SEU Accounting Evaluating Decentralized Operations Discussion

Chapter 10
Evaluating
Decentralized
Operations
Learning Objectives
(slide 1 of 2)
• Obj. 1: Describe the advantages and
disadvantages of decentralized operations.
• Obj. 2: Prepare a responsibility accounting
report for a cost center.
• Obj. 3: Prepare responsibility accounting reports
for a profit center.
• Obj. 4: Compute and interpret the return on
investment and residual income for an
investment center.
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Learning Objectives
(slide 2 of 2)
• Obj. 5: Describe and illustrate how the market
price, negotiated price, and cost price
approaches to transfer pricing may be used by
decentralized segments of a business.
• Obj. 6: Describe and illustrate the use of profit
margin, investment turnover, and R O I in
evaluating whether a company should expand
through franchised or owner-operated stores.
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Centralized and Decentralized Operations
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Advantages of Decentralization
(slide 1 of 2)
• For large companies, it is difficult for top
management to:
o Maintain daily contact with all operations
o Maintain operating expertise in all product lines and
services
• In such cases, delegating authority to managers
closest to the operations usually results in better
decisions.
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Advantages of Decentralization
(slide 2 of 2)
• Decentralized operations provide excellent training
for managers.
• Delegating responsibility allows managers to
develop managerial experience early in their
careers.
o
This helps a company retain managers, some of whom
may be later promoted to top management positions.
• Managers of decentralized operations often work
closely with customers.
o
As a result of this, they tend to identify with customers and,
thus, are often more creative in suggesting operating and
product improvements.
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Disadvantages of Decentralization
Decisions made by one manager may
negatively affect the profits of the company.
Assets and expenses may be duplicated
across divisions.
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Advantages and Disadvantages
of Decentralized Operations
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Responsibility Accounting
• In a decentralized business, accounting assists
managers in evaluating and controlling their
areas of responsibility, called responsibility
centers.
o Responsibility accounting is the process of
measuring and reporting operating data by
responsibility center.
o Three types of responsibility centers are as follows:
▪ Cost centers, which have responsibility over costs
▪ Profit centers, which have responsibility over revenues and costs
▪ Investment centers, which have responsibility over revenues, costs,
and investment in assets
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Responsibility Accounting for Cost Centers
(slide 1 of 3)
• A cost center manager has responsibility for
controlling costs.
o However, a cost center manager does not make
decisions concerning sales or the amount of fixed
assets invested in the center.
• Cost centers may vary in size from a small
department to an entire manufacturing plant.
• Cost centers may exist within other cost centers.
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Cost Centers in a University
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Responsibility Accounting for Cost Centers
(slide 2 of 3)
• Responsibility accounting for cost centers
focuses on the controlling and reporting of costs.
• Budget performance reports that report
budgeted and actual costs are normally
prepared for each cost center.
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Responsibility Accounting Reports for
Cost Centers (slide 3 of 3)
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Check Up Corner
•
Cost Center Responsibility
Measures (slide 1 of 2)
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
$140,000
Factory wages
77,000
Supervisor salaries
15,500
Utilities
8,700
Depreciation of plant equipment
9,000
Maintenance
3,200
Insurance
750
Property taxes
800
Total
$254,950
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Check Up Corner
•
Cost Center Responsibility
Measures (slide 2 of 2)
During July, actual costs incurred in the Commercial Products Division were as
follows:
Materials
Factory wages
77,800
Supervisor salaries
15,500
Utilities
8,560
Depreciation of plant equipment
9,000
Maintenance
3,025
Insurance
750
Property taxes
820
Total
•
$152,000
$267,455
Prepare a budget performance report for the director of the Commercial Products
Division for July.
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Check Up Corner
Cost Center Responsibility
Measures Solution
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Responsibility Accounting for Profit Centers
(slide 1 of 3)
• A profit center manager has the responsibility
and authority for making decisions that affect
both revenues as well as costs and profits.
o Profit centers may be divisions, departments, or
products.
o The manager does not make decisions concerning
the fixed assets invested in the center.
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Responsibility Accounting for Profit Centers
(slide 2 of 3)
• Responsibility accounting for profit centers
focuses on reporting revenues, expenses, and
operating income.
o Thus, responsibility accounting reports for profit
centers take the form of income statements.
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Responsibility Accounting for Profit Centers
(slide 3 of 3)
• The profit center income statement should
include only revenues and expenses that are
controlled by the manager.
o Controllable revenues are revenues earned by the
profit center.
o Controllable expenses are costs that can be
influenced (controlled) by the decisions of the profit
center managers.
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Service Department Charges
(slide 1 of 9)
• The controllable expenses of profit centers include direct
operating expenses such as sales salaries and utility
expenses.
• A profit center may incur expenses provided by internal
centralized service departments.
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Service Department Charges
(slide 2 of 9)
• Service department charges are indirect
expenses to a profit center.
o They are similar to the expenses that would be
incurred if the profit center purchased the services
from outside the company.
• A profit center manager has control over service
department expenses if the manager is free to
choose how much service is used.
o In such cases, service department allocations are
assigned to profit centers based on the usage of the
service by each profit center.
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Service Department Charges
(slide 3 of 9)
• Nova Entertainment Group (N E G), a diversified
entertainment company, has two operating
divisions organized as profit centers.
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Service Department Charges
(slide 4 of 9)
• The revenues and direct operating expenses for
the two divisions are shown below.
Theme Park
Division
Movie Production
Division
Revenues
$6,000,000
$2,500,000
Operating expenses
$2,495,000
$ 405,000
o The operating expenses consist of direct expenses,
such as the wages and salaries of a division’s
employees.
