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MANAGERIAL
ACCOUNTING
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MANAGERIAL
ACCOUNTING
Creating Value in a
Dynamic Business Environment

Seventh Edition

Ronald W. Hilton
Cornell University

Boston Burr Ridge, IL Dubuque, IA Madison, WI New York San Francisco St. Louis
Bangkok Bogot Caracas Kuala Lumpur Lisbon London Madrid Mexico City
Milan Montreal New Delhi Santiago Seoul Singapore Sydney Taipei Toronto
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MANAGERIAL ACCOUNTING: CREATING VALUE IN A DYNAMIC BUSINESS ENVIRONMENT


Published by McGraw-Hill/Irwin, a business unit of The McGraw-Hill Companies, Inc., 1221
Avenue of the Americas, New York, NY, 10020. Copyright 2008 by The McGraw-Hill
Companies, Inc. All rights reserved. No part of this publication may be reproduced or distributed
in any form or by any means, or stored in a database or retrieval system, without the prior written
consent of The McGraw-Hill Companies, Inc., including, but not limited to, in any network or
other electronic storage or transmission, or broadcast for distance learning.
Some ancillaries, including electronic and print components, may not be available to customers
outside the United States.
This book is printed on acid-free paper.
1 2 3 4 5 6 7 8 9 0 WCK/WCK 0 9 8 7 6
ISBN-13: 978-0-07-302285-7
ISBN-10: 0-07-302285-3
Editorial director: Stewart Mattson
Managing developmental editor: Gail Korosa
Executive marketing manager: Krista Bettino
Senior media producer: Elizabeth Mavetz
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Lead production supervisor: Rose Hepburn
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Cover design: George Kokkonas
Typeface: 11/12 Times Roman
Compositor: Techbooks
Printer: Quebecor World Versailles Inc.
Material from the Uniform CPA Examination, Questions and Unofficial Answers, Copyright 1978, 1979, 1980,
1981, 1982, 1983, 1984, 1987, 1988, 1989, 1990, 1991 by the American Institute of Certified Public Accountants,
Inc. is adapted with permission.
Material from the Certificate in Management Accounting Examinations, Copyright 1977, 1978, 1979, 1980,
1981, 1982, 1983, 1984, 1987, 1990, 1991, 1992, 1993, 1994, 1995, 1996, 1997, 1998, 1999, 2000 by the Institute
of Management Accountants is adapted with permission.
Logos from Caterpillar, Inc., Wal-Mart Stores, Inc., and Southwest Airlines Co. appear in this text with permission
from those companies.
Library of Congress Cataloging-in-Publication Data
Hilton, Ronald W.
Managerial accounting : creating value in a dynamic business environment / Ronald W.
Hilton.7th ed.
p. cm.
Includes index.
ISBN-13: 978-0-07-302285-7 (alk. paper)
ISBN-10: 0-07-302285-3 (alk. paper)
1. Managerial accounting. I. Title.
HF5657.4.H55 2008
658.15!11dc22
2006018043

www.mhhe.com
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To my wife, Meg, and our sons, Brad and Tim.


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VI Preface

A MARKET LEADER FOR SIX EDITIONS,


HILTON CONTINUES THAT TRADITION
OF MANAGERIAL ACCOUNTING
INNOVATION AND EXCELLENCE.
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Preface VII

ABOUT THE AUTHOR


Ronald W. Hilton is a Professor of Accounting
at Cornell University. With bachelors and masters degrees
in accounting from The Pennsylvania State University, he
received his Ph.D. from The Ohio State University.
A Cornell faculty member since 1977, Professor Hilton
also has taught accounting at Ohio State and the University
of Florida, where he held the position of Walter J. Matherly
Professor of Accounting. Prior to pursuing his doctoral
studies, Hilton worked for Peat, Marwick, Mitchell and
Company and served as an officer in the United States Air
Force.
Professor Hilton is a member of the Institute of
Management Accountants and has been active in the
American Accounting Association. He has served as
associate editor of The Accounting Review and as a
member of its editorial board. Hilton also has served on the
editorial board of the Journal of Management Accounting
Research. He has been a member of the
resident faculties of both the Doctoral
Consortium and the New Faculty Consortium
sponsored by the American Accounting
Association.
With wide-ranging research interests, Hilton
has published articles in many journals,
including the Journal of Accounting
Research, The Accounting Review,
Management Science, Decision Sciences,
The Journal of Economic Behavior and
Organization, Contemporary Accounting
Research, and the Journal of Mathematical
Psychology. He also has published a
Professor Hilton tours a microchip monograph in the AAA Studies in Accounting Research
production facility located outside series, and he is a co-author of Cost Management:
Taipei, Taiwan. In recent years, Strategies for Business Decisions, Budgeting: Profit
Professor Hilton has consulted with Planning and Control, and Cost Accounting: Concepts and
practicing managerial accountants Managerial Applications. Professor Hiltons current research
throughout the world. interests focus on contemporary cost management systems
and international issues in managerial accounting. In recent
years, he has toured manufacturing facilities and consulted
with practicing managerial accountants in North America,
Europe, Asia, and Australia.
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VIII Preface

BRINGING REAL-WORLD FOCUS TO

Managerial Accounting.
The world of business is changing dramatically.
As a result, the role of managerial accounting
is very different than it was even a decade
ago. Today, managerial accountants serve as
internal business consultants, working side-by-
side in cross-functional teams with managers
from all areas of the organization. For a
thorough understanding of managerial
accounting, students should not only be able to
produce accounting information, but also
understand how managers are likely to use
and react to the information.
The goal of Managerial Accounting is to
acquaint students of business with the
fundamental tools of management accounting
and to promote their understanding of the
dramatic ways in which the field is changing.
The emphasis throughout the text is on using
accounting information to help manage an
organization.

