LAMBERS REVIEW
VIDEO SUPPLEMENT FOR
BUSINESS ENVIRONMENT & CONCEPTS (BEC)
ECONOMICS
CHAPTERS 3, 4 AND 5
1
ECONOMIC CONCEPTS AND THEORY: BEC
I. Supply and Demand A. The market matches buyers and sellers of good and services. B. Demand is the quantity of a good or service that consumers are willing and able to
purchase at various prices. 1. Law of demand – the price of a product and the quantity demanded are inversely
related.2. Substitution effect – when prices decrease, buyer will enter the market. The
product will be cheaper relative to other goods and is substituted for them.3. Income effect – people buy more when prices are lower.
a. Normal goods – commodities for which demand is negatively related toincome.
b. Inferior goods – commodities for which demand is negatively related toincome.
c. Substitutes – increase is price of one product will generate an increase indemand for another.
d. Complements – increase in the price for one product will generate a decreasein demand for another. Bread prices go up, jelly demand goes down
C. Demand curves 1. Elasticity of demand – the parentage change in quantity demanded divided by the
percentage change in price.D. Supply is the amount of goods or services that producers are willing to offer at a given
price. 1. Law of supply – the price of a product and the quantity supplied are positively
related.2. Price elasticity of supply – percentage change in quantity supplied divided by the
percentage change in price.3. Equilibrium – the point at which the demand and supply curves intersect.
E. Law of diminishing returns – a fixed amount of production resources, the addition of increments of labor will produce diminishing returns.
F. Law of diminishing marginal utility – useful will decline as consumers acquired additional units of a product.
II. GDP and Business Cycles
A. National income – the measure of the output and performance of a nations’ economy. 1. Gross domestic product (GDP) – the total market value of all final goods and
services produced within the US whether domestic or foreign during a year.2. Gross national product (GNP) – value of output produced with the US owned
resources regardless of their location. GNP is GDP plus output of US ownedresources abroad minus foreign owned resources in the US.
3. Measurement of GDP can use one of two approaches.a. Income approach – GDP is sum of various types of income such as wages,
interest, rents, indirect business taxes, net foreign income.b. Expenditure approach – GDP is sum of spending such as personal
consumption spending, gross private domestic investment, governmentpurchases, net exports.
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4. Net domestic product – GDP – deprecation (consumption of fixed assets)5. National income – NDP + US net income earned abroad – indirect business taxes
such as sales taxes.6. Personal income – NI – corporate taxes – social security contributions + transfer
payments7. Disposable income – PI – personal income taxes
B. Business cycles 1. Peak phase – economy has reached its highest level of production (GDP).2. Trough – low levels of economic activity and under use of resources.3. Recovery (expansion) – increasing economic activity.4. Recession – activity severely contracts.5. Depression – conditions are similar but longer lasting.
C. Economic indicators – 1. Consumer price index (CPI) – based on prices of 364 goods and services over
time.2. Leading indicators such as new orders, building permits, weekly production.3. Lagging indicators – unemployment consumer credit,
D. Employment 1. Natural rate of unemployment – the long-term rate that would exist even if
there were no cyclical unemployment.2. Full employment – when the real rate of unemployment is equal to the natural
rate.3. Frictional unemployment – employees are between jobs.4. Structural unemployment – includes those who have skills but do not match
the required skill levels. by employers.5. Cyclical unemployment – downturn in the business cycle.
III. Fiscal EconomicsA. Deals with the ability of the economy to generate and maintain full employment over the
long run without government intervention. Three assumptions about this theory. 1. The difference between savings plans and investment plans is fundamental to an
understanding of changes in the level of income.2. Price flexibility cannot be relied upon to provide full employment.3. Equilibrium GDP does not necessarily provide full employment.
B. Multi plier – a change in consumption, investment, net exports or government spending result s in a multiplied change in equilibrium GDP.
1. Marginal propensity to consume (MPC) – the percentage of additional incomethat is consumed.
2. Marginal propensity to save (MPS) – the percentage of additional income thatis saved.a. MPC + MPS = 1 or MPS = 1 – MPC
IV. Money and the EconomyA. M1 – coins and currency, checking depositsB. M2 – M1 plus savings, small time deposits, money market accounts.C. Monetary policy by the FED is designed to control the economy through the supply of
money in the banking system. Tools to accomplish this are: 1. Reserves2. Discount rates.
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V. Unemployment, Inflation, Deflation, Government A. Unemployment - types
1. Frictional – caused by the normal workings of the labor market.2. Structural – aggregate demand is sufficient to provide full employment but the
distribution of demand does not relate to labor force.3. Cyclical4. Seasonal5. Regional6. Technological.
B. Inflation 1. Cost-push – increased production costs are passed on to the consumer.2. Demand-pull – demand for goods and services is excessive.3. Consumer price index
C. Government’s role 1. Taxation
a. Progressiveb. Regressivec. Proportional
2. Direct taxes are paid by the taxpayer directly such as income taxes.3. Indirect taxes are paid by someone else even though the individual will eventually
pay the taxes.
