Locational Break-Even Analysis

Locational Break-Even Analysis is the use of cost-volume analysis to make an economic comparison of locaiton alternatives.There are three steps to locational break-even analysis 1) Determine the fixed and variable cost for each location 2) Plot the costs for each location, with costs on the vertical axis of the graph and annual volume on the horizontal axis. 3) Select the location that has the lowest total cost for the expected production volume.The following is an example of how the locational break-even analysis is done mathematically.A company is considering three locations for a new plant, Chicago, New York, andAtlanta. Study has shown that fixed and variable costs for each site are as follows: FIXED COSTS VARIABLE COSTS Chicago $2500.00 $45 / UNIT New York $3500.00 $30 / UNIT Atlanta $2200.00 $40 / UNITThe selling price of the product is $70 and the company wishes to find a location with an expected volume of 1200 per year.The equation to be used for each is: TOTAL COST = FIXED COSTS + VARIABLE COSTS (VOLUME)When each is calculated, the total cost for each city is as follows: Chicago $56,500 New York $39,500 Atlanta $50,200Based on these calculations for a volume of 1200 per year, New York would have the lowest cost and would therefore be the preferred location.This example shows how locational break-even analysis provides us with a location that will yield the lowest cost of doing business.Breakeven/ Cost-Volume Analysis

Cost-volume analysis is used in several different areas of POM and QM especially capacity planning and location analysis. Breakeven and cost/volume analysis are included in nearly every POM textbook. Cost/volume analysis is used to find the point of indifference between two options based on fixed and variable costs. A breakeven point is computed in terms of units or dollars. Breakeven is simply a special case of cost/volume analysis where there is one fixed cost, one variable cost and a revenue per unit.Cost-volume analysis

In cost-volume analysis we compare two or more options to determine what option is least costly at any volume. The costs consist of two types - fixed costs and variable costs but there may be several individual costs which comprise the fixed costs or the variable costs In the example below we are indicating that there are 5 different individual costs and two options.

DataCost Type.Each type of cost must be identified as either a fixed cost or a variable cost. The default is that the first cost in the list is fixed and that all other costs are variable. These values can be changed by using the usual dropdown box.Costs. The specific cost for each option gets listed in the two columns in the table.Volume. If a volume analysis is desired then enter the volume at which this analysis should be performed. The volume analysis will compute the total cost (revenue) at the chosen volume. If the volume is 0 then no volume analysis will be performed other than for the breakeven point. We have asked for a volume analysis at 250 units.

The Cost/Volume or Breakeven Analysis Solution ScreenSolution

The solution screen is very straightforward. In the screen above there are 5 costs with some of them being fixed and some of them being variable. The program displays the following four outputs.Total Fixed Costs. For each of the two options the program takes the fixed costs, sums them up and lists them below the table. In this example the total fixed costs for option 1 are $1300 (800+500) while the total fixed costs for option 2 are $900 (700+200).Total Variable Costs.The program identifies the variable costs, sums them up and lists them. In this example the total variable costs for option 1 are $10 per unit while for option 2 they are $12 per unit.Break even point in units.The breakeven point is the difference between the fixed costs divided by the difference between the variable costs and this is displayed in units. In the example it is 200 units.Break even point in dollars. The breakeven point can also be expressed in dollars.A volume analysis has been performed for a volume of 250 units. The total fixed costs and total variable costs have been computed for each option and these have been summed to yield the total cost for each option.A graph is available as shown below.

Breakeven analysisExample 2- Using Breakeven Analysis with pricesOne standard type of break even analysis has revenue versus cost.

Data entry for this option is slightly different in that the program creates a column for costs and a column for revenues. The fixed and variable costs get entered in the cost column and the revenue per unit is placed in the revenue column.We have used three types of cost to set up the table. The first is for the fixed cost of $10,000, the second is for the variable cost of $20 per unit and the third is for the (variable) revenue of $25 per unit. The program will compute a break-even volume of 2000 units or $50,000 (not shown).Example 3 - Breakeven point with three optionsThe break even module can perform a breakeven analysis for two or three options. Below we demonstrate the output for a 3 option breakeven. Of course, while there are three breakeven points only two of them are relevant.MANAGEMENT ACCOUNTING CONCEPTS AND TECHNIQUESBy Dennis Caplan, University at Albany (State University of New York)CHAPTER 17:Cost Variances for Variable and Fixed OverheadChapter Contents:-Cost variances for variable overhead-Cost variances for fixed overhead-The fixed overhead spending variance-The fixed overhead volume variance-Additional issues related to the volume variance-Comprehensive example of fixed overhead variances-Exercises and problemsCost Variances for Variable Overhead:The formulas for splitting the flexible budget variance for variable overhead into a price variance and an efficiency variance are the same as the formulas for direct materials and direct labor explained in Chapter 7. The price variance for variable overhead is called the variable overheadspending variance:Spending variance =PV=AQx (APSP)Efficiency variance =EV=SPx (AQSQ)WhereAPis the actual overhead rate used to allocate variable overhead, andSPis the budgeted overhead rate. The Qs refer to the quantity of the allocation base used to allocate variable overhead, so thatAQis the actual quantity of the allocation base used during the period, andSQis the standard quantity of the allocation base. The standard quantity of the allocation base is the amount of the allocation base that should have been used (i.e., would have been budgeted) for the actual output units produced.Given the use of the allocation base in these formulas for the cost variances for variable overhead, the meaning of these variances differs fundamentally from the interpretation of the variances for direct materials and direct labor. Consider a company that allocates electricity using direct labor as the allocation base. A negative variable overhead efficiency variance does not necessarily mean that the factory used more electricity than the flexible budget quantity of kilowatt hours for the actual outputs produced. Rather, the negative variance literally means that the factory used more direct labor than the flexible budget quantity for direct labor. If there is a cause-and-effect relationship between the allocation base and the variable overhead cost category (i.e., if more direct labor hours implies more electricity used), then the negative efficiency variance suggests that more electricity was used than the flexible budget quantity, but the efficiency variance does not measure kilowatts directly.Similarly, a negative spending variance for variable overhead does not necessarily mean that the cost per kilowatt-hour was higher than budgeted. Rather, a negative spending variance for variable overhead literally states that the actual overhead rate was higher than the budgeted overhead rate, which could be dueeitherto a higher cost per kilowatt-hour,or more kilowatt hours used per unit of the allocation base. Hence, what one might think should be included in the efficiency variance (kilowatt hours required per direct-labor-hour being higher or lower than budgeted) actually gets included as part of the spending variance.Cost Variances for Fixed Overhead:Whereas the cost variances for direct materials, direct labor, and variable overhead all use the same two formulas, the cost variances for fixed overhead are different, and do not use these formulas at all.Also, whereas cost variances for direct materials, direct labor, and variable overhead can be calculated for individual products in a multi-product factory, cost variances for fixed overhead can only be calculated for the factory or facility as a whole. (More precisely, fixed overhead cost variances can only be calculated for the combined operations to which the resources represented by the fixed costs apply.)There are two fixed overhead cost variances: the spending variance and the volume variance.The Fixed Overhead Spending Variance:Thefixed overhead spending varianceis the difference between two lump sums:Actual fixed overhead costs incurredBudgeted fixed overhead costsThe fixed overhead spending variance is also called thefixed overhead price varianceor thefixed overhead budget variance.The Fixed Overhead Volume Variance:Thefixed overhead volume varianceis also called theproduction volume variance, because this variance is a function of production volume. The volume variance attaches a dollar amount to the difference between two production levels. The first production level is the actual output for the period. The second production level is the denominator-level concept in the budgeted fixed overhead rate, expressed in units. As discussed in the previous chapter, there are two common choices for this denominator:(1)budgeted production(2)factory capacityThe interpretation of the volume variance depends on which of these two denominators are used, but in either case, the production volume variance is the difference between budgeted fixed overhead (a lump sum), and the amount of fixed overhead that would be allocated to production under a standard costing system using this fixed overhead rate.The volume variance with budgeted production in the denominator of the O/H rate:First we use budgeted production to calculate the volume variance. In this case:volume variance=(budgeted fixed overheadxunits produced)budgeted fixed overhead

budgeted production

The term in parenthesis equals the amount of fixed overhead that would be allocated to production under a standard costing system, when budgeted production is the denominator-level concept.Sincebudgetedfixed overheadbudgeted production=budgeted overhead ratetheabove expression for the volume variance is algebraically equivalent to the following formula:volume variance=(units producedbudgeted production)xbudgeted overhead rate

