Managerial accounting

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MANAGERIAL A CCO U NT I NG This page intentionally left blank MANAGERIAL AC C O U N T I N G RAMJI BALAKRISHNAN The University of Iowa K . S I VA R A M A K R I S H N A N University of Houston G E O F F R E Y B. S P R I N K L E Indiana University John Wiley & Sons, Inc PUBLISHER ASSOCIATE PUBLISHER SENIOR ACQUISITIONS EDITOR SENIOR MARKETING MANAGER SENIOR PRODUCTION EDITOR Senior designer SENIOR ILLUSTRATION EDITOR EDITORIAL ASSISTANT ASSOCIATE Photo editor Senior Media editor INTERIOR DESIGN COVER DESIGN COVER PHOTO George Hoffman Christopher DeJohn Jeff Howard Julia Flohr William A. Murray Kevin Murphy Sandra Rigby Kara Taylor Sheena Goldstein Allie K. Morris Nancy Field David Levy Tyler Stableford/Getty Images This book was set in New Baskerville Regular by GGS Book Services PMG and printed and bound by R.R. Donnelley. This book is printed on acid free paper.   Copyright ©2009 John Wiley & Sons, Inc. All rights reserved. No part of this publication may be ­reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning or otherwise, except as permitted under Sections 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923 (Web site: www.copyright.com). Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030-5774, (201) 748-6011, fax (201) 748-6008, or online at: www.wiley.com/go/permissions. To order books or for customer service please call 1-800-CALL WILEY (225-5945). Library of Congress Cataloging-in-Publication Data Balakrishnan, Ramji.   Managerial accounting/Ramji Balakrishnan, K. Sivaramakrishnan, Geoffrey B. Sprinkle.     p. cm.   Includes index.   ISBN 978-0-471-46785-4 (cloth)   1. Managerial accounting. I. Sivaramakrishnan, K. (Konduru) II. Sprinkle, Geoffrey B.   III. Title.   HF5657.4.B34 2009 2008039519   658.15'11—dc22 Printed in the United States of America 10  9  8  7  6  5  4  3  2  1 Dedication Ramji Balakrishnan To my parents, Usha, Vasu and Uma K. Sivaramakrishnan To my father, my sisters Viji and Parvathi, my wife Devika, my daughter Vidya, and in loving memory of my mother Geoffrey B. Sprinkle To Shari, Jason, Jack, and Scott This page intentionally left blank About the Authors Ramji Balakrishnan is the Carlson-KPMG Professor of Accounting and the Director of the RSM McGladrey Institute for Accounting Research and Education at the University of Iowa. Dr. Balakrishnan has a B.Sc. in Statistics from the University of Madras in 1977, an MBA from the Indian Institute of Management, Ahmedabad in 1979, and a Ph.D. from Columbia University in 1986. He is a Certified Management Accountant and is a recipient of the Robert Beyer Bronze Medal. He joined the University of Iowa in 1986 and has been there since except for a year at Georgia State University. A top-rated teacher and researcher, Dr. Balakrishnan has published his research in premier journals such as The Accounting Review, Journal of Accounting Research, Contemporary Accounting Research, Management Science, Journal of Management Accounting Research and Accounting Horizons. Along with Dr. Sivaramakrishnan, he won the 2003 Best Paper award for notable contribution to the management accounting literature. Dr. Balakrishnan serves on several Editorial Boards and has served as Associate Editor. He has taught managerial accounting at the undergraduate, graduate, and doctoral levels, and has published several teaching cases. He was the President of the Management Accounting Section of the AAA for 2005-2006. Konduru “Shiva” Sivaramakrishnan is currently a Professor and C.T. Bauer Endowed Chair in Accounting at the C.T. Bauer College of Business, University of Houston. He received his BTech in Engineering from the Indian Institute of Technology, Madras in 1977, an MBA from Xavier Institute, Jamshedpur, India, in 1982, and a Ph.D. in Accounting and Information Systems from the Kellogg Graduate School of Management at Northwestern University in 1989. Prior to his current position, he was a tenured Associate Professor at the Graduate School of Industrial Administration, Carnegie Mellon University, and Professor and Philip Ljungdahl Chair in Accounting at Texas A&M University. Dr. Sivaramakrishnan has significant research and teaching accomplishments. His research has appeared in premier journals such as The Accounting Review, Journal of Accounting Research, Contemporary Accounting Research, Management Science, Journal of Management Accounting Research, Accounting Horizons, Journal of Accounting and Economics, and Review of Financial Studies. Along with Dr. Ramji Balakrishnan, he won the 2003 Best Paper award for notable contribution to the management accounting literature. Shiva serves on several editorial boards, and is currently an Associate Editor of the Journal of Management Accounting Research. He has won numerous awards for teaching excellence at both undergraduate and graduate levels. Geoffrey B. Sprinkle is an Associate Professor, Whirlpool Faculty Fellow, and Chair of the Honors Program at the Kelley School of Business at Indiana University. Dr. Sprinkle has both B.S. and M.S. degrees in Accounting from Arizona State University, and his Ph.D. from The University of Iowa. He is a Certified Public Accountant, earning the Gold Medal in the state of Arizona on the May, 1989 CPA exam and the Elijah Watts Sells award nationally. He primarily teaches managerial