Managerial Accounting Third Edition Karen W si ken Braun Case Western Reserve University Wendy M. Tietz Kent State University PEARSON Boston Columbus Indianapolis New York San Francisco Upper Saddle River Amsterdam Cape Town Dubai London Madrid Milan Munich Paris Montreal Toronto Delhi Mexico City Sao Paulo Sydney Hong Kong Seoul Singapore Taipei Tokyo
CONTENTS Introduction to Managerial Accounting 2 What is Managerial Accounting? 4 Managers' Three Primary Responsibilities 4 A Road Map: How Managerial Accounting Fits In 5 Differences Between Managerial Accounting and Financial Accounting 6 What Role do Management Accountants Play? 7 Organizational Structure 7 The Changing Roles of Management Accountants 9 The Skills Required of Management Accountants 9 Professional Association 11 Average Salaries of Management Accountants 11 Ethics 11 Examples of Ethical Dilemmas 12 What Regulatory Issues Affect Management Accounting? 17 Sarbanes-Oxley Act of 2002 17 International Financial Reporting Standards (IFRS) 18 Extensible Business Reporting Language (XBRL) 18 What Business Trends Affect Management Accounting? 19 Sustainability, Social Responsibility, and the Triple Bottom Line 19 Shifting Economy 19 Global Marketplace 20 Advanced Information Systems 20 Lean Operations 21 Total Quality Management 22 End of Chapter 25 Building Blocks of Managerial Accounting 46 What are the Most Common Business Sectors and Their Activities? 48 Service, Merchandising, and Manufacturing Companies 48 Which Business Activities Make up the Value Chain? 50 Coordinating Activities Across the Value Chain 51 Sustainability and the Value Chain 52 How do Companies Define Cost? 53 Cost Objects, Direct Costs, and Indirect Costs 53 Costs for Internal Decision Making and External Reporting 54 Merchandising Companies' Inventoriable Product Costs 56 Review: Inventoriable Product Costs or Period Costs? 58 Prime and Conversion Costs 58 Additional Labor Compensation Costs 59 How are Inventoriable Product Costs and Period Costs Shown in the Financial Statements? 62 Service Companies 62 Merchandising Companies 63 Manufacturing Companies 64 Comparing Balance Sheets 66 What Other Cost Terms are Used by Managers? 66 Controllable Versus Uncontrollable Costs 66 Relevant and Irrelevant Costs 67 Fixed and Variable Costs 68 How Manufacturing Costs Behave 69 Calculating Total and Average Costs 69 End of Chapter 73 IV
3Job Costing 102 What Methods are Used to Determine the Cost of Manufacturing a Product? 104 Process Costing 104 Job Costing 105 How do Manufacturers Determine a Job's Cost? 106 Overview: Flow of Inventory Through a Manufacturing System 106 Scheduling Production 107 Purchasing Raw Materials 108 Using a Job Cost Record to Accumulate Job Costs 110 Tracing Direct Materials Cost to a Job 111 Tracing Direct Labor Cost to a Job 112 Allocating Manufacturing Overhead to a Job 114 Completing the Job Cost Record and Using it to Make Business Decisions 118 How Can Job Costing Information be Enhanced for Decision Making? 120 Sustainability and Job Costing 120 Non-Manufacturing Costs 121 Direct or Variable Costing 122 How do Managers Deal with Underallocated or Overallocated Manufacturing Overhead? 126 What Journal Entries are Needed in a Manufacturer's Job Costing System? 128 APPENDIX 3A 141 How do Service Firms Use Job Costing to Determine the Amount to Bill Clients? 141 What Costs are Considered Direct Costs of Serving the Client? 141 What Costs are Considered Indirect Costs of Serving the Client? 142 Finding the Total Cost of the Job and Adding a Profit Markup 143 Invoicing the Client Using a Professional Billing Rate 143 What Journal Entries are Needed in a Service Firm's Job Costing System? 144 End of Chapter 145 Activity-Based Costing, Lean Operations, and the Costs of Quality 178 Why and How do Companies RefineTheir Cost Allocation Systems? 180 Simple Cost Allocation Systems Can Lead to Cost Distortion 180 Review: Using a Plantwide Overhead Rate to Allocate Indirect Costs 181 Using Departmental Overhead Rates to Allocate Indirect Costs 182 Using Activity-Based Costing to Allocate Indirect Costs 188 How do Managers Use the Refined Cost Information to Improve Operations? 194 Activity-Based Management (ABM) 194 Sustainability and Refined Costing Systems 196 Passing the Cost-Benefit Test 197 What is Lean Thinking? 202 The Eight Wastes of Traditional Operations 202 Characteristics of Lean Operations 204 Lean Operations in Service and Merchandising Companies 208 Sustainability and Lean Thinking 208 How do Managers Improve Quality? 209 Costs of Quality (COQ) 209 Relationship Among Costs 210 Using Costs of Quality Reports to Aid Decisions 211 End of Chapter 217
