Managerial Accounting Tools for Business Decision-Making

Managerial Accounting teaches students the fundamental concepts of managerial accounting in a concise and easy to comprehend fashion. Stimulating review materials at the end of each section helps students develop their decision-making skills. Students are provided the tools and guidance to take more initiative in their learning, making them more engaged, more prepared, and more confident.

1 Managerial Accounting 1

Accounting Keeps Businesses Afloat 1

Managerial Accounting Basics 3

Introduction 3

Comparing Managerial and Financial Accounting 4

Management Functions and Organizational Structures 5

Management Functions 5

Organizational Structures 6

Business Ethics 7

Creating Proper Incentives 8

Code of Ethical Standards 9

Corporate Social Responsibility 10

Managerial Accounting Today 11

Service Industry Trends 12

Managerial Accounting Practices 13

Accounting Organizations and Professional Accounting Careers in Canada 16

2 Managerial Cost Concepts and Cost Behaviour Analysis 25

Mining Cost-Cutting Potential 25

Managerial Cost Concepts 27

Manufacturing Costs 27

Prime Costs and Conversion Costs 28

Product Versus Period Costs 29

Cost Concepts—A Review 29

Cost Behaviour Analysis 32

Variable Costs 32

Fixed Costs 33

Relevant Range 34

Mixed Costs 35

The High-Low Method of Classifying Costs 36

Manufacturing Costs in Financial Statements 39

Income Statement 39

Balance Sheet 41

3 Job-Order Cost Accounting 70

A Pressing Need to Calculate Costs 70

Cost Accounting Systems 72

Job-Order Cost Systems 72

Process Cost Systems 72

Job-Order Cost Flow 74

Accumulating Manufacturing Costs 75

Assigning Manufacturing Costs to Work in Process 77

Raw Materials Costs 78

Factory Labour Costs 80

Manufacturing Overhead Costs 82

Predetermined Overhead Rate 82

Accounting for Jobs Completed and Sold 85

Assigning Costs to Finished Goods 86

Assigning Costs to Cost of Goods Sold 86

Job-Order Costing for Service Companies 87

Summary of Job-Order Cost Flows 88

Advantages and Disadvantages of Job-Order Costing 89

Applied Manufacturing Overhead 90

Under-Applied or Over-Applied Manufacturing Overhead 91

4 Process Cost Accounting 120

Business in a Bottle 120

The Nature of Process Cost Systems 122

Process Costing for Manufacturing Companies 122

Process Costing for Service Companies 122

Similarities and Differences Between Job-Order Cost and Process Cost Systems 123

Operations Costing 124

The Flow and Assignment of Manufacturing Costs 126

Process Cost Flow and Assigning Costs 126

Assignment of Manufacturing Costs—Journal Entries 126

Equivalent Units 128

Weighted-Average Method 129

Refinements on the Weighted-Average Method 129

The Production Cost Report 131

Calculate the Physical Unit Flow (Step 1) 132

Calculate the Equivalent Units of Production (Step 2) 133

Calculate the Unit Production Costs (Step 3) 133

Prepare a Cost Reconciliation Schedule (Step 4) 134

Preparing the Production Cost Report 135

Equivalent Units and Production Cost Report— Sequential Process Setting 136

Appendix 4A: FIFO Method 138

Equivalent Units under FIFO 138

FIFO and Weighted-Average 144

5 Activity-Based Costing 174

The ABCs of Tracking Cost 174

Traditional Costing Versus Activity-Based Costing 175

Traditional Costing Systems 176

Illustration of a Traditional Costing System 176

The Need for a New Approach 176

Activity-Based Costing 177

Applying an Activity-Based Costing System 179

Identify and Classify Activities and Allocate Overhead to Cost Pools (Step 1) 180

