DB- Support Department and Joint Cost Allocation

Module 05: Discussion
DB- Support Department and Joint Cost Allocation
Discuss the allocation of support department costs and joint costs for one of the following types
of business: (a) TV assembler, (b) building contractor, (c) automobile repair shop, (d) paper
manufacturer, (e) custom jewelry manufacturer? Discuss which of the three commonly used
methods for allocating support department costs would or could be used and which of the four
methods for allocating joint costs would or could be used in that business type and why. In the
business type you selected, what is the most important implication improving operations in that
business type?
Directions:
• Discuss the concepts, principles, and theories from your textbook. Cite your textbooks
and cite any other sources if appropriate.
• Your initial post should address all components of the question with a 500 word limit.
• Reply to at least two discussion posts with comments that further and advance the
discussion topic.
Allocation of support department costs and joint product costs requires practicing the different
allocation methods to fully understand how they work.
Learning Outcomes
1. Explain methods for allocating support department costs to products.
2. Solve allocation of support department costs using different methods.
3. Examine joint product costs using different methods.
Readings
Required
• Chapter 5 in Managerial Accounting
• Borad, S. B. (2020, May 18). Cost Allocation – Meaning, Importance, Process and More.
EFinanceManagement.com. (seminal)
Recommended:
• Chapter 5 PowerPoint slides in Managerial Accounting
• Cairney, T., & Sinclair, D. T. (2006). An Examination of Support Department Cost
Allocations. The Journal of Cost Analysis & Management, 8(1), 37–
54.
Chapter 5
Support
Department and
Joint Cost
Allocation
Support Departments (slide 1 of 3)
• A support department provides a necessary
service to produce a product, but is not directly
involved in the production process.
o For example, Janitorial and Maintenance departments
are necessary for production, but are not directly
involved in production.
• Support departments are sometimes called service
departments because they provide services to
other departments.
• Support departments are normally accounted for as
a cost or responsibility center. All direct costs of the
support department are accumulated in the center.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Support Departments (slide 2 of 3)
• Because support department costs are only
indirectly related to production, they are difficult to
apply to products.
o However, it is difficult, if not impossible, to find an
appropriate cost driver for applying these costs to a
product.
• Some companies consider support department
costs to be facility-level costs and do not apply them
to products.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Support Departments (slide 3 of 3)
o This approach ignores the fact that support
department services may be used more heavily by
some products than others, which can result in
inaccurate product costs.
▪ Hence, guidance for incorporating support department cost
allocation into a product costing system is provided in the
following slides.
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Single Plantwide Rate (slide 1 of 2)
• When a single plantwide overhead rate is used to
apply overhead to products, support department
costs are simply combined with all other overhead
costs.
o The total overhead cost is then applied to the
products using a single cost driver.
• Because a single driver is used for all overhead
costs, it is unlikely that the driver selected is
appropriate for every type of overhead.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Single Plantwide Rate (slide 2 of 2)
o This method ignores the fact that the processes used
in manufacturing a product may differ from those
used for other products.
o As a result, using a single plantwide rate may result in
inaccurate product costs.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Multiple Production Department Rates
• When multiple production department rates are
used to apply overhead to products, overhead costs
are first directly traced or distributed to support and
production departments.
o Support department costs are then allocated to
production departments based on the amount of
support activity used by each production department.
o After support department costs are allocated to the
production departments, production department costs
are then applied to the products using cost drivers for
each production department.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Activity-Based Costing (slide 1 of 2)
• When activity-based costing (ABC) is used to apply
overhead to products, support department costs are
referred to as support activity costs.
o The process for allocating support activity costs is
similar to that used with multiple production
department rates.
▪ Overhead costs are directly traced or distributed to
support and production activities.
▪ Support activity costs are allocated to production
activities.
▪ Production activity costs are applied to the products
using cost drivers for each production activity.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Activity-Based Costing (slide 2 of 2)
• The terms assign, distribute, apply, and allocate are
often used when referring to manufacturing costs
and the transfer of these costs to departments and
products.
o Transferring overhead costs to support and
production departments is referred to as distributing
overhead costs.
o Transferring costs to products is referred to as
applying costs to products or the application of costs.
o Allocating costs or cost allocation may be used in a
variety of ways.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Allocating Support Department Costs
to Production Departments
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The Direct Method
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Using the Direct Method – Decker Tables
(slide 1 of 6)
• Step 1 – The costs for each department are determined
by identifying costs that can be traced to a specific
department.
Department
costs
Janitorial
Department
Cafeteria
Department
Cutting
Department
Assembly
Department
$310,000
$169,000
$1,504,000
$680,000
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Using the Direct Method – Decker Tables
(slide 2 of 6)
• Step 2 – An appropriate cost driver is determined for
each support department.
o
The more square footage that needs to be the cleaned, the
higher the Janitorial costs.
Support Department
Cost Driver
Janitorial Department
Square footage to be serviced
Cafeteria Department
Number of employees
• Step 3 – The usage of the support department cost
drivers by each department is determined.
Janitorial
Department
Cafeteria
Department
Cutting
Department
Assembly
Department
Square feet
50
5,000
1,000
4,000
Number of employees
10
3
30
10
Cost Driver
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Using the Direct Method – Decker Tables
(slide 3 of 6)
• Step 4 – The percentage usage of support
department cost drivers by the production
departments is determined.
o Determining the percentage usage based on square
footage
1,000
Cutting Department:
= 20% of Janitorial Services
1,000 + 4,000
4,000
Assembly Department:
= 80% of Janitorial Services
1,000 + 4,000
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Using the Direct Method – Decker Tables
(slide 4 of 6)
o Determining the percentage based on the number of
employees
30
Cutting Department:
= 75% of Janitorial Services
30 + 10
10
Assembly Department:
= 25% of Cafeteria Services
30 + 10
• Step 5 – Support department costs are allocated
to the production departments by multiplying the
percentage usage of each production
department by the total support department
costs.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Using the Direct Method – Decker Tables
(slide 5 of 6)
Department
Janitorial Department Costs
Cutting Department
$ 62,000 ($310,000 × 20%)
Assembly Department
248,000 ($310,000 × 80%)
Total
$310,000
• The Cafeteria costs of $126,750 are allocated
$161,250 to the Cutting Department and $42,250 to
the Assembly Department, as follows:
Department
Cafeteria Department Costs
Cutting Department
$126,750 ($169,000 × 75%)
Assembly Department
42,250 ($169,000 × 25%)
Total
$169,000
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Using the Direct Method – Decker Tables
(slide 6 of 6)
• The support department costs are added to any
costs that were directly traced or distributed to
the production departments in Step 1.
o Thus, the total costs of the Cutting and Assembly
departments are as follows:
Cutting Department
$1,504,000 (from Step 1) + $62,000 (from Step 5) + $126,750 (from Step 5) = $1,692,750
Assembly Department
$680,000 (from Step 1) + $248,000 (from Step 5) + 42,250 (from Step 5) = $970,250
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The Sequential Method or Step-Down Method
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The Sequential Method (slide 1 of 7)
• Under the sequential method, support department
costs are never allocated back to a support
department whose costs have already been
allocated.
o As a result, the sequential method captures some, but
not all, of the inter-support-department services.
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The Sequential Method – Allocation of Costs
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The Sequential Method (slide 2 of 7)
• There may be a conflict in the preceding factors.
o
For example, the support department with the highest costs may
serve the fewest number of other support departments.
o
As a result, managers often make subjective assessments about
the order of allocating support departments.
• Steps 1 to 3 of the sequential method are the same as
for the direct method.
Support Departments
Specifics
Production Departments
Janitorial
Cafeteria
Square feet
50
5,000
1,000
4,000
Number of employees
10
3
30
10
$310,000
$169,000
$1,504,000
$680,000
Department costs
Cutting Assembly
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
The Sequential Method (slide 3 of 7)
• In Step 4, the proportional usage of each
support department’s cost driver by the other
departments to which its costs are to be
allocated is determined.
o Assume that Decker Tables decides to allocate
Janitorial costs first, followed by Cafeteria costs.
Janitorial Department Usage
Department
Square Feet
Usage Percent
Cafeteria
5,000
50%
Cutting
1,000
10
Assembly
4,000
40
Totals
10,000
100%
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
The Sequential Method (slide 4 of 7)
• The proportional usage of Cafeteria services by the
Cutting and Assembly departments is as follows:
Cafeteria Department Usage
Department
o
Square Feet
Usage Percent
Cafeteria
5,000
50%
Cutting
1,000
10
Assembly
4,000
40
Totals
10,000
100%
The usage of the Cafeteria Department by the Janitorial
Department is not considered.
▪ This is because the Cafeteria Department costs are allocated after
the Janitorial Department.
o
Once a support department’s costs are allocated under the sequential
method, it is not allocated any additional costs.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
The Sequential Method (slide 5 of 7)
• In Step 5, each support department’s costs are
allocated to other departments.
o The support department’s total costs are multiplied by
the proportional usage of the departments to which
costs are allocated.
• Under the sequential method, the total support
department costs to be allocated will also include
any costs that were allocated to that support
department from other support departments.
o This is a major difference between the sequential
method and the direct method.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
The Sequential Method (slide 6 of 7)
• To illustrate, the Janitorial Department’s costs of
$310,000 are allocated to the Cafeteria, Cutting, and
Assembly departments by multiplying $310,000 by
each department’s proportional usage, as follows:
Department
Janitorial Department
Costs ($)
×
Cafeteria
Department
$310,000 ×
Cutting
Department
310,000
Assembly
Department
310,000
Totals
×
×
Usage
Allocated
=
Percent (%)
Cost ($)
50% =
$155,000
10
=
31,000
40
=
124,000
100%
$310,000
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The Sequential Method (slide 7 of 7)
• The total Cafeteria Department costs of $324,000
($169,000 + $155,000) are allocated to the Cutting
and Assembly departments as follows:
Department
Cafeteria Department
Costs ($)
×
Cutting
Department
$324,000 ×
Assembly
Department
324,000
Totals
×
Usage
Allocated
=
Percent (%)
Cost ($)
75% =
25
100%
=
$243,000
81,000
$324,000
• The support department cost allocations using the
sequential method for Decker Tables are
summarized in the next slide.
