PROF. JOHN JOHNELL J.

DELA CRUZ, CPA, MBA

ALL RIGHTS RESERVED.2023
1

INTG 415-MANAGEMENTS ADVISORY SERVICES

MEMORY GUIDE
Corporate Governance, Internal Control, and Enterprise Risk Management

- The document was filed with the secretary of the state to obtain a certificate of incorporation.

- The committee of the board of directors oversees the company's accounting and financial reporting
processes and oversees the audits of the financial statements of the company.

- Evaluating the occurrence of events that had negative effects and were unanticipated or viewed is highly
unlikely.

- The body is charged with running the corporation on behalf of the shareholders.

- A case law–derived concept that provides that a corporate director may not be held liable for errors in
judgment, providing the director acted with good faith, loyalty, and due care.

- The board of directors committee reviews and approves executive compensation and makes
recommendations to the board regarding incentive-based compensation. It attempts to align incentives
with shareholder objectives and risk appetite. The Dodd-Frank Act requires all members to be
independent and provides that in setting compensation, the members may request the company to engage
compensation advisors independent of management.

-Set forth how the directors or officers are selected, how meetings are conducted, the types and duties of
officers, and the required meetings.

-A concept provides that directors and officers must put the corporation's interest before their
interest. Accordingly, if a director is approached with a business opportunity that would be of interest
to and benefit the corporation, they must first offer the opportunity to the corporation before pursuing
it on their behalf.

-A process designed to identify potential events that may affect the organization manage risk to be within
its risk appetite to provide reasonable assurance regarding achieving organizational objectives.

-An individual that monitors internal control within an organization.

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-Executive benefits are other than compensation, such as retirement, use of corporate assets, golden
parachutes, and corporate loans.

-The risk to the organization if management does nothing to alter its likelihood or impact.

-The risk of the event after considering management’s response.

-The amount of risk an organization is willing to accept to achieve its objectives.

-Analyzing the potential (likelihood and impact) effects of risk.

-The acceptable variation to achieving a particular objective.

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Economics, Strategy, and Globalization

-A country has an advantage over others in producing a good or service.

-A fluctuation in aggregate economic o

.utput that lasts for several years.

-A country's advantage in producing a good or service is that it has no alternative users of its
resources that would involve a higher return.

-Depicts the relationship between changes in personal disposable income and consumption.

-A strategy that involves focusing on reducing the costs and time to produce, sell, and distribute a
product or service.

-The quantity of a good or service a consumer is willing and able to purchase at a given price.

-The rate of decline in the price level of goods and services.

-A deep and long-lasting recession.

-A form of predatory pricing is when a manufacturer in one country exports a product at a lower
price than the price charged in its home country.

-The amount of profit over normal profit.

-A government makes payments to encourage the production and export of specific products.

-The excess (deficit) of government taxes to government transfer payments and purchases.

-The rate of increase in the price level of goods and services.

-The additional output is obtained from employing one additional resource unit (e.g., one additional worker).

-The additional revenue is received from selling one additional unit of a product.
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-The change in total revenue from employing one additional unit of a resource.

-The price at which all the goods offered for sale will be sold.

-A market is characterized by many firms selling a differentiated product or service.

-The price of all goods and services produced by a domestic economy for a year at current market prices.

-The interest rate in terms of the nation’s currency.

-The amount of profit necessary to compensate the owners for their capital and managerial skills.

-A market characterized by significant barriers to entry. As a result, there are few sellers of the product.

-The amount of income individuals has to purchase goods and services.

-The maximum amount of production could take place in an economy without putting pressure on the
general level of prices.

-A specified maximum price may be charged for a good, usually established by a government. A price
ceiling will cause goods shortages.

-A government usually establishes a minimum price that may be charged for good. A price floor will
cause overproduction of the goods.

-A strategy involves modifying a product to make it more attractive to the target market or to differentiate it
from competitors’ products.

-An industry in which there are a large number of sellers of virtually identical products or services.
No individual seller can affect the market price.

-A market in which there is a single seller of a product or service for which there are no close
substitutes.
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-The price of all goods and services produced by a domestic economy at price level adjusted (constant)
prices.

-The interest rate is adjusted for inflation.

-A period of negative gross domestic product growth.

-As the price of a good or service falls, consumers will use it to replace similar goods or services.

-The quantity of a good or service that producers at a given price will supply.

