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JWCL162_fm_i-xxx,1.qxd 9/17/09 7:04 PM Page iii 5th EDITION Managerial Accounting TOOLS FOR BUSINESS DECISION MAKING team for success Jerry J Weygandt PhD, CPA University of Wisconsin—Madison Madison, Wisconsin Paul D Kimmel PhD, CPA University of Wisconsin—Milwaukee MiIwaukee, Wisconsin Donald E Kieso PhD, CPA Northern Illinois University DeKalb, Illinois John Wiley & Sons, Inc JWCL162_fm_i-xxx,1.qxd 9/9/09 3:27 PM Page iv Vice President & Publisher Associate Publisher Associate Editor Senior Editor Project Editor Development Editor Production Manager Senior Production Editor Associate Director of Marketing Senior Marketing Manager Executive Media Editor Media Editor Creative Director Senior Designer Production Management Services Senior Illustration Editor Senior Photo Editor Editorial Assistant Marketing Assistant Assistant Marketing Manager Cover Designer Cover Photo Cover Credit George Hoffman Christopher DeJohn Brian Kamins Jeff Howard Ed Brislin Terry Ann Tatro Dorothy Sinclair Valerie A Vargas Amy Scholz Julia Flohr Allison Morris Greg Chaput Harry Nolan Madelyn Lesure Ingrao Associates Sandra Rigby Elle Wagner Kara Taylor Laura Finley Diane Mars Madelyn Lesure Jon Feingersh/Stone/Getty Images Jon Feingersh/Stone/Getty Images, Inc This book was set in New Aster 10/12 by Aptara®, Inc and printed and bound by R R Donnelley-JC The cover was printed by R R Donnelley-JC Copyright © 2010, 2008, 2005, 2002, 2000 John Wiley & Sons, Inc All rights reserved No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning or otherwise, except as permitted under Sections 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, website 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)7486008, website http://www.wiley.com/go/permissions To order books or for customer service, please call 1-800-CALL WILEY (225-5945) Jerry J Weygandt PhD, CPA; Paul D Kimmel, PhD, CPA; and Donald E Kieso, PhD, CPA Managerial Accounting, Edition ISBN-13 978- 0-470-47714-4 Printed in the United States of America 10 JWCL162_fm_i-xxx,1.qxd 9/9/09 3:27 PM Page v Dedicated to the Wiley sales representatives who sell our books and service our adopters in a professional and ethical manner and to Enid, Merlynn, and Donna JWCL162_fm_i-xxx,1.qxd 9/9/09 3:27 PM Page vi Team for Success Innovation in Education For over 200 years, John Wiley & Sons, Inc has provided subjectdefining textbooks, like the one in your hands While great advances have been made in the way we educate, in the end, it is content that is at the heart of 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students, faculty, authors, and institutions Each element provides mutual service, feedback, content, and opportunity which results in a dynamic exchange of ideas and experiences This collective partnership is what truly sets Wiley apart from other publishers "Explains concepts in an approachable way and reinforces the concepts.” - Donna Johnston-Blair Santa Clara University JWCL162_fm_i-xxx,1.qxd 9/9/09 3:27 PM Page vii Team for Success The Wiley Faculty Network WileyPLUS Author Commitment JWCL162_fm_i-xxx,1.qxd 9/9/09 3:27 PM Page viii Author Commitment Collaboration Innovation Experience After decades of success as authors of textbooks like this one, Jerry Weygandt, Paul Kimmel, and Don Kieso, Wiley Accounting's “Team for Success,” understand that teaching accounting goes beyond simply presenting data The Team for Success authors are truly effective because they know that teaching is about telling compelling stories in ways that make each concept come-to-life Teacher / Author / Professional Through their textbooks, supplements, online learning tools, and classrooms, these authors have developed a comprehensive pedegogy that engages students in learning and faculty with teaching Unlike other author teams, these authors collaborate throughout the process While a certain author may take the lead on a given book, the end result is a true collaboration where each author brings his individual experience and talent to the development of every paragraph, page, and chapter, thus creating a truly wellrounded, thorough view on any given accounting topic Many Ways in One Direction Our Team for Success has developed a learning system that addresses every learning style Each year brings new insights, feedback, ideas, and improvements on how to deliver the material to every student with a passion for the subject in a format that gives them the best chance to succeed The key to the team's approach is in understanding that, just as there are many different ways to learn, there are also many different ways to teach In Their Own Words Visit the Wiley Team for Success website to hear from the authors first-hand as they discuss their teaching styles, collaboration, and the future of accounting www.wileyteamforsuccess.com team for success “This textbook is one of the easiest for students to follow.” - Cheryl Copeland California State University, Fresno JWCL162_ndx_I1-I15.qxd I-4 9/3/09 10:45 AM Page I-4 Subject Index Cash: alternatives to, 597 bonds for, 597 liquidity of, 656–657 net, 585, 587, 591–595, 600 net change in, 598 Cash accounting, 545 Cash budget, 402–405 Cash disbursements section (of cash budget), 403 Cash flow(s) See also Statement of cash flows and capital budgeting, 545–546 for company evaluation, 600–601 discounted, 548–549 free, 600–601 inflows, 545, 546, 598 net annual, 547 outflows, 545, 546, 598 predicting, 584 Cash flow information, 545–546 Cash flow numbers, 545, 559 Cash flow techniques, 548 Cash inflows, 545, 546, 598 Cash outflows, 545, 546, 598 Cash payback technique, 547–548 Cash receipts, 613 Cash receipts section (of cash budget), 402–403 CEO (chief executive officer), 7–8 Certified public accountants (CPAs), 24 CFO (chief financial officer), Change in accounting principle, 670 Channel stuffing, 672 Charges, job, 346 Chief executive officer (CEO), Chief financial officer (CFO), China, 18 CIM (computer-integrated manufacturing), 21 Closing entries, 29–30 COLAs (cost of living adjustments), 497 Collaboration, 449 College degree, value of, 312 Common-size analysis, see Vertical analysis Common stock, 662 Common stockholders’ equity, return on, 660–661, 665 Companies, see Businesses Comparative analysis, 646–647 Comparative balance sheets, 584, 588 Comparisons, 647, 655 Compensation programs, 449 Competence, B-1 Compounding periods, A-3, A-14 Compound interest, A-2–A-4 Comprehensive income, 670 Computer-integrated manufacturing (CIM), 21 Computerization, 21 Confidentiality, B-1–B-2 Conflict resolution, B-2 Constraints, theory of, 22, 255 Contribution margin, 216, 244, 254–255 per unit, 213–214 ratios, 214, 246, 257 Control accounts, 62, 63 Control device, budgets as, 388 Controllable costs, 446, 449 Controllable items, 446 Controllable margin, 454, 457 Controllable revenues, 449 Controller, Controlling, as management function, 6–7 Conversion costs, 108 Conversion rates, 248 Corporate fraud, Corporate managers, 664 Cost(s), 10–12 See also Standard costs of ABC implementation, 161–162 accumulating, 59–60, 70 controllable vs noncontrollable, 446, 449 of degrees, 312 direct labor, 11 direct materials, 11 energy, 260 in financial statements, 13–19 joint, 306 manufacturing, 10–19 of morale, 311 opportunity, 300, 303–304, 350 overhead, 11–12, 152, 157–158, 161–162 product vs period, 12 reducing, 24 relevant, 300, 301 sunk, 300, 306, 308 target, 339–340 variable, 204–205, 208–211, 351 Cost accounting, 56 Cost accounting systems, 56, 115 absorption costing, 263–272 activity-based, see Activity-based costing and cost-plus pricing, 341–343 defined, 56 job order costing, 56–57 see also Job order cost systems operations costing, 115 process costing, 57 see also Process cost systems standard, 516–519 target costing, 339–340 traditional, 152–153, 155–156, 158–159, 167–168 variable, see Variable costing Cost-based transfer price, 352–354 Cost behavior analysis, 204–211 fixed costs in, 205–206 and identification of variable and fixed costs, 211 mixed costs in, 208–210 relevant range in, 206–208 variable costs in, 204–205 Cost centers, 452–453 Cost determination, Cost drivers, 153, 154 at Caterpillar, 105 identifying, 156–157 Cost flows: and job order costing, 58–72 and process costing, 103–104 Costing and costing systems, see Cost accounting systems Cost of capital, 551 Cost of goods manufactured, 13, 14 Cost of goods manufactured schedule, 14, 15 Cost of goods purchased, 13 Cost of goods sold: assigning costs to, 68 in flow of costs, 70 Cost of living adjustments (COLAs), 497 Cost-plus pricing, 69, 341–343 Cost pools: and ABC, 161 activity, 153, 154 allocating overhead to, 156 overhead, 153 Cost reconciliation schedule, 113, 123–124 Cost structures, 256–259 and break-even point, 257–258 and contribution margin ratio, 257 and margin of safety ratio, 258 and operating leverage, 258–259 Cost-volume-profit (CVP) analysis, 211–223, 242–272 assumptions of, 212 and break-even analysis, 215–218, 246 components of, 212 and cost structure, 256–259 margin of safety in, 220–221, 246 and sales mix, 250–255 and target net income, 218–220, 246–247 and variances, 508–509 Cost-volume-profit (CVP) graph, 217–218, 220 Cost-volume-profit (CVP) income statement, 212–214 and contribution margin per unit, 213–214 and contribution margin ratio, 214 variances on, 508–509 CPAs (certified public accountants), 24 Credibility, B-2 Credits: tax, 222 on worksheets, 28 Credit balance, 73 Creditors: long-term, 646 short-term, 646, 655 Current liability, 594–595 Current ratio, 655–656 formula for, 664 managing, 656 Cutoff rate, see Discount rate CVP analysis, see Cost-volume-profit analysis CVP graph, see Cost-volume-profit graph CVP income statement, see Cost-volume-profit income statement D Days in inventory, 658 Debits, 28 Debit balance, 73 Debt to total assets ratio, 663–665 Decentralization, 448 Decision-making process, 298–300 make-or-buy decisions, 297, 302–304 sell-or-process-further decision, 305–307 Degree of operating leverage, 258–259 Departmental overhead costs (report), 437 Depreciation, 592 accumulated, 609 and operating expenses, 615 Direct fixed costs, 453 Directing, as management function, 6, Direct labor, 11, 153 costs of, 152 as manufacturing cost, 11 and overhead costs, 153 Direct labor budget, 398–399 Direct labor price standard (direct labor rate standard), 497 Direct labor quantity standard (direct labor efficiency standard), 498 Direct materials, 11, 497 Direct materials budget, 396 Direct method (statement of cash flows), 589, 611–617 Discontinued operations, 667–668 Discounted cash flow techniques, 549 Discounting, A-11 Discounting the future amount, A-7 Discount rate (required rate of return, hurdle rate, cutoff rate), 548, 551 Dividends, 584–585 Dunlap, Al “Chainsaw,” 311 E Earned revenues, 591 Earnings, quality of, 671–672 Earnings per share (EPS), 661–662, 665 Earning power, 667–671 and changes in accounting principle, 670 and comprehensive income, 670 defined, 667 and irregular items, 667–671 Earnings retained, see Retained earnings statements E-commerce, business-to-business (B2B), 21 Electricity, 260 JWCL162_ndx_I1-I15.qxd 9/3/09 10:45 AM Page I-5 Subject Index Employees: evaluations of, 162 fraud by, safety of, 555 Ending work in process inventory, 14 Energy costs, 260 Enterprise resource planning (ERP) software systems, 21 EPS, see Earnings