Major strength is how it relates managerial accounting to the


general management function and reveals the managerial
accountant as an important member of the management
team.
Linda C. Bowen,
University of North Carolina Chapel Hill
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Preface IX

YOUR MANAGERIAL ACCOUNTING CLASS

Focus Companies.
Focus Companies provide a powerful strategy for
fostering learning, and Hiltons integration of focus
The company story acts as a hook to get
companies throughout the text is unmatched by any students interested in the chapter material.
other managerial accounting book. Each chapter Michele Matherly,
University of North Carolina at Charlotte
introduces important managerial accounting topics
within the context of a realistic company. Students
see the immediate impact of managerial accounting
decisions on companies and gain exposure to
different types of organizations.
In today's world, it is important to teach the
student from a standpoint of a variety of
Balanced. different business organizations. Hilton does a
Hiltons Managerial Accounting offers the most great job of diversifying his material among
various types of business organizations.
balanced coverage of manufacturing and service Marilyn Ciolino,
companies. He recognizes that students will be Delgado Community College

working in a great variety of business environments


and will benefit from exposure to diverse types of
companies. Hilton uses a wide variety of examples
from retail, service, manufacturing, and nonprofit
organizations.
Perhaps what sets Hilton apart from the
competition is its recognition that the
Contemporary. world consists of more than
manufacturing firms, and that managerial
Hilton continues to be the leader in presenting the accounting plays a significant role in
most contemporary coverage of managerial service and not-for-profit organizations.
Lanny Solomon,
accounting topics. The traditional tools of managerial University of Missouri Kansas City
accounting such as product costing and budgeting
have been updated with current approaches. New
topics such as environmental cost management and
The Sarbanes-Oxley Act have been added.

Flexible.
Managerial Accounting is written in a modular format
The book goes beyond covering the basics and
allowing topics to be covered in the order you want. organizes and integrates contemporary topics nicely.
For example, Chapter 17 covers absorption, variable Harrison McCraw,
State University of West Georgia
and throughput costing. Many instructors like to cover
this topic early in the course. So, Chapter 17 is
written so that it can be assigned right after Chapter
3. A table showing the text's flexibility is in the
Instructor's Resource Manual.
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X Preface
How Does Managerial Accounting: Creating
Value in a Dynamic Business Environment
Bring the Real World into Your Classroom?

FOCUS COMPANIES
Students need to see the relevance of
managerial accounting information in order
to actively engage in learning the material.
Ron Hilton found that by using Focus
Companies to illustrate concepts, students INSERT tearsheet from
immediately saw the significance of the front endsheet
(to come)
material and became excited about the
content. Hiltons integration of Focus
Companies throughout the text is
unmatched by any other managerial
accounting textbook. Each chapter
introduces important managerial topics
THIS CHAPTERS FOCUS COMPANY
within the context of a realistic company.
is The Walt Disney Company. This entertainment ser-
vices company is a giant in the industry with theme
parks, feature film studios, animation studios, televi-
sion broadcasting, hotels and resorts, and retail stores.
Using the Walt Disney Company as an illustration, we
will introduce the field of managerial accounting. We
will explore how managerial accountants work in part-

Whenever the Focus Company is nership with managers to add value to the organiza-
tion. The major themes of managerial accounting also
are introduced, and we will return to them throughout
the book.
presented in the chapter, its logo is shown
so the student sees its application to the Each chapter is built around a focus
company, in which the chapters key points
are illustrated. This chapters focus is on
The Walt Disney Company. The focus
text topic. companies in subsequent chapters are
not real companies, but they are realistic
scenarios built on actual company
practices. Whenever the focus company
is discussed in the chapter, the company
logo appears in the margin.

