BEC - Notes Chapter 1

Corporate Governance
Rights, duties, responsibilities, and authority of BOD & Officers
BOD-- What is the board of directors primary role
Individually they have no authority, but the directors are fiduciaries of the corp and MUST always act in the best
interest of the corp.
1. Safeguard the companys assets
2. Maximize shareholder return
o They have the sole discretion to declare distributions to shareholders
BODWhen can the board of directors not be held liable to the corp and when can they be held liable to the corp
Not held liable = if acts preformed or decisions made were done in good faith (ethically)
Held liable = for negligent acts or omissions
BOD-- The principle that protects corporate directors from personal liability for acts performed in good faith and in a
manner that the director believes is in the best interest of the corporation, exercising the care that a reasonably prudent
person would exercise in a similar position is known as
Business Judgement Rule
BOD-- When is a director entitled to rely on information, opinions, reports, or statements
If they were prepared by: corporate officers, employees, legal counsel, or accountants
BOD-- Under the BOD fiduciary duties, they have a duty of loyalty. What does that mean
It prohibits directors from competing with the corporation
o If a director is presented with a business opportunity that is of interest to their corp, that prohibits the
director from taking the opportunity for themselves.
It the corp doesnt take the opportunity, the director may them accept it for their self
If a director has a conflict of interest, they must disclose of it or the transaction must have been fair/reasonable to
the corp for it to be valid
Officers-- What is the officers primary role
They are individual agents who manage it day-to-day operations and may bind the corp to contracts made on its
behalf (This makes the corp liable)
o They also have the same fiduciary duties are directors
Officers-- How are officers selectedwhat type of authority do they have
They are selected by the directors and may also be removed by them with or without cause
Actual authority = oral or written instructions
Apparent authority = by their title of CEO or CFO
Officers-- Are officers allowed to be directors and/or shareholders
They can be directors, but the majority of the board should be independent
They can be shareholders
Sarbanes-Oxley Act of 2002
What has the Sarbanes-Oxley Act had an effect on since it was in place
Corporate responsibility
Enhanced financial disclosures
Fraud Accountability
Corp Responsibility--The corporate responsibility section of the act relates to the establishment of what
An audit committee
Representations made by key corporate officers (CEO and CFO)
Corp Responsibility--Public companies are responsible for establishing an audit committee. What does the audit
committee do
Resolve disputes between the auditor and management
They are members of the corpss BOD, but are independent
Establish procedures to accept reports of complaints
Corp ResponsibilityAn audit committee must be independent with regard to the issuer. The independence criteria is
1. Audit committee members may not accept compensation from the issuer for consulting or advisory services.

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2. Audit committee members may not be an affiliated person of the issuer (affiliation = person has ability to
influence financial decisions)
Corp Responsibility--Corporate officials (CEO and CFO) must sign certain representations regarding annual and
quarterly reports. By signing off, they are saying what
They have reviewed the report
The report does not contain untrue statements or omit material information
They assume responsibility for internal controls
They have made disclosures to the issuers auditors and the audit committee
Corp Responsibility--If an issuer is required to prepare an accounting restatement due to material noncompliance with
financial reporting requirements, what can happen to the CEO/CFO
May be required to reimburse the issuer for bonus compensation or gains on sales of securities during that period
Fin. Disclosures-- Additional disclosures are intended to improve investor confidence by providing transparency.
The enhanced financial disc losers associated with the issuer reports include additional details regarding
The financial statements
Internal controls
Senior officers
The operations of the audit committee
Fin. DisclosuresGenerally issuers are prohibited from what
Making personal loans to directors or executive officers
Fin. DisclosuresDisclosures are required for persons who generally have a direct or indirect ownership of ___% or
more of what type of stock
10% +
Any class of stock
Fin. DisclosuresWhat should be disclosed about internal controls
A statement that management is responsible for establishing/maintaining an adequate internal control structure
A conclusion about the effectiveness of the internal controls
A statement that the auditor has attested and reported on managements evaluation of internal controls
Fin. DisclosuresWhat needs to be disclosed for senior officers
Whether or not the company has adopted a code of conduct for the CEO, CFO, controller, and chief accountant
o If there is no code of conduct, must disclose the reasons
Fin. DisclosuresWhat does the standards on the code of ethics for senior officers promote
Honest and ethical conduct
Full, fair, accurate, and timely disclosures
Compliance with laws, rules, and regulations
Fin. DisclosuresAt least one member of the audit committee should be a financial expert. The issuer should disclose the
existence of a financial expert or give reasons if they dont have one. What qualifies a person as a financial expert
Qualifies as one through education or past experiences (very liberal rules)
They should have knowledge about: understanding and application of GAAP, experience with internal controls,
understanding audit committee functions, and experience in preparing or auditing F/S
o The BOD will decide if they qualify based on their situation
Fin. DisclosuresWhat is the purpose of having at least 1 financial expert on the audit committee
They are a resource of the audit committee
Fraud AccountabilityWhat are the jail sentences for each of the following situations
1. An individual who alters, destroys, or falsify an entry in a document
20 years + a fine
2. A corporation should retain all audit and review work papers for 7 years. Failure to do so can result in
10 years + a fine
3. An individual who knowingly takes harmful action against a whistle-blower
10 years
Fraud Accountability-- What is the statute of limitations for securities fraud