per share Equal Employment Opportunity Act, 494 Equipment: incremental analysis for, 308 loss on sale of, 592–593, 615 replacement of, 308 retention of, 308 Equity: stockholders’, 651–652, 665 trading on the, 661 Equivalent units of production, 107–115, 119–122 FIFO method computation of, 119–120, 122 weighted-average method computation of, 107–109 ERP (enterprise resource planning) software systems, 21 Ethics: and budgeting, 391 business, 8–9 and competence, B-1 and confidentiality, B-1–B-2 and conflict resolution, B-2 and credibility, B-2 in determining equivalent units, 108 and documentation, 62 and IMA, B-1–B-2 and incentives, 8–9 and integrity, B-2 principles of, B-1 and standards, 496, B1–B2 and taxes, 356 of transferring profits, 356 Eurich, Beecher, 99 European Union, 18 Evaluation process (capital budgeting), 544–546 Excess capacity, 350–351 Exotic Newcastle Disease, 445 Expenses payable, accrued, 614 External sales, 338–346 cost-plus pricing for, 341–343 and target costing, 339–340 time-and-material pricing for, 345–347 variable-cost pricing for, 343 Extraordinary items, 668–669 Financial statement(s): balance sheet, 6–17 income statement, 13–15 management’s responsibility for, manufacturing costs reflected in, 13–19 and preparation of job order costing, 72–74 Financial statement analysis, 644–676 common-size analysis, 651–654 of earning power, 667–676 horizontal analysis, 647–651 irregular items, 667–671 need for, 646–647 quality of earnings, 671–672 ratio analysis, 654–666 tools for, 647 trend analysis, 647–651 vertical analysis, 651–654 Financing activities, 585, 586 in indirect method, 597–598 net cash provided by, 600 Financing section (of cash budget), 403 Finished goods, assigning costs to, 67–68 Finished goods inventory, 70 First-in, first-out (FIFO) method, 119–125 and cost reconciliation schedule, 123–124 and equivalent units of production, 119–120, 122 and physical unit flow, 120–122 and production cost report, 124 and unit production costs, 122–123 weighted-average method vs., 124–125 Fixed costs (traceable costs): computing, with high-low method, 209–210 in cost behavior analysis, 205–206 identifying, with cost behavior analysis, 211 in responsibility accounting, 453 Flexible budget(s), 439–446 budgetary control with, 439–446 case study, 442–443 development of, 441 with management by exception, 446 Flexible budget reports, 444–445 Flexible manufacturing, 459 Flowcharts, activity, 163–164 Food budgets, 410 Forecasts, sales, see Sales forecasts Forrest, Brian, 203 Fragrance manufacturers, 255 Fraud, Free cash flows, 600–601 Full-cost pricing, 343, 359 Future value: of annuities, A-4–A-6 of single amounts, A-2–A-4 F Facility-level activities, 165, 166 Factory labor costs: accumulating, 59–60 assigning, 63–64, 104–105 Factory overhead, see Manufacturing overhead Fair Labor Standards Act, 494 Favorable variances, 501 FIFO method, see First-in, first-out method Financial accounting, Financial budgets, 392, 402–407 and budgeted balance sheet, 405–407 cash budget, 402–405 Financial calculators, A-13–A-16 applications of, A-15–A-16 and compounding period, A-14 keys on, A-13–A-14 minus signs on, A-14 plus signs on, A-14 present value function on, A-14 rounding on, A-14–A-15 Financial executives, Financial information, 299 Financial reporting fraud, G Generally accepted accounting practices (GAAP), 672 and absorption-cost pricing, 359 net income measured under, 270 Globalization, 345–356 Global warming, 260 Goods manufactured, cost of, 13, 14 Government budgets, 409 Graham, Benjamin, 645 Greenhouse gases, 260 Growth, 348 H Harris, Franco, 151 Health care, 203, 513 High-inventory turnover, 659 High-low method, 209–210 High-school graduates, 312 Horizontal (trend) analysis, 647–651 of balance sheets, 648–649 of income statements, 649–650 of retained earnings statements, 650–651 Housing costs, 410 I-5 Human behavior, 390–391 Hurdle rate, see Discount rate Hybrid vehicles, 222 I Ideal standards, 496 IMA, see Institute of Management Accountants IMA Ethics Counselor, B-2 IMA Statement of Ethical Professional Practice, 9, B-1–B-2 Incentives, 8–9 Income: comprehensive, 670 from discontinued operations, 667 net, 585, 587 pro forma, 672 residual, 464–465 target net, 218–220, 246 Income (margin) measure, 456 Income statement(s), 13–15, 437, 588 budgeted, 400–401 CVP, 212–214, 508–509 horizontal analysis of, 649–650 statement of cash flows vs., 584 variances disclosed on, 508–509 vertical analysis of, 651–654 Income tax payable, 609 Incremental analysis, 296–313 and activity-based costing, 311 approach used in, 299–300 defined, 299 for elimination of unprofitable segments, 308–309 for equipment retention/replacement, 308 for make-or-buy decision, 302–304 for outsourcing, 354 qualitative factors in, 310–311 for sell-or-process-further decision, 305–307 with special orders, 301 types of, 300 in virtual companies, 354 India, 18 Indirect fixed costs, 453 Indirect labor, 11 Indirect manufacturing costs, see Manufacturing overhead Indirect materials, 11 Indirect method (statement of cash flows), 589–600, 605–611 direct method vs., 589 investing and financing activities, cash from, 597–598 and net change in cash, 598 operating activities, net cash from, 591–595 worksheets for, 605–611 Industry averages (norms), 647, 655 Insourcing, 24 Institute of Management Accountants (IMA), 9, B-2 Integrity, B-2 Intercompany comparisons, 647, 655 Interest, A-1–A-4 compound, A-2–A-4 simple, A-1 Interest coverage, see Times interest earned Interest rates, A-1 Internal audit staff, Internal rate of return (IRR), 558–560 Internal rate of return method, 558–560 advantages of, 562 decision rule for, 559–560, 562 net present value method