Managerial Accounting

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Cover Title Page Copyright Page About the Author Preface Acknowledgments Contents 1 MANAGERIAL ACCOUNTING IN THE INFORMATION AGE GOAL OF MANAGERIAL ACCOUNTING Planning Budgets for Planning Control Performance Reports for Control Decision Making A Comparison of Managerial and Financial Accounting Internal versus External Users Need to Use GAAP Detail of Information Emphasis on Nonmonetary Information Emphasis on the Future Similarities between Financial and Managerial Accounting COST TERMS USED IN DISCUSSING PLANNING, CONTROL, AND DECISION MAKING Variable and Fixed Costs Variable Costs Fixed Costs Sunk Costs Opportunity Costs Direct and Indirect Costs Controllable and Noncontrollable Costs TWO KEY IDEAS IN MANAGERIAL ACCOUNTING Decision Making Relies on Incremental Analysis THE INFORMATION AGE AND MANAGERIAL ACCOUNTING Impact of Information Technology on Management of the Value Chain Information Flows between Milano and Customers Information Flows between Milano and Suppliers Using Information Technology to Gain Internal Efficiencies Software Systems That Impact Value Chain Management Enterprise Resource Planning Systems Supply Chain Management Systems Customer Relationship Management Systems ETHICAL CONSIDERATIONS IN MANAGERIAL DECISION MAKING Ethical and Unethical Behavior Sarbanes-Oxley Act A Framework for Ethical Decision Making IMA Statement of Ethical Professional Practice THE CONTROLLER AS THE TOP MANAGEMENT ACCOUNTANT SUMMARY OF LEARNING OBJECTIVES APPENDIX IMA STATEMENT OF ETHICAL PROFESSIONAL PRACTICE2 Principles Standards Resolution of Ethical Conflict LINK TO PRACTICE: Long Supply Chains Create Opportunity Costs Problems Related to the Wrong Performance Measures Casinos Manage with Data from CRM Systems Feds Investigating Walmart Over Bribery in Mexico Are the Procurement Practices of the Hershey Company Ethical? Review Problems Key Terms Self-Assessment Questions Exercises Problems Cases 2 JOB-ORDER COSTING FOR MANUFACTURING AND SERVICE COMPANIES COST CLASSIFICATIONS FOR MANUFACTURING FIRMS Manufacturing Costs Direct Material Direct Labor Manufacturing Overhead Nonmanufacturing Costs Selling Costs General and Administrative Costs Product and Period Costs Product Costs Period Costs PRODUCT COST INFORMATION IN FINANCIAL REPORTING AND DECISION MAKING BALANCE SHEET PRESENTATION OF PRODUCT COSTS FLOW OF PRODUCT COSTS IN ACCOUNTS INCOME STATEMENT PRESENTATION OF PRODUCT COSTS Cost of Goods Manufactured Cost of Goods Sold TYPES OF COSTING SYSTEMS OVERVIEW OF JOB COSTS AND FINANCIAL STATEMENT ACCOUNTS JOB-ORDER COSTING SYSTEM Direct Material Cost Direct Labor Cost Journal Entry to Record Direct Labor Manufacturing Overhead Journal Entries to Record Manufacturing Overhead Assigning Costs to Jobs: A Summary EASTLAKE REVISITED: USING JOB COST INFORMATION RELATION BETWEEN THE COSTS OF JOBS AND THE FLOW OF COSTS IN WORK IN PROCESS, FINISHED GOODS, AND COST OF GOODS SOLD ALLOCATING OVERHEAD TO JOBS: A CLOSER LOOK Overhead Allocation Rates The Overhead Allocation Base Activity-Based Costing (ABC) and Multiple Overhead Rates PREDETERMINED OVERHEAD RATES Eliminating Overapplied or Underapplied Overhead JOB-ORDER COSTING FOR SERVICE COMPANIES Comprehensive Example MODERN MANUFACTURING PRACTICES AND PRODUCT COSTING SYSTEMS Just-in-Time (JIT) Production Lean Manufacturing Computer-Controlled Manufacturing Total Quality Management SUMMARY OF LEARNING OBJECTIVES LINK TO PRACTICE: Product and Period Costs at SpaceX