Managerial accounting by balakrishnan varamakrishnan and geoffrey b sprinkle

As such, these chapters distinguish between cost accounting computing product costs and managerial account- ing providing information for decision making.. In Chapter 1, we provide four

M A N A G E R I A L

A C C O U N T I N G

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107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923 (Web site: www.copyright.com) Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030-5774, (201) 748-6011, fax (201) 748-6008, or online at: www.wiley.com/go/permissions.

Ramji Balakrishnan

To my parents, Usha, Vasu and Uma

K Sivaramakrishnan

To my father, my sisters Viji and Parvathi, my wife Devika,

my daughter Vidya, and in loving memory of my mother

Geoffrey B Sprinkle

To Shari, Jason, Jack, and Scott

Dedication

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Ramji Balakrishnan is the Carlson-KPMG Professor of Accounting and the

Director of the RSM McGladrey Institute for Accounting Research and Education

at the University of Iowa Dr Balakrishnan has a B.Sc in Statistics from the University of Madras in 1977, an MBA from the Indian Institute of Management, Ahmedabad in 1979, and a Ph.D from Columbia University in 1986 He is a Certified Management Accountant and is a recipient of the Robert Beyer Bronze Medal He joined the University of Iowa in 1986 and has been there since except for a year at Georgia State University A top-rated teacher and researcher, Dr

Balakrishnan has published his research in premier journals such as The Accounting Review, Journal of Accounting Research, Contemporary Accounting Research, Management Science, Journal of Management Accounting Research and Accounting Horizons Along

with Dr Sivaramakrishnan, he won the 2003 Best Paper award for notable tion to the management accounting literature Dr Balakrishnan serves on several Editorial Boards and has served as Associate Editor He has taught managerial accounting at the undergraduate, graduate, and doctoral levels, and has published several teaching cases He was the President of the Management Accounting Section of the AAA for 2005-2006.

contribu-Konduru “Shiva” Sivaramakrishnan is currently a Professor and C.T Bauer

Endowed Chair in Accounting at the C.T Bauer College of Business, University

of Houston He received his BTech in Engineering from the Indian Institute of Technology, Madras in 1977, an MBA from Xavier Institute, Jamshedpur, India,

in 1982, and a Ph.D in Accounting and Information Systems from the Kellogg Graduate School of Management at Northwestern University in 1989 Prior to his current position, he was a tenured Associate Professor at the Graduate School of Industrial Administration, Carnegie Mellon University, and Professor and Philip Ljungdahl Chair in Accounting at Texas A&M University Dr Sivaramakrishnan has significant research and teaching accomplishments His research has appeared

in premier journals such as The Accounting Review, Journal of Accounting Research, Contemporary Accounting Research, Management Science, Journal of Management Accounting Research, Accounting Horizons, Journal of Accounting and Economics, and Review of Financial Studies Along with Dr Ramji Balakrishnan, he won the 2003 Best

Paper award for notable contribution to the management accounting literature Shiva serves on several editorial boards, and is currently an Associate Editor of the

Journal of Management Accounting Research He has won numerous awards for teaching

excellence at both undergraduate and graduate levels.

Geoffrey B Sprinkle is an Associate Professor, Whirlpool Faculty Fellow, and

Chair of the Honors Program at the Kelley School of Business at Indiana University

Dr Sprinkle has both B.S and M.S degrees in Accounting from Arizona State University, and his Ph.D from The University of Iowa He is a Certified Public Accountant, earning the Gold Medal in the state of Arizona on the May, 1989 CPA exam and the Elijah Watts Sells award nationally He primarily teaches managerial accounting to undergraduates and is the recipient of numerous school-wide and university-level teaching awards Dr Sprinkle’s writings focus on motivation and coordination problems within organizations, including performance-evaluation

and reward systems His work has been published in journals such as The Accounting Review, The American Economic Review, Accounting, Organizations and Society, Journal of Accounting Research, Behavioral Research in Accounting, Issues in Accounting Education, and The Journal of Management Accounting Research He also currently serves on the Editorial Boards of The Accounting Review, The British Accounting Review, Accounting, Organizations and Society, and The Journal of Management Accounting Research.

About the Authors

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Compared to existing books on the market, we believe

our book offers several advantages and unique

fea-tures Below, we summarize the key attributes of our

text In the pages following the summary, we provide

a richer discussion of our approach and pedagogy.

• We provide an easy to understand integrated

framework that links topics into a seamless

whole In the early chapters, we introduce two

ideas: More costs and benefits become relevant

as a decision’s horizon expands, and all

deci-sions involve a cycle of planning and control We

implement the first idea by organizing the text

into modules corresponding to short-term and

long-term decisions We then address planning

and control decisions within each horizon We

are pleased to report that our colleagues and

we have received outstanding student feedback

on the tightly integrated nature of our text—

students and instructors report that chapters

follow naturally from one to the next, with

everything “fitting” together.

• Both the overall structure of the book and

indi-vidual chapters emphasize using accounting

information for decision making. Across chapters,

we use the time-based template to emphasize the

links among the various decisions that

manag-ers make, enabling students to see the linkages

among seemingly unrelated decisions Before

each module, we use a part-opener to remind

students about the relations among

organiza-tional decisions, and to place forthcoming topics

in the appropriate context Within each chapter,

we maintain the focus on decision making by

exploring a specific business problem Each chapter also uses the same four-step approach

to solving business problems.

• Both the chapter text and end-of-chapter

materials provide a balanced coverage of

manufacturing and service sectors Examples considered in the chapters include a gym, a caterer, a hospital, a consulting firm, a copy center, and a call center Moreover, every chapter contains numerous exercises and problems relating to service and nonprofit settings We have received rave reviews from instructors and students about both the breadth and depth of our end-of- chapter materials.

• The book is student friendly Our initial

drafts used a conversational tone and day examples to illustrate concepts We then subjected these drafts to several rounds of review by English editors, undergraduate stu- dents, and faculty to increase accessibility and impact In addition to the standard exhibits, we

every-include “Check It!” boxes of mini-worksheets that

students can use to verify and fine-tune their understanding of the material.

• We maintain the integrity of the framework while

allowing instructors the flexibility to modify

cov-erage to best suit their individual needs We help instructors by presenting several sample syllabi that show alternate sequencing of topics (please see Section 5 in this Preface for further details) The primary flexibility lies in whether, after cover- ing basic terminology and cost flows, instructors choose to cover product costing or to plunge directly into short-term decisions.

