Part 1 Study Unit 1

1. Part 1 Study Unit 1 Ethics for Management Accountants and Cost Management Concepts

2. ICMA’s Requirements for CMA Designation Become a Member! Preferably of a local chapter (there are benefits). Pass both parts of the exam within 3 years (of starting the process). Satisfy the education requirements. Satisfy the experience requirements. Comply with IMA’s Statement of Ethical Professional Practice. To remain a CMA you have to maintain active member, full-fill the requirements for CE, comply with IMA’s Ethics statements and applicable state laws.

3. Gleim CMA Review System • Gleim Suggested Study Steps – see page 8 • Alternative steps – per Ron • Multiple Choice Quizzes • Audiovisual Presentation • True/False Study Questions • Knowledge Transfer Outline • Essay • CMA Test Prep Online • Practice Exam vs. Study Session

4. Table of Contents Study Unit 1 - Ethics for Management Accountants and Cost Management Concepts Study Unit 2 - Cost Accumulation Systems Study Unit 3 - Cost Allocation Techniques Study Unit 4 - Operational Efficiency and Business Process Performance Study Unit 5 - Budgeting Concepts and Forecasting Techniques Study Unit 6 - Budget Methodologies and Budget Preparation Study Unit 7 - Cost and Variance Measures Study Unit 8 - Responsibility Accounting and Performance Measures Study Unit 9 - Internal Controls – Risk and Procedures for Control Study Unit 10 - Internal Controls – Internal Auditing and Systems Controls * See class schedule for dates

5. Part 1 Exam • Topics • Planning, Budgeting and Forecasting30% Level C • Performance Management 25% Level C • Cost Management 25% Level C • Internal Controls 15% Level C • Professional Ethics5% Level C

6. Exam format • 3 hrs - 100 multiple choice questions = approx. 1.5 minutes per question (on average). • Find ways to “bank” time • Look for short-cuts • You will find that you most question do not seem “easy”, don’t get discouraged • You “earn” points for each question answered correctly • Some questions are “test” questions that carry no point value. You will not know which ones they are • Extra time can be carried forward to the Essay portion • 1 hr - 2 Essay questions with up to 8 sub-parts • You can’t go back to multiple-choice part once you enter this portion of the exam • Whatever you have typed on the screen will be saved as your answer, irrespective if the timer runs out on you

7. Exam format • If you find you have weaknesses in any topic ref. Appendix A for ref. the appropriate sub –units. • The coverage percentage given for each major topic within each examination part represents the relative weight given to that topic in an examination part. The number of questions presented in each major topic area approximates this percentage. • You will be expected to understand the “impact” of taxes when reporting and analyzing financial results. • You are “assumed” to have knowledge of preparation of financial statements, business economics, time-value of money concepts, statistics and probability.

8. Most common reasons for missing questions Misreading the requirement (stem) – Read the question first Not understanding what is required Making a math error – Try to not do calculations of paper first, with the idea of “transferring” to the exam later. If you know how to use your memory button(s) well on your calculator, use it (i.e. save sub-calculations in your calculator). Applying the wrong rule or concept Being distracted by one or more of the answers – the most common wrong answers are the incorrect alternatives Incorrectly eliminating answers from considerations – read all answers first, some are more correct or complete then others Not having any knowledge of the topic tested – don’t agonize over it. If possible try to make an educated guess by eliminating obvious wrong answers. If you guess, use the same letter each time. Employing bad intuition when guessing

9. Required Cognitive Skills Knowledge: Ability to remember previously learned material such as specific facts, criteria, techniques, principles, and procedures (identify, define). Comprehension: Ability to grasp and interpret the menaing of material (classify, explain, distinguish). Application: Ability to break down material into its component parts so that its organizational structure can be understood…(differentiate, estimate, order). Synthesis: Ability to put parts together to form a new whole or proposed set of operations; ability to relate ideas and formulate hypothesis (combine, formulate, revise). Evaluation: Ability to judge the value of material for a given purpose on the basis of consistency, logical accuracy, and comparison to standards (criticize, justify, conclude).

10. Test Coverage Level A: Requiring the skill levels of knowledge and comprehension. Level B: Requiring the skill levels of knowledge, comprehension, application, and analysis. Level C: Requiring all six skill levels – Knowledge, comprehension, application, analysis, synthesis, and evaluation. Examples of each are given in Appendix C, page 407.

