THE DEFINITIVE GUIDE TO CMA EXAM FORMULAS · 2020-02-12 · section definition the statement of...

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THE DEFINITIVEGUIDE TO

CMA EXAM FORMULAS

SECTION

SECTION A1: FINANCIAL STATEMENTS

THE STATEMENT OF FINANCIAL POSITION

THE ACCOUNTING EQUATION ASSETS = LIABILITIES + EQUITY

SAMPLE BALANCE SHEET

ABC COMPANYBALANCE SHEET

AS OF DECEMBER 31, 20XX

ASSETS: LIABILITIES:

CURRENT ASSETS $###,### CURRENT LIABILITIES $###,###

CASH ACCOUNTS PAYABLE

ACCOUNTS RECEIVABLE ACCRUED EXPENSES

INVENTORY SHORT-TERM NOTES PAYABLE

SHORT-TERM PREPAIDS DEFERRED REVENUE

NON-CURRENT ASSETS ###,### NON-CURRENT LIABILITIES ###,###

LONG-TERM PREPAIDS BONDS PAYABLE

EQUIPMENT EQUITY: ###,###

BUILDING COMMON STOCK

LAND ADDITIONAL PAID IN CAPITAL

LESS: ACCUM. DEPRECIATION RETAINED EARNINGS

TOTAL ASSETS: $###,### TOTAL LIABILITIES AND EQUITY: $###,###

DEFINITION

A STATEMENT OF FINANCIAL POSITION TELLS YOU WHAT THE COMPANY OWNS (ASSETS), HOW MUCH THE COMPANY OWES TOITS CREDITORS (LIABILITIES) AND THE RESIDUAL INTEREST OF THE COMPANY (EQUITY).

BALANCE SHEET STATEMENT ACCOUNTS ARE REAL OR PERMANENT ACCOUNTS WHICH ARE CARRIED FORWARD INTO THENEXT ACCOUNTING PERIOD. THEREFORE, THE BALANCES REFLECTED IN A STATEMENT OF FINANCIAL POSITION ARE THE AC-CUMULATION OF TRANSACTIONS FROM THE INCEPTION OF THE ENTITY TO THE CURRENT REPORTING PERIOD.

PURPOSE

THE BALANCE SHEET REFLECTS THE FINANCIAL POSITION OF AN ENTITY AT A PARTICULAR POINT IN TIME.

3

SECTION


STATEMENT OF OPERATIONS

STATEMENT OF OPERATIONS NET INCOME = REVENUE – EXPENSES

SAMPLE INCOME STATEMENT

ABC COMPANYINCOME STATEMENT

FOR THE PERIOD ENDING: DECEMBER 31, 20XX

SALES REVENUE $###,###

SERVICE REVENUE ###,###

TOTAL REVENUE $###,###

LESS: COST OF GOODS SOLD ###,###

GROSS PROFIT ###,###

LESS: OPERATING EXPENSES ###,###

NET INCOME BEFORE TAX ###,###

INCOME TAX EXPENSE ###,###

NET INCOME $###,###

DEFINITION

INCOME STATEMENT REFLECTS WHAT THE COMPANY EARNED (REVENUES) AND HOW THE RESOURCES OF THE COMPANYWHERE SPENT (EXPENSES) IN ORDER TO PRODUCE THOSE REVENUES OVER A PERIOD OF TIME. INCOME STATEMENT AC-COUNTS ARE NOMINAL OR TEMPORARY ACCOUNTS WHICH ARE CLOSED AT THE END OF THE REPORTING PERIOD TO THERETAINED EARNINGS EQUITY SECTION OF THE BALANCE SHEET. THEREFORE, AT THE BEGINNING OF EACH CALENDAR ORFISCAL YEAR, ALL INCOME STATEMENT ACCOUNTS ARE ZERO.

PURPOSE

THE INCOME STATEMENT PRESENTS THE FINANCIAL PERFORMANCE OF AN ENTITY DURING A SPECIFIED PERIOD OF TIME.

4

SECTION


STATEMENT OF CASH FLOWS

SAMPLE STATEMENT OF CASH FLOWS

ABC COMPANYSTATEMENT OF CASH FLOWS (INDIRECT METHOD)


CASH FLOWS FROM OPERATING ACTIVITIES

PROFIT / (LOSS) BEFORE TAXATION $42,300

ADJUSTMENTS FOR:

DEPRECIATION 4,700

AMORTIZATION 1,000

INVESTMENT INCOME (5,000)

INTEREST EXPENSE 4,000

PROFIT / (LOSS) ON THE SALE OF PROPERTY, PLANT & EQUIPMENT 300

PROFIT / (LOSS) ON THE SALE OF INTANGIBLE ASSETS –

WORKING CAPITAL CHANGES:

(INCREASE) / DECREASE IN TRADE AND OTHER RECEIVABLES (8,700)

(INCREASE) / (DECREASE) IN INVENTORIES (3,500)

INCREASE / (DECREASE) IN TRADE AND OTHER PAYABLES 4,400

CASH GENERATED FROM OPERATIONS 39,500

INTEREST PAID (2,800)

INCOME TAXES PAID (4,000)

DIVIDENDS RECEIVED 1,850

NET CASH FROM OPERATING ACTIVITIES 34,550

CASH FLOWS FROM INVESTING ACTIVITIES

BUSINESS ACQUISITIONS, NET OF CASH ACQUIRED (17,500)

PURCHASE OF PROPERTY, PLANT AND EQUIPMENT (4,300)

PURCHASE OF INTANGIBLE ASSETS –

PROCEEDS FROM SALE OF EQUIPMENT –

PROCEEDS FROM SALE OF INTANGIBLES –

ACQUISITION OF INVESTMENTS (10,000)

INVESTMENT INCOME 4,800

NET CASH USED IN INVESTING ACTIVITIES (27,000)

CASH FLOWS FROM FINANCING ACTIVITIES

PROCEEDS FROM ISSUE OF SHARE CAPITAL –

PROCEEDS FROM LONG-TERM BORROWINGS 10,000

PAYMENT OF LONG-TERM BORROWINGS (3,950)

NET CASH USED IN FINANCING ACTIVITIES 6,050

NET INCREASE IN CASH AND CASH EQUIVALENTS 9,900

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,600

CASH AND CASH EQUIVALENTS AT END OF PERIOD $11,500

5

SECTION

DEFINITION

THE STATEMENT OF CASH FLOWS (SCF) IS THE REPORT THAT CONTAINS THE INFLOWS AND OUTFLOWS OF CASH DURING ASPECIFIED PERIOD OF TIME.

PURPOSE

THE SOURCES AND USES OF CASH CAN BE CLASSIFIED AS: A) OPERATING CASH FLOWS – INCLUDES CASH FLOWS FROMTRANSACTIONS THAT AFFECT THE FIRM’S NORMAL OPERATIONS SUCH AS CASH RECEIVED FROM CUSTOMERS AND CASH PAIDFOR SUPPLIERS. B) INVESTING CASH FLOWS – CONTAINS CASH FLOWS WHICH RELATES TO ACQUISITION AND DISPOSAL OFNON-CURRENT ASSETS SUCH AS CASH PAID FOR THE ACQUISITION OF FIXED ASSETS. C) FINANCING CASH FLOWS – CONSISTSOF CASH FLOWS FROM TRANSACTIONS AFFECTING LONG-TERM DEBT AND EQUITY OR THE CAPITAL STRUCTURE OF AN ENTITYSUCH AS ISSUANCE OF BONDS AND COMMON STOCK.


STATEMENT OF COMPREHENSIVE INCOME

SAMPLE STATEMENT OF COMPREHENSIVE INCOME

ABC COMPANYSTATEMENT OF COMPREHENSIVE INCOME

FOR THE PERIOD ENDING: DECEMBER 31, 2011

Note Year ended 31 December2011 2010

Profit for the year 9,500 8,430Other comprehensive incomeGains on revaluation of land and buildings – 600Available-for-sale financial assets (120) –Cash flow hedges (3) 45Currency translation differences 740 (92)Other comprehensive income for the year, net of tax 617 553

Total comprehensive income for the year $10,117 $8,983

DEFINITION

COMPREHENSIVE INCOME INCLUDES ALL CHANGES IN EQUITY EXCEPT THOSE TRANSACTIONS EXECUTED BY THE OWNERSOF THE COMPANY SUCH AS OWNER’S CONTRIBUTION AND DISTRIBUTION. COMPREHENSIVE INCOME IS BROADER IN SCOPE ASCOMPARED TO THE INCOME STATEMENT BY INCLUDING ALL CHANGES IN EQUITY EXCEPT FOR SHAREHOLDER TRANSACTIONS.

PURPOSE

THE STATEMENT OF COMPREHENSIVE INCOME ENCOMPASSES ALL ITEMS THAT ARE INCLUDED IN THE INCOME STATEMENTBUT THE INCOME STATEMENT MAY NOT COMPRISE ALL ITEMS THAT ARE REFLECTED IN THE STATEMENT OF COMPREHENSIVEINCOME. THUS, COMPREHENSIVE INCOME CONSISTS OF NET INCOME AND OTHER COMPREHENSIVE INCOME. THE OTHER COM-PREHENSIVE INCOME ITEMS WHICH ARE NOT INCLUDED IN THE NET INCOME ARE THE FOLLOWING:A) FOREIGN CURRENCY TRANSLATION GAINS AND LOSSES.

B) GAINS OR LOSSES AND PRIOR SERVICE COSTS OR CREDITS RELATED TO A DEFINED BENEFIT PENSION PLAN THAT HAVENOT BEEN RECOGNIZED AS COMPONENTS OF NET PERIODIC BENEFIT COST.

C) UNREALIZED HOLDING GAINS OR LOSSES ON AVAILABLE-FOR-SALE SECURITIES, AND;

D) THE EFFECTIVE PORTION OF THE GAIN OR LOSS ON A DERIVATIVE DESIGNATED AS A CASH FLOW HEDGE.

6

SECTION


STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

SAMPLE STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY

ABC COMPANYSTATEMENT OF CHANGES IN STOCLJOLDERS EQUITY


PreferredStock

CommonStock

AdditionalPaid-In Capital

Retained Earnings(Accum Deficit)

Total

Beginning balance $##,### $##,### $##,### $##,### $##,###

Issuance of stock ##,### ##,### ##,### ##,### ##,###

Net income (net loss) ##,### ##,### ##,### ##,### ##,###

Dividends ##,### ##,### ##,### ##,### ##,###

Other ##,### ##,### ##,### ##,### ##,###

Ending balance $###,### $###,### $###,### $###,### $###,###

DEFINITION

THE STATEMENT OF CHANGES IN STOCKHOLDER’S EQUITY IS SIMPLY THE RECONCILIATION OF THE TRANSACTIONS AFFECTINGTHE BALANCES OF EACH OF THE STOCKHOLDER’S EQUITY ACCOUNTS, INCLUDING THE CAPITAL STOCK, ADDITIONAL PAID-IN-CAPITAL, RETAINED EARNINGS AND ACCUMULATED OTHER COMPREHENSIVE INCOME, DURING A SPECIFIED PERIOD OFTIME. STOCKHOLDER’S EQUITY ACCOUNTS AS A COMPONENT OF THE BALANCE SHEET ARE PERMANENT ACCOUNTS IN WHICHTRANSACTIONS WERE ACCUMULATED TO DATE, AND TRANSACTIONS IN BETWEEN THE BEGINNING AND ENDING BALANCESMAKE THE FINANCIAL STATEMENT USEFUL.

