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Review for Final Exam Sales Budget

Production Budget

Cash Collections Budget

Material Purchases Budget

Number of Units to be Produced x Units of materials needed to make one unit Material Units needed for Production + Desired Ending Materials Inventory Total Material Units Needed --Less Beginning Inventory of Material Units = Units of Material to be Purchased x Cost per unit of material = Cost of Material to be Purchased.

Cash Payments

Direct Labor Budget

Overhead Budget

Ending Finished Goods Budget


Production costs per unit Quantity Cost Direct materials 5.00 lbs. $ 0.40 Direct labor 0.05 hrs. $ 10.00 Manufacturing overhead 0.05 hrs. $ 49.70 Budgeted finished goods inventory Ending inventory in units Unit product cost Ending finished goods inventory Total $ 2.00 0.50 2.49 $ 4.99 5,000 $ 4.99 $ 24,950

Selling and Administrative Budget

The Cash Budget

Budget Ends

Budgeted Income Statement Budgeted Balance Sheet Budgeted Statement of Cash Flows

Chapter 9 Flexible Budgets


Jones Inc. Flexible Budget Created 12/31/2007
8,000 units Sales ($100 per unit) Variable Costs DM ($15 per unit) DL ($10 per unit) VOH ($5 per unit) Vsell ($2 per unit) VG*&A ($4 per unit) Fixed Costs Overhead Selling General Administrative $ 800,000 9,000 units 10,000 units 11,000 units 12,000 units $ 900,000 $1,000,000 $1,100,000 $1,200,000

120,000 80,000 40,000 16,000 32,000 288,000 250,000 200,000 150,000 600,000

135,000 90,000 45,000 18,000 36,000 324,000 250,000 200,000 150,000 600,000 $ (24,000) $

150,000 100,000 50,000 20,000 40,000 360,000 250,000 200,000 150,000 600,000 40,000

165,000 110,000 55,000 22,000 44,000 396,000 250,000 200,000 150,000 600,000 $ 104,000

180,000 120,000 60,000 24,000 48,000 432,000 250,000 200,000 150,000 600,000 $ 168,000

Net Income from Operations $ (88,000)

Activity & Revenue/Spending Variances

Budget with Multiple Drivers

Chapter 10 - Standards & Variances


A
Standard Quantity or Hours

B
Standard Price or Rate

AxB
Standard Cost per Unit
12.00 35.00 7.50 54.50

Inputs
Direct materials Direct labor Variable mfg. overhead Total standard unit cost

3.0 lbs. $ 4.00 per lb. $ 2.5 hours 14.00 per hour 2.5 hours 3.00 per hour $

Variance Analysis
Variance Analysis

Quantity Variance

Price Variance

Materials quantity variance Labor efficiency variance VOH efficiency variance

Materials price variance Labor rate variance VOH rate variance

Spending Variances
Price Variances (Actual Qty(actual price std price) Dmat Price Variance = Act Qty Purch (actual price stdard price) Dlabor Rate Variance = Act Hrs (actual rate standard rate) VOH Rate Variance = Act Hrs (actual VOH rate std VOH rate) Quantity Variances = Std Price (Actl Qty Std Qty) Dmat Qty Var = Std Price (act qty used std qty allowed) Dlabor Effic Var = Std Labor Rate (actl hrs std hours allowed) VOH Effic Var = Std VOH Rate (actl hrs std hrs allowed)

A General Model for Variance Analysis

(1) Standard Quantity Allowed for Actual Output, at Standard Price (SQ SP)

(2) Actual Quantity of Input, at Standard Price (AQ SP)

(3) Actual Quantity of Input, at Actual Price (AQ AP)

Quantity Variance (2) (1)

Price Variance (3) (2)

Spending Variance (3) (1)

A Statistical Control Chart


Warning signals for investigation Favorable Limit

Desired Value

Unfavorable Limit

Variance Measurements

Advantages and Disadvantages


Standard costs are a key element of the management by exception approach which helps managers focus their attention on the most important issues. Standards that are viewed as reasonable by employees can serve as benchmarks that promote economy and efficiency. Standard costs can greatly simplify bookkeeping. Standard costs fit naturally into a responsibility accounting system. Standard cost variance reports are usually prepared on a monthly basis and are often released days or weeks after the end of the month; hence, the information can be outdated. If variances are misused as a club to negatively reinforce employees, morale may suffer and employees may make dysfunctional decisions. Labor variances make two important assumptions. First, they assume that the production process is labor-paced; if labor works faster, output will go up. Second, the computations assume that labor is a variable cost. These assumptions are often invalid in todays automated manufacturing environment where employees are essentially a fixed cost. In some cases, a favorable variance can be as bad or worse than an unfavorable variance. Excessive emphasis on meeting the standards may overshadow other important

Chapter 11 - Decentralization in Organizations


Benefits of Decentralization
Top management freed to concentrate on strategy.

