VARIABLE AND ABSORPTION COSTING

 Variable costing (direct, contribution margin reporting or marginal) – a product costing method that includes only
the variable manufacturing costs in the cost of a unit of product. It is under this method in which fixed
factory overhead is treated as period cost.

 Absorption costing (traditional, conventional, or full costing) – a product costing method that includes all
manufacturing costs, both variable and fixed, in the cost of a unit of product. It is under this method that fixed
overhead is considered as a product cost.

 DISTINCTIONS BETWEEN PERIOD COST AND PRODUCT COST

Period cost Product cost
 Cost that is charged against current revenue on  Cost included in product costing which is apportioned
the basis of time period regardless of the between the sold and unsold units.
difference between production and sales volume.
 Does not form part of the cost of inventory  A portion of cost which had been allocated to the
unsold units becomes part of the cost of inventory.
 Diminishes income for the current period by its full  Diminishes income by that portion thereof identified
amount. with the remainder being deferred to the next
accounting period as part of the cost of ending
inventory.

 DIFFERENCES BETWEEN ABSORPTION COSTING AND VARIABLE COSTING

ABSORPTION COSTING VARIABLE COSTING
Cost  Seldom segregates costs into variable and fixed  Segregates all costs – manufacturing, selling
segregation costs and administrative costs into fixed and
variable
Inventories  Includes both variable and fixed manufacturing  Includes only variable manufacturing costs.
costs. Because of this treatment, the peso amount
of under this method is always smaller than
inventories under absorption costing.
Treatment of  Treated as product cost  Treated as period cost
fixed factory
overhead
Income  Distinguishes by its nature or function of costs:  Distinguishes by its behavior, variable or fixed:
statement Sales P xxxx Sales P xxx
Less: Cost of Sales Xxxx Less: TOTAL VARIABLE Xxx
Gross profit P xxxx COSTS**
Less: operating expenses Xxxx Contribution margin** P xxx
Absorption income P xxxx Less: TOTAL FIXED COSTS** Xxx
Variable costing income P xxxx

**Total variable costs is composed of VARIABLE

MANUFACTURING COSTS and VARIABLE SELLING
AND ADMINISTRATIVE EXPENSES
**Contribution margin is the amount of revenue
remaining after deducting variable costs. (Note: If
Sales is deducted to variable manufacturing costs
only (assuming there is still a variable S&A
expenses), the output is called MANUFACTURING
MARGIN)
**Total fixed costs is composed of FIXED
OVERHEAD and FIXED SELLING AND
ADMINISTRATIVE EXPENSES
Net income  Net income between the two methods may differ from each other because of the difference in the
amount of fixed overhead costs recognized as expense during an accounting period. This is due to
variations between sales and production. In the long run, however, both methods give substantially
the same results since sales cannot continuously exceed production, nor production can continually
exceed sales.

 DIFFERENCE IN NET INCOME UNDER ABSORPTION AND VARIABLE COSTING

PRODUCTION VS. ENDING INVENTORY VS. ABSORPTION INCOME VS. REASON
SALES BEGINNING INVENTORY VARIABLE INCOME

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 Production = Sales Ending inventory = Beginning Absorption income = Variable Fixed overhead expensed
Inventory income under absorption costing is
equal to fixed overhead
expensed under variable
costing
Production > Sales Ending inventory > Beginning Absorption income > Variable Fixed overhead expensed
inventory income under absorption costing is
less than Fixed overhead
expensed under variable
costing
Production < Sales Ending Inventory < Beginning Absorption Income < Variable Fixed overhead expensed
inventory income under absorption costing is
greater than fixed overhead
expensed under variable
costing.

 RECONCILIATION OF ABSORPTION AND VARIABLE COSTING INCOME FIGURES

FORMULA ALTERNATIVE FORMULA

Absorption Income P xxx Absorption Income P xxx

(+) Fixed OH Beginning Inventory Xxx (+/-) Change in Inventory:
Total P xxx Production (units) xxxx
(-) Fixed OH Ending Inventory Xxx Sales (units) xxxx
Variable Income P xxx Difference xxxx
(x) Fixed OH cost per unit P xx Xxx
Variable income P xxx

 USES AND LIMITATIONS OF VARIABLE COSTING

Uses Limitations
 Variable costing reports are simpler and more  Segregation of costs by its behavior might be difficult,
understandable particularly in the case of mixed costs
 Data needed for breakeven and cost-volume-profit  Matching principle is violated by using variable costing which
analysis are readily available excludes fixed overhead from the product costs and charges
the same to period costs regardless of production and sales
 Problems involved in allocating fixed costs is eliminated  With variable costing, inventory costs and other related
 It is more compatible with the standard cost accounting accounts, such as working capital, current ratio and quick
system ratio are understated because of the exclusion of fixed
 Its reports provide more useful information for pricing overhead in the computation of product cost
decisions and other decision making problems
encountered by management

 STANDARD COSTS UNDER ABSORPTION AND VARIABLE COSTING

When a firm uses the standard costing system and income statements are prepared under the absorption and variable costing
methods:
1) costs of goods sold are computed at standard
2) standard cost of goods sold is adjusted to actual costs by adding unfavorable variances and/ or
deducting favorable variances:
a) Absorption costing – both variable and fixed manufacturing cost variances are used as adjustments to the standard cost of
goods sold
b) Variable costing – only variable manufacturing cost variances are used as adjustments to the standard cost of goods sold.

END OF LECTURE

EXERCISES

1. Consider the following three product costing alternatives: process costing, job order costing and standard
costing. Which of these can be used in conjunction with absorption costing?
a. job order costing c. process costing
b. standard costing d. all of these

2. If a firm produces more units than it sells, absorption costing, relative to variable costing will result in
a. higher income and assets c. lower income but higher assets
b. higher income but lower assets d. lower income and assets

3. Under absorption costing, fixed manufacturing overhead could be found in all of the following except the
a. work in process account c. cost of goods sold
b. finished goods inventory account d. period costs

4. If a firm uses absorption costing, fixed manufacturing overhead will be included

a. only on the balance sheet
b. only on the income statement
c. on both the balance sheet and income statement
d. on neither the balance sheet nor income statement

5. An ending inventory on an absorption costing balance sheet would

a. sometimes be less than the ending inventory valuation under variable costing
b. always be less than the ending inventory valuation under variable costing
c. always be the same as the ending inventory valuation under variable costing
d. always be greater than or equal to the ending inventory valuation under variable costing

6. absorption costing differs from variable costing in all of the following except

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 a. treatment of fixed manufacturing overhead c. acceptability for external reporting
b. treatment of variable production cost d. arrangement of the income statement

7. Under variable costing, which of the following are costs that can be inventoried?
a. variable selling and administrative expense c. fixed manufacturing overhead
b. variable manufacturing overhead d. fixed selling and administrative expense