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The earlier of 2 years after the discovery of the facts constituting the violation
OR 5 years after the violation

Internal Controls (COSO)

What are the characteristics of Committee on Sponsoring Organizations (COSO)
It is an independent private sector initiative to study fraudulent financial reporting
It is regarded as an appropriate basis to document the assessment of internal controls
Known as the Treadway Commission
There are 17 principles that are categorized into 5 major internal control components
Who uses the COSO frameworkhow is it used by the groups
Management/BOD = obtain an understanding of what constitutes an effective system of internal control and
applying the internal control in the organization
External stakeholders = provides confidence that an organization has a system of internal control
What determines the sufficiency of controls and assessing their effectiveness
Management judgement
Internal control is a process that is designed to be implemented by an orgs management, BOD, and employees to provide
reasonable assurance that it will achieve its framework objectives. What are the categories of its objectives that must be
present to be considered an effective system of internal controls
ORC with R being the main focus of COSO
1. Operations Objectives = effectiveness and efficiency of an entitys operations
2. Reporting Objectives = financial reporting is reliable, timeliness and transparent
3. Compliance Objectives = ensure the entity is adhering to all laws and regulations
There are additional components needed to achieve the 3 objectives of internal controls. What are they (describe)
CRIME It would be a CRIME if you forgot these 5 components
These apply to all 3 categories of an entitys objectives (ORC)
1. Control Environment (Tone at the top-ethics)
2. Risk Assessment by Management (F/S are misstated or there is fraud)
3. Information and Communication Systems (FACT- fair, accurate, complete, and timely)
4. Monitoring Activities (Efficiencies of internal controls & reporting defines)
5. Existing Control Activities (policies & procedures to mitigate risk)
CRIME The control environment (tone at the top) includes processes, structures, and standards that provide the
foundation for an entity to establish a system of internal control. What are the principles that related to the control
environment
EBOCA
1. Commitment to ethics and integrity (ethics should be adopted by top management and demonstrated
throughout the entire org)
2. Board independence and oversight (board is separate from management and oversee internal controls)
3. Organizational structure (there are reporting lines, authorities, and responsibilities relating to objectives)
4. Commitment to competence (hire, develop, and retain competent employees)
5. Accountability (individuals are held accountable for their internal control responsibilities)
CRIME What are some traits of a code of ethics for employees
It should provide guidelines on situations
Describe the companys values, policies, and mission
Talk about consequences if in violation of the code
An employee should be aware and acknowledge their understanding of it
CRIME Risk assessment is an entitys identification and analysis of risks to the achievement of its objectives. What are
the principles that relate to risk assessment
SIIC
1. Specify objectives (objectives are created that allows for assessment of risks related to the objectives)
2. Identify and analyze risks (identify risks across entire org and determine how risks should be managed)
3. Identify and assess changes (asses changes that could significantly impact the internal controls)
4. Consider potential for fraud (consider fraud in assessing risks)

