ABC & TOC integrated cost assessment, planning, control, and performance appraisal tools for decision-making on optimum results

The IPPPA-Tool-I.

The first set of IPPPA tool-I consisting of the following, enable to assess the operating, investment and financing efficiency & effectiveness under changing/uncertainty conditions through equilibrium optimization.

a=IROS= CM Ratio (1-BER)

b=IROI/(IROIBIT) = a*ITR

c=IROIBT =b - (WKd*DIR)

d=IROIAT= = c *((1-TR)

e=ILROE= IROIAT *1/(1-DIR))

f=ITeROE=IROI*(1-TR)

III.D.6.1.a. Determination of integrated return on sales (IROS): The concept of short & long-run integrated return on sales (IROS) is determined by subtracting the product of contribution ratio and Breakeven Ratio, which is nothing but fixed cost to contribution ratio, from contribution ratio. It is able to derive two distinct ROS values in a progression namely integrated chain of short runs called MROS and the integrated progressive short runs effects in due course of a long-run called PROS representing medium period changing effects (effects of short runs) with the concept of factual accumulated accounting data of operating variables in progression. The short and long-run IROS curves i.e. MROS and PROS together are enabled to imply the Economic equilibrium principle to find the point of optimization of firm ROS, which is identifiable/ determined through the point of intersection of the PROS curve by the MROS curve from above. The intersection point also indicates the optimization of the operating efficiency of the firm. It relieves the ambiguity and constraints of Degree of Operating Leverage (DOL) and is the best & more accurate alternative measurement for decision-making on operating leverage. It is able to unify the long-run returns on sales with short-run factual (changing conditions) operating leverage. The following formula is enabled to provide such integrated analysis.

a=IROS= CM Ratio (1-BER)

Where: CMRatio= Contribution Ratio, BER= Break-even Ratio, PROS=Progressive Return on sales, MROS= Marginal return on sales.

III.D.6.1.b. Determination of integrated return on investment (IROI): The concept of short & long-run integrated return on Investment (IROI) is determined as the product of IROS and Investment Turnover Ratio (ITR). It is able to derive two distinct IROI values in a progression namely integrated chain of short runs called MROI and the integrated progressive short runs effects in due course of a long called PROI representing medium period changing effects (effects of short runs) by using the factual accumulated accounting data of operating variables in progression. The short and long run IROI curves i.e. Combination of MROI and PROI together are able to imply the Economic equilibrium principle to find the point of optimization of firm ROI which is identifiable / determined through the point of intersection of “PROI curve in the conditions of the changing investment” or the “‘X’ axis in the constant investment conditions” by the MROI curve from above. The respective intersection point also indicates the optimization of the investment effectiveness of the firm. It is able to integrate DuPont’s ROI with DOL and relieved the ambiguity and constraints of DuPont’s ROI and DOL mutually is the best & most accurate alternative measurement for decisions that are based on DOL and DuPont’s ROI. It is able to unify the operating long-run returns on investments with short-run factual (changing conditions) operating leverage. The following formula is enabled to provide such integrated analysis.

b=IROI/(IROIBIT) = a*ITR  or  IROS*ITR

Where:ROIBIT= return on investment before interest and tax, ITR= investment turnover Ratio, PROI =Progressive ROI, MROI=Marginal ROI.

III.D.6.1.c.Determination of integrated return on investment before tax (IROIBT): The short and long-run integrated return on Investment before Tax (IROIBT) is determined by subtracting the product of the weighted cost of debt and Debt to Investment Ratio from the IROI. It is able to derive two distinct IROIBT values in the progression of operations called the integrated chain of short runs called MROIBT and the integrated progressive short runs effects in due course of a long run called PROIBT representing medium period changing effects (effects of short runs) with the application of factual accumulated accounting data of operating variables in progression. The short and long run IROIBT curves i.e. MROIBT and PROIBT together are enabled to imply the Economic equilibrium principle to find the point of optimization of firm ROIBT which is identifiable / determined through the point of intersection of “PROIBT curve in the conditions of the changing investment” or the “‘X’ axis in the constant investment conditions” by the MROIBT curve from above. The intersection point also indicates the optimization of investment effectiveness with the returns after the cost of debt of the firm. It relieved the ambiguity and constraints of Degree of Financial Leverage (DFL) and combined leverage (DCL). It is the best & most accurate alternative measurement for financial and combined leverage-based short-run and ROI-based long-run decision-making. It is able to unify the short-run factual (changing conditions) operating and financial leverages with long-run returns on investments. The following formula is enabled to provide such integrated analysis.

c=ROIBIT =b - (WKd*DIR)   or   IROI* (WKd*DIR)

Where: ROIBIT= Return on Investment before Tax, WKd= weighted Cost of Debt, DIR= Debt to total investment Ratio.

