Managerial Accounting Tools for Business Decision-Making Fifth Canadian Edition JERRY J WEYGANDT Ph.D., CPA University of Wisconsin—Madison Madison, Wisconsin PAUL D KIMMEL Ph.D., CPA University of Wisconsin—Milwaukee Milwaukee, Wisconsin DONALD E KIESO Ph.D., CPA Northern Illinois University DeKalb, Illinois IBRAHIM M ALY Ph.D John Molson School of Business Concordia University Montreal, Quebec VICE PRESIDENT, EDUCATION Tim Stookesberry Director Michael McDonald EXECUTIVE Editor Zoë Craig Senior Manager, Content Enablement & Operations Karen Staudinger Development Editor Daleara Jamasji Hirjikaka SENIOR Marketing Manager Anita Osborne Senior Content Manager Dorothy Sinclair Production Editor Meaghan MacDonald Media Editor Elena Saccaro DESIGN Wiley COVER DESIGN Joanna Vieira/Wiley Senior Photo Editor Mary Ann Price Cover Image â sergua/Shutterstock This book was set in Stix Regular by Aptarađ, Inc and printed and bound by Quad Graphics/Versailles The cover was printed by Quad Graphics/Versailles Founded in 1807, John Wiley & Sons, Inc has been a valued source of knowledge and understanding for more than 200 years, helping people around the world meet their needs and fulfill their aspirations Our company is built on a foundation of principles that include responsibility to the communities we serve and where we live and work In 2008, we launched a Corporate Citizenship Initiative, a global effort to address the environmental, social, economic, and ethical challenges we face in our business Among the issues we are addressing are carbon impact, paper specifications and procurement, ethical conduct within our business and among our vendors, and community and charitable support For more information, please visit our website: www.wiley.com/go/citizenship Copyright © 2018 John Wiley & Sons Canada, Ltd Copyright © 2018 John Wiley & Sons, Inc All rights reserved No part of this work covered by the copyrights herein may be reproduced or used in any form or by any 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return shipping label are available at www.wiley.com/go/returnlabel If you have chosen to adopt this textbook for use in your course, please accept this book as your complimentary desk copy Outside of the United States, please contact your local representative Material from CPA Canada has been adapted and/or reprinted with permission of the Chartered Professional Accountants of Canada, Toronto, Canada Any changes to the original material are the sole responsibility of the author (and/or publisher) and have not been reviewed or endorsed by the Chartered Professional Accountants of Canada ISBN: 978-1-119-40399-9 The inside back cover will contain printing identification and country of origin if omitted from this page In addition, if the ISBN on the back cover differs from the ISBN on this page, the one on the back cover is correct Printed in the United States of America 10 9 8 7 6 5 4 3 2 1 About the Authors U.S Edition JERRY J WEYGANDT, Ph.D., CPA, is the Arthur Andersen Alumni Emeritus Professor of Accounting at the University of Wisconsin—Madison He holds a Ph.D in accounting from the University of Illinois Articles by Professor Weygandt have appeared in Accounting Review, Journal of Accounting Research, Accounting Horizons, Journal of Accountancy, and other academic and professional journals Professor Weygandt is author of other accounting and financial reporting books and is a member of the American Accounting Association, the American Institute of Certified Public Accountants, and the Wisconsin Society of Certified Public Accountants He has served on numerous committees of the American Accounting Association and as a member of the editorial board of Accounting Review; he has also served as President and Secretary-Treasurer of the American Accounting Association In addition, he has been actively involved with the American Institute of Certified Public Accountants and has been a member of the Accounting Standards Executive Committee of that organization He served on the FASB task force that examined the reporting issues related to accounting for income taxes and as a trustee of the Financial Accounting Foundation Professor Weygandt has received the Chancellor's Award for Excellence in Teaching and the Beta Gamma Sigma Dean's Teaching Award He is on the board of directors of M&I Bank of Southern Wisconsin He is the recipient of the Wisconsin Institute of CPAs' Outstanding Educator's Award and the Lifetime Achievement Award In 2001, he received the American Accounting Association's Outstanding Accounting Educator Award PAUL D KIMMEL, Ph.D., CPA, received