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Managerial Accounting
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1 Managerial Accounting 2 Just Add Water and Paddle: Current Designs 2 LO 1: Identify the features of managerial accounting and the functions of management 4 Comparing Managerial and Financial Accounting 4 Management Functions 4 Organizational Structure 6 LO 2: Describe the classes of manufacturing costs and the differences between product and period costs 8 Manufacturing Costs 8 Product Versus Period Costs 10 Illustration of Cost Concepts 10 LO 3: Demonstrate how to compute cost of goods manufactured and prepare financial statements for a manufacturer 12 Income Statement 12 Cost of Goods Manufactured 13 Cost of Goods Manufactured Schedule 14 Balance Sheet 14 LO 4: Discuss trends in managerial accounting 16 Service Industries 16 Focus on the Value Chain 17 Balanced Scorecard 18 Business Ethics 19 Corporate Social Responsibility 20 2 Job Order Costing 46 Profiting from the Silver Screen: Disney 46 LO 1: Describe cost systems and the flow of costs in a job order system 48 Process Cost System 48 Job Order Cost System 48 Job Order Cost Flow 49 Accumulating Manufacturing Costs 50 LO 2: Use a job cost sheet to assign costs to work in process 52 Raw Materials Costs 53 Factory Labor Costs 55 LO 3: Demonstrate how to determine and use the predetermined overhead rate 57 LO 4: Prepare entries for manufacturing and service jobs completed and sold 60 Assigning Costs to Finished Goods 60 Assigning Costs to Cost of Goods Sold 61 Summary of Job Order Cost Flows 61 Job Order Costing for Service Companies 63 Advantages and Disadvantages of Job Order Costing 64 LO 5: Distinguish between under- and overapplied manufacturing overhead 65 Under- or Overapplied Manufacturing Overhead 66 3 Process Costing 88 The Little Guy Who Could: Jones Soda Co 88 LO 1: Discuss the uses of a process cost system and how it compares to a job order system 90 Uses of Process Cost Systems 90 Process Costing for Service Companies 91 Similarities and Differences Between Job Order Cost and Process Cost Systems 91 LO 2: Explain the flow of costs in a process cost system and the journal entries to assign manufacturing costs 93 Process Cost Flow 93 Assigning Manufacturing Costs-Journal Entries 93 LO 3: Compute equivalent units 96 Weighted-Average Method 96 Refinements on the Weighted-Average Method 97 LO 4: Complete the four steps to prepare a production cost report 99 Compute the Physical Unit Flow (Step 1) 100 Compute the Equivalent Units of Production (Step 2) 100 Compute Unit Production Costs (Step 3) 101 Prepare a Cost Reconciliation Schedule (Step 4) 102 Preparing the Production Cost Report 102 Costing Systems-Final Comments 103 LO *5: Appendix 3A: Compute equivalent units using the FIFO method 106 Equivalent Units Under FIFO 106 Comprehensive Example 107 FIFO and Weighted-Average 111 4 Activity-Based Costing 134 Precor is on Your Side 134 LO 1: Discuss the difference between traditional costing and activity-based costing 136 Traditional Costing Systems 136 Illustration of a Traditional Costing System 136 The Need for a New Approach 137 Activity-Based Costing 137 LO 2: Apply activity-based costing to a manufacturer 140 Identify and Classify Activities and Assign Overhead to Cost Pools (Step 1) 140 Identify Cost Drivers (Step 2) 140 Compute Activity-Based Overhead Rates (Step 3) 141 Allocate Overhead Costs to Products (Step 4) 141 Comparing Unit Costs 142 LO 3: Explain the benefits and limitations of activity-based costing 145 The Advantage of Multiple Cost Pools 145 The Advantage of Enhanced Cost Control 146 The Advantage of Better Management Decisions 148 Some Limitations and Knowing When to Use ABC 149 LO 4: Apply activity-based costing to service industries 150 Traditional Costing Example 151 Activity-Based Costing Example 152 LO *5: Appendix 4A: Explain just-in-time (JIT) processing 155 Objective of JIT Processing 156 Elements of JIT Processing 156 Benefits of JIT Processing 156 5 Cost-Volume-Profit 182 Don't Worry-Just Get Big: Amazon.com 182 LO 1: Explain variable, fixed, and mixed costs and the relevant range 184 Variable Costs 184 Fixed Costs 185 Relevant Range 186 Mixed Costs 187 LO 2: Apply the