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CRIME Information and communication systems support the identification, capture, and exchange of information in a
timely and useful manner. What are the principles that relate to information and communication
OCI
1. Obtain and use information (fact is fair, accurate, complete, timely)
2. Communicate with external parties (CPA firm)
3. Internally communicate information (internal audit, audit committee, and management)
CRIME Monitoring is the process of assessing the quality of internal control performance over time by assessing the
design and operation of controls on a timely basis and taking necessary corrective actions. What are principles that
relate to monitoring
OCS
1. Ongoing and/or separate evaluations (tests internal controls to see if present & functioning update
mission/values)
2. Communication of deficiencies (report and communicate deficiencies to those who correct deficiencies)
CRIME Existing control activities are set forth by an entitys policies and procedures to ensure that the orders initiated
by management to mitigate risks are performed. What are the principles that relate to existing control activities
CTP
1. Select and develop control activities(contribute to the mitigation of risks to acceptable levels)
2. Select and develop technology controls (controls over technology to support achievement of objectives)
3. Deployment of policies and procedures (put policies into action)
An effective internal control system requires that all 5 components and 17 principles that are relevant be what
Present = components and relevant principles are included in the design and implementation of the control
system
Functioning = components and relevant principles are operating as designed in the control system
What is the trick to remembering all components and principles
A CRIME took place! EBOCA was SIIC and forgot to include OCI in the annual F/S. As a result he got sent to
OCS (on campus suspension) and had to CTP (cut the pies) for a party all day
Enterprise Risk Management
What is enterprise risk management designed to do
Identify potential events that may affect the entity & manage risk to be w/in its risk appetite so entity can achieve
objectives
Who is best fit for determining risks and coming up with a risk procedures
A manager within the department
What are the main enterprise risk management framework steps
1. Set strategies and objectives
2. Evaluate how an organization will respond to risks
3. Devote time to event identification which may be positive or negative to reduce operational surprises
What are the objectives for enterprise risk managementwhat would be examples of each
S + ORC
1. Strategic Objective = high-level goals designed to achieve the mission (set an industry rank for company)
2. Operations Objectives = effectiveness and efficiency of an entitys operations (conduct focus groups)
3. Reporting Objectives = financial reporting is reliable, timeliness and transparent (uniform chart of accts)
4. Compliance Objectives = ensure the entity is adhering to all laws and regulations (ethics hotline)
What are all the components of enterprise risk management
The components are similar to those in COSO (CRIME), but are more broader
Know IS EAR AIM
1. Internal Environment
(CRIME-- Control Environment)
2. Setting Objectives
Four categories of SORC
3. Event Identification
(CRIME)
4. Assessment of Risk
(CRIME)
Risk Assessment by Management
5. Risk Response
(CRIME)
6. Activities (control)
(CRIME -- Existing Control Activities)
7. Information and Communication (CRIME -- Information and Communication Systems)
8. Monitoring
(CRIME -- Monitoring Activities)
Components of ERM-- The internal environment (tone at the top) is similar to the control environment of COSO. What
are the elements of the internal environment

BEC - Notes Chapter 1

EBOCA + HR
1. Commitment to ethics and integrity
2. Board oversight (authority and accountability of management)
3. Organizational structure
4. Commitment to competence
5. Accountability
6. Human resources standards (background checks, hire, train, evaluate, compensate, and promote)
7. Risk appetite and risk management philosophy (aggressive or conservative attitudes)

