1 Manager?al Accounting and the Business Environment 2
Planning 4
The Work of Management and the Need for Managerial Accounting lnformation 4
Controlling 5
Directing and Motivating 5
The End Results of Manogers Activities 6
Comparison of Financial and Managerial Accounting 7
The Planning and Control Cycle 7
Generally Accepted Accounting Principles(GAAP) 8
Segments of an Organization 8
Emphasis on the Future 8
Relevance and Flexibility of Data 8
Less Emphasis on Precision 8
Expanding Role of Managerial Accounting 9
Managerial Accounting-Not Mandatory 9
Just-in-Time(JIT) 10
The Changing Business Environment 10
Total Quality Management(TQM) 15
Process Reengineeting 18
The Theory of Constraints(TOC) 20
Automation 20
Infernational Competition 23
Decentralization 24
Organizational Structure 24
Line and Staff Relationships 25
Professional Ethics 26
The Controller 26
Company Codes of Conduct 27
Code of Conduct for Management Accountants 27
Codes of Conduct on the International Level 29
Summary 30
The Certified Management Accountant（CMA） 30
Key Terms for Review 31
Exercises 33
Questions 33
Problems 35
Group Exercises 38
PART 1 THE FOUNDATION:Cost Behowior，and Systems Design 41
2 Cost Terms，Concepts，and Classifications 42
General Cost Classifications 44
Manufacturing Costs 45
Nonmanufacturing Costs 46
Product Costs 47
Period Costs 47
Period Costs versus Product Costs 47
Cost Classifications on Financial Statements 48
The Balance Sheel 49
The lncome Statement 50
Schedule of Cost of Goods Manufactured 51
Product Costs-A Closer Look 52
An Example of Cost Flows 54
Inventoriable Costs 54
Cost Classifications for Predicling Cost Behavior 55
Variable Cost 56
Fixed Cost 57
Indirect Cost 58
Direct Cost 58
Cost Classifications for Assigning Costs to Cost Objects 58
Differential Cost and Revenue 59
Cost Classifications for Decision Making 59
Oppartunity Cost 60
Summary 61
Sunk Cost 61
Review Problem 1：Cost Terms 62
Review Problem2：Schedule of Cost of Goods Manufactured and Income Statement 63
Key Terms for Review 64
Appendix 2A：Further Classification of Labor Costs 65
Questions 67
Exercises 68
Problems 71
Cases 78
Group Exercises 79
3 Systems Design：Job-Order Costing 82
Process Costing 84
Types of Costing Systems 84
The Need for Unit Product Cost Data 84
Job-Order Costing 85
Job-Order Costing-An Overview 86
Summary of Costing Methods 86
Measuring Direct Materials Cost 87
Job Cost Sheet 88
Measuring Direct Labor Cost 89
Application of Manufacturing Overhead 90
Computation of Unit Costs 93
Choice of an Allocation Base for Overhead Cost 93
The Purchase and Issue of Materials 95
Job-Order Costing-The Flow of Costs 95
Summary of Document Flows 95
Manufacturing Overhead Costs 98
Labor Cost 98
The Application of Manufacturing Overhead 99
Cost of Goods Manufactured 101
Nonmanufacturing Costs 101
Summary of Cost Flows 102
Cost of Goods Sold 102
Underapplied and Overapplied Overhead 106
Problems of Overhead Application 106
Disposition of Under-or Overapplied Overhead Balances 107
A General Model of Product Cost Flows 108
Multiple Predetermined Overhead Rates 109
Use of Bar Code Technology 110
Job-Order Costing in Service Companies 110
Review Problem：Job-Order Costing 112
Summary 112
Questions 115
Key Terms for Review 115
Exercises 116
Problems 121
Coses 132
Group Exercises 135
4 Systems Design：Process Costing 138
A Perspective of Process Cost Flows 141
Differences between Job-Order and Process Costing 141
Comparison of Job-Order and Process Costing 141
Similarities between Job-Order and Process Costing 141
Processing Departments 142
The Flow of Mafterials，Labor，and Overhead Costs 143
Materials，Labor，and Overhead Cost Entries 144
Equivalent Units of Production 147
Weighted-Average Method 148
Production Report-Weighted-Average Method 149
Step2：Compute the Total and Unit Costs 151
Step1：Prepare a Quanlity Schedule and Compute the Equivalent Units 151
Step3：Prepare a Cost Reconciliation 152
A Comment about Rounding Errors 154
Operation Costing 155
Review Problem：Process Cost Flows and Reports 156
Summary 156
Key Terms for Review 158
Appendix 4A：FIFO Method 159
Questions 165
Exercises 166
Problems 169
Cases 175
Group Exercises 176
5 Systems Design：Activity-Based Costing and Quality Management 178
