Managerial Accounting, 9th Edition [9 ed.] 0538742801, 9780538742801

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Table of contents :
Front Cover......Page 1
Title Page......Page 4
Copyright......Page 5
Contents......Page 8
Preface......Page 16
About the Authors......Page 30
CHAPTER 1 The Changing Business Environment: A Manager's Perspective......Page 33
DECISION POINT A MANAGER'S FOCUS WAL-MART STORES, INC.......Page 34
Management Accounting and Financial Accounting: A Comparison......Page 35
Management Accounting and the Management Process......Page 36
Value Chain Analysis......Page 42
Primary Processes and Support Services......Page 43
Managers and Value Chain Analysis......Page 44
Continuous Improvement......Page 46
Management Tools for Continuous Improvement......Page 47
Achieving Continuous Improvement......Page 48
Using Performance Measures in the Management Process......Page 50
The Balanced Scorecard......Page 51
Standards of Ethical Conduct......Page 53
A LOOK BACK AT WAL-MART STORES, INC.......Page 56
STOP & REVIEW......Page 58
CHAPTER ASSIGNMENTS......Page 60
CHAPTER 2 Cost Concepts and Cost Allocation......Page 75
DECISION POINT A MANAGER'S FOCUS THE HERSHEY COMPANY......Page 76
Cost Classifications and Their Uses......Page 77
Cost Traceability......Page 78
Cost Classifications for Financial Reporting......Page 79
Income Statement and Accounting for Inventories......Page 81
Statement of Cost of Goods Manufactured......Page 82
Cost of Goods Sold and a Manufacturer's Income Statement......Page 84
Document Flows and Cost Flows Through the Inventory Accounts......Page 85
The Manufacturing Cost Flow......Page 87
Elements of Product Costs......Page 89
Computing Product Unit Cost......Page 90
Product Cost Measurement Methods......Page 91
Computing Service Unit Cost......Page 93
Allocating the Costs of Overhead......Page 94
Allocating Overhead: The Traditional Approach......Page 96
Allocating Overhead: The ABC Approach......Page 98
A LOOK BACK AT THE HERSHEY COMPANY......Page 100
STOP & REVIEW......Page 102
CHAPTER ASSIGNMENTS......Page 105
CHAPTER 3 Costing Systems: Job Order Costing......Page 121
DECISION POINT A MANAGER'S FOCUS COLD STONE CREAMERY, INC......Page 122
Communicating......Page 123
Product Costing Systems......Page 124
Job Order Costing in a Manufacturing Company......Page 126
Materials......Page 127
Overhead......Page 129
Sold Units......Page 130
Reconciliation of Overhead Costs......Page 131
A Manufacturer's Job Order Cost Card and the Computation of Unit Cost......Page 132
Job Order Costing in a Service Organization......Page 133
A LOOK BACK AT COLD STONE CREAMERY, INC.......Page 136
STOP & REVIEW......Page 138
CHAPTER ASSIGNMENTS......Page 140
CHAPTER 4 Costing Systems: Process Costing......Page 159
DECISION POINT A MANAGER'S FOCUS DEAN FOODS......Page 160
The Process Costing System......Page 161
Patterns of Product Flows and Cost Flow Methods......Page 162
Cost Flows Through the Work in Process Inventory Accounts......Page 163
Computing Equivalent Production......Page 164
Equivalent Production for Direct Materials......Page 165
Summary of Equivalent Production......Page 166
Accounting for Units......Page 167
Assigning Costs......Page 170
Process Costing for Two or More Production Departments......Page 172
Accounting for Units......Page 174
Assigning Costs......Page 176
A LOOK BACK AT DEAN FOODS......Page 179
STOP & REVIEW......Page 182
CHAPTER ASSIGNMENTS......Page 184
CHAPTER 5 Value-Based Systems: ABM and Lean......Page 197
DECISION POINT A MANAGER'S FOCUS LA-Z-BOY, INC.......Page 198
Value-Based Systems and Management......Page 199
Value Chains and Supply Chains......Page 200
Process Value Analysis......Page 201
Activity-Based Management......Page 202
Activity-Based Costing......Page 203
The Cost Hierarchy and the Bill of Activities......Page 204
Just-in-Time (JIT)......Page 207
Accounting for Product Costs in a JIT Operating Environment......Page 209
Backflush Costing......Page 211
Comparison of ABM and Lean......Page 215
A LOOK BACK AT LA-Z-BOY, INC.......Page 216
STOP & REVIEW......Page 219
CHAPTER ASSIGNMENTS......Page 221
CHAPTER 6 Cost Behavior Analysis......Page 237
DECISION POINT A MANAGER'S FOCUS FLICKR......Page 238
The Behavior of Costs......Page 239
The Scatter Diagram Method......Page 245
The High-Low Method......Page 246
Contribution Margin Income Statements......Page 248
Cost-Volume-Profit Analysis......Page 249
Breakeven Analysis......Page 251
Using an Equation to Determine the Breakeven Point......Page 252
The Breakeven Point for Multiple Products......Page 253
Applying C-V-P to Target Profits......Page 256
A LOOK BACK AT FLICKR......Page 259
STOP & REVIEW......Page 262
CHAPTER ASSIGNMENTS......Page 264
CHAPTER 7 The Budgeting Process......Page 279
DECISION POINT A MANAGER'S FOCUS FRAMERICA CORPORATION......Page 280
Advantages of Budgeting......Page 281
Budgeting Basics......Page 282
Preparation of a Master Budget......Page 284
Budget Procedures......Page 287
The Sales Budget......Page 288
The Production Budget......Page 289
The Direct Materials Purchases Budget......Page 290
The Overhead Budget......Page 292
The Selling and Administrative Expense Budget......Page 293
The Cost of Goods Manufactured Budget......Page 294
The Budgeted Income Statement......Page 296
The Cash Budget......Page 297
The Budgeted Balance Sheet......Page 300
A LOOK BACK AT FRAMERICA CORPORATION......Page 302
STOP & REVIEW......Page 305
CHAPTER ASSIGNMENTS......Page 307
CHAPTER 8 Performance Management and Evaluation......Page 331
DECISION POINT A MANAGER'S FOCUS VAIL RESORTS......Page 332
Other Measurement Issues......Page 333