VI. International TradeA. Comparative advantage – countries should produce products when they have the
competitive advantage for sale and buy when they do not. 1. Production possibilities curve – represents the tradeoffs between two alternative
goods that can be produced from the same amount of resources.
VII. Trade BarriersA. The following items are barriers to successful trade.
1. Tariffs – consumption taxes to restrict imports.a. Antidumping taxes
2. Import quotasa. Embargo – total ban on some kinds of imports.
VIII. Foreign Currency Rates and MarketsA. Exchange rate determination
1. Spot rate – rate paid for immediate delivery of a currency.2. Forward exchange rate – future price of currency.
B. Avoiding the problem through hedging. 1. Purchased or selling forward contracts.
IX. Balance of PaymentsA. Balance of trade is difference between total exports and imports of goods.
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LAMBERS REVIEW
VIDEO SUPPLEMENT FOR
BUSINESS ENVIRONMENT & CONCEPTS (BEC)
INFORMATION TECHNOLOGY IMPLACATIONS IN THE BUSINESS ENVIRONMENT
CHAPTER 10
5
AUDITING AND BUSINESS INFORMATION SYSTEMS
I. Characteristics of Computer Processing A. Transaction trails – trails may exist for only a short period of time B. Uniform processing of transactions – computers will process transactions in the same
manner and helps eliminate errors. C. Segregation of functions – in a manual system segregation of duties helps prevent
errors and fraud. In a computer system, one operator may be performing overlapping duties. Therefore, other controls must be in place to help prevent problems.
D. Possible errors and fraud – the possibility of individuals getting access to data, changing data and access to assets is greater in a computer environment.
E. Better supervision – management can use analytical tools to watch over the situation better than in a manual system. It improves the quality of information as well.
II. Information Systems – covers 4 areasA. Operational level – transaction processing systems (TPS)
1. Part of the accounting system such as general journal and ledgers, payrollrecords, cash records, production planning records.
B. Knowledge level – knowledge work systems (KWS) 1. Used by profession and technical professional. Such things as CAD or
computer aided design systems and office automation systems (OAS) are usedto process normal information
C. Management level – Management information systems (MIS) and decision support systems (DSS).
1. Used to help management in monitoring, controlling, decision-making andordinary administrative functions such as logistics, personnel, marketing,finance, manufacturing, etc. It is very interactive and helps automate certaindecisions where logic can be implemented.
2. Accounting information systems (AIS) is used to process financialtransactions. This system records journal entries and the ledger system.
D. Strategic level – executive support systems (ESS) or Executive Information System 1. This system helps management with changing unstructured problems and is
focused on the broader more narrow decisions that senior management mustmake.
III. Systems Development and the Life Cycle ApproachA. The System Development life cycle approach – used the develop highly structured
application systems. The major advantage is better management and control of the entire process. The steps are: 1. Proposal – application that addresses the need for a system, support for it, and
the scheduling of the process.2. Feasibility study – determines whether the system is technically, economically
and operationally feasible. One looks at the cost-benefit analysis
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3. Information requirements – the requirements of users, reports needed, databasesand other operating characteristics.
4. General design – user specifications, inputs and outputs of the system,processing flow, controls, and documentation.
5. Physical system design6. Physical database design7. Procedure development – layout chart8. Flowcharting and diagrams9. Program development – coding and testing the system.
a. Structured programming – divides the system into modules that canconcurrently be programmed.
b. Computer aided systems engineering (CASE) – It allows softwaredesign and development through computer documentation for routinetypes of programs.
10. Implementation - installation and operationa. System conversionb. Trainingc. Follow-up
IV. Effects of It on Business ProcessesA. The effects of this process relates to information security, privacy, risk management,
internal controls.
V. Enterprise Resource Planning (ERP) A. ERP is designed to integrate business-wide information systems by creating one
database linked to all of the other applications. 1. The architecture of an ERP deals with client-server configuration such as local
area networks and wide area networks and database management systems.B. Material requirement planning (MRP) – designed to control materials used in a
production setting by placing raw materials into production at the precise moment of need.
C. Manufacturing resource planning (MRP-II) – a more advanced stage of MRP that integrates production, sales, inventory, scheduling and cash flows into one control and planning system.
VI. Artificial IntelligenceA. AI is computer software designed to perceive, reason, and understand business
decisions. It begins with: 1. Knowledge database2. Inference engine to help make decisions.3. Heuristics or exploration problem-solving techniques that uses self-education
methods to evaluate feedback and improve performance.4. Network logic to learn from mistakes.5. Fuzzy logic system to deal with imprecise data and problems that have many
solutions.B. These systems allow us to make decisions quicker and with more uniformity, such as
choosing an audit program within a given set of circumstances.