III.D.6.1.d. Determination of integrated return on investment after tax (IROIAT): The short and long-run integrated return on Investment after Tax (IROIAT) is determined by subtracting the product of IROIBT and TR from the IROIBT. It is able to derive two distinct IROIAT values in the progression namely integrated chain of short runs called MROIAT and the integrated progressive short runs effects in due course of a long called PROIAT representing medium period changing effects (effects of short runs) with the concept of factual accumulated accounting data of operating variables in progression. The short and long run IROIAT curves i.e. MROIAT and PROIAT together are enabled to imply the Economic equilibrium principle to find the point of optimization of firm ROIAT which is identifiable / determined through the point of intersection of “PROIAT curve in the conditions of the changing investment” or the “‘X’ axis in the constant investment conditions” by the MROIAT curve from above. The intersection point also indicates the optimization of investment effectiveness with the returns after interest and taxes of the firm. It is able to unify the long-run returns on investments with short-run factual (changing conditions) operating & financial leverage with Tax effects. It an important measurement to make decisions that are associated with tax levies apart from DCL and ROI. The following formula is enabled to provide such integrated analysis.

d=ROIAT= = c *((1-TR) or ROIBT*(1-TR)

ROIAIT= Return on Investment after Interest and Taxes, Tr = tax rate,

III.D.6.1.e. Determination of integrated progressive return on equity when capital includes debt capital (PLROE): The short and long-run integrated progressive return on Equity of actual debt involved in the capital of the firm (PLROE) is determined by dividing the PROIAT with the value derived from subtracting the product of PROIAT and DIR from the PROIAT. It is able to derive the integrated progressive short-run effects in due course of a long i.e. PLROE. It explains the state of medium period changing effects (effects of short runs) by using the factual accumulated accounting data of operating variables in the progression of the factual debt content involved in the capital financing of a firm. It is used as a measure to apply together with PTeROE to determine leverage indifferent point to assess the risk premium optimization with the help of MROI or MROIBT/MROIAT to ensure the optimization of EPS that marks the optimization of financing effectiveness in terms of achieved/target operating efficiency under changing operating conditions.

e=LROE= ROIAT *1/(1-DIR))  ore=LROE= d *1/(1-DIR))

LROE return on Equity for factual Debt involved in the capital of the firm.

III.D.6.1.f. Determination of integrated progressive return on equity as deemed pure/total equity capital (PTeROE): The short and long-run integrated progressive return on Equity of deemed pure/total equity capital financing of the firm (PTeROE). It is determined by subtracting the product of ROI and TR from the ROI. It is able to represent the integrated progressive short-run effects in due course of a long on PTeROE. It explains the state of medium period changing effects (effects of short runs) by using the factual accumulated accounting data of operating variables in progression in the deemed pure/total Equity capital financial condition of the firm. It is used as a measure to apply together with PLROE to determine leverage indifferent point that discloses the misconceptions of tax benefits with leverage on one hand and able to assess the risk premium optimization with the help of MROI or MROIBT/MROIAT to ensure the optimization of EPS that marks the optimization of financing effectiveness on the other. It is able to unify the long-run returns on finances with short-run factual (changing conditions) operating & financial combined leverages and Tax effects and paved the way for financial leverage optimization and financial & investment risk premium optimization to optimize the EPS. The following formula is enabled to determine the integrated TeROE.

f=TeROE= ROI*(1-TR) or f= b*(1-TR)

Where:TeROE= return on Equity of deemed total/pure equity condition of a firm.

The IPPPA-Tool-II: for measurement of impacts of changes as elasticity of ROS in progression for decision-making on control of costs for optimal results.

the formulae for determination of the impact of changes in variables on the targeted Returns, individually:

a. The Elasticity of ROS on planned/target Revenues (ETROS) with respect to a given change only in price (SP) of the product/product mix

a= ETROSSp= ΔSPR

b. The Elasticity of ROS on planned/target Revenues (ETROS) with respect to a given change only in the volume of the product/product mix

b= ETROSvol={[(ΔVolR2)*(BER*CMR)]*(1+ΔVolR1)}+ (TROS*ΔVolR1)

c. The Elasticity of ROS on planned/target Revenues (ETROS) with respect to a given change only in Variable Cost of the product/product mix

c= ETROSvc= ΔVCR

d. The Elasticity of ROS on planned/target Revenues (ETROS) with respect to a given change only in Fixed Cost of the product/product mix

d= ETROSFc= {(ΔFCR)*BER*(CM Ratio)}

the formulae for determination of the impact of changes in variables on the targeted Returns, individually together with volume and other variables:

a. The Elasticity of ROS on planned/target Revenues (ETROS) with respect to a given change in price (SP) of the product/product mix

a= ETROSSp= ΔSPR*(1+ΔVolR1)

b. The Elasticity of ROS on planned/target Revenues (ETROS) with respect to a given change in volume of the product/product mix

b= ETROSvol={[(ΔVolR2)*(BER*CMR)]*(1+ΔVolR1)}+ (TROS*ΔVolR1)

c. The Elasticity of ROS on planned/target Revenues (ETROS) with respect to a given change in Variable Cost of the product/product mix

c= ETROSvc= ΔVCR*(1+ΔVolR1)

d. The Elasticity of ROS on planned/target Revenues (ETROS) with respect to a given change only in Fixed Cost of the product/product mix

d= ETROSFc= {[(ΔFCR)*(1-ΔVolR2)]*BER*CMR}*(1+ΔVolR1)

e. The extent of net Sum of effect on TROS:

e=ETROSall= (a+b) - (c+d)