ACT 500 SEU Balanced Scorecard and Corporate Responsibility Questions

Chapter 14The Balanced
Scorecard and
Corporate Social
Responsibility
Learning Objectives
• Obj. 1: Describe the concept of a performance measurement
system.
• Obj. 2: Describe and illustrate the basic elements of a
balanced scorecard.
• Obj. 3: Describe and illustrate the balanced scorecard,
including the use and impact of strategy maps, measure
maps, strategic learning scorecard cascading, and cognitive
biases.
• Obj. 4: Describe corporate social responsibility (CSR),
including methods of measuring and encouraging social
responsibility using the balanced scorecard.
• Obj. 5: Use capital investment analysis to evaluate CSR
projects.
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Performance Measurement Systems
• Performance measurement systems are used by
management to assess how well employees or units within
a company meet the company’s goals and objectives.
o
A performance measurement system does this by using
metrics (or measures) of current conditions or performance.
▪ A metric or measure is a representation of something a person or
company cares about.
• Metrics like operating income and cash flows are often
used by companies to measure their financial
condition and performance.
• Strategic performance measurement systems define
and link strategic objectives to the performance metrics of
a company.
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The Balanced Scorecard
(slide 1 of 2)
• The balanced scorecard (BSC) is the best-known
strategic performance measurement system.
• The balanced scorecard emphasizes a balanced view
of performance, thus its name, from multiple
perspectives—not just financial.
• For example, nonfinancial performance metrics such
as customer satisfaction and employee training are
included within the balanced scorecard.
o
Such metrics are often leading indicators of future
financial performance.
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The Balanced Scorecard
(slide 2 of 2)
• For example, if customer satisfaction for a movie
theatre declines, sales for future months may also
decline.
o
In contrast, actual sales is normally considered a
lagging indicator.
• Some companies call their strategic performance
measurement systems balanced scorecards even if
they do not include all of the elements of a traditional
balanced scorecard.
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Elements of the Balanced Scorecard
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Performance Perspectives
(slide 1 of 4)
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Balance among Perspectives in the Balanced
Scorecard
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Performance Perspectives
(slide 2 of 4)
• The objectives of the performance perspectives are as
follows:
o
Focus management on looking beyond typical financial
measures of performance, such as sales and profits, and
thus, encourage a more balanced view of performance.
o
Organize the scorecard into types of performance.
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Performance Perspectives
(slide 3 of 4)
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Performance Perspectives
(slide 4 of 4)
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Strategic Objectives
(slide 1 of 2)
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Strategic Objectives
(slide 2 of 2)
• Assume that Cordier Toys, Inc., an online toy retailer,
uses a balanced scorecard and has developed strategic
objectives for each of the four performance perspectives
as shown in Slide 14.
• These strategic objectives provide guidance to Cordier’s
management as to the actions that should be taken
related to the four performance perspectives.
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Cordier Toys’ Strategic Objectives
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Performance Metrics
• Performance metrics are used to assess performance in
achieving the strategic objectives.
o
At least one metric is used for each strategic objective.
• Cordier Toys, Inc., has developed the performance metrics
shown in Slide 16.
• Cordier Toys uses these performance metrics for
assessing its success in achieving its strategic objectives.
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Cordier Toys’ Performance Metrics
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Strategic Initiatives
• Strategic initiatives are action plans that management
implements to achieve the strategic objectives.
• Cordier Toys, Inc., plans to use two strategic initiatives to
achieve the strategic objectives of improving delivery
times and training employees.
o
To reduce delivery times, management plans to automate
its picking and packaging process.
o
To motivate employees to participate in training programs,
management plans to provide pay increases to employees
who achieve training goals.
• Slide 18 shows how these two strategic initiatives are
directed at achieving the strategic objectives of train
employees and improve delivery times.
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Cordier Toys’ Strategic Initiatives
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Performance Targets
(slide 1 of 2)
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Performance Targets
(slide 2 of 2)
• Cordier Toys, Inc., developed the following performance
targets to serve as employee goals:
o
Achieve 100 hours of median training time per employee.
o
Maintain an average employee tenure of at least 2.2 years.
o
Reduce the delivery time from the moment a product is ordered
to the time it is delivered to 60 hours or less.
o
Reduce erroneous shipments to 2 per week.
o
Increase the percentage of customers who return to the website
to make additional purchases to 45% or higher.
o
Increase the online customer satisfaction rating to 9.4 (out of 10)
or higher.
o
Increase market share to 1.31% or higher.
o
Increase operating profits to $57 million or higher.
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Cordier Toys’ Performance Targets
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Using the Balanced Scorecard
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Strategy Maps
(slide 1 of 3)
• A strategy map shows the expected cause-and-effect
relationships among strategic objectives.
o
In doing so, a strategy map shows how each strategic
objective contributes to the overall mission or strategy of
the company.
o
Sometimes a strategy map is referred to as a value chain.
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Cordier Toys’ Strategy Map
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Strategy Maps
(slide 2 of 3)
• Dotted arrows have been added to Cordier Toys’
balanced scorecard shown in Slide 24.
o
These arrows create a strategy map that links the strategic
objectives to each other and ultimately to the overall
objective of increasing profits.
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Strategy Maps
(slide 3 of 3)
• Cordier Toys’ strategy map shows that training
employees and reducing employee turnover are
expected to improve delivery times and reduce shipping
errors.
o
In turn, improving delivery times and reducing shipping
errors are expected to increase customer delight, which in
turn is expected to increase profits.
o
Finally, reducing shipping errors will also increase profits
by reducing the costs associated with processing returns.
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Check Up Corner
Understanding a Strategy Map
• Cameron Tools Inc. has developed a balanced scorecard with six
objectives under the four standard performance perspectives.
o
o
o
o
In the learning and growth perspective, the company has strategic
objectives to (1) promote employees from within the company and (2)
recruit quality recent graduates.
In the internal processes perspective, the company has strategic
objectives to (1) increase innovation and (2) improve communication
between departments.
In the customer perspective, the company has a strategic objective to
provide higher-quality products that last longer.
Finally, in the financial perspective, the company has the strategic
objective to increase profits.
• Given these strategic objectives, draw a strategy map that shows
how these objectives influence each other and ultimately lead to the
company’s objective of increasing profits.
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Check Up Corner
Understanding a Strategy Map
Solution (slide 1 of 3)
• A possible version of the strategy map with an explanation of the
links between strategic objectives follows:
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Check Up Corner
Understanding a Strategy Map
Solution (slide 2 of 3)
• Promoting employees from within can be expected to:
o Increase the ability to recruit quality recent graduates, because these
new hires can look forward to job growth within the company.
o Increase innovation and improve communication between departments,
because employees will be more willing to innovate if they know it may
lead to a promotion, and employees who have spent a long time at the
company will better understand proper communication between
departments.
• Recruiting quality recent graduates can be expected to increase
innovation, because quality new hires are likely to bring a fresh
perspective and new ideas to the company.
• Both increased innovation and improved interdepartment
communications can be expected to lead to more efficient
production of higher-quality, more durable products.
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Check Up Corner
Understanding a Strategy Map
Solution (slide 3 of 3)
• Increased innovation and improved interdepartment communications
may also directly increase profits as more efficient, cost-reducing
production processes are developed and costly errors are avoided.
• Finally, the production of better products can also be expected to
increase profits.
• While the links provided in this solution represent a possible
mapping of strategic objectives on the balanced scorecard for
Cameron Tools Inc., this mapping is not the only possible solution.
o Linking strategic objectives together on a balanced scorecard always
involves some degree of subjectivity.
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Measure Maps (slide 1 of 3)
• A measure map shows the expected relationships
among performance metrics.
o
These expected relationships are based on the strategy
map, which links the strategic objectives.
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Measure Maps (slide 2 of 3)
• The measure map also shows which metrics are
leading indicators and which measures are lagging
indicators of performance.
o
Metrics that are early in the value chain are normally
considered leading indicators, while metrics later in the
value chain are normally lagging indicators.
▪ A leading indicator can be any metric where performance is
predictive of performance in another metric.
▪ A lagging indicator can be any metric where performance is
predicted by performance in another metric.
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Cordier Toys’ Measure Map
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Measure Maps (slide 3 of 3)
• The relationships shown in the measure map of Slide
33 are the same as the strategy map, with two
exceptions.
o
The delight the customer objective is related to the two
performance metrics of percentage of customers who
shop again and online customer satisfaction rating.
Both of these metrics are leading indicators for the two
performance metrics of market share and operating
profit.
o
The reduce shipping errors objective is related to the
number of erroneous shipments. While this metric is not
expected to significantly affect market share, it is a
leading indicator for operating profit. That is, the costs
of processing returns will decrease operating profit.
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Check Up Corner
•
•
Understanding a Measure Map
Building on the Cameron Tools Inc. balanced scorecard example from Slide 27,
assume that the company has the following performance metrics for each
strategic objective:
o Promote from within: Percentage of new managers promoted from within the
company
o Recruit quality recent graduates: Number of entry-level employees from top
10 manufacturing colleges
o Increase innovation: Product durability test scores and number of production
hours per product
o Improve communication between departments: Number of production errors
due to miscommunication
o Provide high-quality, durable products: Number of products returned on
warranty and online product ratings
o Increase profits: Market share and gross profit
Given these performance metrics and their related strategic objectives, draw a
measure map showing the expected relationships among performance metrics.
