CTA – Capital Investment Analysis

CriticalThinkingAssignment

Module1

2

-CapitalInvestment Analysis

Q-The management team of Lisa’s Linens & Furniture is considering the following capital projects:

10,000SAR

0,000SAR

00,000SAR

8

3

2

5

3

Assume that each project has no salvage value, and the firm uses a discount rate of 10%. Top management has decided that only 2,200,000SAR can be spent in the current year for capital projects.

1. Compute the net present value (NPV), profitability index, and internal rate of return for each of the projects.

2. Rank the projects according to each method used in Part 1.

3. Explain how you would recommend to management of the company that the money should be spent. What would be the total NPV of your chosen investments?

4. What other methods could be used with this information to evaluate whether this project is feasible or not? How does the time value of money concept impact the cash flows and outcome?

You must show all your work. Complete the problems in an Excel spreadsheet. Be sure to show all your work on the Excel spreadsheet to receive credit.

Learning Outcomes

1. Examine the relation of capital investment analysis to the management process.
2. Solve capital investment evaluations including using net present value and internal rate of return.
3. Evaluate payback calculations and accounting rate of return.
4. Distinguish factors that can impact the capital budgeting process.

Readings

Required:

• Chapter 12 in Managerial Accounting

Sarwary, Z. (2019). Capital budgeting techniques in SMEs: A literature review. Journal of Accounting & Finance (2158-3625), 19(3), 97–114.

Recommended:

• Module 10 PowerPoint Presentation
• Nikias, A. D. (2019). An experimental examination of the effects of information control on budget reporting with relative project evaluation. Journal of Management Accounting Research, 31(2), 177–196.

Ghumro, I. A., Lashari, A. A., Bhatti, I., & Abro, M.-R. (2019). Investment decisions: How it influence capital budgeting practices. Journal of Managerial Sciences, 13(2), 84–94.

Critical Thinking Assignment
Module 12 – Capital Investment Analysis
Q- The management team of Lisa’s Linens & Furniture is considering the following capital projects:
Project
New manufacturing plant
Machinery
Leasehold improvements
Computers
Office furniture
Company plan
Company car
Cost
Annual cash
flows
20,000,000SAR

