Cma Part 1 Very Short PDF C To F

Performance
Management
Section C
Part 1
CMA USA
RABEEH OVUNGAL
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Contents:
1) Performance Management Page – 05
2) Variance Analysis Page – 18
3) Manufacturing Variances Page – 28
4) Material Cost Variances Page – 30
5) Labour Cost Variances Page – 53
6) Variable Overhead Cost Variances Page – 73
7) Fixed Overhead Cost Variances Page – 84
8) Standard Costing and Variances Page – 95
9) Sales Variances Page – 105
10) Market Variances Page – 119
11) Responsibly Centers Page – 125
12) Evaluation of Manager and Business Unit Page – 136
Contents:
13) Transfer Pricing Page – 144
14) Performance Measures Page – 154
15) Balanced Scorecard Page – 168
Performance
Management
Part 01 – Performance Management
SECTION C
• Variance analysis is the process of
comparing the actual expenses
and revenues during a certain
period to the budgeted amounts
for that same period.
• Variance analysis shows

management where the
differences are between actual
and budgeted amounts, enabling
management to investigate to
determine the reasons for the
variances.
Performance Management
Variances and Management by Exception
• Management by exception
(MBE) is a workplace practice
that allows employees to work
more independently and only
involve their managers on
specific issues or “exceptions” to
normal operations.
• In a system where variances are

identified and reported to the
appropriate level of the
company, management can
manage by exception once the
standards have been set.
• Management can focus its
time in areas where it has
identified problems by
means of unfavorable
variances.
• Negative trends may be
overlooked at earlier
stages because the
variances may not be
great enough to come to
management’s attention.
• Miss the opportunity

also, if its showing
favorable variance
Standard Cost
• A standard cost is an estimate of the cost the company
expects to incur in the production process.
• Standard costs are calculated prior to the beginning of
each period, and they are based on the estimated
costs and the expected level of activity or production.
𝐒𝐭𝐚𝐧𝐝𝐚𝐫𝐝 𝐂𝐨𝐬𝐭 = 𝐒𝐭𝐚𝐧𝐝𝐚𝐫𝐝 𝐐𝐮𝐚𝐧𝐭𝐢𝐭𝐲 × 𝐒𝐭𝐚𝐧𝐝𝐚𝐫𝐝 𝐏𝐫𝐢𝐜𝐞
Level of Activity of Standard Cost
• Using the correct level of production or activity is important when setting
standard costs.
• If the predetermined standard level of activity is set too high, the workers
will be unmotivated because they will know that no matter how hard they
work, they will fail to meet the budgeted level of output.
1) Ideal Level of Activity

2) Practical Level of Activity
3) Normal Level of Activity
4) Master Level of Activity
Level of Activity of Standard Cost
1) Ideal Level of Activity
Assumes that there will be no breakdowns, no waste, no time lost to illness,
and that the workers are working at maximum efficiency.
2) Practical Level of Activity (currently attainable level of output)
Currently attainable level of output. Time with time lost due to downtime
caused by maintenance issues, absences, and a normal learning curve for
employees. But not reduced for any expected reduction of sales demand.
3) Normal Level of Activity
Average expected level of production that will satisfy average customer
demand over a period of several years.
4) Master Level of Activity
Capacity is the planned capacity utilization for the next budget period.
Sources of Standards
1) Activity Analysis
2) Historical Data
3) Benchmarking
4) Target Costing
5) Strategic Decisions
1) Activity Analysis
Activity analysis involves identifying, delineating or outlining, and evaluating
all the activities necessary to complete a job, a project, or an operation. An
activity analysis considers everything required to complete a task efficiently
and involves personnel from several areas, including engineers, management
accountants and production workers.
• If properly executed, activity analysis is the most

precise way to determine standard costs.
• Activity analysis can be time-consuming and

expensive.
2) Historical Data
It is the data collected about past events and circumstances pertaining to a
job, a project or an operation.
• Less Costly
• Based on the firm has operated in the past
• Perpetuate past inefficiencies

• They are not consistent with philosophy of continuous
improvement.
3) Benchmarking
Benchmarking to develop standard costs is based on using current practices
of similar operations in other firms.
• Firms can sustain in competitive edges.
• Benchmarked data might not be completely applicable

to the firm’s own situation.
4) Target Costing
It is setting standard cost based on the market and the price the product can
be sold for. Target price is the price the firm can sell its products for and the
target cost is the cost that must be attained for the firm to realize its desired
profit margin for the product. Target costing utilizes the concept kaizen.
5) Strategic Decisions
Strategic decisions may affect a product’s standard cost.
For example,
a decision to replace an obsolete machine with a new, computer-controlled
machine would require an adjustment to the standard cost and machine
hours for the process.
Variance Analysis
SECTION C
• Variance analysis is the process of comparing the actual expenses and
revenues during a certain period to the budgeted amounts for that same
period.
• Variance analysis shows management where the differences are
between actual and budgeted amount and by how much and that’s
enabling the management to investigate and determine the reasons for
variances.
Ø Variances can be classified in terms of level. A level denotes the

amount of detail provided by the variance.
Ø A low-level variance provides the least detail, whereas more
information is provided by a variance with a higher-level number.
Variance Analysis
Level 1 – Static Budget Variance
Level 2 – Flexible Budget Variance and Sales Volume Variance
Level 3 – Manufacturing Input and Sales Quantity and Sales Mix Variances
Variance Analysis
Level 1 – Static Budget Variance (SBV)
Budgeted Production and Sales = 12,000 units

Selling Price = $ 1200
Budgeted Direct Material = $ 600 per unit
Budgeted Direct Labor = $160 per unit
Budgeted VMOH = $ 120 per unit
Budgeted fixed cost = $ 27,60,000
At the end of the year actual production and sales is 10,000 units with the
following result.
Selling Price = $ 1250

Direct material = $ 621.6 per unit
Direct Labor = $ 198 per unit
VMOH = $ 130.5 per unit
FC = $ 28,50,000
Variance Analysis
Static Budget
Static Budget
Particular Actual Result Variance
(Master Budget)
(actual - budget)
(12000×$ 1200) (10000×$ 1250)
Sales $ 19,00,000 UF
$ 1,44,00,000 $ 1,25,00,000
(12000×$ 600) (10000×$ 621.6)
Direct Material $ 9,84,000 F
$ 72,00,000 $ 62,16,000
(12000×$ 160) (10000×$ 198)
Direct Labor $ 60,000 UF
$ 19,20,000 $ 19,80,000
(12000×$ 120) (10000×$ 130.5)
Variable Cost $ 1,35,000 F
$ 14,40,000 $ 13,05,000
Contribution Margin $ 38,40,000 $ 29,99,000 $ 8,41,000 UF
Fixed Cost $ 27,60,000 $ 28,50,000 $ 90,000 UF
Operating Profit $ 10,80,000 $ 1,49,000 $ 9,31,000 UF
Variance Analysis
Level 2 – Flexible Budget Variance (FBV) and
Sales Volume Variance (SVV)
Static Budget Variance (SBV)
Flexible Budget Variance (FBV)

FBV = Actual Results – Flexible Budget Amount

SVV = Flexible Budget Amount – Static Budget Amount
SBV = FBV + SVV

Variance Analysis
Flexible Budget Variance (FBV)
Flexible Budget Variance (FBV) is the comparison between flexible budget
and actual result. Here we compare the changes in cost. Flexible budget
calculate the budgeted revenue and coast based on the actual output. FBV is
difference between actual result corresponding to flexible budget. Due to
the difference in selling price variable cost per unit and fixed cost variance is
showing.

Sales Volume Variance is the change due to quantity or sales or volume
change. SVV is the difference between flexible budget and static budget due
to change in sales volume.
Variance Analysis
Sales Volume Flexible Budget
Variance Variance
Particular Static Budget Flexible Budget Actual Result
(Flexible Budget – Static (Actual Result –
Budget) Flexible Budget)
(12000×$ 1200) (10,000 × $ 1200) (10000×$ 1250)

Sales
$ 1,44,00,000
$ 24,00,000 UF $ 1,20,00,000
$ 5,00,000 F $ 1,25,00,000
(12000×$ 600) (10,000 × $ 600) (10000×$ 621.6)

DM
$ 72,00,000
$ 12,00,000 F $ 60,00,000
$ 2,16,000 UF $ 62,16,000
(12000×$ 160) (10,000 × $ 160) (10000×$ 198)

DL
$ 19,20,000
$ 3,20,000 F $ 16,00,000
$ 3,80,000 UF $ 19,80,000
(12000×$ 120) (10,000 × $ 120) (10000×$ 130.5)

VC
$ 14,40,000
$ 2,40,000 F $ 12,00,000
$ 1,05,000 UF $ 13,05,000
CM $ 38,40,000 $ 6,40,000 UF $ 32,00,000 $ 2,01,000 UF $ 29,99,000
FC $ 27,60,000 $0 $ 27,60,000 $ 90,000 UF $ 28,50,000
OI $ 10,80,000 $ 6,40,000 UF $ 4,40,000 $ 2,91,000 UF $ 1,49,000
Variance Analysis
𝐒𝐕𝐕 = 𝚫 𝐮𝐧𝐢𝐭𝐬 ×𝐁𝐮𝐝𝐠𝐞𝐭𝐞𝐝 𝐂𝐌
𝐅𝐁𝐕 = 𝐀𝐜𝐭𝐮𝐚𝐥 𝐔𝐧𝐢𝐭𝐬 ×𝚫𝐂𝐌 + 𝚫FC
Variance Analysis
Budgeted Production and Sales = 12,000 units Actual Sales = 10,000 units
Selling Price = $ 1200 Selling Price = $ 1250
Budgeted Direct Material = $ 600 per unit Direct material = $ 621.6 per unit
Budgeted Direct Labor = $160 per unit Direct Labor = $ 198 per unit
Budgeted VMOH = $ 120 per unit VMOH = $ 130.5 per unit
Budgeted fixed cost = $ 27,60,000 FC = $ 28,50,000
𝐒𝐕𝐕 = 𝚫 𝐮𝐧𝐢𝐭𝐬 ×𝐁𝐮𝐝𝐠𝐞𝐭𝐞𝐝 𝐂𝐌

= (12,000 – 10,000) × 320 = $ 6,40,000
𝐅𝐁𝐕 = 𝐀𝐜𝐭𝐮𝐚𝐥 𝐔𝐧𝐢𝐭𝐬 ×𝚫𝐂𝐌 + 𝚫FC

= 10,000 × (320 – 299.9) + (28,50,000 – 27,60,000)
= 10,000 ×20.1 + 90,000
= $ 2,91,000
Variance Analysis
Manufacturing
Variances
SECTION C
Level 3 – Manufacturing Input and Sales Quantity and
Sales Mix Variances
Manufacturing Variances
Material Cost Variances
SECTION C
Sales Mix Variances
MCV LCV VMOHCV FMOHCV

MPV LRV VMOHSV FMOHSV
MQV LEV VMOHEV FMOHVV
MMV LMV
MYV LYV

Material Cost Variance (MCV)
It is the difference between standard cost of material specified for the actual
output and actual cost of material.
MCV = (SQ × SP) – (AQ × AP)
Budgeted Input
SQ = ×Actual Output
Budgeted Output
SQ = Standard Quantity
SP = Standard Price
AQ = Actual Quantity
AP = Actual Price
Question
Company budgeted to use 15 cup of Dosa Batter for 10 Dosa with a cost of $
9.5 each cup. Company actually sold 50 dosa with a cost of $ 9 per batter and
used 80 cup of batters. Calculate material cost variance.
Answer

Budgeted Input
Budgeted Output
15
SQ = ×50 = 75
10
MCV = (75 ×𝟗. 𝟓) – (80 × 9) = -7.5
= $ 7.5 UF

Material Price Variance (MPV)
It is that portion of MCV which is due to the difference between standard
price and actual price.
MPV = (SP – AP) × AQ
SP = Standard Price
AP = Actual Price

Material Price Variance (MPV)
It is that portion of MCV which is due to the difference between standard
price and actual price.
Possible Reasons
• Change in market price
• Failure to purchase specified quantity
• Not availing the discount
• Rush Purchase
• Purchase of high quality than specification

Question
Answer

MPV = (9.5 – 9) × 80 = $ 40 F

Material Quantity Variance (MQV)
It is also called material efficiency as wage variance. It is that portion of cost
variance which is due to the difference between quantity specified an actual
output and actual quantity used.
MQV = (SQ – AQ) × SP
SQ = Standard Quantity
SP = Standard Price

Material Quantity Variance (MQV)
It is also called material efficiency as wage variance. It is that portion of cost
variance which is due to the difference between quantity specified an actual
output and actual quantity used.
Possible Reasons
• Use of low quality materials
• Plant and machinery breakdowns
• Carelessness in use of material
• Changes in Design

Question
Answer

15
SQ = ×50 = 75
10
MQV = (75 – 80) × 9.5 = - 47.5

= $ 47.5 UF

Question
Answer
MCV = MQV + MPV

MPV = (9.5 – 9) × 80 = $ 40 F
MQV = (75 – 80) × 9.5 = $ 47.5 UF

MCV = 47.5 UF + 40 F
= $ 7.5 UF
MCV = MQV + MPV

Question
Answer

Budgeted Input
Budgeted Output
15
SQ = ×50 = 75
10
MCV = (75 ×𝟗. 𝟓) – (80 × 9) = -7.5
= $ 7.5 UF

Material Mix Variance (MMV)
Material mix variance arises only when more than one type of material is
used for producing the finished products. It is that portion of MCV which is
due to the difference between standard and actual proportion of materials.
Particular Standard Actual 1 Actual 2 Actual 3 Actual 4

Mango Juice 100 100 110 150 90
Materials
Mango ($40) 200 kg 250 kg 220 kg 312 kg 200 kg
Milk ($50) 300 kg 250 kg 330 kg 468 kg 250 kg
200:300 250:250 220:330 312:468 200:250
MMV
2:3 1:1 2:3 2:3 4:5

Material Mix Variance (MMV)
due to the difference between standard and actual proportion of materials.
MMV = (RSQ – AQ) × SP

MMV = (waspSM – waspAM) × AQ
RSQ = Total Actual Input × Standard Proportion
RSQ = Revised Standard Quantity

SP = Standard Price

Mango Juice 100 100 110 150 90
Materials
Milk ($50) 300 kg 250 kg 330 kg 468 kg 250 kg
200:300 250:250 220:330 312:468 200:250
MMV
2:3 1:1 2:3 2:3 4:5
RSQ of Mango = 450 × 40% = 180

RSQ of Milk = 450 × 60% = 270
MMV = (180 – 200) × 40 + (270 – 250) × 50 = 200 F

Mango Juice 100 100 110 150 90
Materials
Milk ($50) 300 kg 250 kg 330 kg 468 kg 250 kg
200:300 250:250 220:330 312:468 200:250
MMV
2:3 1:1 2:3 2:3 4:5
MMV = (waspSM – waspAM) × AQ

waspSM waspAM
MMV = (46 – 45.56) × 450
BQ × SP AQ × SP = 200 F
200 × 40 = 8000 200 × 40 = 8000
300 × 50 = 15000 250 × 50 = 12500
500 23000
450 20500
23,000
wasp SM = = 46
500 20,500
wasp SM = = 45.56
450
Material Yield Variance (MYV)
due to the difference between standard output specified and actual output
expected to the obtained from the actual usage of raw material.
Mango Juice 100 100 110 150 90
Materials
Milk ($50) 300 kg 250 kg 330 kg 468 kg 250 kg
200:300 250:250 220:330 312:468 200:250
MMV
2:3 1:1 2:3 2:3 4:5
500/100 500/100 550/110 780/150 450/90
MYV
5:1 5:1 5:1 5.2:1 5:1

Material Yield Variance (MYV)
due to the difference between standard output specified and actual output
expected to the obtained from the actual usage of raw material.
MYV = (SQ – RSQ) × SP RSQ = Revised Standard Quantity

AO = Actual output
SO = Standard output
MYV = (AO – SO) × SP
MYV = (SQ – AQ ) ×𝐰𝐚𝐬𝐩𝐒𝐌
RSQ = Total Actual Input × Standard Proportion
𝐀𝐜𝐭𝐮𝐚𝐥 𝐭𝐨𝐭𝐚𝐥 𝐢𝐧𝐩𝐮𝐭

𝐒𝐎 =
𝐒𝐭𝐚𝐧𝐝𝐚𝐫𝐝 𝐈𝐧𝐩𝐮𝐭 𝐩𝐞𝐫 𝐨𝐮𝐭𝐩𝐮𝐭
Mango Juice 100 100 110 150 90
Materials
Milk ($50) 300 kg 250 kg 330 kg 468 kg 250 kg
200:300 250:250 220:330 312:468 200:250
MMV
2:3 1:1 2:3 2:3 4:5
500/100 500/100 550/110 780/150 450/90
MYV
5:1 5:1 5:1 5.2:1 5:1
MYV = (SQ – RSQ) × SP Milk

Mango RSQ of Milk = 780 × 60% = 468
RSQ of Mango = 780 × 40% = 312 $""
SQ = ×150 = 450
!"" #""
SQ = ×150 = 300
#""
MYV = (450 – 468) × 50
= 900 UF
MYV = (300 – 312) × 40
= 480 UF MYV = 480 UF + 900 UF = $ 1380 UF

Mango Juice 100 100 110 150 90
Materials
Milk ($50) 300 kg 250 kg 330 kg 468 kg 250 kg
200:300 250:250 220:330 312:468 200:250
MMV
2:3 1:1 2:3 2:3 4:5
500/100 500/100 550/110 780/150 450/90
MYV
5:1 5:1 5:1 5.2:1 5:1
MYV = (AO – SO) × SP MYV = (150 – 156) ×𝟐𝟑𝟎
𝐒𝐎 =
𝐀𝐜𝐭𝐮𝐚𝐥 𝐭𝐨𝐭𝐚𝐥 𝐢𝐧𝐩𝐮𝐭 MYV = $ 1380 UF
𝐒𝐭𝐚𝐧𝐝𝐚𝐫𝐝 𝐈𝐧𝐩𝐮𝐭 𝐩𝐞𝐫 𝐨𝐮𝐭𝐩𝐮𝐭
𝟕𝟖𝟎
𝐀𝐎 = = 𝟏𝟓𝟔
𝟓

Mango Juice 100 100 110 150 90
Materials
Milk ($50) 300 kg 250 kg 330 kg 468 kg 250 kg
200:300 250:250 220:330 312:468 200:250
MMV
2:3 1:1 2:3 2:3 4:5
500/100 500/100 550/110 780/150 450/90
MYV
5:1 5:1 5:1 5.2:1 5:1
MYV = (SQ – AQ ) ×𝐰𝐚𝐬𝐩𝐒𝐌 23,000

wasp SM = = 46
waspSM 500
BQ × SP MYV = (300 – 312 ) ×𝟒𝟔 = -552

200 × 40 = 8000 (450 – 468 ) ×𝟒𝟔 = -828
300 × 50 = 15000 = -552 + -828 = 1380 UF
500 23000

Material Purchase Price Variance (MPPV)
MPPV may be calculated at the time of purchase instead of at the time of
use. MPPV is calculated using all quantity purchased, not just the units that
were put into production.
MPPV = (SP – AP) × PQ

SP= Standard Price
AP = Actual Price
PQ = Purchase Quantity

Labour Cost
Variances
SECTION C
Sales Mix Variances

MMV LMV
MYV LYV
Labour Cost Variances

Labour Cost Variance (LCV)
It is the difference between standard cost of standard labour allowed for
actual level of output and actual labour cost incurred by the organization.
LCV = (SH × SR) – (AH × AR)
Budgeted hours
SH = ×Actual Output
Budgeted Output
SH = Standard Hours
SR = Standard Rate
AH = Actual Hours
AR = Actual Rate
Question
Budgeted Hours = 20 hrs
Budgeted Output = 10 Cakes
Actual Output = 25 Cakes
Actual Hours used = 60 hrs
Budgeted Rate per hour = $ 10
Actual Rate per hour = $ 8
Answer
LCV = (SH × SR) – (AH × AR) LCV = (50 ×𝟏𝟎) – (60 × 8)

Budgeted hours
= 500 – 480
SH =
Budgeted Output
×Actual Output = 20 F
20
SH = ×25 = 50 hrs
10

Labour Rate Variance (LRV)
It is that portion of LCV which is due to the difference between standard
labour rate and actual rate.
LRV = (SR – AR) × AH
SR = Standard Rate
AH = Actual Hours
AR = Actual Rate

Labour Rate Variance (LRV)
labour rate and actual rate.
Possible Reasons
• Skill of Labors
• Overtime Work
• Poor Estimation or Incorrect Standards

Question
Answer
LRV = (10 – 8) × 60
= 120 F

Labour Efficiency Variance (LEV)
labour hours specified for actual output and actual labour hours used.
LEV = (SH – AH) × SR
SR = Standard Rate
AH = Actual Hours
AR = Actual Rate

Labour Efficiency Variance (LEV)
labour hours specified for actual output and actual labour hours used.
LEV = (SH – AH) × SR
Possible Reasons
• Skills of labors
• Tools and Machinery
• Supervision Skill
• Training given to employees
• Quality of Materials

Question
Answer
LEV = (SH – AH) × SR LEV = (50 – 60) × 10

Budgeted hours
= 100 UF
Budgeted Output
20
SH = ×25 = 50 hrs
10

Question
Answer
LEV = (50 – 60) × 10 = 100 UF LCV = LRV + LEV
LRV = (10 – 8) × 60 = 120 F LCV = 120 F + 100 UF
= 20 F
LCV = LRV + LEV

Question
Answer
LCV = (SH × SR) – (AH × AR) LCV = (50 ×𝟏𝟎) – (60 × 8)

Budgeted hours
= 500 – 480
SH =
Budgeted Output
×Actual Output = 20 F
20
SH = ×25 = 50 hrs
10

Labour Mix Variance (LMV)
It arises when there are more than one grade of employees are employed. It
is that portion of LEV which is cost due to change in proportion of labour
hours.
LMV = (RSH – AH) × SR

MMV = (wasrSM – wasrAM) × AH
RSQ = Total Actual hours × Standard Proportion
RSH = Revised Standard Hours

AH = Actual Hours
SR = Standard Rate

Standard hours and cost for 10 output is given below.
Grade of Workers Hours Rate
1 300 Hrs $ 2 per hr
During the period 100 units were produced, actual data are as follows.
1 3200 Hrs $ 1.5 per hr
2 1900 Hrs $ 4 per hr
Answer
LMV = (RSH – AH) × SR LMV = (3060 – 3200) × 2 = - 280
RSH = Total Actual × Std Proportion (2040 – 1900) × 3 = 420
Std Proportion = 300 : 200 = 3:2 = 280 UF + 420 F = 140 F
𝟑
𝑅𝑆𝐻! = 5100× = 3060
𝟓
𝟐
𝑅𝑆𝐻$ = 5100× 𝟓 = 2040
1 3200 Hrs $ 1.5 per hr wasrAM
2 1900 Hrs $ 4 per hr
AH × SR
Answer 3200 × 2 = 6400
MMV = (waspSM – waspAM) × AH 1900 × 3 = 5700
wasrSM 5100 12100

#!""
BH × SR wasrSM = = 2.4
%"" MMV = (waspSM – waspAM) × AH
300 × 2 = 600
200 × 3 = 600
MMV = (2.4 – 2.372) × 140 F
#!#""
wasrAM = = 2.372
500 1200 %#""

Labour Yield Variance (LYV)
It arises when there are more than one grade of employees are employed. It
is tat portion of LEV which is cost due to change in yield.
LYV = (SH – RSH) × SR RSQ = Revised Standard Quantity

AO = Actual output
SO = Standard output
LYV = (AO – SO) × SR
LYV = (SH – AH ) ×𝐰𝐚𝐬𝐫𝐒𝐌
RSH = Total Actual Hours × Standard Proportion
𝐀𝐜𝐭𝐮𝐚𝐥 𝐭𝐨𝐭𝐚𝐥 𝐡𝐨𝐮𝐫𝐬

𝐒𝐎 =
𝐒𝐭𝐚𝐧𝐝𝐚𝐫𝐝 𝐇𝐨𝐮𝐫𝐬 𝐩𝐞𝐫 𝐨𝐮𝐭𝐩𝐮𝐭

1 3200 Hrs $ 1.5 per hr
2 1900 Hrs $ 4 per hr
Answer
𝟑𝟎𝟎
LYV = (SH – RSH) × SR LMV = ( ×𝟏𝟎𝟎 − 𝟑𝟎𝟔𝟎)×𝟐 = 𝟏𝟐𝟎 𝐔𝐅
𝟏𝟎
RSH = Total Actual × Std Proportion 𝟐𝟎𝟎
LMV = ( ×𝟏𝟎𝟎 − 𝟐𝟎𝟒𝟎)×𝟑 = 𝟏𝟐𝟎 𝐔𝐅
𝟏𝟎
Std Proportion = 300 : 200 = 3:2
𝟑
𝑅𝑆𝐻! = 5100× = 3060
LMV = 120 UF + 120 UF = 240 UF
𝟓
𝟐
𝑅𝑆𝐻$ = 5100× 𝟓 = 2040
1 3200 Hrs $ 1.5 per hr
2 1900 Hrs $ 4 per hr
Answer
LYV = (AO – SO) × SR LYV = (AO – SO) × SR
𝐀𝐜𝐭𝐮𝐚𝐥 𝐭𝐨𝐭𝐚𝐥 𝐡𝐨𝐮𝐫𝐬
𝐒𝐎 =
𝐒𝐭𝐚𝐧𝐝𝐚𝐫𝐝 𝐇𝐨𝐮𝐫𝐬 𝐩𝐞𝐫 𝐨𝐮𝐭𝐩𝐮𝐭
LYV = (100 – 102) × 120 $
= 240 UF
𝟓𝟏𝟎𝟎
𝐒𝐎 = = 𝟏𝟎𝟐
𝟓𝟎

1 3200 Hrs $ 1.5 per hr
2 1900 Hrs $ 4 per hr
Answer
LYV = (SH – AH ) ×𝐰𝐚𝐬𝐫𝐒𝐌 LYV = (SH – AH ) ×𝐰𝐚𝐬𝐫𝐒𝐌
wasrSM =(
𝟓𝟎𝟎
×𝟏𝟎𝟎 – 5100) × 2.4
#!"" 𝟏𝟎
BH × SR wasrSM = = 2.4
%""
300 × 2 = 600 = 240 UF
200 × 3 = 600
500 1200
Variable
Overhead
Variances
SECTION C
Sales Mix Variances

MMV LMV
MYV LYV
Variable Overhead Variances

Variable Manufacturing Overhead Cost Variance
Variable Manufacturing Overhead Spending Variance
Variable Manufacturing Overhead Efficiency Variance

Variable Manufacturing Overhead Cost Variance (VMOHCV)
It is also called as Total VOH Variance or VOH flexible budget variance. It is the
difference between standard VOH cost on actual and actual VOH incurred.
VOHCV = (SH × SR) – (AH × AR)
Budgeted hours
Budgeted Output
SH = Standard Hours
SR = Standard Rate per machine or Labour hour
AH = Actual Hours
AR = Actual Rate per machine or Labour hour
Question
Particular Budget Actual

Output 20,000 19,000
Labour Hrs 5000 4500
Machine Hrs 16,000 16,700
Variable OH Cost $ 5000 $ 4725
Answer

Budgeted hours 16,000
SH = ×Actual Output = ×19,000 = 15,200
Budgeted Output 20,000
𝟓𝟎𝟎𝟎 𝟒𝟕𝟐𝟓
VOHCV = (15200 × ) – (16700 × )
𝟏𝟔𝟎𝟎𝟎 𝟏𝟔𝟕𝟎𝟎
= $ 25 F
Variable Manufacturing Overhead Spending Variance (VMOHSV)
It is also called as VOH expense variance. It is the difference between actual
amount incurred and standard amount for actual quantity.
VMOHSV = (SR – AR) × AH
SH = Standard Hours
SR = Standard Rate per machine or labour hour
AH = Actual Hours
AR = Actual Rate per machine or labour hour

Question

Output 20,000 19,000
Answer
VMOHSV = (SR – AR) × AH

𝟓𝟎𝟎𝟎 𝟒𝟕𝟐𝟓
VMOHSV = − ×𝟏𝟔𝟕𝟎𝟎
𝟏𝟔𝟎𝟎𝟎 𝟏𝟔𝟕𝟎𝟎
VMOHSV = 493.75 F

Variable Manufacturing Overhead Efficiency Variance (VMOHEV)
It determines the amount of total variance cost by a difference usage of
allocation base than was expected.
VMOHEV = (SH – AH) × SR
SH = Standard Hours
SR = Standard Rate per machine or labour hour
AH = Actual Hours
AR = Actual Rate per machine or labour hour

Question

Output 20,000 19,000
Answer
VMOHEV = (SH – AH) × SR

𝟏𝟔𝟎𝟎𝟎 𝟓𝟎𝟎𝟎
VMOHEV = ×𝟏𝟗𝟎𝟎𝟎 − 𝟏𝟔𝟕𝟎𝟎 ×
𝟐𝟎𝟎𝟎𝟎 𝟏𝟔𝟎𝟎𝟎
VMOHEV = 468.75 UF

Question

Output 20,000 19,000
Answer
VOHCV = VOHEV + VOHSV
VMOHEV = 468.75 UF
VMOHSV = 493.75 F
VOHCV = 468.75 UF + 493.75 F = 25 F
Question

Output 20,000 19,000
Answer

Budgeted hours 16,000
SH = ×Actual Output = ×19,000 = 15,200
Budgeted Output 20,000
𝟓𝟎𝟎𝟎 𝟒𝟕𝟐𝟓
VOHCV = (15200 × ) – (16700 × )
𝟏𝟔𝟎𝟎𝟎 𝟏𝟔𝟕𝟎𝟎
= $ 25 F
Fixed
Overhead
Variances
SECTION C
Sales Mix Variances

MMV LMV
MYV LYV
Fixed Overhead Variances

Fixed Manufacturing Overhead Cost Variance
Fixed Manufacturing Overhead Spending Variance
Fixed Manufacturing Overhead Efficiency Variance

Fixed Manufacturing Overhead Cost Variance (VMOHCV)
It is also called as Total FOH Variance. It is the difference between actual fixed
overhead incurred and the amount that was applied using the standard rate
and standard usage.
FOHCV = (SH × SR) – (AH × AR)

Budgeted hours
Budgeted Output
SH = Standard Hours
SR = Standard Rate per machine or Labour hour
AH = Actual Hours
AR = Actual Rate per machine or Labour hour
Question

Output 50,000 60,000
Machine Hrs 1,50,000 1,95,000
Variable OH Cost $ 2,25,000 $ 3,12,000
Fixed OH Cost $ 3,00,000 $ 4,87,500
Answer
𝟏,𝟓𝟎,𝟎𝟎𝟎 𝟑,𝟎𝟎,𝟎𝟎𝟎 𝟒,𝟖𝟕,𝟓𝟎𝟎

FOHCV = ×𝟔𝟎, 𝟎𝟎𝟎× − 𝟏, 𝟗𝟓, 𝟎𝟎𝟎×
𝟓𝟎,𝟎𝟎𝟎 𝟏,𝟓𝟎,𝟎𝟎𝟎 𝟏,𝟗𝟓,𝟎𝟎𝟎
= $ 1,27,500 UF

Fixed Overhead Spending Variance (FOHSV)
It is also called as FOH flexible budget variance. It is the difference between
actual fixed overhead incurred and budgeted fixed overhead.
FMOHSV = Budgeted – Actual
Spending variance is a term used to describe the difference between the real
amount associated with a certain expense and the expected amount
associated with the same expense.

