Managerial Accounting: Creating Value

in a Dynamic Business Environment -

eBook PDF
Visit to download the full and correct content document:
https://ebooksecure.com/download/managerial-accounting-creating-value-in-a-dynam
ic-business-environment-ebook-pdf/
Managerial Accounting: Creating Value
in a Dynamic Business Environment -
eBook PDF
Visit to download the full and correct content document:
https://ebooksecure.com/download/managerial-accounting-creating-value-in-a-dynam
ic-business-environment-ebook-pdf/
Managerial
Accounting
Creating Value in a Dynamic
Business Environment

Twelfth Edition

Ronald W. Hilton
Cornell University

David E. Platt
University of Texas at Austin
MANAGERIAL ACCOUNTING: CREATING VALUE IN A DYNAMIC BUSINESS ENVIRONMENT,
12TH EDITION
Published by McGraw-Hill Education, 2 Penn Plaza, New York, NY 10121. Copyright © 2020 by McGraw-Hill
Education. All rights reserved. Printed in the United States of America. Previous editions © 2017, 2014, and 2011.
No part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or
retrieval system, without the prior written consent of McGraw-Hill Education, including, but not limited to, in any
network or other electronic storage or transmission, or broadcast for distance learning.
Some ancillaries, including electronic and print components, may not be available to customers outside
the United States.
This book is printed on acid-free paper.
1 2 3 4 5 6 7 8 9 LWI 21 20 19
ISBN 978-1-259-96951-5
MHID 1-259-96951-7
Portfolio Manager: Elizabeth Eisenhart
Product Developers: Erin Quinones and Allie Kukla
Marketing Manager: Katherine Wheeler
Content Project Managers: Pat Frederickson and Brian Nacik
Buyer: Sandy Ludovissy
Design: Matt Diamond
Content Licensing Specialist: Ann Marie Jannette
Cover Image: ©IM_Photo/Shutterstock
Compositor: SPi Global
We are grateful to the American Institute of Certified Public Accountants for allowing the use of adapted mate-
rial from the Uniform CPA Examination (1978–1984, 1987, 1990–1991) as well as to the Institute of Management
Accountants for allowing the use of adapted material from the Certificate in Management Accounting Examinations
(1977–1984, 1987, 1990–2000).
All credits appearing on page or at the end of the book are considered to be an extension of the copyright page.
Library of Congress Cataloging-in-Publication Data

Names: Hilton, Ronald W., author. | Platt, David E., author.

Title: Managerial accounting : creating value in a dynamic business
environment / Ronald W. Hilton, Cornell University, David E. Platt,
University of Texas at Austin.
Description: Twelfth Edition. | Dubuque : McGraw-Hill Education, [2019] |
Revised edition of the authors’ Managerial accounting, [2017]
Identifiers: LCCN 2019022188 | ISBN 9781259969515 (alk. paper)
Subjects: LCSH: Managerial accounting.
Classification: LCC HF5657.4 .H55 2019 | DDC 658.15/11—dc23
LC record available at https://lccn.loc.gov/2019022188

The Internet addresses listed in the text were accurate at the time of publication. The inclusion of a website does not
indicate an endorsement by the authors or McGraw-Hill Education, and McGraw-Hill Education does not guarantee
the accuracy of the information presented at these sites.

mheducation.com/highered
Ronald W. Hilton:
To Meg, Brad, Molly, Tim, Kerry, and Liliana.

David E. Platt:
To Nancy, for her love and patience.
Praise for MANAGERIAL ACCOUNTING
Hilton is a comprehensive managerial accounting text that incorporates a wide variety of applications and examples.
You are certain to find the examples and problems to fit your style. The emphasis of management of the firm and
depth of coverage makes this text worthy of consideration.”
—Todd Jensen, Sierra College

The Hilton 11e text is a fantastic resource for an Introductory Managerial Accounting course. It covers all of the nec-
essary topics in a logical order and with an appropriate level of rigor.”
—Laura Zellers, Wichita State University

“Extremely comprehensive, easy to read managerial accounting textbook that provides well-designed integrated
examples along with coverage of service-based companies.”
—Angela Sandberg, Jacksonville State University

“I am loving the book, and I see the students learning the concepts a lot quicker than my previous experience.”
—Patti Brown, The University of Texas at Austin

“I would describe it as the Cadillac of core management accounting textbooks.”

—Bill Wempe, Texas Christian University

“This is an excellent text—well balanced, well organized, and up to date with current topics, including service
industries and state-of-the-art manufacturing environments. I highly recommend it also for the excellent examples
and illustrations through focus companies and contrasting companies.”
—John C. Anderson, San Diego State University

“I’ve been using this text since its second edition, and it gets better each year with continuous improvement.”
—Steve G. Green, United States Air Force Academy

“Well written with good explanations of the ‘why’ and ‘how’.”

—Christa Morgan, Georgia Perimeter College

“Major strength is how it relates managerial accounting to the general management function and reveals the
managerial accountant as an important member of the management team.”
—Linda C. Bowen, University of North Carolina–Chapel Hill

“The book goes beyond covering the basics and organizes and integrates contemporary topics nicely.”
—Harrison McCraw, State University of West Georgia

“Well written, well organized and excellent end of chapter problems.”

—Kathleen Sevigny, Boston College

“The technology supplements and instructor resources are top-notch and very appropriate for our students.”
—Marilyn Okleshen, Minnesota State University–Mankato

“The book is very thorough, well written, and still remains student-friendly. The supplements are outstanding.”
—Ben Baker, Davidson College

“A solid, well-written, user-friendly book; can’t go wrong with it!”

—Rochelle Greenberg, Florida State University

iv
 Preface V

Hilton & Platt Managerial Accounting: After

12 editions, one of the most enduring and respected
managerial accounting books on the market.

Keeping pace with the speed of modern business, the authors combine their experience and expertise to make
sure Managerial Accounting is the most relevant, accurate, and up-to-date textbook in the field. Managerial
Accounting continues to focus and update content to bridge accounting and management practices.
VI Preface

About the Authors

Ronald W. Hilton is a Professor Emeritus of Accounting at Cornell

University. With bachelor’s and master’s degrees in accounting from The
Pennsylvania State University, he received his PhD from The Ohio State Uni-
versity. A Cornell faculty member since 1977, Professor Hilton also has taught
accounting at Ohio State and the University of Florida, where he held the
position of Walter J. Matherly Professor of Accounting. Prior to pursuing his
doctoral studies, Hilton worked for Peat, Marwick, Mitchell and Company and
served as an officer in the United States Air Force.
Professor Hilton is a member of the Institute of Management Accountants
and has been active in the American Accounting Association. He has served
as associate editor of The Accounting Review and as a member of its edito-
rial board. Hilton also has served on the editorial board of the Journal of
Management Accounting Research. He has been a member of the resident
©Jon Reis Photography
faculties of both the Doctoral Consortium and the New Faculty Consortium
sponsored by the American Accounting Association. With wide-ranging research interests, Hilton has published
articles in many journals, including the Journal of Accounting Research, The Accounting Review, Management
Science, Decision Sciences, the Journal of Economic Behavior and Organization, Contemporary Accounting
Research, and the Journal of Mathematical Psychology. He also has published a monograph in the AAA Studies
in Accounting Research series, and he is a co-author of Cost Management: Strategies for Business Decisions,
Budgeting: Profit Planning and Control, and Cost Accounting: Concepts and Managerial Applications. Professor
Hilton’s current research interests focus on contemporary cost management systems and international issues in
managerial accounting. In recent years, he has toured manufacturing facilities and consulted with practicing mana-
gerial accountants in North America, Europe, Asia, and Australia.

David E. Platt is a member of the Accounting faculty and the Associ-

ate Dean for Undergraduate Programs at the McCombs School of Business,
University of Texas at Austin. He earned a BS Econ from the Wharton School
at the University of Pennsylvania, an MBA in Marketing from Syracuse Uni-
versity, and a PhD from Cornell University. After earning his CPA while work-
ing for Pricewaterhouse Coopers, he spent several years doing financial and
product management at a supply chain systems integrator. Dr. Platt currently
teaches a variety of managerial accounting courses at UT, including the
sophomore-level Fundamentals of Managerial Accounting, and has received
teaching awards at both the undergraduate and graduate levels. He directed
UT–Austin’s Center for International Business Education and Research
(CIBER) and has served as a chair of the Partnership in International Manage-
Courtesy of University of Texas
ment, a consortium of leading graduate business schools worldwide. He has
been a visiting lecturer at the Sorbonne Graduate Business School in Paris,
and has delivered training for companies in the United States, Europe, Latin
America, and China.
What’s New in the 12th Edition?
New and Enhanced Themes
In the 12th edition of Hilton & Platt Managerial
Accounting, the authors have significantly
increased their coverage of data analytics and so-
called big data in the context of managerial
accounting. The topic is first introduced in Chapter 1,
where it is discussed in the context of the Whole
Foods Market contrast company. It then gets
deeper coverage in Chapter 6, which includes an
illustration of data visualization using both Excel
and Tableau. And discussions of big data and its
impact in managerial decision making are sprin-
kled throughout the book, such as the new
Management Accounting Practice (MAP) inset
“Big Data ‘Use Cases’ in Managing Costs and
Profits” in Chapter 3, other new MAPs in Chapters
5, 9, and 10, and in general discussion.
Hilton & Platt Managerial
Accounting has long been a
leader in integrating discus-
sion of business ethics into
the managerial accounting context through the
use of the Institute of Management Accountants’
Statement of Ethical Professional Practice and the
Focus on Ethics feature that appears at the end of
most chapters. In the 12th edition, the authors take
a major step forward in business ethics cover-
age by updating a number of the Focus on Ethics
scenarios and linking all of them to the thoughtful
and entertaining ethics concepts videos produced
by the business educators at Ethics Unwrapped.
Indicated by the logo that appears at the front of
this paragraph, the videos offer instructors the
opportunity to expand the discussion of ethical
concepts in business while providing students
some conceptual underpinnings for the ethical
dilemmas presented and their solutions.
New and Updated Content and Examples
Chapter 1 introduces managerial accounting to
students and motivates them by demonstrat-
ing its relevance in managing different types
of organizations. Based on user feedback, the
authors now focus less on managerial accoun-
tants per se and more on managerial account-
ing as a widely applicable toolset used by all
managers. Consistent with this change in focus,
the authors have streamlined the presentation
of where managerial accountants are found in
organizations. As mentioned above, they also
add an introductory discussion of data analyt-
ics and big data, while updating thumbnail views
of a few other key topics in management, such
as the value chain, capacity, and the balanced
scorecard. In addition, the discussions involving
the contrast company Whole Foods Market have
been updated to reflect the revised context of the
company’s acquisition by Amazon.
Chapter 2 sees the introduction of a new
contrast company, Gold’s Gym. Continuing their
commitment to including plentiful service indus-
try examples, the authors build their discussion
of costs in the service industry around a fitness
business, a context that will be familiar to many
students, making the discussion more relevant to
them and therefore more memorable.
After adding time-driven ABC (TDABC) in a
health-care setting to Chapter 5 in the last edition,
the 12th edition further revises the presentation
of traditional activity-based costing (ABC) in that
chapter by introducing a new focus company,
Dronze, Inc. This company produces recreational
drones and, while staying close to the pedagogi-
cal approach to teaching ABC used in previous
editions, the update continues the authors’ com-
mitment to keeping the example companies fresh
and relevant for students.
Chapter 6, which covers cost behavior and
cost estimation, continues the authors’ thematic
development of data analytics and big data in the
12th edition with a separate section addressing
these topics. The challenges and opportunities of
big data, though in large part beyond the scope of
this text, are developed here to provide students
vii
 with a greater perspective on the origins and anal-
ysis of the data that is used in decision making,
and to alert them to the relevance of a topic they
likely will encounter in subsequent courses.
Data analytics, the process of examining data
sets in order to draw conclusions about the infor-
mation they contain, is increasingly important in
managing many organizations. Data visualization,
which is the presentation of data in a graphical or
pictorial format to help managers discern patterns,
trends, and complex scenarios embedded in the
data, goes hand in hand with data analytics. To
cover these emerging topics, the authors extend
their discussion of the Chapter 6 focus company,
Donut Desire (a chain of five donut shops in
Toronto). The example analyzes a data set consist-
ing of ten years of monthly data about the utility
costs and activity levels in the company’s various
shops. To augment the discussion of data visual-
ization in the Donut Desire example, traditional
Excel visualizations are supplemented by outputs
from Tableau, which is a rapidly growing data
visualization software package now used in many
businesses.
Chapter 7, which covers cost-volume-profit
analysis, addresses the role of income taxes in
the chapter’s appendix. In this edition, the authors
have updated this coverage to reflect the lower
overall U.S. corporate tax rate resulting from the
Tax Cuts and Jobs Act (TCJA) that became effec-
tive in 2018.
During 2018, when the authors were begin-
ning work on the 12th edition, there was increased
focus on corporate social responsibility and con-
versations about the role of companies in society,
exemplified by the “Letter to CEOs” published in
January by Blackrock CEO Larry Fink. Believing
that managerial accounting needs to be respon-
sive to such concerns, the authors have rewritten
and expanded the section of Chapter 8 previously
called “Costs of Environmental Sustainability”
to broaden its coverage into corporate social
responsibility generally, often characterized
viii
currently as “Environmental, Social, and
Governance (ESG) Initiatives.” The chapter pro-
vides a discussion of ways in which managerial
accounting measurement concepts apply to the
ESG initiatives undertaken by companies and the
ways in which ESG investors might use such data.
Chapter 12 has been formally split into two
sections that can be covered independently:
Responsibility Accounting and the Balanced
Scorecard. While the responsibility accounting
section is largely unchanged from the prior edi-
tion, based on user input the authors have signifi-
cantly expanded the text’s balanced scorecard
coverage. In addition to expanding the discussion
of the balanced scorecard technique, they have
created a new contrast company example that
places the balanced scorecard discussion in the
context of a high-tech startup that is attempting
to target Millennials and Gen Z consumers. This
new example company will be more relevant and
memorable for students, most of whom will fall
into these generations, enhancing their under-
standing of this important performance man-
agement technique. They have also included a
number of startup performance metrics in the
example that students will find interesting (e.g.,
cash burn rate and runway) and added an exer-
cise that reinforces these metrics. (Operational
performance measures have been moved to a
new appendix to Chapter 12.)
Chapter 15, on target costing and pricing
decisions, has an updated discussion of dynamic
pricing on the Internet by e-tailers, as well as a
new Focus on Ethics inset.
Chapter 16, which covers capital expenditure
decisions, addresses the role of income taxes in
discounted-cash-flow analysis in Section 2 of the
chapter. For the 12th edition, the authors have
updated this coverage to reflect the lower over-
all U.S. corporate tax rate resulting from the Tax
Cuts and Jobs Act (TCJA) that became effective
in 2018. Also, while recognizing that this is not a
tax textbook, they provide a brief discussion of
the depreciation rules (including the Modified
Accelerated Cost Recovery System, or MACRS)
under the TCJA. Moreover, the lower tax rates
under the TCJA extend to Chapter 16’s end-of-
chapter assignment material.
Updated Pedagogy
In addition to the specific examples above, many
chapters include streamlined and condensed
explanations, and the addition of more current
examples and references from the popular busi-
ness press.
Service Industry Examples
The service industry continues to play a
dominant role in the U.S. economy, despite
continuing emphasis on the importance of manu-
facturing. The authors have continued their track
record of finding and integrating examples from
service industry organizations, while making
service industry examples featured in focus and
contrast companies increasingly relevant for
students. Widely acknowledged as having the
most service industry focus of any managerial
accounting text, the 12th edition widens the mar-
gin even further.
In Their Own Words
The authors continually work to update many of
the quotations in this popular feature, keeping
them fresh and relevant for today’s students.
Many of the quotations are new in this edition.
These quotes from practicing managers and
managerial accountants portray the important role
managerial accounting plays in today’s dynamic
business environment.
Management Accounting Practice (MAPs)
Many of these real-world examples have been
revised and updated to make them more current,
and several new examples have been added.
While some of the MAPs are completely new,
to address the data analytics theme mentioned
above, many of the existing MAPs have been
updated as well to keep them relevant and accu-
rate. For example, in the Chapter 1 MAP “Using
Managerial Accounting to Monetize the Internet,”
the authors have added a discussion of various
efforts to return journalism to profitability. And
in Chapter 2, the MAP “Managing Health Care
Costs Through Cost Behavior” has been updated
for the current state of the debate over the
Affordable Care Act.
Your feedback is crucial in improving each
new edition of Managerial Accounting and has
been the motivation for many changes in this 12th
edition, including new themes, revised coverage
of key topical areas, and new pedagogy for the
most challenging topics.
ix
X Preface

How Does Hilton & Platt 12e Prepare Students

for the Businesses of Today and Tomorrow?
Managerial Accounting.
Business is always changing: new technologies, new models, new global competitors.
And students, despite being more technologically adept every year, need a framework
for all of that change so that they can hit the ground running in their careers. To keep
up, managers must be able to interpret the rapid flow of information and make the right
decisions. Assisted by the tools of managerial accounting, and by managerial accounting
professionals, managers will work side by side in global, cross-functional teams to make
the complex decisions that today’s dynamic business environment requires of them. The
goal of Managerial Accounting is to acquaint students of business with the fundamental
tools of managerial decision making and to provide a context for understanding and react-
ing to the dramatic ways in which business is changing. The emphasis throughout the text
is on using accounting informa-
tion to help manage an organiza-
tion, while explaining concepts in
a way that students can relate to.
They should not only be able to
produce accounting information,
but also understand how man-
agers are likely to use and react
to the information in a range of
businesses.

“Hilton is a comprehensive managerial

accounting text that incorporates a wide
variety of applications and examples.
You are certain to find the examples and
problems to fit your style. The emphasis
on management of the firm and depth
of coverage makes this text worthy of
consideration”
—Todd Jensen, CPA, Sierra College
 Preface XI

Relevant. “The company story acts as a hook to get

Focus Companies provide a powerful strategy for students interested in the chapter material.”
—Michele Matherly, University of North
fostering learning, and the integration of Focus Carolina at Charlotte

Companies throughout the Hilton & Platt text is

unmatched by other managerial accounting books.
“I think it’s an excellent book for advanced
Each chapter introduces important managerial and Masters-level studying management
accounting.”
accounting topics within the context of a realistic
—Michael Thomas Paz, Cornell Univsersity-
company. Students see the immediate impact of SC College of Business

managerial accounting decisions on companies and

gain exposure to different types of organizations. “Balanced, time-proven approach to mana-
gerial accounting.”
Balanced. —Michael Flores, Wichita State University

Hilton & Platt Managerial Accounting offers the most

balanced coverage of service and manufacturing
companies. The authors recognize that students will
be working in a great variety of business environ-
ments and will benefit from exposure to diverse types
“A nice intro textbook, with multiple
perspectives on the behavioral aspects of
managerial accounting. Touches many
modern issues facing the field.”
Theodore Rodgers, Emory University

of companies. A wide variety of examples from retail,

service, manufacturing, and nonprofit organizations
“Perhaps what sets Hilton & Platt apart
are included. from the competition is its recognition that
the world consists of more than manufac-
turing firms and that managerial account-
Contemporary.
ing plays a significant role in service and
Hilton & Platt continues to be the leader in present- not-for-profit organizations.”
—Lanny Solomon, University of Missouri–
ing the most contemporary coverage of managerial Kansas City
accounting topics. The traditional tools of manage-
rial accounting such as budgeting and product costing have been updated with current
approaches. Emerging topics such as data visualization, environmental cost management,
monetizing the Internet, and time-driven activity-based costing are also discussed.

