ACCT 500 SEU Cost Volume Profit Analysis Exercises

Chapter 6Cost-Volume-Profit
Analysis
Learning Objectives
• Obj. 1: Classify costs as variable costs, fixed costs, or mixed costs.
• Obj. 2: Compute the contribution margin, the contribution margin
ratio, and the unit contribution margin.
• Obj. 3: Determine the break-even point and sales necessary to
achieve a target profit.
• Obj. 4: Using a cost-volume-profit chart and a profit-volume chart,
determine the break-even point and sales necessary to achieve a
target profit.
• Obj. 5: Compute the break-even point for a company selling more
than one product, the operating leverage, and the margin of safety.
• Obj. 6: Describe and illustrate the use of cost-volume-profit analysis
for decision making in a service business.
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Cost Behavior
(slide 1 of 2)
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Cost Behavior
(slide 2 of 2)
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Variable Costs
(slide 1 of 2)
• Variable costs are costs that vary in proportion to
changes in the activity base.
• When the activity base is units produced, direct materials
and direct labor costs are normally classified as variable
costs.
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Variable Costs
(slide 2 of 2)
• Assume that Jason Sound Inc. produces stereo systems. The parts
for the stereo systems are purchased from suppliers for $10 per unit
and are assembled by Jason Sound. For Model JS-12, the direct
materials costs for the relevant range of 5,000 to 30,000 units of
production are as follows:
Number of Units of Model
JS-12 Produced
Direct Materials
Cost per Unit
Total Direct
Materials Cost
5,000 units
$10
$ 50,000
10,000 units
$10
$100,000
15,000 units
$10
$150,000
20,000 units
$10
$200,000
25,000 units
$10
$250,000
30,000 units
$10
$300,000
• As shown, variable costs have the following characteristics:
o
Cost per unit remains the same regardless of changes in the activity
base.
o
Total cost changes in proportion to changes in the activity base.
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Variable Cost Graphs
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Variable Costs and Their Activity Bases
Type of Business
Cost
Activity Base
University
Instructor salaries
Number of classes
Passenger airline
Fuel
Number of miles flown
Manufacturing
Direct materials
Number of units produced
Hospital
Nurse wages
Number of patients
Hotel
Housekeeping wages
Number of guests
Bank
Teller wages
Number of banking transactions
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Fixed Costs
(slide 1 of 2)
• Fixed costs are costs that remain the same in total
dollar amount as the activity base changes.
• When the activity base is units produced, many
factory overhead costs such as straight-line
depreciation are classified as fixed costs.
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Fixed Costs
(slide 2 of 2)
• Assume that Minton Inc. manufactures, bottles, and distributes perfume. The
production supervisor is Jane Sovissi, who is paid $75,000 per year. For the
relevant range of 50,000 to 300,000 bottles of perfume, the total fixed cost of
$75,000 does not vary as production increases. As a result, the fixed cost
per bottle decreases as the units produced increase. This is because the
fixed cost is spread over a larger number of bottles, as follows:
Number of bottles of perfume
produced
Total salary for
Jane Sovissi
Salary per bottle of
perfume produced
50,000 bottles
$75,000
$1,500
100,000 bottles
$75,000
$0.750
150,000 bottles
$75,000
$0.500
200,000 bottles
$75,000
$0.375
250,000 bottles
$75,000
$0.300
300,000 bottles
$75,000
$0.250
• As shown, fixed costs have the following characteristics:
Cost per unit decreases as the activity level increases and increases as the
activity level decreases.
o Total cost remains the same regardless of changes in the activity base.
o
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Fixed Cost Graphs
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Fixed Costs and Their Activity Bases
Type of Business
Fixed Cost
Activity Base
University
Building (straight-line)
depreciation
Number of students
Passenger airline
Airplane (straight-line)
depreciation
Number of miles flown
Manufacturing
Plant manager salary
Number of units produced
Hospital
Property insurance
Number of patients
Hotel
Property taxes
Number of guests
Bank
Branch manager salary
Number of customer accounts
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Mixed Costs
(slide 1 of 8)
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Mixed Costs
(slide 2 of 8)
• Assume that Simpson Inc. manufactures sails,
using rented machinery. The rental charges are
as follows:
Rental charge = $15,000 per year + $1 for each hour used in excess
of 10,000 hours
• The rental charges for various hours used within
the relevant range of 8,000 hours to 40,000
hours are as follows:
Hours Used
Rental Charge
8,000 hours $15,000
12,000 hours $17,000 {$15,000 + [(12,000 hrs. – 10,000 hrs.) × $1]}
20,000 hours $25,000 {$15,000 + [(20,000 hrs. – 10,000 hrs.) × $1]}
40,000 hours $45,000 {$15,000 + [(40,000 hrs. – 10,000 hrs.) × $1]}
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Mixed Costs
(slide 3 of 8)
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Mixed Costs
(slide 4 of 8)
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Mixed Costs
(slide 5 of 8)
• Assume that the Equipment Maintenance
Department of Kason Inc. incurred the following
costs during the past five months:
Months
Units Produced
Total Cost
June
1,000 units
$45,550
July
1,500 units
$52,000
August
2,100 units
$61,500
September
1,800 units
$57,500
October
750 units
$41,250
• The number of units produced is the activity
base, and the relevant range is the units
produced between June and October.
