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Managerial Accounting
Tools for Business Decision Making
Ninth Edition
JERRY J. WEYGANDT Ph D, CPA
University of Wisconsin—Madison
Madison, Wisconsin
PAUL D. KIMMEL Ph D, CPA
University of Wisconsin—Madison
Madison, Wisconsin
JILL E. MITCHELL MS, MEd, CIA
Northern Virginia Community College
Annandale, Virginia
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D E D I C AT E D T O
Our spouses, Enid, Merlynn, and Sean,
for their love, support, and encouragement.
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This book was set in 9.5/12 STIX Two Text by Lumina Datamatics, Inc.
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ISBN-13: 978-1-119-70955-8
The inside back cover will contain printing identification and country of origin if omitted from this page. In addition, if the ISBN on
the back cover differs from the ISBN on this page, the one on the back cover is correct.
Library of Congress Cataloging-in-Publication Data
Names: Weygandt, Jerry J., author. | Kimmel, Paul D., author. | Mitchell, Jill E., author.
Title: Managerial accounting : tools for business decision making / Jerry
J. Weygandt, PhD, CPA, University of Wisconsin-Madison Madison,
Wisconsin, Paul D. Kimmel, PhD, CPA, University of Wisconsin-Madison
Madison, Wisconsin, Jill E. Mitchell, MS, MEd, CIA,
Northern Virginia Community College Annandale, Virginia.
Description: Ninth edition. | Hoboken, NJ : Wiley, [2021] | Includes index.
Identifiers: LCCN 2020030561 (print) | LCCN 2020030562 (ebook) | ISBN
9781119709589 | ISBN 9781119754053 (adobe pdf) | ISBN
9781119709558 (epub)
Subjects: LCSH: Managerial accounting.
Classification: LCC HF5657.4 .W49 2021 (print) | LCC HF5657.4 (ebook) | DDC
658.15/11—dc23
LC record available at https://lccn.loc.gov/2020030561
LC ebook record available at https://lccn.loc.gov/2020030562
Printed in America.
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8
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6
5
4
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Brief Contents
Cost Concepts for Decision-Makers
1
Managerial Accounting 1-1
2
Job Order Costing
2-1
2A Job Order Costing (non-debit-and-credit approach)*
3
Process Costing 3-1
3A Process Costing (non-debit-and-credit approach)*
4
Activity-Based Costing 4-1
Decision-Making Concepts
5
Cost-Volume-Profit 5-1
6
Cost-Volume-Profit Analysis: Additional Issues 6-1
7
Incremental Analysis 7-1
8
Pricing 8-1
Planning and Control Concepts
9
Budgetary Planning 9-1
10
Budgetary Control and Responsibility Accounting 10-1
11
Standard Costs and Balanced Scorecard 11-1
12
Planning for Capital Investments 12-1
Performance Evaluation Concepts
13
Statement of Cash Flows 13-1
14
Financial Analysis: The Big Picture 14-1
AP P E N D I X A
Time Value of Money
A-1
CASES FOR MANAGEMENT DECISION MAKING *
COMPANY INDEX / SUBJECT INDEX
I-1
RAPID REVIEW: CHAPTER CONTENT
* Available in Wiley’s online course and Wiley Custom.
v
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From the Authors
Dear Student,
Why This Course? Remember your biology course in high school? Did you have one of those
“invisible man” models (or maybe something more high-tech than that) that gave you the opportunity to look “inside” the human body? This accounting course offers something similar.
To understand a business, you have to understand the financial insides of a business organization. A managerial accounting course will help you understand the essential financial components of businesses. Whether you are looking at a large multinational company like Apple
or Starbucks or a single-owner software consulting business or coffee shop, knowing the
fundamentals of managerial accounting will help you understand what
is happening. As an employee, a manager, an investor, a business owner,
“Whether you are looking at a large multinaor a director of your own personal finances—any of which roles you will
tional company like Apple or Starbucks or
have at some point in your life—you will make better decisions for having
a single-owner software consulting business
taken this course.
or coffee shop, knowing the fundamentals of
managerial accounting will help you underWhy This Text? Your instructor has chosen this text for you because of
stand what is happening.”
the authors’ trusted reputation. The authors have worked hard to provide
instructional material that is engaging, timely, and accurate.
How to Succeed? We’ve asked many students and many instructors whether there is a secret
for success in this course. The nearly unanimous answer turns out to be not much of a secret:
“Do the homework.” This is one course where doing is learning. The more time you spend on
the homework assignments—using the various tools that this text provides—the more likely
you are to learn the essential concepts, techniques, and methods of accounting.
Good luck in this course. We hope you enjoy the experience and that you put to good use
throughout a lifetime of success the knowledge you obtain in this course. We are sure you
will not be disappointed.
Jerry J. Weygandt
Paul D. Kimmel
Jill E. Mitchell
vi
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Author Commitment
J E R R Y J . W E YG A N D T, P h D, C PA , is
Arthur Andersen Alumni Emeritus Professor of Accounting at the University
of Wisconsin—Madison. He holds a Ph.D.
in ­accounting from the University of Illinois. ­A rticles by Professor Weygandt have
­appeared in The Accounting Review, Journal of Accounting Research, Accounting Horizons, Journal of Accountancy, and other
academic and professional journals. These
articles have examined such financial reporting issues as accounting for price-level
adjustments, pensions, convertible securities, stock option contracts, and ­interim
reports. Professor Weygandt is author of
other accounting and financial ­reporting
texts and is a member of the American
­Accounting Association, the ­A merican
Institute of Certified Public Accountants,
and the Wisconsin Society of Certified
Public ­Accountants. He has served on numerous committees of the American Accounting Association and as a member
of the editorial board of the ­Accounting
­Review; he also has served as President
and Secretary-Treasurer of the ­A merican
­Accounting Association. In addition, he has
been actively involved with the American­
Institute of Certified Public Accountants
and has been a member of the Accounting
Standards Executive Committee (AcSEC)
of that organization. He has served on the
FASB task force that ­examined the ­reporting
issues related to ­accounting for income taxes and served as a trustee of the Financial
Accounting Foundation. Professor Weygandt has received the Chancellor’s Award
for Excellence in Teaching and the Beta
Gamma Sigma Dean’s Teaching Award. He
is on the board of directors of M & I Bank of
Southern Wisconsin. He is the recipient of
the Wisconsin Institute of CPA’s Outstanding Educator’s Award and the Lifetime
Achievement Award. In 2001 he received
the American Accounting Association’s
Outstanding Educator Award.
PA U L D. K I M M E L , P h D, C PA , ­received
his bachelor’s degree from the University of
Minnesota and his doctorate in accounting
from the University of Wisconsin. He was an
Associate Professor at the University of
Wisconsin—Milwaukee for more than 25
years and is now a Senior Lecturer at the
University of Wisconsin—Madison. He has
public accounting experience with Deloitte
& Touche (Minneapolis). He was the recipient of the UWM School of Business Advisory Council Teaching Award and the Reggie
Taite Excellence in Teaching Award, and
a three-time winner of the Outstanding
Teaching Assistant Award at the University
of Wisconsin. He is also a recipient of the Elijah Watts Sells Award for Honorary Distinction for his results on the CPA exam. He is
a member of the American Accounting Association and the Institute of Management
Accountants and has published articles in
Accounting Review, Accounting ­Horizons,
Advances in Management Accounting, Managerial Finance, Issues in Accounting Education, and Journal of Accounting Education, as well as other journals. His research
interests include accounting for financial
instruments and innovation in accounting
education.
JILL E. MITCHELL, MS, MEd, CIA, is a Professor of Accounting at Northern Virginia Community College (NOVA), where she has taught
face-to-face, hybrid, and online courses since
2008. Since 2009, she has been an adjunct instructor at George Mason University (GMU).
She is a past president of the Washington,
D.C. Chapter of the Accounting and Financial
Women’s Alliance (AFWA), and she served
on the board of directors of the Virginia Society of CPAs (VSCPA). She is a member of the
American Accounting Association (AAA) and
the Institute of Internal Auditors. Jill serves
on the AAA Education Committee and is the
co-chair for the Conference on Teaching and
Learning in Accounting (CTLA). Prior to
joining the faculty at NOVA, Jill was a senior
auditor with Ernst & Young’s Business Risk
Services practice in Miami, Florida. She is a
certified internal auditor and earned an MS in
Accountancy from the University of Virginia
and a BBA in Management Information Systems from the University of Georgia honors
program. Recently, she earned an MEd in
Instructional Design Technology from GMU.
Jill is a recipient of the Outstanding Faculty
Award, the Commonwealth’s highest honor
for faculty of Virginia’s universities and colleges presented by the State Council of Higher Education for Virginia; the Virginia Community
College System Chancellor’s Award for Teaching Excellence; the AFWA’s Women Who
Count Award; the AAA Two-Year College
Educator of the Year Award; and the AAA/J.
Michael and Mary Anne Cook/Deloitte Foundation Prize, the foremost recognition of an
individual who consistently demonstrates the
attributes of a superior teacher in the discipline
of accounting.
vii
Corporate
Social
Responsibility
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New to This Edition: Data Analytics
The balanced scorecard attempts to take a broader, more inclusive view of corporate profitability measures. Many companies, however, have begun to evaluate not just corporate profitability but also corporate social responsibility.
• Corporate social responsibility considers a company’s efforts to employ sustainable business practices with regard to its employees, society, and the environment.
• This is sometimes referred to as the triple bottom line because it evaluates a company’s
performance with regard to people, planet, and profit.
The authors carefully considered how to thoughtfully and meaningfully integrate data ana• Recent reports indicate that nearly 80% of the 500 largest U.S. companies provide sustainlytics into the managerial accounting course, and are pleased to provide the following data
ability reports.
Managerial Accounting Today 1-21
analytics resources.
Make no mistake, these companies are still striving to maximize profits—in a competitive
Throughout this text, we offer many
examples
of how
successful
datamight recognize a few of the names
world,
they won’t
survive
long ifcompanies
they don’t.are
Inusing
fact, you
analytics. We also provide examples on
of one
analytical
tool, data
Dataofvisuala recent
list (published
byvisualizations.
Corporate Knights)
the 100 most sustainable companies in the
izations often help managers acquireworld.
a more
intuitive
understanding
of (1)Electric,
the relationships
Are
you surprised
that General
adidas, BMW, Coca-Cola, or Apple made
Real-world
examples
that illustrate
engaging
situations
in companies
are approach,
provided throughout
between variables and (2) business
trends.
end-of-chapter
homework
material
provides
the
list? The
These
companies
have
learned
that with
a long-term,
sustainable
they can
the
text.
opportunities to perform basic data analytics
andprofits
data visualizations
in selected
chapters.
maximize
while also acting
in the best
interest of their employees, their communities,
and the environment. In fact, a monetary bonus was provided by 87% of the companies on the
list to managers that met sustainability goals. At various points within this text, we discuss
Data Analytics Insight The
Waltwhere
Disney
Company
situations
real
companies use the very skills that you are learning to evaluate decisions
from a sustainable perspective, such as in the following Insight box.
Data Analytics in the Real World
Disney uses the MagicBand information to support daily
adjustments of operations as well as long-term planning. For
The Walt Disney Company makes
example, the company can use this information to monitor park
People, Planet, andfunProfit
Phantom
seem Insight
effortless at its
theme Tac
usage and subsequently encourage visitors to change their itinerparks, but there is a magic mountain
aries to different activities that will require a shorter wait time. If
Recently,
Bangladesh’s
textile
has seen some
signifiof data
collection going on behind
customers
are waiting
in line,
theyindustry
aren’t happy—and
they
also
People
Matter
cant improvements
in working
conditions
and uses
safetyofstandards.
As
the scenes. For example, Disney
aren’t
spending money.
Long-term
planning
MagicBand
Manyemploys
clothing
factoriesanalytics,
in developing
Brad Adams,include
Asia director
of Human
Rights Watch,
notes,menu
“The
behavioral
which
information
designing
new
attractions
and
updating
Paulbr/Getty Images
countries
are known
unsafeand
buildings,
Paulbr/Getty Images
(Dhaka)ingovernment
belatedly
to register unions, which is
uses data
to bothforpredict
influoptions
response tohas
supply
and begun
demand.
working
conditions,
and wage
and
an important first step, but it now needs to ensure that factory owners
ence customer behavior, inpoor
countless
ways.
Disney collects
the data
aabeele/Shutterstock.com
aabeele/Shutterstock.com
One
the While
ownerstheof
stop persecuting
their leaders
andDisney
actually
allow
them
function.”
through its “MagicBands”labor
worn violations.
by visitors to
theofparks.
Source:
Randerson112358,
“How
World
Uses
BigtoData,”
Phantom
Tac,
a
clothing
manufacturer
MagicBands provide visitors with many benefits (e.g., delivering
medium.com
(May
18, 2019).
Sources:
Jim
Yardley,
“Clothing
Brands
Sidestep
Blame
for
Safety
in Bangladesh,
did make
efforts
develop
business
customized
itineraries,
reducing
waittolines,
and sustainable
providing customer
Lapses,”
The
New
York
Times
Online
(December
30,
2013);
and
Palash
practices. This
owner,characters),
David Mayor,
provided
funding
for a trainrecognition
by Disney
these
bands are
also delivering
What
behavioral
analytics,
and
how does
DisneyFactories
use it to
Ghosh,is“Despite
Low Pay,
Poor Work
Conditions,
Garment
ing
program
for
female
workers.
He
also
developed
a
website
to
continual information to the company about the locations, activiminimize
lines
at its
theme parks?
(Answer
is available
Empowering
Millions
of Bangladeshi
Women,”
International
Businessat
educate customers about the workers’ conditions. But Phantom
ties,
eating habits, and purchases of Disney visitors.
the
end
of the
Times
(March
25,chapter.)
2014).
Tac also had to make a profit. Things got tight when one of its
customers canceled orders because Phantom Tac failed a social
What are some of the common problems for many clothing
compliance audit. The company had to quit funding the training
factories in developing countries? (Answer is available at
program and the website.
the end of the chapter.)
ACTION PLAN
DO IT! 4 Trends in Managerial Accounting
Using Data in Its Own World
Data Analytics and Decision-Making
• Develop a forward-
The text also provides numerous discussions on how managers are increasingly relying on
looking view, in order
data analytics to make decisions using accounting information.to advise and provide
Match the descriptions that follow with the corresponding terms.
Terms:
The Value of
Data Analytics
Descriptions:
information to various
members of the
1. ________ All activities associated with providing a a. Activity-based costing.
Companies have never had so much available data. In many companies,
virtually every aspect
organization.
b. Balanced scorecard.
product or performing a service.
of operations—the employees, the customers, even the manufacturing equipment—leaves a
• Understand current
Corporate
socialcan
responsibility.
2. ________ A method of allocating
overhead
based c.
data
trail. However,
while
“big data”
be impressive, it can also
be overwhelming.
business
trends and
on each product’s use of activities in making the d. Just-in-time (JIT) inventory.
issues.
product.
• Having all the data
in the
world
will not necessarily
e. Total
quality
management
(TQM). lead to better results.
3. ________ Systems implemented to•reduce
defects
The trick
is having
the
skills
and
know-how
to use the data in ways that result in more
f. Statement of Ethical Professional
in finished products with the goal of achieving zero
productive (and happier)
employees,
more
satisfied customers, and more profitable
Practice.
defects.
operations.
g. Value chain.
4. ________ A performance-measurement approach
that uses both financial and nonfinancial
It ismeasures,
therefore not surprising that one of the most rapidly growing areas of business today
tied to company objectives, to evaluate
is dataa company’s
analytics. Data analytics is the use of techniques, which often combine software and Managerial Accounti
operations in an integrated fashion.
statistics, to analyze data to make informed decisions.
5. ________ Inventory system in which
goods are this text, we offer many examples of how successful companies are using data
Throughout
manufactured or purchased just as
they are needed
analytics.
We also provide examples of one analytical tool, data visualizations. Data visualfor use or sale.
izations often help managers acquire a more intuitive understanding of (1) the relationships
6. ________ A company’s efforts tobetween
employ variables
sustain- and (2) business trends. The end-of-chapter homework material provides
able business practices with regard
to its employopportunities
to perform basic data analytics and data visualizations in selected chapters.
ees, society, and the environment.
viii
7. ________ A code of ethical standards developed by
Data Analytics
the Institute of Management Accountants.
Using Data in Its Own World
Solution
1. g
2. a
Insight The Walt Disney Company
3. e
4. b
5. d
6. c
7. f
The Walt Disney Company makes
Disney uses the MagicBand information to
adjustments of operations as well as long-term p
example, the company can use this information to
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5-46 CHAPTE R 5
N E W TO T H I S E D I T I O N : DATA A NA LYTICS
Cost-Volume-Profit
Corporation
Data Analytics Waterways
in Action
(Note: This is a continuation of the Waterways case from Chapters 1–4.)
WC5 The Vice President for Sales and Marketing at Waterways Corporation is planning for producMost chapters offer Data Analytics
in Action problems, to offer students the opportunity to see
tion needs to meet sales demand in the coming year. He is also trying to determine how the company’s
profits mightto
be help
increased
in the realistic
coming year. business
This case asksproblems.
you to use cost-volume-profit
concepts
how they might use data analytics
solve
Excel templates
to help Waterways understand contribution margins of some of its products and decide whether to
for each of the Data Analytics
in
Action
problems
provide
students
a
framework
for
solving
mass-produce any of them.
the problem. Data Analytics
in Excel videos provide students with step-by-step guidance in
Go to WileyPLUS for complete case details and instructions.
performing the Excel skills they will need to solve these problems.
Data Analytics in Action
Using Data Visualization to Analyze Costs
Excel
DA5.1 Data visualization can be used to compare options.
Example: Consider the Management Insight box “Are Robotic Workers More Humane?” presented
in the chapter. Data analytics can help Kroger determine if using robots in its warehouse would be a
cost-effective decision. Consider the following chart, which compares income effects in both a manual
and a robotic system. When using human labor in a manual system, we see that labor costs are substantial. When a robotic system is utilized, we see that depreciation is a larger cost item, and labor is
much less.
Income Effects of Manual and Robotic Systems
Net Operating Income
Other Fixed Costs
Depreciation
Contribution Margin
Variable Selling Costs
Labor in Warehouse
Cost of Groceries Sold
Revenue
0
200,000
400,000
600,000
800,000
$1,000,000
(in millions)
Manual system
Robotic system
If we assume that revenues will increase 40% due to an increased sales volume, what effect will
we see on net operating income? As shown in the following chart, the increase in net operating income
is larger in an automated system. This is because the labor increase was a smaller dollar amount than
the respective increase in a manual system, coupled with no increase in total fixed costs. This effect is
often referred to as operating leverage, which is discussed further in Chapter 6.
Income Effects of Manual and Robotic Systems
with 40% Sales Volume Increase
Net Operating Income
Other Fixed Costs
Depreciation
Contribution Margin
Variable Selling Costs
Labor in Warehouse
Cost of Groceries Sold
Revenue
0
200,000
400,000
600,000
800,000
1,000,000 1,200,000 $1,400,000
(in millions)
Manual system
Robotic system
Expand Your Critical Thinking
For this case, you will use an approach similar to that used in the example just presented. You will
help a fast food restaurant evaluate the benefits of installing a kiosk in the lobby to automate customer
orders, thus reducing the need for cashiers. This case requires you to compare income statement data
for traditional and digital ordering for the restaurant, and then create and analyze a bar chart.
Go to WileyPLUS for complete case details and instructions.
Data Analytics at HydroHappy
Data Visualization Homework Assignments
DA5.2 HydroHappy management wants to examine its largest non–value-added cost, selling costs, to
see if it can identify a better cost driver in an effort to lower its total selling costs. The company currently uses the number of sales calls as its cost driver. For this case, you will generate scatter charts, as
well as use Excel’s Slope and Intercept functions, to help HydroHappy determine the best cost driver
visualizations
accompanied by questions are available with most
for selling costs.
PowerBI and Tableau
chapters. PowerBI and Tableau
visualizations
allow
to interpret visualizations and
Go to WileyPLUS
for complete case
details students
and instructions.
think critically about data.
Expand Your Critical Thinking
Data AnalyticsDecision-Making
ModuleAcross the Organization
Creative Ideas Company has decided to introduce a new product. The new product can be manuAn accounting-specificCT5.1
data
analytics module with interactive lessons, case studies,
factured by either a capital-intensive method or a labor-intensive method. The manufacturing method will
not affectonline
the qualitycourse.
of the product.
The estimated
manufacturing
by the two methods
areindustry-­
as follows.
and videos is part of the Wiley
The
module
has beencosts
prepared
using
CapitalLaborvalidated content to help students develop the professional
competencies
needed
for the
Intensive
Intensive
changing workforce.
Direct materials
$5 per unit
$5.50 per unit
Direct labor
Variable overhead
$6 per unit
$3 per unit
$8.00 per unit
$4.50 per unit
Excel
5-47
ix
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New to This Edition:
Chapter-by-Chapter Changes
Chapter 1: Managerial Accounting
• NEW section on the value of data analytics in helping
managers understand the relationship between CVP variables and business trends.
• NEW Data Analytics Insight box on how Disney uses its
MagicBands as a source of data to analyze the behavior
of its customers.
• Expanded discussion within “Manufacturing Costs” section to ensure student understanding of raw materials
versus direct materials as well as what is considered to
be manufacturing overhead. Also updated Illustration 1.4
(assignment of costs to cost categories) to include an explanation for each cost classification, again to ensure student understanding.
• Moved up discussion of balance sheet (before income
statement) in “Manufacturing Costs in Financial Statements” section for more logical presentation of topics.
• Updated each “Managerial Accounting Today” section
subtopic for the latest information on service industries,
lean manufacturing, balanced scorecard, ethics, and social responsibility.
• NEW Data Analytics in Action problems allow students
to perform basic data analytics and data visualization.
• NEW business and markets news videos from Bloomberg
that reference real-world news and decision-making related to accounting concepts. With accompanying multiplechoice and discussion questions.
Chapter 2: Job Order Costing
• NEW Data Analytics Insight box on how Autodesk uses
data analytics to improve its software and profitability.
• More discussion on assigning raw materials costs and
assigning factory labor costs, to improve student understanding.
• Updated time ticket discussion for more recent process
involving scanning of employee identification codes.
• NEW Data Analytics in Action problems allow students
to perform basic data analytics and data visualization.
Chapter 3: Process Costing
x
the “Transfer to Next Department” section, have added
explanation of what department transfers entail.
Chapter 4: Activity-Based Costing
• NEW data analytics discussion added to section of identifying cost drivers.
• NEW Data Analytics Insight box on how companies such
as GE and UPS use data analytics to help reduce non–
value-added activities.
• NEW section (“Assigning Nonmanufacturing Overhead
Costs”) and income statement presentations, to help highlight differences between traditional costing and activitybased costing.
Chapter 5: Cost-Volume-Profit
• NEW discussion on CVP and the use of data analytics,
using DHL Express as an example.
• NEW expanded highlighted equations, to show more
detailed calculations for improved understanding.
• NEW expanded explanation of what CVP analysis is.
• NEW illustration and discussion on how a GAAP income
statement differs from a CVP income statement.
• NEW discussion on the variable cost ratio.
• Updated Service Company Insight to feature more recent
information on the business of music promotion (and
using Drake as an example instead of the Rolling Stones)
and computing the break-even point.
• Enhanced end-of-chapter assignments by offering
students more opportunities to prepare CVP income
statements, as well as a new problem on regression
analysis.
• NEW Data Analytics in Action problems allow students to perform basic data analytics and data visualization.
• NEW business and markets news videos from Bloomberg
that reference real-world news and decision-making related to accounting concepts. With accompanying multiplechoice and discussion questions.
Chapter 6: Cost-Volume-Profit Analysis: Additional
Issues
• Production cost report now has the “Cost Reconciliation
Schedule” section to include costs to be accounted for,
not just costs accounted for.