Flexible.
Managerial Accounting is written in a modular format allowing topics to be covered in
the order you want. For example, some instructors prefer to cover contribution-margin
approaches to decision making and/or relevant costs early in the course. So Chapter 6
(cost behavior and estimation), Chapter 7 (CVP), and Chapter 14 (relevant costs) are written
so they can be covered immediately after Chapter 2, which introduces basic cost concepts.
A table showing the text’s flexibility is in the Introduction to the Instructor’s Manual.
XII Preface

How Does Hilton & Platt 12e Help Students

Learn Managerial Accounting in the Context
of Business?
FOCUSCOMPANIES
Students need to see the relevance of
managerial accounting information in order
1 The Crucial Role of
Managerial Accounting in a
Dynamic Business Environment
FOCUSCOMPANY>>>
to actively engage in learning the material.
THIS CHAPTER’S FOCUS

Ron Hilton and Dave Platt use their years COMPANY is The Walt Disney
Company. This entertainment services company is
a giant in the industry with theme parks, feature film

working as managers and consultants to studios, animation studios, television broadcasting,

hotels and resorts, and retail
stores. Using The Walt Disney
create Focus Companies that illustrate Company as an illustration, we
will introduce the field of mana-

key concepts, and students immediately gerial accounting and its major
themes. Some of you are excited
©Eye Ubiquitous/Superstock
about studying accounting. But
see the significance of the material and even more of you are asking, “Why do I need to
study managerial accounting? I’m not going to be an

become excited about the content. accountant!” That is a good

question. Our primary focus
in this book is the ways in
Each chapter is built
around a focus company,
in which the chapter’s
key points are illustrated.

Whenever the Focus Company is pre- which managers use mana-

This chapter’s focus is
on The Walt Disney
Company. The focus
gerial accounting concepts
companies in subse-

sented in the chapter, its logo is shown so and tools to make their deci-
sions. Along the way, we will
quent chapters are not
real companies, but they
are realistic scenarios

©Parinya Suwanitch/123RF
also explore how managerial built on actual company

the student sees its application to the text accountants work in partner-
ship with managers to add
value to the organization.
topic.
practices. Whenever
the focus company is
discussed in the chapter,
the company logo
appears in the margin.

“I like the ‘Focus on the Company’ at the begin-

ning of each chapter and this type of boxed info
throughout each chapter.”
—Anna Cianci, Drexel University

<<<INCONTRAST
In contrast to the entertainment
services setting of The Walt

CONTRASTCOMPANIES ©Ed Endicott/Alamy

Disney Company, we will turn our
attention to Whole Foods Market,
a division of Amazon.com, Inc. This power-

A Contrast Company is also introduced in
each chapter. In most cases these highlight
house food retailer has over 400 stores around
North America and Europe. Historically a
leader in the area of corporate social responsi-
bility, Whole Foods Market is frequently faced
with challenging decisions that require them

an industry different from that of the Focus to balance the need to run a profitable busi-
ness, and generate a satisfactory return for
Amazon.com, against the cost of their much-

Company. This feature allows even greater publicized commitment to organic foods and
sustainable produc-
Each chapter also
tion. We will explore
emphasis on service-industry firms and includes a contrast
company. In most
cases, the contrast
managerial accounting’s
company will present contribution to Whole

other nonmanufacturing environments. It a key chapter topic in

an industry that is dif-
ferent from that of the
Foods Market’s efforts
to sell products that are
focus company. In this
more costly to produce
also helps demonstrate the wide applica- chapter, the focus com-
©Justin Sullivan/Getty Images

pany (Walt Disney) is an in a competitive mar-

entertainment services
company, whereas ket, while still achieving
the contrast company
bility of the managerial accounting tech- (Whole Foods Market) is
a food retailer.
appropriate returns for
investors.

niques being taught.


Real-World Examples
The Hilton & Platt text provides a variety of thought-
provoking, real-world examples to focus students
on managerial accounting tools and professionals
as an essential part of the management process.
Featured organizations include Amazon, Gold’s
Gym, Southwest Airlines, Whole Foods Market,
General Electric, FedEx, and many others. These
companies are highlighted in blue in the text.
In Their Own Words
Quotes from both practicing managers and manage-
rial accountants are included in the margins through-
out the text. These actual quotes show how the field
of management accounting is changing, emphasize
how the concepts are actually used, and demon-
strate that management accountants are key play-
ers in most companies’ management teams. In the
e-book, the quotes are hyperlinked to the appropri-
ate point in the References. Many references have,
in turn, been hyperlinked to the source material.
Management Accounting Practice
The managerial accounting practices of well-
known, real-world organizations are highlighted in
these boxes. They stimulate student interest and
provide a springboard for classroom discussion.
Focus on Ethics
This feature is included in most chapters. Focus on
Ethics poses an ethical dilemma, then asks tough
questions that underscore the importance of ethical
management. Some of these are based on real-
world incidents while others are fictional but based
on well-established anecdotal evidence. We anchor
the discussions on the Institute of Management
Accountants’ Statement of Ethical Professional
Practice, which is presented in the Focus on Ethics
in Chapter 1.
At the end of each Focus on Ethics segment,
we link to videos from the well-respected Ethics
Unwrapped series to provide a conceptual underpin-
ning and a basis for further discussion or assignments.
Preface XIII
p g g y
payment due date, and so on. Now imagine these data for all of the company’s 400-plus
stores around North America and Europe, every day of the year. That’s an intimidating
amount of data! Because of that, companies historically concentrated their efforts on
simply recording this huge volume of data efficiently and accurately. The goal was to
©Ed Endicott/Alamy
keep suppliers, customers, and employees happy, and to know what products are on the
shelves and be able to display and price them accurately and effectively.
Today, however, the power and relatively low cost of technology have allowed com-
panies to move from just recording these data to analyzing them, with the goal of generat-
ing insights about the company’s suppliers, customers, and employees, indeed about their
entire value chain. And as they have put these data to work, and combined them with
other data that they can collect or acquire, companies have uncovered insights that help
them to operate more effectively and profitably. For example, Whole Foods Market
knows that their customers are 67% more likely to spend recreational time outdoors than
the average grocery customer, and 154% more likely to earn over $200,000 per year.15
Knowing this helps Whole Foods Market managers, and their parent company Amazon,
to better manage the operations, marketing, and strategy in their value chain. For exam-
ple, they might choose to promote the kinds of foods that appeal to outdoorsy consumers.
But even more significantly, they might also try out new product assortments and pricing
strategies to attract more shoppers from the very large population of people who earn less
than $200 000 per year
“Great graphics, exhibits, and illustrations to keep
the computer generation interested.”
—Kathy Sevigny, Boston University
Florida operations, which entailed choosing among the available alternatives.
Planning
Disney’s top management team decided on an aggressive, and expensive, plan to expand the
“What I need is someone
who can analyze data, see
company’s Florida operations and profitability by building on the Star Wars brand franchise
that the company owns. Their plan included a large expansion of the Disney’s Hollywood
problems and figure out Studios theme park, dedicated to a new attraction called Star Wars: Galaxy’s Edge, with
solutions . . . [just doing]
debits and credits and
a new “immersive” Star Wars Hotel resort connected to it. Created and designed by Walt
Disney’s Imagineering Division, the 14-acre park expansion would offer guests a chance to
financial statements doesn’t inhabit a planet in the Star Wars galaxy, both visiting it and staying there in the hotel.
really help me.” (1b)
Tente Casters Inc
Next came the detailed planning phase. How would the rides and simulations
designed by the Imagineering Division be laid out and organized? What food and bever-
age operations would be appropriate? What characters would be present in the attraction,
and how many employees of all types would be needed on a day-to-day basis? What sup-
plies would be required to run the park and hotel? How much would electricity and other
utilities cost for the new attraction? How should the hotel’s rooms be priced? And finally,
what other incremental sales opportunities could be created to help pay for the expensive
project? Disney’s management team had to plan for running Star Wars: Galaxy’s Edge
and the Star Wars Hotel, which meant developing a detailed financial and operational
description of anticipated operations.
Directing Operational Activities
CHALLENGES IN FP&A AND VARIANCE DATA ANALYTICS
In other chapters of this text, we have talked about the many ways in which big data and
data analytics impact managerial accounting tools and techniques. Variance analysis and
d
d
M
A
anagement
ccounting
related financial planning and analysis (FP&A) techniques are no exception. But the varietyy P ractice
of those impacts might surprise you.
As the term big data suggests, one of those impacts is data volume. Advanced Microo AMD; AstraZeneca;
Devices (AMD), one of the world’s biggest semiconductor companies, has “over 80,000 0 Simplot Foods;
individual cost objects and five production facilities worldwide.” Such a complex opera--
tion needs to use advanced data analytics and accounting software to compute costss
San Francisco Ballet
and then “analyze profitability and validate yield assumptions [standards] for complicated d
product flows.”
Global biopharmaceutical company AstraZeneca certainly has challenges related to
data volume as well. But they also had to tackle a particularly tough problem relating
to the worldwide summarization of financial results, called “the close” by accountants, to
provide standardized information for variance analysis and other purposes. With “facili-
ties in more than 100 countries and $26.1 billion sales . . . [from] thousands of accounts
spread across all its global legal entities . . . [and] a total workforce of more than 57,000
people ” doing this efficiently is hard By using cloud-based data analytics and accounting
“Good extras within chapters—ethics at the end of
each chapter, MAPs throughout chapter, the Focus
vs. In Contrast real-world examples.”
—Mike Thomas, Humboldt State University
Focus on Ethics
LEARNING FROM PAST MISTAKES: BOEING FINDS disaster was quietly unfolding inside Boeing’s sprawling
IT DOESN’T PAY TO HIDE PROBLEMS FROM
INVESTORS
factories—one that would ultimately . . . cause several
executives to lose their jobs, and lead to claims of
Aircraft manufacturers use job-order costing to track the cost accounting fraud.” During this period, high demand
of an airplane. And, as this chapter discusses, supply chain
management and production controls also play an important
for Boeing’s airplanes in a strong economy flew head-
on into a disrupted production environment caused by
part in managing and controling production costs. But, try as efforts to modernize manufacturing processes, leading
they might, things don’t always go according to plan.
In the late 1990s, The Boeing Company’s top manage-
to “a manufacturing nervous breakdown.” The result was
dramatically reduced profitability, a problem whose size
ment had been seeking a merger with McDonnell-Douglas was allegedly hidden from investors so that the inevitable
Corporation, whose board of directors was reluctant to
approve a deal. Finally, the deal went through, and the
drop in Boeing’s stock price would not jeopardize the
McDonnell-Douglas deal.
world’s largest aerospace company was born, a company Moreover, the BusinessWeek article reports that, “Boe-
that could compete in both the commercial and defense
aeronautics markets and even in more speculative flight
ing did more than simply fail to tell investors about its pro-
duction disaster. It also engaged in a wide variety of
ventures like space shuttles and rockets. aggressive accounting techniques that papered over the
Unfortunately, as reported by BusinessWeek in
May 2002 following a three-month investigation, “a
mess.” After the merger with McDonnell-Douglas, the truth
came out in the form of much lower earnings.6
XIV Preface

How Can My Students Use Hilton & Platt 12e to

Master the Concepts of Managerial Accounting?

End-of-Chapter Assignment Material

Each chapter includes an extensive selection of assignment material, including Review Questions,
Exercises, Problems, and Cases. Our problem and case material conforms to AECC and AACSB rec-
ommendations and facilitates class discussions and projects.

Review Problems on Cost Classifications

Review Problems present both a
Problem 1
Several costs incurred by Myrtle Beach Golf Equipment, Inc., are listed below. For each cost, indicate
problem and a complete solution,
which of the following classifications best describe the cost. More than one classification may apply to
the same cost item. For example, a cost may be both a variable cost and a product cost. allowing students to review the
Cost Classifications
a. Variable entire problem-solving process.
b. Fixed
c. Period
d. Product
e. Administrative Key Terms are bolded in the text
f. Selling
g. Manufacturing and linked to their definition in the
h. Research and development
i. Direct material eBook version. In the print version,
j. Direct labor
k. Manufacturing overhead
they are repeated at the end of
Cost Items
1. Metal used in golf clubs. the chapter with page references.
2. Salary of the plant manager.
The book also includes a complete
Glossary of Key Terms (fully hyper-
generally. linked in the eBook).
Key Terms
For each term’s definition refer to the indicated page, or turn to the glossary at the end of the text. Review Questions, Exercises,
attention-directing function, 7 chief financial officer data science, 22 staff positions, 13
(CFO), 13
Problems, and Cases are compre-
balanced scorecard, 10 financial accounting, 11 strategic cost
controller (or comptroller), 13 management, 18
big data, 22
cost accounting system, 11
internal auditor, 15
treasurer, 15
hensive in covering the points in the
capacity, 19 line positions, 13
Certified Management cost drivers, 18 managerial accountants, 5 value chain, 17 chapter. They exhibit a wide range
Accountant (CMA), 23 cost relationship, 18 managerial accounting, 4
Chartered Global Man- data analytics, 22 practical capacity, 19 of difficulty, and the Instructor’s
agement Accountant data governance, 22
(CGMA), 23 Manual provides guidance for the
instructor on the difficulty level and
time required for each problem.
Numerous adapted CMA and CPA
problems are included.
Review Questions
2–1. Distinguish between product costs and period costs. 2–17. Which of the following costs are likely to be control-
2–2. Why are product costs also called inventoriable costs? lable by the chief of nursing in a hospital? Why?
a. Cost of medication administered.
2–3. What is the most important difference between a
manufacturing firm and a service industry firm, with b. Cost of overtime paid to nurses due to scheduling
“Best selection of problems of any text:
regard to the classification of costs as product costs or errors. a large number of problems, problems
period costs? c. Cost of depreciation of hospital beds.
2–4. List several product costs incurred in the production of 2–18. Distinguish between out-of-pocket costs and opportu-
at all levels, including many interesting,
a backpack. nity costs. different problems that challenge stu-
2–5. List, describe, and give an example of each of the four 2–19. Define the terms sunk cost and differential cost.
different types of production processes.
2–20. Distinguish between marginal and average costs.
dents, and often interesting real-world
2–6. Why is the cost of idle time treated as manufacturing
overhead?
2–21. Think about the process of registering for classes at applications.”
your college or university. What additional informa-
2–7. Explain why an overtime premium is included in
manufacturing overhead.
tion would you like to have before you register? How —Lynda Thoman, Purdue University
would it help you? What sort of information might
2 8 What is meant by the phrase “different costs for differ i f i l df ?
 Preface XV

EXCEL® Spreadsheets Spreadsheet applications are essential to contemporary accounting practice.

Students must recognize the power of spreadsheets and know how accounting data are presented in
them. Excel applications are discussed where appropriate in the text.

118 Chapter 3 Product Costing and Cost Accumulation in a Batch Production Environment
Several exercises and problems in each Each of these inventory balances was 10 percent higher at the end of the year.

chapter include an optional requirement Required:

1. Prepare a schedule of cost of goods manufactured for 20x1.
2. What was the cost of goods sold for the year?
for students to Build a Spreadsheet to 3. Build a spreadsheet: Construct an Excel spreadsheet to solve all of the preceding requirements.
Show how the solution will change if the following data change: direct material used amounted to

develop the solution.  Exercise 3–31

$281,000 and raw-material inventory on December 31 was $28,000.

Manufacturing Cost Flows Reimel Furniture Company, Inc., incurred the following costs during 20x2.
(LO 3-2, 3-6)
Raw material used................................................................................................................................................ $174,000
Direct labor ........................................................................................................................................................... 324,000

“Good description of managerial accounting During 20x2, manufacturing overhead of $180,000 was applied to production. Products costing
$120,000 were finished, and products costing $132,000 were sold on account for $195,000. There were
tools. Easy to read and understand. Strength is no purchases of raw material during the year. The beginning balances in the firm’s inventory accounts
are as follows:
in the end-of-chapter problems—good variety Raw material ......................................................................................................................................................... $227,000

and lots of them.” Work in process ....................................................................................................................................................

Finished goods .....................................................................................................................................................
18,000
30,000

—Priscilla Wisner, Thunderbird School of Global Required:

Management 1 Prepare T-accounts to show the flow of costs through the company’s manufacturing accounts

®
Problems All applicable Problems are available in Connect.

Many problems can be solved using the The following data refer to Twisto Pretzel Company for the year 20x1.  Problem 3–42
Schedule of Cost of Goods
Work-in-process inventory, 12/31/x0 ..................... $ 8,100 Utilities for sales and administrative offices .......... 2,500 Manufactured and Sold;
Excel spreadsheet templates found in Selling and administrative salaries ........................ 13,800 Other selling and administrative expenses ........... 4,000 Income Statement
Insurance on factory and equipment ..................... 3,600 Indirect-labor cost incurred .................................... 29,000 (LO 3-6)
Work-in-process inventory, 12/31/x1 ..................... 8,300 Depreciation on factory building ............................ 3,800
Connect. An Excel logo appears in the Finished-goods inventory, 12/31/x0 ...................... 14,000 Depreciation on cars used by sales personnel ..... 1,200
Cash balance, 12/31/x1 ......................................... 6,000 Direct-labor cost incurred ....................................... 79,000

margin next to these problems for easy Indirect material used .............................................
Depreciation on factory equipment .......................
4,900
2,100
Raw-material inventory, 12/31/x1 ..........................
Accounts receivable, 12/31/x1 ..............................
11,000
4,100
1. Total manufacturing
costs: $175,100
Raw-material inventory, 12/31/x0 .......................... 10,100 Rental for warehouse space to store raw material .... 3,100 3. Net income: $7,100
identification. Property taxes on factory .......................................
Finished-goods inventory, 12/31/x1 ......................
2,400
15,400
Rental of space for company president’s office ....
Applied manufacturing overhead ...........................
1,700
58,000
Purchases of raw material in 20x1 ........................ 39,000 Sales revenue ......................................................... 205,800
Utilities for factory ................................................... 6,000 Income tax expense ............................................... 5,100

Required:
1. Prepare Twisto Pretzel Company’s schedule of cost of goods manufactured for 20x1.
2. Prepare the company’s schedule of cost of goods sold for 20x1. The company closes overapplied
or underapplied overhead into Cost of Goods Sold.
3. Prepare the company’s income statement for 20x1.

 Problem 3–43
Burlington Clock Works manufactures fine, handcrafted clocks. The firm uses a job-order costing sys-
Basic Job-Order Costing;
tem, and manufacturing overhead is applied on the basis of direct-labor hours. Estimated manufacturing
Journal Entries

Excel Simulations Simulated Excel questions, assignable within Connect, allow students to practice
their Excel skills—such as basic formulas and formatting—within the context of managerial accounting.
These questions feature animated, narrated Help and Show Me tutorials (when enabled), as well as
automatic feedback and grading for both students and professors.