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The Reciprocal Services Method
(slide 1 of 10)
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The Reciprocal Services Method
(slide 2 of 10)
• Steps 1 to 3 of the reciprocal method are the same
as for the direct and sequential methods.
Specifics
Janitorial
Cafeteria
Square feet
50
5,000
1,000
4,000
Number of
employees
10
3
30
10
$310,000
$169,000
$1,504,000
$680,000
Department cost
Cutting
Assembly
• Support departments never allocate their own costs
to themselves.
o The two cells shaded in the table are not needed.
▪ These drivers represent services the support departments
used within their departments.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
The Reciprocal Services Method
(slide 3 of 10)
• In Step 4, the proportional usage of each support
department’s cost driver by the other departments to
which its costs are to be allocated is determined.
• The proportional usages of Janitorial services are
the same as those indicated with the sequential
method.
Janitorial Department Usage
Square
Feet
Usage
Percent
Cafeteria
5,000
50%
Cutting
1,000
Assembly
Totals
Department
Cafeteria Department Usage
Number of
employees
Usage
Percent
Janitorial
10
20%
10
Cutting
30
60
4,000
40
Assembly
10
20
10,000
100%
Totals
50
100%
Department
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
The Reciprocal Services Method
(slide 4 of 10)
• In Step 5, support department costs are allocated
simultaneously among the departments.
o
This is done by using multiple algebraic equations with
variables for unknown quantities.
o
To illustrate, costs are allocated from Janitorial to
Cafeteria, Cutting, and Assembly by multiplying the total
Janitorial costs by the proportional usage of the other
departments.
o
The total Janitorial costs, however, include an unknown
amount for costs related to its employees’ use of the
cafeteria.
▪ Thus, the total of the Janitorial costs is expressed by the
unknown, J.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
The Reciprocal Services Method
(slide 5 of 10)
• Costs are allocated from Cafeteria to Janitorial,
Cutting, and Assembly by multiplying the total
Cafeteria costs by the proportional usage of the
other departments.
o But again, the total Cafeteria costs will include an
unknown amount for costs related to the Cafeteria
Department’s use of the Janitorial Department’s
services.
o Thus, the total of the Cafeteria costs is expressed by
the unknown, C.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
The Reciprocal Services Method
(slide 6 of 10)
• The total costs of the Janitorial Department will
include 20% of the Cafeteria Department’s
costs, which is the percent usage of the cafeteria
by the Janitorial Department.
J = $310,000 + (0.20  C)
• The total costs of the Cafeteria Department will
include 50% of the Janitorial Department’s costs,
which is the percent usage of Janitorial services
by the Cafeteria Department.
C = $169,000 + (0.50  J)
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
The Reciprocal Services Method
(slide 7 of 10)
• The preceding yields two equations with two
unknowns, as follows:
Equation 1: J = $310,000 + (0.20  C)
Equation 2: C = $169,000 + (0.50  J)
• Equation 2 can be rewritten in terms of J.
C = $169,000 + (0.50  J)
C – $169,000 = 0.50  J
C – $169, 000
= J
0.50
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The Reciprocal Services Method
(slide 8 of 10)
• J in Equation 1 can then be replaced, resulting
in the following equation:
Equation 3:
C – $169,000
= $310,000 + (0.20  C)
0.50
• Solving Equation 3 for C yields the following:
C – $169,000
= $310,000 + (0.20  C)
0.50
C – $169,000 = (0.50  $310,000) + (0.50  0.20  C)
C = $169,000 + (0.50  $310,000) + (0.50  0.20  C)
C = $169,000 + $155,000 + (0.10  C)
C – (0.10  C) = $169,000 + $155,000
0.90  C = $324,000
$324,000
0.90
C = $360,000
C=
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The Reciprocal Services Method
(slide 9 of 10)
• Adding the value of C to Equation 1 results in
the following:
J = $310,000 + (0.20  C)
= $310,000 + (0.20  $360,000)
= $310,000 + $72,000
= $382,000
• The total Janitorial Department cost and the total
Cafeteria Department cost can now be allocated
to the other departments based on the
percentage usages, as shown in the next slide.
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The Reciprocal Services Method
(slide 10 of 10)
Departments
Janitorial
Department
Costs ($)
Usage
Allocated
× Percent =
Cost($)
(%)
Cafeteria Department
382,000 ×
50 =
191,000
Cutting Department
382,000 ×
10 =
38,000
Assembly Department
382,000 ×
40 =
152,000
100
382,000
Totals
Departments
Cafeteria
Department
Costs ($)
Usage
Allocated
× Percent =
Cost($)
(%)
Janitorial Department
360,000 ×
20 =
72,000
Cutting Department
360,000 ×
60 =
216,000
Assembly Department
360,000 ×
20 =
72,000
100
360,000
Totals
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Comparison of Support Department Cost
Allocation Methods
• The total costs allocated to the Cutting and
Assembly departments are different depending on
which of the three support department allocation
methods is used, as shown in the next slide.
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Joint Costs
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Allocating Joint Costs
Physical units method
Weighted average method
Market value at split-off method
Net realizable value method
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Physical Units Method (slide 1 of 3)
• The physical units method allocates joint costs using a
physical measure of the products at the split-off point,
such as pounds, gallons, or inches.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Physical Units Method (slide 2 of 3)
• The joint costs per batch of mud are as follows:
Specifics
Amount ($)
Direct materials
17,750
Direct labor
2,300
Overhead
213,790
Total costs
233,840
• Assume that at the split-off point, there are the
following quantities of products:
Specifics
Quantity (pounds)
Skin cream
200
Shampoo
150
Soap
150
Total
500
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Physical Units Method (slide 3 of 3)
• Using the physical units method, the total joint
costs of $233,840 are allocated using the
pounds of products at the split-off point.
Product
Split-Off
Quantity
(pounds)
Percent
at
Split-Off
× Joint Cost =
Joint Cost
Allocation
Skin cream
200
40 ×
$233,840 =
$ 93,536
Shampoo
150
30 ×
233,840 =
70,152
Soap
150
30 ×
233,840 =
70,152
500
100
Totals
$233,840
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
The Weighted Average Method (slide 1 of 3)
• The weighted average method allocates joint costs
based on weight factors for each product.
o The weight factors are multiplied by physical units to
arrive at weighted physical units.
o These weighted physical units are then used to
allocate the joint costs to the products.
o The weight factors can be based on a variety of
factors, such as the type of labor needed for each
product, the difficulty of producing each product,
and the estimated wear and tear on machines
caused by each product.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
The Weighted Average Method (slide 2 of 3)
• Assume that Davis Pharmaceuticals allocates joint
costs based on the mixing times of each product.
o The mixing speed for shampoo is three times that of
cream and soap.
o Thus, management applies a weighting factor of 3 to
shampoo and a weighting factor of 1 to skin cream
and soap.
▪ The weighted pounds for shampoo is 450 pounds.
▪ The weighted pounds for skin cream is 200 pounds.
▪ The weighted pounds for soap is 150 pounds.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
The Weighted Average Method (slide 3 of 3)
• The joint cost allocations for all three products
are shown below.
Split-Off
Quantity
(pounds)
Mixing
Time
Weight
Factor
Weighted
Pounds of
Mixing Time
(pounds)
Weighted
Percent of
Mixing Time
(%)
×
Joint
Cost ($)
=
Joint Cost
Allocation
($)
Skin
cream
200
1
200
25.00
×
$233,840 =
$ 58,460
Shampoo
150
3
450
56.25
×
233,840 =
131,535
Soap
150
1
150
18.75
×
233,840 =
43,845
500
5
800
100.00
Product
Totals
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
$233,840
The Market Value at Split-Off Method
(slide 1 of 3)
• The market value at split-off method allocates
joint costs using each product’s total market value at
the split-off point.
o Products that have a higher market value are
allocated more joint costs.
• To use the market value at split-off method, an
estimate of the market value at split-off must be
available.
• If a product is sold at the split-off point, its actual
sales price is used.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
The Market Value at Split-Off Method
(slide 2 of 3)
• Assume that Davis Pharmaceuticals can sell
skin care cream and shampoo at the split-off
point.
o At split-off point, skin care cream and shampoo sell
for $540 per pound and $480 per pound, respectively.
▪ Though soap requires additional processing to be sold,
management estimates a market value of $400 per pound for
soap at the split-off point.
Skin cream ($540 × 200 pounds)
$108,000
Skin cream ($480 × 150 pounds)
72,000
Soap
60,000
($400 × 150 pounds)
Total market value
$240,000
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
The Market Value at Split-Off Method
(slide 3 of 3)
• Using the market value at split-off method, the
joint cost allocations for all three products are
shown below.
Product
Estimated
Selling
Total
Split-Off
Price
Market Value
Quantity ×
=
per Pound
at Split-Off
(pounds)
at
($)
Split-Off ($)
Percent of
Total
Market
Joint Cost
Joint Cost
×
=
Value at
($)
Allocation ($)
Split-Off
(%)
Skin
cream
200
×
$ 540
=
$108,000
45
×
233,840
=
$105,228
Shampoo
150
×
480
=
72,000
30
×
233,840
=
70,152
Soap
150
×
400
=
60,000
25
×
233,840
=
58,460
500
×
$1,420
$240,000
100
Totals
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
$233,840
The Net Realizable Value Method
(slide 1 of 5)
• The net realizable value method allocates joint costs
using each product’s estimated net realizable value after
it is fully processed.
o
Products that have a higher net realizable value are
allocated more joint costs.
• Products that have a higher net realizable value are
allocated more joint costs.
