CVP CM= Revenue VC CM% = CM per unit / selling price BEP (Units) = FC/CM per unit BEP($)=FC/CM % (FC + Target profit)/CM per Unit (FC + target profit)/CM% Tax : Unit [FC+(TP/1-t)]/CM per Unit Sales $ = Unit [FC+(TP/1-t)]/CM % Margin of safety = Revenue BEP($) MoS % = MoS in $$/ Revenue ROE = NI/Equity=NI/Sales (Operating efficiency)*Sales/TA (productivity)* TA/Equity (Leverage) CM = Selling Price - VManf. - VMkt/Admin Avg CM Per Unit = ($CMA x Sales Mix % UnitsA)+ ($CMB x Sales Mix % UnitsB) Avg CM % = (%CMA x Sales Mix $ UnitsA)+ (%CMB x Sales Mix $ UnitsB)PROCESS COSTING / SPOILAGE *Ignore Degree of Completion for WIP Beg Total Spoilage = (Units in Beg. WIP + Units Started) (Good Units completed &transferred out + Units in End. WIP) Abnormal spoilage = Total spoilage normal spoilage Normal (Design-can included in COGM) vs. Abnormal spoilage (unexpected/inefficiencies/operations loss) Spoilage (dispose) vs rework (fixed & sold) vs scrapRelevant Journal Entries Completed/Transferred (Net) DR. FG CR. WIPREWORK JE before Rework: DR. WIP, CR. Material control, wages payable, MOH Applied [unit affected only] Rework JE: DR. MOH [norm. all jobs]; WIP [specific job]; Loss from Abnormal Rework[abnormal rework] CR. Materials, Wage payable; MOH Applied; DR. WIP1, WIP2 CR. MOH appSPOILAGE Common to all jobs [DR. Materials control, MOH, CR. WIP] Specific job [DR. material control CR. WIP]Abnormal [DR. Material control, loss from abnormal ;CR.WIP]SCRAP (time of sale) Specific job: Dr. Cash/ AR CR. WIP Control; All jobs: DR. Cash/AR CR. MOH Control

MOH UNDERAPPLIED [Applied OHACTUAL OH] CR1.Close to COGS (Immaterial)(DR. MOH Control CR. COGS,CR. MOH Applied,)2.Proration (Material) (DR. MOH Control, CR. WIP, FG, COGS, MOH Applied) USE T-accounts

JOB ORDER- Normal, Actual, Standard Costing NORMAL Direct: Actual direct costs assigned to job as incurred. [Actual cost rate * Actual quantityIndirect: Budgeted rate*actual quantityBUDGETED INDIRECT COST RATE =Budgeted annual indirect cost/ budgeted quantity ACTUAL Direct: Actual DC assigned to job; Indirect: actual MOH applied when actual amt is known STANDARD: std DC assigned as incurred + MOH applied using predetermined rate

JE: (1) Material purchase [Dr. Materials, Cr. AP] (2)Material usage [Dr. WIP DM, DR. MOH-Indirect, Cr. Materials]; (3 )Labour [same as material use]; (4) Actual OH[Dr. MOH, Cr. Cost deprec, tax, insure]; (5) OH applied [ Dr. WIP, Cr. MOH Applied]; (6) COGM [Dr. FG, Cr. WIP]; Sale of FG JE: (1) Record sale (Dr. AR, Cr. Sale) (2) record COGS (Dr. COG, Cr. FG) ; Nonmanufacturing costs charged to expense as incur

Proration Approach (Based on Allocated MOH)(1)Account Balance (before proration)(2)Allocated MOH included in each account balance (WIP, FG, COGS) before proration (3)Allocated MOH included in each account balance as % of total MOH = (ex. WIP/total MOH applied)(4)Proration of $___ (under or over applied MOH) * %(5) Account balance (after proration)

CAPITAL BUDGETING (Draw out timeline Yr. 0 and beyNPV Method - NO TAX ImplicationsNet Initial Investment (Year 0)Working Capital needed (Year 0)PV : (1)Annual net cash inflows (inflow outflow) (2)Salvage value of equip. (3) Working capital recapture Sum of above is NPV INCOME TAXES IMPLICATIONS(1) After-tax cost (net cash outflow) = (1- tax rate) x tax-deductible cash expense (2) After-tax benefit (net cash inflow) = (1-tax rate) x Taxable cash receipt (3) Tax savings from CCA tax shield = tax rate x CCA