accounting to undergraduates and is the recipient of numerous school-wide and university-level teaching awards. Dr. Sprinkle’s writings focus on motivation and coordination problems within organizations, including performance-evaluation and reward systems. His work has been published in journals such as The Accounting Review, The American Economic Review, Accounting, Organizations and Society, Journal of Accounting Research, Behavioral Research in Accounting, Issues in Accounting Education, and The Journal of Management Accounting Research. He also currently serves on the Editorial Boards of The Accounting Review, The British Accounting Review, Accounting, Organizations and Society, and The Journal of Management Accounting Research. This page intentionally left blank Preface Executive Summary Compared to existing books on the market, we believe our book offers several advantages and unique features. Below, we summarize the key attributes of our text. In the pages following the summary, we provide a richer discussion of our approach and pedagogy. • We provide an easy to understand integrated framework that links topics into a seamless whole. In the early chapters, we introduce two ideas: More costs and benefits become relevant as a decision’s horizon expands, and all decisions involve a cycle of planning and control. We implement the first idea by organizing the text into modules corresponding to short-term and long-term decisions. We then address planning and control decisions within each horizon. We are pleased to report that our colleagues and we have received outstanding student feedback on the tightly integrated nature of our text— students and instructors report that chapters follow naturally from one to the next, with everything “fitting” together. • Both the overall structure of the book and individual chapters emphasize using accounting information for decision making. Across chapters, we use the time-based template to emphasize the links among the various decisions that managers make, enabling students to see the linkages among seemingly unrelated decisions. Before each module, we use a part-opener to remind students about the relations among organizational decisions, and to place forthcoming topics in the appropriate context. Within each chapter, we maintain the focus on decision making by exploring a specific business problem. Each chapter also uses the same four-step approach to solving business problems. • Both the chapter text and end-of-chapter materials provide a balanced coverage of manufacturing and service sectors. Examples considered in the chapters include a gym, a caterer, a hospital, a consulting firm, a copy center, and a call center. Moreover, every chapter contains numerous exercises and problems relating to service and nonprofit settings. We have received rave reviews from instructors and students about both the breadth and depth of our end-of-chapter materials. • The book is student friendly. Our initial drafts used a conversational tone and everyday examples to illustrate concepts. We then subjected these drafts to several rounds of review by English editors, undergraduate students, and faculty to increase accessibility and impact. In addition to the standard exhibits, we include “Check It!” boxes of mini-worksheets that students can use to verify and fine-tune their understanding of the material. • We maintain the integrity of the framework while allowing instructors the flexibility to modify coverage to best suit their individual needs. We help instructors by presenting several sample syllabi that show alternate sequencing of topics (please see Section 5 in this Preface for further details). The primary flexibility lies in whether, after covering basic terminology and cost flows, instructors choose to cover product costing or to plunge directly into short-term decisions. xii Preface 1. Introduction Managerial accounting facilitates planning and control decisions. Planning decisions relate to choices about acquiring and using resources to deliver products and services to customers (e.g., which products and services to offer, their prices, and the resources needed, such as materials, labor, and equipment). Control decisions concern how much to delegate, as well as how to motivate, measure, evaluate, and reward performance. Current managerial accounting textbooks generally group product costing, cost management (ABC/ABM), short-term decisions, and performance evaluation practices into four separate modules. This grouping allows students to gain a working knowledge of current managerial accounting practices. However, while each book may provide solid coverage on one or more important dimensions, none offers a satisfactory, overarching theme. The average student walks away with a collection of concepts and techniques but with little idea of why things work the way they do. Armed with only the “what” and the “how” but not the “why,” students have no framework that lets them see the principles that drive practice or helps them adapt to novel or changing circumstances. We provide instructors and students with a unifying, problem-solving framework. We believe that the framework itself must be the key takeaway from any introductory managerial accounting course. By virtue of its logic and internal consistency, the framework allows students to: • Understand the big picture. • Examine