Ebook Akuntansi Biaya dan Manajemen Mahe
Accounting
An Introduction to Concepts, Methods and Uses
10e
Michael W. Maher
University of California – Davis
Clyde P. Stickney
Dartmouth College
Roman L. Weil
University of Chicago
Managerial Accounting: An Introduction to Concepts, Methods, and Uses, Tenth Edition Michael W. Maher, Clyde P. Stickney, and Roman L. Weil
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For
KATHLEEN, KRISTA, ANDREA
For
ALLIE, BAILLIE, CHARLIE, CONMAN, GRETA, ISABELLA, AND LILY AND KATHY
With Thanks
For Our Students
Whatever be the detail with which you cram your students, the chance of their meeting in after-life exactly that detail is infinitesimal; and if they do meet it, they will probably have forgotten what you taught them about it. The really useful training yields a comprehension of a few general principles with a thorough grounding in the way they apply to a variety of concrete details. In subsequent practice the students will have forgotten your particular details; but they will remember by an unconscious common sense how to apply principles to immediate circumstances.
Alfred North Whitehead The Aims of Education and Other Essays
WITH THANKS
Preface
Our St atement of Principle
We remain convinced that our primary job as educators is to teach problem-solving skills as well as the organizational (and social) context in which students will, as managers, conduct economic activities. An increasing number of employers ask that business school graduates seek out ways to add value to organizations, not just work competently on projects that superiors assign to them. Focusing on problem-solving skills and the organizational context of decisions will serve current and future students well in responding to employers’ expectations.
Management accounting should not be primarily concerned with making computations. Students should aim to understand the organization’s business issues that created a need for implementing such concepts as activity-based costing and the balanced scorecard. And students should view the success or failure of these methods and concepts in the context of the organization’s operating and business environment. We know many examples in which thoughtful practitioners developed complex activity-based costing, balanced scorecard, and other management accounting methods only to have them fail in implementation. These methods did not fail because of errors in computations; they failed because their developers did not sufficiently understand the problems that the organization needed to solve. Or they failed because these practitioners could not gain agreement on goals and strategies from both top management and the people who would later implement the methods. In other words, understanding business concepts and real incentives for decisions is more valuable than mere proficiency with accounting tools.
As educators, and as authors, we aim to help students develop lifelong problem-solving skills and understand the organizational and social context in which the organization’s members make decisions. Students educated in this manner can add value to organizations and society, whether they work in accounting or some other field.
The Tenth Edition and the Future of Man agement Accountin g
The tenth edition continues to reflect our philosophy in every respect. We emphasize conceptual and analytical thinking over training in procedures. The following three examples demonstrate how we apply that philosophy.
More than three-fourths of the book focuses on managerial decision making (Chapters 1, 4–12). This is not a baby cost accounting book. We want our students to focus on business problem solving and the business context in which they use accounting information. We devote an entire chapter (Chapter 12) to incentive issues that go beyond the conventional profit and investment center material because students should be aware that these issues drive management decision making to a large degree. This chapter includes extensive discussion of problems with incentive systems that lead to fraudulent financial reporting. We provide answers to even-numbered exercises in addition to the usual self-study problems so students get immediate feedback on each chapter’s basic ideas. By enabling students to get immediate feedback on each chapter’s basic ideas, we provide opportunity for instructors to explore the big concepts and to integrate ideas from different chapters.
Preface v
T HEME S OF THE R E VIS ION We wrote this book for students who expect to become managers, whether in marketing,
finance, IT, or some other area. Previous editions have taught readers how to use accounting information to add value to their organizations and have emphasized concepts over procedures. The tenth edition continues these themes and improves on their application, as the list of chapter changes makes clear. We have increased our discussion of ethical issues, including the Sarbanes-Oxley Act, and management’s use of internal controls to prevent fraud. We have added discussions of strategic cost management issues in Chapters 1 and 4, as noted below.
T HE O RGANIZ ATION AND U S E OF T HIS B OOK
We divide the book into three major parts to allow maximum flexibility for instructors’ teaching preferences.
Part One, ‘‘Overview and Basic Concepts’’ (Chapters 1–3) Part Two, ‘‘Managerial Decision Making’’ (Chapters 4–8) Part Three, ‘‘Motivating Managers to Make Good Decisions’’ (9–13)
Part One covers fundamental concepts, including activity-based management, and provides an overview of managerial accounting. After Part One, instructors may cover Parts Two and Three in whichever order they prefer. Chapter 1 introduces managerial accounting and ties it to strategic cost analysis, the value chain, and ethical issues. Chapter 2 presents traditional job and process product costing. Chapter 3 covers activity-based costing and management.
Part Two discusses concepts and methods useful for managerial decision making. Chapter 4 covers strategic management of costs, quality, and time. Chapter 5 discusses cost behavior and methods of estimating cost driver rates. Chapter 6 discusses financial modeling, with cost volume profit treated as a simple example. Chapter 7 discusses differential cost and revenue analysis. Chapter 8 discusses long-run decision making involving capital budgeting.
