MS NOTES

INTRODUCTION
TO MS Determine SP
Introduce new
product
Management
Services (MS)
Management

Accounting (MA)

Financial

Management

Provide useful
Relevant
information
Managers → decision
making
Improve process
Open a new
branch Minimize
cost

SUMMARY NOTES - MAS [Link], CPA

 Characteristics of Management Accounting Vs. Financial Accounting (FA)
(MA)
1. User 🡪 Managers (internal users) 1. External users
2. No accounting standards (only as 2. PFRS 🡪 FS
needed) (quarterly/annually)
3. Relates to the future 3. Past transactions

Line – directly involved in revenue-generating activities

Staff – supports the line position (IT dept, payroll, legal)

Organizational Structure
Stockholder

BO

CEO

(M g) VP - Line
P- ar VP/CFO - Line (Operations) Managers
Li ke (Finance) VP - Staff (HR)
ne tin

Treasurer Controller Internal Audit

SUMMARY NOTES - MAS [Link], CPA

 COST CONCEPTS

Cost 🡪 SP 🡪 Demand 🡪 Net Income 🡪 Stock

Price
factory ↑ ↑ ↑
office
Ex: Calculator (cost object)

CLASSIFICATION 1. Type
Product – incurred to manufacture a DM DL
product OH 🡪 rent, utilities, taxes, depreciation, insurance
- ex. of factory
Manufacturing/inventoriable BS: Inventory 🡪 I/S: COGS
cost
Period – non-manufacturing cost Selling 🡪 sales commission, advertisement, delivery
- Operating Expenses Admin 🡪 salaries to officers, R&D, BDE, depreciation
(OFFICE) Expensed as incurred 🡪 I/S
a
2. Traceability n
g
Direct 🡪 DM, DL Indirect 🡪 Assumption: valid
Total e
OH Per within the relevant
Unit r

3. Behavior Fixed Cost Constant VC )

Variable Cost FC
Direct Total
Constant
Cost
(Mixed
Inverse

COST SEGREGATION TECHNIQUES

Cost Function (linear equation)
1. High-Low Method 🡪 basis is cost drivers not Slope (VC/u)
cost

=
∆𝑌 𝑌𝐻− 𝑌𝐿 Units
∆𝑋 𝑋𝐻− 𝑋𝐿
VC/u = b=
3. Least Squares / Regression Fixed Cost/
2. Scattergraph 🡪 🡪 most accurate Y-intercept
FORMULA (COGS)

b. Σ𝑦 = 𝑛𝑎 + 𝑏Σ𝑥
a. Y = a + bx DMCost
Total used DL
plots data
c. Σx𝑦 = 𝑎Σ𝑥 + 𝑏Σ𝑥2
OH TMC
WIP, beg
Independent variableFG, beg
(units
points TC (WIP, end) (FG, end)
Y = a + bx sold)
COGM

COGS
Correlation Analysis

● Used to measure the strength of linear relationship between two or more variables.
● The correlation between two variables can be seen by drawing a scatter diagram:
✔ If the points seem to form a straight line, there is a high correlation.
✔ If the points form a random pattern, there is a low correlation or no correlation at all.

GOODNESS OF FIT 🡪 accuracy/reliability of cost function

1. Coefficient of Correlation (r) – measures the degree of relationship between two variables
-1 negative correlation
0 no correlation
+1 positive correlation

2. Coefficient of Determination (𝒓𝟐) – strength of

0
The closer to one, the better 1
the cost function

SUMMARY NOTES - MAS [Link], CPA

 CVP ANALYSIS
⮡ study of the effects of changes in costs and volume on a company’s profits
⮡ important in profit planning
⮡ considers interrelationships among:
✔ Volume or level of activity
✔ Unit selling prices
✔ Variable cost per unit
✔ Total fixed costs
✔ Sales mix

Contribution Margin (I/S) 🡪 focuses on the behavior of cost

Sales xx x
- Variable Cost (xx) Contribution Margin e
xx d
- Fixed Cost (xx)
Profit / NI / OI xx O
H
Manufact
uring F
Cost i
(DM, DL, x
VOH) e
Variable d
S&A
S
F
&
i
A

Formulas: 𝐹𝐶 If Multiple products A

𝐶𝑀/𝑢
Units =
↓
1. Break-even point (BEP) 𝐹𝐶
→ Sales mix
↑
𝐶𝑀𝑅
🡪 Sales = TC (VC + FC) Pesos = → Composite BEP
→ WACM
𝐶𝑀
🡪 Profits = 0 -
🡪 CM = FC
🡪 BEP = VC + FC 𝑆𝑎𝑙𝑒𝑠

2. Target/Desired Profits (TP)

𝑈𝑛𝑖𝑡𝑠 = 𝐹𝐶 +
𝑃𝑟𝑜𝑓𝑖𝑡
TP 𝐶𝑀/𝑢
Before tax

𝐹𝐶 + 𝑃𝑒𝑠𝑜𝑠 =
𝐶𝑀𝑅

🡪 the lower the better

sales can decrease
3. Margin of Safety before incurring a
loss The higher, the
Extent to which
better

Units
MOS
𝑆𝑎𝑙𝑒𝑠
=

𝑈𝑛𝑖𝑡𝑠
(actua
l/plan
ned) –
BEP in
units
Pesos

𝑆𝑎𝑙𝑒𝑠
=

𝑃𝑒𝑠𝑜𝑠 –
BEP in
pesos

SUMMARY NOTES - MAS [Link], CPA

 𝑀𝑂𝑆 𝑆𝑎𝑙𝑒𝑠
Ratio =

𝐶𝑀
𝑃𝑟𝑜𝑓𝑖𝑡
4. Degree of Operating Leverage (DOL) =
→ % ∆ in Sales → effects in profit
1
𝑀𝑂𝑆
→ ∆ % sales x DOL = ∆ % profit before tax =

Example: DOL= 5
↑ 10% Sales x 5 → ↑50% Profit

5. Sensitivity Analysis
🡪 “what if” technique that examines the impact of changes on any variables.
🡪 ∆ in SP, VC, FC → effect on profit

Assumptions:
● The behavior of both costs and revenues is linear throughout the relevant range of the activity index.
● Costs can be classified accurately as either variable or fixed.
● Changes in activity are the only factors that affect costs.
● All units produced are sold.
● When more than one type of product is sold, the sales mix will remain constant (the percentage
that each product represents of total sales will stay the same).

SUMMARY NOTES - MAS [Link], CPA

 ABSORPTION VS. VARIABLE COSTING
Income Statement:
Absorption Costing (AC) DM Variable Costing (VC)
Sales DL
Sales DM DL
V - COGS
- COGS (product) GP OH  V
OH GP
-OPEX (period) Profit F FOH
V -OPEX V
S&A F S&A
Profit F

Absorption costing → normal accounting

⮡ accepted for external reporting
⮡ compliance with GAAP/PFRS
⮡ includes all manufacturing costs (direct materials, direct labor and both variable and fixed
overhead) in the cost of a unit of product.
⮡ Treats fixed manufacturing overhead as a product cost.
⮡ Also called Full Costing and Conventional Costing.

Variable Costing → use only internally, for management purposes

⮡ Costing method that includes only variable manufacturing costs (direct materials, direct
labor, and variable manufacturing overhead) in the cost of a unit of product.
⮡ Treats fixed manufacturing overhead as a period cost.
⮡ Also called Direct Costing.

Product costs
⮡ are costs that are a necessary and integral part of producing the finished product.
⮡ do not become expenses until the company sells the finished goods inventory.

Period Cost
⮡ costs that are matched with the revenue of a specific time period rather than included as part
of the cost of a salable product.
⮡ include selling and administrative expenses and companies deduct them from revenues in the period in
which
they are incurred.

Note:

✔ Selling and administrative expenses are period costs under both absorption and variable costing.
✔ Companies use the cost-volume-profit format in preparing a variable costing income statement.

