Process costing is a bit more complicated than job order costing, which we studied last week. It is important to read the materials, watch the videos, and attempt to work through the examples to understand how to calculate equivalent units and equivalent costs per unit.
Discussion Requirement
Cost Systems
What type of industries are best suited for process cost systems? Discuss how the process cost system is tracked and recorded for one of the following types of business: (a) TV assembler, (b) building contractor, (c) automobile repair shop, (d) paper manufacturer, (e) custom jewelry manufacturer? In the business type you selected, what is the most important purpose of the cost of production report and how can it improve operations in that business type?
Directions:
Discuss the concepts, principles, and theories from your textbook. Cite your textbooks and cite any other sources if appropriate.
Your initial post should address all components of the question with a 600 word limit.
Learning Outcomes
Explain a process costing system and identify when its use is most beneficial.
Compare key similarities and differences between job order costing and process costing systems.
Calculate product cost using process costing.
Readings
Bragg, S. (2018, February 9). AccountingTools. AccountingTools.
https://www.accountingtools.com/articles/what-is-a-process-costing-system.html
(seminal)?
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
© 2020, 2018 Cengage Learning, Inc.
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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
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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 620
Emphasizing Pull Manufacturing 620
Emphasizing Zero Defects 621
Emphasizing Supply Chain
Management 621
Lean Accounting 623
Fewer Transactions 623
Combined Accounts 623
Nonfinancial Performance Measures 625
Direct Tracing of Overhead 625
12
Activity Analysis 626
Nature of Capital Investment Analysis 566
Analysis for Decision Making 632
Capital Investment
Analysis 564
Methods Not Using Present Values 567
Average Rate of Return Method 567
Cash Payback Method 568
Methods Using Present Values 570
Present Value Concepts 571
Net Present Value Method and Index 573
Internal Rate of Return Method 576
Costs of Quality 626
Quality Activity Analysis 627
Value-Added Activity Analysis 629
Process Activity Analysis 630
Lean Performance for Nonmanufacturing 632
Make a Decision 649
Take It Further 651
Certified Management Accountant (CMA®)
Examination Questions (Adapted) 652
Pathways Challenge 619, 653
14
The Balanced Scorecard
and Corporate Social
Responsibility 654
Performance Measurement Systems 656
The Balanced Scorecard 657
Performance Perspectives 657
Strategic Objectives 659
Performance Metrics 659
Strategic Initiatives 660
Performance Targets 661
Using the Balanced Scorecard 661
Strategy Maps 661
Measure Maps 663
Strategic Learning 665
Scorecard Cascading 667
Cognitive Biases 667
Corporate Social Responsibility 670
CSR Reporting 671
Corporate Social Responsibility and the Balanced Scorecard 672
Encouraging Corporate Social Responsibility 674
Analysis for Decision Making 674
Capital Investment in CSR 674
Contents
Cash Flows from Financing
Activities 712
Bonds Payable 712
Common Stock 712
Dividends and Dividends Payable 713
Preparing the Statement of Cash Flows 714
Analysis for Decision Making 716
Free Cash Flow 716
Appendix 1 Spreadsheet (Work Sheet)
for Statement of Cash Flows—The Indirect
Method 717
Analyzing Accounts 718
Retained Earnings 719
Other Accounts 719
Preparing the Statement of Cash Flows 720
Appendix 2 Preparing the Statement of Cash
Flows—The Direct Method 720
Cash Received from Customers 721
Cash Payments for Merchandise 721
Cash Payments for Operating Expenses 722
Gain on Sale of Land 722
Interest Expense 723
Cash Payments for Income Taxes 723
Reporting Cash Flows from Operating
Activities—Direct Method 723
Make a Decision 692
Make a Decision 752
Take It Further 693
Take It Further 755
Certified Management Accountant (CMA®)
Examination Questions (Adapted) 695
Pathways Challenge 714, 756
Pathways Challenge 669, 696
16
15
Statement of Cash
Flows 698
Reporting Cash Flows 700
Cash Flows from Operating Activities 701
Cash Flows from Investing Activities 703
Cash Flows from Financing Activities 703
Noncash Investing and Financing
Activities 704
Format of the Statement of Cash
Flows 704
No Cash Flow per Share 705