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Service Department Charges
(slide 5 of 9)
• N E G’s service departments and the expenses
they incurred for the year ended December 31,
20Y8, are as follows:
Purchasing
$400,000
Payroll Accounting
255,000
Legal
250,000
Total
$905,000
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Service Department Charges
(slide 6 of 9)
• A cost driver for each service department is
used to allocate service department expenses to
the Theme Park and Movie Production divisions.
o The cost driver for each service department is a
measure of the services performed.
▪ For N E G, the service department cost drivers are as
follows:
Department
Cost Driver
Purchasing
Number of purchase requisitions
Payroll Accounting
Number of payroll checks
Legal
Number of billed hours
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Service Department Charges
(slide 7 of 9)
• The use of services by the Theme Park and
Movie Production divisions is as follows:
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Service Department Charges
(slide 8 of 9)
• The rates at which allocated are charged to
each division are called support department
charge rates. These rates are computed as
follows:
Support Department Allocation Rate =
Support Department Expense
Total Support Department Usage
o N E G’s service department charges are computed as
follows:
Purchasing Allocation Rate =
Payroll Allocation Rate =
Legal Allocation Rate =
$400,000
= $10 per purchase requisition
40,000 purchase requisitions
$255,000
= $17 per payroll check
15,000 payroll checks
$250,000
= $250 per hr.
1,000 billed hrs.
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Service Department Charges
(slide 9 of 9)
• The services used by each division are
multiplied by the service department allocation
rates to determine the service department
allocations for each division, computed as
follows:
Support Department Allocation = Service Usage × Support Department Allocation Rate
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Service Department Charges to N E G
Divisions
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Profit Center Reporting
• In evaluating the profit center manager,
operating income should be compared over time
to a budget.
• However, it should not be compared across
profit centers because the profit centers are
usually different in terms of size, products, and
customers.
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Divisional Income Statements—N E G
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Check Up Corner
•
•
•
Profit Center Responsibility
Reporting (slide 1 of 2)
Johnson Company has two divisions, East and West, that operate as profit centers.
Sales, cost of goods sold, and selling expenses for the two divisions for the year
ended December 31 are as follows:
East Division ($)
West Division ($)
Sales
$3,000,000
$8,000,000
Cost of goods sold
1,650,000
4,200,000
Selling expenses
850,000
1,850,000
In addition, the company has two support departments, Legal and Tech Support.
The support department expenses for the year ended December 31 are as follows:
Legal Department
Tech Support
Department
$350,000
$250,000
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Check Up Corner
•
•
•
Profit Center Responsibility
Reporting (slide 2 of 2)
The Legal Department costs are allocated to user divisions based on the number
of hours of service, and the Tech Support Department costs are allocated to user
divisions based on the number of computers.
The usage of service by the two divisions is as follows:
Legal
Tech Support
East Division
500 hours
80 computers
West Division
1,500 hours
120 computers
Total
2,000 hours
200 computers
Prepare income statements for the year ended December 31, showing operating
income for the two divisions.
o
Use two column headings: East and West.
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Check Up Corner
Profit Center Responsibility
Reporting Solution
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Responsibility Accounting for Investment
Centers (slide 1 of 2)
• An investment center manager has the
responsibility and the authority to make
decisions that affect not only costs and revenues
but also the assets invested in the center.
• Investment centers are often used in diversified
companies organized by divisions.
o In such cases, the divisional manager has authority
similar to that of a chief operating officer or president
of a company.
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Responsibility Accounting for Investment
Centers (slide 2 of 2)
• Because investment center managers have
responsibility for revenues and expenses,
operating income is part of investment center
reporting.
• In addition, because the manager has
responsibility for the assets invested in the
center, the following two additional measures of
performance are used:
o Return on investment
o Residual income
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Divisional Income Statements—DataLink Inc.
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Return on Investment
(slide 1 of 14)
• Because investment center managers control the
amount of assets invested in their centers, they
should be evaluated on the use of these assets.
• One measure that considers the amount of assets
invested in an investment center is the return on
investment (R O I) or return on assets.
• The return on investment (R O I) is computed as
follows:
Return on Investment (ROI) =
Operating Income
Invested Assets
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Return on Investment
(slide 2 of 14)
• The return on investment is useful because the
three factors subject to control by divisional
managers (revenues, expenses, and invested
assets) are considered.
o The higher the return on investment, the better the
division is using its assets to generate income.
• In effect, the return on investment measures the
income (return) on each dollar invested.
o
As a result, the return on investment can be used as a
common basis for comparing divisions with each other.
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Return on Investment
(slide 3 of 14)
• The invested assets of DataLink’s three divisions
are as follows:
Invested Assets
Northern Division
$350,000
Central Division
700,000
Southern Division
500,000
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Return on Investment
(slide 4 of 14)
• Using the operating income for each division in
slide 37, the return on investment for each
division is computed as follows:
o
Northern Division:
Return on Investment =
o
Operating Income
$70,000
=
= 20%
Invested Assets
$350,000
Central Division:
Return on Investment =
o
Operating Income
$84,000
=
= 12%
Invested Assets
$700,000
Southern Division:
Return on Investment =
Operating Income
$75,000
=
= 15%
Invested Assets
$500,000
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Return on Investment
(slide 5 of 14)
• To analyze differences in the return on
investment across divisions, the DuPont
formula for the return on investment is often
used.
• The DuPont formula views the return on
investment as the product of two factors.
o Profit margin, which is the ratio of operating income
to sales
o Investment turnover, which is the ratio of sales to
invested assets
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Return on Investment
(slide 6 of 14)
• Using the DuPont formula, the return on
investment is expressed as follows:
Return on Investment = Profit Margin × Investment Turnover
Return on Investment =
Operating Income
Sales
×
Sales
Invested Assets
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Return on Investment
(slide 7 of 14)
• The DuPont formula is useful in evaluating divisions.
o This is because the profit margin and the investment
turnover reflect the following underlying operating
relationships of each division:
▪ Profit margin indicates operating profitability by computing the
profit earned on each sales dollar.
