BIP Formulae

Total cost

Fixed cost + (Variable cost per unit × number of units)

Prime cost

Direct materials + direct labour + direct expenses

OAR

Budgeted overhead / budgeted activity

OAR per unit

OAR per hour × number of hours per unit

Overhead absorbed

Actual activity (hours or units) × OAR

Under/over absorption

Actual overhead – overhead absorbed

Difference in marginal costing and absorption costing profit

Change in inventory units × OAR per unit

Stocks Increase → Absorption profit more

Price elasticity of demand

% change in quantity demanded / % change in price

Income elasticity of demand

% change in quantity demanded / % change in household incomes

Cross elasticity of demand

% change in quantity of good A demanded / % change in the price of good B

Price elasticity of supply (PES)

% change in quantity supplied / % change in price

Coefficient of determination

(correlation coefficient)²

Inventory turnover period

Inventory / cost of sales (or purchases) × 365 days

Rate of inventory turnover

Cost of sales / inventory

Inventory turnover period

1 / rate of inventory turnover × 365 days

Receivables collection period

Receivables / credit sales revenue × 365

Payables payment period

Payables / credit purchases (or cost of sales) × 365

Current ratio

Current assets / current liabilities

Quick (acid test) ratio

(Current assets – inventories) / current liabilities

Cash operating cycle

Receivable days + inventory days – payable days

Breakeven point

Fixed costs / contribution per unit

Contribution ratio

Contribution per unit / sales price per unit

Breakeven revenue

Breakeven point in units × sales price

Or Breakeven revenue

Fixed costs / contribution ratio

Margin of safety

Budgeted sales – breakeven sales

Accounting rate of return (ARR)

Average annual accounting profit / initial (or average) investment × 100%

Profit

Cashflow – depreciation

Compounding by annual r%:

Cashflow × (1 + r)ⁿ

Discounting by annual r%:

Cashflow × 1 / (1 + r)ⁿ

NPV

∑ present values

Present value of perpetuity

Cashflow × 1 / r

Internal rate of return (IRR)

a + [(NPVₐ / (NPVₐ – NPVᵦ)) × (b – a)

Material budget formula. ?+? = ?+?

Opening inventory + purchases = closing inventory + Material used

target sales formula to reach a certain profit

Fixed costs + target profit / Contribution

budgeted production units formula =

closing inventory + sales - opening inventory

IRR or NPV more optimistic?

IRR. Assumes any cash generated can be re-invested at same high rate as project’s own IRR. In reality, such investment opps are hard to find

factors o production x 4 ? and how to remember

CELL - Capital, Enterprise, Land, Labour

work out purchases from COGS and INV

Purchases = COGS + inventory increase

what happens if IRR less than cost of capital?

NPV is negative

What happens to IRR, DPP and PP if cost of capital increases

IRR - No change

Discounted PP - Increases length

Payback period - No change

What happens to IRR if cashlflows are underestimated and corrected? And why?

Increase IRR. Greater discount rate required to get a 0 NPV for the IRR

how calculate coefficient of variation?

standard deviation divided by the mean. Standard deviation is the square root of the variance

What does positive and negative cross PED indicate?

Positive = Substitutes

Negative = Complements

Dublin Ltd is taking out a leasing agreement for five years. Dublin must pay £24,000 at the beginning of the first year as a deposit, to be followed by four equal payments at the beginning of years two, three, four and five. At a discount rate of 10%, the present value of the four equal payments is £63,590.

The total amount to be paid during the lease period is:

	£112,258
	£104,240
	£96,380
	£87,590

104, 240. Year 1 - 4 Discount factor is 3.170. 63,590 / 3.17 = 20,059. + 24,0000 deposit = 104,240