Managerial Accounting

8TH EDITION

DON R. HANSEN
Oklahoma State University
•••

MARYANNE M. MOWEN
Oklahoma State University
 Managerial Accounting, Eighth Edition
Don R. Hansen, Maryanne M. Mowen

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 iii
Preface

The eighth edition of Hansen & Mowen’s Managerial Accounting introduces students
to the fundamentals of management accounting. Though it is assumed that students
have been introduced to the basics of financial accounting, extensive knowledge of
financial accounting is not needed. The emphasis is on the use of accounting infor-
mation in today’s business environment, so this text provides coverage of the most
cutting edge topics and developments in the field. Thus, the text should be of value
to students with a variety of backgrounds. Although written to serve undergraduates,
the text has been used successfully at the graduate level. There is sufficient variety in
the assignment material to accommodate both undergraduate and graduate students.
Many business school students who are required to take a course in manage-
ment accounting are not accounting majors. For these students, it is often difficult to
appreciate the value of the concepts being taught. Managerial Accounting, 8e, over-
comes this attitude by using introductory chapter scenarios based on real-world set-
tings, photos illustrating practical applications of management accounting concepts,
and realistic examples illustrating the concepts within the chapters. Seeing that effec-
tive management requires a sound understanding of how to use accounting informa-
tion should pique the interests of both accounting and nonaccounting majors.
One major area of improvement for this edition has been to enhance the quality
and quantity of end-of-chapter material. As a result of extensive focused reviewing
and analysis, the end-of-chapter material now offers several activities by level of dif-
ficulty for each learning objective to ensure that students will have plenty of oppor-
tunity to practice the concepts they learn in the chapter. The end-of-chapter activities
are unmatched by any text on the market.
We are confident that this innovative managerial accounting text will prepare
your students to perform at their best. The new edition will ensure stronger student
performance and ongoing satisfaction with your managerial accounting course.

NEW Features of the Eighth Edition

The eighth edition now offers even more to ensure you and your students experience
a higher level of performance in managerial accounting, including:

The Most Current Coverage of Contemporary Topics. A new entire chap-

ter on Activity-Based Management (Chapter 5), a new chapter covering Lean
Accounting (Chapter 16), and a new appendix on Joint Product Costing (after Chap-
ter 7) in this edition dedicate significant attention to the most current issues in
managerial accounting today. New materials on simplifying ABC are also introduced
in Chapter 4.

Streamlined, Reorganized Table of Contents. We have streamlined, reor-

ganized, and carefully tailored this edition’s contents to reflect the way your students
best learn contemporary and traditional managerial accounting topics. Special topics
are now grouped together in the last part of the text to enhance understanding.

Variety and Strength in End-of-Chapter Problems and Exercises.

Based on detailed reviewer feedback, exercises and problems now offer more variety
and are clearly classified both by level of difficulty and by corresponding learning
objectives for your ease in selecting appropriate assignments for each class. All end-
of-chapter materials directly correspond to AACSB and CMA standards to ensure stu-
dent comprehension and positive outcomes. Furthermore, there are a significant
number of new and revised exercises and problems in each chapter.

iii
 Connection throughout Chapter-Opening Scenarios. New chapter-opener cases
now introduce a fictional company that is referenced throughout each chapter to
connect and illustrate major chapter concepts. These cases provide a focused look
at how each chapter’s managerial accounting concepts apply to today’s business
world.

New! Ethical Insights Boxes. Important ethical concepts capture student

interest, assist in retaining critical managerial accounting topics, and show students
how to learn from ethical dilemmas as they prepare for CPA and CMA exams. These
are identified by a marginal icon.

New! Managers Decide Decision-Making Boxes. This edition’s new

emphasis on decision-making throughout each chapter challenges students to apply
what they learn in a decision context and shows the relevance of managerial
accounting concepts to the real business world.

NEW! ThomsonNOW™ for Managerial Accounting. This outcomes-driven,

integrated online learning and course management system provides the ultimate in
flexibility and ease of use with the results you want NOW to support your course
goals and ensure positive student performance. You’ll save time as you efficiently
teach and reinforce content with an integrated eBook, interactive learning tools, and
personalized study plans; test with an algorithmic test bank; and grade results based
on AACSB and CMA accreditation standards.

Hallmark Features
We have also retained those features that have made this text successful through
seven editions:

Integrated Strategic Cost Management Concepts. An emphasis on budg-

eting, ABM, and decentralization keeps materials relevant and prepares today’s stu-
dents for situations they will encounter.

Unique Environmental Cost Management Chapter. Introduce your stu-

dents to the emerging field of environmental cost management with new, actual
examples that demonstrate the value of environmental cost management as they
show how managers can reduce costs by implementing environmentally conscious
processes.

New E-Commerce Coverage in First Chapter. A new section presented

early in this edition (within Chapter 1) overviews the impact of e-commerce on
today’s management accounting issues.

Integrated Strategic Cost Management Concepts. An emphasis through-

out this edition on budgeting, ABM, and decentralization keeps the materials rele-
vant to situations encountered in the business world.

Integrated Coverage of Contemporary and Traditional Topics. This

edition introduces the latest costing techniques alongside more traditional topics to
help students see the advantages and disadvantages of a traditional cost manage-
ment system versus cost management systems that include practices such as ABC,
ABM, target costing, and the Balanced Scorecard. Coverage of both traditional and
contemporary topics helps ensure that students are well prepared to work in a vari-
ety of business environments.

