Formulas Flashcards
Variable cost per unit with high low method (purpose, use, formula)
Purpose: find total cost per unit of expenses that fluctuate depending on product output
Useful for: seeing the total effect of fluctuating expenses, factor in setting prices
Formula: change in cost (high to low) / change in units (high to low)
Total cost (purpose, use, formula & sub-formula)
Purpose: find the overall total cost including fixed expenses and variable expenses
Use: useful in determining sales prices, determining expenses of producing product
Formula: FC + (VC per units * # units)
note:
FC = fixed cost (tost cost - (variable cost * #units))
VC = variable cost
Contribution Margin per unit (CM) (purpose, use, formula)
Purpose: The profit left on sale of one unit, after all variable expenses subtracted from revenue.
Use: determining min possible sale price
Interpretation: should be relatively high in order to cover fixed expenses and admin OH,
Formula: sales price per unit - total variable costs per unit (result is in dollars)
Contribution Margin ratio (purpose, use, interpret, formula, sub formula)
Purpose: find earnings available to pay for fixed expenses and still generate a profit
Useful for: determining overall sales price to make profit, determine special “sale” prices, determine different margins at different sales levels
How to interpret result: should be relatively high in order to cover fixed expenses and admin OH,
Formula: CM per unit / sales price per unit
NOTE:
CM = contribution margin (sales price per unit - total variable costs per unit)
break-even point in units (purpose, use, interpretation, formula, subform)
Purpose: locate the sales volume at which a business earns exactly no money, where all contribution margin earned is needed to pay for the company’s fixed costs
Use: Find amount of remaining capacity after breakeven point is reached, which reveals the max amount of profit that can be generated.
Find impact on profit if automation (FC) replaces labor (VC).
Find change in profits if product prices are altered.
Find amount of losses could be sustained if business suffers a sales downturn.
Establishing the overall ability of a company to generate a profit.
Interpretation: When the break even point is near the maximum sales level of a business, nearly impossible for company to earn a profit even under the best of circumstances.
Formula: FC / CM
NOTE:
FC = fixed cost = total cost - (variable cost * # units)
CM = contribution margin per unit
CM = sales price per unit - total variable costs per unit
break-even point in dollars (purpose, use, interpretation, formula, subform)
Purpose: locate the sales volume at which a business earns exactly no money, where all contribution margin earned is needed to pay for the company’s fixed costs
Use: Find amount of remaining capacity after breakeven point is reached, which reveals the max amount of profit that can be generated.
Find impact on profit if automation (FC) replaces labor (VC).
Find change in profits if product prices are altered.
Find amount of losses could be sustained if business suffers a sales downturn.
Establishing the overall ability of a company to generate a profit.
Interpretation: When the break even point is near the maximum sales level of a business, nearly impossible for company to earn a profit even under the best of circumstances.
Formula: FC / CM ratio
NOTE:
FC = fixed cost = total cost - (variable cost * # units)
CM ratio = (sales price per unit - total variable costs per unit) / sales price per unit
dollar sales needed to reach a target after-tax income
Purpose: Find the sales amt needed to reach a goal after-tax income
Use: allows for more thorough planning on projections with pessimistic, optimistic and realistic scenarios in numbers.
Formula: (FC + target pretax income) / CM ratio
Note:
FC = fixed cost = total cost - (total variable cost * # units)
CM ratio = (sales price per unit - total variable costs per unit) / sales price per unit
unit sales needed to reach target after-tax income (purpose, use, formula, subforms)
Purpose: Find the number of units that must be sold to reach a goal after-tax income
Use: allows for more thorough planning on projections with pessimistic, optimistic and realistic scenarios in numbers.
Formula: (FC + target pretax income) / CM
Notes:
FC = fixed cost = total cost - (total variable cost * # units)
CM = (sales price per unit - total variable price per unit)
Margin of safety in $ (purpose, use, interpretation, formula, subforms)
Purpose: Find the reduction in sales that can occur before the breakeven point is reached. The risk of loss a business is subjected to by changes in sales.
Use: allows for more thorough planning on projections with pessimistic, optimistic and realistic scenarios in numbers. useful when a significant proportion of sales at risk of decline or elimination, as may be the case when a sales contract is coming to an end.
Interpretation: Min margin of safety may warrant reduction of expenses. Large margin of safety business is well-protected from sales variations.
Formula: expected sales - break-even sales
NOTE:
Break-even sales: FC / CM ratio
FC = fixed cost = total cost - (variable cost * # units)
CM ratio = (sales price per unit - total variable costs per unit) / sales price per unit
Margin of safety in % (purpose, use, interpretation, formula, subforms)
Purpose: Find the reduction in sales that can occur before the breakeven point is reached. The risk of loss a business is subjected to by changes in sales.