PURPOSE

INVESTMENTS BY OWNERS ESTABLISH OR INCREASE OWNERSHIP INTERESTS IN THE ENTITY AND MAY BE RECEIVED IN THEFORM OF CASH, GOODS OR SERVICES, OR SATISFACTION OR CONVERSION OF THE ENTITY’S LIABILITIES. DISTRIBUTION DE-CREASE OWNERSHIP INTERESTS AND INCLUDE NOT ONLY CASH DIVIDENDS WHEN DECLARED (OR OTHER CASH WITHDRAWALSBY OWNERS OF NON-CORPORATE ENTITIES) BUT ALSO TRANSACTIONS SUCH AS REACQUISITIONS OF THE ENTITY’S EQUITYSECURITIES AND DISTRIBUTIONS âAIJIN KINDâAI OF NONCASH ASSETS. INFORMATION ABOUT THOSE EVENTS IS USEFUL, INCONJUNCTION WITH OTHER FINANCIAL STATEMENT INFORMATION, TO INVESTORS, CREDITORS, AND OTHER USERS AS AN AIDIN ASSESSING FACTORS SUCH AS THE ENTITY’S FINANCIAL FLEXIBILITY, PROFITABILITY AND RISK.

7

SECTION

SECTION A2: RECOGNITION, MEASUREMENT, VALUATION, AND DISCLOSURE

VALUATION OF ACCOUNTS RECEIVABLE

VALUATION OF ACCOUNTSRECEIVABLE =

XXX GROSS ACCOUNTS RECEIVABLE (ENDING BALANCE)

− XXX LESS: ALLOWANCE FOR RETURNS

− XXX LESS: ALLOWANCE FOR UNCOLLECTABLE ACCOUNTS

= XXX EQUALS: NET REALIZABLE VALUE OF ACCOUNTS RECEIVABLE

DEFINITION

NET REALIZABLE VALUE OF ACCOUNTS RECEIVABLE IS THE AMOUNT COLLECTIBLE FROM CUSTOMERS NET OF ALLOWANCEFOR RETURNS AND ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS.

PURPOSE

ACCOUNTS RECEIVABLE IS REPORTED ON THE BALANCE SHEET AT NET REALIZABLE VALUE.


CALCULATION OF ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS

CALCULATION OF ALLOWANCE FORUNCOLLECTIBLE ACCOUNTS =

XXX ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS (REQUIRED BALANCE)

+ XXX ADD: ACCOUNTS WRITTEN OFF DURING THE YEAR

− XXX LESS: ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS (BEGIN BALANCE)

= XXX EQUALS: BAD DEBTS EXPENSE FOR THE PERIOD

DEFINITION

NET REALIZABLE VALUE OF ACCOUNTS RECEIVABLE IS THE AMOUNT COLLECTIBLE FROM CUSTOMERS NET OF ALLOWANCEFOR RETURNS AND ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS.

PURPOSE

THE REQUIRED BALANCE OF ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS WILL BE USED TO COMPUTE THE UNCOLLECTIBLEACCOUNTS EXPENSE FOR THE PERIOD BY SQUEEZING OUT THE FORMULA FOR ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS.

8

SECTION


COST OF GOODS SOLD FORMULA

COST OF GOODS SOLD =XXX BEGINNING INVENTORY

+ XXX ADD: PURCHASES

= XXX COST OF GOODS AVAILABLE FOR SALE

− XXX LESS: ENDING INVENTORY

= XXX EQUALS: COST OF GOODS SOLD

DEFINITION

ACCUMULATING COST IN INVENTORY DELAYS EXPENSE RECOGNITION UNTIL THE INVENTORY IS SOLD OR REVENUE IS RECOG-NIZED. INVENTORY CAN HAVE SIGNIFICANT IMPACT ON BOTH THE BALANCE SHEET AND THE INCOME STATEMENT ESPECIALLYFOR MERCHANDISING OR RETAILING BUSINESSES IN WHICH THE PRIMARY SOURCE OF REVENUE COMES FROM THE SALE OFGOODS.

PURPOSE

FROM THE FORMULA, WE ARE ACTUALLY ALLOCATING THE COST OF GOODS AVAILABLE FOR SALE INTO:1. COST OF GOODS SOLD (EXPENSE) TO BE REFLECTED IN THE INCOME STATEMENT2. ENDING INVENTORY (ASSET) TO BE REPORTED IN THE BALANCE SHEET.


TIME VALUE OF MONEY FORMULA

TIME VALUE OF MONEY FORMULA = PV =FV

(1 + k)n

where: PV = PRESENT VALUEFV = FUTURE VALUEk = INTEREST RATEn = NUMBER OF PERIODS

DEFINITION

THE TIME VALUE OF MONEY IS THE FUNDAMENTAL LAW OF FINANCE. IT STATES THAT CASH RECEIVED IN THE FUTURE IS WORTHLESS THAN CASH RECEIVED IN THE PRESENT.

PURPOSE

STANDARD FORMULA USED IN MANY AREAS OF FINANCIAL ANALYSIS TO ASSIST MANAGERS WITH DECISIONS ON INVESTMENTALTERNATIVES, CAPITAL PROJECTS, COST OF CAPITAL, etc.

9

SECTION


WEIGHTED AVERAGE COST OF CAPITAL (WACC)

WEIGHTED AVERAGE COST OF CAPITAL = WACC =[(DEBT % OF CAPITAL) × (DEBT YIELD) × (1 – TAX RATE)] +

(EQUITY % OF CAPITAL) × (REQUIRED RATE OF RETURN ON EQUITY)

DEFINITION

WACC IS A MIXTURE OF DEBT AND EQUITY COSTS WEIGHTED BY THEIR DOLLAR AMOUNTS. DEBT AND EQUITY ARE TREATEDDIFFERENTLY IN THE EQUATION BECAUSE DEBT PAYMENTS ARE MADE BEFORE TAX, WHILE EQUITY DIVIDENDS ARE AFTER TAX.

PURPOSE

A METHOD USED TO DETERMINE A PERCENTAGE RATE VALUE OF EQUITIES AND APPLIED TO DISCOUNT FUTURE CASH FLOWS.NOTE: REQUIRED RETURN ON EQUITY CAN BE ESTIMATED BY THE DIVIDEND YIELD OR THE CAPITAL ASSET PRICING MODEL(CAPM).


DIVIDEND YIELD

DIVIDEND YIELD = ANNUAL DIVIDEND (D)SHARE PRICE

DEFINITION

THE RATIO OF DIVIDENDS PER SHARE TO MARKET PRICE PER SHARE.

PURPOSE

MEASURES THE RETURN ON THE ANNUAL DIVIDEND RELATIVE TO THE MARKET PRICE PER COMMON SHARE.

10

SECTION


CAPITAL ASSET PRICING MODEL (CAPM)

CAPM = R = RF + β(RM − RF )

where: R = EXPECTED RETURNRF = RISK FREE RATE OF RETURN (COMPENSATION FOR HOLDING

THE INVESTMENT)RM = MARKET RATE

(RM − RF ) = MARKET RISK PREMIUMβ = BETA COEFFICIENT, SYSTEMATIC (UNDIVERSIFIABLE) RISK

ANALYSIS OF β: IF β:β > 1 HIGH RISK MULTIPLIER OF STOCK PRICE, HIGHLY VOLATILEβ < 1 LOW RISK MULTIPLIER OF STOCK PRICE, LESS VOLATILEβ = 1 MARKET & STOCK PRICE MOVE PERFECTLY TO CHANGES IN MARKETβ = 0 NO CORRECLATION OF STOCK PRICE AND MARKET PRICEβ < 0 STOCK PRICE MOVES INVERSELY WITH THAT OF THE ENTIRE MARKET

DEFINITION

THE CAPITAL ASSET PRICING MODEL (CAPM) IS A FINANCIAL MODEL USED IN CALCULATING THE EXPECTED RISKADJUSTEDRETURNS. THE CAPITAL ASSET PRICING MODEL IS BASED ON THE CONCEPT OF THE TIME VALUE OF MONEY AND RISK REPRE-SENTED BY THE RISK-FREE RATE (RF ) AND THE BETA (β) MULTIPLIED BY THE MARKET RISK PREMIUM (RM −RF ) RESPECTIVELY.THE RISK FREE RATE IS THE INVESTOR’S COMPENSATION FOR HOLDING THE INVESTMENT DURING A SPECIFIED PERIOD OFTIME (TIME VALUE OF MONEY) WHILE THE BETA (β) MULTIPLIED BY THE MARKET RISK PREMIUM (RM − RF ) REPRESENTS THEADDITIONAL RISK AN INVESTOR IS WILLING TO TAKE.

PURPOSE

THE CAPM FACTORS IN THE TIME VALUE OF MONEY AND RISK REPRESENTED BY THE RISK-FREE RATE AND BETA MULTIPLIEDBY THE MARKET RISK PREMIUM.


DIVIDEND YIELD METHOD

CONSTANT GROWTH DIVIDENDDISCOUNT MODEL =

P0 =D1

(r − g)

where: P0 = PRICE OF STOCK TODAYD1 = NEXT ANNUAL DIVIDEND PER SHAREr = INVESTOR REQUIRED RATE OF RETURNg = ANNUAL FUTURE GROWTH RATE OF THE DIVIDEND

SOLVING FOR "g " GROWTH RATE (r − g) =D1

P0

DEFINITION

IT IS AN EQUITY VALUATION METHOD THAT ASSUMES THE GROWTH RATE OF DIVIDENDS IS CONSTANT AND IT CANNOT BE EQUALTO OR HIGHER THAN THE REQUIRED RATE OF RETURN.

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SECTION


DEPRECIATION – STRAIGHT LINE METHOD

STRAIGHT LINEDEPRECIATION EXPENSE =

ORIGINAL COST− SALVAGE VALUEESTIMATED USEFUL LIFE

ORDEPRECIABLE COST

ESTIMATED USEFUL LIFE

DEFINITION

THIS IS THE MOST COMMONLY USED DEPRECIATION METHOD FOR SIMPLICITY AND EASE OF COMPUTATION. DEPRECIATIONCOMPUTED USING THE STRAIGHT-LINE METHOD WILL BE EQUAL ANNUALLY OVER THE ASSET’S DEPRECIABLE LIFE.

PURPOSE

CALCULATE THE ALLOCATED PERIOD COST OF THE CONSUMPTION OF FIXED ASSETS THAT WERE USED IN THE GENERATIONOF REVENUE FOR THE SAME PERIOD OF TIME.


DEPRECIATION – DOUBLE DECLINING BALANCE METHOD

DOUBLE DECLINING BALANCEDEPRECIATION EXPENSE =

2

ESTIMATED USEFUL LIFE× CARRYING AMOUNT (BOOK VALUE) AT

THE BEGINNING OF YEAR

DEFINITION

THIS IS BASED ON THE PREMISE THAT MORE DEPRECIATION SHOULD BE RECOGNIZED IN THE EARLY YEARS OF THE ASSET’SESTIMATED LIFE AND LESS DEPRECIATION FROM THE PREVIOUS YEARS. THEREFORE, THE NET INCOME IS LOWER IN THEEARLY YEARS OF THE ASSET’S USEFUL LIFE AND LARGER IN THE LATER YEARS OF THE ASSET’S USEFUL LIFE AS COMPAREDTO STRAIGHT-LINE METHOD.

