CONTENTS
l Managerial Accounting and the Business Environment
The Work of Management and the Need (or Managerial Accounting
Information
Planning
Directing and Motivating
Controlling
The End Results of Managers' Activities
The Planning and Control Cycle
Comparison of Financial and Managerial Accounting
Emphasis on the Future
Relevance and Flexibility of Data
less Emphasis on Precision
Segments of an Organization
Generally Accepted Accounting Principles (GAAP)
Managerial Accounting-Not Mandatory
Expanding Role of Managerial Accounting
The Changing Business Environment
Just-in-Time (JlT)
Total Quality Management (TQM)
Process Reengineering
Automation
The Theory of Constraints (TOC)
International Competition
Organizational Structure
Decentralization
line and Staff Relationships
The Controller
Professional Ethics
Code of Conduct for Management Accountants
Company Codes of Conduct
Codes of Conduct on the International Level
The Certified Management Accountant (CMA)
Summary
Key Terms for Review
Questions
Exercises
Problems
Group Exercises
2 Cost Terms, Concepts, and Classifications
General Cost Classifications
Manufacturing Costs
Nonmanufacturing Costs
period Costs versus Product Costs
period Costs
Product Costs
Cost Classifications on Financial Statements
The Balance Sheet
The lncome Statement
Schedule of Cost of Goods Manufactured
Product Costs-A Closer look
Inventoriable Costs
An Example of Cost Flows
Cost Classifications for Predicting Cost Behavior
Variable Cost
Fixed Cost
Cost Classifications for Assigning Costs to Cost Obiects
Direct Cost
Indirect Cost
Cost Classifications for Decision Making
Differential Cost and Revenue
Opportunity Cost
Sunk Cost
Summary
Review Problem l: Cost Terms
Review Problem 2: Schedule of Cost of Goods Manufactured and
Income Statement
Key Terms for Review
Appendix 2A: Further Classification of Labor Costs
Questions
Exercises
Problems
Cases
Group Exercises
3 Systems Design: Job-Order Costing
The Need for Unit Product Cost Data
Types of Costing Systems
Process Costing
Job-Order Costing
Summary of Costing Methods
Job-Order Costing-An Overview
Measuring Direct Materials Cost
Job Cost Sheet
Measuring Direct Labor Cost
Application of Manufacturing Overhead
Choice of an Allocation Base for Overhead Cost
Computation of Unit Costs
Summary of Document Flows
Job-Order Costing-The Flow of Costs
The Pucchase and issue of Materials
Labor Cost
Manufacturing Overhead Costs
The Application of Manufacturing Overhead
Nonmanufacturing Costs
Cost of Goods Manufactured
Cost of Goods Sold
Summary of Cost Flows
Problems of Overhead Application
Underapplied and Overapplied Overhead
Disposition of Under- or Overapplied Overhead Balances
A General Model of Product Cost Flows
Multiple Predetermined Overhead Rates
Job-Order Costing in Service Companies
Use of Bar Code Technology
Summary
Review Problem: Job-Order Costing
Key Terms for Review
Questions
Exercises
Problems
Cases
Group Exercises
4 Systems Design: Process Costing
Comparison of Job-Order and Process Costing
Similarities between Job-Order and Process Costing
Differences between Job-Order and Process Costing
A Perspective of Process Cost Flows
Processing Departments
The Flow of Materials, Labor, and Overhead Costs
Materials, Labor, and Overhead Cost Entries
Equivalent Units of Prpduction
Weighted-Average Method
Production Report-Weighted-Average Method
Step l: Prepare a Quantity Schedule and Compute the Equivalent
Units
Step 2: Compute the Total and Unit Costs
Step 3: Prepare a Cost Reconciliation
A Comment about Rounding Errors
Operation Costing
Summary
Review Problem: Process Cost Flows and Reports
Key Terms for Review
Appendix 4A: FtFO Method
Questions
Exercises
Problems
Cases
Group Exercises
5 Systems Design: Activity-Based Costing and Quality Management
The Concept of Activity-Based Costing
Level One: Plantwide Overhead Rate
Level Two: Departmental Overhead Rates
Level Three: Activity-Based Costing
Design of an Activity-Based Costing System
Process Value Analysis (PVA)
identifying Activity Centers
Assigning Costs to Activity Centers
Selecting Cost Drivers
Graphic Example of Activity-Based Costing
Numerical Example of Activity-Based Costing
Comtek Sound, Inc.'s Basic Data
Direct Labor-Hours as a Base
Activities as a Base