-The percentage of the total labor force that is unemployed at a given time.
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Financial Risk Management and Capital Budgeting

Avoidable costs
Costs will not continue to be incurred if a particular course of action is taken.

Cash flow hedge

A hedge of the variability in the cash flows of a recognized asset or liability or a forecasted trans-action is
attributable to a particular risk.

Committed costs
Costs related to the company’s basic commitment to open its doors (e.g., depreciation, property taxes,
management salaries, etc.).

Credit (default) risk.

The risk that a firm will default on the payment of interest or principal of a debt.

Currency swaps
In forward-based contracts, two parties agree to exchange an obligation to pay cash flows in one
currency for an obligation to pay in another.

Differential (incremental) cost.

The difference in cost between two alternative courses of action.

Discretionary costs.
Fixed costs whose level is set by current management decisions (e.g., advertising, research,
development, etc.).

Fair value hedge.

A hedge of the changes in fair value of a recognized asset or liability or an unrecognized firm
commitment.

Forwards.
Negotiated contracts to purchase and sell a specific quantity of a financial instrument, foreign currency,
or commodity at a price specified at the origination of the contract, with delivery and payment at a
specified future date.

Futures.
Forward-based standardized contracts take delivery of a specified financial instrument, foreign currency,
or commodity at a specified future date or during a specified period, generally at the market price.

Interest rate risk.

The risk is that a debt instrument's value will decline due to an increase in prevailing interest rates.

Interest rate swaps.

Forward-based contracts in which two parties agree to swap streams of payments over a specified time.
These contracts are often used for trading variable-rate instruments for fixed-rate instruments.

Internal rate of return method.

Uses the rate of return that equates investment with future cash flows to evaluate investment
alternatives.
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Market risk.
The risk is that the value of a debt instrument will decline due to a decline in the aggregate value of all
assets in the economy.

Net present value method.

Uses the present value of future cash flows to evaluate investment alternatives.

Opportunity cost.
The maximum income or savings (benefit) is forgone by rejecting an alternative.

Options.
An instrument that allows, but does not require, the holder to buy (call) or sell (put) a specific or
standard commodity or financial instrument at a specified price during a specified time or date.

Outlay cost.
The case disbursement is associated with a specific project.

Payback method.
Evaluates investment alternatives based on the length of time until the investment is recaptured.

Relevant costs.
Future costs will change as a result of a specific decision.

Sensitivity analysis.
Exploring the importance of various assumptions to forecasted results.

Sunk (unavoidable) costs.

Committed costs that are not avoidable and are therefore irrelevant to future decisions.

Swaption.
A swap option gives the holder the right to enter a swap at a specified future date with specified terms.

Systematic risk.
The risk is related to market factors that cannot be diversified away.

Unsystematic risk.
The risk exists for one particular investment or a group of like investments. This risk can be diversified
away.

PROF. JOHN JOHNELL J. DELA CRUZ, CPA, MBA

ALL RIGHTS RESERVED.2023
 8

Financial Management

Arbitrage pricing model.

Uses a series of systematic risk factors to develop a value that reflects the multiple dimensions of
systematic risk.

Cash discounts.
Discounts for early payment of accounts.

Compensating balance.
A required minimum level of deposit based on a loan agreement.

Concentration banking.
Payments from customers are routed to local branch offices rather than firm headquarters. This reduces
collection time.

Cost of capital.
The weighted-average cost of a firm’s debt and equity financing components.

Debenture.
A bond that is not secured by the pledge of a specific property.

Economic order quantity.

An inventory technique that minimizes the sum of inventory ordering and carrying costs.

Electronic funds transfer.

The movement of funds electronically without the use of a check.

Factoring.
The sale of receivables to a finance company.

Financial leverage.
Measures the extent to which the firm uses debt financing.

Float.
The time that elapses relates to mailing, processing, and clearing checks.

The inventory conversion period.

The average time required to convert materials into finished goods and sell the goods.

Just-in-time production.
A demand-pull system in which each component of a finished good is produced when needed by the
next production stage.

Just-in-time purchasing.
A demand-pull inventory system in which raw materials arrive just as needed for production. It
minimizes inventory holding costs.

PROF. JOHN JOHNELL J. DELA CRUZ, CPA, MBA

ALL RIGHTS RESERVED.2023
 9

Lockbox system.
A system in which customer payments are sent to a post office box maintained by the company’s bank.
This reduces collection time and improves controls.

Mortgage bond.
A bond secured with the pledge of a specific property.

