managers MANAGERIAL ACCOUNTING for McGraw-Hill Irwin = ~~~ ^ ^ s = Eric W. Noreen, Ph.D., CMA Peter C. Brewer, Ph.D., CPA Ray H. Garrison, D.B.A.

Transcription

1 managers = ~~~ ^ ^ s = MANAGERIAL ACCOUNTING for Second E d i t i o n Eric W. Noreen, Ph.D., CMA Professor Emeritus University of Washington Peter C. Brewer, Ph.D., CPA Miami University Oxford, Ohio Ray H. Garrison, D.B.A., CPA Professor Emeritus Brigham Young University Me Gravu Hill McGraw-Hill Irwin

2 Contents Managerial Accounting and the Business Environment 1 Globalization 2 Strategy 4 Organizational Structure 5 Decentralization 5 The Functional View of Organizations 5 Process Management 7 Lean Production 8 " The Lean Thinking Model 8 The Theory of Constraints (TOC) 10 Six Sigma 11 The Importance of Ethics in Business 12 Code of Conduct for Management Accountants Company Codes of Conduct 14 ' Codes of Conduct on the International Level 17 Corporate Governance 17 The Sarbanes-Oxley Act of Enterprise Risk Management 19 Identifying and Controlling Business Risks 19 Corporate Social Responsibility 21 The Certified Management Accountant (CMA) 22 Summary 23 Glossary 24 Questions 25 Exercises 25 Problems 26 Research and Application Managerial Accounting and Cost Concepts 30 The Work of Management and the Need for Managerial Accounting Information 31 Planning 31 Directing and Motivating 32 Controlling 32 The End Results of Managers' Activities 33 The Planning and Control Cycle 33 Comparison of Financial and Managerial Accounting 33 Emphasis on the Future 34 Relevance of Data 34 Less Emphasis on Precision 35 Segments of an Organization 35 Generally Accepted Accounting Principles (GAAP) 35 Managerial Accounting Not Mandatory 35 General Cost Classifications 36 Manufacturing Costs 36 Direct Materials 36 Direct Labor 37 Manufacturing Overhead 37 Nonmanufacturing Costs 38 Product Costs versus Period Costs 38 Product Costs 38 Period Costs 39 Prime Cost and Conversion Cost 39 xxi

3 Cost Classifications on Financial Statements 41 The Balance Sheet 41 The Income Statement 42 Schedule of Cost of Goods Manufactured 44 Product Cost Flows 45 Inventoriable Costs 46 An Example of Cost Flows 46 Cost Classifications for Predicting Cost Behavior 46 Variable Cost 48 Fixed Cost 49 Cost Classifications for Assigning Costs to Cost Objects 51 Direct Cost 51 Indirect Cost 51 Cost Classifications for Decision Making 52 Differential Cost and Revenue 52 Opportunity Cost 53 Sunk Cost 54 Summary 54 Review Problem 1: Cost Terms 55 Review Problem 2: Schedule of Cost of Goods Manufactured and Income Statement 56/ Glossary 57 Questions 58 Exercises 59 Problems 64 Cases 71 Research and Application 73 3 Cost Behavior: Analysis and Use 74 Types of Cost Behavior Patterns Variable Costs 75 The Activity Base 76 Extent of Variable Costs 76 True Variable versus Step-Variable Costs 11 True Variable Costs 77 Step-Variable Costs 77 The Linearity Assumption and the Relevant Range Fixed Costs 80 Types of Fixed Costs 81 Committed Fixed Costs 81 Discretionary Fixed Costs 82 The Trend toward Fixed Costs 82 Is Labor a Variable or a Fixed Cost? 83 Fixed Costs and the Relevant Range 84 Mixed Costs 85 The Analysis of Mixed Costs 86 Diagnosing Cost Behavior with a Scattergraph Plot 88 The High-Low Method 90 The Least-Squares Regression Method 94 Multiple Regression Analysis 96 The Contribution Format Income Statement 96 Why a New Income Statement Format? 96 The Contribution Approach 96 Summary 97 Review Problem 1: Cost Behavior 98 Review Problem 2: High-Low Method 99 Glossary 100 Questions 100 Exercises 101 Problems 104 Cases 109 Research and Application 110 Appendix 3A: Least-Squares Regression Computations 111 Cost-Volume-Profit Relationships 118 The Basics of Cost-Volume-Profit (CVP) Analysis 119 Contribution Margin 120 CVP Relationships in Equation Form 122 CVP Relationships in Graphic Form 123 Preparing the CVP Graph 123 Contribution Margin Ratio (CM Ratio) 125 XXII