PURPOSE

CALCULATE THE ALLOCATED PERIOD COST OF THE CONSUMPTION OF FIXED ASSETS THAT WERE USED IN THE GENERATIONOF REVENUE FOR THE SAME PERIOD OF TIME. SALVAGE VALUE IS NOT FACTORED IN THIS FORMULA. THE NET FIXED ASSETVALUE IS REDUCED TO THE SALVAGE VALUE.


DEPRECIATION – SUM-OF-THE-YEARS’-DIGITS METHOD

SUM-OF-THE-YEARS’-DIGITSDEPRECIATION EXPENSE =

n(n + 1)

2× DEPRECIABLE COST OF FIXED ASSETS

where: n = NUMBER OF YEARS

DEFINITION

THE SUM-OF-THE-YEARS’-DIGITS METHOD USES THE FRACTION DERIVED BY DIVIDING THE NUMBER OF YEARS (n) LEFT AT THEBEGINNING OF THE YEAR AND THE COMPUTED SUM-OF-THE-YEARS’-DIGITS (SYD).

PURPOSE

CALCULATE THE ALLOCATED PERIOD COST OF THE CONSUMPTION OF FIXED ASSETS THAT WERE USED IN THE GENERATIONOF REVENUE FOR THE SAME PERIOD OF TIME. SYD DOES FACTOR IN THE ASSET’S SALVAGE VALUE.

12

SECTION


DEPRECIATION – UNITS OF PRODUCTION METHOD

UNITS OF PRODUCTIONDEPRECIATION EXPENSE =

UNITS PRODUCED FOR THE YEARTOTAL ESTIMATED UNITS PRODUCED

DURING LIFE OF FIXED ASSET

× DEPRECIABLE COST(COST – SALVAGE VALUE)

DEFINITION

THE UNITS OF PRODUCTION (UOP) METHOD ESTIMATES THE TOTAL UNITS OF PRODUCTION THAT THE LONG-TERM ASSET (i.e.MACHINE) WILL PRODUCE DURING ITS USEFUL LIFE AND COMPUTES DEPRECIATION BASED ON THE UNITS

PURPOSE

CALCULATE THE ALLOCATED PERIOD COST OF THE CONSUMPTION OF FIXED ASSETS THAT WERE USED IN THE GENERATIONOF REVENUE FOR THE SAME PERIOD OF TIME. UOP DOES FACTOR IN THE ASSET’S SALVAGE VALUE.

SECTION B3: FORECASTING TECHNIQUES

SIMPLE REGRESSION FORMULA

REGRESSION FORMULA = y = a+ bx

where: y = DEPENDENT VARIABLE (TOTAL COST)a = Y -INTERCEPT OR THE VALUE OF Y WHEN X = 0 (FIXED COST)b = SLOPE OR COEFFICIENT OF THE INDEPENDENT VARIABLE

(VARIABLE COST)x = INDEPENDENT VARIABLE (COST DRIVER)

EQUATION TO SOLVE FOR "a" AND "b" = a =

(∑y2)(∑

x2)−(∑

x)(∑

xy)

n(∑

x2)−(∑

x)2

b =n(∑

xy)−(∑

x)(∑

y)

n(∑

x2)−(∑

x)2

where: y = DEPENDENT VARIABLE (TOTAL COST)x = INDEPENDENT VARIABLE (COST DRIVER)n = NUMBER OF OBSERVANCES (SAMPLE SIZE)

DEFINITION

IN A SIMPLE REGRESSION EQUATION, THERE IS ONLY ONE INDEPENDENT VARIABLE AND ONE DEPENDENT VARIABLE AND THERELATIONSHIP BETWEEN THEM IS LINEAR. THE TWO BASIC ASSUMPTIONS OF THE SIMPLE REGRESSION EQUATION:A. CHANGES IN THE DEPENDENT VARIABLE CAN BE EXPLAINED BY THE CHANGE IN THE INDEPENDENT VARIABLE AND;B. THE RELATIONSHIP BETWEEN THE DEPENDENT AND INDEPENDENT VARIABLE IS LINEAR.

PURPOSE

THE SIMPLE REGRESSION EQUATION IS USED IN ESTIMATING TOTAL COSTS FOR FLEXIBLE BUDGETS.

13

SECTION

SECTION B5: ANNUAL PROFIT PLAN AND SUPPORTING SCHEDULES

THE SALES BUDGET (SAMPLE)

ABC COMPANYSALES BUDGET

FOR THE YEAR ENDING: DECEMBER 31, 20XX

PRODUCT: UNIT SALES VOLUME UNIT SALES × PRICE TOTAL SALESA XXX $XXX $XXX

B XXX $XXX $XXX

C XXX $XXX $XXX

D XXX $XXX $XXX

TOTAL REVENUE FROM SALES XXX $XXX

DEFINITION

THE PRODUCTION BUDGET IS PREPARED AFTER THE CREATION OF THE SALES BUDGET. THE PRODUCTION BUDGET IS THENUMBER OF UNITS TO BE PRODUCED IN ORDER TO SATISFY THE REQUIREMENTS OF THE SALES FORECAST TAKING INTOACCOUNT THE INVENTORY LEVEL. WITHOUT THE UNIT SALES INPUT DATA FROM THE SALES BUDGET, THE PRODUCTION BUDGETWILL NOT BE COMPUTED NOR COMPLETED..

PURPOSE

THE PRODUCTION BUDGET DICTATES THE NUMBER OF DIRECT MATERIALS UNITS AND DIRECT LABOR HOURS NEEDED TOSATISFY THE PROJECTED UNIT SALES. THE PRODUCTION BUDGET SERVES AS THE BASIS FOR THE CREATION OF DIRECT MA-TERIALS BUDGET AND DIRECT LABOR BUDGET.


THE PRODUCTION BUDGET (SAMPLE)

ABC COMPANYPRODUCTION BUDGET


DESIRED ENDING INVENTORY XXX

ADD: PROJECTED UNIT SALES XXX

GOODS AVAILABLE FOR SALE XXX

LESS: BEGINNING INVENTORY XXX

TOTAL PRODUCTION UNITS XXX

DEFINITION

THE PRODUCTION BUDGET IS PREPARED AFTER THE CREATION OF THE SALES BUDGET. THE PRODUCTION BUDGET IS THENUMBER OF UNITS TO BE PRODUCED IN ORDER TO SATISFY THE REQUIREMENTS OF THE SALES FORECAST TAKING INTOACCOUNT THE INVENTORY LEVEL. WITHOUT THE UNIT SALES INPUT DATA FROM THE SALES BUDGET, THE PRODUCTION BUDGETWILL NOT BE COMPUTED NOR COMPLETED.

PURPOSE

THE PRODUCTION BUDGET DICTATES THE NUMBER OF DIRECT MATERIALS UNITS AND DIRECT LABOR HOURS NEEDED TOSATISFY THE PROJECTED UNIT SALES. THE PRODUCTION BUDGET SERVES AS THE BASIS FOR THE CREATION OF DIRECT MA-TERIALS BUDGET AND DIRECT LABOR BUDGET.

14

SECTION


THE DIRECT MATERIALS BUDGET (SAMPLE)

ABC COMPANYDIRECT MATERIALS BUDGET


UNITSTOTAL DIRECT MATERIALS NEEDED FOR PRODUCTION XXX

ADD: DESIRED ENDING INVENTORY (% OF PRODUCTION NEEDS) XXX

TOTAL DIRECT MATERIALS AVAILABLE FOR PRODUCTION XXX

LESS: DIRECT MATERIALS, BEGINNING INVENTORY XXX

TOTAL NUMBER OF DIRECT MATERIALS TO BE PURCHASED XXX

MULTIPLY: PURCHASE PRICE PER UNIT OF DIRECT MATERIALS XXX

TOTAL COST OF DIRECT MATERIAL PURCHASES XXX

DEFINITION

THE DIRECT MATERIALS BUDGET IS PREPARED AFTER THE CREATION OF THE PRODUCTION BUDGET. THE DIRECT MATERIALSPURCHASES BUDGET CALCULATES HOW MANY INDIVIDUAL UNITS OF EACH COMPONENT NEEDED FOR THE FINAL PRODUCT ISNEEDED FOR THE PERIOD AND THE COST OF PURCHASING THOSE COMPONENTS.

PURPOSE

ESTIMATED (ACTUAL) BEGINNING INVENTORY AND EXPECTED ENDING INVENTORY LEVELS MUST BE TAKEN INTO ACCOUNT INDETERMINING THE AMOUNT OF DIRECT MATERIALS TO BE PURCHASED. THE CHANGE IN INVENTORY LEVELS ADJUSTS THEDIRECT MATERIALS PRODUCTION REQUIREMENTS TO ARRIVE AT THE TOTAL COST FOR DIRECT MATERIAL PURCHASES.


DIRECT MATERIALS USAGE (SAMPLE)

ABC COMPANYDIRECT MATERIALS USAGE BUDGET


UNITSUNITS TO BE PRODUCED (BASED ON PRODUCTION BUDGET) XXX

MULTIPLY: REQUIRED NUMBER OF DIRECT MATERIALS PER UNIT XXX

TOTAL DIRECT MATERIALS NEEDED FOR PRODUCTION XXX

MULTIPLY: PURCHASE PRICE PER UNIT OF DIRECT MATERIALS XXX

TOTAL COST OF DIRECT MATERIALS NEEDED FOR PRODUCTION XXX

DEFINITION

THE DIRECT MATERIALS USAGE BUDGET IS PREPARED AFTER THE CREATION OF THE PRODUCTION BUDGET. IT CALCULATESTHE COST OF THE COMPONENT MATERIALS TO BE USED DURING THE PERIOD.

15

SECTION


THE DIRECT LABOR BUDGET (SAMPLE)

ABC COMPANYDIRECT LABOR BUDGET


UNITSUNITS TO BE PRODUCED (EXTRACTED FROM THE PRODUCTION BUDGET) XXX

MULTIPLY: REQUIRED NUMBER OF DIRECT LABOR HOURS PER UNIT XXX

TOTAL DIRECT LABOR HOURS NEEDED FOR PRODUCTION XXX

MULTIPLY: DIRECT LABOR RATE PER HOUR XXX

TOTAL DIRECT LABOR COST XXX

DEFINITION

EXTRACTED FROM THE PRODUCTION OF UNITS, THE DIRECT LABOR BUDGET FACTORS IN THE HOURLY RATE IN LABOR MULTI-PLIED BY THE NUMBER OF HOURS NEEDED TO CONVERT DIRECT MATERIAL INTO FINISHED PRODUCT.


MANUFACTURING OVERHEAD BUDGET (SAMPLE)

ABC COMPANYMANUFACTURING OVERHEAD BUDGET


UNITSTOTAL DIRECT LABOR HOURS NEEDED FOR PRODUCTION (FROM DL BUDGET) XXX

MULTIPLY: VARIABLE OVERHEAD RATE PER HOUR XXX

TOTAL VARIABLE MANUFACTURING OVERHEAD COSTS XXX

ADD: TOTAL FIXED MANUFACTURING OVERHEAD COSTS XXX

TOTAL MANUFACTURING OVERHEAD COSTS XXX

DEFINITION

UNLIKE DIRECT MATERIALS AND DIRECT LABOR BUDGET, OVERHEAD COSTS ARE INDIRECT COSTS WHICH MAY OR MAY NOTCHANGE DIRECTLY IN PROPORTION TO THE CHANGE IN THE LEVEL OF ACTIVITY.

