managerial accounting class test

• Chapter 3: Cost-Volume-Profi t Analysis and Pricing Decisions

• Chapter 7: Activity-Based Costing and Activity-Based Management

• Focus On Customer Profi tability

• Chapter 8: Using Accounting Information to Make Managerial Decisions

DAVIS ✺ DAVIS

CLASS TEST MATERIALS

AccountingManagerial

For class testing purposes only; not for reproduction. © John Wiley & Sons, Inc.

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This booklet contains:

• Preface• Full Table of Contents• Chapter 3: Cost-Volume-Profi t Analysis and Pricing Decisions• Chapter 7: Activity-Based Costing and Activity-Based Management• Focus On Customer Profi tability Analysis• Chapter 8 Using Accounting Information to Make Managerial Decisions• WileyPLUS pages

© John Wiley & Sons, Inc.

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Today’s business environment is a complex assort-ment of relationships, all of which are necessary for an organization’s success in the marketplace. These relationships can involve external parties such as suppliers and customers or internal parties such as employees. And all of these relationships rely on some form of managerial accounting in-formation to support decision-making activities.

Non-accounting business majors frequently ask, “Why do I need to take accounting? I’m not going to do accounting; I’ll hire an accountant to do that for me.” What these students fail to understand is that a working knowledge of accounting is essential to suc-cess in business, even when the accounting “work” is left to the trained accountants. Decision makers at all levels in the organization must know what account-ing information to ask for and must know how to interpret that information before reaching a conclu-sion about a course of action. For instance, how can a marketing manager decide on a price for a prod-uct without fully understanding the product’s cost to manufacture? How can a plant manager determine how to reward employees’ performance without un-derstanding their ability to control costs and quality?

Those of us teaching introductory accounting courses may be partly to blame for this miscon-ception. Often we place too much emphasis on the “accounting” and not enough emphasis on the “busi-ness”. We are more concerned with students getting the “right” answer rather than understanding what to do with that right answer. Realizing that most students in an introductory managerial accounting course are not going to major in accounting, this book seeks to position managerial accounting in a broader context of business decision making.

This book does not attempt to be all things for all people. Instead, it is targeted to a typical university sophomore with limited business knowledge, both in terms of theoretical education and practical expe-rience. While the nature of the book may be suitable for other audiences, we anticipate that the majority of students using this book have very little business foundation on which to build. Limited knowledge of business topics is assumed, though we anticipate that students have completed an introductory fi nan-cial accounting course. Therefore, our overriding

Preface

iii

objective is to lay a fi rm foundation of basic mana-gerial accounting on which new concepts in areas of fi nance, marketing and management can be built.

The vision of this book is to provide an easy-to-use learning system for introductory managerial accounting students. Our expectation is that this learning system will:

1. facilitate students’ learning of introductory man-agerial accounting concepts;

2. improve students’ understanding of how to use these concepts as support for management deci-sions; and,

3. improve students’ retention of these concepts for use in subsequent business and accounting courses.

Distinguishing Features

Learning Unit OrganizationMany students approach reading a chapter in an accounting textbook with a lack of interest. This textbook attempts to combat the traditional long chapter organization by using a format with chap-ters comprised of several short learning units. The units are written as if the authors are speaking di-rectly to the student/reader. Questions are raised to encourage the student to think about issues before merely plodding through the information. Addition-ally, each unit features reinforcing examples and exercises that allow students to assess their level of understanding before progressing to the next unit. Answers to these exercises are at the end of the chapter to keep the students on track as they learn new material. Thus, the passive reading of longer chapters is replaced by frequent active demonstra-tions, exercises and explorations.

The learning unit structure should reduce the time you spend in course design and syllabus preparation. The learning units assist in identifying appropriate ways to “chunk” textbook content and assign appro-priate exercises and problems for the students to do as they are learning the material. You are also able to customize course content by omitting or reordering units to meet your desired topical coverage.

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Some topics are covered in stand-alone “Focus On . . .” units. These units provide basic topical in-struction and are positioned to allow you to easily choose to include or exclude the topic from your course without affecting the text’s fl ow.

Integrated Running Case ExamplesTo really understand how managerial accounting information supports business decision-making ac-tivities, students need a context in which to place those decisions. This book creates this context by using C&C Sports, a fi ctitious manufacturer of sports apparel, and its supply chain partners to illustrate concepts. Sports apparel is a product line that all students are familiar with, and the produc-tion processes used in the industry are simple to understand.