vs., 559, 561 Internal sales, 348–349 See also Transfer pricing Internet, 21 airline industry and, 216 B2B e-commerce, 21 Intracompany comparisons, 647, 655 JWCL162_ndx_I1-I15.qxd I-6 9/3/09 10:45 AM Page I-6 Subject Index Inventory(-ies), beginning work in process, 14 days in, 658 finished goods, 70 product costs as, 12 Inventory methods: just-in-time, 21–22 periodic, 13–15 Inventory turnover, 658, 664 formula for, 664 high, 659 Investing activities, 585, 586 in indirect method, 597–598 net cash provided by, 600 Investment(s): and interest, A-2 short-term, 656–657 Investment centers, 452, 455–458 Investors, 664 IRR (internal rate of return), 558–560 Irregular items, 667–671 discontinued operations, 667–668 and earning power, 667–671 extraordinary items, 668–669 J Japan, 159 JIT (just-in-time) inventory method, 21–22 JIT processing, see Just-in-time processing Job assignment, see Assigning manufacturing costs Job cost sheets, 61 Job order cost systems, 54–75, 115, 517–519 accumulating costs, 60 advantages and disadvantages of, 71–72 assigning costs in, 61–68 assigning manufacturing costs, 61–68 features of, 56–57 financial statement preparation in, 72–74 flow of costs in, 58–72 in Greetings, Inc case study, CA-3–CA-5 journal entries in, 517–518 ledger accounts in, 518–519 process costing vs., 57, 101–103 for service companies, 68–69 Jobs (employment), 24 Jobs (products), 56–57 Johnson, Matthew, 664 Joint costs, 306 Just-in-time (JIT) inventory method, 21–22 Just-in-time (JIT) processing, 174–176 benefits of, 175–176 elements in, 174–175 objective of, 174 L Labor: direct, 11, 152, 153, 398–399 factory, 60, 63–64, 104–105 indirect, 11 Labor costs: calculating, with time-and-material pricing, 345–346 direct, 152 Labor price variances, 504 Labor quantity variances, 504, 505 Labor reports, 437 Labor variances, 505 LCDs (liquid crystal displays), 557 Lean manufacturing, 210 Leverage, 661 Leveraging (trading on the equity), 661 Liability(-ies): current, 594–595 total, 652 Line positions, Liquid crystal displays (LCDs), 557 Liquidity, 646 of borrower, 646 of cash, 656–657 immediate, 656 of receivables, 656–657 short-term, 656 Liquidity ratios, 655–658 acid-test ratio, 656–657 average collection period, 657–658 current ratio, 655–656 days in inventory, 658 inventory turnover, 658 quick, 656–657 receivables turnover, 657–658 summary of, 664 Loans: auto, A-15 calculating amounts of, A-15–A-16 mortgage, A-15–A-16 safety of, 646 Long-range planning, 392 Long-term bonds, issuance of, 597 Long-term creditors, 646 Low-volume enterprises, 659 M Machine hours, 152, 153 Madison Square Garden, 394 Make-or-buy decision: incremental analysis for, 302–304 opportunity cost in, 303–304 and outsourcing, 297, 304 Management (managers), 664 decision-making process of, 298–300 and financial statements, functions of, 6, Management, activity-based, 163–164, 171 Management accounting, see Managerial accounting Management by exception, 446 Managerial accountants, Managerial accounting (management accounting), 4–5 activities of, current trends in, 20–26 defined, financial accounting vs., Manufacturing, 10–11 flexible, 459 merchandising vs., 10 and outsourcing, 24 Manufacturing companies: accounting cycle for, 27–30 outsourcing by, 297 Manufacturing costs, 10–19 See also Manufacturing overhead assigning, 61–68, 104–106 calculating, for absorption-cost pricing, 359 direct labor, 11 direct materials, 11 in financial statements, 13–19 in job order costing, 61–68 in process costing, 104–106 Manufacturing overhead, 11–12, 65 accumulating costs of, 60 assigning costs of, 65–67, 105 over-/underapplied, 73–74 in year-end balance, 73–74 Manufacturing overhead budget, 399–400 Manufacturing overhead variances, 506–507 Manufacturing Summary account, 29 Margin (income) measure, 456 Margin of safety, 220–221, 246–247 Margin of safety ratio, 220 Market-based transfer price, 354 Market positioning, 558 Markup, 341 calculating, for absorption-cost pricing, 359–360 calculating, for variable-cost pricing, 361 Master budgets, 392–393 reports for, 437–439 sales point in, 394 Material(s): direct, 10–11 indirect, 11 pricing, 345–347 raw, 11, 59, 62, 104 and total materials variance, 501 Materiality, 446 Material loading charge, 345 calculating, 345–346 for overhead costs, 345 Material requisition slips, 62 Materials quantity variance, 501–502 Material variances, 502–503 MBA calculators, see Financial calculators Medical costs, 203, 513 Merchandise purchases budget, 407–408 Merchandisers, 407–408 Merchandising, 10 Minimum transfer price, 350 Minus signs (in time value of money problems), A-14 Mixed costs, 208–210 Money, time value of, see Time value of money Morale, cost of, 311 Mortgage loans, calculating, A-15–A-16 Moser, Thomas, 206 Multiple products, 305–307 Mutually exclusive projects, 555–557 N NAFTA, 18 Negotiated transfer prices, 349–352 with excess capacity, 350–351 with no excess capacity, 350 variable costs in, 351 Net annual cash flow, 547 Net cash: from investing activities, 600 net income vs., 587 from operating activities, 585, 591–595, 600 Net change in cash, 598 Net income, 587 net cash vs., 587 as performance measure, 585 per share, 662 target, 218–220, 246 Net present value (NPV), 548 Net present value method, 548–553 assumptions of, 553–555 for equal annual cash flows, 549–550 intangible benefits in, 553–555 internal rate of return method vs., 559, 561 with mutually exclusive projects, 555–557 and post-auditing, 558 and sensitivity analysis, 557 for unequal annual cash flows, 550 No excess capacity, 350 Noncash activities: changes of, 593–594 on statement of cash flows, 586 Noncontrollable costs, 446 Nonfinancial information, 299 Nonmanufacturing