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IT CONTROLS
I. Functional Areas of IT Operations A. Controls should ensure that the system is running efficient and effectively.
1. Control environment and the assignment of authority and responsibility.B. Segregation of duties
1. Database administrator – overall responsibility for developing andmaintaining the database and controls of data.
2. Systems analyst – the architect of the system. They flowchart and design thesystem.
3. Programmers – write the program according to the design from the analyst.4. Operators – data entry.5. Help desk – log in problems and provide helpful information to users.6. Data conversion operators – data preparation and transmission from remote
terminals.7. Librarians – controls the programs and documentation.8. End users- applies the application programs.
II. Disaster Recovery and Business ContinuityA. Recovery plans deal with the regeneration of information and files should they be
destroyed. They create backup copies for such situations. B. The various types of processes dictate the type of recovery plans necessary.
1. Batch processing – checkpoint procedures involve capturing data and programindicators at specific points and storing those valued in another file. Processingcould be restarted at one of the checkpoints.
2. Online processing – rollback and recovery involves dumping the master filecontents onto a backup file.
3. Database management system – used dual logging with the use of twotransaction logs written simultaneously on two separate storage media.
C. Hot and cold sites 1. Hot site is an arrangement with the hardware vendor to provide a fully
operational backup facility configured to the user’s needs in case of emergency.2. Cold site does not have this capability.
III. Documentation and Development MethodsA. Systems documentation – narratives, flowcharts, definitions, input and output forms,
record layouts, etc. B. Program documentation – program flowcharts, source code, and test data, data
structure. C. Operating documentation – setup, files, input procedures, run times, recovery
procedures and controls. D. Procedural documentation – master plan and operations to be performed, files, and
data definition. E, User documentation – describes the system and producers for data entry, error
checking and correction, and formats and uses of reports.
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1. Preventive – attempts to head off problems before they occur. 2. Detective – checks to determine if preventive controls are working. These
might also be called feedback controls. 3. Feedforward – help look into the future and control future events – budgets. 4. Directive – provide for limitations in decision making within parameters. 5. Corrective – controls designed to fix problems.
B. In ut Controls - are concerned with the accuracy and completeness of date entered Int
the processing system.
1. Control totals - designed to detect errors in processing by being aware of the information before processing. a. Batch totals - such as total hours by department. b. Record counts - how many being processed. c. Hash totals - non-accounting number such as social security numbers. 2. Computer editing a. Self-checking digits - a pre-tested number is assigned to an item and
entered by this number. If the number is entered incorrectly, the computer will catch the problem.
b. Validity check - checks the validity of a number against a master file of pre-approved numbers.
c. Reasonableness tests - put a limit on the number of hours an employee can work in a week or the amount of pay they can make in a week and the computer will edit against that amount and not process entries in excess.
d. Sequence checks – records are in the right order.
IV. Hardware Controls A. Dual read – an input device may read an input twice for comparison. B. Duplicate circuitry – allows the arithmetic logic unit of the CPU to perform
calculations twice and compare. C. Echo check – provides peripheral device to return a signal sent by the CPU such as a
printer before printing. D. Write protection – all data storage media, except hard disks, have a ring, table or notch
that can be used to prevent writing. E. Parity check – adds a digit to the end of a binary code to determine if data has been
altered.
V. Acce A.
ss Controls Physical security controls – limit access and protect against environment risks and
natural catastrophes. B. Logical security controls – needed for communications network and connections externally.
1. Passwords and ID numbers. a. Encryption – uses algorithm to scramble text for transmission. b. Callback – user to call the computer, give id, hang up, and wait for an
authorized number. c Biometrics – uses physical characteristics to id a person
VI. Application Controls - relate to the actual operations of the computer system. A. Types of controls
p
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C. Processing Controls 1. Procedures to prevent processing incorrect files and identify the operator who
caused the error. 2. Logic checks are incorporated to provide assurance that transactions are
properly valued. 3. Run-to-run totals are verified where appropriate.
D. Output controls 1. Control totals. 2. Limit processing time. 3. End of run markers for completeness. 4. Controlling distribution of the reports.
VIII. End-User Computing (EUC)
A. This involves user-create systems that are maintained and operated outside the normal system.
B. Audit trails are usually bad since the operator created the system and it might have poor documentation.
IX. Internet Security
A. Passwords. B. Firewall – separates an external network and prevents passage of specific types of
traffic from entering the system. HARDWARE, SOFTWARE AND DATA
I. Characteristics of an Information System
A. Hardware - The physical components of the system which include the CPU (arithmetic logic unit, controls, primary storage), drives, disks, printers, terminals, etc. 1. Mainframes – large, high-speed computers. 2. Microcomputers – such as personal computers are small but have many
independent business applications. 3. Workstations – desktop machines but have enhanced math and graphic abilities 4. Storage devices include
a. Random access – has direct access to data no matter how it is stored physically.
b. Sequential – data is processed in the order it is stored. Can be indexed to get one to the point in the text quicker – like a textbook.
c. Magnetic tape –cheap form of secondary storage. d. Magnetic disks – larger space for storage. e. CD-ROM f. WORM – read once write many and cannot be erased.