Components of ERM -- Organizations set objectives and identify events that may prevent the achievement of those
objectives. What are the elements of setting objectives
4 categories of SORC items
1. Strategic objectives (mission driven objectives)
2. Related objectives (these support strategic objectives)
a. Operational objectives (efficiency, effectiveness, and profitability goals)
b. Reporting objectives (external and internal reporting)
c. Compliance objectives (comply with laws, rules, and regulations)
3. Selected objectives (support mission, but also align with the entitys risk appetite)
4. Risk appetite (benchmark for strategy setting and is the balance to accept risk to achieve growth)
5. Risk tolerances (accepted level of variation relative to the achievement of objectives)
Components of ERM Both positive (opportunities) and negative (risks) events should be identified. What are the
elements of event identification
1. Events (an occurrence that impacts strategy or the achievement of objectives)
2. Influencing factors (economics recessions, natural storms, social changes in society, technology choices)
3. Event ID techniques
a. Event inventories (list of potential events common to companies in a particular industry)
b. Internal analysis (analysis performed by internal staff as part of business planning)
c. Escalation of threshold triggers (Comparison of activity to criteria may trigger an identification
of event)
4. Event interdependencies (a change in interest rates might impact exchange rates, etc)
5. Event categories
a. External = economic, natural environment, political, social, and technological
b. Internal = infrastructure, personnel, process, and technology
6. Distinguishing risks and opportunities (negative events prevent achievement of objectives risk and
positive event that promote achievement of objectives opportunities)
Components of ERM Risks are analysed in relation to their likelihood that their severity and the anticipated risks that
continue even though management has taken action. What are the elements of assessment of risk
1. Inherent and residual risk (Inherent = the risk to an org. that exists if management takes no action to
change the likelihood or impact of a risk. Residual = the risk to an org that exists after management takes
action to mitigate the impact of an event)
2. Establishing likelihood and impact (likelihood = probability an event will occur. Impact = the severity)
3. Data sources (drawn from past experience with similar events)
4. Assessment techniques
a. Benchmarking (use of common data from orgs with similar characteristics)
b. Probabilistic model (use of a range of events and impacts the likelihood using assumptions)
c. Non-probabilistic model (use of subjective assumptions to estimate event impact)
5. Event relationships (management determines if individual events correlate or are unrelated)

Generally, an organization will not operate beyond the limits of their risk appetite. Risk appetite has generally
been exceeded when
The likelihood and impact of negative events significantly exceeds residual risks
Components of ERM Risk response is managements response to risk which must align with the orgs overall risk
appetite. What are the elements of risk response
1. Evaluating possible responses (management will generally respond to risk in 1 of 4 ways)
a. Avoidance = may elect to avoid or terminate risk (discontinue the underperforming product line)
b. Reduction = may elect to reduce or mitigate risk (invest in technology to monitor inventory
levels so dont have shortage or diversify its offerings)
c. Sharing = may reduce risk by transferring risk (buying insurance)

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d. Acceptance = may take no action (content with how things are)

2. Selected responses (management selects a response from the 4 alternatives above)
3. Portfolio view (entities must review their total residual risk in comparison to risk tolerances)

Components of ERM Control activities are the policies and procedures used to effect managements response to risk.
What are the elements of control activities
Similar to risk response
1. Integration with risk response (policies and procedures should mirror actions anticipated by the risk
response)
2. Types of control activities
a. Top level reviews (variance analysis- budgeted V actual)
b. Direct function or activity management (review of performance reports and reconciliations)
c. Information processing (batch totals and other common controls)
d. Physical controls (assets are kept in a secure location and documents in a locket/fire proof vault)
e. Performance indicators (do ratio analysis and compare to standards to find red flags)
f. Segregation of duties (segregation of authorization and record keeping)
Components of ERM Information and communication includes the identification, capture, and communication of
information throughout the organization in an effective way. What are the elements of information/communication
1. Information (FACTfair, accurate, complete, timely)
2. Communication (internal, external, and the means of communication (social networking, e-mail, etc))
Components of ERM Monitoring should be used to manage risk. What are the elements of monitoring
1. Ongoing monitoring activities
2. Separate evaluations
3. Reporting deficiencies
For enterprise risk management to be running effectively what must happen.
Each component of ERM (IS EAR AIM) is present and functioning
There is no material weakness
What are limitations of enterprise risk management
It is subject to human judgement
Evaluations could be made in error
Managers can override controls