The Balanced Scorecard and Management......Page 334
Responsibility Accounting......Page 336
Types of Responsibility Centers......Page 337
Organizational Structure and Performance Management......Page 339
Evaluating Cost Center Performance Using Flexible Budgeting......Page 341
Evaluating Profit Center Performance Using Variable Costing......Page 342
Return on Investment......Page 344
Residual Income......Page 346
Economic Value Added......Page 347
The Importance of Multiple Performance Measures......Page 349
Linking Goals, Performance Objectives, Measures, and Performance Targets......Page 350
The Coordination of Goals......Page 351
A LOOK BACK AT VAIL RESORTS......Page 354
STOP & REVIEW......Page 357
CHAPTER ASSIGNMENTS......Page 359
CHAPTER 9 Standard Costing and Variance Analysis......Page 375
DECISION POINT A MANAGER'S FOCUS iROBOT CORPORATION 345......Page 376
Standard Costs and Managers......Page 377
Standard Direct Labor Cost......Page 378
Standard Overhead Cost......Page 379
Total Standard Unit Cost......Page 380
The Role of Flexible Budgets in Variance Analysis......Page 381
Using Variance Analysis to Control Costs......Page 383
Computing Direct Materials Variances......Page 386
Analyzing and Correcting Direct Materials Variances......Page 388
Computing Direct Labor Variances......Page 389
Analyzing and Correcting Direct Labor Variances......Page 391
Using a Flexible Budget to Analyze Overhead Variances......Page 392
Computing Overhead Variances......Page 393
Analyzing and Correcting Overhead Variances......Page 398
Using Cost Variances to Evaluate Managers' Performance......Page 400
A LOOK BACK AT iROBOT CORPORATION......Page 402
STOP & REVIEW......Page 407
CHAPTER ASSIGNMENTS......Page 409
CHAPTER 10 Short-Run Decision Analysis......Page 423
DECISION POINT A MANAGER'S FOCUS BANK OF AMERICA......Page 424
Incremental Analysis for Short-Run Decisions......Page 425
Incremental Analysis for Outsourcing Decisions......Page 428
Incremental Analysis for Special Order Decisions......Page 430
Incremental Analysis for Segment Profitability Decisions......Page 433
Incremental Analysis for Sales Mix Decisions......Page 435
Incremental Analysis for Sell or Process- Further Decisions......Page 438
A LOOK BACK AT BANK OF AMERICA......Page 441
STOP & REVIEW......Page 444
CHAPTER ASSIGNMENTS......Page 446
CHAPTER 11 Capital Investment Analysis......Page 463
DECISION POINT A MANAGER'S FOCUS AIR PRODUCTS AND CHEMICALS INC.......Page 464
Capital Investment Analysis......Page 465
Capital Investment Analysis in the Management Process......Page 466
Cost of Capital......Page 468
Ranking Capital Investment Proposals......Page 469
Expected Benefits from a Capital Investment......Page 470
Depreciation Expense and Income Taxes......Page 471
Disposal or Residual Values......Page 472
Interest......Page 473
Present Value......Page 474
Present Value of an Ordinary Annuity......Page 475
The Net Present Value Method Illustrated......Page 477
The Payback Period Method......Page 480
The Accounting Rate-of-Return Method......Page 481
A LOOK BACK AT AIR PRODUCTS AND CHEMICALS INC.......Page 483
STOP & REVIEW......Page 485
CHAPTER ASSIGNMENTS......Page 487
CHAPTER 12 Pricing Decisions, Including Target Costing and Transfer Pricing......Page 501
DECISION POINT A MANAGER'S FOCUS LAB 126......Page 502
Pricing Policy Objectives......Page 503
External and Internal Pricing Factors......Page 504
Total Revenue and Total Cost Curves......Page 506
Auction-Based Pricing......Page 508
Cost-Based Pricing Methods......Page 509
Gross Margin Pricing......Page 510
Return on Assets Pricing......Page 511
Summary of Cost-Based Pricing Methods......Page 512
Pricing Services......Page 513
Factors Affecting Cost-Based Pricing Methods......Page 514
Differences Between Cost-Based Pricing and Target Costing......Page 516
Target Costing Analysis in an Activity-Based Management Environment......Page 518
Transfer Pricing......Page 520
Developing a Transfer Price......Page 521
Using Transfer Prices to Measure Performance......Page 522
A LOOK BACK AT LAB......Page 524
STOP & REVIEW......Page 527
CHAPTER ASSIGNMENTS......Page 529
CHAPTER 13 Quality Management and Measurement......Page 547
DECISION POINT A MANAGER'S FOCUS AMAZON .COM......Page 548
Managers' Use of MIS......Page 549
Financial Measures of Quality......Page 551
Nonfinancial Measures of Quality......Page 552
Measuring Service Quality......Page 556
Evaluating the Costs of Quality......Page 557
Evaluating Nonfinancial Measures of Quality......Page 560
The Evolving Concept of Quality......Page 561
Recognition of Quality......Page 563
A LOOK BACK AT AMAZON.COM......Page 565
STOP & REVIEW......Page 567
CHAPTER ASSIGNMENTS......Page 569
CHAPTER 14 Financial Analysis of Performance......Page 585
DECISION POINT A MANAGER'S FOCUS STARBUCKS CORPORATION 555......Page 586
Financial Performance Measurement: Creditors' and Investors' Objectives......Page 587
Standards of Comparison......Page 588
Sources of Information......Page 590
Executive Compensation......Page 592
Horizontal Analysis......Page 594
Trend Analysis......Page 597
Vertical Analysis......Page 598
Ratio Analysis......Page 600
Evaluating Liquidity......Page 602
Evaluating Profitability......Page 604
Evaluating Long-Term Solvency......Page 605
Evaluating the Adequacy of Cash Flows......Page 606
Evaluating Market Strength......Page 608
A LOOK BACK AT STARBUCKS CORPORATION......Page 609
STOP & REVIEW......Page 614
CHAPTER ASSIGNMENTS......Page 616
APPENDIX A Present Value Tables......Page 635
ENDNOTES......Page 639
COMPANY INDEX......Page 641
SUBJECT INDEX......Page 643
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Managerial

