1

MAS
reviewer Management
overview
Controllership
Accounting: an

NOTES FROM THE BOOK OF RODELIO S. ROQUE - Process by which manager assures that
and ReSA hand-outs company resources are obtained and
Compiled by: Kathleen L. Albano, CPA in transit
utilized according to plan and objectives
for PERSONAL review purpose ONLY
Controller
- The one responsible for accounting aspect
Management Accounting: an overview of management control
MAS
Cost Behavior Analysis Line vs. Staff function
CVP analysis a. Line function
Absorption and Variable Costing  authority to give commands to
Relevant costing subordinates
Budgeting  exercise downward
Standard and Variance analysis b. Staff function
Responsibility Acctng. And Transfer  authority to give advices
Pricing  exercise upward
Activity-based costing and management
Strategic cost management Controller vs. Treasures
Quantitative techniques a. Controller
Capital Budgeting  Protection of assets
MACROECONOMICS  Recording and reporting
MICROECONOMICS b. Treasurer
 Custody of assets
 Credit and collection

Ethical standards (CICO)

a. Competence – maintain an appropriate
level of professional expertise
b. Integrity – avoid any conflict of interest
and advise concerned parties of any
potential conflicts
c. Confidentiality – refrain from disclosing
confidential information
d. Credibility– communicate the info. Fairly
and objectively

Management
- Planning, organizing and controlling task
to realize the objectives of an organization
- Basic management functions;
a. Planning – setting objectives and
choosing the best alternative to attain
the set objectives
b. Organizing – utilizing available
resources as plans are carried out
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c. Controlling – comparing actual  Usually rendered for the management

performance with the set plans or that is usually a 3rd party client
standards
Note: decision making is an inherent BROAD Stages in MAS engagements
function a. Analysis stage
 Determining facts and circumstances
b. Design stage
Management Acctng  Evaluating possible solutions,
- Provide accounting info to managers who communicating findings and presenting
will use the info as basis in making recommendations
decision c. Implementation stage
 Scheduling actions and providing
- Mngt. Acctng vs. Financial acctng technical assistance in the
Financial Mngt.acctng implementation of the recommendations
Acctng
a. users external Internal SPECIFIC Stages in MAS engagements (NPC-
(managemen PIEP)
t) 1. Negotiating the engagements
b. guiding GAAP Mngt. Wants 2. Preparing for and starting the
principles and needs engagements
c. emphasis Reliability Relevance 3. Conducting the engagements
of reports (precision (timeliness of 4. preparing and presenting the reports and
recommendations
of data) data)
5. Implementing the recommendations
d. amount of Compress Extensive 6. Evaluating the engagements
detail and and detailed 7. Post-engagement follow up
simplified
e. Focus of On On segment Management consultant
info business and business - person who is qualified to advise and
as a whole as a whole assist businessmen on a professional basis
f. Time Historical Future in identifying and solving specific
orientation data oriented management problems
using current
and past data Documents used to formalize management
consultancies and engagements
a. contract
 legal document prepared by the client,
incorporating a proposal letter prepared
by a business advisor
b. proposal letter
MAS  an offer of service, which if accepted by
the client becomes a contractual
Consulting services performed by the CPA’s
engagements
and other financial advisors to improve
c. engagement letter
client’s use of its capabilities and resources to  used when the client has already agreed
achieve business objectives that the business advisor will conduct the
engagement
Characteristics d. confirmation letter
 Broad in scope  brief and concise statement of
 Involves problem solving agreement previously reached with a
 Involves varied assignment client
 Usually non-recurring
 Relates to the future MAS practice standards
 Require highly qualified staff a. personal characteristics
 Human relationship play a vital role in  practitioner must act with integrity,
each engagement objectivity and independent in mental
attitude
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b. competence  Relevant range, range of activity within