Operations Management: Performance Management &Impact of Measures on Behavior

Financial and Nonfinancial Performance Measures
What is the purpose of both financial and nonfinancial measures
Motivate appropriate employee behaviour
How do you tell the difference between a financial and a nonfinancial measurement
Financial = generally items measured in dollars that provides insight into the financial operations
Nonfinancial = generally focus on operational statistics that focus on their operational objectives
o Used to observe problems and gets attention to those errors
Delivery times
Materials used
Miles/hours driven
Defects
What are the types of financial measures on performance (describe them)
1. Profit (income generated after expenses)
2. Return on Investment (may be based off of assets, equity, etc.)
3. Variance Analysis (comparison on budgeted V actual)
4. Balanced Scorecard (converts a companys strategic objectives into a set of performance measures)
Productivity is a measure of

BEC - Notes Chapter 1

Efficiency and uses the relationships derive from actual performance in comparison to similar orgs overtime
(benchmarking)

What are the types of nonfinancial external benchmarks on productivity (describe them)
1. Total factor productivity ratios (TFP)
o Considers both material AND labor costs
o Output (units produced) Total Costs (material & labor)
2. Partial productivity ratios (PPRs)
o Considers material OR labor
o Focus is on the quantity NOT cost
o Output (units produced) Specific Quantity (hours, lbs, etc.)
What are the types of nonfinancial internal benchmarks on productivity (describe them)
1. Control charts (plots actual results and shows an interval that is an acceptable range AKA goal post conformance.
It is also used to determine zero defects)
2. Pareto diagrams histograms (a defects frequency diagram that goes from most frequent to less frequent and
shows both individual and cumulative frequencies)
3. Cause-and-Effect fishbone diagram (managers use it to identify the sources of problems in the production
process and their locations)
Impact of Marketing Practices on Performance
Marketing seeks to establish value for an organizations products. Describe each of the types of marketing
1. Transition Marketing
o Customers are attracted for a single sale (lowest price) Example = car
2. Interaction-Based Relationship Marketing
o Customers are attracted for the purpose of a sale that serves as the basis for an ongoing relationship
(repeat business)
3. Database Marketing
o Info is gathered on customers and the info is used to segment customers into target markets for more
effective selling efforts
4. E-marketing
o Use of internet
5. Network Marketing
o Focuses on relationships and referrals
Incentive Compensation
What are the types of compensation for managers
Fixed salary = guaranteed periodic payments
Bonuses = based on either performance or stock performance expectations
o These motivate and provide incentive for employees to improve operating performances
Other incentives perks = non-salary benefits like use of vacation homes, company jets, company cars, etc.
o BOD must approve these
o If the perk was used for personal gain, then it may be included in their taxable income
o They are criticized as being excessive
Incentive compensation must balance employee focus on 1) current rewards for current performance against the impact
of 2) current decisions on future performance. What is an example of each type of performance compensation
1. Current performance = cash bonuses
2. Current performance but emphasize future performance = restricted stock options (due to vesting)

Operations Management: Cost Measurement Methods and Techniques

Cost Objects
What is a cost driverWhat are the types of operational cost drivers
A causal factor (the cause) that increases the cost (the effect) of a cost objective.
o For example, weather is a significant driver in the airline industry.
1. Volume based - associated with traditional cost accounting systems. (uses a single cost pool & a single OH rate)
o Based on aggregate volume output (# of DLH, machine hours, or production units)
2. Activity based - associated with contemporary cost accounting systems. (uses multiple OH rates)
o Based on an activity that adds value to output (packaging, inspection)

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What are cost objects or objectives

Resources or activities that serve as the basis for management decisions
o It can be a product, customer, department, geographic region, plant, etc. for which costs are measured
and assigned.
Cost accounting system objectives are designed to meet the goal of measuring cost objects or objectives. What are the
most frequent objectives (describe them)
PIE
1. Product Costing (inventory, COGMAN, and COGS)
2. Income Determination (profitability)
3. Efficiency Measures (comparison to standards)
What items are included in prime and conversion costs
Prime = DM + DL
Conversion = DL + OH applied
How would you find the cost of direct materials used with a set of information
Beginning Balance of DM
+ Purchases and Transportation In
-- Purchase returns and allowances
= Material Available
-- Cost of Material Used
SQUEEZE
= Ending Balance DM