Executive Summary

Preface

Managerial accounting facilitates planning and

con-trol decisions Planning decisions relate to choices

about acquiring and using resources to deliver

prod-ucts and services to customers (e.g., which prodprod-ucts

and services to offer, their prices, and the resources

needed, such as materials, labor, and equipment)

Control decisions concern how much to delegate,

as well as how to motivate, measure, evaluate, and

reward performance.

Current managerial accounting textbooks generally

group product costing, cost management (ABC/ABM),

short-term decisions, and performance evaluation

prac-tices into four separate modules This grouping allows

students to gain a working knowledge of current

mana-gerial accounting practices However, while each book

may provide solid coverage on one or more important

dimensions, none offers a satisfactory, overarching

theme The average student walks away with a

collec-tion of concepts and techniques but with little idea of

why things work the way they do Armed with only the

“what” and the “how” but not the “why,” students have

no framework that lets them see the principles that drive

practice or helps them adapt to novel or changing

circumstances.

We provide instructors and students with a unifying,

problem-solving framework. We believe that the

frame-work itself must be the key takeaway from any

intro-ductory managerial accounting course By virtue

of its logic and internal consistency, the framework

allows students to:

• Understand the big picture.

• Examine new ideas and concepts and their

relation to existing practice.

• See how accounting information helps manage

a complex entity.

At the core of our framework is the one feature

common to all decisions—every decision involves a

cost-benefit trade-off The decision could be personal

(should I eat out or make dinner?) or organizational

(should we continue using traditional performance

measures or switch to the balanced scorecard?) The

decision could relate to planning (how should we

price this product?) or control (where should we set

the sales quota?) The theme of systematically

mea-suring costs and benefits to make effective decisions

runs throughout our text.

The first outgrowth of this theme, indicated by

the titles of the modules, is our emphasis on a

decision’s horizon Time influences whether a cost

or benefit is relevant for decision The costs of the production plant and equipment are not relevant to many short-term decisions Thus, there is no need to allocate these fixed costs to make effective short-term decisions In the long term, however, a firm can man- age capacity costs by shrinking or expanding its invest- ment in plant and equipment Thus, to make effective long-term decisions, a firm needs to identify varia- tions in resource consumption patterns and create allocation mechanisms that capture the cost impact of these variations Ultimately, when confronted with a decision problem, the successful manager knows what costs and benefits to include in the decision, and how

to measure these costs and benefits.

A second important aspect of our framework is an integrated treatment of planning and control deci- sions Planning and control are two sides of the same coin Diagnostic and feedback measures inform orga- nizations of how well they implemented the plan, thereby providing input for the next plan Similarly, performance evaluation and incentive schemes arise

in response to strategic aspects of the planning cess An integrated treatment highlights these links, permitting students to perceive planning and control decisions as part of the same framework.

pro-PEDAGOGY

Students learn best from simple examples Once students understand the basic issues at an intuitive level, it is easier for them to understand similar issues

in other business contexts We therefore begin each chapter with an example that students can readily comprehend and to which they could relate We then walk students through the issues and use the vignette

as a springboard to more advanced settings.

In addition to linking topics across chapters, we tightly integrate topics within a chapter To this end, each chapter tells a story The opening vignette serves to raise pertinent questions, and the chapter answers these questions In this fashion, the student perceives the concepts as being interrelated and not disjointed.

We note three other important features:

• We made a strategic decision to collaborate

on one chapter at a time; although more consuming, this team-based approach ensures that we choose the best among the many ways

time-of presenting the same material This approach ensures that the book speaks with one voice.

1 Introduction

• We have tried to make the text extremely

acces-sible This allows instructors, after ensuring that

students understand the basics, to devote some

class time to higher-order learning and explore

conceptual and qualitative issues As detailed in

Section 4, the end-of-chapter materials contain

thought questions that instructors can use to ate such discussions.

• We hope to surprise you with both the breadth and depth of our end-of-chapter materials We have devoted substantial efforts to ensuring that the problems and solutions are of the highest quality.

The typical student has limited exposure to business,

even though she may have taken courses in

finan-cial accounting and microeconomics Accordingly,

the key task is both to explain the many kinds of

decisions needed to operate a successful business

and to communicate how managers use cost

infor-mation in these decisions It is not enough to know

prevalent practice It is vital that the student

under-stand whether and why a certain practice has merit

in a given situation This understanding requires

a sound framework In line with the adage about

teaching a man to fish, we believe that the average student will appreciate our framework for decision making.

The focus on using cost data for decision making makes our book well suited for a course that employs

a perspective We believe that such a focus is particularly appropriate for the introductory course It also is consistent with the widespread move to change the curriculum from a technical- accounting perspective to a business- oriented, or process, perspective.

user-2 Audience

Module I: INTRODUCTION

AND FRAMEWORK

Our first module contains three chapters In Chapter 1,

we illustrate a four-step framework for decision

mak-ing, and we distinguish how individuals make

deci-sions from how organizations make decideci-sions We

next introduce two important classes of organizational

decisions—planning decisions and control decisions

We then discuss how organizations use managerial

accounting information for both planning and control

We conclude Chapter 1 by examining the role of ethics

in decision making, and discussing how societal and

professional standards shape organizational decisions.

Making a decision requires that we identify what

costs and benefits to measure, and then estimate

them Chapters 2 focuses on the principles that

help us accomplish these two tasks We begin with

two principles, controllability and relevance, that

3 Organization of Content

determine which costs and benefits to measure Using

these principles, we offer an approach for grouping business decisions per their horizon This grouping of decisions forms the basis for the modular approach that unfolds We next discuss the principles that are fundamental to estimating costs and benefits: variabil- ity and traceability Finally, we extend the principle of variability to develop a hierarchy of costs, which helps

to increase the accuracy of estimated costs.

We conclude this introductory module with a chapter on cost terminology and an overview of how accounting systems record the flow of costs This chapter begins by discussing cost flows in a ser- vice environment such as a health club, where the accounting and cost flows are somewhat intuitive

We next move to cost flows in merchandising firms

to introduce the concept of an inventory account Finally, we consider manufacturing organizations.

Module II: SHORT-TERM PLANNING AND

CONTROL: MAXIMIZING CONTRIBUTION

We define the short term as a period over which

orga-nizations cannot change capacity costs arising from

long-term commitments related to property, plant,

equipment, and personnel These costs, which we

often term fixed costs, are therefore not relevant for

term decisions Accordingly, the goal for

short-term decisions is to maximize contribution margin,

which is revenue less variable costs.