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Mixed Costs
(slide 6 of 8)
• For Kason, the difference between the units produced and the total
costs at the highest and lowest levels of production are as follows:
Units Produced
Total Cost
Highest level
2,100 units
$61,500
Lowest level
(750) units
(41,250)
Difference
1,350 units
$20,250
• The total fixed cost does not change with changes in production.
o
Thus, the $20,250 difference in the total cost is the change in the total
variable cost.
▪ Dividing this difference of $20,250 by the difference in production is an
estimate of the variable cost per unit. For Kason, this estimate is computed
as follows:
Difference in total cost
Variable cost per unit =
Difference in units produced
$20,250
=
= $15 per unit
1,350 units
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Mixed Costs
(slide 7 of 8)
• The fixed cost is estimated by subtracting the total variable costs
from the total costs for the units produced, as follows:
Fixed cost = Total costs – (Variable cost per unit × Units produced)
• The fixed cost is the same at the highest and the lowest levels of
production, as follows for Kason:
Highest level (2,100 units) :
Fixed cost = Total costs – (Variable cost per unit × Units produced)
= $61,500 – ($15 × 2,100 units)
= $61,500 – $31,500
= $30,000
Lowest level (750 units) :
Fixed cost = Total costs – (Variable cost per unit × Units produced)
= $41,250 – ($15 × 750 units)
= $41,250 – $11,250
= $30,000
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Mixed Costs
(slide 8 of 8)
• Using the variable cost per unit and the fixed
cost, the total equipment maintenance cost for
Kason can be computed for various levels of
production as follows:
Total costs = (Variable cost per unit × Units produced) + Fixed costs
= ($15 × Units produced) + $30,000
o For example, the estimated cost of 2,000 units of
production is $60,000, computed as follows:
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Variable and Fixed Cost Behavior
Effect of Changing Activity Level
Cost
Total Amount
Per-Unit Amount
Variable
Increases and decreases
proportionately with activity level.
Remains the same
regardless of activity level.
Fixed
Remains the same regardless of
activity level.
Increases and decreases
Inversely with activity level.
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Variable, Fixed, and Mixed Costs
Variable Costs
Fixed Costs
Mixed Costs
Direct materials
Straight-line depreciation
Quality Control
Department salaries
Direct labor
Property taxes
Purchasing Department
salaries
Electricity expense
Production supervisor
salaries
Maintenance expenses
Supplies
Insurance expense
Warehouse expenses
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Check Up Corner
Cost Behavior
(slide 1 of 2)
•
O&W Metal Company makes designer emblems for luxury vehicles. Each emblem
is handcrafted out of titanium to the customer’s design specifications. O&W’s
artisans are paid an hourly wage and work between 30 and 60 hours a week. O&W
uses the straight-line method of depreciation. To ensure that each emblem
conforms to the customer’s specifications, O&W has each emblem inspected by an
independent company. The inspection company charges a set price per month,
plus an additional amount for each item inspected. After inspection, each emblem
is shipped in a crush-resistant shipping container.
a.
Which of O&W’s costs (titanium, artisan wages, equipment depreciation, inspection,
shipping containers) is a mixed cost?
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Check Up Corner
Cost Behavior
(slide 2 of 2)
b.
Data on total mixed costs and total production for O&W’s five months of
operations are as follows:
Units produced
Total cost
August
1,000 units
$ 80,000
September
1,200 units
$ 86,000
October
1,600
$ 98,000
November
2,500
$125,000
December
2,200
$116,000
Using the high-low method, determine the (1) variable cost per unit and (2) total
fixed costs.
c.
O&W estimates that it will produce 2,000 units during January. Using your
answer to (b), estimate the (1) total variable costs and (2) fixed cost per unit
for January.
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Check Up Corner
Cost Behavior Solution
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Cost-Volume-Profit Relationships
• Cost-volume-profit analysis is the examination of the
relationships among selling prices, sales and production
volume, costs, expenses, and profits.
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Contribution Margin
(slide 1 of 2)
• Contribution margin is the excess of sales over
variable costs, computed as follows:
• Contribution margin covers fixed costs. Once the
fixed costs are covered, any additional
contribution margin increases operating income.
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Contribution Margin
(slide 2 of 2)
• Assume the following data for Lambert Inc.:
Sales
50,000 units
Sales price per unit
$20 per unit
Variable cost per unit
$12 per unit
Fixed costs
$300,000
Contribution Margin Income Statement Format
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Contribution Margin Ratio
(slide 1 of 3)
• The contribution margin ratio, sometimes
called the profit-volume ratio, indicates the
percentage of each sales dollar available to
cover fixed costs and to provide operating
income.
