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MAS Summary Notes

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dario.depedro
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MS NOTES INTRODUCTION TO MS, Determine SP ° 1 / introduce new product Management __-Mansgement Accounting (Ha) Managers (internal users) 4. External users 2. No accounting standar sfieeded) | 2. PFRS > FS (quartery/annvally) 3. Relates tot 3. Past transactions Line ~ cirectly involved in revenue-generating activities, Staff — supports the line position (iT dept, payroll, legal) Organizational Structure Stockholder B90 ceo VP - Line Line VP - Line VP - Staff (Marketing) —(_ (Financ: (Operations) (HR) fan Treasurer Controller Internal Audit Reference: Sir Brad’s Lecture + Pinnacle Handout Compiled by: CPM COST CONCEPTS Cost > SP > Demand Net Income > Stock Price — . + 7 ‘office Ex: (cost ot CLASSIFICATION DM Prost — incurred to manufacture a ex. Manufacturing 1 mm Period —non-manufacturing cost _-Seling - sales commission, advertisement, delivery Operating Expenses << admin > salaries to officers, R&D. BDE, depreciation (OFFICE) Expensed as incurted > US OH > rent, ules, taxes, depreciation, insurance of factory 2. Traceability < Direct > DM, DL Indirect > OH Total per Unit Assumption: valid within the relevant ae range _-Variable Cost ‘ 3. Behavior | Direct E= ve: = constant bee Cost {| __ (Mixed) Fixed Cost Constant [\ irivers=) Ly COST SEGREGATION TECHNIQUES Cost Funetion (linear equation) 1. High-Low Method -> basisiis\60st driver not cost [> Slope (vow) oy er Yeas vol = batt = tacts 17 independent variable a Fixed Cosy ‘tts sold) 2, Scattergraph ~ plots data points Vetocont Tc Total Cost LX ua nits RMULA 3, Least Squares / Regression > most accurate Mt used a. Yeas be t H iuc IP, beg FG, beg IP.end) — {(FG_end ‘+The correlation between two variables can be seen by drawir "Ifthe points seem to form a straight line, there is ¥- fthe points form a random patiemn, there is alow eorrelation or no correlation ata GOODNESS OF FIT > accucy/eaity of cos tution 1. Coefficient of Correlation (1) - measures the degree of relationship between two variables 1 negative correlation 0 no correlation +1 positive correlation 2, Coefficient of Determination (r2) ~ strength ofthe cost function <9} The closer to one, the better Reference: Sir Brad’s Lecture + Pinnacle Handout Compiled by: CPM CVP ANALYSIS. study of the fits 4+ important in 4 considers interrelationships among: Volume or level of activity Unit selling prices Variable cost per unit Total fixed costs Sales mix KARR SK Contribution Margin (US) > focuses on the behavior of cost Sales Xx _ Manufacturing Cost (DM, DL, VOH) =Variable Cost aap SBA Contribution Margin xx Variable : fox) < Fixed OH rofit / NI/ xx Fixed S&A P u o —— Formulas: Units =—"2 ~) If Multiple products 7 4. Breakceven point (BEP)< + Sales mix > Sales = TC (VC + FC) ~Pesos = > Composite BEP > Profits = 0 > WACM 3 ee Lew 2, TargetDesired Profits (TP) FC Profit~ CHa > Before tax Units = TP FC + Profit” ae 8. Margin of afoy-< Quarto wicca con deta tlowinan.es) Units = Salesis (actual/planned) ~ BEP in units Mos Pesos = Salespesce ~ BEP in pesos ~~ Ratio = 205 Profit 4, Degree of Operating Leverage (DOL). + % in Sales -> effects in profit 1 > A % sales x DOL = A % profit before tax 2° Example: DOL= 5 4 10% Sales x 5 + 150% Profit 5. Sensitivity Analysis > “what if technique that examines the impact of changes on any vatiables. > Ain SP, VC, FC — effect on profit [Analysis: BEP |, Favorable [i Unfavorable he lower, the bee Assumptions: ‘+The behavior of both es i$ linear throughout the relevant range of the activity index. ‘+ Costs can be classified accurately as either variable or fixed. ‘+ Changes in activity factors that affect costs. + Allunits produced — ‘+ When more than one type of product is sold, the sales mix will remain constant (the percentage that each product, represents of total sales will stay the same). Reference: Sir Brad’s Lecture + Pinnacle Handout Compiled by: CPM ABSORPTION VS. VARIABLE COSTING Income Sixtement: Absomiioncostine{Ac) === Marple Casti(¥CL Sales DM Sales = COGS, (omy Bat oy GP. —~ F =OH > V_ -OPEX (period) ——— saacV Soe EtOH Profit normal accounti & accepted for 4 compliance with 4 includes all manufacturing costs (direct materials, direct labor and both variable and fixed overhead) in the cost of aunit ict. & Treats © Also called Variable Costing ~> use only intemal, for management purposes Costing method that includes only variable manufacturing costs (direct materials, direct labor, and variable man 1d) in the cost of a unit of product 4 Also call Product costs are costs that are a neces 4 donot become Period Cost costs that are matched with the revenue af a specific ime period rather than included as part ofthe cost of a include seling and administrative expenses and companies deduct them from revenues in the period in which they are incurred. Note: ¥ _Seling and administrative expenses are period costs under bot ¥ Companies use the cost-volume-profit format in preparing a ve _—AC = Product Cost —> I Fred HAG = Pas Cos Iver Sos sb ‘Summary: AC ve In short: P= 5 (10,000 NI =Ni sold) 140,000 cocs |__| 10,000 OPEX P>S=ACNI> VENI Produced T NI {NI P $ (8,000 sold) | {2,000 El 110,000 OPEX ACNI=VCNI - 1 8,000 COGS NI P <8 (14,000 INI 7 soe) | s14000coss | (cco OPE te voor : _____Inventory Vent Beg. xx ADD : | in inventory B00 ed sod 212 ninventon EOH/unit< DepueT : jin inventory Produced wx {2x __Sold_ > whenever there's sales, increase in ‘ncoraiamauabia cop 0" margin Reference: Sir Brad’s Lecture + Pinnacle Handout Compiled by: CPM Potential Advantages of Variable Costing * arabe costing as several ott advantages eave to absrnton costing ‘0 Net income computed under variable costing is unaffected by changes in production levels. ‘© The use of variable costing is consistent with cost-volume-profit analysis and increment ‘© _Netincome computed under variable costing is closely tied to changes in sales and provides a more realistic, assessment of the company's success or failure. ‘©The presentation of fixed and variable cost components on the variable costing income statement makes it easier to identify these costs and understand their effect on the company’s results, Reference: Sir Brad’s Lecture + Compiled by: CPM STANDARD COSTING AND VARIANCE ANALYSIS Sele bret 4 comparison between actual and standard wed Sande Standard Costes bey 1. Evaluate performance of management coe. Poneed aS 2. Simply costing ana “\ —e mente @ Standard cost [esencedcor Uses: ‘The Need for Standards o Astandardis a measure of tablished by management as a guide in making decisions. © Astandard is n ssuring performance. In managerial accounting, standards relate to (ceSSSaG RSS TRYONDU uses eR goOeS OT ONT SED. © Astandard cost is used as a measure of performance. © A eancard ino 1g RODD © Both standards and budgets ate predetermined costs, and both contibute to management planning andcont + Astandard is a unit amount + Abudget isa total amount. jes of Standard Cost ¥ They facitate management(plaAning. ¥ They promote by making employees mOre "COSt-Consciou ¥ They are useful in ¥- They contribute to management control by providing a ba Y v They are useful in highlighting They simplify costing of inventories and reduce clerical costs. ‘Two levels of Standard ‘© Ideal standards - represent oli levels Of performance under perfect operating conditions. ‘© Normal standards - represent efficient ttainable under expected operating conditions. 