c. client benefit which cost behavior pattern is valid
 practitioner should notify the client of B. Time assumption
any reservations he may have  Cost behavior pattern are TRUE only over
concerning the realization of anticipated a specified period of time
benefits C. Linearity assumption
d. due professional care  Cost is assumed to manifest a linear
e. understanding with a client relationship over a relevant range
 practitioner should inform his client of all
significant matters related to Cost estimation: segregating variable and
engagement fixed cost
f. planning and supervision
a. High-low method
g. sufficient relevant data
 Computed from 2 sampled data the
 are to be obtained, documented and
evaluated in developing conclusions and
highest and lowest points based on
recommendations ACTIVITY or COST DRIVER
h. communication of result Change∈Cost
 unit VC=
Change∈ Activity
 outlier , a data point that falls from
other data points in a scatter diagram
b. Scattergraph
 All observed cost are plotted on a
Cost Behavior Analysis graph
c. Least-squares regression method
Cost – monetary amount of resources given  Statistical techniques that investigates
up to attain some objective the association between dependent
and independent variables
Cost behavior – relationship between cost  Determines the line of the best fit for a
and activity set of observations
COST Total Per unit  Simple regression – if there is only
amount 1 independent variable ( y = a +
a. Fixed constant Inverse bx)
1. DISCRETIONARY relationshi
 Multiple regression – if analysis
2. COMMITED p
involves multiple independent
b. Variable Direct constant
1. TRUE variable relationshi variables ¿)
2. Step variable p Formulas
c. Mixed Direct Inverse a. Y = na +bx (n, no. of observation)
relationshi relationshi b. ∑xy = a∑x + b∑ x 2
p p
Where; x = activity and y is the cost

Mixed cost CORRELATION ANALYSIS

- a combination of fixed and variable cost - Used to measure the strength of linear
- Y = a + bX relationship between two or more
- Where; variables
 Y = Total cost (dependent variable) - CORRELATION, closeness of linear
 a = Total FC (vertical y-axis intercept relationship between the cost and activity
 b = unit VC (slope of the line or variable
coefficient)
 X = activity or cost driver (independent COEFFICIENT OF CORRELATION (r)
variable ) - Measure the relative strength of linear
relationship between two variables.
Cost behavior assumptions and - Values ranges from -1 to + 1.0
limitations
A. Relevant range assumption COEFFICIENT OF DETERMINATION (r 2)
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- A measure of goodness or fit in the f. Time value of money is ignored

regression
- The higher the (r 2) the more confident BREAK-EVEN analysis
one can have in the estimated cost (Formula approach)
formula. a. Single product
- Values ranges from -1 to + 1.0 ¿ cost
1. BEP∈ pesos=
CM ratio
¿ cost
2. BEP∈units=
CM per unit
b. Multiple Product
¿ cost
1. BEP∈ pesos=
WCM ratio
¿ cost
2. BEP∈units=
WCM per unit

 CMratio=total CM /Sales∈Pesos
Computation of weighted CM ratio
A B total
CVP analysis CMR per product xx yy
Definition – a systematic examination of the Times: sales mix ratio xx yy
relationship among cost, cost driver and Weighted CMR xx yy xxyy
profit.

Sales mix ratio = sales /total sales

Application of CVP analysis
a. Type of product to produce and sell Units mix ratio = units sold /total units sold
b. Pricing policy to follow
c. Marketing strategy to use  Computation of COMPOSITE
d. Type of productive facilities to acquire weighted CM
A B total
Contribution Margin income statement
CMR per product xx yy
Sales xxx
Less: Variable cost (xx) Times: ratio of the 2 product xx yy
Contribution Margin xxx Composite CMR xx yy xxyy
Less: Total fixed Cost (xx)
Income before tax xxx unit sold of A
Ratio of product A =
unit sold ∈B
Note: this is prepared for management’s own
use only unit sold of B
Some Inherent assumption about CVP Ratio of product B =
unit sold∈ A
a. All cost are either a variable or fixed
cost
b. Cost and revenue relationship are
predictable and linear over relevant
range of activity and a specified Margin of safety (MS)
period of time - The amount of peso sales or number
c. SP per unit and market condition of units by which actual or budgeted
remain unchanged sales may be decreased without
d. Productions equal sales, there is no
resulting to a loss
change in inventory
- Formulas
e. If company sell multiple product, sales
mix is constant a. MSpesos=Sales inpesos−BEPpesos
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b. MSunits=Sales∈units−BEPunits Fixed OH
c. MS ratio=MSpesos /Sales∈ pesos (xx)
Fixed and Variable
Operating leverage Selling and Admin expense (xx)
- Extent to which a company uses fixed Net income before Tax xxx
cost in its cost structure
- Leverage, is achieved by increasing
fixed cost while lowering the variable Absorption costing income statement
cost Sales xxx
- Measures how sensitive the profit is to Less: COGS
change in sales volume
Direct Material xxx
- DOL=Total CM / Profit before Tax or
Direct labor xxx
- DOL=% ∆∈PBT /% ∆∈Sales
Variable OH xxx
Fixed OH xxx (xx)
Gross margin xxx
Less: Fixed and Variable
Selling and Admin expense (xx)
Net income before Tax xxx

