Formulae - MAC4861

Costing section
1. Total Cost (Prime cost)
= (Varaible cost x Units produced) + Fixed Costs

2. Variable cost per unit (High-Low Method)

= Cost at highest level of activity - Cost at loweest level of activity
Units produced at highest level of activity - Units produced at lowest level of activity
Steps to high - low method
a. Determine highest and lowest activity level
b. Calculate variable cost per unit by nr 2

3. Straight line equition

y = a + bx
1 is independent
relationship in linear

4. Least squared method

Solve a:
a= ∑y -b∑x
n n

Solve b:
b= n ∑ xy - ∑ x ∑ y
n ∑ x ² - (∑ x)²

5. Correlation Coefficient

r= n ∑ xy - ∑ x ∑ y
√(n ∑ x ² - ( ∑ x )²)(n ∑ y ² - ( ∑ y ²))

Note: The higher "r" = stronger relationship between independent and dependent
vairiables

6. Overhead rate
= cost centre overheads
cost centre direct labour hours or machine hours

Note: Overhead rate could be in machine hour rate or direct labour hour rate

7. Non manufactucturing overhead absorption rate

= estimated non manufacturing overhead
estimated manufacturing cost

8. Budgeted overhead rate

= Budgeted fixed cost per period
Budgeted average units produced

9. Expenditure variance
= Actual overhead expenses - budgeted overhead expense

10. Valume Variance calculation

Step 1: Calculate bugeted rate
Step 2: Rate calculated x actual production volume

11. Fixed amount overheads absorbed

= Units produced x Budgeted overhead rate

Page 1 of 25
 Formulae - MAC4861
Costing section
12. Adjusting absorption costing profit to vairable costing profit
Absorption costing profit xxxxx
Fixed overheads deffered to inventory (xxx)
( o/b Inventory - c/b inventory) x Budgeted fixed
overhead rate

Vairable costing profit xxxxx

13. Deferred volume variance (IAS 2)

= o/b inventory x [ Budgeted fixed overhead rate - (total fixed costs / annual units produced)]
Dr Income
Cr Inventory

14. Steps to doing an ABC Question

• STEP 1: ABC calculation questions often ask a student to compare an ABC system with an existing method of costing products.
You should thus separate the information for the existing method of costing and the ABC method.

• STEP 2: Existing method – the company could, for example, be using a traditional absorption costing method or direct/variable
costing. You has to ascertain what the existing method of costing is as this will be the first calculation. Every question is different
because every company is different.

• STEP 3: ABC – Identify the activities and their relevant cost drivers and decide which cost driver matches with a specific
overhead cost. Calculate the cost per activity using the cost drivers and then allocate costs to products/cost objects based on
their usage of the activity.

• Always remember that the difference between all the costing methods i.e. variable costing, absorption costing and ABC
costing lies in the treatment of the fixed overheads.
OVERHEADS ONLY

Existing method ABC method

# Variable costing? # Activities
# Absorption costing? # Cost drivers?
# Consume support activities equally # Large variation in consumption of support
activities
# Support activity costs are small when compared to # Support activity costs are a substantial part of
total overhead costs total overhead costs

15. Recon between absorption profit and variable profit

= Increase/decrease in closing stock x Fixed cost per unit

16. Allocation rate

= Bugeted overgead / appropriate allocation basis

17. Driver volume calculation (ABC Method)

= Annaul sales ÷/x by activity

18. Driver rate calculation (ABC Method)

= Total cost ÷ Total driver volume

19. Cost per unit with normal lossess in process (no scrap value)
= Cost incurred for the period
Expected output from actual input

20. Cost per unit with abnormal lossess in process (a scrap value attached)
= Input cost less scrap value of normal loss
Expected output from actual input

Page 2 of 25
 Formulae - MAC4861
Costing section
21. Break even sales value
= Fixed costs
Contribution ratio

22. Contribution ratio

= Budgeted Revenue (90% of capacity)
Total Budgeted Revenue (@ 100%)

