B2- Strategic Planning: Techniques for Forecasting, Budgeting, and Analysis Flashcards
Contribution Margin
Contribution Margin:
Sales - Variable Costs
Var. Costs include = var. manufacturing costs (DM+DL+VMO), and variable selling costs.
Margin of Safety
In Break even analysis (accounting), margin of safety is how much output or sales level can fall before a business reaches its breakeven point.
=Sales - BE Sales
Current Sales Level – Breakeven Point /
Current Sales Level
Breakeven Sales
&
Margin of Safety
BE Sales = Fixed Costs / (contrib. margin / sales)
=90K/(120/200) = 90K/.6 = 150K BE Sales
Margin of Safety = Sales - BE sales
200k-150K = 50K
How to get to units of breakeven?
“Additional Fixed Costs” / Contrib .Margin
Absorption Costing Method
Fixed MO + DM + DL +Var.Man.Costs
GAAP approved
Encourages larger inventories since it “Absorbs” fixed overhead cost into units produced
Variable Costing Method
aka Direct Costing
DM + DL + Var. Man. Overhead
Fixed M.O. is treated as a period cost and expensed
Breakeven Analysis
Sales = Fixed Cost / Contrib. Margin Ratio (contrib. margin expressed as a % of revenue)
Which costing method provides lowest inventory value?
Variable Costing
since only var. costs are capitalized, there is nothing fixed, such as inventory
Operating Margin
=Contribution Margin - Fixed Costs
where CM is sales rev - var.
Relevant Range
Range of activity levels in which cost behavior characteristics (fixed or variable) are valid. Within a relevant range, fixed costs are assumed to remain the same (IE they do not change.)
Fixed Costs
= Contribution Margin per unit * BE units
so PY Fixed Cost = 5.25 * 20,000
Breakeven Units Calculation
Fixed Cost / Contrib. per Unit
What does “higher contribution margin” mean?
More profitable
Relevant Range
Relevant range is the range of activity within which fixed costs and variable costs are meaningful and valid
Marginal Analysis
- Marginal Cost (change in total cost due to a one unit increase in output)
Opportunity Cost
Cost that would have been saved / Profit that would have been earned IF another decision alternative would have been accepted.
What is the “minimum accepted selling price”?
Should include only incremental costs associated with the order. EG:
Var + Other
(ignore: fixed costs; idle capacity)
When considering alternative costs, what do you consider?
A: Relevant costs… or costs that will change under different alternatives
What is the High-low method?
[Highest Cost - Lowest Cost] / [corresponding unit amnt - corresponding unit amnt.]
Y= a(fixed) + bx(var)
Coeff. of Determination
r2
Percentage of variation in the DEP. variable explained by the variation of the INDEP. variable
Regression Equation?
statistical model that estimates the DEP. variable based on changes in the INDEP. variable
Gross Margin
Gross margin is the difference between revenue and cost of goods sold, or COGS, divided by revenue, expressed as a percentage. Generally, it is calculated as the selling price of an item, less the cost of goods sold (production or acquisition costs, essentially).
Rev - COGS / Rev
COGS Feb?
Est. Sales (given) at $650K
“COGS avg. 40% of sales volume”
$650K*.4 = $260K COGS
What’s in COGM?
Materials Used
Direct Labor
Overhead Applied
WIP inventory budgets
NO FG Inventory budget!!!
Calculate Flexible Budget
Actual Units (Given) * CM/unit (budg.) - Budg Fixed
12,000 * (40K/10K)
-30K
Order of Budgets
First, Goals of Company are established and Communicated
Sales
Production
Direct materials
(can be followed by budgeted inc. stat and budgeted bal. sheet)
Cash disbursements
(incl. cash flow statement)
What is true about a Relevant Range?
Within a relevant range, fixed costs remain constant. Fixed costs per unit DECREASE as production increase.
Var. cost per unit remains Same.