Part Three concentrates on managerial planning and performance evaluation. Chapter 9 provides an overview of planning and control and discusses development of budgets as tools for planning and control. Chapter 10 discusses profit and cost center performance evaluation, including profit variance analysis, cost variance analysis, variance investigation, and the use of nonfinancial performance measures. Chapter 11 focuses on performance evaluation in
investment centers, including transfer pricing and EVA 1 . Chapter 12 discusses incentive issues, including use of the balanced scorecard, internal controls, and ethical problems related to incentive systems, such as financial fraud. Chapter 13 discusses cost allocation, which is self-contained and can be taught anywhere in chapter sequence.
The Appendix discusses compound interest calculations used in discounted cash flow analysis. It provides concepts of the time value of money useful to management accountants.
The Glossary defines comprehensively the concepts and terms used by managers and management accountants. It is one of the most comprehensive and informative glossaries that students might ever find.
Major F e ature s of the Tenth Edition
E NHANCE S C RITIC AL T HINK ING S K ILL S
Users of previous editions have found this book to be strong in requiring critical thinking. A critical-thinking approach views accounting as a process of reporting information for people Users of previous editions have found this book to be strong in requiring critical thinking. A critical-thinking approach views accounting as a process of reporting information for people
to use, as opposed to a view of accounting as a set of rules or procedures to follow. We hope to prepare the next generation of managers and managerial accountants to think through specific situations for themselves using the concepts explored in this book.
To enhance instructors’ ability to get students into a critical-thinking mode, we include in each chapter a section of assignment materials called Critical Analysis and Discussion Questions. We have found these questions particularly useful for in-class assignments for groups of students who discuss the issues and report the results of their discussion. These questions make good take-home group or individual writing assignments.
C ONCE P TUAL A P P ROACH
This edition, like those before it, emphasizes concepts over procedures. We believe students in M.B.A. managerial accounting classes should understand the fundamental concepts and see the ‘‘big picture,’’ leaving more detailed procedures to cost accounting classes and on- the-job training. Although a minority of students taking managerial accounting classes will become accountants, all will use managerial accounting concepts during their careers. We intend to give them a solid grounding in those concepts in this book.
E THIC AL AND C ONTROL I S SUES
In previous editions, we integrated discussion of ethical issues throughout the chapters. In addition, Chapter 12 (‘‘Incentive Issues’’) had an extensive discussion of financial fraud and ethical issues related to incentive plans. In this edition, we discuss ethical issues and cover the Sarbanes-Oxley Act in Chapter 1, which also has new, provocative assignment items. Chapter 4 (‘‘Strategic Management of Costs, Quality, and Time’’) has new material linking ethical decisions to creating quality products and the effects of good or bad reputation on the company. In Chapter 12, we have added a discussion of internal controls from a management perspective and added new assignment material.
V ARIE T Y OF E ND - OF -C HAP TE R A S S IGNMENT M ATE RIAL S
Accounting instructors know the value of interesting and accurate assignment materials. We have written exercises and problems to reflect the new material. We have extensively class- tested the assignment material and worked every question, exercise, problem, and case many times in preparing this edition.
The variety and quantity of end-of-chapter assignment materials make the book suitable for various approaches to the M.B.A. managerial course. To help the instructor assign homework and select items for class presentation, we have divided the assignment materials into five categories: Review Questions, Critical Analysis and Discussion Questions, Exercises, Problems, and Cases.
Review Questions are straightforward questions about key concepts in the chapter. Critical Analysis and Discussion Questions are thought-provoking questions about the challenging issues that managers and accountants face. These questions are particularly good for written essays and class discussions. Exercises reinforce key concepts in the chapter, often referring the student to a particular illustration. Exercises typically deal with a single topic and are particularly useful for classroom demonstration. To enhance the self-learning dimension of the book, we include fully worked-out solutions at the end of the chapter to the even-numbered exercises. (For convenience, we also place these solutions in the Solutions Manual.) Problems challenge the student to apply and interpret the material in the chapter, many with thought-provoking discussion or essay questions. We have added more critical-thinking requirements to problems, and we have added numerous problems, particularly in Chapters 7 (‘‘Differential Cost Analysis for Decision Making’’) and 12 (‘‘Incentive Issues’’).
Preface vii
Cases encourage students to apply concepts from multiple chapters and their other courses to deal with complex managerial issues. These are particularly good for advanced students and graduate students with some previous background in managerial accounting.
S ELF -S TUDY P ROB LEMS WITH F ULL S OLUTIONS
Better and more motivated students take every opportunity to test their understanding. Students who find managerial accounting at the M.B.A. level to be more challenging need additional resources for self-help. We have designed this book to make it easy for students to learn the basic concepts on their own, thereby making more class time available for discussion. Like most other managerial accounting textbooks, this one includes Self-Study Problems placed at key points in each chapter. (Their answers appear at the end of the chapter.) In addition, the worked-out solutions to half of the exercises in each chapter give students ample opportunity to test their knowledge of the basic concepts. Ideally, they will come to class with a solid understanding of the basic ideas, and instructors can devote class time to provocative discussion.
M ANAGERIAL A P P LIC ATIONS
Students are more motivated to learn the material if they see its application to real-world problems, particularly ones they believe they will face. This book contains Managerial Applications that are similar to sidebars in news magazines. These allow the student to explore company practices that illustrate concepts discussed in the text without disrupting the flow of study. See the table of contents for a list of Managerial Applications.