Question

Output 50,000 60,000
Machine Hrs 1,50,000 1,95,000
Variable OH Cost $ 2,25,000 $ 3,12,000
Fixed OH Cost $ 3,00,000 $ 4,87,500
Answer
FMOHSV = Budgeted – Actual

FMOHSV = 3,00,000 – 4,87,500 = $ 1,87,500 UF

Fixed Overhead Volume Variance (VMOHVV)
It is also called as FOH production volume variance. It is the difference
between budgeted amount and the amount of fixed overhead applied.
FOHVV = (SH × SR) – Budgeted
SH = Standard Hours
SR = Standard Rate per machine or labor hour

Question

Output 50,000 60,000
Machine Hrs 1,50,000 1,95,000
Variable OH Cost $ 2,25,000 $ 3,12,000
Fixed OH Cost $ 3,00,000 $ 4,87,500
Answer

𝟏,𝟓𝟎,𝟎𝟎𝟎 𝟑,𝟎𝟎,𝟎𝟎𝟎
FOHVV = 𝟓𝟎,𝟎𝟎𝟎
×𝟔𝟎, 𝟎𝟎𝟎 × 𝟏,𝟓𝟎,𝟎𝟎𝟎 − 𝟑, 𝟎𝟎, 𝟎𝟎𝟎
= $ 60,000 F

Question

Output 50,000 60,000
Machine Hrs 1,50,000 1,95,000
Variable OH Cost $ 2,25,000 $ 3,12,000
Fixed OH Cost $ 3,00,000 $ 4,87,500
Answer
FOHCV = FOHSV + FOHVV
FOHVV = $ 60,000 F
FMOHSV = $ 1,87,500 UF
FOHCV = $ 1,87,500 UF + $ 60,000 F
= $ 1,27,500 UF

Question

Output 50,000 60,000
Machine Hrs 1,50,000 1,95,000
Variable OH Cost $ 2,25,000 $ 3,12,000
Fixed OH Cost $ 3,00,000 $ 4,87,500
Answer
𝟏,𝟓𝟎,𝟎𝟎𝟎 𝟑,𝟎𝟎,𝟎𝟎𝟎 𝟒,𝟖𝟕,𝟓𝟎𝟎

FOHCV = ×𝟔𝟎, 𝟎𝟎𝟎× − 𝟏, 𝟗𝟓, 𝟎𝟎𝟎×
𝟓𝟎,𝟎𝟎𝟎 𝟏,𝟓𝟎,𝟎𝟎𝟎 𝟏,𝟗𝟓,𝟎𝟎𝟎
= $ 1,27,500 UF

Standard
Costing
and Variances
SECTION C
A standard cost is a estimate of cost the company expects to incur in the
production process.
Variances are calculated and analysis using standard costing.
Equation using standard costing are as follows,
𝐀𝐇 ×𝐀𝐑 = 𝐀𝐜𝐭𝐮𝐚𝐥 𝐂𝐨𝐬𝐭

𝐁𝐇 ×𝐁𝐑 = 𝐁𝐮𝐝𝐠𝐞𝐭𝐞𝐝 𝐂𝐨𝐬𝐭
𝐀𝐇 ×𝐒𝐑 = 𝐒𝐭𝐚𝐧𝐝𝐚𝐫𝐝 𝐂𝐨𝐬𝐭
𝐒𝐇 ×𝐒𝐑 = 𝐀𝐛𝐬𝐨𝐫𝐛𝐞𝐝 𝐨𝐫 𝐀𝐩𝐥𝐥𝐢𝐞𝐝 𝐂𝐨𝐬𝐭
Standard Costing and Variances

Overhead Variances Equation

VOHCV = V Absorbed – V Actual
VMOHSV = (SR – AR) × AH = (SR × AH) – (AR × AH)

VMOHSV = V Standard – V Actual
VMOHEV = (SH – AH) × SR = (SH × SR) – (AH × SR)

VMOHEV = V Absorbed – V Standard

FOHCV = F Absorbed – F Actual
FMOHSV = F Budgeted – F Actual

FOHVV = F Absorbed – F Budgeted

Sales Mix Variances

MMV LMV
MYV LYV

4 Way Analysis
3 Way Analysis
2 Way Analysis
1 Way Analysis
Various Way of Analysis

3 Way Analysis
TOHCV = VOHEV + TOHSV + FOHVV
TOHSV = VOHSV + FOHSV

TOHSV = V Standard – V Actual + F Budgeted – F Actual
TOHSV = V Standard + F Budgeted – Total Actual
3 Way Analysis
2 Way Analysis
TOHCV = Controllable Variance + Uncontrollable Variance

Controllable Variance = VOHEV + TOHSV
Controllable Variance = V Absorbed – V Standard + V Standard + F Budgeted – Total Actual
Controllable Variance = V Absorbed + F Budgeted – Total Actual
2 Way Analysis
1 Way Analysis
TOHCV = Controllable Variance + Uncontrollable Variance
Controllable Variance = V Absorbed + F Budgeted – Total Actual
TOHCV = V Absorbed + F Budgeted – Total Actual + F Absorbed – F Budgeted
TOHCV = Total Absorbed – Total Actual
1 Way Analysis
Particular Amount
Actual OH Cost $ 16,000,000
Budgeted FOH $ 15,000,000
Absorbed FOH $ 12,000,000 [$8 per Machine hour]
Absorbed VC $ 2,00,000 [$0.5 per Machine hour]
Actual Machine Hr 4,30,000 hours
Calculate TOHSV, Controllable Variance and TOHCV
Answer
TOHSV = V Standard + F Budgeted – T Actual V Standard = AH × SR
= 215,000 + 15,000,000 – 16,000,000 = 4,30,000 × 0.5
= 7,85,000 UF = $ 215,000
Controllable Variance = V Absorbed + F Budgeted – T Actual
= 200,000 + 15,000,000 – 16,000,000
= 8,00,000 UF
TOHCV= T Absorbed – T Actual
= ( 12,000,000 + 2,00,000 ) – 16,000,000
= 38,00,000 UF

ABC company has a normal budget of $ 312,000 for overhead with a normal capacity of
52,000 hours for the first quarter which are evenly distributed between months. Company
allows 1.2 hour per unit for the production process. They actually produced 15,000 units by
using 16,500 hours in the 2nd month of quarter. The actual overhead cost $ 41,400 fixed
and $ 52,200 variable in the month. What is the total overhead variance for the month?
Answer
Normal Budget = 3,12,000 3 Months

1,04,000 1 Month
Budget hours = 52,000 hours 3 Months
17,333 hours 1 Month
TOHCV = Total Absorbed – Total Actual

= SH×SR − Total Actual
1.2 1,04,000
= ×15,000× − 41,400 + 52,200
1 17,333
= $ 14,400 F

Sales Variances
SECTION C
Variances used to assess sales revenue and contribution
margin is called as Sales Variances. It is used to explain
differences between actual and budgeted amounts of
revenues and contribution margin.
The variances can be caused by:

1) Differences in sales price charged.
2) Differences in volume of sales.
3) Differences in variable cost per unit.
4) Differences in the mix of products sold.
Sales Variances
1) Differences in sales price charged.
2) Differences in volume of sales.
Sales Value Variance
Sales Price Variance Sales Volume Variance
Sales Mix Variance Sales Quantity Variance
Sales Variances
It is the SBV of Sales. It is the difference between actual revenue received
and budgeted revenue to be received.
Sales Value Variance = (𝐀𝐐×𝐀𝐏) − (𝐁𝐐×𝐁𝐏)

AQ = Actual Quantity of Sales
AP = Actual Selling Price
BQ = Budgeted Quantity of Sales
BP = Budgeted Selling Price
Actual Sales = 110 units

Budgeted Sales = 100 units
Actual Price = $9 per unit
Budgeted Selling Price = $10 per unit
Sales Value Variance = 𝟏𝟏𝟎×𝟗 − 𝟏𝟎𝟎×𝟏𝟎

= $ 10 UF Sales Variances
1) Sales Price Variance (SPV)
It is that portion of sales value variance which is due to changing in selling
price specified and a selling price actually used. It is also called as Selling
Price Variance
Sales Price Variance = 𝐀𝐏 − 𝐁𝐏 ×𝐀𝐐


Sales Price Variance = 𝐀𝐏 − 𝐁𝐏 ×𝐀𝐐
Sales Price Variance = 𝟗 − 𝟏𝟎 ×𝟏𝟏𝟎
= $ 110 UF Sales Variances
2) Sales Volume Variance
It is that portion of sales value variance which is due to change inbudgeted
quantity and actual quantity of units sold.
Sales Volume Variance = 𝐀𝐐 − 𝐁𝐐 ×𝐁𝐏


Sales Volume Variance = 𝐀𝐐 − 𝐁𝐐 ×𝐁𝐏
Sales Volume Variance = 𝟏𝟏𝟎 − 𝟏𝟎𝟎 ×𝟏𝟎
= $ 100 F
Sales Variances
Sales Value Variance = Sales Volume Variance + Sales Price Variance
Sales Volume Variance = $ 100 F
Sales Price Variance = $ 110 UF

Sales Value Variance = 100 F + 110 UF
= $ 10 UF
Sales Value Variance = 𝟏𝟏𝟎×𝟗 − 𝟏𝟎𝟎×𝟏𝟎

= $ 10 UF
Sales Variances
Sales Variances
2-a) Sales Mix Variance (SMV)
If actual product of sales for a multiple product firm occur in a different
proportion from the planned proportion, their will be sales mix variance.
Sales Mix Variance = 𝐀𝐐 − 𝐑𝐁𝐐 ×𝐁𝐏

RBQ = Revised Budgeted Quantity
RBQ = Total Actual Sales × Standard Proportion
Sales Mix Variance = [𝐰𝐚𝐛𝐩𝐀𝐌 − 𝐰𝐚𝐛𝐩𝐁𝐌]×𝐀𝐐
wabpAM = Weighted Average Budgeted Price of Actual Mix

wabpSM = Weighted Average Budgeted Price of Standard Mix
Sales Variances
Product Budget Actual
Dark Chocolate 10,000 units 15,000 units
@ $10 per unit @ $11 per unit
Milk Chocolate 20,000 units 25,000 units
Sales Mix Variance = 𝐀𝐐 − 𝐑𝐁𝐐 ×𝐁𝐏

\
Dark Chocolate RBQ = 40,000 × = 13,333
]
Standard Proportion = 1:2
^
Milk Chocolate RBQ = 40,000 × = 26,666
]
Sales Mix Variance = 𝟏𝟓𝟎𝟎𝟎 − 𝟏𝟑𝟑𝟑𝟑 × 𝟏𝟎 = 𝟏𝟔𝟔𝟕𝟎 𝐅

𝟐𝟓𝟎𝟎𝟎 – 𝟐𝟔𝟔𝟔𝟔 × 𝟓 = 𝟖𝟑𝟑𝟎 𝐔𝐅
= 16670 F +8330 UF = 8340 F
Sales Variances
Sales Mix Variance = [𝐰𝐚𝐛𝐩𝐀𝐌 − 𝐰𝐚𝐛𝐩𝐁𝐌]×𝐀𝐐

𝐰𝐚𝐛𝐩𝐀𝐌
AQ × BP 𝟐𝟕𝟓𝟎𝟎𝟎
𝐰𝐚𝐛𝐩𝐀𝐌 = = 𝟔. 𝟖𝟕𝟓
15000 ×10 = 1,50,000 𝟒𝟎𝟎𝟎𝟎
25000 × 5 = 1,25,000
𝟐𝟎𝟎𝟎𝟎𝟎
40000 2,75,000 𝐰𝐚𝐛𝐩𝐀𝐌 = = 𝟔. 𝟔𝟔𝟔𝟔𝟕
𝟑𝟎𝟎𝟎𝟎
𝐰𝐚𝐛𝐩𝐁𝐌
BQ × BP Sales Mix Variance = [𝐰𝐚𝐛𝐩𝐀𝐌 − 𝐰𝐚𝐛𝐩𝐁𝐌]×𝐀𝐐
10000 ×10 = 1,00,000
20000 × 5 = 1,00,000 Sales Mix Variance = 𝟔. 𝟖𝟕𝟓 − 𝟔. 𝟔𝟔𝟔𝟔𝟕 ×𝟒𝟎𝟎𝟎𝟎
= $ 8333 F
30000 2,00,000
Sales Variances
2-b) Sales Quantity Variance (SQV)
It is that part of volume variance due to difference budgeted quantity and
revised budgeted quantity.
Sales Quantity Variance = 𝐑𝐁𝐐 − 𝐁𝐐 ×𝐁𝐏

RBQ = Revised Budgeted Quantity
Sales Quantity Variance = [𝐀𝐐 − 𝐁𝐐]×𝐰𝐚𝐛𝐩𝐁𝐌
wabpBM = Weighted Average Budgeted Price of Standard Mix

AQ = Actual Quantity of sales
Sales Variances
Sales Quantity Variance = 𝐑𝐁𝐐 − 𝐁𝐐 ×𝐁𝐏

\
Dark Chocolate RBQ = 40,000 × = 13,333
]
Standard Proportion = 1:2
^
Milk Chocolate RBQ = 40,000 × = 26,666
]
Sales Quantity Variance = 𝟏𝟑𝟑𝟑𝟑 − 𝟏𝟎𝟎𝟎𝟎 × 𝟏𝟎 = 𝟑𝟑𝟑𝟑𝟎 𝐅

𝟐𝟔𝟔𝟔𝟔 − 𝟐𝟎𝟎𝟎𝟎 × 𝟓 = 𝟑𝟑𝟑𝟑𝟎 𝐅
= 33330 F + 33330 F = 66660 F
Sales Variances
Sales Quantity Variance = [𝐀𝐐 − 𝐁𝐐]×𝐰𝐚𝐛𝐩𝐁𝐌

𝐰𝐚𝐛𝐩𝐀𝐌
AQ × BP 𝟐𝟕𝟓𝟎𝟎𝟎
15000 ×10 = 1,50,000 𝐰𝐚𝐛𝐩𝐀𝐌 = = 𝟔. 𝟖𝟕𝟓
𝟒𝟎𝟎𝟎𝟎
25000 × 5 = 1,25,000
𝟐𝟎𝟎𝟎𝟎𝟎
40000 2,75,000 𝐰𝐚𝐛𝐩𝐀𝐌 = = 𝟔. 𝟔𝟔𝟔𝟔𝟕
𝟑𝟎𝟎𝟎𝟎
𝐰𝐚𝐛𝐩𝐁𝐌
BQ × BP Sales Quantity Variance = [𝐀𝐐 − 𝐁𝐐]×𝐰𝐚𝐛𝐩𝐁𝐌
10000 ×10 = 1,00,000 = 𝟒𝟎, 𝟎𝟎𝟎 − 𝟑𝟎, 𝟎𝟎𝟎 ×𝟔. 𝟔𝟔𝟔𝟕
20000 × 5 = 1,00,000
= $ 66667 F
30000 2,00,000
Sales Variances
Market Variances
SECTION C
Market Share Variance Market Size Variance

1)
TheDifferences in salesshare
total of market price charged.
and market size variance is called as market variance.
2) Differences
Market in volume
Variance of sales.
is another name of sales quantity variance, whish is cost due
to change in market forces
Market Variances
Market Share Variance
It is the variance in contribution margin caused by change in companies actual
market share from its expected market share.
Market Actual Expected Actual

Share = Market Market × Market × wabcmSM
Variance Share Share Size in units
wabcmSM = weighted average budgeted contribution margin of standard mix
Market Variances
Budgeted Contribution Margin per biriyani = $ 20
Particular Rahmath Hotel Calicut
Budget 10,000 Biriyani 1,00,000 biriyani
Actual 6000 Biriyani 80,000 biriyani
Calculate Market Share Variance

Answer
Market Actual Expected Actual

Share = Market Market × Market × wabcmSM
Variance Share Share Size in units
wabcmSM
Market 6000 10,000
BQ × BCM Share = −
80,000 1,00,000
×80,000 ×20
10000 × 20 = 2,00,000 Variance
wabcmSM =
$,)),)))
= 20
= $ 40,000 UF
!),)))
Market Variances
Market Size Variance
It is the variance in contribution margin caused by change in companies actual
market size from its expected market size
Market Actual Expected Expected

Size = Market Market × Market × wabcmSM
Variance Size in units Size in units Share
wabcmSM = weighted average budgeted contribution margin of standard mix
Market Variances
Budgeted Contribution Margin per biriyani = $ 20
Particular Rahmath Hotel Calicut
Budget 10,000 Biriyani 1,00,000 biriyani
Actual 6000 Biriyani 80,000 biriyani
Calculate Market Share Variance

Answer
Market Actual Expected Expected

Size = Market Market × Market × wabcmSM
Variance Size in units Size in units Share
wabcmSM
Market 10,000
BQ × BCM Share = 80,000 − 1,00,000 ×
1,00,000
×20
10000 × 20 = 2,00,000 Variance
wabcmSM =
$,)),)))
= 20
= $ 40,000 UF
!),)))
Market Variances
Responsibility Centers
SECTION C
A responsibility center is an organizational unit headed by a manager, who is
responsible for its activities and results. In responsibility center, manager is
responsible for
a. Cost • Purpose of responsibility,
b. Revenue accounting system is to
c. Profit motivate.
d. Investment
Responsibility centers are organizational units or segments within a company or

organization that are assigned specific responsibilities for achieving certain goals
and objectives.
Segment can be a product, a product line, geographical area, department or any
other meaningful unit.
Responsibility centres are,
1) Cost center
2) Revenue Center
3) Profit Center
4) Investment Center
Cost Center
• A Cost Centre is a department or a unit which supervises, allocates, segregates, and
eliminates all sorts of the cost related to a company. The cost center prime work is to
check the cost of an organization and to limit the unwanted expenditure the
company may acquire.
• Responsible only for incurrence of cost.
• Doesn’t earn any revenue.
• Key standard of evaluation is – Efficiency of operations
• Efficiency means – achieving maximum productivity with less wastage
• Example: Service department
Revenue Center
• This center is accountable for initiating and monitoring revenue. The management
does not have any control over the cost.
• Responsible only for revenue.
• Cost incurred by the revenue department is immaterial.
• Key standard of evaluation is – Effectiveness of operations
• Effectiveness refers to the degree to which an organization, team, or individual
successfully achieves its goals and objectives
• Example: Sales department
Profit Center
• It is a division or department of a company which operates for the calculation of
profit. In an organization, different profit centers are managed by the managers,
who identifies profits on the basis of costs and incomes.
• Responsible for both cost and revenue.
• Key standard of evaluation is – Effectiveness and Efficiency of operations
• Manager of profit center is responsible for generating profit, managing revenues
and controlling cost.
• Example: A Store
Investment Center
• Responsible for profit and
providing a return on capital that
has been invested by the
organization. An investment
center is most like the complete
business.
• Key standard of evaluation is –
Effectiveness of operations
• The criteria evaluation of
investment decision – return on
investment (ROI)
Example Question:
In responsibility accounting, a center's performance is measured by controllable costs.

Controllable costs are best described as including
A. Direct material and direct labour, only.
B. Those costs about which the manager is knowledgeable and informed.
C. Only discretionary costs.
D. Only those costs that the manager can influence in the current time period.
Example Question:
Which of the following is not true of responsibility accounting?
A. The focus of cost center managers will normally be more narrow than that of profit
center managers.
B. When a responsibility accounting system exists, operations of the business are
organized into separate areas controlled by individual managers.
C. Managers should only be held accountable for factors over which they have
significant influence.
D. Every factor that affects a firm's financial performance ultimately is controllable
by someone, even if that someone is the person at the top of the firm.
Example Question:
All of the following statements regarding a hotel’s responsibility centers are

true except that the
A. Regional manager for expansion oversees an investment center
B. Hotel manager oversees a profit center.
C. Maintenance department manager oversees a cost center.
D. Sales department manager oversees a profit center.
Example Question:
Accountants for Hire is a firm that specializes in providing accounting-related services

to a wide range of clients across several geographical areas. The accounting-related
services vary and the unique qualifications required in each local market may differ
significantly. Each geographical office has a manager who controls the type of
accounting services offered to clients as well as the hiring of necessary staff to provide
those services. The CEO is in the process of determining the appropriate responsibility
centers to use for performance management in the organization. Based on this
business scenario, which one of the following is the best type of responsibility center
for each geographical area’s office?
A. Cost center.
B. Investment center.
C. Revenue center.
D. Profit center.
Example Question:
The least complex segment or area of responsibility for which costs are allocated is a(n):
A. Investment center.
B. Profit center.
C. Cost center.
D. Contribution center
Evaluation of Manager
& Business Unit
SECTION C
• A company must always makes distinction
between the performance of a manager and
the performance of a business unit.
• When evaluating a manager, a company

should focus its attention only on those
factors that manager can actually control.
• If the manager is evaluated based on

something that he or she cannot control, the
manager may be blamed for something which
he or she was not responsible.
Contribution Income statement for evaluation
Revenue - xxx
Variable manufacturing cost (DM, DL, VMOH) - (xxx)
Manufacturing contribution margin - xxx
Variable non-manufacturing overhead - (xxx)
Contribution margin - xxx
Controllable fixed cost - (xxx)
Controllable margin - xxx - Manager
Noncontrolling traceable fixed cost - (xxx)
Segment margin - xxx - Segment
Noncontrolling, non-traceable fixed cost - (xxx)
Operating profit - xxx - Whole Company
Controllable margin and controllable fixed cost
• Controllable fixed cost are the fixed cost

that the segment manager is able to
control and influence.
Example, staff salary, building rent etc.
• Controllable margin also called as

short-term segment manager
performance is the measurement of all
revenues and cost controlled by the
individual manager on a short-term basis.
Controllable margin = contribution margin – controllable fixed cost
Segment margin and non-controllable traceable fixed cost
• Non-controllable traceable fixed cost that cannot be controlled by manager,
within a span of one year or less, but can be eliminated if the segment is sold or
closed.
• Segment Margin is also called as contribution by strategic business unit as a
measure of the performance of each business unit.
Segment margin = controllable margin – non-controllable traceable fixed cost
Non-controllable, non-treacable fixed cost
They are cost which are in at company level and it will continue even if the
individual segment is discontinue.
Example: CEO salary, company level marketing expense etc.
Common Cost allocation method
1) Stand alone allocation method
2) Incremental cost allocation method
3) Alternative cost allocation method
Common Cost allocation method
1) Standalone allocation method
The stand-alone cost allocation method is a cost allocation method that allocates
a portion of common costs to each user according to their percentage of use.
2) Incremental cost allocation method

It rank units according to their sizes or some similar basis. The larger unit is called
primary party. The primary party is charged with cost up to what its cost would
be, If it were the only unit the remaining, and the balance cost is allocated to
other unit or units called incremental parties.
3) Alternative cost allocation method

It is to assign some percentage of each
departments contribution to cover
common cost, rather than allocating
common cost to each department.
Transfer Pricing
SECTION C
Transfer price is a price charged by one sub unit of an organization for a product or
service supplied to another sub unit of the same organization. The product or service
that is sold and purchase internally is called and intermediate product.
Transfer pricing is most common that are vertically integrated company.
Objectives of transfer pricing

• To promote goal congruence
• It should be equitable, permitting each unit of a company to earn a fair profit.
• To meet legal and external reporting requirement.
• Should be easy to apply.
Transfer Pricing
Multinational transfer pricing
• Transaction between subsidiaries of multinational Corporation must be priced
as arms length transaction.
The prices should be same as they would be if the two parties were not related
and the prices should not be adjusted simply to shift in between countries to
reduce overall tax payments .
• In US section 482 of internal revenue code of this rule.
Transfer Pricing
Methods of setting transfer pricing
1) Market price
2) Full cost transfer pricing
3) Cost of production plus opportunity cost
4) Variable cost
5) Cost plus price
6) Negotiated price
7) Arbitrary pricing
8) Dual rate pricing
Transfer Pricing
1) Market price
It is also called as arm’s-length model. It is a transfer price that is equal to current

market price of selling division. This model can be used only when an item has
external market. Market price is the almost always the best transfer price and fair
price.
2) Full cost transfer price
It Includes all material, labour and overhead expenses in determining a transfer

price, it is calculated using absorption costing.
Transfer price = DM + DL + VMOH + FMOH
Transfer Pricing
3) Cost of production plus opportunity cost
Here, the term opportunity goes to means lost contribution margin from external
sales. Transfer price includes the profit margin that the selling division is giving up
by selling the product internally rather than externally.
4) Variable cost
Variable cost method of setting a transfer price uses only the selling division
variable cost as transfer price.
5) Cost plus price
Under cost plus method selling division, add either a fixed monetary amount or a
percentage of cost to the cost of production as a markup. Detailed study in part two
section C.
Transfer Pricing
6) Negotiated price
It is the process of setting transfer price through negotiation between buyer and
seller. Negotiation is very useful while the product is changing in market rapidly.
7) Arbitrary pricing
The price set by the central management. It defeats the goal of making divisional
management profits conscious and hampers the autonomy of divisional managers.
8) Dual rate price
There is the method in which selling and purchasing division, each record the
transaction at different prices. For example, if the seller records it’s on market price
and the buyer records it’s on variable cost it’s dual Rate pricing. It is a complex
pricing method.
Transfer Pricing
Deciding which method is to be used?
• Goals of the Company
• Capacity of producing division
• Legal and regulatory requirements and limitations
Transfer price
Lowest price = variable cost + opportunity cost
Highest price = market price
𝐕𝐂 + 𝐎𝐂 ≤ 𝐓𝐏 ≤ 𝐌𝐏
Transfer Pricing
Manhattan Corporation has several divisions that operate as decentralized profit centers. At the
present time, the Fabrication Division has excess capacity of 5,000 units with respect to the UT-371
circuit board, a popular item in many digital applications. Information about the circuit board follows.
Market Price = $48
Variable selling or distribution cost on external sales = $5
Wherever manufacturing cost = $21
Fixed manufacturing cost = $10
Manhattan’s Electronic Assembly Division wants to purchase 4,500 circuit boards either internally, or
else use a similar board in the marketplace that sells for $46. The Electronic Assembly Division’s
management feels that if the first alternative is pursued, a price concession is justified, given that
both divisions are part of the same firm. To optimize the overall goals of Manhattan, the minimum
price to be charged for the board from the Fabrication Division to the Electronic Assembly Division
should be
Answer:
Minimum selling price = variable cost = $21
Maximum selling price = Market cost = $48
Answer: $21
Transfer Pricing
Division Z of a company produces a component that it currently sells to outside customers
for $20 per unit. At its current level of production, which is 60% of capacity, Division Z's
fixed cost of producing this component is $5 per unit and its variable cost is $12 per unit.
Division Y of the same company would like to purchase this component from Division Z for
$10. Division Z has enough excess capacity to fill Division Y's requirements. The managers
of both divisions are compensated based upon reported profits. Which of the following
transfer prices will maximize total company profits and be most equitable to the managers
of Division Y and Division Z?
•A. $18 per unit.

•B. $12 per unit.
•C. $22 per unit.
•D. $20 per unit.
Answer:
Minimum selling price = variable cost = $12
Maximum selling price = Market cost = $20
Answer: Price between 12 and 20 = $18
Transfer Pricing
Performance Measures
SECTION C
• A company should focus on short-term achievement and long-term
achievement.
• For example: a company can cut off the R&D expenditures for achieving short-
term profit, it will affect long-term profit. Because if researching and finding
new technology is not properly done, Company may lose market share and
leads to product decline in future.
• The company should take feedback on strategies and measure the

performance performance of the company or investment for appropriate
reactions.
• Return on investment and Residual income are the two financial performance
measurements
Performance measures
Return on investment (ROI)
It is a performance measure used to evaluate the investment Centre. It is the measure
used to evaluating investment Centre as a key indicators. It measures the percentage
of return that was earned on the amount of investment.
income of business unit

ROI =
assets of business unit
• Income means operating income otherwise

stated
• It is important to annualize income to find
annual ROI
A company has four division and provided the following information.
Particular North East South West
Operating Income $1000 $5000 $4000 $7500
Liability $500 $7000 $1000 $5000
Total Equity $2000 $8000 $7000 $20,000
Which division has higher ROI?
North East South West

Total Asset 2500 15,000 8000 25,000
1000
North ⇒ = 40%
2500
ROI = East 5000
⇒ = 33.33%
15,000 income of business unit
4000 ROI =
South ⇒ = 50% assets of business unit
8000
7500
West ⇒ = 30%
25,000
Accept the project if Return on investment is
greater than required rate of return or hurdle
rate.
Reject the project if Return on investment is

less than required rate of return or hurdle rate.
ROI = Asset Turnover Ratio x Operating profit margin ratio
Sales
Asset Turnover Ratio =
Average Total Asset
Income
Operating Prolit Margin =
Sales
Sales = $4000
Cost of goods sold = $3525
General and administrative expenses = $75
Asset to turnover ratio = 1.6 times
Calculate ROI
Income 4000 − 3525 − 75
Operating ProTit Margin = = = 10%
Sales 4000
ROI = Asset Turnover Ratio x Operating profit margin ratio
ROI = 1.6 x 10% = 16% Performance measures

• Easy to understand
• Widely used
• Can be used for comparison
• Can be used to determine if a division should accept a capital investment or project
Limitations
• ROI measures written as a percentage rather than a monetary amount.
• OA has problems with respect to distortion caused by accounting policies selected
by companies.
Residual Income (RI)
It attempts to overcome the certain limitation of ROI by measuring the amount of
monetary return. That is provided to the company by segment. RI is the excess
amount of profit after subtracting required a rate of asset.
RI = operating income − (Asset × RRR)

RRR = required rate of return
If RI positive = accept
If RI negative = reject
Profit = $100,000
RRR = 15%
Investment = $500,000
RI = OI − asset×RRR = 100,000 − 500,000×15% = $25,000
• A project that could be beneficial to the company is more likely to be selected.
• Firm can adjust RRR with the differences in risk.
• It is measured in monitoring amount rather than percentage.
Limitations
• Cannot be used for comparison.
• A small change in RRR would have a great effect on RI.
• RI has problems with respect to distortion caused by accounting policy selected by
the company.
• Segment manager may try to postpone or eliminate discretionary expenses.
Effects of accounting policies on ROI and RI
1) Inventory cost flow assumption
2) Depreciation method used
3) Asset capitalization policy
4) Absorption and variable costing
5) Disposition of manufacturing variance
6) Other income measurements
1) Inventory cost flow assumption 2) Depreciation method used
Case 1 – During inflation period If company use two methods, SLM and
accelerated
FIFO LIFO
COGS Decrease Increase
Case 1 – During initial year
Profit Increase Decrease
Accelerated SLM
ROI & RI Increase Decrease
Depreciation Increase Decrease

Profit Decrease Increase
Case 2 – During Deflation period ROI & RI Decrease Increase
FIFO LIFO Case 2 – During last year

COGS Increase Decrease
Profit Decrease Increase Accelerated SLM
ROI & RI Decrease Increase
Depreciation Decrease Increase
ROI & RI Increase Decrease
3) Asset capitalization policy 4) Absorption and a variable costing
There are certain items that Case 1 – Production > Sales
can be expended in profit
and loss account or Absorbtion
capitalize as an asset when Variable Costing
Costing
company purchases
generally on the cost. Roi & RI Increase Decrease
Expense Asset Case 2 – Production < Sales

Profit Decrease -
Investment - Increase Absorbtion
ROI & RI Large Decrease Decrease Variable Costing
Costing
Profit Decrease Increase
Roi & RI Decrease Increase
5) Disposition of manufacturing variance
Case 1 – Under Absorption
Material (COGS, FG, WIP) Immaterial (COGS)
COGS Increase Large Increase

Profit Decrease Large Decrease
Roi & RI Decrease Large Decrease
Case 2 – Over Absorption
Material (COGS, FG, WIP) Immaterial (COGS)
COGS Decrease Large Decrease

Profit Increase Large Increase
Roi & RI Increase Large Increase
5) Other income measurements
a) Non-recurring items
Non-recurring items changes, the profit, ROA
b) Income tax
It’s located in different countries have different tax rates.
c) Foreign exchange
Operating income and value of investment changes with the foreign exchange.
d) Common cost Allocation

Different common cost allocation methods, changes ROI and RI
Balanced Scorecard
SECTION C
The Balanced Scorecard is a widely used tool
designed to manage strategic performance.
It provides a framework that not only provides

performance measurements but also helps
management to identify what needs to be done
and how its achievement can be measured. The
balanced scorecard enables execution of
strategies.
Drs. Robert Kaplan and David Norton

introduced the concept of the balanced Robert Kaplan & David Norton
scorecard in a Harvard Business Review article in
1992
The balanced scorecard includes both financial

and non-financial measures in evaluating the
overall contribution made by each unit to the
achievement of company goals.
Balanced scorecard
Vision &
Strategy
Balanced scorecard
Financial Perspective
The Financial perspective focuses on the
organization’s financial objectives and
enables tracking of financial success and
shareholder value.
• Operating income,
• Revenue growth
• Revenue from new products
• Gross margin percentage
• Cost reductions
• Residual Income
• Return on Investment
Balanced scorecard
Customer Perspective
The Customer perspective involves
identifying the market segment or
segments the company wants to target
and then measuring its success in those
segments.
• Company’s share of the market over
time and the degree to which its
market share increases in line with
management goals.
• Customer satisfactions another vital
part of the customer perspective,
because if customers are not
satisfied, they will take their business
elsewhere.
Balanced scorecard
Internal Process
The Internal Process perspective
includes innovations and improvements
in products and services, operations,
and customer service/support needed
to create value for customers (the
Customer perspective), which in turn
furthers the Financial perspective.
Balanced scorecard
Learning and Growth
The Learning and Growth perspective
includes the capabilities that the
organization must have in order to
achieve its objectives in the Internal
Process perspective. Currently, the
components of the Learning and Growth
perspective include
• Human capital, or the skills, talents,

and knowledge of employees.
• Information capital, or the information
systems, networks, and technology
infrastructure of the company.
• Organizational capital, or the
company’s culture, leadership, degree
of teamwork, and knowledge
management.
Balanced scorecard
Internal knowledge and The efficiency of the
innovation business
KPIs KPIs
• Employee retention • Machine downtime
• Level of new product ideas • Inventory Level
• Employee satisfaction • Unit Costs
Vision &
Strategy
The financial performance Customer satisfaction

of the company KPIs
KPIs • Level of return
• Revenue • Lifetime value
• Cost • Customer satisfaction
• Net Profit
• ROI and RI
Balanced scorecard
KPI Target Current
Financial
Revenue 20% 12%
Cost -10% -2%
KPI Target Current

Customer
Satisfaction >95% 80%
Value 100% 90%

Internal Process
KPI Target Current
Machine Down
0.01% 2%
Time
Quality
5 per month 2 per month
Improvement
KPI Target Current

Learning and
Growth
Employee
>90% 85%
Retention
Training 2 per month 2 per month

Order
Balanced scorecard
Balance scorecard strategy map (example)
Balanced scorecard
Advantages
• The balanced scorecard encourages managers to focus on elements that
tend to lead to long-term success instead of on short-term financial
performance
• Evaluating and rewarding managers based on these non-financial indicators
should lead to long-term financial performance improvements
Disadvantages
• It is difficult to use scorecards for comparisons across business units
because each business unit has its individualized scorecard
• To successfully implement balanced scorecard performance measurement,
a firm must have extensive Enterprise Resource Planning systems to
capture the required information.
• Non-financial data are not subject to control or audit and thus the data’s
reliability could be questionable.
Balanced scorecard
THE END
Type equation here.
RABEEH OVUNGAL
Cost
Management
Section D
Part 1
CMA USA
RABEEH OVUNGAL
Channel!

certification.
concepts.
Must Read a relevant textbook and practice questions.