new ideas and concepts and their relation to existing practice. • See how accounting information helps manage a complex entity. At the core of our framework is the one feature common to all decisions—every decision involves a cost-benefit trade-off. The decision could be personal (should I eat out or make dinner?) or organizational (should we continue using traditional performance measures or switch to the balanced scorecard?). The decision could relate to planning (how should we price this product?) or control (where should we set the sales quota?). The theme of systematically measuring costs and benefits to make effective decisions runs throughout our text. The first outgrowth of this theme, indicated by the titles of the modules, is our emphasis on a decision’s horizon. Time influences whether a cost or benefit is relevant for decision. The costs of the production plant and equipment are not relevant to many short-term decisions. Thus, there is no need to allocate these fixed costs to make effective short-term decisions. In the long term, however, a firm can manage capacity costs by shrinking or expanding its investment in plant and equipment. Thus, to make effective long-term decisions, a firm needs to identify variations in resource consumption patterns and create allocation mechanisms that capture the cost impact of these variations. Ultimately, when confronted with a decision problem, the successful manager knows what costs and benefits to include in the decision, and how to measure these costs and benefits. A second important aspect of our framework is an integrated treatment of planning and control decisions. Planning and control are two sides of the same coin. Diagnostic and feedback measures inform organizations of how well they implemented the plan, thereby providing input for the next plan. Similarly, performance evaluation and incentive schemes arise in response to strategic aspects of the planning process. An integrated treatment highlights these links, permitting students to perceive planning and control decisions as part of the same framework. PEDAGOGY Students learn best from simple examples. Once students understand the basic issues at an intuitive level, it is easier for them to understand similar issues in other business contexts. We therefore begin each chapter with an example that students can readily comprehend and to which they could relate. We then walk students through the issues and use the vignette as a springboard to more advanced settings. In addition to linking topics across chapters, we tightly integrate topics within a chapter. To this end, each chapter tells a story. The opening vignette serves to raise pertinent questions, and the chapter answers these questions. In this fashion, the student perceives the concepts as being interrelated and not disjointed. We note three other important features: • We made a strategic decision to collaborate on one chapter at a time; although more timeconsuming, this team-based approach ensures that we choose the best among the many ways of presenting the same material. This approach ensures that the book speaks with one voice. Preface • We have tried to make the text extremely accessible. This allows instructors, after ensuring that students understand the basics, to devote some class time to higher-order learning and explore conceptual and qualitative issues. As detailed in Section 4, the end-of-chapter materials contain xiii thought questions that instructors can use to initiate such discussions. • We hope to surprise you with both the breadth and depth of our end-of-chapter materials. We have devoted substantial efforts to ensuring that the problems and solutions are of the highest quality. 2. Audience The typical student has limited exposure to business, even though she may have taken courses in financial accounting and microeconomics. Accordingly, the key task is both to explain the many kinds of decisions needed to operate a successful business and to communicate how managers use cost information in these decisions. It is not enough to know prevalent practice. It is vital that the student understand whether and why a certain practice has merit in a given situation. This understanding requires a sound framework. In line with the adage about teaching a man to fish, we believe that the average student will appreciate our framework for decision making. The focus on using cost data for decision making makes our book well suited for a course that employs a user-perspective. We believe that such a userfocus is particularly appropriate for the introductory course. It also is consistent with the widespread move to change the curriculum from a technicalaccounting perspective to a business-oriented, or process, perspective. 