high-low method to determine the components of mixed costs 188 High-Low Method 189 Importance of Identifying Variable and Fixed Costs 191 LO 3: Prepare a CVP income statement to determine contribution margin 192 Basic Components 192 CVP Income Statement 192 LO 4: Compute the break-even point using three approaches 196 Mathematical Equation 196 Contribution Margin Technique 197 Graphic Presentation 198 LO 5: Determine the sales required to earn target net income and determine margin of safety 199 Target Net Income 199 Margin of Safety 201 6 Cost-Volume-Profit Analysis: Additional Issues 222 Not Even a Flood Could Stop It: Whole Foods Market 222 LO 1: Apply basic CVP concepts 224 Basic Concepts 224 Basic Computations 225 CVP and Changes in the Business Environment 226 LO 2: Explain the term sales mix and its effects on break-even sales 229 Break-Even Sales in Units 229 Break-Even Sales in Dollars 231 LO 3: Determine sales mix when a company has limited resources 233 LO 4: Indicate how operating leverage affects profitability 235 Effect on Contribution Margin Ratio 236 Effect on Break-Even Point 236 Effect on Margin of Safety Ratio 237 Operating Leverage 237 LO *5: Appendix 6A: Explain the differences between absorption costing and variable costing 240 Example: Comparing Absorption Costing with Variable Costing 240 Net Income Effects 242 Decision-Making Concerns 246 Potential Advantages of Variable Costing 248 7 Incremental Analysis 274 Keeping It Clean: Method Products 274 LO 1: Describe management's decision-making process and incremental analysis 276 Incremental Analysis Approach 276 How Incremental Analysis Works 277 Qualitative Factors 278 Relationship of Incremental Analysis and Activity-Based Costing 278 Types of Incremental Analysis 279 LO 2: Analyze the relevant costs in accepting an order at a special price 279 LO 3: Analyze the relevant costs in a make-or-buy decision 281 Opportunity Cost 282 LO 4: Analyze the relevant costs in determining whether to sell or process materials further 283 Single-Product Case 284 Multiple-Product Case 284 LO 5: Analyze the relevant costs to be considered in repairing, retaining, or replacing equipment 287 LO 6: Analyze the relevant costs in deciding whether to eliminate an unprofitable segment or product 288 8 Pricing 314 They've Got Your Size-and Color: Zappos.com 314 LO 1: Compute a target cost when the market determines a product price 316 Target Costing 317 LO 2: Compute a target selling price using cost-plus pricing 318 Cost-Plus Pricing 318 Variable-Cost Pricing 321 LO 3: Use time-and-material pricing to determine the cost of services provided 322 LO 4: Determine a transfer price using the negotiated, cost-based, and market-based approaches 326 Negotiated Transfer Prices 326 Cost-Based Transfer Prices 329 Market-Based Transfer Prices 330 Effect of Outsourcing on Transfer Pricing 331 Transfers Between Divisions in Different Countries 331 LO *5: Appendix 8A: Determine prices using absorption-cost pricing and variable-cost pricing 333 Absorption-Cost Pricing 333 Variable-Cost Pricing 335 LO *6: Appendix 8B: Explain issues involved in transferring goods between divisions in different countries 337 9 Budgetary Planning 360 What's in Your Cupcake?: BabyCakes NYC 360 LO 1: State the essentials of effective budgeting and the components of the master budget 362 Budgeting and Accounting 362 The Benefits of Budgeting 362 Essentials of Effective Budgeting 362 The Master Budget 365 LO 2: Prepare budgets for sales, production, and direct materials 367 Sales Budget 367 Production Budget 368 Direct Materials Budget 369 LO 3: Prepare budgets for direct labor, manufacturing overhead, and selling and administrative expenses, and a budgeted income statement 372 Direct Labor Budget 372 Manufacturing Overhead Budget 373 Selling and Administrative Expense Budget 374 Budgeted Income Statement 374 LO 4: Prepare a cash budget and a budgeted balance sheet 376 Cash Budget 376 Budgeted Balance Sheet 379 LO 5: Apply budgeting principles to nonmanufacturing companies 381 Merchandisers 381 Service Companies 382 Not-for-Profit Organizations 383 10 Budgetary Control and Responsibility Accounting 410 Pumpkin Madeleines and a Movie: Tribeca Grand Hotel 410 LO 1: Describe budgetary control and static budget reports 412 Budgetary Control 412 Static Budget Reports 413 LO 2: Prepare flexible budget reports 415 Why Flexible Budgets? 