Introduction
In 1988, Logue stated that each transaction cost includes at lease two components, one is explicit cost which can be measured easily, such as commission; another one is implicated cost which is not able to be estimated directly. (Louge, 1988) The market impact cost is an example to illustrate implicated cost, which causes concern in transaction cost. From then on, how to measure the transaction cost became a significant issue of economic and financial industry. (Louge, 1988)
On Logue’s research, he eager to establish an approach to estimate the market impact cost, basing on a benchmark trade price. Utilizing the actual trading price and the benchmark price, participators are able to measure the market impact cost. (Louge, 1988) Logue use the Volume Weight Average Model (VWAP) as the tool to prove his finding. However, we can not ignore the shortfalls about the VWAP, including it never consider the opportunity cost and will be less effective in less liquid market.
The aim of this report is utilizing the Volume Weight Average Model (VWAP) to assess the benchmark price of two stocks--BTA and YLC, and to calculate the market impact cost in one day practice. The report will criticize the risk of this approach and give some improvement of this model.
Has VWAP Been Achieved?
In this trade execution, there are two stock were observed, one is Biota Holdings Limited (BTA), the other is Lynas Corporation Limited (LYC). Both shares are listed on the Australian Security Exchanger (ASX). The executed strategy is that brokers divide the orders as small as possible and try to trade the stock frequently. Below Chart 1 and 2 has illustrate the trade volume in respective to each trade.
Chart 1
Chart 2
Before the trade was executed, the 5 days trading data had been already processed and get the historical ratio of trade volume per hour. Under the formula of VWAP, the 50,000 shares were divided into 6 segments, each part on behalf of one hour on the trading day. The trading volume would follow the ratio in different sections.
Table 1
VWAP of The Experiment Average Actual Trade Price Execution Cost Execution Cost*
LYC $0.546977 $0.548 1 cent 0.187%
BTA $2.236223 $2.223 1.3 cent 0.594%
*Execution Cost is the percentage of the difference between actual price and the benchmark price.
In the whole execution, the first round the brokers sold 50,000 shares of BTA and the VWAP of that day was $2.236223 per share. However, comparing with the average actual trade price $2.223, the estimated VWAP is higher than the actual price $0.
Its trading volume increased to over 17.7 million contracts, up 21 per cent from the previous year. This significant growth is largely due to strong growth in interest-rate and index derivatives products, which increased 40 per cent and 15 per cent respectively. In addition, the underlying value of contracts traded averaged more than $30 billion (currency is of Canadian Dollars) on a daily basis, compared to $20 billion in 2002.Though the Montreal Exchange was doing fine on its own joining together with the Toronto Exchange has made the
[6] Colin Drury, Management and Costing Accounting, (7th edition), Chapter 8, Cost-volume-profit analysis, p. 165-173
It was the year 1987 when the Gartner Group popularized the form of full cost accounting named Total Cost of Ownership (TCO)(author, Gartner Total Cost of Ownership). Originally TCO was mainly used in the IT business sector. This changed in the 1980’s when it became clear to many organizations that there is a distinct difference between purchase price and full costs of a products ownership. This brings us towards the main strength of conducting a TCO analysis, besides taking the purchase costs into account, which consist of the amount a money an organization pays for the required service, product or capital outlay. It also considers 1. Acquisition costs; these can consist of sourcing, administration, freight, and taxes. 2. Usage costs, which consists of the costs associated with converting the given product or service into a finished product. And finally 3. End of life cycle costs; the costs or profits incurred when disposing of a product. TCO can be seen as a form of full cost accounting; it systematically collects and presents all the data for each proposed alternative.
Costing as defined by Blocher, Stout, Juras, and Cokins (2016) ‘is the process of accumulating, classifying, and assigning direct materials, direct labor, and factory overhead costs to cost objects, which most commonly are products, services, or projects” (p. 96). Further relayed by Blocher et al. (2016), is the type of costing system a company employs depends on the industry, product or service manufactured or provided, and the benefit versus the cost of the particular system chosen. Job and process costing systems are two different avenues by which companies can accumulate their costs as a first step in determining accurate pricing for their product or service. While one method tracks costs that can be specifically attached to a unique product, batch of products, or service, and then also allocates the overhead to the individual units or services, the other method also tracks the direct costs but accumulates the overhead costs for the shared services used to produce indistinguishable products, then assigns them to a functional department, and from there assigns them to products. Job and process costing system characteristics are examined in further detail, and examples of companies that use each are provided.
