Financial Planning Flashcards
(84 cards)
2
Q
What is a Master Budget?
A
Budget targeted for the company as a whole
Includes budgets for Operations and Cash Flows
Includes set of budgeted Financial Statements
A Master budget is on one level of activity only
3
Q
How do Fixed Costs affect budgeting?
A
Costs independent of the level activity within the relevant range
Property Tax is the same whether you produce 100-000 units or zero units
However – Fixed Costs per unit vary given the amount of activity
If you produce fewer units- fixed costs per unit will be greater than if you produce more units – i.e. less units to spread the cost over
4
Q
How do Variable Costs affect budgeting?
A
The more Direct Materials or Direct Labor used- the more Variable Costs per unit
However – Variable Costs per unit don’t change with the level of activity like Fixed Costs per unit
5
Q
How are Material Variances calculated?
A
SAM:
Standard Material Costs
- Actual Material Costs
= Material Variance
6
Q
How are Labor Variances calculated?
A
SAL
Standard Labor Costs
- Actual Labor Costs
= Labor Variance
7
Q
How are Overhead Variances calculated?
A
OAT
Overhead Applied
- Actual Overhead Cost
= Total Overhead Variance
8
Q
How does Absorption Costing compare to Variable Costing?
A
Absorption Costing - External Use- Cost of Sales- Gross Profit- SG&A
Variable Costing - Internal Use- Variable Costs- Contribution Margin- Fixed Costs
9
Q
How is Contribution Margin calculated?
A
Sales Price (per unit)
- Variable Cost (per unit)
= Contribution Margin (per unit)
10
Q
How is Break-even Point (per unit) calculated?
A
Total Fixed Costs / Contribution Margin (per unit)
= Break-even Point Per Unit
Assumption: Total Costs & Total Revenues are LINEAR
11
Q
What is the focus in a Cost Center?
A
Management is concerned only with costs
12
Q
What is the focus in a Profit Center?
A
Management is concerned with both costs and profits
13
Q
What is the focus in an Investment Center?
A
Management is concerned with costs- profits- and assets
14
Q
What is the Delphi technique?
A
Forecasting technique where Data is collected and analyzed
Requires judgement/consensus
15
Q
What is Regression Analysis?
A
A forecasting technique where Sales is the dependent variable.
Simple Regression - One independent variable
Multiple Regression - Multiple independent variables
16
Q
What are Econometric Models?
A
Forecast sales using Economic Data
17
Q
What are Naive Forecasting Models?
A
Very Simplistic
“Eyeball” past trends and make an estimate
18
Q
How does a Moving Average compare to Exponential Smoothing?
A
Both project estimates using average trends from recent periods
Difference: Exponential Smoothing weighs recent data more heavily
19
Q
What are the characteristics of Short-term Cost Analysis?
A
Uses Relevant Costs Only
Ignore Sunk Costs
Opportunity Cost is a Must
20
Q
What is Cost-Volume-Profit (CVP) Analysis?
A
Cost-volume-profit (CVP) analysis provides management with profitability estimates at all levels of production in the relevant range (the normal operating range between our high and low point)
CVP (or breakeven) analysis is based on the firm’s profit function
Profit (NI) = Sales (S) - FC - VC
- when profit = 0
21
Q
What are the assumptions of CVP analysis?
A
When applying CVP to a specific case and in interpreting the results therefrom, it is important to keep in mind the assumptions underlying CVP:
- Selling price does not change with the activity level
- The sales mix remains constant
- Costs can be separated into fixed and variable elements
- Variable costs per unit are constant
- Total fixed costs are constant over the relevant range
- Productivity and efficiency are constant
- Units produced = Units sold (this means that there is no change in ending inventory)
22
Q
What is Variable (Direct) costing?
A
Variable or Direct costing is a form of inventory costing.
Variable costing considers fixed manufacturing costs as period rather than product cost. It is advocated because, for internal reporting, it presents a clear picture of performance when there is a significant change in inventory
Variable costing is NOT GAAP
23
Q
What is Financial planning?
A
Financial planning is the process of:
- Analyzing the investment and financing alternatives available to a firm
- Forecasting the future consequences of the alternatives
- Deciding which alternatives to undertake
- Measuring subsequent performance against established goals. You always have to seek feedback and determine how well you did in with your plan
Financial planning must be tied to the strategic plans to top management
24
Q
What is the Top-down mandated budget approach?