1ct Materials (DM) Varianc: AP x AQ) Materials Price Variance (MPV). a Bex 8 Materials Usage/Quantiy Variance (MUV)-» ALWAV'S BBIRESUBRSAUBNGn Materials Price Variance fies: © Key Points IRMI (AQ Purchase xSP) xx Y Actual > Standard |MPV — unfavorable x Y Actual < Standard MPV — favorable oa AP (AQ Purchase x AP) xx © Accountability The purchasing agent is generally résponsibie for the pice variance because he has the control over the price paid for the acquisition of the materials. Materials Quantity Variance les © Key Points IP Inventory (SQx SP) xx ¥- Actual > Standard = unfavorable IMav — unfavorable mx v Actual < Standard = favorable MQV — favorable x AP (AQ used x SP) xx © Accountabi v The jor the quantity variance because he HaSiINBIGORtTo) Reference: Sir Brad’s Lecture + Pinnacle Handout Compiled by: CPM .ct Labor (DL) Variance ‘abor Rate Variance (LRV) Es for LRV & LEV: abor Efficiency Variance (LRV) LEV |P Inventory (SH x SP) rot LV — unfavorable ~ LEV - unfavorable mm 2 LRV — favorable x Labor Rate Variance LEV —tavorable x © Key Points Wages Payable (AH KAR) xx Actual > Standard = unfavorable Actual < Standard = favorable © Accountability ‘The production manager is generally responsible for the labor rate variance because he has the responsibility for seeing that labor price iance are kept under control. a Labor Efficiehey Variance © Key Points © Accountability Th BT coer apne ob Aree RERETTRSN sh cots over the staffs which are dir Overhead (OH) Variance (short-cut) Variable Fixed ' ‘Actual AVR XA) + [AFRICAHD, « BAAH SvRxAH| + BFC | Spending | Cotolable BASH SVRxSH + BFC! Efficiency Total Standard SVRxSH + SFRxSH! Volume 7} Uncontrollable There’ no uch hing os ed ince Variance + Fixed cost i IX AND YIELD, > Two types of Materials and Labor > Only applicable to DM and DL DM: AP x AQx AM SP x AQ x AM |} Total Materials Price Variance SPxsoxsu I Mats Mi Variance | = Materials Usage SPxAQx SM | Spacaesm | Materais Yield Variance. DL: AR x AH x AM SR x AH x AM Labor Rate Variance SR x SHx SM i xSHx I } Labor Mix Variance SR x AHx AM | taro Vance SR x SHx SM Labor Yield Variance Reference: Sir Brad’s Lecture + Pinnacle Handout Compiled by: CPM Factory Overhead (FOH) Variance 1. Two-way Analysis a. Controllable Variance ‘responsibility of ‘over the costs to which the variances relate. Actual FOH ~~ BASH (ox) Controllable Variance xx b. Volume Variance ‘anagers to the extent that they can exercise control “responsibilty of the executive and departmental management. BASH Xx Standard FOH ood Volume Variance Xx > Key Points ‘© Actual FOH > Budgeted FOH = unfavorable controllable variance ‘0 Budgeted FOH > Standard FOH = unfavorable volume variance /olume Variance - unfavorable Controllable Variance — favorable Volume Variance — favorable Factory Overhead Control 2, Three-way Analysis a. Spending Variance Actual Factory Overhead BAAH: Fixed as budgeted Variable (AH x SR) Spending Variance RE b. Efficiency Variance BAAH: Fixed as budgeted Variable (AH x SR) RR BASH: Fixed as budgeted Variable (SH x SR) Efficiency Variance RE cc. Volume Variance BASH: Fixed as budgeted Variable (SH x SR) Standard Factory Overhead Volume Variance RE xEX Reference: Sir Brad’s Lecture + Pinnacle Handout REE xs x Compiled by: CPM 3. Four-way Anal ‘a. Variable Spending Variance Actual Variable FOH xx ES: BAAH: Variable (AHx SR) (xx) Variable Spending Variance xx [Factory Overhead Control xx Various Accounts x b. Fixed Spending Variance IP (std. costs) Actual Fixed FOH * Apeied FOH xx BAAH: BFC tod Fixed Spending Variance x c. Efficiency Variance BASH: Fixed as budgeted Variable (AH x SR) Be z BASH: Fixed as budgeted Variable (SH x SR) Efficiency Variance x BE E 4d. Volume Variance BASH: Fixed as budgeted Variable (SH x SR) Standard FOH Volume Variance BE REx Reporting Variances ‘© Allvariances should be reported to appropriate level ‘© Variance reports facilitate the principle of ‘© Top management normally looks for measure, such as more that ” by highlighting significant differences. . These may be judged on the basis of some quantitative standard or more than P1000. Statement Presentation of Variances ‘In income statements prepared for management under a standard cast accounting system, cost of goods sold is Seed at tar daa costar he vances are dsosed separately < Whentherarero sirfcant ifernces between ‘actual costs and standard costs, companies report their inventories o Ifthere are eee actual and standard costs, the financial statements must report inventories. and cost, oss. Reference: Sir Brad’s Lecture + Pinnacle Handout Compiled by: CPM BUDGETING ’ = goals in orderto achieve the oojoansa + Planning tool used by management to set; ie a ance mat of the organization - > Speatheaded by the Budget Committee ‘overall reeponsible 6¢ budget prepar ‘composed of the President, Treasurer, Controller and Managers of different Gepanments head by the Budget Director + Ata tomate steret merge ro w+ The tole of accaurtng hing te bngating proven ist = Provie istrcal daa‘ revenues, cst, and expense. Bigot managers + Prepare ‘Short-term — 1 year Ties ot tno tim 2 yr Cail tn Benetts of Budgeting ¥ Requires all levels of management ead. Provides definite objectives for évalvating performance, Creates an early warning system for potential problems. Facilitates coordination of activities within the entity's oy ations. Results in greater management awareness of the entity's overall operations. Motivates personnel throughout the organization. KARR 8 Essentials of Effective Budgeting ‘© In order to be effective management tools, budgets must be based upon: = Asound organizational which authority and responsibility are clearly defined: * Research and analysis to determine the feasibility of new products, services, and operating techniques, + Management acceptance which is enhanced when all levels of management participate in the prepar of the budget, and the budget has the support of top management. ~ ‘© A continuous twelve-month budget results from dropping the month just 0 Zero-based budgeting is a budget and. planning process in which each manager must justify a department's entire budget from a base of zero every period, © Life-cycle budget éstmatée a product's revenues and expenses over fier ite 6jBe begining wn