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Check Up Corner
Understanding a Measure Map Solution
(slide 1 of 4)
• The following is a possible version of the measure
map with an explanation of the links between
strategic objectives:
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Check Up Corner
Understanding a Measure Map Solution
(slide 2 of 4)
•
•
The links in the measure map are, for the most part, a reflection of the links in the
strategy map. For example, consider the percentage of new managers promoted
from within the company, which is a performance metric of the promote from
within objective. Because the promote from within objective is expected to
influence the recruit quality recent graduates, increase innovation, and improve
communication between departments objectives, the performance metrics of
these objectives will be related in a similar fashion. Specifically, the percentage of
new managers promoted from within the company should influence the number
of entry-level employees from top 10 manufacturing colleges (a performance
metric of recruit quality recent graduates), product durability test scores and
number of production hours per product (both performance metrics of increase
innovation), and number of production errors due to miscommunication (a
performance metric of improve communication between departments).
All other performance metric linkages in the measure map follow this pattern,
with two exceptions. First, note that there are two performance metrics of the
increase innovation objective. Each of these performance metrics represents a
different aspect of the increase innovation objective.
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Check Up Corner
Understanding a Measure Map Solution
(slide 3 of 4)
Product durability test scores represent innovation related to product design, while
number of production hours per product represents innovation related to the
production process. Further, only one of these performance metrics is expected to
have a direct effect on the increase profits objective. Because number of production
hours per product has clear implications for the cost of goods manufactured and sold,
this performance metric will likely impact gross profit (a performance metric of the
increase profits objective). Second, although there are two performance metrics
related to increasing profits, both performance metrics represent a different aspect of
this objective. Market share represents an increase in revenues, which will increase
profits. Gross profit represents both revenues and costs. Thus, performance metrics
that are likely to affect costs should directly link to the gross profit performance
metric in the measure map, while performance metrics that are likely to affect
revenues should directly link to both market share and gross profit. Accordingly,
because number of production hours per product and number of production errors
due to miscommunication both directly affect costs, they are both linked to gross
profit. However, because number of products returned on warranty and online
product ratings affect revenues, both performance metrics are linked to both market
share and gross profit.
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Check Up Corner
Understanding a Measure Map Solution
(slide 4 of 4)
•
•
Number of production hours per product and number of production errors due to
miscommunication can both be expected to directly influence gross profit.
Product durability test scores and number of production errors due to
miscommunication can both be expected to influence number of products
returned on warranty and online product ratings. These will both, in turn, affect
market share and gross profit.
While the links provided in this solution represent a possible mapping of
performance metrics on the balanced scorecard for Cameron Tools Inc., this
mapping is not the only possible solution. Linking performance metrics together
on a balanced scorecard always involves some degree of subjectivity.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Strategic Learning
(slide 1 of 4)
• If the expected relationships are not supported by statistical
analyses, management may need to adjust its strategic
objectives.
o
This process of using performance metrics to verify strategic
objective expectations and, if necessary, adjusting them is called
strategic learning.
• The lack of statistical support for a relationship among
performance metrics does not necessarily mean that the
strategic objective is flawed.
o
For example, the lack of statistical support may occur because
the performance metric does not accurately measure the
strategic objective. In other cases, there may be a time lag in
how the performance metric measures the strategic objective.
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Strategic Learning
(slide 2 of 4)
• Assume that Cordier Toys, Inc., uses statistical analyses
to verify expected relationships between its performance
metrics and strategic objectives.
• Assume that the analyses support most of the
relationships. However, an increase in the online
customer satisfaction rating did not generate an increase
in the operating profit, as shown in Slide 42.
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Analyzing Performance at Cordier Toys
• Possible reasons for this
result are as follows:
o
o
o
Reason 1: Delighting the
customer has no effect on
increasing profits.
Reason 2: Operating profit is
a poor performance metric
for increasing profits.
Reason 3: The online
customer satisfaction rating
is a poor performance metric
for delighting the customer.
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Strategic Learning
(slide 3 of 4)
• Of the possible reasons for the unsupported relationship,
Reason 1 and Reason 2 do not seem logical.
o
Customer satisfaction should lead to an increase in
customers, sales, and profits (Reason 1).
o
Operating profit is a direct measure of increasing profits
(Reason 2).
• Online customer satisfaction rating is a poor metric for
increasing profits (Reason 3), as summarized in Slide
44.
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Strategic Learning at Cordier Toys
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Strategic Learning
(slide 4 of 4)
• Assume that upon further investigation, Cordier Toys learned
that to avoid low online customer satisfaction ratings, its sales
team had been contacting unsatisfied customers.
o
Specifically, the sales team offered to let the customers keep the
merchandise with a full refund, provided the customers adjust
their customer satisfaction feedback to a positive rating.
▪ While this practice increased Cordier Toys’ online customer
satisfaction ratings, it decreased operating profits. That is, sales
decreased (refunds), but cost of goods sold did not.
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Scorecard Cascading
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Cognitive Biases
• Decision making with the balanced scorecard may be
subject to cognitive or psychological biases.
• A cognitive bias results in decisions that are not
economically accurate or rational.
• Some of the cognitive biases that may affect the use of
balanced scorecards are as follows:
o
Motivated reasoning
o
Surrogation
o
Common measures bias
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Motivated Reasoning
(slide 1 of 4)
• Motivated reasoning is the tendency for a person to
see what they want to see in data. The reason people
are susceptible to motivated reasoning is that they want
to feel good about themselves.
o
As a result, they convince themselves that data they are
looking at tell them what they want to hear. People subject
to motivated reasoning tend to do the following:
▪ Ignore bad news
▪ Rely too heavily on good news
▪ Stop gathering information when results look good
▪ Continue searching for good news when things look bad
▪ Interpret ambiguous news as good news
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Motivated Reasoning
(slide 2 of 4)
• Assume that Cordier Toys, Inc., is evaluating the
strategic initiative of automating picking and
packaging systems in its 10 warehouses. Before
fully implementing the initiative, Cordier Toys
decided to try it out at Warehouses 1–5. After
one month, the following data have been
Automation NOT
Automation Implemented
gathered:
Implemented
(Pilot Program)
Warehouses 1–5
Warehouse number
1
Hours from ordered to
delivered
Number of erroneous
shipments
2
3
4
Warehouses 6–10
5
6
7
8
9
10
48 52 53 47 52
73 71 69 65
72
28 31 15 23 37
12
11
8 15 13
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Motivated Reasoning
(slide 3 of 4)
• The performance metric of hours from ordered to
delivered averaged 50.4 hours [(48 + 52 + 53 + 47 + 52)
÷ 5] at Warehouses 1–5 where the initiative was
implemented.
• At Warehouses 6–10 where the initiative was not
implemented, the average hours from ordered to
delivered was 70.0 hours [(73 + 71 + 69 + 65 + 72) ÷ 5].
o
As a result, the automation initiative was evaluated by the
manager in charge of the test as validated (successful).
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Motivated Reasoning
(slide 4 of 4)
• Assume that the manager who developed the initiative
was also in charge of evaluating its success. Because
the manager evaluating the initiative also developed it,
the manager may be biased by motivated reasoning to
find support for the initiative.
o
For example, the performance metric of number of
erroneous shipments was an average of 26.8 errors [(28 +
31 + 15 + 23 + 37) ÷ 5] at Warehouses 1–5 (with
automation). In contrast, Warehouses 6–10 (without
automation) had an average of 11.8 errors [(12 + 8 + 15 +
13 + 11) ÷ 5].
▪ Although the hours from ordered to delivered were lower in the
automated warehouses, the number of erroneous shipments
increased. Thus, the pilot program showed mixed results for
automating the warehouses.
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Surrogation
(slide 1 of 2)
• Surrogation is the tendency to behave like the
performance metrics are the strategic objectives.
• Cordier Toys, Inc., uses the online customer satisfaction
rating as a performance metric for the strategic objective
to delight the customer.
o
To maximize this metric, Cordier Toys’ employees sent
customers follow-up emails asking for positive ratings.
▪ While this may increase customer satisfaction ratings, it may not
actually increase customer satisfaction. It may, in fact, decrease
customer satisfaction when customers receive unsolicited emails.
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Surrogation
(slide 2 of 2)
• In this case, Cordier Toys’ employees are subject to
surrogation by treating the customer satisfaction rating
as though it is the strategic objective, forgetting that
customer delight is the true aim.
o
This surrogation effect may be compounded if Cordier
Toys uses the customer satisfaction rating for determining
employee pay raises.
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Common Measures Bias
(slide 1 of 4)
• Companies may use balanced scorecards for evaluating
the performance of their divisions. In such cases, the
scorecards for different divisions are often similar, but
not identical.
o
When managers compare the performance of divisions within a
company, they may ignore performance metrics that are unique
to individual divisions.
o
Instead, managers may focus on common performance metrics
for all divisions. This bias is called the common measures bias.
• A result of the common measures bias is that it ignores
the unique features of divisional scorecards. This can
lead to inaccurate assessments of divisional
performance.
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Common Measures Bias
(slide 2 of 4)
• Assume that Cordier Toys, Inc., has two divisions:
Warehousing and Sales. Each division has a unique
scorecard.
o
The Warehousing Division’s scorecard focuses on the
learning and growth and internal processes perspectives.
o
The Sales Division’s scorecard focuses on the learning
and growth and customer perspectives.
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Common Measures Bias
(slide 3 of 4)
• Both scorecards have the learning and growth
performance metrics of median training hours per
employee and average employee tenure. These are
common metrics.
o
The Warehousing scorecard has the unique metrics of
hours from ordered to delivered and number of erroneous
shipments.
o
The Sales scorecard has the unique metrics of percentage
of customers who shop again and online customer
satisfaction rating.