8. How will a favorable volume variance affect net income under each f the following method?
a. b. c. d.
Absorption Reduce Reduce Increase Increase
Variable No effect Increase No effect Reduce

9. gross margin is equal to selling price less

a. variable expenses c. variable manufacturing expenses
b. variable selling and administrative expenses d. cost of goods sold

10. Consider the following statements about absorption costing and variable costing:
I. Variable costing is consistent with contribution reporting and cost volume profit analysis
II.Absorption costing must be used for external financial reporting
III. A number of companies use both absorption and variable costing
Which of the above statements is/are true?
a. I only c. III only
b. II only d. I, II and III

11. Which of the following differs between absorption costing and variable costing?
a. number of units produced c. sales revenues
b. fixed overhead volume variance d. treatment of variable manufacturing overhead

12. Selling and administrative expenses are considered to be

a. a product cost under variable costing
b. product cost under absorption costing
c. part of fixed manufacturing overhead under variable costing
d. period cost under variable costing

13. Santa Fe Corporation has computed the following unit costs for the year just ended: direct materials used P25;
direct labor P19; variable manufacturing overhead P35; fixed manufacturing overhead P40; variable selling and
administrative cost P17 and fixed selling and administrative cost P32. Which of the following choices correctly
depicts the per-unit cost of inventory under variable costing and absorption costing?
a. b. c. d.
Variable costing P79 P79 P96 P96
Absorption costing P 119 P 151 P 119 P 151

14. Indiana Company incurred the following costs during the past year when planned production and actual
production each totaled 20,000 units:
Direct materials used P 280,000 Fixed manufacturing overhead P 100,000
Direct labor 120,000 Variable selling and administrative cost 60,000
Variable manufacturing overhead 160,000 Fixed selling and administrative costs 90,000
1) If Indiana uses variable costing, the total inventoriable costs for the year would be
a. P400,000 b. P460,000 c. P560,000 d. P620,000
2) The oer-unit inventoriable cost under absorption costing is
a. P9.50 b. P25.00 c. P28.00 d. P33.00

15. The following are information under MC’s records for the year ended December 31. There were no work in
process inventories at the beginning and end of the year:
Net sales P 1,400,000 Operating expenses
Cost of goods manufactured: Variable P 98,000
Variable P 630,000 Fixed 140,000
Fixed 315,000 Units manufactured 70,000 units
Units sold 60,000 units
Finished goods inventory 1/1 -0-
1) What would be MC’s finished goods inventory cost at December 31 under direct costing method?
a. P90,000 b. P104,000 c. P105,000 d. P135,000
2) What would be MC’s finished goods inventory cost at December 31 under absorption costing method?
a. P90,000 b. P104,000 c. P105,000 d. P135,000
3) Under full costing method, MC’s operating income for the year would be
a. P217,000 b. P307,000 c. P352,000 d. P374,000
4) Under variable costing method, MC’s operating income for the year would be
a. P217,000 b. P307,000 c. P352,000 d. P135,000

16. Aaron Company, which has only one product, has provided the following data concerning the most
recent month of operations:
Selling price P 90 Variable cost per unit:
Units in beginning inventory 0 Direct materials P 21
Units produced 3,400 Direct labor 38
Units sold 3,000 Variable manufacturing overhead 6
Units in ending inventory 400 Variable selling and administrative 4
Fixed costs:
Fixed manufacturing overhead P54,400
Fixed selling and administrative 3,000

Page 3 of 16
 1) What is the unit product cost for the month under:
A) Variable costing? a. P69 b. P65 c. P85 d. P81
B) Absorption costing? a. P81 b. P65 c. P85 d. P69
2) The total contribution margin for the month under variable costing approach is:
a. P27,000 b. P63,000 c. P8,600 d. P75,000
3) The total gross margin for the month under the absorption costing approach is:
a. P12,000 b. P59,400 c. P63,000 d. P27,000
4) What is the total period cost under:
A) variable costing approach? a. P54,400 b. P69,400 c. P57,400 d. P15,000
B) absorption costing approach? a. P54,400 b. P3,000 c. P69,400 d. P15,000
5) What is the net operating income for the month under:
A) Variable costing? a. P12,000 b. P(20,400) c. P5,600 d. PP6,400
B) Absorption costing? a. P6,400 b. P12,000 c. P5,600 d. P(20,400)

17. A company had income of P50,000 using direct costing for a given period. Beginning and ending inventories
for that period were 13,000 units and 18,000 units respectively. Ignoring income taxes, if the fixed overhead
application rate were P2 per unit, what would the income be, under absorption costing?
a. P40,000 b. P50,000 c. P60,000 d. none of these

18. Willis Company had a net operating income of P75,000 using variable costing and a net operating income of
P57,000 using absorption costing. Variable production costs were P15 per unit. Total fixed manufacturing overhead
was P120,000 and 10,000 units were produced. During the year, the inventory level:
a. increased by 1,200 units c. decreased by 1,500 units
b. increased by 1,500 units d. decreased by 1,200 units

19. This year, Robert Company’s income under absorption costing was P2,000 lower than its income under
variable costing. the company sold 8,000 units during the year and its variable costs were P8 per unit, of which P 2
were variable selling expense. If production cost was $10 per unit under absorption costing, then how many units
did the company produce during the year?
a. 7,500 units b. 7,000 units c. 9,000 units d. 8,500 units

20. The vice president of sales of Huber Corporation has received the income statement for November. The statement
has been prepared on the direct cost basis and is reproduced below. The company has just adopted a direct
costing system for internal reporting purposes. The controller attached the following notes to the statements:
 The unit sales price for November averaged P24
 The standard unit manufacturing costs for the month were: Variable costs P12 and Fixed costs P4
The unit rate for fixed manufacturing costs is a predetermined rate based upon a normal monthly production
of 150,000 units. Production for November was 45,000 units in excess of sales. The inventory at November
30 consisted of 80,000 units.
Huber Corporation
Income statement
For the month of November
(in millions)
Sales P 2,400
Less: Variable standard CGS 1,200
Manufacturing margin P 1,200
Less: Fixed manufacturing cost at budget P 600
Fixed manufacturing cost spending variance 0 600
Gross margin P 600
Less: Fixed selling and administrative costs 400
Net income before taxes P 200

1) The net income before taxes under absorption costing is: a. P400 b. P380 c. P780 d. P280

2) What is the value of ending inventory on November 30 under

A) Absorption costing? a. P1,280,000 b. P960,000 c. P880,000 d. P1,040,000

B) Variable costing? a. P960,000 b. P1,280,000 c. P800,000 d. P945,000

3) The difference in ending inventory under variable costing and absorption costing is represented by
a. FOH of P4 per unit b. VOH of P13 per unit c. FOH of P13 per unit d. VOH of 4 per unit

4) Direct manufacturing cost per unit is:

a. P12 b. P16 c. P14 d. P13 e. none of these

5) The absorption manufacturing cost per unit is

a. P12 b. P16 c. P14 d. P13 e. none of these

Items 6 to 9 are based on the assumption that Huber Corporation uses actual costing for fixed overhead, and that
in all prior months, the plant operated at capacity.