PV tax shield on CCA C=cost of investment; d= CCA tax rate; T = tax rate; r =discount rate; n = # of periods in Project; S=salvage value

Time of production DR. Materials CR. WIP Control (specific job); All Jobs: Return to room DR. Materials CR. MOH Control Sale of scrap: DR. Cash CR. Materials Control Reusestoreroom: DR. Materials control, CR. Manufacturing Dept, OH Control. reuse: DR. WIP CR. Materials Control

Goods units complete/transfer- [to acct for - spoil- end]1-norm spoilage % x [units started - units spoiled]2-norm spoilage % x [units account for - units spoiled] 3-norm spoilage % x [good unit completed/transferred - unit spoil] Don't forget to apply degree of completion for end WIP ; Decision Strategy = Minimax (Loss), Maximax (Gain), Max. Most Likely Gain, Max. Expected Value

Stmt COGM/COGSBegn Raw Material+PurchaseTotal Available-End Raw MaterialDirect MaterialDirect Labour CostIndirect Manf. + OHTotal Manf. Cost+Begn WIPTotal WIP-End WIPCOGM (To I/S)+Begn FGICOG Available For Sale-End FGICOGS

EXPECTED PAYOFF & OPPORTUNITY LOSS*What are you willing to pay for ""?

REGRESSION identify and assess strength of linear relationship btwn changes in 1 cost driver (X) and predicted indirect MOH cost pool (Y) y = a +bx [identify y and x in question context] Sb standard error of coefficients (i.e. bs), smaller = more confidence = Se/((x-)2) Se = (SSE/df) standard error of the estimate, less scatter = more confident of predictive ability, find on t-table (95% = 2.5% at each end), = y (t-score * Se) t-stat reports usefulness of results. larger the # of cost observations, the larger n will be and Standard error will decrease. larger the t-stat, more likely it will exceed the critical value in t-stat value. R2 (Goodness of Fit) - SSR/TSS or 1-SSE/TSS relationship b/w DV and IV (compares % of change in predicted cost pool that can be explained by change in cost driver) higher R2 better (below 70% is iffy) P Value determine if IV should be removed, want >0.05 b/c able to say with 95% confidence that b 0. smaller p-value smaller prob of coming to wrong conclusion

COST CONCEPTS - Product Cost - incurred to make product, inventoriable cost, record as asset first, recognize as expense when sold (i.e. freight in, depreciation, licensing fees, labour, supplies) Direct- able to directly trace (identifiable) DL, DM Indirect- cannot be directly traced MOH Prime cost = DM + DL Conversion Cost = DL +MOHProduct Cost = DM + DL + MOH TVC = DM+ DL+ VOHComponents of Product Cost: Variable Costing (Rev. - VC = CM - FC = OP) Sum of All V Manuf. and Selling Cost = DM+DL+VMOH+VMkt Full Absorption Costing (Rev. - Cost/COGS = GM - Period Cost = OP) Sum of All V or F Manuf. Cost =DM+DL+V MOH+F MOH Full Costing = Sum of all cost of manuf. and selling unit of productPeriod Cost - nonmanuf. cost, incurred to sell/operate, recog. expense when cost incurred (i.e.mkt, admin, freight out, commission, presidents salary, operating cost)

CH.12 Pricing Decisions:Target cost = Anticipated selling price Desired Profit Markup % on absorption cost = (Required ROI x Investment)+SG&A expenses divided by (unit sales unit product cost)

Cost Plus selling price = cost + (markup % x cost)

DEPARTMENT ALLOCATIONDIRECT METHOD -allocate to production depts.; ignore other service dept(Same for Each Service Dept)S1 Rate = $35,000 / (1600+2100) = $9.46Allocate S1 Costs: $9.46 * 1600 and $9.46 * 2100

STEP/SEQUENTIAL ALLOCATION METHOD FIRST allocate service dept that serves other service dept more, THEN allocate service depts. that serve prod depts. more last1st DEPT allocate among service + production2nd DEPT allocate among production only

RECIPROCAL METHODSet up 2 algebra formulas & substitute. Apply at same time (RMBR to bring both service dept to 0)

PRODUCTION Byproduct revenues reduction of COGSSALE Byproduct revenues revenue itemRevenues:Main product (both production and sale recognized)*Byproduct (only recognized under Sale Method) COGS:Total manufacturing costs [same under both]*Deduct byproduct sales value (only under Production Method)=Net Manufacturing costsDeduct main product ending inventory =[Net manufacturing cost/ total production units] x ending inventory

