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Strategic Planning > Forecasting And Projection > Flashcards

Forecasting And Projection Flashcards

0
Q

What is the break even point?

A

The point whIch revenues equal total cost

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1
Q

What is cost volume profit analysis used for?

A

To forecast profits at different levels of sales and production volume.

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2
Q

Cost volume profit analysis general assumptions are?

A
  1. All costs can be separated into either variable or fixed costs
  2. Volume is the only relevant factor affecting cost
  3. All costs behave in a linear fashion in relation to production volume (over the long term)
  4. Cost behaviors are anticipated to remain constant over the relevant range of production volume
  5. The longer the time period, the greater the percentage of variable costs.

TC = FC (VC per unit ✖ volume)

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3
Q

What is the Contribution Approach?

A

Fixed vs. variable
Uses variable costing (direct costing)
Not GAAP
Extremely useful for internal decision making

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4
Q

What is the equation for the contribution approach?** memorize**

A

Revenue
Less: variable costs (DM + DL + var. mfg. overhead + var. SG&A)
———————–
Contribution margin
Less: fixed costs (fixed mfg. O/H + fixed SG&A)
————————
Net income

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5
Q

What do variable costs include?

A

Direct labor, direct material, variable manufacturing overhead, shipping and packing, and variable selling expenses.

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6
Q

What do fixed costs include?

A

Fixed overhead, fixed selling, and most general and administrative expenses

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7
Q

What is unit contribution margin?

A

The unit sales price - the unit variable cost

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8
Q

What is the contribution margin ratio formula?

A

Contribution margin➗ revenue

* the contribution margin expressed as a percentage of revenue*

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9
Q

What is the absorption approach?

A

Product vs. period
Required financial reporting under GAAP
Product cost not expensed until sold

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10
Q

What is the absorption approach equation?

A

Revenue
Less: cost of goods sold ( DM+ DL+ var. mfg.O/H+ fixed mfg.O/H)
——————————-
Gross margin
Less: operating expenses (fixed +variable+ SG&A (period cost))
——————————-
Net income

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11
Q

What is the difference between the contribution approach and the absorption approach?

A

The treatment of the fixed factory overhead.
Absorption- all fixed factory overhead is treated as a product cost and is included in inventory values
Contribution- all fixed factory overhead is treated as a period cost and is expensed in the period incurred.

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12
Q

What are the product costs under absorption costing?

A

Direct materials
Direct labor
Variable manufacturing overhead
Fixed manufacturing overhead (only expense for portion related to units sold)

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13
Q

What are the period costs in absorption costing?

A

Variable and fixed selling, general, and administrative expenses

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14
Q

What are the product costs for variable (direct) costing?

A

Direct material
Direct labor
Variable manufacturing overhead

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15
Q

What are the period costs under the variable approach?

A

Fixed manufacturing overhead (100% expensed immediately)

Variable and fixed selling, general, and administrative expenses

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16
Q

What is the effect on income if production is greater than sales?
(Variable vs absorption)

A

Less fixed overhead expensed under absorption, thus absorption will have higher profit over variable

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17
Q

What is the effect on income is sales is greater that production? (Variable vs. absorption)

A

Lower inventory & more fixed overhead expensed under absorption, thus absorption will have a lower profit then variable

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18
Q

What are the three steps in computing the differences between absorption and variable? memorize

A

Step1: compute fixed cost per unit
(fixed manufacturing overhead/ units produced)

Step 2: compute the change in income
(change in inventory units ✖ fixed cost per unit)

Step 3: determine the impact of the change in income:
No change in inventory: absorption net income=variable net income
Increase in inventory: absorption net income > variable net income
Decrease in inventory: absorption net income< variable net income

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19
Q

What does break even analysis determine?

A

The sales required (in dollars or units) to achieve zero profit or loss from operations. After break even has been achieved, each additional unit sold will increase net income by the amount of the contribution margin per unit

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20
Q

How do you calculate the break even point under the contribution approach in units?

A

Total fixed costs / contribution margin per unit= break even point in units

Contribution margin per unit = (selling price / unit) - (variable cost/ unit)

21
Q

What is the general breakeven formula? And what are the two variations of this formula?

A

Breakeven point (BEP) occurs when sales equals total cost (variable cost plus fixed costs)

  1. Total sales dollars at the BEP = total variable costs + total fixed costs
  2. Unit sales price ✖ units at BEP = (units at BEP ✖variable cost per unit) + total fixed costs
22
Q

What are the two basic formulas to calculate the required sales dollars or unit sales required to produce a target profit?

