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.

4

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.

33