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Summary Business economics IBM1 Semester 1 €7,19
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  7. Business Economics

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Summary Business economics IBM1 Semester 1
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Summary of the Business economics course given by Jan Claes in the 1st semester in the first year of IBM. Summary is based on the powerpoints and containes all things you need to know for the exam. Not all excersices are included.

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  • 22 januari 2023
  • 48
  • 2022/2023
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Summary Business Economics
Contents
Chapter 1: Management accounting ................................................................................................................................ 6
1. Business economics .................................................................................................................................................. 6
1.1 Business economics ............................................................................................................................................ 6
2. Accounting information system ................................................................................................................................ 6
2.1 Definition............................................................................................................................................................. 6
2.2 Users of accounting information ........................................................................................................................ 6
2.3 Roles of Accounting information ........................................................................................................................ 7
2.4 Importance of accounting information ............................................................................................................... 7
3. Budget and performance reports ............................................................................................................................. 8
3.1 Definitions ........................................................................................................................................................... 8
3.2 Management by exception ................................................................................................................................. 8
4. Product life and value ............................................................................................................................................... 8
4.1 Product life cycle ................................................................................................................................................. 8
4.2 The value chain ................................................................................................................................................... 9
5. Accounting’s position in the organisation ................................................................................................................ 9
5.1 What a management accountant does............................................................................................................... 9
5.2 Controller and treasurer function ....................................................................................................................... 9
6. Current trends and influences in management accounting ................................................................................... 10
6.1 Current trends ................................................................................................................................................... 10
6.2 Influences .......................................................................................................................................................... 10
Chapter 2: Cost behaviour .............................................................................................................................................. 10
1. Cost behaviour / Cost driver ................................................................................................................................... 10
1.1 Cost behaviour .................................................................................................................................................. 10
1.2 Value chain functions, costs and cost drivers ................................................................................................... 12
2. Variable / Fixed / mixed cost behaviour ................................................................................................................. 12
2.1 Definitions ......................................................................................................................................................... 12
2.2 ........................................................................................................................................................................... 13
3. Relevant range ................................................................................................................................................... 13
3.1 Definition........................................................................................................................................................... 13
3.2 Fixed cost and relevant range ........................................................................................................................... 14
4. Cost-Volume-Profit analysis (CVP) .......................................................................................................................... 14
4.1 Definitions ......................................................................................................................................................... 14
5. Break-even / Net Profit / Contribution margin / Operating leverage / Gross margin ............................................ 15
5.1 Break-even point ............................................................................................................................................... 15
5.2 Contribution margin vs profit............................................................................................................................ 15
1

, 5.3 How to determine the break-even point? ........................................................................................................ 15
5.4 Target Net profit ............................................................................................................................................... 16
5.5 Operating leverage............................................................................................................................................ 16
5.6 Gross margin vs Contribution margin ............................................................................................................... 16
Chapter 3: Cost Functions ............................................................................................................................................... 16
1. Cost drivers and cost behaviour.............................................................................................................................. 16
1.1 Linear cost behaviour ........................................................................................................................................ 16
1.2 Management’s influence on cost behaviour .................................................................................................... 17
2. Capacity Decisions / Committed fixed costs / Discretionary fixed costs ................................................................ 17
2.1 Capacity decisions ............................................................................................................................................. 17
2.2 Committed fixed costs ...................................................................................................................................... 17
2.3 Discretionary fixed costs ................................................................................................................................... 17
2.4 Examples of committed and discretionary fixed costs ..................................................................................... 18
5. Technology decisions / cost-control incentives ...................................................................................................... 18
5.1 Technology decisions ........................................................................................................................................ 18
5.2 Cost-control incentives ..................................................................................................................................... 18
6. Control functions .................................................................................................................................................... 18
6.1 Usage ................................................................................................................................................................. 18
6.2 Cost function equation...................................................................................................................................... 19
6.3 Developing cost functions ................................................................................................................................. 19
6.4 Choice of cost drivers: activity analysis............................................................................................................. 19
7. Methods of measuring cost functions .................................................................................................................... 19
7.1 Engineering analysis .......................................................................................................................................... 19
7.2 Account analysis ................................................................................................................................................ 19
Chapter 4: Cost Allocation .............................................................................................................................................. 20
1. Costs ........................................................................................................................................................................ 20
1.1 Cost management system ................................................................................................................................. 20
1.2 Cost ................................................................................................................................................................... 20
1.3 Cost object ........................................................................................................................................................ 20
1.4 Cost accounting system .................................................................................................................................... 21
1.5 Direct and indirect costs ................................................................................................................................... 21
1.6 Cost allocation ................................................................................................................................................... 21
1.7 Cost assignment ................................................................................................................................................ 21
1.8 Cost pool ........................................................................................................................................................... 22
1.9 Unallocated costs .............................................................................................................................................. 22
1.10 Statement of operating income ...................................................................................................................... 22
2. Categories of manufacturing costs ......................................................................................................................... 22
2.1 Definition........................................................................................................................................................... 22