6) How many units were produced during November?

a. 100,000 b. 145,000 c. 150,000 d. 155,000 e. none of these

7) Under FIFO, what is Huber’s November income using absorption costing?

a. P200,000 b. P212,400 c. P380,000 d. P391,200 e. none of these

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 8) What is the actual unit fixed costs for units produced in November?
a. P4.00 b. P4.10 c. P4.14 d. P4.46 e. none of these

9) Under LIFO, what is Huber’s November income using absorption costing?

a. P386,300 b. P331,200 c. P391,200 d. P326,300 e. none of these

Long problems with solutions:

1. L Company, which has only one product, has provided the following data concerning its most recent month of
operations: selling price P138; units in beginning inventory 500; units produced 4,100; units sold 4,300; units in
ending inventory 300; Variable cost per unit: direct materials P31, direct labor P59, variable manufacturing
overhead P4 and variable selling and administrative P9; Fixed costs: fixed manufacturing overhead P94,300 and
fixed selling and administrative P47,300. The company produces the same number of units every month, although
the sales in units vary from month to month. the company’s variable costs per unit and total fixed costs have been
constant from month to month.
a) what is the unit product cost for the month under: (1) variable costing? (2) absorption costing?
Variable costing Absorption costing
Direct materials P 31 P 31
Direct labor 59 59
Variable manufacturing overhead 4 4
Fixed manufacturing overhead (P94,300 / 4,100) 23
Unit product cost P 94 P 117

b) prepare an income statement for the month using the contribution margin format and the variable costing
method:
Sales (P138 x 4,300 units) P593,400
Less: Variable expenses
Variable cost of Sales:
Beginning inventory P 47,000
Add: variable manufacturing costs 385,400
Goods available for sale P432,400
Less: ending inventory 28,200
Variable cost of sales P 404,200
Variable selling and administrative 38,700 442,900
Contribution margin P 150,500
Less: Fixed expenses
Fixed manufacturing overhead P 94,300
Fixed selling and administrative 47,300 141,600
Net operating income P 8,900

c) prepare an income statement for the month using the absorption costing method:
Sales P 593,400
Cost of goods sold:
Beginning inventory P 58,500
Add: cost of goods manufactured 479,700
Cost of goods available P 538,200
Less: ending inventory 35,100 503,100
Gross margin P 90,300
Less: selling and administrative
Variable selling and administrative P 38,700
Fixed selling and administrative 47,300 86,000
Net operating income P 4,300

d) reconcile the variable costing and absorption costing net operating incomes for the month
Variable costing net income P 8,900
Add/ Deduct : change in income
Production in units 4,100 units
Sold units (4,300) units
Difference (VY > AY) (200) units
(x) Fixed overhead per unit P23 per unit (4,600)
Absorption net income P 4,300

2. M Corporation has the following data: normal capacity 25,000; budgeted production 20,000; actual sales (@ P25
per unit) 21,000; practical capacity 30,000; actual production 22,000; standard variable production cost per unit
P15 and budgeted fixed production costs P120,000. there were no variable costs variances for the year. Fixed
costs incurred were equal to the budgeted amount. There were no beginning inventories and no selling and
administrative expenses.
a) compute the absorption income if fixed cost per unit are determined using: (1) normal capacity; (2) practical
capacity and (3) budgeted production

@normal capacity @practical capacity @budgeted production

Standard variable production cost P15.00 P 15.00 P 15.00
Budgeted fixed overhead:
Normal: (P120,000 / 25,000) 4.80
Practical: (P120,000/ 30,000) 4.00
Budgeted: (P120,000 / 20,000) 6.00
Unit cost P 19.80 P 19.00 P 21.00
Sales (21,000 x P25) P 525,000 P 525,000 P 525,000
Cost of sales:
Normal (21,000 x P19.80) P 415,800
Practical (21,000 x P19.00) P 399,000
Budgeted (21,000 x P21) P 441,000
(+/-) Volume variances:

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 Normal: (22,000 – 25,000) x P4.80 P14,400 UF
Practical: (22,000 – 30,000) x P4.00 P 32,000 UF
Budgeted: (22,000 – 20,000) x P6.00 P (12,000) F
Adjusted cost of sales P(430,200) P(431,000) P(429,000)
Absorption net income P 94,800 P 94,000 P 96,000
b) Compute the variable costing income
@normal capacity @practical capacity @budgeted production
Sales P 525,000 P 525,000 P 525,000
Variable costs: (21,000 x P15) (315,000) (315,000) (315,000)
Contribution margin P210,000 P 210,000 P 210,000
Fixed costs:
Actual fixed overhead (120,000) (120,000) (120,000)
Variable net income P 90,000 P 90,000 P 90,000

3. B Company has just completed its first year of operations. The unit costs on a normal costing basis are as follows:
Manufacturing costs (per unit): Selling and administrative costs:
Direct materials (2 lbs. @ P20) P 40.00 Variable P 15 per unit
Direct labor (1.5 hours @ P90) 135.00 Fixed P 1,090,000
Variable overhead (1.5 hr @ P20) 30.00
Fixed overhead (1.5 hr @ P30) 45.00
During the year, the company had the following activity: Units produced 24,000; Unit selling price P420; Units sold
21,500 and direct labor hours used 36,000. actual fixed overhead was P12,000 less than budgeted fixed overhead.
Budgeted variable overhead was P5,000 less than the actual variable overhead. The company used an expected
actual activity level of 36,000 direct labor hours to compute the predetermined overhead rates. Any overhead
variances are closed to cost of goods sold.
a) compute the unit cost using: (1) absorption costing and (2) variable costing
Absorption costing Variable costing
Direct materials P 40 P 40
Direct labor 135 135
Variable overhead 30 30
Fixed overhead 45 --
Unit cost P 250 P 205

b) compute the operating income using (1) absorption costing and (2) variable costing
ABSORPTION VARIABLE
Sales (21,500 x P420) P 9,030,000 Sales P 9,030,000
Cost of sales: (21,500 x P250) P 5,375,000 Total variable cost:
Variable variance 5,000 UF Variable cost of sales (21,500 x P205) P4,407,500
Fixed variance (12,000) F Variable variance 5,000 UF
Adjusted cost of P (5,368,000) Adjusted variable cost P 4,412,500
sales of sales
Gross profit P 3,662,000 Variable selling and 322,500
administrative
Operating Total variable costs P (4,735,000)
expenses
Variable selling (21,500 x P15) P322,500 Contribution margin P 4,295,000
and
administrative
Fixed selling and 1,090,000 Total fixed costs:
administrative
Total operating P (1,412,500) Fixed overhead (24,000 x P45) P 1,080,000
expense applied
Net income P 2,249,500 Fixed variance (12,000) F
Actual fixed overhead P 1,068,000
Fixed selling and 1090,000
administrative
Total fixed cost P (2,158,000)
Net income P 2,137,000

c) reconcile the difference between the two income

Absorption net income P 2,249,500
(+/-) change
Production 24,000 units
Sold (21,500 units)
Difference (AY > VY) 2,500 units
(x) Fixed OH rate P 45.00 (112,500)
Variable income P 2,137,000