Integrated Use of Spreadsheets. To accurately reflect industry practice, this

edition illustrates key managerial techniques, such as regression, using spreadsheets
rather than cumbersome manual calculations.

International Coverage. A full chapter (Chapter 18) highlighting international

issues, as well as numerous international examples integrated throughout the text,
emphasizes the critical importance of this topic.
iv
Simplified Budgeting Coverage. A simpler example more clearly illustrates
important budgeting concepts in this edition.

Least Squares Regression Manual Computation. Coverage of manual

computation of regression coefficients helps students understand the technical and
theoretical concepts underlying ordinary least squares analysis.

Ethics Coverage. As with previous editions, the eigthth edition emphasizes the
study of ethical conduct for management accountants. The role of ethics is discussed
in Chapter 1, and the Statement of Ethical Professional Conduct developed by the
Institute of Management Accountants is introduced. The impact of the Sarbanes-
Oxley Act and its ethics requirements for publicly traded companies is discussed.
Chapter 1 has several substantive problems on ethics, and subsequent chapters have
at least one problem or case involving an ethical dilemma. These problems allow
the instructor to introduce value judgments into management accounting decision
making. Chapter 14, dealing with international issues in management accounting,
also has a section that discusses ethics in the international environment.

Real-World Emphasis. The eighth edition incorporates real-world applications

of management accounting concepts, making the study of these concepts more
familiar and interesting to the student. Real-company examples are incorporated
throughout. Names of real companies are highlighted throughout the text for easy
identification and are listed in a company index at the back of the text. Photos are
included to help students relate to the real-world nature of management accounting.

Increased Coverage of Service Industry. Service businesses are experienc-

ing unprecedented growth in today’s economy. Managers of service businesses often
use the same management accounting models as manufacturers, but they must
adapt them to their own unique situations of providing intangibles to consumers.
To address this need, many service industry applications are included in the eighth
edition. In addition, many real-company examples of service businesses are given.

Chapter Organization and Structure

Each chapter is carefully structured to help students focus on important concepts
and retain them. Components found in each chapter include:

Learning Objectives. Each chapter begins with a set of learning objectives to

guide students in their study of the chapter. These objectives outline the organiza-
tional flow of the chapter and serve as points of comprehension and evaluation.
Learning objectives are tied to specific sections of topic coverage within the chapter.
They are repeated in the margin at the beginning of the corresponding chapter cov-
erage and are summarized at the end of the chapter.

Summary of Learning Objectives. Each chapter concludes with a compre-

hensive summary of the learning objectives. Students can review and test their
knowledge of key concepts and evaluate their ability to complete chapter objectives.

Scenario. An interesting, real-world scenario opens each chapter. The scenario ties
directly to concepts covered in the chapter and helps students relate chapter topics
to actual business happenings. “Questions to Think About,” critical-thinking ques-
tions that appear at the end of each scenario, are designed to pique student interest
in the chapter and stimulate class discussion.

Key Terms. Throughout each chapter, key terms appear in bold font for quick
identification. A list of key terms, with page references, is presented at the end of
each chapter to provide additional reinforcement. All key terms are defined in a
comprehensive glossary at the end of the text.

Review Problems. Each chapter contains at least one review problem with the
accompanying solution provided. These review problems demonstrate the applica-
tion of major concepts and procedures covered in the chapter. v
 Questions for Writing and Discussion. Approximately 15 to 25 short-answer
questions appear at the end of each chapter to test students’ knowledge of chapter
concepts. Many of the questions call for students to use critical thinking and written
and oral communication skills. Several questions can be used to stimulate class par-
ticipation and discussion.

Exercises and Problems. Exercises and problems are correlated by learning

objectives, listed in the margin below the exercise and problem titles. A document
showing correlations of each end of chapter activity by level of difficulty, learning
objective, and AACSB and CMA learning outcomes standards is available on the free
website. Exercises and problems adapted from past CMA exams are designated with
a margin icon.

Exercises. Exercises usually emphasize one or two chapter concepts and can be
completed fairly quickly (30 minutes maximum). Exercises require basic application
and computation and often ask students to interpret and explain their results.

Problems. Each chapter contains many end-of-chapter problems, with varying

degrees of length and difficulty. Problems usually have more than one issue and
present challenging situations, complex computations, and interpretations.

Managerial Decision Cases. Most chapters contain at least two cases. Cases
have greater depth and complexity than problems. They are designed to help stu-
dents integrate multiple concepts and further develop their analytical skills. Several
cases deal with ethical behavior.

Research Assignments. Research assignments appear in all chapters (except

Chapter 1), allowing students to expand their research and communication skills
beyond the classroom. One research assignment in each chapter, labeled “Cyber-
case,” requires the student to research information on the Internet.

Check Figures. Key figures for solutions to selected problems and cases are pro-
vided at the end of the text as an aid to students as they prepare their answers.

Chapter by Chapter Changes

Chapter 1 Added material on Sarbanes-Oxley (SOX) and ethics requirements for
publicly-traded companies. Added section on corporate codes of conduct mandated
by SOX.

Chapter 4 New materials on simplifying ABC have been added.

Chapter 5 This is a newly named and formed chapter with some new material
and some elements previously found in other chapters; consolidating materials per-
taining to activity-based management (ABM).

Chapter 6 Major revision due to the combining of two previous chapters on job-
order costing and process costing.

Chapter 7 Added appendix on joint product costing.