This formula for the volume variance illustrates the statement above; that the volume variance attaches a dollar amount to the difference between two production levels. In this case, the two production levels are actual production and budgeted production. The interpretation of the volume variance, when budgeted production is used in the denominator of the overhead rate, is the following. When actual production is less than budgeted production, the volume variance represents the fixed overhead costs that are not allocated to product because actual production is below budget. In this case, the volume variance isunfavorable. When actual production is greater than budgeted production, then the volume variance represents the additional fixed overhead costs that are allocated to product because actual production exceeds budget. In this case, the volume variance isfavorable.The intuition for when the volume variance is favorable and when it is unfavorable is the following. If the company can produce more units of output using the same fixed assets (i.e., the resources that comprise fixed overhead), then assuming those additional units can be sold, the company is more profitable. When fixed overhead is allocated to production, this greater profitability is reflected in a lower per-unit production cost, because the same amount of total fixed overhead is spread over more units. On the other hand, if fewer units are produced than planned, then the same fixed overhead is spread over fewer units, the per-unit production cost is higher, and the company is less profitable. This higher or lower profitability that arises from changes in production levels is not an artifact of the accounting system. Even if the company uses Variable Costing, and expenses fixed overhead as a lump-sum period cost, when the company makes and sells fewer units than planned using the same fixed overhead resources, it really is less profitable than was budgeted, and when the company makes and sells more units than planned using the same fixed overhead resources, it really is more profitable than was budgeted.The volume variance with factory capacity in the denominator of the O/H rate:Next we use factory capacity to calculate the volume variance. In this case:volume variance=(budgeted fixed overheadxunits produced)budgeted fixed overhead

factory capacity

Sincebudgetedfixed overheadfactory capacity=budgeted overhead ratetheabove expression for the volume variance is algebraically equivalent to the following formula:volume variance=(units producedfactory capacity)xbudgeted overhead rate

The interpretation of the volume variance, when factory capacity is used in the denominator of the overhead rate, is the following. Actual production is almost always below capacity. The volume variance represents the fixed overhead costs that are not allocated to product because actual production is below capacity. Hence the volume variance represents the cost of idle capacity, and this variance is typicallyunfavorable. For this reason, this volume variance is sometimes called theidle capacity variance. In the unlikely event that the factory produces above capacity (which can occur if the concept of practical capacity is used, and actual down-time for routine maintenance, etc., is less than expected), then the volume variance represents the additional fixed overhead costs that are allocated to product because actual production exceeds capacity. In this case, the volume variance isfavorable.Additional Issues Related to the Volume Variance:Under what circumstances would a company calculate the volume variance using budgeted production as the denominator-level concept, and under what circumstances would a company use factory capacity as the denominator-level concept?The use of budgeted production in the calculation of the volume variance attaches a lump sum benefit or cost to actual production levels that exceed or fall short of budgeted production levels. For this reason, many companies consider this calculation of the volume variance to be an important performance measure for the factory manager and marketing managers responsible for making and marketing the product.The use of factory capacity in the calculation of the volume variance provides an indication of how low the per-unit cost can go, if demand equals or exceeds factory capacity. If senior management would like product managers to make pricing and operating decisions based on a long-term expectation that demand for the product will equal or exceed factory capacity, even though current or short-term demand is below capacity, calculating the per-unit cost in this manner will encourage product managers to take this long-run perspective. For example, consider the launch of a new product line in a new factory. If fixed overhead is allocated based on budgeted production, then product managers might feel pressured to set sales prices that will cover full product costs at initially-low production levels, but these sales prices might be too high to generate sufficient initial consumer interest in the product for a successful product launch.Another reason to use factory capacity in the denominator of the fixed overhead rate, and in the calculation of the volume variance, is that doing so isolates the cost of idle capacity. Often, the decision to build a factory that is larger than current demand warrants is a strategic decision made at high levels within the organization. If the fixed overhead associated with this factory is allocated based on budgeted or actual production, the per-unit cost of every unit manufactured includes a small portion of the cost of this strategic decision, and the cost reports of factory managers and the product profitability statements of product managers are negatively affected by this unused capacity. Some companies prefer to isolate the cost associated with this strategic decision, and to either show the cost of idle capacity as separate line-items on the cost reports and profit statements of the factory manager and product managers, or remove this cost entirely from these performance reports, and report it only at the corporate level.Allocating fixed overhead using actual production can provide managers short-run incentives to overproduce, because as production increases, the per-unit cost decreases. Similarly, calculating the volume variance using budgeted production in the denominator of the overhead rate can provide managers short-run incentives to overproduce, because as production exceeds budget, the volume variance becomes increasingly favorable. For this reason, some companies choose not to allocate fixed overhead at all. However, the use of factory capacity in the denominator of the fixed overhead rate accomplishes the same objective, because it isolates the volume variance such that the performance reports of these managers need not be affected by it.We have assumed, throughout this section, that fixed overhead is allocated based on units of output. However, we saw in the chapter on activity-based costing that units of production is often a poor choice of allocation base in a multi-product factory, and many companies that use standard costing systems use allocation bases that are more sophisticated, such as direct labor hours or direct materials dollars. The question might arise, how does the use of a different allocation base, such as direct labor hours, affect the calculation of the volume variance? The answer is:Not at all.Because of the way in which standard costing systems work, the amount of fixed overhead that will be allocated to product does not depend on the choice of allocation base.For example, assume that a one-product company budgets two direct labor hours to make each unit, and assume that if fixed overhead is allocated based on output units, the budgeted fixed overhead rate is $10 per unit. Then using direct labor hours as the allocation base, the budgeted fixed overhead rate is $5 per direct labor hour. Because of the mechanics of standard costing systems, no matter whether the $10-per-unit rate is used, or the $5-per-direct-labor-hour rate is used, $10 of fixed overhead will be allocated to every unit produced, no matter how many direct labor hours are actually used per unit. (If this fact is not obvious to you, refer back to Chapter 10 on standard costing.) Therefore, for the purpose of calculating the volume variance, we might as well use the easiest allocation base, which is units-of-output.It is important to recognize that even though most manufacturing companies use a standard costingsystem,and even though the calculation of the fixed overhead volume variance relies on the concept of standard costing, companies can calculate the volume variance even if they do not use a standard costing system. In this case, the calculation is identical to the discussion above, but the company will not be able to obtain the required information from the cost accounting system itself, but rather, will need to make a separate calculation.Comprehensive Example of Fixed Overhead Variances:The Coachman Company makes pencils. The pencils are sold by the box. Following is information about the companys only factory:BudgetActualCapacity

Number of boxesDirect labor hoursMachine hoursFixed overhead10,000200500$40,00012,000250650$42,00020,000

The outputs here are boxes of pencils. The inputs are direct labor hours and machine hours. First we calculate a fixed overhead rate using actual amounts, and output units as the allocation base:$42,000 12,000 boxes = $3.50 per box.Using this overhead rate, every box of pencils iscostedat the variable cost of production plus $3.50 in allocated fixed overhead.Next:we calculate a fixed overhead rate using budgeted costs, and budgeted output units as the denominator-level concept:$40,000 10,000 boxes = $4.00 per box.Next:we calculate a fixed overhead rate using budgeted costs, and factory capacity as the denominator-level concept (expressed in terms of output units).$40,000 20,000 boxes = $2.00 per box.The advantage of using capacity in the denominator is that this denominator-level concept shows how low the fixed cost per unit can go, and hence, how low the total cost per unit can go, as production increases.The fixed overhead spending variance is calculated as follows:$42,000 actual$40,000 budgeted = $2,000 unfavorable.Next:we calculate the volume variance using capacity as the denominator-level concept:volumevariance = ($2.00 perboxx 12,000boxes)$40,000 = $16,000 unfavorableorequivalently:volumevariance = $2.00 per box x (12,000 boxes20,000boxes) = $16,000 unfavorableIf the company uses a standard costing system, the amount ofoverallocatedorunderallocatedfixed overhead is the difference between actual fixed overhead incurred, and fixed overhead allocated to product, calculated as follows:actualfixed overheadfixed overhead allocated= $42,000($2.00 perboxx12,000boxes)= $42,000$24,000 = $18,000 underallocatedThis $18,000 of underallocated fixed overhead is equal to the sum of the $2,000 unfavorable fixed overhead spending variance and the $16,000 unfavorable volume variance.Next:we calculate the volume variance using budgeted production as the denominator-level concept:volumevariance = ($4.00 perboxx12,000boxes)$40,000 = $8,000 favorableorequivalently:volumevariance = $4.00 per box x (12,000 boxes10,000boxes) = $8,000 favorableIf the company uses a standard costing system, the amount ofoverallocatedorunderallocatedfixed overhead is the difference between actual fixed overhead incurred, and fixed overhead allocated to product, calculated as follows:actualfixed overheadfixed overhead allocated= $42,000($4.00 perboxx 12,000boxes)= $42,000$48,000 = $6,000overallocatedThis $6,000 ofoverallocatedfixed overhead is equal to the sum of the $2,000 unfavorable fixed overhead spending variance (which did not change when we changed the denominator-level concept from capacity to budgeted production) and the $8,000 favorable volume variance.To illustrate that the choice of allocation base does not affect the calculation of the volume variance, we recalculate the volume variance assuming the company allocates overhead using machine hours as the allocation base and budgeted production as the denominator-level concept. The budgeted overhead rate is now$40,000 500 machine hours = $80 per machine hour.Since the standard for machine time is one hour for every twenty boxes (derived from the budget column in the box at the beginning of the example), the standard costing system will allocate fixed overhead as follows:Budgetedoverhead rate x (standard inputs allowedfor actual outputs achieved)= $80 per machine hour x (12,000 boxes 20 boxes per machine hour)= $80 per machine hour x 600 machine hours = $48,000And the volume variance isfixedoverhead allocated to productbudgeted fixed overhead= $48,000$40,000 = $8,000 favorable, as before.Variable Mfg Overhead: Standard Cost, Spending Variance, Efficiency Variance"Manufacturing overhead costs" refer to any costs within a manufacturing facility other than direct material and direct labor. Manufacturing overhead includes such things as indirect labor, indirect materials (such as manufacturing supplies), utilities, quality control, material handling, and depreciation on the manufacturing equipment and facilities."Variable" manufacturing overhead costs will increase in total as output increases. An example is the cost of the electricity needed to operate the machines that cut and sew the denim. Another example is the cost of the manufacturing supplies (such as needles and thread) that increase when production increases. In our example we assume that these variable manufacturing overhead costs fluctuate in response to the number of direct labor hours. Recall the original estimates made when DenimWorks was formed:

January 2013Let's begin by determining the standard cost of variable manufacturing overhead for the good output that DenimWorks produces in January 2013:

Recall that there were 50 actual direct labor hours in January. Let's assume that the actual cost for the variable manufacturing overhead (electricity and manufacturing supplies) during January is $90.Our analysis will look like this:Variable Manufacturing Overhead Analysis for January 2013:

Notice that for the good output produced in January, the actual cost of variable manufacturing overhead was $90 and the total standard cost of variable manufacturing overhead cost allowed for the good output was $84. This unfavorable difference of $6 agrees to the sum of the two variances:

Variable Manufacturing Overhead Efficiency VarianceAs the above analysis shows, DenimWorks did not produce the good output efficientlyit used 50 actual direct labor hours instead of the 42 standard direct labor hours allowed.The additional 8 hours no doubt caused the company to use additional electricity and supplies. Measured at the originally estimated rate of $2 per direct labor hour, this amounts to $16 (8 hours x $2). This is referred to as anunfavorablevariable manufacturing overheadefficiencyvariance.Variable Manufacturing Overhead Spending VarianceIn the analysis above, item 2 shows that based on the 50 direct labor hours actually used, electricity and supplies could reasonably add up to $100 instead of the standard of $84. (If the good output took 8 actual direct labor hours more than the standard hours to cut and sew the denim, the company will likely have additional electricity and supplies costs since it is operating the machines for an additional 8 hours.) We find, however, that the actual cost of the electricity and supplies is $90, not $100. This $10 favorable variance indicates that the company did not spend the planned $2 per direct labor hour. (Perhaps electricity rates were lower than the rates anticipated when the standard costs were established.)Actual variable manufacturing overhead costs are debited to overhead cost accounts. The credits are made to accounts such as Accounts Payable. For example:

Another entry records how these overheads are assigned to the product based on standard costs:

As our analysis notes above and these entries illustrate, DenimWorks has an actual variable manufacturing overhead of $90, but only $84 (the standard amount) was applied to the products. The $6 difference is "explained" by the two variances:

February 2013Recall that in February 2013 the company produced 200 large aprons and 100 small aprons. We use that good output to compute the standard cost of variable manufacturing overhead for February 2013:

Given that there were 75 actual direct labor hours in February and assuming that the actual cost for the variable manufacturing overhead in February was $156, our analysis will look like this:Variable Manufacturing Overhead Analysis for February 2013:

The favorable difference between the actual cost of $156 and the standard cost of $160 agrees to the sum of the two variances:

Actual variable manufacturing overhead costs are debited to overhead cost accounts. The credits are made to accounts such as Accounts Payable. For example:

Another entry records how these overheads are assigned to the product:

As our analysis notes above and as these entries illustrate, even though DenimWorks had actual variable manufacturing overhead of $156, the standard amount of $160 was applied to the products. For the month of February 2013 the company applied more variable manufacturing overhead to its products than it actually incurred.We will discuss later how to report the balances in the variance accounts under the heading"What To Do With Variance Amounts".Fixed Mfg Overhead: Standard Cost, Budget Variance, Volume Variance"Fixed" manufacturing overhead costs remain the same in total even though the volume of production may increase by a modest amount. For example, the property tax on the manufacturing facility might be $50,000 per year and it arrives as one tax bill in December. The amount of the property tax bill was not dependent on the number of units produced or the number of machine hours that the plant operated. Other examples include the depreciation or rent on production facilities; salaries of production managers and supervisors; and professional memberships and training for personnel in the manufacturing area. Although the fixed manufacturing overhead costs present themselves as large monthly or annual expenses, they are, in reality, a small part of each product's cost.DenimWorks has two fixed manufacturing overhead costs:

A small amount of these fixed manufacturing costs must be allocated to each apron produced. This is known asabsorption costingand it explains why some accountants say that each product must "absorb" a portion of the fixed manufacturing overhead costs.A simple way to assign or allocate the fixed costs is to base it on things such as direct labor hours, machine hours, or pounds of direct material. (Accountants realize that this is simplistic; they know that overhead costs are a result ofor are driven bymany different factors.) Nonetheless, we will assign the fixed manufacturing overhead costs to the aprons by using the same method we used for variable manufacturing overheadby using direct labor hours.

Establishing a Predetermined RateCompanies typically establish a standard fixed manufacturing overhead rate prior to the start of the year and then use that rate for the full year. Let's assume it is December 2012 and DenimWorks is developing the standard fixed manufacturing overhead rate to use in 2013. (As mentioned above, we will assign the fixed manufacturing overhead on the basis of direct labor hours.)Step 1.Project/estimate the fixed manufacturing overhead costs for the year 2013.We indicated above that DenimWorks' only fixed manufacturing overhead costs are rents of $700 per month (space and equipment) totaling to $8,400 for the year 2013.Step 2.Project/estimate the total number of standard direct labor hours that are needed to manufacture your products during 2013.We can do that from the information given earlier (and repeated here):

Step 3.Compute the standard fixed manufacturing rate to be used in 2013.

Note:One of the reasons a company develops a predetermined annual rate is so that the rate is uniform throughout the year, even though the number of units manufactured may fluctuate month by month. For example, if the company used monthly rates, the rate would be high in the months when few units are manufactured (monthly fixed costs of $700 100 units produced = $7 per unit) and low when many units are produced (monthly fixed costs of $700 350 units = $2 per unit).Fixed Manufacturing Overhead Budget VarianceThe difference between theactualamount of fixed manufacturing overhead and theestimatedamount (the amount budgeted when setting the overhead rate prior to the start of the year) is known as the fixed manufacturing overhead budget variance.In our example, we budgeted the annual fixed manufacturing overhead at $8,400 (monthly rents of $700 x 12 months). If DenimWorks pays more than $8,400 for the year, there is an unfavorable budget variance; if the company pays less than $8,400 for the year, there is a favorable budget variance.