Cash Flows from Operating
Activities—The Indirect Method 705
Net Income 707
Adjustments to Net Income 707
Cash Flows from Investing Activities 710
Land 710
Building and Accumulated
Depreciation—Building 711
Financial Statement
Analysis 758
Analyzing and Interpreting Financial Statements 760
The Value of Financial Statement Information 760
Techniques for Analyzing Financial Statements 761
Analytical Methods 761
Horizontal Analysis 761
Vertical Analysis 763
Common-Sized Statements 765
Analyzing Liquidity 766
Current Position Analysis 767
Accounts Receivable Analysis 768
Inventory Analysis 769
Analyzing Solvency 772
Ratio of Fixed Assets to Long-Term Liabilities 772
Ratio of Liabilities to Stockholders’ Equity 772
Times Interest Earned 773
Analyzing Profitability 774
Asset Turnover 775
Return on Total Assets 775
Return on Stockholders’ Equity 776
xix
xx
Contents
Return on Common Stockholders’ Equity 777
Earnings per Share on Common Stock 778
Price-Earnings Ratio 779
Dividends per Share 780
Dividend Yield 780
Summary of Analytical Measures 782
Corporate Annual Reports 783
Management Discussion and Analysis 783
Report on Internal Control 784
Report on Fairness of the Financial Statements 784
Appendix 1 Unusual Items on the Income Statement 785
Unusual Items Affecting the Current Period’s
Income Statement 785
Unusual Items Affecting the Prior Period’s
Income Statement 786
Appendix 2 Fair Value and Comprehensive Income 786
Fair Value 787
Comprehensive Income 787
Make a Decision 815
Take It Further 816
Pathways Challenge 779, 818
Appendix A: Interest Tables A-1
Appendix B: Nike Inc., Form 10-K for the Fiscal Year
Ended May 31, 2017 Selected Excerpts B-1
Glossary G-1
Index I-1
Managerial
Accounting
15e
Chapter
1
Introduction to
Managerial Accounting
Chapter 1
Principles
Introduction to Managerial Accounting
Developing Information
COST SYSTEMS
COST ALLOCATIONS
Chapter 2 Job Order Costing
Chapter 3 Process Costing
Chapter 4 Activity-Based Costing
Chapter 5 Support Departments
Chapter 5 Joint Costs
Decision Making
PLANNING AND EVALUATING TOOLS
Chapter 6 Cost-Volume-Profit Analysis
Chapter 7 Variable Costing
Chapter 8 Budgeting Systems
Chapter 9 Standard Costing and Variances
Chapter 10 Decentralized Operations
Chapter 11 Differential Analysis
2
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
Gibson Guitars
G
ibson guitars have been used by musical legends over the
years, including B.B. King, Chet Atkins, Brian Wilson (Beach
Boys), Jimmy Page (Led Zeppelin), Jackson Browne, John Fogerty,
Jose F eliciano, Miranda Lambert, Sheryl Crow, and Wynonna Judd.
For example, Sheryl Crow has used her 1964 Gibson Country Western guitar in all of her recordings.
Known for its quality, Gibson Guitars celebrated its 120th
anniversary in 2014. Staying in business for over 120 years requires
a thorough understanding of how to manufacture high-quality
guitars.1 In addition, it requires knowledge of how to account for
the costs of making guitars. For example, Gibson needs cost information to answer the following questions:
This chapter introduces managerial accounting concepts that are
useful in addressing these questions. This chapter begins by describing
managerial accounting and its relationship to financial accounting.
Following this overview, the management process is described along
with the role of managerial accounting. Finally, characteristics of managerial accounting reports, managerial accounting terms, and uses of
managerial accounting information are described and illustrated.
Sources: http://www.gibson.com/Gibson/History.aspx. Chris Kornelis, The
Wall Street Journal, “How Sheryl Crow Finally Broke Her Starbucks Habit,”
May 24, 2017.
Fabio Pagani/Shutterstock.com
▪ What should be the selling price of its guitars?
▪ How many guitars does it have to sell in a year to cover its
costs and earn a profit?
▪ How many employees should the company have working on
each stage of the manufacturing process?
▪ How would purchasing automated equipment affect the costs
of its guitars?
Link to Gibson Guitars . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pages 4, 5, 6, 7, 9, 11, 16
In May 2016, Gibson Guitars filed for bankruptcy. Gibson blamed its financial woes on the debt it had incurred by acquiring companies that produced headphones, turntables,
and speakers. After satisfying its creditors and reorganizing, Gibson plans to focus its future operations on its core competency—the manufacture of guitars.