We begin Module II with a discussion of how to

estimate relevant costs for short-term decisions The

key here is to identify fixed and variable costs,

lead-ing us to discuss techniques such as account

classifi-cation, the high-low method, and regression analysis

We end this chapter by showing how a

contribu-tion margin statement helps managers organize the

resulting information to make effective short-term

decisions

We devote Chapters 5 and 6 to planning decisions

In Chapter 5, we introduce Cost-Volume-Profit (CVP)

analysis, a natural outgrowth of the contribution

mar-gin statement studied in the previous chapter The

CVP relations among costs, volume, and profit provide

a convenient tool for profit planning Following this,

we apply the CVP relation to evaluate decision options

and, in the process, illustrate how managers could use

the CVP relations to evaluate operating risk

While CVP analysis is useful for overall profit

plan-ning, it is not suitable for many localized decision

problems that arise because of the temporary

mis-match between the supply and demand for capacity

resources Specifically, most organizations invest in

capacity resources such as plant, equipment, and

per-sonnel based on expectations of long-term demand

Actual demand rarely equals anticipated demand,

however In some periods, actual demand falls short

of expectations, meaning that managers must find

ways to utilize idle resources gainfully At other times,

actual demand exceeds available capacity,

chang-ing the manager’s problem to one of extractchang-ing the

maximum benefit from available resources In either

instance, organizations cannot fix the mismatch by

changing capacity because they cannot control

capac-ity levels and costs in the short term In Chapter 6,

we discuss two approaches—the incremental and

totals—to frame and solve such decision problems

We illustrate these approaches in several contexts

such as make-or-buy, accepting a special order, and

allocating a scarce resource

Chapter 7 examines operating budgets Budgets

incorporate planning decisions on how and where to

use resources Budgets also serve as the benchmark

for evaluating actual results, a control decision In

this way, budgets bridge the planning and control

dimensions We emphasize the tension between the planning and control roles for budgets in our discussion of both the mechanics of budgeting and the budgeting process.

Chapter 8 focuses on short-term control decisions

We begin by introducing the concept of a variance, which is the deviation between a budgeted and actual result We then present the mechanics of variance analysis, with a focus on using variances to reconcile budgeted and actual profit Finally, we emphasize the link back to planning decisions by discussing how to construct and interpret a profit reconciliation state- ment to determine possible corrective actions.

Module III: PLANNING AND CONTROL OVER THE LONG TERM: MAXIMIZING PROFIT

Over the long term, organizations can control most costs considered fixed in the short term That is, orga- nizations can alter capacity levels over this horizon Thus, the goal for long-term decisions is to maxi- mize profit, which is revenue less variable costs less capacity costs However, it often is difficult to estimate the controllable costs for many long-term decisions that pertain to individual products or customers The difficulty arises because products and customers typically share capacity resources, meaning that orga- nizations cannot trace capacity costs to individual products and customers In the language of Chapter

2, capacity costs are indirect costs Consequently, while performing a detailed account analysis to estimate controllable capacity costs is the economi- cally correct approach, it is not cost effective Thus,

as a practical matter, firms use cost allocations to approximate the change in capacity costs.

We devote Chapter 9 to cost allocations, a tool that firms employ to estimate costs over the long term We begin by describing how a firm might use allocations in a common decision problem—setting prices We note that firms allocate costs not just for decision making but for other reasons as well, including reporting income to external parties such

as shareholders and the IRS, justifying cost-based reimbursements, and influencing behavior within the organization Accordingly, we discuss these uses

of cost allocations and how an allocation’s intended purpose guides the choice of an allocation proce- dure In this way, the chapter provides an integrated discussion of the various demands for cost allocations within an organization.

We focus Chapter 10 on activity-based costing (ABC) and management At its core, ABC is a refined methodology for allocating capacity costs

We examine how ABC can lead to better decisions

by improving estimates of controllable capacity costs

We then discuss the steps associated with designing

product-costing systems and symptoms that might

help organizations decide if they need to update

the current costing system We end by highlighting

some of the costs and benefits of implementing

ABC ABC exploits the linkages among resources,

activities, and products to provide more accurate

measures of product profitability than traditional

allocation systems do Thus, after describing the

mechanics of ABC, we discuss how to use ABC data

to improve profitability by managing products,

customers, and resources Customer Profitability

Analysis allows organizations to identify profitable

and unprofitable customers, and suggests ways to

increase profit by managing customer relationships

We refer to this and other uses of activity-based

cost-ing information to manage profit as activity-based

management, or ABM.

Despite their widespread use, allocations have two

limitations when used to make decisions: (1) They do

not consider the time value of money; and (2) they do

not consider the lumpy nature of capacity resources

These limitations are of particular concern when the

firm is considering a large expenditure on a

long-lived resource For such expenditures, organizations

routinely engage in capital budgeting, the focus of

Chapter 11 As operational budgets do for short-term

decisions, capital budgets provide the link between

long-term planning and control decisions In

par-ticular, capital budgets provide an economic basis for

analyzing expenditures on capacity resources, and

control decisions focus on the effective use of these

resources.

Chapter 12 examines control decisions over the

long term Most organizations delegate decisions over

the use of resources to managers lower in the

orga-nizational hierarchy Decentralization leads to a

con-flict arising from the lack of goal congruence among

different levels in the organization Accordingly, we

begin the chapter by discussing the benefits and

costs associated with decentralizing decision making

We describe common forms of decentralization in

organizations and highlight the critical role of

per-formance evaluation systems in these environments

We discuss the principles that govern performance

measurement in organizations, and apply them to

measure and evaluate the performance of different

responsibility centers

In Chapter 13, we discuss how an organization’s

strategy affects its cost structure and defines the

business and operational constructs that require

measurement We also introduce and present the

balanced scorecard as a means of effectively

inte-grating an organization’s strategy with its control

system We begin with value chain analysis and strategic planning We introduce strategy and, using real-world examples, highlight the critical linkages between the value chain, strategy, and cost struc- ture We next discuss the impact of strategy on key organizational processes In each instance, our aim

is to show why the process configuration follows naturally from the strategic choice and provides a competitive advantage This approach allows us to discuss how to measure whether a process actually is yielding the desired advantage and how to motivate employees to stay focused on strategic objectives We then illustrate how the balanced scorecard can help

in this regard Our discussion underscores how the scorecard categories flow naturally from the organi- zation’s strategy We emphasize the choice among metrics and the importance of linking the metrics both within and across categories We conclude with

a brief discussion of implementation issues.

