Discussion: CVP
16
Batch 1
1. Cost Behavior Analysis
2. Cost Valuation Profit Analysis
3. Absorption & Variable Costing
14
Total Cost = F x C + VC
10
y= a
r
i
s
e
12
_______
run
1 2 3 4
+ bx
Least-Square
Regression Method
Dependent Y intercept Slope Independent
Variable
(Fixed Cost)
Variable
∑y=na+b∑x
∑ x y = a ∑ x + b ∑ x2
Slope (b) = rise = ∆Y
run ∆X
CM = F x C + P
S
-VC
CM
-F x C
P
x = F x C (increase)
CM/unit
x = unit increase
―Before interest & taxes‖
DOL = CM
OI
Indifference Point
1. Unit CM x Q – FC = Unit CM x Q – FC
∆% in profit = ∆% Sales x DOL
OI
MS = Sales – BES
MSR = MS
Sales
2. FC + (VC unit x Q) = FC + (VC unit x Q)
BES = F x C
CMR
CM x MS = P
Sales
Sales
Sales
BEP units = F x C
CMR x MSR = NPR
CM/unit
[
CMR x (Sales – BES) = P
CM – FxC = P
P=P
] [ ]
S CM/S x MS/S = P/S S
CMR x MS = P
Page 1 of 50
Discussion: Sales Mix
BEP units = F x C
WtdAvg CM/Unit *
products
x
y
CM/unit
xxx
xxx
Sales Mix Ratio
x%
x%
_____________
Wtd.Avg.CM/Unit xxx + xxx = xxx
Note: Cetiris Paribus  unless otherwise stated, other ―things‖ are constant
1. Degree of operating leverage
 Operating Leverage function = DOL = CM
Profit
 ∆%Sales x OLF (or) DOL = ∆ %P
MAS
BES = F x C
CMR
1. CMR = CM = ∆CM
Sales ∆Sales
BES = F x C + P
CMR
2. CMR = F x C = ∆F x C
BES ∆ BES
S
=
FxC
CMR- ROS

3. CMR = P = ∆ P
MS ∆ MS
Note: this can be use only
if the profit is a percentage.
Page 2 of 50
DM
DL
VPOA
FFOA
TMC
WIP
―Variable
Cost‖
CGM
AY
VY
∆Y
Sales
(CGS)
GP
P>S
<
E>B
<
A>V
<
xxx
xxx
xxx
∆Y = ∆ Inventory x FFOA/unit
FGI
- (Ope. Exp)
Period Cost
(fully expense)
―Variable Costing‖
NY
(P vs S)
(E vs B)
Example: Dep‘n.
Variable Costing
FFOA Dep‘n.
(factory equipment)
Absorption Costing - PRODUCT COST
- PERIOD COST
AC – DC
* ∆y fluctuating with sales
* ∆y fluctuating with production & sales
Page 3 of 50
Batch 2
Special Order [refer to your formulas]!!
4. Relevant Costing
5. Budgeting
6. Standard Costing
Continue or Discontinue
MS – 04
Make or Buy
Sales
VC
CM
- F x C (Direct) Traceable
Segment Margin
- F x C (Indirect) Common
Profit
Note: Add lang ng add!!
Make
Buy
DM
DL
VPOA
FFOA
HC
xxx
xxx
xxx
xxx
xxx
xxx*
xxx*
BEP = F x C
CM/unit
Product price
---
xxx
1. SD Point
xxx
xxx
*AC
*OC
xxx
xxx
xxx
Note:
Income sacrifice or
forgone if on make!
xxx
relevant cost to make
Best product
Combination
=
(+) => Continue
segment
(-) => Shutdown
segment
F x C – SD Cost
CM/unit
Note:
SD point > continue
Produce
SD point < discontinue
relevant cost to buy
= CM/unit
hours/unit
CM/hour or
[scarce resources]
Page 4 of 50
- WC
0
Sell or Process Further
A
Split - off Point
Joint Process 
C
1.
L NCL
NC
M
I
L
O
CL
F0
0
E
- COC
CB
―Joint Cost‖
FPC
1. Collection Platform!
Sale at Split off
Sales if Process further xxx
Less: FPC
(xxx)
Advantage/Disadvantage
Sale at Split-off
Sale
FPC
xxx
2.
xxx
xxx
March xxx
February xxx
January xxx
Process further
xxx
---
xxx
(xxx)
xxx
xxx
Total Collection xxx
*Best Product
Combination*
Note: [Refer to your formulas]!!
MS – OS – Budgeting!!
Quantitative
Budget = PLAN
MASTER BUDGET


Operating – IS
Financial – BS
Production Budget
DM by
- DM produced
DM end
DM used
DM used
DL
FOH
TMC
WIP by
TMC
- WIP end
CGM
Page 5 of 50
FGI by
CGM
- FGI end
CGS
Sales
CGS
GP
- Express
nY
100%
(65%)
35%
(25%)
10%
MS: 06 Standard Costing
[Refer to your summary]
FOH Vminus = AC–SC = AFOH–SFOH
DM Variance = AC – SC = (AP x AQ) – (SP x SQ)
MQV = ∆Q x SP = (AQ–SQ) SP
MPV = AQ x ∆P = AQ (AP–SP)
2 way
3 way
4 way
Con.Vol
AFOH
S.E.VOL
AFOH
Spending
BAAH
CON
Efficiency
BASH
VOL
SHSR
VOL
S.S.E.VOL
BASH
MPUV = AQused x ∆P
MPPV = AQpurchased x ∆P
SHSR
(SFOH)
DL Variance= AC – SC= (AR x AH)–(SR x SH)
LE V
= ∆H x SR= (AH–SH) SR
LR V
= AH x ∆R= AH (AR–SR)
FOH = fixedCost + slope (activity level)
PLAN
= BH = BFOH
OPERATION =AH = BAAH
CONTROLLING =SH = BASH
x


