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750 to 1000 words

The purpose of this assignment is for students to substantively gather pertinent information on their research topic for the Final Research Paper.

Research Topic: The Role of Managerial Accountants in Strategic Planning and Budgeting

Please see the attached Abstract Assignment

Based on your chosen research topic from Week 3, find two (2) current (published in the past five (5) years), peer-reviewed journal articles. Students must utilize the UC Online Library database.

Students may not use websites, blogs, Wikipedia, news stories, magazines, etc. for their sources. Students must find current peer-reviewed journal articles from the UC Library Online database.

Upload the completed article abstracts (compiled in one (1) MS Word document and numbered #7, #8) Minimum two (2) article reviews

Sample Abstract Assignment Completed Example
Abstract 1:
Bibliographic Citation
Savas, A. C., Bozgeyik, Y., & Eser, Ä°. (2014). A Study on the Relationship between Teacher Self
Efficacy and Burnout. European Journal of Educational Research EUROPEAN J ED
RES, 3(4), 159-166.
Ahmet Cezmi SavaÅŸ PhD, Yunus Bozgeyik PhD, and Ä°smail Eser PhD
Research Concern
As pointed out by the researchers, teacher competency is important, but the impact of teacher
well-being and self-efficacy cannot be ignored when determining teacher effectiveness. More
importantly a growing number of teachers are experiencing burnout within the teaching
profession. While other research has been conducted on job burnout in other employment
sectors, the same paradigms do not seem to hold true for teaching. Moreover, it is hypothesized
through data gathered in the literature that not all teachers experience burnout syndrome.
Therefore, the researchers in this article are primarily focused on characteristics that protect
teachers from burnout and the relationship between self-efficacy and burnout syndrome.
The main purpose of this study was to explore the relationship between teacher self-efficacy and
teacher burnout in order to see if a positive, negative, or no correlation existed.
Therefore, the researchers attempted to answer the question of is teacher burnout caused by low
levels of self-efficacy in teaching?
Precedent Literature
Vast amounts of research in teacher self-efficacy and job burnout have already been conducted.
Tuğrul and Çelik (2002) assert that the problems teacher come across in school settings can lead
them to experience job burnout syndrome. Furthermore, the researchers then identify a
commonly used job burnout of model based on the works of Maslach & Jackson (1981) which
holds job burnout consists of three dimensions; the most important of these dimensions,
exhaustion develops as a result of experiencing excessive work-load and it is related stress. This
literature citation helps to frame the focus for the remainder of the introduction which focuses on
how job burnout is derived from stress related factors: fatigue, tension, addiction, and
depression. Next, the researchers refine the focus of their study to include precedent literature on
the topic of self-efficacy, and they point out how self-efficacy is tied to job burnout. Following
the researcher’s assertions, they define efficacy as the necessary knowledge, skills and attitudes
to carry out a role (Balcı, 2005, p. 197). Finally, the authors funnel down into their topic and
research question by citing the work of Bandura (1997) who puts forward that teacher selfefficacy can have a positive effect on teacher motivation and performance. From this literature
review, the researchers make their claim for the purpose and usefulness of their study.
Research Methodology
The model used for data collection in this study was correlational research survey design model.
As stated in the journal, the correlational research design is utilized to see whether there is a
relationship between two variables after they are measured quantitatively (Savas, Bozgeyik, &
Eser, 2014). The population included in the research includes teachers working in various
primary and secondary state schools in the center of Gaziantep, Turkey. The sample consisted of
163 randomly chosen teachers from the population during the 2014-2015 academic year. The
table below shows the distribution of the sample.
Two questionnaires were developed in order to gather data. One of the questionnaires was
designed based on the model from Maslach and Jackson (1981) to determine teacher burnout.
The other questionnaire was based on the work of Tschannen-Moran and Woolfolk (2001) to
address teachers’ perception of self-efficacy.
As previously mentioned, two questionnaires were used as the data gathering instrument. The
first sought to understand teacher burnout. This questionnaire used three subscales: exhaustion,
depersonalization and personal accomplishment to frame the findings. The other questionnaire
sought to understand teachers’ perception of self-efficacy in the subscales of efficacy in student
engagement, efficacy in instructional strategies and efficacy in classroom management subscales.
As mentioned in the journal, the data of the study was analyzed by SPSS programme. The data
were analyzed through calculation of means, frequencies, correlation and hierarchical multiple
regression analysis (Savas, Bozgeyik, & Eser, 2014). The results revealed that classroom
management was the area teachers felt they had the greatest amount of self-efficacy in.
Moreover, burnout levels were low compared to perceived efficacy levels. However, the
teachers did report perceiving themselves high in the area of exhaustion meaning that teachers
believed they are worn-out rather than burnout, but this only remained true for teachers with high
self-efficacy. Teachers with low self-efficacy more often reported feeling as if they were burned
The authors of this study revealed that teachers with low self-efficacy levels experienced burnout
more than their colleagues with high teacher self-efficacy levels. Through these findings the
researchers conclude that improving teacher self-efficacy levels is critical for making schools
more effective. Furthermore, the authors connect their findings with that of Karahan and Balat
(2011) who found a negative relationship between teacher self-efficacy and burnout for teachers
in private schools. This further proved the validity of their study. Therefore, the pointed
conclusion is that in order to improve schools, teachers must have high self-efficacy.
Suggestions for Further Research
Based on the conclusion from this study that high levels of teacher self-efficacy lead to greater
classroom performance, more research will need to be conducted to determine ways to improve
teacher self-efficacy. Furthermore, the authors suggest that this data should also come from a
qualitative perspective in order to yield the greatest possible conclusions.
Abstract 2
Bibliographic Citation
Dodson, R. (2014). Which Field Experiences Best Prepare Future School Leaders? An Analysis
of Kentucky’s Principal Preparation Program. Educational Research Quarterly, 37(4),
41-56. Retrieved June 14, 2016, from Eric.
Richard L. Dodson Ed.D. in educational administration, Professor at Murray State University
Research Concern
The journal opens by identifying the problem that Kentucky principals are not “ready” when they
graduate from in state principal preparation programs. Therefore, the education professional
standards board in Kentucky implemented a requirement to enforce that all individuals in a
principal preparation program complete field hours as part of their program. Dodson is primarily
concerned with understanding if there really is a benefit to these field hours and what makes
some experiences higher quality than others.
Research Purpose Statement
As stated by Dodson (2014), The purpose of this research is to explore the overall utility of field
experiences in training future school leaders and what exactly constitutes ‘high-quality” field
experiences in the eyes of currently practicing principals.
Moreover, the following five research questions were developed:
1. Are programs that include field experiences more effective in preparing principals than those
than do not include field experiences?
2. Does allowing students and their administrators to choose field experiences result in more
effective training than having the university script which field experiences students perform?
3. Which field experiences do current principals consider the most effective?
4. What type(s) of field experiences should be added to principal preparation programs?
5. Does requiring field experiences put Kentucky ahead of the curve in principal preparation?
Precedent Literature
As previously mentioned, there is vast scholarship that states current school principals were not
“ready” when they completed their principal preparation program. This problem then leads to
too much on the job learning (Dodson, 2014). The author then cites research from Turnbull and
Haslam (2010) that proposes districts could improve principal quality by acting as “consumers,”
encouraging local universities to craft programs to meet specific needs. In response to this
research, Dodson (2014) mentions that some districts have designed local level preparation
programs that coincide with the experiences taking place at the universities. This is followed up
with further research data from Zubrzycki (2012) that asserts, nationwide, ‘homegrown”
leadership academies and career tracks supplement university-based programs, adding hands-on
experience, mentoring, and training in district-specific information and initiatives. The authors
argument is followed up with additional literature that suggest only true “hands-on” field
experiences will lead to improvement of principal preparation programs (Fry, Bottoms, and
O’Neill, 2005). The literature review section is concluded with the point that one learns school
leadership by examining the key concepts and skills used by effective school leaders, watching
good models, and “trial and error” on the job (Bottoms & O’Neill, 2001). Overall, the literature
review from the journal was either short in nature or short to show there is a gap in literature
about the evaluation of field experience in principal preparation programs.
The author of this journal begin his data gathering by compiling a survey that was sent to 170
school superintendents that asked them to forward the survey to local school principals. A total
of 900 possible principals were given the opportunity as one district of 230 declined
participations. All in all, 263 principals responded to the survey giving the study just under a 30
percent participation rate. Of the participants, 99.2 percent were public school principals. Over
49 percent were listed as principals of elementary schools, 29.3 percent were listed as middle or
junior high, and 32.8 percent listed as high school. Finally, 51.4 percent that completed the
survey were female and 48.6 were male.
The instrument used for data collection in this study was an online survey administered through
email. According to Dodson (2014), The survey used a Likert-scale attitude measure, as well as
forced choice (yes/no) and open-ended questions. Questions examined principal perceptions of
field experiences’ impact on their preparation to be school leaders.
Over 60 percent of participants reported completing field experiences during their principal
preparation program. 91.4 percent perceived field experiences as valuable to preparation while
8.6 percent found them ineffective. Of the principals that did not complete field experiences, all
of them agreed they would have been better prepared if they had participated in field
experiences. In attempting to find out what types of field experiences would achieve the greatest
benefit, Dodson (2014) states, Desired experiences vary and include: shadow a principal; work
on instruction and discipline; participate in committee meetings; conduct instructional coaching;
analyze student data; conduct teacher observations and evaluations; develop a budget; Site-Based
Decision Making; train to interact with upset parents; engage in Comprehensive School
Improvement Planning; handle personnel issues; and review school law. Clearly, the complex
demands of leading a school cannot adequately be taught without real-world practice. Finally,
this study sought to determine if having a choice in your field experience placement increased
your satisfaction. The data yield that 71.5 percent of principals that chose their field experiences
were satisfied while only 37.1 percent who did not choose their placement were satisfied.
Dodson (2014) points out, this research indicates that programs that include field experiences are
more effective in preparing principals than are those that lack field experiences. In addition, the
best way to implement field experiences seem to be allowing students and their administrators
jointly to choose those experiences. Therefore, this study offers support for the need of field
experiences in principal preparation programs not only in Kentucky but also in other states as
well. Finally, this study also concludes that there needs to be a variety of field experiences for
principal preparation program students to engage in.
Suggestions for Further Research
Overall, Dodson does not outline many suggestions for further research, but he does offer that
more research should be conducted on this same topic with principals of more urban/high
population schools. Also, he adds the importance of a study to indicate if adding a thorough
internship to principal preparation programs would also improve principal readiness.