11. Exam Strategies Budget your time, know your “time hacks” See how many Essay sub-questions you will be given. There are two parts with different amounts of sub-parts Answer the questions in consecutive order, and limit the number you want to come back to no more than say 10, but make sure you answer it before going on to the next. Never leave a question unanswered, score is based on number of correct answers. Do not allow the answer choices to affect your reading of the question

12. The essays • Remember, 2 essay questions with up to 8 parts each! • The ICMA grades on both subject matter and writing skills on the essay portion of the CMA exam. For writing skills to be graded, the response must be relevant to the question asked. The criteria for grading are as follows: • Use of standard English – includes proper grammar, punctuation, and spelling • Organization – response is arranged logically and coherently • Clarity – analysis is clearly communicated with well-constructed sentences and appropriate vocabulary. • Ref. Scenario for Essay Questions 16-19 • Handout for in-class students • Separate file for online students • The CMA exam uses essays to reflect a more "real-world" environment in which candidates must apply the knowledge they have acquired. Essays are graded on both writing skills and subject matter. Partial credit IS available for essays that have some correct and some incorrect points. Finally, it is important to remember that essays are not intended to test typing ability, so the time you allocated for essay response is adequate to complete the questions even if you do not have the best typing skills. • Answering multiple-choice questions is an effective method to study the material for both the multiple-choice and essay sections of the exam. They are an excellent diagnostic tool that will allow you to quickly identify your weak areas. Also, think about what your answer would be if the question were not multiple-choice. When reviewing the correct and incorrect answer explanations, your "essay answers" should be somewhat equivalent to the detailed answer explanations.

13. Prepping forthe exam Decide if you will be using one of the approved financial calculators on the exam? Focus on what you don’t know Realize that you will be more proficient in some topics more than others Read, quiz, evaluate (what you don’t know), sit for lecture, re-quiz, identify anything you need help with one on one? Practice the Essay questions – use the Gleim Essay Wizard Mid-way through the course, create a short mock multiple choice exams (say no more than 50 questions) to condition for the longer 100 question exam. Right after our cram session take the Gleim online CMA Practice Exam that came with your Gleim study material. It is a 4 hour exam. Contact instructor and review anything not quite clear.

14. Ethics tested on the Exams • Ethics is tested from: • Individual Perspective – Part 1 • Organizational Perspective – Part 2 • Questions could be either Multiple Choice or Essay • Make sure you study the IMA Framework on Ethics, ref. the IMA website, or following URL: http://www.imanet.org/PDFs/Public/Press_Releases/STATEMENT%20OF%20ETHICAL%20PROFESSIONAL%20PRACTICE_2.2.12.pdf http://www.imanet.org/resources_and_publications/ethics_center_helpline.aspx • Have it “conceptually” memorized. • Similar to the AICPA version • You will then be able to answer any question from there • Stay “within” an objective view, and don’t get side-tracked in emotional distractors

15. 1.1 Ethics for Management Accountants • Candidates need to be prepared to answer ethics questions that will be integrated with any of the other topics tested on Part 1. This includes multiple-choice or essay type questions. • You have to: • Identify the exact nature of ethical dilemma • How to resolve it • Memorize content of IMA’s Statement of Ethical Professional Practices (see page 20)

16. 1.1 Ethics for Management Accountants

17. 1.1 Ethics for Management Accountants Correct Answer: A One of the responsibilities of an IMA member under the competence standard is to “maintain an appropriate level of professional expertise by continually developing knowledge and skills.” (S)he must also “perform professional duties in accordance with relevant laws, regulations, and technical standards.” The third requirement under this standard is to “provide decision support information and recommendations that are accurate, clear, concise, and timely.” Incorrect Answers: B: The confidentiality standard concerns an IMA member’s responsibility not to disclose or use the firm’s confidential information. C: The integrity standard pertains to conflicts of interest, avoidance of acts discreditable to the profession, and refraining from activities that prejudice the ability to carry out duties ethically. D: Credibility is the fourth standard of IMA’s Statement of Ethical Professional Practice. It requires that information be communicated “fairly and objectively,” and that all information that could reasonably influence users be disclosed.