y = a + b‗x‘
if BASH ‗x‘= Standard Hours based on Actual
Production
if BAAH ‗x = Actual Hours based on Actual
Production
Page 6 of 50
Variable
Spending
Fixed
Spending
Efficiency
Volume
Unit
Capital Budgeting
1. Payback Period = Net Initial Cost of Investment
Amount Net Aler-Tax Cash (Inflows)
2. Bail-Out Payback Period = Net Initial of Investment
*Includes Salvage Value!
3. Accounting Rate of Return : Average Annual Net Income
Investment
4. Payback Reciprocal : Net Cash Inflows = _____1___________
Investment
Payback Period
Discounted Techniques
1.
–
PV of Cash Inflows
PV of Cash Outflows
Net Present Value
÷
=
PV of Cash Inflows
PV of Cash Outflows
Profitability Index
÷
NPV
=
Investment
NPV Index
2. Internal Rate of Return (IRR)
2.1
PVF for IRR = Net Investment Cost
Net Cash Inflows
Microeconomics
Ed = ∆% in Quantity Demanded = ∆% in Quantity Demanded ’ ∆ in Price
∆% in Price
Average Quantity
Average Price
Page 7 of 50
Ed >1 = Elastic
Ed =1 = Unit
Elastic/Unitary
Ed <1 = Inelastic
Batch 3
7. Responsibility Accounting
8. Balance Score Card & Accounting Based Cost
9. Quantitative Techniques
Controllable
1.  Direct Cost
Non-Controllable
2.  Indirect Cost – Non-Controllable
Performance Report
* Cost Center – Variance Analysis
* Revenue Center – Variance Analysis
* Profit Center – Variance Analysis
– Segmented Inc. Statements
* Investment Center – Variance Analysis
– Segment Inc. Statements
– EVA (Economy Values Added)
– Residual Income
– Return on Investment (ROA)
EVA = Operating after Tax – Required Income
Required Income = (Total Assets – Current Liab) + WACC
Residual Income = Operating Income – Required Income
Required Income + Operating Assets x Minimum ROI
Return on investment = Operating Inc/Operating Assets
= Margin x Turn Over
Operating Income x Sales
Sales
Operating Income
ROA
=
Net Income
Assets
ROS x ATO
=
Sales x Net Income
Assets
Sales
Page 8 of 50
Sales
-VCGS
Manufacturing CM
xxx
(xxx)
xxx
-Variable Selling Admin (xxx)
Contribution Margin
xxx
-Controllable Fixed Cost (xxx)
Short-Run Pref. Margin
xxx
-Non-Controllable Fixed Cost (xxx)
Segment Margin
xxx
-Allocated Fixed Cost
(xxx)
Profit/Net Income
xxx
MS-12 Discussion [Gross Profit Variance Analysis]
xxx
SVV
2009
xxx
COS (xxx)
Sales
GP
SPV
*
QF
xx
*
xx
*
PF
xx
=
2010
xxx
*
xx
=
(xxx)
xxx
Price
Factor
xxx
CVV
xxx
CPV
Volume factor
Cost Factor
PART 2: MS-07: Transfer Pricing:
[Upper Limit]
1. Maximum transfer Price = Cost of Buying from Outside Suppliers
(Selling Price-SP)
[Lower Limit]
2. Minimum Transfer Price = Variable Cost per Unit + Lost CM per Unit on Outside Sales.
= VC/unit + Total Contribution Margin to be lost
Total no. ―order unit‖ purchased!
Basis of Transfer Price
1. Cost Based Transfer Price
a. Variable Cost
b. Full Cost (NMC)
c. Full Absorption Cost
d. Cost Plus
2. Market Base & Transfer Price
a. Market Price (R=SP)
b. Modified (SP adjusted for my
allowance for discounts)
3. Negotiated Price
4. Arbitrary Price (No basis)
Service Cost Allocation
1. Direct Method
2. Step down
3. Reciprocal Method
Reciprocal Method (Mathematical Approach)
[A = 100 + .2B]
[B= 20 = .4A]
Direct Method
Step Down
A
B
X
Y
Total
xxx
xxx40
%
40%
20%
60%
A
A xxx
40/60
20/60
90%
B
xxx
70%
20%
A
(xxx)
70/90
20/90
B
(xxx)
Page 9 of 50
20%
B
X
xxx40% 40
60%
xxx40% xxx40%
xxx 60/80
Y
20
20%
xxx20%
xxx20/80
MS: 08 Activities Based Costing & Balance Score Card
STEPS IN IMPLEMENTING ABC
1. Perform process Value analysis (Value Added Activity & Non Value Added Activity)
2. Identify Cost Drivers (Activities) Cost Pools & Activity centres.
3. Calculate Predetermined Overhead Notes
*Predetermined OH Rate = Est. OH COST
Est. Activity level
4. Allocate the OH Cost to the products on the basis of predetermined rates.
Manufacturing Cycle Efficiency
Receipt of
o
Order
Start of
o
Production
Shipment
o
of goods
Delivery Cycle Time = wait time + [Process time + Inspective Time + Move Time +‖Queue Time‖
=‖Manufacturing Cycle‖ (Throughput Time)]
Delivery Cycle (Lead Time)
Delivery Cycle Time = wait time + Manufacturing Cycle
Manufacturing Cycle = PT +IT + MT+ QT
Manufacturing Cycle = Process Time
Efficiency Ratio Manufacturing Cycle
Percentage on NVA Activities = IT +MT+ QT
Manufacturing Cycle
Marketing Effectiveness
1. Sales Volume Variance = (AQ-BQ) B-CM/unit
2. Market Share Variance = (AS-BS) AS x BSP
3. Market Size Variance = (A Size-B Sales) BS x
Productivity Measures
BSP
Productivity = Output = Products
Input
DM, DL, FOH
Productive =
---
A. Operational Partial Productivity =
B. Financial Partial Productivity =
Units
DM, DL
Units
[Dm, DL x Cost/unit]
Units
DM + DL
Page 10 of 50
C. Total Productivity
=
MS: 09 PERT- CEM [Quantitative Techniques]
B





Events : A, B, C, D
Activities: A-B, B-D, A-C, C-D
Parallel : A-B & A-C, B-D & C-D
Series: A-B & B-D, A-C &C-D
Paths : A-B-D, A-C-D
A
D
C
Te= Expected Time
To= Optimistic Time
Tm= Most likely Time
Tp = Pessimistic Time
Te = To+ 4Tm+ Tp
6
PROBABBILITY ANALYSIS
1. Deterministic Approach base on most likely events [pat atom of probability]
(Mean) Mode]
2. Expected Value Approach: Consider
Everything! (Anything)
[Problem is Silent EVA]
LEARNING CURVE ANALYSIS

Note:
The commodities average time per units is reduced by certain percentage each time the
production doubles!

