INTERMEDIATE ACCOUNTING 3 (AC 6)

SHAREHOLDER’s EQUITY PART I (1st Topic)

○ CORPORATION – artificial being created from operation of law – having right of succession,
powers, attributes, and properties.
○ Corporations are characterized by absentee ownership and limited liability.
○ Corporations have a separate personality from its owners.
○ In a corporation, investments and changes from net income/loss is reflected on invested
capital and earnings/losses in the business.

○ RA 11232, REVISED CORPORATION CODE OF THE PHILIPPINES – general law that

governs creation of private corporations.
○ Private corporations owned by government are created by special laws.

FORMULA OF SHAREHOLDER’s EQUITY

Share capital
Add: Share premium
Retained earnings
Other comprehensive income
Subscribed Share capital
Less: Dividends
Treasury shares d
SHAREHOLDER’s EQUITY

○ SHARES – units of ownership in a corporation or financial asset owned by investors who

exchange capital in return for these units.
○ Shareholders are entitled to any profits that the company may earn in the form of dividends.

○ CORPORATORS (Shareholders) – members of the corporation. Also regarded as investors

of the corporation after its formation.
○ INCORPORATORS – members who file the Articles of Incorporation. They comprise of the
original members when forming the corporation.
○ SHAREHOLDERS – owners of shares in a stock corporation. Shareholders may be natural
or artificial.
○ Only natural shareholder can become an incorporator.

○ STOCK CORPORATION – capital stock divided into shares to be distributed to the holders.
Its owners are called “Shareholders”.
○ NONSTOCK CORPORATION – does not maintain capital stock. Corporations not falling
under the classification of a stock corporation shall be considered nonstock corporation. Its
owners are called “Members”.

○ MEMBERS – corporators of a nonstock corporation.

○ DIRECTORS – exercises corporate powers, conduct all operations, and control properties of
business.

COMPONENTS OF SHAREHOLDER’S EQUITY

1. Legal Capital 4. Share capital subscription receivable
2. Retained earnings 5. Treasury share
3. Other comprehensive income
○ LEGAL CAPITAL (Share Capital) – what the shareholders invested in the corporation. It is
the amount of a firm's equity that is not allowed to leave the business.
○ Share capital is always computed as number of shares multiplied to par value.

SHARE CAPITAL WITH PAR VALUE COMPONENTS

1. Share capital
2. Share dividends
3. Subscribed share capital

SHARE CAPITAL WITH NO PAR VALUE COMPONENTS

1. Share capital
2. Share dividends
3. Subscribed share capital
4. Share premium

SHARE CAPITAL ISSUED CONSIDERATION OTHER THAN CASH

1. Fair value of the property of the services/assets received
2. Fair value of the share capital issued
3. Par value of shares issued

ENTRY FOR SHARE CAPITAL ISSUED FOR CASH CONSIDERATION

○ RETAINED EARNINGS – amount of profit a company has left over after paying all its direct
costs, indirect costs, income taxes and its dividends to shareholders.

COMPONENTS OF RETAINED EARNINGS

1. Accumulated profit/loss
2. Prior Period Adjustments
3. Dividends declared
4. Other transactions affective share capital

○ OTHER COMPREHENSIVE INCOME – includes revenues, expenses, gains, and losses that
have yet to be realized and are excluded from net income on an income statement.

OTHER COMPREHENSIVE INCOME COMPONENTS

1. Revaluation Surplus 3. Foreign Currency Translation
2. Unrealized Gains/Losses on FVOCI 4. Actual Gains and Losses
 TWO TYPES OF SHARES
1. Ordinary shares 2. Preference shares

○ ORDINARY SHARE – residual ownership interest in corporation. Ordinary shareholders

bear the ultimate risk of loss and receive the benefits of success of the corporation.
○ PREFERENCE SHARES – special class of shares that have preferential rights that are not
found in an ordinary share.
○ Usually issued with a par value.
○ Preference share does not have voting rights.

COMMON FEATURES OF PREFERENCE SHARES

1. Cumulative 4. Callable
2. Participating 5. Redeemable
3. Convertible

○ CUMULATIVE – dividends that are not declared in the prior period - dividend in arrears, that
when dividends declared are declared in the current period, dividends in arrears are to be
exhausted first.
○ PARTICIPATING – additional dividends paid proportionate to ordinary shareholders on the
basis of total premium of a fixed amount or rate.
○ CONVERTIBLE – transforms from preference share to ordinary share.
○ CALLABLE – corporation have the right to reacquire and retire the share at a fixed or
determinable call price. Presented as part of equity.
○ REDEEMABLE – shares that are required to be retired or reacquired by issuing corporation,
at the option of the shareholder at a specified date.

○ AUTHORIZED SHARES – max number of shares that can be subscribed and issued to
shareholders.
○ ISSUED SHARES – shares that corporation has issued to its shareholders, along with its
stock certification.
○ This is computed as authorized shares minus treasury shares.
○ UNISSUED SHARES – portion of authorized share capital not yet issued and still available
for subscription and issuance.
○ SHARE DIVIDENDS – profit distributed to its shareholders. The additional shares provided
when computing for par value to cash consideration.
○ SHARE PREMIUM – amount of money that a company receives for its shares over and
above their nominal value.
(E.g., freight-in, gain on sale on treasury share, donated capital)
○ TOTAL CONTRIBUTED CAPITAL – total value of a company's equity purchased by
investors directly from a company.
○ This indicates the total amount of money that the shareholders paid to a company to acquire
their stakes in it.
○ SUBSCRIPTION – legal binding contract between the corporation and the subscriber.
Contract requires downpayment.
○ At the time of subscription, Subscription Receivable account (contra-equity) is debited for the
subscription in exchange for cash price and Subscriber Share Capital is credited for the par
value of the subscribed shares with excess as Share Premium.

○ SUBSCRIBED SHARES – shares of stock that will be issued upon completion of deferred
payment purchase contract with an investor.
○ SHARE CAPITAL SUBSCRIPTIONS RECEIVABLE – long-term unpaid amount of the
subscribed share capital. This decreases the total shareholders’ equity.
○ Any balance in the Subscribed Share Capital is presented under Contributed Capital.
Subscription Receivable is reported as deduction from shareholders’ equity or may be shown as
current asset if collection is expected within one year or less.

○ DELINQUENT SHARES – subscribed shares that are outstanding or not paid.

○ DELINQUENT BUYER – subscriber of the shares that did not pay.

IN CASE OF DELINQUENT SUBSCRIPTION, THE CORPORATION CAN RESORT TO

THE FOLLOWING REMEDIES
1. Sue the delinquent subscriber to enforce collection
2. Sell the delinquent shares at a public auction to the highest bidder
3. Convert it to treasury shares

○ HIGHEST BIDDER – one who is willing to pay all costs with the least amount of shares and
all the increment costs for advertisement of the auction.

ENTRIES FOR SUBSCRIPTION

1. At downpayment
Cash xx
Subscription Receivable xx
Subscribed Share Capital xx

2. At collection of first installment:

Cash xx
Subscription Receivable xx

3. At default of the original subscriber xx

Receivable from highest bidder
Subscription Receivable xx
Cash xx

4. Payment of highest bidder

Cash xx
Receivable from highest bidder xx
#
Subscribed Share Capital xx
Share Capital xx

5. If there were no bidder, convert it to treasury share

Treasury Shares xx
Receivable from Highest Bidder xx
#
Subscribed Share Capital xx
Share Capital xx
○ When two or more classes of equity securities are issued for a single payment, the lumpsum
price is allocated among the classes of securities issued on their relative fair values.