A
Top-down mandated approach involves upper-level management establishing the budget parameters and it is passed down through the organization to each reporting unit
Advantages:
- Quick preparation time
- Clear communication of managements’ objectives
Disadvantages:
Lower-level management & employees may view it to be dictatorial and not fully embrace and accept the budget
25
Q
What is the Participative (bottom-up) budget approach?
A
The Participative (bottom-up) budget approach is driven by involving lower-level management and employees
Advantages:
- Employees may more readily accept the budget
- Morale may be improved
- Budget input is provided by a larger number of individuals, which means that the budget may be more accurate
Disadvantages:
- Process is time-consuming
- Managers may try to pad their budgets - meaning that they make it very easy for them to achieve their budget
26
What are the components of the Master budget?
A Master budget is on one level of activity
only
The master budget summarizes the results of the following budgets:
1. Operating budget - budgeted income statement & supporting schedule. Note that whatever isn't in the financial budget is included in the operating budget
2. Financial budget - consist of the following budgets:
a. Capital or capital expenditures budget
b. Cash budget
c. Budgeted balance sheet
d. Budgeted statement of cash flows
27
What does the budget process consist of?
The budget process begins with an estimate of sales then proceeds systematically as follows:
1. Develop of sales forecast - everything depends on how much you can sell
2. Develop a production schedule to calculate production costs and COGS - figure out how much your going to produce. Once you figure out how much your going to sell; then you determine how much your going to produce
3. Estimate other expenses & revenues - Once you figure out how much your going to produce; then you can estimate your expense for materials, labor, VMOH + Fixed overhead, investment in PP&E (capital expense budget), and all period cost budgets such as R&D and SG&A
4. All of the items above flow through to the Cash budget
5. Cash budget items flow through to the budgeted income statement
6. Budgeted income statement items flow through to the budgeted balance sheet
7. Budgeted balance sheet items flow through to the budget statement of cash flows
28
What is the Capital (capital expenditures) budget?
The capital or capital expenditures budget displays the financial effects of purchases and retirements of long-lived assets
This information is needed to budget the cash and financing needs of the firm
29
What is Activity-based budgeting (ABB)?
Activity-based budgeting (ABB) complements activity-based costing (ABC) by focusing on the costs of activities necessary for production and sales
An activity-based budget is developed by multiplying the budgeted level of the cost driver for each activity by the budgeted cost rate and summing the costs by functional or spending categories
ABB estimates the costs of performing various activities, in contrast to traditional budgeting which directly budgets costs for functional or spending categories (i.e. R&D, G&A)
30
What is Kaizen budgeting?
Kaizen budgeting projects costs on the basis of improvements yet to be implemented rather than upon current conditions
The budget will not be achieved unless the improvements are actually made
31
What is Decomposition of time series?
Decomposition of time series is one approach to forecast sales based on historical data
This technique is especially appropriate when sales are seasonal or cyclical in nature. The technique examines prior sales data and estimates seasonal and cyclical effects
When these effects are extracted from the prior data, historical trends may be observed and projected into the future
32
What is the Markov technique?
The Markov technique is on approach to forecast sales based on forecasts of consumer behavior
This technique attempts to forecast consumer purchasing by considering factors such as brand loyalty and brand switching behavior
These data are used to predict changes in the firm's market share, which is then used to develop the sales forecast
33
What is a Flexible budget?
A flexible budget is a budget adjusted for changes in volume, meaning you can "flex up" or "flex down"
This type of budget is for multiple activities, but they all have to stay within the relevant range. Compare this with the Master budget, which is only on one level of activity
In the planning phase, a flexible budget is used to compare the effects of various activity levels on costs and revenues
In the controlling phase, the flexible budget is used to help analyze actual results by comparing actual results with a flexible budget for the level of activity achieved in the period
Standard costing naturally complements flexible budgeting
34
What is Responsibility accounting?
Responsibility accounting allocates those revenue and/or assets which a manager can control to that manager's responsibility center and holds the manager accountable for the operating results
The level or types of responsibility that a manager can have are:
1. Cost center (i.e. payroll department & accounting - have costs only)
2. Profit center (have costs & profits)
3. Investment center (i.e. PP&E, investments and intangible assets)
35
What activities or tasks are involved in a project?