S upplements Accomp anyin g the Text
I NS T RUC TOR ’ S M ANUAL
The Instructor’s Manual (by P. N. Saksena, Indiana University, South Bend) includes chapter overviews, learning objectives, lecture notes with teaching suggestions, and suggestions for group discussion, all focusing on the needs of M.B.A. instructors. The Instructor’s Manual is available on the Instructor’s Resource CD.
T EST B ANK
The Test Bank includes a mix of questions and problems tuned to the lasting needs of M.B.A. instructors. The Test Bank is available in ExamView format on the Instructor’s Resource CD.
S OLUTIONS M ANUAL The Solutions Manual (by the text authors) contains responses to questions and solutions to
all exercises, problems, and cases. The Solutions Manual is available on the Instructor’s Resource CD.
I NS T RUC TOR S R E SOURCE CD WITH E X AM V IE W ’ R
This CD contains the Solutions Manual, Instructor’s Manual, Test Bank files in Word, ExamView 1 , and PowerPoint slides.
viii Preface
L EC TURE S IN P OWE R P OINT Accompanying the tenth edition are PowerPoint slides (by Gail Wright, Professor Emeritus,
Bryant University), available by download to students and instructors for use in preparing and displaying material for lectures. The PowerPoint slides may be found on the product Web site and on the Instructor’s Resource CD.
P RODUC T S UP PORT W EB S ITE
Instructors and students may turn to www.thomsonedu.com/accounting/maher for resources geared to the M.B.A. managerial course such as PowerPoint lectures, instructor supplements, and quizzes.
A CKNOWLED GMENT S
We are grateful to a number of people for their comments, criticisms, and suggestions, among them Peter Ben Ezra (George Washington University), P. N. Saksena (Indiana University, South Bend), Felix Amenkhienan (Radford University), Frank LaMarra (Wayne State University), Dan Law (Gonzaga University), James Bierstaker (University of Massachusetts-Boston), Laurie McWhorter (University of North Carolina-Charlotte), Jay Holmen (University of Wisconsin-Eau Claire), and Myung-Ho Yoon (Northeastern Illinois University).
We wish to thank Acquisitions Editor Keith Chasse, Developmental Editor Michael Guendelsberger, Marketing Manager Kristen Bloomstrom Hurd, Content Project Manager Joanna Grote, Art Director Linda Helcher, Marketing Coordinator Mary Popelar, Editorial Assistant Amanda Wolfe, Project Manager Santosh Vasudevan with ICC Macmillan Inc., and Executive MarComm Manager Brian Chaffee, among others, for their efforts. We especially appreciate their patience and dedication to publishing excellence.
M. W. M.
C. P. S. R. L. W.
Brief Contents
Preface iv
Part One Overview and Basic Concepts 1
Chapter 1 Fundamental Concepts 3 Chapter 2
Measuring Product Costs 33 Chapter 3
Activity-Based Management 77
Part Two Managerial Decision Making 113
Chapter 4 Strategic Management of Costs, Quality, and Time 115 Chapter 5
Cost Drivers and Cost Behavior 141 Chapter 6
Financial Modeling for Short-Term Decision Making 183 Chapter 7
Differential Cost Analysis for Operating Decisions 219 Chapter 8
Capital Expenditure Decisions 273
Part Three Motivating Managers to Make Good Decisions 301
Chapter 9 Profit Planning and Budgeting 303 Chapter 10
Profit and Cost Center Performance Evaluation 349 Chapter 11
Investment Center Performance Evaluation 393 Chapter 12
Incentive Issues 429 Chapter 13
Allocating Costs to Responsibility Centers 461
Appendix: Compound Interest Examples and Applications 491 Compound Interest and Annuity Tables 506 Glossary 509 Index 603
Contents
Preface iv
Part 1
Overview and Basic Concepts 1
Chapter 1
Fundamental Concepts 3
Managerial Application: Managers Need Cost Information for Survival 4 | User Orientation 4 | Comparing Financial and Managerial Accounting 4 | Problem 1.1 for Self-Study 5 | Implementing Strategies 5 | Misuses of Accounting Information 5 | Key Financial Players in the Organization 6 | Ethical Issues 8 | Managerial Application: J & J’s Credo 10 | Understanding Basic Cost Concepts 11 | Contrasting Income Statements for Managerial Use to Those for External Reporting 13 | Problem 1.2 for Self-Study 14 | Managing Costs 14 | Combining the Value Chain and Strategic Cost Analysis 17 | Managerial Accounting in Modern Production Environments 19 | Problem 1.3 for Self-Study 21 | Costs and Benefits of Accounting 21 | The Makeup of the Book 22 | Summary 22 | Key Terms and Concepts 23 | Solutions to Self-Study Problems 23 | Appendix 1.1: Standards of Ethical Conduct for Management Accountants 24 | Questions, Exercises, Problems, and Cases 26 | Suggested Solutions
to Even-Numbered Exercises 31
Chapter 2
Measuring Product Costs 33
Product Costs in Manufacturing Companies 34 | Recording Costs by Department and Assigning Costs to Products 34 | Fundamental Accounting Model of Cost Flows 35 | Problem 2.1 for Self-Study 37 | Managerial Application: Using the Basic Cost Flow Equation to Detect Fraud 37 | Cost Measure: Actual or Normal Costing 38 | Problem