– If a division’s profit margin increases, and all other factors remain
the same, the division’s return on investment will increase.
▪ Investment turnover indicates operating efficiency by
computing the number of sales dollars generated by each
dollar of invested assets.
– If a division’s investment turnover increases, and all other factors
remain the same, the division’s return on investment will
increase.
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Return on Investment
(slide 8 of 14)
The return on investment, profit margin, and investment
turnover operate in relationship to one another.
More income can be earned by either increasing the investment
turnover, increasing the profit margin, or both.
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Return on Investment
(slide 9 of 14)
• Using the DuPont formula yields the same return
on investment for each of DataLink’s divisions,
computed as follows:
Return on Investment =
o
Operating Income
Sales
×
Sales
Invested Assets
Northern Division:
$70,000
$560,000
×
= 12.5% × 1.6 = 20%
$560,000
$350,000
Return on Investment =
o
Central Division:
Return on Investment =
o
$84,000
$672,000
×
= 12.5% × 0.96 = 12%
$672,000
$700,000
Southern Division:
Return on Investment =
$75,000
$750,000
×
= 10% × 1.5 = 15%
$750,000
$500,000
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Return on Investment
(slide 10 of 14)
• To increase the return on investment, the profit
margin and investment turnover for a division
may be analyzed.
• Assume that the revenues of the Northern
Division could be increased by $56,000 through
increasing operating expenses, such as
advertising, to $385,000.
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Return on Investment
(slide 11 of 14)
o
o
The Northern Division’s operating income will increase
from $70,000 to $77,000, computed as follows:
Revenues ($560,000 + $56,000)
$ 616,000
Operating expenses
(385,000)
Operating income before support department allocations
$ 231,000
Support department allocations
(154,000)
Operating income
$ 77,000
The return on investment for the Northern Division, using
the DuPont formula, is recomputed as follows:
Return on Investment =
$77,000
$616,000
×
= 12.5% × 1.76 = 22%
$616,000
$350,000
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Return on Investment
(slide 12 of 14)
• The return on investment is also useful in deciding where
to invest additional assets or expand operations.
o
For example, DataLink should give priority to expanding
operations in the Northern Division because it earns the
highest return on investment.
▪ In other words, an investment in the Northern Division will
return 20 cents (20%) on each dollar invested.
▪ In contrast, investments in the Central and Southern divisions
will earn only 12 cents and 15 cents, respectively, per dollar
invested.
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Return on Investment
(slide 13 of 14)
• A disadvantage of the return on investment as a
performance measure is that it may lead
divisional managers to reject new investments
that could be profitable for the company as a
whole.
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Return on Investment
(slide 14 of 14)
• Assume the following returns on investment for
the Northern Division of DataLink:
Current return on investment
20%
Minimum acceptable return on investment set
by top management
10%
Expected return on investment for new project
14%
o If the manager of the Northern Division invests in the
new project, the Northern Division’s overall return on
investment will decrease from 20% due to averaging.
▪ Thus, the division manager might decide to reject the project,
even though the new project’s expected return of 14%
exceeds DataLink’s minimum acceptable return of 10%.
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Residual Income
(slide 1 of 5)
• Residual income is useful in overcoming some
of the disadvantages of the return on
investment.
• Residual income is the excess of operating
income over a minimum acceptable operating
income.
o 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 on such
factors as the cost of financing.
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Residual Income
(slide 2 of 5)
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Residual Income—DataLink, Inc.
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Residual Income
(slide 3 of 5)
• The major advantage of residual income as a
performance measure is that it considers the
minimum acceptable return on investment,
invested assets, and the operating income for
each division.
o In doing so, residual income encourages division
managers to maximize operating income in excess of
the minimum.
▪ This provides an incentive to accept any project that is
expected to have a return on investment in excess of the
minimum.
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Residual Income
(slide 4 of 5)
• Assume the following returns on investment for
the Northern Division of DataLink:
Current return on investment
20%
Minimum acceptable return on investment set by top management
10%
Expected return on investment for new project
14%
o
If the manager of the Northern Division is evaluated on
new projects using only the return on investment, the
division manager might decide to reject the new project.
▪ This is because investing in the new project will decrease
Northern’s current return on investment of 20%.
– While this helps the division maintain its high R O I, it hurts the
company as a whole as the expected return on investment of
14% exceeds DataLink’s minimum acceptable of return on
investment of 10%.
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Residual Income
(slide 5 of 5)
o In contrast, if the manager of the Northern Division is
evaluated using residual income, the new project
would probably be accepted.
▪ This is because the new project will increase the Northern
Division’s residual income.
– In this way, residual income supports both divisional and overall
company objectives.
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Check Up Corner
•
Investment Center Performance
Measures
Yummy Foods Company is a diversified company with three divisions organized as
investment centers. Condensed data taken from the records of the three divisions
for the year ended December 31 are as follows:
Snack Goods
Canned Foods
Frozen Foods
Revenues
$ 784,000
$ 940,800
$1,050,000
Operating expenses
(470,400)
(700,000)
(562,500)
Operating income before support
department allocations
$ 313,600
$ 240,800
$ 487,500
Support department allocations
(219,520)
(99,680)
(382,500)
Operating income
$ 94,080
$ 141,120
$ 105,000
Invested assets
$ 448,000
$ 940,800
$ 750,000
a. Using the DuPont formula for return on investment, compute the profit margin, investment
b.
turnover, and return on investment for each division.
