Chapter 11: Strategic Leadership Chapter 5 Financial aspects of logistics and supply chain management

Chapter 11: Strategic Leadership

Chapter 5

Financial aspects of logistics and supply chain management


Contents

• Introduction

• Part A: Introduction to financial management decision making

• Part B: Introduction to cost accounting and calculations for decision-making purposes


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


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


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.


Introduction

• Wealth of shareholders

• Accounting information

• Drivers of market value

• Part A: financial decision making

• Part B: cost accounting


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.


Cost of equity

• Introduction

• Risk-free rate

• Market risk premium

• The beta factor

• Capital asset pricing model

Ce = Rf + (ß x Mrp)


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.


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


Value drivers

• Revenue

• Operating costs

• Tax

• Working capital

• Property, plant and equipment


Return on investment

• Introduction

• Profit margin

• Asset turnover


Part B: Introduction to cost accounting and calculations for decision-making purposes

• Logistics costing and activity-based

costing

• Marginal costing

• Cost-volume-profit analysis


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)


Logistics costing and activity-based costing (continued)

Activity-based costing


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


Cost-volume-profit analysis

• Introduction to CVP and its relevance

to logistics

• Contribution approach to CVP

analysis

• CVP analysis in decision making


Contribution approach to cost-volume-profit analysis• Breakeven point

• Margin of safety

• Sales to achieve a target profit

• Breakeven graph


Cost-volume-profit analysis in decision making• Change in fixed cost

• Change in variable cost

• Change in selling price

• Conclusion on CVP


Conclusion

• Examples

• Questions

Documents

Chapter 11: Strategic Leadership Chapter 5 Financial aspects of logistics and supply chain management