CMA Part 1 Formula Guide - CMA Exam Academy

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THE DEFINITIVE
GUIDE TO
CMA EXAM
FORMULAS
SECTION A1: FINANCIAL STATEMENTS
THE STATEMENT OF FINANCIAL POSITION
THE ACCOUNTING EQUATION ASSETS = LIABILITIES + EQUITY
SAMPLE BALANCE SHEET
ABC COMPANY
BALANCE SHEET
AS OF DECEMBER 31, 20XX
ASSETS: LIABILITIES:
CURRENT ASSETS $###,### CURRENT LIABILITIES $###,###
CASH ACCOUNTS PAYABLE
ACCOUNTS RECEIVABLE ACCRUED EXPENSES
INVENTORY SHORT-TERM NOTES PAYABLE
SHORT-TERM PREPAIDS DEFERRED REVENUE
NON-CURRENT ASSETS ###,### NON-CURRENT LIABILITIES ###,###
LONG-TERM PREPAIDS BONDS PAYABLE
EQUIPMENT EQUITY: ###,###
BUILDING COMMON STOCK
LAND ADDITIONAL PAID IN CAPITAL
LESS: ACCUM. DEPRECIATION RETAINED EARNINGS
TOTAL ASSETS: $###,### TOTAL LIABILITIES AND EQUITY: $###,###
DEFINITION
A STATEMENT OF FINANCIAL POSITION TELLS YOU WHAT THE COMPANY OWNS (ASSETS), HOW MUCH THE COMPANY OWES TO
ITS CREDITORS (LIABILITIES) AND THE RESIDUAL INTEREST OF THE COMPANY (EQUITY).
BALANCE SHEET STATEMENT ACCOUNTS ARE REAL OR PERMANENT ACCOUNTS WHICH ARE CARRIED FORWARD INTO THE
NEXT ACCOUNTING PERIOD. THEREFORE, THE BALANCES REFLECTED IN A STATEMENT OF FINANCIAL POSITION ARE THE AC-
CUMULATION OF TRANSACTIONS FROM THE INCEPTION OF THE ENTITY TO THE CURRENT REPORTING PERIOD.
PURPOSE
THE BALANCE SHEET REFLECTS THE FINANCIAL POSITION OF AN ENTITY AT A PARTICULAR POINT IN TIME.
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STATEMENT OF OPERATIONS
STATEMENT OF OPERATIONS NET INCOME = REVENUE – EXPENSES
SAMPLE INCOME STATEMENT
ABC COMPANY
INCOME STATEMENT
FOR THE PERIOD ENDING: DECEMBER 31, 20XX
SALES REVENUE $###,###

SERVICE REVENUE ###,###
TOTAL REVENUE $###,###
LESS: COST OF GOODS SOLD ###,###
GROSS PROFIT ###,###
LESS: OPERATING EXPENSES ###,###
NET INCOME BEFORE TAX ###,###
INCOME TAX EXPENSE ###,###
NET INCOME $###,###
DEFINITION
INCOME STATEMENT REFLECTS WHAT THE COMPANY EARNED (REVENUES) AND HOW THE RESOURCES OF THE COMPANY
WHERE SPENT (EXPENSES) IN ORDER TO PRODUCE THOSE REVENUES OVER A PERIOD OF TIME. INCOME STATEMENT AC-
COUNTS ARE NOMINAL OR TEMPORARY ACCOUNTS WHICH ARE CLOSED AT THE END OF THE REPORTING PERIOD TO THE
RETAINED EARNINGS EQUITY SECTION OF THE BALANCE SHEET. THEREFORE, AT THE BEGINNING OF EACH CALENDAR OR
FISCAL YEAR, ALL INCOME STATEMENT ACCOUNTS ARE ZERO.
PURPOSE
THE INCOME STATEMENT PRESENTS THE FINANCIAL PERFORMANCE OF AN ENTITY DURING A SPECIFIED PERIOD OF TIME.
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STATEMENT OF CASH FLOWS
SAMPLE STATEMENT OF CASH FLOWS
ABC COMPANY
STATEMENT OF CASH FLOWS (INDIRECT METHOD)
CASH FLOWS FROM OPERATING ACTIVITIES

PROFIT / (LOSS) BEFORE TAXATION $42,300
ADJUSTMENTS FOR:
DEPRECIATION 4,700
AMORTIZATION 1,000
INVESTMENT INCOME (5,000)
INTEREST EXPENSE 4,000
PROFIT / (LOSS) ON THE SALE OF PROPERTY, PLANT & EQUIPMENT 300
PROFIT / (LOSS) ON THE SALE OF INTANGIBLE ASSETS –
WORKING CAPITAL CHANGES:

(INCREASE) / DECREASE IN TRADE AND OTHER RECEIVABLES (8,700)
(INCREASE) / (DECREASE) IN INVENTORIES (3,500)
INCREASE / (DECREASE) IN TRADE AND OTHER PAYABLES 4,400
CASH GENERATED FROM OPERATIONS 39,500
INTEREST PAID (2,800)
INCOME TAXES PAID (4,000)
DIVIDENDS RECEIVED 1,850
NET CASH FROM OPERATING ACTIVITIES 34,550
CASH FLOWS FROM INVESTING ACTIVITIES

BUSINESS ACQUISITIONS, NET OF CASH ACQUIRED (17,500)
PURCHASE OF PROPERTY, PLANT AND EQUIPMENT (4,300)
PURCHASE OF INTANGIBLE ASSETS –
PROCEEDS FROM SALE OF EQUIPMENT –
PROCEEDS FROM SALE OF INTANGIBLES –
ACQUISITION OF INVESTMENTS (10,000)
INVESTMENT INCOME 4,800
NET CASH USED IN INVESTING ACTIVITIES (27,000)
CASH FLOWS FROM FINANCING ACTIVITIES

PROCEEDS FROM ISSUE OF SHARE CAPITAL –
PROCEEDS FROM LONG-TERM BORROWINGS 10,000
PAYMENT OF LONG-TERM BORROWINGS (3,950)
NET CASH USED IN FINANCING ACTIVITIES 6,050
NET INCREASE IN CASH AND CASH EQUIVALENTS 13,600
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,600
CASH AND CASH EQUIVALENTS AT END OF PERIOD $15,200
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DEFINITION
THE STATEMENT OF CASH FLOWS (SCF) IS THE REPORT THAT CONTAINS THE INFLOWS AND OUTFLOWS OF CASH DURING A
SPECIFIED PERIOD OF TIME.
PURPOSE
THE SOURCES AND USES OF CASH CAN BE CLASSIFIED AS: A) OPERATING CASH FLOWS – INCLUDES CASH FLOWS FROM
TRANSACTIONS THAT AFFECT THE FIRM’S NORMAL OPERATIONS SUCH AS CASH RECEIVED FROM CUSTOMERS AND CASH PAID
FOR SUPPLIERS. B) INVESTING CASH FLOWS – CONTAINS CASH FLOWS WHICH RELATES TO ACQUISITION AND DISPOSAL OF
NON-CURRENT ASSETS SUCH AS CASH PAID FOR THE ACQUISITION OF FIXED ASSETS. C) FINANCING CASH FLOWS – CONSISTS
OF CASH FLOWS FROM TRANSACTIONS AFFECTING LONG-TERM DEBT AND EQUITY OR THE CAPITAL STRUCTURE OF AN ENTITY
SUCH AS ISSUANCE OF BONDS AND COMMON STOCK.
STATEMENT OF COMPREHENSIVE INCOME
SAMPLE STATEMENT OF COMPREHENSIVE INCOME
ABC COMPANY
STATEMENT OF COMPREHENSIVE INCOME
FOR THE PERIOD ENDING: DECEMBER 31, 2011
Note Year ended 31 December
2011 2010
Profit for the year 9,500 8,430
Other comprehensive income
Gains on revaluation of land and buildings – 600
Available-for-sale financial assets (120) –
Cash flow hedges (3) 45
Currency translation differences 740 (92)
Other comprehensive income for the year, net of tax 617 553
Total comprehensive income for the year $10,117 $8,983
DEFINITION
COMPREHENSIVE INCOME INCLUDES ALL CHANGES IN EQUITY EXCEPT THOSE TRANSACTIONS EXECUTED BY THE OWNERS
OF THE COMPANY SUCH AS OWNER’S CONTRIBUTION AND DISTRIBUTION. COMPREHENSIVE INCOME IS BROADER IN SCOPE AS
COMPARED TO THE INCOME STATEMENT BY INCLUDING ALL CHANGES IN EQUITY EXCEPT FOR SHAREHOLDER TRANSACTIONS.
PURPOSE
THE STATEMENT OF COMPREHENSIVE INCOME ENCOMPASSES ALL ITEMS THAT ARE INCLUDED IN THE INCOME STATEMENT
BUT THE INCOME STATEMENT MAY NOT COMPRISE ALL ITEMS THAT ARE REFLECTED IN THE STATEMENT OF COMPREHENSIVE
INCOME. THUS, COMPREHENSIVE INCOME CONSISTS OF NET INCOME AND OTHER COMPREHENSIVE INCOME. THE OTHER COM-
PREHENSIVE INCOME ITEMS WHICH ARE NOT INCLUDED IN THE NET INCOME ARE THE FOLLOWING:
A) FOREIGN CURRENCY TRANSLATION GAINS AND LOSSES.
B) GAINS OR LOSSES AND PRIOR SERVICE COSTS OR CREDITS RELATED TO A DEFINED BENEFIT PENSION PLAN THAT HAVE
NOT BEEN RECOGNIZED AS COMPONENTS OF NET PERIODIC BENEFIT COST.
C) UNREALIZED HOLDING GAINS OR LOSSES ON AVAILABLE-FOR-SALE SECURITIES, AND;
D) THE EFFECTIVE PORTION OF THE GAIN OR LOSS ON A DERIVATIVE DESIGNATED AS A CASH FLOW HEDGE.
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STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
SAMPLE STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY
ABC COMPANY
STATEMENT OF CHANGES IN STOCLJOLDERS EQUITY
Preferred Common Additional Retained Earnings

Total
Stock Stock Paid-In Capital (Accum Deficit)
Beginning balance $##,### $##,### $##,### $##,### $##,###
Issuance of stock ##,### ##,### ##,### ##,### ##,###

Net income (net loss) ##,### ##,### ##,### ##,### ##,###
Dividends ##,### ##,### ##,### ##,### ##,###
Other ##,### ##,### ##,### ##,### ##,###
Ending balance $###,### $###,### $###,### $###,### $###,###
DEFINITION
THE STATEMENT OF CHANGES IN STOCKHOLDER’S EQUITY IS SIMPLY THE RECONCILIATION OF THE TRANSACTIONS AFFECTING
THE BALANCES OF EACH OF THE STOCKHOLDER’S EQUITY ACCOUNTS, INCLUDING THE CAPITAL STOCK, ADDITIONAL PAID-
IN-CAPITAL, RETAINED EARNINGS AND ACCUMULATED OTHER COMPREHENSIVE INCOME, DURING A SPECIFIED PERIOD OF
TIME. STOCKHOLDER’S EQUITY ACCOUNTS AS A COMPONENT OF THE BALANCE SHEET ARE PERMANENT ACCOUNTS IN WHICH
TRANSACTIONS WERE ACCUMULATED TO DATE, AND TRANSACTIONS IN BETWEEN THE BEGINNING AND ENDING BALANCES
MAKE THE FINANCIAL STATEMENT USEFUL.
PURPOSE
INVESTMENTS BY OWNERS ESTABLISH OR INCREASE OWNERSHIP INTERESTS IN THE ENTITY AND MAY BE RECEIVED IN THE
FORM OF CASH, GOODS OR SERVICES, OR SATISFACTION OR CONVERSION OF THE ENTITY’S LIABILITIES. DISTRIBUTION DE-
CREASE OWNERSHIP INTERESTS AND INCLUDE NOT ONLY CASH DIVIDENDS WHEN DECLARED (OR OTHER CASH WITHDRAWALS
BY OWNERS OF NON-CORPORATE ENTITIES) BUT ALSO TRANSACTIONS SUCH AS REACQUISITIONS OF THE ENTITY’S EQUITY
SECURITIES AND DISTRIBUTIONS âĂIJIN KINDâĂİ OF NONCASH ASSETS. INFORMATION ABOUT THOSE EVENTS IS USEFUL, IN
CONJUNCTION WITH OTHER FINANCIAL STATEMENT INFORMATION, TO INVESTORS, CREDITORS, AND OTHER USERS AS AN AID
IN ASSESSING FACTORS SUCH AS THE ENTITY’S FINANCIAL FLEXIBILITY, PROFITABILITY AND RISK.
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SECTION A2: RECOGNITION, MEASUREMENT, VALUATION, AND DISCLOSURE
VALUATION OF ACCOUNTS RECEIVABLE
VALUATION OF ACCOUNTS XXX GROSS ACCOUNTS RECEIVABLE (ENDING BALANCE)

