sale

ot for
FORMULAS IN MANAGEMENT
a ) n SERVICES
riaa
PA
(@C
CJB
High Low Method DM DM + DL + OH
DL = Product Cost
VC = HC – LC
OH
HA-LA Admin + Selling +
TMC
WIP, B. Finance + Other
FC = TC – (VC x Level of Activity)
TWIP sal=ePeriod Cost
*can use either High or Low
for
WIP,tE.
o
a n
)COGM DM + DL
a
a FG, B. = Prime Cost
Least Square Regression Method P Ari
C COGAS
B (@ FG, E. DL + OH
VC = n( ∑xy) – ( ∑x)C(J∑y) COGS = Conversion Cost
n( ∑x²) – (∑x)²
Admin + Selling =
FC = ( ∑y) – VC( ∑x) Operating Cost
n ∑y = na + b∑x
∑xy = a∑x + b∑x 2
CONTRIBUTION MARGIN INCOME SALES MIX
Sales
Composite BEP = Fixed Cost
(Variable Cost)
weighted average contribution margin*
Contribution Margin
*WACM = use proportion
(Fixed Cost)
Net Income
sa le
t for
BREAK-EVEN POINT
a ) no
TARGET PROFIT

riaa RS(u) = FC + Target Profit*

A
BEP(unit) = Fixed Cost
CP CM in Unit
CM in unit
B (@
BEP(peso) = Fixed Cost
CJ RS(peso) = FC + Target Profit*
CM ratio
CM ratio*
*before tax
or BEP(unit) x selling price/unit

*CM ratio = CM/ sales

If the given profit is after tax, we need to DEGREE OF OPERATING LEVERAGE
gross up:
DOL = Contribution Margin
Income before tax
RS(u) = FC + Target Profit/1-tax rate
CM in Unit Interpretation:
∆ % income before tax = ∆ % sales x DOL
RS(peso) = FC + Target Profit/1-tax rate
sa le
∆ % sale = ∆ % income before tax
CM ratio
ot for DOL
) n
MARGIN OF SAFETY
MOS in unit = Sales in Unit– BEP in Units riaaaMOS (SALES) + BEP (SALES) = ACTUAL SALES
A
CP
B (@
MOS in peso = Sales in Peso – BEP in pesos A. Break-even point

CJ
or MOS in pesos = Net Income
B. Profit
C. Fixed Cost
CM Ratio D. Activity Base
E. Pesos
F. Variable Cost
MOS Ratio = Margin of Safety ÷ Sales G. Loss
H. Total Cost
I. Revenue
Sales - can be actual or planned sales
ABSORPTION COSTING RECONCILIATION
Sales Variable Net Income
(COGS)* +/ - ∆ in Inventory* x FOH/Unit
Gross Profit
Absorption Net Income
(Operating Expense)**
*if decrease, less/ if increase, add
Profit/Net Income e
or
or sal
*Product Cost – DL, DM , OH
**Period Cost – Selling & Admin n o t f Net Income
Absorption
)Add: Fixed OH, Beg Inv.
r i aaaLess: Fixed OH, End Inv.
VARIABLE COSTING A
Sales CP Variable Net Income
(@
(VC)*
C JB Unit Fixed OH = Difference in Income
Gross Profit
(FC)** ∆ in Inventory
Profit/Net Income
*Product Cost – DL, DM , OH
Difference in Income =
**Period Cost – Selling & Admin ∆ in production x Fixed OH/Unit
 sale
t for
a ) no
riaa
A
CP
B (@
CJ
SALES BUDGET PRODUCTION BUDGET
Cash Sales xx Budgeted Sales xx
Credit Sales xx Ending Finished Goods xx
Total Sales xx (Beginning Finished Goods) (xx)
Budgeted Production xx
COLLECTION BUDGET
Current Month Collection xx sa le
MATERIALS PURCHASED BUDGET
Prior Month Collection xx for
ot Production
Budgeted xx
Total Collection xx )
x n
number of materials need xx
riaaa Materials Used xx
A
MERCHANDISE PURCHASE BUDGET CP Ending Material Inventory xx
Budgeted Sale xx (@ (Beginning Material Inventory) (xx)
J B
Ending Inventory C xx Materials Purchases xx
(Beginning Inventory) (xx)
Merchandise Purchase xx
DIRECT LABOR BUDGET CASH BUDGET
Budgeted Production xx Beginning Cash Balance xx
X direct labor hours needed xx Collection xx
X direct labor rate xx Cash Available xx
Direct Labor Cost xx (Disbursement) (xx)
(Minimum Cash e
OPERATING EXPENSE BUDGET s a l Balance)
Excess/Deficiency
(xx)
xx
Rent xx t for
Financing
o xx
Advertisement xx a n
)(Investing) (xx)
Salaries xx ria
a Ending Cash Balance xx
Wages P
xx
A
C
Others B (@ xx OVERHEAD BUDGET
CJ
Total Operating Expense xx Budgeted Production xx
X OH Rate/Unit xx
Overhead Cost xx
Types Decision Criteria
Make or buy General Rule
Accept or With excess capacity = General rule
reject a
special order Without excess capacity = General rule + contribution margin of
lost sale from regular order
Retain or
r ale of old equipment,
Relevant: Cost of new equipment, SalvagesValue
Replace difference in future operating cost t fo
Equipment
a ) no
a & Accumulate Depreciation of old
riaCost
Irrelevant: BV/Original
equipment P A
Retain of @C= Positive = Retain Allocated FC > Net Loss = Retained
Segment Margin
(
B
Eliminate
Unprofitable
CJ Allocated FC < Net Loss = Eliminate
Segment Margin = Negative = Eliminate
Segment or
Product Segment Margin = Sales – VC = Avoidable FC
Sell Incremental Revenue > Incremental Cost = Process Further
Immediately
 or Process Incremental Revenue < Incremental Cost = Sell at split-off
Further
Incremental Revenue = Revenue after processing further – Revenue
at split off point