VI Process Costing 254 Process Costing: An Overview 256 Two Basic Costing Systems: Job Costing and Process Costing 256 How Does the Flow of Costs Differ Between Job and Process Costing? 257 What are the Building Blocks of Process Costing? 260 Conversion Costs 260 Equivalent Units 260 Inventory Flow Assumptions 261 How Does Process Costing Work in the First Processing Department? 262 Step 1: Summarize the Flow of Physical Units 264 Step 2: Compute Output in Terms of Equivalent Units 264 Step 3: Summarize Total Costs to Account For 266 Step 4: Compute the Cost per Equivalent Unit 266 Step 5: Assign Total Costs to Units Completed and to Units in Ending Work in Process Inventory 267 Average Unit Costs 267 Sustainability and Process Costing 268 What Journal Entries are Needed in a Process Costing System? 269 How Does Process Costing Work in a Second or Later Processing Department? 274 Process Costing in SeaView's Insertion Department 274 Steps 1 and 2: Summarize the Flow of Physical Units and Compute Output in Terms of Equivalent Units 276 Steps 3 and 4: Summarize Total Costs to Account for and Compute the Cost per Equivalent Unit 277 Step 5: Assign Total Costs to Units Completed and to Units in Ending Work in Process Inventory 278 Unit Costs and Gross Profit 279 Production Cost Reports 280 Journal Entries in a Second Processing Department 281 End of Chapter 287 Q Cost Behavior 318 Cost Behavior: How do Changes in Volume Affect Costs? 320 Variable Costs 320 Fixed Costs 323 Mixed Costs 325 Relevant Range 327 Other Cost Behaviors 329 Sustainability and Cost Behavior 331 How do Managers Determine Cost Behavior? 334 Account Analysis 334 Scatter Plots 334 High-Low Method 336 Regression Analysis 338 Data Concerns 342 What are the Roles of Variable Costing and the Contribution Margin Income Statement? 342 Comparing Absorption Costing and Variable Costing 342 An Alternative Income Statement Format 344 Comparing Operating Income: Variable versus Absorption Costing 346 Reconciling Operating Income Between the Two Costing Systems 348 End of Chapter 355
VII 7 Cost-Volume-Profit Analysis 394 How Does Cost-Volume-Profit Analysis Help Managers? 396 Data and Assumptions Required for CVP Analysis 396 The Unit Contribution Margin 397 The Contribution Margin Ratio 398 How do Managers Find the Breakeven Point? 400 The Income Statement Approach 400 The Shortcut Approach Using the Unit Contribution Margin 401 The Shortcut Approach Using the Contribution Margin Ratio 402 How do Managers Find the Volume Needed to Earn a Target Profit? 403 How Much Must we Sell to Earn a Target Profit? 403 Graphing CVP Relationships 404 How do Managers Use CVP to Plan for Changing Business Conditions? 411 Changing the Sales Price 411 Changing Variable Costs 412 Changing Fixed Costs 414 Sustainability and CVP 415 Changing the Mix of Products Offered for Sale 416 Information Technology and Sensitivity Analysis 419 What are Some Common Indicators of Risk? 420 Margin of Safety 420 Operating Leverage 421 Choosing a Cost Structure 424 End of Chapter 429 Relevant Costs for Short-Term Decisions 456 How do Managers Make Decisions? 458 Relevant Information 458 Relevant Nonfinancial Information 459 Keys to Making Short-Term Special Decisions 460 Sustainability and Short-Term Business Decisions 461 How do Managers Make Special Order and Regular Pricing Decisions? 461 Special Order Decisions 462 Regular Pricing Decisions 465 How do Managers Make Other Special Business Decisions? 473 Decisions to Discontinue Products, Departments, or Stores 473 Product Mix Decisions when Resources are Constrained 477 Outsourcing Decisions (Make or Buy) 479 Decisions to Sell As Is or Process Further 483 End of Chapter 488
VIM o The Master Budget 514 How and Why do Managers Use ' Budgets? 516 How are Budgets Used? 516 How are Budgets Developed? 516 What are the Benefits of Budgeting? 518 What is the Master Budget? 519 How are the Operating Budgets Prepared? 520 Sales Budget 520 Production Budget 521 Direct Materials Budget 523 Direct Labor Budget 524 Manufacturing Overhead Budget 525 Operating Expenses Budget 526 Budgeted Income Statement 527 How are the Financial Budgets Prepared? 532 Capital Expenditure Budget 532 Cash Collections Budget 532 Cash Payments Budget 533 Combined Cash Budget 535 Budgeted Balance Sheet 537 Sensitivity Analysis and Flexible Budgeting 538 Sustainability and Budgeting 539 How do the Budgets for Service and Merchandising Companies Differ? 540 Service Companies 540 Merchandising Companies 540 Impact of Credit and Debit Card Sales on Budgeting 542 End of Chapter 547 Performance Evaluation 588 How Does Decentralization Affect Performance Evaluation? 590 Advantages and Disadvantages of Decentralization 590 Performance Evaluation Systems 591 What is Responsibility Accounting? 591 Types of Responsibility Centers 592 Responsibility Center Performance Reports 594 Evaluation of Investment Centers 597 Transfer Pricing 602 How do Managers Use Flexible Budgets to Evaluate Performance? 608 Creating a Flexible Budget Performance Report 609 Underlying Causes of the Variances 611 How do Companies Incorporate Nonfinancial Performance Measurement? 613 The Balanced Scorecard 613 Sustainability and Performance Evaluation 618 End of Chapter 621
