ntroductiorito MANAGERIAL ACCOUNTING McGraw-Hill Irwin Professor Miami University Professor Emeritus, Brigham Young University

Transcription

1 ntroductiorito MANAGERIAL ACCOUNTING N Professor Miami University Professor Emeritus, Brigham Young University Professor Emeritus, University of Washington McGraw-Hill Irwin

2 CONTENTS PROLOGUE Managerial Accounting: An Overview I WHAT IS MANAGERIAL ACCOUNTING? 2 Planning 3 Controlling 3 Decision Making 4 WHY DOES MANAGERIAL ACCOUNTING MATTER TO YOUR CAREER? 5 Business Majors 5 Accounting Majors 6 Professional Certification A Smart Investment 7 WHAT SKILLS DO MANAGERS NEED TO SUCCEED? 8 Strategic Management Skills 8 Enterprise Risk Management Skills 9 Process Management Skills 10 Lean Production 11 The Theory of Constraints (TOC) I I Measurement Skills 12 Leadership Skills 13 THE IMPORTANCE OF ETHICS IN BUSINESS 14 Code of Conduct for Management Accountants 14 CORPORATE SOCIAL RESPONSIBILITY 16 Summary 18 Glossary 18 Questions 19 CHAPTER ONE Managerial Accounting and Cost Concepts 20 Decision Feature: Understanding Costs Aids the Growth of a Billion Dollar Company 21 GENERAL COST CLASSIFICATIONS 22 Manufacturing Costs 22 Direct Materials 22 Direct Labor 22 Manufacturing Overhead 23 Nonmanufacturing Costs 23 PRODUCT COSTS VERSUS PERIOD COSTS 23 Product Costs 23 Period Costs 24 Prime Cost and Conversion Cost 24 COST CLASSIFICATIONS FOR PREDICTING COST BEHAVIOR 26 Variable Cost 26 Fixed Cost 27 The Linearity Assumption and the Relevant Range 29 Mixed Costs 31 THE ANALYSIS OF MIXED COSTS 32 Diagnosing Cost Behavior with a Scattergraph Plot 32 The High-Low Method 34 The Least-Squares Regression Method 36 TRADITIONAL AND CONTRIBUTION FORMAT INCOME STATEMENTS 38 The Traditional Format Income Statement 38 The Contribution Format Income Statement 39 COST CLASSIFICATIONS FOR ASSIGNING COSTS TO COST OBJECTS 39 Direct Cost 39 Indirect Cost 40 COST CLASSIFICATIONS FOR DECISION MAKING 40 Differential Cost and Revenue 40 Opportunity Cost 41 Sunk Cost 41 Summary 42 Guidance Answers to Decision Point 44 Guidance Answers to Concept Checks 44 Review Problem I: Cost Terms 44 Review Problem 2: High-Low Method 45 Glossary 46 Questions 47 Applying Excel 48 The Foundational Exercises 50 Problems 55 Building Your Skills 61 CHAPTER TWO Job-Order Costing 64 Decision Feature: Two Former College Students Succeeding as Entrepreneurs 65 JOB-ORDER COSTING AN OVERVIEW 66 JOB-ORDER COSTING AN EXAMPLE 67 Measuring Direct Materials Cost 68 Job Cost Sheet 68 Measuring Direct Labor Cost 69 Computing Predetermined Overhead Rates 70 Applying Manufacturing Overhead 71 Manufacturing Overhead A Closer Look 72 XXVI

3 Contents xxvii The Need for a Predetermined Rate 72 Choice of an Allocation Base for Overhead Cost 73 Computation of Unit Costs 74 JOB-ORDER COSTING THE FLOW OF COSTS 76 The Purchase and Issue of Materials 77 Issue of Direct and Indirect Materials 77 Labor Cost 78 Manufacturing Overhead Costs 78 Applying Manufacturing Overhead 79 The Concept of a Clearing Account 80 Nonmanufacturing Costs 81 Cost of Goods Manufactured 82 Cost of Goods Sold 82 SCHEDULES OF COST OF GOODS MANUFACTURED AND COST OF GOODS SOLD 85 UNDERAPPLIEDAND OVERAPPLIED OVERHEAD A CLOSER LOOK 86 Computing Underapplied and Overapplied Overhead 86 Disposition of Underapplied or Overapplied Overhead Balances 88 A General Model of Product Cost Flows 89 Multiple Predetermined Overhead Rates 89 JOB-ORDER COSTING IN SERVICE COMPANIES 90 Summary 91 Guidance Answer to Decision Point 92 Guidance Answers to Concept Checks 92 Review Problem: Job-Order