Archive for November, 2010

Utilitarianism Consequentialism

Utilitarianism (Thrift Edition)   — Kotchian values consequences (protection of jobs and investment in company) over
     potential violation of duty (responsibilities of government officials to uphold the law)
   — Moral dilemma:  Consequences (teleological theory) vs. Duty (deontological theory)
   — Utilitarianism focuses more on the consequences of an action
  ∙  Two Types of Ethical Theories
   — Utilitarianism vs. Kantian ethics (duty) vs. Virtue (i.e., Aristotle – not covered in the
   — Teleological:  ends over means (judged by maximum balance of good over bad)
       ∙∙ Strengths:  in accord with most moral reasoning (makes sense), precise and
         objective method
       ∙∙ Weaknesses:  ignores promises and duties, does not take into consideration rights,
          justice, and obligations (i.e., free speech might do more harm, yet is a basic right)
   — Deontological:  actions are analyzed according to moral rules (duties)
       ∙∙ Strengths:  good when consequences are irrelevant (e.g., contracts, family
          obligations), examines motives (e.g., giving to charity for tax reasons or for
       ∙∙ Weaknesses: rules seem arbitrary at times and potentially ethnocentric, no clear-
          cut priority among rules
∙  Classic Utilitarianism
   — Jeremy Bentham and John Stuart Mill –> created practical guide in English reform
Utilitarianism and Other Essays  — Bentham: “hedonistic calculation” means the sum of pleasure minus pain for all
     individuals affected by an action (> 0 = good, < 0 = evil) – critics argue is pleasure a
     sufficient measure of human happiness?
 — Mill:  injects overall happiness into calculation rather than just pleasure (quality
    besides quantity)

∙  The Forms of Utilitarianism
   — Classic (Act) Utilitarianism:  AN ACTION IS RIGHT IF AND ONLY IF IT
      Key Features:  consequentialism (consequences), hedonism (pleasure), maximalism
      (greatest net balance between pleasure and pain), universalism (everybody included in the
Cost Benefit Analysis: Concepts and Practice (3rd Edition)∙  Problems with Calculating Utility
— Difficulty in calculating how much, in identifying alternative courses, and
       accounting for differing preferences among different people
  — Lockheed did not account for the pain of other companies and might have been
      wrong under the utilitarian calculation
  — Cost-Benefit Analysis (used to select means and ends) vs. Cost Effective Analysis
(predetermined ends with least costly means)
  — Problems with CBA: difficult to put monetary value on non-market items, often
     understates value (ignores opportunity costs)
  — One advantage of utilitarianism is its transparency since any ethics theory is value-

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Foreign Bribery

  — bribery condemned and illegal in many countries, yet practiced widely
 — is it ethical to give into demands of bribery? (“when in Rome, do as the Romans do?”)
∙  What is bribery?
   — FCPA (Foreign Corrupt Practices Act): established in 1977 forbids American
     corporations to offer or make any payment to a foreign official for the purpose of
     “influencing any act or decision of such foreign official in his official capacity or of
     inducing such foreign official to obtain or retain business.”
 — facilitating payments allowed (small payments to “grease the wheel” and allowable
    under local law)
∙  What is wrong with bribery?
   — Violation of duty and trust of gov’t. officials
   — Unethical to add to the corruption of officials
  — Hurts fair and efficient markets (false competition, rents)
∙  What should be done?
   — FCPA has its problems (only US involved, intermediaries often make payments –
      not the corporations)
  — U.S. can compete without using bribery
  — OECD treaty (1996) should lead to other countries adopting FCPA standards

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Activity Based Costing

Activity-based Cost Management: An Executive's GuideGoal of ABC: to establish a better cause-effect relationship between products and overhead costs
Traditional Costing:
§  Costs are divvied up based on the allocation base, e.g. Direct Labor Hours
§  Cost pools are typically departments, e.g. R&D, marketing, sales, finance, human resources
§  Divide cost pool by allocation base gives the allocation rate
§  Homogeneity of cost pool is not very strong
ABC Costing:
§  Costs are divvied up based cost drivers, e.g. number of customers, machine hours, etc
§  Cost pools are typically activities, e.g. design products, set up molding machine, distribute, etc
§  Divide cost pool by the cost driver gives the allocation rate
§  Homogeneity of cost pool is strong
Cost hierarchy:
§  Unit – costs that change with the level of units produced                      
§  Batch – costs that change with the number of batches produced
§  Product – costs that change with the number of products supplied
§  Facility – costs that do not change much with the change in volume     