18. 1.1 Ethics for Management Accountants

19. 1.1 Ethics for Management Accountants Correct Answer: A The competence standard pertains to an IMA member’s responsibility to “recognize and communicate professional limitations or other constraints that would preclude responsible judgment or successful performance of an activity.” Incorrect Answers: B: The confidentiality standard concerns an IMA member’s responsibility not to disclose or use the firm’s confidential information. C: The integrity standard deals with conflicts of interest, avoidance of acts discreditable to the profession, and refraining from activities that prejudice the ability to carry out duties ethically. D: Credibility is the fourth standard of IMA’s Statement of Ethical Professional Practice. It requires that information be communicated “fairly and objectively,” and that all information that could reasonably influence users be disclosed.

20. 1.1 Ethics for Management Accountants See Essay Scenario 1 & 2 See Essay Scenario 16, 17, 18, 19

21. 1.2 Cost Management Terminology • Financial Accounting • Reporting to external users • Financial statements • Historical focus • Management Accounting • Reporting to internal users • Improve organizational decision making • Future focus • Cost Accounting • Supports both financial and management accounting “Information about the cost of resources acquired and consumed by an organization underlies effective reporting for both internal and external users”.

22. 1.2 Cost Management Terminology IMA Definition of Cost Management Accounting: Measurement in monetary terms of the amount of resources used for some purpose. The term by itself is not operational. It becomes operational when modified by a term that defines the purpose, such as acquisition cost, incremental cost, or fixed cost.

23. 1.2 Cost Management Terminology • Cost Object • Entity to which costs can be attached • Examples: • Products • Processes • Employees • Departments • Facilities

24. 1.2 Cost Management Terminology • Manufacturing v. Nonmanufacturing • Direct materials • Direct labor • Manufacturing overhead • Indirect materials • Tangible inputs unable to trace • Indirect labor • Labor that cannot be traced • Factory operating costs • Utilities, real estate taxes, insurance, depreciation

25. 1.2 Cost Management Terminology Manufacturing Costs • Prime cost • Direct materials + direct labor • Costs attributable to the product • Conversion cost • Direct labor + manufacturing overhead • Costs of converting raw materials into finished product

26. 1.2 Cost Management Terminology Nonmanufacturing Costs • Selling (Marketing) expenses • How much to get the product to the consumer • Sales Personnel • Salaries • Expensive dinners • Fancy sporting events • Morale boosting trips to exotic locations • Product Transportation • Administrative Expenses • Other costs not related to producing or marketing the product • Adrien’ssalary • Adrien’sexpensive dinners • Fancy sporting events for Adrien to attend • Trips to exotic locations to boost Adrien’smorale

27. 1.2 Cost Management Terminology Product v. Period • To capitalize or to expense? • Product Costs • Capitalized as part of finished goods inventory. Become component of cost of goods sold • Period Costs • Expensed as incurred • Not capitalized and excluded from cost of goods sold

28. 1.2 Cost Management Terminology • Distinction between product costs and period costs important for external reporting purposes. • GAAP • All manufacturing costs must be treated as product costs, and all selling and administrative costs must be treated as period costs. • ABSORPTION COSTING • Internal Reporting • Capitalize only variable manufacturing costs as product costs, treat all other costs (variable S&A and the fixed portion of both production and S&A expenses) as period costs. • VARIABLE COSTING

29. 1.2 Cost Management Terminology Direct Costs - Can be TRACED • Direct materials • Direct Labor Indirect Costs - Cannot be associated with a particular cost objective • Indirect materials • Indirect labor

30. 1.2 Cost Management Terminology Indirect costs collected in cost pools • Cost Pool • Account where similar cost elements are accumulated Example - Manufacturing Overhead

31. 1.2 Cost Management Terminology Common Costs • Indirect cost • Shared by two or more users • Rationally allocated • Examples: • Depreciation for HQ building • Allocated amongst departments

32. 1.2 Cost Management Terminology

33. 1.2 Cost Management Terminology Correct Answer: D Under an absorption costing system, inventoriable (product) costs include all costs necessary for good production. These include direct materials and conversion costs (direct labor and overhead). Both fixed and variable overhead is included in inventory under an absorption costing system. Inventoriable costs are treated as assets until the products are sold because they represent future economic benefits. These costs are expensed at the time of sale. Incorrect Answers: A: Overhead costs as well as prime costs (direct materials and labor) are included in inventory. B: Materials costs are also included. C: Inventory costs are expensed when the goods are sold, not when they are transferred to finished goods.

