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CPA - Business Environment > B4 - Operations Management: Planning Techniques > Flashcards

B4 - Operations Management: Planning Techniques Flashcards

1
Q

What is the regression analysis method?

A
  1. It is a satistical method that fits a line to the data by the method of least squares. It is the most accurate way to classify costs of an object as either fixed or variable.
  2. estimates the dependent variable based on changes of the independent variable.
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2
Q

How does multiple regression works?

A

Multiple regression involves more than one independent variable.

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3
Q

How does simple regression works?

A

Simple regression involves only one independent variable.

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4
Q

What is the formula to determine total costs in a regression analysis?

A

Total costs = Fixed costs + Variable costs per unit * units produced

  • Fixed costs will not change regardless of the number of units produced.
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5
Q

What is the best correlation of stocks that produces the least risk?

A

Stocks that have a perfect negative correlation with each other produce the greatest benefit from risk reduction.

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6
Q

What is the coefficient of determination (R2)?

A

The coefficient of determination (R2) is the proportion of the total variation in the dependent variable (y) explained by the independent variable (x). x being volume, equals to R2 (e.g., 0.90^2=0.81).

The higher the R2, the better the “fit” of the regression equation linking the two variables.

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7
Q

What is the formula to compute contribution margin under variable (direct) costing approach?

A

Revenue
less: Variable COGS (DM, DL, Var. manufacturing OH)
less: Var. SG&A
= Contribution Margin
less: fixed costs (Fixed OH, fixed SG&A)
= Net income

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8
Q

What is the formula to calculate gross profit under the absorption approach?

A

Revenue
Less: COGS
= Gross margin
Less: operating expenses (var. SG&A, fixed SG&A)
= Net income

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9
Q

How are fixed costs treated under the absorption approach?

A

Fixed factory OH costs are treated as product cost and it’s included in inventory values. COGS includes both fixed costs and variable costs.

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10
Q

How are fixed costs treated under variable costing?

A

Fixed factory OH is treated as a period cost and is expensed in the period incurred. Inventory values include only the variable manufacturing costs, so COGS only includes variable manufacturing costs.

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11
Q

How are SG&A expenses treated under the absorption approach?

A

Both variable and fixed SG&A expenses are part of operating expenses and reported in the income statement separately from COGS.

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12
Q

How are SG&A expenses treated under the variable costing approach?

A

The variable SG&A is part of the total variable costs for contribution margin calculation.

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13
Q

What is the formula to compute contribution margin ratio?

A

CM ratio = Sales - VC/Sales

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14
Q

What costs are assigned to inventory under variable costing?

A

Under variable costing, only variable manufacturing costs (DM, DL, and var. OH) are assigned to inventory.

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15
Q

When inventory produced is greater than inventory sold, what is the effect of net income under absorption and variable costing?

A

When inventory produced > inventory sold, net income under absorption costing is higher than variable costing. Fixed mfg OH creates the difference as this is included in the gross margin calculation as a product cost; whereas, for variable costing, fixed mfg OH is excluded from the calculation of contribution margin. The impact in net income is calculated by determining the fixed cost per unit (fixed cost/units produced) and multiplying the ending finished goods (difference of units produced and units sold)

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16
Q

What formula is used to calculate breakeven units using regression analysis (cost-volume-profit analysis)?

A

sales/unit * units sold = FC + VC/unit * units produced

It is also computed as follows:
breakeven = Fixed costs/ CM (SP - VC/unit)

  • Breakeven occurs when sales equals costs.
  • cost incurred in advertising can be included as part of the fixed costs.
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17
Q

What is the formula to calculate breakeven without knowing the sales price per unit?

A

Breakeven = Fixed costs/contribution margin ratio

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18
Q

What is the formula to compute margin of safety?

A

Margin of safety = sales - breakeven sales

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19
Q

What is the formula to compute target profit?

A

target profit in units = Fixed costs + before-tax profit/CM

Target profit amount = Fixed costs + before-tax profit/CM ratio

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20
Q

What is the formula to compute return on sales?

A

Return on sales = Income before interest (income and expenses) and taxes/ sales

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21
Q

What is the formula to compute the number of units needed to achieve a desired profit above break even?

A

Sales (units) = Pretax profit/contribution margin per unit

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22
Q

What is target pricing?