23. Unit variable costs

= Change in total cost
Change in volume

24. Break even point units (CVP)

= Fixed costs
Contribution per unit

25. Units to be sold to obtain x profit (CVP)

= Fixed costs + Target profit
Contribution per unit

26. Contribution margin (CVP)

= Sales revenue - variable costs

27. Profit volume ratio / Contribution margin ratio

= Contribution margin
Sales price

28. Margin of safety

= Expected sales - Break even sales
Expected sales

29. Degree of operating leverage

= Contribution margin
Profit

30. Break even sales in Rands (CVP)

= Fixed Costs
Contribution margin ratio

31. Weighted average contribution mix

= (% of total production x contribution) + (% Production x Contribution
Total production
(See activity 2, self assessment, Tut 102 pg 106)

32. Weighted average contribution per unit

= Contribution margin
Profit

Page 3 of 25
 Formulae - MAC4861
Costing section
33. Learning Curve
Y=aXᵇ or cummulative average time per unit
y = average time per unit previous cummulative average time per unit
a = time required to produce 1 unit
x = number of units
b = exponent (times made)
b= log(learning curve)
log ²

34. Material Variances

AP x AQ
Changing
1 part Price Variance
only!!

SP x AQ (actual mix)

Mix Variance
Changing 1 part
only!!
SP x AQ (in std mix) Usage Variance

Yeild Variance

SP x SQ

Usage Variances:
- Based on used in production

Price Variance:
- Stock @ standard cost = Material purchased
- Stock FIFO/Weighted average = Material used in production

35. Labour Variances (When labour is variable)

AR x AH (clock hours)
Changing
1 part Rate Variance
only!!

SR x AH (clock hours)
Idle Time
Changing 1 part
only!!
SR x AH (work hours) Effeciency Variance

SR x SH (clock hours)

Work Hours
1. Take std clock hours x productivity
2. Std cost/ Productivity = Std rate per hour

Page 4 of 25
 Formulae - MAC4861
Costing section
36. Vairiable overheads variances

AR x AH
Changing 1
Expernditure variance
part only!!

SR x AH

Effeciency Variance

SR x SH

37. Fixed cost variance (inlcuding if labour is a fixed costs)

Actual fixed costs

Expernditure variance
Budget costs
Capacity Variance

SR x AH Volume Variance

Efficiency Variance
Absorbed

38. Sales Variances

AP x AQ
Changing
1 part Price Variance
only!!

SP x AQ (actual mix)

Mix Variance
Changing 1 part
only!!
SP x AQ (in std mix) Volume Variance

Quantity Variance

SP x SQ

39. Some rules for variances in standard costing

Sales Variances Cost Vairances

+ Favourable + Unfavourable
- Unfavourable - Favourable

Page 5 of 25
 Formulae - MAC4861
Costing section
40. Fixed overhead rate (Standard costing)
= Budgeted fixed overheads
Budgeted standard hours

41. Residual income

= Controlable profit - Capital charge
OR
(operating profit - required return on investment)

(Controlable investment x cost of capital %)

42. EVA (Economic value added) - Tut 103 pg 38

= Adjusted divisional profit - (Adjusted capital emploed x divisional WACC)

IF EVA > 0 : Economic value is created/added

If EVA < 0 : Economic value is destoyed

43. Transfer price

= Sales price - relevant variable cost

Note: Adjust for opportunity cost

Page 6 of 25
 Formulae - MAC4861

SWOT Analysis
44. Operating Margin or Gross profit %
= Operating profit S: Strenghts
Internal
Sales W: Weaknesses
O: Oppertunities
External
45. Return on investment T: Threats
= Operating profit
Total assets - liabilities

Page 7 of 25
 Formulae - MAC4861
Finance section
Cost of capital
46. W.A.C.C (Weighted average cost of capital)
[Kₑ x (debt : equity ratio)] + [kᵈ x (debt : equity ratio)]