2.2 for Self-Study 39 | Choosing the Right Cost System 39 | Job and Process Costing Systems 41 | Problem 2.3 for Self-Study 42 | Flow of Costs through Accounts 42 | Problem 2.4 for Self-Study 45 | Ethical Issues in Job Costing 45 | Just-in-Time (JIT) Methods 45 | Problem 2.5 for Self-Study 48 | Do Integrated Accounting Systems Satisfy Managerial Needs? 49 | Summary 49 | Key Terms and Concepts 51 | Appendix 2.1: Computing Costs of Equivalent Production 51 | Solutions to Self-Study Problems 55 | Questions, Exercises, Problems, and Cases 57 | Suggested Solutions to Even-Numbered
Exercises 72
Chapter 3
Activity-Based Management 77
Strategic Use of Activity-Based Management 78 | Activity Analysis 78 | Traditional Methods versus Activity-Based Costing 80 | Activity-Based Costing 81 | Activity-Based Costing Methods 81 | Activity-Based Costing Illustrated 84 | Problem 3.1 for Self- Study 86 | Activity-Based Management and Costing in Marketing 86 | Managerial
Application: Cost Management in Action: Why Hewlett-Packard Now Manages
Suppliers Instead of Overhead 87 | Cost Hierarchies 87 | Problem 3.2 for Self-Study 89 |
Managerial Application: Resources Used versus Resources Supplied in Health
Care 90 | Managerial Application: Impact of ABC on Shareholder Value 93 | Summary 93 | Key Terms and Concepts 94 | Solutions to Self-Study Problems 95 | Questions, Exercises, Problems, and Cases 96 | Suggested Solutions to Even-Numbered
Exercises 110
Contents xi
Part 2 Managerial Decision Making 113
Chapter 4 Strategic Management of Costs, Quality, and Time 115 Why Is Quality Important? 115 | Traditional versus Quality-Based View 116 | Quality According to the Customer 117 | Quality and the Value Chain 118 | Quality Control 119 | Costs of Failing to Control and Improve Quality 119 | Trading Off Quality Control and Failure Costs 119 | Problem 4.1 for Self-Study 121 | Measuring the Cost of Quality in a Nonmanufacturing Setting 122 | Is Quality Free? 122 | Managerial Application: Quality, Reputation, and Ethics 123 | Identifying Quality Problems 123 | Just-in-Time and Total Quality Management 124 | The Importance of Time in a Competitive Environment 125 | Using Activity-Based Management to Improve Customer Response Time 127 | Strategic Performance Measurement Using the Balanced Scorecard 127 | Traditional Managerial Accounting Systems Can Limit the Impact of Total Quality Management 128 | Summary 129 | Key Terms and Concepts 130 | Solution to Self-Study Problem 130 | Questions, Exercises, and Problems 130 | Suggested Solutions to Even-Numbered Exercises 138
Chapter 5 Cost Drivers and Cost Behavior 141 The Nature of Fixed and Variable Costs 142 | Types of Fixed Costs 145 | Other Cost Behavior Patterns 145 | Problem 5.1 for Self-Study 148 | Problem 5.2 for Self- Study 150 | Cost Estimation Methods 150 | Estimating Costs Using Historical Data 151 | Problem 5.3 for Self-Study 157 | Data Problems 158 | Ethical Issues in Data Analysis 158 | Managerial Application: United Airlines Uses Regression to Estimate Cost Behavior 159 | Strengths and Weaknesses of Cost Estimation Methods 159 | Problem 5.4 for Self-Study 161 | Summary 161 | Key Terms and Concetps 162 | Solutions to Self-Study Problems 163 | Appendix 5.1: Deriving Learning Curves 165 | Appendix 5.2: Interpreting Regression Analysis Output 166 | Questions, Exercises, and Problems 168 | Suggested Solutions to Even-Numbered Exercises 180
Chapter 6 Financial Modeling for Short-Term Decision Making 183 What Is Financial Modeling? 184 | The Cost-Volume-Profit Model 184 | Applications of Financial Modeling 188 | Problem 6.1 for Self-Study 190 | Problem 6.2 for Self-Study 191–192 | Using Sales Dollars as a Measure of Volume 193 | Income Taxes 193 | Managerial Application: Calculating Break-Even Points for a Brewpub 194 | Multiple Product Financial Modeling 195 | Problem 6.3 for Self-Study 198 | Simplifications and Assumptions 199 | Financial Modeling and ABC’s Multiple-Cost Drivers 200 | Summary 202 | Key Terms and Concepts 203 | Solutions to Self-Study Problems 203 | Questions, Exercises, Problems, and Cases 205 | Suggested Solutions to Even-Numbered Exercises 216
Chapter 7 Differential Cost Analysis for Operating Decisions 219 The Differential Principle 220 | Major Influences on Pricing 221 | Short-Run versus
Long-Run Pricing Decisions 222 | Differential Approach to Pricing 223 | Problem 7.1 for Self-Study 224 | Long-Run Pricing Decisions 224 | Managerial Application: Pricing Practices in Various Countries 225 | Life-Cycle Product Costing and Pricing 225 | Legal Issues Relating Costs to Prices 225 | Using Target Prices to Set Target Costs 226 | Customer Profitability and Differential Analysis 226 | Problem 7.2 for Self-Study 228 | Product Choice Decisions 228 | Theory of Constraints and Throughput Contribution Analysis 230 | Make-or-Buy Decisions 232 | Managerial Application: Cost Management in Action: Why Hewlett-Packard Now Manages Suppliers Instead of Overhead 232 | Problem 7.3 for Self-Study 233 | Joint Products: Sell or Process Further 234 | Problem 7.4 for Self-Study 235 | Adding and