Chapter 10 Combines two previous chapters into one. Includes absorption and
variable costing, segmented reporting, investment center performance evaluation,
and transfer pricing.

Chapter 16 Half of this chapter is brand-new material focusing on lean manufac-

turing and lean accounting. Value streams, pull manufacturing, lead times, forms and
sources of waste, value stream costing, value stream reporting, value stream reporting,
and value-stream performance measurement are examples of topics discussed.

vi
Ancillaries
Instructor’s Manual, 0-324-37717-7 (Prepared by Scott Colvin, Naugatuck Val-
ley Community Technical College). The instructor’s manual contains a complete set
of lecture notes for each chapter and a transition guide for the seventh edition of
Management Accounting, as well as other widely used management accounting texts.

Solutions Manual, 0-324-64499-X (Prepared by Don Hansen and Maryanne

Mowen, Oklahoma State University). The solutions manual contains the solutions
for all end-of-chapter questions, exercises, problems, and cases. Solutions have been
verified multiple times to ensure their accuracy and reliability.

Test Bank, 0-324-37622-7 (Prepared by Jane Stoneback, Central Connecticut State

University). Revised for the eighth edition, the test bank offers multiple-choice prob-
lems, short problems, and essay problems. Designed to make exam preparation as
convenient as possible for the instructor, each test bank chapter contains enough
questions and problems to permit the preparation of several exams without repeti-
tion of material. All questions are identified by level of difficulty, learning objective,
and AACSB and CMA learning outcomes standards.

ExamView ® Testing Software. This supplement, included on the Instructor’s

Resource CD-ROM, contains all of the questions in the printed test bank. This pro-
gram is an easy-to-use test creation software compatible with Microsoft Windows.
Instructors can add or edit questions, instructions, answers, and select questions
(randomly or numerically) by previewing them on the screen. Instructors can also
create and administer quizzes online, whether over the Internet, a local area network
(LAN), or a wide area network (WAN).

Spreadsheet Templates. Spreadsheet templates using Microsoft Excel are avail-

able for downloading from the product support website. These templates provide
outlined formats of solutions for selected end-of-chapter exercises and problems.
These exercises and problems are identified with a margin symbol. The templates
allow students to develop spreadsheet and “what-if” analysis skills.

PowerPoint Slides (Prepared by Gail Wright, Bryant University). Selected trans-

parencies of key concepts and exhibits from the text are available in PowerPoint
presentation software. Available on the Instructor’s Resource CD-ROM or the prod-
uct support website.

Instructor’s Resource CD-ROM, 0-324-23493-7. Key instructor ancillaries

(solutions manual, instructor’s manual, test bank, ExamView®, and PowerPoint®
slides) are provided on CD-ROM, giving instructors the ultimate tool for customiz-
ing lectures and presentations.

Product Website (http://thomsonedu.com/accounting/hansen). A website

designed specifically for Managerial Accounting, 8e includes online and download-
able instructor and student resources. The website features an interactive study center
organized by chapter, with learning objectives, Web links, glossaries, and online
quizzes with automatic feedback.

ThomsonNOW TM Make the most of your course with ThomsonNOW™ for

Hansen & Mowen Managerial Accounting, 8e. This integrated, online learning and
course management system provides the ultimate in flexibility and ease of use with
the results you want NOW. ThomsonNOW supports your course goals and ensures
positive student performance. You’ll save time as you efficiently teach and reinforce
content with an integrated eBook, Experience Managerial Accounting videos, interac-
tive learning tools, and personalized study plans; test with an algorithmic test bank;
and grade results based on AACSB and CMA accreditation standards. For more infor-
mation visit http://www.thomsonedu.com

vii
 JoinIn TM on TurningPoint ® JoinInTM on TurningPoint® is a unique Microsoft®
PowerPoint®-based, interactive student response system and lecture tool that merges
the instructor’s PowerPoint presentation with interactive questions that assess stu-
dents’ understanding of material on the spot. As students are quizzed using clicker
technology, instructors can use the instant feedback to lecture more efficiently.
JoinIn on TurningPoint is the right solution to help you:
•Boost students’ interaction and engagement.
•Assist students who lack confidence to participate by interacting anonymously.
•Illustrate the relevance of lecture topics with polls, data slicing, and ranking the
popularity of answers.
•Check attendance.
•Improve retention.
•Assess students’ understanding of a concept instantaneously and identify the
“Teachable Moment.”
•Manage your lecture, make assessments, collect student responses, and post
results to your gradebook, all in one tool.

WebTutor™ Toolbox on WebCT ® and on Blackboard ® WebTutor Toolbox

complements Managerial Accounting, 8e by providing interactive reinforcement. Web-
Tutor’s online teaching and learning environment brings together content manage-
ment, assessment, communication, and collaboration capabilities for enhancing in-
class instruction or as a study resource for students. Access certificates for WebTutor
can be bundled with the textbook or sold separately. For more information, includ-
ing a demo, visit http://e.thomsonlearning.com

Business & Company Resource Center. The power to answer all types of
business queries is at your fingertips with Business & Company Resource Center
(BCRC). Unlike other available online business resources, this comprehensive data-
base offers a dynamic research opportunity, providing accurate, up-to-date company
and industry intelligence for thousands of firms. BCRC provides access to a wide
variety of global business information including competitive intelligence, career and
investment opportunities, business rankings, company histories and much more. To
learn more visit http://www.gale.com/BusinessRC/