Kₑ : Required rate of return to ordinary share holders

kᵈ : Cost of debt after tax

47. Gordan's growth model

= D or D +g
Kₑ - g PV

D : Dividend in 1 yrs D : Dividend in 1 yrs + growth %

Kₑ : Required rate of shareholders PV : Share price
g : Growth to infinity g : Growth %

48. Future value

FV = PV(1 + i)ⁿ

49. Present Value

PV = FV
(1 + i)ⁿ

50. Present Value of perpetuity

PV = I
i

I : Income
i : Interest

51. Present Value of shares (infinite time)

P₀ = D₀
Kₑ

52. Present Value of shares (finite time)

P₀ = D₁
Kₑ - g

Page 8 of 25
 Formulae - MAC4861
Finance section
Cost of capital
53. Irredeemable debt present value

= i(after tax) or I (1 + t)
YTM (after tax) kᵈ (1 - t)
Thus kᵈ = I (1 - t)
YTM : market rate of interest PV

54. Gearing

= LT Debt
(LT Debt + Equity)

55. Debt (Solvency)

= Total debt
Total assets

56. Debt to Equity

= Non current liabilities : Equity

57. Expected value: Single asset (ex- ante)

ER = ∑n - P₁ x R₁

P : Probabilty factor
R : Observed returns
n : Number of observation

58. Expected value: Portfolio (ex- ante)

ERᵨ = W₁E(R₁) +W₂E(R₂)

W₁ : Weight of portfolio 1 to total portfolio

E(R₁) ∑n - P₁ x R₁
W₂ : Weight of portfolio 2 to total portfolio
E(R₂) ∑n - P₂ x R₂

59. Ex - post analysis (1 share project)

(Key this in on calculator)
Option 1 Option 2 Result
MODE 10 STAT 0
2ndF M-CLR 0 0 Clear all
Y1 return ENT 1
Y2 return ENT 2
Y3 return ENT 3
Y4 return ENT 4
Y5 return ENT 5
ALPHA ₓ‾ Average/mean
ALPHA sx standard deviation
2ndF x² variance

Page 9 of 25
 Formulae - MAC4861
Finance section
Cost of capital
60. Coffiecient of variation

= σ
EM

σ : Standard deviation
EM : Expected mean (E( R ))

61. Variance

σ ²

62. Standard deviation

Square roote of Variance (σ ²)

63. Covariance and correlation

Option 1 Option 2 Result Beta Calc

MODE 11 STAT 1 COVARxm
2ndF M-CLR 0 0 Clear all σm
Returns for portfolio 1 (x;y) 1 ENT 1
3 (x;y) 4 ENT 2 r * σy * σx
5 (x;y) 6 ENT 3 σy² (RCL 9)
7 (x;y) 8 ENT 4
9 (x;y) 10 ENT 5
RCL σₓ Standard deviation A
RCL σy Standard deviation B
RCL r Correlation coffiecient

64. Weighted avarage risk

WAσp = W% x σx + W% σy

W% = weighted in portfolio
σx = standard deviation on x

65. Capital pricing model

Security market line
E( Ri ) = Rf + ᵦi[E(Rm) - Rf]

E( Ri ) : Required rate of return on I (Ke)

Rf : Risk free rate of return
ᵦi : Systematic risk of security
E(Rm) : Return on market portfolio
E(Rm) - Rf : Rick premium

Page 10 of 25
 Formulae - MAC4861
Finance section
Cost of capital
66. Equity vs Asset Beta
- ungear to the proxy beta
ᵦ ung= E
ᵦ gear x
E + D(1-t)

- re-gear to the proxy beta

ᵦ gear= E + D(1-t)
ᵦ ung x
E

67. Cummulative non-redeemable preference share valuation

P0 = D1 or PV = D
r-g Kp
Note: : Adjust for appropriate year D : Dividend
: Ensure Px preceeds dividends year by 1 year PV : Trade price

68. Redeembale preference shares or debt

PMT: Dividend / Interest
FV: Capital
PV: Market Value
n: Nr of years
Comp i= Kp

69. Fair rate of return

Pre tax yeild to maturity (R of R) x (1 - 28%)