Examples of Companies Using Job-Order and Process Costing Systems Lean Principles Are Not Just for Manufacturing Firms Just-in-Time or Just-in-Case Can There Be Too Much Emphasis on Quality? Review Problems Key Terms Self-Assessment Questions Exercises Problems Cases 3 PROCESS COSTING DIFFERENCE BETWEEN JOB-ORDER AND PROCESS COSTING SYSTEMS PRODUCT AND COST FLOWS Product Flows through Departments Cost Flows through Accounts Direct Material Direct Labor Manufacturing Overhead Transferred-in Cost CALCULATING UNIT COST Equivalent Units Cost per Equivalent Unit CALCULATING AND APPLYING COST PER EQUIVALENT UNIT: MIXING DEPARTMENT EXAMPLE Cost Transferred Out Ending Work in Process PRODUCTION COST REPORT Reconciliation of Units Reconciliation of Costs BASIC STEPS IN PROCESS COSTING: A SUMMARY KENT CHEMICAL REVISITED: ANSWERING STACY’S QUESTION DEALING WITH TRANSFERRED-IN COST: PACKAGING DEPARTMENT EXAMPLE PROCESS COSTING AND INCREMENTAL ANALYSIS “YOU GET WHAT YOU MEASURE!” AND MANUFACTURING PROCESSES SUMMARY OF LEARNING OBJECTIVES LINK TO PRACTICE: What Type of Costing System Is Used by ExxonMobil Corporation for the Product Mobil 1? Virtual Plant Tour for Company Using Process Costing Review Problems Key Terms Self-Assessment Questions Exercises Problems Cases 4 COST-VOLUME-PROFIT ANALYSIS COMMON COST BEHAVIOR PATTERNS Variable Costs Fixed Costs Discretionary versus Committed Fixed Costs Mixed Costs Step Costs Relevant Range COST ESTIMATION METHODS Account Analysis Scattergraphs High-Low Method Regression Analysis The Relevant Range and Cost Estimation COST-VOLUME-PROFIT ANALYSIS The Profit Equation Break-Even Point Margin of Safety, Contribution Margin Units Needed to Achieve Profit Target Contribution Margin Ratio Dollar Sales Needed to Achieve Profit Target “What If” Analysis Change in Fixed and Variable Costs Change in Selling Price MULTIPRODUCT ANALYSIS Contribution Margin Approach Contribution Margin Ratio Approach ASSUMPTIONS IN CVP ANALYSIS CODECONNECT EXAMPLE REVISITED: ANSWERING MARY’S QUESTIONS Planning Control Decision Making OPERATING LEVERAGE CONSTRAINTS SUMMARY OF LEARNING OBJECTIVES APPENDIX USING REGRESSION IN EXCEL TO ESTIMATE FIXED AND VARIABLE COSTS Setting Up the Spreadsheet Interpreting the Output of the Regression Program LINK TO PRACTICE: Using Less Water but Paying Higher Rates! Breaking Even on a Golf Course Is Harder than Making Par Deciding to Use the Contribution Margin per Unit or the Contribution Margin Ratio Which Firm Has the Higher Contribution Margin Ratio? Impact of Operating Leverage at Vulcan Materials Fixed Costs Too High—Make Them Variable! Review Problems Key Terms Self-Assessment Questions Exercises Problems Cases 5 VARIABLE COSTING FULL (ABSORPTION) AND VARIABLE COSTING Variable Costing Income Statement EFFECTS OF PRODUCTION ON INCOME FOR FULL VERSUS VARIABLE COSTING: THE CLAUSENTUBE EXAMPLE Quantity Produced Equals Quantity Sold Quantity Produced Is Greater Than Quantity Sold Quantity Produced Is Less Than Quantity Sold Explaining What Happened at ClausenTube Impact of JIT on the Income Effects of Full versus Variable Costing BENEFITS OF VARIABLE COSTING FOR INTERNAL REPORTING Variable Costing Facilitates CVP Analysis VARIABLE COSTING LIMITS MANAGEMENT OF EARNINGS VIA PRODUCTION VOLUME SUMMARY OF LEARNING OBJECTIVES LINK TO PRACTICE: German Companies More Likely to Use Variable Costing Overproduction to Avoid Showing a Loss Cut in Production at John Deere Likely to Hurt Profit Margin Review Problems Key Terms Self-Assessment Questions Exercises