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Standard Costing – Alternative Costing Systems

Updating Standard Cost SystemsStandard costing:
Based on standard (budgeted) values rather than on actual results. 
Static budget:
Used for standard costing.  Created in an income statement format that summarizes the expected performance at the beginning of the budgeting period.  The volume that is used is the expected production (or sales) volume.
Flexible budget:
The flexible budget is the budget that is created at the end of the year that represents the actual volume produced (or sold) during the specified period.
Flexible Budget Variance:
Difference between the static budget and the flexible budget.  To determine what the reasons are for the variance, the following variances are calculated by changing one variable at a time:
Volume Variance:
This variance estimates the impact on profits of changes in sales volume
Volume Variance = (Actual volume – Budgeted volume) x Budgeted contribution margin
Efficiency Variance:
This variance estimates the impact of changes in efficiency use of inputs
Efficiency variance = (Budgeted quantity – Actual quantity) x Budgeted price of inputs
Sales Price Variance:
This variance estimates the impact on profits of changes in mix of sales
Sales price variance = (Actual price – Budgeted price) x Actual volume

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Alternative Costing Systems

Actual vs. Standard Costing:
Cost Accounting: Foundations and Evolutions– Standard costing is base on budgets
Full Costing (Absorption) vs. Variable Costing:
-Differs in the treatment of fixed overhead
Full costing: fixed overhead is assigned to units of inventory and show up in the income statement as part of the COGS when the units are sold.  When units are produced and not sold, fixed overhead stays in finished goods inventory.  Therefore, if inventories increase during a period (i.e. production exceeds sales), the full costing method will report higher operating income since unsold inventory will be “held up” in inventory and won’t hit the income statement until the units are sold. 
            – Direct costs  [variable mfg (direct material and labor) and fixed mfg (factory overhead) ]
              Gross margin
            – Indirect costs (variable SG&A and fixed SG&A)
              Operating profit
Variable costing: no fixed overhead is assigned to inventory.   Fixed overhead is a period expense which enters the income statement as a line-item every period regardless of the number of units sold
            – Variable costs  [variable mfg (direct material and labor) and variable SG&A ]
              Contribution margin
            – Fixed costs [fixed mfg (factory overhead) and fixed SG&A ]
              Operating profit
Alternative Costing System – Click on image to enlarge

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Cost Accounting – Review

Schaum's Outline of Cost Accounting, 3rd, Including 185 Solved ProblemsProduct costs:
– Costs that can be attributed to the generation and delivery of individual products
– Also called “inventoriable” costs and are capitalized in the WIP accounts
Period costs:
– Costs that are attributable to time periods
– Period costs are not capitalized in inventory accounts and go directly to the income statement
– Only appear on income statement as COGS when the product is sold
Direct costs:
– Costs that can be directly related to a cost object
– Includes both variable (varies with volume) and fixed costs (doesn’t vary in specified time span)
– Direct materials: materials that are used in production that end up as part of the finished product
– Direct labor: wages for the workers who are directly involved in the production process
Direct fixed costs: Example: machines à how to estimate cost per unit of fixed costs is an issue
Direct variable costs: Example: material, labor
Indirect costs (Overhead costs):
– Costs that cannot be directly related to a cost object à how to estimate cost per unit is an issue
– Includes both variable (varies with volume) and fixed costs (doesn’t vary in specified time span)
– Examples: spare parts for machines, electric power, supervisor’s salary
– Indirect materials: materials used in production that do not end up as part of finished product
            – Example: supplies and spare parts for machines
– Indirect labor: costs of workers who work in the factory but not directly on the mfg process
            – Example: the factory foreman
Indirect fixed costs: Examples: finance staff, a machine that is used by more than product
Indirect variable costs: Examples: sales force
Relevant costs: used for decision making
– Depends on decision under consideration, no universal method for classifying relevant costs
– Usually variable costs are relevant and fixed costs are not but it depends on the situation
Contribution Margin:
Relevant costs are frequently equal to variable costs
Contribution margin = Price – variable costs (direct, indirect, manufacturing, and SG&A)
Profit = Contribution margin – fixed costs/volume
Breakeven volume (where profit = 0) = fixed costs / contribution margin
When determining which product to produce you should select the product with the highest contribution margin per unit volume on the capacity constraint assuming that fixed costs do not change.