Dropping Parts of Long-Run Pricing Decisions 222 | Differential Approach to Pricing 223 | Problem 7.1 for Self-Study 224 | Long-Run Pricing Decisions 224 | Managerial Application: Pricing Practices in Various Countries 225 | Life-Cycle Product Costing and Pricing 225 | Legal Issues Relating Costs to Prices 225 | Using Target Prices to Set Target Costs 226 | Customer Profitability and Differential Analysis 226 | Problem 7.2 for Self-Study 228 | Product Choice Decisions 228 | Theory of Constraints and Throughput Contribution Analysis 230 | Make-or-Buy Decisions 232 | Managerial Application: Cost Management in Action: Why Hewlett-Packard Now Manages Suppliers Instead of Overhead 232 | Problem 7.3 for Self-Study 233 | Joint Products: Sell or Process Further 234 | Problem 7.4 for Self-Study 235 | Adding and Dropping Parts of
Operations 235 | Problem 7.5 for Self-Study 236 | Inventory Management Decisions 236 | Innovations in Inventory Management and Flexible Manufacturing 238 | Problem 7.6 for Self-Study 239 | Summary 239 | Key Terms and Concepts 241 | Solutions to Self-Study Problems 241 | Appendix 7.1: Linear Programming 243 | Appendix 7.2: Economic Order Quantity Model 248 | Questions, Exercises, Problems, and Cases 249 | Suggested Solutions to Even-Numbered Exercises 268
Chapter 8
Capital Expenditure Decisions 273
Capital Budgeting: Investment and Financing Decisions 274 | Strategic Considerations 274 | Managerial Application: Environmental Investments 275 | Discounted Cash Flow 275 |
A Basic Example of Discounted Cash Flow Analysis 277 | Expanded Example of Discounted Cash Flow Analysis 278 | Problem 8.1 for Self- Study 279 | Sensitivity of Net Present Value to Estimates 280 | Internal Rate of Return 282 | Net Present Value and Internal Rate of Return: A Comparison 283 | Problem 8.2 for Self-Study 283 | Managerial Application: Investing in Improved Technology 284 | Justification of Investments in Advanced Production Systems 284 | Problem 8.3 for Self-Study 285 | Identifying Good Investments 286 | Audits and Capital Budgeting 287 | Behavioral Issues 287 | Summary 288 | Key Terms and Concepts 289 | Solutions to Self-Study Problems 289 | Questions, Exercises, Problems, and Cases 292 | Suggested Solutions to Even-Numbered Exercises 298
Part 3 Motivating Managers to Make Good Decisions 301
Chapter 9
Profit Planning and Budgeting 303
Strategic Planning 304 | The Organizational Plan 304 | The Human Element in Budgeting 306 | Managerial Application: Honesty in Managerial Reporting 307 | Tools for Planning and Performance Evaluation 308 | The Process of Developing the Master Budget 309 | Managerial Application: Developing Master Budgets Throughout the World 309 | Where to Start? With Your Customers (Forecasting Sales) 310 | Victoria’s Gourmet Coffee: A Comprehensive Illustration 311 | Managerial Application: Using the Internet for Budgeting 317 | Incentives for Accurate Forecasts 317 | Comparison of the Flexible and Master Budgets 317 | Problem 9.1 for Self-Study 319 | Budgeting in Nonprofit Organizations 319 | Ethical Issues in Budgeting 319 | Establishing an Operating Budget in the Real World 320 | Summary 323 | Key Terms and Concepts 323 | Solutions to Self-Study Problems 324 | Appendix 9.1: Comprehensive Master Budget—Victoria’s Gourmet Coffee 324 | Appendix 9.2: Incentive Model for Accurate Reporting 330 | Questions, Exercises, Problems, and Cases 331 | Suggested Solutions to Even-Numbered Exercises 345
Chapter 10
Profit and Cost Center Performance Evaluation 349 Variance Analysis 349 | Responsibility for Marketing and Administrative Variances 350 | Problem 10.1 for Self-Study 353 | Cost Variance Analysis 353 | Production Cost Variance Analysis 353 | Reasons for Materials, Labor, and Variable Manufacturing Overhead Variances 354 | Managerial Application: An Antidote to Biased Standards: How Workers Develop Their Own Standards at NUMMI 355 | Problem 10.2 for Self- Study 355 | Problem 10.3 for Self-Study 359 | Variable Overhead in Service Organizations 361 | Period-to-Period Analysis of Changes in Financial Performance 361 | Problem 10.4 for Self-Study 365 | Activity-Based Standard Costing 366 | Variance Analysis in High-Technology Companies 367 | Quality Control and Variance Investigation 368 | Problem 10.5 for Self-Study 370 | Employee Participation 370 |
Contents xiii
Summary 371 | Key Terms and Concepts 372 | Appendix 10.1: Mix and Yield Variances 372 | Problem 10.6 for Self-Study 373 | Solutions to Self-Study Problems 374 | Questions, Exercises, Problems, and Cases 376 | Suggested Solutions to Even-Numbered Exercises 390