1
3
4
Chapter 1
Introduction to Managerial Accounting
What’s Covered
Introduction to Managerial Accounting
Role of Managerial Accounting
▪▪ Differences with Financial Accounting (Obj. 1)
▪▪ Management Organization (Obj. 1)
▪▪ Management Process (Obj. 1)
▪▪ Uses of Managerial Accounting
Information (Obj. 1)
Manufacturing Operations
▪▪ Nature of Manufacturing (Obj. 2)
▪▪ Direct and Indirect Costs (Obj. 2)
▪▪ Manufacturing Costs (Obj. 2)
Manufacturing Financial
Statements
▪▪ Balance Sheet (Obj. 3)
▪▪ Income Statement (Obj. 3)
Learning Objectives
Obj. 1 Describe managerial accounting, including its
differences with financial accounting, its place in
the organization, and its uses.
Obj. 2 Describe and illustrate the nature of manufacturing
operations, including different types and classifications
of costs.
Obj. 3 Describe and illustrate financial statements for a
manufacturing business, including the balance sheet,
statement of cost of goods manufactured, and income
statement.
Analysis for Decision Making
Obj. 4 Describe and illustrate utilization rates in evaluating performance for service companies.
Objective 1
Describe managerial
accounting, including
its differences with
financial accounting, its
place in the organization, and its uses.
Managerial Accounting
Managers make numerous decisions during the day-to-day operations of a business and in planning
for the future. Managerial accounting provides much of the information used for these decisions.
Some examples of managerial accounting information along with the chapter in which it is
described and illustrated follow:
▪▪ Classifying manufacturing and other costs and reporting them in the financial statements
(Chapter 1)
▪▪ Determining the cost of manufacturing a product or providing a service (Chapters 2, 3, 4,
and 5)
▪▪ Evaluating the impact of cost allocation and activity-based costing (Chapters 4, 5)
▪▪ Estimating the behavior of costs for various levels of activity and assessing cost-volume-profit
relationships (Chapter 6)
▪▪ Evaluating operating performance using cost behavior relationships (Chapter 7)
▪▪ Planning for the future by preparing budgets (Chapter 8)
▪▪ Evaluating manufacturing costs by comparing actual with expected results (Chapter 9)
▪▪ Evaluating decentralized operations by comparing actual and budgeted costs as well as computing various measures of profitability (Chapter 10)
▪▪ Evaluating special decision-making situations by comparing differential revenues and costs,
pricing products, and managing bottlenecks (Chapter 11)
▪▪ Evaluating alternative proposals for long-term investments in fixed assets (Chapter 12)
▪▪ Planning operations using principles of lean manufacturing and activity analysis (Chapter 13)
▪▪ Evaluating company performance using the balanced scorecard and corporate responsibility
metrics (Chapter 14)
Link to
Gibson Guitars
Orville Gibson started producing guitars in 1894 in Kalamazoo, Michigan. He produced guitars and mandolins
based upon the arch-top design of violins.
Chapter 1
Introduction to Managerial Accounting
Differences Between Managerial and Financial Accounting
Accounting information is often classified into two types: financial and managerial. E
xhibit 1 shows
the relationship between financial accounting and managerial accounting.
Exhibit 1
Financial Accounting
and Managerial
Accounting
Managerial
Accounting
Reports
Financial
Statements
Statement of
Cash Flows
Balance Sheet
Production
Report
Statement of
Stockholders’ Equity
Activity
Analysis
Income
Statement
Budget
Report
Financial Statements
Managerial Accounting Reports
Users of Information
External users and company management
Management
Nature of Information
Objective
Objective and subjective
Guidelines for Preparation
Prepared according to GAAP
Prepared according to management needs
Timeliness of Reporting
Prepared at fixed intervals
Prepared at fixed intervals and on an as-needed basis
Focus of Reporting
Company as a whole
Company as a whole or segment
Financial accounting information is reported at fixed intervals (monthly, quarterly, yearly)
in general-purpose financial statements. These financial statements—the income statement, statement of stockholders’ equity, balance sheet, and statement of cash flows—are prepared according
to generally accepted accounting principles (GAAP). These statements are used by external users
such as the following:
▪▪ Shareholders
▪▪ Creditors
▪▪ Government agencies
▪▪ The general public
Gibson Mandolin-Guitar Mfg. Co., Ltd. was formed in 1902 in Kalamazoo, M
ichigan, with the
support of five investors.
Managers of a company also use general-purpose financial statements. For example, in planning future operations, managers often begin by evaluating the current income statement and
statement of cash flows.
Managerial accounting information is designed to meet the specific needs of a company’s
management. This information includes the following:
▪▪ Historical data, which provide objective measures of past operations
▪▪ Estimated data, which provide subjective estimates about future decisions
Management uses both types of information in directing daily operations, planning future operations, and developing business strategies.
Unlike the financial statements prepared in financial accounting, managerial accounting reports
do not always have to be:
▪▪ Prepared according to generally accepted accounting principles (GAAP). This is because GAAP
may not always be relevant to the specific decision-making needs of management.
