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Chapter 1. Managerial Accounting and the Business Environment, 1
Globalization, 2
Strategy, 4
The Work of Management and the Need for Managerial Accounting Information, 5
Planning, 6
Directing and Motivating, 6
Controlling, 6
The End Results of Managers' Activities, 7
The Planning and Control Cycle, 7
Comparison of Financial and Managerial Accounting, 7
Emphasis on the Future, 7
Relevance of Data, 9
Less Emphasis on Precision, 9
Segments of an Organization, 9
Generally Accepted Accounting Principles (GAAP), 9
Managerial Accounting—Not Mandatory, 9
Organizational Structure, 10
Decentralization, 10
The Functional View of Organizations, 10
Line and Staff Relationships, 11
The Chief Financial Officer, 11
Process Management, 12
Lean Production, 13
The Lean Thinking Model, 13
The Theory of Constraints (TOC), 15
Six Sigma, 16
Technology in Business, 17
E-Commerce, 17
Enterprise Systems, 19
The Importance of Ethics in Business, 19
Code of Conduct for Management Accountants, 21
Company Codes of Conduct, 23
Codes of Conduct on the International Level, 24
Corporate Governance, 25
The Sarbanes-Oxley Act of 2002, 26
Enterprise Risk Management, 27
Identifying and Controlling Business Risks, 27
The Certified Management Accountant (CMA), 28
Summary, 29
Glossary, 30
Questions, 31
Exercises, 31
Problems, 33
Research and Application, 36
Chapter 2. Cost Terms, Concepts, and Classifications, 38
General Cost Classifications, 39
Manufacturing Costs, 39
Direct Materials, 39
Direct Labor, 40
Manufacturing Overhead, 41
Nonmanufacturing Costs, 41
Product Costs versus Period Costs, 41
Product Costs, 42
Period Costs, 42
Prime Cost and Conversion Cost, 42
Cost Classifications on Financial Statements, 45
The Balance Sheet, 45
The Income Statement, 46
Schedule of Cost of Goods Manufactured, 47
Product Cost Flows, 49
Inventoriable Costs, 50
An Example of Cost Flows, 50
Cost Classifications for Predicting Cost Behavior, 51
Variable Cost, 51
Fixed Cost, 53
Cost Classifications for Assigning Costs to Cost Objects, 55
Direct Cost, 55
Indirect Cost, 56
Cost Classifications for Decision Making, 56
Differential Cost and Revenue, 56
Opportunity Cost, 58
Sunk Cost, 59
Summary, 59
Review Problem 1: Cost Terms, 59
Review Problem 2: Schedule of Cost of Goods Manufactured and Income Statement, 60
Glossary, 62
Questions, 63
Exercises, 63
Problems, 67
Cases, 75
Research and Application, 77
Chapter 3. Systems Design: Job-Order Costing, 78
Process and Job-Order Costing, 79
Process Costing, 79
Job-Order Costing, 80
Job-Order Costing—An Overview, 80
Measuring Direct Materials Cost, 81
Job Cost Sheet, 82
Measuring Direct Labor Cost, 82
Application of Manufacturing Overhead, 84
Using the Predetermined Overhead Rate, 84
The Need for a Predetermined Rate, 85
Choice of an Allocation Base for Overhead Cost, 86
Computation of Unit Costs, 87
Summary of Document Flows, 88
An Extended Example of Job-Order Costing, 88
Direct and Indirect Materials, 88
Labor Cost, 90
Manufacturing Overhead Cost, 91
Applying Manufacturing Overhead, 91
Underapplied or Overapplied Overhead, 92
Disposition of Underapplied or Overapplied Overhead, 93
Prepare an Income Statement, 94
Cost of Goods Sold, 94
The Direct Method of Determining Cost of Goods Sold, 94
The Indirect Method of Determining Cost of Goods Sold, 95
Income Statement, 96
Multiple Predetermined Overhead Rates, 97
Job-Order Costing in Service Companies, 97
Use of Information Technology, 97
Summary, 99
Review Problem: Job-Order Costing, 99
Glossary, 101