• Some products can be sold at the split-off point or be
processed further and sold for a higher price.
o
Net realizable value is the estimated selling price of a
product less any costs necessary to further process the
product beyond the split-off point.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
The Net Realizable Value Method
(slide 2 of 5)
• For products processed beyond the split-off
point, net realizable value is computed as
follows:
Net Realizable Value = (Final Selling Price × Quantity) – Additional Processing Costs
• For products not processed beyond the split-off
point, the net realizable value is computed as
follows:
Net Realizable Value = Selling Price at Split-Off  Quantity
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
The Net Realizable Value Method
(slide 3 of 5)
• To illustrate, assume the following for Davis
Pharmaceuticals’ three products:
Selling Price at
Split-Off Point ($)
Additional
Processing
Costs ($)
Selling Price
after
Further
Processing ($)
Skin cream
540
2,000 per batch
730
Shampoo
420
4,000 per batch
425
Soap
None
6,000 per batch
520
Products
• Davis Pharmaceuticals must decide which
products to process further and which to sell at
split-off.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
The Net Realizable Value Method
(slide 4 of 5)
• Given the preceding decisions on further
processing, the percentages of total net
realizable value of the three products are as
follows:
Product
Net Realizable Value ($)
Skin cream
$144,000
50%
Shampoo
72,000
25
Soap
72,000
25
$288,000
100%
Totals
Percent of Total Net Realizable Value (%)
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
The Net Realizable Value Method
(slide 5 of 5)
• Using the net realizable value method, the joint
costs of $233,840 are allocated as follows:
Product
Percent of Total
Net Realizable
Value (%)
Skin cream
50%
Shampoo
25
Soap
25
Totals
100%
×
Joint
Cost ($)
=
×
233,840
=
$116,920
233,840
=
58,460
233,840
=
58,460
×
×
Joint Cost Allocation ($)
$233,840
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Comparison of Joint Cost Allocation Methods
(slide 1 of 2)
• None of the four methods is more accurate than any
other method because they all allocate costs that
are, by definition, inseparable.
o Thus, a subjective determination must be made as to
the most appropriate method to use.
▪ The physical units method is the easiest to use and
allocates more costs to skin cream than to shampoo
and soap because more pounds of skin cream were
produced in the joint process.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Comparison of Joint Cost Allocation Methods
(slide 2 of 2)
• If management wants joint cost allocations to reflect
the difficulty with which products are made, the
weighted average method is most appropriate.
o If management wants joint cost allocations to reflect
the final market value of products, the net realizable
value method is ideal.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
By-Products (slide 1 of 2)
• By-products are goods of low value that are
produced from a joint production process.
• Because of their low value, it is not worth the effort
to develop separate product costs for by-products.
o Instead, the revenues from by-products are often
used to offset the cost of the joint production process.
o Alternatively, the sale of by-products is sometimes
reported as other revenue on the income statement
with no related cost of goods sold.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
By-Products (slide 2 of 2)
• Assume that an early step in the joint production of
skin cream, shampoo, and soap for Davis
Pharmaceuticals is the removal of small amounts of
mercury from the mud.
o Rather than incur the costs of further processing the
mercury or disposing of the mercury in an
environmentally safe manner, Davis Pharmaceuticals
sells it to Knight Manufacturing.
o Each batch produces $320 worth of mercury by-
product.
▪ Davis Pharmaceuticals subtracts the $320 of mercury
revenues from the joint production overhead costs.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Analysis for Decision Making (slide 1 of 5)
• Allocating support department costs and joint costs
has important implications for product costing.
o Some product costs are easy to identify and trace
directly to the products
▪ For example, it is easy to identify and trace direct
materials in a product that is not a joint product, or to
identify and trace direct materials for a joint product
after the split-off point.
• Production employee performance is often
evaluated based on product costs.
o For example, production manager bonuses may be
tied to decreasing product costs.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Analysis for Decision Making (slide 2 of 5)
• Consider the performance report of three
general managers who oversee three separate
chemical lines.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Analysis for Decision Making (slide 3 of 5)
• All GMs were over their cost targets. Ranking the
managers based on total costs:
o McKenna performed closest to her targets, over by
$42,350, followed by Jenn, over by $123,600, and
Jeff, over by $148,700.
o Thus, the company president may believe that
McKenna is the strongest GM of the group
• However, closer examination reveals a more
complex story.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Analysis for Decision Making (slide 4 of 5)
• McKenna missed her target primarily because her
direct materials costs were too high.
o This could be because of wasted materials in the
production process or some other cause.
• Jeff missed his performance target primarily
because of a higher-than-expected allocation of
support costs.
o This could be due to overuse of support activities.
▪ But since these costs are allocated based on square
feet and number of employees, Jeff may not be
responsible for the higher costs.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Analysis for Decision Making (slide 5 of 5)
• Jenn missed her performance target primarily
because of the allocation of joint product costs.
o These costs are allocated based on the net realizable
value of the chemical produced, Drison.
▪ Drison generates significantly higher margins than the
other two lines.
▪ As a result, Jenn’s product line received a much higher
allocation of joint costs.
▪ Jenn, however, has no oversight over the joint
production process, and is not responsible for the
higher costs.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Managerial
Accounting
Carl S. Warren
Professor Emeritus of Accounting
University of Georgia, Athens
William B. Tayler
Brigham Young University
Australia • Brazil • Mexico • Singapore • United Kingdom • United States
15e
Managerial Accounting, 15e
Carl S. Warren
William B. Tayler
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Intellectual Property Analyst: Reba Frederics
Library of Congress Control Number: 2018954981
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ISBN: 978-1-337-91202-0
Cengage
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Boston, MA 02210
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Printed in the United States of America
Print Number: 01
Print Year: 2018
Preface
Roadmap for Success
Warren/Tayler Managerial Accounting, 15e, provides a sound pedagogy for giving s­ tudents a solid
foundation in managerial accounting. Warren/Tayler covers the fundamentals AND ­motivates students to learn by showing how accounting is important to businesses.
Warren/Tayler is successful because it reaches students with a combination of new and tried-andtested pedagogy.
This revision includes a range of new and existing features that help Warren/Tayler provide
­students with the context to see how accounting is valuable to business. These include:
▪▪ New! Make a Decision section
▪▪ New! Pathways Challenge
▪▪ New! Certified Management Accountant (CMA®) Examination Questions
Warren/Tayler also includes a thorough grounding in the fundamentals that any business student
will need to be successful. These key features include:
▪▪ Presentation style designed around the way students learn
▪▪ Updated schema
▪▪ At the start of each chapter, a schema, or roadmap, shows students what they are going to
learn and how it is connected to the larger picture. The schema illustrates how the chapter
content lays the foundation with managerial concepts and principles. Then it moves students
through developing the information and ultimately into evaluating and analyzing information
in order to make decisions.
Chapter
15
Statement
of Cash Flows
Principles
Chapter 1 Introduction to Managerial Accounting
Developing Information
COST SYSTEMS
Chapter 2
Chapter 3
Chapter 4
COST ALLOCATIONS
Chapter 5
Chapter 5
Job Order Costing
Process Costing
Support Departments
Joint Costs
Activity-Based Costing
Decision Making
PLANNING AND EVALUATING TOOLS
Chapter 6
Chapter 7
Chapter 8
Chapter 9
Chapter 10
Chapter 11
Cost-Volume-Profit Analysis
Variable Costing
Budgeting Systems
Standard Costing and Variances
Decentralized Operations
STRATEGIC TOOLS
Chapter 12
Chapter 13
Chapter 13
Chapter 14
Chapter 14
Capital Investment Analysis
Lean Manufacturing
Activity Analysis
The Balanced Scorecard
Corporate Social Responsibility
Differential Analysis
Chapter 15
Financial
accounting
Statement
of Cash Flows
Managerial
accounting
Chapter 16
Financial Statement
Analysis
698
12020_ch15_rev02_698-757.indd 698
8/4/18 11:45 AM
iii
iv
Preface
312
Chapter 7 Variable Costing for Management Analysis
▪▪ Link to the “opening company” of each chapter
examples
how
the byconcepts
The $80,000calls
increaseout
in operating
income underof
Proposal
2 is caused
the allocation of the
fixed manufacturing costs of $400,000 over a greater number of units manufactured. Specifically,
introduced in the chapter are connected to the
opening
company.
This
shows
how
accountan increase in production from 20,000 units to 25,000 units means that the
fixed manufacturing
cost per unit decreases from $20 ($400,000 ÷ 20,000 units) to $16 ($400,000 ÷ 25,000 units). Thus,
ing is used in the real world by real companies.
the cost of goods sold when 25,000 units are manufactured is $4 per unit less, or $80,000 less in
total (20,000 units sold × $4). Since the cost of goods sold is less, operating income is $80,000
more when 25,000 units rather than 20,000 units are manufactured.
Managers should be careful in analyzing operating income under absorption costing when finished goods inventory changes. Increases in operating income may be created by simply increasing finished goods inventory. Thus, managers could misinterpret such increases (or decreases) in
operating income as due to changes in sales volume, prices, or costs.
Adobe Systems Inc.
A
ssume that you have three different options for a summer job.
How would you evaluate these options? Naturally there are
many things to consider, including how much you could earn from
each job.
Determining how much you could earn from each job may
not be as simple as comparing the wage rate per hour. For example, a job as an office clerk at a local company pays $8 per hour. A
job delivering pizza pays $10 per hour (including estimated tips),
although you must use your own transportation. Another job working in a beach resort over 500 miles away from your home pays $8
per hour. All three jobs offer 40 hours per week for the whole summer. If these options were ranked according to their pay per hour,
the pizza delivery job would be the most attractive. However, the
costs associated with each job must also be evaluated. For example, the office job may require that you pay for downtown parking and purchase office clothes. The pizza delivery job will require
you to pay for gas and maintenance for your car. The resort job will
require you to move to the resort city and incur additional living
costs. Only by considering the costs for each job will you be able to
determine which job will provide you with the most income.
Just as you should evaluate the relative income of various
choices, a business also evaluates the income earned from its
choices. Important choices include the products offered and the
geographical regions to be served.
A company will often evaluate the profitability of products
and regions. For example, Adobe Systems Inc. (ADBE),
one of the largest software companies in the world, determines
the income earned from its various product lines, such as Acrobat®,
Photoshop®, Premiere®, and Dreamweaver® software. Adobe uses
this information to establish product line pricing, as well as sales,
support, and development effort. Likewise, Adobe evaluates the
income earned in the geographic regions it serves, such as the
United States, Europe, and Asia. Again, such information aids management in managing revenue and expenses within the regions.
In this chapter, how businesses measure profitability using
absorption costing and variable costing is discussed. After illustrating and comparing these concepts, how businesses use them for
controlling costs, pricing products, planning production, analyzing
market segments, and analyzing contribution margins is described
and illustrated.