• The contribution margin ratio is computed as
follows:
Contribution margin ratio =
o
Contribution margin
Sales
The contribution margin for Lambert Inc. is computed as
follows:
Contribution margin ratio =
$400,000
= 40%
$1,000,000
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Contribution Margin Ratio
(slide 2 of 3)
• The contribution margin ratio is most useful
when the increase or decrease in sales volume
is measured in sales dollars. In this case, the
change in sales dollars multiplied by the
contribution margin ratio equals the change in
operating income, computed as follows:
Change in operating income = Change in sales dollars × Contribution margin ratio
o For example, if Lambert adds $80,000 in sales from
the sale of an additional 4,000 units, its operating
income will increase by $32,000, computed as
follows:
Change in operating income = Change in sales dollars × Contribution margin ratio
Change in operating income = $80,000 × 40% = $32,000
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Contribution Margin Ratio
(slide 3 of 3)
• The preceding analysis is confirmed by the
contribution margin income statement of
Lambert that follows:
Sales (54,000 units × $20)
Variable costs (54,000 units × $12)
Contribution margin (54,000 units × $8)
Fixed costs
Operating income
$1,080,000
(648,000)*
$ 432,000**
(300,000)
$ 132,000
*$1,080,000 × 60%
**$1,080,000 × 40%
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Unit Contribution Margin
(slide 1 of 3)
• The unit contribution margin is useful for
analyzing the profit potential of proposed
decisions.
• The unit contribution margin is computed as:
Unit contribution margin = Sales price per unit – Variable cost per unit
o If Lambert Inc.’s unit selling price is $20 and its
variable cost per unit is $12, the unit contribution
margin is computed as follows:
Unit contribution margin = Sales price per unit – Variable cost per unit
Unit contribution margin = $20 – $12 = $8
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Unit Contribution Margin
(slide 2 of 3)
• The unit contribution margin is most useful when the
increase or decrease in sales volume is measured in
sales units (quantities). In this case, the change in
sales volume (units) multiplied by the unit
contribution margin equals the change in operating
income, computed as follows:
Change in operating income = Change in sales units × Unit contribution margin
o Assume that Lambert’s sales could be increased by
15,000 units, from 50,000 units to 65,000 units. The
increase in Lambert’s operating income is computed
as follows:
Change in operating income = Change in sales units × Unit contribution margin
Change in operating income = 15,000 units × $8 = $120,000
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Unit Contribution Margin
(slide 3 of 3)
• The preceding analysis is confirmed by the
contribution margin income statement of
Lambert that follows:
Sales (65,000 units × $20)
Variable costs (65,000 units × $12)
Contribution margin (65,000 units × $8)
Fixed costs
Operating income
$1,300,000
(780,000)
$ 520,000
(300,000)
$ 220,000
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Check Up Corner
•
Contribution Margin
Toussant Company sells 20,000 units at $120 per unit. Variable costs are $90 per
unit, and fixed costs are $250,000.
a.
b.
c.
Prepare an income statement for Toussant in contribution margin format.
Determine Toussant’s (1) contribution margin ratio and (2) unit contribution margin.
How much would operating income change if Toussant’s sales increased by 3,000
units?
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Check Up Corner
Contribution Margin Solution
(Slide 1 of 2)
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Check Up Corner
Contribution Margin Solution
(Slide 2 of 2)
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Break-Even Point
(slide 1 of 6)
• The break-even point is the level of operations
at which a company’s revenues and expenses
are equal.
• At break-even, a company reports neither an
operating income nor an operating loss.
• The break-even point in sales units is computed
as follows:
Fixed costs
Break – even sales (units) =
Unit contribution margin
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Break-Even Point
(slide 2 of 6)
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Break-Even Point
(slide 3 of 6)
• Assume the following data for Baker
Corporation:
$90,000
Fixed costs
Unit selling price
$ 25
Unit variable cost
(15)
Unit contribution margin
$ 10
• The break-even point for Baker is computed as
follows:
Break – even sales (units) =
Fixed costs
$90,000
=
= 9,000 units
Unit contribution margin
$10
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Break-Even Point
(slide 4 of 6)
• The following income statement for Baker
verifies the break-even point of 9,000 units:
Sales (9,000 units × $25)
$225,000
Variable costs (9,000 units × $15)
(135,000)
Contribution margin
$ 90,000
Fixed costs
Operating income
(90,000)
$
0
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Break-Even Point
(slide 5 of 6)
• The break-even point in sales dollars can be
determined directly as follows:
Break – even sales (dollars) =
Fixed costs
Contribution margin ratio
o The contribution margin ratio can be computed using
the unit contribution margin and unit selling price as
follows:
Unit contribution margin
Contribution Margin Ratio =
Unit selling price
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Break-Even Point
(slide 6 of 6)
• The contribution margin ratio for Baker is
computed as follows:
Contribution Margin Ratio =
Unit contribution margin $10
=
= 40%
Unit selling price
$25
• Thus, the break-even sales dollars for Baker can
be computed directly as follows:
Break – even sales (units) =
Fixed costs
$90,000
=
= $225,000
Contribution margin ratio
40%
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Effect of Changes in Fixed Costs
(Slide 1 of 3)
• Fixed costs do not change in total with changes
in the level of activity. However, fixed costs may
change because of other factors such as
advertising campaigns, changes in property tax
rates, or changes in factory supervisors’
salaries.