Problems Cases 6 COST ALLOCATION AND ACTIVITY-BASED COSTING PURPOSES OF COST ALLOCATION To Provide Information for Decision Making To Reduce Frivolous Use of Common Resources To Encourage Evaluation of Services To Provide “Full Cost” Information PROCESS OF COST ALLOCATION Determining the Cost Objective Forming Cost Pools Selecting an Allocation Base ALLOCATING SERVICE DEPARTMENT COSTS Direct Method of Allocating Service Department Costs Allocating Budgeted and Actual Service Department Costs PROBLEMS WITH COST ALLOCATION Responsibility Accounting and Controllable Costs Arbitrary Allocations Unitized Fixed Costs and Lump-Sum Allocations The Problem of Too Few Cost Pools Using Only Volume-Related Allocation Bases ACTIVITY-BASED COSTING The Problem of Using Only Measures of Production Volume to Allocate Overhead The ABC Approach Hierarchy of Activities Relating Cost Pools to Products Using Cost Drivers The ABC Approach at McMaster Screen Technologies: A Comprehensive Example McMaster’s Costs under the Traditional Approach McMaster’s Costs under the ABC Approach Pros and Cons of ABC Benefits Limitations ACTIVITY-BASED MANAGEMENT REMEMBER—YOU GET WHAT YOU MEASURE! SUMMARY OF LEARNING OBJECTIVES APPENDIX ACTIVITY-BASED MANAGEMENT Step 1: Determine Major Activities Step 2: Identify Resources Used by Each Activity Step 3: Evaluate the Performance of the Activities Step 4: Identify Ways to Improve the Efficiency and/or Effectiveness of the Activities CONCLUSION LINK TO PRACTICE: Cost-plus Contracts Create Incentive to Misallocate Costs Basis for Allocating Costs to Federal Grants and Contracts Disputes over Allocations not Limited to the Private Sector Avoiding a Disastrous Decision by Using ABC Banks and Other Service Companies Use ABM ABC Points to Process Improvement and Cost Control Review Problems Key Terms Self-Assessment Questions Exercises Problems Cases 7 THE USE OF COST INFORMATION IN MANAGEMENT DECISION MAKING INCREMENTAL ANALYSIS When Your Boss Asks, “What Does This Product (Service) Cost?” You Should Say, “Why Do You Want to Know?” ANALYSIS OF DECISIONS FACED BY MANAGERS Additional Processing Decision Make-or-Buy Decisions: The General Refrigeration Example Dropping a Product Line Beware of the Cost Allocation Death Spiral! Summary of Incremental, Avoidable, Sunk, and Opportunity Costs DECISIONS INVOLVING JOINT COSTS Allocation of Joint Costs Additional Processing Decisions and Joint Costs QUALITATIVE CONSIDERATIONS IN DECISION ANALYSIS SUMMARY OF LEARNING OBJECTIVES APPENDIX THE THEORY OF CONSTRAINTS THE FIVE-STEP PROCESS OF TOC Step 1: Identify the Binding Constraint Step 2: Optimize Use of the Constraint Step 3: Subordinate Everything Else to the Constraint Step 4: Break the Constraint Step 5: Identify a New Binding Constraint IMPLICATIONS OF TOC FOR INSPECTIONS, BATCH SIZES, AND ACROSS-THE-BOARD CUTS LINK TO PRACTICE: Sell Partially Completed Superyacht? Boeing’s Global Outsourcing Strategy Blamed for 3-Year Delay in 787 PACCAR Decides to Make as Well as Buy! Indian Wireless Company Outsources to U.S. and European Firms! Spike TV Drops Impact Wrestling Ronald H. Coase’s Contribution to Incremental Analysis The Sunk Cost Effect Qualitative Considerations in Outsourcing to China Review Problems Key Terms Self-Assessment Questions Exercises Problems Cases 8 PRICING DECISIONS, CUSTOMER PROFITABILITY ANALYSIS, AND ACTIVITY-BASED PRICING THE PROFIT-MAXIMIZING PRICE PRICING SPECIAL ORDERS COST-PLUS PRICING TARGET COSTING ANALYZING CUSTOMER PROFITABILITY: REVISITING THE PRICED RIGHT