• NEW Data Analytics Insight box on how Caesars Entertainment uses data analytics to determine how to maximize profits from its customers.
• Throughout, have carefully scrutinized discussion to
ensure complete student understanding. For example, in
• NEW Data Analytics in Action problems allow students
to perform basic data analytics and data visualization.
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N E W TO T H I S E D I T I O N : C H A PT E R- BY- C H A PT ER C HA NGES
Chapter 7: Incremental Analysis
• Highlighted the decision rules, as well as additional factors to consider, for incremental analysis decisions.
• NEW business and markets news videos from Bloomberg
that reference real-world news and decision-making related to accounting concepts. With accompanying multiplechoice and discussion questions.
Chapter 8: Pricing
• NEW Data Analytics Insight box on how Big Data
Pricing helps customers use data analytics to improve
dynamic pricing practices.
• NEW Data Analytics in Action problem allows students
to perform basic data analytics and data visualization.
• NEW Data Analytics in Action problems allow students
to perform basic data analytics and data visualization.
Chapter 9: Budgetary Planning
• NEW Data Analytics Insight box on how Dickey’s Barbecue Pit uses data analytics to improve restaurant sales
performance.
• NEW Data Analytics in Action problem allows students
to perform basic data analytics and data visualization.
• NEW business and markets news videos from Bloomberg
that reference real-world news and decision-making related to accounting concepts. With accompanying multiplechoice and discussion questions.
Chapter 10: Budgetary Control and Responsibility
Accounting
• NEW Data Analytics Insight boxes on rolling forecasts
and zero-based budgeting.
• Updated section on “Judgmental Factors in ROI” with
“Alternative Measures of ROI Inputs” for more precise
discussion and improved student understanding.
• NEW Data Analytics in Action problems allow students
to perform basic data analytics and data visualization.
• NEW business and markets news videos from Bloomberg
that reference real-world news and decision-making related to accounting concepts. With accompanying multiplechoice and discussion questions.
Chapter 11: Standard Costs and Balanced Scorecard
• NEW Data Analytics Insight box on how manufacturing
companies are using technology such as 5G cellular to
improve the amount and speed of data collection to improve operations.
xi
• NEW highlighted applications of determining standard
costs in “A Case Study” section, for improved student understanding.
• NEW Data Analytics in Action problem allows students
to perform basic data analytics and data visualization.
• NEW business and markets news videos from Bloomberg
that reference real-world news and decision-making related to accounting concepts. With accompanying multiplechoice and discussion questions.
Chapter 12: Planning for Capital Investments
• NEW Data Analytics Insight box on how Electronic Arts
uses data from its current online video games to help it
develop future products.
• Improved illustration showing computation of cash payback period by including detailed steps and computations.
• NEW Management Insight box on 5G and how it presents
a risky investment to telecom companies.
• NEW Data Analytics in Action problems allow students
to perform basic data analytics and data visualization.
• NEW business and markets news videos from Bloomberg
that reference real-world news and decision-making related to accounting concepts. With accompanying multiplechoice and discussion questions.
Chapter 13: Statement of Cash Flows
• Added more T-accounts and journal entries to increase
understandability of preparing the statement of cash
flows using the indirect method.
• Used 2019 Apple financial statements for example
of how to analyze the statement of cash flows using
free cash flow calculation, for increased student engagement.
Chapter 14: Financial Analysis: The Big Picture
• NEW section on how data analytics can assist in improving valuation models.
• NEW presentation of discontinued operations on the income statement (previously on the statement of comprehensive income) as well as discussion and format of the
statement of comprehensive income.
• NEW business and markets news videos from Bloomberg
that reference real-world news and decision-making related to accounting concepts. With accompanying multiplechoice and discussion questions.
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Proven Pedagogical Features
Why do we have a photo of kayaks on our cover? Our text opens with a story about Current
Designs kayaks, and each chapter contains a case that illustrates how managerial accounting
can help in the kayak production process. The kayaks thus represent areas of active learning,
of learning that’s best accomplished through full engagement, commitment, and practice.
In this new edition, all content has been carefully reviewed and revised to ensure
maximum student understanding. At the same time, the time-tested features that have
proven to be of most help to students have been retained, such as the following.
Infographic Learning
C H A PT E R 5
Cost-Volume-Profit
Over half of the text is visual, providing students alternative ways of learning about accounting.
Components of CVP analysis
ILLUSTRATION 5.10
Cost (per unit)
Sales
Sales
$
$
Volume or level
Raw materials,
variable labor,
etc.
Cost
5-12
Utilities, taxes,
depreciation,
etc.
$
Cost Behavior Analysis
Units
5-5
Units
Total fixed
Unit selling
a per unit basis, the cost of rent declines as activity
increases,
Unit variable
costs as part (b) of IllusSales mix
of activity (quantity)
costs
price
tration 5.2 shows. At 2,000 units, the unit cost per cell phone is $5 ($10,000 ÷ 2,000).
When Damon produces 10,000 cell phones, the unit cost of the rent is only $1 per phone
($10,000 ÷ 10,000).
3. Changes in activity are the only factors that affect costs.
The trend for many manufacturers is to have more fixed costs and fewer variable costs.
4. All units produced are sold.
This trend is the result of increased use of automation and less use of employee direct labor.
Real-world
examples,
which
illustrate
situations
in companies,
are provided
When (fixed
more
than
type ofwhereas
productdirect
isengaging
sold,
the costs
sales mix will
remain constant.
That
As a result, depreciation and rent5.charges
costs)one
increase,
labor
throughout
the text. that
Answers
to
the critical
thinking
questions
are
now
available
atSales
the end
is,
the
percentage
each
product
represents
of
total
sales
will
stay
the
same.
(variable costs) decrease.
of mix
eachcomplicates
chapter. CVP analysis because different products will have different cost relationships. In this chapter, we assume a single product. In Chapter 6, however, we examine the
sales mix more closely.
Real-World Decision-Making
People, Planet, and Profit Insight BrightFarms
When these assumptions are not valid, the CVP analysis may be inaccurate.
Soil erosion is a non-issue since plants are grown hydroponically
(in a solution of water and minerals), and land requirements
The United Nations’ Food and Agriculare reduced because of vertical structures. But, some fixed
ture Organization estimates that by 2050,
costs are higher. First, there is the cost of the building. Also,
roughly 70% of people will live in cities. This
multistory buildings require artificial lighting for plants on
so to
important
management often wants this information
means thatBecause
more foodCVP
will is
need
be hauled for decision-making,
lower floors.
reported
a cost-volume-profit
(CVP)
income
statement
use.already
farther to get
it to theinconsumer.
To address
Rooftop greenhouses on format
existing for
cityinternal
structures
the lack of farmable land and reduce the
appear financially viable. For example, a 15,000 square-foot roof• The CVP
income
statement
classifies
costs as variable or fixed and computes a contribucost of transporting
produce,
some
comtop greenhouse in Brooklyn already produces roughly 30 tons of
tion
margin.
panies, such as New York-based Brightvegetables per year for local residents.
Farms, are •building
urban greenhouses.
Contribution
margin (CM) is the amount of revenue remaining after deducting variBrightFarms’ mission
is “to grow
food instated
the both
Sources:
Farming:
Does
Stack
Up?” The Economist
able costs.
It is often
as a “Vertical
total amount
and
on Ita Really
per unit
basis.
same communities where it’s consumed.”
(December 9, 2010); Jane Black, “BrightFarms Idea: Greenhouses
iStock.com/Jani
Agatha Koroglu/Bryson
In doing so, theWe
company
says itElectronics
uses 80% Company
That Cut Short
the Path from
Plantincome
to Grocery
Shelf,” Theand
Washington
use Vargo
to illustrate
a CVP
statement
to conShutterstock.com
less water, 90%
less
land,
and
95%
less
shipPost
(May 7, 2013);
BrightFarms.com
(2019).
trast it with an income statement
reported
underand
generally
accepted
accounting principles
ping fuel than long-distance, field-grown produce.
(GAAP). Vargo Electronics produces cell phones. Illustration 5.11 presents relevant data for
This sounds great, but do the numbers work? Some
What are some of the variable and fixed costs that are
the cell phones sold by this company in June 2022.
variable costs are reduced. For example, the use of pesticides,
impacted by hydroponic farming? (Answer is available at
herbicides, fuel costs for shipping, and water are all reduced.
the end of the chapter.)
Gardens in the Sky
CVP Income Statement
ILLUSTRATION 5.11
Selling and cost data for
Vargo
xii Electronics
Unit selling price per cell phone
Unit variable costs
Direct materials
$185
Direct labor
100
In Illustration 5.1 part (a), a straight line is drawnSales
throughout
entire range of the activity
personnelthe
commissions
15
Relevant Range
$500
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by Email at discountsmtb@hotmail.com
drawing a vertical line from the break-even point to the horizontal axis. For the cell phones,
the break-even point is $500,000 of sales, or 1,000 units.
sales
PROV At
E N this
PE DAG
O Glevel,
I C A LVargo
FEATUwill
REScover
xiii
costs but make no profit.
DO IT! Exercises
The CVP graph also shows both the net income and net loss areas. Thus, the amount of net
income or net loss at each level of sales can be derived from the sales and total-cost lines.
DO IT! Exercises in the body of the text prompt
to stopbecause
and review
key concepts.
They
A CVPstudents
graph is useful
the effects
of a change
in any component in the CVP analysis
be quickly
seen. Foras
example,
10% increase
in solution.
the unit selling price will change the location
outline the Action Plan necessary to can
complete
the exercise
well as ashow
a detailed
of the sales line. Likewise, the effects on total costs of wage increases can be quickly observed.
DO IT! 4
ACTION PLAN
• Apply the profit
equation: Sales −
Variable costs − Fixed
costs = Net income.
• Apply the break-even
equation: Fixed costs ÷
Unit contribution
margin = Break-even
point in sales units.
Break-Even Analysis
Lombardi Company has a unit selling price of $400, unit variable costs of $240, and fixed costs
of $180,000. Compute the break-even point in sales units using (a) a mathematical equation and
(b) unit contribution margin.
Solution
a. The equation is $400Q − $240Q − $180,000 = $0; ($400Q − $240Q) = $180,000. The breakeven point in sales units is 1,125.
b. The unit contribution margin is $160 ($400 − $240). The calculation therefore is
Using the Decision Tools 5-23
$180,000 ÷ $160, and the break-even
point in sales units is 1,125.
exercise
material:
BE5.8,
BE5.9, DO
5.4, E5.8,
DO IT! 5 Related
Break-Even
Point,
Margin
of Safety,
andIT!
Target
NetE5.9, E5.10, E5.11, E5.12, and E5.13.
Income
ACTION PLAN
• Apply the equation for
the break-even point in
sales dollars.
• Apply the equations for
the margin of safety in
dollars and the margin
of safety ratio.
Zootsuit Inc. makes travel bags that sell for $56 each. For the coming year, management expects
fixed costs to total $320,000 and variable costs to be $42 per unit. Compute the following: (a) breakeven point in sales dollars using the contribution margin (CM) ratio; (b) the margin of safety and
margin of safety ratio assuming actual sales are $1,382,400; and (c) the sales dollars required to
earn net income of $410,000.
Target Net Income and Margin of Safety
Decision Tools
• Apply the equation
for the sales dollars
to achieve target net
income.
Solution
a. Contribution margin ratio = [($56 − $42) ÷ $56] = 25%
Accounting concepts that Break-even
are useful
for
management
are highlighted
EARN
I NG
O÷BJ
CTI VE 5
point inLsales
dollars
=
$320,000
25% E
= decision-making
$1,280,000
b. Margin of of
safetyDecision
= $1,382,400 −Tools
$1,280,000
= $102,400
throughout the text. A summary
is
included
in
each
chapter
well
as a and determine margin
Determine the sales required to earn targetasnet
income
Margin of safety ratio = $102,400 ÷ $1,382,400 = 7.4%
practice exercise and solution
called
Using
the
Decision
Tools.
c. Sales dollars = ($320,000
+ $410,000) ÷ 25% = $2,920,000
of safety.
Related exercise material: BE5.10,
BE5.11,
5.5, E5.14, E5.15, E5.16, and E5.17.
5-24
C HABE5.12,
PTE R DO
5 IT!
Cost-Volume-Profit
USING THE DECIS ION TOOLS
Amazon.com
Target Net Income
Solution
a. Sales
Less:
Variable costs (20,000 keyboards × $15)
Fixed costs
Operating income
Amazon.com faces many situations where it needs to apply the decision tools presented in this
chapter, such as calculating the break-even point to determine a product’s profitability. Amazon’s
dominance of the online retail space, selling other company’s products, is well known. But not
everyone may realize that Amazon also sells its own private-label electronics, including USB
cables, mice, keyboards, and audio cables, under the brand name AmazonBasics. Assume that
Amazon’s management was provided with the following information regarding the production
and sales of Bluetooth keyboards for tablet computers for 2022.
$500,000
300,000
Rather than simply striving to “breaking even,” management usually
sets an income objective
135,000
$ 65,000
often called target net income. It then determines the sales necessary
to achieve this speciper keyboard
$25
fied level of income by using one b.ofSelling
the price
three
approaches discussed
earlier.
Cost Schedules
Variable costs
Direct labor per keyboard
Direct materials per keyboard
Variable overhead per keyboard
Variable cost per keyboard
Mathematical Equation
Fixed costs (per year)
Manufacturing
Selling
Administrative
Total
fixed costs
ILLUSTRATION 5.24
Selling price per keyboard
Equation for sales
to meet
Sales, 2022 (20,000 keyboards)
target net income
Instructions
$ 8.00
4.00
3.00
$15.00
Variable cost per keyboard
15
Unit contribution margin
$10
c. Fixed costs ÷ Unit contribution margin = Break-even point in sales units: $135,000 ÷ $10 =
13,500 units
d. Fixed costs ÷ Contribution margin ratio = Break-even point in sales dollars: $145,000* ÷
We know that at the break-even point
no profit or loss results for the company. By adding an
40%** = $362,500
amount for target net income to the
same
basic equation, we obtain
*Current
fixed costs
$135,000 the equation shown in
Additional advertising expense
10,000
Illustration
5.24
for
determining
required
sales.
$ 25,000
Revised fixed costs
$145,000
40,000
70,000
$135,000
$25.00
$500,000
**Unit contribution margin remains $10, as unit variable cost and unit selling price did not change.
Contribution margin ratio = Unit contribution margin ÷ Unit selling price: 40% = $10 ÷ $25
Sales
−
Fixed
Target Net
e.Variable
Sales = (Fixed costs + Target
net income) ÷ Contribution
margin ratio
−
$525,000
Costs= ($145,000 + $65,000)
Costs÷ 40%
=
Income
Recall that once the break-even point has been reached so that fixed costs are covered, each
Appendix
5A increases
Regression
additional
unit sold
net incomeAnalysis
by the amount of the unit contribution margin. We can
b. What is the unit contribution margin for 2022?
rewrite the equation with contribution margin (sales minus variable costs) on the left-hand side,
c. What is the break-even point in sales units for 2022?
and
target
the
right.
that target net income is $120,000
LEA RNon
IN G
OBJ
ECT IVAssuming
E *6
d. Assume that management set the sales target for the
yearfixed
2023 at costs
a level ofand
$550,000
(22,000net income
keyboards at the same unit selling price). Amazon’s
believes that to attain
Apply regression
analysis
to determine
theis
components
of mixed
costs.
formanagement
Vargo Electronics,
thethecomputation
of required
sales
in units
as shown
in Illustration
5.25.
(Ignore any income tax considerations.)
a. What is the operating income for 2022?
sales target in 2023, the company must incur an additional selling expense of $10,000 for advertising in 2023, with all other unit variable costs and fixed costs remaining constant. What will
be the break-even point in sales dollars for 2023 if the company spends the additional $10,000?
e. If the company spends the additional $10,000 for advertising in 2023 and unit variable costs,
unit selling price, and all other fixed costs remain at 2022 levels, what is the sales level in
dollars required to equal 2022 operating income?
The high-low method is often used to estimate fixed and variable costs for a mixed-cost situation.
• An advantage of the high-low method is that it is easy to apply.
• But, how accurate and reliable is the estimated cost equation that it produces?
For example, consider the example shown in Illustration 5A.1, which indicates the cost equation line produced by the high-low method for Metro Transit Company’s maintenance costs.
How well does the high-low method represent the relationship between miles driven and total
cost? This line is close to nearly all of the data points. Therefore, in this case, the high-low
method provides a cost equation that is a very good fit for this data set. It identifies fixed and
variable costs in an accurate and reliable way.
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xiv
PROVE N PE DAGO GICAL F EATU R ES
Review and Practice
Practice Brief Exercises
5-31
Each
chapter concludes with a Review and Practice section which fixed
includes
a review of learncosts added, (c) needs variable costs added, and (d) there is a
10. c. Fixed costs ÷ Contribution margin ratio = Break-even point in
ingsales
objectives,
Decision
Tools
review,
key
terms
glossary,
practice
multiple-choice
correct answer givenquestions
(b).
dollars. Solving for fixed costs, (200,000 × $4) × .25 = $200,000,
with
annotated
solutions,
practice
brief
exercises
with
solutions,
practice
exercises
with
solunot (a) $100,000, (b) $160,000, or (d) $300,000.
13. a. Margin
of safety
is computed
as Actual sales − Break-even point
tions,
and
a
practice
problem
with
a
solution.
in sales dollars. Therefore, choices (b) Contribution margin − Fixed
11. c. If Brownstone’s sales revenue is $100 greater than its breakeven sales dollars, its net income will be $30 or ($100 × 30%), not (a)
5-28 CH APTER 5 Cost-Volume-Profit
$100 or (b) $70. Choice (d) is incorrect because net income can be
determined without knowing fixed costs.
12. b. The correct equation is Sales = Variable costs + Fixed costs +
Target net income. The other choices are incorrect because (a) needs
Review and Practice
costs, (c) Break-even sales − Variable costs, and (d) Actual sales −
Contribution margin are incorrect.
14. b. The margin of safety ratio is computed by dividing the margin
of safety in dollars of $180,000 ($600,000 − $420,000) by actual sales
of $600,000. The result is 30% ($180,000 ÷ $600,000), not (a) 25%,
(c) 33 _13 %, or (d) 45%.
LearningBrief
Objectives
Review
Practice
Exercises
Determine variable- and fixed-cost
1. (LO 2) Benji Company accumulates the following data concerning a mixed cost, using miles as the
4 Compute the break-even point
1 Explain
usingusing
three
components
theapproaches.
high-low method.
activity
level. variable, fixed, and mixed costs and the
relevant range.
Miles Driven
Total Cost
Miles Driven
Total Cost
At the break-even point, sales revenue equals total costs, resulting in a
January
7,500
$20,000
March
8,500
net income of $22,000
zero. The break-even point can be (a) computed from a
Variable costs are costs that vary in total directly and proportionately
February
8,200
21,100
April
8,300
21,750 (b) computed by using a contribution margin
mathematical equation,
with changes in the activity index. Fixed costs are costs that remain
technique,
and
(c) derived from a CVP graph.
the
same inthe
total
regardless ofand
changes
in the
activity index.
Compute
variable-cost
fixed-cost
components
using the high-low method.
The relevant range is the range of activity in which a company
expects to operate during a year. It is important in CVP analysis
5 Determine the sales required to earn target net
because
the behavior of costs is assumed to be linear throughout the
Solution
income and determine margin of safety.
relevant range.
1. Mixed costs change in total but not proportionately with changes
The general equation for required sales is Sales − Variable costs −
in theHigh
activity level. For purposes
mixed costs must
Low of CVP analysis,
Difference
Fixed costs = Target net income. Two other equations are (1) Sales in
be classified into their fixed and variable components.
$22,000
−
$20,000
=
$2,000
units = (Fixed costs + Target net income) ÷ Unit contribution margin,
8,500
−
7,500
=
1,000
and (2) Sales dollars = (Fixed costs + Target net income) ÷ Contribu2 Apply the high-low method to determine the
tion margin ratio.
Unit variableof
costs
per mile
= $2,000 ÷ 1,000 = $2.00.
components
mixed
costs.
Margin of safety is the difference between actual or expected
High
Low
sales and sales at the break-even point. The equations for margin of
Total cost
$22,000
$20,000 safety metrics are (1) Actual (or expected) sales − Break-even sales
Determine the unit variable costs by dividing the change in total costs
Less: Variable costs
= Margin of safety in dollars, and (2) Margin of safety in dollars ÷
at the highest and lowest levels of activity by the difference in activ8,500 × $2.00
17,000
Actual (expected) sales = Margin of safety ratio.
ity at those levels. Then, determine fixed costs by subtracting total
15,000
7,500 × $2.00
variable costs from the amount of total costs at either the highest or
Total
fixed
costs
$ 5,000
$ 5,000
lowest
level
of activity.
*6 Apply regression analysis to determine the
components of mixed costs.
Mixed cost is $5,000 plus $2.00 per mile.
3 Prepare a CVP income statement to determine
contribution margin.
2. (LO 3) Determine the missing amounts.
Unit Selling
Unit Variable
Unit Contribution
The five components of CVP analysis are (1) volume or level of activPrice
Costs
Margin
ity (quantity), (2) unit selling price, (3) unit variable costs, (4) total
$800
$520
(a) amount of
fixed costs, and (5) sales mix. Contribution margin is the
500
(c)
$200
revenue remaining after deducting variable costs. It is identified in a
(e)
(f)
450
CVP income statement, which classifies costs as variable or fixed. It
can be expressed as a total amount, as a per unit amount, or as a ratio.
The high-low method provides a quick
estimate
ofamounts
the costforequation
Determine
missing
contribution
margin.
for a mixed cost. However, the high-low
method
is based on only the
Contribution Margin
highest and lowest data points. Regression analysis provides an estiRatio
mate of the cost equation based on all data points. The cost equation
line that (b)
results from regression analysis minimizes the sum of the
(d)
(squared) distances of all of the data points from the cost equation
45%
line. Computer programs such as Excel enable easy estimation of the
cost equation with regression.
Solution
2. a. ($800 − $520) = $280
b. ($280 ÷ $800) = 35%
d. ($200 ÷ $500) = 40%
c. ($500 −
$200) =Review
$300
Decision
Tools
e. ($450 ÷ 45%) = $1,000
f. ($1,000 − $450) = $550
3. (LO 3) Kitty Cora makes and sells biscuit batter by the batch. The unit selling price is $10 per batch.
The following data pertain to the month ended June 30, 2022.
Decision Checkpoints
Info Needed for Decision
Tool to Use for Decision
What was the contribution
toward fixed costs and net
income from each unit sold?
Fixed costs
$ 75,000
Selling price per unit and unit
Unit
Variable costs
300,000
variable costs
contribution
Net income
125,000
margin
What would be the increase
Unit contribution margin and
Contribution
=
Unit
selling
price
Unit
−
Unit
variable
cost
Unit
Prepare CVP income statement.
How to Evaluate Results
Every unit sold will increase
net income by the contribution
margin.
Every dollar of sales will
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Engaging Digital Tools
Digital study tools in Wiley’s online course include the following.
Real-World Company Videos
Real-world company videos feature both small businesses and larger companies to help
students apply content and see how business owners apply concepts from the text in the real
world. New to this edition for Chapters 1, 5, 7, 9, 10, 11, 12, and 14 are news videos from
Bloomberg that reference real-world news and decision-making related to accounting concepts. With accompanying multiple-choice and discussion questions
Source: YouTube.
Solution Walkthrough Videos
Solution Walkthrough Videos are available as question assistance and to help students develop problem-solving techniques. These videos walk students through solutions step-by-step
and are based on the most regularly assigned exercises and problems in the text.
Source: YouTube.
xv
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xvi
ENGAGING DIGITA L TOOLS
Interactive Tutorials
Interactive tutorials are voice-guided reviews of topics in each learning objective. Checkpoints in the tutorials require students to review and solve simple self-assessment exercises.