3. Organization of Content Module I: INTRODUCTION AND FRAMEWORK Our first module contains three chapters. In Chapter 1, we illustrate a four-step framework for decision making, and we distinguish how individuals make decisions from how organizations make decisions. We next introduce two important classes of organizational decisions—planning decisions and control decisions. We then discuss how organizations use managerial accounting information for both planning and control. We conclude Chapter 1 by examining the role of ethics in decision making, and discussing how societal and professional standards shape organizational decisions. Making a decision requires that we identify what costs and benefits to measure, and then estimate them. Chapters 2 focuses on the principles that help us accomplish these two tasks. We begin with two principles, controllability and relevance, that determine which costs and benefits to measure. Using these principles, we offer an approach for grouping business decisions per their horizon. This grouping of decisions forms the basis for the modular approach that unfolds. We next discuss the principles that are fundamental to estimating costs and benefits: variability and traceability. Finally, we extend the principle of variability to develop a hierarchy of costs, which helps to increase the accuracy of estimated costs. We conclude this introductory module with a chapter on cost terminology and an overview of how accounting systems record the flow of costs. This chapter begins by discussing cost flows in a service environment such as a health club, where the accounting and cost flows are somewhat intuitive. We next move to cost flows in merchandising firms to introduce the concept of an inventory account. Finally, we consider manufacturing organizations. xiv Preface Module II: SHORT-TERM PLANNING AND CONTROL: MAXIMIZING CONTRIBUTION We define the short term as a period over which organizations cannot change capacity costs arising from long-term commitments related to property, plant, equipment, and personnel. These costs, which we often term fixed costs, are therefore not relevant for short-term decisions. Accordingly, the goal for shortterm decisions is to maximize contribution margin, which is revenue less variable costs. We begin Module II with a discussion of how to estimate relevant costs for short-term decisions. The key here is to identify fixed and variable costs, leading us to discuss techniques such as account classification, the high-low method, and regression analysis. We end this chapter by showing how a contribution margin statement helps managers organize the resulting information to make effective short-term decisions. We devote Chapters 5 and 6 to planning decisions. In Chapter 5, we introduce Cost-Volume-Profit (CVP) analysis, a natural outgrowth of the contribution margin statement studied in the previous chapter. The CVP relations among costs, volume, and profit provide a convenient tool for profit planning. Following this, we apply the CVP relation to evaluate decision options and, in the process, illustrate how managers could use the CVP relations to evaluate operating risk. While CVP analysis is useful for overall profit planning, it is not suitable for many localized decision problems that arise because of the temporary mismatch between the supply and demand for capacity resources. Specifically, most organizations invest in capacity resources such as plant, equipment, and personnel based on expectations of long-term demand. Actual demand rarely equals anticipated demand, however. In some periods, actual demand falls short of expectations, meaning that managers must find ways to utilize idle resources gainfully. At other times, actual demand exceeds available capacity, changing the manager’s problem to one of extracting the maximum benefit from available resources. In either instance, organizations cannot fix the mismatch by changing capacity because they cannot control capacity levels and costs in the short term. In Chapter 6, we discuss two approaches—the incremental and totals—to frame and solve such decision problems. We illustrate these approaches in several contexts such as make-or-buy, accepting a special order, and allocating a scarce resource. Chapter 7 examines operating budgets. Budgets incorporate planning decisions on how and where to use resources. Budgets also serve as the benchmark for evaluating actual results, a control decision. In this way, budgets bridge the planning and control dimensions. We emphasize the tension between the planning and control roles for budgets in our discussion of both the mechanics of budgeting and the budgeting process. Chapter 8 focuses on short-term control decisions. We begin by introducing the concept of a variance, which is the deviation between a budgeted and actual result. We then present the mechanics of variance analysis, with a focus on using variances to reconcile budgeted and actual profit. Finally, we emphasize the link back to planning decisions by discussing how to construct and interpret a profit reconciliation statement to determine possible corrective actions. Module III: PLANNING AND CONTROL OVER THE LONG TERM: MAXIMIZING PROFIT Over the long term, organizations can control most costs considered fixed in the short term. That is, organizations can alter capacity levels over this horizon. Thus, the goal for long-term decisions is to maximize profit, which is revenue less variable costs less capacity costs. However, it often is difficult to estimate the controllable costs for many long-term decisions that pertain to individual products or customers. The difficulty arises because products and customers typically share capacity resources, meaning that organizations cannot trace capacity costs to individual products and customers. In the language of Chapter 2, capacity costs are indirect costs. Consequently, while performing a detailed account analysis to estimate controllable capacity costs is the