• Changes in fixed costs affect the break-even
point as follows:
o
Increases in fixed costs increase the break-even point.
o
Decreases in fixed costs decrease the break-even point.
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Effect of Change in Fixed Costs on Break-Even
Point
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Effect of Changes in Fixed Costs
(slide 2 of 3)
• Assume that Bishop Co. is evaluating a proposal
to budget an additional $100,000 for advertising.
The data for Bishop Co. follow:
Current
Proposed
Unit selling price
$ 90
$ 90
Unit variable cost
(70)
(70)
$ 20
$ 20
$600,000
$700,000
Unit contribution margin
Fixed costs
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Effect of Changes in Fixed Costs
(slide 3 of 3)
• Bishop’s break-even point before the additional
advertising expense of $100,000 is computed as
follows:
Break – even sales (units) =
Fixed costs
$600,000
=
= 30,000 units
Unit contribution margin
$20
• Bishop’s break-even point after the additional
advertising expense of $100,000 is computed as
follows:
Break – even sales (units) =
Fixed costs
$700,000
=
= 35,000 units
Unit contribution margin
$20
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Effect of Changes in Unit Variable Costs
(slide 1 of 3)
• Unit variable costs do not change with changes in the
level of activity. However, unit variable costs may be
affected by other factors such as changes in the cost per
unit of direct materials, changes in the wage rate for
direct labor, or changes in the sales commission paid to
salespeople.
• Changes in unit variable costs affect the break-even
point as follows:
o
Increases in unit variable costs increase the break-even point.
o
Decreases in unit variable costs decrease the break-even point.
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Effect of Change in Unit Variable
Cost on Break-Even Point
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Effect of Changes in Unit Variable Costs
(slide 2 of 3)
• Assume that Park Co. is evaluating a proposal to
pay an additional 2% commission on sales to its
salespeople as an incentive to increase sales.
The data for Park follow:
Current
Proposed
Unit selling price
$ 250
$ 250
Unit variable cost
(145)
Unit contribution margin
$ 105
$ 100
$840,000
$840,000
Fixed costs
(150)*
*$150 = $145 + (2% × $250 unit selling price)
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Effect of Changes in Unit Variable Costs
(slide 3 of 3)
• Park’s break-even point before the additional 2%
commission is computed as follows:
Break – even sales (units) =
Fixed costs
$840,000
=
= 8,000 units
Unit contribution margin
$105
• Bishop’s break-even point after the additional
2% commission is computed as follows:
Break – even sales (units) =
Fixed costs
$840,000
=
= 8,400 units
Unit contribution margin
$100
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Effect of Changes in Unit Selling Price
(slide 1 of 3)
• Changes in the unit selling price affect the
break-even point as follows:
o Increases in the unit selling price decrease the break-
even point.
o Decreases in the unit selling price increase the break-
even point.
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Effect of Change in Unit Selling Price on BreakEven Point
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Effect of Changes in Unit Selling Price
(slide 2 of 3)
• Assume that Graham Co. is evaluating a
proposal to increase the unit selling price of a
product from $50 to $60. The data for Graham
follow:
Current
Proposed
Unit selling price
$ 50
$ 60
Unit variable cost
(30)
(30)
Unit contribution margin
$ 20
$ 30
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Effect of Changes in Unit Selling Price
(slide 3 of 3)
• Graham’s break-even point before price
increase is computed as follows:
Break – even sales (units) =
Fixed costs
$600,000
=
= 30,000 units
Unit contribution margin
$20
• Graham’s break-even point after price increase
is computed as follows:
Break – even sales (units) =
Fixed costs
$600,000
=
= 20,000 units
Unit contribution margin
$30
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Effects of Changes in Selling Price and Costs
on Break-Even Point
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Target Profit
(slide 1 of 4)
• The sales required to earn a target or desired
amount of profit is determined by modifying the
break-even equation as follows:
Sales (units) =
Fixed costs + Target profit
Unit contribution margin
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Target Profit
(slide 2 of 4)
• Assume the following data for Waltham Co.:
Fixed costs
$200,000
Target profit
100,000
Unit selling price
$ 75
Unit variable cost
(45)
Unit contribution margin
$ 30
• The sales necessary for Waltham to earn the
target profit of $100,000 is computed as follows:
Sales (units) =
Fixed costs + Target profit $200,000 + $100,000
=
= 10,000 units
Unit contribution margin
$30
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Target Profit
(slide 3 of 4)
• The following income statement for Waltham
verifies the computation on Slide 59:
Sales (10,000 units × $75)
$ 750,000
Variable costs (10,000 units × $45)
(450,000)
Contribution margin (10,000 units × $30)
$ 300,000
Fixed costs
(200,000)
Operating income
$ 100,000 = Target profit
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Target Profit
(slide 4 of 4)
• As shown on the income statement for Waltham,
sales of $750,000 are necessary to earn a target
profit of $100,000. The sales of $750,000
needed to earn a target profit of $100,000 can
be computed directly using the contribution
margin ratio as follows:
Unit contribution margin $30
=
= 40%
Unit selling price
$75
Fixed costs + Target profit
Sales (dollars) =
Contribution margin ratio
$200,000 + $100,000 $300,000
=
=
= $750,000
40%
40%
Contribution Margin Ratio =
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Cost-Volume-Profit (Break-Even) Chart
(slide 1 of 5)
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Cost-Volume-Profit (Break-Even) Chart
(slide 2 of 5)
• The cost-volume-profit chart is constructed using the following steps:
o
Step 1: Volume in units of sales is indicated along the horizontal axis. The range
of volume shown is the relevant range in which the company expects to operate.