RECEIVABLE = − XXX LESS: ALLOWANCE FOR RETURNS
− XXX LESS: ALLOWANCE FOR UNCOLLECTABLE ACCOUNTS
= XXX EQUALS: NET REALIZABLE VALUE OF ACCOUNTS RECEIVABLE
DEFINITION
NET REALIZABLE VALUE OF ACCOUNTS RECEIVABLE IS THE AMOUNT COLLECTIBLE FROM CUSTOMERS NET OF ALLOWANCE
FOR RETURNS AND ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS.
PURPOSE
ACCOUNTS RECEIVABLE IS REPORTED ON THE BALANCE SHEET AT NET REALIZABLE VALUE.
CALCULATION OF ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS
CALCULATION OF ALLOWANCE FOR XXX ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS (REQUIRED BALANCE)
UNCOLLECTIBLE ACCOUNTS = + XXX ADD: ACCOUNTS WRITTEN OFF DURING THE YEAR
− XXX LESS: ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS (BEGIN BALANCE)
= XXX EQUALS: BAD DEBTS EXPENSE FOR THE PERIOD
DEFINITION
NET REALIZABLE VALUE OF ACCOUNTS RECEIVABLE IS THE AMOUNT COLLECTIBLE FROM CUSTOMERS NET OF ALLOWANCE
FOR RETURNS AND ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS.
PURPOSE
THE REQUIRED BALANCE OF ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS WILL BE USED TO COMPUTE THE UNCOLLECTIBLE
ACCOUNTS EXPENSE FOR THE PERIOD BY SQUEEZING OUT THE FORMULA FOR ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS.
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COST OF GOODS SOLD FORMULA
XXX BEGINNING INVENTORY

COST OF GOODS SOLD =
+ XXX ADD: PURCHASES
= XXX COST OF GOODS AVAILABLE FOR SALE
− XXX LESS: ENDING INVENTORY
= XXX EQUALS: COST OF GOODS SOLD
DEFINITION
ACCUMULATING COST IN INVENTORY DELAYS EXPENSE RECOGNITION UNTIL THE INVENTORY IS SOLD OR REVENUE IS RECOG-
NIZED. INVENTORY CAN HAVE SIGNIFICANT IMPACT ON BOTH THE BALANCE SHEET AND THE INCOME STATEMENT ESPECIALLY
FOR MERCHANDISING OR RETAILING BUSINESSES IN WHICH THE PRIMARY SOURCE OF REVENUE COMES FROM THE SALE OF
GOODS.
PURPOSE
FROM THE FORMULA, WE ARE ACTUALLY ALLOCATING THE COST OF GOODS AVAILABLE FOR SALE INTO:
1. COST OF GOODS SOLD (EXPENSE) TO BE REFLECTED IN THE INCOME STATEMENT
2. ENDING INVENTORY (ASSET) TO BE REPORTED IN THE BALANCE SHEET.
TIME VALUE OF MONEY FORMULA
FV
TIME VALUE OF MONEY FORMULA = PV =
(1 + k )n
where: PV = PRESENT VALUE
F V = FUTURE VALUE
k = INTEREST RATE
n = NUMBER OF PERIODS
DEFINITION
THE TIME VALUE OF MONEY IS THE FUNDAMENTAL LAW OF FINANCE. IT STATES THAT CASH RECEIVED IN THE FUTURE IS WORTH
LESS THAN CASH RECEIVED IN THE PRESENT.
PURPOSE
STANDARD FORMULA USED IN MANY AREAS OF FINANCIAL ANALYSIS TO ASSIST MANAGERS WITH DECISIONS ON INVESTMENT
ALTERNATIVES, CAPITAL PROJECTS, COST OF CAPITAL, etc.
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WEIGHTED AVERAGE COST OF CAPITAL (WACC)
[(DEBT % OF CAPITAL) × (DEBT YIELD) × (1 – TAX RATE)] +

WEIGHTED AVERAGE COST OF CAPITAL = WACC =
(EQUITY % OF CAPITAL) × (REQUIRED RATE OF RETURN ON EQUITY)
DEFINITION
WACC IS A MIXTURE OF DEBT AND EQUITY COSTS WEIGHTED BY THEIR DOLLAR AMOUNTS. DEBT AND EQUITY ARE TREATED
DIFFERENTLY IN THE EQUATION BECAUSE DEBT PAYMENTS ARE MADE BEFORE TAX, WHILE EQUITY DIVIDENDS ARE AFTER TAX.
PURPOSE
A METHOD USED TO DETERMINE A PERCENTAGE RATE VALUE OF EQUITIES AND APPLIED TO DISCOUNT FUTURE CASH FLOWS.
NOTE: REQUIRED RETURN ON EQUITY CAN BE ESTIMATED BY THE DIVIDEND YIELD OR THE CAPITAL ASSET PRICING MODEL
(CAPM).
DIVIDEND YIELD
ANNUAL DIVIDEND (D)

DIVIDEND YIELD =
SHARE PRICE
DEFINITION
THE RATIO OF DIVIDENDS PER SHARE TO MARKET PRICE PER SHARE.
PURPOSE
MEASURES THE RETURN ON THE ANNUAL DIVIDEND RELATIVE TO THE MARKET PRICE PER COMMON SHARE.
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CAPITAL ASSET PRICING MODEL (CAPM)
CAPM = R = RF + β(RM − RF )
where: R = EXPECTED RETURN

RF = RISK FREE RATE OF RETURN (COMPENSATION FOR HOLDING
THE INVESTMENT)
RM = MARKET RATE
(RM − RF ) = MARKET RISK PREMIUM
β = BETA COEFFICIENT, SYSTEMATIC (UNDIVERSIFIABLE) RISK
ANALYSIS OF β : IF β :
β > 1 HIGH RISK MULTIPLIER OF STOCK PRICE, HIGHLY VOLATILE
β < 1 LOW RISK MULTIPLIER OF STOCK PRICE, LESS VOLATILE
β = 1 MARKET & STOCK PRICE MOVE PERFECTLY TO CHANGES IN MARKET
β = 0 NO CORRECLATION OF STOCK PRICE AND MARKET PRICE
β < 0 STOCK PRICE MOVES INVERSELY WITH THAT OF THE ENTIRE MARKET
DEFINITION
THE CAPITAL ASSET PRICING MODEL (CAPM) IS A FINANCIAL MODEL USED IN CALCULATING THE EXPECTED RISKADJUSTED
RETURNS. THE CAPITAL ASSET PRICING MODEL IS BASED ON THE CONCEPT OF THE TIME VALUE OF MONEY AND RISK REPRE-
SENTED BY THE RISK-FREE RATE (RF ) AND THE BETA (β) MULTIPLIED BY THE MARKET RISK PREMIUM (RM − RF ) RESPECTIVELY.
THE RISK FREE RATE IS THE INVESTOR’S COMPENSATION FOR HOLDING THE INVESTMENT DURING A SPECIFIED PERIOD OF
TIME (TIME VALUE OF MONEY) WHILE THE BETA (β) MULTIPLIED BY THE MARKET RISK PREMIUM (RM − RF ) REPRESENTS THE
ADDITIONAL RISK AN INVESTOR IS WILLING TO TAKE.
PURPOSE
THE CAPM FACTORS IN THE TIME VALUE OF MONEY AND RISK REPRESENTED BY THE RISK-FREE RATE AND BETA MULTIPLIED
BY THE MARKET RISK PREMIUM.
DIVIDEND YIELD METHOD
CONSTANT GROWTH DIVIDEND D1

P0 =
DISCOUNT MODEL = (r − g )
where: P0 = PRICE OF STOCK TODAY
D1 = NEXT ANNUAL DIVIDEND PER SHARE
r = INVESTOR REQUIRED RATE OF RETURN
g = ANNUAL FUTURE GROWTH RATE OF THE DIVIDEND
D1
SOLVING FOR "g " GROWTH RATE (r − g ) =
P0
DEFINITION
IT IS AN EQUITY VALUATION METHOD THAT ASSUMES THE GROWTH RATE OF DIVIDENDS IS CONSTANT AND IT CANNOT BE EQUAL
TO OR HIGHER THAN THE REQUIRED RATE OF RETURN.
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DEPRECIATION – STRAIGHT LINE METHOD
STRAIGHT LINE ORIGINAL COST − SALVAGE VALUE DEPRECIABLE COST

OR
DEPRECIATION EXPENSE = ESTIMATED USEFUL LIFE ESTIMATED USEFUL LIFE
DEFINITION
THIS IS THE MOST COMMONLY USED DEPRECIATION METHOD FOR SIMPLICITY AND EASE OF COMPUTATION. DEPRECIATION
COMPUTED USING THE STRAIGHT-LINE METHOD WILL BE EQUAL ANNUALLY OVER THE ASSET’S DEPRECIABLE LIFE.
PURPOSE
CALCULATE THE ALLOCATED PERIOD COST OF THE CONSUMPTION OF FIXED ASSETS THAT WERE USED IN THE GENERATION
OF REVENUE FOR THE SAME PERIOD OF TIME.
DEPRECIATION – DOUBLE DECLINING BALANCE METHOD
DOUBLE DECLINING BALANCE 2 CARRYING AMOUNT (BOOK VALUE) AT

×
DEPRECIATION EXPENSE = ESTIMATED USEFUL LIFE THE BEGINNING OF YEAR
DEFINITION
THIS IS BASED ON THE PREMISE THAT MORE DEPRECIATION SHOULD BE RECOGNIZED IN THE EARLY YEARS OF THE ASSET’S
ESTIMATED LIFE AND LESS DEPRECIATION FROM THE PREVIOUS YEARS. THEREFORE, THE NET INCOME IS LOWER IN THE
EARLY YEARS OF THE ASSET’S USEFUL LIFE AND LARGER IN THE LATER YEARS OF THE ASSET’S USEFUL LIFE AS COMPARED
TO STRAIGHT-LINE METHOD.
PURPOSE
OF REVENUE FOR THE SAME PERIOD OF TIME. SALVAGE VALUE IS NOT FACTORED IN THIS FORMULA. THE NET FIXED ASSET
VALUE IS REDUCED TO THE SALVAGE VALUE.
DEPRECIATION – SUM-OF-THE-YEARS’-DIGITS METHOD
SUM-OF-THE-YEARS’-DIGITS n(n + 1)
DEPRECIATION EXPENSE = × DEPRECIABLE COST OF FIXED ASSETS
2
where: n = NUMBER OF YEARS
DEFINITION
THE SUM-OF-THE-YEARS’-DIGITS METHOD USES THE FRACTION DERIVED BY DIVIDING THE NUMBER OF YEARS (n) LEFT AT THE
BEGINNING OF THE YEAR AND THE COMPUTED SUM-OF-THE-YEARS’-DIGITS (SYD).
PURPOSE
OF REVENUE FOR THE SAME PERIOD OF TIME. SYD DOES FACTOR IN THE ASSET’S SALVAGE VALUE.
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DEPRECIATION – UNITS OF PRODUCTION METHOD