economically correct approach, it is not cost effective. Thus, as a practical matter, firms use cost allocations to approximate the change in capacity costs. We devote Chapter 9 to cost allocations, a tool that firms employ to estimate costs over the long term. We begin by describing how a firm might use allocations in a common decision problem—setting prices. We note that firms allocate costs not just for decision making but for other reasons as well, including reporting income to external parties such as shareholders and the IRS, justifying cost-based reimbursements, and influencing behavior within the organization. Accordingly, we discuss these uses of cost allocations and how an allocation’s intended purpose guides the choice of an allocation procedure. In this way, the chapter provides an integrated discussion of the various demands for cost allocations within an organization. We focus Chapter 10 on activity-based costing (ABC) and management. At its core, ABC is a refined methodology for allocating capacity costs. We examine how ABC can lead to better decisions Preface by improving estimates of controllable capacity costs. We then discuss the steps associated with designing product-costing systems and symptoms that might help organizations decide if they need to update the current costing system. We end by highlighting some of the costs and benefits of implementing ABC. ABC exploits the linkages among resources, activities, and products to provide more accurate measures of product profitability than traditional allocation systems do. Thus, after describing the mechanics of ABC, we discuss how to use ABC data to improve profitability by managing products, customers, and resources. Customer Profitability Analysis allows organizations to identify profitable and unprofitable customers, and suggests ways to increase profit by managing customer relationships. We refer to this and other uses of activity-based costing information to manage profit as activity-based management, or ABM. Despite their widespread use, allocations have two limitations when used to make decisions: (1) They do not consider the time value of money; and (2) they do not consider the lumpy nature of capacity resources. These limitations are of particular concern when the firm is considering a large expenditure on a longlived resource. For such expenditures, organizations routinely engage in capital budgeting, the focus of Chapter 11. As operational budgets do for short-term decisions, capital budgets provide the link between long-term planning and control decisions. In particular, capital budgets provide an economic basis for analyzing expenditures on capacity resources, and control decisions focus on the effective use of these resources. Chapter 12 examines control decisions over the long term. Most organizations delegate decisions over the use of resources to managers lower in the organizational hierarchy. Decentralization leads to a conflict arising from the lack of goal congruence among different levels in the organization. Accordingly, we begin the chapter by discussing the benefits and costs associated with decentralizing decision making. We describe common forms of decentralization in organizations and highlight the critical role of performance evaluation systems in these environments. We discuss the principles that govern performance measurement in organizations, and apply them to measure and evaluate the performance of different responsibility centers. In Chapter 13, we discuss how an organization’s strategy affects its cost structure and defines the business and operational constructs that require measurement. We also introduce and present the balanced scorecard as a means of effectively integrating an organization’s strategy with its control xv system. We begin with value chain analysis and strategic planning. We introduce strategy and, using real-world examples, highlight the critical linkages between the value chain, strategy, and cost structure. We next discuss the impact of strategy on key organizational processes. In each instance, our aim is to show why the process configuration follows naturally from the strategic choice and provides a competitive advantage. This approach allows us to discuss how to measure whether a process actually is yielding the desired advantage and how to motivate employees to stay focused on strategic objectives. We then illustrate how the balanced scorecard can help in this regard. Our discussion underscores how the scorecard categories flow naturally from the organization’s strategy. We emphasize the choice among metrics and the importance of linking the metrics both within and across categories. We conclude with a brief discussion of implementation issues. Module IV: COST ACCOUNTING SYSTEMS This module explores the mechanics of cost accounting systems. Chapters 14 and 15, respectively, introduce students to two basic cost accounting systems: job and process costing. Both of these systems use allocations to value inventory and compute the cost of goods sold in accordance with GAAP. As such, these chapters distinguish between cost accounting (computing product costs) and managerial accounting (providing information for decision making). In the context of job costing, we introduce the notion of a predetermined overhead rate, and we discuss how to deal with under- or over-applied overhead. In