Benefits and Limitations of Activity-Based Costing
Benefits of Activity-Based Costing
limitations of Activity-Based Costing
Activity-Based Costing and Service Industries
International Use of Activity-Based Costing
Quality Management
Grade
Quality of Design
Quality of Conformance
Quality of Conformance-A Closer Look
Prevention Costs
Appraisal Costs
Internal Failure Costs
External Failure Costs
Distribution of Quality Costs
Quality Cost Reports
Quality Cost Reports in Graphic Form
Use of Quality Cost Information
International Aspects of Quality
The ISO 9000 Standards
Summary
Review Problem: Activity-Based Costing
Key Terms for Review
Appendix 5A: Cosf Flows in an Activity-Based Cosfing System
Questions
Exercises
Problems
Cases
Group Exercises
6 Cost Behavior: Analysis and Use
Types of Cost Behavior Fhtterns
Variable Costs
True Variable versus Step-Variable Costs
The Linearity Assumption and the Relevant Range
Fixed Costs
Types of Fixed Costs
The Trend toward Fixed Costs
Fixed Costs and the Relevant Range
Mixed Costs
The Analysis of Mixed Costs
The High-Low Method
The Scattergraph Method
The Least-Squares Regression Method
The Use ofJudgment in Cost Analysis
Multiple Regression Analysis
Engineering Approach to Cost Study
The Contribution Format
Why a New income Statement Format?
The Contribution Approach
Summary
Review Problem l: Cost Behavior
Review Problem 2: High-Low Method
Key Terms for Review
Append'ix 6A: Least-Squares Regression Calculations
Questions
Exercises
Problems
Cases
Group Exercises
l THE CENTRAL THEME: Planning and Control
7 Cost-Volume-Profit Relationships
The Basics of Cost-Volume-Profit (CVP) Analysis
Contribution Margin
Contribution Margin Ratio (CM Ratio)
Some Applications of CVP Concepts
Importance of the Contribution Margin
Break-Even Analysis
Break-Even Computations
CVP Relationships in Graphic Form
Target Net Profit Analysis
The Margin of Sofety
CVP Considerations in Choosing a Cost Structure
Cost Structure and Profit Stability
Operating Leverage
Automation: Risks and Rewards from a CVP Perspective
Structuring Sales Commissions
The Concept of Sales Mix
The Definition of Sales Mix
Sales Mix and Break-Even Analysis
Sales Mix and per Unit Contribution Margin
Assumptions of CVP Analysis
Summary
Review Problem: CVP Relationships
Key Terms for Review
Questions
Exercises
Problems
Cases
Group Exercises
8 Variable Costing: A Tool for Management
Overvlew of Absorption and Variable Costing
Absorption Costing
Variable Costing
Unit Cost Computations
The Controversy over Fixed Overhead Cost
Income Comparison of Absorption and Variable Costing
The Definition of an Asset
Extended Comparison of Income Data
Effecl of Changes in Production on Net Income
Variable Costing
Absorption Costing
The Impact on the Manager
Other Factors in Choosing a Costing Method
CVP Analysis and Absorption Costing
Pricing Decisions
External Reporting and Income Taxes
Advantages of the Contribution Approach
Variable Costing and the Theory of Constraints
Impact ofJlT Inventory Methods
Summary
Revtew Problem
Key Terms for Review
Questions
Exercises
Problems
Cases
Group Exercises
9 Profit Planning
The Basic Framework of Budgeting
Definition of Budgeting
Personal Budgets
Difference between Planning and Control
Advantages of Budgeting
Responsibility Accounting
Choosing a Budget Period
The Self-lmposed Budget
The Matter of Human Relations
The Budget Committee
The Master Budget-A Network of Interrelationships
Sales Forecasting-A Critical Step
Preparing the Master Budget
The Sales Budget
The Production Budget
Inventory Purchases-Merchandising Firm
The Direct Materials Budget
The Direct Labor Budget
The Manufacturing Overhead Budget
The Ending Finished Goods Inventory Budget
The Selling and Administrative Expense Budget
The Cash Budget
The Budgeted Income Statement
The Budgeted Balance Sheet
Expanding the Budgeted Income Statement
JlT Purchasing
Zero-Base Budgeting
International Aspects of Budgeting
The Need for Further Budgeting Material
Review Problem: Budget Schedules
Key Terms for Review
Appendix 9A: Economic Order QuanHty (EOQj and the
Reorder Point
Questions
Exercises
Problems
Cases
Group Exercises
10 Standard Costs and Operating Performance Measures
Standard Costs-Management by Exception
Who Uses Standard Costs?