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Managerial Accounting
Maryanne M. Mowen
Oklahoma State University
Don R. Hansen
Oklahoma State University
Dan L. Heitger
Miami University
Australia • Brazil • Mexico • Singapore • United Kingdom • United States
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
Managerial Accounting: The Cornerstone of Business
Decision Making, Seventh Edition
Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger
Sr. Vice President, General Manager,
Social Science and Qualitative Business: Erin Joyner
© 2018, 2014 Cengage Learning®
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who are at the heart of our passion for teaching.
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Brief Contents
Introduction to Managerial Accounting
Basic Managerial Accounting Concepts
Cost Behavior and Forecasting
Job-Order Costing and Overhead Application
Activity-Based Costing and Management
Process Costing
Cost-Volume-Profit Analysis 332
Tactical Decision Making and Relevant Analysis
Profit Planning and Flexible Budgets
Standard Costing and Variance Analysis
Performance Evaluation and Decentralization
Capital Investment Decisions
Emerging Topics in Managerial Accounting
Statement of Cash Flows
Financial Statement Analysis
Check Figures
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Dear Colleague,
We have been teaching managerial accounting for decades. We love it and believe strongly that
managerial accounting is one of the most important courses in the business curriculum! Since it
is one of the first business courses students take, we work to share our love and enthusiasm for the
material and to show each student that managerial accounting is both FUN and RELATABLE
to their current life, as well as to their future.
We wrote this book because there was no other book available that helped us reach the wide variety
of students we see each term. Reaching students is a challenge because:
• There is so much material to teach that instructors don’t have time for the “fun stuff;”
• Students don’t connect the detail with the big picture;
• Many students juggle jobs, family, and so on, so they have little time—their time in the class
must be optimized for understanding;
• Managerial accounting is not as straightforward as financial, and students must develop
judgment skills in addition to absorbing material;
• There is a tremendous diversity of students (incoming skills, language, etc.); and
• There is no standard road map to teach the course (a.k.a., the balance sheet).
Our approach is to make the entire managerial accounting experience for instructors and
students timely, meaningful, fun, and relatable. This edition contains numerous new
features that achieve these goals in a way that positively sets our book apart from all other
managerial accounting books. For instance, our new chapter, “Emerging Topics in Managerial
Accounting,” addresses timeliness by covering cutting-edge topics. Our unique “Here’s How It’s Used”
pedagogy enables students to enjoy the process of developing a deeper understanding of
managerial accounting and its implications for themselves, as well as businesses. Our watchwords
are “Here’s How:”
1. Here’s How It’s Used Concept Clip Animations for many major topics portray the most
difficult concepts in a brief and fun animated cartoon. They present the information in
a logical, entertaining, and relatable way that pertains not only to businesses, but also to
students’ everyday lives.
2. Here’s How It’s Used Examples (formerly Cornerstones) throughout the text walk students
through the most important managerial accounting models and help them solve computations. Students say these examples really get them started on their homework and help
them understand the material before class. As a result, the Examples allow the instructor to
focus valuable class time on the “why,” and allow students to understand the big picture—
helping students see the relevance and importance of what they are learning.
3. Here’s Why It’s Important highlights for students the reason that key topics within each
chapter are important. This new feature significantly helps students better understand the
big picture of why managerial accounting is important.
4. Experience Managerial Accounting Videos focus on real companies, such as Coldstone
Creamery, Second City Comedy Club, and Boyne USA ski resorts, and the integrated
real-world examples of Kicker Speakers provide students with inside access into how management accounting is used to make real-world business decisions.
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
Using our text, you don’t need to spend as much valuable class time teaching “how,” you can
focus on “why.”
• Examples are built around how students work, summarizing key procedures to help students complete homework independently.
• Because students are able to complete homework independently, they do not bombard the
instructor with “How do I do this?” type questions.
Students who want to go farther can use:
• Blueprint Problems. We wrote these expressly to accompany this book and help students
expand their understanding.
• Blueprint Problems Using Excel. We wrote these to help develop students’ spreadsheet
skills. Students are required to develop their own Excel formulas to solve the problems.
• Analyzing Relationships. We developed these to help students use a graphical approach
to see exactly how changing one or more underlying variables affects a model. These allow
students to engage in sensitivity analysis and to consider the related analytical questions.
These help to foster analytical skills and to develop judgment and understanding.
Our goal is to improve student understanding and preparedness while allowing you to focus on
meaningful applications of managerial accounting to important real-world topics. We believe it
will work in your classroom and look forward to teaming up with you to improve your students’
success and make managerial accounting meaningful, fun, and relatable.
Maryanne Mowen, Don Hansen, Dan Heitger
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
Close the Gap
Between Homework and Exam Performance
We’ve talked with hundreds of accounting
instructors across the country and we are learning
that online homework systems have created a new
challenge in the accounting course.
learning the content, but rather memorizing their
CengageNOWv2 better prepares students for
the exam by providing an online homework
experience that is similar to
what students will experience on the
exam and in the real world.
way through the system.
Read on to see how CengageNOWv2 helps close this gap.
We are hearing that students perform well on the
homework but poorly on the exam, which leads
instructors to believe that students are not truly
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
Closing the gap, one step at a time.
Multi-Panel View
One of the biggest complaints students have about online homework is the scrolling, which prevents students from
seeing the big picture and understanding the accounting system. This new Multi-Panel View in CengageNOWv2 enables
students to see all the elements of a problem on one screen.
• Students make
connections and see
the tasks as connected
components in the
accounting process.
• Dramatically reduced
scrolling eliminates
student frustration.
Blank Sheet of
Paper Experience
Many students perform
well on homework but
struggle when it comes
to exams. Now, with the
new Blank Sheet of Paper
Experience, students must
problem-solve on their
own, just as they would if
taking a test on a blank
sheet of paper. This discourages overreliance on the system.
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
From Motivation to Mastery
Engage students and better prepare them for class.
Concept Clips
Written by the authors, these clips provide
students with a deeper explanation into the
why and the how of managerial accounting
Video: Tell Me More
Tell Me More lecture activities explain the core
concepts of the chapter through an engaging
auditory and visual presentation that is ideal for
all class formats—flipped mode, online, hybrid,
Adaptive Study Plan
The Adaptive Study Plan is an assignable/gradable study center that adapts
to each student’s unique needs and provides a remediation pathway to keep
students progressing.
Help students apply accounting concepts.
Video: Show Me How
Linked to end-of-chapter problems in CengageNOWv2, Show Me How
problem demonstration videos provide a step-by-step model of a
similar problem.
Teach students to go beyond memorization to true
Mastery Problems for Managerial Accounting, 7e
These problems allow students to see the interrelationships
among core concepts.
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
And that’s not all…
You might also want to learn about the MindTap eReader, our LMS integration options, and more.
MindTap eReader
ADA Accessibility
The MindTap eReader is the most robust digital
reading experience available.
Cengage Learning is committed to making its
educational materials accessible to users of all abilities.
We are steadily working to increase accessibility and
create a full spectrum of usable tools, features, and
choices that are accessible for users of all abilities.
All new Cengage Learning products and services are
designed with accessibility in mind.
• Fully optimized for the iPad.
• Note-taking, highlighting, and more.
• Off-line access on smartphones.
The MindTap eReader also features ReadSpeaker®,
an online text-to-speech application that vocalizes,
or “speechenables,” online educational content.
LMS Integration
CengageNOWv2 can be seamlessly integrated
with most learning management systems.
Adopters will enjoy:
• A Seamless User Experience—Access your
Cengage resources seamlessly using only
your LMS login credentials.
• Simplified Registration Process—Get students
up and running faster!
• Content Customization and Deep Linking—Use our
Content Selector to create a unique learning path for
students that blends your content with Cengage
Learning activities, eText, and more within your
LMS course.
• Automatic Grade Synchronization*—Need to have
your course grades recorded in your LMS gradebook?
No problem. Simply select the activities you want
synched and grades will automatically be recorded in
your LMS gradebook.
* Grade synchronization is currently available with Blackboard,
Brightspace (powered by D2L), Angel 8, and Canvas.
• With the latest release of CengageNOWv2:
• Images and graphics have been converted to HTML
tables so that they can be read by screen readers.
• The assignment experience now offers proper
heading structure to support easy navigation with
assistive technology.
• CengageNOWv2 solutions offer high contrast and
well-structured HTML, which helps support screen
reader interactivity.
• All videos are created with closed captioning and
transcripts available for download.
• The MindTap eReader is HTML-based and compatible
with most screen reading assistive software. The
eReader supports browser settings for high-contrast
narrative text, variable font sizes, and multiple
foreground and background color options.
For more information on accessibility, please visit
IPAD Tablet Compatibility
CengageNOWv2 is fully compatible with the iPad and
other tablet devices, with the exception of General
Ledger (CLGL) and Excel Tutorials, which are flash
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
New to this Edition
I. New Additions to Each Chapter
A number of meaningful features were added to each chapter in
this edition, including:
Management, Business Sustainability, Quality Cost Management,
Lean Accounting, International Issues in Management Accounting,
and the Role of Cost and Managerial Accounting in Fraud and
Forensic Accounting.
✳ Here’s How It’s Used: Several Here’s How It’s Used boxes
in each chapter tell students how managerial concepts are used
in a variety of businesses and in their own lives. This exciting
new feature makes the material more relatable and meaningful.
Here’s How It’s Used features include:
III. Restructuring of Chapter Content and
In Your Life
A restructuring of the text tightened and aligned topics in a natural
sequence. In this edition:
Data Analytics
• Reduction in chapters. The total number of chapters was
At Kicker
At Real Companies
✳ Here’s Why It’s Important: Brief explanations of why the
concepts are important are highlighted in the text to motivate
students in their study.
✳ New A and B sets of Brief Exercises: These new sets of
brief exercises give instructors more options for using illustrative
exercises in class and then assigning very similar material to get
students started with homework.
✳ Animated Concept Clip: All new brief animated video
clips help students understand concepts and see them in a visual
reduced from 16 to 15. By streamlining, eliminating, and realigning
topics, the number of chapters was reduced, but the number of
topics available to cover was actually increased.
• Chapter elimination. The chapter on variable and absorption costing and inventory management was eliminated and the
basic material on absorption costing and variable costing was
added to Chapter 3 on Cost Behavior and Forecasting. Locating
these topics in this chapter provides a good foundation for the
costing chapters that follow. It also allows students the opportunity to see an immediate application of cost behavior. The
inventory management topic was eliminated and its coverage
deferred to a higher level course.
