Managerial Accounting Fifteenth Edition Ray H Garrison, D.B.A., CPA Professor Emeritus Brigham Young University Eric W Noreen, Ph.D., CMA Professor Emeritus University of Washington Peter C Brewer, Ph.D., CPA Wake Forest University Managerial Accounting Fifteenth Edition Ray H Garrison, D.B.A., CPA Professor Emeritus Brigham Young University Eric W Noreen, Ph.D., CMA Professor Emeritus University of Washington Peter C Brewer, Ph.D., CPA Wake Forest University Managerial Accounting Fifteenth Edition Ray H Garrison, D.B.A., CPA Professor Emeritus Brigham Young University Eric W Noreen, Ph.D., CMA Professor Emeritus University of Washington Peter C Brewer, Ph.D., CPA Wake Forest University MANAGERIAL ACCOUNTING, FIFTEENTH EDITION Published by McGraw-Hill Education, Penn Plaza, New York, NY 10121 Copyright © 2015 by McGraw-Hill Education All rights reserved Printed in the United States of America Previous editions © 2012, 2010, and 2008 No part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written consent of McGraw-Hill Education, including, but not limited to, in any network or other electronic storage or transmission, or broadcast for distance learning Some ancillaries, including electronic and print components, may not be available to customers outside the United States This book is printed on acid-free paper DOW/DOW ISBN 978-0-07-802563-1 MHID 0-07-802563-X Senior Vice President, Products & Markets: Kurt L Strand Vice President, Content Production & Technology Services: Kimberly Meriwether David Director: Tim Vertovec Brand Manager: Donna M Dillon Executive Director of Development: Ann Torbert Development Editor II: Katie Jones Director of Digital Content: Patricia Plumb Digital Development Editor: Julie Hankins Digital Product Analyst: Xin Lin Senior Marketing Manager: Kathleen Klehr Director, Content Production: Terri Schiesl Content Project Manager: Pat Frederickson Content Project Manager: Rachel Townsend Senior Buyer: Carol A Bielski Design: Matthew Baldwin Cover Image: ©Getty Images, 2011 Viennamornings Lead Content Licensing Specialist: Keri Johnson Typeface: 10.5/12 Times Roman Compositor: Laserwords Private Limited Printer: R R Donnelley Materials from the Certified Management Accountant Examinations, © 2014 by the Institute of Certified Management Accountants, are reprinted and adapted with permission All credits appearing on page or at the end of the book are considered to be an extension of the copyright page Library of Congress Cataloging-in-Publication Data Garrison, Ray H Managerial accounting / Ray H Garrison, D.B.A., CPA, Professor Emeritus, Brigham Young University, Eric W Noreen, Ph.D., CMA, Professor Emeritus, University of Washington, Peter C Brewer, Ph.D., CPA, Wake Forest University.—Fifteenth Edition pages cm Includes index ISBN 978-0-07-802563-1 (alk paper)—ISBN 0-07-802563-X (alk paper) Managerial accounting I Noreen, Eric W II Brewer, Peter C III Title HF5657.4.G37 2015 658.15’11—dc23 2013036157 The Internet addresses listed in the text were accurate at the time of publication The inclusion of a website does not indicate an endorsement by the authors or McGraw-Hill Education, and McGraw-Hill Education does not guarantee the accuracy of the information presented at these sites www.mhhe.com Contents Chapter Chapter Managerial Accounting: An Overview Managerial Accounting and Cost Concepts 27 What Is Managerial Accounting? Planning Controlling Decision Making Cost Classifications for Assigning Costs to Cost Objects 28 Direct Cost 28 Indirect Cost 29 Why Does Managerial Accounting Matter to Your Career? Business Majors Accounting Majors Professional Certification—A Smart Investment Cost Classifications for Manufacturing Companies 29 Manufacturing Costs 29 Direct Materials 29 Direct Labor 29 Manufacturing Overhead 30 Nonmanufacturing Costs 30 Managerial Accounting: Beyond the Numbers An Ethics Perspective Code of Conduct for Management Accountants A Strategic Management Perspective 11 An Enterprise Risk Management Perspective 12 A Corporate Social Responsibility Perspective 14 A Process Management Perspective 14 A Leadership Perspective 16 Intrinsic Motivation 17 Extrinsic Incentives 17 Cognitive Bias 17 Summary 18 Glossary 18 Questions 19 Exercises 19 Appendix 1A: Corporate Governance 23 Glossary (Appendix 1A) 25 Questions 26 Cost Classifications for Preparing Financial Statements 31 Product Costs 31 Period Costs 31 Prime Cost and Conversion Cost 32 Cost Classifications for Predicting Cost Behavior 33 Variable Cost 33 Fixed Cost 34 The Linearity Assumption and the Relevant Range 35 Mixed Costs 37 The Analysis of Mixed Costs 38 Diagnosing Cost Behavior with a Scattergraph Plot 39 The High-Low Method 40 The Least-Squares Regression Method 42 xxxi CHAPTER Managerial Accounting: An Overview Managerial Accounting: It’s More Than Just Crunching Numbers BUSIN ESS FO CUS “Creating value through values” is the credo of today’s management accountant It means that management accountants should maintain an unwavering commitment to ethical values while using their knowledge and skills to influence decisions that create value for organizational stakeholders These skills include managing risks and implementing strategy through planning, budgeting and forecasting, and decision support Management accountants are strategic business partners who understand the financial and operational sides of the business They not only report and analyze financial measures, but also nonfinancial measures of process performance and corporate social performance Think of these responsibilities as profits (financial statements), process (customer focus and satisfaction), people (employee learning and satisfaction), and planet (environmental stewardship) ■ Source: Conversation with Jeff Thomson, president and CEO of the Institute of Management Accountants Chapter his chapter explains why managerial accounting  is important to the future careers of all business students It begins by answering two questions: (1) What is managerial accounting? and (2) Why does managerial accounting matter to your career? It concludes by discussing six topics—ethics, strategic management, enterprise risk management, corporate social responsibility, process management, and leadership—that define the business context for applying the quantitative aspects of managerial accounting T What Is Managerial Accounting? Many students enrolled in this course will have recently completed an introductory financial accounting course Financial accounting is concerned with reporting financial information to external parties, such as stockholders, creditors, and regulators Managerial accounting is concerned with providing information to managers for use within the organization Exhibit 1–1 summarizes seven key differences between financial and managerial accounting It recognizes that the fundamental difference between "DDPVOUJOH EXHIBIT 1–1 Comparison of Financial and Managerial Accounting r
