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Indicators for Activity Based costing (ABC)

When should management consider incurring the considerable cost of designing and implementing an activity-based costing system. Some indicators can signal the need for new costing system: Line managers do not believe the product costs reported by accounting department. Marketing personnel are unwilling to use product costs in making pricing decisions. Complex products that are difficult […]

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Decision Tree Models

Decision Trees In a capital budgeting exercise, the decision-maker has to identify and evaluate the various alternative courses of action leading to the investment decision. A decision tree captures these alternatives in form of a diagram and is useful for clarifying the range of alternative course of action, assessing possible outcomes. In a statistical sense, […]

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The Cost Indifference Point

The Cost Indifference Point A cost indifference point is the point at which total cost (fixed and variable) of two alternatives under consideration is the same. A company may have two methods available for production and it may so happen that at lower levels of activity one method is suitable up to a particular pint […]

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Zero based budgeting

Zero-Base Budgeting Steps involved in the introduction of Zero-base budgeting 1. Corporate objectives should be established and laid down in detail. 2. Decision units should be identified by dividing the organization according to functions, operations or activities for detailed analysis. 3. An analysis and documentation of each decision unit should be done by a responsible […]

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The Sources of BETA

THE SOURCES OF BETA Where does Beta come from? What is the source? Definitely, not thin air! Well, we can identify three sources:   Source 1: Revenue Cycle of the firm Some firms expand very well during the expansion phase of a business cycle; others do badly. Revenues and distributable income of many entities (example […]

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Risk Adjusted Discount Rate (RADR) for capital budgeting

RISK ADJUSTED DISCOUNTED RATE (RADR) Meaning of RADR:- The discount   rates in capital budgeting represents the expected rate of return. Projects with higher risk are generally expected to provide a higher return. Conversely, projects with relatively lower risk will provide a lower rate of return. Consequently all projects should not be discounted at the same […]

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Does Dividend policy Matters?

The case for some dividend Signal Effect :- Investors read signals about the future prospects of the company based on the dividends announced. A high dividend payout may suggest that the management is gung-ho about the future. A low dividend payout may suggest that the management is not very confident about the future. Differential tax […]

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Causes of Variances

Causes of Variances In order that variance analysis is of any use, it is essential to precisely determine causes of variances so that management may initiate action to rectify an unfavorable variance. Reason for Material Price Variance Following are the possible causes of this variance: Change in market price Change in delivery cost Emergency purchases […]

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Importance of Margin of Safety

Importance of Margin of Safety: The size of margin of safety is a very important indicator of the soundness of a business. It shows how much sales may decrease before the firm will suffer a loss. If the size of margin of safety is high, chances of incurring loss by the business will be remote […]

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Assumptions of Break Even Analysis

The break-even analysis is based on a series of assumptions, which are as follows: All costs (production, selling and production) can be segregated into fixed and variable components. Behavior of costs is linear i.e. there will be a straight line if cost data are shown on a graph. The total amount of fixed costs will […]

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