5. Peripheral devices a. Magnetic ink character reader (MICR) – banks use to read checks. b. Point of sale terminals such as teller machines. c. Voice recognition compares ones voice with their patterns. d. Optical scanners – used to pass a light pen over the price tage to record. e. Laser bar code scanners – reads bar codes to record transaction.
B. Software - the brains behind the operations of the computer.
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1. Operating systems or supervisory program – performs the functions of controls, scheduling, and interfacing with the application programs. They include utility programs that perform basic operations such as merging and sorting files. a. Multiprogramming – a program can be accessed and data sent to print
while another program is opened and running. b. Multiprocessing – multiple CPUs process data while sharing
peripherals. 2. Utility programs – perform simple tasks such as sorting and merging file. 3. Source program – language used in the original program, which is a high level
language. a. BASIC b. COBOL c. FORTRAN d. Java e. Pascal f. C, C+, C++
4. Object program – the program, which was converted to a machine-readable form from the source program.
5. Interpreter program – converts a source program into an object program one line at a time and must be done with every use of the computer.
6. Compiler program – converts source program to object program for the entire program at once.
7. Application program or user program – program used to process data such as Excel, Word, etc.
8. Database management system – an intermediate program, which controls the processing of data for an entire system database through access controls.
III. Data Structure
A. Terms for data systems 1. Bit – a zero or one and is the smallest unit of measurement for a computer. 2. Byte – group of 8 bits. 3. Field – a group of related characters such as id numbers 4. File – group of related fields such as an address. 5. Transactions file – data for a given account. 6. Master file – permanent data file such as general ledger accounts.
IV. The Role of Information Systems Within Business
A. The role of IS today for the accountant is to process complex accounting information and reports the results to management in a timely manner so that business decision can be made effectively. The decision is extremely dependent upon the quality and correctness of the information. Therefore, proper design and controls are a vital element of any information system.
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PROCESSING MODES, DATABASES, AND NETWORKS I. Processing Systems
A. Batch Process 1. Transactions are accumulated and processed in groups. The transaction
summary is then posted to a mater file (general ledger). This system is simple and easy to operate but is slow. An example of this system would be payroll.
B. On-Line, Real Time Systems 1. On-line systems give individuals immediate access to data. Real time refers to
the ability of the individual to update data immediately. This system is fast but more difficult to audit.
C. Distributed Processing Systems (Decentralized vs. centralized) 1. Refers to the fact that instead of using mainframes for access to programs and
files, there is a stand-alone computer on the desk of an individual with full programming and processing capabilities.
D. Separate File System 1. Each file is updated individually in separate processing runs.
II. Databases
A. Database system 1. Database system – software that helps utilize the data within the system. It
allows for one single storage site for all data without any redundancy. Data integrity is of ultimate importance since contamination ruins the data for all users.
2. Database management system – software that helps communication take place between application programs and regulates the access and ownership of data structures.
3. Database structure would include – we get to data with pointers and keys a. Hierarchical – data ownership looks like an organizational chart. b. Network – each element can have multiple owners. c. Relational – each element is connected logically based upon their
interrelationships. 4. Data dictionary – describes the use of data from the database in applications. 5. Schema – a description of the logical structure of the database since data is
stored randomly. III. Data Communications and Networks
A. Movement of data 1. Multiplexors – switching devices that route the flow of data. 2. Modem – hardware device to convert digital signals from terminals and
the CPU into analog for transmission. 3. Communication channels
a. Narrowband – telegraph lines b. Voice band – telephone lines. c. Broadband – multiple paths that permits simultaneous
transmissions of different kinds of data.
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B. Types of networks 1. Value-added networks (VAN) – mailbox services where the sender and
receivers are never directly connected to each other but runs through a third party network.
2. Local area network (LAN) – local distribution of data 3. Wide area network (WAN) or distributed data processing – distributed in a
wide geographic area C. Applications
1. Electronic mail 2, Voice mail 3. Teleconferencing 4. Fax machines 5. Electronic bulletin board – database into which computer users may dial to
read or post messages. D. Network configuration – how lines of communication will flow in a network.
1. Point-to-point – from one terminal to another along a straight line. 2. Bus – many connected computers where the line of communication is along a
straight line. 3. Ring – the communication line connects the computers in a circle. 4. Fully connected – the lines of communication go directly from one terminal to
another. 5. Star – a dedicated server is placed in the center and the individual terminals
from out from that center like a star. Communication flows through the server before going to the intended terminal.
E-COMMERCE
I. EDI A. The communication of electronic documents directly from a computer in one business
to a computer in another business. B. It uses standards to convert documents into an electronic form. C. Encryption is a vital part of the protection of secure information.