Setting Standard Costs
ideal Versus Practical Standards
Setting Direct Materials Standards
Setting Direct Labor Standards
Setting Variable Manufacturing Overhead Standards
Are Standards the Same as Budgets?
Advantages of Standard Costs
Disadvantages of Standard Costs
A General Model for Variance Analysis
Price and Quantity Variances
Using Standard Costs-Direct Materials Variances
Materials Price Variance--A Closer Look
Materials Quantity Variance-A Closer Look
Using Standard Costs-Direct Labor Variances
Labor Rate Variance-A Closer Look
labor Efficiency Variance--A Closer Look
Using Standard Costs-Variable Manufacturing Overhead Variances
Manufacturing Overhead Variance-A Closer Look
Structure of Performance Reports
Variance Analysis and Management by Exception
Operating Performance Measures
Standard Costs and the New Competitive Environment
New Performance Measures
Quality Control Measures
Material Control Measures
Inventory Control Measures
Machine Performance Measures
Delivery performance Measures
Standard Costs and Operating Rerformance Measures
International Uses of Standard Costs
Summary
Review Problem: Standard Costs
Key Terms for Review
Appendix lOA: General Ledger Entries to Record Variances
Questions
Exercises
Problems
Cases
Group Exercises
11 Flexible Budgets and Overhead Analysis
Flexible Budgets
Charcicteristics of a Flexible Budget
Deficiencies of the Static Budget
How the Flexible Budget Works
The Measure of Activity-A Critical Choice
The Overhead ferformance Report-A Closer Look
The Problem of Budget Allowances
Spending Variance Alone
Both Spending and Efficiency Variances
Expanding the Flexible Budget
Fixed Costs and the Flexible Budget
Activity-Based Costing and the Flexible Budget
Overhead Rates and Fixed Overhead Analysis
Flexible Budgets and Overhead Rates
Overhead Applications in a Standard Cost System
The Fixed Overhead Vanances
The Budget Variance--A Closer Look
The Volume Variance-A Closer Look
Graphic Analysis of Fixed Overhead Variances
Cautions in Fixed Overhead Analysis
Overhead Variances and Under- or Overapplied Overhead Cost
Presentations of Variances on the Income Statement
Review Problem: Overhead Analysis
Key Terms for Review
Questions
Exercises
Problems
Cases
Group Exercises
12 Segment Reporting, Profitability Analysis, and Decentralization
Hindrances to Proper Cost Assignment
Omission of Costs
Inappropriate Methods for Allocating Costs among Segments
Arbitrarily Dividing Common Costs among Segments
Segment Reporting and Profitability Analysis
Levels- of Segmented Statements
Assigning Costs to Segments
Sales and Contribution Margin
Traceable and Common Fixed Costs
Traceable Costs Can Become Common Costs
Segment Margin
Varying Breakdowns of Total Sales
Customer Profitability Analysis
Responsibility Accounting
Decentralization and Segment Reporting
Cost, Profit, and Investment Centers
Measuring Management Performance
Rate of Return for Measuring Managerial Ferformance
The Return on Investment (ROl) Formula
Net Operating Income and Operating Assets Defined
Plant and Equipment: Net Book Value or Gross Cost?