Icons identify key business areas in the Problems and Cases in each chapter:

Ethical Issues Group Work Internet Research

International Setting Business Excel Template

Communication
 Instructor Supplements
Assurance of Learning Ready Many educa-
tional institutions today are focused on the notion of
assurance of learning, an important element of some
accreditation standards. Hilton & Platt Managerial
Accounting, 12th edition, is designed specifically to
support your assurance of learning initiatives with a
simple, yet powerful, solution. Each test bank ques-
tion for Managerial Accounting, 12th edition, maps
to a specific chapter learning outcome/objective
listed in the text. You can use our test bank software
and Connect to easily query for learning outcomes/
objectives that directly relate to the learning objec-
tives for your course. You can then use the reporting
features of Connect to aggregate student results in
similar fashion, making the collection and presenta-
tion of assurance of learning data simple and easy.
AACSB Statement McGraw-Hill Education is
a proud corporate member of AACSB International.
Recognizing the importance and value of AACSB
accreditation, we have sought to recognize the
curricula guidelines detailed in AACSB standards for
business accreditation by connecting selected ques-
tions in Hilton & Platt Managerial Accounting, 12th
edition, with the general knowledge and skill guide-
lines found in the AACSB standards. The statements
contained in Hilton & Platt 12th edition are provided
only as a guide for the users of this text. The AACSB
leaves content coverage and assessment clearly
within the realm and control of individual schools,
the mission of the school, and the faculty. The
AACSB charges schools with the obligation of doing
assessment against their own content and learning
goals. While Hilton & Platt 12th edition and its teach-
ing package make no claim of any specific AACSB
qualification or evaluation, we have labeled selected
questions according to the six general knowledge
and skills areas. The labels or tags within Hilton
& Platt 12th edition are as indicated. There are, of
course, many more within the test bank, the text,
and the teaching package that might be used as a
“standard” for your course. However, the labeled
questions are suggested for your consideration.
xvi
®
Connect
Connect houses all the
instructor resources you need to administer your
course, including:
• Solutions Manual
• Test Bank
• Instructor PowerPoint® slides
• Instructor’s Manual
• Excel Spreadsheet Solutions
• Supplementary Chapter Solutions
“The available website accompanying the text offers
some challenging and helpful aids for students.”
—Melvin Houston, Wayne State University
Instructor’s Manual This comprehensive
manual includes step-by-step, explicit instruc-
tions on how the text can be used to implement
alternative teaching methods. It also provides
guidance for instructors who use the traditional
lecture method. The guide includes lesson plans
and demonstration problems with student work
papers, as well as solutions.
Solutions Manual Prepared by the authors,
the solutions manual contains complete solu-
tions to all of the text’s end-of-chapter review
questions, exercises, problems, and cases. The
solutions manual also includes a discussion of the
issues in each of the chapter-by-chapter Focus
on Ethics pieces.
Excel Spreadsheet Templates This
resource includes solutions to spreadsheet prob-
lems found in the text end-of-chapter material.
PowerPoint Presentations A complete
set of Instructor PowerPoints follows the chapter-
by-chapter content.
Test Bank This test bank contains multiple
choice questions, essay questions, and short
problems. Each test item is coded for level of
difficulty, learning objective, AACSB, AICPA, and
Bloom’s taxonomy.
FOR INSTRUCTORS

You’re in the driver’s seat.

Want to build your own course? No problem. Prefer to use our
turnkey, prebuilt course? Easy. Want to make changes throughout the
65%
semester? Sure. And you’ll save time with Connect’s auto-grading too. Less Time
Grading

They’ll thank you for it.

Adaptive study resources like SmartBook® 2.0 help
your students be better prepared in less time. You
can transform your class time from dull definitions to
dynamic debates. Find out more about the powerful
personalized learning experience available in
SmartBook 2.0 at www.mheducation.com/highered/
connect/smartbook
Laptop

Make it simple, Solutions for your

make it affordable.
Connect makes it easy with seamless
integration using any of the major
Learning Management Systems—
Blackboard®, Canvas, and D2L, among
others—to let you organize your course
in one convenient location. Give your
students access to digital materials at
a discount with our inclusive access
program. Ask your McGraw-Hill
representative for more information.
Padlock: Jobalou/Getty Images
challenges.
A product isn’t a solution. Real
solutions are affordable, reliable,
and come with training and
ongoing support when you need it
and how you want it. Our Customer
Experience Group can also help
you troubleshoot tech problems—
although Connect’s 99% uptime
means you might not need to call
them. See for yourself at status.
mheducation.com
Checkmark: Jobalou/Getty Images
 FOR STUDENTS

Effective, efficient studying.

Connect helps you be more productive with your study time and get better grades using tools like
SmartBook 2.0, which highlights key concepts and creates a personalized study plan. Connect sets you
up for success, so you walk into class with confidence and walk out with better grades.

Study anytime, anywhere. “I really liked this

Download the free ReadAnywhere app and access your app—it made it easy
online eBook or SmartBook 2.0 assignments when it’s to study when you
convenient, even if you’re offline. And since the app don't have your text-
automatically syncs with your eBook and SmartBook 2.0
assignments in Connect, all of your work is available book in front of you.”
every time you open it. Find out more at
www.mheducation.com/readanywhere - Jordan Cunningham,
Eastern Washington University

No surprises.
The Connect Calendar and Reports tools keep you on track with the
work you need to get done and your assignment scores. Life gets busy;
Connect tools
ools help you keep learning through it all.

Calendar: owattaphotos/Getty Images

Learning for everyone.

McGraw-Hill works directly with Accessibilityy Services
Departments and faculty to meet the learning
ng needs
of all students. Please contact your Accessibility
bility
Services office and ask them to email
accessibility@mheducation.com, or visit
www.mheducation.com/about/accessibility y
for more information.

Top: Jenner Images/Getty Images, Left: Hero Images/Getty Images, Right: Hero Images/Getty Images
Acknowledgments
We Are Grateful
We would like to express our appreciation to the many people who have provided assistance in the
development of this textbook. First, our gratitude goes to the thousands of managerial accounting
students we have had the privilege to teach over many years. Their enthusiasm, comments, and
questions have challenged us to clarify our thinking about many topics in managerial accounting.
Second, we express our sincere thanks to the following professors who provided extensive
reviews and contributions for this and prior editions:
John C. Anderson, San Diego State
University
Jeffrey Archambault, Marshall University
Florence Atiase, University of Texas at
Austin
Rowland Atiase, University of Texas at
Austin
Ben Baker, Davidson College
K. R. Balachandran, Stern School of
Business, New York University
Frederick Bardo, Shippensburg University
Joseph Beams, University of New Orleans
Michael Blue, Bloomsburg University
Linda Bowen, University of North Carolina
Richard Brody, University of New Haven
Wayne Bremser, Villanova University
Dr. Kathie J. Shaffer, CMA, Frostburg State
University
Linda Brown, St. Ambrose University
Russell Calk, New Mexico State University
Chiaho Chang, Montclair State University
Anna Cianci, Drexel University
Deb Cosgrove, University of Nebraska
at Lincoln
William Eichenauer, Northwest State
Community College
Amanda Farmer, University of Georgia
Leslie Fletcher, Georgia Southern University
Waqar Ghani, Saint Joseph’s University
Marybeth Govan, Sinclair Community
College
Ralph Greenberg, Temple University
Rochelle Greenberg, Florida State
University
Maggie Houston, Wright State University
Melvin Houston, Wayne State University
Dennis Hwang, Bloomsburg University
Mike Metzcar, Indiana Wesleyan University
Christa Morgan, Georgia Perimeter
College
Karl Putnam, University of Texas at El
Paso
Theodore Rodgers, Emory University
Casey Rowe, Purdue University, West
Lafayette
Angela Sandberg, Jacksonville State
University
Kathleen Sevigny, Boston College
Lynda Thoman, Purdue University
Michael Thomas, Humboldt State
University
William J. Callahan, CPA, St. Joseph’s
University
Richard Campbell, University of Rio
Grande
Gyan Chandra, Miami University
Marilyn Ciolino, Delgado Community
College
Paul Copley, James Madison University
Maureen Crane, California State
University, Fresno
Stephen Dempsey, University of Vermont
Patricia Derrick, George Washington
University
Martha Doran, San Diego State University
Allan Drebin, Northwestern University
Barbara Durham, University of Central
Florida
James Emig, Villanova University
Robert Eskew, Purdue University
Andrew Felo, Pennsylvania State
University at Great Valley
Michael Flores, Wichita State University
Kimberly Frank, University of Nevada at
Las Vegas
Alan Friedberg, Florida Atlantic University
Steve G. Green, United States Air Force
Academy
Edward Goodhart, Shippensburg
University
Denise Guithues Amrhein, Saint Louis
University
Sueann Hely, West Kentucky
Community & Technical College
Susan B. Hughes, University of Vermont
Todd Jensen, CPA, Sierra College
Paul Juras, Wake Forest University
Sherrie Koechling, Lincoln University
Stacey Konesky, Kent State University
Wikil Kwak, University of Nebraska at
Omaha
Christy Larkin, Bacone College
James Lasseter, Jr. University of South
Florida
Angelo Luciano, Columbia College
Lois Mahoney, Eastern Michigan University
Ana Marques, University of Texas at
Austin
Scott Martens, University of Minnesota
Maureen Mascha, Marquette University
Michele Matherly, University of North
Carolina at Charlotte
Harrison McCraw, State University of
West Georgia
Metzger Sanjay Mehrotra, Northwestern
University
Jamshed Mistry, Worcester Polytechnic
Institute
Morgan Hamid Mohammadi, St. Xavier
University
Cynthia Nye, Bellevue University
Marilyn Okleshen, Minnesota State
University
Mohamed Onsi, Syracuse University
Putnam Michael Thomas Paz, Cornell
University
Samuel Phillips, Shenandoah University
Kamala Raghavan, Texas Southern
University
Thomas H. Ramsey, Wake Forest
University
Frederick Rankin, Washington University
Roy Regel, University of Montana at
Missoula
Laura Rickett, Kent State University
Don Samelson, Colorado State
University
Angela Sandberg, Jacksonville State
University
Rebecca Sawyer, University of North
Carolina at Wilmington
Pamela Schwer, St. Xavier University
Shaffer Thomas Selling, Thunderbird,
The Garvin School of International
Management
Lanny Solomon, University of Missouri
at Kansas City
Wendy Tietz, Kent State University
Ralph Tower, Wake Forest University
Mark Turner, Stephen F. Austin State
University
Michael Tyler, Barry University
Bill Wempe, Texas Christian University
James Williamson, San Diego State
University
Priscilla Wisner, Thunderbird, The Garvin
School of International Management
Jia Wu, University of Massachusetts,
Dartmouth
Jennifer Yin, University of Texas at San
Antonio
Richard Young, Ohio State University
Laura Zellers, Wichita State University
xix
We want to thank Beth Woods and Helen Roybark for their thorough checking of the content and solutions
manual for accuracy and completeness.

The supplements are a great deal of work to prepare. We appreciate the efforts of those who developed
them, since these valuable aids make teaching the course easier for everyone who uses the text. Thank
you to Luann Bean, Florida Institute of Technology; Beth Kobylarz, Julie Hankins, James Emig, Villanova
University; Patricia Plumb, User Euphoria; Patti Lopez, Valencia College; Dr. Kay Poston, Francis Marion
University; and Dr. Helen Roybark, Ph.D., CPA, CFE, Radford University for their contributions to the ancillary
products.

We are indebted to Professors Roland Minch and Michael Maher for allowing the use of their case materi-
als in the text. The source for the actual company information in Chapters 1 and 2 regarding The Walt Disney
Company, Whole Foods Market, Procter & Gamble, Walmart, Southwest Airlines, and Gold’s Gym is the com-
panies’ published annual reports and other public materials available on their company websites.

Finally, we wish to express our gratitude to the fine people at McGraw-Hill who so professionally guided
this book through the publication process. In particular, we wish to acknowledge Tim Vertovec, Elizabeth
Eisenhart, Erin Quinones, Pat Frederickson, Allie Kukla, Brian Nacik, Michele Janicek, Katherine Wheeler, and
Matt Diamond.

Ronald W. Hilton
David E. Platt

xx
Focus Company and Contrast Company Used in Each Chapter
Focus Company Focus Company Contrast
Chapter Title Focus Company Logo Industry Company

1. The Crucial Role of Managerial The Walt Disney Company Entertainment Whole Foods
Accounting in a Dynamic Busi- Market, Inc
ness Environment (grocery retailer)

2. Basic Cost Management Concepts Comet Computer Computer manufacturer, Gold’s Gym
Internet sales (fitness service
company)

3. Product Costing and Cost Ac- Blue River Paddle Boards Blue River Manufacturer, stand-up Small World
cumulation in a Batch Production PADDLE BOARDS paddle boards Advertising
Environment (ad agency)

4. Process Costing and Hybrid MVP Sports, Wisconsin Manufacturer, baseball MVP Sports, Minnesota
Product-Costing Systems Div’n gloves Div’n (manufacturer)

5. Activity-Based Costing and Dronze Inc. Manufacturer, Immunity

Management recreational drones Medical Center
(health care)

6. Activity Analysis, Cost Behavior, Donut Desire

DONUT Food service Constellation
and Cost Estimation
DESIRE retail chain Communications
Technology
(manufacturer)

7. Cost-Volume-Profit Analysis Seattle Contemporary Nonprofit arts organization Digital: Time

Theater (manufacturer)

8. Variable Costing and Measurement FitDat.com Designer and manufacturer, FitDat.com (designer/
of ESG and Quality Costs smart watches manufacturer)

9. Financial Planning and Analysis: Snowcap Music Festivals Producer of music festivals FestiChair.com
The Master Budget (manufacturer and
Internet retailer)

xxi
Focus Company and Contrast Company Used in Each Chapter
Focus Company Focus Company Contrast
Chapter Title Focus Company Logo Industry Company

10. Standard Costing and Analysis DCdesserts.com Wholesale food service Forest Home
of Direct Costs National Bank
(financial services)

11. Flexible Budgeting and Analysis DCdesserts.com Wholesale food service Upstate Auto
of Overhead Costs Rentals (vehicle
rental services)

12. Responsibility Accounting Aloha Hotels and Resorts Resort hotel chain FLIT FinTech
and the Balanced Scorecard (online financial
services startup)

13. Investment Centers and Suncoast Food Centers Retail grocery chain Suncoast
Transfer Pricing Food Processing
Division
(manufacturing)

14. Decision Making: Relevant Worldwide Airways International airline International

Costs and Benefits Chocolate
Company
(manufacturer)

15. Target Costing and Cost Analysis Sydney Sailing Supplies Manufacturer, sailboats Sydney Sailing
for Pricing Decisions Marine Services
(contractor)

16. Capital Expenditure Decisions City of Mountainview City government High Country
Department
Stores (retailer)

17. Allocation of Support Activity Riverside Clinic Health care provider International
Costs and Joint Costs Chocolate
Company
(manufacturer)

xxii
 Brief Contents

1. The Crucial Role of Managerial Accounting in a Dynamic Business

Environment 2
2. Basic Cost Management Concepts 34
3. Product Costing and Cost Accumulation in a Batch
Production Environment 80
4. Process Costing and Hybrid Product-Costing Systems 136
5. Activity-Based Costing and Management 168
6. Activity Analysis, Cost Behavior, and Cost Estimation 232
7. Cost-Volume-Profit Analysis 282
8. Variable Costing and the Measurement of ESG and Quality Costs 332
9. Financial Planning and Analysis: The Master Budget 368
10. Standard Costing and Analysis of Direct Costs 430
11. Flexible Budgeting and Analysis of Overhead Costs 474
12. Responsibility Accounting and the Balanced Scorecard 520
13. Investment Centers and Transfer Pricing 572
14. Decision Making: Relevant Costs and Benefits 616
15. Target Costing and Cost Analysis for Pricing Decisions 666
16. Capital Expenditure Decisions 708
17. Allocation of Support Activity Costs and Joint Costs 760

Appendix I: The Sarbanes–Oxley Act, Internal Controls, and Management

Accounting 788
Appendix II: Compound Interest and the Concept of Present Value 794
Appendix III: Inventory Management 802
References for “In Their Own Words” 809
Glossary 812
Index of Companies and Organizations 823
Index of Subjects 826
Focus on Ethics Statement 848

xxiii
Contents

Review Questions 28
Exercises 28
Problems 29
Case 31

1 The Crucial Role of Managerial Accounting

in a Dynamic Business Environment 2

Managerial Accounting: A Business Partnership

with Management 4
Managing Resources, Activities, and People 5
2 Basic Cost Management Concepts 34
Decision Making 6
Planning 6 What Do We Mean by a Cost? 36
Directing Operational Activities 6 Product Costs, Period Costs, and Expenses 37
Controlling 6
Costs on Financial Statements 38
How Managerial Accounting Adds Value to the Income Statement 38
Organization 7
Balance Sheet 41
Objectives of Managerial Accounting Activity 7
M.A.P. Using Managerial Accounting To
Manufacturing Operations and Manufacturing
Monetize the Internet 8
Costs 41
Assembly Manufacturing 42
The Balanced Scorecard 10
Manufacturing Costs 42
Managerial Accounting in Different Types of
Organizations 11 Manufacturing Cost Flows 45

Managerial versus Financial Accounting 11 NonManufacturing Production Costs 47

Where Do We Find Managerial Accountants in Basic Cost Management Concepts: Different

an Organization? 13 Costs for Different Purposes 47
Cross-Functional Deployment 15 Cost Drivers 48
Variable and Fixed Costs 48
The Operational Context of Managerial
Accounting 16 M.A.P. Managing Health Care Costs Through
Cost Behavior 51
Managerial Accounting and the Value Chain 17
Cost Management and Accountability 52
Capacity and Capacity Costs 18
Economic Cost Concepts 53
M.A.P. Managing the Costs of Unused Capacity
Costs and Benefits of Information 57
in the Auto Industry: A Global Challenge 21
Big Data, Data Analytics, and Managerial M.A.P. How Airlines Make Money Today 57
Accounting 21 Costs in the Service Industry 58
Managerial Accounting as a Career 23 Focus on Ethics: Ethics 101: Is “Just Following
Professional Organizations 23 Orders” an Acceptable Excuse? 60
Professional Certification 23 Chapter Summary 61

Managerial Accounting and the Ethical Climate Review Problems on Cost Classifications 62
of Business 24 Key Terms 63
Review Questions 64
Focus on Ethics: IMA Statement of Ethical
Professional Practice 25 Exercises 65

Chapter Summary 26 Problems 68

Key Terms 27 Cases 77

xxiv
 Contents xxv

Choosing the Cost Driver for Overhead

Application 107
Departmental Overhead Rates 107

Two-Stage Cost Allocation 107

Project Costing: Job-Order Costing in
Nonmanufacturing Organizations 108
Focus on Ethics: Learning from Past Mistakes:
Boeing Finds it Doesn’t Pay to Hide Problems
from Investors 111
3 Product Costing and Cost Accumulation in a Chapter Summary 112
Batch Production Environment 80 Review Problem on Job-Order Costing 113
Key Terms 114
Product and Service Costing 82 Review Questions 115
Product Costing in Nonmanufacturing Firms 84 Exercises 116
Flow of Costs in Manufacturing Firms 84 Problems 121
Cases 133
Types of Product-Costing Systems 86
Job-Order Costing Systems 86
Process-Costing Systems 87
Summary of Product-Costing System Alternatives 87
Accumulating Costs in a Job-Order Costing
System 87
Job-Cost Record 88
Direct-Material Costs 89 4 Process Costing and Hybrid Product-Costing
M.A.P. Big Data “Use Cases” In Managing Costs Systems 136
and Profits 90
Direct-Labor Costs 91 Comparison of Job-Order Costing and Process
Manufacturing-Overhead Costs 92 Costing 138
Summary of Event Sequence in Job-Order Flow of Costs 138
Costing 94 Differences Between Job-Order and Process
Costing 140
Illustration of Job-Order Costing 94
Purchase of Material 94 Equivalent Units: A Key Concept 140
Use of Direct Material 94 Equivalent Units 140
Use of Indirect Material 96 Illustration of Process Costing 142
Use of Direct Labor 96 Basic Data for Illustration 143
Use of Indirect Labor 97 M.A.P. New York Wine Industry 144
Manufacturing-Overhead Costs Incurred 97 Weighted-Average Method of Process
Application of Manufacturing Overhead 98 Costing 145
Summary of Overhead Accounting 98 Other Issues in Process Costing 149
Selling and Administrative Costs 99 Actual versus Normal Costing 149
Completion of a Production Job 100 Other Cost Drivers for Overhead Application 149
Sale of Goods 100 Subsequent Production Departments 149
Underapplied and Overapplied Overhead 100
Hybrid Product-Costing Systems 150
Schedule of Cost of Goods Manufactured 103
Operation Costing for Batch Manufacturing
Schedule of Cost of Goods Sold 103 Processes 150
Posting Journal Entries to the Ledger 104 Chapter Summary 153
Further Aspects of Overhead Application 106 Review Problem on Process Costing 154
Actual and Normal Costing 106 Key Terms 155
xxvi Contents