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(""1*'34 Managerial Accounting: An Overview financial and managerial accounting is that financial accounting serves the needs of those outside the organization, whereas managerial accounting serves the needs of managers employed inside the organization Because of this fundamental difference in users, financial accounting emphasizes the financial consequences of past activities, objectivity and verifiability, precision, and companywide performance, whereas managerial accounting emphasizes decisions affecting the future, relevance, timeliness, and segment performance A segment is a part or activity of an organization about which managers would like cost, revenue, or profit data Examples of business segments include product lines, customer groups (segmented by age, ethnicity, gender, volume of purchases, etc.), geographic territories, divisions, plants, and departments Finally, financial accounting is mandatory for external reports and it needs to comply with rules, such as generally accepted accounting principles (GAAP) and international financial reporting standards (IFRS), whereas managerial accounting is not mandatory and it does not need to comply with externally imposed rules As mentioned in Exhibit 1–1, managerial accounting helps managers perform three vital activities—planning, controlling, and decision making Planning involves establishing goals and specifying how to achieve them Controlling involves gathering feedback to ensure that the plan is being properly executed or modified as circumstances change Decision making involves selecting a course of action from competing alternatives Now let’s take a closer look at these three pillars of managerial accounting Planning Assume that you work for Procter & Gamble (P&G) and that you are in charge of the company’s campus recruiting for all undergraduate business majors In this example, your planning process would begin by establishing a goal such as: our goal is to recruit the “best and brightest” college graduates The next stage of the planning process would require specifying how to achieve this goal by answering numerous questions such as: • • • • • • • How many students we need to hire in total and from each major? What schools we plan to include in our recruiting efforts? Which of our employees will be involved in each school’s recruiting activities? When will we conduct our interviews? How will we compare students to one another to decide who will be extended job offers? What salary will we offer our new hires? Will the salaries differ by major? How much money can we spend on our recruiting efforts? As you can see, there are many questions that need to be answered as part of the planning process Plans are often accompanied by a budget A budget is a detailed plan for the future that is usually expressed in formal quantitative terms As the head of recruiting at P&G, your budget would include two key components First, you would have to work with other senior managers inside the company to establish a budgeted amount of total salaries that can be offered to all new hires Second, you would have to create a budget that quantifies how much you intend to spend on your campus recruiting activities Controlling Once you established and started implementing P&G’s recruiting plan, you would transition to the control process This process would involve gathering, evaluating, and responding to feedback to ensure that this year’s recruiting process meets expectations It would also include evaluating the feedback in search of ways to run a more effective recruiting campaign next year The control process would involve answering questions such as: • • Did we succeed in hiring the planned number of students within each major and at each school? Did we lose too many exceptional candidates to competitors? Chapter • • • • • Did each of our employees involved in the recruiting process perform satisfactorily? Is our method of comparing students to one another working? Did the on-campus and office interviews run smoothly? Did we stay within our budget in terms of total salary commitments to new hires? Did we stay within our budget regarding spending on recruiting activities? As you can see, there are many questions that need to be answered as part of the control process When answering these questions your goal would be to go beyond simple yes or no answers in search of the underlying reasons why performance exceeded or failed to meet expectations Part of the control process includes preparing performance reports A performance report compares budgeted data to actual data in an effort to identify and learn from excellent performance and to identify and eliminate sources of unsatisfactory performance Performance reports can also be used as one of many inputs to help evaluate and reward employees Although this example focused on P&G’s campus recruiting efforts, we could have described how planning enables FedEx to deliver packages across the globe overnight, or how it helped Apple develop and market the iPad We could have discussed how the control process helps Pfizer, Eli Lilly, and Abbott Laboratories ensure that their pharmaceutical drugs are produced in conformance with rigorous quality standards, or how Kroger relies on the control process to keep its grocery shelves stocked We also could have looked at planning and control failures such as BP’s massive oil spill in the Gulf of Mexico In short, all managers (and that probably includes you someday) perform planning and controlling activities Decision Making Perhaps the most basic managerial skill is the ability to make intelligent, data-driven decisions Broadly speaking, many of those decisions revolve around the following three questions What should we be selling? Who should we be serving? How should we execute? Exhibit  1–2 provides examples of decisions pertaining to each of these three categories The left-hand column of Exhibit  1–2 suggests that every company must make decisions related to the products and services that it sells For example, each year Procter & Gamble must decide how to allocate its marketing budget across 25 brands that each generates over $1 billion in sales as well as other brands that have promising growth potential Mattel must decide what new toys to introduce to the market Southwest Airlines must decide what ticket prices to establish for each of its EXHIBIT 1–2 Examples of Decisions What should we be selling? Who should we be serving? How should we execute? What products and services should be the focus of our marketing efforts? Who should be the focus of our marketing efforts? How should we supply our parts and services? What new products and services should we offer? Who should we start serving? How should we expand our capacity? What prices should we charge for our products and services? Who should pay price premiums or receive price discounts? How should we reduce our capacity? What products and services should we discontinue? Who should we stop serving? How should we improve our efficiency and effectiveness? This page intentionally left blank Photo Credits Chapter Chapter Page 1: © Abel Mitja Varela/Getty Images RF; p 11: © Author’s Image/Punchstock RF; p 12: © Imagestate Media/John Foxx RF; p 16: © Miguel Medina/AFP/Getty Images Page 392: © Michael Sears/MCT/Newscom; p 400: © Francisco Cruz/Purestock/Superstock RF; p 404: © Janis Christie/Getty Images RF; p 405: © 2005 Comstock Images, JupiterImages Corporation RF Chapter Chapter 10 Page 27: © Purestock/SuperStock RF; p 30: © Digital Vision/PunchStock RF; p 32: Courtesy of Walmart; p 35: © Sandee Noreen; p 44: © Getty Images/flickr RF; p 47: Gotham Dream Cars Page 427: © Bloomberg via Getty Images; p 429: © Woods Wheatcroft/Aurora/Getty Images; p 435: © Royalty-Free/Corbis; p 439: © Rob Melnychuk/Getty Images RF Chapter Chapter 11 Page 83: Courtesy of University Tees, Inc.; p 85(top and bottom): © Sandee Noreen; p 92: © Keith Brofsky/Getty Images RF; p 109: Courtesy of Fast Wrap USA Page 477: © ZUMA Press, Inc./Alamy; p 481: © John Burke/Photolibrary/Getty Images; p 493: © TongRo Image Stock/Alamy RF; p 495: © JGI/Tom Grill/Getty Images RF Chapter Page 144: © ramzi hachicho/fotolia RF; p 147: © Yves Logghe/AP Images; p 149: © Mark Ralston/AFP/Getty Images Chapter 12 Page 531: © Imaginechina/AP Images; p 544: © Getty Images/PictureIndia RF; p 550: © The McGraw-Hill Companies, Inc./Andy Resek Chapter Page 187: © Kirby Lee/Getty Images; p 200: © Yellow Dog Productions/Getty Images RF; p 204: Courtesy of Will Hander at Snap Fitness; p 208: © Royalty-Free/ Corbis Chapter 13 Page 583: © David Goldman/AP Images for Frito-Lay; p. 585: © Royalty-Free/Corbis; p 598: © Ingram Publishing/SuperStock RF; p 603: © PRNewsFoto/Royal Caribbean International Chapter Page 233: © Bloomberg via Getty Images; p 242: © Photodisc Collection/Getty Images RF; p 245: © TRBfoto/Getty Images RF Chapter Page 286: © Brand X Pictures/PunchStock RF; p 290(top and bottom), 291: © Sandee Noreen; p 301: © Ryan McVay/Getty Images RF Chapter