RELEVANT INFORMATION FOR DECISION MAKING

COST ALLOCATION

Reciprocal Method

S1 = S1’s Budgeted OH Cost + %S2

S2 = S2’s Budgeted OH Cost + %S1

S1 = S1’s Budgeted OH Cost + % (S2’s Budgeted OH Cost + %S1)

RESPONSIBILITY ACCOUNTING

Preparation of Segmented Income Statement

Service revenue xx
Variable cost (xx)
Segment Contribution Margin xx
Controllable fixed cost (by managers) (xx)
Controllable profit margin (by managers) xx
Non-controllable fixed costs (fixed cost controllable by others) –
fixed cost that is traceable but non-controllable (xx)
Segment Profit Margin xx
Less: Allocated Common expenses (traceable costs not
controllable by managers and others) (xx)
Income before taxes xx
Less Income Tax Expense (xx)
Net income xx

ROI = Net income

Average invested Capital

*Invested Capital = Asset - Liabilities

*Silent: The given data of invested capital is average
DuPont of ROI = Profit Margin x Asset Turnover

Residual Income = Capital Invested x (Target Return or ROI – Imputed interest

rate)

or OPERATING income or EBIT - (Average Operating assets x Cost of Capital)

EVA = NOPAT - (Invested Capital x Cost of Capital or WACC**)

**Cost of capital or WACC is equity charges

PERFORMANCE MEASURE

Throughput per hour = Manufacturing Cycle Efficiency (MCE) x Process

Productivity x Quality Yield

*Throughput - the amount of units passing through a system or process

*The higher the throughput the better

MCE = Value-added processing time

Total Processing Time

Process Productivity

= TOTAL units produced during the period

Value-added processing time

Process quality yield = Percentage of products that pass through the compliance
check

MASTER BUDGET
A. Operating Budget

1. Sales Budget:

Unit sales x Selling price per unit = Peso Sales

2. Production Budget:

Unit of sales + Units desired in EI – Units in BI = Units to be produced

3. Purchases Budget:

Units to be produced + Units desired in EI – Units in BI = Units to be purchased

4. Direct labor budget:

Units of production
x Standard time allowed per unit
Standard labor time allowed
x Per hour direct labor cost
Total direct labor cost

5. Overhead budget:

Predicted activity base

x Variable overhead rate per unit of activity
Total variable OH cost
+ Fixed OH cost
Total OH cost

6. Selling and administrative budget

Predicted sales pesos

x Variable S&A rate per pesos
Total variable S&A cost
+ Fixed S&A cost
Total S&A cost

B. Financial Budget

1. Cash Budget

Beginning cash balance

+ Cash receipts (collections)
Cash available for disbursements (excluding noncash expenses)
- Cash needed for disbursements
Cash excess or deficiency
- Minimum desired cash balance
Cash needed or available for investment or financing
+ or - various financing measures
Ending cash balance

2. Budgeted Financial Statements

CAPITAL BUDGETING

FACTORS

Net Investment (Cash Outflow) comprises:

1. Old asset
○ Proceeds from Sale (-) inflow
○ Trade in value (-) reduces outflow
○ Tax on gain on sale (+) outflow
○ Tax loss on sale/ Tax Savings (-) reduced outflow
○ Avoidable repairs, net of tax (-) reduced outflow
 ○ Removal cost, net of tax (+) outflow
2. New Asset
○ Acquisition costs (+) outflow
○ Other direct attributable costs (+) outflow
3. Changes in Working Capital
○ Increase in WC (+) Consumes cash (Increase in Accounts Receivable)
○ Decrease in WC (-) Provides cash (Increase in Accounts Payable)

Acquisition: 2 and 3 only

Replacement: 1 to 3

After-Tax Cash Flows

Alternative 1:

Cost Savings/ Cash Operating Income xx

Incremental Depreciation (xx)

Cash inflow before tax xx

Tax (xx)

Incremental net Income xx

Incremental Depreciation xx

After-tax cash flow xx

Alternative 2:

After-tax cash flow = Cost Savings or Cash Operating Income + Tax Savings
TECHNIQUES

a. Payback Period (recouping the investment)

= Investment
After-Tax Cash Flows

or Investment
Cash savings

(whichever is applicable)

i. Depreciation given along with Tax rates -> Consider the tax depreciation benefit

ii. Depreciation only the given -> Sunk cost

b. Payback bailout:
- Consider the salvage value (i.e., add the salvage value).

For first year:

Salvage value (at yr. end) xx

CFAT (at the end of the yr.) xx

Total xx

For second year onwards:

Salvage value (at yr. end) xx

CFAT (at the end of the yr.) xx

CFAT (previous years) xx

Total xx

Unknown period
= Cost of the investment - Cash inflow prior year - Salvage value (current yr.)

Cash inflow (current year)

c. Payback reciprocal = 1/Payback period

Accounting Rate of Return

Accounting rate of return

= Accounting Profit
Initial or (Average) Investment

= Accounting Profit
Investment plus Residual Value divided by 2

If silent: Average Investment (Rationale: Accounting profit is derived from average

amounts during the period)

Net Present Value (excess of cash inflows over outflows)

Present value of cash inflow = Cash inflow x PV of annuity @ discount rate or cost
of capital

NPV = Cash Inflow minus the PV of Cash Outflow (Accept if: NPV is 0 or more)
NPV:

PV of Cash inflows:

CFAT @PV of 1 if uneven or @PV of annuity if even

Salvage value @ PV of 1 or @ time zero if SV = 0 at last year

Working Capital @PV of 1

PV of Cash outflows:

Net investment (@ time zero)

Profitability Index

Profitability Index

= PV of Cash inflow
PV of Cash Outflow

= Net Present value +1

Investment

Internal Rate of Return

NPV (0) = Cash outflow + Cash inflow x PV of annuity @IRR

IRR is missing:

*IRR is a discount rate that makes NPV equals to zero

0 = Cash outflow + Cash inflow
(1 + IRR)*

*Cash outflow = Cash inflow x PV of Annuity @ IRR**

**Present value @Annuity = Cost of Investment

Annual savings

(Then: IRR = Trial and Error approach)

Comparison:

IRR > Cost of Capital -> accept

Equivalent annuity cash flow

Equivalent annuity cash flow = (Interest rate x NPV)

[1 - (1 + r)n ]

Relevant references:

Capital Budgeting (KGA Tutorials):

https://www.youtube.com/channel/UCkIldeHd9h2LpqMOqsaeHzQ

Payback period (Uneven) and Payback Reciprocal:

https://www.youtube.com/watch?v=yZG2ddMK2Ko

Equivalent Annual Annuity (EAA):

https://www.investopedia.com/terms/e/equivalent-annual-annuity-approach.asp