310,000SAR

320,000SAR

80,000SAR

500,000SAR

118,000SAR
178,000SAR
497,000SAR
114,000SAR
392,000SAR
800,000SAR
230,000SAR
240,000SAR
77,000SAR
Years
13
6
8
3
2
5
3
Assume that each project has no salvage value, and the firm uses a discount rate of 10%. Top management has decided that only 2,200,000SAR can be
spent in the current year for capital projects.
1. Compute the net present value (NPV), profitability index, and internal rate of return for each of the projects.
2. Rank the projects according to each method used in Part 1.
3. Explain how you would recommend to management of the company that the money should be spent. What would be the total NPV of your chosen
investments?
4. What other methods could be used with this information to evaluate whether this project is feasible or not? How does the time value of money concept
impact the cash flows and outcome?
You must show all your work. Complete the problems in an Excel spreadsheet. Be sure to show all your work on the Excel spreadsheet to receive credit.
Learning Outcomes
1. Examine the relation of capital investment analysis to the management process.
2. Solve capital investment evaluations including using net present value and internal rate of return.
3. Evaluate payback calculations and accounting rate of return.
4. Distinguish factors that can impact the capital budgeting process.
Readings
Required:
• Chapter 12 in Managerial Accounting
• Sarwary, Z. (2019). Capital budgeting techniques in SMEs: A literature review. Journal of Accounting & Finance (2158-3625), 19(3), 97–114.
Recommended:
• Module 10 PowerPoint Presentation
• Nikias, A. D. (2019). An experimental examination of the effects of information control on budget reporting with relative project evaluation. Journal of
Management Accounting Research, 31(2), 177–196.
• Ghumro, I. A., Lashari, A. A., Bhatti, I., & Abro, M.-R. (2019). Investment decisions: How it influence capital budgeting practices. Journal of
Managerial Sciences, 13(2), 84–94.
Chapter 12
Capital
Investment
Analysis
Learning Objectives
• Obj. 1: Describe the nature and importance of capital
investment analysis.
• Obj. 2: Evaluate capital investment proposals, using the
average rate of return and cash payback methods.
• Obj. 3: Evaluate capital investment proposals, using the net
present value and internal rate of return methods.
• Obj. 4: Describe factors that complicate capital investment
analysis.
• Obj. 5: Describe and diagram the capital rationing process.
• Obj. 6: Describe and illustrate the use of sensitivity and
expected value analyses in evaluating capital investment
proposals.
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Nature of Capital Investment Analysis
(slide 1 of 3)
• Companies use capital investment analysis to
evaluate long-term investments.
o Capital investment analysis (or capital budgeting) is
the process by which management plans, evaluates,
and controls investments in fixed assets.
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Nature of Capital Investment Analysis
(slide 2 of 3)
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Nature of Capital Investment Analysis
(slide 3 of 3)
• The two methods that use present values
consider the time value of money.
o The time value of money concept recognizes that
a dollar today is worth more than a dollar tomorrow
because today’s dollar can earn interest.
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Methods Not Using Present Values
• The methods not using present values are often
useful in evaluating capital investment proposals
that have relatively short useful lives.
o In such cases, the timing of the cash flows (the time
value of money) is less important.
• Because the methods not using present values
are easy to use, they are often used to screen
proposals.
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Average Rate of Return Method
(slide 1 of 5)
• The average rate of return, sometimes called the
accounting rate of return, measures the average
income as a percent of the average investment.
• The average rate of return is computed as follows:
o Assuming straight-line depreciation, the average
investment is computed as follows:
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Average Rate of Return Method
(slide 2 of 5)
• Assume that management is evaluating the purchase of
a new machine as follows:
Cost of new machine
Residual value
Expected total income from machine
Expected useful life
$500,000
$0
$200,000
4 years
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Average Rate of Return Method
(slide 3 of 5)
• The average investment is computed as follows:
• The average rate of return on the average investment is
computed as follows:
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Average Rate of Return Method
(slide 4 of 5)
• The average rate of return of 20% should be
compared to the minimum rate of return required
by management.
o If the average rate of return equals or exceeds the
minimum rate, the machine should be purchased or
considered for further analysis.
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Average Rate of Return Method
(slide 5 of 5)
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Cash Payback Method
(slide 1 of 8)
