Modules 7–10 (ABC, Pricing, Master Budget, CVP) — final exam quick reference
Pool rate (predetermined overhead rate for each activity cost pool):
Pool rate = Budgeted overhead in pool ÷ Budgeted total cost-driver quantity
(Always divide by the total driver quantity across all products — never by each product's quantity separately. There is only one pool of money, so only one rate.)
Overhead allocated to a product (per pool):
Allocated overhead = Pool rate × Quantity of cost driver consumed by that product
Total overhead allocated to a product (across all pools):
Total overhead = Σ (Pool rate × Cost driver consumed) over all pools
Total product cost (manufacturing cost per unit):
Total cost = Direct materials + Direct labour + Σ Allocated overhead
(If the question asks for overhead only, stop after Σ allocated overhead. If it asks for product cost or manufacturing cost per unit, you MUST add DM and DL. Don't lose marks by forgetting this.)
Four-level cost hierarchy — match driver to level:
| Level | Driver examples |
|---|---|
| Unit-level | Units, machine hours, direct labour hours |
| Batch-level | Number of setups, orders, inspections, batches |
| Product-sustaining | Number of products, engineering changes, design hours |
| Facility-sustaining | Square metres (often allocated arbitrarily) |
Target Costing (market-based, used in competitive markets):
Target Cost = Target Price − Target Operating Income per unit
(Price is given by the market; gap to current cost is closed by value engineering.)
Cost-Plus Pricing (used in non-competitive markets):
Price = Cost base × (1 + Markup %)
Price = Cost base + Markup $ per unit
Markup % from a target return on investment:
Target annual operating income = Investor capital × Target ROI
Target operating income per unit = Annual target OI ÷ Units sold
Markup % = Target OI per unit ÷ Cost base per unit
Cost-base options (largest base ↔ smallest markup needed):
| Cost base | Includes |
|---|---|
| Variable manufacturing | DM + DL + Variable MOH |
| Variable | Variable manufacturing + Variable period |
| Manufacturing (absorption) | DM + DL + All MOH |
| Full cost (preferred in long-run pricing) | All manufacturing + all period costs |
Cost incurrence vs locked-in costs: Most cost is locked in at the design stage, long before it is incurred. Reduce cost before lock-in — afterwards is too late.
Golden rule of budget sequencing: the first line of any sub-budget = the last line of the previous sub-budget.
Sequence (operating budget):
Revenue → Production → Materials usage → Materials purchases → Direct labour → MOH → Ending inventories → COGS → Operating expenses → Budgeted income statement.
Revenue (Sales) Budget:
Revenue = Selling price × Units sold (per product)
Production Budget (units):
Sales units (from revenue budget)
+ Target ending finished-goods inventory
− Beginning finished-goods inventory
= Units to produce
Materials Usage Budget (per material):
Material quantity used = Units to produce × Quantity of material per unit of product
(Sum across products to get total usage of each material. No inventory adjustment here.)
Materials Purchases Budget (per material):
Material needed for production
+ Target ending raw-material inventory
− Beginning raw-material inventory
= Materials to purchase (in units)
× Cost per unit of material = Total purchase cost
Direct Labour Budget:
Labour cost = Units to produce × Labour hours per unit × Wage rate per hour
(Separate calculation per labour type, then sum. No inventory.)
MOH Budget: Variable MOH = rate × driver; Fixed MOH = total.
COGS Budget: DM used + DL + MOH + Beginning FG inventory − Ending FG inventory.
Budgeted Income Statement:
Revenue − COGS = Gross margin − Operating expenses = Operating income
Schedule (a) — Receipts: For each month, collect from sales using collection terms (e.g., 60% in month of sale, 25% next month, 15% month after). Go back enough months to cover the collection tail. Add one-off cash inflows.
Schedule (b) — Disbursements:
Cash Budget (run one month at a time, in order):
Opening cash balance
+ Total receipts (from schedule a)
= Cash available
− Total disbursements (from schedule b)
= Ending cash balance → this becomes next month's opening balance
(You cannot do all months in parallel — each opening balance depends on the previous closing balance.)
Cash-position levers: collect faster; pay slower; invest idle cash short-term.
| Centre | Manager controls |
|---|---|
| Cost centre | Costs |
| Revenue centre | Revenues (theoretical only — can't exist without cost responsibility too) |
| Profit centre | Revenues + Costs |
| Investment centre | Revenues + Costs + Investment decisions |
Core definitions:
Contribution Margin per unit (CMU) = Selling price − Variable cost per unit
Total Contribution Margin = Revenue − Total variable cost
Contribution Margin Ratio (CMR) = CM ÷ Revenue = CMU ÷ SP
Operating Income = Total CM − Total Fixed Cost
The one CVP formula to memorise (target-OI form; break-even is just target = 0):
Units = (Fixed cost + Target operating income) ÷ Contribution margin per unit
Revenue $ = (Fixed cost + Target operating income) ÷ Contribution margin ratio
Break-even (set Target OI = 0):
Break-even units = Fixed cost ÷ CMU
Break-even revenue = Fixed cost ÷ CMR
Income taxes — convert target to pre-tax first:
Pre-tax target OI = Net income ÷ (1 − Tax rate)
Then plug into the target-OI formula above.
(Tax does NOT affect break-even — at break-even, profit = 0, so there is no tax to pay.)
Margin of safety:
Margin of safety ($) = Budgeted revenue − Break-even revenue
Margin of safety (units) = Budgeted units − Break-even units
Margin of safety (%) = Margin of safety $ ÷ Budgeted revenue
Degree of operating leverage (DOL):
DOL = Contribution margin ÷ Operating income (at a given activity)
% change in operating income = DOL × % change in sales
(High DOL = more fixed cost relative to variable = bigger upside AND downside per 1% revenue change.)
Weighted-Average Unit CM (WAUCM) = Σ (CM per unit × Sales mix proportion)
Total break-even units = Fixed cost ÷ WAUCM
Then split back into individual products: each product's break-even units = Total break-even units × that product's mix proportion
(Never report only the total — split it back, otherwise the answer is meaningless.)
CVP units always round UP — never down. 231.2 → 232. (At 231 you have not actually broken even.)