)
Fixed OH →
C
O
Summary:
G
A S
C (I/
= S)
Pr V
o C
d =
uc P
t er
C io
os d
t C
→ os
In t
v
e O
nt P
or E
y X
(B (I/
/S S)

SUMMARY NOTES - MAS [Link], CPA

 In short:

P > S = AC NI >
Produced 10,000 VC NI P < S = AC
NI < VC NI P = S
AC = AC NI = VC NI
VC
P = S (10,000
sold)
Reconciliation
I
VC NI B
± (∆ in inventory x FOH/unit AC NI ADD : ↑ in inventory P
DEDUCT : ↓ in inventory

→ whenever there’s sales, increase in income is equal to contribution margin

SUMMARY NOTES - MAS [Link], CPA

 Potential Advantages of Variable Costing

● Variable costing has several potential advantages relative to absorption costing:

o Net income computed under variable costing is unaffected by changes in production levels.

o The use of variable costing is consistent with cost-volume-profit analysis and incremental
analysis.

o Net income computed under variable costing is closely tied to changes in sales and provides
a more realistic assessment of the company’s success or failure.

o The presentation of fixed and variable cost components on the variable costing income
statement makes it easier to identify these costs and understand their effect on the
company’s results

SUMMARY NOTES - MAS [Link], CPA

 STANDARD COSTING AND VARIANCE ANALYSIS
Comparison between actual
Ideal, benchmark, measure of
and standard
performance
Uses:

Standard Cost best estimate of the management 1. Evaluate performance of

Should be cost Planned unit cost of the product management
2. Simplify costing
1

The Need for Standards

o A standard is a measure of acceptable performance established by management as a guide in making

decisions.
o A standard is a benchmark or “norm” for measuring performance. In managerial accounting,
standards relate to the cost and quantity of inputs used in manufacturing goods or providing
services.
o A standard cost is a determined unit cost which is used as a measure of performance.
o A standard is the budgeted cost per unit of product.
o Both standards and budgets are predetermined costs, and both contribute to management planning
and control.
▪ A standard is a unit amount.
▪ A budget is a total amount.

Advantages of Standard Cost

✔ They facilitate management planning.

✔ They promote greater economy by making employees more “cost-conscious”.
✔ They are useful in setting selling prices.
✔ They contribute to management control by providing a basis for evaluation of cost control.
✔ They are useful in highlighting variances in management by exception.
✔ They simplify costing of inventories and reduce clerical costs.’

Two levels of Standard

o Ideal standards - represent optimum levels of performance under perfect operating conditions.
o Normal standards - represent efficient levels of performance that are attainable under expected
operating conditions.

Direct Materials (DM) Variance

AP x AQ SP x AQ P
Materials Price Variance (MPV) o
i
n
t

o
f

P
u
r
c
h
a
s
e

(
i
f

SUMMARY NOTES - MAS [Link], CPA

 o o
s i d
i n u
l t c
e t
n o i
t f o
) n
P
P r
SP x SQ Materials Usage/Quantity Variance (MUV) → ALWAYS
Point of Production

Materials Price Variance JEs:

o Key Points RMI (AQ Purchase x SP) xx
✔ Actual > Standard = unfavorable MPV – unfavorable xx
✔ Actual < Standard = favorable MPV – favorable x
AP (AQ Purchase x AP) x
o Accountability
✔ The purchasing agent is generally responsible for the price variance because he has the
control over the price paid for the acquisition of the materials.

Materials Quantity Variance JEs:

o Key Points WIP Inventory (SQ x SP) x
✔ Actual > Standard = unfavorable MQV – unfavorable x
✔ Actual < Standard = favorable MQV – x
favorable AP x
o Accountability (AQ used x SP)
✔ The production manager is generally responsible for the quantity variance because he
has the control over the use of the materials

SUMMARY NOTES - MAS [Link], CPA

 Direct Labor (DL) Variance

AR x AH SR x AH SR x SH
L
a
b
o
r

R
a
t
e

V
a
r
i
a
n
c
e

(
L
R
V
)

L
a
b
o
r

E
f
f
i
c
i
e
n
c
y

V
a
r

SUMMARY NOTES - MAS [Link], CPA

 i (
a L
n R
c V
e )

Labor Rate Variance

o Key Points
✔ Actual > Standard = unfavorable
✔ Actual < Standard = favorable

o Accountability
✔ The production manager is generally responsible for the labor rate variance
because he has the responsibility for seeing that labor price/rate variance are kept
under control.

Labor Efficiency Variance

o Key Points
✔ Actual > Standard = unfavorable
✔ Actual < Standard = favorable

o Accountability
✔ The production manager is generally responsible for the labor efficiency variance since he
has the control over the staffs which are directly involved in the production.

Overhead (OH) Variance (short-cut)

Variable Spending
Fixed Spending

Variable
Spendin
Controllable Uncontrollable
Fixed Total
g
Actual Efficienc
y
Volume

- There’s no such thing as Fixed Efficiency Variance

- Fixed cost is uncontrollable

MIX AND YIELD

→ Two types of Materials and Labor

→ Only applicable to DM and DL

DM:
AP x AQ x AM SP x AQ x AM SP x SQ x SM
Materials Mix Variance
Total Materials Price Variance
SP x AQ x SM SP x SQ x SM
DL: Materials Yield Variance
= Materials Usage

AR x AH x AM SR x AH x AM Labor Yield Variance

SR x SH x SM Labor Rate Variance Labor Mix

SR x AH x AM SR x SH x SM Variance

SUMMARY NOTES - MAS [Link], CPA

 = Labor Efficiency Variance

SUMMARY NOTES - MAS [Link], CPA

 Factory Overhead (FOH) Variance

1. Two-way Analysis
a. Controllable Variance
⮡ responsibility of the production department managers to the extent that they can
exercise control over the costs to which the variances relate.

Actual FOH xx
BASH (xx)
Controllable Variance xx

b. Volume Variance
⮡ responsibility of the executive and departmental management.

BASH xx
Standard FOH (xx)
Volume Variance xx

→ Key Points
o Actual FOH > Budgeted FOH = unfavorable controllable variance
o Budgeted FOH > Standard FOH = unfavorable volume variance

Applied FOH xx
Controllable Variance – unfavorable xx
Volume Variance – unfavorable xx
Controllable Variance – xx
favorable
Volume Variance – favorable xx
Factory Overhead Control xx

2. Three-way Analysis
a. Spending Variance

Actual Factory Overhead xx

BAAH:
Fixed as budgeted xx
Variable (AH x SR) xx (
Spending Variance x
x
)
x
x
b. Efficiency Variance

BAAH:
Fixed as budgeted xx
Variable (AH x SR) xx xx
BASH:
Fixed as budgeted xx
Variable (SH x SR) xx (
Efficiency Variance x
x
)
x
x
c. Volume Variance

BASH:
Fixed as budgeted xx
Variable (SH x SR) xx x
Standard Factory x
Overhead (
Volume Variance x
x

SUMMARY NOTES - MAS [Link], CPA

 )
x
x

SUMMARY NOTES - MAS [Link], CPA

 3. Four-way Analysis
a. Variable Spending Variance

Actual Variable FOH xx JEs:

BAAH: Variable (AH x SR)
Factory Overhead x
(xx) Variable Spending Variance xx Control x x
x
WIP (std. costs) xx
b. Fixed Spending Variance
Applied FOH x
x
Actual Fixed FOH xx
BAAH: BFC (xx)
Fixed Spending Variance xx

c. Efficiency Variance

BASH:

Fixed as budgeted xx
BASH: Variable (AH x SR) xx xx

Fixed as budgeted xx
Variable (SH x SR) xx (xx)
Efficiency Variance xx

d. Volume Variance

BASH:
Fixed as budgeted xx
Variable (SH x SR) xx xx
Standard FOH (xx)
Volume Variance xx

Reporting Variances

o All variances should be reported to appropriate levels of management as soon as possible.

o Variance reports facilitate the principle of “management by exception” by highlighting significant
differences.
o Top management normally looks for significant variances. These may be judged on the basis of
some quantitative measure, such as more than 10% of the standard or more than P1,000.

Statement Presentation of Variances

o In income statements prepared for management under a standard cost accounting system, cost of
goods sold is stated at standard cost and the variances are disclosed separately.

o When there are no significant differences between actual costs and standard costs, companies report
their inventories at standard costs.

o If there are significant differences between actual and standard costs, the financial statements must
report inventories and cost of goods sold at actual costs.