Fixed Manufacturing Overhead Volume VarianceRecall that the fixed manufacturing overhead (such as the large amount of rent paid at the start of every month) must be assigned to each apron produced. In other words, each apron must absorb a small portion of the fixed manufacturing overhead. At DenimWorks, the fixed manufacturing overhead is assigned to the good output by multiplying the standard rate by the standard hours of direct labor in each apron. Hopefully, by the end of the year there are enough good aprons produced to absorb all of the fixed manufacturing overhead.The fixed manufacturing overhead volume variance compares the amount of fixed manufacturing overhead budgeted to the amount that was applied to (or absorbed by) the good output. If the amount applied is less than the amount budgeted, there is an unfavorable volume variancethere was not enough good output to absorb the budgeted amount of fixed manufacturing overhead. If the amount applied to the good output is greater than the budgeted amount of fixed manufacturing overhead, the fixed manufacturing overhead volume variance is favorable. In summary, if DenimWorks applies more than the amount budgeted, the volume variance is favorable; if it applies less than the amount budgeted, the volume variance is unfavorable.Illustration of Fixed Manufacturing Overhead Variances for 2013Let's assume that in 2013 DenimWorks manufactures (has actual good output of) 5,300 large aprons and 2,600 small aprons. Let's also assume that the actual fixed manufacturing overhead costs for the year are $8,700. As we calculated earlier, the standard fixed manufacturing overhead rate is $4 per standard direct labor hour.We begin by determining the fixed manufacturing overhead applied to (or absorbed by) the good output produced in the year 2013:

Our analysis looks like this:Fixed Manufacturing Overhead Analysis for the Year 2013:

This analysis shows that the actual fixed manufacturing overhead costs are $8,700 and the fixed manufacturing overhead costs applied to the good output are $8,440. This unfavorable difference of $260 agrees to the sum of the two variances:

Actual fixed manufacturing overhead costs are debited to overhead cost accounts. The credits are made to accounts such as Accounts Payable or Cash. For example:

Another entry records how these overheads are assigned to the product:

Assembly Line Balancing

This model is used to balance workloads on an assembly line. Five heuristic rules can be used for performing the balance. The cycle time can be given explicitly or the production rate can be given and the program will compute the cycle time. This model will not split tasks. Task splitting is discussed in more detail in a later section.The Model

The general framework for assembly line balancing is dictated by the number of tasks which are to be balanced. These tasks are partially ordered as shown for example in the precedence diagram below.

Method.The five heuristic rules which can be chosen are:longest operation timemost following tasksranked positional weightshortest operation time andleast number of following tasks.NOTE:Ties are broken in an arbitrary fashion if two tasks have the same priority based on the rule given.The remaining parameters are:Cycle time. The cycle time can be given in one of two ways. One way is when the cycle time is given directly as shown above. While this is the easiest method, it is more common to determine the cycle time from the demand rate. The cycle time is converted into the same units as the times for the tasks. (See example 2).Time unit. The time unit for the tasks is given by this dropdown box. You must choose either seconds, hours or minutes. Notice that the column heading for the task times will change as you select different time units.Task times. The task times are given.Precedences. Enter the precedences, one per cell. If there are two precedences they must be entered in two cells. Do not enter 'a,b'. In fact, a comma will not be acceptedNotice that in the precedence list we have typed both 'a' and 'A'. As mentioned previously, the case of the letters is irrelevant.Example 1In this example we have 6 tasks namedathroughf. The precedence diagram for this problem appears above. The time to perform each task is above the task. Also, note that the tasks which are ready at the beginning of the balance are tasksaandb.Finally, in this first example we use a cycle time of 10.

Solution

The screen above contains the solution to our first example. The solution screen will always have the same appearance and contain the same information regardless of the rule which is chosen for the balance. The information is as follows.The cycle time.The cycle time which was used appears below the balance. This cycle time was either given directly or was computed. In this example the cycle time was given directly as 10 seconds.Station numbers. The station numbers appear in the far left column. They are printed only for the first task which is loaded into each station. In this example three stations are required.Task names. The tasks which are loaded into the station are listed in the second column. In this example tasksb, eandaare in station 1, tasksdandcare in station 2 and taskfis in station 3.Task times. The length of time for each task appears in this column.Time left.The length of time which remains at the station is listed in this column. The last number at each station is of course the idle time at that station. For example, there is 1 second of idle time at station 1, 1 second at station 2, and 2 seconds at station 3 for a total of 4 seconds of idle time per cycle.Ready tasks. The tasks which are ready appear here. A ready task is any task which has had its precedences met. We emphasize this because some books do not list a task as ready if its time exceeds the time remaining at the station. Also, if the number of characters in the ready task list is very long you might want to widen that column.Time allocated. The total time allocated for making each unit is printed. This time is the product of the number of stations and the cycle time at each station. In this example we have 3 stations each with a cycle time of 10 seconds for a total work time of 30 station-seconds.The time needed to make one unit.This is simply the sum of the task times. In the example we have 1 + 5 + 2 + 7 + 3 + 8 = 26 seconds.Idle time.This is the time needed subtracted from the time allocated. This example has 30 - 26= 4 which matches the 4 seconds found in the column of time left.The efficiency. Efficiency is defined as the time needed divided by the time allocated. In this example the efficiency is computed as 26/30 which is .8667The balance delay. The balance delay is the percentage of wasted time or 100% - the efficiency. In this example it is 4 (the idle time)/30 or .1333 which is also determined by 1-.8667.Minimum theoretical number of stations. This is the total time to make one unit divided by the cycle time and roundedupto the nearest integer. In this example we have 26 seconds required to make one unit divided by a 10 second cycle time for an answer of 2.6. which we roundupto 3 stations.The precedence graph can be displayed as well as a bar graph indicating how much time was used at each station. These are shown at the end of this section. In addition, if there is idle time at every station then a note will appear at the top indicating that the balance can be improved (by reducing the cycle time).Example 2 - computing the cycle time

Suppose that for the same data we require a production of 2250 units in 7.5 hours.

We assume full minutes and hours and compute the cycle time as(7.5 hrs/2,250units)*60 min/hr*60 sec/min = 27,000/2,250 = 12 secondsas illustrated in the balance in the screen below.

Other rules

Most following tasks

A common way to choose tasks is by using the task with the most tasks following. Notice from the diagram thatahas three tasks following it andbhas 2 tasks following it. Therefore the first task scheduled is taskawhen using this rule.Ranked positional weight method

The ranked positional weight computes the sum of the task and all tasks which follow. For example, for taskathe ranked positional weight is 1 + 2 + 7 + 8 = 18 while for taskbthe weight is 5 + 3 + 8 =16. The task with the largest weight is scheduled first (if it will fit in the remaining time). Notice thatehas a higher ranked positional weight thanc.Shortest operation time

Another rule that is used sometimes is to give priority to the task which takes the least amount of time.Least number of followers

The last rule which is available is the least number of followers.Example 3 - What to do if longest operation time will not fit

Some books and some software do not apply the longest operation time rule properly. If the task with the longest time will not fit into the station then the task with the second longest time should be placed in the station if it will fit.In the screen below we present data for 8 tasks. Notice that tasksbandcfollow taska.

The balance appears above for a cycle time of 5 seconds. After taskais completed tasksbandcare ready. Taskbis longer but will not fit in the 4 seconds which remain at station 1. Therefore, taskcis inserted into the balance. We caution you that if the answer in your book differs from the program to check if the book has neglected to put in the task with the longest operation time that will fit.Example 4 - Splitting Tasks

If the cycle time is less than the amount of time to perform a specific task then there is a problem. We perform what is termed task splitting but in reality is actually duplication. For example, suppose that the cycle time is 2 minutes and a task takes 5 minutes. Then we have the task performed three times (by three people at three machines independent of one another). The effect is that three units will be done every 5 minutes which is equivalent to one unit every 1.33 minutes which fits into the 2 minute cycle.Now, the actual way that the three people work may vary. While other programs will split tasks the assumptions vary from program to program. Rather than making assumptions we leave it to you to split the tasks by dividing the task time appropriately.Suppose that in Example 1 we wanted to use a cycle time of 6 seconds. Then it is necessary to replicate both tasks d and f since they will not fit in the cycle time. The approach to use is to solve the problem by dividing the task times by two since this replication is needed. We present the results below

Graphs

Two different graphs are available. The first is a precedence graph as shown below. Please note that there may be several different ways to draw a precedence graph.

The second graph is of time used at each station. In a perfect world these would all be the same (a perfect balance)