research \ded and adding a future month, and development, proceeding through the introduction and growth stages, into the maturity stage, and finally, into the harvest or decline stage. _———__ 6 Kaizen budgeting assumes contnuousimproveror¥o products and processes, uevaly by nay ef many sal innovations rather than major changes. ee 0 The responsibility for coordinating the preparation of the budget is assi reccabudget committee. The budget committee usually includes the president, tveasuterchie! accountant (contlley), and management personnel from each major area ofthe company. ‘© Long-range planning involves the selection of strategies to achieve long-term goals and the development of Policies and plans to implement the strategies. Long-range plans contain considerably less detail than budgets. = a Reference: Sir Brad’s Lecture + Pinnacle Handout Compiled by: CPM Operating > Sales, DM, DL, OH, COGS, S&A\ budget» BudGeed US) —— — odor Master Budget —< Fs end goal ot budgeting ~~ _pinsncigt eB + budgeted sof. 1 set of interrelated budgets Financial Beg. Bal mos + Receipts Disbursements Minimum cash balance \ constitutes a plan of action cash) fora specified time period * cing e Bank loans excess financing <“ ‘Techniques: End Bal. End bal. Shares 4. T-accounts 2. Follow instructions. Sales Budget: the starting point in preparing the master budget, ——__ Budgeted Income Statement: the important end product of the operating budget + This budget indicates the expected profitability of operations for the budget period. 4+ The budgeted income statement provides the basis for evaluating company performance. Cash Budget: shows anticipated cash flows 4 Because cash is so vital, this budget is often considered to be the most important financial budget. The cash budget contai three sections, (a) Cash receipts, (b) Cash disbursements and (c) Financing SS ‘The Flexible Budget & Atle us levels of activity. In essence, the flexible budget is a series 4 Flexible budget reports are appropriate for evaluating performance since both actual and budgeted costs are based on the actual activity level achieved. Managanet by Excpton Management by exception m ‘management's review of a budget report is focused either entirely or primariy on diiferences between actual results and planned objectves 4 For management by exception to be effective, there must be guidelines for identi criteria are — ‘© Materiality—usually expressed as a percentage iiference from budget. ‘© Controllability of the item—exception guidelines are more restrictive for controllable items than for items the manager cannot control The usual ing an except Reference: Sir Brad’s Lecture + Pinnacle Handout Compiled by: CPM INCREMENTAL ANALYSIS / RELEVANT COSTING \ method of choosing the best option among atematves Future General Rul ' NN Sama increm ‘cost must differ amongaltematives | ~ FC are relevant if avoldabi Make: or Buy Choose the option that has the lower cost In most cases, fixed costs are irelevant. Consider opportunity costs, if any Opportunity costs: The potential benefit that may be obtained by following an altemative course of action Relevant cost, (DM, DL, VOH, VS&A) otherwise, irrelevant core Aw excess capacity -> for relevant cost, apply General Rule Accept or Reject Special Order < wig excess capacity -> General Rule + Opportunity Cost (lost CM) ‘Accept the order when the additional revenue from the special order exceeds additional cost Provided the regular market will not be affected. In most cases, fixed are irrelevant The relevant information is the difference between the variable manufacturing costs to produce the special order and expected revenues. If the company is operating at full capacity its likely that the special order would be rejected. core r 3, Retain or replace equipment 44 Relevant items to be considered: « The effects on variable costs + The cost of the new equipment 4 Any disposal value of the existing asset must also be considered 4 Book value of old asset is irrelevant —> Sunk Cost or Eliminate unprofitable segment/product Continue if segment’s avoidable revenue is greater than the avoidable costs Otherwise consider shutting down the segment since allocated fixed cost is usually unavoidable, itis considered irrelevant. & Sales -ve FC (avoidable) retain it Margin <> Segment Margin <* Rg 5. Sell immediately or Process Further 4 Process further if additional revenue from processing further is greater than further processing costs. Split-off point int Cost incremental cost rinsP (FPC) 6. Which products to produce given scarce resources? > ranking of products & limited — basis: CM per scarce resource Reference: Sir Brad’s Lecture + Pinnacle Handout Compiled by: CPM RESPONSIBILITY ACCOUNTING involves accumulating and reporting costs (and revenues) on the basis of the manager who has the authority to ake re dao-dy docs about he ters Objective: proper evaluation of responsibility centers -> Divisions, departments, branches, segments > Headed by managers (contrliabily) A cost over which a manager has control is called «(controllable cost. follows that. * All costs are controllable by epmanagement becavse ofthe braad ange of ts aetty + Fewer costs are controllable as one moves down to each lower level of managerial responsibility because of the manager's decreasing authority Decentralization fo Refersto Capasso by an individual n of the or into more manageable units wherein each unit is managed 70 is given decision authority and is held accountable for his or her decisions. © Goal congruence occurs when units of organizs /e incentives to perform fora common interest. The purpose of a responsibility system is to motivate management performance that adheres to company overall objectives. © Sub-Optimization occurs whafone segmabo! a company takes action that is nits is detrimental to the firm as a whole. Types of Responsibility Centers: 1 Cost Center S cost Revenue Center & revenue Profit Center 4 revenue & cost Investment Center 4 revenue & cost & investment ~ Maintenance, IT, HR, Payroll, Production ~ Sales Department, Marketing Department ~ SM Department Store, supermarket, cinema + Head office of SM —_—_—e. profit operating Margin x Asset Tumaver Net Operatng incomelSaks x Soles, Ave Operating Assets Performance 2 ing Income 4. Return on Investment (Rol) =-22atin nome urn on Investment (RON = 2a te 8B +68 — Variance Analysis (actual vs. standard) —> Variance Analysis (actual revenue vs. target revenue) Sales =e cM = Controllable FC Controllable Profit Margin ier a Invested asset/capital at BV idual Income (Rl) = Operating Income ~ (Ave. Operating Asset x + Required/acceptable return ‘3. Economic Value Added (EVA) = Op Inc after Tax ~ (Ave, Op Asset x WACC) 4 focus is more on LT capital > Return on Investment —» most common measure of performance f > Operating income refers to earnings before interest and taxes. Operating assets includes all