Gradable Excel Questions
Gradable Excel questions for each chapter provide students an opportunity to practice Excel
skills in the context of solving accounting problems.
Data Visualization Homework Assignments
PowerBI and Tableau visualizations accompanied by questions are available with most
chapters. PowerBI and Tableau visualizations allow students to interpret visualizations and
think critically about data.
In addition, other learning opportunities in Wiley’s online course include the following.
• Accounting-Specific Data Analytics Module offers interactive lessons, case studies,
and videos. The module has been prepared using industry-validated content to help
students develop the professional competencies needed for the changing workforce.
• Waterways Corporation is a continuing case that spans across chapters and offers
students the opportunity to see how a small business might use managerial accounting
to operate effectively.
• Wiley Accounting Updates (wileyaccountingupdates.com) provide faculty and students with weekly curated news articles and suggested discussion questions.
• Flashcards and Crossword Puzzles help students study and master basic vocabulary
and concepts.
• Student Practice quickly and effectively assesses student understanding of the material
they have just covered.
• Adaptive Practice helps students quickly understand what they know and what they
do not know, and provides opportunities for practice to effectively prepare for class or
quizzes and exams.
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Contents
1 Managerial Accounting
1-1
Just Add Water . . . and Paddle: Current Designs 1-1
Managerial Accounting Basics 1-3
Comparing Managerial and Financial Accounting 1-3
Management Functions 1-4
Organizational Structure 1-5
Managerial Cost Concepts 1-7
Manufacturing Costs 1-8
Product versus Period Costs 1-9
Illustration of Cost Concepts 1-10
Manufacturing Costs in Financial Statements 1-12
Balance Sheet 1-12
Income Statement 1-13
Cost of Goods Manufactured 1-14
Cost of Goods Manufactured Schedule 1-15
Managerial Accounting Today 1-16
Service Industries 1-16
Focus on the Value Chain 1-17
Balanced Scorecard 1-19
Business Ethics 1-19
Corporate Social Responsibility 1-20
The Value of Data Analytics 1-20
Data Analytics Insight: Using Data in Its Own World 1-21
Data Analytics in Action 1-44
2 Job Order Costing
2-1
Profiting from the Silver Screen: Disney 2-1
Cost Accounting Systems 2-3
Process Cost System 2-3
Job Order Cost System 2-4
Data Analytics Insight: Providing Service Through the
Cloud 2-4
Job Order Cost Flow 2-5
Accumulating Manufacturing Costs 2-5
Assigning Manufacturing Costs 2-7
Raw Materials Costs 2-8
Factory Labor Costs 2-10
Predetermined Overhead Rates 2-13
Entries for Jobs Completed and Sold 2-16
Assigning Costs to Finished Goods 2-17
Assigning Costs to Cost of Goods Sold 2-17
Summary of Job Order Cost Flows 2-18
Job Order Costing for Service Companies 2-19
Advantages and Disadvantages of Job
Order Costing 2-20
Applied Manufacturing Overhead 2-22
Under- or Overapplied Manufacturing Overhead 2-22
Data Analytics in Action 2-43
3 Process Costing
3-1
The Little Guy Who Could: Jones Soda 3-1
Overview of Process Cost Systems 3-3
Uses of Process Cost Systems 3-3
Process Costing for Service Companies 3-4
Similarities and Differences Between Job Order Cost
and Process Cost Systems 3-4
Process Cost Flow and Assigning Costs 3-6
Process Cost Flow 3-6
Assigning Manufacturing Costs—Journal Entries 3-7
Equivalent Units 3-9
Weighted-Average Method 3-10
Refinements on the Weighted-Average Method 3-10
The Production Cost Report 3-13
Compute the Physical Unit Flow (Step 1) 3-14
Compute the Equivalent Units of Production (Step 2) 3-15
Compute Unit Production Costs (Step 3) 3-15
Prepare a Cost Reconciliation Schedule (Step 4) 3-16
Preparing the Production Cost Report 3-17
Costing Systems—Final Comments 3-18
Appendix 3A: FIFO Method for Equivalent Units 3-21
Equivalent Units Under FIFO 3-21
Comprehensive Example 3-22
FIFO and Weighted-Average 3-26
4 Activity-Based Costing
4-1
Precor Is on Your Side: Precor­ 4-1
Traditional vs. Activity-Based Costing 4-3
Traditional Costing Systems 4-3
Illustration of a Traditional Costing System 4-3
The Need for a New Approach 4-4
Activity-Based Costing 4-5
ABC and Manufacturers 4-7
Identify and Classify Activities and Allocate Overhead
to Cost Pools (Step 1) 4-8
Identify Cost Drivers (Step 2) 4-8
Compute Activity-Based Overhead Rates (Step 3) 4-9
Assign Overhead Costs to Products (Step 4) 4-10
Comparing Unit Costs 4-10
ABC Benefits and Limitations 4-13
The Advantage of Multiple Cost Pools 4-13
The Advantage of Enhanced Cost Control 4-15
xvii
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xviii
CONTE NTS
The Advantage of Better Management Decisions 4-18
Some Limitations and Knowing When
to Use ABC 4-18
Data Analytics Insight: Delivering People and Packages 4-19
ABC and Service Industries 4-20
Traditional Costing Example 4-20
Activity-Based Costing Example 4-21
Appendix 4A: Just-in-Time Processing 4-24
Objective of JIT Processing 4-25
Elements of JIT Processing 4-26
Benefits of JIT Processing 4-26
5 Cost-Volume-Profit
5-1
Don’t Worry—Just Get Big: Amazon.com 5-1
Cost Behavior Analysis 5-3
Variable Costs 5-3
Fixed Costs 5-4
Relevant Range 5-5
Mixed Costs 5-7
Mixed Costs Analysis 5-8
High-Low Method 5-8
Importance of Identifying Variable and Fixed Costs
Cost-Volume-Profit Analysis 5-11
Basic Components 5-11
CVP Income Statement 5-12
Break-Even Analysis 5-16
Mathematical Equation 5-16
Contribution Margin Techniques 5-17
Graphic Presentation 5-19
Target Net Income and Margin of Safety 5-20
Target Net Income 5-20
Margin of Safety 5-21
CVP and Data Analytics 5-22
Appendix 5A: Regression Analysis 5-24
Data Analytics in Action 5-46
5-10
6 Cost-Volume-Profit Analysis:
Additional Issues
6-1
Not Even a Flood Could Stop It: Whole Foods Market 6-1
Basic CVP Concepts 6-3
Basic Concepts 6-3
CVP and Changes in the Business Environment 6-5
Sales Mix and Break-Even Sales 6-7
Break-Even Sales in Units 6-8
Data Analytics Insight: Taking No Chances with Its Profits 6-10
Break-Even Sales in Dollars 6-10
Sales Mix with Limited Resources 6-13
Operating Leverage and Profitability 6-15
Effect on Contribution Margin Ratio 6-16
Effect on Break-Even Point 6-17
Effect on Margin of Safety Ratio 6-17
Operating Leverage 6-17
Appendix 6A: Absorption Costing versus
Variable Costing 6-21
Example Comparing Absorption Costing with
Variable Costing 6-21
Net Income Effects 6-24
Decision-Making Concerns 6-28
Potential Advantages of Variable Costing 6-30
Data Analytics in Action 6-51
7 Incremental Analysis
7-1
Keeping It Clean: Method Products 7-1
Decision-Making and Incremental Analysis 7-3
Incremental Analysis Approach 7-3
How Incremental Analysis Works 7-4
Qualitative Factors 7-5
Relationship of Incremental Analysis
and Activity-Based Costing 7-5
Types of Incremental Analysis 7-6
Special Orders 7-6
Make or Buy 7-8
Opportunity Cost 7-9
Sell or Process Further 7-11
Single-Product Case 7-11
Multiple-Product Case 7-12
Repair, Retain, or Replace Equipment 7-14
Eliminate Unprofitable Segment or Product 7-16
8 Pricing
8-1
They’ve Got Your Size—and Color: Zappos.com 8-1
Target Costing 8-3
Establishing a Target Cost 8-4
Cost-Plus and Variable-Cost Pricing 8-5
Cost-Plus Pricing 8-5
Limitations of Cost-Plus Pricing 8-7
Variable-Cost Pricing 8-8
Time-and-Material Pricing 8-10
Transfer Prices 8-13
Negotiated Transfer Prices 8-14
Cost-Based Transfer Prices 8-18
Market-Based Transfer Prices 8-19
Effect of Outsourcing on Transfer Pricing 8-19
Transfers Between Divisions in Different Countries 8-20
Data Analytics Insight: Setting the Optimal Price 8-20
Appendix 8A: Absorption-Cost and
Variable-Cost Pricing 8-22
Absorption-Cost Pricing 8-23
Variable-Cost Pricing 8-24
Appendix 8B: Transfers Between Divisions in
Different Countries 8-26
Data Analytics in Action 8-45
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CONTENTS
9 Budgetary Planning
9-1
What’s in Your Cupcake?: Erin McKennaʼs Bakery NYC 9-1
Effective Budgeting and the Master Budget 9-3
Budgeting and Accounting 9-3
The Benefits of Budgeting 9-3
Essentials of Effective Budgeting 9-4
The Master Budget 9-7
Sales, Production, and Direct Materials Budgets 9-8
Sales Budget 9-8
Production Budget 9-10
Direct Materials Budget 9-10
Direct Labor, Manufacturing Overhead, and S&A
Expense Budgets 9-14
Direct Labor Budget 9-14
Manufacturing Overhead Budget 9-15
Selling and Administrative Expense Budget 9-15
Budgeted Income Statement 9-16
Data Analytics Insight: That’s Some Tasty Data! 9-17
Cash Budget and Budgeted Balance Sheet 9-18
Cash Budget 9-18
Budgeted Balance Sheet 9-21
Budgeting in Nonmanufacturing Companies 9-23
Merchandisers 9-23
Service Companies 9-24
Not-for-Profit Organizations 9-25
Data Analytics in Action 9-48
10 Budgetary Control and
Responsibility Accounting
10-1
Pumpkin Madeleines and a Movie: The Roxy Hotel
Tribeca 10-1
Budgetary Control and Static Budget Reports 10-3
Budgetary Control 10-3
Static Budget Reports 10-4
Flexible Budget Reports 10-7
Why Flexible Budgets? 10-7
Developing the Flexible Budget 10-9
Flexible Budget—A Case Study 10-10
Flexible Budget Reports 10-12
Data Analytics Insight: These Forecasts Move with the
Times! 10-13
Responsibility Accounting and Responsibility
Centers 10-14
Controllable versus Noncontrollable Revenues
and Costs 10-16
Principles of Performance Evaluation 10-16
Data Analytics Insight: Hitting the Road with Zero-Based
Budgeting 10-18
Responsibility Reporting System 10-18
Types of Responsibility Centers 10-19
Investment Centers 10-24
Return on Investment (ROI) 10-24
Responsibility Report 10-25
Alternative Measures of ROI Inputs 10-26
Improving ROI 10-26
Appendix 10A: ROI versus Residual Income
Residual Income Compared to ROI 10-31
Residual Income Weakness 10-31
Data Analytics in Action 10-52
xix
10-30
11 Standard Costs and Balanced
Scorecard
11-1
80,000 Different Caffeinated Combinations: Starbucks 11-2
Overview of Standard Costs 11-3
Distinguishing Between Standards and Budgets 11-4
Setting Standard Costs 11-4
Direct Materials Variances 11-8
Analyzing and Reporting Variances 11-8
Calculating Direct Materials Variances 11-10
Direct Labor and Manufacturing Overhead
Variances 11-13
Direct Labor Variances 11-13
Data Analytics Insight: Speedy Data to the Rescue! 11-16
Manufacturing Overhead Variances 11-16
Variance Reports and Balanced Scorecards 11-18
Reporting Variances 11-18
Income Statement Presentation of Variances 11-19
Balanced Scorecard 11-20
Appendix 11A: Standard Cost Accounting System 11-24
Journal Entries 11-24
Ledger Accounts 11-26
Appendix 11B: Overhead Controllable
and Volume Variances 11-26
Overhead Controllable Variance 11-27
Overhead Volume Variance 11-28
Data Analytics in Action 11-47
12 Planning for Capital
Investments
12-1
Floating Hotels: Holland America Line 12-2
Capital Budgeting and Cash Payback 12-3
Cash Flow Information 12-3
Illustrative Data 12-4
Cash Payback 12-4
Net Present Value Method 12-6
Equal Annual Cash Flows 12-7
Unequal Annual Cash Flows 12-8
Choosing a Discount Rate 12-9
Simplifying Assumptions 12-10
Comprehensive Example 12-10
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xx
CONTE NTS
Capital Budgeting Challenges and
Refinements 12-12
Intangible Benefits 12-12
Profitability Index for Mutually Exclusive
Projects 12-14
Risk Analysis 12-15
Post-Audit of Investment Projects 12-16
Internal Rate of Return 12-17
Comparing Discounted Cash Flow
Methods 12-18
Annual Rate of Return 12-20
Data Analytics Insight: Increasing the Chances of Gaming
Wins 12-21
Data Analytics in Action 12-37
13 Statement of Cash Flows
13-1
Got Cash?: Microsoft 13-2
Usefulness and Format of the Statement of
Cash Flows 13-3
Usefulness of the Statement of Cash Flows 13-3
Classification of Cash Flows 13-3
Significant Noncash Activities 13-4
Format of the Statement of Cash Flows 13-5
Preparing the Statement of Cash Flows—
Indirect Method 13-6
Indirect and Direct Methods 13-7
Indirect Method—Computer Services
Company 13-7
Step 1: Operating Activities 13-9
Summary of Conversion to Net Cash Provided
by Operating Activities—Indirect
Method 13-12
Step 2: Investing and Financing Activities 13-13
Step 3: Net Change in Cash 13-15
Analyzing the Statement of Cash Flows 13-17
Free Cash Flow 13-17
Appendix 13A: Statement of Cash Flows—Direct
Method 13-20
Step 1: Operating Activities 13-20
Step 2: Investing and Financing Activities 13-26
Step 3: Net Change in Cash 13-27
Appendix 13B: Worksheet for the Indirect
Method 13-27
Preparing the Worksheet 13-28
Appendix 13C: Statement of Cash Flows—T-Account
Approach 13-32
14 Financial Analysis: The Big
Picture
14-1
It Pays to Be Patient: Warren Buffett 14-2
Sustainable Income and Quality of Earnings 14-3
Sustainable Income 14-3
Quality of Earnings 14-7
Horizontal Analysis and Vertical Analysis 14-9
Horizontal Analysis 14-10
Vertical Analysis 14-12
Ratio Analysis 14-15
Liquidity Ratios 14-16
Solvency Ratios 14-17
Profitability Ratios 14-17
Financial Analysis and Data Analytics 14-18
Comprehensive Example of Ratio Analysis 14-18
Appendix A Time Value of
Money
A-1
Interest and Future Values A-2
Nature of Interest A-2
Future Value of a Single Amount A-3
Future Value of an Annuity A-5
Present Values A-8
Present Value Variables A-8
Present Value of a Single Amount A-9
Present Value of an Annuity A-11
Time Periods and Discounting A-13
Present Value of a Long-Term Note or Bond A-13
Capital Budgeting Situations A-16
Using Financial Calculators A-18
Present Value of a Single Sum A-19
Present Value of an Annuity A-19
Future Value of a Single Sum A-20
Future Value of an Annuity A-20
Internal Rate of Return A-20
Useful Applications of the Financial Calculator A-21
CASES FOR MANAGEMENT DECISION-MAKING
(Available in Wiley’s online course.)
COMPANY INDEX
I-1
SUBJECT INDEX
I-3
RAPID REVIEW: CHAPTER CONTENT
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Acknowledgments
Managerial Accounting has benefited greatly from the input of users,
focus group participants, manuscript reviewers, ancillary authors,
and proofers. We greatly appreciate the constructive suggestions and
innovative ideas of users and reviewers from this and previous editions as well as the creativity and accuracy of the ancillary authors
and checkers.
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ACKNOWLE DG ME N TS
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We thank Benjamin Huegel and Teresa Speck of St. Mary’s University for their extensive efforts in the preparation of the homework
materials related to Current Designs. We also appreciate the considerable support provided to us by the following people at Current
Designs: Mike Cichanowski, Jim Brown, Diane Buswell, and Jake
Greseth. We also benefited from the assistance and suggestions provided to us by Joan Van Hise in the preparation of materials related
to sustainability.
We appreciate the exemplary support and commitment given to us by editor Veronica Schram, marketing manager Christina
Koop, course content developer Jenny Welter, instructional designer
Matt Origoni, senior course production operations specialist Nicole
Repasky, editorial supervisor Terry Ann Tatro, designer Jon Boylan,
program assistant Natalie Munoz, senior production editor Rachel
Conrad, and Julie Perry, Cindy Durand, Amy Kopperude, Jennifer
Collins, Gladys Soto, and Richard Bretan at Lumina. All of these professionals provided innumerable services that helped the text take
shape.
We will appreciate suggestions and comments from users—
instructors and students alike. You can send your thoughts and ideas
about the text to us via email at: AccountingAuthors@yahoo.com.
Paul D. Kimmel
Madison, Wisconsin
Jerry J. Weygandt
Madison, Wisconsin
Jill E. Mitchell
Annandale, Virginia
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CHAPTER 1
Managerial Accounting
Chapter Preview
This chapter focuses on issues illustrated in the following Feature Story about Current Designs
and its parent company Wenonah Canoe. To succeed, the company needs to determine and
control the costs of material, labor, and overhead, and understand the relationship between costs
and profits. Managers often make decisions that determine their company’s fate—and their own.
Managers are evaluated on the results of their decisions. Managerial accounting provides tools
to assist management in making decisions and evaluating the effectiveness of those decisions.
Feature Story
Just Add Water … and Paddle
Mike Cichanowski grew up on the Mississippi River in
Winona, Minnesota. At a young age, he learned to paddle a
canoe so he could explore the river. Before long, Mike began
crafting his own canoes from bent wood and ­f iberglass
The Chapter Preview describes
the purpose of the chapter and
highlights major topics.
The Feature Story helps you
picture how the chapter topic
relates to the real world of
business and accounting.
in his dad’s garage. Then, when his canoe-­making shop­
outgrew the garage, he moved it into an old warehouse.
When that was going to be torn down, Mike came to a
critical juncture in his life. He took out a bank loan and
built his own small shop, giving birth to the company
­Wenonah Canoe.
Wenonah Canoe soon became known as a pioneer in
developing techniques to get the most out of new materials
1-1
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1-2
CH A PT E R 1
Managerial Accounting
such as plastics, composites, and carbon fibers—maximizing
strength while minimizing weight.
In the 1990s, as kayaking became popular, Mike made
another critical decision when he acquired Current Designs,
a premier Canadian kayak manufacturer. This venture allowed
Wenonah to branch out with new product lines while providing Current Designs with much-needed capacity expansion
and manufacturing expertise. Mike moved Current Designs’
headquarters to Minnesota and made a big (and potentially
risky) investment in a new production facility. Today, the
company’s 90 employees produce about 12,000 canoes and
kayaks per year. These are sold across the country and around
the world.
Mike will tell you that business success is “a three-legged
stool.” The first leg is the knowledge and commitment to
Video
make a great product. Wenonah’s canoes and Current Designs’
­ ayaks are widely regarded as among the very best. The second
k
leg is the ability to sell your product. Mike’s company started
off making great canoes, but it took a little longer to figure
out how to sell them. The third leg is not something that most
of you would immediately associate with entrepreneurial success. It is what goes on behind the scenes—accounting. Good
accounting information is absolutely critical to the countless
decisions, big and small, that ensure the survival and growth
of the company.
Bottom line: No matter how good your product is, and no
matter how many units you sell, if you don’t have a firm grip
on your numbers, you are up a creek without a paddle.
Source: www.wenonah.com.
Watch the What Is Managerial Accounting? video in WileyPLUS for an introduction to managerial accounting and the topics presented in this course.
Chapter Outline
The Chapter Outline presents the chapter’s topics and subtopics, as well as practice opportunities.
LEARNING OBJECTIVES
LO 1 Identify the features of
managerial accounting and the
functions of management.
REVIEW
PRACTICE
• Comparing managerial and
financial accounting
DO IT! 1 Managerial Accounting
­Overview
• Management functions
• Organizational structure
LO 2 Describe the classes of
manufacturing costs and the
differences between product and
period costs.
• Manufacturing costs
LO 3 Demonstrate how to compute
cost of goods manufactured and
prepare financial statements for a
manufacturer.
• Balance sheet
LO 4 Discuss trends in managerial
accounting.
• Service industries
DO IT! 2 Managerial Cost Concepts
• Product versus period costs
• Illustration of cost concepts
DO IT! 3 Cost of Goods Manufactured
• Income statement
• Cost of goods manufactured
• Cost of goods manufactured
schedule
• Focus on the value chain
DO IT! 4 Trends in Managerial
Accounting
• Balanced scorecard
• Business ethics
• Corporate social responsibility
• The value of data analytics
Go to the Review and Practice section at the end of the chapter for a targeted summary
and practice applications with solutions.
Visit WileyPLUS for additional tutorials and practice opportunities.
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Managerial Accounting Basics
1-3
Managerial Accounting Basics
LEARNING OBJECTIVE 1
Identify the features of managerial accounting and the functions of management.
Managerial accounting provides economic and financial information for managers and
other internal users. The skills that you learn in this course will be vital to your future
success in business. You don’t believe us? Let’s look at examples of some of the crucial
activities of employees at Current Designs and where those activities are addressed in
this text.
• In order to know whether it is making a profit, Current Designs needs accurate
information about the cost of each kayak (Chapters 2, 3, and 4). To be profitable,
Current Designs adjusts the number of kayaks it produces in response to changes
in economic conditions and consumer tastes. It needs to understand how changes
in the number of kayaks it produces impact its production costs and profitability
(Chapters 5 and 6).
• Further, Current Designs’ managers often consider alternative courses of action. For
example, should the company accept a special order from a customer, produce a particular kayak component internally or outsource it, or continue or discontinue a particular
product line (Chapter 7)? Related to this decision is determining what price to charge for
the kayaks (Chapter 8).
• In order to plan for the future, Current Designs prepares budgets (Chapter 9), and then
compares its budgeted numbers with its actual results to evaluate performance and identify areas that need to change (Chapters 10 and 11).
• Finally, Current Designs sometimes needs to make substantial investment decisions,
such as the building of a new factory or the purchase of new equipment (Chapter 12).
Someday, you are going to face decisions just like these. You may end up in sales, marketing, management, production, or finance. You may work for a company that provides medical
care, produces software, or serves up mouth-watering meals. No matter what your job position
or product, the skills you acquire in this class will increase your chances of business success.
Put another way, in business you can either guess or you can make an informed decision. As
former Microsoft CEO Steve Ballmer said, “If you’re supposed to be making money in business and supposed to be satisfying customers and building market share, there are numbers
that characterize those things. And if somebody can’t speak to me quantitatively about it, then
I’m nervous.” This course gives you the skills you need to quantify information so you can
make informed business decisions.
Comparing Managerial and Financial Accounting
There are both similarities and differences between managerial and financial accounting.
• Each field of accounting deals with the economic events of a business. For example,
determining the unit cost of manufacturing a product is part of managerial accounting. Reporting the total cost of goods manufactured and sold is part of financial
accounting.
• Both managerial and financial accounting require that a company’s economic events be
quantified and communicated to interested parties.
Illustration 1.1 summarizes the principal differences between financial accounting and
managerial accounting.
Essential terms and concepts
are printed in blue where they
first appear and are defined in
the end-of-chapter Glossary
Review.
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1-4
CH A PT E R 1
Managerial Accounting
ILLUSTRATION 1.1 Differences between financial and managerial accounting
Feature
Financial Accounting
Managerial Accounting
Primary Users
of Reports
External users: stockholders,
creditors, and regulators.
Internal users: officers and
managers.