the process-costing chapter, we explain the concept of an equivalent unit and discuss how to apply process costing to settings with many cost pools and opening inventory. Chapter 16 presents two refinements that could help organizations increase the accuracy of cost systems: dual-rate systems and accounting for interactions among departments (service department allocations). We discuss how these refinements arise from the organization’s desire to improve the accuracy in reported product costs. Because many might wish to skip or skim these topics, we adopt a modular presentation to give instructors flexibility in the depth of coverage. We put the “traditional” cost accounting topics into separate chapters in a stand-alone module. This placement provides instructors flexibility in coverage. One can cover one or more of these chapters immediately after Chapter 3, after Chapter 9, or even skip this material entirely without interrupting the flow of the text. xvi Preface 4. Chapter Template PART OPENER Each module begins with a one- to two-page overview of the module. Part openers refer to a template for organizing business decisions and explain how the topics in the module fit within the framework. The goal is to provide a “road map” for the module. Each chapter has the following features: LEARNING OBJECTIVES Learning objectives are useful because they prime students’ thinking and focus their attention on the big picture both before and after delving into the details. Our goal is to have an average of four to five learning objectives per chapter. Each learning objective has its own section within the chapter. Common terminology and margin notes alert students to these linkages between learning objectives and sections. The summary discusses each of the learning objectives and reiterates the key concepts. OPENING VIGNETTE We open each chapter with a simple “story” of a business facing a decision problem. Vignettes include a story about a gym dealing with new competition, a catering business deciding whether to accept an engagement, and a cabinet-maker expanding his product line. These vignettes help us link different sections in the chapter logically. A few vignettes continue across chapters to show linkages among the topics. BODY OF THE CHAPTER Each chapter begins with an intuitive discussion of the issues in the opening vignette. Rather than providing a solution, we focus the discussion on sharpening the relevant questions and identifying pertinent costs and benefits. Following this discussion, we proceed as per the list of learning objectives. We use numerical examples, graphs, and additional everyday examples to make the concepts resonate with students. Our goal is to tell a story rather than present disjointed techniques. As mentioned earlier, one of our main goals is to provide an integrated framework for using accounting information to make effective decisions. Two features help us deliver on this goal. • Apply the Decision Framework! In Chapter 1, we provide four steps for effective decision making: (1) Specify the decision problem, including the decision maker’s goals, (2) identify options, (3) measure costs and benefits to determine the value of each option, and (4) make the decision, choosing the option with the highest value. At the beginning of each chapter, we summarize the vignette in this sequence, “solving” it by the end of the chapter. This feature serves to underscore our text’s emphasis on introducing every concept in the context of a specific decision and then generalizing the idea. • Chapter Connections For every chapter, we have boxes that show how the concept under discussion builds on concepts from prior chapters, and how the current topic is the foundation is the material discussed in later chapters. For instance, we link the discussion of CVP analysis (Chapter 5) back to identifying fixed and variable costs (Chapter 4). We also note that while CVP analysis is useful for profit planning and short-term decisions that pertain to the firm as a whole, it can be difficult to adapt CVP analysis to more localized short-term decision problems. Accordingly, we consider such decisions in Chapter 6. In the spirit of active learning, we induce students to work along with the text. • Check-It! These exercises and mini-worksheets ask students to verify some numbers or computations in the text. The objective is to confirm that the student is following the material and is not lost. There usually are four to six such boxes per chapter. (We provide solutions at the end of each chapter to help the student verify that they have mastered the concept.) Finally, we show application to current business. • Connecting to Practice: (Description of decision context). We have three to five such “call-out” boxes per chapter. Each call-out box discusses a relevant and recent phenomenon, drawing from business publications such as the Wall Street Journal, Business Week, or the New York Times. SUMMARY Our summary section links directly back to our learning objectives. The opening paragraph in the Preface summary section discusses the general theme of the chapter. We then provide a transition to the next chapter. RAPID REVIEW We present this summary of key points at the end of the chapter. There are four to six summary observations that distill the take-away points for each learning objective (section). The intent