MANAGERIAL ACCOUNTING

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MANAGERIAL ACCOUNTING

Creating Value in a Dynamic Business Environment

Seventh Edition

Ronald W. HiltonCornell University

Boston Burr Ridge, IL Dubuque, IA Madison, WI New York San Francisco St. LouisBangkok Bogotá Caracas Kuala Lumpur Lisbon London Madrid Mexico CityMilan Montreal New Delhi Santiago Seoul Singapore Sydney Taipei Toronto

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MANAGERIAL ACCOUNTING: CREATING VALUE IN A DYNAMIC BUSINESS ENVIRONMENT

Published by McGraw-Hill/Irwin, a business unit of The McGraw-Hill Companies, Inc., 1221

Avenue of the Americas, New York, NY, 10020. Copyright © 2008 by The McGraw-Hill

Companies, Inc. All rights reserved. No part of this publication may be reproduced or distributed

in any form or by any means, or stored in a database or retrieval system, without the prior written

consent of The McGraw-Hill Companies, Inc., including, but not limited to, in any network or

other electronic storage or transmission, or broadcast for distance learning.

Some ancillaries, including electronic and print components, may not be available to customers

outside the United States.

This book is printed on acid-free paper.

1 2 3 4 5 6 7 8 9 0 WCK/WCK 0 9 8 7 6

ISBN-13: 978-0-07-302285-7

ISBN-10: 0-07-302285-3

Editorial director: Stewart MattsonManaging developmental editor: Gail KorosaExecutive marketing manager: Krista BettinoSenior media producer: Elizabeth MavetzSenior project manager: Susanne RiedellLead production supervisor: Rose HepburnSenior designer: Adam RookePhoto research coordinator: Lori KramerPhoto researcher: David A. TietzSupplement producer: Ira C. RobertsMedia project manager: Matthew PerryCover design: George KokkonasTypeface: 11/12 Times RomanCompositor: TechbooksPrinter: Quebecor World Versailles Inc.

Material from the Uniform CPA Examination, Questions and Unofficial Answers, Copyright © 1978, 1979, 1980,

1981, 1982, 1983, 1984, 1987, 1988, 1989, 1990, 1991 by the American Institute of Certified Public Accountants,

Inc. is adapted with permission.

Material from the Certificate in Management Accounting Examinations, Copyright © 1977, 1978, 1979, 1980,

1981, 1982, 1983, 1984, 1987, 1990, 1991, 1992, 1993, 1994, 1995, 1996, 1997, 1998, 1999, 2000 by the Institute

of Management Accountants is adapted with permission.

Logos from Caterpillar, Inc., Wal-Mart Stores, Inc., and Southwest Airlines Co. appear in this text with permission

from those companies.

Library of Congress Cataloging-in-Publication Data

Hilton, Ronald W.

Managerial accounting : creating value in a dynamic business environment / Ronald W.

Hilton.—7th ed.

p. cm.

Includes index.

ISBN-13: 978-0-07-302285-7 (alk. paper)

ISBN-10: 0-07-302285-3 (alk. paper)

1. Managerial accounting. I. Title.

HF5657.4.H55 2008

658.15�11—dc22

2006018043

www.mhhe.com

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To my wife, Meg, and our sons, Brad and Tim.

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A MARKET LEADER FOR SIX EDITIONS,HILTON CONTINUES THAT TRADITION

OF MANAGERIAL ACCOUNTING INNOVATION AND EXCELLENCE.

VI Preface

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ABOUT THE AUTHOR

Ronald W. Hilton is a Professor of Accountingat Cornell University. With bachelor’s and master’s degreesin accounting from The Pennsylvania State University, hereceived his Ph.D. from The Ohio State University.

A Cornell faculty member since 1977, Professor Hiltonalso has taught accounting at Ohio State and the Universityof Florida, where he held the position of Walter J. MatherlyProfessor of Accounting. Prior to pursuing his doctoralstudies, Hilton worked for Peat, Marwick, Mitchell andCompany and served as an officer in the United States AirForce.

Professor Hilton is a member of the Institute ofManagement Accountants and has been active in theAmerican Accounting Association. He has served asassociate editor of The Accounting Review and as amember of its editorial board. Hilton also has served on theeditorial board of the Journal of Management Accounting

Research. He has been a member of theresident faculties of both the DoctoralConsortium and the New Faculty Consortiumsponsored by the American AccountingAssociation. With wide-ranging research interests, Hilton

has published articles in many journals,including the Journal of AccountingResearch, The Accounting Review,Management Science, Decision Sciences,The Journal of Economic Behavior andOrganization, Contemporary AccountingResearch, and the Journal of MathematicalPsychology. He also has published a

monograph in the AAA Studies in Accounting Researchseries, and he is a co-author of Cost Management:Strategies for Business Decisions, Budgeting: ProfitPlanning and Control, and Cost Accounting: Concepts andManagerial Applications. Professor Hilton’s current researchinterests focus on contemporary cost management systemsand international issues in managerial accounting. In recentyears, he has toured manufacturing facilities and consultedwith practicing managerial accountants in North America,Europe, Asia, and Australia.

Professor Hilton tours a microchipproduction facility located outsideTaipei, Taiwan. In recent years,Professor Hilton has consulted withpracticing managerial accountantsthroughout the world.

Preface VII

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Managerial Accounting.

The world of business is changing dramatically.

As a result, the role of managerial accounting

is very different than it was even a decade

ago. Today, managerial accountants serve as

internal business consultants, working side-by-

side in cross-functional teams with managers

from all areas of the organization. For a

thorough understanding of managerial

accounting, students should not only be able to

produce accounting information, but also

understand how managers are likely to use

and react to the information.

The goal of Managerial Accounting is to

acquaint students of business with the

fundamental tools of management accounting

and to promote their understanding of the

dramatic ways in which the field is changing.

The emphasis throughout the text is on using

accounting information to help manage an

organization.

BRINGING REAL-WORLD FOCUS TO

“Major strength is how it relates managerial accounting to the

general management function and reveals the managerial

accountant as an important member of the management

team.”

— Linda C. Bowen,

University of North Carolina – Chapel Hill

VIII Preface

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Focus Companies. Focus Companies provide a powerful strategy forfostering learning, and Hilton’s integration of focuscompanies throughout the text is unmatched by anyother managerial accounting book. Each chapterintroduces important managerial accounting topicswithin the context of a realistic company. Studentssee the immediate impact of managerial accountingdecisions on companies and gain exposure todifferent types of organizations.

Balanced.Hilton’s Managerial Accounting offers the mostbalanced coverage of manufacturing and servicecompanies. He recognizes that students will beworking in a great variety of business environmentsand will benefit from exposure to diverse types ofcompanies. Hilton uses a wide variety of examplesfrom retail, service, manufacturing, and nonprofitorganizations.

Contemporary.Hilton continues to be the leader in presenting themost contemporary coverage of managerialaccounting topics. The traditional tools of managerialaccounting such as product costing and budgetinghave been updated with current approaches. Newtopics such as environmental cost management andThe Sarbanes-Oxley Act have been added.

Flexible. Managerial Accounting is written in a modular formatallowing topics to be covered in the order you want.For example, Chapter 17 covers absorption, variableand throughput costing. Many instructors like to coverthis topic early in the course. So, Chapter 17 iswritten so that it can be assigned right after Chapter3. A table showing the text's flexibility is in theInstructor's Resource Manual.

YOUR MANAGERIAL ACCOUNTING CLASS

“The company story acts as a hook to get

students interested in the chapter material.”

— Michele Matherly, University of North Carolina at Charlotte

“In today's world, it is important to teach the

student from a standpoint of a variety of

different business organizations. Hilton does a

great job of diversifying his material among

various types of business organizations.”

— Marilyn Ciolino, Delgado Community College

Preface

“The book goes beyond covering the basics and

organizes and integrates contemporary topics nicely.”

—Harrison McCraw, State University of West Georgia

IX

“Perhaps what sets Hilton apart from the

competition is its recognition that the

world consists of more than

manufacturing firms, and that managerial

accounting plays a significant role in

service and not-for-profit organizations.”

— Lanny Solomon, University of Missouri – Kansas City

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X Preface

How Does Managerial Accounting: CreatingValue in a Dynamic Business EnvironmentBring the Real World into Your Classroom?

FOCUS COMPANIESStudents need to see the relevance of

managerial accounting information in order

to actively engage in learning the material.

Ron Hilton found that by using Focus

Companies to illustrate concepts, students

immediately saw the significance of the

material and became excited about the

content. Hilton’s integration of Focus

Companies throughout the text is

unmatched by any other managerial

accounting textbook. Each chapter

introduces important managerial topics

within the context of a realistic company.

Whenever the Focus Company is

presented in the chapter, its logo is shown

so the student sees its application to the

text topic.

CONTRAST COMPANIESNew to this edition, a Contrast Company is

now introduced in each chapter. In most

cases these highlight an industry different

from that of the Focus Company. This

feature allows even greater emphasis on

service-industry firms and other non-

manufacturing environments. The Focus

Companies and Contrast Companies are

listed on the front endpapers.

THIS CHAPTER’S FOCUS COMPANYis The Walt Disney Company. This entertainment ser-vices company is a giant in the industry with themeparks, feature film studios, animation studios, televi-sion broadcasting, hotels and resorts, and retail stores.Using the Walt Disney Company as an illustration, wewill introduce the field of managerial accounting. Wewill explore how managerial accountants work in part-nership with managers to add value to the organiza-tion. The major themes of managerial accounting alsoare introduced, and we will return to them throughoutthe book.