assets acquired to generate operating income. Residual Income ~ difference between operating income and the minimum peso return required on a company's, operating assets. SatMV & Required / GTA-CL acceptable return Reference: Sir Brad’s Lecture + Pinnacle Handout Compiled by: CPM » Economic Value Added — more specific version of residual income that measures the investment center's real economic gains _—_—____——_—_ 4 Ituses the weighted average cost of capital (WACC) to compute the required income. ——— ROI is patterned after the DuPont technique to compute Return on Assets: Return on Assets = Return on Sales x Asset Turnover me mw sates Tests = Sates ‘assets Principles of Performance Evaluation ‘© The human factor is critical in evaluating performance. © Behavioral principles include: Managers of responsibility centers should have direct input into the process of establishing budget goals of their area of responsibilty. The evaluation of performance should be based entirely on matters that are controllable by the manager being evaluated, Top management should support the evalvation process The evaluation process must allow managers to respond to their evaluations. The evaluation should identify both good and poor performance. ‘© Performance evaluation under responsibility accounting should be based on certain reporting principles. ‘0 Performance reports should: 1. Direct Method: Service Department -> Production Department — 2. Step Method: Service Department & Production Department — 3. Reciprocal/Algebraic Method: Considers the reciprocal services ar Allocation M Contain only data that are controllable by the manager of the responsibilty center. Provide accurate and reliable budget data to measure performance. Highlight significant differences between actual results and budget goals. Be tailor-made for the intended evaluation Be prepared at reasonable intervals. od (eng the Service Department Balance Scorecard = financial & non-financial = more holistic; basis for future performance of managers 1. Financial > ROI, RI, EVA > Internal > Monetary 2. Customer > Pricing, quality, customer service > Extemal 3. Internal > Production, bottlenecks, breakdowns, delivery = Intermal Process > Customer focus Non-menetary & Learning & > Development of employees, trainings = intemal Growth ‘compensated, monetized sick leave - > Employee focus Reference: Sir Brad’s Lecture + Pinnacle Handout Compiled by: CPM TRANSFER PRICING ABC Company ‘Transfer Price —> price charged by one division to another SP 100 Selling Buying Objective: to set transfer price to achieve goal congruence Bu Sh] | ink | | Marker Je} — Supplier End Goal: to maximize the NI ofthe whole company copacity 2.000 units 10,000 units Y P120/units Objectives of Transfer Pricing: (Customer ‘+ To facilitate optimal decision-making + To provide a basis in measuring divisional performance ‘© To motivate the different department heads in improving their performance and that oftheir departments. _7 Maximum Transfer Price > Market Price Rites 'w/ excess capacity > variable cost Minimum Transter Pree excess capacty -» VC + CM (opportunity cost) To minimize the effect of sub-optimization, a range for transfer price must be set based on the following limits: ‘+ Maximum transfer price: Cost of buying from outside suppliers ‘+ Minimum transfer price: Variable cost per unit + Lost Contribution Margin per unit on outside sales ‘© When company segment is operating at full capacity, the lost CM per unit on outside sales is the ‘opportunity cost of transferring products to another company segment. ther Types ransfer Pi in 4. Cost plus (cost + markup) 4 may be based on full cost, variable cost, or some modification including a markup. 4 often leads to poor performance evaluations and purchasing decisions 4 Under this approach, divisions sometimes use improper transfer prices which leads to a loss of profitability and unfair evaluations of division performance. does not provide the seling division with proper incentive. does not reflect the selling division's true profitability and doesn't even provide adequate incentive for the selling division to control costs since the division's costs are passed on to the buying division. 2. Variable Cost (OM, DL. VOH, VS8A) uses all of the variable costs, including selling and administrative costs, as the cost base and provides for fixed costs and target ROI through the markup 4 ismore useful for making short-run decisions because it considers variable cost and fixed cost behavior patterns separately 4+ more consistent with cost-volume-profit analysis used to measure the profit implications of changes in price and volume. 4 provides the type of data managers need for pricing special orders 4 avoids arbitrary allocation of common fixed costs to individual product lines. 3, Full production cost (DM, DL, OH) + uses total manufacturing cost as the cost base and provides for selling/administrative costs plus the target RO! through the markup. 4, Negotiated Price ‘4 selling division, establishes, a minimum transfer price and the purchasing division establishes a maximum transfer price. 4 Companies often do not use negotiated transfer pricing because: ‘+ Market price information is sometimes not easily obtainable. + A lack of trust between the two negotiating divisions may lead to a breakdown in negotiations. ‘+ Negotiations often lead to different pricing strategies from division to vision which is sometimes costly to implement. 5, Market-based Price 4 based on existing market prices of competing goods often considered the best approach because itis objective and generally provides the proper economic incentives, Reference: Sir Brad’s Lecture + Pinnacle Handout Compiled by: CPM CAPITAL BUDGETING > Involves long-term investment decision > involves choosing among various projects to find the one(s) that will maximize a company’s return on its financial investment. > Top managemen/BOD are involved -> accept/reject ‘The capital budgeting decision, under any technique, depends in part on a variety of considerations: The availability of funds, Relationships among proposed projects. The company's basic decision-making approach. ‘The risk associated with a particular project. RAR K Non-discounting<— voce of retrn f Do not consider time value of money Techniques: ‘Net Present Value (NPV) scountna< Profit index (Pt) | Considers ime vale of money Internal Rate of Return (IRR) Non-Discounting 1. Payback Period > Time it takes to recover the initial investment (years) > The shorter the payback period, the more attractive the investment. 