Financial Budget Process
Includes:
1) Cash and Capital Purchases Budget
2) Balance Sheet and Stmnt. Cash Flows
Operating Budget Process Includes:
1) All budgets except cash and cap. purchases
2) The pro forma income statement
Variable Overhead Efficiency Variance
VOH Eff. Var. = Standard Rate x (actual hours - standard hours)
Material Price Variance
= Actual QUANTITY x (actual price - standard price)
Var. Overhead Spending Variance
= Actual HOURS x (actul price - standard price)
Selling Price Variance
= Actual QUANTITY x (actual price - standard price)
Direct Labor Usage Variance
= (standard hrs - actual hrs) X standard RATE
PURE DADS..
Or how to calculate DM and DL variances
P - Price Variance (for DM) = Actual Q purch * [actual $price - stnd. $price]
U - Usage / Quant. Variance (for DM) = Stnd. Price$ * {actual quantity - stdrd. quantity]
R - Rate Variance (for DL) = Actual Hrs Work * [actual rate - stndrd rate]
E- Efficiency Variance (for DL) = Standard Rate * (actual hrs worked - standard hrs)
DA = Diff x Actual DS = Diff x Standard
P = DA U = DS R= DA E = DS
Variable Cost Flex. Budg. Var
Var. Costs - Budg. Var. Costs
where Budge Var Costs =
1) determine unit price
2) multiply times Actual Sold
1) Budg. Var Total Costs Budg Items Sold
=145,000 Actual Var costs (LESS) (180,000 total budg var/6,000 total budge sale) = $30/u * 5000 actual sale
145K - 150K = 5K unfavorable
Production volume variance?
Applied Overhead = (st. var. OH * st. hours) + (St FO rate* actual production)
Budg. Overhead = (st. var OH rate * st. hours) + (St. FO rate * std. production)
Applied Overhead - Budge Overhead = Prod. Volume Variance
What is variable overhead efficiency based on?
Budgeted Var. OH (based on standard hours) - Budgeted OH (based on actual hours)
Market Share Variance
=Budgeted Contrib. Margin per Unit * Actual Units Sold * (act. market share - budg. market share)
How to calculate Market Share?
Actual = Actual units produced // mkt share
Budg Mkt Share = Budg units produced / mkt share
get Mkt. Share Percentages
Balanced Scorecard Elements
Innovation
Customer Satisfaction
Internal Business Process
Finance
What is relevant to a make-or-buy decision? what isn’t?
Is: var. labor, var. materials, avoidable fixed costs
Is NOT: depreciation, factory management costs, property taxes
Relevant Range
Range within which the relationship between a cost and its cost driver remains valid.
Within the range, the FIXED COST WILL REMAIN FIXED and var cost per unit WILL NOT CHANGE.
Economic Order Quantity
In corporate finance, economic order quantity (EOQ) is the order quantity that minimizes the total holding costs and ordering costs. It is one of the oldest classical production scheduling models.
EOQ is the Denominator – use it to divide Total Units to be Purch. (based on BASE formula)
Cash Receipts vs. Cash Disbursments
receipts = collections
disb = outlays
When production is greater than sales, absorption costing income > var. costing income. WHY?
Production in EXCESS of sales results in increases in inventory that include capitalization of fixed product costs that are immediately expensed under variable costing.
How do you calculate CM per U?
How to calculate BE?
CM per U = Sales price Per Unit - Var. Cost per Unit
BE Formula = Fixed Costs / CM/u
BE in Sales Dollars
BE In Sales $ = Fixed Costs / (CM/sales)
So if Var Costs are 25% of sales – than CM/sales is 75%
Which is reportable for GAAP purposes - variable or absorption?
A: Absorption
Represents GAAP and for benefit of external users
TOTAL SALES COST
= Breakeven + Margin of Safety
SELLING PRICE (using Gross Margin concept)
Sell Price = Costs / (1-MS)
=$89 / .6
= $148.33
Contrib. Margin
VS.
Operating Income
CM = Net Sales Revenue (LESS) Variable Costs
Operating Income = Contrib. Margin (LESS) Fixed Costs
What is the best transfer pricing model?
To Charge Market Price
even among divisions
Throughput Resources
conversion of resources into finished product
Budgeted Income Statement
Anticipated Accrual Basis Net Inc./Loss; and added to beg. owner’s equity to generate owner’s equity section of budgeted balance sheet