A
  1. A technique to establish the product cost allowed to ensure both profitability per unit and total sales volume.
  2. Used when selling price is already so low that you can’t lower it or you will lose money, and you can’t raise it because there are too many competitors already selling at that low price.
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23
Q

What is the formula to compute selling price using target costing?

A

Selling price = cost/ratio of costs to sales

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24
Q

is target pricing associated with cost-based pricing?

A

No, target pricing is not associated with cost-based pricing.
Cost-based pricing is associated with :
1. Price stability
2. Price justification
3. Fixed-cost recovery

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25
Q

What is the formula to compute quick ratio?

A

quick ratio = cash + AR + marketable securities/current liabilities

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26
Q

Which of the following ratios is appropriate for the evaluation of AR?

A

Days sales in AR ratio indicates the receivable’s quality and the success of the firm in collecting outstanding receivables.

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27
Q

What is opportunity cost?

A

It is the cost of foregoing the next best alternative when making a decision.

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28
Q

What is the formula to compute accounting profit?

A

Accounting profit = total revenues - total explicit costs

Implicit costs are opportunity costs and ignored in financial accounting.

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29
Q

How is historical cost treated in a decision analysis situation?

A

Historical costs is not relevant in a decision analysis situation.

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30
Q

What is a sunk cost?

A

Sunk costs are unavoidable, they are not relevant for decision making because they will no change. The cost was already incurred in the past so its not relevant for decision making (e.g., R&D)

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31
Q

What are considered relevant costs to the decision making?

A
  1. Direct costs (also variable costs)
  2. Prime costs
  3. Discretionary costs
  4. Incremental costs
  5. Opportunity costs
  6. Controllable costs
  7. Avoidable costs
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32
Q

What are considered not relevant costs to the decision making?

A
  1. Sunk costs
  2. Uncontrollable costs
  3. Unavoidable costs
  4. Absorption costs
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33
Q

When a make or buy decision needs to be made what costs become relevant?

A
  1. variable costs
  2. avoidable fixed costs

The total of these costs to make are compared to the cost to buy the product.

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34
Q

What are avoidable fixed costs?

A

Avoidable fixed costs “attach” to a specific decision and are incurred only if that decision is taken. They’re relevant in a marginal analysis.

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35
Q

What is budgeting?

A

The process of creating a formal plan and translating goals into quantitative format.

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36
Q

What are authoritative standards?

A

Authoritative standards are set exclusively by management.
- they can be implemented quickly and will likely include all costs
- workers might not accept imposed standards.

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37
Q

What are the type of financial budgets?

A
  1. Pro form financial statements (income statement, balance sheet, statement of CF)
  2. Cash budget.
38
Q

When are financial budgets prepared?

A

Financial budgets are prepared at the end of the budgeting process and are prepared last.

39
Q

How are cash budgets derived?

A

Cash budgets are derived from the operating budget that assumes accrual basis assumptions (e.g., credit sales and credit purchases)

40
Q

When are sales budgets prepared?

A

Sales budgets are the foundation of the entire budget process and it’s the first budget prepared.

41
Q

What does the sales budget represents?

A

The sales budget represents the anticipated sales of the organization in units and dollars. It drives the development of most other components of the master budget.

42
Q

What is the first step in developing a sales budget?

A

Forecasting sales volume

43
Q

What is the formula to compute the relationship between budgeted production, sales, and inventory levels after sales are estimated?

A

Budgeted Sales in units
Add: Ending Inventory in units
Less: Beginning inventory in units
= Budgeted production in units.

44
Q

Are depreciation and interest expense adjusted for inflation?

A

No, depreciation expense is based on historical cost, and interest expense is based on a fixed amortization schedule. No adjustment is performed.

45
Q

How is the labor rate variance computed?

A

Labor rate = actual hrs * (actual rate - standard rate)

46
Q

How is the labor usage/efficiency variance computed?

A

usage/efficiency variance = standard rate * (standard hrs allowed - actual hrs worked)

47
Q

How is an unfavorable and favorable variances recorded in an overhead account?

A
  1. Unfavorable variances in an overhead account are recorded as debit balances
  2. Favorable variances are recorded as credit balances
48
Q

What items are included in the overhead T-account?

A
  1. volume variance
  2. efficiency variance
  3. spending variance
49
Q

What is the formula to compute the variable overhead spending variance?

A

VOH spending variance = actual hours * (actual rate - standard rate)

50
Q

What is the formula to compute the variable overhead efficiency variance?