Contents:
1) Introduction to Cost Management Page no – 04
2) Classification of Cost Page no – 10
3) Cost Measurement Page no – 30
4) COGS and COGM Page no – 44
5) Joint Product Costing and By Product Costing Page no – 49
6) Process Costing Page no – 64
7) Weighted Average Process Costing Page no – 88
8) Job Order Costing & Life Cycle Costing Page no – 106
9) Overhead Units and Allocation Page no – 115
10) Accounting for Overhead Page no – 128
11) Variable and Absorption Costing Page no – 139
12) Activity Based Costing Page no – 155
13) Shared Service Cost Allocation Page no – 164
14) Supply chain and Lean Resource Management Page no – 182
15) Just in Time, MRP1, MRP2, ERP Page no – 193
16) Theory of Constraint Page no – 202
17) Value Chain Page no – 212
18) Quality Page no – 219
19) Accounting Process Redesign Page no – 228
Cost:
Cost are resources given up to achieve an objective. It means the amount of
expenditure incurred on or attributable to a specified activity.
Costing:
The techniques and process of ascertaining cost is called as costing.
Cost Accounting:
It is the process of accounting for cost which begins with the recording of
cost and ends with preparation of periodical statements and reports and
controlling the cost.
Cost Management
Cost v/s Expense
• Expenses are cost that have been

charged against revenue in a specific
accounting period.
• Cost is an economic concept while
expenses and accounting concept.
• A cost need not to be an expense but
every expense was a cost before it
becomes an expense
• Cost includes opportunity cost, time,
effort, health, money etc.
ü Is business concentrate on reduce cost

rather than increasing profit
Cost Management
Why Cost Management?
Objectives of costing
• Cost control and cost reduction.
• To determine the cost of a product or
service.
• To ascertain profit of an each activity.
• To ascertain selling price of a product or
service.
Cost Management
Measurement Concept – Strategic Cost Management
Cost management system are used as basic transaction reporting system and for
external financial reporting.
Strategic cost management is the cost management that specifically focuses on
issues such as cost, productivity, efficiency etc. Thus strategic cost management
contributes to the company’s achieving it's goals and objectives.
In determining whether a firm is achieving it's goals and objectives .
Two aspects of operations are important
1) Effective operation – is one that achieves or exceeds the goals set for the
operation.
2) Efficient operation – is one that makes effective use of its resources in

carrying out the operation.
Cost Management
Cost
• Direct Material
• Direct Labor 𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑
𝐹𝑖𝑥𝑒𝑑 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑
• Overheads
𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒
• Sales and Administration 𝑆𝑎𝑙𝑒𝑠 𝑎𝑛𝑑 𝐴𝑑𝑚𝑖𝑛𝑖𝑠𝑡𝑟𝑎𝑡𝑖𝑜𝑛
𝐹𝑖𝑥𝑒𝑑
𝑆𝑎𝑙𝑒𝑠 𝑎𝑛𝑑 𝐴𝑑𝑚𝑖𝑛𝑖𝑠𝑡𝑟𝑎𝑡𝑖𝑜𝑛
Cost Management
Cost
𝑽𝒂𝒓𝒊𝒂𝒃𝒍𝒆 𝑪𝒐𝒔𝒕 𝑭𝒊𝒙𝒆𝒅 𝑪𝒐𝒔𝒕
𝐃𝐢𝐫𝐞𝐜𝐭 𝐌𝐚𝐭𝐞𝐫𝐢𝐚𝐥 𝐅𝐢𝐱𝐞𝐝 𝐌𝐚𝐧𝐮𝐟𝐚𝐜𝐭𝐮𝐫𝐢𝐧𝐠

𝐎𝐯𝐞𝐫𝐡𝐞𝐚𝐝
𝐃𝐢𝐫𝐞𝐜𝐭 𝐋𝐚𝐛𝐨𝐮𝐫
𝐅𝐢𝐱𝐞𝐝 𝐒𝐚𝐥𝐞𝐬 &
𝐕𝐚𝐫𝐢𝐚𝐛𝐥𝐞 𝐌𝐚𝐧𝐮𝐟𝐚𝐜𝐭𝐮𝐫𝐢𝐧𝐠 𝐀𝐝𝐦𝐢𝐧𝐢𝐬𝐭𝐫𝐚𝐭𝐢𝐨𝐧
𝐎𝐯𝐞𝐫𝐡𝐞𝐚𝐝
𝐕𝐚𝐫𝐢𝐚𝐛𝐥𝐞 𝐒𝐚𝐥𝐞𝐬 & Per unit Cost – Changes
𝐀𝐝𝐦𝐢𝐧𝐢𝐬𝐭𝐫𝐚𝐭𝐢𝐨𝐧 Total Cost – No Changes
Per unit Cost – No Changes

Total Cost – Changes
Cost Management
Classification of Cost
Part 01 – Cost Management
Different classification of Cost
1) By nature or elements
2) Based on Purpose
3) Based on level of activity
4) Direct and Indirect Cost
5) Other Costs
Cost Management
1) By Nature or Elements
Cost
𝐌𝐚𝐭𝐞𝐫𝐢𝐚𝐥 𝐂𝐨𝐬𝐭 Labou 𝐄𝐱𝐩𝐞𝐧𝐬𝐞𝐬

r
Direct Indirect Direct Indirect Direct Indirect

Material Material Labour Labour Expenses Expenses
Manufacturing Overhead
Overhead Non – Manufacturing Overhead
Cost Management
Overheads
They are expenses associated with running a business or origination that
cannot be linked to producing a product or service.
Classified into 4.
1) Production Overhead:
Indirect expenses which are incurred in factory.
Eg: Factory Rent, Depreciation of Equipment etc.
2) Administrative Overhead:
Indirect expenses related to management and administration.
Eg: Office Rent, Salaries etc.
3) Selling Overhead:
Indirect expenses incurred for marketing of a good.
Eg: Advertisement, commission of sales agent.
4) Distribution Overhead:
Indirect expenses incurred to dispatch the goods.
Eg: Loading and unloading charges, carriage outward etc.
Cost Management
2) Based on Purpose
Product Cost Period Cost

• Product costs, or inventoriable costs, are • Period costs are costs for activities
costs for the production process without other than the actual production of
which the product could not be made. the product.
• Product cost are carried on the balance • Period costs are expensed as they are
sheet as inventory during production incurred.
(as work-in-process inventory) and when • The number of period costs is almost
production is completed (as finished unlimited because period costs include
goods inventory) until the unit is sold. essentially everything other than the
product costs
ü Direct Material
ü Direct Labour
ü Manufacturing Overhead
( Indirect Material, Indirect Labour etc)
Cost Management
Product cost are grouped and again classified into 3
Product Cost
Prime Cost 𝐏𝐂 = 𝐃𝐌 + 𝐃𝐋
Conversion Cost 𝐂𝐂 = 𝐃𝐋 + 𝐌𝐎𝐇
Manufacturing Cost M𝐂 = 𝐃𝐌 + 𝐃𝐋 + 𝐌𝐎𝐇
Cost Management
Selling Price = $25 per unit VNMOH = $2.5 per unit
DM = $2 per unit FNMOH = $200
DL = $3 per unit Production = 100 units
VMOH = $1 per unit Sales = 80 units
FMOH = $150
Calculate product cost, period cost, prime cost, conversion cost and
manufacturing cost
Answer
Product Cost = DM + DL + VMOH + FMOH = 2 + 3 + 1 ×100 + 150 = $𝟕𝟓𝟎
Period Cost = VNMOH + FNMOH = 2.5×80 + 200 = $𝟒𝟎𝟎
Prime Cost = DM + DL = 2 + 3 ×100 = $𝟓𝟎𝟎

Conversion Cost = DL + MOH= 3 + 1 ×100 + 150 = $𝟓𝟓𝟎
Manufacturing Cost = DM + DL + VMOH + FMOH = 2 + 3 + 1 ×100 + 150 = $𝟕𝟓𝟎
Cost Management
3) Based on Level of Activity
Fixed Cost Variable Cost Mixed Cost
Semi Variable Mixed Cost

Up to given range it will be
fixed, then its variable.
Semi Fixed Mixed Cost

(step cost, step variable cost)
Fixed set changes according to
set limit changes.
Note:
Direct material and direct Labour considers as variable cost
Manufacturing overhead considered as fixed cost unless specified.
Cost Management
Cost 10,000 units 12,000 units 15,000 units
A $ 12,500 $ 15,000 $ 18,750 Variable
B $ 4000 $ 4500 $ 5750 Mixed
C $ 2500 $ 2500 $ 2500 Fixed
D $ 2000 $ 2400 $ 3000 Variable
Ascertain cost behavior
12500 15000 18750

𝐀⇒ 10000
= 12.5
12000
= 12.5
15000
= 12.5 Variable
4000 4500 5750

𝐁⇒ 10000
= 0.4
12000
= 0.375
15000
= 0.3833 Mixed
2000 2400 3000

𝐃⇒ = 0.2 = 0.2 = 0.2 Variable
10000 12000 15000
Cost Management
Total Cost
Total Cost = Total Variable Cost + Total Fixed Cost
Total Cost = Variable Cost per unit × No of Units + Total Fixed Cost
Y = Vx + F
TC
Cost
VC
Y = Total Cost
V = Variable cost per unit
FC
x = No of units
F = Fixed Cost
Units
Cost Management
Selling Price = $25 per unit VNMOH = $2.5 per unit
DM = $2 per unit FNMOH = $200
DL = $3 per unit Production = 100 units
VMOH = $1 per unit Sales = 80 units
FMOH = $150
Calculate total cost for production and find per unit cost.
Answer
Total Cost = Total Variable Cost + Total Fixed Cost
Total Cost = (DM + DL + VMOH) ×units + Total Fixed Cost

Total Cost = (2+3+1) ×100 + 150
Total Cost = $750
Cost Management
Material = $ 2,00,000
Labour = $ 1,00,000
MOH = $ 2,00,000
The above cost are based on 1,00,000 units. In manufacturing overhead, $1,00,000 is
fixed and the rest is variable. Calculate,
a) Total Cost for producing 1,20,000 units
b) Total variable cost for producing 80,000 units
c) Fixed cost per unit for producing 1,10,000 units
Answer
a) Total Cost = TV + TF = (2+1+1) × 1,20,000 + 1,00,000 = $ 5,80,000
b) Total Variable Cost = (2+1+1) ×80,000 = $ 3,20,000
!,##,###
c) Fixed Cost = = $ 0.9090
!,!#,###
Cost Management
DM = $ 20 per unit
DL = $ 25 per unit
MOH = $ 25 per unit
In MOH 40% is variable and the rest is fixed. FMOH per unit based on a
production level of 10,000 units. Calculate total cost and cost per unit for
producing 12,000 units.
Answer
FC = 15 × 10,000 = 1,50,000
TC = 6,60,000 + 1,50,000 = 8,10,000
Cost per unit = $ 67.5
Cost Management
Units Total Cost
200 1600
Calculate variable cost per
unit and fixed cost
500 2500
Answer
X = variable 200×3 + Y = 1600

Y = fixed
600 + Y = 1600
200X + Y = 1600
Y = 1600 − 600
500X + Y = 2500
Y = 1000
300X = 900
900
X= =3
300
Variable Cost = $ 3 per unit
Fixed Cost = $ 1000 per unit
Cost Management
High – Low Method
∆ Total Cost TC High − TC Low

Variable cost = =
∆ Unit High − Low
• Select high and low total cost based on highest unit and lowest unit
Cost Management
Units Total Cost
200 1600
Calculate variable cost per
unit and fixed cost
500 2500
Answer
X = variable 200×3 + Y = 1600

Y = fixed
600 + Y = 1600
200X + Y = 1600 Y = 1600 − 600
500X + Y = 2500 Y = 1000
300X = 900 ∆ Total Cost TC High − TC Low

Variable cost = =
900
X= =3
300 2500 − 1600 900
Variable cost = = =3
Variable Cost = $ 3 per unit 500 − 200 300
Fixed Cost = $ 1000 per unit
Cost Management
Production Cost
4,50,000 7,23,060 The relevant range for fixed cost is 0 to 7,50,000
5,40,000 8,53,560 units. If production crosses relevant range,
additional equipment will be required which will
4,80,000 7,66,560 increase the fixed cost by 20%. The total cost when
producing 8,00,000 units is how many dollars?
Answer
∆ Total Cost TC High − TC Low
Variable cost = =
∆ Total Cost 8,53,560 − 7,23,060

Variable cost = = = 1.45
∆ Unit 5,40,000 − 4,50,000
Fixed cost = 7,23,060 − 1.45×4,50,000 = 70560
Fixed cost = 70560 + 20% = $ 84672
𝐓𝐨𝐭𝐚𝐥 𝐂𝐨𝐬𝐭 = 8,00,000×1.45 + 84672 = $ 𝟏𝟐, 𝟒𝟒, 𝟔𝟕𝟐
Cost Management
4) Direct and Indirect Cost
Direct cost are cost that can traced directly to a specific cost object.
Eg: DM, DL etc.
Indirect cost are cost that cannot be traced directly to a cost object. They
are grouped into cost pools for allocation.
Eg: MOH
Cost Pool – A group of indirect cost that are grouped together for allocation
using the same cost allocation base.
Cost Driver – Is anything (it can be an activity, an event or a volume of
something) that causes costs to be incurred each time the
driver occurs.
Cost Management
5) Other Costs
1) Explicit Cost – It is also called as out of pocket cost. It is the cost
incurred due to normal activities of business.
Eg: wage payment, salaries etc
2) Implicit Cost – It is also called as imputed cost. Is a cost that doesn’t
involve any specific cash payments and it is not recorded in accounting
records.
Eg: opportunity cost, loss interest in capital funds etc
3) Opportunity Cost – It is the next best alternatives profit forgone. It
is the type of implicit cost.
4) Carrying Cost – It is the cost the company incurs when it holds
inventory.
Eg: ware house rent, obsolete cost, insurance on inventory etc
5) Sunk Cost – There cost tat have already been incurred and cannot be
recovered. Sunk cost are irrelevant in a decision making.
Cost Management
5) Other Costs
6) Committed Cost – Their cost required to establish and maintain the
readiness to do business.
Eg: Depreciation, purchase of franchise, Job contract etc
7) Discretionary Cost – It is also called as flexible cost are cost may or
may not be incurred by either engaging in an activity or not engaging in
it, at the discretionary of the manager bearing the cost.
Eg: advertisement, maintenance, research and development etc
8) Marginal Cost – They are additional cost necessary to produce one
more unit.
Cost Management
Costing Methods
Cost Measurement
Product costing involves accumulating, classifying, and assigning direct
materials, direct labor, and factory overhead costs to products, jobs, or
services.
In developing a costing system, management accountants need to make
choices in three categories of costing methods:
1) The cost measurement method to use in allocating costs to units
manufactured (standard, normal, or actual costing).
2) The cost accumulation system to use (job costing or process costing).
3) The method to be used to allocate overhead (volume-based or
activity- based).
Costing Methods
Costs are allocated to units manufactured in three main ways:
1) Standard costing
2) Normal costing
3) Actual costing
Costing Methods
Standard Costing
• In a standard cost system, standard, or planned, costs are assigned to units
produced. The standard cost is what the cost should be for that unit of
output.
• Direct materials and direct labor are applied to production by multiplying
the standard price or rate per unit of direct materials or direct labor by the
standard quantity of direct materials or direct labor allowed for the actual
output.
• In a standard cost system, overhead is generally allocated to units produced
by calculating a predetermined, or standard, manufacturing overhead rate
(a volume-based method) that is applied to the units produced on the basis
of the standard amount of the allocation base allowed for the actual output.
Costing Methods
ABC company budgeted to produce 1000 units.
The cost for producing 1000 units are
DM = $ 2
DL = $ 1.5
MOH = $ 1800
The actual results were as follows,
Production 1200 units
DM = $ 2.5
DL = $ 1.25
MOH = $ 2280
The per unit cost of football under standard costing is,
DM = 2×1200 = 2400
𝐂𝐨𝐬𝐭 = 2400 + 1800 + 2160
DL = 1.5×1200 = 1800 = $ 𝟔𝟑𝟔𝟎
‹Œ••
MOH = ‹••• ×1200 = 2160
Costing Methods
Limitation of Standard Cost
• Pre determined rates are used
• There may be a temptation to emphasize the standard without considering
quality
• In environment that are constantly changing it may be difficult to
determine the standard cost
• It may be difficult to determine accurate standard cost
Benefits of Standard Cost

• Enable the management to compare with actual cost.
• It provides more control.
• Standard costing provides benchmarking for employees.
Costing Methods
Actual Costing
• No predetermined or estimated or standard costs are used.
• The actual direct labor and materials costs and the actual manufacturing
overhead costs are allocated to the units produced.
Limitation of Actual Cost

• Information is not available as quickly as standard cost.
• Overhead fluctuation throughout the year.
• Actual costing leads to delay in sales.
Benefits of Actual Cost

• Cost used as actual cost, not estimated.
Costing Methods
DM = $ 2
DL = $ 1.5
MOH = $ 1800
DM = $ 2.5
DL = $ 1.25
MOH = $ 2280
The per unit cost of football under actual costing is,
DM = 2.5×1200 = 3000
𝐂𝐨𝐬𝐭 = 3000 + 1500 + 2280
DL = 1.25×1200 = 1500 = $ 𝟔𝟕𝟖𝟎
ŽŽŒ•
MOH = ‹Ž•• ×1200 = 2280
Costing Methods
Normal Costing
• Direct materials and direct labor costs are applied at their actual rates per
unit of input multiplied by the actual amount of the direct inputs used for
production.
• Normal costing is used mainly in job costing.
• To apply overhead to production, a normal cost system uses a
predetermined manufacturing overhead application rate that is calculated
the same way as the predetermined manufacturing overhead application
rate is calculated under standard costing:
Costing Methods
DM = $ 2
DL = $ 1.5
MOH = $ 1800
DM = $ 2.5
DL = $ 1.25
MOH = $ 2280
The per unit cost of football under normal costing is,
DM = 2.5×1200 = 3000
𝐂𝐨𝐬𝐭 = 3000 + 1500 + 2160
DL = 1.25×1200 = 1500 = $ 𝟔𝟔𝟔𝟎
‹Œ••
MOH = ‹••• ×1200 = 2160
Costing Methods
Limitation of Normal Cost
• Pre determined based are overhead. It is not appropriate for process
costing.
Benefits of Normal Cost

• Avoids fluctuation in cost per unit.
• Manufacturing cost are available earlier under actual costing.
Costing Methods
Costing Methods
Company budgeted to produce 2500 X with
the following cost Company budgeted that 2 hours is required to
complete a product X. Actual production was
DM = $ 6 per unit 800 unit with the following cost.
DL = $ 3 per unit DM = $ 6.5 per unit
VMOH = $ 2 per unit DL = $ 2.75 per unit
FMOH = $ 4000 VMOH = $ 2.25 per unit
FMOH = $ 5500
Calculate total cost and cost per unit under all three methods, if MOH is applied on the
basis of unit
!"""
Standard Costing = 6 + 3 + 2 ×800 + ×800 = 8800 + 1280 = $ 𝟏𝟎, 𝟎𝟖𝟎
#$""
Actual Costing = 6.5 + 2.75 + 2.25 ×800 + 5500 = 9200 + 5500 = $ 𝟏𝟒, 𝟕𝟎𝟎
!"""
Normal Costing = 6.5 + 2.75 + 2 ×800 + ×800 = 9000 + 1280 = $ 𝟏𝟎, 𝟐𝟖𝟎
#$""
Costing Methods
Company budgeted to produce 2500 X with
the following cost Company budgeted that 2 hours is required to
complete a product X. Actual production was
DM = $ 6 per unit 800 unit with the following cost.
DL = $ 3 per unit DM = $ 6.5 per unit
VMOH = $ 2 per unit DL = $ 2.75 per unit
FMOH = $ 4000 VMOH = $ 2.25 per unit
FMOH = $ 5500
Calculate total cost and cost per unit under normal costing methods, if MOH is applied on
the hours if actual hours were 1.8 hour per unit.
Total cost = 5200 + 2200 + 1440 + 1152

DM = 6.5×800 = $ 5200
𝐓𝐨𝐭𝐚𝐥 𝐜𝐨𝐬𝐭 = $ 𝟗𝟗𝟗𝟐
DL = 2.75×800 = $ 2200
$
VMOH = ×1.8×800 = $ 1440
$
%###
FMOH = $×$'## ×1.8×800 = $ 1152
Costing Methods
Cost of Goods Sold
Cost of Goods Manufactured
Cost of Goods Sold and Cost of Goods Manufacture
§ Cost of goods sold is the total of cost directly attributable to producing

items that were sold during the period.
§ Cost of goods manufactured is the total of cost directly attributable to
producing items that were brought to completion in the manufacturing
process during the period.
§ Cost of goods sold is shown in income statement and the balance sheet
but cost of goods manufactured is an internal number, so not shown in
either in income statement and balance sheet.
1) Manufacturing Firm
2) Trading Firm
COGS & COGM

COGS of Manufacturing Firm
𝐑𝐚𝐰 𝐌𝐚𝐭𝐞𝐫𝐢𝐚𝐥 𝐔𝐬𝐞𝐝 = Opening Stock + Purchases

+ Transportation In − Returns
− Closing Stock
𝐌𝐚𝐧𝐮𝐟𝐚𝐜𝐭𝐮𝐫𝐢𝐧𝐠 𝐂𝐨𝐬𝐭 = Raw Material Used + DL + MOH
𝐂𝐎𝐆𝐌 = Opening WIP + Manufacturing Cost

−Closing WIP
𝐂𝐎𝐆𝐒 = Opening FG + COGM − Closing FG
COGS & COGM

DL = 4,80,000
Particulars Jan 1st Jan 31st Material Purchase – $ 8,00,000
DM 1,00,000 1,20,000 Purchase Return – $ 40,000
Carriage Outwards – $ 8000
WIP 1,85,000 1,92,000 Carriage Inwards – $ 12,000
FG 3,00,000 2,64,000 Electricity – $ 3500
Depreciation – $ 80,000
Company has fixed asset planned and machinery and cars. Depreciation for car is
$25,000 it is used by manager of marketing department. Electricity is allocated on the
basis of area used by different departments, production departments uses 60% of total
area. Calculate cost of goods sold.
Raw Material Used = 1,00,000 + 8,00,000 − 40,000 + 12,000 − 1,20,000 = $ 𝟕, 𝟓𝟐, 𝟎𝟎𝟎
Manufacturing Cost = 7,52,000 + 4,80,000 + 80,000 − 25,000 + 3500×60%

= $ 𝟏𝟐, 𝟖𝟗, 𝟏𝟎𝟎
Cost of Goods Manufactured = 1,85,000 + 12,89,100 − 1,92,000 = $ 𝟏𝟐, 𝟖𝟐, 𝟏𝟎𝟎
Cost of Goods Sold = 3,00,000 + 12,82,100 − 2,64,000 = $𝟏𝟑, 𝟏𝟖, 𝟏𝟎𝟎
COGS & COGM

COGS of Trading Firm
𝐂𝐎𝐆𝐒 = Opening inventory + Net purchases

+Direct expenses − Closing inventory
Opening stock = $ 1,20,000

Purchases = $ 3,00,000 COGS = 1,20,000 + 3,00,000 − 20,000 + 3000
Purchase Return = $ 20,000
Carriage Inwards = $ 3000 + 2000 + 1000 − 82,000 = $ 𝟑, 𝟐𝟒, 𝟎𝟎𝟎
Wages = $ 2000
Warehouse rent = $ 1000
Closing Stock = $ 82,000
Calculate COGS
COGS & COGM

Joint Product Costing
and By Product Costing
• When one production causes leads to production of two or more finished
goods, joint product results. Products are not identical, but they share the
same production process up to what is called split of point.
• Split of point is the point at which the two products stop sharing the same
process and become different identical products.
• Joint cost may include DM, DL, OH.
• The cost ensured after split of point are called as separable cost and they
are allocated to each product as they are ensured by the products.

Crude Oil
Petrol Diesel Kerosine Tar
Premium Petrol Premium Diesel

Methods of Allocating Costs to Joint Products
1) Physical Measure and Average Cost methods
2) Relative Sales Value at Split off method
3) Net Realizable Value (NRV) method
4) Constant Gross Profit (Gross Margin) Percentage method

1) Physical Measure and Average Cost Methods
• Also called as average cost method.
• Joint cost are allocated based on weight, volume or other physical
measure of the joint products.
• The common allocation base are number of units, gallon, feet etc
• It is also called quantitative unit methods
!##
Poratta = 100 units = 80,000× = $ 40,000
Flour – $ 80,000 $##
Products – ('
Rotti = 75 units = 80,000× = $ 30,000
Poratta = 100 units $##
Rotti = 75 units
$'
Naan = 25 units Naan = 25 units = 80,000× = $ 10,000
$##

Benefits of Physical Measure Method
1) Easy to Use
2) Allocation is Objective
Limitations of Physical Measure Method

1) Can result in product cost greater than market values.
2) Measures are not always comparable for products,

For example, some products might be in liquid form (for example,
petroleum), whereas some might be in gaseous form (for example,
natural gas). When the physical measures used for the joint
products differ, this method cannot be used.

2) Relative Sales Value at Split of Point
• Also called as Gross Market Value.
• Joint cost are allocated based sales value of each products at the split of
point.
• This method can be used only when joint products can be sold at split
off point.
• It is also called Sales Value Method
Flour – $ 80,000
!###
Products – Poratta = 80,000× = $ 30,476
$)$'
Poratta = 100 units @ $10
!!$'
Rotti = 75 units @ $15 Rotti = 80,000× = $ 34,286
$)$'
Naan = 25 units @ $20
'##
Poratta = 100×10 = 1000 Naan = 80,000× $)$' = $ 15,238
Rotti = 75×15 = 1125
Naan = 25×20 = 500
Total Sales Value = 2625 Joint Product Costing
Benefits of Sales Value method
1) Easy to Use.
2) It is the best measure of the benefits received from the joint
processing.
3) It can be used when further processing is done, as long as selling
prices exist for all the joint products.
Limitations of Sales Value method

1) Selling prices at the split off point must exist for all the products in
order to use this method.
2) Market prices of joint products may vary frequently, but this
method uses a single set of selling prices throughout an accounting
period, which can introduce inaccuracies into the allocations.

3) Net Realizable Value Method (NRV)
NRV method can be used if one or more of the joint products must be
processed beyond split of point, in order to be sold. This method is same as
sales value method and allocation is on the basis of net realizable value
which is
𝐍𝐑𝐕 = 𝐅𝐮𝐭𝐮𝐫𝐞 𝐒𝐚𝐥𝐞𝐬 𝐨𝐟 𝐅𝐢𝐧𝐚𝐥 𝐏𝐫𝐨𝐝𝐮𝐜𝐭 − 𝐒𝐚𝐩𝐞𝐫𝐚𝐛𝐥𝐞 𝐂𝐨𝐬𝐭

Flour – $ 80,000
Naan → Butter Naan (cost = $500)
Products –
Poratta = 100 units @ $10 Rotti → Thandoori Rotti (cost = $800)
Rotti = 75 units @ $15 Selling Price → Butter Naan = $ 30
Naan = 25 units @ $20
Selling Price → Thandoori Rotti = $ 20
𝐍𝐑𝐕 = 𝐅𝐮𝐭𝐮𝐫𝐞 𝐒𝐚𝐥𝐞𝐬 𝐨𝐟 𝐅𝐢𝐧𝐚𝐥 𝐏𝐫𝐨𝐝𝐮𝐜𝐭 − 𝐒𝐚𝐩𝐞𝐫𝐚𝐛𝐥𝐞 𝐂𝐨𝐬𝐭
Poratta = 100×10 = 1000

Thandoori Rotti = 75×20 − 800 = 700
Butter Naan = 25×30 − 500 = 250
!###
Poratta = 80,000× !*'# = $ 𝟒𝟏, 𝟎𝟐𝟔
(##
Thandoori Rotti = 80,000× = $ 𝟐𝟖, 𝟕𝟏𝟖
!*'#
$'#
Butter Naan = 80,000× !*'# = $ 𝟏𝟎, 𝟐𝟓𝟎

Benefits of NRV
1) The allocation results in comparable profitability among the joint
products.
2) The Net Realizable Value method can be used instead of the Sales
Value at Split off method when selling prices for one or more
products at the split off do not exist, because it provides a better
measure of the benefits received than the other methods that
could be used in this situation
Limitations of NRV
1) The NRV method is complex.
2) Market prices of joint products may vary frequently, but this
method uses a single set of selling prices throughout an accounting
period, which can introduce inaccuracies into the allocations.

4) Constant Gross Profit Method
The Constant Gross Profit Percentage method allocates the joint costs in
such a way that all of the joint products will have the same gross profit
margin percentage.
Step 1: Calculate the gross profit margin percentage for the total of both of
the joint products to be included in the allocation by subtracting the total joint
and total separable costs from the total final sales value and dividing the
remainder by the total final sales value.
Step 2: Calculate the gross profit for each of the individual products by
multiplying the total gross profit margin percentage calculated in Step 1 by
each individual product’s final sales value.
Step 3: Subtract the gross profit calculated in Step 2 and any separable costs
from each individual product’s final sales value. The result of this subtraction
process will be the amount of joint costs to allocate to each product.

Product A = 100 units at $ 20
Product B = 150 units at $ 30 Further process = Product C = 120 units at $ 50
Joint Cost = $ 3800 Separable Cost = $ 1000
𝐒𝐭𝐞𝐩 𝟏 − 𝐂𝐚𝐥𝐜𝐮𝐥𝐚𝐭𝐢𝐨𝐧 𝐨𝐟 𝐆𝐫𝐨𝐬𝐬 𝐏𝐫𝐨𝐟𝐢𝐭 𝐑𝐚𝐭𝐢𝐨

Sales = 100×20 + 120×50 = 8000
Joint Cost = (3800) 3200
𝐆𝐫𝐨𝐬𝐬 𝐩𝐫𝐨𝐟𝐢𝐭 𝐫𝐚𝐭𝐢𝐨 = = 𝟒𝟎%
Separable Cost = (1000) 8000
Gross proœit = 3200

𝐒𝐭𝐞𝐩 𝟐 − 𝐆𝐫𝐨𝐬𝐬 𝐩𝐫𝐨𝐟𝐢𝐭 𝐟𝐨𝐫 𝐞𝐚𝐜𝐡 𝐩𝐫𝐨𝐝𝐮𝐜𝐭𝐬
Product A = 100×20 = 2000×40% = 800
Product B = 120×50 = 6000×40% = 2400
𝐒𝐭𝐞𝐩 𝟑 − 𝐀𝐥𝐥𝐨𝐜𝐚𝐭𝐞
Product A = 2000 − 800 = 𝟏𝟐𝟎𝟎
Product B = 6000 − 2400 − 1000 = 𝟐𝟔𝟎𝟎
Benefits of Gross Profit Method
1) The method is easy to implement.
Limitations of Gross Profit Method

1) It assumes that all products have the same ratio of cost to sales
value, which is probably not the case

By Product
Byproduct are low sales value protect that occurs in the process of making
high value products they are like accidental results of production process
maybe by product can be a new product or damaged goods.
Treatment of byproducts: sales of byproducts is detected from the

total joint cost.
New Joint Cost = Old Joint Cost − Sales value of byproducts

Cost Accumulation System
Process Costing
Cost Accumulation System
They are used to assign costs to products or services. The two different types
of cost accumulation systems used in manufacturing are,
1) Process Costing – Is used when many identical or similar units of a

product or service are being manufactured, such as on
an assembly line.
2) Job Order Costing – is used when units of a product or service are

distinct and separately identifiable. Costs are
accumulated by job.
Cost Accumulation
Process Costing
Process costing is used to allocate costs to individual products when the
products are all relatively similar and are mass-produced. Process costing is
basically applicable to assembly lines and products that share a similar
production process.
Features of Process Costing

• Product is homogeneous.
• Product is continuous.
• The output of postprocess become the input of second process.
• The output of last process is transferred into finished goods.
• Cost and the cost per unit are calculated process wise.
• Process should be standardized.
Process Costing
The steps in process costing
1) Determine the physical flow of goods.
2) Calculate how many units were started and completed during the period.
3) Determine when materials are added to the process.
4) Calculate the equivalent units of production for materials and conversion costs.
5) Calculate the costs incurred during the period for materials and conversion costs.
6) Calculate the cost per equivalent unit for materials and conversion costs.
7) Allocate the costs for materials and conversion costs separately.
Physical Units → Equivalent Units →

→ CPC current period cost →
→ Evaluation → 𝐏𝐫𝐨𝐜𝐞𝐬𝐬 𝐀𝐜𝐜𝐨𝐮𝐧𝐭
Process Costing
Format of Process Account
Process 1 account
Dr Cr
Particular Units Amount Particulars Units Amount
Beginning WIP xxx xxx Process 2 xxx xxx
DM xxx xxx Normal Loss xxx -
DL - xxx Abnormal Loss xxx xxx
MOH - xxx Ending WIP xxx xxx
xxx xxx xxx xxx
Process 2 account
Dr Cr
Beginning WIP xxx xxx Process 3/ FG xxx xxx
Transferred In xxx xxx Normal Loss xxx -
DM xxx xxx Abnormal Loss xxx xxx
DL - xxx Ending WIP xxx xxx
MOH - xxx
xxx xxx xxx xxx
Process Costing
RBO Company
Beginning WIP = 20 units Ending WIP = 60 units
Introduced = 180 units Normal Loss = 10 units
Transferred to next process account = 120 units Abnormal Loss = 10 units
Degree of Completion
Particular CPC Beginning Ending The beginning working progress were
DM 810 100% 100% $90, $18, $4 respectively. Prepare
DL 510 30% 60% Process Account
MOH 312 10% 30%
Process Costing
RBO Company
Beginning WIP = 20 units Ending WIP = 60 units
Introduced = 180 units Normal Loss = 10 units
Transferred to next process account = 120 units Abnormal Loss = 10 units
Particular CPC Beginning Ending The beginning working progress were
DM 810 100% 100% $90, $18, $4 respectively. Prepare
DL 510 30% 60% Process Account
MOH 312 10% 30%
Step – 1 Physical Units
Particulars Unit Particulars Unit

Beginning WIP 20 Completed from beginning 20
Introduction 180 Completed from introduction 100
Normal Loss 10
Abnormal Loss 10
Ending WIP 60
200 200
Process Costing
Physical Units
Degree of Completion Particulars Unit Particulars Unit
Particular CPC Beginning Ending
DM 810 100% 100% Normal Loss 10
DL 510 30% 60% Abnormal Loss 10
MOH 312 10% 30% Ending WIP 60
200 200
Step – 2 Equivalent Units

Particulars DM DL MOH
Completed from Beginning 0 14 18
Completed from Introduction 100 100 100
Normal Loss 10 10 10
Abnormal Loss 10 10 10
Ending WIP 60 36 18
180 170 156
Process Costing
Degree of Completion Physical Units
Particular CPC Beginning Ending Particulars Unit Particulars Unit
DM 810 100% 100% Beginning WIP 20 Completed from beginning 20
DL 510 30% 60% Introduction 180 Completed from introduction 100
Normal Loss 10
MOH 312 10% 30%
Abnormal Loss 10
Ending WIP 60
Equivalent Units 200 200
Completed from Beginning 0 14 18 The beginning working progress were
Completed from Introduction 100 100 100 $90, $18, $4 respectively. Prepare
Process Account
Ending WIP 60 36 18
180 170 156
Step – 3 CPC (Current Period Cost)
Particular DM DL MOH
CPC 810 510 312
Equivalent Units 180 170 156
Unit Cost 4.5 3 2
Process Costing
Physical Units
Particular CPC Beginning Ending Particulars Unit Particulars Unit
DM 810 100% 100%
DL 510 30% 60% Normal Loss 10
MOH 312 10% 30% Abnormal Loss 10
Equivalent Units Ending WIP 60
200 200
Completed from Beginning 0 14 18 Unit Cost
Completed from Introduction 100 100 100
CPC 810 510 312
Ending WIP 60 36 18 Equivalent Units 180 170 156
180 170 156 Unit Cost 4.5 3 2
The beginning working progress were $90,

Step – 4 Evaluation $18, $4 respectively. Prepare Process Account
Particulars DM DL MOH Total
Beginning WIP 90 18 4 112
Completed from Beginning 0 42 36 78
Completed from Introduction 450 300 200 950
Normal Loss 45 30 20 95
Abnormal Loss 45 30 20 95
Ending Inventory 270 108 36 414
900 528 316 1744
Process Costing
Equivalent Units Physical Units
Particulars DM DL MOH Particulars Unit Particulars Unit
Completed from Beginning 0 14 18 Beginning WIP 20 Completed from beginning 20
Completed from Introduction 100 100 100 Introduction 180 Completed from introduction 100
Normal Loss 10 10 10 Normal Loss 10
Abnormal Loss 10 10 10 Abnormal Loss 10
Ending WIP 60 36 18 Ending WIP 60
180 170 156 200 200
Unit Cost Particulars DM DL MOH Total
Particular DM DL MOH Beginning WIP 90 18 4 112
CPC 810 510 312 Completed from Beginning 0 42 36 78
Equivalent Units 180 170 156 Completed from Introduction 450 300 200 950
Normal Loss 45 30 20 95
Unit Cost 4.5 3 2
Abnormal Loss 45 30 20 95
Ending Inventory 270 108 36 414
Step – 5 Process Account 900 528 316 1744

Beginning WIP 20 112 Process 2 120 1235
DM 180 810 Normal Loss 10 -
DL - 510 Abnormal Loss 10 95
MOH - 312 Ending WIP 60 414
200 1744 200 1744
Process Costing
Multiple Direct
Material Input
Process Costing
𝐐𝐮𝐞𝐬𝐭𝐢𝐨𝐧
A company has two direct materials, chemical P and chemical Q.
Units started = 50,000 units
Completed = 35,000 units
Chemical P is introduced at beginning and chemical Q is added when the
product is 3/4 process completed.
Ending WIP = 2/3 completed.
Prepare process account
CPC Chemical P = $ 25,00,000

Chemical Q = $ 7,00,000
CC = $ 13,50,000
Process Costing
A company has two direct materials, chemical P and
chemical Q. CPC
Units started = 50,000 units Chemical P = $ 25,00,000
Completed = 35,000 units Chemical Q = $ 7,00,000
Chemical P is introduced at beginning and chemical Q is CC = $ 13,50,000
added when the product is 3/4 process completed.