How would you find the direct labor amount with a set of information
Add labor costs that are directly part of making a product.
How would you find the applied overhead amount with a set of information
1. Overhead rate = Budgeted overhead costs (quality inspections, material handling) Estimated cost driver
(estimated DLH, MH, or DL$)
2. Overhead applied = Actual cost driver (based on actual production) overhead rate
What are the differences between product costs and period costs
Product = All costs related to the manufacturing of the product (includes goods purchases/mfg. for resale)
o It includes DM, DL, OH, WIP, finished goods, and COGS
o The costs are considered inventoriable meaning it is an asset on the B/S before the product is sold
o When the product is sold, it then goes on the I/S (COGS) matching principle
Period = All costs associated with selling the product and administering and managing the operations of the firm
o It includes selling (advertising, shipping, and customer service), general and admin (legal fees, executive
salaries, printing annual reports, and R&D) expenses as well as interest exp
o These costs are expensed in the period in which they are incurred and not inventoriable
o Goes on the I/S only
What are the differences between manufacturing costs and nonmanufacturing costs
Mfg. = Include all costs associated with the manufacture of a product (treated as product costs)
o Consists of both direct (DM + DL) and indirect costs (indirect material, labor, OH)
o Normal Spoilage
Nonmfg. = Costs that do not relate to the manufacturing of a product (treated as period costs)
o Selling, general, and admin expenses
o Abnormal Spoilage
How would you find total manufacturing cost with a set of information
DM + DL + OH = total manufacturing costs
o The OH could be based off a percentage of DL
What are examples of nonvalue-added costs
Moving, handling, and storing products
Tracing Costs to Cost Objects (product, dept., geog, area)
A direct cost can be easily traced to a cost pool/object. What are the characteristics & examples of DM and DL
DM = The costs of materials purchased to be used in production

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It includes freight-in (freight-out = selling exp) AND a reasonable amount for normal scrap created by the
process
DL = The cost of the labor that is directly related to the production of the product
o It includes a reasonable amount of expected down time for the labor (breaks, setups, training)

An indirect cost is not easily traceable to a cost pool/object. What are the characteristics of indirect materials, indirect
labor and other indirect costs
These are ALL manufacturing OH costs (single cost pool)
o Material = Materials that were not used specifically or couldnt be traced to the completed product easily
Nails, glue, and cleaning supplies used on product
o Labor = Labor that supports the manufacturing process but does not work directly on the specific job
Shift supervisors, maintenance workers, forklift drivers, janitorial staff, engineers, HR staff, etc.
o Other costs = Other costs other than those for material and labor
Depreciation, rent, property taxes, insurance, utilities, etc.
How are indirect costs treated when they were 1) incurred in the factory and 2) incurred in the office
1. Factory = product cost manufacturing OH
2. Office = period cost selling, general and admin
What is the distribution of overhead costs known as
Cost allocation
Cost Behavior
What are examples of items that would be considered 1) variable costs, 2) fixed costs, and 3) semi-variable costs
1. Variable = Sales, DM, DL, normal spoilage, expenses tied to a formula, and utilities tied to hours of production
2. Fixed = Depreciation, rent, insurance, taxes, salaries, and utilities ties to annual rate
3. Semi-variable = Indirect labor and maintenance/repairs with a contractual amount and a variable rate
What are the behaviors and amounts that change (total cost or per unit) for both variable cost and fixed costs
Variable:
o Behavior = Total cost changes proportionally with the cost driver (sales volume/production volume)
o Amount = As production volume increases or decreases, the total variable cost will also increase or
decrease in the same direction, but the variable cost per unit will always remain the same

Fixed:
o Behavior = Total cost does not change when the cost driver changes
o Amount = As production volume increases or decreases, fixed costs remain the same, but the cost per
unit will increase or decrease in the opposite direction of the production volume

What is the relevant range

Refers to a specific activity level that is bounded by a minimum and maximum amount.
Within the designated boundaries, certain revenue or cost levels can be expected to occur.
Outside of that relevant range, revenues and expenses will likely differ from the expected amount.

