MS Reviewer
MS Reviewer
MS Reviewer
Classification by Type:
Direct Material Prime Cost Income &
1)Manufacturing Cost (PRODUCT) Direct Labor Balance
*Incurred as manufacturing the product Factory Overhead Conversion Cost Statement
Formula:
DM used
Direct Labor
Factory Overhead
Total Manufacturing Cost
W/P beg
(W/P end)
Cost of Goods Manufactured
FG beg
(FG end)
Cost of Goods Sale Income Statement
Classification by Traceability:
Direct Direct Materaial and Direct Labor
Unit
Fixed:
Constant Inversely
Formula:
Sales Mfg cost (DM,DL,Variable OH)
(Variable Cost) Variable S&A
Contribution Margin Factory Overhead
(Fixed Cost) Fixed S&A
Profit/ Operating/Net Income
Sales Mix
1. Break Even Analysis Fixed Cost Composite Break Even Point
Units =
Sales = TC (VC + FC) CM/unit Weighted Average CM
CM = FC
Profit = 0 Fixed Cost CM
Pesos =
CMR Sales
before tax
2. Target Profit Fixed Cost + Target Profit
Units =
Sales = TC (VC + FC) CM/unit
CM = FC
Profit = 0 Fixed Cost + Target Profit
Pesos =
Contribution Margin Ratio
3. Margin of Safety
amount by which actual sales may be reduced WITHOUT incurring a loss
Formula:
Contribution Margin
DOL =
Profit
5. Sensitivity Analysis
Selling Price, Variable Cost and Fixed Cost ---> Profits
Uses:
1 Evaluate Performance
2 Simplify Costing
Direct Material
AP X AQ MPV Material Price Variance (purchase)
SP X AQ
SP X SQ MQV Material Quantity Variance (production)
Budgeting
-Is a plan expressed in quantitative terms on how to acquire & use the resources of the
entity during a certain future period of time.
Objective: Goals
Targets *Budget Committee - preparation
Performance Review
Types:
1. Make or buy
2. Accept or reject special order
With Excess Capacity GR
Residual Income
RI = OI - (Ave. operating asset X Min Rate of Return)
Required Return/ Acceptable
Capital Budgeting
Long term invetment decision
Top management and BOD will decide if accept or reject
Payback Period
Non- discounting
Techniques Accounting Rate of Return
Non- Discounting
1. Payback Period
Time it takes tao recover the initial investment (years) Initial Investment
Advantage: Easy to compute and Understand Annual Cash Flow
Disadvantage: Ignores TVM and beyond the PP
Remember:
1. To convert Net Income to Cash Flow
Net Income + Depreciation expense @ 100% = Cash Flow
2. Tax Shield/Savings (Increase Deduction; Decrease Taxable Income & Tax
Depreciation Expense X 30% = Tax Shield
Discounting
1. Net Present Value
Present Value Cash Inflow
- Present Value Cash Outflow (initial investment)
Net Present Value Time Value of Money
Ordinary Annuity
2. Profitability Index Sample Rate: 10% 1.1
used in mutually exclusive projects In my Calculation: ÷ Twice
PVCI =
PI =
PVCO M+ Years
MRC
3. Internal Rate of Return (trial & error) Annuity Due 1.1
interest rate that makes ÷
PVCI = PVCO (NPV=0) M+
IRR > Cost of Capital ---- Accept MRC
IRR < Cost of Capital ---- Reject
Cost of Capital
Discount Rate, Required Rate, Minimum Rate of Return, Hurdle Rate
Ordinary Share
1. Dividend Discount Model (Gordon Growth Model)
Retained Earnings Ordinary Share
D1 D1
+g +g
Po Po
gross of flotation cost net of flotation cost
- stock issuance cost
2. Capital Asste Pricing Model (CAPM)
R = RF + B (MR - RF)
Market risk Premium
Characteristics:
a) Liquidity - ability to pay Short Term obligations (suppliers)
b) Solvency - ability to pay Long Term obligations (bank)
c) Profitability - performance
Pattern:
1) Return ------------ Net Income (Numerator)
2) Turnover ------------ Sales (Numerator) *not always
3) Margin ------------ Sales (Denominator)
Working Capital Management
Resources of the business used in everyday operations Achieve Balance between:
WC = CA - CL Risk and Return(Income)
CASH
Meet Cash Requirements
- Maintain optimal level of cash
Avoid Idle Cash
Baumol Model
2 X D X TC D = Annual CC = Carrying Cost
OCB =
CC TC = Transaction Cost
Positive + Bank > Book Maximized
- Manage Float Delay (Outstanding Check)
Negative - Bank < Book Minimized
(Deposit in Transit)
Mail Float - mailed by customer but not yet received by the seller
Processing Float - received by the seller but not yet deposited
Clearing Float - deposited but have not cleared yet
- Cash Budget
Beg Balance
Receipts
(Disbursements)
(Min Cash Balance)
+ - bank loan
Excess financing
EB EB shares
INVENTORY
Meet Customer Demands 1. How many units to order? EOQ
- Maintain optimal
Economic Order Quantity
level of inty
Minimize Cost 2. When to Order? ROP
Reorder Point
w/o Safety Stock - Normal Lead Time
EOQ = 2 X D X TC ROP
CC w/ Safety Stock - Normal Lead time + SS
ACCOUNTS RECEIVABLE
credit policy Conservative (2/10;n/30) Decrease Credit Sales; A/R; Bad
credit terms (n/30) Debts
cash discount (2/10) Aggressive (5/10;n/50) Increase Credit Sales; A/R; Bad
relaxed Debts
to accelerate collection
ACCOUNTS PAYABLE
Increase positive float
Delay payment to supplier
Discount 360
X
Cost of Giving Up Cash Discount = 100 - Discount n
(credit period - discount period)
SHORT TERM LOANS
Financing Charges (interest)
Effective Interest Rate =
Net Proceeds (usable amount)
annual
Quantitative Techniques
Application of mathematics in solving business problems
Techniques:
1. Linear Programming - optimization model
optimal/ best solution
Maximize Income
Objective: Constraints(limited/scarce resources)
Minimize Costs
3. Program Evaluation and Review Techniques (PERT) - Critical Path Method (CPM)
is developed to aid managers in controlling large scale (complex)
Terminologies:
Pert Diagram - probabilistic diagram; free form network
Events - discrete moment; representing start or finish of an activity
Activities - tasks to be accomplished
Series - cannot be done unless another activity is undertaken first
Parallel - can be performed simultaneously with another activity
Critical Path - longest path; minimum time to complete the project
Slack Time - time that can be added to an activity without increasing the total time (delay)
Crash Time - time to complete an activity under rush or urgent condition
Economics
Demand (buyer)
Microeconomics
Branches individual, business Supply (seller)
Macroeconomics
entire company
2. Income Effect
As Income Increase, Demand for Normal Goods Increase (Starbucks)