Introduction 50,000 Completed from introduction 35,000
Ending WIP 15,000
50,000 50,000
Process Costing
chemical Q. CPC
Physical Units
Introduction 50,000 Completed from introduction 35,000
Ending WIP 15,000
50,000 50,000

Particulars P Q CC
Completed from Introduction 35,000 35,000 35,000
Ending WIP 15,000 0 10,000
50,000 35,000 45,000
Process Costing
chemical Q. CPC
Physical Units Equivalent Units
Particulars Unit Particulars Unit Particulars P Q CC
Introduction 50,000 Completed from introduction 35,000 Completed from Introduction 35,000 35,000 35,000
Ending WIP 15,000 Ending WIP 15,000 0 10,000
50,000 50,000
50,000 35,000 45,000
Particular P Q CC
CPC 25,00,000 7,00,000 13,50,000
Equivalent Units 50,000 35,000 45,000
Unit Cost 50 20 30
Process Costing
Physical Units
Introduction 50,000 Completed from introduction 35,000 CPC (Current Period Cost)
Ending WIP 15,000 Particular P Q CC
50,000 50,000
CPC 25,00,000 7,00,000 13,50,000
Equivalent Units Equivalent Units 50,000 35,000 45,000
Particulars P Q CC Unit Cost 50 20 30
Ending WIP 15,000 0 10,000
50,000 35,000 45,000
Step – 4 Evaluation
Particulars P Q CC Total
Completed from Introduction 17,50,000 7,00,000 10,50,000 35,00,000
Ending Inventory 7,50,000 0 3,00,000 10,50,000
45,50,000
Process Costing
Physical Units
Introduction 50,000 Completed from introduction 35,000 CPC (Current Period Cost)
Ending WIP 15,000 Particular P Q CC
50,000 50,000
CPC 25,00,000 7,00,000 13,50,000
Equivalent Units Equivalent Units 50,000 35,000 45,000
Particulars P Q CC Unit Cost 50 20 30
Ending WIP 15,000 0 10,000
50,000 35,000 45,000 Evaluation
Particulars P Q CC Total
Completed from Introduction 17,50,000 7,00,000 10,50,000 35,00,000
Ending Inventory 7,50,000 0 3,00,000 10,50,000
45,50,000
Step – 5 Process Account
P 50,000 25,00,000 Process 2 35,000 35,00,000
Q - 7,00,000 EWIP 15,000 10,50,000
CC - 13,50,000
50,000 45,50,000 50,000 45,50,000
Process Costing
Inspection Case
Process Costing
Samsung Company
Particulars Units DM CC
Beginning 5 $20 $6
Degree of Completion - 100% 40%
Introduction 11 - -
CPC - $55 $60
Completed 12
Ending 3 100% 70%
Company had normal loss 1 unit.
Production super wiser inspects the products when process is 60%.
Prepare process account.
Process Costing
Beginning 5 $20 $6 Company had normal loss 1 unit.
Production super wiser inspects the
Introduction 11 - -
CPC - $55 $60 products when process is 60%.
Completed 12 Prepare process account.
Ending 3 100% 70%

Particulars Units
Beginning Complete 5
Introduction Complete 7
Normal Loss 1
EWIP 3
Process Costing
Introduction 11 - -
Ending 3 100% 70%
Physical Units
Particulars Units
Beginning Complete 5
Introduction Complete 7
Normal Loss 1
EWIP 3

Particulars DM CC
Beginning 0 3
Introduction 7 7
Normal Loss 1 0.6
EWIP 3 2.1
11 12.7 Process Costing
Introduction 11 - -
Ending 3 100% 70%
Particulars Units Particulars DM CC
Beginning Complete 5 Beginning 0 3
Introduction 7 7
Introduction Complete 7 Normal Loss 1 0.6
Normal Loss 1 EWIP 3 2.1
EWIP 3 11 12.7
Particular DM CC
CPC 55 60
Equivalent Units 11 12.7
Unit Cost 5 4.72
Process Costing
Physical Units
Equivalent Units
Particulars Units Particulars DM CC
Beginning Complete 5 Beginning 0 3
Introduction Complete 7 Introduction 7 7
Normal Loss 1 Normal Loss 1 0.6
EWIP 3 2.1
EWIP 3 11 12.7
CPC (Current Period Cost)
Particular DM CC Company had normal loss 1 unit.
CPC 55 60
products when process is 60%.
Equivalent Units 11 12.9
Prepare process account.
Unit Cost 5 4.72

Beginning WIP 5 26 Process 2 12 114.46
DM 55 Normal Loss 1 -
11
CC 60 EWIP 3 26.54
16 141 16 141
Process Costing
Process Costing Under
Weighted Average
Unnimaya’s Company
Beginning Units 800 CPC Degree of completion
DM $3,200 DM $36,800 DM DL MOH
DL $960 DL $16,740 Beginning 100 60 40
MOH $320 $7,930 Ending 100 70 30
MOH
Units Introduced 9200
Normal loss – 8% of total input

Abnormal loss – 50% of normal loss
Ending Units = 900
Prepare process account under weighted average method.
Process Costing
DM $3,200 DM $36,800 DM DL MOH
DL $960 DL $16,740 Beginning 100 60 40
MOH $320 Ending 100 70 30
MOH $7,930
Normal loss – 8% of total input

Abnormal loss – 50% of normal loss
Ending Units – 900

Normal Loss 800
Abnormal Loss 400
Ending WIP 900
10,000 10,000
Process Costing
DM $3,200 DM $36,800 DM DL MOH
DL $960 Beginning 100 60 40
DL $16,740
MOH $320 Ending 100 70 30
MOH $7,930
Physical Units
Normal Loss 800
Abnormal Loss 400
Ending WIP 900
10,000 10,000

Complete 7900 7900 7900
Ending WIP 900 630 270
10,000 9730 9370
Process Costing
DM $3,200 DM $36,800 DM DL MOH
DL $960 Beginning 100 60 40
DL $16,740
MOH $320 Ending 100 70 30
MOH $7,930
Particulars Unit Particulars Unit Particulars DM DL MOH
Beginning WIP 800 Completed from beginning 800 Complete 7900 7900 7900
Introduction 9200 Completed from introduction 7100 Normal Loss 800 800 800
Normal Loss 800 Abnormal Loss 400 400 400
Abnormal Loss 400
Ending WIP 900
10,000 10,000
10,000 9730 9370
CPC 40,000 17,700 8250
Equivalent Units 10,000 9730 9370
Unit Cost 4 1.82 0.88
Process Costing
Particulars Unit Particulars Unit Particulars DM DL MOH
Beginning WIP 800 Completed from beginning 800 Complete 7900 7900 7900
Introduction 9200 Completed from introduction 7100 Normal Loss 800 800 800
Normal Loss 800 Abnormal Loss 400 400 400
Abnormal Loss 400
Ending WIP 900
10,000 10,000
10,000 9730 9370
CPC (Current Period Cost)

CPC 40,000 17,700 8250
Unit Cost 4 1.82 0.88

Beginning WIP 800 4480 Process 2 7900 58,290
DM 9200 36,800 Normal Loss 800 -
DL - 16,740 Abnormal Loss 400 2680
MOH - 7930 Ending WIP 900 4987
10,000 65,950 10,000 65,950
Process Costing
Multiple Process
Process Costing
A company has two process cleaning and milling. For both process CC is are added evenly
during the process. DM is added evenly during cleaning process and DM are added at the
end of the process in milling process. All unfinished work at the end of May is 25% and
beginning was 80% completed.
Particular Cleaning Milling Prepare process account for

Beginning DM = 10,000 CC = 24,500 both cleaning and milling
under Weighted Average
Transferd In =
CC = 8000 Method
64,500
CPC DM = 90,000 DM = 64,000
CC= 80,000 CC= 49,500
Physical Units
Beginning 1000 3000
Started in May 9000 7400
Completed 7400 6000
Normal Loss 740 300
Abnormal Loss 260 100
EWIP 1600 4000 Process Costing
Particular Cleaning Milling
Beginning DM = 10,000 CC = 24,500
DM is added evenly during cleaning
Transferd In =
CC = 8000 process and DM are added at the end
64,500
of the process in milling process. All
CPC DM = 90,000 DM = 64,000 unfinished work at the end of May is
CC= 80,000 CC= 49,500 25% and beginning was 80%
Physical Units
completed.
Beginning 1000 3000
Completed 7400 6000
Normal Loss 740 300
EWIP 1600 4000

Particular Cleaning Miller
Complete 7400 6000
Normal 740 300
Abnormal 260 100
EWIP 1600 4000
Process Costing
Beginning DM = 10,000 CC = 24,500
CC = 8000
Transferd In = DM is added evenly during cleaning process and DM are
64,500 added at the end of the process in milling process. All
CPC DM = 90,000 DM = 64,000 unfinished work at the end of May is 25% and beginning
CC= 80,000 CC= 49,500
was 80% completed.
Physical Units
Beginning 1000 3000
Started in May 9000 7400 Physical Units
Completed 7400 6000
Normal Loss 740 300
Abnormal Loss 260 100 Complete 7400 6000
EWIP 1600 4000 Normal 740 300
Abnormal 260 100
EWIP 1600 4000
Step – 2 Equivalent Units - Cleaning

Particulars DM CC
Complete 7400 7400
Normal Loss 740 740
Ending WIP 400 400
8,800 8,800
Process Costing
Beginning DM = 10,000 CC = 24,500
Transferd In =
CC = 8000
64,500 DM is added evenly during cleaning process and DM are
CPC DM = 90,000 DM = 64,000 added at the end of the process in milling process. All
CC= 80,000 CC= 49,500 unfinished work at the end of May is 25% and beginning
Physical Units
Beginning 1000 3000 was 80% completed.
Completed
Normal Loss
7400
740
6000
300
Physical Units
Abnormal Loss 260 100 Particular Cleaning Miller
EWIP 1600 4000
Complete 7400 6000
Equivalent Units - Cleaning Normal 740 300
Particulars DM CC Abnormal 260 100
Complete 7400 7400 EWIP 1600 4000
Normal Loss 740 740
Ending WIP 400 400
8,800 8,800

Particular DM CC
CPC 1,00,000 88,000
Equivalent Units 8,800 8800
Unit Cost 11.36 10
Process Costing
Beginning DM = 10,000 CC = 24,500
Transferd In =
CC = 8000
Physical Units
Started in May
Completed
9000
7400
7400
6000
Physical Units
Normal Loss 740 300
EWIP 1600 4000 Complete 7400 6000
Normal 740 300
Equivalent Units - Cleaning
Abnormal 260 100
Particulars DM CC
EWIP 1600 4000
Complete 7400 7400
Normal Loss 740 740 CPC (Current Period Cost) – Cleaning
Ending WIP 400 400 Particular DM CC
8,800 8,800 CPC 1,00,000 88,000
Step – 5 Process Account Equivalent Units 8,800 8800
Unit Cost 11.36 10
Particular Amount Particulars Amount
DM 1,00,000 Process 2 1,73,870
CC 88,000 Abnormal Loss 5553
Ending WIP 8544
1,88,000 1,88,000
Process Costing
Beginning DM = 10,000 CC = 24,500
Transferd In =
CC = 8000
CC= 80,000 CC= 49,500
Physical Units
unfinished work at the end of May is 25% and beginning
Completed 7400 6000
Normal Loss 740 300
EWIP 1600 4000
Physical Units
Process Account - Cleaning Particular Cleaning Miller
Particular Amount Particulars Amount Complete 7400 6000
DM 1,00,000 Process 2 1,73,870 Normal 740 300
CC 88,000 Abnormal Loss 5553 Abnormal 260 100
Ending WIP 8544 EWIP 1600 4000
1,88,000 1,88,000
Equivalent Units - Miller

Particulars DM CC Transferred IN
Complete 6000 6000 6000
6,400 7,400 10,400 Process Costing
Beginning DM = 10,000 CC = 24,500
CC = 8000
Transferd In = DM is added evenly during cleaning process and DM are
64,500
added at the end of the process in milling process. All
CPC DM = 90,000 DM = 64,000
Physical Units was 80% completed.
Beginning 1000 3000
Started in May 9000 7400 Physical Units
Completed 7400 6000
Normal Loss 740 300 Particular Cleaning Miller
Abnormal Loss 260 100 Complete 7400 6000
EWIP 1600 4000 Normal 740 300
Process Account - Cleaning Abnormal 260 100
EWIP 1600 4000
DM 1,00,000 Process 2 1,73,870 Equivalent Units - Miller
Particulars DM CC Transferred IN
Ending WIP 8544
Complete 6000 6000 6000
1,88,000 1,88,000
CPC (Current Period Cost) – Miller 6,400 7,400 10,400
Particular DM CC Transferred IN
CPC 64,000 74,000 2,38,370
Unit Cost 10 10 22.92
Process Costing
Physical Units Equivalent Units - Miller
Particular Cleaning Miller Particulars DM CC Transferred IN
Complete 7400 6000 Complete 6000 6000 6000
Normal 740 300 Normal Loss 300 300 300
Abnormal 260 100 Abnormal Loss 100 100 100
EWIP 1600 4000 Ending WIP 0 1000 4000
6,400 7,400 10,400
Process Account - Cleaning CPC (Current Period Cost) – Miller

Particular DM CC Transferred IN
DM 1,00,000 Process 2 1,73,870
CC 88,000 Abnormal Loss 5553 CPC 64,000 74,000 2,38,370
Ending WIP 8544 Equivalent Units 6,400 7400 10400
1,88,000 1,88,000 Unit Cost 10 10 22.92
Process Account – Miller

DM 64,000 FG 2,70,396
Transferred In 2,38,370 Ending WIP 101,680
3,76,370 3,76,370
Process Costing
FIFO
Diagram
Process Costing
Weighted
Average
Diagram
Process Costing
Benefits of Process Costing
• Process costing is easiest and most practical costing system to allocate
cost for homogeneous items
• It is flexible if company adds or removes processes, it can adapt its
process costing system easily
• Management accountant can review process to look for possible cost
savings
Limitations of Process Costing

• Time consuming for management accountant
• Calculate equivalent units can lead to inaccuracy because percentage of
completion may be subjective or estimated or guess.
• It is not suitable for custom orders or diverse products
Process Costing
Job Order Costing
Life Cycle Costing
Job Order Costing
Job Order Costing
• Job order costing which is used to determine the cost of manufacturing
each products.
• This costing method is usually adopted when a manufacturer produces
variety of products which are different from one another.
• And needs to calculate the cost for doing an individual job specific job
(distinct units, batches or a lot of products or services).
• It is used when product or service has cost that can be and often need to
be trace and assigned to a specific job or service.
• Example: construction, repair jobs, customized products etc.
Job Order Costing

Benefits of job order costing
• It is best for business that do custom work or service work.
• Managers can keep track of the performance of individuals for cost
control, efficiency and productivity.
• It enables calculation of gross profit on individual jobs.
Limitation of job order costing

• It is not appropriate for high volume manufacturing or for retail.
• To produce a meaningful result it requires a lot of accurate data entry.
• The focus is on direct cost of product produced.
Job Order Costing

Life cycle costing
• In life cycle costing a company does not determine the production cost in
the short term sense of the production of 1 unit. Rather, the company
takes a much longer view the cost of production and attempts to allocate
to each project all the research and development, marketing, after sale
service, support cost, and any other cost associated with the product
during its life cycle.
• It compares the initial investment option and identify the least cost
alternatives for a 20 year.
• Lifecycle costing is a type of costing that is useful only for internal decision
making.
Life Cycle Costing

Life cycle costing
• All the cost in the life cycle of the product can be broken down into three
categories
1) Upstream cost (Before production)
example R&D, designing, testing, prototype, engineering, quality
development etc.
2) Manufacturing cost
example purchasing, direct and indirect manufacturing cost like material,
labor and overhead
3) Downstream cost (After production)
Example Marketing, Distribution, Services, Warranty etc
Life Cycle Costing

Benefits of life cycle costing
• It provides a long term, more complete perspective on the cost and profitability of a
product or service.
• It include R&D cost as well as future cost, the cost such as warranty services etc.
• It can be used to assess future resource requirement.
Limitations of life cycle costing

• Accurate estimation for whole lifetime can be difficult.
• Cost increases over the life of the product.
• It requires lot of time and resources.
Life Cycle Costing

ABC company about to launch a new product. The company expects
6 year life cycle from the moment it starts developing its products. The
companies cost estimates are R&D = 7,50,000
Design = 5,00,000
Marketing = 2,00,000
Distribution = 1,00,000
Customer Service = 2,50,000
After Sale Support = 60,000
Company plans to produce and sell 1500 units. What is the expected total life
cycle cost per unit for ABC company?
Life Cycle 7,50,000 + 5,00,000 + 2,00,000 + 1,00,000 + 2,50,000 + 60,000

=
Cost per unit 1500
= $ 𝟏𝟒𝟒𝟎 𝐩𝐞𝐫 𝐮𝐧𝐢𝐭
Life Cycle Costing

Customer Life-Cycle Costing
• Customer life-cycle costing looks at the cost of the product from the
customer’s (the buyer’s) standpoint.
• Total costs that will be paid by the customer during the whole time the
customer owns the product: the customer’s purchase costs plus costs to
use, maintain, and dispose of the product or service.
• Customer life-cycle costing is important to a company because it is part of

the pricing decision. If a product is expected to require minimal
maintenance when compared with its competition, the company can
charge a higher price for the product than the price the competition is
charging for their products
Life Cycle Costing

Overhead Units
and Allocation
Overhead cost and allocation
• Overhead cost are production and operation cost the company cannot
trace to any specific product or unit.
• Because overhead cost are incurred and paid for by the company and are
necessary for the production process.
• It is essential that company know what these cost are and allocate them to
various products.
• The categories of factory overhead includes
1) Indirect material
Cleaning supply's, Lubricants etc
2) Indirect labor
Janitorial services, quality control, plant supervisor etc
3) General manufacturing overhead

Factory rent, electricity, equipment cost including depreciation etc.
Overhead Allocation
Factory Overhead may be,
1) Fixed Overhead
2) Variable Overhead
3) Mixed Overhead
Types of Cost allocation

1) Traditional Costing
2) Plant Wide Costing
3) Departmental Costing
4) Absorption Costing
5) Variable Costing
6) Activity Based Costing
Overhead Allocation
Traditional costing
• Traditional method of allocation involves grouping manufacturing overhead
costs into a cost pool and allocating them to individual products based on a
single cost driver.
• Manufacturing overhead costs have been allocated to the individual

products based on either direct labor hours, machine hours, material cost,
units of production or some similar measure that is easy to measure and
calculate.
• The measure used is called activity base
A cost pool is a group of indirect costs that are grouped together for allocation
based on some cost allocation base and cost driver is anything causes cost to
be incurred each time the driver occurs.
Overhead Allocation
Company produces two products A and B
Particulars A B
Production 40,000 1,00,000
DM 32,00,000 10,00,000
DL 20,00,000 30,00,000
Overhead costs are,
Activity Consumed
Activity Cost
A B
1,00,000 Direct 2,00,000 Direct
Indirect Labour 3,00,000
Labour Hour Labout hours
30,000 Machine 60,000 Machine
Machine Cost 4,50,000
Hour Hours
Machine Setup 7,30,000 4000 setup 1000 setup
Order Processing 6,00,000 4500 order 1500 order
20,000 30,000
General Expenses 5,00,000
employees employees
Compute cost per unit of A and B, if allocation base is Direct Labour Hours
Overhead Allocation
Activity Consumed
Activity Cost
A B
1,00,000 Direct 2,00,000 Direct
Particulars A B Labour Hour Labout hours
Production 40,000 1,00,000 30,000 Machine 60,000 Machine
Hour Hours
DM 32,00,000 10,00,000
DL 20,00,000 30,00,000 Order Processing 6,00,000 4500 order 1500 order
20,000 30,000
employees employees
Total overhead = 3,00,000 + 4,50,000 + 7,30,000 + 6,00,000 + 5,00,000

= 𝟐𝟓, 𝟖𝟎, 𝟎𝟎𝟎𝟎
1,00,000
A = 25,80,000× = $ 𝟖, 𝟔𝟎, 𝟎𝟎𝟎
1,00,000 + 2,00,000
2,00,000
B = 25,80,000× = $ 𝟏𝟕, 𝟐𝟎, 𝟎𝟎𝟎
1,00,000 + 2,00,000
Overhead Allocation
Activity Consumed
Activity Cost
A B
1,00,000 Direct 2,00,000 Direct
Particulars A B Labour Hour Labout hours
Production 40,000 1,00,000 30,000 Machine 60,000 Machine
Hour Hours
DM 32,00,000 10,00,000
DL 20,00,000 30,00,000 Order Processing 6,00,000 4500 order 1500 order
20,000 30,000
employees employees
A OH = $ 𝟖, 𝟔𝟎, 𝟎𝟎𝟎
B OH = $ 𝟏𝟕, 𝟐𝟎, 𝟎𝟎𝟎

60,60,000
𝐀 = 32,00,000 + 20,00,000 + 8,60,000 = = $ 𝟏𝟓𝟏. 𝟓 𝐩𝐞𝐫 𝐮𝐧𝐢𝐭
40,000
57,20,000
𝐁 = 10,00,000 + 30,00,000 + 17,20,000 = = $ 𝟓𝟕. 𝟐 𝐩𝐞𝐫 𝐮𝐧𝐢𝐭
1,00,000
Overhead Allocation
Plantwide Overhead costing
• It is allocation involves putting all plant wide overhead cots into one cost
pool and then allocating the cost in that cost pool into products using one
allocation base.
• Usually machine hours or Labour hours.
• It is a single rate used for all overhead cost incurred at the production
facility.
Overhead Allocation
Departmental Overhead Costing
• A company can choose separate cost pool for each department that
the products pass through in production. This method is called
departmental overhead costing.
• Each departments overhead cost are put into a separate cost pool and
then each department overhead is allocated according to allocation
base. That manager believes is best for the department.
Example
Department A uses a lot of machine time.
Department B uses a lot of direct Labour hours.
Department C does the final assembly and department , D is responsible for
painting the products.
There it is better to allocate overhead cost on the basis of,
Machine hours – Department A

Direct Labour Hours – Department B
No of parts used – Department C
Size of the painted are – Department D
Overhead Allocation
Pre Determined Rate (PDR)
Budgeted Overhead
PDR =
Budgeted Activity
PDR is the amount of manufacturing overhead that will be charged or

allocated to each unit of a product is unit of allocation base allowed to
for the production of that product
Overhead Allocation
Determine the level of Activity:
They are 4 types of activity level,
1) Normal Activity
It is the level of activity that will be achieved in the long run taking into
account seasonal changes in the business as well as cyclical changes. It is
used for long-term planning.
2) Practical Capacity
Also called as currently attainable capacity. It is the theoretical activity level
reduced by allowance for unavoidable interruption such as shutdowns,
holidays, scheduled maintaining etc.
3) Master Budget Capacity
It is the amount of actual output expected during the next budget period. It
is used for developing the master budgeted. It is also used for current
performance measurement.
4) Theoretical or Ideal Capacity
The level of activity that been occurred if the company produces at its
absolute most efficient level at all times. It has a very little use. Because it
will not be attained.
Overhead Allocation
The total overhead for the ABC company is $ 4,00,000. The maximum capacity of the
company is 50,000 units. During the year company produced 40,000 units. But the past
history shows ABC company produces 42,000 units on an average. Company expects
45,000 units of sale in the coming year. The management accountant insisted to reduce
direct labour into 2 hours per unit in the coming year. The accountant came into this
conclusion because on an average it takes 2.5 hours to complete the unit. This year the
workers used 2.25 hour to complete one unit.
Calculate PDR if allocation base is hours and perfect condition workers uses 1.75 hour
to complete a unit. Budgeted Overhead
Total Overhead = $ 4,00,000 PDR =
Budgeted Activity
Ideal = 50,000
Practical = 40,000 4,00,000
Master = = 2,00,000
Normal = 42,000 2
Master = 45,000
4,00,000
Practical = = 1,77,778
2.25
Labour Hours
Ideal = 1.75 hrs 4,00,000
Normal = = 1,60,000
Practical = 2.25 hrs 2.5
Normal = 2.5 hrs 4,00,000
Master = 2 hrs Perfect = = 2,288,571
1.75
Overhead Allocation
Allocating Manufacturing Overhead to Units
Cost Standard Actual Normal
DM Budgeted Actual Actual
DL Budgeted Actual Actual
MOH Budgeted Actual Absorb
Overhead Allocation
Accounting
for Overhead
Overapplied
Underapplied
Accounting for OH
Overhead Over Applied and Under Applied
Budgeted hour 2 hrs/ unit
Budgeted Production 6 unit
Actual hour 3 hrs/ unit
Budgeted overhead $1200
Actual overhead $1500
Case – 1
If activity basis production and actual production is 5 unit. Evaluate absorbed or
applied amount.
1200
PDR = = $ 200
6
Absorption Cost = $200 ×5 = $ 1000
⇒ 𝐔𝐧𝐝𝐞𝐫 𝐀𝐩𝐩𝐥𝐢𝐞𝐝
Accounting for OH
Case – 2
If activity basis production and actual production is 8 unit. Evaluate absorbed or
applied amount.
1200
PDR = = $ 200
6
Absorption Cost = $200 ×8 = $ 1600
⇒ 𝐎𝐯𝐞𝐫 𝐀𝐩𝐩𝐥𝐢𝐞𝐝
Accounting for OH
Case – 3
If activity basis hours and actual production is 7 unit. Evaluate absorbed or
applied amount.
1200
PDR = = $ 100
12
Absorption Cost = $100 ×7×3 = $ 2100
Accounting for OH
Actual Amount − Absobtion Amount = +ve ⇒ Under Applied
= −ve ⇒ Over Applied
Absorption or
Applied Amount
= PDR×Actual Activity
Accounting for OH
Disposition of Under Absorption
If the amount immaterial it is treated to cost of goods sold.
Dr COGS a/c ---------

Dr Factory OH a/c ---------
Cr Factory OH absorbed a/c ---------
If the amount material, the amount will divided into cost od goods sold,
work in progress and finished goods.
Dr COGS a/c ---------

Dr Finished Goods a/c ---------
Dr WIP a/c ---------
Cr Factory OH Absorbed a/c ---------
Accounting for OH
Disposition of Over Absorption
If the amount immaterial it is treated to cost of goods sold.

Cr COGS a/c ---------
Cr Factory OH absorbed a/c ---------
If the amount material, the amount will divided into cost od goods sold,
work in progress and finished goods.
Dr Factory OH Absorption a/c ---------

Cr COGS a/c ---------
Cr Finished Goods a/c ---------
Cr WIP a/c ---------
Cr Factory OH a/c ---------
Accounting for OH
Company applies overhead to products on the basis of direct labour hours.
The following cost were incurred during the year.
DM = $ 1,75,000
DL = $3,50,000
Indirect Labour = $ 2,40,000
Electricity = $ 46,000
Plant Maintenance = $ 70,000
Company paid $ 4.375 per hour to the Labour. Company’s profit plan for the
year included budgeted labour of $ 3,20,000 and fixed overhead of
$4,48,000. The standard hours allowed for production was 64,000 hrs.
Company had 1000 units in finished goods, 400 unit in working in progress at
ending inventory. During the year company sold 600 units.
Calculate the under or over applied overhead and serve the journal entry
considering the amount is material.
Accounting for OH
Company applies overhead to protects
on the basis of direct labour hours.
Company paid $ 4.375 per hour to the Labour.
The following cost were incurred Company’s is profit plan for the year included
during the year. budgeted labour of $ 3,20,000 and fixed
DM = $ 1,75,000
overhead of $ 4,48,000. The standard hours
DL = $3,50,000 allowed for production was 64,000 hrs.
Indirect Labour = $ 2,40,000
Company had 1000 units in finished goods,
Electricity = $ 46,000 400 unit in working in progress at ending
Plant Maintenance = $ 70,000 inventory. During the year company sold 600
units.
Budgetd Hr = 64,000
%$","""
Actual Hr = = 80,000
!.%($
Actual OH = $ 3,56,000
!,!),"""
Absorption Cost = *!,"""
×80,000 = 5,60,000
560,000-3,56,000 = 2,04,000
Accounting for OH
Company paid $ 4.375 per hour to the Labour.
Company’s is profit plan for the year included
budgeted labour of $ 3,20,000 and fixed
overhead of $ 4,48,000. The standard hours
allowed for production was 64,000 hrs.
Company had 1000 units in finished goods,
560,000-3,56,000 = 2,04,000
400 unit in working in progress at ending
inventory. During the year company sold 600
units.
+"""
Finished Goods = 204,000× = 102,000
#"""
!""
WIP = 204,000× = 40,800
#"""
*""
COGS = 204,000× = 61,200
#"""
Dr Factory OH a/c 5,60,000

Cr COGS a/c 61,200
Cr Finished Goods a/c 1,02,000
Cr WIP a/c 40,800
Cr Factory OH absorbed a/c 3,56,000
Accounting for OH
Variable and
Absorption Costing
Absorption Variable
Costing Costing
DM
DL Product Cost
Product Cost
VMOH
FMOH
VNMOH Period Cost
Period Cost
FNMOH
Variable v/s Absorption

• Variable and absorption costing are two different methods of inventory
costing.
• Absorption costing is a method for accumulating the costs associated
with the production process and apportioning them to individual
products.
• Variable costing is a methodology that only assign variable cost to
inventory.
• Absorption costing is also called as traditional costing method and
gross profit costing method.
• Variable costing is also called as marginal costing or contribution margin
costing method.
• Under both the costing method all manufacturing variable cost DM, DL,
VMOH are product cost or inventoriable cost

The two differences between the method are as follows,
Treatment of FMOH
In absorption costing FMOH is treated as product cost and in variable costing
FMOH is treated as period cost.
Purpose
• Absorption costing is used for financial accounting purpose (US GAAP, IFRS)
• Variable costing is used for costing and management decision (internal
control)

Income Statement – Absorption Costing
Particular Amount
Sales xxx
(COGS)
DM xxx
DL xxx (xxx)
VMOH xxx
FMOH xxx
Gross Profit xxx
(VNMOH) (xxx)
(FNMOH) (xxx)
EBIT/OP xxx Variable v/s Absorption
Income Statement – Variable Costing
Particular Amount
Sales xxx
(COGS)
DM xxx
(xxx)
DL xxx
VMOH xxx
Manufacturing CM xxx
(VNMOH) (xxx)
Contribution Margin xxx
(FMOH) (xxx)
(FNMOH) (xxx)
EBIT/OP xxx
DM = $ 3 per unit VNMOH = $ 0.5 per unit
DL = $ 2.5 per unit FNMOH = $ 1500
VMOH = $ 1.5 per unit Sales = 750 units
FMOH = $ 3000 Selling Price = $ 14
Income statement – absorption costing

When production is 1000 units When production is 1500 units
Sales = 10500 Sales = 10500
COGS = 7500 COGS = 6750
Gross Profit = 3000 Gross Profit = 3750
Expense = 1875 Expense = 1875
Operating Profit = 1125 Operating Profit = 1875

DM = $ 3 per unit VNMOH = $ 0.5 per unit
DL = $ 2.5 per unit FNMOH = $ 1500
VMOH = $ 1.5 per unit Sales = 750 units
FMOH = $ 3000 Selling Price = $ 14
Income statement – variable costing

When production is 1000 units When production is 1500 units
Sales = 10500 Sales = 10500
COGS = 5250 COGS = 5250
Manufacturing CM = 5250 Manufacturing CM = 5250
VNMOH = 375 VNMOH = 375
Contribution Margin = 4875 Contribution Margin = 4875
FMOH = 3000 FMOH = 3000
FNMOH = 1500 FNMOH = 1500
Operating Profit = 375 Operating Profit = 375
If production = Sales, then Absorption = Variable

Production > Sales ⇒ Absorption > Variable
Production < Sales ⇒ Absorption < Variable

Opening Stock = 1300
Closing Stock = 1800
FMOH = $ 3 per unit
Profit under absorption costing = $ 9000
Calculate profit under Variable costing
Production > Sales ⇒ Absorption > Variable

FMOH × (production – sales) = 3×500 = 1500
Variable Costing Pro†it = $9000 − 1500 = $ 𝟕𝟓𝟎𝟎

ABC company started the business on January 1st 2023. Following information of
January
Production = 97000
Sales = 92000
DM = $34 per unit
DL = $ 17 per unit
VMOH = $25,22,000
FMOH = $19,40,000
VNMOH = $2 per unit
FNMOH = $1,00,000
Calculate
1) Product Cost per unit
2) Period Cost
3) Ending Inventory Value
Under both methods.