Reconciliation of absorption and Variable

incomes
Absorption income xxx
Absorption and Variable Add: FOH beginning xxx
Costing Less: FOH end (xx)
Variable income xxx
VARIABLE ABSORPTION SHORT TERM NON-ROUTINE DECISIONS
Profit (Relevant costing)
fluctuates sales production of - Have an effect on the profitability, but have no
with the goods materially calculated impact on long term
stability and strategy of an organization
Other Direct Conventional - RELEVANT COST, those that are used in
terms costing or full making a decision. It have2 features namely
costing a. Differential or Relevant cost –
change from one alternative to
DM DM another while incremental cost
Product DL DL refer to those increase in cost from
cost Variable Variable OH one option to another
OH Fixed OH
b. Future-oriented – are yet to be
incurred in upcoming activities
Variable costing income statement
- Objectives;
Sales xxx a. Maximizes profit
Less: COGS b. Minimizes Cost
Direct Material xxx
FORMULAS – remember only relevant cost are
Direct labor xxx
considered but not for shut down thingy
Variable OH xxx (xx)
Contribution margin xxx 1. Make or buy a part or Outsourcing
Less:
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  Profit per limitingresources

¿ CM
Cost ¿ make ( relevant cost only ) – cost ¿ buy=favorable∨unfav . per hour∗unit per hour

2. Accept or Reject Special Order 10. Maximization of Scarce Resources

incremental sales xxx  CM per hour
less : incremental costs (xx) Unit CM
¿
incremental P/ L xxx hours per unit required
 Units Required
If operating in full capacity: ¿ Available hours /hours required
Incremental P/L xxx
Less: lost CM xxx 11. Sell now or later
Advantage/disadvantage xxx
Salesif sold now xxx
Less: incremental profit if sold later (xx)
3. Drop or continue a business segment Advantage or disadvantage xxx
CM xxx
Less: Avoidable FC (xx)
12. Replace or Retain
Controllable segment margin xxx
 Cash inflow−cash outflow
4. Special order pricing
a. Full Capacity= VC + lost CM for regular sale
13. Scrap or rework
b. With excess capacity = VC Incremental after reworking xxx
Less: incremental profit if sold as scrap xx
Advantage or disadvantage xxx
5. Sell as is or process further
Incremental sales xxx
Less: incremental cost (xx) 14. Indifference point (algebraic)
Incremental P/L xxx
Vs.
Profit if sell as is xxx

6. Continue or shut down temporarily

shutdown point =
total FC −shutdown cost Budgeting
CM unit Budget – quantitative expression of plan
a. Strategic plan – for long term
Then; b. Tactical plan – for short term
Contribution Margin xxx
Less: Fixed Cost (xx) Master budget
Profit or loss xxx - a comprehensive budget that consolidates
the overall plan of the organization for a
period
7. Minimum Bid Price –
- compose of
- should be equal to incremental cost
a. Operating budget (income
Incremental cost xxx
statement)
Add: opportunity cost xxx 1. Sales
Less: savings (xx) 2. Production / purchases
Min. bid price xxx 3. COGS
4. Operating Expenses
5. Net Income
8. Maximum Bid Price 6. Income statement
b. Financial budget
1. Cash
9. Optimization of Scarce Resources 2. Balance sheet
Unit CM 3. Cash flow statement
 CM per hour= 4. Capital expenditure
hours per unit required
5. Working capital
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- Only those variances that are material in

Terminologies used amount whether favorable or unfavorable,
a. Fixed budget should be investigated
 prepared for a one level of activity
within a certain period Two types of standard
b. Flexible budget a. Ideal standards/ theoretical or
Maximum-efficiency standard– are
 prepared for a different level of activity
attainable only under the best
within a certain period
circumstances and which require a perfect
 based on ACTUAL production performance.
 y = a +b(x) b. Practical standards – an attainable
c. Continuous budget standard
 12-month budget that rolls forward one
month as the current month is
FORMULAS:
completed
ACTUAL BUDGETED STANDARD
d. Zero-based budget
PRICE
 Managers are required to justify the
AM x AP AM x SR SI x SR
cost as if the program were proposed for
Price efficiency
the first time
Qnty. Usage
e. Imposed budgeting
 Budget are prepared by top
LABOR
management with little or no inputs
from operating personnel
AH x AR AH x SR SH x SR
price efficiency
f. Participatory budgeting
 Budgets are developed thru joint
decision by top management and
operating personnel VOH
g. Budget committee AH x AR AH x SR SH x SR
 Group of key management responsible Spending efficiency
for over-all policy matters relating to the
budget program
h. Budget manual FOH
 Describes how a budget is prepared and AH x AR Normal capacity x SR SH x SR
includes a planning calendar and Spending VOLUME
distribution instructions for all budget
schedules

