BEC Lecture 2 Flashcards
What is the formula for the contribution approach?
Revenue
Less: Variable costs
Contribution margin
Less: Fixed costs
Net income
What is the contribution margin ratio formula?
Contribution margin ratio =
Contribution margin / Revenue
What is the absorption formula?
Revenue
Less: Cost of goods sold
Gross margin
Less: Operating expenses
Net income
Explain the difference between the contribution approach and the absorption approach.
The difference is the treatment of fixed overhead. Under the absorption approach, fixed overhead is a product cost. Under the contribution approach, fixed overhead is a period cost.
Explain the difference between absorption costing net income and variable costing net income.
The difference depends on the change in inventory level during the period.
No change in inventory:
Absorption income = Variable income
Increase in inventory:
Absorption income > Variable income
Decrease in inventory:
Absorption income < Variable income
What is the formula for breakeven point in units?
Breakeven point in units =
Total fixed costs
Contribution margin per unit
What is the formula for breakeven point in dollars?
Breakeven point in dollars =
Total fixed costs
Contribution margin ratio
What is the formula for required sales volume for target profit?
Sales (units) =
(Fixed cost + Pretax profit)
Contribution margin per unit
What is the formula for setting selling prices based on assumed volume?
Sales price per unit =
(Fixed costs + Variable costs + Pretax profit)
Number of units sold
What is the margin of safety formula?
Margin of safety (in dollars) =
Total sales (in dollars) - Breakeven sales (in dollars)
Describe transfer pricing (from a non-global perspective) and list the strategies that may be used to establish transfer prices.
A transfer price is the price charged for the sale/purchase of a product internally (between two or more divisions within the same company).
The following strategies may be used to establish tranfer prices:
- Negotiated Price
- Market Price
- Cost
Describe transfer pricing from a global perspective.
Transfer pricing is a methodology for allocating profits and losses among related entities within the same legal group or corporation in different tax jurisdictions.
Transfer prices must be approximate the prices for comparable transations between independent parties.
Define opportunity costs evaluated in considering an opportunity when the firm is operating at capacity.
Opportunity costs at full capacity is defined as the net benefit given up for the best alternative use of the capacity.
How should management approach a special order decision?
Special orders require a firm to decide if a specially priced order should be accepted or rejected. When there is excess capacity, a special order should be accepted if the selling price per unit is greater than the variable cost per unit. If the company is operating at full capacity, the opportunity cost is producing the special order should be included in the analysis.
How should management approach a make or buy decision?
The decision to make or buy a component (also referred to as insourcing vs. outsourcing) is similar to the special order decision. Mangers should consider only relevant costs and select the lowest-cost alternative.
How should management approach a sell or process further decision?
A sell or process further decision is made by comparing the incremental cost and the incremental revenue generated after split-off point.
- If the incremental revenue exceeds the incremental cost, the organication should process further.
- If the incremental cost exceeds the incremental revenue, the organization should sell at the split-off point.
How should management approach a keep or drop decision?
When deciding whether to keep or drop a segment, a firm should compare the fixed costs that can be avoided if the segment is dropped (i.e., the cost of running the segment) to the contribution margin that will be lost if the segment is dropped.
The segment should be kept if the lost contribution margin exceeds avoided fixed costs and dropped if the lost contribution margin is less than avoided fixed costs.
What is linear regression?
Linear regression is a method for studying the relationship between two or more variables. Linear regression is used to predict the value of a dependent variable [e.g., total cost (y)] corresponding to given values of the independent variables [e.g. fixed costs (A), variable cost per unit (B), and production expressed in units (x)].
Simple regression involves only one independent variable.
Multiple regression involves more than one independent variable.
Explain the coefficient of correlation.
The coefficient of correlation (r) measures the strength of the linear relationship between the independent variable (x) and the dependent variable (y).
The range is from -1.00 to 1.00, with -1.00 indicating perfect inverse correlation, 1.00 indicating perfect positive correlation, and 0.00 indicating no correlation.
Explain the coefficient of determination.
The coefficient of determination (R2) is the proportion of the total variation in the dependent variable (y) explained by the independent variable (x).
The range lies between zero and one, with a higher R2 representing a better fit for a regression line.
Explain the concept of a learning curve.
Learning curve analysis is based on the premise that as workers become more familiar with a specific task, the per-unit labor hours will decline as experience is gained and production become more efficient.
The calculation begins with the first unit/batch. As cumulative production doubles (from one unit to two units, to eight units, etc.), cumulative average time per unit falls to a fixed percentage (the learning curve rate) of the previous time.
Describe the high-low method and how it is applied.