A

Sales= variable costs + (fixed costs + net income before taxes)
Or
Sales=( fixed cost + profit) / contribution margin ratio

23
Q

How do you compute the target profit before tax?

A

Target profit before tax= target profit after tax / (1- tax rate)

24
Q

How do you calculate a company’s profit after breakeven?

A

Units sold ✖ the contribution margin per unit

25
Q

What is the margin of safety?

A

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

26
Q

How do you calculate the margin if safety in sales dollars?

A

Total sales in dollars - breakeven sales in dollars = margin of safety in dollars

27
Q

How do you calculate the margin of safety in percentage?

A

Margin of safety in dollars / total sales= margin of safety percentage.

28
Q

What is target costing?

A

A technique used to establish the product cost allowed to ensure both profitability per unit and total sales volume.

29
Q

What are the two factors that you must take into consideration with target costing?

A

Cost determination- target cost= market price- required profit
Implications- compromised quality & increased marketing / downstream costs

30
Q

Marginal analysis: what are relevant revenues and costs?

A

When making business decisions: revenues and costs related to those decisions are only deemed relevant if they change.

31
Q

Margin analysis: what are irrelevant costs?

A

Cost that do not differ between alternatives

32
Q

Marginal costs: what are incremental costs?

A

Will change & relevant costs

The additional costs incurred to produce an additional amount of the unit over the present output.

33
Q

Marginal analysis: what are sunk costs?

A

Will not change. Costs that are unavoidable because they were incurred in the past and cannot be recovered as a result of a decision.

34
Q

Margin analysis: what are opportunity costs?

A

The cost of foregoing the next best alternative when making a decision. It is a relevant cost.

35
Q

Marginal analysis: what is controllable costs?

A

Relevant
Costs that can be authorized at a specific level of management. They will change as a result of selecting different alternatives.

36
Q

Hat are marginal costs? ** memorize**

A

The same of the costs required for a one-unit increase in activity. Marginal costs include all variable costs AND any avoidable fixed costs associated with a decision.

37
Q

What is a special order decision?

A

Opportunities that require a firm to decide if a special priced order should be accepted or rejected.

38
Q

Special order: determine relevant costs.

If you presume EXCESS capacity…. Then

A

Accept if sales price > relevant costs (variable costs)

39
Q

Special order: determine relevant costs.

If you presume FULL capacity… Then

A

Accept if sales price > relevant cost + opportunity cost

(Contribution margin in $ (forgo))/size of special order = opportunity cost per uni

40
Q

Make vs. Buy

A

Chose the lowest one:

If relevant cost to make (including opportunity costs) < outside purchase, then make it.

41
Q

Sell vs. process further

A

If incremental revenue > incremental cost, then process further
Join costs= sunk costs - already incurred
Separable costs= relevant- incurred after the split off point

42
Q

Keep or drop a segment (product line)

A

Keep the segment if the lost contribution margin exceeds avoided fixed costs.
Drop the segment if the lost contribution margin is less than avoided fixed costs.

43
Q

Strategic factors to consider in regards to keep vs. drop a segment?

A
  1. Complementary product
  2. Employee moral
  3. Growth potential
  4. Opportunity costs
44
Q

A formal depiction of the objective, the constraints, and the steps in process are seen thru what two models?

A

Sensitivity analysis & forecast analysis

45
Q

What is sensitivity analysis?

A

The process of experimenting with different parameters and assumptions regarding a model of cataloging the range of results to view the possible consequences of a decision.
Often use probabilities

46
Q

What is forecast analysis?

A

An extension of sensitivity analysis.

Predicting future values of a dependent variable using information from a previous time period.

47
Q

What is regression analysis?

A

Total cost= total fixed cost + (variable cost per unit ✖ volume)
Or
Dependent variable= y- intercept+ (slope ✖ independent variable)
Or
y= A+Bx

48
Q

What is the high low method?

A

A simple technique that is used to estimate the fixed and variable portions of cost, usually production costs.
Analyze:
- divide the difference between high and low dollar costs
- use high or low volume to calculate the variable costs by multiplying the volume times the variable cost per unit.

49
Q

What is the result if the high low method?

A

The total cost formula of a flexible budget formula

50
Q

What is a flexible budget?

A

A series of budgets that ate prepared for a range of activity levels rather than a single activity.

51
Q

What is the flexible budget formula?

A

Total cost= fixed cost + ( variable cos per unit✖ number of units)

Strategic Planning (2 decks)

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