BFCC The Role of Managerial Accountants in Strategic Planning & Budgeting Research

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Research Topic : The Role of Managerial Accountants in Strategic Planning and Budgeting

Article Abstracts assignment : The purpose of this assignment is for students to substantively gather pertinent information on their research topic for the Final Research Paper.

  • Based on your chosen research topic from Week 3, find six (6) current (published in the past five (5) years), peer-reviewed journal articles. Students must utilize the UC Online Library database.
  • Students may not use websites, blogs, wikipedia, news stories, magazines, etc. for their sources. Students must find current peer-reviewed journal articles from the UC Library Online database.
  • Upload the completed article abstracts (compiled in one (1) MS Word document and numberred #1, #2, #3, etc.) by the Sunday due date: Minimum six (6) article reviews

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Sample Abstract Assignment Completed Example Abstract 1: Bibliographic Citation Savas, A. C., Bozgeyik, Y., & Eser, İ. (2014). A Study on the Relationship between Teacher Self Efficacy and Burnout. European Journal of Educational Research EUROPEAN J ED RES, 3(4), 159-166. Authors Ahmet Cezmi Savaş PhD, Yunus Bozgeyik PhD, and İsmail Eser PhD Research Concern As pointed out by the researchers, teacher competency is important, but the impact of teacher well-being and self-efficacy cannot be ignored when determining teacher effectiveness. More importantly a growing number of teachers are experiencing burnout within the teaching profession. While other research has been conducted on job burnout in other employment sectors, the same paradigms do not seem to hold true for teaching. Moreover, it is hypothesized through data gathered in the literature that not all teachers experience burnout syndrome. Therefore, the researchers in this article are primarily focused on characteristics that protect teachers from burnout and the relationship between self-efficacy and burnout syndrome. Purpose The main purpose of this study was to explore the relationship between teacher self-efficacy and teacher burnout in order to see if a positive, negative, or no correlation existed. Therefore, the researchers attempted to answer the question of is teacher burnout caused by low levels of self-efficacy in teaching? Precedent Literature Vast amounts of research in teacher self-efficacy and job burnout have already been conducted. Tuğrul and Çelik (2002) assert that the problems teacher come across in school settings can lead them to experience job burnout syndrome. Furthermore, the researchers then identify a commonly used job burnout of model based on the works of Maslach & Jackson (1981) which holds job burnout consists of three dimensions; the most important of these dimensions, exhaustion develops as a result of experiencing excessive work-load and it is related stress. This literature citation helps to frame the focus for the remainder of the introduction which focuses on how job burnout is derived from stress related factors: fatigue, tension, addiction, and depression. Next, the researchers refine the focus of their study to include precedent literature on the topic of self-efficacy, and they point out how self-efficacy is tied to job burnout. Following the researcher’s assertions, they define efficacy as the necessary knowledge, skills and attitudes to carry out a role (Balcı, 2005, p. 197). Finally, the authors funnel down into their topic and research question by citing the work of Bandura (1997) who puts forward that teacher selfefficacy can have a positive effect on teacher motivation and performance. From this literature review, the researchers make their claim for the purpose and usefulness of their study. Research Methodology The model used for data collection in this study was correlational research survey design model. As stated in the journal, the correlational research design is utilized to see whether there is a relationship between two variables after they are measured quantitatively (Savas, Bozgeyik, & Eser, 2014). The population included in the research includes teachers working in various primary and secondary state schools in the center of Gaziantep, Turkey. The sample consisted of 163 randomly chosen teachers from the population during the 2014-2015 academic year. The table below shows the distribution of the sample. Two questionnaires were developed in order to gather data. One of the questionnaires was designed based on the model from Maslach and Jackson (1981) to determine teacher burnout. The other questionnaire was based on the work of Tschannen-Moran and Woolfolk (2001) to address teachers’ perception of self-efficacy. Instrumentation As previously mentioned, two questionnaires were used as the data gathering instrument. The first sought to understand teacher burnout. This questionnaire used three subscales: exhaustion, depersonalization and personal accomplishment to frame the findings. The other questionnaire sought to understand teachers’ perception of self-efficacy in the subscales of efficacy in student engagement, efficacy in instructional strategies and efficacy in classroom management subscales. Findings As mentioned in the journal, the data of the study was analyzed by SPSS programme. The data were analyzed through calculation of means, frequencies, correlation and hierarchical multiple regression analysis (Savas, Bozgeyik, & Eser, 2014). The results revealed that classroom management was the area teachers felt they had the greatest amount of self-efficacy in. Moreover, burnout levels were low compared to perceived efficacy levels. However, the teachers did report perceiving themselves high in the area of exhaustion meaning that teachers believed they are worn-out rather than burnout, but this only remained true for teachers with high self-efficacy. Teachers with low self-efficacy more often reported feeling as if they were burned out. Conclusions The authors of this study revealed that teachers with low self-efficacy levels experienced burnout more than their colleagues with high teacher self-efficacy levels. Through these findings the researchers conclude that improving teacher self-efficacy levels is critical for making schools more effective. Furthermore, the authors connect their findings with that of Karahan and Balat (2011) who found a negative relationship between teacher self-efficacy and burnout for teachers in private schools. This further proved the validity of their study. Therefore, the pointed conclusion is that in order to improve schools, teachers must have high self-efficacy. Suggestions for Further Research Based on the conclusion from this study that high levels of teacher self-efficacy lead to greater classroom performance, more research will need to be conducted to determine ways to improve teacher self-efficacy. Furthermore, the authors suggest that this data should also come from a qualitative perspective in order to yield the greatest possible conclusions. Abstract 2 Bibliographic Citation Dodson, R. (2014). Which Field Experiences Best Prepare Future School Leaders? An Analysis of Kentucky's Principal Preparation Program. Educational Research Quarterly, 37(4), 41-56. Retrieved June 14, 2016, from Eric. Authors Richard L. Dodson Ed.D. in educational administration, Professor at Murray State University Research Concern The journal opens by identifying the problem that Kentucky principals are not “ready” when they graduate from in state principal preparation programs. Therefore, the education professional standards board in Kentucky implemented a requirement to enforce that all individuals in a principal preparation program complete field hours as part of their program. Dodson is primarily concerned with understanding if there really is a benefit to these field hours and what makes some experiences higher quality than others. Research Purpose Statement As stated by Dodson (2014), The purpose of this research is to explore the overall utility of field experiences in training future school leaders and what exactly constitutes ‘high-quality” field experiences in the eyes of currently practicing principals. Moreover, the following five research questions were developed: 1. Are programs that include field experiences more effective in preparing principals than those than do not include field experiences? 2. Does allowing students and their administrators to choose field experiences result in more effective training than having the university script which field experiences students perform? 3. Which field experiences do current principals consider the most effective? 4. What type(s) of field experiences should be added to principal preparation programs? 5. Does requiring field experiences put Kentucky ahead of the curve in principal preparation? Precedent Literature As previously mentioned, there is vast scholarship that states current school principals were not “ready” when they completed their principal preparation program. This problem then leads to too much on the job learning (Dodson, 2014). The author then cites research from Turnbull and Haslam (2010) that proposes districts could improve principal quality by acting as “consumers,” encouraging local universities to craft programs to meet specific needs. In response to this research, Dodson (2014) mentions that some districts have designed local level preparation programs that coincide with the experiences taking place at the universities. This is followed up with further research data from Zubrzycki (2012) that asserts, nationwide, ‘homegrown” leadership academies and career tracks supplement university-based programs, adding hands-on experience, mentoring, and training in district-specific information and initiatives. The authors argument is followed up with additional literature that suggest only true “hands-on” field experiences will lead to improvement of principal preparation programs (Fry, Bottoms, and O'Neill, 2005). The literature review section is concluded with the point that one learns school leadership by examining the key concepts and skills used by effective school leaders, watching good models, and “trial and error” on the job (Bottoms & O’Neill, 2001). Overall, the literature review from the journal was either short in nature or short to show there is a gap in literature about the evaluation of field experience in principal preparation programs. Methodology The author of this journal begin his data gathering by compiling a survey that was sent to 170 school superintendents that asked them to forward the survey to local school principals. A total of 900 possible principals were given the opportunity as one district of 230 declined participations. All in all, 263 principals responded to the survey giving the study just under a 30 percent participation rate. Of the participants, 99.2 percent were public school principals. Over 49 percent were listed as principals of elementary schools, 29.3 percent were listed as middle or junior high, and 32.8 percent listed as high school. Finally, 51.4 percent that completed the survey were female and 48.6 were male. Instrumentation The instrument used for data collection in this study was an online survey administered through email. According to Dodson (2014), The survey used a Likert-scale attitude measure, as well as forced choice (yes/no) and open-ended questions. Questions examined principal perceptions of field experiences’ impact on their preparation to be school leaders. Findings Over 60 percent of participants reported completing field experiences during their principal preparation program. 91.4 percent perceived field experiences as valuable to preparation while 8.6 percent found them ineffective. Of the principals that did not complete field experiences, all of them agreed they would have been better prepared if they had participated in field experiences. In attempting to find out what types of field experiences would achieve the greatest benefit, Dodson (2014) states, Desired experiences vary and include: shadow a principal; work on instruction and discipline; participate in committee meetings; conduct instructional coaching; analyze student data; conduct teacher observations and evaluations; develop a budget; Site-Based Decision Making; train to interact with upset parents; engage in Comprehensive School Improvement Planning; handle personnel issues; and review school law. Clearly, the complex demands of leading a school cannot adequately be taught without real-world practice. Finally, this study sought to determine if having a choice in your field experience placement increased your satisfaction. The data yield that 71.5 percent of principals that chose their field experiences were satisfied while only 37.1 percent who did not choose their placement were satisfied. Conclusions Dodson (2014) points out, this research indicates that programs that include field experiences are more effective in preparing principals than are those that lack field experiences. In addition, the best way to implement field experiences seem to be allowing students and their administrators jointly to choose those experiences. Therefore, this study offers support for the need of field experiences in principal preparation programs not only in Kentucky but also in other states as well. Finally, this study also concludes that there needs to be a variety of field experiences for principal preparation program students to engage in. Suggestions for Further Research Overall, Dodson does not outline many suggestions for further research, but he does offer that more research should be conducted on this same topic with principals of more urban/high population schools. Also, he adds the importance of a study to indicate if adding a thorough internship to principal preparation programs would also improve principal readiness. Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 SEVENTH EDITION Managerial Accounting THE C O RNERSTO N E O F B U SIN E SS DECI SI O N MA KI NG Maryanne M. Mowen Oklahoma State University Don R. Hansen Oklahoma State University Dan L. Heitger Miami University Australia • Brazil • Mexico • Singapore • United Kingdom • United States Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Managerial Accounting: The Cornerstone of Business Decision Making, Seventh Edition Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger Sr. Vice President, General Manager, Social Science and Qualitative Business: Erin Joyner © 2018, 2014 Cengage Learning® ALL RIGHTS RESERVED. No part of this work covered by the copyright herein may be reproduced or distributed in any form or by any means, except as permitted by U.S. copyright law, without the prior written permission of the copyright owner. Executive Product Director: Mike Schenk Product Director: Jason Fremder Product Manager: Matt Filimonov Content Development Manager: Daniel Celenza Product Assistant: Audrey Jacobs Executive Marketing Manager: Robin LeFevre Sr. Content Project Manager: Martha Conway Manufacturing Planner: Doug Wilke For product information and technology assistance, contact us at Cengage Learning Customer & Sales Support, 1-800-354-9706 For permission to use material from this text or product, submit all requests online at www.cengage.com/permissions Further permissions questions can be emailed to permissionrequest@cengage.com Production Service: Cenveo Sr. Art Director: Michelle Kunkler Unless otherwise noted, all items are © Cengage Learning. Cover and Internal Designer: Harasymczuk Design Cover Image: © Digital Storm/Shutterstock.com Kicker Icon: Courtesy of Kicker Kicker Speaker Image: © dencg/Shutterstock.com Intellectual Property Analyst: Brittani Morgan Intellectual Property Project Manager: Reba Frederics Microsoft Excel® is a registered trademark of Microsoft Corporation. © 2017 Microsoft. Library of Congress Control Number: 2016958236 ISBN: 978-1-337-11577-3 Cengage Learning 20 Channel Center Street Boston, MA 02210 USA Cengage Learning is a leading provider of customized learning solutions with employees residing in nearly 40 different countries and sales in more than 125 countries around the world. Find your local representative at www.cengage.com. Cengage Learning products are represented in Canada by Nelson Education, Ltd. To learn more about Cengage Learning Solutions, visit www.cengage.com Purchase any of our products at your local college store or at our preferred online store www.cengagebrain.com Printed in Canada Print Number: 01 Print Year: 2016 Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 This book is dedicated to our students—past, present, and future— who are at the heart of our passion for teaching. Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Brief Contents CHAPTER 1 Introduction to Managerial Accounting 2 CHAPTER 2 Basic Managerial Accounting Concepts 30 CHAPTER 3 Cost Behavior and Forecasting CHAPTER 4 Job-Order Costing and Overhead Application CHAPTER 5 Activity-Based Costing and Management CHAPTER 6 Process Costing CHAPTER 7 Cost-Volume-Profit Analysis 332 MAKING THE 78 148 214 276 CONNECTION 390 CHAPTER 8 Tactical Decision Making and Relevant Analysis CHAPTER 9 Profit Planning and Flexible Budgets CHAPTER 10 Standard Costing and Variance Analysis MAKING THE CONNECTION 454 520 588 CHAPTER 11 Performance Evaluation and Decentralization CHAPTER 12 Capital Investment Decisions MAKING THE CONNECTION 697 Emerging Topics in Managerial Accounting CHAPTER 14 Statement of Cash Flows CHAPTER 15 Financial Statement Analysis 700 790 836 891 Check Figures Index 590 644 CHAPTER 13 Glossary 392 899 903 iv Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Dear Colleague, We have been teaching managerial accounting for decades. We love it and believe strongly that managerial accounting is one of the most important courses in the business curriculum! Since it is one of the first business courses students take, we work to share our love and enthusiasm for the material and to show each student that managerial accounting is both FUN and RELATABLE to their current life, as well as to their future. We wrote this book because there was no other book available that helped us reach the wide variety of students we see each term. Reaching students is a challenge because: • There is so much material to teach that instructors don’t have time for the “fun stuff;” • Students don’t connect the detail with the big picture; • Many students juggle jobs, family, and so on, so they have little time—their time in the class must be optimized for understanding; • Managerial accounting is not as straightforward as financial, and students must develop judgment skills in addition to absorbing material; • There is a tremendous diversity of students (incoming skills, language, etc.); and • There is no standard road map to teach the course (a.k.a., the balance sheet). Our approach is to make the entire managerial accounting experience for instructors and students timely, meaningful, fun, and relatable. This edition contains numerous new features that achieve these goals in a way that positively sets our book apart from all other managerial accounting books. For instance, our new chapter, “Emerging Topics in Managerial Accounting,” addresses timeliness by covering cutting-edge topics. Our unique “Here’s How It’s Used” pedagogy enables students to enjoy the process of developing a deeper understanding of managerial accounting and its implications for themselves, as well as businesses. Our watchwords are “Here’s How:” 1. Here’s How It’s Used Concept Clip Animations for many major topics portray the most difficult concepts in a brief and fun animated cartoon. They present the information in a logical, entertaining, and relatable way that pertains not only to businesses, but also to students’ everyday lives. 2. Here’s How It’s Used Examples (formerly Cornerstones) throughout the text walk students through the most important managerial accounting models and help them solve computations. Students say these examples really get them started on their homework and help them understand the material before class. As a result, the Examples allow the instructor to focus valuable class time on the “why,” and allow students to understand the big picture— helping students see the relevance and importance of what they are learning. 3. Here’s Why It’s Important highlights for students the reason that key topics within each chapter are important. This new feature significantly helps students better understand the big picture of why managerial accounting is important. 4. Experience Managerial Accounting Videos focus on real companies, such as Coldstone Creamery, Second City Comedy Club, and Boyne USA ski resorts, and the integrated real-world examples of Kicker Speakers provide students with inside access into how management accounting is used to make real-world business decisions. v Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Using our text, you don’t need to spend as much valuable class time teaching “how,” you can focus on “why.” • Examples are built around how students work, summarizing key procedures to help students complete homework independently. • Because students are able to complete homework independently, they do not bombard the instructor with “How do I do this?” type questions. Students who want to go farther can use: • Blueprint Problems. We wrote these expressly to accompany this book and help students expand their understanding. • Blueprint Problems Using Excel. We wrote these to help develop students’ spreadsheet skills. Students are required to develop their own Excel formulas to solve the problems. • Analyzing Relationships. We developed these to help students use a graphical approach to see exactly how changing one or more underlying variables affects a model. These allow students to engage in sensitivity analysis and to consider the related analytical questions. These help to foster analytical skills and to develop judgment and understanding. Our goal is to improve student understanding and preparedness while allowing you to focus on meaningful applications of managerial accounting to important real-world topics. We believe it will work in your classroom and look forward to teaming up with you to improve your students’ success and make managerial accounting meaningful, fun, and relatable. Sincerely, Maryanne Mowen, Don Hansen, Dan Heitger vi Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Close the Gap Between Homework and Exam Performance with CengageNOWv2. We’ve talked with hundreds of accounting instructors across the country and we are learning that online homework systems have created a new challenge in the accounting course. learning the content, but rather memorizing their CengageNOWv2 better prepares students for the exam by providing an online homework experience that is similar to what students will experience on the exam and in the real world. way through the system. Read on to see how CengageNOWv2 helps close this gap. We are hearing that students perform well on the homework but poorly on the exam, which leads instructors to believe that students are not truly Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Closing the gap, one step at a time. Multi-Panel View One of the biggest complaints students have about online homework is the scrolling, which prevents students from seeing the big picture and understanding the accounting system. This new Multi-Panel View in CengageNOWv2 enables students to see all the elements of a problem on one screen. • Students make connections and see the tasks as connected components in the accounting process. • Dramatically reduced scrolling eliminates student frustration. Blank Sheet of Paper Experience Many students perform well on homework but struggle when it comes to exams. Now, with the new Blank Sheet of Paper Experience, students must problem-solve on their own, just as they would if taking a test on a blank sheet of paper. This discourages overreliance on the system. Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 From Motivation to Mastery MOTIVATION: Engage students and better prepare them for class. Concept Clips Written by the authors, these clips provide students with a deeper explanation into the why and the how of managerial accounting concepts. Video: Tell Me More Tell Me More lecture activities explain the core concepts of the chapter through an engaging auditory and visual presentation that is ideal for all class formats—flipped mode, online, hybrid, face-to-face. Adaptive Study Plan The Adaptive Study Plan is an assignable/gradable study center that adapts to each student’s unique needs and provides a remediation pathway to keep students progressing. APPLICATION: Help students apply accounting concepts. Video: Show Me How Linked to end-of-chapter problems in CengageNOWv2, Show Me How problem demonstration videos provide a step-by-step model of a similar problem. MASTERY: Teach students to go beyond memorization to true understanding. Mastery Problems for Managerial Accounting, 7e These problems allow students to see the interrelationships among core concepts. Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 And that’s not all… You might also want to learn about the MindTap eReader, our LMS integration options, and more. MindTap eReader ADA Accessibility The MindTap eReader is the most robust digital reading experience available. Cengage Learning is committed to making its educational materials accessible to users of all abilities. We are steadily working to increase accessibility and create a full spectrum of usable tools, features, and choices that are accessible for users of all abilities. All new Cengage Learning products and services are designed with accessibility in mind. • Fully optimized for the iPad. • Note-taking, highlighting, and more. • Off-line access on smartphones. The MindTap eReader also features ReadSpeaker®, an online text-to-speech application that vocalizes, or “speechenables,” online educational content. LMS Integration CengageNOWv2 can be seamlessly integrated with most learning management systems. Adopters will enjoy: • A Seamless User Experience—Access your Cengage resources seamlessly using only your LMS login credentials. • Simplified Registration Process—Get students up and running faster! • Content Customization and Deep Linking—Use our Content Selector to create a unique learning path for students that blends your content with Cengage Learning activities, eText, and more within your LMS course. • Automatic Grade Synchronization*—Need to have your course grades recorded in your LMS gradebook? No problem. Simply select the activities you want synched and grades will automatically be recorded in your LMS gradebook. * Grade synchronization is currently available with Blackboard, Brightspace (powered by D2L), Angel 8, and Canvas. • With the latest release of CengageNOWv2: • Images and graphics have been converted to HTML tables so that they can be read by screen readers. • The assignment experience now offers proper heading structure to support easy navigation with assistive technology. • CengageNOWv2 solutions offer high contrast and well-structured HTML, which helps support screen reader interactivity. • All videos are created with closed captioning and transcripts available for download. • The MindTap eReader is HTML-based and compatible with most screen reading assistive software. The eReader supports browser settings for high-contrast narrative text, variable font sizes, and multiple foreground and background color options. For more information on accessibility, please visit www.cengage.com/accessibility. IPAD Tablet Compatibility CengageNOWv2 is fully compatible with the iPad and other tablet devices, with the exception of General Ledger (CLGL) and Excel Tutorials, which are flash based. www.cengage.com/cnowv2 Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 New to this Edition I. New Additions to Each Chapter A number of meaningful features were added to each chapter in this edition, including: Management, Business Sustainability, Quality Cost Management, Lean Accounting, International Issues in Management Accounting, and the Role of Cost and Managerial Accounting in Fraud and Forensic Accounting. ✳ Here’s How It’s Used: Several Here’s How It’s Used boxes in each chapter tell students how managerial concepts are used in a variety of businesses and in their own lives. This exciting new feature makes the material more relatable and meaningful. Here’s How It’s Used features include: • • • • • III. Restructuring of Chapter Content and Organization In Your Life A restructuring of the text tightened and aligned topics in a natural sequence. In this edition: Data Analytics • Reduction in chapters. The total number of chapters was Sustainability At Kicker At Real Companies ✳ Here’s Why It’s Important: Brief explanations of why the concepts are important are highlighted in the text to motivate students in their study. ✳ New A and B sets of Brief Exercises: These new sets of brief exercises give instructors more options for using illustrative exercises in class and then assigning very similar material to get students started with homework. ✳ Animated Concept Clip: All new brief animated video clips help students understand concepts and see them in a visual way. reduced from 16 to 15. By streamlining, eliminating, and realigning topics, the number of chapters was reduced, but the number of topics available to cover was actually increased. • Chapter elimination. The chapter on variable and absorption costing and inventory management was eliminated and the basic material on absorption costing and variable costing was added to Chapter 3 on Cost Behavior and Forecasting. Locating these topics in this chapter provides a good foundation for the costing chapters that follow. It also allows students the opportunity to see an immediate application of cost behavior. The inventory management topic was eliminated and its coverage deferred to a higher level course. • Chapter elimination. The chapter on flexible budgeting and learning objective section: Check Point questions help students perform quick self-checks while reading chapter material. overhead analysis was eliminated and its topics moved to other chapters. The flexible budgeting material was added to Chapter 9 on Profit Planning to give students an overview of both static and flexible budgets in the same chapter. The overhead analysis material was added to the standard costing chapter (Chapter 10) to give students a complete picture of a standard costing system. ✳ Key Term Definitions: To facilitate study and review, defi- • Chapters relocated. Cost-Volume-Profit Analysis has been ✳ Check Point questions at the conclusion of each nitions for each key term are now found at the end of each chapter (in addition to the glossary at the end of the text). II. Creation of a New Chapter The growing importance of managerial accounting in several critical areas led to the creation of a completely new chapter, Emerging Topics in Managerial Accounting, that provides students with exciting insights and cutting-edge perspectives on Enterprise Risk moved to Chapter 7 to allow instructors to explain the basics of job-order, activity-based (moved to follow job order costing), and process costing. This relocation enables students to develop a richer understanding of costs used in CVP. • Chapter relocated. The Tactical Decision Making and Relevant Analysis chapter is positioned immediately after CVP and now includes material on segmented income statements to provide students with a more logical and impactful understanding of how to prepare and interpret Keep-or-Drop decisions. xi Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 xii New to this Edition • Topic depth increased and new chapter added. The basic introduction to quality costing and environmental issues was removed from the chapter on activity based costing and management. A much deeper treatment of these topics, as well as Enterprise Risk Management, Business Sustainability, Issues in International Managerial Accounting, and the Role of Cost and Managerial Accounting in Fraud and Forensic Accounting, is now found in the new chapter, Emerging Topics in Managerial Accounting (Chapter 13). Our strong belief is that these additions and changes maintain all of the positive aspects of our previous editions that current users enjoy and appreciate, while significantly improving the managerial accounting experience for students and instructors alike. This new edition helps students to learn firsthand that managerial accounting is timely, meaningful, fun, and relatable to their everyday lives! Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Acknowledgments and Thanks Thank you to the following instructors who contributed to the development of the 7th edition of Managerial Accounting: The Cornerstone of Business Decision Making. By reviewing, verifying, or participating in focus groups, you allowed us to create a text that will benefit all of our students and instructors that use this text. Janice Akao, Butler Community College Michael Alles, Rutgers Business School Cornelia Alsheimer, Santa Barbara City College Linda Amann, University of Wisconsin–Whitewater Julie Armstrong, St. Clair County Community College Elise Bartley, Westminster College Nancy Batch, Texas A&M–San Antonio Robert Beatty, Anne Arundel Community College Connie Belden, Butler Community College Pamela S. Benner, Stark State College Debbie Benson, Kennesaw State University Dr. Timothy B. Biggart, Berry College Eric Blazer, Millersville University Cindy Bleasdale, Hilbert College Marie Blouin, Ithaca College Maryann Bolton, Central Community College–Hastings Campus Marian W. Boscia, King’s College Anna Boulware, St. Charles Community College Amy Bourne, Oregon State University Thomas J. Bradley, Ashford University Rachel Brassine, East Carolina University Jerold K. Braun, Daytona State College Jeff Brennan, Austin Community College Ann K. Brooks, University of New Mexico Patti Brown, The University of Texas at Austin Richard Buchanan, Oklahoma State University Esther Bunn, Stephen F Austin State University Kelley Butler, Ivy Tech Community College Marci Butterfield, University of Utah Edward Bysiek, St. Bonaventure Leonor M. Cabrera, Canada College Don Campodonico, Notre Dame de Namur University Tongyu Cao, University College Cork, Ireland Rodney Carmack, Arkansas State University Sandra Cereola, James Madison University Richard Chen, Eastern Kentucky University Bea Chiang, The College of New Jersey Linda Christiansen, Indiana University Southeast Lisa Church, Rhode Island College Jay Cohen, Oakton Community College Kelley Colston, University of Toledo Margaret Combs, University of the Cumberlands Stephanie Comer, Cornerstone University Rita Kingery Cook, University of Delaware Dixon Cooper, Henderson State University Sandra Copa, North Hennepin Community College Karen Crisonino, County College of Morris Anthony Daly-Leonard, Delaware County Community College David Dearman, University of Arkansas–Little Rock Charlene Deno, SUNY Oneonta Harry DeWolf, Mt. Hood Community College Patricia A. Doherty, Boston University David Doyon, Southern NH University Barbara Durham, University of Central Florida Howard Eskew, San Diego Mesa College Diane Eure, Texas State University Jade Fang, Marist College Christopher Ferro, College of DuPage Clayton Forester, University of Minnesota Robert Foster, California State University, Northridge Shari Fowler, Briar Cliff University Sheri Geddes, Hope College Joe Gerard, University of Wisconsin–Whitewater Daniel J. Gibbons, Waubonsee Community College Paul Goodchild, University of Central Missouri Julie Goodin, Immaculata University Andrea Gouldman, Weber State University Bob Gutschick, College of Southern Nevada Joohyung Ha, University of San Francisco Wilbert Harri, Pima Community College Bob Hartung, Metro Community College Haihong He, California State University, Los Angeles Candice Heino, Anoka Ramsey Community College Youngwon Her, California State University, Northridge Dave Hinrichs, Lehigh Jan Hlavaty, Lakeland Community College Dr. Louann Hofheins, The University of Findlay Steve Horan, University of Sioux Falls Melvin Houston, Wayne State University Wayne Ingalls, University of Maine Marianne James, California State University, Los Angeles Steve Johnson, Minnesota State University, Mankato Jeffrey Jones, The College of Southern Nevada Stani Kantcheva, Cincinnati State Technical and Community College Kathryn W. Kapka, The University of Texas at Tyler Ben Kaplan, Johnson & Wales University Howard Keller, IUPUI xiii Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 xiv Acknowledgments and Thanks Marie Kelly, Stephen F Austin State University Dr. Bhagwan Khanna, Ball State University Garry Kirk, Southwest Wisconsin Technical College Christine Kloezeman, Glendale Community College Barbara Kren, Marquette University Marco Lam, Western Carolina University Meg Costello Lambert, Oakland Community College–Auburn Hills Donna Larner, Cornerstone University John Lauck, Louisiana Tech University Dr. Mark Lawrence, University of North Alabama Rose Layton, University of Southern California Brian R. Lazarus, Baltimore City Community College Chuohsuan Lee, SUNY Plattsburgh Michael Lee, Boise State University Cedric Lewis, UNF Ping Lin, California State University, Long Beach Danny Litt, UCLA Harold Little, Western Kentucky University William Lloyd, Lock Haven University John Logsdon, Webber International University Dennis M. Lopez, University of Texas at San Antonio Suzanne Lowensohn, Colorado State University Claudia A. Lubaski, Lorain County Community College Susan Lynn, University of Baltimore Ajay Maindiratta, NYU–Stern Diane Marker, University of Toledo Maureen McBeth, College of DuPage Dawn McKinley, Harper College Roger McMillian, Mineral Area College Tammy Metzke, Milwaukee Area Technical College Michael Meyer, University of Notre Dame Linda Miller, Northeast Community College Stephanie Morris, Mercer University Kenneth Mullins, University of Wisconsin–Stevens Point Gerald F. Murphy, Capital Community College Pam Neely, SUNY Brockport Mary Beth Nelson, North Shore Community College Mary Netzler, University of Maryland–University College Richard Newmark, University of Northern Colorado Joseph Malino Nicassio, Westmoreland County Community College Barbara A. Norris, Johnson & Wales University Kalpana Pai, Notre Dame de Namur University Angela Pannell, Mississippi State University Laurel Parrilli, Cornell University Richard Pettit, Mountain View College Kristen Quinn, Northern Essex Community College Rama Ramamurthy, Georgetown University Paulette Ratliff-Miller, Grand Valley State University Barbara Reider, University of Montana Barbara Rice, Gateway Community and Technical College Vernon Richardson, University of Arkansas Constance Rodriguez, SUNY Brockport Paulette Rodriguez, The University of Texas at El Paso Molly Rogers, University of Cincinnati Katrina Rowe, Schenectady County Community College Paul San Miguel, Western Michigan University Christine Schalow, University