The high-low method is a technique that is used to estimate the fixed and variable portions of total costs.
To apply the high-low method:
- Divide the difference between the high and low dollar total costs by the difference in high and low volumes to obtain the variable cost per unit.
- Use either the high volume or the low volume to calculate the variable cost by multiplying the volume times the variable cost per unit.
- Subtract the total calculated cost from total costs to obtain fixed costs.
Define currently attainable standards.
Currently attainable standards represent costs that result from work performed by employees with appropriate training and the experience but without extraordinary effort.
Define ideal standards.
Ideal standards represent costs that result from perfect efficiency and effectiveness in job performance.
Define flexible budget.
A flexible budget is a budget that can be adjusted to any activity level; it shows how costs vary with production volume.
Budgeted TC = FC + (VC/unit x Activity Level)
Fixed cost in total are constant over the relevant range of activity level.
Define a master budget.
A master budget documents specific short-term operating performance goals for a period of time, normally one year or less. The plan generally includes an operating (nonfinancial) budget as well as a financial budget.
List the operating budgets included in the master budget.
- Sales budget
- Production budget
- Direct materials budget
- Direct labor budget
- Overhead budget
- Cost of goods sold budget
- SG&A budget
What is the equation for the direct materials purchases budget?
Units of direct materials for a production period
+ Decired ending inventory at the end of the period
-Beginning inventory at the start of the period
=Units of direct materials to be purchased for the period
x Cost per unit
=Cost of direct materials to be purchased for the period (purchases at cost)
What is the equation for the direct materials usage budget?
Beginning inventory at cost
+Purchases as cost
- Ending inventory at cost
= Direct materials usage (cost of materials used)
What is the equation for the direct labor budget?
Budgeted production (in units)
x Hours (or fractions of hours) required to produce each unit
=Total number of hours needed
x Hourly wage rate
= Total wages
List the financial budgets included in the master budget.
- Cash budget
- Pro forma financial statements
Explain the sections of the cash budget.
- Cash available: consists of cash balances (cash on hand) and cash collections from sales.
- Cash disbursements: cash outlays associated with purchases and operating expenses.
- Financing: primatily involves using a line of credit to maintain minimum cash balances.
Identify the direct materials variances (two-way variance analysis).
- Direct materials price variance = AQ x (AP-SP)
- AQ = Actual Quantity Purchased
- AP = Actual Price
- SP = Standard Price
- Direct materials quantity usage variance = SP x (AQ - SQ)
- SP = Standard Price
- AQ = Actual Quantity Used
- SQ = Standard Quantity Allowed
Identify the direct labor variances (two-way variance analysis).
- Direct labor rate variance = AH x (AR - SR)
- Direct labor variance = SR x (AH - SH)
where: AR = actual labor rate
SR = standard labor rate
AH = actual hours worked
SH = Standard hours allowed
Identify the manufacturing overhead variances.
VOH rate (spending) variance:
Actual hours x ( Actual rate - Standard rate)
VOH efficiency variance:
Standard rate x (Actual hours - Standard hours allowed for actual production volume)
FOH budget (spending) variance:
Actual fixed overhead - Budgeted fixed overhead
FOH volume variance:
Budgeted fixed overhead - Standard fixed overhead cost allocated to production*
*based on Actual production* Standard rate
Describe two alternative ways to calculate the volume variance.
Volume variance =
Budgeted fixed overhead - Applied fixed overhead
Volume variance =
(Actual Production in units - Budgeted production in units) x Per unit standard fixed overhead rate
Sometimes called Production Volume Variance
What is the formula for sales volume variance?
Sales volume variance =
[Actual sold units - Budgeted sales units]x Standard contribution margin per unit.
What is the formula for sales price variance?
Sales price variance =
[Actual SP / unit - Budgeted SP / unit] x Actual units sold
Define contribution by SBU.
Contribution by SBU represents the difference between the contribution (Revenue - Variable costs) and controllable fixed costs (those costs that managers can impact in less than one year).
Also called controllable margin.
What is the purpose of the balanced scorecard?
The balanced scorecard displays performance relative to critical success factors identified by multiple dimensions of a business operation.
What dimensions or categories of business operation are frequently identified by the balanced scorecard?
Finance
Internal business processes
Customer satisfaction
Advancement of innovation and human resource development
List and define the types of responsibility segments (or strategic business units–SBUs) that are used to establish business performance measures.
Cost SBU
Managers are held responsible for controlling costs.
Revenue SBU
Managers are held responsible for generating revenues.
Profit SBU
Managers are held responsible for producing a target profit.
Investment SBU
Managers are held responsible for return on investment.