A project is a series of activities and tasks that
1. Have specific definable objectives
2. Have defined start and end dates
3. Are subject to funding constraints (meaning that the project will have a budget)
4. Consume resources, people, equipment, etc.
5. Cut across various functional areas of the organization
Projects are usually planned and executed by multidisciplinary teams, consisting of individuals from different functional areas and led by a project manager
36
What are the 4 basis elements to Project management?
The 4 basis elements of project management are as follows:
1. Resources - people, equipment, materials, etc.
2. Time - task durations, task interdependencies, the critical path, etc.
3. Money - costs, contingencies, profits, etc.
4. Scope - project size, goals, requirements, etc.
37
What are the 5 stages or processes involved with Project management lifecycle?
The 5 stages or processes within project management lifecycle are as follows:
1. Project initiation
2. Project planning
3. Project execution
4. Project monitoring and control
5. Project closure
38
What does Project planning consist of?
| Stage or process within Project Management lifecycle
Project planning consist of:
1. Defining the work requirements
2. Defining the quality and quantity of the work
3. Identifying the needed resources
4. Scheduling the activities & tasks
5. Identifying and assessing risks
Typically, in this phase, a Statement of work (SOW) will be completed. A SOW is a narrative description of the work to be performed to complete the project, deliverables and milestones (start & end date of project)
The SOW will also include project specifications - detailed listing of man-hours, equipment & materials
Work breakdown structure (WBS) may be prepared - breaks down the project into manageable, independent & measurable elements with their own budget as assign elements to responsible managers (or people)
39
What is Project initiation?
| Stage or process within Project Management lifecycle
Project initiation involves:
1. Selecting the best project
2. Determining the benefits of the project
3. Obtaining proper authorization and approvals for the project
4. Assign the project or team leader for the project
5. Might have a project charter which outlines what is expected to be achieved from the project, the project manager authority and provides the authority for the project to do what its suppose to do
40
What are the various techniques used to schedule and control a project?
The following are techniques used to schedule and control a project:
1. Gantt chart
2. Milestone chart
3. Line of balance
4. Network diagram
5. Program Evaluation and Review Technique (PERT)
6. PERT cost
7. Critical Path Method (CPM)
8. Graphical Evaluation and Review Technique (GERT)
9. Project crashing
10. ABC Analysis
41
What is a Gantt chart?
| Technique to schedule & control a project
A gantt chart is a type of bar chart that illustrates the scheduled start and finish of elements of a project over time
42
What is a Milestone chart?
| Technique to schedule & control a project
A milestone chart is a type of chart that illustrates the milestones for a project over time
43
What is a Line of balance chart?
| Technique to schedule & control a project
A line of balance chart is a type of chart that illustrates the series of activities that are related
It is appropriate where a project has a series of activities
44
What is a Network diagram?
| Technique to schedule & control a project
A network diagram illustrates the logical representation of activities that defines the sequence of the work of a project - it illustrates the path of a project
Advantages:
1. Illustrates the interdependencies between activities
2. Identifies critical paths in a project
3. Facilitates risk analysis for the activities in the project
4. Enables management to evaluate the effect of an activity delay on the project completion date
45
What is Program Evaluation and Review Technique (PERT)?
| Technique to schedule & control a project
PERT is a network technique that formally focuses on the interdependency of activities and the time required to complete an activity to schedule and control the project
PERT uses the critical path - shortest amount of time necessary to accomplish the project
In PERT analysis, slack time - difference between the expected time and the latest time the activity can be completed without delaying the project
PERT is typically used where there is a high variability of completion times (like R&D projects)
46
What is PERT cost?
| Technique to schedule & control a project
PERT cost allows the addition of resource cost considerations to the schedule produced by the PERT technique
Allows the inclusion of cost uncertainty into the analysis
47
What is the Critical Path Method (CPM)?
| Technique to schedule & control a project
CPM is similar to PERT, but it only uses one time estimate that represents the normal time to complete an activity
CPM is used for projects where there is less variability in time estimates
CPM includes a procedure for time/cost tradeoff to minimize the sum of direct and indirect project costs
48
What is Graphical Evaluation and Review Technique (GERT)?
