Post by Glenn on Aug 4, 2008 23:53:33 GMT -5
Some help with the first part of the gap fill areas.
www.allbusiness.com/glossaries/discretionary-cost/4952750-1.html
www.softletter.com/PDFs/FHp10-p13.pdf
books.google.com.au/books?id=FfQD_XdACNcC&pg=PA123&lpg=PA123&dq=marketing+ratios&source=web&ots=HygDqxWHMV&sig=4yLVAzeuE9wAP_mVCYRpwUTJl2E&hl=en&safe=active
discretionary cost
cost changed easily by management decision such as advertising, repairs and maintenance, and research and development; also calledmanaged cost. The analyst should note whether the current level of discretionary expense is consistent with previous trends and with the company's resent and future requirements. Discretionary costs are often reduced when a firm is in difficulty or desires to show a stable earnings trend. A reduction in discretionary costs may cause a deterioration in the quality of earnings since management is starving the firm by holding down necessary expenses (for example, a lack of repairs causing equipment breakdown).The trend in discretionary costs as a percent of net sales and related assets should be examined.
Business Definition for: quality of earnings
Dictionary of Accounting Terms
quality of earnings
extent that net income is realistic in portraying the operating performance of a business-that reported results have not intentionally been overstated or understated by management. In appraising net income, quantitative techniques, such as ratio analysis, can be employed.
Dictionary of Finance and Investment Terms
quality of earnings phrase describing a corporation's earnings that are attributable to increased sales and cost controls, as distinguished from artificial profits created by inflated values in inventories or other assets. In a period of high inflation, the quality of earnings tends to suffer, since a large portion of a firm's profits is generated by the rising value of inventories. In a lower inflation period, a company that achieves higher sales and maintains lower costs produces a higher quality of earnings-a factor often appreciated by investors, who are frequently willing to pay more for a higher quality of earnings. In the wake of the Enron debacle in 2001, quality of earnings became an issue of high priority and a variety of accounting reforms were under consideration.
See also Operating Profit (or Loss) , Financial Accounting Standards Board (FASB)
Related Terms:
Operating Profit (or Loss)
the difference between the revenues of a business and the related costs and expenses, excluding income derived from sources other than its regular activities and before income deductions; synonymous with net operating profit (or loss), operating income (or loss), and net operating income (or loss). Income deductions are a class of items comprising the final section of a company's income statement, which, although necessarily incurred in the course of business and customarily charged before arriving at net income, are more in the nature of costs imposed from without than costs subject to the control of everyday operations. They include interest; amortized discount and expense on bonds; income taxes; losses from sales of plants, divisions, major items of property; prior-year adjustments; charges to contingency reserves; bonuses and other periodic profit distributions to officers and employees: write-offs of intangibles: adjustments arising from major changes in accounting methods, such as inventory valuation and other material and nonrecurrent items. In the wake of the Enron debacle in 2002, Standard & Poor's announced a new definition of operating earnings, whereby restructuring and certain other expenses that are not generally included by many companies in their operating earnings figure will be include, and certain gains will be excluded. Two controversial examples: Pension gains are excluded from core earnings by the S&P definition while employee stock-option costs are included. In several highly publicized cases, earnings have been inflated by exaggerated returns on pension fund investments and executive compensation not reflected as an expense.
en.wikipedia.org/wiki/Activity-based_costing
Activity-based costing
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In a business organization, Activity-Based Costing (ABC) is a method of assigning the organization's resource costs through activities to the products and services provided to its customers. It is generally used as a tool for understanding product and customer cost and profitability. As such, ABC has predominantly been used to support strategic decisions such as pricing, outsourcing and identification and measurement of process improvement initiatives.
Contents
[hide]
• 1 Historical development
• 2 Methodology
• 3 Limitations
• 4 References
• 5 External links
[edit] Historical development
Traditionally cost accountants had arbitrarily added a broad percentage of expenses onto the direct costs to allow for the indirect costs.
However as the percentages of indirect or overhead costs had risen, this technique became increasingly inaccurate because the indirect costs were not caused equally by all the products. For example, one product might take more time in one expensive machine than another product, but since the amount of direct labor and materials might be the same, the additional cost for the use of the machine would not be recognised when the same broad 'on-cost' percentage is added to all products. Consequently, when multiple products share common costs, there is a danger of one product subsidizing another.
The concepts of ABC were developed in the manufacturing sector of the United States during the 1970s and 1980s. During this time, the Consortium for Advanced Manufacturing-International, now known simply as CAM-I, provided a formative role for studying and formalizing the principles that have become more formally known as Activity-Based Costing.[1]
Robin Cooper and Robert Kaplan, proponent of the Balanced Scorecard, brought notice to these concepts in a number of articles published in Harvard Business Review beginning in 1988. Cooper and Kaplan described ABC as an approach to solve the problems of traditional cost management systems. These traditional costing systems are often unable to determine accurately the actual costs of production and of the costs of related services. Consequently managers were making decisions based on inaccurate data especially where there are multiple products.
Instead of using broad arbitrary percentages to allocate costs, ABC seeks to identify cause and effect relationships to objectively assign costs. Once costs of the activities have been identified, the cost of each activity is attributed to each product to the extent that the product uses the activity. In this way ABC often identifies areas of high overhead costs per unit and so directs attention to finding ways to reduce the costs or to charge more for costly products.
Activity-based costing was first clearly defined in 1987 by Robert S. Kaplan and W. Bruns as a chapter in their book Accounting and Management: A Field Study Perspective.[2] They initially focused on manufacturing industry where increasing technology and productivity improvements have reduced the relative proportion of the direct costs of labor and materials, but have increased relative proportion of indirect costs. For example, increased automation has reduced labor, which is a direct cost, but has increased depreciation, which is an indirect cost.
Like manufacturing industries, financial institutions also have diverse products and customers which can cause cross-product cross-customer subsidies. Since personnel expenses represent the largest single component of non-interest expense in financial institutions, these costs must also be attributed more accurately to products and customers. Activity based costing, even though originally developed for manufacturing, may even be a more useful tool for doing this.[3][4]
[edit] Methodology
• Cost center
• Cost allocation
• Fixed cost
• Variable cost
• Cost driver
Direct labor and materials are relatively easy to trace directly to products, but it is more difficult to directly allocate indirect costs to products. Where products use common resources differently, some sort of weighting is needed in the cost allocation process. The measure of the use of a shared activity by each of the products is known as the cost driver. For example, the cost of the activity of bank tellers can be ascribed to each product by measuring how long each product's transactions takes at the counter and then by measuring the number of each type of transaction.
[edit] Limitations
Even in activity-based costing, some overhead costs are difficult to assign to products and customers, for example the chief executive's salary. These costs are termed 'business sustaining' and are not assigned to products and customers because there is no meaningful method. This lump of unallocated overhead costs must nevertheless be met by contributions from each of the products, but it is not as large as the overhead costs before ABC is employed.
Although some may argue that costs untraceable to activities should be "arbitrarily allocated" to products, it is important to realize that the only purpose of ABC is to provide information to management. Therefore, there is no reason to assign any cost in an arbitrary manner.
