This book lives up to its intention as an introduction to the basics of money and investing. It begins with the history of the monetary system in the United States and elsewhere, explains stocks, stock exchanges, the market and its cycles, bonds, mutual funds, and futures and options.
Full of charts, tables, and graphics, it provides illustrations and examples of concepts and financial processes, such as what happens during a purchase of stock on the New York Stock Exchange. Additionally, it shows correlations--the cause and effect relationship between weak and strong dollars on international stock purchases.
The book offered investment strategies, using options. As the authors stated:
"You can use options conservatively to increase your income or to limit your risk.
The most popular income-producing strategy is selling covered calls. You write call options on a share-for-share basis against stocks you own. If someone exercises the calls, you meet your obligation to sell by handing over your stocks. The goals of covered calls are to provide some protection if the stock price falls, establish a selling price above the current market price or increase your income in a sideways market, when prices move up and down within a very small range.
Writing cash-secured puts is another income-oriented approach. You sell a put for each 100 shares of stock an investor is willing to buy at a special price. Then, as security, you invest an equivalent amount in U.S. Treasury bills or a money market account. If the put is exercised, you liquidate that investment and use the cash to buy the stock"(pp. 144-145).
I plan to read more recent editions of this book, to make a comparison of the information they contain. Stay tuned!
Morris, K. M. & V. B. Morris. (1999). The Wall Street Journal Guide to Understanding Money and Investing. New York: Lightbulb Press, Inc. and Dow Jones & Co., Inc.
Friday, November 27, 2009
Tuesday, November 3, 2009
Time-Driven Activity-Based Costing
Kaplan, R. S. & Anderson, S. R. (2007). Time-driven Activity-Based Costing : A simpler and more Powerful Path to Higher Profits. Boston, MA: Harvard Business School Press.
Robert Kaplan, best known for his work on the Balanced Scorecard, and Steven R. Anderson wrote this book to demonstrate how enterprise resource planning (ERP) systems enable companies to assess at the transaction level the time consumed in steps of processes. Specifically, time-driven activity-based costing measured the "cost and profitability of producing and delivering their products and services, and managing their customer relationships" (p. xi).
The Balanced Scorecard, equally as necessary for companies to evaluate their progress, reveals how companies create value for employees, shareholders, customers, and investors.
If a company realized a low total-cost strategy, activity-based costing enables managers to accurately measure the costs of significant processes. If a company has not gaged the profitability of their customers, activity-based costing provides insight into that information. According to the authors, customer profitability influences other customer metrics, "such as satisfaction, retention, and growth, to signal that customer relationships are desirable only if these relationships generate increased profits" (p. xii).
Traditional standard cost system employed three cost factors--labor, materials, and overhead. With increased automation, the authors argued that allocations of costs under this system became distorted. Activity-based costing corrected these distortions "by tracing these indirect and support costs first to the activities performed by the organization's shared resources, and then assigning the activity costs down to orders, products, and customers on the basis of the quantity of each organizational activity consumed" (p. 5).
Anderson improved on the activity-based costing model with the 'time-driven activity-based costing' (TDABC). Finding the data gathering to support the conventional model "time-consuming . . . costly . . . subjective . . . . difficult to validate . . . local . . . not easily updated . . . theoretically incorrect when it ignored the potential for unused capacity" (p. 7), TDABC modified the conventional system "by eliminating the need to interview and survey employees for allocating resource costs to activities before driving them down to cost objects (orders, products, and customers).
Time-driven activity based costing involves a two step process. The first, "the TDABC model calculates the cost of supplying resource capacity . . . personnel, supervision, occupancy, equipment and technology" (p. 8). "It divides this total cost by the capacity--the time available from the employees actually performing the work--of the department to obtain the capacity cost rate" (p. 8). The second step, "TDABC uses the capacity cost rate to drive departmental resource costs to cost objects by estimating the demand for resource capacity . . . that each cost object requires"(p. 8).