• Chapter elimination. The chapter on flexible budgeting and
learning objective section: Check Point questions
help students perform quick self-checks while reading chapter
overhead analysis was eliminated and its topics moved to other
chapters. The flexible budgeting material was added to Chapter
9 on Profit Planning to give students an overview of both static
and flexible budgets in the same chapter. The overhead analysis
material was added to the standard costing chapter (Chapter 10)
to give students a complete picture of a standard costing system.
✳ Key Term Definitions: To facilitate study and review, defi-
• Chapters relocated. Cost-Volume-Profit Analysis has been
✳ Check Point questions at the conclusion of each
nitions for each key term are now found at the end of each chapter (in addition to the glossary at the end of the text).
II. Creation of a New Chapter
The growing importance of managerial accounting in several critical areas led to the creation of a completely new chapter, Emerging
Topics in Managerial Accounting, that provides students with
exciting insights and cutting-edge perspectives on Enterprise Risk
moved to Chapter 7 to allow instructors to explain the basics of
job-order, activity-based (moved to follow job order costing),
and process costing. This relocation enables students to develop
a richer understanding of costs used in CVP.
• Chapter relocated. The Tactical Decision Making and
Relevant Analysis chapter is positioned immediately after CVP and
now includes material on segmented income statements to provide students with a more logical and impactful understanding
of how to prepare and interpret Keep-or-Drop decisions.
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
New to this Edition
• Topic depth increased and new chapter added.
The basic introduction to quality costing and environmental issues
was removed from the chapter on activity based costing and management. A much deeper treatment of these topics, as well as
Enterprise Risk Management, Business Sustainability, Issues in
International Managerial Accounting, and the Role of Cost and
Managerial Accounting in Fraud and Forensic Accounting, is
now found in the new chapter, Emerging Topics in Managerial
Accounting (Chapter 13).
Our strong belief is that these additions and changes maintain
all of the positive aspects of our previous editions that current
users enjoy and appreciate, while significantly improving the
managerial accounting experience for students and instructors
alike. This new edition helps students to learn firsthand that
managerial accounting is timely, meaningful, fun, and relatable
to their everyday lives!
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
Acknowledgments and Thanks
Thank you to the following instructors who contributed to the development of the 7th edition of Managerial Accounting: The Cornerstone
of Business Decision Making. By reviewing, verifying, or participating in focus groups, you allowed us to create a text that will benefit all of
our students and instructors that use this text.
Janice Akao, Butler Community College
Michael Alles, Rutgers Business School
Cornelia Alsheimer, Santa Barbara City College
Linda Amann, University of Wisconsin–Whitewater
Julie Armstrong, St. Clair County Community College
Elise Bartley, Westminster College
Nancy Batch, Texas A&M–San Antonio
Robert Beatty, Anne Arundel Community College
Connie Belden, Butler Community College
Pamela S. Benner, Stark State College
Debbie Benson, Kennesaw State University
Dr. Timothy B. Biggart, Berry College
Eric Blazer, Millersville University
Cindy Bleasdale, Hilbert College
Marie Blouin, Ithaca College
Maryann Bolton, Central Community College–Hastings Campus
Marian W. Boscia, King’s College
Anna Boulware, St. Charles Community College
Amy Bourne, Oregon State University
Thomas J. Bradley, Ashford University
Rachel Brassine, East Carolina University
Jerold K. Braun, Daytona State College
Jeff Brennan, Austin Community College
Ann K. Brooks, University of New Mexico
Patti Brown, The University of Texas at Austin
Richard Buchanan, Oklahoma State University
Esther Bunn, Stephen F Austin State University
Kelley Butler, Ivy Tech Community College
Marci Butterfield, University of Utah
Edward Bysiek, St. Bonaventure
Leonor M. Cabrera, Canada College
Don Campodonico, Notre Dame de Namur University
Tongyu Cao, University College Cork, Ireland
Rodney Carmack, Arkansas State University
Sandra Cereola, James Madison University
Richard Chen, Eastern Kentucky University
Bea Chiang, The College of New Jersey
Linda Christiansen, Indiana University Southeast
Lisa Church, Rhode Island College
Jay Cohen, Oakton Community College
Kelley Colston, University of Toledo
Margaret Combs, University of the Cumberlands
Stephanie Comer, Cornerstone University
Rita Kingery Cook, University of Delaware
Dixon Cooper, Henderson State University
Sandra Copa, North Hennepin Community College
Karen Crisonino, County College of Morris
Anthony Daly-Leonard, Delaware County Community College
David Dearman, University of Arkansas–Little Rock
Charlene Deno, SUNY Oneonta
Harry DeWolf, Mt. Hood Community College
Patricia A. Doherty, Boston University
David Doyon, Southern NH University
Barbara Durham, University of Central Florida
Howard Eskew, San Diego Mesa College
Diane Eure, Texas State University
Jade Fang, Marist College
Christopher Ferro, College of DuPage
Clayton Forester, University of Minnesota
Robert Foster, California State University, Northridge
Shari Fowler, Briar Cliff University
Sheri Geddes, Hope College
Joe Gerard, University of Wisconsin–Whitewater
Daniel J. Gibbons, Waubonsee Community College
Paul Goodchild, University of Central Missouri
Julie Goodin, Immaculata University
Andrea Gouldman, Weber State University
Bob Gutschick, College of Southern Nevada
Joohyung Ha, University of San Francisco
Wilbert Harri, Pima Community College
Bob Hartung, Metro Community College
Haihong He, California State University, Los Angeles
Candice Heino, Anoka Ramsey Community College
Youngwon Her, California State University, Northridge
Dave Hinrichs, Lehigh
Jan Hlavaty, Lakeland Community College
Dr. Louann Hofheins, The University of Findlay
Steve Horan, University of Sioux Falls
Melvin Houston, Wayne State University
Wayne Ingalls, University of Maine
Marianne James, California State University, Los Angeles
Steve Johnson, Minnesota State University, Mankato
Jeffrey Jones, The College of Southern Nevada
Stani Kantcheva, Cincinnati State Technical and Community
Kathryn W. Kapka, The University of Texas at Tyler
Ben Kaplan, Johnson & Wales University
Howard Keller, IUPUI
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Acknowledgments and Thanks
Marie Kelly, Stephen F Austin State University
Dr. Bhagwan Khanna, Ball State University
Garry Kirk, Southwest Wisconsin Technical College
Christine Kloezeman, Glendale Community College
Barbara Kren, Marquette University
Marco Lam, Western Carolina University
Meg Costello Lambert, Oakland Community College–Auburn Hills
Donna Larner, Cornerstone University
John Lauck, Louisiana Tech University
Dr. Mark Lawrence, University of North Alabama
Rose Layton, University of Southern California
Brian R. Lazarus, Baltimore City Community College
Chuohsuan Lee, SUNY Plattsburgh
Michael Lee, Boise State University
Cedric Lewis, UNF
Ping Lin, California State University, Long Beach
Danny Litt, UCLA
Harold Little, Western Kentucky University
William Lloyd, Lock Haven University
John Logsdon, Webber International University
Dennis M. Lopez, University of Texas at San Antonio
Suzanne Lowensohn, Colorado State University
Claudia A. Lubaski, Lorain County Community College
Susan Lynn, University of Baltimore
Ajay Maindiratta, NYU–Stern
Diane Marker, University of Toledo
Maureen McBeth, College of DuPage
Dawn McKinley, Harper College
Roger McMillian, Mineral Area College
Tammy Metzke, Milwaukee Area Technical College
Michael Meyer, University of Notre Dame
Linda Miller, Northeast Community College
Stephanie Morris, Mercer University
Kenneth Mullins, University of Wisconsin–Stevens Point
Gerald F. Murphy, Capital Community College
Pam Neely, SUNY Brockport
Mary Beth Nelson, North Shore Community College
Mary Netzler, University of Maryland–University College
Richard Newmark, University of Northern Colorado
Joseph Malino Nicassio, Westmoreland County Community College
Barbara A. Norris, Johnson & Wales University
Kalpana Pai, Notre Dame de Namur University
Angela Pannell, Mississippi State University
Laurel Parrilli, Cornell University
Richard Pettit, Mountain View College
Kristen Quinn, Northern Essex Community College
Rama Ramamurthy, Georgetown University
Paulette Ratliff-Miller, Grand Valley State University
Barbara Reider, University of Montana
Barbara Rice, Gateway Community and Technical College
Vernon Richardson, University of Arkansas
Constance Rodriguez, SUNY Brockport
Paulette Rodriguez, The University of Texas at El Paso
Molly Rogers, University of Cincinnati
Katrina Rowe, Schenectady County Community College
Paul San Miguel, Western Michigan University
Christine Schalow, University of Wisconsin–Stevens Point
Erica Scheidecker, University of Dubuque
Lee Schiffel, Valparaiso University
Pamela Schwer, St. Xavier University
Randy Serrett, University of Houston–Downtown
Carlo Silvesti, Gwynedd Mercy University
James Sinclair, Georgetown University
Ercan Sinmaz, Houston Community College
Harshini Siriwardane, University of Cincinnati
Jennifer Smith, Chattahoochee Technical College
Stephan Smith, Nicholls State University
Mohsen Souissi, Fayetteville State University
Vicki Splawn, Mid-America Christian University
Jason Stanfield, Purdue
George Starbuck, McMurry University
Dr. J. William Stinde, Glendale Community College
James Sundberg, Eastern Michigan University
Kenton Swift, University of Montana
Karen Tabak, Maryville University
Diane Tanner, University of North Florida
Glade Tew, BYU–Idaho
Todd Thornock, Iowa State University
Sarah Thorrick, Loyola University New Orleans
Donald Trippeer, SUNY Oneonta
Hugh Van Seaton, Jacksonville University
Glenn Walberg, University of Vermont
Joe Welker, College of Western Idaho
Wendy Wilson, Texas Christian University
Maef Woods, Heidelberg University
Patricia Worsham, Norco College
Gail Wright, Castleton University
Jennifer Yin, University of Texas at San Antonio
Xiaoli Yuan, ECSU
Benny Zachry, Tulane University
Syed Zaidi, California State University, Santa Monica
Ronald Zullo, Northeastern University
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About the Authors
Dr. Maryanne M. Mowen is Associate Professor Emerita of Accounting at Oklahoma
State University. She currently teaches online classes in cost and management accounting for
Oklahoma State University. She received her Ph.D. from Arizona State University. She brings
an interdisciplinary perspective to teaching and writing in cost and management accounting,
with degrees in history and economics. She has taught classes in ethics and the impact of the
Sarbanes-Oxley Act on accountants. Her scholarly research is in the areas of management accounting, behavioral decision theory, and compliance with the Sarbanes-Oxley Act. She has published articles in journals such as Decision Science, The Journal of Economics and Psychology,
and The Journal of Management Accounting Research. Dr. Mowen has served as a consultant
to mid-sized and Fortune 100 companies and works with corporate controllers on management
accounting issues. She is a member of the Northern New Mexico chapter of SCORE and serves
as a counselor, assisting small and start-up businesses. Outside the classroom, she enjoys hiking,
traveling, reading mysteries, and working crossword puzzles.
