accounting for managers

Accounting for Managers v 1.0 This is the book Accounting for Managers (v 1.0) This book is licensed under a Creative Commons by-nc-sa 3.0 (http://creativecommons.org/licenses/by-nc-sa/ 3.0/) license See the license for more details, but that basically means you can share this book as long as you credit the author (but see below), don't make money from it, and make it available to everyone else under the same terms This book was accessible as of December 29, 2012, and it was downloaded then by Andy Schmitz (http://lardbucket.org) in an effort to preserve the availability of this book Normally, the author and publisher would be credited here However, the publisher has asked for the customary Creative Commons attribution to the original publisher, authors, title, and book URI to be removed Additionally, per the publisher's request, their name has been removed in some passages More information is available on this project's attribution page (http://2012books.lardbucket.org/attribution.html?utm_source=header) For more information on the source of this book, or why it is available for free, please see the project's home page (http://2012books.lardbucket.org/) You can browse or download additional books there ii Table of Contents About the Authors Acknowledgments Dedication Preface Chapter 1: What Is Managerial Accounting? Characteristics of Managerial Accounting Planning and Control Functions Performed by Managers 14 Key Finance and Accounting Personnel 19 Ethical Issues Facing the Accounting Industry 24 Computerized Accounting Systems 31 Cost Terminology 36 How Product Costs Flow through Accounts 49 Income Statements for Manufacturing Companies 56 Chapter 2: How Is Job Costing Used to Track Production Costs? 88 Differentiating Job Costing from Process Costing 90 How a Job Costing System Works 94 Assigning Manufacturing Overhead Costs to Jobs 102 Job Costing in Service Organizations 117 Chapter Wrap-Up: Summary of Cost Flows at Custom Furniture Company 122 Chapter 3: How Does an Organization Use Activity-Based Costing to Allocate Overhead Costs? 154 Why Allocate Overhead Costs? 156 Approaches to Allocating Overhead Costs 158 Using Activity-Based Costing to Allocate Overhead Costs 166 Using Activity-Based Management to Improve Operations 187 Using Activity-Based Costing (ABC) and Activity-Based Management (ABM) in Service Organizations 191 Variations of Activity-Based Costing (ABC) 201 iii Chapter 4: How Is Process Costing Used to Track Production Costs? 240 Comparison of Job Costing with Process Costing 242 Product Cost Flows in a Process Costing System 247 Determining Equivalent Units 257 The Weighted Average Method 262 Preparing a Production Cost Report 279 Chapter 5: How Do Organizations Identify Cost Behavior Patterns? 303 Cost Behavior Patterns 305 Cost Estimation Methods 321 The Contribution Margin Income Statement 348 The Relevant Range and Nonlinear Costs 354 Appendix: Performing Regression Analysis with Excel 358 Chapter 6: How Is Cost-Volume-Profit Analysis Used for Decision Making? 389 Cost-Volume-Profit Analysis for Single-Product Companies 391 Cost-Volume-Profit Analysis for Multiple-Product and Service Companies 408 Using Cost-Volume-Profit Models for Sensitivity Analysis 422 Impact of Cost Structure on Cost-Volume-Profit Analysis 431 Using a Contribution Margin When Faced with Resource Constraints 434 Income Taxes and Cost-Volume-Profit Analysis 437 Using Variable Costing to Make Decisions 444 Chapter 7: How Are Relevant Revenues and Costs Used to Make Decisions? 485 Using Differential Analysis to Make Decisions 487 Make-or-Buy Decisions 490 Product Line Decisions 499 Customer Decisions 513 Review of Cost Terms Used in Differential Analysis 522 Special Order Decisions 524 Cost-Plus Pricing and Target Costing 532 Identifying and Managing Bottlenecks 535 Be Aware of Qualitative Factors 541 Appendix: Making Decisions Involving Joint Costs 543 iv Chapter 8: How Is Capital Budgeting Used to Make Decisions? 583 Capital Budgeting and Decision Making 585 Net Present Value 598 The Internal Rate of Return 609 Other Factors Affecting NPV and IRR Analysis 616 The Payback Method 623 Additional Complexities of Estimating Cash Flows 632 The Effect of Income Taxes on Capital Budgeting Decisions 637 Appendix: Present Value Tables 643 Chapter 9: How Are Operating Budgets Created? 662 Planning and Controlling Operations 664 The Budgeting Process 668 The Master Budget 671 Budgeting in Nonmanufacturing Organizations 704 Ethical Issues in Creating Operating Budgets 711 Chapter 10: How Do Managers Evaluate Performance Using Cost Variance Analysis? 743 Flexible Budgets 745 Standard Costs 747 Direct Materials Variance Analysis 758 Direct Labor Variance Analysis 768 Variable Manufacturing Overhead Variance Analysis 779 Determining Which Cost Variances to Investigate 787 Using Variance Analysis with Activity-Based Costing 793 Fixed Manufacturing Overhead Variance Analysis 799 Appendix: Recording Standard Costs and Variances 806 Chapter 11: How Do Managers Evaluate Performance in Decentralized Organizations? 842 Using Decentralized Organizations to Control Operations 844 Maintaining Control over Decentralized Organizations 852 Comparing Segmented Income for Investment Centers 857 Using Return on Investment (ROI) to Evaluate Performance 862 Using Residual Income (RI) to Evaluate Performance 881 Using Economic Value Added (EVA) to Evaluate Performance 888 Wrap-Up of Game Products, Inc 898 Appendix: Transfer Prices between Divisions 902 v Chapter 12: How Is the Statement of Cash Flows Prepared and Used? 938 Purpose of the Statement of Cash Flows 940 Three Types of Cash Flow Activities 943 Four Key Steps to Preparing the Statement of Cash Flows 949 Using the Indirect Method to Prepare the Statement of Cash Flows 955 Analyzing Cash Flow Information 984 Appendix: Using the Direct Method to Prepare the Statement of Cash Flows 993 Chapter 13: How Do Managers Use Financial and Nonfinancial Performance Measures? 