MANAGEMENT ADVISORY SERVICES

 Management Advisory Services – refers to that area of accounting work concerned with providing advice and
technical assistance to help clients improve the use of their resources to achieve their goals.
 Management Consultant – person who is qualified by education, experience, technical ability and temperament to advise or
assist businessmen on a professional basis in identifying, defining and solving specific management problems involving the
organization, planning, direction, control and operation of the firm.

Reasons for hiring management consultants

1) Help define specific problems and develop 4) Train client personnel
solutions 5) Help improve intra-company communications
2) Provide specialized skills and experience 6) Render an independent opinion
3) Provide confidential service in which the 7) Help get results
identity of the client is concealed
 Role of consultants and clients in MAS engagements:

Page 6 of 16
 CONSULTANT CLIENT
In full scope engagements (this  Limited to that of an advisor; in the
covers all the seven phases in the implementation stage, his role is
analytical process) merely to provide technical
assistance
In special study engagements (the  To proceed through the first 5  To supply pertinent information
client seeks only an impartial and phases analytical process, apply and to make decision on the
objective study of a case and the objective judgment to the facts, and case. Any action beyond the
resulting recommendations. These present findings and point of decision is solely the
involve only the first five stages in recommendations to the client for responsibility of the client
the analytical process) decision and further action
In informal advice (its structure is  To respond as practicable at the
informal and no presumption moment and express the basis for
should exist that an extensive the response
study has been performed)
 Advantages of CPAs over other professionals in MAS practice
 They are already familiar with the client and his business, and enjoy the client’s confidence
 They are members of a profession with recognized standing and are equipped with technical know-how in accounting and
taxation
 Responsibilities of Management Accountants:
1) Reporting – providing reports to management as well as shareholders, creditors and governmental agencies
2) Interpretation – interpreting and providing internal as well as external information pertinent to the various segments of
the organization
3) Resource management – establishing systems which facilitate planning and control of the firm’s resources (e.g. tax
planning and compliance etc..)
4) Information systems development – designing and developing overall management information system
5) Technological implementation – familiarization with modern equipment and techniques appropriate to controlling and
using information. (e.g. computer application and network communications system)
6) Verification – application of internal audit procedures to assure the accuracy and reliability of information derived from
the accounting system and related sources
7) Administration – development and maintenance of an effective and efficient management accounting organization (e.g.
accounting policy and procedure manuals)
 Factors for the emergence and growth of Management Consultancy
1. Growth in size and complexity of business firms 5. Need for adequate and timely information in management
2. Complexities in managing and conducting a business decision making
3. Lack of competent staff 6. Development of techniques for the solution of management
4. Trend towards industrialization problems, and businessmen’s awareness of their usefulness

CPAs performing management consulting and other advisory services are

considered in the practice of professional accounting and are bound by the
Code of Ethics for Professional Accountants

 Characteristics of Management Advisory Services (MAS)

a) Services are rendered for the management rather than e) Involves varied assignments
for third parties f) Engagements are usually non-recurring
b) Involves problem solving g) Engagements required highly qualified staff
c) Relates to the future h) Human relations play a vital role in each engagement
d) Broad in scope

Page 7 of 16
 Scope of MAS
MAS are usually related to the services rendered by CPAs in the areas of auditing, tax and accounting and may involve
activities such as:
1. Counseling, management in its analysis, planning, organizing, operating and controlling functions
2. Reviewing and suggesting improvements in policies, procedures, systems, methods and organizational relationships
3. Introducing new ideas, concepts and methods to management
4. Conducting special studies, proposing plans and programs and providing guidance and technical assistance in their
implementation

 Broad areas of MAS

Areas normally related to the Accounting and Finance Areas not normally related to the Accounting and
functions Finance functions
1)Financial accounting systems design and development  General management consultation
2)Management accounting systems design and development 1) Management (operations) audit
3)Development and establishment of budgetary controls 2) Measurement of operating performance
 Cost Accounting 3) Mergers and acquisition studies
1. Development of standard cost system 4) Development of compensation programs
2. Cost analysis and control 5) Pension plan review
3. Variance analysis 6) Special studies on industry potential
 Financial management 7) Long-range planning
2. Establishment of capital  Project feasibility studies – involves financial
budgeting procedures technical and marketing evaluation of proposed
3. Study of the cost of capital projects.
and cost of debt  Organization and personnel
4. Financial analysis for 1) Review of existing organization structure
project studies 2) Organization and administrative manual
5. Establishment of operating preparation
and cash budgets 3) Job evaluation and salary administration
6. Valuation of common 4) Development of personnel rating programs
stocks for purposes of mergers and sale 5) Retirement plan studies
6) Studies of office cost reduction systems
7) Determining cost of alternatives in collective
bargaining agreements
 Industrial engineering
The services listed here are not necessarily exhaustive, nor 1)Production, planning, scheduling and control
complete. The practitioner may offer other services not 2)Plant layout studies
mentioned here depending on the practitioner’s 3)Inventory management studies
COMPETENCE, EXPERIENCE, TECHNICAL ABILITY and 4)Materials control system design and
PROFESSIONAL INTEGRITY to meet or deliver such other development
services he offers. 5)Preventive maintenance system design and
development
6)Development of work standards
7)Purchasing management, including value
analysis
 Marketing
1) Product profitability analysis
2) Pricing policy determination
3) Market forecasting
4) Distribution cost analysis
5) Salesmen’s incentive compensation
evaluation
 Operations research – involves the use of
mathematical techniques such as linear
programming, PERT/CPM, queuing theory,
simulation etc.. to solve operational problems