MANAGEMENT ACCOUNTING: CONCEPTS AND TECHNIQUESBy Dennis CaplanPART 4: DETERMINING THE COST OF INVENTORYCHAPTER 17:COST VARIANCES FOR VARIABLE AND FIXED OVERHEADChapter Contents:-Cost Variances for Variable Overhead-Cost Variances for Fixed Overhead-The Fixed Overhead Spending Variance-The Fixed Overhead Volume Variance-Additional Issues Related to the Volume Variance-Comprehensive Example of Fixed Overhead VariancesCost Variances for Variable Overhead:The formulas for splitting the flexible budget variance for variable overhead into a price variance and an efficiency variance are the same as the formulas for direct materials and direct labor explained in Chapter 6. The price variance for variable overhead is called the variable overheadspending variance:Spending variance =PV=AQx (APSP)Efficiency variance =EV=SPx (AQSQ)WhereAPis the actual overhead rate used to allocate variable overhead, andSPis the budgeted overhead rate. The Qs refer to the quantity of the allocation base used to allocate variable overhead, so thatAQis the actual quantity of the allocation base used during the period, andSQis the standard quantity of the allocation base. The standard quantity of the allocation base is the amount of the allocation base that should have been used (i.e., would have been budgeted) for the actual output units produced.Given the use of the allocation base in these formulas for the cost variances for variable overhead, the meaning of these variances differs fundamentally from the interpretation of the variances for direct materials and direct labor. Consider a company that allocates electricity using direct labor as the allocation base. A negative variable overhead efficiency variance does not necessarily mean that the factory used more electricity than the flexible budget quantity of kilowatt hours for the actual outputs produced. Rather, the negative variance literally means that the factory used more direct labor than the flexible budget quantity for direct labor. If there is a cause-and-effect relationship between the allocation base and the variable overhead cost category (i.e., if more direct labor hours implies more electricity used), then the negative efficiency variance suggests that more electricity was used than the flexible budget quantity, but the efficiency variance does not measure kilowatts directly.Similarly, a negative spending variance for variable overhead does not necessarily mean that the cost per kilowatt-hour was higher than budgeted. Rather, a negative spending variance for variable overhead literally states that the actual overhead rate was higher than the budgeted overhead rate, which could be dueeitherto a higher cost per kilowatt-hour,or more kilowatt hours used per unit of the allocation base. Hence, what one might think should be included in the efficiency variance (kilowatt hours required per direct-labor-hour being higher or lower than budgeted) actually gets included as part of the spending variance.Cost Variances for Fixed Overhead:Whereas the cost variances for direct materials, direct labor, and variable overhead all use the same two formulas, the cost variances for fixed overhead are different, and do not use these formulas at all.Also, whereas cost variances for direct materials, direct labor, and variable overhead can be calculated for individual products in a multi-product factory, cost variances for fixed overhead can only be calculated for the factory or facility as a whole. (More precisely, fixed overhead cost variances can only be calculated for the combined operations to which the resources represented by the fixed costs apply.)There are two fixed overhead cost variances: the spending variance and the volume variance.The Fixed Overhead Spending Variance:Thefixed overhead spending varianceis the difference between two lump sums:Actual fixed overhead costs incurredBudgeted fixed overhead costsThe fixed overhead spending variance is also called thefixed overhead price varianceor thefixed overhead budget variance.The Fixed Overhead Volume Variance:Thefixed overhead volume varianceis also called theproduction volume variance, because this variance is a function of production volume. The volume variance attaches a dollar amount to the difference between two production levels. The first production level is the actual output for the period. The second production level is the denominator-level concept in the budgeted fixed overhead rate, expressed in units. As discussed in the previous chapter, there are two common choices for this denominator:(1)budgeted production(2)factory capacityThe interpretation of the volume variance depends on which of these two denominators are used, but in either case, the production volume variance is the difference between budgeted fixed overhead (a lump sum), and the amount of fixed overhead that would be allocated to production under a standard costing system using this fixed overhead rate.The volume variance with budgeted production in the denominator of the O/H rate:First we use budgeted production to calculate the volume variance. In this case:volume variance=(budgeted fixed overheadXunits produced)budgeted fixed overhead

budgeted production

The term in parenthesis equals the amount of fixed overhead that would be allocated to production under a standard costing system, when budgeted production is the denominator-level concept.Sincebudgetedfixed overheadbudgeted production=budgeted overhead ratetheabove expression for the volume variance is algebraically equivalent to the following formula:volume variance=(units producedbudgeted production)xbudgeted overhead rate

This formula for the volume variance illustrates the statement above; that the volume variance attaches a dollar amount to the difference between two production levels. In this case, the two production levels are actual production and budgeted production. The interpretation of the volume variance, when budgeted production is used in the denominator of the overhead rate, is the following. When actual production is less than budgeted production, the volume variance represents the fixed overhead costs that are not allocated to product because actual production is below budget. In this case, the volume variance isunfavorable. When actual production is greater than budgeted production, then the volume variance represents the additional fixed overhead costs that are allocated to product because actual production exceeds budget. In this case, the volume variance isfavorable.The intuition for when the volume variance is favorable and when it is unfavorable is the following. If the company can produce more units of output using the same fixed assets (i.e., the resources that comprise fixed overhead), then assuming those additional units can be sold, the company is more profitable. When fixed overhead is allocated to production, this greater profitability is reflected in a lower per-unit production cost, because the same amount of total fixed overhead is spread over more units. On the other hand, if fewer units are produced than planned, then the same fixed overhead is spread over fewer units, the per-unit production cost is higher, and the company is less profitable. This higher or lower profitability that arises from changes in production levels is not an artifact of the accounting system. Even if the company uses Variable Costing, and expenses fixed overhead as a lump-sum period cost, when the company makes and sells fewer units than planned using the same fixed overhead resources, it really is less profitable than was budgeted, and when the company makes and sells more units than planned using the same fixed overhead resources, it really is more profitable than was budgeted.The volume variance with factory capacity in the denominator of the O/H rate:Next we use factory capacity to calculate the volume variance. In this case:volume variance=(budgeted fixed overheadxunits produced)budgeted fixed overhead

factory capacity

Sincebudgetedfixed overheadfactory capacity=budgeted overhead ratetheabove expression for the volume variance is algebraically equivalent to the following formula:volume variance=(units producedfactory capacity)xbudgeted overhead rate

The interpretation of the volume variance, when factory capacity is used in the denominator of the overhead rate, is the following. Actual production is almost always below capacity. The volume variance represents the fixed overhead costs that are not allocated to product because actual production is below capacity. Hence the volume variance represents the cost of idle capacity, and this variance is typicallyunfavorable. For this reason, this volume variance is sometimes called theidle capacity variance. In the unlikely event that the factory produces above capacity (which can occur if the concept of practical capacity is used, and actual down-time for routine maintenance, etc., is less than expected), then the volume variance represents the additional fixed overhead costs that are allocated to product because actual production exceeds capacity. In this case, the volume variance isfavorable.Additional Issues Related to the Volume Variance:Under what circumstances would a company calculate the volume variance using budgeted production as the denominator-level concept, and under what circumstances would a company use factory capacity as the denominator-level concept?The use of budgeted production in the calculation of the volume variance attaches a lump sum benefit or cost to actual production levels that exceed or fall short of budgeted production levels. For this reason, many companies consider this calculation of the volume variance to be an important performance measure for the factory manager and marketing managers responsible for making and marketing the product.The use of factory capacity in the calculation of the volume variance provides an indication of how low the per-unit cost can go, if demand equals or exceeds factory capacity. If senior management would like product managers to make pricing and operating decisions based on a long-term expectation that demand for the product will equal or exceed factory capacity, even though current or short-term demand is below capacity, calculating the per-unit cost in this manner will encourage product managers to take this long-run perspective. For example, consider the launch of a new product line in a new factory. If fixed overhead is allocated based on budgeted production, then product managers might feel pressured to set sales prices that will cover full product costs at initially-low production levels, but these sales prices might be too high to generate sufficient initial consumer interest in the product for a successful product launch.Another reason to use factory capacity in the denominator of the fixed overhead rate, and in the calculation of the volume variance, is that doing so isolates the cost of idle capacity. Often, the decision to build a factory that is larger than current demand warrants is a strategic decision made at high levels within the organization. If the fixed overhead associated with this factory is allocated based on budgeted or actual production, the per-unit cost of every unit manufactured includes a small portion of the cost of this strategic decision, and the cost reports of factory managers and the product profitability statements of product managers are negatively affected by this unused capacity. Some companies prefer to isolate the cost associated with this strategic decision, and to either show the cost of idle capacity as separate line-items on the cost reports and profit statements of the factory manager and product managers, or remove this cost entirely from these performance reports, and report it only at the corporate level.Allocating fixed overhead using actual production can provide managers short-run incentives to overproduce, because as production increases, the per-unit cost decreases. Similarly, calculating the volume variance using budgeted production in the denominator of the overhead rate can provide managers short-run incentives to overproduce, because as production exceeds budget, the volume variance becomes increasingly favorable. For this reason, some companies choose not to allocate fixed overhead at all. However, the use of factory capacity in the denominator of the fixed overhead rate accomplishes the same objective, because it isolates the volume variance such that the performance reports of these managers need not be affected by it.We have assumed, throughout this section, that fixed overhead is allocated based on units of output. However, we saw in the chapter on activity-based costing that units of production is often a poor choice of allocation base in a multi-product factory, and many companies that use standard costing systems use allocation bases that are more sophisticated, such as direct labor hours or direct materials dollars. The question might arise, how does the use of a different allocation base, such as direct labor hours, affect the calculation of the volume variance? The answer is:Not at all.Because of the way in which standard costing systems work, the amount of fixed overhead that will be allocated to product does not depend on the choice of allocation base.For example, assume that a one-product company budgets two direct labor hours to make each unit, and assume that if fixed overhead is allocated based on output units, the budgeted fixed overhead rate is $10 per unit. Then using direct labor hours as the allocation base, the budgeted fixed overhead rate is $5 per direct labor hour. Because of the mechanics of standard costing systems, no matter whether the $10-per-unit rate is used, or the $5-per-direct-labor-hour rate is used, $10 of fixed overhead will be allocated to every unit produced, no matter how many direct labor hours are actually used per unit. (If this fact is not obvious to you, refer back to Chapter 10 on standard costing.) Therefore, for the purpose of calculating the volume variance, we might as well use the easiest allocation base, which is units-of-output.It is important to recognize that even though most manufacturing companies use a standard costingsystem,and even though the calculation of the fixed overhead volume variance relies on the concept of standard costing, companies can calculate the volume variance even if they do not use a standard costing system. In this case, the calculation is identical to the discussion above, but the company will not be able to obtain the required information from the cost accounting system itself, but rather, will need to make a separate calculation.Comprehensive Example of Fixed Overhead Variances:The Coachman Company makes pencils. The pencils are sold by the box. Following is information about the companys only factory:BudgetActualCapacity