C&C Sports is introduced in an early “Focus On . . .” unit that provides company history, a brief exploration of the company’s resources, and a brief look at the sports apparel industry. While we believe that covering this unit with your students will help set the stage for the remainder of the course, you can choose to omit it without losing the continuity of the running case examples.

Other companies along C&C Sports’ supply chain are used to illustrate topics that are bet-ter suited to, say, a retail operation or a service provider. Using these additional companies also allows students to better understand the supply chain concept and the reality that companies must work with their supply chain partners to achieve maximum results.

Each chapter opens with “The Pitch,” a decision faced by C&C Sports or a supply chain partner that sets the stage for the chapter content. The contexts for these decisions span the functional areas of the business; they are not just accounting decisions. Thus students from all business majors are able to see the importance of managerial accounting infor-mation throughout all functional areas of the or-ganization. Recognizing the material’s relevance to their chosen major should increase their interest in the course and enhance their understanding.

The use of the C&C Sports scenarios also fa-cilitates discussion of the “big picture” effects of decisions and will link the strategic mission of the business with the types of decisions being taught. Explicitly discussing the link between strategy and the decisions that must be made will allow students to understand why a new topic is being introduced.

Reality ChecksEach chapter contains several Reality Checks, which are short summaries of articles from the popular business press illustrating applications of concepts presented in the chapter. These examples provide a “real world” connection for the students and rein-force that the material they are learning is not just a classroom exercise. These summaries also illustrate that decisions based on managerial accounting in-formation have direct business consequences.

Think About ItThroughout the learning units, students encounter Think About It questions requiring them to think critically about the topic being discussed. Solutions to these questions appear on a subsequent page so students can evaluate their level of understanding before moving on.

Watch Out!Concepts that students frequently fi nd confusing or for which errors commonly occur are highlighted in Watch Out! sections. Students are advised how to avoid these mistakes, with the intent being to elimi-nate the bad habits before they begin.

Sequential Topical DevelopmentAs discussed earlier, C&C Sports and its supply chain partners provide a context in which business decisions are made, allowing students to see how managerial accounting information can be used to assist in decision making. Therefore, the ordering of the chapters in the book is designed around a story that places these decisions in temporal order rather than the more traditional grouping of “Planning/Controlling,” “Decision Making” and “Evaluating” sections. With this ordering of topics, the students are learning about managerial accounting while C&C Sports’ managers face decisions and learn how to use managerial accounting to support those decisions. Allowing students to discover how mana-gerial accounting concepts solve C&C Sports’ vari-ous business issues will result in increased retention of the material.

One example of this ordering is the placement of activity-based costing after variance analysis rather than after job order and process costing. This place-ment allows students to learn, along with C&C managers, that assigning costs to products and esti-mating costs with one cost driver does not necessar-ily provide good information for decision making.

iv Preface

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The ordering of the chapters is based on the fol-lowing story line.

• C&C Sports is introduced with an empha-sis on its products, size, location, resources, supply chain, and competitive advantage. (Focus on C&C Sports)

• Universal Sports Exchange, a retailer in C&C Sports’ supply chain, explores the need for cost behavior information to estimate and predict fi nancial results. (Chapters 2 and 3)

• C&C Sports develops product costs for its three products using job order costing. (Chapter 4)

• Bradley Textile Mills develops product costs for its fabric using process costing. (Focus on Process Costing)

• Bradley Textile Mills managers are engaged in a discussion of how increasing produc-tion will decrease the fi xed cost per unit of yard of material. (Focus on Absorption and Variable Costing)

• C&C Sports plans for the coming year by de-veloping standards and a master budget once desired production volume is determined. (Chapter 5)

• C&C Sports recognizes the need to evalu-ate its performance using fl exible budget and variance analysis. It fi nds that results for direct materials and direct labor are in line with standards, but overhead costs dif-fer from expectations. This fi nding leads into the need to better understand the company’s cost drivers. (Chapter 6)

• Durable Zipper Company’s accountant is overwhelmed by the volume of entries needed to record product costs. She looks to a stan-

dard cost system to help reduce the recording volume. (Focus on Standard Costing)

• C&C explores the use of Activity Based Costing (ABC) in response to its earlier per-formance evaluation. Management discusses overhead pools and how those resources are consumed by the organization. The resulting product costs yield a picture of product prof-itability that is different from management’s assumptions using traditional job order cost-ing. Management also explores other non-fi nancial performance metrics. (Chapter 7)