Dollar amounts of total sales and total costs are indicated along the vertical axis.
o
Step 2: A total sales line is plotted by connecting the point at zero on the left
corner of the graph to a second point on the chart. The second point is
determined by multiplying the maximum number of units in the relevant range,
which is found on the far right of the horizontal axis, by the unit sales price. A line
is then drawn through both of these points. This is the total sales line.
o
Step 3: A total cost line is plotted by beginning with total fixed costs on the vertical
axis. A second point is determined by multiplying the maximum number of units in
the relevant range, which is found on the far right of the horizontal axis by the unit
variable costs and adding the total fixed costs. A line is then drawn through both
of these points. This is the total cost line.
o
Step 4: The break-even point is the intersection point of the total sales and total
cost lines. A vertical dotted line drawn downward at the intersection point
indicates the units of sales at the break-even point. A horizontal dotted line drawn
to the left at the intersection point indicates the sales dollars and costs at the
break-even point.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Cost-Volume-Profit (Break-Even) Chart
(slide 3 of 5)
• Assume the following data for Munoz Co.:
Total fixed costs
$100,000
Unit selling price
$ 50
Unit variable cost
(30)
Unit contribution margin
$ 20
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Cost-Volume-Profit Chart
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Cost-Volume-Profit (Break-Even) Chart
(slide 4 of 5)
• The break-even point for Munoz is $250,000 of
sales, which represents sales of 5,000 units.
o Operating profits will be earned when sales levels are
to the right of the break-even point.
o Operating losses will be incurred when sales levels
are to the left of the break-even point.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Cost-Volume-Profit (Break-Even) Chart
(slide 5 of 5)
• Assume that Munoz is evaluating a proposal to
reduce fixed costs by $20,000. In this case, the
total fixed costs would be $80,000 ($100,000 –
$20,000).
o Under this scenario, the total sales line on the cost-
volume-profit will not change, but the total cost line will
change.
o Also, the break-even point for Munoz will decrease to
$200,000 and 4,000 units of sales.
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Revised Cost-Volume-Profit Chart
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Profit-Volume Chart
(slide 1 of 7)
• Another graphic approach to cost-volume-profit
analysis is the profit-volume chart, which plots
only the difference between total sales and total
costs (or profits).
o In this way, the profit-volume chart allows managers to
determine the operating profit (or loss) for various
levels of units sold.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Profit-Volume Chart
(slide 2 of 7)
• The profit-volume chart is constructed using the following steps:
o
Step 1: Volume in units of sales is indicated along the horizontal axis.
The range of volume shown is the relevant range in which the company
expects to operate. Dollar amounts indicating operating profits and
losses are shown along the vertical axis.
o
Step 2: A point representing the maximum operating loss is plotted on
the vertical axis at the left. This loss is equal to the total fixed costs at the
zero level of sales.
o
Step 3: A point representing the maximum operating profit within the
relevant range is plotted on the right.
o
Step 4: A diagonal profit line is drawn connecting the maximum
operating loss point with the maximum operating profit point.
o
Step 5: The profit line intersects the horizontal zero operating profit line
at the break-even point in units of sales. The area indicating an operating
profit is identified to the right of the intersection, and the area indicating
an operating loss is identified to the left of the intersection.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Profit-Volume Chart
(slide 3 of 7)
• Assume the following data for Munoz Co.:
Total fixed costs
$100,000
Unit selling price
$ 50
Unit variable cost
(30)
Unit contribution margin
$ 20
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Profit-Volume Chart
(slide 4 of 7)
• The maximum operating loss is equal to the
fixed costs of $100,000. Assuming that the
maximum units that can be sold within the
relevant range is 10,000 units, the maximum
operating profit is $100,000, computed as
follows:
Sales (10,000 units × $50)
$ 500,000
Variable costs (10,000 units × $30)
(300,000)
Contribution margin (10,000 units × $20)
$ 200,000
Fixed costs
(100,000)
Operating income
$ 100,000 = Maximum profit
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Profit-Volume Chart
(slide 5 of 7)
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Profit-Volume Chart
(slide 6 of 7)
• The break-even point for Munoz is 5,000 units of
sales, which is equal to total sales of $250,000.
o Operating profits will be earned when sales levels are
to the right of the break-even point (operating profit
area).
o Operating losses will be incurred when sales levels
are to the left of the break-even point (operating loss
area).