Appendix 3A: The Predetermined Overhead Rate and Capacity, 101
Questions, 104
Exercises, 104
Problems, 109
Cases, 115
Research and Application, 119
Chapter 4. Cost Behavior: Analysis and Use, 120
Types of Cost Behavior Patterns, 121
Variable Costs, 121
The Activity Base, 122
Extent of Variable Costs, 124
True Variable versus Step-Variable Costs, 124
True Variable Costs, 124
Step-Variable Costs, 124
The Linearity Assumption and the Relevant Range, 125
Fixed Costs, 126
Types of Fixed Costs, 127
Committed Fixed Costs, 128
Discretionary Fixed Costs, 128
The Trend toward Fixed Costs, 129
Is Labor a Variable or a Fixed Cost?, 129
Fixed Costs and the Relevant Range, 130
Mixed Costs, 132
The Analysis of Mixed Costs, 134
Diagnosing Cost Behavior with a Scattergraph Plot, 136
The High-Low Method, 139
The Least-Squares Regression Method, 141
Multiple Regression Analysis, 143
The Contribution Format Income Statement, 143
Why a New Income Statement Format?, 143
The Contribution Approach, 144
Summary, 144
Review Problem 1: Cost Behavior, 145
Review Problem 2: High-Low Method, 146
Glossary, 147
Appendix 4A: Least-Squares Regression Using Microsoft^® Excel, 147
Questions, 149
Exercises, 150
Problems, 154
Cases, 160
Research and Application, 163
Chapter 5. Cost-Volume-Profit Relationships, 165
The Basics of Cost-Volume-Profit (CVP) Analysis, 166
Contribution Margin, 167
CVP Relationships in Graphic Form, 169
Preparing the CVP Graph, 169
Contribution Margin Ratio (CM Ratio), 171
Some Applications of CVP Concepts, 172
Change in Fixed Cost and Sales Volume, 172
Change in Variable Costs and Sales Volume, 173
Change in Fixed Cost, Sales Price, and Sales Volume, 174
Change in Variable Cost, Fixed Cost, and Sales Volume, 175
Change in Selling Price, 175
Break-Even Analysis, 176
Break-Even Computations, 176
The Equation Method, 176
The Contribution Margin Method, 177
Target Profit Analysis, 177
The CVP Equation, 177
The Contribution Margin Approach, 178
The Margin of Safety, 179
CVP Considerations in Choosing a Cost Structure, 180
Cost Structure and Profit Stability, 180
Operating Leverage, 182
Structuring Sales Commissions, 183
Sales Mix, 184
The Definition of Sales Mix, 184
Sales Mix and Break-Even Analysis, 185
Assumptions of CVP Analysis, 187
Summary, 187
Review Problem: CVP Relationships, 188
Glossary, 191
Questions, 191
Exercises, 191
Problems, 196
Cases, 204
Research and Application, 207
Chapter 6. Variable Costing: A Tool for Management, 208
Overview of Absorption and Variable Costing, 209
Absorption Costing, 209
Variable Costing, 209
Selling and Administrative Expense, 209
Unit Cost Computations, 210
Income Comparison of Absorption and Variable Costing, 211
Extended Comparison of Income Data, 213
Effect of Changes in Production on Net Operating Income, 217
Variable Costing, 218
Absorption Costing, 218
Choosing a Costing Method, 221
The Impact on the Manager, 221
CVP Analysis and Absorption Costing, 222
Decision Making, 222
External Reporting and Income Taxes, 223
Advantages of Variable Costing and the Contribution Approach, 224
Variable Costing and the Theory of Constraints, 224
Impact of Lean Production, 225
Summary, 225
Review Problem: Contrasting Variable and Absorption Costing, 226
Glossary, 228
Questions, 228
Exercises, 229
Problems, 232
Cases, 239
Chapter 7. Activity-Based Costing: A Tool to Aid Decision Making, 242
Activity-Based Costing: An Overview, 243
How Costs Are Treated under Activity-Based Costing, 244
Nonmanufacturing Costs and Activity-Based Costing, 244
Manufacturing Costs and Activity-Based Costing, 244