Types and Frequency
of Reports
External financial statements.
Quarterly and annually.
Internal reports.
As frequently as needed.
Purpose of Reports
General-purpose.
Special-purpose for
specific decisions.
Content of Reports
Pertains to business as a whole.
Highly aggregated (condensed).
Limited to accrual accounting
and cost data.
Governed by generally accepted
accounting principles (GAAP).
Pertains to subunits of the business.
Very detailed.
Extends beyond accrual accounting
to any relevant data.
Evaluated based on relevance to
decisions.
Verification Process
Audited by CPA.
No independent audits.
Management Functions
Managers’ activities and responsibilities can be classified into three broad functions:
1. Planning.
2. Directing.
3. Controlling.
In performing these functions, managers make decisions that have a significant impact on the
organization.
Planning requires managers to look ahead and to establish objectives.
• These objectives are often diverse: maximizing short-term profits and market share,
maintaining a commitment to environmental protection, and contributing to social programs.
• A key objective of management is to add value to the business under its control. Value
is usually measured by the price of the company’s stock and by the potential selling price
of the company.
For example, Hewlett-Packard, in an attempt to gain a stronger foothold in the computer
industry, greatly reduced its prices to compete with Dell.
Directing involves coordinating a company’s diverse activities and human resources to
produce a smooth-running operation.
• This function relates to implementing planned objectives and providing necessary incentives to motivate employees.
• Directing also involves selecting executives, appointing managers and supervisors, and
hiring and training employees.
For example, manufacturers such as Campbell Soup Company, General Motors, and Dell
need to coordinate purchasing, manufacturing, warehousing, and selling. Service corporations such as American Airlines, Federal Express, and AT&T coordinate scheduling, sales,
service, and acquisitions of equipment and supplies.
The third management function, controlling, is the process of keeping the company’s
activities on track.
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Managerial Accounting Basics
• In controlling operations, managers determine whether planned goals are met.
• When there are deviations from targeted objectives, managers decide what changes are
needed to get back on track.
Scandals at companies like Theranos and Danske Bank attest to the fact that companies need
adequate controls to ensure that the company develops and distributes accurate information.
How do managers achieve control? A smart manager in a very small operation can make
personal observations, ask good questions, and know how to evaluate the answers. But using
this approach in a larger organization would result in chaos. Imagine the president of Apple
attempting to determine whether the company is meeting its planned objectives without some
record of what has happened and what is expected to occur. Thus, large businesses typically use a
formal system of evaluation. These systems include such features as budgets, responsibility centers, and performance evaluation reports—all of which are features of managerial accounting.
Decision-making is not a separate management function. Rather, it is the outcome of the
exercise of good judgment in planning, directing, and controlling.
Organizational Structure
Most companies prepare organization charts to show the interrelationships of activities and
the delegation of authority and responsibility within the company. Illustration 1.2 shows a
typical organization chart.
ILLUSTRATION 1.2 A typical corporate organization chart
Stockholders
Board of
Directors
Chief Executive
Officer and
President
General
Counsel/
Secretary
Vice President
Marketing
Treasurer
Vice President
Finance/Chief
Financial Officer
Internal
Auditor
Controller
Vice President
Operations
Vice President
Human
Resources
Line
Employees
Staff
Employees
Stockholders own the corporation. They provide oversight indirectly through a board of
directors they elect.
• The board formulates the operating policies for the company or organization.
• The board selects officers, such as a president and one or more vice presidents, to execute
policy and to perform daily management functions.
Vice President
Information
Technology
1-5
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1-6
CH A PT E R 1
Managerial Accounting
The chief executive officer (CEO) has overall responsibility for managing the business.
As the organization chart shows, the CEO delegates responsibilities to other officers.
Responsibilities within the company are frequently classified as either line or staff
positions.
• Employees with line positions are directly involved in the company’s primary revenuegenerating operating activities. Examples of line positions include the vice president of
operations, vice president of marketing, factory managers, supervisors, and production
personnel.
• Employees with staff positions are involved in activities that support the efforts of the
line employees. In a company like General Electric or Facebook, employees in finance,
legal, and human resources have staff positions.
• While activities of staff employees are vital to the company, these employees are nonetheless there to support the line employees who engage in the company’s primary operations.
The chief financial officer (CFO) is responsible for all of the accounting and finance
issues the company faces. The CFO is supported by the controller and the treasurer. The
controller’s responsibilities include:
1. Maintaining the accounting records.
2. Ensuring an adequate system of internal control.
3. Preparing financial statements, tax returns, and internal reports.
The treasurer has custody of the corporation’s funds and is responsible for maintaining the
company’s cash position.
Also serving the CFO is the internal audit staff. The staff’s responsibilities include:
• Reviewing the reliability and integrity of financial information provided by the controller
and treasurer.
• Ensuring that internal control systems are functioning properly to safeguard corporate
assets.
• Investigating compliance with policies and regulations.
Insight boxes illustrate
interesting situations in real
companies and show how
managers make decisions
using accounting information.
Guideline answers to the critical
thinking questions are available
at the end of the chapter.
In many companies, these staff members also determine whether resources are used in the
most economical and efficient fashion.
The vice president of operations oversees employees with line positions. For example, the
company might have multiple factory managers, each of whom reports to the vice president
of operations. Each factory also has department managers, such as fabricating, painting, and
shipping, each of whom reports to the factory manager.
Management Insight DPR Construction
Does a Company Need a CEO?
Can a company function without a person at the top? Nearly all companies
have a CEO although some, such as
Oracle, Chipotle, and Whole Foods,
have operated with two people in the
Sam
SamEdwards/Caiaimage/
Edwards/Caiaimage/
CEO position. Samsung even had three
Getty
GettyImages
Images
CEOs at the same time. On the other
hand, Abercrombie & Fitch operated for more than two years
without a CEO because its CEO unexpectedly quit and a suitable
replacement was hard to find. In fact, some companies replace
the CEO position with a management committee. These companies feel this structure improves decision-making and increases
collaboration. For example, the 4,000 employees of DPR Construction are overseen by an eight-person committee. Committee members are rotated off gradually but then continue to advise
current members. The company notes that this approach provides
more continuity over time than the sometimes sudden and harsh
changes that occur when CEOs are replaced.
Source: Rachel Feintzeig, “Companies Manage with No CEO,” Wall
Street Journal (December 13, 2016).
What are some of the advantages cited by companies that
choose a structure that lacks a CEO? (Answer is available at
the end of the chapter.)
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Managerial Cost Concepts
DO IT! exercises ask you to put newly acquired knowledge to work. They outline the Action Plan
necessary to complete the exercise, and they show the Solution.
DO IT! 1
Managerial Accounting Overview
Indicate whether the following statements are true or false. If false, explain why.
1. Managerial accountants have a single role within an organization: collecting and reporting
costs to management.
2. Financial accounting reports are general-purpose and intended for external users.
3. Managerial accounting reports are special-purpose and issued as frequently as needed.
4. Managers’ activities and responsibilities can be classified into three broad functions: cost
accounting, budgeting, and internal control.
5. Managerial accounting reports must now comply with generally accepted accounting principles (GAAP).
Solution
1. False. Managerial accountants do determine product costs, but they are also responsible for evaluating how well the company employs its resources. As a result, when the company makes critical strategic decisions, managerial accountants serve as team members alongside personnel from
production, marketing, and engineering.
2. True.
3. True.
4. False. Managers’ activities are classified into three broad functions: planning, directing, and controlling. Planning requires managers to look ahead to establish objectives. Directing involves
coordinating a company’s diverse activities and human resources to produce a smooth-running
operation. Controlling keeps the company’s activities on track.
5. False. Managerial accounting reports are for internal use and thus do not have to comply with
GAAP.
Related exercise material: BE1.1, BE1.2, DO IT! 1.1, and E1.1.
Managerial Cost Concepts
LEARNING OBJECTIVE 2
Describe the classes of manufacturing costs and the differences between product
and period costs.
In order for managers at Current Designs to plan, direct, and control operations effectively,
they need good information. One very important type of information relates to costs. Managers should ask questions such as the following.
1. What costs are involved in making a product or performing a service?
2. If we decrease production volume, will costs change?
3. What impact will automation have on total costs?
4. How can we best control costs?
To answer these questions, managers obtain and analyze reliable and relevant cost information. The first step is to understand the various cost categories that companies use.
ACTION PLAN
• Understand that
managerial accounting
is a field of accounting
that provides economic
and financial
information for
managers and other
internal users.
• Understand that
financial accounting
provides information
for external users.
• Analyze which users
require which different
types of information.
1-7
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1-8
CH A PT E R 1
Managerial Accounting
Manufacturing Costs
Manufacturing consists of activities and processes that convert raw materials into finished
goods. Contrast this type of operation with merchandising, which sells products in the form
in which they are purchased.
• Manufacturing costs incurred to produce a product are classified as direct materials,
direct labor, and manufacturing overhead.
• Typically, manufacturing costs are incurred at the production facility (the factory). The
terms manufacturing cost and product cost are used interchangeably.
Direct Materials
$
$
Direct Materials
To obtain the materials that will be converted into the finished product, the manufacturer
purchases raw materials. Raw materials are the basic materials and parts used in the manufacturing process.
Raw materials that can be physically and directly associated with the finished product
during the manufacturing process are direct materials. Examples include flour in the baking of bread, syrup in the bottling of soft drinks, and steel in the making of automobiles.
A ­primary direct material of many Current Designs’ kayaks is polyethylene powder. Some of
its high-performance kayaks use Kevlar®.
Some raw materials cannot be easily associated with the finished product. These are
called indirect materials. Indirect materials have one of two characteristics:
1. They do not physically become part of the finished product (such as polishing compounds
used by Current Designs for the finishing touches on kayaks).
2. They are impractical to trace to the finished product because their physical association
with the finished product is too small in terms of cost (such as cotter pins and lock washers used in kayak rudder assembly).
Companies account for indirect materials as part of manufacturing overhead. So, all direct
materials are raw materials, but not all raw materials are direct materials.
Direct Labor
$
$
Direct Labor
The work of factory employees that can be physically and directly associated with converting
raw materials into finished goods is direct labor. Bottlers at Coca-Cola, bakers at Hostess
Brands, and equipment operators at Current Designs are employees whose activities are
usually classified as direct labor. Indirect labor refers to the work of manufacturing-related
employees that has no physical association with the making of the finished product or for
which it is impractical to trace costs to the goods produced. Examples include salaries and
wages of factory maintenance people, factory security, product quality inspectors, and factory supervisors. While these employees work in the production facility, they are not directly
involved in converting raw materials into the finished product. Like indirect materials, companies classify indirect labor as manufacturing overhead.
Manufacturing Overhead
$
$
Manufacturing
Overhead
Manufacturing overhead consists of manufacturing costs that are indirectly associated
with the manufacture of the finished product.
• Manufacturing overhead includes indirect materials, indirect labor, depreciation on factory buildings and machines, and insurance, taxes, and maintenance on factory facilities.
• If the cost is manufacturing-related but cannot be classified as direct materials or direct
labor, it should be considered manufacturing overhead.
One study of manufactured goods found the following magnitudes of the three different
product costs as a percentage of the total product cost: direct materials 54%, direct labor 13%,
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Managerial Cost Concepts
and manufacturing overhead 33% (see Alternative Terminology). Note that the direct labor
component is the smallest. This component of product cost is dropping substantially because
of automation. Companies are working hard to increase productivity by decreasing labor. In
some companies, direct labor has become as little as 5% of the total cost.
Tracing direct materials and direct labor costs to specific products is fairly straightforward. Good recordkeeping can tell a company how much plastic it used in making
each type of gear, or how many hours of factory labor it took to assemble a part. But
tracing overhead costs to specific products presents problems. How much of the purchasing agent’s salary is attributable to the hundreds of different products made in the
same factory? What about the grease that keeps the machines running smoothly, or the
electricity costs of the factory? Boiled down to its simplest form, the question becomes:
Which products cause the incurrence of which costs? In subsequent chapters, we show
various methods of aggregating and allocating overhead to products as these costs cannot
be directly traced.
1-9
ALTERNATIVE
TERMINOLOGY
Some companies use terms
such as factory overhead,
indirect manufacturing
costs, and burden instead of
manufacturing overhead.
Alternative terminology notes
present synonymous terms used
in practice.
Product versus Period Costs
Each of the manufacturing cost components—direct materials, direct labor, and manufacturing overhead—are product costs. As the term suggests, product costs are costs that
are a necessary and integral part of producing the finished product (see Alternative
­Terminology).
• All manufacturing costs are classified as product costs.
• Companies record product costs, when incurred, as an asset called inventory.
• These costs do not become expenses until the company sells the finished goods inventory.
ALTERNATIVE
TERMINOLOGY
All manufacturing costs
are product costs, which
are also called inventoriable
costs.
• At that point, the company records the expense as cost of goods sold.
Period costs are costs that are matched with the revenue of a specific time period rather
than included in inventory as part of the cost to produce a salable product.
• These are nonmanufacturing costs.
• Period costs include selling and administrative expenses.
• In order to determine net income, companies deduct these period costs from revenues in
the period in which they are incurred.
Illustration 1.3 summarizes these relationships and cost terms. Our main concern in
this chapter is with product costs.
ILLUSTRATION 1.3
All Costs
Product versus period costs
Product Costs
Manufacturing Costs
(Inventoriable)
Period Costs
Nonmanufacturing Costs
(Non-Inventoriable)
Direct Materials
Selling
Expenses
Direct Labor
Manufacturing Overhead
• Indirect materials
• Indirect labor
• Other indirect costs
Administrative
Expenses
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1-10 C H A PT E R 1
Managerial Accounting
Illustration of Cost Concepts
To improve your understanding of cost concepts, we illustrate them here through an extended
example. Suppose you started your own snowboard factory, Terrain Park Boards. Think that’s
impossible? Burton Snowboards was started by Jake Burton Carpenter, when he was only
23 years old. Jake initially experimented with 100 different prototype designs before settling
on a final design. Then Jake, along with two relatives and a friend, started making 50 boards
per day in Londonderry, Vermont. Unfortunately, while they made a lot of boards in their first
year, they were only able to sell 300 of them. To get by during those early years, Jake taught
tennis and tended bar to pay the bills.
Illustration 1.4 shows some of the costs that your snowboard factory, Terrain Park
Boards, would incur. We have classified each cost as a product cost or a period cost, as well as
provided an explanation for the classification. We have also specified whether product costs
are direct materials, direct labor, or manufacturing overhead.
ILLUSTRATION 1.4
Assignment of costs to cost
categories
Cost
1. Wood cores, fiberglass, and resin
($30 per board)
2. Labor to trim and
shape boards ($40
per board)
3. Factory equipment depreciation
($25,000)
4. Property taxes on
factory building
($6,000 per year)
5. Advertising costs
($60,000 per year)
6. Sales commissions
($20 per board)
7. Factory maintenance salaries
($25,000 per year)
8. Salary of factory
manager ($70,000
per year)
9. Cost of shipping
boards to customers ($8 per board)
10. Salary of product
quality inspector
($20,000 per year)
Product Cost
(direct materials,
Period Cost
direct labor, or man­
(nonExplanation
ufacturing overhead) manufacturing)
Direct materials
Essential elements of finished product
Direct labor
Manufacturing overhead
Physically and directly associated with converting raw
materials into finished goods
Factory cost that is not direct
materials or direct labor
Manufacturing overhead
Factory cost that is not direct
materials or direct labor
X
X
Manufacturing overhead
Manufacturing overhead
X
Manufacturing overhead
Not a cost associated with
producing product
Not a cost associated with
producing product
A factory cost, but employees
are not physically and directly
involved with converting raw
materials into finished goods
A factory cost, but employees
are not physically and directly
involved with converting raw
materials into finished goods
Not a cost associated with
producing product
A factory cost, but employees
are not physically and directly
involved with converting raw
materials into finished goods
Total manufacturing costs are the sum of the product costs—direct materials, direct
labor, and manufacturing overhead—incurred in the current period. If Terrain Park Boards
produces 10,000 snowboards the first year, the total manufacturing costs would be $846,000,
as shown in Illustration 1.5.
Once it knows the total manufacturing costs, Terrain Park Boards can compute the average manufacturing cost per unit. Assuming 10,000 units, the cost to produce one snowboard
is $84.60 ($846,000 ÷ 10,000 units).
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Managerial Cost Concepts
1.
2.
3.
4.
7.
8.
Cost Item
Material cost ($30 × 10,000)
Labor cost ($40 × 10,000)
Depreciation on factory equipment
Property taxes on factory building
Factory maintenance salaries
Salary of factory manager
ILLUSTRATION 1.5
Manufacturing Cost
$300,000
400,000
25,000
6,000
25,000
70,000
20,000
10. Salary of product quality inspector
Total manufacturing product costs
1-11
Computation of total
manufacturing product costs
$846,000
The cost concepts discussed in this chapter are used extensively in subsequent chapters.
So study Illustration 1.4 carefully. If you do not understand any of these classifications, go
back and reread the appropriate section.
Service Company Insight Allegiant Airlines
Low Fares but Decent Profits
When other airlines were cutting flight service due to recession, Allegiant Airlines
increased capacity by 21%. Sounds crazy,
doesn’t it? But it must have known something
because while the other airlines were losing
iStock.com/Stephen
Stephen
Strathdee\
Strathdee
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money, it was generating profits. In fact, it
often has the industry’s highest profit margins.
Consider also that its average one-way fare is only $83. So how does it
make money? As a low-budget airline, it focuses on controlling costs.
Allegiant purchases used planes for $3 million each rather
than new planes for $40 million. It flies out of small towns, so
wages are low and competition is nonexistent. It minimizes hotel
DO IT! 2
costs by having its flight crews finish their day in their home cities.
The company also only flies a route if its 150-passenger planes are
nearly full (it averages about 90% of capacity). The bottom line is
that Allegiant knows its costs to the penny. Knowing what your
costs are might not be glamorous, but it sure beats losing money.
Sources: Susan Carey, “For Allegiant, Getaways Mean Profits,” Wall
Street Journal Online (February 18, 2009); and Scott Mayerowitz, “Tiny
Allegiant Air Thrives on Low Costs, High Fees,” http://bigstory.ap.org
(June 28, 2013).
What are some of the line items that would appear in the
cost of services performed schedule of an airline? (Answer
is available at the end of the chapter.)
Managerial Cost Concepts
ACTION PLAN
A bicycle company has these costs: tires, wages of employees who put tires on the wheels, factory
building depreciation, advertising expenditures, factory machine lubricants, spokes, salary of factory manager, salary of accountant, handlebars, salaries of factory maintenance employees, and
salary of product quality inspector. Classify each of these costs as a product cost or a period cost.
Specify direct materials, direct labor, or manufacturing overhead for product costs.
Solution
Cost
Tires
Wages of employees who put tires on the wheels
Factory building depreciation
Advertising expenditures
Factory machine lubricants
Spokes
Salary of factory manager
Salary of accountant
Handlebars
Salaries of factory maintenance employees
Salary of product quality inspector
Product Cost
Direct materials
Direct labor
Manufacturing overhead
Manufacturing overhead
Direct materials
Manufacturing overhead
Direct materials
Manufacturing overhead
Manufacturing overhead
Period Cost
X
X
Related exercise material: BE1.3, BE1.4, BE1.5, BE1.6, DO IT! 1.2, E1.2, E1.3, E1.4, E1.5, E1.6, and E1.7.
• Direct materials:
any raw materials
physically and directly
associated with the
finished product.
• Direct labor: the work
of factory employees
directly associated with
the finished product.
• Manufacturing
overhead: any costs
indirectly associated
with the finished
product.
• Costs that are not
product costs are period
costs.
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1-12 C H A PT E R 1
Managerial Accounting
Manufacturing Costs in Financial Statements
LEARNING OBJECTIVE 3
Demonstrate how to compute cost of goods manufactured and prepare financial
statements for a manufacturer.
Decision Tools that are useful
for management decisionmaking are highlighted
throughout the text. A summary
of the Decision Tools is provided
in the Review and Practice
section of each chapter.
The financial statements of a manufacturer are very similar to those of a merchandiser. For
example, you will find many of the same sections and same accounts in the financial statements of Procter & Gamble that you find in the financial statements of Dick’s Sporting
Goods. The principal differences between their financial statements occur in two places:
1. The current assets section in the balance sheet.
2. The cost of goods sold section in the income statement.
Each step in the accounting cycle for a merchandiser also applies to a manufacturer.
Decision Tools
The balance sheet helps
managers determine
whether sufficient
inventory exists to meet
forecasted demand.
• For example, prior to preparing financial statements, manufacturers make adjustments.
• The adjustments are essentially the same as those of a merchandiser.
Balance Sheet
The balance sheet for a merchandising company shows just one category of inventory. In
contrast, the balance sheet for a manufacturer may have three inventory accounts, raw materials, work in process, and finished goods, as shown in Illustration 1.6 for Current Designs’
kayak inventory (see Decision Tools).
ILLUSTRATION 1.6
Inventory accounts for a manufacturer
Raw Materials
Inventory
Work in Process
Inventory
Finished Goods
Inventory
Shows the cost applicable to
units that have been started
into production but are only
partially completed.
Shows the cost of completed
goods on hand.
Urethane
Shows the cost of raw
materials on hand.
Finished Goods Inventory is to a manufacturer what Inventory is to a merchandiser. In both
cases, these represent the goods that the company has available for sale. The current assets
sections presented in Illustration 1.7 contrast the presentations of inventories for merchandising and manufacturing companies. The remainder of the balance sheet is similar for the
two types of companies.
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Manufacturing Costs in Financial Statements
ILLUSTRATION 1.7
1-13
Current assets sections of merchandising and manufacturing balance sheets
Merchandising Company
Manufacturing Company
Balance Sheet
December 31, 2022
Balance Sheet
December 31, 2022
Current assets
Cash
Accounts receivable (net)
Inventory
Prepaid expenses
Total current assets
Current assets
Cash
Accounts receivable (net)
Inventory
Finished goods
Work in process
Raw materials
Prepaid expenses
$100,000
210,000
400,000
22,000
$732,000
$180,000
210,000
$80,000
25,200
22,800
Total current assets
128,000
18,000
$536,000
Income Statement
Under a periodic inventory system, the income statements of a merchandiser and a manufacturer differ in the cost of goods sold section.
• Merchandisers compute cost of goods sold by adding the beginning inventory to the cost
of goods purchased and subtracting the ending inventory.
• Manufacturers compute cost of goods sold by adding the beginning finished goods inventory
to the cost of goods manufactured and subtracting the ending finished goods inventory.
Illustration 1.8, which assumes a periodic inventory system, shows these different methods.
ILLUSTRATION 1.8
Merchandiser
Beginning
Inventory
Cost of
Goods
Purchased
–
Ending
Inventory
Merchandiser versus
manufacturer cost of goods
sold calculations
=
Cost of Goods Available for Sale
Cost of
Goods Sold
Manufacturer
Beginning
Finished Goods
Inventory
Cost of
Goods
Manufactured
–
Ending
Finished Goods
Inventory
=
Cost of Goods Available for Sale
A number of accounts are involved in determining the cost of goods manufactured. To
eliminate excessive detail, income statements typically show only the total cost of goods manufactured. A separate statement, called a Cost of Goods Manufactured Schedule, presents the
details (see Illustration 1.11).
Illustration 1.9 shows the different presentations of the cost of goods sold sections for
merchandising and manufacturing companies. The other sections of an income statement are
similar for merchandisers and manufacturers.