4 Some Applications of CVP Concepts 127 Change in Fixed Cost and Sales Volume 127 Change in Variable Costs and Sales Volume 128 Change in Fixed Cost, Sales Price, and Sales Volume 129 Change in Variable Cost, Fixed Cost, and Sales Volume 130 Change in Selling Price 131 Target Profit and Break-Even Analysis 131 Target Profit Analysis, 131 The Equation Method 131 The Formula Method 131 Target Profit Analysis in Terms of Sales Dollars 132 Break-Even Analysis 133 Break-Even in Unit Sales 133 Break-Even in Sales Dollars 134 The Margin of Safety 135 CVP Considerations in Choosing a Cost Structure 136 Cost Structure and Profit Stability 136 Operating Leverage 138 Structuring Sales Commissions 140 Sales Mix 140 The Definition of Sales Mix 140 / Sales Mix and Break-Even Analysis 141 Assumptions of CVP Analysis 143 Summary 143 Review Problem: CVP Relationships 144 Glossary 146 Questions 147 Exercises 147 Problems 152 Cases 160 Research and Application 162 Systems Design: Job-Order Costing 164 Process and Job-Order Costing 165 Process Costing 165 Job-Order Costing 165 Job-Order Costing An Overview 166 Measuring Direct Materials Cost 167 Job Cost Sheet 168 Measuring Direct Labor Cost 169 Applying of Manufacturing Overhead 170 Using the Predetermined Overhead Rate 171 The Need for a Predetermined Rate 171 Choice of an Allocation Base for Overhead Cost 172 Computation of Unit Costs 173 Summary of Document Flows 173 An Extended Example of Job-Order Costing 175 Direct and Indirect Materials 175 Labor Cost 176 Manufacturing Overhead Cost 176 Applying Manufacturing Overhead 177 Underapplied or Overapplied Overhead 178 Disposition of Underapplied or Overapplied Overhead 179 Prepare an Income Statement 180 Cost of Goods Sold 180 The Direct Method of Determining Cost of Goods Sold 180 The Indirect Method of Determining Cost of Goods Sold 180 Income Statement 182 Multiple Predetermined Overhead Rates 182 Job-Order Costing in Service Companies 183 Summary 183 Review Problem: Job-Order Costing 184 Glossary 185 Questions 186 Exercises 186 Problems 191 Cases 196 Research and Application 198 Appendix 5A: The Predetermined Overhead Rate and Capacity 199 XXIII

5 Variable Costing: A Tool for Management 206 Overview of Absorption and Variable Costing 207 Absorption Costing 207 Variable Costing 207 Selling and Administrative Expenses 207 Summary of Differences 207 Absorption Costing Income Statement 209 Variable Costing Contribution Format Income Statement 210 Reconciliation of Variable Costing with Absorption Costing Income 211 Choosing a Costing Method 214 The Impact on the Manager 214 CVP Analysis and Absorption Costing 215 Decision Making 215 External Reporting and Income Taxes 215 Advantages of Variable Costing and the Contribution Approach 216 Variable Costing and the Theory of Constraints 217 Impact of Lean Production 217 Summary 218 Review Problem: Contrasting Variable and Absorption Costing 218 Glossary 220 Questions 220 Exercises 221 Problems 225 Cases 231 Manufacturing Costs and Activity-Based Costing 236 Cost Pools, Allocation Bases, and Activity-Based Costing 236 Designing an Activity-Based Costing (ABC) System 239 Steps for Implementing Activity-Based Costing 241 Step 1: Define Activities, Activity Cost Pools, and Activity Measures 241 The Mechanics of Activity-Based Costing 243 Step 2: Assign Overhead Costs to Activity Cost Pools 243 Step 3: Calculate Activity Rates 246 Step 4: Assign Overhead Costs to Cost Objects 247 Step 5: Prepare Management Reports 250 Comparison of Traditional and ABC Product Costs 253 Product Margins Computed Using the Traditional Cost System 253 The Differences between ABC and Traditional Product Costs 254 Targeting Process Improvements 257 Activity-Based Costing and External Reports 259 The Limitations of Activity-Based Costing 259 Summary 260 Review Problem: Activity-Based Costing 261 Glossary 262 Questions 263 Exercises 263 Problems 271 Research and Application 275 Appendix 7A: ABC Action Analysis 275 Chaf>te Activity-Based Costing: A Tool to Aid Decision Making 234 Activity-Based Costing: An Overview 235 How Costs Are Treated under Activity-Based Costing 236 Nonmanufacturing Costs and Activity-Based Costing 236 xxiv Profit Planning 287 The Basic Framework of Budgeting 288 Advantages of Budgeting 288 Responsibility Accounting 288 Choosing a Budget Period 289

