• Chapter 3: Cost-Volume-Profi t Analysis and Pricing Decisions
• Chapter 7: Activity-Based Costing and Activity-Based Management
• Focus On Customer Profi tability
• Chapter 8: Using Accounting Information to Make Managerial Decisions
DAVIS ✺ DAVIS
CLASS TEST MATERIALS
AccountingManagerial
For class testing purposes only; not for reproduction. © John Wiley & Sons, Inc.
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This booklet contains:
• Preface• Full Table of Contents• Chapter 3: Cost-Volume-Profi t Analysis and Pricing Decisions• Chapter 7: Activity-Based Costing and Activity-Based Management• Focus On Customer Profi tability Analysis• Chapter 8 Using Accounting Information to Make Managerial Decisions• WileyPLUS pages
© John Wiley & Sons, Inc.
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Today’s business environment is a complex assort-ment of relationships, all of which are necessary for an organization’s success in the marketplace. These relationships can involve external parties such as suppliers and customers or internal parties such as employees. And all of these relationships rely on some form of managerial accounting in-formation to support decision-making activities.
Non-accounting business majors frequently ask, “Why do I need to take accounting? I’m not going to do accounting; I’ll hire an accountant to do that for me.” What these students fail to understand is that a working knowledge of accounting is essential to suc-cess in business, even when the accounting “work” is left to the trained accountants. Decision makers at all levels in the organization must know what account-ing information to ask for and must know how to interpret that information before reaching a conclu-sion about a course of action. For instance, how can a marketing manager decide on a price for a prod-uct without fully understanding the product’s cost to manufacture? How can a plant manager determine how to reward employees’ performance without un-derstanding their ability to control costs and quality?
Those of us teaching introductory accounting courses may be partly to blame for this miscon-ception. Often we place too much emphasis on the “accounting” and not enough emphasis on the “busi-ness”. We are more concerned with students getting the “right” answer rather than understanding what to do with that right answer. Realizing that most students in an introductory managerial accounting course are not going to major in accounting, this book seeks to position managerial accounting in a broader context of business decision making.
This book does not attempt to be all things for all people. Instead, it is targeted to a typical university sophomore with limited business knowledge, both in terms of theoretical education and practical expe-rience. While the nature of the book may be suitable for other audiences, we anticipate that the majority of students using this book have very little business foundation on which to build. Limited knowledge of business topics is assumed, though we anticipate that students have completed an introductory fi nan-cial accounting course. Therefore, our overriding
Preface
iii
objective is to lay a fi rm foundation of basic mana-gerial accounting on which new concepts in areas of fi nance, marketing and management can be built.
The vision of this book is to provide an easy-to-use learning system for introductory managerial accounting students. Our expectation is that this learning system will:
1. facilitate students’ learning of introductory man-agerial accounting concepts;
2. improve students’ understanding of how to use these concepts as support for management deci-sions; and,
3. improve students’ retention of these concepts for use in subsequent business and accounting courses.
Distinguishing Features
Learning Unit OrganizationMany students approach reading a chapter in an accounting textbook with a lack of interest. This textbook attempts to combat the traditional long chapter organization by using a format with chap-ters comprised of several short learning units. The units are written as if the authors are speaking di-rectly to the student/reader. Questions are raised to encourage the student to think about issues before merely plodding through the information. Addition-ally, each unit features reinforcing examples and exercises that allow students to assess their level of understanding before progressing to the next unit. Answers to these exercises are at the end of the chapter to keep the students on track as they learn new material. Thus, the passive reading of longer chapters is replaced by frequent active demonstra-tions, exercises and explorations.
The learning unit structure should reduce the time you spend in course design and syllabus preparation. The learning units assist in identifying appropriate ways to “chunk” textbook content and assign appro-priate exercises and problems for the students to do as they are learning the material. You are also able to customize course content by omitting or reordering units to meet your desired topical coverage.
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Some topics are covered in stand-alone “Focus On . . .” units. These units provide basic topical in-struction and are positioned to allow you to easily choose to include or exclude the topic from your course without affecting the text’s fl ow.
Integrated Running Case ExamplesTo really understand how managerial accounting information supports business decision-making ac-tivities, students need a context in which to place those decisions. This book creates this context by using C&C Sports, a fi ctitious manufacturer of sports apparel, and its supply chain partners to illustrate concepts. Sports apparel is a product line that all students are familiar with, and the produc-tion processes used in the industry are simple to understand.
C&C Sports is introduced in an early “Focus On . . .” unit that provides company history, a brief exploration of the company’s resources, and a brief look at the sports apparel industry. While we believe that covering this unit with your students will help set the stage for the remainder of the course, you can choose to omit it without losing the continuity of the running case examples.
Other companies along C&C Sports’ supply chain are used to illustrate topics that are bet-ter suited to, say, a retail operation or a service provider. Using these additional companies also allows students to better understand the supply chain concept and the reality that companies must work with their supply chain partners to achieve maximum results.
Each chapter opens with “The Pitch,” a decision faced by C&C Sports or a supply chain partner that sets the stage for the chapter content. The contexts for these decisions span the functional areas of the business; they are not just accounting decisions. Thus students from all business majors are able to see the importance of managerial accounting infor-mation throughout all functional areas of the or-ganization. Recognizing the material’s relevance to their chosen major should increase their interest in the course and enhance their understanding.
The use of the C&C Sports scenarios also fa-cilitates discussion of the “big picture” effects of decisions and will link the strategic mission of the business with the types of decisions being taught. Explicitly discussing the link between strategy and the decisions that must be made will allow students to understand why a new topic is being introduced.