Dr. Don R. Hansen is Professor Emeritus of Oklahoma State University. He received his
Ph.D. from the University of Arizona in 1977. He has an undergraduate degree in mathematics
from Brigham Young University. He has published articles in both accounting and engineering
journals including The Accounting Review, The Journal of Management Accounting Research,
Accounting Organizations and Society, Accounting Horizons, and IIE Transactions. He has
served on the editorial board of The Accounting Review. His outside interests include family,
church activities, reading, movies, and watching sports.
Dr. Dan L. Heitger is the Deloitte Professor of Accounting and Co-Director of the William
Isaac & Michael Oxley Center for Business Leadership at Miami University. He received
his Ph.D. from Michigan State University and his undergraduate degree in accounting from
Indiana University. He actively works with executives and students of all levels in developing
and teaching courses in managerial accounting, business sustainability, risk management, stakeholder management, governance, and business reporting. He co-founded an organization that
provides executive education for large international organizations. His interactions with business professionals, through executive education and the Center, allow him to bring a current and
real-world perspective to his writing. His published research focuses on managerial accounting
and risk management issues and has appeared in Harvard Business Review, Behavioral Research
in Accounting, Accounting Horizons, Issues in Accounting Education, Journal of Accountancy,
and Management Accounting Quarterly. His outside interests include hiking with his family in
the National Park system.
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
Introduction to Managerial Accounting
The Meaning of Managerial Accounting 4
Information Needs of Managers and Other Users 5
Planning 5
Controlling 5
Decision Making 6
Financial Accounting and Managerial Accounting 7
Financial Accounting 7
Managerial Accounting 7
Comparison of Financial and Managerial Accounting 7
Exhibit 1.1 Comparison of Financial and Managerial
Accounting 8
Current Focus of Managerial Accounting 9
New Methods of Costing Products and Services 9
Customer Orientation 9
Exhibit 1.2 The Value Chain 10
Cross-Functional Perspective 11
Total Quality Management 11
Time as a Competitive Element 12
Efficiency 13
The Role of the Managerial Accountant 13
Exhibit 1.3 Kicker Inc. Organizational Chart 14
Managerial Accounting and Ethical Conduct 15
Ethical Behavior 16
Company Codes of Ethical Conduct 17
Standards of Ethical Conduct for Managerial Accountants 18
Exhibit 1.4 Statement of Ethical Professional Practice 19
Certification 20
The Certified Management Accountant 20
The Certified Public Accountant 21
The Certified Internal Auditor 21
Basic Managerial Accounting Concepts
The Meaning and Uses of Cost 32
Cost 32
Cost Objects 33
Accumulating and Assigning Costs 33
Assigning Costs to Cost Objects 33
Exhibit 2.1 Object Costing 35
Product and Service Costs 37
Providing Cost Information 38
Determining Product Cost 38
Exhibit 2.2 Product Costs Include Direct Materials, Direct
Labor, and Overhead 39
Example 2.1 How to Calculate Product Cost in Total
and Per Unit 40
Example 2.2 How to Calculate Prime Cost and Conversion
Cost in Total and Per Unit 41
Exhibit 2.3 The Impact of Product versus Period Costs on the
Financial Statements 42
Preparing Income Statements 44
Cost of Goods Manufactured 44
Example 2.3 How to Calculate the Direct Materials Used
in Production 45
Example 2.4 How to Calculate Cost of Goods Manufactured 45
Cost of Goods Sold 46
Example 2.5 How to Calculate Cost of Goods Sold 46
Exhibit 2.4 Relationship between the Flow of Costs,
Inventories, and Cost of Goods Sold 47
Income Statement: Manufacturing Firm 47
Example 2.6 How to Prepare an Income Statement for a
Manufacturing Firm 48
Example 2.7 How to Calculate the Percentage of Sales
Revenue for Each Line on the Income Statement 49
Income Statement: Service Firm 50
Example 2.8 How to Prepare an Income Statement for a
Service Organization 50
Cost Behavior and Forecasting
Basics of Cost Behavior 80
Measures of Output and the Relevant Range 81
Fixed Costs 81
Exhibit 3.1 Colley Computers Fixed Cost of Supervision 83
Variable Costs 84
Exhibit 3.2 Colley Computers Variable Cost of DVD-ROM
Drives 86
More Advanced Cost Behavior: The Reasonableness of
Straight-Line Cost Relationships 86
Semi-Variable Costs 86
Exhibit 3.3 Semi-Variable Cost: Decreasing Rate 86
Exhibit 3.4 Semi-Variable Cost: Increasing Rate 87
Mixed Costs and Step Costs 88
Mixed Costs 88
Exhibit 3.5 Mixed Cost Behavior 89
Step Cost Behavior 89
Exhibit 3.6 Step Costs: Narrow Steps and Wide Steps 90
Accounting Records and Need for Cost Separation 91
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Methods for Separating Mixed Costs into Fixed
and Variable Components 91
Example 3.1 How to Create and Use a Cost Formula 92
The High-Low Method 93
Example 3.2 How to Use the High-Low Method to Calculate
Fixed Cost and the Variable Rate and to Construct a Cost
Formula 94
Example 3.3 How to Use the High-Low Method to Calculate
Predicted Total Variable Cost and Total Cost for Budgeted
Output 95
Example 3.4 How to Use the High-Low Method to Calculate
Predicted Total Variable Cost and Total Cost for a Time
Period That Differs from the Data Period 96
Scattergraph Method 97
Exhibit 3.7 Anderson Company’s Materials Handling Cost 97
Exhibit 3.8 Scattergraphs with Nonlinear Cost 99
The Method of Least Squares 99
Exhibit 3.9 Line Deviations 99
Exhibit 3.10 A Portion of the Summary Output from Excel for
Anderson Company 100
Example 3.5 How to Use the Regression Method to Calculate
Fixed Cost and the Variable Rate and to Construct a Cost
Formula and to Determine Budgeted Cost 101
Comparison of Methods 101
Exhibit 3.11 Overview of Methods for Separating Mixed Costs
into Fixed and Variable Components 102
Managerial Judgment 102
Variable and Absorption Income Statements: Two Ways
of Measuring Income 105
Absorption Costing 105
Variable Costing 105
Comparison of Variable and Absorption Costing
Methods 105
Exhibit 3.12 Classification of Costs under Absorption and
Variable Costing as Product or Period Costs 105
Inventory Valuation 106
Example 3.6 How to Compute Inventory Cost under
Absorption Costing 106
Example 3.7 How to Compute Inventory Cost under Variable
Costing 107
Exhibit 3.13 Product Cost under Absorption and Variable
Costing 108
Income Statements Using Variable and Absorption
Costing 108
Example 3.8 How to Prepare an Absorption-Costing Income
Statemen 108
Example 3.9 How to Prepare a Variable-Costing Income
Statement 109
Production, Sales, and Income Relationships 109
Exhibit 3.14 Production, Sales, and Income Relationships 109
Appendix 3A: Using the Regression Programs 110
Exhibit 3.15 Spreadsheet Data for Anderson Company 111
Exhibit 3.16 Regression Output for Anderson
Company 112
Goodness of Fit 112
Job-Order Costing and Overhead
Application 148
Characteristics of the Job-Order Environment 150
Job-Order Production and Costing 150
Process Production and Costing 151
Exhibit 4.1 Comparison of Job-Order and Process
Costing 151
Production Costs in Job-Order Costing 152
Normal Costing and Overhead Application 152
Actual Costing versus Normal Costing 152
Importance of Unit Costs to Manufacturing Firms 153
Importance of Unit Costs to Service Firms 153
Normal Costing and Estimating Overhead 154
Example 4.1 How to Calculate the Predetermined Overhead
Rate and Apply Overhead to Production 155
Exhibit 4.2 Actual and Applied Overhead 156
Example 4.2 How to Reconcile Actual Overhead with
Applied Overhead 157
Departmental Overhead Rates 157
Example 4.3 How to Calculate Predetermined Departmental
Overhead Rates and Apply Overhead to Production 158
Example 4.4 How to Convert Departmental Data to
Plantwide Data to Calculate the Overhead Rate and Apply
Overhead to Production 159
Unit Costs in the Job-Order System 159
Keeping Track of Job Costs with Source Documents 161
Job-Order Cost Sheet 161
Exhibit 4.3 Job-Order Cost Sheet 161
Materials Requisitions 162
Exhibit 4.4 Materials Requisition Form 162
Time Tickets 162
Exhibit 4.5 Time Ticket 163
The Flow of Costs through the Accounts 164
Exhibit 4.6 Flow of Costs through the Accounts of a Job-Order
Costing Firm 164
Accounting for Materials 165
Exhibit 4.7 Summary of Materials Cost Flows 165
Accounting for Direct Labor Cost 165
Exhibit 4.8 Summary of Direct Labor Cost Flows 166
Accounting for Overhead 166
Accounting for Actual Overhead Costs 167
Exhibit 4.9 Summary of Overhead Cost Flows 167
Accounting for Finished Goods 167
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Exhibit 4.10 Summary of Cost Flows from Work in Process to
Finished Goods 168
Accounting for Cost of Goods Sold 168
Exhibit 4.11 Schedule of Cost of Goods Manufactured 169
Exhibit 4.12 Statement of Cost of Goods Sold 169
Example 4.5 How to Prepare Brief Job-Order Cost
Sheets 170
Accounting for Nonmanufacturing Costs 172
Exhibit 4.13 Income Statement 172
Appendix 4A: Journal Entries Associated With Job-Order
Costing 173
Exhibit 4.14 Posting of Journal Entries to the Accounts 175
Appendix 4B: Support Department
Cost Allocation 176
Types of Departments 176
Exhibit 4.15 Steps for Determining Product Costs by Using
Predetermined Departmental Overhead Rates 177
Methods of Support Department Cost Allocation 177
Exhibit 4.16 Illustration of the Direct Method 178
Example 4.6 How to Assign Support Department Costs by
Using the Direct Method 178
Exhibit 4.17 Illustration of the Sequential Method 180
Example 4.7 How to Assign Support Department Costs by
Using the Sequential Method 181
Activity-Based Costing and Management
Limitations of Functional-Based Cost Accounting Systems
Nonunit-Related Overhead Costs 216
Exhibit 5.1 ABC Hierarchy 217
Product Diversity 218