UNITS PRODUCED FOR THE YEAR DEPRECIABLE COST
UNITS OF PRODUCTION ×
TOTAL ESTIMATED UNITS PRODUCED (COST – SALVAGE VALUE)
DEPRECIATION EXPENSE =
DURING LIFE OF FIXED ASSET
DEFINITION
THE UNITS OF PRODUCTION (UOP) METHOD ESTIMATES THE TOTAL UNITS OF PRODUCTION THAT THE LONG-TERM ASSET (i.e.
MACHINE) WILL PRODUCE DURING ITS USEFUL LIFE AND COMPUTES DEPRECIATION BASED ON THE UNITS
PURPOSE
OF REVENUE FOR THE SAME PERIOD OF TIME. UOP DOES FACTOR IN THE ASSET’S SALVAGE VALUE.
SECTION B3: FORECASTING TECHNIQUES
SIMPLE REGRESSION FORMULA
REGRESSION FORMULA = y = a + bx
where: y = DEPENDENT VARIABLE (TOTAL COST)

a = Y -INTERCEPT OR THE VALUE OF Y WHEN X = 0 (FIXED COST)
b = SLOPE OR COEFFICIENT OF THE INDEPENDENT VARIABLE
(VARIABLE COST)
x = INDEPENDENT VARIABLE (COST DRIVER)
P P P P
y x2 − x xy
EQUATION TO SOLVE FOR "a" AND "b " = a= P P 2
n x2 − x
P P P
n xy − x y
b= P P 2
n x2 − x
where: y = DEPENDENT VARIABLE (TOTAL COST)
x = INDEPENDENT VARIABLE (COST DRIVER)
n = NUMBER OF OBSERVANCES (SAMPLE SIZE)
DEFINITION
IN A SIMPLE REGRESSION EQUATION, THERE IS ONLY ONE INDEPENDENT VARIABLE AND ONE DEPENDENT VARIABLE AND THE
RELATIONSHIP BETWEEN THEM IS LINEAR. THE TWO BASIC ASSUMPTIONS OF THE SIMPLE REGRESSION EQUATION:
A. CHANGES IN THE DEPENDENT VARIABLE CAN BE EXPLAINED BY THE CHANGE IN THE INDEPENDENT VARIABLE AND;
B. THE RELATIONSHIP BETWEEN THE DEPENDENT AND INDEPENDENT VARIABLE IS LINEAR.
PURPOSE
THE SIMPLE REGRESSION EQUATION IS USED IN ESTIMATING TOTAL COSTS FOR FLEXIBLE BUDGETS.
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SECTION B5: ANNUAL PROFIT PLAN AND SUPPORTING SCHEDULES
THE SALES BUDGET (SAMPLE)
ABC COMPANY
SALES BUDGET
FOR THE YEAR ENDING: DECEMBER 31, 20XX
PRODUCT: UNIT SALES VOLUME UNIT SALES × PRICE TOTAL SALES

A XXX $XXX $XXX
B XXX $XXX $XXX
C XXX $XXX $XXX
D XXX $XXX $XXX
TOTAL REVENUE FROM SALES XXX $XXX
DEFINITION
THE SALES BUDGET IS THE STARTING POINT OF THE PREPARATION OF THE MASTER BUDGET. THE SALES BUDGET IS THE
DETAILED SCHEDULE OF THE EXPECTED SALES FOR THE UPCOMING PERIOD. THE SALES BUDGET IS CONSIDERED AS THE
FOUNDATION OF THE ANNUAL PROFIT PLAN.
PURPOSE
THE ACCURACY OF THE SALES FORECAST IS CRUCIAL IN THE OVERALL BUDGET SUCCESS BECAUSE ALL OTHER PARTS OF THE
MASTER BUDGET SUCH AS THE PRODUCTION, PURCHASES, INVENTORY, AND EXPENSES BUDGET WILL DEPEND ON THE SALES
BUDGET. FOR EXAMPLE, IF THE SALES BUDGET IS UNREALISTICALLY HIGH, THEN THE PRODUCTION BUDGET WILL ALSO BE
ABNORMALLY HIGH LEADING TO EXCESSIVE INVENTORY. EXCESSIVE INVENTORY WILL EVENTUALLY LEAD TO HIGHER CARRYING
COSTS AND LOSSES FROM OBSOLESCENCE.
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THE PRODUCTION BUDGET (SAMPLE)
ABC COMPANY
PRODUCTION BUDGET
DESIRED ENDING INVENTORY XXX

ADD: PROJECTED UNIT SALES XXX
GOODS AVAILABLE FOR SALE XXX
LESS: BEGINNING INVENTORY XXX
TOTAL PRODUCTION UNITS XXX
DEFINITION
THE PRODUCTION BUDGET IS PREPARED AFTER THE CREATION OF THE SALES BUDGET. THE PRODUCTION BUDGET IS THE
NUMBER OF UNITS TO BE PRODUCED IN ORDER TO SATISFY THE REQUIREMENTS OF THE SALES FORECAST TAKING INTO
ACCOUNT THE INVENTORY LEVEL. WITHOUT THE UNIT SALES INPUT DATA FROM THE SALES BUDGET, THE PRODUCTION BUDGET
WILL NOT BE COMPUTED NOR COMPLETED.
PURPOSE
THE PRODUCTION BUDGET DICTATES THE NUMBER OF DIRECT MATERIALS UNITS AND DIRECT LABOR HOURS NEEDED TO
SATISFY THE PROJECTED UNIT SALES. THE PRODUCTION BUDGET SERVES AS THE BASIS FOR THE CREATION OF DIRECT MA-
TERIALS BUDGET AND DIRECT LABOR BUDGET.
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THE DIRECT MATERIALS BUDGET (SAMPLE)
ABC COMPANY
DIRECT MATERIALS BUDGET
UNITS
TOTAL DIRECT MATERIALS NEEDED FOR PRODUCTION XXX
ADD: DESIRED ENDING INVENTORY (% OF PRODUCTION NEEDS) XXX
TOTAL DIRECT MATERIALS AVAILABLE FOR PRODUCTION XXX
LESS: DIRECT MATERIALS, BEGINNING INVENTORY XXX
TOTAL NUMBER OF DIRECT MATERIALS TO BE PURCHASED XXX
MULTIPLY: PURCHASE PRICE PER UNIT OF DIRECT MATERIALS XXX
TOTAL COST OF DIRECT MATERIAL PURCHASES XXX
DEFINITION
THE DIRECT MATERIALS BUDGET IS PREPARED AFTER THE CREATION OF THE PRODUCTION BUDGET. THE DIRECT MATERIALS
PURCHASES BUDGET CALCULATES HOW MANY INDIVIDUAL UNITS OF EACH COMPONENT NEEDED FOR THE FINAL PRODUCT IS
NEEDED FOR THE PERIOD AND THE COST OF PURCHASING THOSE COMPONENTS.
PURPOSE
ESTIMATED (ACTUAL) BEGINNING INVENTORY AND EXPECTED ENDING INVENTORY LEVELS MUST BE TAKEN INTO ACCOUNT IN
DETERMINING THE AMOUNT OF DIRECT MATERIALS TO BE PURCHASED. THE CHANGE IN INVENTORY LEVELS ADJUSTS THE
DIRECT MATERIALS PRODUCTION REQUIREMENTS TO ARRIVE AT THE TOTAL COST FOR DIRECT MATERIAL PURCHASES.
DIRECT MATERIALS USAGE (SAMPLE)
ABC COMPANY
DIRECT MATERIALS USAGE BUDGET
UNITS
UNITS TO BE PRODUCED (BASED ON PRODUCTION BUDGET) XXX
MULTIPLY: REQUIRED NUMBER OF DIRECT MATERIALS PER UNIT XXX
TOTAL DIRECT MATERIALS NEEDED FOR PRODUCTION XXX
MULTIPLY: PURCHASE PRICE PER UNIT OF DIRECT MATERIALS XXX
TOTAL COST OF DIRECT MATERIALS NEEDED FOR PRODUCTION XXX
DEFINITION
THE DIRECT MATERIALS USAGE BUDGET IS PREPARED AFTER THE CREATION OF THE PRODUCTION BUDGET. IT CALCULATES
THE COST OF THE COMPONENT MATERIALS TO BE USED DURING THE PERIOD.
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THE DIRECT LABOR BUDGET (SAMPLE)
ABC COMPANY
DIRECT LABOR BUDGET
UNITS
UNITS TO BE PRODUCED (EXTRACTED FROM THE PRODUCTION BUDGET) XXX
MULTIPLY: REQUIRED NUMBER OF DIRECT LABOR HOURS PER UNIT XXX
TOTAL DIRECT LABOR HOURS NEEDED FOR PRODUCTION XXX
MULTIPLY: DIRECT LABOR RATE PER HOUR XXX
TOTAL DIRECT LABOR COST XXX
DEFINITION
EXTRACTED FROM THE PRODUCTION OF UNITS, THE DIRECT LABOR BUDGET FACTORS IN THE HOURLY RATE IN LABOR MULTI-
PLIED BY THE NUMBER OF HOURS NEEDED TO CONVERT DIRECT MATERIAL INTO FINISHED PRODUCT.
MANUFACTURING OVERHEAD BUDGET (SAMPLE)
ABC COMPANY
MANUFACTURING OVERHEAD BUDGET
UNITS
TOTAL DIRECT LABOR HOURS NEEDED FOR PRODUCTION (FROM DL BUDGET) XXX
MULTIPLY: VARIABLE OVERHEAD RATE PER HOUR XXX
TOTAL VARIABLE MANUFACTURING OVERHEAD COSTS XXX
ADD: TOTAL FIXED MANUFACTURING OVERHEAD COSTS XXX
TOTAL MANUFACTURING OVERHEAD COSTS XXX
DEFINITION
UNLIKE DIRECT MATERIALS AND DIRECT LABOR BUDGET, OVERHEAD COSTS ARE INDIRECT COSTS WHICH MAY OR MAY NOT
CHANGE DIRECTLY IN PROPORTION TO THE CHANGE IN THE LEVEL OF ACTIVITY.
VARIABLE MANUFACTURING OVERHEAD COSTS ARE PRODUCTION OVERHEAD COSTS THAT CHANGE DIRECTLY IN PROPORTION
TO THE CHANGE IN THE LEVEL OF ACTIVITY. VARIABLE MANUFACTURING OVERHEAD COSTS INCLUDE INDIRECT MATERIALS,
INDIRECT LABOR AND OTHER VARIABLE MANUFACTURING OVERHEAD COSTS.
FIXED MANUFACTURING OVERHEAD COSTS ARE PRODUCTION OVERHEAD COSTS THAT DO NOT CHANGE DIRECTLY IN PROPOR-
TION TO THE CHANGE IN THE LEVEL OF ACTIVITY. FIXED OVERHEAD MANUFACTURING COSTS INCLUDE FACTORY INSURANCE,
FACTORY RENT, FACTORY DEPRECIATION EXPENSE, PRODUCTION SUPERVISOR’S SALARY AND OTHER FIXED MANUFACTURING
OVERHEAD COSTS.
16
COST OF GOODS SOLD BUDGET (SAMPLE)
ABC COMPANY
COST OF GOODS SOLD BUDGET
ESTIMATED COST OF BEGINNING INVENTORY XXX

ADD: COST OF UNITS PRODUCED
DIRECT MATERIALS XXX
DIRECT LABOR XXX
MANUFACTURING OVERHEAD XXX
BUDGETED PRODUCTION COSTS XXX
BUDGETED COST OF GOODS AVAILABLE FOR SALE XXX
LESS: DESIRED ENDING INVENTORY XXX
BUDGETED COST OF GOODS SOLD XXX
COMPUTATION OF DESIRED ENDING INVENTORY (ASSUME USING FIFO METHOD)
DESIRED ENDING INVENTORY (ASSUME THAT FIFO METHOD IS USED)