Controlling the Rate of Return
Increase Sales
Reduce Expenses
Reduce Operating Assets
The Problem of Allocated Expenses and Assets
Criticisms of ROl
Residual Income-Another Measure of Fterformance
Motivation and Residual Income
Divisional Comparison and Residual Income
Summary
Review Problem l: Segmented Statements
Review Problem 2: Return on Investment (ROl) and Residual Income
Key Terms for Review
Appendix l 2A: Transfer Pricing
Review Problem 3: Transfer Pricing
Questions
Exercises
Problems
Cases
Group Exercises
PART lll THE CAPSTONE: Usina Cost Data in Decision Making
13 Relevant Costs for Decision Making
Cost Concepts for Decision Making
Identifying Relevant Costs
Different Costs for Different Purposes
Sunk Costs Are Not Relevant Costs
Book Value of Old Equipment
Future Costs that Do Not Differ Are Not Relevant Costs
An Example of Irrelevant Future Costs
Why Isolate Relevant Costs?
Adding and Dropping Product Lines and Other Segments
An lllustration of Cost Analysis
A Comparative Format
Beware of Allocated Fixed Costs
The Make or Buy Decision
Strategic Aspects of the Make or Buy Decision
An Example of Make or Buy
The Matter of Opportunity Cost
Special Orders
Utilization of Scaice Resources
Contribution in Relation to Scarce Resources
Managing Constraints
The Problem of Multiple Constraints
Joint Product Costs and the Contribution Approach
The Pitfalls of Allocation
Sell or Process Further Decisions
Activity-Based Costing and Relevant Costs
Summary
Review Problem: Relevant Costs
Key Terms (or Review
Questions
Exercises
Problems
Cases
Group Exercises
14 Capital Budgeting Decisions
Capita Budgeting-An investment Concept
Typical Capital Budgeting Decisions
Characteristics of Business investments
Discounted Cash Flows-The Net Present Value Method
The Net Present Value Method lllustrated
Emphasis on Cash Flows
Recovery of the Original Investment
Simplifying Assumptions
Choosing a Discount Rate
An Extended Example of the Net Present Value Method
Discounted Cash Flows-The Internal Rate of Return Method
The Internal Rate of Return Method lllustrated
Salvage Value and Other Cash Flows
The Process of Interpolation
Using the Internal Rate of Return
The Cost of Capital as a Screening Tool
Comparison of the Net Present Value and the Internal Rate of Return
Methods
Expanding the Net Present Value Method
The Total-Cost Approach
The Incremental-Cost Approach
Least-Cost Decisions
Capital Budgeting and Nonprofit Organizations
Investments in Automated Equipment
Benefits from Automation
Decision Framework for Intangible Benefits
Other Approaches to Capital Budgeting Decisions
The Payback Method
Evaluation of the payback Method
An Extended Example of Payback
payback and Uneven Cash Flows
The Simple Rate of Return Method
Criticisms of the Simple Rate of Return
The Choice of an Investment Base
Postaudit of Investment Proiects
Summary
Review Problem l: Basic Present Value Computations
Review Problem 2: Comparison of Capital Budgeting Methods
Key Terms for Review
Appendix 14A: The Concept of Presenf Value
Appendix 14B: Inflation and Capital Budgeting
Appendix 14C: Fufure Value and Present Value Tables
Questions
Exercises
Problems
Cases
Group Exercises
15 Further Aspects of investment Decisions
Income Taxes and Capital Budgeting
The Concept of After-Tax Cost
The Concept of Depreciation Tax Shield
Modified Accelerated Cost Recovery System
The Choice of a Depreciation Method
Example of Income Taxes and Capital Budgeting
The Total-Cost Approach and Income Taxes
Preference Decisions-The Ranking of investment Projects
Internal Rate of Return Method
Net Present Value Method
Comparing the Preference Rules
Summary
Review Problem: Capital Budgeting and Taxes
Key Terms for Review
Questions
Exercises
Problems
Cases
Group Exercises
Part IV SELECTED TOPlCS FOR FURTHER STUDY
16 Service Department Costing: An Activity Approach
The Need for Cost Allocation
Guidelines for Cost Allocation
Selecting Allocation Bases
Interdepartmental Services
Allocating Costs by Behavior
Pitfalls in Allocating Fixed Costs
Should Actual or Budgeted Costs Be Allocated?