415 Developing the Flexible Budget 418 Flexible Budget-A Case Study 418 Flexible Budget Reports 420 LO 3: Apply responsibility accounting to cost and profit centers 422 Controllable Versus Noncontrollable Revenues and Costs 424 Principles of Performance Evaluation 424 Responsibility Reporting System 426 Types of Responsibility Centers 428 LO 4: Evaluate performance in investment centers 431 Return on Investment (ROI) 431 Responsibility Report 432 Judgmental Factors in ROI 433 Improving ROI 433 LO *5: Appendix 10A: Explain the difference between ROI and residual income 437 Residual Income Compared to ROI 437 Residual Income Weakness 438 11 Standard Costs and Balanced Scorecard 464 80,000 Different Caffeinated Combinations: Starbucks 464 LO 1: Describe standard costs 466 Distinguishing Between Standards and Budgets 467 Setting Standard Costs 467 LO 2: Determine direct materials variances 471 Analyzing and Reporting Variances 471 Direct Materials Variances 472 LO 3: Determine direct labor and total manufacturing overhead variances 475 Direct Labor Variances 475 Manufacturing Overhead Variances 477 LO 4: Prepare variance reports and balanced scorecards 479 Reporting Variances 479 Income Statement Presentation of Variances 480 Balanced Scorecard 481 LO *5: Appendix 11A: Identify the features of a standard cost accounting system 485 Journal Entries 485 Ledger Accounts 487 LO *6: Appendix 11B: Compute overhead controllable and volume variances 488 Overhead Controllable Variance 488 Overhead Volume Variance 489 11 Standard Costs and Balanced Scorecard 464 80,000 Different Caffeinated Combinations: Starbucks 464 LO 1: Describe standard costs 466 Distinguishing Between Standards and Budgets 467 Setting Standard Costs 467 LO 2: Determine direct materials variances 471 Analyzing and Reporting Variances 471 Direct Materials Variances 472 LO 3: Determine direct labor and total manufacturing overhead variances 475 Direct Labor Variances 475 Manufacturing Overhead Variances 477 LO 4: Prepare variance reports and balanced scorecards 479 Reporting Variances 479 Income Statement Presentation of Variances 480 Balanced Scorecard 481 LO *5: Appendix 11A: Identify the features of a standard cost accounting system 485 Journal Entries 485 Ledger Accounts 487 LO *6: Appendix 11B: Compute overhead controllable and volume variances 488 Overhead Controllable Variance 488 Overhead Volume Variance 489 12 Planning for Capital Investments 512 Floating Hotels: Holland America Line 512 LO 1: Describe capital budgeting inputs and apply the cash payback technique 514 Cash Flow Information 514 Illustrative Data 515 Cash Payback 515 LO 2: Use the net present value method 517 Equal Annual Cash Flows 518 Unequal Annual Cash Flows 519 Choosing a Discount Rate 520 Simplifying Assumptions 521 Comprehensive Example 521 LO 3: Identify capital budgeting challenges and refinements 522 Intangible Benefits 522 Profitability Index for Mutually Exclusive Projects 524 Risk Analysis 526 Post-Audit of Investment Projects 526 LO 4: Use the internal rate of return method 528 Comparing Discounted Cash Flow Methods 529 LO 5: Use the annual rate of return method 530 13 Statement of Cash Flows 550 Got Cash?: Microsoft 550 LO 1: Discuss the usefulness and format of the statement of cash flows 552 Usefulness of the Statement of Cash Flows 552 Classification of Cash Flows 552 Significant Noncash Activities 553 Format of the Statement of Cash Flows 554 LO 2: Prepare a statement of cash flows using the indirect method 555 Indirect and Direct Methods 555 Indirect Method-Computer Services Company 556 Step 1: Operating Activities 558 Summary of Conversion to Net Cash Provided by Operating Activities-Indirect Method 561 Step 2: Investing and Financing Activities 562 Step 3: Net Change in Cash 563 LO 3: Analyze the statement of cash flows 566 Free Cash Flow 566 LO *4: Appendix 13A: Prepare a statement of cash flows using the direct method 568 Step 1: Operating Activities 570 Step 2: Investing and Financing Activities 574 Step 3: Net Change in Cash 576 LO *5: Appendix 13B: Use the T-account approach to prepare a