A

VOH efficiency variance = standard rate * (actual hours - standard hours allowed for actual production volume)

standard hours allowed are computed as follows:
actual output produced
* standard direct labor hrs
= standard hours allowed.

51
Q

What is the formula to compute the fixed overhead spending variance?

A

Fixed OH spending variance = Actual fixed OH - Budgeted fixed OH

A favorable variance occurs when actual fixed OH are less than budgeted.
An unfavorable variance occurs when actual fixed OH are more than budgeted.

52
Q

What is the formula to compute the fixed OH volume variance?

A

FOH volume variance = Budgeted fixed OH - standard fixed OH cost allocated to production (based on actual production * standard rate)

  • Favorable variance occurs when volume is higher than anticipated (more units produced using same amount of fixed costs).
  • Unfavorable variance occurs when volume is lower than anticipated (fewer units produced using same amount of resources)
53
Q

What is the formula to compute sales price variance?

A

Sales price variance = (actual SP/unit - budgeted SP/unit) * actual sold units

54
Q

What is the formula to compute sales volume variance?

A

Sales volume variance (contribution margin approach) = (actual sold units - budgeted sales units) * standard contribution margin per unit.

or

Sales volume variance (sales price approach) = (actual sold units - budgeted sales units) * standard sales price.

55
Q

What are the benefits of cash budgeting?

A

Cash budgeting has the benefits of:
1. Displaying the cash effects of the master budget on actual cash flows.
2. Assisting in the determination of whether additional sources of financing are required.
3. Evaluating the optimal use of trade credit.

56
Q

What is the formula to compute inventory %?

A

inventory % = Inventory/Total assets

57
Q

What is the formula to compute inventory turnover?

A

Inventory Turnover = COGS/Avg. Inventory

58
Q

What is the purpose of a flexible budget?

A
  1. To adjust the number of units (output) actually sold to the master (static) budget as it won’t match with the number of units that we expected to sale.
  2. Predict outcomes and accommodate changes in actual activity. Revenues and expenses are adjusted to display anticipated levels of achieved outputs.
59
Q

What are assumptions and use of a flexible budget?

A

Considers the standard revenue per unit, standard variable cost per unit and fixed cost over the relevant range (same as master budget). sales and variable costs per unit are multiplied to the actual units of output sold and produced.

60
Q

What is the purpose of the variance analysis of the flexible budget?

A

Compares actual activity and performance evaluation

61
Q

What is the benefits of the flexible budget?

A

Displays different volume levels of activity to pinpoint areas in which efficiencies have been achieved or waste has occurred.

62
Q

What is a disadvantage of the flexible budget?

A

dependent on the accurate identification (estimate) of fixed and variable costs and determination of relevant range.

63
Q

What is a disadvantage of the master budget?

A

Master budget is limited to one unit of activity.

64
Q

What is the purpose of creating a master budget (annual business plan)?

A

Communicates specific short-term operating performance goals for a period (1 year or less). Includes operating (nonfinancial) and financial budgets outlining sources of funds and plans for expenditures.

65
Q

When are material and labor variances unfavorable?

A

Material and labor variances are expense variances. When actual price/rate or actual quantity/hours exceed standards, variances are unfavorable

66
Q

When are material and labor variances favorable?

A

If standards exceed actuals, variances are favorable

67
Q

What is the journal entry to record the purchase of raw material using flexible budgeting?

A

Dr. Raw material inventory (flexible total)
Dr. DM purchase variance (plug)
Cr. AP (actual amount spent)

68
Q

What is journal entry to record the movement of raw materials to production using flexible budgeting?

A

Dr. WIP inventory (budgeted amount)
Dr. DM usage variance (plug)
Cr. Raw material inventory (flexible amount)

69
Q

What is the journal entry to record direct labor used and accrued for payment?

A

Dr. WIP inventory (budget amount)
Dr. DL efficiency variance
Cr. DL rate variance
Cr. Accrued payroll (actual amount spent)

70
Q

What are the benefits a company could realize from cash budgeting or developing a pro forma statement of cash flows?

A
  1. Displaying the cash effects of the master budget on the actual cash inflows and outflows from operations.
  2. Determining when additional sources of financing (ST or LT) are necessary and planning for cash expenditures with cash availability.
  3. Evaluates the optimal use of trade credits.
71
Q

How to calculate days sales in AR?