companies, 407–409 merchandisers, 407–408 not-for-profit organizations, 408–409 service enterprises, 408 Non–value-added activities, 163–164 Normal capacity, 498 Normal range, see Relevant range Normal standards, 496 Norms, 647, 655 Not-for-profit organizations, 408–409 NPV (net present value), 548 See also Net present value method JWCL162_ndx_I1-I15.qxd 9/3/09 10:45 AM Page I-7 Subject Index O Olympic Games, 405 Open Standards Benchmarking Collaborative, 496 Operating activities, 585, 586 in indirect method, 591–595 net cash provided by, 585, 591–595, 600 Operating assets: reducing average of, 457–458 valuation of, 456 Operating budgets, 392–401 and budgeted income statement, 400–401 defined, 392 direct labor budget, 398–399 direct materials budget, 396 manufacturing overhead budget, 399–400 planning for, 392–401 preparation of, 392–401 production budget, 395 sales budget, 394–395 selling and administrative expense budget, 400 Operating expenses, 615 Operating leverage, 258–259 Operations costing, 115 Opportunity costs, 300 in make-or-buy decision, 303–304 and no excess capacity, 350 Orders: accepting, at special prices, 301 incremental analysis for, 301 Ordinary items, 668 Organizational structure, 7–8 Organization charts, Orr, Mike, 493 Outsourcing, 24, 354 in make-or-buy decision, 304 by manufacturers, 297 and transfer pricing, 354 Overapplied overhead, 73–74 Overhead, 152 See also Manufacturing overhead and ABC, 161–162 and activity-based costing, 153 assigning, to products, 157–158 departmental overhead costs, 437 and direct labor, 153 inefficient use of, 507 in job order costing, 72 Overhead controllable variance, 506, 519–520 Overhead cost pools, 153 Overhead rates: computing, 157 predetermined, 65, 70, 152 Overhead variance, 519–521 Overhead volume variance, 506, 520–521 Overspending, in government budgets, 409 P Participative budgeting, 390–391 Payback period, 547 Payout ratio, 662–663, 665 P-E, see Price-earnings ratio Percentages, 654 Performance evaluation, 458–459 Performance measures, 454 Period(s): average collection, 657–658 budget, 389–390 compounding, A-3, A-14 payback, 547 Period costs, 12 Periodic inventory system, 13–15 Personal budgets, 410 Peterschmidt, David, 243 Pharmaceutical industry, 338 Physical unit(s), 110–111 and FIFO method, 120–122 in process costing, 110–111, 120–122 Planning, as management function, Plasma screens, 557 Plus signs (in time value of money problems), A-14 Post-audits, 557–558 Practical range, see Relevant range Predetermined overhead rates, 65, 70, 152 Preferred dividends, 661 Preferred stock, 661 Prenumbering, 62 Present value, A-7 See also Net present value method of annuities, A-9–A-11 in capital budgeting decisions, A-11–A-13 functions for, in calculators, A-1 of single amounts, A-7–A-9 of single sums, A-14–A-15 variables affecting, A-7 Present value (PV) key, A-14 Price-earnings (P-E) ratio, 662, 665 Price takers, 338–339 Pricing, 336–362 cost-plus costing, 341–343 for external sales, 338–346 for internal sales, see Transfer pricing target costing, 339–340 time-and-material, 345–347 time-and-material pricing, 345–347 transfer, see Transfer pricing variable-cost, 343, 361–362 variable-cost pricing, 343 Principal, A-1 Process cost systems, 57, 99–126 assigning costs in, 104–106 cost reconciliation schedule, preparation of, 113 equivalent units of production, computation of, 107–109, 111–112, 119–125 and flow of costs, 103–104 job order costing vs., 57, 101–103 physical unit flow, computation of, 110–111 preparing production cost report, 113–114 and production cost report, 110 for service companies, 101 unit production costs, computation of, 112–113 uses of, 100–101 Product costing, for service industries, 19–20 Product costs: as inventory, 12 magnitudes affecting, 11–12 period costs vs., 12 Production budget, 395 Production cost reports: and FIFO method, 124 in process costing, 110, 113–114, 124 Product-level activities, 165, 166 Product quality, 22 Professional analysts, 664 Profitability, 646 Profitability index, 555–557 Profitability ratios, 658–663 asset turnover, 659–660, 665 earnings per share, 661–662 payout ratio, 662–663 price-earnings ratio, 662 profit margin, 658–659 return on assets, 660 return on common stockholders’ equity, 660–661 summary of, 665 Profit centers, 452–454 Profit margin (rate of return on sales), 659, 665 I-7 Pro forma income, 672 Proportions, 654 “Pull approach,” 174 “Push approach,” 174 PV (present value) key, A-14 Q Quality of earnings, 671–672 alternative accounting methods for, 671 analysis of, 671–672 improper recognition of, 672 and pro forma income, 672 Quick ratios, see Acid-test ratios R Rate of return on sales, see Profit margin Rates, 654 Ratio(s), 654 acid-test, 656–657 asset turnover, 659–660 average collection period, 657–658 current, 655–656 days in inventory, 658 debt to total assets ratio, 663–665 earnings per share, 661–662 inventory turnover, 658 liquidity, 655–658, 664 payout, 662–663 price-earnings, 662 profitability, 658–663, 665 profit margin, 659 quick, 656–657 receivables turnover, 657–658 return on assets, 660 return on common stockholders’ equity, 660–661 solvency, 663–665 summary of, 665 times interest earned, 663–664 working capital, 655 Ratio analysis, 647, 654–666 with liquidity ratios, 655–658 with profitability ratios, 658–663 with solvency ratios, 663–665 Raw materials, 11 accumulating costs of, 59 assigning costs of, 62, 104 Receivables, liquidity of, 656–657 Receivables turnover, 657–658, 664 Recessions, job losses in, 210 Reconciling items, 608–610 Regulations, see Standards Relevant costs, 300, 301 Relevant range: of activity index, 207 in cost behavior analysis, 206–208 Reporting: determining