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Common Measures Bias
(slide 4 of 4)
• Assume that in evaluating both divisions, Cordier Toys’
management focuses on median training hours per
employee and average employee tenure.
o
Because the Warehousing Division employees received
more training and stay longer with the company, Cordier
Toys awards the Warehousing Division manager a larger
bonus.
▪ The fact that Cordier Toys ignored the unique metrics for each
division is an example of the common measures bias.
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Divisional Scorecards at Cordier Toys
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Corporate Social Responsibility
• Corporate social responsibility (CSR) describes the
efforts of companies to take responsibility for the impact
their operations have on society and to improve social
well-being within and outside of the firm.
• CSR activities can include far-reaching issues such as
reducing global poverty and protecting the environment.
• When CSR activities involve ensuring the ability to meet
current needs without compromising the ability of future
generations to meet their needs (such as with efforts that
protect the environment), the CSR activities are referred
to as sustainability efforts.
o
Sometimes the terms CSR and sustainability are used
interchangeably.
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CSR Activities
Category
Description
Examples
Agriculture
Farming and ranching techniques
that do not damage or disrupt the
environment
Mixed farming, crop rotation,
multiple cropping
Energy
Generating energy with little or no
pollution
Wind turbines, solar power
Engineering and
construction
Designing and constructing buildings
that are highly efficient in using
natural resources while minimizing
pollution
Recycled building materials,
high-efficiency heating and
cooling systems, renewable
energy generation
Transportation
Using transportation methods that
result in little pollution and have a
minimal impact on the environment
Expanded public transportation
systems, green vehicles,
biofuel-powered vehicles
Waste minimization
Recycling and reuse practices that
reduce the amount of waste disposed
in landfills
Curbside recycling collection,
composting, reusable products
(e.g., water bottles)
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CSR Reporting
(slide 1 of 2)
• CSR and sustainability information can provide important
feedback to guide a company’s strategic and operational
decision making.
o
Managers can use this feedback to increase revenue,
control costs, and allocate resources efficiently.
o
For example, eco-efficiency measures are a form of CSR
information that helps managers evaluate the savings
generated by using fewer natural resources in a
company’s operations.
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Eco-Efficiency Measures
Energy efficiency
Energy cost savings from replacing lighting fixtures
in a production facility with energy-efficient lighting
Material use efficiency
Materials cost savings from reducing the amount of
product packaging materials
Fuel efficiency
Fuel cost savings from replacing gas-powered
vehicles with hybrid or alternative energy vehicles
Waste efficiency
Waste removal cost savings from recycling and
reusing waste and byproduct materials
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
CSR Reporting
(slide 2 of 2)
• The Global Reporting Initiative is an international
organization that develops and encourages the use of
sustainability reporting standards.
• Many corporations use a triple bottom line approach to
their sustainability by reporting on the following:
o
Financial performance
o
Social performance
o
Environmental performance
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Corporate Social Responsibility and the
Balanced Scorecard (slide 1 of 4)
• A balanced scorecard, which links all of the company’s
strategic objectives together, is helpful in integrating
CSR activities into the core strategy of the company.
o
In doing so, companies may include CSR activities in a
separate corporate social responsibility performance
perspective.
▪ Other companies integrate CSR strategic objectives into the four
perspectives (learning and growth, internal processes, customer,
and financial) of the balanced scorecard.
– This creates what is sometimes referred to as a sustainability
balanced scorecard (SBSC).
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Corporate Social Responsibility and the
Balanced Scorecard (slide 2 of 4)
• Assume that Cordier Toys, Inc., has decided to integrate
CSR strategic objectives into a SBSC balanced
scorecard. Specifically, Cordier Toys has developed the
following CSR strategic objectives:
o
Ensure that employees are satisfied with their work
environments (employee satisfaction)
o
Minimize waste of environmental resources, including
energy and water (minimize waste)
o
Maintain a socially responsible image for customers
(maintain CSR image)
• In developing its SBSC scorecard, Cordier Toys must
first decide where the CSR strategic objectives fit within
its strategy map.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Sustainability Balanced Scorecard (SBSC)
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Corporate Social Responsibility and the
Balanced Scorecard (slide 3 of 4)
• Cordier Toys selected the following performance metrics
to match with its new CSR strategic objectives:
o
Employee satisfaction rating (for the employee satisfaction
objective)
o
Utility cost variance (for the minimize waste objective)
o
Customer survey rating on CSR (for the maintain CSR
image objective)
• For each of the new performance metrics, Cordier Toys
also sets the following performance targets:
o
Achieve employee satisfaction ratings of 8.5 or higher
o
Maintain a favorable utility cost variance
o
Achieve customer survey rating on CSR of 8.7 or higher
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Corporate Social Responsibility and the
Balanced Scorecard (slide 4 of 4)
• Cordier Toys has implemented two new strategic
initiatives.
o
To minimize waste, management has hired a continuous
improvement manager who is to oversee waste reduction.
o
To improve employee satisfaction, management has
added a vacation bonus for all employees.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Measures of CSR Strategic Objectives
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Encouraging Corporate Social Responsibility
• To be successful, a balanced scorecard must encourage
managers and employees to achieve strategic
objectives.
o
Tying manager and employee compensation directly to
performance metrics and targets encourages and
motivates managers and employees to achieve strategic
objectives.
• CSR activities are often used by recruiters to hire top
talent interested in making a difference beyond the
traditional financial results.
o
Management must carefully consider the trade-off between
intrinsic motivation and incentive compensation, especially
when attempting to motivate CSR-related performance.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Capital Investment in CSR
(slide 1 of 5)
• To implement CSR practices, significant capital
investments are often required.
• Some examples of CSR-related capital investments are
provided in Slide 72
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Examples of CSR Capital Investments
CSR Objective
Capital Investment Example
Minimize resource waste and
environmental degradation
A mining company invests in land, soil, and water
reclamation projects.
Develop new sustainable
markets
A consumer products company invests in equipment to
produce environmentally friendly cleaning products.
Reduce litigation risks
A paper mill invests in wastewater recycling to avoid the
potential legal liability for river contamination.
Maintain an attractive and safe
working environment
A software company invests in an employee wellness
and fitness center to attract and retain high-performance
employees.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Capital Investment in CSR
(slide 2 of 5)
• CSR investment proposals can be analyzed using
managerial accounting methods.
o
For example, the investment in manufacturing equipment
for a new environmentally safe cleaning product would
require capital investment analysis.
• The benefits of some CSR investments may be difficult
to measure and, thus, must be evaluated qualitatively.
o
For example, the benefits of a wellness and fitness center
for employees would be difficult to evaluate quantitatively.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Capital Investment in CSR
(slide 3 of 5)
• CSR investments may be legally mandated and, thus,
are justified more by the requirements of the law than by
their immediate economic benefits.
o
Examples might be land, soil, and water reclamation
projects and wastewater recycling project.
• Carpenter Company proposes to install solar panels to
satisfy a portion of its power requirements for its
manufacturing plant.
o
The solar panels’ investment cost is $150,000. The solar
panels’ operating and maintenance cost is expected to be
$20,000 per year.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Capital Investment in CSR
(slide 4 of 5)
o
The plant uses an average of 3,000 kilowatt-hours (kwh) per
day for 250 sunny days per year. A kilowatt-hour is the use of
1,000 watts per hour and is a standard measure of electricity
consumption.
o
The solar panels
replace metered
electricity from the
power company that
costs Carpenter
$0.12 per kwh.
o
The solar panels are
expected to last 10
years and have no
salvage value.
Annual cost savings:
Kilowatt-hours per day
3,000 kwh
Number of sunny operating days
×
250 days
Kilowatt-hours per year
750,000 kwh
Metered electricity cost per kwh
× $0.12 per kwh
Total metered cost savings
$ 90,000
Annual solar panel operating cost
(20,000)
Net annual savings
$ 70,000
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Capital Investment in CSR
(slide 5 of 5)
• The net present value of the project, assuming a
minimum rate of return of 10%, is computed as follows:
Annual net cash flow savings from installing solar panels
$ 70,000
Present value factor for an annuity of $1 at 10% for 10
periods (Appendix A)
× 6.14457
Present value of annual savings (rounded)
$ 430,120
Amount to be invested
(150,000)
Net present value
$ 280,120
• The net present value is positive; thus, the proposal is
supported by the analysis.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Balanced Scorecard and Corporate Responsibility
Discussion Question:
Q- Measuring with Metrics
•
Define what a metric is and share an example of a metric that exists in your everyday life,
non-business related.
• Now consider metrics that exist in businesses that you have worked for – what employee
performance and financial conditions were they measuring and why? (If the company you
worked for did not measure what do you think of that now and what should they have
measured?)
Directions:
• Discuss the concepts, principles, and theories from your textbook. Cite your textbooks and
cite any other sources if appropriate.
• Your initial post should address all components of the question with a 600 word limit.
Learning Outcomes
1. Demonstrate how a balanced scorecard aligns performance with organizational goals.
2. Evaluate how to implement a balanced scorecard in an organization.
3. Develop an investment plan for corporate social responsibility and sustainability.
Readings
Required:
• Chapter 14 in Managerial Accounting
• Rotaru, K., Fehrenbacher, D. D., Liang, M. H., & Schulz, A. K.-D. (2020). Causal inference in
judgment using the balanced scorecard. Journal of Management Accounting Research, 32(2),
201–224.
• Atz, U., Van Holt, T., Douglas, E., & Whelan, T. (2019). The return on sustainability
investment (ROSI): Monetizing financial benefits of sustainability actions in
companies. Review of Business, 39(2), 1–31.