of Wisconsin–Stevens Point Erica Scheidecker, University of Dubuque Lee Schiffel, Valparaiso University Pamela Schwer, St. Xavier University Randy Serrett, University of Houston–Downtown Carlo Silvesti, Gwynedd Mercy University James Sinclair, Georgetown University Ercan Sinmaz, Houston Community College Harshini Siriwardane, University of Cincinnati Jennifer Smith, Chattahoochee Technical College Stephan Smith, Nicholls State University Mohsen Souissi, Fayetteville State University Vicki Splawn, Mid-America Christian University Jason Stanfield, Purdue George Starbuck, McMurry University Dr. J. William Stinde, Glendale Community College James Sundberg, Eastern Michigan University Kenton Swift, University of Montana Karen Tabak, Maryville University Diane Tanner, University of North Florida Glade Tew, BYU–Idaho Todd Thornock, Iowa State University Sarah Thorrick, Loyola University New Orleans Donald Trippeer, SUNY Oneonta Hugh Van Seaton, Jacksonville University Glenn Walberg, University of Vermont Joe Welker, College of Western Idaho Wendy Wilson, Texas Christian University Maef Woods, Heidelberg University Patricia Worsham, Norco College Gail Wright, Castleton University Jennifer Yin, University of Texas at San Antonio Xiaoli Yuan, ECSU Benny Zachry, Tulane University Syed Zaidi, California State University, Santa Monica Ronald Zullo, Northeastern University Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 About the Authors Dr. Maryanne M. Mowen is Associate Professor Emerita of Accounting at Oklahoma State University. She currently teaches online classes in cost and management accounting for Oklahoma State University. She received her Ph.D. from Arizona State University. She brings an interdisciplinary perspective to teaching and writing in cost and management accounting, with degrees in history and economics. She has taught classes in ethics and the impact of the Sarbanes-Oxley Act on accountants. Her scholarly research is in the areas of management accounting, behavioral decision theory, and compliance with the Sarbanes-Oxley Act. She has published articles in journals such as Decision Science, The Journal of Economics and Psychology, and The Journal of Management Accounting Research. Dr. Mowen has served as a consultant to mid-sized and Fortune 100 companies and works with corporate controllers on management accounting issues. She is a member of the Northern New Mexico chapter of SCORE and serves as a counselor, assisting small and start-up businesses. Outside the classroom, she enjoys hiking, traveling, reading mysteries, and working crossword puzzles. Dr. Don R. Hansen is Professor Emeritus of Oklahoma State University. He received his Ph.D. from the University of Arizona in 1977. He has an undergraduate degree in mathematics from Brigham Young University. He has published articles in both accounting and engineering journals including The Accounting Review, The Journal of Management Accounting Research, Accounting Organizations and Society, Accounting Horizons, and IIE Transactions. He has served on the editorial board of The Accounting Review. His outside interests include family, church activities, reading, movies, and watching sports. Dr. Dan L. Heitger is the Deloitte Professor of Accounting and Co-Director of the William Isaac & Michael Oxley Center for Business Leadership at Miami University. He received his Ph.D. from Michigan State University and his undergraduate degree in accounting from Indiana University. He actively works with executives and students of all levels in developing and teaching courses in managerial accounting, business sustainability, risk management, stakeholder management, governance, and business reporting. He co-founded an organization that provides executive education for large international organizations. His interactions with business professionals, through executive education and the Center, allow him to bring a current and real-world perspective to his writing. His published research focuses on managerial accounting and risk management issues and has appeared in Harvard Business Review, Behavioral Research in Accounting, Accounting Horizons, Issues in Accounting Education, Journal of Accountancy, and Management Accounting Quarterly. His outside interests include hiking with his family in the National Park system. xv Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Contents CHAPTER 1 Introduction to Managerial Accounting 2 The Meaning of Managerial Accounting 4 Information Needs of Managers and Other Users 5 Planning 5 Controlling 5 Decision Making 6 Financial Accounting and Managerial Accounting 7 Financial Accounting 7 Managerial Accounting 7 Comparison of Financial and Managerial Accounting 7 Exhibit 1.1 Comparison of Financial and Managerial Accounting 8 Current Focus of Managerial Accounting 9 New Methods of Costing Products and Services 9 Customer Orientation 9 Exhibit 1.2 The Value Chain 10 Cross-Functional Perspective 11 Total Quality Management 11 Time as a Competitive Element 12 Efficiency 13 The Role of the Managerial Accountant 13 Exhibit 1.3 Kicker Inc. Organizational Chart 14 Managerial Accounting and Ethical Conduct 15 Ethical Behavior 16 Company Codes of Ethical Conduct 17 Standards of Ethical Conduct for Managerial Accountants 18 Exhibit 1.4 Statement of Ethical Professional Practice 19 Certification 20 The Certified Management Accountant 20 The Certified Public Accountant 21 The Certified Internal Auditor 21 CHAPTER 2 Basic Managerial Accounting Concepts The Meaning and Uses of Cost 32 Cost 32 Cost Objects 33 Accumulating and Assigning Costs 33 Assigning Costs to Cost Objects 33 Exhibit 2.1 Object Costing 35 Product and Service Costs 37 Providing Cost Information 38 Determining Product Cost 38 30 Exhibit 2.2 Product Costs Include Direct Materials, Direct Labor, and Overhead 39 Example 2.1 How to Calculate Product Cost in Total and Per Unit 40 Example 2.2 How to Calculate Prime Cost and Conversion Cost in Total and Per Unit 41 Exhibit 2.3 The Impact of Product versus Period Costs on the Financial Statements 42 Preparing Income Statements 44 Cost of Goods Manufactured 44 Example 2.3 How to Calculate the Direct Materials Used in Production 45 Example 2.4 How to Calculate Cost of Goods Manufactured 45 Cost of Goods Sold 46 Example 2.5 How to Calculate Cost of Goods Sold 46 Exhibit 2.4 Relationship between the Flow of Costs, Inventories, and Cost of Goods Sold 47 Income Statement: Manufacturing Firm 47 Example 2.6 How to Prepare an Income Statement for a Manufacturing Firm 48 Example 2.7 How to Calculate the Percentage of Sales Revenue for Each Line on the Income Statement 49 Income Statement: Service Firm 50 Example 2.8 How to Prepare an Income Statement for a Service Organization 50 CHAPTER 3 Cost Behavior and Forecasting 78 Basics of Cost Behavior 80 Measures of Output and the Relevant Range 81 Fixed Costs 81 Exhibit 3.1 Colley Computers Fixed Cost of Supervision 83 Variable Costs 84 Exhibit 3.2 Colley Computers Variable Cost of DVD-ROM Drives 86 More Advanced Cost Behavior: The Reasonableness of Straight-Line Cost Relationships 86 Semi-Variable Costs 86 Exhibit 3.3 Semi-Variable Cost: Decreasing Rate 86 Exhibit 3.4 Semi-Variable Cost: Increasing Rate 87 Mixed Costs and Step Costs 88 Mixed Costs 88 Exhibit 3.5 Mixed Cost Behavior 89 Step Cost Behavior 89 Exhibit 3.6 Step Costs: Narrow Steps and Wide Steps 90 Accounting Records and Need for Cost Separation 91 xvi Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Contents Methods for Separating Mixed Costs into Fixed and Variable Components 91 Example 3.1 How to Create and Use a Cost Formula 92 The High-Low Method 93 Example 3.2 How to Use the High-Low Method to Calculate Fixed Cost and the Variable Rate and to Construct a Cost Formula 94 Example 3.3 How to Use the High-Low Method to Calculate Predicted Total Variable Cost and Total Cost for Budgeted Output 95 Example 3.4 How to Use the High-Low Method to Calculate Predicted Total Variable Cost and Total Cost for a Time Period That Differs from the Data Period 96 Scattergraph Method 97 Exhibit 3.7 Anderson Company’s Materials Handling Cost 97 Exhibit 3.8 Scattergraphs with Nonlinear Cost 99 The Method of Least Squares 99 Exhibit 3.9 Line Deviations 99 Exhibit 3.10 A Portion of the Summary Output from Excel for Anderson Company 100 Example 3.5 How to Use the Regression Method to Calculate Fixed Cost and the Variable Rate and to Construct a Cost Formula and to Determine Budgeted Cost 101 Comparison of Methods 101 Exhibit 3.11 Overview of Methods for Separating Mixed Costs into Fixed and Variable Components 102 Managerial Judgment 102 Variable and Absorption Income Statements: Two Ways of Measuring Income 105 Absorption Costing 105 Variable Costing 105 Comparison of Variable and Absorption Costing Methods 105 Exhibit 3.12 Classification of Costs under Absorption and Variable Costing as Product or Period Costs 105 Inventory Valuation 106 Example 3.6 How to Compute Inventory Cost under Absorption Costing 106 Example 3.7 How to Compute Inventory Cost under Variable Costing 107 Exhibit 3.13 Product Cost under Absorption and Variable Costing 108 Income Statements Using Variable and Absorption Costing 108 Example 3.8 How to Prepare an Absorption-Costing Income Statemen 108 Example 3.9 How to Prepare a Variable-Costing Income Statement 109 Production, Sales, and Income Relationships 109 Exhibit 3.14 Production, Sales, and Income Relationships 109 Appendix 3A: Using the Regression Programs 110 xvii Exhibit 3.15 Spreadsheet Data for Anderson Company 111 Exhibit 3.16 Regression Output for Anderson Company 112 Goodness of Fit 112 CHAPTER 4 Job-Order Costing and Overhead Application 148 Characteristics of the Job-Order Environment 150 Job-Order Production and Costing 150 Process Production and Costing 151 Exhibit 4.1 Comparison of Job-Order and Process Costing 151 Production Costs in Job-Order Costing 152 Normal Costing and Overhead Application 152 Actual Costing versus Normal Costing 152 Importance of Unit Costs to Manufacturing Firms 153 Importance of Unit Costs to Service Firms 153 Normal Costing and Estimating Overhead 154 Example 4.1 How to Calculate the Predetermined Overhead Rate and Apply Overhead to Production 155 Exhibit 4.2 Actual and Applied Overhead 156 Example 4.2 How to Reconcile Actual Overhead with Applied Overhead 157 Departmental Overhead Rates 157 Example 4.3 How to Calculate Predetermined Departmental Overhead Rates and Apply Overhead to Production 158 Example 4.4 How to Convert Departmental Data to Plantwide Data to Calculate the Overhead Rate and Apply Overhead to Production 159 Unit Costs in the Job-Order System 159 Keeping Track of Job Costs with Source Documents 161 Job-Order Cost Sheet 161 Exhibit 4.3 Job-Order Cost Sheet 161 Materials Requisitions 162 Exhibit 4.4 Materials Requisition Form 162 Time Tickets 162 Exhibit 4.5 Time Ticket 163 The Flow of Costs through the Accounts 164 Exhibit 4.6 Flow of Costs through the Accounts of a Job-Order Costing Firm 164 Accounting for Materials 165 Exhibit 4.7 Summary of Materials Cost Flows 165 Accounting for Direct Labor Cost 165 Exhibit 4.8 Summary of Direct Labor Cost Flows 166 Accounting for Overhead 166 Accounting for Actual Overhead Costs 167 Exhibit 4.9 Summary of Overhead Cost Flows 167 Accounting for Finished Goods 167 Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 xviii Contents Exhibit 4.10 Summary of Cost Flows from Work in Process to Finished Goods 168 Accounting for Cost of Goods Sold 168 Exhibit 4.11 Schedule of Cost of Goods Manufactured 169 Exhibit 4.12 Statement of Cost of Goods Sold 169 Example 4.5 How to Prepare Brief Job-Order Cost Sheets 170 Accounting for Nonmanufacturing Costs 172 Exhibit 4.13 Income Statement 172 Appendix 4A: Journal Entries Associated With Job-Order Costing 173 Exhibit 4.14 Posting of Journal Entries to the Accounts 175 Appendix 4B: Support Department Cost Allocation 176 Types of Departments 176 Exhibit 4.15 Steps for Determining Product Costs by Using Predetermined Departmental Overhead Rates 177 Methods of Support Department Cost Allocation 177 Exhibit 4.16 Illustration of the Direct Method 178 Example 4.6 How to Assign Support Department Costs by Using the Direct Method 178 Exhibit 4.17 Illustration of the Sequential Method 180 Example 4.7 How to Assign Support Department Costs by Using the Sequential Method 181 CHAPTER 5 Activity-Based Costing and Management 214 Limitations of Functional-Based Cost Accounting Systems 216 Nonunit-Related Overhead Costs 216 Exhibit 5.1 ABC Hierarchy 217 Product Diversity 218 Illustrating the Failure of Unit-Based Overhead Rates 218 Exhibit 5.2 Product-Costing Data for Rio Novo’s Porto Behlo Plant 219 Example 5.1 How to Calculate Consumption Ratios 220 Example 5.2 How to Calculate Activity Rates 221 Example 5.3 How to Calculate Activity-Based Unit Costs 222 Exhibit 5.3 Activity Rates and Activity-Based Unit Costs for Rio Novo’s Porto Behlo Plant 222 Illustrating Relationships: Product Diversity and ProductCosting Accuracy 223 Exhibit 5.4 Diversity and Product-Costing Accuracy 225 Activity-Based