Accounting NINTH EDITION

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Managerial

Accounting NINTH EDITION

Susan V. Crosson, M.S. Accounting, C.P.A Santa Fe College

Belverd E. Needles, Jr., Ph.D., C.P.A., C.M.A. DePaul University

Managerial Accounting, Ninth Edition Susan Crosson, Belverd Needles Vice President of Editorial, Business: Jack W. Calhoun Editor in Chief: Rob Dewey Executive Editor: Sharon Oblinger

© 2011, 2008 South-Western, Cengage Learning Photo Credits: p. 3, Dorling Kindersley/Getty Images; p. 45, Caro/Alamy; p. 91, Lori Adamski Peek /Workbook Stock/Getty Images; p. 129, Tim Boyle/Newsmakers/ Getty Images; p. 167, AP Photo/Carlos Osorio; p. 207, Ben Bloom/Getty images; p. 249, Laura Doss/Fancy/PhotoLibrary; p.301, Ben Blankenburg/istockphoto; p. 345, UPI Photo/ Kevin Dietsch/Newscom; p. 393, Jupiterimages; p. 433, Monkey Business Images, 2009/ Used under license from Shutterstock.com; p. 471, AP Photo/Mark Lennihan; p. 517, © Richard Levine/Alamy; p. 555 AP Photo/Martin Mejia

Supervising Developmental Editor: Katie Yanos Sr. Marketing Manager: Kristen Hurd Marketing Coordinator: Heather Mooney Sr. Marketing Communications Manager: Libby Shipp Content Project Manager: Darrell Frye

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Printed in the United States of America 1 2 3 4 5 6 7 14 13 12 11 10

BRIEF CONTENTS 1

The Changing Business Environment: A Manager’s Perspective

2

Cost Concepts and Cost Allocation

3

Costing Systems: Job Order Costing

4

Costing Systems: Process Costing

5

Value-Based Systems: ABM and Lean

6

Cost Behavior Analysis

206

7

The Budgeting Process

248

8

Performance Management and Evaluation

9

Standard Costing and Variance Analysis

10 Short-Run Decision Analysis

392

11 Capital Investment Analysis

432

2

44 90

128 166

300

344

12 Pricing Decisions, Including Target Costing and Transfer Pricing

470

13 Quality Management and Measurement 14 Financial Analysis of Performance APPENDIX

A

Present Value Tables

516

554

604

v

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CONTENTS Preface xv About the Authors xxix

CHAPTER 1

The Changing Business Environment: A Manager’s Perspective DECISION POINT 씰 A MANAGER’S FOCUS WAL-MART STORES, INC.

3

2

Achieving Continuous Improvement 17

The Role of Management Accounting 4

Performance Measures: A Key to Achieving Organizational Objectives 19

Management Accounting and Financial Accounting: A Comparison 4 Management Accounting and the Management Process 5

Using Performance Measures in the Management Process 19 The Balanced Scorecard 20 Benchmarking 22

Value Chain Analysis 11 Primary Processes and Support Services 12 Advantages of Value Chain Analysis 13 Managers and Value Chain Analysis 13

Standards of Ethical Conduct 22 A LOOK BACK AT 씰 WAL-MART STORES, INC.

STOP & REVIEW

25

27

CHAPTER ASSIGNMENTS

29

Continuous Improvement 15 Management Tools for Continuous Improvement 16

CHAPTER 2

Cost Concepts and Cost Allocation DECISION POINT 씰 A MANAGER’S FOCUS THE HERSHEY COMPANY

45

Cost Information 46

44 Income Statement and Accounting for Inventories 50 Statement of Cost of Goods Manufactured 51 Cost of Goods Sold and a Manufacturer’s Income Statement 53

Managers’ Use of Cost Information 46 Cost Information and Organizations 46 Cost Classifications and Their Uses 46 Cost Traceability 47 Cost Behavior 48 Value-Adding Versus Nonvalue-Adding Costs 48 Cost Classifications for Financial Reporting 48

Elements of Product Costs 58

Financial Statements and the Reporting of Costs 50

Prime Costs and Conversion Costs 59 Computing Product Unit Cost 59

Inventory Accounts in Manufacturing Organizations 54 Document Flows and Cost Flows Through the Inventory Accounts 54 The Manufacturing Cost Flow 56

vii

viii

Contents

CHAPTER 3

Product Cost Measurement Methods 60 Computing Service Unit Cost 62

A LOOK BACK AT 씰 THE HERSHEY COMPANY

Cost Allocation 63

STOP & REVIEW

Allocating the Costs of Overhead 63 Allocating Overhead: The Traditional Approach 65

CHAPTER ASSIGNMENTS

69

71 74

Costing Systems: Job Order Costing DECISION POINT 씰 A MANAGER’S FOCUS COLD STONE CREAMERY, INC.