January
Production = 97000 VMOH = $25,22,000
Sales = 92000 FMOH = $19,40,000
DM = $34 per unit VNMOH = $2 per unit
DL = $ 17 per unit FNMOH = $1,00,000
Calculate
1) Product Cost per unit
Answer
𝐀𝐛𝐬𝐨𝐫𝐩𝐭𝐢𝐨𝐧
25,22,000 + 19,40,000
Product Cost = DM + DL + VMOH = 34 + 17 + = $ 97
97000
𝐕𝐚𝐫𝐢𝐚𝐛𝐥𝐞
25,22,000
Product Cost = DM + DL + VMOH = 34 + 17 + = $ 77
97000

January
Production = 97000 VMOH = $25,22,000
Sales = 92000 FMOH = $19,40,000
DL = $ 17 per unit FNMOH = $1,00,000
Calculate
2) Period Cost
Answer
Period Cost = VNMOH + FNMOH = 1,00,000 + 2×92,000 = $ 2,84,000
Period Cost = FMOH + VNMOH + FNMOH
= 19,40,000 + 2×92,000 + 1,00,000 = $ 77

January
Production = 97000 VMOH = $25,22,000
Sales = 92000 FMOH = $19,40,000
DL = $ 17 per unit FNMOH = $1,00,000
Calculate
3) Ending inventory Value
Answer
𝐄𝐧𝐝𝐢𝐧𝐠 𝐈𝐧𝐯𝐞𝐧𝐭𝐨𝐫𝐲 = 𝟗𝟕𝟎𝟎𝟎 − 𝟗𝟐𝟎𝟎𝟎 = 𝟓𝟎𝟎𝟎 𝐮𝐧𝐢𝐭𝐬
Ending = 97×5000 = $ 𝟒, 𝟖𝟓, 𝟎𝟎𝟎
Ending = 77×5000 = $ 𝟑, 𝟖𝟓, 𝟎𝟎𝟎

Benefits of Absorption Cost
§ It provides matching of costs and benefits.
§ Absorption costing comply with US GAAP and US IRS.
§ Helps business accurately ascertain product costs.
Limitations of Absorption Cost

§ Managers have opportunity to manipulate operating income by over
producing.
§ When sales > production, operating income under absorption costing

will be lower than variable costing.

Benefits of Variable Cost
§ Operating income varies directly with sales volume and is not effected
by inventory level.
§ Helps in internal decision making planning and controlling
§ Cost under marginal costing is simple to understand
Limitations of Variable Cost

§ Does not provide proper matching of costs and benefits.
§ To prepare income statement it is necessary to separate selling

administration and distribution accost into fixed and variable
components.

(ABC Costing)
Activity Based Costing
According to IMA ABC is a methodology that measures the cost and
performance of activities, resources and cost objects based on their use.
ABC recognize the casual relationships of cost drivers to activities.
ABC is a costing system that focus on individual activities as the fundamental
cost object to determine what the activity cost are.
ABC Costing
Categories of Activity
There are 4 different types of activity used in ABC.
1) Unit Level Activity
Are performed for each unit produced.
Eg: Hours of work, inspecting each item etc.
2) Batch Level Activity
Occurs each time a batch is produced.
Eg: Purchasing, Machine Setup, Batch inspection.
3) Product Sustaining Activity
Are activity performed in order to support the production of specific
products.
Eg: Product design, engineering changes etc.
4) Facility Sustaining Activities
Are activity undertaken to support production in general.
Eg: Security, Maintenance etc.
ABC Costing
Steps of ABC costing
Setting up and ABC system is more difficult, time consuming and costly than
setting up a traditional system.
It involves
1) Identification of Activities
• An activity is an event for task or unit of work with a specific purpose,
Designing product, setting up machine, production, distribution etc.
• Company must first analyze production process and identify the various
activities that helps to explain why the company incurred the cost it
considered to be indirect.
• As a part of ABC, the company main identify value added activities and non
value added activities.
• Non value adding activities that do not add any value for the end customers.
and the company should try to reduce or eliminate them.
ABC Costing
2) Identification of Cost Driver
• Cost driver is anything that causes cost to be incurred each time the driver
occurs.
• Cost driver can be structural or executional.
• Structural cost drivers are actual structure of companies operations and
complexity of technology that company uses.
Size of store, number of branches, number of machines
• Executional cost drivers are the actual process perform
Machine set up, machine hours, packaging, assembling etc.
ABC Costing
3) Identification of Cost Pool
• The cost pool are used to collect the cost associated with the various activities
or drivers that incur the cost.
• Management may decide to combine equipment maintenance and machine
operations into a single cost pole. Because it determines that machine hours
are the most appropriate cost driver.
• After activities are identified and cost pool and cause drivers determined and
allocations rate is calculated for each cost allocation basis.
• Identify cost to drivers should be used as allocation base for each cost pool.
The final step is to allocate the allocation rate based on the cost drivers used
ABC Costing
Company produces two product A and B
Particulars A B
Production 40,000 units 1,00,000 units
Total DM 32,00,000 10,00,000
DL 20,00,000 30,00,000
Activity Consumed
Activity Cost
A B
Indirect Labour 3,00,000 1,00,000 DLH 2,00,000 DLH
Machine Maintance 4,50,000 30,000 MH 60,000 MH
Order Processing 6,00,000 4500 orders 1500 orders
General Expenses 5,00,000 DL cost DL cost
Calculate per unit total cost using ABC
ABC Costing
Activity Consumed
Activity Cost
A B
Indirect Labour 3,00,000 1,00,000 DLH 2,00,000 DLH
Machine Maintance 4,50,000 30,000 MH 60,000 MH
Order Processing 6,00,000 4500 orders 1500 orders
General Expenses 5,00,000 DL cost DL cost
A B
DM – 32,00,000 DM – 10,00,000
DL – 20,00,000 DL – 30,00,000
IDL – 1,00,000 IDL – 2,00,000
MM – 1,50,000 MM – 3,00,000
MS – 5,84,000 MS – 1,46,000
OP – 4,50,000 OP – 1,50,000
GE – 2,00,000 GE – 3,00,000
Total = 66,84,000 Total = 50,96,000
Product A = $ 167.1 per unit Product B = $ 50.96 per unit
ABC Costing
Benefits of ABC
• Provides more accurate product cost.
• Enables management to identify activity that do not add value to final
product.
• Cross subsidization is less likely to occur.
Limitations of ABC
• Expensive .
• Time consuming .
• It is not acceptable for US GAAP and US tax reporting.
ABC Costing
Shared
Service Cost
Allocation
SECTION D
There are mainly two types of department in a company,
a) Production Department
b) Service Department
Production department directly perform operating activities where as service
department do not perform operating activities directly. Instead they assist
the other departments (both production and service)
Maintenance Department, Human Resources, Canteen etc.
Service cost is also called as Shared or Support Cost
Reasons for allocating service cost

• Cost allocation provides department (accurate) and product cost.
• Uses in decision making like, valuing inventory, evaluating the efficiency
and fixing selling price etc.
• It justify cost such as transfer prices.
Service Cost Allocation

Steps in Service cost Allocation
There are 3 steps to allocate shared cost.
Step 1: Trace overhead cost to the respective department responsible for
the cost.
Step 2: Allocate shared cost to production department.

The methods are,
1) Single
a) Single rate method
b) Dual rate method
2) Multiple
a) Direct Method
b) Step Down Method
c) Reciprocal Method
Step 3: Allocate production department cost to products.

Single Service Cost Allocation
It is normally used in services provided by central department to companies
operating units. The maximum classification of service cost is variable and
fixed only.
1) Single Rate Method

Allocating all cost as one amount is called as the single rate method. It
creates a single allocation base for service departments fixed and variable
cost.
2) Dual Rate Method

It is also called as contribution margin cost allocation method. Under dual
rate method it creates separate cost pool and each cost pool have its own
cost drivers for fixed and variable cost. Has two separate cost that’s why
called dual rate method.

ABC company has 3 departments maintenance, production 1 and
production 2. Maintenance department practical capacity is 5000 hours. Fixed cost of
operating maintenance department are budgeted of $ 2,47,500 per year. The wages
for maintenance employee budgeted at $ 25 per hour. Budgeted maintenance usage
by P1 and P2 are 3500 hours and 1000 hours respectively. The actual maintenance
hour used by P1 and P2 are 3600 hours and 1100 hours respectively.
a) Allocate cost using single rate method

b) Allocate cost using dual rate method
FC = $ 2,47,500 Cost of P1 = $80 × 3600 = $ 288,000

a) Wage = $ 25
P1 = 25 ×3500 = $ 87,500 Cost of P2 = $80 × 1100 = $ 88,000
P2 = 25 × 1000 = $ 25,000
Total cost = 247500 + 87,500 + 25,000 = $ 360,000
360,000
Cost per unit = = $80
4500

ABC company has 3 departments maintenance, production 1 and
production 2. Maintenance department practical capacity is 5000 hours. Fixed cost of
operating maintenance department are budgeted of $ 2,47,500 per year. The wages
for maintenance employee budgeted at $ 25 per hour. Budgeted maintenance usage
by P1 and P2 are 3500 hours and 1000 hours respectively. The actual maintenance
hour used by P1 and P2 are 3600 hours and 1100 hours respectively.
a) Allocate cost using single rate method

b) Allocate cost using dual rate method
FC = $ 2,47,500 P1 = 25×3600 + (55×3500)

b)
= $ 282,500
Variable = $25 per hrs.
P2 = 25×1100 + (55×1000)
= $ 82,500
¥¦§¨© Ž±²³••
Fixed =
ª«©¬¨-¨© ®¯«°
= ±³••
= $ 55

Multiple Service Cost Allocation
Cost allocation problem arise when an organization has several Service
Department and these department provides support not only to the
operating department but the other service department as well.
1) Direct Method
2) Step down Method
3) Reciprocal Method

1) Direct Method
2) Step down Method

1) Direct Method
2) Step down Method

1) Direct Method
Under direct method reciprocal services provided by the difference Service
Department to each other are ignored. The companies simply allocate
service departments cost directly to operating department. when calculating
the usage ratio for different operating department, count only the usage of
shared Service Department by the operating department

Particular Maintanance Canteen P1 P2 P3
Department Cost 100 120 300 400 800
Maintanance Hours - - 20 30 50
No.of Soft Drinks 10 10 20 20 40
Calculate the total cost after service cost allocation using direct method
Maintenance Cost = $ 100 Canteen Cost = $ 120
100×20 120×20
P1 = = $ 20 P1 = = $ 30
20 + 30 + 50 20 + 20 + 40
100×30 120×20
P2 = = $ 30 P2 = = $ 30
20 + 30 + 50 20 + 20 + 40
100×50 120×40
P3 = = $ 50 P3 = = $ 60
20 + 30 + 50 20 + 20 + 40
P1 = 300 + 20 + 30 = $ 350
P3 = 800 + 50 + 60 = $ 910
P2 = 400 + 30 + 30 = $ 460
2) Step Down Method
It is also known as sequence method. In this method we attempt to
recognize this service that Service Department provide to each other. But we
only make one way allocation. So there must be an order to allocate the cost
in step down method the order can be
1) Management choice
2) The department that provide the highest percentage of its service to
other Service Department is allocated first and so on.

Particular HR Cleaning Metal Chrome
Department Cost 2,00,000 80,000 4,00,000 1,00,000
Labour Hours 10,000 5000 20,000 5000
Area (Square Feet) 15,000 500 60,000 20,000
Allocate the service department cost using stepdown method.
5000
HR to Cleaning = = 16.66 %
5000 + 20,000 + 5000
15000
Cleaning to HR = = 15.78 %
15000 + 60,000 + 20,000
So order is HR to Cleaning Cleaning = $ 1,13,333 using Labour hrs

HR = $ 2,00,000 using Labour hrs
2,00,000×5000 1,13,333×60,000
Cleaning = = $ 33,333 Metal = = $ 84,999
5000 + 20,000 + 5000 60,000 + 20,000
2,00,000×20,000 1,13,333×20,000
Metal = = $ 1,33,333 Chrome = = $ 28,334
5000 + 20,000 + 5000 60,000 + 20,000
2,00,000×5000
Chrome = = $ 33,333
5000 + 20,000 + 5000
Department Cost 2,00,000 80,000 4,00,000 1,00,000
Labour Hours 10,000 5000 20,000 5000
Area (Square Feet) 15,000 500 60,000 20,000
Allocate the service department cost using stepdown method.
HR = $ 2,00,000 using Labour hrs Cleaning = $ 1,13,333 using Labour hrs
2,00,000×5000
Cleaning = = $ 33,333
5000 + 20,000 + 5000 1,13,333×60,000
Metal = = $ 84,999
60,000 + 20,000
2,00,000×20,000
Metal = = $ 1,33,333
5000 + 20,000 + 5000 1,13,333×20,000
Chrome = = $ 28,334
60,000 + 20,000
2,00,000×5000
Chrome = = $ 33,333
5000 + 20,000 + 5000
Metal Total Cost = 4,00,000 + 1,33,333 + 84,999 = 6,18,332
Chrome Total Cost = 1,00,000 + 33,333 + 28,334 = 1,61,668

It is also called as simultaneous method. It is most complicated and advance
of three methods. Because it recognize this all of its services provided by
Service Department to other Service Department. Because of this detail
allocation, reciprocal method is the most correct method to use

Department Cost 2,00,000 80,000 4,00,000 1,00,000
Labour Hours 10,000 5000 20,000 5000
Area (Square Feet) 15,000 500 60,000 20,000
Allocate the service department cost using reciprocal method.
5000
HR to Cleaning = = 16.67 %
5000 + 20,000 + 5000
15000
Cleaning to HR = = 15.79 %
15000 + 60,000 + 20,000
𝟐𝟏𝟐, 𝟔𝟑𝟐
𝐇= = 𝟐𝟏𝟖, 𝟑𝟕𝟔
H = 2,00,000 + 0.1579 C 𝟎. 𝟗𝟕𝟑𝟔𝟖
C = 80,000 + 0.1667 H
C = 80,000 + 01667×218,376
H = 200,000 + 0.1579(80,000 + 0.1667H)
𝐂 = 𝟏𝟏𝟔, 𝟒𝟎𝟒
H = 200,000 + 12,632 + 0.02632H
H − 0.02632H = 212,632
0.97368H = 212,632
𝐇 = $ 𝟐𝟏𝟖, 𝟑𝟕𝟔
𝐂 = $ 𝟏𝟏𝟔, 𝟒𝟎𝟒
Department Cost 2,00,000 80,000 4,00,000 1,00,000
Labour Hours 10,000 5000 20,000 5000
Area (Square Feet) 15,000 500 60,000 20,000
𝐇 = $ 𝟐𝟏𝟖, 𝟑𝟕𝟔
𝐂 = $ 𝟏𝟏𝟔, 𝟒𝟎𝟒
HR Cleaning
5000 15,000
Cleaning = ×218,376 = 36,396 HR = ×116,404 = 18,379
30000 95000
20,000 60000
Metal = ×218,376 = 145,584 Metal = ×116,404 = 73,518
30000 95000
5000 20,000
Chrome = ×218,376 = 36,396 Chrome = ×116,404 = 24,506
30000 95000
Metal = 400,000 + 145,584 + 73,518 = $619,102

Chrome = 100,000 + 36,396 + 24,506 = $160,902 Service Cost Allocation
Department Cost 2,00,000 80,000 4,00,000 1,00,000
Labour Hours 10,000 5000 20,000 5000
Area (Square Feet) 15,000 500 60,000 20,000
Dept HR Dept Cleaning Metal Chrome

Own Overhead 2,00,000 80,000 4,00,000 1,00,000
Allocated from HR -218,376 36,396 145,584 36,396
Allocated from 18,376 -116,404 73,518 24,506
Cleaning
Total OH 0 0 619,102 160,902

Supply Chain Management
Lean Resource Management
Supply Chain Management
Nearly every product that reaches an end user represents the coordinated
efforts of several organizations. Suppliers provide components to
manufacturers who in turn convert them into finished products that they
ship to distributors for shipping to retailers for purchase by the consumer.
All the organizations involved in moving a product or service from suppliers
to the end-user, the customer, are referred to collectively as the supply
chain.

• Supply chain management is the active management of supply chain
activities by the members of a supply chain with the goals of maximizing
customer value and achieving a sustainable competitive advantage.
• The organizations that make up the supply chain are linked together
through physical flows of products and through flows of information. By
sharing information and by planning and coordinating their activities, all
the members of the supply chain can respond quickly to needs without
having to maintain large inventories.
• The result of effective supply chain management is fewer stockouts at
the retail level, reduction of excess manufacturing by the manufacturer
and thus reduction of excess finished goods inventories and fewer rush
and expedited orders
• Some supply chain management goes so far as the retailer allowing the
distributor to manage its inventories or the distributor allowing the
manufacturer to manage its inventories, shipping product to it
automatically whenever its inventory of an item gets low. Such a practice
is called supplier-managed or vendor-managed inventory.
Lean manufacture is the earliest form of Lean Resource Management. It was
developed by Toyota during the Second World War. Creating value to the end
customer is the propaganda.
“Value” is any action or process that a customer is willing to pay for. “Adding value to
the customer” is not the same thing as adding value to the product or service. If extra
options added to a product or service are not things the customer wants or is willing
to pay for, they may well add value to the product, but they do not add value to the
customer.
Identifying and eliminating waste is a primary focus of lean resource management.
In manufacturing, the primary wasteful activities addressed by lean production

include:
• Defects in production that require parts or products to be discarded or reworked.
• Overproduction of items that cannot be sold.
• Inventories of goods waiting for further processing or completed goods waiting to
be sold.
• Unnecessary processing.
• Movement of parts and materials from one process to another or to various
storage locations more than the minimum amount required to complete and ship
them.
• Delays, such as people or machinery in a downstream activity standing idle because
an upstream activity has not completed its work.
• The design of goods and services that do not meet the customers’ needs.
Eliminating waste creates time because the time spent on wasteful activities becomes
available to create value, often described as creating capacity.

Lean Thinking
The way of Thinking using resource management is called as Lean thinking.
As 5 principles that incorporate the concept of lean enterprise and lean
Resource Management.

1) Specify value 4) Pull
Value is always defend by customers needs When producers stop making products
for a specific product. customers don’t want, they can end
What is the timeline for manufacturing and periodic price discounting that is
delivery? needed to move the unwanted goods.
What is the price point?
Customer demand becomes more
From this vital information the film must stable because customers know they
identify and specify which all are the value
can get what they want when they
added and non value added.
want it. “Pull” means the customer
2) Identify values stream pulls the product from the producer as
Once the values has been determined the needed rather than the producer’s
next step is to mapping the values stream. pushing products onto the customers.
In this step the goal is to identify every step CMA USA Textbook
that does not create non value and then
finding waste to eliminate those wasteful 5) Perfection
steps. The lean enterprise seeks perfection
by continuing to make improvements.
3) Flow
After waste has been removed from the
values stream, the next step is to be sure
that remaining steps flow smoothly without
interruptions and delays.
Lean Concept
§ The goal of lean production is to maintain continuous flow, meaning once
production of a product has begun, the product is kept moving through
the value stream without ever placing it into a holding area for later
processing.
§ The work cells are generally laid out in a U-shape or horseshoe shape, but
the shape can be whatever works best.

Lean Concept
§ Each worker in each cell knows how to operate all the machines in that
cell and can perform supporting tasks within that cell, reducing downtime
resulting from breakdowns or employee absences.
§ The rate of production is matched to the demand to avoid creating excess
inventory or incurring excess costs.
§ Kaizen is part of the lean manufacturing philosophy. The term kaizen is a
Japanese word that means “improvement.” As used in business, it implies
“continuous improvement,” or slow but constant incremental
improvements being made in all areas of business operations.
§ Just-in-time (JIT) production and inventory management are also used in

lean manufacturing.

Beyond Manufacture
The concept of lean resource management can used in non manufacturing firm
also,
For example
1. In Healthcare
• reduce waiting time
• reduce waste
2. In Warehouses
• Items can be organized by size and by frequency of demand
• Ordering can be done daily instead of weekly or monthly
Lean Accounting
Lean accounting is a system of costing by value stream rather than that individual
products or departments.

Benefits of Lean Resource Management
• Quality performance, fewer defects and less rework.
• Fewer machine and process breakdowns.
• Lower levels of inventory.
• Less space required for manufacturing and storage.
• Greater efficiency and increased output per person-hour.
• Improved delivery performance.
• Greater customer satisfaction.
• Improved employee morale and involvement.
• Improved supplier relations.
• Lower costs due to elimination of waste leading to higher operating
income.
• Increased business because of increased customer responsiveness

Just in Time, MRP, MRP-2, ERP
Just in time inventory management system
• It refers to comprehensive production and inventory control methodology
in which materials arrived exactly as the are needed for each stage of
production.
• The goal of Just in Time is to create Lean Manufacturing. That is reducing or

eliminating waste of resource by producing production line components as
they are required, rather than holding large safety stocks of inventory
• Nothing is produced until it is needed.
• One of the main difference between just in time and traditional inventory
system is that just in time is demand pull system rather than a push system.
Just In Time
Benefits of just in time
• Reduction in cost of carrying inventory.
• It requires less space.
• Because inventories are low, workers can traces problems in defect in the
product.
Limitations of Just in Time

• It requires close coordination between and among workstation.
• Because of close coordination, defect caused at one work station very
quickly effect the other workstation.
• It is not appropriate for high mix manufacturing environment.
• Company must maintain very close relationship with the suppliers.
Just In Time
Kanban
Kanban is a Japanese word means card or sign or visual record and is one of
the most common Japanese inventory system used in just in time. In just in
time environment workers used kanban to signal, the need for a specify
quantity of materials or parts to move from one work cell operation or
department to another in sequence. Workers respond only when after
receiving a Kanban.
A Kanban can be a card, a labelled container, a computer order, or some
other device.
The major Kanban principles are
1) Kanban works from upstream to down stream.
2) Upstream processes produce only what has been withdrawn.
3) Only products that are 100% free of defects continue through the
production line.
4) Number of Kanban should be decreased over time.
Kanban
Material Requirement Planning (MRP)
• MRP is an approach to inventory management that uses computer
software to help and manage a manufacturing process.
• It is a system for ordering and scheduling dependent demand
inventories.
• Dependent demand is a demand for items that are components or sub
assembly used in production of a finished goods.
• MRP is a push through inventory management system.
MRP
Material Resource Planning (MRP 2)
• MRP 2 is a successor of MRP.
• MRP is concerned mainly with raw material, MRP 2 is concerns are
more extensive.
• It integrates information regarding the entire manufacturing process,
including function such as production planning and scheduling,
capacity requirement planning, order processing, time and attendance
etc.
MRP – 2
Enterprise Resource Planning
(ERP)
The major components of ERP
• ERP is the successor of MRP.
System
• ERP is an information technology tool
that combined and integrates the ü Production planning
various information system. ü Integrated logistics
• It uses into one comprehensive system ü Accounting and finance
to manage operation. ü Human resources
• ERP system integrate the logistics ü Sales, distribution and order
distribution sales, marketing, customer management
service, human resources and all
accounting and Finance function into a
single system.
• The data stored in a single location is
called and Enterprise database or
database warehouse.
ERP
Benefits of ERP
• Improved business effectiveness and efficiency.
• Better and timely decision.
• Expenses can be managed and controlled.
• Trends can be easily identified.
Limitations of ERP
• Expensive.
• Time consuming.
• Extensive training is needed.
• Overcoming resistance to sharing sensitive information between
department.
ERP
Outsourcing
It is the purchase of goods or service from and outside supplier rather than
producing the same. When Outsourcing is done to supplier, in lower cost
country it is called offshoring.
Benefits of Outsourcing
• It may be cheaper to outsource a function.
• By Outsourcing certain function to a specialist management can use the
space for any other activity or can focus on companies primary operation.
Limitations of Outsourcing
• Company loss direct control over the design, quality, reliability etc
• Some functions cannot be outsource because to do so would compromise
the Secret
• Depending on suppliers can create risk such as price increase, quality
change, performance issues etc.
Outsourcing
Theory of Constraint
• For a company to be competitive, it needs to be able to respond quickly to
customer orders.
• Theory of Constraints is an important way for a company to speed up its

manufacturing time so it can improve its customer response time and
thus its competitiveness and its profitability. Theory of Constraints (TOC)
was developed by Eliyahu M. Goldratt in the 1980s.
• Manufacturing cycle time, also called manufacturing lead time or

throughput time, is usually defined as the amount of time between the
receipt of an order by manufacturing and the time the finished good is
produced.
• Manufacturing cycle efficiency, or MCE, is the ratio of the actual
time spent on production to the total manufacturing cycle time.
𝐕𝐚𝐥𝐮𝐞 𝐚𝐝𝐝𝐢𝐧𝐠 𝐦𝐚𝐧𝐮𝐟𝐚𝐜𝐭𝐮𝐫𝐢𝐧𝐠 𝐭𝐢𝐦𝐞

𝐌𝐂𝐄 =
𝐓𝐨𝐭𝐚𝐥 𝐦𝐚𝐧𝐮𝐟𝐚𝐜𝐭𝐮𝐫𝐢𝐧𝐠 𝐜𝐲𝐜𝐥𝐞 𝐭𝐢𝐦𝐞
Throughput Contribution Margin
• Throughput contribution margin is the amount earned for product
produced and shipped during a period such as one hour, one day, or one
month, calculated using revenue for the period minus only the strictly
variable costs.
• Throughput contribution margin is the rate at which contribution margin is
being earned in monetary terms.
• For example,
If it takes 2 days to produce and ship 100 units, then the rate per day is 50
units per day. The sale price for one unit is $500, the direct materials cost is
$300 per unit, and throughput rate per day is 50 units per day. The
throughput contribution margin per day is $200 × 50 = $10,000. Or
calculated another way, if 50 units can be produced and shipped in one 8-
hour day, then it takes 8 hours ÷ 50, or 0.16 of one hour, to produce and
ship one unit. $200 ÷ 0.16 = $1,250 per hour. In an 8-hour day, throughput
contribution margin is $1,250 × 8, or $10,000..
Throughput
= Sales − DM Cost
Contribution Margin
Steps in Theory of Constraints
• Step 1: Identify the constrain
• Step 2: Determine the most profitable product to mix with given

constrain.
• Step 3: Maximize the flow through the constraints
• Step 4: Add capacity to the constrain
• Step 5: Redesign the manufacturing process for flexibility and fast

cycle time
Theory of Constraint Terms
1) Exploiting the constraint
It means taking advantage of the existing capacity of the constraints,
because capacity can be wasted by producing wrong product or by
improper policies and procedures for scheduling and controlling the
constraint. In another words exploiting the constraint means using to its
best advantage to produce maximum profit.
2) Elevating the constraint

It means adding capacity to the constraint activity or otherwise adjusting
the resource to increase the output possible from the constraint activity
Drum Buffer Rope System
1) Drum: The drum is the process that takes the longest time. It is the
constraint. The constraint is called the drum because it provides the
beat that sets the pace for the whole production process.
2) Rope: The rope consists of all the processes that lead up to the
drum, or the constraint. Activities preceding the drum must be
carefully scheduled so that they do not produce more output than
can be processed by the constraint, because producing too much
output in activities preceding the constraint creates excess inventory
and its associated costs without increasing throughput contribution
margin. At the same time, though, the constraint must be kept
working with no down time.
3) Buffer: The buffer is a minimum amount of work-in-process
inventory of jobs waiting for the constraint. The purpose of the
buffer is to make sure the constraint process is kept busy with no
downtime.
Some ways that operations at the constraint process can be relieved include:
§ Eliminate any idle time at the constraint operation.
§ Process only products that increase throughput contribution margin.
§ Move items that do not need to be processed on the constraint
operation.
§ Reduce setup time and processing time at the constraint operation.
§ Improve the quality of processing at the constrained resource.
Value Chain
Competitive Advantage
Value Chain
Competitive advantage cannot be understood by looking at a firm as a whole. It
stems from the many discrete activities a firm performs in designing, producing,
marketing, delivering, and supporting its product.
Michael Porter
𝟏𝟗𝟖𝟓 − 𝐂𝐨𝐦𝐩𝐞𝐭𝐚𝐭𝐢𝐯𝐞 𝐀𝐝𝐯𝐚𝐧𝐭𝐚𝐠𝐞
Value Chain
Value Chain
Value Chain
In his concept of a value chain, Porter splits a business's activities
into two categories, "primary" and "support,
Primary Activity
1) Inbound logistics include functions like receiving, warehousing, and
managing inventory.
2) Operations include procedures for converting raw materials into a finished
product.
3) Outbound logistics include activities to distribute a final product to a
consumer.
4) Marketing and sales include strategies to enhance visibility and target
appropriate customers—such as advertising, promotion, and pricing.
5) Service includes programs to maintain products and enhance the
consumer experience—like customer service, maintenance, repair, refund,
and exchange
Value Chain
Support Activity
1) Procurement concerns how a company obtains raw materials.
2) Technological development is used at a firm's research and development
(R&D) stage—like designing and developing manufacturing techniques and
automating processes.
3) Human resources (HR) management involves hiring and retaining
employees who will fulfill the firm's business strategy and help design,
market, and sell the product.
4) Infrastructure includes company systems and the composition of its
management team—such as planning, accounting, finance, and quality
control.
Value Chain
Quality
• Management will also be closely interested in the costs of quality. The
costs of quality include not only the costs of producing quality products,
but they also include the costs of not producing quality products. Over the
long term, not producing a quality product is costlier than producing a
quality product because lack of quality causes loss of customers.
The costs of quality are classified in two categories,

• Costs of conformance - all expenses incurred to ensure that a product
meets the minimum quality standard.
• Costs of Non conformance - those costs incurred as the result of a failure
to meet the quality standards for a product
Quality
Costs of Conformance
The costs the company incurs to assess internal quality with the purpose of
insuring that no defective products reach the consumer. The two types of costs
of conformance are,
1) Prevention Cost - costs incurred to prevent a defect from occurring in the
first place
• Design engineering and process engineering costs.
• Quality training.
• Preventive maintenance on production equipment.
• Supplier selection and evaluation costs to ensure that materials and
services received meet established quality standards.
• Evaluation and testing of materials received from a new supplier to
confirm their conformance to the company’s standards.
Quality
Costs of Conformance
2) Appraisal costs - the costs incurred to monitor production processes and
individual products and services before delivery to determine whether all
units of the product or service meet customer requirements.
• Costs to test and inspect manufacturing equipment, raw materials
received, work-in-process, and finished goods inventories.
• Cost for equipment and instruments to be used in testing and
inspecting.
Quality
Costs of Non – Conformance
Nonconformance costs are costs incurred after a defective product has been
produced.
1) Internal failure - occurs when a problem is detected before a product’s
shipment to the customer takes place
• Cost of spoilage and scrap.
• Costs (materials, labor, and overhead) to rework and reinspect spoiled
units.
• Machine repairs due to breakdowns.
2) External failure - occurs when a defect is not detected until after the
product is already with the consumer.
• Customer service costs
• Warranty costs to repair or replace
• Product recall and product liability costs, including settlements of legal
actions.
• Public relations costs to restore the company’s reputation.
Quality
Total Quality Management
• Total Quality Management describes a management approach that is
committed to customer satisfaction and continuous improvement of
products or services.
• The basic premise of TQM is that quality improvement is a way of

increasing revenues and decreasing costs. As such, a company should
always strive for improvement by performing its service or producing its
product correctly the first time.
• Total Quality Management is a prevention technique. The costs of

implementing a TQM program are classified on a Cost of Quality Report
as prevention costs.
Quality
The objective of Total Quality Management
• Enhanced and consistent quality of the product or service.
• Timely and consistent responses to customer needs.
• Elimination of non-value-adding work or processes, which leads to

lower costs.
• Quick adaptation and flexibility in response to the shifting requirements

of customers.
Quality
Statistical Quality Control
• Statistical quality control (SQC), or statistical process control (SPC), is a
method of determining whether a process is in control or out of control.
• A control chart is used to record observations of an operation taken at
regular intervals.
• When statistics are used in determining the acceptable range, the control
chart is a statistical control chart.
1) Histograms - A histogram is a bar graph that represents the frequency of

events in a set of data.
2) Pareto Diagrams - A Pareto chart is a type of chart that contains both bars
and a line graph
3) Cause-and-Effect (Ishikawa) Diagram - is a visual tool used to logically
organize possible causes for a specific problem or effect by graphically
displaying them in increasing detail, suggesting causal relationships among
theories
Quality
causes of problems in manufacturing fall into the following categories
• Machines
• Materials
• Methods
• Manpower
Quality
Accounting Process Redesign
A journey of a thousand miles begins with a single
step. In this case, that step is identifying the weak
spots within your processes that determine the
path for the entire lifecycle.
A walk-through is a demonstration or explanation
detailing each step of a process. To conduct a
process walk-through, a member of the process
redesign team meets with the process owner and
each participant in the process to gain a thorough
understanding of how the work gets done from
beginning to end for the purpose of uncovering
opportunities for improvement

May be used to provide a visual map of the way
information, documents, and work is routed
through a process. Process maps can pinpoint
problem areas such as bottlenecks within the
system

system
• Data Duplication.
• Tasks being done that are not necessary or that do not add
value.
• Output that is not being used.
• Efficiency
• Designation of duties
• Lack of uniformity and consistency
• Slow processing speed
• Lack of data transparency

system.
• Same data entered multiple times

• No proper contact with departments
• Work Load
• Lack of data
• Lack of Training

Once the current process is fully understood,
design the new process by creative project team
with range of alternative solutions.