IN CONTRASTto the entertainment services setting ofThe Walt Disney Company, we will turnour attention to Gap, Inc. This majorclothing retailer has over 3,000 storesaround the world, which sell Gap,Banana Republic, Old Navy, and Forth &Towne apparel. We will explore Gap’svalue chain, which is the set of linked,value-creating activities, ranging fromsecuring basic raw materials and energyto the ultimate delivery of products andservices. As a retailer, Gap focuses onapparel design, marketing, and sales. Allmanufacturing of its clothing lines iscontracted out to garment manufacturersthroughout the world.

Each chapter also includes a contrast company. In most cases, the contrast company will present a key chapter topicin an industry that is different from that of the focus company. In this chapter, the focus company (Walt Disney) is anentertainment services company, whereas the contrast company (The Gap) is a fashion retailer.

Walt DisneyCompany

Each chapter is built around a focuscompany, in which the chapter’s key pointsare illustrated. This chapter’s focus is onThe Walt Disney Company. The focuscompanies in subsequent chapters arenot real companies, but they are realisticscenarios built on actual companypractices. Whenever the focus companyis discussed in the chapter, the companylogo appears in the margin.

INSERT tearsheet fromfront endsheet

(to come)

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Preface

REAL-WORLD FOCUS

Real-World Examples

The Hilton text provides a variety of thought-

provoking, real-world examples to focus students

on managerial accounting as an essential part of

the management process. Featured organizations

include FedEx, Ford, Bank of America,

Amazon.com, the Gap, and many others. These

companies are highlighted in blue in the text.

In Their Own Words

Quotes from both practicing managers and

managerial accountants are included in the

margins throughout the text. These actual quotes

show how the field of management accounting is

changing, emphasize how the concepts are

actually used, and demonstrate that management

accountants are key players in most companies’

management teams.

Management Accounting Practice

The managerial accounting practices of well-

known, real-world organizations are highlighted in

these boxes. They stimulate student interest and

provide a springboard for classroom discussion.

Focus on Ethics

This feature is included in most chapters. Focus

on Ethics poses an ethical dilemma, then asks

tough questions that underscore the importance of

ethical management. Some of these are based on

real-world incidents while others are fictional but

based on well-established anecdotal evidence.

The Ethical Climate of Business and the Role of the AccountantWho among us is not shocked and dismayed by the seemingly endless stream of cor-porate scandals that we have experienced over the past few years. The headlines keepon coming—AOL, Bristol-Myers Squib, Conseco, Enron, Global Crossing, KPMG,Rite Aid, Tyco, Worldcom, Xerox—and the list goes on. Many of the cases involvemismanagement, some are characterized by alleged ethical lapses, and in someinstances there is alleged criminal behavior. Who is to blame? According to most ob-servers, there is plenty of blame to go around: greedy corporate executives, managerswho make overreaching business deals, lack of oversight by various companies’boards of directors (particularly the boards’ audit committees), shoddy work by exter-nal auditors, lack of sufficient probing by Wall Street analysts and the financial press,and some accountants who have been all too willing to push the envelope on aggres-sive accounting to (or beyond) the edge. Billions of dollars have been lost in employeepension funds, several states’ investment portfolios, and the private investment ac-counts of the public. It will no doubt take many years to sort out the mess. Companieshave gone bankrupt; fortunes have been lost; careers have been ruined; and more of thesame is yet to come. Some of those involved will likely end up in jail. Several finan-cial executives have filed guilty pleas on felony charges. Some are serving time in

LO9

Understand the ethical

responsibilities of a

managerial accountant.

Topic 1–2

“We are looked upon asbusiness advisors, morethan just accountants,and that has a lot to dowith the additionalanalysis and theforward-looking goalswe are setting.” (1a)1

Caterpillar

Managerial Accounting:

A Business Partnership with Management

The role of managerial accounting is very different now than it was even a decade ago.In the past, managerial accountants operated in a strictly staff capacity, usually physi-cally separated from the managers for whom they provided reports and information.Nowadays, managerial accountants serve as internal business consultants, workingside-by-side in cross-functional teams with managers from all areas of the organiza-tion. Rather than isolate managerial accountants in a separate accounting department,companies now tend to locate them in the operating departments where they are work-ing with other managers to make decisions and resolve operational problems.Managerial accountants take on leadership roles on their teams and are sought out forthe valuable information they provide. The role of the accountant in leading-edge com-panies “has been transformed from number cruncher and financial historian to beingbusiness partner and trusted advisor.”2

An organization’s management team, on which managerial accountants play an in-tegral role, seeks to create value for the organization by managing resources, activities,and people to achieve the organization’s goals effectively.

ManagementAccountingPracticeDell Computer

MASS CUSTOMIZATION

“There is no better way to make, sell, and deliver PCs than the way Dell Computer does it, and no-body executes that model better than Dell.” The company’s machines are made to order and deliv-ered directly to customers, who get the exact machines they want cheaper than they can get themfrom Dell’s competition. “Dell has some 24 facilities in and around Austin and employs more than18,000 local workers. Dell is improving its earnings and gaining market share even in tough eco-nomic times.2 Nevertheless, Michael Dell, the company’s restless founder, is constantly looking forways to improve the company’s operations.” In one year alone, Dell cut $1 billion out of its costs—halffrom manufacturing—and Dell executives vowed to cut another $1 billion.

“Visit the Topfer Manufacturing Center in Austin, and it’s hard to conceive how Dell could beany more efficient. Workers already scuttle about in the 200,000-square-foot plant like ants on ahot plate. Gathered in cramped six-person ‘cells,’ they assemble computers from batches of partsthat arrive via a computer-directed conveyor system overhead. If a worker encounters a problem,

Focus on Ethics

WAS WORLDCOM’S CONTROLLER JUST FOLLOWING ORDERS?Through a series of mergers and acquisitions, WorldCom, Inc.grew to become the nation’s second-largest long-distancetelecommunications company. WorldCom’s core communicationservices included network data transmission over public and pri-vate networks. Trouble arose for WorldCom because of the im-mense overcapacity in the telecommunications industry due tooverly optimistic growth projections during the Internet boom.The combination of overcapacity, decreased demand, and highfixed costs still poses a serious problem for many of the majorplayers in the industry.

In June 2002, the company disclosed that it had overstatedearnings for 2001 and the first quarter of 2002 to the tune of

the capitalization allowed the company to spread the recognitionof its expenses into the future, which increased net income in thecurrent period. The expenses in question related to line costs—the fees that WorldCom pays outside providers for access to theircommunications networks. In addition, the company announcedin July 2002 that it had also manipulated reserve accounts,which affected another $3.8 billion in earnings in 1999 and2000.

The problems at WorldCom were discovered during an in-ternal audit and brought to the attention of the company’s newauditors, KPMG. Arthur Andersen served as WorldCom’s auditorsduring the period covered by the alleged accounting scandal.Arthur Andersen maintained that the details of the accountingfraud were kept from them by senior WorldCom management.

XI

“As most students taking a basic principles of

managerial accounting course are not accounting

majors, they don't always understand why they need

to know this information. I believe you could use

them to show why finance people, marketing people,

management people, etc., need to know this

information.”

—Lois Mahoney, Eastern Michigan University

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XII Preface

A FOCUS ON EXCEPTIONALEND-OF-CHAPTER MATERIAL

Review Problems present both a problem and a

complete solution allowing students to review the

entire problem-solving process.

Key Terms are bolded in the text and repeated at

the end of the chapter with page references. The

book also includes a complete Glossary of Key

Terms. Key Terms are also available as online

flash cards at the book's Web site.

Review Questions, Exercises, Problems, and

Cases are comprehensive in covering the points in

the chapter. They exhibit a wide range of difficulty

and the Instructor's Manual provides guidance for

the instructor on the difficulty level and time

required for each problem. Numerous adapted

CMA and CPA problems are included.

1–1. According to some estimates, the volume of electronic

commerce transactions exceeds $3 trillion. Business-to-

business transactions account for almost half of this

amount. What changes do you believe are in store for

managerial accounting as a result of the explosion in

e-commerce?

1–2. List two plausible goals for each of these organizations:

Amazon.com, American Red Cross, General Motors,

Wal-Mart, the City of Seattle, and Hertz.

1–3. List and define the four basic management activities.

1–4. Give examples of each of the four primary management

activities in the context of a national fast-food chain

such as Barger King.

1–5. Give examples of how each of the objectives of manage-

rial accounting activity would be important in an airline

1–10. How could your college or university use the concepts in

the balanced scorecard? List two possible performance

measures that would be relevant to a college or univer-

sity, for each of the balanced scorecard’s four areas.

1–11. What does the following statement by a managerial ac-

countant at Caterpillar imply about where in the organi-

zation the managerial accountants are located? “[We] are

a partner with all of the other functions in the business

here.” (Reference 1a at end of text.)

1–12. What is meant by the following statement? “Managerial

accounting often serves an attention-directing role.”

1–13. What is the chief difference between manufacturing and

service industry firms?

1–14. Define the following terms: just-in-time, computer-

integrated manufacturing cost management system

Review Questions

Key Terms

activity accounting, 24

activity-based costing(ABC), 24

activity-based management(ABM), 24

attention-directing function, 7

balanced scorecard, 9

Certified Management Accountant (CMA), 28

chief financial officer(CFO), 13

continuous improvement, 23

controller (orcomptroller), 13

cost accounting system, 11

cost driver, 25

cost management system, 24

empowerment, 7

financial accounting, 10

internal auditor, 13

just-in-time (JIT) production system, 22

line positions, 13

managerial accounting, 4

non-value-added costs, 24

staff positions, 13

strategic cost management, 26

theory of constraints, 26

total quality management(TQM), 23

treasurer, 13

value chain, 24

For each term’s definition refer to the indicated page, or turn to the glossary at the end of the text.