Link to
Gibson Guitars
5
6
Chapter 1
Introduction to Managerial Accounting
▪▪ Prepared at fixed intervals (monthly, quarterly, yearly). Although some management reports are
prepared at fixed intervals, most reports are prepared as management needs the information.
▪▪ Prepared for the business as a whole. Most management reports are prepared for products,
projects, sales territories, or other segments of the company.
Link to
Gibson Guitars
Chicago Musical Instrument Company purchased Gibson in 1944.
Managerial Accounting in the Organization
While no two company structures are identical, most large companies are organized in terms of “verticals” and “horizontals.” Verticals are sometimes referred to as business units, because they are often
structured as separate businesses within the parent company. These verticals normally develop products that are sold directly to customers. Verticals prepare their own income statements, also referred to
as profit and loss (P&L) statements, which report their ongoing performance and profitability.
Horizontals are departments within the company that are not responsible for developing products. The role of horizontals is to provide services to the various verticals and other horizontals.
As such, horizontals do not report profit and loss (P&L) statements. Marketing, human resources,
information technology, legal, facilities, accounting, and finance are normally horizontal departments within a company.
At McAfee, Inc. (MFE), a cyber security provider, the Chief Financial Office functions as a
horizontal department that serves McAfee’s two main verticals: the Consumer Business Unit and the
Enterprise Business Unit. Rather than hire and train separate accounting and finance departments
within each vertical, it is more efficient to centralize this function as a horizontal department.
To illustrate, a partial organizational chart of McAfee’s Chief Executive Office and Chief Financial Office are shown in Exhibit 2.
Exhibit 2
Partial Organization Chart for McAfee
Chief Executive Officer (CEO)
Chief Executive Office
Exec.
Vice President
Consumer
Business Unit
Exec.
Vice President
Enterprise
Business Unit
Exec.
Vice President
Sales &
Marketing
Exec.
Vice President
(Chief Financial
Officer)
Chief Financial
Office
Sr.
Vice President
(Chief Tech.
Officer)
Chief Technology
Office
Verticals
Sr.
Vice President
General Counsel
Sr.
Vice President
Human
Resources
Horizontals
Exec. Vice President
(Chief Financial Officer)
Chief Financial Office
VP, Finance
Consumer
VP, Finance
Enterprise
Supports Verticals
VP, Finance
Sales &
Marketing
VP, Finance
Consolidations
Supports Horizontals
VP, Accounting
(Chief Acct.
Officer)
Chief Accounting
Office
Supports Corporate
Chapter 1
Introduction to Managerial Accounting
7
As shown in Exhibit 2, the chief financial officer (CFO) is an executive vice president, who,
along with leadership of the other verticals and horizontals, reports directly to the chief executive
officer (CEO). Each of the two verticals (Consumer Business Unit and Enterprise Business Unit)
has a “VP of Finance” that reports to the CFO. In addition, the Sales & Marketing and Consolidations horizontals have their own “VP of Finance” that reports to the CFO.2 The “VP of Accounting”
is called the chief accounting officer (CAO) and oversees technical accounting, accounting policy,
credit, collections, tax, treasury, and internal audit at McAfee. The functions reporting to the CFO
sometimes are grouped together and are referred to as corporate finance.
Finance and accounting professionals often work within verticals and other horizontals managing budgets, tracking key metrics, and generating accounting reports. Doing so requires coordinating and interacting closely with operational employees. As a result, the functions of these
professionals are sometimes referred to as operations finance or as financial planning and analysis. Although finance and accounting professionals often work within verticals and other horizontals, they do not normally report directly to the heads of those units or departments. Instead, they
report to an accounting and finance VP, who in turn reports to the CFO. This allows the accounting
and finance professionals to maintain their independence.
At some companies, the manager of the accounting function of a vertical (business unit) is
referred to as the controller. At smaller companies, controller may be used to refer to the chief
financial officer. At still other companies, controller may be used to signify rank within the accounting and finance function. For example, the head accountant of a manufacturing facility at Deere &
Company (DE) is called a controller. In contrast, at Intel Corporation (INTC), accounting and
finance employees start as analysts, are promoted to senior analysts, then to managers, and then
to controllers.
As discussed above, few accounting and finance professionals are called “managerial accountants.” However, the work of accounting and finance professionals requires a thorough knowledge
and understanding of managerial accounting, which, in turn, provides a valuable foundation for
advancing to senior management positions.
One of Gibson ’s most influential managers was Ted McCarty, who was the company president from
1950–1966. During this period, Gibson was known for its innovations. For example, in 1954, McCarty invented the
tune-o-matic bridge with adjustable saddles.
