[Natasha1996]

I know that fair value has 3 basic criteria but my question is related to the difference between market value and fair value. I had a problem so I asked you a very specific example so I could know them.

Could you please elaborate your answer?

What i understand is that fair value is actually the market value but it could be different because it is price agreed between the seller and buyer and either the buyer negotiated the price which means it is going to be lower than the market value or seller has convinced the buyer to pay more for the asset than it actual market price?

For example the seller is ready to sell the asset for $100,000 but the buyer negotiated the price and seller agreed to accept $90,000 even though the marker price of the assets was $100,000?

Another scenario is that the seller has convinced the buyer for the potential benefits of the asset and buyer is willing to pay more for the asset to $120,000 even though the actual market price is $100,000?

Thank you.

[Natasha1996]

You didn’t answer question (1) and (2)

3. You are saying that operating activities are those usual business activity or trading from which business earn revenue and pay expenses. In other words it refers to the whole SOPL items?

4. I saw your lecture where you explained that business can either raise money from equity (issuing shares) or from long-term borrowing but could you please be specific how many long-term borrowing options are there?

5. Please correct me that Bank deposits are considered current assets because they are short-term investments but it could be a long-term investment also if a business invest funds for a longer period of time?

6. What i wanted to know here is that a business is allowed to lend money to other businesses (but not to the public) and it will be our either long-term or short-term investment depending on their period as current assets in SOFP. Although a business is NOT allowed to lend money to public because only banks can do that not the limited companies?

7. Is it true that money earns from long-term investments such as NCA and short-term investments such as CA are both used to generate revenue and pay expenses during the year which will be shown in SOPL?

Sorry to bother you. Thanks multitude!

[Natasha1996]

I didn’t know that. Could you please explain a bit to me?

[Natasha1996]

You mean to say that machine setups are used to produce the number of batches where units are produced of each product.

The machine setup costs should be absorbed based on the (number of setups OR number of batches) because it is the batches that require machine setups for the production, not the number of units in batch size. (if I am correct?)

Could you tell me the appropriate overhead costs for which we can have the batch size as its cost driver? And then we will use batch size to absorb the overhead (just like I did in my previous response).

[Natasha1996]

[Question]
For example, if we are two products with the following information.

Products——————-Product A——-Product B
Production units————1000————-1200
Batch size——————–100—————150

Overheads information:
machine setup costs—————$18,000

If the machine setup overheads are absorbed using the number of batches then we do this way:
Number of batches = Total Production units / Batch size
Total number of batches = (1000 / 100) + (1200 / 150) = 18

Overhead absorption rate = $18,000 / 18 = $1000

Absorb overhead to each product:
Product A = $1000 x 10 = $10000
Product B = $1000 x 8 = $8000

However, if the machine setup overheads are absorbed using batch size then we do this way:
Total batch size = Batch size of product A + Batch size of product B
Total batch size = (10 + 15) = 25

Overhead absorption rate = $18,000 / 25 = $720

Absorb overhead to each product:
Product A = $720 x 10 = $7200
Product B = $720 x 15 = $10800

[Natasha1996]

Could you please also tell me the logic behind the material mix variance and material yield variance?

Your last reply was really helpful. It would be kind of you if you can tell me the above question too.

THANKS for your support 🙂

[Natasha1996]

According to your answer, we need a number of batches to calculate total machine setups as a cost driver for machine setup costs like this:

1) Machine cost:
Total number of batches = (80000 / 100) + (60000 / 50) = 2000

But since the cost driver for machine setup costs is machine setup per batch. we need to calculate total machine setups.

Total machine setups:
Product A = (800 batch x 3 setups) = 2400
Product B = (1200 batch x 3 setups) = 3600
Total machine setups = 6000

Overhead absorption rate = $180,000 / 6000 = $30 per machine setups

Absorb overhead to each product:
Product A = $30 x 2400 = $72,000
Product B = $30 x 3600 = $108,000

It is correct now SIR?

