BEC 2: Strategic Planning

Question 1

What is CVP?

Answer 1

Cost-volume profit analysis: used by managers to forecast profits at different levels of sales and production volume; synonymous with breakeven analysis.

Question 2

What is the contribution approach, the corresponding equation, and the contribution margin ratio?

Answer 2

Used for b/e analysis. Identify each element as fixed or variable costs to define its relationship to volume and computation of b/e. Also called direct costing. Not GAAP, for internal decisions.

Revenue

Less: VC (DM, DL, Var. mfg. OH, & Var. SG&A)

= Contribution margin

Less: FC (Fixed mfg. OH & Fixed SG&A)

= Net Income

Contribution margin/revenue

Question 3

What is the absorption approach and its corresponding equation?

Answer 3

Does not segregate FC and VC; product (not exp. until sold) vs. period costs; multiple step I/S - matching approach; required under GAAP.

Revenue

Less: COGS (DM, DL, Var. mfg. OH, & Fixed mfg. OH)

= Gross margin

Less: Op. Exps. (F & V SG&A “period costs”)

= Net Income

Question 4

What does an I/S look like under the absorption (full cost) & variable (direct) cost methods?

Answer 4

Absorption (Full Cost): Sales less: COGS = GM Less: V.SG&A & F.SG&A = Op. Inc.

Variable (Direct): Sales less: V.COGS & V.SG&A = CM Less: F.Mfg.OH & F.SG&A = Op. Inc.

Only difference is F mfg. OH is a product cost under absorption & a period cost under variable.

Question 5

What is the difference between variable costing net income and absorption costing net income?

Answer 5

No change in inventory: Absorption NI = Variable NI

Inc. in inv.: Absorption NI > Variable NI

Dec. in inv.: Absorption NI < Variable NI

ex.) Production > Sales: Less F.OH exp. under absorption, thus higher profit.

Question 6

What are the following formulas: 1. Breakeven point in units 2. Breakeven point in dollars (both methods) 3. Sales to produce target profit 4. Target profit before tax ?

Answer 6

1. Total FC / CM per unit (sp/unit - vc/unit)
2. a. unit price * BE units
   b. total FC/CM ratio (CM/sales)
3. Sales = VC + (FC + NI before taxes) OR

Sales = (FC + Profit) / CM ratio (profit = EBT)

4. Target profit after taxes / (1-tax rate)

Question 7

What is the margin of safety in dollars and as a percentage of sales?

Answer 7

1. Total sales (in dollars) - BE sales (in dollars)
2. Margin of safety (in dollars) / total sales

Question 8

What is the target cost computation? What is operational decision analysis? What are marginal costs? What does the opportunity cost per unit equal?

Answer 8

1. Target cost = market price - required profit
2. Referred to as marginal analysis; used when analyzing business decisions that focus on the relevant revenues and costs associated with the decision.
3. Sum of the costs required for a one-unit increase in activity. Include all VC and any avoidable FC
4. CM in $ (forgo) / size of the special order

Question 9

What are the components of the Simple (one N) Linear Regression Model? What does (r) & (R2) stand for?

Answer 9

y = A + Bx

TC = total FC + (VC/unit * volume)

Dependent variable = y-int. + (slope * independent variable N)

r = coefficient of correlation (strength of linear relationship between x & y)

R2 = coefficient of determination (proportion of total variation in y explained by x)

* The higher, the better

Question 10

With budgets, what are standards, and what are the different types?

Answer 10

Standards are per unit budgets that are integral to the development of flexible budgets.

1. Ideal: represents costs from perfect efficiency and effectiveness - forward looking - no provisions - CQI - unattainable standards (demotivation).
2. Currently attainable: use with flexible budgets - costs from work with training and experience but without extraordinary effort - provisions made - perception standards are reasonable - judgment and potential manipulation.
3. Authoritative: set exclusively by mngt. - can be implemented quickly and include all costs - workers might not accept.
4. Participative: set by managers and individuals - likely to be accepted - slower to implement.

Question 11

What is a master budget, what is it comprised of, and what types of budgets do those include?

Answer 11

“Annual business plan” - yr. or less - static budget (one level of activity) - comprised of operating (non-financial) & financial budgets in anticipation of achieving a single level of sales volume for a specified period.

Operational: describe resources (DM, DL) needed and how to acquire them - 1.*Sales; 2.*Production; 3. Selling and administrative; & 4. Personnel budgets

Financial: detail sources and uses of funds to be used in operations - 1. Pro forma F/S & 2.*Cash budgets

Question 12

What formula displays the relationship between production, sales, and inventory levels?

Answer 12

Budgeted Sales

+ Desired Ending Inventory

Less: Beginning Inventory

= Budgeted Production

Question 13

What is the DM budget defined by and what are the corresponding formulas?

Answer 13

1. DM Purchase Budget:
   a. ) Number of units to be purchased:

Units of DM needed for a production period

+ Desired end. inv. at the end of the period

less: Beg. inv. at the start of the period
b. ) Cost of DM to be purchased:

Number of units to be purchased * cost per unit

2. DM Usage Budget (Cost of DM used):

Beg. inv. at cost

+ purchases at cost

• end. inv. at cost

Question 14

What is the Direct Labor Budget Formula?