Recommended:
• Module 13 PowerPoint Presentation
• Yilmaz, D. E., & Antmen, F. (2019). Project selection method based on balanced scorecard
framework. Business & Economics Research Journal, 10(5), 1179–1187.
Managerial
Accounting
Carl S. Warren
Professor Emeritus of Accounting
University of Georgia, Athens
William B. Tayler
Brigham Young University
Australia • Brazil • Mexico • Singapore • United Kingdom • United States
15e
Managerial Accounting, 15e
Carl S. Warren
William B. Tayler
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Intellectual Property Analyst: Reba Frederics
Library of Congress Control Number: 2018954981
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Carly Belcher
ISBN: 978-1-337-91202-0
Cengage
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Printed in the United States of America
Print Number: 01
Print Year: 2018
Preface
Roadmap for Success
Warren/Tayler Managerial Accounting, 15e, provides a sound pedagogy for giving s­ tudents a solid
foundation in managerial accounting. Warren/Tayler covers the fundamentals AND ­motivates students to learn by showing how accounting is important to businesses.
Warren/Tayler is successful because it reaches students with a combination of new and tried-andtested pedagogy.
This revision includes a range of new and existing features that help Warren/Tayler provide
­students with the context to see how accounting is valuable to business. These include:
▪▪ New! Make a Decision section
▪▪ New! Pathways Challenge
▪▪ New! Certified Management Accountant (CMA®) Examination Questions
Warren/Tayler also includes a thorough grounding in the fundamentals that any business student
will need to be successful. These key features include:
▪▪ Presentation style designed around the way students learn
▪▪ Updated schema
▪▪ At the start of each chapter, a schema, or roadmap, shows students what they are going to
learn and how it is connected to the larger picture. The schema illustrates how the chapter
content lays the foundation with managerial concepts and principles. Then it moves students
through developing the information and ultimately into evaluating and analyzing information
in order to make decisions.
Chapter
15
Statement
of Cash Flows
Principles
Chapter 1 Introduction to Managerial Accounting
Developing Information
COST SYSTEMS
Chapter 2
Chapter 3
Chapter 4
COST ALLOCATIONS
Chapter 5
Chapter 5
Job Order Costing
Process Costing
Support Departments
Joint Costs
Activity-Based Costing
Decision Making
PLANNING AND EVALUATING TOOLS
Chapter 6
Chapter 7
Chapter 8
Chapter 9
Chapter 10
Chapter 11
Cost-Volume-Profit Analysis
Variable Costing
Budgeting Systems
Standard Costing and Variances
Decentralized Operations
STRATEGIC TOOLS
Chapter 12
Chapter 13
Chapter 13
Chapter 14
Chapter 14
Capital Investment Analysis
Lean Manufacturing
Activity Analysis
The Balanced Scorecard
Corporate Social Responsibility
Differential Analysis
Chapter 15
Financial
accounting
Statement
of Cash Flows
Managerial
accounting
Chapter 16
Financial Statement
Analysis
698
12020_ch15_rev02_698-757.indd 698
8/4/18 11:45 AM
iii
iv
Preface
312
Chapter 7 Variable Costing for Management Analysis
▪▪ Link to the “opening company” of each chapter
examples
how
the byconcepts
The $80,000calls
increaseout
in operating
income underof
Proposal
2 is caused
the allocation of the
fixed manufacturing costs of $400,000 over a greater number of units manufactured. Specifically,
introduced in the chapter are connected to the
opening
company.
This
shows
how
accountan increase in production from 20,000 units to 25,000 units means that the
fixed manufacturing
cost per unit decreases from $20 ($400,000 ÷ 20,000 units) to $16 ($400,000 ÷ 25,000 units). Thus,
ing is used in the real world by real companies.
the cost of goods sold when 25,000 units are manufactured is $4 per unit less, or $80,000 less in
total (20,000 units sold × $4). Since the cost of goods sold is less, operating income is $80,000
more when 25,000 units rather than 20,000 units are manufactured.
Managers should be careful in analyzing operating income under absorption costing when finished goods inventory changes. Increases in operating income may be created by simply increasing finished goods inventory. Thus, managers could misinterpret such increases (or decreases) in
operating income as due to changes in sales volume, prices, or costs.
Adobe Systems Inc.
A
ssume that you have three different options for a summer job.
How would you evaluate these options? Naturally there are
many things to consider, including how much you could earn from
each job.
Determining how much you could earn from each job may
not be as simple as comparing the wage rate per hour. For example, a job as an office clerk at a local company pays $8 per hour. A
job delivering pizza pays $10 per hour (including estimated tips),
although you must use your own transportation. Another job working in a beach resort over 500 miles away from your home pays $8
per hour. All three jobs offer 40 hours per week for the whole summer. If these options were ranked according to their pay per hour,
the pizza delivery job would be the most attractive. However, the
costs associated with each job must also be evaluated. For example, the office job may require that you pay for downtown parking and purchase office clothes. The pizza delivery job will require
you to pay for gas and maintenance for your car. The resort job will
require you to move to the resort city and incur additional living
costs. Only by considering the costs for each job will you be able to
determine which job will provide you with the most income.
Just as you should evaluate the relative income of various
choices, a business also evaluates the income earned from its
choices. Important choices include the products offered and the
geographical regions to be served.
A company will often evaluate the profitability of products
and regions. For example, Adobe Systems Inc. (ADBE),
one of the largest software companies in the world, determines
the income earned from its various product lines, such as Acrobat®,
Photoshop®, Premiere®, and Dreamweaver® software. Adobe uses
this information to establish product line pricing, as well as sales,
support, and development effort. Likewise, Adobe evaluates the
income earned in the geographic regions it serves, such as the
United States, Europe, and Asia. Again, such information aids management in managing revenue and expenses within the regions.
In this chapter, how businesses measure profitability using
absorption costing and variable costing is discussed. After illustrating and comparing these concepts, how businesses use them for
controlling costs, pricing products, planning production, analyzing
market segments, and analyzing contribution margins is described
and illustrated.
Link to
Adobe Systems
Under variable costing, operating income is $200,000, regardless of whether 20,000 units or
25,000 units are manufactured. This is because no fixed manufacturing costs are allocated to the
units manufactured. Instead, all fixed manufacturing costs are treated as a period expense.
To illustrate, Exhibit 8 shows the variable costing income statements for Frand for the
production of 20,000 units, 25,000 units, and 30,000 units. In each case, the operating income
is $200,000.
Chapter 2
Pete Jenkins/AlAmy stock Photo
Exhibit 8
Variable Costing
Income Statements
for Three Production
Levels
52
Job Order Costing
In a recent absorption costing income statement, Adobe Systems reported (in millions) total revenue
of $5,854, cost of revenue of $820, gross profit of $5,034, operating expenses of $3,541, and operating
income of $1,493.
Frand Manufacturing Company
Variable Costing Income Statements
Sales (20,000 units × $75) . . . . . . . . . . . . . . . .
Variable cost of goods sold:
Variable cost of goods manufactured:
(20,000 units × $35) . . . . . . . . . . . . . . .
(25,000 units × $35) . . . . . . . . . . . . . . .
(30,000 units × $35) . . . . . . . . . . . . . . .
Ending inventory:
(0 units × $35) . . . . . . . . . . . . . . . . . . . .
(5,000 units × $35) . . . . . . . . . . . . . . . .
(10,000 units × $35) . . . . . . . . . . . . . . .
Total variable cost of goods sold . . . . . .
Manufacturing margin. . . . . . . . . . . . . . . . . . .
Variable selling and administrative
expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Contribution margin. . . . . . . . . . . . . . . . . . . . .
Fixed costs:
Fixed manufacturing costs . . . . . . . . . . .
Fixed selling and administrative
expenses . . . . . . . . . . . . . . . . . . . . . . . . .
Total fixed costs . . . . . . . . . . . . . . . . . . . . . .
Operating income . . . . . . . . . . . . . . . . . . . . . . .
20,000 Units
Manufactured
25,000 Units
Manufactured
30,000 Units
Manufactured
$1,500,000
$1,500,000
$ 1,500,000
$ (700,000)
$ (875,000)
$(1,050,000)
0
175,000
$ (700,000)
$ 800,000
$ (700,000)
$ 800,000
350,000
$ (700,000)
$ 800,000
(100,000)
$ 700,000
(100,000)
$ 700,000
(100,000)
$ 700,000
no discrepancies, a journal entry is made to record the purchase. The journal
entry$ to
record$ (400,000)
the
$ (400,000)
(400,000)
supplier’s invoice related to Receiving Report No. 196 in Exhibit 4 is as follows:
(100,000)
(100,000)
(100,000)
Link to Adobe Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pages 305, 309, 312, 316, 319
$ (500,000)
$ 200,000
$ (500,000)
$ 200,000
$ (500,000)
$ 200,000
303
12020_ch07_ptg01_302-351.indd 303
A 5 L 1
1
1
a.
E
Materials
Accounts Payable
Materials purchased during December.
10,500
10,500
7/12/18 12:15 PM
The storeroom releases materials for use in manufacturing when a materials requisition is
received. Examples of materials requisitions are shown in Exhibit 4.
The materials requisitions for each job serve as the basis for recording materials used. For direct
materials, the quantities and amounts from the materials requisitions are posted to job cost sheets. Job
▪▪ To
aid comprehension
and to demonstrate
themake
impact
journal
entriesledger.
include
cost
sheets,
which are also illustrated
in Exhibit 4,
up of
thetransactions,
work in process
subsidiary
the
net
effect
of
the
transaction
on
the
accounting
equation.