BUDGETED PRODUCTION COSTS XXX
DIVIDE: UNITS PRODUCED XXX
PRODUCTION COSTS PER UNIT XXX
MULTIPLY: UNITS IN ENDING INVENTORY XXX
DESIRED COST OF ENDING INVENTORY XXX
DEFINITION
THE COMPONENTS OF THE COST OF GOODS SOLD INCLUDE ALL OF THE MANUFACTURING COSTS INCURRED IN PRODUCING
THE SOLD INVENTORY SUCH AS THE DIRECT MATERIAL, DIRECT LABOR AND MANUFACTURING OVERHEAD.
CONTRIBUTION MARGIN
SALES (UNITS × SALES PRICE) XXX

LESS: VARIABLE COSTS (UNITS × VARIABLE COST PER UNIT) XXX
CONTRIBUTION MARGIN XXX
LESS: FIXED EXPENSES XXX
OPERATING INCOME XXX
DEFINITION
CONTRIBUTION MARGIN IS THE DIFFERENCE BETWEEN THE TOTAL REVENUES (e.g., SALES) AND TOTAL VARIABLE EXPENSES.
CONTRIBUTION MARGIN IS THE AMOUNT AVAILABLE TO COVER FIXED OPERATING EXPENSES. CONTRIBUTION MARGIN PER
UNIT IS THE SALES PER UNIT LESS VARIABLE EXPENSES PER UNIT. IN A VARIABLE COSTING INCOME STATEMENT, VARIABLE
OPERATING EXPENSES ARE SEPARATED FROM FIXED OPERATING EXPENSES.
17
SALES AND ADMINISTRATIVE EXPENSE BUDGET (SAMPLE)
ABC COMPANY
SELLING AND ADMINISTRATIVE EXPENSES BUDGET
UNITS
BUDGETED SALES (IN UNITS) XXX
MULTIPLY: VARIABLE SELLING AND ADMINISTRATIVE EXPENSE PER UNIT XXX
TOTAL VARIABLE SELLING AND ADMINISTRATIVE EXPENSES XXX
ADD: FIXED SELLING AND ADMINISTRATIVE EXPENSES:
MARKETING XXX
ACCOUNTING XXX
HUMAN RESOURCES XXX
ADMINISTRATIVE XXX
CUSTOMER SERVICE XXX
TOTAL FIXED SELLING AND ADMINISTRATIVE EXPENSES XXX
TOTAL SELLING AND ADMINISTRATIVE EXPENSES XXX
DEFINITION
SELLING EXPENSES INCLUDE ANY EXPENSES INCURRED FOR THE PURPOSE OF SELLING AND DELIVERING THE PRODUCT TO
CUSTOMERS. SELLING EXPENSES INCLUDE FREIGHT-OUT, SALARIES AND COMMISSIONS OF SALES PERSONNEL, ADVERTISING
AND PROMOTION. ADMINISTRATIVE EXPENSES ARE THE EXPENSES OTHER THAN THOSE INCURRED FOR MANUFACTURING AND
SELLING. ADMINISTRATIVE EXPENSES INCLUDE EXPENSES FOR MANAGING THE ORGANIZATION SUCH AS EXPENSES COMING
FROM HUMAN RESOURCE, ACCOUNTING, CUSTOMER SERVICE AND ADMINISTRATIVE DEPARTMENT. NOTE: SELLING AND ADMIN-
ISTRATIVE EXPENSES CAN BE EITHER FIXED OR VARIABLE.
18
PRO FORMA INCOME STATEMENT (SAMPLE)
ABC COMPANY
PRO FORMA INCOME STATEMENT
SALES XXX
LESS: COST OF GOODS SOLD:
DIRECT LABOR XXX
MANUFACTURING OVERHEAD XXX
TOTAL MANUFACTURING COSTS XXX
ADD: BEGINNING INVENTORY XXX
LESS: DESIRED ENDING INVENTORY XXX
GROSS PROFIT XXX
LESS: SELLING AND ADMINISRATIVE EXPENSES XXX
OPERATING INCOME (NET INCOME BEFORE INCOME TAX) XXX
LESS: INCOME TAXES (ex. 30%) XXX
NET INCOME XXX
DEFINITION
A PRO FORMA INCOME STATEMENT IS DERIVED BY THE KEY TOTALS FROM THE OTHER BUDGETS AND ASSEMBLED IN A STAN-
DARD INCOME STATEMENT FORMAT.
19
CAPITAL BUDGET (SAMPLE)
ABC COMPANY
CAPITAL BUDGET
APPROVED PROJET #1 XXX

TOTAL CAPITAL BUDGET XXX
DEFINITION
THE CAPITAL EXPENDITURE BUDGET IS CREATED INDEPENDENTLY FROM THE OTHER ELEMENTS OF THE MASTER BUDGET.
CAPITAL BUDGET AS A PART OF STRATEGIC PLANNING AFFECTS THE COMPANY’S LONGTERM PROFITABILITY. THE CAPITAL
BUDGET IS A PLAN FOR LONG-TERM CAPITAL EXPENDITURES SUCH PROPERTY, PLANT AND EQUIPMENT. THE ACQUISITION OF
THESE CAPITAL ASSETS AFFECTS THE BUDGETED BALANCE SHEET (e.g., THE ACQUISITION OF A MACHINE) BUDGETED INCOME
STATEMENT, (e.g., DEPRECIATION OF NEW EQUIPMENT) AND THE CASH BUDGET (e.g., CASH SET ASIDE THE ACQUISITION OF
PROPERTY, PLANT AND EQUIPMENT).
PURPOSE
THE CAPITAL BUDGET CONSISTS OF THE APPROVED CAPITAL PROJECTS AND THE AMOUNT RESERVED FOR EACH CAPITAL
PROJECT.
20
CASH BUDGET (SAMPLE)
ABC COMPANY
CASH BUDGET
Q1 Q2 Q3 Q4
BEGINNING CASH BALANCE XXX XXX XXX XXX
ADD: CASH RECEIPTS XXX XXX XXX XXX
COLLECTIONS FROM CUSTOMERS XXX XXX XXX XXX
TOTAL CASH AVAILABLE XXX XXX XXX XXX
CASH DISBURSEMENTS XXX XXX XXX XXX

DIRECT MATERIALS XXX XXX XXX XXX
DIRECT LABOR XXX XXX XXX XXX
MANUFACTURING OVERHEAD COSTS XXX XXX XXX XXX
NONMANUFACTURING COSTS XXX XXX XXX XXX
ACQUISITION OF EQUIPMENT XXX XXX XXX XXX
INCOME TAXES XXX XXX XXX XXX
TOTAL DISBURSEMENTS XXX XXX XXX XXX
ADD: MINIMUM CASH BALANCE REQUIRED XXX XXX XXX XXX
TOTAL CASH NEEDED XXX XXX XXX XXX
EXCESS CASH (DEFICIT) XXX XXX XXX XXX
FINANCING:
BORROWINGS XXX XXX XXX XXX
REPAYMENT DURING PERIOD XXX XXX XXX XXX
INTEREST EXPENSE XXX XXX XXX XXX
TOTAL EFFECTS OF FINANCING XXX XXX XXX XXX
ENDING CASH BALANCE XXX XXX XXX XXX
DEFINITION
THE CASH BUDGET IS COMPOSED OF THE SCHEDULE OF CASH RECEIPTS, SCHEDULE OF CASH DISBURSEMENTS AND CASH
BALANCES.
21
SECTION C1: REVENUE VARIANCE REPORT
REVENUE VARIANCE REPORT (SAMPLE)
ABC COMPANY
REVENUE VARIANCES REPORT
ACTUAL BUDGET VARIANCE

SALES REVENUE – COFFEE $ 100,000 $ 105,000 $ (5,000) UNF
SALES REVENUE – TEA 55,000 30,000 25,000 FAV
SALES REVENUE – OTHER BEVERAGES 35,000 20,000 15,000 FAV
SALES REVENUE – PASTRIES 65,000 85,000 (20,000) UNF
TOTAL $ 255,000 $ 240,000 $ 15,000 FAV
DEFINITION
REVENUE CENTER IS RESPONSIBLE FOR THE GENERATION OF REVENUE.
PURPOSE
REVENUE CENTERS ARE MORE CONCERNED WITH THE COMPANY’S TOP LINE OR THE REVENUE-GENERATING ACTIVITIES OF
THE COMPANY. REVENUE CENTERS ARE EVALUATED BASED ON REVENUE VARIANCES OR THE DIFFERENCE BETWEEN PLANNED
AND ACTUAL REVENUE AMOUNTS. IF ACTUAL REVENUES EXCEED BUDGET, YOU HAVE A FAVORABLE RESULT; OTHERWISE, YOU
HAVE AN UNFAVORABLE RESULT.
22
SECTION C1: COST VARIANCES REPORT
COST VARIANCE REPORT (SAMPLE)
ABC COMPANY
COST VARIANCES REPORT
MANUFACTURING
DIRECT MATERIALS $ 45,000 $ 40,000 $ 5,000 UNF
DIRECT LABOR $ 30,000 $ 25,000 $ 5,000 UNF
VARIABLE MFG OVERHEAD $ 12,000 $ 10,000 $ 2,000 UNF
FIXED MFG OVERHEAD $ 10,000 $ 10,000 $ –
TOTAL $ 97,000 $ 85,000 $ 12,000 UNF
NONMANUFACTURING
SELLING $ 35,000 $ 35,000 $ – UNF
ADMINISTRATION $ 45,000 $ 50,000 $ (5,000) FAV
TOTAL $ 80,000 $ 85,000 $ (5,000) FAV
DEFINITION
COST CENTER IS RESPONSIBLE FOR THE INCURRENCE OF COST.
PURPOSE
COST CENTERS ARE EVALUATED USING COST VARIANCES. IF ACTUAL COSTS EXCEED BUDGET ESTIMATES, YOU HAVE AN UN-
FAVORABLE RESULT; OTHERWISE, YOU HAVE AN FAVORABLE RESULT.
23
SECTION C1: PROFIT CENTER
PROFIT CENTER EVALUATION FORM (SAMPLE)
SALES XXX
LESS: VARIABLE MANUFACTURING COSTS XXX
MANUFACTURING CONTRIBUTION MARGIN XXX
LESS: VARIABLE SELLING AND ADMINISTRATIVE EXPENSES XXX
LESS: CONTROLLABLE FIXED COSTS AND EXPENSES
FIXED MANUFACTURING OVERHEAD XXX
FIXED SELLING AND ADMINISRATIVE EXPENSES XXX XXX
CONTROLLABLE MARGIN (SHORT-RUN PERFORMANCE) XXX MANAGER’S PERFORMANCE BASIS
LESS: NONCONTROLLABLE FIXED COSTS AND EXPENSES XXX
SEGMENT MARGIN (LONG-RUN PERFORMANCE) XXX SEGMENT’S PERFORMANCE BASIS
DEFINITION
PROFIT CENTER IS RESPONSIBLE FOR THE GENERATION OF REVENUE AND INCURRENCE OF COST. THEREFORE, IT IS RESPON-
SIBLE FOR PROFIT WHICH IS THE DIFFERENCE BETWEEN REVENUE AND COSTS.
PURPOSE
SEGMENT MANAGERS ARE EVALUATED BASED ON CONTROLLABLE MARGIN WHILE A SEGMENT IS EVALUATED BASED ON ITS
SEGMENT MARGIN.
24
SECTION C1: PERFORMANCE ANALYSIS REPORT USING A MASTER (STATIC) BUDGET
ACTUAL vs. MASTER PERFORMANCE ANALYSIS REPORT (SAMPLE)
MASTER BUDGET ACTUAL RESULTS

BUDGETED UNIT SALES 150,000 ACTUAL UNIT SALES 100,000
BUDGETED SALES PRICE PER UNIT $ 12.00 ACTUAL SALES PRICE PER UNIT $ 11.00
BUDGETED VARIABLE COST PER UNIT $ 5.20 ACTUAL VARIABLE COST PER UNIT $ 5.75
BUDGETED FIXED COSTS $ 510,000 ACTUAL FIXED COSTS $ 475,000
ABC CHOCOLATES, INC

