CVP Analysis + Pricing Decisions
How to determine the mark-up %?
MP % = (ROI + Remaining items not in cost)/cost
What are relevant costs?
Costs that...
1. Occur in the future
2. Different for each alternative
Name all of the operating budgets.
1. Sales Budget
2. Production Budget
3. DM, DL, MOH Budgets
4. S&A Budget
5. Budgeted Income Statement
Type of accounting where it involves accumulating & reporting costs (revenues) on basis of manager who can directly control them.
What is responsibility accounting?
What are standard costs?
Bonus: What are the types?
Predetermined costs or target costs that should be incurred under efficient operating conditions.
Presented on unit cost basis
Types: Ideal & normal
What's the formula for minimum transfer price per unit?
Variable cost per unit to be transferred + opportunity cost per unit
Name all of the decisions that require incremental analysis.
Bonus: Name which ones use the general format
1. Accept or reject special offer*
2. Discontinue a product/service line*
3. Sell or further process a joint product*
4. Determine optimal mix of products (with resource constraints)
5. Make or buy
6. Retain or replace equipment
What's the required production in units formula? (Used in the production budget)
Budgeted Sales Unit + Desired Ending FG Units - Beginning FG Units = Required Production Units
What's the difference between static & flexible budget?
Static budget - based on pre-specified level of activity.
Flexible budget - reflects a range of activities of division, unit, etc. Flexible for variable expenses.
How do you calculate quantity variance for DM or DL?
Name the 3 techniques used to find the Break-even Point.
2. CM Technique: FC/Unit CM or CM Ratio
3. Graphical Technique: Interception of Total Cost Line & Revenue Line
When a company has resource constraints, which product should they produce more?
The one with the highest CM per unit of limited resource.
Which budget can I use to find COGS?
No, don't say the budgeted income statement.
Sales Budget - use expected unit sales
What's the controllable margin?
It's Contribution Margin - Controllable Fixed Costs.
Excess of contribution margin over controllable fixed costs. Gives best measure of manager's performance in controlling revenues & costs.
What are some reasons for unfavourable direct labour price variances?
Name at least 2
1. Union contracts
2. More experienced workers
3. Overtime
4. Standards haven't reflected negotiated increase in wages.
What does the CVP analysis assume?
1. Costs can be divided into fixed & variable components
2. Total costs & total revenue are linear
3. Changes in activity are the only factors that affect costs
4. Inventory levels are constant
What would be relevant information when a company's deciding to retain or replace equipment?
1. Cost of new machine
2. Remaining useful life of old machine
3. Scarp value of old machine
4. Selling price of old machine
5. Variable manufacturing (operating costs) of machines
What are the benefits of budgeting?
Name at least 3
1. All levels of MGMT are forced to plan ahead.
2. Gives definite objectives for evaluating performance at each level of responsibility
3. Creates an early warning system for potential problems
4. Facilitates coordination of activities within business
5. More awareness of company's overall operations
6. Motivates
What's the Dupont method?
ROI = Op. Income or Ctrl M/Avg Operating Assets
Which becomes Profit Margin x Asset Turnover
Profit Margin: Op. Income/sales
Asset Turnover: Sales/Avg Operating Assets
Draw the general variance analysis format chart for finding DM or DL variances.
Again, I can't draw here.
How would you find the break even point in dollars when the company sells more than 1 product (using sales mix)?
1. Get weighted average CM ratio - e.g. sales mix% in dollars x CM as % of sales...
2. Break even in $ = FC/Weighted CM Ratio
Draw out the general format for an incremental analysis.
It costs $20 to upload pictures here :0
What is participative budgeting & what are its pros + cons?
Budgetary approach that starts with input from lower-level managers & works upward so that managers at all levels participate.
Pros: More accurate budget estimates, makes goals seem achievable, lower level see things as fair
Cons: Time consuming & costly, can lead to budgetary slack
What are the principles for performance evaluation?
1. MGMT by exception - only looking at material & controllable differences.
2. Behavioral principles
3.Reporting principles
How do you calculate the efficiency variance?
Comes from variable MOH.
(Actual Hrs x Standard variable rate) - (Applied variable OH)