Exhibit 4 shows the posting of $2,000 of direct materials to Job 71 and $11,000 of direct
materials to Job 72.2 Job 71 is an order for 20 units of Jazz Series guitars, while Job 72 is an order
for 60 units of American Series guitars.
A summary of the materials requisitions is used as a basis for the journal entry recording the
materials used for the month. For direct materials, this entry increases (debits) Work in Process and
decreases (credits) Materials as follows:
12020_ch07_ptg01_302-351.indd 312
A 5 L 1
12
E
b.
Work in Process
Materials
Materials requisitioned to jobs
($2,000 + $11,000).
13,000
13,000
Many companies use computerized information processes to record the use of materials. In
such cases, storeroom employees electronically record the release of materials, which automatically updates the materials ledger and job cost sheets.
Ethics: Do It!
ETHICS
Phony
Invoice Scams
this information to create a fictitious invoice. The invoice
7/12/18 12:15 PM
Preface
▪▪ Located in each chapter, Why It M
­ atters shows students how accounting is important
to ­businesses with which they are familiar. A Concept Clip icon indicates which Why It
Matters features have an accompanying concept clip video in CNOWv2.
CONCEPT CLIP
476
Chapter 10
Evaluating Decentralized Operations
Why It Matters
CONCEPT CLIP
Coca-Cola Company: Go West Young Man
A
major decision early in the history of Coca-Cola (KO) was to ex314
Chapter 7 Variable Costing
for Management
pand
outside Analysis
of the United States to the rest of the world. As a result,
Coca-Cola
is known today the world over. What is revealing is how
Solution:
a. (1)
this
decision has impacted the revenues and profitability of Coca-Cola across
Absorption Costing Income Statements
(30,000 The
units produced
× $40 variable
its international and
North
following
table shows
Proposal 2: segments.
Proposal
1: American
manufacturing cost per unit) + $600,000
40,000 Units
30,000 Units
the percent of revenues
and percent
of operating
fixed cost income from the internaManufactured Manufactured
Sales (30,000 unitstional
× $100) and North American
$ 3,000,000 geographic
$ 3,000,000 segments.
(40,000 units produced × $40 variable manufacturing
Cost of goods sold:
Cost of goods manufactured
Ending inventory
Total cost of goods sold
Gross profit
Selling and administrative expenses
Operating income
$(1,800,000)
—
$(1,800,000)
$ 1,200,000
(350,000)
$ 850,000
$(2,200,000)
550,000
$(1,650,000)
$ 1,350,000
(350,000)
$ 1,000,000
$(1,200,000)
$ 1,800,000
(210,000)
$ 1,590,000
$(1,200,000)
$ 1,800,000
(210,000)
$ 1,590,000
$ (600,000)
(140,000)
$ (740,000)
$ 850,000
$ (600,000)
(140,000)
$ (740,000)
$ 850,000
different story. More than 65% of Coca- Cola’s profitability comes
from international segments. Given the revenue segmentation,
this suggests that the international profit margins must be higher
than the North American profit margin. Indeed this is the case, as
can be seen in the following table:
Profit Margin
International average
North America
cost per unit) + $600,000 fixed cost
Operating
10,000 units (40,000 produced
– 30,000 sold)
× $55 per unit ($2,200,000 ÷ 40,000 units)
Revenues
Income
48.4%
24.2%
The average profit margin for all the international segments is
two times as large as the North American segment. These results
(2)
reflect the heart of the Coca-Cola marketing strategy. In international markets, Coca-Cola is able to charge relatively higher prices
Proposal 2:
Proposal 1:
due to high demand and less competition as compared to the North
Units 7 Variable
30,000 Units350 40,000
Chapter
Costing
Management
Analysis
30,000
units for
produced
× $40 variable
The first column
showsManufactured
that the international
provide
Manufactured
manufacturing costsegments
per unit
American market.
Sales (30,000 units × $100)
2. units
Chassen
Company,
a cracker and cookie manufacturer, has the following unit costs for the
produced
× $40 variable
over 58% of the$ 3,000,000
revenues,$ 3,000,000
while North40,000
America
provides
almost
Variable cost of goods sold:
month
June:
manufacturing
costofper
unit
Variable cost of goods
$(1,200,000) However,
$(1,600,000)
Variable manufacturing
cost The Coca-Cola
$5.00
Source:
Company, Form 10-K for the Fiscal Year Ended December 31, 2017.
42%manufactured
of the revenues.
the 10,000
operating
income
a
units (40,000 produced
– 30,000 tells
Ending inventory
—
400,000
International segments
North American segment
Variable
Total Costing Income Statements
Total variable cost of goods sold
Manufacturing margin
Variable selling and administrative expenses
Contribution margin
Fixed costs:
Fixed manufacturing costs
Fixed selling and administrative expenses
Total fixed costs
Operating income
(30,000 units sold × $7 variable selling cost per
unit) + $140,000
58.4%
41.6
Variable Costs
100%
65.6%
34.4
100%
sold) × $40 variable cost per unit
Variable marketing cost
Fixed manufacturing cost
Fixed marketing cost
3.50
2.00
4.00
30,000 units sold × $7 variable
selling cost
unitof 100,000 units were manufactured during June, of which 10,000 remain in ending
A per
total
the only finished goods inventory at June 30. Under the absorption costing concept, the
Residualare Income
inventory. Chassen uses the first-in, first-out (FIFO) inventory method, and the 10,000 units
Fixed Costs
value of Chassen’s June 30 finished goods inventory would be:
▪▪ New! Pathways Challenge encourages
students’
interest
in accounting
emphasizes of the return on investment.
Residual income
is useful
in overcoming
some of and
the disadvantages
a. $50,000.
b. $70,000.
Residual income
is
the
excess
of
operating
income
over
aChallenge
minimum acceptable operating income,
the
critical
thinking
aspect
of
accounting.
A
suggested
answer
to
the
Pathways
$85,000.
b. The difference (in a.) is caused by including $150,000 fixed manufacturing costs (10,000 units × $15 fixedc.manufacturing
cost per unit) in the
d. $145,000. 7.
ending inventory, which decreases the cost of goods sold and increases theas
operating
income byin
$150,000.
shown
Exhibit
is provided at the end of the chapter. 3. Mill Corporation had the following unit costs for the recent calendar year:
Check Up Corner
Manufacturing
Nonmanufacturing
Pathways
Challenge
Exhibit
7
Variable
Fixed
$8.00
2.00
$3.00
5.50
Operating Inventory
income for Mill’s sole product totaled 6,000 units on January 1 and 5,200 units on
December 31. When
compared
to variable
income, Mill’s absorption costing income is:
Minimum acceptable
operating
income
ascosting
a
a. $2,400 lower.
Economic Activity
percent ofb.invested
assets
$2,400 higher.
Absorption costing is required by generally accepted accounting principles (GAAP) for reporting to exterc. $6,800 lower.
Residual
nal stakeholders. Thus, auto manufacturers like Ford
Motor income
Company (F) and General Motors
$ XXX
Residual
Income
This is
Accounting!
(XXX)
$ XXX
$6,800 higher.
Company (GM) use absorption costing in preparing their financiald.statements.
Under absorption costing,
fixed manufacturing costs are included in inventory. Thus, the4.
moreBethany
cars the auto
companies
lower
Company
hasmake,
just the
completed
the first month of producing a new product but has
the fixed cost per car and the smaller the cost of goods sold. In the years
preceding
the U.S.
and The product incurred variable manufacturing costs of
not yet
shipped
anyfinancial
of this crisis
product.
economic downturn of 2008, Ford and General Motors produced more
cars than were
to customers.1 costs of $2,000,000, variable marketing costs of $1,000,000,
$5,000,000,
fixedsold
manufacturing
Critical Thinking/Judgment
and fixed marketing costs of $3,000,000.
Under the variable costing concept, the inventory value of the new product would be:
The minimum acceptable operating income is computed by multiplying the company minimum
return on investment by the invested assets. The minimum rate is set by top management, based
d. $11,000,000.
on such factors
as theanswer
cost
ofof chapter.
financing.
Suggested
at end
Marielle Segarra, “Why the Big Three Put Too Many Cars on the
CFO.com (ww2.cfo.com/management-accounting/2012/02/
ToLot,”illustrate,
assume that DataLink Inc. has established 10% as the minimum acceptable return
why-the-big-three-put-too-many-cars-on-the-lot/), February 2, 2012.
Pathways
Challenge
on investment
for divisional
assets. The residual incomes for the three divisions are shown in
Exhibit 8.
This is Accounting!
If Ford and General Motors have high fixed costs and low variable costs,
how would producing more cars
a. $5,000,000.
affect their operating income under absorption costing? under variable
b. costing?
$6,000,000.
If absorption costing allows companies like Ford and General Motors to change their operating income by
c. $8,000,000.
increasing or decreasing production, why does GAAP require absorption costing?
1
Information/Consequences
12020_ch07_ptg01_302-351.indd 314
Exhibit 8
7/12/18 12:15 PM
By producing more cars than were sold, Ford (F) and General Motors (GM) increased their operating income reported under absorption costing. This is because a portion of their fixed manufacturing costs
were included in ending inventory rather than cost of goods sold.
Northern Division
Residual Income—
DataLink, Inc.
12020_ch07_ptg01_302-351.indd 350
Central Division
Southern Division
Underincome
variable costing, producing more cars would not affect operating
income, because all fixed manufacOperating
$ 70,000
$ 84,000
turing costs are included in cost of goods sold regardless of how many cars are produced.
$ 75,000
Minimum acceptable operating income
A reason often given for why GAAP requires absorption costing is that it focuses on operating income “over
as a percent
invested
assets:
the longof
term.