2

, 2.2 Direct materials ................................................................................................................................................. 23
2.3 Direct labour costs ............................................................................................................................................ 23
2.4 Indirect production costs (Manufacturing overhead)....................................................................................... 23
3. Types of costing systems......................................................................................................................................... 23
3.1 Traditional costing system ................................................................................................................................ 23
3.2 Activity-based costing system (ABC) ................................................................................................................. 24
3.3 Steps to the ABC system ................................................................................................................................... 25
Chapter 5: Pricing decisions ............................................................................................................................................ 26
1. Relevance ................................................................................................................................................................ 26
1.1 The concept of relevance .................................................................................................................................. 26
1.2 Decision model .................................................................................................................................................. 27
1.3 Accuracy and relevance .................................................................................................................................... 28
1.4 Relevance of income statements ...................................................................................................................... 28
2. Absorption an Contribution approach .................................................................................................................... 28
2.1 Absorption costing ............................................................................................................................................ 28
2.2 Contribution costing.......................................................................................................................................... 29
2.3 Comparing Absorption and contribution approaches ...................................................................................... 29
3. Special sales order................................................................................................................................................... 29
3.1 Example ............................................................................................................................................................. 29
4. Incorrect analysis: Misuse of unit cost .................................................................................................................... 30
4.1 Example ............................................................................................................................................................. 30
5. Activity-based costing, special orders, and relevant costs ..................................................................................... 30
5.1 Example ............................................................................................................................................................. 30
6. Influences on pricing in practice ........................................................................................................................ 31
6.1 Cost-plus pricing................................................................................................................................................ 31
6.2 Target costing.................................................................................................................................................... 31
Chapter 8: Budgeting ...................................................................................................................................................... 32
1. Budgeting terms ...................................................................................................................................................... 32
1.1 Favourable & unfavourable variances .............................................................................................................. 32
2. Static and flexible Budgets ...................................................................................................................................... 32
2.1 Static budgets.................................................................................................................................................... 32
2.2 Flexible budgets ................................................................................................................................................ 32
2.3 Activity-based flexible budget........................................................................................................................... 32
2.4 Static-budget variances and flexible-budget variances .................................................................................... 34
2.5 Flexible-budget variances ................................................................................................................................. 34
2.6 Sales-activity variances ..................................................................................................................................... 34
3. Standards in variance .............................................................................................................................................. 34
3.1 Role of standards in determining variances...................................................................................................... 34

3

, 3.2 Setting standards .............................................................................................................................................. 34
3.3 Currently attainable standards ......................................................................................................................... 34
4. Trade-offs ................................................................................................................................................................ 34
4.1 Definition........................................................................................................................................................... 34
5. Investigating variances ............................................................................................................................................ 35
5.1 When to investigate .......................................................................................................................................... 35
5.2 Isolating the causes of variances ...................................................................................................................... 35
5.3 Comparison with prior periods ......................................................................................................................... 35
6. Flexible-budget variance in detail (Direct variable costs) ....................................................................................... 35
6.1 Variances for material and labour standards.................................................................................................... 35
6.2 Price and quantity variances ............................................................................................................................. 36
6.3 Quantity (usage) variance computations .......................................................................................................... 36
6.4 Price variance computations ............................................................................................................................. 37
6.5 Direct materials flexible budget ........................................................................................................................ 37
6.6 Interpretation of price and quantity variances ................................................................................................. 37
7. Variable-overhead variances (Indirect variable costs) ............................................................................................ 37
7.1 Spending / efficiency variances......................................................................................................................... 37
8. Fixed-overhead spending variance (Fixed costs) .................................................................................................... 37
Chapter 16: Financial Statements ................................................................................................................................... 38
1. What and for who? ................................................................................................................................................. 38
1.1 For who? ........................................................................................................................................................... 38
1.2 What? ................................................................................................................................................................ 38
2. Balance sheet .......................................................................................................................................................... 38
2.1 Definition........................................................................................................................................................... 38
3. Operating cycle ....................................................................................................................................................... 38
3.1 Definition........................................................................................................................................................... 38
4. Classified balance sheet: assets section.................................................................................................................. 39
4.1 Cash equivalents ............................................................................................................................................... 39
4.2 Short-term investments .................................................................................................................................... 39
4.3 Accounts receivable .......................................................................................................................................... 39
4.4 Inventories ........................................................................................................................................................ 40
4.5 Prepaid expenses and other current assets ...................................................................................................... 40
4.6 Noncurrent assets: property, plant and equipment ......................................................................................... 40
4.7 Depreciation ...................................................................................................................................................... 41
4.8 Intangible assets................................................................................................................................................ 41
5. Classified balance sheet: Liabilities section ............................................................................................................ 41
5.1 Current liabilities ............................................................................................................................................... 41
5.2 Working capital ................................................................................................................................................. 42

