Managerial Accounting Input for Decision Making

This text is written as an integrated work in managerial accounting, and is intended for use as a basic text for

students after completing a first semester or quarter course in financial accounting at either the undergraduate or

graduate level.

This text is organized around the following major areas of managerial accounting:

An Overview of Managerial Accounting. In this section, the text discusses the uses of managerial accounting and contrasts the type and use of information provided by managerial accounting and financial accounting (Chapter 1). Chapter 2 focuses on basic cost information and behavior. In this chapter we distinguish between the different types of costs incurred by organizations. In addition, this chapter discusses the behavior of these costs with changes in activity as well as the effect of cost behavior on managerial decisions.

Cost Accumulation. Chapters 3 through 5 illustrate the process through which the organization accumulates costs with its products and services. In Chapter 3, we focus on production and service processes that require different levels of effort across individual jobs (job-order costing). Chapter 4 illustrates the cost accumulation process for manufacturing environments characterized by the production of a large number of similar products (process costing). Chapter 5 focuses on the process through which overhead costs are accumulated with the organization’s inventory and services. The dedication of an entire chapter to overhead costs is considered necessary given the importance of controlling overhead costs to organizations in manufacturing inventory and providing services.

The Use of Managerial Accounting Information. Chapters 6 through 11 describe various uses of managerial accounting information. Topics discussed in these chapters include variable costing and costvolume-profit analysis (Chapter 6), standard costing and determination of variances (Chapter 7), budgeting (Chapter 8), responsibility accounting (Chapter 9), short-term managerial decisions (Chapter 10), and capital budgeting (Chapter 11). In these chapters, the basic principles of cost behavior and cost accumulation discussed in the preceding two sections are applied to important decisions facing managers in today’s

business world.

Part I:  Introduction to Managerial Accounting

1 Introduction Managerial Accounting

INTRODUCTION. LEARNING OBJECTIVES. THE NEED FOR MANAGERIAL ACCOUNTING INFORMATION.

ACCOUNTING SYSTEMS AND THE MANAGEMENT PROCESS. Identifying and Gathering

Information on Transactions. Preparing Reports. Using Reports for Decisions and Activities. Feedback.

The Role of Accountants in the Management Process. LOCATION OF THE ACCOUNTING FUNCTION.

OVERVIEWOF THE MANAGERIAL ACCOUNTING FUNCTION. Preparing Budgets and Devising Standards.

Accumulating Data on Costs and Profits. Comparing Actual Activity with Plans or Budgets. Advising

Management About Nonroutine Decisions. SUMMARY. KEY DEFINITIONS.

2 Analyzing Cost Behavior

LEARNING OBJECTIVES. INTRODUCTION. TYPES OF COSTS. Direct Materials. Direct Labor. Manufacturing

Overhead.OVERVIEWOF COST BEHAVIOR. Level of Activity (Cost Driver).Relevant Range.

ILLUSTRATION OF COST BEHAVIOR. Fixed Costs.Variable Costs. Step Costs. Semi-Variable (Mixed)

Costs. ANALYZING COST BEHAVIOR. The Graphical Method. The Two-Point Method. Semi-Averages

Method. Least Squares Regression Method. COST BEHAVIOR FOR RETAIL AND SERVICE COMPANIES.

USING MANAGERIAL ACCOUNTING INFORMATION: BETTER BOOKS. SUMMARY. KEY DEFINITIONS.

ILLUSTRATIVE PROBLEM.

Part II:  Cost Accumulation

3 Job-Order Costing

LEARNING OBJECTIVES. INTRODUCTION. IMPORTANCE OF COST ACCUMULATION. Preparation

of Financial Statements. Internal Decision-Making Process. INTRODUCTION TO JOB-ORDER COSTING:

THE ACE CONSTRUCTION COMPANY.Obtain Direct Materials. Incur Manufacturing Costs.Completion

of Production. Sale of Inventory. PREPARATION OF FINANCIAL STATEMENTS. Cost of Goods

Manufactured Statement. Cost of Goods Sold Statement. SUMMARY: THE ACE CONSTRUCTION

COMPANY.USING MANAGERIAL ACCOUNTING INFORMATION: ACE CONSTRUCTION COMPANY.

SUMMARY. KEY DEFINITIONS. ILLUSTRATIVE PROBLEM.