II. Electronic Funds Transfer
A. The ability for financial institutions worldwide to access and transfer funds. III. Point of Sale Transactions
A. A point of sale system captures and transmits a retail transaction instantly. IV. Software Attacks
A. Protection from malicious software 1. Trojan horse – an innocent program houses a hidden function meant to destroy. 2. Virus – copies itself from file to file. 3. Worm – copies itself from computer to computer.
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AUDITING IN A COMPUTER ENVIRONMENT I. Auditing in a Computer Environment - the auditor must test the EDP system to see if it is
working the way it is designed to work. A. Test data approach - auditor may develop test data by using valid and invalid data and
entering this into the system and see how it is processed. Such things as invalid numbers, duplicate entries, excess hours.
B. Integrated test facility (ITF) - establishes a dummy entity within a client's system to see if the data will be processed correctly.
C. Snapshots - auditor embeds software routines at different points within an application to capture and report images of selected transactions as it is processed at preselected points in the program.
D. System control audit review file (SCARF) - uses software embedded in the system to gather information at predetermined points in a system. It is stored and reported to the auditor at predetermined intervals.
E. Parallel simulation - auditor builds a program independent of the client's software. The two programs are run parallel to each other and the outputs are compared for consistency.
F. Code review - auditor reviews computer code in the client's program looking for an inappropriate code or program logic.
G. Code comparison - EDP control group keeps a control copy of the original program (blueprint) and compares the original copy to the program currently in use looking for changes.
IX. On-Line Real Time System Controls
A. In this type of system, the major concern is access and the ability to change data without leaving an audit trail. 1. Use passwords to enter the system. 2. Passwords should periodically be voided and changed. 3. Input editing is very important - validity checks. 4. All activity should be logged into a history file with user identification. 5. File backup should be maintained.
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LAMBERS REVIEW
INSTRUCTORS SUPPLEMENT AND NOTES FOR BUSINESS ENVIRONMENT & CONCEPTS (BEC)
COST AND MANAGERIAL ACCOUNTING CHAPTERS 11, 13 & 14
PART 1
COST TERMS
PRIME COST = D. MAT + D.LABOR
CONVERSION COST = DIRECT LABOR + FACTORY OVERHEAD
PRODUCT DIRECT MATERIALS COST = DIRECT LABOR
FACTORY OVERHEAD
PERIOD COST = EXPENSE
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Total factory overhead Units to Monthly Annual*
Month
budgeted ($50,000 per month plus $1 per unit)
be Produced
rate per unit
Rate Per Unit
January $ 70,000 20,000 $ 3.50 $3.715 February $ 80,000 30,000 $ 2.67 $3.715 March $ 90,000 40,000 $ 2.25 $3.715 April $ 100,000 50,000 $ 2.00 $3.715 May $ 65,000 15,000 $ 4.33 $3.715 June $ 60,000 10,000 $ 6.00 $3.715 July $ 55,000 5,000 $ 11.00 $3.715 August $ 51,100 1,000 $ 51.00 $3.715 September $ 55,000 5,000 $ 11.00 $3.715 October $ 60,000 10,000 $ 6.00 $3.715 November $ 65,000 15,000 $ 4.33 $3.715 December $ 70,000 20,000 $ 3.50 $3.715
$821,000 221,000 $3.715
*Can be subdivided as follows:
Variable overhead Portion = $821,000 ‐ ($50,000 x 12 $1.00
221000
Fixed Overhead Portion = $600,000 221,000
$ 2.715
Combined overhead Rate $3.715
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Avery Company uses a pre-determined factory overhead rate based on direct labor hours. Avery’s budgeted overhead was $300,000 based on a budgeted volume of 100,000 direct labor hours. Actual overhead amounted to $325,000 with actual labor hours totaling 110,000. How much was the overapplied or underapplied factory overhead?