= COGSGross Margin

JOINT COST PROCESSINGDecision to sell product at spilt off or process further - JP cost prior to split off = sunk cost, process further only if incremental revenue (diff. b/w sales value before and after) > cost

Physical Measure MethodJC allocated based on proportional measure (i.e. weight, volume) at SOP = % of total * (joint material + joint conversion cost)

Sale Value @ Splitoff Method1) Calculate Sales Value of Total Production @SOP2) Allocate weighting btwn products3) Apply weighting to Joint costs

Estimated NRV1) Final sales value 2) DEDUCT: Separable Cost 3) =NRV @ Splitoff4) Weighting $ 5) Joint cost allocated

Constant Gross Margin NRV Method STEP 1 (one column)Final sales value of total production in accounting periodDeduct joint & separable costs=GROSS MARGIN (%)STEP 2 (multiple columns by products)Final sales value of total production (by category of products)\Deduct gross margin using constant gross margin percentage=Total production costsSTEP 3Deduct separable costsJoint costs allocated

JOINT COST & BYPRODUCTS NRV of Byproduct = Byproduct Revenue Separable CostCost to be allocated = Joint Costs NRV of byproduct

cCH.7 VARIANCE ANALYSIS (Quantitative & Qualitative)LVL 0 Static Budget Variance = Actual Operating Income Static-Budget AmountLVL 2 Spit into (1) Flexible-Budget Variance = Actual results Flexible budget amount (2) Sales Volume Variance = Flexible budget amount static budget amount split flexible budget variance into (1) Selling price variance = (Actual selling price Budgeted selling price) x Actual units sold (2) Variable cost variance = Actual variable cost flexible variable cost (3) Fixed cost variance = Actual fixed cost flexible budget fixed cost LVL 3 RATE Variance = (Actual rate of input Budgeted rate of input) x Actual quantity of input purchased [=(AQxAP)-(AQ*SP)=AQ(AP-SP)EFFICIENCY Variance = (Actual quantity of input used Budgeted quantity of input allowed for actual output units achieved) x Budgeted rate of input (AQ*SP)-(SQ*SP) = SP(AQ-SQ)LVL 4 (extension of efficiency variance) Mix Variance = Aggregate Sum of all products (Actual input mix % - Budgeted input mix %) x Actual total inputs used x Budgeted Rate Yield Variance = (Actual total units of input used Budgeted total units of inputs used) x Budgeted input mix % x Budgeted price per input unit

LVL 3 Interpretation: Rate Variance budgeted purchase rates set w/o careful analysis o suppliers; less skillfully negotiation with vendors; bought in smaller lot sizes than budgeted, didnt take advantage of quantity discounts; unexpected increase due to unanticipated market demand or unanticipated transportation costs. Efficiency Variance underskilled, unmotivated workers were hired; production process reorganized, new machine installed, creating additional DML time as workers learn new process; created too many rush-order interruptions that led to overtime; did not properly maintain machines, leading to additional DML to avoid damage done by machine

RELEVANT COSTING & DECISION MAKINGGeneral "relevant"=expected future, differ among alternative courses of action Special Order (Short/Long Term DecisionsFixed cost irrelevant) Outsourcing (past sunk costs irrelevant) Opportunity Cost contribution to operating income that is lost *Cost of alternative = incremental cost + opportunity cost (aka profit forgone from choosing this alternative) Carrying Cost of Inventory income forgone forgone by tying up $$ in inventory and not investing it elsewhere ; *Average investment in inventory under 2 scenarios [price*unit] /[divide by 2] Opportunity cost of interest forgone from 240,000-unit purchase at start of year= $946,800 0.10 = $94,680*Alt #1 & Alt #2: (1) Annual purchase order cost, (2) annual purchase costs*(3) deduct annual rate of return earned by investing cash not tied up in inventory rate x [avg inventory under alt 1 - avg inventory under alt 2] Product Mix "What is CONSTRAINING RESOURCE?"*How many constraining resource does each unit need? *Rank products in terms of highest CM per unit of constraining resource Theory of Constraints*eliminate idle time; process only parts/products that increase margin; shift products that do not have to be made on bottleneck machine; reduce setup time and processing timeMASTER OPERATING BUDGET 1. Revenue Budget {estimated units * price}2. Production Budget Budgeted Sales (units) + Target ending inventory (ending)= Required inventory for the month- Beginning FG Inventory (Units) = Budgeted Production (Units) 3. a) DM USAGE BudgetDM to be used in production [units to be produced*weight} **Multiple items of DM**Calculate Total DM to be UsedDM to be used from Beg. InventoryMultiply by: Cost per kg of beg inv=Cost of DM o be used from beg inv (1)DM used from purch. [total DM to be used beg inv]Multiply by: cost per unit of beg inv=Cost of DM to be used from purchase (2)Total cost of DM to be used (1) + (2) b) DM PURCHASE Budget DM to be used in productionAdd: Target ending DM Inventory=Total RequirementsDeduct: Beg DM inventoryDM to be purchasedMultiply by: cost per unit of purchased materials4. DML budget [unit produced*DML per unit*wage rate]5. MOH Budget Variable MOH Costs+ Fixed MOH Costs6. Ending inventory budgetCost per Unit of Input x Amt ($) Sum of all inputs Materials, DML, MOH, etcTotal Ending Inventory = target end inventory x cost ($)7. COGS Budget Beg FG inventory + DM Used + DML + MOH = COGMCOGAS = COGM + Beg FG InventoryDeduct: Ending FG Inventory=COGS8. Other (Nonproduction) Costs Budget 9. Budgeted Operating Income Statement