Incremental unit time (to time produce the last unit) is reduce when production doubles.
Units
xxx
?
x
Average Hours =
Total Hours
xxx
xxx
xxx
xxx
=
=
Multiply by: ―Learning Curve‖
Expression Curve
Page 11 of 50
Continuation: MS-09
Inventory Models:
EOQ = √
where:
or √
O- cost per order
D- Annual Demand in units
C- Carrying Cost
Carrying Cost = EOQ
2
Ordering Cost = D
EOQ
Total Cost = Carrying Cost + Ordering Cost
Average Inventory = O +EOQ + SS
2
Concept of Recorder Point:
Lead Time: period from the time an order is planed until such time the order is received.
 Normal (Average) Lead Time- usual delay
 Maximum Lead time – usual/normal lead time adds allowance for reasonable further delay.



Normal Lead time Usage =Normal Lead time x Average Usage
Safety Stock = (Max. LT-Normal LT) Average Usage
Reorder Point = Maximum Lead time x Average Usage
= Normal lead time Usage + Safety Stock
Economic Lot Size
ELS = √
Where: O= set-up cost
D= annual production requirement
C = cost of carrying units for 1 year
* How many units?
> Ordering Cost
> Carrying Cost
* Where to place?
> Stock-out Cost
> Carrying Cost
Page 12 of 50
Continuation: MS-09
Linear Programming
Objective: Maximize revenue
Minimize cost and expenses
Maximize Net Profit!
1. Objective Function
2. Identify Constraint Function
3. Optimal/Product Mix
a. Substitution
b. Test Coordinates
MS:10 Capital Budgeting
3 Factors
a. Net Investment
b. Cost of Profit
c. Net Returns

1. Net Investment
Cost
Cash Out
xxx
-
Savings
Cash In
xxx
(xxx) -Tax on Gain
-needed working capital
xxx -Tax loss/ tax shield
xxx
xxx
Accrual
xxx
Net Income
―Net Investment‖

Cash
Cash in xxx
- Cash out (xxx)
Net Cash Flows
2.
A. Operating Income (EBIT)
Interest %
EBT
Tax %
NIAT
Preferred Div (amount)
NI – C/S
xxx
(xxx)
xxx
(xxx)
xxx
(xxx)
xxx
EPS = Ny – Preferred Div.
Wtd Average C/S Outstanding
10. Capital Budgeting
11. Financial Management
12. Financial Statement Analysis
Page 13 of 50
2. Cost & Capital
Borrowed
Capital
A
CA
NCA
Inventory
Capital
L
Interest 5% x 80% = 4%
E
Dividends 10% x 20% = 2%
6%
1. MV over BV
2. Effective Rate over Nominal Rate
Sources:
Debt: Yield
Equity:
(P/S)
(C/S)
= Rf+b(Rf-km)
Div Yield = Div/Share
MP/Share
WACC = is minimum acceptable rate of return, desirable rate of return
Bail-Out ―Payback Period‖
Year 1 2
3
Net Investment
xxx xxx xxx
Cash Flow
xxx
Salvage Value
xxx
Decision Rules Acceptable

PB Period < Standards of Industry
Life ÷ 2

ARR > Cost of Capital
Note: You always consider of disposing the asset
at your end. [The same as payback period] Adjust
cash flows only]
Net Returns
* Net Cash Flow = Ny + Dep‘n.
Sales
- VC
* Net Investment = ―PB period‖ – ―Liquidating Concern‖
Net Cash Flows
CM
- F x C (cash)
* Net Income = ARR
Net Investment
– ―Profitability Concern‖
- Dep‘n
Profit
- Tax
Ny
Average Investment =
= NI
Average Investment
AI= Cost + SV/2
Page 14 of 50
Original Investment =
= NI
Original Investment
Capital Budgeting with consideration of Time
Value Method


1. IRR to solve
Cost of Investment
Ordinary PVF % =
NPV = PV of Cash Inflow – PV of Cash
Outflow
PI = PV of Cash Inflow ÷ PV of Cash
Outflow
Annual Cash Flow
2. Trial and Error on choices available
IRR = PV of Cash Inflow = PV of Cash Outflow
Decision Rules
IRR = NPV = O

PB pd ≤ 1. Industry Std
2. life ÷ 2

ARR
*Computation of Effective Rate

NPV Index = NPV ÷ Investment
Payback Reciprocal
≥
Cost of Capital
*Non Discount Method
PB pd =
Payback Period
life
1. PB pd ≤

2
2. Cash Inflow – Uniform

↑IRR = ↓ PVF
↓IRR = ↑ PVF

NPV
≥ 0
<

PI
≥ 1
<

IRR
> Cost of Capital
<
*Discount Methods
Page 15 of 50
MS: II Financial Management
Baumol Model (William) Cash Management
Optimal Cash
Cash Management Strategies
1. Accelerating Collection (Lockbox
System)
²(Annual Cash Requirement)
(Cost Per Transaction)
Balance (OCB)
Opportunity Cost of
Holding Cash
2. Slowing Disbursement (Playing Floats)
Total Cost of Cash Balance = °Holding Cost +°°
Transaction Cost
3. Redding Precautionary (Zero Balance
Accounts)
Idle Cash
°Holding Cost = Average Cash Balance x
Opportunity Cost
Concept of Float
Average Cash Balance = Optimal Cash Balance ÷
2
°°Transaction Cost = No. of Transactions x Cost
per Transaction
1. Types of Float
2. Positive Float (Disbursement)
3. Negative Float (Collection)
Number of Transaction = Annual Cash
Requirement ÷ OCB
-
Mail Float – Customer payments
mailed but not yet received by
seller.
-
Processing Float – Customer
payment received by the seller but
not yet deposited.
-
Clearing Float – Amount of
customers’ check that have been
deposited but have not cleared
yet.
Cash Conversion Cycle
Average Age Inventory
Average Collection Period
xx
xx
Operating Cycle
Average Buyout Period
xx
(xxx)
Cash Conversion Cycle
xxx
Page 16 of 50
Accounts Receivable Management
6. Manufacturing Resource Planning
(Various Areas)
7. Enterprise Resource Planning (All
Functional Areas)
8. ABC Classification System
1. Credit Selection and Standards
2. Credit Terms
3. Collection and Monitoring Program
1. Credit Selection and Standards
Short-Term Credit Financing