FACTORY OVERHEAD
CONTROL APPLIED
ACTUAL COST ACTUAL HOURS X PRE-DETERMINED RATE
UNDER/OVER APPLIED
FACTORY OVERHEAD
INTERIM STATEMENTS
UNDERAPPLIED = PREPAID MFG. COST = CA
OVERAPPLIED – DEFERRED CREDIT = CL
YEAR END STATEMENTS
NOT MATERIAL = CLOSE TO COST OF GOODS SOLD
MATERIAL = ALLOCATE TO COST OF GOODS SOLD, FINISHED GOODS INVENTORY AND WORK IN PROCESS
EXAMPLE: COST OF GOODS SOLD = 50%
FINISHED GOODS INV = 30% WORK IN PROCESS INV = 20%
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DIRECT COSTING INCOME STATEMENT
SALES
-VARIABLE COST OF GOODS SOLD
-VARIABLE SELL. & ADM EXPENSE
CONTRIBUTION MARGIN
-FIXED FACTORY OVERHEAD
-FIXED SELL. & ADM. EXPENSE
OPERATING INCOME
DIFFERENCE IN INCOME
ABSORPTION VS DIRECT COSTING
CHANGE IN INVENTORY
X
FIXED MFG. OVERHEAD PER UNIT
TOTAL DIFFERENCE
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COST BEHAVIOR
VARIABLE COST
VARIABLE COST IN TOTAL VARY IN EFFECT
PROPORTION TO PRODUCTION (SALES) within
THE RELEVANT RANGE AND WITHIN THE TIME PERIOD
VARIABLE COSTS PER UNIT ARE FIXED PER UNIT
WITHIN THE RELEVANT RANGE AND WITHIN
A GIVEN TIME PERIOD
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DIRECT COSTING
INCOME STATEMENT
SALES
-VARIABLE COST OF GOODS SOLD
-VARIABLE SELL. & ADM EXPENSE
CONTRIBUTION MARGIN
-FIXED FACTORY OVERHEAD
-FIXED SELL. & ADM. EXPENSE
OPERATING INCOME
DIFFERENCE IN INCOME
ABSORPTION VS DIRECT COSTING
CHANGE IN INVENTORY
X
FIXED MFG. OVERHEAD PER UNIT
TOTAL DIFFERENCE
SUMMARY NO
CHANGE IN INVENTORY = SAME INCOME
INCREASE IN INVENTORY = ABSORPTION HIGHER
DECREASE IN INVENTORY = DIRECT HIGHER
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COST-VOLUME-PROFIT RELATIONSHIPS
THE SEAHAWK COMPANY IS PLANNING TO SELL 200,000 UNITS OF PRODUCT B. THE FIXED COSTS ARE $400,000 AND THE VARIABLE COSTS ARE 60% OF THE SELLING PRICE. IN ORDER TO REALIZE A PROFIT OF $100,000, THE SELLING PRICE PER UNIT WOULD HAVE TO BE:
a. $3.75 b. $4.17 c. $5.00 d. $6.25
SALES
-VARIABLE COST
CONTRIBUTION MARGIN
-FIXED COST
OPERATING INCOME
COST-VOLUME-PROFIT RELATIONSHIPS
KOBY CO. HAS SALES OF $200,000 WITH VARIABLE EXPENSES OF $150,000. FIXED EXPENSES OF $60,000 AND AN OPERATING LOSS OF $10,000. BY HOW MUCH WOULD KOBY HAVE TO INCREASE ITS SALES IN ORDER TO ACHIEVE AN OPERATING INCOME OF 10% OF SALES?
SALES -VARIABLE COST
CONTRIBUTION MARGIN -FIXED COST
OPERATING INCOME
SALES = VARIABLE COST + FIXED COST + OPERATING INCOME
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Rice Corporation currently operates two divisions which had operating results for the year ended December 31, 1982, as follows:
West
Division Troy Division
Sales
$600,000
$300,000 Variable costs 310,000 200,000 Contribution margin 290,000 100,000
Fixed costs for the Division
110,000
70,000
Margin over direct costs
180,000
30,000
Allocated corporate costs
90,000
45,000
Operating income
$ 90,000
$(15,000)
Since the Troy Division also sustained an operating loss during 1981, Rice’s president is considering the elimination of the division. Assume that the Troy Division fixed costs could be avoided if the division were eliminated. If the Troy division had been eliminated on January 1, 1982, Rice Corporation’s 1982 operating income would have been
a. $15,000 higher b. $30,000 lower c. $45,000 lower d. $60,000 higher
CAPITAL BUDGETING
A. PAYBACK
B. NET PRESENT VALUE
C. INTERNAL RATE OF RETURN
D. ACCTG. RATE OF RETURN
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MANAGERIAL RATIOS
ROI = NET INCOME TOTAL ASSETS
OR
ROI = SALES X NET INCOME
TOTAL ASSETS SALES
OR
ROI = ASSET TURNOVER X PROFIT MARGIN (CAPITAL TURNOVER)
Select Co. had the following 1994 financial statement relationships:
Asset turnover 5 Profit margin on sales 0.02
What was Select’s 1994 percentage return on assets?