OPERATING INCOME ANALYSIS
FOR THE YEAR ENDED: DECEMBER 31, 20XX
ACTUAL MASTER (STATIC)

VARIANCE
RESULTS BUDGET
UNITS 100,000 150,000 (50,000) UNF
SALES $ 1,100,000 $ 1,800,000 $ (700,000) UNF
LESS: VARIABLE COSTS 575,000 780,000 205,000 FAV
CONTRIBUTION MARGIN $ 525,000 $ 1,020,000 $ (495,000) UNF
LESS: FIXED COSTS 475,000 510,000 35,000 FAV
OPERATING INCOME $ 50,000 $ 510,000 $ (460,000) UNF
DEFINITION
A REPORT THAT BRINGS TOGETHER THE REVENUE AND MANUFACTUING COST VARIANCES FORMS.
PURPOSE
A PERFORMANCE ANALYSIS COMPARES ACTUAL RESULTS TO THE MASTER BUDGET. IT CALCULATES FAVORABLE AND UNFA-
VORABLE VARIANCES FROM BUDGET, AND PROVIDE EXPLANATIONS FOR VARIANCES.
VARIANCE EXPLANATIONS
SALES VARIANCE ANALYSIS
THE ACTUAL SALES FALL BELOW THE BUDGET BY $700,000 SIMPLY BECAUSE OF THE DIFFERENCE IN UNIT SALES OF 50,000
UNITS (150,000 UNITS BUDGETED-100,000 UNITS ACTUAL) AND THE DIFFERENCE IN SALES PRICE PER UNIT OF $1 ($12 – BUDGET
VERSUS $11 – ACTUAL).
TOTAL BUDGET VARIANCE = FLEXIBLE BUDGET VARIANCE + SALES VOLUME VARIANCE

= (DIFF. IN SALES PRICE/UNIT × ACTUAL UNITS) +
(DIFF. UNITS SOLD × BUDGETED SALES PRICE/UNIT)

= ($1 × 100,000) + (50,000 × $12)
= ($100,000 UNF) + ($600,000 UNF)
= $700,000 UNF
25
VARIABLE COSTS VARIANCE ANALYSIS
THERE IS A FAVORABLE VARIABLE COSTS VARIANCE OF $205,000 IS MAINLY DUE TO THE DIFFERENCE IN UNIT SALES OF 50,000
UNITS (150,000 UNITS BUDGETED-100,000 UNITS ACTUAL) REDUCED BY UNFAVORABLE DIFFERENCE IN VARIABLE COST PER
UNIT OF $0.55 ($5.20-BUDGET VERSUS $5.75- ACTUAL).
TOTAL BUDGET VARIANCE = FLEXIBLE BUDGET VARIANCE + SALES VOLUME VARIANCE

= (DIFF. IN VARIABLE COST/UNIT × ACTUAL UNITS) +
(DIFF. UNITS SOLD × BUDGETED VARIABLE COST/UNIT)

= – (100,000 × $0.55) + (50,000 × $5.20)
= – 55,000 (UNF) + 260,000 (FAV)
= $205,000 FAV
FIXED COSTS VARIANCE ANALYSIS
THE $35,000 FAVORABLE DIFFERENCE OF ACTUAL AND BUDGETED FIXED COSTS IS DUE TO FACTORS OTHER THAN THE DIFFER-
ENCE IN UNIT SALES AS FIXED COSTS DO NOT CHANGE WITH THE LEVEL OF OUTPUT WITHIN THE RELEVANT RANGE.
26
SECTION C1: PERFORMANCE ANALYSIS REPORT USING A FLEXIBLE BUDGET
CONVERT MASTER (STATIC) BUDGET TO A FLEXIBLE BUDGET REPORT (SAMPLE)

ABC CHOCOLATES, INC

OPERATING INCOME ANALYSIS
ACTUAL FLEXIBLE MASTER (STATIC)

RESULTS BUDGET BUDGET
UNITS 100,000 100,000 150,000
SALES $ 1,100,000 $ 1,200,000 * $ 1,800,000

LESS: VARIABLE COSTS 575,000 520,000 ** 780,000
CONTRIBUTION MARGIN $ 525,000 $ 680,000 $ 1,020,000
LESS: FIXED COSTS 475,000 510,000 *** 510,000
OPERATING INCOME $ 50,000 $ 170,000 $ 510,000
* BUDGETED SALES PRICE PER UNIT × ACTUAL UNITS SOLD OR (100,000 × $12.00)
** BUDGETED VARIABLE COST PER UNIT × ACTUAL UNITS SOLD OR (100,000 × $5.20)
*** FIXED COSTS IS DERIVED FROM THE MASTER BUDGET’S FIXED COST AMOUNT
DEFINITION
THE FLEXIBLE BUDGET ADJUSTS THE ELEMENTS OF THE BUDGETED OPERATING INCOME (REVENUES AND EXPENSES) TO THE
ACTUAL LEVEL OF OUTPUT ACHIEVED.
PURPOSE
A MASTER BUDGET IS DESIGNED FOR ONLY ONE LEVEL OF ACTIVITY. A FLEXIBLE BUDGET ADJUSTS THE MASTER (STATIC)
BUDGET REVENUES AND COSTS TO THE ACTUAL LEVEL ACHIEVED USING BUDGETED RATES, RESPECTIVELY.
27
SECTION C1: SALES VOLUME VARIANCE REPORT
SALES VOLUME VARIANCE REPORT (SAMPLE)

ABC CHOCOLATES, INC

SALES VOLUME VARIANCE
FLEXIBLE MASTER (STATIC)

VARIANCE
BUDGET BUDGET
UNITS 100,000 150,000 (50,000) UNF
SALES $ 1,200,000 $ 1,800,000 $ (600,000) UNF

LESS: VARIABLE COSTS 520,000 780,000 260,000 FAV
CONTRIBUTION MARGIN $ 680,000 $ 1,020,000 $ (340,000) UNF
LESS: FIXED COSTS 510,000 510,000 –
DEFINITION
THE FLEXIBLE BUDGET ADJUSTS THE ELEMENTS OF THE BUDGETED OPERATING INCOME (REVENUES AND EXPENSES) TO THE
ACTUAL LEVEL OF OUTPUT ACHIEVED.
PURPOSE
A MASTER BUDGET IS DESIGNED FOR ONLY ONE LEVEL OF ACTIVITY. A FLEXIBLE BUDGET ADJUSTS THE MASTER (STATIC)
BUDGET REVENUES AND COSTS TO THE ACTUAL LEVEL ACHIEVED USING BUDGETED RATES, RESPECTIVELY.
SALES-VOLUME VARIANCE ANALYSIS
THE SALES-VOLUME VARIANCE OF ABC CHOCOLATES, INC. AMOUNTED TO $340,000 WHICH IS THE DIFFERENCE OF FLEXIBLE
BUDGET OPERATING INCOME AND THE MASTER (STATIC) BUDGET OPERATING INCOME.
28
SECTION C1: FLEXIBLE BUDGET VARIANCE REPORT
FLEXIBLE BUDGET VARIANCE REPORT (SAMPLE)

ABC CHOCOLATES, INC

FLEXIBLE BUDGET VARIANCE REPORT
ACTUAL FLEXIBLE
VARIANCE
RESULTS BUDGET
UNITS 100,000 100,000 –
SALES $ 1,100,000 $ 1,200,000 $ (100,000) UNF

LESS: VARIABLE COSTS 575,000 520,000 (55,000) UNF
CONTRIBUTION MARGIN $ 525,000 $ 680,000 $ (155,000) UNF
LESS: FIXED COSTS 475,000 510,000 35,000
DEFINITION
VARIANCE REPORT COMPARES ACTUAL RESULTS TO THE FLEXIBLE BUDGET.
PURPOSE
A FLEXIBLE BUDGET ADJUSTS THE MASTER (STATIC) BUDGET REVENUES AND COSTS TO THE ACTUAL LEVEL OF ACTIVITY
ACHIEVED USING BUDGETED RATES, RESPECTIVELY.
FLEXIBLE BUDGET vs. ACTUAL RESULTS VARIANCE ANALYSIS:
THEREFORE, THERE IS AN UNFAVORABLE FLEXIBLE BUDGET VARIANCE OF $120,000 WHICH IS THE DIFFERENCE OF ACTUAL
OPERATING INCOME OF $50,000 AND THE FLEXIBLE BUDGET OPERATING INCOME OF $170,000.
SALES VARIANCE ANALYSIS
THE FLEXIBLE BUDGET SALES VARIANCE OF $100,000 UNFAVORABLE IS THE DIFFERENCE OF THE ACTUAL SALES PRICE PER
UNIT OF $11 AND THE FLEXIBLE BUDGET SALES PRICE PER UNIT OF $12 AT THE ACTUAL LEVEL OF OUTPUT ACHIEVED (UNITS
SOLD).
VARIABLE COSTS ANALYSIS
THE VARIABLE COSTS FLEXIBLE BUDGET VARIANCE OF $55,000 UNFAVORABLE IS THE DIFFERENCE OF THE ACTUAL VARIABLE
COST PER UNIT OF $5.75 AND THE FLEXIBLE BUDGET VARIABLE COST PER UNIT OF $5.20 AT THE ACTUAL LEVEL OF OUTPUT
ACHIEVED (UNITS SOLD).
FIXED COSTS ANALYSIS
THE FIXED COSTS FLEXIBLE BUDGET VARIANCE IS THE DIFFERENCE OF ACTUAL FIXED COSTS AND THE BUDGETED FIXED
COST.
29
SECTION C1: PRICE (RATE) VARIANCE RELATED TO DIRECT MATERIALS OR DIRECT LABOR INPUTS
PRICE (RATE) VARIANCE RELATED TO DIRECT MATERIALS OR DIRECT LABOR INPUTS
PURPOSE
PRICE (RATE) VARIANCES IS THE DIFFERENCE OF ACTUAL AND BUDGETED (STANDARD) UNIT INPUT PRICE MULTIPLIED BY THE
ACTUAL QUANTITY OF INPUT SUCH AS UNITS OF DIRECT MATERIALS USED AND DIRECT LABOR HOURS. THE VARIANCES OF
DIRECT MATERIALS, DIRECT LABOR CAN BE SIMPLY COMPUTED USING THE MNEMONIC: QAAS-PASS.
Price or Rate −→ P Q ←− Quantity or Efficiency
A A [1] DIRECT MATERIAL PRICE VARIANCE