Operating leverage.
Measures the degree to which a firm builds fixed costs into its operations.

Payables deferral period.

The average time between the purchase of materials and labor and the payment of cash for them.

Precautionary balances.
Cash is available for emergencies.

Receivables collection period.

The average length of time required to collect accounts receivable.

Speculative balances.
Cash is available to take advantage of favorable business opportunities.

Subordinated debenture.
A bond with claims subordinated to other general creditors.

Supply chain.
Describes the processes involved in a good’s production and distribution.

Warehousing. Inventory financing in which the inventory is held in a public warehouse under the lender’s
control.

PROF. JOHN JOHNELL J. DELA CRUZ, CPA, MBA

ALL RIGHTS RESERVED.2023
 10

Performance Measures and Management Techniques

Balanced scorecard.
A strategic performance measurement system that includes financial and non-financial performance
measures. The measures are in the four perspectives of financial, customer, internal business processes,
and learning and growth.

Cash flow ROI.

The average real cash return on all existing projects is reflected in the financial statements.

Continuous improvement.
Seeks continual improvement of machinery, materials, labor, and production methods by soliciting
suggestions and ideas from employees and customers.

Cost of quality.
A technique based on the philosophy that failures have an underlying cause, prevention is cheaper
than failures, and the cost of quality performance can be measured.

Cross-sectional analysis.
Involves benchmarking the firm’s ratios against ratios of similar firms at a point in time.

Economic profit.
Accounting profit minus the cost of capital.

Economic value-added.
Net operating profit after taxes minus the after-tax weighted-average cost of capital multiplied by total
assets minus current liabilities.

Free cash flow.

Net operating profit after taxes plus depreciation and amortization minus capital expenditures minus the
change in working capital requirements.

Horizontal analysis.
Involves an evaluation of the firm’s ratios and trends over time.

Kaizen.
The Japanese art of continuous improvement.

Pareto chart.
A bar graph that ranks causes of process variations by the degree of impact on quality.

Strategy maps.
Diagrams of the cause and effect relationships between strategic objectives.

Residual income.
Net income minus a cost of capital based on capital invested in the project or division.

Residual income profile.

A graphical way to look at the relationship between residual income and return on investment.

PROF. JOHN JOHNELL J. DELA CRUZ,

CPA, MBA
ALL RIGHTS RESERVED.2023
 11

Total quality management.

Focuses on managing the firm to excel in quality in all dimensions of products and services for
customers.

Value-based management.
Involves the use of value-based metrics in a strategic management system.

PROF. JOHN JOHNELL J. DELA CRUZ, CPA, MBA

ALL RIGHTS RESERVED.2023
 12

Cost Measurement and Assignment

Absorption (full) costing.

Considers fixed manufacturing overhead to be a product cost.

Activity-based costing (ABC)

A cost system that focuses on activities determines their costs and then uses appropriate cost drivers to
trace costs to the products based on the activities.

Activity-based management (ABM)

Integrates ABC with other concepts such as Total Quality Management (TQM) and target costing to
produce a management system that strives for excellence through cost reduction, continuous process
improvement, and productivity gains.

Actual activity level.

The level of production occurring for the period.

Backflush costing.
A costing system that omits to record some or all of the journal entries to track the purchase and
production of goods. Goods are costed after they have been completed.

Computer-integrated manufacturing (CIM).

A highly automated and integrated production process that is controlled by computers.

Conversion costs.
These include direct manufacturing labor and manufacturing overhead. They are the costs of converting
direct materials into finished products.

Cost assignment.
This encompasses cost tracing (assignment of direct costs to a cost object) and cost allocation
(assignment of indirect costs to the cost object). A cost object is an item (product, department, process,
etc.) for which cost is determined.

Cost driver.
A factor that causes a cost to be incurred. Cost drivers may be volume-related (e.g., repair costs may
depend on the volume of machine-hours) and transaction-related (purchasing costs may depend on the
number of purchase transactions).

Cost estimation.
Examining past relationships of costs and level of activity to develop predictions of future costs.

Cost management system (CMS).

A planning and control system measures the cost of significant activities, identifies non-value-added
costs, and identifies activities that will improve organizational performance.

Cost pools.
Groupings of related costs accumulated to be allocated to a product or other cost object.

Cycle time (or throughput time).

The time required to complete a good from the start of the production process until the product is finished.