Use: allows for more thorough planning on projections with pessimistic, optimistic and realistic scenarios in numbers. useful when a significant proportion of sales at risk of decline or elimination, as may be the case when a sales contract is coming to an end.
Interpretation: Min margin of safety may warrant reduction of expenses. Large margin of safety business is well-protected from sales variations.
Formula: (expected sales - breakeven sales) / expected sales
NOTE:
Break-even sales: FC / CM ratio
FC = fixed cost = total cost - (variable cost * # units)
CM ratio = (sales price per unit - total variable costs per unit) / sales price per unit
break-even point in composite units
Purpose: Find the sales volume in units at which no profit is earned, just enough money is made to cover all fixed costs. Break even point for companies with more than one product. Allows analysis of overall break-even with average of all product lines.
Use: to measure the break-even point of multiple products, departments, and even the company as a whole
Find impact on profit if automation (FC) replaces labor (VC).
Find change in profits if product prices are altered.
Find amount of losses could be sustained if business suffers a sales downturn.
Establishing the overall ability of a company to generate a profit.
Interpretation: When the break even point is near the maximum sales level of a business, nearly impossible for company to earn a profit even under the best of circumstances.
Formula: fixed cost / contribution margin composite per unit
NOTE:
Steps:
1. Find variable cost per unit per product line
2. Sum product lines, this is the composite
FC = fixed cost = total cost - (total variable cost * # units)
CM = cost margin
Weighted-average Contribution Margin
Purpose: average amount that a group of products or services contribute to paying down the fixed costs of a business
Use: used to project profit levels at various sales levels. Based on assumption that same mix of product sales and margins will apply in the future.
Interpretation: should be relatively high in order to cover fixed expenses and admin OH,
Formula: CM per unit * Sales Mix
Steps:
- Find variable cost per unit per product line
- Find percentage of each production line to overall sales mix
- multiple CM per unit * the sales mix percentage
FC = fixed cost = total cost - (total variable cost * # units) CM = cost margin
Degree of leverage
Purpose: fixed costs as a percentage of its total costs.
Use: evaluate the break even point of a business, as well as the likely profit levels on individual sales.
Interpretation:
High operating leverage: large proportion of costs are fixed. Firm earns large profit per incremental sale, but must attain sufficient sales volume to cover large fixed costs. If achieves this, will have major profit on all sales after fixed costs covered.
Low operating leverage: . large proportion of sales are variable costs. Costs are only incurred if there is a sale. Firm earns much smaller profit on each incremental sale, but does not have to generate much sales volume to cover fixed costs. Easier for company to earn profit at low sales levels but doesn’t ear outsized profits w/additional sales.
Formula: CM (dollars) / pre-tax income
Note:
CM = cost margin
CM = sales price per unit - total variable costs per unit (result is in dollars)
fixed cost based on total cost and variable cost
total cost - (variable cost * # units)
total variable costs based on total sales, fixed costs and pretax income
Total sales - total fixed costs - pretax income
Income Relations in CVP analysis
Sales - Variable Costs =
Contribution Margin - Fixed Cost =
Income
Pre-tax income from sales units, CM unit, and fixed cost
(sales units * CM unit) - fixed costs = pre-tax income
Break-even point in # of units for weighted average contribution margin
(fixed cost + total pre-tax income (always 0 if basing on break-even)) / contribution margin per unit
of units to sell for each product line based on break-even point
“1. begin with weighted average contribution margin per unit formula above
2. break-even point in # of units * (# units in product line / total # of units in all product lines)”
Cost per unit using fixed cost and # units produced
fixed cost / # units
Three assumptions made in CVP analysis.