Module IV: COST ACCOUNTING SYSTEMS

This module explores the mechanics of cost ing systems Chapters 14 and 15, respectively, intro- duce students to two basic cost accounting systems: job and process costing Both of these systems use allocations to value inventory and compute the cost

account-of goods sold in accordance with GAAP As such, these chapters distinguish between cost accounting (computing product costs) and managerial account- ing (providing information for decision making) In the context of job costing, we introduce the notion of

a predetermined overhead rate, and we discuss how

to deal with under- or over-applied overhead In the process-costing chapter, we explain the concept of

an equivalent unit and discuss how to apply process costing to settings with many cost pools and opening inventory

Chapter 16 presents two refinements that could help organizations increase the accuracy of cost systems: dual-rate systems and accounting for interac- tions among departments (service department alloca- tions) We discuss how these refinements arise from the organization’s desire to improve the accuracy in reported product costs Because many might wish to skip or skim these topics, we adopt a modular pre- sentation to give instructors flexibility in the depth

of coverage.

We put the “traditional” cost accounting topics into separate chapters in a stand-alone module This placement provides instructors flexibility in coverage One can cover one or more of these chapters imme- diately after Chapter 3, after Chapter 9, or even skip this material entirely without interrupting the flow of the text.

4 Chapter Template

PART OPENER

Each module begins with a one- to two-page overview

of the module Part openers refer to a template for

organizing business decisions and explain how the

topics in the module fit within the framework The

goal is to provide a “road map” for the module.

Each chapter has the following features:

LEARNING OBJECTIVES

Learning objectives are useful because they prime

students’ thinking and focus their attention on the

big picture both before and after delving into the

details Our goal is to have an average of four to five

learning objectives per chapter Each learning

objec-tive has its own section within the chapter Common

terminology and margin notes alert students to these

linkages between learning objectives and sections

The summary discusses each of the learning

objec-tives and reiterates the key concepts.

OPENING VIGNETTE

We open each chapter with a simple “story” of a

busi-ness facing a decision problem Vignettes include a story

about a gym dealing with new competition, a catering

business deciding whether to accept an engagement,

and a cabinet-maker expanding his product line These

vignettes help us link different sections in the chapter

logically A few vignettes continue across chapters to

show linkages among the topics.

BODY OF THE CHAPTER

Each chapter begins with an intuitive discussion of the

issues in the opening vignette Rather than providing

a solution, we focus the discussion on sharpening the

relevant questions and identifying pertinent costs and

benefits Following this discussion, we proceed as per

the list of learning objectives We use numerical

exam-ples, graphs, and additional everyday examples to make

the concepts resonate with students Our goal is to tell a

story rather than present disjointed techniques

As mentioned earlier, one of our main goals is to

provide an integrated framework for using

account-ing information to make effective decisions Two

features help us deliver on this goal

• Apply the Decision Framework! In Chapter 1, we

provide four steps for effective decision making:

(1) Specify the decision problem, including the decision maker’s goals, (2) identify options, (3) measure costs and benefits to determine the value of each option, and (4) make the decision, choosing the option with the highest value At the beginning of each chapter, we summarize the vignette in this sequence, “solving” it by the end

of the chapter This feature serves to underscore our text’s emphasis on introducing every concept

in the context of a specific decision and then generalizing the idea.

• Chapter Connections For every chapter, we have boxes that show how the concept under discussion builds on concepts from prior chapters, and how the current topic is the foundation is the material discussed in later chapters For instance, we link the discussion of CVP analysis (Chapter 5) back to identifying fixed and variable costs (Chapter 4)

We also note that while CVP analysis is useful for profit planning and short-term decisions that per- tain to the firm as a whole, it can be difficult to adapt CVP analysis to more localized short-term decision problems Accordingly, we consider such decisions in Chapter 6

In the spirit of active learning, we induce students

to work along with the text.

• Check-It! These exercises and mini-worksheets ask students to verify some numbers or computa- tions in the text The objective is to confirm that the student is following the material and is not lost There usually are four to six such boxes per chapter (We provide solutions at the end of each chapter to help the student verify that they have mastered the concept.)

Finally, we show application to current business.

• Connecting to Practice: (Description of decision context). We have three to five such “call-out” boxes per chapter Each call-out box discusses

a relevant and recent phenomenon, drawing

from business publications such as the Wall Street Journal, Business Week, or the New York Times

SUMMARY

Our summary section links directly back to our learning objectives The opening paragraph in the

summary section discusses the general theme of the

chapter We then provide a transition to the next

chapter.

RAPID REVIEW

We present this summary of key points at the end of the

chapter There are four to six summary observations

that distill the take-away points for each learning

objective (section) The intent is to cement the

student’s understanding and to provide a ready review

prior to an examination.

REVIEW (SELF-STUDY) PROBLEM

Each chapter has one or two integrated self-study

problems with solutions These problems assist

stu-dents in working through the concepts presented in

the chapter and also ready students for the

end-of-chapter material.

GLOSSARY

Key terms—that is, terms that are novel to the

stu-dent and require definition—are boldfaced and

defined in the chapter We repeat these terms, with

their accompanying definition, in a section

immedi-ately following the summary section

END OF CHAPTER MATERIALS

We hope to surprise you with the quality of the

end-of-chapter materials We note the following points:

• We wrote both the questions and the

solu-tions manual We also developed the materials

concurrently with the text to ensure tight

linkages between chapter content and the

end-of- chapter materials Our extremely detailed

solutions go well beyond providing the

calcula-tions By discussing the application in detail,

the solutions manual serves to reinforce student

understanding.

• We consider examples in both the manufacturing

and the service sectors We also provide a range

of problems that apply the concepts to

not-for-profit entities

• Many questions raise ethical and social issues

These issues arise not as stand-alone topics but as

part of the decision-making process.

• We provide spreadsheet and graphing templates,

where appropriate

We provide two sets of qualitative questions, with

the aim of verifying student preparation and as a

basis for class discussion These are:

• Review Questions. These 10 to 15 questions test definitions and comprehension of key concepts The goal is to verify that the student has read the chapter with some care.