STEPS WHEN LUMPSUM PAYMENT IS MADE TO SHARES WHEN FAIR VALUE IS

GIVEN
1. Multiply the number of shares (ordinary and preference) at their fair value price.
2. Add both ordinary and preference share and get the total.
3. Divide the shares at fair value by total of both shares, payment or cash consideration
(Pro rate).
4. Then multiply to the cash payment, or to the non-cash asset given up or the fair value of
shares (if there’s no cash payment made).
5. Deduct the amount in step 4 to the “Share Capital – Ordinary/Preference Share” and
reflect it unto the account “Share Premium – Ordinary/Preference Share”.
*Note that to get the Share Capital – Ordinary/Preference Share, you only need to
multiply the number of shares to its stated par value.

○ Entity typically incurs various costs in issuing equity instruments. The costs are accounted
for as a deduction from equity. If there is no resulting share premium pertaining to that issue,
share issue costs are recorded as expenses.
○ Amount of transaction costs accounted for as a deduction from equity in the period is
disclosed separately in the statement of changes in equity.

○ SHARE ISSUANCE COST – added to share capital and share premium.

○ SHARE RETIREMENT COST – deducts share capital and share premium.
○ If shares are reacquired then retired, Share Capital is debited equal to the par of the shares
retired. Share Premium is debited equivalent to the amount of credit at the date the shares were
originally issued; and Cash is credited equal to the retirement price.
○ If retirement price is less than original issue price of the shares being retired, the difference
is credited to a share premium account appropriately described.

IF THE RETIREMENT PRICE EXCEEDS THE ORIGINAL ISSUE PRICE,

DIFFERENCE IS DEBITED TO THE FOLLOWING:
1. Share premium from previous retirement
2. Retained earnings

ENTRIES IF RETIREMENT PRICE IS EQUAL ORIGINAL ISSUED PRICE OF SHARE

Share capital xx
Cash xx

ENTRIES IF RETIREMENT PRICE IS LESS THAN ORIGINAL ISSUED PRICE OF

SHARE
Share capital xx
Cash xx
Share premium - retirement xx
 ENTRIES IF RETIREMENT PRICE IS GREATER THAN ORIGINAL ISSUED PRICE OF
SHARE
Share capital xx
Share premium – retirement xx
Retained earnings xx
Cash xx

ENTRIES IF ENTITY WANTS TO RETIRE OUTSTANDING SHARES

Share capital xx
Share premium xx
Share premium – retirement xx
Retained earnings xx
Cash xx

○ TREASURY SHARES – shares that were issued or any outstanding shares and is
repurchased by the company. Decreases the total shareholders’ equity.
○ Treasury shares is a contra-equity account.
○ Treasury is recorded at cost.
○ A treasury share has no voting or preemptive right.
○ It does not participate in any type of dividends and no right to assets in the event of
liquidation.

ENTRIES FOR TREASURY SHARES

1. REACQUISITION OF SHARES
Treasury Share xx
Cash xx

2. REISSUANCE OF TREASURY SHARES; REISSUANCE PRICE IS EQUAL TO

ACQUISITION COST
Cash xx
Treasury Share xx

3. REISSUANCE OF TREASURY SHARES; REISSUANCE PRICE IS LESS THAN

ACQUISITION COST
Cash xx
Share Premium – Treasury Share xx
Retained earnings
Treasury Share xx

4. REISSUANCE OF TREASURY SHARES; REISSUANCE PRICE IS GREATER THAN

ACQUISITION COST
Cash
Treasury Share
Share Premium – Treasury Share
 5. RETIREMENT OF TREASURY SHARES
Cash xx
Share premium xx
Share premium – Treasury share xx
Retained earnings xx
Treasury Share xx

TWO TYPES OF RETAINED EARNINGS

1. Unrestricted Retained Earnings 2. Restricted Retained Earnings

○ UNRESTRICTED RETAINED EARNINGS – liquid type of retained earnings that serves

has no purpose or no specific allocation of the amount reflected in this account.
(E.g., Accumulated profits)
○ RESTRICTED RETAINED EARNINGS – this type of retained earnings has purpose or is
planned for certain projects or costs in the future. Thus, it is not liquid.
○ Reasons for restrictions are legal restrictions, loan covenants, and board decisions.
(E.g., Treasury Share)

JOINT ENTRY FOR TREASURY ACQUISITION, WITH RETAINED EARNINGS

Unrestricted Retained Earnings xx
Restricted Retained Earnings xx

JOINT ENTRY FOR TREASURY REISSUING, WITH RETAINED EARNINGS

Restricted Retained Earnings xx
Unrestricted Retained Earnings xx

○ DONATED TREASURY SHARE – issued treasury share but no cost is allocated.

○ DONATED CAPITAL – serves as the share premium when donated treasury shares is either
acquired or reissued.

ENTRIES IF FAIR VALUE IS GIVEN WHEN DONATED TREASURY SHARE IS

ACQUIRED
Treasury Share xx
Donated Capital xx

ENTRIES IF FAIR VALUE IS NOT GIVEN WHEN DONATED TREASURY SHARE IS

ACQUIRED
Memo entry only

ENTRIES IF FAIR VALUE IS GIVEN WHEN DONATED TREASURY SHARE IS

REISSUED
 Cash xx
Treasury Share xx
Donated Capital xx
ENTRIES IF FAIR VALUE IS NOT GIVEN WHEN DONATED TREASURY SHARE IS
REISSUED
Cash xx
Donated Capital xx

○ SHARE/STOCK SPLIT – increases the number of outstanding shares, but its par value
decreases.
○ REVERSE SHARE/STOCK SPLIT – decreases the number of outstanding shares, but its par
value increases.
○ Share/stock split is only a memo entry. Thus, not affecting the shareholder’s equity in the
financial statements.
○ Ratio is used when computing for split or reverse split.
○ SPLIT – multiply first then divide.
○ REVERSE SPLIT – divide first then multiply.

OTHER COMPREHENSIVE FORMULAS

○ ISSUED ORDINARY SHARE = Authorized shares – unissued ordinary shares
○ ISSUED PREFERENCE SHARE = Authorized shares – unissued preference shares
○ SHARE PREMIUM = Add and/or deduct all share premiums
○ TOTAL CONTRIBUTED CAPITAL = Issued shares + subscribed share capital + share
premium – subscribed receivable
○ LEGAL CAPITAL = Issued shares + subscribed share capital + share premium
○ SHAREHOLDER’s EQUITY = Accumulated profits + subscribed shares + freight-in +
authorized shares + gain on sale + donated capital + restricted retained earnings + unrestricted
retained earnings – unissued shares – cash dividends payable – treasury shares

RECAPITALIZATION (2nd Topic)

○ RECAPITALIZATION – change in capital structure of the company. Old shares are cancelled
and new shares are issued.

ENTRIES ON RECAPITALIZATION
○ QUASI-REORGANIZATION – financially troubled organization is permitted, but not required,
to revalue its assets and liabilities, and realign its equity to establish a fresh start.
○ Wipes out excessive amount of negative balance (deficit) in retained earnings account.

TWO MAJOR METHODS IN WIPING OUT THE DEFICIT

1. Reduction of par value
2. Revaluation of properties

○ Assets and liabilities are always measured at their fair values.

○ The amount of wiped-out deficit in retained earnings is not available for dividend
declarations.

SHAREHOLDER’s EQUITY PART II (3rd Topic)

○ RETAINED EARNINGS – cumulative amounts of net income earned less cumulative

amounts of declared dividends.
○ Its normal balance is credit.
○ If there are losses incurred, retained earnings may have a negative balance – called
“Accumulated losses”.
○ Retained earnings may be restricted or unrestricted.
 APPROPRIATION OF RETAINED EARNINGS
1. Legal Restriction 3. Voluntary Restriction
2. Contractual Restriction
○ LEGAL RESTRICTION – restriction by law. (Restriction equal to cost of treasury stocks)
○ CONTRACTUAL RESTRICTION – restriction required by legal contract. (Restriction for
bond redemption or sinking fund)
○ VOLUNTARY RESTRICTION – restriction under management’s discretion. (Restriction for
plant expansion, increase in working capital, or contingency fund)

○ DIVIDENDS – form of income that shareholders receive for purchases of shares issued by
an entity.
○ Dividends are voluntary and the entity isn’t obliged to pay it unless there’s a declaration.