• The expected period of time between the date of an
investment and the recovery in cash of the amount
invested is the cash payback period.
• When annual net cash inflows are equal, the cash
payback period is computed as follows:
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Cash Payback Method
(slide 2 of 8)
• Assume that management is evaluating the purchase of
a new machine.
Cost of new machine
$200,000
Cash revenues from machine per year
$50,000
Expenses of machine per year, including depreciation
$30,000
Depreciation per year
$20,000
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Cash Payback Method
(slide 3 of 8)
• To simplify, the revenues and expenses other than
depreciation are assumed to be in cash. Hence, the net
cash inflow per year from use of the machine is as
follows: Net cash flow per year:
Cash revenues from machine
$ 50,000
Cash expenses of machine
(10,000)*
Net cash inflow per year
$ 40,000
*Expenses of machine, including depreciation
$ 30,000
Depreciation expense
(20,000)
Cash expenses of machine
$ 10,000
• The estimated cash payback period for the investment in
the machine is computed as follows:
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Cash Payback Method
(slide 4 of 8)
• In the preceding example, the annual net cash inflows
are equal ($40,000 per year).
• When the annual net cash inflows are not equal, the
cash payback period is determined by adding the annual
net cash inflows until the cumulative total equals the
initial cost of the proposed investment.
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Cash Payback Method
(slide 5 of 8)
• Assume that a proposed investment has an initial cost of
$400,000. The annual and cumulative net cash inflows
over the proposal’s six-year life are as follows:
Year
Net Cash
Flow
Cumulative
Net Cash
Flow
1
$60,000
$60,000
2
$80,000
$140,000
3
$105,000
$245,000
4
$155,000
$400,000
5
$100,000
$500,000
6
$90,000
$590,000
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Cash Payback Method
(slide 6 of 8)
• The cumulative net cash flow at the end of Year 4
equals the initial cost of the investment, $400,000.
Thus, the payback period is four years.
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Cash Payback Method
(slide 7 of 8)
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Cash Payback Method
(slide 8 of 8)
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Check Up Corner
•
•
Capital Investment Analysis Not
Using Present Value
Tyme Manufacturing Inc. is evaluating a capital investment proposal for a
new machine. The new machine has a cost of $230,000, an expected useful
life of six years, and a residual value of $20,000. Information on expected
annual revenues and expenses associated with the machine is as follows:
Revenue from machine
$125,000
Expenses of machine, other than depreciation
$75,000
Depreciation expense
$35,000
All revenues and expenses are in cash, except for depreciation expense.
Determine the following:
a.
b.
The average rate of return, and
The cash payback period.
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Check Up Corner
Capital Investment Analysis Not
Using Present Value Solution
a. Average rate of return:
a. Cash payback period:
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Methods Using Present Values (slide 1 of 2)
• An investment in fixed assets may be viewed
as purchasing a series of net cash flows over
a period of time.
• The timing of when the net cash flows will be
received is important in determining the value
of a proposed investment.
• Present value methods use the amount and
timing of the net cash flows in evaluating an
investment.
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Methods Using Present Values (slide 2 of 2)
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Present Value of an Amount
(slide 1 of 3)
• Assume that you have $1 to invest as follows:
Amount to be invested
$1
Period to be invested
3 years
Interest rate
12%
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Present Value of an Amount
(slide 2 of 3)
• After one year, the $1 earns interest of $0.12 ($1
× 12%) and, thus, will grow to $1.12 ($1 × 1.12).
• In the second year, the $1.12 earns 12% interest
of $0.134 ($1.12 × 12%) and, thus, will grow to
$1.254 ($1.12 × $1.12) by the end of the second
year.
• By the end of the third year, your $1 investment
will grow to $1.404.
This process of interest earning interest is called
compounding.
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Compound Amount of $1
for Three Periods at 12%
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Present Value of an Amount
(slide 3 of 3)
On January 1, 2016, what is the present value of
$1.404 to be received on December 31, 2018?
The partial present value of $1 table on the next
slide indicates that the present value of $1 to be
received in three years with earnings compounded
at the rate of 12% per year is 0.712.
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Partial Present Value of $1 Table
Present Value of $1 at Compound Interest
Year
6%
10%
12%
15%
20%
1
0.943
0.909
0.893
0.870
0.833
2
0.890
0.826
0.797
0.756
0.694
3
0.840
0.751
0.712
0.658
0.579
4
0.792
0.683
0.636
0.572
0.482
5
0.747
0.621
0.567
0.497