Costing 93 Glossary 95 Questions 96 Applying Excel 96 The Foundational Exercises 98 Problems 106 Building Your Skills 112 CHAPTER "THREE Activity-Based Costing I 16 Decision Feature: Managing Product Complexity I 17 ASSIGNING OVERHEAD COSTS TO PRODUCTS I 18 Plantwide Overhead Rate I 18 Departmental Overhead Rates 119 Activity-Based Costing (ABC) 119 DESIGNING AN ACTIVITY-BASED COSTING SYSTEM 121 Hierarchy of Activities 122 An Example of an Activity-Based Costing System Design 124 USING ACTIVITY-BASED COSTING 125 Comtek Sound, Inc.'s Basic Data 125 Direct Labor-Hours as a Base 126 Computing Activity Rates 127 Computing Product Costs 128 Shifting of Overhead Cost 129 TARGETING PROCESS IMPROVEMENTS 131 EVALUATION OF ACTIVITY-BASED COSTING 131 The Benefits of Activity-Based Costing 131 Limitations of Activity-Based Costing 132 The Cost of Implementing Activity-Based Costing 133 Limitations of the ABC Model 133 Modifying the ABC Model 133 Activity-Based Costing and Service Industries 134 Summary 135 Guidance Answer to Decision Point 135 Guidance Answers to Concept Checks 135 Review Problem: Activity-Based Costing 136 Glossary 138 Questions 138 Applying Excel 138 The Foundational Exercises 142 Problems 147 Building Your Skills 152 CHAPTER FOUR /' ' ' I Process Costing 156 u Decision Feature: Costing the "Quicker-Picker-Upper" 157 COMPARISON OF JOB-ORDER AND PROCESS COSTING 158 Similarities between Job-Order and Process Costing 158 Differences between Job-Order and Process Costing 158 COST FLOWS IN PROCESS COSTING 159 Processing Departments 159 The Flow of Materials, Labor, and Overhead Costs 160 Materials, Labor, and Overhead Cost Entries 161 * Materials Costs 161 Labor Costs 161 Overhead Costs 161 Completing the Cost Flows 162 EQUIVALENT UNITS OF PRODUCTION 164 Weighted-Average Method 164 COMPUTE AND APPLY COSTS 166 Cost per Equivalent Unit Weighted-Average Method 166 Applying Costs Weighted-Average Method 167 Cost Reconciliation Report 168 Summary 169 Guidance Answer to Decision Point 170 Guidance Answers to Concept Checks 170 Review Problem: Process Cost Flows and Costing Units 170 Glossary 173 Questions 173 Applying Excel 174 The Foundational Exercises 176 Problems 180 Building Your Skills 184

4 xxviii Contents CHAPTERiFIVE Cost-VolumevProfit Relationships 186 Decision Feature: Moreno Turns Around the Los Angeles Angels 187 THE BASICS OF COST-VOLUME-PROFIT (CVP) ANALYSIS 188 Contribution Margin 189 CVP Relationships in Equation Form 191 CVP Relationships in Graphic Form 192 Preparing the CVP Graph 192 Contribution Margin Ratio (CM Ratio) 195 Some Applications of CVP Concepts 196 Change in Fixed Cost and Sales Volume 198 Change invariable Cost and Sales Volume 199 Change in Fixed Cost, Selling Price, and Sales Volume 199 Change in Variable Cost, Fixed Cost, and Sales Volume 200 Change in Selling Price 201 TARGET PROFIT AND BREAK-EVEN ANALYSIS 201 Target Profit Analysis 201 The Equation Method 202 The Formula Method 202 ' Target Profit Analysis in Terms of Sales Dollars 202 Break-Even Analysis 203 Break-Even in Unit Sales 203 Break-Even in Sales Dollars 204 The Margin of Safety 205 CVP CONSIDERATIONS IN CHOOSING A COST STRUCTURE 206 tcost Structure and Profit Stability 206 ' Operating Leverage 208 STRUCTURING SALES COMMISSIONS 210 SALES MIX 210 The Definition of Sales Mix 210 Sales Mix and Break-Even Analysis 211 ASSUMPTIONS OF CVP ANALYSIS 213 Summary 213 Guidance Answer to Decision Point 214 Guidance Answers to Concept Checks 215 Review Problem: CVP Relationships 215 Glossary 218 Questions 218 Applying Excel 218 The Foundational Exercises 220 Problems 226 Building Your Skills 234 CHAPTER^!