Short Answer Flashcards
Client comes to you seeking advise on job order costing vs process order costing. Draft a memo to explain the difference.
Intro - purpose of this memo is to differentiate between job-order and process costing and to help you select a system that is appropriate for your business.
Body - The systems are cost accumulation systems used to track and accumulated costs. They are both designed to assign costs of inventory and cost of goods sold. Each system uses different methodologies. A process costing system averages product costs, including direct materials, direct labor, and overhead, and applies those costs to a large number of homogeneous products. Unlike a process costing system, a job-order costing system allocates those same costs to each individual job. Because each of the homes you build is unique and easily identifiable, job-order costing is the most appropriate cost system.
It is essential that you understand the records you will use to track the profitability of each job. The job cost record summarizes the direct materials, direct labor, and overhead for each job and ultimately enables you to determine the final cost of constructing the home. The materials requisition form feeds into the job cost record. While construction supplies may be purchased in bulk for several jobs at once time, a materials requisition form identifies the construction materials used on each individual job. Labor time tickets serve the same function as a materials requisition form in that they enable payroll expenses to be assigned to individual jobs based on the amount of time actually spent on each project.
Please contact us with any additional questions you might have. Our firm would be pleased to help you implement a job-order cost accounting system in your business at your earliest convenience.
Your company’s FA accountant uses a spreadsheet to keep subsidiary records for FA, Accum. Depr, and current year depr. The spreadsheet is used to calculate book/tax. The accounting mange asked you to evaluate whether the company should eliminate the use of spreadsheets for this purpose and consider the implementation of a software package.
Intro - Thank you for your interest in moving toward a software package for tracking fixed-assets.
Issue - There are definite concerns regarding the sustainability of our current system as we grow in size.
Explanation - Spread sheets are easier to use but must be input manually.
Processing will be easier on software.
Spreadsheets can be lost or corrupted. manipulated by the user.
Software is easier to pick up should someone leave.
Conclusion - as you can see there are many reasons a software package may be more beneficial for us.
Closing - Thank you so much for your time and consideration. I hope that what I have written in this memo helps you. Please do not hesitate to reach out should you have a questions or concerns.
XYZ Co. uses forward contracts effectively to offset price volatility for the purchase of raw materials. The CEO is considering extending this practice for the purchase of additional raw materials.
Write a memo to the CEO describing the factors that should be considered in deciding whether to extend this practice.
Intro The purpose of this memo is to discuss factors in considering to extend the forward contracts practices of XYZ CO.
Issue With regard to purchasing, forward contracts can be very beneficial in a market of rising prices, but can be penal in a market with falling prices.
Explanation
Forward contract gives the company the ability to lock in a set exchange rate at a future point in time.
If a company is making future purchases, by locking the price we save money.
However in a market where prices are falling, if the future price is locked in we may be penalized by the contract.
Also, if the contract is greatly unfavorable to the supplier it increases the likelihood of default.
Conclusion By extending our forward contract practices for purchases, XYZ can save money in a market of rising prices, however may suffer an economic loss in a market where price is falling.
Closing Thank you for your time and consideration. I hope that what I have written in this memo helps you. Please do not hesitate to contact me should you have any question or concerns.
Internal audit team noted the CFO is reallocating the investment portfolio into high risk, high return investments. Investments are roughly 20% of the company assets. Write a memo to the audit committee expressing your concern over the investment strategy and the increased risk. Discuss procedures and controls.
Intro - The purpose of this memo is to discuss reallocating JRM’s investment portfolio into high-risk, high return investments.
Issue - While investing in high-risk, high-return investments can provide an above average return, it can open the company to potential financial risks.
Explanation - Diversification will be necessary in a high risk strategy. Portfolio of investments. Alternative investments (cash, fixed income).
Twenty percent is a significant amount of assets. Need to create target percentages to better protect ourselves.
Conclusion - With a more careful approach the company can mitigate the high-risk associated with high-return investments.
Closing - Thank you for your time and consideration. I hope that what I have written in this memo helps you. Do not hesitate to contact me should you have any questions or concerns.
The president is deciding between issuing debt versus equity in order to raise the funds needed to build several new plants around the country.