OFFICE SUPPLIES CASE CUSTOMER PROFITABILITY AND PERFORMANCE MEASURES ACTIVITY-BASED PRICING SUMMARY OF LEARNING OBJECTIVES LINK TO PRACTICE: Pricing Strategy: Apple’s Approach to Pricing Pricing Power More Important Than Management Pricing Treasure Hunt Items at Costco Insull’s Most Radical Innovation Wasn’t Technology—It Was Pricing! Target Costing Analyst Position at Whirlpool How to Fix Unprofitable Customers Sprint Drops Customers for Excessive Use of Customer Service Review Problems Key Terms Self-Assessment Questions Exercises Problems Cases 9 CAPITAL BUDGETING AND OTHER LONG-RUN DECISIONS CAPITAL BUDGETING DECISIONS EVALUATING INVESTMENT OPPORTUNITIES: TIME VALUE OF MONEY APPROACHES Basic Time Value of Money Calculations The Net Present Value Method Steps in the NPV Method An Example of the NPV Approach Comparing Alternatives with NPV The Internal Rate of Return Method The Internal Rate of Return with Unequal Cash Flows Summary of Net Present Value and Internal Rate of Return Methods CONSIDERING “SOFT” BENEFITS IN INVESTMENT DECISIONS Calculating the Value of Soft Benefits Required to Make an Investment Acceptable ESTIMATING THE REQUIRED RATE OF RETURN ADDITIONAL CASH FLOW CONSIDERATIONS Cash Flows, Taxes, and the Depreciation Tax Shield Adjusting Cash Flows for Inflation OTHER LONG-RUN DECISIONS SIMPLIFIED APPROACHES TO CAPITAL BUDGETING Payback Period Method Accounting Rate of Return The Accounting Rate of Return Is Not a Reliable Estimate of the Internal Rate of Return CONFLICT BETWEEN PERFORMANCE EVAL UATION AND CAPITAL BUDGETING WILSON AIR EXAMPLE REVISITED SUMMARY OF LEARNING OBJECTIVES APPENDIX A USING EXCEL® TO CALCULATE NPV AND IRR LINK TO PRACTICE: Royal Caribbean International Invests $1.4 Billion in Cruise Ship NPV of Livengood Gold Mine Depends on Estimates College Education Yields 15% Return Use of NPV and IRR by CFOs Soft Benefits Related to Investing in ERP System Cost of Capital for Various Business Sectors Depreciation Tax Shield at Delta Air Lines Payback on Home Solar Power, Review Problems Key Terms Self-Assessment Questions Exercises Problems Cases 10 BUDGETARY PLANNING AND CONTROL USE OF BUDGETS IN PLANNING AND CONTROL Planning Control DEVELOPING THE BUDGET Budget Time Period Zero-Based Budgeting THE MASTER BUDGET Sales Budget Production Budget Direct Material Purchases Budget Direct Labor Budget Manufacturing Overhead Budget Selling and Administrative Expense Budget Budgeted Income Statement Capital Acquisitions Budget Cash Budget Budgeted Balance Sheet USE OF COMPUTERS IN THE BUDGET PLANNING PROCESS BUDGETARY CONTROL Budgets as a Standard for Evaluation Static and Flexible Budgets INVESTIGATING BUDGET VARIANCES CONFLICT IN PLANNING AND CONTROL USES OF BUDGETS Why Budget-Based Compensation Can Lead to Budget Padding and Income Shifting EVALUATION, MEASUREMENT, AND MANAGEMENT BEHAVIOR THE PRESTON JOYSTICK CASE REVISITED SUMMARY OF LEARNING OBJECTIVES LINK TO PRACTICE: Problems with Five-Year Budgets People Problems in Budgeting Budget Process in Great Britain Address Cash Flow Uncertainty with a Revolving Loan Spreadsheets for Budgeting Using Rolling Budgets to Deal with Changes in Economic Conditions Ratcheting and the Ability to Achieve Budget Targets Review Problems Key Terms Self-Assessment Questions Exercises Problems Cases 11 STANDARD COSTS AND VARIANCE ANALYSIS STANDARD COSTS Standard Costs and Budgets Development of Standard Costs Ideal versus Attainable Standards A GENERAL APPROACH TO VARIANCE ANALYSIS MATERIAL VARIANCES Material Price Variance