• Discussion Questions. These questions, 10 to 15 per chapter, expand the student’s understanding These questions might ask the student to consider how the analysis would change if an underlying assumption were to change, list additional factors that a manager would consider, and explain how the idea may apply to different settings.

We construct exercises and problems at three levels of difficulty.

• Foundational Exercises. The 15 or so exercises test students’ basic understanding of chapter materials These focused problems apply chapter concepts to the given setting.

• Intermediate Problems. These problems, 10 or so per chapter, typically require both quantitative and qualitative answers These problems often require students to consider (trade off) multiple objectives.

• Advanced Problems. These problems require students to think creatively and to move beyond

a direct application of chapter content We have three to five challenging problems per chapter.

Consistent with the theme of providing a solving framework, we organize many questions (particularly, intermediate and challenging problems) into three parts:

• Application of chapter content. This part asks students to apply a formula or concept discussed

in the chapter

• Sensitivity analysis. Intermediate and advanced level (“challenging”) problems have one or more questions that ask the student to probe the effect of relaxing one of the “simplifying” assump- tions For example, we may ask how estimated cost changes as operations approach capacity limits

• Qualitative and strategic considerations. The final part expands the analysis to include important but hard to quantify factors For example, in this part, we may ask the student

to discuss the quality implications of outsourcing

a component.

Finally, each chapter has one to three mini-cases These cases integrate most of the chapter’s learning objectives and could serve as the basis for group ( collaborative) activity or for a richer discussion of the issues presented in the chapter in a broader organizational context

5 Flexibility in Sequencing Chapters

There are at least three ways to organize the chapters

in this book in the context of a 15-week semester long

course.

A TRADITIONAL ORGANIZATION

Begin with Chapters 1–3 to introduce students to

managerial accounting, cost terminology, and cost

flows Move to Chapters 14 and 15, which cover job

and process costing After covering product costing,

revert to Chapter 4, which covers how to estimate

costs for short-term decisions From here on out,

chapters unfold in a traditional sequence

We anticipate that many instructors following this

sequence will omit Chapter 16 on service department

allocations The instructors also might end the course

with Chapter 12, which covers decentralization,

performance measurement, and transfer pricing.

B DECISION-MAKING FOCUS

We advocate this sequence The only modification

to the chapter sequence that we might make is to reduce the coverage of the chapters on strategic planning and control (Chapter 13) and to skim Chapter 16 We along with some of our colleagues have found that this approach works extremely well for undergraduates and MBA audiences.

Many people who reviewed earlier drafts went above and beyond the call of duty when giving us valuable feedback We particularly note with gratitude input from Helen Adams (University of Washington), Arthur Francia (University of Houston), Laureen Maines (Indiana University), Robert Milbrath (University of Houston), Mark Penno (University of Iowa), Devika Subramanian (Rice University), and Michael Williamson (University of Texas at Austin) We also owe an intellectual debt to Bala Balachandran (Northwestern University), Joel Demski (University of Florida) and Shyam Sunder (Yale University), who shaped our thinking on the subject of management accounting Several hundred students read and gave us comments on earlier versions of this book We particularly thank Manasee Atre, Jacob Madden, Rebecca McCright, Kevin Klimes, and P Vijay, for their detailed comments Pamela Bourjaily, Christian Kuiate, Marina Ruseva, and Jean Thompson provided outstanding editorial support.

At Wiley, the staff who helped make this project a reality include our editor Jeff Howard, production editor Bill Murray, project editor Ed Brislin, media editor Allie Morris, marketing manager Julia Flohr, and assistant marketing manager Carly DeCandia Mark Bonadeo, previously of John Wiley, was key in encouraging us

to undertake and persevere with this challenging and rewarding task of textbook writing.

Grand Valley State University

Carolyn Strand Norman

Virginia Commonwealth University

College of Eastern Utah

Charles Tony Wain

Babson College

Mary Ann Welden

Wayne State University

Ohio State University

Focus Group Participants

Michigan State University

Joseph San Miguel

Naval Postgraduate School

Richard Merryman, Jefferson County Community

College—State University of New York, PowerPoint

and Study Guide author

Patricia Mounce, University of Central Arkansas, Test

Bank author

Debra Cosgrove, University of Nebraska—Lincoln,

Study Guide author

Eileen Shifflett, James Madison University, online

Bernie Weinrich, Lindenwood University

Module I:

I N T R O D U C T I O N A N D F R A M E W O R K

Chapter 1 Accounting: Information for Decision Making 2

Chapter 2 Identifying and Estimating Costs and Benefits 40

Chapter 3 Cost Flows and Cost Terminology 74

M o d u l e I I :

S H O RT- T E R M P L A N N I N G A N D C O N T R O L :

Chapter 4 Techniques for Estimating Fixed and Variable Costs 110

Chapter 5 Cost-Volume-Profit Analysis 154

Chapter 6 Decision Making in the Short Term 200

Chapter 7 Operating Budgets: Bridging Planning and Control 252

Chapter 8 Budgetary Control and Variance Analysis 304

Module III:

PLANNING AND CONTROL OVER THE LONG TERM:

Chapter 9 Cost Allocations: Theory and Applications 354

Chapter 10 Activity-Based Costing and Management 400

Chapter 11 Managing Long-Lived Resources: Capital Budgeting 446

Chapter 12 Performance Evaluation in Decentralized Organizations 488 Chapter 13 Strategic Planning and Control 532

Module IV:

Chapter 14 Job Costing 576

Chapter 15 Process Costing 612

Chapter 16 Support Activity and Dual-Rate Allocations 634

Brief Contents

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C h a p t e r 1

Accounting: Information

L E A R N I N G O B J E C T I V E S 3

The Four-Step Framework

for Decision Making 4

Step 1: Specify the Decision Problem,

Including the Decision Maker’s Goals 4

Step 2: Identify Options 5

Step 3: Measure Benefits and Costs to

Determine the Value of Each Option 6

Step 4: Make the Decision 7

Decision Making In Organizations 8

Organizational Goals 8

Aligning Individual Goals With

Organizational Goals 9

The Planning and Control Cycle 10

Accounting and Decision Making 12

ACCOU NTING ENVIRONM ENT 19

A P P E N D I X B : The Institute of Management

Accountants’ (IMA) Code of Ethics 22

Identifying and Estimating

L E A R N I N G O B J E C T I V E S 41

Knowing What to Measure 42 Controllability 42

Relevance 42 Comparing Controllability and Relevance 44 Sunk Costs 45

Time and Controllability 46 Categorizing Decisions Based on Time 46

How to Estimate Costs and Benefits 49 Variability 50

C h a p t e r 3

Cost Flows and Cost Terminology 74

L E A R N I N G O B J E C T I V E S 75

Product and Period Costs 76

Cost Flows In Service Organizations 77

Cost Flows In Merchandising

Cost Allocations 88 Beware of Allocated Costs When Making Decisions 91 Wrapping It Up 92