 MAS classifications based on required expertise

Usual services Somewhat specialized services Highly specialized services
 Evaluation of form of business  Assisting in the installation of a  Reviewing the organization structure
organization mechanized accounting system  Auditing management policies
 Analysis of financial and operating  Making a cost analysis of  Conducting motion studies
statements operations  Surveying an industry or trade for
 Design and installation of  Finding sources of capital and current trends
accounting systems figuring the approximate cost of  Evaluating the desirability of a
 Design of filing systems and small business loans, bond issue particular area for plant location
storing accounting records and stock issuance  Preparing market analysis
 Suggestions for improvements in  Giving advice on dividend policy  Reviewing an insurance program
internal control and plans for expansion  Advising on data processing allocation
 Establishment of control to assist  Calculations on government
management and expedite the contract and allocating costs in
audit process compliance with reporting
 Preparation of insurance claims in requirements
case of business interruptions  Advising on accounting and tax
 Research and evaluation of matters relative to estate
alternative methods of handling a planning
transaction for its effect on  Surveying credit losses
finance and tax consequences  Assisting in bankruptcy and
 Assistance in the preparation of receivership proceedings
forecasts and budgets  Recruiting accounting and
 Presentation and explanation of bookkeeping personnel for the
 statements client
 Assisting clients in purchase or  Preparing an analysis of paper
sale of business flow
 Testifying on client’s behalf  Presenting and analyzing the pros
 Determination of the effect of and cons of various retirement
various employee compensation and profit-sharing plans
plans on net income  Advising on various wage
 Aid in labor union negotiations incentive plans

Analytical approach and process In case the client requests the consultant to proceed the latter
1. Ascertaining the pertinent facts and circumstances may also be involved in:
2. Seeking and identifying objectives Planning and scheduling actions
3. Defining the problem or opportunity for improvement Advising and providing technical assistance in implementing
4. Evaluating and determining possible solutions
5. Presenting findings and recommendations

 Three broad stages

 Analysis stage – consists of ascertaining the pertinent facts and circumstances, seeking and identifying objectives and
defining the problem or opportunity for improvement
 Design stage – consists of evaluating and determining possible solutions and presenting findings and recommendations
 Implementation stage – consists of planning and scheduling actions and advising and providing technical assistance in
implementing.
 MAS Practice Standards
All CPAs engages in MAS should observe a set of MAS practice standards, which are classified into
GENERAL and TECHNICAL standards.
GENERAL STANDARDS TECHNICAL STANDARDS
1. PROFESSIONAL COMPETENCE – The MAS practitioner shall 1. ROLE OF MAS PRACTITIONER – the practitioner should
undertake only those engagements which he or his firm not assume the role of management or take any
can reasonably expect to compete position which may impair the practitioner’s
2. DUE PROFESSIONAL CARE – the MAS practitioner shall objectivity in performing an engagement. The
exercise due professional care when performing an practitioner should maintain his independence to
engagement enable him to render his professional judgment and
3. PLANNING AND SUPERVISION – the MAS practitioner shall opinions with objectivity. His main role is that of an
adequately plan and supervise an engagement in a adviser.
manner that provides reasonable assurance that the work 2. UNDERSTANDING WITH THE CLIENT – a written or oral
is conducted in accordance with the understanding with understanding should be reached with the client
the client and with the professional standards and rules of concerning the nature, scope and limitations of the
conduct engagement to be performed
4. SUFFICIENT RELEVANT DATA – the MAS practitioner shall 3. CLIENT BENEFIT – the MAS practitioner should obtain
obtain sufficient relevant data to complete the an understanding of the possible benefits the client
engagement in accordance with the understanding with wishes to achieve from the engagement before
the client and to provide a reasonable basis for making beginning the work. The practitioner should notify the
conclusions and formulating recommendations in relation client of any reservations he may have concerning the
to the engagement realization of the anticipated benefits
5. FORECASTS – the MAS practitioner shall not permit his 4. COMMUNICATION OF RESULTS – the MAS practitioner
name to be used in connection with any forecast of future should communicate to the client his principal
transactions in a manner that may lead to the belief that findings, conclusions, recommendations or other
the practitioner vouches for the achievability of the results of the engagement, including major facts and
forecast assumptions used, limitations, reservations or other
qualifications

 Stages in MAS engagements

A. Negotiating the engagement
B. Preparing for and starting the engagement
C. Conducting the engagement
D.Preparing and presenting the reports and recommendations
E. Implementing the recommendations\evaluating the engagement
F. Post engagement follow-up

These stages constitute the specific activities involved in the MAS engagement cycle which, in general terms, are the
following: (1) PRE-ENGAGEMENT CONSIDERATIONS; (2) ENGAGEMENT PLANNING; (3) ENGAGEMENT MANAGEMENT AND
EXECUTION; (4) ENGAGEMENT CONCLUSION.
 Standards of Ethical Conduct
Management accountants have an obligation to the organization they serve, their profession, the public and themselves to
maintain the highest standards of ethical conduct. Adherence to these standards is integral in achieving the objectives of
management accounting. Management accountants may not commit acts contrary to these standards nor shall they condone
the commission of such acts by others within the organizations.

Management accountants have a responsibility to:

 Maintain an appropriate level of professional competence by ongoing development of their
knowledge and skills
COMPETENCE  Perform their professional duties in accordance with relevant laws, regulations and technical
standards
 Prepare complete and clear reports and recommendations after appropriate analyses of relevant
and reliable information
 Refrain from disclosing confidential information acquired in the course of their work, except
when authorized, unless legally obligated to do so
CONFIDENTIALITY  Inform subordinates as appropriate regarding the confidentiality of information acquired in the
course of their work and monitor their activities to assure the maintenance of that confidentiality
  Refrain from using or appearing to use confidential information acquired in the course of their
work for unethical or illegal advantage either personally or through third parties
 Avoid actual/apparent conflicts of interest and advise all appropriate parties of any potential
conflict
 Refrain from engaging in any activity that would prejudice their ability to carry out their duties
INTEGRITY ethically
 Refrain any gift, favor or hospitality that would influence or appear to influence their actions
 Refrain from either actively/passively subverting the attainment of the organization’s legitimate
and ethical objectives
 Recognize and communicate professional limitations or other constraints that would preclude
responsible judgment or successful performance of an activity
 Communicate unfavorable as well as favorable information and professional judgment and
opinions
 Refrain from engaging in r supporting any activity that would discredit the profession
 Communicate information fairly and objectively
OBJECTIVITY  Disclose fully all relevant information that could reasonably be expected to influence an
intended user’s understanding of the reports, comments and recommendations presented.