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1-14 C H A PT E R 1
ILLUSTRATION 1.9
Managerial Accounting
Cost of goods sold sections of merchandising and manufacturing income statements
Merchandising Company
Manufacturing Company
Income Statement (partial)
For the Year Ended December 31, 2022
Income Statement (partial)
For the Year Ended December 31, 2022
Cost of goods sold
Inventory, Jan. 1
Cost of goods purchased
Cost of goods available for sale
Less: Inventory,
Dec. 31
Cost of goods sold
$ 70,000
650,000
720,000
400,000
$320,000
Cost of goods sold
Finished goods inventory, Jan. 1
Cost of goods manufactured
(see Illustration 1.11)
$ 90,000
370,000
Cost of goods available for sale
Less: Finished goods inventory,
Dec. 31
460,000
80,000
Cost of goods sold
$380,000
Cost of Goods Manufactured
An example may help show how companies determine the cost of goods manufactured.
Assume that on January 1, Current Designs has a number of kayaks in various stages of
production. In total, these partially completed manufactured units are called beginning work
in process inventory. These are kayaks that were worked on during the prior year but were
not completed. As a result, these kayaks will be completed during the current year. The cost
of beginning work in process inventory is based on the manufacturing costs incurred in
the prior period.
Current Designs first incurs manufacturing costs in the current year to complete the
­kayaks that were in process on January 1. It then incurs manufacturing costs for production of
new orders. The sum of the direct materials costs, direct labor costs, and manufacturing overhead incurred in the current year is the total manufacturing costs for the current period.
We now have two cost amounts:
1. The cost of the beginning work in process.
2. The total manufacturing costs for the current period.
The sum of these costs is the total cost of work in process for the year.
At the end of the year, Current Designs may have some kayaks that are only partially completed. The costs of these unfinished units represent the cost of the ending work in process
inventory. To find the cost of goods manufactured, we subtract the ending work in process
inventory from the total cost of work in process. Illustration 1.10 shows the calculation for
determining the cost of goods manufactured.
ILLUSTRATION 1.10
Cost of goods manufactured
calculation
Beginning Total
Total Cost of
Work in Process
+
Manufacturing
=
Work
in Process
Inventory Costs
Ending
Total Cost of
—
Work in Process
=
Work in Process
Inventory
Cost of Goods
Manufactured
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Manufacturing Costs in Financial Statements
1-15
Cost of Goods Manufactured Schedule
The cost of goods manufactured schedule reports cost elements used in calculating cost
of goods manufactured. Illustration 1.11 shows the schedule for Current Designs (using
assumed data). The schedule presents detailed data for direct materials and for manufacturing
overhead (see Decision Tools).
You should be able to distinguish between “Total manufacturing costs” and “Cost of
goods manufactured.”
• As Illustration 1.11 shows, total manufacturing costs is the sum of all manufacturing
costs (direct materials, direct labor, and manufacturing overhead) incurred during the
period.
• Cost of goods manufactured is the cost of those goods that were completed during the
period and are no longer work in process; these costs relate to finished goods.
Decision Tools
The cost of goods
manufactured schedule
helps managers
determine if the
company is maintaining
control over the costs of
production.
• If we add beginning work in process inventory to the total manufacturing costs
incurred during the period and then subtract the ending work in process inventory
(the calculation given in Illustration 1.10), we arrive at the cost of goods manufactured
during the period.
• Cost of goods manufactured represents the costs related to items that were completed
during the period and are therefore included in finished goods.
ILLUSTRATION 1.11
Current Designs
Cost of goods manufactured
schedule
Cost of Goods Manufactured Schedule
for the Year Ended December 31, 2022
Work in process, January 1
Direct materials
Raw materials inventory, January 1
Raw materials purchases
Total raw materials available for use
Less: Raw materials inventory, December 31
Direct materials used
Direct labor
Manufacturing overhead
Indirect labor
Factory repairs
Factory utilities
Factory depreciation
Factory insurance
Total manufacturing overhead
Total manufacturing costs
Total cost of work in process
Less: Work in process, December 31
$ 18,400
$ 16,700
152,500
169,200
22,800
$146,400*
175,600
14,300
12,600
10,100
9,440
8,360
54,800
Cost of goods manufactured
*To simplify the presentation, assumes that all raw materials used were direct materials.
376,800
395,200
25,200
$370,000
Often, numbers or categories
in the financial statements
are highlighted in red type
to draw your attention to key
information.
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1-16 C H A PT E R 1
Managerial Accounting
ACTION PLAN
• Start with beginning
work in process as the
first item in the cost of
goods manufactured
schedule.
• Sum direct materials
used, direct labor,
and manufacturing
overhead to determine
total manufacturing
costs.
• Sum beginning work
in process and total
manufacturing costs to
determine total cost of
work in process.
• Cost of goods
manufactured is the
total cost of work in
process less ending
work in process.
DO IT! 3
Cost of Goods Manufactured
The following information is available for Keystone Company.
March 1
March 31
Raw materials inventory
$12,000
$10,000
Work in process inventory
2,500
4,000
$ 90,000
Raw materials purchased in March
Direct labor in March
75,000
Manufacturing overhead in March
220,000
Prepare the cost of goods manufactured schedule for the month of March 2022. (Assume that all
raw materials used were direct materials.)
Solution
Keystone Company
Cost of Goods Manufactured Schedule
For the Month Ended March 31, 2022
Work in process, March 1
Direct materials
Raw materials, March 1
Raw materials purchases
Total raw materials available for use
Less: Raw materials, March 31
Direct materials used
Direct labor
Manufacturing overhead
$ 2,500
$ 12,000
90,000
102,000
10,000
$ 92,000
75,000
220,000
Total manufacturing costs
387,000
Total cost of work in process
Less: Work in process, March 31
389,500
4,000
Cost of goods manufactured
$385,500
Related exercise material: BE1.7, BE1.8, BE1.9, BE1.10, DO IT! 1.3, E1.8, E1.9, E1.10, E1.11, E1.12, E1.13,
E1.14, E1.15, E1.16, and E1.17.
Managerial Accounting Today
LEARNING OBJECTIVE 4
Discuss trends in managerial accounting.
In this rapidly changing world, managerial accounting needs to continue to innovate in order
to provide managers with the information they need.
Service Industries
Much of the U.S. economy has shifted toward an emphasis on services.
• Today, approximately 80% of U.S. workers are employed by service companies.
• Airlines, marketing agencies, cable companies, and governmental agencies are just a few
examples of service companies.
• Service companies differ from manufacturing companies in that services are consumed
immediately by customers.
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Managerial Accounting Today
For example, an airline uses special equipment to provide its product, but the output of that
equipment is consumed immediately by the customer in the form of a flight. A marketing
agency performs services for its clients that are immediately consumed by the customer in
the form of a marketing plan. In contrast, a manufacturing company like Boeing records the
airplanes that it manufactures as inventory until they are sold.
This chapter’s examples feature manufacturing companies because accounting for the
manufacturing environment requires the use of the broadest range of accounts. That is,
the accounts used by service companies represent a subset of those used by manufacturers
because service companies are not producing inventory. Neither an airline nor a marketing
agency produces an inventoriable product. However, just like a manufacturer, each needs to
keep track of the costs of its services in order to know whether it is generating a profit (see
Ethics Note). An airline needs to know the cost of flight service to each destination, and a
marketing agency needs to know the cost to develop a marketing plan. The techniques shown
in this chapter to accumulate manufacturing costs to determine manufacturing inventory are
equally useful for determining the costs of performing services.
Many of the examples we present in subsequent chapters, as well as some end-of-chapter
materials, will be based on service companies.
Focus on the Value Chain
Ethics Notes help sensitize you
to some of the ethical issues in
accounting.
ETHICS NOTE
Do telecommunications
companies have an
obligation to provide
service to remote or lowuser areas for a fee that
may be less than the cost of
the service?
The value chain refers to all business processes associated with providing a product or performing a service. Illustration 1.12 depicts the value chain for a manufacturer.
• Note that the value chain includes both manufacturing and nonmanufacturing costs.
• Many of the most significant business innovations in recent years have resulted either
directly, or indirectly, from a focus on the value chain.
For example, lean manufacturing was originally pioneered by Japanese automobile manufacturer Toyota but is now widely employed. Lean manufacturing requires a review of all
business processes in an effort to increase productivity and eliminate waste, all while continually trying to improve quality.
ILLUSTRATION 1.12
A manufacturer’s value chain
Unlimited
Warranty
Research &
development
and product
design
Acquisition of
raw materials
Production
Sales and
marketing
Delivery
Manufacturing Costs
Just-in-time (JIT) inventory methods, which have significantly lowered inventory
levels and costs for many companies, are one innovation that resulted from the focus on the
value chain.
• Under the JIT inventory method, goods are manufactured or purchased just in time for sale.
• However, JIT also necessitates increased emphasis on product quality. Because JIT
companies do not have excess inventory on hand, they cannot afford to stop production
because of defects or machine breakdowns. If they stop production, deliveries will be
delayed and customers will be unhappy.
Partially as a consequence of JIT, many companies now focus on total quality management (TQM) to reduce defects in finished products, with the goal of zero defects.
1-17
Customer
relations and
subsequent
services
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1-18 C H A PT E R 1
Managerial Accounting
Toyota was one of the pioneers of TQM processes as early as the 1940s. Some of the largest companies in the world, including Ford and ExxonMobil, have benefitted from these
practices.
Another innovation is the theory of constraints.
• This involves identification of “bottlenecks”—constraints within the value chain that
limit a company’s profitability.
• Once a major constraint has been identified and eliminated, the company moves on to fix
the next most significant constraint.
General Motors found that by applying the theory of constraints to its distribution system,
it could more effectively meet the demands of its dealers and minimize the amount of excess
inventory in its distribution system. This also reduced its need for overtime labor.
Technology has played a big role in the focus on the value chain and the implementation
of lean manufacturing. For example, enterprise resource planning (ERP) systems, such
as those provided by SAP, provide a comprehensive, centralized, integrated source of information to manage all major business processes—from purchasing, to manufacturing, to sales,
to human resources.
• ERP systems have, in some large companies, replaced as many as 200 individual software
packages.
• In addition, the focus on improving efficiency in the value chain has resulted in adoption
of automated manufacturing processes.
As overhead costs have increased because of factory automation, the accuracy of overhead cost allocation to specific products has become more important. In response, managerial
accountants devised an allocation approach called activity-based costing (ABC).
• ABC allocates overhead based on each product’s use of particular activities in making
the product.
• In addition to providing more accurate product costing, ABC can contribute to increased
efficiency in the value chain.
For example, suppose one of a company’s overhead pools is allocated based on the number of
setups that each product requires. If a particular product’s cost is high because it is allocated
a lot of overhead due to a high number of setups, management will be motivated to try to
reduce the number of setups and thus reduce its overhead allocation. ABC is discussed further
in Chapter 4.
Management Insight Inditex SA
Supplying Today’s (Not
Yesterday’s) Fashions
In terms of total sales dollars, Inditex SA
is the planet’s largest fashion retailer. What
does it do differently than its competitors?
How did it double its sales over a recent
seven-year period while competitors such
Pixel-shot / Alamy Stock
Photo
as Gap Inc. stumbled badly? Inditex disPixel-shot/Alamy Stock Photo
tinguishes itself in its value chain’s ability to react quickly to constantly changing customer tastes. First, designers and commercial
staff sit side by side in a massive, open workspace facility, taking
direct input from sales staff around the world regarding new product ideas. Manufacturing facilities are located relatively near company headquarters, allowing more direct input and oversight into
production. Also, all goods (other than online sales) are shipped
straight from the ­production facility to stores, rather than warehouses. As a result of its unique approach to how it designs, manufactures, and distributes its goods, Inditex can actually sometimes
get a new product from initial idea to the store shelf in two weeks
rather than the industry norm of two to eight months. And
because Inditex provides customers with designs that competitors
don’t have yet, it can charge higher prices while also continuing to
look for ways to increase efficiency and thus cut costs.
Source: Patricia Kowsmann, “Fast Fashion: How a Zara Coat Went
from Design to Fifth Avenue in 25 Days,” Wall Street Journal (December 6, 2016).
What steps has Inditex taken that make its value chain
unique? (Answer is available at the end of the chapter.)
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Managerial Accounting Today
Balanced Scorecard
The balanced scorecard corrects for management’s sometimes biased or limited perspective.
• This approach uses both financial and nonfinancial measures to evaluate all aspects of a
company’s operations in an integrated fashion.
• The performance measures are linked in a cause-and-effect fashion to ensure that they all
tie to the company’s overall objectives.
For example, to increase return on assets, the company could try to increase sales. To increase
sales, the company could try to increase customer satisfaction. To increase customer satisfaction, the company could try to reduce product defects. Finally, to reduce product defects, the
company could increase employee training. The balanced scorecard, which is discussed further
in Chapter 11, is now used by many companies, including Hilton Hotels, Walmart, and HP.
Business Ethics
All employees within an organization are expected to act ethically in their business activities.
Given the importance of ethical behavior to corporations and their owners (stockholders),
an increasing number of organizations provide codes of business ethics for their employees.
Creating Proper Incentives
Companies like Amazon.com, IBM, and Nike use complex systems to monitor, control,
and evaluate the actions of managers. Unfortunately, these systems and controls sometimes
unwittingly create incentives for managers to take unethical actions.
• Because budgets are also used as an evaluation tool, some managers try to “game” the
budgeting process by underestimating their division’s predicted performance so that it
will be easier to meet their performance targets.
• But, if budgets are set at unattainable levels, managers sometimes take unethical actions to
meet the targets in order to receive higher compensation or, in some cases, to keep their jobs.
In a recent example, the largest bank in the United States, Wells Fargo, admitted that it
had fired 5,300 employees for opening more than 2 million accounts without customer approval
or knowledge. According to the director of the Consumer Financial Protection Bureau, “Wells
Fargo employees secretly opened unauthorized accounts to hit sales targets and receive bonuses.”
Code of Ethical Standards
In response to corporate scandals, the U.S. Congress enacted the Sarbanes-Oxley Act (SOX)
to help prevent lapses in internal control.
• CEOs and CFOs are now required to certify that financial statements give a fair presentation of the company’s operating results and its financial condition.
• Top managers must certify that the company maintains an adequate system of internal
controls to ensure accurate financial reports.
• Companies now pay more attention to the composition of the board of directors. In particular, the audit committee of the board of directors must be comprised entirely of independent members (that is, non-employees) and must contain at least one financial expert.
• The law substantially increases the penalties for misconduct.
To provide guidance for managerial accountants, the Institute of Management Accountants (IMA) has developed a code of ethical standards, entitled IMA Statement of Ethical
Professional Practice. Management accountants should not commit acts in violation of these
standards. Nor should they condone such acts by others within their organizations. Throughout the text, we address various ethical issues managers face.
1-19
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1-20 C H A PT E R 1
Managerial Accounting
Corporate Social Responsibility
The balanced scorecard attempts to take a broader, more inclusive view of corporate profitability measures. Many companies, however, have begun to evaluate not just corporate profitability but also corporate social responsibility.
• Corporate social responsibility considers a company’s efforts to employ sustainable business practices with regard to its employees, society, and the environment.
• This is sometimes referred to as the triple bottom line because it evaluates a company’s
performance with regard to people, planet, and profit.
• Recent reports indicate that nearly 80% of the 500 largest U.S. companies provide sustainability reports.
Make no mistake, these companies are still striving to maximize profits—in a competitive
world, they won’t survive long if they don’t. In fact, you might recognize a few of the names
on a recent list (published by Corporate Knights) of the 100 most sustainable companies in the
world. Are you surprised that General Electric, adidas, BMW, Coca-Cola, or Apple made
the list? These companies have learned that with a long-term, sustainable approach, they can
maximize profits while also acting in the best interest of their employees, their communities,
and the environment. In fact, a monetary bonus was provided by 87% of the companies on the
list to managers that met sustainability goals. At various points within this text, we discuss
situations where real companies use the very skills that you are learning to evaluate decisions
from a sustainable perspective, such as in the following Insight box.
People, Planet, and Profit Insight Phantom Tac
People Matter
Many clothing factories in developing
countries are known for unsafe buildings,
poor working conditions, and wage and
aabeele/Shutterstock.com
aabeele/Shutterstock.com labor violations. One of the owners of
Phantom Tac, a clothing manufacturer
in Bangladesh, did make efforts to develop sustainable business
practices. This owner, David Mayor, provided funding for a training program for female workers. He also developed a website to
educate customers about the workers’ conditions. But Phantom
Tac also had to make a profit. Things got tight when one of its
customers canceled orders because Phantom Tac failed a social
compliance audit. The company had to quit funding the training
program and the website.
Recently, Bangladesh’s textile industry has seen some significant improvements in working conditions and safety standards. As
Brad Adams, Asia director of Human Rights Watch, notes, “The
(Dhaka) government has belatedly begun to register unions, which is
an important first step, but it now needs to ensure that factory owners
stop persecuting their leaders and actually allow them to function.”
Sources: Jim Yardley, “Clothing Brands Sidestep Blame for Safety
Lapses,” The New York Times Online (December 30, 2013); and Palash
Ghosh, “Despite Low Pay, Poor Work Conditions, Garment Factories
Empowering Millions of Bangladeshi Women,” International Business
Times (March 25, 2014).
What are some of the common problems for many clothing
factories in developing countries? (Answer is available at
the end of the chapter.)
The Value of Data Analytics
Companies have never had so much available data. In many companies, virtually every aspect
of operations—the employees, the customers, even the manufacturing equipment—leaves a
data trail. However, while “big data” can be impressive, it can also be overwhelming.
• Having all the data in the world will not necessarily lead to better results.
• The trick is having the skills and know-how to use the data in ways that result in more
productive (and happier) employees, more satisfied customers, and more profitable
operations.
It is therefore not surprising that one of the most rapidly growing areas of business today
is data analytics. Data analytics is the use of techniques, which often combine software and
statistics, to analyze data to make informed decisions.
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Managerial Accounting Today
1-21
Throughout this text, we offer many examples of how successful companies are using data
analytics. We also provide examples of one analytical tool, data visualizations. Data visualizations often help managers acquire a more intuitive understanding of (1) the relationships
between variables and (2) business trends. The end-of-chapter homework material provides
opportunities to perform basic data analytics and data visualizations in selected chapters.
Data Analytics Insight The Walt Disney Company
Using Data in Its Own World
The Walt Disney Company makes
fun seem effortless at its theme
parks, but there is a magic mountain
of data collection going on behind
the scenes. For example, Disney
employs behavioral analytics, which
Paulbr/Getty Images
Paulbr/Getty Images
uses data to both predict and influence customer behavior, in countless ways. Disney collects the data
through its “MagicBands” worn by visitors to the parks. While the
MagicBands provide visitors with many benefits (e.g., delivering
customized itineraries, reducing wait lines, and providing customer
recognition by Disney characters), these bands are also delivering
continual information to the company about the locations, activities, eating habits, and purchases of Disney visitors.
DO IT! 4
Disney uses the MagicBand information to support daily
adjustments of operations as well as long-term planning. For
example, the company can use this information to monitor park
usage and subsequently encourage visitors to change their itineraries to different activities that will require a shorter wait time. If
customers are waiting in line, they aren’t happy—and they also
aren’t spending money. Long-term planning uses of MagicBand
information include designing new attractions and updating menu
options in response to supply and demand.
Source: Randerson112358, “How Disney World Uses Big Data,”
medium.com (May 18, 2019).
What is behavioral analytics, and how does Disney use it to
minimize lines at its theme parks? (Answer is available at
the end of the chapter.)
Trends in Managerial Accounting
Match the descriptions that follow with the corresponding terms.
Terms:
Descriptions:
1. ________ All activities associated with providing a
product or performing a service.
a. Activity-based costing.
2. ________ A method of allocating overhead based
on each product’s use of activities in making the
product.
c. Corporate social responsibility.
3. ________ Systems implemented to reduce defects
in finished products with the goal of achieving zero
defects.
4. ________ A performance-measurement approach
that uses both financial and nonfinancial measures,
tied to company objectives, to evaluate a company’s
operations in an integrated fashion.
5. ________ Inventory system in which goods are
manufactured or purchased just as they are needed
for use or sale.
6. ________ A company’s efforts to employ sustainable business practices with regard to its employees, society, and the environment.
7. ________ A code of ethical standards developed by
the Institute of Management Accountants.
Solution
1. g
2. a
3. e
4. b 5. d 6. c 7. f
Related exercise material: BE1.11, DO IT! 1.4, and E1.18.
b. Balanced scorecard.
d. Just-in-time (JIT) inventory.
e. Total quality management (TQM).
f. Statement of Ethical Professional
Practice.
g. Value chain.
ACTION PLAN
• Develop a forwardlooking view, in order
to advise and provide
information to various
members of the
organization.
• Understand current
business trends and
issues.
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1-22 C H A PT E R 1
Managerial Accounting
Using the Decision Tools
comprehensive exercises
ask you to apply business
information and the decision
tools presented in the chapter.
Most of these exercises are
based on the companies
highlighted in the Feature Story.
USING TH E D EC I S I O N TO O LS
Current Designs
Current Designs faces many situations where it needs to apply the decision tools in this chapter,
such as analyzing the balance sheet for optimal inventory levels. For example, assume that the
market has responded enthusiastically to a new Current Designs’ model, the Otter. As a result, the
company has established a separate manufacturing facility to produce these kayaks. Now assume
that the company produces 1,000 of these kayaks per month. Current Designs’ monthly manufacturing costs and other data for the Otter are as follows.
1. Rent on manufacturing equipment (lease cost)
$2,000/month
2. Insurance on manufacturing building
$750/month
3. Raw materials (plastic, fiberglass, etc.)
$180/kayak
4. Utility costs for manufacturing facility
$1,000/month
5. Utility costs for administrative office
$800/month
6. Wages for assembly-line workers in manufacturing facility
$130/kayak
7. Depreciation on administrative office equipment
$650/month
8. Miscellaneous manufacturing materials used (lubricants, solders, etc.)
$12/kayak
9. Property taxes on manufacturing building
$24,000/year
10. Manufacturing supervisor’s salary
$5,000/month
11. Advertising for the Otter
$30,000/year
12. Sales commissions
$30/kayak
13. Depreciation on manufacturing building
$4,000/month
Instructions
a. Prepare an answer sheet with the following column headings.
Product Costs
Cost
Item
Direct
Materials
Direct
Labor
Manufacturing
Overhead
Period
Costs
Enter each cost item on your answer sheet, placing an “X” under the appropriate headings.
b. Compute total manufacturing costs for the month.
Solution
a.
Product Costs
Cost Item
Direct
Materials
Direct
Labor
Manufacturing
Overhead
1. Rent on manufacturing
equipment ($2,000/month)
X
2. Insurance on
manufacturing building
($750/month)
X
3. Raw materials
($180/kayak)
X
4. Manufacturing utility costs
($1,000/month)
X
5. Office utility costs
($800/month)
6. Wages for assembly workers
($130/kayak)
X
X
7. Depreciation on administrative
office equipment ($650/month)
8. Miscellaneous manufacturing
materials used ($12/kayak)
Period
Costs
X
X
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Learning Objectives Review
1-23
Product Costs
Direct
Materials
Cost Item
Direct
Labor
9. Property taxes on
manufacturing building
($24,000/year)
10. Manufacturing supervisor’s
salary ($5,000/month)
Manufacturing
Overhead
Period
Costs
X
X
11. Advertising cost
($30,000/year)
X
12. Sales commissions
($30/kayak)
X
13. Depreciation on
manufacturing building
($4,000/month)
b.
X
Cost Item
Manufacturing Cost
Rent on manufacturing equipment
Insurance on manufacturing building
Raw materials ($180 × 1,000)
Manufacturing utilities
Labor ($130 × 1,000)
Miscellaneous materials ($12 × 1,000)
Property taxes on manufacturing building ($24,000 ÷ 12)
Manufacturing supervisor’s salary
Depreciation on manufacturing building
$ 2,000
750
180,000
1,000
130,000
12,000
2,000
5,000
4,000
Total manufacturing costs
$336,750
Current Designs’ monthly manufacturing cost to produce 1,000 Otters is $336,750.
The Review and Practice
section provides opportunities
to review key concepts and
terms as well as complete
multiple-choice questions,
brief exercises, exercises, and
a practice problem. Detailed
solutions are also included.