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Profit-Volume Chart
(slide 7 of 7)
• Assume that Munoz is evaluating a proposal to increase fixed
costs by $20,000. In this case, the total fixed costs will
increase to $120,000 ($100,000 + $20,000), and the maximum
operating loss will also increase to $120,000. At the maximum
sales of 10,000 units, the maximum operating profit would be
computed as follows:
Sales (10,000 units × $50)
$ 500,000
Variable costs (10,000 units × $30)
(300,000)
Contribution margin (10,000 units × $20)
$ 200,000
Fixed costs
(120,000)
Operating income
$ 80,000 = Revised maximum profit
o
Under this scenario, the break-even point for Munoz will increase
to $300,000 and 6,000 units of sales.
o
The operating loss area will increase, while the operating profit
area will decrease.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Original Profit-Volume Chart and
Revised Profit-Volume Chart
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Assumptions of Cost-Volume-Profit Analysis
• Cost-volume-profit analysis depends on several
assumptions. The primary assumptions are as
follows:
o Total sales and total costs can be represented by straight
lines.
o Within the relevant range of operating activity, the
efficiency of operations does not change.
o Costs can be divided into fixed and variable components.
o The sales mix is constant.
o There is no change in the inventory quantities during the
period.
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Check Up Corner
Break-Even Sales and Target Profit
• DeHan Company, a sporting goods manufacturer, sells binoculars for $140
per unit. The variable cost is $100 per unit, while the fixed costs are
$1,200,000.
a.
Compute:
▪ 1. The anticipated break-even sales (units) for binoculars.
▪ 2. The sales (units) for binoculars required to realize target operating income of
$400,000.
b.
Construct a cost-volume-profit chart for the anticipated break-even sales for
binoculars.
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Check Up Corner
Break-Even Sales and Target Profit
Solution (slide 1 of 2)
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Check Up Corner
Break-Even Sales and Target Profit
Solution (slide 2 of 2)
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Sales Mix Considerations
(slide 1 of 5)
• Many companies sell more than one product at
different selling prices. In addition, the products
normally have different unit variable costs and,
thus, different unit contribution margins.
• In such cases, break-even analysis can still be
performed by considering the sales mix.
o The sales mix is the relative distribution of sales
among the products sold by a company.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Sales Mix Considerations
(slide 2 of 5)
• Assume that Cascade Company sold Products A and B
during the past year, as follows:
Total fixed costs
$ 200,000
Product A Product B
Unit selling price
$ 90
$140
Unit variable cost
(70)
(95)
Unit contribution margin
$ 20
$ 45
Units sold
8,000
2,000
Sales mix
80%
20%
• A total of 10,000 (8,000 + 2,000) units were sold during
the year. Therefore, the sales mix is 80% (8,000 ÷
10,000) for Product A and 20% (2,000 ÷ 10,000) for
Product B.
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Multiple Product Sales Mix
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Sales Mix Considerations
(slide 3 of 5)
• For break-even analysis, it is useful to think of the
individual products as components of one overall
enterprise product.
• The unit selling price of the overall enterprise
product equals the sum of the unit selling prices of
each product multiplied by its sales mix percentage.
• Likewise, the unit variable cost and unit contribution
margin of the overall enterprise product equal the
sum of the unit variable costs and unit contribution
margins of each product multiplied by its sales mix
percentage.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Sales Mix Considerations
(slide 4 of 5)
• For Cascade, Products A and B are components
of one overall enterprise product called E. The
unit selling price, unit variable cost, and unit
contribution margin for E are computed as
follows:
Product E
Product A
Product B
Unit selling price of E
$100 =
($90 × 0.8)
+
($140 × 0.2)
Unit variable cost of E
(75) =
($70 × 0.8)
+
($95 × 0.2)
Unit contribution margin of E
$ 25 =
($20 × 0.8)
+
($45 × 0.2)
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Sales Mix Considerations
(slide 5 of 5)
• Cascade has total fixed costs of $200,000. The
break-even point of E can be determined as
follows using the unit selling price, unit variable
cost, and unit contribution margin of E:
Break – even sales (units) for E =
Fixed costs
$200,000
=
= 8,000 units
Unit contribution margin
$25
• Because the sales mix for Products A and B is
80% and 20%, respectively, the break-even
quantity of A is 6,400 units (8,000 units × 80%)
and B is 1,600 units (8,000 units × 20%).
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Break-Even Sales: Multiple Products
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Operating Leverage
(slide 1 of 6)
• A company’s operating leverage is computed as
follows:
Contribution margin
Operating leverage =
Operating income
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Operating Leverage
(slide 2 of 6)
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Operating Leverage
(slide 3 of 6)
• Assume the following data for Jones Inc. and Wilson Inc.:
Jones Inc.
Wilson Inc.
Sales
$ 400,000
$ 400,000
Variable costs
(300,000)
(300,000)
Contribution margin
$ 100,000
$ 100,000
(80,000)
(50,000)
$ 20,000
$ 50,000
Fixed costs
Operating income
• As shown, Jones and Wilson have the same sales, the same
variable costs, and the same contribution margin. However, Jones
has larger fixed costs and, thus, a higher operating leverage than
Wilson.