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Cost Accumulation Systems

Cost accumulation systems are used to assign costs to products. If the cost object is a custom order, _____ costing is
used. If the cost object is a mass-produced homogeneous product _____ costing is used. How are costs accounted for and
kept track of in each cost system
Custom = job costing
Mass-produced = process costing

Job = Job-cost records (accumulated info from material requisitions and labor time tickets)
Process = Production report (includes beginning inventory, units started, units completed, and ending inventory)

Cost of Goods Manufactured (COGMAN) & Sold (COGS)

What is the formula to calculate the cost of goods manufactured (AKA cost of job completed)
Beginning WIP
+ DM used
+ DL and indirect labor
+ OH applied (other factory costs)
= Total manufacturing costs
-- Ending WIP
= COGMAN
How would you determine direct materials used
Beginning raw materials
+ Purchases
= Available for use
-- Ending raw materials
= DM used
What is the formula to calculate the cost of goods sold
Beginning finished goods
+ COGMAN (or net purchases if retailer)
= COG available for sale
-- Ending finished goods
= COGS
How do you determine the gross margin and contribution margin
Sales less COGS = GM
Sales less total variable expenses = CM
How would you determine gross profit
Sales
+ Beginning finished goods
+ COGMAN
-- Ending finished goods
= GP

COGS items

What would be the formula to calculate the COGS/unit

DM + DL + OH = total manufacturing costs
Total manufacturing costs units = COGS/unit
What would be the formula to calculate the total cost/unit
DM + DL + OH + selling & admin = total cost
Total cost units = total cost/unit

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Job-Order Costing
When would you use a job-order costing systemWhat are examples
When there are relatively few units produced
AND when each unit is unique or easily identifiable
o Examples = construction, aircraft assembly, printing, public accting firm, consulting firm, & repair shops
How are costs allocated under this methodIs this system used for external and internal reporting
Costs are allocated to a specific job as it moves through the manufacturing process
DM and DL are allocated to each job
OH is allocated to each job based on a predetermined OH rate
o Both internal and external reporting is allowed
In normal costing, overhead is estimated and applied to production. The basics of overhead application steps are
Step 1: Calculate the predetermined overhead rate
Budgeted OH for factory Estimated cost driver (labor hrs, labor costs, or machine hrs)
Step 2: Apply overhead to actual production throughout the year
Step 3: Reconcile the difference between the total actual overhead incurred during the year and the total overhead
applied to production.
How would you solve a problem that wanted you to find the total overhead cost for a job
Total variable cost cost driver (DLH or DL$) = cost/unit
+ Total fixed cost cost driver (DLH or DL$) = cost/unit
Then multiply by the actual cost driver used
If you have a credit balance for manufacturing OH, is it favorable or unfavorable explain why it is that answer
Credit balance is on the right side and right hand = favorable
o Applied OH > Actual OH and we overapplied OH
Applied OH is based on the DL and actual OH is given in the problem
What would be included in a T account for manufacturing OH
Manufacturing OH
Actual Costs Incurred:
OH applied
Indirect Labor
Indirect Materials
Utilities
Depreciation
Taxes/ Insurance
Other Indirect Costs
Underapplied OH
Overapplied OH
DU (debit under)
CO (credit over)

Process Costing
When would you use a process costing systemWhat are examples
When you have a large number of homogeneous items
o Examples = gas, oil, cereal, paints, flour, glass, food manufacturer, plastic, cement, lumber, etc..
How are costs allocated under this method Is this system used for external and internal reporting
Costs are accumulated by process or department and then the costs are averaged over the total units produced
o Both internal and external reporting is allowed
How would you determine the cost of inventory that is transferred to raw materials, WIP and finished goodsHow
would you determine COGS