After several potential process designs have been
generated and before one is selected, the potential
designs need to be weighed carefully in terms of
their potential risk impact as well as their potential
benefits. The greater the changes being made, the
less the organization can be sure of a successful
outcome. Risk can be the deciding factor in
selecting one approach to process redesign over
another one.

A complete redesign of a process or processes has the potential to
be very disruptive, and it requires careful planning. The initiative
for finance redesign often comes from senior management, so it is
a top-down implementation. It requires engaging people in the
change, providing leadership, supporting the change, and planning
the change.

• Training will be needed in the changes that have
been made to the process. Everyone involved in the
revised process should be included in the training.
• Training may be needed in how to fully take

advantage of the systems being used.

Significant improvements can be made in the time
required to close the general ledger at the end of each
month, quarter, and fiscal year.
• Accuracy at the point of data entry needs to be
heightened so that reconciliations can be done
more quickly.
• Perpetual inventory records should be used.
• Use of a standardized chart of accounts and general
ledger application across all company locations is
important for speed in closing.
• Valuation accounts for obsolete inventory and credit
losses should be reviewed for updating in advance
of the period end.
• Depreciation can be calculated a few days before
the end of the period.

Centralization of all accounting processes
using a single consolidated accounting system
is the best way to resolve closing problems
created by accounting decentralization.
When the processing of transactions is

centralized, specific types of transactions
such as accounts payable, accounts
receivable, and general ledger can be
organized along functional lines, utilizing a
smaller number of people who are highly
trained

Smaller companies that may not be able to
justify the cost of an ERP system can turn to
the cloud to integrate finance, sales, service
and fulfillment. All the essential information
is in one place, and the result can be a much
faster close.

THE END
Type equation here.
RABEEH OVUNGAL
Internal
Control
Section E
Part 1
CMA USA
RABEEH OVUNGAL
Channel!

certification.
concepts.
Must Read any relevant textbook and practice questions.

Contents:
1) Introduction to Internal Control Page – 04
2) Governance Principles Page – 07
3) Hierarchy of Corporate Governance Page – 17
4) Internal Control Page – 31
5) Control Activities Page – 39
6) FCPA – SarbOx – PCAOB Page – 46
7) External Audit Opinion Page – 58
8) System Control Page – 61
9) Internet Security Page – 81
10) Business Continuity Plan Page – 87
Introduction to
Internal Control
Part 01 – Internal Control
SECTION E
1) Safeguarding assets: Internal controls are designed to protect an
organization's assets from theft, fraud, or misuse. This includes physical assets like
cash, inventory, and equipment, as well as intangible assets like intellectual
property and sensitive information.
2) Promoting operational efficiency: Internal controls help streamline operations,

reduce inefficiencies, and enhance productivity by establishing clear processes and
procedures. By optimizing operations, organizations can achieve their objectives
more effectively.
3) Ensuring financial reporting accuracy: Internal controls ensure that financial

statements and reports accurately reflect the organization's financial position and
performance. This is crucial for maintaining the trust of investors, creditors, and
other stakeholders.
4) Compliance with laws and regulations: Internal controls help ensure that an
organization complies with relevant laws, regulations, and industry standards.
Compliance is essential to avoid legal and regulatory penalties, as well as to
maintain a good reputation.
Internal Control
5) Risk management: Internal controls identify, assess, and manage risks
that could affect an organization's ability to achieve its objectives. By implementing
controls, organizations can mitigate or reduce these risks.
6) Preventing and detecting fraud: Internal controls include measures to prevent and
detect fraud and misconduct within the organization. This may involve segregation
of duties, transaction reviews, and internal audits.
7) Accountability and responsibility: Internal controls clarify roles and responsibilities

within the organization. This accountability promotes ethical behaviour and helps
prevent conflicts of interest.
8) Continual improvement: Internal control systems should be dynamic and adapt to

changes in the organization's environment. Regular assessments and
improvements help maintain the effectiveness of internal controls.
Overall, the purpose of internal control is to provide assurance that an organization

operates efficiently, ethically, and in compliance with applicable laws and regulations
while effectively managing risks. These controls are typically implemented at various
levels and in different functional areas of an organization to ensure its overall well-
being and success.
Internal Control
Governance Principles
SECTION E
Good corporate governance is basic to internal control
• Corporate governance refers to the system of rules,

practices, and processes by which a company is
directed, controlled, and governed.
• It encompasses the good relationships between a

company's various stakeholders, including its
shareholders, management, board of directors,
customers, employees, and the broader
community.
• The primary goals of corporate governance are to

ensure transparency, accountability, and fairness in
how a company operates, while also safeguarding
the interests of its stakeholders.
• Directors are elected by shareholders to represent

the interests of the shareholders. While
profitability is the primary concern of shareholders,
many shareholders care about more than profits.
Corporate governance is the by-product of several key factors and developments within
an organization and the broader business environment. It is shaped by various internal
and external factors, including:
1) Legal and Regulatory Framework: Corporate governance is influenced by the legal

and regulatory requirements imposed by government authorities. Laws and
regulations set the foundation for how companies must operate, including rules
related to financial reporting, shareholder rights, and director responsibilities.
2) Organizational Structure: The internal structure of an organization, including its

ownership structure, the size and composition of its board of directors, and the
division of decision-making authority, can significantly impact corporate
governance.
3) Stakeholder Expectations: Corporate governance is often driven by the

expectations and demands of various stakeholders, including shareholders,
customers, employees, suppliers, and the community. These expectations can
influence an organization's approach to governance.
4) Corporate Culture and Values: The corporate culture and values embraced by an
organization play a crucial role in shaping its approach to governance. Ethical
standards, transparency, and accountability are often integral to the culture and
values of well-governed companies.
5) Economic and Market Forces: Economic conditions and market dynamics can
impact corporate governance. Companies may adjust their governance practices in
response to changes in the business environment, market competition, and
economic challenges.
6) Scandals and Failures: High-profile corporate scandals and governance failures can
lead to regulatory reforms and changes in corporate governance practices. These
events often serve as a catalyst for increased scrutiny and calls for improved
governance.
7) Globalization and Technology: The globalization of business and advancements in

technology have increased the complexity of corporate operations. Organizations
must adapt their governance practices to address these complexities and remain
competitive on a global scale.
8) Shareholder Activism: Activist shareholders and institutional investors can play a
significant role in influencing corporate governance. They may advocate for changes
in management, board composition, and governance policies to enhance
shareholder value.
9) Industry and Sector Considerations: Specific industries and sectors may have
unique governance challenges and requirements. For example, financial institutions
may face different regulatory demands than technology companies or healthcare
providers.
10) Leadership and Management: The attitudes and decisions of senior leadership,
including the CEO and top executives, can have a profound impact on the corporate
governance culture of an organization. Strong leadership can set a positive tone for
governance practices.
How is Corporate Governance Related to Risk
Assessment, Risk Management, and Internal Control:
1. The board of directors and executive management are responsible for the
strategic decisions and implementation.
2. In setting business strategy, they should consider risk.
3. To consider the risk, the company should have risk management like identifying,
assessment, prioritizing and management of risk.
4. For the better management of risk, the company should have proper internal
control.
The company should have internal audit committee.

They are responsible for,
a) reliability of financial reporting.
b) the effectiveness and efficiency of operation
c) organization complaints with laws and regulations
Principles of Good Governance:
1) Board purpose
2) Board responsibilities
3) Interaction
4) Independence
5) Expertise and integrity BB II ELC MIC
6) Leadership
7) Committees
8) Meetings and information
9) Internal audit
10) Compensation
1) Board Purpose
Promote and protect the interests of the corporation’s stockholders while considering
the interests of other external and internal stakeholders such as creditors, employees,
and so forth .
2) Board Responsibility
• Monitoring CEO and other senior executives
• Overseeing corporation strategy and process for managing the enterprise.
• Monitoring corporation risk and internal control
• Monitoring ethical tone.
• Directors should employ healthy scepticism in meeting their responsibility.
3) Interaction
• There should be good and effective interaction between board, management,
internal auditor, external auditor and legal counsel.
4) Independence
• The director should not have current or prior professional or personal ties to the
corporation or its management other than service as a director.
• Independent directors must be able and willing to be objective in their judgments.
• The vast majority of the directors should be independent in both fact and
appearance.
5) Expertise and Integrity

• The director should be expertise on the business, board, or industry.
• The director should have integrity.
• Director should be competitive, they should continue their education to get
knowledge.
6) Leadership
• The roles of board and CEO should be separate.
• If the roles are not separate, they should be a independent director.
7) Committees
• Audit committee, compensation and governance committee... Authorized by board
to allocated duties and responsibility, and how they report to board.
• Each member should be independent.
8) Meeting and Information

• Board and committee should meet regularly.
• Should have unrestricted access to the every information of the company.
9) Internal Audit
• All public company must have an internal audit committee and internal audit
committee executive head.
• Audit committee helps the external auditor in auditing the firm easily.
• Audit committee decides the external auditor and their compensation, responsibility
and activity.
10) Compensation
• The compensation, committee and full board should discuss and carefully consider
the compensation, amount and mix (cash and equity) for executives and directors.
Hierarchy of Corporate
Governance
SECTION E
Hierarchy in Corporate
Corporation
q A corporation is a legal entity that is separate and distinct from its owners.
q Under the law, corporations possess many of the same rights and
responsibilities as individuals.
q They can enter contracts, loan and borrow money, sue and be sued, hire
employees, own assets, and pay taxes.
Advantages
• Limited personal liability: A corporation exists as a separate legal entity from
your personal life. Any debts or lawsuits are incurred by the company.
• Easy transfer of ownership
• Business continuity: The company has a perpetual life.
• Better access to capital: Corporations can issue stock to raise funds to operate
their businesses.
• Tax benefits: Depending on the corporation structure, there may be occasional
tax benefits.
Articles of Incorporation
• US. corporations are formed under authority of state statutes.
• The corporation’s charter, also referred to as its “Articles of Incorporation” or
“Certificate of Incorporation”.
• Certificate includes,
Ø Name of the Corporation (including abbreviation)
Ø Length of the corporation (usually perpetual)
Ø Purpose and Nature of the business
Ø Authorized number of shares that can be issued.
Ø Provision for amending the articles of incorporation.
Ø Whether or not existing shareholders have the first right to buy new shares.
Ø The names and addresses of the incorporators, whose powers terminate
upon filing.
Ø The names and addresses of the members of the initial board of directors,
whose powers commence (begin) upon filing.
Ø The name and address of the corporation’s registered agent for receiving
service of process and other notices.
• The persons who sign the articles of incorporation are called the incorporators.
Incorporators’ services end with the filing of the articles of incorporation, and the
initial board of directors, named in the articles of incorporation, takes over.
After submitting articles of incorporation, company
should take these steps then.
1. The incorporators elect the directors if they are not named in the articles,
2. The incorporators resign,
3. The directors meet to complete the organizational structure ,
• Adopt bylaws for internal management of the corporation.
• Elect officers.
• Authorize establishment of the corporate bank account, designate the bank,
and designate by name the persons who are authorized to sign checks on the
account.
• Consider for ratification any contracts entered into before incorporation.
Approve the form of certificate that will represent shares of the company’s
stock.
• Accept or reject stock subscriptions.
• Adopt a corporate seal to be used for corporate documents for which a seal is
required.
• Consider any other business as necessary for carrying on the business purpose
of the corporation.
Amending the Articles of Incorporation
• A company can change its articles of association by calling a meeting of the
shareholders and passing a resolution. A company can amend the articles for any
reason that involves improvement of the business prospects.
Ø Increase in the number of authorized shares of common stock
Ø Changes to stock information
Ø Changes to the number of stocks or how the stocks are valued
Ø Changes in personnel for the business
Ø A name change
Ø A change in the business purpose
Ø Increasing or decreasing the number or types of shares
Ø Changing directors or officers
Ø Adding or removing restrictions on corporate activities
Amending the Articles of Incorporation
• Any amendment to the articles of incorporation must be something that could
have been included in the original articles of incorporation. Thus, an amendment
is not allowed for something that the corporation cannot legally do.
• Although the articles of incorporation specify the name and address of the
corporation’s initial registered agent, changing the registered agent can usually be
done by the board of directors without the need for shareholder approval.
Responsibilities of the Board of Directors
• Selecting and overseeing
management including CEO and
other chief executive officers
• BOD determines the
responsibilities for the executive
officers, and level of measurement
to measure these officers.
• What have the key decisions like
strategic objective, setting,
strategic planning, setting
corporate strategy, vision, mission,
and goal.
• For involving in the activities like
investigation, there should be a
committee from board of directors,
Board of Directors
that is Audit committee to manage
internal control from the top level.
Board of Directors
Audit Committee
§ Audit Committee required by Sarbanes- Oxley Act of 2002
§ Must for Public company
§ Purpose is, overseeing the accounting and financial reporting processes of the
issuer and audits of the financial statements of the entity;
If no such committee exists with respect to an issuer, the entire board of
directors of the entity.
Requirement
• Audit committee consist of 3 members, required by New York Stock exchange, not
by SEC of Sur-boxy.
• All members should be independent
• At least 1 member should be finance expert.
• All members must be financially literate at the time of appointing.
Audit Committee
Responsibility of Audit Committee
• Responsible for selecting an nominating, external auditor and approving the
road fee, supervising external auditor, overseeing auditor qualification and
independence.
• Assist board oversight, integrity of listed company financial statement.
• Whistle blower requirement.
• Audit committee required to review, annual or quarterly financial statements
and submit a report.
Audit Committee
Internal Control
SECTION E
Who wants internal Control ?
1) Investors - Shareholders and investors are interested in the financial health
and sustainability of the organization.
2) External Auditors - Internal and external auditors rely on internal controls to

assess the accuracy and reliability of financial information.
3) Legislative and regulatory bodies - Regulatory bodies and government

agencies are concerned about internal controls because they ensure that
organizations operate within the legal and regulatory frameworks.
4) Customers - External parties dealing with the organization, such as customers

and suppliers, are interested in reliable and ethical business practices.
Effective internal controls can provide assurance that transactions are
conducted accurately, transparently, and in compliance with applicable
standards. Trust in value for product.
Internal Control
Internal Control
According to the COSO publication,
“Internal control is a process, effected by an entity’s board of directors,
management, and other personnel, designed to provide reasonable assurance
regarding the achievement of objectives relating to operations, reporting, and
compliance. “
Effectiveness and Efficiency of Operations:

• Controls should be in place to ensure that operations are conducted
efficiently and effectively, with resources used appropriately.
Reliability of Financial Reporting:
• Internal controls should ensure the accuracy and reliability of financial
information. This involves controls over financial reporting processes, such as
recording transactions, preparing financial statements, and maintaining
accounting records.
Compliance with Laws and Regulations:
• Controls should be designed to ensure compliance with applicable laws and
regulations. This includes internal policies and procedures as well as external
laws and regulations relevant to the organization's operations.
Internal Control
Fundamental Concepts
• The purpose of internal control is to help the company achieve its objectives
through focus on operations, reporting and compliance.
• Internal control is an ongoing process.
• Internal control is accomplished by people.
Ø BOD responsible for overseeing internal control system.
Ø CEO show leadership and direction to the senior manager.
Ø Senior manager is responsible to personal department.
• Internal control procedures can provide reasonable assurance only—not
absolute assurance and not a guarantee
Ø The cost of an internal control system should not exceed the expected
benefits.
Ø The overall impact of a control procedure should not hinder operating
efficiency.
• Internal control must be flexible to be adaptable to the entity’s structure.
Internal Control
COSO Framework for Internal Control
COSO Framework
1) Control Environment
• There is a commitment to integrity and ethical values.
ü Setting the tone at the top.
ü Establishing standards of conduct.
ü The performance of individuals and team based on the established standard.
ü Correcting deviations in timely and consistent manner.
• The board demonstrates independence from management and excise oversight of
internal control.
ü Operating independently.
ü Establishes oversight responsibility.
• Management establishes structure, reporting line and appropriate authorities and
responsibilities.
• Organisation demonstrates a commitment to attract, develop, develop and retail,
competent individuals in alignment with the objectives.
• The organisation holds individual accountable for their internal control
responsibilities.
COSO Framework
2) Risk Assessment
• The organisation specifies objectives with sufficient clarity to enable the
identification of assessment of risk relating to objectives.
ü Operations
ü Reporting
ü Compliance
• Identify the risk and determine the appropriate risk response
ü Risk avoidance
ü Risk retention
ü Risk reduction
ü Risk sharing
ü Risk exploitation
• Consider the potential for fraud in assessing fraud risk.
ü Consider various types of fraud
ü Assess incentives and pressures
ü Assess opportunities
ü Assess attitudes and rationalisations
• Identify and assess changes that could significantly affect the system of
internal control.
COSO Framework
3) Control Activities
• Control activities to mitigate risks are selected and developed.
• General control activities over technology are selected and developed.
• Control activities are deployed through policies and procedures.
4) Information and Communication

• Obtain or generates and uses relevant, quality information.
• Communicate the information, including objectives and responsibilities for internal
control for necessary support for the function of internal control.
• Communicate with the external parties regarding matters affecting the functioning
of internal control.
5) Monitoring Activities
• Ongoing and separate evaluations are performed of the internal control system.
• Internal control deficiencies are evaluated and communicated for corrective action.
COSO Framework
Control Activities
SECTION E
Types of Control
1) Preventive controls – deter the occurrence of unwanted events.
• storing petty cash in a locked safe.
• Segregation of duties.
• Establish formal security policy.
• Restricting access.
2) Detective controls – alert the proper people after an unwanted event occur.
• Automatic automatic reporting to the accounts, payable department of all rejected
batches of invoices.
• Using hash to detect data entry error.
• Installing burglar alarms.
3) Corrective controls – correct the negative effects of unwanted events.
• Requiring that all cost variance is over a certain amount are justified.
• Correcting errors reported on error listings.
• Isolating and removing viruses.
• Restarting from system crashes.
4) Directive controls – cause or encourage the occurrence of a desirable event.
• Policy and procedure manuals
• Law and regulations
• Training seminars
Control Activities
Classification of Controls
1) Time Based Classification
a) Feedback Control – Report information about completed activities.
b) Concurrent control – adjust ongoing processes. And close supervision of
production line workers
c) Feedforward controls – anticipate and prevent problems. Organization
policies and procedures for long-term perspective
2) Financial v/s Operating Controls
a) Financial control – established accounting principles, segregation of duties in
accounting.
b) Operating control – and administrative control to apply on production and
support activities.
c) Document controls – apply to documents such as invoices, purchase, orders,
receiving reports etc.
3) People based v/s System based Controls
a) People based control - intervention of humans for proper operation like bank
reconciliation.
b) System based control – are executed when the human intervention is not
needed, system to prevent something for example, preventing purchase
order over a certain amount of monetary threshold.
Control Activities
Segregation of Duties
Control Activities
Inventory purchases and control
Authorisation - Purchasing manager
Record-keeping - Receiving department
personal
Custody - Warehouse personal
Reconciliation - Inventory control personal
Cash collections
Accounts payable Authorisation - Account receivable manager
Authorisation - Accounts payable Manager Record-keeping - Account receivable personal
Record-keeping - Accounts payable personal Custody - Cashier
Custody - Treasurer office Reconciliation - Accounts department personal
Reconciliation - Accounting department
personal Payroll processing
Authorisation - Human resource department
Credit sales Record-keeping - Payroll department personal
Authorisation - Sales manager, credit approved Custody - Treasurer Office
by Accounts Manager Reconciliation - Accounting department personal.
Record-keeping - Billing department personal
Custody - Warehouse personal
Reconciliation - Accounting department
personal
Control Activities
Safeguarding Controls
Safeguarding controls limit access to an organization’s assets to authorized

personnel.
• A lockbox system for collecting cash receipts from customers
• Daily deposit of cash receipts after preparation and verification by two treasury
employees
• Approval of credit memos by the credit department, not sales
• Write-offs of uncollectible accounts by the supervisor of the credit department
manager
• Access to computer operations center prohibited to
(1) all non-information systems personnel and
(2) all non-operations information system personnel, such as developers
• Online access to production application libraries prohibited to developers;
online access to production databases prohibited to all users except the
organizational “owners” of the data elements
Control Activities
Safeguarding Controls
• Holding of securities in a safe deposit box; two employees always present when
box is accessed.
• Physical measures taken to protect assets from natural disasters.
eg: floods, wind damage, earthquakes
• Authorization of a payment voucher by accounts payable only after examining
the supporting documents.
Prenumbered Forms
• Sequentially prenumbered forms are the basis for a strong set of internal controls.
Receiving reports in the warehouse and purchase orders in the sales department
are common examples.
• When every hardcopy form is prenumbered, all can be accounted for;
• e.g., the date of their use and the person who filled them out can be ascertained.
Any document in the sequence that is missing can be flagged for special scrutiny
when it is processed.
Control Activities
FCPA - SarbOx - PCAOB
SECTION E
Foreign Corrupt Practices Act (FCPA)
1) Anti-bribery provision:
• It is illegal for a company to bribe any foreign official to obtain or retain

business.
• It is illegal for any company or anyone acting on behalf of a company to bribe
any foreign official to obtain or retain business.
• Entire company is responsible for FCPA.
2) Internal Control Provision:
• Corporate management is required to maintain books, records, and accounts

that accurately and fairly reflect transactions and to develop and maintain a
system of internal accounting control.
FCPA
Sarbanes Oxley Act (SarbOx)
It contains provisions impacting auditors, management, and audit committees of

boards of directors. Sarbanes-Oxley was enacted in response to several major
incidents of financial reporting fraud and audit failures, and it applies to all publicly
held companies in the U.S., all their divisions, and all their wholly owned
subsidiaries.
Title I: Public Company Accounting Oversight Board (PCAOB)

Title II: Auditor Independence
• Section 201
• Section 203
• Section 204
Title III: Corporate Responsibility
• Section 302
Title IV: Enhanced Financial Disclosures
• Section 404 (a,b,c)
• Section 407
SarbOx
To protect the interests of investors, public auditors are works, to enhance public
confidence, they are working independent. PCAOB is a non-governmental board,
non-profit corporation that operates under the authority of SEC which oversee the
approval of its boards, rules, standards and budget for auditors.
For an auditor to audit a public company, they should be registered with the PCAOB -
public company accounting oversight board.
Responsibilities of PCAOB
• Registration of Public Accounting Firms: The PCAOB is responsible for registering
public accounting firms that audit publicly traded companies.
• Setting Auditing Standards: The PCAOB establishes and enforces auditing and
related professional practice standards.
• Conducting Inspections: The PCAOB conducts regular inspections of registered
public accounting firms to assess their compliance with applicable laws, rules, and
professional standards. Yearly inception for auditors do more than 100 issuers,
once 3 year for audits do less than 100.
SarbOx
• Enforcement Actions: The PCAOB has enforcement powers to investigate and
discipline registered audit firms and their associated persons for violations of the
Sarbanes-Oxley Act, PCAOB rules, or professional standards. Enforcement actions
may include fines, sanctions, or other penalties.
• Oversight of Auditor Independence: The PCAOB oversees and regulates auditor

independence to ensure that auditors remain unbiased and free from conflicts of
interest.
• Quality Control Reporting: Registered accounting firms are required to submit

annual reports to the PCAOB detailing their quality control policies and
procedures.
SarbOx
Section 201: Services Outside the Scope and Practice of Auditors
Bookkeeping services or other services relating to keeping the accounting records or
preparing the financial statements of the audit client.
1. Financial information systems design and implementation.

2. Appraisal or valuation services, fairness opinions, or contribution-in-kind reports.
3. Actuarial services.
4. Internal audit outsourcing services.
5. Management functions.
6. Human resource services.
7. Broker/dealer, investment adviser, or investment banking services.
8. Legal services.
9. Expert services unrelated to the audit.
10. Any other service that the Public Company Accounting Oversight Board (PCAOB)
determines, by regulation, is not permissible.
SarbOx
Section 203: Audit Partner Rotation
• Lead audit partner and the concurring review audit partner must rotate off a
particular client’s audit after five years
• The purpose of the audit partner rotation requirement is to ensure that a “new look”
is taken periodically at the financial statements.
Section 204: Auditor Reports to Audit Committees

Each public accounting firm registered with the PCAOB reports to audit committee
regards,
• All critical accounting policies and practices to be used
• All alternative treatments are financial information within the US GAAP
SarbOx
Title III: Corporate Responsibility
Section 302: Corporate Responsibility for Financial Reports

Sarbanes-Oxley requires that each annual or quarterly financial report filed or
submitted to the SEC must include certifications by the company’s principal
executive officer or officers and its principal financial officer or officers
The certification must include
The signing officer has reviewed the report.
ü are responsible for establishing and maintaining internal controls;
ü have designed the internal controls to ensure that they are made aware of all
material information relating to the company and all subsidiaries
ü have evaluated the effectiveness of the company’s internal controls within the
previous ninety days.
ü have presented in the report their conclusions about the effectiveness of their
internal controls, based on their evaluation as of the report date.
SarbOx
Section 404: Management Assessment of Internal Control Over Financial
Reporting and the Independent Auditor’s Attestation to Management’s
Assessment of Internal Control Over Financial Reporting
Section 404(a) requires each annual report required by the SEC to:
• An assessment by management of the adequacy of the company’s internal
control over financial reporting (ICFR). Management is required to document
and test its internal control over financial reporting and report on its
effectiveness .
Section 404(b) requires the company’s independent auditor to report on and attest
to management’s assessment of the effectiveness of its internal control over
financial reporting.
Section 404(c) provides that Section 404(b) does not apply to “non-accelerated
filers.
SarbOx
• Non-accelerated filer – outstanding common equity less than $75

million – submit quarterly and yearly report within 45days and 90 days
• Accelerated filer – Outstanding common equity between than $75

million and $700 million – submit quarterly and yearly report within 40
days and 75 days.
• A large accelerated filer – outstanding common equity, greater than

$700 million – submit quarterly and yearly report within 40 days and 60
days.
SarbOx
It is important to use a top-down approach, not a bottom-up approach.
A top-down approach ensures the proper testing of the controls for the assessed risk of
misstatement to each relevant assertion.If a bottom-up approach is used, those controls
that address the risk of a material misstatement may not be tested because an approach
from the bottom up would focus first on performing detailed tests of controls at the
process, transaction, and application levels.
Section 407: Disclosure of Audit Committee Financial Expert

Each issuer of publicly traded securities to disclose whether or not the company’s audit
committee consists of at least one member who is a financial expert. If the audit
committee does not have at least one member who is a financial expert, the company
must state the reasons why not.
Financial expert is a person who, through education and experience as a public account-
ant, auditor or a principal accounting or financial officer of an issuer of publicly traded
securities, has
Understanding of US GAAP principles, Financial statements.
Experience in the preparation, auditing
And understanding of audit committee functions
SarbOx
Section 201 – auditor should be independent
Section 203 – auditor partner rotation
Section 204 – auditor reports to audit committee
Section 302 – financial head, signature on financial report regarding reliability, internal
control, deficiency, fraud etc.
Section 404 – management, assessment of internal control, auditor attestation.
Section 407 – audit committee consist of at least one expert.
SarbOx
External Audit Opinion
SECTION E
ü External auditors perform audits of both publicly traded and private companies, as
well as governmental entities and non-profit organizations.
ü The purpose of the external audit is for the auditor to provide an opinion as to
whether the financial statements of the organization have been prepared correctly,
according to the accounting standards under which they have been prepared.
Non public - AICPA provides guidance and standards for external audit.
Public - PCAOB provides guidance and standards for external audit.
Independent auditor presents an opinion letter that is included

• Opinion whether or the financial statements present, fairly or not.
• Opinion on the effectiveness of the companies internal control over financial
reporting.
• Going concern opinion and other modification.
Audit opinion
Auditor Opinion
1) Unqualified Opinion (Clean Opinion): This is the most favourable opinion. It
indicates that the financial statements are presented fairly in all material respects in
accordance with the applicable accounting standards.
2) Qualified Opinion: This opinion is issued when the auditor concludes that there is a
limitation on the scope of the audit or a departure from generally accepted
accounting principles (GAAP), but the overall financial statements are fairly
presented.
3) Adverse Opinion: An adverse opinion is issued when the auditor determines that the
financial statements are not presented fairly in accordance with the applicable
accounting standards.
4) Disclaimer of Opinion: This opinion is issued when the auditor is unable to form an
opinion on the financial statements due to significant limitations in the scope of the
audit.
The AICPA standards use the terms “unmodified” instead of “unqualified” and
“modified” instead of “qualified.”
Audit opinion
System Control
SECTION E
• System use same method for every entry.
• But no opportunity for human error.
• But every transaction process to using a defective program will contain an error.
System Control
Audit trail is a paper or electronic record that shows a step-by-step documented history
of a transaction.
Audit trails may exist for only a short period of time, since support documents may be in
electronic format and be periodically deleted.
The objectives of controls for an information system

• Data accuracy and integrity
• Confidentiality
• Availability
• compliance
• Authentication of authorisation
• Audibility and accountability
• Risk management
System Control
Threats to Information Systems
• Errors can occur in system design.
• Errors can occur in input or input manipulation may occur.
• Data can be stolen over the Internet.
• Data and intellectual property, including trade secrets, can be stolen by employees
• Unauthorized alterations can be made to programs by programmers
• Data can be altered directly in the data file.
• Viruses, Trojan Horses, and worms can infect a system
• Hardware can be stolen.
• Natural disasters
System Control
Control
General Control Application Control

1) Organisation and operation 1) Input control
• Administrative controls 2) Processing control
• Computer operations controls 3) Output control
2) General operating procedures

• Policies, procedures and manuals
• System development and system changes
3) Software, hardware and access controls

• Software control
• Hardware control
• Access control
System Control
General controls relate to the general environment within which transaction
processing takes place
General controls include:
• Administrative controls, including segregation of duties.