Techniques for Estimating

Fixed and Variable Costs 110

L E A R N I N G O B J E C T I V E S 111

Contribution Margin Statement 112

Organizing Information to Help Make Decisions 112

Using the Contribution Margin Statement 113

Estimating Cost Structure 114

Account Classification Method 116

Evaluation of the Account Classification Method 118

High-Low Method 118

Mechanics of the High-Low Method 120

Evaluation of the High-Low Method 122

Regression Analysis 123

Evaluation of the Regression Method 125

Choosing An Appropriate Method 126

Segmented Contribution

Margin Statements 128

Product-Level Contribution Margin Statement 128

Region- and Customer-Level Contribution Margin

Using the CVP Relation to Make Short-Term Decisions 164 Using the CVP Relation to Evaluate Price Changes 164

Using the CVP Relation to Evaluate Operating Risk 166 Margin of Safety 167

Operating Leverage 169

Multiproduct CVP Analysis 171 Profit Planning With Multiple Products 172 Making Decisions Using CVP Analysis 175

CVP Analysis—A Critical Evaluation 177

Characteristics of Short-Term Decisions 202

Fixed Supply of Capacity 202

Demand Changes Frequently 202

Closing the Gap between Demand and Supply 203

Contexts for Short-Term Decision Making 204

Evaluating Options 205

Relevant Cost Analysis 209

An Alternate Approach 210

Comparing the Methods 211

Additional Examples of Short-Term

Operating Budgets: Bridging

L E A R N I N G O B J E C T I V E S 253

What is a Budget? 254

Why Do Firms Use Budgets? 254

Preparing a Master Budget 258

Revenue Budget 258 Production Budget 258 Direct Materials Usage Budget 260 Direct Labor Budget 262

Manufacturing Overhead Cost Budget 263 Variable Cost of Goods Manufactured Budget 264 Variable Cost of Goods Sold Budget 265

Budgeted Income Statement 268 Iterative Nature of the Budgeting Process 269

Cash Budget 270

Cash Inflows from Operations 271 Cash Outflows from Operations 272 Net Cash Flow from Operations 274 Pulling It All Together 274

Factors Influencing the Budgeting Process 276

Organizational Structure 276 Management Styles 278 Past Performance and the Budgeting Process 280

Budgets as the Basis for Control 306

How to Calculate Variances 308

Breaking Down the Total Profit Variance 309 Flexible Budget 310

Components of the Flexible Budget Variance 313 Input Quantity and Price Variances 315

Interpreting and Using Variances 319

General Rules for Analyzing Variances 320 Making Control Decisions in Response to Variances 322

A P P E N D I X A : Purchase Price Variance 328

A P P E N D I X B : Market Size and Market Share

Refining the Allocation 361

Pulling It All Together 363

Cost Allocations for Reporting Income 364

Incentives and Cost Allocations 368

Using Allocations to Justify Costs and

Reimbursements 368

Using Cost Allocations to Influence Behavior 371

Controllability and Alternate Demands for Cost

Step 4: Measuring Denominator Volume 409

Decision Usefulness of ABC Systems 410

Computing Product Costs 410 Reporting Activity-Based Costing Data 412 Decisions at MKC 414

Implementing Activity Based Costing 416

Activity-Based Management 416

Product Planning 416 Customer Planning 416 Resource Planning 419

Roles of Capital Budgets 448

Capital Budgeting and Cost Allocations 448 Capital Budgets and Budgeting 449

Elements of Project Cash Flows 450

Initial Outlay 451

Estimated Life and Salvage Value 451

Timing and Amounts of Operating Cash Inflows 452

Cost of Capital 453

Methods for Evaluating Project Profitability 454

Discounted Cash Flow Techniques in Capital

Budgeting 454

Net Present Value 454

Internal Rate of Return 458

Comparing NPV and IRR 459

Other Evaluation Criteria for Capital

Budgeting 459

Payback Method 459

Modified Payback 461

Accounting Rate of Return 462

Popularity of Discounted Cash Flow Techniques 462

Taxes and Capital Budgeting 463

Depreciation Tax Shield 464

Salvage Value and Taxes 465

Allocating Capital Among Projects 466

Nonfinancial Costs and Benefits 467

Flexibility and Real Options 468

Decentralization of Decision Making 490

Benefits and Costs of Decentralization 491

Evaluating Cost and Profit Centers 495

Performance Evaluation in Profit Centers 496

Performance Measurement in Investment Centers 498

Return on Investment 498 Residual Income 502 Economic Value Added 503 Measuring Long-Term Performance 505

Transfer Pricing 506

Demand for Transfer Prices 506 Conflict in Setting Transfer Prices 507 Practice Patterns 508

International Transfer Pricing 509

The Value Chain 539

Building a Value Chain 539 Management Accounting and the Value Chain 540

Strategic Cost Planning 542

Life-Cycle Analysis 542 Target Costing 544

Implementing Strategy 546

Critical Success Factors 547

Monitoring Strategy Implementation 551

Components of a Balanced Scorecard 552

Predetermined Overhead Rates 587

Determining Cost of Goods Manufactured 588

Determining Cost of Goods Sold 589

End-of-Period Adjustments for

Overhead 591

Calculating the Amount in the Control

Accounts 591

Correct Rates at Year-End 592

Write Off to Cost of Goods Sold 592

Prorate among Inventory Accounts and COGS 594

Comparing the Methods 594

Mechanics of Process Costing 614

Process Costing with Many Cost Pools

and Beginning Inventory 616

Process Costing with Many Pools 616

Considering Beginning Inventory 619

Standard Process Costing 620

Line and Support Activities 636

Methods for Allocating Support Activity Costs 638

Direct Method 639 Step-Down Method 641 Reciprocal Method 643 Integration with Predetermined Overhead Rates 645

M A N A G E R I A L

A C C O U N T I N G

Tom and Lynda own and operate

Hercules Health Club Hercules maintains

a top-notch reputation because of Tom and

Lynda’s attention to detail The club is neat

and clean, and offers the small conveniences

and personalized services that many people

appreciate As a result, Hercules is a profitable

business, even though it does not provide the

latest in physical training equipment.