Link to
Adobe Systems
Under variable costing, operating income is $200,000, regardless of whether 20,000 units or
25,000 units are manufactured. This is because no fixed manufacturing costs are allocated to the
units manufactured. Instead, all fixed manufacturing costs are treated as a period expense.
To illustrate, Exhibit 8 shows the variable costing income statements for Frand for the
production of 20,000 units, 25,000 units, and 30,000 units. In each case, the operating income
is $200,000.
Chapter 2
Pete Jenkins/AlAmy stock Photo
Exhibit 8
Variable Costing
Income Statements
for Three Production
Levels
52
Job Order Costing
In a recent absorption costing income statement, Adobe Systems reported (in millions) total revenue
of $5,854, cost of revenue of $820, gross profit of $5,034, operating expenses of $3,541, and operating
income of $1,493.
Frand Manufacturing Company
Variable Costing Income Statements
Sales (20,000 units × $75) . . . . . . . . . . . . . . . .
Variable cost of goods sold:
Variable cost of goods manufactured:
(20,000 units × $35) . . . . . . . . . . . . . . .
(25,000 units × $35) . . . . . . . . . . . . . . .
(30,000 units × $35) . . . . . . . . . . . . . . .
Ending inventory:
(0 units × $35) . . . . . . . . . . . . . . . . . . . .
(5,000 units × $35) . . . . . . . . . . . . . . . .
(10,000 units × $35) . . . . . . . . . . . . . . .
Total variable cost of goods sold . . . . . .
Manufacturing margin. . . . . . . . . . . . . . . . . . .
Variable selling and administrative
expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Contribution margin. . . . . . . . . . . . . . . . . . . . .
Fixed costs:
Fixed manufacturing costs . . . . . . . . . . .
Fixed selling and administrative
expenses . . . . . . . . . . . . . . . . . . . . . . . . .
Total fixed costs . . . . . . . . . . . . . . . . . . . . . .
Operating income . . . . . . . . . . . . . . . . . . . . . . .
20,000 Units
Manufactured
25,000 Units
Manufactured
30,000 Units
Manufactured
$1,500,000
$1,500,000
$ 1,500,000
$ (700,000)
$ (875,000)
$(1,050,000)
0
175,000
$ (700,000)
$ 800,000
$ (700,000)
$ 800,000
350,000
$ (700,000)
$ 800,000
(100,000)
$ 700,000
(100,000)
$ 700,000
(100,000)
$ 700,000
no discrepancies, a journal entry is made to record the purchase. The journal
entry$ to
record$ (400,000)
the
$ (400,000)
(400,000)
supplier’s invoice related to Receiving Report No. 196 in Exhibit 4 is as follows:
(100,000)
(100,000)
(100,000)
Link to Adobe Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pages 305, 309, 312, 316, 319
$ (500,000)
$ 200,000
$ (500,000)
$ 200,000
$ (500,000)
$ 200,000
303
12020_ch07_ptg01_302-351.indd 303
A 5 L 1
1
1
a.
E
Materials
Accounts Payable
Materials purchased during December.
10,500
10,500
7/12/18 12:15 PM
The storeroom releases materials for use in manufacturing when a materials requisition is
received. Examples of materials requisitions are shown in Exhibit 4.
The materials requisitions for each job serve as the basis for recording materials used. For direct
materials, the quantities and amounts from the materials requisitions are posted to job cost sheets. Job
▪▪ To
aid comprehension
and to demonstrate
themake
impact
journal
entriesledger.
include
cost
sheets,
which are also illustrated
in Exhibit 4,
up of
thetransactions,
work in process
subsidiary
the
net
effect
of
the
transaction
on
the
accounting
equation.
Exhibit 4 shows the posting of $2,000 of direct materials to Job 71 and $11,000 of direct
materials to Job 72.2 Job 71 is an order for 20 units of Jazz Series guitars, while Job 72 is an order
for 60 units of American Series guitars.
A summary of the materials requisitions is used as a basis for the journal entry recording the
materials used for the month. For direct materials, this entry increases (debits) Work in Process and
decreases (credits) Materials as follows:
12020_ch07_ptg01_302-351.indd 312
A 5 L
12
1
E
b.
Work in Process
Materials
Materials requisitioned to jobs
($2,000 + $11,000).
13,000
13,000
Many companies use computerized information processes to record the use of materials. In
such cases, storeroom employees electronically record the release of materials, which automatically updates the materials ledger and job cost sheets.
Ethics: Do It!
ETHICS
Phony
Invoice Scams
this information to create a fictitious invoice. The invoice
7/12/18 12:15 PM
Preface
▪▪ Located in each chapter, Why It M
­ atters shows students how accounting is important
to ­businesses with which they are familiar. A Concept Clip icon indicates which Why It
Matters features have an accompanying concept clip video in CNOWv2.
CONCEPT CLIP
476
Chapter 10
Evaluating Decentralized Operations
Why It Matters
CONCEPT CLIP
Coca-Cola Company: Go West Young Man
A
major decision early in the history of Coca-Cola (KO) was to ex314
Chapter 7 Variable Costing
for Management
pand
outside Analysis
of the United States to the rest of the world. As a result,
Coca-Cola
is known today the world over. What is revealing is how
Solution:
a. (1)
this
decision has impacted the revenues and profitability of Coca-Cola across
Absorption Costing Income Statements
(30,000 The
units produced
× $40 variable
its international and
North
following
table shows
Proposal 2: segments.
Proposal
1: American
manufacturing cost per unit) + $600,000
40,000 Units
30,000 Units
the percent of revenues
and percent
of operating
fixed cost income from the internaManufactured Manufactured
Sales (30,000 unitstional
× $100) and North American
$ 3,000,000 geographic
$ 3,000,000 segments.
(40,000 units produced × $40 variable manufacturing
Cost of goods sold:
Cost of goods manufactured
Ending inventory
Total cost of goods sold
Gross profit
Selling and administrative expenses
Operating income
$(1,800,000)
—
$(1,800,000)
$ 1,200,000
(350,000)
$ 850,000
$(2,200,000)
550,000
$(1,650,000)
$ 1,350,000
(350,000)
$ 1,000,000
$(1,200,000)
$ 1,800,000
(210,000)
$ 1,590,000
$(1,200,000)
$ 1,800,000
(210,000)
$ 1,590,000
$ (600,000)
(140,000)
$ (740,000)
$ 850,000
$ (600,000)
(140,000)
$ (740,000)
$ 850,000
different story. More than 65% of Coca- Cola’s profitability comes
from international segments. Given the revenue segmentation,
this suggests that the international profit margins must be higher
than the North American profit margin. Indeed this is the case, as
can be seen in the following table:
Profit Margin
International average
North America
cost per unit) + $600,000 fixed cost
Operating
10,000 units (40,000 produced
– 30,000 sold)
× $55 per unit ($2,200,000 ÷ 40,000 units)
Revenues
Income
48.4%
24.2%
The average profit margin for all the international segments is
two times as large as the North American segment. These results
(2)
reflect the heart of the Coca-Cola marketing strategy. In international markets, Coca-Cola is able to charge relatively higher prices
Proposal 2:
Proposal 1:
due to high demand and less competition as compared to the North
Units 7 Variable
30,000 Units350 40,000
Chapter
Costing
Management
Analysis
30,000
units for
produced
× $40 variable
The first column
showsManufactured
that the international
provide
Manufactured
manufacturing costsegments
per unit
American market.
Sales (30,000 units × $100)
2. units
Chassen
Company,
a cracker and cookie manufacturer, has the following unit costs for the
produced
× $40 variable
over 58% of the$ 3,000,000
revenues,$ 3,000,000
while North40,000
America
provides
almost
Variable cost of goods sold:
month
June:
manufacturing
costofper
unit
Variable cost of goods
$(1,200,000) However,
$(1,600,000)
Variable manufacturing
cost The Coca-Cola
$5.00
Source:
Company, Form 10-K for the Fiscal Year Ended December 31, 2017.
42%manufactured
of the revenues.
the 10,000
operating
income
a
units (40,000 produced
– 30,000 tells
Ending inventory
—
400,000
International segments
North American segment
Variable
Total Costing Income Statements
Total variable cost of goods sold
Manufacturing margin
Variable selling and administrative expenses
Contribution margin
Fixed costs:
Fixed manufacturing costs
Fixed selling and administrative expenses
Total fixed costs
Operating income
(30,000 units sold × $7 variable selling cost per
unit) + $140,000
58.4%
41.6
Variable Costs
100%
65.6%
34.4
100%
sold) × $40 variable cost per unit
Variable marketing cost
Fixed manufacturing cost
Fixed marketing cost
3.50
2.00
4.00
30,000 units sold × $7 variable
selling cost
unitof 100,000 units were manufactured during June, of which 10,000 remain in ending
A per
total
the only finished goods inventory at June 30. Under the absorption costing concept, the
Residualare Income
inventory. Chassen uses the first-in, first-out (FIFO) inventory method, and the 10,000 units
Fixed Costs
value of Chassen’s June 30 finished goods inventory would be:
▪▪ New! Pathways Challenge encourages
students’
interest
in accounting
emphasizes of the return on investment.
Residual income
is useful
in overcoming
some of and
the disadvantages
a. $50,000.
b. $70,000.
Residual income
is
the
excess
of
operating
income
over
aChallenge
minimum acceptable operating income,
the
critical
thinking
aspect
of
accounting.
A
suggested
answer
to
the
Pathways
$85,000.
b. The difference (in a.) is caused by including $150,000 fixed manufacturing costs (10,000 units × $15 fixedc.manufacturing
cost per unit) in the
d. $145,000. 7.
ending inventory, which decreases the cost of goods sold and increases theas
operating
income byin
$150,000.
shown
Exhibit
is provided at the end of the chapter. 3. Mill Corporation had the following unit costs for the recent calendar year:
Check Up Corner
Manufacturing
Nonmanufacturing
Pathways
Challenge
Exhibit
7
Variable
Fixed
$8.00
2.00
$3.00
5.50
Operating Inventory
income for Mill’s sole product totaled 6,000 units on January 1 and 5,200 units on
December 31. When
compared
to variable
income, Mill’s absorption costing income is:
Minimum acceptable
operating
income
ascosting
a
a. $2,400 lower.