Product Costing 225 Exhibit 5.5 Activity-Based Costing: Assigning Cost of Overhead 226 Identifying Activities and Their Attributes 226 Exhibit 5.6 Activity Dictionary for Hemingway Bank’s Credit Card Department 228 Assigning Costs to Activities 228 Exhibit 5.7 Work Distribution Matrix for Hemingway Bank’s Credit Card Department 228 Example 5.4 How to Assign Resource Costs to Activities by Using Direct Tracing and Resource Drivers 229 Exhibit 5.8 Activity Costs for Hemingway Bank’s Credit Card Department 229 Assigning Costs to Products 229 Exhibit 5.9 Assigning Costs for Hemingway Bank’s Credit Card Department 230 Activity-Based Customer Costing and Activity-Based Supplier Costing 231 Exhibit 5.10 Whale Curve of Cumulative Customer Profitability 232 Activity-Based Customer Costing 232 Example 5.5 How to Calculate Activity-Based Customer Costs 233 Activity-Based Supplier Costing 234 Example 5.6 How to Calculate Activity-Based Supplier Costs 235 Process-Value Analysis 236 Exhibit 5.11 Process-Value Analysis Model 237 Driver Analysis: The Search for Root Causes 237 Activity Analysis: Identifying and Assessing Value Content 237 Example 5.7 How to Assess Nonvalue-Added Costs 241 Activity Performance Measurement 241 Example 5.8 How to Calculate Cycle Time and Velocity 242 CHAPTER 6 Process Costing 276 Characteristics of Process Manufacturing 278 Types of Processes 278 Exhibit 6.1 Sequential Processing Illustrated 278 Exhibit 6.2 Parallel Processing Illustrated 279 How Costs Flow through the Accounts in Process Costing 280 Exhibit 6.3 Flow of Manufacturing Costs through the Accounts of a Process-Costing Firm 280 Example 6.1 How to Account for Cost Flows Without Work-in-Process Inventories 280 Accumulating Costs in the Production Report 281 Service and Manufacturing Firms 282 The Impact of Work-In-Process Inventories on Process Costing 283 Equivalent Units of Production 283 Example 6.2 How to Calculate Equivalent Units of Production with No Beginning Work in Process 284 Example 6.3 How to Measure Output and Assign Costs: No Beginning Work in Process 285 Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Contents Two Methods of Treating Beginning Work-in-Process Inventory 286 Weighted Average Costing 286 Overview of the Weighted Average Method 287 Example 6.4 How to Measure Output and Assign Costs: Weighted Average Method 287 Five Steps in Preparing a Production Report 288 Example 6.5 How to Prepare a Physical Flow Schedule 289 Production Report 291 Example 6.6 How to Prepare a Production Report: Weighted Average Method 292 Evaluation of the Weighted Average Method 292 Multiple Inputs and Multiple Departments 293 Nonuniform Application of Manufacturing Inputs 293 Example 6.7 How to Calculate Equivalent Units, Unit Costs, and Valuing Inventories with Nonuniform Inputs 294 Multiple Departments 295 Exhibit 6.4 Production Report: Weighted Average Method 296 Example 6.8 How to Calculate the Physical Flow Schedule, Equivalent Units, and Unit Costs with Transferred-In Goods 296 Appendix 6A: Production Report—First-In, First-Out Costing 298 Differences between the First-In, First-Out and Weighted Average Methods 298 Example of the First-In, First-Out Method 298 Example 6.9 How to Calculate Output and Cost Assignments: First-In, First-Out Method 298 Exhibit 6.5 Physical Flow Schedule 300 Example 6.10 How to Prepare a Production Report: First-In, First-Out Method 301 CHAPTER 7 Cost-Volume-Profit Analysis 332 Break-Even Point in Units and in Sales Dollars 334 Using Operating Income in Cost-Volume-Profit Analysis 334 Exhibit 7.1 The Contribution Margin Income Statement 335 Example 7.1 How to Prepare a Contribution Margin Income Statement 336 Exhibit 7.2 Contribution Margin and Fixed Cost at Break-Even for Whittier Company 337 Break-Even Point in Units 337 Example 7.2 How to Calculate the Break-Even Point in Units 338 Break-Even Point in Sales Dollars 338 Example 7.3 How to Calculate the Variable Cost Ratio and the Contribution Margin Ratio 340 Example 7.4 How to Calculate the Break-Even Point in Sales Dollars 341 xix Units and Sales Dollars Needed to Achieve a Target Income 343 Units to Be Sold to Achieve a Target Income 343 Example 7.5 How to Calculate the Number of Units to Be Sold to Earn a Target Operating Income 344 Sales Revenue to Achieve a Target Income 345 Example 7.6 How to Calculate Sales Needed to Earn a Target Operating Income 345 Graphs of Cost-Volume-Profit Relationships 346 The Cost-Volume-Profit Graph 347 Exhibit 7.3 Cost-Volume-Profit Graph 347 Assumptions of Cost-Volume-Profit Analysis 348 Illustrating Relationships Among CVP Variables 348 Exhibit 7.4 Cost-Volume-Profit Relationships 349 Multiple-Product Analysis 351 Break-Even Point in Units 352 Example 7.7 How to Calculate the Break-Even Units for a Multiple-Product Firm 353 Break-Even Point in Sales Dollars 354 Example 7.8 How to Calculate the Break-Even Sales Dollars for a Multiple-Product Firm 354 Cost-Volume-Profit Analysis and Risk and Uncertainty 356 Exhibit 7.5 Summary of the Effects of Alternative 1 357 Exhibit 7.6 Summary of the Effects of Alternative 2 358 Exhibit 7.7 Summary of the Effects of Alternative 3 358 Introducing Risk and Uncertainty 358 Exhibit 7.8 Margin of Safety 359 Example 7.9 How to Calculate the Margin of Safety 360 Example 7.10 How to Calculate the Degree of Operating Leverage 361 Example 7.11 How to Calculate the Impact of Increased Sales on Operating Income Using the Degree of Operating Leverage 362 Exhibit 7.9 Differences between a Manual and an Automated System 363 Sensitivity Analysis and Cost-Volume-Profit 363 MAKING THE CONNECTION: INTEGRATIVE EXERCISE (CHAPTERS 2, 3, AND 7) 390 CHAPTER 8 Tactical Decision Making and Relevant Analysis 392 Short-Run Decision Making 394 The Decision-Making Model 394 Step 1: Recognize and Define the Problem 395 Step 2: Identify the Alternatives as Possible Solutions 395 Step 3: Identify the Costs and Benefits Associated with Each Feasible Alternative 396 Step 4: Estimate the Relevant Costs and Benefits for Each Feasible Alternative 396 Step 5: Assess Qualitative Factors 397 Copyright 2018 Cengage Learning. 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WCN 02-200-203 xx Contents Step 6: Make the Decision 398 Relevant Costs Defined 399 Cost Behavior and Relevant Costs 401 Some Common Relevant Cost Applications 402 Make-or-Buy Decisions 403 Exhibit 8.1 Make-or-Buy Decisions 403 Example 8.1 How to Structure a Make-or-Buy Problem 405 Special-Order Decisions 406 Exhibit 8.2 Accept or Reject a Special Order 406 Example 8.2 How to Structure a Special-Order Problem 407 Keep-or-Drop Decisions 408 Example 8.3 How to Prepare a Segmented Income Statement 410 Exhibit 8.3 Comparison of Segmented Income Statement With and Without Allocated Common Fixed Expense 411 Example 8.4 How to Structure a Keep-or-Drop Product-Line Problem 412 Example 8.5 How to Structure a Keep-or-Drop Product-Line Problem with Complementary Effects 414 Further Processing of Joint Products 414 Exhibit 8.4 Further Processing of Joint Products 416 Example 8.6 How to Structure the Sell-or-Process-Further Decision 416 Product Mix Decisions 417 Example 8.7 How to Determine the Optimal Product Mix with One Constrained Resource 418 Example 8.8 How to Determine the Optimal Product Mix with One Constrained Resource and a Sales Constraint 419 Multiple Constrained Resources 420 The Use of Costs in Pricing Decisions 420 Cost-Based Pricing 420 Example 8.9 How to Calculate Price by Applying a Markup Percentage to Cost 421 Target Costing and Pricing 422 Example 8.10 How to Calculate a Target Cost 423 CHAPTER 9 Profit Planning and Flexible Budgets 454 Description of Budgeting 456 Budgeting and Planning and Control 456 Exhibit 9.1 Planning, Control, and Budgets 456 Advantages of Budgeting 457 The Master Budget 457 Exhibit 9.2 The Master Budget and Its Interrelationships 458 Preparing the Operating Budget 459 Sales Budget 459 Example 9.1 How to Prepare a Sales Budget 460 Production Budget 461 Example 9.2 How to Prepare a Production Budget 461 Direct Materials Purchases Budget 462 Example 9.3 How to Prepare a Direct Materials Purchases Budget 463 Direct Labor Budget 464 Example 9.4 How to Prepare a Direct Labor Budget 464 Overhead Budget 464 Example 9.5 How to Prepare an Overhead Budget 464 Ending Finished Goods Inventory Budget 465 Example 9.6 How to Prepare an Ending Finished Goods Inventory Budget 465 Cost of Goods Sold Budget 466 Example 9.7 How to Prepare a Cost of Goods Sold Budget 466 Selling and Administrative Expenses Budget 466 Example 9.8 How to Prepare a Selling and Administrative Expenses Budget 467 Budgeted Income Statement 467 Example 9.9 How to Prepare a Budgeted Income Statement 467 Preparing the Financial Budget 469 Cash Budget 469 Exhibit 9.3 The Cash Budget 469 Example 9.10 How to Prepare a Schedule for Cash Collections on Accounts Receivable 470 Example 9.11 How to Determine Cash Payments on Accounts Payable 471 Example 9.12 How to Prepare a Cash Budget 472 Budgeted Balance Sheet 473 Exhibit 9.4 Budgeted Balance Sheet 474 Using Flexible Budgets for Planning and Performance Reporting 475 Example 9.13 How to Prepare a Before-the-Fact Flexible Budget 476 Exhibit 9.5 Performance Report Comparing Actual Costs to the Static Budget 477 Example 9.14 How to Prepare a Performance Report Using a Flexible Budget 478 Using Budgets for Performance Evaluation 479 Frequent Feedback on Performance 480 Monetary and Nonmonetary Incentives 480 Participative Budgeting 480 Exhibit 9.6 The Art of Standard Setting 481 Realistic Standards 481 Controllability of Costs 482 Multiple Measures of Performance 482 CHAPTER 10 Standard Costing and Variance Analysis 520 Unit Standards and Basic Concepts of Standard Costing 522 How Standards Are Developed 523 Types of Standards 523 Copyright 2018 Cengage Learning. 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WCN 02-200-203 Contents Exhibit 10.1 Types of Standards 523 Why Standard Cost Systems Are Adopted 524 Exhibit 10.2 Cost Assignment Approaches 525 Exhibit 10.3 Standard Cost Sheet for Corn Chips 526 Example 10.1 How to Compute Standard Quantities Allowed (SQ and SH) 527 Variance Analysis: General Description 528 Price and Usage Variances 528 Exhibit 10.4 Variance Analysis: General Description 529 The Decision to Investigate 529 Example 10.2 How to Use Control Limits to Trigger a Variance Investigation 531 Variance Analysis: Materials And Labor 532 Total Variance for Materials 532 Example 10.3 How to Calculate the Total Variance for Materials 532 Direct Materials Variances 533 Example 10.4 How to Calculate Materials Variances: Formula and Columnar Approaches 534 Using Materials Variance Information 535 Total Variance Analysis: Direct Labor 536 Example 10.5 How to Calculate the Total Variance for Labor 537 Direct Labor Variances 538 Example 10.6 How to Calculate Labor Variances: Formula and Columnar Approaches 539 Using Labor Variance Information 539 Additional Cost Management Practices 541 Overhead Analysis 543 Total Variable Overhead Variance 543 Example 10.7 How to Calculate the Total Variable Overhead Variance 543 Variable Overhead Variances 544 Example 10.8 How to Calculate Variable Overhead Spending and Efficiency Variances: Columnar and Formula Approaches 544 Comparison of the Variable Overhead Spending Variance with the Price Variances of Materials and Labor 545 Responsibility for the Variable Overhead Spending Variance 546 Responsibility for the Variable Overhead Efficiency Variance 546 A Performance Report for the Variable Overhead Spending and Efficiency Variances 546 Example 10.9 How to Prepare a Performance Report for the Variable Overhead Variances 547 Fixed Overhead Analysis 547 Total Fixed Overhead Variance 548 Example 10.10 How to Calculate the Total Fixed Overhead Variance 548 Fixed Overhead Variances 549 xxi Example 10.11 How to Calculate Fixed Overhead Variances: Columnar and Formula Approaches 549 Responsibility for the Fixed Overhead Spending Variance 550 Analysis of the Fixed Overhead Spending Variance 550 Responsibility for the Fixed Overhead Volume Variance 551 Analysis of the Volume Variance 552 Exhibit 10.5 Graphical Analysis of the Volume Variance 552 Appendix 10A: Accounting for Variances 552 Entries for Direct Materials Variances 553 Entries for Direct Labor Variances 553 Disposition of Materials and Labor Variances 554 MAKING THE CONNECTION: INTEGRATIVE EXERCISE (CHAPTERS 5, 9, AND 10) 588 CHAPTER 11 Performance Evaluation and Decentralization 590 Decentralization and Responsibility Centers 592 Exhibit 11.1 Centralization and Decentralization 592 Reasons for Decentralization 592 Divisions in the Decentralized Firm 593 Types of Goods or Services 593 Exhibit 11.2 Decentralized Divisions 594 Geographic Lines 594 Responsibility Centers 594 Exhibit 11.3 Types of Responsibility Centers and Accounting Information Used to Measure Performance 595 Measuring the Performance of Investment Centers by Using Return on Investment 596 Return on Investment 596 Margin and Turnover 597 Example 11.1 How to Calculate Average Operating Assets, Margin, Turnover, and Return on Investment 597 Exhibit 11.4 Comparison of Divisional Performance 598 Advantages of Return on Investment 599 Disadvantages of the Return on Investment Measure 600 Measuring the Performance of Investment Centers by Using Residual Income and Economic Value Added 602 Residual Income 603 Example 11.2 How to Calculate Residual Income 603 Economic Value Added (EVA) 604 Example 11.3 How to Calculate Economic Value Added 605 Transfer Pricing 607 Impact of Transfer Pricing on Divisions and the Firm as a Whole 607 Exhibit 11.5 Impact of Transfer Price on Transferring Divisions and the Company, ABC Inc., as a Whole 607 Transfer Pricing Policies 608 Example 11.4 How to Calculate Transfer Price 609 Appendix 11A: The Balanced Scorecard—Basic Concepts 611 Exhibit 11.6 Balanced Scorecard for Ashley Hotel* 612 Strategy Translation 612 Copyright 2018 Cengage Learning. 