DIVIDENDS MAY BE DECLARED AS

1. Dividends out of earnings 2. Dividends out of capital

○ TRUST FUND DOCTRINE – prohibits private corporations to distribute legal capital to

stockholders for protection of corporate creditors.
○ However, corporation is allowed to declare dividends to stockholders out of unrestricted
retained earnings.
○ Only issued shares and outstanding shares are entitled to dividends.

FORMULA FOR OUTSTANDING SHARES

Issued shares
Add: Subscribed shares
Less: Treasury shares f
Total Outstanding Shares

TYPES OF DIVIDENDS
1. Cash dividends 3. Share dividends
2. Property dividends

○ CASH DIVIDENDS – distributions in the form of cash.

○ Most common type of dividends.
○ Decreases equity.
○ Cash dividends shall be paid in full to subscribers.
JOURNAL ENTRIES FOR CASH DIVIDENDS
○ Dividends payable are always measured at fair value.

○ PROPERTY DIVIDENDS – distributions in the form of noncash assets.

○ Most uncommon type of dividends.
○ Decreases equity.
○ Used when existing noncash assets cannot be realized immediately.

ENTRIES FOR PROPERTY DIVIDENDS

PROPERTY DIVIDENDS PAYABLE

DATE OF Recognize and measure the dividends payable equal to the fair value
DECLARATION of the noncash asset to be distributed
DATE OF Update payable to the fair value of noncash asset
REPORTING 1. Increase in asset’s fair value will increase property dividends
payable and decrease retained earnings
2. Decrease in asset’s fair value will decrease property dividends
payable and increase retained earnings

DATE OF Update payable to the fair value of noncash asset. Any difference
SETTLEMENT between updated amount and carrying amount of noncash asset will
immediately be recognized in profit or loss
 NONCASH ASSET TO BE DISTRIBUTED
Under PFRS 5, lower of asset’s carrying amount and fair value less costs to distribute except:
1. Current assets
2. Financial assets
3. All other non-current assets

○ If carrying amount is greater than fair value, reclassify the asset to the greater amount.

○ SHARE DIVIDENDS – aka “Bonus Issue”. Distributions in the form of entity’s own shares.
○ Simply a transfer of retained earnings to contributed capital.
○ Share dividends payable isn’t a liability but a part of equity account.
○ No effect in equity.
○ Issued in full if subscribers are not yet delinquent.
○ Share dividends shall be withheld from delinquent subscriber until subscription is fully paid.
○ Share dividends may be classified as either small or large dividends.

ENTRIES FOR SMALL DIVIDENDS

ENTRIES FOR LARGE DIVIDENDS

 FORMULA FOR OUTSTANDING SHARES
Issued shares
Add: Subscribed shares
Less: Treasury shares f
Total Outstanding Shares

○ LIABILITY DIVIDENDS – temporary cash shortage. May either be (1) Scrip dividends and
(2) Bond dividends.

 SCRIP DIVIDENDS – short-term, and may or may not bear interest.

 BOND DIVIDENDS – long-term and interest bearing.

JOURNAL ENTRIES FOR LIABILITY DIVIDENDS

○ LIQUIDATING DIVIDENDS – aka “Dividends out of Capital”. Treated as return of capital and
declare normally during liquidation.
○ Contra-equity account, hence, this has a normal debit balance.
○ Decreases equity but does not affect retained earnings.

ENTRIES FOR LIQUIDATING DIVIDENDS

Capital Liquidated
Liquidating Dividends Payable
#
Liquidating Dividends Payable
Cash
○ FRACTIONAL SHARE DIVIDENDS – if it’s impossible to issue full shares to shareholders
when dividends are declared, entity may issue fractional rights and give holders time to
accumulate sufficient warrants.

ENTRIES FOR FRACTIONAL SHARE DIVIDENDS

○ TREASURY SHARES AS SHARE DIVIDENDS – charged to retained earnings at cost of

treasury shares.
○ NON-DETACHABLE SHARE WARRANT – entitle holders to acquire shares at certain price
within a specific period.

ENTRIES FOR NON-DETACHABLE SHARE WARRANT

○ DETACHABLE SHARE WARRANTS

JOURNAL ENTRIES FOR DETACHABLE SHARE WARRANTS

 STEPS TO ALLOCATION
1. Multiply the number of shares and warrants to be issued at their fair value.
2. Get the total of both products.
3. Multiply the product of fair values to its respective amount then divide by the number of
total when adding the fair value total of shares and warrants.
4. Multiply the answer in step three to the allocation cost total.
5. To get the allocation cost, multiply the number of shares to be issued at its issue price.
 COST ACCOUNTING AND CONTROL I

BASIC CONCEPTS (1st Topic)

○ MANAGERIAL ACCOUNTING – information here are presented and supplied to

management to operate business efficiently.
○ Used by managers who plan and control the organization.
○ Focuses on the future and emphasizes relevance for more timely details.
○ Perspective is on segments only of the organization.
○ Does not follow GAAP and is not mandatory for external reporting to external users.

○ COST ACCOUNTING – records, summarizes, analyzes, and interprets details of costs of

materials, labor, and overhead.

PURPOSES OF COST ACCOUNTING

1. Estimating and bidding 2. Planning, budgets, and control

○ COST – measurement of the amount of resources used for some purpose.

○ COST POOL – group of costs associated with an activity.
○ COST OBJECT – intermediate and final disposition of cost pools. (e.g., overhead account)
○ COST DRIVER – causes change in cost pool for an activity. Used as basis of cost allocation.
(e.g., estimated hours to build a product)
○ ACTIVITY – event, action, work sequence that incur costs when producing a
product/service. It has two types: (1) Value-adding activities and (2) Non-value-adding activities.
○ VALUE-ADDING ACTIVITIES – necessary workflow to make the product.
○ NON-VALUE-ADDING ACTIVITIES – does not make the product or service more valuable.
○ MANUFACTURING – conversion of materials into finished goods by using labor and
incurring other costs, called manufacturing overhead.
○ MANUFACTURING OVERHEAD (Factory Overhead) – sum of all indirect costs incurred
while manufacturing a product. Comprises mainly of utilities and overheads.
(e.g., Indirect materials and labors, utilities expense, rent expense, advertising expense, factory
insurance and depreciation)

FUNDAMENTAL FORMULA
Add: Direct materials
Direct labor
Factory overhead
TOTAL MANUFACTURING COST
○ PRIME COST – consists of direct materials plus direct labor.
○ CONVERSION COST – consists of direct labor plus factory overhead.

INVENTORIES FOR A MANUFACTURING COMPANY

1. Raw Materials Inventory 3. Finished Goods
2. Work in Process
 ○ RAW MATERIALS INVENTORY – cost of raw materials and factory supplies to be used in
manufacturing process.
○ WORK IN PROCESS INVENTORY – cost of raw materials, direct labor, and manufacturing
overhead of goods where manufacturing has begun but not completed at end of fiscal period.
○ FINISHED GOODS INVENTORY – cost of goods completed and are ready for sale.
○ Any changes in this account is reflected in cost of goods sold section.

GENERAL FORMULA
Total manufacturing cost
Add: Beginning work in process x
Total Cost of Goods in Process
Less: Ending work in process x
Cost of Goods Manufactured
Add: Beginning finished goods x
Total Goods Available for Sale
Less: Ending finished goods x
Total Cost of Goods Sold

COST AS TO TYPE
1. PRODUCT COST – costs incurred to manufacture the product
2. PERIOD COST – cost that are expensed in the period of incurrence and do not become
part of the cost of inventory

COST AS TO FUNCTION
1. MANUFACTURING COST – costs incurred in the factory to convert raw materials into
finished goods. Includes:
 DIRECT MANUFACTURING COSTS – consists of direct material and direct labor.
 INDIRECT MANUFACTURING COST – all manufacturing overhead.