statement of cash flows 576 14 Financial Statement Analysis 600 It Pays to Be Patient: Warren Buffett 600 LO 1: Apply horizontal and vertical analysis to financial statements 602 Need for Comparative Analysis 602 Tools of Analysis 602 Horizontal Analysis 603 Vertical Analysis 606 LO 2: Analyze a company's performance using ratio analysis 608 Liquidity Ratios 609 Profitability Ratios 612 Solvency Ratios 616 Summary of Ratios 618 LO 3: Apply the concept of sustainable income 620 Discontinued Operations 621 Other Comprehensive Income 621 A Time Value of Money A-1 LO 1: Compute interest and future values A-1 Nature of Interest A-1 Future Value of a Single Amount A-3 Future Value of an Annuity A-4 LO 2: Compute present values A-7 Present Value Variables A-7 Present Value of a Single Amount A-7 Present Value of an Annuity A-9 Time Periods and Discounting A-11 Present Value of a Long-Term Note or Bond A-11 LO 3: Compute the present value in capital budgeting situations A-14 LO 4: Use a financial calculator to solve time value of money problems A-15 Present Value of a Single Sum A-16 Present Value of an Annuity A-17 Useful Applications of the Financial Calculator A-17 B Standards of Ethical Conduct for Management Accountants B-1 IMA Statement of Ethical Professional Practice B-1 Principles B-1 Standards B-1 Resolution of Ethical Conflict B-2 Cases for Managerial Decision-Making (The full text of these cases is available online at www.wiley.com/college/weygandt) Company Index I-1 Subject Index I-3

About the Author

Jerry J. Weygandt, PhD, CPA, is Arthur Andersen Alumni Professor of Accounting at the University of Wisconsin-Madison. He holds a Ph.D. in accounting from the University of Illinois. Articles 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 books and is a member of the American Accounting Association, the American 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 American Accounting Association. He is the recipient of the Wisconsin Institute of CPAs Outstanding Educator's Award and the Lifetime Achievement Award. In 2001 he received the American Accounting Association's Outstanding Accounting Educator Award. Paul D. Kimmel, PhD, CPA, received his bachelor's degree from the University of Minnesota and his doctorate in accounting from the University of Wisconsin. He is an Associate Professor at the University of Wisconsin -Milwaukee, and 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 is a three-time winner of the Outstanding Teaching Assisting 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 has published articles in Accounting Review, Accounting Horizons, Advances in Management Accounting, Managerial Finance, Issues in Accounting Education, Journal of Accounting Education, as well as other journals. His research interests include accounting for financial instruments and innovation in accounting education. He has published papers and given numerous talks on incorporating critical thinking into accounting education, and helped prepare a catalog of critical thinking resources for the Federated Schools of Accountancy. Donald E. Kieso, PhD, CPA, received his bachelor's degree from Aurora University and his doctorate in accounting from the University of Illinois. He is currently the KPMG Peat Marwick Emeritus Professor of Accounting at Northern Illinois University. He has public accounting experience with Price Waterhouse & Co. (San Francisco and Chicago) and Arthur Andersen & Co. (Chicago) and research experience with the Research Division of the American Institute of Certified Public Accountants (New York). He has done postdoctorate work as a Visiting Scholar at the University of California at Berkeley and is a recipient of NIU's Teaching Excellence Award and four Golden Apple Teaching Awards. Professor Kieso is the author of other accounting and business books and is a member of the American Accounting Association, the American Institute of Certified Public Accountants, and the Illinois CPA Society. He is currently serving on the Board of Trustees and Executive Committee of Aurora University, as a member of the Board of Directors of Castle BancGroup Inc., and as Treasurer and Director of Valley West Community Hospital.

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