Character
Capacity
Capital
Conditions
Collection
-
A. Aggressive Financing Strategy
B. Conservative Financing
Strategy
2. Credit Terms





Working Capital Financing Policies
C. Maturity Financing Strategy
(Semi- Aggressive/ Semi –
Conservative)
Cash Discount
Credit Analysis
Collection Cost
Bad Debts Losses
Financing Cost
D. Matching Policy (Self
Liquidating)
Total Financing Requirement
Inventory Management
1. Just-in-Time (JIT) Production System
2. Fixed Order Quantity System
3. Periodic Review / Replacement
System
4. Optional Replenishment System
5. Material Requirement Planning
(Demand Forecast)
Page 17 of 50
-
Permanent Financing Requirement
(Minimum Operation
Requirement) - Fixed long term
assets
-
Temporary Financing Requirement
(Seasonal Operation Requirement)
- Permanent current assets
Factors of Considerations in Selecting Sources
of Short-Term Funds

Cost
Term Funds



Discounted
Interest
Sources of Short-
Availability
Credits
Influence
Requirement
Credits
Cost =
- Unsecured
FV – Interest
Discounted
Interest
Cost =
FV – Interest – CB
- Secured Loans
- Banking
Interest + Issue Cost
Cost of Commercial Paper =
FV – Interest-Issuance Cost
Cost of Short-Term Credit
-
Cost of Trade Credit with Supplier
Discount Rate
Cost =
Long-Term Financing Decision



360
x
100% - DR %
Credit Paid – Disc.
A
LTFD
Capital Structure
Financial Structure
Period
Capital Structure = Financial Structure (Total Assets)
– Current Liabilities
-
Cost of Bank Loans Effective
Annual Rate
W/o compensating
balance
Not Discounted
with compensating
balance
Not Discounted
Interest
Cost =
Required Increase in Assets
(Asset/Sale)
Interest
Cost =
Amount Received
→
in Sales x
Structure Increase in Liabilities →
(Liabilities/Sale)
in Sales x
Increase in R.E
Additional Fund Needed
FV – Compensating Bal.
Page 18 of 50
L
AFN
RE
Concept of Leverage
DOL = CM
or
EBIT
DFL = EBIT or
EBIT-Interest
DL = ∆% in EBIT
∆% in Sales
DPL = ∆% in EPS
∆% in EBIT
* Deduct Preferred div. (before to)
From EBIT, if my.
DTL = CM
EBIT- Interest
or
DFL = ∆% in EPS
∆% in Sales
DTL = DOL x DFL
Cash Break Down Point
CBP units = FC – Dep‘n
CM/unit
Page 19 of 50
Financial Statement Analysis
Ratio Used to Evaluate Long-Term Financial Position/Stability
Fixed Assets
Fixed Assets to Total Equity =
Total Equity
Fixed Assets (NET)
Fixed Assets to Total Assets =
Total Assets
Net Sales
Sale to Fixed Assets
=
Fixed Assets (NET)
CS SHE
B.V/ Share – CS
=
CS Outstanding
NIAT
Times Preferred Div. Earned
=
Preferred Dividend
Total Assets
Capital Intensity Rate
=
Net Assets
Net Income before tax & fixed changes
Times Fixed Changes End =
Fixed Changes + sinking fund payment
Page 20 of 50
Test of Over-All Short-term SOLVENCY or Short-term Financial Position
* Working Capital/Turn Over = Net Sales
Avg. Working Capital
* Diffusion Interval Ratio = Current Liabilities
Cash & Cash Equivalent
* Payable Turn Over = Net Purchases
Avg. Asset Payable
* Fixed Assets Long-term Liab = Fixed Assets
Long-term Liabilities
Ratios Indications of Income Position
* Rate of Return on Avg. Current Asset = Income
Avg. Current Assets
* Operating Profit Margin = Operating Profit
Net Sales
* Cast flow Margin = Operating Cash Flows
Net Sales
Page 21 of 50
(personal notes of grr-quash2)
Management Advisory Services
Sequence of topics (Accounting 8n)
4. Managerial Accounting
5. Cost Volume Profit & Break-Even Analysis
6. Standard cost & Variance Analysis
7. Variable & Absorption Costing
8. Differential Cost Analysis
9. Pricing Decisions
10. Responsibility Accounting
11. Budgeting
12. Financial Statement Analysis
13.Capital Budgeting
Managerial Finance ( Finance 3,4&5)
1. The role & Environment of Managerial Finance ( Chapter 1)