Economic Activity
percent ofb.invested
assets
$2,400 higher.
Absorption costing is required by generally accepted accounting principles (GAAP) for reporting to exterc. $6,800 lower.
Residual
nal stakeholders. Thus, auto manufacturers like Ford
Motor income
Company (F) and General Motors
$ XXX
Residual
Income
This is
Accounting!
(XXX)
$ XXX
$6,800 higher.
Company (GM) use absorption costing in preparing their financiald.statements.
Under absorption costing,
fixed manufacturing costs are included in inventory. Thus, the4.
moreBethany
cars the auto
companies
lower
Company
hasmake,
just the
completed
the first month of producing a new product but has
the fixed cost per car and the smaller the cost of goods sold. In the years
preceding
the U.S.
and The product incurred variable manufacturing costs of
not yet
shipped
anyfinancial
of this crisis
product.
economic downturn of 2008, Ford and General Motors produced more
cars than were
to customers.1 costs of $2,000,000, variable marketing costs of $1,000,000,
$5,000,000,
fixedsold
manufacturing
Critical Thinking/Judgment
and fixed marketing costs of $3,000,000.
Under the variable costing concept, the inventory value of the new product would be:
The minimum acceptable operating income is computed by multiplying the company minimum
return on investment by the invested assets. The minimum rate is set by top management, based
d. $11,000,000.
on such factors
as theanswer
cost
ofof chapter.
financing.
Suggested
at end
Marielle Segarra, “Why the Big Three Put Too Many Cars on the
CFO.com (ww2.cfo.com/management-accounting/2012/02/
ToLot,”illustrate,
assume that DataLink Inc. has established 10% as the minimum acceptable return
why-the-big-three-put-too-many-cars-on-the-lot/), February 2, 2012.
Pathways
Challenge
on investment
for divisional
assets. The residual incomes for the three divisions are shown in
Exhibit 8.
This is Accounting!
If Ford and General Motors have high fixed costs and low variable costs,
how would producing more cars
a. $5,000,000.
affect their operating income under absorption costing? under variable
b. costing?
$6,000,000.
If absorption costing allows companies like Ford and General Motors to change their operating income by
c. $8,000,000.
increasing or decreasing production, why does GAAP require absorption costing?
1
Information/Consequences
12020_ch07_ptg01_302-351.indd 314
Exhibit 8
7/12/18 12:15 PM
By producing more cars than were sold, Ford (F) and General Motors (GM) increased their operating income reported under absorption costing. This is because a portion of their fixed manufacturing costs
were included in ending inventory rather than cost of goods sold.
Northern Division
Residual Income—
DataLink, Inc.
12020_ch07_ptg01_302-351.indd 350
Central Division
Southern Division
Underincome
variable costing, producing more cars would not affect operating
income, because all fixed manufacOperating
$ 70,000
$ 84,000
turing costs are included in cost of goods sold regardless of how many cars are produced.
$ 75,000
Minimum acceptable operating income
A reason often given for why GAAP requires absorption costing is that it focuses on operating income “over
as a percent
invested
assets:
the longof
term.
” In other words,
while operating income may vary from year to year, all manufacturing costs
are eventually
reported on the income statement as cost of goods sold
or as a write-down of inventory using
$350,000
× 10%
(35,000)
the lower-of-cost-or-market rule. Thus, over the life of a company, the total amount of operating income will
be the same
regardless of whether absorption or variable costing is used.
$700,000
× 10%
(70,000)
$500,000 × 10%
Suggested Answer
Residual income
$ 35,000
$ 14,000
(50,000)
$ 25,000
7/12/18 12:15 PM
v
Preface
▪▪ To aid learning and problem solving, throughout each chapter the Check Up Corner
exercises provide students with step-by-step guidance on how to solve problems. Problemsolving tips help students avoid common errors.
Chapter 10
Check Up Corner 10-1
Evaluating Decentralized Operations
467
Cost Center Responsibility Measures
Delinco Tech Inc. manufactures corrosion-resistant water pumps and fluid meters. Its Commercial Products
Division is organized as a cost center. The division’s budget for the month ended July 31 is as follows
(in thousands):
Materials
Factory wages
Supervisor salaries
Utilities
Depreciation of plant equipment
Maintenance
Insurance
Property taxes
$140,000
77,000
15,500
8,700
9,000
3,200
750
800
$254,950
During July, actual costs incurred in the Commercial Products Division were as follows:
Materials
Factory wages
Supervisor salaries
Utilities
Depreciation of plant equipment
Maintenance
Insurance
Property taxes
$152,000
77,800
15,500
8,560
9,000
3,025
750
820
$267,455
Prepare a budget performance report for the director of the Commercial Products Division for July.
Solution:
The report shows the budgeted costs and
actual costs along with the differences.
Budget Performance Report
Director, Commercial Products Division
For the Month Ended July 31
Materials ………………………………..
Factory wages ………………………….
Supervisor salaries…………………….
Utilities…………………………………..
Depreciation of plant equipment ….
Maintenance……………………………
Insurance ……………………………….
Property taxes ………………………….
Actual
Budget
$152,000
77,800
15,500
8,560
9,000
3,025
750
820
$267,455
$140,000
77,000
15,500
8,700
9,000
3,200
750
800
$254,950
}
vi
Over
Budget
The report allows cost center
managers to focus on areas
of significant differences.
(Under)
Budget
$12,000
800
$(140)
Each difference is classified as
over budget or under budget.
(175)
20
$12,820
$(315)
Check Up Corner
Preface
▪▪ Analysis for Decision ­Making ­highlights how companies use accounting ­information to make
decisions and evaluate their business. This provides students with context of why accounting
is important 376
to companies.
Chapter 8 Budgeting
Analysis for Decision Making
Objective 6
Describe and
illustrate the use of
staffing budgets for
nonmanufacturing
businesses.
Nonmanufacturing Staffing Budgets
The budgeting illustrated in this chapter is similar to budgeting used for nonmanufacturing
businesses. However, many nonmanufacturing businesses often do not have direct materials
purchases budgets, direct labor cost budgets, or factory overhead cost budgets. Thus, the budgeted income statement is simplified in many nonmanufacturing settings.
A primary budget in nonmanufacturing businesses is the labor, or staffing, budget. This budget, which is highly flexible to service demands, is used to manage staffing levels. For example,
a theme park will have greater staffing in the summer vacation months than in the fall months.
Likewise, a retailer will have greater staffing during the holidays than on typical weekdays.
To illustrate, Concord Hotel operates a hotel in a business district. The hotel has 150 rooms
that average 120 guests per night during the weekdays and 50 guests per night during the weekend. The housekeeping staff is able to clean 10 rooms per employee. The number of housekeepers required for an average weekday and weekend is determined as follows:
Weekday
Weekend
120
÷ 10
12
50
÷ 10
5
Number of guests per day
Rooms per housekeeper
Number of housekeepers per day
If each housekeeper is paid $15 per hour for an eight-hour shift per day, the annual budget
for the staff is as follows:
Weekday
Number of housekeepers per day
Hours per shift
Days per year
Number of hours per year
Rate per hour
Housekeeping staff annual budget
12
8
260*
24,960
×
$15
Weekend
Total
5
8
104**
4,160
× $15
×
×
×
×
$374,400
$62,400
$436,800
* 52 weeks × 5 days
** 52 weeks × 2 days
The budget can be used to plan and manage the staffing of the hotel. For example,
if a wedding were booked for the weekend, the budgeted increase in staffing could be
compared with the increased revenue from the wedding to verify the profit plan.
Make a Decision
Nonmanufacturing Staffing Budgets
Analyze Johnson Stores’ staffing budget for holidays (MAD 8-1)
▪▪ Make a Decision in the end-of-chapter
material gives students a chance to analyze real-world
Analyze Mercy Hospital’s staffing budget (MAD 8-2)
Chapter 6 Cost-Volume-Profit Analysis
297
business decisions.
Analyze Adventure Park’s staffing budget (MAD 8-3)
Analyze Ambassador Suites’ staffing budget (MAD 8-4)
Make a Decision
Make a Decision
Cost-Volume-Profit Analysis for Service Companies
MAD 6-1 Analyze Global Air’s cost-volume-profit relationships
Obj. 6
Global Air is considering a new flight between Atlanta and Los Angeles. The average fare per
seat for the flight is $760. The costs associated with the flight are as follows:
12020_ch08_ptg01_352-409.indd 376
Fixed costs for the flight:
Crew salaries . . . . . . . . . . . . . . . . . . $ 5,000
Operating costs . . . . . . . . . . . . . . . 50,000
Aircraft depreciation . . . . . . . . . . 25,000
Total . . . . . . . . . . . . . . . . . . . . . . . . $80,000
Variable costs per passenger:
Passenger check-in . . . . . . . . . . .
Operating costs . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . .
16/07/18 6:34 am
$ 20
100
$120
The airline estimates that the flight will sell 175 seats.
a. Determine the break-even number of passengers per flight.
b. Based on your answer in (a), should the airline add this flight to its schedule?
c. How much profit should each flight produce?
What additional issues might the airline consider in this decision?
d.
MAD 6-2 Analyze Ocean Escape Cruise Lines’ cost-volume-profit relationships
Obj. 6
Ocean Escape Cruise Lines has a boat with a capacity of 1,200 passengers. An eight-day ocean
cruise involves the following costs:
Crew
Fuel
Fixed operating costs
$240,000
60,000
800,000
The variable costs per passenger for the eight-day cruise include the following:
Meals
Variable operating costs
$900
400
The price of the cruise is $2,400 per passenger.
a. Determine the break-even number of passengers for the eight-day cruise.
b. Assume 900 passengers booked the cruise. What would be the profit or loss for the cruise?
c. Assume the cruise was booked to capacity. What would be the profit or loss for the cruise?
If the cruise cannot book enough passengers to break even, how might the cruise
d.
line respond?