| Technique to schedule & control a project
GERT is similar to PERT but it has the advantage of allowing looping and branching based on the results of a particular activity
It is appropriate for projects that may be completed in a number of ways
49
What is Project crashing?
| Technique to schedule & control a project
Project crashing is a term used to describe the practice of adding resources to shorten selected activity time on the critical path of a project
In effect, the manager is trading off money for time. Each activity may be viewed as having two types of completion times:
1. Normal (planned) time
2. Crash time (the shortest possible time)
50
What does Project execution consist of?
| Stage or process within Project Management lifecycle
Project execution includes:
1. Negotiating for team members
2. Directing the work
3. Managing team members to improve performance
51
What is ABC analysis?
| Technique to schedule & control a project
ABC analysis involves the categorization of tasks into groups and these groups are often ranked as follows:
A - Tasks that are perceived as being urgent and important
B - Tasks that are important, but not urgent
C - Tasks that are neither urgent nor important
52
How is risk management applicable to project management?
Project risks include the following:
1. Risks related to costs over-runs
2. Time slippage
3. Inappropriately defined scope
4. Dissatisfaction with deliverables
5. A key person (project manager) can leave the company and abandon the project
The steps in the risk management include the following:
1. Identification of risks
2. Quantifying the risks
3. Prioritizing the risks
4. Developing a risk response
53
What are the typical problems within project management?
Problems in project management typically arise from one of the following:
1. Organizational uncertainty - working relationship between project manager and functional manager has not been adequately defined by senior management
2. Unusual decision pressures - project managers must make quick decisions in uncertain situations and with incomplete information (they may not have all the facts). Also, they may have a limited budget. Senior management needs to support the project manager decisions in getting the project completed
If senior management doesn't provide support, the following could occur:
a. Could cause delays in approving certain aspects of the project
b. Inability to resolve conflict between the project and the different functions within the organization
c. Delays in getting the resources the project manager needs to complete the project
3. Inadequate senior management support
54
What does Project monitoring and control consist of?
| Stage or process within Project Management lifecycle
Project monitoring and control includes:
1. Tracking progress of the project
2. Comparing actual outcomes to predicted outcomes - compare what actually happened vs. what you planned to happen
3. Analyzing variances and their effects
4. Making adjustments - you can make adjustments in the middle of the project by getting feedback; then incorporating adjustments mid-way to complete the project
55
What does Project closure consist of?
| Stage or process within Project Management lifecycle
Project closure includes:
1. Determining that all work has been completed
2. Closure of the contract, financial charges, and paperwork
56
What is the goal of Transfer Pricing?
The goal of transfer pricing is to provide autonomous segment managers with an incentive to maximize the profits of the entire company and NOT just the performance of their particular part of the organization or division
57
What are the 3 concepts that relate to most differential cost decisions?
The 3 concepts that relate to most differential cost decisions are as follows:
1. The only relevant cost or revenues are those expected future costs & revenues that differ across alternatives
2. All costs incurred in the past (sunk costs) are irrelevant, unless they have future tax ramifications (i.e. joint costs, cost of obsolete inventory, depreciation recapture & fixed costs in the short-term). Selling something at a gain or loss may have a tax consequence
3. Opportunity cost - the income obtainable from an alternative use of a resource - must be considered. You must always consider what you are foregoing when you choose a particular alternative
58
What does Differential cost decisions consist of?
Differential cost decisions include the following:
1. Sell or process further
2. Special order - should you take special orders?
3. Outsourcing (make or buy) - when you decide to make something in-house, this is called insourcing. When you make a decision to buy inputs, this is really outsourcing
4. Closing a department or segment
5. Sale of obsolete inventory
6. Scare resources - how do you allocate the resources that you have?
59
What is the Contribution Margin formula?
Contribution margin is ALWAYS denominated in dollars:
Selling price
- Variable cost
= Contribution margin
60
What is the Contribution Margin Ratio (CMR)?
Contribution margin ratio is denominated as a %:
Selling price - Variable cost / Selling price
61
How do you calculate the Break-even-point (BEP) in Units?
BEP Units = Total Fixed Costs / CM per unit
Note: If a problem gives us the contribution margin in terms of units, then we use the BEP in units formula
62
How do you calculate the Break-even-point (BEP) in Units when a problem mentions profit?