Lower-level decisions often based on better information. Lower level managers can respond quickly to customers. Lower-level managers gain experience in decision-making. Decision-making authority leads to job satisfaction.

Decentralization in Organizations
Lower-level managers may make decisions without seeing the big picture.

May be a lack of coordination among autonomous managers. Lower-level managers objectives may not be those of the organization.

Disadvantages of Decentralization
May be difficult to spread innovative ideas in the organization.

Cost, Profit, and Investments Centers


Cost Center Profit Center Investment Center

Cost, profit, and investment centers are all known as responsibility centers.

Responsibility Center

Return on Investment (ROI) Formula


Income before interest and taxes (EBIT)

Net operating income ROI = Average operating assets


Cash, accounts receivable, inventory, plant and equipment, and other productive assets.

Understanding ROI The DuPont Model


Net operating income ROI = Average operating assets Net operating income Margin = Sales Sales Turnover = Average operating assets ROI = Margin Turnover

Calculating Residual Income


Residual = income Net operating income

Average operating assets

Minimum required rate of return

This computation differs from ROI. ROI measures net operating income earned relative to the investment in average operating assets. Residual income measures net operating income earned less the minimum required return on average operating assets.

Delivery Performance Measures


Order Received Production Started Goods Shipped

Wait Time

Process Time + Inspection Time + Move Time + Queue Time Throughput Time Delivery/Mfg Cycle Time

Manufacturing Cycle = Efficiency

Value-added time Manufacturing cycle time

The Balanced Scorecard


Management translates its strategy into performance measures that employees understand and influence.
Customer

Financial

Performance measures
Internal business processes Learning and growth

Chapter 11 Incremental/Relevant Analysis


1. What is relevant information? 2. Keeping or dropping a product line 3. Make or buy decisions (outsourcing/insourcing) 4. Special Order 5. Constrained Resource (limited amount to be allocated) 6. Sell Now or Process Further

1. Relevant Costs and Benefits


A relevant cost is a cost that deals with the future differs between alternatives.

A relevant benefit is a benefit deals with the future that differs between alternatives.

2. Keeping/Dropping a Product Line


Comparative Income Approach Solution Keep Drop Digital Digital Watches Watches Sales $ 500,000 $ Less variable expenses: Manufacturing expenses 120,000 Shipping 5,000 Commissions 75,000 Total variable expenses 200,000 Contribution margin 300,000 Less fixed expenses: General factory overhead 60,000 60,000 Salary of line manager 90,000 Depreciation 50,000 50,000 Advertising - direct 100,000 Rent - factory space 70,000 General admin. expenses 30,000 30,000 Total fixed expenses 400,000 140,000 Net operating loss $ (100,000) $ (140,000) Difference $ (500,000) 120,000 5,000 75,000 200,000 (300,000) 90,000 100,000 70,000 260,000 $ (40,000)

3. The Make or Buy Decision


Cost Per Unit

Outside purchase price Direct materials (20,000 units) Direct labor Variable overhead Depreciation of equip. Supervisor's salary General factory overhead Total cost

$ 25 $ 9 5 1 3 2 10 $ 30

Cost of 20,000 Units Buy Make $ 500,000 180,000 100,000 20,000 40,000 $ 340,000

$ 500,000

The avoidable costs associated with making part 4A include direct

materials, direct labor, variable overhead, and the supervisors salary.

4. Special Orders
If Jet accepts the special order, the incremental revenue will exceed the incremental costs. In other words, net operating income will increase by $6,000. This suggests that Jet should accept the order.
Increase in revenue (3,000 $10) Increase in costs (3,000 $8 variable cost) Increase in net income $ 30,000 24,000 $ 6,000

Note: This answer assumes that the fixed costs are unavoidable and that variable marketing costs must be incurred on the special order.

5. Utilization of a Constrained Resource


The key is the contribution margin per unit of the constrained resource.
Product 1 Contribution margin per unit Time required to produce one unit Contribution margin per minute $ 2 24 $ 15 1.00 min. 0.50 min. $ 24 $ 30

Ensign should emphasize Product 2 because it generates a contribution margin of $30 per minute of the constrained resource relative to $24 per minute for Product 1.

6. Sell Now or Process Further


Analysis of Sell or Process Further Per Log
Lumber Sawdust

Sales value after further processing Sales value at the split-off point Incremental revenue Cost of further processing Profit (loss) from further processing

270 140 130 50 80

50 40 10 20 (10)

Ch 13. Capital Budgeting Decisions

Determine alternatives Estimate cash flows for each alternative Use computational tools to evaluate alternative
Net

present value Internal rate of return Payback Simple rate of return


Make a decision Follow up with an evaluative post audit .