Material Quantity Variance DIRECT LABOR VARIANCES Labor Rate Variance Labor Efficiency Variance OVERHEAD VARIANCES Controllable Overhead Variance Detailed Analysis of the Controllable Overhead Variance Overhead Volume Variance Computing the Overhead Volume Variance Interpreting the Overhead Volume Variance Calculating the Financial Impact of Operating at More or Less than Planned Capacity TEST YOUR KNOWLEDGE: COMPREHENSIVE EXAMPLE Material Variances Labor Variances Overhead Variances INVESTIGATION OF STANDARD COST VARIANCES Management by Exception Favorable Variances May Be Unfavorable Can Process Improvements Lead to Unfavorable Variances? Beware: Evaluation in Terms of Variances Can Lead to Excess Production RESPONSIBILITY ACCOUNTING AND VARIANCES SUMMARY OF LEARNING OBJECTIVES APPENDIX RECORDING STANDARD COSTS IN ACCOUNTS Recording Material Costs Recording Labor Cost Recording Manufacturing Overhead Recording Finished Goods Recording Cost of Goods Sold Closing Variance Accounts LINK TO PRACTICE: Starbucks Uses Standard Costs How Often Do Companies Update Standards? Standard Costing—In the Beginning You Get What You Measure! Review Problems Key Terms Self-Assessment Questions Exercises Problems Cases 12 DECENTRALIZATION AND PERFORMANCE EVALUATION WHY FIRMS DECENTRALIZE Advantages of Decentralization Disadvantages of Decentralization WHY COMPANIES EVALUATE THE PERFORMANCE OF SUBUNITS AND SUBUNIT MANAGERS Evaluating Subunits Evaluating Subunit Managers Responsibility Accounting and Performance Evaluation COST CENTERS, PROFIT CENTERS, AND INVESTMENT CENTERS Cost Centers Profit Centers Investment Centers EVALUATING INVESTMENT CENTERS WITH ROI Measuring Income and Invested Capital When Calculating ROI Problems with Using ROI Problems of Overinvestment and Underinvestment: You Get What You Measure! Evaluation in Terms of Profit Can Lead to Overinvestment Evaluation in Terms of ROI Can Lead to Underinvestment EVALUATION USING ECONOMIC VALUE ADDED (EVA ) Residual Income (RI) Revisiting the Situation at Action Industries Solving the Overinvestment and Underinvestment Problems Economic Value Added (EVA ) EVA Example USING A BALANCED SCORECARD TO EVALUATE PERFORMANCE Tying the Balanced Scorecard Measures to the Strategy for Success Scenario 1. Learning and Growth Dimension Scenario 2. Internal Process Dimension Scenario 3. Customer Dimension Scenario 4. Financial Dimension How Balance Is Achieved in a Balanced Scorecard DEVELOPING A STRATEGY MAP FOR A BALANCED SCORECARD KEYS TO A SUCCESSFUL BALANCED SCORECARD: TARGETS, INITIATIVES, RESPONSIBILITY, FUNDING, TOP MANAGEMENT SUPPORT Targets Initiatives Responsibility Funding Top Management Support SUMMARY OF LEARNING OBJECTIVES APPENDIX TRANSFER PRICING MARKET PRICE AS THE TRANSFER PRICE MARKET PRICE AND OPPORTUNITY COST VARIABLE COST AS THE TRANSFER PRICE FULL COST PLUS PROFIT AS THE TRANSFER PRICE NEGOTIATED TRANSFER PRICES TRANSFER PRICING AND INCOME TAXES IN AN INTERNATIONAL CONTEXT LINK TO PRACTICE: Subunits at Nordstrom The Focus on ROI and Shareholder Value Is Not the Same in France, Germany, and Japan as It Is in the United States and Great Britain Did Boeing’s Focus on ROI Lead to Excessive Outsourcing? Companies That Have Used EVA Deere & Company Uses SVA Rather Than EVA Focus on EVA Affects Key Decisions across an Organization Use of EVA at Whole Foods Brigham and Women’s Hospital Receives Award for Its Balanced Scorecard Transfer Pricing at Starbucks Review Problems Key Terms Self-Assessment Questions Exercises Problems Cases EULA