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Managerial Accounting for Managers, 1st Edition

by Noreen, Eric; Brewer, Peter; Garrison, Ray

Publisher: McGraw-Hill Higher Education

Publishing Date: 2008/02/29

eText ISBN-10

0-07-725257-8

eText ISBN-13

978-0-07-725257-1

Print ISBN-10

0-07-352697-5

Print ISBN-13

978-0-07-352697-3

Saleable Print ISBN-10

0-07-352697-5

Saleable Print ISBN-13

978-0-07-352697-3

Table of Contents

Chapter 1. Managerial Accounting and the Business Environment, 1

Globalization, 2

The Work of Management and the Need for Managerial Accounting Information, 5

Directing and Motivating, 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

Technology in Business, 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

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

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

Review Problem 1: Cost Terms, 59

Review Problem 2: Schedule of Cost of Goods Manufactured and Income Statement, 60

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

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

Review Problem: Job-Order Costing, 99

Appendix 3A: The Predetermined Overhead Rate and Capacity, 101

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

Review Problem 1: Cost Behavior, 145

Review Problem 2: High-Low Method, 146

Appendix 4A: Least-Squares Regression Using Microsoft^® Excel, 147

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

The Definition of Sales Mix, 184

Sales Mix and Break-Even Analysis, 185

Assumptions of CVP Analysis, 187

Review Problem: CVP Relationships, 188

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

Review Problem: Contrasting Variable and Absorption Costing, 226

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

Review Problem: Activity-Based Costing, 269

Appendix 7A: ABC Action Analysis, 271

Review Problem: Activity Analysis Report, 278

Glossary (Appendix 8A), 279

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

Review Problem: Budget Schedules, 322

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

Review Problem: Standard Costs, 375

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

Review Problem: Overhead Analysis, 414

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

Review Problem 1: Segmented Statements, 462

Review Problem 2: Return on Investment (ROI) and Residual Income, 463

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

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

Review Problem: Relevant Costs, 523

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

Review Problem 1: Basic Present Value Computations, 572

Review Problem 2: Comparison of Capital Budgeting Methods, 573

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

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

Appendix B. Profitability Analysis, 621

Introduction, 622

Absolute Profitability, 622

Relative Profitability, 623

Volume Trade-Off Decisions, 625

Managerial Implications, 626

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