his bachelor's degree from the University of Minnesota and his doctorate in accounting from the University of Wisconsin He is an Associate Professor at the University of Wisconsin— Milwaukee, and has public accounting experience with Deloitte & Touche He was the recipient of the UWM School of Business Advisory Council Teaching Award and the Reggie Taite Excellence in Teaching Award, and a three-time winner of the Outstanding Teaching Assistant Award at the University of Wisconsin He is also a recipient of the Elijah Watts Sells Award for Honorary Distinction for his results on the CPA exam He is a member of the American Accounting Association and the Institute of Management Accountants and has published articles in Accounting Review, Accounting Horizons, Advances in Management Accounting, Managerial Finance, Issues in Accounting Education, and Journal of Accounting Education, as well as other journals His research interests include accounting for financial instruments and innovation in accounting education He has published papers and given numerous talks on incorporating critical thinking into accounting education, and helped prepare a catalogue of critical thinking resources for the Federated Schools of Accountancy DONALD E KIESO, Ph.D., CPA, received his bachelor's degree from Aurora University and his doctorate in accounting from the University of Illinois He has served as chairman of the Department of Accountancy and is currently the KPMG Emeritus Professor of Accounting at Northern Illinois University He has public accounting experience with Price Waterhouse & Co and Arthur Andersen & Co and research experience with the Research Division of the American Institute of Certified Public Accountants He is a recipient of NIU's Teaching Excellence Award and four Golden Apple Teaching Awards Professor Kieso is a member of the American Accounting Association, the American Institute of Certified Public Accountants, and the Illinois CPA Society He has served as a member of the Board of Directors of the Illinois CPA Society, the AACSB's Accounting Accreditation Committees, the State of Illinois Comptroller's Commission, as Secretary-Treasurer of the Federation of Schools of Accountancy, and as Secretary-Treasurer of the American Accounting Association Professor Kieso is currently serving on the Board of Trustees and Executive Committee of Aurora University, and is a member of various other boards From 1989 to 1993, he served as a charter member of the national Accounting Education Change Commission He is the recipient of the Outstanding Accounting Educator Award from the Illinois CPA Society, the FSA's Joseph A Silvoso Award of Merit, the NIU Foundation's Humanitarian Award for Service to Higher Education, the Distinguished Service Award from the Illinois CPA Society, and in 2003 an honorary doctorate from Aurora University Canadian Edition IBRAHIM M ALY, Ph.D., is a professor in the Department of Accountancy at the John Molson School of Business, Concordia University, where he has been on faculty since 1989 Professor Aly holds a Ph.D and MBA (with distinction) in accounting from the University of North Texas, as well as an M.S and B.Comm (with distinction) in accounting from Cairo University, Egypt Professor Aly has taught at a variety of universities in Egypt, Saudi Arabia, the United States, and Canada and he has developed and coordinated many accounting courses at both the undergraduate and graduate levels He participated in the Symposium on Models of Accounting Education, sponsored by the Accounting Education Change Commission of the American Accounting Association Throughout his many years of teaching, Professor Aly's method of instruction has consistently met with high praise from his students He won the College of Business Teaching Innovation Award for two consecutive years Professor Aly has published in reputable refereed journals in the fields of managerial accounting, financial accounting, behavioural accounting, and accounting education In addition, he has published a book on management accounting entitled Readings in Management Accounting: New Rules for New Games in Manufacturing and Service Organizations He has presented his work at over 35 scholarly national and international conferences, and been chosen as the Department of Accountancy Research Professor He has organized the department's luncheon presentations series and the Ph.D visiting speaker series, both of which provide an indispensable academic service to graduate students and professors Professor Aly has given numerous workshops and seminars on financial and managerial