[3] DIRECT LABOR RATE VARIANCE
DIRECT MATERIAL QUANTITY VARIANCE [2] S A [5] VARIABLE OVERHEAD RATE VARIANCE
DIRECT LABOR EFFICIENCY VARIANCE [4]
VARIABLE OVERHEAD EFFICIENCY VARIANCE [6] S S
SECTION C1: [1] DIRECT MATERIALS PRICE VARIANCE (DMPV)
DIRECT MATERIALS PRICE VARIANCE (DMPV)
A A
S A
S S
DMPV
XXX ACTUAL DIRECT MATERIALS PRICE PER UNIT [A] × ACTUAL QUANTITY OF DIRECT MATERIALS USED [A]
XXX LESS: STANDARD DIRECT MATERIALS PRICE PER UNIT [S] × ACTUAL QUANTITY OF DIRECT MATERIALS USED [A]
XXX DIRECT MATERIALS PRICE VARIANCE
NOTE
ANOTHER TYPE OF A PRICE VARIANCE IS THE DIRECT MATERIALS PURCHASE PRICE VARIANCE. DIRECT MATERIALS PURCHASE
PRICE VARIANCE IS THE DIFFERENCE OF ACTUAL AND STANDARD DIRECT MATERIALS UNIT PRICE MULTIPLIED BY THE ACTUAL
UNITS OF DIRECT MATERIALS PURCHASED.
PURPOSE
DIRECT MATERIALS PRICE VARIANCE (DMPV) IS THE DIFFERENCE OF THE ACTUAL DIRECT MATERIALS PRICE PER UNIT AND THE
STANDARD DIRECT MATERIALS PRICE PER UNIT USING THE ACTUAL QUANTITY OF DIRECT MATERIALS USED.
30
SECTION C1: [3] DIRECT LABOR RATE VARIANCE (DMLV)
DIRECT LABOR RATE VARIANCE (DMLV)
A A
S A
S S
DLRV
XXX ACTUAL DIRECT LABOR RATE [A] × ACTUAL NUMBER OF DIRECT LABOR HOURS WORKED [A]
XXX LESS: STANDARD DIRECT LABOR RATE [S] × ACTUAL NUMBER OF DIRECT LABOR HOURS WORKED [A]
XXX DIRECT LABOR RATE VARIANCE
PURPOSE
DIRECT LABOR RATE VARIANCE IS THE DIFFERENCE OF ACTUAL DIRECT LABOR RATE AND STANDARD DIRECT LABOR RATE
MULTIPLIED BY THE ACTUAL NUMBER OF DIRECT LABOR HOURS WORKED.
SECTION C1: [2] DIRECT MATERIAL USAGE VARIANCE (DMUV)
DIRECT MATERIAL USAGE VARIANCE (DMUV)
A A
S A
S S
DMUV
XXX STANDARD DIRECT MATERIALS PRICE PER UNIT [S] × ACTUAL QUANTITY OF DIRECT MATERIALS USED [A]
XXX LESS: STANDARD DIRECT MATERIALS PRICE PER UNIT [S] × STANDARD INPUT ALLOWED FOR ACTUAL OUTPUT [S]
XXX DIRECT MATERIALS QUANTITY VARIANCE
PURPOSE
DIRECT MATERIALS USAGE VARIANCE IS THE DIFFERENCE OF ACTUAL UNITS OF DIRECT MATERIALS USED AND THE UNITS OF
DIRECT MATERIALS THAT SHOULD HAVE BEEN USED (STANDARD) FOR ACTUAL OUTPUT MULTIPLIED BY THE STANDARD DIRECT
MATERIAL PRICE PER UNIT.
31
SECTION C1: [4] DIRECT LABOR EFFICIENCY VARIANCE (DLEV)
DIRECT LABOR EFFICIENCY VARIANCE (DLEV)
A A
S A
S S
DLEV
XXX STANDARD DIRECT LABOR RATE [S] × ACTUAL NUMBER OF DIRECT HOURS WORKED [A]
XXX LESS: STANDARD DIRECT LABOR RATE [S] × STANDARD INPUT ALLOWED FOR ACTUAL OUTPUT (SIAFAO) [S]
XXX DIRECT LABOR EFFICIENCY VARIANCE
PURPOSE
DIRECT LABOR EFFICIENCY VARIANCE IS THE DIFFERENCE OF ACTUAL DIRECT LABOR HOURS WORKED AND THE NUMBER OF
DIRECT LABOR HOURS THAT SHOULD HAVE BEEN WORKED (STANDARD) FOR ACTUAL OUTPUT MULTIPLIED BY THE STANDARD
DIRECT LABOR RATE.
SECTION C1: FIXED AND VARIABLE OVERHEAD AS THEY RELATE TO SPENDING AND EFFICIENCY VARIANCES
FIXED AND VARIABLE OVERHEAD AS THEY RELATE TO SPENDING AND EFFICIENCY VARIANCES
PURPOSE
THE TOTAL FIXED OVERHEAD IS THE DIFFERENCE OF ACTUAL FIXED OVERHEAD AND STANDARD FIXED OVERHEAD.
PURPOSE
FIXED OVERHEAD SPENDING VARIANCE IS THE DIFFERENCE OF ACTUAL FIXED OVERHEAD AND BUDGETED FIXED OVERHEAD.
PURPOSE
FIXED OVERHEAD VOLUME VARIANCE IS THE DIFFERENCE OF BUDGETED FIXED OVERHEAD AND STANDARD FIXED OVERHEAD.
NOTE THAT THERE IS NO SUCH THING AS âĂIJFIXED OVERHEAD EFFICIENCY VARIANCEâĂİ. IF A PROBLEM ASKS FOR âĂIJFIXED
OVERHEAD EFFICIENCY VARIANCEâĂİ, THEN THE ANSWER SHOULD BE âĂIJCANNOT BE DETERMINEDâĂİ.
A ACTUAL FIXED OVERHEAD = ACTUAL FOH RATE × ACTUAL ACTIVITY

FIXED SPENDING VARIANCE
B BUDGETED FIXED OVERHEAD = BUDGETED FOH RATE × BUDGETED ACTIVITY
FIXED VOLUME VARIANCE

S STANDARD FIXED OVERHEAD = BUDGETED FOH RATE × STANDARD ACTIVITY*
*REMEMBER THE STANDARD FIXED OVERHEAD RATE IS COMPUTED BY DIVIDING THE BUDGETED FOH BY THE BUDGETED ACTIVITY.
*STANDARD ACTIVITY IS THE SIAFAO OR THE STANDARD INPUT ALLOWED FOR ACTUAL OUTPUT.
32
SECTION C1: [5] VARIABLE OVERHEAD SPENDING VARIANCE (VOSV)
VARIABLE OVERHEAD SPENDING VARIANCE (VOSV)
A A
S A
S S
VOSV
XXX ACTUAL VARIABLE OVERHEAD RATE [A] × ACTUAL LEVEL OF ACTIVITY [A]
XXX LESS: STANDARD VARIABLE OVERHEAD RATE [S] × ACTUAL LEVEL OF ACTIVITY [A]
XXX VARIABLE OVERHEAD SPENDING VARIANCE
PURPOSE
VARIABLE OVERHEAD SPENDING VARIANCE IS THE VARIANCE CAUSED BY THE DIFFERENCE IN THE ACTUAL VARIABLE OVER-
HEAD RATE AND THE STANDARD VARIABLE OVERHEAD RATE AT THE ACTUAL NUMBER OF INPUTS USED.
SECTION C1: [6] VARIABLE OVERHEAD EFFICIENCY VARIANCE (VOEV)
VARIABLE OVERHEAD EFFICIENCY VARIANCE (VOEV)
A A
S A
S S
VOEV
XXX STANDARD VARIABLE OVERHEAD RATE [S] × ACTUAL LEVEL OF ACTIVITY [A]
XXX LESS: STANDARD VARIABLE OVERHEAD RATE [S] × STANDARD OF ACTIVITY [S]
XXX VARIABLE OVERHEAD EFFICIENCY VARIANCE
PURPOSE
VARIABLE OVERHEAD EFFICIENCY VARIANCE IS THE VARIANCE CAUSED BY THE DIFFERENCE IN THE ACTUAL INPUT AND STAN-
DARD INPUT ALLOWED FOR ACTUAL OUTPUT AT THE STANDARD VARIABLE OVERHEAD RATE.
33
SECTION C1: SALES MIX, SALES QUANTITY AND SALES VOLUME VARIANCES
SALES VOLUME VARIANCE CALCULATION
DEFINITION
THE SALES VOLUME VARIANCE IS COMPOSED OF THE SALES QUANTITY VARIANCE AND THE SALES-MIX VARIANCE.
EXAMPLE
SAIGON LEATHER GOODS, INC. SELLS TWO PRODUCTS AND HAD THE FOLLOWING DATA FOR LAST MONTH
WALLETS BELTS
BUDGET ACTUAL BUDGET ACTUAL
UNIT SALES 11,000 12,000 9,000 12,000
UNIT CONTRIBUTION MARGIN 9.00 9.60 20.00 21.00
SALES VOLUME VARIANCE:
BUDGETED UNIT
ACTUAL BUDGET
CONTRIBUTION
UNITS UNITS
MARGIN
WALLETS (12,000 – 11,000) × 9.00 = 9,000
BELTS (12,000 – 9,000) × 20.00 = 60,000
TOTAL SALES VOLUME VARIANCE = 69,000 FAV
SALES QUANTITY VARIANCE:
STEP #1
COMPUTE WASPSM.
(TOTAL ACTUAL UNITS SOLD FOR ALL PRODUCTS – TOTAL BUDGETED UNITS SOLD FOR ALL
FORMULA =
PRODUCTS) × WEIGHTED AVERAGE STANDARD PRICE FOR THE STANDARD MIX (WASPSM)
STANDARD STANDARD
TOTAL
UCM QUANTITY
WALLETS 9.00 × 11,000 = 99,000
BELTS 20.00 × 9,000 = 180,000
20,000 = 279,000 WASPSM $ 13.95
STEP #2
COMPUTE FOR THE TOTAL ACTUAL UNITS SOLD FOR ALL PRODUCTS AND TOTAL BUDGETED UNITS SOLD FOR ALL PRODUCTS.
TOTAL ACTUAL UNITS SOLD FOR ALL PRODUCTS (12,000 + 12,000) 24,000
TOTAL BUDGETED UNITS SOLD FOR ALL PRODUCTS (11,000 + 9,000) 20,000
STEP #3
SUBSTITUTE THE AMOUNTS TO THE FORMULA.
SALES QUANTITY VARIANCE = (24,000 – 20,000)×$13.95 [WASPSM] 55,800 FAV
34
SALES MIX VARIANCE:
FORMULA = SALES MIX VARIANCE = (WASPAM - WASPSM) × TOTAL ACTUAL UNITS SOLD
WASPAM = WEIGHTED AVERAGE STANDARD PRICE FOR THE ACTUAL MIX.

WASPSM = WEIGHTED AVERAGE STANDARD PRICE FOR THE STANDARD MIX.
STEP #1
COMPUTE WASPAM.
TOTAL BUDGETED UNIT

ACTUAL
ACTUAL CONTRIBUTION
UNITS
UNITS MARGIN
WALLETS (12,000 / 24,000) × 9.00 = $ 4.50
BELTS (12,000 / 24,000) × 20.00 = $ 10.00
WASPAM $ 14.50
STEP #2
COMPUTE WASPAM.
STANDARD STANDARD
TOTAL
UCM QUANTITY
WALLETS 9.00 × 11,000 = 99,000
BELTS 20.00 × 9,000 = 180,000
20,000 = 279,000 WASPSM $ 13.95
STEP #3
SUBSTITUTE THE AMOUNTS TO THE FORMULA: (WASPAM – WASPSM) × TOTAL ACTUAL UNITS SOLD
SALES MIX VARIANCE = ($14.50 – $13.95) × 24,000 13,200 FAV
35
SECTION C1: MIX VARIANCES
MIX VARIANCE CALCULATIONS
PURPOSE
MIX VARIANCE CAN BE EITHER A REVENUE-RELATED (SALES) OR MANUFACTURING COST-RELATED MIX VARIANCE. THE SALES
MIX VARIANCE AND THE SALES QUANTITY VARIANCE ARE THE COMPONENTS OF THE TOTAL SALES VOLUME VARIANCE. THESE
VARIANCES ARE APPLICABLE ONLY WHEN MORE THAN ONE PRODUCT IS BEING SOLD.
THE MIX VARIANCE AND THE YIELD VARIANCE ARE THE COMPONENTS OF TOTAL EFFICIENCY (QUANTITY) VARIANCE. THESE
VARIANCES ARE APPLICABLE ONLY WHEN MORE THAN ONE INPUT IS BEING USED TO PRODUCE THE OUTPUT.
DIRECT MATERIALS (OR LABOR) MIX VARIANCE
FORMULA = (WASCAM – WASCSM) × AQ
WASCAM = WEIGHTED AVERAGE STANDARD COST ACTUAL MIX.