Determine the residual income for each division, assuming a minimum acceptable return on
investment is 14%.
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Check Up Corner
Investment Center Performance
Measures Solution (Slide 1 of 2)
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Check Up Corner
Investment Center Performance
Measures Solution (Slide 2 of 2)
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Transfer Pricing
(slide 1 of 2)
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Transfer Pricing
(slide 2 of 2)
• The objective of setting a transfer price is to
motivate managers to behave in a manner that
will increase the overall company income.
• Transfer prices can be set as low as the variable
cost per unit or as high as the market price.
o Often, transfer prices are negotiated at some point
between the two.
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Commonly Used Transfer Prices
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Income Statements—
No Transfers Between Divisions
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Market Price Approach
(slide 1 of 3)
• Using the market price approach, the transfer
price is the price at which the product or service
transferred could be sold to outside buyers.
• If an outside market exists for the product or
service transferred, the current market price may
be a proper transfer price.
Transfer Price = Market Price
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Market Price Approach
(slide 2 of 3)
• Assume that materials used by Wilson in
producing snack food in the Western Division
are currently purchased from an outside supplier
at $20 per unit.
o The same materials are produced by the Eastern
Division.
o The Eastern Division is operating at full capacity of
50,000 units and can sell all it produces to either the
Western Division or to outside buyers.
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Market Price Approach
(slide 3 of 3)
• A transfer price of $20 per unit (the market price)
has no effect on the Eastern Division’s income
or total company income.
o The Eastern Division will earn revenues of $20 per
unit on all its production and sales, regardless of who
buys its product.
o The Western Division will pay $20 per unit for
materials (the market price).
• In this situation, the use of the market price as
the transfer price is proper.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Negotiated Price Approach
(slide 1 of 11)
• If unused or excess capacity exists in the
supplying division (the Eastern Division) and the
transfer price is equal to the market price, total
company profit may not be maximized.
o This is because the manager of the Western Division
will be indifferent toward purchasing materials from
the Eastern Division or from outside suppliers.
▪ In both cases the Western Division manager pays $20 per
unit (the market price).
▪ Therefore, the Western Division may purchase the materials
from outside suppliers.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Negotiated Price Approach
(slide 2 of 11)
• If the Western Division purchases the materials
from the Eastern Division, the difference
between the market price of $20 and the
variable costs of the Eastern Division of $10 per
unit can cover fixed costs and contribute to
overall company profits.
o Thus, the Western Division manager should be
encouraged to purchase the materials from the
Eastern Division.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Negotiated Price Approach
(slide 3 of 11)
• The negotiated price approach allows the
managers to agree (negotiate) among
themselves on a transfer price.
• The only constraint is that the transfer price be
less than the market price but greater than the
supplying division’s variable costs per unit, as
follows:
Variable Costs per Unit < Transfer Price < Market Price © 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Negotiated Price Approach (slide 4 of 11) • Assume that instead of a capacity of 50,000 units, the Eastern Division’s capacity is 70,000 units. • In addition, assume that the Eastern Division can continue to sell only 50,000 units to outside buyers. © 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Negotiated Price Approach (slide 5 of 11) • A transfer price less than $20 would encourage the manager of the Western Division to purchase from the Eastern Division. o This is because the Western Division is currently purchasing its materials from outside suppliers at a cost of $20 per unit. ▪ Thus, its materials cost would decrease, and its operating income would increase. © 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Negotiated Price Approach (slide 6 of 11) • At the same time, a transfer price above the Eastern Division’s variable costs per unit of $10 would encourage the manager of the Eastern Division to supply materials to the Western Division. o In doing so, the Eastern Division’s operating income would also increase. © 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Income Statements—Negotiated Transfer Price © 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Negotiated Price Approach (slide 7 of 11) • The increase of $100,000 in the Eastern Division’s income can also be computed as follows: Increase in Eastern (Supplying) Division's Operating Income = (Transfer Price – Variable Cost per Unit) × Units Transferred = ($15 – $10)  20,000 units = $100,000 • The increase of $100,000 in the Western Division’s income can also be computed as follows: Increase in Western (Purchasing) Division's Operating Income = (Market Price – Transfer Price) × Units Transferred = ($20 – $15)  20,000 units = $100,000 © 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Negotiated Price Approach (slide 8 of 11) • Comparing the exhibits in slides 65 and 75 shows that Wilson’s operating income increased by $200,000. • Any negotiated transfer price between $10 and $20 is acceptable, as shown in the following formula: Variable Costs per Unit < Transfer Price < Market Price $10 < Transfer Price < $20 © 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Negotiated Price Approach (slide 9 of 11) • Any transfer price within this range will increase the overall operating income for Wilson by $200,000. o The increases in the Eastern and Western divisions’ operating income will vary depending on the transfer price. • A transfer price of $16 would increase the Eastern Division’s operating income by $120,000, computed as follows: Increase in Eastern (Supplying) Division's Operating Income = (Transfer Price – Variable Cost per Unit) × Units Transferred = ($16 – $10)  20,000 units = $120,000 © 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Negotiated Price Approach (slide 10 of 11) • A transfer price of $16 would increase the Western Division’s operating income by $80,000, computed as follows: Increase