Number of boxesDirect labor hoursMachine hoursFixed overhead10,000200500$40,00012,000250650$42,00020,000

The outputs here are boxes of pencils. The inputs are direct labor hours and machine hours. First we calculate a fixed overhead rate using actual amounts, and output units as the allocation base:$42,000 12,000 boxes = $3.50 per box.Using this overhead rate, every box of pencils iscostedat the variable cost of production plus $3.50 in allocated fixed overhead.Next we calculate a fixed overhead rate using budgeted costs, and budgeted output units as the denominator-level concept:$40,000 10,000 boxes = $4.00 per box.Next we calculate a fixed overhead rate using budgeted costs, and factory capacity as the denominator-level concept (expressed in terms of output units).$40,000 20,000 boxes = $2.00 per box.The advantage of using capacity in the denominator is that this denominator-level concept shows how low the fixed cost per unit can go, and hence, how low the total cost per unit can go, as production increases.The fixed overhead spending variance is calculated as follows:$42,000 actual$40,000 budgeted = $2,000 unfavorable.Next, we calculate the volume variance using capacity as the denominator-level concept:volumevariance = ($2.00 perboxx 12,000boxes)$40,000 = $16,000 unfavorableor equivalently:volume variance = $2.00 per box x (12,000 boxes20,000boxes) = $16,000 unfavorableIf the company uses a standard costing system, the amount ofoverallocatedorunderallocatedfixed overhead is the difference between actual fixed overhead incurred, and fixed overhead allocated to product, calculated as follows:actual fixed overheadfixed overhead allocated$42,000($2.00 perboxx12,000boxes)= $42,000$24,000 = $18,000underallocatedThis $18,000 ofunderallocatedfixed overhead is equal to the sum of the $2,000 unfavorable fixed overhead spending variance and the $16,000 unfavorable volume variance.Next, we calculate the volume variance using budgeted production as the denominator-level concept:volume variance = ($4.00 perboxx12,000boxes)$40,000 = $8,000 favorableor equivalently:volume variance = $4.00 per box x (12,000 boxes10,000boxes) = $8,000 favorableIf the company uses a standard costing system, the amount ofoverallocatedorunderallocatedfixed overhead is the difference between actual fixed overhead incurred, and fixed overhead allocated to product, calculated as follows:actual fixed overheadfixed overhead allocated$42,000($4.00 perboxx 12,000boxes)= $42,000$48,000 = $6,000overallocatedThis $6,000 ofoverallocatedfixed overhead is equal to the sum of the $2,000 unfavorable fixed overhead spending variance (which did not change when we changed the denominator-level concept from capacity to budgeted production) and the $8,000 favorable volume variance.To illustrate that the choice of allocation base does not affect the calculation of the volume variance, we recalculate the volume variance assuming the company allocates overhead using machine hours as the allocation base and budgeted production as the denominator-level concept. The budgeted overhead rate is now$40,000 500 machine hours = $80 per machine hour.Since the standard for machine time is one hour for every twenty boxes (derived from the budget column in the box at the beginning of the example), the standard costing system will allocate fixed overhead as follows:Budgetedoverhead rate x (standard inputs allowedfor actual outputs achieved)= $80 per machine hour x (12,000 boxes 20 boxes per machine hour)= $80 per machine hour x 600 machine hours = $48,000And the volume variance isfixed overhead allocated to productbudgeted fixed overhead= $48,000$40,000 = $8,000 favorable, as before.Yield (finance)From Wikipedia, the free encyclopediaThis articleneeds additional citations forverification.Please helpimprove this articlebyadding citations to reliable sources. Unsourced material may be challenged and removed.(January 2011)

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Infinance, the termyielddescribes the amount in cash (in percent terms) that returns to the owners of asecurity. Normally, it does not include the price variations, at the difference of the totalreturn. Yield applies to various stated rates of return on stocks (common and preferred, andconvertible), fixed income instruments (bonds, notes, bills, strips, zero coupon), and some other investment type insurance products (e.g. annuities).The term is used in different situations to mean different things. It can be calculated as a ratio or as aninternal rate of return(IRR). It may be used to state the owner's total return, or just a portion ofincome, or exceed the income.Because of these differences, the yields from different uses should never be compared as if they were equal. This page is mainly a series of links to other pages with increased details.Contents[hide] 1Bonds, notes, bills 2Preferred shares 3Preferred trust units 4Common shares 5Annuities 6REITs, royalty trust, income trusts 7Real Estate & Property 8How to evaluate the yield (%) 9See also 10ReferencesBonds, notes, bills[edit]Main article:Bond valuationThecoupon rate(also nominal rate) is the yearly total ofcoupons(or interest) paid divided by the Principal (Face) Value of the bond.Thecurrent yieldis those same payments divided by the bond's spot market price.Theyield to maturityis the IRR on the bond's cash flows: the purchase price, the coupons received and the principal at maturity.Theyield to callis the IRR on the bond's cash flows, assuming it is called at the first opportunity, instead of being held till maturity.The yield of a bond is inversely related to its price today: if the price of a bond falls, its yield goes up. Conversely, if interest rates decline (the market yield declines), then the price of the bond should rise (all else being equal).There is also TIPS (Treasury Inflation Protected Securities), also known as Inflation Linked fixed income. TIPS are sold by the US Treasury and have a "real yield". The bond or note's face value is adjusted upwards with the CPI-U, and a real yield is applied to the adjusted principal to let the investor always outperform the inflation rate and protect purchasing power. However, many economists believe that the CPI under-represents actual inflation. In the event of deflation over the life of this type of fixed income, TIPS still mature at the price at which they were sold (initial face). Losing money on TIPS if bought at the initial auction and held to maturity is not possible even if deflation was long lasting.Preferred shares[edit]Like bonds, preferred shares compensate owners with scheduled payments which resemble interest. However, preferred "interest" is actually in the form of a dividend. This is a significant accounting difference as preferred dividends, unlike debt interest, are charged after taxes and below net income, therefore reducing net income and ultimately earnings per share. Preferred shares may also contain conversion privileges which allow for their exchange into common stock.Thedividend yieldis the total yearly payments divided by the principal value of the preferred share.Thecurrent yieldis those same payments divided by the preferred share's market price.If the preferred share has a maturity (not always) there can also be ayield to maturityandyield to callcalculated, the same way as for bonds.Preferred trust units[edit]Like preferred shares but units in a trust. Trusts have certain tax advantages to standard corporations and are typically deemed to be "flow-through" vehicles. Private mutual funds trusts are gaining in popularity in Canada following the changes to tax legislation which forced many publicly tradedroyalty truststo convert back into corporations. Investors seeking the high yields typically associated with the energy royalty trusts are increasingly investing in private mutual energy fund trusts.Common shares[edit]Common shares will often pay out a portion of the earnings as dividends. Thedividend yieldis the total dollars (RMB, Yen, etc.) paid in a year divided by the spot price of the shares. Most web sites and reports are updated with the expected future year's payments, not the past year's.The price/earnings ratio quoted for common shares is the reciprocal of what is called theearnings yield. EarningsPerShare / SharePrice.Annuities[edit]Thelife annuitiespurchased to fund retirement pay out a higheryieldthan can be obtained with other instruments, because part of the payment comes from areturn of capital. $YearlyDistribution / $CostOfContract.REITs, royalty trust, income trusts[edit]Like annuities,distribution yieldsfromREITs, Royalty trusts, and Income trusts often include cash that exceeds the income earned: that isreturn of capital. $YearlyDistribution / $SharePrice.Real Estate & Property[edit]Several different yields are used as measures of a real estate investment, includinginitial,equivalentandreversionaryyields.Initial Yield is the annualised rents of a property expressed as a percentage of the property value.Initialyield.com (May 2012)."Glossary, Initial Yield".Initial Yield. Retrieved May 2012.E.g. 100,000 passing rent per annum 1,850,000 valuation 100000/1850000 = 0.054 or 5.4%Reversionary Yield is the anticipated yield to which the initial yield will rise (or fall) once the rent reaches the ERV.Initialyield.com (May 2012)."Glossary, Reversionary Yield".Reversionary Yield. Retrieved May 2012.E.g. 150,000 ERV per annum 1,850,000 valuation 150000/1850000 = 0.081 or 8.1%Equivalent Yield lies somewhere in between the initial yield and reversionary yield, it encapsulates theDCFof the property with rents rising (or falling) from the current annualised rent to the underlying estimated rental value (ERV) less costs that are incurred along the way. The discount rate used to calculate the net present value (NPV) of theDCFto equal zero is the equivalent yield, or theIRR.Initialyield.com (May 2012)."Glossary, Equivalent Yield".Equivalent Yield. Retrieved May 2012.The calculation not only takes into account all costs, but other assumptions including rent reviews and void periods. A trial and error method can be used to identify the equivalent yield of aDCF, or if using Excel, the goal seek function can be used.How to evaluate the yield (%)[edit]All financial instruments compete with each other in the market place. Yield is one part of the total return of holding a security. A higher yield allows the owner to recoup his investment sooner, and so lessens risk. But on the other hand, ahigh yieldmay have resulted from a falling market value for the security as a result of higher risk.Yield levels vary mainly with expectations ofinflation. Fears of high inflation in the future mean that investors ask for high yield (a low price vs the coupon) today.The maturity of the instrument is one of the elements that determinesrisk. The relationship between yields and the maturity of instruments of similar credit worthiness, is described by theyield curve. Long dated instruments typically have a higher yield than short dated instruments.The yield of a debt instrument is generally linked to the credit worthiness anddefaultprobability of the issuer. The more the default risk, the higher the yield would be in most of the cases since issuers need to offer investors some compensation for the risk.See also[edit] Ecological yield Yield curve 30-day yield 7 Day SEC Yield Nominal yield Bond (finance)Ch. 8 Location Planning and AnalysisEdit0156Summary