IX I I Standard Costs and Variances 654 What are Standard Costs? 656 Types of Standards 656 Information Used to Develop and Update Standards 656 Computing Standard Costs 657 Sustainability and Standard Costs 659 How do Managers Use Standard Costs to Compute DM and DL Variances? 659 Using Standard Costs to Develop the Flexible Budget 659 Direct Material Variances 660 Direct Labor Variances 664 Summary of Direct Material and Direct Labor Variances 667 Advantages and Disadvantages of Using Standard Costs and Variances 667 How do Managers Use Standard Costs to Compute MOH Variances? 672 Variable Manufacturing Overhead Variances 672 Fixed Manufacturing Overhead Variances 674 Standard Costing Systems 676 APPENDIX 11A 680 Standard Costing 680 Standard Costing Income Statement 683 End of Chapter 684 Capital Investment Decisions and the Time Value of Money 710 What is Capital Budgeting? 712 Four Popular Methods of Capital Budgeting Analysis 712 Focus on Cash Flows 713 Capital Budgeting Process 713 Sustainability and Capital Investments 714 How do Managers Calculate the Payback Period and Accounting Rate of Return? 715 Payback Period 715 Accounting Rate of Return (ARR) 718 How do Managers Compute the Time Value of Money? 723 Factors Affecting the Time Value of Money 723 Future Values and Present Values: Points Along the Time Continuum 724 Future Value and Present Value Factors 725 Calculating Future Values of Single Sums and Annuities Using FV Factors 725 Calculating Present Values of Single Sums and Annuities Using PV Factors 727 How do Managers Calculate the Net Present Value and Internal Rate of Return? 730 Net Present Value (NPV) 731 Internal Rate of Return (IRR) 735 How do the Capital Budgeting Methods Compare? 738 APPENDIX 12A 741 Present Value Tables and Future Value Tables 741 Table A Present Value of $1 741 Table B Present Value of Annuity of $1 742 Table C Future Value of $1 743 Table D Future Value of Annuity of $1 744 APPENDIX 12B 745 Using a TI-83, TI-83 Plus, TI-84, or TI-84 Plus Calculator to Perform Time Value of Money Calculations 745 APPENDIX 12C 751 Using Microsoft Excel (2007 and 2010) to Perform Time Value of Money Calculations 751 End of Chapter 757
Q) Statement of Cash Flows 776 What is the Statement of Cash Flows? 778 Three Types of Activities That Generate and Use Cash 779 Two Methods of Presenting Operating Activities 781 Sustainability and the Statement of Cash Flows 782 How is the Statement of Cash Flows Prepared Using the Indirect Method? 785 Information Needed to Prepare the Statement of Cash Flows 785 Preparing the Cash Flows from Operating Activities 785 Preparing the Cash Flows from Investing Activities 791 Preparing the Cash Flows from Financing Activities 793 Interpreting the Statement of Cash Flows 795 Recap: Steps to Preparing the Statement of Cash Flows Using the Indirect Method 795 How is the Statement of Cash Flows Prepared Using the Direct Method? 796 Overview 796 Determining Cash Payments and Receipts 797 End of Chapter 805 Financial Statement Analysis 830 What are the Most Common Methods of Analysis? 832 Horizontal Analysis 832 Horizontal Analysis of the Income Statement 834 Horizontal Analysis of the Balance Sheet 834 Trend Percentages 834 Vertical Analysis 836 How do we Compare One Company with Another? 838 What are Some of the Most Common Financial Ratios? 843 Measuring Ability to Pay Current Liabilities 843 Measuring Ability to Sell Inventory and Collect Receivables 844 Measuring Ability to Pay Long-Term Debt 846 Measuring Profitability 847 Analyzing Stock Investments 849 Red Flags in Financial Statement Analysis 851 Sustainability and Financial Statement Analysis 851 End of Chapter 858
15 Challenges to Implementing Environmental 884 Management Accounting 894 Future of Environmental Management Why is Sustainability Important? 886 Accounting 895 Reasons to Embed Sustainability in the E nc j of Chapter 898 Organization 886 Information Used to Support Sustainability 890 _.,.. Uses of Environmental Management Accounting Glossary/Index -6 Information 891 xi