Level One：Plantwide Overhead Rate 180
The Concept of Activity-Based Costing 180
Level Two：Deparlmental Overhead Rates 181
Level Three：Activity-Based Costing 182
Process Value Analysis(PVA) 183
Design of an Activity-Based Costing System 183
Idenlifying Activily Centers 185
Assigning Costs to Activity Centers 187
Graphic Example of Activity-Based Costing 188
Selecting Cost Drivers 188
Numerical Example of Activity-Based Costing 190
Comtek Sound，Inc．′s Basic Data 191
Activities as a Base 192
Direct labor-Hours as a Base 192
Benefits of Activity-Based Costing 196
Benefits and Limitations of Activity-Based Costing 196
Limitations of Activity-Based Costing 197
International Use of Activity-Based Costing 199
Activity-Based Costing and Service Industries 199
Quality of Design 200
Grade 200
Quality Management 200
Quality of Conformance-A Closer Look 202
Quality of Confo?mance 202
Prevention Costs 203
Internal Failure Costs 204
Appraisal Costs 204
External Failure Costs 205
Distribution of Quality Costs 206
Quality Cost Reports 207
Use of Quality Cost Information 208
Quality Cost Reports in Graphic Form 208
International Aspects of Quality 209
The ISO 9000 Standards 210
Review Problem：Activity-Based Costing 211
Summary 211
Key Terms for Review 213
Appendix 5A：Cost Flows in an Activity-Based Costing System 214
Questions 217
Exercises 219
Problems 224
Cases 233
Group Exercises 237
6 Cost Behavior：Analysis and Use 238
Types of Cost Behayior Patterns 240
Variable Costs 241
True Variable Versus Step-Variable Costs 242
Fixed Costs 244
The Linearity Assumption and the Relevant Range 244
Types of Fixed Costs 245
the Trend toward Fixed Costs 247
Fixed Costs and the Relevant Range 248
Mixed Costs 249
The Analysis of Mixed Costs 251
The High-Low Method 253
The Scattergraph Method 255
The Least-Squares Regression Method 257
The Use of Judgment in Cost Analysis 258
The Contribution Format 259
Engineering Approach to Cost Study 259
Multiple Regression Analysis 259
Summary 260
The Contribution Approach 260
Why a New Income Statement Format? 260
Review Problem1：Cost Behavior 261
Key Terms for Review 262
Review Problem2：High-Low Methad 262
Appendix 6A：Least-Squares Regression Calculations 263
Questions 265
Exercises 266
Problems 268
Cases 274
Group Exercises 275
PART 11 THE CENTRAL THEME：Planning and Control 277
7 Cost-Volume-Profit Relationships 278
Contribution Margin 281
The Basics of Cost-Volume-Profit(CVP)Analysis 281
Contribution Margin Ratio (CM Ratio) 283
Some Applications of CVP Concepts 284
Importance of the Contribution Margin 287
Break-Even Computations 288
Break-Even Analysis 288
CVP Relationships in Graphic Form 290
Target Net Profit Analysis 293
The Margin of Safety 295
Cost Structure and Profit Stability 296
CVP Considerations in Choosing a Cost Structure 296
Operating Leverage 298
Automation：Risks and Rewards from c CVP Perspective 300
Structuring Sales Commissions 301
Sales Mix and B?eak-Even Analysis 302
The Definition of Sales Mix 302
The Concept of Sales Mix 302
Assumptions of CVP Analysis 304
Sales Mix and per Unit Contr?bution Margin 304
Review Problem：CVP Relationships 305
Summary 305
Key Terms for Review 307
Questions 308
Exercises 309
Problems 311
Cases 319
Group Exercises 322
8 Variable Costing：A Tool for Management 324
Variable Costing 326
Absorption Costing 326
Overvlew of Absorption and Variable Costing 326
Unit Cost Computations 327
Income Comparison of Absorption and Variable Costing 328
The Controversy over Fixed Overhead Cost 328
The Definition of an Asset 330
Extended Comparison of Income Data 331
Absorption Costing 335
Variable Costing 335
Effect of Changes in Production on Net Income 335
The Impact on the Manager 338
CVP Analysis and Absorption Costing 339
Other Factors in Choosing a Costing Method 339
External Reporting and Income Taxes 340
Pricing Decisions 340
Advantages of the Contribution Approach 341
Impact of JIT Inventory Methods 342
Variable Costing and the Theory of Constraints 342
Review Problem 343
Summary 343
Questions 345
Key Terms for Review 345
Exercises 346
Problems 348
Cases 352
Group Exercises 356
9 Profit Planning 358
Difference Between Planning and Control 360
Personol budgets 360
The Basic Framework of Budgeting 360