Note:
Standard and Variance - Material mix variance = (actual output –Standard ) SP
analysis Where; Std. output = standard production using
Standard – a measure of acceptable the actual materials
performance established by management as
a guide in making economic decision
Responsibility accounting
Standard cost – what cost should be
Budget cost – expected cost
- DEFINITION:
 System of accounting wherein
performance, based on cost/revenue, are
Users of Standard Costs
recorded and evaluated by levels of
a. Manufacturing firms
responsibility within an organization
b. Service firms
- PURPOSE
c. Non-profit Organization
 motivate employees
- Relevant classification of cost
Variance – the difference between actual and
a. Controllable
standard cost
b. Non-controllable
a. Favorable/ credit balance / desirable
b. Unfavorable/ debit balance / adverse
Responsibility center
Management by exception - Segment of an entity engaged in performing a
single function or a group of related functions;
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usually governed by a manager who is held  Ideally the service department with the
responsible for the outcome of the activities highest cost are the first one to be
and attainment of goals of the segment allocated
c. Reciprocal method
Types of Responsibility center
Responsibl measurement
e for
a. cost Cost Variance TRANSFER PRICING
analysis TRANSFER PRICE
b. revenue Revenue Actual vs. target - Amount charged by one segment of a firm for
revenue
products or services that are supplied to
c. profit Revenue GP analysis
Cost another segment of the same firm
d. investme Revenue ROI
nt Cost RI
- OBJECTIVE
Investment EVA
 Evaluate performance by virtually
transforming cost center into profit
Formulas
centers so that performance of the
a. manager of mainly cost centers can be
Operrating income Sales measured reliably in terms of both
ROI= × revenues and expenses
sales Ave . operating assets
(Margin or return on sale) (Asset turnover)
- Basis of transfer price
b. RI =op . income−¿)
a. Cost-based
(Target income)
 Variable
c.  Full cost (variable and fixed OH and
EVA=op .income after tax−target income non-manufacturing cost)
target income=( TA −CL ) WACC  Full absorption (variable and fixed
OH)
 Cost plus ( VC/FC/FA plus MARK UP)
Performance report
- The end product of responsibility accounting b. Market based (ideal transfer price)
process, it shows and compares actual results
 Market price (reg. Selling price/
with the intended results, thereby highlighting
quoted price)
deviations that need corrective actions
 Modified market (SP adjusted for
any allowance for disc.)
Decentralization
- Separation or division of an organization c. Negotiated price
into more manageable units wherein each unit d. Arbitrary price
is managed by an individual who is given
decision authority and is held accountable for
Maximum transfer price (buying division)
his or her decision
- Cost of buying from outside supplier
Decentralization related concepts
a. Goal congruence Minimum transfer price (selling division)
 Purpose of responsibility system is to - With excess capacity
motivate management  Variable cost
b. Sub-optimization
 One management takes action for its - Operating at full capacity
best interest but detrimental to the firm  Variable cost + lost CM (opportunity
as a whole cost)
c. Organizational chart – chart that shows the
responsibility relationship among managers in NOTE: a make or buy decision lang siya for the
an org. buying division. Kaya for computing the overall
effect sa company simply compute the gain in
Service cost allocation buying from outside or from the inside times the
a. Direct method unit sold.
 Service cost are DIRECTLY allocated to
the operating departments
b. Step-down method (Hybrid method)
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Activity-based costing and d. Facility or General operations level –

performed in order for the entire
Activity-based management production process

ABC vs. TRADITIONAL COSTING

ABC TRADITIONAL
- Allocates OH to multiple activity cost pools (peanut butter
and assigns the activity cost pools to ABC costing)