2. F/S & Analysis (Chapter 2)
3. Cash Flows & Financial Planning (Chapter 3)
4. Time Value of Money (Chapter 4)
5. Working Capital & Current Asset Management (Chapter 14)
6. Current Liabilities Management (Chapter 15)
7. The Cost of Capital (Chapter 11)
8. Capital Budgeting Cash Flows (Chapter 8)
9. Capital budgeting Technique (Chapter 9)
10. Hybrid & Donatives Security (Chapter 16) [including Chapter 17]
Page 22 of 50
11. Leverage & Capital Structure ( Chapter 12)
COST-VOLUME-PROFIT &
5 BREAK-EVEN ANALYSIS
SALES (Units x Sp per Unit)
Less: Cos
Gp
Less: Operating Expenses (Selling & Administrative Expenses)
Profit / less
Y = a + bx
Where: Y = Total Cost
Fixed Cost
= y=a
A = Total Fixed Cost
Variable Cost = y =bx
B = Variable Cost per Unit
Mixed Cost
= y = a +bx
X = Number of Units
Variable Costing I/S
Sales
- Variable Cost (Cost & Expenses ) [ Manufacturing , Selling ,Admin]
Contribution Margin
- Fixed Cost
Profit
Break Even Analysis
1. Equation Method Or Algebraic Approach
Sales – Variable Cost – Fixed Cost = Profit
Sales – Variable Cost + Fixed Cost + Profit
Sales = Units x Selling Price per Unit
Variable Cost = Units x Variable Cost per Unit
Page 23 of 50
CONTRIBUTION MARGIN OR FORMULA APPROACH
Sales in units
= Fixed Cost + Profit
Contribution margin per Unit
Break over sales in unit
= Fixed Cost
Contribution margin per Unit
Contribution Margin
= Sales –Variable Cost
Sales
= Variable Cost + Contribution Margin
Variable Cost Ratio
= Variable Cost
Sales
Contribution Margin Ration
= Contribution Margin
Sales
Sales
= Variable Cost
Variable Cost “Ratio”
Sales
= Contribution Margin
Contribution Margin Ratio
Contribution Margin – Fixed Cost = Profit
Contribution Margin
= Fixed cost + Profit
Sales
= Contribution Margin
Contribution Margin “Ratio”
Sales
= Fixed Cost + Profit
Contribution Margin “Ratio”
Break Over Sales in Peso
= Fixed Cost
Contribution Margin “Ratio”
BES IN UNITS & BES IN PESOS
Sales in Units
= Fixed Cost + Profit
Sales
= Fixed Cost + Profit
CM Ratio
Page 24 of 50
Margin of Safety
= Actual or
- Break – even Sales
Planned sales
Margin of Safety Ratio = Actual or
- Break – even Sales
Planned Sales
Actual or Planned Sales
= Margin of Safety
Actual or Planned Sales
MULTIPLE PRODUCT BREAK – EVEN ANALYSIS
PROCEDURE:
1.
Contribution Margin per Unit
x
xxx
Sales mix Ratio
x xxx
Composite Contribution Margin or
Contribution Margin per Sales
xx
Total Fixed Cost
2. No. of Sales =
Composite Contribution margin
MS in Units = Actual Sales – Break even paid Sales
SP
SP
= Margin of Safety ( in peso)
CMR
1
FC
2
=
BES
IF fc is constant:
3
AFC
= CM =
ABES
SALES
ACM =
ASALES
4
F =
MS
PR
MSR
or per unit
A Profit = CMR
A Sales
3. Products * Number of
Sales mix
X
Sales
CM/unit
APROFIT
Sales/unit
A in Unit Sales
Break Even
=
Ratio
SP
X
BE
=
points in Units
Page 25 of 50
point in peso
= cm/unit
7
VARIABLE & ABSORPTION COSTING
CONVENTIONAL FORMAT
VARIABLE COSTING FORMAT
(Absorption , full, Conventional)
(Direct Costing)
Sales
xxx (complete in volume
Sales
xxx (w/o volume
Less: Cos
(xxx)
Less: Variable Cost
(xxx) ( capacity or
analysis)
Gross Income
xxx
Contribution Margin
xxx fixed Volume)
Less: Operating Exp.
(xxx)
Less: Fixed Cost
(xxx)
Income (less)
xxx
Income [or Less]
xxx
UNITS PRODUCED
unit sold
DM
DL
COST
Cost of Goods
DM
PRODUCT
Sold
DL
COST
(change against sales)
FPOH
unit sold
Cost of Goods
PRODUCT
VPOH
UNITS PRODUCE
VFOP
Cost of
Cost of Inventory
Unsold unit
Sold
Unsold unit
Inventory
(Treated as Asset)
Note : From T.R. CPA
1.
>
P
2. [App liable first year & P = S]
= S
OI =
<
E
A
inventory x FFOA / unit
Reconciliation: Absorption Custom Income
xxx
>
Add: FFOH in Beginning Inventory
xxx
= B
Total
xxx
<
Less: FFOH in Ending Inventory
(xxx)