Problems

The following data refer to Twisto Pretzel Company for the year 20x1.

Work-in-process inventory, 12/31/x0 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,100

Selling and administrative salaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,800

Insurance on factory and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,600

Work-in-process inventory, 12/31/x1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,300

Finished-goods inventory, 12/31/x0 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,000

Cash balance, 12/31/x1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000

Indirect material used . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,900

Depreciation on factory equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,100

Raw-material inventory, 12/31/x0 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,100

Property taxes on factory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,400

Finished-goods inventory, 12/31/x1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,400

Purchases of raw material in 20x1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39,000

Utilities for factory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000

Utilities for sales and administrative offices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,500

Other selling and administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,000

Indirect-labor cost incurred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,000

Depreciation on factory building . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,800

Depreciation on cars used by sales personnel 1 200

All applicable Problems are available with McGraw-Hill’s Homework Manager TM.

Problem 3–42Schedule of Cost of GoodsManufactured and Sold;Income Statement(LO 6)

Managerial Accounting is known for its comprehensive and reliable end-of-chapter material.

Each chapter includes an extensive selection of assignment material including Review Questions,

Exercises, Problems, and Cases.

Review Problems on Cost Classifications

Problem 1Several costs incurred by Myrtle Beach Golf Equipment, Inc. are listed below. For each cost, indicate

which of the following classifications best describe the cost. More than one classification may apply to

the same cost item. For example, a cost may be both a variable cost and a product cost.

Cost Classificationsa. Variable

b. Fixed

c. Period

d. Product

e. Administrative

f. Selling

g. Manufacturing

h Research and development

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Preface XIII

Each chapter includes problems and cases exploring key business areas.

Logos next to the problems identify these topics.

Ethical Issues

International Issues

Group Work

Business

Communication

Internet

Research

Excel

Template

EXCELSpreadsheet applications are essential to contemporary accounting practice. Students must rec-

ognize the power of spreadsheets and know how accounting data are presented in them. We dis-

cuss Excel applications where appropriate in the text.

Several exercises and problems in each chapter

include an optional requirement for students to

Build a Spreadsheet to develop the solution.

Many problems can be solved using the Excel

spreadsheet templates contained on the text's

Web site. An Excel logo appears in the margin

next to these problems for easy identification

The following information pertains to Trenton Glass Works for the year just ended.

Budgeted direct-labor cost: 75,000 hours at $16 per hour

Actual direct-labor cost: 80,000 hours at $17.50 per hour

Budgeted manufacturing overhead: $997,500

Actual selling and administrative expenses: 435,000

Actual manufacturing overhead:

Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $231,000

Property taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,000

Indirect labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82,000

Supervisory salaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200,000

Utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59,000

Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,000

Rental of space . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300,000

Indirect material (see data below) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79,000

Indirect material:

Beginning inventory, January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48,000

Purchases during the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94,000

Ending inventory, December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63,000

Required:

1. Compute the firm’s predetermined overhead rate, which is based on direct-labor hours.

2. Calculate the overapplied or underapplied overhead for the year.

3. Prepare a journal entry to close out the Manufacturing Overhead account into Cost of Goods Sold.

4. Build a spreadsheet: Construct an Excel spreadsheet to solve requirements (1) and (2) above. Showhow the solution will change if the following data change: budgeted manufacturing overhead was$990,000, property taxes were $25,000, and purchases of indirect material amounted to $97,000.

The following data pertain to the Oneida Restaurant Supply Company for the year just ended.

Exercise 3–34Overapplied or UnderappliedOverhead(LO 4, 5)

Exercise 3–35Predetermined Overhead

World Gourmet Coffee Company (WGCC) is a distributor and processor of different blends of coffee.

The company buys toffee beans from around the world and roasts, blends, and packages them for resale.

WGCC currently has 15 different coffees that it offers to gourmet shops in one-pound bags. The major

cost is raw materials; however, there is a substantial amount of manufacturing overhead in the predom-

inantly automated roasting and packing process. The company uses relatively little direct labor.

Some of the coffees are very popular and sell in large volumes, while a few of the newer blends

have very low volumes. WGCC prices its coffee at full product cost, including allocated overhead, plus

a markup of 30 percent. If prices for certain coffees are significantly higher than market, adjustments are

made. The company competes primarily on the quality of its products, but customers are price-conscious

as well.

Data for the 20x1 budget include manufacturing overhead of $3,000,000, which has been allocated

on the basis of each product’s direct-labor cost. The budgeted direct-labor cost for 20x1 totals $600,000.

Based on the sales budget and raw-material budget, purchases and use of raw materials (mostly coffee

beans) will total $6,000,000.

The expected prime costs for one-pound bags of two of the company’s products are as follows:

Kona Malaysian

Direct material . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3.20 $4.20

Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .30 .30

WGCC’s controller believes the traditional product-costing system may be providing misleading

cost information. She has developed an analysis of the 20x1 budgeted manufacturing-overhead costs

shown in the following chart.

Problem 5–41Activity-Based Costing(LO 1, 2, 4, 5, 7)

“Good description of managerial accounting tools.

Easy to read and understand. Strength is in the end-

of-chapter problems - good variety and lots of them.”

—Priscilla Wisner, Thunderbird, The Garvin School of International Man-agement

“Excellent in comparison to the competition. It is

thorough and has a good quality and quantity of

material for students to test themselves.”

—Laura Rickett, Kent State University

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XIV Preface

WHAT'S NEW IN THE SEVENTH EDITION?

Contrast CompaniesNew to the seventh edition is a contrast companyin each chapter. As in previous editions, eachchapter is built around a realistic Focus Companyin which the chapter's key points are illustrated.In this edition, however, a Contrast Company isalso introduced, which in most cases will featurean industry different from that of the focuscompany. This new feature allows even greateremphasis on service-industry firms and othernon-manufacturing environments. The focuscompanies and contrast companies are listed inthe front endpapers.

Greater Emphasis on the Service IndustryIn addition to introducing the contrast companiesdescribed above, a greater effort has been madeto point out the relevance of managerialaccounting concepts and tools in service-industrysettings. Many examples are given throughout thetext of real-world service-industry firms usingmanagerial accounting information.

The Sarbanes-Oxley ActThree sections of Sarbanes-Oxley (SOX) aregermane to management accounting, becausethey address aspects of internal controls overfinancial reporting. Section 101 establishes thePublic Company Accounting Oversight Board(PCAOB), which has established requirements forassessing internal controls. The sections thathave caused the most significant challenges forcompanies, and hence created the mostcontroversy, are sections 302 and 404. Theimplications of these three SOX sections arecovered in the 7th Edition.

StreamliningTo streamline this edition, Chapters 5 and 6 havebeen heavily revised and reorganized. Significantchanges to both the content and pedagogy inthese chapters, which cover activity-basedcosting and activity-based management, makethese challenging topics more accessible tostudents.

Updated Topic TacklerThis popular tutorial offers a virtualhelping hand in understanding themost challenging topics in themanagerial accounting course.

Through a step-by-step sequence of video clips,PowerPoint slides, interactive practice exercises,and self-tests, Topic Tackler offers help on twokey topics for each chapter. These topics areindicated by a logo in the text. New in this editionare audio-narrated electronic slides.

Focus on EthicsSeveral of the Focus on Ethics pieces have beenrevised to make this feature even more useful asa vehicle for exploring ethical issues in theclassroom. The Focus on Ethics piece in Chapter1 has been revised to reflect the new Statementof Ethical Professional Practice adopted by theInstitute of Management Accountants in 2005.The Focus on Ethics piece in Chapter 5addresses difficult ethical issues that can arise inthe aftermath of an ABC project. The Chapter 6ethics piece addresses the use of customerprofitability analysis as the basis for providingdifferential treatment for different classes ofcustomers.

End-of-Chapter MaterialThe end-of-chapter material has once again beenvery heavily revised. Several new problems havebeen added, and virtually all of the exercises,problems, and cases contain data different fromthat in the sixth edition.

Build a SpreadsheetThis new feature adds a spreadsheet requirementto several exercises and problems in eachchapter. Students are asked to build an Excelspreadsheet that will solve the exercise and thenmanipulate the solution by changing some of thekey data in the exercise.

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Preface XV

Heavily revised coverage of key topical areas, brand new pedagogy for the most

challenging topics, and new assignment material make the seventh edition more

useful than ever to students and faculty alike.

Chapter 1: Coverage of IMA's new Statement of EthicalProfessional Practice. New coverage of the balancedscorecard using United Parcel Service as an illustration.Expanded coverage of the value chain. Introduction ofContrast Company: The Gap, an apparel retailer. (Incontrast to the Focus Company: The Walt Disney Com-pany, an entertainment services company.)

Chapter 2: Introduction of Contrast Company: Midas,an automotive service company. (In contrast to the Fo-cus Company: Comet Computer Company, a manufac-turer.)

Chapter 3: Introduction of Contrast Company: MidtownAdvertising Agency, an advertising services company.(In contrast to the Focus Company: Adirondack Outfit-ters, a manufacturer of canoes and small boats.)