WASCSM = WEIGHTED AVERAGE WEIGHTED AVERAGE STANDARD COST STANDARD MIX
AQ = ACTUAL QUANTITY OF MATERIALS PURCHASED OR LABOR HOURS WORKED
EXAMPLE
HANOI COFFEE, INC. SELLS AN EXPORT QUALITY WHOLESALE 3-IN-1 COFFEE MIX AND HAD THE FOLLOWING DATA FOR LAST
MONTH:
DIRECT MATERIALS:
PER SACK PER KILO
ACTUAL MIX STD MIX ACTUAL COST STD COST
COFFEE BEANS 10.00 kg 11.00 kg $ 18.00 $ 21.00
CREAMER 3.50 4.00 5.50 6.00
SUGAR 1.50 2.50 2.50 3.00
DIRECT LABOR:
PER SACK PER HOUR
ACTUAL MIX STD MIX ACTUAL COST STD COST
ROASTING & GRINDING 3.00 hrs 2.90 hrs $ 10.25 $ 10.00
MIXING 1.75 2.00 8.75 8.00
PACKING 0.25 0.30 6.50 6.00
ACTUAL SACKS OF COFFEE PRODUCED: 10,000
36
DIRECT MATERIALS MIX VARIANCE
STEP #1
COMPUTE WASCAM
STD COST ACTUAL MIX TOTAL

COFFEE BEANS $ 21.00 × 10.00 = 210.00
CREAMER $ 6.00 × 3.50 = 21.00
SUGAR $ 3.00 × 1.50 = 4.50
15.00 = 235.00 WASCAM = 15.70
STEP #2
COMPUTE WASCSM
STD COST STD MIX TOTAL

COFFEE BEANS $ 21.00 × 11.00 = 231.00
CREAMER $ 6.00 × 4.00 = 24.00
SUGAR $ 3.00 × 2.50 = 7.50
17.50 = 262.50 WASCSM = 15.00
STEP #3
COMPUTE TOTAL ACTUAL QUANTITY OF DIRECT MATERIALS USED
ACTUAL MIX TOTAL OUTPUT TOTAL

COFFEE BEANS $ 10.00 × 10,000 = 100,000
CREAMER $ 3.50 × 10,000 = 35,000
SUGAR $ 1.50 × 10,000 = 15,000
30,000 = 150,000
STEP #4
SUBSTITUTE THE AMOUNTS TO THE FORMULA: (WASCAM - WASCSM) × AQ
DIRECT MATERIALS MIX VARIANCE = ($15.70 - $15.00) × 150,000 $ 105,000 UNF
THE DIRECT MATERIALS MIX VARIANCE IS UNFAVORABLE BECAUSE THE WEIGHTED AVERAGE STANDARD COST FOR ACTUAL
MIX IS GREATER THAN THE WEIGHTED AVERAGE STANDARD COST FOR STANDARD MIX.
37
DIRECT LABOR MIX VARIANCE
STEP #1
COMPUTE WASCAM
STD RATE ACTUAL MIX TOTAL

ROASTING & GRINDING $ 10.00 × 3.00 = 30.00
MIXING $ 8.00 × 1.75 = 14.00
PACKING $ 6.00 × 0.25 = 1.50
5.00 = 45.50 WASCAM = 9.10
STEP #2
COMPUTE WASCSM
STD COST STD MIX TOTAL

ROASTING & GRINDING $ 10.00 × 2.90 = 29.00
MIXING $ 8.00 × 2.00 = 16.00
PACKING $ 6.00 × 0.30 = 1.80
5.20 = 46.80 WASCSM = 9.00
STEP #3
COMPUTE TOTAL ACTUAL QUANTITY OF DIRECT MATERIALS USED
ACTUAL MIX TOTAL OUTPUT TOTAL

ROASTING & GRINDING $ 3.00 × 10,000 = 30,000
MIXING $ 1.75 × 10,000 = 17,500
PACKING $ 0.25 × 10,000 = 2,500
30,000 = 50,000
STEP #4
SUBSTITUTE THE AMOUNTS TO THE FORMULA: (WASCAM - WASCSM) × AQ
DIRECT LABOR MIX VARIANCE = ($9.10 – $9.00) × 50,000 5,000 UNF
THE DIRECT LABOR MIX VARIANCE IS UNFAVORABLE BECAUSE THE WEIGHTED AVERAGE STANDARD COST FOR ACTUAL MIX IS
GREATER THAN THE WEIGHTED AVERAGE STANDARD COST FOR STANDARD MIX.
38
SECTION C1: YIELD VARIANCES
YIELD VARIANCE CALCULATIONS
PURPOSE
THE MIX VARIANCE AND THE YIELD VARIANCE ARE THE COMPONENTS OF TOTAL EFFICIENCY (QUANTITY) VARIANCE. THESE
VARIANCES ARE APPLICABLE ONLY WHEN MORE THAN ONE INPUT IS BEING USED TO PRODUCE THE OUTPUT.
DIRECT MATERIALS YIELD VARIANCE IS THE DIFFERENCE OF THE TOTAL ACTUAL QUANTITY AND THE TOTAL STANDARD QUAN-
TITY OF THE DIRECT MATERIALS CONSUMED USING THE WEIGHTED AVERAGE STANDARD COST FOR STANDARD MIX (WASCSM).
DIRECT MATERIALS (OR LABOR) YIELD VARIANCE
FORMULA = (TOTAL ACTUAL QUANTITY - TOTAL STANDARD QUANTITY) × WASCSM
(TOTAL ACTUAL DIRECT LABOR HOURS - TOTAL STANDARD DIRECT LABOR HOURS) × WASCSM
WASCSM = WEIGHTED AVERAGE STANDARD COST FOR A STANDARD MIX
EXAMPLE
HANOI COFFEE, INC. SELLS AN EXPORT QUALITY WHOLESALE 3-IN-1 COFFEE YIELD AND HAD THE FOLLOWING DATA FOR LAST
MONTH:
DIRECT MATERIALS:
PER SACK PER KILO
ACTUAL YIELD STD YIELD ACTUAL COST STD COST
COFFEE BEANS 10.00 kg 11.00 kg $ 18.00 $ 21.00
CREAMER 3.50 4.00 5.50 6.00
SUGAR 1.50 2.50 2.50 3.00
DIRECT LABOR:
PER SACK PER HOUR
ACTUAL YIELD STD YIELD ACTUAL COST STD COST
ROASTING & GRINDING 3.00 hrs 2.90 hrs $ 10.25 $ 10.00
MIXING 1.75 2.00 8.75 8.00
PACKING 0.25 0.30 6.50 6.00
ACTUAL SACKS OF COFFEE PRODUCED: 10,000
39
DIRECT MATERIALS YIELD VARIANCE
STEP #1
COMPUTE FOR THE TOTAL ACTUAL QUANTITY OF DIRECT MATERIALS USED
ACTUAL TOTAL
TOTAL
MIX OUTPUT
COFFEE BEANS $ 10.00 × 10,000 = 100,000
CREAMER $ 3.50 × 10,000 = 35,000
SUGAR $ 1.50 × 10,000 = 15,000
30,000 = 150,000
STEP #2
COMPUTE FOR THE TOTAL STANDARD QUANTITY OF DIRECT MATERIALS THAT SHOULD HAVE BEEN USED
STANDARD TOTAL
TOTAL
MIX OUTPUT
COFFEE BEANS $ 11.00 × 10,000 = 110,000
CREAMER $ 4.00 × 10,000 = 40,000
SUGAR $ 2.50 × 10,000 = 25,000
30,000 = 175,000
STEP #3
COMPUTE WASCSM
STANDARD STANDARD
TOTAL
COST MIX
COFFEE BEANS $ 21.00 × 11.00 = 231.00
CREAMER $ 6.00 × 4.00 = 24.00
SUGAR $ 3.00 × 2.50 = 7.50
17.50 = 262.50 WASCSM = 15.00
STEP #4
SUBSTITUTE THE FORMULA: (TOTAL ACTUAL QUANTITY – TOTAL STANDARD QUANTITY) × WASCSM
DIRECT MATERIALS YIELD VARIANCE = (150,000 – 175,000) × $15.00 $ (375,000) FAV
THE DIRECT MATERIALS YIELD VARIANCE IS FAVORABLE BECAUSE THE TOTAL ACTUAL QUANTITY OF DIRECT MATERIALS USED
IS LESS THAN THE TOTAL STANDARD QUANTITY OF DIRECT MATERIALS THAT SHOULD HAVE BEEN USED.
THEREFORE, THE TOTAL DIRECT MATERIALS QUANTITY VARIANCE WOULD BE $270,000 FAVORABLE OR THE SUM OF DIRECT
MATERIALS MIX VARIANCE OF $105,000 UNFAVORABLE AND THE DIRECT MATERIALS YIELD VARIANCE OF $375,000 FAVORABLE.
40
DIRECT LABOR YIELD VARIANCE
STEP #1
COMPUTE FOR THE TOTAL ACTUAL NUMBER OF DIRECT LABOR HOURS
ACTUAL TOTAL
TOTAL
MIX OUTPUT
YIELDING $ 1.75 × 10,000 = 17,500
PACKING $ 0.25 × 10,000 = 2,500
30,000 = 50,000
STEP #2
COMPUTE FOR THE TOTAL STANDARD NUMBER OF DIRECT LABOR THAT SHOULD HAVE BEEN EMPLOYED
STANDARD TOTAL
TOTAL
MIX OUTPUT
YIELDING $ 2.00 × 10,000 = 20,000
PACKING $ 0.30 × 10,000 = 3,000
30,000 = 52,000
STEP #3
COMPUTE WASCSM:
STANDARD STANDARD
TOTAL
COST MIX
COFFEE BEANS $ 10.00 × 2.90 = 29.00
CREAMER $ 8.00 × 2.00 = 16.00
SUGAR $ 6.00 × 0.30 = 1.80
5.20 = 46.80 WASCSM = 9.00
STEP #4
SUBSTITUTE THE FORMULA: (TOTAL ACTUAL DLH - TOTAL STANDARD DLH) × WASCSM
DIRECT LABOR YIELD VARIANCE = (50,000 – 52,000) × $9.00 $ (18,000) FAV
THE DIRECT LABOR YIELD VARIANCE IS FAVORABLE BECAUSE THE TOTAL ACTUAL NUMBER OF DIRECT LABOR EMPLOYED IS
LESS THAN THE TOTAL STANDARD NUMBER OF DIRECT LABOR HOURS THAT SHOULD HAVE BEEN EMPLOYED.
THEREFORE, THE TOTAL DIRECT LABOR EFFICIENCY VARIANCE WOULD BE $13,000 FAVORABLE OR THE SUM OF DIRECT LABOR
MIX VARIANCE OF $5,000 UNFAVORABLE AND THE DIRECT LABOR YIELD VARIANCE OF $18,000 FAVORABLE.
41
SECTION C3: PERFORMANCE MEASURES
RETURN ON INVESTMENT
INCOME OF BUSINESS UNIT (PRODUCT)

RETURN ON INVESTMENT =
AVERAGE INVESTED CAPITAL
DUPONT METHOD TO CALCULATE RETURN ON INVESTMENT (ALTERNATE METHOD)
RETURN ON INVESTMENT = PROFIT MARGIN × INVESTMENT TURNOVER
NET INCOME SALES (REVENUE)

×
SALES (REVENUE) AVG INVESTED ASSETS
DEFINITION
RETURN ON INVESTMENT (ROI) IS THE FUNDAMENTAL PERFORMANCE MEASURE OF AN INVESTMENT CENTER. IT IS ALSO USED
IN EVALUATING CAPITAL INVESTMENTS.
PURPOSE
TO BE USEFUL, THE COMPANY’S ROI MUST BE COMPARED WITH THE REQUIRED RATE OF RETURN (HURDLE RATE). IF THE COM-
PANY’S ROI IS GREATER THAN THE REQUIRED RATE OF RETURN (HURDLE RATE), THEN THE INVESTMENT CENTER EXCEEDED
EXPECTATIONS OR THE CAPITAL INVESTMENT MUST BE ACCEPTED. IF THE COMPANY’S ROI IS LESS THAN THE REQUIRED RATE
OF RETURN (HURDLE RATE), THEN THE INVESTMENT CENTER IS LAGGING BEHIND EXPECTATIONS OR THE CAPITAL INVESTMENT
MUST BE REJECTED.
SECTION C3: PERFORMANCE MEASURES
RESIDUAL INCOME
 