2. NON-MANUFACTURING COST – costs which are not incurred in transforming materials

into finished goods.

COST AS TO TRACEABILITY/ASSIGNMENT TO COST OBJECTS

1. DIRECT COST – costs that are related to a cost object, and can economically and
effectively be traced to that cost object.
2. INDIRECT COST – costs that are related to a cost object, but cannot economically and
effectively be traced to that cost object.

COST AS TO BEHAVIOR
1. VARIABLE COST – total amount varies directly to change in activity level.
2. FIXED COST – the total amount remains unchanged or is in constant level.

VARIABLE COST AND FIXED COST WITHIN A RELEVANT RANGE

TOTAL AMOUNT PER UNIT COST
VARIABLE COST varies directly constant
FIXED COST constant varies inversely
 ○ MIXED COST – cost that has component of both variable and fixed cost.
○ Mixed cost always varies and is not constant, despite having the component of the fixed
cost.

MIXED COST WITHIN A RELEVANT RANGE

VARIABLE COMPONENT FIXED COMPONENT
TOTAL AMOUNT increases
COST PER UNIT decreases

FORMULA FOR MIXED COST

Y = a + bx Y – Mixed cost b – Variable cost
a – Fixed cost x – Activity/Cost driver

METHODS TO SEPARATE VARIABLE AND FIXED COST

1. High-low method 3. Least squares regression method
2. Scattergraph method

○ HIGH-LOW METHOD – used to identify variable cost per unit.

○ To begin with, search for the highest and lowest activity level first – then look for its cost to
be used in the formula.
○ Always account the outliers to get the most accurate answer.
○ To get it, simply deduct the cost price of the product from the previous period to the current
period, and so on. When looking at its differences, look for the amount that stands out too much
and simply exclude it from the other data.

FORMULA FOR HIGH-LOW METHOD

Variable cost per unit = Highest cost – lowest cost d
Highest activity – lowest activity

○ The basic objective of cost accounting is the determination of a product’s cost for inventory
valuation and income determinations. The ff are used in accumulated a product’s cost.

○ LEAST SQAURES REGRESSION METHOD – most accurate and reliable method to divide
the company’s mixed cost into its fixed and variable cost components. It is also known as
“Linear Regression Analysis”.

FORMULAS FOR LEAST SQUARES REGRESSION METHOD

EQUATION 1 – ∑y = na + b∑x
EQUATION 2 – ∑xy = ∑xa + b∑x2

∑ – Summation x – Activity driver a – Fixed costs

n – Number of instances y – Production costs b – Variable costs
 ○ To solve for least squares method, get all the necessary points in the equations.
○ After solving for all the points, both na and ∑xa needs to be equal, thus multiply it to a certain
number that will make it the same. Remember that multiply the number on both sides of the
equation
○ Afterwards, eliminate all the equal values and you may now compute for the value of b.
○ Repeat the process until you get all the needed values (a) in the given equation.

SYSTEM OF COST ACCUMULATION

1. Actual Cost System (Historical) 3. Normal Cost System
2. Standard Cost System (Predetermined)

○ ACTUAL COST SYSTEM (Historical) – direct materials and labor, and factory overhead
costs are determined as they occur simultaneously with manufacturing operations, but the total
of these costs is only determined after the operation has been completed.
○ STANDARD COST SYSTEM (Predetermined) – costs are determined in advanced from
analysis and forecasts made before the actual production begins.
○ NORMAL COST SYSTEM – combination of actual cost system and standard cost system.
○ Uses only the actual amounts of direct material and direct labor costs (Actual costing).
○ Whereas, factory overhead costs are accumulated based on predetermination (Standard
costing).

FORMULA – Predetermined rate = Estimated manufacturing overhead costs

Estimated activity driver
– Predetermined rate • Actual activity driver
= NORMAL COST

PRODUCT COSTS ACTUAL COSTING STANDARD COSTING NORMAL COSTING

DIRECT MATERIALS Actual Standard Actual
DIRECT LABOR Actual Standard Actual
FACTORY OVERHEAD Actual Standard Predetermined

TYPES OF COST SYSTEMS

1. Job Order Cost System 3. Dual Systems
2. Process Cost System

○ JOB ORDER COST SYSTEM – accumulates costs applicable to each specified job order or
lot of similar goods manufactured on a specific order for stock or for a customer.
○ Often used by manufacturers that produces variety of products.
○ Cost is identified for each job or work by batch or by order for specifications. This method is
most applicable to orders that have different varieties.
○ Identifies total manufacturing cost per job. There’s a separate identification for manufacturing
cost per job orders.
○ In job order cost system, jobs are categorized by certain numbers to keep record of it and is
then recorded at “Job Record Sheet”.
 FORMULA FOR JOB ORDER COST SYSTEM
Cost per unit = Total cost of job
Units produced
DOCUMENTS USED IN JOB ORDER COSTING
1. Materials Requisition Form 3. Job Cost Sheet
2. Time Ticket

○ MATERIALS REQUISITION FORM – records data of raw materials.

○ MATERIALS LEDGER CARD – book that is used to update data of raw materials.
○ COST CLERK – one who posts information on the Job Post Sheet.
○ TIME TICKET – used when a job is producing a unique order. It records the work they have
completed.
○ Records data about direct labor and the labor hours.

○ JOB COST SHEET – main source for tracking items to keep prices and inventory accurate.
○ To maintain its accuracy, job cost sheet keeps track of certain information such as date job
was started, date employees completed the job, date of shipping, customer information, costs,
labor information, and summary of cost of job.
○ Costs of direct materials are recorded periodically, whereas direct labor costs are recorded
on job cost sheet.

WHERE IS JOB ORDER COST APPLICABLE ASIDE FROM MANUFACTURING

1. Manufacturing Companies 3. Medical Service Businesses
2. White Collar Businesses 4. Film Studio and Production Companies

○ PROCESS COST SYSTEM – aka “Average Costing. Accumulates cost without attempting to
allocate them during accounting period.
○ At the end of the period, the average cost per unit is determined by dividing number of goods
produced to total cost accumulated.
○ Utilized best for continuous flow production of identical goods.

STEPS IN TYPICAL CYCLE OF OPERATION IN A COMPANY

1. Procurement 3. Warehousing
2. Production 4. Selling

○ PROCUREMENT – materials and supplies need for manufacturing are ordered, received,
and stored. Direct and indirect factory labor, and services are obtained.
○ Purchases of materials, labor and overhead costs are recorded as debit to materials.
○ Factory payroll and manufacturing overhead control as these costs are used in a factory
operation, they are credited as accounts transferred to production.
○ MANUFACTURING OVERHEAD CONTROL – track and control indirect manufacturing costs
incurred in a production process.
○ This is the accumulation of all manufacturing overhead costs during a specific accounting
period.
○ At year end, should the total amount of manufacturing overhead control be in the debit
balance, this represents underapplied amount to the job over the actual costs.
○ On the other hand, should the total amount be in the credit balance, this represents
overapplied amount to the job over the actual costs.
○ If it’s overapplied, this represents a favorable outcome, or vice versa. Because
overapplication is usually viewed as considerable outcome of the job order, for the estimation
was overstated than the actual costs incurred.
○ In underapplication, this is viewed normally as overspending of actual costs with regards to
the estimation.
○ The overapplied or underapplied amount may be adjusted under (1) adjusted COGS account,
and (2) work in process, finished goods account, and COGS.
○ Only allocate the work in process, finished goods account, and COGS amount for
over/underapplied amount when the balance is too significant/material, and pro-rate.
○ But if the over/underapplied amount when the balance is not significant/material, allocate it to
adjusted COGS.
○ FACTORY PAYROLL – temporary accounts that act like assets/expenses. These are wages
paid to production workers; made on an hourly, daily or piecework basis.

