BEC 2 Flashcards
Breakeven Computations
Sales -VC- FC = Profit
Sales - VC = Contribution margin
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)
Contribution Margin ratio
(CM = Sales - VC)
CM Ratio = CM / Sales
Total fixed costs / contribution margin ratio = Breakeven point in dollars
CVP Analysis-Profit Performance
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
Margin of Safety
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
Application of overhead is accomplished in 2 steps
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)
Variable Overhead Efficiency Variance
VOH efficiency variance = Standard rate X (Actual hours - Standard hours allowed for actual production volume)
Relevant Range
Relevant range is the range of activity within which the relationships of fixed costs and variable costs are meaningful and valid.
The use of absorption costing vs variable costing
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:
High-low method
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
Master budget vs Flexible budget
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.
Expected value
Computations that assign probabilities to potential outcomes quantify both the likelihood (percentage) and outcome (amounts) into a single value.
Budgets
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
Material efficiency variance
(Actual Qty Used - Standard Qty Used) X Standard Price
Material price variance
Actual qty X (Actual - Standard price)
Sales variance formulas
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)
Mnemonic
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
Production volume variance
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)
Variable Overhead Rate (Spending) Variance
VOH rate (spending) = Actual hrs X (Actual rate - Standard rate)
Variable Overhead Efficiency Variance (assumes we are using DL hours)
VOH efficiency rate = Standard rate X (Actual hrs - Standards hrs allowed for Actual production volume)
Fixed Overhead Budget (Spending) Variance
FOH budget (spending) variance = Actual Fixed OH - Budgeted fixed overhead
Fixed Overhead Volume Variance
aka Production volume variance
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
Controllable margin
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.
Critical success factors
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
Balanced scorecard
Typically defines organizational performance in four dimensions:
-innovation, customer satisfaction, internal business processes and finance.