91

Product Unit Cost Information and the Management Process 92 Planning 92 Performing 92 Evaluating 92 Communicating 92

Product Costing Systems 93 Job Order Costing in a Manufacturing Company 95 Materials 96 Labor 98

CHAPTER 4

Allocating Overhead: The ABC Approach 67

90

Overhead 98 Completed Units 99 Sold Units 99 Reconciliation of Overhead Costs 100

A Job Order Cost Card and the Computation of Unit Cost 101 A Manufacturer’s Job Order Cost Card and the Computation of Unit Cost 101 Job Order Costing in a Service Organization 102 A LOOK BACK AT 씰 COLD STONE CREAMERY, INC.

STOP & REVIEW

105

107

CHAPTER ASSIGNMENTS

109

Costing Systems: Process Costing

128

The Process Costing System 130 Patterns of Product Flows and Cost Flow Methods 131

Accounting for Units 136 Accounting for Costs 139 Assigning Costs 139 Process Costing for Two or More Production Departments 141

Cost Flows Through the Work in Process Inventory Accounts 132

Preparing a Process Cost Report Using the Average Costing Method 143

Computing Equivalent Production 133

Accounting for Units 143 Accounting for Costs 145 Assigning Costs 145

DECISION POINT 씰 A MANAGER’S FOCUS DEAN FOODS

129

Equivalent Production for Direct Materials 134 Equivalent Production for Conversion Costs 135 Summary of Equivalent Production 135

Preparing a Process Cost Report Using the FIFO Costing Method 136

A LOOK BACK AT 씰 DEAN FOODS

STOP & REVIEW

148

151

CHAPTER ASSIGNMENTS

153

ix

Contents

CHAPTER 5

Value-Based Systems: ABM and Lean DECISION POINT 씰 A MANAGER’S FOCUS LA-Z-BOY, INC.

167

Value-Based Systems and Management 168 Value Chains and Supply Chains 169 Process Value Analysis 170 Value-Adding and Non-Value-Adding Activities 171 Value-Based Systems 171 Activity-Based Management 171 Managing Lean Operations 172

CHAPTER 6

166

The New Operating Environment and Lean Operations 176 Just-in-Time (JIT) 176 Continuous Improvement of the Work Environment 178 Accounting for Product Costs in a JIT Operating Environment 178

Backflush Costing 180 Comparison of ABM and Lean 184 A LOOK BACK AT 씰 LA-Z-BOY, INC.

Activity-Based Costing 172

STOP & REVIEW

The Cost Hierarchy and the Bill of Activities 173

CHAPTER ASSIGNMENTS

185

188 190

Cost Behavior Analysis DECISION POINT 씰 A MANAGER’S FOCUS FLICKR

206 207

Cost Behavior and Management 208 The Behavior of Costs 208

Mixed Costs and the Contribution Margin Income Statement 214 The Engineering Method 214 The Scatter Diagram Method 214 The High-Low Method 215 Statistical Methods 217 Contribution Margin Income Statements 217

Breakeven Analysis 220 Using an Equation to Determine the Breakeven Point 221 The Breakeven Point for Multiple Products 222

Using C-V-P Analysis to Plan Future Sales, Costs, and Profits 225 Applying C-V-P to Target Profits 225 A LOOK BACK AT 씰 FLICKR

STOP & REVIEW

228

231

CHAPTER ASSIGNMENTS

233

Cost-Volume-Profit Analysis 218

CHAPTER 7

The Budgeting Process DECISION POINT 씰 A MANAGER’S FOCUS FRAMERICA CORPORATION

249

The Budgeting Process 250 Advantages of Budgeting 250 Budgeting and Goals 251 Budgeting Basics 251

The Master Budget 253

248 Preparation of a Master Budget 253 Budget Procedures 256

Operating Budgets 257 The Sales Budget 257 The Production Budget 258 The Direct Materials Purchases Budget 259 The Direct Labor Budget 261

x

Contents

CHAPTER 8

A LOOK BACK AT 씰 FRAMERICA CORPORATION

Financial Budgets 265

STOP & REVIEW

The Budgeted Income Statement 265

CHAPTER ASSIGNMENTS

271

274 276

Performance Management and Evaluation DECISION POINT 씰 A MANAGER’S FOCUS VAIL RESORTS

301

Performance Measurement 302 What to Measure, How to Measure 302 Other Measurement Issues 302 Organizational Goals and the Balanced Scorecard 303 The Balanced Scorecard and Management 303

Responsibility Accounting 305

300

Performance Evaluation of Investment Centers 313 Return on Investment 313 Residual Income 315 Economic Value Added 316 The Importance of Multiple Performance Measures 318

Performance Incentives and Goals 319

Types of Responsibility Centers 306 Organizational Structure and Performance Management 308

Linking Goals, Performance Objectives, Measures, and Performance Targets 319 Performance-Based Pay 320 The Coordination of Goals 320

Performance Evaluation of Cost Centers and Profit Centers 310

STOP & REVIEW

Evaluating Cost Center Performance Using Flexible Budgeting 310 Evaluating Profit Center Performance Using Variable Costing 311

CHAPTER 9

The Capital Expenditures Budget 266 The Cash Budget 266 The Budgeted Balance Sheet 269

The Overhead Budget 261 The Selling and Administrative Expense Budget 262 The Cost of Goods Manufactured Budget 263

A LOOK BACK AT 씰 VAIL RESORTS

323

326

CHAPTER ASSIGNMENTS

328

Standard Costing and Variance Analysis DECISION POINT 씰 A MANAGER’S FOCUS iROBOT CORPORATION