Reality ChecksEach chapter contains several Reality Checks, which are short summaries of articles from the popular business press illustrating applications of concepts presented in the chapter. These examples provide a “real world” connection for the students and rein-force that the material they are learning is not just a classroom exercise. These summaries also illustrate that decisions based on managerial accounting in-formation have direct business consequences.
Think About ItThroughout the learning units, students encounter Think About It questions requiring them to think critically about the topic being discussed. Solutions to these questions appear on a subsequent page so students can evaluate their level of understanding before moving on.
Watch Out!Concepts that students frequently fi nd confusing or for which errors commonly occur are highlighted in Watch Out! sections. Students are advised how to avoid these mistakes, with the intent being to elimi-nate the bad habits before they begin.
Sequential Topical DevelopmentAs discussed earlier, C&C Sports and its supply chain partners provide a context in which business decisions are made, allowing students to see how managerial accounting information can be used to assist in decision making. Therefore, the ordering of the chapters in the book is designed around a story that places these decisions in temporal order rather than the more traditional grouping of “Planning/Controlling,” “Decision Making” and “Evaluating” sections. With this ordering of topics, the students are learning about managerial accounting while C&C Sports’ managers face decisions and learn how to use managerial accounting to support those decisions. Allowing students to discover how mana-gerial accounting concepts solve C&C Sports’ vari-ous business issues will result in increased retention of the material.
One example of this ordering is the placement of activity-based costing after variance analysis rather than after job order and process costing. This place-ment allows students to learn, along with C&C managers, that assigning costs to products and esti-mating costs with one cost driver does not necessar-ily provide good information for decision making.
iv Preface
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The ordering of the chapters is based on the fol-lowing story line.
• C&C Sports is introduced with an empha-sis on its products, size, location, resources, supply chain, and competitive advantage. (Focus on C&C Sports)
• Universal Sports Exchange, a retailer in C&C Sports’ supply chain, explores the need for cost behavior information to estimate and predict fi nancial results. (Chapters 2 and 3)
• C&C Sports develops product costs for its three products using job order costing. (Chapter 4)
• Bradley Textile Mills develops product costs for its fabric using process costing. (Focus on Process Costing)
• Bradley Textile Mills managers are engaged in a discussion of how increasing produc-tion will decrease the fi xed cost per unit of yard of material. (Focus on Absorption and Variable Costing)
• C&C Sports plans for the coming year by de-veloping standards and a master budget once desired production volume is determined. (Chapter 5)
• C&C Sports recognizes the need to evalu-ate its performance using fl exible budget and variance analysis. It fi nds that results for direct materials and direct labor are in line with standards, but overhead costs dif-fer from expectations. This fi nding leads into the need to better understand the company’s cost drivers. (Chapter 6)
• Durable Zipper Company’s accountant is overwhelmed by the volume of entries needed to record product costs. She looks to a stan-
dard cost system to help reduce the recording volume. (Focus on Standard Costing)
• C&C explores the use of Activity Based Costing (ABC) in response to its earlier per-formance evaluation. Management discusses overhead pools and how those resources are consumed by the organization. The resulting product costs yield a picture of product prof-itability that is different from management’s assumptions using traditional job order cost-ing. Management also explores other non-fi nancial performance metrics. (Chapter 7)
• Bradley Textile Mills’ managers evaluate the profi tability of the company’s customers and explore the need to price certain extra services based on the ABC results to increase profi t-ability. (Focus on Customer Profi tability)
• C&C Sports’ management team meets to discuss the vice presidents’ various areas of responsibility. Each vice president faces a different decision whose costs are not as ob-vious as it fi rst seems. (Chapter 8)
• C&C Sports seeks to expand its product line to increase profi tability. The company’s managers use capital budgeting techniques to assess the viability of investing in equip-ment to produce baseballs. (Chapter 9)
• Centex Yarns’ Nylon Fibers division has shown a loss for the past three years. The division’s vice president must determine how much the division is contributing to the com-pany’s fi nancial health. (Chapter 10)
• C&C Sports’ management recognizes that performance evaluation needs to be expanded to recognize the relation between fi nancial and non-fi nancial measures. A balanced scorecard is developed for the company. (Chapter 11)
Preface v
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Elizabeth Davis, Executive Vice President and Provost and
Professor of Accounting at Baylor University, joined the accounting
faculty at Baylor University in 1992 after receiving her Ph.D. in
accounting from Duke University. She also holds a BBA in accounting
from Baylor University and is a CPA (Louisiana, inactive).
Prior to pursuing her graduate studies, Professor Davis worked
as an auditor for Arthur Andersen & Co. in New Orleans, Louisiana.
While in public practice, she specialized in the audits of fi nancial
institutions and real estate.
Professor Davis’s research has been published in a number of journals including Orga-
nizational Behavior and Human Decision Processes, Advances in Accounting, Advances in
Accounting Behavioral Research, Advances in Accounting Education, Issues in Accounting
Education, Journal of Accounting Case Research, and Today’s CPA. She has received The
Institute of Management Accountants’ Lybrand Gold Medal and a Certifi cate of Merit for her
publications in Management Accounting and Strategic Finance.
Author Biographies
Charles E. Davis, Walter Plumhoff Professor of Accounting
and Chair of the Department of Accounting and Business Law at
Baylor University, joined the accounting faculty at Baylor in 1991
after receiving his Ph.D. in accounting from the University of North
Carolina at Chapel Hill. He also holds an MBA from University of
Richmond and a BBA in accounting from The College of William
and Mary, and is a CPA (Virginia).