VARIABLE MANUFACTURING OVERHEAD COSTS ARE PRODUCTION OVERHEAD COSTS THAT CHANGE DIRECTLY IN PROPORTIONTO THE CHANGE IN THE LEVEL OF ACTIVITY. VARIABLE MANUFACTURING OVERHEAD COSTS INCLUDE INDIRECT MATERIALS,INDIRECT LABOR AND OTHER VARIABLE MANUFACTURING OVERHEAD COSTS.

FIXED MANUFACTURING OVERHEAD COSTS ARE PRODUCTION OVERHEAD COSTS THAT DO NOT CHANGE DIRECTLY IN PROPOR-TION TO THE CHANGE IN THE LEVEL OF ACTIVITY. FIXED OVERHEAD MANUFACTURING COSTS INCLUDE FACTORY INSURANCE,FACTORY RENT, FACTORY DEPRECIATION EXPENSE, PRODUCTION SUPERVISOR’S SALARY AND OTHER FIXED MANUFACTURINGOVERHEAD COSTS.

16

SECTION


COST OF GOODS SOLD BUDGET (SAMPLE)

ABC COMPANYCOST OF GOODS SOLD BUDGET


ESTIMATED COST OF BEGINNING INVENTORY XXX

ADD: COST OF UNITS PRODUCED

DIRECT MATERIALS XXX

DIRECT LABOR XXX

MANUFACTURING OVERHEAD XXX

BUDGETED PRODUCTION COSTS XXX

BUDGETED COST OF GOODS AVAILABLE FOR SALE XXX

LESS: DESIRED ENDING INVENTORY XXX

BUDGETED COST OF GOODS SOLD XXX

COMPUTATION OF DESIRED ENDING INVENTORY (ASSUME USING FIFO METHOD)

DESIRED ENDING INVENTORY (ASSUME THAT FIFO METHOD IS USED)

BUDGETED PRODUCTION COSTS XXX

DIVIDE: UNITS PRODUCED XXX

PRODUCTION COSTS PER UNIT XXX

MULTIPLY: UNITS IN ENDING INVENTORY XXX

DESIRED COST OF ENDING INVENTORY XXX

DEFINITION

THE COMPONENTS OF THE COST OF GOODS SOLD INCLUDE ALL OF THE MANUFACTURING COSTS INCURRED IN PRODUCINGTHE SOLD INVENTORY SUCH AS THE DIRECT MATERIAL, DIRECT LABOR AND MANUFACTURING OVERHEAD.


CONTRIBUTION MARGIN

SALES (UNITS × SALES PRICE) XXX

LESS: VARIABLE COSTS (UNITS × VARIABLE COST PER UNIT) XXX

CONTRIBUTION MARGIN XXX

LESS: FIXED EXPENSES XXX

OPERATING INCOME XXX

DEFINITION

CONTRIBUTION MARGIN IS THE DIFFERENCE BETWEEN THE TOTAL REVENUES (e.g., SALES) AND TOTAL VARIABLE EXPENSES.CONTRIBUTION MARGIN IS THE AMOUNT AVAILABLE TO COVER FIXED OPERATING EXPENSES. CONTRIBUTION MARGIN PERUNIT IS THE SALES PER UNIT LESS VARIABLE EXPENSES PER UNIT. IN A VARIABLE COSTING INCOME STATEMENT, VARIABLEOPERATING EXPENSES ARE SEPARATED FROM FIXED OPERATING EXPENSES.

17

SECTION


SALES AND ADMINISTRATIVE EXPENSE BUDGET (SAMPLE)

ABC COMPANYSELLING AND ADMINISTRATIVE EXPENSES BUDGET


UNITSBUDGETED SALES (IN UNITS) XXXMULTIPLY: VARIABLE SELLING AND ADMINISTRATIVE EXPENSE PER UNIT XXXTOTAL VARIABLE SELLING AND ADMINISTRATIVE EXPENSES XXXADD: FIXED SELLING AND ADMINISTRATIVE EXPENSES:

MARKETING XXXACCOUNTING XXXHUMAN RESOURCES XXXADMINISTRATIVE XXXCUSTOMER SERVICE XXX

TOTAL FIXED SELLING AND ADMINISTRATIVE EXPENSES XXXTOTAL SELLING AND ADMINISTRATIVE EXPENSES XXX

DEFINITION

SELLING EXPENSES INCLUDE ANY EXPENSES INCURRED FOR THE PURPOSE OF SELLING AND DELIVERING THE PRODUCT TOCUSTOMERS. SELLING EXPENSES INCLUDE FREIGHT-OUT, SALARIES AND COMMISSIONS OF SALES PERSONNEL, ADVERTISINGAND PROMOTION. ADMINISTRATIVE EXPENSES ARE THE EXPENSES OTHER THAN THOSE INCURRED FOR MANUFACTURING ANDSELLING. ADMINISTRATIVE EXPENSES INCLUDE EXPENSES FOR MANAGING THE ORGANIZATION SUCH AS EXPENSES COMINGFROM HUMAN RESOURCE, ACCOUNTING, CUSTOMER SERVICE AND ADMINISTRATIVE DEPARTMENT. NOTE: SELLING AND ADMIN-ISTRATIVE EXPENSES CAN BE EITHER FIXED OR VARIABLE.

18

SECTION


PRO FORMA INCOME STATEMENT (SAMPLE)

ABC COMPANYPRO FORMA INCOME STATEMENT


SALES XXXLESS: COST OF GOODS SOLD:

DIRECT MATERIALS XXXDIRECT LABOR XXXMANUFACTURING OVERHEAD XXX

TOTAL MANUFACTURING COSTS XXXADD: BEGINNING INVENTORY XXXLESS: DESIRED ENDING INVENTORY XXX

GROSS PROFIT XXXLESS: SELLING AND ADMINISRATIVE EXPENSES XXXOPERATING INCOME (NET INCOME BEFORE INCOME TAX) XXXLESS: INCOME TAXES (ex. 30%) XXXNET INCOME XXX

DEFINITION

A PRO FORMA INCOME STATEMENT IS DERIVED BY THE KEY TOTALS FROM THE OTHER BUDGETS AND ASSEMBLED IN A STAN-DARD INCOME STATEMENT FORMAT.

19

SECTION


CAPITAL BUDGET (SAMPLE)

ABC COMPANYCAPITAL BUDGET


APPROVED PROJET #1 XXX





TOTAL CAPITAL BUDGET XXX

DEFINITION

THE CAPITAL EXPENDITURE BUDGET IS CREATED INDEPENDENTLY FROM THE OTHER ELEMENTS OF THE MASTER BUDGET.CAPITAL BUDGET AS A PART OF STRATEGIC PLANNING AFFECTS THE COMPANY’S LONGTERM PROFITABILITY. THE CAPITALBUDGET IS A PLAN FOR LONG-TERM CAPITAL EXPENDITURES SUCH PROPERTY, PLANT AND EQUIPMENT. THE ACQUISITION OFTHESE CAPITAL ASSETS AFFECTS THE BUDGETED BALANCE SHEET (e.g., THE ACQUISITION OF A MACHINE) BUDGETED INCOMESTATEMENT, (e.g., DEPRECIATION OF NEW EQUIPMENT) AND THE CASH BUDGET (e.g., CASH SET ASIDE THE ACQUISITION OFPROPERTY, PLANT AND EQUIPMENT).

PURPOSE

THE CAPITAL BUDGET CONSISTS OF THE APPROVED CAPITAL PROJECTS AND THE AMOUNT RESERVED FOR EACH CAPITALPROJECT.

20

SECTION


CASH BUDGET (SAMPLE)

ABC COMPANYCASH BUDGET


Q1 Q2 Q3 Q4BEGINNING CASH BALANCE XXX XXX XXX XXX

ADD: CASH RECEIPTS XXX XXX XXX XXX

COLLECTIONS FROM CUSTOMERS XXX XXX XXX XXX

TOTAL CASH AVAILABLE XXX XXX XXX XXX

CASH DISBURSEMENTS XXX XXX XXX XXX

DIRECT MATERIALS XXX XXX XXX XXX

DIRECT LABOR XXX XXX XXX XXX

MANUFACTURING OVERHEAD COSTS XXX XXX XXX XXX

NONMANUFACTURING COSTS XXX XXX XXX XXX

ACQUISITION OF EQUIPMENT XXX XXX XXX XXX

INCOME TAXES XXX XXX XXX XXX

TOTAL DISBURSEMENTS XXX XXX XXX XXX

ADD: MINIMUM CASH BALANCE REQUIRED XXX XXX XXX XXX

TOTAL CASH NEEDED XXX XXX XXX XXX

EXCESS CASH (DEFICIT) XXX XXX XXX XXX

FINANCING:

BORROWINGS XXX XXX XXX XXX

REPAYMENT DURING PERIOD XXX XXX XXX XXX

INTEREST EXPENSE XXX XXX XXX XXX

TOTAL EFFECTS OF FINANCING XXX XXX XXX XXX

ENDING CASH BALANCE XXX XXX XXX XXX

DEFINITION

THE CASH BUDGET IS COMPOSED OF THE SCHEDULE OF CASH RECEIPTS, SCHEDULE OF CASH DISBURSEMENTS AND CASHBALANCES.

21

SECTION

SECTION C1: REVENUE VARIANCE REPORT

REVENUE VARIANCE REPORT (SAMPLE)

ABC COMPANYREVENUE VARIANCES REPORT

ACTUAL BUDGET VARIANCE

SALES REVENUE – COFFEE $ 100,000 $ 105,000 $ (5,000) UNF

SALES REVENUE – TEA 55,000 30,000 25,000 FAV

SALES REVENUE – OTHER BEVERAGES 35,000 20,000 15,000 FAV

SALES REVENUE – PASTRIES 65,000 85,000 (20,000) UNF

TOTAL $ 255,000 $ 240,000 $ 15,000 FAV

DEFINITION

REVENUE CENTER IS RESPONSIBLE FOR THE GENERATION OF REVENUE.

PURPOSE

REVENUE CENTERS ARE MORE CONCERNED WITH THE COMPANY’S TOP LINE OR THE REVENUE-GENERATING ACTIVITIES OFTHE COMPANY. REVENUE CENTERS ARE EVALUATED BASED ON REVENUE VARIANCES OR THE DIFFERENCE BETWEEN PLANNEDAND ACTUAL REVENUE AMOUNTS. IF ACTUAL REVENUES EXCEED BUDGET, YOU HAVE A FAVORABLE RESULT; OTHERWISE, YOUHAVE AN UNFAVORABLE RESULT.

22

SECTION

SECTION C1: COST VARIANCES REPORT

COST VARIANCE REPORT (SAMPLE)

ABC COMPANYCOST VARIANCES REPORT

MANUFACTURING


DIRECT MATERIALS $ 45,000 $ 40,000 $ 5,000 UNF

DIRECT LABOR $ 30,000 $ 25,000 $ 5,000 UNF

VARIABLE MFG OVERHEAD $ 12,000 $ 10,000 $ 2,000 UNF

FIXED MFG OVERHEAD $ 10,000 $ 10,000 $ –

TOTAL $ 97,000 $ 85,000 $ 12,000 UNF

NONMANUFACTURING


SELLING $ 35,000 $ 35,000 $ – UNF

ADMINISTRATION $ 45,000 $ 50,000 $ (5,000) FAV

TOTAL $ 80,000 $ 85,000 $ (5,000) FAV

DEFINITION

COST CENTER IS RESPONSIBLE FOR THE INCURRENCE OF COST.

PURPOSE

COST CENTERS ARE EVALUATED USING COST VARIANCES. IF ACTUAL COSTS EXCEED BUDGET ESTIMATES, YOU HAVE AN UN-FAVORABLE RESULT; OTHERWISE, YOU HAVE AN FAVORABLE RESULT.