Illustrating the Failure of Unit-Based Overhead Rates 218
Exhibit 5.2 Product-Costing Data for Rio Novo’s Porto Behlo
Plant 219
Example 5.1 How to Calculate Consumption Ratios 220
Example 5.2 How to Calculate Activity Rates 221
Example 5.3 How to Calculate Activity-Based Unit
Costs 222
Exhibit 5.3 Activity Rates and Activity-Based Unit Costs for
Rio Novo’s Porto Behlo Plant 222
Illustrating Relationships: Product Diversity and ProductCosting Accuracy 223
Exhibit 5.4 Diversity and Product-Costing Accuracy 225
Activity-Based Product Costing 225
Exhibit 5.5 Activity-Based Costing: Assigning Cost of
Overhead 226
Identifying Activities and Their Attributes 226
Exhibit 5.6 Activity Dictionary for Hemingway Bank’s Credit
Card Department 228
Assigning Costs to Activities 228
Exhibit 5.7 Work Distribution Matrix for Hemingway Bank’s
Credit Card Department 228
Example 5.4 How to Assign Resource Costs to Activities by
Using Direct Tracing and Resource Drivers 229
Exhibit 5.8 Activity Costs for Hemingway Bank’s Credit Card
Department 229
Assigning Costs to Products 229
Exhibit 5.9 Assigning Costs for Hemingway Bank’s Credit
Card Department 230
Activity-Based Customer Costing and Activity-Based
Supplier Costing 231
Exhibit 5.10 Whale Curve of Cumulative Customer
Profitability 232
Activity-Based Customer Costing 232
Example 5.5 How to Calculate Activity-Based Customer
Costs 233
Activity-Based Supplier Costing 234
Example 5.6 How to Calculate Activity-Based Supplier Costs
Process-Value Analysis 236
Exhibit 5.11 Process-Value Analysis Model 237
Driver Analysis: The Search for Root Causes 237
Activity Analysis: Identifying and Assessing Value
Content 237
Example 5.7 How to Assess Nonvalue-Added Costs 241
Activity Performance Measurement 241
Example 5.8 How to Calculate Cycle Time and
Velocity 242
Process Costing
Characteristics of Process Manufacturing 278
Types of Processes 278
Exhibit 6.1 Sequential Processing Illustrated 278
Exhibit 6.2 Parallel Processing Illustrated 279
How Costs Flow through the Accounts in Process
Costing 280
Exhibit 6.3 Flow of Manufacturing Costs through the Accounts
of a Process-Costing Firm 280
Example 6.1 How to Account for Cost Flows Without
Work-in-Process Inventories 280
Accumulating Costs in the Production Report 281
Service and Manufacturing Firms 282
The Impact of Work-In-Process Inventories on Process
Costing 283
Equivalent Units of Production 283
Example 6.2 How to Calculate Equivalent Units of
Production with No Beginning Work in Process 284
Example 6.3 How to Measure Output and Assign Costs: No
Beginning Work in Process 285
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Two Methods of Treating Beginning Work-in-Process
Inventory 286
Weighted Average Costing 286
Overview of the Weighted Average Method 287
Example 6.4 How to Measure Output and Assign Costs:
Weighted Average Method 287
Five Steps in Preparing a Production Report 288
Example 6.5 How to Prepare a Physical Flow
Schedule 289
Production Report 291
Example 6.6 How to Prepare a Production Report: Weighted
Average Method 292
Evaluation of the Weighted Average Method 292
Multiple Inputs and Multiple Departments 293
Nonuniform Application of Manufacturing Inputs 293
Example 6.7 How to Calculate Equivalent Units, Unit Costs,
and Valuing Inventories with Nonuniform Inputs 294
Multiple Departments 295
Exhibit 6.4 Production Report: Weighted
Average Method 296
Example 6.8 How to Calculate the Physical Flow Schedule,
Equivalent Units, and Unit Costs with Transferred-In
Goods 296
Appendix 6A: Production Report—First-In, First-Out
Costing 298
Differences between the First-In, First-Out and Weighted
Average Methods 298
Example of the First-In, First-Out Method 298
Example 6.9 How to Calculate Output and Cost
Assignments: First-In, First-Out Method 298
Exhibit 6.5 Physical Flow Schedule 300
Example 6.10 How to Prepare a Production Report: First-In,
First-Out Method 301
Cost-Volume-Profit Analysis
Break-Even Point in Units and in Sales Dollars 334
Using Operating Income in Cost-Volume-Profit Analysis 334
Exhibit 7.1 The Contribution Margin Income Statement 335
Example 7.1 How to Prepare a Contribution Margin Income
Statement 336
Exhibit 7.2 Contribution Margin and Fixed Cost at Break-Even
for Whittier Company 337
Break-Even Point in Units 337
Example 7.2 How to Calculate the Break-Even Point in
Units 338
Break-Even Point in Sales Dollars 338
Example 7.3 How to Calculate the Variable Cost Ratio and
the Contribution Margin Ratio 340
Example 7.4 How to Calculate the Break-Even Point in
Sales Dollars 341
Units and Sales Dollars Needed to Achieve a Target Income 343
Units to Be Sold to Achieve a Target Income 343
Example 7.5 How to Calculate the Number of Units to Be
Sold to Earn a Target Operating Income 344
Sales Revenue to Achieve a Target Income 345
Example 7.6 How to Calculate Sales Needed to Earn a Target
Operating Income 345
Graphs of Cost-Volume-Profit Relationships 346
The Cost-Volume-Profit Graph 347
Exhibit 7.3 Cost-Volume-Profit Graph 347
Assumptions of Cost-Volume-Profit Analysis 348
Illustrating Relationships Among CVP Variables 348
Exhibit 7.4 Cost-Volume-Profit Relationships 349
Multiple-Product Analysis 351
Break-Even Point in Units 352
Example 7.7 How to Calculate the Break-Even Units for a
Multiple-Product Firm 353
Break-Even Point in Sales Dollars 354
Example 7.8 How to Calculate the Break-Even Sales Dollars
for a Multiple-Product Firm 354
Cost-Volume-Profit Analysis and Risk and Uncertainty
Exhibit 7.5 Summary of the Effects of Alternative 1 357
Exhibit 7.6 Summary of the Effects of Alternative 2 358
Exhibit 7.7 Summary of the Effects of Alternative 3 358
Introducing Risk and Uncertainty 358
Exhibit 7.8 Margin of Safety 359
Example 7.9 How to Calculate the Margin of Safety 360
Example 7.10 How to Calculate the Degree of Operating
Leverage 361
Example 7.11 How to Calculate the Impact of Increased
Sales on Operating Income Using the Degree of Operating
Leverage 362
Exhibit 7.9 Differences between a Manual and an Automated
System 363
Sensitivity Analysis and Cost-Volume-Profit 363
Tactical Decision Making and Relevant
Analysis 392
Short-Run Decision Making 394
The Decision-Making Model 394
Step 1: Recognize and Define the Problem 395
Step 2: Identify the Alternatives as Possible Solutions 395
Step 3: Identify the Costs and Benefits Associated with Each
Feasible Alternative 396
Step 4: Estimate the Relevant Costs and Benefits for Each
Feasible Alternative 396
Step 5: Assess Qualitative Factors 397
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Step 6: Make the Decision 398
Relevant Costs Defined 399
Cost Behavior and Relevant Costs 401
Some Common Relevant Cost Applications 402
Make-or-Buy Decisions 403
Exhibit 8.1 Make-or-Buy Decisions 403
Example 8.1 How to Structure a Make-or-Buy Problem 405
Special-Order Decisions 406
Exhibit 8.2 Accept or Reject a Special Order 406
Example 8.2 How to Structure a Special-Order
Problem 407
Keep-or-Drop Decisions 408
Example 8.3 How to Prepare a Segmented Income
Statement 410
Exhibit 8.3 Comparison of Segmented Income Statement With
and Without Allocated Common Fixed Expense 411
Example 8.4 How to Structure a Keep-or-Drop Product-Line
Problem 412
Example 8.5 How to Structure a Keep-or-Drop Product-Line
Problem with Complementary Effects 414
Further Processing of Joint Products 414
Exhibit 8.4 Further Processing of Joint Products 416
Example 8.6 How to Structure the Sell-or-Process-Further
Decision 416
Product Mix Decisions 417
Example 8.7 How to Determine the Optimal Product Mix
with One Constrained Resource 418
Example 8.8 How to Determine the Optimal Product Mix
with One Constrained Resource and a Sales Constraint
Multiple Constrained Resources 420
The Use of Costs in Pricing Decisions 420
Cost-Based Pricing 420
Example 8.9 How to Calculate Price by Applying a Markup
Percentage to Cost 421
Target Costing and Pricing 422
Example 8.10 How to Calculate a Target Cost 423
Profit Planning and Flexible Budgets
Description of Budgeting 456
Budgeting and Planning and Control 456
Exhibit 9.1 Planning, Control, and Budgets 456
Advantages of Budgeting 457
The Master Budget 457
Exhibit 9.2 The Master Budget and Its Interrelationships 458
Preparing the Operating Budget 459
Sales Budget 459
Example 9.1 How to Prepare a Sales Budget 460
Production Budget 461
Example 9.2 How to Prepare a Production Budget 461
Direct Materials Purchases Budget 462
Example 9.3 How to Prepare a Direct Materials Purchases
Budget 463
Direct Labor Budget 464
Example 9.4 How to Prepare a Direct Labor Budget 464
Overhead Budget 464
Example 9.5 How to Prepare an Overhead Budget 464
Ending Finished Goods Inventory Budget 465
Example 9.6 How to Prepare an Ending Finished Goods
Inventory Budget 465
Cost of Goods Sold Budget 466
Example 9.7 How to Prepare a Cost of Goods Sold
Budget 466
Selling and Administrative Expenses Budget 466
Example 9.8 How to Prepare a Selling and Administrative
Expenses Budget 467
Budgeted Income Statement 467
Example 9.9 How to Prepare a Budgeted Income
Statement 467
Preparing the Financial Budget 469
Cash Budget 469
Exhibit 9.3 The Cash Budget 469
Example 9.10 How to Prepare a Schedule for Cash
Collections on Accounts Receivable 470
Example 9.11 How to Determine Cash Payments on
Accounts Payable 471
Example 9.12 How to Prepare a Cash Budget 472
Budgeted Balance Sheet 473
Exhibit 9.4 Budgeted Balance Sheet 474
Using Flexible Budgets for Planning and Performance
Reporting 475
Example 9.13 How to Prepare a Before-the-Fact Flexible
Budget 476
Exhibit 9.5 Performance Report Comparing Actual Costs to
the Static Budget 477
Example 9.14 How to Prepare a Performance Report Using a
Flexible Budget 478
Using Budgets for Performance Evaluation 479
Frequent Feedback on Performance 480
Monetary and Nonmonetary Incentives 480
Participative Budgeting 480
Exhibit 9.6 The Art of Standard Setting 481
Realistic Standards 481