Definition of Budgeting 360
Advantages of Budgeting 361
Responsibility Accounting 362
Choosing a Budget Period 363
The Matter of Human Relations 365
The Budget Committee 366
The Master Budget-A Network of Interrelationships 367
Sales Forecasting-A Critical Step 368
Preparing the Master Budget 369
The Production Budget 371
The Sales Budgei 371
The Direct Maferials Budget 373
Inventory Purchases-Merchandising Firm 373
The Direct Labor Budge? 374
The Manufacturing Overhead Budget 375
The Selling and Administrative Expense Budget 376
The Ending Finished Goods Inventory Budget 376
The Cash Budget 377
The Budgeted Income Statement 378
The Budgeted Balance Sheet 380
Expanding the Budgeted Income Statement 381
JIT Purchasing 383
Zero-Base Budgeting 384
International Aspec s of Budgeting 385
Review Problem：Budget Schedules 386
The Need for Further Budgeting Material 386
Key Terms for Review 388
Appendix 9A：Economic Order Quanfity(EOQ) and the Reorder Point 389
Exercises 396
Questions 396
Problems 399
Cases 409
Group Exercises 412
10 Standard Costs and Operating Performance Measures 414
Standard Costs-Management by Exception 416
Setting Standard Costs 417
Who Uses Standard Costs? 417
Ideal Versus Practical Standards 418
Setting Direct Materials Standards 419
Setting Variable Manufacturing Overhead Standards 421
Setting Direct Labor Standards 421
Advantages of Standard Costs 422
Are Standards the Same as Budgets? 422
Price and Quantity Variances 423
A General Model for Variance Analysis 423
Disadvantages of Standard Costs 423
Using Standard Costs—Direct Materials Variances 425
Materials Price Variance—A Closer Look 426
Materials Quantity Variance—A Closer Look 428
Labor Rate Variance —A Closer Look 429
Using Standard Costs—Direct Labor Variances 429
Labor Efficiency Variance—A Closer Look 430
Manufacturing Overhead Variance—A Closer Look 431
Using Standard Costs—Variable Manufacturing Overhead Variances 431
Structure of Performance Reports 434
Variance Analysis and Management by Exception 435
Standard Costs and the New Competitive Environment 436
Operating Performance Measures 436
New Performance Measures 437
Quality Control Measures 438
Inventory Control Measures 439
Material Control Measures 439
Machine Performance Measures 440
Delivery Performance Measures 441
International Uses of Standard Costs 443
Standard Costs and Operating Performance Measures 443
Summary 444
Review Problem:Standard Costs 445
Key Terms for Review 446
Appendix 10A:General Ledger Entries to Record Variances 448
Exercises 449
Questions 449
Problems 452
Cases 462
Group Exercises 465
11 Flexible Budgets and Overhead Analysis 468
Deficiencies of the Static Budget 470
Characteristics of a Flexible Budget 470
Flexible Budgets 470
How the Flexible Budget Works 472
The Measure of Activity—A Critical Choice 473
The Problem of Budget Allowances 474
The Overhead Performance Report—A Closer Look 474
Spending Variance Alone 475
Both Spending and Efficiency Variances 477
Expanding the Flexible Budget 478
Activity-Based Costing and the Flexible Budget 479
Fixed Costs and the Flexible Budget 479
Overhead Rates and Fixed Overhead Analysis 481
Flexible Budgets and Overhead Rates 482
Overhead Applications in a Standard Cost System 483
The Budget Variance—A Closer Look 484
The Fixed Overhead Variances 484
The Volume Variance—A Closer Look 485
Graphic Analysis of Fixed Overhead Variances 486
Overhead Variances and Under-or Overapplied Overhead Cost 487
Cautions in Fixed Overhead Analysis 487
Presentations of Variances on the Income Statement 488
Review Problem:Overhead Analysis 489
Questions 491
Key Terms for Review 491
Exercises 492
Problems 495
Cases 503
Group Exercises 507
12 Segment Reporting,Profitability Analysis,and Decentralizotion 510
Hindrances to Proper Cost Assignment 512
Inappropriate Methods for Allocating Costs among Segments 513
Omission of Costs 513
Arbitrarily Dividing Common Costs among Segments 514
Levels of Segmented Statements 517
Segment Reporting and Profitability Analysis 517
Sales and Contribution Margin 518
Assigning Costs to Segments 518
Traceable and Common Fixed Costs 520
Traceable Costs Can Become Common Costs 521
Segment Margin 522
Customer Profitability Analysis 523
Varying Breakdowns of Total Sales 523