SUMMARY NOTES - MAS [Link], CPA

 BUDGETING
goals targets
→ Planning tool used by in order to achieve the objectives
performance reviews
management to set of the organization

→ Spearheaded by the Budget Committee

⮡ overall responsible for budget preparation
⮡ composed of the President, Treasurer, Controller and Managers of
different departments
⮡ head by the Budget Director

→ A budget is a formal written statement of management’s plans for a specified time period, expressed
in financial terms.
→ The role of accounting during the budgeting process is to:
▪ Provide historical data on revenues, costs, and expenses.
▪ Express management’s plans in financial terms.
▪ Prepare periodic budget reports.
Short-term → 1 year
Types of Budgets Long-term → >1 year (Capital Budgeting)

Benefits of Budgeting

✔ Requires all levels of management to plan ahead.

✔ Provides definite objectives for evaluating performance.
✔ Creates an early warning system for potential problems.
✔ Facilitates coordination of activities within the entity’s overall operations.
✔ Results in greater management awareness of the entity’s overall operations.
✔ Motivates personnel throughout the organization.

Essentials of Effective Budgeting

o In order to be effective management tools, budgets must be based upon:

▪ A sound organizational structure in which authority and responsibility are clearly defined.
▪ Research and analysis to determine the feasibility of new products, services, and operating
techniques.
▪ Management acceptance which is enhanced when all levels of management participate in
the preparation of the budget, and the budget has the support of top management.

o A continuous twelve-month budget results from dropping the month just ended and adding a future
month.

o Zero-based budgeting is a budget and planning process in which each manager must justify a
department’s entire budget from a base of zero every period.

o Life-cycle budget estimates a product’s revenues and expenses over its entire life cycle beginning
with research and development, proceeding through the introduction and growth stages, into the
maturity stage, and finally, into the harvest or decline stage.

o Kaizen budgeting assumes the continuous improvement of products and processes, usually by way
of many small innovations rather than major changes.

o The responsibility for coordinating the preparation of the budget is assigned to a budget committee.
The budget committee usually includes the president, treasurer, chief accountant (controller), and
management personnel from each major area of the company.

o Long-range planning involves the selection of strategies to achieve long-term goals and the
development of policies and plans to implement the strategies. Long-range plans contain
considerably less detail than budgets.

SUMMARY NOTES - MAS [Link], CPA

 budget → Budgeted I/S
→ production and sale
Master Budget
Operating → Sales, DM, DL, OH, COGS, S&A
FS
⮡ end goal of budgeting 2. Follow instructions excess financing
⮡ set of interrelated Financial End Bal. End bal.
budgets → cash
⮡ constitutes a plan of Budgeted SCF,
action for a specified Beg. Bal B/S
time period + Receipts
- Disbursements
- Minimum cash
Techniques: balance
+ - Bank loans
1. T-accounts
Shares

Sales Budget: the starting point in preparing the master budget.

Budgeted Income Statement: the important end product of the operating budgets.
⮡ This budget indicates the expected profitability of operations for the budget period.
⮡ The budgeted income statement provides the basis for evaluating company performance.

Cash Budget: shows anticipated cash flows.

⮡ Because cash is so vital, this budget is often considered to be the most important financial budget.
⮡ The cash budget contains three sections, (a) Cash receipts, (b) Cash disbursements and (c) Financing.

The Flexible Budget

⮡ A flexible budget projects budget data for various levels of activity. In essence, the flexible budget
is a series of static budgets at different levels of activity.

⮡ Flexible budget reports are appropriate for evaluating performance since both actual and budgeted
costs are based on the actual activity level achieved.

Management by Exception
⮡ Management by exception means that top management’s review of a budget report is focused
either entirely or primarily on differences between actual results and planned objectives.

⮡ For management by exception to be effective, there must be guidelines for identifying an exception.
The usual
criteria are:
o Materiality—usually expressed as a percentage difference from budget.

o Controllability of the item—exception guidelines are more restrictive for controllable items
than for items the manager cannot control.

SUMMARY NOTES - MAS [Link], CPA

 INCREMENTAL ANALYSIS / RELEVANT COSTING
⮡ method of choosing the best option among alternatives

Future General Rule:

Relevant Cost
Incremental/Differential - All variable cost are relevant.
⮡ cost must differ among (DM, DL, VOH, VS&A)
alternatives - FC are relevant if avoidable,
otherwise, irrelevant

Types:
1. Make or Buy
⮡ Choose the option that has the lower cost.
⮡ In most cases, fixed costs are irrelevant.
⮡ Consider opportunity costs, if any.
⮡ Opportunity costs: The potential benefit that may be obtained by following an
alternative course of action.
Rule
2. Accept or Reject Special Order w/o excess capacity → General Rule + Opportunity
w/ excess capacity → for relevant cost, apply General Cost (lost CM)

⮡ Accept the order when the additional revenue from the special order exceeds additional cost
⮡ Provided the regular market will not be affected.
⮡ In most cases, fixed are irrelevant
⮡ The relevant information is the difference between the variable manufacturing costs
to produce the special order and expected revenues.
⮡ If the company is operating at full capacity, it is likely that the special order would be rejected.

3. Retain or replace equipment

⮡ Relevant items to be considered:
● The effects on variable costs
● The cost of the new equipment
⮡ Any disposal value of the existing asset must also be considered
⮡ Book value of old asset is irrelevant → Sunk Cost

4. Retain or Eliminate unprofitable segment/product

⮡ Continue if segment’s avoidable revenue is greater than the avoidable costs;
⮡ Otherwise consider shutting down the segment since allocated fixed cost is usually
unavoidable, it is considered irrelevant.
⮡ Sales
- VC
- FC (avoidable)
Segment Margin - eliminate
+ retain

5. Sell immediately or Process Further

⮡ Process further if additional revenue from processing further is greater than further processing
costs.
Split-off point

Joint Cost A
Common; C Sunk Cost
(DM, DL, OH) B Further processing cost (FPC)

Rule: Process further of incremental revenue > incremental cost

↑ in SP (FPC)

6. Which products to produce given scarce resources?

→ ranking of products
→ basis: CM per scarce resource
⮡ limited

SUMMARY NOTES - MAS [Link], CPA

 RESPONSIBILITY ACCOUNTING
⮡ involves accumulating and reporting costs (and revenues) on the basis of the manager who has
the authority to make the day-to-day decisions about the items.
Objective: proper evaluation of responsibility centers → Divisions, departments, branches, segments
→ Headed by managers (controllability)

A cost over which a manager has control is called a controllable cost. It follows that:

▪ All costs are controllable by top management because of the broad range of its activity.
▪ Fewer costs are controllable as one moves down to each lower level of managerial responsibility
because of the manager’s decreasing authority.

Decentralization

o Refers to the separation or division of the organization into more manageable units wherein each
unit is managed by an individual who is given decision authority and is held accountable for his or
her decisions.

o Goal congruence occurs when units of organization have incentives to perform for a common
interest. The purpose of a responsibility system is to motivate management performance that
adheres to company overall objectives.

o Sub-Optimization occurs when one segment of a company takes action that is in its own best
interests but is detrimental to the firm as a whole.

Types of Responsibility Centers:

1. Cost Center → Maintenance, IT, HR, Payroll, → Variance Analysis
⮡ cost Production (actual vs.
standard)
2. Revenue Center → Sales Department, Marketing → Variance Analysis
⮡ revenue Department (actual revenue vs. target
revenue)
3. Profit Center → SM Department Store, supermarket, → Sales
⮡ revenue cinema -
⮡ cost V
C

4. Investment → Head office of SM C

Center M
⮡ revenue - Controllable FC
⮡ cost Controllable Profit
⮡ investment
Margin
IBIT

𝐸𝐵
2
1. Return on Investment (ROI)
= 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝐼𝑛𝑐𝑜𝑚𝑒 𝐴𝑣𝑒.𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔
𝐴𝑠𝑠𝑒𝑡

𝐵𝐵 +
Invested asset/capital
at BV

Performance
2. Residual Income (RI) = Operating Income – (Ave. Operating Asset x
Measure ui
⮡ the higher, the better r
e
Minim
d
um
/
Rate
a
of
c
Retur
c
n)
e
⮡ p
R t
e a
q

SUMMARY NOTES - MAS [Link], CPA

 bl n
e
r
e
t 3. Economic Value Added (EVA) = Op Inc after
u Tax – (Ave. Op Asset x WACC)
r
⮡ re ⮡ at MV
foc on ⮡ TA - CL
us LT ⮡ Required / acceptable return
is cap
mo ital

⮚ Return on Investment → most common measure of performance for investment centers

⮚ Operating income refers to earnings before interest and taxes. Operating assets includes all assets
acquired to generate operating income.
⮚ Residual Income – difference between operating income and the minimum peso return required on
a company’s operating assets.