• Bradley Textile Mills’ managers evaluate the profi tability of the company’s customers and explore the need to price certain extra services based on the ABC results to increase profi t-ability. (Focus on Customer Profi tability)

• C&C Sports’ management team meets to discuss the vice presidents’ various areas of responsibility. Each vice president faces a different decision whose costs are not as ob-vious as it fi rst seems. (Chapter 8)

• C&C Sports seeks to expand its product line to increase profi tability. The company’s managers use capital budgeting techniques to assess the viability of investing in equip-ment to produce baseballs. (Chapter 9)

• Centex Yarns’ Nylon Fibers division has shown a loss for the past three years. The division’s vice president must determine how much the division is contributing to the com-pany’s fi nancial health. (Chapter 10)

• C&C Sports’ management recognizes that performance evaluation needs to be expanded to recognize the relation between fi nancial and non-fi nancial measures. A balanced scorecard is developed for the company. (Chapter 11)

Preface v

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Elizabeth Davis, Executive Vice President and Provost and

Professor of Accounting at Baylor University, joined the accounting

faculty at Baylor University in 1992 after receiving her Ph.D. in

accounting from Duke University. She also holds a BBA in accounting

from Baylor University and is a CPA (Louisiana, inactive).

Prior to pursuing her graduate studies, Professor Davis worked

as an auditor for Arthur Andersen & Co. in New Orleans, Louisiana.

While in public practice, she specialized in the audits of fi nancial

institutions and real estate.

Professor Davis’s research has been published in a number of journals including Orga-

nizational Behavior and Human Decision Processes, Advances in Accounting, Advances in

Accounting Behavioral Research, Advances in Accounting Education, Issues in Accounting

Education, Journal of Accounting Case Research, and Today’s CPA. She has received The

Institute of Management Accountants’ Lybrand Gold Medal and a Certifi cate of Merit for her

publications in Management Accounting and Strategic Finance.

Author Biographies

Charles E. Davis, Walter Plumhoff Professor of Accounting

and Chair of the Department of Accounting and Business Law at

Baylor University, joined the accounting faculty at Baylor in 1991

after receiving his Ph.D. in accounting from the University of North

Carolina at Chapel Hill. He also holds an MBA from University of

Richmond and a BBA in accounting from The College of William

and Mary, and is a CPA (Virginia).

Prior to pursing his Ph.D., Professor Davis worked for Reynolds

Metals Company, Coopers & Lybrand, and Investors’ Savings Bank,

all in Richmond, Virginia. It was while working in various cost accounting positions at Reyn-

olds Metals that Professor Davis developed his appreciation for managerial accounting.

Professor Davis’s research has been published in a number of journals including Accounting Horizons, Advances in Accounting, Advances in Accounting Behavioral

Research, Advances in Accounting Education, Issues in Accounting Education, Journal

of Accountancy, Journal of Information Systems, and Today’s CPA. He has received The

Institute of Management Accountants’ Lybrand Gold Medal and two Certifi cates of Merit

for his publications in Management Accounting and Strategic Finance. Professor Davis

currently serves on the Editorial Board of Strategic Finance and is a former member of the

Editorial Board of Issues in Accounting Education.

vii

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Managerial Accounting

Davis & Davis, Baylor University

Dear Student, Thank you for participating in our class test program with a

selection of chapters from Charles and Elizabeth Davis’ forthcom-ing book, Managerial Accounting, 1e. We understand that it re-quires time and energy to use alternate course materials, and we appreciate your assistance and commitment. You are an important part of the publishing process.

We would greatly appreciate your feedback once you have com-pleted using this material. Please follow the link below to complete a brief questionnaire about your class test experience.

http://www.mywiley.info/Davis Once again, thank you for your participation in this class test.

Should any questions arise, please don’t hesitate to contact us.

Class Test Materials

Brian Kamins Project EditorAccounting

[email protected]

Ramona ShermanSenior Marketing Manager Accounting

[email protected]

Michael McDonaldSenior Acquisitions EditorAccounting

[email protected]

ix

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Instructor SupplementsWileyPLUS: Is an innovative, research-based, online environment for effective teaching and learning.

Solutions Manual: Contains answers to all the end-of-chapter exercises and problem material.

Instructor’s Manual: Contains unit summaries, assignment classifi cations, related readings, and lecture notes based on the PPT slides.

Test Bank: Contains a variety of exam questions for instructors, including true-false, multiple-choice, matching, brief exercises, exercises, short answer, and essay.