PRACTICAL APPLICATION
Capacity cost rate = Cost of capacity supplied
----------------------------------------------
Practical capacity of resources supplied
Capacity cost rate = $567,000
------------------------------------------------
630,000 minutes = $0.90 per minute
TDABC estimates of customer related activities:
Process customer orders : 8 minutes
Handle customer inquiries: 44 minutes
Perform credit check: 50 minutes
TDABC COST DRIVERS
-------------------------------------------------------------------------
Activity Unit time (minutes) Rates (at $0.90/minute)
----------------------------------------------------------------------------------------
Process customer order 8 $ 7.20
Handle customer inquiry 44 $39.60
Perform credit check 50 $45.00
Used capacity
Unused capacity (8.2)
As a tool for future decision making, the TDABC allows managers to develop trends of data over time. Modifications to the tool occur from new activities, for example, changes in time due to more complicated or custom processes, changes in cost rates, due to automation or increased efficiencies, such as the implementation of quality programs. Therefore, the system adapts to changes in circumstances.
To estimate processing time, the first principal of TDABC, enterprise resource planning systems aid companies in accumulating data, such as cubic meters, kilograms, gigabytes, and bauds. Global positioning systems and radio frequency identification devices facilitate accumulating data. Having detailed and complete business process diagrams simplifies calculating time estimates. The author argued that the granularity at the transaction level provided greater accuracy for users of TDABC. Recommending steps for implementation, the authors suggested the following: "begin with the most costly processes . . . define the scope of the process . . . determine the key drivers of time . . . use readily available driver variables . . . start simple . . . engage operational personnel to help build and validate the model" (p. 36).
The second principal, aggregating the cost of capacity supplied, consolidates all department costs--"the compensation of frontline employees and their supervisors; occupancy, technology, and other equipment costs; and the costs of corporate staff functions that support the work performed" (p. 41). How companies determine these costs vary depending on the nature of the business and the degree of specificity desired. For example, equipment costs can apply historical, replacement costs, or the "opportunity cost of the investment in the equipment"(p. 43). The second part of this equation, practical capacity, "can be estimated somewhat arbitrarily or studied analytically. The arbitrary approach assumes that practical capacity is a specified percentage, say, 80 or 85 percent, of theoretical capacity" (p. 52). Similarly, equipment might register 15 to 20 percent downtime. Enterprise resource planning systems might record actual repair time, startups, downtime, vacation and sick time for equipment and employees. Although actual costs from accounting systems supply readily available numbers, some firms elect to use budgeted, normalized costs.
The remainder of the book covered the implementation of TDABC and some case studies, of organizations as diverse as an historical black university (HBU), for-profit companies, and not-for profit organizations. The authors address the transformation of customers from unprofitable to profitable with the TDABC system. They end the book by responding to frequently asked questions.
Robert Kaplan, best known for his work on the Balanced Scorecard, and Steven R. Anderson wrote this book to demonstrate how enterprise resource planning (ERP) systems enable companies to assess at the transaction level the time consumed in steps of processes. Specifically, time-driven activity-based costing measured the "cost and profitability of producing and delivering their products and services, and managing their customer relationships" (p. xi).
The Balanced Scorecard, equally as necessary for companies to evaluate their progress, reveals how companies create value for employees, shareholders, customers, and investors.
If a company realized a low total-cost strategy, activity-based costing enables managers to accurately measure the costs of significant processes. If a company has not gaged the profitability of their customers, activity-based costing provides insight into that information. According to the authors, customer profitability influences other customer metrics, "such as satisfaction, retention, and growth, to signal that customer relationships are desirable only if these relationships generate increased profits" (p. xii).
Traditional standard cost system employed three cost factors--labor, materials, and overhead. With increased automation, the authors argued that allocations of costs under this system became distorted. Activity-based costing corrected these distortions "by tracing these indirect and support costs first to the activities performed by the organization's shared resources, and then assigning the activity costs down to orders, products, and customers on the basis of the quantity of each organizational activity consumed" (p. 5).