accounting Hallmark Features Managerial Accounting, Fifth Canadian Edition, provides a simple and practical introduction to managerial accounting It explains the concepts you need to know, while also emphasizing the importance of decision-making In this new edition, all content has been carefully reviewed and revised to ensure maximum student understanding; for example, the author has included additional discussion of the break-even mathematical equations At the same time, the time-tested features that have proven to be of most help to students have been retained, such as the following DO IT! Exercises DO IT! Exercises in the body of the material prompt students to stop and review key concepts They outline the Action Plan necessary to complete the exercise and show a detailed solution Review and Practice Each chapter concludes with a Review and Practice section that includes a review of learning objectives, decision tools and review, a key terms glossary, a Comprehensive DO IT! exercise with a solution, and self-study multiplechoice questions with annotated solutions Infographic Learning Over half of the content coverage is visual, providing students with alternative ways of learning about accounting Real-World Decision-Making Real-world examples that illustrate interesting situations in companies and how managers make decisions using accounting information are integrated throughout, such as in the opening Feature Story as well as the Insight boxes Decision Tools Accounting concepts that are useful for management decision-making are highlighted throughout A summary of Decision Tools is included in each chapter, as well as a practice exercise and solution, Using Decision Tools see also manufacturing overhead costs activity-based overhead rate, 180–181, 180f, 181f allocation to cost pools, 180, 180f assignment to products, 181–182, 182f company-wide costs, 189 service company, 190f under traditional costing system, 190f P Palacios, Milagros, 556n paper billing, 187 participative budgeting, 427, 448 Passariello, Christina, 6n Patriquin, Martin, 125n Pedwell, Terry, 187n per-unit manufacturing cost, 326, 326f, 337–338, 340f perfection, 15 performance evaluation, 488–489 see also performance measurement behavioural principles, 489 controllability, 489 and inventory costing methods, 333–335 investment centres, evaluation of performance of, 495–499 management by exception, 488 materiality, 488–489 principles, 488–489 reporting principles, 489 performance measurement see also performance evaluation balanced scorecard, 16, 18, 534–535, 553–556, 555f, 563 financial measures, 552–553 non-financial measures, 553f residual income, 500–502, 501f, 505 standard costs See standard costs standardization of, 536–537 performance standards, 187 period costs, 29, 29f, 45 perpetual inventory system, 72 personal budgets, 445 Pettypiece, Shannon, 138n physical unit flow, 132–133, 133f physical units, 132, 148 Pichon, Hugues, 6n planning, 5 post-audit, 603–604, 612 post-secondary education, 336 practical range See relevant range predetermined overhead rate, 82–84, 82f, 89, 96, 176 present value, 605f see also net present value (NPV) price takers, 372 pricing absorption cost-plus pricing, 377–378, 377f, 378f, 396 external sales, 371–383 factors, 372f importance of, 372 internal sales, 384–392 markup, 374, 374f, 375f, 377–378, 377f, 396 target cost, 372–373, 372f, 396 target selling price, 374, 380–381, 396 time-and-material pricing, 381–383, 381f, 383f, 396 total cost-plus pricing, 374–376, 374f, 396 transfer pricing, 384–392, 384f variable cost-plus pricing, 379–380, 379f, 396 prime costs, 28, 28f, 45 process cost accounting cost of goods sold, transfer to, 128 equivalent units of production, 128–131, 129f factory labour costs, 127 finished goods, transfer to, 127 manufacturing costs, flow and assignment of, 126–128 manufacturing overhead costs, 127 materials cost, 126–127 next department, transfer to, 127 operations costing, 124–125 process cost flow, 126, 126f process cost system, 72–73, 73f, 96, 122–125, 148 production cost report, 131–137, 135f, 137f process cost flow, 126, 126f process cost system, 72–73, 73f, 96, 123f, 148 nature of, 122–125 vs job-order cost system, 123–124, 123f, 124f process further or sell, 285–287, 286f, 287f product costing for manufacturing companies, 29–30 for service industries, 30–31 product costs, 29–31, 29f, 45, 179 product-level activities, 185, 186f, 194 production budget, 431–432, 432f, 448 production cost, 540f production cost report, 131–137, 135f, 137f, 148 cost reconciliation schedule, 134–135, 134f equivalent units of production, calculation