Decentralization and Segment Reporting 525
Responsibility Accounting 525
Cost,Profit,and Investment Centers 526
The Return on Investment (ROI) Formula 528
Rate of Return for Measuring Managerial Performance 528
Measuring Management Performance 528
Net Operating Income and Operating Assets Defined 529
Plant and Equipment:Net Book Value or Gross Cost? 530
Controlling the Rate of Return 531
Reduce Operating Assets 532
Reduce Expenses 532
Increase Sales 532
The Proplem of Allocated Expenses and Assets 533
Residual Income—Another Measure of Performance 534
Criticisms of ROI 534
Motivation and Residual Income 535
Divisional Comparison and Residual Income 536
Review Problem 1:Segmented Statements 537
Summary 537
Review Problem 2:Return on Investment (ROI) and Residual Income 538
Key Terms for Review 539
Appendix 12A:Transfer Pricing 540
Review Problem 3:Transfer Pricing 549
Questions 551
Exercises 552
Problems 556
Cases 569
Group Exercises 571
PART Ⅲ THE CAPSTONE:Using Cost Data in Decision Making 573
13 Relevant Costs for Decision Making 574
Identifying Relevant Costs 576
Cost Concepts for Decision Making 576
Sunk Costs Are Not Relevant Costs 577
Different Costs for Different Purposes 577
Book Value of Old Equipment 578
Future Costs that Do Not Differ Are Not Relevant Costs 580
Why Isolate Relevant Costs? 582
An Example of Irrelevant Future Costs 582
Adding and Dropping Product Lines and Other Segments 583
An Illustration of Cost Analysis 584
Beware of Allocated Fixed Costs 586
A Comparative Format 586
The Make or Buy Decision 588
Strategic Aspects of the Make or Buy Decision 589
An Example of Make or Buy 590
The Matter of Opportunity Cost 591
Special Orders 592
Contribution in Relation to Scarce Resources 593
Utilization of Scarce Resources 593
Managing Constraints 595
Joint Product Costs and the Contribution Approach 596
The Problem of Multiple Constraints 596
Sell or Process Further Decisions 597
The Pitfalls of Allocation 597
Activity-Based Costing and Relevant Costs 599
Review Problem:Relevant Costs 600
Summary 600
Key Terms for Review 601
Questions 602
Exercises 603
Problems 607
Cases 615
Group Exercises 620
14 Capital Budgeting Decisions 622
Capital Budgeting—An Investment Concept 624
Characteristics of Business Investments 625
Typical Capital Budgeting Decisions 625
The Net Present Value Method Illustrated 626
Discounted Cash Flows—The Net Present Value Method 626
Emphasis on Cash Flows 628
Recovery of the Original Investment 629
Choosing a Discount Rate 630
Simplifying Assumplions 630
An Extended Example of the Net Present Value Mathod 631
The Internal Rate of Return Method Illustrated 632
Discounted Cash Flows—The Internal Rate of Return Method 632
Salvage Value and Other Cash Flows 633
The Cost of Capital as a Screening Tool 634
Using the Internal Rate of Return 634
The Process of Interpolation 634
Comparison Of The Net Present Volue and the Internral Rate of Return Methods 635
The Total-Cost Approach 636
Expanding the Net Present Value Method 636
The Incremental-Cost Approach 638
Least-Cost Decisions 639
Investments in Automated Equipment 640
Capital Budgeting and Nonprofit Organizations 640
Benefits from Automation 641
Decision Framework for Intangible Benefits 642
The Payback Method 643
Other Approaches to Capital Budgeting Decisions 643
Evaluation of the Payback Method 644
An Extended Example of Payback 645
The Simple Rate of Return Method 646
Payback and Uneven Cash Flows 646
The Choice of an Investment Base 648
Criticisms of the Simple Rate of Return 648
Postaudit of Investment Projects 649
Summary 650
Review Problem 1:Basic Present Value Computations 651
Review Problem 2:Comparison of Capital Budgeting Methods 652
Key Terms for Review 653
Appendix 14A:The Concept of Present Value 654
Appendix 14B:Inflation and Capital Budgeting 658
Appendix 14C:Future Value and Present Value Tables 660
Questions 662
Exercises 663
Problems 666
Cases 675
Group Exercises 678
15 Forther Aspects Opvestment Decisions 680
Income Taxes and Capital Budgeting 682
The Concepi of After-Tax Cost 683
The Concept of Depreciation Tax Shield 685
Modified Accelerated Cost Recovery System 686
The Choice of a Depreciation Method 691
Example or Income Taxes and Capital Budgeting 692