Why It Matters
Certified Management Accountants
T
he Institute of Management Accountants (IMA®) is a worldwide
association of over 100,000 accounting and finance professionals across more than 140 countries. The IMA works to support
the management accounting profession with programs involving
continuing education, certification, networking, ethics, research, and
scholarships. In the United States, there are over 1.3 million accountants and auditors, most of whose work involves management
accounting. The projected growth rate of the accounting profession
over the coming decade is 11%, which is 4% higher than the projected
average growth rate of all professions.
To meet the growing needs of the accounting profession, IMA
offers the Certified Management Accountant (CMA) certificate.
2
Consolidations supports the aggregation of financial statements from other units.
Link to
Gibson Guitars
The CMA is not a state or local certificate, but a globally recognized
credential. The CMA is earned by passing a two-part examination.
Part 1 covers financial reporting, planning and budgeting, performance management, cost management, and internal controls.
Part 2 covers financial statement analysis, corporate finance, decision analysis, risk management, investment decisions, and professional ethics. Those passing the examination have proven that
they have mastered the skills required to oversee the management
accounting and finance functions within a company or other entity.
For more information, visit the IMA’s website at www.imanet.org.
Source: U.S. Bureau of Labor Statistics: www.bls.gov/ooh/business-and-financial/
accountants-and-auditors.htm#tab-6.
8
Chapter 1
Introduction to Managerial Accounting
The Management Process
Managerial accounting supports management and the management process. The management
process has the following five basic phases, as shown in Exhibit 3:
▪▪ Planning
▪▪ Directing
▪▪ Controlling
▪▪ Improving
▪▪ Decision making
As Exhibit 3 illustrates, the five phases interact with one another.
Exhibit 3
The Management
Process
Operations
Planning: Strategic
and Operational
Results
Feedback
Improving
Actions
Plans
Decision Making
Feedback
Directing
Feedback
Controlling
Planning Management uses planning in developing the company’s objectives (goals) and
translating these objectives into courses of action. For example, a company may set an objective
to increase market share by 15% by introducing three new products. The actions to achieve this
objective might be as follows:
▪▪ Increase the advertising budget
▪▪ Open a new sales territory
▪▪ Increase the research and development budget
Planning may be classified as follows:
▪▪ Strategic planning, which is developing long-term actions to achieve the company’s objectives.
These long-term actions are called strategies, which often involve periods of 5 to 10 years.
Why It Matters
Vertical and Horizontal Functions for Service Companies
F
unctions that are normally performed by vertical and horizontal units may be applied to service companies. Some examples are as follows:
Service Industry
Vertical Function
Horizontal Function
Airline
Crew, baggage handling, and gate staff
Information systems, accounting, human resources
Hotel
Housekeeping and reception staff
Maintenance, hotel manager, grounds
Hospital
Doctors, nurses, other caregivers
Admissions, records, billing
Banking
Tellers, loan officers, trust officers, and brokers
Branch manager, information systems
Telecommunications
Sales, customer service, and customer
installation staff
Information systems, regional management, and
network maintenance
Chapter 1
Introduction to Managerial Accounting
9
▪▪ Operational planning, which develops short-term actions for managing the day-to-day operations of the company.
Directing The process by which managers run day-to-day operations is called directing. An
example of directing is a production supervisor’s efforts to keep the production line moving
without interruption (downtime). A credit manager’s development of guidelines for assessing the
ability of potential customers to pay their bills is also an example of directing.
Controlling Monitoring operating results and comparing actual results with the expected results is controlling. This feedback allows management to isolate areas for further investigation
and possible remedial action. It may also lead to revising future plans. This philosophy of controlling by comparing actual and expected r esults is called management by exception.
Improving Feedback is also used by managers to support continuous process improvement.
Continuous process improvement is the philosophy of continually improving employees, business processes, and products. The objective of continuous improvement is to eliminate the source
of problems in a process. In this way, the right products (services) are delivered in the right
quantities at the right time.
Decision Making Inherent in each of the preceding management processes is d
ecision
making. In managing a company, management must continually decide among alternative actions. For example, in directing operations, managers must decide on an operating structure,
training procedures, and staffing of day-to-day operations.
Managerial accounting supports managers in all phases of the management process. For example,
accounting reports comparing actual and expected operating results help managers plan and improve
current operations. Such a report might compare the actual and expected costs of defective materials.
If the cost of defective materials is unusually high, management might decide to change suppliers.
Gibson struggled financially from 1966–1986. The company was purchased and sold several times and
experienced declining sales.