A. 0.1% B. 0.4% C. 2.5% D. 10.0%
ECONOMIC ORDER QUANTITY
ORDER = 2 X COST TO PLACE X DEMAND PER SIZE ONE ORDER PERIOD
COST TO HOLD ONE UNIT FOR ONE PERIOD
ECONOMIC PRODUCTION RUN
EPR = 2 X Demand x Setup Per Pound Cost
COST TO HOLD ONE UNIT FOR ONE PERIOD
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LAMBERS REVIEW INSTRUCTORS SUPPLEMENT AND NOTES FOR BUSINESS ENVIRONMENT & CONCEPTS (BEC)
COST AND MANAGERIAL ACCOUNTING CHAPTERS 11 & 12
PART 2
STANDARD COST PROBLEM
Four-Variance Overhead Analysis
At the beginning of 1984, Beal Company adopted the following standards:
Input Total Direct materials 3 lbs. @ $2.50 per lb. $ 7.50 Direct labor 5 hrs. @ $7.50 per hr. 37.50 Factory overhead:
Variable $3.00 per direct labor hour 15.00 Fixed $4.00 per direct labor hour 20.00
Standard cost per unit $80.00
Normal volume per months 40,000 standard labor hours, Beal’s January 1984 budget was based on normal volume. During January, Beal produced 7,800 units, with records indicating the following:
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Direct materials purchased 25,000 lbs. @ $2.60 Direct materials used 23,100 lbs. Direct labor 40,100 hrs. @ $7.30
Factory Overhead:
-Variable $135,000 -Fixed 165,000
Total Factory Overhead $300,000
Required:
For the month of January 1984, compute the following variances, indicating whether each is favorable or unfavorable:
1. Direct materials price variance, based on purchases. 2. Direct materials usage variance. 3. Direct labor rate variance. 4. Direct labor efficiency variance. 5. Variable Factory Overhead Spending Variance 6. Fixed Factory Overhead Spending Variance. 7. Variable Factory Overhead Efficiency Variance 8. Factory Overhead Volume Variance.
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STANDARD COST VARIANCES (FOUR VARIANCE ANALYSIS OF FACTORY OVERHEAD)
Price/ Rate/ Spending Usage/ Efficiency
I. Direct Material Price Variance I. Direct Material Usage Variance
Price Per Pound
x Actual Pounds
Purchased
= Total
Cost
Total Usage x
Std Cost per pound = Total
Actual Actual Vs vs Standard Standard
Allowed
Total Variance
Total Variance
II. Direct Labor Rate Variance II. Direct Labor Efficiency Variance
Rate Per Hour
X Actual Hours = Total Total Hours
x Std Per Hour
= Total Cost
Actual Actual Vs Vs Standard Standard
Allowed
Total Variance
Total Variance
III. Variable Overhead Spending Variance III. Variable Overhead Efficiency Variance
Rate Per Hour
x Actual Hours
= Total Cost
Total Hours
x Std Per Hour
= Total Cost
Actual Actual Vs vs Standard Standard
Allowed
Variance Variance
IV. Fixed Overhead Spending Variance IV. Fixed Overhead Volume (Capacity) Variance
Actual Fixed Spending Total Hours
x Std Per Hour
= Total Cost
vs
Budgeted Budgeted Fixed Spending Vs
Standard Variance Allowed
Variance
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ANALYSIS OF THE TYPES OF FACTORY OVERHEAD VARIANCES
Four-Way Analysis Three-Way Analysis Two-Way Analysis
1. Variable Overhead Spending 1. Total Overhead Spending
2. Fixed Overhead Spending 1. Controllable Overhead
3. Variable Overhead Efficiency 2. Variable Overhead Efficiency
4. Fixed Overhead Volume 3. Fixed Overhead Volume 2. Fixed Overhead Volume
THREE-WAY OVERHEAD ANALYSIS
TOTAL OVERHEAD SPENDING VARIANCE
ACTUAL SPENDING VS
FLEXIBLE BUDGET – ACTUAL HOURS
STD PER HR X ACT. HRS = TOTAL
V/C FIXED COST
VARIANCE
TWO-WAY OVERHEAD ANALYSIS
CONTROLLABLE VARIANCE
ACTUAL TOTAL SPENDING VS
FLEXIBLE BUDGET FOR STD. HRS
STD PER HR. X STD HRS = TOTAL
V/C FIXED COST
TOTAL FLEXIBLE BUDGET
VARIANCE
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WEIGHTED AVERAGE
Multiple Choice #45
45. Barnett Company adds materials at the beginning of the process in department M. Conversion costs were 75% complete as to the 8,000 units in work-in-process at May 1, 1983, and 50% complete as to the 6,000 units in work-in-process at May 31. During May 12,000 units were completed and transferred to the next department. An analysis of the cost relating to work-in-process at May 1 and to production activity for May is a follows:
Costs
Materials Conversion
Work-in-process, 5/1 $ 9,600 $ 4,800 Costs added in May 15,600 14,400
Using the weighted-average method, the total cost per equivalent unit for May 2was a. $2.47 b. $2.50 c. $2.68 d. $3.16
WIP – Weighted Average
Units Dollars Units Dollars
8000 Beg Inv. CC – 75%, Mat 100% Materials 9600 COMPLETED &
Conversion Cost 4800 TRANSFERRED 8000 Total Beg. Inv. 14,400
10,000
Current Period
Started
END INVENTORY
MATERIALS Materials 15,600 CONVERSION COST Conversion cost 14,400
18000 Total to Account for 44,400
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COST ACCOUNTING PROCESS COSTING METHOD