Effect of Allocations on Operating Departments
A Summary of Cost Allocation Guidelines
Implementing the Allocation Guidelines
Basic Allocation Techniques
An Extended Example
No Distinction Made between Fixed and Variable Costs
Should All Costs Be Allocated?
Beware of Sales Dollars as an Allocation Base
Summary
Review Problem: Direct and Step Methods
Key Terms for Review
Questions
Exercises
Problems
Cases
Group Exercises
17 "How Well Am l Doing?" Statement of Cash Flows
The Basic Approach to a Statement of Cash Flows
Definition of Cash
Constructing the Statement of Cash Flows Using Changes in
Noncash Balance Sheet Accounts
An Example of a Simplified Statement of Cash Flows
Constructing a Simplified Statement of Cash Flows
Depreciation, Depletion, and Amortization
The Need for a More Detailed Statement
Organization of the Full-Fledged Statement of Cash Flows
Operating Activities
Investing Activities
Financing Activities
Other Issues in Preparing the Statement of Cash Flows
Cash Flows: Gross or Net?
Operating Activities: Direct or Indirect Method?
Direct Exchange Transactions
An Example of a Full-Fledged Statement of Cash Flows
Eight Basic Steps to Preparing the Statement of Cash Flows
Setting Up the Worksheet (Steps ]-4)
Adiustments to Reflect Gross, Rather Than Net, Amounts (Step 5)
Classifying Entrtes as Operating, Investing, or Financing Activities
(Step 6)
The Completed Statement of Cash Flows (Steps 7 and 8)
Interpretation of the Statement of Cash Flows
Summary
Review Problem
Key Terms for Review
Appendix 17A: The Direct Method of Determining the
"Nef Cash Provided by Operating ActivHies'
Questions
Exercises
Problems
Group Exercises
18 "How Well Am l Doings" Financial Statement Analysis
Limitations of Financial Statement Analysis
Comparison of Financial Data
The Need to Look beyond Ratios
Statements in Comparative and Common-Size Form
Dollar and percentage Changes on Statements
Common-Size Statements
Ratio Analysis-The Common Stockholder
Earnings per Share
Extraordinary Iitems and Earnings per Share
Fully Diluted Earnings per Share
Price-Earnings Ratio
Dividend payout and Yield Ratios
Return on Total Assets
Return on Common Stockholders' Equity
Financial Leverage
Book Value per Share
Ratio Analysis-The Short-Term Creditor
Working Capital
Current Ratio
Acid-Test (Quick) Ratio
Accounts Receivable Turnover
Inventory Turnover
Ratio Analysis-The Long-Term Creditor
Times Interest Earned Ratio
Debt-to-Equity Ratio
Summary of Rafios and Sources of Comparative Ratio Data
Summary
Review Problem: Selected Ratios and Financial Leverage
Key Terms for Review
Questions
Exercises
Problems
Group Exercises
Appondlx Pricing Products and Services
Cost-Plus Pricing
The Absorption Approach
The Contribution Approach
Determining the Markup percentage
Markup on an Absorption Basis
Markup on a Contribution Basis
Target Costing
Reasons (or Using Target Costing
An Example of Target Costing
Service Companies-Time and Material Pricing
Time Component
Material Component
An Example of "lime and Material Pricing
Key Terms for Review
Questions
Exercises
Problems
Photo Credits
Author Index
Company Index
Subject Index
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