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Types of consumer behaviour models

Consumer Behavior and Marketing ActionPerhaps the most useful set of categories is that of low, medium or high level models. In this case the level refers to the level of complexity – so a low level model would be a relatively simple representation of the phenomenon while a high level model of the same event would be much more complex and detailed and
include more variables.

Simple models

  • Black Box models
  • Personal variable models
  • Personal Variable/Post Purchase Satisfaction model

Comprehensive models

Black Box Models of Consumer Behaviour (Soloman, Bamossy & Askegaard, 1999)

  • Black box models focus solely on inputs and outputs 
  • Do not consider internal variables. 
  • They suggest that a given stimulus will prompt a particular response, within this processing centre;memory, goals and expectations are considered.

Simple black box models are based on identifiable observable and measurable variables, however they are unable to predict or explain behaviour.

Understanding the Consumer: A European PerspectiveNicosia Model (Dubois 2000)

The model is split into four key fields:

  1. The source of a message to the consumers attitude
  2. The search for and evaluation of alternatives 
  3. The act of purchase 
  4. Storage and the use of the purchased product.

The model attempted to demonstrate how the company influences the consumer through its promotional and advertising activities. However, criticisms have been raised about this model, include its descriptive content, its brevity, that it has never been fully tested and is now considered historical.

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The Four Models of Consumer Behavior

Consumer Behavior For Dummies1. Economic model: Economic model of consumer behaviour is one-dimensional. This means that buying decisions of a person are governed by the concept of utility. Being a rational man he will make his purchase decisions with the intention of maximizing the utility/benefits.

Economic model is based on certain predictions of buying behaviour
(a) price effect-lesser the price of the product, more will be the quantity purchased
(b) Lesser the price of the substitute product, lesser will be the quantity of the original product bought (substitution effect)

(c) More the purchasing power, more will be the quantity purchased (income effect).

2. Learning model: Classical psychologists have been interested in the formation and satisfaction of needs and tastes. They argued that living beings were influenced by both innate needs such as the primary needs of hunger, thirst, sex, shelter and learned needs like fear & guilt. A drive or internal stimulus which when directed towards a drive-reducing object becomes a motive. The various products or service will act as a stimulus to satisfy drives.

For example, if you are a hungry you will be driven towards food, which after consumption will reduce the
drive and provide and provide satisfaction.

Consumer Spatial Behavior: A Model of Purchasing Decisions over Space and Time
3. Psychoanalytical model: This model is based on the work of psychologists who were concerned with personality. They were of the view that human needs and motives operated at the conscious as well as subconscious levels. Sigmund Freud developed this theory.

According to him human behaviour or personality for that matter is the outcome of three components, viz.,
(a) ‘id’ which is the source of all psychic energy which drives us as action
(b) ‘super ego’ which is the internal representation of what is approved by the society
(c) ‘ego’ which is the conscious directing ‘id’ impulses to find gratification in a socially acceptable manner.

Thus we can say that human behaviour is directed by a complex set of deep-seated motives. This means that buyers will be influenced by symbolic factors in buying a product. Motivational research has been involved in investing motives of consumer behaviour so as to develop suitable marketing implications accordingly. Marketers have been using this approach to generate ideas for developing product-design, features, advertising and other promotional techniques.

Economics and Consumer Behavior
4. The sociological model: According to this model the individual buyer is a part of the institution called society. Since he is living in a society, gets influenced by it and in turn also influences it in its path of development. He is playing many roles as a part of various formal and informal associations or organisations i.e., as a family member, as an employee of a firm, as a member of a professional forum and as an active member of an informal cultural organization.

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The Howard Sheth Model of Buying Behaviour

The Howard Sheth Model of Buying Behaviour serves two purposes:

Customer Behavior: Consumer Behavior and Beyond
1. It indicates how complex the whole question of consumer behaviour is.
2. It provides the framework for including various concepts like learning, perception, attitudes, etc., which play a role in influencing consumer behaviour.