4 Process Costing

LEARNING OBJECTIVES. INTRODUCTION. AN OVERVIEW OF PROCESS COSTING. COMPREHENSIVE

EXAMPLE: THE AMERICAN VEGETABLE COMPANY. Account for Units Produced. Determine

Total Manufacturing Costs. Determine Equivalent Units of Production. Calculate the Cost per Unit.

Accumulate Costs with Inventory Units.Transfer and Completion of Production. JOINT MANUFACTURING

PROCESSES. COST ACCUMULATION FOR SERVICE ORGANIZATIONS. JUST-IN-TIME INVENTORY

AND PRODUCTION MANAGEMENT. USING MANAGERIAL ACCOUNTING

INFORMATION: THE AMERICAN VEGETABLE COMPANY. SUMMARY. KEY DEFINITIONS. ILLUSTRATIVE

PROBLEM.

5 Overhead Costs and Activity-Based Costing

LEARNING OBJECTIVES. INTRODUCTION. THE NATURE OF MANUFACTURING OVERHEAD

COSTS. Applying Overhead Cost to Production. Recording Overhead Costs. TWO-STAGE ALLOCATIONS

OF SERVICE DEPARTMENT COSTS. Determining Departmental Overhead Rates. Allocating

Service Department Costs to Operating Departments (Stage 1 Allocations). ACTIVITY-BASED COSTING.

Step 1: Identify Overhead Costs Pools. Step 2: Identify Cost Drivers. Step 3: Allocate Costs to Inventory

Items.Other Issues Involved with Activity-Based Costing.USING MANAGERIAL ACCOUNTING

DATA: THE AMERICAN VEGETABLE COMPANY. SUMMARY. KEY DEFINITIONS. ILLUSTRATIVE

PROBLEM.

Part Ill:  Management’s Use of Managerial Accounting Information

6 Cost Behavior—Cost-Volume-Profit Analysis and Variable and Absorption Costing

LEARNING OBJECTIVES. INTRODUCTION.CVP ANALYSIS:GRAPHICAL APPROACH CVP ANALYSIS:

EQUATION APPROACHES.General Equation Approach.Unit Contribution Margin Approach.Contribution

Margin Ratio Approach. OTHER USES OF CVP ANALYSIS. Desired Level of Profit (Before

Taxes).Desired Profit (After Taxes).Variable Levels of Profit.Change in Variable Costs/Contribution Margin.

Change in Fixed Costs. Calculating Necessary Selling Prices. CVP for Multiple Products. OPERATING

LEVERAGE AND AUTOMATED MANUFACTURING PROCESSES. ASSUMPTIONS OF CVP

ANALYSIS. PRACTICAL APPLICATION OF CVP ANALYSIS. INCOME DETERMINATION: ABSORPTION

AND VARIABLE COSTING. Absorption (Full) Costing. Variable (Direct) Costing. Comparing Absorption

and Variable Costing.USING MANAGERIAL ACCOUNTING INFORMATION:GOLDEN MUSIC

PRODUCERS. SUMMARY. KEY DEFINITIONS. ILLUSTRATIVE PROBLEM.

7 Standard Costing and Variance Analysis

LEARNING OBJECTIVES. INTRODUCTION. PERFORMANCE STANDARDS. Direct Materials and Direct

Labor Costs.Manufacturing Overhead Costs.VARIANCE ANALYSIS:DIRECT MATERIALS AND DIRECT

LABOR COSTS. Direct Material Variances. Direct Labor Variances. COST ACCUMULATION IN

A STANDARD COSTING SYSTEM. RECENT DEVELOPMENTS IN THE MANUFACTURING ENVIRONMENT.

BENEFITS OF PERFORMANCE STANDARDS AND STANDARD COSTING.USING MANAGERIAL

ACCOUNTING INFORMATION: SPORTSWORLD. SUMMARY. KEY DEFINITIONS.

ILLUSTRATIVE PROBLEM. Appendix-Variance Analysis: Manufacturing Overhead Costs. VARIABLE

OVERHEAD COSTS. Variable Overhead Efficiency Variance. Variable Overhead Spending Variance.

Summary: Variable Overhead Variances. FIXED OVERHEAD COSTS. Fixed Overhead Volume Variance.

Fixed Overhead Spending Variance. Summary: Fixed Overhead Variances.OVERALL ANALYSIS

OF OVERHEAD VARIANCES. ACCUMULATION OF MANUFACTURING OVERHEAD COSTS WITH

PRODUCTION.