MAD 6-3 Analyze Star Stream’s cost-volume-profit relationships
Obj. 6
Star Stream is a subscription-based video streaming service. Subscribers pay $120 per year for the
service. Star Stream licenses and develops content for its subscribers. In addition, Star Stream leases
servers to hold this content. These costs are not variable to the number of subscribers, but must
be incurred regardless of the subscriber base. In addition, Star Stream compensates telecommunication companies for bandwidth so that Star Stream customers receive fast streaming services.
vii
viii
Preface
▪▪ At the end of each chapter, Let’s Review is a new chapter summary and self-assessment feature
that is designed to help busy students prepare for an exam. It includes a summary of each
learning objective’s key points, key terms, multiple-choice questions, exercises, and a sample
problem that students may use to practice.
▪▪ Sample multiple-choice questions allow students to practice with the type of assessments they
are likely to see on an exam.
▪▪ Short exercises and a longer problem allow students to apply their knowledge.
▪▪ Answers provided at the end of the Let’s Review section let students check their knowledge
immediately.
▪▪ Take It Further in the end-of-chapter activities allows instructors to assign other special activities related to ethics, communication, and teamwork.
▪▪ NEW! Certified Management Accountant (CMA®) Examination Questions help students
­prepare for the CMA exam so they can earn CMA certification.
CengageNOWv2
CengageNOWv2 is a powerful course management and online homework resource that provides
control and customization to optimize the student learning experience. Included are many proven
resources, such as algorithmic activities, a test bank, course management tools, reporting and
assessment options, and much more.
NEW! Excel Online
Cengage and Microsoft have partnered in CNOWv2 to provide students with a uniform, authentic
Excel experience. It provides instant feedback, built-in video tips, and easily accessible spreadsheet
work. These features allow you to spend more time teaching college accounting applications and
less time troubleshooting Excel.
These new algorithmic activities offer pre-populated data directly in Microsoft Excel Online. Each
student receives his or her own version of the problem to perform the necessary data calculations
in Excel Online. Their work is constantly saved in Cengage cloud storage as a part of homework
assignments in CNOWv2. It’s easily retrievable so students can review their answers without cumbersome file management and numerous downloads/uploads.
Motivation: Set Expectations and Prepare Students
for the Course
CengageNOWv2 helps motivate students and get them ready to learn by reshaping their misconceptions about the introductory accounting course and providing a powerful tool to engage students.
CengageNOWv2 Start-Up Center
Students are often surprised by the amount of time they need to spend outside of class working
through homework assignments in order to succeed. The CengageNOWv2 Start-Up Center will help
students identify what they need to do and where they need to focus in order to be successful
with a variety of new resources.
▪▪ What Is Accounting? Module ensures students understand course expectations and how to be
successful in the introductory accounting course. This module consists of two assignable videos: Introduction to Accounting and Success Strategies. The Student Advice Videos offer advice
from real students about what it takes to do well in the course.
▪▪ Math Review Module, designed to help students get up to speed with necessary math skills,
includes math review assignments and Show Me How math review videos to ensure that students have an understanding of basic math skills.
▪▪ How to Use CengageNOWv2 Module focuses on learning accounting, not on a particular software system. Quickly familiarize your students with CengageNOWv2 and direct them to all of
its built-in student resources.
Preface
Motivation: Prepare Them for Class
With all the outside obligations accounting students have, finding time to read the textbook before
class can be a struggle. Point students to the key concepts they need to know before they attend
class.
▪▪ Video: Tell Me More. Short Tell Me More lecture activities explain the core concepts of the
chapter through an engaging auditory and visual presentation. Available either on a standalone basis or as an assignment, they are ideal for all class formats—flipped model, online,
hybrid, or face-to-face.
Provide Help Right When Students Need It
The best way to learn accounting is through practice, but students often get stuck when attempting homework assignments on their own.
▪▪ Video: Show Me How. Created for the most frequently assigned end-of-chapter items,
Show Me How problem demonstration videos provide a step-by-step model of a similar problem. Embedded tips help students avoid common mistakes and pitfalls.
SHOW ME HOW
ix
x
Preface
Help Students Go Beyond Memorization to True
Understanding
Students often struggle to understand how concepts relate to one another. For most students, an
introductory accounting course is their first exposure to both business transactions and the accounting system. While these concepts are already difficult to master individually, their combination
and interdependency in the introductory accounting course often pose a challenge for students.
▪▪ Mastery Problems. Mastery Problems enable you to assign problems and activities designed to
test students’ comprehension and mastery of difficult concepts.
MindTap eReader
The MindTap eReader for Warren/Tayler’s Managerial Accounting is the most robust digital
reading experience available. Hallmark features include:
▪▪ Fully optimized for the iPad.
▪▪ Note taking, highlighting, and more.
▪▪ Embedded digital media.
▪▪ The MindTap eReader also features ReadSpeaker®, an online text-to-speech application that
vocalizes, or “speech-enables,” online educational content. This feature is ideally suited for
both instructors and learners who would like to listen to content instead of (or in addition
to) reading it.
Cengage Unlimited
Cengage Unlimited is a first of-its-kind digital subscription designed specifically to lower costs.
Students get total access to everything Cengage has to offer on demand—in one place. That’s
20,000 eBooks, 2,300 digital learning products, and dozens of study tools across 70 disciplines and
over 675 courses. Currently available in select markets. Details at www.cengage.com/unlimited.
New to This Edition
In all chapters, the following improvements have been made:
▪▪ Chapter schemas revised throughout.
▪▪ Link to page references added at the beginning of the
chapter allow students to easily locate the ties to the
opening company throughout the chapter.
▪▪ New learning objective for Analysis for Decision Making.
▪▪ Stock ticker symbol has been inserted for all real-world
(publicly listed) companies. This helps students to use
financial websites to locate real company data.
▪▪ New Pathways Challenge feature added, consistent with
the work of the Pathways Commission. This feature
emphasizes the critical thinking aspect of accounting. A
Suggested Answer to the Pathways Challenge is provided
at the end of the chapter.
▪▪ New Make a Decision section at the end of the Analysis
for Decision Making directs students and instructors to
the real-world company end-of-chapter materials related
to Analysis for Decision Making. Also, the continuing company analysis is identified and referenced in this Make a
Decision section.
▪▪ New items have been added to the Take It Further section
at the end of the chapter.
▪▪ New Certified Management Accountant (CMA®) Examination Questions help students prepare for the CMA exam
so they can earn CMA certification.
Chapter 1
▪▪ “Managerial Accounting in the Organization” section significantly revised to discuss horizonal and vertical business units; McAfee, Inc., is used as an illustration.
▪▪ New Why It Matters features the IMA and CMA.
▪▪ New Why It Matters features vertical and horizontal
­functions for service companies.
▪▪ Discussion of sustainability and accounting moved to new
Chapter 14.
Chapter 2
▪▪ Discussion of sustainability and accounting moved to new
Chapter 14.
▪▪ Added one new Analysis for Decision Making item.
Preface
Chapter 3
▪▪ Why It Matters feature (Sustainable Papermaking) moved
to Chapter 14.
▪▪ Lean manufacturing discussion with related homework
items moved to Chapter 13.
▪▪ Added one new Analysis for Decision Making item.
xi
▪▪ Added four new revenue variance exercises.
▪▪ Added one new Analysis for Decision Making item.
Chapter 10
▪▪ Balanced scorecard discussion moved to new Chapter 14.
▪▪ Added one new Analysis for Decision Making item.
Chapter 4
Chapter 11
▪▪ Added Learning Objective 7: Describe and illustrate the use
of activity-based costing information in decision making.
▪▪ Total cost and variable cost concepts for product pricing
were moved to an end-of-chapter appendix.
▪▪ Added one new Make a Decision item.
Chapter 5—NEW Chapter
▪▪ Learning Objectives:
▪▪ Describe support departments and support department
costs.
▪▪ Describe the allocation of support department costs
using a single plantwide rate, multiple department
rates, and activity-based costing.
▪▪ Allocate support department costs to production
departments using the direct method, sequential
method, and reciprocal services method.
▪▪ Describe joint products and joint costs.
▪▪ Allocate joint costs using the physical units, weighted
average, market value at split-off, and net realizable
value methods.
▪▪ Describe and illustrate the use of support department
and joint cost allocations to evaluate the performance
of production managers.
Chapter 6
▪▪ Added one new Analysis for Decision Making item.
Chapter 7
▪▪ Contribution margin analysis deleted from chapter.
▪▪ Revenue variance added as an appendix to Chapter 9.
Chapter 8
▪▪ Added one new Analysis for Decision Making item.
Chapter 9
▪▪ Added new appendix on revenue variances.
▪▪ Nonfinancial performance measures (previously Learning
Objective 6) moved to new Chapter 14.
Chapter 12
▪▪ Analysis for Decision Making on capital investment for
sustainability has been moved to new Chapter 14.
▪▪ Added new Analysis for Decision Making entitled “Uncertainty: Sensitivity and Expected Value Analyses.”
▪▪ Added six new Make a Decision items.
Chapter 13
▪▪ Added Objective 4: Describe and illustrate the use of lean
principles and activity analysis in a service or administrative setting.
Chapter 14—NEW chapter
▪▪ Learning objectives:
▪▪ Describe the concept of a performance measurement
system.
▪▪ Describe and illustrate the basic elements of a balanced scorecard.
▪▪ Describe and illustrate the balance scorecard, including
the use and impact of strategy maps, measure maps,
strategic learning, scorecard cascading, and cognitive
biases.
▪▪ Describe corporate social responsibility (CSR), including methods of measuring and encouraging social
responsibility using the balanced scorecard.
▪▪ Use capital investment analysis to evaluate CSR projects.
Acknowledgements
The many enhancements to this edition of Managerial Accounting are the direct result of reviews, surveys, and focus groups
with instructors at institutions across the country. We would like to take this opportunity to thank those who have helped
us better understand the challenge of the financial accounting course and provided valuable feedback on our content and
digital assets.