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WCN 02-200-203 xxii Contents Exhibit 11.7 Testable Strategy Illustrated 614 The Four Perspectives and Performance Measures 615 Exhibit 11.8 Summary of Objectives and Measures: Financial Perspective 616 Exhibit 11.9 Summary of Objectives and Measures: Customer Perspective 617 Example 11.5 How to Compute Cycle Time and Velocity 618 Example 11.6 How to Calculate Manufacturing Cycle Efficiency 620 Exhibit 11.10 Summary of Objectives and Measures: Internal Perspective 621 Exhibit 11.11 Summary of Objectives and Measures: Learning and Growth Perspective 622 CHAPTER 12 Capital Investment Decisions 644 Types of Capital Investment Decisions 646 Independent and Mutually Exclusive Projects 646 Making Capital Investment Decisions 646 Nondiscounting Models: Payback Period and Accounting Rate of Return 647 Payback Period 648 Example 12.1 How to Calculate Payback 648 Accounting Rate of Return 650 Example 12.2 How to Calculate the Accounting Rate of Return 651 Discounting Models: The Net Present Value Method 652 Net Present Value Defined 652 Net Present Value Illustrated 653 Example 12.3 How to Assess Cash Flows and Calculate Net Present Value 653 Illustrating Relationships: NPV, Discount Rates, and Cash Flows 654 Exhibit 12.1 NPV, Discount Rates, and Cash Flow 655 Internal Rate of Return 656 Internal Rate of Return Defined 656 Internal Rate of Return Illustrated: Multiple-Period Setting with Uniform Cash Flows 656 Example 12.4 How to Calculate Internal Rate of Return with Uniform Cash Flows 657 Internal Rate of Return Illustrated: Multiple-Period Setting with Uneven Cash Flows 657 Postaudit of Capital Projects 659 Postaudit Illustrated 659 Postaudit Benefits 660 Postaudit Limitations 661 Mutually Exclusive Projects 661 Net Present Value Compared with Internal Rate of Return 661 Exhibit 12.2 Net Present Value Compared with Internal Rate of Return 662 NPV Analysis for Mutually Exclusive Projects Illustrated 662 Example 12.5 How to Calculate Net Present Value and Internal Rate of Return for Mutually Exclusive Projects 663 Special Considerations for Advanced Manufacturing Environment 664 Exhibit 12.3 Investment Data; Direct, Intangible, and Indirect Benefits 665 Appendix 12A: Present Value Concepts 667 Future Value 667 Present Value 667 Present Value of an Uneven Series of Cash Flows 668 Exhibit 12A.1 Present Value of an Uneven Series of Cash Flows 668 Present Value of a Uniform Series of Cash Flows 669 Exhibit 12A.2 Present Value of an Annuity 669 Appendix 12B: Present Value Tables 669 Exhibit 12B.1 Present Value of a Single Amount 670 Exhibit 12B.2 Present Value of an Annuity 671 MAKING THE CONNECTION: INTEGRATIVE EXERCISE (CHAPTERS 3, 5, 8, AND 12) 697 CHAPTER 13 Emerging Topics in Managerial Accounting 700 Enterprise Risk Management 702 Exhibit 13.1 Key Steps within the ERM Process 702 Determining Risk Appetite 703 Exhibit 13.2 Key Elements of a Portfolio Risk Management Perspective 703 Identifying Top Risks 703 Assessing Inherent Risks 703 Responding to Risks Using a Portfolio Perspective 705 Example 13.1 How to Use Net Benefit to Evaluate Risk Response Alternatives 707 Monitoring the ERM Process 708 Business Sustainability 709 Exhibit 13.3 The Role of Management Accounting in the Business Sustainability Cycle 710 Exhibit 13.4 Business Sustainability Issues throughout the Value Chain 711 Exhibit 13.5 The Relationship Between Stakeholders and Strategy 712 Exhibit 13.6 Stakeholder Engagement Activities at Eli Lilly 713 Exhibit 13.7 The Relationship between Stakeholder Concerns and Business Success at UPS 714 Exhibit 13.8 Rapid Growth in Corporate Sustainability Reporting Since Its Inception 716 Exhibit 13.9 Widespread Adoption of Corporate Sustainability Reporting across Industries 716 Exhibit 13.10 The Global Phenomenon of Corporate Sustainability Reporting 717 Exhibit 13.11 Growth in Independent Assurance of Corporate Sustainability Information 718 Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Contents Quality Cost Management 719 Costs of Quality 720 Exhibit 13.12 Examples of Quality Costs by Category 721 Reporting Quality Costs 721 Example 13.2 How to Prepare a Quality Cost Report 721 Exhibit 13.13 Quality Cost Categories: Relative Contribution by Category 723 Controlling Quality Costs 724 Example 13.3 How to Prepare an Interim Quality Performance Report 724 Example 13.4 How to Prepare Multiple-Period Quality Trend Reports 726 Exhibit 13.14 Multiple-Period Trend Graph: Total Quality Costs 726 Exhibit 13.15 Multiple-Period Trend Graph: Individual Quality Cost Categories 727 Lean Manufacturing and Lean Accounting 727 Lean Manufacturing 727 Exhibit 13.16 Order Fulfillment Value Stream 728 Exhibit 13.17 Traditional Batch Production Process 729 Exhibit 13.18 Proposed Manufacturing Cell 730 Example 13.5 How to Calculate Production Time for Traditional and Cellular Manufacturing 730 Lean Accounting 731 Exhibit 13.19 Value-Stream Cost Assignments 732 Exhibit 13.20 Value-Stream Costs and Production Hours: Models X12 and Y35 735 Example 13.6 How to Calculate Value-Stream Product Costs 735 Value-Stream Operational Control 736 Exhibit 13.21 Holland Company Value-Stream Box Scorecard 736 International Issues in Management Accounting 738 Types of Involvement in the International Economy 738 Foreign Currency Exchange 740 Example 13.7 How to Calculate the Value of an Exchange in Another Currency 741 Transfer Pricing and the Multinational Firm 743 Exhibit 13.22 Use of Transfer Pricing to Affect Taxes Paid 743 The Role of Cost and Managerial Accounting in Fraud And Forensic Accounting 745 Fraud and Management Accounting 745 Forensic Accounting in Management Accounting 747 Exhibit 13.23 Applying Different Types of Accounting Knowledge to Forensic Accounting 748 CHAPTER 14 Statement of Cash Flows 790 Overview of the Statement of Cash Flows 792 Cash Defined 792 Sources and Uses of Cash 792 Exhibit 14.1 Sources and Uses of Cash 792 xxiii Methods for Calculating Operating Cash Flows 793 Example 14.1 How to Classify Activities and Identify Them as Sources or Uses of Cash 793 Noncash Exchanges 794 Preparation of the Statement: Indirect Method 795 Exhibit 14.2 Balance Sheets: Lemmons Company 795 Step 1: Compute the Change in Cash 796 Example 14.2 How to Compute the Change in Cash 796 Step 2: Compute Operating Cash Flows 796 Example 14.3 How to Calculate Operating Cash Flows Using the Indirect Method 796 Step 3: Compute Investing Cash Flows 798 Example 14.4 How to Compute Investing Cash Flows 798 Step 4: Compute Financing Cash Flows 799 Example 14.5 How to Compute Financing Cash Flows 799 Step 5: Prepare the Statement of Cash Flows 800 Example 14.6 How to Prepare the Statement of Cash Flows 800 The Direct Method: An Alternative Approach 801 Example 14.7 How to Calculate Operating Cash Flows Using the Direct Method 802 Worksheet Approach to the Statement of Cash Flows 803 Exhibit 14.3 Balance Sheets: Portermart Company 804 Example 14.8 How to Prepare a Statement of Cash Flows Using a Worksheet Approach 804 Analysis of Transactions 806 The Final Step 807 Exhibit 14.4 Worksheet-Derived Statement of Cash Flows for Portermart Company 808 CHAPTER 15 Financial Statement Analysis 836 Common-Size Analysis 838 Exhibit 15.1 Common-Size Analysis 839 Horizontal Analysis 839 Example 15.1 How to Prepare Common-Size Income Statements Using Base Period Horizontal Analysis 839 Vertical Analysis 840 Example 15.2 How to Prepare Income Statements Using Net Sales as the Base: Vertical Analysis 840 Percentages and Size Effects 841 Ratio Analysis 842 Standards for Comparison 842 Exhibit 15.2 Ratio Analysis 843 Classification of Ratios 844 Exhibit 15.3 Income Statement and Statement of Retained Earnings for Payne Company for Year 2 844 Exhibit 15.4 Comparative Balance Sheets for Payne Company for Years 1 and 2 845 Liquidity Ratios 846 Current Ratio 846 Quick or Acid-Test Ratio 848 Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 xxiv Contents Example 15.3 How to Calculate the Current Ratio and the Quick (or Acid-Test) Ratio 848 Accounts Receivable Turnover Ratio 848 Example 15.4 How to Calculate the Average Accounts Receivable, the Accounts Receivable Turnover Ratio, and the Accounts Receivable Turnover in Days 849 Inventory Turnover Ratio 850 Example 15.5 How to Calculate the Average Inventory, the Inventory Turnover Ratio, and the Inventory Turnover in Days 851 Impact of the Just-in-Time Manufacturing Environment 852 Leverage Ratios 853 Times-Interest-Earned Ratio 853 Example 15.6 How to Calculate the Times-Interest-Earned Ratio 853 Debt Ratio 854 Example 15.7 How to Calculate the Debt Ratio and the Debt-to-Equity Ratio 855 Profitability Ratios 856 Return on Sales 856 Example 15.8 How to Calculate the Return on Sales 856 Return on Total Assets 856 Example 15.9 How to Calculate the Average Total Assets and the Return on Assets 857 Return on Common Stockholders’ Equity 857 Example 15.10 How to Calculate the Average Common Stockholders’ Equity and the Return on Stockholders’ Equity 858 Earnings per Share 859 Example 15.11 How to Compute Earnings per Share 859 Price-Earnings Ratio 859 Example 15.12 How to Compute the Price-Earnings Ratio 860 Dividend Yield and Payout Ratios 860 Example 15.13 How to Compute the Dividend Yield and the Dividend Payout Ratio 861 The Importance of Profitability Ratios to External Users of the Financial Statements 861 Glossary 891 Check Figures Index 899 903 Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 SEVENTH EDITION Managerial Accounting THE C O RNERSTO N E O F B U SIN E SS DECI SI O N MA KI NG Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Introduction to Managerial Accounting 1 After studying Chapter 1, you should be able to: ▶ 2 ▶ 3 ▶ 4 ▶ 5 ▶ 6 ▶ Explain the meaning of managerial accounting. Explain the differences between managerial accounting and financial accounting. Identify and explain the current focus of managerial accounting. Describe the role of managerial accountants in an organization. Explain the importance of ethical behavior for managers and managerial accountants. Identify three forms of certification available to managerial accountants. Nico Traut/Shutterstock.com 1 Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 EXPERIENCE MANAGERIAL DECISIONS with BuyCostumes.com The greatest benefit of managerial accounting is also its biggest challenge— to provide managers with information that improves decisions and creates organizational value. This information helps inform managers about the impact of various strategic and operational decisions on key nonfinancial performance measures and their eventual impact on the organization’s financial performance. The information is challenging to prepare and analyze because it requires an understanding of all value chain components that affect the organization, including research and development, production, marketing, distribution, and customer service. Since its inception in 1999, BuyCostumes.com has blended the right managerial accounting information and an innovative business model “Using the Internet and to provide over 10 billion costume combinations to millions of customers all over the world. marketing creativity, Using the Internet and marketing creativity, BuyCostumes.com serves a BuyCostumes.com serves a growing market market of 150 million of consumers. For example, U.S. consumers spend over $2.5 billion each year on Halloween U.S. consumers who spend costumes for adults, children and even pets $2.5 billion on Halloween (who account for $350 million of this amount)! costumes each year.” According to BuyCostumes.com’s CEO, the company measures key performance indicators to guide its decision making. For example, managerial accountants analyze measures of customer satisfaction, average time between order placement and costume arrival for each shipping method, and the profitability of individual customer types. As customer trends change, competitors emerge, and technological advances occur, BuyCostumes.com’s managerial accounting information adapts to provide crucial insight into the company’s performance and how its strategy should evolve to remain one of the world’s largest Internet costume retailers. 