6 The Self-Imposed Budget 290 Human Factors in Budgeting 291 The Budget Committee 292 The Master Budget: An Overview 293 Preparing the Master Budget 294 The Sales Budget 296 The Production Budget 296 Inventory Purchases Merchandising Company 298 The Direct Materials Budget 299 The Direct Labor Budget 301 The Manufacturing Overhead Budget 302 The Ending Finished Goods Inventory Budget 303 The Selling and Administrative Expense Budget 303 The Cash Budget 304 The Budgeted Income Statement 308 The Budgeted Balance Sheet 309 Summary 311 Review Problem: Budget Schedules 311 Glossary 313 Questions 313 Exercises 314 Problems 318 Cases 330 Research and Application 332 Flexible Budgets and Performance Analysis 334 Flexible Budgets 335 Characteristics of a Flexible Budget 335 Deficiencies of the Static Planning Budget 335 How a Flexible Budget Works 338 Flexible Budget Variances 338 Activity Variances 339 Revenue and Spending Variances 340 A Performance Report Combining Activity and Revenue and Spending Variances 341 Performance Reports in Nonprofit Organizations 343 Performance Reports in Cost Centers 344 Flexible Budgets with Multiple Cost Drivers 344 Some Common Errors 346 Summary 347 / Review Problem: Variance Analysis Using a Flexible Budget 348 Glossary 349 Questions 350 Exercises 350 Problems 358 Cases 363 Standard Costs and Operating Performance Measures 367 Standard Costs Management by Exception 369 Who Uses Standard Costs? 370 Setting Standard Costs 370 Ideal versus Practical Standards 371 Setting Direct Materials Standards 372 Setting Direct Labor Standards 373 Setting Variable Manufacturing Overhead Standards 374 A General Model for Variance Analysis 374 Price and Quantity Variances 374 Using Standard Costs Direct Materials Variances 375 Materials Price Variance A Closer Look 378 Isolation of Variances 378 Responsibility for the Variance 378 Materials Quantity Variance A Closer Look 379 Using Standard Costs Direct Labor Variances 380 Labor Rate Variance A Closer Look 381 Labor Efficiency Variance A Closer Look 381 Using Standard Costs Variable Manufacturing Overhead Variances 382 Manufacturing Overhead Variances A Closer Look 383 XXV

7 Variance Analysis and Management by Exception 385 International Uses of Standard Costs 386 Evaluation of Controls Based on Standard Costs 387 Advantages of Standard Costs 387 Potential Problems with the Use of Standard Costs 387 Operating Performance Measures 388 Delivery Cycle Time 388 Throughput (Manufacturing Cycle) Time 388 Manufacturing Cycle Efficiency (MCE) 389 Summary 390 Review Problem: Standard Costs 391 Glossary 393 Questions 393 Exercises 394 Problems 397 Cases 404 Appendix 10A: Predetermined Overhead Rates and Overhead Analysis in a Standard Costing System 406 tt Segment Reporting, Decentralization, and the Balanced Scorecard 419 Decentralization in Organizations 420 Advantages and Disadvantages of Decentralization 420 Responsibility Accounting 421 Cost, Profit, and Investment Centers 421 Cost Center 421 Profit Center 421 Investment Center 422 An Organizational View of Responsibility Centers 422 Decentralization and Segment Reporting 423 Building a Segmented Income Statement 424 Levels of Segmented Statements 425 Sales and Contribution Margin 427 Traceable and Common Fixed Costs 427 Identifying Traceable Fixed Costs 428 Activity-Based Costing 428 Traceable Costs Can Become Common Costs 429 Segment Margin 430 Segmented Financial Information in External Reports 431 Hindrances to Proper Cost Assignment 431 Omission of Costs 431 Inappropriate Methods for Assigning Traceable Costs among Segments 432 Failure to Trace Costs Directly 432 Inappropriate Allocation Base 432 Arbitrarily Dividing Common Costs among Segments 432 Evaluating Investment Center Performance Return on Investment 433 The Return on Investment (ROI) Formula 434 Net Operating Income and Operating Assets Defined 434. Understanding ROI 434 Criticisms of ROI 436 Residual Income 437 Motivation and Residual Income 438 Divisional Comparison and Residual Income 439 Balanced Scorecard 440 Common Characteristics of Balanced Scorecards A Company's Strategy and the Balanced Scorecard 443 Tying Compensation to the Balanced Scorecard 445 Advantages of Timely and Graphic Feedback 445 Summary 446 Review Problem 1: Segmented Statements 446 Review Problem 2: Return on Investment (ROI) and Residual Income 448 Glossary 448 Questions 449 Exercises 449 Problems 456 Cases 463 Research and Applications 466 Appendix 11A: Transfer Pricing 467 Appendix 11B: Service Department Charges xxvi