23

SECTION

SECTION C1: PROFIT CENTER

PROFIT CENTER EVALUATION FORM (SAMPLE)

SALES XXXLESS: VARIABLE MANUFACTURING COSTS XXXMANUFACTURING CONTRIBUTION MARGIN XXXLESS: VARIABLE SELLING AND ADMINISTRATIVE EXPENSES XXXCONTRIBUTION MARGIN XXXLESS: CONTROLLABLE FIXED COSTS AND EXPENSES

FIXED MANUFACTURING OVERHEAD XXXFIXED SELLING AND ADMINISRATIVE EXPENSES XXX XXX

CONTROLLABLE MARGIN (SHORT-RUN PERFORMANCE) XXX MANAGER’S PERFORMANCE BASISLESS: NONCONTROLLABLE FIXED COSTS AND EXPENSES XXXSEGMENT MARGIN (LONG-RUN PERFORMANCE) XXX SEGMENT’S PERFORMANCE BASIS

DEFINITION

PROFIT CENTER IS RESPONSIBLE FOR THE GENERATION OF REVENUE AND INCURRENCE OF COST. THEREFORE, IT IS RESPON-SIBLE FOR PROFIT WHICH IS THE DIFFERENCE BETWEEN REVENUE AND COSTS.

PURPOSE

SEGMENT MANAGERS ARE EVALUATED BASED ON CONTROLLABLE MARGIN WHILE A SEGMENT IS EVALUATED BASED ON ITSSEGMENT MARGIN.

24

SECTION

SECTION C1: PERFORMANCE ANALYSIS REPORT USING A MASTER (STATIC) BUDGET

ACTUAL vs. MASTER PERFORMANCE ANALYSIS REPORT (SAMPLE)

MASTER BUDGET ACTUAL RESULTSBUDGETED UNIT SALES 150,000 ACTUAL UNIT SALES 100,000BUDGETED SALES PRICE PER UNIT $ 12.00 ACTUAL SALES PRICE PER UNIT $ 11.00BUDGETED VARIABLE COST PER UNIT $ 5.20 ACTUAL VARIABLE COST PER UNIT $ 5.75BUDGETED FIXED COSTS $ 510,000 ACTUAL FIXED COSTS $ 475,000

ABC CHOCOLATES, INCOPERATING INCOME ANALYSIS

FOR THE YEAR ENDED: DECEMBER 31, 20XX

ACTUALRESULTS

MASTER (STATIC)BUDGET

VARIANCE

UNITS 100,000 150,000 (50,000) UNF

SALES $ 1,100,000 $ 1,800,000 $ (700,000) UNF

LESS: VARIABLE COSTS 575,000 780,000 205,000 FAV

CONTRIBUTION MARGIN $ 525,000 $ 1,020,000 $ (495,000) UNF

LESS: FIXED COSTS 475,000 510,000 35,000 FAV

OPERATING INCOME $ 50,000 $ 510,000 $ (460,000) UNF

DEFINITION

A REPORT THAT BRINGS TOGETHER THE REVENUE AND MANUFACTUING COST VARIANCES FORMS.

PURPOSE

A PERFORMANCE ANALYSIS COMPARES ACTUAL RESULTS TO THE MASTER BUDGET. IT CALCULATES FAVORABLE AND UNFA-VORABLE VARIANCES FROM BUDGET, AND PROVIDE EXPLANATIONS FOR VARIANCES.

VARIANCE EXPLANATIONS

SALES VARIANCE ANALYSIS

THE ACTUAL SALES FALL BELOW THE BUDGET BY $700,000 SIMPLY BECAUSE OF THE DIFFERENCE IN UNIT SALES OF 50,000UNITS (150,000 UNITS BUDGETED-100,000 UNITS ACTUAL) AND THE DIFFERENCE IN SALES PRICE PER UNIT OF $1 ($12 – BUDGETVERSUS $11 – ACTUAL).

TOTAL BUDGET VARIANCE = FLEXIBLE BUDGET VARIANCE + SALES VOLUME VARIANCE

= (DIFF. IN SALES PRICE/UNIT × ACTUAL UNITS) +

(DIFF. UNITS SOLD × BUDGETED SALES PRICE/UNIT)

= ($1 × 100,000) + (50,000 × $12)

= ($100,000 UNF) + ($600,000 UNF)

= $700,000 UNF

25

SECTION

VARIABLE COSTS VARIANCE ANALYSIS

THERE IS A FAVORABLE VARIABLE COSTS VARIANCE OF $205,000 IS MAINLY DUE TO THE DIFFERENCE IN UNIT SALES OF 50,000UNITS (150,000 UNITS BUDGETED-100,000 UNITS ACTUAL) REDUCED BY UNFAVORABLE DIFFERENCE IN VARIABLE COST PERUNIT OF $0.55 ($5.20-BUDGET VERSUS $5.75- ACTUAL).

TOTAL BUDGET VARIANCE = FLEXIBLE BUDGET VARIANCE + SALES VOLUME VARIANCE

= (DIFF. IN VARIABLE COST/UNIT × ACTUAL UNITS) +

(DIFF. UNITS SOLD × BUDGETED VARIABLE COST/UNIT)

= – (100,000 × $0.55) + (50,000 × $5.20)

= – 55,000 (UNF) + 260,000 (FAV)

= $205,000 FAV

FIXED COSTS VARIANCE ANALYSIS

THE $35,000 FAVORABLE DIFFERENCE OF ACTUAL AND BUDGETED FIXED COSTS IS DUE TO FACTORS OTHER THAN THE DIFFER-ENCE IN UNIT SALES AS FIXED COSTS DO NOT CHANGE WITH THE LEVEL OF OUTPUT WITHIN THE RELEVANT RANGE.

26

SECTION

SECTION C1: PERFORMANCE ANALYSIS REPORT USING A FLEXIBLE BUDGET

CONVERT MASTER (STATIC) BUDGET TO A FLEXIBLE BUDGET REPORT (SAMPLE)


ABC CHOCOLATES, INCOPERATING INCOME ANALYSIS


ACTUALRESULTS

FLEXIBLEBUDGET


UNITS 100,000 100,000 150,000

SALES $ 1,100,000 $ 1,200,000 * $ 1,800,000

LESS: VARIABLE COSTS 575,000 520,000 ** 780,000

CONTRIBUTION MARGIN $ 525,000 $ 680,000 $ 1,020,000

LESS: FIXED COSTS 475,000 510,000 *** 510,000

OPERATING INCOME $ 50,000 $ 170,000 $ 510,000

* BUDGETED SALES PRICE PER UNIT × ACTUAL UNITS SOLD OR (100,000 × $12.00)

** BUDGETED VARIABLE COST PER UNIT × ACTUAL UNITS SOLD OR (100,000 × $5.20)

*** FIXED COSTS IS DERIVED FROM THE MASTER BUDGET’S FIXED COST AMOUNT

DEFINITION

THE FLEXIBLE BUDGET ADJUSTS THE ELEMENTS OF THE BUDGETED OPERATING INCOME (REVENUES AND EXPENSES) TO THEACTUAL LEVEL OF OUTPUT ACHIEVED.

PURPOSE

A MASTER BUDGET IS DESIGNED FOR ONLY ONE LEVEL OF ACTIVITY. A FLEXIBLE BUDGET ADJUSTS THE MASTER (STATIC)BUDGET REVENUES AND COSTS TO THE ACTUAL LEVEL ACHIEVED USING BUDGETED RATES, RESPECTIVELY.

27

SECTION

SECTION C1: SALES VOLUME VARIANCE REPORT

SALES VOLUME VARIANCE REPORT (SAMPLE)


ABC CHOCOLATES, INCSALES VOLUME VARIANCE


FLEXIBLEBUDGET


VARIANCE

UNITS 100,000 150,000 (50,000) UNF

SALES $ 1,200,000 $ 1,800,000 $ (600,000) UNF

LESS: VARIABLE COSTS 520,000 780,000 260,000 FAV

CONTRIBUTION MARGIN $ 680,000 $ 1,020,000 $ (340,000) UNF

LESS: FIXED COSTS 510,000 510,000 –


DEFINITION

THE FLEXIBLE BUDGET ADJUSTS THE ELEMENTS OF THE BUDGETED OPERATING INCOME (REVENUES AND EXPENSES) TO THEACTUAL LEVEL OF OUTPUT ACHIEVED.

PURPOSE

A MASTER BUDGET IS DESIGNED FOR ONLY ONE LEVEL OF ACTIVITY. A FLEXIBLE BUDGET ADJUSTS THE MASTER (STATIC)BUDGET REVENUES AND COSTS TO THE ACTUAL LEVEL ACHIEVED USING BUDGETED RATES, RESPECTIVELY.

SALES-VOLUME VARIANCE ANALYSIS

THE SALES-VOLUME VARIANCE OF ABC CHOCOLATES, INC. AMOUNTED TO $340,000 WHICH IS THE DIFFERENCE OF FLEXIBLEBUDGET OPERATING INCOME AND THE MASTER (STATIC) BUDGET OPERATING INCOME.

28

SECTION

SECTION C1: FLEXIBLE BUDGET VARIANCE REPORT

FLEXIBLE BUDGET VARIANCE REPORT (SAMPLE)


ABC CHOCOLATES, INCFLEXIBLE BUDGET VARIANCE REPORT


ACTUALRESULTS

FLEXIBLEBUDGET

VARIANCE

UNITS 100,000 100,000 –

SALES $ 1,100,000 $ 1,200,000 $ (100,000) UNF

LESS: VARIABLE COSTS 575,000 520,000 (55,000) UNF

CONTRIBUTION MARGIN $ 525,000 $ 680,000 $ (155,000) UNF

LESS: FIXED COSTS 475,000 510,000 35,000


DEFINITION

VARIANCE REPORT COMPARES ACTUAL RESULTS TO THE FLEXIBLE BUDGET.

PURPOSE

A FLEXIBLE BUDGET ADJUSTS THE MASTER (STATIC) BUDGET REVENUES AND COSTS TO THE ACTUAL LEVEL OF ACTIVITYACHIEVED USING BUDGETED RATES, RESPECTIVELY.

FLEXIBLE BUDGET vs. ACTUAL RESULTS VARIANCE ANALYSIS:

THEREFORE, THERE IS AN UNFAVORABLE FLEXIBLE BUDGET VARIANCE OF $120,000 WHICH IS THE DIFFERENCE OF ACTUALOPERATING INCOME OF $50,000 AND THE FLEXIBLE BUDGET OPERATING INCOME OF $170,000.

SALES VARIANCE ANALYSIS

THE FLEXIBLE BUDGET SALES VARIANCE OF $100,000 UNFAVORABLE IS THE DIFFERENCE OF THE ACTUAL SALES PRICE PERUNIT OF $11 AND THE FLEXIBLE BUDGET SALES PRICE PER UNIT OF $12 AT THE ACTUAL LEVEL OF OUTPUT ACHIEVED (UNITSSOLD).

VARIABLE COSTS ANALYSIS

THE VARIABLE COSTS FLEXIBLE BUDGET VARIANCE OF $55,000 UNFAVORABLE IS THE DIFFERENCE OF THE ACTUAL VARIABLECOST PER UNIT OF $5.75 AND THE FLEXIBLE BUDGET VARIABLE COST PER UNIT OF $5.20 AT THE ACTUAL LEVEL OF OUTPUTACHIEVED (UNITS SOLD).