Variable Costing Income
xxx
= V
FFOH
Period cost ( Treated in full as expense during
<
the period of insurance)
Note : Variable Selling & Admin –
Fixed Selling & Admin
Page 26 of 50
8 Different Cost Analysis
A. Defining the Problem
B. Setting of Criteria
C. Identifying the alternative Courses
D. Determination of possible Consequences of Alternatives
E. Evaluating the Alternative
F. Choosing the best alternative and making the decision
Decision Including Alternative Choices
1. Make or Buy
Solution:
PURCHASE Price per Unit
xxx
Less: Relevant Manufacturing Cost / unit
DM
xxx
DL
xxx
VFOH
xxx
Fixed Available Fix Cost
xxx
(xxx)
Difference
xxx
Multiple no. Units’
xxx
Net Advantage (Dis advantage)
xxx
Of making [“Set“]
2. Accept or Reject Special Order
Special Selling Price
xxx
Less: Relevant Cost per unit
Variable Manufacturing
Selling
xxx
* xxx
Contribution Margin / Units
Multiple by no. of Units
Total Contribution Margin From Special Order
(xxx)
xxx
x xxx
xxx
Page 27 of 50
Less: Contribution Margin To be Lost by reducing sales
( xxx )
To regular Costumers
Incremental Profit From Special Order
xxx
Make
Buy
VMC
PP
AC
FC / SAVINGS
OC
XXX
XXX
ADVANTAGE / DISADVANTAGE
CONTINUE OR DISCONTINUE
OPERATING A BUSSINESS SEGMENT
Continue
Unit sales Price
xxx
Unit Variable cost
(xxx)
Contribution Margin
xxx
Fixed Cost
Profit / loss per Unit
Discontinue
(xxx)
(xxx)
xxx
xxx
Contribution Margin / unit x
Sales in Units
SALE OR PROCESSED PURTHER
Additional sale Value if processed Further ( a b)
Less: profit Processing Cost
xxx
(xxx)
Page 28 of 50
Profit / less per Unit if processed further
xxx
Multiple The no. of Units
x
Total less if Processed further
xxx
xxx
PRODUCT COMBINATION/ UTILIZATION OF SCARCE
RESOURCES
PRODUCT
1. Contribution Margin/unit
÷ Required
/unit
Contribution Margin/ Unit
A
B
C
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
Note: The product that has a greater Contribution
Per Hour is Transferred the one that is first
To be satisfied w/ regards to Production …….
1. Quantity to produce and sell (Market / Unit)
2. Quantity of products to make or buy
To input Product requirements
Page 29 of 50
Standard Cost & Variance Analysis
Material Variance
Labor Variance
Total Material Variance = MPV+MUQV
Material Price Variance = AQ (AP-SP)
Material Usage Quantity = SP (AQ-SQ)
Actual
Budgeted
AP x AQ
AQ x SP
Total Labor Variance = LPV+LQV
Labor Price Variance = AH (AR-SR)
Labor Quantity Variance = SR (AH-SH)
Standard
Actual
Budgeted
Standard
SP x SQ
AR x AH
AH x SR
SR x SH
Material Price Variance
Material Usage Quantity
Variance
= AQ (AP-SP)
= SP (AQ-SQ)
Total Material Variance = MPV + MUQY
Labor Price Variance
Labor Usage Quanity
Variance
= AH (AR-SR)
= SR (AH-SH)
Total Labor Variance = LPH + LQV
Page 30 of 50
FOH Variance Analysis
1. Total FOH Variance
= AFOH-SFOH
2. Controllable Variance
= AFOH-BASH
3. Volume Capacity Variance
= BHSA-SFOH [(NC-AC)
FR/ UNITS]
2.1 Spending Variance
Variance
= AFOH-BAAH
2.2 Variable Efficiency Variance
= BAAH-BASH, [(AH-SH) Vrate]
3.1 Fixed Efficiency Variance
= (AH-SH) Fixed Rate
Total Efficiency Variance,
= (AH –SH) Total Rate
3.2 Idle Time Capacity Variance
= (NC-AC in units) FR/Units
2.1.A Fixed Spending Variance
= (FAFOH-FBAAA)
2.1.B Variable Spending Variance
= (VAFOH-VBAAH)
FOH Variance [AFOH-SFOH] = Total Variance
Controllable Variance
[AFOH – BASH]
Spending Variance
Volume Variance = 2 Way Variance
[BASH-SFOH] or
Variable Efficiency
Variance
Volume Variance = 3 Way Variance
Fixed Spending Variable Spending Variable Efficiency Volume Variance = 4 Way Variance
Variance
Variance
Variance
[FAFOH-FBAAA] [VAFOH-VBAAH]
Controllable Variance Total Efficiency Variance
[AH-SH] Total Rate
Idle Time = Alternative 3 Way
Capacity Variance
[NC-AC hours] Fixed/hours
Alternative 4 way =
Controllable Variance Fixed Efficiency Variable Efficiency Idle Time Capacity
Variance
Variance
Variance
(AH-SH) Function/rate (AH-SH) Variable/rate
Page 31 of 50
I.
FINANCIAL STATEMENT ANALYSIS
Two Analyzing Financial Statements
1. Absolute
=
2. Percentage Change
=
MRV-MPPV
MRV-MPPV
MPPV
3. Trend Percentage
=
_MRV_
MPPV
VERTICAL ANALYSIS
Liquidity Ratio
1. Current Ratio
=
2. Acid Test Ratio =
Current Asset
Current Liability
Current Asset Inventory
Current Liabilities
ACTIVITY RATIO
Inventory Turn Over = ___CGS__
=
Average inventory
# of working days (360)
Average Sales Period
Receivable Turn Over = Net Credit Sales = # of working days (360)
Average A/R
Average Collection Period
Payable Turn Over = Net Credit Purchases = # of working days (360)
Average A/P
Average Payment Period
Operating Cycle = Average Sales Period +Average Collection Period
Cash Conversion Cycle =Operating Cycle –Average Payment Period
SOLVENCY RATIO
1. Debt Ratio = Total Liabilities
Total Assets
2. Equity Ratio = Total Equity
Total Assets
3. Debt to Equity = Total Liabilities
Ratio
Total Equity
4. 100% = Debt Ratio + Equity Ratio
5. Debt to Equity Ratio = Debt Ratio
Page 32 of 50
Equity Ratio
6. Time Interest = Operating Income or NIBIT
Earned Ratio
Interest
7. Fixed Payment =
Coverage Ratio
NIBIT + LEASE
Interest + Lease+ [Principal + Preferred Fix]
1 – Tax%
PROFITABILITY RATIO
1. GP Ratio
=
GP
Sales
2. OI Ratio
=
OI
Sales
3. Net Profit
Ratio
=
NIAT 
Sales
4. Net Profit
Ratio
=
NIACS
Sales
5. Return on
Sales
=
NIAT
Sales
6. Return on
Asset
=
NIAT
Average Asset
7. Return on
Equity
=
NIAT
Average Equity
8. Asset Turnover =
Sales
Average Asset