John Alpers, Tennessee Wesleyan
Anne Marie Anderson, Raritan Valley
Community College
Maureen Baker, Long Beach City
College
Cindy Bolt, The Citadel
Julie Bonner, Central Washington
University
Charles Boster, Salisbury University
Jerold K. Braun, Daytona State College
Shauna Butler, St. Thomas Aquinas
College
Kirk Canzano, Long Beach City College
Dixon Cooper, Ouachita Baptist
University
Bryan Corsnitz, Long Beach City
College
Pat Creech, Northeastern Oklahoma
A&M
Daniel De La Rosa, Fullerton College
Heather Demshock, Lycoming College
xii
Scott Dotson, Tennessee Wesleyan
University
Hong Duong, Salisbury University
James Emig, Villanova University
Dave Fitzgerald, Jackson College
Kenneth Flug, St. Thomas Aquinas
College
Thomas Heikkinen, Jackson College
Susanne Holloway, Salisbury University
Daniel Kim, Midlands Technical
College
Angela Kirkendall, South Puget Sound
Community College
Satoshi Kojima, East Los Angeles
College
Tara Maciel, San Diego Mesa College
Annette Maddox, Georgia Highlands
College
LuAnn Bean Mangold, Florida Institute
of Technology
Allison McLeod, University of North Texas
Rodney Michael
Shawn Miller, Lone Star College
Dr. April Poe, University of the
Incarnate Word
Francisco Rangel, Riverside City
College
Benjamin Reyes, Long Beach City
College
Lauran B. Schmid, The University of
Texas Rio Grande Valley
Meghna Singhvi, Loyola Marymount
University
Margie Snow, Norco College
Michael Stoots, UCLA extension
Patricia Tupaj, Quinsigamond
Community College
Randi Watts, Baker College
Cammy Wayne, Harper College
Melissa Youngman, National Technical
Institute for the Deaf, RIT
About the Authors
Carl S. Warren
©Terry R. Spray InHisImage Studios
Dr. Carl S. Warren is Professor Emeritus of Accounting at the University of Georgia, Athens. Dr.
Warren has taught classes at the University of Georgia, University of Iowa, Michigan State University, and University of Chicago. He has focused his teaching efforts on principles of accounting
and auditing. Dr. Warren received his Ph.D. from Michigan State University and his BBA and MA
from the University of Iowa. During his career, Dr. Warren published numerous articles in professional journals, including The Accounting Review, Journal of Accounting Research, Journal of
Accountancy, The CPA Journal, and Auditing: A Journal of Practice and Theory. Dr. Warren has
served on numerous committees of the American Accounting Association, the American Institute of
Certified Public Accountants, and the Institute of Internal Auditors. He has consulted with numerous companies and public accounting firms. His outside interests include handball, golfing, skiing,
backpacking, motorcycling, and fly-fishing. He also enjoys interacting with his five grandchildren,
Bella and Mila (twins), Jeremy, and Brooke and Robbie (twins).
William B. Tayler
© Emory University
Dr. William B. Tayler is the Robert J. Smith Professor of Accountancy in the Marriott School of
Business at Brigham Young University (BYU). Dr. Tayler is an internationally renowned, awardwinning accounting researcher and instructor. He has presented his research as an invited speaker
at universities and conferences across the globe. Dr. Tayler earned his Ph.D. and master’s degree at
Cornell University. He teaches in BYU’s Executive MBA Program and in BYU’s School of Accountancy, one of the top ranked accounting programs in the world. Dr. Tayler has also taught at
Cornell University and Emory University and has received multiple teaching awards. Dr. Tayler is
a Certified Management Accountant and consultant specializing in cost accounting, performance
measurement, the assignment of decision rights, and incentive compensation. His work has been
published in top journals, including Accounting Horizons, Accounting, Organizations and Society, The Accounting Review, Contemporary Accounting Research, IMA Educational Case Journal,
Journal of Accounting Research, Journal of Behavioral Finance, Journal of Finance, Review of
Financial Studies, and Strategic Finance. Dr. Tayler serves on the editorial boards of The Accounting Review, Management Accounting Research, and Accounting, Organizations and Society. He is
also director of the Institute of Management Accountants Research Foundation.
xiii
Brief Contents
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
Introduction to Managerial Accounting. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2
Job Order Costing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
46
Process Cost Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
94
Activity-Based Costing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
150
Support Department and Joint Cost Allocation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
204
Cost-Volume-Profit Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
248
Variable Costing for M
­ anagement Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
302
Budgeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
352
Evaluating Variances from Standard Costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
410
Evaluating Decentralized Operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
460
Differential Analysis and Product Pricing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
510
Capital Investment Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
564
Lean Manufacturing and Activity Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
612
The Balanced Scorecard and Corporate Social Responsibility. . . . . . . . . . . . . . . . . . . . . . . . . .
654
Statement of Cash Flows. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
698
Financial Statement Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
758
Appendix A Interest Tables. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
A-1
Nike Inc., Form 10-K for the Fiscal Year Ended May 31, 2017 Selected Excerpts. . . .
B-1
Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
G-1
Index. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
I-1
Appendix B
xiv
Contents
1
Introduction to Managerial
Accounting 2
Managerial Accounting 4
Differences Between Managerial and Financial Accounting 5
Managerial Accounting in the Organization 6
The Management Process 8
Uses of Managerial Accounting Information 9
Manufacturing Operations 11
Nature of Manufacturing 11
Direct and Indirect Costs 11
Manufacturing Costs 12
Financial Statements for a Manufacturing Business 17
Balance Sheet 17
Income Statement 18
Analysis for Decision Making 21
Utilization Rates 21
Make a Decision 41
Take It Further 43
Certified Management Accountant (CMA®)
Examination Questions (Adapted) 45
Take It Further 89
Certified Management Accountant (CMA®)
Examination Questions (Adapted) 92
Pathways Challenge 59, 93
3
Process Cost Systems 94
Process Manufacturers 96
Comparing Job Order and Process Cost Systems 97
Cost Flows for a Process Manufacturer 98
Cost of Production Report 101
Step 1: Determine the Units to Be Assigned Costs 102
Step 2: Compute Equivalent Units of Production 102
Step 3: Determine the Cost per Equivalent Unit 106
Step 4: Allocate Costs to Units Transferred
Out and Partially Completed Units 107
Preparing the Cost of Production Report 109
Journal Entries for a Process Cost System 112
Using the Cost of Production Report 116
Pathways Challenge 13, 45
Analysis for Decision Making 116
2
Appendix Weighted Average Method 118
Job Order Costing 46
Cost Accounting Systems Overview 48
Job Order Cost Systems 48
Process Cost Systems 48
Job Order Cost Systems for Manufacturing
Businesses 49
Materials 50
Factory Labor 52
Factory Overhead 54
Work in Process 60
Finished Goods 61
Sales and Cost of Goods Sold 61
Period Costs 62
Summary of Cost Flows for Legend Guitars 62
Job Order Cost Systems for Service Businesses 64
Types of Service Businesses 64
Flow of Costs in a Service Job Order Cost System 64
Analysis for Decision Making 66
Analyzing Job Costs 66
Make a Decision 86
Analyzing Process Costs 116
Determining Costs Using the Weighted
Average Method 118
The Cost of Production Report 120
Make a Decision 142
Take It Further 145
Certified Management Accountant (CMA®)
Examination Questions (Adapted) 147
Pathways Challenge 112, 149
4
Activity-Based Costing 150
Product Costing Allocation Methods 152
Single Plantwide Factory
Overhead Rate Method 153
Multiple Production Department Factory
Overhead Rate Method 155
Department Overhead Rates and Allocation 156
Distortion of Product Costs 157
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Contents
Activity-Based Costing Method 160
Activity Rates 162
Allocating Costs 163
Distortion in Product Costs 165
Dangers of Product Cost Distortion 165
Activity-Based Costing for
Selling and Administrative Expenses 167
Activity-Based Costing in Service
Businesses 168
Analysis for Decision Making 173
Using ABC Product Cost Information to Reduce Costs 173
Make a Decision 199
Take It Further 201
Certified Management Accountant (CMA®)
Examination Questions (Adapted) 202
6
Cost-Volume-Profit
Analysis 248
Cost Behavior 250
Variable Costs 251
Fixed Costs 252
Mixed Costs 254
Summary of Cost Behavior Concepts 256
Cost-Volume-Profit Relationships 258
Contribution Margin 258
Contribution Margin Ratio 258
Unit Contribution Margin 259
Mathematical Approach to Cost-Volume-Profit
Analysis 261
Break-Even Point 261
Target Profit 265
Pathways Challenge 171, 203
Graphic Approach to Cost-Volume-Profit Analysis 266
5
Special Cost-Volume-Profit Relationships 272
 Support Department and Joint
Cost Allocation 204
Support Departments 206
Support Department Cost Allocation 207
Single Plantwide Rate 208
Multiple Production Department Rates 208
Activity-Based Costing 209
Allocating Support Department Costs
to Production Departments 210
Direct Method 211
The Sequential Method 213
The Reciprocal Services Method 217
Comparison of Support Department Cost
Allocation Methods 221
Joint Costs 222
Joint Cost Allocation 222
The Physical Units Method 222
The Weighted Average Method 223
The Market Value at Split-Off Method 223
The Net Realizable Value Method 224
Comparison of Joint Cost Allocation Methods 225
By-Products 227
Analysis for Decision Making 227
Using Support Department and Joint Cost
Allocations for Performance Evaluation 227
Make a Decision 243
Take It Further 245
Certified Management Accountant (CMA®)
Examination Questions (Adapted) 246
Pathways Challenge 221, 247
Cost-Volume-Profit (Break-Even) Chart 266
Profit-Volume Chart 268
Use of Spreadsheets in Cost-Volume-Profit Analysis 269