012345 67 > Advantage: Easy to compute and understand fe cleadvantages: ven (10M) 2M 2M 2M 2M 2M 2M 2M 1. Ignores Time Value of Money (TVM) ‘Uneven (10M) 2M 3M 5M 4M 2M iM 6M 2 Ignores performance beyond the payback period Formula: Initial Investment] Wet Cash Inflow 2, Accounting Rate of Return (ARR) / RO! > Measures the profitability of project based on income > Advantages: 4-Simplicity of calculation 2.Management's familiarity with the accounting terms used in the computation, > Disadvantage: Does not consider TVM Formula ARI Annual Income Tavestment .w/ salvage value -> average > \wio salvage value -» Initial Investment (simple) > The required rate of return is generally based on the company's cost of capital. > Decision Rule: Acceptable if rate of return > management's required rate of return, > The higher the rate of return for a given risk, the more attractive the investment, Reference: Sir Brad’s Lecture + Pinnacle Handout Compiled by: CPM iscounting > Uses discounted CF Ly pv > consiaers Tv 1. Net Present Value (NPV) » The higher the positive net present value, the more attractive the investment. Formula Even (equal) -> ordinary annuity or annuity due PVC! -» PV of Cash Inflow Cashflow < -PVCO -+ PV of Cash Outflow (initial investment) Uneven (unequal) -> PV of 1 NPV 0123 5 & accept Pp}? 3 4 § & reject (aM) 3008 3008 200% 300% 200 al ee Discount Rate > Cost of capital — the rate that the company must pay to obtain funds from creditors and stockholders. * All cash flows come at the end of each year. « All cash flows are immediately reinvested in another project that has a similar return, ‘All cash flows can be predicted with certainty. In theory, all projects with positive NPVs should be accepted. However, companies rarely are able to adopt all positive- NPV proposals because: |The proposals are mutually exclusive (if the company adopts one proposal, it would be impossible to also adopt the other proposal). ‘+ Companies have ited resources. 2. Profitability Index (PI) > method that compares the relative merits of alternative capital investment projects. > Used in mutually exclusive project, Limited resource; only choose one project Formula: py PUCL PV of Future CF PVCO ” Tnitial Investments | {Ne 1, the better 3. Internal Rate of Return (IRR) > The interest rate that makes the PVCI = PVCO (NPV = 0) > Trial and error > Technique: startin the middle rate Formula: PU or = Matt backion a ove IRR > Cost of Capital -> accept + discount rate, | NPV IRR < Cost of Capital -> reject | discount rate, | NPV + If positive NPV; always TRUE that IRR > Cost of Capital + T fisk, t discount rate, | NPV Remember: . | 1. To convert NIto CF 2. Tax shield/savings 1 Deduction, + Taxable Income, | Tax Net income i Depreciation Expense x Tax Rate = Tax Shield Cash Flows & Loss 4 Gain Reference: Sir Brad’s Lecture + Pinnacle Handout Compiled by: CPM Intangible Benefits ‘+ _ Intangible benefits, such as increased quality, improved safety, or enhanced employee loyalty, are difficult to quantify, and thus often are ignored in capital budgeting decisions. ‘+ To avoid rejecting projects that should actually be accepted, managers can either ‘© Calculate the net present value (NPV) ignoring intangible benefits, and ifthe resulting NPV is negative, evaluate whether the intangible benefits are worth at least the amount of the negative NPV. ‘© Incorporate intangible benefits into the NPV calculation by projecting rough, conservative estimates of their value. If, after using conservative estimates, the net present value is positive, the project should be accepted, Sensitivity Analysis uses a number of outcome estimates to get a sense of the variability among potential returns 4 In general, a higher risk project should be evaluated using a higher discount rate, Post-Audit of Investment Projects ‘+ A post-audit is a thorough evaluation of how well a project's actual performance matches the projections made when the project was proposed. ‘+ Performing a post-audit is important for several reasons, ‘© Since managers know that their results will be evaluated, there is an incentive for them to make accurate estimates rather than presenting overly optimistic estimates in an effort to get projects approved. © A post-audit provides a formal mechanism for determining whether existing projects should be continued, expanded, or terminated. © Post-audits improve future investment proposals because managers improve their estimation techniques by evaluating past successes and failures. ‘+A post-audit involves the same evaluation techniques that were used in making the original capital budgeting decision—for example, use of the net present value method. The difference is that, in the post-audit, actual figures are inserted where known, and estimation of future amounts is revised based on new information. Reference: Sir Brad’s Lecture + Pinnacle Handout Compiled by: CPM COST OF CAPITAL > Discount rate, required return, minimum rate of return, hurdle rate Capital Bpo | 10% Bi A 5 [| Projects: ABC Co. Tex shield sources cost Formula 4. Creditors (bank loans) Interest (cost of debt) Interest Rate x (1 ~ tax rate) Psoe 2. Shareholders (issue Dividends (cost of eau nm shares) oss Dividends Income RE ° 1 2 3 4 5 1, Dividend Discount Model (ODM) (Gordon Growth Model) 2. Capital Asset Pricing Model (CAPM) + Po — current price + Dy —next dividend + G — growth rate in dividends per share (it is assumed that the dividend payout ratio, retention rate, and theretore the EPS ‘growth rate are constant) Weighted Average Cost of Capital (WAGC) + More than one source of capital > Considers capital structure of the company Debt PS RE os AeNe Reference: Sir Brad’s Lecture + Pinnacle Handout (2) RE os Dy Dd, Rr By TY Stock issuance cost & (gross of flotation costs) + (net of flotation costs) same RF +6 (MR-RF) Market risk premium + RF - Risk Free Rate (Treasury Bond) +B - Beta (Volatility Risk) + MR ~ Market Retums (average retus of PSE) Compiled by: CPM FINANCIAL STATEMENT ANALYSIS > Involves the evaluation of an entity's past performance, present condition and business potentials analyzing the financial statements. ABC Co. Users —| FS |—» Decision making Comparative analysis may be made on a number of different bases. ‘+ Intracompany basis—Compares an item or financial relationship within a company in the current same item or relationship in one or more prior years. by way of year with the ‘+ Industry averages—Compares an item or financial relationship of a company with industry averages. ‘+ Intercompany basis—Compares an item or financial relationship of one company with the same relationship in one or more competing companies. item or Tools: 4. Horizontal Analysis 2025 2028 y, Also called trend analysis Sales. 4M aM oT > Evaluate FS items over a period of time > Changes as % A. 2, Vertical (common size) Analysis 2025 2026 > Evaluate items win the FS as a percentage of a base amount Sales. 