Anderson improved on the activity-based costing model with the 'time-driven activity-based costing' (TDABC). Finding the data gathering to support the conventional model "time-consuming . . . costly . . . subjective . . . . difficult to validate . . . local . . . not easily updated . . . theoretically incorrect when it ignored the potential for unused capacity" (p. 7), TDABC modified the conventional system "by eliminating the need to interview and survey employees for allocating resource costs to activities before driving them down to cost objects (orders, products, and customers).
Time-driven activity based costing involves a two step process. The first, "the TDABC model calculates the cost of supplying resource capacity . . . personnel, supervision, occupancy, equipment and technology" (p. 8). "It divides this total cost by the capacity--the time available from the employees actually performing the work--of the department to obtain the capacity cost rate" (p. 8). The second step, "TDABC uses the capacity cost rate to drive departmental resource costs to cost objects by estimating the demand for resource capacity . . . that each cost object requires"(p. 8).
PRACTICAL APPLICATION
Capacity cost rate = Cost of capacity supplied
----------------------------------------------
Practical capacity of resources supplied
Capacity cost rate = $567,000
------------------------------------------------
630,000 minutes = $0.90 per minute
TDABC estimates of customer related activities:
Process customer orders : 8 minutes
Handle customer inquiries: 44 minutes
Perform credit check: 50 minutes
TDABC COST DRIVERS
-------------------------------------------------------------------------
Activity Unit time (minutes) Rates (at $0.90/minute)
----------------------------------------------------------------------------------------
Process customer order 8 $ 7.20
Handle customer inquiry 44 $39.60
Perform credit check 50 $45.00
Used capacity
Unused capacity (8.2)
As a tool for future decision making, the TDABC allows managers to develop trends of data over time. Modifications to the tool occur from new activities, for example, changes in time due to more complicated or custom processes, changes in cost rates, due to automation or increased efficiencies, such as the implementation of quality programs. Therefore, the system adapts to changes in circumstances.
To estimate processing time, the first principal of TDABC, enterprise resource planning systems aid companies in accumulating data, such as cubic meters, kilograms, gigabytes, and bauds. Global positioning systems and radio frequency identification devices facilitate accumulating data. Having detailed and complete business process diagrams simplifies calculating time estimates. The author argued that the granularity at the transaction level provided greater accuracy for users of TDABC. Recommending steps for implementation, the authors suggested the following: "begin with the most costly processes . . . define the scope of the process . . . determine the key drivers of time . . . use readily available driver variables . . . start simple . . . engage operational personnel to help build and validate the model" (p. 36).
The second principal, aggregating the cost of capacity supplied, consolidates all department costs--"the compensation of frontline employees and their supervisors; occupancy, technology, and other equipment costs; and the costs of corporate staff functions that support the work performed" (p. 41). How companies determine these costs vary depending on the nature of the business and the degree of specificity desired. For example, equipment costs can apply historical, replacement costs, or the "opportunity cost of the investment in the equipment"(p. 43). The second part of this equation, practical capacity, "can be estimated somewhat arbitrarily or studied analytically. The arbitrary approach assumes that practical capacity is a specified percentage, say, 80 or 85 percent, of theoretical capacity" (p. 52). Similarly, equipment might register 15 to 20 percent downtime. Enterprise resource planning systems might record actual repair time, startups, downtime, vacation and sick time for equipment and employees. Although actual costs from accounting systems supply readily available numbers, some firms elect to use budgeted, normalized costs.
The remainder of the book covered the implementation of TDABC and some case studies, of organizations as diverse as an historical black university (HBU), for-profit companies, and not-for profit organizations. The authors address the transformation of customers from unprofitable to profitable with the TDABC system. They end the book by responding to frequently asked questions.
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