Prior to pursing his Ph.D., Professor Davis worked for Reynolds
Metals Company, Coopers & Lybrand, and Investors’ Savings Bank,
all in Richmond, Virginia. It was while working in various cost accounting positions at Reyn-
olds Metals that Professor Davis developed his appreciation for managerial accounting.
Professor Davis’s research has been published in a number of journals including Accounting Horizons, Advances in Accounting, Advances in Accounting Behavioral
Research, Advances in Accounting Education, Issues in Accounting Education, Journal
of Accountancy, Journal of Information Systems, and Today’s CPA. He has received The
Institute of Management Accountants’ Lybrand Gold Medal and two Certifi cates of Merit
for his publications in Management Accounting and Strategic Finance. Professor Davis
currently serves on the Editorial Board of Strategic Finance and is a former member of the
Editorial Board of Issues in Accounting Education.
vii
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Managerial Accounting
Davis & Davis, Baylor University
Dear Student, Thank you for participating in our class test program with a
selection of chapters from Charles and Elizabeth Davis’ forthcom-ing book, Managerial Accounting, 1e. We understand that it re-quires time and energy to use alternate course materials, and we appreciate your assistance and commitment. You are an important part of the publishing process.
We would greatly appreciate your feedback once you have com-pleted using this material. Please follow the link below to complete a brief questionnaire about your class test experience.
http://www.mywiley.info/Davis Once again, thank you for your participation in this class test.
Should any questions arise, please don’t hesitate to contact us.
Class Test Materials
Brian Kamins Project EditorAccounting
Ramona ShermanSenior Marketing Manager Accounting
Michael McDonaldSenior Acquisitions EditorAccounting
ix
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Instructor SupplementsWileyPLUS: Is an innovative, research-based, online environment for effective teaching and learning.
Solutions Manual: Contains answers to all the end-of-chapter exercises and problem material.
Instructor’s Manual: Contains unit summaries, assignment classifi cations, related readings, and lecture notes based on the PPT slides.
Test Bank: Contains a variety of exam questions for instructors, including true-false, multiple-choice, matching, brief exercises, exercises, short answer, and essay.
Computerized Test Bank: An electronic version of the test bank. Instructors can create their own exams, including multiple versions with randomized questions and answer choices.
PowerPoint® Slides: Detailed lecture notes for instructors, including fi gures and tables from the text.
Managerial Accounting Video Program
Student SupplementsWileyPLUS: Is an innovative, research-based, online environment for effective teaching and learning.
Excel Templates: Allows students to complete select end-of-chapter questions and problems in Excel.
Excel Working Papers: Provides students with Excel templates for solving all applicable end-of-chapter questions and problems.
Student Study Guide: Provides students with a detailed review of chapter learning objectives, and a review of key vocabulary and concepts. Review questions, including multiple-choice, matching, true-false, and problems allow students to reinforce key concepts.
PRICING, FORMATS, AND CONTENTFLEXIBLE
Students have more options than the traditional textbook. Consider an eBook, loose-leaf binder version or a custom publication. Learn more about our fl exible pricing, fl exible for-mats and fl exible content at www.wiley.copm/college/wileyfl ex
xi
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ContentsInstructor Preface iii
Student Preface vi
Acknowledgements ix
Author Biographies xi
Dedication xii
Brief Contents xiii
Chapter 1 Accounting as a Tool for Management 2
Unit 1.1 What Is Managerial Accounting? 3Defi nition of Managerial Accounting 3Comparison of Managerial and Financial Accounting 4
Internal versus External Users 5Lack of Mandated Rules 5Focus on Operating Segments 5Focus on the Future 6Emphasis on Timeliness 6
The Manager’s Role 7Planning 8Controlling and Evaluating 8Decision Making 9Management in Action 9
The Managerial Accountant’s Role 10REALITY CHECK Just Because Polly wants
a cracker doesn’t mean she’ll get it 11UNIT 1.1 REVIEW 12Key Terms 12Self Study Questions 12Unit 1.1 Practice Exercise 13Selected Unit 1.1 Answers 13
Unit 1.2 Different Strategies, Different Information 14
Matching Accounting Information to an Organization’s Strategy 14
Product Differentiation versus Low-Cost Production 14
REALITY CHECK Strategic planning sometimes requires nerves of steel 15