Computerized Test Bank: An electronic version of the test bank. Instructors can create their own exams, including multiple versions with randomized questions and answer choices.

PowerPoint® Slides: Detailed lecture notes for instructors, including fi gures and tables from the text.

Managerial Accounting Video Program

Student SupplementsWileyPLUS: Is an innovative, research-based, online environment for effective teaching and learning.

Excel Templates: Allows students to complete select end-of-chapter questions and problems in Excel.

Excel Working Papers: Provides students with Excel templates for solving all applicable end-of-chapter questions and problems.

Student Study Guide: Provides students with a detailed review of chapter learning objectives, and a review of key vocabulary and concepts. Review questions, including multiple-choice, matching, true-false, and problems allow students to reinforce key concepts.

PRICING, FORMATS, AND CONTENTFLEXIBLE

Students have more options than the traditional textbook. Consider an eBook, loose-leaf binder version or a custom publication. Learn more about our fl exible pricing, fl exible for-mats and fl exible content at www.wiley.copm/college/wileyfl ex

xi

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ContentsInstructor Preface iii

Student Preface vi

Acknowledgements ix

Author Biographies xi

Dedication xii

Brief Contents xiii

Chapter 1 Accounting as a Tool for Management 2

Unit 1.1 What Is Managerial Accounting? 3Defi nition of Managerial Accounting 3Comparison of Managerial and Financial Accounting 4

Internal versus External Users 5Lack of Mandated Rules 5Focus on Operating Segments 5Focus on the Future 6Emphasis on Timeliness 6

The Manager’s Role 7Planning 8Controlling and Evaluating 8Decision Making 9Management in Action 9

The Managerial Accountant’s Role 10REALITY CHECK Just Because Polly wants

a cracker doesn’t mean she’ll get it 11UNIT 1.1 REVIEW 12Key Terms 12Self Study Questions 12Unit 1.1 Practice Exercise 13Selected Unit 1.1 Answers 13

Unit 1.2 Different Strategies, Different Information 14

Matching Accounting Information to an Organization’s Strategy 14

Product Differentiation versus Low-Cost Production 14

REALITY CHECK Strategic planning sometimes requires nerves of steel 15

Market Share: Build, Hold, Harvest, or Divest 15

Monitoring Strategic Performance 16The Balanced Scorecard 16Supply Chain Management 17Just-In-Time (JIT) Inventory 18

REALITY CHECK A supply chain touchdown 19Enterprise Resource Planning (ERP) Systems 20

UNIT 1.2 REVIEW 20Key Terms 20Self Study Questions 20Unit 1.2 Practice Exercise 21Selected Unit 1.2 Answers 21

Unit 1.3 Ethical Considerations in Managerial Accounting 22

REALITY CHECK Blowing the whistle 27


CHAPTER SUMMARY 29KEY TERMS 29EXERCISES 30PROBLEMS 32CASES 32ENDNOTES 34

FOCUS ON C&C Sports 36

C&C’s History 36

A Brief Look at C&C’s Resources 38

Industry Statistics 42FOCUS SUMMARY 44ENDNOTES 44

Chapter 2 Cost Behavior and Cost Estimation 46

Unit 2.1 Cost Behavior Patterns 48

Variable Costs 48

Fixed Costs 50

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Discretionary versus Committed Fixed Costs 51

Step Costs 51

Mixed Costs 52REALITY CHECK If it looks like a variable

cost . . . 53


Unit 2.2 Cost Estimation 55

Scattergraphs 56

High-Low Method 58

Regression Analysis 60REALITY CHECK Where does the relevant

range end? 61

Cost Estimation and the Relevant Range 61


Unit 2.3 Contribution Margin Analysis 63

Contribution Margin 64REALITY CHECK The contribution margin

recipe 65

Contribution Format Income Statement 66



Chapter 3 Cost-Volume-Profi t Analysis and Pricing Decisions 80

Unit 3.1 Breakeven Analysis 82

The Breakeven Point 82REALITY CHECK Who really uses

breakeven analysis? 84

Breakeven Graphs 8 4

Margin of Safety 86


Unit 3.2 Cost-Volume-Profi t Analysis 88

Target Operating Income 88

Target Net Income 89

What-If Analysis 90Limitations of CVP Analysis 91

Cost Structure and Operating Leverage 92REALITY CHECK Fixed versus variable costs 94