Chapter 5: Heavy revision and reorganization of mater-ial covering activity-based costing. Brand new pedagogy,making this challenging topic more accessible to stu-dents. New Focus Company: Patio Grill Company, amanufacturer of gas barbeque grills. Introduction ofContrast Company: Delaware Medical Center, a healthcare provider.

Chapter 6: Reorganization and revision of activity-based management coverage. New Focus Company:Patio Grill Company, a manufacturer. Introduction ofContrast Company: Federal Express, a worldwide ex-press delivery service.

Chapter 7: Introduction of Contrast Company: CosmosCommunications Technology, a manufacturer of commu-nications satellites. (In contrast to the Focus Company:Tasty Donuts, a restaurant chain.)

Chapter 8: Introduction of Contrast Company: Accu-Time, a manufacturer of digital clocks. (In contrast to theFocus Company: Seattle Contemporary Theater, a non-profit theater organization.)

Chapter 9: Movement of the chapter's appendix cover-ing inventory management to a stand-alone appendix atthe end of the textbook. Introduction of Contrast Com-pany: Philadelphia Fitness Cooperative, a fitness club.

(In contrast to the Focus Company: CozyCamp.com, amanufacturer of camping equipment, with online sales)

Chapter 10: Revision and expansion of coverage of thebalanced scorecard. Introduction of Contrast Company:Forest Home National Bank, a financial services com-pany. (In contrast to the Focus Company:DCDesserts.com, a producer of fresh fancy desserts withemphasis on e-commerce.)

Chapter 11: Introduction of Contrast Company: UpstateAuto Rentals, a car-rental service company. (In contrastto the Focus Company: DCDesserts.com, a producer offresh fancy desserts with emphasis on e-commerce.)

Chapter 12: Introduction of Contrast Company: Hand-ico, a manufacturer of cordless phones. (In contrast tothe Focus Company: Aloha Hotels and Resorts, a hoteland resort chain.

Chapter 13: Introduction of Contrast Company: Sun-coast's Food Processing Division, which operates bak-eries and dairy and meat processing plants for thegrocery retailer. (In contrast to the Focus Company:Suncoast Food Centers, a grocery retailer.)

Chapter 14: Introduction of Contrast Company: Interna-tional Chocolate Company, a chocolate producer. (Incontrast to the Focus Company: Worldwide Airways, anairline.)

Chapter 15: Introduction of Contrast Company: MarineServices, a marina service and construction company.(In contrast to the Focus Company: Sydney Sailing Sup-plies, a sailboat manufacturer.)

Chapter 16: Introduction of Contrast Company: HighCountry Department Stores, a retailer. (In contrast to theFocus Organization: City of Mountainview, a city govern-ment.)

Chapter 18: Introduction of Contrast Company: Interna-tional Chocolate Company, a chocolate producer. (Incontrast to the Focus Company: Riverside Clinic, ahealth care provider.)

SIGNIFICANT CONTENT CHANGES

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XVI Preface

HOW CAN TECHNOLOGY SUPPORTSTUDENT SUCCESS?

Our technology resources help students and instructors focus on learning success. By using the Internet andmultimedia resources, students get book-specific help at their convenience. Compare our technology to thatof any other book and we’re confident you’ll agree that Managerial Accounting has the best in the market.Teaching aids make in-class presentations easy and stimulating. These aids give you more power than everto teach your class the way you want.

MCGRAW-HILL’S

HOMEWORK MANAGER™

McGraw-Hill's Homework Manager is a Web-basedhomework management system that gives you unparal-leled power and flexibility in creating homework assign-ments, tests, and quizzes. Homework Managerduplicates problem structures directly from the end-of-chapter material in your McGraw-Hill textbook, using al-gorithms to provide limitless variations of textbookproblems. Use Homework Manager to supply online self-graded practice tests for students, or create assignmentsand tests with unique versions of every problem: Home-work Manager can grade assignments automatically, pro-vide instant feedback to students, and store all results inyour private gradebook. Detailed results let you see at aglance how each student does and easily track theprogress of every student in your course.

MCGRAW-HILL’S

HOMEWORK MANAGER

PLUS™

McGraw-Hill's Homework Manager Plus combines thepower of Homework Manager with the latest interactivelearning technology to create a comprehensive, fully inte-grated online study package.

Students using Homework Manager Plus can access notonly Homework Manager itself, but the Interactive On-

line Textbook as well. Far more than a textbook on ascreen, this resource is completely integrated into Home-work Manager, allowing students working on assignmentsto click a hotlink and instantly review the appropriate ma-terial in the textbook.

By including Homework Manager Plus with your textbookadoption, you're giving your students a vital edge as theyprogress through the course and ensuring that the help theyneed is never more than a mouse click away.

INTERACTIVE ONLINE

VERSION OF THE TEXTBOOK

In addition to the textbook, students can rely on this onlineversion of the text for a convenient way to study. Whileother publishers offer a simple PDF, this interactive Web-based textbook contains hotlinks to key definitions and isintegrated with Homework Manager to give students quickaccess to relevant content as they work through problems,exercises, and practice quizzes.

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Preface XVII

TOPIC TACKLER

This software is a completetutorial focusing on areas inthe course that give studentsthe most trouble. It provideshelp on two key topics foreach chapter by use of

• Video Clips• PowerPoint Slide Shows• Interactive Exercises• Self-Grading Quizzes

A logo in the text marks the topic covered in Topic Tackler.

ZINIO DIGITAL EDITION

A leader in digital media, Zinio offers students using Managerial Accounting7/e the full benefit of its powerful, flexible digital reading system. Using theZinio reader, you can search your digital textbook, highlight important pas-sages, or jot down electronic notes. Navigating a textbook has never beeneasier. You can even print pages to study from off line. To order your ZinioDigital Edition of Managerial Accounting 7/e visit www.textbooks.zinio.com.

iPOD CONTENT

Harness the power of one of the most popular technology tools students usetoday–the Apple iPod. Our innovative approach allows students to downloadaudio and video presentations as well as quizzes for each chapter in the text,right into their iPod and take learning materials with them wherever they go. Itmakes review and study time as easy as putting on headphones. Visit theManagerial Accounting Online Learning Center (www.mhhe.com/hilton7e) tolearn more details on available iPod content–and enhance your learning ex-perience today.

“I think this tool is a great way for students to get

additional help in some of the challenging areas of

Managerial Accounting. It allows them to see the

topic explained again, see additional examples, and

try extra exercises to help them further their skills and

knowledge.”

—Laura Rickett, Kent State University

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XVIII Preface

HOW CAN TECHNOLOGY SUPPORTINSTRUCTOR SUCCESS?

ONLINE COURSE MANAGEMENT (WebCT, eCollege, and TopClass)

We offer Managerial Accounting content forcomplete online courses. You can customize theOnline Learning Center content and author yourown course materials. No matter which onlinecourse solution you choose, you can count onthe highest level of support. Our specialists offerfree training and answer any question you havethrough the life of your adoption.

PAGEOUT

McGraw-Hill’s Course Management System,PageOut, is the easiest way to create a Web sitefor your accounting course. There’s no need forHTML coding, graphic design, or a thick how-tobook. Just fill in a series of boxes and click on oneof our professional designs. In no time your courseis online with a Web site that contains yoursyllabus. If you need help, our team of productspecialists is ready to take your course materialsand build a custom Web site to your specifications.

CPS CLASSROOM PERFORMANCE SYSTEM

This is a revolutionary system that brings ultimateinteractivity to the classroom. CPS is a wireless responsesystem that gives you immediate feedback from everystudent in the class. CPS units include easy-to-usesoftware for creating and delivering questions andassessments to your class. With CPS you can asksubjective and objective questions. Then every studentsimply responds with their individual, wireless responsepad, providing instant results. CPS is the perfect tool forengaging students while gathering important assessmentdata. In response to user feedback from instructors andstudents, software features have been added. Thesefeatures include a PowerPoint plug-in, an improved data-sorting capability, a comprehensive grade bookcomplement, web-based access to all McGraw-Hill CPScontent, and other powerful classroom learning functions.

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Preface XIX

FOR STUDENTS

More and more students are studying online. That's why we offer an OnlineLearning Center (OLC) that follows Managerial Accounting chapter by chapter.It doesn't require any building or maintenance and is ready to go the moment youtype in the URL. The OLC includes:

FOR INSTRUCTORS

The book's password-protected Instructor's site OLC contains essential coursematerials. You can pull all of this material into your PageOut course syllabus oruse it as part of another online course management system such as Blackboard,WebCT or eCollege. You get all the resources available to students, plus...

• Chapter Objectives• Glossary• Topic Tackler Tutorial• PowerPoint Slides• Narrated Slides• Check Figures• Excel Spreadsheets

• Spreadsheet Guide & Tips• Company Web Sites• Accounting Information• Supplementary Chapters• Sample Study Guide Chapter• Text Updates• Videos

• Instructor’s Solutions Manual• Instructor’s Resource Manual• Text Exhibits• Text Updates

• Video Guide and Exercises• Excel Solutions• Supplementary Chapter Solutions• PowerPoint Slides

ONLINE LEARNING CENTER (OLC)www.mhhe.com/hilton7e

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XX Preface

SUPPLEMENTS

Instructor Supplements

Instructor’s Manual (Available on the password-protectedInstructor’s Edition Online LearningCenter (OLC) and Instructor’s ResourceCD)

This comprehensive manualincludes chapter outlines,summaries, and teachingoverviews. A homework gridprovides estimated time for eachassignment and its learningobjective. The manual also cross-references all the key supplementsincluding the Test Bank, ManagerialAccounting Video Series, andPowerPoint slides. Prepared byLanny Solomon of University ofMissouri – Kansas City.

