. costs incurredfor the period 835,000=Total work in processduring the period 960,000$ –Ending work inprocess inventory 200,000=Cost of goodsmanufactured 760,000$ Quick Check üBeginning finished goods inventory was $130,000. The cost of goods manufactured for the month was $760,000. The ending finished goods inventory was $150,000. What was the cost of goods sold for the month?A. $ 20,000.B. $740,000.C. $780,000.D. $760,000.Beginning finished goods inventory was$130,000. The cost of goods manufactured for the month was $760,000. The ending finished goods inventory was $150,000. What was the cost of goods sold for the month?A. $ 20,000.B. $740,000.C. $780,000.D. $760,000.Quick Check ü$130,000 + $760,000 = $890,000$890,000 -$150,000 = $740,000Learning Objective 5Define and giveexamples of variablecosts and fixed costs.Cost Classifications for Predicting Cost BehaviorHow a cost will react to changes in the level of business activity.v Total variable costschange when activitychanges.v Total fixed costs remainunchanged when activitychanges.How a cost will react to changes in the level of business activity.v Totalvariable costs change when activity changes.v Total fixed costs remain unchanged when activity changes.Total Variable Cost Your total long distance telephone bill is based on how many minutes you talk.Minutes Talked Tot a lL o n g D is t a n ceT elephon eBillVariable Cost Per UnitMinutes TalkedP e rM i n u te TelephoneC h argeThe cost per long distance minute talked is constant. For example, 10 cents per minute.Total Fixed CostYour monthly basic telephone bill probably does not change when youmake more local calls.Number of Local CallsM o n t h ly B a s icTelephoneB ill Fixed Cost Per Unit Number of Local Calls M o n t h l y B a s i c T e l e p h on eBillpe rLocalCa l lThe average fixed cost per local call decreases as more local calls are made.Cost Classifications for Predicting Cost BehaviorBehavior of Cost (within the relevant range)Cost In Total Per UnitVariable Total variable cost changes Variable cost per unit remains as activity level changes.the same over wide rangesof activity.Fixed Total fixed cost remains Average fixed cost per unit goes the same even when the down as activity level goes up.activity level changes.Quick Check üWhich of the following costs would be variable with respect to the number of cones sold at aBaskins & Robbins shop? (There may bemore than one correct answer.)A. The cost of lighting the store.B. The wages of the store manager.C. The cost of ice cream.D. The cost of napkins for customers.Quick Check üWhich of the following costs would be variable with respect to the number of cones sold at aBaskins & Robbins shop? (There may bemore than one correct answer.)A. The cost of lighting the store.B. The wages of the store manager.C. The cost of ice cream.D. The cost of napkins for customers.Learning Objective 6Define and giveexamples of direct andindirect costs. Assigning Costs to Cost ObjectsDirect costsn Costs that can beeasily and convenientlytraced to a unit ofproduct or other costobject.n Examples: Directmaterial and direct labor Indirect costsn Costs that cannot be easily and convenientlytraced to a unit ofproduct or other costobject.n Example: Manufacturing overheadLearning Objective 7Define and give examples ofcost classifications used inmaking decisions: differentialcosts, opportunity costs, andsunk costs.Cost Classifications for Decision MakingEvery decision involves a choicebetween at least two alternatives. Only those costs andbenefits that differbetween alternativesare relevant to thedecision. All othercosts and benefits canand should be ignored.Differential Costs and RevenuesCosts and revenues that differamong alternatives. Example:You have a job paying $1,500 per month in your hometown. You have a job offer in a neighboring city that pays $2,000 per month. The commuting cost to the city is $300 per month.Differential revenue is: $2,000 –$1,500 = $500Differential cost is:$300Net Differential Benefit is:$200Opportunity CostsThe potential benefit that is given up when one alternative is selectedover another.Example:If you werenot attending college,you could be earning$15,000 per year.Your opportunity costof attending college forone year is $15,000.Sunk CostsSunk costs cannot be changed by any decision. They are not differential costs and should be ignored when making decisions. Example:You bought an automobile that cost $10,000 two years ago. The $10,000 cost is sunk because whether you drive it, park it, trade it, or sell it, you cannot change the $10,000 cost. Quick Check üSuppose you are trying to decide whether todrive or take the train to Portland to attend a concert. You have ample cash to do either, butyou don’t want to waste money needlessly. Isthe cost of the train ticket relevant in thisdecision? In other words, should the cost of thetrain ticket affect the decision of whether youdrive or take the train to Portland?A. Yes, the cost of the train ticket is relevant.B. No, the cost of the train ticket is notrelevant.Quick Check üSuppose you are trying to decide whether todrive or take the train to Portland to attend a concert. You have ample cash to do either, but you don’t want to waste money needlessly. Is the cost of