Location PlanningEvery firm must use location planning techniques. There are many options for location planning. Corporations choose from expanding an existing location, shutting down one location and moving to another, adding new locations while retaining existing facilities, or doing nothing. There are a variety of methods used to decide the best location or alternatives for the corporation. Methods such as identifying the country, general region, small number of community alternatives, and site alternatives.

Several factors that influence location positioning include the location of raw materials, proximity to the market, climate, and culture. Models for evaluating whether a location is best for an organization consist of cost-profit analysis for locations, the center of gravity model, the transportation model, and factor rating.

This chapter discusses the decision to relocate a facility by considering costs and benefits. If you are planning on moving or acquiring a new facility, there are many factors to consider: the size, the geographic area, culture, transportation costs and others. After a location or locations have been chosen a cost-profit-volume analysis is done.

The main factors that affect location decisions include regional factors, community considerations, and site-related factors. Community factors consist of quality of life, services, attitudes, taxes, environmental regulations, utilities, and development support.

EVALUATING LOCATION ALTERNATIVES(Page 385)There are three specific analytical techniques available to aid in evaluating location alternatives:

1. Location Cost-Volume-Profit Analysis:1. The Cost-Volume-Profit (CVP) Analysis can be represented either mathematically or graphically. It involves three steps: 1) For each location alternative, determine the fixed and variable costs, 2)For all locations, plot the total-cost lines on the same graph, and 3) Use the lines to determine which alternatives will have the highest and lowest total costs for expected levels of output. Additionally, there are four assumptions one must keep in mind when using this method:1. Fixed costs are constant.2. Variable costs are linear.3. Required level of output can be closely estimated.4. There is only one product involved.5. 2. Total cost = FC = v(Q)where FC=Fixed Cost, v=Variable Cost per Unit, Q=Number of Units (Also shown below but not in the same format)

1. Factor Rating1. This method involves qualitative and quantitative inputs, and evaluates alternatives based on comparison after establishing a composite value for each alternative. Factor Rating consists of six steps:1. Determine relevant and important factors.2. Assign a weight to each factor, with all weights totaling 1.00.3. Determine common scale for all factors, usually 0 to 100.4. Score each alternative.5. Adjust score using weights (multiply factor weight by score factor); add up scores for each alternative.6. The alternative with the highest score is considered the best option.2. Minimum scores may be established to set a particular standard, though this is not necessary.2. Center of Gravity Method:1. This technique is used in determining the location of a facility which will either reduce travel time or lower shipping costs. Distribution cost is seen as a linear function of the distance and quantity shipped. The Center of Gravity Method involves the use of a visual map and a coordinate system; the coordinate points being treated as the set of numerical values when calculating averages. If the quantities shipped to each location areequal, the center of gravity is found by taking the averages of thexandycoordinates; if the quantities shipped to each location aredifferent, a weighted average must be applied (the weights being the quantities shipped).Company RelocatingThere are many factors that contribute to a company relocating. Some of the reasons include expanding the market and diminishing resources. For an existing company to relocate, they must weigh their options when planning to relocate elsewhere. They can expand their existing facility, add new ones and keep their existing facilities open, move to another location and shut down one location, or keep things the way they are and not do anything. Globalization has led many companies to set up operations in other countries. Two factors that make relocation appealing are advances in technology and trade agreements. By going global, companies will expand their markets and be able to cut costs in labor, transportation, and taxes. They also have gained ideas for new products and services.

IDENTIFYING A COUNTRY, REGION, COMMUNITY, AND SITE(Page 376)factors that influence location decisions are:Manufacturing:oAvailability of energy and wateroProximity to raw materialsoTransportation costService:oTraffic patternsoProximity to marketsoLocation of competitorsimportant factors have been determined, an organization will narrow down alternatives to a specific geographic region. These factors that influence location selection are often different depending on whether the firm is a manufacturing or service firm. When deciding on a location, mangers must take into account the culture shock employees might face after a location move. Culture shock can have a big impact on employees which might affect workers productivity, so it is important that mangers look at this.

vIDENTIFYING A COUNTRYoA decision maker must understand the benefits and risks as well as the probabilities of them occurring

vIDENTIFYING A REGION-4 major considerationsoLocation to Raw Materials:The three most important reasons for a firm to locate in a particular region includesraw materials, perishability, and transportation cost.This often depends on what business the firm is in.oLocation to Markets:Profit maximizing firms locate near markets that they want to serve as part of their competitive strategy. AGeographic information system(GIS)is a computer based tools for collecting, storing, retrieving, and displaying demographic data on maps.oLabor Factors: Primary considerations include labor availability, wage rates, productivity, attitudes towards work, and the impact unions may have.oOther: Climate is sometimes a consideration because bad weather can disrupt operations. Taxes are also an important factor due to the fact that taxes affect the bottom line in some financial statements.

vIDENTIFYING A COMMUNITYoThere are many important factors for deciding upon the community in which move a business. They include facilities for education, shopping, recreation and transportation among many others. From a business standpoint these factors include utilities, taxes, and environmental regulation.

vIDENTIFYING A SITEoThe main considerations in choosing a site are land, transportation, zoning and many others. When identifying a site I]it is important to consider to see if the company plans on growing at this location. If so, the firm must consider whether or not location is suitable for expansion.There are many decisions that go into choosing exactly where a firm will establish its operations. First, a company must determine the driving factors that will influence which areas are suitable locations. After these factors have been determined, the company will identify potential countries and examine the pros and cons of establishing operations in these countries. After looking at pro and cons of the different countries and deciding on a country, then decision makers will identify a region within the country. When identifying a region, decision makers must take the four major factors explained above into consideration. The last two stages of the search include choosing a community and a site.

Note: The above part is way too lengthy for this assignment.Summary below..

Summary: There are several ways that are very helpful in evaluating location alternatives, such as locational cost-profit-volume analysis, factor rating, and the center of gravity method. First, let's take a look at Location Cost-Profit-Volume Analysis.

This analysis can be done numerically or graphically. The procedure for locational cost-profit-volume analysis involves these steps:

1. Determine the fixed and variable costs associated with each location alternative.2. Plot the total-cost lines for all location alternatives on the same graph.3. Determine which location will have the lowest total cost for the expected level of output. Alternatively, determine which location will have the highest profit.

This method assumes the following:1. Fixed costs are constant for the range of probable output.2. Variable costs are linear for the range of probable output.3. The required level of output can be closely estimated.4. Only one product is involved.