Page 342: © Sandee Noreen; p 357: © Ryan McVay/Getty Images RF; p 361: © Eric Noreen; p 364: © Stew Milne/ AP Images Chapter 14 Page 634: © Bloomberg via Getty Images; p 636: © The McGraw-Hill Companies, Inc./Jill Braaten; p 640: © Steve Mason/Getty Images RF; p 653: © Randy Allbritton/Getty Images RF Chapter 15 Page 675: © Mario Tama/Getty Images; p 687: © Jack Hollingsworth/Getty Images RF; p 691: © Monty Rakusen/Getty Images RF Appendix A Page 714 (top and bottom): © Eric Noreen 741 This page intentionally left blank Index Page numbers followed by n refer to notes Abbot Laboratories, 4, 14 Abercrombie & Fitch, 429 Absolute profitability, 728 Absorption costing activity-based, 130–133 activity-based costing compared to, 287, 289 in cost-plus pricing, 718–720 defined, 84, 234–235 variable costing income reconciled with, 239–242 variable vs., 235–239 Absorption costing income statement, 238–239 Accenture Ltd., 33 Account analysis, 39 Accounting majors, related to managerial accounting, 7–8 Accounts receivable turnover, 683–684, 693 Accrual concept, 31 Acid-test ratio, 682–683, 693 Action analysis activity-based costing, 331–336 assigning overhead costs to products, 331–334 ease of adjustment codes, 334 view of activity-based costing data, 334–336 Action analysis report, 310, 331 Activity batch-level, 131, 290–291 customer-level, 291 defined, 130–131, 290 defining, 294–295 denominator, 459 organization-sustaining, 291 product-level, 131, 291 unit-level, 290 Activity base, 33 Activity-based absorption costing, 130–133 Activity-based costing (ABC) absorption costing compared to, 287, 289 action analysis, 331–336 allocation bases and, 288–291 in China, 292 in construction industry, 298 cost pools and, 288–291 critical perspective of, 290 defined, 287 designing system for, 292–295 external reports and, 311 implementation steps in, 294 assign overhead costs to activity cost pools, 295–299 assign overhead costs to cost objects, 300–303 calculate activity rates, 299–300 define activities, activity cost pools, activity measures, 294–295 prepare management reports, 303–306 limitations of, 311–312 manufacturing costs and, 288 model of, 294 nonmanufacturing costs and, 287–288 overhead in, 288 overview of, 92, 287–291 process improvements using, 310–311 relevant costs and, 555 in Thailand, 310 traditional product costs compared to, 306–310 Activity-based management, 310 Activity cost pools, 290 assigning overhead costs to, 295–299 defined, 131 defining, 294–295 Activity measure defined, 131, 290 defining, 294–295 Activity rates calculating, 299–300 defined, 131 Activity variances, 398–399 defined, 399 in performance report, 401–404 Adams, Russell, 541n Adams, Susan, 109n Adidas, 343 Administrative costs, 30 Aéropostale, 685 Airbus, 29 Alcoa, 640 Aldrich, Lester, 87n Allocation first-stage, 296 second-stage, 300 of service department costs, 524–528 Allocation base activity-based costing and, 288–291 choice of, 91–92 defined, 89 inappropriate, 252 Allstate Insurance Company, 179 Almanac of Business and Industrial Financial Ratios, 694 AMA Annual Statement Studies, 694 Amazon.com, 584, 653 American Express, 477, 493 American Institute of Certified Public Accountants (AICPA), 79, 638n Anchoring bias, 17 Andreas STIHL, 239 Annuity, 623 Ansberry, Clare, 407n Apple Computer, 4, 12, 29, 636 Appraisal costs, 73, 74 APS, 310 Under Armour, 33 Arnold, Eric, 93n Arnst, Catherine, 27n Artisan Shutter Company, 640 Assan Aluminum, 287 Asset accounts, equation for, 635 Asset management, ratio analysis for, 683–685 Astore, Giuliano, 85, 85n AT&T, 583 Audi, Tamara, 367n Average collection period, 683–684, 693 Average sale period, 684, 693 Avoidable cost, 532 Bain & Company, 493 Balanced scorecard characteristics of, 490–493 compensation tied to, 495 customer loyalty, 493 defined, 490 performance measures for, 492 ROI and, 482 strategy and, 490–491, 493–494 sustainability and, 495 Balanced Scorecard Collaborative, 491 Balance sheet beginning, 350 budgeted, 365–367 comparative, 677 Bally’s Total Fitness, 204 Barr, Paul, 405n Batch-level activities, 131, 290–291 Bausch & Lomb, 484 743 744 Index Baxter International, 14, 435 Bays, Brad, 144n BearingPoint, 493 Bechtel International, 84 Beck, Melinda, 488n Benchmarking, 311 Best Buy, 484 BestSportsApparel.com, 394 Beverage Tasting Institute of Chicago, 481 Bias anchoring, 17 cognitive, 17–18 Bible, Lynn, 652n Bidwell, Chuck, 687 Bill of materials, 86 BMW, 493 Body Shop (The), 490 Boeing, 5, 84, 244, 334n, 550 Boise Cascade, 484 Bombardier Learjet, 30 Book value per share, 692, 693 Boonyanuwat, Nirachara, 310n Bottleneck, 547, 551 See also Constraints Botts, William, 531 Boyle, Matthew, 32n, 594n BP, Break-even analysis, 200–202 in dollar sales, 201–202 equation method of, 201 formula method of, 201 sales mix and, 210–211 segmented income statements and, 250–251 Break-even chart, 192 Break-even point defined, 190 in dollar sales, 201–202 Brewer, Peter C., 495n Brosnahan, Jan, 489n Brown, Erika, 286n Budget cash, 347, 348, 360–364 continuous, 344 defined, 3, 343–344 direct labor, 348, 356–357 direct materials, 348, 355–356 ending finished goods inventory, 358–359 flexible (see Flexible budget) manufacturing overhead, 348, 357–358 master (see Master budget) merchandise purchases, 354–355 participative, 345 perpetual, 344 planning, 394–397 production, 348, 353–354 sales, 347, 348, 352–353 self-imposed, 345 selling and administrative expense, 348, 359–360 See also Budgeting Budgetary slack, 345 Budgeting advantages of, 343 capital (see Capital budgeting) of Civil War Trust, 342 at Costume Specialists, 344 human factors in, 345–346 at New Balance, 343 responsibility accounting in, 344 strategy and, 343 See also Budget; Flexible budget; Master budget Budget period, choosing, 344–345 Budget variance, 461 Burger King, 688 Burgstahler, David, 720n Burritt, Chris, 32n Burrows, Peter, 482n, 636n Business majors, related to managerial accounting, 5–7 Business process, 14–16 Calabro, Lori, 495n4 Calagione, Sam, 205 Campbell Soup, 29 Canon Inc., 543 Capacity idle, 288n, 514–516 normal, 138n predetermined overhead rates and, 138–140 Capital budgeting cash flows in, 584–585 decisions involving, 584 defined, 584 internal rate of return method, 594–596 net operating income versus cash flows in, 584–585 net present value method, 589–594, 596–598 overview of, 584–585 payback method, 586–589 postaudit of investment projects, 603 preference decisions, 600–601 simple rate of return method, 601–603 at Staples, 583 time value of money in, 585 uncertain cash flows, 599–600 Caroline’s Desserts, 684 Cash budget, 348, 360–364 defined, 347 Cash equivalents, 636 Cash flows at Apple, 636 at Artisan Shutter Company, 640 in capital budgeting, 584–585 direct method of computing, 637–638 discounting, 585 equations for computing, 635, 635n free, 652–653 gross, 640–643 at Herald Metal and Plastic Works, 364 indirect method of computing, 637–640 at Kroger, 634 present value of series of, 623–624 uncertain, 599–600 uneven, 588–589 at Vines of Mendoza, 585 See also Statement of cash flows Caterpillar, 14 Cendrowski, Scott, 477n Certified Management Accountant (CMA), 7–8 Certified Public Accountant (CPA), Cessna Aircraft Company, 400 Charles Schwab, 287 Chasing, in inventory management, 685 Choi, Kunhee, 298n Chrysler, 233, 721 Cianbro, 92, 92n Cintas Corporation, Cisco Systems, 12 CIT Group, 675 Citigroup, 287, 675 Civil War Trust, 342 Clearing account, concept of, 97–98 Coca-Cola, 287, 484, 692, 728 Code of conduct for management accountants, 9–11 Cognitive bias, 17–18 Columbia Pictures, 108 Committed fixed costs, 35 Common cost, 29 Common fixed cost defined, 244–245 dividing among segments, 252–253 Common-size financial statements, 679–681 Compaq, 721 Comparative balance sheet, 677 Comparative financial statements, 676–679 Comparative income statement, for productline analysis, 540–541 Compensation tied to balanced scorecard, 495 Compound interest, 621–622 ConAgra Foods, 437 Condé Nast Publications, 541 