Chapter 5

2. Chapter 5 Financial aspects of logistics and supply chain management

3. Introduction Part A: Introduction to financial management decision making Part B: Introduction to cost accounting and calculations for decision-making purposes Contents

4. 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

5. 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

6. 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.

7. Introduction • Wealth of shareholders • Accounting information • Drivers of market value • Part A: financial decision making • Part B: cost accounting

8. 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.

9. Cost of equity Introduction Risk-free rate Market risk premium The beta factor Capital asset pricing model Ce = Rf + (ß x Mrp)

10. 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.

11. 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

12. Value drivers Revenue Operating costs Tax Working capital Property, plant and equipment

13. Return on investment Introduction Profit margin Asset turnover

14. Part B: Introduction to cost accounting and calculations for decision-making purposes Logistics costing and activity-based costing Marginal costing Cost-volume-profit analysis

15. 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)

16. Logistics costing and activity-based costing (continued) Activity-based costing

17. 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

18. Cost-volume-profit analysis Introduction to CVP and its relevance to logistics Contribution approach to CVP analysis CVP analysis in decision making

19. Contribution approach to cost-volume-profit analysis Breakeven point Margin of safety Sales to achieve a target profit Breakeven graph

20. Cost-volume-profit analysis in decision making Change in fixed cost Change in variable cost Change in selling price Conclusion on CVP

21. Conclusion Examples Questions