Inputs: In the Howard Sheth theory, the most significant stimulus affecting the buying behaviour are the information cues about the characteristics of the product. These cues may be significant if it comes to the buyer from the product itself when he is involved in a shopping activity. A similar set of cues, which are symbolic in nature, may also act as information sources. Both these significative and symbolic information cues represent the firms marketing efforts. The broad or product characteristics acting as information cues are quality, price, distinctiveness, service and availability.
There are impersonal sources like mass media communications and advertising, over which the firm has no control. However, the information sources also include sales and service personnel who can add and help the marketing efforts of the firm. The third source is social information cues which could affect buying behaviour towards the product or brand and these include family, friends or other members of the group with whom buyer comes into contact or to which he aspires to be in. The social source is personal and the company marketer has no control over this source.

Consumer Behavior For DummiesPerceptual Constructs: This refers to all the complex states or psychological processes (perception) and how the individual deals with the information cues received from various sources. It can be seen that all information available is not attended to (attention) and may not always be crystal clear in its meanings
(ambiguity). Although the individual may be engaged in an overt search for information, sometimes he/she may be bombarded with unwanted information. Moreover, any information cues to which the individual may attend may be distorted (perceptual bias) as result of his own frame of reference.

Learning Constructs: The second set of hypothetical constructs in the Howard Sheth model of buying behaviour are more complex and numerous. ‘Motives’ refers to the goals the individual attempts to achieve
through his/her buying behaviour. These goals are derived from the various drives (needs), which may be acting as a cue for his/her motive.

More closely related to the buyers intention in his attitude towards the product/brand. Whether he/she formed a positive attitude towards the product/brand. Other learning constructs include ‘brand comprehension’ i.e.,
knowledge/awareness about the brand characteristic features that forms the basis for the buyers evoked set of alternatives; choice criteria, and the confidence the individual has about his/ her brand comprehension, attitudes, or intentions. Finally, the Howard Sheth model includes a construct, ‘satisfaction’. This refers to ‘feedback’ mechanism, i.e., the post purchase and post use evaluation of the output of the process.

Why We Buy: The Science of Shopping--Updated and Revised for the Internet, the Global Consumer, and Beyond
Output: The purchase decision is the output. If after using the product, the consumer is satisfied with it, this will reinforce his positive attitude and purchase intent about the product and brand. Also, the positive attitude makes the consumer more attentive to the product/brand’s stimuli and further increases his brand comprehension.

If the consumer is dissatisfied with experience of using the product/brand, it will trigger off a reaction of negative attitude, low attention to the product stimuli. Poor brand comprehension and negative intention to purchase.

Exogenous or external Variables: Howard Sheth model theory also includes a number of variables, which are not explained but have a bearing on some or all of the constructs discussed above and indirectly
influences the output or consumer response.

1. Social and organizational setting: Man is basically a social animal. Because of his interactions with various groups and society, they look to each other for guidance regarding what to buy, how to buy/dress, etc.
Consumer Behavior : Buying, Having, and Being
2. Social class: In order to conform to the norms of the social class to which he/she belongs, the individual will be engaged in a behaviour, which will be acceptable to the social class to which it belongs.

3. Culture: refers to the shared, somewhat consistent pattern of behaviour of a group of people. Each culture has a set of beliefs, values, etc. So the pattern of buyer behaviour will be based on a pattern of behaviour shared in a specific subset of a larger culture-a subculture trait.

4. Purchasing power/ Financial status: The money/income available for purchasing goods and services during some specific time period also plays a role in influencing the consumption pattern and thereby his buying behaviour.

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Engel-Kollat-Blackwell Model

Consumer BehaviorVariables grouped into categories
a) Stimulus inputs 
b) information processing 
c) decision process and 
d) variables influencing the decision process
Strength of model

  • Deals with low-involvement situations. It is suggested that in low involvement situation the degree to which the various stages in the model are undertaken decreases
Problems with model
  • No way of testing e.g. If had idea of personality characteristics how could they be applied or measured in relation to predicting buyer behaviour
  • Lack of specificity i.e. variables are named in superficially plausible way but not specified in any operational detail

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