products by means of cost drivers. COST

DRIVER SEVERAL SINGLE
1. CAPITAL
- Definition of T erms: Applicable intensive A. Labor
a. Cost driver – factor that causes a for 2. PRODUCT intensive
change in the cost pool for a particular DIVERSE B. Low OH
activity 3. High OH companies
b. Activity – any event, action, companies
transaction or work sequence that Simple and
incurs cost when producing a product or INEXPENSIVE
a service to implement
c. Activity cost pool – a “bucket” in
which cost are accumulated that relate
to a single activity measure in the ABC FORMULA:
system.
d. Value-adding activities – activities estimated OH cost
that are necessary to produce the Predetermined OH rate=
product (COST that BUYER ARE WILLING TO Estimated activity level
PAY FOR)
e. Non-value-adding activities –
activities that do not make the product ABM
or service more valuable to a customer - Integrates ABC with other concepts such
as TQM , Process value analysis and target
- Benefits and limitation of ABC costing
Benefits Limitations - To produce a management system that
a. Leads to more cost a. Can be expensive strives for excellence through COST
pool b. Some arbitrary
REDUCTION and ELIMINATE NON-VALUE
b. Enhanced control allocations
over OH cost continues ADDED activities and cost
c. Leads to better
management BALANCED SCORECARD
decision - Performance measurement that
combines traditional financial measures
- ABC information is useful for; with non- financial measures
a. Pricing and product mix decision - Perspective
b. Cost reductions and process a. Financial
improvement decision b. Customer
c. Product design decision
c. Learning and growth
d. Decision for planning and managing
activities
d. Internal business processes
- Components
a. Strategic objectives
- Type of activity level
 WHAT is to be achieved
a. Unit level – activity that is done for each
unit of production
b. Strategic initiative
b. Batch level – perform for each batch of  HOW it will achieved
product produced c. Performance measures
c. Product level or Product sustaining d. Baseline performance
level– activities that are needed to support e. Targets
the entire product line  Level of performance needed
in the performance measures
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Manufacturing cycle efficiency - The application of cost management

Delivery cycle or lead time techniques so that those techniques may
= wait time + manufacturing cycle reduce cost and improve the strategic position
time or throughput time of the firm.
- It involves the recognition of the importance
of cost relationship among various activities in
Manufacturing cycle time
the value chain, and managing those
= process + inspective + move + que
relationship to the firm’s advantage.
time
Note: Process time is the ONLY value added time
- Focus of Managerial Accounting
Manufacturing cycle efficiency ratio a. Customer value and Value chain
= process time / manufacturing cycle  Customer value
time  The difference between what is
received and given up by the
Throughput accounting customer when buying a
- DM is the only VARIABLE cost product.
- Throughput CM = sales – material cost  Value chain
 set of activities to produced
product and services
Categories of Quality cost
a. Prevention cost b. Total quality management
b. Appraisal cost
 An approach to continuous
 done during inspection improvement that focuses on serving
 cost incurred to detect the customer
individual units that do not  Quality cost – cost incurred on
conform to specifications quality related processes
c. Internal failure – includes down time 1. Conformance cost, incurred to
(no work is done due to the equipment prevent defective products from
being inoperative) falling in the hand of the customer
d. External failure – cost that MUST be a. Preventive cost – cost that
avoid reduces the number of defects
b. Appraisal cost – cost incurred
Conformance cost for inspection to make sure the
- Cost incurred to keep defective products product meet the quality
standards.
from falling into the hands of the customer
2. Non-conformance cost
- Examples are
a. Internal failure cost
a. Prevention and appraisal cost b. External failure cost

Non-conformance cost c. Just in Time

- Cost incurred because defects are  “ demand-pull system”
produced despite efforts to avoid them  Where inventory are purchase or
- Examples are produce only as needed
a. Internal and external failure cost  Relies heavily on GOOD QUALITY
MATERIALS
Productivity measures  Managing the production process
- measures the good output over the specified focuses on “total processing time per
units used unit”
output ∈units
productivity= d. Business Process Re-engineering
inputs∗¿ ¿  Redesigning business process to
reduce cost and eliminate
Where Inputs is; inefficiencies for error
a. Partial
 Operational = quantity e. Theory of Constraint
 Financial = total cost  Consider the effective management of
b. Total, input is equal to its total cost constraint as a key to success in
meeting objectives
Strategic cost management
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 Considered as process of “continuous  Developed to aid the