Solutions Manual (Available on the password-protectedInstructor’s Edition OLC and InstructorResource CD)

Prepared by the author, the manualcontains complete solutions to allthe text’s end-of-chapter reviewquestions, exercises, problems,and cases.

Test Bank(Available on the Instructor’s Resource CD)

This test bank in Word formatcontains multiple-choice questions,essay, and short problems. Eachtest item is coded for level ofdifficulty, learning objective, andtype. Type refers to whether theproblem is a recall, an application,or an analysis problem based onBloom’s taxonomy. Prepared byLanny Solomon.

Algorithmic Diploma

Test Bank

ISBN-10: 007326492X

ISBN-13: 9780073264929

This computerized test bankcontains algorithmic problemsenabling instructors to createsimilarly structured problems withdifferent values, allowing everystudent to be assigned a uniquequiz or test.

PowerPoint Slides (Available on the password-protectedInstructor’s Edition Online LearningCenter (OLC) and Instructor’s ResourceCD)

These slides cover key conceptsfound in each chapter.

Instructor Resource

CD-ROM

ISBN-10: 0073022861

ISBN-13: 9780073022864

This CD includes electronicversions of the Instructor’s Manual,Solutions Manual, Test Bank, aswell as PowerPoint slides forinstructor and students, video clips,exhibits in the text, spreadsheettemplates with solutions, andadditional chapters on ProcessCosting: The First-in, First-OutMethod, The Statement of CashFlows, and Financial StatementAnalysis and their SolutionsManuals.

Managerial Accounting

Video Library

These short videos, developed byDallas County Community College,provide for classroom discussion.The focus is on the preparation,analysis, and use of accountinginformation for business decisionmaking.

Hilton’s instructor and student support materials are comprehensive,providing you with superior classroom support and bringing out the best in your students.

“The technology supplements andinstructor resources are top notch, andvery appropriate for our students.”—Marilyn Okleshen, Minnesota State University – Mankato

“It has excellent student and instructorresources.”—Michael Tyler, Barry University

“Excellent illustrations, pictures,support materials, etc.”—K.R. Balachandran, New York University

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Preface XXI

Student Supplements

Study Guide

ISBN-10: 0073022926

ISBN-13: 9780073022925

This guide incorporates many of theaccounting skills essential to studentsuccess. Each chapter contains chapterfocus suggestions, read and recallquestions, self-test questions andexercises, and ideas for study groups.In addition to reinforcing and applyingthe key concepts in the text, the studyguide coaches students on how tostudy individually and in groups.Prepared by Douglas deVidal of theUniversity of Texas at Austin.

Topic Tackler(Available on the Online LearningCenter)

This tutorial offers a virtualhelping hand inunderstanding the most

challenging topics in the managerialaccounting course. Through a step-by-step sequence of video clips,PowerPoint slides, interactive practiceexercises, and self-tests, Topic Tackleroffers help on two key topics for eachchapter. These topics are indicated bya logo in the text.

Check Figures(Available on the Online Learning Center)

These provide key answers for selectedproblems in the text.

Narrated Slides(Available on the Online Learning Center)

These slides cover key chapter topics inan audio-narrated presentation sure tohelp learning.

Excel Templates(Available on the Online Learning Center)

These spreadsheets allow students todevelop business skills by usingtemplates to solve selectedassignments identified by an icon in theend-of-chapter material.

PowerPoint Slides(Available on the Online Learning Center)

These slides offer a great visualcompliment to lectures and cover keytopics for each chapter in the book.

“It has good content and greatsupporting materials, especially forstudents who must miss class fromtime to time, and want to study on theirown.”—Roy Regel, University of Montana at Missoula

“The book is very thorough, well-writtenand still remains student-friendly. Thesupplements are outstanding.”—Ben Baker, Davidson College

McGraw-Hill’s Homework

Manager Plus™

This integrates all of the text’smultimedia resources. With just oneaccess code, students can obtain stateof the art study aids includingHomework Manager and an onlineversion of the text.

McGraw-Hill’s Homework

Manager™

This web-based software duplicatesproblem structures directly from theend-of-chapter material in the textbook.It uses algorithms to provide a limitlesssupply of self-graded practice.

Online Learning Center (OLC)

www.mhhe.com/hilton7e

Students can rely on the OLC for helpin the course. It provides PowerPointslides, self-graded quizzes, videos, andmuch more. See page XIX for moredetails.

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XXII Preface

Acknowledgments

REVIEWERS

Linda Brown, St. Ambrose UniversityJeffrey Archambault, Marshall UniversityBen Baker, Davidson CollegeK. R. Balachandran, New York UniversityMichael Blue, Bloomsburg UniversityWayne Bremser, Villanova UniversityRichard Campbell, University of Rio

GrandeMarilyn Ciolino, Delgado Community

CollegePaul Copley, James Madison UniversityPatricia Derrick, George Washington

UniversityBarbara Durham, University of Central

Florida

Robert Eskew, Purdue UniversityAndrew Felo, Pennsylvania State

University at Great ValleyMichael Flores, Wichita State UniversitySueann Hely, West Kentucky Community &

Technical CollegePaul Juras, Wake Forest UniversitySherrie Koechling, Lincoln UniversityChristy Larkin, Bacone CollegeLois Mahoney, Eastern Michigan

UniversityMaureen Mascha, Marquette UniversityMichele Matherly, University of North

Carolina at CharlotteHarrison McCraw, State University of

West GeorgiaJamshed Mistry, Worcester Polytechnic

Institute

Hamid Mohammadi, St. Xavier UniversityKarl Putnam, University of Texas at El PasoRoy Regel, University of Montana at

MissoulaLaura Rickett, Kent State UniversityDon Samelson, Colorado State UniversityAngela Sandberg, Jacksonville State

UniversityRebecca Sawyer, Univesity of North

Carolina at WilmingtonPamela Schwer, St. Xavier UniversityThomas Selling, Thunderbird, the Garvin

School of International ManagementMichael Tyler, Barry UniversityPriscilla Wisner, Thunderbird, the Garvin

School of International ManagementRichard Young, Ohio State University

I Am Grateful

I would like to express my appreciation to people who have provided assistance in the development ofthis textbook. First, my gratitude goes to the thousands of managerial accounting students I have hadthe privilege to teach over many years. Their enthusiasm, comments, and questions have challengedme to clarify my thinking about many topics in managerial accounting.

Second, I express my sincere thanks to the following professors who provided extensive reviews for the seventh edition:

PAST EDITION REVIEWERSMy grateful appreciation is extended to

those who reviewed previous editions:

Denise Guithues Amrhein, Saint Louis University

Florence Atiase, University of Texas at Austin

Rowland Atiase, University of Texas at Austin

K. R. Balachandran, New York University,Frederick Bardo, Shippensburg UniversityLinda Bowen, University of North CarolinaWayne Bremser, Villanova UniversityRichard Brody, University of New HavenGyan Chandra, Miami UniversityPaul Copley, University of Georgia

Maureen Crane, California State University,Fresno

Stephen Dempsey, University of VermontMartha Doran, San Diego State UniversityAllan Drebin, Northwestern UniversityJames Emig, Villanova UniversityMichael Flores, Wichita State UniversityKimberly Frank, University of Nevada at

Las VegasAlan Friedberg, Florida Atlantic UniversityEdward Goodhart, Shippensburg UniversityPaul Juras, Wake Forest UniversityStacey Konesky, Kent State UniversityJames Lasseter, Jr. University of South

FloridaAngelo Luciano, Columbia CollegeAna Marques, University of Texas at AustinSanjay Mehrotra, Northwestern UniversityCynthia Nye, Bellevue University

Marilyn Okleshen, Minnesota State University

Mohamed Onsi, Syracuse UniversitySamuel Phillips, Shenandoah UniversityFrederick Rankin, Washington UniversityLanny Solomon, University of Missouri at

Kansas CityLynda Thoman, Purdue UniversityWendy Tietz, Kent State UniversityRalph Tower, Wake Forest UniversityMark Turner, Stephen F. Austin State

UniversityBill Wempe, Texas Christian UniversityJames Williamson, San Diego State

UniversityPriscilla Wisner, Graduate School of

International Management

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Preface XXIII

I once again thank those individuals whose input over the last edition has helped the book to evolve

to its present form, especially: Noah Barsky, Villanova University; Mohamed Bayou, University of

Michigan, Dearborn; Bruce Bradford, Fairfield University; Dan Daly, Boston College; Theresa

Hammond, Boston College; and Clifford Nelson, University of Connecticut.

I want to thank Beth Woods and Ilene Persoff for their thorough checking of the text and solutions

manual for accuracy and completeness.

The supplements are a great deal of work to prepare. I appreciate the efforts of those who prepared

them, since these valuable aids make teaching the course easier for everyone who uses the text.

Lanny Solomon of the University of Missouri at Kansas City prepared the Test Bank and the

Instructor's Manual. Peggy Hussey of Northern Kentucky University prepared the PowerPoint slides

and Excel spreadsheet templates. Douglas deVidal of the University of Texas at Austin wrote the

Study Guide. Linda Schain of Hofstra University prepared Topic Tackler. Leland Mansuetti authored

the online quizzes.