ETHICS
Ethics: Do It!
Environmental Managerial Accounting
Throughout the last decade, environmental issues have become
an increasingly important part of the business environment for
most companies. Companies and managers must now consider the environmental impact of their business decisions in the
same way that they would consider other operational issues.
Link to
Gibson Guitars
To help managers make sound business decisions, the emerging field of environmental management accounting focuses on
computing the environmental-related costs of business decisions.
Environmental managerial accountants evaluate a variety of issues
such as the volume and level of emissions, the estimated costs of
different levels of emissions, and the impact that environmental
costs have on product cost. Managers use these results to consider
the environmental effects of their business decisions.
Uses of Managerial Accounting Information
As mentioned earlier, managerial accounting provides information and reports for managers to use
in operating a business. Some examples of how managerial accounting could be used by a guitar
manufacturer include the following:
▪▪ The cost of manufacturing each guitar could be used to determine its selling price.
▪▪ Comparing the costs of guitars over time can be used to monitor and control costs.
▪▪ Performance reports could be used to identify any large amounts of scrap or employee downtime. For example, large amounts of unusable wood (scrap) after the cutting process should be
investigated to determine the underlying cause. Such scrap may be caused by saws that have
not been properly maintained.
10
Chapter 1
Introduction to Managerial Accounting
▪▪ A report could analyze the potential efficiencies and savings of purchasing a new computerized
saw to speed up the production process.
▪▪ A report could analyze how many guitars need to be sold to cover operating costs and expenses.
Such information could be used to set monthly selling targets and bonuses for sales personnel.
As the prior examples illustrate, managerial accounting information can be used for a variety
of purposes. For example, managers must consider the social and environmental settings in which
a business operates, in order to make sound strategic and operational decisions. Issues such as
population growth, resource scarcity, declining ecosystems, increasing urbanization, and climate
change all have a direct impact on a company’s potential for long-term success. As a result, managers are using new management techniques and measures that consider these issues. These new
management techniques and measures are described and illustrated in Chapter 14, “The Balanced
Scorecard and Corporate Social Responsibility.”
Check Up Corner 1-1
1.
Management Process
Indicate whether the following statements are true or false:
a. Managerial accounting information is designed primarily to meet the needs of external users such as
shareholders, creditors, and the general public.
b. Managerial accounting reports must be prepared for the business as a whole.
c. Operational planning develops short-term actions for managing the day-to-day operations of the company.
2. Three phases of the management process are planning, controlling, and improving. Match the following
descriptions to the proper phase:
Phase of Management Process
Description
Planning
a. Monitoring the operating results and comparing the actual results
with expected results
b. Rejects solving problems with temporary solutions that fail to address
the root cause of the problem
c. Used by management to develop the company’s objectives
Controlling
Improving
Solution:
1.
a. False. The primary focus and design of managerial accounting information is to meet the specific needs of
a company’s management.
b. False. Managerial accounting reports do not have to be prepared for the business as a whole. Most
management reports are prepared for products, projects, sales territories, or other segments of the company.
c. True. Operational planning develops short-term actions for managing the day-to-day operations of the
company. In contrast, strategic planning develops long-term actions (strategies) to achieve the company’s
objectives.
2. Planning: c. Used by management to develop the company’s objectives
Controlling: a. Monitoring the operating results and comparing the actual results with expected results
Improving: b. Rejects solving problems with temporary solutions that fail to address the root cause of the
problem
Check Up Corner
Why It Matters
Not According to Plan
T
here are times even the best of plans go awry. Sometimes plans
are impacted by events outside of management control. For
example, Hurricane Sandy ruined the beach and resort businesses along the New Jersey shore. Few management plans would
be able to provide for such an extreme contingency. Force majeure
(meaning “superior force”) clauses in contracts can be used to nullify
contracts when such events occur. Such clauses are used when the
normal operating plans are disrupted by events beyond management
control or expectation. For example, a hotel damaged by Hurricane
Sandy under a force majeure clause would not be required to fulfill a
contract to supply rooms for a convention. In other cases, events may
be dramatic, but can be anticipated. An example was the dramatic
decline in oil prices during the middle 2010s that reduced the oil
revenue earned by U.S. shale oil producers. Many of these producers
planned and then executed financial contracts, termed hedges, that
earned money from lower oil prices, to partially offset revenue losses.
Chapter 1
Introduction to Managerial Accounting
Manufacturing Operations
The operations of a business can be classified as service, retail, or manufacturing. Although the
chapters of this text focus primarily on manufacturing and service businesses, most of the managerial accounting concepts discussed also apply to retail businesses.
