Midterm Analysis – L. Chen
Chapter 7: Activity-Based Costing (ABC)
Although the slides seem to be very complex, this topic is actually pretty simple. It’s actually very similar
to what we’ve learned in the previous chapters, except now the cost drivers will be activities instead of
jobs. The exam questions are still using the same concepts as we learned in job costing though.
Chapter 10: Budgeting and Control
What is a budget: a financial plan on how you will gain and use your resources/money over a
period of time. It is most commonly only in the unit of $ (but does not have to. If you are really
keen and you can have other quantities, but you will have to make sure you don’t confuse
yourself and other readers once you start putting in units other than $).
Use of budget: as per my previous point, it is used for planning, and in addition to that, it is also
used for control. When actual results come out, you can compare the actual results with your
plan and analyze what’s different in order to see more insights about the business and identify
strengths and weaknesses, and areas for improvement.
Tutor’s Note: there are many different types of budget in the lecture slides, like master budget,
operating budget, financial budget, sales budget, etc. If you are confused, don’t worry. All these
types of budget are essentially the same concept applied in different scenarios. The concept is
basically that a budget is a plan of what’s going to happen later. So making the budget itself isn’t
hard; what’s hard is coming up with accurate assumptions and forecasts (but these are all given
to you in your exam questions so you get to skip out on the hardest part).
Chapter 12: Strategic Investment Decisions
In this chapter, you will apply 4 metrics in capital budgeting to evaluate investment decisions.
Net Present Value (NPV): a measure used to assess the appropriateness of capital expenditure.
It takes into account of all present and future cash flows (both inflows and outflows) associated
with a certain project, and discount the cash flows back to present time. If the net present value
is positive, then the project is profitable and we accept it. If NPV is negative, then we reject this unprofitable project. When we choose between projects that are positive in NPV, we choose
the highest NPV project. It is the most preferred measure for evaluating appropriateness of
capital expenditures. One assumption is that the firm has the ability to reinvest cash flows at
the rate of return equivalent to cost of capital (similar to the idea of compound interest)