Identify Cost Drivers (Step 2) 180

Calculate Overhead Rates (Step 3) 180

Assign Overhead Costs to Products (Step 4) 181

Unit Cost Comparison 182

Benefits and Limitations of Activity- Based Costing 184

Benefits of ABC 184

Some Limitations of ABC and Knowing When to Use ABC 188

Activity-Based Costing in Service Industries 189

Traditional Costing Example 189

Activity-Based Costing Example 190

6 Decision-Making: Cost–Volume–Profit 225

Not Much Room to Move on Price 225

Cost-Volume-Profit Analysis, Income Statement, and the Contribution Margin 227

Basic Components 227

Cost-Volume-Profit Income Statement 227

Contribution Margin per Unit 229

Contribution Margin Ratio 229

Break-Even Analysis 231

Mathematical Equation 232

Contribution Margin Technique 232

Graphic Presentation 233

Target Operating Income and the Margin of Safety 234

Target Operating Income before Tax 234

Target Operating Income after Tax 236

Margin of Safety 237

CVP and Changes in the Business Environment 238

Sales Mix and Break-Even Sales 240

Break-Even Sales in Units 241

Break-Even Sales in Dollars 242

Appendix 6A: Cost Structure and Operating Leverage 244

Effect on Contribution Margin Ratio 245

Effect on Break-Even Point 245

Effect on Margin of Safety Ratio 245

Operating Leverage 245

Degree of Operating Leverage 246

7 Incremental Analysis 275

Outsourcing Can Be Outstanding 275

Decision-Making and the Incremental Analysis Approach 277

Management’s Decision-Making Process 277

Incremental Analysis Approach 278

Special Orders 280

Make or Buy 282

Opportunity Cost 283

Sell or Process Further 285

Single-Product Case 285

Multiple-Product Case 286

Retain or Replace Equipment 288

Eliminate an Unprofitable Segment or Product 289

Allocate Limited Resources 291

8 Alternative Inventory Costing Methods: A Decision-Making Perspective 324

Getting to the “Meat” of Inventory Costing 325

Inventory Costing Methods 326

Illustration Comparing Absorption Costing and Variable Costing 326

Net Income Effects 328

Decision-Making Concerns 333

Performance Evaluation 333

Potential Advantages of Variable Costing 335

Appendix 8A: Other Inventory Costing Methods 336

Normal Costing 337

Throughput Costing 339

9 Pricing 370

A Clear Pricing Strategy 370

Pricing Goods for External Sales 371

Target Costing 372

Total Cost-Plus Pricing 374

Absorption Cost-Plus Pricing 377

Variable Cost-Plus Pricing 379

Pricing Services 381

Transfer Pricing for Internal Sales 384

Transfer Pricing—An Explanation 384

Transfer-Pricing Approaches 387

Effect of Outsourcing on Transfer Pricing 391

Transfers Between Divisions in Different Countries 391

10 Budgetary Planning 424

Budgeting for Smooth Skies 424

Budgeting Basics and the Master Budget 426

Budgets and Accounting 426

The Benefits of Budgeting 426

Essentials of Effective Budgeting 426

Length of the Budget Period 427

The Budgeting Process 427

Budgeting and Human Behaviour 427

Budgeting and Long-Range Planning 429

The Master Budget 429

Preparing the Sales, Production, and Direct Materials Budgets 430

Sales Budget 431

Production Budget 431

Direct Materials Budget 432

Preparing the Direct Labour, Manufacturing Overhead, and S&A Expense Budgets 434

Direct Labour Budget 435

Manufacturing Overhead Budget 435

Selling and Administrative Expenses Budget 436

Budgeted Income Statement 436

Preparing the Financial Budgets 438

Cash Budget 438

Budgeted Balance Sheet 441

Budgeting in Non-Manufacturing Companies 442

Merchandisers 443

Service Enterprises 443

Not-for-Profit Organizations 444

11 Budgetary Control and Responsibility Accounting 475

Keeping the Budget on Track 475

The Concept of Budgetary Control and Static Budget Reports 477

Budgetary Control 477

Static Budget Reports 478

Flexible Budgets 480

Why Flexible Budgets? 481

Developing the Flexible Budget 483

Flexible Budget—A Case Study 483

Flexible Budget Reports 485

Responsibility Accounting for Cost and Profit Centres 487

The Responsibility Accounting Concept 487

Controllable Versus Noncontrollable Revenues and Costs 488

Principles of Performance Evaluation 488

Responsibility Reporting System 490

Types of Responsibility Centres 492

Evaluating Performance in Investment Centres 495

Return on Investment (ROI) 495

Responsibility Report 496

Judgemental Factors in ROI 496

Improving ROI 497

Appendix 11A: Residual Income—Another Performance Measurement 500

Residual Income Compared with ROI 501

Residual Income Weakness 502

12 Standard Costs and Balanced Scorecard 534

Grading a University 534

Standards—Needs and Costs 536

Distinguishing Between Standards and Budgets 537

Setting Standard Costs 537

Analyzing and Reporting Variances from Standards 540

Direct Materials Variances 541

Causes of Materials Variances 543

Direct Labour and Manufacturing Overhead Variances 544

Direct Labour Variances 544

Manufacturing Overhead Variances 546

Variance Reports and the Balanced Scorecard 552

Reporting Variances 552

Income Statement Presentation of Variances 552

Balanced Scorecard 553

Appendix 12A: Standard Cost Accounting System 556

Journal Entries 557

Ledger Accounts 558

13 Planning for Capital Investments 590

Planning Big Projects Takes Energy 590

The Capital Budgeting Evaluation Process and the Cash Payback Technique 592

Cash Flow Information 593

Illustrative Data 593

Cash Payback Technique 594

Net Present Value Method 595

Equal Annual Cash Flows 596

Unequal Annual Cash Flows 597

Choosing a Discount Rate 597

Simplifying Assumptions 598

Comprehensive Example 599

Capital Budgeting Challenges 600

Intangible Benefits 600

Profitability Index for Mutually Exclusive Projects 602

Risk Analysis 603

Post-Audit of Investment Projects 603

Internal Rate of Return Method 604

Determining the Internal Rate of Return 605

Internal Rate of Return Versus Net Present Value 606

Annual Rate of Return Method 607

Annual Rate of Return Method: Pros and Cons 608

Appendix 13A: Time Value of Money 632

Company Index I-1

Subject Index I-3

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