They asked you, the CFO, to write a memo outlining the advantages and disadvantages of using debt relative to equity. He also wants the memo to cover the impact that his decision might have on the firm’s WACC and firm value.
A company’s capital structure will consist of both debt and equity. The percentage allocated to both debt and equity requires an understanding of the advantages and disadvantages of each form of capital, as well as recognizing the impact that the decision will have on the firm’s weighted average cost of capital and firm value.
The principal advantage of issuing debt, from a cash flow perspective, is the interest tax shield. Interest costs associated with debt provide a deductible expense that lowers a company’s overall tax burden, whereas dividends paid by a company to its stockholders do not provide a comparable tax benefit. Another advantage of debt stems from the fact that debt holders must be paid interest before stockholders receive dividends. As a result, debt is seen as a safer investment from the perspective of the investor and therefore costs less than equity from a required return perspective.
The biggest disadvantage to debt is that it represents a fixed cost for the issuing company. Whereas dividends are issued at the discretion of the company, debt interest payments must be met if the company wishes to avoid defaulting on its obligation. This can be problematic in difficult economic environments when cash may be constrained. Another disadvantage of debt is the negative impact it can have on a company’s financial ratios, including the debt to equity and interest coverage ratios. These ratios are often used by banks and other financial institutions to determine the risk associated with lending a company additional funds. Higher debt levels indicate higher levels of risk, equating to higher borrowing costs.
The after-tax cost of debt and the cost of equity represent the principal components of the firm’s weighted average cost of capital (WACC). As the goal of the company should be to minimize the WACC in order to increase firm value, debt financing appears advantageous due to its tax advantages and lower costs. While debt does represent a lower cost source of financing than equity, too much debt will cause an undesirable increase in the company’s WACC. Additional borrowing may result in debt investors requiring a higher rate of return due to increased default risk. In addition, equity holders will also require a higher rate of return as the likelihood of receiving dividends decreases when the company takes on more debt. Ultimately, the company must find an optimal ratio where the benefits of issuing additional debt outweigh the costs of issuing too much debt.
If you have any questions regarding these issues, I am available for further discussion at your convenience.
A new member of the board asked you to explain the five components of internal control according to COSO.
Write a memo to the new board member explaining the components.
The COSO Internal Control—Integrated Framework is a tool used to help organizations develop and maintain effective systems of internal control. The framework takes a principles-based approach, in which 17 principles are grouped into five integrated components (control environment, risk assessment, information and communication, monitoring, and control activities). The five components, described in detail below, must all be present and functioning for an internal control system to be effective.
The control environment sets the “tone at the top” for the organization and includes the standards, processes, and structures needed for an effective internal control system. A commitment to ethics and integrity, the independence and oversight role of the board, the organizational structure, a commitment to competence, and accountability are the principles that are captured in the control environment. An effective control environment serves as the foundation for the other four components.
Risk assessment captures how an entity identifies and analyzes risks that may impact the achievement of its objectives. The principles include specifying objectives (operating, reporting, and compliance), identifying and analyzing risk, assessing the potential for fraud, and identifying and assessing changes that could affect internal controls.
The information and communication component entails obtaining and using information to support internal control functioning. This information should be shared both within the entity (internal communications) and outside of the entity (external communications).
The monitoring component involves evaluating the quality of internal controls by assessing system designs and operations and taking necessary corrective actions. Ongoing and separate evaluations, as well as communicating deficiencies to parties that can take corrective actions, are the key principles within the monitoring component.
Control activities are established by an entity to ensure that directives are initiated by management to mitigate risks. Principles include the selection and development of control activities, the specific development of technology controls, and the deployment of policies and procedures.
If you have any questions or would like to discuss these components in further detail, please do not hesitate to contact me.
A senior manager is considering going public. write a memo discussing the expanded role of a company’s audit committee in light of the provisions of the Sarbanes Oxley Act. Discuss the expanded role of a company’s audit committee in light of the provisions of Sarbanes-Oxley Act.
Intro The purpose of this memo is to discuss the expanded role of the audit committee according to Sarbanes-Oxley Act (SOX).
