PM Ratta List

Created by sanaullah aka MSB

Opening notes

After reviewing handouts of many f5 teachers and studying both study texts and
reviewing examiner reports i came to know that there are many things in f5 which
are pure ratta and students perform poor in that, if the same student is provided
with this ratta list on exam day he will solve many questions easily. The point is many
topics just require remembrance. So remember these notes just and this will help
you in exam alot atleast you will not be forgetting anything.
Throughput Accounting

● Throughput or return per factory hour

= throughput per unit/product time on bottleneck resource

● Cost per factory hour

=total factory cost/total bottleneck resource time available

● Throughput accounting ratio

=return per factory hour/cost per factory hour

Multi product decision making in throughput
accounting
● Calculate throughput per unit
● Calculate (throughput per unit/ bottleneck resource per unit)
● Rank
 If question is asking life
cycle costing never count
relevant costing because life
cycle costing and relevant
costing are two different

Life cycle costing vs

concepts

relevant costing
DECISION MAKING
 Make or buy 1. Calculate saving/unit
2. Calculate saving/unit
With multiple products & limiting per limiting factor
factors 3. rank
 BEP units =fc/cont per unit
*fc=production+non production

BEP revenue= FC/cs ratio

Margin of safety= activity above BEP

(profitable area)

BREAK-EVEN MOS%=mos/budgeted or actual units x

100

Single product Target sales units =(FC+TP)/cont per unit

Target sales revenue=(FC+TP)/cs ratio

Break even ( multiple products)
Break even point for multiple products
= BEP = FC/cont per mix

Break even revenue for multiple products

=FC/ weighted average cs ratio

Weighted average cs ratio = total cont per mix/ total revenue per mix

Target sales = (FC+TP)/weighted avg cs ratio

Note

In multi product profit volume chart pv chart

Straight line = as per given ratio mix

Curved line = as per changing mix

Margin of safety multiple products

1. Calculate cont per unit

2. Calculate cont per mix
3. Calculate BEP in mixes
4. Calculate BEP in units
5. Calculate BEP in revenue
6. Calculate the MOS
Linear Programming

Greater than >

Less than <

Maximum or upto matlab less than or equals to

Minimum or atleast matlab greater than or equals to

Steps of linear programming

1. Assign variables to product like x and y

2. Establish contranits & write non negativity
3. Objective function
4. Plot constraints on graph
5. Identify feasible area
6. Iso contribution line
7. Optimal production plan
Shadow price (dual price)

This is the extra contribution by acquiring 1 extra binding constraint

The maximum extra amount over and above the normal price that should be paid for
one additional unit of scarce resource
Calculating shadow dual price

1. Write optimal point

2. Just increase 1 of binding constraint
3. Solve; new production
4. New contribution
5. Extra contribution (shadow price)
The demand equation
The equation analyses the pattern of selling price and demand change and helps
management to decide optimal selling price for optimal quantity

P=a-bQ

p= optimal selling price

Q= optimal quantity demanded

b= change in price/ change in quantity

a= selling price where demand is zero (nil)

a= current sp+((current Q/change in Q)x change in SP)

Optimal quantity

Optimal quantityis when Marginal revenue= marginal cost

Marginal revenue = a-2bQ

mc= vc per unit

To maximise profit equate MC and Marginal revenue & solve to find Q

But remember when there is incremental fc so mc=mr metod is not used

Cost equations including volume based discounts

fc= 250000

vc= 6$/unit upto 5000 units, 10% discount on all units purchased over 5000 units

y=250000+6x for x<5000 less than or equals to

y=250000+5.4x for x>5000 greater than 5000

Maximax, maximin and minimax regret
Maximax technique for risk seeker (best out of best)

Maximin for risk averse manager best out of worst

Minimax regret rule= this technique is for looser manager who took wrong decision
in the past

Note: application of this technique

1. Calculate the regret value in line with uncomfortable factors

2. Find the maximum possible regret in line with controllable factors
3. Select the option having the regret minimum
The correlation coefficient