70. NPV Index

DCF
I0

DCF : Discounted cash flows

I : Initial investment

71. Average accounting return

ARR Average net profit after tax
Average Investments

72. EAI (Equivalent Annual Income)

NPV
PV (factor)

Note: : NPV = NPV to infinity = NPV

PV(factor) x r

73. NPV

Cashflow x 1/(1 + target WACC)

74. PV (factor)

1/(1+WACC)

Page 11 of 25
 Formulae - MAC4861
Finance section
Cost of capital
75. Profitability Index
= PV of future cash flows (NPV)
Initial Investments

76. IRR (Internal rate of return)

Project A:
-100 000 CFj IRR > Wacc = + NPV Accept project
65 000 CFj IRR < WACC = -NPV Reject
45 000 CFj
25 000 CFj IRR and NPV index(91) = used to calc cheapest form of finance
2ndF CASH COMP = 19.9%

77. Modified IRR (Internal rate of return)

Step 1: Calc FV (using WACC) of sum of cash inflows for each year to end of project
Step 2: Comp NPV and IRR in normal way
Step 3: Revised cashflow will now show outlay in year 0 and sum of total cash inflows as
lumpsum in final year with 0 cash flows in between
(Skae, Chap 6, pg 180 for example)

78. Money rate if return

[(I+R)(I+i)] - 1

R : Real rate of return

i : Inflation

79. Inflation rate

(1 + n) = (1 + r)(1 + i)

R : Real rate of return

i : Expected rates of Inflation
n : Nominal rate of return (inlc inflation)

80. Theoretical ex-right price

1 x ((N x cum rights price) + issue price)

N+1

Page 12 of 25
 Formulae - MAC4861
Finance section
Working capital management
81. Working capital

Current Assets - Short term debt

82. Working capital cycle

Debtors days + inventory days - creditors days

83. Annual cost of missed discount

Cash discount % x 360 days x 100

100 - Cash discount % nr of days payment is made after discount period 1

84. EOQ (Economic order quantity)

OD + HE
E 2

Solve E = Square root 2 OD

H
OD : Order cost x demand (Annual demand x order cost per order)
H : Holding costs per unit per annum

Notes:
Holdings costs = holding cost per unit per annum x average unit on hand
Average unit on hand = (order quantity/2) +safety stock
Orderring Costs = cost per order x (Annual demand / order quantity)
Re - order point = (average lead time x average daily usage) + safety stock
Total cost of inventory = acquisition cost + ordering cost + holding cost

85. Safety Stock

Average lead time x Average daily usage + Safety inventory

86. Avaluating the change in credit policy

1. Net change in contribution (sales - variable cost) or gross profit (sales - gross profit)
2. Change in discount given
3. Change in collection costs
4. Change in bad debts
5. Change in the finance costs:
Increase Working capital = Increase finance costs
Decrease Working capital = Decrease finance costs

Page 13 of 25
 Formulae - MAC4861
Finance section
The tresuary function
87. Forward rates

1. Direct Quote premium or discount % (Rate of exchange)

Forward - Spot x 360 x 100
Spot n

2. Interest rate parity theory (IRP)

Forward Rate = Spot rate x 1 + Interest in country 1
1 + Interest in country 2

3. Inflation power parity theory (PPP)

Forward Rate = Spot rate x 1 + Inflation in country 1
1 + Inflation in country 2

4. International fisher effect

IRP = PPP
88. Credit Risk (Internal hedging techniques)
1. Invoicing in local currency
2. Matching payments and receipts from different transactions
3. Speeding up or slowing down payments or receipts (Leads or Lags)
4. Netting of transactions = Only net needs to be hedged
5. Diversification

89. Credit Risk (External hedging techniques)

1. Money market hedge
2. Use derivatives:
a. Forward exchange contracts (FEC)
b. Foreign exchange future contracts
c. Foreign exchange option contracts
d. Currency swap

90. Interest Rate Risk (Internal hedging techniques)

1. Matching - term and duration on rate and investment rate
2. Smoothing - maintaining mix of floating and fixed rates
3. Pooling - using cash surpluses to offset cash shortages