FIXED COSTS ANALYSIS

THE FIXED COSTS FLEXIBLE BUDGET VARIANCE IS THE DIFFERENCE OF ACTUAL FIXED COSTS AND THE BUDGETED FIXEDCOST.

29

SECTION

SECTION C1: PRICE (RATE) VARIANCE RELATED TO DIRECT MATERIALS OR DIRECT LABOR INPUTS

PRICE (RATE) VARIANCE RELATED TO DIRECT MATERIALS OR DIRECT LABOR INPUTS

PURPOSE

PRICE (RATE) VARIANCES IS THE DIFFERENCE OF ACTUAL AND BUDGETED (STANDARD) UNIT INPUT PRICE MULTIPLIED BY THEACTUAL QUANTITY OF INPUT SUCH AS UNITS OF DIRECT MATERIALS USED AND DIRECT LABOR HOURS. THE VARIANCES OFDIRECT MATERIALS, DIRECT LABOR CAN BE SIMPLY COMPUTED USING THE MNEMONIC: QAAS-PASS.

P Q

A A

S A

S S

Price or Rate −→ ←− Quantity or Efficiency

[1] DIRECT MATERIAL PRICE VARIANCE[3] DIRECT LABOR RATE VARIANCE[5] VARIABLE OVERHEAD RATE VARIANCEDIRECT MATERIAL QUANTITY VARIANCE [2]

DIRECT LABOR EFFICIENCY VARIANCE [4]VARIABLE OVERHEAD EFFICIENCY VARIANCE [6]

SECTION C1: [1] DIRECT MATERIALS PRICE VARIANCE (DMPV)

DIRECT MATERIALS PRICE VARIANCE (DMPV)

P Q

A A

S A

S S


DMPV

XXX ACTUAL DIRECT MATERIALS PRICE PER UNIT [A] × ACTUAL QUANTITY OF DIRECT MATERIALS USED [A]

XXX LESS: STANDARD DIRECT MATERIALS PRICE PER UNIT [S] × ACTUAL QUANTITY OF DIRECT MATERIALS USED [A]

XXX DIRECT MATERIALS PRICE VARIANCE

NOTE

ANOTHER TYPE OF A PRICE VARIANCE IS THE DIRECT MATERIALS PURCHASE PRICE VARIANCE. DIRECT MATERIALS PURCHASEPRICE VARIANCE IS THE DIFFERENCE OF ACTUAL AND STANDARD DIRECT MATERIALS UNIT PRICE MULTIPLIED BY THE ACTUALUNITS OF DIRECT MATERIALS PURCHASED.

PURPOSE

DIRECT MATERIALS PRICE VARIANCE (DMPV) IS THE DIFFERENCE OF THE ACTUAL DIRECT MATERIALS PRICE PER UNIT AND THESTANDARD DIRECT MATERIALS PRICE PER UNIT USING THE ACTUAL QUANTITY OF DIRECT MATERIALS USED.

30

SECTION

SECTION C1: [3] DIRECT LABOR RATE VARIANCE (DMLV)

DIRECT LABOR RATE VARIANCE (DMLV)

P Q

A A

S A

S S


DLRV

XXX ACTUAL DIRECT LABOR RATE [A] × ACTUAL NUMBER OF DIRECT LABOR HOURS WORKED [A]

XXX LESS: STANDARD DIRECT LABOR RATE [S] × ACTUAL NUMBER OF DIRECT LABOR HOURS WORKED [A]

XXX DIRECT LABOR RATE VARIANCE

PURPOSE

DIRECT LABOR RATE VARIANCE IS THE DIFFERENCE OF ACTUAL DIRECT LABOR RATE AND STANDARD DIRECT LABOR RATEMULTIPLIED BY THE ACTUAL NUMBER OF DIRECT LABOR HOURS WORKED.

SECTION C1: [2] DIRECT MATERIAL USAGE VARIANCE (DMUV)

DIRECT MATERIAL USAGE VARIANCE (DMUV)

P Q

A A

S A

S S


DMUV

XXX STANDARD DIRECT MATERIALS PRICE PER UNIT [S] × ACTUAL QUANTITY OF DIRECT MATERIALS USED [A]

XXX LESS: STANDARD DIRECT MATERIALS PRICE PER UNIT [S] × STANDARD INPUT ALLOWED FOR ACTUAL OUTPUT [S]

XXX DIRECT MATERIALS QUANTITY VARIANCE

PURPOSE

DIRECT MATERIALS USAGE VARIANCE IS THE DIFFERENCE OF ACTUAL UNITS OF DIRECT MATERIALS USED AND THE UNITS OFDIRECT MATERIALS THAT SHOULD HAVE BEEN USED (STANDARD) FOR ACTUAL OUTPUT MULTIPLIED BY THE STANDARD DIRECTMATERIAL PRICE PER UNIT.

31

SECTION

SECTION C1: [4] DIRECT LABOR EFFICIENCY VARIANCE (DLEV)

DIRECT LABOR EFFICIENCY VARIANCE (DLEV)

P Q

A A

S A

S S


DLEV

XXX STANDARD DIRECT LABOR RATE [S] × ACTUAL NUMBER OF DIRECT HOURS WORKED [A]

XXX LESS: STANDARD DIRECT LABOR RATE [S] × STANDARD INPUT ALLOWED FOR ACTUAL OUTPUT (SIAFAO) [S]

XXX DIRECT LABOR EFFICIENCY VARIANCE

PURPOSE

DIRECT LABOR EFFICIENCY VARIANCE IS THE DIFFERENCE OF ACTUAL DIRECT LABOR HOURS WORKED AND THE NUMBER OFDIRECT LABOR HOURS THAT SHOULD HAVE BEEN WORKED (STANDARD) FOR ACTUAL OUTPUT MULTIPLIED BY THE STANDARDDIRECT LABOR RATE.

SECTION C1: FIXED AND VARIABLE OVERHEAD AS THEY RELATE TO SPENDING AND EFFICIENCY VARIANCES

FIXED AND VARIABLE OVERHEAD AS THEY RELATE TO SPENDING AND EFFICIENCY VARIANCES

PURPOSE

THE TOTAL FIXED OVERHEAD IS THE DIFFERENCE OF ACTUAL FIXED OVERHEAD AND STANDARD FIXED OVERHEAD.

PURPOSE

FIXED OVERHEAD SPENDING VARIANCE IS THE DIFFERENCE OF ACTUAL FIXED OVERHEAD AND BUDGETED FIXED OVERHEAD.

PURPOSE

FIXED OVERHEAD VOLUME VARIANCE IS THE DIFFERENCE OF BUDGETED FIXED OVERHEAD AND STANDARD FIXED OVERHEAD.NOTE THAT THERE IS NO SUCH THING AS âAIJFIXED OVERHEAD EFFICIENCY VARIANCEâAI. IF A PROBLEM ASKS FOR âAIJFIXEDOVERHEAD EFFICIENCY VARIANCEâAI, THEN THE ANSWER SHOULD BE âAIJCANNOT BE DETERMINEDâAI.

A ACTUAL FIXED OVERHEAD = ACTUAL FOH RATE × ACTUAL ACTIVITY

B BUDGETED FIXED OVERHEAD = BUDGETED FOH RATE × BUDGETED ACTIVITY

S STANDARD FIXED OVERHEAD = BUDGETED FOH RATE × STANDARD ACTIVITY*

FIXED SPENDING VARIANCE

FIXED VOLUME VARIANCE

*REMEMBER THE STANDARD FIXED OVERHEAD RATE IS COMPUTED BY DIVIDING THE BUDGETED FOH BY THE BUDGETED ACTIVITY.*STANDARD ACTIVITY IS THE SIAFAO OR THE STANDARD INPUT ALLOWED FOR ACTUAL OUTPUT.

32

SECTION

SECTION C1: [5] VARIABLE OVERHEAD SPENDING VARIANCE (VOSV)

VARIABLE OVERHEAD SPENDING VARIANCE (VOSV)

P Q

A A

S A

S S


VOSV

XXX ACTUAL VARIABLE OVERHEAD RATE [A] × ACTUAL LEVEL OF ACTIVITY [A]

XXX LESS: STANDARD VARIABLE OVERHEAD RATE [S] × ACTUAL LEVEL OF ACTIVITY [A]

XXX VARIABLE OVERHEAD SPENDING VARIANCE

PURPOSE

VARIABLE OVERHEAD SPENDING VARIANCE IS THE VARIANCE CAUSED BY THE DIFFERENCE IN THE ACTUAL VARIABLE OVER-HEAD RATE AND THE STANDARD VARIABLE OVERHEAD RATE AT THE ACTUAL NUMBER OF INPUTS USED.

SECTION C1: [6] VARIABLE OVERHEAD EFFICIENCY VARIANCE (VOEV)

VARIABLE OVERHEAD EFFICIENCY VARIANCE (VOEV)

P Q

A A

S A

S S


VOEV

XXX STANDARD VARIABLE OVERHEAD RATE [S] × ACTUAL LEVEL OF ACTIVITY [A]

XXX LESS: STANDARD VARIABLE OVERHEAD RATE [S] × STANDARD OF ACTIVITY [S]

XXX VARIABLE OVERHEAD EFFICIENCY VARIANCE

PURPOSE

VARIABLE OVERHEAD EFFICIENCY VARIANCE IS THE VARIANCE CAUSED BY THE DIFFERENCE IN THE ACTUAL INPUT AND STAN-DARD INPUT ALLOWED FOR ACTUAL OUTPUT AT THE STANDARD VARIABLE OVERHEAD RATE.

33

SECTION

SECTION C1: SALES MIX, SALES QUANTITY AND SALES VOLUME VARIANCES

SALES VOLUME VARIANCE CALCULATION

DEFINITION

THE SALES VOLUME VARIANCE IS COMPOSED OF THE SALES QUANTITY VARIANCE AND THE SALES-MIX VARIANCE.

EXAMPLE

SAIGON LEATHER GOODS, INC. SELLS TWO PRODUCTS AND HAD THE FOLLOWING DATA FOR LAST MONTH

WALLETS BELTS

BUDGET ACTUAL BUDGET ACTUALUNIT SALES 11,000 12,000 9,000 12,000

UNIT CONTRIBUTION MARGIN 9.00 9.60 20.00 21.00

SALES VOLUME VARIANCE:

ACTUALUNITS

BUDGETUNITS

BUDGETED UNITCONTRIBUTION

MARGINWALLETS (12,000 – 11,000) × 9.00 = 9,000

BELTS (12,000 – 9,000) × 20.00 = 60,000

TOTAL SALES VOLUME VARIANCE = 69,000 FAV

SALES VOLUME VARIANCE:

STEP #1

COMPUTE WASPSM.

FORMULA =(TOTAL ACTUAL UNITS SOLD FOR ALL PRODUCTS – TOTAL BUDGETED UNITS SOLD FOR ALLPRODUCTS) × WEIGHTED AVERAGE STANDARD PRICE FOR THE STANDARD MIX (WASPSM)

STANDARDUCM

STANDARDQUANTITY

TOTAL

WALLETS 9.00 × 11,000 = 99,000

BELTS 20.00 × 9,000 = 180,000

20,000 = 279,000 WASPSM $ 13.95

STEP #2

COMPUTE FOR THE TOTAL ACTUAL UNITS SOLD FOR ALL PRODUCTS AND TOTAL BUDGETED UNITS SOLD FOR ALL PRODUCTS.