Market Share: Build, Hold, Harvest, or Divest 15
Monitoring Strategic Performance 16The Balanced Scorecard 16Supply Chain Management 17Just-In-Time (JIT) Inventory 18
REALITY CHECK A supply chain touchdown 19Enterprise Resource Planning (ERP) Systems 20
UNIT 1.2 REVIEW 20Key Terms 20Self Study Questions 20Unit 1.2 Practice Exercise 21Selected Unit 1.2 Answers 21
Unit 1.3 Ethical Considerations in Managerial Accounting 22
REALITY CHECK Blowing the whistle 27
UNIT 1.3 REVIEW 28Key Terms 28Self Study Questions 28Unit 1.3 Practice Exercise 28Selected Unit 1.3 Answers 28
CHAPTER SUMMARY 29KEY TERMS 29EXERCISES 30PROBLEMS 32CASES 32ENDNOTES 34
FOCUS ON C&C Sports 36
C&C’s History 36
A Brief Look at C&C’s Resources 38
Industry Statistics 42FOCUS SUMMARY 44ENDNOTES 44
Chapter 2 Cost Behavior and Cost Estimation 46
Unit 2.1 Cost Behavior Patterns 48
Variable Costs 48
Fixed Costs 50
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Discretionary versus Committed Fixed Costs 51
Step Costs 51
Mixed Costs 52REALITY CHECK If it looks like a variable
cost . . . 53
UNIT 2.1 REVIEW 53Key Terms 53Self Study Questions 54Unit 2.1 Practice Exercise 54Selected Unit 2.1 Answers 54
Unit 2.2 Cost Estimation 55
Scattergraphs 56
High-Low Method 58
Regression Analysis 60REALITY CHECK Where does the relevant
range end? 61
Cost Estimation and the Relevant Range 61
UNIT 2.2 REVIEW 62Key Terms 62Self Study Questions 62Unit 2.2 Practice Exercise 62Selected Unit 2.2 Answers 62
Unit 2.3 Contribution Margin Analysis 63
Contribution Margin 64REALITY CHECK The contribution margin
recipe 65
Contribution Format Income Statement 66
UNIT 2.3 REVIEW 69Key Terms 69Self Study Questions 69Unit 2.3 Practice Exercise 69Selected Unit 2.3 Answers 69
CHAPTER SUMMARY 70KEY TERMS 71EXERCISES 72PROBLEMS 75CASES 78ENDNOTES 79
Chapter 3 Cost-Volume-Profi t Analysis and Pricing Decisions 80
Unit 3.1 Breakeven Analysis 82
The Breakeven Point 82REALITY CHECK Who really uses
breakeven analysis? 84
Breakeven Graphs 8 4
Margin of Safety 86
UNIT 3.1 REVIEW 86Key Terms 86Self Study Questions 86Unit 3.1 Practice Exercise 87Selected Unit 3.1 Answers 87
Unit 3.2 Cost-Volume-Profi t Analysis 88
Target Operating Income 88
Target Net Income 89
What-If Analysis 90Limitations of CVP Analysis 91
Cost Structure and Operating Leverage 92REALITY CHECK Fixed versus variable costs 94
UNIT 3.2 REVIEW 95Key Terms 95Self Study Questions 95Unit 3.2 Practice Exercise 96Selected Unit 3.2 Answers 96
Unit 3.3 Multiproduct CVP Analysis 97REALITY CHECK What’s in the mix? 99
Limitations of Multiproduct CVP Analysis 101
UNIT 3.3 REVIEW 101Key Terms 101Self Study Questions 101Unit 3.3 Practice Exercise 102Selected Unit 3.3 Answers 102
Unit 3.4 Pricing Decisions 103
Infl uences on Price 103
Cost-Plus Pricing 104
Target Costing 105REALITY CHECK Filling the tank empties
the wallet 106
xiv Contents
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UNIT 3.4 REVIEW 107Key Terms 107Self Study Questions 107Unit 3.4 Practice Exercise 107Selected Unit 3.4 Answers 108
CHAPTER SUMMARY 109KEY TERMS 111EXERCISES 111PROBLEMS 115CASES 120ENDNOTES 123
Chapter 4 Product Costing for Manufacturing Companies 124
Unit 4.1 Product and Period Costs 126
Product Costs 126Direct Materials 127Direct Labor 127Overhead 128
Period Costs 129Selling Costs 129General and Administrative Costs 130
REALITY CHECK Showing cost classifi cations in published fi nancial statements 131
UNIT 4.1 REVIEW 131Key Terms 131Self Study Questions 132Unit 4.1 Practice Exercise 132Selected Unit 4.1 Answers 133
Unit 4.2 Product Cost Flows 134
Inventory Account Defi nitions 134
Recording of Cost Flows 136REALITY CHECK A lotta latte 139
Schedule of Cost of Goods Manufactured 140
UNIT 4.2 REVIEW 141Key Terms 141Self Study Questions 141Unit 4.2 Practice Exercise 142Selected Unit 4.2 Answers 142
Unit 4.3 Job Order Costing 143
Accumulating Direct Job Costs 144Tracing Direct Materials Costs 145Tracing Direct Labor Costs 146
Allocating Manufacturing Overhead Costs 147
REALITY CHECK Tracking direct labor costs 148
Calculating the Predetermined OverheadRate 149Applying Manufacturing Overhead to Jobs 149
REALITY CHECK Here come the robots 150
UNIT 4.3 REVIEW 151Key Terms 151Self Study Questions 151Unit 4.3 Practice Exercise 152Selected Unit 4.3 Answers 152
Unit 4.4 Underapplied and Overapplied Manufacturing Overhead 153
Closing Underapplied and Overapplied Overhead to Cost of Goods Sold 154
Prorating Underapplied and Overapplied Overhead 155
UNIT 4.4 REVIEW 157Key Terms 157Self Study Questions 157Unit 4.4 Practice Exercise 157Selected Unit 4.4 Answers 157
CHAPTER SUMMARY 159KEY TERMS 160EXERCISES 161PROBLEMS 166CASES 173
FOCUS ON Process Costing 176
Process Costing 178
Cost Flows 178
Comparison of Process Costing and Job Order Costing 180