1030 Trend Analysis of Financial Statements 1033 Common-Size Analysis of Financial Statements 1044 Ratio Analysis of Financial Information 1053 Wrap-Up of Chapter Example 1095 Nonfinancial Performance Measures: The Balanced Scorecard 1098 vi About the Authors Kurt Heisinger Kurt Heisinger (CMA, CPA, MBA) teaches financial and managerial accounting full time and holds a tenured position at Sierra College He recently received the 2011–12 Faculty of the Year award, which was voted on and presented by the Associated Students of Sierra College Kurt has also taught accounting classes at the University of California—Davis and American River College Kurt began his career in public accounting with Ernst & Young and continued as a manager of a large local accounting firm in California He received his MBA at the University of California—Davis and is currently a certified management accountant (CMA) and certified public accountant (CPA) The knowledge Kurt gained from his seven years in industry and more than 15 years in education has enabled him to write a clear and concise book filled with real world examples Joe Ben Hoyle Joe Hoyle is an associate professor of accounting at the Robins School of Business at the University of Richmond In 2006, he was named by BusinessWeek as one of 26 favorite undergraduate business professors in the United States In 2007, he was selected as the Virginia Professor of the Year by the Carnegie Foundation for the Advancement of Teaching and the Council for the Advancement and Support of Education In 2009, he was judged to be one of the 100 most influential members of the accounting profession by Accounting Today Joe has two market-leading textbooks published with McGraw-Hill—Advanced Accounting (eleventh edition, 2012) and Essentials of Advanced Accounting (fifth edition, 2012), both coauthored with Tom Schaefer of the University of Notre Dame and Tim Doupnik of the University of South Carolina About the Authors At the Robins School of Business, Joe teaches fundamentals of financial accounting, intermediate financial accounting I, intermediate financial accounting II, and advanced financial accounting He earned his BA degree in accounting from Duke University and his MA degree in business and economics, with a minor in education, from Appalachian State University He has written numerous articles and continues to make many presentations around the country on teaching excellence He maintains a blog on teaching at http://www.joehoyle-teaching.blogspot.com Joe also has three decades of experience operating his own CPA (Certified Public Accountant) Exam review programs In 2008, he created CPA Review for Free (http://www.CPAreviewforFREE.com), which provides thousands of free questions to help accountants around the world prepare for the CPA Exam Joe and his wife, Sarah, have four children and four grandchildren Acknowledgments We would like to thank the following reviewers Their insightful feedback and suggestions for improving the material helped us make this a better text: • • • • • • • • • • • • • • • • • • • • • • • • • • • • • William Murphy, University of Wisconsin—Stout Carleton Donchess, Bridgewater State University Jason Sharp, Ferrum College Todd Jensen, Sierra College Robert Walsh, University of Dallas Michael Brown, Millikin University Jennifer Robinson, Trident Technical College James Aitken, Central Michigan University Delvan Roehling, Ivy Tech Community College Carol Lawrence, Northern Kentucky University Curtis Crocker, Central Georgia Technical College Kathleen Fitzpatrick, University of Toledo Walt Walczykowski, Sierra College Annette Fisher, Glendale Community College Walter Austin, Mercer University Hubert Glover, Drexel University Steven LaFave, Augsburg College Joan Van Hise, Fairfield University Holly Ratwani, Bridgewater College Alan Shattuck, Sierra College Paul Fisher, Rogue Community College Rick Blumenfeld, Sierra College Paula Wilson, University of Puget Sound Jianing Fang, Iona College Dan Sevall, Lincoln University Alan Adams, Dean College John Stancil, Florida Southern College Christy Land, Catawba Valley Community College Birendra Mishra, University of California—Riverside Dedication Kurt Heisinger To my parents for their continued optimism and support; to my wife and children for their patience and encouragement; and to Michael Maher, professor of management at the University of California—Davis, who served as my mentor and encouraged me to write this book I could not have done it without him ... managers, sales managers, and any other personnel in the organization who use accounting information for decision making Managerial accounting3 focuses on internal users—executives, product managers, ... financial information for external users in accordance with U.S GAAP Managerial accounting provides detailed financial and nonfinancial information for internal users who use the information for decision... Managerial accounting detailed information provided monthly Managerial accounting information is for future projections and involves a segment of the company Financial accounting historical information