* Variable Costing and Segment Reporting:Tools for Management 236 Decision Feature: IBM's $2.5 Billion Investment in Technology 237 OVERVIEW OF VARIABLE AND ABSORPTION COSTING 238 Variable Costing 238 Absorption Costing 238 Selling and Administrative Expenses 239 Summary of Differences 239 VARIABLE AND ABSORPTION COSTING AN EXAMPLE 240 Variable Costing Contribution Format Income Statement 240 Absorption Costing Income Statement 242 RECONCILIATION OF VARIABLE COSTING WITH ABSORPTION COSTING INCOME 244 ADVANTAGES OF VARIABLE COSTING AND THE CONTRIBUTION APPROACH 247 Enabling CVP Analysis 247 Explaining Changes in Net Operating Income 248 Supporting Decision Making 248 Adapting to the Theory of Constraints 249 SEGMENTED INCOME STATEMENTS AND THE CONTRIBUTION APPROACH 249 Traceable and Common Fixed Costs and the Segment Margin 249 Identifying Traceable Fixed Costs 251 Traceable Costs Can Become Common Costs 251 SEGMENTED INCOME STATEMENTS AN EXAMPLE 251 Levels of Segmented Income Statements 253 Segmented Income Statements and Decision Making 253 SEGMENTED INCOME STATEMENTS COMMON MISTAKES 255 Omission of Costs 255 Inappropriate Methods for Assigning Traceable Costs among Segments 255 Failure to Trace Costs Directly 255 Inappropriate Allocation Base 255 Arbitrarily Dividing Common Costs among Segments 256 INCOME STATEMENTS AN EXTERNAL REPORTING PERSPECTIVE 256 Companywide Income Statements 256 Segmented Financial Information 257 Summary 258 Guidance Answer to Decision Point 258 Guidance Answers to Concept Checks 259 Review Problem I: Contrasting Variable and Absorption Costing 259 Review Problem 2: Segmented Income Statements 261 Glossary 262 Questions 262

5 Contents xxix Applying Excel 263 The Foundational Exercises 265 Problems 271 Building Your Skills 278 CHAPTER SEVEN Profit Planning 282 Decision Feature: Planning for a Crisis Civil War Preservation Trust 283 THE BASIC FRAMEWORK OF BUDGETING 284 Advantages of Budgeting 284 Responsibility Accounting 285 Choosing a Budget Period 285 The Self-imposed Budget 286 Human Factors in Budgeting 287 The Master Budget: An Overview 288 PREPARING THE MASTER BUDGET 289 The Sales Budget 291 The Production Budget 293 Inventory Purchases Merchandising Company 294 The Direct Materials Budget 294 The Direct Labor Budget 297 The Manufacturing Overhead Budget 298 The Ending Finished Goods Inventory Budget 299 The Selling and Administrative Expense Budget 300 The Cash Budget 301 The Budgeted Income Statement 305 The Budgeted Balance Sheet 306 Summary 308 Guidance Answer to Decision Point 309 Guidance Answers to Concept Checks 309 Review Problem: Budget Schedules 309 Glossary 311 Questions 312 Applying Excel 312 The Foundational Exercises 314 Problems 320 Building Your Skills 330 FLEXIBLE BUDGET VARIANCES 340 Revenue Variances 340 Spending Variances 341 FLEXIBLE BUDGETS WITH MULTIPLE COST DRIVERS 341 STANDARD COSTS SETTING THE STAGE 343 Setting Direct Materials Standards 344 Setting Direct Labor Standards 344 Setting Variable Manufacturing Overhead Standards 345 Using Standards in Flexible Budgets 345 A GENERAL MODEL FOR STANDARD COST VARIANCE ANALYSIS 346 USING STANDARD COSTS DIRECT MATERIALS VARIANCES 347 The Materials Quantity Variance 348 The Materials Price Variance 349 USING STANDARD COSTS DIRECT LABOR VARIANCES 351 The Labor Efficiency Variance 351 The Labor Rate Variance 352 USING STANDARD COSTS VARIABLE MANUFACTURING OVERHEAD VARIANCES 353 The Variable Manufacturing Overhead Efficiency and Rate Variances 354 AN