Section 5 Operations Management Flashcards
Return on Anything
Net Income / (Whatever you want the return on)
NI / Average Total Assets
NI / Average Shareholder’s Equity
NI / Total Investment
Economic Value Added
EVA = Net Operating Profit After Taxes - (Invested Capital * Weighted Average Cost of Capital)
OR
NOPAT - Required Return
Breakeven Formula
Fixed Costs / Contribution Margin
To Calculate a Goal
Fixed Costs + Target Profit / Contribution Margin
Contribution Margin = Sales - Variable Costs
Types of Variances
Price Variance - Actual Quantity
Rate Variance - Actual Quantity
Have Price Need to Add Quantity
Usage Variance - Standard Rate
Efficiency Variance - Standard Rate
Have Quantity of Hours/Materials Need to Add Price
Short Formula =
Difference * (Units or Price) = Variance in Units or Price
The general formula for calculating a variance is:
Standard amount - actual amount = difference or variance
Then take this difference, and:
If it is a price or rate variance, multiply the difference by the actual quantity. In this case you’d be finding the difference in prices or rates and multiplying it by the actual quantity.
If it is a usage or efficiency variance, multiply the difference in quantity by the standard rate. In this case you’d be finding the difference in labor hours or quantities used and then multiplying the difference by the standard rates.
Labor Rate Variance - Standard Hourly Wage vs Actual Hourly Wage multiplied by the Actual Quantity
Equivalent Finished Units
Weighted Average EFU = Units Transferred Out + (% Completed Ending Inv)
FIFO EFU = Beg Inv * %Completed in Current Period + Units Started and Completed + % End Inv Completed
Cost Per EFU
Weighted Average = (Beg Inv + Current Costs) / EFU
FIFO = Current Cost / EFU
Absorption Costing vs Variable Costing
Absorption costing entails allocating fixed overhead costs to all units produced for an accounting period.
- Used for External Reporting
- Inventory Includes Fixed OH
- GAAP
Variable costing includes all of the variable direct costs in COGS but excludes direct, fixed overhead costs.
- Used for Internal Purposes
- Not GAAP
- Inventory only includes Variable Product Costs
Prime Cost vs conversion cost
Prime = DM + DL
Conversion = DL + MOH
Product Cost = DM + DL + MOH
High Low Method
High Cost - Low Cost
High Quantity - Low Quantity
Difference of Cost / Difference of Quantity = Price per Item
Margin of Safety
The margin of safety is actual sales minus break-even sales (BES).
BES equals the sum of variable costs (VC) and fixed costs (FC).
Gross Margin vs Contribution Margin
Gross Margin = Sales - COGS
Contribution = Sales - Variable Costs
CM in Units = Fixed Costs / CM
CM in Price = Fixed Costs / CM%
Nothing includes Selling Costs!
2, 3 &4 Way Variance
4 Variance Model = Variable Overhead Spending Variance + Variable Overhead Efficiency Variance + Fixed Overhead Spending Variance + Production Volume Variance
3 Variance Model = Spending Variance (Variable Overhead Spending Variance + Fixed Overhead Spending Variance) + Variable Overhead Efficiency Variance + Production Volume Variance
2 Variance Model = Controllable Variance (Variable Overhead Spending Variance + Fixed Overhead Spending Variance + Variable Overhead Efficiency Variance) + Uncontrollable Variance (Production Volume Variance)
Future Price of Security (Gordon Growth Model)
D0 = Dividend *((1 + Growth Rate) To the Power of the year of price desired)
GGM = D0 * (ERR - Growth Rate)
Balanced Scorecard
How to Improve
FINANCIAL
LEARNING & Growth
Internal Business Process
Customer
Direct vs Step Method (Intercompany Sales)
Direct - Do not charge other departments
Direct - All Overhead and Variable selling Costs are Period Costs.
Step - Charge other departments what it normally costs for the product/service