Controllability of Costs 482
Multiple Measures of Performance 482
Standard Costing and Variance
Analysis 520
Unit Standards and Basic Concepts of Standard
Costing 522
How Standards Are Developed 523
Types of Standards 523
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Exhibit 10.1 Types of Standards 523
Why Standard Cost Systems Are Adopted 524
Exhibit 10.2 Cost Assignment Approaches 525
Exhibit 10.3 Standard Cost Sheet for
Corn Chips 526
Example 10.1 How to Compute Standard Quantities
Allowed (SQ and SH) 527
Variance Analysis: General Description 528
Price and Usage Variances 528
Exhibit 10.4 Variance Analysis:
General Description 529
The Decision to Investigate 529
Example 10.2 How to Use Control Limits to Trigger a
Variance Investigation 531
Variance Analysis: Materials And Labor 532
Total Variance for Materials 532
Example 10.3 How to Calculate the Total Variance for
Materials 532
Direct Materials Variances 533
Example 10.4 How to Calculate Materials Variances:
Formula and Columnar Approaches 534
Using Materials Variance Information 535
Total Variance Analysis: Direct Labor 536
Example 10.5 How to Calculate the Total Variance for
Labor 537
Direct Labor Variances 538
Example 10.6 How to Calculate Labor Variances: Formula
and Columnar Approaches 539
Using Labor Variance Information 539
Additional Cost Management Practices 541
Overhead Analysis 543
Total Variable Overhead Variance 543
Example 10.7 How to Calculate the Total Variable Overhead
Variance 543
Variable Overhead Variances 544
Example 10.8 How to Calculate Variable Overhead
Spending and Efficiency Variances: Columnar and Formula
Approaches 544
Comparison of the Variable Overhead Spending Variance with
the Price Variances of Materials and Labor 545
Responsibility for the Variable Overhead Spending
Variance 546
Responsibility for the Variable Overhead Efficiency
Variance 546
A Performance Report for the Variable Overhead Spending and
Efficiency Variances 546
Example 10.9 How to Prepare a Performance Report for the
Variable Overhead Variances 547
Fixed Overhead Analysis 547
Total Fixed Overhead Variance 548
Example 10.10 How to Calculate the Total Fixed Overhead
Variance 548
Fixed Overhead Variances 549
Example 10.11 How to Calculate Fixed Overhead Variances:
Columnar and Formula Approaches 549
Responsibility for the Fixed Overhead Spending Variance 550
Analysis of the Fixed Overhead Spending Variance 550
Responsibility for the Fixed Overhead Volume Variance 551
Analysis of the Volume Variance 552
Exhibit 10.5 Graphical Analysis of the Volume Variance 552
Appendix 10A: Accounting for Variances 552
Entries for Direct Materials Variances 553
Entries for Direct Labor Variances 553
Disposition of Materials and Labor Variances 554
Performance Evaluation and Decentralization
Decentralization and Responsibility Centers 592
Exhibit 11.1 Centralization and Decentralization 592
Reasons for Decentralization 592
Divisions in the Decentralized Firm 593
Types of Goods or Services 593
Exhibit 11.2 Decentralized Divisions 594
Geographic Lines 594
Responsibility Centers 594
Exhibit 11.3 Types of Responsibility Centers and Accounting
Information Used to Measure Performance 595
Measuring the Performance of Investment Centers by Using
Return on Investment 596
Return on Investment 596
Margin and Turnover 597
Example 11.1 How to Calculate Average Operating Assets,
Margin, Turnover, and Return on Investment 597
Exhibit 11.4 Comparison of Divisional Performance 598
Advantages of Return on Investment 599
Disadvantages of the Return on Investment Measure 600
Measuring the Performance of Investment Centers by Using
Residual Income and Economic Value Added 602
Residual Income 603
Example 11.2 How to Calculate Residual Income 603
Economic Value Added (EVA) 604
Example 11.3 How to Calculate Economic Value Added 605
Transfer Pricing 607
Impact of Transfer Pricing on Divisions and the Firm as a
Whole 607
Exhibit 11.5 Impact of Transfer Price on Transferring Divisions
and the Company, ABC Inc., as a Whole 607
Transfer Pricing Policies 608
Example 11.4 How to Calculate Transfer Price 609
Appendix 11A: The Balanced Scorecard—Basic
Concepts 611
Exhibit 11.6 Balanced Scorecard for Ashley Hotel* 612
Strategy Translation 612
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Exhibit 11.7 Testable Strategy Illustrated 614
The Four Perspectives and Performance Measures 615
Exhibit 11.8 Summary of Objectives and Measures: Financial
Perspective 616
Exhibit 11.9 Summary of Objectives and Measures: Customer
Perspective 617
Example 11.5 How to Compute Cycle Time and Velocity
Example 11.6 How to Calculate Manufacturing Cycle
Efficiency 620
Exhibit 11.10 Summary of Objectives and Measures: Internal
Perspective 621
Exhibit 11.11 Summary of Objectives and Measures: Learning
and Growth Perspective 622
Capital Investment Decisions
Types of Capital Investment Decisions 646
Independent and Mutually Exclusive Projects 646
Making Capital Investment Decisions 646
Nondiscounting Models: Payback Period and Accounting
Rate of Return 647
Payback Period 648
Example 12.1 How to Calculate Payback 648
Accounting Rate of Return 650
Example 12.2 How to Calculate the Accounting Rate of
Return 651
Discounting Models: The Net Present Value Method 652
Net Present Value Defined 652
Net Present Value Illustrated 653
Example 12.3 How to Assess Cash Flows and Calculate Net
Present Value 653
Illustrating Relationships: NPV, Discount Rates, and Cash Flows 654
Exhibit 12.1 NPV, Discount Rates, and Cash Flow 655
Internal Rate of Return 656
Internal Rate of Return Defined 656
Internal Rate of Return Illustrated: Multiple-Period Setting
with Uniform Cash Flows 656
Example 12.4 How to Calculate Internal Rate of Return with
Uniform Cash Flows 657
Internal Rate of Return Illustrated: Multiple-Period Setting
with Uneven Cash Flows 657
Postaudit of Capital Projects 659
Postaudit Illustrated 659
Postaudit Benefits 660
Postaudit Limitations 661
Mutually Exclusive Projects 661
Net Present Value Compared with Internal Rate of
Return 661
Exhibit 12.2 Net Present Value Compared with Internal Rate of
Return 662
NPV Analysis for Mutually Exclusive Projects Illustrated 662
Example 12.5 How to Calculate Net Present Value and
Internal Rate of Return for Mutually Exclusive
Projects 663
Special Considerations for Advanced Manufacturing
Environment 664
Exhibit 12.3 Investment Data; Direct, Intangible, and Indirect
Benefits 665
Appendix 12A: Present Value Concepts 667
Future Value 667
Present Value 667
Present Value of an Uneven Series of Cash Flows 668
Exhibit 12A.1 Present Value of an Uneven Series of Cash Flows
Present Value of a Uniform Series of Cash Flows 669
Exhibit 12A.2 Present Value of an Annuity 669
Appendix 12B: Present Value Tables 669
Exhibit 12B.1 Present Value of a Single Amount 670
Exhibit 12B.2 Present Value of an Annuity 671
EXERCISE (CHAPTERS 3, 5, 8, AND 12) 697
Emerging Topics in Managerial Accounting
Enterprise Risk Management 702
Exhibit 13.1 Key Steps within the ERM Process 702
Determining Risk Appetite 703
Exhibit 13.2 Key Elements of a Portfolio Risk Management
Perspective 703
Identifying Top Risks 703
Assessing Inherent Risks 703
Responding to Risks Using a Portfolio Perspective 705
Example 13.1 How to Use Net Benefit to Evaluate Risk
Response Alternatives 707
Monitoring the ERM Process 708
Business Sustainability 709
Exhibit 13.3 The Role of Management Accounting in the
Business Sustainability Cycle 710
Exhibit 13.4 Business Sustainability Issues throughout the Value
Chain 711
Exhibit 13.5 The Relationship Between Stakeholders and
Strategy 712
Exhibit 13.6 Stakeholder Engagement Activities at Eli Lilly 713
Exhibit 13.7 The Relationship between Stakeholder Concerns
and Business Success at UPS 714
Exhibit 13.8 Rapid Growth in Corporate Sustainability
Reporting Since Its Inception 716
Exhibit 13.9 Widespread Adoption of Corporate Sustainability
Reporting across Industries 716
Exhibit 13.10 The Global Phenomenon of Corporate
Sustainability Reporting 717
Exhibit 13.11 Growth in Independent Assurance of Corporate
Sustainability Information 718
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Quality Cost Management 719
Costs of Quality 720
Exhibit 13.12 Examples of Quality Costs by Category 721
Reporting Quality Costs 721
Example 13.2 How to Prepare a Quality Cost Report 721
Exhibit 13.13 Quality Cost Categories: Relative Contribution
by Category 723
Controlling Quality Costs 724
Example 13.3 How to Prepare an Interim Quality
Performance Report 724
Example 13.4 How to Prepare Multiple-Period Quality
Trend Reports 726
Exhibit 13.14 Multiple-Period Trend Graph: Total Quality
Costs 726
Exhibit 13.15 Multiple-Period Trend Graph: Individual
Quality Cost Categories 727
Lean Manufacturing and Lean Accounting 727
Lean Manufacturing 727
Exhibit 13.16 Order Fulfillment Value Stream 728
Exhibit 13.17 Traditional Batch Production Process 729
Exhibit 13.18 Proposed Manufacturing Cell 730
Example 13.5 How to Calculate Production Time for
Traditional and Cellular Manufacturing 730
Lean Accounting 731
Exhibit 13.19 Value-Stream Cost Assignments 732
Exhibit 13.20 Value-Stream Costs and Production Hours:
Models X12 and Y35 735
Example 13.6 How to Calculate Value-Stream Product Costs
Value-Stream Operational Control 736
Exhibit 13.21 Holland Company Value-Stream Box Scorecard
International Issues in Management Accounting 738
Types of Involvement in the International Economy 738
Foreign Currency Exchange 740
Example 13.7 How to Calculate the Value of an Exchange in
Another Currency 741
Transfer Pricing and the Multinational Firm 743
Exhibit 13.22 Use of Transfer Pricing to Affect Taxes Paid 743
The Role of Cost and Managerial Accounting in Fraud And
Forensic Accounting 745
Fraud and Management Accounting 745
Forensic Accounting in Management Accounting 747
Exhibit 13.23 Applying Different Types of Accounting
Knowledge to Forensic Accounting 748
Statement of Cash Flows