in Western (Purchasing) Division's Operating Income = (Market Price – Transfer Price) × Units Transferred = ($20 – $16)  20,000 units = $80,000 • With a transfer price of $16, Wilson Company’s operating income still increases by $200,000. o This amount consists of the Eastern Division’s increase of $120,000 and the Western Division’s increase of $80,000. © 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Negotiated Price Approach (slide 11 of 11) • A negotiated price provides each division manager with an incentive to negotiate the transfer of materials. • At the same time, the overall company’s operating income will also increase. • However, the negotiated approach only applies when the supplying division has excess capacity. © 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 • • • Transfer Pricing The materials used by the South Division of Eagle Company are currently purchased from outside suppliers at $30 per unit. These same materials are produced by Eagle’s North Division. Operating income assuming no transfers between divisions is $1,200,000 for the North Division and $1,360,000 for the South Division. The North Division has unused capacity and can produce the materials needed by the South Division at a variable cost of $15 per unit. The two divisions have recently negotiated a transfer price of $22 per unit for 30,000 units. Based on the agreed upon transfer price, with no reduction in the North Division’s current sales: a. b. c. How much would the North Division’s operating income increase? How much would the South Division’s operating income increase? How much would Eagle Company’s operating income increase? © 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 Transfer Pricing Solution © 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Cost Price Approach (slide 1 of 3) • Under the cost price approach, cost is used to set transfer prices. • A variety of costs may be used in this approach, including: o Total product cost per unit ▪ Direct materials, direct labor, and factory overhead are included in the transfer price. o Variable product cost per unit ▪ The fixed factory overhead cost is excluded from the transfer price. © 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Cost Price Approach (slide 2 of 3) • Actual costs or standard (budgeted) costs may be used in applying the cost price approach. o If actual costs are used, inefficiencies of the producing (supplying) division are transferred to the purchasing division. ▪ Thus, there is little incentive for the producing (supplying) division to control costs. – Most companies use standard costs in the cost price approach. – In this way, differences between actual and standard costs remain with the producing (supplying) division for cost control purposes. © 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Cost Price Approach (slide 3 of 3) • The cost price approach is most often used when the responsibility centers are organized as cost centers. • When the responsibility centers are organized as profit or investment centers, the cost price approach is normally not used. © 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Franchise Operations (slide 1 of 7) • A franchise is the right or license granted to an individual or group to market a company’s goods or services. • The franchisor is the entity that provides the franchise, while the franchisee is the entity that pays for the franchise. • The franchise fee is often expressed as a percent of revenues earned by the franchisee. • In addition, the franchisee invests in the property and equipment to deliver the franchised product or service. © 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Franchise Operations (slide 2 of 7) • The franchisor often provides support in start-up, advertising, management development, business systems, and supplier relationships. o The benefits to a franchisee are instant access to a recognized brand, established customer base, and working business systems. o The main benefit to the franchisor is an ability to expand the brand without investing significantly in property and equipment. © 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Franchise Operations (slide 3 of 7) • From the franchisor’s perspective the return on investment for franchised operations should be increased by the low investment. o The DuPont formula should show a healthy profit margin combined with a high investment turnover. • Assume that Hilton Worldwide Holdings, Inc. (HLT), has both company-operated and franchised hotel operations. o In a recent year, Hilton had 141 company-operated hotels and 4,781 franchised hotels around the world. © 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Franchise Operations (slide 4 of 7) • Segment disclosures with some assumptions regarding owned and franchised operations are as follows, in millions: Company-Operated Franchised Revenues $ 4,126 $ 1,701 Operating expenses $ 3,100 $ 0 General and administrative expenses* $ 0 $ 616 Property, plant, and equipment** $ 8,037 $ 893 *Assume all the general and administrative expenses support franchised operations, since less than 3% of hotel properties are company-operated. ** Total property, plant, and equipment is $8,930. Assume 10% of total property, plant, and equipment support administrative (franchised) operations, while the remaining 90% consist of owned hotel properties. © 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Franchise Operations (slide 5 of 7) • The return on investment (R O I) using the DuPont formula for both segments is as follows: Return on Investment = Profit Margin × Investment Turnover Return on Investment = Operating Income Revenues × Revenues Invested Assets o Company-Operated Hotels: $1,0261 $4,126 Return on Investment = × $4,126 $8,037 = 24.9% × 0.51 = 12.7% (rounded) 1 $4,126 – $3,100 © 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Franchise Operations (slide 6 of 7) o Franchised Hotels: $1,0852 $1,701 Return on Investment = × $1,701 $893 = 63.8% × 1.90 = 121.2% (rounded) 2 $1,701 – $616 • Under these assumptions, franchised hotels provide a superior R O I compared to companyoperated hotels. © 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Franchise Operations (slide 7 of 7) • The superior performance is caused by both a stronger profit margin and a higher investment turnover. • The R O I will often favor franchised operations in this way. o This is likely the reason for Hilton’s decision to emphasize franchised operations. © 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Evaluating Decentralized Operations Discussion Question: Decentralized Operations Sherry Smith is the president/CEO of Tiller Components. She founded the firm and has led it to become an industry leader in the area of automobile manufacturing components and parts. The company has plants in