Review and Practice
Learning Objectives Review
1 Identify the features of managerial accounting and
the functions of management.
2 Describe the classes of manufacturing costs and the
differences between product and period costs.
The primary users of managerial accounting reports, issued as frequently as needed, are internal users, who are officers, department
heads, managers, and supervisors in the company. The purpose of
these reports is to provide special-purpose information for a particular user for a specific decision. The content of managerial accounting
reports pertains to subunits of the business. It may be very detailed,
and may extend beyond the accrual accounting system. The reporting standard is relevance to the decision being made. No independent
audits are required in managerial accounting.
The functions of management are planning, directing, and controlling. Planning requires management to look ahead and to establish objectives. Directing involves coordinating the diverse activities
and human resources of a company to produce a smooth-running
operation. Controlling is the process of keeping the activities on track.
Manufacturing costs are typically classified as either (1) direct
materials, (2) direct labor, or (3) manufacturing overhead. Raw
materials that can be physically and directly associated with the finished product during the manufacturing process are called direct
materials. The work of factory employees that can be physically
and directly associated with converting raw materials into finished
goods is considered direct labor. Manufacturing overhead consists
of costs that are indirectly associated with the manufacture of the
finished product. Manufacturing costs are typically incurred at the
manufacturing facility.
Product costs are costs that are a necessary and integral part
of producing the finished product (manufacturing costs). Product
costs are also called inventoriable costs. These costs do not become
expenses until the company sells the finished goods inventory.
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1-24 C H A PT E R 1
Managerial Accounting
Period costs are costs that are identified with a specific time
period rather than with a salable product. These costs relate to nonmanufacturing costs and therefore are not inventoriable costs. They
are expensed as incurred.
Demonstrate how to compute cost of goods
manufactured and prepare financial statements for a
manufacturer.
3
Companies add the cost of the beginning work in process to the total
manufacturing costs for the current year to arrive at the total cost of
work in process for the year. They then subtract the ending work in
process from the total cost of work in process to arrive at the cost of
goods manufactured.
The difference between a merchandising and a manufacturing balance sheet is in the current assets section. The current assets
section of a manufacturing company’s balance sheet presents three
inventory accounts: finished goods inventory, work in process inventory, and raw materials inventory.
The difference between a merchandising and a manufacturing
income statement is in the cost of goods sold section. A manufacturing
cost of goods sold section shows beginning and ending finished goods
inventories and the cost of goods manufactured.
4
Discuss trends in managerial accounting.
Managerial accounting has experienced many changes in recent
years, including a shift toward service companies as well as an
emphasis on ethical behavior. Improved practices include a focus on
managing the value chain through techniques such as just-in-time
inventory, total quality management, activity-based costing, and
theory of constraints. The balanced scorecard is now used by many
companies in order to attain a more comprehensive view of the company’s operations, and companies are now evaluating their performance with regard to their corporate social responsibility. Finally,
data analytics and data visualizations are important tools that help
businesses identify problems and opportunities, and then make
informed decisions.
Decision Tools Review
Decision Checkpoints
Info Needed for Decision
Tool to Use for Decision
How to Evaluate Results
What is the composition of
a manufacturing company’s
inventory?
Amount of raw materials, work
in process, and finished goods
inventories
Balance sheet
Determine whether there are
sufficient finished goods, raw
materials, and work in process
inventories to meet forecasted
demand.
Is the company maintaining
control over the costs of
production?
Cost of material, labor, and
overhead
Cost of goods manufactured
schedule
Compare the cost of goods
manufactured to revenue expected
from product sales.
Glossary Review
Activity-based costing (ABC) A method of allocating overhead based
on each product’s use of activities in making the product. (p. 1-18).
Balanced scorecard A performance-measurement approach that uses
both financial and nonfinancial measures, tied to company objectives, to
evaluate a company’s operations in an integrated fashion. (p. 1-19).
Board of directors The group of officials elected by the stockholders of
a corporation to formulate operating policies and select officers who will
manage the company. (p. 1-5).
Chief executive officer (CEO) Corporate officer who has overall
responsibility for managing the business and delegates responsibilities to
other corporate officers. (p. 1-6).
Chief financial officer (CFO) Corporate officer who is responsible for
all of the accounting and finance issues of the company. (p. 1-6).
Controller Financial officer responsible for a company’s accounting
records, system of internal control, and preparation of financial statements, tax returns, and internal reports. (p. 1-6).
Corporate social responsibility The efforts of a company to employ
sustainable business practices with regard to its employees, society, and
the environment. (p. 1-20).
Cost of goods manufactured Total cost of work in process less the cost
of the ending work in process inventory. Cost of all the items completed
during the period. (p. 1-14).
Data analytics The use of techniques, which often combine software
and statistics, to analyze data to make informed decisions. (p. 1-20).
Direct labor The work of factory employees that can be physically and dir­
ectly associated with converting raw materials into finished goods. (p. 1-8).
Direct materials Raw materials that can be physically and directly
associated with manufacturing the finished product. (p. 1-8).
Enterprise resource planning (ERP) system Software that provides
a comprehensive, centralized, integrated source of information used to
manage all major business processes. (p. 1-18).
Indirect labor Work of factory employees that has no physical association with the finished product or for which it is impractical to trace the
costs to the goods produced. (p. 1-8).
Indirect materials Raw materials that do not physically become part
of the finished product or that are impractical to trace to the finished
product because their physical association with the finished product is too
small. (p. 1-8).
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Practice Multiple-Choice Questions
1-25
Just-in-time (JIT) inventory Inventory system in which goods are
manufactured or purchased just in time for sale. (p. 1-17).
Theory of constraints A specific approach used to identify and manage constraints in order to achieve the company’s goals. (p. 1-18).
Line positions Jobs that are directly involved in a company’s primary
revenue-generating operating activities. (p. 1-6).
Total cost of work in process Cost of the beginning work in process
plus total manufacturing costs for the current period. (p. 1-14).
Managerial accounting A field of accounting that provides economic
and financial information for managers and other internal users. (p. 1-3).
Total manufacturing costs The sum of direct materials, direct labor,
and manufacturing overhead incurred in the current period. (p. 1-10).
Manufacturing overhead Manufacturing costs that are indirectly
associated with the manufacture of the finished product. (p. 1-8).
Total quality management (TQM) Systems implemented to reduce
defects in finished products with the goal of achieving zero defects. (p. 1-17).
Period costs Costs that are matched with the revenue of a specific time
period and charged to expense as incurred. (p. 1-9).
Treasurer Financial officer responsible for custody of a company’s
funds and for maintaining its cash position. (p. 1-6).
Product costs Costs that are a necessary and integral part of producing the finished product. All manufacturing costs are classified as product
costs and are included in inventory. (p. 1-9).
Triple bottom line The evaluation of a company’s social responsibility
performance with regard to people, planet, and profit. (p. 1-20).
Sarbanes-Oxley Act (SOX) Law passed by Congress intended to reduce
unethical corporate behavior. (p. 1-19).
Staff positions Jobs that support the efforts of line employees. (p. 1-6).
Value chain All business processes associated with providing a product
or performing a service. (p. 1-17).
Work in process inventory Partially completed manufactured units.
(p. 1-14).
Practice Multiple-Choice Questions
1. (LO 1) Managerial accounting:
7. (LO 2) Which of the following costs are classified as a period cost?
a. is governed by generally accepted accounting principles.
a. Wages paid to a factory custodian.
b. places emphasis on special-purpose information.
b. Wages paid to a production department supervisor.
c. pertains to the entity as a whole and is highly aggregated.
c. Wages paid to the CEO.
d. is limited to cost data.
d. Wages paid to an assembly worker.
2. (LO 1) The management of an organization performs several
broad functions. They are:
a. planning, directing, and selling.
b. planning, directing, and controlling.
c. planning, manufacturing, and controlling.
d. directing, manufacturing, and controlling.
3. (LO 2) Direct materials are a:
Product
Cost
Manufacturing
Overhead Cost
Period
Cost
a. Yes
Yes
No
b. Yes
No
No
c. Yes
Yes
Yes
No
No
No
d.
4. (LO 2) Which of the following costs would a computer manufacturer include in manufacturing overhead?
a. The cost of the disk drives.
b. The wages earned by computer assemblers.
c. The cost of the memory chips.
d. Depreciation on testing equipment.
5. (LO 2) Which of the following is not an element of manufacturing overhead?
a. Sales manager’s salary.
b. Factory manager’s salary.
c. Factory repairman’s wages.
8. (LO 3) For the year, Redder Company has cost of goods manufactured of $600,000, beginning finished goods inventory of
$200,000, and ending finished goods inventory of $250,000. The
cost of goods sold is:
a. $450,000.
c. $550,000.
b. $500,000.
d. $600,000.
9. (LO 3) Cost of goods available for sale is a step in the calculation
of cost of goods sold of:
a. a merchandising company but not a manufacturing company.
b. a manufacturing company but not a merchandising company.
c. a merchandising company and a manufacturing company.
d. neither a manufacturing company nor a merchandising
company.
10. (LO 3) A cost of goods manufactured schedule shows beginning and ending inventories for:
a. raw materials and work in process only.
b. work in process only.
c. raw materials only.
d. raw materials, work in process, and finished goods.
11. (LO 3) The calculation to determine the cost of goods manufactured is:
a. Beginning raw materials inventory + Total manufacturing
costs − Ending work in process inventory.
b. Beginning work in process inventory + Total manufacturing costs − Ending finished goods inventory.
c. Beginning finished goods inventory + Total manufacturing
costs − Ending finished goods inventory.
d. Product inspector’s salary.
6. (LO 2) Indirect labor is a:
a. nonmanufacturing cost.
c. product cost.
b. raw material cost.
d. period cost.
d. Beginning work in process inventory + Total manufacturing costs − Ending work in process inventory.
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1-26 C H A PT E R 1
Managerial Accounting
12. (LO 4) After passage of the Sarbanes-Oxley Act:
a. reports prepared by managerial accountants must be
audited by CPAs.
b. CEOs and CFOs must certify that financial statements provide a fair presentation of the company’s operating results.
c. the audit committee, rather than top management, is
responsible for the company’s financial statements.
d. reports prepared by managerial accountants must comply
with generally accepted accounting principles (GAAP).
13. (LO 4) Which of the following managerial accounting techniques attempts to allocate manufacturing overhead in a more
meaningful fashion?
Solutions
1. b. Managerial accounting emphasizes special-purpose information. The other choices are incorrect because (a) financial accounting
is governed by generally accepted accounting principles, (c) financial
accounting pertains to the entity as a whole and is highly aggregated,
and (d) cost accounting and cost data are a subset of management
accounting.
2. b. Planning, directing, and controlling are the broad functions
performed by the management of an organization. The other choices
are incorrect because (a) selling is performed by the sales group in the
organization, not by management; (c) manufacturing is performed by
the manufacturing group in the organization, not by management;
and (d) manufacturing is performed by the manufacturing group in
the organization, not by management.
3. b. Direct materials are a product cost only. Therefore, choices (a),
(c), and (d) are incorrect as direct materials are not manufacturing
overhead or a period cost.
4. d. Depreciation on testing equipment would be included in manufacturing overhead because it is indirectly associated with the finished product. The other choices are incorrect because (a) disk drives
would be direct materials, (b) computer assembler wages would be
direct labor, and (c) memory chips would be direct materials.
5. a. The sales manager’s salary is not directly or indirectly associated with the manufacture of the finished product. The other choices
are incorrect because (b) the factory manager’s salary, (c) the factory
repairman’s wages, and (d) the product inspector’s salary are all elements of manufacturing overhead.
6. c. Indirect labor is a product cost because it is part of the effort
required to produce a product. The other choices are incorrect because
(a) indirect labor is a manufacturing cost because it is part of the effort
required to produce a product, (b) indirect labor is not a raw material
cost because raw material costs only include direct materials and indirect materials, and (d) indirect labor is not a period cost because it is
part of the effort required to produce a product.
7. c. Wages paid to the CEO would be included in administrative
expenses and classified as a period cost. The other choices are incorrect because (a) factory custodian wages are indirect labor, which is
manufacturing overhead and a product cost; (b) production department supervisor wages are indirect labor, which is manufacturing
a. Just-in-time inventory.
c. Balanced scorecard.
b. Total quality management.
d. Activity-based costing.
14. (LO 4) Corporate social responsibility refers to:
a. the practice by management of reviewing all business processes in an effort to increase productivity and eliminate
waste.
b. an approach used to allocate overhead based on each product’s use of activities.
c. the attempt by management to identify and eliminate constraints within the value chain.
d. efforts by companies to employ sustainable business practices with regard to employees and the environment.
overhead and a product cost; and (d) assembly worker wages is direct
labor and is a product cost.
8. c. Cost of goods sold is computed as Beginning finished goods
inventory ($200,000) + Cost of goods manufactured ($600,000) −
Ending finished goods inventory ($250,000), or $200,000 + $600,000 −
$250,000 = $550,000. Therefore, choices (a) $450,000, (b) $500,000,
and (d) $600,000 are incorrect.
9. c. Both a merchandising company (periodic inventory system) and
a manufacturing company use cost of goods available for sale to calculate cost of goods sold. Therefore, choices (a) only a merchandising
company, (b) only a manufacturing company, and (d) neither a manufacturing company or a merchandising company are incorrect.
10. a. A cost of goods manufactured schedule shows beginning
and ending inventories for raw materials and work in process only.
Therefore, choices (b) work in process only and (c) raw materials only
are incorrect. Choice (d) is incorrect because the schedule does not
include finished goods.
11. d. The calculation to determine the cost of goods manufactured
is Beginning work in process inventory + Total manufacturing costs −
Ending work in process inventory. The other choices are incorrect
because (a) raw materials inventory, (b) ending finished goods inventory, and (c) beginning finished goods inventory and ending finished
goods inventory are not part of the computation.
12. b. CEOs and CFOs must certify that financial statements provide a fair presentation of the company’s operating results. The other
choices are incorrect because (a) reports prepared by financial (not
managerial) accountants must be audited by CPAs; (c) SOX clarifies
that top management, not the audit committee, is responsible for
the company’s financial statements; and (d) reports by financial (not
managerial) accountants must comply with GAAP.
13. d. Activity-based costing attempts to allocate manufacturing
overhead in a more meaningful fashion. Therefore, choices (a) justin-time inventory, (b) total quality management, and (c) balanced
scorecard are incorrect.
14. d. Corporate social responsibility refers to efforts by companies
to employ sustainable business practices with regard to employees
and the environment. The other choices are incorrect because
(a) defines lean manufacturing, (b) refers to activity-based costing,
and (c) describes the theory of constraints.
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Practice Brief Exercises
1-27
Practice Brief Exercises
1. (LO 1) The following are selected data for Lopez Furniture.
Utilities for manufacturing equipment
Classify manufacturing costs.
$120,000
Wood
850,000
Depreciation on factory building
220,000
Wages for production workers
391,000
Fabric
313,000
Delivery expense
144,000
Property taxes on factory
70,000
Using this selected data, determine total (a) direct materials, (b) direct labor, (c) manufacturing overhead, (d) product costs, and (e) period costs.
Solution
1. a. Wood ($850,000) + Fabric ($313,000) = $1,163,000
b. Wages for production workers, $391,000
c. Utilities ($120,000) + Depreciation ($220,000) + Property taxes ($70,000) = $410,000
d. Direct materials ($1,163,000) + Direct labor ($391,000) + Manufacturing overhead ($410,000) =
$1,964,000
e. Delivery expense, $144,000
2. (LO 3) Cody Cellular has the following data: direct labor $100,000, direct materials used $90,000,
total manufacturing overhead $110,000, beginning work in process $15,000, and ending work
in process $24,000. Compute (a) total manufacturing costs, (b) total cost of work in process, and
(c) cost of goods manufactured.
Compute total manufacturing costs and
total cost of work in process.
Solution
2. a. Direct materials use
Direct labor
Total manufacturing overhead
Total manufacturing costs
$ 90,000
100,000
110,000
$300,000
b. Beginning work in process
Total manufacturing costs
Total cost of work in process
$ 15,000
300,000
$315,000
c. Total cost of work in process
Less ending work in process
Cost of goods manufactured
$315,000
(24,000)
$291,000
3. (LO 3) The following are current asset items in alphabetical order for Asche Company’s balance
sheet at December 31, 2022. Prepare the current assets section (including a complete heading).
Accounts receivable
$100,000
Cash
29,000
Finished goods
47,000
Prepaid expenses
20,000
Raw materials
39,000
Short-term investments
51,000
Work in process
44,000
Prepare current assets section.
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1-28 C H A PT E R 1
Managerial Accounting
Solution
3.
Asche Company
Balance Sheet
December 31, 2022
Current assets
Cash
Short-term investments
Accounts receivable
Inventories
Finished goods
Work in process
Raw materials
Prepaid expenses
$ 29,000
51,000
100,000
$47,000
44,000
39,000
130,000
20,000
Total current assets
$330,000
Practice Exercises
Determine the total amount of various
types of costs.
1. (LO 2) Fredricks Company reports the following costs and expenses in May.
Factory utilities
Depreciation on factory
equipment
Depreciation on delivery trucks
Indirect factory labor
Indirect materials
Direct materials used
Factory manager’s salary
$ 15,600
12,650
8,800
48,900
80,800
137,600
13,000
Direct labor
Sales salaries
Property taxes on factory
building
Repairs to office equipment
Factory repairs
Advertising
Office supplies used
Instructions
From the information, determine the total amount of:
a. Manufacturing overhead.
b. Product costs.
c. Period costs.
Solution
1. a. Factory utilities
Depreciation on factory equipment
Indirect factory labor
Indirect materials
Factory manager’s salary
Property taxes on factory building
Factory repairs
$ 15,600
12,650
48,900
80,800
13,000
2,500
2,000
Manufacturing overhead
$175,450
b. Direct materials used
Direct labor
Manufacturing overhead
$137,600
89,100
175,450
Product costs
c. Depreciation on delivery trucks
Sales salaries
Repairs to office equipment
Advertising
Office supplies used
Period costs
$402,150
$
8,800
46,400
2,300
18,000
5,640
$ 81,140
$89,100
46,400
2,500
2,300
2,000
18,000
5,640
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Practice Problem
2. (LO 3) Tommi Corporation incurred the following costs during the year.
Direct materials used in production
Depreciation on factory
Property taxes on store
Labor costs of assembly-line workers
Factory supplies used
$120,000
60,000
7,500
110,000
25,000
Advertising expense
Property taxes on factory
Delivery expense
Sales commissions
Salaries paid to sales clerks
$45,000
19,000
21,000
35,000
50,000
1-29
Compute cost of goods manufactured
and sold.
Work in process inventory was $10,000 at January 1 and $14,000 at December 31. Finished goods inventory was $60,500 at January 1 and $50,600 at December 31. (Assume that all raw materials used were
direct materials.)
Instructions
a. Compute cost of goods manufactured.
b. Compute cost of goods sold.
Solution
2. a. Work in process, January 1
Direct materials used
Direct labor
Manufacturing overhead
Depreciation on factory
Factory supplies used
Property taxes on factory
$120,000
110,000
$ 10,000
$60,000
25,000
19,000
104,000
Total manufacturing overhead
Total manufacturing costs
334,000
Total cost of work in process
Less: Ending work in process
344,000
14,000
Cost of goods manufactured
$330,000
b. Finished goods inventory, January 1
Cost of goods manufactured
$ 60,500
330,000
Cost of goods available for sale
Less: Finished goods inventory, December 31
390,500
50,600
$339,900
Cost of goods sold
Practice Problem
(LO 3) Superior Company has the following cost and expense data for the year ended December 31,
2022.
Raw materials, 1/1/22
Raw materials, 12/31/22
Raw materials purchases
Work in process, 1/1/22
Work in process, 12/31/22
Finished goods, 1/1/22
Finished goods, 12/31/22
Direct labor
Factory manager’s salary
Insurance, factory
$ 30,000
20,000
205,000
80,000
50,000
110,000
120,000
350,000
35,000
14,000
Property taxes, factory building
Sales revenue
Delivery expenses (to customers)
Sales commissions
Indirect labor
Factory machinery rent
Factory utilities
Depreciation, factory building
Administrative expenses
$ 6,000
1,500,000
100,000
150,000
105,000
40,000
65,000
24,000
300,000
Instructions
a. Prepare a cost of goods manufactured schedule for Superior Company for 2022. (Assume that all
raw materials used were direct materials.)
b. Prepare an income statement for Superior Company for 2022.
c. Assume that Superior Company’s accounting records show the balances of the following current
asset accounts: Cash $17,000, Accounts Receivable (net) $120,000, Prepaid Expenses $13,000, and
Short-Term Investments $26,000. Prepare the current assets section of the balance sheet for Superior Company as of December 31, 2022.
Prepare a cost of goods manufactured
schedule, an income statement, and a
partial balance sheet.
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1-30 C H A PT E R 1
Managerial Accounting
Solution
a.
Superior Company
Cost of Goods Manufactured Schedule
For the Year Ended December 31, 2022
Work in process, January 1
Direct materials
Raw materials inventory, January 1
Raw materials purchases
Total raw materials available for use
Less: Raw materials inventory, December 31
Direct materials used
Direct labor
Manufacturing overhead
Indirect labor
Factory utilities
Factory machinery rent
Factory manager’s salary
Depreciation, factory building
Insurance, factory
Property taxes, factory building
Total manufacturing overhead
$ 80,000
$ 30,000
205,000
235,000
20,000
$215,000
350,000
$105,000
65,000
40,000
35,000
24,000
14,000
6,000
289,000
Total manufacturing costs
854,000
Total cost of work in process
Less: Work in process, December 31
934,000
50,000
Cost of goods manufactured
$884,000
b.
Superior Company
Income Statement
For the Year Ended December 31, 2022
Sales revenue
Cost of goods sold
Finished goods inventory, January 1
Cost of goods manufactured
Cost of goods available for sale
Less: Finished goods inventory, December 31
Cost of goods sold
Gross profit
Operating expenses
Administrative expenses
Sales commissions
Delivery expenses
Total operating expenses
$1,500,000
$110,000
884,000
994,000
120,000
874,000
626,000
300,000
150,000
100,000
Net income
550,000
$
c.
76,000
Superior Company
Balance Sheet (partial)
December 31, 2022
Current assets
Cash
Short-term investments
Accounts receivable (net)
Inventory
Finished goods
Work in process
Raw materials
Prepaid expenses
Total current assets
$ 17,000
26,000
120,000
$120,000
50,000
20,000
190,000
13,000
$366,000
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Brief Exercises
1-31
Brief Exercises, DO IT! Exercises, Exercises, Problems, Data Analytics Activities, and many
additional resources are available for practice in WileyPLUS.
Questions
1. a. “Managerial accounting is a field of accounting that provides economic information for all interested parties.” Is this true? Explain
why or why not.
13. Sealy Company has beginning raw materials inventory $12,000,
ending raw materials inventory $15,000, and raw materials purchases
$170,000. What is the cost of direct materials used?
b. Joe Delong believes that managerial accounting serves only
manufacturing firms. Is Joe correct? Explain.
14. Tate Inc. has beginning work in process $26,000, direct materials
used $240,000, direct labor $220,000, total manufacturing overhead
$180,000, and ending work in process $32,000. What are the total
manufacturing costs?
2. Distinguish between managerial and financial accounting as to
(a) primary users of reports, (b) types and frequency of reports, and
(c) purpose of reports.
3. How do the content of reports and the verification of reports differ
between managerial and financial accounting?
4. Linda Olsen is studying for the next accounting mid-term examination. Summarize for Linda what she should know about management functions.
5. “Decision-making is management’s most important function.” Is
this true? Explain why or why not.
6. Explain the primary difference between line positions and staff
positions, and give examples of each.
7. Jerry Lang is unclear as to the difference between the balance
sheets of a merchandising company and a manufacturing company.
Explain the difference to Jerry.