Conformance, quality of, 73 Conmed, 242 Constrained resource contribution margin per unit of, 548–550, 731 utilization of, 547–551 Index Constraints at Boeing, 550 defined, 547 elevating, 550 managing, 550–551 multiple, 551 in profitability analysis, 728 relaxing, 550 Continuous budget, 344 Contra-asset accounts, equation for, 635, 638 Contribution approach advantages of, 242–243 to constructing income statements, 45 defined, 45 joint product costs and, 552–555 to segmented income statements, 244–253 Contribution format income statement, 45 traditional compared to, 44 variable costing, 236–237 Contribution margin in cost-volume-profit analysis, 189–191 defined, 45 per unit of constrained resource, 548–550 Contribution margin ratio (CM ratio), 194–196 Control defined, 343 detective, 24–25 internal, 24–25 preventive, 24–25 Controlling, 3–4 Conversion cost, 32 Cooper, Robin, 290n Coppertone, 145 Corporate governance, 23–25, 23n Corporate social responsibility, 14 Cost See under individual cost categories Cost analysis for product line and segment decisions, 538–540 Cost behavior cost classification for predicting, 33–38 defined, 33 linear, 40 mixed, 38, 39–40 variable and fixed, 37 Cost centers defined, 479 performance reports in, 404 Cost classification for assigning to cost objects, 28–29 for decision making, 45–47 for manufacturing companies, 29–31 for predicting cost behavior, 33–38 for preparing financial statements, 31–32 summary of, 28 Cost drivers in activity-based costing, 290 defined, 33, 91 in electronics industry, 33 flexible budgets with multiple, 404–406 Coster, Helen, 585n Cost flows in job-order costing, 93–101 cost of goods manufactured, 99 cost of goods sold, 99–101 labor, 95–96 manufacturing overhead, 96–98 materials, 94–95 model of, 107–108 nonmanufacturing, 98–99 in process costing, 146–149 in standard cost system, 472 Costing methods comparison of, 176 operation, 156 used in companies, 305 See also Job-order costing; Process costing Cost objects assigning overhead costs to, 300–303 cost classification for, 28–29 defined, 28 Cost of capital, 592 Cost of goods manufactured defined, 93 in job-order costing, 99 schedule of, 102–104 Cost of goods sold closing out to, 106 in job-order costing, 99–101 schedule of, 102–104 Cost of quality, 73–79 Cost-plus pricing absorption costing approach to, 718–720 defined, 714 Cost pools, 131, 288–291, 294–299 Cost reconciliation report, 155, 175 Cost structure choosing, 205–208 defined, 33 profit stability and, 205–207 sales commissions, 209 Cost system, normal, 90 Costume Specialists, 344 Cost-volume-profit (CVP) analysis applications of, 196–200 assumptions of, 188 basics of, 189–200 break-even analysis, 200–202 contribution approach, 242–243 contribution margin, 189–191 contribution margin ratio, 194–196 cost structure choice and, 205–208 defined, 188 margin of safety, 204–205 745 operating leverage, 207–208 profit stability, 205–207 relationships in equation form, 191–192 relationships in graphic form, 192–194 sales commissions, 209 sales mix, 209–211 target profit analysis, 202–204 variable costing and, 242–243 Cost-volume-profit (CVP) graph, 192–194 Covel, Simona, 533n, 640n, 684n Craft, Matthew, 187n Culp, 721 Cummins Engine, 721 Current ratio, 682, 693 Customer intimacy, 12 Customer-level activities, 291 Customer loyalty, measuring, 493 Customer value propositions, 12 CVP analysis See Cost-volume-profit (CVP) analysis Daihatsu Motors, 721 Darley, Adrian, 675 Dassault Aviation, 400 Debt management, 686–687 Debt-to-equity ratio, 686–687, 693 Decentralization, advantages and disadvantages of, 478–479 Decentralized organization, 478 Decision making, 4–5 activity-based costing and, 555 comparative income statement used for, 540–541 constrained resource utilization, 547–551 cost classification for, 45–47 cost concepts for, 532–538 defined, differential and total approaches reconciled, 536–538 fixed cost allocation and, 540–542 joint product costs and, 552–555 least-cost, 597–598 make or buy, 542–544 opportunity cost and, 533, 545 preference, 584, 600–601 product lines, adding and dropping, 538–542 relevant benefits for, 532–536 relevant costs for, 532–536, 538, 555 screening, 584, 600 segmented income statements and, 249 segments, adding and dropping, 538–542, 728–731 sell or process further decisions, 554–555 special orders, 545–546 variable costing for, 243 volume trade-off decisions, 731–733 Decremental costs, 46 746 Index Degree of operating leverage, 207 Delivery cycle time, 487 Deloitte, 14 Delta Airlines, 635 DeMartini, Robert, 343 Deming, W Edwards, 78 Denominator activity, 459 Dependent variable, 39 Depreciation in capital budgeting, 629 real or economic, 535 in statement of cash flows, 638–639 Desroches, Denis, 305n Detective control, 24–25 Deutsche Telekom, 675 Different costs for different purposes concept, 533 Differential analysis defined, 532 role of, in decision making, 532 total approach reconciled with, 536–538 See also Decision making Differential cost, 45–46, 532 Differential revenue, 45–46, 532 Direct cost, 28–29 Direct costing, 234 Direct exchange transactions, 636n2 Direct labor, 29 Direct labor budget, 348, 356–357 Direct labor cost, 29–30, 33n measuring, 88 Direct labor variances, 437–439 journal entries for, 472 Direct materials defined, 29 purchase of, and risk, 435 Direct materials budget, 348, 355–356 Direct materials cost, 29 in job-order costing, 94–95 measuring, 86 at Subway, 30 Direct materials standards, 429 Direct materials variances, 434–436 journal entries for, 471 Direct method of computing cash flows, 637–638 Direct method of determining net cash provided by operating activities, 671–673 Direct method of service department allocations, 180–181 Discounted value, 621 Discounting, 623 Discounting cash flows internal rate of return method, 585 net present value method, 589 Discount rate, 590, 623 Discretionary fixed costs, 35 Disney World, 244 District of Columbia, 407 Dividend payout ratio, 691–692, 693 Dividends, in economic downturn, 675 Dividend yield ratio, 692, 693 Dodes, Rachel, 429n Dogfish Head Craft Brewery, 205 Dumaine, Brian, 481n Dun and Bradstreet, 484 Duncan, David, 342n DuPont, 29, 482, 690 Duration drivers, 290 Earnings before interest and taxes (EBIT), 480 Earnings per share, 690–691, 693 Earnings quality, 653 Ease of adjustment codes, 334 EBIT (earnings before interest and taxes), 480 Economic depreciation, 535 Economic Value Added (EVA®), 484, 484n2 EDGAR, 692, 694 Edwards, Andrew, 691n Egger, Stefan, 34, 34n E.I du Pont de Nemours and Company See DuPont Einhorn, Bruce, 208n Elastic demand, 715 Elasticity of demand, 715–716 Eli Lilly and Company, 4, 14, 484 Emirates, 550 Ending finished goods inventory budget, 358–359 Engardio, Pete, 242n Engineering approach, 39 Enos, Michael, 109 Enron, 23 Enterprise risk management, 12–14 Equation method of break-even analysis, 201 Equation method of target profit analysis, 202 Equity multiplier, 687, 693 Equivalent units, 151 Equivalent units of production, 149–153 defined, 151 FIFO method, 171–175 weighted-average compared to FIFO, 173–174 Estee Lauder, 594 Esterl, Mike, 603n Ethan Allen, 29 Ethics, 9–11 Ethics Helpline, 11 EVA® (Economic Value Added), 484, 484n2 Evans, Michael, 585 External failure costs, 73–75 External reports activity-based costing and, 311 income statements and, 253–254 Extrinsic motivation, 17 ExxonMobil, 145 Facebook, 593 Factory burden, 30 Factory overhead, 30 Fairchild Semiconductor, 287 Fairclough, Gordon, 435n FASB Accounting Standards Codification (FASB Codification), 253n Fast Wrap, 109 Federal Mogul, 484 FedEx, 4, FIFO method of process costing, 171–176 applying costs in, 174–175 cost per equivalent unit in, 174 cost reconciliation report in, 175 defined, 151 equivalent units of production in, 171–172 weighted-average compared to, 171, 173–174, 176 Financial accounting, managerial vs., 2–3 Financial Accounting Standards Board (FASB), 253n Financial leverage, 686 Financial ratios See Ratio analysis Financial