Review Questions 155 Key Terms 201

Exercises 156 Review Questions 202
Problems 159 Exercises 202

Case 167 Problems 208

Cases 227

5 Activity-Based Costing and

Management 168

Traditional, Volume-Based Product-Costing 6 Activity Analysis, Cost Behavior, and Cost

System 171
Trouble in Denver 172
Activity-Based Costing System 172
ABC Stage One 173
ABC Stage Two 174
Interpreting the ABC Product Costs 177
The Punch Line 179
Why Traditional Volume-Based Systems Distort
Product Costs 180
M.A.P. Cost Distortion at Rockwell
International 182
Activity-Based Costing: Some Key Issues 182
Cost Drivers 183
M.A.P. Big Data and Activity-Based Costing in
Services 183
Collecting ABC Data 185
Activity Dictionary and Bill of Activities
Activity-Based Management 187
Two-Dimensional ABC 187
Using ABM to Identify Non–Value-Added
Activities and Costs 188
Customer-Profitability Analysis 190
Illustration of Customer-Profitability Analysis
M.A.P. Customer Profitability Analysis at Bank
One Corp. 192
Activity-Based Costing in the Service
Industry 194
Time-Driven Activity-Based Costing 194
Activity-Based Costing at Immunity Medical
Center 195
Interpreting the Primary Care Unit’s TDABC
Information 197
Estimation 232
Cost Behavior Patterns 235
Variable Costs 235
Step-Variable Costs 236
Fixed Costs 236
Step-Fixed Costs 237
Semivariable Cost 239
Curvilinear Cost 240
Using Cost Behavior Patterns to Predict
Costs 241
M.A.P. Is Direct Labor a Variable or a Fixed
Cost? 242
Engineered, Committed, and Discretionary
Costs 243
Cost Behavior in Other Industries 244
Cost Estimation 244
187
Account-Classification Method 245
Visual-Fit Method 245
High-Low Method 247
Least-Squares Regression Method 248
Multiple Regression 250
Data Collection Issues 250
191 Engineering Method of Cost Estimation 251
Big Data and Data Analytics 252
Characteristics and Potential Uses of Big Data 252
Data Analytics and Data Visualization 253
Effect of Learning on Cost Behavior 258
Focus on Ethics: Cisco Systems, Walmart, Taco Bell,
Starbucks, U-Haul, General Dynamics, and Farmers
Insurance: Is Direct Labor a Variable Cost? 259
Chapter Summary 260

Focus on Ethics: Conflict of Interest: Ethical Review Problems on Cost Behavior and Estimation 261
Challenges In Making Product Changes 198 Key Terms 262
Chapter Summary 199 Appendix to Chapter 6: Least-Squares Regression Using
Review Problem on Cost Drivers and Product-Cost Microsoft® Excel 262
Distortion 200 Review Questions 264
 Contents xxvii

Exercises 265 CVP Analysis, Activity-Based Costing, and

Problems 270 Advanced Manufacturing Systems 306
Cases 279 A Move Toward JIT and Flexible
Manufacturing 307
Chapter Summary 310
Review Problem on Cost-Volume-Profit Analysis 311
Key Terms 311
Appendix to Chapter 7: Effect of Income Taxes 312
Review Questions 314
Exercises 315
7 Cost-Volume-Profit Analysis 282 Problems 317
Cases 328
Illustration of Cost-Volume-Profit Analysis 285
Projected Expenses and Revenue 285
The Break-Even Point 286
Contribution-Margin Approach 286
Graphing Cost-Volume-Profit Relationships 288 8 Variable Costing and the Measurement of
Interpreting the CVP Graph 289 ESG and Quality Costs 332
Alternative Format for the CVP Graph 291
Profit-Volume Graph 291 Section 1: Absorption and Variable Costing 334
Fixed Manufacturing Overhead: The Key 335
Target Profit 291
Illustration of Absorption and Variable
Contribution-Margin Approach 292
Costing 336
Equation Approach 292
Absorption-Costing Income Statements 336
Graphical Approach 293
Variable-Costing Income Statements 337
Applying CVP Analysis 293 Reconciling Income under Absorption and
Safety Margin 293 Variable Costing 337
Changes in Fixed Expenses 293 Cost-Volume-Profit Analysis 339
Changes in the Unit Contribution Margin 294 Evaluation of Absorption and Variable Costing 339
Predicting Profit Given Expected Volume 295 M.A.P. IRS: Unique Product Packaging is an
Interdependent Changes in Key Variables 296 Inventoriable Cost 341
CVP Information in Published Annual Reports 297 Section 2: Costs of Assuring Quality 341
M.A.P. Faced with Intensifying Competition, Airlines Measuring and Reporting Quality Costs 341
Keep an Eye on Break-Even Load Factors 297 Changing Views of Optimal Product Quality 343
CVP Analysis with Multiple Products 298 M.A.P. Six Sigma For Quality Management And
Assumptions Underlying CVP Analysis 300 Cost Reduction 346

Role of Spreadsheets and Computerized Planning ISO 9000 Standards 346

Models 300 Section 3: Environmental, Social, and
CVP Relationships and the Income Statement 301 Governance (ESG) Initiatives 348
Traditional Income Statement 301 Measuring ESG Outcomes and
Performance 348
Contribution Income Statement 301
Measuring ESG Costs 349
Comparison of Traditional and Contribution
Income Statements 302 Managing Private Environmental Costs 352

Cost Structure and Operating Leverage 303 Focus on Ethics: Incentive to Overproduce
Operating Leverage 304 Inventory 353
Chapter Summary 354
M.A.P. Operating Leverage Helps Some Web
Companies to be Profitable 305 Review Problem on Absorption and
Variable Costing 355
Cost Structure and Operating Leverage: A Cost-
Benefit Issue 306 Key Terms 356
xxviii Contents

Review Questions 357 Behavioral Impact of Budgets 399

Exercises 357 Budgetary Slack: Padding the Budget 399
Problems 360 Participative Budgeting 400
Cases 365
Focus on Ethics: Padding the Budget: Unethical
Action or Sensible Precaution? 401
Chapter Summary 401
Review Problem on Preparing Master Budget
9 Financial Planning and Analysis: The Master Schedules 402
Key Terms 404
Budget 368
Review Questions 404
Financial Planning and Analysis (FP&A) Exercises 405
Systems 370 Problems 409
Purposes of Budgeting 371 Cases 422
Types of Budgets 372
The Master Budget: A Planning Tool 372
Sales of Services or Goods 372
Sales Forecasting 373
Operational Budgets 374
Financing Budgets 375
M.A.P. The Budget: Valuable Planning Tool or
Costly Waste of Time? 376 10 Standard Costing and Analysis of Direct
Budgeted Financial Statements 377 Costs 430
Activity-Based Budgeting 377
Managing Costs 432
Developing the Master Budget 378 Management by Exception 433
Sales Budget 380
Setting Standards 434
Purchases Budget 381
Methods for Setting Standards 434
Direct Labor Budget 381
Participation in Setting Standards 434
Production Overhead and SG&A Budgets 383
Perfection versus Practical Standards: A
Financing Budgets 384 Behavioral Issue 435
Budgeted Financial Statements 387 Use of Standards by Service Organizations 435
Summary: Key Features of a Master Budget 388
Cost Variance Analysis 436
Extending the Master Budget for a Manufacturing Direct-Material Standards 436
Firm 389 Direct-Labor Standards 437
Production Budget 390
Standard Costs Given Actual Output 437
Direct-Material Budget 391
Analysis of Cost Variances 438
Budgeted Schedule of Cost of Goods
Direct-Material Variances 439
Manufactured and Sold 393
Direct-Labor Variances 441
Budgeted Balance Sheet 394
M.A.P. Challenges in FP&A and Variance Data
Assumptions and Predictions Underlying the Analytics 443
Master Budget 395 Multiple Types of Direct Material or Direct
Financial Planning Models 396 Labor 444
Budget Administration 396 Allowing for Production Loss 444
M.A.P. Budgeting, Done Right, is Very Big Significance of Cost Variances 445
Data! 397 A Statistical Approach 447
International Aspects of Budgeting 399 Behavioral Impact of Standard Costing 448
 Contents xxix

Controllability of Variances 448 Overhead Cost Performance Report 490

Interaction among Variances 449 Activity-Based Flexible Budget 491
Standard Costs and Product Costing 450 M.A.P. Cost Management Systems in
Germany 492
Evaluation of Standard Costing Systems 451
Advantages of Standard Costing 451 Flexible Budgeting in the Service Industry 493
Criticisms of Standard Costing in Today’s Focus on Ethics: Wool Meet Eyes: Is Self-
Manufacturing Environment 452 Deception Unethical? 494
M.A.P. Working With Suppliers to Manage Chapter Summary 495
Costs 453
Review Problem on Flexible Budgeting and Analysis of
Focus on Ethics: Bogus Bonus: Sacrificing Overhead Costs 496
Quality To Cut Standard Costs 454 Key Terms 497
Chapter Summary 455 Appendix A to Chapter 11: Standard Costs and Product
Review Problem on Standard Costing and Analysis of Costing 498
Direct Costs 455 Appendix B to Chapter 11: Sales Variances 499
Key Terms 457 Review Questions 500
Appendix to Chapter 10: Use of Standard Costs Exercises 501
for Product Costing 458 Problems 504
Review Questions 460 Cases 516
Exercises 460
Problems 462
Cases 471

12 Responsibility Accounting and the Balanced

Scorecard 520

11 Flexible Budgeting and Analysis of Overhead Section 1: Responsibility Accounting 523

Costs 474 Responsibility Centers 523
Illustration of Responsibility Accounting 524
Overhead Budgets 476
Performance Reports 526
Flexible Budgets 477
Budgets, Variance Analysis, and Responsibility
Advantages of Flexible Budgets 477
Accounting 529
The Activity Measure 478
Cost Allocation 529
Flexible Overhead Budget Illustrated 479 Cost Allocation Bases 529
Formula Flexible Budget 479 Allocation Bases Based on Budgets 530
Overhead Application in a Standard-Costing Behavioral Effects of Responsibility
System 481 Accounting 531
Choice of Activity Measure 482 Information versus Blame 531
Criteria for Choosing the Activity Measure 482 Controllability 531
Motivating Desired Behavior 531
Cost Management Using Overhead Cost
Variances 483 Segmented Reporting 532
Variable Overhead 484 Segments versus Segment Managers 534
Fixed Overhead 487 Key Features of Segmented Reporting 534
xxx Contents

Section 2: The Balanced Scorecard 534 Other Issues in Segment Performance

What Is a “Balanced Scorecard”? 535 Evaluation 587
Flit FinTech: A Balanced Scorecard Example 538 Alternatives to ROI, Residual Income,
M.A.P. The Balanced Scorecard in an and Economic Value Added (EVA) 587
Established Company 544 Importance of Nonfinancial Information 588
Lead and Lag Measures: The Key to the Balanced Measuring Performance in Nonprofit
Scorecard 545 Organizations 588
Balanced Scorecard and the Chain of Cause and Transfer Pricing 589
Effect 546 Goal Congruence 589
M.A.P. Using Cause and Effect to Link the General Transfer-Pricing Rule 590
Balanced Scorecard to Strategy 547 Transfers Based on the External Market Price 593
Focus on Ethics: Short Term Gain, Long Term Negotiated Transfer Prices 594
Pain? 549 Cost-Based Transfer Prices 595
Chapter Summary 550 Standard versus Actual Costs 596
Review Problems on Responsibility Accounting and the Undermining Divisional Autonomy 596
Balanced Scorecard 550 An International Perspective 596
Key Terms 552 M.A.P. Transfer Pricing and Tax Issues 597
Appendix to Chapter 12: Operational Performance Transfer Pricing in the Service Industry 598
Measures 553
Review Questions 555 Behavioral Issues: Risk Aversion and
Incentives 598
Exercises 556
Problems 560 Goal Congruence and Internal Control
Cases 569 Systems 599
Focus on Ethics: What If Your Company Based
Your Raise On Next Year’s Performance? 600
Chapter Summary 600
Review Problems on Investment Centers and Transfer
Pricing 601
Key Terms 602
Review Questions 603
Exercises 603
Problems 606
Cases 611
13 Investment Centers and Transfer
Pricing 572

Delegation of Decision Making 574

Obtaining Goal Congruence: A Behavioral
Challenge 575
Adaptation of Management Control
Systems 575
Measuring Performance in Investment
Centers 576
Return on Investment 576
Residual Income 578
Economic Value Added 581
M.A.P. Pay for Performance Based on EVA
Measuring Income and Invested Capital 583
Invested Capital 583
Measuring Investment-Center Income
Inflation: Historical-Cost versus Current-Value
Accounting 587
14 Decision Making: Relevant Costs and
Benefits 616
The Managerial Accountant’s Role in Decision
Making 618
Steps in the Decision-Making Process 619
Quantitative versus Qualitative Analysis 619
582 Obtaining Information: Relevance, Accuracy, and
Timeliness 620
Relevant Information 621
586 Unique versus Repetitive Decisions 622
Importance of Identifying Relevant Costs and
Benefits 622
 Contents xxxi

Identifying Relevant Costs and Benefits 622 Costs 669

Sunk Costs 622 Political, Legal, and Image-Related Issues 670
Irrelevant Future Costs and Benefits 625 Economic Profit-Maximizing Pricing 670
Opportunity Costs 625 Total Revenue, Demand, and Marginal Revenue
Summary 626 Curves 670
Total Cost and Marginal Cost Curves 672
Analysis of Special Decisions 626
Profit-Maximizing Price and Quantity 672
Accept or Reject a Special Offer 626 Price Elasticity 675
Outsource a Product or Service 628 Limitations of the Profit-Maximizing Model 675
M.A.P. Insourcing Makes a Come-Back 629 Costs and Benefits of Information 675
Add or Drop a Service, Product, or Department 631 Role of Accounting Product Costs in Pricing 676
M.A.P. Adding Services to Stay Competitive 633 Cost-Plus Pricing 676
Special Decisions in Manufacturing Firms 633 Absorption-Cost Pricing Formulas 677
Joint Products: Sell or Process Further 633 Variable-Cost Pricing Formulas 678
Determining the Markup 678
Decisions Involving Limited Resources 635
M.A.P. E-Tailers and Retailers Embroiled
Uncertainty 637
in Price Wars 680
Activity-Based Costing and Today’s Advanced Cost-Plus Pricing: Summary and Evaluation 680
Manufacturing Environment 638
Strategic Pricing of New Products 681
Conventional Outsourcing (Make-or-Buy)
Analysis 638 Target Costing 681
Activity-Based Costing Analysis of the M.A.P. Dynamic Pricing on the Internet 682
Outsourcing Decision 638 A Strategic Profit and Cost Management
Process 682
Other Issues in Decision Making 640
Activity-Based Costing and Target Costing 684
Incentives for Decision Makers 640
Product-Cost Distortion and Pricing: The Role of
Short-Run versus Long-Run Decisions 641 Activity-Based Costing 684
Pitfalls to Avoid 641 Value Engineering and Target Costing 685
Focus on Ethics: Effects of a Decision to Close a Time and Material Pricing 686
Department and Outsource 642
Competitive Bidding 688
Chapter Summary 643
Effect of Antitrust Laws on Pricing 691
Review Problem on Relevant Costs 643
Key Terms 644 Focus on Ethics: Dynamic Pricing Based on
Appendix to Chapter 14: Linear Programming 645
Individual Profiling 691
Chapter Summary 692
Review Questions 647
Review Problem on Cost-Plus Pricing 693
Exercises 648
Key Terms 694
Problems 651
Review Questions 694
Cases 663
Exercises 695
Problems 697
Cases 704

15 Target Costing and Cost Analysis for Pricing

Decisions 666 16 Capital Expenditure Decisions 708
Major Influences on Pricing Decisions 668 Section 1: Discounted-Cash-Flow Analysis 711
Customer Demand 669 Net-Present-Value Method 712
Actions of Competitors 669 Internal-Rate-of-Return Method 712
xxxii Contents

Comparing the NPV and IRR Methods 715

Assumptions Underlying Discounted-Cash-Flow
Analysis 715
Choosing the Hurdle Rate 716
Depreciable Assets 717

Comparing Two Investment Projects 717

Managerial Accountant’s Role 720 17 Allocation of Support Activity Costs and
Postaudit 720 Joint Costs 760
Real Option Analysis 721
Section 1: Service Department Cost Allocation 762
Section 2: Income Taxes and Capital Direct Method 765
Budgeting 721 Step-Down Method 765
After-Tax Cash Flows 721 Reciprocal-Services Method 766
Accelerated Depreciation 724 Fixed versus Variable Costs 767
After-Tax Cash Flows, Depreciation, and the Tax M.A.P. Exploding Costs and Cost Reimbursement
Law 725 In The Health Care Industry 769
Modified Accelerated Cost Recovery System Dual Cost Allocation 769
(MACRS) 726 Allocate Budgeted Costs 771
Gains and Losses on Disposal 728 Today’s Advanced Manufacturing
Investment in Working Capital 729 Environment 771
Extended Illustration of Income-Tax Effects in The Rise of Activity-Based Costing 772
Capital Budgeting 730 Section 2: Joint Product Cost Allocation 772
M.A.P. Big Pharma Uses Capital Budgeting in Allocating Joint Costs 772
Developing New Drugs 732 M.A.P. Joint Cost Allocation in the Oil and Gas
Ranking Investment Projects 733 Industry 774
Chapter Summary 775
Section 3: Alternative Methods for Making Review Problem on Service Department Cost
Investment Decisions 734 Allocation 776
Payback Method 735 Key Terms 777
Accounting-Rate-of-Return Method 736 Appendix to Chapter 17: Reciprocal-Services Method 777
Review Questions 779
Focus on Ethics: Dysfunctional Focus on Early
Exercises 779
Cash Flows 739
Problems 781
Chapter Summary 739
Cases 786
Review Problems on Capital Expenditure Decisions 740
Appendix I: The Sarbanes–Oxley Act, Internal
Key Terms 741
Controls, and Management Accounting 788
Appendix A to Chapter 16: Future Value and Present
Appendix II: Compound Interest and the
Value Tables 742
Concept of Present Value 794
Appendix B to Chapter 16: Impact of Inflation 744
Appendix III: Inventory Management 802
Review Questions 746
Exercises 747
References for “In Their Own Words” 809
Problems 750 Glossary 812
Cases 757 Index of Companies and Organizations 823
Index of Subjects 826
Focus on Ethics Statement 848