IMPORTANT SUBTLETY IN THE MATERIALS VARIANCES 356 Summary 358 Guidance Answer to Decision Point 359 Guidance Answers to Concept Checks 359 Review Problem I: Variance Analysis Using a Flexible Budget 359 Review Problem 2: Standard Costs 361 Glossary 363 Questions 363 Applying Excel 364 The Foundational Exercises 366 Problems 373 Building Your Skills 378 Appendix 8A : Predetermined Overhead Rates and Overhead Analysis in a Standard Costing System 381 Appendix 8A Glossary 387 Appendix 8A Exercises and Problems 387 Appendix 8B: Journal Entries to Record Variances 393 Appendix 8B: Exercises and Problems 394 CHAPTERtEipHT Flexible Budgets, Standard Costs, and Variance Analysis 334 Decision Feature: Managing Materials and Labor 335 THE VARIANCE ANALYSIS CYCLE 336 FLEXIBLE BUDGETS 337 Characteristics of a Flexible Budget 337 Deficiencies of the Static Planning Budget 337 How a Flexible Budget Works 339 CHAPTER NINE V l i Performance Measurement in Decentralized Organizations 398 Decision Feature: Sony Attempts to Rebound 399 DECENTRALIZATION IN ORGANIZATIONS 400 Advantages and Disadvantages of Decentralization 400 RESPONSIBILITY ACCOUNTING 401 Cost, Profit, and Investment Centers 401 Cost Center 401

6 XXX Contents Profit Center 401 Investment Center 401 EVALUATING INVESTMENT CENTER PERFORMANCE RETURN ON INVESTMENT 402 The Return on Investment (ROI) Formula 402 Net Operating Income and Operating Assets Defined 402 Understanding ROI 403 Criticisms of ROI 405 RESIDUAL INCOME 406 Motivation and Residual Income 407 Divisional Comparison and Residual Income 409 OPERATING PERFORMANCE MEASURES 410 Delivery Cycle Time 410 Throughput (Manufacturing Cycle) Time 410 Manufacturing Cycle Efficiency (MCE) 411 BALANCED SCORECARD 413 Common Characteristics of Balanced Scorecards 413 A Company's Strategy and the Balanced Scorecard 416 Tying Compensation to the Balanced Scorecard 418 Advantages of Timely and Graphic Feedback 419 Summary 419 Guidance Answer to Decision Point 420 Guidance Answers to Concept Checks 421 Review Problem: Return on Investment (ROI) and Residual Income 421 Glossary 422 Questions 422 Applying Excel 422 The Foundational Exercises 424 Problems 429 Building Your Skills 436 CHAPTER TEN \\ Differential Analysis: The Key to Decision Making 438 Decision Feature: Massaging the Numbers 439 COST CONCEPTS FOR DECISION MAKING 440 Identifying Relevant Costs and Benefits 440 Different Costs for Different Purposes 441 An Example of Identifying Relevant Costs and Benefits 441 Reconciling the Total and Differential Approaches 444 Why Isolate Relevant Costs? 446 ADDING AND DROPPING PRODUCT LINES AND OTHER SEGMENTS 447 An Illustration of Cost Analysis 447 A Comparative Format 449 Beware of Allocated Fixed Costs 449 THE MAKE OR BUY DECISION 451 An Example of Make or Buy 452 OPPORTUNITY COST 453 SPECIAL ORDERS 454 UTILIZATION OF A CONSTRAINED RESOURCE 455 Contribution Margin per Unit of the Constrained Resource 456 Managing Constraints 458 JOINT PRODUCT COSTS AND THE CONTRIBUTION APPROACH 461 The Pitfalls of Allocation 462 Sell or Process Further Decisions 462 Summary 464 Guidance Answer to Decision Point 465 Guidance Answers to Concept Checks 465 Review Problem: Differential Analysis 466 Glossary 467 Questions 467 Applying Excel 468 The Foundational Exercises 470 Problems 478 Building Your Skills 485 CHAPTER ELEVEN Capital Budgeting Decisions I Decision Feature: Capital Investments: A Key to Profitable Growth 491 CAPITAL BUDGETING PLANNING INVESTMENTS 492 Typical Capital Budgeting Decisions 492 The Time Value of Money 492 THE NET PRESENTVALUE