8 Relevant Costs for Decision Making 487 Cost Concepts for Decision Making 488 Identifying Relevant Costs and Benefits 488 Different Costs for Different Purposes 489 An Example of Identifying Relevant Costs and Benefits 490 Reconciling the Total and Differential Approaches 492 Why Isolate Relevant Costs? 493 Adding and Dropping Product Lines and Other Segments 494 An Illustration of Cost Analysis 495 A Comparative Format 497 Beware of Allocated Fixed Costs 497 The Make or Buy Decision 498 Strategic Aspects of the Make or Buy Decision 499 An Example of Make or Buy 499, Opportunity Cost 500 Special Orders 501 Utilization of a Constrained Resource 502 Contribution Margin per Unit of the Constrained Resource 503 Managing Constraints 504 The Problem of Multiple Constraints 506 Joint Product Costs and the Contribution Approach 506 The Pitfalls of Allocation 506 Sell or Process Further Decisions 508 Activity-Based Costing and Relevant Costs 509 Summary 510 Review Problem: Relevant Costs 510 Glossary 511 Questions 511 Exercises 512 Problems 519 Cases 527 Capital Budgeting Decisions 534 Capital Budgeting Planning Investments 535 Typical Capital Budgeting Decisions 535 The Time Value of Money 535 Discounted Cash Flows The Net Present Value Method 536 The Net Present Value Method Illustrated 536 Emphasis on Cash Flows 538 Typical Cash Outflows 538 Typical Cash Inflows 538 Recovery of the Original Investment 538 Simplifying Assumptions 539 Choosing a Discount Rate 540 An Extended Example of the Net Present Value Method 541 Discounted Cash Flows The Internal Rate of Return Method 542 The Internal Rate of Return Method Illustrated 542 Salvage Value and Other Cash Flows 543 Using the Internal Rate of Return 543 The Cost of Capital as a Screening Tool 543 Comparison of the Net Present Value and Internal Rate of Return Methods 543 Expanding the Net Present Value Method 544 The Total-Cost Approach 544 The Incremental-Cost Approach 545 Least-Cost Decisions 546 Uncertain Cash Flows 548 An Example 548 Real Options 549 Preference Decisions The Ranking of Investment Projects 549 Internal Rate of Return Method 550 Net Present Value Method 550 xxvii

9 Other Approaches to Capital Budgeting Decisions 551 The Payback Method 551 Evaluation of the Payback Method 552 An Extended Example of Payback 553 Payback and Uneven Cash Flows 554 The Simple Rate of Return Method 554 Criticisms of the Simple Rate of Return 556 Postaudit of Investment Projects 556 Summary 557 Review Problem: Comparison of Capital Budgeting Methods 558 Glossary 559 Questions 560 Exercises 560 Problems 564 Cases 573 Appendix 13A: The Concept of Present Value 575 Appendix 13B: Present Value Tables 581 Appendix 13C: Income Taxes in Capital Budgeting Decisions 583 Appendix Pricing Products and Services 591 Introduction 592 The Economists' Approach to Pricing 592 Elasticity of Demand 592 The Profit-Maximizing Price 593 The Absorption Costing Approach to Cost-Plus Pricing 596 Setting a Target Selling Price Using the Absorption Costing Approach 596 Determining the Markup Percentage 597 Problems with the Absorption Costing Approach 598 Target Costing 599 Reasons for Using Target Costing 599 An Example of Target Costing 600 Summary 600 Glossary 601 Questions 601 Exercises 601 Problems 602 Appendix Profitability Analysis 607 Introduction 608 Absolute Profitability 608 Relative Profitability 608 Volume Trade-Off Decisions 611 Managerial Implications 613 Summary 614 Glossary 614 Questions 615 Exercises 615 Problems 616 Cases 619 Credits 620 Index 621 xxviii