Process Management

Operational planning vs. strategic planning

- Strategic planning is performed ONLY at the highest level of management and focuses on long term goals. - Operational planning results in budget data to be used in planning day to day operations. Performance reports come from the operational planning.

The performance of a standard cost center should be evaluated by comparing...

Actual costs with flexible budget costs. Cost centers are evaluated on costs incurred (actual costs) related to budgeted and standard costs. Cost center reports should compare controllable actual costs (i.e., costs for which the center maintains responsibility) to flexible budget costs.

Breakeven analysis is also known as...

Cost-volume-profit.

What do the units above the breakeven point signify?

For example, if the breakeven point is 20,000 units, every unit above that quantity, is profit. The amount of profit will be determined by the contribution margin per unit. So if the contribution margin (used in the denominator to calculate the breakeven point in units) was $6, then the 20,000 units+1 unit= $6 profit. 20,000 units+ 3 units= $6*3units=$18 profit.

To determine the return on investment for a company, the numerator of the fraction used should be:

Income before nonrecurring items plus interest expense net of income tax.

Important factors in decision making

Incremental costs, whether fixed or variable, are relevant in decision making. Incremental costs represent the difference in the total cost between two alternatives. It is these future incremental costs that are important ("relevant") to the decision-making process, the act of choosing between/among alternative courses of action.

If the objective is to maximize residual income, what project should a company pick?

Residual income is the amount of net income in excess of the imputed interest charge, so the division's historical return is irrelevant if the goal is to maximize residual income. A project should be accepted if it has a rate of return above the implicit rate of return and rejected otherwise.

How do we calculate standard gross profit?

Standard gross profit is calculated by the difference between revenue and standard cost.

Contribution margin ratio

The contribution margin ratio is calculated by doing contribution margin divided into sales, or contribution margin per unit divided into sales price.

Breakeven point in units

The formula is total fixed costs divided into contribution margin per unit. Be careful, the total fixed costs not only include factory overhead but also fixed selling costs. Also, to calculate contribution margin per unit, we will have to deduct sales price per unit minus variable material and labor cost minus variable selling cost.

If the question in the MCQ is, how many units do they need to sell to generate a $90,000 profit BEFORE taxes, what is the formula?

The formula will be (Total fixed costs+desired profit) divided into contribution margin per unit.

Margin of Safety

The margin of safety is calculated by actual or budgeted sales minus breakeven sales.

If the question in the MCQ is, how many units do they need to sell to generate a $90,000 profit AFTER taxes, what is the formula?

The only difference with the formula above is that the desired profit will have to be divided by (1-tax rate).

What are the two essential components of ROI?

The two essential components of return on investment (ROI) are profit margin and investment turnover. Profit margin is the ratio of income to sales. Profit margin indicates the portion of each sales dollar that a company generates as profit. Investment turnover is the ratio of sales to capital invested. Investment turnover is an indication of the number of times a company generates sales for each invested dollar in segment assets.

Breakeven point in sales dollars

We will multiply the breakeven point in units (calculated above) by the selling price. Breakeven point in units * selling price per unit. It can also be calculated by doing fixed cost divided into contribution margin ratio (contribution margin/sales).

When we are deliberating what is the opportunity cost if the company will accept a special order, we need to consider...

what is the net cash inflow that will be lost if the special order is accepted. For make or buy decisions, the opportunity cost is the contribution margin to regular customers, equal to the amount of profit given up and not earned as a result of selling to the special order customers rather than the regular customers. Be careful, I might want to only consider variable costs (and forget to deduct them from the sales price to regular customers). I believe I would tend to forget because opportunity cost, only has the word cost on it, and I might forget that is the earnings given up.