METHOD 493 Emphasis on Cash Flows 494 Typical Cash Outflows 494 Typical Cash Inflows 495 Simplifying Assumptions 495 Choosing a Discount Rate 495 An Extended Example of the Net Present Value Method 496 EXPANDING THE NET PRESENTVALUE METHOD 498 The Total-Cost Approach 498 The Incremental-Cost Approach 499 Least-Cost Decisions 500 PREFERENCE DECISIONS THE RANKING OF INVESTMENT PROJECTS 502 THE INTERNAL RATE OF RETURN METHOD 504 THE NET PRESENTVALUE METHOD AND INCOME TAXES 504 OTHER APPROACHES TO CAPITAL BUDGETING DECISIONS 504 The Payback Method 504 Evaluation of the Payback Method 505 An Extended Example of Payback 506 Payback and Uneven Cash Flows 506 The Simple Rate of Return Method 508 Criticisms of the Simple Rate of Return 509 POSTAUDIT OF INVESTMENT PROJECTS 510

7 Contents XXXI Summary "511 Guidance Answer to Decision Point 512 Guidance Answers to Concept Checks 512 Review Problem: Comparison of Capital Budgeting Methods 512 Glossary 514 Questions 514 Applying Excel 515 The Foundational Exercises 517 Problems 520 Building Your Skills 526 Appendix I I A:The Concept of Present Value 528 Review Problem: Basic Present Value Computations 532 Appendix 11A Glossary 533 Appendix 11A Exercises 533 Appendix I IB: Present Value Tables 535 CHAPTER TWELVE Statement of Cash Flows 538 ji Decision Feature: Understanding Cash Flows 539 THE STATEMENT OF CASH FLOWS: KEY CONCEPTS 541 Organizing the Statement of Cash Flows 541 Operating Activities: Direct or Indirect Method? 542 The Indirect Method: A Three-Step Process 543 Investing and Financing Activities: Gross Cash Flows 546 Property, Plant, and Equipment 546 Retained Earnings 548 Summary of Key Concepts 549 AN EXAMPLE OF A STATEMENT OF CASH FLOWS 550 Operating Activities 551 Investing Activities 553 Financing Activities 553 Seeing the Big Picture 555 INTERPRETING THE STATEMENT OF CASH FLOWS 556 Consider a Company's Specific Circumstances 556 Consider the Relationships among Numbers 557 Free Cash Flow 557 Earnings Quality 558 Summary 559 Guidance Answer to Decision Point 559 Guidance Answers to Concept Checks 559 Review Problem 560 Glossary 564 Questions 564 The Foundational Exercises 566 Problems 569 Building Your Skills 577 Appendix l2a:the Direct Method of Determining the Net Cash Provided by Operating Activities 577 Appendix 12A Exercises and Problems 579 CHAPTER TJHIRTEEN Financial Statement Analysis 582 Decision Feature: Keeping an Eye on Dividends 583 LIMITATIONS OF FINANCIAL STATEMENT ANALYSIS 584 Comparing Financial Data across Companies 584 Looking beyond Ratios 584 STATEMENTS IN COMPARATIVE AND COMMON-SIZE FORM 584 Dollar and Percentage Changes on Statements 585 Common-Size Statements 587 RATIO ANALYSIS THE COMMON STOCKHOLDER 589 Earnings per Share 589 Price-Earnings Ratio 590 Dividend Payout and Yield Ratios 591 The Dividend Payout Ratio 591 The Dividend Yield Ratio 591 Return on Total Assets 592 Return on Common Stockholders' Equity 592 Financial Leverage 593 Book Value per Share 593 RATIO ANALYSIS THE SHORT-TERM CREDITOR 594 Working Capital 594 Current Ratio 594 Acid-Test (Quick) Ratio 595 Accounts Receivable Turnover 595 Inventory Turnover 596 RATIO ANALYSIS THE LONG-TERM CREDITOR 597 Times Interest Earned Ratio 598 Debt-to-Equity Ratio 598 SUMMARY OF RATIOS AND SOURCES OF COMPARATIVE RATIO DATA 599 Summary 602 Guidance Answer to Decision Point 602 Guidance Answers to Concept Checks 602 Review Problem: Selected Ratios and Financial Leverage 602 Glossary 605 Questions 605 The Foundational Exercises 606 Problems 61 I Building Your Skills 618 Credits 622 Index 623