Here're a couple of important formulas to remember:

Total cost = Fixed cost + Variable cost per unit * Quantity or volume of outputTotal profit = Quantity(Revenue per unit - Variable cost per unit) - Fixed cost

In most situations, other factors besides cost must also be considered. We will now consider another kind of cost often considered in location decisions: transportation costs.

Transportation costs sometimes play an important role in location decisions. The company can include the transportation costs in a locational cost-volume analysis by incorporating the transportation cost per unit being shipped into the variable cost per unit if a facility will be the sole source or destination of shipments. When there is a problem with shipment of goods from multiple sending points to multiple receiving points, and a new location is to be added to the system, the company should undertake a separate analysis of transportation. In this case, transportation model of linear programming is very helpful. The model is used to analyze each of the configurations considered, and it reveals the minumum costs each would provide. Then the information can be included in the evaluation of location alternatives.

Multiple Plant Manufacturing Strategies(page 381-382)-When comapnies have several manufacturing facilities there are several different ways for a company to organize their operations. These ways include: assigning different product lines to different plants, assigning different market areas to different plants, or assigning different processes to different plants. These strategies carry their own cost and managerial implications, but they also carry a certain competitive advantage. There are four different types of plant strategies:

1. Product Plant Strategy Products or product lines are produced in separate plants, and each plant is usually responsible for supplying the entire domestic market. It is a decentralized approach as each plant focuses on a narrow set of requirements that includes specialization of labor, materials, and equipment along product lines. Specialization involved in this strategy usually results in economies of scale and, compared to multipurpose plants, lower operating costs. The plant locations may either be widely scattered or placed relatively close to one another.

2.Market Area Plant Strategy

Here, plants are designed to serve a particular geographic segment of a market. The individual plants can produce either most, or all of the company's products and supply a limited geographical area. The operating costs of this strategy are often times higher than those of product plants, but savings on shipping costs for comparable products can be made. This strategy is useful when shipping costs are high due to volume, weight, or other factors. It can also bring the added benefits of faster delivery and response times to local needs. It requires a centralized coordination of decisions to add or delete plants, or to expand or downsize current plants because of changing market conditions.

3.Process Plant Strategy

Here, different plants concentrate on different aspects of a process. This strategy is most useful when products have numerous components; separating the production of components results in less confusion than if all the production were done in the same location. A major issue with this strategy is the coordination of production throughout the system, and it requires a highly informed, centralized administration in order to be an effective operation. It can bring about additional shipping costs, but a key benefit is that individual plants are highly specialized and generate volumes that brings economies of scale.

4.General-Purpose Plant Strategy

Plants are flexible and have the ability to handle a range of products

It allows for a quick response to products and market changes, but can be less productive than a more focused approach. A benefit to this approach is the increase in learning opportunities that happens when similar operations are being done in different plants. Solutions to problems as well as improvements made at one plant can be shared with the other plants

Question 1:From a company standpoint, which factors determine the desirability of a community as a place for its workers and managers to live?A) The amount of parking spacesB) Retail storesC) SchoolsD) Locals attitudes towards the company.E) Both C and D.

Answer: E. Page 380.

Question 2:What isNOTa risk a corporation must consider when planning a location?A) PoliticalB) ExportingC) EconomicD) CulturalE) Economic

Answer: B. Pages 373-374.

Question 3:What do banks, fast-food chains, supermarkets, and retail stores view locations as?A) One in many intricate decisions for their organizationsB) A crucial part of the marketing strategy.C) An easier way to distribute their product or service.D) New ideas for future investments.E) A second home.

Answer: B. Page 369

Question 4:What is the third step when making location decisions?A) Evaluate the alternatives and make a selection.B) Identify important factors.C) Decide on criteria for evaluating alternatives.D) Develop location alternatives.E) None of the above.

Answer: D. Page 376.

Question 5:What is the center of gravity method?A) A method that determines the location of a facility that will minimize shipping cost and travel time to various destinations.B)A method that determines the location of a facility closest to the most number of consumers.C) A method that determines the location of a facility closest to the main supplierD) A method that determines the location of a facility in the middle-point of all suppliers.E) none of the above

Answer: A. Page 388

1.) Location analysis assumes that both qualitative and quantitative factors are important in determining an ideal location when using:a. The Transportation Modelb. The Center of Gravity Methodc. Factor Ratingd. Cost-Profit Analysise. None of the above

Page 379 9th Ed.

2.) The transportation model can be applied to solve factors including:I. CostII. ProfitIII. CapacityIV. Managementa. I onlyb. I and II onlyc. I, II, and III onlyd. II, III, and IV onlye. II and IV only

Page 391 9th Edition

3.) The Transportation Model uses the following information to determine costs:a. A list of shipping originsb. Demand of destinationsc. Unit costsd. None of the abovee. All of the above

4.) Which is aTRUEassumption needed to perform Cost-Profit Volume Analysis?a. Fixed costs are exponentialb. Variable costs are logarithmicc. All costs are lineard. At least 2 products are being comparede. Revenue is NOT included in the analysis

*9th Edition says that variable costs are linear, and fixed costs are constant.*

5.) In the Factor Rating Method of location analysis, which of the following isNOTa managerial choice?a. Assigning weight to the importance of aspects being comparedb. Adding the applied (weight x value) of various categories to get a composite for a locationc. Determining the ultimate choice for the locationd. Assigning information gathering on a locatione. All of the above are managerial choices

Question 5 needs an answer, also needs page numbers where answers are found

1) What does GIS stand for?A. General Information SystemsB. Great Information SystemsC. Geographic Information SystemsD. General InstitutionsE. None of the above

Answer: C

2)The primary consideration for identifying a site is?A. LocationB. ZoningC. TransportationD. None of the AboveE. All of the above

Answer: E

3) What are the common techniques used to evaluate location alternatives?A. Locational cost-profit-volume analysisB. Factor ratingsC. Center of gravity methodD. Transportation modelE. All of the above

Answer: E

4) What is a general-purpose plant strategy?A. A general approach to evaluating locations that include qualitative and quantitative inputs.B. A way to evaluate rating of geographic areaC. A general approach to evaluating locations that include regional inputs.D. A way of being capable of handling a wide range of different products.E. None of the above

Answer: D

5) Method for locating a distribution center that minimizes the distribution costs.A.Location cost-pofit-volume analysisB. Method for finding balance between company culture and geographic culture.C. Method that compares costs to benefitsD. All of the above.E. None of the above

Answer: A

1) What is a primary factor in the regional level of location decisions?A. Location of raw materials or suppliesB. Quality of lifeC. Location of marketsD. A and CE. None of the above

Answer: D page 365 (9th edition)

2) In a geographic information system (GIS), which isNOTinvolved in the data?A. AgeB. IncomesC. Quality of lifeD. Type of employmentE. Type of housing

Answer: C page 366 (9th edition)

3) What is a disadvantage of globalization?A. Transportation costsB. Security costsC. Unskilled laborD. Import restrictionsE. All of the above

Answer: E page 373 (9th edition)

4) Mining operations, farming, forestry, and fishing are all examples of which primary reason for firms locating near or at the source of raw materials?A. NecessityB. PerishabilityC. Transportation costsD. ProcessingE. None of the aboveAnswer: A page 365 (9th edition)

5) Which of the following would you establish a composite value for?A. The transportation modelB. Factor ratingC. The center of gravity methodD. Locational Cost-Profit-Volume AnalysisE. Geographic information system

Answer: B page 379 (9th edition)

1. Which of these isa computer-based tool for collecting, storing, retrieving, and displaying demographic data on maps?A. Geographic Data SystemB. Geographic Information SystemC. Demographic Data SystemD. CAME. none of the above

Answer: B page 379

2. Which is a major consideration when choosing to operate in a region?A. the minimum wage rateB. identifying a communityC. location to raw materialsD. possible sites availableE. none of the above

Answer: C page 378

3. Considering global expansion, decision makers need to be absolutely clear on the benefits and risks and the likelihood of their occurrences when deciding upon identifying:A. a continentB. a siteC. a communityD. a countryE. none of the above

Answer: D page 378

4. A dominant factor that influences the location decision of a manufacturing firm is:A. Climate changesB. Location to competitorsC. Proximity to marketsD. Transportation costE. none of the above

Answer: D page 376

5. Which of the following isNota primary consideration when identifying a site for operations?A. LandB. TransportationC. ZoningD. Future expansionE. All of the AboveAnswer: E page 381

1. When using the Center of Gravity Method, what are the two differing variables for equal and unequal quantities shipped, respectively?a. n1; n2b. n;Qc. n; nid. e; uee. n; Qi

Answer:e(pages 388-89)

2. Which location alternative technique involve