ENTRY FOR PROCUREMENT

Materials
Factory Payroll
Manufacturing Overhead Control
Cash/Payable

○ PRODUCTION – materials are transferred from the storeroom to the factory. Labor tools,
machines, power, and other costs are applied to complete the product.

ENTRY FOR PRODUCTION

Work in process
Materials
Factory Payroll
Manufacturing Overhead Control

○ WAREHOUSING – finished goods are moved from the factory to the warehouse to be held
until they are sold.
○ The cost of finished goods from work in process is recorded as to debit to finished goods.
○ The cost of merchandise shipped to the warehouse is credited to finished goods and charged
to cost of goods sold.

ENTRY FOR WAREHOUSING

Finished goods
Work in process

○ SELLING – customers are found. Merchandise is shipped from the warehouse. Sales to
customers are recorded.
○ The cost is debited to cost of goods sold and at the end of the counting period, the account is
closed by crediting cost of goods sold and debiting income summary.
 ENTRY FOR SELLING
Cost of goods sold
Finished goods
#
Cash/Accounts Receivable
Sales revenue

Cost Accounting Cycle for Materials

Cost Accounting Cycle for Labor

PURCHASING MATERIALS (2nd Topic)

○ Cost of raw materials is a major part of total manufacturing cost of each product.
○ This is where most manufacturing companies invest large sums.
○ Control over materials guard theft and also minimize waste and misuse from causes.

DEPARTMENTS IN ORGANIZATION FOR CONTROL

1. Purchasing Department 4. Accounting Department
2. Receiving Department 5. Cash Department
3. Storeroom
○ PURCHASING DEPARTMENT – places orders for materials.
○ PURCHASING AGENT – purchases materials. Must buy materials in correct quantities at a
proper time and at the lowest price.
○ The routine work of purchasing agent begins with the receipt of a purchase requisition.
○ REORDER POINT – time when an item has reached a level at which it should be reordered.

REORDER POINT FACTORS

1. Frequency of material used
2. Length of time to be delivered (Lead Time)
3. Minimum level of materials to be maintained (Safety Stock)
FORMULAS
REORDER POINT = Safety stock + (average use • max/normal lead time)
SAFETY STOCK = (Max lead time – normal lead time) • average use
NORMAL LEAD TIME USAGE = Normal lead time • average use
MAX LEAD TIME USAGE = Max lead time • average use

○ Standard quantity to be ordered varies from item to item.

○ This should have necessary quantity to get the best price while keeping inventory at an
appropriate level.
○ ECONOMIC ORDER QUANTITY – company's optimal order quantity that meets demand
while minimizing its total costs related to ordering, receiving, and holding inventory.

FORMULA FOR EOQ

EOQ = √ 2 • annual requirement • cost of an order/item

cost to carry a single order/item

○ PURCHASE REQUISITION – written request for materials and is prepared in duplicate.

○ One copy is sent to purchasing department, while the other is retained in the storeroom files.
○ This must be numbered for easy reference.
○ PURCHASE ORDER – written authorization to the supplier to ship the material, and is
prepared in five copies.
○ (1) First copy is sent to the supplier, (2) to the storeroom, (3) to the receiving department,
and (4) two copies to the purchasing department.
○ Purchase orders are all prenumbered.

○ RECEIVING DEPARTMENT – inspects incoming shipments and verification of quantities

received.
○ The receiving clerk upon receipt of materials takes out his copy of the purchase order and
compares it to the contents of the delivered goods.
○ After counting and inspecting, the receiving clerk then prepares a receiving report.
○ RECEIVING REPORT – shows all details of shipment, including comments on the condition
of the materials received.
○ Receiving report is duplicated in four copies: (1) purchasing department, (2) storeroom, (3)
storeroom supervisor, and (4) receiving clerk.
○ Materials are also called stores; hence material ledgers are sometimes called stores ledger.
○ STOREROOM – protects materials from physical deterioration and ensures stocks are
properly issued.
○ When the invoice is received from the supplier, it is sent to the purchasing department.
○ The purchasing department then compares the supplier’s invoice with the purchase order
and the receiving report.
○ If all documents are in order; (1) purchase invoice, (2) receiving report, and (3) purchase
order are all stapled, then a voucher is prepared – “Disbursement voucher”.
○ Disbursement voucher is sent to the accounting department for recording.

○ ACCOUNTING DEPARTMENT – records transactions in the accounts after documentary

evidences have been supplied.
○ The voucher clerk checks all the documents if they are properly approved and signed.
○ This double checking is another part of an effective internal control system.
○ The voucher clerk enters the purchase in the voucher register.
○ CASH DEPARTMENT – pays all invoices after approval by the accounting department.
○ A staff in the cash department prepares a check for the amount in the voucher.
○ The check is sent to the supplier, and the voucher is returned to the voucher clerk.
○ The disbursement voucher is then the basis for the preparation of journal entries to record
the purchase and the payment of the invoice.

○ The production manager prepares a bill of materials when a new sales order is received.
○ The bill of materials lists the needed materials on the job and the date needed.
○ This record enables storeroom supervisor to check the quantity of the material.

○ DEBIT MEMORANDUM – notice to vendor of deduction from invoice for the cost of returned
materials.
○ CREDIT MEMORANDUM – notice to supplier if the materials that are kept in excess for
future use, and is not included in the invoice.

CONTROL PROCEDURES
1. Order Cycling 4. ABC Plan
2. Min-Max Method 5. Automatic Order System
3. Two-Bin Method

○ ORDER CYCLING – materials are reviewed on a regular cycle.

○ MIN-MAX METHOD – minimum and maximum inventory levels are determined.
○ TWO-BIN METHOD – used for inexpensive items. The first bin is empty when an order is
placed. The second bin covers until the order is received.
○ ABC PLAN – used for expensive and wide variety of items.
a) A ITEMS – most expensive items, but very few.
b) B ITEMS – moderately expensive items and moderate in quantity.
c) C ITEMS – inexpensive items and is in large volumes.
○ AUTOMATIC ORDER SYSTEM – order is placed when inventory reaches a standard level
of items.
STORING AND ISSUING MATERIALS (3rd Topic)

○ Physical control begins from the time materials are delivered to the storeroom.
○ Whereas, written controls include receiving report, recording in materials ledger card, and
through the preparation of journal entries.

STORING MATERIALS PROCEDURE

1. Admission to storeroom area is restricted to employees under immediate supervision of
storeroom supervisor
2. Storeroom supervisor is responsible for protection of materials
3. The materials are assigned certain numbers
4. Materials are stored in a systematic manner

○ BIN TAG – informal record showing quantities of materials received, issued, and on-hand.

○ MATERIALS REQUISITION – indicates quantity, material number, description, and job

number.
○ One copy is filed as (1) receipt, and the second copy is given to the (2) storeroom clerk.

○ MATERIAL LEDGER CARD – each card serves as a perpetual inventory record.

○ This is a subsidiary ledger verified against the materials account in the general ledger.

○ After recording the materials ledger card, the requisition is then forwarded to the cost clerk –
who journalizes in a special journal, called “Materials Requisition Journal”.
○ MATERIALS REQUISITION JOURNAL – a special journal that reflects general ledger cost
accounts.
○ Special journals improve the efficiency of the journalizing process.

○ JOB COST SHEET – direct materials are reflected to charge a particular job.
○ DEPARTMENTAL OVERHEAD ANALYSIS SHEET – all indirect manufacturing expenses
are posted from a requisition for such materials.

PRINCIPLES OF INTERNAL CONTROL

1. Admittance to storeroom area should be restricted
2. Materials ledger card should be maintained
3. Materials should be identified, stored, and protected
4. Materials should be issued upon authorization
5. Accounting system should permit periodic check of materials ledger
6. Different persons should be involved in storage and issuance operations
○ Materials returned to storeroom as result of requisitioning too many materials, withdrawing
wrong materials must be accompanied by a returned materials report.
○ The return materials report is prepared in duplicate: one filled out by department that issued
for requisition or storeroom supervisor.
○ The materials returned are entered in the bin tag, under “Quantity Issued Column”.
○ RETURN SHIPPING ORDER – authorizes any return of materials prepared by the
purchasing agent in three copies, together with a debit memo prepared in three copies as well.
○ The three copies are given to the (1) purchasing agent, (2) shipping department, and (3)
accounting department.