Experience Managerial Accounting Video Series. A series of 14 videos

illustrating key management accounting concepts including job order, cost volume
profit, activity based costing, Pricing, cost behavior, budgeting, process costing and
more. These videos feature companies such as Washburn Guitar, BP, Hard Rock Café,
Cold Stone Creamery, and more. Access to these videos can be included at no addi-
tional cost with a new book or can be purchased separately at the bookstore or pur-
chased directly online. See your Thomson South-Western sales representative for
more details or visit http://thomsonedu.com/accounting/hansen

Acknowledgments
We would like to express our appreciation for all who have provided helpful com-
ments and suggestions. The reviewers of the prior editions helped make it a success-
ful product. Many valuable comments from instructors and students have helped us
make significant improvements in the text. We would particularly like to thank the
following reviewers, who provided in-depth reviews:

Reviewers
Alex Ampadu Kashi R. Balachandran
University at Buffalo New York University
James Aselta H. Francis Bush
Sacred Heart University Virginia Military Institute
Professor Rowland Atiase Michael Flores
University of Texas at Austin Wichita State University
viii
Professor Ananda R. Ganguly Priscilla S. Wisner
Purdue University Montana State University
Liming Guan Zoomerang Survey Participants
University of Hawaii at Manoa Wagdy M. Abdallah
Pamela Z. Jackson Seton Hall University
Augusta State University Joseph Adamo
Gordon Klein Cazenovia College
UCLA Sue Aman
Cathy X. Larson Kaskaskia College
Middlesex Community College Douglas M. Asbury
J. Mike Metzcar, CPA University of Findlay
Indiana Wesleyan University Sandra Bailey
Theodora L. Moten Oregon Tech
LeTourneau University Kashi Balachandran
Cynthia Nye New York University
Bellevue University Carroll Barnes
Kathy F. Otero Minneapolis Community & Technical
University of Texas at El Paso College
Frederick W. Rankin Nancy E. Coulmas
Colorado State University Bloomsburg University
Juan M. Rivera Kevin Devine
University of Notre Dame Xavier University
Richard Schmidt Maggie Houston
LeTourneau University Online Wright State University
E. Daniel Shim Celina Jozsi
Sacred Heart University University of South Florida
Dr. John J. Surdick Patti Lopez
Xavier University Valencia Community College
Lynda Thoman Lowell Mooney
Purdue University Georgia Southern University
Wendy Tietz Abbie Gail Parham
Kent State University Georgia Southern University
Bill Wempe Angela Sandberg
Texas Christian University Jacksonville State University
Scott White Akili J. Sanyika
Lindenwood University Georgia Perimeter College
James E. Williamson Ramgopal Venkataraman
San Diego State University University of Minnesota - Twin Cities
George R. Wilson Priscilla Wisner
University of Georgia Montana State University

We also would like to thank our verifiers for the text and solutions manual—
Scott Butterfield, Clayton State University; and Ann Martel, Marquette University.
Their careful editing helped us produce a text and ancillary package of high quality
and accuracy.
We also want to express our gratitude to the Institute of Management Accoun-
tants for its permission to use adapted problems from past CMA examinations. The
IMA has also given us permission to reprint the ethical standards of conduct for
management accountants.
Finally, we should offer special thanks to the staffs of Thomson Publishing and
Lachina Publishing Services. They have been helpful and have carried out their tasks
with impressive expertise and professionalism.
Don R. Hansen
Maryanne M. Mowen

ix
About the Authors

Don R. Hansen
Dr. Don R. Hansen is Professor of Accounting at Oklahoma State University. He
received his Ph.D. from the University of Arizona in 1977. He has an undergraduate
degree in mathematics from Brigham Young University. His research interests
include activity-based costing and mathematical modeling. He has published articles
in both accounting and engineering journals including The Accounting Review, The
Journal of Management Accounting Research, Accounting Horizons, and IIE Transactions.
He has served on the editorial board of The Accounting Review. His outside interests
include family, church activities, reading, movies, watching sports, and studying
Spanish.

Maryanne M. Mowen
Dr. Maryanne M. Mowen is Associate Professor of Accounting at Oklahoma State
University. She received her Ph.D. from Arizona State University in 1979. Dr. Mowen
brings an interdisciplinary perspective to teaching and writing in cost and manage-
ment accounting, with degrees in history and economics. In addition, she does
scholarly research in behavioral decision theory. She has published articles in jour-
nals such as Decision Science, The Journal of Economics and Psychology, and The Journal
of Management Accounting Research. Dr. Mowen’s interests outside the classroom
include reading, playing golf, traveling, and working crossword puzzles.

x
 B r i e f C o n t e n txi s

Preface iii

Part I Basic Management Accounting Concepts 1

Chapter 1 Introduction: The Role, History, and Direction of Management
Accounting 2
Chapter 2 Basic Management Accounting Concepts 32

Part II Activity-Based Accounting 69

Chapter 3 Activity Cost Behavior 70
Chapter 4 Activity-Based Product Costing 116
Chapter 5 Activity-Based Management 164

Part III Product and Service Costing 211

Chapter 6 Job-Order and Process Costing 212
Chapter 7 Support-Department Cost Allocation 270

Part IV Planning and Control 313

Chapter 8 Budgeting for Planning and Control 314
Chapter 9 Standard Costing: A Managerial Control Tool 366
Chapter 10 Segmented Reporting, Investment Center Evaluation,
and Transfer Pricing 416