0.402
6
0.705
0.564
0.507
0.432
0.335
7
0.665
0.513
0.452
0.376
0.279
8
0.627
0.467
0.404
0.327
0.233
9
0.592
0.424
0.361
0.284
0.194
10
0.558
0.386
0.322
0.247
0.162
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Present Value of an Amount of $1.404
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Present Value of an Annuity
(slide 1 of 4)
• An annuity is a series of equal net cash flows
at fixed time intervals.
o Cash payments for monthly rent, salaries, and
bond interest are all examples of annuities.
• The present value of an annuity is the
amount of cash needed today to yield a series
of equal net cash flows at fixed time intervals
in the future.
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Present Value of an Annuity
(slide 2 of 4)
• The present value of a $100 annuity for five
periods at 12% could be determined by using
the present value factors in the partial present
value of $1 table (see slide 28).
o Each $100 net cash flow could be multiplied by the
present value of $1 at a 12% factor for the
appropriate period and summed to determine a
present value of $360.50.
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Present Value of a $100 Amount
for Five Consecutive Periods
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Present Value of an Annuity
(slide 3 of 4)
• Using a present value of an annuity table,
such as the one on the next slide, is a
simpler approach.
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Partial Present Value of an Annuity Table 1
Present Value of an Annuity of $1 at Compound Interest
Year
6%
10%
12%
15%
20%
1
0.943
0.909
0.893
0.870
0.833
2
1.833
1.736
1.690
1.626
1.528
3
2.673
2.487
2.402
2.283
2.106
4
3.465
3.170
3.037
2.855
2.589
5
4.212
3.791
3.605
3.353
2.991
6
4.917
4.355
4.111
3.785
3.326
7
5.582
4.868
4.564
4.160
3.605
8
6.210
5.335
4.968
4.487
3.837
9
6.802
5.759
5.328
4.772
4.031
10
7.360
6.145
5.650
5.019
4.192
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Present Value of an Annuity
(slide 4 of 4)
• The present value factors in the table shown in slide 34
are the sum of the present value of $1 factors (see slide
28) for the number of annuity periods. Thus, 3.605 in the
annuity table in slide 34 is the sum of the five present
value of $1 factors at 12% (see slide 28), computed as
follows:
Present Value Factor
for $1 (slide 28)
Present value factor for $1 for 1 year @12%
0.893
Present value factor for $1 for 2 years @12%
0.797
Present value factor for $1 for 3 years @12%
0.712
Present value factor for $1 for 4 years @12%
0.636
Present value factor for $1 for 5 years @12%
0.567
Present value factor for an annuity of $1 for 5 years (from slide 34)
3.605
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Net Present Value Method and Index
• The net present value method and present
value index are often used in combination.
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Net Present Value Method
(slide 1 of 6)
• The net present value method compares
the amount to be invested with the present
value of the net cash inflows.
o It is sometimes called the discounted cash flow
method.
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Net Present Value Method
(slide 2 of 6)
• The interest rate (return) used in net present
value analysis is the company’s minimum
desired rate of return.
o This rate, sometimes termed the hurdle rate, is based
on such factors as the purpose of the investment and
the cost of obtaining funds for the investment.
• If the present value of the cash inflows equals or
exceeds the amount to be invested, the proposal
is desirable.
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Net Present Value Method
(slide 3 of 6)
• Assume the following data for a proposed
investment in new equipment:
Cost of new equipment
Expected useful life
Minimum desired rate of return
$200,000
5 years
10%
Expected cash flows to be received each year:
Year 1
$ 70,000
Year 2
60,000
Year 3
50,000
Year 4
40,000
Year 5
40,000
Total expected cash flows
$260,000
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Net Present Value Method
(slide 4 of 6)
• The present value of the net cash flow for each
year is computed by multiplying the net cash
flow for the year by the present value factor of
$1 for that year, as follows:
Year
Present
Value of $1 at
10%
×
Net Cash
Flow
=
Present Value of
Net Cash Flow
1
0.909
×
$ 70,000
=
$ 63,630
2
0.826
×
60,000
=
49,560
3
0.751
×
50,000
=
37,550
4
0.683
×
40,000
=
27,320
5
0.621
×
40,000
=
24,840
Total
$260,000
Amount to be invested
$ 202,900
(200,000)
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Learning . May not be scanned, copied or duplicated, or posted to a publicly accessible website, in$whole 2,900
or in part.
Net ©present
value
®
Present Value of Equipment Cash Flows
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Net Present Value Method
(slide 5 of 6)
• The net present value of $2,900 indicates that
the purchase of the new equipment is expected
to recover the investment and provide more than
the minimum rate of return of 10%.
o Thus, the purchase of the new equipment is
desirable.
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Net Present Value Method
(slide 6 of 6)