- constant fixed price
- constant variable price
- constant sales price
Profit increase using degree of operating leverage and sales increase
operating leverage * sales increase
COGS for Merchandiser
Beginning Inventory +
Cost of Goods Purchased -
Ending Inventory
=COGS
COGS for Manufacturer
Beginning finished goods inventory + Cost of goods manufactured -
ending finished goods inventory
=COGS
Prime costs
Direct Materials + Direct labor
Conversion costs
direct labor + factory overhead
Cycle Time (CT)
process time + inspection time + move time + wait time
Cycle Efficiency (CE)
value-added time / cycle time
Cost of Goods Manufactured
Sum of direct materials used + direct labor + overhead costs
non-value-added time
inspection time + move time + wait time
value-added time
equals process time
conversion costs per equivalent unit
direct labor costs + factory OH costs per equivalent unit
Merchandise purchases budget in equation form
inventory to be purchased = budgeted ending inventory + budgeted cost of sales for the period - budgeted beginning inventory
How to compute number of dollars of inventory to be purchased for budget if merchandise purchases budget is expressed in units and only one product is involved
of dollars of inventory = units to be purchased * cost per units
Merchandise Purchases Budget spreadseet
Next month's budget sales (units) * Ratio of inventory to future sales (*%) =Budget ending inventory (units) \+ budgeted sales = required units of available merchandise - beginning inventory (units) = units to be purchased ... budget cost per unit (* units to be purchased) =budgeted cost of merchandise purchases
selling expense budget spreadsheet formula
budgeted sales * sales commission percent = sales commissions \+ salary for sales manager = total selling expenses
cash budget
beginning cash balance + budgeted cash receipts - budgeted cash disbursements = preliminary cash balance
contribution margin format for flexible budget layouts?
- format beginning with sales followed by variable costs and then fixed costs
- both expected individual and total variable costs are reported and then subtracted from sales
- difference between sales and variable costs equals contribution margin
- expected amts of fixed costs listed next
- expected income from ops before taxes
cost variance (CV) equation in simple format
CV = actual cost (AC) - standard cost (SC)
Notes:
AC = Actual quantity (AQ) * Actual Price (AP)
SC = Standard Quantity (SQ) * Standard Price (SP)
Actual Cost (AC) formula
actual quantity X actual price
Note: the input (material or labor) used to manufacture the quantity of output
standard cost (SC) and what is it
standard quantity (SQ) x Standard price (sp)
note: the expected input for the quantity of ouput
Formula for Cost Variance or Total Variance
Price Variance (PV) + Quantity Variance (QV)
Note: PV = (AQ * AP) - (AQ * SP) QV = (AQ * SP) - (SQ * SP) AQ = actual quantity AP = actual price SP = standard price SQ = standard quantity
Formula for Price Variance with four factors
(AQ * AP) - (AQ * SP)
Note: AQ = actual quantity AP = actual price SP = standard price SQ = standard quantity
Formula for Quantity Variance with four factors
(AQ * SP) - (SQ * SP)
AQ = actual quantity AP = actual price SP = standard price SQ = standard quantity
Price variance formula with three factors
(AP - SP) * AQ
Note: AQ = actual quantity AP = actual price SP = standard price SQ = standard quantity
Quantity variance formula with three factors
(AQ - SQ) * SP
Note: AQ = actual quantity AP = actual price SP = standard price SQ = standard quantity
What can the labor cost variance be divided into?
rate (price) variance and efficiency (quantity) variance
Formula for actual labor cost
AH * AR
Note:
AH = Actual Direct Labor Hours
AR = Actual Wage Rate
Formula for standard labor cost
SH * SR
Note:
SH = Standard Direct Labor Hours for Actual Output
SR = Standard Wage Rate
How find the Actual Hours at Standard Rate to compute variance from standard cost
AH * SR
Note:
AH: Actual Direct Labor Hours
SR: Standard Rate (wage)
Formula for computing rate variance in labor hours
AC - (AH * SR)
Note: AH = Actual Direct Labor Hours AR = Actual Wage Rate SH = Standard Direct Labor Hours for Actual Output SR = Standard Wage Rate
Formula for labor efficiency variance
(AH * SR) - Standard Cost
Note: Standard Cost = SH * SR AH = Actual Direct Labor Hours AR = Actual Wage Rate SH = Standard Direct Labor Hours for Actual Output SR = Standard Wage Rate
Formula for Total Direct Labor Variance
Rate Variance - Efficiency Variance
Note: AH = Actual Direct Labor Hours AR = Actual Wage Rate SH = Standard Direct Labor Hours for Actual Output SR = Standard Wage Rate
What are the 4 general steps to establishing the standard overhead cost rate
- use same cost structure used to construct flexible budget at end of period
- identify the diff overhead cost components and classify each as variable or fixed
- select level of activity (volume) and predict total OH cost
- divide total by allocation base to get standard rate
overhead cost variance formula (OCV)
OCV = Controllable Variance - Volume Variance
Note:
Controllable Variance: actual OH - budgeted OH
Volume Variance: budgeted OH - applied OH
formula for fixed overhead rate
fixed OH $ / budgeted DL hours
formula for variable Overhead rate
variable OH $ / budgeted DL hours
variable cost flexible budget