SUMMARY NOTES - MAS [Link], CPA

 ⮚ Economic Value Added – more specific version of residual income that measures the investment
center’s real economic gains.
⮡ It uses the weighted average cost of capital (WACC) to compute the required income.

ROI is patterned after the DuPont technique to compute Return on Assets:

Return on Assets = Return on Sales x Asset Turnover

𝑁𝐼
𝑁𝐼 𝑆𝑎𝑙𝑒𝑠
𝐴𝑠𝑠𝑒𝑡𝑠 𝑆𝑎𝑙𝑒𝑠 𝐴𝑠𝑠𝑒𝑡𝑠
= x

Principles of Performance Evaluation

o The human factor is critical in evaluating performance.

o Behavioral principles include:
▪ Managers of responsibility centers should have direct input into the process of establishing
budget goals of their area of responsibility.

▪ The evaluation of performance should be based entirely on matters that are controllable
by the manager being evaluated.

▪ Top management should support the evaluation process

▪ The evaluation process must allow managers to respond to their evaluations.

▪ The evaluation should identify both good and poor performance.

o Performance evaluation under responsibility accounting should be based on certain reporting

principles.

o Performance reports should:

▪ Contain only data that are controllable by the manager of the responsibility center.

▪ Provide accurate and reliable budget data to measure performance.

▪ Highlight significant differences between actual results and budget goals.

▪ Be tailor-made for the intended evaluation.

▪ Be prepared at reasonable intervals.

Service Allocation Method

1. Direct Method: Service Department → Production Department

2. Step Method: Service Department & Production Department
3. Reciprocal/Algebraic Method: Considers the reciprocal services among the Service Department

Balance Scorecard
- financial & non-financial
- more holistic; basis for future performance of managers

1. Financial → ROI, RI, EVA → Internal → Monetary

2. Customer → Pricing, quality, customer service → Externa

l
3. Internal → Production, bottlenecks, breakdowns, → Internal
Process → delivery Customer focus Non-
monetary
4. Learning & → Development of employees, trainings, → Internal
Growth compensated, monetized sick leave
→ Employee focus

SUMMARY NOTES - MAS [Link], CPA

 TRANSFER PRICING SP 100
Objectives of Transfer VC (40)
Transfer Price → price Pricing: CM 60
charged by one division
Capacity: 10,000 units Supplier 2,000 units
to another ● To facilitate
₱120/units
optimal decision- ABC Company
Objective: to set transfer making.
price to achieve goal ● To provide a Selling Buying
congruence basis in
End Goal: to maximize measuring
the NI of the whole divisional
company performance.

Customer
● To motivate the different department heads in improving their performance and that of their
departments.

w/ excess capacity →
Rules Minimum Transfer
variable cost
Price w/o excess capacity → VC +
Maximum Transfer Price → Market Price
CM (opportunity cost)

Maximum vs. Minimum Transfer Prices

To minimize the effect of sub-optimization, a range for transfer price must be set based on the following limits:

● Maximum transfer price: Cost of buying from outside suppliers

● Minimum transfer price: Variable cost per unit + Lost Contribution Margin per unit on outside sales
o When a company segment is operating at full capacity, the lost CM per unit on
outside sales is the opportunity cost of transferring products to another company
segment.

Other Types of Transfer Pricing

1. Cost plus (cost + markup)
⮡ may be based on full cost, variable cost, or some modification including a markup.
⮡ often leads to poor performance evaluations and purchasing decisions
⮡ Under this approach, divisions sometimes use improper transfer prices which leads
to a loss of profitability and unfair evaluations of division performance.
⮡ does not provide the selling division with proper incentive.
⮡ does not reflect the selling division’s true profitability and doesn’t even provide adequate
incentive for the selling division to control costs since the division’s costs are passed on to
the buying division.

2. Variable Cost (DM, DL, VOH, VS&A)

⮡ uses all of the variable costs, including selling and administrative costs, as the cost base
and provides for fixed costs and target ROI through the markup
⮡ is more useful for making short-run decisions because it considers variable cost and fixed cost
behavior
patterns separately.
⮡ more consistent with cost-volume-profit analysis used to measure the profit implications
of changes in price and volume.
⮡ provides the type of data managers need for pricing special orders
⮡ avoids arbitrary allocation of common fixed costs to individual product lines.

3. Full production cost (DM, DL, OH)

⮡ uses total manufacturing cost as the cost base and provides for selling/administrative
costs plus the target ROI through the markup.

4. Negotiated Price
⮡ selling division, establishes, a minimum transfer price and the purchasing division
establishes a maximum transfer price.
⮡ Companies often do not use negotiated transfer pricing because:
● Market price information is sometimes not easily obtainable.
● A lack of trust between the two negotiating divisions may lead to a breakdown in
negotiations.
●Negotiations often lead to different pricing strategies from division to division which
is sometimes costly to implement.

SUMMARY NOTES - MAS [Link], CPA

 5. Market-based Price
⮡ based on existing market prices of competing goods
⮡ often considered the best approach because it is objective and generally provides the
proper economic incentives.

SUMMARY NOTES - MAS [Link], CPA

 CAPITAL BUDGETING

→ Involves long-term investment decision

→ involves choosing among various projects to find the one(s) that will maximize a company’s return on its
financial investment.
→ Top management/BOD are involved → accept/reject

The capital budgeting decision, under any technique, depends in part on a variety of considerations:

✔ The availability of funds.

✔ Relationships among proposed projects.
✔ The company’s basic decision-making approach.
✔ The risk associated with a particular project.

Techniques

Non-discounting

Discounting
Payback Period
Accounting Rate of
Return

Net Present Value (NPV)

Profitability Index (PI)
Internal Rate of Return
(IRR)

Do not consider time

value of money

Considers time value of

money

SUMMARY NOTES - MAS [Link], CPA

 Non-Discounting

1. Payback Period
→ Time it takes to recover the initial
investment (years)
→ The shorter the payback period, the 0 1 2 3 4 5 6 7
more attractive the investment.
→ Advantage: Easy to compute and
understand
→ Disadvantages: Even (10M) 2M 2M 2M 2M 2M 2M 2M
1. Ignores Time Value of Money Uneven (10M) 2M 3M 5M 4M 2M 1M 6M
(TVM)
2. Ignores performance beyond
the payback period

𝑰𝒏𝒊𝒕𝒊𝒂𝒍 𝑰𝒏𝒗𝒆𝒔𝒕𝒎𝒆𝒏𝒕
Formula:

𝑷𝑩𝑷 =
𝑵𝒆𝒕 𝑪𝒂𝒔𝒉 𝑰𝒏𝒇𝒍𝒐𝒘

2. Accounting Rate of Return (ARR) / ROI

→ Measures the profitability of project based on income
→ Advantages:
1. Simplicity of calculation
2. Management’s familiarity with the accounting terms used in the computation.
→ Disadvantage: Does not consider TVM
Formula:
𝑨𝑹𝑹 = 𝑨𝒏𝒏𝒖𝒂𝒍 𝑰𝒏𝒄𝒐𝒎𝒆
𝑰𝒏𝒗𝒆𝒔𝒕𝒎𝒆𝒏𝒕 𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡+𝑆𝑎𝑙𝑣𝑎𝑔𝑒 𝑉𝑎𝑙𝑢𝑒
w/ salvage value → average →
2

w/o salvage value → Initial

Investment (simple)

→ The required rate of return is generally based on the company’s cost of capital.
→ Decision Rule: Acceptable if rate of return > management’s required rate of return.
→ The higher the rate of return for a given risk, the more attractive the investment.

SUMMARY NOTES - MAS [Link], CPA

 Discounting

→ Uses discounted CF
PV → considers TVM

1. Net Present Value (NPV)

→ The higher the positive net present value, the more attractive the investment.
Formula: 0 1 2 3 4 5
PVCI → PV of Cash Inflow Cashflow (1M) 300k 300k 300k 300k 200k
-PVCO → PV of Cash
Outflow (initial Even (equal) → ordinary annuity or
investment) NPV annuity due
⮡ + accept
Uneven (unequal) → PV of 1
⮡ - reject

Discount Rate

→ Cost of capital — the rate that the company must pay to obtain funds from creditors and
stockholders.
→ Assumptions:
● All cash flows come at the end of each year.
● All cash flows are immediately reinvested in another project that has a similar return.
● All cash flows can be predicted with certainty.