Overview of the Statement of Cash Flows 792
Cash Defined 792
Sources and Uses of Cash 792
Exhibit 14.1 Sources and Uses of Cash 792
Methods for Calculating Operating Cash Flows 793
Example 14.1 How to Classify Activities and Identify Them
as Sources or Uses of Cash 793
Noncash Exchanges 794
Preparation of the Statement: Indirect Method 795
Exhibit 14.2 Balance Sheets: Lemmons Company 795
Step 1: Compute the Change in Cash 796
Example 14.2 How to Compute the Change in Cash 796
Step 2: Compute Operating Cash Flows 796
Example 14.3 How to Calculate Operating Cash Flows Using
the Indirect Method 796
Step 3: Compute Investing Cash Flows 798
Example 14.4 How to Compute Investing Cash Flows 798
Step 4: Compute Financing Cash Flows 799
Example 14.5 How to Compute Financing Cash Flows 799
Step 5: Prepare the Statement of Cash Flows 800
Example 14.6 How to Prepare the Statement of Cash Flows
The Direct Method: An Alternative Approach 801
Example 14.7 How to Calculate Operating Cash Flows Using
the Direct Method 802
Worksheet Approach to the Statement of Cash Flows 803
Exhibit 14.3 Balance Sheets: Portermart Company 804
Example 14.8 How to Prepare a Statement of Cash Flows
Using a Worksheet Approach 804
Analysis of Transactions 806
The Final Step 807
Exhibit 14.4 Worksheet-Derived Statement of Cash Flows for
Portermart Company 808
Financial Statement Analysis
Common-Size Analysis 838
Exhibit 15.1 Common-Size Analysis 839
Horizontal Analysis 839
Example 15.1 How to Prepare Common-Size Income
Statements Using Base Period Horizontal Analysis 839
Vertical Analysis 840
Example 15.2 How to Prepare Income Statements Using Net
Sales as the Base: Vertical Analysis 840
Percentages and Size Effects 841
Ratio Analysis 842
Standards for Comparison 842
Exhibit 15.2 Ratio Analysis 843
Classification of Ratios 844
Exhibit 15.3 Income Statement and Statement
of Retained Earnings for Payne Company for Year 2 844
Exhibit 15.4 Comparative Balance Sheets for Payne Company
for Years 1 and 2 845
Liquidity Ratios 846
Current Ratio 846
Quick or Acid-Test Ratio 848
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Example 15.3 How to Calculate the Current Ratio and the
Quick (or Acid-Test) Ratio 848
Accounts Receivable Turnover Ratio 848
Example 15.4 How to Calculate the Average Accounts
Receivable, the Accounts Receivable Turnover Ratio, and
the Accounts Receivable Turnover in Days 849
Inventory Turnover Ratio 850
Example 15.5 How to Calculate the Average Inventory, the
Inventory Turnover Ratio, and the Inventory Turnover in
Days 851
Impact of the Just-in-Time Manufacturing Environment 852
Leverage Ratios 853
Times-Interest-Earned Ratio 853
Example 15.6 How to Calculate the Times-Interest-Earned
Ratio 853
Debt Ratio 854
Example 15.7 How to Calculate the Debt Ratio and the
Debt-to-Equity Ratio 855
Profitability Ratios 856
Return on Sales 856
Example 15.8 How to Calculate the Return on Sales 856
Return on Total Assets 856
Example 15.9 How to Calculate the Average Total Assets and
the Return on Assets 857
Return on Common Stockholders’ Equity 857
Example 15.10 How to Calculate the Average Common
Stockholders’ Equity and the Return on Stockholders’
Equity 858
Earnings per Share 859
Example 15.11 How to Compute Earnings per Share
Price-Earnings Ratio 859
Example 15.12 How to Compute the Price-Earnings Ratio
Dividend Yield and Payout Ratios 860
Example 15.13 How to Compute the Dividend Yield and the
Dividend Payout Ratio 861
The Importance of Profitability Ratios to External Users of the
Financial Statements 861
Glossary 891
Check Figures
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Managerial Accounting
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
Introduction to Managerial
After studying Chapter 1, you
should be able to:
Explain the meaning of
managerial accounting.
Explain the differences
between managerial
accounting and financial
Identify and explain the
current focus of managerial
Describe the role of
managerial accountants in
an organization.
Explain the importance
of ethical behavior for
managers and managerial
Identify three forms of
certification available to
managerial accountants.
Nico Traut/Shutterstock.com
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with BuyCostumes.com
The greatest benefit of managerial accounting is also its biggest challenge—
to provide managers with information that improves decisions and creates
organizational value. This information helps inform managers about the
impact of various strategic and operational decisions on key nonfinancial
performance measures and their eventual impact on the organization’s
financial performance. The information is challenging to prepare and
analyze because it requires an understanding of all value chain components
that affect the organization, including research and development,
production, marketing, distribution, and customer service.
Since its inception in 1999, BuyCostumes.com
has blended the right managerial accounting
information and an innovative business model
“Using the Internet and
to provide over 10 billion costume combinations
to millions of customers all over the world.
marketing creativity,
Using the Internet and marketing creativity,
BuyCostumes.com serves a
BuyCostumes.com serves a growing market
market of 150 million
of consumers. For example, U.S. consumers
spend over $2.5 billion each year on Halloween
U.S. consumers who spend
costumes for adults, children and even pets
$2.5 billion on Halloween
(who account for $350 million of this amount)!
costumes each year.”
According to BuyCostumes.com’s CEO, the
company measures key performance indicators
to guide its decision making. For example,
managerial accountants analyze measures of customer satisfaction, average
time between order placement and costume arrival for each shipping
method, and the profitability of individual customer types. As customer
trends change, competitors emerge, and technological advances occur,
BuyCostumes.com’s managerial accounting information adapts to provide
crucial insight into the company’s performance and how its strategy should
evolve to remain one of the world’s largest Internet costume retailers.
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
Chapter 1 Introduction to Managerial Accounting
Explain the meaning of managerial
Here’s Why It’s important
What do we mean by managerial accounting? Quite simply, managerial accounting is the
provision of accounting information for a company’s internal users. More specifically, managerial accounting represents the firm’s internal accounting system designed to provide the necessary
financial and nonfinancial information that helps company managers make the best possible
decisions. Unlike financial accounting, managerial accounting is not bound by any formal criteria such as generally accepted accounting principles (GAAP). Managerial accounting has three
broad objectives:
• To provide information for planning the organization’s actions.
• To provide information for controlling the organization’s actions.
• To provide information for making effective decisions.
Using recent examples from many companies in both the for-profit and not-for-profit sectors, this textbook explains how all manufacturing (e.g., aircraft producer—Boeing
Corporation), merchandising (e.g., clothing retailer—American Eagle Outfitters), and service
(e.g., healthcare provider—Cleveland Clinic, or online retailer Amazon.com) organizations
use managerial accounting information and concepts. People in all types of positions—from
corporate presidents to graphic designers to hospital administrators—can improve their managerial skills by being well-grounded in the basic concepts and use of managerial accounting
information for planning, controlling, and decision making.1
The exciting reality is that the importance and scope of managerial accounting information
is growing rapidly around the globe. As a result, the demand for businesspeople who possess the
ability to create, understand, use, and communicate managerial accounting information continues to grow. Chapter 13 explores special and emerging managerial accounting areas, such
as enterprise risk management, lean and quality accounting, corporate sustainability reporting,
and fraud and forensic accounting.
Here’s How It’s Used:
One of the fastest growing needs in business is the area
of corporate sustainability measurement and reporting.
Managerial accounting plays an important role in this
exciting aspect of business. Thousands of companies
increasingly release to the public (i.e., suppliers, regulators,
employees, human rights organizations, environmental
groups, customers, etc.) very large quantities of managerial
accounting information that traditionally either did not
exist or was released only internally. This information is
released through optional reports known as corporate
sustainability reports (e.g., Coca-Cola, McDonald’s),
social responsibility reports (e.g., Starbucks, Target), or
citizenship reports (e.g., ExxonMobil, General Electric).
The release of these reports often occurs because firms want
to manage their reputation by preparing and releasing
such information themselves, rather than having Internet
bloggers, newspapers, and cable news networks publish their
own estimates of such information. Some leading companies
(e.g., Clorox, Eli Lilly, Novo Nordisk) have even moved
so far as to combine their sustainability report with their
annual report, thereby resulting in a single, integrated
report containing both traditional financial accounting
information as well as managerial accounting information.1
Measuring the nonfinancial aspects of corporate business
sustainability, including economic, social, environmental,
legal, and political issues, and then linking their impact on
the company’s financial performance requires the unique
insights and expertise of managerial accountants!