Note: Entries printed in blue denote topics that emphasize contemporary issues in managerial accounting and
cost management.
Design Elements: (mouse): ©Image Source, all rights reserved; (globe): ©Doug Armand/Getty Image; (scale): ©DNY59/Getty Images;
(tablet): ©McGraw-Hill Education; (pen): ©Shutterstock/wrangler
Chapter Openers: (Disney): ©Eye Ubiquitous/Superstock; (tablet): ©Robert Mora/Alamy; (paddle): ©Alexey_Ulyanov/Shutterstock; (baseball glove):
©Photodisc/Getty Images; (drone controller): ©IM_VISUALS/Shutterstock; (donuts): ©Photodisc/PunchStock; (masks): ©Ingram Publishing/Alamy; (watch):
©scanrail/123RF; (mixer): ©mrgarry/123RF; (dessert): ©Elena Veselova/Shutterstock; (hat): ©Shutterstock/Madlen; (snorkel): ©Andrew Paterson/Getty Images;
(grocerys): ©Brand X Pictures/PunchStock; (airplane): ©Ilene MacDonald/Alamy; (sailboat): ©tonobalaguer/123RF; (flowers): ©NPS Photo by Robb Hannawacker;
(blood pressure): ©Siede Preis/Getty Images
Managerial
Accounting
Creating Value in a
Dynamic Business Environment
1 The Crucial Role of
Managerial Accounting in a
Dynamic Business Environment
FOCUSCOMPANY>>>

THIS CHAPTER’S FOCUS

COMPANY is The Walt Disney
Company. This entertainment services company is
a giant in the industry with theme parks, feature film
studios, animation studios, television broadcasting,
hotels and resorts, and retail
stores. Using The Walt Disney
Company as an illustration, we
will introduce the field of mana-
gerial accounting and its major
themes. Some of you are excited
©Eye Ubiquitous/Superstock
about studying accounting. But
even more of you are asking, “Why do I need to
study managerial accounting? I’m not going to be an
accountant!” That is a good Each chapter is built
around a focus company,
question. Our primary focus in which the chapter’s
in this book is the ways in key points are illustrated.
This chapter’s focus is
which managers use mana- on The Walt Disney
Company. The focus
gerial accounting concepts
companies in subse-
and tools to make their deci- quent chapters are not
real companies, but they
sions. Along the way, we will are realistic scenarios
©Parinya Suwanitch/123RF

also explore how managerial built on actual company

accountants work in partner-
ship with managers to add
value to the organization.
practices. Whenever
the focus company is
discussed in the chapter,
the company logo
appears in the margin.
 <<<INCONTRAST
In contrast to the entertainment
services setting of The Walt
Disney Company, we will turn our
©Ed Endicott/Alamy
attention to Whole Foods Market,
a division of Amazon.com, Inc. This power-
house food retailer has over 400 stores around
North America and Europe. Historically a
leader in the area of corporate social responsi-
bility, Whole Foods Market is frequently faced
with challenging decisions that require them
to balance the need to run a profitable busi-
ness, and generate a satisfactory return for
Amazon.com, against the cost of their much-
publicized commitment to organic foods and
sustainable produc-
Each chapter also
includes a contrast tion. We will explore
company. In most managerial accounting’s
cases, the contrast
company will present contribution to Whole
a key chapter topic in
Foods Market’s efforts
an industry that is dif-
ferent from that of the to sell products that are
focus company. In this
chapter, the focus com- more costly to produce
©Justin Sullivan/Getty Images

pany (Walt Disney) is an in a competitive mar-

entertainment services
company, whereas ket, while still achieving
the contrast company
appropriate returns for
(Whole Foods Market) is
a food retailer. investors.
 After completing this chapter, you should be able to:
1-1
1-2
1-3
1-4
Learning Objectives high- 1-5
light the key topics to be
covered in the chapter. 1-6
They are repeated in the
margin of the text where
they are discussed. Also, 1-7
each end-of-chapter
assignment lists its 1-8
learning objectives
in the margin. 1-9
1-10
1-11
Learning Objective 1-1
Define managerial accounting
and describe its role in the
management process.
4
Define managerial accounting and describe its role in the management process.
Explain four fundamental management processes that help organizations attain
their goals.
List and describe five objectives of managerial accounting activity.
Explain the major differences between managerial and financial accounting.
Describe the accounting and finance structure in an organization.
Describe the roles of an organization’s chief financial officer (CFO) or controller,
treasurer, and internal auditor.
Understand and explain the value chain concept.
Explain how investments in capacity affect managerial decision making.
Understand and explain big data and data analytics and how they interact with
managerial accounting.
Discuss the professional organizations and certifications in the field of managerial
accounting.
Describe the ethical responsibilities and ethical standards that apply to managerial
accounting.
Many different kinds of organizations affect our daily lives. Manufacturers, retailers, ser-
vice industry firms, agribusiness companies, nonprofit organizations, and government
agencies provide us with a vast array of goods and services. All of these organizations
have two things in common. First, every organization has a set of goals or objectives.
An airline, such as Qantas or Southwest Airlines, might specify profitability and cus-
tomer service as its goals. The New York Police Department’s goals would include public
safety and security coupled with cost minimization. Second, in pursuing an organiza-
tion’s goals, managers need information. The information needs of management range
across financial, production, marketing, legal, and environmental issues. Generally, the
larger the organization, the greater management’s need for information.
In this chapter, we will explore the role of managerial accounting within the overall
management process. In the remaining chapters, we will expand our study by exploring
the many concepts and tools used in managerial accounting.
Managerial Accounting: A Business Partnership with Management
Managerial accounting is the process of identifying, measuring, analyzing, interpret-
ing, and communicating information in pursuit of an organization’s goals. Managerial
accounting is an integral part of the management process, and managerial accountants
are important strategic partners in an organization’s management team. But note that
the actions listed above are not done just by accountants: all managers use the tools of
 Chapter 1 The Crucial Role of Managerial Accounting in a Dynamic Business Environment 5

managerial accounting. That is why you are here—even if you are not planning to be an
accountant! “As their role moves from
An organization’s management team seeks to create value for the organization by governance to guidance,
managing resources, activities, and people to achieve the organization’s goals effec- [managerial accountants
tively and efficiently. Managerial accounting provides tools and perspectives that help are] turning complex data
managers accomplish this, and for that reason it is important that every business student into actionable insight,
study it. implementing digitally-
Managerial accountants are specialists in using the tools of managerial accounting. enabled business models,
They help the organization and support its managers in running the operation effectively. measuring new KPIs [key
Their knowledge builds from the material in this textbook to include advanced tools as performance indicators] to
well as knowledge and techniques specific to a company and its industry. measure value, managing
The role of managerial accounting is very different now than it was years ago. In rising levels of risk, and
the past, managerial accountants were organized into support departments, often physi- supporting their rapidly
cally separated from the managers for whom they provided reports and information. Now, expanding customer
rather than isolate managerial accountants in a separate department, companies usually bases.” (1a)1
locate them in the operating departments where they are working with other managers to Oracle
make decisions and resolve operational problems. Managerial accountants, often carry-
ing the job title of “analyst,” take on leadership roles on their teams and are sought out
for the valuable information they provide. The role of the accountant in leading-edge
companies “has been transformed from number cruncher and financial historian to being
business partner and trusted advisor.”2 And the tools of managerial accounting can add
value for all managers.

Managing Resources, Activities, and People

The owners, directors, or trustees of an organization set its goals, generally with the help
of management. For example, The Walt Disney Company’s goals are set by its board
of directors, who are elected by the company’s stockholders. Disney’s mission, which
guides the board in goal setting, says that they “seek to develop the most creative, innova-
tive and profitable entertainment experiences and related products in the world.”3
In pursuing its goals, an organization acquires resources (for example, funding, pat-
Learning Objective 1-2
ents, and buildings), hires people, and then engages in an organized set of activities. It is
up to the management team to make the best use of the organization’s resources, activi- Explain four fundamental
ties, and people in achieving the organization’s goals. In trying to accomplish this, the management processes that
day-to-day work of the management team comprises the following four activities: help organizations attain their
goals.
1. Decision making
2. Planning
3. Directing operational activities
4. Controlling

1
In Their Own Words Throughout the text, you will find these quotes from both practicing managers and managerial
accountants. Collectively they portray the important role managerial accounting plays in today’s dynamic business
environment. The references for these quotes appear at the end of the text. The references are organized by chapter;
thus reference (1a) relates to the first quote in Chapter 1, and so forth.
2
Gary Siegel, “The Image of Corporate Accountants,” Strategic Finance 82, no. 2 (August 2000), p. 71.
3
The Walt Disney Company, which is discussed in this chapter, is, of course, a real company, and information about
its mission, structure and leadership can be found at www.thewaltdisneycompany.com/about/. However, the focus
organizations around which subsequent chapters are built are not real organizations. They are instead realistic set-
tings in which to discuss business and managerial accounting issues, and in most cases are based on real organiza-
tions. Similarly, each chapter includes a discussion of a contrast company. Some of these contrast companies, such
as food retailer Whole Foods Market in this chapter, are real companies. Others are fictitious companies that are
based on real organizations. These realistic illustrations and scenarios are intended to help students connect the
business and managerial accounting issues discussed in this book to everyday life.
6 Chapter 1 The Crucial Role of Managerial Accounting in a Dynamic Business Environment
“What I need is someone
who can analyze data, see
problems and figure out
solutions . . . [just doing]
debits and credits and
financial statements doesn’t
really help me.” (1b)
Tente Casters Inc
Decision Making
Recently, Disney’s management and board of directors decided that one of the company’s
growth objectives would be to expand guest and hotel capacity in its Walt Disney World
Resort in Florida. It was not immediately clear, however, how best to do this. Should they
build a new hotel facility on the scarce available land near one of the company’s four
existing Florida theme parks—the Magic Kingdom, Epcot, Disney’s Hollywood Studios,
and Disney’s Animal Kingdom? Or should they build a new type of theme park with its
own hotels, a substantial investment? Should they build new attractions in one or more
of the existing parks, and renovate and expand one of the existing hotel properties? Or
should the company branch out in a new direction with an entirely different type of facil-
ity? How would each of these alternative courses of action mesh with the company’s
mission to provide “creative, innovative and profitable entertainment?” Disney’s top
management team had to make a decision about the best way to expand the company’s
Florida operations, which entailed choosing among the available alternatives.
Planning
Disney’s top management team decided on an aggressive, and expensive, plan to expand the
company’s Florida operations and profitability by building on the Star Wars brand franchise
that the company owns. Their plan included a large expansion of the Disney’s Hollywood
Studios theme park, dedicated to a new attraction called Star Wars: Galaxy’s Edge, with
a new “immersive” Star Wars Hotel resort connected to it. Created and designed by Walt
Disney’s Imagineering Division, the 14-acre park expansion would offer guests a chance to
inhabit a planet in the Star Wars galaxy, both visiting it and staying there in the hotel.
Next came the detailed planning phase. How would the rides and simulations
designed by the Imagineering Division be laid out and organized? What food and bever-
age operations would be appropriate? What characters would be present in the attraction,
and how many employees of all types would be needed on a day-to-day basis? What sup-
plies would be required to run the park and hotel? How much would electricity and other
utilities cost for the new attraction? How should the hotel’s rooms be priced? And finally,
what other incremental sales opportunities could be created to help pay for the expensive
project? Disney’s management team had to plan for running Star Wars: Galaxy’s Edge
and the Star Wars Hotel, which meant developing a detailed financial and operational
description of anticipated operations.
Directing Operational Activities
Planning for the creation of the new attraction and hotel requires extensive prediction.
But once the attraction and hotel have been built, equipped, and staffed, the dynamic pro-
cess of actually running them begins. How many guests are expected to arrive this week?
How many cashiers should be on duty on Saturday morning? How much of each type of
food should be ordered each day? How much cash will be needed to meet the payroll, pay
the utility bills, and buy maintenance supplies? All of these questions fall under the gen-
eral heading of directing operational activities, which means running the organization on
a day-to-day basis.
Controlling
As the new attraction and the hotel operate, the company can begin to observe the results
of operations. Are Disney’s goals for the attraction and hotel being accomplished? Is the
new attraction “creative, innovative, and profitable?” How do we measure that? Gen-
erally, and most importantly, have operations adhered to the plans developed by man-
agement for achieving the goals? In seeking to answer these questions, management is
engaged in control, which means ensuring that the organization operates in the intended
manner and achieves its goals.
 Chapter 1 The Crucial Role of Managerial Accounting in a Dynamic Business Environment 7

How Managerial Accounting Adds Value to the Organization

Managers need information for all of the managerial activities described in the preceding
section. That information comes from a variety of sources, including economists, finan-
cial experts, marketing and production personnel, accountants, and the organization’s
managerial accounting system.

Objectives of Managerial Accounting Activity

Managerial accounting activity comprises a set of tools, systems, and perspectives
Learning Objective 1-3
that add value to an organization by supporting the following five major objectives:
List and describe five
1. Providing information for decision making and planning. objectives of managerial
2. Assisting managers in directing and controlling operational activities. accounting activity.

3. Motivating managers and other employees toward the organization’s goals.

4. Measuring the performance of activities, subunits, managers, and other
employees within the organization.
5. Assessing the organization’s competitive position, and working with other man-
agers to ensure the organization’s long-run competitiveness in its industry.
Although financial data make up a large part of the inputs and outputs of a managerial
accounting system, there is a strong trend toward the presentation of nonfinancial data as “You don’t have resources
well. Managerial accounting systems supply all kinds of information to management in to do everything. You focus
support of management’s role in directing the organization’s activities. Measuring, man- on things that have the
aging, and continually improving operational activities are critical to an organization’s maximum return.” (1c)
success. As we will see in subsequent chapters, contemporary managerial accounting Kraft Heinz Co.
systems focus on the activities that occur at all levels of the organization.
To illustrate the objectives of managerial accounting activity, let us continue with the
example of Star Wars: Galaxy’s Edge and the Star Wars Hotel.

Providing Information for Decision Making and Planning For virtually all major
decisions, Disney’s management team would rely heavily on managerial accounting infor-
mation. For example, the decision to establish the new attraction and hotel would be influ-
enced by estimates of the costs of designing the rides and simulations and maintaining them
throughout the attraction’s life. The theme park’s managers also would rely on managerial
accounting data in formulating plans for the attraction’s operations. Prominent in those plans
would be a budget detailing the projected revenues and costs of operating the attraction.
Because of the complexity and importance of this decision, Disney’s managers and
accountants would work together on teams as decisions were made and plans formulated “What we’re seeing is less
for the new attraction’s operations. transactional and more
decision support type of
work. More analytical,
Assisting Managers in Directing and Controlling Operational Activities Direct-
more . . . option analysis.
ing and controlling day-to-day operations require a variety of data about the process of
Looking at the whole
providing entertainment services. For example, in directing operational activities, the
spectrum of options in
park’s management team would need data about customer food-service demand patterns
helping management make
in order to make sure appropriate staffing was provided in the theme park’s various food
decisions.” (1d)
venues. In controlling operations, management would compare actual costs incurred with
Boeing
those specified in the budget.
Managerial accounting information often assists management through its attention-
directing function. Managerial accounting reports do not necessarily solve a decision
problem. Most often, they direct managers’ attention to an issue that requires their skills
and then, ideally, provide the data that is relevant in helping them to solve the problem. To
illustrate, suppose Star Wars: Galaxy’s Edge incurred electricity costs that significantly
exceeded the budget. This fact does not explain why the budget was exceeded, nor does
8 Chapter 1 The Crucial Role of Managerial Accounting in a Dynamic Business Environment

it tell management what action to take, but it does direct management’s attention to the
situation. Suppose that upon further investigation, the accounting records reveal that the
rate Disney pays for electricity has increased substantially. This information will help man-
agement in framing the decision problem. Should steps be taken to conserve electricity?
Should they seek out a different electric power provider? Perhaps management should con-
sider investing in a more sophisticated air conditioning system to manage the Florida heat.

USING MANAGERIAL ACCOUNTING TO MONETIZE THE INTERNET

U

M anagement
A ccounting
P ractice
Facebook, Walmart,
REI, Amazon, Fox
News, The New
York Times, The
Wall Street Journal,
LinkedIn
The managerial account-
ing practices of well
known, real-world organi-
zations are highlighted in
these boxes. You will see
how topics in the chapter
are actually used. Actual
companies are indicated
in blue whenever they
are referenced.
For any company operating online, monetizing the Internet means finding a way to gener-
F
a revenues from users in order to make a profit after the costs of providing the Internet
ate
s
service or content. Creating a successful revenue model is one of the biggest challenges
f
faced by Internet companies, and managerial accounting information and techniques are
a crucial part of finding and managing the correct model. Here are some examples of how
c
companies are trying to monetize the Internet.
Targeted Content
T
F
Four months after Facebook’s initial public offering (IPO) of its stock on May 18, 2012, with its
sshares trading more than 50% below their $38 per share initial offering price, investors
w
were demanding answers to a question they had begun asking soon after the IPO: “How
w
will [Facebook] continue to monetize its more than 900 million users on a consistent
basis?”4 Many changes in Facebook’s site during the following months and years have
been intended to do exactly that, with managerial accountants analyzing the costs and
benefits of different courses of action. For example, design changes in March 2013 were
intended to “help the company increase monetization by improving its ability to target con-
tent to users with increased precision based on ‘likes.’”5 In subsequent years, Facebook
seems to have solved the Internet monetization problem, becoming highly profitable with
its stock trading by mid-2018 at five to six times the IPO price.
Competing with Amazon
Walmart was slow to embrace Internet sales because of their investment in bricks-and-
mortar stores. But they and other companies that invest in physical stores, such as REI, see
an opportunity to monetize the Internet in conjunction with their stores by providing what
competitor Amazon cannot. “Walmart touches 90% of all Americans within 10 miles of a store
[and] has demand to justify third-party sellers on its marketplace to ship products to ‘for-
ward deployed’ warehouses (read: ‘stores’).”6 By offering customers the opportunity to have
purchases shipped free of charge to its stores, Walmart could see cost efficiencies from
using its existing supply chain to bring products to consumers. And when consumers visit a
store to pick up their purchases, they are likely to purchase other products, an incremental
profit opportunity not available to Amazon. Moreover, stores can deliver services to con-
sumers along with the packages they have ordered online. “Stores are fighting back with
what has always defined specialty retail: service and community . . . REI has offered events,
skills clinics [and] last summer it created 1,000 more aimed squarely at women.”7 But when
services are provided free of charge, they must demonstrate that they drive increased sales
to result in an overall net profit. Managerial accounting tools help provide that insight.
(continues)

4
Steven Russolillo and Kaitlyn Kiernan, “MarketBeat: Facebook Shares Fall Below $30,” Wall Street Journal,
May 29, 2012.
5
Andrew Tonner, “What Does Facebook’s Redesign Mean for Investors?” The Motley Fool, March 7, 2013, http://
www.fool.com/investing/general/2013/03/07/what-does-facebook-redesign-mean-for-investors.aspx.
6
Alex Moazed, “Walmart is Coming for Amazon–and Winning,” Inc., October 11, 2017.
7
Mya Frazier, “Amazon’s War on Gear,” Outside, July 11, 2018.
 Chapter 1 The Crucial Role of Managerial Accounting in a Dynamic Business Environment 9

Making Journalism Profitable Again

“Publishers are still experimenting with how best to reach, retain, and monetize their audi-
ences.” One of the great seismic shifts of the last decade has been the stampede of adver-
tisers from print to online media. Managers in news organizations that were built on print ad
revenues are trying to figure out how to monetize their online presence in a world where
online content is generally free—while also remaining independent of undue editorial influ-
ence by advertisers. Managerial accounting techniques help to divide costs among dif-
ferent channels while allocating revenues among those same channels, in order to better
understand profitability. From Fox News trying out video content on Facebook’s “Watch” plat-
form, to The New York Times’ various subscription models, to The Wall Street Journal-sponsored
posts on LinkedIn, there is still no clear business model for delivering the news, profitably.8

Motivating Managers and Other Employees Toward the Organization’s Goals

Organizations have goals. However, organizations also are made up of people who have
goals of their own. The goals of individuals are diverse, and they do not always match
those of the organization. A key purpose of managerial accounting is to motivate manag-
ers and other employees to direct their efforts toward achieving the organization’s goals.
One means of achieving this purpose is through budgeting. In establishing a budget for
Disney’s Star Wars: Galaxy’s Edge, top management indicates how resources are to be
allocated and what activities are to be emphasized. When actual operations do not con-
form to the budget, the managerial accounting system will highlight the deviation from
plan, and managerial accounting tools will help the theme park’s managers to analyze
and explain the reasons for the deviation.