In theory, all projects with positive NPVs should be accepted. However, companies rarely are able to adopt
all positive- NPV proposals because:
⮡ The proposals are mutually exclusive (if the company adopts one proposal, it would be impossible
to also adopt the other proposal).
⮡ Companies have limited resources.

2. Profitability Index (PI)

→ method that compares the relative merits of alternative capital investment projects.
→ Used in mutually exclusive project
⮡ Limited resource; only choose one project

𝑷𝑽𝑪𝑰
𝑷𝑽 𝒐𝒇 𝑭𝒖𝒕𝒖𝒓𝒆 𝑪𝑭
Formula:

𝑷𝑰 = 𝒐𝒓
𝑷𝑽𝑪𝑶 𝑰𝒏𝒊𝒕𝒊𝒂𝒍 𝑰𝒏𝒗𝒆𝒔𝒕𝒎𝒆𝒏𝒕𝒔
; the ↑, the better

3. Internal Rate of Return (IRR)

→ The interest rate that makes the PVCI = PVCO (NPV = 0)
→ Trial and error
→ Technique: start in the middle

rate Formula:

𝑁𝑒𝑡 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 𝐶𝑜𝑠𝑡

𝑁𝑒𝑡 𝐶𝑎𝑠ℎ 𝐼𝑛𝑓𝑙𝑜𝑤𝑠
PVF for IRR =

Decision guide: Inverse:

IRR > Cost of Capital → accept IRR < Cost of ↑ discount rate, ↓ NPV
Capital → reject ↓ discount rate, ↑ NPV

❖ If positive NPV; always TRUE that IRR > Cost of Capital

❖ ↑ risk, ↑ discount rate, ↓ NPV

Remember:
1. To convert NI to CF 2. Tax shield/savings
↑ Deduction, ↑ Taxable Income, ↓ Tax
Net Income
+ Depreciation Expense (100%) Cash
Depreciation Expense x Tax Rate = Tax Shield
Flows
⮡ Loss
⮡ Gain

SUMMARY NOTES - MAS [Link], CPA

 Intangible Benefits

● Intangible benefits, such as increased quality, improved safety, or enhanced employee loyalty,
are difficult to quantify, and thus often are ignored in capital budgeting decisions.

● To avoid rejecting projects that should actually be accepted, managers can either:
o Calculate the net present value (NPV) ignoring intangible benefits, and if the resulting
NPV is negative, evaluate whether the intangible benefits are worth at least the amount
of the negative NPV.

o Incorporate intangible benefits into the NPV calculation by projecting rough, conservative
estimates of their value. If, after using conservative estimates, the net present value is
positive, the project should be accepted.

Sensitivity Analysis
⮡ uses a number of outcome estimates to get a sense of the variability among potential returns.
⮡ In general, a higher risk project should be evaluated using a higher discount rate.

Post-Audit of Investment Projects

● A post-audit is a thorough evaluation of how well a project’s actual performance matches the
projections made when the project was proposed.

● Performing a post-audit is important for several reasons.

o Since managers know that their results will be evaluated, there is an incentive for them to
make accurate estimates rather than presenting overly optimistic estimates in an effort to get
projects approved.

o A post-audit provides a formal mechanism for determining whether existing projects should be
continued, expanded, or terminated.

o Post-audits improve future investment proposals because managers improve their estimation
techniques by evaluating past successes and failures.

● A post-audit involves the same evaluation techniques that were used in making the original capital
budgeting decision—for example, use of the net present value method. The difference is that, in the
post-audit, actual figures are inserted where known, and estimation of future amounts is revised
based on new information.

SUMMARY NOTES - MAS [Link], CPA

 COST OF CAPITAL

→ Discount rate, required return, minimum rate of return, hurdle rate

Capital
10%
8%
Projects
ABC Co.

Tax shield
Sources Cost Formula
1. Creditors (bank loans) Interest (cost of debt) Interest Rate x (1 – tax
rate)
PS → 𝐷
𝑃0
2. Shareholders (issue Dividends (cost of
shares) equity) OS*→

3 4 5
Income
Dividends RE 0 1 2 𝑃0 𝐷1

*→ (1) (2)

𝐷1 𝐷1
RE OS

+𝑔 +𝑔
1. Dividen

𝑃0 𝑃0
d Stock
Discoun issuance
t Model cost
(DDM)
(Gordo
n
Growth
Model)
⮡ (net of flotation costs)
⮡ (gross of flotation costs)

2. Capital Asset Pricing Model (CAPM) Market risk

● 𝑷𝟎 – current price
● 𝑫𝟏 – next dividend
premium

● G – growth rate in dividends per share ● RF – Risk Free Rate (Treasury

(it is assumed that the dividend payout Bond)
ratio, retention rate, and therefore the ● β - Beta (Volatility Risk)
EPS growth rate are constant) ● MR – Market Returns (average
returns of PSE)
same RF + β (MR – RF)

Weighted Average Cost of Capital (WACC)

→ More than one source of capital

→ Considers capital structure of the company

1. Debt
2. PS
3. RE
4. OS

SUMMARY NOTES - MAS [Link], CPA

 FINANCIAL STATEMENT ANALYSIS
→ Involves the evaluation of an entity’s past performance, present condition and business potentials
by way of analyzing the financial statements.

ABC Co.
Users FS Decision making

Comparative analysis may be made on a number of different bases.

● Intracompany basis—Compares an item or financial relationship within a company in the current

year with the same item or relationship in one or more prior years.

● Industry averages—Compares an item or financial relationship of a company with industry averages.

● Intercompany basis—Compares an item or financial relationship of one company with the

same item or relationship in one or more competing companies.
Tools:

𝑌2
−1
1. Horizontal 2025 2026

𝑌1
Analysis Sales 1M 1.4M
→ Also called
1.4𝑀
− 1 = 40%↑
trend analysis
→ Evaluate FS 1𝑀
items over a
period of time
→ Changes
as % ∆

2. Vertical (common size) Analysis obligations (banks)

→ Evaluate items w/n the FS as a c. Profitability – analyze performance of a
percentage of a base amount company
⮡ BS → Total Assets
⮡ IS → Sales
→ Used when comparing the Patterns:
companies (intercompany
analysis) 1. Return → NI (numerator)
2. Turnover → Sales (numerator)
3. Margin → Sales (denominator)
3. Ratio Analysis
2 years BS → Average → 𝐼𝑆
𝐵𝑆
→ Evaluate relationships among FS items

2025 2026
Characteristics: Sales 1M 2M
COGS (400K) 40% (1M) 50%
a. Liquidity – ability to pay short-term GP 600K 60% 1M 50%
obligations (suppliers) EXP (200K) 20% (600K) 30%
b. Solvency – ability to pay long-term NI 400K 40% 400K 20%

- Operating Cycle = Days in AR + Days in Inventory

- Cash Conversion Cycle = Operating Cycle – Days in AP

SUMMARY NOTES - MAS [Link], CPA

 FORMULAS
LIQUIDITY RATIOS

𝐶𝑢𝑟𝑟𝑒𝑛𝑡
→ Measure of adequacy of working capital.