improvement” managers in controlling
large-scale, complex
f. Activity Based Costing problems
g. Balanced Scorecard  PERT related terminologies;
h. Corporate social responsibility a. PERT DIAGRAM –
probabilistic diagram of
Terms: interrelationship of a
complex series of activities
- Continuous improvement
b. EVENTS – time
 Constant effort tno eliminate waste,
representing the start or
reduces response time, simplify the finish of an activity
design and improve quality and c. ACTIVITIES – task to be
customer services accomplished
 Done in two ways  SERIES – activity
a. Business process re-engineering is done after
 Redesigning the business another
process  PARALLEL –
b. KAIZEN activity can be
 Small and continual or gradual done
improvement during the simultaneously
manufacturing phase
c. CPM – Critical Path Method
 Like PERT, but uses
deterministic time and
cost estimates
Quantitative techniques  Its advantage includes
- Application of mathematics in actual cost estimates plus the
business operations concept of crash efforts
- Operations research and costs
 Discipline of applying quantitative  Terminologies
methods a. Critical path
- INCLUDE the following  Longest path in
1. network model the PERT
 project scheduling technique network
2. probability analysis b. Expected time
3. learning curve  Average time
an activity
4. inventory models
require
5. linear programming
c. Slack time
 Time added
without
Network model delaying the
 Involve project scheduling entire project
technique d. Crash time
 Common examples are;
1. Grantt or bar chart
2. PERT PROBABILITY ANALYSIS
3. CPM– Critical Path Method - Important due to the unpredictability of
future events
a. Grantt or bar chart - Decision making involve;
 Graphical scheduling a. Risk – possible future state of nature is
technique in the form of a KNOWN
horizontal bar chart b. Uncertainty - possible future state of
nature is NOT KNOWN
b. PERT – Program Evaluation
and Review Technique - Expected value
 12

 Found by multiplying the probability of  Units that SHOULD BE PLACED

each outcome by its pay off and every order to economize the
summing up the product sum of ordering cost
 “ DECISION TREE DIAGRAM” devised
2 Do
that show several possible decision or
acts and the possible consequences of
each act



EOQ=
Where;
√ c

- Probability related terminologies
 Objective probabilities
 Calculated from ACTUAL or
logic experience
 Subjective probabilities
 Based on JUDGEMENTS
 Mutually exclusives events
 Events that CANNOT occur
simultaneously
 Independent events
 Occurrence of one event
has NO effect on probability
of another
 Joint probability
 Probability of two events
will occur
 Conditional probability
 One will occur given the
other has ALREADY
occurred
LEARNING CURVE
- Describes the efficiencies arising from
experience
- Cumulative average time per unit is
REDUCED by a certain percentage each
time PRODUCTION DOUBLES
- Incremental unit time is REDUCED when
PRODUCTION DOUBLES
- NOTES:
 Units x Average = Total
 Units, double from time to time
 Average, where you apply the rate
 D – annual demand
 O – ordering cost per unit
 C – carrying cost per unit
- Total inventory cost
= EOQ/2 (c) + D/EOQ (o)
(Average inventory) (No. of order)
Average inventory
a. Without safety stock = EOQ/2
b. With safety stock = (EOQ/2) + SS
c. EOQ is NOT available
= beg. + ending inventory / 2
- Reorder point
 Order point, the inventory level
that automatically calls for “
PLACING A NEW ORDER”
 LEAD time = order time + receive
time
a. Normal Lead time – usual
delay in the receipt of ordered
goods
b. Maximum lead time – adds to
normal lead time a reasonable
allowance for further delay
 Lead time usage
= Lead time x average usage
 Safety stock
= allowance for delay x average usage
 Ave. usage
= Annual demand / total working days

 Re-order point
INVENTORY MODELS a. Without SS = lead time usage
- Devised use to MINIMIZE the cost b. With SS = lead time usage +
associated with inventory SS
- Components of inventory cost
a. Carrying cost LINEAR PROGRAMMING
 Cost Increases with order size or - Help to determine the volume of various
quantity of inventory on hand products to produce due to multiple
b. Ordering cost constraint in the resources
 Cost Decreases with order size or - Objective
quantity of inventory on hand  Maximize revenue
 Minimize cost and expenses
- EOQ - Simplex method