8. How are manufacturing costs classified?
9. Mel Finney claims that the distinction between direct and indirect
materials is based entirely on physical association with the product.
Is Mel correct? Why?
10. Tina Burke is confused about the differences between a product
cost and a period cost. Explain the differences to Tina.
11. Identify the differences in the cost of goods sold section of an
income statement between a merchandising company and a manufacturing company.
12. The determination of the cost of goods manufactured involves
the following factors: (A) beginning work in process inventory,
(B) total manufacturing costs, and (C) ending work in process inventory. Identify the meaning of X in the following equations:
a. A + B = X b. A + B − C = X
15. Tate Inc. has beginning work in process $26,000, direct materials used $240,000, direct labor $220,000, total manufacturing
overhead $180,000, and ending work in process $32,000. What
are (a) the total cost of work in process and (b) the cost of goods
manufactured?
16. In what order should manufacturing inventories be reported in a
balance sheet?
17. How does the output of manufacturing operations differ from
that of service operations?
18. Discuss whether the product costing techniques discussed in this
chapter apply equally well to manufacturers and service companies.
19. What is the value chain? Describe, in sequence, the main components of a manufacturer’s value chain.
20. What is an enterprise resource planning (ERP) system? What are
its primary benefits?
21. Why is product quality important for companies that implement
a just-in-time inventory system?
22. Explain what is meant by “balanced” in the balanced scorecard
approach.
23. In what ways can the budgeting process create incentives for
unethical behavior?
24. What rules were enacted under the Sarbanes-Oxley Act to address
unethical accounting practices?
25. What is activity-based costing, and what are its potential
benefits?
Brief Exercises
BE1.1 (LO 1), C Complete the following comparison table between managerial and financial accounting.
Primary users of reports
Types of reports
Frequency of reports
Purpose of reports
Content of reports
Verification process
Financial Accounting
Managerial Accounting
Distinguish between managerial and
financial accounting.
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1-32 C H A PT E R 1
Managerial Accounting
Identify the three management
functions.
BE1.2 (LO 1), C Listed below are the three functions of the management of an organization.
1. Planning. 2. Directing. 3. Controlling.
Identify which of the following statements best describes each of the above functions.
a. ______ requires management to look ahead and to establish objectives. A key objective of management is to add value to the business.
b. ______ involves coordinating the diverse activities and human resources of a company to produce a
smooth-running operation. This function relates to the implementation of planned objectives.
c. ______ is the process of keeping the activities on track. Management determines whether goals are
being met and what changes are necessary when there are deviations.
Classify manufacturing costs.
BE1.3 (LO 2), C Determine whether each of the following costs should be classified as direct materials
(DM), direct labor (DL), or manufacturing overhead (MO).
a. ______ Frames and tires used in manufacturing bicycles.
b. ______ Wages paid to production workers.
c. ______ Insurance on factory equipment and machinery.
d. ______ Depreciation on factory equipment.
Classify manufacturing costs.
Identify product and period costs.
Classify manufacturing costs.
BE1.4 (LO 2), C Indicate whether each of the following costs of an automobile manufacturer would be
classified as direct materials, direct labor, or manufacturing overhead.
a. ______ Windshield.
e. ______ Factory machinery lubricants.
b. ______ Engine.
f. ______ Tires.
c. ______ Wages of assembly-line worker.
g. ______ Steering wheel.
d. ______ Depreciation of factory machinery.
h. ______ Salary of painting supervisor.
BE1.5 (LO 2), C Identify whether each of the following costs should be classified as product costs or
period costs.
a. ______ Manufacturing overhead.
d. ______ Advertising expenses.
b. ______ Selling expenses.
e. ______ Direct labor.
c. ______ Administrative expenses.
f. ______ Direct materials.
BE1.6 (LO 2), C Presented here are Rook Company’s monthly manufacturing cost data related to its
tablet computer product.
a. Utilities for manufacturing equipment
$116,000
b. Raw materials (CPU, chips, etc.)
85,000
c. Depreciation on manufacturing building
880,000
d. Wages for production workers
191,000
Enter each cost item in the following table, placing an “X” under the appropriate classification.
Product Costs
Direct
Materials
Direct
Labor
Manufacturing
Overhead
a.
b.
c.
d.
Compute total manufacturing costs and
total cost of work in process.
BE1.7 (LO 3), AP Francum Company has the following data: direct labor $209,000, direct materials
used $180,000, total manufacturing overhead $208,000, and beginning work in process $25,000. Compute
(a) total manufacturing costs and (b) total cost of work in process.
Prepare current assets section of
balance sheet.
BE1.8 (LO 3), AP In alphabetical order, here are current asset items for Roland Company’s balance sheet
at December 31, 2022. Prepare the current assets section (including a complete heading).
Accounts receivable
Cash
Finished goods
Prepaid expenses
Raw materials
Work in process
$200,000
62,000
91,000
38,000
83,000
87,000
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DO IT! Exercises
BE1.9 (LO 3), AP The following are incomplete manufacturing cost data. Determine the missing
amounts for these three independent situations.
1.
2.
3.
Direct
Materials
Used
Direct
Labor
Manufacturing
Overhead
Total
Manufacturing
Costs
$40,000
?
$55,000
$61,000
$75,000
?
$ 50,000
$140,000
$111,000
?
$296,000
$310,000
BE1.10 (LO 3), AP Use the data from BE1.9 and the data that follow. Determine the missing amounts.
Total
Manufacturing
Costs
Work
in Process
(Jan. 1)
Work
in Process
(Dec. 31)
Cost of
Goods
Manufactured
?
$296,000
$310,000
$120,000
?
$463,000
$82,000
$98,000
?
?
$331,000
$715,000
1.
2.
3.
BE1.11 (LO 4), C The Sarbanes-Oxley Act (SOX) has important implications for the financial community. Explain two implications of SOX.
1-33
Determine missing amounts in
computing total manufacturing costs.
Determine missing amounts in
computing cost of goods manufactured.
Identify important regulatory changes.
DO IT! Exercises
DO IT! 1.1 (LO 1), C Indicate whether the following statements are true or false. If false, indicate how
to correct the statement.
Identify managerial accounting
concepts.
1. The board of directors has primary responsibility for daily management functions.
2. Financial accounting reports pertain to subunits of the business and are very detailed.
3. Managerial accounting reports must follow GAAP and are audited by CPAs.
4. M
anagers’ activities and responsibilities can be classified into three broad functions: planning,
directing, and controlling.
DO IT! 1.2 (LO 2), C A music company has these costs:
Advertising
Blank CDs
Depreciation of CD image burner
Salary of factory manager
Factory supplies used
Identify managerial cost classifications.
Paper inserts for CD cases
CD plastic cases
Salaries of sales representatives
Salaries of factory maintenance employees
Salaries of employees who burn music onto CDs
Classify each cost as a period or a product cost. Within the product cost category, indicate whether the
cost is part of direct materials (DM), direct labor (DL), or manufacturing overhead (MO).
DO IT! 1.3 (LO 3), AP The following information is available for Tomlin Company.
Raw materials inventory
Work in process inventory
Materials purchased in April
Direct labor in April
Manufacturing overhead in April
April 1
April 30
$10,000
5,000
$14,000
3,500
Prepare cost of goods manufactured
schedule.
$ 98,000
80,000
160,000
Prepare the cost of goods manufactured schedule for the month of April 2022. (Assume that all raw
materials used were direct materials.)
DO IT! 1.4 (LO 4), C Match the descriptions that follow with the corresponding terms.
Descriptions:
1. ______ Inventory system in which goods are manufactured or purchased just as they are needed
for sale.
2. ______ A method of allocating overhead based on each product’s use of activities in making the
product.
Identify trends in managerial
accounting.
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1-34 C H A PT E R 1
Managerial Accounting
3. ______ Systems that are especially important to firms adopting just-in-time inventory methods.
4. ______ Part of the value chain for a manufacturing company.
5. ______ The U.S. economy is trending toward this.
6. ______ A performance-measurement approach that uses both financial and nonfinancial measures,
tied to company objectives, to evaluate a company’s operations in an integrated fashion.
7. ______ Requires that top managers certify that the company maintains an adequate system of
internal controls over financial reporting.
Terms:
a.
b.
c.
d.
Activity-based costing.
Balanced scorecard.
Total quality management (TQM).
Research and development, and product design.
e. Service industries.
f. Just-in-time (JIT) inventory.
g. Sarbanes-Oxley Act (SOX).
Exercises
Identify distinguishing features of
managerial accounting.
E1.1 (LO 1), C Justin Bleeber has prepared the following list of statements about managerial accounting, financial accounting, and the functions of management.
1. Financial accounting focuses on providing information to internal users.
2. Staff positions are directly involved in the company’s primary revenue-generating activities.
3. Preparation of budgets is part of financial accounting.
4. Managerial accounting applies only to merchandising and manufacturing companies.
5. Both managerial accounting and financial accounting deal with many of the same economic
events.
6. Managerial accounting reports are prepared only quarterly and annually.
7. Financial accounting reports are general-purpose reports.
8. Managerial accounting reports pertain to subunits of the business.
9. Managerial accounting reports must comply with generally accepted accounting principles.
10. The company treasurer reports directly to the vice president of operations.
Instructions
Identify each statement as true or false. If false, indicate how to correct the statement.
Classify costs into three classes of
manufacturing costs.
E1.2 (LO 2), C The following is a list of costs and expenses usually incurred by Barnum Corporation, a
manufacturer of furniture, in its factory.
1. Salaries for product inspectors.
2. Insurance on factory machines.
3. Property taxes on the factory building.
4. Factory repairs.
5. Upholstery used in manufacturing furniture.
6. Wages paid to assembly-line workers.
7. Factory machinery depreciation.
8. Glue, nails, paint, and other small parts used in production.
9. Factory supervisors’ salaries.
10. Wood used in manufacturing furniture.
Instructions
Classify these items into the following categories: (a) direct materials, (b) direct labor, and (c) manufacturing overhead.
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Exercises 1-35
E1.3 (LO 2), C Trak Corporation, which manufactures bicycles, incurred the following costs.
Bicycle components
Depreciation on factory
Property taxes on retail store
Labor costs of assembly-line workers
Factory supplies used
$100,000
60,000
7,500
110,000
13,000
Advertising expense
Property taxes on factory
Customer delivery expense
Sales commissions
Salaries paid to sales clerks
$45,000
14,000
21,000
35,000
50,000
Identify types of costs and explain their
accounting.
Instructions
a. Identify each of the above costs as direct materials, direct labor, manufacturing overhead, or period
costs.
b. Explain the basic difference in accounting for product costs and period costs.
E1.4 (LO 2), AP Knight Company reports the following costs and expenses in May.
Factory utilities
Depreciation on factory
equipment
Depreciation on delivery trucks
Indirect factory labor
Indirect materials
Direct materials used
Factory manager’s salary
$ 15,500
12,650
3,800
48,900
80,800
137,600
8,000
Direct labor
Sales salaries
Property taxes on factory
building
Repairs to office equipment
Factory repairs
Advertising
Office supplies used
$69,100
46,400
2,500
1,300
2,000
15,000
2,640
Determine the total amount of various
types of costs.
Excel
Excel templates for selected
exercises and problems provide
students a framework for solving
in Excel.
Instructions
From the information, determine the total amount of:
a. Manufacturing overhead.
b. Product costs.
c. Period costs.
E1.5 (LO 2), C Gala Company is a manufacturer of laptop computers. Various costs and expenses associated with its operations are as follows.
Classify various costs into different cost
categories.
1. Property taxes on the factory building.
2. Production superintendents’ salaries.
3. Memory boards and chips used in assembling computers.
4. Depreciation on the factory equipment.
5. Salaries for quality control inspectors.
6. Sales commissions paid to sell laptop computers.
7. Electrical components used in assembling computers.
8. Wages of workers assembling laptop computers.
9. Soldering materials used on factory assembly lines.
10. Salaries for the night security guards for the factory building.
The company intends to classify these costs and expenses into the following categories: (a) direct materials, (b) direct labor, (c) manufacturing overhead, and (d) period costs.
Instructions
List the items (1) through (10). For each item, indicate the cost category to which it belongs.
E1.6 (LO 2), C Service The administrators of Crawford County’s Memorial Hospital are interested in
identifying the various costs and expenses that are incurred in producing a patient’s X-ray. A list of such
costs and expenses is presented here.
1. Salaries for the X-ray machine technicians.
2. Wages for the hospital janitorial personnel.
3. Film costs for the X-ray machines.
4. Property taxes on the hospital building.
5. Salary of the X-ray technicians’ supervisor.
6. Electricity costs for the X-ray department.
7. Maintenance and repairs on the X-ray machines.
Classify various costs into different cost
categories.
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1-36 C H A PT E R 1
Managerial Accounting
8. X-ray department supplies.
9. Depreciation on the X-ray department equipment.
10. Depreciation on the hospital building.
The administrators want these costs and expenses classified as (a) direct materials, (b) direct labor, or
(c) service overhead.
Instructions
List the items (1) through (10). For each item, indicate the cost category to which the item belongs.
Classify various costs into different cost
categories.
E1.7 (LO 2), AP Service
its delivery service.
National Express reports the following costs and expenses in June 2022 for
Indirect materials used
Depreciation on delivery equipment
Dispatcher’s salary
Property taxes on office building
CEO’s salary
Gas and oil for delivery trucks
$ 6,400
11,200
5,000
870
12,000
2,200
Drivers’ salaries
Advertising
Delivery equipment repairs
Office supplies
Office utilities
Repairs on office equipment
$16,000
4,600
300
650
990
180
Instructions
Determine the total amount of (a) delivery service (product) costs and (b) period costs.
Classify various costs into different cost
categories.
E1.8 (LO 2), AP Evilene Company makes industrial-grade brooms. It incurs the following costs.
1. Salaries for broom inspectors.
11. Salaries for customer service representatives.
2. Copy machine maintenance at corporate
headquarters.
12. Salaries for factory maintenance crew.
3. Hourly wages for assembly workers.
14. Salaries for the raw materials receiving department employees.
4. Research and development for new broom
types.
5. Salary for factory manager.
6. Depreciation on broom-assembly equipment.
7. Salary for the CEO administrative assistant.
8. Wood for handles.
13. Sales team golf outings with customers.
15. Advertising expenses.
16. Depreciation on the CFO company car.
17. Straw for brooms.
18. Salaries for sales personnel.
19. Shipping costs to customers.
9. Factory cleaning supplies.
10. Lubricants for broom-assembly factory
equipment.
Instructions
a. Indicate whether each cost is direct materials, direct labor, manufacturing overhead, or nonmanufacturing.
b. Indicate whether each cost is a product cost or a period cost.
Compute cost of goods manufactured
and sold, and discuss classification of
various costs.
E1.9 (LO 3), AP Lopez Corporation incurred the following costs during 2022.
Direct materials used in product
Depreciation on factory
Property taxes on store
Labor costs of assembly-line workers
Factory supplies used
$120,000
60,000
7,500
110,000
23,000
Advertising expense
Property taxes on factory
Delivery expense
Sales commissions
Salaries paid to sales clerks
$45,000
14,000
21,000
35,000
50,000
Work in process inventory was $12,000 at January 1 and $15,500 at December 31. Finished goods inventory was $60,000 at January 1 and $45,600 at December 31.
Instructions
a. Compute cost of goods manufactured.
b. Compute cost of goods sold.
c. For those costs not included in the calculations in part (a) or part (b), explain how they would be
classified and reported in the financial statements.
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Exercises 1-37
E1.10 (LO 3), AP An incomplete cost of goods manufactured schedule is presented here.
Determine missing amounts in cost of
goods manufactured schedule.
Hobbit Company
Cost of Goods Manufactured Schedule
For the Year Ended December 31, 2022
Work in process, January 1
Direct materials
Raw materials inventory, January 1
Raw materials purchases
$210,000
$ ?
158,000
Total raw materials available for use
Less: Raw materials inventory, December 31
Direct materials used
Direct labor
Manufacturing overhead
Indirect labor
Factory depreciation
Factory utilities
?
22,500
$180,000
?
18,000
36,000
68,000
Total manufacturing overhead
Total manufacturing costs
Total cost of work in process
Less: Work in process, December 31
122,000
?
?
81,000
Cost of goods manufactured
$540,000
Instructions
Complete the cost of goods manufactured schedule for Hobbit Company. (Assume that all raw materials
used were direct materials.)
E1.11 (LO 3), AN Manufacturing cost data for Copa Company are presented as follows.
Case A
$ (a)
57,000
46,500
195,650
(b)
221,500
(c)
185,275
Direct materials used
Direct labor
Manufacturing overhead
Total manufacturing costs
Work in process 1/1/22
Total cost of work in process
Work in process 12/31/22
Cost of goods manufactured
Case B
$68,400
86,000
81,600
(d)
16,500
(e)
11,000
(f)
Case C
$130,000
(g)
102,000
253,700
(h)
337,000
70,000
(i)
Determine the missing amount of
different cost items.
Instructions
Determine the missing amount for each letter (a) through (i).
E1.12 (LO 3), AN Incomplete manufacturing cost data for Horizon Company for 2022 are presented as
follows for these four independent situations.
1.
2.
3.
4.
Direct
Materials
Used
$117,000
(c)
80,000
70,000
Direct
Labor
$140,000
200,000
100,000
(g)
Manufacturing
Overhead
$ 87,000
132,000
(e)
75,000
Total
Manufacturing
Costs
$ (a)
450,000
265,000
288,000
Work in
Process
Jan. 1
$33,000
(d)
60,000
45,000
Work in
Process
Dec. 31
$ (b)
40,000
80,000
(h)
Cost of
Goods
Manufactured
$360,000
470,000
(f)
270,000
Instructions
a. Determine the missing amount for each letter.
b. Prepare a condensed cost of goods manufactured schedule for situation (1) for the year ended
December 31, 2022.
Determine the missing amount of
different cost items, and prepare a
condensed cost of goods manufactured
schedule.
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1-38 C H A PT E R 1
Managerial Accounting
Prepare a cost of goods manufactured
schedule and a partial income
statement.
Excel
E1.13 (LO 3), AP Cepeda Corporation has the following cost records for June 2022.
Indirect factory labor
Direct materials used
Work in process, 6/1/22
Work in process, 6/30/22
Finished goods, 6/1/22
Finished goods, 6/30/22
$ 4,500
20,000
3,000
3,800
5,000
7,500
Factory utilities
Depreciation, factory equipment
Direct labor
Maintenance, factory equipment
Indirect materials used
Factory manager’s salary
$
400
1,400
40,000
1,800
2,200
3,000
Instructions
a. Prepare a cost of goods manufactured schedule for June 2022.
b. Prepare an income statement through gross profit for June 2022 assuming sales revenue is
$92,100.
Classify various costs into different
categories and prepare cost of services
performed schedule.
E1.14 (LO 2, 3), AP Service Keisha Tombert, the bookkeeper for Washington Consulting, a political
consulting firm, has recently completed a managerial accounting course at her local college. One of the
topics covered in the course was the cost of goods manufactured schedule. Keisha wondered if such a
schedule could be prepared for her firm. She realized that, as a service-oriented company, it would have
no work in process inventory to consider.
Listed here are the costs her firm incurred for the month ended August 31, 2022.
Supplies used on consulting contracts
Supplies used in the administrative offices
Depreciation on equipment used for contract work
Depreciation on administrative office equipment
Salaries of professionals working on contracts
Salaries of administrative office personnel
Janitorial services for professional offices
Janitorial services for administrative offices
Insurance on contract operations
Insurance on administrative operations
Utilities for contract operations
Utilities for administrative offices
$ 1,700
1,500
900
1,050
15,600
7,700
700
500
800
900
1,400
1,300
Instructions
a. Prepare a schedule of cost of contract services performed (similar to a cost of goods manufactured
schedule) for the month.
b. List the costs not included in (a), and then explain how they would be classified and reported in the
financial statements.
Determine cost of goods manufactured
and prepare a partial income
statement.
E1.15 (LO 3), AP The following information is available for Aikman Company.
Raw materials inventory
Work in process inventory
Finished goods inventory
Materials purchased
Direct labor
Manufacturing overhead
Sales revenue
January 1, 2022
$21,000
13,500
27,000
2022
$150,000
220,000
180,000
910,000
December 31, 2022
$30,000
17,200
21,000
Instructions
a. Compute cost of goods manufactured. (Assume that all raw materials used were direct materials.)
b. Prepare an income statement through gross profit.
c. Show the presentation of the ending inventories on the December 31, 2022, balance sheet.
d. How would the income statement and balance sheet of a merchandising company be different from
Aikman’s financial statements?
Indicate in which schedule or financial
statement(s) different cost items would
appear.
E1.16 (LO 3), C University Company produces collegiate apparel. From its accounting records, it prepares the following schedule and financial statements on a yearly basis.
a. Cost of goods manufactured schedule.
b. Income statement.
c. Balance sheet.
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Exercises 1-39
The following items are found in the company’s accounting records and accompanying data.
1. Direct labor.
2. Raw materials inventory, January 1.
3. Work in process inventory, December 31.
4. Finished goods inventory, January 1.
5. Indirect labor.
6. Depreciation expense of factory machinery.
7. Work in process, January 1.
8. Finished goods inventory, December 31.
9. Factory maintenance salaries.
10. Cost of goods manufactured.
11. Depreciation expense of delivery equipment.
12. Cost of goods available for sale.
13. Direct materials used.
14. Heat and electricity for factory.
15. Repairs to roof of factory building.
16. Cost of raw materials purchases.
Instructions
List the items (1)–(16). For each item, indicate by using the appropriate letter or letters, the schedule and/
or financial statement(s) in which the item would appear.
E1.17 (LO 3), AP An analysis of the accounts of Roberts Company reveals the following manufacturing
cost data for the month ended June 30, 2022.
Inventory
Raw materials
Work in process
Finished goods
Beginning
$9,000
5,000
9,000
Ending
$13,100
7,000
8,000
Prepare a cost of goods manufactured
schedule, and present the ending
inventories on the balance sheet.
Excel
Costs incurred: raw materials purchases $54,000, direct labor $47,000, manufacturing overhead $19,900.
The specific overhead costs were: indirect labor $5,500, factory insurance $4,000, machinery depreciation $4,000, machinery repairs $1,800, factory utilities $3,100, and miscellaneous factory costs $1,500.
(Assume that all raw materials used were direct materials.)
Instructions
a. Prepare the cost of goods manufactured schedule for the month ended June 30, 2022.
b. Show the presentation of the ending inventories on the June 30, 2022, balance sheet.
E1.18 (LO 3), AP Writing McQueen Motor Company manufactures automobiles. During September
2022, the company purchased 5,000 head lamps at a cost of $15 per lamp. Fifty of these lamps were used
to replace the head lamps in autos used by traveling sales staff, and 4,600 lamps were put in autos manufactured during the month.
Of the autos put into production during September 2022, 90% were completed and transferred to the
company’s storage lot. Of the cars completed during the month, 70% were sold by September 30.
Determine the amount of cost to appear
in various accounts, and indicate
in which financial statements these
accounts would appear.
Instructions
a. Determine the cost of head lamps that would appear in each of the following accounts at September
30, 2022: Raw Materials, Work in Process, Finished Goods, Cost of Goods Sold, and Selling
Expenses.
b. Write a short memo to the chief accountant, indicating whether and where each of the accounts in
(a) would appear on the income statement or on the balance sheet at September 30, 2022.
E1.19 (LO 4), C The following is a list of terms related to managerial accounting practices.
1. Activity-based costing.
2. Just-in-time inventory.
3. Balanced scorecard.
4. Value chain.
Identify various managerial accounting
practices.
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1-40 C H A PT E R 1
Managerial Accounting
Instructions
Match each of the terms with the statement below that best describes the term.
a. ______ A performance-measurement technique that attempts to consider and evaluate all aspects of
performance using financial and nonfinancial measures in an integrated fashion.
b. ______ The group of activities associated with providing a product or performing a service.
c. ______ An approach used to reduce the cost associated with handling and holding inventory by
reducing the amount of inventory on hand.
d. ______ A method used to allocate overhead to products based on each product’s use of the activities
that cause the incurrence of the overhead cost.