I acknowledge the Institute of Management Accountants for permission to use problems from Certified

Management Accountant (CMA) examinations. I also acknowledge the American Institute of Certified

Public Accountants for permission to use problems from the Uniform CPA Examinations, Questions,

and Unofficial Answers. I am indebted to Professors Roland Minch, David Solomons and Michael

Maher for allowing the use of their case materials in the text. The source for the actual company

information in Chapters 1 and 2 regarding The Walt Disney Company, Caterpillar, Wal-Mart, and

Southwest Airlines was the companies’ published annual reports.

Finally, I wish to express my gratitude to the fine people at McGraw-Hill/Irwin who so professionally

guided this book through the publication process. In particular, I wish to acknowledge Steve

DeLancey, Stewart Mattson, Gail Korosa, Susanne Riedell, Elizabeth Mavetz, Rose Hepburn, Krista

Bettino, Adam Rooke, Lori Kramer, Ira Roberts and Matthew Perry.

Ronald W. Hilton

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xxiv

Part I Fundamentals and Cost-Accumulation Systems1 The Changing Role of Managerial Accounting in a Dynamic Business

Environment •••2 Basic Cost Management Concepts and Accounting for Mass Customization

Operations •••3 Product Costing and Cost Accumulation in a Batch Production Environment •••4 Process Costing and Hybrid Product-Costing Systems •••

Part II Cost Management Systems, Activity-Based Costing, and Activity-BasedManagement

5 Activity-Based Costing •••6 Activity-Based Management and Cost Management Tools •••

Part III Planning, Control, and Cost Management Systems7 Activity Analysis, Cost Behavior, and Cost Estimation •••8 Cost-Volume-Profit Analysis •••9 Profit Planning, Activity-Based Budgeting, and e-Budgeting •••

10 Standard Costing, Operational Performance Measures, and the Balanced Scorecard •••

11 Flexible Budgeting and the Management of Overhead and Support Activity Costs •••12 Responsibility Accounting, Quality Control, and Environmental Cost Management •••13 Investment Centers and Transfer Pricing •••

Part IV Using Accounting Information in Decision Making14 Decision Making: Relevant Costs and Benefits •••15 Target Costing and Cost Analysis for Pricing Decisions •••16 Capital Expenditure Decisions •••

Part V Selected Topics for Further Study17 Absorption, Variable, and Throughput Costing •••18 Allocation of Support Activity Costs and Joint Costs •••

Appendix I: The Sarbanes-Oxley Act, Internal Controls, and Management

Accounting •••

Appendix II: Compound Interest and the Concept of Present Value •••

Appendix III: Inventory Management •••

References for “In Their Own Words” •••

Glossary •••

Photo Credits •••

Index of Companies and Organizations •••

Index of Subjects •••

Contents in Brief

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xxv

Part IFundamentals and Cost AccumulationSystems

1 The Changing Role of ManagerialAccounting in a Dynamic BusinessEnvironment ••Managerial Accounting: A Business Partnership withManagement •••

Managing Resources, Activities, and People •••

Decision Making •••

Planning •••

Directing Operational Activities •••

Controlling •••

How Managerial Accounting Adds Value to the Organization •••

Objectives of Managerial Accounting Activity •••

The Balanced Scorecard •••

M.A.P. The Balanced Scorecard •••

Managerial versus Financial Accounting •••

Managerial Accounting in Different Types of

Organizations •••

Where Are Managerial Accountants Located in anOrganization? •••

Organization Chart •••

Line and Staff Positions •••

Cross-Functional Deployment •••

Physical Location •••

Major Themes in Managerial Accounting •••

Contents

Information and Incentives •••

Behavioral Issues •••

Costs and Benefits •••

Evolution and Adaptation in Managerial

Accounting •••

e-Business •••

Service versus Manufacturing Firms •••

Emergence of New Industries •••

Global Competition •••

Focus on the Customer •••

Cross-Functional Teams •••

Computer-Integrated Manufacturing •••

Product Life Cycles and Diversity •••

Time-Based Competition •••

M.A.P. The Internet as a Lifeline •••

Information and Communication Technology •••

Just-in-Time Inventory Management •••

Total Quality Management •••

Continuous Improvement •••

Cost Management Systems •••

Strategic Cost Management and the Value Chain •••

Theory of Constraints •••

The Ethical Climate of Business and the Role of theAccountant •••

Managerial Accounting as a Career •••

Professional Organizations •••

Professional Certification •••

Professional Ethics •••

Focus on Ethics: IMA Statement of Ethical Professional Practice •••

Chapter Summary •••

Key Terms •••

Review Questions •••

Exercises •••

Note: Entries printed in blue denote topics that emphasize

contemporary issues in managerial accounting and cost management.

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xxvi Contents

Problems •••

Case •••

2 Basic Cost Management Concepts andAccounting for Mass CustomizationOperations •••What Do We Mean by a Cost? •••

Product Costs, Period Costs, and Expenses •••

Costs on Financial Statements •••

Income Statement •••

Balance Sheet •••

Manufacturing Operations and Manufacturing Costs •••

M.A.P. Mass Customization •••

Mass-Customization Manufacturing •••

Manufacturing Costs •••

Manufacturing Cost Flows •••

Production Costs in Service Industry Firms and

Nonprofit Organizations •••

Basic Cost Management Concepts: Different Costs forDifferent Purposes •••

The Cost Driver Team •••

Variable and Fixed Costs •••

The Cost Management and Control Team •••

M.A.P. Airline Industry: Cost Structure, Cost Drivers,and a Shifting Business Model •••

The Outsourcing Action Team •••

Costs and Benefits of Information •••

Costs in the Service Industry •••

Focus on Ethics: Was WorldCom’s Controller Just Following Orders? •••

Chapter Summary •••

Review Problems on Cost Classifications •••

Key Terms •••

Review Questions •••

Exercises •••

Problems •••

Cases •••

3 Product Costing and Cost Accumulation ina Batch Production Environment •••Product and Service Costing •••

Product Costing in Nonmanufacturing Firms •••

Flow of Costs in Manufacturing Firms •••

Types of Product-Costing Systems •••

Job-Order Costing Systems •••

Process-Costing Systems •••

Summary of Alternative Product-Costing Systems •••

Accumulating Costs in a Job-Order Costing System •••

Job-Cost Record •••

Direct-Material Costs •••

Direct-Labor Costs •••

Manufacturing-Overhead Costs •••

M.A.P. Supply Chain Management •••

Summary of Event Sequence in Job-Order

Costing •••

Illustration of Job-Order Costing •••

Purchase of Material •••

Use of Direct Material •••

Use of Indirect Material •••

Use of Direct Labor •••

Use of Indirect Labor •••

Incurrence of Manufacturing-Overhead Costs •••

Application of Manufacturing Overhead •••

Summary of Overhead Accounting •••

Selling and Administrative Costs •••

Completion of a Production Job •••

Sale of Goods •••

Underapplied and Overapplied Overhead •••

Schedule of Cost of Goods Manufactured •••

Schedule of Cost of Goods Sold •••

Posting Journal Entries to the Ledger •••

Further Aspects of Overhead Application •••

Accuracy versus Timeliness of Information:

A Cost-Benefit Issue •••

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Choosing the Cost Driver for Overhead Application •••

Limitation of Direct Labor as a Cost Driver •••

Departmental Overhead Rates •••

M.A.P. Are Layoffs a Good Way to Cut Costs Duringan Economic Downturn? •••

Two-Stage Cost Allocation •••

Project Costing: Job-Order Costing in NonmanufacturingOrganizations •••

Changing Technology in Manufacturing Operations •••

Electronic Data Interchange •••

M.A.P. Online Purchasing •••

Use of Bar Codes •••

Focus on Ethics: Did Boeing Exploit Accounting Rules toConceal Cost Overruns and Production Snafus? •••

Chapter Summary •••

Key Terms •••

Appendix to Chapter 3: Activity-Based Costing:An Introduction •••

Review Questions •••

Exercises •••

Problems •••

Cases •••

4 Process Costing and Hybrid Product-Costing Systems •••Comparison of Job-Order Costing and Process Costing •••

Flow of Costs •••

Differences Between Job-Order and Process

Costing •••

Equivalent Units: A Key Concept •••

Equivalent Units •••

Illustration of Process Costing •••

Basic Data for Illustration •••

M.A.P. New York Wine Industry •••

Weighted-Average Method of Process Costing •••

Other Issues in Process Costing •••

Actual versus Normal Costing •••

Other Cost Drivers for Overhead Application •••

Subsequent Production Departments •••

Hybrid Product-Costing Systems •••

Operation Costing for Batch Manufacturing

Processes •••

Chapter Summary •••

Key Terms •••

Appendix to Chapter 4: Process Costing in SequentialProduction Departments •••

Review Questions •••

Exercises •••

Problems •••

Cases •••

Part IICost Management Systems,Activity-Based Costing, and Activity-BasedManagement