INCOME OF ASSETS OF REQUIRED RATE
RESIDUAL INCOME = −  × 
BUSINESS UNIT BUSINESS UNIT OF RETURN
DEFINITION
RESIDUAL INCOME IS THE EXCESS OF INCOME OVER DESIRED RETURN. UNLIKE THE ROI, THE RESIDUAL INCOME IS A DOLLAR
AMOUNT RATHER THAN A PERCENTAGE.
PURPOSE
AGAIN, THE INCOME OF BUSINESS UNIT IS PRESUMED TO BE OPERATING INCOME UNLESS OTHERWISE STATED. THE ASSETS OF
BUSINESS UNIT REFER TO THE INVESTED CAPITAL EMPLOYED IN AN INVESTMENT CENTER OR A PROPOSED CAPITAL INVEST-
MENT. ALSO IN THE FORMULA, THE REQUIRED RATE OF RETURN REFERS TO THE RATE SET BY MANAGEMENT.
42
SECTION D1: MEASUREMENT CONCEPTS
VARIABLE COSTING INCOME STATEMENT (SAMPLE)
ABC COMPANY
VARIABLE COSTING INCOME STATEMENT
SALES XXX
LESS: VARIABLE MANUFACTURING COSTS
DIRECT LABOR XXX
MANUFACTURING OVERHEAD XXX XXX
MANUFACTURING CONTRIBUTION MARGIN XXX
LESS: VARIABLE SELLING AND ADMINISTRATIVE EXPENSES XXX
LESS: FIXED COSTS AND EXPENSES
FIXED MANUFACTURING OVERHEAD XXX
FIXED SELLING AND ADMINISTRATIVE EXPENSES XXX XXX
DEFINITION
VARIABLE COSTS AND EXPENSES INCLUDE VARIABLE MANUFACTURING OVERHEAD COSTS AND VARIABLE SELLING AND ADMIN-
ISTRATIVE EXPENSES. FIXED COSTS AND EXPENSES INCLUDE FIXED MANUFACTURING OVERHEAD COSTS AND FIXED SELLING
AND ADMINISTRATIVE EXPENSES. HOWEVER, ONLY VARIABLE MANUFACTURING COSTS (DIRECT MATERIALS, DIRECT LABOR
AND VARIABLE MANUFACTURING OVERHEAD COSTS) ARE CONSIDERED AS PRODUCT COSTS. AGAIN, FIXED MANUFACTURING
OVERHEAD COSTS ARE TREATED AS PERIOD COSTS AND ARE NOT REFLECTED IN THE BALANCE SHEET AS INVENTORY COSTS.
SECTION D1: MEASUREMENT CONCEPTS
ABSORPTION COSTING INCOME STATEMENT (SAMPLE)
ABC COMPANY
ABSORPTION COSTING INCOME STATEMENT
SALES XXX
LESS: VARIABLE MANUFACTURING COSTS
DIRECT LABOR XXX
VARIABLE MANUFACTURING OVERHEAD COSTS XXX
FIXED MANUFACTURING OVERHEAD COSTS XXX XXX
GROSS PROFIT (GROSS MARGIN) XXX
LESS: OPERATING EXPENSES
VARIABLE SELLING AND ADMINISTRATIVE EXPENSES XXX
FIXED SELLING AND ADMINISTRATIVE EXPENSES XXX XXX
DEFINITION
ABSORPTION COSTING, ON THE OTHER HAND, APPLIES FIXED MANUFACTURING OVERHEAD COSTS AS A PART OF THE COST OF
INVENTORY. ALSO, THE ABSORPTION COSTING IS A REQUIREMENT FOR EXTERNAL FINANCIAL REPORTING.
43
SECTION D3: OVERHEAD COSTS
PLANT-WIDE OVERHEAD RATE
TOTAL BUDGETED OVERHEAD COST

PLANT-WIDE OVERHEAD RATE =
SINGLE PLANT − WIDE COST DRIVER
DEFINITION
THE PLANT-WIDE METHOD USES THE TOTAL OVERHEAD COSTS TO DETERMINE TO OVERHEAD RATES. IT DERIVES THE OVER-
HEAD RATE BY DIVIDING THE TOTAL OVERHEAD COSTS IN A SINGLE COST DRIVER.
DEPARTMENTAL OVERHEAD RATE
BUDGETED DEPARTMENTAL OVERHEAD COST

DEPARTMENTAL OVERHEAD RATE =
DEPARTMENTAL COST DRIVER
DEFINITION
THE DEPARTMENTAL METHOD USES THE TOTAL OVERHEAD COSTS TO DETERMINE TO OVERHEAD RATES. IT DERIVES THE OVER-
HEAD RATE BY DIVIDING THE TOTAL OVERHEAD COSTS IN A SINGLE COST DRIVER.
INDIVIDUAL OVERHEAD RATE
OVERHEAD COST
INDIVIDUAL OVERHEAD RATE =
COST DRIVER
DEFINITION
THE INDIVIDUAL COST DRIVER METHOD FURTHER BREAKS DOWN THE TOTAL OVERHEAD INTO MULTIPLE COMPONENTS USING
MULTIPLE COST DRIVERS.
44
FIXED OVERHEAD APPLICATION RATE
BUDGETED FIXED OVERHEAD COST

FIXED OVERHEAD APPLICATION RATE =
BUDGETED LEVEL OF ACTIVITY (BLOA)
DEFINITION
FIXED OVERHEAD EXPENSE DOES NOT CHANGE WITH THE LEVEL OF ACTIVITY WITHIN THE RELEVANT RANGE. HOWEVER,
THERE MUST BE AN ALLOCATION BASE FOR FIXED OVERHEAD EXPENSES TO ALLOCATE COSTS. THE ALLOCATION BASE FOR
FIXED OVERHEAD EXPENSE MAYBE DIRECT LABOR HOURS, MACHINE HOURS OR OTHER COST DRIVERS DEEMED AS DEEMED
APPROPRIATE.
PURPOSE
THE BUDGETED FIXED OVERHEAD FOR THE AMOUNT EXPECTED TO BE INCURRED FOR THE BUDGETED LEVEL OF ACTIVITY. THE
BUDGETED LEVEL OF ACTIVITY IS THE LEVEL OF ACTIVITY THAT IS EXPECTED FOR THE NEXT PERIOD. THE STANDARD FIXED
OVERHEAD RATE IS ALSO KNOWN AS THE FIXED OVERHEAD APPLICATION RATE.
SECTION D4: SUPPLY CHAIN MANAGEMENT
THROUGHPUT CONTRIBUTION
THROUGHPUT CONTRIBUTION = SALES − DIRECT MATERIALS
DEFINITION
THROUGHPUT CONTRIBUTION IS THE CONTRIBUTION MARGIN USING THROUGHPUT COSTING. SINCE DIRECT MATERIALS COST
IS THE ONLY COSTS CONSIDERED AS VARIABLE COST IN THROUGHPUT COSTING.
SECTION E1: GOVERNANCE, RISK, AND COMPLIANCE
CALCULATING EXPECTED LOSS
EXPECTED LOSS FORMULA = P (E ) × P (F ) × EXPECTED LOSS
where: P (E ) = PROBABILITY OF THE EVENT OCCURRING

P (F ) = PROBABILITY OF A CONTROL FAILURE
DEFINITION
INTERNAL CONTROL RISK WITHIN AN ORGANIZATION IS THE RISK THAT EITHER THE FAILURE OR THE LACK OF A CONTROL WILL
LEAD TO A FINANCIAL LOSS. INTERNAL CONTROL RISK CAN BE QUANTIFIED BY CALCULATING THE EXPECTED LOSS.
45
THE END

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12

THE STATEMENT OF FINANCIAL POSITION

THE ACCOUNTING EQUATION ASSETS = LIABILITIES + EQUITY

SAMPLE BALANCE SHEET

STATEMENT OF OPERATIONS NET INCOME = REVENUE – EXPENSES

SAMPLE INCOME STATEMENT

SALES REVENUE $###,###

STATEMENT OF CASH FLOWS

SAMPLE STATEMENT OF CASH FLOWS

CASH FLOWS FROM OPERATING ACTIVITIES

WORKING CAPITAL CHANGES:

CASH FLOWS FROM INVESTING ACTIVITIES

CASH FLOWS FROM FINANCING ACTIVITIES

NET INCREASE IN CASH AND CASH EQUIVALENTS 13,600

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,600

CASH AND CASH EQUIVALENTS AT END OF PERIOD $15,200

SECTION A1: FINANCIAL STATEMENTS

STATEMENT OF COMPREHENSIVE INCOME

SAMPLE STATEMENT OF COMPREHENSIVE INCOME

STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

SAMPLE STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY

Preferred Common Additional Retained Earnings

Issuance of stock ##,### ##,### ##,### ##,### ##,###

VALUATION OF ACCOUNTS RECEIVABLE

VALUATION OF ACCOUNTS XXX GROSS ACCOUNTS RECEIVABLE (ENDING BALANCE)

ACCOUNTS RECEIVABLE IS REPORTED ON THE BALANCE SHEET AT NET REALIZABLE VALUE.

SECTION A2: RECOGNITION, MEASUREMENT, VALUATION, AND DISCLOSURE

CALCULATION OF ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS

COST OF GOODS SOLD FORMULA

XXX BEGINNING INVENTORY

SECTION A2: RECOGNITION, MEASUREMENT, VALUATION, AND DISCLOSURE

TIME VALUE OF MONEY FORMULA

WEIGHTED AVERAGE COST OF CAPITAL (WACC)

[(DEBT % OF CAPITAL) × (DEBT YIELD) × (1 – TAX RATE)] +

SECTION A2: RECOGNITION, MEASUREMENT, VALUATION, AND DISCLOSURE

ANNUAL DIVIDEND (D)

THE RATIO OF DIVIDENDS PER SHARE TO MARKET PRICE PER SHARE.

CAPITAL ASSET PRICING MODEL (CAPM)

where: R = EXPECTED RETURN

SECTION A2: RECOGNITION, MEASUREMENT, VALUATION, AND DISCLOSURE

DIVIDEND YIELD METHOD

CONSTANT GROWTH DIVIDEND D1

DEPRECIATION – STRAIGHT LINE METHOD

STRAIGHT LINE ORIGINAL COST − SALVAGE VALUE DEPRECIABLE COST

SECTION A2: RECOGNITION, MEASUREMENT, VALUATION, AND DISCLOSURE

DEPRECIATION – DOUBLE DECLINING BALANCE METHOD

DOUBLE DECLINING BALANCE 2 CARRYING AMOUNT (BOOK VALUE) AT

SECTION A2: RECOGNITION, MEASUREMENT, VALUATION, AND DISCLOSURE

DEPRECIATION – SUM-OF-THE-YEARS’-DIGITS METHOD

DEPRECIATION – UNITS OF PRODUCTION METHOD

SECTION B3: FORECASTING TECHNIQUES

SIMPLE REGRESSION FORMULA

where: y = DEPENDENT VARIABLE (TOTAL COST)

THE SALES BUDGET (SAMPLE)

PRODUCT: UNIT SALES VOLUME UNIT SALES × PRICE TOTAL SALES

THE PRODUCTION BUDGET (SAMPLE)

DESIRED ENDING INVENTORY XXX

THE DIRECT MATERIALS BUDGET (SAMPLE)

SECTION B5: ANNUAL PROFIT PLAN AND SUPPORTING SCHEDULES

DIRECT MATERIALS USAGE (SAMPLE)

THE DIRECT LABOR BUDGET (SAMPLE)

SECTION B5: ANNUAL PROFIT PLAN AND SUPPORTING SCHEDULES

MANUFACTURING OVERHEAD BUDGET (SAMPLE)