B2 Flashcards
Cost-volume profit (CVP) analysis
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.
General assumptions used under CVP analysis
- All costs can be separated into either variable or fixed
- Volume is the only relevant factor affecting cost
- All costs behave in a linear fashion in relation to production volume.
- Cost behaviors remain constant over the relevant range
- Costs show greater variability over time.
Contribution approach (direct costing)
Identifies each element of cost as fixed or variable
Absorption approach
- Required for financial reporting under U.S. GAAP
- Does not segregate fixed and variable costs
Contribution margin ratio
Contribution margin/revenue
Contribution vs. absorption
Production is greater than sales
Absorption net income > variable net income
Contribution vs. absorption
Sales greater than production
Absorption net income
BEP in units
Total fixed costs/CM per unit
BEP in dollars (2 ways)
- BEP in units * SP/unit
2. Total fixed costs/CM ratio
Contribution margin ratio
Contribution margin/sales
Target costing
A technique used to establish the product cost allowed to ensure both profitability per unit and total sales volume
Marginal analysis
Used when analyzing business decisions such as the introduction of a new product or changes in output levels of existing products, acceptance or rejection of special orders, making or buying a product or service, selling or processing further, and adding or dropping a segment. Focuses on the relevant revenues and costs that are associated with a decision.
Discretionary costs
Costs arising from periodic (usually annual) budgeting decisions by management to spend in areas not directly related to manufacturing; generally relevant
Incremental costs
The additional costs incurred to produce an additional amount of the unit over the present output; relevant costs and include all variable costs and any avoidable fixed costs associated with the decision
Opportunity costs
The cost of foregoing the next best alternative when making a decision; relevant costs
Operational and tactical planning
The process of determining the specific objectives and means by which strategic plans will be achieved. They are short-term and cover periods up to 18 months
Ideal standards
- Represent the costs that result from perfect efficiency and effectiveness in job performance. Generally not historical; they are forward-looking and no provisions is made for normal spoilage or downtime.
- Advantage: emphasis on continuous quality improvement
- Disadvantage: Demotivation of EEs by the use of unattainable standards
Currently attainable standards
- Represent costs that result from work performed by EEs with appropriate training and experience but w/o extraordinary effort. Provisions are made for normal spoilage and downtime.
- Advantage: Fosters the perception that standards are reasonable
- Disadvantage: Required use of judgment and potential manipulation
Master budget
Documents specific short term operating performance goals for a period, normally one year or less. Normally include an operating (non-financial) budget as well as a financial budget that outlines the sources of funds and detailed plans for their expenditure
Operating budgets
Established to describe the resources needed and the manner in which those resources will be acquired
Includes: sales budgets, production budgets, selling and administrative budgets, and personnel budgets
Financial budgets
Define the detailed sources and uses of funds to be used in operations
Includes: pro forma financial statements, cash budgets
Capital budgets
Identify and allow management to evaluate the capital additions of the organization, often over a multi-year period. Financing is a significant component of the capital purchases budget. Capital budgets detail the planned expenditures for capital items. Capital budgets are highly dependent on the availability of cash or credit, and they generally involve long-term commitments by the organization.
Flexible budget
A financial plan prepared in a manner that allows for adjustments for changes in production or sales and accurately reflects expected costs for the adjusted output.
DM price variance
AQ purchased * (AP-SP)
DM quantity (efficiency) variance
SP (AQ used-SQ allowed)
DL rate variance
Actual hours worked (AR-SR)
DL efficiency variance
SR (Actual hours worked-Standard hours allowed)
To determine how the “difference” is calculated in variance analysis, the difference is always SAD
Standard-Actual=Difference
Recognize the 4 main types of variances for raw materials and direct labor (PURE)
Price variance (for DM) Usage (quantity) variance (for DM) Rate variance (for DL) Efficiency variance (for DL)
VOH rate (spending) variance formula
Actual hours * (AR-SR)
VOH efficiency variance formula
SR*(Actual hours-standards hours allowed for actual production volume)
FOH budget (spending) variance formula
Actual fixed OH-budgeted fixed OH
FOH volume variance formula
Budgeted fixed OH-Standard FOH cost allocated to production
VOH rate (spending) variance explanation
Tells managers whether more or less was spent on variable OH than expected. A favorable variance occurs when the standard rate exceeds the actual rate, which is beneficial to a company because it means that it paid less per labor hour than expected. An unfavorable variance occurs when the actual rate exceeds the standard rate, which means that the company paid more per labor hour than it expected to spend.
VOH efficiency variance explanation
This variance is tied to the efficiency with which labor hours are utilized. Isolates the amount of total variable overhead variance that is due to using more or fewer direct labor hours than what was budgeted. A favorable variance results from using fewer labor hours than budgeted, and an unfavorable variance stems from using more labor hours than budgeted.
FOH budget (spending) variance explanation
Companies budget an amount for FOH costs, and this variance focuses at a high level on whether more or less was spent than budgeted. A favorable variance occurs when actual FOH costs are less than the budgeted, and an unfavorable variance results from actual FOH costs exceeding the budgeted amount.
FOH volume variance explanation
FOH costs are typically applied using a rate derived from budgeted fixed OH costs and expected volume. When the actual volume produced differs from the amount used to calculate the FOH application rate there will be a variance. A favorable variance occurs when volume is higher than anticipated, which implies that more units were produced using the same amount of fixed resources. An unfavorable variance occurs when volume is lower than anticipated, as fewer units were produced using a fixed amount of resources.
Production volume variance (aka FOH budget variance)
(Actual production-budgeted production)* per unit standard FOH rate
Sales price variance
(Actual SP/unit-budgeted SP/unit)* Actual units sold
Sales volume variance
(Actual units sold-budgeted sales units)*Standard CM per unit
Balanced scorecard critical success factors (FICA)
Financial
Internal business processes
Customer satisfaction
Advancement of innovation and HR development
Cost based pricing is associated with (3 things)
- Price stability
- Price justification
- Foxed-cost recovery
Contribution margin
Revenue-variable costs
Margin of safety (in dollars)
Total sales (dollars)-Breakeven sales (dollars) = margin of safety
The coefficient of correlation (r)
Measures the strength of the linear relationship between the independent variable (x) and the dependent variable (y)
The coefficient of determination (r^2)
The proportion of the total variation in the dependent variable (y) explained by the independent variable (x)
Sensitivity analysis
The process of experimenting with different parameters and assumptions regarding a model and cataloging the range of results to view the possible consequences of a decision