costs vs., performance evaluation, 459 Required rate of return, see Discount rate Residual income, 464–465 defined, 464 ROI vs., 464–465 weakness of, 465 Responsibility accounting, 447–459 See also Responsibility centers with controllable vs noncontrollable revenues and costs, 449 performance evaluation in, 458–459 reporting system for, 449–451 Responsibility centers, 452–458 behavior affecting, 458 cost centers, 452–453 investment centers, 455–458 profit centers, 453–454 Responsibility reporting system, 449–451 for investment centers, 456 for profit centers, 453–454 Restructuring, 669 JWCL162_ndx_I1-I15.qxd I-8 9/3/09 10:45 AM Page I-8 Subject Index Retained earnings statements: horizontal analysis of, 650–651 statement of cash flows vs., 584 Return on assets, 660, 665 Return on common stockholders’ equity, 660–661, 665 Return on investment (ROI), 455 disadvantage of, 464 improvement of, 457–458 judgmental factors in, 456–457 with positive or zero net present value, 549 residual income vs., 464–465 Revenues: controllable vs noncontrollable, 449 earned, 591 Risk analysis, 557 Robotic equipment, 21 ROI, see Return on investment Rounding, A-14–A-15 S Safety: employee, 555 margin of, 220–221, 246–247 Sales: external, 338–346 internal, 348–349 see also Transfer pricing rate of return on, 659, 664 Sales budgets, 394–395 Sales dollars: break-even point in, 216, 251–253 for target net income, 219, 220 Sales forecasts, 390, 394 Sales mix, 250–255 and break-even analysis, 215–216, 250–253 defined, 250 with limited resources, 254–255 Sales reports, 437 Sales units: break-even point in, 215–216, 250–251 for target net income, 219 Sarbanes-Oxley Act of 2002 (SOX), Scott, Susan, 55 Scrap reports, 437 SEC, see Securities and Exchange Commission Securities, available-for-sale, 670 Securities and Exchange Commission (SEC): and disclosure requirements, 664 on pro forma income, 672 Security analysts, 664 Segments, 448 Selling and administrative expense budget, 400 Selling expenses (report), 437 Sell-or-process-further decision, 305–307 for multiple products, 305–307 for single products, 305 Sensitivity analysis, 557 Service companies: activity-based costing in, 162, 167–170 airline baggage handling costs, 159 balanced scorecard approach in, 512 break-even and margin of safety in, 221 budgeting in, 405, 408, 409, 445 contribution margin in, 216, 253 cost structures of, 259 credit card companies, 300 employment in, 19 job order costing for, 68–69 for non–value-adding activities, 170 pricing, 348 process costing for, 101 product costing for, 19–20 standard costs in, 494 traditional costing in, 167–168 Short-term creditors, 646, 655 Short-term investments, 656–657 Short-term liquidity, 656 Simple interest, A-1 Single amount: future value of, A-2–A-4 present value of, A-7–A-9 Single sum: discounting, A-12 present value of, A-14–A-15 Small businesses, 75, 390 Solar power, 260 Sole proprietorships, 75 Solvency ratios, 663–665 debt to total assets ratio, 663 summary of, 665 times interest earned, 663–664 SOX (Sarbanes-Oxley Act of 2002), Staff positions, Standard costs, 494–499 advantages of, 495 defined, 494 direct labor price standard, 497 and direct labor variance, 503–505 direct materials price standard, 497 and direct materials variance, 501–503 in health care, 513 and manufacturing overhead variance, 506–507 predetermined overhead rate, 498–499 setting, 495–500 variances affecting, 500–509 Standard cost accounting system, 516–519 journal entries, 517–518 ledger accounts, 518–519 Standard hours allowed, 506, 519 Standards: budgets vs., 494–495 need for, 494–495 normal vs ideal, 496 Standards of Ethical Professional Practice, B-2 Statement of cash flows, 582–603 activity classifications in, 585–586 for company evaluation, 600–601 comparative balance sheets vs., 584 direct method, 589, 611–617 format of, 587 and free cash flows, 600–601 under GAAP and IFRS, 586 income statements vs., 584 indirect method, 589–600, 605–611 noncash activities on, 586 preparation of, 588–600 retained earnings statements vs., 584 usefulness of, 584–585 worksheets for preparing, 605–611 Static budget(s), 437–439 See also Master budgets defined, 437 for performance evaluation, 440 Static budget reports, 437–439 Stock(s): issuance of, for cash, 597 preferred, 661 Stockholders, 7, 646 Stockholders’ equity, 652, 660–661, 665 Subsidiary ledger, 61 Summary entries, 60 Sunk costs, 300, 306, 308 Suppliers, dependability of, 174–175 T Target costs, 339–340 Target net income, 218–220, 246 contribution margin technique for, 219–220 and cost-volume-profit graph, 220 formula for, 219 in sales dollars, 219, 220 sales units for, 219 Target price, 339 Target selling price, 341 for absorption-cost pricing, 360 for variable-cost pricing, 361–362 Tax credits, for hybrid vehicles, 222 Tax rates, global differences in, 354–356 Technology, 21 Theory of constraints, 22, 255 Tilton, Glenn, 512 Time, A-1 Time-and-material pricing, 345–347 Times interest earned, 663–665 Time tickets, 63 Time value of money, A-1–A-16 and discounting, A-11 future value of an annuity, A-4–A-6 future value of a single amount, A-2–A-4 and interest, A-1–A-2 present values, A-7–A-15 and use of financial calculators, A-15–A-16 Time wasting, 171 Total assets, 662–665 Total cost of work in process, 14 Total costs accounted for, 113 Total costs to be accounted for, 113 Total labor variance, 504 Total liabilities, 652 Total manufacturing costs, 14 Total materials variance, 501 Total overhead variance, 506 Total quality management (TQM) systems, 22, 175 Total units to be accounted for, 110 Toyota Prius, 222 TQM systems, see Total quality management systems Traceable costs, see Fixed costs Trading on the equity (leveraging), 661 Traditional costing: activity-based costing vs., 152–153, 155–156, 158–159 in service industries, 167–168 unit costs under, 158–159 Transfer prices, 348–349 Transfer pricing, 348–349 abuse of, 356 cost-based, 352–354 in global environment, 345–356 in Greetings, Inc case study, CA-11–CA-13 market-based, 354 negotiated, 349–352 and outsourcing, 354 tax rates affecting, 355 Treasurer, Trend analysis, see Horizontal analysis Trend forecasting, 558 Tuition, 312 Turnover: asset, 659–660 high-inventory, 659 inventory, 658, 664 receivables, 657–658, 664 U Underapplied overhead, 73–74 Unfavorable variances, 500 Unionized workers, 505 Unit costs: with activity-based costing, 156–159 calculating, for variable-cost pricing, 361–362 with traditional costing, 158–159 Unit-level activities, 165, 166 Unit production costs: defined, 112 with FIFO method, 122–123 in process costing, 112–113, 122–123 Units started and completed, 119 Unprofitable segments: elimination of, 308–309 incremental analysis for, 308–309 V Value(s), adding, 6, 163 book, 308 future, A-2–A-6 JWCL162_ndx_I1-I15.qxd 9/3/09 10:45 AM Page I-9 Subject Index measurement of, net present, 548 present, A-7–A-15 time value of money, A-1–A-16 Value-added activities, 163 Value chain, 20–21 and technology, 21 and theory of constraints, 22 Value investing, 645 Variable cost(s): computing, with high-low method, 209–210 in cost behavior analysis, 204–205 identifying, with cost behavior analysis, 211 in negotiated transfer pricing, 351 Variable costing, 263 See also specific topics, e.g., Job costing absorption costing vs., 263–272 deciding when to use, 270–271 example of, 265–269 potential advantages of, 271–272 Variable-cost pricing, 343, 361–362 Variances: disclosing, 508–509 and management by exception, 508 reporting, 507–508 Vertical analysis, 647, 651–654 of balance sheets, 651–652 of income statements, 651–654 Vertical growth, 338 Vice president of operations, Virtual companies, 151, 354 W Weighted-average method, 107–109, 124–125 Wind-power electricity, 260 Working capital, 655 Working capital ratio, 655 Worksheets: closing entries on, 29–30 in indirect method, 605–611 preparation of, 28–29 Y Year-end balance, 73–74 I-9 JWCL162_ndx_I1-I15.qxd 9/3/09 10:45 AM Page I-10 JWCL162_ndx_I1-I15.qxd 9/3/09 10:45 AM Page I-11 JWCL162_ndx_I1-I15.qxd 9/3/09 10:45 AM Page I-12 JWCL162_ndx_I1-I15.qxd 9/3/09 10:45 AM Page I-13 JWCL162_ndx_I1-I15.qxd 9/3/09 10:45 AM Page I-14 JWCL162_ndx_I1-I15.qxd 9/3/09 10:45 AM Page I-15 JWCL162_end_EP1-EP3.qxd 9/19/09 7:56 PM Page RAPID REVIEW Chapter Content MANAGERIAL ACCOUNTING (Chapter 1) COST-VOLUME-PROFIT (Chapters and 6) Characteristics of Managerial Accounting Types of Costs Primary Users Internal users Reports Internal reports issued as needed Purpose Special purpose for a particular user Content Pertains to subunits, may be detailed, use of relevant data Verification No independent audits Variable costs Vary in total directly and proportionately with changes in activity level Fixed costs Remain the same in total regardless of change in activity level Mixed costs Contain both a fixed and a variable element CVP Income Statement Format Total Types of Manufacturing Costs Direct materials Raw materials directly associated with finished product Direct labor Work of employees directly associated with turning raw materials into finished product Manufacturing overhead Costs indirectly associated with manufacture of finished product Sales Variable costs $xx xx xx xx $xx Contribution margin Fixed costs Net income Per Unit $xx xx $xx Contribution ϭ margin per unit Unit selling price Ϫ Unit variable costs ϭ Fixed costs Ϭ Unit contribution margin* Break-even ϭ point in dollars Fixed costs Ϭ Contribution margin ratio* JOB ORDER AND PROCESS COSTING (Chapters and 3) Break-even point in units Types of Accounting Systems Job order Costs are assigned to each unit or each batch of goods Process cost Costs are applied to similar products that are mass-produced in a continuous fashion Required sales in units ϭ for target net income Job Order and Process Cost Flow Job Order Cost Flow Process Cost Flow Direct Materials Direct Labor Manufacturing Overhead Direct Materials Direct Labor Manufacturing Overhead Degree of operating leverage Work in Process Finished Goods Inventory Finished Goods Inventory Cost of Goods Sold Cost of Goods Sold Contribution Ϭ margin Ϭ Contribution margin per unit Net income *For multiple products, use weighted-average INCREMENTAL ANALYSIS (Chapter 7) Work in Process Inventory Job No 101 Job No 102 Job No 103 ϭ (Fixed costs ϩ Target net income) Identify the relevant costs associated with each alternative Relevant costs are those costs and revenues that differ across alternatives Choose the alternative that maximizes net income Opportunity costs are those benefits that are given up when one alternative is chosen instead of another one Opportunity costs are relevant costs Sunk costs have already been incurred and will not be changed or avoided by any future decision Sunk costs are not relevant costs PRICING (Chapter 8) ACTIVITY-BASED COSTING (Chapter 4) ← ← ← Overhead Costs Activity Cost Pools Divide by Cost Drivers Assign to Products Activity-based costing involves the following four steps: Identify and classify the major activities involved in the manufacture of specific products, and allocate the manufacturing overhead costs to the appropriate cost pools Identify the cost driver that has a strong correlation to the costs accumulated in the cost pool Compute the overhead rate for each cost driver Assign manufacturing overhead costs for each cost pool to products, using the overhead rates (cost per driver) External