ERM Enterprise Objectives

• Strategic - high level goals designed to achieve mission
• Operations - achieve operations through effective & efficient use of resources
• Reporting - reliable reporting
• Compliance - compliance with laws & regulations

Breakeven Computation

Breakeven point in units = (Total fixed costs) / (Contribution margin per unit)

Contribution margin per unit = SP/unit - VC/unit

Breakeven point (in dollars) = Unit price x Breakeven point in units
= (Total fixed costs) / (Contribution margin ratio)

Contribution margin ratio = CM / Sales

Contribution vs. Absorption Approach

Contribution Approach (Not GAAP)

• Revenue - Variable cost = Contribution Margin - Fixed costs = Net income
• Variable costs (DM + DL + Variable O/H + Variable SG&A)
• Fixed costs (Fixed O/H + Fixed SG&A)

Unit contribution margin = Unit sales price - Unit variable cost

Contribution margin ratio = Contribution Margin / Revenue

Absorption Approach (Product vs. Period)

• Revenue - COGS = Gross Margin - Operating expenses = Net income
• COGS (DM + DL + O/H [Variable & Fixed])
• Operating expenses (SG&A period cost)

Difference between Contribution Approach & Absorption Approach 

• Absorption costing: Product costs include Fixed Manufacturing Overhead
• Only expense for portion of units sold 
• Variable costing: Period costs include Fixed Manufacturing Overhead

Effect on Income

• No change in inventory: Absorption net income = Variable net income
• Increase in inventory: Absorption net income > Variable net income
• Fixed O/H to be expensed decreases
• Decrease in inventory: Absorption net income < Variable net income
• Fixed O/H to be expensed increases 

Enterprise Risk Management

• Internal environment
• Setting objectives
• Event identification
• Assessment of risk
• Risk response
• Control activities 
• Information and communication
• Monitoring

Cost Components - Equivalent Units

Background information:

Work-in-process, beginning: 100 units, 30% complete
Units completed and transferred out: 400 units
Work-in-process, end: 300 units, 30% complete

Beginning cost: $10,000
Current cost: $15,000

FIFO equivalent units of production

1. (Work-in-process, beginning)*(% remaining to be completed) = 100 * 70% = 70
2. (Units completed) - (Work-in-process, beginning) = 400 - 100 = 300
3. (Work-in-process, end)*(% completed) = 300 * 30% = 90

Equivalent units (EU) = 70 + 300 + 90 = 460

Cost per equivalent unit = (Current cost) / (EU) = $15,000 / 460 = $32.61

Weighted-average equivalent units of production

1. Units completed = 400
2. (Work-in-process, end)*(% completed) = 300 * 30% = 90

Equivalent units (EU) = 400 + 90 = 490

Cost per equivalent unit = (Beginning cost + Current cost) / (EU) = ($10,000 +15,000) / 490 = $51.02

COGM and COGS

Gross profit:

• Sales - COGS = Gross Profit

Cost of good sold (COGS):

• Finished Goods Beginning + COGM - Finished Goods Ending = COGS
• Goes to Income Statement

Cost of goods manufactured (COGM):

• WIP Beginning + Manufacturing Costs (DM + DL + O/H Applied) - WIP Ending = COGM
• Goes to COGS

Direct material (DM) used:

• Raw Materials Beginning + Purchase (includes freight in) - Raw Materials Ending = DM
• Goes to COGM 

Common Cost Objects and Calculation

• Prime cost = Direct material + Direct labor
• Conversion costs = Direct labor + Factory overhead (applied)
• Product costs = Prime cost + Conversion cost = Direct material + Direct labor + Factory overhead applied 

Applied Overhead Calculation

Applied overhead = Actual cost driver x Overhead rate

Overhead rate = Budgeted overhead cost / Estimated cost driver

COSO: Internal Control Integrated Framework

• Control environment
• Risk assessment
• Information & communication
• Monitoring
• Existing control activities

Control environment principles:

• Competency commitment
• HR
• Organization structure
• Philosophy
• Participation of BOD
• Ethics and integrity
• Responsibility and authority