MA & Finance Equations

Question 1

Price or rate variance

Answer 1

(AP - SP) x AQ

AQ = actual quantity purchased

Question 2

Quantity/Usage/Efficiency Variance

Answer 2

(AQ -SQ) x SP

AQ = actual quantity used

Question 3

Static budget variance

Answer 3

Flexible budget variance + sales volume variance

(AQ x AP) - (SQ x SP)

AQ/SQ= actual/standard volume of units

Question 4

Fixed cost variance

Answer 4

Actual cost - budgeted cost

Question 5

Flexible budget variance

Answer 5

(AP - SP) x AQ

AQ = actual quantity of outputs

Rate variance + efficiency variance

Question 6

Sales volume variance

Answer 6

(AQ sold - SQ) x SP or CM

Sales mix variance + sales quantity variance

Question 7

Sales quantity variance

Answer 7

(Budgeted unit sales - unit sales at standard mix) x SP or CM

Market share variance + market size variance

Question 8

Sales mix variance

Answer 8

(AQ sold at actual sales mix - unit sales at standard mix) x Std CM/unit

Question 9

Market share variance

Answer 9

Actual market size in units x (actual market share % - budgeted market share %) x Std CM/unit

Question 10

Market size variance

Answer 10

(Actual market size in units - budgeted market size in units) x budgeted market share x std CM/unit

Question 11

Lease VS buy

Answer 11

May need to calculate implicit rate for the lease

Use implicit rate in the lease to calculate PV if it lower than the company’s incremental borrowing rate

Compare present value after tax costs of the lease versus cost to purchase less tax shield

Question 12

Break Even Analysis

Answer 12

Fixed costs/CM

Fixed costs includes depreciation on initial investment but doesn’t include initial investment. Sunk costs not included.

Question 13

Valuation - Capitalization of Earnings

Answer 13

1. Determine type of earnings to be capitalized (EBITDA, earning before interest and tax, net profit after tax, free cash flow)
2. Normalize above type of earnings
3. Apply capitalization rate.

Does not have deduction of liabilities

Question 14

Interest rate calculation in excel

Answer 14

Present value should be negative.
Rate computed will be the nominal rate for the length of period used in calculation.
Must be multiplied by number of periods in a year to get nominal annual rate. Nominal annual rate is then used to calculate effective annual rate.

Effective annual rate = [1 + (nominal annual rate/# of compounding periods)}^# of compounding periods)

Question 15

Weighted average cost of capital (WACC)

Answer 15

WACC = [after tax cost of debt x (market value of debt / total capital)] + [cost of equity x (market value of equity/total capital)

After tax cost of debt = cost of debt x (1 - tax rate)

cost of equity = risk-free rate + [beta x (market return - risk free rate)]
beta is the measure of amount of volatility or systemic risk involved in a specific investment in comparison to the market
Beta = 1; returns on a share are perfectly correlated with returns on the market
Beta > 1; shares are more volatile or sensitive
if shares are X% more sensitive then Beta would be 1.X

market value of equity = market value of a share x number of shares
market value of equity does not include retained earnings or contributed surplus.

total capital = market value of debt + market value of equity

Question 16

Process costing - weighted average method

Answer 16

Step 1: compute units to be accounted for: Beginning WIP units + units started into production

Step 2: compute output in terms of EU:
DM EU = # completed units x 100% + # units in ending WIP x % materials complete
Conversion EU = # completed units x 100% + # units in ending WIP x % conversion complete

Step 3: compute costs to account for (do for material, conversion and total added together)
Costs in beginning WIP + costs added in current period

Step 4: compute cost per EU
DM Cost per EU = total DM costs to account for/ DM EU
Conversion Cost per EU = total conversion costs to account for/ Conversion EU

Step 5: assign total costs to units completed and to ending WIP
DM/conversion Cost per EU x DM/Conversion EU

For steps 2 to 5 set up excel as:
Columns: relevant total (units or cost), DM (EU or cost) , Conversion (EU or cost)
do separate row for 100% complete and WIP beginning or ending

Question 17

Process costing - FIFO method

Answer 17

Step 1: compute units to be accounted for: Beginning WIP units + units started into production

Step 2: compute output in terms of EU:
DM EU = units in beginning WIP x % to complete + # started and completed units x 100% + # units in ending WIP x % materials complete
Conversion EU = units in beginning WIP x % to complete + # started and completed units x 100% + # units in ending WIP x % conversion complete

Step 3: compute costs to account for (do for material, conversion and total added together)
Costs in beginning WIP + costs added in current period

Step 4: compute cost per EU
DM Cost per EU = DM costs added in current period/ DM EU
Conversion Cost per EU = conversion costs added in current period/ Conversion EU

Step 5: assign total costs to units completed (beginning WIP and started & completed) and to ending WIP
DM or conversion Cost per EU x DM/Conversion EU
Costs in beginning WIP directly assigned to beginning WIP and above cost just allocated based on EU to complete.

For steps 2 to 5 set up excel as:
Columns: relevant total (units or cost), DM (EU or cost) , Conversion (EU or cost)
do separate row for 100% complete and WIP beginning and/or ending

Question 18

Activity based costing

Answer 18

Define cost pools & assign a driver to each based on how the specific pool’s costs are created

Steps:
1. Identify the cost objective (individual product line, individual or type of customer)
2. Identify activities and cost drivers - these become the cost pools (ex: ordering, admin, machining)
3. assign indirect costs to cost pools
4. calculate activity rates - divide total indirect costs in cost pools by volume of the cost driver
5. assign indirect costs to cost objectives - multiply activity rate by volume of activity for cost objective. each cost pool is included as its own line under indirect costs in the departmental income statement

Question 19

Spoilage - Job Costing

Answer 19

Normal Spoilage - charge to OH
Normal Spoilage specific to a particular job - cost assigned to particular job
Abnormal spoilage for out-of-control operations: charge to the period
Abnormal spoilage attributable to a particular job: charge to the job

Question 20

Spoilage - process costing

Answer 20

Normal spoilage - include in costs transferred out (increases the cost of good units)
Abnormal spoilage - charge to the period, cost removed from inventory

Question 21

Joint product costing

Answer 21

Physical output method:
- joint costs allocated based on physical measure like volume, weight etc
- have to use same physical measure for all products

Sales value at split-off point method:
- joint costs allocated based on relative sales value at the split-off point
- can’t be used when some products are not sold at the split-off point

Net realizable value method:
- joint costs allocated based on relative total NRV
- NRV of each product = final selling price - separate costs

Production waste & byproducts before the split-off point:
- cost or NRV from sale included in joint costs

Production waste & byproducts after the split-off point:
- included in separate costs

Question 22

Service department cost allocations

Answer 22

Direct allocation method:
- service department costs allocated to operating departments based on quantity of an allocation base w/o considering allocation of costs from any other service departments

Step-down allocation method:
- service department costs allocated to both operating and service departments, beginning with the service department that provides the most services to other departments. Costs for each service department are allocated one at a time.

Reciprocal allocation method:
- service department costs allocated simultaneously from all service departments to both operating and service departments
- need to use two equations for 2 service departments and use algebra to solve for total service department cost with allocation of other service department costs.
example:
service department A has $50,000 costs, uses 15% of service department B
service department B has $30,000 costs, uses 20% of service department A
A = 50,000 + 0.15B
B = 30,000 + 0.2A

Question 23

NPV calculation in excel

Answer 23

=initial investment + NPV(rate, cell range)

Cell range should not include time 0 (initial investment) since that amount does not need to be discounted.
Cell ranges is each year of cash flows or earnings.