345

Standard Costing 346 Standard Costs and Managers 346 Computing Standard Costs 347 Standard Direct Materials Cost 347 Standard Direct Labor Cost 347 Standard Overhead Cost 348 Total Standard Unit Cost 349

344

Variance Analysis 350 The Role of Flexible Budgets in Variance Analysis 350 Using Variance Analysis to Control Costs 352

Computing and Analyzing Direct Materials Variances 355 Computing Direct Materials Variances 355 Analyzing and Correcting Direct Materials Variances 357

xi

Contents Computing and Analyzing Direct Labor Variances 358 Computing Direct Labor Variances 358 Analyzing and Correcting Direct Labor Variances 360

Computing and Analyzing Overhead Variances 361 Using a Flexible Budget to Analyze Overhead Variances 361

CHAPTER 10

Using Cost Variances to Evaluate Managers’ Performance 369 A LOOK BACK AT 씰 iROBOT CORPORATION

STOP & REVIEW

371

376

CHAPTER ASSIGNMENTS

378

Short-Run Decision Analysis DECISION POINT 씰 A MANAGER’S FOCUS BANK OF AMERICA

393

Short-Run Decision Analysis and the Management Process 394 Incremental Analysis for Short-Run Decisions 394

Incremental Analysis for Outsourcing Decisions 397 Incremental Analysis for Special Order Decisions 399

CHAPTER 11

Computing Overhead Variances 362 Analyzing and Correcting Overhead Variances 367

392 Incremental Analysis for Segment Profitability Decisions 402 Incremental Analysis for Sales Mix Decisions 404 Incremental Analysis for Sell or ProcessFurther Decisions 407 A LOOK BACK AT 씰 BANK OF AMERICA

STOP & REVIEW

410

413

CHAPTER ASSIGNMENTS

415

Capital Investment Analysis DECISION POINT 씰 A MANAGER’S FOCUS AIR PRODUCTS AND CHEMICALS INC.

433

The Capital Investment Process 434 Capital Investment Analysis 434 Capital Investment Analysis in the Management Process 435 The Minimum Rate of Return on Investment 437 Cost of Capital 437 Other Measures for Determining Minimum Rate of Return 438 Ranking Capital Investment Proposals 438

Measures Used in Capital Investment Analysis 439 Expected Benefits from a Capital Investment 439 Equal Versus Unequal Cash Flows 440 Carrying Value of Assets 440 Depreciation Expense and Income Taxes 440 Disposal or Residual Values 441

432 The Time Value of Money 442 Interest 442 Present Value 443 Present Value of a Single Sum Due in the Future 444 Present Value of an Ordinary Annuity 444

The Net Present Value Method 446 Advantages of the Net Present Value Method 446 The Net Present Value Method Illustrated 446

Other Methods of Capital Investment Analysis 449 The Payback Period Method 449 The Accounting Rate-of-Return Method 450 A LOOK BACK AT 씰 AIR PRODUCTS AND CHEMICALS INC.

STOP & REVIEW

452

454

CHAPTER ASSIGNMENTS

456

xii

Contents

CHAPTER 12

Pricing Decisions, Including Target Costing and Transfer Pricing DECISION POINT 씰 A MANAGER’S FOCUS LAB 126

471

Factors Affecting Cost-Based Pricing Methods 483

The Pricing Decision and the Manager 472

Pricing Based on Target Costing 485

Pricing Policies 472 Pricing Policy Objectives 472 Pricing and the Management Process 473 External and Internal Pricing Factors 473

Differences Between Cost-Based Pricing and Target Costing 485 Target Costing Analysis in an Activity-Based Management Environment 487

Economic Pricing Concepts 475 Total Revenue and Total Cost Curves 475 Marginal Revenue and Marginal Cost Curves 477 Auction-Based Pricing 477

Cost-Based Pricing Methods 478 Gross Margin Pricing 479 Return on Assets Pricing 480 Summary of Cost-Based Pricing Methods 481 Pricing Services 482

CHAPTER 13

470

Pricing for Internal Providers of Goods and Services 489 Transfer Pricing 489 Developing a Transfer Price 490 Other Transfer Price Issues 491 Using Transfer Prices to Measure Performance 491 A LOOK BACK AT 씰 LAB 126

STOP & REVIEW

493

496

CHAPTER ASSIGNMENTS

498

Quality Management and Measurement DECISION POINT 씰 A MANAGER’S FOCUS AMAZON .COM

517

The Role of Management Information Systems in Quality Management 518 Enterprise Resource Planning Systems 518 Managers’ Use of MIS 518

Financial and Nonfinancial Measures of Quality 520 Financial Measures of Quality 520 Nonfinancial Measures of Quality 521 Measuring Service Quality 525

516

Measuring Quality: An Illustration 526 Evaluating the Costs of Quality 526 Evaluating Nonfinancial Measures of Quality 529

The Evolving Concept of Quality 530 Recognition of Quality 532 A LOOK BACK AT 씰 AMAZON.COM

STOP & REVIEW

536

CHAPTER ASSIGNMENTS

538

534

xiii

Contents

CHAPTER 14

Financial Analysis of Performance DECISION POINT 씰 A MANAGER’S FOCUS STARBUCKS CORPORATION

555

Foundations of Financial Performance Measurement 556 Financial Performance Measurement: Management’s Objectives 556 Financial Performance Measurement: Creditors’ and Investors’ Objectives 556 Standards of Comparison 557 Sources of Information 559 Executive Compensation 561

APPENDIX A

554 Trend Analysis 566 Vertical Analysis 567 Ratio Analysis 569

Comprehensive Illustration of Ratio Analysis 571 Evaluating Liquidity 571 Evaluating Profitability 573 Evaluating Long-Term Solvency 574 Evaluating the Adequacy of Cash Flows 575 Evaluating Market Strength 577

Tools and Techniques of Financial Analysis 563

A LOOK BACK AT 씰 STARBUCKS CORPORATION

Horizontal Analysis 563

CHAPTER ASSIGNMENTS

Present Value Tables Endnotes 608 Company Index 610 Subject Index 612

STOP & REVIEW

578

583 585

604

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PREFACE Accounting in Motion!