reporting, internal controls for, 25 Financial statement analysis common-size statements, 679–681 comparing across companies, 676 comparing over time, 677–679 defined, 676 limitations of, 676 McDonald’s, 678–679 ratio analysis (see Ratio analysis) Financial statements common-size, 679–681 comparative form, 676–679 cost classification for, 31–32 dollar and percentage changes on, 677–679 Financing activities defined, 637 on statement of cash flows, 640–643, 648–649 Finished goods defined, 93 ending inventory budget, 358–359 Firestone, 428 First-stage allocation, 296 Fisher Scientific International, 287 Fixed cost behavior of, 34–35 change in, 197–199 committed, 35 Index common, 244, 245, 252–253 defined, 34 discretionary, 35 managed, 35 in product-line analysis, 540–542 in service department charges to operating departments, 525, 527–528 traceable, 244–245, 252 Fixed cost behavior, 37 Fixed overhead variances, 463 Fletcher, June, 598n Flexible budget activity variances, 398–399 characteristics of, 394 common errors in, 406–407 defined, 394 in hospitals, 405 with multiple cost drivers, 404–406 performance reports in, 401–404 revenue variances, 399–401 spending variances, 399–401 standard costs in, 431 static planning budget vs., 394–397 use of, 397–398 variances in, 398–404 Ford Motor Company, 29, 584, 721 Formula method of break-even analysis, 201 Formula method of target profit analysis, 203 Four Seasons Dallas, 651 Four Seasons Maui, 651 Four Seasons San Francisco, 651 France Telecom, 675 Free cash flow, 652–653 FreeEdgar, 694 French, Rick, 472n Frito-Lay, 583 Full cost method, 235 Future value, present value and, 622 GAAP See Generally accepted accounting principles (GAAP) Gallo, Angela, 495n Gap, 438 Genentech, 14 General Electric, 493 Generally accepted accounting principles (GAAP), 3, 240n, 253, 253n, 311, 636, 637, 640, 673 General Mills, 145, 286 General Motors, 5, 233, 244, 479 Georgia-Pacific, 153, 484 Gold, Harry, 714, 714n Goodrich, Google, 12, 593 Gotham Dream Cars, 47 Graham, Jefferson, 44n Great Embroidery LLC, 14 Greenleaf Book Group, 200 Greenpeace International, 15 Greyhound’s Bolt Bus, 545 Gross cash flows, 640–643 Gross margin, 44 Gross margin percentage, 688, 693 Grunberg, Sven, 593n Guarino, Jennifer, 687 Gulfstream Aerospace, 400 Haddad, Joe, 83n Hallmark, 84 Han, Seungheon, 298n Hanesbrands, 429 Harvard Medical School Hospital, 38 Hasbro Inc., 364 Hatch, Toby, 305n Herald Metal and Plastic Works, 364 Hershey Foods, 484 Hewlett-Packard, 5, 29, 179, 543 High-low method of cost analysis, 39, 40–42 Holmes, Elizabeth, 429n, 685n Home Depot, 44 Honda, 493 Hoover’s Online, 694 Hopper, Trevor, 290n Horizontal analysis, 676, 677–679 Huang, Patricia, 205n Hubbard, Graham, 495, 495n Hudson, Kris, 651n Hurdle rate, 595 Husky Injection Molding, 484 Hyatt Hotel, 478 Hypertherm Inc., 357 Idle capacity, 288n transfer pricing with, 514–516 IFRS See International financial reporting standards (IFRS) Ignis Asset Management, 675 Income statement absorption costing, 238–239 budgeted, 364–365 companywide, 253 comparative, 540–541 contribution format traditional compared to, 44–45 variable costing, 236–237 external reporting perspective on, 253–254 segmented, 244–253 break-even analysis, 250–251 common mistakes, 251–253 decision making, 249 example of, 246–249 financial information in, 253–254 super-variable costing, 280, 282 traditional format, 44–45 747 variable costing, 280–282 Income taxes, capital budgeting and, 629–631 Incremental analysis, 198 Incremental cost, 46 Incremental net operating income, 584 Independent variable, 40 Indirect cost, 29 Indirect labor, 30 Indirect manufacturing cost, 30 Indirect materials defined, 29 in job-order costing, 94–95 Indirect method of computing cash flows, 637–640 Indirect method of determining net cash provided by operating activities, direct method vs., 671–673 Industrial Motion Inc., 533 Industry Norms & Key Business Ratios, 694 Inelastic demand, 715 Inspection costs, 74 Inspection time, 487 Institute of Management Accountants (IMA), 1n, 7, 8, Ethics Helpline, 11 Statement of Ethical Professional Practice, 9–11 Intercontinental Hotels Group, 404 Interdepartmental services, 179 Interest, mathematics of, 621–622 Intermediate product, 553 Internal control, 24–25 Internal control report, 23–24 Internal failure costs, 73–75 Internal rate of return, 594 Internal rate of return method of capital budgeting defined, 594 illustration of, 594–595 net present value compared to, 596 preference decisions, 600 time value of money in, 585 International financial reporting standards (IFRS), 3, 253, 636, 637, 640, 673 International Organization for Standardization (ISO), 78 Internet, catalogs and, 245 Intrinsic motivation, 17 Intuit, 493 Inventoriable costs, 31 Inventory budget, ending finished goods, 358–359 Inventory management, in apparel industry, 685 Inventory purchases in budgeting, 354–355 Inventory turnover ratio, 684, 693 748 Index Investing activities defined, 637 gross cash flows, 640–643 on statement of cash flows, 640–643, 647–648 Investment center defined, 479 evaluating performance of, 479–483 Investment planning See Capital budgeting ISO 9000 standards, 78–79 Isuzu Motors, 721 ITT Automotive, 721 J&B Wholesale, 287 Jaguar, 493 Jargon, Julie, 687n J.C Penney, 429, 484 Job, defined, 84 Job cost sheet, 86–87 Job-order costing defined, 84 direct labor cost, 88 direct materials cost, 86 example of, 85–93 at Fast Wrap, 109 flow of costs, 93–101 cost of goods manufactured, 99 cost of goods sold, 99–101 labor, 95–96 manufacturing overhead, 96–98 materials, 94–95 model of, 107–108 nonmanufacturing, 98–99 job cost sheet, 86–87 overhead cost allocation base for, 91–92 underapplied and overapplied, 104–108 overhead rates manufacturing, 89–90 predetermined, 88–89, 90–91, 107 overview of, 84–85 process costing compared to, 145–146 schedules of cost of goods manufactured and cost of goods sold, 102–104 service companies, 108–109 unit costs, 92–93 Johnson, George, 47 Johnson & Johnson, 14 Joint cost, 553 Joint product costs and the contribution approach, 552–555 Joint products, 553 Jones Apparel Group, 429 JPMorgan Chase, 675 Just-in-time production (JIT), 16, 74 J.W Hulme Company, 687 Kang, Stephanie, 343n Kansas City Power & Light, 484 Kaplan, Robert S., 495 KB Home, 30 Kellogg’s, 145 Kelly Blue Book, 535 Kennedy, Frances, 489n KFC, 594 Kharif, Olga, 210n Kiley, David, 47n Kim, Yong-Woo, 298n Kimes, Mina, 286n King, Alfred, 334n Komatsu, 721 Kowitt, Beth, 153n Kozlowski, Eric, 533 KPMG, 14 Kroger, 4, 244, 634, 635 Labor cost direct and indirect, 29–30 entries for, 148 in job-order costing, 95–96 labor rates compared to, 149 managing in a difficult economy, 357 measuring, 88 in process costing, 147–149 Labor efficiency variance, 432, 438–439 Labor rate variance, 432, 438 Lakewood, California, outsourcing by, 367 Lauricella, Tom, 675n Lawson, Raef, 305n Lawton, Christopher, 33n Leadership, 16–18 Lean accounting, 489 Lean operating performance measures, 489 Lean Production at Conmed, 242 defined, 16 at Louis Vuitton, 16 Lean thinking, 16 Leap, Terry, 14n Least-squares regression analysis, 39, 40, 42–44 using Microsoft Excel, 67–69 Lee, Louise, 245n Leverage financial, 686 operating, 205, 207–208 Levi Strauss, 84 Liability accounts, equation for, 635 LIFO inventory flow assumption, 240n Lighthizer, James, 342n Limited Brands, 438 Linear cost behavior, 40 Linearity assumption, relevant range and, 35–37 Linear programming, 551 Liquidity defined, 681 measures of, 681–683 Liu, Lana Y.J., 292n L L Bean, 584 Lobb, Annelena, 675n Los Angeles Angels, 187 Loughry, Misty L., 14n Louis Vuitton, 16 Lowe’s, 44, 287, 643 LSG SkyChefs, 84 Lunney, Elizabeth, 361n Lunsford, J Lynn, 550n Macy’s Department Stores, 640 Maidenform Brands, 429 Majestic Ocean Kayaking, 37 Major, Maria, 290n Make or buy decision, 542–544 defined, 542 example of, 543–544 strategic aspects of, 543 Maker’s Mark, 481 Maltby, Emily, 394n Managed fixed costs, 35 Management accountant code of conduct for, 