1 For a more in-depth discussion of the future of sustainability accounting, see “Currents of Change: The KPMG Survey
of Corporate Responsibility Reporting 2015,” taken from KPMG’s website, www.kpmg.com/crreporting; or Brian
Ballou, Dan Heitger, and Chuck Landes, “Accounting for the Sustainability Cycle,” 2013, taken from the American
Institute of Certified Public Accountants’ website, www.aicpa.org/interestareas/frc/assuranceadvisoryservices/
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Chapter 1 Introduction to Managerial Accounting
Information Needs of Managers and Other Users
Managerial accounting information is needed by a number of individuals. In particular, managers and empowered workers need comprehensive, up-to-date information for the following
• planning
• controlling
• decision making
The detailed formulation of action to achieve a particular end is the management activity
called planning. Planning requires setting objectives and identifying methods to achieve
those objectives. For example, a firm may set the objective of increasing its short- and longterm profitability by improving the overall quality of its products. DaimlerChrysler drastically improved the quality and profitability of its Chrysler automobile division in the early
21st century to the point where its quality surpassed that of Mercedes-Benz (also owned by
DaimlerChrysler). By improving product quality, firms like DaimlerChrysler (now Daimler
AG) should be able to reduce scrap and rework, decrease the number of customer complaints
and warranty work, reduce the resources currently assigned to inspection, and so on, thus
increasing profitability. To realize these benefits, management must develop some specific
methods that, when implemented, will lead to the achievement of the desired objective. A
plant manager, for example, may start a supplier evaluation program to identify and select
suppliers who are willing and able to supply defect-free parts. Empowered workers may be
able to identify production causes of defects and to create new methods for producing a product that will reduce scrap and rework and the need for inspection. The new methods should
be clearly specified and detailed.
Planning is only half the battle. Once a plan is created, it must be implemented and its implementation monitored by managers and workers to ensure that the plan is being carried
out as intended. The managerial activity of monitoring a plan’s implementation and taking
corrective action as needed is referred to as controlling. Control is usually achieved by
comparing actual performance with expected performance. This information can be used
to evaluate or to correct the steps being taken to implement a plan. Based on the feedback,
a manager (or worker) may decide to let the plan continue as is, take corrective action of
some type to put the actions back in harmony with the original plan, or do some midstream
The managerial accounting information used for planning and control purposes can
be either financial or nonfinancial in nature. For example, Duffy Tool and Stamping saved
$14,300 per year by redesigning a press operation. In one department, completed parts (made
by a press) came down a chute and fell into a parts tub. When the tub became full, press
operators had to stop operation while the stock operator removed the full tub and replaced
it with an empty one. Workers redesigned the operation so that each press had a chute with
two branches—each leading to a different tub. Now when one tub is full, completed parts
are routed into the other tub. The $14,300 savings are a financial measure of the success of
the redesign. The redesign also eliminated machine downtime and increased the number of
units produced per hour (operational feedback), both of which are examples of nonfinancial
performance. Both types of measures convey important information. Often, financial and
nonfinancial feedback is given to managers in the form of performance reports that compare
the actual data with planned data or other benchmarks.
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Chapter 1 Introduction to Managerial Accounting
Decision Making
The process of choosing among competing alternatives is called decision making. This managerial
function is intertwined with planning and control in that a manager cannot successfully plan or
control the organization’s actions without making decisions regarding competing alternatives. For
instance, if BMW contemplates the possibility of offering a car that runs on gasoline and hydrogen, its ultimate decision would be improved if information about the alternatives (e.g., pertaining
to gasoline versus hydrogen versus hybrid combinations of these two automobile fuel options) is
gathered and made available to managers. One of the major roles of the managerial accounting
information system is to supply information that facilitates decision making. For example, based
on managerial accounting information concerning current market size and potential growth opportunities in the costume market, BuyCostumes.com decided to sell many different types of
costumes internationally in order to best meet customer demand. As a result, the company offers a
selection of exclusive and licensed costumes and accessories that equate to over 10 billion costume
combinations! This important strategic decision allows BuyCostumes.com to serve as a premier
destination for the 10 million global partiers that visit its website each Halloween. Interestingly,
since its creation, BuyCostumes.com management has correctly predicted the outcome of each
presidential election based on the sales data from its presidential candidate mask collection.
Here’s How It’s Used:
What Constitutes Managerial
Accounting Information?
You are the Costco executive who has been chosen to decide
whether or not the company should continue its policy of
sourcing its finest coffee from Rwanda.
What types of information should you consider as you
decide how best to structure and analyze this important
long-term strategic decision? What challenges do you
expect to face in making this decision?
What constitutes managerial accounting information is growing
considerably as organizations must make decisions that include
the global consequences of their actions, as well as the impact
on an increasingly large number of vocal, well-informed, and
powerful stakeholders. Stakeholders include the company’s
customers, suppliers, employees, regulators, politicians,
lawmakers, and local community members. Generally speaking,
managerial accounting information can be financial in nature,
such as sales revenue or cost of sales, or nonfinancial in nature,
such as the number of quality defects or the percentage
of manufacturing plants that are inspected for compliance
with human rights policies. One of the most exciting—and
yet daunting—aspects of managerial accounting is that one
can choose to measure anything, assuming the resources,
information technology, and creativity exist to capture the
desired performance measure.
As a Costco executive, one of the first nonfinancial factors you
likely would consider measuring is the quality of the Rwandan
coffee to ensure that it fulfills Costco’s strategic goal of creating
a competitive advantage by providing premium coffee to
customers. Quality could be defined by the beans’ taste, shelf life
longevity, or other factors valued by customers. Other important
nonfinancial performance measures might include the time
required to ship the harvested beans from Rwanda to Costco
stores around North America and the presence of a local farming
workforce in Rwanda critical to successfully sustaining a long-term
supply chain between Rwandan fields and Costco customers.
One of the most important financial items to measure
would be the importance to Costco’s customers of purchasing
premium quality coffee, which could be measured by the
additional price they are willing to pay for Rwandan coffee
over and above more average quality coffee. Other financial
measures might include the cost of harvesting, inspecting, and
shipping beans, as well as investments in Rwandan farming
communities (e.g., physical infrastructure and schools) that
ensure the relationship is sustainable for future generations.
Finally, you should consider how the decision to continue
sourcing premium coffee from Rwanda will be perceived by
Costco’s important stakeholders, including its customers who
buy the coffee, suppliers who provide the coffee beans, and
government officials in the United States and Rwanda who
set trading policies between the two countries. Accurately
measuring issues like stakeholder perceptions of such decisions
can be difficult because the managerial accountant oftentimes
must invent new measures, figure out where the data to create
such measures might come from, and estimate how accurate
these measures will be once collected.
The managerial accountant’s ability to inform
executive decision makers by providing innovative,
accurate, and timely performance measures can
create an important competitive advantage for the
organization by improving its key decisions.
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Chapter 1 Introduction to Managerial Accounting
Check Point
1. Which activity generally occurs first: decision making, planning, or control?
Planning usually occurs first to set objectives, followed by controlling to monitor
implementation of the planned objectives, and, finally, decision making to choose the
best alternative(s).
2. The desire to attract and retain the most talented workers in a given industry is
an example of which activity: decision making, planning, or control?
Planning. Setting an objective to improve workforce quality is an example of an
important planning activity.
There are two basic kinds of accounting information systems: financial accounting and managerial accounting. The company’s accounting system should be designed to provide both financial
and managerial accounting information. The key point is flexibility—the system should be able
to supply different information for different purposes.
Explain the differences between
managerial accounting and financial
Here’s Why It’s important
Financial Accounting
Financial accounting is primarily concerned with producing information (financial statements) for external users, including investors, creditors, customers, suppliers, government agencies (Food and Drug Administration, Federal Communications Commission, etc.), and labor
unions. This information has a historical orientation and is used for such things as investment
decisions, stewardship evaluation, monitoring activity, and regulatory measures. Financial statements must conform to certain rules and conventions that are defined by various agencies, such
as the Securities and Exchange Commission (SEC), the Financial Accounting Standards Board
(FASB), and the International Accounting Standards Board (IASB). These rules pertain to issues such as the recognition of revenues; timing of expenses; and recording of assets, liabilities,
and stockholders’ equity.
Managerial Accounting
The managerial accounting system produces information for internal users, such as managers, executives, and workers. Thus, managerial accounting could be properly called internal accounting,
and financial accounting could be called external accounting. Specifically, managerial accounting
identifies, collects, measures, classifies, and reports financial and nonfinancial information that
is useful to internal users in planning, controlling, and decision making.
Comparison of Financial and Managerial Accounting
When comparing financial accounting to managerial accounting, several differences can
be identified. Some of the more important differences follow and are summarized in
Exhibit 1.1.
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Chapter 1 Introduction to Managerial Accounting
• Targeted users. Managerial accounting focuses on providing information for internal users,
while financial accounting focuses on providing information for external users.
• Restrictions on inputs and processes. Managerial accounting is not subject to the requirements of
Exhibit 1.1
Comparison of Financial
and Managerial Accounting
generally accepted accounting principles set by the SEC and the FASB that must be followed
for financial reporting. The inputs and processes of financial accounting are well defined. Only
certain kinds of economic events qualify as inputs, and processes must follow generally accepted methods. Unlike financial accounting, managerial accounting has no official body that prescribes the format, content, and rules for selecting inputs and processes and preparing reports.
Type of information. The restrictions imposed by financial accounting tend to produce objective and verifiable financial information. For managerial accounting, information may be
financial and nonfinancial and may be much more subjective in nature.
Time orientation. Financial accounting has a historical orientation (i.e., looking through
the rearview mirror). It records and reports events that have already happened. Although
managerial accounting also records and reports events that have already occurred, it strongly emphasizes providing information about future events (i.e., looking through the front
windshield). Management, for example, may want to know what it will cost to produce a
product next year. This future orientation is necessary for planning and decision making.
Degree of aggregation. Managerial accounting provides measures and internal reports used to
evaluate the performance of entities, product lines, departments, and managers. Essentially,
detailed information is needed and provided. Financial accounting, on the other hand, focuses on overall firm performance, providing a more aggregated viewpoint.
Breadth. Managerial accounting is much broader than financial accounting. It includes aspects of managerial economics, industrial engineering, and management science as well as
numerous other areas.
Financial Accounting
Managerial Accounting
• Externally focused
• Must follow externally imposed rules
• Objective financial information
• Internally focused
• No mandatory rules
• Financial and nonfinancial
information; subjective information
• Emphasis on the future
• Internal evaluation and decisions
based on very detailed information
• Broad, multidisciplinary
• Historical orientation
• Information about the firm as a whole
• More self-contained
Check Point
1. Is the preparation of financial statements for the annual report a task more
suited to managerial accounting or financial accounting?
Financial accounting. While managerial accounting provides important inputs (such as
work-in-process inventory or cost of goods…
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