MANAGERIAL
A CCO U NT I NG
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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
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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
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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.
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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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