the train ticket relevant in this decision? In other words, should the cost of the train ticket affect the decision of whether you drive or take the train to Portland?A. Yes, the cost of the train ticket is relevant.B. No, the cost of the train ticket is notrelevant.Quick Check üSuppose you are trying to decide whether to drive or take the train to Portland to attend a concert. You have ample cash to do either, but you don’t want to waste money needlessly. Is the annual cost of licensing your car relevant in this decision?A. Yes, the licensing cost is relevant.B. No, the licensing cost is not relevant.Quick Check üSuppose you are trying to decide whether to drive or take the train to Portland to attend a concert. You have ample cash to do either, but you don’t want to waste money needlessly. Is the annual cost of licensing your car relevant in this decision?A. Yes, the licensing cost is relevant.B. No, the licensing cost is not relevant.Quick Check üSuppose that your car could be sold now for $5,000. Is this a sunk cost?A. Yes, it is a sunk cost.B. No, it is not a sunk cost.Suppose that your car could be sold now for $5,000. Is this a sunk cost?A. Yes, it is a sunk cost.B. No, it is not a sunk cost.Quick Check üSummary of the Types of Cost ClassificationsFinancial Reporting PredictingCost BehaviorAssigning Costs to Cost Objects Decision MakingEnd of Chapter 1。
风险,资本,成本和资本预算讲义(英文)
• Understand how the liquidity of a firm’s stock affects its cost of capital
Slide 3
Chapter Outline
• That is not to say that a firm’s beta cannot change.
– Changes in product line – Changes in technology – Deregulation – Changes in financial leverage
Slide 13
Using an Industry Beta
• It is frequently argued that one can better estimate a firm’s beta by involving the whole industry.
• If you believe that the operations of the firm are similar to the operations of the rest of the industry, you should use the industry beta.
Slide 10
12.2 Estimation of Beta
Market Portfolio - Portfolio of all assets in the economy. In practice, a broad stock market index, such as the S&P Composite, is used to represent the market.
ABC成本分析法(英文版)PPT
Departmental Overhead Rates
Indirect Labor Indirect Materials Other Overhead
6
Stage One: Costs assigned to pools Cost pools
Department 1
Department 2
Department 3
Departmental Overhead Rates
Indirect Labor
Indirect Materials
7
Stage One: CCost pools Stage Two: Costs applied to products
Other Overhead
Activity Based Costing (ABC)
The objective of activity-based costing is to understand the causes of overhead costs and to identify the real profitability of products and customers.
The Key Question: Does the amount of the activity cost pool increase with the number of units produced?
Batch-Level Costs...
23
– are resources sacrificed on activities that
4
Departmental Overhead Rates
5
Finishing Department Painting Department
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11-9
Time Value of Money
A dollar today is worth more than a dollar a year from now since a dollar received today can be invested, yielding more than a dollar a year from now.
11-4
Meaning of Capital Budgeting
• Capital budgeting can be defined as the process of analyzing, evaluating, and deciding whether resources should be allocated to a project or not.
• Capital budgeting has three phases: – Identifying potential investments, – Choosing which investments to make, and – Follow-up monitoring of the investments.
11-5
11-6
Types of Capital Budgeting Decisions
• Should we add a new product to our existing product line? • Should we expand into a new market? • Should we replace our existing machinery? • Should we buy fully automatic or semiautomatic machinery • Where to locate manufacturing facility?
11-8
The Time Value of Money
Which would you rather have -- $1,000 today or $1,000 in 5 years?
Obviously, $1,000 today. Money received sooner rather than later allows one to use the funds for investment or consumption purposes. This concept is referred to as the TIME VALUE OF MONEY!!
11-7
Investment and Return
• Investment and return form the foundation of capital budgeting analysis, which focuses on whether the expected increased cash flows (return) will justify the investment in the long-term asset
• Capital assets create these capacity-related costs
11-3
Need to Control Capital Assets
• Organizations have developed specific tools to control the acquisition and use of long-term assets because: – Organizations are usually committed to long-term assets for an extended time, creating the potential for • Excess capacity that creates excess costs • Scarce capacity that creates lost opportunities – The amount of money committed to the acquisition of capital assets is usually quite large – The long-term nature of capital assets creates technological risk – Reduce an organization’s flexibility
• Investment is the monetary value of the assets the organization gives up to acquire a long-term asset which are often called capital outlays.
• Return is the increased future cash inflows attributable to the long-term asset
• Two costs – Opportunity cost – Sunk costg
Chapter 11
Long-Term (Capital) Assets
• Capital assets are equipment or facilities that provide services to the organization for more than one fiscal period.