Chapter 11 Investment Center Performance Evaluation 393 Divisional Organization and Performance 393 | Return on Investment as the Performance Measure 395 | Transfer Pricing: Measuring Divisional Revenue and Costs for Transactions inside the Organization 396 | Alternative Ways to Set Transfer Prices 398 | Problem 11.1 for Self-Study 401 | Global Transfer Pricing Practices 401 | Multinational and Multistate Transfer Pricing 402 | Managerial Application: Just-in-Time Production in Japan and the Internal Revenue Service in the United States 403 | Problem 11.2 for Self-Study 403 | Measuring Division Operating Costs 403 | Measuring the Investment in Divisions 404 | Contribution Approach to Division Reporting 405 | Components of Return on Investment 405 | Economic Value Added 407 | Managerial Application: Does Economic Value Added Beat Earnings? 409 | Problem 11.3 for Self-Study 410 | Summary 410 | Key Terms and Concepts 411 | Solutions to Self-Study Problems 411 | Questions, Exercises, Problems, and Cases 412 | Suggested Solutions to Even-Numbered
Exercises 425 Chapter 12
Incentive Issues 429 Divisional Incentive Compensation Plans 429 | Managerial Application: Conflicts in an Incentive Compensation Plan 431 | Views of Behavior 431 | Using the Balanced Scorecard 433 | Building the Incentive Plan Around the Balanced Scorecard 434 | Managerial Application: Does Customer Satisfaction Pay Off? 437 | Managerial Application: Successfully Implementing the Balanced Scorecard: The FMC Experience 439 | Problem 12.1 for Self-Study 439 | Motivational Issues in Designing Incentive Systems for Division Managers and Their Subordinates 439 | Applications to Nonprofit Organizations 442 | Problems with Incentive Compensation Plans 443 | Fraudulent Financial Reporting 443 | Types of Fraud 444 | Managerial Application: Software Company’s Stock Tanks after Premature Revenue Recognition Disclosed 445 | Causes of Financial Fraud 446 | Environmental Conditions 447 | Internal Controls to Protect Assets and Provide Quality Information 447 | Incentive Problems in International Markets 449 | Problem 12.2 for Self-Study 450 | Summary 450 | Key Terms and Concepts 451 | Solutions to Self-Study Problems 451 | Questions, Exercises, Problems, and Cases 451 | Suggested Solutions to Even-Numbered Exercises 460
Chapter 13 Allocating Costs to Responsibility Centers 461 The Nature of Common Costs 461 | Purposes of Common Cost Allocations 462 | Cost Allocation 463 | Problem 13.1 for Self-Study 469 | Marketing and Administrative Costs 471 | Allocating Joint-Process Costs 472 | Joint-Process Cost Allocation Methods 472 | Problem 13.2 for Self-Study 473 | Problem 13.3 for Self-Study 474 | Summary 475 | Key Terms and Concepts 475 | Solutions to Self-Study Problems 476 | Questions, Exercises, Problems, and Cases 477 | Suggested Solutions to Even-Numbered Exercises 488
Appendix: Compound Interest Examples and Applications 491 Compound Interest and Annuity Tables 506 Glossary 509 Index 603
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PART ONE
ma cmu
10
Overview and Basic Concepts
The noted management writer Peter Drucker calls accounting the most intellectually challenging and turbulent area in the field of management. Whatever your career plans, the ideas in this book will help you meet those challenges. Chapters 1–3 lay the foundation for the rest of the book. Chapter 1 provides the groundwork for the book, including tying strategic cost analysis to the value chain. Chapter 2 shows you how cost systems work. Chapter 3 focuses on managing overhead costs, emphasizing activity-based costing and management. We emphasize cost management and the use of cost information to create strategic advantages.
chapter
Fundamental Concepts
Learning Objectives
1. Distinguish between managerial and financial
prepared for managerial use and those
accounting.
prepared for external reporting.
2. Understand how managers can use 7. Understand the concepts useful for managing accounting information to implement
costs.
strategies.
8. Describe how managerial accounting
3. Identify the key financial players in the
supports modern production environments.
organization.
9. Understand the importance of effective
4. Understand managerial accountants’
communication between accountants and
professional environment and ethical users of managerial accounting information. responsibilities.
10. Understand the ethical standards that make 5. Master the concept of cost.
up the Institute of Management Accountants’ 6. Compare and contrast income statements
Code of Ethics (Appendix 1.1).
Managers must equip themselves with the tools and insights to act strategically about business opportunities. This book discusses how managers can use information—both financial and nonfinancial—to implement strategic plans and improve the process of providing goods and services to people. Organizational success typically requires intelligent use of information. About
80 percent of new businesses fail within five years after opening their doors, often because management does not use information to make good decisions, plan for growth, and forecast cash needs. For example, the Managerial Application ‘‘Why Managers Need Cost Information’’ tells of the early days of Domino’s Pizza, when the company nearly went bankrupt because of poor information. Organizations with poor information systems also have difficulty obtaining financing from banks, venture capitalists, and shareholders.