Measuring the Performance of Activities, Subunits, Managers, and Other

Employees within the Organization One means of motivating people toward the
organization’s goals is to measure their performance in achieving those goals. Such mea-
surements then can be used as the basis for rewarding performance through positive feed-
back, promotions, and pay raises. For example, most large corporations compensate their
executives, in part, on the basis of the profit achieved by the subunits they manage. In
other organizations, managers are rewarded on the basis of operational measures, such
as product quality, sales, or on-time delivery. At Star Wars: Galaxy’s Edge, for example,
management could be rewarded, in part, on the basis of growth in percent of theme park
visitors who visit the attraction.
In addition to measuring the performance of people, the managerial accounting sys-
tem measures the performance of an organization’s subunits, such as divisions, product
lines, geographical territories, and departments. These measurements help the subunits’
managers obtain the highest possible performance level in their units. Such measure-
ments also help top management decide whether a particular subunit is a viable economic
investment. For example, it may turn out that a particular simulation at Star Wars: Gal-
axy’s Edge is too costly to maintain, despite the efforts of a skilled management team.

Assessing the Organization’s Competitive Position, and Working with Other

Managers to Ensure the Organization’s Long-Run Competitiveness in Its Industry
The business environment often changes very rapidly. These changes result from global com-
petition, rapidly advancing technology, and trends in communication such as social media.

8
Pete Brown, “Platforms and Publishers: No Sign of Retreat,” Columbia Journalism Review, February 23, 2017;
Deepa Seetharaman and Lukas I. Alpert, “Facebook Nears Deals on News Shows for Video Platform ‘Watch’,” The
Wall Street Journal, May 31, 2018.
10 Chapter 1 The Crucial Role of Managerial Accounting in a Dynamic Business Environment

“Accounting was always
an analytical profession
[but] the kinds of numbers
you’re analyzing has
changed from strict debits
and credits to analyzing
your processes.” (1e)
Koch Industries
The activities that make an enterprise successful today may no longer be sufficient next year.
A crucial role of managerial accounting is to continually assess how an organization stacks
up against the competition, with an eye toward continuously improving. Among the ques-
tions asked in assessing an organization’s competitive position are the following:

ģ
How well is the organization doing in its internal operations and business processes?

ģ
How well is the organization doing in the eyes of its customers? Are their needs
being served as well as possible?

ģ
How well is the organization doing from the standpoint of innovation, learning,
and continuously improving operations? Is the organization a trendsetter that
embraces new products, new services, and new technology? Or is it falling behind?

ģ
How well is the organization doing financially? Is the enterprise viable as a con-
tinuing entity?

The Balanced Scorecard

One example of a managerial accounting tool that is used to assess competitive position
and ensure long-run competitiveness is a management framework called the balanced
scorecard.9 Depicted in Exhibit 1–1 for The Walt Disney Company, the balanced score-
card is a model of business performance evaluation that includes several types of finan-
cial and nonfinancial performance measures.
If an organization is to remain viable in a changing and ever more competitive busi-
ness environment, its managers need to continually ask the questions emphasized in the
balanced scorecard. The Walt Disney Company is no exception.

How does The Walt Financial Perspective

Disney Company
look to its shareholders? Goals Measures

What do customers think of the In which activities

entertainment services provided by must The Walt Disney
The Walt Disney Company? Company excel?

Customer Perspective Internal Business Process Perspective

Goals Measures Goals Measures

Learning and Growth Perspective

Exhibit 1–1 Goals Measures

Balanced Scorecard Measure-
ment Categories Applied How can The Walt Disney Company
to The Walt Disney Company continually improve and create value?

9
The balanced scorecard concept was developed by Robert S. Kaplan and David P. Norton. See Robert S. Kaplan
and David P. Norton, The Strategy-Focused Organization: How Balanced Scorecard Companies Thrive in the New
Business Environment (Boston: Harvard Business School Press, 2001).
 Chapter 1 The Crucial Role of Managerial Accounting in a Dynamic Business Environment 11

ģ
Disney’s management team must be concerned with the quality of the company’s
business processes as well as its entertainment services.

ģ
Management must continually monitor the needs of its customers and assess
their level of satisfaction with the services provided.

ģ
The company’s overall financial strength also must be prominent in manage-
ment’s thinking.

ģ
Management must ask if the company possesses the skills it needs to continually
adapt as the entertainment industry changes.
The balanced scorecard is an important managerial accounting concept. We will pro-
vide an extensive discussion of the balanced scorecard in Chapter 12.

Managerial Accounting in Different Types of Organizations

Organizations need information the way humans need food: without this basic fuel,
they cannot sustain the activities that make them vital. This is true whether they are “[A CFO should] be a
profit-seeking or nonprofit enterprises and regardless of the activities they pursue. As strategic partner to the
a result, managerial accounting information is vital in all types of organizations. Ford chief executive officer
(manufacturing), J.Crew (retail), GoDaddy.com (Internet), American Airlines (transpor- and the business. . . . For
tation), Marriott Hotels (tourism), Goldman Sachs (financial services), The University CFOs of high-growth
of Texas (education), The American Red Cross (nonprofit), M. D. Anderson Cancer tech companies, the key
Center (health care), and the U.S. Department of Defense (government) all have manage- is managing growth and
rial accountants who provide information to management. Moreover, the five basic pur- balancing growth and
poses of managerial accounting activity are relevant in each of these organizations, and profitability.” (1f)
all managers in those companies and industries are using managerial accounting tools. Trulia Inc.

Managerial versus Financial Accounting

Take another look at the major objectives of managerial accounting activity. Notice
Learning Objective 1-4
that the focus in each of these objectives is on managers. Thus, the focus of managerial
accounting is on the needs of managers within the organization, rather than interested Explain the major differences
parties outside the organization. between managerial and
Financial accounting, by contrast, is the use of accounting information for report- financial accounting.
ing to parties outside the organization. The annual report distributed by McDonald’s
Corporation or Facebook to its stockholders is an example of the output from a financial
accounting system. Users of financial accounting information include current and pro-
spective stockholders, lenders, investment analysts, unions, consumer groups, and gov-
ernment agencies.
There are many similarities between managerial accounting information and
financial accounting information because they both draw upon data from an organiza-
tion’s core accounting system. This is the system of procedures, personnel, and com-
puters used to accumulate and store financial data in the organization. One part of
the overall accounting system is the cost accounting system, which accumulates data
about the costs of producing the company’s outputs (goods and services). These data
are used in both managerial and financial accounting. For example, production cost
data typically are used in helping managers evaluate the pricing of different products
or services, which is a managerial accounting use. However, production cost data also
are used to value inventory on a manufacturer’s balance sheet, which is a financial
accounting use.
Exhibit 1–2 depicts the relationships among an organization’s core accounting sys-
tem, its cost accounting system, and uses of the data for managerial accounting and
financial accounting purposes. Although similarities do exist between managerial
and financial accounting, the differences are even greater. Exhibit 1–3 lists the most
important differences.
12 Chapter 1 The Crucial Role of Managerial Accounting in a Dynamic Business Environment

Exhibit 1–2 Accounting System

Managerial Accounting, (one part of the organization’s management information system)
Financial Accounting, and
Cost Accounting Accumulates data for use in both financial and managerial accounting

Cost Accounting System

(one part of the organization’s overall accounting system)

Accumulates cost information

Managerial Accounting Financial Accounting

Information for decision making, Published financial statements and
planning, directing, and controlling other financial reports
an organization’s operations, and
assessing its competitive position

Internal Users of Information External Users of Information

Managers at all levels in the Stockholders, financial analysts,
organization lenders, unions, consumer groups,
and governmental agencies
©Fredo de Luna/Purestock/Superstock ©Alfredo Garcia Saz/Shutterstock

Exhibit 1–3
Differences between Managerial Accounting Financial Accounting
Managerial and Financial
Accounting Users of Information Managers, within the organization. Interested parties, outside the organization.

Regulation Not required and unregulated, since it is
intended only for management.
Required and must conform to generally
accepted accounting principles. Regulators
include the International Accounting Standards
Board, the Financial Accounting Standards
Board (U.S.), and the U.S. Securities and
Exchange Commission.

Source of Data The organization’s core accounting system, Almost exclusively drawn from the organi-
plus various other sources, provide financial zation’s core accounting system, which accu-
data as well as nonfinancial data such as mulates financial information.
product defect rates, quantities of material
and labor used in production, occupancy
rates in hotels, and average take-off delays
in airlines.

Nature of Reports Reports often focus on subunits within the
and Procedures organization, such as departments, divisions,
geographical regions, or product lines.
Based on a combination of historical data,
estimates, and projections of future events.
Published reports focus on the enterprise in
its entirety. Generally consolidated from the
reports of geographic or business segment
divisions, and based almost exclusively on
historical transaction data.
Another random document with
no related content on Scribd:
 So far as the land extended, bird life prevailed; the species being
the snowy owl, the snow-bunting, and the ptarmigan. Full collections
were made of all the birds frequenting Smith Sound; and our
naturalists had the satisfaction of discovering the long-sought-for
breeding-haunts of the knott and sanderling.[13]
Few species of marine fish were obtained, but “an interesting
small salmonoid” was met with in fresh-water lakes as far north as
lat. 82° 35’. A fine collection of marine invertebrates was secured by
dredging and trawling; and the character of the sea-bottom from
Baffin Bay up to lat. 83° 19’ N. was accurately ascertained by a
series of careful soundings.
In the department of botany our naturalists were rewarded by the
discovery of between twenty and thirty species of phanerogamic
plants between the parallels of 82° and 83°. Much richer and more
varied results were obtained in the cryptogamic flora.
Geologically, the facts arrived at were of the utmost value. “The
whole west coast of Smith Sound, from Cape Isabella to Cape
Union, has been fully surveyed and mapped, and large collections
have been made both of fossils and rock-specimens; while the
sledge-parties which explored the shore of the Polar Basin, both to
east and west, brought back sufficient material to determine the
geological character of the country. Silurian limestones, richly
fossiliferous, were the prevailing rocks along Smith Sound. Miocene
deposits, including a twenty-foot seam of coal, were found as far
north as lat. 81° 44’. From the shales and sandstones of this
formation a beautiful series of leaf-impressions were collected,
illustrating the characteristic flora of the epoch, and presenting a
remarkable demonstration of the existence of a temperate climate
within five hundred miles of the present Pole at a comparatively
recent geological time. Not less important are the indications of great
recent changes in the elevation of the land afforded by the discovery
of thick post-pliocene deposits, lying at a considerable elevation
above the sea-level, and containing fossils similar to the existing
marine fauna. Lastly, very interesting and suggestive observations
have been made on glaciation and ice-action in general.”
 This, of course, is but a summary, and a very brief and
condensed one, of researches which have evidently been of the
highest importance. And it might almost be said of the late
expedition, that even had its geographical discoveries been less
valuable, its scientific results would have entitled it to a foremost
place in the annals of Arctic Enterprise.

Our record of Arctic expeditions will fitly close with a sketch of the
cruise of the Pandora, a screw-yacht commanded by Captain Allen
Young, which left England in the summer of 1876, in order to open
up communications with the Admiralty expedition.
 CHART
SHOWING THE DISCOVERIES
OF THE
BRITISH POLAR EXPEDITION
1875–76.
[From Map accompanying Official Report published in “Nature.”]
Captain Young left Upernavik on the evening of the 19th of July,
and stood away to the northward—in bad weather, and with the wind
blowing a gale. Through vast fields of ice he threaded his way,
sometimes under sail, sometimes under steam, until, on the morning
of the 24th, he found his ship completely surrounded, in lat. 75° 10’
N.
No time was lost in endeavouring to effect an escape by charging
the ice at full speed,—again and again returning to the onset; and a
slow but steady progress was being made, when the field in which
they were held fast, drifting before the gale, “collided” with a group of
grounded bergs, and exposed the little vessel to such severe
pressure, that preparations were made for abandoning her.
Provisions, ammunition, camping and travelling gear, all were made
ready, and the boats were lowered as far as possible at the davits.
Meantime, heavy charges of gunpowder were used to blast the ice
where it pressed the ship most severely; and the bergs taking a
different direction, the Pandora began to recover herself, and before
night settled down nearly to her usual level. In the darkness of the
night, with the wind howling, and the snow and sleet driving in heavy
showers, she moved ahead with the pack; and in this way continued
her progress until the 27th, when the weather cleared, and Captain
Young discovered that he had advanced right into the heart of
Melville Bay, with no water in sight. Full in view were Capes Walker
and Melville, the Peaked Hill, and huge glacier-streams embedded in
the intervening valleys. All around was one vast monotonous sheet
of rugged ice. It was not until the 29th that the Pandora, after many
hairbreadth escapes, got into open water, in lat. 75° 50’ N., and long.
64° 55’ W. While thus imprisoned in the grasp of the floe, the
explorers killed only one Polar bear, four seals, and a few little auks.
In a clear sea they now stood away to the westward, passing
Capes Dudley, Digges, and Athol, and other headlands familiar in
the records of Arctic adventure. At noon on the 31st, when off
Wolstenholm Island, another gale overtook them, increasing rapidly
to almost hurricane fury. This was an unpleasant experience; for the
deck was washed by heavy seas, and it was with the greatest
difficulty they avoided coming into collision with the icebergs which
drifted rapidly through the snow and spray.
Reaching Cary Island, they landed to examine Captain Nares’
depôt of provisions, and found it in good preservation. The cairn had
not been visited since Young’s call at the island on the 10th of
September in the previous year. Afterwards they made for
Sutherland Island, where they found a record of the American
explorer, Captain Hartstene, dated August 16, 1855. It is with a
curious feeling that, in these regions of almost perpetual winter, the
voyager comes upon such faint memorials of men who, like him,
have dared all the perils of ice-floes and icebergs, and adventured
into seas far beyond the track of ordinary commercial enterprise.
On Littleton Island, a record of the expedition was found. The
document was dated July 28, 1875, and signed by Captain Nares;
and it indicated the course about to be taken by the ships under his
orders. Owing to the ice-encumbered condition of the straits,
however, Captain Young could not follow it up; and instead of
crossing to Cape Isabella, he resolved to examine the coast in
Hartstene Bay, in order to seek a harbour for the relief-ship which the
Admiralty had intended to send out in 1877, in case of the non-return
of the Polar Expedition. This was found on the 4th of August, not far
from the Eskimo settlement of Etah, and named after the Pandora. It
would seem to offer every advantage as winter quarters for Arctic
discovery-ships; the surrounding hills are “dotted with Arctic hares,
appearing like snow-balls on the luxurious vegetation.” The little auk
breeds in thousands on the cliffs, eider fowl and guillemots haunt the
waters, and the adjacent valleys and pastures are frequented by
reindeer.
Captain Young next made for Cape Isabella, which he reached
on the 6th of August. Watchful eyes soon discovered a large cairn on
the summit of this headland. A boat was lowered, and the contents
of the cairn soon obtained, while despatches and letters for Captain
Nares’ expedition were left in their stead. Then the Pandora steamed
to the northward; but, owing to the adverse winds and the
accumulated ice, could make no way, and was forced back to Cape
Isabella. Another attempt was made to the eastward, and for several
days the gallant little ship crossed and recrossed the straits, through
the pack, always beset with ice, and frequently enshrouded in
impenetrable fogs. No fewer than three times was she compelled to
take shelter in Pandora Harbour. On the 19th she was driven back to
the northward of Littleton Island, and Captain Young and some of his
officers took the opportunity of visiting the Polaris camp. Nothing
remained of the house erected by Captain Buddington except a few
broken boards. The rocks were strewn with pieces of metal,
fragments of clothing, and other waifs and strays. The cache in
which the retreating party had deposited their books and instruments
was also examined; but the only relics were a brass bowl of a seven-
inch compass, a tin tube, and parts of a telescope. Some cases and
casks, containing records for the use of Captain Nares, were
securely placed among the rocks on the western point of the island;
and Captain Young then returned to Cape Isabella.
Finding nothing here of any interest, and convinced that no
travelling or boat party had reached that position from the Polar
ships, the Pandora bore away to the northward under canvas. “It was
very dark and thick,” says Captain Young, “but sufficiently clear to
enable us to avoid the heavy ice. By nine a.m. we were up to
Lecomte Island, when we were stopped by a fog until eleven o’clock,
when I could see from aloft that the main pack extended across the
straits into Rosse Bay. We were in a lake of land water, with close-
packed and heavy ice all round, from south to north, and again
closing on the land from the eastward. Our only chance of moving
seemed to be through a narrow lead or slack place, running first to
the east-north-east, and then again apparently towards the east
coast. We entered the pack, and succeeded by five p.m. in again
escaping into the land water in Hartstene Bay.” Such are the
experiences of twelve hours in the ice-clogged waters of the North!
But we need not delay the reader with these minute particulars,
notwithstanding their interest as illustrative of the nature of the
struggle waged with so much persistency of purpose by the Arctic
explorer. The sea was now covered everywhere with ice and bergs.
Storms were of frequent occurrence; and the wind and wave beaten
Pandora was forced back into Baffin Bay.
Here, on the 28th of August, her captain could see that the solid
ice had filled the straits and the head of the bay right across to Cape
Alexander. The way north being thus obstructed, Captain Young
resolved on proceeding towards Upernavik, in North Greenland,
hoping to find that the last ship had not already sailed for Denmark,
and in that case to send an officer home with despatches, while the
Pandora returned to Smith Strait.
On the 29th she was off Hakluyt Island, and steered for Bardin
Bay in Whale Sound. On entering the bay, a summer tent could be
seen, and some Eskimos, with their dogs, running to and fro,
evidently with the view of attracting the attention of the visitors.
Captain Young accordingly landed, with some of his officers, and
accompanied by Christian, his Eskimo interpreter. The natives met
them with the utmost confidence and fearlessness, assisting to haul
their boat up on the shore. They were ten in number, and all
members of one family. Food appeared to be plentiful with them, but
they were profuse in their thanks for some walrus-flesh given by
Captain Young. Their manners were frank and communicative, and
they showed considerable vivacity, rejoicing over the results of a
very good hunting season. Neither European ships nor white men
had they seen for years; but they said that an old man, who, with his
family, inhabited Northumberland Island, told of two ships which had
passed to the northward “last summer.” How lonely must be the life
led by these poor savages! Never gladdened by the sight of a sail;
but, year after year, shut up in their frozen solitudes, and without any
other object or purpose before them than to obtain just enough food
to avoid a premature and miserable death!
Among their treasures Captain Young observed a ship’s bucket,
half the top of a mahogany table, the paddle of a Greenlander’s
kayack, much ice-worn, and a piece of packing-case marked “Lime
juice—Leith;” all of which, they said, had drifted into the bay at
different times from the southward. These people seemed to Captain
Young of a kind and simple disposition, while they were evidently
robust and healthy. All that they had—and it was little enough—they
freely pressed upon their visitor; and when asked what present they
would like, their chief selected only some gimlets and a fifteen-foot
ash oar. The latter, he said, would split up into spear-shafts; the
former he wanted for boring bone and ivory. Captain Young,
however, gave them several other useful articles; accepting in return
some narwhal horns, specimens of their pot-stone cooking-kettles,
and of the iron pyrites which they used for striking fire. An exchange
of dogs also took place; five of the dogs belonging to the Pandora
being given for three of the finest bear-hunting and tame dogs of the
Eskimos.
At Upernavik, the Pandora, after a stormy and dangerous
passage, arrived on the evening of September the 7th, but found that
the last ship had sailed for Europe. As there were no means,
therefore, of communicating with England, and as, without such
communication, Captain Young did not feel authorized to winter in
the North, a supply of fresh water wars taken on board, and the ship
steered for home. From the 15th to the 21st she tarried at
Goodhav’n, in Disco Island. In Davis Strait she encountered large
quantities of heavy Spitzbergen drift-ice, and weathered a severe
south-easterly gale. On the 16th of October, in lat. 54° 38’ N., and
long. 44° 30’ W., she sighted the Arctic ships, Alert and Discovery,
and hastened to communicate with them. They kept together until
the 19th. On the following day, the Pandora was buffeted by another
hurricane; but the rest of her voyage was accomplished in safety,
and was marked by no incidents of importance.
Here, for the present, terminates the record of British enterprise
and adventure in the Arctic World. It is difficult to believe, however,
that the nation will rest until the “heart of the mystery has been
plucked out,” the Secret finally mastered, and the British flag hoisted
on that remote point which is conventionally known as the North
Pole.
 INDEX.