91. Interest Rate Risk (External hedging techniques)

Use derivatives:
a. Forward rate agreement (FRA)
b. Interest rate future contracts
c. Interest rate option contracts
d. Interest rate swap agreement

Page 14 of 25
 Formulae - MAC4861
Finance section
Ratio analyses

Page 15 of 25
 Formulae - MAC4861
Finance section
Ratio analyses

Page 16 of 25
 Formulae - MAC4861
Finance section
Ratio analyses

Page 17 of 25
 Formulae - MAC4861
Finance section

Ratio analyses

Page 18 of 25
 Formulae - MAC4861
Business valuations

92. Market capitilisattion

= Quoted market price per share x Number of shares in issue

93. Valuation methods

94. Price earnings ratio

= 1 or Market price per share
Earnings yeild Earnings (or Diluted headline earnigs) per share

95.
= 1 or Market price per share
Earnings yeild Earnings per share

Page 19 of 25
 Formulae - MAC4861
Business valuations
96. Types of multiples
1. Price/earnings (P/E) multiple
Value = Maintainable earnings x adjusted P/E multiple
2. Enterprise value/EBITDA multiple
Value = Maintainable EBITDA x adjusted EV/EBITDA multiple
3. Enterprise value/EBIT multiple
Value = Maintainable EBIT x adjusted EV/EBIT multiple

97. Earnings Multiples – Price/earnings multiple

Value = Maintainable earnings x adjusted P/E multiple

Maintainable earnings:
Profit after tax and after preference dividends adjusted as follows:
-Eliminate any Income/expenses that are not likely to happen again in the future.
-Include Income/expenses which are likely to happen in the future.
-Adjust Income/expenses that are not Market related/reasonable (directors salaries, rentals, etc.)
-Eliminate any Income from non Operating assets which will be valued separately (dividends, interest, rentals, etc.)

(Where there is a trend, use the most recent earings)

(Where there is no trend use the wighted average earnings)

98. Valuation using P/E Multiple

99. Free cash flow adjustment to earnings

Estimate the future free cash flows (FCF) the following adjustments to profit before tax:
-Eliminate depreciation and other non cash items.
-Eliminate any Income from non Operating assets which will be valued separately.
-Eliminate long term interest (long term borrowings are valued separately).
-Deduct tax paid (i.e. not tax expense for the year but the actual amount of tax paid – same as you would on a cash flow
statement). The tax effect of interest must be eliminated.
-Account for movements in working capital (non cash current assets and non debt current liabilities).
-Deduct any investment in fixed assets.

Page 20 of 25
 Formulae - MAC4861
Business valuations
100. PV of Future Cash Flows

PV : FCF/ WACC - g

101.

102. Net Asset valuation

Value of assets - Value of Debt

Note:
Market vlaue to be used if trading as going concern
Liquidation value to be used when not a going concern

103. Dividend yeild

= Dividend per share

Market price per share

104. Earning yeild

= Earnings per share

Market price per share

105. Instrinc Method

Value of assets - valaue of liabilities - issued preference share capital

Should be used when:

1. Stricly when value of majority share is calculated
2. Property/investment company
3. New concern with no profit or financial hostory
3. Concerns with no income producing assets and this value is higher that NPV

Page 21 of 25
 Formulae - MAC4861
Mergers and acquisitions
106. The synergy effect

Page 22 of 25
 Formulae - MAC4861
Business valuations
107. Majority Valuations - 2 Methods

Free cash flow valuations Market Multiple Valuations

Free cash flow to firm Free cash flow to equity Price earnings Market to book ratio
valuations
Value firm: Value of equity:
FCF1 + FCF2 FCFE1 + FCFE2 Price per share Price per share
(1 + WACC) (1 + WACC) ² …….. (1 + k) (1 + k) ²…….. Earnings per share Equity value per share