over 35 areas across the country. Smith is finding that she cannot manage and stay on track with things the way she was able to in the past. Discuss the decision-making approaches (centralized and decentralized) that you might use if you were the CEO of Tiller Components and how this would affect the different local and regional managers. • • • What activities would be conducted centrally and which would you decentralize? How would the shifts in this method of decision-making and management that you suggest impact the company overall? Further, how can the use of analytical tools assist Smith with better understanding how each of her divisions and segments are performing? • Directions: • Discuss the concepts, principles, and theories from your textbook. Cite your textbooks and cite any other sources if appropriate. • Your initial post should address all components of the question with a 600 word limit. Learning Outcomes 1. Explain how properly linked performance incentives and measures add value for all stakeholders in performance management and evaluation. 2. Examine cost centers, profit centers, and investment centers. 3. Interpret return on investment (ROI) and residual income. 4. Develop financial statements using vertical and horizontal analysis, liquidity, and profitability ratios. Readings Required: • Chapter 10 in Managerial Accounting • Bergeron, C., Gueyie, J.-P., & Sedzro, K. (2019). Earnings multifactor process, residual income valuation, and long-run risk. Journal of Theoretical Accounting Research, 15(1), 23– 43. Recommended: • Module 10 PowerPoint Presentation • Erb, E. C. (2020). The re-emergence of the residual income model in the valuation of firms and investment projects. Public Finance Quarterly (0031-496X), 65(3), 430–442. 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 © 2020, 2018 Cengage Learning, Inc. Unless otherwise noted, all content is © Cengage. ALL RIGHTS RESERVED. No part of this work covered by the copyright herein Senior Vice President, Higher Ed Product, Content, and Market Development: Erin Joyner may be reproduced or distributed in any form or by any means, except as permitted by U.S. copyright law, without the prior written permission of the copyright owner. Product Director: Jason Fremder Product Manager: Matt Filimonov For product information and technology assistance, contact us at Sr. Content Manager: Diane Bowdler Cengage Customer & Sales Support, 1-800-354-9706 or support.cengage.com. Product Assistant: Aiyana Moore Executive Marketing Manager: Nathan Anderson For permission to use material from this text or product, submit all requests online at www.cengage.com/permissions. Production Service: Lumina Datamatics, Inc. Designer: Chris Doughman Cover and Internal Design: Ke Design Microsoft Excel® is a registered trademark of Microsoft Corporation. Cover Image: hkeita/Shutterstock.com © 2018 Microsoft. Intellectual Property Analyst: Reba Frederics Library of Congress Control Number: 2018954981 Intellectual Property Project Manager: Carly Belcher ISBN: 978-1-337-91202-0 Cengage 20 Channel Center Street Boston, MA 02210 USA Cengage is a leading provider of customized learning solutions with employees residing in nearly 40 different countries and sales in more than 125 countries around the world. Find your local representative at www.cengage.com. Cengage products are represented in Canada by Nelson Education, Ltd. To learn more about Cengage platforms and services, register or access your online learning solution, or purchase materials for your course, visit www.cengage.com. Printed in the United States of America Print Number: 01 Print Year: 2018 Preface Roadmap for Success Warren/Tayler Managerial Accounting, 15e, provides a sound pedagogy for giving s­ tudents a solid foundation in managerial accounting. Warren/Tayler covers the fundamentals AND ­motivates students to learn by showing how accounting is important to businesses. Warren/Tayler is successful because it reaches students with a combination of new and tried-andtested pedagogy. This revision includes a range of new and existing features that help Warren/Tayler provide ­students with the context to see how accounting is valuable to business. These include: ▪▪ New! Make a Decision section ▪▪ New! Pathways Challenge ▪▪ New! Certified Management Accountant (CMA®) Examination Questions Warren/Tayler also includes a thorough grounding in the fundamentals that any business student will need to be successful. These key features include: ▪▪ Presentation style designed around the way students learn ▪▪ Updated schema ▪▪ At the start of each chapter, a schema, or roadmap, shows students what they are going to learn and how it is connected to the larger picture. The schema illustrates how the chapter content lays the foundation with managerial concepts and principles. Then it moves students through developing the information and ultimately into evaluating and analyzing information in order to make decisions. Chapter 15 Statement of Cash Flows Principles Chapter 1 Introduction to Managerial Accounting Developing Information COST SYSTEMS Chapter 2 Chapter 3 Chapter 4 COST ALLOCATIONS Chapter 5 Chapter 5 Job Order Costing Process Costing Support Departments Joint Costs Activity-Based Costing Decision Making PLANNING AND EVALUATING TOOLS Chapter 6 Chapter 7 Chapter 8 Chapter 9 Chapter 10 Chapter 11 Cost-Volume-Profit Analysis Variable Costing Budgeting Systems Standard Costing and Variances Decentralized Operations STRATEGIC TOOLS Chapter 12 Chapter 13 Chapter 13 Chapter 14 Chapter 14 Capital Investment Analysis Lean Manufacturing Activity Analysis The Balanced Scorecard Corporate Social Responsibility Differential Analysis Chapter 15 Financial accounting Statement of Cash Flows Managerial accounting Chapter 16 Financial Statement Analysis 698 12020_ch15_rev02_698-757.indd 698 8/4/18 11:45 AM iii iv Preface 312 Chapter 7 Variable Costing for Management Analysis ▪▪ Link to the “opening company” of each chapter examples how the byconcepts The $80,000calls increaseout in operating income underof Proposal 2 is caused the allocation of the fixed manufacturing costs of $400,000 over a greater number of units manufactured. Specifically, introduced in the chapter are connected to the opening company. This shows how accountan increase in production from 20,000 units to 25,000 units means that the fixed manufacturing cost per unit decreases from $20 ($400,000 ÷ 20,000 units) to $16 ($400,000 ÷ 25,000 units). Thus, ing is used in the real world by real companies. the cost of goods sold when 25,000 units are manufactured is $4 per unit less, or $80,000 less in total (20,000 units sold × $4). Since the cost of goods sold is less, operating income is $80,000 more when 25,000 units rather than 20,000 units are manufactured. Managers should be careful in analyzing