○ Entires are recorded on materials ledger cards using the following procedures:
a) Materials Purchased – recorded as goods received.
b) Materials Issued – recorded as goods issued.
c) Materials Returned to Storeroom – recorded as goods returned.
d) Materials Returned to Supplier – recorded as goods that are sent back.

○ Entries made at the end of the period in materials account are as follows:

a) Materials Purchased – data from voucher register’s material column.

b) Materials Issued – data from total materials column on materials requisition journal.
c) Materials Returned to Storeroom – data from total materials column in returned
materials journal.
d) Materials Returned to Supplier – data from total entry in parenthesis of voucher
register’s materials column.
 TOTAL QUALITY AND OPERATIONS MANAGEMENT
(TQM)

Chapter 1 (1st Topic)

○ QUALITY – subjective and relates to different criteria based on individual roles in production
marketing value chain.
○ Quality may be referred to as the goodness of a product.
○ Quality has been an important aspect of production operations throughout history.
○ WALTER SHEWHART – one of the pioneers of quality control.

BASED ON UNITED STATES SURVEY, QUALITY DEFINES

1. Perfection 6. Providing a good, usable product
2. Consistency 7. Doing it right the first time
3. Eliminating waste 8. Delighting or pleasing customers
4. Speed of Delivery 9. Total customer service and satisfaction
5. Compliance with policies and procedures

SIX DIFFERENT PERSPECTIVES OF QUALITY

1. Transcendent 4. Value
2. Product 5. Manufacturing
3. User 6. Customer

○ TRANSCENDENT PERSPECTIVE – transcend or to go beyond customer’s expectations in

quality.
○ PRODUCT PERSPECTIVE – related to quantity of some product attribute. Larger numbers
of product attributes are equivalent to higher quality (mass production).
○ USER PERSPECTIVE – individuals have different wants and needs, hence different
expectations of a product arise. This leads to a user-based definition of quality – fitness for
intended use.
○ VALUE PERSPECTIVE – relationship of product benefits to price. Consumers no longer buy
solely on the basis of price.
○ CUSTOMER BENEFIT PACKAGE – quality of total package of goods and services. Includes
physical product and quality dimensions; presale supports, on-time delivery, and post-sale
supports.
○ MANUFACTURING PERSPECTIVE – consistency in goods and services. Conformance to
specifications.
○ SPECIFICATION – targets and tolerance determined by designer of goods and services.
○ NOMINAL SPECIFICATIONS – ideal values for production to strive.
○ CUSTOMER PERSPECTIVE – totality of features and characteristics of a product or
services that bears on its ability to satisfy given needs. Product and user definition, and is driven
by the need to create satisfied customers.
○ Meeting the expectations of consumers is the ultimate goal of any business.
○ EXTERNAL CUSTOMERS – consumer outside the organization.
○ INTERNAL CUSTOMER – consumer within the organization.

○ INTEGRATING QUALITY PERSPECTIVES IN THE VALUE CHAIN – important to create

and deliver goods and services.
○ Customers is the driving force for the production of goods and services, and customers
generally view quality from either the transcendent or the product perspective.

QUALITY PERSPECTIVE IN THE VALUE CHAIN

HISTORY OF QUALITY MANAGEMENT

1. Age of Craftsmanship
2. Early Twentieth Century
3. Post World War II
4. U.S. “Quality Revolution”
5. Rapid Growth of Quality in Business
6. Product Quality to Total Quality Management

○ AGE OF CRAFTMANSHIP (Middle-ages) – during the middle-ages in Europe, the skilled

craftsperson served both manufacturer and inspector, “All-in-one”.
○ EARLY TWENTIETH CENTURY (1900s) – managers and engineers were given the task of
planning; supervisors and workers took the task of execution. Through work assignments,
quality assurance fell into the hands of inspectors. Eventually, manufacturing companies
created separate quality departments.
○ FREDERICK W. TAYLOR – “Father of Scientific Management”. The works of Taylor led to a
new philosophy of production. He separated the planning function from the execution function.
○ BELL SYSTEM – leader in early modern history of industrial quality management.
○ QUALITY ASSURANCE – planned and systematic activity directed toward providing
consumers with products of appropriate quality.
○ QUALITY CONTROL – evaluation of a process to determine if corrective action is needed to
ensure that level of quality is achieved.
○ STATISTICAL QUALITY CONTROL – application of statistical methods for controlling
quality. This ushered in the era of Western Electric Group, led by Walter Shewhart and is
credited with developing control charts.

○ POST WORLD WAR II – shortage of civilian goods in US made production top priority.
Quality remained the province of specialist, but quality was not the priority of top managers. Top
management relied on mass inspection.
○ STATISTICAL QUALITY CONTROL – introduced by Dr. Joseph Jurah and Dr. W. Edwards
Deming to aid the Japanese in rebuilding efforts. It prevented the defect product to the end user.
○ KAIZEN – culture of continuous improvement.

○ US QUALITY REVOLUTION (1980s) – remarkable change in growing awareness in quality.

○ One of the most influential individuals in the quality revolution was W. Edwards Deming.
○ Quality became recognized as a key to worldwide competitiveness and was heavily
promoted throughout the industry.

○ RAPID GROWTH OF QUALITY IN BUSINESS – government recognized how quality is

critical to nation’s economic health.
○ Interest in quality grew in an unprecedented rate. Manufacturers and service organizations
made significant strides in improving quality.

○ FROM PRODUCT QUALITY TO TOTAL QUALITY MANAGEMENT (1980s-1990s) – by

listening to customers and develop long-term relationships, develop strategy, measure
performance, analyze data, reward and train employees, and the like are the true enablers of
quality, customer satisfaction, and business results.
○ Recognized that quality of management is as important as quality management.
○ TOTAL QUALITY – people-focused management system that aims to increase customer
satisfaction. It is a total system approach and integral part of high-level strategy, and continuous
effort.

○ EARLY MANAGEMENT FAILURE – TQMs failures were mostly rooted at poor strategies,
flawed organizational approaches, and flawed management systems.

○ PERFORMANCE EXCELLENCE PRESENTATION – fundamental business activities such

as role of leadership, strategic plans, how data and information's used in decision making, and
improved environmental conditions.
○ PERFORMANCE EXCELLENCE – integrated approach to organizational performance
management.

○ EMERGENCE OF SIX SIGMA – new approach to quality improvement in the late 1900s, is a
customer-focused, result-oriented approach. And integrate many traditional quality
improvements which are validated and tested over the years.

○ GLOBALIZATION OF QUALITY – due to high competition around the world, the global
marketplace, domestic and even international organization realized that, in order to survive in
the competition, they need to depend on high quality.
○ Many countries have mounted efforts to increased quality awareness, including conferences,
seminars, radio show, school essay contest, pamphlet distribution , publications & etc.

○ CURRENT AND FUTURE CHALLENGES – the challenge today is to ensure the managers
continue to focus on quality management performance excellence through their organization.
○ A former Xerox president David Kearns observed that Quality is a race without a finish line.
 EIGHT KEY FORCES THAT WILL INFLUENCE THE FUTURE OF QUALITY
1. Global Responsibility 5. Workforce of the Future
2. Consumer Awareness 6. Aging Population
3. Globalization 7. Twenty First Century Quality
4. Increasing rate of change 8. Innovation

MANUFACTURING SYSTEM
1. Marketing and Sales 6. Tool Engineering
2. Product Design and Engineering 7. Industrial Engineering & Process Design
3. Purchasing and Receiving 8. Finish Goods Inspections and Testing
4. Production Planning and Scheduling 9. Packaging, Shipping, and Warehousing
5. Manufacturing and Assembly 10. Installation and service

QUALITY IN SERVICE ORGANIZATION

○ Many service organizations such as airlines, banks and hotels have well developed quality
systems. (This system begins with a commitment to a customer.)
○ Service quality can be viewed from manufacturing analogy, for instance, technical standards.