PROF. JOHN JOHNELL J. DELA CRUZ, CPA, MBA

ALL RIGHTS RESERVED.2023
 13

Direct costs.
Costs easily are traced to a specific business segment (e.g., product, division, department).

Direct manufacturing labor.

The cost of labor directly transforms a product. This theoretically should include fringe benefits but
frequently does not. This is contrasted with indirect manufacturing labor, which is the cost of
supporting labor (e.g., material-handling labor, factory supervisors).

Direct materials inventory.

This includes the cost of materials awaiting entry into the production system.

Direct materials.
The cost of materials is directly and conveniently traceable to a product. Minor material items (nails,
glue) is not deemed conveniently traceable. These items are treated as indirect materials along with
production supplies.

Engineered costs.
Determined from industrial engineering studies that examine how activities are performed and if/ how
performance can be improved.

Factory (manufacturing) overhead.

Normally includes indirect manufacturing labor costs, supplies costs, and other production facility costs
such as plant depreciation, taxes, etc. It comprises all manufacturing costs that are not direct materials or
direct labor.

Finished goods inventory.

Includes the cost of units completed but unsold.

Fixed costs.
Costs that do not vary with the level of activity within the relevant range for a given time (usually one
year), for example, plant depreciation.

Flexible manufacturing system (FMS).

A series of computer-controlled manufacturing processes can be easily changed to make various
products.

Hybrid-costing.
A system blends the characteristics of both the job order and process costing systems. Firms using this
system typically produce large numbers of closely related products.

Indirect costs.
Costs that are not easily traceable to specific segments include factory overhead.

Job order costing.

A system for allocating costs to groups of unique products made to customer specifications.

Joint costs.
Costs are common to multiple products that emerge at a split-off point.

PROF. JOHN JOHNELL J. DELA CRUZ, CPA,

MBA
ALL RIGHTS RESERVED.2023
 14

Joint costing.
A system of assigning joint costs to joint products whose overall sales values are relatively significant.

Learning curve.
A function that demonstrates how productivity improves as workers become more proficient at producing
the product.

Mixed costs (semivariable).

Costs that have a fixed component and a variable component. These components are separated using
scattergraph, high-low, or linear regression methods.

Nonlinear cost function.

A straight line does not describe a cost function over the relevant range.

Non-value-added costs.
The cost of activities can be eliminated without the customer perceiving a decline in product quality
or performance.

Normal activity level.

The production level is expected to be achieved over several periods or seasons under normal
circumstances.

Period costs.
Costs cannot be associated (or matched) with manufactured goods (e.g., advertising expenditures). Period
costs become expenses when incurred.

Prime costs.
Costs are easily traceable to specific production units and include direct manufacturing labor and
materials.

Process costing.
A system for allocating costs to homogeneous units of a mass-produced product.

Product costs.
Costs that can be associated with the production of specific goods. Product costs attach to a physical
unit and become an expense in the period in which the unit to which they attach is sold. Product costs
normally include direct labor, materials, and factory overhead.

Product life-cycle costing.

Tracks the accumulation of costs that occur, starting with the research and development for a product and
ending with the time when sales and customer support are withdrawn.

Relevant range
The operating range of activity in which cost behavior patterns are valid. It is the product range for which
fixed costs remain constant (e.g., if production doubles, an additional shift of salaried foremen would be
added, and fixed costs would increase).

PROF. JOHN JOHNELL J. DELA CRUZ, CPA,

MBA
ALL RIGHTS RESERVED.2023
 15

Stepped costs (or semifixed costs)

They are fixed over relatively short ranges of production levels (e.g., supervisors’ salaries). Fixed,
variable, and semifixed costs are diagrammed below.

Relevant Range
Variable
Fixed

Dollars
Semifi
xed

A Production Level B
Value chain.
The sequence of business functions in which value is added to a firm’s products or services. This
sequence includes research and development, product design, manufacturing, marketing,
distribution, and customer service.

Value-added cost.
The cost of activities cannot be eliminated without the customer perceiving a decline in product quality or
performance.

Variable (direct) costing.

Costing considers all fixed manufacturing overhead as a period cost rather than a product cost.

Work in process inventory.

Includes the cost of units being produced but not yet completed.

PROF. JOHN JOHNELL J. DELA CRUZ, CPA, MBA

ALL RIGHTS RESERVED.2023
 16

Planning, Control, and Analysis

Activity-based budgeting.
A budgeting approach focuses on the cost of activities required to produce and sell products. It is an
extension of activity-based costing.