This revision of Managerial Accounting is based on an understanding of the nature, culture, and motivations of today’s undergraduate students and on extensive feedback from many instructors who use our book. These substantial changes meet the needs of these students, who not only face a business world increasingly complicated by ethical issues, globalization, and technology but who also have more demands on their time. To assist them to meet these challenges, the authors carefully show them how the effects of business transactions, which are the result of business decisions, are recorded in a way that will be reflected on the financial statements. Instructors will find that building on the text’s historically strong pedagogy, the authors have strengthened transaction analysis and its link to the accounting cycle.

Updated Content, Organization and Pedagogy

Strong Pedagogical System Managerial Accounting originated the pedagogical system of Integrated Learning Objectives. The system supports both learning and teaching by providing flexibility in support of the instructor’s teaching of first-year accounting. The chapter review and all assignments identify the applicable learning objective(s) for easy reference. Each learning objective refers to a specific content area, usually either conceptual content or procedural techniques, in short and easily understandable segments. Each segment is followed by a “Stop and Apply” section that illustrates and solves a short exercise related to the learning objective.

STOP

& APPLY

Match the letter of each item below with the numbers of the related items: a. An inventory cost b. An assumption used in the valuation of inventory c. Full disclosure convention d. Conservatism convention e. Consistency convention f. Not an inventory cost or assumed flow ____ 1. Cost of consigned goods ____ 2. A note to the financial statements explaining inventory policies

____ ____ ____

____ ____ ____

3. Application of the LCM rule 4. Goods flow 5. Transportation charge for merchandise shipped FOB shipping point 6. Cost flow 7. Choosing a method and sticking with it 8. Transportation charge for merchandise shipped FOB destination

SOLUTION

1. f; 2. c; 3. d; 4. b; 5. a; 6. f; 7. e; 8. f

xv

xvi

Preface

To make the text more visually appealing and readable, it is divided into student-friendly sections with brief bulleted lists, new art, photographs, and endof-section review material.

Cash Flows and the Timing of Transactions LO5 Show how the timing of transactions affects cash flows and liquidity.

To avoid financial distress, a company must be able to pay its bills on time. Because the timing of cash flows is critical to maintaining adequate liquidity to pay bills, managers and other users of financial information must understand the difference between transactions that generate immediate cash and those that do not. Consider the transactions of Miller Design Studio shown in Figure 2-3. Most of them involve either an inflow or outflow of cash. As you can see in Figure 2-3, Miller’s Cash account has more transactions than any of its other accounts. Look at the transactions of July 10, 15, and 22:  July 10: Miller received a cash payment of $2,800.  July 15: The firm billed a customer $9,600 for a service it had already performed.  July 22: The firm received a partial payment of $5,000 from the customer, but it had not received the remaining $4,600 by the end of the month. Because Miller incurred expenses in providing this service, it must pay careful attention to its cash flows and liquidity. One way Miller can manage its expenditures is to rely on its creditors to give it time to pay. Compare the transactions of July 3, 5, and 9 in Figure 2-3.

Study Note After Step 1 has been completed, the Income Summary account reflects the account balance of the Design Revenue account before it was closed.

Enhanced RealWorld Examples Demonstrate Accounting in Motion

Further, to reduce distractions, the margins of the text include only Study Notes, which alert students to common misunderstandings of concepts and techniques; key ratio and cash flow icons, which highlight discussions of profitability and liquidity; and accounting equations. In this edition, we reduced excessive detail, shortened headings, simplified explanations, and increased readability in an effort to reduce the length of each chapter.

IFRS, Fair Value, and Other Updates International Financial Reporting Standards and fair value have been integrated throughout the book where accounting standards have changed and also in the Business Focus features where applicable. All current events, statistics, and tables have been updated with the latest data.

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FOCUS ON BUSINESS PRACTICE IFRS: The Arrival of International Financial Reporting Standards in the United States Over the next few years, international financial reporting standards (IFRS) will become much more important in the United States and globally. The International Accounting Standards Board (IASB) has been working with the Financial Accounting Standards Board (FASB) and similar boards in other nations to achieve identical or nearly identical standards worldwide. IFRS are now required in many parts of the world, including Europe. The Securities-

and Exchange Commission (SEC) recently voted to allow foreign registrants in the United States. This is a major development because in the past, the SEC required foreign registrants to explain how the standards used in their statements differed from U.S. standards. This change affects approximately 10 percent of all public U.S. companies. In addition, the SEC may in the near future allow U.S. companies to use IFRS. 11

Use of Diverse Companies Each chapter begins with a Decision Point, a real-world scenario about a company that challenges students to see the connection between accounting information and management decisions.

DECISION POINT  A USER’S FOCUS



An order for airplanes is obviously an important economic event for both the buyer and the seller. Is there a difference between an economic event and a business transaction that should be recorded in the accounting records?



Should Boeing record the order in its accounting records?



How important are liquidity and cash flows to Boeing?