1M 2M 4 BS > Total Assets COGS (400K) 40% (1M) 50% GIS Sales GP 600K 60% 1M 50% > EXP — (200K) 20% (600K) 30% Used when comparing the companies noe 0% {intercompany analysis) 3. Ratio Analysis > Evaluate relationships among FS items Characteristics: ‘a. Liquidity — abilty to pay short-term obligations (suppliers) b. Solvency ~ ability to pay long-term obligations (banks) c. Profitability ~ analyze performance of a company Patterns: 4, Return -> NI (oumerator) 2, Turnover -> Sales (numerator) 3. Margin -» Sales (denominator) 2years BS -> Average >= = Operating Cycle = Days in AR + Days in Inventory - Cash Conversion Cycle = Operating Cycle — Days in AP Reference: Sir Brad’s Lecture + Pinnacle Handout Compiled by: CPM FORMULAS LIQUIDITY RATIOS > Measure of adequacy of working capital (Acid Test Ratio) Current Liabilities i Current Assets > Primary test of liquidity to meet current obligations from Current Ratio Current Liabilities current assets. > Measures the number of times that the current ‘Quick Ratio Quick Assets liabilities could be paid with the avaitable cash and near-cash assets > Ex. cash, current receivables and marketable securities “> Measures the number of times receivables are (Days' in Receivables) Receivables Net Credit Sales ‘Tumover ‘Foerage Receivables | recorded and collected during the period. ‘Average Age of Receivables 360 > Indicates the average number of days during which the (Average Collection Period) RTO company must wait before receivables are collected, “> Measures the number of times that the inventory is Accounts Payable Turnover eT ies cous Inventory Turnover a replaced during the period nerae eo) 360. + Indicates the average number of days during which the Daye inlnventory ro company must wait before the inventories are sold Net Credit Purchases| > Measures the speed with which a company paye lis suppliers. => indicates the length of time during which payables Normal Operating Cycle | inventory + Average Age of Receivables Average Age of Accounts 360 *o9° povanle a remain unpaid average agar | > Tre ina takes company axaue inventor, sl that inventory, and receive cash from its customers in exchange for the inventory sold, ‘Average Age of Inventory + Average Age of Receivables + Average Age of Accounts Payable Cash Conversion Cycle > The time (measured in days) it takes for a company to convert its investments in inventory and other resources into cash flows from sales. PROFITABILITY RATIOS > Determines the portion of sales that went into Return on Equity Average Equity Return on Sales Income (Net Profit Margin) NetSales company's earnings. Income > Efficiency with which assets are used operate the Return on Assets = business. Average Asset Income “> Measures the amount eamed on the owner's or stockholders’ investment. Earnings Per Share Operating Profit —> Measures profit generated after consideration of operating costs. Net Sales n > Measures the abiliy of the firm to translate sales to Cash Flow Margin Overating CF cash Net Sales Price per share Price-Earnings (PE) Ratio os > Itindicates the number of pesos required to buy P1 of earnings. Dividend per share Dividend Yield Price per share > Measures the rate of return in the investors common stock investments. Dividend per share Dividend Pay-out Ratio a > It indicates the proportion of eamings distributed as dividends. Reference: Sir Brad’s Lecture + Pinnacle Handout Compiled by: CPM ‘SOLVENCY RATIOS Times Interest Earned (TIE) EBIT Tnterest Expense > It determines the extent to which operations cover interest expense Debt-Equity Ratio Total Liabilicies “> Proportion of assets provided by creditors compared to that provided by owners. Total Equity Debt Ratio Total Liabilities + Proportion of total assets provided by creditors Total Assets Total Equit Equity Ratio gully — Proportion of total assets provided by owners. Total Assets Reference: Sir Brad’s Lecture + Pinnacle Handout Compiled by: CPM WORKING CAPITAL MANAGEMENT 4 The administration and control of current assets and current liabilities with the goal of maximizing the value of the firm with appropriate balance between profitability and risk Working Capital -> resources of the business used in everyday operations “> Objective: To achieve balance between risk and return (income) “Matching > CL» CA; NCL-> NCA > Policies <—Conservative > | WC; financing almost all asset investments with long-term capital ‘Aggressive > | WC; uses short-term liabilities to finance forking Capital = Current Assets ‘Current Liabilities (Cash, AR, Inventory) (AP, Short-term Loans) Operating Cycle = Days in AR + Days in Inventory Ge @ Cash Conversion Cycle = Days in AR + Days in Inventory — Days in AP Gao) & Gora) 1, Cash Management _to meet cash requirements > to maintain optimal level of cash <0 Meek cas reat > Reasons for holding cash *. Transaction motive - to facitate normal transactions ofthe business. 2.Precautionary motive - to provide for buffer against contingencies, 3.$peculative motive - to avail of business and investment opportunities. 4.Contractual motive - by provisions of a contract (e.g., compensating balance in a bank). jemand / annual cash requirements Baumol yoximal Cash Balance (OCB) { ITC = transaction cost Model ICC = carrying cost / opportunity cost (%) > Total cost of cash balance = holding costs + transaction costs ‘© Holding Costs = average cash balance" x opportunity cost © Transaction Costs = number of transactions" x cost per transaction = Where: + “Average cash balance = OCB = 2 + “*Number of transactions per year annual cash requirement + OCB = Manage toat (delay) bank > book -» OC (Buyer) -> Maximize Negative -> bank < book -> DIT (Seller) > Minimize 1. Mail Float ~ check not yet received 2. Processing Float — received but not yet deposited 3. Clearing Float — deposited but not yet cleared > To prepare Cash Budget ———+[Beg Bal + Cash Receipts Cash Disbursements Minimum cash balance + - excess financing End Bal. End bal Reference: Sir Brad’s Lecture + Pinnacle Handout Compiled by: CPM 2, Inventory Management ‘ to meet customer dernands > To maintain optimal level of inventory << minimize cost How many units to order? EOQ Model > 2issues to resolve: ‘When to order? Re-Order Point (ROP) fenem ‘Order Quantity (EOQ) © quantity to be ordered, which minimizes the sum of the ordering and carrying casts = annual sales demand ‘C = ordering cost, shipping cost, setup cost (C = freight, insurance, storage cost, obsolescence| FOO werage Inventory Assumptions of the EOQ Model: Demand occurs at a constant rate throughout the year. Lead time on the receipt of the orders is constant The entire quantity ordered is received at one time. ‘The unit costs of the items ordered are constant; thus, there can be no quantity discounts. There are no limitations on the size of the inventory. geen normal lead time ‘w/ safety stock (SS) -> normal lead time + SS Mon Wed Mon Wed Thu days ss 4days + 3 days x 100 = 300 units L_AS% 7} 4 days x 100 = 400 units 4 Lead time — period between the time the order is placed and received. + Normal time usage = Normal lead time x Average usage. + Safety stock = (Maximum lead time — Normal lead time) x Average usage 3. Accounts Receivable Management