𝐴𝑠𝑠𝑒𝑡𝑠
→ Primary test of liquidity to meet current
Current Ratio
obligations from current assets.
𝐶𝑢𝑟𝑟𝑒𝑛𝑡
𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
→ Measures the number of times that the
Quick Ratio 𝑄𝑢𝑖𝑐𝑘 𝐴𝑠𝑠𝑒𝑡𝑠 current liabilities could be paid with the

𝐶𝑢𝑟𝑟𝑒𝑛𝑡
(Acid Test Ratio) available cash and near-cash assets

𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
→ Ex. cash, current receivables and marketable
securities
𝑁𝑒𝑡 𝐶𝑟𝑒𝑑𝑖𝑡 → Measures the number of times receivables
𝑆𝑎𝑙𝑒𝑠
Receivables
are recorded and collected during the period.
𝐴𝑣𝑒𝑟𝑎𝑔𝑒
Turnover

𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠

360
Average Age of
Receivables → Indicates the average number of days during
𝐴𝑅𝑇𝑂
(Average Collection which the company must wait before
Period) (Days’ in receivables are collected.
Receivables)
𝐶𝑂𝐺𝑆 → Measures the number of times that the

𝐴𝑣𝑔. 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦
Inventory Turnover inventory is replaced during the period

360
Average Age of
→ Indicates the average number of days during
𝐼𝑇𝑂
Inventory*
(Inventory Conversion which the company must wait before the
Period) (Days’ in inventories are sold.
Inventory)
𝑁𝑒𝑡 𝐶𝑟𝑒𝑑𝑖𝑡 → Measures the speed with which a company
Accounts Payable 𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒𝑠 pays its suppliers.
𝐴𝑣𝑔. 𝑇𝑟𝑎𝑑𝑒
Turnover
𝑃𝑎𝑦𝑎𝑏𝑙𝑒𝑠
360
→ indicates the length of time during which
Average Age of Accounts
𝐴𝑃𝑇𝑂
Payable payables remain unpaid.

→ The time it takes a company to acquire

Average Age of
Normal Operating Cycle inventory, sell that inventory, and receive
Inventory +
cash from its customers in exchange for the
Average Age of
inventory sold.
Receivables
Average Age of
Inventory + → The time (measured in days) it takes for a
Cash Conversion Cycle Average Age of company to convert its investments in
Receivables inventory and other resources into cash flows
+ Average Age of from sales.
Accounts Payable

PROFITABILITY RATIOS
𝐼𝑛𝑐𝑜𝑚𝑒
→ Determines the portion of sales that went into
Return on Sales
𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠
(Net Profit company’s earnings.
Margin)
𝐼𝑛𝑐𝑜𝑚𝑒 → Efficiency with which assets are used operate

𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐴𝑠𝑠𝑒𝑡
Return on Assets the business.

𝐼𝑛𝑐𝑜𝑚𝑒 → Measures the amount earned on the owner’s

𝐴𝑣𝑒𝑟𝑎𝑔𝑒
Return on Equity or stockholders’ investment.

𝐸𝑞𝑢𝑖𝑡𝑦
𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔
→ Measures profit generated after
𝑃𝑟𝑜𝑓𝑖𝑡
Earnings Per Share consideration of operating costs.

𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠

SUMMARY NOTES - MAS [Link], CPA

 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝐶𝐹
→ Measures the ability of the firm to translate

𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠
Cash Flow Margin sales to cash.

𝑃𝑟𝑖𝑐𝑒 𝑝𝑒𝑟
→ It indicates the number of pesos required to
𝑠ℎ𝑎𝑟𝑒
Price-Earnings (PE) buy ₱1 of earnings.

𝐸𝑃𝑆
Ratio

𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑝𝑒𝑟 → Measures the rate of return in the investor’s

Dividend Yield 𝑠ℎ𝑎𝑟𝑒 common stock investments.

𝑃𝑟𝑖𝑐𝑒 𝑝𝑒𝑟
𝑠ℎ𝑎𝑟𝑒
𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑝𝑒𝑟
→ It indicates the proportion of earnings
𝑠ℎ𝑎𝑟𝑒
Dividend Pay-out Ratio distributed as dividends.

𝐸𝑃𝑆

SOLVENCY RATIOS
𝐸𝐵𝐼𝑇 → It determines the extent to which operations

𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡
Times Interest Earned (TIE) cover interest expense

𝐸𝑥𝑝𝑒𝑛𝑠𝑒
𝑇𝑜𝑡𝑎𝑙 → Proportion of assets provided by creditors
Debt-Equity Ratio 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 compared to that provided by owners.

𝑇𝑜𝑡𝑎𝑙 𝐸𝑞𝑢𝑖𝑡𝑦

𝑇𝑜𝑡𝑎𝑙
𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
→ Proportion of total assets provided by creditors
Debt Ratio

𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠

𝑇𝑜𝑡𝑎𝑙
𝐸𝑞𝑢𝑖𝑡𝑦
Equity Ratio → Proportion of total assets provided by owners.

𝑇𝑜𝑡𝑎𝑙
𝐴𝑠𝑠𝑒𝑡𝑠

SUMMARY NOTES - MAS [Link], CPA

 WORKING CAPITAL MANAGEMENT
⮡ The administration and control of current assets and current liabilities with the goal of maximizing
the value of the firm with appropriate balance between profitability and risk.

Working Capital → resources of the business used in everyday operations

→ Objective: To achieve balance between risk and return (income)
Matching → CL → CA; NCL → NCA
→ Policies Aggressive → ↓ WC; uses short-term liabilities to
Conservative → ↑ WC; financing almost all asset finance
investments with long-term capital.
Working Capital = Current Assets – Current Liabilities
(Cash, AR, Inventory) (AP, Short-term
Loans)

360
(
Operating Cycle = Days in AR + Days in Inventory
360
𝐴𝑅𝑇𝑂
(
𝐼𝑇𝑂
) )

Cash Conversion Cycle = Days in AR + Days in Inventory – Days in AP

(
360 360
( (
360
𝐴𝑅𝑇𝑂 𝐼𝑇𝑂 𝐴𝑃𝑇𝑂
) ) )

1. Cash Management cash

→ to maintain optimal level of cash requirement
→ Reasons for holding cash s to avoid
idle cash
to meet
[Link] motive - to facilitate normal transactions of the business.
[Link] motive - to provide for buffer against contingencies.
[Link] motive - to avail of business and investment opportunities.
[Link] motive - by provisions of a contract (e.g., compensating balance in a bank).

Where:
Baum Optimal Cash Balance (OCB) = ට 2 𝑥 𝐷 D = demand / annual cash
𝑥 𝑇𝐶 𝐶 requirements TC = transaction
𝐶
ol
Model cost
→ Total cost of cash balance = holding costs + transaction CC = carrying cost / opportunity
costs
o Holding Costs = average cash balance* x opportunity cost
o Transaction Costs = number of transactions** x cost per transaction
▪ Where:
● *Average cash balance = OCB ÷ 2
● **Number of transactions per year = annual cash requirement ÷ OCB
Positive → bank > book → OC (Buyer) → Maximize
→ Manage float (delay)
Negative → bank < book → DIT (Seller) → Minimize
1. Mail Float – check not yet received
2. Processing Float – received but not yet deposited
3. Clearing Float – deposited but not yet cleared

→ To prepare Cash Budget

Beg. Ba
+ Cash
1. Ca
2. M
+
exce
End Ba

SUMMARY NOTES - MAS [Link], CPA

 2. Inventory Management to meet customer
→ To maintain optimal level of inventory demands
minimize cost

How many units to order? EOQ Model

→ 2 issues to resolve:
When to order? Re-Order Point (ROP)

Where:
Order Quantity (EOQ) = ට
Economic 2𝑥𝐷𝑥
𝑇𝐶 𝐶
D = annual sales demand
𝐶 TC = ordering cost, shipping cost, setup
⮡ quantity to be ordered, which
cost
minimizes the sum of the ordering
and carrying costs Average
𝐸𝑂𝑄 2
Inventory =

Assumptions of the EOQ Model:

1. Demand occurs at a constant rate throughout the year.

2. Lead time on the receipt of the orders is constant.
3. The entire quantity ordered is received at one time.
4. The unit costs of the items ordered are constant; thus, there can be no quantity
discounts.
5. There are no limitations on the size of the inventory.

w/o safety stock (SS) → normal lead time

Re-Order Point
w/ safety stock (SS) → normal lead time + SS
Mon Wed Mon Wed Thu

3 days
3 days x 100 = 300 units
4 days x 100 = 400 units

❖ Lead time – period between the time the order is placed and received.
❖ Normal time usage = Normal lead time x Average usage.
❖ Safety stock = (Maximum lead time – Normal lead time) x Average usage

3. Accounts Receivable Management ↓ Bad Debts Aggressive (relaxed) 5/10, n/60 →

→ To use effective credit policy
↑Credit Sales, ↑ AR, ↑ Bad Debts
⮚ Credit terms (n/30)
⮚ Cash Discounts (2/10)
Credit period
Conservative (2/10, n/30) → ↓ Credit Sales, ↓ AR,
Disc period
0 1 3
0 0
2

→ pay existing loan

→ Ways to Accelerate collections →investment opportunity
⮚ Shorten credit terms.
⮚ Offer special discounts to customers who pay their accounts within a specified period.
⮚ Speed up the mailing time of payments form customers to the firm.
⮚ Minimize float, that is, reduce the time during which payments received by the firm
remain uncollected funds.