Unit 3.3 Multiproduct CVP Analysis 97REALITY CHECK What’s in the mix? 99

Limitations of Multiproduct CVP Analysis 101


Unit 3.4 Pricing Decisions 103

Infl uences on Price 103

Cost-Plus Pricing 104

Target Costing 105REALITY CHECK Filling the tank empties

the wallet 106

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Chapter 4 Product Costing for Manufacturing Companies 124

Unit 4.1 Product and Period Costs 126

Product Costs 126Direct Materials 127Direct Labor 127Overhead 128

Period Costs 129Selling Costs 129General and Administrative Costs 130

REALITY CHECK Showing cost classifi cations in published fi nancial statements 131


Unit 4.2 Product Cost Flows 134

Inventory Account Defi nitions 134

Recording of Cost Flows 136REALITY CHECK A lotta latte 139

Schedule of Cost of Goods Manufactured 140


Unit 4.3 Job Order Costing 143

Accumulating Direct Job Costs 144Tracing Direct Materials Costs 145Tracing Direct Labor Costs 146

Allocating Manufacturing Overhead Costs 147

REALITY CHECK Tracking direct labor costs 148

Calculating the Predetermined OverheadRate 149Applying Manufacturing Overhead to Jobs 149

REALITY CHECK Here come the robots 150


Unit 4.4 Underapplied and Overapplied Manufacturing Overhead 153

Closing Underapplied and Overapplied Overhead to Cost of Goods Sold 154

Prorating Underapplied and Overapplied Overhead 155


CHAPTER SUMMARY 159KEY TERMS 160EXERCISES 161PROBLEMS 166CASES 173

FOCUS ON Process Costing 176

Process Costing 178

Cost Flows 178

Comparison of Process Costing and Job Order Costing 180

Similarities 180Differences 181

Contents xv

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Cost Accumulation and Reporting 181

Reconciling Activity and Costs 182

Calculating Equivalent Units 182

Allocating Product Costs to Units 183

REALITY CHECK Costs in the oyster bed 186

Process Costing Recap 186

FOCUS REVIEW 188KEY TERMS 188SELF-STUDY QUESTIONS 188FOCUS 2 PRACTICE EXERCISE 188SELECTED FOCUS 2 ANSWERS 189FOCUS SUMMARY 190EXERCISES 191PROBLEMS 193CASES 195ENDNOTES 196

FOCUS ON Variable and AbsorptionCosting 198

Variable and Absorption Costing 200

Absorption Costing versus Variable Costing 200

Income Effects of Variable Costing 201When Production Volume Equals Sales Volume 202When Production Volume Exceeds Sales Volume 203

REALITY CHECK Variable costing, German style 204

When Production Volume is Less than Sales Volume 204

Reconciling Income under Absorption Costing and Variable Costing 205

FOCUS REVIEW 206KEY TERMS 206SELF-STUDY QUESTIONS 206FOCUS 3 PRACTICE EXERCISE 207SELECTED FOCUS 3 ANSWERS 207FOCUS SUMMARY 209EXERCISES 209PROBLEMS 212CASE 215

Chapter 5 Planning and Forecasting 216

Unit 5.1 Planning and the Budgeting Process 218

What Is a Budget? 218

The Budgeting Process 219Information Flows 220Behavioral Issues 220Starting Points 222

REALITY CHECK The changing budget process 222

Time Frames 222


Unit 5.2 Performance Standards 225

REALITY CHECK The diamond standard 226

Ideal versus Practical Standards 226

Product Standards 227Direct Materials 227Direct Labor 229Manufacturing Overhead 230


Unit 5.3 Building the Master Budget: The Operating Budget 232

The Sales Budget 234

The Selling and Administrative Expense Budget 235

The Production Budget 237

The Direct Materials Purchases Budget 238

The Direct Labor Budget 241

The Manufacturing Overhead Budget 242

The Ending Inventory and Cost of Goods Sold Budget 244

Ending Raw Materials 244Ending Finished Goods 246

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REALITY CHECK Budgeting around the world 246

Cost of Goods Sold 247


Unit 5.4 Building the Master Budget: The Cash Budget 250

Cash Available to Spend 250The Cash Receipts Budget 252

Cash Disbursements 253REALITY CHECK Is there a crystal ball

for forecasting sales and collections? 254The Cash Payments for Materials Budget 255Other Cash Disbursements 256