Weighted Average FIFO
I. Equivalent Units I. Equivalent Units
Direct Materials
Conversion Cost
Direct Materials
Conversion Costs
Beginning Inventory Beginning Inventory
Started & Completed Started & Completed
Ending Inventory Ending Inventory
Total Total
II. Weighted Average = Total Cost II. FIFO Av = Current Cost Cost Per Unit
Direct Materials
Total Production Cost Pe
Direct Ma
Current Production
Conversion Cost
Conversio
Total Total
III. Cost of Ending Inventory III. Cost of Ending Inventory
Equivalent Units x
Cost Per Unit
= Total Cost
Equivalent Units x
Cost Per Unit
= Total cost
Direct Materials Direct Materials
Conversion cost Conversion Cost
Total Cost Total Cost
IV. Cost of Goods Manufactured (Completed and Transferred)
IV. Cost of Goods Manufactured (Completed and Transferred)
Total Average Cost Per Unit X
Units completed and Transferred
= Total Cost
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FIFO PROCESS COST
Multiple Choice #45
45. Barnett Company adds materials at the beginning of the process in department M. Conversion costs were 75% complete as to the 8,000 units in work-in-process at May 1, 1983, and 50% complete as to the 6,000 units in work-in-process at May 31. During May 12,000 units were completed and transferred to the next department. An analysis of the cost relating to work-in-process at May 1 and to production activity for May is a follows:
Costs
Materials Conversion
Work-in-process, 5/1 $ 9,600 $ 4,800 Costs added in May 15,600 14,400
Using the FIFO cost method, the total cost per equivalent unit for May 2was a. $2.47 b. $2.50 c. $2.68 d. $3.16
WIP – FIFO Units Dollars Units Dollars
8000 Beg Inv. CC – 75%, Mat 100% COMPLETED &
Materials 9600 TRANSFERRED Conversion Cost 4800
8000 Total Beg. Inv. 14,400 END INVENTORY MATERIALS
Current Period CONVERSION COST 10,000 Started
Materials 15,600 Conversion cost 14,400
18000 Total to Account for 44,400
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JOINT COST
Tish Co. produces two joint products, Ebo and Gel. Joint production costs for May 1985 were $30,000. During May 1985 further processing costs beyond the split-off point, needed to convert the products into salable form, were $16,000 and $24,000 for 1,600 units of Ebo and 800 units of Gel, respectively. Ebo sells for $25 per unit and Gel sells for $50 per unit. Tish uses the next realizable value method for allocating joint product costs. What were the joint costs allocated to Ebo for May 1985?
a. $10,000 b. $12,000 c. $18,000 d. $20,000
JOINT COST – SOLUTION
Joint cost_
CALCULATION OF RELATIVE SALES VALUE
ADDED RELATIVE SALES PRODUCT SALES - COST = VALUE
EBO
GEL
ALLOCATION OF JOINT COST RELATIVE SALES VALUE METHOD
RELATIVE SALES JOINT COST = ALLOCATED PRODUCT VALUE RATIO X TOTAL COST
EBO
GEL
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BY-PRODUCT PROBLEM
Lares Confectioners, Inc., makes a candy bar called Rey, which sells for $.50 per pound. The manufacturing process also yields a product known as Nagu. Without further processing, Nagu sells for $.10 per pound. With further processing, Nagu sells for $.30 per pound. During the month of April, total joint manufacturing costs up to the point of separation consisted of the following charges to work in process:
Raw materials $150,000 Direct labor 120,000 Factory overhead 30,000
Production for the month aggregated 394,000 pounds of Rey and 30,000 pounds of Nagu. To complete Nagu during the month of April and obtain a selling price of $.30 per pound, further processing of Nagu during April would entail the following additional costs:
Raw materials $2,000 Direct labor 1,500 Factory overhead 500
Required: Prepare the April journal entries for Nagu, if Nagu is: 1. Transferred as a by-product at sales value to the warehouse without further processing,
with a corresponding reduction of Rey’s manufacturing costs. 2. Further processes as a by-produce and transferred to the warehouse at net realizable
value, with a corresponding reduction of Rey’s manufacturing costs.
SOLUTION
Debit Credit 1. By-product inventory – Nagu $3,000
Work in process – Rey $3,000 (30,000 lbs. @ $.10/lb.)
2. By-product inventory – Nagu 9,000
Raw materials 2,000 Direct labor 1,500 Factory overhead 500 Work in process – Rey 5,000 (30,000 lobs. @ $.30/lb)
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BENCHMARKING
&
BEST PRACTICES
BENCHMARKING IS A PART OF THE TOTAL
QUALITY MANAGEMENT APPROACH. IT
INVOLVES EVALUATING CURRENT
MANAGEMENT PRACTICES VS THE BEST
PRACTICES IN THE INDUSTRY. THE COMPANY
THEN USES THE BEST PRACTICES AS A
“BENCHMARK” TO MEASURE AND IMPROVE ITS
MANAGEMENT PROCEDURES.
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