34. 1.2 Cost Management Terminology

35. 1.2 Cost Management Terminology Correct Answer: D Direct labor costs are wages paid to labor that can feasibly be specifically identified with the production of finished goods. Factory overhead consists of all costs, other than direct materials and direct labor, that are associated with the manufacturing process. Thus, straight-time wages would be treated as direct labor; however, because the overtime premium cost is a cost that should be borne by all production, the overtime hours times the overtime premium should be charged to manufacturing overhead. Incorrect Answers: A: The straight-time wages times the overtime hours should still be treated as direct labor. B: Only the straight-time wages times the overtime hours is charged to direct labor. C: Labor costs are not related to repairs and maintenance expense.

36. 1.3 Cost Behavior and Relevant Range • Relevant Range – Limits within which per-unit variable cost remain constant and fixed cost are not changeable. • “In the short-run” (All costs are considered variable in the long-run) • “The efficiency of a company’s current manufacturing plant” “Cost behavior and estimates are valid only within a relevant range, or the normal level of operating activity. Beyond the relevant range, cost relationships are likely to change, and with them, cost estimates”. Ask yourself – “How wide is the relevant range of activity? When does the company leave one relevant range and enter another one with a different cost function? The answer is company specific, and greatly affects the cost estimates used in decision making.”

37. 1.3 Cost Behavior and Relevant Range Types of Costs and their characteristics • Variable cost • Total cost varies in proportion to changes in the level of activity • The cost per unit remains constant, regardless of the level of activity

38. Exhibit 1 - Variable Cost

39. 1.3 Cost Behavior and Relevant Range Types of Costs and their characteristics • Fixed cost • Total cost remains fixed, regardless of changes in the level of activity. • The cost per unitvaries inversely with changes in the level of activity.

40. Exhibit 2 – Fixed Cost

41. 1.3 Cost Behavior and Relevant Range Types of Costs and their characteristics • Mixed or semivariable cost • Have both a fixed and variable component. • Both the total cost and unit cost will vary changes in the level of activity. • Two methods of estimating mixed: • Regression or scattergraph method – more complex, usually applied using computers and not tested on the exam. • High-low method – less accurate, but quicker. Cost at highest activity level – Cost at lowest activity level Driver at highest activity level – Driver at lowest activity level What is a driver? Machine Hours for examples

42. Exhibit 3 - Mixed CostHigh-Low Method Example (p. 138) High Month: May Low Month: July Numerator: $3,400 -$1,900 = $1,500 Denominator: 1,600 –800 = 800 hours Variable Costs: $1,500 / 800 = $1.875 per hour Fixed Costs: $1,900 –(800 x $1.875) = $400

43. Exhibit 3 - Mixed Cost

44. 1.3 Cost Behavior and Relevant Range Types of Costs and their characteristics (continued) • Step cost • Total cost remain constant over the. • Unit cost decrease a usage within the step range.

45. Exhibit 4 – Step Cost

46. 1.3 Cost Behavior and Relevant Range Types of Costs and their characteristics (continued) • Linear vs. Nonlinear Cost Functions • Fixed cost per unit and step cost have non-linear-cost functions • Fixed costs • Has asymptotic (linear asymptote is not parallel to the x- or y-axis, it is called an oblique asymptote or slant asymptote ) character – it will never intersect the X-axis. • Step cost – if steps are relatively narrow, cost are usually treated as variable, but if steps are wide they more similar to fixed costs.

47. Question #1 The difference between variable costs and fixed costs is? Variable costs per unit fluctuate and fixed costs per unit remain constant. Variable costs per unit are fixed over the relevant range and fixed costs per unit are variable. Total variable costs are variable over the relevant range and fixed in the long term, while fixed costs never change. Variable costs per unit change in varying increments, while fixed costs per unit change in equal increments.

48. Question #2 The difference between the sales price and total variable costs is? Net profit. The breakeven point. The contribution margin. Gross operating profit.

49. Question #3 Ace, Inc. estimates its total materials handling costs at two production levels as follows: CostGallons $160,000 80,000 $132,000 60,000 What is the estimated total cost for handling 75,000 gallons? (Hint: High/Low Method)

50. Question #3 (continued) Numerator: $160k -$132k = $28k Denominator: 80k gallons –60k gallons = 20k Variable Costs: $28k / 20k gallons = $1.40 per gallon Fixed Costs = Total Cost –Variable Portion $160k –(80k x $1.40) = $48k $48k + (75k x $1.40) = $153,000