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Present Value Index
(slide 1 of 4)
• When capital investment funds are limited and the
proposals involve different investments, a ranking of the
proposals can be prepared using a present value index.
• The present value index is computed as follows:
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Present Value Index
(slide 2 of 4)
• The present value index for the investment in the
preceding slides is 1.0145, computed as follows:
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Present Value Index
(slide 3 of 4)
• Assume that a company is considering three proposals.
The net present value and the present value index for
each proposal are as follows:
Total present value of net cash flow
Proposal A
Proposal B
Proposal C
$ 107,000
$ 86,400
$ 86,400
(100,000)
(80,000)
(90,000)
7,000
$ 6,400
Amount to be invested
Net present value
$
$
3,600
Present value index:
Proposal A ($107,000 ÷ $100,000)
Proposal B ($86,400 ÷ $80,000)
1.07
1.08
Proposal C ($86,400 ÷ $90,000)
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0.96
Present Value Index
(slide 4 of 4)
• A project will have a present value index greater than
1 when the net present value is positive.
• When the net present value is negative, the present
value index will be less than 1.
• Proposal B is the most desirable.
o
Proposal B returns $1.08 present value per dollar invested,
whereas Proposal A returns only $1.07.
o
Proposal B requires an investment of $80,000, compared to
an investment of $100,000 for Proposal A.
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Internal Rate of Return Method
(slide 1 of 6)
• The internal rate of return (I R R) method uses
present value concepts to compute the rate of
return from a capital investment proposal based
on its expected net cash flows.
o This method, sometimes called the time-adjusted rate
of return method, starts with the proposal’s net cash
flows and works backward to estimate the proposal’s
expected rate of return.
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Internal Rate of Return Method
(slide 2 of 6)
• Assume that management is evaluating the following
proposal to purchase new equipment:
Cost of new equipment
$33,530
Yearly expected cash flows to be received
$10,000
Expected life
5 years
Minimum desired rate of return
12%
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Net Present Value Analysis at 12%
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Internal Rate of Return Method
(slide 3 of 6)
• The $36,050 present value of the cash inflows, based
on a 12% rate of return, is greater than the $33,530 to
be invested. Thus, the internal rate of return must be
greater than 12%.
• Through trial and error, the rate of return equating the
$33,530 cost of the investment with the present value
of the net cash flows can be determined to be 15%.
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Present Value of an Annuity
at the Internal Rate of Return Rate
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Internal Rate of Return Method
(slide 4 of 6)
• When equal annual net cash flows are expected from a proposal, the
internal rate of return can be determined as follows:
o
Step 1: Determine a present value factor for an annuity of $1 as follows:
o
Step 2: Locate the present value factor determined in Step 1 in the
present value of an annuity of $1 table (see slide 34) as follows:
▪ Locate the number of years of expected useful life of the investment in the
Year column.
▪ Proceed horizontally across the table until you find the present value factor
computed in Step 1.
o
Step 3: Identify the internal rate of return by the heading of the column
in which the present value factor in Step 2 is located.
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Internal Rate of Return Method
(slide 5 of 6)
• Assume that management is evaluating the
following proposal to purchase new equipment:
Cost of new equipment
$97,360
Yearly expected cash flows to be received
$20,000
Expected useful life
7 years
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Partial Present Value of an Annuity Table 2
Present Value of an Annuity of $1 at Compound Interest
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Internal Rate of Return Method
(slide 6 of 6)
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Check Up Corner
•
•
Net Present Value and Internal
Rate of Return Analyses
The management of Broncial Industries Inc. is considering a capital investment
project. The net cash flows expected from the project are $50,000 a year for seven
years. The project requires an investment of $243,400, and no residual value is
expected.
Determine:
a. The net present value for the project, using a minimum rate of return of 6% and the
present value of an annuity table appearing in this chapter (Slide 34).
b. The present value index. Round to two decimal places.
c. The internal rate of return for the project by (1) computing a present value factor for an
annuity of $1 and (2) using the present value of an annuity table appearing in this
chapter (Slide 34).
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Check Up Corner
Net Present Value and Internal Rate of
Return Analyses Solution (slide 1 of 3)
