B3-M3 Projection and Forecasting Techniques

Question 1

How to calculate for fixed costs using flexible budget formula costs and high low method?

Answer 1

Simple technique:

Gather data and compare high and low volumes and costs

High-Low:
Variable costs per unit = Change in $ / Change in units

Flexible budget formula:
Total cost = Fixed cost + [Variable cost x number of units]

Reminder: using either high or the low will produce the same total fixed cost result

Question 2

What is contribution approach and how to calculate contribution margin?

Answer 2

Contribution approach = NOT GAAP - this approach uses variable (direct) costing which is useful for internal decision making (not financial reporting)

Revenue
Less: Variable Costs
= Contribution Margin
Less: Fixed costs
= Net income

Question 3

What is the difference in the absorption costing/approach vs. Variable (direct) Costing or Contribution approach?

Answer 3

The difference between variable costing and full absorption costing lies in the treatment of fixed manufacturing costs.

Absorption costing approach (US GAAP) considers Fixed Manufacturing OH as product cost

Variable/Direct costing (Non GAAP) considers Fixed Manufacturing OH as Period Cost (indirect cost)

Question 4

How to calculate breakeven point?

Answer 4

Determines sales required to achieve zero profit/loss from operations

Breakeven point in units = Total $ Fixed Costs / CM per unit
Breakeven Point in $ = Total $ Fixed Costs / CM ratio
Breakeven point in $ = BE point in units x Unit Price

Question 5

What’s the difference between coefficient of correlation (r) vs. Coefficient of determination (r2)

Answer 5

Coefficient of Correlation (r) Measures strength of linear relation
between x and y

Coefficient of Determination (R2) How much the change in y is explained by change in x

Question 6

What is learning curve and how calculate Average time per unit using this approach?

Answer 6

The basic premise of the learning curve is that operating efficiency and/or production increases in repetitive tasks as experience is gained. The rate of improvement, measured by the learning curve, has a regular pattern that can be stated as follows:
As cumulative quantities double, average cost per unit decreases by a specified percent of the previous cost.

Avg time (2 units) = #first hours * % learning curve
Total time (2 units) = Avg time * 2 units
Avg time (4 units) = #Prior hours * %
learning curve
Total time (4 units) = New avg time * 4
units
Same concept as above for 8 units