Assumptions of Cost-Volume-Profit Analysis 270
Sales Mix Considerations 272
Operating Leverage 274
Margin of Safety 275
Analysis for Decision Making 277
Cost-Volume-Profit Analysis for Service Companies 277
Make a Decision 297
Take It Further 298
Certified Management Accountant (CMA®)
Examination Questions (Adapted) 300
Pathways Challenge 256, 301
7
 Variable Costing for
­Management Analysis 302
Operating Income: Absorption and Variable Costing 304
Absorption Costing 304
Variable Costing 305
Effects of Inventory 307
Analyzing Operating Income Using
Absorption and ­Variable Costing 310
Using Absorption and Variable Costing 315
Controlling Costs 315
Pricing Products 315
Planning Production 316
Analyzing Market Segments 316
Analyzing Market Segments 316
Sales Territory Profitability Analysis 318
Product Profitability Analysis 319
Salesperson Profitability Analysis 319
Contents
Variable Costing for Service Businesses 321
Reporting Income 321
Analyzing Segments 322
Analysis for Decision Making 324
Segment Analysis and EBITDA 324
Make a Decision 346
Take It Further 348
Certified Management Accountant (CMA®)
Examination Questions (Adapted) 349
Pathways Challenge 314, 350
8
Budgeting 352
Nature and Objectives of Budgeting 354
Objectives of Budgeting 354
Human Behavior and Budgeting 355
Budgeting Systems 356
Static Budget 357
Flexible Budget 358
Master Budget 360
Operating Budgets 361
Sales Budget 361
Production Budget 362
Direct Materials Purchases Budget 363
Direct Labor Cost Budget 364
Factory Overhead Cost Budget 366
Cost of Goods Sold Budget 366
Selling and Administrative Expenses Budget 368
Budgeted Income Statement 369
Financial Budgets 370
Cash Budget 370
Capital Expenditures Budget 375
Budgeted Balance Sheet 375
Analysis for Decision Making 376
Nonmanufacturing Staffing Budgets 376
Make a Decision 404
Take It Further 405
Certified Management Accountant (CMA®)
Examination Questions (Adapted) 407
Pathways Challenge 370, 408
9
 Evaluating Variances
from Standard Costs 410
Standards 412
Setting Standards 412
Types of Standards 413
Reviewing and Revising Standards 413
Criticisms of Standard Costs 413
Budgetary Performance Evaluation 414
Budget Performance Report 414
Manufacturing Cost Variances 415
Direct Materials and
Direct Labor Variances 416
Direct Materials Variances 416
Direct Labor Variances 419
Factory Overhead Variances 422
The Factory Overhead Flexible Budget 423
Variable Factory Overhead Controllable Variance 424
Fixed Factory Overhead Volume Variance 424
Reporting Factory Overhead Variances 426
Factory Overhead Account 427
Recording and Reporting Variances
from Standards 430
Analysis for Decision Making 432
Service Staffing Variances 432
Appendix Revenue Variances 433
Comprehensive Problem 5 453
Make a Decision 455
Take It Further 456
Certified Management Accountant (CMA®)
Examination Questions (Adapted) 458
Pathways Challenge 418, 459
10
 Evaluating Decentralized
Operations 460
Centralized and Decentralized Operations 462
Advantages of Decentralization 462
Disadvantages of Decentralization 463
Responsibility Accounting 464
Responsibility Accounting for Cost Centers 464
Responsibility Accounting for Profit Centers 468
Support Department Allocations 468
Profit Center Reporting 470
Responsibility Accounting
for Investment Centers 472
Return on Investment 472
Residual Income 476
Transfer Pricing 479
Market Price Approach 480
Negotiated Price Approach 480
Cost Price Approach 483
Analysis for Decision Making 483
Franchise Operations 483
Make a Decision 504
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Contents
Take It Further 506
Certified Management Accountant (CMA®)
Examination Questions (Adapted) 508
Pathways Challenge 463, 509
11
 Differential Analysis and
Product Pricing 510
Differential Analysis 512
Lease or Sell 514
Discontinue a Segment or Product 515
Make or Buy 516
Replace Equipment 518
Process or Sell 519
Accept Business at a Special Price 519
Setting Normal Product Selling Prices 522
Cost-Plus Methods 523
Product Cost Method 523
Illustration 524
Target Costing Method 525
Production Bottlenecks 527
Managing Bottlenecks 528
Pricing Bottleneck Products 528
Analysis for Decision Making 529
Yield Pricing in Service Businesses 529
Appendix Total and Variable Cost Methods to Setting
Normal Price 530
Total Cost Method 530
Variable Cost Method 533
Make a Decision 557
Take It Further 559
Certified Management Accountant (CMA®)
Examination Questions (Adapted) 561
Pathways Challenge 517, 562
Factors That Complicate Capital
Investment Analysis 579
Income Tax 579
Unequal Proposal Lives 579
Lease Versus Capital Investment 581
Uncertainty 581
Changes in Price Levels 582
Qualitative Considerations 583
Capital Rationing 583
Analysis for Decision Making 584
Uncertainty: Sensitivity and Expected
Value Analyses 584
Make a Decision 605
Take It Further 607
Certified Management Accountant (CMA®)
Examination Questions (Adapted) 609
Pathways Challenge 575, 610
13
 Lean Manufacturing and
Activity Analysis 612
Lean Principles 614
Reducing Inventory 615
Reducing Lead Times 615
Reducing Setup Time 617
Emphasizing Product-Oriented Layout 620
Emphasizing Employee Involvement 620
Emphasizing Pull Manufacturing 620
Emphasizing Zero Defects 621
Emphasizing Supply Chain
Management 621
Lean Accounting 623
Fewer Transactions 623
Combined Accounts 623
Nonfinancial Performance Measures 625
Direct Tracing of Overhead 625
12
Activity Analysis 626
Nature of Capital Investment Analysis 566
Analysis for Decision Making 632
 Capital Investment
Analysis 564
Methods Not Using Present Values 567
Average Rate of Return Method 567
Cash Payback Method 568
Methods Using Present Values 570
Present Value Concepts 571
Net Present Value Method and Index 573
Internal Rate of Return Method 576
Costs of Quality 626
Quality Activity Analysis 627
Value-Added Activity Analysis 629
Process Activity Analysis 630
Lean Performance for Nonmanufacturing 632
Make a Decision 649
Take It Further 651
Certified Management Accountant (CMA®)
Examination Questions (Adapted) 652
Pathways Challenge 619, 653
14
 The Balanced Scorecard
and Corporate Social
Responsibility 654
Performance Measurement Systems 656
The Balanced Scorecard 657
Performance Perspectives 657
Strategic Objectives 659
Performance Metrics 659
Strategic Initiatives 660
Performance Targets 661
Using the Balanced Scorecard 661
Strategy Maps 661
Measure Maps 663
Strategic Learning 665
Scorecard Cascading 667
Cognitive Biases 667
Corporate Social Responsibility 670
CSR Reporting 671
Corporate Social Responsibility and the Balanced Scorecard 672
Encouraging Corporate Social Responsibility 674
Analysis for Decision Making 674
Capital Investment in CSR 674
Contents
Cash Flows from Financing
Activities 712
Bonds Payable 712
Common Stock 712
Dividends and Dividends Payable 713
Preparing the Statement of Cash Flows 714
Analysis for Decision Making 716
Free Cash Flow 716
Appendix 1 Spreadsheet (Work Sheet)
for Statement of Cash Flows—The Indirect
Method 717
Analyzing Accounts 718
Retained Earnings 719
Other Accounts 719
Preparing the Statement of Cash Flows 720
Appendix 2 Preparing the Statement of Cash
Flows—The Direct Method 720
Cash Received from Customers 721
Cash Payments for Merchandise 721
Cash Payments for Operating Expenses 722
Gain on Sale of Land 722
Interest Expense 723
Cash Payments for Income Taxes 723
Reporting Cash Flows from Operating
Activities—Direct Method 723
Make a Decision 692
Make a Decision 752
Take It Further 693
Take It Further 755
Certified Management Accountant (CMA®)
Examination Questions (Adapted) 695
Pathways Challenge 714, 756
Pathways Challenge 669, 696
16
15
 Statement of Cash
Flows 698
Reporting Cash Flows 700
Cash Flows from Operating Activities 701
Cash Flows from Investing Activities 703
Cash Flows from Financing Activities 703
Noncash Investing and Financing
Activities 704
Format of the Statement of Cash
Flows 704
No Cash Flow per Share 705
Cash Flows from Operating
Activities—The Indirect Method 705
Net Income 707
Adjustments to Net Income 707
Cash Flows from Investing Activities 710
Land 710
Building and Accumulated
Depreciation—Building 711
 Financial Statement
Analysis 758
Analyzing and Interpreting Financial Statements 760
The Value of Financial Statement Information 760
Techniques for Analyzing Financial Statements 761
Analytical Methods 761
Horizontal Analysis 761
Vertical Analysis 763
Common-Sized Statements 765
Analyzing Liquidity 766
Current Position Analysis 767
Accounts Receivable Analysis 768
Inventory Analysis 769
Analyzing Solvency 772
Ratio of Fixed Assets to Long-Term Liabilities 772
Ratio of Liabilities to Stockholders’ Equity 772
Times Interest Earned 773
Analyzing Profitability 774
Asset Turnover 775
Return on Total Assets 775
Return on Stockholders’ Equity 776
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Contents
Return on Common Stockholders’ Equity 777
Earnings per Share on Common Stock 778
Price-Earnings Ratio 779
Dividends per Share 780
Dividend Yield 780
Summary of Analytical Measures 782
Corporate Annual Reports 783
Management Discussion and Analysis 783
Report on Internal Control 784
Report on Fairness of the Financial Statements 784
Appendix 1 Unusual Items on the Income Statement 785
Unusual Items Affecting the Current Period’s
Income Statement 785
Unusual Items Affecting the Prior Period’s
Income Statement 786
Appendix 2 Fair Value and Comprehensive Income 786
Fair Value 787
Comprehensive Income 787
Make a Decision 815
Take It Further 816
Pathways Challenge 779, 818
Appendix A: Interest Tables A-1
Appendix B: Nike Inc., Form 10-K for the Fiscal Year
Ended May 31, 2017 Selected Excerpts B-1
Glossary G-1
Index I-1
Managerial
Accounting
15e
Chapter
1
Introduction to
Managerial Accounting
Chapter 1
Principles
Introduction to Managerial Accounting
Developing Information
COST SYSTEMS
COST ALLOCATIONS
Chapter 2   Job Order Costing
Chapter 3   Process Costing
Chapter 4   Activity-Based Costing
Chapter 5   Support Departments
Chapter 5   Joint Costs
Decision Making
PLANNING AND EVALUATING TOOLS
Chapter 6  Cost-Volume-Profit Analysis
Chapter 7   Variable Costing
Chapter 8   Budgeting Systems
Chapter 9  Standard Costing and Variances
Chapter 10 Decentralized Operations
Chapter 11 Differential Analysis
2
STRATEGIC TOOLS
Chapter 12
Chapter 13
Chapter 13
Chapter 14
Chapter 14
Capital Investment Analysis
Lean Manufacturing
Activity Analysis
The Balanced Scorecard
Corporate Social Responsibility
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