Answer 14

Budgeted production (in units) * hrs. (or fraction of hrs.) required = Total number of hrs. needed * hourly wage rate = Total wages

Question 15

What is the factory overhead budget?

Answer 15

IM + IL + “factory” costs

Fixed and variable production costs that aren’t related to DL or DM

Question 16

What is the cost of goods manufactured and sold budget?

Answer 16

COGM - sum of budgets for each element of manf.

1. DL
2. DM
3. Factory OH (applied) : Product costs

COGS: COGM

+ Beg. FG Inv.

Less: End. FG Inv.

Question 17

What are the three major sections of the cash budget and what do they consist of?

Answer 17

1. Cash Available:
   a. ) Cash balances Cash sales that period
   b. ) Cash collections Collections of A/R
2. Cash Disbursements (“Use”):
   a. ) Purchases - cash purchases, credit purchases, and credit payments
   b. ) Operating Exps. (salaries, rent, insurance, utilities) 1. % prior month exps paid 2. current month exps paid 3. current month exps w/ deferred disb.
3. Financing: Operating “line of credit” used to maintain minimum cash bal. and which excess/idle cash will be invested.

Question 18

What do cash budgets consider? (six steps)

Answer 18

`1. Beg. cash

2. Cash collections from sales (add)
3. Cash disbursements for purchases and operating exps (subtract)
4. Computed ending cash
5. Cash requirements to sustain operations (subtract)
6. Working capital loans to maintain cash requirements “Desired end. cash bal.”

Question 19

What are the DM & DL variances and their equation?

Answer 19

DM price v: actual quantity purchased * (actual price - stnd. price)

DM quantity usage v.: stnd. price * (actual quantity used - standard quantity allowed)

DL rate v: actual hrs worked * (actual rate - stnd. rate)

DL efficiency v.: stnd rate * (actual hrs. worked - stnd. hrs. allowed)

SQA/SHA: actual output * stnd. allowed per unit

Question 20

What are the three different overhead variance models?

Answer 20

1. Net OH v. (one-way v.) 1 vs. 4

(net dr. or cr. bal. in OH acct.)

2. Two-way v. (PURE DADS - book)
   a. Budget (controllable) v. 1 vs. 3
   b. Volume (uncontrollable) v. 3 vs. 4
3. Three-way v. (SEV)
   a. Spending v. 1 vs. 2
   b. Efficiency v. 2 vs. 3
   c. Volume (uncontrollable) v. 3 vs. 4

Question 21

What is the mnemonic associated with the manufacturing OH variances and what it stands for?

Answer 21

ABA BSA

1. A Actual
2. BA Budget amt. based on Actual hrs worked (inputs)
3. BS Budget amt. based on Standard hrs allowed for production (units) achieved (output).
4. A overhead Applied to WIP

Question 22

What are the formulas for ABA BSA?

Answer 22

1. A - Actual OH costs incurred
2. BA - Bud. F.OH + (Actual DLH worked * Stnd. V.OH rate per DLH)
3. BS - Bud. F.OH + (Stnd. DLH allowed * Stnd. V.OH rate per DLH)
4. A - Stnd. total OH rate per DLH * Stnd. DLH allowed

*Stnd. total OH rate per DLH = Stnd. V.OH + Stnd. F.OH

*SHA = Stnd. DLH per unit * Actual units produced

Question 23

In standard costing, what two steps accomplishes the application of overhead?

Answer 23

Step 1: Calculate OH rate = Budgeted OH costs / est. cost driver (MH, LH, Labor $)

Step 2: Applied OH = Stnd. cost driver for actual level of activity (SHA) * OH rate (from step 1)

Question 24

What is the sales variance, its two component variances, and their formulas?

Answer 24

Sales V.: Actual Rev. - Bud. Rev.

a. Sales price V:

(Actual SP/unit - Bud. SP/unit) * actual units sold

b. Sales volume V:

(Actual sold units - Bud. sales units) * Stnd. contribution margin per unit (SP-VC)

Question 25

What is a responsibility segment? What are the four financial measures that managers are held accountable for?

Answer 25

1. Strategic Business Unit (SBUs)
2. “CRPI” lowest to highest
   a. Cost SBU
   b. Rev. SBU
   c. Profit SBU
   d. Invest. SBU

Question 26

How do you est. the designs for financial scorecards?

Answer 26

Est. designs for fin. scorecards are pointed “AT US.”

a. Accurate & Timely
b. Understandable
c. Specific accountability (by segment) - (product lines, geographic areas, customer)

Question 27

What are the critical success factors (CSFs) of the balanced scorecard classified as?

Answer 27

“FICA”

1. Financial - profit - pointed “AT US”
2. Internal business processes - efficient production
3. Customer satisfaction - mkt. share
4. Advancement of innovation and HR development (learning and growth) - retention of key employees

* 2-4 non-financial

Question 28

What does the budget organization chart look like?

Answer 28