Part V Managerial Decision Making 469

Chapter 11 Cost-Volume-Profit Analysis: A Managerial Planning Tool 470
Chapter 12 Tactical Decision Making 514
Chapter 13 Capital Investment Decisions 562
Chapter 14 Inventory Management 620

Part VI Special Topics 665

Chapter 15 Quality Costs and Productivity: Measurement, Reporting,
and Control 666
Chapter 16 Lean Accounting, Target Costing, and the Balanced
Scorecard 722
Chapter 17 Environmental Cost Management 776
Chapter 18 International Issues in Management Accounting 816
xi
 Contents
Preface iii
PART 1 BASIC MANAGEMENT ACCOUNTING CONCEPTS
Chapter 1 • Introduction:
The Role, History, and Direction
of Management Accounting 2
Management Accounting Information
System 4
Information Needs of Managers
and Other Users 4 The Management
Process 5 Organization Type 7
Management Accounting and Financial
Accounting 7
A Brief Historical Perspective of
Management Accounting 9
Current Focus of Management
Accounting 10
Activity-Based Management 10 Customer
Orientation 11 Cross-Functional
Perspective 13 Total Quality Management
13 Time as a Competitive Element 14
Efficiency 14 E-business 15
The Role of the Management Accountant 15
Structure of the Company 15 Sarbanes-
Oxley Act of 2002 16
Management Accounting and Ethical
Conduct 17
Ethical Behavior 17 Company Codes
of Conduct and SOX 18 Standards of
Ethical Conduct for Management
Accountants 19
Certification 21
The CMA 21 The CPA 21 The CIA 22
Summary of Learning Objectives 22
Key Terms 23
Questions for Writing and Discussion 23
Exercises 24
xii
Problems 28
Research Assignment 31
Chapter 2 • Basic Management
Accounting Concepts 32
Cost Assignment: Direct Tracing, Driver
Tracing, and Allocation 34
Cost 35 Cost Objects 35 Accuracy of
Assignments 36
Product and Service Costs 39
Different Costs for Different Purposes 41
Product Costs and External Financial
Reporting 42
External Financial Statements 44
Income Statement: Manufacturing
Firm 44 Income Statement: Service
Organization 46
Types of Management Accounting Systems:
A Brief Overview 46
FBM versus ABM Accounting Systems 47
Choice of a Management Accounting
System 50
Summary of Learning Objectives 51
Key Terms 51
Review Problems 52
Questions for Writing and Discussion 54
Exercises 55
Problems 61
Managerial Decision Cases 66
Research Assignments 68
 Contents
Preface iii
PART 1 BASIC MANAGEMENT ACCOUNTING CONCEPTS
Chapter 1 • Introduction:
The Role, History, and Direction
of Management Accounting 2
Management Accounting Information
System 4
Information Needs of Managers
and Other Users 4 The Management
Process 5 Organization Type 7
Management Accounting and Financial
Accounting 7
A Brief Historical Perspective of
Management Accounting 9
Current Focus of Management
Accounting 10
Activity-Based Management 10 Customer
Orientation 11 Cross-Functional
Perspective 13 Total Quality Management
13 Time as a Competitive Element 14
Efficiency 14 E-business 15
The Role of the Management Accountant 15
Structure of the Company 15 Sarbanes-
Oxley Act of 2002 16
Management Accounting and Ethical
Conduct 17
Ethical Behavior 17 Company Codes
of Conduct and SOX 18 Standards of
Ethical Conduct for Management
Accountants 19
Certification 21
The CMA 21 The CPA 21 The CIA 22
Summary of Learning Objectives 22
Key Terms 23
Questions for Writing and Discussion 23
Exercises 24
xii
Problems 28
Research Assignment 31
Chapter 2 • Basic Management
Accounting Concepts 32
Cost Assignment: Direct Tracing, Driver
Tracing, and Allocation 34
Cost 35 Cost Objects 35 Accuracy of
Assignments 36
Product and Service Costs 39
Different Costs for Different Purposes 41
Product Costs and External Financial
Reporting 42
External Financial Statements 44
Income Statement: Manufacturing
Firm 44 Income Statement: Service
Organization 46
Types of Management Accounting Systems:
A Brief Overview 46
FBM versus ABM Accounting Systems 47
Choice of a Management Accounting
System 50
Summary of Learning Objectives 51
Key Terms 51
Review Problems 52
Questions for Writing and Discussion 54
Exercises 55
Problems 61
Managerial Decision Cases 66
Research Assignments 68
PART 2 ACTIVITY-BASED ACCOUNTING
Chapter 3 • Activity Cost
Behavior 70
The Basics of Cost Behavior 72
Fixed Costs 72 Variable Costs 73 Mixed
Costs 74 Classifying Costs According to
Behavior 75
Activities, Resource Usage, and Cost
Behavior 78
Flexible Resources 78 Committed
Resources 78 Step-Cost Behavior 79
Implications for Control and Decision
Making 81
Methods for Separating Mixed Costs into
Fixed and Variable Components 82
Linearity Assumption 83 The High-Low
Method 86 The Scatterplot Method 87
The Method of Least Squares 90 Using
the Regression Programs 91
Reliability of Cost Formulas 93
R2—The Coefficient of Determination 93
Coefficient of Correlation 93
Multiple Regression 94
Managerial Judgment 96
Summary of Learning Objectives 98
Key Terms 98
Review Problems 99
Questions for Writing and Discussion 100
Exercises 101
Problems 109
Managerial Decision Case 114
Research Assignment 115
Chapter 4 • Activity-Based Product
Costing 116
Unit Costs 118