[Natasha1996]

Sorry I do not understand it ’cause the correct cost drivers are as follows:

The correct cost driver for machine setup cost is machine setups per batch:
Total Machine setups : (100 x 3) + (50 x 3) = 450

The correct cost driver for processing cost is processing time per unit:
Total Processing time in hours : (80000 x 3/60) + (60000 x 5/60) = 9000 hours

OR we can do this way (both gives same answer)
Total Processing time in hours : (80000 x 3) + (60000 x 5) / 60 = 9000 hours

The correct cost driver for order cost is batch size:
Total Batches : 100 + 50 = 150

The correct cost driver for inspection cost is production units:
Total production units = 80000 + 60000 = 140,000

1) You said that machine setup cost is absorbed using batches but you didn’t see the machine setup per batch (which is the correct cost driver) is already given above.

2) I am afraid you are mistaken in calculating total processing time here because the correct answer is 9000 hours just the way I calculated above. You took 3 instead of 5 minutes for product S

Please tell me where I am wrong and why?

[Natasha1996]

Thanks 🙂

Could you say that to calculate the totals of budgeted, actual, and standard we can do like this:

Budgeted Total = (Budgeted hours x Standard rate)
Actual Total—–= (Actual hours x Actual rate)
Standard Total = (Actual hours x Standard rate)

[Natasha1996]

So we compare total budgeted and total actual cost (just the way I wrote above).

And what I said above was all correct too about how to calculate total budgeted, actual, and standard cost?

And could you tell what is the difference between them?

[Natasha1996]

It is March/June 2019 paper.

[Natasha1996]

It’s Okay!

Could you please help me question Best Night Co instead? I only need help with calculating non-financial performance measures and understanding them.

And please tell me whether we should use the balanced scorecard or Building block model?

[Natasha1996]

This is what I understood from your lecture please correct me if i’m wrong.

All these factors will improve TPAR:

1) Increase the selling price means higher Throughput cost per hour (i.e. return per hour)

2) Reduce the material cost means higher Throughput per hour (i.e. return per hour)

3) Reduce the fixed costs means fixed costs per bottleneck hours (i.e. factory cost per factory hour) will be lower

4) Speedup Bottleneck Process refers to produce faster by taking less hours per unit means higher Throughput per hour (i.e. return per hour)

[Natasha1996]

Sir, please correct my last response.

And Thanks for answering me all the time (you are the BEST :))

[Natasha1996]

Sir, I need correction about the last line of my previous question I asked you regarding we have to adjust Std Profit and Std Contribution in these two variances or not which are Sales Volume and Fixed Overhead Volume variances.

I saw your notes where you didn’t use Std Profit/contribution rather you used Fixed Overhead cost/hour to calculate Fixed Overhead Volume variance.

Please say again that only the sales volume variance will need to be adjusted for absorptional and marginal costing (Std Profit or Std Contribution respectively)

Please correct me.

[Natasha1996]

You did mean to say that whether we use absorptional or marginal costing the two variances will be affected and therefore we need to adjust as follows:

In Absorptional costing we use Profit per unit;
In Marginal costing we use Contribution per unit;

[Sales volume and Fixed Overhead Volume variance will need to be adjusted; No other variances will need adjustment]

All correct?

[Natasha1996]

You did not say what I wrote above was all correct or not?

Is it correct too:
In Planning variance, we change Actual to Revised Standard
In Operational variance, we change Standard to Revised Standard

[Natasha1996]

I already watched ur lecture that’s why I was asking about these queries. Is this below all correct?

1) In Single-Product CVP we can calculate Breakeven units; Breakeven revenue; Margin of Safety; C/S ratio; because we have fixed cost incurred which belongs to one product only so it is easier to calculate everything.

2) BUT with Multi-Product CVP we cannot calculate Breakeven units; Margin of Safety; because we have fixed cost incurred which belongs to more than one product (so we don’t know which product has how much fixed cost) so it is not possible to calculate them.

3) But we can calculate Breakeven revenue; C/S ratio by taking Average figures (i.e. Total Figures). So we calculate BE revenue by taking Average Figures such as (Total Contribution / Total Sales revenue) to get C/S ratio of all the products.

4) Although we can only use the Average C/S ratio to calculate BE revenue rather than BE units because we don’t know the individual Fixed cost of each product?

[Natasha1996]

What I meant was whether how many types of budget (such as incremental, rolling, and flexed) are being examined in paper PM and whether how many types of budget are calculation based and how many are theory based?