Incremental Cost = Cost of further processing

What Rank the product using Contribution Margin s le scares resources.
aper
product to r
fo to sell & produce.
The highest rank will be the priorityt product
produce with
a ) no
given scares
resources
r aa = CM/Scare resources
CM x Scares Resource iRequired
A
P
( @C
B
General Rule: CJ
✓ Variable Cost are relevant.
✓ Fixed Cost are irrelevant except when avoidable.

• Shutdown Cost = FC unavoidable + Additional Cost + Start-up Cost

• Shutdown Saving = FC avoidable – additional cost – start-up cost
• Shutdown point = Shutdown Saving / CMU using price during declining period
PERFORMANCE REPORT Du Pont Formula:
Sales xx Profit Margin* x Asset Turnover**
(VC) (xx)
(CDFC) (xx) *Profit Margin=
ControllableMargin xx <-- evaluate the manager Operating Income
(UDFC) (xx) Sales
Segment Margin xx
sa le
** Asset Turnover =
(IFC) (xx)  evaluate the segment
t for
Sales
Operating Income xx
a ) no Average Operating Asset

riaa Operating Income x Sales

RETURN ON INVESTMENT A
CP Sales x Average Operating Asset
Operating Income*
B (@
Average Operating Asset**CJ Waiting Processing Inspection Moving Queuing

*income before interest & taxes Throughput Time

** Beg + End / 2 Delivery Cycle Time
** A.K.A. Investment
**Operating Asset is at BV Manufacturing Cycle Time = Process Time / Unit produced
Velocity = unit produced/ process time
RESIDUAL INCOME RULES IN TRANSFER PRICING

Operating Income* xx 1. Maximum Transfer Price = the market

(Less: Average Operating Asset** x price
Minimum Rate of Return***) (xx) 2. Minimum Transfer Price
Residual Income xx
sa
cost
le
a. With excess capacity = variable
*** A.K.A. Interest Rate
t for
b. Without excess capacity = Selling
*** Required/Acceptable Return of
a ) no Price
Company
riaa c. With excess capacity but

ECONOMIC VALUE ADDED (EVA)C

PA insufficient = allocation method
and average.
@
B ( xx
CJ
Operating Income After Tax PRICING DECISION
(Less: Average Operating Asset**** x
Weighted Average Cost of Capital***) (xx) ➢ Selling Price = Desired Income + Cost
Economic Value Added xx ➢ Selling Price = Murk-up % x Cost Base
➢ MU% = Desired Income + excluded
**** Operating Asset is at MV Cost Base
****Total Asset – Current Liabilities
NET PRESENT VALUE PAYBACK PERIOD

Present Value of Cash Inflows Initial Investment

(*Present Value of Cash Outflows) Annual Cashflow*
+/- Net Present Value

PROFITABILITY INDEX sa le
ACCOUNTING RATE OF RETURN
for
ot Income
Annual
Present Value of Cash Inflows ) n
Present Value of Cash Outflows ria aaInvestment*
A
@
Even Cash Inflows = use Ordinary Annuity
CP To convert Net Income to Cashflows

B(
CJ
Uneven Cash Inflows = use Annuity Due Net Income + Depreciation expense

Tax Shield/ Savings

INTERNAL RATE OF RETURN .
*Source of Deduction x Tax Rate
Trial and Error to get the IRR.
*Depreciation expense, loss on sale
As the IRR increase the NPV decrease & vice versa.
IRR > Cost of Capital = Accept
IS< Cost of Capital = Reject
COST OF DEBT CAPITAL ASSET PRICING MODEL

Interest Rate x (1 – Tax Rate) R = Rf + β (Rm – Rf)

