B2 - Planning Techniques: Forecasting and Projection Flashcards
In a decision analysis situation, what costs are generally NOT relevant to the decision?
Historical Cost
When considering alternatives, such as discontinuation of a product line, what costs should management consider most?
Relevant Costs
Contribution Margin Ratio
CM/Sales
Break-even point (FORMULA)
Total Fixed Costs/Contribution Margin Ratio (OR Contribution Margin per unit)
Margin of Safety
Difference between current sales and break-even sales. (Actual, or budgeted, sales less break-even sales).
Contribution Approach (EQUATION)
Revenue
Less: Variable Costs (DM+DL+Var. Mfg O/H+Var. SG&A)
Contribution Margin
Less: Fixed Costs (Fixed Mfg. O/H+Fixed SG&A)
Net Income
When do fixed costs equal contribution margin?
At Break-even
For short-run profit maximization, a company should manufacture the product with:
The GREATER contribution margin per hour of manufacturing capacity.
How can a company determine the total amount to be included in the calculation to determine the minimum acceptable price for a job?
The minimum acceptable selling price should include only the incremental costs associated with the order. (Most of the time special orders won’t affect regular sales, if there is idle capacity).
Required Sales Volume for Target Profit (FORMULA)
Sales = Variable Costs + (Fixed Costs + Net income before taxes) OR Sales = (Fixed Cost + Profit (EBT))/Contribution margin ratio
Target Sales (with Tax Considerations) FORMULA
EBT * (1-T) = “Target NI”
Target Profit Before Tax (FORMULA)
=Target Profit After Tax/(1-tax rate)
Relationship between absorption costing and variable costing: When production exceeds sales…
Inventory is higher;
under ABSORPTION costing, a portion of the fixed mfg. O/H is included with each unit in Ending Inventory.
Under variable costing, ALL fixed mfg. O/H is a period cost and expensed during the period.
Relationship between absorption costing and variable costing: When Sales exceed production…
Inventory is lower;
Under absorption costing, the fixed mfg. O/H carried over from a previous period as a part of beg. inventory is charged to cost of sales.
Under variable costing, those fixed costs were charged to income in a prior period (when they were incurred).
Determine the impact of the change in income when comparing the difference between variable costing and absorption costing
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
What is the difference between contribution approach and absorption approach?
The treatment of FIXED factory overhead.
In the Variable Costing Method, Fixed Factory O/H is expensed immediately (treated as a period cost).
In regards to special orders, when a company has presumed EXCESS capacity, when should a company accept the special order?
Accept if Selling Price > Relevant Costs (Variable Costs) **
**Don’t forget to include any contribution margin of the alternative use of production capacity (if given).
What kind of equation estimates the dependent variables
Regression Equation
Multiple regression differs from simple regression in that it:
Has more independent variables.
There are a variety of ways of classifying costs of an object as either fixed or variable. The most accurate method is considered to be:
The regression analysis method
In regards to special orders, when a company is running at FULL capacity, when should a company accept the special order?
Accept if Selling Price > Relevant Costs (Variable Costs) + Opportunity Cost.
The coefficient of determination, r squared, in a multiple regression equation is the:
Percentage of variation in the dependent variable explained by the variation in the independent variables.