Similarities 180Differences 181
Contents xv
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Cost Accumulation and Reporting 181
Reconciling Activity and Costs 182
Calculating Equivalent Units 182
Allocating Product Costs to Units 183
REALITY CHECK Costs in the oyster bed 186
Process Costing Recap 186
FOCUS REVIEW 188KEY TERMS 188SELF-STUDY QUESTIONS 188FOCUS 2 PRACTICE EXERCISE 188SELECTED FOCUS 2 ANSWERS 189FOCUS SUMMARY 190EXERCISES 191PROBLEMS 193CASES 195ENDNOTES 196
FOCUS ON Variable and AbsorptionCosting 198
Variable and Absorption Costing 200
Absorption Costing versus Variable Costing 200
Income Effects of Variable Costing 201When Production Volume Equals Sales Volume 202When Production Volume Exceeds Sales Volume 203
REALITY CHECK Variable costing, German style 204
When Production Volume is Less than Sales Volume 204
Reconciling Income under Absorption Costing and Variable Costing 205
FOCUS REVIEW 206KEY TERMS 206SELF-STUDY QUESTIONS 206FOCUS 3 PRACTICE EXERCISE 207SELECTED FOCUS 3 ANSWERS 207FOCUS SUMMARY 209EXERCISES 209PROBLEMS 212CASE 215
Chapter 5 Planning and Forecasting 216
Unit 5.1 Planning and the Budgeting Process 218
What Is a Budget? 218
The Budgeting Process 219Information Flows 220Behavioral Issues 220Starting Points 222
REALITY CHECK The changing budget process 222
Time Frames 222
UNIT 5.1 REVIEW 223Key Terms 223Self Study Questions 223Unit 5.1 Practice Exercise 224Selected Unit 5.1 Answers 224
Unit 5.2 Performance Standards 225
REALITY CHECK The diamond standard 226
Ideal versus Practical Standards 226
Product Standards 227Direct Materials 227Direct Labor 229Manufacturing Overhead 230
UNIT 5.2 REVIEW 230Key Terms 230Self Study Questions 231Unit 5.2 Practice Exercise 231Selected Unit 5.2 Answers 231
Unit 5.3 Building the Master Budget: The Operating Budget 232
The Sales Budget 234
The Selling and Administrative Expense Budget 235
The Production Budget 237
The Direct Materials Purchases Budget 238
The Direct Labor Budget 241
The Manufacturing Overhead Budget 242
The Ending Inventory and Cost of Goods Sold Budget 244
Ending Raw Materials 244Ending Finished Goods 246
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REALITY CHECK Budgeting around the world 246
Cost of Goods Sold 247
UNIT 5.3 REVIEW 247Key Terms 247Self Study Questions 247Unit 5.3 Practice Exercise 248Selected Unit 5.3 Answers 248
Unit 5.4 Building the Master Budget: The Cash Budget 250
Cash Available to Spend 250The Cash Receipts Budget 252
Cash Disbursements 253REALITY CHECK Is there a crystal ball
for forecasting sales and collections? 254The Cash Payments for Materials Budget 255Other Cash Disbursements 256
Cash Excess (Cash Needed) 256
Short-Term Financing 257
Ending Cash Balance 257
UNIT 5.4 REVIEW 258Key Terms 258Self Study Questions 258Unit 5.4 Practice Exercise 259Selected Unit 5.4 Answers 259
Unit 5.5 Pro-Forma Financial Statements 260
The Pro-Forma Income Statement 261
The Pro-Forma Balance Sheet 262REALITY CHECK How the pros use
pro-formas 263Assets 263Liabilities and Stockholders’ Equity 264
UNIT 5.5 REVIEW 265Key Terms 265Self Study Questions 265Unit 5.5 Practice Exercise 265Selected Unit 5.5 Answers 265
CHAPTER SUMMARY 267KEY TERMS 269EXERCISES 269PROBLEMS 274CASES 277ENDNOTES 282
Chapter 6 Performance Evaluation: Variance Analysis 284
Unit 6.1 Flexible Budgets: A Performance Evaluation Tool 286
Static Budgets 286Variances 287Management by Exception 287
Flexible Budgets 288REALITY CHECK Who’s being fl exible? 289
Using Flexible Budgets to Analyze Static Budget Variances 290
A Revised Performance Report 291Computing Sales Volume Variances 292Computing Flexible Budget Variances 293
Using Variances to Evaluate the Sales Strategy 294
UNIT 6.1 REVIEW 295Key Terms 295Self Study Questions 296Unit 6.1 Practice Exercise 296Selected Unit 6.1 Answers 297
Unit 6.2 Variance Analysis: Direct Materials 298
Analyzing the Direct Materials Variances 299Direct Materials Price Variance 299
REALITY CHECK Big things in small packages 301
Direct Materials Quantity Variance 301
Interpreting Direct Materials Variances 302Explaining Direct Materials Price Variances 303Explaining Direct Materials Quantity Variances 303
REALITY CHECK A variance to remember 304
UNIT 6.2 REVIEW 305Key Terms 305Self Study Questions 305Unit 6.2 Practice Exercise 305Selected Unit 6.2 Answers 306
Unit 6.3 Variance Analysis: Direct Labor 307
Analyzing the Direct Labor Variances 307Direct Labor Rate Variance 307Direct Labor Effi ciency Variance 309
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Interpreting Direct Labor Variances 309Explaining Direct Labor Rate Variances 309Explaining Direct Labor Effi ciency Variances 310
REALITY CHECK Fast and furious or slow and steady? 311