The Net Present Value Method


Investment in equipment Working capital needed Annual net cash inflows Relining of equipment Salvage value of equip. Working capital released Net present value Years Now Now 1-5 3 5 5 Cash Flows $ (160,000) (100,000) 80,000 (30,000) 5,000 100,000 10% Factor 1.000 1.000 3.791 0.751 0.621 0.621 Present Value $ (160,000) (100,000) 303,280 (22,530) 3,105 62,100 $ 85,955

Accept the contract because the project has a positive net present value.

Internal Rate of Return Method


Future cash flows are the same every year in this example, so we can calculate the internal rate of return as follows:
PV factor for the = internal rate of return Investment required Annual net cash flows

$104, 320 = 5.216 $20,000

Internal Rate of Return Method


Using the present value of an annuity of $1 table . . . Find the 10-period row, move across until you find the factor 5.216. Look at the top of the column and you find a rate of 14%.
Periods 1 2 . . . 9 10 10% 0.909 1.736 . . . 5.759 6.145 12% 0.893 1.690 . . . 5.328 5.650 14% 0.877 1.647 . . . 4.946 5.216

Ranking Investment Projects The Profitability Index


Project = profitability index Net present value of the project Investment required
Project A Net present value (a) Investment required (b) Profitability index (a) (b) $ $ 1,000 10,000 0.10 Project B $ $ 1,000 5,000 0.20

The higher the profitability index, the more desirable the project.

The Payback Method Even Annual Cash Flows


Payback period = Investment required Annual net cash inflow

Payback period = Payback period =

$140,000 $35,000
4.0 years

According to the companys criterion, management would invest in the espresso bar because its payback period is less than 5 years.

Payback and Uneven Cash Flows


When the cash flows associated with an investment project change from year to year, the payback formula introduced earlier cannot be used. Instead, the un-recovered investment must be tracked year by year. The $4,000 cost is recovered in four years
$1,000 $0 $2,000 $1,000 $500

Simple Rate of Return Method


Does not focus on cash flows -- rather it focuses on accounting net operating income. The following formula is used to calculate the simple rate of return:
Simple rate Annual incremental net operating income = of return Initial investment*

*Should be reduced by any salvage from the sale of the old equipment

Overview of Chapter 15 Tools for Financial Statement Analysis

Horizontal Analysis
Trend

changes over time as percentages

Vertical or Common-Sized Analysis


Convert

all items on the financial statements to percentage ratios to compare and trend:

Ratio Analysis
Using
Liquidity
Profitability Market

Value Solvency Operational Effectiveness

Horizontal Analysis
CLOVER CORPORATION Comparative Balance Sheets December 31 Increase (Decrease) Last Year Amount %

This Year Assets Current assets: Cash Accounts receivable, net Inventory Prepaid expenses Total current assets Property and equipment: Land Buildings and equipment, net Total property and equipment Total assets

12,000 60,000 80,000 3,000 155,000

23,500 40,000 100,000 1,200 164,700

$ (11,500) 20,000 (20,000) 1,800 (9,700) 35,000 35,000 $ 25,300

(48.9) 50.0 (20.0) 150.0 (5.9) 0.0 41.2 28.0 8.7

40,000 120,000 160,000 $ 315,000

40,000 85,000 125,000 $ 289,700

Horizontal Analysis
CLOVER CORPORATION Comparative Income Statements For the Years Ended December 31 Increase (Decrease) Amount % $ 40,000 8.3 45,000 14.3 (5,000) (3.0) 2,600 2.1 (7,600) (19.5) (600) (8.6) (7,000) (21.9) (2,100) (21.9) $ (4,900) (21.9)

This Year Last Year Sales $ 520,000 $ 480,000 Cost of goods sold 360,000 315,000 Gross margin 160,000 165,000 Operating expenses 128,600 126,000 Net operating income 31,400 39,000 Interest expense 6,400 7,000 Net income before taxes 25,000 32,000 Less income taxes (30%) 7,500 9,600 Net income $ 17,500 $ 22,400

Common-Size Statements
CLOVER CORPORATION Comparative Income Statements For the Years Ended December 31 Common-Size What conclusions can we draw? Percentages This Year Last Year This Year Last Year Sales $ 520,000 $ 480,000 100.0 100.0 Cost of goods sold 360,000 315,000 69.2 65.6 Gross margin 160,000 165,000 30.8 34.4 Operating expenses 128,600 126,000 24.8 26.2 Net operating income 31,400 39,000 6.0 8.2 Interest expense 6,400 7,000 1.2 1.5 Net income before taxes 25,000 32,000 4.8 6.7 Less income taxes (30%) 7,500 9,600 1.4 2.0 Net income $ 17,500 $ 22,400 3.4 4.7

Ratio Analysis

Liquidity Working Capital, Current Ratio, Quick Ratio Earnings per share Price/Earnings Ratio Dividend Payout Ratio Dividend Yield Ratio Return on Total Assets Return on Total Equity Book Value per share Accounts Receivable Turnover Inventory Turnover Average Receivable Collection Period Average Sales Period Times Interest Earned Debt to Equity