Problems
Classify manufacturing costs into
different categories and compute the
unit cost.
Check figures provide a key
number to let you know you are
on the right track.
a. DM
DL
MO
PC
$75,000
$58,000
$22,100
$25,100
P1.1 (LO 2), AP Ohno Company specializes in manufacturing a unique model of bicycle helmet. The
model is well accepted by consumers, and the company has enough orders to keep the factory production
at 10,000 helmets per month (80% of its full capacity). Ohno’s monthly manufacturing costs and other
expense data are as follows.
Rent on factory equipment
Insurance on factory building
Raw materials used (plastics, polystyrene, etc.)
Utility costs for factory
Supplies used for general office
Wages for assembly-line workers
Depreciation on office equipment
Miscellaneous materials used (glue, thread, etc.)
Factory manager’s salary
Property taxes on factory building
Advertising for helmets
Sales commissions
Depreciation on factory building
$11,000
1,500
75,000
900
300
58,000
800
1,100
5,700
400
14,000
10,000
1,500
Instructions
a. Prepare an answer sheet with the following column headings.
Cost
Item
Direct
Materials
Product Costs
Direct
Manufacturing
Labor
Overhead
Period
Costs
Enter each cost item on your answer sheet, placing the dollar amount under the appropriate heading. Total the dollar amounts in each of the columns.
b. Compute the cost to produce one helmet.
Classify manufacturing costs into
different categories and compute the
unit cost.
P1.2 (LO 2), AP Bell Company has been a retailer of audio systems for the past 3 years. However, after
a thorough survey of audio system markets, Bell decided to turn its retail store into an audio equipment
factory. Production began October 1, 2022.
Direct materials costs for an audio system total $74 per unit. Workers on the production lines are
paid $12 per hour. An audio system takes 5 labor hours to complete. In addition, the rent on the equipment used to assemble audio systems amounts to $4,900 per month. Indirect materials cost $5 per system.
A supervisor was hired to oversee production; her monthly salary is $3,000.
Factory janitorial costs are $1,300 monthly. Advertising costs for the audio system will be $9,500 per
month. The factory building depreciation is $7,800 per year. Property taxes on the factory building will
be $9,000 per year.
Instructions
a. DM
DL
MO
PC
$111,000
$ 90,000
$ 18,100
$ 9,500
a. Prepare an answer sheet with the following column headings for October 2022.
Cost
Item
Direct
Materials
Product Costs
Direct
Manufacturing
Labor
Overhead
Period
Costs
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Problems 1-41
Assuming that Bell manufactures, on average, 1,500 audio systems per month, enter each cost item
on your answer sheet, placing the dollar amount per month under the appropriate heading. Total
the dollar amounts in each of the columns.
b. Compute the cost to produce one audio system.
P1.3 (LO 3), AN Incomplete manufacturing costs, expenses, and selling data for two different cases for
the year ended December 31, 2022, are as follows.
Direct materials used
Direct labor
Manufacturing overhead
Total manufacturing costs
Beginning work in process inventory
Ending work in process inventory
Sales revenue
Sales discounts
Cost of goods manufactured
Beginning finished goods inventory
Cost of goods available for sale
Cost of goods sold
Ending finished goods inventory
Gross profit
Operating expenses
Net income
1
$ 9,600
5,000
8,000
(a)
1,000
(b)
24,500
2,500
17,000
(c)
22,000
(d)
3,400
(e)
2,500
(f)
Case
2
$ (g)
8,000
4,000
16,000
(h)
3,000
(i)
1,400
24,000
3,300
(j)
(k)
2,500
7,000
(l)
5,000
Determine the missing amount of
different cost items, and prepare a
condensed cost of goods manufactured
schedule, an income statement, and a
partial balance sheet.
Instructions
a. Determine the missing amount for each letter.
b. Prepare a condensed cost of goods manufactured schedule for Case 1.
c. Prepare an income statement and the current assets section of the balance sheet for Case 1. Assume
that in Case 1 the other items in the current assets section are as follows: Cash $3,000, Accounts
Receivable (net) $15,000, Raw Materials $600, and Prepaid Expenses $400.
P1.4 (LO 3), AP The following data were taken from the records of Clarkson Company for the fiscal year
ended June 30, 2022.
Raw Materials
Inventory 7/1/21
Raw Materials
Inventory 6/30/22
Finished Goods
Inventory 7/1/21
Finished Goods
Inventory 6/30/22
Work in Process
Inventory 7/1/21
Work in Process
Inventory 6/30/22
Direct Labor
Indirect Labor
$ 48,000
39,600
96,000
75,900
19,800
18,600
139,250
24,460
Accounts Receivable
Factory Insurance
Factory Machinery
Depreciation
Factory Utilities
Office Utilities Expense
Sales Revenue
Sales Discounts
Factory Manager’s Salary
Factory Property Taxes
Factory Repairs
Raw Materials Purchases
Cash
$ 27,000
4,600
b. Ending WIP
c. Current assets
$ 6,600
$29,000
Prepare a cost of goods manufactured
schedule, a partial income statement,
and a partial balance sheet.
Excel
16,000
27,600
8,650
534,000
4,200
58,000
9,600
1,400
96,400
32,000
Instructions
a. Prepare a cost of goods manufactured schedule. (Assume that all raw materials used were direct
materials.)
b. Prepare an income statement through gross profit.
a. CGM
b. Gross profit
c. Current assets
$386,910
$122,790
$193,100
c. Prepare the current assets section of the balance sheet at June 30, 2022.
P1.5 (LO 3), AN Empire Company is a manufacturer of smartphones. Its controller resigned in October
2022. An inexperienced assistant accountant has prepared the following income statement for the month
of October 2022.
Prepare a cost of goods manufactured
schedule and a correct income
statement.
Excel
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1-42 C H A PT E R 1
Managerial Accounting
Empire Company
Income Statement
For the Month Ended October 31, 2022
Sales revenue
Less: Operating expenses
Raw materials purchases
Direct labor cost
Advertising expense
Selling and administrative salaries
Rent on factory facilities
Depreciation on sales equipment
Depreciation on factory equipment
Indirect labor cost
Utilities expense
Insurance expense
$264,000
190,000
90,000
75,000
60,000
45,000
31,000
28,000
12,000
8,000
Net loss
$780,000
803,000
$ (23,000)
Prior to October 2022, the company had been profitable every month. The company’s president is
concerned about the accuracy of the income statement. As her friend, you have been asked to review the
income statement and make necessary corrections. After examining other manufacturing cost data, you
have acquired additional information as follows.
1. Inventory balances at the beginning and end of October were:
Raw materials
Work in process
Finished goods
October 1
$18,000
20,000
30,000
October 31
$29,000
14,000
50,000
2. Only 75% of the utilities expense and 60% of the insurance expense apply to factory operations. The
remaining amounts should be charged to selling and administrative activities.
Instructions
a. CGM
b. NI
$581,800
$2,000
a. Prepare a schedule of cost of goods manufactured for October 2022. (Assume that all raw materials
used were direct materials.)
b. Prepare a correct income statement for October 2022.
Continuing Cases
Each chapter includes a
hypothetical case featuring
Current Designs, the company
described at the beginning of
this chapter. Students can also
work through this case following
an Excel tutorial available in
WileyPLUS. Each chapter’s
tutorial focuses on a different
Excel function or feature.
Excel
Current Designs
CD1 Mike Cichanowski founded Wenonah Canoe and later purchased Current Designs, a company
that designs and manufactures kayaks. The kayak-manufacturing facility is located just a few minutes
from the canoe company’s headquarters in Winona, Minnesota.
Current Designs makes kayaks using two different processes. The rotational molding process uses
high temperature to melt polyethylene powder in a closed rotating metal mold to produce a complete
kayak hull and deck in a single piece. These kayaks are less labor-intensive and less expensive for the
company to produce and sell.
Its other kayaks use the vacuum-bagged composite lamination process (which we will refer to as the
composite process). Layers of fiberglass or Kevlar® are carefully placed by hand in a mold and are bonded
with resin. Then, a high-pressure vacuum is used to eliminate any excess resin that would otherwise add
weight and reduce the strength of the finished kayak. These kayaks require a great deal of skilled labor as
each boat is individually finished. The exquisite finish of the vacuum-bagged composite kayaks gave rise
to Current Designs’ tag line, “A work of art, made for life.”
Current Designs has the following managers:
Mike Cichanowski, CEO
Diane Buswell, Controller
Deb Welch, Purchasing Manager
Bill Johnson, Sales Manager
Dave Thill, Kayak Factory Manager
Rick Thrune, Production Manager for Composite Kayaks
The company’s accounting data for the most recent period is as follows.
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Continuing Cases
1-43
Current Designs
Home
Insert
Page Layout
Formulas
Data
Review
View
fx
P18
B
A
C
D
E
Period
Costs
Amount
1
Product Costs
2
3
Payee
Purpose
Direct
Materials
Direct
Labor
Manufacturing
Overhead
4
Winona Agency
Property insurance for factory
3,200
5
Bill Johnson
(sales manager)
Payroll check—payment to sales
manager
1,700
Xcel Energy
Winona Printing
Electricity for factory
Price lists for salespeople
8
Jim Kaiser (sales
representative)
Sales commissions
1,250
9
Dave Thill
(factory manager)
Payroll check—payment to
factory manager
1,450
10
Dana Schultz
(kayak assembler)
Payroll check—payment to
kayak assembler
760
11 Composite One
Bagging film used when kayaks are
assembled; it is discarded after use
260
12 Fastenal
Shop supplies—brooms, paper
towels, etc.
890
13 Ravago
Polyethylene powder which is the
main ingredient for the rotational
molded kayaks
3,170
14 Winona County
Property taxes on factory
5,480
North American
15
Composites
Kevlar® fabric for composite kayaks
4,930
6
7
16
Waste
Management
17 None
Trash disposal for the company
office building
Record depreciation
of manufacturing equipment
450
85
660
4,540
Instructions
a. What are the primary information needs of each manager?
b. Name one special-purpose management accounting report that could be designed for each manager.
Include the name of the report, the information it would contain, and how frequently it should be
issued.
c. When Diane Buswell, controller for Current Designs, reviewed the accounting records for a recent
period, she noted the cost items and amounts shown above (amounts are assumed). Enter the
amount for each item in the appropriate cost category. Then sum the amounts in each cost category
column.
Waterways Corporation
WC1 Waterways Corporation is a private corporation formed for the purpose of providing the products and the services needed to irrigate farms, parks, commercial projects, and private lawns. It has a
centrally located factory in a U.S. city that manufactures the products it markets to retail outlets across
the nation. It also maintains a division that performs installation and warranty servicing in six metropolitan areas.
The mission of Waterways is to manufacture quality parts that can be used for effective irrigation
projects that also conserve water. Through that effort, the company hopes to satisfy its customers, perform rapid and responsible service, and serve the community and the employees who represent the company in each community.
The company has been growing rapidly, so management is considering new ideas to help the company continue its growth and maintain the high quality of its products.
The Waterways case starts in
this chapter and continues in
every remaining chapter. You
will find the complete case for
each chapter in WileyPLUS.
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1-44 C H A PT E R 1
Managerial Accounting
Waterways was founded by Will Winkman, who is the company president and chief executive officer
(CEO). Working with him from the company’s inception is Will’s brother, Ben, whose sprinkler designs
and ideas about the installation of proper systems have been a major basis of the company’s success. Ben
is the vice president who oversees all aspects of design and production in the company.
The factory itself is managed by Todd Senter, who hires line managers to supervise the factory
employees. The factory makes all of the parts for the irrigation systems. The purchasing department is
managed by Helen Hines.
The installation and training division is overseen by vice president Henry Writer, who supervises the
managers of the six local installation operations. Each of these local managers hires his or her own local
service people. These service employees are trained by the home office under Henry Writer’s direction
because of the uniqueness of the company’s products.
There is a small human resources department under the direction of Sally Fenton, a vice president
who handles the employee paperwork, though hiring is actually performed by the separate departments.
Teresa Totter is the vice president who heads the sales and marketing area; she oversees 10 well-trained
salespeople.
The accounting and finance division of the company is run by Ann Headman, who is the chief
financial officer (CFO) and a company vice president. She is a member of the Institute of Management
Accountants and holds a certificate in management accounting. She has a small staff of accountants,
including a controller and a treasurer, and a staff of accounting input operators who maintain the
financial records.
A partial list of Waterways’ accounts and their balances for the month of November follows.
Accounts Receivable
Advertising Expenses
Cash
Depreciation—Factory Equipment
Depreciation—Office Equipment
Direct Labor
Factory Utilities
Finished Goods Inventory, November 30
Finished Goods Inventory, October 31
Indirect Labor
Office Salaries
Office Supplies Expense
Other Administrative Expenses
Prepaid Expenses
Raw Materials Inventory, November 30
Raw Materials Inventory, October 31
Raw Materials Purchases
Rent—Factory Equipment
Repairs—Factory Equipment
Sales Revenue
Sales Commissions
Work in Process Inventory, October 31
Work in Process Inventory, November 30
$ 275,000
54,000
260,000
16,800
2,400
42,000
27,000
68,800
72,550
48,000
325,000
1,600
72,000
41,250
52,700
38,000
184,500
47,000
4,500
1,350,000
40,500
52,700
42,000
Instructions
a. Based on the information given, construct an organizational chart of Waterways Corporation.
b. A list of accounts and their values are given above. From this information, prepare a cost of goods
manufactured schedule, an income statement, and a partial balance sheet for Waterways Corporation for the month of November. (Assume that all raw materials used were direct materials.)
Data Analytics in Action
Many chapters include data
analytics activities, which provide
students opportunities to employ
basic tools to analyze data.
Excel
Using Data Visualization to Determine Performance
DA1.1 Data visualization can be used to review company results.
Example: Recall the Management Insight “Supplying Today’s (Not Yesterday’s) Fashion” presented
in the chapter. Data analytics can help Inditex determine how it is performing over time. For retailers, the gross margin percentage is a good measure of how the company is doing, as it indicates what
­percentage of sales is available to cover selling and administration costs and generate profit. From
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Expand Your Critical Thinking
publicly available data, we can calculate Inditex’s gross margin percentage [(Sales – Cost of goods sold) ÷
Sales] and track it over time. What do you observe when you look at the following chart?
Gross Margin Percentages
Inditex's Gross Margin Percentages
62.0%
60.0
58.0
56.0
54.0
52.0
50.0
2007
2008
2009
2010
2011
Gross margin percentage
2012 2013 2014 2015 2016 2017
Year
Linear (gross margin percentage)
2018
Hopefully, you immediately noticed that Inditex is able to maintain a high and stable gross margin over the time period shown. Management should be quite pleased with this. But another measure
of success, revenue per employee, can provide management with even more insight concerning its
sales. This case will require you calculate and graph this data for Inditex, and then analyze the results.
Go to WileyPLUS for complete case details and instructions.
Data Analytics at Inditex Corporation
DA1.2 You are excited about your upcoming job interview at Inditex. You realize that you need to
have a better understanding of the company so that you can have several thoughtful questions prepared to ask during the interview. For this case, you will use Inditex’s performance information to
create several visualizations that will help increase your knowledge of the company’s operations.
Go to WileyPLUS for complete case details and instructions.
Expand Your Critical Thinking
Decision-Making Across the Organization
CT1.1 Wendall Company specializes in producing fashion outfits. On July 31, 2022, a tornado touched
down at its factory and general office. The inventories in the warehouse and the factory were completely
destroyed, as was the general office nearby. However, after a careful search of the disaster site the next
morning, Bill Francis, the company’s controller, and Elizabeth Walton, the cost accountant, were able to
recover a small part of the manufacturing cost data for the current month.
“What a horrible experience,” sighed Bill. “And the worst part is that we may not have enough
records to use in filing an insurance claim.”
“It was terrible,” replied Elizabeth. “However, I managed to recover some of the manufacturing
cost data that I was working on yesterday afternoon. The data indicate that our direct labor cost in July
totaled $250,000 and that we had purchased $365,000 of raw materials. Also, I recall that the amount
of raw materials used for July was $350,000. But I’m not sure this information will help. The rest of our
records are blown away.”
“Well, not exactly,” said Bill. “I was working on the year-to-date income statement when the tornado
warning was announced. My recollection is that our sales in July were $1,240,000 and our gross profit
ratio has been 40% of sales. Also, I can remember that our cost of goods available for sale was $770,000
for July.”
“Maybe we can work something out from this information!” exclaimed Elizabeth. “My experience
tells me that our manufacturing overhead is usually 60% of direct labor.”
Excel
1-45
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1-46 C H A PT E R 1
Managerial Accounting
“Hey, look what I just found,” cried Elizabeth. “It’s a copy of this June’s balance sheet, and it shows
that our inventories as of June 30 are Finished goods $38,000, Work in process $25,000, and Raw materials $19,000.”
“Super,” yelled Bill. “Let’s go work something out.”
In order to file an insurance claim, Wendall Company needs to determine the amount of its inventories as of July 31, 2022, the date of the tornado touchdown.
Instructions
With the class divided into groups, determine the amount of cost in the Raw Materials, Work in Process,
and Finished Goods inventory accounts as of the date of the tornado touchdown. (Assume that all raw
materials used were direct materials.)
Managerial Analysis
CT1.2 Tenrack is a fairly large manufacturing company located in the southern United States. The company manufactures tennis rackets, tennis balls, tennis clothing, and tennis shoes, all bearing the company’s distinctive logo, a large green question mark on a white flocked tennis ball. The company’s sales have
been increasing over the past 10 years.
The tennis racket division has recently implemented several advanced manufacturing techniques.
Robot arms hold the tennis rackets in place while glue dries, and machine vision systems check for
defects. The engineering and design team uses computerized drafting and testing of new products. The
following managers work in the tennis racket division:
Jason Dennis, Sales Manager (supervises all sales representatives)
Peggy Groneman, Technical Specialist (supervises computer programmers)
Dave Marley, Cost Accounting Manager (supervises cost accountants)
Kevin Carson, Production Supervisor (supervises all manufacturing employees)
Sally Renner, Engineer (supervises all new-product design teams)
Instructions
a. What are the primary information needs of each manager?
b. Which, if any, financial accounting report(s) is each likely to use?
c. Name one special-purpose management accounting report that could be designed for each manager.
Include the name of the report, the information it would contain, and how frequently it should
be issued.
Real-World Focus
CT1.3 The Institute of Management Accountants (IMA) is an organization dedicated to excellence
in the practice of management accounting and financial management.
Instructions
Go to the IMA’s website to locate the answers to the following questions.
a. How many members does the IMA have, and what are their job titles?
b. What are some of the benefits of joining the IMA as a student?
c. Use the chapter locator function to locate the IMA chapter nearest you, and find the name of the
chapter president.
Communication Activity
CT1.4 Refer to P1.5 and add the following requirement.
Prepare a letter to the president of the company, Shelly Phillips, describing the changes you made.
Explain clearly why net income is different after the changes. Keep the following points in mind as you
compose your letter.
1. This is a letter to the president of a company, who is your friend. The style should be generally
formal, but you may relax some requirements. For example, you may call the president by her
first name.
2. Executives are very busy. Your letter should tell the president your main results first (for example,
the amount of net income).
3. You should include brief explanations so that the president can understand the changes you made
in the calculations.
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Expand Your Critical Thinking
Ethics Case
CT1.5 Steve Morgan, controller for Newton Industries, was reviewing production cost reports for the
year. One amount in these reports continued to bother him—advertising. During the year, the company
had instituted an expensive advertising campaign to sell some of its slower-moving products. It was still
too early to tell whether the advertising campaign was successful.
There had been much internal debate as how to report advertising cost. The vice president of
finance argued that advertising cost should be reported as a cost of production, just like direct materials
and direct labor. He therefore recommended that this cost be identified as manufacturing overhead and
reported as part of inventory costs until sold. Others disagreed. Morgan believed that this cost should
be reported as an expense of the current period, so as not to overstate net income. Others argued that it
should be reported as prepaid advertising and reported as a current asset.
The president finally had to decide the issue. He argued that advertising cost should be reported
as inventory. His arguments were practical ones. He noted that the company was experiencing financial
difficulty and that expensing this amount in the current period might jeopardize a planned bond ­offering.
Also, by reporting the advertising cost as inventory rather than as prepaid advertising, less attention
would be directed to it by the financial community.
Instructions
a. Who are the stakeholders in this situation?
b. What are the ethical issues involved in this situation?
c. What would you do if you were Steve Morgan?
All About You
CT1.6 The primary purpose of managerial accounting is to provide information useful for management
decisions. Many of the managerial accounting techniques that you learn in this course will be useful for
decisions you make in your everyday life.
Instructions
For each of the following managerial accounting techniques, read the definition provided and then provide an example of a personal situation that would benefit from use of this technique.
a. Break-even point (Chapter 5).
b. Budget (Chapter 9).
c. Balanced scorecard (Chapter 11).
d. Capital budgeting (Chapter 12).
Considering Your Costs and Benefits
CT1.7 Because of global competition, companies have become increasingly focused on reducing costs.
To reduce costs and remain competitive, many companies are turning to outsourcing. Outsourcing
means hiring an outside supplier to provide elements of a product or service rather than producing them
internally.
Suppose you are the managing partner in a CPA firm with 30 full-time staff members. Larger firms
in your community have begun to outsource basic tax-return preparation work to India. Should you outsource your basic tax-return work to India as well? You estimate that you would have to lay off six staff
members if you outsource the work. The basic arguments for and against are as follows.
YES:The wages paid to Indian accountants are very low relative to U.S. wages. You will not be able
to compete unless you outsource.
NO:Tax-return data are highly sensitive. Many customers will be upset to learn that their data are
being emailed around the world.
Instructions
Write a response indicating your position regarding this situation. Provide support for your view.
Answers to Insight and Accounting Across the Organization Questions
Does a Company Need a CEO? Q: What are some of the advantages cited by companies that choose
a structure that lacks a CEO? A: Companies that replace the CEO with a management committee do so
because they believe that it enhances decision-making, improves collaboration, and increases management continuity by avoiding the disruptions associated with replacing a CEO.
1-47
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1-48 C H A PT E R 1
Managerial Accounting
Low Fares but Decent Profits Q: What are some of the line items that would appear in the cost of
services performed schedule of an airline? A: Some of the line items that would appear in the cost
of services performed schedule of an airline would be fuel, flight crew salaries, maintenance wages,
depreciation on equipment, airport gate fees, and food-service costs.
Supplying Today’s (Not Yesterday’s) Fashions Q: What steps has Inditex taken that make its value
chain unique? A: Inditex has taken numerous steps to make its supply chain more efficient and responsive. It employs an open workspace facility, where designers and commercial staff sit together and take
calls regarding product ideas directly from sales employees. Production facilities are primarily located
within a reasonably close distance, so management can direct and monitor production. Goods are
shipped directly to stores, rather than warehouses, thus saving time and ensuring that goods are shipped
to their intended targets.
People Matter Q: What are some of the common problems for many clothing factories in developing
countries? A: Some of the common problems for many clothing factories in developing countries would
be pressure to produce goods faster, lack of training for workers, unsafe buildings, substandard work conditions, and wage and labor violations. These problems can be exacerbated by the fact that many young
women in developing countries are willing to accept low wages and working conditions that Americans
consider unsafe because factory jobs offer them an opportunity to have a life that is better than that available in their villages.
Using Data in Its Own World Q: What is behavioral analytics, and how does Disney use it to minimize
lines at its theme parks? A: Behavioral analytics is the use of data to predict and influence customer
behavior. To minimize wait lines, and thus improve its customers’ experiences, Disney uses data collected
from its visitors’ “MagicBands” to determine what incentives to provide to encourage customers to shift
their itineraries to underutilized activities.
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