BEC 2

Question 1

Breakeven Computations

Sales -VC- FC = Profit

Sales - VC = Contribution margin

Answer 1

1) Break even point in units

Fixed costs/ Contribution margin per unit

2) Breakeven Point in Dollars

Unit price X Breakeven point (in units) = Breakeven point (in dollars)

Question 2

Contribution Margin ratio

Answer 2

(CM = Sales - VC)

CM Ratio = CM / Sales

Total fixed costs / contribution margin ratio = Breakeven point in dollars

Question 3

CVP Analysis-Profit Performance

Answer 3

a. Sales Unit Needed to Obtain a Desired Profit

Sales (units)= (Fixed cost + Pretax profit) / Contribution margin per unit

b. Sales Dollars needed to obtain a Desired Profit
(1) Summation of Total Costs and Profits

Sales dollars = Variable costs + Fixed costs + Pretax profit

(2) Contribution Margin ratio

Sales= Fixed cost +Pretax profit/ Contribution margin ratio

Question 4

Margin of Safety

Answer 4

Is the excess of sales over breakeven sales and is generally expressed as either dollars or a percentage.

1) Sales Dollars

Total sales (in dollars) - Breakeven sales (in dollars) = Margin of safety (in dollars)

2) Percent

Margin of safety in dollars / Total sales = Margin of safety percentage

Question 5

Application of overhead is accomplished in 2 steps

Answer 5

Step 1: Calculated overhead rate = Budgeted overhead costs / Estimated cost driver

Step 2: Applied overhead = Standard cost driver for actual level of activity X Overhead rate (from Step 1)

Question 6

Variable Overhead Efficiency Variance

Answer 6

VOH efficiency variance = Standard rate X (Actual hours - Standard hours allowed for actual production volume)

Question 7

Relevant Range

Answer 7

Relevant range is the range of activity within which the relationships of fixed costs and variable costs are meaningful and valid.

Question 8

The use of absorption costing vs variable costing

Answer 8

Step 1: Compute fixed cost per unit
Step 2: Compute change in income
Step 3A: Apply rule: Increase in inventory means absorption net income ˃ variable net income
Step 3B: Calculate variable costing income:

Question 9

High-low method

Answer 9

Simple technique that is used to estimate the fixed and variable portions of cost, usually production costs

1) Total costs= Fixed costs +(VC/unit X #units)
y= a + bx

Question 10

Master budget vs Flexible budget

Answer 10

Master budget: Overall budget, consisting of many smaller budgets, that is based on one specific level of production.

Flexible budget: Series of budgets based on difference activity levels within the relevant range.

Question 11

Expected value

Answer 11

Computations that assign probabilities to potential outcomes quantify both the likelihood (percentage) and outcome (amounts) into a single value.

Question 12

Budgets

Answer 12

Financial budget process includes:

1) Cash and capital purchases budgets
2) Balance sheet and statement of cash flows

Operating budget process includes:

1) All budgets except cash and capital purchases
2) The pro forma income statement

Annual business plan process is comprised of the development of operating budgets followed by financial budgets

Question 13

Material efficiency variance

Answer 13

(Actual Qty Used - Standard Qty Used) X Standard Price

Question 14

Material price variance

Answer 14

Actual qty X (Actual - Standard price)

Question 15

Sales variance formulas

Answer 15

1) Sales price variance=(Actual SP/unit - Budgeted SP/unit) X Actual sold units
2) Sales volume variance= (Actual sold units - Budgeted sales units) X Standard CM per unit
3) Market size variance = ((Actual market size (in units) - Expected market size (in units)) X Budgeted market share % X Budgeted CM per unit (weighted - average)
4) Market share variance = (Actual market share % - Budgeted market share %) X Actual industry units X Budgeted CM per unit (weighted-average)

Question 16

Mnemonic

Answer 16

P = D X A
U=  D X S
R=  D  X A
E=  D  X S

P Price variance (for DM)
U Usage (quantity) variance (for DM) 
R Rate variance (for DL)
E Efficiency variance (for DL)

DA Difference x Actual
DS Difference x Standard
DA Difference x Actual
DS Difference x Standard

Question 17

Production volume variance

Answer 17

The formula for the production volume variance component for overhead variances is computed as applied overhead minus budgeted overhead based on standard hours. The sole difference between these two calculated amounts is the application of fixed factory overhead.

Applied Overhead:

(Standard variable overhead rate × Standard direct labor hours allowed) + (Standard fixed overhead rate × Actual Production)

Budgeted overhead based on standard hours

(Standard variable overhead rate × Standard direct labor hours allowed) + (Standard fixed overhead rate × Standard Production)

Question 18

Variable Overhead Rate (Spending) Variance

Answer 18

VOH rate (spending) = Actual hrs X (Actual rate - Standard rate)

Question 19

Variable Overhead Efficiency Variance (assumes we are using DL hours)

Answer 19

VOH efficiency rate = Standard rate X (Actual hrs - Standards hrs allowed for Actual production volume)

Question 20

Fixed Overhead Budget (Spending) Variance

Answer 20

FOH budget (spending) variance = Actual Fixed OH - Budgeted fixed overhead

Question 21

Fixed Overhead Volume Variance

aka Production volume variance

Answer 21

FOH volume variance = Budgeted fixed overhead - Standard fixed overhead cost allocated to production*

*based on Actual production X Standard rate

Alternative formula:
=(Actual production- Budgeted production) X Per unit Standard fixed O/H rate

Question 22

Controllable margin

Answer 22

Controllable margin is computed as contribution margin net of controllable costs.

Controllable costs represent those fixed assets that managers can impact in less than one year.

Question 23

Critical success factors

Answer 23

Financial and non-financial features of an organization that contribute to its success in achieving strategy are referred to as critical success factors and are normally classified as:

1) Financial solvency and return;
2) Customer satisfaction;
3) Internal business processes, and
4) Human resources innovation

Question 24

Balanced scorecard

Answer 24

Typically defines organizational performance in four dimensions:

-innovation, customer satisfaction, internal business processes and finance.