Cash Excess (Cash Needed) 256

Short-Term Financing 257

Ending Cash Balance 257


Unit 5.5 Pro-Forma Financial Statements 260

The Pro-Forma Income Statement 261

The Pro-Forma Balance Sheet 262REALITY CHECK How the pros use

pro-formas 263Assets 263Liabilities and Stockholders’ Equity 264



Chapter 6 Performance Evaluation: Variance Analysis 284

Unit 6.1 Flexible Budgets: A Performance Evaluation Tool 286

Static Budgets 286Variances 287Management by Exception 287

Flexible Budgets 288REALITY CHECK Who’s being fl exible? 289

Using Flexible Budgets to Analyze Static Budget Variances 290

A Revised Performance Report 291Computing Sales Volume Variances 292Computing Flexible Budget Variances 293

Using Variances to Evaluate the Sales Strategy 294


Unit 6.2 Variance Analysis: Direct Materials 298

Analyzing the Direct Materials Variances 299Direct Materials Price Variance 299

REALITY CHECK Big things in small packages 301

Direct Materials Quantity Variance 301

Interpreting Direct Materials Variances 302Explaining Direct Materials Price Variances 303Explaining Direct Materials Quantity Variances 303

REALITY CHECK A variance to remember 304


Unit 6.3 Variance Analysis: Direct Labor 307

Analyzing the Direct Labor Variances 307Direct Labor Rate Variance 307Direct Labor Effi ciency Variance 309

Contents xvii

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Interpreting Direct Labor Variances 309Explaining Direct Labor Rate Variances 309Explaining Direct Labor Effi ciency Variances 310

REALITY CHECK Fast and furious or slow and steady? 311


Unit 6.4 Variance Analysis: Overhead 314

Variable Overhead 314Variable Overhead Spending Variance 315Variable Overhead Effi ciency Variance 316Interpreting Variable Overhead Variances 317

Fixed Overhead 317



FOCUS ON Standard Costing Systems 334

Standard Costing Systems 336

Recording Direct Materials 337

Recording Direct Labor 338

Recording Variable Overhead 339REALITY CHECK Are standard costing

systems headed for extinction? 340

Recording Fixed Overhead 341

Transferring Completed Units to Finished Goods Inventory 342

Recording Cost of Goods Sold 343

Disposing of Variances 343

Advantages of Standard Costing 344

FOCUS REVIEW 344KEY TERMS 344SELF-STUDY QUESTIONS 344FOCUS 4 PRACTICE EXERCISE 345SELECTED FOCUS 4 ANSWERS 345

FOCUS SUMMARY 348EXERCISES 349PROBLEMS 351

Chapter 7 Activity-Based Costing and Activity-Based Management 354

Unit 7.1 Activity-Based Costing 356

Why Activity-Based Costing? 356

Classifi cation of Activities 359REALITY CHECK At the center

of activity 360

UNIT 7.1 REVIEW 362Key Terms 362Self Study Questions 362 Unit 7.1 Practice Exercise 363Selected Unit 7.1 Answers 363

Unit 7.2 Developing Activity-Based Product Costs 364

Step 1: Identify Activities 364

Step 2: Develop Activity Cost Pools 365

Step 3: Calculate Activity Cost Pool Rates 366

Step 4: Allocate Costs to Products or Services 368

Step 5: Calculate Unit Product Costs 369REALITY CHECK Can activity-based

costing solve the FAA’s funding crisis? 370


Unit 7.3 Activity-Based Management 376

Activity Management 377

Process Improvement 378

Reassessment of Product Profi tability 379

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REALITY CHECK Activity fi gures to the rescue 381

Activity-Based Budgeting 381


CHAPTER SUMMARY 384KEY TERMS 385EXERCISES 385PROBLEMS 390CASE 397ENDNOTES 399

FOCUS ON Customer Profi tability 400

Customer Profi tability 402

Identifying Unprofi table Customers 402

Addressing Unprofi table Customers 406REALITY CHECK Sprint drops more

than a call 407

FOCUS REVIEW 408KEY TERMS 408SELF-STUDY QUESTIONS 408Focus 5 Practice Exercise 409SELECTED FOCUS 5 ANSWERS 409FOCUS SUMMARY 411EXERCISES 411PROBLEMS 414ENDNOTE 417