Cost Pools, Allocation Bases, and Activity-Based Costing, 244
Designing an Activity-Based Costing (ABC) System, 246
Step 1: Define Activities, Activity Cost Pools, and Activity Measures, 249
The Mechanics of Activity-Based Costing, 251
Step 2: Assign Overhead Costs to Activity Cost Pools, 251
Step 3: Calculate Activity Rates, 254
Step 4: Assign Overhead Costs to Cost Objects, 255
Step 5: Prepare Management Reports, 257
Comparison of Traditional and ABC Product Costs, 260
Product Margins Computed Using the Traditional Cost System, 261
The Differences between ABC and Traditional Product Costs, 262
Targeting Process Improvements, 265
Activity-Based Costing and External Reports, 266
The Limitations of Activity-Based Costing, 267
Summary, 268
Review Problem: Activity-Based Costing, 269
Glossary, 271
Appendix 7A: ABC Action Analysis, 271
Summary, 277
Review Problem: Activity Analysis Report, 278
Glossary (Appendix 8A), 279
Questions, 280
Exercises, 280
Problems, 290
Cases, 294
Research and Application, 295
Chapter 8. Profit Planning, 297
The Basic Framework of Budgeting, 298
Advantages of Budgeting, 298
Responsibility Accounting, 298
Choosing a Budget Period, 299
The Self-Imposed Budget, 300
Human Factors in Budgeting, 301
The Budget Committee, 303
The Master Budget: An Overview, 303
Preparing the Master Budget, 305
The Sales Budget, 306
The Production Budget, 307
Inventory Purchases—Merchandising Firm, 309
The Direct Materials Budget, 309
The Direct Labor Budget, 311
The Manufacturing Overhead Budget, 312
The Ending Finished Goods Inventory Budget, 314
The Selling and Administrative Expense Budget, 314
The Cash Budget, 316
The Budgeted Income Statement, 319
The Budgeted Balance Sheet, 320
Summary, 322
Review Problem: Budget Schedules, 322
Glossary, 324
Questions, 325
Exercises, 325
Problems, 328
Cases, 339
Research and Application, 342
Chapter 9. Standard Costs and the Balanced Scorecard, 343
Standard Costs—Management by Exception, 345
Who Uses Standard Costs?, 346
Setting Standard Costs, 347
Ideal versus Practical Standards, 347
Setting Direct Materials Standards, 348
Setting Direct Labor Standards, 349
Setting Variable Manufacturing Overhead Standards, 350
Are Standards the Same as Budgets?, 350
A General Model for Variance Analysis, 350
Price and Quantity Variances, 351
Using Standard Costs—Direct Materials Variances, 352
Materials Price Variance—A Closer Look, 354
Isolation of Variances, 354
Responsibility for the Variance, 354
Materials Quantity Variance—A Closer Look, 355
Using Standard Costs—Direct Labor Variances, 356
Labor Rate Variance—A Closer Look, 357
Labor Efficiency Variance—A Closer Look, 358
Using Standard Costs—Variable Manufacturing Overhead Variances, 359
Manufacturing Overhead Variances—A Closer Look, 360
Variance Analysis and Management by Exception, 361
International Uses of Standard Costs, 362
Evaluation of Controls Based on Standard Costs, 363
Advantages of Standard Costs, 363
Potential Problems with the Use of Standard Costs, 363
Balanced Scorecard, 364
Common Characteristics of Balanced Scorecards, 365
A Company's Strategy and the Balanced Scorecard, 368
Tying Compensation to the Balanced Scorecard, 370
Advantages of Timely and Graphic Feedback, 370
Some Measures of Internal Business Process Performance, 372
Delivery Cycle Time, 372
Throughput (Manufacturing Cycle) Time, 372
Manufacturing Cycle Efficiency (MCE), 373
Some Final Observations Concerning the Balanced Scorecard, 374
Summary, 375
Review Problem: Standard Costs, 375
Glossary, 377
Questions, 378
Exercises, 379
Problems, 384
Cases, 393