Issue To better explain the changes I would like to discuss the role of the audit committee (AC), who are eligible audit committee members, and the importance of independence.
Explanation
Public companies must adhere to SOX. members must be independent member of the board.
Independence means members cannot receive compensation for consulting/advisory services.
Cannot have influence over financial decisions. That is the role of the CEO/CFO.
One member of the committee must be a financial expert.
The audit committee is responsible for selecting, compensating and oversight of the independent auditor.
The AC must try and resolve disputes between management and the IA.
AC must develop whistleblower procedures.
Conclusion Adherence to SOX shows outsiders that the board of directors are actively engaged in monitoring internal controls and the audit of their company’s financial statements.
Closing Thank you for your time and consideration. I hope that what I have written in this memo helps you. Please do not hesitate to contact me should you have any questions or concerns.
The operations manager of a company noticed that the number of customers steadily increased over the last six months. It was determined that many of the returns were caused by poor quality. You have been hired as a consultant to assist the company in addressing this problem.
Write a memo to the operations manager, discuss the cause and solutions to assist the company in addressing poor product quality.
Intro - thank you for reaching out to us regarding x.
Issue - We have investigated the cause and determined it is poor quality. We discuss the following
body - problems related to workers. training, unmotivated, under-paid, bad decisions can lead to poor quality
- problems with PPE. not functioning properly, wear and tear,
-problems with raw materials. garbage in, garbage out.
-problems with process. remove bottlenecks.
solution - look closely at the above issues and take corrective actions. Higher quality can lead to lower prevention, appraisal, and internal/external costs.
closing - Thank you for you time. Happy to discuss solutions in further detail.
The CEO of ABC Inc has asked for advice about changing from FIFO to LIFO. As the controller you believe that LIFO is the best methodology for inventory costing purposes. In your memo explain advantages and disadvantages of each method and identify conditions under which LIFO might produce advantages over FIFO.
Intro - Thank you for your interest in X.
Issue - FIFO and LIFO have advantages, I am writing this memo to explain why LIFO is the best method.
Body - FIFO lower obsolete goods, more accurate balance sheet, COGS, profits are higher during inflation, stronger financial ratios, pay more in taxes.
LIFO - inventory is made of the oldest items. leads to a higher COGS. Lowers profit therefore pay less taxes. Financial ratios will be not as strong. LIFO not allowed under IFRS.
Solution - LIFO is the better option as pay less in taxes.
conclusion - thank you for your time and consideration. I hope that what I have written in this memo helps you. Please do not hesitate to contact me should you have any questions or concerns.
Your company trades internationally and has strong import/export business. The company’s exports are increasing and the dollar is getting stronger in relation to the company’s trading partners. In the midst of all the good news, profitability is falling.
Explain in a memorandum to stockholders.
Intro - Thank you for contacting us regarding x.
Issue - even though exports are increasing, profitability is falling. This may seem counterintuitive but there are valid reasons this might occur.
Customers pay us in foreign currency. We convert this into US dollars before including it in rev.
If the dollar strengthens it means the FC is weakening. Which means when we received a weakened FC, we also received less dollars.
Transaction exposure.
Economic exposure.
If the dollar continues to strengthen we can source materials from that country
Solution -
conclusion - happy to discus further
The price in gasoline has quadrupled in the past year. Guzzling motors manufactures only on high priced automobile that consumes vast quantities of gasoline. As the accounting manager, draft a memo to the president that contemplates the impact of the economic conditions. Suggest two ways to stimulate demand.
Intro - Thank you for your inquiry into ways to stimulate demand for our automobile in these adverse economic conditions.
Issue - It is important that your are aware of the impact of the current conditions on consumer’s disposable income, potential product substitution, market demand for our product and ways we can stimulate demand.
Explanation - price of gasoline has increased while income is stagnant.
with less disposable income consumers want less expensive automobiles.
consumers will likely make product substitutions for more economic cars.
Considering the state of the market, I am concerned demand for our automobile will decline.
We sell only one product, the lack of diversified products will result in an increased risk in these adverse conditions.
We need to proactively stimulate demand.
new products
discounts
Conclusion - unless we develop new strategies we will .
Happy to discuss further.