(VC / predicted units) * actual units
Direct Materials Cost Variance
Price Variance - Quantity Variance
or Actual Units at Actual cost - Standard Units at Standard Cost
Note:
Price Variance= (AP - SP) * AQ
Quantity Variance = (AQ - SQ) * SP
Direct Labor Cost Variance
Rate Variance - Efficiency Variance
Note:
Rate: (AR - SR) * AH
Efficiency: (AH - SH) * SR
Variable OH Cost Variance
Spending Variance - Efficiency Variance
Note: Spending Variance: (AVR - SVR) * AH Efficiency Variance: (AH - SH) * SVR AVR: SVR:
Fixed OH Variance
Spending Variance - Volume Variance
Note:
Spending Variance: actual OH - budgeted OH
Volume Variance: budgeted OH - (SH * SFR)
SH:
SFR:
actual price (AP)
total actual direct materials (DM) / actual direct materials (DM) quantity
standard quantity (sq) total
actual units x standard quantity units
actual rate:
actual total labor / actual labor hours
standard hours overall
actual units * standard labor hours (units)
Labor rate variance
(AR - SR) * AH
Note:
Actual Rate
Standard Rate
Actual Hours
Labor Efficiency Variance
(AH - SH) * SR
Note:
actual hours
Standard hours
standard rate
applied overhead
total overhead cost per hour * actual base rate (labor hrs, mach hours, etc)
planned hours per unit
planned hours of direct labor / planned units to be produced
total overhead variance
actual overhead - standard oh
controllable variance
actual overhead - applied overhead
fixed overhead volume variance
budgeted fixed overhead - fixed overhead cost applied
Direct materials quantity variance
or
direct material usage/efficiency variance
( SQ − AQ ) × SP
Direct materials Price Variance
or
direct material spending/rate variance
( SP − AP ) × AQ
total direct material variance
direct material usage variance + direct material price variance
or
standard cost - actual cost
Sell or process analysis
Revenue if process - revenue if sold as is = incremental revenue - cost to process = incremental net income
scrap or rework analysis
sale of reworked units - less costs to rework defects - less opportunity cost of not making new units = incremental net income.
Compare against net income for scrap.
make or buy analysis
Make:
direct materials/unit + direct labor/unit.
compare against purchase price for buying item. Incremental cost needs to be less than purchase cost.
sales mix analysis formula w/unlimited demand and products use different inputs
selling price per unit - variable cost per unit = contribution margin per unit / machine hours per unit
greater contribution margin should be produced
sales mix analysis formula w/unlimited demand and products with same inputs
selling price per unit - variable cost per unit = contribution margin per unit… go with one that has higher contribution margin per unit.
net purchase price of equipment formula
total cost - any trade-in allowance/cash receipt for old equipment
eliminate or continue product
identify expenses as avoidable or unavoidable, then avoidable expenses must be more than current sales for that product
replace or keep equipment
cost to buy new machine (neg) + trade in + reduction to variable manufacturing costs = total increase () or decrease + net income
sales mix analysis formula w/limited demand and products with different inputs
figure which has the highest contribution margin per input, make the max of those, then diff of other
accounting rate of return
(after-tax net income) / (average investment)
NOTE:
average investment = investment’s (beg value + end value) / 2
payback period
cost of investment / annual net cash flow
net present value of investment
Step 1: find present value of annual net cash flow (income+depreciation)*PV of annuity % (found on chart)
Step 2: PV of annual net cash flow - cost of investment
Step 3: answer above must be greater than % needed fo move forward with investment
NOTE: when calculating cash flow * PV, multiple the PV of 1 factor by each useful life year by income, multiply the salvage value by the last useful year,
profitability index
(net present value of cash flows) / investment cost
internal rate of return
step 1: compute present value factor for investment project (amount invested/net cash flows)
step 2: identify discount rate (IRR) yielding present value factor (usually use chart, search down the applicable year row for the rate matching your NPV)
answer: the found discount % rate on the chart implies the IRR is at/approx that percentage
break-even time (BET)
cash flows * present value of I 1 needed precentage = present val of cash flows
pres val of cash flows subtracted from cost over years to find break even time
Return on investment or investment center return on total assets
investment center net income / investment center averge invested assets
OR
profit margin * investment turnover
OR
((investment center net income * investment cneter ales) * (invesmetn center sales / investmetn center averagessets))
investment center residual income or economic value added (EVA)
investment center net income - target investment center net income
What is the IRR Decision Rule?
in order for a project to create value in the company, IRR must be greater than the required return.
What is capital-constrained environment?
when a firm does not have enough capital to fund ALL projects, resources are limited
What is a conventional cash flow?
cash flow that begins with a negative initial outlay followed by series of positive inflows