Importance of Unit Product Costs 119
Production of Unit Cost Information 119
Functional-Based Product Costing 119
Plantwide Rates 120 Departmental
Rates 122
Limitations of Functional-Based Cost
Accounting Systems 124
Non-Unit-Related Overhead Costs 125
Product Diversity 126 An Example
Illustrating the Failure of Unit-Based
Overhead Rates 126
Activity-Based Product Costing: Detailed
Description 129
Identifying Activities and Their Attributes
129 Assigning Costs to Activities 132
Assigning Activity Costs to Other Activities
133 Assigning Costs to Products 133
Detailed Classification of Activities 134
Reducing the Size and Complexity of the
Activity-Based Costing System 137
Reducing Rates Using Consumption Ratios
137 Reducing Rates by Approximating
ABC 137 Comparison with Functional-
Based Costing 139
Summary of Learning Objectives 139
Key Terms 140
Review Problems 140
Questions for Writing and Discussion 143
Exercises 144
Problems 150
Managerial Decision Cases 158
Research Assignment 162
Chapter 5 • Activity-Based
Management 164
Activity-Based Management: A Conceptual
Overview 166
Implementing ABM 167 ABM and
Responsibility Accounting 170 Financial-
Based Responsibility Compared with
Activity-Based Responsibility 171
Process Value Analysis 175
Driver Analysis: The Search for Root Causes
175 Activity Analysis: Identifying and
Assessing Value Content 176 Activity
Performance Measurement 178
Measures of Activity Performance 179
xiii
Value- and Non-Value-Added Cost
Reporting 179 Trend Reporting 181
The Role of Kaizen Standards 182
Benchmarking 183 Drivers and
Behavioral Effects 184 Activity Capacity
Management 184
Activity-Based Customer and Supplier
Costing 186
Activity-Based Customer Costing 186
Activity-Based Supplier Costing 188
PART 3 PRODUCT AND SERVICE COSTING
Chapter 6 • Job-Order and Process
Costing 212
Characteristics of the Job-Order and Process
Environment 214
Job-Order Production and Costing 214
Process Production and Costing 214
Cost Flows Associated with Job-Order
Costing 215
Calculating Unit Cost with Job-Order
Costing 215 Job-Order Cost Sheet 216
The Flow of Costs through the Accounts
218
The Process Environment and Cost
Flows 225
Types of Process Manufacturing 226 How
Costs Flow Through the Accounts in Process
Costing 226 Accumulating Costs in the
Production Report 227
The Impact of Work-in-Process Inventories
on Process Costing 228
Equivalent Units of Production 228 Two
Methods of Treating Beginning Work-in-
Process Inventory 230
Weighted Average Costing 230
Five Steps in Preparing a Production Report
230 Example of the Weighted Average
Method 231 Evaluation of the Weighted
Average Method 233
Multiple Inputs and Multiple
Departments 234
Nonuniform Application of Manufacturing
Inputs 234 Multiple Departments 238
xiv
Summary of Learning Objectives 190
Key Terms 190
Review Problems 190
Questions for Writing and Discussion 192
Exercises 193
Problems 202
Managerial Decision Case 209
Research Assignment 210
Appendix A: Production Report—FIFO
Costing 239
Differences between the FIFO and
Weighted Average Methods 239 Example of
the FIFO Method 239
Appendix B: Journal Entries Associated with
Job-Order and Process Costing 243
Journal Entries Associated with Job-Order
Costing 243 Journal Entries Associated with
Process Costing 245
Summary of Learning Objectives 246
Key Terms 247
Review Problems 248
Questions for Writing and Discussion 251
Exercises 252
Problems 261
Managerial Decision Case 267
Research Assignment 268
Chapter 7 • Support-Department Cost
Allocation 270
An Overview of Cost Allocation 272
Types of Departments 272 Allocating
Costs from Departments to Products 273
Types of Allocation Bases 274 Objectives
of Allocation 275
Allocating One Department’s Costs to
Another Department 277
A Single Charging Rate 277 Multiple
Charging Rates 278 Budgeted versus
Actual Usage 279
Choosing a Support-Department Cost
Allocation Method 280
Direct Method of Allocation 281
Sequential Method of Allocation 282
Reciprocal Method of Allocation 285
Comparison of the Three Methods 286
Departmental Overhead Rates and Product
Costing 288
Appendix: Joint Cost Allocation 289
Accounting for Joint Product Costs 289
PART 4 PLANNING AND CONTROL
Chapter 8 • Budgeting for Planning
and Control 314
Description of Budgeting 316
Budgeting and Planning and Control 316
Advantages of Budgeting 317
Preparing the Master Budget 318
Directing and Coordinating 319 Major
Components of the Master Budget 319
Preparing the Operating Budget 319
Preparing the Financial Budget 325
Using Budgets for Performance
Evaluation 331
Static Budgets versus Flexible Budgets 331
The Behavioral Dimension of Budgeting 334
Activity-Based Budgeting 337
Static Activity Budgets 337 Activity
Flexible Budgeting 338
Summary of Learning Objectives 340
Key Terms 341
Review Problems 341
Questions for Writing and Discussion 344
Exercises 344
Problems 352
Managerial Decision Cases 363
Research Assignment 365
Summary of Learning Objectives 291
Key Terms 292
Review Problems 292
Questions for Writing and Discussion 296
Exercises 296
Problems 304
Managerial Decision Cases 308