TOTAL ACTUAL UNITS SOLD FOR ALL PRODUCTS (12,000 + 12,000) 24,000

TOTAL BUDGETED UNITS SOLD FOR ALL PRODUCTS (11,000 + 9,000) 20,000

STEP #3

SUBSTITUTE THE AMOUNTS TO THE FORMULA.

SALES QUANTITY VARIANCE = (24,000 – 20,000)×$13.95 [WASPSM] 55,800 FAV

34

SECTION

SALES MIX VARIANCE:

FORMULA = SALES MIX VARIANCE = (WASPAM - WASPSM) × TOTAL ACTUAL UNITS SOLD

WASPAM = WEIGHTED AVERAGE STANDARD PRICE FOR THE ACTUAL MIX.

WASPSM = WEIGHTED AVERAGE STANDARD PRICE FOR THE STANDARD MIX.

STEP #1

COMPUTE WASPAM.

ACTUALUNITS

TOTALACTUAL

UNITS

BUDGETED UNITCONTRIBUTION

MARGINWALLETS (12,000 / 24,000) × 9.00 = $ 4.50

BELTS (12,000 / 24,000) × 20.00 = $ 10.00

WASPAM $ 14.50

STEP #2

COMPUTE WASPAM.

STANDARDUCM

STANDARDQUANTITY

TOTAL

WALLETS 9.00 × 11,000 = 99,000

BELTS 20.00 × 9,000 = 180,000

20,000 = 279,000 WASPSM $ 13.95

STEP #3

SUBSTITUTE THE AMOUNTS TO THE FORMULA: (WASPAM – WASPSM) × TOTAL ACTUAL UNITS SOLD

SALES MIX VARIANCE = ($14.50 – $13.95) × 24,000 13,200 FAV

35

SECTION

SECTION C1: MIX VARIANCES

MIX VARIANCE CALCULATIONS

PURPOSE

MIX VARIANCE CAN BE EITHER A REVENUE-RELATED (SALES) OR MANUFACTURING COST-RELATED MIX VARIANCE. THE SALESMIX VARIANCE AND THE SALES QUANTITY VARIANCE ARE THE COMPONENTS OF THE TOTAL SALES VOLUME VARIANCE. THESEVARIANCES ARE APPLICABLE ONLY WHEN MORE THAN ONE PRODUCT IS BEING SOLD.

THE MIX VARIANCE AND THE YIELD VARIANCE ARE THE COMPONENTS OF TOTAL EFFICIENCY (QUANTITY) VARIANCE. THESEVARIANCES ARE APPLICABLE ONLY WHEN MORE THAN ONE INPUT IS BEING USED TO PRODUCE THE OUTPUT.

DIRECT MATERIALS (OR LABOR) MIX VARIANCE

FORMULA = (WASCAM – WASCSM) × AQ

WASCAM = WEIGHTED AVERAGE STANDARD COST ACTUAL MIX.

WASCSM = WEIGHTED AVERAGE WEIGHTED AVERAGE STANDARD COST STANDARD MIX

AQ = ACTUAL QUANTITY OF MATERIALS PURCHASED OR LABOR HOURS WORKED

EXAMPLE

HANOI COFFEE, INC. SELLS AN EXPORT QUALITY WHOLESALE 3-IN-1 COFFEE MIX AND HAD THE FOLLOWING DATA FOR LASTMONTH:

DIRECT MATERIALS:PER SACK PER KILO

ACTUAL MIX STD MIX ACTUAL COST STD COSTCOFFEE BEANS 10.00 kg 11.00 kg $ 18.00 $ 21.00

CREAMER 3.50 4.00 5.50 6.00

SUGAR 1.50 2.50 2.50 3.00

DIRECT LABOR:PER SACK PER HOUR

ACTUAL MIX STD MIX ACTUAL COST STD COSTROASTING & GRINDING 3.00 hrs 2.90 hrs $ 10.25 $ 10.00

MIXING 1.75 2.00 8.75 8.00

PACKING 0.25 0.30 6.50 6.00

ACTUAL SACKS OF COFFEE PRODUCED: 10,000

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SECTION

DIRECT MATERIALS MIX VARIANCE

STEP #1

COMPUTE WASCAM

STD COST ACTUAL MIX TOTALCOFFEE BEANS $ 21.00 × 10.00 = 210.00

CREAMER $ 6.00 × 3.50 = 21.00

SUGAR $ 3.00 × 1.50 = 4.50

15.00 = 235.00 WASCAM = 15.70

STEP #2

COMPUTE WASCSM

STD COST STD MIX TOTALCOFFEE BEANS $ 21.00 × 11.00 = 231.00

CREAMER $ 6.00 × 4.00 = 24.00

SUGAR $ 3.00 × 2.50 = 7.50

17.50 = 262.50 WASCSM = 15.00

STEP #3

COMPUTE TOTAL ACTUAL QUANTITY OF DIRECT MATERIALS USED

ACTUAL MIX TOTAL OUTPUT TOTALCOFFEE BEANS $ 10.00 × 10,000 = 100,000

CREAMER $ 3.50 × 10,000 = 35,000

SUGAR $ 1.50 × 10,000 = 15,000

30,000 = 150,000

STEP #4

SUBSTITUTE THE AMOUNTS TO THE FORMULA: (WASCAM - WASCSM) × AQ

DIRECT MATERIALS MIX VARIANCE = ($15.70 - $15.00) × 150,000 $ 105,000 UNF

THE DIRECT MATERIALS MIX VARIANCE IS UNFAVORABLE BECAUSE THE WEIGHTED AVERAGE STANDARD COST FOR ACTUALMIX IS GREATER THAN THE WEIGHTED AVERAGE STANDARD COST FOR STANDARD MIX.

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SECTION

DIRECT LABOR MIX VARIANCE

STEP #1

COMPUTE WASCAM

STD RATE ACTUAL MIX TOTALROASTING & GRINDING $ 10.00 × 3.00 = 30.00

MIXING $ 8.00 × 1.75 = 14.00

PACKING $ 6.00 × 0.25 = 1.50

5.00 = 45.50 WASCAM = 9.10

STEP #2

COMPUTE WASCSM

STD COST STD MIX TOTALROASTING & GRINDING $ 10.00 × 2.90 = 29.00

MIXING $ 8.00 × 2.00 = 16.00

PACKING $ 6.00 × 0.30 = 1.80

5.20 = 46.80 WASCSM = 9.00

STEP #3

COMPUTE TOTAL ACTUAL QUANTITY OF DIRECT MATERIALS USED

ACTUAL MIX TOTAL OUTPUT TOTALROASTING & GRINDING $ 3.00 × 10,000 = 30,000

MIXING $ 1.75 × 10,000 = 17,500

PACKING $ 0.25 × 10,000 = 2,500

30,000 = 50,000

STEP #4

SUBSTITUTE THE AMOUNTS TO THE FORMULA: (WASCAM - WASCSM) × AQ

DIRECT LABOR MIX VARIANCE = ($9.10 – $9.00) × 50,000 5,000 UNF

THE DIRECT LABOR MIX VARIANCE IS UNFAVORABLE BECAUSE THE WEIGHTED AVERAGE STANDARD COST FOR ACTUAL MIX ISGREATER THAN THE WEIGHTED AVERAGE STANDARD COST FOR STANDARD MIX.

38

SECTION

SECTION C1: YIELD VARIANCES

YIELD VARIANCE CALCULATIONS

PURPOSE

THE MIX VARIANCE AND THE YIELD VARIANCE ARE THE COMPONENTS OF TOTAL EFFICIENCY (QUANTITY) VARIANCE. THESEVARIANCES ARE APPLICABLE ONLY WHEN MORE THAN ONE INPUT IS BEING USED TO PRODUCE THE OUTPUT.

DIRECT MATERIALS YIELD VARIANCE IS THE DIFFERENCE OF THE TOTAL ACTUAL QUANTITY AND THE TOTAL STANDARD QUAN-TITY OF THE DIRECT MATERIALS CONSUMED USING THE WEIGHTED AVERAGE STANDARD COST FOR STANDARD MIX (WASCSM).

DIRECT MATERIALS (OR LABOR) YIELD VARIANCE

FORMULA = (TOTAL ACTUAL QUANTITY - TOTAL STANDARD QUANTITY) × WASCSM

(TOTAL ACTUAL DIRECT LABOR HOURS - TOTAL STANDARD DIRECT LABOR HOURS) × WASCSM

WASCSM = WEIGHTED AVERAGE STANDARD COST FOR A STANDARD MIX

EXAMPLE

HANOI COFFEE, INC. SELLS AN EXPORT QUALITY WHOLESALE 3-IN-1 COFFEE YIELD AND HAD THE FOLLOWING DATA FOR LASTMONTH:

DIRECT MATERIALS:PER SACK PER KILO

ACTUAL YIELD STD YIELD ACTUAL COST STD COSTCOFFEE BEANS 10.00 kg 11.00 kg $ 18.00 $ 21.00

CREAMER 3.50 4.00 5.50 6.00

SUGAR 1.50 2.50 2.50 3.00

DIRECT LABOR:PER SACK PER HOUR

ACTUAL YIELD STD YIELD ACTUAL COST STD COSTROASTING & GRINDING 3.00 hrs 2.90 hrs $ 10.25 $ 10.00

MIXING 1.75 2.00 8.75 8.00

PACKING 0.25 0.30 6.50 6.00

ACTUAL SACKS OF COFFEE PRODUCED: 10,000

39

SECTION

DIRECT MATERIALS YIELD VARIANCE

STEP #1

COMPUTE FOR THE TOTAL ACTUAL QUANTITY OF DIRECT MATERIALS USED

ACTUALMIX

TOTALOUTPUT

TOTAL

COFFEE BEANS $ 10.00 × 10,000 = 100,000

CREAMER $ 3.50 × 10,000 = 35,000

SUGAR $ 1.50 × 10,000 = 15,000

30,000 = 150,000

STEP #2

COMPUTE FOR THE TOTAL STANDARD QUANTITY OF DIRECT MATERIALS THAT SHOULD HAVE BEEN USED

STANDARDMIX

TOTALOUTPUT

TOTAL

COFFEE BEANS $ 11.00 × 10,000 = 110,000

CREAMER $ 4.00 × 10,000 = 40,000

SUGAR $ 2.50 × 10,000 = 25,000

30,000 = 175,000

STEP #3

COMPUTE WASCSM

STANDARDCOST

STANDARDMIX

TOTAL

COFFEE BEANS $ 21.00 × 11.00 = 231.00

CREAMER $ 6.00 × 4.00 = 24.00

SUGAR $ 3.00 × 2.50 = 7.50

17.50 = 262.50 WASCSM = 15.00

STEP #4

SUBSTITUTE THE FORMULA: (TOTAL ACTUAL QUANTITY – TOTAL STANDARD QUANTITY) × WASCSM

DIRECT MATERIALS YIELD VARIANCE = (150,000 – 175,000) × $15.00 $ (375,000) FAV

THE DIRECT MATERIALS YIELD VARIANCE IS FAVORABLE BECAUSE THE TOTAL ACTUAL QUANTITY OF DIRECT MATERIALS USEDIS LESS THAN THE TOTAL STANDARD QUANTITY OF DIRECT MATERIALS THAT SHOULD HAVE BEEN USED.

THEREFORE, THE TOTAL DIRECT MATERIALS QUANTITY VARIANCE WOULD BE $270,000 FAVORABLE OR THE SUM OF DIRECTMATERIALS MIX VARIANCE OF $105,000 UNFAVORABLE AND THE DIRECT MATERIALS YIELD VARIANCE OF $375,000 FAVORABLE.