→ Factors considered in making Accounts Receivable Policies

[Link] Standard: the Five C’s of Credit:
✔ Character – customers’ willingness to pay.
✔ Capacity – customers’ ability to generate cash flows.
✔ Capital – customers’ financial sources.
✔ Conditions – current economic or business conditions.
✔ Collateral – customers’ assets pledged to secure debt.

SUMMARY NOTES - MAS [Link], CPA

 [Link] Terms
✔ Credit period and discount offered for customer’s prompt payment.
✔ Ex. cash discounts, credit analysis and collections costs, bad debt losses
and financing costs.

[Link] Program
✔ Shortening the average collection period may preclude too much investment
in receivable (low opportunity costs) and too much loss due to delinquency
and defaults.

4. Accounts Payable Management

→ Analysis of credit terms:
[Link] the cash discount – if cash discount is to be taken, a firm should pay on the
last day of the discount period.

[Link] up cash discount – if the firm has to give up the cash discount, it should pay
on the last day of the credit period.

→ Maximize the positive float

→ Delay payment

𝐷𝑖𝑠𝑐𝑜𝑢𝑛𝑡
Cost of Giving up Cash Discounts:

= 𝑥 3
100% − 𝐷𝑖𝑠𝑐𝑜𝑢𝑛𝑡 6
0
�
�
⮡ Credit period – discount period

❖ How to know if we have to forgo cash discounts?

✔ Compare % of cost of giving up cash discounts to % of other alternative using
the money for investment or payment of loans.
✔ Decision Guide: Greater benefit.

5. Short-Term Loans Management

𝐹𝑖𝑛𝑎𝑛𝑐𝑒 𝐶ℎ𝑎𝑟𝑔𝑒𝑠
→ Usual questions: What is the annual effective interest rate?

𝐸𝑓𝑓𝑒𝑐𝑡𝑖𝑣𝑒 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡
other fees -
𝑁𝑒𝑡 𝑃𝑟𝑜𝑐𝑒𝑒𝑑𝑠
𝑅𝑎𝑡𝑒 (𝐸𝐼𝑅) =
savings Usable
Interest amount
annual expense +

6. Bank Loans
o Single-payment notes – if the interest is payable upon maturity, the effective interest rate is
equal to the nominal rate.

o Discounted Note – the effective interest rate is higher than the nominal rate.

Effective interest rate = Interest Principal amount - Discounted interest

If the term is less than a year, the interest rate is annualized.

o Compensating Balance (CB) – an arrangement whereby a borrower is required to maintain

a certain percentage of amount borrowed as compensating balance in the current
account of the borrower.

o Cost of Bank Loans

⮚ Without compensating balance
𝐷𝑖𝑠𝑐𝑜𝑢𝑛𝑡 𝑅𝑎𝑡𝑒
100%−𝐷𝑖𝑠𝑐𝑜𝑢𝑛𝑡 𝑅𝑎𝑡𝑒 𝑥 360 𝑑𝑎𝑦𝑠
Cost =
𝐶𝑟𝑒𝑑𝑖𝑡 𝑃𝑒𝑟𝑖𝑜𝑑−𝐷𝑖𝑠𝑐𝑜𝑢𝑛𝑡 𝑃𝑒𝑟𝑖𝑜𝑑

SUMMARY NOTES - MAS [Link], CPA

 ⮚ With compensating balance
𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡
𝐹𝑎𝑐𝑒 𝑉𝑎𝑙𝑢𝑒−𝐶𝑜𝑚𝑝𝑒𝑛𝑠𝑎𝑡𝑖𝑛𝑔 𝐵𝑎𝑙𝑎𝑛𝑐𝑒
Cost =
or

𝑁𝑜
𝑚𝑖𝑛
𝑎𝑙
%
100
%
−𝐶
𝐵%

SUMMARY NOTES - MAS [Link], CPA

 QUANTITATIVE ANALYSIS

→ Application of mathematics in solving business problems

NETWORK MODELS

1. Network Models
→ Involves project scheduling techniques that are designed to aid the planning and control of
largescale projects that have many interrelated activities.
→ These models aid management in predicting and controlling costs that pertain to certain
projects or business activities.
2. Use of Network Models
→ Planning
→ Measuring progress to schedule
→ Evaluating changes to schedule
→ Forecasting future progress
→ Practicing and controlling costs

Techniques:

1. Linear Programming
→ Optimization Model
→ Goal: To find the optimal/best solution in business operation
→ Best possible combination
Maximize Income ts
Objective
(limi
Minimize Cost
ted/
Subj scar
ect ce
to reso
cons urce
train )

Note:
❖ If only two products → use trial and error (based on the choices)
❖ If more than two products → apply incremental analysis/relevant costing (CM/scarce resource)
❖ Limited resources must be allocated to the company’s most profitable products so that net
income is maximized.
❖ Linear programming models are extremely helpful in the analysis and solution of resource allocation
problems.
❖ Simplex method is a much-detailed linear programming technique especially useful if there are
more than two variables in a linear programming problem.

2. Decision Tree Analysis

→ Normally devised to show several possible decisions or acts and the possible consequences
(outcome or events) of each act.
→ Calculate the expected monetary value (EMV) of each outcome based on the decision.

(1) Alternative Couse of Action → (2) Apply probabilities (%) → (3) Computation of EMV → (4) Decision
Information
EMV Difference: (EVPI)
Expected ⮡ price to pay to get access to
Under Certainty Under
Value of perfect information
Uncertainty Perfect
❖ Decision making involves:
✔ Risk – this occurs when the probability distribution of the possible future state of nature
is known.

✔ Uncertainty – this occurs when the probability distribution of possible future state of
nature is not known and must be subjectively determined.

SUMMARY NOTES - MAS [Link], CPA

 3. Project Evaluation Review Techniques (PERT) – Critical Path Method (CPM)
→ PERT - developed to aid managers in controlling largescale, complex problems.
→ CPM - uses deterministic time and cost estimates
→ Used in project management (scheduling/monitoring)
→ Applicable to large scale projects
→ Similar to Gantt Chart
⮡ Graphical illustration of a scheduling technique in the form of a horizontal bar chart
⮡ Milestones
Steps:
1 6
1. List of Activities
2. Time Required
Longest path Start
3. Identify the critical path
Minimum time to complete the
project

A – C – D = 12 months
Example: B – C – D = 14 months → critical
path
Activities Time Required
Year 1 Year 2
A. Planning 1 month Parallel activities Feb B D D
B. Excavation 3 months (can be done at the same time) Mar B Total 14
C. Structuring 6 months months
D. Finishing 5 months Immediate predecessor / Series (can’t Apr C C
proceed until the previous steps are May C C
done) June C C
Jan A B D D July C C
Crashing → to speed up the without increasing the total
process time required on the critical
→ behind schedule (delay) path
→ Decision guide: Cost to crash
Aug C C
> Penalty for Delay
Sept C C
Slack Time → amount of time that can be Oct D D
added to an activity Nov D D
Dec D D
→ length of time an activity can be delayed without forcing a delay for the entire project.

4. Learning Curve
→ Process is improved over time due to learning & efficiencies
→ Requires ↓ time & ↓ resources as we produce additional unit
→ % of decrease takes effect every doubling of units

Time/unit Example: 80% Learning Curve

(10 hrs)

X2 X2 X2
1 → 2 → 4 → 8
# of units Hours 10 8 6.4
5.12

→ The cumulative average time per unit is reduced by a certain percentage each time production
doubles.
→ Incremental unit time (time to produce the last unit) is reduced when production doubles.

5. Forecasting
→ Use if mathematics to predict future behavior
Time Series: Nov Dec
1. Trend ↑, ↓, ↑, ↓
2. Seasonal summer ↑, rainy ↓
3. Cyclical Christmas ↑, Jan ↓ ↑ ↓ ↑
4. Irregular random ↓
Example: Coffee Shop
Jan Feb Mar Apr May June July Aug Sept Oct

SUMMARY NOTES - MAS [Link], CPA

 ECONOMICS

⮡ Science of choice; it is the social science that studies the choices people, businesses, governments,
and societies make as they cope with scarcity.
⮡ Fundamental economic problem is scarcity.
⮡ Because the available resources are never enough to satisfy human wants, choices are necessary.