4

, 5.3 Noncurrent liabilities......................................................................................................................................... 42
5.4 Stockholders’ equity.......................................................................................................................................... 42
5.5 Common and preferred stock ........................................................................................................................... 42
5.6 Retained earnings and other comprehensive income ...................................................................................... 43
5.7 Treasury stock ................................................................................................................................................... 43
5.8 Income statement ............................................................................................................................................. 43
5.9 Revenues and expenses .................................................................................................................................... 43
5.9 Income, Earnings and profit .............................................................................................................................. 44
6. Financial management ............................................................................................................................................ 44
6.1 Definition........................................................................................................................................................... 44
7. Statement of changes in stockholders’ equity ........................................................................................................ 44
7.1 Explaining changes ............................................................................................................................................ 44
8. Relationship between balance sheet and income statement ........................................................................... 45
9. The analytical power of the balance sheet equation.............................................................................................. 45
9.1 What? ................................................................................................................................................................ 45
10. Annual reports ...................................................................................................................................................... 45
10.1 Definition......................................................................................................................................................... 45
Chapter 17: Analysing financial statements ................................................................................................................... 45
1. How to analyse financial statements ...................................................................................................................... 45
1.1 What is analysing financial statements............................................................................................................. 45
1.2 Component percentages ................................................................................................................................... 46
1.3 Uses of ratios..................................................................................................................................................... 46
2. Time- series comparisons........................................................................................................................................ 47
2.1 What? ................................................................................................................................................................ 47
3. Nike overview.......................................................................................................................................................... 47
3.1 Balance sheet .................................................................................................................................................... 47
3.2 Income statement ............................................................................................................................................. 48




5

,Chapter 1: Management accounting
1. Business economics
1.1 Business economics
• Part of economics
o Unlimited needs versus limited resources (scarcity and choice)
o Main objective: maximum profit with minimum use of resources
• This principle applied within business organisations




• Resources are anything you use within your company, such as raw material, personnel, fixed assets, time
• Which decisions do we need to make?
• If we USE resources, we get COSTS
o A cost can be seen as the translation of the usage of a resource

2. Accounting information system
2.1 Definition
• An accounting system is a formal mechanism for gathering, organizing, and communicating information
about an organization’s activities
• In order to reduce costs and complexity, many organizations use a general-purpose accounting system that
attempts to meet the needs of both external and internal users

2.2 Users of accounting information




6

, 2.3 Roles of Accounting information
• Scorekeeping
o Evaluate organizational performance
• Attention directing
o Compare actual results to expected
• Problem solving
o Assess possible courses of action

2.4 Importance of accounting information
• Accounting information is used in decision making for planning and control
o Planning describes how the organization will achieve its objectives
o Control is the process of implementing plans and evaluating if objectives are achieved




7

, 3. Budget and performance reports
3.1 Definitions
• Budget
o quantitative expression of a plan of action
• Performance reports
o compare actual results with budgeted amounts
o provide feedback by comparing results with plans
o highlight variances
o Example:




• Variances
o deviations from plans

3.2 Management by exception
• Concentrating more on areas that deviate from the plan and less on areas that conform with plans and are
presumed to be running smoothly
o PRO:
▪ Frees managers from needless concern with those phases of operations that adhere to plans
and are running smoothly
▪ More focused
o Contra
▪ Attention should be given to products/services which are actually operating well.

4. Product life and value
4.1 Product life cycle
• Product life cycle refers to the various stages through which a product passes




8

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