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Check Up Corner
Net Present Value and Internal Rate of
Return Analyses Solution (slide 2 of 3)
Internal rate of return = 10%
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Check Up Corner
Net Present Value and Internal Rate of
Return Analyses Solution (slide 3 of 3)
Present Value of an Annuity of $1 at Compound Interest
Year
6%
10%
12%
15%
20%
1
0.943
0.909
0.893
0.870
0.833
2
1.833
1.736
1.690
1.626
1.528
3
2.673
2.487
2.402
2.283
2.106
4
3.465
3.170
3.037
2.855
2.589
5
4.212
3.791
3.605
3.353
2.991
6
4.917
4.355
4.111
3.785
3.326
7
5.582
4.868
4.564
4.160
3.605
8
6.210
5.335
4.968
4.487
3.837
9
6.802
5.759
5.328
4.772
4.031
10
7.360
6.145
5.650
5.019
4.192
The internal rate of return
is the rate of return that
equates the present value
of equal annual net cash
flows to the amount to be
invested.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Factors That Complicate Capital Investment Analysis
Income tax
Qualitative
factors
Factors that
may impact
capital
investment
decisions
Proposals
with
unequal
lives
Leasing
versus
purchasing
Changes in
price levels
Uncertainty
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Income Tax
• The impact of income tax on capital investment
decisions can be material.
o For example, in determining depreciation for federal
income tax purposes, useful lives that are much
shorter than actual useful lives are often used.
o Also, depreciation for tax purposes often differs from
depreciation for financial statement purposes. As a
result, the timing of the cash flows for income taxes
can have a significant impact on capital investment
analysis.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Unequal Proposal Lives
(slide 1 of 2)
• The prior capital investment illustrations
assumed that the alternative proposals had
the same useful lives. In practice, however,
proposals often have different lives.
• Assume that a company is considering
purchasing a new truck or a new computer
network. The data for each proposal follow:
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Unequal Proposal Lives
(slide 2 of 2)
Truck
Computer Network
$100,000
$100,000
10%
10%
8 years
5 years
Year 1
$ 30,000
$ 30,000
Year 2
30,000
30,000
Year 3
25,000
30,000
Year 4
20,000
30,000
Year 5
15,000
35,000
Year 6
15,000
0
Year 7
10,000
0
Year 8
10,000
0
$155,000
$155,000
Cost
Minimum desired rate of return
Expected useful life
Yearly expected cash flows to be received:
Total
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Net Present Value Analysis—Unequal Lives of Proposals (Top)
Net Present Value Analysis—Equalized Lives of Proposals
(Bottom)
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Check Up Corner
•
Net Present Value—
Unequal Lives
Acme Company is evaluating two projects with unequal lives. Project 1 requires an
original investment of $50,000. The project will yield cash flows of $12,000 per
year for five years. Project 1 could be sold at the end of five years for a price of
$30,000. Project 2 has a net present value of $8,900 over a five-year life.
a.
b.
Determine the net present value of Project 1 over a five-year life, with residual value,
assuming a minimum rate of return of 12%.
Which project provides the greater net present value?
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Check Up Corner
a.
Net Present Value—
Unequal Lives Solution
Present value of $12,000 per year
at 12% for 5 years
$43,260
Present value of $30,000 at 12% at
the end of 5 years
[$12,000 × 3.605 (Slide 34,
12%, 5 years)]
$17,010
Total present value of Project 1
$60,270
[$30,000 × 0.567 (Slide 28,
12%, 5 years)]
Total cost of Project 1
$50,000
Net present value of Project 1
$10,270
a. Project 1. Project 1 has a net present value of $10,270, which is greater than the
net present value of Project 2, $8,900.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Lease Versus Capital Investment
• Some advantages of leasing a fixed asset include the
following:
o
The company has use of the fixed asset without spending large
amounts of cash to purchase the asset.
o
The company eliminates the risk of owning an obsolete asset.
o
The company may deduct the annual lease payments for income
tax purposes.
• A disadvantage of leasing a fixed asset is the following:
o
It is normally more costly than purchasing the asset.
▪ This is because the lessor (owner of the asset) includes in the rental
price not only the costs of owning the asset, but also a profit.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Uncertainty
• All capital investment analyses rely on factors
that are uncertain.
o For example, estimates of revenues, expenses,
and cash flows are uncertain.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Changes in Price Levels
(slide 1 of 2)
• Price levels normally change as the economy
improves or deteriorates.
o General price levels often increase in a rapidly growing
economy, which is called inflation.
▪ During such periods, the rate of return on an investment should
exceed the rising price level.
o If this is not the case, the cash returned on the
investment will be less than expected.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Changes in Price Levels
(slide 2 of 2)