9–11 salaries of, Management by exception, 393 Management reports, in activity-based costing, 303–306 Managerial accounting accounting majors related to, 7–8 business majors related to, 5–7 corporate social responsibility perspective of, 14 defined, enterprise risk management perspective of, 12–14 ethics perspective of, 9–11 financial vs., 2–3 importance of, to careers, 5–8 leadership perspective of, 16–18 measurement skills in, 8–9 overview of, 1–2 process management perspective of, 14–16 strategic management perspective of, 11–12 Manufacturing costs activity-based costing and, 288 classification of, 29–31 defined, 29–30 direct labor, 29–30 direct materials, 29 Manufacturing cycle efficiency (MCE), 488–489 Manufacturing cycle time, 487–488 Manufacturing overhead Index applying, 97–98 cost flow of, 89–90, 96–98 defined, 30 variable, 430–431, 439–442 Manufacturing overhead budget, 348, 357–358 Margin contribution, 45, 189–191, 194–196, 548–550 gross, 44 product, 303, 306–307 in ROI, 480–482 segment, 244 Marginal cost, 46 Marginal costing, 234 Marginal revenue, 46 Margin of safety, 204–205 Market performance, ratio analysis of, 690–692 Market price, 517 Markup defined, 714 on variable cost, 716–718 Markup percentage, determining, 719–720 Marriot International, 404 Marston, Gregg, 85n Maskell, Brian, 489n Mason, Richard, 652n Master budget assumptions for, 347–348, 350–352 balance sheet, 350, 365–367 cash budget, 348, 360–364 defined, 343 direct labor budget, 348, 356–357 direct materials budget, 348, 355–356 ending finished goods inventory budget, 358–359 estimates for, 347–348 income statement, 364–365 inventory purchases, 354–355 manufacturing overhead budget, 348, 357–358 merchandise purchases budget, 354–355 overview of, 346–348 preparing, 348–367 production budget, 348, 353–354 questions answered by, 347–348 sales budget, 348, 352–353 selling and administrative expense budget, 348, 359–360 Matching principle, 31 Materials direct and indirect, 29, 94–95 entries for, 148 in job-order costing, 94–95 in process costing, 147–149 purchase and issue of, 94–95 raw, 29, 93 Materials price variance, 432, 435, 442–443 Materials quantity variance, 432, 436, 442–443 Materials requisition form, 86 Matlack, Carol, 400n Matsushita Electric, 721 Mattel, Maywood, California, outsourcing by, 367 McCartney, Scott, 301n McDonald’s, 428, 444, 678, 688 McGregor, Jena, 493n, 544n Megabus, 545 Meijer, 438 Merchandise purchases budget, 354–355 Merck & Co., 584 Mergent Industrial Manual and Mergent Bank and Finance Manual, 694 Miami University, 83 Michaels, Daniel, 550n Michelin, 179 Microsoft, 14, 210, 482, 692 Miller, John W., 147n Mills, John, 652n Mitsubishi Kasei, 179, 721 Mixed costs analysis of, 38–44 high-low method, 39, 40–42 least-squares regression method, 39, 42–44 scattergraph method, 39–40 behavior of, 38, 39–40 defined, 37 Morben-Eeftink, Tracy, 37, 37n Moreno, Arturo, 187 Motivation, extrinsic and intrinsic, 17 Move time, 487 Mt Sinai Hospital, 179 Multiple predetermined overhead rate, 107 Multiplier, equity, 687, 693 Murphy, Maxwell, 643n Nalley’s, 146 Nassauer, Sarah, 404n National Basketball Association, 394 National Health Service (NHS), 547 NEC, 721 Needleman, Sarah E., 14n, 344n, 394n Negotiated transfer prices, 512–516 Nestlé, 15 Net book value, 480 Net cash provided by operating activities, 637 direct method of determining, 671–673 Net operating income, 44 cash flows versus, 584–585 defined, 480 explaining changes in, 243 749 in return on investment, 480 super-variable costing reconciled with variable costing, 281–282 variable costing, 237 variable costing reconciled with absorption costing, 239–242 Net present value, 589 Net present value method of capital budgeting, 589–594 cash flows, 584–585 defined, 589 example of, 593–594 illustration of, 589–592 income taxes and, 629–631 internal rate of return compared to, 596 least-cost decisions, 597–598 preference decisions, 600–601 recovery of original investment, 592–593 time value of money in, 585 total-cost approach, 596–597 Net profit margin percentage, 688–689, 693 New Balance, 343 Nike, 343, 438 Nippodenso, 721 Nissan, 721 Nonmanufacturing costs activity-based costing and, 287–288 defined, 30–31 job-order costing and, 98–99 Nonprofit organizations, performance reports in, 404 Non–value-added activities, 488 Nordstrom, 12 Noreen, Eric, 720n Normal capacity, 138n Normal cost system, 90 Norton, David, 495 Nucor Corporation, 392 O’Connell, Vanessa, 438n OECD Principles of Corporate Governance, 23n Office Depot, 438 O’Hanlon, John, 484n3 Old Rip Van Winkle Distillery, 481 Olin, 484 Olympus, 721 Operating activities defined, 637 direct method of computing, 637–638 indirect method of computing, 637–640, 644–651 net cash provided by, 637, 671–673 Operating assets, 480 Operating cycle, 685, 693 Operating departments defined, 524 service department charges to, 524–528 750 Index Operating leverage, 205, 207–208 degree of, 207–208 Operating performance measures, 486–489 delivery cycle time, 487 lean, 489 manufacturing cycle efficiency, 488–489 manufacturing cycle time, 487–488 throughput time, 487–488 Operational excellence, 12 Operation costing, 156 Operations Workforce Optimization, 438 Opportunity cost decision making and, 545 defined, 46, 533 Oracle, 543 Order-filling costs, 30 Order-getting costs, 30 Organization for Economic Co-Operation and Development, 23n Organization-sustaining activities, 291 Organization-sustaining costs, 288 Out-of-pocket costs, 594 Outsourcing by municipalities, 367 tasks rather than jobs, 544 Overapplied overhead, 104–108, 464 Overhead application defined, 89 in standard cost system, 460 Overhead cost in action analysis report, 331–334 allocation base for, 91–92 assigning to activity cost pools, 295–299 assigning to cost objects, 300–303 definition of, in activity-based costing, 288 entries for, 148 manufacturing, 30, 89–90, 96–98 in process costing, 147–149 underapplied and overapplied, 104–108, 464 Overhead rates manufacturing, 89–90 predetermined, 88–89, 90–91, 138–140, 430, 459–460 Overhead variances fixed, 463–464 reconciling underapplied or overapplied overhead with, 464 Paladino, Robert, 491, 491n Pan, Fei, 292n Papa John’s, 477 Participative budget, 345 Passariello, Christina, 16n Pauli, George, 14 Payback method of capital budgeting defined, 586 evaluation of, 586–587 example of, 587–588 uneven cash flows, 588–589 Payback period, 586 Peasnell, Ken, 484n3 Peers, Martin, 653n PepsiCo, 244 Peregrine Outfitters, 287 Performance measurement balanced scorecard, 490–495 cost center, 479 decentralization and, 478–479 delivery cycle time, 487 investment center, 479 lean operating, 489 manufacturing cycle efficiency, 488–489 manufacturing cycle time, 487–488 operating, 486–489 profit center, 479 residual income, 483–486 responsibility accounting, 479 return on investment, 479–483 throughput time, 487–488 transfer pricing, 512–518, 524–528 See also Standard cost variance analysis; Standard costs Performance report activity, revenue, spending variances in, 401–404 in cost centers, 404 defined, in hotel industry, 404 in nonprofit organizations, 404 Period costs, 31, 44, 93 Perlroth, Nicole, 204n Perpetual budget, 344 PetroHawk Energy, 594 Pfeifer, Brian, 533 Pfizer, 4, 544 Phase Consulting, 405 Pioneer Corporation, 541 Pizza Hut, 594 Planning, 3, 343 Planning budget deficiencies of static, 394–397 defined, 394 Plantwide overhead rate, 107 Pleven, Liam, 87n PNC Bank, 14 On Point Promos, 83 Postaudit, 603 Predatory prices, 714n1 Predetermined lump-sum amounts, 525 Predetermined overhead rates capacity and, 138–140 computing, 88–89 defined, 89 multiple, 107 need for, 90–91 in standard cost system, 459–460 variable portion of, 430 Preference decisions, 584, 600–601 Present value computation of, 622–623 defined, 621 future value and, 622 interest, 621–622 of series of cash flows, 623–624 tables, 627–628 Press, Jim, 11 Press Ganey Associates, 488 Prevention costs, 73–74 Preventive control, 24–25 Price discrimination, 