Research and Application, 395
Chapter 10. Flexible Budgets and Overhead Analysis, 396
Flexible Budgets, 397
Characteristics of a Flexible Budget, 397
Deficiencies of the Static Budget, 398
How a Flexible Budget Works, 400
Using the Flexible Budgeting Concept in Performance Evaluation, 400
The Measure of Activity—A Critical Choice, 402
Variable Overhead Variances—A Closer Look, 403
Actual versus Standard Hours, 403
Spending Variance Alone, 404
Interpreting the Spending Variance, 405
Both Spending and Efficiency Variances, 405
Interpreting the Efficiency Variance, 405
Control of the Efficiency Variance, 406
Activity-Based Costing and the Flexible Budget, 406
Overhead Rates and Fixed Overhead Analysis, 407
Flexible Budgets and Overhead Rates, 407
Denominator Activity, 408
Computing the Overhead Rate, 408
Overhead Application in a Standard Cost System, 409
The Fixed Overhead Variances, 409
The Budget Variance—A Closer Look, 410
The Volume Variance—A Closer Look, 411
Graphic Analysis of Fixed Overhead Variances, 412
Cautions in Fixed Overhead Analysis, 413
Overhead Variances and Underapplied or Overapplied Overhead Cost, 413
Summary, 414
Review Problem: Overhead Analysis, 414
Glossary, 417
Questions, 417
Exercises, 418
Problems, 424
Cases, 432
Chapter 11. Segment Reporting and Decentralization, 437
Decentralization in Organizations, 438
Advantages and Disadvantages of Decentralization, 438
Responsibility Accounting, 439
Cost, Profit, and Investment Centers, 439
Cost Center, 439
Profit Center, 439
Investment Center, 440
An Organizational View of Responsibility Centers, 440
Decentralization and Segment Reporting, 441
Building a Segmented Income Statement, 442
Levels of Segmented Statements, 444
Sales and Contribution Margin, 446
Traceable and Common Fixed Costs, 446
Identifying Traceable Fixed Costs, 446
Activity-Based Costing, 447
Traceable Costs Can Become Common Costs, 447
Segment Margin, 448
Segmented Financial Information in External Reports, 450
Hindrances to Proper Cost Assignment, 450
Omission of Costs, 450
Inappropriate Methods for Assigning Traceable Costs among Segments, 451
Failure to Trace Costs Directly, 451
Inappropriate Allocation Base, 451
Arbitrarily Dividing Common Costs among Segments, 451
Evaluating Investment Center Performance—Return on Investment, 452
The Return on Investment (ROI) Formula, 453
Net Operating Income and Operating Assets Defined, 453
Understanding ROI, 453
Example 1: Increased Sales without Any Increase in Operating Assets, 456
Example 2: Decreased Operating Expenses with No Change in Sales or Operating Assets, 456
Example 3: Decreased Operating Assets with No Change in Sales or Operating Expenses, 456
Example 4: Invest in Operating Assets to Increase Sales, 457
ROI and the Balanced Scorecard, 457
Criticisms of ROI, 458
Residual Income, 459
Motivation and Residual Income, 460
Divisional Comparison and Residual Income, 461
Summary, 462
Review Problem 1: Segmented Statements, 462
Review Problem 2: Return on Investment (ROI) and Residual Income, 463
Glossary, 464
Appendix 11A: Transfer Pricing, 465
Review Problem 3: Transfer Pricing, 471
Glossary (Appendix 12A), 472
Appendix 11B: Service Department Charges, 472
Glossary (Appendix 12B), 478
Questions, 479
Exercises, 479
Problems, 487
Cases, 496
Research and Application, 498
Chapter 12. Relevant Costs for Decision Making, 499
Cost Concepts for Decision Making, 500
Identifying Relevant Costs and Benefits, 500
Different Costs for Different Purposes, 501
An Example of Identifying Relevant Costs and Benefits, 502
Reconciling the Total and Differential Approaches, 504