UNIT 6.3 REVIEW 312Key Terms 312Self Study Questions 312Unit 6.3 Practice Exercise 313Selected Unit 6.3 Answers 313
Unit 6.4 Variance Analysis: Overhead 314
Variable Overhead 314Variable Overhead Spending Variance 315Variable Overhead Effi ciency Variance 316Interpreting Variable Overhead Variances 317
Fixed Overhead 317
UNIT 6.4 REVIEW 318Key Terms 318Self Study Questions 318Unit 6.4 Practice Exercise 318Selected Unit 6.4 Answers 319
CHAPTER SUMMARY 320KEY TERMS 320EXERCISES 320PROBLEMS 326CASES 329ENDNOTES 333
FOCUS ON Standard Costing Systems 334
Standard Costing Systems 336
Recording Direct Materials 337
Recording Direct Labor 338
Recording Variable Overhead 339REALITY CHECK Are standard costing
systems headed for extinction? 340
Recording Fixed Overhead 341
Transferring Completed Units to Finished Goods Inventory 342
Recording Cost of Goods Sold 343
Disposing of Variances 343
Advantages of Standard Costing 344
FOCUS REVIEW 344KEY TERMS 344SELF-STUDY QUESTIONS 344FOCUS 4 PRACTICE EXERCISE 345SELECTED FOCUS 4 ANSWERS 345
FOCUS SUMMARY 348EXERCISES 349PROBLEMS 351
Chapter 7 Activity-Based Costing and Activity-Based Management 354
Unit 7.1 Activity-Based Costing 356
Why Activity-Based Costing? 356
Classifi cation of Activities 359REALITY CHECK At the center
of activity 360
UNIT 7.1 REVIEW 362Key Terms 362Self Study Questions 362 Unit 7.1 Practice Exercise 363Selected Unit 7.1 Answers 363
Unit 7.2 Developing Activity-Based Product Costs 364
Step 1: Identify Activities 364
Step 2: Develop Activity Cost Pools 365
Step 3: Calculate Activity Cost Pool Rates 366
Step 4: Allocate Costs to Products or Services 368
Step 5: Calculate Unit Product Costs 369REALITY CHECK Can activity-based
costing solve the FAA’s funding crisis? 370
UNIT 7.2 REVIEW 372Key Terms 372Self Study Questions 372Unit 7.2 Practice Exercise 373Selected Unit 7.2 Answers 374
Unit 7.3 Activity-Based Management 376
Activity Management 377
Process Improvement 378
Reassessment of Product Profi tability 379
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REALITY CHECK Activity fi gures to the rescue 381
Activity-Based Budgeting 381
UNIT 7.3 REVIEW 381Key Terms 381Self Study Questions 382Unit 7.3 Practice Exercise 382Selected Unit 7.3 Answers 382
CHAPTER SUMMARY 384KEY TERMS 385EXERCISES 385PROBLEMS 390CASE 397ENDNOTES 399
FOCUS ON Customer Profi tability 400
Customer Profi tability 402
Identifying Unprofi table Customers 402
Addressing Unprofi table Customers 406REALITY CHECK Sprint drops more
than a call 407
FOCUS REVIEW 408KEY TERMS 408SELF-STUDY QUESTIONS 408Focus 5 Practice Exercise 409SELECTED FOCUS 5 ANSWERS 409FOCUS SUMMARY 411EXERCISES 411PROBLEMS 414ENDNOTE 417
Chapter 8 Using Accounting Information to Make Managerial Decisions 418
Unit 8.1 Identifying Relevant Information 420
What Is Relevant Information? 420REALITY CHECK My brain’s about to
explode! 421
Relevant Cost Identifi cation: An Example 423
A Relevant Cost Decision Model 424
UNIT 8.1 REVIEW 425Key Terms 425Self Study Questions 426Unit 8.1 Practice Exercise 426Selected Unit 8.1 Answers 426
Unit 8.2 Special Order Pricing 427
Characteristics of a Special Order 427
Relevant Costs of a Special Order 428REALITY CHECK I’ll give you
this much 429
Qualitative Issues in Special Order Pricing 429
Recap of the Decision Process 431
UNIT 8.2 REVIEW 431Key Terms 431Self Study Questions 431Unit 8.2 Practice Exercise 431Selected Unit 8.2 Answers 432
Unit 8.3 Outsourcing 432
Outsourcing Defi ned 433REALITY CHECK Take it outside 434
A Basic Outsourcing Decision Model 434
Alternative Uses for Facilities 436
Qualitative Issues in Outsourcing 437
Recap of the Decision Process 437
UNIT 8.3 REVIEW 438Key Terms 438Self Study Questions 438Unit 8.3 Practice Exercise 438Selected Unit 8.3 Answers 438
Unit 8.4 Allocating Constrained Resources 439
Contribution Margin per Constrained Resource 440
Allocation of Constrained Resources 442
Theory of Constraints 442REALITY CHECK Money doesn’t grow
on trees 443
Recap of the Decision Process 444
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UNIT 8.4 REVIEW 444Key Terms 444Self Study Questions 444Unit 8.4 Practice Exercise 445Selected Unit 8.4 Answers 445
Unit 8.5 Keeping or Eliminating Operations 446
Identifi cation of Common Costs 447
Segment Margin Analysis 448REALITY CHECK At the drop
of a hat 450
Additional Factors to Consider 450
Recap of the Decision Process 451
UNIT 8.5 REVIEW 451Key Terms 451Self Study Questions 451Unit 8.5 Practice Exercise 452Selected Unit 8.5 Answers 452
CHAPTER SUMMARY 453KEY TERMS 454EXERCISES 455PROBLEMS 459CASES 465ENDNOTES 469
Chapter 9 Capital Budgeting 470
Unit 9.1 Capital Budgeting Decisions 472
Investing in Capital Assets 472
Making Capital Budgeting Decisions 473
Screening Decisions versus Preference Decisions 474