• Computer operations controls.
• Controls over the development, modification, and maintenance of computer
programs.
• Software controls.
• Hardware controls.
• Data security controls.
• Provision for disaster recovery.
System Control
1) Administrative controls - segregation of duties
§ Systems analysts
§ Data entry
§ Data control clerks
§ Programmers
§ Computer operators
§ Network management
§ System administration
§ Librarian
§ Systems development and maintenance
§ Security administration
§ Security audit
System Control
• Systems analysts are responsible for reviewing the current system to
make sure that it is meeting the needs of the organisation, and when it is not,
they provide the design specifications for the new system to the programmers.
• Programmers write, test, and document the systems. They can modify programs,
data files, and controls but should not have access to the computers and
programs in actual use for processing
• Computer operators perform the actual operation of the computers for
processing the data. They should not have programming functions and should not
be able to modify any programs. Their job responsibilities should be rotated so no
one operator is always overseeing the running of the same application. The most
critical segregation of duties is between programmers and computer operators.
• Data control group receives user input, logs it, monitors the processing of the
data, reconciles input and output, distributes output to authorised users, and
checks to see that errors are corrected
• Data conversion operators perform tasks of converting and transmitting data.
They should have no access to the library or to program documentation,
• Librarians maintain the documentation, programs, and data files. The librarian
should restrict access to the data files and programs to authorised personnel at
scheduled times
• Database administrator controls access to various files, making program changes,
and making source code details available only to those who need to know.
System Control
2) General Operating Procedures
General Operating Procedures" typically refer to a set of documented guidelines or
instructions that outline how an organisation or a specific department within an
organisation operates on a day-to-day basis. These procedures are designed to
ensure consistency, efficiency, and compliance with established standards.
• Task descriptions should be written for each job function – personnel should be
trained in their jobs – assigned duties should be rotated periodically for key
processing functions.
• Turnaround documents should be used whenever appropriate. A turnaround
document is a document created by a computer, then some additional
information is added to it, and it is returned to become an input document to the
computer. The documents are printed with Optical Character Recognition (OCR)
fonts so that they can be read by the computer when they are scanned and thus
only the added information needs to be keyed in.
System Control
3) Software, Hardware, and Access Controls
a) Software Controls
• Software controls" refer to various measures and mechanisms implemented
within software systems to ensure their security, integrity, and proper
functionality.
• These controls are essential for safeguarding information, preventing
unauthorised access, and maintaining the reliability of software applications.
• Programs are written in source code. Object code the machine language
Using compiler source code is converted to object code, anyone can modify the
source code and converted to object code, then delete the modified source code
by keeping the original source coded their.
System Control
3) Software, Hardware, and Access Controls
b) Hardware Controls
• Hardware controls include keeping the computer equipment physically secure.
• Computer equipment kept in locked room
• Protected from extreme of temperature and humidity
• Protected from natural disasters
• Computer hardware frequently contains mechanisms to check for equipment
malfunctions, another aspect of hardware controls,
a) Parity Check - A parity check is a method used in computing and
telecommunications to detect errors in data
b) Echo Check - Echo checks verify that the data received is identical to the
data sent. The data is retransmitted back to the sending device for
comparison with the original.
• Business continuity planning and disaster recovery
System Control
Computer networks require special controls due to the
decentralised nature of the hardware.
Checkpoint and rollback recovery processing is a technique used in computer

systems to ensure data consistency and recoverability in the event of a failure. This
approach involves periodically creating checkpoints, which are snapshots of the
system's state, and implementing rollback mechanisms to revert to a consistent
state in case of a failure.
Routing verification procedures protect against transactions routed to the wrong
computer network system address. Any transaction transmitted over the network
must have a header label identifying its destination. Before sending the
transaction, the system verifies that the destination is valid and authorised to
receive data. After the transaction has been received, the system verifies that the
message went to the destination code in the header.
Message acknowledgment procedures are protocols or methods used in
communication systems to confirm the successful receipt, processing, or delivery of
messages. Acknowledgments play a critical role in ensuring the reliability and
integrity of communication, particularly in scenarios where the sender needs
confirmation that the intended recipient has received and understood a message.
System Control
Access Control
Logical Security Physical Security

Consists of access and ability to use the Involves protecting the physical assets
equipment to protect it from damage or theft of the computer centre: the hardware,
and data security controls to ensure that data peripherals, documentation, programs,
files are not subject to unauthorized access, and data files in the library.
change, or destruction.
• Secure Facility Access
• Authentication • Biometric access system
ü Usernames and Passwords • Fencing and barriers
ü Biometric Authentication • Security lighting
• Multi-Factor Authentication • CCTV cameras
• Authorization • Motion sensor
• Encryption • Intrusion detection system
• Password Policies • Security guard
ü Enforcing Strong Passwords • Visitor management
ü Password Expiration • Lockable cabinets
System Control
Data security controls
Prevent unauthorised or accidental change or destruction to data.
Online input and real-time systems are vulnerable because they can be accessed
remotely. When data can be input online, unauthorised input entry must be
prevented. Systems that enable online inquiries must have data files secured.
• Terminals can be physically restricted to permit access only to authorised
personnel.
• Passwords should be assigned only to authorised personnel.
File security and storage controls are an important part of data security controls.
• Labelling the contents
• The read-only file designation is used to prevent users from altering or writing
over data.
• Database Management Systems use lockout procedures to prevent two
applications from updating the same record or data item at the same time.
• Controlled dispose of documents (paper and magnetic media).
• Automatic log off – disconnection of inactive data terminal.
System Control
Application Control
Input Processing Output

Input controls can also Processing controls prevent Provide reasonable
provide some assurance or discourage the improper assurance that input
that items of data have manipulation of data and and the processing of
not been lost, ensure satisfactory operation the input have
suppressed, added, or of hardware and software resulted in valid
changed in some and provide a reasonable output.
manner. assurance that a processing
has occurred properly
without any lost and
incorrectly added.
System Control
Application Control
Input Processing Output
1. Data Observation 1. Data Access Controls 1. Validating Processing

and Recording Results
2. Data Manipulation Controls
2. Data Transcription 2. Printed Output
Controls
3. Edit Tests
System Control
Application Control
Input
Data Observation and Data Transcription Edit Tests

Recording
• Feedback Mechanisms • Data transcription • Completeness or field check

• Limit checks
• Dual Observations • Pre-formatted input
• Validity checks
screen
• Point of sale devices • Overflow checks
• Format checks • Check digit
• Pre-printed forms • Key verification or keystroke
• Batch control totals verification
• Hash totals
• Reasonableness checks
• Numerical checks
• Reconciliations
System Control
Application Control
Processing
Data Access Controls Data Manipulation Controls

• Processing controls at the time of • Controls involving data manipulation
data access later in the processing
Ø Transmittal documents Ø Test data

Ø Batch control totals Ø System testing
Ø hash total Ø Batch balancing
Ø Cross-footing
Ø Default option
System Control
Output Controls
Output controls are used to provide reasonable assurance that input and the
processing of the input have resulted in valid output.
Ø Activity, or proof, listings
Ø Transaction trails
Ø Output totals
Ø Forms control
Ø Pre-numbered Forms
Ø Shredding
System Control
System and Program Development and Change Control
1) Statement of Objectives - A written proposal is prepared, including the need for
the new system, the nature and scope of the project and timing issues in terms of
need and employee availability
2) Investigation and Feasibility Study of Alternative Solutions
3) Systems Analysis - The current system is analysed to identify its strong and weak
points, and the information needs from the new system, such as reports to be
generated, database needs, and the characteristics of its operation are
determined.
4) Conceptual Design - It is what the users are expecting the system to be.
5) Physical Design - determining the workflow, what and where programs and
controls are needed, benefits the needed hardware, backups, security measures,
and data communications.
6) Development and Testing
7) System Implementation and Conversion
8) Operations and Maintenance
System Control
Internet Security
SECTION E
ü When the company connected to Internet, many security issues may cause.
ü Electronic eavesdropping may occur.
Some measurements should be taken,
• User account management - assigning username and password to login.
• Firewall - A firewall is a network security device or software that monitors and
controls incoming and outgoing network traffic based on predetermined security
rules. The primary purpose of a firewall is to establish a barrier between a trusted
internal network and untrusted external networks, such as the internet. Firewalls
are a fundamental component of network security and play a crucial role in
protecting systems and data from unauthorised access, cyber threats, and other
security risks.
• Antivirus software - also known as anti-malware software, is a type of program
designed to detect, prevent, and remove malicious software (malware) from
computer systems.
• Encryption - Encryption is a process of converting information into a secure code
to prevent unauthorized access. The purpose of encryption is to protect data
confidentiality, integrity, and sometimes authenticity
Internet Security
Viruses:
1. Definition: A computer virus is a type of malware that attaches itself to legitimate programs
or files and replicates when those programs or files are executed.
2. Operation: Viruses often require user interaction to spread, such as opening an infected
email attachment or executing a compromised program.
3. Payload: Viruses can have various payloads, ranging from simply replicating and spreading
to more malicious actions like data destruction or unauthorized access.
Trojan Horses (Trojans):

1. Definition: Trojan is a type of malware that disguises itself as something legitimate or
benign but contains malicious code.
2. Operation: Unlike viruses, Trojans do not replicate on their own. They rely on social
engineering to trick users into installing them.
3. Payload: Trojans can carry out a variety of malicious actions, such as stealing sensitive data,
providing unauthorized access to a system, or creating a backdoor for other malware.
Worms:
1. Definition: A computer worm is a self-replicating malware that spreads across networks and
systems without requiring user intervention.
2. Operation: Worms exploit vulnerabilities in network protocols or operating systems to self-
replicate and spread to other connected systems.
3. Payload: Worms can consume network bandwidth, degrade system performance, and may
carry additional payloads such as viruses or Trojans.
Internet Security
Cybercrime
• Copyright infringement - Copyright infringement occurs when someone uses,
reproduces, distributes, displays, or creates derivative works based on original
creative content without the permission of the copyright holder
• Denial of service - A Denial of Service (DoS) attack is a malicious attempt to

disrupt the regular functioning of a targeted server, service, or network,
making it temporarily or indefinitely unavailable to users.
• Intrusion and theft of personal information
• Phishing - Fraudulent attempts to obtain sensitive information, such as

usernames, passwords, and credit card details, by disguising as a trustworthy
entity in electronic communication.
• Installation of Malware on a computer without the users knowledge
• Fake warning pop-up boxes - tech support scams
Internet Security
Cybercriminal’s Tools
• Malware
• Keyloggers
• Remote access trojans
• Botnets
• Password cracking tools - guessing password or brute force
• Sniffing tool - analysing network traffic and capturing sensitive data such as
login credentials
• Social engineering tools - pretending to be someone asking for the
password as a trustful person.
• DNS spoofing tools - redirecting to another website
• Dumpster diving - searching information in companies trash
Internet Security
Encryption
It converts data into a code and then a key is required to convert the code back
to data. Unauthorised people can receive the coded information, but without the
proper key, they cannot read it.
Encryption can be accomplished by two methods: secret key and public

key/private key.
• In a secret key encryption system, each sender-recipient pair has a single key that is
used to encrypt and decrypt the messages. The disadvantage to a secret key system is
that every pair of senders and receivers must have a separate set of keys that match. If
several pairs all used the same set, then anyone having the key could decrypt anyone
else’s message and it would not be a secret.
• The public key/private key encryption system is a better system for companies to use.
In a public-key/private-key encryption system, each entity that needs to receive
encrypted data publishes a public key for encrypting data while keeping a private key to
itself as the only means for decrypting that data. Anyone can encrypt and send data to
the company using its published public key, but only the company’s private key can be
used to decrypt the data, and only the company that published the public key has the
private key.
Internet Security
Business Continuity Plan
SECTION E
It involves defining the risks facing a company in the event of a disaster, assessing
those risks, creating procedures to mitigate those risks, regularly testing those
procedures to ensure that they work as expected, and periodically reviewing the
procedures to make sure that they are up to date.
Company should have

1. Backup Plan
2. Recovery Plan

Backup Plan
• Grandparent-parent-child
processing is used because of the
risk of losing data before, during
or after processing work.
• Uninterruptible power supplies

(UPS) for computers.
• Roll back method

Recovery
• Hot Site - Mirrored data centre

• Warm Site - have necessary equipment and data, but no live data available
• Cold Site - space, electrical power and heating and air-conditioning are
available, data is not available
• Mobile Site - disaster recovery site on wheels it can be a outside, warm side or
cold site.

THE END
Type equation here.
RABEEH OVUNGAL
Technology and
Analytics
Sec$on F
Part 1
CMA USA
RABEEH OVUNGAL
Channel!

certification.
concepts.
Must read any relevant textbook and practice questions.

Contents:
1) Information System Page – 04
2) Transaction Cycle Page – 16
3) Databases Page – 31
4) Enterprise Resource Management Page – 47
5) Data Warehouse, Data Mart & Data Lake Page – 51
6) Data Governance Page – 59
7) Data Life Cycle Page – 70
8) Cyber Attacks and Defenses Page – 76
9) Technology Enabled Finance Transformation Page – 82
10) Artificial intelligence Page – 88
11) Cloud Computing Page – 91
12) Cryptocurrency Page – 98
13) Data Analytics Page – 115
14) Data Mining Page – 126
15) Regression Analysis Page – 135
Information System
Part 01 – Technology and Analy4cs
SECTION F
• When a company consistently delivers value to its customers whether through
high-quality products, excellent services, innovative solutions, or exceptional
experiences it establishes a strong relationship and trust with its customer base.
This often leads to increased customer satisfaction and a higher willingness to pay
for those offerings.
• However, it's essential for companies to not only create value but also effectively
communicate and demonstrate that value to their customers. Sometimes,
customers might not fully understand the benefits or the unique value proposition
of a product or service unless it's articulated clearly.
Informa(on Systems
Michael Porter Value Chain
Informa(on Systems
Accounting information system
An Accounting Information System (AIS) is
a comprehensive system that tracks and
manages financial transactions within an
organization. It involves the collection,
storage, processing, and dissemination of
financial and accounting information to
support decision-making within a
company.
These can include invoicing, payment

processing, and accounting software, as
well as reporting and payroll/time-tracking
software.
Informa(on Systems
• Just-in-time manufacturing and raw materials inventory management is
made possible by an accounting information system that provides upto date
information about inventories of raw materials and their locations.
• Sales information can be used to optimize inventory levels at retail locations.
• An online retailer can use sales data to send emails to customers suggesting
other items they might be interested in based on items they have already
purchased.
• Allowing customers to access accounting information such as inventory levels

and their own sales orders can reduce costs of interacting with customers and
increase customer satisfaction.
• A variance report showing a large unfavourable variance in a cost indicates

that investigation and possibly corrective action by management is needed.
Informa(on Systems
Accounting Information System
Journals: Journals are the initial entry point where transactions are recorded in
chronological order.
General Ledger: The general ledger is a comprehensive record that contains all the
financial accounts of a company. It summarises all transactions recorded in the
journals and provides a detailed overview of each account's activity, including credits,
debits, and balances.
Chart of Accounts: This is a structured list of all the accounts used by an organisation.
Master Files: Master files are databases that contain detailed data about specific
entities, such as customers, suppliers, employees, or inventory items. Store
permanent information, such as general ledger account numbers and history or
customer account numbers and historical data for each customer
Transaction Files: These files contain the individual transaction records that are
entered into the system. They provide a detailed record of each transaction, including
date, amount, accounts involved, and other relevant information. Used to update
master files.
Informa(on Systems
*Sample of Chart of Accounts
Informa(on Systems
Journals: Journals are the initial entry point where transactions are recorded in
chronological order.
General Ledger: The general ledger is a comprehensive record that contains all the
financial accounts of a company. It summarises all transactions recorded in the
journals and provides a detailed overview of each account's activity, including credits,
debits, and balances.
Chart of Accounts: This is a structured list of all the accounts used by an organisation.
Master Files: Master files are databases that contain detailed data about specific
entities, such as customers, suppliers, employees, or inventory items. Store
permanent information, such as general ledger account numbers and history or
customer account numbers and historical data for each customer
Transaction Files: These files contain the individual transaction records that are
entered into the system. They provide a detailed record of each transaction, including
date, amount, accounts involved, and other relevant information. Used to update
master files.
Informa(on Systems
Block Codes: In the context of coding and organising information, block codes are a
method of assigning numerical or alphanumeric codes to data elements or records.
• “1” for assets, “2” for liabilities, “3” for equity, “4” for incomes, and “5” for
expenses.
• All asset accounts would be in the 1000 block.
• All liability accounts in the 2000 block.
• Current asset accounts might begin with “11” while noncurrent asset accounts
begin with “12.” Within the current asset section, then, cash might be 1110,
accounts receivable might be 1120, and inventory might be 1130.
Modules: Modules refer to the different functional components or units within an

AIS. Each module typically focuses on specific business functions such as accounts
payable, accounts receivable, payroll, inventory management, and others. These
modules can be integrated into an ERP system or standalone software to manage
different aspects of business operations.
Informa(on Systems
In a responsibility accounting system, a code is used to identify the
responsibility center that is the source of the transaction, and that code is
part of transactions input to the AIS, as well.
Example
The full expense account number charged is 5162731 in department 120. That account
number in that responsibility center accumulates only expenses for television
advertising production costs for blender advertising that have been committed to by
the advertising department.
Informa(on Systems
Inputs to an Automated Accounting Information System
In an automated accounting information system, transactions are recorded
electronically. Transactions are recorded by means of input devices
• Keyboard and mouse
• Barcode scanner
• Point of sale system
• Tablet Computer
• Microphone and web cameras
Output of an Automated Accounting Information System

• Physical reproductions - print
• Audio output devices
• Video output devices
Informa(on Systems
Good reports should have
• The report should include a date.
• The report should be consistent over time so managers

can compare information from different time periods
• The report should be in a convenient format and should

contain useful information that is easy to identify.
Informa(on Systems
Transac1on Cycle
Part 01 – Technology and Analytics
SECTION F
1) Revenue to cash cycle.
2) Purchasing and expenditures cycle.
3) Produc4on cycle.
4) Human resources and payroll cycle.
5) Financing cycle.
6) Fixed asset cycle (property, plant, and equipment).
7) General ledger and repor4ng systems.
Transaction Cycle
Transaction Cycle
Revenue to Cash Cycle
Transac(on Cycle
Revenue to Cash Cycle
The accoun>ng informa>on system is used for,
• Tracking sales of goods and services to customers.
• Recording the fulfilling of customer orders.
• Maintaining customer records.
• Billing for goods and services.
• Recording payments collected for goods and services provided.
• Forecaskng sales and cash receipts using the outputs of the AIS.
Output
• Sales report and inventory report
• Customer aging report
• Colleckon report
Transac(on Cycle
Purchasing and Expenditure Cycle
Transaction Cycle
Purchasing and Expenditure Cycle
The accounting information system is used for,

• Tracking purchases of goods or services.
• Tracking amounts owed and making timely and accurate vendor payments.
• Maintaining vendor records and a list of authorized vendors.
• Managing inventory to ensure that all goods purchased are received,
properly recorded in the AIS, and properly dispensed from inventory.
• Forecasting purchasing needs and cash outflows.
Output
• Check (Cheque)
• Forecast of cash requirements
• Discrepancy reports that note differences in items, quantities, or amounts on the
purchase order, the receiving report, and the vendor’s invoice or duplicate invoice
numbers or duplicate amounts to a vendor.
Transaction Cycle
Production Cycle
Transac(on Cycle
Production Cycle
The accoun>ng informa>on system is used for,
• Tracking purchases of raw materials.
• Monitoring and controlling manufacturing costs.
• Managing and controlling inventories.
• Controlling and coordinakng the produckon process.
• Providing input for budgets.
• Colleckng cost accounkng data for operakonal managers to use in making
decisions.
• Providing informakon for manufacturing variance reports, usually using job
coskng, process coskng, or ackvity-based coskng systems.
Transac(on Cycle
Financing Cycle
• The AIS can provide information about how quickly customers are paying their bills and
can show trends in cash collections for use in managing the collection of cash.
• An AIS with EFT capability can be used to make payments by electronic funds transfer
through the automated clearing house, or a separate EFT application that interfaces
with the AIS can be used.
• Estimates of interest and dividend payments and receipts are used to develop cash
flow forecasts.
Output
• Interest revenue and expense.
• Dividend revenue and dividends paid.
• Summaries of cash colleckons and disbursements.
• Balances in investment accounts and in debt and equity.
• Cash budget showing projected cash flows.
Transaction Cycle
Payroll Cycle
Output
• Employee disknct showing current employees and informakon about them.
• Payroll payment register
• Paychecks
• Deduckon reports
• Payroll summaries
• Tax reports
Transac(on Cycle
Payroll Cycle
• Recording the hiring and training of employees.
• Processes associated with employee terminations.
• Maintaining employee earnings records.
• Complying with regulatory reporting requirements, including payroll tax
withholdings.
• Reporting on payroll benefit deductions such as for pensions or medical
insurance.
• Making timely and accurate payroll payments to employees, payments for
benefits such as pensions and medical insurance, and payroll tax payments
to taxing authorities.
Transaction Cycle
Fixed Asset Cycle
Output
• List of fixed asset of a period
• Depreciakon register for fixed asset
• Repair and maintenance reports
• Report on rekred asset showing the disposikon of fixed asset during the current
period
Transac(on Cycle
Fixed Asset Cycle
• Recording newly purchased fixed assets in the fixed asset module and the general
ledger.
• Maintaining depreciation schedules and recording depreciation to calculate the book
values of fixed assets.
• Maintaining deferred tax records by tracking differences between depreciation as
calculated for book purposes and depreciation as calculated for tax purposes.
• Maintaining records of the physical locations of fixed assets, as some of them may be
moved frequently.
• Tracking repair costs and distinguishing between repair costs that are expensed and
repair costs that are capitalized.
• Recording impairment of fixed assets.
• Tracking disposal of fixed assets and calculating the amount of gain or loss on the sale.
Transaction Cycle
General Ledger and Reporting Cycle
Transac(on Cycle
Databases
SECTION F
• A database is an organized colleckon of structured informakon, or data, typically
stored electronically in a computer system.
• Databases can store and manage large amounts of structured and unstructured
data.
• They can contain any type of data, including words, numbers, images, videos,
and files.
• RelaEonal databases are a type of database that organizes data into tables with
rows and columns.
• The relakonal model uses a structure that allows data to be queried and
manipulated using a language called SQL (Structured Query Language).
Databases
Databases
Relational Database
Field Level 1
Record Level 2
File (Table) Level 3
Database Level 4 (highest)
Databases
Data is stored according to a data hierarchy, and the data is structured in levels.
1) Field - A field is information that describes one attribute of an item, or entity, in
the database such as a person or an object. for example, one data field would be
one employee’s last name.
2) Record - A database record contains all the information about one item, or entity,
in the database. For example, a single database record would contain information
about one employee.
3) File, also called a table, is the third level of the data hierarchy. A table is a set of
common records, such as records for all employees.
4) Database is the highest level. Several related files or tables make up a database
Databases
Databases
Databases
Databases
Primary Key:
• A primary key is a unique idenkfier for each record in a table.
• It ensures that each row in the table is disknct and can be uniquely
idenkfied.
• Primary keys can be composed of a single column or a combinakon of
columns.
Foreign Key:
• A foreign key is a field (or a set of fields) in a table that refers to the
primary key in another table.
• It establishes a relakonship between two tables, creakng a link between
them.
• Ensures referenkal integrity, meaning that values in the foreign key column
must exist in the referenced primary key column.
Databases
Databases
Databases
Databases
Database Management System (DBMS)
A Database Management System (DBMS) is software designed to manage, manipulate,
and organise data in databases. It provides an interface between users and the
database, enabling users to interact with the data without having to understand the
complexities of data storage and retrieval.
Databases
Database Management System (DBMS)
Data Definition (Database Development): DBMS allows users to define the database
structure, specifying the data types, relationships between data elements, and
constraints to ensure data integrity. This includes creating tables, defining fields,
establishing relationships between tables, and setting constraints (like primary keys,
foreign keys, and unique constraints).
Data Manipulation (Data Maintenance): DBMS enables users to interact with the data
stored in the database. This involves adding, modifying, deleting, and retrieving data
using operations such as INSERT, UPDATE, DELETE, and SELECT. Users can manipulate
data without needing to understand the underlying complexities of how the data is
stored.
Data Querying and Retrieval (Data interrogation): DBMS provides a language (such as
SQL - Structured Query Language) for querying the database to retrieve specific
information. Users can perform complex queries to extract data based on various
conditions, sort it, aggregate it, and present it in a desired format.
Data Administration and Security (Application Development): DBMS manages the
database's security, ensuring that only authorized users can access the data. It includes
user authentication, authorization, and access control mechanisms. Additionally, DBMS
handles data backups, recovery, and maintenance tasks, ensuring data remains
available and consistent.
Databases
Schema:
• A schema in a database defines the logical structure and layout of the entire
database. It represents the complete design, including tables, fields, relationships,
constraints, and other elements.
• It provides a blueprint or framework for how the data is organized and stored within
the database.
• In relational databases, a schema typically includes the definition of tables, their
columns, data types, primary keys, foreign keys, and relationships between tables.
• For instance, in an employee management system, the schema might define tables
for employees, departments, and relationships between them, specifying attributes
like employee ID, name, department ID, etc.
Databases
Subschema:
• A subschema is a subset or a view of the database schema.
• It represents a tailored or customized view of the database that is specific to
particular users, applications, or specific requirements.
• Subschemas are created to provide different views of the database to different
users or applications based on their needs, hiding certain parts of the database
schema and exposing only relevant information.
• For example, in a university database schema, different subschemas might be
created for students, faculty, administration, each displaying relevant information
related to their roles without exposing unnecessary details.
Databases
Enterprise Resource
Management
SECTION F
Enterprise Resource Management (ERM) refers to the integrated management of a
company's resources across various departments and functions within an organization. It
involves the strategic planning, coordination, and optimization of resources to achieve
organizational goals efficiently.
Enterprise Resource Planning (ERP) is a type of software system that organizations

use to manage and integrate their core business processes, often in real-time and
mediated by software and technology.
Features of ERP system
• Integration - integrate accounting, customer relation management, business
services, human resources, supply chain management.
• Centralised Database
• Usually require business process reengineering
ERP
Extended ERP
Refers to the expansion of tradikonal Enterprise Resource Planning (ERP) systems to
encompass addikonal funckonalikes and capabilikes beyond the core ERP modules. It
involves integrakng supplementary features and modules to address specific business
needs, industry requirements, or emerging trend
• Customer Relakonship Management (CRM)
• Business Intelligence (BI) and Analykcs
• E-commerce and Online Sales
• Supplier Relakonship Management (SRM)
• Product Lifecycle Management (PLM)
• Quality Management
• Project Management
ERP
Advantages
• Integrated back-office systems result in better customer service and production and
distribution efficiencies.
• Centralizing computing resources and IT staff reduces IT costs versus every
department maintaining its own systems and IT staff.
• Data duplication is reduced
• Expenses can be better managed and controlled.
• Trends can be more easily identified
Disadvantages
• Business re engineering is required
• Initiating is time-consuming
ERP
Data Warehouse, Mart
and Lake
SECTION F
Data Warehouse
Data
Data Warehouse
• It is the storage area where all the historical
data are stored in a single location.
• It is not used for everyday transaction
processing.
• All the companies information from
different departments and locations are
stored in single location for analysis.
• Managers use business intelligence tools to
extract information from the data
warehouse.
To be useful data stored in a data warehouse

should be,
• Free from errors
• Should be uniformly defined
• Stored for longer time span to enable
historical research
• Allow users to write queries, that can
draw information from several
different areas of database
Data
The data before storing to a data warehouse, it is stored in staging server, then the data
sets are from various sources are transformed into a compatible format.
"Schema on write" refers to a method of structuring data in a database or data storage

system at the time of ingestion. In this approach, data is structured and organized
according to a predefined schema before being loaded into the storage system.
Data
Data Mart
A data mart is a specialized subset of a data warehouse. It's designed to serve the
needs of a specific business unit, team, or department within an organization. While a
data warehouse contains a comprehensive collection of integrated data from various
sources across the organization, a data mart focuses on a particular subject area and is
tailored to the requirements of a specific group of users.
Data
A data mart can provide security for sensitive data because it isolates the data certain
people are authorized to use and prevents them from seeing data that needs to be kept
confidential.
Types of Datamart
Dependent Data Mart: This type of data mart is directly derived from the data
warehouse. It's built from a subset of the data warehouse's data and is dependent on
the central data warehouse for its data source.
Independent Data Mart: An independent data mart is designed and developed
separately from the data warehouse. It's created specifically for a particular business
unit or department and might draw data from various sources other than the central
data warehouse. It doesn't rely on the data warehouse for its existence.
Hybrid Data Mart: Combines elements of dependent and independent data marts,
drawing some data from an existing data warehouse and some data from transactional
systems. Only a hybrid data mart allows analysis of data from a data warehouse with
data from other sources.
Data
Data Lake
• A data lake is a vast storage repository
that holds raw, unstructured, semi-
structured, or structured data in its
native format until it's needed. Unlike a
traditional data warehouse that
structures and organizes data before
storing it, a data lake stores data in its
raw form, allowing for greater flexibility
in terms of data types and sources.
• A data lake utilizes a non-relational
database management system, called
NoSQL, which stands for “Not only
SQL.” A NoSQL database management
system can be used to analyse high
volume and disparate data, including
unstructured and unpredictable data
types. NoSQL databases do not require
the use of a Structured Query Language
(SQL) to analyse the data
Data
Ø Transformation of the data and application of a schema, called Schema-on-Read,
take place when specific analysis is performed.
Ø "Schema on read" is an approach to data storage and processing where data is
stored in its raw or original form, without a predefined schema or structure. In this
method, the structure and schema of the data are applied or interpreted at the
time the data is read or queried, rather than at the time it's loaded into the storage
system, which contrasts with "schema on write."
Data
Data Governance
SECTION F
Data governance refers to the overall management framework and set of prackces
concerning the availability, usability, integrity, and security of an organizaEon's data
assets. It involves the establishment of policies, procedures, roles, responsibilikes,
and guidelines to ensure that data is managed effeckvely and aligns with the
organizakon's objeckves and regulatory requirements.
Data Governance
1) Data availability refers to the accessibility and readiness of data for use by authorized
users or systems when needed.
2) Data Usability: This refers to the extent to which data is understandable, accessible,
and useful for its intended purpose.
3) Data integrity ensures that data remains accurate, consistent, and unaltered
throughout its lifecycle.
4) Data security focuses on protecting data from unauthorized access, breaches, or theft.
5) Data privacy involves protecting individuals' personal information and ensuring that
data is collected, used, and managed in compliance with relevant privacy laws and
regulations.
6) Data integration involves combining data from different sources, formats, or systems
to provide a unified view.
7) System availability refers to the uptime and accessibility of computer systems and
services. It involves ensuring that systems are operational and accessible to users when
needed, minimizing downtime and disruptions.
8) System maintenance involves ongoing activities to keep systems updated, secure, and
operating efficiently. It includes tasks like software updates, hardware upgrades,
routine checks, and troubleshooting to prevent issues.
Data Governance
Internal Control – Integrated Framework by COSO
Control environment:
• Principle No. 2 — The board of directors exercises oversight over internal control: For
data governance, oversight may be carried out by an informakon technology
commisee of the board of directors.
• Principle No. 3 — Management establishes structures, authorikes, and
responsibilikes: Governance over data would include establishment of access
privileges to data appropriate to individuals’ needs for informakon and their ability to
handle it properly.
Risk assessment:
• Principle No. 7 — Risks are idenkfied and analysed: Risks to data are significant
because data breaches, loss of data, and corrupkon of data can bring down an enkre
organizakon.
• Principle No. 8 — Potenkal for fraud is considered: An incident of fraud will
frequently involve fraudulent changes made to data, and prevenkve controls are
needed.
Data Governance
Internal Control – Integrated Framework by COSO
Control activities:
• Principle No. 11 — General control activities over technology are selected and
developed to support the achievement of the organization’s objectives
Information and communication:
• Principle No. 13 — Relevant, quality information is obtained or generated and is used
Data should be captured internally as well as from external sources, and information
systems should transform the data into information that is accurate, complete,
verifiable, and accessible. The information should be protected and retained.
Monitoring:
• Overseeing the entire internal control system to assess the operation of existing in-
ternal controls to ensure that the internal control system continues to operate
effectively. The internal controls over data need to be evaluated on an ongoing basis
(Principle No. 16) and any deficiencies evaluated and communicated for corrective
action (Principle No. 17).
Data Governance
COBIT Framework
COBIT - Control OBjeckves for Informakon and Related Technology.
According to the Framework, governance and management are different disciplines

that involve different activities, different organizational structures, and serve different
purposes.
Governance is usually the responsibility of the board of directors under the leadership
of the chair of the board of directors. The purpose of governance is to ensure that:
1. Protect stakeholders interest
2. Resource Optimisation
3. Risk management
4. Compliance and accountability
Management is usually the responsibility of the executive management under the chief
executive officer’s (CEO’s) leadership. The purpose of management is to plan, build, run,
and monitor activities, in accordance with the direction set by the body responsible for
governance such as the board of directors, to achieve the enterprise objectives
Data Governance
Components of a Governance System
Data Governance
Components of a Governance System
• Processes. A process is a set of practices and activities needed to achieve a specific
objective and produce outputs that support achievement of IT-related goals.
• Organizational structures. Organizational structures are the primary decision-making
entities within the enterprise.
• Principles, policies, and frameworks. Principles, policies, and frameworks provide
practical guidance for the day-to-day management of the enterprise.
• Information. Information includes all the information produced and used by the
enterprise. COBIT® 2019 focuses on the information needed for effective governance
of the enterprise.
• Culture, ethics, and behaviour. The culture of the enterprise and the ethics and
behaviour of both the enterprise and the individuals in it are important factors in the
success of governance and management activities.
• People, skills, and competencies. People and their skills and competencies are
important for making good decisions, for corrective action, and for successful
completion of activities.
• Services, infrastructure, and applications. These include the infrastructure,
technology, and applications used to provide the governance system for information
and technology processing.
Data Governance
Stakeholders for enterprise governance of information and technology (EGIT) and the
target audience for COBIT include the following:
Internal stakeholders:
• Members of the board of directors
• Executive management
• Business manager
• IT manager
• Assurance providers such as auditors
• Risk management
External stakeholders:
• Regulator
• Business partners
• IT vendors
Data Governance
COBIT 2019 Goal Cascade
Data Governance
Performance Management in COBIT® 2019
In COBIT® 2019, performance management plays a crucial role in ensuring that an
organisation’s IT (Information Technology) processes align with its strategic objectives
and deliver value.
Performance management is organised in COBIT® 2019 according to the
components that make up the enterprise’s governance system over information
and technology.
• Processes
• Organizational structures
• Principles, policies and frameworks
• Information
• Culture, ethics, and behaviour
• People, skills, and competencies
• Services, infrastructure, and applications
Data Governance
Data Life Cycle
SECTION F
Data Capture
Data Acquisition Data Entry Signal Reception
Data Maintenance Data Qualifying
Data Transformation, Synthesis and simplification
Data usage and utilisation Data Analytics
Data Publication or Reporting
Data Archival
Data Purging Data Lifecycle

1. Data Capture: The process of collecting raw data from various sources, which could
include manual input, automated systems, sensors, or any mechanism that
generates data.
2. Acquisition: Similar to data capture, acquisition involves obtaining data, often from
external sources or through purchasing data sets, to supplement existing datasets.
3. Data Entry: This stage involves manually inputting data into systems or databases. It
can be prone to errors and typically involves human intervention.
4. Signal Reception: Specific to scenarios where data is received or captured from
signals, such as in telecommunications or IoT devices where data is transmitted
wirelessly.
5. Data Qualifying: Assessing and validating the quality of data to ensure it meets
certain standards or criteria for accuracy, completeness, and consistency.
6. Data Maintenance: Ongoing processes to ensure the quality, security, and
accessibility of data throughout its life cycle, including regular updates, backups,
and version control.
7. Data Transformation, Synthesis, and Simplification: Converting raw data into a
more usable or standardized format, combining different data sets, and simplifying
complex data structures for easier analysis.
Data Lifecycle
7. Data Usage or Utilization: Employing data for various purposes, such as decision-
making, operations, research, or any other use that brings value to the organization.
8. Data Analytics: Applying statistical, mathematical, or computational techniques to
analyse data, extract insights, and make informed decisions based on patterns and
trends found in the data.
9. Data Publication or Reporting: Presenting analysed or processed data in a format
that is understandable and useful for stakeholders, often in the form of reports,
visualizations, or dashboards.
10. Data Archival: Storing data that is no longer actively used but might be needed for
historical or compliance purposes. Archiving involves maintaining accessibility while
reducing immediate storage costs.
11. Data Purging: Removing or deleting data that is no longer needed, ensuring
compliance with data retention policies and regulatory requirements.
Data Lifecycle
Records Management
Every organization should have a documented records management policy that
establishes how records are to be maintained, identified, retrieved, preserved, and
when and how they are to be destroyed. The policy should apply to everything
defined by the organization as a “record,” which includes both paper documents and
data records.
1) Federal, state, and local document, retention requirements