CASH BUDGET (multiple quarters)Cash Balance, beginADD: Receipts (Collections from customers)Total cash available for needs (a) DEDUCT: Disbursements (DM, payroll, taxes, purchase)Total Disbursements (b)Cash balance before borrowing (a)-(b) = (c)Minimum cash balance desired (d)Additional cash available/(needed) (c)-(d)=(e)Interest payment (f) Loan borrowing/(repayment( (e)+(f) Cash balance, ending Payback Period (Uniform CF)Payback = Net initial investment/Increase in CFNon-uniform CF set up 4 columns(1) Year (2) Cash Savings/flows (3)Cumulative cash savings (add up from prior year + current year) (3) Net initial invst yet to be recoveredAccrual Accounting Rate of Return=(Increase in after-tax income Depreciation associated with project)/ Net Initial investment

CH.8 VARIANCE ANALYSIS (FMOH, VMOH)FMOH VARIANCE CALCULATION/INTREPRATION Budgeted FOH rate per unit of allocation base = Budgeted FOH rate/ Budgeted quantity of allocation base units LVL 1: Static budget variance = Actual results static-budget amount; LVL 2: flexible budget variance = Actual results Flexible-budget amount; LVL 3: rate variance = actual results amt allowed for relevant range Interpretation of FMOH Rate Variance: poor/unrealistic FMOH projections in original budget process; unplanned salary increase to retain the plant manager; increased equipment lease or depreciation rates; increased insurance premiums on production assets; increased property taxes on production facilities. Production Volume Variance = Budgeted FOH (Total fixed overhead assigned for ACTUAL output x Budgeted fixed overhead rate) Interpretation sales prices & demand level JOURNAL ENTRIES: (1) DR. FMOH Control CR. Salaries, lease, tax, insurance payble(2) DR. WIP Control CR. FMOH Allocated (3) DR. FMOH Allocated, FMOH Rate Variance, FMOH PVV CR. FMOH Control Close out to COGS DR. COG CR. FMOH Rate variance FLEXIBLE BUDGET VARIABLE OVERHEAD VARIANCELVL 2: (1) Variable MOH Flexible-budget variance = Actual result flexible-budget amount (2) Variable MOH sales-volume variance = flexible budget amount static budget amount LVL 3: Flexible-budget variance for VOH = Actual costs Flexible-budget costVariable OH RATE Variance = (Actual VOH cost per unit of cost allocation base - Budgeted VOH rate per unit of cost base) x Actual quantity of VOH rate allocation used for actual OR Actual Costs Incurred (Actual Input x Budgeted Rate)Variable OH Efficiency Variance = (Actual units of VOH cost allocation base used for actual output units achieved - Budgeted units of VOH cost allocation base allowed for actual output units achieved) x Budgeted VOH allocation rateInterpretation: Efficiency Variance machine malfunction (poor maintenance); poor production scheduling, too much idle time; poor coordination btwn sales and production, poor quality of materialsRate Variance manufacturing labour portion, variable utilities cost (less due to holiday?); reduction in quantities of supplies purchased/used; change in classification of an input from indirect to direct. JOURNAL ENTRIES NEEDED(1) DR. VMOH Control CR. Utilities, wage, payable(2) DR. WIP Control CR. VMOH Allocated(3) DR. VMOH Allocated, VMOH Efficiency Variance CR. VMOH Control, VMOH Rate Variance