THE BOEING COMPANY In April 2006, the Chinese government announced that it had ordered 80 Boeing commercial jet liners, thus fulfilling a commitment it had made to purchase 150 airplanes from Boeing. Valued at about $4.6 billion, the order for the 80 airplanes was one of many events that brought about Boeing’s resurgence in the stock market. After Boeing received this order, as well as orders from other customers, its stock began trading at an all-time high. Typically, it takes Boeing almost two years to manufacture an airplane. In this case, the aircraft delivery cycle was expected to peak in 2009.1

These company examples come full circle at the end of the chapter by linking directly to the A Look Back At diverse company examples illustrate accounting concepts and encourage students to apply what they have learned.

A LOOK BACK AT



THE BOEING COMPANY The Decision Point at the beginning of the chapter described the order for 80 airplanes that the Chinese government placed with Boeing. It posed the following questions: • An order for airplanes is obviously an important economic event to both the buyer and the seller. Is there a difference between an economic event and a business transaction that should be recorded in the accounting records? • Should Boeing record the order in its accounting records? • How important are liquidity and cash flows to Boeing? Despite its importance, the order did not constitute a business transaction, and neither the buyer nor the seller should have recognized it in its accounting records. At the time the Chinese government placed the order, Boeing had not yet built the airplanes. Until it delivers them and title to them shifts to the Chinese government, Boeing cannot record any revenue.

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Use of Well-Known Public Companies This textbook also offers examples from highly recognizable public companies, such as CVS Caremark, Southwest Airlines, Dell Computer, and Netflix, to relate basic accounting concepts and techniques to the real world. The latest available data is used in exhibits to incorporate the most recent FASB pronouncements. The authors illustrate current practices in financial reporting by referring to data from Accounting Trends and Techniques (AICPA) and integrate international topics wherever appropriate.

Consolidated means that data from all companies owned by CVS are combined.

CVS Caremark Corporation Consolidated Statements of Operations

CVS’s fiscal year ends on the Saturday closest to December 31.

Fiscal Year Ended (In millions, except per share amounts) Net revenues Cost of revenues

Dec. 31, 2008 (52 weeks)

Dec. 29, 2007 (52 weeks)

Dec. 30, 2006 (53 weeks)

$87,471.9 69,181.5

$76,329.5 60,221.8

$43,821.4 32,079.2

Gross profit

18,290.4

16,107.7

11,742.2

Total operating expenses

12,244.2

11,314.4

9,300.6

Operating profit1 Interest expense, net2

6,046.2 509.5

4,793.3 434.6

2,441.6 215.8

Earnings before income tax provision Loss from discontinued operations, net of income tax benefit of $82.4 Income tax provision

5,536.7 (132)

4,358.7 —

2,225.8 —

2,192.6

1,721.7

856.9

Net earnings3 Preference dividends, net of income tax benefit4

3,212.1 14.1

2,637.0 14.2

1,368.9 13.9

Net earnings available to common shareholders

$ 3,198.0

$ 2,622.8

$ 1,355.0

$

$

$

BASIC EARNINGS PER COMMON SHARE:5

Net earnings Weighted average common shares outstanding

2.23 1,433.5

1.97 1,328.2

1.65 820.6

DILUTED EARNINGS PER COMMON SHARE:

Net earnings Weighted average common shares outstanding

$

2.18 1,469.1

$

1.92 1,371.8

$

1.60 853.2

Revised and Expanded Assignments Assignments have been carefully scrutinized for direct relevancy to the learning objectives in the chapters. Names and numbers for all Short Exercises, Exercises, and Problems have been changed except those used on videos. We have reversed the alternate and main problems from the previous edition. Most importantly, alternative problems have been expanded so that there are ample problems for any course. All of the cases have been updated as appropriate and the number of cases in each chapter has been reduced in response to user preferences. The variety of cases in each chapter depends on their relevance to the chapter topics, but throughout the text there are cases involving conceptual understanding, ethical dilemmas, interpreting financial reports, group activities, business communication, and the Internet. Annual report cases based on CVS Caremark and Southwest Airlines can be found at the end of the chapter.

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Specific Chapter Changes The following chapter-specific changes have been made in this edition of Managerial Accounting: Chapter 1 The Changing Business Environment: A Manager’s Perspective • Updated definition of management accounting in LO1 • Lean production introduced as a key term in LO3 • Sections on total quality management and activity based management in LO3 revised • Updated Focus on Business Practice box on how to blow the whistle on fraud Chapter 2 Cost Concepts and Cost Allocation • New company (Hershey’s) used as example in the Decision Point • Discussions of costs in LO2 in previous edition incorporated in LO1 • Introduction to methods of product cost measurement added and section on computing service unit cost shortened in new LO4 • LO7 and LO8 in previous edition (the traditional and ABC approaches to allocating overhead) streamlined and incorporated in new LO5 Chapter 3 Costing Systems: Job Order Costing • Chapter 3 in previous edition separated into two chapters, with new Chapter 3 focusing on job order costing and new Chapter 4 focusing on process costing • Operations costing system introduced as a key concept • Discussions of manufacturer’s job order cost card, computation of unit cost, and job order costing in a service organization included in new LO4 Chapter 4 Costing Systems: Process Costing • New chapter (part of Chapter 3 in previous edition) Chapter 5 Value-Based Systems: ABM and Lean • Chapter revised to emphasize value-based systems • LO1, LO2, and LO3 in last edition revised and incorporated in new LO1 • New listing of the disadvantages of activity-based costing in LO2 • New focus on lean operations in LO3 and section on accounting for product costs added Chapter 6 Cost Behavior Analysis • New company (Flickr) used as example in the Decision Point • Sections on variable, fixed, and mixed costs, which were in LO2 in last edition, now included in LO1 • Concept of a step cost introduced in discussion of fixed costs in LO1 • Methods used to separate the components of mixed costs and the contribution margin income statement now the focus of LO2 • Material in LO4 reformatted to clarify concepts