Research Assignments 311
Chapter 9 • Standard Costing: A
Managerial Control Tool 366
Unit Standards 368
How Standards Are Developed 368 Types
of Standards 369 Why Standard Cost
Systems Are Adopted 369
Standard Product Costs 371
Variance Analysis: General Description 373
Price and Efficiency Variances 373 The
Decision to Investigate 373
Variance Analysis: Materials and Labor 376
Direct Materials Variances 376 Direct
Labor Variances 380
Variance Analysis: Overhead Costs 382
Variable Overhead Variances 382 Fixed
Overhead Variances 386
Appendix: Accounting for Variances 389
Entries for Direct Materials Variances 389
Entries for Direct Labor Variances 389
Disposition of Materials and Labor
Variances 390 Overhead Variances 390
Summary of Learning Objectives 391
Key Terms 392
Review Problem 392
Questions for Writing and Discussion 394
Exercises 395
Problems 402
Managerial Decision Cases 410
Research Assignments 413
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Chapter 10 • Segmented Reporting,
Investment Center Evaluation, and
Transfer Pricing 416
Decentralization and Responsibility Centers
418
Reasons for Decentralization 418 Divisions
in the Decentralized Firm 419
Measuring the Performance of Profit Centers
Using Variable and Absorption Income
Statements 422
Inventory Valuation 423 Income
Statements Using Variable and Absorption
Costing 423 Production, Sales, and Income
Relationships 424 The Treatment of Fixed
Overhead in Absorption Costing 427
Evaluating Profit-Center Managers 428
Segmented Income Statements Using
Variable Costing 429
Measuring the Performance of Investment
Centers Using ROI 431
Return on Investment 431 Margin and
Turnover 432 Advantages of ROI 433
Disadvantages of the ROI Measure 435
PART 5 MANAGERIAL DECISION MAKING
Chapter 11 • Cost-Volume-Profit
Analysis: A Managerial Planning
Tool 470
Break-Even Point in Units 472
Using Operating Income in CVP Analysis
472 Shortcut to Calculating Break-Even
Units 474 Unit Sales Needed to Achieve
Targeted Profit 475
Break-Even Point in Sales Dollars 477
Profit Targets and Sales Revenue 478
Comparison of the Two Approaches 479
Multiple-Product Analysis 479
Break-Even Point in Units 480 Sales Dollars
Approach 482
Graphical Representation of CVP
Relationships 483
The Profit-Volume Graph 483 The Cost-
Volume-Profit Graph 484 Assumptions of
Cost-Volume-Profit Analysis 485
xvi
Measuring the Performance of Investment
Centers Using Residual Income and
Economic Value Added 436
Residual Income 436 Economic Value
Added (EVA) 438
Transfer Pricing 439
Impact of Transfer Pricing on Divisions and
the Firm as a Whole 440 Transfer Pricing
Policies 441 Market Price 442 Cost-Based
Transfer Prices 442 Negotiated Transfer
Prices 443
Summary of Learning Objectives 443
Key Terms 444
Review Problems 445
Questions for Writing and Discussion 449
Exercises 450
Problems 455
Managerial Decision Cases 463
Research Assignment 467
Changes in the CVP Variables 487
Introducing Risk and Uncertainty 489
Sensitivity Analysis and CVP 491
CVP Analysis and Activity-Based Costing 492
Example Comparing Conventional and ABC
Analysis 493 Strategic Implications:
Conventional CVP Analysis versus ABC
Analysis 494 CVP Analysis and JIT 495
Summary of Learning Objectives 496
Key Terms 496
Review Problems 497
Questions for Writing and Discussion 499
Exercises 499
Problems 505
Managerial Decision Cases 511
Research Assignment 513
Chapter 12 • Tactical Decision
Making 514
Tactical Decision Making 516
Model for Making Tactical Decisions 517
Relevant Costs Defined 520 Ethics in
Tactical Decision Making 521
Relevance, Cost Behavior, and the Activity
Resource Usage Model 522
Flexible Resources 522 Committed
Resources 523
Illustrative Examples of Relevant Cost
Applications 524
Make-or-Buy Decisions 524 Keep-or-Drop
Decisions 526 Special-Order Decisions 530
Decisions to Sell or Process Further 531
Product Mix Decisions 533
One Constrained Resource 533 Multiple
Constrained Resources 534
Pricing 534
Cost-Based Pricing 534 Target Costing and
Pricing 536 Legal Aspects of Pricing 537
Fairness and Pricing 539
Appendix: Linear Programming 539
Summary of Learning Objectives 542
Key Terms 543
Review Problem 543
Questions for Writing and Discussion 544
Exercises 544
Problems 551
Managerial Decision Cases 558
Research Assignments 561
Chapter 13 • Capital Investment
Decisions 562
Types of Capital Investment Decisions 564
Nondiscounting Models 566
Payback Period 566 Accounting Rate of
Return 568
Discounting Models: The Net Present Value
Method 569
NPV Defined 569 An Example Illustrating
Net Present Value 570
Internal Rate of Return 570
Example: Multiple-Period Setting with
Uniform Cash Flows 571 Multiple-Period
Setting: Uneven Cash Flows 572
Postaudit of Capital Projects 573
Honley Medical Company: An Illustrative
Application 573 One Year Later 574
Benefits of a Postaudit 574
Mutually Exclusive Projects 575
NPV Compared with IRR 575 Example:
Mutually Exclusive Projects 576
Computation and Adjustment of Cash
Flows 578
Adjusting Forecasts for Inflation 578
Conversion of Gross Cash Flows to
After-Tax Cash Flows 580