REALITY CHECK Going on a capital spending spree 475
Cash Flow Identifi cation 475Post-Implementation Audit 477
UNIT 9.1 REVIEW 477Key Terms 477Self Study Questions 477Unit 9.1 Practice Exercise 477Selected Unit 9.1 Answers 478
Unit 9.2 Time Value of Money 479
Present Value of $1 479Calculating Present Value 480Compound Interest 481Discount Rates and Present Value 482
Present Value of an Annuity 482Calculating Present Value of an Annuity 482Using Excel® to Calculate Present Values 483
REALITY CHECK The sport of present value 484
UNIT 9.2 REVIEW 484Key Terms 484Self Study Questions 484Unit 9.2 Practice Exercise 485Selected Unit 9.2 Answers 485
Unit 9.3 Discounted Cash Flow Techniques 486
Net Present Value 487Amount and Timing of the Cash Flows 487Appropriate Discount Rate 487Present Value of Each Cash Flow 488
REALITY CHECK Don’t discount the choice of a discount rate 489
Net Present Value of the Project 489Another Look at Net Present Value Calculations 490Using Excel® to Calculate Net Present Value 491Assumptions of the Net Present Value Model 492
Internal Rate of Return 492Projects with Even Cash Flows 492Projects with Uneven Cash Flows 493Using Excel® to Calculate Internal Rate of Return 494Assumptions of the Internal Rate of Return Model 494
Screening and Preference Decisions using NPV and IRR 494
UNIT 9.3 REVIEW 495Key Terms 495Self Study Questions 496Unit 9.3 Practice Exercise 496Selected Unit 9.3 Answers 497
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Unit 9.4 Other Capital Budgeting Techniques 497
Payback Period 498Projects with Even Cash Flows 498Projects with Uneven Cash Flows 498Limitations of the Payback Period 499
Accounting Rate of Return 500REALITY CHECK So many choices,
so little money 501
UNIT 9.4 REVIEW 502Key Terms 502Self Study Questions 502Unit 9.4 Practice Exercise 502Selected Unit 9.4 Answers 502
CHAPTER SUMMARY 503KEY TERMS 506EXERCISES 506PROBLEMS 509CASES 512ENDNOTES 515
Chapter 10 Decentralization and Performance Evaluation 516
Unit 10.1 Centralized versus Decentralized Organizations 518
Why Decentralization? 519Advantages of Decentralization 519Disadvantages of Decentralization 520
REALITY CHECK Can nonprofi ts profi t from decentralization? 521
Responsibility Accounting 521Cost Centers 521Profi t Centers 522Investment Centers 522
UNIT 10.1 REVIEW 523Key Terms 523Self Study Questions 523Unit 10.1 Practice Exercise 523Selected Unit 10.1 Answers 524
Unit 10.2 Segment Evaluation 524
Defi ning a Segment 525
Segment Margin Income Statements 525REALITY CHECK The whole isn’t always
greater than the sum of its parts 526
When Traceable Fixed Costs Become Common Costs 527
Segment Reporting, Segment Margin, and GAAP 527
UNIT 10.2 REVIEW 528Key Terms 528Self Study Questions 528Unit 10.2 Practice Exercise 529Selected Unit 10.2 Answers 529
Unit 10.3 Return on Investment 530
Return on Investment 530
The DuPont Model 532Increase in Sales Revenue 533Decrease in Expenses 533Decrease in Assets 534
Shortcomings of Return on Investment 534REALITY CHECK What’s your
blog’s ROI? 535
UNIT 10.3 REVIEW 536Key Terms 536Self Study Questions 536Unit 10.3 Practice Exercise 537Selected Unit 10.3 Answers 537
Unit 10.4 Residual Income and EVA® 538
Residual Income 538
Shortcomings of Residual Income 539
Economic Value Added (EVA) 539Step 1: Calculating Net Operating Profi t 540Step 2: Calculating Invested Capital 540Step 3: Calculating the Weighted-Average Cost of Capital 540Step 4: Calculating EVA 541
EVA Compared to Residual Income 541REALITY CHECK Putting EVA in the
driver’s seat 542
UNIT 10.4 REVIEW 542Key Terms 543Self Study Questions 543Unit 10.4 Practice Exercise 543Selected Unit 10.4 Answers 543
Appendix Transfer Pricing 544Selecting a Transfer Price Base 545
REALITY CHECK The taxing transfer 546
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Determining the Minimum Transfer Price 547Selling Division Has Excess Capacity 547Selling Division Has No Excess Capacity 548
APPENDIX REVIEW 550Key Terms 550Self Study Questions 550Appendix Practice Exercise 550Selected Appendix Answers 551
CHAPTER SUMMARY 552KEY TERMS 553EXERCISES 554PROBLEMS 559CASE 562ENDNOTES 565
Chapter 11 Performance Evaluation Revisited: A Balanced Approach 566
Unit 11.1 Performance Measures 568
Lagging Indicators 568
Leading Indicators 569
Financial versus Nonfi nancial Measures 570REALITY CHECK Batter up 572
Choosing the Right Measures 572
Using Measures to Drive Performance 573
UNIT 11.1 REVIEW 575Key Terms 575Self Study Questions 575Unit 11.1 Practice Exercise 575Selected Unit 11.1 Answers 575
Unit 11.2 The Balanced Scorecard 576
The Four Balanced Scorecard Perspectives 577
Learning and Growth Perspective 577Internal Business Processes Perspective 578Customer Perspective 579Financial Perspective 579