Nature of Manufacturing
11
Objective 2
Describe and
illustrate the nature
of manufacturing
operations, including
different types and
classifications of costs.
As a basis for illustration of manufacturing operations, a guitar manufacturer, Legend Guitars, is
used. Exhibit 4 is an overview of Legend’s guitar manufacturing operations.
Exhibit 4
Guitar-Making Operations of Legend Guitars
Guitar
Strings
Wood
Guitar
Bridge
Customer Places Order
Materials
Cutting
Assembly
Finished Guitar
Legend’s guitar-making process begins when a customer places an order for a guitar. Once the
order is accepted, the manufacturing process begins by obtaining the necessary materials. An employee
then cuts the body and neck of the guitar out of raw lumber. Once the wood is cut, the body and neck
of the guitar are assembled. When the assembly is complete, the guitar is painted and finished.
Gibson provides tours of its Memphis guitar factory located at 145 Lt. George W. Lee Avenue.
Link to
Gibson Guitars
Direct and Indirect Costs
A cost is a sacrifice made to obtain some benefit. For example, cash (or credit) used to purchase
equipment is the cost of the equipment. If equipment is purchased by exchanging assets other
than cash, the current market value of the assets given up is the cost of the equipment purchased.
In managerial accounting, costs are often assigned to a cost object. A cost object can be anything
to which costs are assigned and will vary depending upon the decision-making needs of management. For example, a cost object may be a product, a sales territory, a department, or an activity, such
as research and development. Costs identified with cost objects are either direct costs or indirect costs.
Direct costs are identified with and can be traced to a cost object. For example, as shown in
Exhibit 5, the cost of wood (materials) used by Legend Guitars in manufacturing a guitar is a
direct cost of the guitar.
Materials
Cost Object: Guitar
Direct Cost
Exhibit 5
Direct Costs of Legend
Guitars
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Chapter 1 Introduction to Managerial Accounting
Indirect costs are not identified with or traced to a cost object. For example, as shown in
Exhibit 6, the salaries of the Legend Guitars production supervisors are indirect costs of producing a guitar. Although the production supervisors contribute to the production of a guitar, their
salaries cannot be identified with or traced to any individual guitar.
Exhibit 6
Indirect Costs of
Legend Guitars
Production Supervisor
Cost Object: Guitar
Depending on the cost object, a cost may be either a direct or an indirect cost. For example, the
salaries of production supervisors are indirect costs when the cost object is an individual guitar. If,
however, the cost object is Legend Guitars’ overall production process, then the salaries of production supervisors are direct costs.
This process of classifying a cost as direct or indirect is illustrated in Exhibit 7.
Exhibit 7
Classifying Direct
and Indirect Costs
Direct Cost
Identify the
cost object
Determine if
the cost can be
identified with
and traced to the
cost object
Traceable
Not
Traceable
Indirect Cost
Manufacturing Costs
The cost of a manufactured product includes the cost of materials used in making the product.
In addition, the cost of a manufactured product includes the cost of converting the materials into
a finished product. For example, Legend Guitars uses employees (direct labor) and machines
(factory overhead) to convert wood (direct materials) into finished guitars. Thus, as shown in
Exhibit 8, the cost of a finished guitar (the cost object) includes the following:
▪▪ Direct materials cost
▪▪ Direct labor cost
▪▪ Factory overhead cost
Chapter 1
Introduction to Managerial Accounting
Exhibit 8
Manufacturing Costs
of Legend Guitars
Direct Materials
Direct Labor
Factory Overhead
Direct Materials Cost Manufactured products begin with raw materials that are converted into
finished products. The cost of any material that is an integral part of the finished product is classified
as a direct materials cost. For Legend Guitars, direct materials cost includes the cost of the wood
used in producing each guitar. Other examples of direct materials costs include the cost of electronic
components for a television, silicon wafers for microcomputer chips, and tires for an automobile.
For Legend, the cost of the glue used in the guitar is not a direct materials cost. This is because the
cost of glue is an insignificant part of the total cost of each guitar and is difficult to trace accurately
to a guitar. Instead, the cost of glue is classified as a factory overhead cost, which is discussed later.
Direct Labor Cost Most manufacturing processes use employees to convert materials into
finished products. The cost of employee wages that is an integral part of the finished product
is classified as direct labor cost. For Legend Guitars, direct labor cost includes the wages of
the employees who cut each guitar out of raw lumber and assemble it. Other examples of direct
labor costs include mechanics’ wages for repairing an automobile, machine operators’ wages for
manufacturing tools, and assemblers’ wages for assembling a laptop computer.