Degree of correlation/ how strong the relationship is

The correlation coefficient

R must always be between -1 and +1

r=1 means perfect positive correlation

r=0 there is no linear correlation

r= -1 means there is perfect negative correlation

If r>0.8 then there is strong positive correlation

If r < 0.8 then there is strong negative correlation

Index adjustment factor

This topic is rarely tested however the formula is

Index level to which costs will be adjusted divided by actual index level of costs
The coefficient of determination = r^2

The coefficient of determination represents the proportion of the total variation in y

variable that is explained by the regression equation

For eg factory overhead is a function of machine hours with r^2= 0.80

This means 80% of the total variation of factory overhead is explained by the
machine hours
Linear regression

y=a+bx

y= dependent variable

a= y-intercept

b=gradient of a straight line

x= independent variable
continued

n= no of pairs of data

a= y-bx

y=average (mean) of y= sum y divide by n

x= avg (mean) of x = sum x divide by n

Learning curves
As cumulative output doubles, cumulative average time per unit falls to a given % of
the previous average time per unit

y= avg time a= time taken on first unit b= learning index = logR/log2

Learning rate formula

Y=ar^n

y=cumulative average time per unit to produce x units

a= time required to produce the 1st unit

r=learning rate expressed as decimal

n= the number of times the units have doubled since the first unit was produced.
Time series

The additive model = T + SV

The multiplicative model= T x SV

Basic variances
Material price variances

Actual quantity purchased X actual price

Actual quantity purchased X standard price

Material usage variances

Actual quantity used x standard price

Std quantity for actual units x standard price

Labour basic variances

Labour rate variance

Actual labour hours x actual labour rate
Actual labour hours x std labour rate

Labour efficiency variance

Actual units should take _____ hours
But actually took ______ hours
Diff = variance hours X std hourly rate
Basic sales variance

Sales price variance = actual quantity sold x actual price

Actual quantity sold x std price

Sales volume variance

Actual quantity sold x std margin

Budgeted quantity sold x std margin

Note = std margin = cont per unit if marginal costing or profit per unit if absorption
costing used
Advance
variances
Next page
Material basic usage variance

Should use x kg

Actual used y kg

Diff x std cost

This material basic usage is divided into mix and yield further
Dm mix variance

It only checks whatever the actual quantity are used- whether or not - it is as per
RATIO eg of format
Materials Ratios Mix should Actual mix Diff kgs Std cost Varaince
be used

M1 3 3696 kg 3750kg 54 adv 4$ 216 adv

M2 2 2464 kg 2410 kg 54 fav 6$ 351 fav

Dm yield variance = quantity + ratio

For example
Per unit std (3:2) that is 5kg per unit
Dm should be used 5kg x 12000 units = 6000kgs
Actual used both total (3750+2410) = 6160 kgs
Waste = 160 kg
Ratio = (3:2)
Now divide this waste as per ratio and calculate variance of each material
Sales yield variance

Many students do mistake in calculating sales yield variance

The mistake is they take selling price

Never take sp

Take profit

Standard profit or contribution per unit

When multiplying with quantities

Point to remember

Market size variance is also known as sales volume planning variance

Market share variance is also known as sales volume operational variance

Losses

Losses only affect yield variance not mixed variance

Input = output + wastage

Eg 100= 80 + 20
Basic usage with losses

First calculate DMs should be used (input should be 100%)=xxxx

Break this into ratio

Compare with actual used each product

Index adjustment factors

Index level to which costs will be adjusted

—-----------------------------------------------------------------------------------------------

Divided by actual index level of cost

Performance
measurement
Profitability ratios
1) Gross profit margin

Why GP may be high bcz either SP is high or costs are low

2) Operating profit margin

3) ROCE shows profit from each 1$ of capital employed

Capital = total assets - current liabilities

Capital = NCL + equity

Profit = operating profit (PBIT)

A high roce can be achieved by reducing capital employed by reducing long term
liabilities
Efficiency ratios
Asset turnover ratio =
Revenue divided by assets
Or capital employed
It shows the turnover from each 1$ of capital employed

Inventory holding period= inventory/cost of sales x 365

Receivable collection period= recievables/creditsalesx365
Payables payment period =payables/credit-purchases x 365
If credit purchases are not available then use cogs
Gearing/risk Ratios
Operating gearing

Financial gearing

Interest cover
The balanced score card