The Total-Cost Approach and Income Taxes 694
Net Present Valve Method 697
Internal Rate of Return Method 697
Preference Decisions—The Ranking of Investment Projects 697
Companng the Preference Rules 698
Summary 699
Review Problem:Capital Budgeting and Taxes 700
Questions 701
Key Terrrs for Review 701
Exercises 702
Problems 704
Cases 711
Group Exercises 713
Part IV SELECTED TOPICS FOR FURTHER STUDY 717
16 Service Department Costing:An Activity Approach 718
Selecling Allocation Bases 720
Guidelines for Cost Allocation 720
The Need for Cost Allocation 720
Interdepartmental Services 722
Allocating Costs by Behavior 727
Pitfalls in Allocaling Fixed Costs 728
Effect of Allocations on Operating Departments 729
Should Actual o Budgeted Costs Be Allocated? 729
Basic Allocation Techniques 731
Implementing the Allocation Guidelines 731
A Summary of Cost Allocation Guidelines 731
An Extended Example 733
Should All Costs Be Allocated? 735
No Distinction Made between Fixed and Variable Costs 735
Beware of Sales Dollars as an Allocation Base 736
Summary 737
Review Problem:Direct and Step Methods 738
Key Terms for Review 739
Exercises 740
Questions 740
Problems 742
Cases 747
Group Exercises 749
17 How Well Am I Doing2 Stctement of Cash Flows 752
Constructing the Statement of Cash Flows Using Changes in Noncash Balance Sheet Accounts 755
Definition of Cash 755
The Basic Approach to a Statement of Cash Flows 755
Constructing a Simplified Statement of Cash Flows 757
An Example of a Simplified Statement of Cash Flows 757
Depreciation,Depletion,and Amortization 758
Investing Activities 760
Operating Activities 760
The Need for a More Detailed Statement 760
Organization of the Full-Fledged Statement of Cash Flows 760
Other Issues in Preparing the Statement of Cash Flows 761
Financing Activities 761
Direct Exchange Transactions 762
Operating Activities:Direct or Indirect Method? 762
Eight Basic Steps to Preparing the Statement of Cash Flows 763
An Example of a Full-Fledged Statement of Cash Flows 763
Setting Up the Worksheet (Steps 1-4) 765
Adjustments to Reflect Gross,Rather Than Net ,Amounts (Step 5) 766
The Completed Statement of Cash Flows (Steps 7 and 8) 767
Classifying Entries as Operating,Investing,or Financing Activities (Step ó) 767
Interpretation of the Statement of Cash Flows 769
Summary 770
Review Problem 770
Key Terms for Review 772
Appendix 17A:The Direct Method of Determining the Net Cash Provided by Operating Activities 772
Questions 774
Exercises 775
Problems 778
Group Exercises 784
18 How Well Am I Doing? Financial Statement Analysis 786
Limitations of Financial Statement Analysis 788
Comparison of Financial Data 788
The Need to Look beyond Ratios 788
Dollar and Percentage Changes on Statements 789
Statements in Comparative and Common-Size Form 789
Common-Size Statements 792
Ratio Analysis—The Common Stockholder 794
Earnings per Share 794
Extraordinary ltems and Earnings per Share 795
Fully Diluted Earnings per Share 796
Price-Earnings Ratio 797
Dividend Payout and Yield Ratios 797
Return on Total Assets 798
Return on Common Stockholders Equity 799
Financial Leverage 800
Book Value Per Share 801
Ratio Analysis—The Short-Term Creditor 802
Working Capital 802
Current Ratio 803
Acid-Test (Quick)Ratio 804
Accounts Receivable Turnover 804
Inventory Turnover 805
Ratio Analysis—The Long-Term Creditor 806
Times Interest Earned Ratio 806
Debt-to-Equity Ratio 807
Summary of Ratios and Sources of Comparative Ratio Data 808
Summary 809
Review Problem:Selected Ratios and Financial Leverage 809
Key Terms for Review 812
Questions 812
Exercises 813
Problems 816
Group Exercises 826
Appendix Pricing Products and Services 828
Cost-Plus Pricing 830
The Absorption Approach 830
The Contribution Approach 832
Determining the Markup Percentage 832
Markup on an Absorption Basis 833
Markup on a Contribution Basis 834
Target Costing 834
Reasons for Using Target Costing 836
An Example of Target Costing 836
Material Component 837
Time Component 837
An Example of Time and Material Pricing 837
Service Companies—Time and Material Pricing 837
Key Terms for Review 838
Questions 839
Exercises 839
Problems 840
Photo Credits 845
Author Index 847
Company Index 849
Subject Index 851