of, 133, 133f, 136–137 first-in, first-out (FIFO) inventory costing, 143–144, 143–144f physical unit flow, calculation of, 132–133, 133f preparation of, 135–136 sequential process setting, 136–137 unit production costs, calculation of, 133–134, 133f, 134f production department, 544 production requirements formula, 431f profit centre, 492, 493–494, 505 profit margin, 497 profitability index, 602–603, 603f, 612 proration, 92, 96 pull, 15 purchase costs, 333 Q qualitative factors, 279 quality, 14 quantitative factors, 279 R Raj, Althia, 187n raw materials, 27 raw materials costs, 75, 78–79 Raymundo, Oscar, 373n regulations, 536 Reisinger, Don, 373n relevant costs, 279f, 291, 295 relevant range, 34–35, 35f, 45 Ren, Feixue, 556n replace or retain equipment, 288, 288f reporting fraud, 9 reporting principles of performance evaluation, 489 reports for internal users, 1 required rate of return See discount rate residual income, 500–502, 501f, 505 resource allocation, 291–292 responsibility accounting, 487–495, 487f, 505 controllable costs and revenues, 488 responsibility centres, 492–494, 493f responsibility reporting system, 490–492, 491f, 505 uncontrollable costs and revenues, 488 responsibility centres, 492–494, 493f cost centre, 492, 493f, 505 investment centre, 492–493, 495–499, 496f, 505 profit centre, 492, 493–494, 505 responsibility report, 494, 496, 496f responsibility reporting system, 490–492, 491f, 505 retain or replace equipment, 288, 288f return on investment (ROI), 495–499, 495f, 497f, 498f, 500–502, 500f, 505, 555 revenue controllable, 488 uncontrollable, 488 Rheubottom, Robert, 238n risk analysis, 603 Roseman, Ellen, 187n S Sage, Alexandria, 284n sales budget, 431, 431f, 448 sales forecast, 427, 431, 448 sales mix, 240–244, 241f, 250 Sandlos, John, 26n Sarbanes-Oxley Act, 9, 10 segment, 488, 505 sell or process further, 285–287, 286f, 287f selling and administrative expenses budget, 436, 436f, 448 sensitivity analysis, 598, 612 sequential process setting, 136–137 service industry activity-based costing (ABC), 189–191, 190f, 191f break-even, 238 job-order costing, 87–88 margin of safety, 238 overhead, 190f pricing services, 381–383, 381f, 383f process costing, 122–123 product costing, 30–31 time-and-material pricing, 381–383, 381f, 383f traditional costing systems, 189–190, 190f, 191f trends, 12, 12f shareholders, 6 Shaw, Hollie, 138n small business, 93 Smyrlis, Lou, 34n special orders, 280–281, 281f staff positions, 7, 19 standard cost accounting system, 552–553, 556–559, 563 standard cost job-order cost accounting system, 557 standard costs, 536, 563 see also standards advantages of, 536, 536f case study, 537–539 direct labour price standard, 538, 538f, 563 direct labour quantity standard, 538, 539f, 563 direct materials price standard, 538, 538f, 563 direct materials quantity standard, 538, 540f, 563 setting standard costs, 537–539 standard predetermined overhead rate, 539, 539f total standard cost per unit, 539, 539f total standard costs, 540 vs actual costs, 557 standard predetermined overhead rate, 539, 539f, 563 standards costs of standards, 536 ideal standards, 537, 563 need for standards, 536 normal standards, 537, 563 regulations, 536–537 standard costs See standard costs variances, 540–541 vs budgets, 537 Statement of Ethical Professional Practice, 9–10 static budget, 478–480, 481f, 505 stock-outs, 6 strategic management programs, 11–12 Stratton, William, 183n Strauss, Kristy, 535n summary entry, 76, 96 sunk costs, 279f, 295 supply chain, 14, 19 sustainability reporting, 10, 11f Symon, John, 335n T Tabini, Marco, 373n target cost, 372–373, 372f, 374, 396 target costing, 15 target operating income, 234–237, 235f, 250 target selling price, 374, 376f, 380–381, 396 taxes, and transfer pricing, 391–392 Taylor, Cindy, 535 technological change, 13–14 Telfer, Ian, 26 theory of constraints, 14–15, 19, 292, 295 throughput contribution, 340, 341f, 345 throughput costing, 339–342, 341f, 342f, 345 time-and-material pricing, 381–383, 381f, 383f, 396 time management, 192 time ticket, 80, 96 time value of money, 608 total budgeted costs, 484f total conversion cost, 134, 134f total cost of work in process, 40, 45 total cost-plus pricing, 374–376, 374f, 396 total direct labour budget variance (TDLBV), 544, 545f, 563 total direct materials budget variance (TDMBV), 542, 542f, 563 total fixed costs, 33, 34f total fixed overhead variance, 549–551, 549f, 550f, 563 total manufacturing cost per unit, 134, 134f total manufacturing costs, 30, 45 total overhead variance, 546–547, 546f, 563 total quality management (TQM), 14, 19 total standard cost