EXERCISES WITH ANSWERS

1. Corporate social responsibility is

a. Effectively enforced through the controls c. More than the obligation to shareholders to
envisioned by classical economics earn a profit
b. Defined as the obligation to shareholders to earn d. Defined as the obligation to serve long-term,
profit organizational interests

2. The common argument against corporate involvement in socially responsible behavior is that
a. It encourages government intrusion in decision c. It creates goodwill
making d. In a competitive market, such behavior incurs
b. As a legal person, a corporation is accountable for costs that place the company at a
its conduct disadvantage

3. Which of the following is a ethical standard of conduct for managerial accountants? (1) competence; (2) confidentiality;(3)
integrity;(4) objectivity.
a. All of them b. 1,3,4 only c. 1,2,3 only d. 1 and 3 only

4. A CPA engaged in MS practice may not

a. Disclose confidential information unless c. Accept other employment while serving as
authorized or legally obligated management consultant
b. Act as independent auditor of the same client firm d. Be independent in mental attitude
The MS practitioner may act as independent auditor of the same client firm or be employed in another company while being an MS
consultant in another as long as he maintained his independence in mental attitude (with respect to the MS client) and he does not
disclose confidential information about the client unless authorized or legally obligated to do so.

5. A CPA in public practice was engaged by a client who has little accounting and management experience to perform MAS. After
presenting several alternative solutions and the probable outcome each, the CPA decided to implement the best alternative
solution and assumed full responsibility for which the client agreed.
a. The CPA did just the right thing
b. The CPA should have asked the client first if he (the client) is capable to implement the solution before doing it himself
c. The CPA should not have implemented the best alternative solution and should not have assumed full
responsibility even if the client agreed, for these should have been done by the client
d. The CPA was correct in implementing the solution, but full responsibility should have been assumed by the client.
The practitioner should merely e an independent adviser. Implementation and assumption of full responsibility rest with the client, though in
the implementation of the solution, the practitioner could provide technical assistance and advice.

6. A CPA should reject an MAS engagement if

a. He audits the financial statements of a subsidiary of the prospective client
b. The proposed engagement is not accounting related
c. His recommendations are to be subjected to a review by the client
d. It would require him to make management decisions for the prospective client
The CPA/MS practitioner should maintain his independence. He should not make management decisions for the client.

7. If a financial manager/management accountant has a problem in identifying unethical behavior or resolving an ethical conflict,
the first action (s)he should normally take is
a. Consult the board of directors c. Discuss the problem with his/her immediate
b. Notify the appropriate law enforcement agency superior
d. Resign from the company

8. The Code of Ethics for Management Accountants requires a financial manager/management accountant to follow the
established policies of the organization when faced with an ethical conflict. If these policies do not resolve the conflict, the
financial manager/management accountant should
a. Consult the board of directors immediately
b. Contact the next higher managerial level if initial presentation to the immediate superior does not resolve
the conflict
c. Discuss the problem with the immediate superior if (s)he is involved in the conflict
d. Communicate the problem with authorities outside the organization

9. Vhong is a financial manager who has discovered that his company is violating environmental regulations. If his immediate
superior is involved, his appropriate action is to
a. Present the matter to the next higher c. Consult the audit committee
managerial level d. Confront his immediate superior
b. Do nothing for he has a duty of loyalty to the
organization

10. A financial manager/management accountant discovers a problem that could mislead users of the firm’s financial data and
has informed his immediate superior. He should report the circumstances to the audit committee and/or board of directors
only if
 a. The immediate superior, who reports to the chief executive officer knows about the situation but refuses to correct it
b. The immediate superior assures the financial manager/management accountant that the problem will be resolved
c. The immediate superior reports the situation to his/her superior
d. The immediate superior, the firm’s chief executive officer, knows about the situation but refuses to correct
it

11. Integrity is an ethical requirement for all financial managers/management accountants. One aspect of integrity requires
a. Avoidance of conflict of interest c. Refrain from improper use of inside information
b. Performance of professional duties in accordance d. Maintenance of appropriate level of professional
with applicable laws competence

12. The Code of Ethics for Management Accountants includes an integrity standard, which requires the financial
manager/management accountant to
a. Identify and made known anything that may c. Disclose confidential information when authorized
hinder his judgment or prevent satisfactory by his firm or required under the law
completion of any duties d. Refuse gifts from anyone
b. Report any relevant information that could
influence users of financial statements

13. Under which ethical standard of conduct does the managerial accountant have the responsibility to prepare complete and
clear reports and recommendations after appropriate analyses of relevant and reliable information?
a. Objectivity b. Competence c. Confidentiality d. Integrity

14. The Code of Ethics for Management Accountants includes a competence standard, which requires the financial
manager/management accountants to
a. Report information, whether favorable or c. Discuss ethical conflicts and possible courses of
unfavorable action with an unbiased counselor
b. Develop his/her professional proficiency on a d. Discuss with subordinates, their responsibilities
continual basis regarding the disclosure of information about the
firm

15. If a financial manager/management accountant discovers unethical conduct in his organization and fails to act, he will be in
violation of which ethical standard(s)?
a. “actively or passively subvert the attainment of the c. “condone the commission of such acts by others
organization’s legitimate and ethical objectives” within their organizations”
b. “Communicate unfavorable as well as favorable d. All of the answers are correct
information”

16. Under which ethical standard of conduct does managerial accountants have the responsibility to
1) Communicate information fairly and objectively?
a. Competence c. Integrity
b. Confidentiality d. objectivity
2) Refuse any gift, favor or hospitality that would influence or appear to influence his decision?
a. Competence c. Integrity
b. Confidentiality d. objectivity
3) Refrain from either actively or passively subverting the attainment of an organization’s legitimate and ethical objectives?
a. Integrity c. Objectivity
b. Competence d. Confidentiality
4) Disclose fully all relevant information that could reasonably be expected to influence an intended user’s understanding of
the reports, comments and recommendations presented?
a. Objectivity c. Confidentiality
b. Competence d. Integrity

17. Which of the following is incorrect?

1) a. Before accepting an engagement, a practitioner is to notify his partner of any reservations he has regarding
anticipated benefits
b. before undertaking an engagement, a practitioner is to inform his client of all matters related to the engagement
c. the MAS practice standards are applicable not only to structural or organized MAS engagements, but also to informal
advice
d. all of these
Before undertaking an engagement, a practitioner is to inform his client ALL SIGNIFICANT MATTERS related to the engagement.
The MAS practice standards are applicable ONLY to organized MAS engagements

2) a. Sufficient relevant data are to be obtained, documented and evaluated in developing conclusions and
recommendations
b. all significant matters relating to the results of the engagement are to be communicated to the client
c. engagements are to be adequately planned, supervised and controlled
d. in performing MAS, a practitioner must act with maturity and objectivity and be independent in mental
attitude
In performing MAS, a practitioner must act with INTEGRITY and objectivity and be independent in mental attitude

3) a. CPAs performing management services may be considered to be in the practice of management consulting
b. Included in the practice of consulting is the provision of confidential service in which the identity of the client is
concealed
c. business firms hire management consultants to help define specific problems and develop solutions
d. CPAs provide management services to go around the ethical constraints as mandated by the Accountancy
Act
CPAs in MS practice should not go around, but instead, observe/obey the ethical constraints as mandated by the Accountancy Act