is to cement the student’s understanding and to provide a ready review prior to an examination. REVIEW (SELF-STUDY) PROBLEM Each chapter has one or two integrated self-study problems with solutions. These problems assist students in working through the concepts presented in the chapter and also ready students for the end-ofchapter material. GLOSSARY Key terms—that is, terms that are novel to the student and require definition—are boldfaced and defined in the chapter. We repeat these terms, with their accompanying definition, in a section immediately following the summary section. END OF CHAPTER MATERIALS We hope to surprise you with the quality of the endof-chapter materials. We note the following points: • We wrote both the questions and the solutions manual. We also developed the materials concurrently with the text to ensure tight linkages between chapter content and the end-of-chapter materials. Our extremely detailed solutions go well beyond providing the calculations. By discussing the application in detail, the solutions manual serves to reinforce student understanding. • We consider examples in both the manufacturing and the service sectors. We also provide a range of problems that apply the concepts to not-forprofit entities. • Many questions raise ethical and social issues. These issues arise not as stand-alone topics but as part of the decision-making process. • We provide spreadsheet and graphing templates, where appropriate. We provide two sets of qualitative questions, with the aim of verifying student preparation and as a basis for class discussion. These are: xvii • Review Questions. These 10 to 15 questions test definitions and comprehension of key concepts. The goal is to verify that the student has read the chapter with some care. • Discussion Questions. These questions, 10 to 15 per chapter, expand the student’s understanding. These questions might ask the student to consider how the analysis would change if an underlying assumption were to change, list additional factors that a manager would consider, and explain how the idea may apply to different settings. We construct exercises and problems at three levels of difficulty. • Foundational Exercises. The 15 or so exercises test students’ basic understanding of chapter materials. These focused problems apply chapter concepts to the given setting. • Intermediate Problems. These problems, 10 or so per chapter, typically require both quantitative and qualitative answers. These problems often require students to consider (trade off) multiple objectives. • Advanced Problems. These problems require students to think creatively and to move beyond a direct application of chapter content. We have three to five challenging problems per chapter. Consistent with the theme of providing a problemsolving framework, we organize many questions (particularly, intermediate and challenging problems) into three parts: • Application of chapter content. This part asks students to apply a formula or concept discussed in the chapter. • Sensitivity analysis. Intermediate and advanced level (“challenging”) problems have one or more questions that ask the student to probe the effect of relaxing one of the “simplifying” assumptions. For example, we may ask how estimated cost changes as operations approach capacity limits. • Qualitative and strategic considerations. The final part expands the analysis to include important but hard to quantify factors. For example, in this part, we may ask the student to discuss the quality implications of outsourcing a component. Finally, each chapter has one to three mini-cases. These cases integrate most of the chapter’s learning objectives and could serve as the basis for group (collaborative) activity or for a richer discussion of the issues presented in the chapter in a broader organizational context. xviii Preface 5. Flexibility in Sequencing Chapters There are at least three ways to organize the chapters in this book in the context of a 15-week semester long course. A. TRADITIONAL ORGANIZATION Begin with Chapters 1–3 to introduce students to managerial accounting, cost terminology, and cost flows. Move to Chapters 14 and 15, which cover job and process costing. After covering product costing, revert to Chapter 4, which covers how to estimate costs for short-term decisions. From here on out, chapters unfold in a traditional sequence. We anticipate that many instructors following this sequence will omit Chapter 16 on service department allocations. The instructors also might end the course with Chapter 12, which covers decentralization, performance measurement, and transfer pricing. B. DECISION-MAKING FOCUS We advocate this sequence. The only modification to the chapter sequence that we might make is to reduce the coverage of the chapters on strategic planning and control (Chapter 13) and to skim Chapter 16. We along with some of our colleagues have found that this approach works extremely well for undergraduates and MBA audiences. C. STRATEGIC FOCUS The sequencing of chapters allows instructors to deemphasize product costing and to increase the focus on decision making. Follow the chapter sequence, though you should ask students to skim Chapter 3. You can also skip Chapters 14 and 15 on job and process costing, as well as Chapter 16 on service department allocations.
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