A

Days sales in AR = Ending AR (net)/(Sales (net)/365)

Provides an average number of days to convert sales into cash to use it in other parts of the business. a shorter number of days indicates that company is doing a good job collecting outstanding AR. This is an asset utilization ratio.

72
Q

How to calculate days of payables outstanding?

A

days of payables outstanding = Ending AP/(COGS/365)

This is a measure of how long it takes for a company to pay its vendors for goods purchased on credit. if company wishes to conserve cash, it will project longer average time period to pay its vendors.

73
Q

How to calculate days in inventory?

A

days in inventory = Ending inventory/(COGS/365)

This ratio reflects how long it takes on average to turn inventory into sales. The lower the number of days indicating a company is more efficient in converting inventory into sales. This is an asset utilization ratio.

74
Q

How to calculate cash conversion cycle?

A

cash conversion cycle = days sales in AR + Days in inventory - days in AP

a lower cash conversion cycle is better because a company would want to minimize the number of days it takes to convert inventory into sales and sales into cash, while taking as long as possible to pay its vendors.

75
Q

What is the formula to compute VC/unit using High-low method?

A

VC/unit = High price - low price/high volume - low volume

To determine the FC, first use the highest total cost and multiply the VC/unit to it’s volume. Then subtract total cost less VC to derive FC.

76
Q

What is the purpose of the production budget?

A

The production budget is prepared for each product or each department based on the amount that will be produced, stated in units.

77
Q

How is the production budget composed?

A

The production budget is made up of amounts spent for direct labor, direct materials, and factory OH. The amount of the production budget is based on the amounts of inventory on hand and the inventory necessary to sustain sales.

78
Q

What is the purpose of the direct labor budget?

A

Anticipates the hours and rates associated with workers directly involved in meeting production requirements.

79
Q

How is the direct labor budget computed?

A

Budgeted production (in units)
* Hours (or fractions of hours) required to produce each unit
= Total number of hours needed
* Hourly wage rate
= Total wages

DL hours are computed based on the hrs necessary to produce.

80
Q

What is the minimum acceptable price of producing a special order with excess capacity?

A

The minimum acceptable price is equals to the variable cost per unit. Fixed costs are irrelevant.

81
Q

When is a special order with excess capacity accepted?

A

special order should be accepted if selling price is equal or greater than VC.

82
Q

What is the minimum acceptable price of producing a special order at full capacity?

A

The minimum acceptable price is equals to the contribution margin per unit of producing the next alternative (opportunity cost) plus VC per unit of continuing to produce the current product.

83
Q

When is a special order with full capacity accepted?

A

special order should be accepted if selling price is equal or greater than opportunity cost + VC/unit of the original order.

84
Q

When is a Perfect Positive Correlation (+1.00) in a Regression Analysis evaluation?

A

The dependent and independent variables move together in the same direction. An increase (decrease) in the independent variable produces an equivalent increase (decrease) in the department variable (e.g., supply curve).

85
Q

When is Perfect Negative Correlation (-1.00) in a Regression Analysis evaluation?

A

The dependent and independent variables move in equivalent opposite directions. An increase (decrease) in the independent variable produces an equivalent decrease (increase) in the dependent variable (e.g., demand curve)

86
Q

When is no correlation (0.00) in a Regression Analysis evaluation?

A

The dependent and independent variable are not related in a linear fashion. Movement in the independent variables cannot be used to predict the movement in the dependent variable.

87
Q

How is the avoidable fixed costs determined when making a decision to make a product?

A

Avoidable fixed costs when making a decision to make are computed as follows:
Avoidable fixed cost - make = fixed costs incurred if we make the product - fixed costs incurred if we buy the product.

88
Q

How is the avoidable fixed costs determined when making a decision to buy a product?

A

Avoidable fixed costs when making a decision to buy are computed as follows:
Avoidable fixed cost - buy = Purchase price of inventory - VC to make the product.

89
Q

How are disposal proceeds associated with the sale of an old facility relevant to the lease or buy decision?

A

Disposal proceeds are not relevant to the decision to make or buy. These are costs that will occur regardless of the decision to lease or buy.

90
Q

How is relevance of a particular cost to a decision determined?

A

By the potential effect on the decision. Relevant costs are expected future costs that vary with the action taken.

CPA - Business Environment (6 decks)

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