4 Chapter 1 Fundamental Concepts
Managerial Application
Managers Need Cost Information for Survival In its early years, Domino’s Pizza (http://www.
costs would have helped, or did help, the organization dominos.com) nearly went bankrupt before the owner to succeed. In general, an organization’s ability to discovered that the company was losing money on
manage its costs becomes more important as the six-inch pizzas. The company dropped the product
environment becomes more competitive. Hospitals, line and went on to become a multibillion-dollar
airlines, banks, audit firms, and other organizations company. Many hospitals that thrived when insurers
face increasingly stiff competition, driving them to fully reimbursed health care costs now face large
seek better ways to measure productivity and costs. deficits. Many airlines, successful under prior stringent Perhaps you know of organizations that have regulations, have gone bankrupt since regulations
struggled because they did not use cost information to have eased.
manage costs. (One such organization is the U.S. What do these stories all have in common? They government.) represent situations in which better management of
Us er Orient ation
Even if you are not planning a career in finance or accounting, you will be using managerial accounting information. Here are just a few examples.
Marketing managers use financial information to help price products and assess their profitability. Using product cost information, marketing managers ascertain how low they can drop prices and still be profitable. Production managers use financial and nonfinancial information to manage quality and costs and to assure on-time delivery. General managers use financial information to measure employee performance and create incentives.
We take a user’s perspective of accounting in this book. We want you to understand managerial accounting so that you can effectively use the information that accountants provide.
Comp arin g Fin ancial and Man agerial Accountin g
University educators usually divide accounting courses into financial accounting and managerial accounting. Financial accounting deals with reporting to people outside an organization. The users of financial accounting reports include shareholders (owners) of a corporation, creditors (those who lend money to a business), financial analysts, labor unions, and government regulators.
Managerial accounting deals with activities inside the organization. (Most companies call this finance or corporate finance.) Managerial accounting has no rules and regulations, such as generally accepted accounting principles. Unlike financial accounting, which must use historical data, managerial accounting can and does use projections about the future. After all, managers make decisions for the future, not the past.
Like all else in business, managerial accounting information must meet a managerial cost- benefit test. To justify providing managerial accounting information, the benefit from providing the information must exceed the cost of obtaining the information. New managerial accounting initiatives such as activity-based costing and the balanced scorecard (both discussed in later chapters), for example, must pass the cost-benefit test to be worth undertaking.
Misuses of Accounting Information 5
Problem 1.1 for Self-Study Differences between Financial and Managerial Accounting. What are the differences
between financial and managerial accounting? The solution to this self-study problem is at the end of this chapter on page 23.
Implementin g Strate gie s
A good managerial accounting system takes into account the economics of the industries in which the organization operates and the organization’s strategy. For example, suppose managers of a company called e-whatever.com realize that their industry has low barriers to entry; and the organization has competitors, both in ‘‘bricks’’ and in ‘‘clicks.’’ Furthermore, the company’s product is essentially a commodity (a product that is difficult to differentiate from those of competitors), despite the managers having spent millions of dollars to build brand equity. To compete effectively, the organization must excel at order fulfillment and manage costs both to keep prices competitive and to make a reasonable return on shareholders’ investment.
E-whatever.com’s managerial accounting system must provide managers with cost informa- tion to help them assess product profitability, given the competitive market the company faces. It also must highlight problem areas in order fulfillment, such as delays in shipping and unexpectedly high purchase returns. In addition, the managerial accounting system must measure pricing and order fulfillment performance so that managers can reward people for doing well on such critical performance factors.
Consider another type of strategic advantage, the learning phenomenon. Assume General Electric produces a complex navigational device for spacecraft. While other companies could produce it, General Electric has developed a strategic advantage because of the learning phenomenon. The learning phenomenon, which we discuss in detail in Chapter 5, means that General Electric’s labor costs per unit go down as it produces more of the navigational devices. By the time it produces the 40th navigational device, General Electric’s labor costs might be only
a fraction of the costs of a new market entrant that is producing its first navigational device. General Electric’s managerial accounting system should track costs that are potentially subject to the learning phenomenon. It should inform managers how the learning phenomenon affects costs and helps managers predict product costs. The managerial accounting system should also help managers budget costs of production that are subject to the learning phenomenon.
Shelter-Us is a nonprofit organization that operates a shelter for homeless people and provides transition housing for victims of domestic violence. The shelter receives donations from businesses and from private individuals, and it receives grants from various government agencies. The organization aims to provide adequate shelter at minimum cost. Its managers must consider the cost of various types of housing. For example, should the shelter build its own housing units or outsource housing to a local motel?
The managerial accounting system for Shelter-Us should provide information about the costs of various types of shelter. Because the organization receives donations and grants, it should provide information about specific uses of funds received. For example, it should not use funds from a grant earmarked for victims of spousal abuse to provide meals for homeless people.
These examples illustrate that the managerial accounting system should help managers implement an organization’s strategy. The system must be adapted to each organization’s objectives, strategy, and environment.
Misus e s of Accountin g In formation
Managers and other users of accounting information often mistakenly use data for one purpose that are intended for another. For example, many companies compute various inventory costs and depreciation costs for tax purposes; this information does not usually provide data suitable for managerial uses.
Further, most managerial decisions require more detailed data than external financial reports provide. For instance, Amazon.com’s external financial statements present a single
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amount for inventory valuation and a single amount for cost of goods sold expense summarized for all product lines. For decision-making purposes, however, management wants detailed data about the cost of each of several hundred products, such as paperback books and jazz CDs.