COST OF PREFERRED SHARES DIVIDEND GROWTH RATE MODEL

Dividends Cost of Retained Earnings

Stock Price*
r s ale
t foNext Dividends
*Deduct the floatation cost in stock price
a ) no Current Price
+G

riaa
COST OF COMMON STOCK A Cost of New Common Stock
CP
C. Dividends
B (@ Next Dividends
Stock Price CJ +G
CP x (1 – Flotation Cost)

Retained Earnings Breakpoint

What if more than one source of capital:
Weighted Average Cost of Capital (WACC) Retained Earning
Equity %
EBIT
Market Value of the Firm
 Formula Receivable Sales on Credit
LIQUIDITY Turnover Ave. Receivable
Working Current Asset Average Age
Capital (Current Liability) of
360 days
Current Current Asset Receivables/
Receivables Turnover
Ratio Current Liabilities Collection
Quick/Acid Quick Asset Period
Operating sale
Ave. Selling Period +
Test Ratio
Cash Ratio
Current Liabilities
C&Cash Eq t
Cycle for Ave. Collection Period
Current Liabilities a ) no
Fixed Asset Sales
ASSET MANAGEMENT riaa Turnover Ave. Fixed Asset
A Total Asset Sales
Inventory COGS/Sale
CP Turnover Ave. Total Asset
Turnover (@
Ave. Inventory
B DEBT MANAGEMENT RATIO
Average Age
of Inventory* CJ Accounts
Purchase
(Inventory Payable
360 days Ave. Account Payable
Conversion Turnover
Inventory Turnover
Period) Average Age 360 days
(Days’ in of Accounts Payables Turnover
Inventory)
Payable/Pay PROFITABILITY
ment Period Gross Profit Gross Profit
Cash Ave. Selling Period + Margin Sales
Conversion Ave. Collection Period – Operating
Cycle Average Payment Period Operating Profit
Profit
SOLVENCY Sales
Margin
Debt Ratio Total Liabilities Profit
sale Net Income
Debt to
Total Asset
Total Liabilities t for
Margin/Retu
rn on Sales
Sales
Equity Ratio Total Equity a ) no
Cash Flow Operating Cash Flow
Equity Ratio Total Equity riaa Margin Net Sales
A
Total Asset
CP Return on Income
Equity (@
Ave. Total Asset
B
Assets Average Asset
Multiplier
Times CJ
Ave. Total Liability Return on
Equity
Income
Average Equity
EBIT
Interest Earnings Per Net Income – Preferred
Interest Expense
Earned Shares Dividends
Fixed Charge Weighted Ave. Common
EBIT + Fixed Charges
Coverage Shares Outstanding
Interest Expense + FC
Ratio
Book Value Total Common Equity MARKET RATIO
Per Share Weighted Ave. Common Price-
Shares Outstanding Price Per Share
Earnings
Dividends Dividends available to Earnings Per Share
(PE) Ratio
Per Sh are common Market Book Price Per Share Book
Weighted Ave. Common Ratio Value per Share

Dividend
Shares Outstanding Dividend
saleDividend Per Share

Pay-out
Dividend Per Share Yield
t for
Market Price
Price Per Share
Earnings price per share
Ratio
Earnings Per Share
a ) no
per share Cost of equity
Earnings Earnings Per share
riaa
Yield Market Price A
CP
B (@
CJ
CASH MANAGEMENT INVENTORY MANAGEMENT

Optimal Cash Balance = Optimal Order Quantity (EOQ)

2 x C x TC 2 x D x OC
r C

sa le
oCost
Total
for
t of Inventory
Annual Transaction Cost xx
) n
Annual Holding Cost xx
aaaAnnual Transaction Cost xx
Total Cost xx Ari Annual Carrying Cost xx

@ CP Total Cost xx
B(
Transaction Cost x no. of transaction
J
OCB/2 x interest rate C Transaction Cost x no. of transaction
C / OCB EOQ/2 x carrying cost
D / EOQ
RECEIVABLE MANAGEMENT PAYABLE MANAGEMENT
OLD NEW Cost of Giving up the cash discount=
Contribution Margin xx Contribution Margin xx Cash Discount % x 360
(Cost of Investment) (xx) (Cost of Investment) (xx)
(Bad Debt Expense) (xx) (Bad Debt Expense) (xx) 100% - CD n
(Discount) (xx) (Discount) (xx) n = number of days that payment can be
Income xx Income xx le
delayed (credit period – discount period)
sa
for
ot Accounts Payable =
Average
Net Advantage / Disadvantage
) n
Interest Rate x Ave. Investment in AR ria aaAP x Ave. Payment Period / 365
(or, AP / AP turnover)
A
CP
VC x Ave. Collection Period / 365 (or, VC / AR turnover)

Average Account Receivable = B (@ Effective Interest Rate =

CJ
AR x Ave. Collection Period / 365
Financing Charges
Net Proceed
(or, AR / AR turnover)
Interest expense + other fees - savings
Usable amount