Microeconomics – Buy
Branches individual, businesses
er &
Demand (Buyer) Selle
Supply (Seller)
Market

SUMMARY NOTES - MAS [Link], CPA

 Macroeconomics – entire economy of a country

MICROECONOMICS

Law of Demand:
↑ Price, ↓
DEMAND
Demand
50
40
P 2 1. Movement along the demand curve →
30
1 always because of Price (P)
20 2. Shift in demand → other factors (ex.
10 Facemask) → same Price, ↑ Demand

1 2345
D
(quantity demanded)
Downward Sloping:

If Price increases, the buyer will look for

Substitutes.
1. Substitution Effect increases, Demand will decrease. ex.
ex. ↑ Price of chicken, ↓ Demand ↑ Price of sugar, ↓ Demand of
Coke
If Price of Complementary goods/product ↑ Price of Gas, ↓ Demand of Cars

If Price ↓ (given same Law of Diminishing Marginal Utility:

income), Demand ↑
Ex. Monthly
Income P50k x
10% = P5k
2. Income Effect 10 The more the less
Jan. T-shirt P1k → 5 we marginal
Feb. T-shirt P500 → ↑ Demand
consume, utility we
As Income ↑, Demand inferior goods ↓

for normal goods ↑ As receive.

Income ↑, Demand for Marginal: Additional

Utility: Satisfaction

Elasticity of Demand

→ Sensitivity of demand due to price change

→ Formula: ∆ 𝑖𝑛 𝐷𝑒𝑚𝑎𝑛𝑑
∆ 𝑖𝑛 𝑃𝑟𝑖𝑐𝑒

> 1 → Elastic → sensitive (luxury; w/ close substitute) → Ex. Fortuner, Coke, Airline Ticket

Types
= 1 → Unitary Elastic → ∆ in Price = ∆ in Demand → Ex.
Electronic Products; Gadgets

< 1 → Inelastic → not sensitive (necessities; no close

substitute) → Ex. Rice, electricity, cigarettes

❖ Perfectly Elastic → Price ↑ = no more

Demand
❖ Perfectly Inelastic → Price ↑ = no change in
Demand → Ex. Insulin

SUPPLY
↑ Price, ↑
50 S>D
40
PriceSupply
Ceiling
Surplus
P 30
20
10 Equilibrium Price

1 2345 Shortage
Supply (perfect/optimal) Price Floor

SUMMARY NOTES - MAS [Link], CPA

 Upward Sloping

1. Number of Sellers → as the number of sellers ↑, supply ↑

→ Ex. Apple, Samsung → Oppo, Vivo, Realme (more suppliers, more supplies)
Complementary → if the price of complementary goods
2. Closely Related Goods ↑, supply ↑
Substitutes → the supplies will produce goods w/ higher → Ex. ↑ Price of Ink, ↑ Price of Marker, ↑ Supply of
returns. Marker

Law of Diminishing Returns

→ Adding an additional input result in a smaller increase in

output Ex. Workers: 10 hours → 5 units/hr
11 hours → 4 units/hr

Elasticity of Supply:

→ Sensitivity of supply due to price change

∆ 𝑖𝑛 𝑆𝑢𝑝𝑝𝑙𝑦
∆ 𝑖𝑛 𝑃𝑟𝑖𝑐𝑒
→ Formula:

> 1 Elastic
Types < 1 Inelastic Same concept w/ Elasticity of
Demand
= 1 Unitary Elastic

Short-run
vs Long-run
1-5 6 years
years onwards

Cost Variable Fixed 0

Cost → Variable
Produce:
As long as Price = Marginal Cost P = MC; CM = → Economies of Scale
→ Average Cost ↓

● Total product is the total quantity of the output produced in a given period.
● Marginal product is the change made in total product from a change in a variable input (e.g., labor).
⮡ In economics, the term “marginal” is often used to mean “additional”

● Average product is the total product per unit of input (e.g., labor). It is total product divided by the
quantity of labor employed. Another term for average product is productivity.

● Increasing marginal returns occur when the marginal product of an additional worker exceeds the
marginal product of the previous worker. In most productions, increasing marginal returns occurs
initially but decreasing marginal returns will occur eventually.

● Economies of Scale arise because of labor and management specialization, efficient capital, and
factors such as spreading advertising cost over an increasing level of output.

Market # of Sellers Products Control to Price Entry Example

Structure
1. Perfect/Pure Large Identical None Very Easy Divisorial
Competition
2. Monopolistic Many Differentiat Limited Easy Jollibee, McDonalds
Competition ed
3. Oligopoly Few Standardize Huge Hard PLDT, Globe; Shell,
d Petron
4. Monopoly One Unique Huge Blocked Meralco

SUMMARY NOTES - MAS [Link], CPA

 MACROECONOMICS
Gross Domestic Product (GDP)

→ Measure of income and output of a country

→ Primary measure of wealth in a country
(national income) Where:
C = Consumption I = Investment
G = Government Spending
Expenditure Approach → X = Net Exports (Export – Import)
GDP = C + I + G + X

How to measure GDP?

Income Approach → Individuals → Salaries & Wages
Business → profit, rent, interest
Natura tion)
l Gover
Resou nment
rces → →
Depre Taxes
ciation Less: Income earned abroad (OFW)
(Deple
Gross National Product (GNP) = GDP + Income
Abroad Nominal Real
Year 1 1,000 x 100
100,000
100,000
Nominal → measure using current Year 2 1,500 x 120
GDP prices 180,000
150,000
Real → measure is adjusted for (1,5
inflation (remove the x 10
effects of inflation)
Ex. Output Price

Inflation: general increases in price of goods/services

Demand Pull → Demand > Supply Ex. Face Mask

1. Types
(excessive) (demand)

Cost Push → ↑ Price of Sugar (supply)

↑ Price of Coke

2. Inverse Relationship w/ Unemployment

(↑GDP, ↓Unemployment, ↑Income,
↑Consumption, ↑Price)
Philips Curve

Structural – changes of
Unemployment structure in a company
Frictional – mismatch between workers & jobs (ex. Automation)
Cyclical – business cycle

Peak
2019 2022
Recession 2022
Recovery
T
r
o
Role of Government: (Goal: ↑ GDP) u
g
h
2
0
2
1
1. Fiscal Policy

SUMMARY NOTES - MAS [Link], CPA

 ↓ taxes, ↑ Disposable Income, ↑ ↑ taxes, ↑ Government Spending,
Taxes Consumption, ↑ GDP, ↑ Price ↓ Disposable Income, ↓
Consumption, ↓ GDP, ↓ Price

Government Spending → Government Projects

Ex. Infrastructure, ↑ employment, ↑ income, ↑ Consumption, ↑
GDP
2. Monetary Policy
→ Money supply
→ Control: Bangko
Sentral ng Pilipinas
Money Supply
(BSP)
*Bank Reserve Requirement:
- % of deposits the banks are not
1. Discount Rate
allowed to lend
↑ Buy ↑
BSP ↓ Sell ↓
3. Open
Mark
et
Oper
ation
s

T-bills
BSP (BTr)
Public
Cash

SUMMARY NOTES - MAS [Link], CPA

 n
v
Money Supply e
s Househol
Equivalent in Accounting t d
M1 Cash in Bank m Mone
M e Incom Spendin
y
2 n e g
t
I Business

P Money Multiplier (mm)

Income  effect of the release of money in
C the economy
M
)
1
𝑅𝑒𝑠𝑒𝑟𝑣𝑒
a Formula:
𝑅𝑒𝑞𝑢𝑖𝑟𝑒𝑚𝑒𝑛𝑡
r
%
g

i
→
n

a
S
l
p

e
P
n
r
d
o

p
M
e
a
n
r
s
g
i
i
t
n
y
a

l
t

o
P

r
C
o
o
p
n
e
s
n
u
s
m
i
e
t

y
(

M
t

SUMMARY NOTES - MAS [Link], CPA

 o S

a %

e →

( S

M a

P v

MPC + MPS = 100%

SUMMARY NOTES - MAS [Link], CPA