Pricing Markup percentage ϭ Desired ROI per unit Target selling price per unit ϭ Total unit cost ϩ ϭ Variable cost ϩ Opportunity cost Ϭ Total unit cost ( unitTotalcost ϫ Transfer Pricing Minimum transfer price Markup percentage ) JWCL162_end_EP1-EP3.qxd 9/19/09 7:56 PM Page RAPID REVIEW Chapter Content BUDGETS (Chapter 9) Materials price variance ؍AQ ϫ AP Ϫ AQ ϫ SP Materials quantity variance ؍ Labor price variance ؍AH ϫ AR Ϫ AH ϫ SR Labor quantity variance ؍AH ϫ SR Ϫ Components of the Master Budget Sales Budget s Co Haye get Bud Kitchenmate Production Budget Direct Labor Budget Direct Materials Budget AQ ϫ SP Ϫ SQ ϫ SP SH ϫ SR * Overhead controllable variance ؍Actual overhead Ϫ Overhead budgeted Manufacturing Overhead Budget Operating Budgets ؍Fixed overhead rate ϫ * Overhead volume variance Selling and Administrative Expense Budget Normal capacity Ϫ Standard hours allowed *Appendix coverage CAPITAL BUDGETING (Chapter 12) Budgeted Income Statement Capital Expenditure Budget Cash Budget Annual Rate of Return Budgeted Balance Sheet Annual rate of return ؍ Expected annual net income Ϭ Average investment Cash payback period ؍ Cost of capital investment Ϭ Annual cash inflow Financial Budgets Cash Payback RESPONSIBILITY ACCOUNTING (Chapter 10) Types of Responsibility Centers Discounted Cash Flow Approaches Cost Profit Investment Expenses only Expenses and Revenues Expenses and Revenues and ROI Return on Investment Return on investment (ROI) ؍ Investment center controllable margin Average investment center operating assets Ϭ Internal Rate of Return Net Present Value Compute net present value (a dollar amount) If net present value is zero or positive, accept the proposal If net present value is negative, reject the proposal Compute internal rate of return (a percentage) If internal rate of return is equal to or greater than the minimum required rate of return, accept the proposal If internal rate of return is less than the minimum rate, reject the proposal STANDARD COSTS (Chapter 11) STATEMENT OF CASH FLOWS (Chapter 13) Standard Cost Variances Cash flows from operating activities (indirect method) Net income Add: Losses on disposals of assets Amortization and depreciation Decreases in noncash current assets Increases in current liabilities Deduct: Gains on disposals of assets Increases in noncash current assets Decreases in current liabilities Net cash provided (used) by operating activities Total materials variance ؍ Materials price variance ϩ Materials quantity variance Total labor variance ؍ Labor price variance ϩ Labor quantity variance Total overhead variance ؍ Overhead controllable variance ϩ Cash flows from operating activities (direct method) Cash receipts (Examples: from sales of goods and services to customers, from receipts of interest and dividends on loans and investments) $X Cash payments (Examples: to suppliers, for operating expenses, for interest, for taxes) (X) Cash provided (used) by operating activities Overhead volume variance Balanced Scorecard Linked process across perspectives: Financial Customer Internal Process $X X X X (X) (X) (X) Learning and Growth $X $X JWCL162_end_EP1-EP3.qxd 9/19/09 7:56 PM Page RAPID REVIEW Chapter Content FINANCIAL STATEMENT ANALYSIS (Chapter 14) Ratio Formula Purpose or Use Liquidity Ratios Current assets ᎏᎏᎏ Current liabilities Measures short-term debt-paying ability Acid-test (quick) ratio Cash ϩ Short-term investments ϩ Receivables (net) ᎏᎏᎏᎏᎏᎏ Current liabilities Measures immediate short-term liquidity Receivables turnover Net credit sales ᎏᎏᎏ Average net receivables Current ratio Inventory turnover Cost of goods sold ᎏᎏᎏ Average inventory Measures liquidity of receivables Measures liquidity of inventory Profitability Ratios Profit margin Net income ᎏᎏ Net sales Measures net income generated by each dollar of sales Asset turnover Net sales ᎏ Averageᎏ assets Measures how efficiently assets are used to generate sales Net income ᎏᎏᎏ Average total assets Measures overall profitability of assets Net income ᎏᎏᎏᎏᎏᎏ Average common stockholders’ equity Measures profitability of stockholders’ investment Return on assets Return on common stockholders’ equity Earnings per share (EPS) Net income ᎏᎏᎏᎏᎏᎏ Weighted average common shares outstanding 10 Price-earnings (P-E) ratio Market price per share of stock ᎏᎏᎏᎏ Earnings per share 11 Payout ratio Measures net income earned on each share of common stock Measures the ratio of the market price per share to earnings per share Cash dividends ᎏᎏ Net income Measures percentage of earnings distributed in the form of cash dividends Total debt ᎏᎏ Total assets Measures percentage of total assets provided by creditors Income before income taxes and interest expense ᎏᎏᎏᎏᎏᎏ Interest expense Measures ability to meet interest payments as they come due Cash provided by operating activities Ϫ Capital expenditures Ϫ Cash dividends Measures the amount of cash generated during the current year that is available for the payment of additional dividends or for expansion Solvency Ratios 12 Debt to total assets ratio 13 Times interest earned 14 Free cash flow ... include: (SO 2) (a) top-down budgeting (b) management acceptance (c) research and analysis (d) sound organizational structure Compared to budgeting, long-range planning generally (SO 2) has the: (a)... of the chapter (SO 1) (SO 1) Which of the following is not a benefit of budgeting? (a) Management can plan ahead (b) An early warning system is provided for potential problems (c) It enables disciplinary... master budget (SO 3) Prepare a sales budget (SO 3) Prepare a production budget for quarters (SO 3) Prepare a direct materials budget for month (SO 3) BE9-1 Voorhees Manufacturing Company uses