"College Accounting Coach." Process Costing-Definitions And Features(Part1) « Process Costing « Cost Accounting «. Feb. 2007. Web
The concept of beta has gained prominence due to the pioneering works of Sharpe (1963), Lintner (1965) and Mossin (1966). There are many studies that examine the behaviour and nature of beta. These studies include the impact of the length of the estimation interval, the stability of individual security beta as compared to portfolio beta, factors influencing the beta as well as the stability of beta in various market conditions.
Bullwhip Effect has received attention from experts for almost two decades. Various ways have been found before to reduce the Bullwhip effect theoretically and practically as well. From the introduction of Bullwhip, it’s been extended to new level. Various forms have been noticed like Financial Bullwhip effect, Green Bullwhip effect etc. (Xun Wang1, 2016)
The contained paper has been prepared with objectives of elaborating over the three different costing methods namely, Absorption/Full Costing, Variable/Marginal Costing, and Activity Based accounting. The first segment of the report seeks to define and illustrate the costing methods based on the personal understanding of the writer gained through the class room and the academic readings. Part two of the report takes a form of short essay, written critically to evaluate the application of standard costing and variance analysis to any size of business, and concludes with a verdict that whether or not standard costing and variance analysis is applicable to each business with consideration of its costs and benefits of the system.
In a significant step towards convergence, the FASB and IASB (“the Boards”) issued the Exposure Draft, Revenue from Contracts with Customers in 2010. The goal was to create a single joint revenue recognition standard that companies could apply consistently across industries and capital markets thereby improve financial reporting. The Boards highlighted a number of improvements in the proposed standard - removing inconsistencies, improving comparability, requiring enhanced disclosures and clarifying the accounting for contract costs. Instead of focusing on “realized/realizable” and “earned” the Exposure D...
The overall purpose of cost accounting is to advise top administration and the management team on the most suitable and cost effective methods and actions to employ based on cost, capability and efficiencies of a given product or service. It can be defined as the method where all the expenditures used during execution of business activities are gathered, categorized, examined and noted down (Horngren & Srikant, 2000). Once these numbers are gathered and recorded the information is used to determine a selling price and/or to identify possible investment opportunities. Although the principal aim or function of cost accounting is to help the business administration with their decision making and business planning process, the cost accounting data
Capital Asset Pricing Model (CAPM) is an ex ante concept, which is built on the portfolio theory established by Markowitz (Bhatnagar and Ramlogan 2012). It enhances the understanding of elements of asset prices, specifically the linear relationship between risk and expected return (Perold 2004). The direct correlation between risk and return is well defined by the security market line (SML), where market risk of an asset is associated with the return and risk of the market along with the risk free rate to estimate expected return on an asset (Watson and Head 1998 cited in Laubscher 2002).
This report discusses about the strengths and weaknesses two types of asset pricing theory - Capital Asset Pricing Model (CAPM) and Arbitrage Pricing Theory (APT). The CAPM model shows the relationship between the fair expected returns and the systematic risk of a portfolio. Figure 1 shows the formula of CAPM.
middle of paper ... ... 8. Lewis, R.J. "Activity-Based Costing for Marketing." Management Accounting, November 1991, pp. 33-38.
Chapter 11 closes our discussion with several insights into the efficient market theory. There have been many attempts to discredit the random walk theory, but none of the theories hold against empirical evidence. Any pattern that is noticed by investors will disappear as investors try to exploit it and the valuation methods of growth rate are far too difficult to predict. As we said before the random walk concludes that no patterns exist in the market, pricing is accurate and all information available is already incorporated into the stock price. Therefore the market is efficient. Even if errors do occur in short-run pricing, they will correct themselves in the long run. The random walk suggest that short-term prices cannot be predicted and to buy stocks for the long run. Malkiel concludes the best way to consistently be profitable is to buy and hold a broad based market index fund. As the market rises so will the investors returns since historically the market continues to rise as a whole.
Activity-based costing (ABC) is a costing method that is designed to provide managers with cost information for strategic and other decisions that potentially affect capacity and therefore “fixed” as well as variable costs. Activity-based costing is mostly used for internal decision making and managing activities while traditional costing method is used to provide data for external financial reports. Most organization uses activity-based costing as an addition system for using traditional absorption costing as sometimes the traditional cost system misleads the product’s profitability. In a company, there are many products on sale, if one product is sold at a high price with low product margin and a product with high product margin at a low price, it may result in a loss. In addition, due to the reason that cost drivers and enterprises business may change, activity-based costing analysis also needs to be revised periodically. This amendment should be prompted to change pricing, product, customer focus and market share strategy to improve corporate profitability.