714n1 Price-earnings ratio, 691, 693 Price elasticity of demand, 715–716 Price per unit, standard, 429 Price standards, 428 Price variance defined, 432 materials, 435, 442–443 Pricing, transfer, 512–518, 524–528 Pricing products and services cost-plus pricing absorption costing approach to, 718–720 defined, 714 problems with absorption costing approach, 720 discrimination in, 714n1 economists’ approach to, 715–718 markup, 714 predatory, 714n1 price elasticity of demand, 715–716 profit-maximizing price, 716–718 target costing, 721–722 Prime cost, 32 Process costing computing and applying costs in, 153–155 cost flows in, 146–149 materials, labor, and overhead, 147–149 processing departments, 146 cost reconciliation report in, 155 defined, 145 equivalent units of production in, 149–153 FIFO method of, 151, 171–176 job-order costing compared to, 145–146 at Procter & Gamble, 144 weighted-average method of, 151–153 applying costs, 153–154 cost per equivalent unit, 153 Process improvement, activity-based management for, 310–311 Processing departments, 146 Process management, 14–16 Index Process time, 487 Procter & Gamble (P&G), 3–4, 14, 144, 153 Product cost flows, model of, 107–108 Product costs, 44 activity-based compared to traditional, 306–310 defined, 31 Production budget, 348, 353–354 Product leadership, 12 Product-level activities, 131, 291 Product-line analysis, 538–542 Product margin, 303 in traditional cost system, 306–307 Profitability, segmented, 254 Profitability analysis absolute, 728 defined, 728 managerial implications of, 733–734 ratios for, 688–690 relative, 728–731 volume trade-off decisions, 731–733 Profitability index defined, 729 managerial implications of, 733–734 project, 600–601 in relative profitability analysis, 729–731 in volume trade-off decisions, 731–733 Profit center, 479 Profit-maximizing price, 716–718 Profit ratio, 196n Profit stability, cost structure and, 205–207 Project profitability index, 600–601 Property, plant, and equipment account, cash flow analysis of, 641–642 Providence Portland Medical Center (PPMC), 27 Public Company Accounting Oversight Board, 23 Pulte Homes, 87 Purdey, 93 Quaker Oats, 484 Quality, international aspects of, 78–79 Quality circles, 73 Quality cost appraisal costs, 74 defined, 73 distribution of, 75–76 external failure costs, 75 internal failure costs, 74–75 prevention costs, 73–74 quality of conformance, 73, 75 typical, 74 Quality cost reports defined, 76 in graphic form, 76–77, 78 uses of, 77–78 Quality of conformance, 73, 75 Quality Service Associates Inc., 684 Quantity of materials purchased, 442 Quantity of materials used, 442 Quantity per unit, standard, 429 Quantity standards, 428 Quantity variance defined, 432 materials, 436, 442–443 Queue time, 487 Quick ratio, 682–683 R2 statistic, 67 Ramsey, Mike, 583n Range of acceptable transfer prices, 513 Ratanamanee, Wanida, 310n Ratio analysis accounts receivable turnover, 683–684, 693 acid-test ratio, 682–683, 693 asset management, 683–685 average collection period, 683–684, 693 average sale period, 693 book value per share, 692, 693 current ratio, 682, 693 debt management, 686–687 debt-to-equity ratio, 686–687, 693 dividend payout ratio, 691–692, 693 dividend yield ratio, 692, 693 earnings per share, 690–691, 693 equity multiplier, 687, 693 gross margin percentage, 688, 693 inventory turnover, 684, 693 liquidity, 681–683 market performance, 690–692 net profit margin percentage, 688–689, 693 operating cycle, 685, 693 price-earnings ratio, 691, 693 profitability, 688–690 quick ratio, 682–683 return on equity, 689–690, 693 return on total assets, 689, 693 sources of financial ratios, 694 as starting point, 676 summary of, 692–694 times interest earned ratio, 686, 693 total asset turnover, 685, 693 working capital, 681–682, 693 Raw materials defined, 29, 93 managing costs, in apparel industry, 429 See also Materials Real depreciation, 535 Reciprocal method of service department allocations, 182 Reciprocal services, 179 Reddy, Sudeep, 407n Reebok, 28 751 Regression line, 42 Reichheld, Fred, 493 Relative profitability, 728–731 Relevant benefits defined, 532 identifying, 532–536 Relevant costs activity-based costing and, 555 for decision making, 533 defined, 532 identifying, 532–536 isolating, 538 Relevant range defined, 36 fixed costs and, 36 linearity assumption and, 35–37 Residual income defined, 479, 483 divisional comparison and, 486 Economic Value Added (EVA®), 484 motivation and, 485–486 Responsibility accounting, 444 cost, profit, and investment centers, 479 defined, 344 Responsibility accounting system, 479 Responsibility center, 479 Retained earnings, cash flow analysis of, 642–643 Return on equity, 689–690, 693 Return on investment (ROI) criticisms of, 482–483 defined, 479–480 at DuPont, 482 elements of, 483 formula, 480 at Microsoft, 482 net operating income in, 480 at Old Rip Van Winkle Distillery, 481 operating assets in, 480 understanding, 480–482 Return on total assets, 689, 693 Revenue differential, 45–46, 532 marginal, 46 Revenue variances, 399–401 defined, 400 in performance report, 401–404 Reynolds Consumer Products, 145 Risk management, 12–14 in book publishing industry, 200 direct materials purchases, 435 enterprise, 12–14 power outage, 14 Rite Aid, 594 Ritz-Carlton, 12, 404 Rogers, Bill, 714n ROI See Return on investment (ROI) Rolander, Niclas, 593n 752 Index Rolex, 12 Rolls-Royce, Royal Caribbean Cruises, 603 Ryan, Jodi, 7n Saab, Sabel, Kris, 246 Safeway, 244 Sales budget, 348, 352–353 defined, 347 Sales commissions, structuring, 209 Sales mix, 209–211 break-even analysis and, 210–211 defined, 209 Sales volume, change in, 197–199 Sammons, Mary, 594 Sanchanta, Mariko, 11n San Jose, California, outsourcing by, 367 Sarbanes-Oxley Act of 2002, 23–24, 23n Saritprit, Pieanpon, 310n SAS, 536 Scarcity, as strategy, 481 Scattergraph method of cost analysis, 39–40 Schedule of cost of goods manufactured, 102–104 Schedule of cost of goods sold, 102–104 Schiffel, Lee, 8n Schneider Electric, 427 Schroeder, David L., 8n Schwartz, Don, 67n Scott Paper, 145 Screening decisions, 584, 592, 600 Seagate Technologies, 33, 286 Sears, 5, 428, 641 Seattle Opera Company, 404 Second-stage allocation, 300 Segarra, Marielle, 233n Segmented income statements at 3M, 254 break-even analysis and, 250–251 common fixed cost, 244, 245 common mistakes in, 251–253 contribution approach and, 244–253 decision making and, 249 example of, 246–249 financial information in, 253 levels of, 246–249 segment margin, 244 traceable fixed cost, 244–245 Segmented profitability, 254 Segment margin, 244 Segments adding and dropping, 538–542, 728–731 defined, 3, 234 Self-imposed budget, 345 Sell GmbH, 550 Selling, general, and administrative (SG&A) costs, 31 Selling and administrative expense under absorption costing, 235 under variable costing, 235 Selling and administrative expense budget, 348, 359–360 Selling costs, 30 Selling price change in, 200 setting target, 718 See also Pricing products and services Sell or process further decisions, 554–555 Semivariable costs See Mixed cost Service companies, job-order costing in, 108–109 Service department, 524 Service department allocations, 179–182 direct method, 180–181 reciprocal method, 182 step-down method, 181–182 Service department charges to operating departments, 524 actual vs budgeted costs, 525 by behavior, 525–527 example of, 526–527 fixed costs, 525, 527–528 guidelines for, 525–526 pitfalls in, 527–528 variable costs, 525 Services interdepartmental, 179 reciprocal, 179 SG&A (selling, general, and administrative) costs, 31 Sharp, 721 Shell, 512 Shenzhen Hepalink, 435 Shidoni Foundry, 714 Shin, Sungwon, 298n Shirouzu, Norihiko, 11n Silicon Valley Bank, 484 Simmons, Mary, 536 Simple rate of return method of capital budgeting, 601–603 Six Flags, 479 Smith, Carl S., 239n Smith, Kenneth A., 8n Smith, Melanie R., 495n Smith & Hawken, 245 Smoke Jazz and Supper Club, 14 Snap Fitness, 204 Social media, Greenpeace’s use of, 15 Social responsibility, corporate, 14 