○ However, managing this intangible quality or service is more difficult due to its fact that it will
always defends on employee performance.
○ The two most important driver in service quality are people and technology.

QUALITY IN BUSINESS SUPPORT FUNCTIONS

○ In addition to manufacturing and service activities, other business support activities are
necessary for achieving quality. Some of these activities are the following:
1. Finance and Accounting 3. Quality Assurance
2. Legal Services
QUALITY AND COMPETITIVE ADVANTAGE PRESENTATION
○ Traditionally, quality has focused on defect and error reduction, and product control as
means to reduce costs. However, more progressive organization have realized that high quality
is itself an important source of competitive advantage.
○ COMPETITIVE ADVANTAGE – denotes a firm ability to achieve market superiority.

QUALITY AND BUSINESS RESULT PRESENTATION

○ “The proof is in the pudding”
○ Various research studies have shown that quality-focused companies achieved better
employee participation and relations, improved product and service quality, higher productivity,
greater customer satisfaction, increased market share, and improved profitability.

QUALITY AND PERSONAL VALUES

○ Today, organizations are asking employees to take more responsibility for acting as the point
of contact between the organization and the customer, to be team player and to provide better
customer service.
○ Quality begins with individual attitudes and behavior.
○ Employees who embrace quality as a personal value often go beyond what they asked or
normally expected to do in order to reach a difficult goal or provide extraordinary service to a
customer.
○ Quality must begin at a personal level and practiced in all activities of daily life.

CUSTOMER FOCUS (2nd Topic)

○ CUSTOMER FOCUS – most important principle of quality management.

○ Without customers, businesses won’t exist.
○ OKYAKUSAMA – Japanese term for “customer” or “honorable guest”.
○ To meet or exceed customer expectations, organizations must understand product attributes
that would lead to customer satisfaction and loyalty.

○ CUSTOMER SATISFACTION – result of delivering a product or service that meets customer

requirements.
○ Vital to keeping customer and growing business.
○ Customer satisfaction ensures quality assurance and control.
○ If there’s customer satisfaction, there will be a repeat purchase that drives profitability.
○ CUSTOMER ENGAGEMENT – customers’ investment in commitment to products.

○ AMERICAN SATISFACTION INDEX (ACSI) – economic indicator that measures customer

satisfaction at the national level.

○ First step in being customer-focused is to understand who are your customers.

○ Customers are those people who ultimately purchase and use a company’s product.
○ INTERNAL CUSTOMER – the recipient of output inside the organization.
○ EXTERNAL CUSTOMERS – those who fall between the organization and the customer, but
are not part of the organization. (Middleman, reseller, distributor, retailer)

AT&T’s CUSTOMER – SUPPLIER MODEL

FUNDAMENTAL QUESTIONS TO IDENTIFY CUSTOMERS

1. What goods and services are produced by your work?
2. Who uses these products and services?
3. Who do I call, write or answer questions for?
4. Who supplies the inputs to my process?

○ CUSTOMER SEGMENTATION – categorization of customers per manner in basis of the

organization such as through geography, demographic, usage, volumes and level of service.

DIMENSIONS OF QUALITY OF A PRODUCT (David A. Garvin)

1. Performance 5. Durability
2. Features 6. Serviceability
3. Reliability 7. Aesthetics
4. Conformance

DIMENSIONS OF QUALITY OF SERVICES

1. Reliability 4. Empathy
2. Assurance 5. Responsiveness
3. Tangibles

○ NORIAKO KANO – segmented customer requirements into three groups: (1) Dissatisfiers,
(2) Satisfiers, and (3) Exciters/delighters.
○ DISSATISFIERS (Must haves) – basic requirements in a product or service.
○ SATISFIERS (Wants) – requirements that customers expressly say they want.
○ EXCITERS/ DELIGHTER (Never thought of) – new or innovative features that customers
do not expect.
○ Innovations, however, are not exciters/delighters for long when customers become familiar
with them.
○ VOICE OF CUSTOMER – aka “Customer’s Feedback”. Customer requirements expressed
in customer terms.

APPROACHES FOR GATHERING CUSTOMER INFORMATION

1. Comment Card’s and Formal Surveys 4. Field Intelligence
2. Focus Groups 5. Complaints
3. Direct Customer contact 6. Internet and Social Media Monitoring

○ AFFINITY DIAGRAM – developed in the 1960’s by Kawakita Jiro. This is a main ingredient
of the KJ Method.
○ Organizes large volumes of information efficiently, and identifies natural patterns for group in
the information.

THREE BROAD CATEGORIES OF STUDY OF INTERNET BANK SERVICE

1. Customer Service Quality
2. Banking Service Product Quality
3. Online System Quality

○ Customer relationships is fostered through strategic partnership and alliances, and using
technology.

KEY PROCESSES ON BUILDING A CUSTOMER-FOCUSED ORGANIZATION

1. Making sincere commitments to customers
2. Ensuring quality customer contact
3. Selecting and developing customer contact
4. Managing complaints and service recovery

APPROACHES TO TRACK CUSTOMER SATISFACTION

1. Transactional Customer Satisfaction Index
2. Relationship Customer Satisfaction
3. Competitive Study

○ Customer satisfaction measurement should not be confined to external customers.

○ A Likert Scale is commonly used to measure the response.

○ W. Edwards Deming stressed the importance of using customer's feedback to improve a

company’s products and processes.

WHY MANY CUSTOMER SATISFACTION EFFORTS FAIL

1. Poor measurement schemes
2. Failure to identify appropriate quality dimensions
3. Failure to weigh dimensions appropriately
4. Lack of comparison with leading competitors
5. Failure to measure potential and former customers
6. Conffusing loyalty with satisfaction
WORKFORCE FOCUS (3rd Topic)

○ WORKFORCE – everyone who is actively involved in accomplishing the work of an

organization.
○ WORKFORCE SATISFACTION – strongly related to customer satisfaction, and ultimately to
business performance.

○ FREDERICK W. TAYLOR – promulgated the departure from the craftmanship concept.

○ Introduced a management approached knowns as “Scientific Management” – focuses on the
idea of scientific selection of employees based on their capabilities.

○ HAWTHORNE STUDIES – focuses on the socio-psychological aspect of human behavior.

○ Managers and supervisors handles all the business operations.
○ Managers monitors production of outputs if it’s efficient. If there’s no monitoring, employees
may slack off.

○ WORKFORCE MANAGEMENT – aka “Human Resource Management”. Organizational

function which facilitates the most valuable asset of the organization – its employees.

THREE STAGES OF EMPLOYMENT CYCLE

1. Pre-Hire 3. Post Hiring
2. Hire

TWO TYPES OF RECRUITMENT

1. Internal – mere transfer of employee from one department to another inside the
organization.
2. External – walk-in applications, job application outside of the organization.

○ STRATEGIC HUMAN RESOURCE MANAGEMENT – concerned with the contributions HR

strategies that make organizational effectiveness, and how these contributions are
accomplished.

○ PERFORMANCE – extent which individual contributes to achieving the goals and objectives
of an organization.
○ HIGH PERFORMANCE – work approaches used to pursue an even higher level of overall
organizational and human performance.

FIVE CONDITIONS OF COLLABORATION (Kay Kendall and Glenn Bodison)

1. Respect 4. Communication
2. Values 5. Trust
3. Purpose

○ WORKFORCE ENGAGEMENT – extent of workforce commitment to accomplish work,

mission, vision of the organization.
○ If there’s more workforce engagement, turn-over rate lessens.
○ Employees are motivated through exciting work, responsibility, and recognition.
○ ENGAGEMENT – workers find personal meaning and motivation in work.
○ EMPLOYEE INVOLVEMENT – employees participate in work-related decisions and
improvement activities.
○ EMPLOYEE SUGGESTION SYSTEM – management tool for the submission, evaluation,
and implementation of an employee's idea to save cost, increase quality, or improve other
elements of work.