For Legend, the wages of the janitors who clean the factory are not a direct labor cost. This is
because janitorial costs are not an integral part or a significant cost of each guitar. Instead, janitorial costs are classified as a factory overhead cost, which is discussed next.
Pathways Challenge
This is Accounting!
Economic Activity
Whether a specific expenditure is considered a direct cost or an indirect cost with respect to a cost object
depends on a number of factors. While some costs are impossible to trace directly to the cost object, many
costs can be traced directly, but doing so may not be economically feasible or justifiable given the benefits
of direct tracing. In most cases, management subjectively determines whether to treat a cost as d
irect or
indirect. Larson & Company, PC, a regional CPA firm based in Utah, bills clients based, in part, on
the costs incurred to serve the client. Some costs, such as billable professional hours, are directly traced to
clients and billed accordingly. Other costs, such as office supplies, are treated as indirect costs. These costs
are not traced directly to clients. Instead, the hourly professional rate is set high enough to provide sufficient
revenue to cover both direct and indirect costs.
Critical Thinking/Judgment
What are the effects of considering indirect costs when determining the hourly professional rate to charge clients?
What happens if serving some clients requires more supplies (printed documents, folders, etc.) than other
clients? Will Larson & Company’s current billing practice capture this difference?
Should Larson & Company consider directly tracing office supplies costs to clients?
Suggested answer at end of chapter.
13
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Chapter 1 Introduction to Managerial Accounting
Factory Overhead Cost Costs other than direct materials and direct labor that are incurred
in the manufacturing process are combined and classified as factory overhead cost. Factory
overhead is sometimes called manufacturing overhead or factory burden.
All factory overhead costs are indirect costs of the product. Some factory overhead costs include
the following:
▪▪ Heating and lighting the factory
▪▪ Repairing and maintaining factory equipment
▪▪ Property taxes on factory buildings and land
▪▪ Insurance on factory buildings
▪▪ Depreciation on factory plant and equipment
Factory overhead cost also includes materials and labor costs that are not directly traced to the
finished product. Examples include the cost of glue used to assemble guitars and the wages of janitorial and supervisory employees.
For Legend Guitars, the costs of glue and janitorial wages are factory overhead costs. Additional factory overhead costs of making guitars are as follows:
▪▪ Sandpaper
▪▪ Buffing compound
▪▪ Oil used to lubricate machines
▪▪ Power (electricity) to run the machines
▪▪ Depreciation of the machines and building
▪▪ Salaries of production supervisors
Prime Costs and Conversion Costs Direct materials, direct labor, and factory overhead
costs may be grouped together for analysis and reporting. Two such common groupings are as
follows:
▪▪ Prime costs, which consist of direct materials and direct labor costs
▪▪ Conversion costs, which consist of direct labor and factory overhead costs
Conversion costs are the costs of converting the materials into a finished product. Direct labor
is both a prime cost and a conversion cost, as shown in Exhibit 9.
Exhibit 9
Prime Costs and
Conversion Costs
Product Costs and Period Costs For financial reporting purposes, costs are classified as
product costs or period costs.
Why It Matters
Factory Overhead Costs
D
efense contractors such as General Dynamics (GD) ,
Boeing (BA) , and Lockheed Martin (LMT) sell
products such as airplanes, ships, and military equipment to
the U.S. Department of Defense. Building large products such as these
requires a significant investment in facilities and tools, all of which are
classified as factory overhead costs. As a result, factory overhead costs are
a much larger portion of the cost of goods sold for defense contractors
than they are in other industries. For example, a U.S. General Accounting
Office study of six defense contractors found that overhead costs were
almost one-third of the price of the final product. This is more than three
times greater than the factory overhead costs for a laptop computer,
which are typically about 10% of the price of the final product.
Chapter 1
Introduction to Managerial Accounting
15
▪▪ Product costs consist of manufacturing costs: direct materials, direct labor, and factory overhead.
▪▪ Period costs consist of selling and administrative expenses. Selling expenses are incurred in marketing the product and delivering the product to customers. Administrative expenses are incurred
in managing the company and are not directly related to the manufacturing or selling functions.
Examples of product costs and period costs for Legend Guitars are presented in Exhibit 10.
Exhibit 10
Examples of Product Costs and Period Costs—Legend Guitars
Product (Manufacturing) Costs
rs
Legend Guita
Direct Materials Cost
▪ Wood used in neck and body
Direct Labor Cost
▪ Wages of saw operator
▪ Wages of employees who
assemble the guitar
Factory Overhead
▪ Guitar strings
▪ Wages of janitor
▪ Power to run the machines
▪ Depreciation expense—factory buildi…
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