• Price levels may also change for foreign
investments.
o This occurs as currency exchange rates change.
▪ Currency exchange rates are the rates at which currency in
another country can be exchanged for U.S. dollars.
– If the amount of local dollars that can be exchanged for one U.S.
dollar increases, then the local currency is said to be weakening
to the dollar.
– When a company has an investment in another country where
the local currency is weakening, the return on the investment, as
expressed in U.S. dollars, is adversely impacted. This is
because the expected amount of local currency returned on the
investment would purchase fewer U.S. dollars.
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Qualitative Considerations
• Some benefits of capital investments are qualitative
in nature and cannot be estimated in dollar terms.
• Some examples of qualitative considerations that
may influence capital investment analysis include
the investment proposal’s impact on the following:
o Product quality
o Manufacturing flexibility
o Employee morale
o Manufacturing productivity
o Market (strategic) opportunities
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Capital Rationing
• Capital rationing is the process by which management
allocates funds among competing capital investment
proposals.
o
Alternative proposals are initially screened by establishing
minimum standards, using the cash payback and the average
rate of return methods.
o
The proposals that survive this screening are further analyzed,
using the net present value and internal rate of return methods.
o
At the end of the capital rationing process, accepted proposals
are ranked and compared with the funds available.
▪ Proposals that are selected for funding are included in the capital
expenditures budget.
▪ Unfunded proposals may be reconsidered if funds later become
available.
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Capital Rationing Decision Process
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Uncertainty: Sensitivity Analysis (slide 1 of 5)
• Sensitivity analysis considers the impact of changing
one or more inputs or assumptions on the resulting
answer (output) of an analysis.
• In capital investment analysis, the inputs are normally
estimated revenues, expenses, cash flows, useful life,
desired rate of return, and residual value of the
investment.
• The initial cost of an investment is normally known, but in
some cases, it may also be estimated.
o
For example, an investment may include estimated
construction costs.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Uncertainty: Sensitivity Analysis (slide 2 of 5)
• Assume that Bryant Inc. is considering an investment in
equipment based upon the following estimates:
Cost of equipment
$2,500,000
Residual value
$100,000
Annual net cash inflows
$600,000
Useful life
Desired rate of return
8 years
15%
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Uncertainty: Sensitivity Analysis (slide 3 of 5)
• Based upon the preceding data, the net present value of the
equipment is computed as follows:
Present value of annual net cash flows ($600,000 × 4.487*)
$ 2,692,200
Present value of residual value ($100,000 × 0.327**)
32,700
Total present value
$ 2,724,900
Amount to be invested
(2,500,000)
Net present value
$
224,900
*Present value factor of an annuity of $1 at 15% for eight years (Slide 34)
**Present value factor of $1 at 15% for eight years (Slide 28)
• The positive net present value of $224,900 indicates that the
investment in the equipment is justified.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Uncertainty: Sensitivity Analysis (slide 4 of 5)
• Assume, however, that there is uncertainty concerning the estimated
annual net cash flows, which could be as low as $400,000 per year.
As a result, management requests a sensitivity analysis assuming
annual net cash flows of $400,000, $500,000, and $600,000.
o
The resulting sensitivity analysis of the net present values of the
equipment is as follows:
Estimated Annual Net Cash Flow
$400,000
$500,000
$600,000
$ 1,794,800
$ 2,243,500
$ 2,692,200
32,700
32,700
32,700
Total present value
$ 1,827,500
$ 2,276,200
$ 2,724,900
Amount to be invested
(2,500,000)
(2,500,000)
(2,500,000)
Present value of annual net cash flows (× 4.487)
Present value of residual value
Net present value
$
672,500
$
223,800
$
224,900
• The preceding sensitivity analysis indicates that investment in the
equipment is not justified if the annual net cash flow is $400,000 or
$500,000.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Uncertainty: Sensitivity Analysis (slide 5 of 5)
• The annual net cash flow necessary to generate a positive net
present value can be computed as follows:
• Annual net cash flows greater than $549,877 will generate a positive
net present value.
• Likewise, assuming annual net cash flows of $600,000, the
minimum number of years of useful life necessary to generate a
positive net present value can also be determined.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Uncertainty: Expected Value Analysis (slide 1 of 4)
• Expected value analysis assigns likelihoods
(probabilities) to various inputs, thus incorporating
uncertainty directly into the output (answer).