Agaricus muscarius, 139.

Agassiz, experiments of, 116.
Alectoria jubata, 137.
Aletsch glacier, the, described, 47.
Algol, or Medusa’s Head, 39.
Arctic Highlanders, 12.
Arctic night, the, characteristics of, 32–34, 93–95.
Arctic region, extent of, 13, 14.
Atmospheric phenomena, 31.
Auk, the, described, 97, 98.
Aurora Borealis, the, phenomena of, 27;
theory of, 29.

Baffin, discoveries of, 227.

Barents, adventures of, 266–269.
Barrens, the, region of, described, 16.
Bear, Polar, natural history of the, 85–93;
hunting seals, 86;
voracity of, 88;
affection for its young, 88, 89.
Beechey, Captain, quoted, 45, 46, 55.
Bell, quoted, 78.
Bellot, Lieutenant, quoted, 123.
Bennet, Stephen, voyage of, 228.
Berkeley, quoted, 140.
Birds, migrations of, 11.
Boötes, constellation of, 40.
Bremer, Frederika, quoted, 138.
Brewster’s, Sir David, experiment with polarised light, 111.
Buddington, Captain, adventures of, 308–311.
Burrough, Stephen, voyage of, 222, 223.
Button, Captain, voyage of, 227.
Bylot, Robert, voyage of, 227.

Carlsen, Captain, voyage of, 270.

Cladonia rangiferina, 137.
Clarke, Dr., quoted, 203.
Clavering, Captain, referred to, 12.
Cochlearia, or scurvy-grass, uses of, 139.
Coleridge, quoted, 69.
Constellations, northern, list of, 37.
Cooley, Mr., quoted, 230.
Corvidæ, the, natural history of, 160.
Cryptogamous plants of the north, 141, 142.
Crystallization, process of, 108.
Cygnus musicus, 161.

D’Almeida, Count, quoted, 205, 206.

Davis, Captain John, voyages of, 224, 225.
Dolphins, the, natural history of, 82, 83.
Dorothea, the, narrow escape of, 55.
Dufferin, Lord, quoted, 166, 167, 172.

Eider ducks, the, natural history of, 103;

in Iceland, 104.
Eskimo dog, the, description of, 190.
Eskimo, the, hunting the walrus, 68, 69;
hut of, 76.
Eskimo kayak described, 182.
Eskimo seal-hunt, an, described, 77, 78.
Eskimo sledge, the, described, 192–196.
Eskimos, the, boundaries of, 175;
character, manners, customs, and clothing, 179–196.

Falcon, the, natural history of, 160.

Faraday, ingenious experiment of, 111.
Felinska, Madame, quoted, 211.
Fish in the Arctic seas, 106.
Flora of the Arctic lands, 19.
Fox, Luke, voyage of, 228.
Fox, the Arctic, natural history of, 151–153.
Fox-trap, a, described, 152.
Franklin, Sir J., overland journey of, 231;
last expedition of, 231;
relics of, discovered, 233, 235, 236.
Fritillaria sarrana, the, properties of, 142, 143.
Frobisher, Sir Martin, voyage of, 223.
Frobisher Strait discovered, 223.

Gale, an Arctic, described, 70.

Gârds of Lapland, described, 207.
Germania, the, expedition of, 245–265.
Geysers, the, phenomena of, 165–167.
Gilbert, Sir Humphrey, death of, 224.
Glacier-ice, peculiarities of, 112.
Glacier in Smith Strait, 124, 127;
of Sermiatsialik, 128, 129.
Glaciers, characteristics of, 47;
motion of, 113–115;
phenomena connected with, 115–118;
of the Arctic regions, 118–133;
of Spitzbergen, 120, 123.
Godhav’n, 167.
Grampus, the, natural history of, 83, 84.
Greenland, scenery on the coast of, 22.
Guillemot, the, described, 96, 97.
Gull, the, described, 103.

Hall, Captain, expedition and death of, 271, 272.

Hansa, the, voyage and loss of, 245–251.
Hans the Hunter, 186–189, 284.
Hare, the Arctic, 154.
Hartwig, Dr., quoted, 15.
Hayes, Dr., quoted, 25, 35, 43, 49, 50, 59, 87, 95, 96, 124, 125,
127, 128, 138, 152, 153, 186, 191, 192, 244;
Arctic expedition of, 244, 245.
Hearne, quoted, 183.
Hecla, the, and the Fury, danger of, 56.
Hegemann, Captain, 245.
Hekla, eruption of, 164.
Henderson, Dr., quoted, 172.
Hill, Mr., quoted, 213, 214.
Hobson, Lieutenant, discovers Franklin relics, 234–236.
Holland, Mr., quoted, 173.
Hore, Mr., voyage of, 222.
Hudson, Henry, discoveries of, 225–228.
Humboldt Glacier, description of, 131–134, 238.
Hutchinson, Captain, quoted, 205.

Icebergs, their dimensions, 41;

their magnificent appearance, 42, 43;
danger to navigation from, 44, 123;
breaking up of, 49;
range of, 50, 51;
in Baffin Bay, 124.
Ice-fields, extent and character of, 54, 56, 57.
Ice-flowers, characteristics of, 108.
Iceland, dimensions of, 162;
history of, 162;
volcanoes of, 163;
dreary landscapes of, 164;
geysers of, 166, 167;
houses and churches of, 170;
travelling in, 172;
horses of, 173.
Iceland moss, uses of, 138, 139.

Jacobshav’n, 168.
Jakut merchants, the, enterprise of, 217.
Jakuts, the, as bear-hunters, 212;
manners and customs of, 216, 217.
James, Captain Thomas, voyage of, 228.
Joe the Eskimo, with Captain Tyson, 278, et sqq.

Kamtschatka, fisheries of, 212;

the dog of, 214, 215.
Kamtschatkans, the, characteristics of, 213, 214.
Kane, Dr., quoted, 15, 32, 33, 34, 42, 68, 73, 74, 88, 91, 92,
131–134, 149, 153, 184, 185, 237, 239, 242, 243;
Arctic explorations of, 237–244.
Knots, the, habits of, 11, 12.
Koldewey, Captain, referred to, 12;
voyage of, 245.

Lagopus, the, 161.

Lamont, Mr., quoted, 60, 62.
Lapland, divisions and extent of, 197;
climate of, 197;
inhabitants of, 197;
the reindeer in, 200;
sledging in, 201;
an interior in, 204, 205.
Lapp dialect, the, 206.
Lapp hunters, the, boldness of, 202.
Lapps, the, dress, manners, and customs of, 198.
Lapps, the Mountain, character of, 199, 200.
Lapps of West Bothnia, 206, 207.
Laube, Dr., quoted, 252.
Lemming, the Arctic, 154.

Macmillan, Dr., quoted, 135, 136, 137, 141.

Markham, C., quoted, 10, 175, 225, 226, 273.
Marten, the, 155.
Martins, M. Charles, quoted, 119, 120, 121.
M’Clintock, Captain Sir Roderick, quoted, 148, 151, 181, 265;
voyage of, 234.
M’Clure, Sir Robert, quoted, 81;
discovers North-West Passage, 233.
Mecham, Captain, quoted, 146, 150.
Mer de Glace of Greenland, 127, 128.
Merganser, the natural history of, 99.
Milton, Lord, and Dr. Cheadle, quoted, 158–160.
Moonlight in the Polar World, 26.
Moraines, described, 115.
Moravian mission-stations in Greenland, 179.
Mosses in the Arctic regions, 139.
Musk-ox, the, natural history of, 149, 150.
Mustelidæ family, the, in the Arctic regions, 155.

Nares, Captain, expedition of, 314, et sqq.

Narwhal, the, natural history of, 82.
Newfoundland colonized, 224.
North-West Passage, utility of, 9.
Novaia Zemlaia, temperature of, 21.

Osborn, Admiral Sherard, quoted, 44, 81, 84, 85, 87, 146, 151,
232, 236, 237.
Ostiaks, the, manners and customs of, 211, 212.
Ostrownoje, trade at, 220.
Oxyria, the, uses of, 141.

Pack-ice, description of, 53.

Parry, Captain, quoted, 44, 46, 56, 230;
voyages of, 228, 229, 230.
Payer, Lieutenant, voyage of, 270, 271.
Penny, Captain, voyage of, 232–234.
Phænogamous plants of the north, 141.
Phocidæ, the.—See Seal.
Plant-life of Spitzbergen, 142;
of Kamtschatka, 142, 143.
Pleiads, the, 39.
Polaris, the, voyage of, 271–313.
Polecat, the, in the Arctic regions, 156, 157.
Pole-Star, the, position of, 36.
Poole, Jonas, voyage of, 228.
Puffin, the, natural history of, 99.

Quenes, or Finns, the, 206.

Rae, Dr., finds relics of Franklin, 233.

Red snow, phenomenon of, explained, 135.
Refraction, phenomena of, 31.
Regelation, what it is, 111.
Reikiavik, description of, 168, 169.
Reindeer, the, natural history of, 144;
usefulness of, 145;
food of, 146;
and wolves, 147;
in Siberia, 218, 219.
Reindeer moss, 137.
Rendu, Bishop, quoted, 114.
Richardson, Sir J., quoted, 145.
Rock-hair, 137.
Rorqual, the, 80.
Ross, Sir James, quoted, 145.
Ross, Sir John, voyages of, 228, 231.

Sabine, Sir Edward, quoted, 10.

Sable, the, natural history of, 156.
Samojedes, the, superstitions of, 208, 209;
manners and customs of, 210, 211.
Schaïtan, an Ostiak idol, 211.
Scoresby, Dr., quoted, 44, 106, 186.
Seal, the, natural history of, 71–73;
flesh of, 73, 74;
different genera of, 75.
Sermiatsialik, glacier of, 127, 128.
Shepherd, Mr., quoted, 104.
Skaptá Jokul, eruption of, 165.
Smew, the, natural history of, 100.
Smith Sound, route by, 228.
Snow, formation of, 108.
Snow-crystals, described, 109.
Snow-line, limit of, 20.
Somerville, Mrs., quoted, 30, 107.
Southey, quoted, 136.
Sporidesmium lepraria, 140.
Spring in the Arctic regions, 34.
Starakis, the, described, 98.
Stephenson, Captain, of the Discovery, 314.
Summer in the Arctic regions, 36.
Swan, the wild, natural history of, 105;
the whistling, 161.

Tadebtsios, or Samojede demons, 209.

Tadibe, the Samojede priest, 209.
Tchuktche, the, manners and customs of, 220.
Temperature of Arctic winter, 33.
Tennyson, quoted, 105.
Thingvalla, the, in Iceland, 168.
Thorne, Dr. Robert, Arctic exploration proposed by, 222.
Tripe de roche, 137, 138.
Tundras, the stony, described, 15, 16.
Tungusi, the, characteristics of, 219, 220.
Tyndall, Professor, quoted, 47, 48, 108, 109–111, 112, 113, 115,
117, 118.
Tyson, Captain, narrative of, 278–308.

Unknown Region, extent of, 10.

Upernavik, described, 176.
Ursa Major, constellation of, 36;
description of, 37, 38.

Waigatz, island of, 208.

Walrus, the, natural history of, 63;
courage of, 64;
gradual decay of, 67.
Walrus-hunt, a, described, 68, 69.
Walrus-hunting, how carried on, 60;
proceeds of, 62.
Ware, quoted, 37, 38.
Whale, the, natural history of, 78;
characteristics of the Greenland, 79, 80;
the Razor-backed, 80.
Whalebone, what it is, described, 79.
Whale-fishery of the Eskimos, 81.
Whirlwinds of the north, 31.
Willoughby, Sir Hugh, loss of, 222.
Wolf, the Arctic, natural history of, 148.
Wolverine, the, cunning of, 157;
anecdotes of, 158–160.
Wooded zone of the Arctic regions, 143.
Wrangel, Admiral von, quoted, 20, 81, 218, 221.

Yakutsk, temperature of, 26.

Young, Captain, cruise of, in the Pandora, 334.
 FOOTNOTES:
[1] The Tringa canutus of ornithologists.
[2] Abies alba et nigra.
[3] Larix Canadensis.
[4] Pinus Banksiana.
[5] Abies Sibirica, Larix Sibirica.
[6] Tyndall, “Forms of Water,” p. 137.
[7] The name given to a plain of ice near Mont Blanc.
[8] Scoresby calculated that it would require 80,000 persons,
labouring continuously from the creation of man to the present
day, to count the number of organisms contained in two miles of
the green water.
[9] So called from its circular form, and because the surface of
the leaf is marked with curved lines.
[10] A more moderate estimate says 1300 persons.
[11] The Academy, November 4, 1876, p. 453.
[12] “Here let the billows stiffen and have rest.”—Coleridge.
[13] The scarcity of animal life in the remote North is shown by
the small quantity of game shot by the sportsmen of the
expedition after reaching winter quarters:—six musk-oxen, twenty
hares, seventy geese, twenty-six ducks, ten ptarmigan, and three
foxes.

Transcriber’s Notes:

1. Obvious printers’, punctuation and spelling errors have been corrected

silently.

2. Where hyphenation is in doubt, it has been retained as in the original.

3. Some hyphenated and non-hyphenated versions of the same words have

been retained as in the original.

4. Where appropriate, the original spelling has been retained.

*** END OF THE PROJECT GUTENBERG EBOOK THE ARCTIC
WORLD ***

Updated editions will replace the previous one—the old editions

will be renamed.

Creating the works from print editions not protected by U.S.

copyright law means that no one owns a United States copyright
in these works, so the Foundation (and you!) can copy and
distribute it in the United States without permission and without
paying copyright royalties. Special rules, set forth in the General
Terms of Use part of this license, apply to copying and
distributing Project Gutenberg™ electronic works to protect the
PROJECT GUTENBERG™ concept and trademark. Project
Gutenberg is a registered trademark, and may not be used if
you charge for an eBook, except by following the terms of the
trademark license, including paying royalties for use of the
Project Gutenberg trademark. If you do not charge anything for
copies of this eBook, complying with the trademark license is
very easy. You may use this eBook for nearly any purpose such
as creation of derivative works, reports, performances and
research. Project Gutenberg eBooks may be modified and
printed and given away—you may do practically ANYTHING in
the United States with eBooks not protected by U.S. copyright
law. Redistribution is subject to the trademark license, especially
commercial redistribution.

START: FULL LICENSE

Another random document with
no related content on Scribd:
The Project Gutenberg eBook of Mathematical
Problems
This ebook is for the use of anyone anywhere in the United States
and most other parts of the world at no cost and with almost no
restrictions whatsoever. You may copy it, give it away or re-use it
under the terms of the Project Gutenberg License included with this
ebook or online at www.gutenberg.org. If you are not located in the
United States, you will have to check the laws of the country where
you are located before using this eBook.

Title: Mathematical Problems

Lecture delivered before the International Congress of
Mathematicians at Paris in 1900

Author: David Hilbert

Translator: Mary Frances Winston Newson

Release date: September 15, 2023 [eBook #71655]

Language: English

Original publication: Lancaster & New York: The Macmillan

Company, 1902

Credits: Laura Natal Rodrigues (Images generously made available

by The Internet Archive.)

*** START OF THE PROJECT GUTENBERG EBOOK

MATHEMATICAL PROBLEMS ***
 BULLETIN OF THE
AMERICAN
MATHEMATICAL SOCIETY

CONTINUATION OF THE BULLETIN OF THE NEW YORK

MATHEMATICAL SOCIETY.

A HISTORICAL AND CRITICAL REVIEW

OF MATHEMATICAL SCIENCE

EDITED BY F.N. COLE, ALEXANDER ZIWET, F. MORLEY,

E.O. LOVETT, C.L. BOUTON,
D.E. SMITH.

VOL. VIII.

OCTOBER 1901 TO JULY 1902.

published for the society

BY
THE MACMILLAN COMPANY,
lancaster, pa., and new york,
1902.

MATHEMATICAL PROBLEMS
 LECTURE DELIVERED BEFORE THE INTERNATIONAL
CONGRESS OF MATHEMATICIANS AT PARIS IN 1900.

BY PROFESSOR DAVID HILBERT.