Avoidable costs.
Costs will not continue to be incurred if a department or product is terminated.

Benchmarking.
Requires that products, services, and activities be continually measured against the best performance
levels inside or outside the organization.

Budget.
Quantification of the plan for operations. A flexible budget is a budget that is adjusted for changes in
volume.

Performance reports
Compare budgeted and actual performance.

Budgetary slack.
Estimating revenues and overestimating expenses make budgeted targets more easily achievable.

Committed costs.
Arise from a company’s basic commitment to open its doors and engage in business (e.g., depreciation,
property taxes, management salaries, etc.).

Contribution margin.
Equals revenue less all variable costs.

Controllable costs.
Can be affected by a manager during the current period (e.g., the amount of direct manufacturing labor
per unit of production is usually under the control of a production supervisor). Uncontrollable costs
cannot be affected by the individual in question (e.g., depreciation is not usually controllable by the
production supervisor).

Cost management.
Refers to the approaches and activities used by management to make planning and control decisions for
the firm.

Cost-volume-profit (CVP) analysis.

A planning tool is used to analyze the effects of changes in volume, sales mix, selling price, variable
expense, fixed expense, and profit.

Differential (incremental) cost.

The difference in cost between the two alternatives.

Discretionary costs.
Fixed costs whose level is set by current management decisions (e.g., advertising, research,
development, etc.).
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Financial planning models.

Support the financial planning process by making it easier to construct projected financial scenarios.
These models incorporate the interrelationships among operating activities, financial activities, and other
factors that affect the business and range from simple models to those that incorporate hundreds of
equations.

Financial budget.
The cash budget, the capital budget, the budgeted balance sheet, and the budgeted statement of cash flows.

Fixed costs.
Costs that do not vary with the level of activity within the relevant range for a given time (usually one
year), for example, plant depreciation.

Incremental budgeting.
Involves developing budgets that require only justification for increases in the funding over the prior
period.

Life-cycle budgeting.
Involves estimating the revenues and costs attributable to each product from initial research and
development to its final customer and support.

Management by exception.
Focuses attention on material deviations from plans (e.g., variances in a performance report) while
allowing areas operating as expected to continue to operate without interference.

Master budget.
A comprehensive expression of management’s operating and financial plans for a future period is
summarized as budgeted financial statements. It consists of the operating and financial budgets.

Mixed costs (semivariable).

Costs that have a fixed component and a variable component. These components are separated using
scattergraph, high-low, or linear regression methods.

Multiple regression.
A model estimates the relationship between a dependent variable and two or more independent
variables. It may be used to develop sales forecasts.

Operating budget.
The budgeted income statement and related schedules.

Opportunity cost.
The maximum income or savings (benefit) is forgone by rejecting an alternative.

Outlay (out-of-pocket) costs.

The cash disbursement is associated with a specific project.

Planning.
Involves selecting goals and choosing methods to attain those goals. Control is the implementation of
the plans and evaluation of their effectiveness in attaining goals.

PROF. JOHN JOHNELL J. DELA CRUZ, CPA, MBA

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ALL RIGHTS RESERVED.2023
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Relevant costs.
Future costs will change as a result of a specific decision.

Relevant range.
The operating range of activity in which cost behavior patterns are valid. Thus, it is the product range
for which fixed costs remain constant (e.g., if production doubles, an additional shift of salaried
foremen would be added, and fixed costs would increase).

Responsibility accounting.
Measures subunit performance based on the costs or revenues assigned to responsibility centers.

Standard costs.
Predetermined target costs.

Sunk, past, or unavoidable costs.

Committed costs are not avoidable and are therefore irrelevant to the decision process.

Tactical profit plan.

A defined short-term financial plan that includes assigned responsibilities at all levels.

Target costing.
Identifies the estimated cost of a new product that must be achieved for that product to be priced
competitively and still produce an acceptable profit. The product is often redesigned, and the production
process is simplified several times before the target cost can be met.

Transfer pricing.
The determination of the price at which goods and services will be “sold” to profit or investment centers
via internal company transfers.

Variable costs.
Costs vary proportionately with the activity level throughout the relevant range (e.g., direct materials).

Variances.
Differences between standards and actual results.

Zero-based budgeting.
Involves developing budgets from the ground up by requiring each program or department to justify its
level of funding.

PROF. JOHN JOHNELL J. DELA CRUZ, CPA, MBA

ALL RIGHTS RESERVED.2023