Chapter 8 Using Accounting Information to Make Managerial Decisions 418

Unit 8.1 Identifying Relevant Information 420

What Is Relevant Information? 420REALITY CHECK My brain’s about to

explode! 421

Relevant Cost Identifi cation: An Example 423

A Relevant Cost Decision Model 424


Unit 8.2 Special Order Pricing 427

Characteristics of a Special Order 427

Relevant Costs of a Special Order 428REALITY CHECK I’ll give you

this much 429

Qualitative Issues in Special Order Pricing 429

Recap of the Decision Process 431


Unit 8.3 Outsourcing 432

Outsourcing Defi ned 433REALITY CHECK Take it outside 434

A Basic Outsourcing Decision Model 434

Alternative Uses for Facilities 436

Qualitative Issues in Outsourcing 437



Unit 8.4 Allocating Constrained Resources 439

Contribution Margin per Constrained Resource 440

Allocation of Constrained Resources 442

Theory of Constraints 442REALITY CHECK Money doesn’t grow

on trees 443


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Unit 8.5 Keeping or Eliminating Operations 446

Identifi cation of Common Costs 447

Segment Margin Analysis 448REALITY CHECK At the drop

of a hat 450

Additional Factors to Consider 450




Chapter 9 Capital Budgeting 470

Unit 9.1 Capital Budgeting Decisions 472

Investing in Capital Assets 472

Making Capital Budgeting Decisions 473

Screening Decisions versus Preference Decisions 474

REALITY CHECK Going on a capital spending spree 475

Cash Flow Identifi cation 475Post-Implementation Audit 477


Unit 9.2 Time Value of Money 479

Present Value of $1 479Calculating Present Value 480Compound Interest 481Discount Rates and Present Value 482

Present Value of an Annuity 482Calculating Present Value of an Annuity 482Using Excel® to Calculate Present Values 483

REALITY CHECK The sport of present value 484


Unit 9.3 Discounted Cash Flow Techniques 486

Net Present Value 487Amount and Timing of the Cash Flows 487Appropriate Discount Rate 487Present Value of Each Cash Flow 488

REALITY CHECK Don’t discount the choice of a discount rate 489

Net Present Value of the Project 489Another Look at Net Present Value Calculations 490Using Excel® to Calculate Net Present Value 491Assumptions of the Net Present Value Model 492

Internal Rate of Return 492Projects with Even Cash Flows 492Projects with Uneven Cash Flows 493Using Excel® to Calculate Internal Rate of Return 494Assumptions of the Internal Rate of Return Model 494

Screening and Preference Decisions using NPV and IRR 494


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Unit 9.4 Other Capital Budgeting Techniques 497

Payback Period 498Projects with Even Cash Flows 498Projects with Uneven Cash Flows 498Limitations of the Payback Period 499

Accounting Rate of Return 500REALITY CHECK So many choices,

so little money 501



Chapter 10 Decentralization and Performance Evaluation 516

Unit 10.1 Centralized versus Decentralized Organizations 518

Why Decentralization? 519Advantages of Decentralization 519Disadvantages of Decentralization 520

REALITY CHECK Can nonprofi ts profi t from decentralization? 521

Responsibility Accounting 521Cost Centers 521Profi t Centers 522Investment Centers 522


Unit 10.2 Segment Evaluation 524

Defi ning a Segment 525

Segment Margin Income Statements 525REALITY CHECK The whole isn’t always

greater than the sum of its parts 526

When Traceable Fixed Costs Become Common Costs 527

Segment Reporting, Segment Margin, and GAAP 527


Unit 10.3 Return on Investment 530

Return on Investment 530

The DuPont Model 532Increase in Sales Revenue 533Decrease in Expenses 533Decrease in Assets 534

Shortcomings of Return on Investment 534REALITY CHECK What’s your

blog’s ROI? 535


Unit 10.4 Residual Income and EVA® 538

Residual Income 538

Shortcomings of Residual Income 539

Economic Value Added (EVA) 539Step 1: Calculating Net Operating Profi t 540Step 2: Calculating Invested Capital 540Step 3: Calculating the Weighted-Average Cost of Capital 540Step 4: Calculating EVA 541

EVA Compared to Residual Income 541REALITY CHECK Putting EVA in the

driver’s seat 542


Appendix Transfer Pricing 544Selecting a Transfer Price Base 545

REALITY CHECK The taxing transfer 546

Contents xxi

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Determining the Minimum Transfer Price 547Selling Division Has Excess Capacity 547Selling Division Has No Excess Capacity 548

APPENDIX REVIEW 550Key Terms 550Self Study Questions 550Appendix Practice Exercise 550Selected Appendix Answers 551