 Detailed linear programming
technique especially useful if there
are MORE THAN TWO variables in
linear programming
CAPITAL BUDGETING
- Process by which management
IDENTIFIES, EVALUATES and MAKES
DECISION on capital investment projects
of an organization
- Capital Investment Factors
a. Net investments
b. Net returns
c. Cost of Capital
a. Net investments
 PRESENT NET cash flow
 Cash outflows – cash inflows
 Costs (cash outflows)
 Purchase price, net of any disc.
 Other incidental expenses
 Training cost, NET of tax
 Additional working capital
needed
 MV of existing idle asset to be
used
 Savings (cash inflows)
 PROCEEDS, net of tax
 Gain net of tax – deduct
 Loss net of tax - add
 Trade in value of the old assets
 Avoidable cost of immediate
repairs of the old assets to be
replaced, NET of related tax
b. Net returns
 NET cash inflows (future)
= NI after tax + noncash expenses
c. Costs of Capital (WACC)
 Specific cost of using long term
funds, obtained from different
sources: borrowed ( debt) and
invested (equity) capital
 Formulas ^_^
Source Costs
s d. Accounting rate of return
Debt After tax interest rate
PS Dividend yield
OS Dividend yield + growth
13
rate
RE Dividend yield + growth
rate
dividend per share
¿ . yield=
Market price per share
 Notes
 Growth rate is assumed to be
constant overtime
 Cost of PS and OS, should be
NET of flotation cost (e.g.
underwriting fees)
 Cost of flotation cost should be
IGNORED in case of RE
 other term
 Min. required rate of return
 Min. acceptable rate of return
 Cut-off rate
 Target rate
 Desired rate of return
 Standard rate
 Hurdle rate
- CAPITAL BUDGETING TECHNIQUE
 Non-discounted method
(PAYBACC)
a. Payback method
 (for even cash flows)
Net Investment
Payback=
Net cash inflows
 For the purpose of computation of
NET RETURNS, if tax rate is NOT
given then there is NO need to
compute for tax
 Decision Rule: Accept if
 PB period ≤ industry
standard or half of its UL
b. Payback reciprocal method
1
 Payback=
Payback Period
 Reasonable estimates of the
discounted cash flow rate of
return (IRR) provided
 Payback period is acceptable
 Net cash inflow are uniform
c. Bail-out payback method
 Entity consider to dispose its
property
 Consider the SALVAGE value in
computing the net cash flow,
 Salvage value is realizable in
full amount
 14

  Benefit that arises from an increase in

Net Income after tax
ARR=
Net AVERAGE Investment
 Decision rule: Accept if
 ARR ≥ cost of capital
 Other terms;
 Book rate of return
 Unadjusted rate of return
 Simple rate of return
 Approximate rate of return
 FS rate of return
activity
- MARGINAL COST
 Cost of an increase in an activity
- PRODUCTION POSSIBILITY FRONTIER
 Shows the MAXIMUM combinations of
an output that can be produced with
given resources and technology
- TECHNOLOGICAL CHANGE
 Development of new GOODS or new
WAYS to produce goods
- CAPITAL ACCUMULATION
 Growth of capital stock

 Discounted method – consider GROSS DOMESTIC PRODUCT

the TIME VALUE of the money - Market value of all the FINAL goods and
(Present internal profit) services produced WITHIN a country
a. Net Present value method - Final good
b. Present value payback method  Item bought by a final user
c. Internal rate of return method - Intermediate good
d. Profitability index method
 Item produced by another and bought
by another firm and use as component
MACROECONOMICS of the final good
BUSNESS CYCLE  NOT directly including in measuring the
a. Peak GDP
 Economic activity is booming
b. Recession - Calculations
 Society’s resources are underused
a. Expenditure approach
 Potential income > actual income  Add up all EXPENDITURES in
purchasing goods and services by
c. Depression
household, businesses and
 Major, long- lasting downsizing in the
government
economy
 Adds the
 Similar to recession, but more severe
1. Consumption expenditures
and less easily adjusted
2. Investment (in PPE)
 Prolonged form of recession 3. Government purchases
d. Trough 4. Net exports (exports – imports)
 low levels of economic activity b. Income approach
 under-usage of resources  Adds the
e. recovery 1. Compensation of the employees
 increasing economic activity 2. Net interest
3. Rental income
TERMS: 4. Corporates profit
- UTILITY 5. Proprietors income
 Satisfaction receive form consuming
goods and services - GDP is measures at
- RATIONAL ECONOMIC WAY OF THINKING a. NOMINAL GDP – current prices
 Individual act whenever benefit exceed b. REAL GDP – price of a given year
cost
- TRADE OFF Inflation
 Something is given up to get - Sustained increase in price level
something - INVERSE relationship with unemployment
- OPPORTUNITY COST - PRICE LEVEL
 Highest valued alternative foregone  Ave. level of prices
 All tradeoffs involve an opportunity cot - Consumer price index
- MARGIN  Measures the price changes in the
 Choices are made in small steps goods and services purchase by a
- MARGINAL BENEFIT consumer