” In other words,
while operating income may vary from year to year, all manufacturing costs
are eventually
reported on the income statement as cost of goods sold
or as a write-down of inventory using
$350,000
× 10%
(35,000)
the lower-of-cost-or-market rule. Thus, over the life of a company, the total amount of operating income will
be the same
regardless of whether absorption or variable costing is used.
$700,000
× 10%
(70,000)
$500,000 × 10%
Suggested Answer
Residual income
$ 35,000
$ 14,000
(50,000)
$ 25,000
7/12/18 12:15 PM
v
Preface
▪▪ To aid learning and problem solving, throughout each chapter the Check Up Corner
exercises provide students with step-by-step guidance on how to solve problems. Problemsolving tips help students avoid common errors.
Chapter 10
Check Up Corner 10-1
Evaluating Decentralized Operations
467
Cost Center Responsibility Measures
Delinco Tech Inc. manufactures corrosion-resistant water pumps and fluid meters. Its Commercial Products
Division is organized as a cost center. The division’s budget for the month ended July 31 is as follows
(in thousands):
Materials
Factory wages
Supervisor salaries
Utilities
Depreciation of plant equipment
Maintenance
Insurance
Property taxes
$140,000
77,000
15,500
8,700
9,000
3,200
750
800
$254,950
During July, actual costs incurred in the Commercial Products Division were as follows:
Materials
Factory wages
Supervisor salaries
Utilities
Depreciation of plant equipment
Maintenance
Insurance
Property taxes
$152,000
77,800
15,500
8,560
9,000
3,025
750
820
$267,455
Prepare a budget performance report for the director of the Commercial Products Division for July.
Solution:
The report shows the budgeted costs and
actual costs along with the differences.
Budget Performance Report
Director, Commercial Products Division
For the Month Ended July 31
Materials ………………………………..
Factory wages ………………………….
Supervisor salaries…………………….
Utilities…………………………………..
Depreciation of plant equipment ….
Maintenance……………………………
Insurance ……………………………….
Property taxes ………………………….
Actual
Budget
$152,000
77,800
15,500
8,560
9,000
3,025
750
820
$267,455
$140,000
77,000
15,500
8,700
9,000
3,200
750
800
$254,950
}
vi
Over
Budget
The report allows cost center
managers to focus on areas
of significant differences.
(Under)
Budget
$12,000
800
$(140)
Each difference is classified as
over budget or under budget.
(175)
20
$12,820
$(315)
Check Up Corner
Preface
▪▪ Analysis for Decision ­Making ­highlights how companies use accounting ­information to make
decisions and evaluate their business. This provides students with context of why accounting
is important 376
to companies.
Chapter 8 Budgeting
Analysis for Decision Making
Objective 6
Describe and
illustrate the use of
staffing budgets for
nonmanufacturing
businesses.
Nonmanufacturing Staffing Budgets
The budgeting illustrated in this chapter is similar to budgeting used for nonmanufacturing
businesses. However, many nonmanufacturing businesses often do not have direct materials
purchases budgets, direct labor cost budgets, or factory overhead cost budgets. Thus, the budgeted income statement is simplified in many nonmanufacturing settings.
A primary budget in nonmanufacturing businesses is the labor, or staffing, budget. This budget, which is highly flexible to service demands, is used to manage staffing levels. For example,
a theme park will have greater staffing in the summer vacation months than in the fall months.
Likewise, a retailer will have greater staffing during the holidays than on typical weekdays.
To illustrate, Concord Hotel operates a hotel in a business district. The hotel has 150 rooms
that average 120 guests per night during the weekdays and 50 guests per night during the weekend. The housekeeping staff is able to clean 10 rooms per employee. The number of housekeepers required for an average weekday and weekend is determined as follows:
Weekday
Weekend
120
÷ 10
12
50
÷ 10
5
Number of guests per day
Rooms per housekeeper
Number of housekeepers per day
If each housekeeper is paid $15 per hour for an eight-hour shift per day, the annual budget
for the staff is as follows:
Weekday
Number of housekeepers per day
Hours per shift
Days per year
Number of hours per year
Rate per hour
Housekeeping staff annual budget
12
8
260*
24,960
×
$15
Weekend
Total
5
8
104**
4,160
× $15
×
×
×
×
$374,400
$62,400
$436,800
* 52 weeks × 5 days
** 52 weeks × 2 days
The budget can be used to plan and manage the staffing of the hotel. For example,
if a wedding were booked for the weekend, the budgeted increase in staffing could be
compared with the increased revenue from the wedding to verify the profit plan.
Make a Decision
Nonmanufacturing Staffing Budgets
Analyze Johnson Stores’ staffing budget for holidays (MAD 8-1)
▪▪ Make a Decision in the end-of-chapter
material gives students a chance to analyze real-world
Analyze Mercy Hospital’s staffing budget (MAD 8-2)
Chapter 6 Cost-Volume-Profit Analysis
297
business decisions.
Analyze Adventure Park’s staffing budget (MAD 8-3)
Analyze Ambassador Suites’ staffing budget (MAD 8-4)
Make a Decision
Make a Decision
Cost-Volume-Profit Analysis for Service Companies
MAD 6-1 Analyze Global Air’s cost-volume-profit relationships
Obj. 6
Global Air is considering a new flight between Atlanta and Los Angeles. The average fare per
seat for the flight is $760. The costs associated with the flight are as follows:
12020_ch08_ptg01_352-409.indd 376
Fixed costs for the flight:
Crew salaries . . . . . . . . . . . . . . . . . . $ 5,000
Operating costs . . . . . . . . . . . . . . . 50,000
Aircraft depreciation . . . . . . . . . . 25,000
Total . . . . . . . . . . . . . . . . . . . . . . . . $80,000
Variable costs per passenger:
Passenger check-in . . . . . . . . . . .
Operating costs . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . .
16/07/18 6:34 am
$ 20
100
$120
The airline estimates that the flight will sell 175 seats.
a. Determine the break-even number of passengers per flight.
b. Based on your answer in (a), should the airline add this flight to its schedule?
c. How much profit should each flight produce?
What additional issues might the airline consider in this decision?
d.
MAD 6-2 Analyze Ocean Escape Cruise Lines’ cost-volume-profit relationships
Obj. 6
Ocean Escape Cruise Lines has a boat with a capacity of 1,200 passengers. An eight-day ocean
cruise involves the following costs:
Crew
Fuel
Fixed operating costs
$240,000
60,000
800,000
The variable costs per passenger for the eight-day cruise include the following:
Meals
Variable operating costs
$900
400
The price of the cruise is $2,400 per passenger.
a. Determine the break-even number of passengers for the eight-day cruise.
b. Assume 900 passengers booked the cruise. What would be the profit or loss for the cruise?
c. Assume the cruise was booked to capacity. What would be the profit or loss for the cruise?
If the cruise cannot book enough passengers to break even, how might the cruise
d.
line respond?
MAD 6-3 Analyze Star Stream’s cost-volume-profit relationships
Obj. 6
Star Stream is a subscription-based video streaming service. Subscribers pay $120 per year for the
service. Star Stream licenses and develops content for its subscribers. In addition, Star Stream leases
servers to hold this content. These costs are not variable to the number of subscribers, but must
be incurred regardless of the subscriber base. In addition, Star Stream compensates telecommunication companies for bandwidth so that Star Stream customers receive fast streaming services.
vii
viii
Preface
▪▪ At the end of each chapter, Let’s Review is a new chapter summary and self-assessment feature
that is designed to help busy students prepare for an exam. It includes a summary of each
learning objective’s key points, key terms, multiple-choice questions, exercises, and a sample
problem that students may use to practice.
▪▪ Sample multiple-choice questions allow students to practice with the type of assessments they
are likely to see on an exam.
▪▪ Short exercises and a longer problem allow students to apply their knowledge.
▪▪ Answers provided at the end of the Let’s Review section let students check their knowledge
immediately.
▪▪ Take It Further in the end-of-chapter activities allows instructors to assign other special activities related to ethics, communication, and teamwork.
▪▪ NEW! Certified Management Accountant (CMA®) Examination Questions help students
­prepare for the CMA exam so they can earn CMA certification.
CengageNOWv2
CengageNOWv2 is a powerful course management and online homework resource that provides
control and customization to optimize the student learning experience. Included are many proven
resources, such as algorithmic activities, a test bank, course management tools, reporting and
assessment options, and much more.
NEW! Excel Online
Cengage and Microsoft have partnered in CNOWv2 to provide students with a uniform, authentic
Excel experience. It provides instant feedback, built-in video tips, and easily accessible spreadsheet
work. These features allow you to spend more time teaching college accounting applications and
less time troubleshooting Excel.
These new algorithmic activities offer pre-populated data directly in Microsoft Excel Online. Each
student receives his or her own version of the problem to perform the necessary data calculations
in Excel Online. Their work is constantly saved in Cengage cloud storage as a part of homework
assignments in CNOWv2. It’s easily retrievable so students can review their answers without cumbersome file management and numerous downloads/uploads.
Motivation: Set Expectations and Prepare Students
for the Course
CengageNOWv2 helps motivate students and get them ready to learn by reshaping their misconceptions about the introductory accounting course and providing a powerful tool to engage students.
CengageNOWv2 Start-Up Center
Students are often surprised by the amount of time they need to spend outside of class working
through homework assignments in order to succeed. The CengageNOWv2 Start-Up Center will help
students identify what they need to do and where they need to focus in order to be successful
with a variety of new resources.
▪▪ What Is Accounting? Module ensures students understand course expectations and how to be
successful in the introductory accounting course. This module consists of two assignable videos: Introduction to Accounting and Success Strategies. The Student Advice Videos offer advice
from real students about what it takes to do well in the course.