You should use the following formula ONLY if a problem mentions profit:
BEP Units = Total Fixed Costs + Before Tax Profit / CM per unit
Note: If a question mentions the word "Profit," put it in the numerator of the formula. You use this formula to solve for profit
63
How do you calculate the Break-even-point (BEP) in Sales $?
Total Fixed Costs / Contribution margin ratio
Note: How do you know when to use BEP sales formula?
Whenever they say contribution margin ratio or they give you a % that's a CMR, which means we automatically use the BEP sales formula
64
How do you calculate the Break-even-point (BEP) in Sales $ when a problem mentions profit?
You should use the following formula ONLY if a problem mentions profit:
BEP Sales $ = Total Fixed Costs + Before Tax Profit / Contribution margin ratio
Note: If a question mentions the word "Profit," put it in the numerator of the formula. You use this formula to solve for profit
65
How do you calculate AFTER Tax Profit?
After-Tax Profit = Before Tax Profit x (1 - Tax Rate)
66
How do you calculate BEFORE Tax Profit?
Before Tax Profit = After Tax Profit / (1 - Tax Rate)
67
How do you calculate Margin of Safety (in units or $)?
Current Sales Level (in units or $)
- BEP (in units or $)
= Margin of Safety (in units or $)
Note: This says how far do you have to fall down before you start to lose $
68
How do you calculate Contribution margin per unit?
CM / unit = Net Income / Margin of Safety in units
69
What is another way of calculating the Contribution Margin Ratio (CMR)?
Another way to the calculate the CMR is:
Net income / Margin of Safety in $
70
What is the Contribution margin income statement?
| Long version
The contribution margin income statement is as follows:
Sales
- Variable COGS (DM, DL & VMOH)
= Manufacturing Contribution margin
- Variable Period costs (Variable SG&A)
= Contribution Margin
- Fixed costs (FMOH as period cost)
= Net Income
Note: When you see a multiple choice question that's really long, then you don't want to use the CVP formula. Instead, you want to use the contribution margin income statement because its easier to use with long questions
Key fact: Treats FMOH as PERIOD cost
71
What is the result when Production > Sales?
If Production > Sales; then Ending inventory INCREASES
Under Direct (Variable) costing: LOWER Net Income
Under Absorption (Full) costing: HIGHER Net income
Note: If you produce more than you sell, then EI should be higher
72
What is the result when Sales > Production?
If Sales > Production; then Ending inventory DECREASES
Under Direct (Variable) costing: HIGHER Net Income
Under Absorption (Full) costing: LOWER Net income
Note: If you sell more than you produce, then EI should be lower
73
What is the result when Production = Sales?
If Production = Sales, then Ending inventory does NOT change
Note: Net income will be the same for Direct (Variable) costing and Absorption (Full) costing
74
What is the Contribution margin income statement?
| Short version
The short version of the contribution margin income statement is as follows:
Sales
- Variable costs
= Contribution Margin
- Fixed costs
= Profit
75
How do you calculate the difference between net income between Direct (Variable) costing and Absorption (Full) costing?
The calculate the difference in net income between the two methods, use the following formula:
Difference in NI = ∆ in Ending Inventory x FMOH/unit
FMOH per unit = Fixed MOH / # of units produced
76
What is the Absorption of Full costing income statement?
The absorption (full) costing income statement is as follows:
Sales
- COGS (DM, DL, VMOH & FMOH)
= Gross Profit (Margin)
- Period costs (Fixed & Variable - SG&A)
= Net Income
Key fact: Treat FMOH as a PRODUCT cost
77
What does the 4-way Overhead Variance Analysis consist of?
