B2 Flashcards
Is the contribution approach GAAP?
No; it only treats variable overhead as a product cost; fixed overhead is seen as a period expense
Contribution Approach Formula
Revenue
CM
Net Income
Is the absorption approach GAAP?
Yes
The only difference between absorption approach and contribution approach?
- the treatment of fixed manufacturing overhead
* the difference will be in COGS
Quick way to calculate fixed manufacturing overhead left in inventory
- find the fixed overhead rate per unit
* multiply it by the number of units still sitting in EI
Production Greater than Sales vs. Sales Greater than Production
P>S = absorption costing will show a higher profit P<S = absorption costing will show lower profit since fixed overhead from prior period is now being expensed in addition
Tendency for managers using the absorption costing
*stockpile inventory
Total sales dollars at the BEP
= (total fixed costs)/(CM ratio)
BEP in units
= (total fixed costs)/(CM per unit)
Amount of profit following the break-even point
= units sold multiplied by the contribution margin
Margin of Safety
excess sales over breakeven sales
- expressed as a dollar or a percentage
- *(Margin of Safety $)/(Total sales)
Target Cost =
Market Price - required profit
Implications of Target Costing
- compromised quality in order to achieve cost level
2. increased marketing and downstream costs
Relevant Costs
- change as a result of selecting different alternatives
* incremental costs always change
Are opportunity costs relevant costs?
Yes
Are controllable costs relevant costs?
Yes
Are marginal costs relevant costs?
Yes
Special Order Decisions
*accept if rev > relevant costs
- Excess capacity
- *SP > VC
- Full capacity
- *SP > VC + opportunity cost
- OPPORTUNITY COST = CONTRIBUTION MARGIN
- (CM in $)/size of special order
Make vs. Buy
Relevant costs to make < cost to buy = make
Sell or Process Further
if incremental revenue > incremental cost = process further
- joint costs are ignored
- separable costs = relevant
Keep or Drop a Segment
- keep the segment if the lost contribution margin exceeds avoided fixed costs
- drop the segment if the lost contribution margin is less than avoided fixed costs
*CONSIDER THE NONFINANCIAL IMPACT!!!
Sensitivity Analysis
(delta TC)/(delta volume)
Linear Regression Formula
y = A + Bx
y = TC A = FC B = VC/unit
Coefficient of Correlation vs. Coefficient of Determination
Correlation: -1;0;1 (strength of linear relationship)
Determination: 0;1 (how much of a change in y can be explained by a change in x)
Learning Curve Rate
*a percentage expression of the decrease in average time as production double (% that still remains)
32 hours vs 40 hours = learning curve of 80%
High-Low Method
- find the highest and lowest X value
- calculate slope
- use the highest or lowest value to find the y intercept
Tactical plans are also known as
single use plans (apply to specific circumstances during a specific time frame)
Two Things Budgets should Include
- management participation
* budget guidelines
Ideal Standards vs. Currently Attainable Standards
Ideal
- implied emphasis on continuous quality improvement
- demotivation of employees
Attainable
- use with flexible budgets
- reasonable
- best standard is the standard that leads to the accomplishment of strategic goals
Authoritative vs. Participative Standards
Authoritative
*set by management, quick, workers might not accept
Participative
*all individual, more likely to accept, time consuming
Another name for the master budget
static budget (one level of activity)
Master Budget Components
*operating budgets and financial budgets for a single level of sales volume
Flow of Master Budget
- Sales budgets
- production budgets
- cash budgets
Production Budget Formula
Unit Sales
Desired Ending Inventory
= units to produce
Direct Materials to be Purchased Budget
Materials needed for production
Desired Ending Inventory
= materials to be purchased
Direct Materials Usage Budget in $
Beginning inventory at cost
+ purchases at cost
= direct materials used
Direct Labor Budget
Budgeted production x hours x hourly wage
Selling and Administrative Expense Budget is dependent upon
sales volume and the sales budget
Cash Budgets and their Three Sections
- cash available (A/R and cash sales)
- cash disbursements (Cash purchases and A/P payments; cash operating expenses (NOT DEPRECIATION)
- financing
Cash Budget Format
Beginning cash
Cash collections from sales
= computed ending cash
= working capital loans to maintain cash requirements
When are the pro forma financial statements created?
last
Major limitations of a flexible budget
*highly dependent on the accurate identification of fixed and variable costs and the determination of the relevant range
Variances must also show ______ to be considered complete
FAVORABLE OR UNFAVORABLE
Controllable vs. Uncontrollable Variance
variable costs vs. fixed costs
Direct Materials Variance
APAQ - SPAQ (units purchased) (PRICE)
SPAQ - SPSQ (units used in production) (USAGE)
Direct Labor Variance
APAQ - SPAQ (RATE)
SPAQ - SPSQ (EFFICIENCY)
Net Overhead Variance
actual overhead vs. applied overhead (1 v 4)
Overhead Variance Numbers
- Actual Overhead
- Budget based on Actual Hours
- Budget based on Standard Hours
- Overhead Applied
- Actual Overhead
- Budgeted FOH + Actual worked x Standard VOH rate
- Budgeted FOH + Standard allowed x VOH rate
- Standard Total OH rate per DLH x Standard DLH allowed
Two-Way Variance
1 v 3
3 v 4
Three-Way Variance
1 v 2 (spending)
2 v 3 (efficiency)
3 v 4 (volume variance)
Key to Difference for Volume
STANDARD HOURS ALLOWED (number of units x standard rate)
not the actual number of hours worked
Sales Price Variance
(Actual SP - Budgeted SP) x quantity sold
Sales Volume Variance
(Actual Quantity - Budgeted Quantity) x CM
Market Share Variance
[Actual Market Share - Budgeted Market Share] x actual industry units x budgeted contribution margin per unit
- building or losing market share
- want to maintain market share
Market Size Variance
the effect the size of the entire market for the product has on the contribution margin for the firm
Types of Responsibility Segments
Cost (lowest responsibility)
Revenue
Profit
Investment (highest responsibility)
Financial Scorecards Design
A ccurate and
T imely
U nderstandable
S pecific accountability by segment
Are common costs controllable?
No
Contribution Reporting for Managers
- SP - VC = CM
- CM - CFC = controllable margin
CFC = controllable fixed costs
Balanced Scorecard
"FICA" F inancial I nternal business processes C ustomer satisfaction A dvancement of innovation and human resource development