▪▪ Math Review Module, designed to help students get up to speed with necessary math skills,
includes math review assignments and Show Me How math review videos to ensure that students have an understanding of basic math skills.
▪▪ How to Use CengageNOWv2 Module focuses on learning accounting, not on a particular software system. Quickly familiarize your students with CengageNOWv2 and direct them to all of
its built-in student resources.
Preface
Motivation: Prepare Them for Class
With all the outside obligations accounting students have, finding time to read the textbook before
class can be a struggle. Point students to the key concepts they need to know before they attend
class.
▪▪ Video: Tell Me More. Short Tell Me More lecture activities explain the core concepts of the
chapter through an engaging auditory and visual presentation. Available either on a standalone basis or as an assignment, they are ideal for all class formats—flipped model, online,
hybrid, or face-to-face.
Provide Help Right When Students Need It
The best way to learn accounting is through practice, but students often get stuck when attempting homework assignments on their own.
▪▪ Video: Show Me How. Created for the most frequently assigned end-of-chapter items,
Show Me How problem demonstration videos provide a step-by-step model of a similar problem. Embedded tips help students avoid common mistakes and pitfalls.
SHOW ME HOW
ix
x
Preface
Help Students Go Beyond Memorization to True
Understanding
Students often struggle to understand how concepts relate to one another. For most students, an
introductory accounting course is their first exposure to both business transactions and the accounting system. While these concepts are already difficult to master individually, their combination
and interdependency in the introductory accounting course often pose a challenge for students.
▪▪ Mastery Problems. Mastery Problems enable you to assign problems and activities designed to
test students’ comprehension and mastery of difficult concepts.
MindTap eReader
The MindTap eReader for Warren/Tayler’s Managerial Accounting is the most robust digital
reading experience available. Hallmark features include:
▪▪ Fully optimized for the iPad.
▪▪ Note taking, highlighting, and more.
▪▪ Embedded digital media.
▪▪ The MindTap eReader also features ReadSpeaker®, an online text-to-speech application that
vocalizes, or “speech-enables,” online educational content. This feature is ideally suited for
both instructors and learners who would like to listen to content instead of (or in addition
to) reading it.
Cengage Unlimited
Cengage Unlimited is a first of-its-kind digital subscription designed specifically to lower costs.
Students get total access to everything Cengage has to offer on demand—in one place. That’s
20,000 eBooks, 2,300 digital learning products, and dozens of study tools across 70 disciplines and
over 675 courses. Currently available in select markets. Details at www.cengage.com/unlimited.
New to This Edition
In all chapters, the following improvements have been made:
▪▪ Chapter schemas revised throughout.
▪▪ Link to page references added at the beginning of the
chapter allow students to easily locate the ties to the
opening company throughout the chapter.
▪▪ New learning objective for Analysis for Decision Making.
▪▪ Stock ticker symbol has been inserted for all real-world
(publicly listed) companies. This helps students to use
financial websites to locate real company data.
▪▪ New Pathways Challenge feature added, consistent with
the work of the Pathways Commission. This feature
emphasizes the critical thinking aspect of accounting. A
Suggested Answer to the Pathways Challenge is provided
at the end of the chapter.
▪▪ New Make a Decision section at the end of the Analysis
for Decision Making directs students and instructors to
the real-world company end-of-chapter materials related
to Analysis for Decision Making. Also, the continuing company analysis is identified and referenced in this Make a
Decision section.
▪▪ New items have been added to the Take It Further section
at the end of the chapter.
▪▪ New Certified Management Accountant (CMA®) Examination Questions help students prepare for the CMA exam
so they can earn CMA certification.
Chapter 1
▪▪ “Managerial Accounting in the Organization” section significantly revised to discuss horizonal and vertical business units; McAfee, Inc., is used as an illustration.
▪▪ New Why It Matters features the IMA and CMA.
▪▪ New Why It Matters features vertical and horizontal
­functions for service companies.
▪▪ Discussion of sustainability and accounting moved to new
Chapter 14.
Chapter 2
▪▪ Discussion of sustainability and accounting moved to new
Chapter 14.
▪▪ Added one new Analysis for Decision Making item.
Preface
Chapter 3
▪▪ Why It Matters feature (Sustainable Papermaking) moved
to Chapter 14.
▪▪ Lean manufacturing discussion with related homework
items moved to Chapter 13.
▪▪ Added one new Analysis for Decision Making item.
xi
▪▪ Added four new revenue variance exercises.
▪▪ Added one new Analysis for Decision Making item.
Chapter 10
▪▪ Balanced scorecard discussion moved to new Chapter 14.
▪▪ Added one new Analysis for Decision Making item.
Chapter 4
Chapter 11
▪▪ Added Learning Objective 7: Describe and illustrate the use
of activity-based costing information in decision making.
▪▪ Total cost and variable cost concepts for product pricing
were moved to an end-of-chapter appendix.
▪▪ Added one new Make a Decision item.
Chapter 5—NEW Chapter
▪▪ Learning Objectives:
▪▪ Describe support departments and support department
costs.
▪▪ Describe the allocation of support department costs
using a single plantwide rate, multiple department
rates, and activity-based costing.
▪▪ Allocate support department costs to production
departments using the direct method, sequential
method, and reciprocal services method.
▪▪ Describe joint products and joint costs.
▪▪ Allocate joint costs using the physical units, weighted
average, market value at split-off, and net realizable
value methods.
▪▪ Describe and illustrate the use of support department
and joint cost allocations to evaluate the performance
of production managers.
Chapter 6
▪▪ Added one new Analysis for Decision Making item.
Chapter 7
▪▪ Contribution margin analysis deleted from chapter.
▪▪ Revenue variance added as an appendix to Chapter 9.
Chapter 8
▪▪ Added one new Analysis for Decision Making item.
Chapter 9
▪▪ Added new appendix on revenue variances.
▪▪ Nonfinancial performance measures (previously Learning
Objective 6) moved to new Chapter 14.
Chapter 12
▪▪ Analysis for Decision Making on capital investment for
sustainability has been moved to new Chapter 14.
▪▪ Added new Analysis for Decision Making entitled “Uncertainty: Sensitivity and Expected Value Analyses.”
▪▪ Added six new Make a Decision items.
Chapter 13
▪▪ Added Objective 4: Describe and illustrate the use of lean
principles and activity analysis in a service or administrative setting.
Chapter 14—NEW chapter
▪▪ Learning objectives:
▪▪ Describe the concept of a performance measurement
system.
▪▪ Describe and illustrate the basic elements of a balanced scorecard.
▪▪ Describe and illustrate the balance scorecard, including
the use and impact of strategy maps, measure maps,
strategic learning, scorecard cascading, and cognitive
biases.
▪▪ Describe corporate social responsibility (CSR), including methods of measuring and encouraging social
responsibility using the balanced scorecard.
▪▪ Use capital investment analysis to evaluate CSR projects.
Acknowledgements
The many enhancements to this edition of Managerial Accounting are the direct result of reviews, surveys, and focus groups
with instructors at institutions across the country. We would like to take this opportunity to thank those who have helped
us better understand the challenge of the financial accounting course and provided valuable feedback on our content and
digital assets.
John Alpers, Tennessee Wesleyan
Anne Marie Anderson, Raritan Valley
Community College
Maureen Baker, Long Beach City
College
Cindy Bolt, The Citadel
Julie Bonner, Central Washington
University
Charles Boster, Salisbury University
Jerold K. Braun, Daytona State College
Shauna Butler, St. Thomas Aquinas
College
Kirk Canzano, Long Beach City College
Dixon Cooper, Ouachita Baptist
University
Bryan Corsnitz, Long Beach City
College
Pat Creech, Northeastern Oklahoma
A&M
Daniel De La Rosa, Fullerton College
Heather Demshock, Lycoming College
xii
Scott Dotson, Tennessee Wesleyan
University
Hong Duong, Salisbury University
James Emig, Villanova University
Dave Fitzgerald, Jackson College
Kenneth Flug, St. Thomas Aquinas
College
Thomas Heikkinen, Jackson College
Susanne Holloway, Salisbury University
Daniel Kim, Midlands Technical
College
Angela Kirkendall, South Puget Sound
Community College
Satoshi Kojima, East Los Angeles
College
Tara Maciel, San Diego Mesa College
Annette Maddox, Georgia Highlands
College
LuAnn Bean Mangold, Florida Institute
of Technology
Allison McLeod, University of North Texas
Rodney Michael
Shawn Miller, Lone Star College
Dr. April Poe, University of the
Incarnate Word
Francisco Rangel, Riverside City
College
Benjamin Reyes, Long Beach City
College
Lauran B. Schmid, The University of
Texas Rio Grande Valley
Meghna Singhvi, Loyola Marymount
University
Margie Snow, Norco College
Michael Stoots, UCLA extension
Patricia Tupaj, Quinsigamond
Community College
Randi Watts, Baker College
Cammy Wayne, Harper College
Melissa Youngman, National Technical
Institute for the Deaf, RIT
About the Authors
Carl S. Warren
©Terry R. Spray InHisImage Studios
Dr. Carl S. Warren is Professor Emeritus of Accounting at the University of Georgia, Athens. Dr.