| Matrix #1 - Standards and Variances
Direct Material, Direct Labor and Variable OH variances (and Sales Variances) use Matrix #1:
TOP LINE: AQ purchased/used x AP
MIDDLE LINE: AQ purchased/used x SP
BOTTOM LINE: SQ allowed (based on units produced) x SP
```
AQ = Actual quantity
AP = Actual purchased/used
SP = Standard price
SQ = Standard quantity
```
Note: The difference between the TOP LINE and MIDDLE LINE is the:
a. Variable OH Spending Variance
b. Price/Rate variance
c. Material Price Variance
d. DL Rate variance
This variance consist of:
1. DM Purchase Price variance - use the ACTUAL QUANTITY PURCHASED in both the top and middle line
2. DM Price variance - use the ACTUAL QUANTITY USED for the top line and middle line
3. DL Rate variance
Note: The difference between the MIDDLE LINE and BOTTOM LINE is:
a. Variable OH Efficiency Variance
b. Sales Volume Variance
c. Direct Material Usage Variance
e. DL Efficiency variance
This variance consist of:
1. DM Quantity/Usage variance
2. DL Efficiency/Usage variance
For DM, DL and VOH variances as you go UP the matrix, if the numbers are going UP (increasing); then the variances = UNFAVORABLE
For sales variances, as you go UP the matrix, if the numbers are going UP (increasing); then the variance are FAVORABLE. Remember these are REVENUES and NOT costs
Note: Matrix #1 only includes two of the four of the 4-way OH variances:
1. Variable OH Spending Variance
2. Variable OH Efficiency Variance
Matrix #2 includes the other OH variances:
1. Fixed OH Spending/Budget Variance
2. Production/Volume Variance (NOT Controllable)
78
What are the variances in the 4-Way Overhead Variance Analysis?
4-Way OH Variance Analysis consists of the following variances:
1. Variable OH Spending Variance
2. Variable OH Efficiency Variance
3. Fixed OH Spending/Budget Variance
4. Production/Volume Variance (NOT Controllable)
79
What does the 3-way Overhead Variance Analysis consist of?
The 3-way OH Variance analysis consist of the following:
TOP LINE: AQ x AP
MIDDLE LINE #1: FOH Budget + Var. (AQ x SP)
MIDDLE LINE #2: FOH Budget + Var. (SQ x SP)
BOTTOME LINE: SQ allowed (based on units produced) x SP
```
AQ = Actual quantity
AP = Actual purchased/used
SP = Standard price
SQ = Standard quantity
```
Note: The difference between the TOP LINE and MIDDLE LINE #1 is the OH Spending/Budget Variance
Note: The difference between the MIDDLE LINE #1 and MIDDLE LINE #2 is the OH Efficiency Variance
Note: The difference between the MIDDLE LINE #2 and BOTTOM LINE is the Production/Volume Variance (NOT Controllable)
Note: The controllable variance =
1. OH Spending/Budget Variance
2. OH Efficiency Variance
80
What does the 4-way Overhead Variance Analysis consist of?
| Matrix #2 - Standards and Variances
Fixed OH variances are in Matrix #2:
TOP LINE: AQ x AP
MIDDLE LINE: Budget
BOTTOM LINE: SQ allowed (based on units produced) x SP
```
AQ = Actual quantity
AP = Actual purchased/used
SP = Standard price
SQ = Standard quantity
```
Note: The difference between the TOP LINE and MIDDLE LINE is the Fixed OH Spending Variance or Fixed OH Budget Variance
Note: The difference between the MIDDLE LINE and BOTTOM LINE is the Production/Volume Variance (NOT Controllable)
81
What are the variances in the 2-Way Overhead Variance Analysis?
2-Way OH Variance Analysis consists of the following variances:
1. Variable OH Spending Variance
+ Variable OH Efficiency Variance
+ Fixed OH Spending/Budget Variance
= Controllable Variance
2. Production/Volume Variance (NOT controllable)
82
What are the variances in the 3-Way Overhead Variance Analysis?
3-Way OH Variance Analysis consists of the following variances:
1. Variable OH Spending Variance
+ Fixed OH Spending/Budget Variance
= OH Spending Variance
2. Variable OH Efficiency Variance (one OH variance in the 4-way analysis) become the OH Efficiency Variance (drop the word variable)
3. Production/Volume Variance (NOT controllable)
83
What is the Flexible Budget formula?
The Flexible budget formula =
Budgeted OH = Total FC + Total Var. costs / (# of Hrs. x variable OH rate per hour)
84
When solving OH variance analysis problems, what would you use if the problem asked you to determine the Material price variance?
If the problem asks you to determine the material price variance, you would use direct materials used since they did NOT use the word "purchase"
You would NOT use direct material purchased
85
When solving OH variance analysis problems, what would you use if the problem asked you to determine the Material purchase price variance?
If the problem asks you to determine the material PURCHASE price variance, you would use direct materials purchased and NOT direct materials used