Jones Inc.
Operating leverage =
Contribution margin $100,000
=
=5
Operating income
$20,000
Wilson Inc.
Operating leverage =
Contribution margin $100,000
=
=2
Operating income
$50,000
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Operating Leverage
(slide 4 of 6)
• Operating leverage can be used to measure the impact
of changes in sales on operating income.
• Using operating leverage, the effect of changes in sales
on operating income is computed as follows:
Percent change in operating income = Percent change  Operating
in sales
leverage
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Operating Leverage
(slide 5 of 6)
• Assume that sales increased by 10%, or $40,000
($400,000 × 10%), for Jones and Wilson. The percent
increase in operating income for Jones and Wilson is
computed as follows:
Jones Inc.
Percent change in operating income = Percent change  Operating
in sales
leverage
= 10%  5% = 50%
Wilson Inc.
Percent change in operating income = Percent change  Operating
in sales
leverage
= 10%  2% = 20%
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Operating Leverage
(slide 6 of 6)
• The validity of this analysis is shown in the following
income statements for Jones and Wilson based on the
10% increase in sales:
Jones Inc.
Wilson Inc.
Sales
$ 440,000
$ 440,000
Variable costs
(330,000)
(330,000)
Contribution margin
$ 110,000
$ 110,000
(80,000)
(50,000)
$ 30,000
$ 60,000
Fixed costs
Operating income
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Effect of Operating Leverage
on operating income
Operating Leverage
Percentage Impact on Operating
Income from a Change in Sales
High
Large
Low
Small
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Margin of Safety
(slide 1 of 3)
• The margin of safety indicates the possible
decrease in sales that may occur before an
operating loss results.
o Thus, if the margin of safety is low, even a small
decline in sales revenue may result in an operating
loss.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Margin of Safety
(slide 2 of 3)
• The margin of safety may be expressed in the following
ways:
Dollars of sales
o Units of sales
o Percent of current sales
o
▪ The margin of safety expressed as a percent of current sales is
computed as follows:
Sales − Sales at break – even point
Margin of safety =
Sales
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Margin of Safety
(slide 3 of 3)
• Assume the following data:
Sales
$250,000
Sales at the break-even point
200,000
Unit selling price
25
• The margin of safety in dollars of sales is $50,000
($250,000 – $200,000).
• The margin of safety in units is 2,000 units ($50,000 ÷
$25).
• The margin of safety expressed as a percent of current
sales is 20% ($50,000 ÷ $250,000).
Therefore, the current sales may decline $50,000, 2,000
units, or 20% before an operating loss occurs.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Check Up Corner
•
Blueberry Inc., a consumer electronics company, manufactures and sells two
products, smartphones and tablet computers. The unit selling price, unit variable
cost, and sales mix for each product are as follows:
Products
•
Special Cost-Volume-Profit
Relationships Solution (Slide 1 of 2)
Unit Selling Price Unit Variable Cost
Sales Mix
Smartphone
$650
$560
60%
Tablet
$550
$475
40%
The company’s fixed costs are $4,200,000.
a. How many units of each product would be sold at the break-even point?
b. Assume Blueberry sells 37,500 smartphones and 25,000 tablets during a
recent year.
▪ Compute the company’s (1) operating leverage and (2) margin of safety.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Check Up Corner
Special Cost-Volume-Profit
Relationships Solution (Slide 1 of 2)
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Check Up Corner
Special Cost-Volume-Profit
Relationships Solution (Slide 2 of 2)
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Cost-Volume-Profit Analysis for Service
Companies (slide 1 of 6)
• Cost-volume-profit relationships in a service company
are measured with respect to customers and activities,
rather than units of product. Examples are as follows:
Service
Break-Even Analysis
Education
Break-even number of students per course
Air transportation
Break-even number of passengers per flight
Health care
Break-even number of patients per outpatient facility
Hotel
Break-even number of guests per time period (day, month, etc.)
Freight transportation
Break-even number of tons per train
Theme park
Break-even number of guests per time period (day, month, etc.)
Financial services
Break-even number of invested funds (dollars) under
management
Subscription services
Break-even number of subscribers
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Cost-Volume-Profit Analysis for Service
Companies (slide 2 of 6)
• Break-even analysis for a service company
involves identifying the correct unit of analysis
and the correct measure of activity for that unit.
• For example, the unit of analysis for an
educational institution could be a course, a
major, a college, or the university as a whole.
o For a specific course, the measure of activity would
be the number of students enrolled in the course.