Warren has taught classes at the University of Georgia, University of Iowa, Michigan State University, and University of Chicago. He has focused his teaching efforts on principles of accounting
and auditing. Dr. Warren received his Ph.D. from Michigan State University and his BBA and MA
from the University of Iowa. During his career, Dr. Warren published numerous articles in professional journals, including The Accounting Review, Journal of Accounting Research, Journal of
Accountancy, The CPA Journal, and Auditing: A Journal of Practice and Theory. Dr. Warren has
served on numerous committees of the American Accounting Association, the American Institute of
Certified Public Accountants, and the Institute of Internal Auditors. He has consulted with numerous companies and public accounting firms. His outside interests include handball, golfing, skiing,
backpacking, motorcycling, and fly-fishing. He also enjoys interacting with his five grandchildren,
Bella and Mila (twins), Jeremy, and Brooke and Robbie (twins).
William B. Tayler
© Emory University
Dr. William B. Tayler is the Robert J. Smith Professor of Accountancy in the Marriott School of
Business at Brigham Young University (BYU). Dr. Tayler is an internationally renowned, awardwinning accounting researcher and instructor. He has presented his research as an invited speaker
at universities and conferences across the globe. Dr. Tayler earned his Ph.D. and master’s degree at
Cornell University. He teaches in BYU’s Executive MBA Program and in BYU’s School of Accountancy, one of the top ranked accounting programs in the world. Dr. Tayler has also taught at
Cornell University and Emory University and has received multiple teaching awards. Dr. Tayler is
a Certified Management Accountant and consultant specializing in cost accounting, performance
measurement, the assignment of decision rights, and incentive compensation. His work has been
published in top journals, including Accounting Horizons, Accounting, Organizations and Society, The Accounting Review, Contemporary Accounting Research, IMA Educational Case Journal,
Journal of Accounting Research, Journal of Behavioral Finance, Journal of Finance, Review of
Financial Studies, and Strategic Finance. Dr. Tayler serves on the editorial boards of The Accounting Review, Management Accounting Research, and Accounting, Organizations and Society. He is
also director of the Institute of Management Accountants Research Foundation.
xiii
Brief Contents
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
Introduction to Managerial Accounting. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2
Job Order Costing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
46
Process Cost Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
94
Activity-Based Costing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
150
Support Department and Joint Cost Allocation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
204
Cost-Volume-Profit Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
248
Variable Costing for M
­ anagement Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
302
Budgeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
352
Evaluating Variances from Standard Costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
410
Evaluating Decentralized Operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
460
Differential Analysis and Product Pricing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
510
Capital Investment Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
564
Lean Manufacturing and Activity Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
612
The Balanced Scorecard and Corporate Social Responsibility. . . . . . . . . . . . . . . . . . . . . . . . . .
654
Statement of Cash Flows. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
698
Financial Statement Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
758
Appendix A Interest Tables. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
A-1
Nike Inc., Form 10-K for the Fiscal Year Ended May 31, 2017 Selected Excerpts. . . .
B-1
Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
G-1
Index. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
I-1
Appendix B
xiv
Contents
1
Introduction to Managerial
Accounting 2
Managerial Accounting 4
Differences Between Managerial and Financial Accounting 5
Managerial Accounting in the Organization 6
The Management Process 8
Uses of Managerial Accounting Information 9
Manufacturing Operations 11
Nature of Manufacturing 11
Direct and Indirect Costs 11
Manufacturing Costs 12
Financial Statements for a Manufacturing Business 17
Balance Sheet 17
Income Statement 18
Analysis for Decision Making 21
Utilization Rates 21
Make a Decision 41
Take It Further 43
Certified Management Accountant (CMA®)
Examination Questions (Adapted) 45
Take It Further 89
Certified Management Accountant (CMA®)
Examination Questions (Adapted) 92
Pathways Challenge 59, 93
3
Process Cost Systems 94
Process Manufacturers 96
Comparing Job Order and Process Cost Systems 97
Cost Flows for a Process Manufacturer 98
Cost of Production Report 101
Step 1: Determine the Units to Be Assigned Costs 102
Step 2: Compute Equivalent Units of Production 102
Step 3: Determine the Cost per Equivalent Unit 106
Step 4: Allocate Costs to Units Transferred
Out and Partially Completed Units 107
Preparing the Cost of Production Report 109
Journal Entries for a Process Cost System 112
Using the Cost of Production Report 116
Pathways Challenge 13, 45
Analysis for Decision Making 116
2
Appendix Weighted Average Method 118
Job Order Costing 46
Cost Accounting Systems Overview 48
Job Order Cost Systems 48
Process Cost Systems 48
Job Order Cost Systems for Manufacturing
Businesses 49
Materials 50
Factory Labor 52
Factory Overhead 54
Work in Process 60
Finished Goods 61
Sales and Cost of Goods Sold 61
Period Costs 62
Summary of Cost Flows for Legend Guitars 62
Job Order Cost Systems for Service Businesses 64
Types of Service Businesses 64
Flow of Costs in a Service Job Order Cost System 64
Analysis for Decision Making 66
Analyzing Job Costs 66
Make a Decision 86
Analyzing Process Costs 116
Determining Costs Using the Weighted
Average Method 118
The Cost of Production Report 120
Make a Decision 142
Take It Further 145
Certified Management Accountant (CMA®)
Examination Questions (Adapted) 147
Pathways Challenge 112, 149
4
Activity-Based Costing 150
Product Costing Allocation Methods 152
Single Plantwide Factory
Overhead Rate Method 153
Multiple Production Department Factory
Overhead Rate Method 155
Department Overhead Rates and Allocation 156
Distortion of Product Costs 157
xv
xvi
Contents
Activity-Based Costing Method 160
Activity Rates 162
Allocating Costs 163
Distortion in Product Costs 165
Dangers of Product Cost Distortion 165
Activity-Based Costing for
Selling and Administrative Expenses 167
Activity-Based Costing in Service
Businesses 168
Analysis for Decision Making 173
Using ABC Product Cost Information to Reduce Costs 173
Make a Decision 199
Take It Further 201
Certified Management Accountant (CMA®)
Examination Questions (Adapted) 202
6
Cost-Volume-Profit
Analysis 248
Cost Behavior 250
Variable Costs 251
Fixed Costs 252
Mixed Costs 254
Summary of Cost Behavior Concepts 256
Cost-Volume-Profit Relationships 258
Contribution Margin 258
Contribution Margin Ratio 258
Unit Contribution Margin 259
Mathematical Approach to Cost-Volume-Profit
Analysis 261
Break-Even Point 261
Target Profit 265
Pathways Challenge 171, 203
Graphic Approach to Cost-Volume-Profit Analysis 266
5
Special Cost-Volume-Profit Relationships 272
 Support Department and Joint
Cost Allocation 204
Support Departments 206
Support Department Cost Allocation 207
Single Plantwide Rate 208
Multiple Production Department Rates 208
Activity-Based Costing 209
Allocating Support Department Costs
to Production Departments 210
Direct Method 211
The Sequential Method 213
The Reciprocal Services Method 217
Comparison of Support Department Cost
Allocation Methods 221
Joint Costs 222
Joint Cost Allocation 222
The Physical Units Method 222
The Weighted Average Method 223
The Market Value at Split-Off Method 223
The Net Realizable Value Method 224
Comparison of Joint Cost Allocation Methods 225
By-Products 227
Analysis for Decision Making 227
Using Support Department and Joint Cost
Allocations for Performance Evaluation 227
Make a Decision 243
Take It Further 245
Certified Management Accountant (CMA®)
Examination Questions (Adapted) 246
Pathways Challenge 221, 247
Cost-Volume-Profit (Break-Even) Chart 266
Profit-Volume Chart 268
Use of Spreadsheets in Cost-Volume-Profit Analysis 269
Assumptions of Cost-Volume-Profit Analysis 270
Sales Mix Considerations 272
Operating Leverage 274
Margin of Safety 275
Analysis for Decision Making 277
Cost-Volume-Profit Analysis for Service Companies 277
Make a Decision 297
Take It Further 298
Certified Management Accountant (CMA®)
Examination Questions (Adapted) 300
Pathways Challenge 256, 301
7
 Variable Costing for
­Management Analysis 302
Operating Income: Absorption and Variable Costing 304
Absorption Costing 304
Variable Costing 305
Effects of Inventory 307
Analyzing Operating Income Using
Absorption and ­Variable Costing 310
Using Absorption and Variable Costing 315
Controlling Costs 315
Pricing Products 315
Planning Production 316
Analyzing Market Segments 316
Analyzing Market Segments 316
Sales Territory Profitability Analysis 318
Product Profitability Analysis 319
Salesperson Profitability Analysis 319
Contents
Variable Costing for Service Businesses 321
Reporting Income 321
Analyzing Segments 322
Analysis for Decision Making 324
Segment Analysis and EBITDA 324
Make a Decision 346
Take It Further 348
Certified Management Accountant (CMA®)
Examination Questions (Adapted) 349
Pathways Challenge 314, 350
8
Budgeting 352
Nature and Objectives of Budgeting 354
Objectives of Budgeting 354
Human Behavior and Budgeting 355
Budgeting Systems 356
Static Budget 357
Flexible Budget 358
Master Budget 360
Operating Budgets 361
Sales Budget 361
Production Budget 362
Direct Materials Purchases Budget 363
Direct Labor Cost Budget 364
Factory Overhead Cost Budget 366
Cost of Goods Sold Budget 366
Selling and Administrative Expenses Budget 368
Budgeted Income Statement 369
Financial Budgets 370
Cash Budget 370
Capital Expenditures Budget 375
Budgeted Balance Sheet 375
Analysis for Decision Making 376
Nonmanufacturing Staffing Budgets 376
Make a Decision 404
Take It Further 405
Certified Management Accountant (CMA®)
Examination Questions (Adapted) 407
Pathways Challenge 370, 408
9
 Evaluating Variances
from Stan…