Sony, 29 Southwest Airlines, 4–5, 12, 14, 38, 490 Special orders, 545–546 Specpan, 598 Spector, Mike, 587n Spending variances, 399–401 Split-off point, 553 Spors, Kelly K., 640n, 684n Sporthotel Theresa, 34 Sprint, 484 Standard, 428 Standard & Poor’s Industry Survey, 694 Standard cost card, 430 Standard cost per unit, 430–431 Standard costs advantages of, 444 defined, 428 flexible budgets and, 431 potential problems with, 444–445 practical vs ideal, 429n setting direct labor, 430 direct materials, 429 variable manufacturing overhead, 430–431 See also Standard cost variance analysis Standard cost system budget variance, 461 cost flows in, 472 fixed overhead, 463–464 overhead application in, 460 predetermined overhead rates in, 459–460 reconciling overhead variances, 464 volume variance, 461–462 Standard cost variance analysis direct labor, 437–439 direct materials, 434–436 labor efficiency, 438–439 labor rate, 438 managerial implications of, 444–445 materials price, 435, 442–443 materials quantity, 436, 442–443 model for, 432–433 variable manufacturing overhead, 439–442 variable overhead efficiency, 440–442 variable overhead rate, 440–442 Standard hours allowed, 433, 460 Standard hours per unit, 430 Standard price per unit, 429 Standard quantity allowed, 433 Standard quantity allowed for the actual output, 434 Standard quantity per unit, 429 Standard rate per hour, 430 Staples, 583 Starbucks, 14 Statement of cash flows defined, 635 direct exchange transactions, 636n2 effects of changes in noncash balance sheet accounts on financing section, 641, 648–649 on investing section, 641 Index on net income, 639–640, 646–647 equations for computing cash flows, 635 example of, 644–651 financing activities, 637, 640–643, 648–649 gross cash flows, 640–643 interpreting, 651–653 investing activities, 637, 640–643, 647–648 key concepts, 636–643 summary of, 643–644 noncash balance sheet accounts and, 650–651 operating activities defined, 637 direct method of computing, 637–638 indirect method of computing, 637– 640, 644–651 net cash provided by, 637, 671–673 organizing, 636–637 property, plant, and equipment, 641–642 retained earnings, 642–643 Statement of Ethical Professional Practice, 9–11 Statistical process control, 73 Steel, Emily, 15n Steiner, Christopher, 12n, 200n Step-down method of service department allocations, 181–182 Step-variable costs, 36 Stern, Stewart & Co., 484n2 Stockholders’ equity accounts, equation for, 635 Strategic management, 11–12 Strategy balanced scorecard and, 490–491, 493–494 defined, 11 failure to execute, 491 of scarcity, 481 Stratton, William O., 305n Suboptimization, 512, 517 Subway, 30, 428 Sunk cost, 46–47, 532 Super-variable costing, 279–282 defined, 279 income statements, 280 reconciling variable costing income with, 281–282 variable costing, 279–280 Sustainable Investment Research Analyst Network (SIRAN), 495 Suthummanon, Sakesun, 310n Sysco Foods, 287 Taco Bell, 594 Takahashi, Yoshio, 11n Target costing, 721–722 Target profit analysis, 200, 202–203 defined, 202 equation method of, 202 formula method of, 203 in terms of dollar sales, 203 Taylor, Alex, III, 149n Taylor, Doug, 427n Tenneco, 149 Texas Instruments, 29, 721 Thomson, Jeff, 1n 3M, 14, 254 Throughput time, 487–488 Times interest earned ratio, 686, 693 Time ticket, 88 Time value of money, 585 See also Present value Tkaczyk, Christopher, 477n, 536n Total asset turnover, 685, 693 Total-cost approach to capital budgeting, 596–598 Touch labor, 29 Towers Perrin, 495n Towers Watson, 495 Toyoda, Akio, 11 Toyota Motor Corporation, 11, 29, 84, 512, 721 Toys ”R” Us, 438, 484 Traceable fixed cost assigning among segments, 252 defined, 244 identifying, 245 Traditional cost system activity-based costing compared to, 306–310 product margins computed using, 306–307 Traditional format income statement, 44–45 contribution compared to, 44 Transaction drivers, 290 Transfer prices at cost, 516–517 defined, 512 divisional autonomy and, 517 idle capacity and, 514–516 international aspects of, 518 at market price, 517 negotiated, 512–516 range of acceptable, 513 service departments to operating departments, 524–528 suboptimization and, 512, 517 Transfer pricing, 512–518 Transferred-in costs, 148 Treacy, Michael, 12n Trend analysis, 677–679 Trend percentages, 678 Trippetti, Debora, 85 Tryphonides, Andrea, 675n Tschang, Chi-Chu, 364n 753 Tuna, Cari, 357n Tupperware, 484 Turnover accounts receivable, 683–684, 693 defined, 480–481 inventory, 684, 693 total asset, 685, 693 Underapplied overhead, 104–108, 464 Unit costs behavioral side of calculating, 239 computing, 92–93 United Airlines, 245, 547 United Food and Commercial Workers Union, 438 U.S Marine Corps, 310 United States Postal Service, 484 Unit-level activities, 290 University of Washington, 179 University Tees, 83 Vail Resorts, 547 Value chain, 15–16, 542 VanderMey, Anne, 30n, 545n Vanilla Bicycles, 12 Van Winkle, Julian III, 481 Van Winkle, Preston, 481 Variable cost, 33–34 change in, 198–199 defined, 33 markup on, 716–718 in service department charges to operating departments, 525 Variable cost behavior, 37 Variable costing absorption costing income reconciled with, 239–242 absorption vs., 235–239 advantages of, 242–243 defined, 234 income statements, 280–281 reconciling super-variable costing income with, 281–282 super-variable costing and, 279–280 Variable costing contribution format income statement, 236–237 Variable expense ratio, 196–197 Variable manufacturing overhead standards, 430–431 Variable manufacturing overhead variances, 439–442 Variable overhead efficiency variance, 432, 440–442 Variable overhead rate variance, 432, 440–442 Variance analysis model for, 432–433 at Nucor Corporation, 392 See also Standard cost variance analysis 754 Variance analysis cycle, 393–394 Variances activity, 398–399 budget, 461 direct labor, 437–439, 472 direct materials, 434–436, 471 fixed overhead, 463 flexible budget, 398–404 journal entries for, 471–472 labor efficiency, 432, 438–439 labor rate, 432, 438 materials price, 432, 435 materials quantity, 432, 436 price, 432 quantity, 432 revenue, 399–401 spending, 399–401 variable manufacturing overhead, 439–442 variable overhead efficiency, 432, 440–442 variable overhead rate, 432, 440–442 volume, 461–462 VBT Bicycling Vacations, 85 Vegas Valley Angels, 531 Index Ventoro Institute LLC, 531 Vertical analysis, 676, 679–681 Vertically integrated, 542 Vilar Performing Arts Center, 246 Vines of Mendoza, 585 Virginia Department of Transportation, 407 Virtuoso, 12 Vivendi, 675 Vizio Inc., 33 Volume trade-off decisions, 731–733 Volume variance, 461–462 Volvo, 493 Wakabayashi, Daisuke, 541n Walmart, 12, 32 Walt Disney Company, 244, 635 Washington Trails Association, 361 Watlow Electric Manufacturing Company, 489 Weber, Joseph, 437n Weighted-average method of process costing, 151–153 applying costs in, 153–154 cost per equivalent unit computed with, 153 defined, 151 FIFO method compared to, 171, 173–174, 176 Wellness scorecard, 495 Wendy’s, 688 Westbrook Partners LLC, 651 Western River Expeditions, 291 White, Sacha, 12 Wiersema, Fred, 12n Wild Turkey, 481 Wilkes, Mary, 405 W.L Gore, 12 Wolf, Carol, 32n Working capital, 681–682, 693 defined, 585 Work in process, 93 Wyndham Hotels and Resorts, 404 Xu Ji Electric Company, 292 YUM! Brands, 584, 594 Zimbalist, Andrew, 394 Ziobro, Paul, 688n Zipcar, 44 ... University MANAGERIAL ACCOUNTING, FIFTEENTH EDITION Published by McGraw-Hill Education, Penn Plaza, New York, NY 10121 Copyright © 2015 by McGraw-Hill Education All rights reserved Printed in the United... aspects of managerial accounting T What Is Managerial Accounting? Many students enrolled in this course will have recently completed an introductory financial accounting course Financial accounting. .. r
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(""1*'34 Managerial Accounting: An Overview financial and managerial accounting is that financial accounting serves the needs of those outside the organization, whereas managerial accounting