Each student is the same in his or her demand for
course-level services. Thus, a break-even analysis
would discover the number of students required for
the course to break even.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Cost-Volume-Profit Analysis for Service
Companies (slide 3 of 6)
• At other units of analysis, the measure of activity
may change.
o For example, the break-even for a college would likely
be measured in number of student credit hours, not
number of students. Not all students are equal in their
demand for college services, because some students
are part-time and some are full-time. However, each
student credit hour is nearly the same.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Cost-Volume-Profit Analysis for Service
Companies (slide 4 of 6)
• The unit of analysis can influence whether costs
are defined as fixed or variable.
o For example, the instructor’s salary is a fixed cost for
a specific course, but can be a variable cost to the
number of sections taught at the college level.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Cost-Volume-Profit Analysis for Service
Companies (slide 5 of 6)
• To illustrate, consider the break-even number of
students for a noncredit course in pottery.
o The course tuition is $500. The costs consist of the
following:
Variable costs per student:
Pottery supplies
$300
Enrollment costs
20
Fixed costs for the course:
Instructor’s salary
$3,000
Rental cost of the classroom
1,500
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Cost-Volume-Profit Analysis for Service
Companies (slide 6 of 6)
Fixed costs
Break – Even Sales (units) =
Unit contribution margin
$4,500
Break – Even Sales (units) =
= 25 students
$500 – $320
o Thus, the course would need to enroll 25 students to
break even.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Critical Thinking Assignment
Cost-Volume-Profit (CVP) Analysis
Q- questions:
Submit as an excel document and show your work with formulas
Fill-in-the-Blank Equations
1. __________ = Difference in Total Cost ÷ Difference in Units Produced
2. Contribution Margin = Sales – __________
3. Contribution Margin Ratio = __________ ÷ Sales
4. __________ = Fixed Costs ÷ Unit Contribution Margin
5. Sales (units) = (__________ + Target Profit) ÷ Unit Contribution Margin
6. Operating Leverage = Contribution Margin ÷ __________
7. Margin of Safety (percent of current sales) = (Sales – Sales at Break-Even Point) ÷__________
8. Margin of Safety (SAR) = Sales (SAR) – __________
Break-Even Sales (SAR)
9. The total cost of production for the last four quarters for Moore’s Mowers is as follows. Use the high-low method to determine the variable cost per unit and
the fixed cost.
Quarter 1
Quarter 2
Quarter 3
Quarter 4
Total Cost
51,000 SAR
56,400 SAR
49,200 SAR
53,700 SAR
Units Produced
2,000
2,300
1,900
2,150
Variable Cost = _____________
Fixed Cost = ____________
10. During 2023, Caps by Huely sold 50,000 finished products with a contribution margin of 55%. The variable costs totaled 40,500 SAR for the year.
Determine the sales, contribution margin, and unit contribution margin.
Sales = ____________
Sales price per unit = ____________
Variable cost per unit = ____________
Contribution margin per unit= ____________
Contribution margin= ____________
11. If a manufacturing company had a contribution margin of $65,700 for 20Y5 from selling 25,000 products at 6 SAR each, determine the variable cost per
unit, contribution margin ratio, and unit contribution margin. Round unit answers to two decimal places and percentages to the nearest whole percent.
Sales (SAR) = ____________
Contribution margin = ____________
Total variable cost= ____________
Variable cost per unit= ____________
Unit contribution margin= ____________
Contribution margin ratio = ____________
12. Determine the change in operating income for each situation for a company that has an increase in total sales of $52,000.
a. Unit contribution margin of $4.50 and each product selling for $8.
= ____________
b. Contribution margin ratio of 24% and each product selling for $10.
= ____________
c. Unit contribution margin of $6, with total variable costs of $25,000 at $5 per unit.
= ____________
13. After incurring an operating loss of $(6,000) in 20Y5, the production manager would like to know the break-even point in sales and units for the company.
During 2023, the company sold 6,000 at $3 each. Variable costs for the year totaled $10,800. Determine the sales and units sold that were needed to break
even.
Sales = ____________
Variable costs = ____________
Contribution margin = ____________
Fixed costs= ____________
Operating income = ____________
14. A tire manufacturer sells its finished goods for 80 SAR each. The variable cost to manufacture each product is 20 SAR, while fixed costs equal 20,700
SAR. In 2022, the company earned operating income of 32,100SAR. In 2023, the CEO would like to increase operating income by 5%. Determine the sales in
dollars and units needed to achieve the CEO’s goal. Round answers to the nearest whole number.
Target Profit = ____________
Submit as an excel document and show your work with formulas
Learning Outcomes
1. Identify cost behaviors and understand costing systems.
2. Recognize variable and fixed costs.
3. Demonstrate cost-volume-profit analysis.
4. Appraise fixed, variable, and mixed costs.
Readings
Required:
• Chapter 6 in Managerial Accounting
• Chen, J. V., Kama, I., & Lehavy, R. (2019). A contextual analysis of the impact of managerial expectations on asymmetric cost behavior. Review of
Accounting Studies, 24(2), 665–693.
Recommended:
• Module 06 PowerPoint Presentation
• Ciftci, M., & Zoubi, T. A. (2019). The magnitude of sales change and asymmetric cost behavior. Journal of Management Accounting Research, 31(3),
65–81.
• Huang, W., & Kim, J. (2020). Linguistically induced time perception and asymmetric cost behavior. Management International Review (MIR), 60(5),
755–785.
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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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 1
12
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…

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