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Becker CPA Review Business 5 Class Notes

1 2009 DeVry/Becker Educational Development Corp. All rights reserved.

BUSINESS 5 CLASS NOTES

Planning and Measurement, or Managerial/Cost Accounting, is the subject of BEC 5. It is estimatedto be 22%-28% of the point values according to the Content Specification Outlineand it breaks outinto four general areas that are analyzed in greater detail in these notes:

Cost measurement and cost accumulation,

Financial models used for operating decisions,

Planning and budgeting, and

Variances and other performance measures.

I. COST MEASUREMENT AND COST MEASUREMENT CONCEPTS

A. Costs may be measured for GAAP(external)or managerial (internal)purposes.

B. Cost drivers have a causal relationship to cost objects.

C. Product costsare "inventoriable" while period costs (SG&A) are expensed in the period

incurred.

D. Direct costsare traceable while indirect costs, mostly manufacturing overhead items, arenot traceable. Indirect costs are allocatedto production by selecting a base.

E. Costs may be variable, fixed or some combination of both (mixed) and may be expressedas a total or on a per-unit basis.

F. Standard costingattempts to measure costs that "should occur" using currentlyattainable standards.

G. Joint and by-product costingattempts to allocate the joint costs of two or more separateproducts. NRV method is best.

II. ACCUMULATING AND ASSIGNING COSTS

A. The Cost of Goods Manufactured accumulates all costs of production, adjusts forchanges in Work in Process and becomes part of the Cost of Goods Sold.

B. Job Order Costingaccumulates costs for individual "unique" jobs.

C. Process Costing accumulates costs for large numbers of homogeneous items, averagesthem and assigns a per-unit cost. FIFO or weighted-average costing is applied toequivalent units.

D. Activity-Based Costing (ABC) is a transaction-based method of assigning cost poolsbased on drivers and activity. ABC identifies value-added and non-value-added activities(NVA) and tries to eliminate, or reduce the NVAs. It is considered superior to traditionalmethods that employed a single base (DL or MH).

III. FACTORS AFFECTING PRODUCTION COSTS

A. Costs may be explicit (out-of-pocket) or implicit (opportunity). Accountingcosts areexplicit and Economic costs are implicit.

B. Large manufacturers can take advantage of their size through economies of scale.Inefficiencies may result in diseconomies.

C. Sunk costs are "gone" and not relevant to decision-making.

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IV. FINANCIAL MODELS USED FOR OPERATING DECISIONS

A. Cost/Volume/Profit (CVP) analysis is used to determine the breakeven pointwhen fixedcosts are "covered" by contribution margin (sales less variable costs). BE can be in unitor dollar sales.

B. Target profit and margin of safety are also part of CVP analysis.

C. Target costing works off of a projected selling price to determine the cost that willgenerate the desired profit.

D. Transfer pricing (four methods)involves internal charges for goods and services within anentity.

E. In operational decision analysis, marginal revenues should exceed marginal costs inorder to approve decision.

F. Economic Value Added (EVA) is similar to Residual Income (BEC3). It comparesincome after taxes to the required return based on WACC.

V. FORECASTING AND PROJECTION TECHNIQUES

A. Budgets are prepared based on sales projections and currently attainable standards.Flexible budgets allow for different costs at various levels of activity. Benchmarkingadopts best practices of different firms as a standard.

B. Data-driven techniques for forecasting include sensitivity, probability/risk andregression analysis, learning curve, high-low method and the flexible budgetingformula.

VI. PLANNING/BUDGETING OVERVIEW AND TECHNIQUES

A. A master budget begins with projected sales and flows through to production, directmaterials, direct labor, manufacturing overhead, SG&A and capital budgets.

B. Flexible budgeting is considered more useful since it identifies costs by behavior and can

be based on attained level of activity.

VII. BUDGET VARIANCE ANALYSIS

A. A performance report compares budget to actual figures and computes variances. Onceagain, a flexible budget generates more useful variances for analysis.

B. Standard cost systems price (rate) and usage (efficiency) variances for DM and DL(SAD and PURE). Manufacturing OH variances can be calculated by three differentcomponents: spending, efficiency and volume.

C. Target market analysis uses salesvolume and mix as well as market size and share toanalyze performance variances.

VIII. ORGANIZATIONAL PERFORMANCE MEASURES

A. Financial scorecards can be prepared for strategic business units. An SBU can beclassified as Cost, Revenue, Profit or Investment. AnSBU can also be classified byproduct line, geographic area or customer.

B. Managers are responsible for variable costs and controllable fixed costs. Common costsare not considered controllable.

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C. Contribution reporting, based on CVP concepts, analyzes performance by contribution toprofitability.

D. Non-financial scorecards evaluate qualitative factors.

E. Balanced scorecards are used for multi-dimensional analysis.

IX. BENCHMARKING TECHNIQUES AND BEST PRACTICES

A. Externally determined benchmarks are typically best practices.

B. Productivity measures how well a company uses scarce resources (TPR and PPR)compared to similar entities.

C. A company may use control charts, Pareto and "fishbone" diagrams to find andanalyze problems internally.

D. To improve processes, an entity may employ Kaizen or activity-based managementtechniques.

E. Quality control techniques analyze the costs of conformance and nonconformance(APIE). In general, conformance costs (such as Prevention and Appraisal) reduce

nonconformance (failure) costs.

F. Total Quality Management (TQM) emphasizes both quality and continuous improvement.

In addition to the text material, the appendices contain more detail on:

I. Annual Profit Plan and Supporting Schedules, including the Cash Budget,

III. Analysis Using Relevant Costs, and

III. Absorption (Full or GAAP) and Variable (Direct) Costing.

Many of the concepts in BEC5 are closely related to those covered in other BEC lectures, especiallyBEC2 and BEC3. As with those classes, some of the homework and supplemental questions were

taken from prior CMA exams and use a multiple-question format that is not used in computer-basedtesting. The questions have a high degree of difficulty likely not to be duplicated on your exam;however, they are extremely effective as a study tool.

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