• Bryant Inc.’s decision on whether to invest in equipment
is used. Specifically, assume that Bryant has assigned
the following likelihoods (probabilities) to the possible
annual net cash flow:
Annual Net Cash Flow
Probability of Occurring
$600,000
0.70
$500,000
0.20
$400,000
0.10
1.00
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Uncertainty: Expected Value Analysis (slide 2 of 4)
• The expected value of the annual net cash flows is
determined by multiplying each of the possible annual
net cash flows by its probability of occurring.
Annual Net
Cash Flow
×
Probability =
of Occurring
Expected
Value
$600,000
×
0.70
=
$420,000
500,000
×
0.20
=
100,000
400,000
×
0.10
=
40,000
Total
×
1.00
=
$560,000
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Uncertainty: Expected Value Analysis (slide 3 of 4)
• The expected value of the annual net cash flows of
$560,000 is used to determine the expected net present
value of the equipment of $45,420, as follows:
Present value of annual net cash flows ($560,000 × 4.487*)
$ 2,512,720
Present value of residual value ($100,000 × 0.327**)
32,700
Total present value
$ 2,545,420
Amount to be invested
(2,500,000)
Net present value
$
45,420
*Present value factor of an annuity of $1 at 15% for eight years (Slide 34)
**Present value factor of $1 at 15% for eight years (Slide 28)
• The positive expected net present value of $45,420
justifies investing in the equipment.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Uncertainty: Expected Value Analysis (slide 4 of 4)
• By assigning probabilities to the various outcomes,
uncertainty is directly incorporated into the analysis.
• However, the “actual” annual net cash flows will likely
differ from the “estimated” annual net cash flows or the
“expected value” of the annual net cash flows.
o
In other words, because future events are being estimated,
uncertainty cannot be totally eliminated.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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
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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 Standard Costs 410
Standards 412
Setting Standards 412
Types of Standards 413
Reviewing and Revising Standards 413
Criticisms of Standard Costs 413
Budgetary Performance Evaluation 414
Budget Performance Report 414
Manufacturing Cost Variances 415
Direct Materials and
Direct Labor Variances 416
Direct Materials Variances 416
Direct Labor Variances 419
Factory Overhead Variances 422
The Factory Overhead Flexible Budget 423
Variable Factory Overhead Controllable Variance 424
Fixed Factory Overhead Volume Variance 424
Reporting Factory Overhead Variances 426
Factory Overhead Account 427
Recording and Reporting Variances
from Standards 430
Analysis for Decision Making 432
Service Staffing Variances 432
Appendix Revenue Variances 433
Comprehensive Problem 5 453
Make a Decision 455
Take It Further 456
Certified Management Accountant (CMA®)
Examination Questions (Adapted) 458
Pathways Challenge 418, 459
10
 Evaluating Decentralized
Operations 460
Centralized and Decentralized Operations 462
Advantages of Decentralization 462
Disadvantages of Decentralization 463
Responsibility Accounting 464
Responsibility Accounting for Cost Centers 464
Responsibility Accounting for Profit Centers 468
Support Department Allocations 468
Profit Center Reporting 470
Responsibility Accounting
for Investment Centers 472
Return on Investment 472
Residual Income 476
Transfer Pricing 479
Market Price Approach 480
Negotiated Price Approach 480
Cost Price Approach 483
Analysis for Decision Making 483
Franchise Operations 483
Make a Decision 504
xvii
xviii
Contents
Take It Further 506
Certified Management Accountant (CMA®)
Examination Questions (Adapted) 508
Pathways Challenge 463, 509
11
 Differential Analysis and
Product Pricing 510
Differential Analysis 512
Lease or Sell 514
Discontinue a Segment or Product 515
Make or Buy 516
Replace Equipment 518
Process or Sell 519
Accept Business at a Special Price 519
Setting Normal Product Selling Prices 522
Cost-Plus Methods 523
Product Cost Method 523
Illustration 524
Target Costing Method 525
Production Bottlenecks 527
Managing Bottlenecks 528
Pricing Bottleneck Products 528
Analysis for Decision Making 529
Yield Pricing in Service Businesses 529
Appendix Total and Variable Cost Methods to Setting
Normal Price 530
Total Cost Method 530
Variable Cost Method 533
Make a Decision 557
Take It Further 559
Certified Management Accountant (CMA®)
Examination Questions (Adapted) 561
Pathways Challenge 517, 562
Factors That Complicate Capital
Investment Analysis 579
Income Tax 579
Unequal Proposal Lives 579
Lease Versus Capital Investment 581
Uncertainty 581
Changes in Price Levels 582
Qualitative Considerations 583
Capital Rationing 583
Analysis for Decision Making 584
Uncertainty: Sensitivity and Expected
Value Analyses 584
Make a Decision 605
Take It Further 607
Certified Management Accountant (CMA®)
Examination Questions (Adapted) 609
Pathways Challenge 575, 610
13
 Lean Manufacturing and
Activity Analysis 612
Lean Principles 614
Reducing Inventory 615
Reducing Lead Times 615
Reducing Setup Time 617
Emphasizing Product-Oriented Layout 620
Emphasizing Employee Involvement 6…