BEC 2: Strategic Planning Flashcards
What is CVP?
Cost-volume profit analysis: used by managers to forecast profits at different levels of sales and production volume; synonymous with breakeven analysis.
What is the contribution approach, the corresponding equation, and the contribution margin ratio?
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
What is the absorption approach and its corresponding equation?
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
What does an I/S look like under the absorption (full cost) & variable (direct) cost methods?
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.
What is the difference between variable costing net income and absorption costing net income?
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.
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 ?
- Total FC / CM per unit (sp/unit - vc/unit)
- a. unit price * BE units
b. total FC/CM ratio (CM/sales) - Sales = VC + (FC + NI before taxes) OR
Sales = (FC + Profit) / CM ratio (profit = EBT)
- Target profit after taxes / (1-tax rate)
What is the margin of safety in dollars and as a percentage of sales?
- Total sales (in dollars) - BE sales (in dollars)
- Margin of safety (in dollars) / total sales
What is the target cost computation? What is operational decision analysis? What are marginal costs? What does the opportunity cost per unit equal?
- Target cost = market price - required profit
- Referred to as marginal analysis; used when analyzing business decisions that focus on the relevant revenues and costs associated with the decision.
- Sum of the costs required for a one-unit increase in activity. Include all VC and any avoidable FC
- CM in $ (forgo) / size of the special order
What are the components of the Simple (one N) Linear Regression Model? What does (r) & (R2) stand for?
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
With budgets, what are standards, and what are the different types?
Standards are per unit budgets that are integral to the development of flexible budgets.
- Ideal: represents costs from perfect efficiency and effectiveness - forward looking - no provisions - CQI - unattainable standards (demotivation).
- 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.
- Authoritative: set exclusively by mngt. - can be implemented quickly and include all costs - workers might not accept.
- Participative: set by managers and individuals - likely to be accepted - slower to implement.
What is a master budget, what is it comprised of, and what types of budgets do those include?
“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
What formula displays the relationship between production, sales, and inventory levels?
Budgeted Sales
+ Desired Ending Inventory
Less: Beginning Inventory
= Budgeted Production
What is the DM budget defined by and what are the corresponding formulas?
- 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
- DM Usage Budget (Cost of DM used):
Beg. inv. at cost
+ purchases at cost
- end. inv. at cost
What is the Direct Labor Budget Formula?
Budgeted production (in units) * hrs. (or fraction of hrs.) required = Total number of hrs. needed * hourly wage rate = Total wages
What is the factory overhead budget?
IM + IL + “factory” costs
Fixed and variable production costs that aren’t related to DL or DM
What is the cost of goods manufactured and sold budget?
COGM - sum of budgets for each element of manf.
- DL
- DM
- Factory OH (applied) : Product costs
COGS: COGM
+ Beg. FG Inv.
Less: End. FG Inv.
What are the three major sections of the cash budget and what do they consist of?
- Cash Available:
a. ) Cash balances Cash sales that period
b. ) Cash collections Collections of A/R - 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. - Financing: Operating “line of credit” used to maintain minimum cash bal. and which excess/idle cash will be invested.
What do cash budgets consider? (six steps)
`1. Beg. cash
- Cash collections from sales (add)
- Cash disbursements for purchases and operating exps (subtract)
- Computed ending cash
- Cash requirements to sustain operations (subtract)
- Working capital loans to maintain cash requirements “Desired end. cash bal.”
What are the DM & DL variances and their equation?
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
What are the three different overhead variance models?
- Net OH v. (one-way v.) 1 vs. 4
(net dr. or cr. bal. in OH acct.)
- Two-way v. (PURE DADS - book)
a. Budget (controllable) v. 1 vs. 3
b. Volume (uncontrollable) v. 3 vs. 4 - Three-way v. (SEV)
a. Spending v. 1 vs. 2
b. Efficiency v. 2 vs. 3
c. Volume (uncontrollable) v. 3 vs. 4
What is the mnemonic associated with the manufacturing OH variances and what it stands for?
ABA BSA
- A Actual
- BA Budget amt. based on Actual hrs worked (inputs)
- BS Budget amt. based on Standard hrs allowed for production (units) achieved (output).
- A overhead Applied to WIP
What are the formulas for ABA BSA?
- A - Actual OH costs incurred
- BA - Bud. F.OH + (Actual DLH worked * Stnd. V.OH rate per DLH)
- BS - Bud. F.OH + (Stnd. DLH allowed * Stnd. V.OH rate per DLH)
- 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
In standard costing, what two steps accomplishes the application of overhead?
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)
What is the sales variance, its two component variances, and their formulas?
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)