conservative (2/10, n/90) -» | Credit Sales, | AR, | Bad Debts > To.use effective credit policy < > Credit terms (n/30) ~ Aggressive (relaxed) 5/10, n/60 -> {Credit Sales, 1 AR, t Bad Debts > Cash Discounts (2/10) Credit period [Discpetiod 50 \ 6 » o_o" 30 ryt 1 a —> pay existing loan > Ways to Accelerate collections > Shorten credit terms. > Offer special discounts to customers who pay their accounts within a specified period. > Speed up the mailing time of payments form customers to the firm. > Minimize float, that is, reduce the time during which payments received by the firm remain uncollected funds. investment opportunity + Factors considered in making Accounts Receivable Poli 1 Credit Standard: the Five C’s of Credit: ¥- Character — customers’ willingness to pay. Capacity ~ customers’ ability to generate cash flows. Capital - customers’ financial sources. Congitions — current economic or business conditions. Collateral — customers’ assets pledged to secure debt. KKK S Reference: Sir Brad’s Lecture + Pinnacle Handout Compiled by: CPM 2 Credit Terms: ¥- Credit petiod and discount offered for customer's prompt payment. ¥ Ex. cash discounts, credit analysis and collections costs, bad debt losses and financing costs. 3.Collection Program Shortening the average collection period may preclude too much investment in receivable {low opportunity costs) and too much loss due to delinquency and defaults. 4. Accounts Payable Management > Analysis of credit terms: 1.Taking the cash the discount period. ‘ount ~ if cash discount is to be taken, a firm should pay on the last day of up cash discount - if the firm has to give up the cash discount, it should pay on the last day of the credit period. > Maximize the positive float > Delay payment Cost of Giving up Cash Discounts: Discount 360 100% — Discount * “n 4 Credit period — discount period “How to know if we have to forgo cash discounts? Compare % of cost of giving up cash discounts to % of other alternative using the money for investment or payment of loans. Y Decision Guide: Greater benefit 5. Short-Term Loans Management > Usual questions: What is the annual effective interest rate? Finance Charges —» Interest expense + other fees - savings Effective interest Rate (E1R) = Finance Charges a ee Net Proceeds = —» Usable amount Ly annual 6. Bank Loans © Single-payment notes — ifthe interest is payable upon maturity, the effective interest rate is equal to the nominal rate, © Discounted Note — the effective interest rate is higher than the nominal rate, Effective interest rate = Interest Principal amount - Discounted interest Ifthe term is less than a year. the interest rate is annualized, © Compensating Balance (CB) — an arrangement whereby a borrower is required to maintain a certain percentage of amount borrowed as compensating balance in the current account of the borrower. © Cost of Bank Loans >» Without compensating balance iscount Rate 360 days Too%-piscount kate * Credit Period Discount Period Cost With compensating balance Compensating Balance OF Foc Reference: Sir Brad’s Lecture + Pinnacle Handout Compiled by: CPM QUANTITATIVE ANALYSIS > Application of mathematics in solving business problems NETWORK MODELS 1. Network Models > Involves project scheduling techniques that are designed to aid the planning and control of largescale projects that have many interrelated activities. > These models aid management in predicting and controling costs that pertain to certain projects or business activities. 2. Use of Network Models = Planning > Measuring progress to schedule > Evaluating changes to schedule + Forecasting future progress > Practicing and controling costs ‘Techniques: 4, Linear Programming > Optimization Model > Goal: To find the optimal/best solution in business operation > Best possible combination Subject to constraints (imitediscarce resource) _->-Maximize Income Objective } ~Minimize Cost Note: If only two products —> use trial and error (based on the choices) If more than two products -> apply incremental analysis/relevant costing (CM/scarce resource) + Limited resources must be allocated to the company's most profitable products so that net income is maximized. Linear programming models are extremely helpful in the analysis and solution of resource allocation problems. + Simplex method is a much-detailed linear programming technique especially useful if there are more than two variables in a linear programming problem. 2. Decision Tree Analysis + Normally devised to show several possible decisions or acts and the possible consequences (outcome or events) of each act. > Calculate the expected monetary value (EMV) of each outcome based on the decision. (1) Alternative Couse of Action — (2) Apply probabilities (%) -> (3) Computation of EMV > (4) Decision ‘Under Certainty ew Difference: Expected Value of Perfect Information (EVPI) Under Uncertainty price to pay to get access to perfect information + Decision making involves: Risk — this occurs when the probability distribution of the possible future state of nature is known, Uncertainty - this occurs when the probability distribution of possible future state of nature is not known and must be subjectively determined, Reference: Sir Brad’s Lecture + Pinnacle Handout Compiled by: CPM 3. Project Evaluation Review Techniques (PERT) — Critical Path Method (CPM) > PERT - developed to aid managers in controling largescale, complex problems. > CPM - uses deterministic time and cost estimates > Used in project management (scheduling/monitoring) > Applicable to large scale projects > Similar to Gantt Chart & Graphical ilustration of a scheduling technique in the form of a horizontal bar chart 1% Milestones ‘Steps: 4. List of Activites 2. Time Required Longest path Start: 3. Ident the critical path ee 6 © © Minimum time to complete the project A-C-D=12.months Example: B-C-D= 14 months ~ critical path Activities Time Reauired Aauues Year Year2 A Planning —‘Tmonth ]_ Parallel activities ln AB DD B. Excavation 3 months!” (can be done at the same time) Fe B DD Semana Smoris | immediate predecessor / Series Mar B Total 14 months D.Firishing 5S months | Imme 5 (can't proceed until the previous Apr CC steps are done) May CC June CC | wuly CC Crashing — to speed up the process Aug ¢ C — behind schedule (delay) Sept CC > Decision guide: Cost to orash > Penalty for Delay Oct_—«D COD Nov 0 D Slack Time > amount of time that can be added to an activity be DOD without increasing the total time required on the critical path > length of time an activity can be delayed without forcing a delay for the entire project. 4, Learning Curve > Process is improved over time due to learning & efficiencies > Requires | time & | resources as we produce additional unit > % of dectease takes effect every doubling of units Timelunt | Example: 80% Learning Curve (10 hrs) x2 x2 x2 taro Hous 10 8 - a8 # of units 6 4 8.12 > The cumulative average time per unit is reduced by a certain percentage each time production doubles, > Incremental unit time (time to produce the last unit) is reduced when production doubles. 