What I know is that budgeting that involves calculation are:
1) Incremental Budgeting
2) Flexed Budgeting
3) Rolling Budget

Budgeting that involves theory are:
1) Zero-based Budgeting
2) Activity Based Costing

Is that all types of the budget that are being examined?

I am confused as to how many types of budgeting are there because I am self-studying 🙂

Please let me know if I am wrong

[Natasha1996]

Thanks for your continuous help SIR, I admire your energy.

1) If we have current financial starts at 1 Jan 2017 being Time 0 then any cash flow which is payable at the end of the first year would be on 31 Dec 2017 at Time 1 because one day difference would not make any problem so we pay it at 31 Dec 2018 at Time 2because tax is in arrears

2) Just like the machine was bought on the last day of the accounting period so the tax is immediately calculated on the very last day 31 Dec 2016 at Time 0; So similarly if any cash flow is on the last day of the current financial year it would be treated same and its tax effect would be on Time (exactly like the Tax-saving on CA)?

Is that correct too?

[Natasha1996]

Thanks for your answer 🙂 You’re Great.

Please comment on these questions too.

1) It could be any cash flow whether Lease payment; Capital Allowance; or any other cash flow and we have to look whether if the first cash flow is on first day then tax effect is on Time 2; Otherwise it is on last day then tax effect is on Time 1 BUT I wanna know it is for any cash flow (right?)

2) If any cash flow says that it occur on the first day then its tax effect would be on Time 2

3) However, if any cash flow says that it occurs on the last day then its tax effect would be on Time 1

4) Any cash flow can be given in the exam question and we have to see whether it effectively happen on first day or last day of accounting period and then their tax effect would be either at Time 2 or Time 1.

This is what i have understood from your answer. Is it correct way sir?

[Natasha1996]

1) BUT is it correct that the cost of equity & debt is a cost to a company but it is a required return to investors??

2) Is there any effect on the risk-free rate and market premium in the CAPM model if there is an increase in the prevailing interest rate?

3) Is there any inclusion of tax in the CAPM model?

[Natasha1996]

Therefore, my answer in the previous post is correct?

And I asked you this too!

I wanna ask you that Finance cost (i.e. cost of interest) will be added to both the EOQ formula calculation & in the calculation of Cost of Holding (just like the above); It is up to US whether we should use finance cost in the calculation or not (just like the examiner doesn’t take finance cost in any of the calculation in his answer) if we don’t take finance cost then we don’t take them in either of the EOQ formula or Cost of Holding calculation. Correct?

Secondly, the examiner hasn’t included the finance cost in the total inventory cost of $16,149 under current policy whereas I think that he should have been done so, what do you say? That would get the full marks too?

[Natasha1996]

Thank you for your answer. It was great stress to me and yes I watched your lecture

I am attempting a past exam question Dusty Co from Sept-Dec 2019 where we are told to calculate EOQ but, the examiner hasn’t included the interest cost of 3% in the EOQ calculation and I wonder why!?

This is how I calculated, can you please just correct me here too?

EOQ = sqrt (2 x 1500,000 x $252) / 0.21 + ($14 x 3%) = 34,641 units

Cost of Reorder (1500,000 / 34,641) x $252 = $10,912
Cost of Holding (34,641 / 2) x ($0.21 + $0.42) = $10,912
EOQ total inventory management cost = $21,824

I know that there might be a difference between my answer and the examiner’s because of the finance cost saving on a reduced overdraft in his answer but the calculation of mine above is all good. correct?

Secondly, I wanna ask you that Finance cost (i.e. cost of interest) will be added to both the EOQ formula calculation & in the calculation of Cost of Holding (just like the above); It is up to US whether we should use finance cost in the calculation or not (just like the examiner doesn’t take finance cost in any of the calculation in his answer) if we don’t take finance cost then we don’t take them in either of the EOQ formula or Cost of Holding calculation. True?

[Natasha1996]

Thanks for the answer. It was indeed helpful. 🙂

I still have a little query that you said that market value is set by the dealer according to whatever investors are prepared to pay.

BUT doesn’t it true that the market value of a share is simply depend on the performance of the company whether it is doing good or not? If so, then how can the dealer control the price in the stock market?

I am stuck here whether the market value of a share price fluctuates according to the company’s performance or it is the price that is set by the dealer in the stock exchange so that investors would be willing to buy & sell.

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