MA & Finance Equations Flashcards
Price or rate variance
(AP - SP) x AQ
AQ = actual quantity purchased
Quantity/Usage/Efficiency Variance
(AQ -SQ) x SP
AQ = actual quantity used
Static budget variance
Flexible budget variance + sales volume variance
(AQ x AP) - (SQ x SP)
AQ/SQ= actual/standard volume of units
Fixed cost variance
Actual cost - budgeted cost
Flexible budget variance
(AP - SP) x AQ
AQ = actual quantity of outputs
Rate variance + efficiency variance
Sales volume variance
(AQ sold - SQ) x SP or CM
Sales mix variance + sales quantity variance
Sales quantity variance
(Budgeted unit sales - unit sales at standard mix) x SP or CM
Market share variance + market size variance
Sales mix variance
(AQ sold at actual sales mix - unit sales at standard mix) x Std CM/unit
Market share variance
Actual market size in units x (actual market share % - budgeted market share %) x Std CM/unit
Market size variance
(Actual market size in units - budgeted market size in units) x budgeted market share x std CM/unit
Lease VS buy
May need to calculate implicit rate for the lease
Use implicit rate in the lease to calculate PV if it lower than the company’s incremental borrowing rate
Compare present value after tax costs of the lease versus cost to purchase less tax shield
Break Even Analysis
Fixed costs/CM
Fixed costs includes depreciation on initial investment but doesn’t include initial investment. Sunk costs not included.
Valuation - Capitalization of Earnings
- Determine type of earnings to be capitalized (EBITDA, earning before interest and tax, net profit after tax, free cash flow)
- Normalize above type of earnings
- Apply capitalization rate.
Does not have deduction of liabilities
Interest rate calculation in excel
Present value should be negative.
Rate computed will be the nominal rate for the length of period used in calculation.
Must be multiplied by number of periods in a year to get nominal annual rate. Nominal annual rate is then used to calculate effective annual rate.
Effective annual rate = [1 + (nominal annual rate/# of compounding periods)}^# of compounding periods)
Weighted average cost of capital (WACC)
WACC = [after tax cost of debt x (market value of debt / total capital)] + [cost of equity x (market value of equity/total capital)
After tax cost of debt = cost of debt x (1 - tax rate)
cost of equity = risk-free rate + [beta x (market return - risk free rate)]
beta is the measure of amount of volatility or systemic risk involved in a specific investment in comparison to the market
Beta = 1; returns on a share are perfectly correlated with returns on the market
Beta > 1; shares are more volatile or sensitive
if shares are X% more sensitive then Beta would be 1.X
market value of equity = market value of a share x number of shares
market value of equity does not include retained earnings or contributed surplus.
total capital = market value of debt + market value of equity
Process costing - weighted average method
Step 1: compute units to be accounted for: Beginning WIP units + units started into production
Step 2: compute output in terms of EU:
DM EU = # completed units x 100% + # units in ending WIP x % materials complete
Conversion EU = # completed units x 100% + # units in ending WIP x % conversion complete
Step 3: compute costs to account for (do for material, conversion and total added together)
Costs in beginning WIP + costs added in current period
Step 4: compute cost per EU
DM Cost per EU = total DM costs to account for/ DM EU
Conversion Cost per EU = total conversion costs to account for/ Conversion EU
Step 5: assign total costs to units completed and to ending WIP
DM/conversion Cost per EU x DM/Conversion EU
For steps 2 to 5 set up excel as:
Columns: relevant total (units or cost), DM (EU or cost) , Conversion (EU or cost)
do separate row for 100% complete and WIP beginning or ending
Process costing - FIFO method
Step 1: compute units to be accounted for: Beginning WIP units + units started into production
Step 2: compute output in terms of EU:
DM EU = units in beginning WIP x % to complete + # started and completed units x 100% + # units in ending WIP x % materials complete
Conversion EU = units in beginning WIP x % to complete + # started and completed units x 100% + # units in ending WIP x % conversion complete
Step 3: compute costs to account for (do for material, conversion and total added together)
Costs in beginning WIP + costs added in current period
Step 4: compute cost per EU
DM Cost per EU = DM costs added in current period/ DM EU
Conversion Cost per EU = conversion costs added in current period/ Conversion EU
Step 5: assign total costs to units completed (beginning WIP and started & completed) and to ending WIP
DM or conversion Cost per EU x DM/Conversion EU
Costs in beginning WIP directly assigned to beginning WIP and above cost just allocated based on EU to complete.
For steps 2 to 5 set up excel as:
Columns: relevant total (units or cost), DM (EU or cost) , Conversion (EU or cost)
do separate row for 100% complete and WIP beginning and/or ending
Activity based costing
Define cost pools & assign a driver to each based on how the specific pool’s costs are created
Steps:
1. Identify the cost objective (individual product line, individual or type of customer)
2. Identify activities and cost drivers - these become the cost pools (ex: ordering, admin, machining)
3. assign indirect costs to cost pools
4. calculate activity rates - divide total indirect costs in cost pools by volume of the cost driver
5. assign indirect costs to cost objectives - multiply activity rate by volume of activity for cost objective. each cost pool is included as its own line under indirect costs in the departmental income statement
Spoilage - Job Costing
Normal Spoilage - charge to OH
Normal Spoilage specific to a particular job - cost assigned to particular job
Abnormal spoilage for out-of-control operations: charge to the period
Abnormal spoilage attributable to a particular job: charge to the job
Spoilage - process costing
Normal spoilage - include in costs transferred out (increases the cost of good units)
Abnormal spoilage - charge to the period, cost removed from inventory
Joint product costing
Physical output method:
- joint costs allocated based on physical measure like volume, weight etc
- have to use same physical measure for all products
Sales value at split-off point method:
- joint costs allocated based on relative sales value at the split-off point
- can’t be used when some products are not sold at the split-off point
Net realizable value method:
- joint costs allocated based on relative total NRV
- NRV of each product = final selling price - separate costs
Production waste & byproducts before the split-off point:
- cost or NRV from sale included in joint costs
Production waste & byproducts after the split-off point:
- included in separate costs
Service department cost allocations
Direct allocation method:
- service department costs allocated to operating departments based on quantity of an allocation base w/o considering allocation of costs from any other service departments
Step-down allocation method:
- service department costs allocated to both operating and service departments, beginning with the service department that provides the most services to other departments. Costs for each service department are allocated one at a time.
Reciprocal allocation method:
- service department costs allocated simultaneously from all service departments to both operating and service departments
- need to use two equations for 2 service departments and use algebra to solve for total service department cost with allocation of other service department costs.
example:
service department A has $50,000 costs, uses 15% of service department B
service department B has $30,000 costs, uses 20% of service department A
A = 50,000 + 0.15B
B = 30,000 + 0.2A
NPV calculation in excel
=initial investment + NPV(rate, cell range)
Cell range should not include time 0 (initial investment) since that amount does not need to be discounted.
Cell ranges is each year of cash flows or earnings.