Well, as often happens in business, when

the going gets good, the competition moves

in Tempted by the market potential, a

national health-club chain, Apex Health &

Fitness, recently opened a branch in the

com-munity Compared to Hercules, Apex’s larger

facility provides a wider choice of equipment,

a bigger swimming pool, and more classes in

aerobics, karate, strength training, and yoga.

Tom and Lynda did not expect Apex to

affect their business significantly, as many

of Hercules’ members have been loyal to

the club for years Imagine Tom and Lynda’s

surprise when they lost nearly 10 percent of

their members to Apex within the first three

months! Concerned by this development, they ask you to recommend options for regaining the lost membership and improving profits.

C h a p t e r 1

Accounting:

Information for Decision Making

Applying the Decision FrAmework

What Is the Problem? Tom and Lynda’s primary goal is to restore Hercules’ profits to the

level earned before Apex arrived

as yoga, control the tide of tions? Should Tom and Lynda invest money to renovate the spa and steam rooms to help differen-tiate Hercules from Apex?

defec-What Are the Costs and Benefits?

Each of these options triggers many costs and generates many benefits

Make the Decision! You can only make an effective deci-sion after systematically considering

all of the costs and benefits of the various options in the context of Tom and Lynda’s goals

As you can see in the Applying the Decision work box on the opposing page, there are many

Frame-possible strategies for you to consider With all these questions and options available, how should you sort through them to determine Hercules’

best course of action? You know other businesses routinely face similar decisions How do they manage?

In this book, we provide you with a foundation

in managerial accounting—a branch of accounting that helps you make business decisions We begin

in this chapter by describing a four-step framework that you could use to systematically structure and analyze any personal or business decision Next,

we explain how decision making in organizations differs from the decisions that we, as individuals, make in our daily lives We then introduce you to two important kinds of organizational decisions— planning decisions and control decisions—and

we discuss how organizations use managerial accounting information to make these decisions

After studying this chapter, you will be able to:

1 Describe the four-step framework for making

decisions.

2 Explain how decision making in organizations

differs from decision making by individuals.

3 Understand how planning and control decisions

relate to each other.

4 Differentiate between financial accounting and

managerial accounting.

5 Discuss the role of ethics in decision making.

L e A r n I n g O B j e C T I v e s

Tom and Lynda are proud owners of a popular gym They are wondering how best to

respond to emerging competition.

Darryl Leniuk/Getty Images

We end the chapter by examining how ethics, as well as societal and professional standards, influence decisions.

We make decisions all the time Do I have enough time for breakfast this morning before rushing off to school or work? What should I wear today? Should I major

in accounting, finance, management, or marketing? Which car should I buy? Where should I live next year? When making decisions, most of us follow a process:

we think about what we want out of the decision, identify available options,

evaluate each one, and then select the option that best meets our goals A decision,

therefore, is simply choosing one option from a set of options to achieve a goal.

As such, we can describe decision making as consisting of the following four steps: Step 1: Specify the decision problem, including the decision maker’s goals Step 2: Identify options.

Step 3: Measure benefits (advantages) and costs (disadvantages) to determine the

value (benefits reaped less costs incurred) of each option.

Step 4: Make the decision, choosing the option with the highest value.

This four-step process, the Decision Framework, applies equally to all decisions, whether

personal or business-related Only the context differs As the book unfolds, you will see the general applicability of this framework For now, let us look closer at each step.

Step 1: Specify the DeciSion problem, incluDing the DeciSion maker’S goalS

Decisions help us accomplish goals We all have goals, or objectives, that we strive to

achieve Tom and Lynda’s primary goal is to restore Hercules’ profits to the level earned before Apex arrived on the scene Thus, their decisions should help them achieve this objective Because of the intertwining of their personal lives and the club, however, Tom and Lynda’s personal goals might influence their decisions For exam- ple, reducing the membership fee carries the risk of permanently lowering income, if the lower fee does not lead to an increase in membership An unwillingness to bear this risk may steer Tom and Lynda away from this option Similarly, Tom and Lynda may not be willing to put in an extra 15 hours per week, even if doing so increases profits by $1,000 a month Ultimately, Tom and Lynda’s decisions also will depend on the relative importance they attach to other factors, such as money, risk, and leisure When determining their goals, individuals frequently differ in the factors they consider and the importance they attach to these factors For example, one musician may wish to become a pop diva, while another may wish to play only for personal enjoyment Some students attach primary importance to their grade point average (GPA), while others accept lower grades for greater involvement in extracurricular activities As you might expect, these differences in goals often lead individuals to make different choices, even when confronted with the same options Given an

LeArnIng OBjeCTIve 1

Describe the four step

framework for making

hour of free time, one person may prefer to watch television while another might

exercise While at the food court in the mall, one person might choose pizza and

another might choose tacos.

As you can see, these examples illustrate the importance of clearly identifying goals

before making decisions Understanding the factors that influence the decision

mak-er’s goals and their relative importance is the first step in making effective decisions.

Step 2: iDentify optionS

The second step is to identify options Some decisions involve a small number of

options For example, consider a contestant’s decision on the popular TV game

show, Let’s Make a Deal! In this show, one of three doors hides a valuable prize such

as a car, while the other two doors conceal less desirable items The contestant first

chooses one of the three doors Let’s assume the contestant picks Door 1 At this

point, the game-show host opens one of the other doors (say Door 2) to reveal a less

desired prize The contestant can now switch between the door initially chosen

(Door 1) and the remaining door (Door 3) The host then opens the final door

chosen to reveal the contestant’s prize.

In this game, the contestant has two decisions: the initial choice and the follow-up

choice For both decisions, the contestant has a clear set of options; the first decision

has three options (see Exhibit 1.1), and the second decision has two options.

In contrast, many decisions have a large number of options Think about

decid-ing where to go on vacation Identifydecid-ing all potential destinations is practically

impossible In such cases, we narrow the options to a manageable number in any

number of ways, such as by placing a budget limit of $1,000 or by only considering

areas in Washington.