Building a Balanced Scorecard 580
C&C Sports’ Strategy Map 581Learning and Growth Perspective 582Internal Business Processes Perspective 582Customer Perspective 582
REALITY CHECK Balancing act 583Financial Perspective 583
C&C Sports’ Balanced Scorecard 583Learning and Growth Perspective 583Internal Business Processes Perspective 584Customer Perspective 584Financial Perspective 584
UNIT 11.2 REVIEW 585Key Terms 586Self Study Questions 586Unit 11.2 Practice Exercise 586Selected Unit 11.2 Answers 586
Unit 11.3 Benchmarking 587REALITY CHECK Benchmarking in
health care 589
UNIT 11.3 REVIEW 590Key Terms 590Self Study Questions 590Unit 11.3 Practice Exercise 590Selected Unit 11.3 Answers 590Appendix Measures of Meeting Delivery Expectations 551Delivery Cycle Time 591Manufacturing Cycle Time 593
APPENDIX REVIEW 594Key Terms 594Self Study Questions 594APPENDIX PRACTICE EXERCISE 594SELECTED APPENDIX ANSWERS 595
CHAPTER SUMMARY 596KEY TERMS 596EXERCISES 597PROBLEMS 599CASE 601ENDNOTES 603
Chapter 12 Financial StatementAnalysis 604
Unit 12.1 Horizontal Analysis of Financial Statements 606
Preparing a Horizontal Analysis 606
Interpreting a Horizontal Analysis 608
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Preparing a Trend Analysis 608REALITY CHECK An apple a day 610
UNIT 12.1 REVIEW 610Key Terms 610Self Study Questions 610Unit 12.1 Practice Exercise 611Selected Unit 12.1 Answers 611
Unit 12.2 Common-Size Financial Statements 612
Preparing the Common-Size Balance Sheet 613
Preparing the Common-Size Income Statement 615
Interpreting the Common-Size Statements 615REALITY CHECK Hospitals suffer from
bad debts 616
UNIT 12.2 REVIEW 617Key Terms 617Self Study Questions 617Unit 12.2 Practice Exercise 618Selected Unit 12.2 Answers 618
Unit 12.3 Ratio Analysis 619
Liquidity Ratios 620Working Capital 622Current Ratio 622Acid-Test or Quick Ratio 622Accounts Receivable Turnover 622Average Collection Period 623Inventory Turnover 623
REALITY CHECK Cash fl ow in a global supply chain 624
Average Days to Sell Inventory 624Interpreting Liquidity Ratios 625
Leverage Ratios 626Debt Ratio 627Debt-to-Equity Ratio 627Times Interest Earned Ratio 627Interpreting Leverage Ratios 627
Profi tability Ratios 628Gross Margin Percentage 628Return on Assets 629Return on Common Stockholders’ Equity 629Interpreting Profi tability Ratios 630
Market Measure Ratios 630Earnings per Share 630Price/Earnings Ratio 631Dividend Payout Ratio 631Interpreting Market Measure Ratios 632
Limitations of Financial Statement Analysis 632
UNIT 12.3 REVIEW 633Key Terms 633Self Study Questions 633Unit 12.3 Practice Exercise 634Selected Unit 12.3 Answers 634
Unit 12.4 Industry Analysis 635REALITY CHECK Growing strong
farms 636
Published Industry Ratio Analyses 636
Industry Statistics 638
UNIT 12.4 REVIEW 640Key Terms 640Self Study Questions 640Unit 12.4 Practice Exercise 640Selected Unit 12.4 Answers 640
CHAPTER SUMMARY 641KEY TERMS 642EXERCISES 643PROBLEMS 648CASES 650ENDNOTES 655
Chapter 13 Statement of Cash Flows 656
Unit 13.1 Categorizing Cash Flows 658
Operating Activities 659REALITY CHECK Cash is king 660
Investing Activities 660
Financing Activities 661
UNIT 13.1 REVIEW 662Key Terms 662Self Study Questions 662Unit 13.1 Practice Exercise 662Selected Unit 13.1 Answers 663
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Unit 13.2 Cash Flows Provided by Operating Activities: The Indirect Method 664
REALITY CHECK How does cash register? 668
UNIT 13.2 REVIEW 668Key Terms 668Self Study Questions 668Unit 13.2 Practice Exercise 669Selected Unit 13.2 Answers 669
Unit 13.3 Cash Flows Provided by Investing and Financing Activities 670
Cash Flows Provided by Investing Activities 670
Property and Equipment 671Other Investing Assets 672
Cash Flows Provided by Financing Activities 672
Debt Financing 672Equity Financing 673
UNIT 13.3 REVIEW 675Self Study Questions 675Unit 13.3 Practice Exercise 676Selected Unit 13.3 Answers 676
Unit 13.4 Constructing and Interpreting the Statement of Cash Flows 677
Analyzing the Statement of Cash Flows 679
A Look to the Future 680
UNIT 13.4 REVIEW 681Self Study Questions 681Unit 13.4 Practice Exercise 681Selected Unit 13.4 Answers 682Appendix Cash Flows Provided by Operating Activities: The Direct Method 683Collections from Customers 684Payments to Suppliers 684Payments to Employees 685Payments for Operating Costs 685Payments for Income Taxes 686
Appendix Review 688Self Study Questions 688APPENDIX PRACTICE EXERCISE 689SELECTED APPENDIX ANSWERS 689
CHAPTER SUMMARY 690KEY TERMS 692EXERCISES 692PROBLEMS 698CASE 704ENDNOTES 705
GLOSSARY G-1
Photo Credits PC-1
COMPANY INDEX CI-1
SUBJECT INDEX SI-1
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AccountingManagerial
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