Chapter 11 Performance Evaluation Revisited: A Balanced Approach 566

Unit 11.1 Performance Measures 568

Lagging Indicators 568

Leading Indicators 569

Financial versus Nonfi nancial Measures 570REALITY CHECK Batter up 572

Choosing the Right Measures 572

Using Measures to Drive Performance 573


Unit 11.2 The Balanced Scorecard 576

The Four Balanced Scorecard Perspectives 577

Learning and Growth Perspective 577Internal Business Processes Perspective 578Customer Perspective 579Financial Perspective 579

Building a Balanced Scorecard 580

C&C Sports’ Strategy Map 581Learning and Growth Perspective 582Internal Business Processes Perspective 582Customer Perspective 582

REALITY CHECK Balancing act 583Financial Perspective 583

C&C Sports’ Balanced Scorecard 583Learning and Growth Perspective 583Internal Business Processes Perspective 584Customer Perspective 584Financial Perspective 584


Unit 11.3 Benchmarking 587REALITY CHECK Benchmarking in

health care 589

UNIT 11.3 REVIEW 590Key Terms 590Self Study Questions 590Unit 11.3 Practice Exercise 590Selected Unit 11.3 Answers 590Appendix Measures of Meeting Delivery Expectations 551Delivery Cycle Time 591Manufacturing Cycle Time 593

APPENDIX REVIEW 594Key Terms 594Self Study Questions 594APPENDIX PRACTICE EXERCISE 594SELECTED APPENDIX ANSWERS 595


Chapter 12 Financial StatementAnalysis 604

Unit 12.1 Horizontal Analysis of Financial Statements 606

Preparing a Horizontal Analysis 606

Interpreting a Horizontal Analysis 608

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Preparing a Trend Analysis 608REALITY CHECK An apple a day 610


Unit 12.2 Common-Size Financial Statements 612

Preparing the Common-Size Balance Sheet 613

Preparing the Common-Size Income Statement 615

Interpreting the Common-Size Statements 615REALITY CHECK Hospitals suffer from

bad debts 616


Unit 12.3 Ratio Analysis 619

Liquidity Ratios 620Working Capital 622Current Ratio 622Acid-Test or Quick Ratio 622Accounts Receivable Turnover 622Average Collection Period 623Inventory Turnover 623

REALITY CHECK Cash fl ow in a global supply chain 624

Average Days to Sell Inventory 624Interpreting Liquidity Ratios 625

Leverage Ratios 626Debt Ratio 627Debt-to-Equity Ratio 627Times Interest Earned Ratio 627Interpreting Leverage Ratios 627

Profi tability Ratios 628Gross Margin Percentage 628Return on Assets 629Return on Common Stockholders’ Equity 629Interpreting Profi tability Ratios 630

Market Measure Ratios 630Earnings per Share 630Price/Earnings Ratio 631Dividend Payout Ratio 631Interpreting Market Measure Ratios 632

Limitations of Financial Statement Analysis 632


Unit 12.4 Industry Analysis 635REALITY CHECK Growing strong

farms 636

Published Industry Ratio Analyses 636

Industry Statistics 638



Chapter 13 Statement of Cash Flows 656

Unit 13.1 Categorizing Cash Flows 658

Operating Activities 659REALITY CHECK Cash is king 660

Investing Activities 660

Financing Activities 661


Contents xxiii

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Unit 13.2 Cash Flows Provided by Operating Activities: The Indirect Method 664

REALITY CHECK How does cash register? 668


Unit 13.3 Cash Flows Provided by Investing and Financing Activities 670

Cash Flows Provided by Investing Activities 670

Property and Equipment 671Other Investing Assets 672

Cash Flows Provided by Financing Activities 672

Debt Financing 672Equity Financing 673

UNIT 13.3 REVIEW 675Self Study Questions 675Unit 13.3 Practice Exercise 676Selected Unit 13.3 Answers 676

Unit 13.4 Constructing and Interpreting the Statement of Cash Flows 677

Analyzing the Statement of Cash Flows 679

A Look to the Future 680

UNIT 13.4 REVIEW 681Self Study Questions 681Unit 13.4 Practice Exercise 681Selected Unit 13.4 Answers 682Appendix Cash Flows Provided by Operating Activities: The Direct Method 683Collections from Customers 684Payments to Suppliers 684Payments to Employees 685Payments for Operating Costs 685Payments for Income Taxes 686

Appendix Review 688Self Study Questions 688APPENDIX PRACTICE EXERCISE 689SELECTED APPENDIX ANSWERS 689


GLOSSARY G-1

Photo Credits PC-1

COMPANY INDEX CI-1

SUBJECT INDEX SI-1

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AccountingManagerial

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