per unit, 539, 539f total standard hours allowed, 547, 563 total unit cost percentage, 376f total units (costs) accounted for, 133, 148 total units (costs) to be accounted for, 132, 148 total variable costs, 32–33, 32f total variable overhead budget variance (TVOHBV), 547–549, 547f, 548f, 563 Townsend, Matt, 138n traditional costing systems, 176–177, 176f, 189–190, 190f, 191f transfer price, 384, 396 see also transfer pricing transfer pricing, 384–392, 384f approaches, 387–392 cost-based transfer price, 390, 390f, 396 excess capacity, 386, 386f, 388, 388f, 390 general transfer-pricing formula, 385f market-based transfer price, 391, 396 negotiated transfer price, 387–390, 388f, 396 no excess capacity, 385–386, 386f, 387–388, 387f, 390f objectives, 384 outsourcing, effects of, 391 special order, 389f and taxes, 391–392 transfers between divisions in different countries, 391–392 units transferred unequal to units forgone, 389, 389f variable costs, 388–389 transferred-in cost, 136, 148 treasurer, 7, 19 triple bottom line, 10, 19 U under-applied overhead, 84, 91–92, 91f, 96 uneven cash flows, 594, 605 unfavourable variance, 540 unit conversion cost, 134, 134f unit cost formulas, 142f unit costs, 182–183, 182f unit fixed costs, 33, 34f unit-level activities, 185, 186f, 194 unit materials cost, 134f unit production costs, 133–134, 133f, 134f, 141–142, 142f, 148 unit variable costs, 32–33, 32f United States regulatory response to corporate scandals, 9 Sarbanes-Oxley Act, 9 university degree, 336 unprofitable segments, 289–290, 290f V value-added activities, 185–186, 187f, 194 value chain, 13–14, 13f, 19 value stream, 15 Vanian, Jonathan, 278n variable cost-plus pricing, 379–380, 379f, 396 variable costing, 326–332, 326f, 345 income statement, 327–328f, 330f, 334f, 341f net income, 328–332, 331f, 341–342, 342f performance evaluation, 333–335 potential advantages, 335 vs absorption costing, 326f vs throughput costing, 341–342, 342f variable costs, 32–33, 32f, 45 and absorption cost-plus pricing, 377 high-low method, 36–38, 37f identification of, 38 nonlinear behaviour, 34–35, 34f total cost-plus pricing, 374f transfer pricing, 388–389 variable cost-plus pricing, 379–380, 379f variance accounts, 557, 559f variance reports, 552, 552f variances, 540–541, 563 breakdown of materials or labour variance, 541f calculation of total variance, 540f direct labour variances, 544–546, 545f direct materials variances, 541–544, 541f, 542f, 543f favourable variance, 540 fixed overhead spending (budget) variance, 549, 549f, 563 fixed overhead volume variance, 549, 549f, 563 income statement, 552–553, 553f labour price variance, 544–546, 545f, 563 labour quantity variance, 545–546, 545f, 563 manufacturing overhead variances, 546–551 materials price variance, 542, 542f, 563 materials quantity variance, 542–543, 543f, 563 statement presentation, 552–553 total direct labour budget variance (TDLBV), 544, 545f, 563 total direct materials budget variance (TDMBV), 542, 542f, 563 total fixed overhead variance, 549–551, 549f, 550f, 563 total labour variance, 545f total materials variance, 542f total overhead variance, 546–547, 546f, 563 total variable overhead budget variance (TVOHBV), 547–549, 547f, 548f, 563 total variance, 540, 540f unfavourable variance, 540 variance reports, 552, 552f Vaughan, Michael, 247n vice-president of operations, 7 virtual companies, 391 W Walsh, Marian, 73n warehouses, 37 Webb, Alex, 284n weighted-average contribution margin, 241f, 243f weighted-average method, 129, 144, 148 wet leasing, 602 wine industry, 125 Wingfield, Nick, 131n work in process beginning work in process inventory, 40, 45 ending work in process inventory, 40, 45 manufacturing costs, assignment of, 77–81 proof of job cost sheet, 84f total cost of work in process, 40, 45 WILEY END USER LICENSE AGREEMENT Go to www.wiley.com/go/eula to access Wiley’s ebook EULA ... managerial accounting Service industry trends Managerial accounting practices DO IT! 4 Trends in Managerial Accounting Accounting organizations and professional accounting careers in Canada Managerial Accounting Basics... quantify information so you can make informed business decisions Managerial accounting applies to all types of businesses—service, merchandising, and manufacturing It also applies to all forms of business. .. throughout, such as in the opening Feature Story as well as the Insight boxes Decision Tools Accounting concepts that are useful for management decision- making are highlighted throughout A summary of Decision Tools is included in each chapter, as well as a practice exercise and solution, Using Decision Tools