 CONTENTS
PROBLEM PAGE
1. CANTOR'S PROBLEM OF THE CARDINAL
10
NUMBER OF THE CONTINUUM.
2. THE COMPATIBILITY OF THE ARITHMETICAL
11
AXIOMS.
3. THE EQUALITY OF THE VOLUMES OF TWO
TETRAHEDRA OF EQUAL BASES AND 13
EQUAL ALTITUDES.
4. PROBLEM OF THE STRAIGHT LINE AS THE
SHORTEST DISTANCE BETWEEN TWO 13
POINTS.
5. LIE'S CONCEPT OF A CONTINUOUS GROUP
OF TRANSFORMATIONS WITHOUT THE
15
ASSUMPTION OF THE DIFFERENTIABILITY
OF THE FUNCTIONS DEFINING THE GROUP.
6. MATHEMATICAL TREATMENT OF THE AXIOMS
18
OF PHYSICS.
7. IRRATIONALITY AND TRANSCENDENCE OF
19
CERTAIN NUMBERS.
8. PROBLEMS OF PRIME NUMBERS. 20
9. PROOF OF THE MOST GENERAL LAW OF
21
RECIPROCITY IN ANY NUMBER FIELD.
10. DETERMINATION OF THE SOLVABILITY OF A
22
DIOPHANTINE EQUATION.
11. QUADRATIC FORMS WITH ANY ALGEBRAIC
22
NUMERICAL COEFFICIENTS.
12. EXTENSION OF KRONECKER'S THEOREM ON 22
ABELIAN FIELDS TO ANY ALGEBRAIC
REALM OF RATIONALITY.
13. IMPOSSIBILITY OF THE SOLUTION OF THE
GENERAL EQUATION OF THE 7TH DEGREE
25
BY MEANS OF FUNCTIONS OF ONLY TWO
ARGUMENTS.
14. PROOF OF THE FINITENESS OF CERTAIN
26
COMPLETE SYSTEMS OF FUNCTIONS.
15. RIGOROUS FOUNDATION OF SCHUBERT'S
28
ENUMERATIVE CALCULUS.
16. PROBLEM OF THE TOPOLOGY OF
28
ALGEBRAIC CURVES AND SURFACES.
17. EXPRESSION OF DEFINITE FORMS BY
29
SQUARES.
18. BUILDING UP OF SPACE FROM CONGRUENT
30
POLYHEDRA.
19. ARE THE SOLUTIONS OF REGULAR
PROBLEMS IN THE CALCULUS OF
32
VARIATIONS ALWAYS NECESSARILY
ANALYTIC?
20. THE GENERAL PROBLEM OF BOUNDARY
34
VALUES.
21. PROOF OF THE EXISTENCE OF LINEAR
DIFFERENTIAL EQUATIONS HAVING A 34
PRESCRIBED MONODROMIC GROUP.
22. UNIFORMIZATIOM OF ANALYTIC RELATION'S
35
BY MEANS OF AUTOMORPHIC FUNCTIONS.
23. FURTHER DEVELOPMENT OF THE METHODS
36
OF THE CALCULUS OF VARIATIONS.
 MATHEMATICAL PROBLEMS[1]

Who of us would not be glad to lift the veil behind which the
future lies hidden; to cast a glance at the next advances of our
science and at the secrets of its development during future
centuries? What particular goals will there be toward which the
leading mathematical spirits of coming generations will strive? What
new methods and new facts in the wide and rich field of
mathematical thought will the new centuries disclose?
History teaches the continuity of the development of science.
We know that every age has its own problems, which the following
age either solves or casts aside as profitless and replaces by new
ones. If we would obtain an idea of the probable development of
mathematical knowledge in the immediate future, we must let the
unsettled questions pass before our minds and look over the
problems which the science of to-day sets and whose solution we
expect from the future. To such a review of problems the present
day, lying at the meeting of the centuries, seems to me well adapted.
For the close of a great epoch not only invites us to look back into
the past but also directs our thoughts to the unknown future.
The deep significance of certain problems for the advance of
mathematical science in general and the important rôle which they
play in the work of the individual investigator are not to be denied. As
long as a branch of science offers an abundance of problems, so
long is it alive; a lack of problems foreshadows extinction or the
cessation of independent development. Just as every human
undertaking pursues certain objects, so also mathematical research
requires its problems. It is by the solution of problems that the
investigator tests the temper of his steel; he finds new methods and
new outlooks, and gains a wider and freer horizon.
It is difficult and often impossible to judge the value of a problem
correctly in advance; for the final award depends upon the gain
which science obtains from the problem. Nevertheless we can ask
whether there are general criteria which mark a good mathematical
problem. An old French mathematician said: "A mathematical theory
is not to be considered complete until you have made it so clear that
you can explain it to the first man whom you meet on the street."
This clearness and ease of comprehension, here insisted on for a
mathematical theory, I should still more demand for a mathematical
problem if it is to be perfect; for what is clear and easily
comprehended attracts, the complicated repels us.
Moreover a mathematical problem should be difficult in order to
entice us, yet not completely inaccessible, lest it mock at our efforts.
It should be to us a guide post on the mazy paths to hidden truths,
and ultimately a reminder of our pleasure in the successful solution.
The mathematicians of past centuries were accustomed to
devote themselves to the solution of difficult particular problems with
passionate zeal. They knew the value of difficult problems. I remind
you only of the "problem of the line of quickest descent," proposed
by John Bernoulli. Experience teaches, explains Bernoulli in the
public announcement of this problem, that lofty minds are led to
strive for the advance of science by nothing more than by laying
before them difficult and at the same time useful problems, and he
therefore hopes to earn the thanks of the mathematical world by
following the example of men like Mersenne, Pascal, Fermat, Viviani
and others and laying before the distinguished analysts of his time a
problem by which, as a touchstone, they may test the value of their
methods and measure their strength. The calculus of variations owes
its origin to this problem of Bernoulli and to similar problems.
Fermat had asserted, as is well known, that the diophantine
equation

( ) is unsolvable—except in certain self-evident

cases. The attempt to prove this impossibility offers a striking
example of the inspiring effect which such a very special and
apparently unimportant problem may have upon science. For
Kummer, incited by Fermat's problem, was led to the introduction of
ideal numbers and to the discovery of the law of the unique
decomposition of the numbers of a circular field into ideal prime
factors—a law which to-day, in its generalization to any algebraic
field by Dedekind and Kronecker, stands at the center of the modern
theory of numbers and whose significance extends far beyond the
boundaries of number theory into the realm of algebra and the theory
of functions.
To speak of a very different region of research, I remind you of
the problem of three bodies. The fruitful methods and the far-
reaching principles which Poincaré has brought into celestial
mechanics and which are to-day recognized and applied in practical
astronomy are due to the circumstance that he undertook to treat
anew that difficult problem and to approach nearer a solution.
The two last mentioned problems—that of Fermat and the
problem of the three bodies—seem to us almost like opposite poles
—the former a free invention of pure reason, belonging to the region
of abstract number theory, the latter forced upon us by astronomy
and necessary to an understanding of the simplest fundamental
phenomena of nature.
But it often happens also that the same special problem finds
application in the most unlike branches of mathematical knowledge.
So, for example, the problem of the shortest line plays a chief and
historically important part in the foundations of geometry, in the
theory of curved lines and surfaces, in mechanics and in the calculus
of variations. And how convincingly has F. Klein, in his work on the
icosahedron, pictured the significance which attaches to the problem
of the regular polyhedra in elementary geometry, in group theory, in
the theory of equations and in that of linear differential equations.
In order to throw light on the importance of certain problems, I
may also refer to Weierstrass, who spoke of it as his happy fortune
that he found at the outset of his scientific career a problem so
important as Jacobi's problem of inversion on which to work.
Having now recalled to mind the general importance of
problems in mathematics, let us turn to the question from what
sources this science derives its problems. Surely the first and oldest
problems in every branch of mathematics spring from experience
and are suggested by the world of external phenomena. Even the
rules of calculation with integers must have been discovered in this
fashion in a lower stage of human civilization, just as the child of to-
day learns the application of these laws by empirical methods. The
same is true of the first problems of geometry, the problems
bequeathed us by antiquity, such as the duplication of the cube, the
squaring of the circle; also the oldest problems in the theory of the
solution of numerical equations, in the theory of curves and the
differential and integral calculus, in the calculus of variations, the
theory of Fourier series and the theory of potential—to say nothing of
the further abundance of problems properly belonging to mechanics,
astronomy and physics.
But, in the further development of a branch of mathematics, the
human mind, encouraged by the success of its solutions, becomes
conscious of its independence. It evolves from itself alone, often
without appreciable influence from without, by means of logical
combination, generalization, specialization, by separating and
collecting ideas in fortunate ways, new and fruitful problems, and
appears then itself as the real questioner. Thus arose the problem of
prime numbers and the other problems of number theory, Galois's
theory of equations, the theory of algebraic invariants, the theory of
abelian and automorphic functions; indeed almost all the nicer
questions of modern arithmetic and function theory arise in this way.
In the meantime, while the creative power of pure reason is at
work, the outer world again comes into play, forces upon us new
questions from actual experience, opens up new branches of
mathematics, and while we seek to conquer these new fields of
knowledge for the realm of pure thought, we often find the answers
to old unsolved problems and thus at the same time advance most
successfully the old theories. And it seems to me that the numerous
and surprising analogies and that apparently prearranged harmony
which the mathematician so often perceives in the questions,
methods and ideas of the various branches of his science, have their
origin in this ever-recurring interplay between thought and
experience.
 It remains to discuss briefly what general requirements may be
justly laid down for the solution of a mathematical problem. I should
say first of all, this: that it shall be possible to establish the
correctness of the solution by means of a finite number of steps
based upon a finite number of hypotheses which are implied in the
statement of the problem and which must always be exactly
formulated. This requirement of logical deduction by means of a
finite number of processes is simply the requirement of rigor in
reasoning. Indeed the requirement of rigor, which has become
proverbial in mathematics, corresponds to a universal philosophical
necessity of our understanding; and, on the other hand, only by
satisfying this requirement do the thought content and the
suggestiveness of the problem attain their full effect. A new problem,
especially when it comes from the world of outer experience, is like a
young twig, which thrives and bears fruit only when it is grafted
carefully and in accordance with strict horticultural rules upon the old
stem, the established achievements of our mathematical science.
Besides it is an error to believe that rigor in the proof is the
enemy of simplicity. On the contrary we find it confirmed by
numerous examples that the rigorous method is at the same time the
simpler and the more easily comprehended. The very effort for rigor
forces us to find out simpler methods of proof. It also frequently
leads the way to methods which are more capable of development
than the old methods of less rigor. Thus the theory of algebraic
curves experienced a considerable simplification and attained
greater unity by means of the more rigorous function-theoretical
methods and the consistent introduction of transcendental devices.
Further, the proof that the power series permits the application of the
four elementary arithmetical operations as well as the term by term
differentiation and integration, and the recognition of the utility of the
power series depending upon this proof contributed materially to the
simplification of all analysis, particularly of the theory of elimination
and the theory of differential equations, and also of the existence
proofs demanded in those theories. But the most striking example for
my statement is the calculus of variations. The treatment of the first
and second variations of definite integrals required in part extremely
complicated calculations, and the processes applied by the old
mathematicians had not the needful rigor. Weierstrass showed us
the way to a new and sure foundation of the calculus of variations.
By the examples of the simple and double integral I will show briefly,
at the close of my lecture, how this way leads at once to a surprising
simplification of the calculus of variations. For in the demonstration
of the necessary and sufficient criteria for the occurrence of a
maximum and minimum, the calculation of the second variation and
in part, indeed, the wearisome reasoning connected with the first
variation may be completely dispensed with—to say nothing of the
advance which is involved in the removal of the restriction to
variations for which the differential coefficients of the function vary
but slightly.
While insisting on rigor in the proof as a requirement for a
perfect solution of a problem, I should like, on the other hand, to
oppose the opinion that only the concepts of analysis, or even those
of arithmetic alone, are susceptible of a fully rigorous treatment. This
opinion, occasionally advocated by eminent men, I consider entirely
erroneous. Such a one-sided interpretation of the requirement of
rigor would soon lead to the ignoring of all concepts arising from
geometry, mechanics and physics, to a stoppage of the flow of new
material from the outside world, and finally, indeed, as a last
consequence, to the rejection of the ideas of the continuum and of
the irrational number. But what an important nerve, vital to
mathematical science, would be cut by the extirpation of geometry
and mathematical physics! On the contrary I think that wherever,
from the side of the theory of knowledge or in geometry, or from the
theories of natural or physical science, mathematical ideas come up,
the problem arises for mathematical science to investigate the
principles underlying these ideas and so to establish them upon a
simple and complete system of axioms, that the exactness of the
new ideas and their applicability to deduction shall be in no respect
inferior to those of the old arithmetical concepts.
To new concepts correspond, necessarily, new signs. These we
choose in such a way that they remind us of the phenomena which
were the occasion for the formation of the new concepts. So the
geometrical figures are signs or mnemonic symbols of space
intuition and are used as such by all mathematicians. Who does not
always use along with the double inequality the picture
of three points following one another on a straight line as the
geometrical picture of the idea "between"? Who does not make use
of drawings of segments and rectangles enclosed in one another,
when it is required to prove with perfect rigor a difficult theorem on
the continuity of functions or the existence of points of
condensation? Who could dispense with the figure of the triangle,
the circle with its center, or with the cross of three perpendicular
axes? Or who would give up the representation of the vector field, or
the picture of a family of carves or surfaces with its envelope which
plays so important a part in differential geometry, in the theory of
differential equations, in the foundation of the calculus of variations
and in other purely mathematical sciences?
The arithmetical symbols are written diagrams and the
geometrical figures are graphic formulas; and no mathematician
could spare these graphic formulas, any more than in calculation the
insertion and removal of parentheses or the use of other analytical
signs.
The use of geometrical signs as a means of strict proof
presupposes the exact knowledge and complete mastery of the
axioms which underlie those figures; and in order that these
geometrical figures maybe incorporated in the general treasure of
mathematical signs, there is necessary a rigorous axiomatic
investigation of their conceptual content. Just as in adding two
numbers, one must place the digits under each other in the right
order, so that only the rules of calculation, i. e., the axioms of
arithmetic, determine the correct use of the digits, so the use of
geometrical signs is determined by the axioms of geometrical
concepts and their combinations.
The agreement between geometrical and arithmetical thought is
shown also in that we do not habitually follow the chain of reasoning
back to the axioms in arithmetical, any more than in geometrical
discussions. On the contrary we apply, especially in first attacking a
problem, a rapid, unconscious, not absolutely sure combination,
trusting to a certain arithmetical feeling for the behavior of the
arithmetical symbols, which we could dispense with as little in
arithmetic as with the geometrical imagination in geometry. As an
example of an arithmetical theory operating rigorously with
geometrical ideas and signs, I may mention Minkowski's work, Die
Geometrie der Zahlen.[2]
Some remarks upon the difficulties which mathematical
problems may offer, and the means of surmounting them, may be in
place here.
If we do not succeed in solving a mathematical problem, the
reason frequently consists in our failure to recognize the more
general standpoint from which the problem before us appears only
as a single link in a chain of related problems. After finding this
standpoint, not only is this problem frequently more accessible to our
investigation, but at the same time we come into possession of a
method which is applicable also to related problems. The
introduction of complex paths of integration by Cauchy and of the
notion of the ideals in number theory by Kummer may serve as
examples. This way for finding general methods is certainly the most
practicable and the most certain; for he who seeks for methods
without having a definite problem in mind seeks for the most part in
vain.
In dealing with mathematical problems, specialization plays, as I
believe, a still more important part than generalization. Perhaps in
most cases where we seek in vain the answer to a question, the
cause of the failure lies in the fact that problems simpler and easier
than the one in hand have been either not at all or incompletely
solved. All depends, then, on finding out these easier problems, and
on solving them by means of devices as perfect as possible and of
concepts capable of generalization. This rule is one of the most
important levers for overcoming mathematical difficulties and it
seems to me that it is used almost always, though perhaps
unconsciously.
Occasionally it happens that we seek the solution under
insufficient hypotheses or in an incorrect sense, and for this reason
do not succeed. The problem then arises: to show the impossibility
of the solution under the given hypotheses, or in the sense
contemplated. Such proofs of impossibility were effected by the
ancients, for instance when they showed that the ratio of the
hypotenuse to the side of an isosceles right triangle is irrational. In
later mathematics, the question as to the impossibility of certain
solutions plays a preeminent part, and we perceive in this way that
old and difficult problems, such as the proof of the axiom of parallels,
the squaring of the circle, or the solution of equations of the fifth
degree by radicals have finally found fully satisfactory and rigorous
solutions, although in another sense than that originally intended. It
is probably this important fact along with other philosophical reasons
that gives rise to the conviction (which every mathematician shares,
but which no one has as yet supported by a proof) that every definite
mathematical problem must necessarily be susceptible of an exact
settlement, either in the form of an actual answer to the question
asked, or by the proof of the impossibility of its solution and therewith
the necessary failure of all attempts. Take any definite unsolved
problem, such as the question as to the irrationality of the Euler-
Mascheroni constant , or the existence of an infinite number of
prime numbers of the form . However unapproachable these
problems may seem to us and however helpless we stand before
them, we have, nevertheless, the firm conviction that their solution
must follow by a finite number of purely logical processes.
Is this axiom of the solvability of every problem a peculiarity
characteristic of mathematical thought alone, or is it possibly a
general law inherent in the nature of the mind, that all questions
which it asks must be answerable? For in other sciences also one
meets old problems which have been settled in a manner most
satisfactory and most useful to science by the proof of their
impossibility. I instance the problem of perpetual motion. After
seeking in vain for the construction of a perpetual motion machine,
the relations were investigated which must subsist between the
forces of nature if such a machine is to be impossible;[3] and this
inverted question led to the discovery of the law of the conservation
of energy, which, again, explained the impossibility of perpetual
motion in the sense originally intended.
 This conviction of the solvability of every mathematical problem
is a powerful incentive to the worker. We hear within us the perpetual
call: There is the problem. Seek its solution. You can find it by pure
reason, for in mathematics there is no ignorabimus.
The supply of problems in mathematics is inexhaustible, and as
soon as one problem is solved numerous others come forth in its
place. Permit me in the following, tentatively as it were, to mention
particular definite problems, drawn from various branches of
mathematics, from the discussion of which an advancement of
science may be expected.
Let us look at the principles of analysis and geometry. The most
suggestive and notable achievements of the last century in this field
are, as it seems to me, the arithmetical formulation of the concept of
the continuum in the works of Cauchy, Bolzano and Cantor, and the
discovery of non-euclidean geometry by Gauss, Bolyai, and
Lobachevsky. I therefore first direct your attention to some problems
belonging to these fields.
[1] Translated for the BULLETIN, with the author's permission, by
Dr. MARY WINSTON NEWSON. The original appeared in the
Göttinger Nachrichten, 1900, pp. 253-297, and in the Archiv der
Mathematik und Physik, 3d ser., vol. 1 (1901), pp. 44-63 and 213-
237.
[2] Leipzig, 1896.
[3] See Helmholtz, "Ueber die Wechselwirkung der Natorkräefte
und die darauf bezüglichen neuesten Ermittelungen der Physik";
Vortrag, gehalten in Königsberg, 1851.
 1. CANTOR'S PROBLEM OF THE
CARDINAL NUMBER OF THE
CONTINUUM.
Two systems, i. e., two assemblages of ordinary real numbers or
points, are said to be (according to Cantor) equivalent or of equal
cardinal number, if they can be brought into a relation to one another
such that to every number of the one assemblage corresponds one
and only one definite number of the other. The investigations of
Cantor on such assemblages of points suggest a very plausible
theorem, which nevertheless, in spite of the most strenuous efforts,
no one has succeeded in proving. This is the theorem:
Every system of infinitely many real numbers, i. e., every
assemblage of numbers (or points), is either equivalent to the
assemblage of natural integers, ... or to the assemblage of
all real numbers and therefore to the continuum, that is, to the points
of a line; as regards equivalence there are, therefore, only two
assemblages of numbers, the countable assemblage and the
continuum.
From this theorem it would follow at once that the continuum
has the next cardinal number beyond that of the countable
assemblage; the proof of this theorem would, therefore, form a new
bridge between the countable assemblage and the continuum.
Let me mention another very remarkable statement of Cantor's
which stands in the closest connection with the theorem mentioned
and which, perhaps, offers the key to its proof. Any system of real
numbers is said to be ordered, if for every two numbers of the
system it is determined which one is the earlier and which the later,
and if at the same time this determination is of such a kind that, if
is before and is before , then always comes before . The
natural arrangement of numbers of a system is defined to be that in
which the smaller precedes the larger. But there are, as is easily
seen, infinitely many other ways in which the numbers of a system
may be arranged.
If we think of a definite arrangement of numbers and select from
them a particular system of these numbers, a so-called partial
system or assemblage, this partial system will also prove to be
ordered. Now Cantor considers a particular kind of ordered
assemblage which he designates as a well ordered assemblage and
which is characterized in this way, that not only in the assemblage
itself but also in every partial assemblage there exists a first number.
The system of integers ... in their natural order is evidently a
well ordered assemblage. On the other hand the system of all real
numbers, i. e., the continuum in its natural order, is evidently not well
ordered. For, if we think of the points of a segment of a straight line,
with its initial point excluded, as our partial assemblage, it will have
no first element.
The question now arises whether the totality of all numbers may
not be arranged in another manner so that every partial assemblage
may have a first element, i. e., whether the continuum cannot be
considered as a well ordered assemblage—a question which Cantor
thinks must be answered in the affirmative. It appears to me most
desirable to obtain a direct proof of this remarkable statement of
Cantor's, perhaps by actually giving an arrangement of numbers
such that in every partial system a first number can be pointed out.