8 Budgeting

LEARNING OBJECTIVES. INTRODUCTION. PURPOSES OF BUDGETING. THE BUDGETING

PROCESS.COMPREHENSIVE EXAMPLE:OPERATING BUDGETS. Sales Budget. Production Budget.

Direct Materials Purchases and Usage Budgets. Direct Labor and Manufacturing Overhead Budgets.

Nonmanufacturing Expense Budget. BUDGETED FINANCIAL STATEMENTS-OPERATIONS. FINANCIAL

AND RESOURCE BUDGETS. Cash Budget. Accounts Receivable Budget. Inventory Budgets.

Property, Plant and Equipment Budget. Accounts Payable Budget. Notes Payable Budget. Budgeted

Shareholders' Equity. NONQUANTITATIVE ASPECTS OF BUDGETING. The Difficulty of Budget Standards.

Participative Budgeting and Slack. BUDGETS FOR MERCHANDISING AND SERVICE ORGANIZATIONS.

USING MANAGERIAL ACCOUNTING INFORMATION: TOY CONCEPTS, INC. SUMMARY.

KEY DEFINITIONS. ILLUSTRATIVE PROBLEM.

9 Control of the Organization—Responsibility Accounting

LEARNING OBJECTIVES. INTRODUCTION. MANAGEMENT CONTROL SYSTEMS. RESPONSIBILITY

CENTERS. RESPONSIBILITY ACCOUNTING AT BLAST! SNACK FOODS. COST CENTERS.

PROFIT CENTERS. INVESTMENT CENTERS. Return on Investment (ROI). Residual Income. ISSUES

IN EVALUATING INVESTMENT CENTERS. Assets. Net Income. Life of Investment.Transfer Pricing.

TOTAL QUALITY MANAGEMENT.NONFINANCIAL PERFORMANCE AND THE BALANCED SCORECARD.

USE OF MANAGERIAL ACCOUNTING INFORMATION: BLAST! SNACK FOODS. SUMMARY.

KEY DEFINITIONS. ILLUSTRATIVE PROBLEM.

10 The Use of Managerial Accounting Data in Making Short-Term Decisions

LEARNING OBJECTIVES. INTRODUCTION.TERMINOLOGY FOR SHORT-TERM DECISIONS. Decisions.

Relevant Costs. Opportunity Costs. Sunk Costs. Summary. THE USE OF MANAGERIAL ACCOUNTING

DATA IN MAKING SHORT-TERM DECISIONS. Product Pricing Decisions. Contribution

Margin (Variable) Approach. Full-Cost (Absorption) Approach. Setting Prices to Earn a Profit. Elasticity

of Demand. SPECIAL ORDERS. No Excess Capacity. Qualitative Considerations. Summary: Special

Orders. CONTINUATION OF A SEGMENT OR PRODUCT LINE.Other Considerations-Resource Constraints.

Summary: Continuation of a Segment or Product Line. ADDITIONAL PROCESSING. MAKEOR-

BUY DECISIONS. Alternative Use of Capacity. Qualitative Considerations. Other Considerations.

SUMMARY. KEY DEFINITIONS. ILLUSTRATIVE PROBLEM.

11 Capital Budgeting: Search for Long-Run Alternatives

LEARNING OBJECTIVES. INTRODUCTION. AN INTRODUCTION TO CAPITAL BUDGETING. Types

of Capital Budgeting Decisions. Capital Budgeting-Quantitative Factors. Capital Budgeting—Qualitative

Factors.CAPITAL BUDGETINGTECHNIQUES THAT IGNORE THE TIME VALUE OF MONEY. Payback

Period. Average Rate of Return (Accounting Rate of Return). CAPITAL BUDGETING TECHNIQUES

THAT CONSIDER THE TIME VALUE OF MONEY. NET PRESENT VALUE. Future Cash Inflows and

Outflows—Basic. Evaluating Competing Projects Using Net Present Value.Additional Complexities Using

Net Present Value. Limitations of the Net Present Value Method. Advantages of the Net Present Value

Method. Summary-Net Present Value. INTERNAL TIME-ADJUSTED RATE OF RETURN. SUMMARY:

TECHNIQUES THAT CONSIDER THE TIME VALUE OF MONEY. SUMMARY OF CAPITAL BUDGETING

TECHNIQUES. POSTAUDIT OF CAPITAL INVESTMENTS. CAPITAL BUDGETING FOR HIGHTECHNOLOGY

ASSETS. THE USE OF CAPITAL BUDGETING TECHNIQUES IN PRACTICE.

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