40

SECTION

DIRECT LABOR YIELD VARIANCE

STEP #1

COMPUTE FOR THE TOTAL ACTUAL NUMBER OF DIRECT LABOR HOURS

ACTUALMIX

TOTALOUTPUT

TOTAL

ROASTING & GRINDING $ 3.00 × 10,000 = 30,000

YIELDING $ 1.75 × 10,000 = 17,500

PACKING $ 0.25 × 10,000 = 2,500

30,000 = 50,000

STEP #2

COMPUTE FOR THE TOTAL STANDARD NUMBER OF DIRECT LABOR THAT SHOULD HAVE BEEN EMPLOYED

STANDARDMIX

TOTALOUTPUT

TOTAL

ROASTING & GRINDING $ 2.90 × 10,000 = 29,000

YIELDING $ 2.00 × 10,000 = 20,000

PACKING $ 0.30 × 10,000 = 3,000

30,000 = 52,000

STEP #3

COMPUTE WASCSM:

STANDARDCOST

STANDARDMIX

TOTAL

COFFEE BEANS $ 10.00 × 2.90 = 29.00

CREAMER $ 8.00 × 2.00 = 16.00

SUGAR $ 6.00 × 0.30 = 1.80

5.20 = 46.80 WASCSM = 9.00

STEP #4

SUBSTITUTE THE FORMULA: (TOTAL ACTUAL DLH - TOTAL STANDARD DLH) × WASCSM

DIRECT LABOR YIELD VARIANCE = (50,000 – 52,000) × $9.00 $ (18,000) FAV

THE DIRECT LABOR YIELD VARIANCE IS FAVORABLE BECAUSE THE TOTAL ACTUAL NUMBER OF DIRECT LABOR EMPLOYED ISLESS THAN THE TOTAL STANDARD NUMBER OF DIRECT LABOR HOURS THAT SHOULD HAVE BEEN EMPLOYED.

THEREFORE, THE TOTAL DIRECT LABOR EFFICIENCY VARIANCE WOULD BE $13,000 FAVORABLE OR THE SUM OF DIRECT LABORMIX VARIANCE OF $5,000 UNFAVORABLE AND THE DIRECT LABOR YIELD VARIANCE OF $18,000 FAVORABLE.

41

SECTION

SECTION C3: PERFORMANCE MEASURES

RETURN ON INVESTMENT

RETURN ON INVESTMENT =INCOME OF BUSINESS UNIT (PRODUCT)

AVERAGE INVESTED CAPITAL

DUPONT METHOD TO CALCULATE RETURN ON INVESTMENT (ALTERNATE METHOD)

RETURN ON INVESTMENT = PROFIT MARGIN × INVESTMENT TURNOVER

NET INCOMESALES (REVENUE)

× SALES (REVENUE)AVG INVESTED ASSETS

DEFINITION

RETURN ON INVESTMENT (ROI) IS THE FUNDAMENTAL PERFORMANCE MEASURE OF AN INVESTMENT CENTER. IT IS ALSO USEDIN EVALUATING CAPITAL INVESTMENTS.

PURPOSE

TO BE USEFUL, THE COMPANY’S ROI MUST BE COMPARED WITH THE REQUIRED RATE OF RETURN (HURDLE RATE). IF THE COM-PANY’S ROI IS GREATER THAN THE REQUIRED RATE OF RETURN (HURDLE RATE), THEN THE INVESTMENT CENTER EXCEEDEDEXPECTATIONS OR THE CAPITAL INVESTMENT MUST BE ACCEPTED. IF THE COMPANY’S ROI IS LESS THAN THE REQUIRED RATEOF RETURN (HURDLE RATE), THEN THE INVESTMENT CENTER IS LAGGING BEHIND EXPECTATIONS OR THE CAPITAL INVESTMENTMUST BE REJECTED.

SECTION C3: PERFORMANCE MEASURES

RESIDUAL INCOME

RESIDUAL INCOME =INCOME OF

BUSINESS UNIT−

ASSETS OFBUSINESS UNIT

× REQUIRED RATEOF RETURN

DEFINITION

RESIDUAL INCOME IS THE EXCESS OF INCOME OVER DESIRED RETURN. UNLIKE THE ROI, THE RESIDUAL INCOME IS A DOLLARAMOUNT RATHER THAN A PERCENTAGE.

PURPOSE

AGAIN, THE INCOME OF BUSINESS UNIT IS PRESUMED TO BE OPERATING INCOME UNLESS OTHERWISE STATED. THE ASSETS OFBUSINESS UNIT REFER TO THE INVESTED CAPITAL EMPLOYED IN AN INVESTMENT CENTER OR A PROPOSED CAPITAL INVEST-MENT. ALSO IN THE FORMULA, THE REQUIRED RATE OF RETURN REFERS TO THE RATE SET BY MANAGEMENT.

42

SECTION

SECTION D1: MEASUREMENT CONCEPTS

VARIABLE COSTING INCOME STATEMENT (SAMPLE)

ABC COMPANYVARIABLE COSTING INCOME STATEMENT


SALES XXXLESS: VARIABLE MANUFACTURING COSTS

DIRECT MATERIALS XXXDIRECT LABOR XXXMANUFACTURING OVERHEAD XXX XXX

MANUFACTURING CONTRIBUTION MARGIN XXXLESS: VARIABLE SELLING AND ADMINISTRATIVE EXPENSES XXXCONTRIBUTION MARGIN XXXLESS: FIXED COSTS AND EXPENSES

FIXED MANUFACTURING OVERHEAD XXXFIXED SELLING AND ADMINISTRATIVE EXPENSES XXX XXX


DEFINITION

VARIABLE COSTS AND EXPENSES INCLUDE VARIABLE MANUFACTURING OVERHEAD COSTS AND VARIABLE SELLING AND ADMIN-ISTRATIVE EXPENSES. FIXED COSTS AND EXPENSES INCLUDE FIXED MANUFACTURING OVERHEAD COSTS AND FIXED SELLINGAND ADMINISTRATIVE EXPENSES. HOWEVER, ONLY VARIABLE MANUFACTURING COSTS (DIRECT MATERIALS, DIRECT LABORAND VARIABLE MANUFACTURING OVERHEAD COSTS) ARE CONSIDERED AS PRODUCT COSTS. AGAIN, FIXED MANUFACTURINGOVERHEAD COSTS ARE TREATED AS PERIOD COSTS AND ARE NOT REFLECTED IN THE BALANCE SHEET AS INVENTORY COSTS.

SECTION D1: MEASUREMENT CONCEPTS

ABSORPTION COSTING INCOME STATEMENT (SAMPLE)

ABC COMPANYABSORPTION COSTING INCOME STATEMENTFOR THE YEAR ENDING: DECEMBER 31, 20XX

SALES XXXLESS: VARIABLE MANUFACTURING COSTS

DIRECT MATERIALS XXXDIRECT LABOR XXXVARIABLE MANUFACTURING OVERHEAD COSTS XXXFIXED MANUFACTURING OVERHEAD COSTS XXX XXX

GROSS PROFIT (GROSS MARGIN) XXXLESS: OPERATING EXPENSES

VARIABLE SELLING AND ADMINISTRATIVE EXPENSES XXXFIXED SELLING AND ADMINISTRATIVE EXPENSES XXX XXX


DEFINITION

ABSORPTION COSTING, ON THE OTHER HAND, APPLIES FIXED MANUFACTURING OVERHEAD COSTS AS A PART OF THE COST OFINVENTORY. ALSO, THE ABSORPTION COSTING IS A REQUIREMENT FOR EXTERNAL FINANCIAL REPORTING.

43

SECTION

SECTION D3: OVERHEAD COSTS

PLANT-WIDE OVERHEAD RATE

PLANT-WIDE OVERHEAD RATE =TOTAL BUDGETED OVERHEAD COSTSINGLE PLANT−WIDE COST DRIVER

DEFINITION

THE PLANT-WIDE METHOD USES THE TOTAL OVERHEAD COSTS TO DETERMINE TO OVERHEAD RATES. IT DERIVES THE OVER-HEAD RATE BY DIVIDING THE TOTAL OVERHEAD COSTS IN A SINGLE COST DRIVER.


DEPARTMENTAL OVERHEAD RATE

DEPARTMENTAL OVERHEAD RATE =BUDGETED DEPARTMENTAL OVERHEAD COST

DEPARTMENTAL COST DRIVER

DEFINITION

THE PLANT-WIDE METHOD USES THE TOTAL OVERHEAD COSTS TO DETERMINE TO OVERHEAD RATES. IT DERIVES THE OVER-HEAD RATE BY DIVIDING THE TOTAL OVERHEAD COSTS IN A SINGLE COST DRIVER.


INDIVIDUAL OVERHEAD RATE

INDIVIDUAL OVERHEAD RATE =OVERHEAD COST

COST DRIVER

DEFINITION

THE INDIVIDUAL COST DRIVER METHOD FURTHER BREAKS DOWN THE TOTAL OVERHEAD INTO MULTIPLE COMPONENTS USINGMULTIPLE COST DRIVERS.

44

SECTION


FIXED OVERHEAD APPLICATION RATE

FIXED OVERHEAD APPLICATION RATE =BUDGETED FIXED OVERHEAD COST

BUDGETED LEVEL OF ACTIVITY (BLOA)

DEFINITION

FIXED OVERHEAD EXPENSE DOES NOT CHANGE WITH THE LEVEL OF ACTIVITY WITHIN THE RELEVANT RANGE. HOWEVER,THERE MUST BE AN ALLOCATION BASE FOR FIXED OVERHEAD EXPENSES TO ALLOCATE COSTS. THE ALLOCATION BASE FORFIXED OVERHEAD EXPENSE MAYBE DIRECT LABOR HOURS, MACHINE HOURS OR OTHER COST DRIVERS DEEMED AS DEEMEDAPPROPRIATE.

PURPOSE

THE BUDGETED FIXED OVERHEAD FOR THE AMOUNT EXPECTED TO BE INCURRED FOR THE BUDGETED LEVEL OF ACTIVITY. THEBUDGETED LEVEL OF ACTIVITY IS THE LEVEL OF ACTIVITY THAT IS EXPECTED FOR THE NEXT PERIOD. THE STANDARD FIXEDOVERHEAD RATE IS ALSO KNOWN AS THE FIXED OVERHEAD APPLICATION RATE.

SECTION D4: SUPPLY CHAIN MANAGEMENT

THROUGHPUT CONTRIBUTION

THROUGHPUT CONTRIBUTION = SALES− DIRECT MATERIALS

DEFINITION

THROUGHPUT CONTRIBUTION IS THE CONTRIBUTION MARGIN USING THROUGHPUT COSTING. SINCE DIRECT MATERIALS COSTIS THE ONLY COSTS CONSIDERED AS VARIABLE COST IN THROUGHPUT COSTING.

SECTION E1: GOVERNANCE, RISK, AND COMPLIANCE

CALCULATING EXPECTED LOSS

EXPECTED LOSS FORMULA = P(E )× P(F )× EXPECTED LOSS

where: P(E ) = PROBABILITY OF THE EVENT OCCURRINGP(F ) = PROBABILITY OF A CONTROL FAILURE

DEFINITION

INTERNAL CONTROL RISK WITHIN AN ORGANIZATION IS THE RISK THAT EITHER THE FAILURE OR THE LACK OF A CONTROL WILLLEAD TO A FINANCIAL LOSS. INTERNAL CONTROL RISK CAN BE QUANTIFIED BY CALCULATING THE EXPECTED LOSS.

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