Managers sometimes believe that they must use the same accounting data for their decision making, planning, and other managerial activities as they present in tax returns and financial statements. That is not correct. In fact, many companies develop managerial accounting systems independent of financial accounting. Some regulated companies, such as Duke Energy have a third accounting system designed to accumulate data to show the regulators, who, to a degree, control the prices Duke Energy can charge some of its customers.
Many organizations have tried simply to take their financial accounting systems as given and modify them a little for managerial uses. The results are often disastrous, because managers do not get the information they need for decision making.
Managers must realize that different uses of accounting information require different types of accounting information. ‘‘One size fits all’’ does not apply to managerial accounting. For example, consider a used laptop computer that you own. Think about how the data you’d want to know would differ as the question you ask changes:
1. What can I sell it for?
2. How much will I get for it if I trade it in with cash for a new one?
3. What value does this old machine have as a backup if I buy a new one but keep the old one?
4. What did the old computer cost new?
5. What is the computer’s book value—original cost reduced by accumulated depreciation?
6. What is the cost basis for tax reporting purposes? Managerial accounting information would be relevant for items 1 through 3, whereas financial
accounting or tax reporting information would be relevant for items 4 through 6.
Key Fin ancial Players in the Org aniz ation
As managers, you should know the key financial players in organizations. Who in the organization will help you get the information you need to manage the company? Exhibit 1.1 shows a typical organization chart—an abbreviated version of DuPont’s. The shaded boxes represent the financial managers at the corporate level.
F INANCIAL V ICE -P RE S IDENT
The top financial person is usually a senior vice-president in the company, the financial vice- president (often called chief financial officer—CFO). This person is in charge of the entire
accounting and finance function and is typically one of the three most influential people in the company. (The other two are the chief executive officer and the president.)
C ONT ROLLE R
The controller manages cost and managerial accounting in most organizations. The name controller sounds like someone who ‘‘controls things.’’ In fact, the controller’s staff works in planning, decision making, designing information systems, designing incentive systems, and helping managers make operating decisions, among other things. If you have a career in marketing, production, or general management, you will have frequent interactions with controllers.
T RE ASURE R The corporate treasurer manages cash flows and raises cash for operations. The treasurer
normally handles relations with banks and other lending or financing sources, including public issues of shares or bonds.
Key Financial Players in the Organization 7
EXHIBIT 1.1
Partial Organization Chart
Board of Directors
Chief Executive Officer
President
Industrial
Staff and
Other Vice-Presidents Biochemicals
Including Engineering Vice-President
Dyes and Pigments
and Materials, Legal, and Employee Relations
Treasurer
Controller
Internal Audit
C OS T A CCOUNTANTS /M ANAGE R S
Cost accountants and cost managers analyze and manage costs. They also work on cross- functional teams, including marketing-oriented teams, to decide whether to keep or drop products because of product profitability. They also work on operations-oriented teams, to find ways to redesign products to save costs.
I NTE RNAL A UDIT
The internal audit department provides a variety of auditing and consulting services. Internal auditors often help managers in that they provide an independent perspective on managers’ problems. Internal auditors frequently act as watchdogs who find internal fraud. For example, the internal auditors at WorldCom ‘‘blew the whistle’’ on top executives by uncovering a substantial accounting misstatement of several billion dollars.
Internal auditors who focus on operations as well as finance are particularly helpful to managers. Such auditors are called operational auditors. In some companies, such as General Electric, internal auditing is an important training ground for managers. Federal legislation affecting corporate governance—the Sarbanes-Oxley Act of 2002—has increased the interaction between internal auditors and the audit committee of the board of directors. The prestige of internal auditing has increased. Likely, the audit committee not only will receive reports directly from the internal auditors but also will set compensation for them.
Notice in Exhibit 1.1 that at DuPont, as at many other companies, the internal audit manager reports to the controller’s superior. The controller is in charge of the accounting systems audited by the internal auditor. If internal auditors report to the controller, then internal auditors are auditing their own boss. The dotted line between Internal Audit and the Board of Directors indicates that internal auditors can communicate directly with the audit committee of the board of
8 Chapter 1 Fundamental Concepts
directors. That allows internal auditors to blow the whistle on anybody in the company—even the president—if they believe it’s necessary.
I NS TITUTE OF M ANAGEMENT A CCOUNTANT S
The Institute of Management Accountants (IMA) (http://www.imanet.org) has thousands of members who work in management accounting. It publishes a journal called Strategic Finance, numerous policy statements, and research studies on accounting issues. It also sponsors the Certified Management Accountant (CMA) and Certified in Financial Management programs, which are the major certifications for managerial accountants.
C ERTIFIED M ANAGEMENT A CCOUNTANT
The Certified Management Accountant (CMA) designation recognizes educational achieve- ment and professional competence in management accounting. The examination, educational requirements, and experience requirements are similar to those for a CPA, but they aim at the professional in management and cost accounting. We have included questions from CMA examinations in this book.
C ERTIFIED P UB LIC A CCOUNTANT
The designation Certified Public Accountant (CPA) indicates that an individual has qualified to
be registered or licensed by passing a written examination and, in some states, satisfying audit experience requirements. The CPA examination includes questions on managerial accounting.