5. Forecasting > Use if mathematics to predict future behavior oor \ Example: Coffee Shop Feet Lat eany 1 an Feb Mar Apr Way June Juy Aug Sept Ost Nov gee 3. Cyclical Christmas 1, Jan | 4 neguar random ee Reference: Sir Brad’s Lecture + Pinnacle Handout Compiled by: CPM ECONOMICS 4+ Science of choice: itis the social science that studies the choices people, businesses, governments, and societies make as they cope with scarcity 4 Fundamental economic problem is scarcity. 4 Because the available resources are never enough to satisty human wants, choices are necessary. __-Demand (Buyer) Market branches _Marcecerice ~ individual, businesses <“sipoiy (Seller) Buyer ‘Macroeconomics ~ entire economy of a country sci eller MICROECONOMICS (Caw of Demané [t Price, | Demand “71. Movement along the demand curve -» always because of Price (P) “~2. Shift in demand — other factors (ex. Facemask) > same Price, t Demand D (quantity demanded) Downward Sloping: 4 If Price increases. the buyer will look for Substitutes. 4, Substitution Effect ex. | Price of chicken, | Demand “\ Price of Complementary goods/product increases. Demand will decrease, ex. 1 Price of sugar, | Demand of Coke 1 Price of Gas, | Demand of Cars _/" Price | (given same income), Demand | >) _Law of Diminishing Marai Ex. Monthly Income P50k x 10% = P5k Utility 2. Income Effect: Jan. Tshirt PAK 5 1+ Demand | The more we consume, the Feb, T-shirt P500 > 10 less marginal utility we “As Income 1, Demand for normal goods + receive As Income 7, Demand for inferior goods | Marginal: Adctional Utility: Satisfaction Elasticity of Demand > Sensitivity of demand due to price change ‘an Demand ‘ain Price > Formula: > 1 > Elastic -> sensitive (\uxury; w/ close substitute) -> Ex. Fortuner, Coke, Aline Ticket ‘Types <= 1 -> Unitary Elastic > in Price = 4 in Demand -> Ex. Electronic Products; Gadgets “<1. Inelastic -> not sensitive (necessities; no close substitute) > Ex. Rice, electricity, cigarettes 4 Perfectly Elastic -» Price 1 = no more Demand. + Perfectly Inelastic -> Price t = no change in Demand -> Ex. Insulin SUPPLY 50 [i Price. 7 Supply Supply Reference: Sir Brad’s Lecture + Pinnacle Handout Compiled by: CPM Upward Sioping 1, Number of Sellers -> as the number of sellers 7, supply 7 — Ex. Apple, Samsung —> Oppo, Vivo, Realme (more suppliers, more supplies) ‘Substitutes — the supplies will produce goods w/ higher returns. 2, Closely Related Goods ° ‘Complementary -> if the price of complementary goods 1, supply 1 —> Ex. | Price of Ink, 1 Price of Marker. + Supply of Marker Law of Diminishing Returns > Adding an additional input result in a smaller increase in output Ex. Workers: 10 hours» 5 unite/hr — 11 hours > 4 units/hr > Elasticity of Supply: + Sensitivity of supply due to price change > Fonnute 26 >t Elastic Types <1 unary erase | same concent w Elsi of Demand <1 Inelastic ‘Short-run vs Long-run 1-5 years 6 years onwards Variable Cost — Variable Cost Fixed » Economies of Scale Produce: + Average Cost | As long as Price = Marginal Cost P=MC;CM=0 Total product is the total quantity of the output produced in a given period. Marginal product is the change made in total product from a change in a variable input (e.g., labor). In economies, the term “marginal” is often used to mean “additional” ‘+ Average product is the total product per unit of input (¢.g., labor). Its total product divided by the quantity of labor employed. Another term for average product is productivity. + Increasing mar; al retums occur when the marginal product of an additional worker exceeds the marginal product of the previous worker. In most productions, increasing marginal returns occurs initially but decreasing marginal retums will occur eventually. Economies of Scale arise because of labor and management specialization, efficient capital, and factors such as spreading advertising cost over an increasing level of output. Market Structure _#of Sellers Products Control to Price __Entry Example 1. PerfectPure Large Identical None Very Easy Divisorial Competition 2. Monopolistic Many Differentiated Limited Easy _Jollibee, McDonalds Competition 3. Oligopoly Few Standardized Huge Hard PLDT, Globe; Shell, Petron 4. Monopoly One Unique Huge Blocked Meralco Reference: Sir Brad’s Lecture + Pinnacle Handout Compiled by: CPM MACROECONOMICS! Gross Domestic Product (GDP) > Measure of income and output of a country > Primary measure of wealth in a country (national income) jonsumption Investment G = Government Spending How to measure GDP? X = Net Exports (Export ~ Import) Expenditure Approach > GDP =C +1+G +x Income Approach -> Individuals -> Salaries & Wages Business > profit, rent, interest Natural Resources -» Depreciation (Depletion) Government -> Taxes [Gress National Product (GNP) = GDP + Income Abroad Less: Income eamned abroad (OFW) Ex Outout Price Nominal Real Year 1,000 x 4 100 100,000 400,000 Year 2 1,500 x" 120 180,000 150,000 (1,500 x 100) _-Nominal > measure using current prices Gop Real -> measure is adjusted for inflation ae (remove the effects of inflation) = Inflation: general increases in price of goods/services Demand Pull » Demand > Supply Ex. Face Mask = tos cane 4. Types (excessive) (eran) - Cost Push > 1 Price of Sugar (supply) . 1 Price of Coke : 2. Inverse Relationship w/ Unemployment . < (/GDP, {Unemployment tincome, {Consumption Price) } Philips Curve nes _/Ftictional = mismatch between workers & jobs Structural — changes of structure in a company (ex. Automation) "Cyclical — business cycle 7 Unemployment Peak = 2022 Recession 2022 Recovery Trough 2021 Role of Government: (Goal: | GDP) _-| taxes, 1 Disposable Income, t Consumption, 1 GDP, t Price Taxes << 1. Fiscal Policy \ ‘Government Spending -» Government Projects Ex. Infrastructure, t employment, t income, | Consumption, | GDP. “1 taxes, 1 Government Spending, | Disposable Income, | Consumption, | GDP, | Price 2. Monetary Policy > Money supply Control: Bangko Sentral ng Pilipinas (BSP) Money Supply LA}. Discount Rate t 1 “Bank Reserve Requirement 2) Bank Reserve Requirement” + i = % of deposits the banks are psp 4 not allowed to lend — erations << BLY 1 3. Open Market Operations —<—— 20 i BSP (BT1) gs» public Reference: Sir Brad’s Lecture + Pinnacle Handout Compiled by: CPM Mt Money Supply <2 M3. Income. Equivalent in Accounting Cash in Bank Cash and Cash Equivalent CCE & Short-term Investment Marginal Propensity to Consume (MPC) % -> Spend Marginal Propensity to Save (MPS) % > Save MPC + MPS = 100% Reference: Sir Brad’s Lecture + Pinnacle Handout Household \ - one \ Money Multiplier (mm) — effect of the release of money in the economy Money \ Supply | Spending Formula: seserve Requirement Compiled by: CPM

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