MI Formula To Learn Flashcards
Periodic weighted average price
Cost of opening inventory + Total cost of receipts in period
/ Units in opening inventory + Total units received in period
OAR (overhead absorption rate)
Production overhead / Activity level
Overhead absorbed
Actual activity (eg labour hours) × Predetermined OAR
Predetermined OAR
Budgeted overhead / Budgeted activity level
Difference in marginal and absorption costing profit
Change in stock in units × OAR per unit
Inventory turnover period
Average inventory / Cost of sales x 365
Rate of inventory turnover
Cost of sales / Average inventory
Receivables collection period
Average receivables / Annual sales revenue x 365
Payables payment period
Average payables / Annual purchases x 365
Current ratio
Current Assets / Current liabilities
Quick (liquidity/acid test) ratio
Current Assets - Inventories / Current Liabilities
Calculating the cash operating cycle
Raw materials holding period + Average production period + Average inventory-holding period + Average receivables collection period - Average payables payment period = Length of cycle
Economic order quantity (EOQ)
Sq root of 2CoD /Ch where
D = Annual demand in units
Co= Cost of placing an orde
Ch= Annual cost of holding one unit in inventory
Return on investment (ROI)
Controllable divisional profit / Divisional capital employed x 100%
Profit should be before interest and tax. Capital employed can be the opening value or average value of opening and closing capital employed. ROI enables performance in different divisions to be compared or a new investment to be appraised.
Residual income (RI)
Controllable profit – Imputed interest charge on controllable investment
Breakeven point (BEP
Contribution required to breakeven / Contribution per unit
Breakeven point (BEP
Total fixed costs / Contribution per unit
Contribution ratio
Contribution per unit / Sales price per unit x 100%
Breakeven revenue
Contribution required to break even / Contribution ratio
Breakeven revenue
Fixed costs / Contribution ratio
Margin of safety
Budgeted sales – Breakeven sales
Margin of safety %
Budgeted sales – Breakeven sales / Budgeted sales x 100%
Sales volume to achieve target profi
Fixed Cost + Required Profit / Contribution per unit
Accounting rate of return (ARR) 1
Average annual accounting profit / initial investment x 100%
Accounting rate of return (ARR) 2
Average annual accounting profit / Average investment x 100%
the average investment is calculated as 1/2 (initial investment + final or scrap value)
Compounding
The formula for the future value or terminal value of an investment plus accumulated interest after n time periods is V =
V = X(1 + r)n
where V is the future value or terminal value of the investment with interest
X is the initial or ‘present’ value of the investment
r is the compound rate of return per time period, expressed as a decimal (so 10% = 0.10, 5% = 0.05 etc)
n is the number of time periods
Usually r is an annual rate of return
and n is the number of year
Discounting formula to calculate the present value (X) of a future sum of money (V) at the end of n time periods is
is X = V × 1/(1+r)n.
perpetuity
The present value of a perpetuity of £a per annum, starting in 1 year is calculated as
cash flow x 1 / r
where r is the annual discount rate
IRR interpolation formula
IRR = a + NPVa / NPVa - NPVb (b-a)
where a is the first discount rate giving NPVa
(note: this should be the lower discount rate which gives the higher NPV)
b is the second discount rate giving NPVb
Profit Margin
A percentage of sales price. E.g a profit margin of a good costing 80 to make and 100 to sell is 20%; profit/sales price
Profit Markup
A percentage of the cost of the good. E.g a good which cost 80 to make with a 20% mark up would sell for 96.
Profit 1
Contribution - FC
Profit 2
TR - TC