9. Equity Turnover =
Sales
Average Equity
10.
EPS
Page 33 of 50
=
NIACS
WACSO
MARKET TEST
1. Price Earnings Ratio = Market Price of CS / EPS
2. Dividend Yield = Div. per Share / Market Value per Share
3. Dividend Pay Out = Div. per Share / EPS
Puzzle Ring to Remember
D
(2) ——
M
—— (3)
⁄
E
DU POINT SYSTEM
1
ROE
→
E%__
↑ ROA
2
3
=
ROS
x
ETO
=
ROS
x
__E%__
ATO
→
4↑
ROS
ROE
= ____NIAT___
=
AVERAGE EQUITY
ROA
= ____NIAT__
AVERAGE ASSETS
__NIAT__ ●
ETO
_____SALES______
SALES
=
=
―ROSETO‖
AVERAGE EQUITY
__NIAT__ ●
______SALES______ =
SALES
AVERAGE ASSETS
Page 34 of 50
―ROSATO‖
GROSS PROFIT VARIANCE ANALYSIS
1.
2.
3.
4.
Sales Price Variance = (MRSP – PPSP) (MRQ)
Sales Quantity Variance = (MRQ – PPQ) (PPSP)
Cost Price Variance = (MRCP – PPCP) (MRQ)
Cost Quantity Variance = (MRQ – PPQ)(PPCP)
1.
2.
3.
4.
Sales Price Variance = MRS – [PPS x QF]
Sales Quantity Variance = MRS/PF – PPS
Cost Price Variance = MRC – [PPC x QF]
Cost Quantity Variance = MRC/PF- PPC
SVV
Prior
--------x
Qf
xxx
x
---Pf
Sales
xxx
x
n%
x
n%
xxx
COS
____
(xxx)
_____
x
n%
x
n%
(xxx)
______
GP
xxx
SPV
=
Price Factor
Recent
xxx
SVV
---------
xxx
---- Cost Function CPV
Volume Variance
-
PLANNING AND CONTROLLING FUNCTION –
∆% Sales x DOL = ∆% Income
A. Cost Volume Profit Analysis
B. Leverage Analysis
1. DOL=
% ∆ in OI
% ∆ in Sales
DFL= % ∆ in NIACS
% ∆ in OI
DTL= % ∆ in NIACS
% ∆ in Sales
NOTE: When there are two year given
2. DOL =
TCM
Operating Income
DFL= Operating Income
OI-Interest- PD
1-T%
NOTE: When only one year is given
Page 35 of 50
DFL= TCM
OI-Interest- PD
1-T%
III. Decisions Making & Evaluation System
Differential Cost Analysis
1. Total Cost Approach
2. Differential Analysis
Incremental Revenue
Less: Incremental Cost
Material
DL
Variable FOA
Incremental Profit
xxx
xxx
xxx
xxx
(xxx)
(xxx)
Make or Buy
Purchase Price
Less: Relevant Manufacturing Cost
DM
DL
VFOA
Difference X
Number of Units
Net Advantage of Make or Buy
xxx
xxx
xxx
xxx
(xxx)
xxx
* xxx
(xxx)
Accept or Reject w/ Excess Capacity
Special Selling Price
Less: Relevant Cost
DM
DL
VFOA
Marginal Profit/ Unit
x No. of Units Ordered
Incremental Advantage of
Accept or Reject the Offer
xxx
xxx
xxx
xxx
(xxx)
xxx
*xxx
(xxx)
Without Excess Capacity
Less: Contribution Margin
Lost by reducing sale
To regular costumers
Incremental Profit from Special Order
(xxx)
(xxx)
Page 36 of 50
Continue or Discontinue Operating a Business Segment
Continue
or
Discontinue
Units Selling Price
xxx
—○—
Units Variable Cost
xxx
—○—
CM
xxx
—○—
FC
(xxx)
(xxx)
Profit
xxx
(xxx)
Manila
Makati
Quezon
Total
Sales
xxx
xxx
xxx
xxx
Variable Cost
(xxx)
(xxx)
(xxx)
(xxx)
CM
xxx
xxx
xxx
xxx
-FC
Profit
Sell or Process Further
Additional/Sales Value if Process Further
xxx
Less:
(xxx)
Profit
Further Processing Cost
xxx
Page 37 of 50
Product Combination / Utilization of Scarce Resource
Steps:
1. Identify the scarce resource.
2. Identify the product utilizing the scarce resource.
3. Compute the CM per Scarce Resource.
CM=
CM
Resource needed per unit
4. Prioritize the product with the highest input of Contribution Margin per Scarce Resource.
(B) Short Term Financial Management
1.) Cash Management
ECQ= √
Conversion Cost =
Total Opportunity Cost = Average Cash Balance x Interest Rate
Accounts Receivable Management
Average Investment in A/R =
Turn Over A/R =
Powerful Tool
Turn Over of A/R =
=
Page 38 of 50
Additional Profit Contribution from Sales
(Increase x CM / Unit)
xxx
Cost in Marginal Investment in A/R
(Marginal Investment x Required Return on Equal Risk Investment)
(xxx)
Cost of Marginal Bond Debts
(Increase in Bad Debts)
(xxx)
Net Profit from Implementation of Proposed Plan
(xxx)
Note: This is about Relaxation of Credit Standards
Speeding-Up Collection of A/R
(w/ Cash Discount)
Additional Profit Contribution from Sales
xxx
(Increase in Units x CM/ unit)
Cost in Marginal Investment in A/R
(Marginal Investment x Required Return)
Cost of Marginal Bad Debts
(xxx) →depends if the
investment is to
spent or save
from the proposed plan.
(xxx)
Cost of Cash Discount
(Total Units x Save Price x No. of
Customers who Avail
(xxx)
Discount x Disc x Ratio)
Net Profit from Initiation of Cash Discount
______
(xxx)
Page 39 of 50
Credit Monitoring
1. Average Collection Period
2. Aging of A/R
Float
1. Mail Float
2. Processing Float
3. Clearing Float
Lock Box System
Investment Reduce = Sales x
Cash Concentration
1. Pool of funds for making cash investment – Short Term.
2. Improves trading and internal control of the firm cash.
3. Reduces idle cash balance.
Resource Invested
Inventory
= COS x
= xxx
+ Accounts Receivable = NCS x
= xxx
- Accounts Payable
= (xxx)
= Purchases x
Resource Invested
(xxx)
Inventory Management
Common Techniques for Managing Inventory
1. ABC Inventory System (Average According to Value of A/P)
2. Two Bin Method
3. EOQ
S = Usage in units per period
O = Order cost per order
C = Carrying cost per unit per period
Q = Order quantity in units
Page 40 of 50
*Order Cost
=Ox
*Carrying Cost = C x
*Total Cost
= Order Cost + Carrying Cost
*EOQ
=√
*Reorder Point = Days of load time x Daily usage
MSR
PR = C =
PR
CMR
=
Profit/sales
CM/SALES MS/SALES
x
5. Indifference Point:
1. (cm/unit multiply Q) –FC = (cm/unit multiply Q) – fe
2. fc+( vc/unit multiply Q) = fc+ (vc/unit multiply Q)
NOTE: Q = Indifference Point
FINANCE 3, 4, & 5
Chapter 3
3.1 Analysing the Firms Cash Flow
3.2 Financial Planning Process
3.3 Cash Planning Cash Budget