18. An MS client asked for internal control system evaluation. During evaluation, the practitioner suggests that certain changes
are necessary in handling some accounts. The client agrees. However, he (the client) requests that his former consultant
supervises the installation. The practitioner knows that such former consultant lacks sufficient expertise to provide the
necessary technical direction and supervision. In this case, the practitioner should
a. Tell the client everything he knows about the former consultant so he could be prevented from supervising the
installation
b. Prevent the former consultant to supervise the installation but he should not tell the client anything about his (former
consultant’s) capabilities
c. Should encourage the former consultant to attend a seminar/workshop to learn the basics of engagement supervision
 d. Decline the engagement if the client insists that the former consultant supervise the installation and the
necessary technical competence would not be provided even through other means
The practitioner should have competence and exercise due care in solving the client’s problem. If the client insists on the assignment of
personnel whom the practitioner believes to lack the necessary technical competence, agreement should be reached t provide such
competence by other means, such as increased supervision or additional support. If this cannot be done, the practitioner should decline
the engagement.

19. Billy and Jong are partners in an MAS firm. One of the firm’s client is Coleen Corp. wherein Billy is a board member. Coleen
Corp is not an audit client. Coleen Corp is negotiating an MS engagement with the MAS firm.
a. It is unethical for the MAS firm to accept the engagement because it is a violation of the standards of independence
b. It is unethical for the MAS firm to accept the engagement because Billy has financial interests in Coleen Corp, hence he
loses his independence as practitioner
c. It is not unethical for the MAS firm to accept the engagement since Coleen Corp may not be considered as a sister
company of the MAS firm
d. It is not unethical for the MAS firm to accept the engagement, as long as there is a full disclosure of the
relationship to all parties at the outset of the engagement and in any written final report
It is not unethical for the MS firm to accept /perform such engagement provided there is full disclosure of the relationship to all parties at
the outset of the engagement in any written final report. Billy, the partner on the client board, should refrain from participating in the board’s
decisions on recommendations resulting from the MAS engagement.

20. Management consultancy

a. Is limited to CPAs d. Is regulated by law, such that an individual must
b. Is not limited to CPAs pass a government licensure examination first
c. May be practiced by anybody since it is not limited before he could practice the same
to CPAs

21. The primary purpose of management advisory services is

a. To conduct special studies, preparation of recommendations, development of plans and programs and provisions of
advice and assistance in their implementation
b. To provide services r to fulfill some social needs
c. To improve the client’s use of its capabilities and resources to achieve the objectives of the organization
d. To earn the best rate of return on resources entrusted to its care with safety of investment being taken into account and
consistent with firm’s social and legal responsibilities

22. Which of the following is a characteristic of management advisory services?

a. Services rendered are for third parties c. Human relations do not play a vital role in each
b. Engagements are usually recurring engagement
d. It involves problem solving
Aside from choice (D), some characteristics of MAS are: (1) services rendered are for management, rather than for third parties; (2)
engagements are non-recurring in nature; (3) human relations play a vital role in each engagement

23. The PICPA committee on MS classified the broad sense of MAS into two groups. What are these classifications?
1) Areas which are normally related to the accounting and finance functions
2) Areas which are not normally related to the accounting and finance functions
3) Areas which use mathematical techniques like linear programming, queuing theory and simulation to solve complicated
operational problems
4) Areas which involve financial, technical and marketing evaluation of proposed projects
a. 1 and 2 b. 3 and 4 c. 2 and 3 d. 1 and 4

24. Generally, the emergence and growth of management consultancy may be attributed to the following factors except
a. Growth in size and complexity of business firms
b. Lack of incompetent staff
c. Complexity in managing and conducting a business
d. Need for adequate and timely information in management decision making

25. Which of the following statements is incorrect?

a. CPAs provide management advisory services to go around the ethical constraints as mandated by the
Accountancy law
b. Business hire management consultants to help define specific problems and develop solutions
c. CPAs who are performing management advisory services may be considered to be in the practice of management
consulting
d. Included in the practice of consulting is the provision of confidential service in which the identity of the client is concealed

26. In marketing and promotion of themselves and their work, professional accountants, including those engaged in management
consulting should
a. Use means which brings the profession into disrepute
b. Not make exaggerated claims for the services they are able to offer, the qualifications they possess, or
experience they have gained
c. Denigrate the work of other accountants
d. Not make any claims for the services they offer
Section 7 (publicity) of the Code of Ethics for professional accountants issues that: In marketing and promotion of themselves and their
work, professional accountants, including those engaged in management consulting should: (1) not use means which brings the profession
into disrepute; (2) not make exaggerated claims for the services they are able to offer, the qualifications they possess or experience they
have gained; (3) not denigrate the work of other accountants

27. A management consultant

a. Is a person who is qualified by education, experience, technical ability and temperament to advise or assist
business men on a professional basis in identifying, defining and solving specific management problems
involving the organization, planning, direction, control and operation of a firm
b. Should be a CPA, a holder of Masters Degree so he may be considered qualified by education, experience, technical
ability and temperament to advise businessmen on how management problems could be solved
c. Is a person who is qualified by education, experience, technical ability and temperament to replace businessmen on a
professional basis in identifying , defining and solving specific management problems involving the organization,
planning, direction, control and operation of a firm
d. Is an employee of a client firm who is qualified by education, experience, technical ability and temperament to advise or
assist businessmen on a professional basis in identifying, defining and solving specific management problems involving
the organization, planning, direction, control and operation of a firm
28. Which of the following activities is not usually performed by a management accountant?
a. Assisting managers to interpret data in managerial c. Gathering data from sources other than the
accounting reports accounting systems
b. Designing system to provide information for d. Deciding the best level of inventory to be
internal and external reports maintained

29. Management services of certified public accountants cover all of the following except
a. Audit, tax and legal services c. Systems design, development and implementation
b. Organizational development d. Project feasibility studies and planning
Audit engagement is different from MS engagements. Legal problems are better referred to law firms, not to CPAs engaged in MS practice

30. Which of the following statements is incorrect?

a. A CPA engaged in the practice of MAS is bound by the code of ethics for professional accountants
b. Management consulting and other advisory services are among the assurance engagements performed by
professional accountants
c. Not all MS practitioners are bound by the code of ethics for professional accountants
d. It is the responsibility of a practitioner to be sure that the nature and scope of the management advisory services he
elects to offer are in conformity with the code of ethics for professional accountants

31. After making the preliminary audit arrangements, an engagement confirmation letter should be sent to the client. The letter
usually would not include
a. Statement that management letter will be issued outlining comments and suggestions as to any procedures requiring the
client’s attention
b. An estimate of the time to be spent on the audit work by audit staff and management
c. Statement that management advisory services would be made available upon request
d. Reference to the auditor’s responsibility for the detection of error and irregularities
This is tantamount to client/engagement solicitation, which is prohibited by the code of professional ethics for CPAs

