2-Strategic Planning: Techniques for Forecasting, Budgeting and Analysis

Question 1

CVP Analysis

Answer 1

Cost-volume-profit (CVP) analysis is used by managers to forecast profits at different levels of sales
and production volume. The point at which revenues equal total costs is called the breakeven point.
Cost-volume-profit analysis is synonymous with breakeven analysis

Question 2

Variable and Fixed Costs

Pass key

Answer 2

Variable costs include direct labor, direct material, variable manufacturing overhead, shipping and
packaging, and variable selling expenses.
Fixed costs include fixed overhead, fixed selling, and most general and administrative expenses.

Question 3

Contribution Ratio

Pass key

Answer 3

The contribution ratio formula is expressed as follows:

Contribution margin ratio= Contribution margin+ Revenue

Question 4

Difference - Absorption vs Variable

Pass Key

Answer 4

Difference between variable costing net income and absorption
Net income. Follow the simple steps below to compute the difference:
Step 1: Compute fixed cost per unit (Fixed manufacturing overhead / Units produced)
Step 2: Compute the change in income (Change in inventory units x Fixed cost per unit)
Step 3: Determine the impact of the change in income

No change in inventory: Absorption net income= Variable net income
Increase in inventory: Absorption net income> Variable net income
Decrease in inventory: Absorption net income< Variable net income

Question 5

Contribution Margin Ratio

Answer 5

Contribution margin / Sales

Question 6

Target Costing

Answer 6

establish the product cost allowed to ensure both profitability per unit and total sales volume.

Question 7

Transfer Pricing Methods

Answer 7

A. Negotiated Price
This is simply a negotiation process between the selling and purchasing divisions until an agreement is reached . The selling division will not accept a price lower than the variable cost to produce and sell the product, and the purchasing division will not accept a price higher than the market price (if available).

B. Market Price
A fair price often can be determined if an outside market exists for the product’s sale/purchase. This price may even be reduced by the selling division due to cost savings from not having to market or distribute the product as it would for an outside sale.

C. Cost
When no external market for the product exists, a reasonable assessment of cost will include at least the variable costs associated with production, with fixed manufacturing overhead added as well. A reasonable profit markup also may be added to the cost to determine the sale price.

Question 8

Sensitivity Analysis

Answer 8

Also called “what-if’ analysis, sensitivity analysis is a risk management tool that is used to test
the effect of specific variables on overall profitability. Managers incorporate sensitivity analysis
into the budgeting process to determine which variables are the most sensitive to change and
therefore will have the biggest im act on the bottom line.

Question 9

coefficient of determination (R2)

Answer 9

The coefficient of determination (R2) is the proportion of the total variation in the dependent variable (y) explained by the independent variable (x).

Its value lies between zero and one.

Question 10

PURE

P=Price Variance - DM
U=Usage variance - DM
R=Rate variance - DL
E=Efficiency variance - DL

Answer 10

DM price variance = Actual (Quantity purchased) x (Actual price- Standard price)

DM quantity usage variance = Standard price x (Actual quantity used- Standard quantity allowed)

DL rate variance = Actual hours worked x (Actual rate - Standard rate)

DL efficiency variance = Standard rate x {Actual hours worked- Standard hours allowed)

Question 11

SAD
PURE
DADS

Answer 11

SAD: Standard- Actual = Difference

P=Price Variance - DM
U=Usage variance - DM
R=Rate variance - DL
E=Efficiency variance - DL

DA Difference x Actual
DS Difference x Standard
DA Difference x Actual
DS Difference x Standard

Question 12

Variances

Pass key

Answer 12

The equations for the four overhead variances are as follows:

VOH rate (spending) variance= Actual hours x (Actual rate- Standard rate)

VOH efficiency variance= Standard rate x (Actual hours -Standard hours allowed for actual production volume)

FOH budget (spending) variance= Actual fixed overhead- Budgeted fixed overhead

FOH volume variance= Budgeted fixed overhead- Standard fixed overhead cost allocated to production*
(* based on Actual production x Standard rate)

Question 13

Applied Overhead

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Answer 13

When standard costing is used, the application of overhead is accomplished in two steps:
Step 1: Calculated overhead rate = Budgeted overhead costs+ Estimated cost driver
Step 2: Applied overhead =Standard cost driver for actual level of activity x Overhead rate (from Step 1)

Question 14

Different SBUs

Answer 14

Cost SBU
Managers are held responsible for controlling costs.

Revenue SBU
Managers are held responsible for generating revenues.

Profit SBU
Managers are held responsible for producing a target profit (accountability for both revenues and costs).

Investment SBU
Managers are held responsible for return on the assets invested to produce the earnings generated by the SBU.

Question 15

Balanced Scorecard

FICA

Answer 15

1. Financial
2. Internal business processes
3. Customer satisfaction
4. Advancement of innovation and human resource development (learning and growth)