3.4 Profit Planning :Proforma Statements
Page 41 of 50
3.5 Preparing the Proforma I/S
3.6 Preparing the Proforma B/S
3.7 Evaluation to Proforma Statements
Chapter 4
4.1 The Role of Time Value in Finance
4.2 Single Amounts
4.3 Amounts
4.4 Mixed Streams
4.5 Compounding Profits { Annually }
More frequently than Annually
4.6 Special Application of Time Value
1. FVA n = PMT x (FX1Fain)
Pmt = FVN n divide FVIFAin dIvide FVIFAin
Note: Determining Deposits Needed to Accumulate a Future Sum
2. Note: Loan Ammortization (Solubule)
PVAn = PMT x (PVIFAin)
PMT = PVAn divide FVIFAin
3. Note: Finding Interest or Growth Rates
RVIFAin = PVAs divide PMT
REFER TO TABLE!!!
5.1 Risk & Return Fundamentals
5.2 Risk of a Single Asset
1.risk averse
2. risk indifferent
Page 42 of 50
3. risk seeking
CHAPTER 6 & 7
(wa pa discuss {studihan}
Chapter 8 (Capitals Budgeting)
Steps :
1.
2.
3.
4.
5.
Proposal Generation
Review & Analysis
Decision Making
Implementation
Follow -Up
Chapter 9 ( Techniques of Capital Budgeting
9.1 Overview of Capital Budgeting
9.2 Payback Period
9.3 Net Present Value [ NPV = Present Values of Cash Inflows – Initials/Investment]
9.4 Internal Rate of Return [ NRV = Initial Investment]
Note: Trials and Error !!!
9.5 Comparing NPV & IRR Techniques
Chapter 14:
14.1 Net Working Capital Fundamentals
14.2 Cash Conversion Cycle
14.3 Inventory Management
14.4 Accounts Receivable Management
14.5 Management Receipts & Disbursement ( Concentration Bank)
Page 43 of 50
Chapter 15 Margin Current Liabilities
15.1 Spontaneous Liabilities
Cost of Giving Up = CD/ 100% -CD multiply 365/N
Cash Discount ↓
CD : Stated Cash discount in percentage firms
N = Number of days that payment can be delayed by giving up cash discount.
Approximate cost Giving cash discount = CD multiply 365/N
15.2 Unsecured Sources of Short-Term Loans
Methods of Computing Interest = Interest/ amount borrowed
(at the end of the year effective rate)
Effective rate ( Discounted deducted in advance = Interest/amount borrowed-interest
F/S Analysis
϶Δ↑ = Index > 100%
϶Δ↓ = Index < 100%
1.
2.
3.
4.
5.
“X” = I/S Related Accounts/ average “x”
X to y = x/y
“x” Margin = ”x”/sales
Return on “x” =NY/”x”
Time “x” earned = + when x is deducted/ “x”
Note:
Ideally – Gross Sales
DY _ D _po
I/S – “ Net Sales “
M/ E
B/S – Total Assets
D/M multiply M/E multiply D/E
Page 44 of 50
I – P.O. = Rotation Ratio (Flowback)
Cash Flow
Sales – COS = GP – OE=OP – Interest {not included]=NPBT or “NBT”- % Tax=NPAT or NIAT
FREE CASH FLOW
Operating Cash Flow
- Gross Investment in Net Operating Assets
Change in Net Working Capital
NOPAT
+
Dep. & Ammortization
Change in LTA +Dep.
Technique:
OPERATING
INVESTING
FINANCING
xxx
xxx
xxx
Current cash = cash provided by operations/ average current liabilities
Debt ratios
Cash debt average ratio = cash provided by operation/ average liablities
Page 45 of 50
Cost and Cost Concept
I.
Cost Classification
A. Function
1. Manufacturing
DM
+ DL + FOH = TMC
DC
CC
2. Commercial ( Non-Manufacturing )
a. Selling and Marketing
b. General And Administrative
B. Behaviour
1. Variable Cost
2. Fixed
3. Hybrid/ Mixed
II.
Cost Segregation
1. Highest and Lowest Points Method
Total Cost
independent variable
y = a + bx
Activities/
Production
dependent variable
Y- Intercept
Fixed Cost
slope
VC per Activity
NOTE: The independent variable is the point where to determine the points to be used.
Page 46 of 50
2. Regression or Method of Least Squares
∑ x y = a ∑ x + b ∑ x2
[ ∑y = an + b ∑ x x
Material “Mixed” & Yield Variance:
MPV
Actual Quantity x Actual Mix x Actual Price
Actual Quantity x Actual Mix x Standard Price
MMV Actual Quantity x Standard Mix x Standard Price
AQ
x
AP
MYU
Material Price Variance
Standard Quantity x Standard Mix x Standard
Price
= Material Price Variance
(
AP – SP ) AQ
AQ
x
SP
Material Quantity/ Usage
Variance
= Material Mixed Variance
TA/ASIC
⇨
[―TAQ‖ x Average SP
= Material Yield Variance
SQ x Average SP
Page 47 of 50
NOTE: Average Selling Price = SP/unit of product x Mix/product
FOH Variance:
Cost Formula:
Y = FC + Variance/unit (x)
Budgeted based on Normal Equity
NOTE: This format is the most convenient for
solving BASH & BAAH
Other Formulas:
1. Volume Variance = (NC – AC in units) F rate/unit
2. Total Efficiency Variance = (AH – SH hrs.) Total OH rate/unit
3. Idle Time Capacity = (NC – AC hrs.) F rate/unit
Page 48 of 50
 Responsibility Accounting
- Systems of Accounting
Performance
Recorded and reported by level of responsibility
 Responsibility Centre
segment of organization
Perform single function
group of related functions
Responsibility Centre
Variance
Cost – Cost
Variance – AR-BR
Revenue – Revenue
Segment I/S
Profit – Revenue & Cost
1.
2.
3.
4.
Segment I/S
ROI
RI
EVA – Economy Value Added
Investment – revenue, cost, investment
Business in a business (Division, Branches)
STEPS:
1. Classify the responsibility centres
2. Classification of controllable and non-controllable
3. Performance report and evaluation
Page 49 of 50
Optional Safety Stock
Usage
Probability
1. Identify the number that has common occurrence
2. Crush or select
Stock Out x # of order x frequency of occurrence x Cost/order
Carrying Cost
No. of units
Selected or Crushed
(Increasing from
the point selected)
Stock Out Cost
Total Cost
Spontaneous Liability
Illustration
5/10; n/10
0
10
20
30
98, 000
40
10,000
2,000 interests
Interest = P x R x T
2000 = 98,000 x n x 30/360
= 24.49 %
Page 50 of 50