- Producer price index
 Measures the Price changes for goods
at the wholesale level
- GDP deflator
 Measures the changes in price for
goods and services included in the GDP
- Primary cause of inflation
a. Demand-pull inflation
 Excess or too much demand for certain
goods that are NOT met by the
increase in supply
b. Cost-push inflation
 Happens when there is a general
increase in the cost of production
Unemployment
- INVERSE relationship with inflation
- Philips curve
 Shows a relationship between inflation
rate and unemployment rate
- Labor force
 Employed + Unemployed
- Types of unemployed
a. Frictional unemployment
 Individuals are forced or voluntarily
changes their job
b. Structural unemployment
 Occurs due to changes in demand for
products
c. Cyclical unemployment
 Occurs as a result of business cycle
 FULL employment, occurs when
there is no cyclical unemployment
FISCAL policy and MONETARY policy
- Use to effectively counter inflation
tendencies
- FISCAL policy
 Government actions design to achieve
economic goal
- FISCAL EXPANSION
 An increase in deficit, either due to
INCREASE IN gov. spending or
DECREASE in taxes
- FISCAL CONTTRACTION
 Increase in taxes to reduce deficit
Monetary policy
- Changing interest rate and the amount of
money in the economy
- When economy is in;
a. Recession
 BSP might LOWER the interest rate
 And inject money to the economy
b. Rapid expansion
15
 BSP might INCREASE the interest rate
 To slow REAL GDP growth and
 Prevent inflation from increasing
ECONOMIC THEORIES
- Classical economic theory
 Market equilibrium will eventually
result in full employment over the long
run without the government
intervention
- Keynesian theory
 Economy does not move towards full
employment on its own, it focuses on
the use of fiscal policy
- Monetarist theory
 Focuses on the monetary policy to
control economic growth
- Supply-side theory
 The most effective way to stimulate
economic growth is through the
bolstering an economy ability to supply
more goods
- Neo Keynesian theory
 Combines Keynesian and monetarist
theory
MICROECONOMICS
Demand
- Relationship off a good and quantity
demanded
- Quantity demanded of a good, is the
amount that consumers plan to buy
- law of demand
 “ceteris paribus” other things being
equal
 The higher the price of the goods, the
smaller the quantity demanded
 Inverse relationship between price
and demand
 Affected by the “consumer group” or
the BUYER
- Elasticity of demand
 Measures the SENSITIVITY of
demand to price change
 Computed as;
% change∈quanitity demanded
ED=
% change∈ price
a. ED > 1, then demand is ELASTIC
 (sensitive to price changes, e.g. luxury
goods)
b. ED = 1, unit elastic
 16

 (insensitive to price changes, e.g. basic  Illegal market forbidden by the

goods)
government
c. ED < 1, inelastic
d. ED = 0, perfectly inelastic
GENERAL NOTES:
(e.g.medicines)
Differentiation
- Avoiding competition in making a product
SUPPLY distinct of that competitors by adding value
- Relationship off a good and quantity or features for which consumer are willing
supplied to pay more
- Quantity supplied, is the amount that As a rule, a company could never incur a loss that
producers plan to sell exceeds it COST

- law of supply ORGANIZATIONAL budget, typically reflect

 “ceteris paribus”
 The higher the price of the goods, the
greater is the quantity supplied
 DIRECT relationship between price
and demand
 Affected by the “SUPPLIER GROUP”
or the producer
EQUILIBRUM
- Where demand and supply are in balance
- A “ MARKET-CLERING” situation where
neither surplus nor shortages exist
- Price ceiling
 Maximum price
 If set BELOW equilibrium price, price
ceiling results to “SHORTAGES”
- Price floor
 Minimum price
 If set ABOVE equilibrium price, price
floor results “SURPLUS”
- Government intervention may change
market equilibrium through TAXES and
SUBSIDIES
TACTICAL plan
Marginal contribution margin
Primary reason in adopting TQM – greater
customer satisfaction
Target costing
- Product strategy in which companies first
determine the price at which they can sell
a new product and then design the product
Curvilinear cost
- Cost exhibit BOTH decreasing and
increasing marginal cost over a specific
range of activity
Committed cost
- Governed mainly by past decision that
establish the present level of operating and
org. capacity and that only change slowly
in response to small changes in capacity
Step-fixed cost
- Cost that remain the same over a wide
range of activity, but jump to a different
amount outside that range

Market
No. of Types of Contr Conditi
produce product ol on of
rs over entry
price
Pure Large Identical None Very
competiti easy
on
Monopolis Many Differentia Limit Easy
tic ted ed
Oligopoly Few Standardiz Limit Hard
ed ed or
Wide
Pure One Unique wide blocke
monopoly d

- Monopsony
 market where only 1 buyer exist
for all sellers
- Black market