Chapter 11: Strategic Leadership
Chapter 5
Financial aspects of logistics and supply chain management
Chapter 11: Strategic Leadership
Contents
• Introduction
• Part A: Introduction to financial management decision making
• Part B: Introduction to cost accounting and calculations for decision-making purposes
Chapter 11: Strategic Leadership
Contents – Part A: Introduction to financial management decision making
• Shareholder value
• Cost of equity
• Free cash flow
• Economic value added
• Value drivers
• Return on investment
Chapter 11: Strategic Leadership
Contents – Part B: Introduction to cost accounting and calculations for decision-making purposes
• Logistics costing and activity-based costing
• Marginal costing
• Cost-volume-profit analysis
Chapter 11: Strategic Leadership
Learning outcomes• Understand the concepts of shareholder value, cost of equity, free cash flow, economic value added and give a brief account of how these values are determined.
• Identify and describe the various drivers of value.• Analyse and interpret a statement of financial position in terms of return on investment, profit margin and asset turnover.
• Describe the objectives of activity-based costing, marginal costing, cost structure calculation, cost-volume-profit analysis, breakeven analysis and explain how these values are determined.
• Solve examples of the various abovementioned concepts numerically and interpret your answers.
Chapter 11: Strategic Leadership
Introduction
• Wealth of shareholders
• Accounting information
• Drivers of market value
• Part A: financial decision making
• Part B: cost accounting
Chapter 11: Strategic Leadership
Shareholder value
Shareholder value is determined by the market value of a company’s shares. Management can increase the market value by either:• increasing and expediting the
projected free cash flow of the
company; or
• reducing the risk of the company,
thereby reducing the cost of equity.
Chapter 11: Strategic Leadership
Cost of equity
• Introduction
• Risk-free rate
• Market risk premium
• The beta factor
• Capital asset pricing model
Ce = Rf + (ß x Mrp)
Chapter 11: Strategic Leadership
Free cash flow
Free cash flow is the cash flow from operating activities actually available for distribution to the shareholders. To increase free cash flow, management needs to:• increase the profit after tax;
• decrease the investment in working
capital; and
• decrease the investment in property,
plant and equipment.
Chapter 11: Strategic Leadership
Economic value added
Economic value added (EVA) is a residual income measure that subtracts the cost of capital employed from the operating profits generated.
EVA = NOPAT – CCE
Chapter 11: Strategic Leadership
Value drivers
• Revenue
• Operating costs
• Tax
• Working capital
• Property, plant and equipment
Chapter 11: Strategic Leadership
Return on investment
• Introduction
• Profit margin
• Asset turnover
Chapter 11: Strategic Leadership
Part B: Introduction to cost accounting and calculations for decision-making purposes
• Logistics costing and activity-based
costing
• Marginal costing
• Cost-volume-profit analysis
Chapter 11: Strategic Leadership
Logistics costing and activity-based costing• Logistics costing
• Activity-based costing process:
- Identifying main activities
- Allocating cost to activities (cost
pools)
- Determining cost drivers (causes)
- Assigning costs to product/service
(usage)
Chapter 11: Strategic Leadership
Logistics costing and activity-based costing (continued)
Activity-based costing
Chapter 11: Strategic Leadership
Marginal costing
• Introduction to marginal costing• Special-order decisions• Discontinuation of a department or
product• Replacement of equipment• Choice of products where a limiting
factor exists:
- Fixed and variable costs
- The concept of contribution per unit
- Limiting-factor decisions• Non-financial factors
Chapter 11: Strategic Leadership
Cost-volume-profit analysis
• Introduction to CVP and its relevance
to logistics
• Contribution approach to CVP
analysis
• CVP analysis in decision making
Chapter 11: Strategic Leadership
Contribution approach to cost-volume-profit analysis• Breakeven point
• Margin of safety
• Sales to achieve a target profit
• Breakeven graph
Chapter 11: Strategic Leadership
Cost-volume-profit analysis in decision making• Change in fixed cost
• Change in variable cost
• Change in selling price
• Conclusion on CVP
Chapter 11: Strategic Leadership
Conclusion
• Examples
• Questions
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