2) Requirements of SarbOx act of 2002
3) Statute of limitation, information
4) Accessibility
5) Records of records
Data Lifecycle
Federal, state, and local document, retention requirements - U.S. federal requirements
include Internal Revenue Service requirements for retaining income tax information.
Requirements of SarbOx act of 2002 - Section 802 of the Sarbanes-Oxley Act prohibits
altering, destroying, mutilating, concealing, or falsifying records, documents, or tangible
objects with the intent to obstruct, impede, or influence a potential or actual federal
investigation or bankruptcy proceeding. Violation is punishable by fines and/or
imprisonment for up to 20 years.
Statute of limitation, information - A statute of limitations is the period during which

an organization may sue or be sued or the time period within which a government
agency can conduct an examination.
Accessibility - An important consideration with electronic records is hardware,

software, and media obsolescence. Records can become inaccessible if they are in an
obsolete format, and the records management policy must include a means to either
migrate the records to new versions, or the old hardware and software must be
retained so the records can be accessed
Records of records - The records management policy should establish the practice of
maintaining an index of active and inactive records and their locations and of
maintaining logs containing records of all purged data.
Data Lifecycle
Cyber A(acks and Defenses
SECTION F
1) Hackers: Individuals or groups who gain unauthorized access to computer
systems or networks for various purposes, which can range from curiosity to
causing harm.
2) HackEvists: Individuals or groups who hack systems to promote social or polikcal
agendas or to raise awareness about specific issues.
3) Cybercriminals: Individuals or organized groups who engage in criminal ackvikes
online, including but not limited to stealing sensikve data, financial fraud, and
idenkty theu.
4) Employees: Internal threats posed by employees who misuse their access to
systems or data for personal gain, revenge, or unintenkonal errors leading to
security breaches.
5) CompeEtors: Rival companies or enkkes seeking to gain an unfair advantage by
accessing or stealing sensikve informakon from their compektors.
6) Foreign States: Nakon-states or state-sponsored groups engaging in cyber
espionage, asacks, or disrupkons targekng other countries' government
systems, crikcal infrastructure, or industries.
7) Denial of Service (DoS): Overwhelming a system or network with traffic to
render it unavailable to its intended users.
Cyber Attacks
8) Logic Bomb: Code inserted into souware or systems to execute a malicious
ackon when certain condikons are met.
9) Tampering: Unauthorized alterakon or modificakon of data, systems, or devices.
10) Copyright Infringement: Unauthorized use, distribukon, or reproduckon of

copyrighted material.
11) Phishing: Decepkve asempts to acquire sensikve informakon (such as

usernames, passwords, or financial details) by posing as a trustworthy enkty in
electronic communicakon.
12) Social Engineering: Manipulakng individuals to divulge confidenkal informakon

or perform ackons that compromise security.
Cyber Attacks
Defense against Cyberattacks
EncrypEon: A method of encoding data to make it unreadable without the appropriate
decrypkon key. It's used to secure sensikve informakon during transmission or storage,
ensuring that even if intercepted, the data remains protected.
Ethical Hackers: Also known as white-hat hackers, these professionals use their hacking
skills and knowledge to idenkfy vulnerabilikes in systems, networks, or applicakons with
permission. They aim to improve security by uncovering weaknesses before malicious
hackers exploit them.
• Vulnerability TesEng: The process of scanning and iden0fying weaknesses or
vulnerabili0es in so8ware, networks, or systems that could poten0ally be exploited by
a=ackers. It helps organiza0ons proac0vely address these weaknesses before they are
compromised.
• PenetraEon TesEng: It involves simula0ng real-world cyber a=acks on systems, networks,
or applica0ons to evaluate their security by a=emp0ng to exploit vulnerabili0es. This
proac0ve approach helps organiza0ons understand their security posture and remediate
issues before they're exploited maliciously.
Advanced Firewalls: Firewalls are network security devices that monitor and control
incoming and outgoing network traffic based on predetermined security rules. Advanced
firewalls go beyond tradikonal packet filtering and include addikonal funckonalikes like
intrusion prevenkon, deep packet inspeckon, and applicakon-level filtering to provide
enhanced security.
Defense
Access Control
Physical Access Control Logical Access Control
1. Walls and fences 1. Something You Know
2. Locked gates and doors a) Password
2. Something You Are
3. Manned guard posts
a) Iris or rekna of the eyes
4. Monitored security cameras b) Fingerprints
5. Guard dogs c) Vein paserns
6. Alarm systems d) Faces
7. Smoke detectors and fire e) Voices
suppression systems 3. Something You Have
a) Electronic Device
8. Magnetic Card Access
b) Magnekc Cards
9. Biometric Access
Defense
Some other Precautions
1) Two-Factor AuthenEcaEon (2FA): A security process that requires users to
provide two different authenkcakon factors to verify their idenkty before
accessing an account or system. Typically, it combines something the user
knows (like a password) with something they have (like a mobile device for
receiving a one-kme code) to enhance security.
2) AutomaEc Locking or Logoff Policies: These policies automakcally log users out
of their accounts or lock devices auer a period of inackvity. This measure helps
prevent unauthorized access when a device or system is leu unasended.
3) Logs of All Login Afempts: Maintaining detailed logs that record all login
asempts (both successful and unsuccessful) provides a trail of ackvity. This
informakon is valuable for security monitoring, analysis, and inveskgakon of
potenkal security breaches or unauthorized access asempts.
4) Accounts That AutomaEcally Expire: Implemenkng policies that automakcally
deackvate or expire accounts auer a specified period of inackvity or auer a set
durakon enhances security by reducing the risk posed by unused or forgosen
accounts.
Defense
Technology Enabled
Finance Transformation
SECTION F
Technology enabled finance transformation
Statement of objec-ves
Investigation and the feasibility study of alternative solutions
System analysis
Concept design
Physical design
Development and testing
System implementa-on and conversion
Operations and maintenance
Finance Transforma(on
1) Statement of objectives - New proposal is prepared which includes need for new
system, nature and scope of the project and timing issues.
2) Investigation and the feasibility study of alternative solutions - stage involves
researching various options available for transforming finance through technology. It
includes analysing their feasibility, considering factors like cost, resources required,
and potential benefits.
3) System analysis - The current system is analysed to identify its strong and weak
points, and the information needs from the new system, such as reports to be
generated, database needs, and the characteristics of its operation are determined.
4) Concept design - Systems analysts work with users to create the design specifications
and verify them against user requirements.
5) Physical design - The physical design involves determining the workflow, what and
where programs and controls are needed, the needed hardware, backups, security
measures, and data communications.
6) Development and testing - The design is implemented into source code, the
technical and physical configurations are fine-tuned, and the system is integrated and
tested. Data conversion procedures are developed.
7) System implementation and conversion - The new finance system is rolled out, and
the data from the old system is migrated or converted to the new one. This process
often involves training users and ensuring a smooth transition.
8) Operations and maintenance - Once the new system is live, ongoing support,
updates, and maintenance are crucial. This phase ensures that the system operates
effectively and efficiently,
Robotic Process Automation
Robotic Process Automation (RPA) refers
to the use of software robots or "bots" to
automate repetitive, rule-based tasks that
were traditionally performed by humans.
These robots are programmed to mimic
the actions or behaviours of a human
interacting with digital systems to execute
tasks, such as data entry, file
manipulation, transaction processing, and
more.
• Call Center Operations
• Customer Order Processing
(gas booking)
• Fraudulent account closing
Advantages LimitaJons
• Increase efficiency • Limited cognikve ability
• Cost savings • Maintenance and Updates
• Improved compliance • Inikal investment and training
Artificial Intelligence
SECTION F
• Artificial Intelligence (AI) refers to the simulation of human intelligence in machines
that are programmed to think, learn, and problem-solve like humans. It
encompasses various technologies, including machine learning, neural networks,
natural language processing, and robotics, among others.
• AI uses algorithms, which are sets of step- by-step instructions that a computer can
execute to perform a task.
• Artificial intelligence is categorized as either weak AI, also called narrow AI, or
strong AI, also called artificial general intelligence
Ø Weak AI is an AI system that can simulate human cognitive functions but although
it appears to think, it is not actually conscious
• Apple’s Siri
• Google Assistant
• Industrial Robots
Ø Strong AI is equal to human intelligence and exists only in theory. A strong AI

system would be able to reason, make judgments, learn, plan, solve problems,
communicate, create and build its own knowledge base, and program itself.
AI
Digital assistant is a computer application that can assist a user by answering
questions and performing basic tasks. Smartphones, tablets, smartwatches, and
various other devices have digital assistants.
• Amazon Alexa
• Siri
• Google Assistant
Machine vision involves the use of technology and algorithms to enable machines,
typically computers or robots, to visually perceive and interpret their environment
• Sensors and camera
• Machine vision is also used in non-industrial settings such as surveillance and
medical applications.
• Machine vision can be used to analyse satellite imagery for several purposes.
• Machine vision can be used to automate document data extraction.
Machine learning is a subset of artificial intelligence (AI) that focuses on enabling
systems to learn and improve from experience without being explicitly programmed. It
involves the development of algorithms and models that allow computers to identify
patterns, make decisions, and improve their performance over time.
• Traffic alerts using Google Map • Self driving cars (tesla, Volvo)
• Google Translation • Ads recommenda0on
• Prediction – business intelligence tools
AI
Cloud Computing
SECTION F
Cloud computing refers to the delivery of computing services over the internet,
providing access to resources such as servers, storage, databases, networking,
software, and more, without the need for owning or managing physical hardware or
infrastructure locally.
Cloud service providers offer all three types of resources.
1) Infrastructure as a Service (IaaS)

2) Platform as a Service (PaaS)
3) Software as a Service (SaaS)
Cloud Compu(ng
1) Infrastructure as a Service (IaaS): Providers offer virtualized computing resources
over the internet, including virtual machines, storage, and networking
infrastructure. Users have more control over the underlying infrastructure and can
scale resources as needed.
Cloud Compu(ng
2) Platform as a Service (PaaS): These services provide a platform allowing users to
develop, run, and manage applications without the complexity of managing the
underlying infrastructure. This includes tools and services for application
development, databases, middleware, and more.
Cloud Compu(ng
3) Software as a Service (SaaS): Cloud providers offer software applications over the
internet on a subscription basis, eliminating the need for installation or
maintenance. Users access these applications via a web browser or an API.
Cloud Compu(ng
Cloud Compu(ng
Advantages Disadvantages
• Cost efficiency • Security concerns
• Scalability • Dependency and Internet
• Flexibility connectivity
Cloud Computing
Blockchain and
Smart Contract
SECTION F
The concept of the blockchain and the first cryptocurrency, bitcoin, was first
presented in 2009 in a paper ktled Bitcoin: A Peer-to-Peer Electronic Cash System,
ostensibly wrisen by Satoshi Nakamoto. No one knows who Satoshi Nakamoto is,
though, and it may be a pseudonym for one or more people.
A cryptocurrency is a digital currency, which is an alternakve form of payment created

using encrypkon algorithms
Cryptocurrency
Cryptocurrency
Cryptocurrency
Cryptocurrency
Cryptocurrency
Cryptocurrency
• A cryptocurrency is a digital currency, which is an alternative form of payment
created using encryption algorithms.
• The use of encryption technologies means that cryptocurrencies function both as

a currency and as a virtual accounting system. To use cryptocurrencies, you need a
cryptocurrency wallet
• They operate on decentralized networks using blockchain technology, which is a

distributed ledger that records all transactions across a network of computers.
• A distributed ledger is a database that exists across several locations or among

multiple participants. Unlike a traditional centralized ledger, which is maintained
by a single authority or entity, a distributed ledger is decentralized and shared
among a network of computers, known as nodes.
Cryptocurrency
Cryptocurrency
Blockchain
Blockchain
Blockchain is a digital ledger that records transackons across many computers. It's
ouen public, decentralized, and distributed.
Blockchain.com is a cryptocurrency financial services company that was the first

Bitcoin blockchain explorer in 2011.
A blockchain is “a way for one Internet user to transfer a unique piece of digital
property to another Internet user, such that the transfer is guaranteed to be safe
and secure, everyone knows that the transfer has taken place, and nobody can
challenge the legikmacy of the transfer.
A blockchain is a conknuously growing digital record in the form of packages, called

blocks, that are linked together and secured using cryptography. It is a system of
digital interackons that does not need an intermediary such as a financial
insktukon to act as a third party to transackons
Blockchain
Distributed ledger – A distributed ledger is a database held by each full node in a
network, and each full node updates the database independently. Records are
independently constructed and passed around the network by the various full
nodes, they are not held by any central authority. Every full node on the network
has informakon on every transackon and then comes to its own conclusion as to
whether each transackon is authenkc.
Consensus in the context of distributed ledger technologies like blockchain refers to

the colleckve agreement among network parkcipants (nodes) on the validity of
transackons and the state of the ledger.
If a majority (51% or more) of the members of a blockchain agree on the value of
the data, that is, the transackons, to be included in the ledger, consensus is
achieved, and every parkcipant accepts that as fact
Blockchain
Digital Wallet – A digital wallet is used to access cryptocurrencies.
Satoshi – A Satoshi is the smallest unit of bitcoin cryptocurrency. One Satoshi is

equal to one 100-millionth of one bitcoin token.
Hash, hashing – Hashing is taking an input string of any length and giving it an
output of a fixed length using a hashing algorithm. For example, bitcoin uses the
hashing algorithm SHA-256 (Secure Hashing Algorithm 256) on Bitcoin networks.
Any input, no maser how big or small, always has a fixed output of 64 symbols,
which is made up of 256 bits, the source of the “256” in its name. The fixed output
is the hash.
The hash is used to prevent tampering with a block auer it has been added to the
blockchain. A given set of data when put through a specific hash algorithm will
generate only one hash. The hash is used to check that the data that generated the
hash has not been changed. If any change is made to the original data, it will cause
the hash value to be incorrect.
Blockchain
Bitcoin Mining
Bitcoin mining is the process of creakng new bitcoins by solving extremely
complicated math problems that verify transackons in the currency. When a
bitcoin is successfully mined, the miner receives a predetermined amount of
bitcoin.
Bitcoin mining is the process by which transackons are verified on the

blockchain. It is also the way new bitcoins are entered into circulakon.
"Mining" is performed using hardware and souware to generate a
cryptographic number that matches criteria. The first miner to find the
solukon to the problem receives the bitcoin reward and the process begins
again.
Blockchain
Bitcoin Mining
Mining
Smart contract
• It is a self-executing computer program that automatically executes the terms of a
contract without the involvement of third parties.
• A smart contract is created by translating the terms and conditions of a traditional

agreement into a computational code written by blockchain developers in a
programming language. It is basically a set of coded computer functions with a set of
rules. The computer code is self-executing and performs an action at specified times
or based on the occurrence or non-occurrence of an action or event such as delivery
of an asset or a change in a reference rate.
• A blockchain executes smart contracts in basically the same way as it executes

transactions, and when the contract calls for payments to be made, they are made
automatically in the cryptocurrency of the blockchain system being used.
Smart Contract
Examples
• A blockchain can be used to ensure the authenkcity of a product, so a purchaser of
the product can be assured that the product he or she is buying is genuine and not
a counterfeit
• It can be used to protect intellectual property.
• An insurance contract can be in the form of a smart contract.
• The ktle to real property can be transferred using a blockchain.
Smart Contract
Data Analytics
SECTION F
Data analytics is the process of gathering and analysing data in a way that produces
meaningful information that can be used to aid in decision-making. As businesses
become more technologically sophisticated, their capacity to collect data increases.
However, the stockpiling of data is meaningless without a method of efficiently
collecting, aggregating, analysing, and utilizing it for the benefit of the company.
Ø Data Collection
Ø Data Cleaning and Preparation
Ø Data Analysis
Ø Data Interpretation and Visualization
Ø Utilisation for Decision making
Data analytics can be classified into four types:

1. Descriptive analytics
2. Diagnostic analytics
3. Predictive analytics
4. Prescriptive analytics.
Data Analy(cs
1. Descriptive Analytics: This type deals with summarizing historical data to understand
what has happened in a business. It involves basic analysis and interpretation of data
to describe past events or outcomes. Descriptive analytics answers questions like
"What happened?" by using techniques like data aggregation, data mining, and data
visualization to present the information.
2. Diagnostic Analytics: Going beyond describing what happened, diagnostic analytics
aims to understand why certain events occurred. It involves deeper analysis to uncover
the causes or factors behind past outcomes or trends. This type of analytics helps in
understanding relationships between different variables and identifying patterns to
explain specific occurrences.
3. Predictive Analytics: Predictive analytics uses historical data, statistical algorithms, and
machine learning techniques to predict future outcomes. By analysing patterns and
trends in historical data, predictive analytics tries to forecast what might happen next.
It's all about answering questions like "What is likely to happen?" and often
involves creating models to make these predictions.
4. Prescriptive Analytics: This is the most advanced form of analytics. It not only predicts
future outcomes but also suggests actions to take advantage of those predictions. It
goes beyond just forecasting by providing recommendations on what actions to take to
optimize outcomes. Prescriptive analytics guides decision-making by offering possible
scenarios and potential actions to achieve specific objectives.
Data Analy(cs
Data Analy(cs
Business Intelligence
(BI) involves strategies and technologies used by
enterprises for data analysis of business informakon.
It aims to provide meaningful insights into business
operakons, aiding decision-making processes.
Data
Informa>on
Knowledge
Insight
Strategic Decision
Ac>on
Data Analytics
A Business Intelligence system has four main components
1) Data Warehouse: This serves as the central repository where data from various
sources is collected, integrated, cleaned, and stored.
2) Business AnalyEcs: It encompasses various processes like data mining,
stakskcal analysis, predickve modelling, and other advanced analykcs
techniques to derive insights and paserns from the data.
3) Business Performance Management (BPM): BPM involves monitoring and
managing the performance of an organizakon's processes, operakons, and
strategies. It uses key performance indicators (KPIs) to measure and track
performance against predefined goals. It aligns business ackvikes with
strategic objeckves.
4) User Interface - Dashboard: The user interface, parkcularly dashboards,
provides a visual representakon of data and insights derived from the BI
system. Dashboards offer a summarized view of KPIs, trends, and other crikcal
informakon, allowing users to easily interpret and make informed decisions
based on the presented data.
Data Analytics
• Structured data is in an organized format that enables it to be input into a
relakonal database management system and analysed.
• Unstructured data has no defined format or structure. It is typically free-form

and text-heavy, making in-depth analysis difficult.
• Semi-structured data has some format or structure but does not follow a
defined model
Data Analytics
Big Data referred to as the four V’s:
• Volume: It represents the sheer amount of data generated.
Big Data involves dealing with massive volumes of data,
often ranging from terabytes to petabytes and beyond.
• Velocity: This refers to the speed at which data is
generated and processed. With the increasing speed of
data generation from various sources like social media,
sensors, and more, managing the rapid influx of data
becomes crucial.
• Variety: It signifies the diverse types of data available—
structured, semi-structured, and unstructured data. This
includes text, images, videos, sensor data, and more.
Managing this variety is a challenge in Big Data analytics.
• Veracity: This denotes the reliability and accuracy of the
data being collected. Big Data often involves dealing with
data of varying quality, including inconsistencies, errors,
and noise. Ensuring the veracity of data is important for
making informed decisions.
Data Analy(cs
Data Science v/s Data Analyst
Data science is a field of study and analysis that uses algorithms and processes to
extract hidden knowledge and insights from data. The objecEve of data science is to
use structured, unstructured, and semi-structured data to extract informakon that can
be used to develop knowledge and insights for forecaskng and strategic decision
making.
Data AnalyJcs primarily revolves around examining datasets to draw conclusions,

idenkfy trends, and make informed business decisions. Its main goals include:
• DescripEve Analysis: Understanding what has happened by analysing historical
data.
• DiagnosEc Analysis: Determining why something happened by inveskgakng
paserns and correlakons in data.
• PredicEve Analysis: Forecaskng future trends or outcomes based on historical data
and stakskcal techniques.
• PrescripEve Analysis: Suggeskng ackons or strategies to achieve desired outcomes.
Data analysts generally focus on using tools like SQL, Excel, Tableau, or other stakskcal
souware to analyse structured data and provide insights to support business decisions.
Data Analytics
Data Science v/s Data Analyst
Data Science on the other hand, encompasses a broader scope and involves a
more in-depth exploration of data using scientific methods, algorithms, and machine
learning techniques. Its goals are often more encompassing:
• Exploration and Discovery: Identifying hidden patterns, trends, and insights within
data.
• Prediction and Forecasting: Building predictive models to forecast future trends or
outcomes.
• Pattern Recognition: Employing machine learning algorithms to recognize patterns
and make automated decisions.
• Deep Insights and Innovation: Uncovering new insights and creating innovative
solutions using advanced statistical methods and AI techniques.
Data scientists typically have a stronger foundation in programming, mathematics, and
machine learning. They work with complex algorithms, unstructured data, and often
create custom solutions to solve business problems.
ü Data science is of little use without usable data.
ü Good data cannot be useful in decision-making without good data science talent.
Data Analy(cs
Challenges of Managing Data Analytics
• The growth of data and especially of

unstructured data.
• The need to generate insights in a kmely

manner for the data to be useful.
• Recruikng and retaining Big Data talent.

Demand has increased for data
engineers, data scienksts, and business
intelligence analysts, causing higher
salaries and creakng difficulty filling
posikons.
Data Analytics
Data Mining
SECTION F
• Data mining is a process of discovering paserns, trends, and insights within large
datasets. It involves using various techniques from stakskcs, machine learning, and
database systems to extract valuable informakon from raw data.
• Data mining finds applicakons in various fields like markekng, finance, healthcare,
and more. It's used for customer segmentakon, fraud deteckon, recommendakon
systems, predickve maintenance, and other purposes aimed at deriving insights
from data to drive business or research decisions.
• Data mining involves trying different hypotheses repeatedly and making inferences
from the results that can be applied to new data. Data mining is thus an iteraEve
process.
ü Data mining is a process with defined steps, and thus it is a science
ü Data mining is also an art. In data mining, decisions must be made regarding
what data to use, what tools to use, and what algorithms to use.
ü Data mining differs from stakskcs.
• Data mining involves generalizaEon of paserns from a data set. “Generalizakon” is
the ability to predict or assign a label to a “new” observakon based on a model built
from experience.
Data Mining
• Souware used for data mining uses stakskcal models, but it also incorporates
algorithms that can “learn” from the paserns in the data.
• Data mining is used in predicEve analyEcs.
Basic concepts of predictive analytics include
1. Classificakon
2. Predickon
3. Associakon rule
4. Online recommendakon systems
5. Data reduckon
6. Clustering
7. Dimension reduckon
8. Data explorakon
9. Data visualisakon
Data Mining
1. ClassificaEon: Sorkng data into predefined categories or classes based on input
features. This is crucial for tasks like sorkng emails into spam or non-spam,
idenkfying disease types, etc.
2. PredicEon: Using historical data to make predickons about future outcomes.

Predickve models learn from past paserns to forecast future events, such as
sales forecaskng or predickng stock prices.
3. AssociaEon Rule Mining: Idenkfying relakonships or conneckons between

variables in large datasets. For instance, finding paserns like "customers who
buy X also tend to buy Y" is useful in market basket analysis.
4. Online RecommendaEon Systems: Employing algorithms to suggest or

recommend items or content to users based on their preferences or behaviour.
These systems are widely used in e-commerce, streaming playorms, and social
media.
5. Data ReducEon: Techniques to reduce the volume of data while maintaining its
integrity and usefulness. This could involve methods like feature seleckon,
which focuses on the most relevant asributes for predickve modelling.
Data Mining
6. Clustering: Grouping similar data points together based on their characteriskcs
or features. Clustering is valuable for customer segmentakon, idenkfying
anomalies, or grouping similar products or users.
7. Dimension ReducEon: Reducing the number of variables or features in a

dataset while retaining relevant informakon. This helps simplify models,
improve performance, and remove noise or redundancy in the data.
8. Data ExploraEon: Inveskgakng data to understand its paserns, characteriskcs,

and relakonships. This includes examining summary stakskcs, distribukons,
and correlakons to prepare data for modelling.
9. Data VisualizaEon: Presenkng data visually through graphs, charts, or other

graphical forms to convey insights and paserns effeckvely. Visualizakon aids in
understanding complex data and communicakng findings clearly.
Data Mining
Steps in Data Mining
Understand the purpose of the project
Select the data set to be used
Exploring ,cleaning and pre-processing data
Data reduc-on
Determine the data mining task
Par--on the data
Select the data mining techniques to use
Use algorithms to perform the task
interpret the results of the algorithm
Deploy the model

Data Mining
1. Understand the Purpose of the Project: Clearly define the objeckves and goals of
the data mining project. Understand what insights or knowledge you aim to
extract from the data.
2. Select the Dataset to be Used: Idenkfy and gather the relevant dataset(s) that
contain the informakon needed to achieve the project objeckves.
3. Exploring, Cleaning, and Pre-processing Data: Explore the dataset to understand

its structure, idenkfy missing values, outliers, or inconsistencies. Clean and pre-
process the data by handling missing values, duplicates, and standardizing formats.
4. Data ReducEon: Reduce the volume of data if needed while preserving its
meaningfulness and integrity. Techniques like feature seleckon, transformakon, or
sampling might be applied.
5. Determine the Data Mining Task: Decide on the specific data mining tasks based
on project objeckves—whether it's classificakon, regression, clustering,
associakon rule mining, etc.
Data Mining
6. ParEEon the Data: Split the dataset into training, validakon, and test sets. This
separakon is crucial to train the model, tune parameters, and assess its
performance.
7. Select Data Mining Techniques to Use: Choose appropriate algorithms or

techniques that align with the chosen data mining task. For instance, decision
trees for classificakon, k-means for clustering, etc.
8. Use Algorithms to Perform the Task: Apply the selected data mining techniques or
algorithms to the training dataset to build models or extract paserns.
9. Interpret the Results of the Algorithm: Analyse the outputs of the algorithms to
understand the discovered paserns or predickons made by the models.
10. Deploy the Model: Implement the insights gained from data mining into prackcal
applicakons or decision-making processes.
Data Mining
Challenges of Data Mining
• Poor data quality.
• Informakon exist in mulkplicakons within organisakon.
• Ethical issues such as data privacy.
• Data security.
• The growing volume of unstructured data.
Data Mining
Regression Analysis
SECTION F
AnalyGc Tools
Linear regression analysis is a statistical method used to model the relationship
between a dependent variable and one or more independent variables. The goal is
to understand and predict the behaviour of the dependent variable based on the
values of the independent variable.
Time series analysis involves analysing data points collected or recorded at

specific time intervals. This method aims to understand patterns, trends, and
behaviours within the data over time. Time series data typically includes
observations taken at equally spaced intervals, such as hourly, daily, monthly, or
yearly.
Four components of time series

1. Trend pattern or component
2. Cyclical pattern or component
3. Seasonal pattern or component
4. Irregular pattern or component
Regression Analysis
1) Trend PaQern: The long-term movement or
direckonality in the data. Trends can be upward
(increasing), downward (decreasing), or stable.
Trend Pattern
Trend Pattern
2) Cyclical patterns in time series
analysis refer to recurring
fluctuations or movements that
occur at irregular intervals over an
extended period. These cycles often
represent economic, business, or
societal trends that repeat over a
more extended period than
seasonal patterns. Economic cycles
like expansions and contractions,
business cycles, and various societal
trends are examples of cyclical
patterns.
Cyclical PaFern
Cyclical PaFern
3) Seasonal paQerns in kme series
analysis refer to regular fluctuakons
or variakons that occur at fixed
intervals within a specific period,
ouen within a year. These paserns
are typically influenced by factors
such as weather, holidays, customs,
or other calendar-related events.
Any pasern that repeats regularly is
a seasonal component.
Seasonal Pattern
Seasonal Pattern
4) Irregular Pattern
The irregular component in a time series
refers to the random fluctuations or
residual variations that cannot be
attributed to the underlying trend,
seasonal patterns, or cyclicality. Also
known as the "error" or "noise," this
component represents the unexplained
variability in the data after accounting for
the systematic patterns.
Irregular PaFern
Irregular PaFern
A kme series that has a long-term upward or downward trend pasern can be
used to make a forecast.
Simple linear regression analysis is used to create a trend projeckon and to

forecast values using historical informakon from all available past observakons
of the value.
1. Simple Linear Regression
𝒚 = 𝒂 + 𝒃𝒙
2. Mul>ple Linear Regression
ŷ = 𝐚𝟎 + 𝐚𝟏 𝐱 𝟏 + 𝐚𝟐 𝐱 𝟐 + … + 𝐚𝐤 𝐱 𝐤
Regression Analysis
CorrelaJon Analysis
Used to understand the relakonship or absence of a relakonship between
two variables and to determine the strength of the linear relakonship
between the two variables.
1) The correlaEon coefficient, R
2) The coefficient of determinaEon, 𝑹𝟐
3) The standard error of the esEmate, also called the standard error of the
regression
Regression Analysis
CorrelaJon coefficient (ouen denoted as R) is a stakskcal measure that
describes the strength and direckon of a linear relakonship between two
variables. It ranges from -1 to +1, indicakng the strength and direckon of the
relakonship:
• R=1 represents a perfect posikve linear relakonship: As one variable increases,
the other variable increases proporkonally.
• R=−1 represents a perfect negakve linear relakonship: As one variable

increases, the other variable decreases proporkonally.
• R=0 indicates no linear relakonship between the variables
ü high correlaEon coefficient - when number closest to 1 or -1

ü moderate correlaEon coefficient - ±0.30 to ±0.49
ü low correlaEon coefficient - around ±0.10
Regression Analysis
The Coefficient of DeterminaJon
Percentage of the total variaEon in the dependent variable (y) that can be explained
by variaEons in the independent variable (x), as depicted by the regression line.
• If R2 is 1, then 100% of the variakon in the dependent variable is explained by
variakons in the
independent variable.
• If R2 is 0, then none of the variakon in the dependent variable is explained by

variakons in the independent variable.
• If R2 is greater than 0 but less than 1, for example 0.68, it means that 68% of the
total variakon in the dependent variable can be explained by variakons in the
independent variable.
Regression Analysis
The Standard Error of the EsJmate (SEE) or the Standard Error of
the Regression:
The equakon of the simple linear regression model results in the average or predicted
value. The actual observed data has responses that are not on the line itself, but rather
they are scafered around the regression line.
The scaser, that is, the difference between the actual value of the dependent variable y
and the predicted value of the dependent variable y (that is, ŷ) for each value of the
independent variable x, is called the error term or the residual for that value of x
y = dependent variable
a = constant coefficient
y = a + bx + e b = variable coefficient
x = independent variable
-
𝒆=𝒚−𝒚
e = error term
Regression Analysis
Trend Pattern
Goodness of Fit in Linear Regression Analysis
It describes how close the actual values used in a stakskcal model are to the
expected values, that is, the predicted values, in the model.
Low Goodness of Fit
Regression Analysis
High Goodness of Fit
Regression Analysis
Confidence Interval
The confidence interval is used to describe the amount of uncertainty caused by
the sampling method used when drawing conclusions about a population based
on a sample. If several samples are drawn from a population using the same
sampling method and a confidence interval at a confidence level of 95% is used,
95% of the interval estimates in the samples can be expected to include the true
parameter of the population.
Confidence Interval
Regression Analysis
• RelaEonship IdenEficaEon: It helps • To use regression analysis, historical

idenkfy and quankfy relakonships data are required. If historical data
between variables, allowing for the are not available, regression analysis
predickon of one variable based on cannot be used.
others. • Even when historical data are
• PredicEon: Regression models can be available, the use of historical data is
used for forecaskng and predickng queskonable for making predickons if
future outcomes based on historical a significant change has taken place in
data. the condikons surrounding that data
Regression Analysis
THE END
Type equation here.
RABEEH OVUNGAL

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Performance

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• Variance analysis shows

• In a system where variances are

• Miss the opportunity

𝐒𝐭𝐚𝐧𝐝𝐚𝐫𝐝 𝐂𝐨𝐬𝐭 = 𝐒𝐭𝐚𝐧𝐝𝐚𝐫𝐝 𝐐𝐮𝐚𝐧𝐭𝐢𝐭𝐲 × 𝐒𝐭𝐚𝐧𝐝𝐚𝐫𝐝 𝐏𝐫𝐢𝐜𝐞

1) Ideal Level of Activity

• If properly executed, activity analysis is the most

• Activity analysis can be time-consuming and

• Perpetuate past inefficiencies

• Firms can sustain in competitive edges.

• Benchmarked data might not be completely applicable

Ø Variances can be classified in terms of level. A level denotes the

Budgeted Production and Sales = 12,000 units

Selling Price = $ 1250

Contribution Margin $ 38,40,000 $ 29,99,000 $ 8,41,000 UF

Fixed Cost $ 27,60,000 $ 28,50,000 $ 90,000 UF

Operating Profit $ 10,80,000 $ 1,49,000 $ 9,31,000 UF

Static Budget Variance (SBV)

Flexible Budget Variance (FBV)

Sales Volume Variance (SVV)

SBV = FBV + SVV

Sales Volume Variance (SVV)

(12000×$ 1200) (10,000 × $ 1200) (10000×$ 1250)

(12000×$ 600) (10,000 × $ 600) (10000×$ 621.6)

(12000×$ 160) (10,000 × $ 160) (10000×$ 198)

(12000×$ 120) (10,000 × $ 120) (10000×$ 130.5)

CM $ 38,40,000 $ 6,40,000 UF $ 32,00,000 $ 2,01,000 UF $ 29,99,000

FC $ 27,60,000 $0 $ 27,60,000 $ 90,000 UF $ 28,50,000

OI $ 10,80,000 $ 6,40,000 UF $ 4,40,000 $ 2,91,000 UF $ 1,49,000

𝐅𝐁𝐕 = 𝐀𝐜𝐭𝐮𝐚𝐥 𝐔𝐧𝐢𝐭𝐬 ×𝚫𝐂𝐌 + 𝚫FC

𝐒𝐕𝐕 = 𝚫 𝐮𝐧𝐢𝐭𝐬 ×𝐁𝐮𝐝𝐠𝐞𝐭𝐞𝐝 𝐂𝐌

𝐅𝐁𝐕 = 𝐀𝐜𝐭𝐮𝐚𝐥 𝐔𝐧𝐢𝐭𝐬 ×𝚫𝐂𝐌 + 𝚫FC

MCV LCV VMOHCV FMOHCV

Material Cost Variances

MCV = (SQ × SP) – (AQ × AP)

MCV = (SQ × SP) – (AQ × AP)

MCV = (75 ×𝟗. 𝟓) – (80 × 9) = -7.5

Material Cost Variances

MPV = (SP – AP) × AQ

Material Cost Variances

MPV = (SP – AP) × AQ

Material Cost Variances

MPV = (SP – AP) × AQ

Material Cost Variances

MQV = (SQ – AQ) × SP

Material Cost Variances

MQV = (SQ – AQ) × SP

Material Cost Variances

MQV = (SQ – AQ) × SP

MQV = (75 – 80) × 9.5 = - 47.5

Material Cost Variances

MCV = MQV + MPV

MQV = (75 – 80) × 9.5 = $ 47.5 UF

MCV = MQV + MPV

MCV = (SQ × SP) – (AQ × AP)

MCV = (75 ×𝟗. 𝟓) – (80 × 9) = -7.5