5 Activity-Based Costing •••Traditional, Volume-Based Product-Costing System •••

Trouble in Denver •••

Activity-Based Costing System •••

ABC Stage One •••

ABC Stage Two •••

Interpreting the ABC Product Costs •••

The Punch Line •••

Why Traditional, Volume-Based Systems

Distort Product Costs •••

M.A.P. Cost Distortion at Rockwell International •••

M.A.P. Cost Distortion at DHL •••

Activity-Based Costing: Some Key Issues •••

Cost Drivers •••

M.A.P. Activity Cost Drivers in the Health CareIndustry •••

Collecting ABC Data •••

Activity Dictionary and Bill of Activities •••

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xxviii Contents

Direct versus Indirect Costs •••

When Is a New Product-Costing System Needed? •••

Activity-Based Costing in the Service Industry •••

Activity-Based Costing at Delaware

Medical Center •••

Interpreting the Primary Care Unit’s ABC

Information •••

Focus on Ethics: Ethical Issues Surrounding Activity-Based Costing •••

Chapter Summary •••

Review Problems on Cost Drivers and Product-Cost Distortion •••

Key Terms •••

Review Questions •••

Exercises •••

Problems •••

Cases •••

6 Activity-Based Management andCost Management Tools •••Activity-Based Management •••

Two-Dimensional ABC •••

Using ABM to Identify Non-Value-Added

Activities and Costs •••

Achieving Cost Reduction •••

Customer-Profitability Analysis •••

Illustration of Customer-Profitability Analysis •••

M.A.P. Customer Profitability Analysis at Bank One Corp. •••

M.A.P. Customer Profitability Analysis at Best Buy •••

Target Costing and Kaizen Costing •••

Target Costing •••

Kaizen Costing •••

Toyota: Target Costing and Kaizen Costing in

Action •••

Benchmarking •••

Reengineering •••

Theory of Constraints •••

Just-in-Time Inventory and Production Management •••

Activity-Based Management in the Service Industry •••

ABM and Cost Management at FedEx •••

Focus on Ethics: Customer Profitability Analysis: Ethics ofDifferential Treatment for Customers •••

Chapter Summary •••

Key Terms •••

Review Questions •••

Exercises •••

Problems •••

Case •••

Part IIIPlanning, Control, and Cost ManagementSystems

7 Activity Analysis, Cost Behavior, and CostEstimation •••Cost Behavior Patterns •••

Variable Costs •••

Step-Variable Costs •••

Fixed Costs •••

Step-Fixed Costs •••

Semivariable Cost •••

Curvilinear Cost •••

Using Cost Behavior Patterns to Predict Costs •••

M.A.P. Is Direct Labor a Variable or a Fixed Cost? •••

Engineered,Committed,and Discretionary Costs •••

Shifting Cost Structure in the Contemporary

Manufacturing Environment •••

Operations-Based versus Volume-Based Cost

Drivers •••

Cost Behavior in Other Industries •••

Cost Estimation •••

Account-Classification Method •••

Visual-Fit Method •••

High-Low Method •••

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Least-Squares Regression Method •••

Multiple Regression •••

Data Collection Problems •••

Engineering Method of Cost Estimation •••

Costs and Benefits of Information •••

Effect of Learning on Cost Behavior •••

Focus on Ethics: Cisco Systems,Wal-Mart, Taco Bell,Starbucks, U-Haul, General Dynamics, and Farmer’sInsurance: Is Direct Labor a Variable Cost? •••

Chapter Summary •••

Review Problems on Cost Behavior and Estimation •••

Key Terms •••

Appendix to Chapter 7: Finding the Least-SquaresRegression Estimates •••

Review Questions •••

Exercises •••

Problems •••

Cases •••

8 Cost-Volume-Profit Analysis •••Illustration of Cost-Volume-Profit Analysis •••

Projected Expenses and Revenue •••

The Break-Even Point •••

Contribution-Margin Approach •••

Equation Approach •••

Graphing Cost-Volume-Profit Relationships •••

Interpreting the CVP Graph •••

Alternative Format for the CVP Graph •••

Profit-Volume Graph •••

Target Net Profit •••

Contribution-Margin Approach •••

Equation Approach •••

Graphical Approach •••

Applying CVP Analysis •••

Safety Margin •••

Changes in Fixed Expenses •••

Changes in the Unit Contribution Margin •••

Predicting Profit Given Expected Volume •••

Interdependent Changes in Key Variables •••

CVP Information in Published Annual Reports •••

M.A.P. Airlines Keep a Close Eye on Break-EvenLoad Factors •••

CVP Analysis with Multiple Products •••

Assumptions Underlying CVP Analysis •••

Role of Computerized Planning Models and Electronic

Spreadsheets •••

CVP Relationships and the Income Statement •••

Traditional Income Statement •••

Contribution Income Statement •••

Comparison of Traditional and Contribution Income

Statements •••

Cost Structure and Operating Leverage •••

Operating Leverage •••

M.A.P. Operating Leverage Helps These WebCompanies Become Profitable •••

Labor-Intensive Production Processes versus Advanced

Manufacturing Systems •••

Cost Structure and Operating Leverage:

A Cost-Benefit Issue •••

M.A.P. Cost Structure and Operating Leverage •••

CVP Analysis, Activity-Based Costing, and AdvancedManufacturing Systems •••

A Move toward JIT and Flexible Manufacturing •••

ABC Provides a Richer Understanding of Cost Behavior

and CVP Relationships •••

Chapter Summary •••

Review Problems on Cost-Volume-Profit Analysis •••

Key Terms •••

Appendix to Chapter 8: Effect of Income Taxes •••

Review Questions •••

Exercises •••

Problems •••

Cases •••

9 Profit Planning, Activity-Based Budgeting,and e-Budgeting •••Purposes of Budgeting Systems •••

Types of Budgets •••

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The Master Budget: A Planning Tool •••

Sales of Services or Goods •••

Sales Forecasting •••

Operational Budgets •••

Budgeted Financial Statements •••

Nonprofit Organizations •••

Activity-Based Budgeting •••

M.A.P. Activity-Based Budgeting (ABB) at AmericanExpress and AT&T Paradyne •••

Using Activity-Based Budgeting to Prepare theMaster Budget •••

Sales Budget •••

Production Budget •••

Direct-Material Budget •••

Direct-Labor Budget •••

Manufacturing-Overhead Budget •••

Activity-Based Budgeting and the Cost Hierarchy •••

Benefits of ABB •••

Selling, General, and Administrative (SG&A)

Expense Budget •••

Cash Receipts Budget •••

Cash Disbursements Budget •••

Cash Budget: Combining Receipts and

Disbursements •••

Budgeted Schedule of Cost of Goods

Manufactured and Sold •••

Budgeted Income Statement •••

Budgeted Statement of Cash Flows •••

Budgeted Balance Sheet •••

Assumptions and Predictions Underlying the Master Budget •••

Financial Planning Models •••

Budget Administration •••

M.A.P. Budget Administration at Cornell University •••

e-Budgeting •••

Firewalls and Information Security •••

M.A.P. Lockheed Martin •••

Zero-Base Budgeting •••

International Aspects of Budgeting •••

Budgeting Product Life-Cycle Costs •••

Behavioral Impact of Budgets •••

Budgetary Slack: Padding the Budget •••

Participative Budgeting •••

Focus on Ethics: Is Padding the Budget Unethical? •••

Chapter Summary •••

Key Terms •••

Review Questions •••

Exercises •••

Problems •••

Cases •••

10 Standard Costing, OperationalPerformance Measures, and theBalanced Scorecard •••Managing Costs •••

Management by Exception •••

Setting Standards •••

Methods for Setting Standards •••

Participation in Setting Standards •••

Perfection versus Practical Standards:

A Behavioral Issue •••

Use of Standards by Service

Organizations •••

Cost Variance Analysis •••

Direct-Material Standards •••

Direct-Labor Standards •••

Standard Costs Given Actual Output •••

Analysis of Cost Variances •••

Direct-Material Variances •••

Direct-Labor Variances •••

M.A.P. Parker Hannifin Corporation’s Brass Products Division •••

Multiple Types of Direct Material or Direct Labor •••

Allowing for Spoilage or Defects •••

Significance of Cost Variances •••

A Statistical Approach •••

Behavioral Impact of Standard Costing •••

Controllability of Variances •••

Interaction among Variances •••

Standard Costs and Product Costing •••

Advantages of Standard Costing •••

Changing Role of Standard-Costing Systems in Today’sManufacturing Environment •••

Criticisms of Standard Costing in Today’s Manufacturing

Environment •••

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M.A.P. Cost of Ownership •••

Adapting Standard-Costing Systems •••

Operational Performance Measures in Today’sManufacturing Environment •••

Gain-Sharing Plans •••

The Balanced Scorecard •••

Lead and Lag Measures: The Key to the

Balanced Scorecard •••

Linking the Balanced Scorecard to

Organizational Strategy •••

M.A.P. Linking the Balanced Scorecard toOrganizational Strategy •••

Focus on Ethics: Sacrificing Quality to Cut Standard Costs •••

Chapter Summary •••

Review Problems on Standard Costing and OperationalPerformance Measures •••

Key Terms •••

Appendix to Chapter 10: Use of Standard Costs for Product Costing •••

Review Questions •••

Exercises •••

Problems •••

Cases •••

11 Flexible Budgeting and theManagement of Overhead andSupport Activity Costs •••Overhead Budgets •••

Flexible Budgets •••

Advantages of Flexible Budgets •••

The Activity Measure •••

Flexible Overhead Budget Illustrated •••

Overhead Application in a Standard-Costing System •••

Choice of Activity Measure •••

Criteria for Choosing the Activity Measure •••

Changing Manufacturing Technology:

Computer-Integrated Manufacturing •••

Cost Drivers •••

Cost Management Using Overhead CostVariances •••

Variable Overhead •••

Fixed Overhead •••

Overhead Cost Performance Report •••

M.A.P. Cost Management Systems in Germany •••

Activity-Based Flexible Budget •••

Flexible Budgeting in the Service Industry •••

Focus on Ethics: Misstated Standards Affect Accuracyof Reports •••

Chapter Summary •••

Review Problem on Overhead Variances •••

Key Terms •••

Appendix A to Chapter 11: Standard Costs and Product Costing •••

Appendix B to Chapter 11: Sales Variances •••

Review Questions •••

Exercises •••

Problems •••

Cases •••

12 Responsibility-Accounting, QualityControl, and Environmental CostManagement •••Responsibility Centers •••

Illustration of Responsibility Accounting •••

Performance Reports •••

Budgets, Variance Analysis, and

Responsibility Accounting •••

Cost Allocation •••

Cost Allocation Bases •••

Allocation Bases Based on Budgets •••

Activity-Based Responsibility Accounting •••

Behavioral Effects of Responsibility Accounting •••

Information versus Blame •••

Controllability •••

Motivating Desired Behavior •••

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xxxii Contents

Segmented Reporting •••

Segments versus Segment Managers •••

Key Features of Segmented Reporting •••

Customer Profitability Analysis and

Activity-Based Costing •••

Total Quality Management •••

Measuring and Reporting Quality Costs •••

Changing Views of Optimal Product Quality •••

M.A.P. Six Sigma for Quality Management and Cost Reduction •••

ISO 9000 Standards •••

Environmental Cost Management •••

Classifying Environmental Costs •••

Managing Private Environmental Costs •••

Environmental Cost Strategies •••

Tie-In to the Responsibility-Accounting System •••

Focus on Ethics: Short-Sighted View of Cost Cutting •••

Chapter Summary •••

Review Problem on Responsibility Accounting •••

Key Terms •••

Review Questions •••

Exercises •••

Problems •••

Cases •••

13 Investment Centers and Transfer Pricing •••Delegation of Decision Making •••

Obtaining Goal Congruence:

A Behavioral Challenge •••

Adaptation of Management Control Systems •••

Measuring Performance in Investment Centers •••

Return on Investment •••

Residual Income •••

Economic Value Added •••

M.A.P. Pay for Performance Based on EVA •••

Measuring Income and Invested Capital •••

Invested Capital •••

Measuring Investment-Center Income •••

Inflation: Historical-Cost versus

Current-Value Accounting •••

Other Issues in Segment Performance Evaluation •••

Alternatives to ROI, Residual Income, and Economic

Value Added (EVA) •••

Importance of Nonfinancial Information •••

Measuring Performance in Nonprofit

Organizations •••

Transfer Pricing •••

Goal Congruence •••

General Transfer-Pricing Rule •••

Transfers Based on the External Market Price •••

Negotiated Transfer Prices •••

Cost-Based Transfer Prices •••

Standard versus Actual Costs •••

Undermining Divisional Autonomy •••

An International Perspective •••

M.A.P. Transfer Pricing and Tax Issues •••

Transfer Pricing in the Service Industry •••

Behavioral Issues: Risk Aversion and Incentives •••

Goal Congruence and Internal Control Systems •••

Chapter Summary •••

Review Problems on Investment Centers and Transfer Pricing •••

Key Terms •••

Review Questions •••

Exercises •••

Problems •••

Cases •••

Part IVUsing Accounting Information in Decision Making

14 Decision Making: Relevant Costs andBenefits •••The Managerial Accountant’s Role in Decision Making •••

Steps in the Decision-Making Process •••

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Quantitative versus Qualitative Analysis •••

Obtaining Information: Relevance,

Accuracy, and Timeliness •••

Relevant Information •••

Unique versus Repetitive Decisions •••

Importance of Identifying Relevant

Costs and Benefits •••

Identifying Relevant Costs and Benefits •••

Sunk Costs •••

Irrelevant Future Costs and Benefits •••

Opportunity Costs •••

Summary •••

Analysis of Special Decisions •••

Accept or Reject a Special Offer •••

Outsource a Product or Service •••

M.A.P. Outsourcing •••

Add or Drop a Service, Product, or

Department •••

M.A.P. Adding a Service •••

Special Decisions in Manufacturing Firms •••

Joint Products: Sell or Process Further •••

Decisions Involving Limited Resources •••

Theory of Constraints •••

Uncertainty •••

Activity-Based Costing and Today’s AdvancedManufacturing Environment •••

Conventional Outsourcing (Make-or-Buy)

Analysis •••

Activity-Based Costing Analysis of the

Outsourcing Decision •••

Other Issues in Decision Making •••

Incentives for Decision Makers •••

Short-Run versus Long-Run Decisions •••

Pitfalls to Avoid •••

Focus on Ethics: Effects of Decision to Close a Departmentand Outsource •••

Chapter Summary •••

Review Problem on Relevant Costs •••

Key Terms •••

Appendix to Chapter 14: Linear Programming •••

Review Questions •••

Exercises •••

Problems •••

Cases •••

15 Target Costing and Cost Analysis forPricing Decisions •••Major Influences on Pricing Decisions •••

Customer Demand •••

Actions of Competitors •••

Costs •••

Political, Legal, and Image-Related Issues •••

Economic Profit-Maximizing Pricing •••

Total Revenue, Demand, and Marginal

Revenue Curves •••

Total Cost and Marginal Cost Curves •••

Profit-Maximizing Price and Quantity •••

Price Elasticity •••

Limitations of the Profit-Maximizing Model •••

Costs and Benefits of Information •••

Role of Accounting Product Costs in Pricing •••

Cost-Plus Pricing •••

Absorption-Cost Pricing Formulas •••

Variable-Cost Pricing Formulas •••

Determining the Markup •••

Cost-Plus Pricing: Summary and Evaluation •••

M.A.P. Price Competition and Cost Management •••

Strategic Pricing of New Products •••

Target Costing •••

M.A.P. Pricing on the Internet by “e-Tailers” •••

A Strategic Profit and Cost Management

Process •••

Activity-Based Costing and Target Costing •••

Product-Cost Distortion and Pricing:

The Role of Activity-Based Costing •••

Value Engineering and Target Costing •••

Time and Material Pricing •••

Competitive Bidding •••

Effect of Antitrust Laws on Pricing •••

Chapter Summary •••

Review Problem on Cost-Plus Pricing •••

Key Terms •••

Review Questions •••

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Exercises •••

Problems •••

Cases •••

16 Capital Expenditure Decisions •••Section 1: Discounted-Cash-Flow Analysis •••

Net-Present-Value Method •••

Internal-Rate-of-Return Method •••

Comparing the NPV and IRR Methods •••

Assumptions Underlying Discounted-

Cash-Flow Analysis •••

Choosing the Hurdle Rate •••

Depreciable Assets •••

Comparing Two Investment Projects •••

Managerial Accountant’s Role •••

Postaudit •••

Real Option Analysis •••

Section 2: Income Taxes and Capital Budgeting •••

After-Tax Cash Flows •••

Accelerated Depreciation •••

Modified Accelerated Cost Recovery System

(MACRS) •••

Gains and Losses on Disposal •••

Investment in Working Capital •••

Extended Illustration of Income-Tax Effects

in Capital Budgeting •••

M.A.P. Capital Budgeting at Pharmaceutical Firms •••

Ranking Investment Projects •••

Section 3: Alternative Methods for Making InvestmentDecisions •••

Payback Method •••

Accounting-Rate-of-Return Method •••

Estimating Cash Flows: The Role of Activity-Based Costing •••

M.A.P. Interactive Television—Capital Budgeting and ABC •••

Justification of Investments in AdvancedManufacturing Systems •••

Focus on Ethics: Dysfunctional Focus on Early Cash Flows •••

Chapter Summary •••

Key Terms •••

Appendix A to Chapter 16: Future Value and Present Value Tables •••

Appendix B to Chapter 16: Impact of Inflation •••

Review Questions •••

Exercises •••

Problems •••

Cases •••

Part VSelected Topics for Further Study

17 Absorption, Variable, and ThroughputCosting •••

Product Costs •••

Illustration of Absorption and Variable Costing •••

Absorption-Costing Income Statements •••

Variable-Costing Income Statements •••

Reconciling Income under Absorption

and Variable Costing •••

Cost-Volume-Profit Analysis •••

Evaluation of Absorption and Variable Costing •••

M.A.P. IRS: Unique Product Packaging Is anInventoriable Cost •••

Throughput Costing •••

Throughput-Costing Income Statements •••

Focus on Ethics: Incentive to Overproduce Inventory •••

Chapter Summary •••

Key Terms •••

Appendix to Chapter 17: Effect of the Volume Variance under Absorption and Variable Costing •••

Review Questions •••

Exercises •••

Problems •••

Case •••

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Contents xxxv

18 Allocation of Support Activity Costs andJoint Costs •••Section 1: Service Department Cost Allocation •••

Direct Method •••

Step-Down Method •••

Reciprocal-Services Method •••

Fixed versus Variable Costs •••

Dual Cost Allocation •••

M.A.P. Cost Management in the Health Care Industry •••

Allocate Budgeted Costs •••

Today’s Advanced Manufacturing Environment •••

The Rise of Activity-Based Costing •••

Section 2: Joint Product Cost Allocation •••

Allocating Joint Costs •••

M.A.P. Joint Cost Allocation in the PetroleumIndustry •••

Chapter Summary •••

Key Terms •••

Appendix to Chapter 18:Reciprocal-Services Method •••

Review Questions •••

Exercises •••

Problems •••

Cases •••

Appendix I: The Sarbanes-Oxley Act,Internal Controls, and ManagementAccounting •••

Appendix II: Compound Interest and theConcept of Present Value •••

Appendix III: Inventory Management •••

References for “In Their Own Words” •••

Glossary •••

Photo Credits •••

Index of Companies and Organizations •••

Index of Subjects •••

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MANAGERIAL ACCOUNTING

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