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Chapter 7 The Budgeting Process • New company (Framerica Corporation) used as example in the Decision Point • LO1 reorganized, revised, and shortened • Section on advantages of budgeting and three new key terms—static budget, continuous budget, and zero-based budgeting added to LO1 Chapter 8 Performance Management and Evaluation • LO1 and LO2 in last edition combined and revised Chapter 9 Standard Costing and Variance Analysis • New company (iRobot Corporation) used as example in the Decision Point • LO1 and LO2 in last edition combined and revised • New Focus on Business Practice box titled “What Do You Get When You Cross a Vacuum Cleaner with a Gaming Console?” Chapter 10 Short-Run Decision Analysis • Chapter revised to focus on the use of incremental analysis in making shortrun decisions; capital investment analysis and time value of money now covered in Chapter 11 Chapter 11 Capital Investment Analysis • New chapter Chapter 12 Pricing Decisions, Including Target Costing and Transfer Pricing • LO1 reorganized and shortened • Updated Focus on Business Practice box on Internet fraud • Discussions of steps followed in gross margin pricing and return on assets pricing in LO3 reformatted for greater clarity • Discussion of the differences between cost-based pricing and target costing in LO4 revised and made more succinct • Section on developing a transfer price in LO5 revised

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Chapter 13 Quality Management and Measurement • In LO2, formula for computing delivery cycle time added and displayed; formula for computing waste time also displayed • In LO4, discussion of Motorola’s Sigma Six quality goal revised, with disadvantages noted Chapter 14 Financial Analysis of Performance • Section on the management process in LO1 revised to increase the focus on management’s objectives • Revised Focus on Business Practice box on pro forma earnings • In LO3, two-year coverage of the comprehensive ratio analysis extended to three years • Revised Focus on Business Practice box on performance measurement and management compensation

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Online Solutions for Every Learning Style

South-Western, a division of Cengage Learning, offers a vast array of online solutions to suit your course and your students’ learning styles. Choose the product that best meets your classroom needs and course goals. Please check with your sales representative for more details and ordering information.

CengageNOW™ CengageNOW for Crosson/Needles Managerial Accounting, 9e is a powerful and fully integrated online teaching and learning system that provides you with flexibility and control. This complete digital solution offers a comprehensive set of digital tools to power your course. CengageNOW offers the following:  Homework, including algorithmic variations  Integrated e-book  Personalized study plans, which include a variety of multimedia assets (from exercise demonstrations to videos to iPod content) for students as they master the chapter materials  Assessment options, including the full test bank and algorithmic variations  Reporting capability based on AACSB, AICPA, and IMA competencies and standards  Course Management tools, including grade book  WebCT and Blackboard Integration Visit www.cengage.com/tlc for more information.

WebTutor™ on Blackboard® and WebCT™ WebTutor™ is available packaged with Crosson/Needles Managerial Accounting, 9e or for individual student purchase. Jump-start your course and customize rich, text-specific content with your Course Management System.  Jump-start: Simply load a WebTutor cartridge into your Course Management System.  Customize content: Easily blend, add, edit, reorganize, or delete content. Content includes media assets, quizzing, test bank, web links, discussion topics, interactive games and exercises, and more. Visit www.cengage.com/webtutor for more information.

Teaching Tools for Instructors

 Instructor’s Resource CD-ROM: Included on this CD set are the key supplements designed to aid instructors, including the Solutions Manual, ExamView Test Bank, Word Test Bank, and Lecture PowerPoint slides.  Solutions Manual: The Solutions Manual contains answers to all exercises, problems, and activities that appear in the text. As always, the solutions are author-written and verified multiple times for numerical accuracy and consistency with the core text.  ExamView® Pro Testing Software: This intuitive software allows you to easily customize exams, practice tests, and tutorials and deliver them over a network, on the Internet, or in printed form. In addition, ExamView comes with searching capabilities that make sorting the wealth of questions from the printed test bank easy. The software and files are found on the IRCD.

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 Lecture PowerPoint® Slides: Instructors will have access to PowerPoint slides online and on the IRCD. These slides are conveniently designed around learning objectives for partial chapter teaching and include art for dynamic presentations. There are also lecture outline slides for each chapter for those instructors who prefer them.  Instructor’s Companion Website: The instructor website contains a variety of resources for instructors, including the Instructor’s Resource Manual (which has chapter planning matrices, chapter resource materials and outlines, chapter reviews, difficulty and time charts, etc.), and PowerPoint slides. www.cengage.com/accounting/needles  Klooster & Allen’s General Ledger Software: Prepared by Dale Klooster and Warren Allen, this best-selling, educational, general ledger package introduces students to the world of computerized accounting through a more intuitive, user-friendly system than the commercial software they will use in the future. In addition, students have access to general ledger files with information based on problems from the textbook and practice sets. This context allows them to see the difference between manual and computerized accounting systems firsthand. Also, the program is enhanced with a problem checker that enables students to determine if their entries are correct. Klooster & Allen emulates commercial general ledger packages more closely than other educational packages. Problems that can be used with Klooster/Allen are highlighted by an icon. The Inspector Files found on the IRCD allow instructors to grade students’ work. A free Network Version is available to schools whose students purchase Klooster/ Allen’s General Ledger Software.

Learning Resources for Students

CengageNOW™ CengageNOW for Crosson/Needles Managerial Accounting, 9e is a powerful and fully integrated online teaching and learning system that provides you with flexibility and control. This complete digital solution offers a comprehensive set of digital tools to power your course. CengageNOW offers the following:  Homework, including algorithmic variations  Integrated e-book  Personalized study plans, which include a variety of multimedia assets (from exercise demonstrations to videos to iPod content) for students as they master the chapter materials  Assessment options, including the full test bank and a