operating income under absorption costing when finished goods inventory changes. Increases in operating income may be created by simply increasing finished goods inventory. Thus, managers could misinterpret such increases (or decreases) in operating income as due to changes in sales volume, prices, or costs. Adobe Systems Inc. A ssume that you have three different options for a summer job. How would you evaluate these options? Naturally there are many things to consider, including how much you could earn from each job. Determining how much you could earn from each job may not be as simple as comparing the wage rate per hour. For example, a job as an office clerk at a local company pays $8 per hour. A job delivering pizza pays $10 per hour (including estimated tips), although you must use your own transportation. Another job working in a beach resort over 500 miles away from your home pays $8 per hour. All three jobs offer 40 hours per week for the whole summer. If these options were ranked according to their pay per hour, the pizza delivery job would be the most attractive. However, the costs associated with each job must also be evaluated. For example, the office job may require that you pay for downtown parking and purchase office clothes. The pizza delivery job will require you to pay for gas and maintenance for your car. The resort job will require you to move to the resort city and incur additional living costs. Only by considering the costs for each job will you be able to determine which job will provide you with the most income. Just as you should evaluate the relative income of various choices, a business also evaluates the income earned from its choices. Important choices include the products offered and the geographical regions to be served. A company will often evaluate the profitability of products and regions. For example, Adobe Systems Inc. (ADBE), one of the largest software companies in the world, determines the income earned from its various product lines, such as Acrobat®, Photoshop®, Premiere®, and Dreamweaver® software. Adobe uses this information to establish product line pricing, as well as sales, support, and development effort. Likewise, Adobe evaluates the income earned in the geographic regions it serves, such as the United States, Europe, and Asia. Again, such information aids management in managing revenue and expenses within the regions. In this chapter, how businesses measure profitability using absorption costing and variable costing is discussed. After illustrating and comparing these concepts, how businesses use them for controlling costs, pricing products, planning production, analyzing market segments, and analyzing contribution margins is described and illustrated. Link to Adobe Systems Under variable costing, operating income is $200,000, regardless of whether 20,000 units or 25,000 units are manufactured. This is because no fixed manufacturing costs are allocated to the units manufactured. Instead, all fixed manufacturing costs are treated as a period expense. To illustrate, Exhibit 8 shows the variable costing income statements for Frand for the production of 20,000 units, 25,000 units, and 30,000 units. In each case, the operating income is $200,000. Chapter 2 Pete Jenkins/AlAmy stock Photo Exhibit 8 Variable Costing Income Statements for Three Production Levels 52 Job Order Costing In a recent absorption costing income statement, Adobe Systems reported (in millions) total revenue of $5,854, cost of revenue of $820, gross profit of $5,034, operating expenses of $3,541, and operating income of $1,493. Frand Manufacturing Company Variable Costing Income Statements Sales (20,000 units × $75) . . . . . . . . . . . . . . . . Variable cost of goods sold: Variable cost of goods manufactured: (20,000 units × $35) . . . . . . . . . . . . . . . (25,000 units × $35) . . . . . . . . . . . . . . . (30,000 units × $35) . . . . . . . . . . . . . . . Ending inventory: (0 units × $35) . . . . . . . . . . . . . . . . . . . . (5,000 units × $35) . . . . . . . . . . . . . . . . (10,000 units × $35) . . . . . . . . . . . . . . . Total variable cost of goods sold . . . . . . Manufacturing margin. . . . . . . . . . . . . . . . . . . Variable selling and administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . Contribution margin. . . . . . . . . . . . . . . . . . . . . Fixed costs: Fixed manufacturing costs . . . . . . . . . . . Fixed selling and administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . Total fixed costs . . . . . . . . . . . . . . . . . . . . . . Operating income . . . . . . . . . . . . . . . . . . . . . . . 20,000 Units Manufactured 25,000 Units Manufactured 30,000 Units Manufactured $1,500,000 $1,500,000 $ 1,500,000 $ (700,000) $ (875,000) $(1,050,000) 0 175,000 $ (700,000) $ 800,000 $ (700,000) $ 800,000 350,000 $ (700,000) $ 800,000 (100,000) $ 700,000 (100,000) $ 700,000 (100,000) $ 700,000 no discrepancies, a journal entry is made to record the purchase. The journal entry$ to record$ (400,000) the $ (400,000) (400,000) supplier’s invoice related to Receiving Report No. 196 in Exhibit 4 is as follows: (100,000) (100,000) (100,000) Link to Adobe Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pages 305, 309, 312, 316, 319 $ (500,000) $ 200,000 $ (500,000) $ 200,000 $ (500,000) $ 200,000 303 12020_ch07_ptg01_302-351.indd 303 A 5 L 1 1 1 a. E Materials Accounts Payable Materials purchased during December. 10,500 10,500 7/12/18 12:15 PM The storeroom releases materials for use in manufacturing when a materials requisition is received. Examples of materials requisitions are shown in Exhibit 4. The materials requisitions for each job serve as the basis for recording materials used. For direct materials, the quantities and amounts from the materials requisitions are posted to job cost sheets. Job ▪▪ To aid comprehension and to demonstrate themake impact journal entriesledger. include cost sheets, which are also illustrated in Exhibit 4, up of thetransactions, work in process subsidiary the net effect of the transaction on the accounting equation. Exhibit 4 shows the posting of $2,000 of direct materials to Job 71 and $11,000 of direct materials to Job 72.2 Job 71 is an order for 20 units of Jazz Series guitars, while Job 72 is an order for 60 units of American Series guitars. A summary of the materials requisitions is used as a basis for the journal entry recording the materials used for the month. For direct materials, this entry increases (debits) Work in Process and decreases (credits) Materials as follows: 12020_ch07_ptg01_302-351.indd 312 A 5 L 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 and consultant specializing in cost accounting, performance measurement, the assignment of decision rights, and incentive compensation. His work has been published in top journals, including Accounting Horizons, Accounting, Organizations and Society, The Accounting Review, Contemporary Accounting Research, IMA Educational Case Journal, Journal of Accounting Research, Journal of Behavioral Finance, Journal of Finance, Review of Financial Studies, and Strategic Finance. Dr. Tayler serves on the editorial boards of The Accounting Review, Management Accounting Research, and Accounting, Organizations and Society. He is also director of the Institute of Management Accountants Research Foundation. xiii Brief Contents 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 Introduction to Managerial Accounting. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Job Order Costing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 Process Cost Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94 Activity-Based Costing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150 Support Department and Joint Cost Allocation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 204 Cost-Volume-Profit Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 248 Variable Costing for M ­ anagement Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 302 Budgeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 352 Evaluating Variances from Standard Costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 410 Evaluating Decentralized Operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 460 Differential Analysis and Product Pricing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 510 Capital Investment Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 564 Lean Manufacturing and Activity Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 612 The Balanced Scorecard and Corporate Social Responsibility. . . . . . . . . . . . . . . . . . . . . . . . . . 654 Statement of Cash Flows. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 698 Financial Statement Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 758 Appendix A Interest Tables. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1 Nike Inc., Form 10-K for the Fiscal Year Ended May 31, 2017 Selected Excerpts. . . . B-1 Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . G-1 Index. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-1 Appendix B xiv Contents 1 Introduction to Managerial Accounting 2 Managerial Accounting 4 Differences Between Managerial and Financial Accounting 5 Managerial Accounting in the Organization 6 The Management Process 8 Uses of Managerial Accounting Information 9 Manufacturing Operations 11 Nature of Manufacturing 11 Direct and Indirect Costs 11 Manufacturing Costs 12 Financial Statements for a Manufacturing Business 17 Balance Sheet 17 Income Statement 18 Analysis for Decision Making 21 Utilization Rates 21 Make a Decision 41 Take It Further 43 Certified Management Accountant (CMA®) Examination Questions (Adapted) 45 Take It Further 89 Certified Management Accountant (CMA®) Examination Questions (Adapted) 92 Pathways Challenge 59, 93 3 Process Cost Systems 94 Process Manufacturers 96 Comparing Job Order and Process Cost Systems 97 Cost Flows for a Process Manufacturer 98 Cost of Production Report 101 Step 1: Determine the Units to Be Assigned Costs 102 Step 2: Compute Equivalent Units of Production 102 Step 3: Determine the Cost per Equivalent Unit 106 Step 4: Allocate Costs to Units Transferred Out and Partially Completed Units 107 Preparing the Cost of Production Report 109 Journal Entries for a Process Cost System 112 Using the Cost of Production Report 116 Pathways Challenge 13, 45 Analysis for Decision Making 116 2 Appendix Weighted Average Method 118 Job Order Costing 46 Cost Accounting Systems Overview 48 Job Order Cost Systems 48 Process Cost Systems 48 Job Order Cost Systems for Manufacturing Businesses 49 Materials 50 Factory Labor 52 Factory Overhead 54 Work in Process 60 Finished Goods 61 Sales and Cost of Goods Sold 61 Period Costs 62 Summary of Cost Flows for Legend Guitars 62 Job Order Cost Systems for Service Businesses 64 Types of Service Businesses 64 Flow of Costs in a Service Job Order Cost System 64 Analysis for Decision Making 66 Analyzing Job Costs 66 Make a Decision 86 Analyzing Process Costs 116 Determining Costs Using the Weighted Average Method 118 The Cost of Production Report 120 Make a Decision 142 Take It Further 145 Certified Management Accountant (CMA®) Examination Questions (Adapted) 147 Pathways Challenge 112, 149 4 Activity-Based Costing 150 Product Costing Allocation Methods 152 Single Plantwide Factory Overhead Rate Method 153 Multiple Production Department Factory Overhead Rate Method 155 Department Overhead Rates and Allocation 156 Distortion of Product Costs 157 xv xvi Contents Activity-Based Costing Method 160 Activity Rates 162 Allocating Costs 163 Distortion in Product Costs 165 Dangers of Product Cost Distortion 165 Activity-Based Costing for Selling and Administrative Expenses 167 Activity-Based Costing in Service Businesses 168 Analysis for Decision Making 173 Using ABC Product Cost Information to Reduce Costs 173 Make a Decision 199 Take It Further 201 Certified Management Accountant (CMA®) Examination Questions (Adapted) 202 6 Cost-Volume-Profit Analysis 248 Cost Behavior 250 Variable Costs 251 Fixed Costs 252 Mixed Costs 254 Summary of Cost Behavior Concepts 256 Cost-Volume-Profit Relationships 258 Contribution Margin 258 Contribution Margin Ratio 258 Unit Contribution Margin 259 Mathematical Approach to Cost-Volume-Profit Analysis 261 Break-Even Point 261 Target Profit 265 Pathways Challenge 171, 203 Graphic Approach to Cost-Volume-Profit Analysis 266 5 Special Cost-Volume-Profit Relationships 272  Support Department and Joint Cost Allocation 204 Support Departments 206 Support Department Cost Allocation 207 Single Plantwide Rate 208 Multiple Production Department Rates 208 Activity-Based Costing 209 Allocating Support Department Costs to Production Departments 210 Direct Method 211 The Sequential Method 213 The Reciprocal Services Method 217 Comparison of Support Department Cost Allocation Methods 221 Joint Costs 222 Joint Cost Allocation 222 The Physical Units Method 222 The Weighted Average Method 223 The Market Value at Split-Off Method 223 The Net Realizable Value Method 224 Comparison of Joint Cost Allocation Methods 225 By-Products 227 Analysis for Decision Making 227 Using Support Department and Joint Cost Allocations for Performance Evaluation 227 Make a Decision 243 Take It Further 245 Certified Management Accountant (CMA®) Examination Questions (Adapted) 246 Pathways Challenge 221, 247 Cost-Volume-Profit (Break-Even) Chart 266 Profit-Volume Chart 268 Use of Spreadsheets in Cost-Volume-Profit Analysis 269 Assumptions of Cost-Volume-Profit Analysis 270 Sales Mix Considerations 272 Operating Leverage 274 Margin of Saf...

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