What is the goal of a production report What are equivalent units

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BEC - Notes Chapter 1

PR = To keep track of the physical flow of units and costs

EU = The amount of DM, DL, and OH needed to complete one unit of production

How would you compute the total value of DM or DL costs in ending inventory using either FIFO or WAVG method
1. Compute equivalent units of production
2. Compute the unit cost of production (cost per equivalent unit)
3. Apply unit costs to the equivalent units in ending inventory
How would you compute the equivalent units of production in FIFO V. WAVG
(Beginning WIP % to be completed)
+ (Units completed -- Beginning WIP)
FIFO
+ (Ending WIP % completed)
Units completed
+ (Ending WIP % completed )

WAVG

How would you find the unit cost of production (cost per equivalent unit) in FIFO V. WAVG
FIFO = current costs only equivalent units
WAVG = (beginning cost + current cost) equivalent units
FIFO & WAVG-- How would you apply the unit cost to the equivalent units in ending inventory
(Ending WIP % completed ) cost per equivalent units = value of either DM, DL, OH in ending inv
If you want the total for materials & conversion, compute separately then add total costs together
When would the equivalent units be the same under both FIFO and WAVG
There is no beginning inventory
What is normal spoilage V. abnormal spoilage How are they treated
Normal spoilage = Occurs under regular operating conditions and is included in the standard cost of the mfg. product
o An inventory cost (COGS) on the B/S
Abnormal spoilage = Shouldnt occur in regular op conditions and is NOT included in standard cost of mfg. product
o A period expense and is charged against income in the period as separate component of COGS
If not all the normal spoilage units are complete/sold, then they are NOT charged against revenue
Activity Based Costing (ABC)
What is an activity-based costing (ABC) system
It is an accounting system that collects financial and operating data on the basis of the cost drivers.
It uses multiple OH rates to assign indirect costs to products (cost objects) based on the resources a product consumes.
(increases cost pools and allocation bases)
It attempt to improves cost allocation by emphasizing long-term product analysis
It can be used with either job order costing or process costing
What are the differences between a traditional system V. an ABC system
1. Traditional = volume based (uses a single cost pool & a single OH rate)
o Based on single volume output (# of DLH, machine hours, or production units)
2. Activity = associated with contemporary cost accounting systems. (uses multiple OH rates)
o Based on an activity that adds value to output (packaging, inspection)
When would it be beneficial to use ABC and thus multiple OH rates
Various products are manufactured that do not pass through the same depts.
If the manufactured products differ in the resources consumed (heterogeneous consumption)
What is an advantage and a limitation of ABC
Advantage = More accurate and reliable information
Limitation = It is more costly than a traditional system
What is the cost driver in ABC Is this system used for external and internal reporting
The number of transactions involved in a particular activity (nonfinancial variable)
Internal reporting only
ABC focuses management on the cost/benefit of activities. What are value-added activities V. non-value-added
activities
Value = DM and DL
Non-value = Warehousing and surplus inventory (these should be eliminated to reduce costs)

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BEC - Notes Chapter 1

Services can also be allocated using ABC. What are the 2 methods used to allocate service costs (explain them).
1. Direct Method = the most widely used method
o Each service departments total costs are directly allocated to the production depts. without recognizing that
service depts. themselves may use the services from other service depts.
2. Step-Down Method = the more sophisticated approach in complex situations
Joint Product Costing
A joint product is two or more products (main products) that are generated from a common input. By-products are minor
products that incidentally result from the manufacture of the main product and their low sales volume is not sufficient to
cover their share of common costs. How are by-product revenues treated How are joint costs treated
By-product:
o Revenue is treated as a reduction to common costs for joint product costing or miscellaneous income
Joint Cost:
o Method 1 = Based on the amount of volume. Divide costs up based on each products weight
If you have any by-product costs, subtract them out first from the total joint costs then do weight
This method is also used for service dept. cost allocations
o Method 2 = Based upon sales value at split-off. Divide costs up based on each products weight
o Method 3 = Based upon Net Realizable Method because there is no sales value at split off. Divide costs up
based on each products weight
Units produced sell price per unit further processing costs (aka separable costs) = NRV
What is the split-off point
The point in the production process where the joint products can be recognized as individual products
o Joint product costs = costs incurred up to the split off point
o Separable costs = costs incurred on a product after the split off point
Sales value less cost of completion and disposal equals _____
Net sales value at split-off point

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