Capital Investment: The Advanced
Manufacturing Environment 585
How Investment Differs 586 How
Estimates of Operating Cash Flows Differ
586 Salvage Value 588 Discount Rates
589
Appendix A: Present Value Concepts 589
Future Value 589 Present Value 590
Present Value of an Uneven Series of Cash
Flows 591 Present Value of a Uniform
Series of Cash Flows 591
Summary of Learning Objectives 594
Key Terms 595
Review Problems 595
Questions for Writing and Discussion 597
Exercises 598
Problems 607
Managerial Decision Cases 615
Research Assignments 619
Chapter 14 • Inventory
Management 620
Traditional Inventory Management 622
Inventory Costs 622 Traditional Reasons
for Holding Inventory 622 Economic
Order Quantity: The Traditional Inventory
Model 624 Computing EOQ 625 Reorder
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Point 625 EOQ and Inventory
Management 627
JIT Inventory Management 628
Basic Features of JIT 629 Setup and
Carrying Costs: The JIT Approach 632
Due-Date Performance: The JIT Solution
634 Avoidance of Shutdown and Process
Reliability: The JIT Approach 634
Discounts and Price Increases: JIT Purchasing
versus Holding Inventories 637 JIT’s
Limitations 638
Theory of Constraints 639
PART 6 SPECIAL TOPICS
Chapter 15 • Quality Costs and
Productivity: Measurement, Reporting,
and Control 666
Measuring the Costs of Quality 668
Quality Defined 668 Costs of Quality
Defined 670 Measuring Quality Costs 671
Reporting Quality Cost Information 673
Quality Cost Reports 673 Quality Cost
Function: Acceptable Quality View 675
Quality Cost Function: Zero-Defects View
675 Activity-Based Management and
Optimal Quality Costs 678 Trend
Analysis 679
Using Quality Cost Information 680
Scenario A: Strategic Pricing 681 Scenario
B: New Product Analysis 683
Productivity: Measurement and Control 684
Partial Productivity Measurement 686
Total Productivity Measurement 688 Price-
Recovery Component 691 Quality and
Productivity 691 Gainsharing 692
Summary of Learning Objectives 693
Key Terms 694
Review Problems 694
Questions for Writing and Discussion 697
Exercises 697
Problems 707
Managerial Decision Cases 717
Research Assignments 719
xviii
Basic Concepts 639 TOC Steps 640
Summary of Learning Objectives 645
Key Terms 646
Review Problems 646
Questions for Writing and Discussion 648
Exercises 649
Problems 655
Managerial Decision Case 661
Research Assignment 662
Chapter 16 • Lean Accounting,
Target Costing, and the Balanced
Scorecard 722
Lean Manufacturing 724
Value by Product 725 Value Stream 725
Value Flow 726 Pull Value 729 Pursue
Perfection 731
Lean Accounting 732
Focused Value Streams and Traceability of
Overhead Costs 733 Value Stream Costing
with Multiple Products 735 Value Stream
Reporting 736 Decision Making 736
Performance Measurement 737
Life-Cycle Cost Management and the Role of
Target Costing 738
The Balanced Scorecard: Basic Concepts 744
Strategy Translation 744 The Role of
Performance Measures 745 The Financial
Perspective 748 Customer Perspective 748
Process Perspective 750 Learning and
Growth Perspective 754
Summary of Learning Objectives 755
Key Terms 755
Review Problems 756
Questions for Writing and Discussion 758
Exercises 758
Problems 765
Managerial Decision Case 774
Research Assignment 775
Chapter 17 • Environmental Cost
Management 776
Measuring Environmental Costs 778
The Benefits of Ecoefficiency 778
Environmental Quality Cost Model 780
Environmental Cost Report 782 Reducing
Environmental Costs 783 An
Environmental Financial Report 785
Assigning Environmental Costs 786
Environmental Product Costs 786
Functional-Based Environmental Cost
Assignments 786 Activity-Based
Environmental Cost Assignments 787
Life-Cycle Cost Assessment 788
Product Life Cycle 788 Assessment
Stages 789
Strategic-Based Environmental Responsibility
Accounting 792
Environmental Perspective 793 The Role
of Activity Management 794
Summary of Learning Objectives 797
Key Terms 797
Review Problem 798
Questions for Writing and Discussion 800
Exercises 801
Problems 808
Research Assignment 814
Chapter 18 • International Issues in
Management Accounting 816
Management Accounting in the International
Environment 818
Levels of Involvement in International
Trade 818
Importing and Exporting 819
Wholly Owned Subsidiaries 821 Joint
Ventures 822
Foreign Currency Exchange 823
Managing Transaction Risk 824 Managing
Economic Risk 827 Managing Translation
Risk 828
Decentralization 829
Advantages of Decentralization in the MNC
829 Creation of Divisions 830
Measuring Performance in the Multinational
Firm 830
Political and Legal Factors Affecting
Performance Evaluation 832 Multiple
Measures of Performance 833
Transfer Pricing and the Multinational
Firm 833
Performance Evaluation 833 Income Taxes
and Transfer Pricing 834
Ethics in the International Environment 836
Summary of Learning Objectives 838
Key Terms 838
Review Problem 839
Questions for Writing and Discussion 840
Exercises 840
Problems 846
Managerial Decision Cases 848
Research Assignment 851
Glossary 852
Subject Index 864
Company Index 873
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