Why Isolate Relevant Costs?, 506
Adding and Dropping Product Lines and Other Segments, 507
An Illustration of Cost Analysis, 507
A Comparative Format, 509
Beware of Allocated Fixed Costs, 509
The Make or Buy Decision, 510
Strategic Aspects of the Make or Buy Decision, 511
An Example of Make or Buy, 511
Opportunity Cost, 513
Special Orders, 514
Utilization of a Constrained Resource, 516
Contribution Margin per Unit of the Constrained Resource, 516
Managing Restraints, 518
The Problem of Multiple Constraints, 519
Joint Product Costs and the Contribution Approach, 519
The Pitfalls of Allocation, 520
Sell or Process Further Decisions, 521
Activity-Based Costing and Relevant Costs, 523
Summary, 523
Review Problem: Relevant Costs, 523
Glossary, 524
Questions, 525
Exercises, 525
Problems, 533
Cases, 540
Chapter 13. Capital Budgeting Decisions, 547
Capital Budgeting—Planning Investments, 548
Typical Capital Budgeting Decisions, 548
The Time Value of Money, 548
Discounted Cash Flows—The Net Present Value Method, 549
The Net Present Value Method Illustrated, 549
Emphasis on Cash Flows, 551
Typical Cash Outflows, 551
Typical Cash Inflows, 551
Recovery of the Original Investment, 552
Simplifying Assumptions, 553
Choosing a Discount Rate, 553
An Extended Example of the Net Present Value Method, 553
Discounted Cash Flows—The Internal Rate of Return Method, 555
The Internal Rate of Return Method Illustrated, 555
Salvage Value and Other Cash Flows, 556
Using the Internal Rate of Return, 556
The Cost of Capital as a Screening Tool, 556
Comparison of the Net Present Value and the Internal Rate of Return Methods, 557
Expanding the Net Present Value Method, 557
The Total-Cost Approach, 557
The Incremental-Cost Approach, 559
Least-Cost Decisions, 559
Uncertain Cash Flows, 561
An Example, 561
Real Options, 562
Preference Decisions—The Ranking of Investment Projects, 563
Internal Rate of Return Method, 563
Net Present Value Method, 563
Other Approaches to Capital Budgeting Decisions, 564
The Payback Method, 564
Evaluation of the Payback Method, 565
An Extended Example of Payback, 566
Payback and Uneven Cash Flows, 567
The Simple Rate of Return Method, 568
Criticisms of the Simple Rate of Return, 570
Postaudit of Investment Projects, 570
Summary, 571
Review Problem 1: Basic Present Value Computations, 572
Review Problem 2: Comparison of Capital Budgeting Methods, 573
Glossary, 574
Appendix 13A: The Concept of Present Value, 575
Glossary (Appendix 13A), 578
Appendix 13B: Present Value Tables, 579
Appendix 13C: Income Taxes in Capital Budgeting Decisions, 581
Glossary (Appendix 13C), 585
Questions, 585
Exercises, 586
Problems, 592
Cases, 601
Appendix A. Pricing Products and Services, 605
Introduction, 606
The Economists' Approach to Pricing, 606
Elasticity of Demand, 606
The Profit-Maximizing Price, 607
The Absorption Costing Approach to Cost-Plus Pricing, 610
Setting a Target Selling Price Using the Absorption Costing Approach, 610
Determining the Markup Percentage, 611
Problems with the Absorption Costing Approach, 612
Target Costing, 613
Reasons for Using Target Costing, 613
An Example of Target Costing, 614
Summary, 614
Glossary, 615
Questions, 615
Exercises, 615
Problems, 616
Appendix B. Profitability Analysis, 621
Introduction, 622
Absolute Profitability, 622
Relative Profitability, 623
Volume Trade-Off Decisions, 625
Managerial Implications, 626
Summary, 629
Glossary, 629
Questions, 629
Exercises, 629
Problems, 631
Cases, 633
Credits, 634
Index, 635

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