32. Following are the steps involved in the analytical approach and process presented at random:
1) Evaluation and determining possible solutions 6) Planning and scheduling actions to achieve the
2) Seeking and identifying objectives desired results
3) Presenting findings and recommendations 7) Advising and providing technical assistance in
4) Ascertaining the pertinent facts and circumstances implementing
5) Defining the problem or opportunity for
improvement
Arrange the above steps in proper order:
a. 1,2,3,4,5,7,6 c. 5,1,4,6,2,7,3
b. 4,2,5,1,3,6,7 d. 7,5,3,1,6,2,4

33. The analytical approach and process may be summarized into three broad stages – analysis, design and implementation.
1) The analysis stage consists of
a. Planning and scheduling actions to achieve the desired results, as well as advising and providing technical assistance
b. Ascertaining the pertinent facts and circumstances, seeking and identifying objectives and defining the
problem or opportunity for improvement
c. Evaluating and determining possible solutions and presenting findings and recommendations
d. All of these
2) The design stage consists of
a. Planning and scheduling actions to achieve the desired results, as well as advising and providing technical assistance
b. Ascertaining the pertinent facts and circumstances, seeking and identifying objectives and defining the problem or
opportunity for improvement
c. Evaluating and determining possible solutions and presenting findings and recommendations
d. All of these
3) The implementation stage consist of
a. Planning and scheduling actions to achieve the desired results, as well as advising and providing
technical assistance
b. Ascertaining the pertinent facts and circumstances, seeking and identifying objectives and defining the problem or
opportunity for improvement
c. Evaluating and determining possible solutions and presenting findings and recommendations
d. All of these

34. Which of the following statements is incorrect?

a. Full scope engagements require client representations from both the working and decision making levels
b. The consultant’s role in full scope engagement should be limited to that of an objective adviser; and in the
implementation stage, his job is merely to provide technical assistance, degrees of which depend on the knowledge and
experience available in the client’s organization
c. In carrying out full scope engagements, the consultant should participate up to the implementation stage and should see
to it that the client accepts overall responsibility for implementation of the chosen course of action
d. Once implementation is concluded, the consultant’s participation is also concluded and only the
consultant’s personnel remain to carry on the solution
The CLIENT’s personnel remain to carry on the solution.

35. In informal advice,

a. Nature of the services rendered is informal and therefore, no presumption should exist that an extensive
study has been performed to identify and consider pertinent facts and alternatives
b. Any action beyond the point of decision is solely the responsibility of the consultant
c. Once the implementation is concluded, the client’s participation is concluded, and only the consultant’s personnel remain
to carry on the solution
d. Consultant need not be independent in mental attitude
*Any action beyond the point of decision should be the responsibility of the CLIENT
*once the implementation is concluded, the CLIENT’S PERSONNEL remains to carry on the solution
*the consultant MUST BE independent in mental attitude

36. The practitioner, before starting an engagement, should first make written communications to inform the client of all
significant matters related to the engagement. Examples of such significant matters are the following except
a. Objectives of the engagement c. Role of all personnel who will be involved in the
b. Scope of engagement engagement
d. None of these
37. This stage of MAS engagement involves various activities which may be generally be classified as gathering of information
and analysis/evaluation of information gathered
a. Negotiating the engagement c. Conducting the engagement
b. Preparing for the engagement d. Preparing and presenting the reports and recommendations
38. To avoid possible misunderstanding in the future, the practitioner should put in writing every term agreed upon with the client
during negotiation. This may be done through any of the following except
a. Proposal letter c. Engagement letter
b. Confirmation letter d. Contract

39. It is an offer of service. When accepted or approved, it becomes a contractual agreement

a. Proposal letter c. Engagement letter
b. Confirmation letter d. Contract
 Proposal letter – an offer of service. When accepted and approved, it becomes a contractual agreement
 Confirmation letter – brief and concise statement of an agreement previously reached with a client
 Engagement letter – contractual agreement used when the client has already agreed that the practitioner will conduct an engagement
 Contract – legal document generally prepared by the client, incorporating a proposal letter or engagement letter prepared by the
practitioner

40. It may be considered as the master plan for the engagement which serves as a framework for controlling its progress. It can
be used as a planning tool that documents how the engagement will be carried out, organizes the engagement into
scheduled and logical sequences and indicates the various tasks necessary to achieve the objectives of the engagement
a. Engagement work program c. Engagement blueprint
b. Master budget d. Engagement plan
Engagement plan refers to the translation of the problem (engagement) definition into steps required to attain objectives of the proposed
subject

41. Engagements should be adequately planned, supervised and controlled. Controlling involves the measurement of progress in
attaining the engagement plan and objectives. At significant engagement plan and objectives. At significant engagement
points, progress should be measured in terms of
a. Time schedule, accomplishments and quality of work
b. Accomplishments, time schedule and expenses incurred
c. Quality of work, number of reports prepared and time schedule
d. Accomplishments, number of personnel who played a role in the engagement and attendance of the participants in the
engagement

42. One of the activities involved in information gathering is recording the information and documenting the process. This can be
accomplished with the use of engagement working papers, which are considered very useful for the following reasons except
a. They provide documentation of the engagement c. They serve as source of ideas and research material for
b. They provide a historical record of the services to the future engagements
client d. They serve as contractual agreement when accepted
and approved by the client

43. An MAS engagement should be evaluated by comparing actual results with established standards to assess the quality of the
engagement. Criteria for evaluation are
a. Achievement of the engagement’s objectives as set forth and agreed upon between the client and the
practitioner, and complete satisfaction of the client company as regards to the results of the engagement
b. Achievement of the engagement’s objectives as set forth and agreed upon between the client and practitioner and
complete satisfaction of the practitioner as regards the results of the engagement
c. Both (a) and (b)
d. Neither (a) nor (b)

44. Final written reports in MS engagements may be classified as either long-form or short form report. The short form report
a. Contains all the circumstances about the engagement, including the practitioner’s findings and recommendations
b. Is issued to the client when he decides to do the implementation phase without requesting assistance from the consultant
c. Is usually issued when during the execution stage of the engagement, interim reporting was extensively
used and there was a close and continuous coordination between the consultant/team members and the
client
d. Summarizes the findings to date, work accomplished in relation to plan and, when appropriate, tentative
recommendations
 Long form reports – contains all the circumstances about the engagement, including practitioner’s findings and recommendations. It is
issued to the client when he decides to do the implementation phase without requesting assistance from the consultant.
 Interim communications – it is the summary of the findings to date, work accomplished in relation to plan and when appropriate,
tentative recommendations

END OF EXERCISES