Discount rate: Discount rate: Listed co. = Share equity

= Target WACC = ke PE Ratio x No. Shares
Cash flow = Net operating profit after Cash flows = exclude interest exp Maintainable
tax (net of tax) earnings
+ - Change in working + change in long term debt
capital
- Capital expenditure Non listed co. = Listed co. =
+ Depreciation Steps to follow: Market to book ratio x
Adjust for non
+ Provisions 1. Obtain PE ratio SH equity per share to
cash items
- non cash items of a highly derive value

Market value = Derived from discounting 2. Adjust PE of Adjustments to equity:

cash flows - Market value of debt that co for
circumstances 1. Research and
unique to your co. devlopment
i.e. Bad
2. Intangibles
circumstances
Both can growth @ constant rate in prepetuity
decrease ratio
3. Work force
and vice versa e.g.
new assets and 4. Advertising/
failing sales customer base &

3. Determine Unlisted and Pvt co. =

maintainable Start with market to
future earnings of book ratio of
your company comparable co and
i.e. Take current
adjust for factors as
ear and adjust for:
you would in PE
- Unusual ietms
valuation (Specifically
after tax
- Growth take into account
- Other factors ajdustments above)
relevant

4. Calculate the
value

5. Reasonabless
test using net

6. Conclude

Page 23 of 25
 Formulae - MAC4861
Business valuations
108. Minority Valuations

Variable growth
Zero dividend growth

Distant Dividens
Contant dividend growth (Gordan)
• Value = • PV = D1/ • Sustainable • (See text
Dividend / (Ke - g) growth book)
Ke • Ke = CAPM occurs after
or Ke = a few
(D1/P) + g unstable
•g = b x r years
(b = after
tax ROA) (r
=
rentention
ratio) = 1 -
payout
ratio)

Page 24 of 25
 Systems used for recording and controlling product

*(Fixed production overheads are included in cost of sales. CVP Analysis

Over/under recovery between actual and budget in I/S) (see ratios 21 -

Variable costing system

Absorption costing system
(Based on normall capacity)

- Fixed costs and variable costs

- Calculate budget recovery rate Inventory is valued at FIFO or
- Calculate absorbed Weighted average
- Calculate variances

Expenditure Under/over recovery Weighted Avarage FIFO

1. Inventory closing: 1. Variance plus absorbed Actual closing balance
= Variable costs + needs to = Actual given of inventory (units) x
recovery rate per unit x Opening balance ( R) + total variable cost per
closing balance variable costs x Closing balance (units) unit
2. Absorbed included in Cost Closing balance (Units) +
of Sales Production

Indirect manufacturing overhead

allcation

Traditional ABC
(Cost drivers are 1. Assigns indirect costs to *(Fixed production overheads a period cost
appropriate in cost objectives included in net profit but not in cost of sales)
volume based) Identify organisation's major activities
(Allocted on AR = Bugeted overhead /
arbitrary basis) appropraite allocation bases
2. Assign to production
Absorbed overhead = AR x
actual units produced Assign costs to cost pools/ cost
centres for each activity
3. Under/ Over recovery of
overheads

•Provide good explanation of costs of each pool

Determine the cost driver for each•Be easily measureable
major activity (Drivers = Activity •The data should be easy to obtain and identifiable
drivers)
•Activity cost drivers consist of transaction and
duration drivers
(Acutal production < Budgeted allocation =
Under recovered)
(Acutal production > Budgeted allocation = Determne cost driver rate = Acitvity
cost/driver volume
Over recovered)
If production > sales : absorption profit > variable profit

Assign cost of activities to

If production < sales : absorption profit < variable profit products. CHarge costs based on
the basis of their usage (Usage is
measured by number of
acitivity's cost it generates)
If production = sales : absorption profit = variable profit

Absorption costing Variable/Direct Costing

I/S I/S
Reveue
Revenue Direct Costs (Variable)
Cost of sales Other variables
Opening stock
Material Contribution
Labour Fixed costs (Period costs)
Closing stock
Gross profit Nett profit
Variances

Mauafacturing profit
Fixed costs

Nett profit