Business decisions frequently have numerous options For example, recall that

some of Tom and Lynda’s many options include reducing the membership fee,

offering new programs such as yoga, and renovating the spa and steam rooms For

most businesses, identifying the set of options is one of the more important tasks of

management Managers frequently distinguish themselves by their ability to identify

the most promising options Throughout the book, we help you sharpen these skills by

con-sidering many different types of business decisions, each with numerous options.

exhibit 1.1 The Three Doors on Let’s Make a Deal! Represent a Clear Set of

Options for the Decision Maker

(NBCU Photo Bank/©AP/Wide World Photos)

Step 3: meaSure benefitS (aDvantageS) anD coStS (DiSaDvantageS) to Determine the value (benefitS reapeD leSS coStS incurreD) of each option

Every option presents a unique trade-off between benefits and costs Suppose you seek to increase profit by increasing a product’s sales, and you have identified two options to accomplish this goal: a price cut or an advertising campaign A price cut will increase sales, but each unit sold will bring in less money An advertising cam- paign also will increase sales, but it costs money to execute Which of these two options should you choose? Naturally, you will choose the option that maximizes

value, which in this case is the increase in profit.

The value of an option equals its benefits less its costs Because value is the

contri-bution of an option to the decision maker’s goals, we measure value relative to the status quo, which is not doing anything at all Even though most businesses measure value in

terms of money, or profit, value need not be a monetary amount We could measure value in terms of leisure time, convenience, or simply feeling good about ourselves As such, the value of the same option might differ among decision makers.

Suppose you need to travel from Orlando, Florida, to Atlanta, Georgia, for the wedding of a family friend You need to choose between flying and driving As Exhibit 1.2 shows, these two options differ in terms of their costs and time required Their value to your decision will rely on your goals for the trip, such as maximizing your time in Atlanta or minimizing your traveling costs.

opportunity cost

Whenever we make a decision and choose an option, we give something up For ample, if you decide to drive from Orlando to Atlanta for a wedding, you will lose the time saved by flying If you fly, you will spend money that you would have saved by driv- ing Opportunity cost is the value of what you give up by making your decision.

ex-In the Atlanta wedding example, you had only two choices, making it easy to measure value and opportunity lost Now consider an example with many options Suppose Megan, a college student, can make $50 running experiments for her biology professor this Saturday Suppose Megan also has two other options this

exhibit 1.2 Decision Makers Might Evaluate

the Costs and Benefits of the Same Two Options (e.g., Flying versus Driving) Differently If Their Goals Differ

Saturday—working as an usher at her school’s football game and earning $75, and

working at the library and making $60 Considering only money, what is her

oppor-tunity cost for running experiments—$60 or $75? It is $75 Why is this? Because $75

is the most she stands to lose by running experiments The opportunity cost of any

decision option is the value to the decision maker of the next best option.

Businesses typically measure value and opportunity cost in terms of money, or profit

Sup-pose Tom and Lynda consider offering either yoga or karate classes at Hercules

In this case, they have three options—offering a yoga class, a karate class, or neither

class (the status quo of doing nothing) The value of offering the yoga class is the

added profit from the yoga class relative to doing nothing Likewise, the value of the

karate class is the change in profit compared to doing nothing If both classes

are profitable, then the opportunity cost of offering the yoga class is the profit from

the karate class Similarly, the opportunity cost of offering the karate class is the

profit from the yoga class.

Effective decision makers ensure that the value of the chosen decision option

exceeds its opportunity cost This comparison makes sure that they are putting their

resources to the best possible use and are maximizing their value In essence, the

concepts of value and opportunity cost emphasize that every decision involves

trad-ing off what we get with what we give up.

Step 4: make the DeciSion (chooSing

the option with the higheSt value)

The best choice is the option with the highest value to the decision maker This also is the only

option whose value exceeds its opportunity cost If your goal is to maximize time

with family and friends, flying from Orlando to Atlanta is your best option Similarly,

if Megan’s goal is to make the most money this Saturday, then working as an usher

at the football game is her best option.

Throughout the book, we use these four steps to frame and describe decisions

To underscore the process, we use a box titled Applying the Decision Framework to

solution at end of chapter.

CHAPTer COnneCTIOns

In Chapter 2, we discuss the concepts associated with identifying

and measuring costs and benefits to determine value and

opportunity cost.

Suppose Tom and Lynda believe that offering yoga will increase Hercules’ profits

by $2,500, while offering karate will decrease Hercules’ profits by $500 Compute

the value and the opportunity cost of Tom and Lynda’s three options

check it! exercise #1

Applying the Decision FrAmework

What Is the Problem? You need to travel from Orlando to Atlanta for a wedding, where you want to spend as much time as possible with family and friends

What Are the Options? The two options are to drive or to fly.

What Are the Costs and Benefits?

Driving is cheaper but results in less time with family and friends Flying costs more but requires less travel time

Make the Decision!

After considering all of the costs and benefits, you decide to fly so that you can maximize your time in Atlanta

show how it applies to the decision at hand For example, you can use the work to guide your decision regarding whether to drive or fly from Orlando to Atlanta.

frame-Thus far, we have examined how the four-step framework applies to individual decision making In the next section, we discuss how the framework applies to deci- sion making in organizations.

explain how decision

making in organizations

differs from decision

making by individuals.

The four-step decision-making framework applies equally well to both individual and

organizational decisions However, there are two important differences First, unlike individuals whose goals might have several factors, organizations tend to have focused goals For example, profit is the dominant goal of commercial organiza- tions As such, these organizations primarily evaluate decisions by their impact on the bottom line.

Second, because an organization is a collection of individuals, we need to think about how individual goals relate to organizational goals Organizations don’t make decisions; the people that comprise the organization do Individual goals might dif- fer from organizational goals, leading to actions that are not in the firm’s best inter- ests To see this, consider a sports team The team’s goal is to win the game However, seeking individual recognition, some players might take actions that put them in the best light even if doing so is not in the team’s best interests The lack of align- ment in goals is even more of an issue when organizational goals are unclear For an example, think back to your last team project Some members may have wanted to work hard and receive a high grade, while others may have simply wanted to pass the class.

organizational goalS

An organization is a group of individuals engaged in a collectively beneficial mission

Organizations form for many reasons Nonprofit organizations and charities such as the Red Cross and Habitat for Humanity seek to help individuals in need and improve people’s lives Professional organizations, such as the American Bar Association , serve the public and the legal profession by promoting justice, educa- tion, and professional integrity.

Decision making in organizations

LeArnIng OBjeCTIve 2