Your client, a non issuer, is considering voluntary adoption of section 404 of the Sarbanes-Oxley Act. The client’s CFO has asked for your advice regarding the benefits of voluntary compliance.
Intro The purpose of this memo is to discuss the potential benefits of voluntary adoption of section 404 of the Sarbanes-Oxley Act.
Issue - The provisions for section 404 are required for public users but voluntary by private companies.
Explanation SOX requires - self assessment of internal controls. Sign off by management on internal controls. Which contain CRIME. Auditors will attest to managements representations.
Advantages - shows outsiders management is in control. Auditors confirm managements assertions. If we plan to go public we are already in compliance.
Conclusion - Voluntary compliance gives the company many advantages list above.
Closing - Thank you for your time and consideration. I hope that what I have written in this memo helps you. Please do not hesitate to reach out should you have any questions or concerns.
Murray CO, has one location that utilized just-in-time inventory that greatly reduces personnel in the inventory process. The board of directors has not considered the JIT system as a factor in its disaster recovery and business continuity plans.
Write a memo discussing the implications of going JIT on the disaster recovery and business continuity plans.
Intro - The purpose of this memo is to discuss the implications of the just-in-time inventory system in Murray Co.’s disaster recovery and business continuity plans.
Issue - These plans need to account for the impacts of disasters on the JIT inventory system.
Explanation - The JIT system can help lower inventory costs by reducing the holding costs of inventory. However by holding less inventory you open yourself to potential out of stocks.
For the JIT system to function properly Murray must be able to order items immediately and have them delivered as quickly as possible. Also, Murray needs to be able to receive the order and move them to production areas quickly. Disasters can impact these areas.
Disaster can impact our customers. They might not be able to receive our deliveries. They might need things we cannot deliver.
Conclusion - There are many scenarios beyond those listed above. The disaster recovery and business continuity plans need to account for them.
Closing - Thank you for your time and consideration. I hope that what I have written in this memo helps you. Please do not hesitate to contact me should you have any questions or concerns.
Inc. is discussing the data storage possibilities for their highly mobile workforce. Currently, data is stored on laptop hard drives and is not centrally available. Management is concerned about data security, accessibility and costs.
Prepare a memo to management discussing various options for data storage for a highly mobile workforce including advantages, disadvantages, and costs.
Intro The purpose of this memo is to discuss how we currently store data in our work environment and possible solutions.
Issue - There are various options for data storage in our highly mobile workforce and this memo will address the advantages, disadvantages and costs of these options.
Explanation
- Data is not centrally stored. Creating data security and integrity issues because the data is controlled and possesses by the end user.
-Data accessibility issues.
-It may appear to be cheaper but it costs more
-Centralize the storage the data with a cloud server.
-Cloud server will allow end user access.
Conclusion - There is a disadvantage of the added costs but the added productivity will ultimately reduce costs and possibly increase revenue.
Closing - Thank you for your interest and consideration. I hope that what I have written in this memo helps you. Please do not hesitate to contact me should you have any questions or concerns.
The executive management wants to develop a comprehensive reporting system and has directed senior management to develop a balanced scorecard. As a controller you have been assigned the task of spearheading the project. The production manager of your company is your peer and has heard of the directive and your role and wants to find out more about what is involved in balanced scorecard. The production manager is suspicious of more measurements and monitoring. In a written communication to the production manager, describe the concept and components of the balanced scorecard, how the process is designed to benefit the company and how the production manager will fit in.
Intro The purpose of this memo is to discuss the balanced scorecard and how it relates to production.
Issue Although the balanced scorecard may seem like an addition to your current workload. It is really a all encompassing tool designed to modify existing systems, improve efficiency company wide and maximize profit.
Explanation
Learning and growth - HR / human capital.
Customer satisfaction - maximizing what the customer expects.
Financial - traditional measures, reducing costs, maximize profits
Production - efficiency/efficacy
Conclusion I recognize your apprehension toward a new system however the balanced scorecard is designed to replace or remove ineffective measures.
Closing Thank you for your time and consideration. I hope that what I have written in this memo helps you. Please do not hesitate to contact me should you have any questions or concerns.