○ SAUL W. GELLERMAN – “Motivation is the art of creating conditions that allow every one of
us, warts and all, to get his work done at his own peak level efficiently”.
○ MOTIVATION – that help employees work towards a particular goal or effectively perform
tasks. Has two types: (1) Extrinsic Motivation and (2) Intrinsic Motivation.
○ EXTRINSIC MOTIVATION – factors that are outside of the person.
○ INTRINSIC MOTIVATION – occurs within the individual.

○ WORK DESIGN – how employees are organized in formal and informal units, such as
department and teams.
○ FORMAL UNIT – has authorization and is a written document.
○ INFORMAL UNIT – a team only for a specific undertaking.
COMMON APPROACHES TO WORK DESIGN
1. Job Enlargement 3. Job Enrichment
2. Job Rotation

○ JOB DESIGN – refers to responsibilities and task assigned to individuals.

JOB DESIGN CHARACTERISTICS
1. Task significance 4. Autonomy
2. Task Identity 5. Feedback from the Job
3. Skill Variety

○ EMPOWERMENT – gives people authority.

○ TEAM – group who work together and cooperate to share work and responsibility.
○ Teamwork breaks down the barriers among individuals, departments, and line and staff
functions.

○ Employees are the key stakeholder of any organization. Health and Safety have always
been priorities in the most companies – Workplace Environment.
○ COMPENSATION AND RECOGNITION – pay and reward, including promotions, bonuses,
and recognition, either monetary and nonmonetary, individual or group.
○ PERFORMANCE APPRAISAL – evaluation of the quality of an employee’s work.
○ Q12 – an instrument implemented by the Gallup Organization.
 STATISTICAL ANALYSIS (STAT 1)

INTRODUCTION TO STATISTICAL CONCEPT (1st Topic)

○ STATISTICS – science of collecting, organizing, summarizing, and analyzing information to

draw conclusions or answer questions.
○ Provides a measure of confidence in any conclusions.

○ DATA – factual information used as a basis for reasoning, discussion, or calculation.

○ UNIVERSE – set of all entities under study.
○ POPULATION – set of all possible values of the variable.
○ INDIVIDUAL – person or object that is a member of the population being studied.
○ PARAMETER – numerical summary of a population.
○ SAMPLE – subset of the population.

○ STATISTIC – numerical summary of a sample. Has two types: (1) Descriptive Statistics and
(2) Inferential Statistics.
○ DESCRIPTIVE STATISTICS – organizes and summarizes data. Descriptive statistics
describe data through summaries, tables, and graphs.
○ INFERENTIAL STATISTICS – takes result from a sample, extend it to the population, and
measure the reliability of the result.
○ If the entire population is studied, then inferential statistics is not necessary, because
descriptive statistics will provide all the information that we need regarding the population.

PROCESS OF STATISTICS
1. Identify the research objective
2. Collect the information needed to answer the questions
3. Organize and summarize the information
4. Draw conclusion from the information

○ VARIABLES – characteristics of the individuals within the population. Variables are classified
into two groups: (1) Qualitative Variables and (2) Quantitative Variables.
○ QUALITATIVE VARIABLES – yields categorical responses. Represents class or category.
○ QUANTITATIVE VARIABLES – numerical values representing an amount or quantity.
Quantitative variables is further divided into two categories: (1) Discrete Variable and (2)
Continuous Variable.

○ DISCRETE VARIABLE – finite number of possible values or a countable number of possible

values. If you count to get the value of a quantitative variable, it is discrete.
○ CONTINUOUS VARIABLE – infinite number of possible values that are not countable. If you
measure to get the value of a quantitative variable, it is continuous.

LEVELS OF MEASUREMENT
1. Nominal Level 3. Interval Level
2. Ordinal Level 4. Ratio Level
○ NOMINAL LEVEL – first level of measurement and is characterized by data that
consist of names, labels or categories only.
○ The data cannot be arranged in ordering scheme. Thus, nominal scales have no numerical
value.
○ Nominal Level is also called “Categorical scales or categorical data”.
○ Example: Color of eyes, type of school, method of payment.
○ ORDINAL LEVEL – data may be arranged in some order, but differences between data
values either cannot be determined or meaningless.
○ An ordinal scale ranks them from highest to lowest, from most to least.
○ Example: Socio economic class, rank of police officer, honors from highest to lowest grade.
○ INTERVAL LEVEL – specifies that the distances between each interval on the scale
○ A value of zero does not mean the absence of the quantity.
○ Example: Temperature, level of anxiety, IQ and EQ test.
○ RATIO LEVEL – represents highest, most precise, level of measurement.
○ Has the properties of the interval level of measurement and the ratio.
○ A value of zero means the absence of the quantity.
○ Example: Height and weight, time, distance and speed.

DATA COLLECTION AND BASIC CONCEPT (2nd Topic)

○ DATA COLLECTION – gathering and measuring information on variables of interest

to answer research questions, test hypotheses, and evaluate outcomes.

SOURCES OF DATA
1. Primary Source 2. Secondary Source

○ PRIMARY SOURCE – provides a first-hand account of an event or time period and are
considered to be authoritative.
○ They represent original thinking, reports on discoveries or events, or they can share new
information.
○ They are usually the first formal appearance of original research.
○ SECONDARY SOURCES – offer an analysis, interpretation or a restatement of primary
sources and are considered to be persuasive.
○ They often involve generalization, synthesis, interpretation, commentary or evaluation in an
attempt to convince the reader of the creator's argument.

FIVE METHODS OF GATHERING PRIMARY DATA

1. Direct personal interviews 4. Experiment
2. Indirect/Questionnaire Method 5. Observation
3. Focus group

○ CENSUS – Is attractive to use if the population is small because It eliminates sampling error
and it provides data on all the members or elements of the population.
SLOVIN’S FORMULA = n = N d n – Sample size N – Population size
1 + Ne2 e – Margin of error

○ PROBABILITY SAMPLING TECHNIQUES – result to samples that are chosen that every
population is known but not has an equal chance of being selected. The samples used are
unbiased samples.

 SIMPLE RANDOM SAMPLING – all members of the population have an equal chance
of being selected. Randomization is done through Lottery Technique or Fish-Bowl
Technique or using a Table of Random Numbers.
 STRATIFIED RANDOM SAMPLING – used when sample is divided into groups or strata
and samples are randomly selected from each stratum.
 SYSTEMATIC SAMPLING WITH A RANDOM START –selection of every kth element of
the population where k = N/n is called the sampling interval. The starting element is
selected randomly.
 CLUSTER SAMPLING – this is sometimes called “Area sampling” because the
population may be very, very large requiring the population to be grouped into clusters.

○ NON-PROBABILITY SAMPLING TECHNIQUES – every element of the population does not

have a known chance of being included in the sample.

 CONVENIENCE SAMPLING – selection of elements in the sample are based on

convenience where the elements are easily accessible.
 QUOTA SAMPLING – used when there is stratification but the sampling ratio is not
used, instead the one doing the sampling merely decides on the allocation or quota.
 PURPOSIVE SAMPLING – selection of members of the sample is based on some
predetermined criteria.

○ DATA COLLECTION & SAMPLING TECHNIQUES

 DIRECT OR INTERVIEW METHOD – there’s a direct contact with the respondent

thus more accurate response is obtained.
 INDIRECT OR QUESTIONNAIRE METHOD – a lot of money and time will be saved
because a questionnaire can be given to the respondents at the same time.
 REGISTRATION METHOD – method of gathering data that is governed by law.
 EXPERIMENTAL METHOD –find out cause and effect relationship.