3 Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 4 Chapter 1 Introduction to Managerial Accounting O BJE C T I V E 1 ▶ Explain the meaning of managerial accounting. Here’s Why It’s important CONCEPT CLIP THE MEANING OF MANAGERIAL ACCOUNTING What do we mean by managerial accounting? Quite simply, managerial accounting is the provision of accounting information for a company’s internal users. More specifically, managerial accounting represents the firm’s internal accounting system designed to provide the necessary financial and nonfinancial information that helps company managers make the best possible decisions. Unlike financial accounting, managerial accounting is not bound by any formal criteria such as generally accepted accounting principles (GAAP). Managerial accounting has three broad objectives: • To provide information for planning the organization’s actions. • To provide information for controlling the organization’s actions. • To provide information for making effective decisions. Using recent examples from many companies in both the for-profit and not-for-profit sectors, this textbook explains how all manufacturing (e.g., aircraft producer—Boeing Corporation), merchandising (e.g., clothing retailer—American Eagle Outfitters), and service (e.g., healthcare provider—Cleveland Clinic, or online retailer Amazon.com) organizations use managerial accounting information and concepts. People in all types of positions—from corporate presidents to graphic designers to hospital administrators—can improve their managerial skills by being well-grounded in the basic concepts and use of managerial accounting information for planning, controlling, and decision making.1 The exciting reality is that the importance and scope of managerial accounting information is growing rapidly around the globe. As a result, the demand for businesspeople who possess the ability to create, understand, use, and communicate managerial accounting information continues to grow. Chapter 13 explores special and emerging managerial accounting areas, such as enterprise risk management, lean and quality accounting, corporate sustainability reporting, and fraud and forensic accounting. Here’s How It’s Used: One of the fastest growing needs in business is the area of corporate sustainability measurement and reporting. Managerial accounting plays an important role in this exciting aspect of business. Thousands of companies increasingly release to the public (i.e., suppliers, regulators, employees, human rights organizations, environmental groups, customers, etc.) very large quantities of managerial accounting information that traditionally either did not exist or was released only internally. This information is released through optional reports known as corporate sustainability reports (e.g., Coca-Cola, McDonald’s), social responsibility reports (e.g., Starbucks, Target), or citizenship reports (e.g., ExxonMobil, General Electric). The release of these reports often occurs because firms want SUS TA I NA B I LI TY to manage their reputation by preparing and releasing such information themselves, rather than having Internet bloggers, newspapers, and cable news networks publish their own estimates of such information. Some leading companies (e.g., Clorox, Eli Lilly, Novo Nordisk) have even moved so far as to combine their sustainability report with their annual report, thereby resulting in a single, integrated report containing both traditional financial accounting information as well as managerial accounting information.1 Measuring the nonfinancial aspects of corporate business sustainability, including economic, social, environmental, legal, and political issues, and then linking their impact on the company’s financial performance requires the unique insights and expertise of managerial accountants! 1 For a more in-depth discussion of the future of sustainability accounting, see “Currents of Change: The KPMG Survey of Corporate Responsibility Reporting 2015,” taken from KPMG’s website, www.kpmg.com/crreporting; or Brian Ballou, Dan Heitger, and Chuck Landes, “Accounting for the Sustainability Cycle,” 2013, taken from the American Institute of Certified Public Accountants’ website, www.aicpa.org/interestareas/frc/assuranceadvisoryservices/ downloadabledocuments/sustainability/whitepaper_accounting_for_the_sustainability_cycle.pdf. Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Chapter 1 Introduction to Managerial Accounting Information Needs of Managers and Other Users Managerial accounting information is needed by a number of individuals. In particular, managers and empowered workers need comprehensive, up-to-date information for the following activities: • planning • controlling • decision making Planning The detailed formulation of action to achieve a particular end is the management activity called planning. Planning requires setting objectives and identifying methods to achieve those objectives. For example, a firm may set the objective of increasing its short- and longterm profitability by improving the overall quality of its products. DaimlerChrysler drastically improved the quality and profitability of its Chrysler automobile division in the early 21st century to the point where its quality surpassed that of Mercedes-Benz (also owned by DaimlerChrysler). By improving product quality, firms like DaimlerChrysler (now Daimler AG) should be able to reduce scrap and rework, decrease the number of customer complaints and warranty work, reduce the resources currently assigned to inspection, and so on, thus increasing profitability. To realize these benefits, management must develop some specific methods that, when implemented, will lead to the achievement of the desired objective. A plant manager, for example, may start a supplier evaluation program to identify and select suppliers who are willing and able to supply defect-free parts. Empowered workers may be able to identify production causes of defects and to create new methods for producing a product that will reduce scrap and rework and the need for inspection. The new methods should be clearly specified and detailed. Controlling Planning is only half the battle. Once a plan is created, it must be implemented and its implementation monitored by managers and workers to ensure that the plan is being carried out as intended. The managerial activity of monitoring a plan’s implementation and taking corrective action as needed is referred to as controlling. Control is usually achieved by comparing actual performance with expected performance. This information can be used to evaluate or to correct the steps being taken to implement a plan. Based on the feedback, a manager (or worker) may decide to let the plan continue as is, take corrective action of some type to put the actions back in harmony with the original plan, or do some midstream replanning. The managerial accounting information used for planning and control purposes can be either financial or nonfinancial in nature. For example, Duffy Tool and Stamping saved $14,300 per year by redesigning a press operation. In one department, completed parts (made by a press) came down a chute and fell into a parts tub. When the tub became full, press operators had to stop operation while the stock operator removed the full tub and replaced it with an empty one. Workers redesigned the operation so that each press had a chute with two branches—each leading to a different tub. Now when one tub is full, completed parts are routed into the other tub. The $14,300 savings are a financial measure of the success of the redesign. The redesign also eliminated machine downtime and increased the number of units produced per hour (operational feedback), both of which are examples of nonfinancial performance. Both types of measures convey important information. Often, financial and nonfinancial feedback is given to managers in the form of performance reports that compare the actual data with planned data or other benchmarks. Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 5 6 Chapter 1 Introduction to Managerial Accounting Decision Making The process of choosing among competing alternatives is called decision making. This managerial function is intertwined with planning and control in that a manager cannot successfully plan or control the organization’s actions without making decisions regarding competing alternatives. For instance, if BMW contemplates the possibility of offering a car that runs on gasoline and hydrogen, its ultimate decision would be improved if information about the alternatives (e.g., pertaining to gasoline versus hydrogen versus hybrid combinations of these two automobile fuel options) is gathered and made available to managers. One of the major roles of the managerial accounting information system is to supply information that facilitates decision making. For example, based on managerial accounting information concerning current market size and potential growth opportunities in the costume market, BuyCostumes.com decided to sell many different types of costumes internationally in order to best meet customer demand. As a result, the company offers a selection of exclusive and licensed costumes and accessories that equate to over 10 billion costume combinations! This important strategic decision allows BuyCostumes.com to serve as a premier destination for the 10 million global partiers that visit its website each Halloween. Interestingly, since its creation, BuyCostumes.com management has correctly predicted the outcome of each presidential election based on the sales data from its presidential candidate mask collection. Here’s How It’s Used: What Constitutes Managerial Accounting Information? You are the Costco executive who has been chosen to decide whether or not the company should continue its policy of sourcing its finest coffee from Rwanda. What types of information should you consider as you decide how best to structure and analyze this important long-term strategic decision? What challenges do you expect to face in making this decision? What constitutes managerial accounting information is growing considerably as organizations must make decisions that include the global consequences of their actions, as well as the impact on an increasingly large number of vocal, well-informed, and powerful stakeholders. Stakeholders include the company’s customers, suppliers, employees, regulators, politicians, lawmakers, and local community members. Generally speaking, managerial accounting information can be financial in nature, such as sales revenue or cost of sales, or nonfinancial in nature, such as the number of quality defects or the percentage of manufacturing plants that are inspected for compliance with human rights policies. One of the most exciting—and yet daunting—aspects of managerial accounting is that one can choose to measure anything, assuming the resources, information technology, and creativity exist to capture the desired performance measure. As a Costco executive, one of the first nonfinancial factors you likely would consider measuring is the quality of the Rwandan coffee to ensure that it fulfills Costco’s strategic goal of creating a competitive advantage by providing premium coffee to customers. Quality could be defined by the beans’ taste, shelf life AT C O S T C O longevity, or other factors valued by customers. Other important nonfinancial performance measures might include the time required to ship the harvested beans from Rwanda to Costco stores around North America and the presence of a local farming workforce in Rwanda critical to successfully sustaining a long-term supply chain between Rwandan fields and Costco customers. One of the most important financial items to measure would be the importance to Costco’s customers of purchasing premium quality coffee, which could be measured by the additional price they are willing to pay for Rwandan coffee over and above more average quality coffee. Other financial measures might include the cost of harvesting, inspecting, and shipping beans, as well as investments in Rwandan farming communities (e.g., physical infrastructure and schools) that ensure the relationship is sustainable for future generations. Finally, you should consider how the decision to continue sourcing premium coffee from Rwanda will be perceived by Costco’s important stakeholders, including its customers who buy the coffee, suppliers who provide the coffee beans, and government officials in the United States and Rwanda who set trading policies between the two countries. Accurately measuring issues like stakeholder perceptions of such decisions can be difficult because the managerial accountant oftentimes must invent new measures, figure out where the data to create such measures might come from, and estimate how accurate these measures will be once collected. The managerial accountant’s ability to inform executive decision makers by providing innovative, accurate, and timely performance measures can create an important competitive advantage for the organization by improving its key decisions. Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 7 Chapter 1 Introduction to Managerial Accounting Check Point 1. Which activity generally occurs first: decision making, planning, or control? Answer: Planning usually occurs first to set objectives, followed by controlling to monitor implementation of the planned objectives, and, finally, decision making to choose the best alternative(s). 2. The desire to attract and retain the most talented workers in a given industry is an example of which activity: decision making, planning, or control? Answer: Planning. Setting an objective to improve workforce quality is an example of an important planning activity. FINANCIAL ACCOUNTING AND MANAGERIAL ACCOUNTING There are two basic kinds of accounting information systems: financial accounting and managerial accounting. The company’s accounting system should be designed to provide both financial and managerial accounting information. The key point is flexibility—the system should be able to supply different information for different purposes. OB J ECT I VE ◀ 2 Explain the differences between managerial accounting and financial accounting. Here’s Why It’s important Financial Accounting Financial accounting is primarily concerned with producing information (financial statements) for external users, including investors, creditors, customers, suppliers, government agencies (Food and Drug Administration, Federal Communications Commission, etc.), and labor unions. This information has a historical orientation and is used for such things as investment decisions, stewardship evaluation, monitoring activity, and regulatory measures. Financial statements must conform to certain rules and conventions that are defined by various agencies, such as the Securities and Exchange Commission (SEC), the Financial Accounting Standards Board (FASB), and the International Accounting Standards Board (IASB). These rules pertain to issues such as the recognition of revenues; timing of expenses; and recording of assets, liabilities, and stockholders’ equity. Managerial Accounting The managerial accounting system produces information for internal users, such as managers, executives, and workers. Thus, managerial accounting could be properly called internal accounting, and financial accounting could be called external accounting. Specifically, managerial accounting identifies, collects, measures, classifies, and reports financial and nonfinancial information that is useful to internal users in planning, controlling, and decision making. Comparison of Financial and Managerial Accounting When comparing financial accounting to managerial accounting, several differences can be identified. Some of the more important differences follow and are summarized in Exhibit 1.1. Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 8 Chapter 1 Introduction to Managerial Accounting • Targeted users. Managerial accounting focuses on providing information for internal users, while financial accounting focuses on providing information for external users. • Restrictions on inputs and processes. Managerial accounting is not subject to the requirements of • • • • Exhibit 1.1 Comparison of Financial and Managerial Accounting generally accepted accounting principles set by the SEC and the FASB that must be followed for financial reporting. The inputs and processes of financial accounting are well defined. Only certain kinds of economic events qualify as inputs, and processes must follow generally accepted methods. Unlike financial accounting, managerial accounting has no official body that prescribes the format, content, and rules for selecting inputs and processes and preparing reports. Type of information. The restrictions imposed by financial accounting tend to produce objective and verifiable financial information. For managerial accounting, information may be financial and nonfinancial and may be much more subjective in nature. Time orientation. Financial accounting has a historical orientation (i.e., looking through the rearview mirror). It records and reports events that have already happened. Although managerial accounting also records and reports events that have already occurred, it strongly emphasizes providing information about future events (i.e., looking through the front windshield). Management, for example, may want to know what it will cost to produce a product next year. This future orientation is necessary for planning and decision making. Degree of aggregation. Managerial accounting provides measures and internal reports used to evaluate the performance of entities, product lines, departments, and managers. Essentially, detailed information is needed and provided. Financial accounting, on the other hand, focuses on overall firm performance, providing a more aggregated viewpoint. Breadth. Managerial accounting is much broader than financial accounting. It includes aspects of managerial economics, industrial engineering, and management science as well as numerous other areas. Financial Accounting Managerial Accounting • Externally focused • Must follow externally imposed rules • Objective financial information • Internally focused • No mandatory rules • Financial and nonfinancial information; subjective information possible • Emphasis on the future • Internal evaluation and decisions based on very detailed information • Broad, multidisciplinary • Historical orientation • Information about the firm as a whole • More self-contained Check Point 1. Is the preparation of financial statements for the annual report a task more suited to managerial accounting or financial accounting? Answer: Financial accounting. While managerial accounting provides important inputs (such as work-in-process inventory or cost of goods...
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Running head: The Role of Managerial Accountants in Strategic Planning and Budgeting

Abstract 1
Bibliographic Citation
Zhang, I., Zhang, Y. (2020). Discussion of “The Effect of Fair Value Accounting on the
Performance Evaluation Role of Earnings.” Journal of Accounting and Economics, 70(2),
doi: https://doi.org/10.1016/j.jacceco.2020.101343
Authors
Ivy Xiying Zhang, Professor at University of California, Riverside, USA; and, Yong Zhang,
Associate Professor at Hong Kong Polytechnic University, PR China.
Research Concern
As pointed by various existing literature, managerial accounting plays an important role
in enabling the organization in developing strategies aimed at enhancing the organization’s
competitive advantage through budgeting, specifically human resources compensation contracts
(e.g. Ball, Li, & Shivakumar, 2015). Contextually, complete financial strategic planning carried
without considering the generally accepted accounting principles (GAAP). Potepa (2020)
illustrated that accounting information helps firms to develop feasible plans and budgets that
address issues such as transaction costs and informational costs, which influence significant
market frictions. Other studies show that the use of unverifiable fair values can affect the value
obtained from managerial accounting in budgeting (Ball, Li, & Shivakumar, 2015). Moreover,
DeFond et al. (2020) show that managerial accounting under the settings of the international
financial reporting standards (IFRS) enhance executive performance evaluation and

1

compensation in an organization. In this note, the researchers in this article aimed at advancing
the existing literature on managerial accounting, particularly fair value accounting, in evaluating
management performance.
Purpose
The main purpose of the study was to review and contribute to DeFond et al.’s (2020)
literature on the application of fair value accounting in evaluating management performance.
Effective evaluation of management performance is shown to improve strategic planning as well
as budgeting in an organization.
Basically, the study attempted to assess and clearly explain the impact of fair value accounting
on an organization’s budget as well as strategic planning.
Precedent Literature
Various existing literature, both supporting and disputing, on the impact of accounting
information on decision making have been carried out over time. On the one hand, Defond et al.
(2020) assert that the bottom-line earnings acted as important elements in evaluating
performance so as to enable compensation planning. Nevertheless, the researchers narrowly
discuss on the importance of managerial accounting on performance evaluation for the purpose
of budgeting yet the two are different concepts. Whilst bottom-line earnings are usually limited
in scope, accounting information combines various financial components, which are easily
resented and efficiently represents for corporate assessment and planning.
Moreover, bottom-line earnings do not present the firm’s value, which is effectively
assessed by considering all financial operations in the organization. Potepa (2020) shows that

bottom-line earnings, at times, require the exclusion of low-persistence earning components so as
to facilitate performance measurement in the organization for strategic planning. However, the
researchers in this study assert that when this approach is computed based on regression strategic
and/or budgetary outcomes over the bottom-line earnings, low association between the two
variables is observed.
Zhang & Zhang (2020) eventually trickle down to the point that bottom-line earnings can
undoubtedly be used for performance evaluation, but the planning is done for short-term
projects. On the other hand, the use of managerial accounting information is not clearly
discussed by DeFond et al. (2020), which leaves out the question on how adjustments to
components of the bottom-line earnings is determined so as to effectively facilitate performance
measurement in an organization. Based on this literature review, Zhang & Zhang (2020) assert
their claim for the need to study the use of fair value accounting in supporting performance
measurement intended for determining compensation contracts in firms.
Methodology
The data used in this study was mainly collected from various studies that focused on the
use of bottom-line earnings for performance measurement in organizations. The study article by
DeFond et al. (2020) was the main article that was being reviewed on how they illustrate the use
of fair value accounting on performance measurement aimed at compensation contracts and
bonus plans. The researchers compare the literature presented by DeFond et al. (2020) in relation
to other studies that applied specific fair-valued items or country-level measures to assess the use
of accounting information for performance measurement.
Instrumentation

The instrument used to conduct the study involved a systematic review of pertinent
information on the use of managerial accounting in strategic planning and budgeting, particularly
fair value accounting in relation to compensation planning in firms. The systematic review
involved comparison of the firm-level measure presented by DeFond et al. (2020) in relation to
fair value reconciliation adjustments conducted by other researchers so as to demonstrate the use
of managerial accounting on strategic planning and budgeting.
Findings
Zhang & Zhang (2020) found out that the reconciliation adjustments done through the
firm-level fair-value accounting measures presented by DeFond et al. (2020) largely contributed
to significant measurement errors. The measurement errors identified had the impact to increase
the favorability of a particular compensation plan with regard to earnings, or decrease the
association due to various accounting components. Nevertheless, the researchers assert that the
despite that DeFond et al. (2020) attempts to demonstrate a firm-level method for applying
accounting information for performance measurement, the method does not encompass an
objective approach for applying accounting information for strategic planning and long-term
budgeting in an organization. This is associated with the substantial measurement errors as well
as assumption that are made so as to support the decision making process. Moreover, the use of
crude financial values, that is before accounting principles have been applied on them, and after
accounting operations have been performed on them resulted to varying outcomes.
Conclusions
The authors of this study conclude that the article by DeFond et al. (2020) illustrates
important aspects concerning the influence of the use of managerial accounting on performance

measurements. The resultant measurement errors can be associated to the current accounting
standard setting. Moreover, the research findings clearly bring up the question on the
effectiveness and objectivity of the use of accounting information on strategic planning.
Suggestions for Further Research
Based on the conclusion in this study, future research work would focus on determining
the extent in which managers apply discretion in determining the ideal reconciliation adjustments
to support strategic planning for the lon...


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