Walt D isney
CONTRAST COMPANIES Company

IN CONTRAST
to the entertainment services setting of
New to this edition, a Contrast Company is The Walt Disney Company, we will turn
our attention to Gap, Inc. This major
clothing retailer has over 3,000 stores
now introduced in each chapter. In most around the world, which sell Gap,
Banana Republic, Old Navy, and Forth &
Towne apparel. We will explore Gaps

cases these highlight an industry different value chain, which is the set of linked,
value-creating activities, ranging from
securing basic raw materials and energy
to the ultimate delivery of products and
from that of the Focus Company. This services. As a retailer, Gap focuses on
apparel design, marketing, and sales. All
manufacturing of its clothing lines is

feature allows even greater emphasis on contracted out to garment manufacturers


throughout the world.
Each chapter also includes a contrast company. In most cases, the contrast company will present a key chapter topic

service-industry firms and other non- in an industry that is different from that of the focus company. In this chapter, the focus company (Walt Disney) is an
entertainment services company, whereas the contrast company (The Gap) is a fashion retailer.

manufacturing environments. The Focus


Companies and Contrast Companies are
listed on the front endpapers.
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Preface XI

REAL-WORLD FOCUS
The Ethical Climate of Business and the Role of the Accountant Real-World Examples
Who among us is not shocked and dismayed by the seemingly endless stream of cor-
LO9

Understand the ethical


porate scandals that we have experienced over the past few years. The headlines keep
on comingAOL, Bristol-Myers Squib, Conseco, Enron, Global Crossing, KPMG,
The Hilton text provides a variety of thought-
Rite Aid, Tyco, Worldcom, Xeroxand the list goes on. Many of the cases involve
provoking, real-world examples to focus students
responsibilities of a
managerial accountant. mismanagement, some are characterized by alleged ethical lapses, and in some
instances there is alleged criminal behavior. Who is to blame? According to most ob-
servers, there is plenty of blame to go around: greedy corporate executives, managers
Topic 12 who make overreaching business deals, lack of oversight by various companies
boards of directors (particularly the boards audit committees), shoddy work by exter-
on managerial accounting as an essential part of
nal auditors, lack of sufficient probing by Wall Street analysts and the financial press,
and some accountants who have been all too willing to push the envelope on aggres-
sive accounting to (or beyond) the edge. Billions of dollars have been lost in employee
the management process. Featured organizations
pension funds, several states investment portfolios, and the private investment ac-
counts of the public. It will no doubt take many years to sort out the mess. Companies
have gone bankrupt; fortunes have been lost; careers have been ruined; and more of the
include FedEx, Ford, Bank of America,
Amazon.com, the Gap, and many others. These
same is yet to come. Some of those involved will likely end up in jail. Several finan-
cial executives have filed guilty pleas on felony charges. Some are serving time in

companies are highlighted in blue in the text.

Managerial Accounting:
A Business Partnership with Management
We are looked upon as
The role of managerial accounting is very different now than it was even a decade ago.
In the past, managerial accountants operated in a strictly staff capacity, usually physi-
In Their Own Words
cally separated from the managers for whom they provided reports and information.
Quotes from both practicing managers and
business advisors, more
than just accountants, Nowadays, managerial accountants serve as internal business consultants, working
and that has a lot to do side-by-side in cross-functional teams with managers from all areas of the organiza-
tion. Rather than isolate managerial accountants in a separate accounting department,
managerial accountants are included in the
with the additional
analysis and the companies now tend to locate them in the operating departments where they are work-
forward-looking goals ing with other managers to make decisions and resolve operational problems.

margins throughout the text. These actual quotes


we are setting. (1a)1 Managerial accountants take on leadership roles on their teams and are sought out for
Caterpillar the valuable information they provide. The role of the accountant in leading-edge com-
panies has been transformed from number cruncher and financial historian to being

show how the field of management accounting is


business partner and trusted advisor.2
An organizations management team, on which managerial accountants play an in-
tegral role, seeks to create value for the organization by managing resources, activities,
and people to achieve the organizations goals effectively.
changing, emphasize how the concepts are
actually used, and demonstrate that management
As most students taking a basic principles of
managerial accounting course are not accounting
accountants are key players in most companies
majors, they don't always understand why they need management teams.
to know this information. I believe you could use
them to show why finance people, marketing people,
management people, etc., need to know this
information.
Lois Mahoney,
Eastern Michigan University

Management
MASS CUSTOMIZATION
Management Accounting Practice
Accounting
Practice
There is no better way to make, sell, and deliver PCs than the way Dell Computer does it, and no-
body executes that model better than Dell. The companys machines are made to order and deliv-
The managerial accounting practices of well-
Dell Computer
ered directly to customers, who get the exact machines they want cheaper than they can get them
from Dells competition. Dell has some 24 facilities in and around Austin and employs more than
18,000 local workers. Dell is improving its earnings and gaining market share even in tough eco-
known, real-world organizations are highlighted in
nomic times.2 Nevertheless, Michael Dell, the companys restless founder, is constantly looking for
ways to improve the companys operations. In one year alone, Dell cut $1 billion out of its costshalf
from manufacturingand Dell executives vowed to cut another $1 billion.
these boxes. They stimulate student interest and
Visit the Topfer Manufacturing Center in Austin, and its hard to conceive how Dell could be
any more efficient. Workers already scuttle about in the 200,000-square-foot plant like ants on a provide a springboard for classroom discussion.
hot plate. Gathered in cramped six-person cells, they assemble computers from batches of parts
that arrive via a computer-directed conveyor system overhead. If a worker encounters a problem,

Focus on Ethics Focus on Ethics


WAS WORLDCOMS CONTROLLER JUST
FOLLOWING ORDERS?
the capitalization allowed the company to spread the recognition
of its expenses into the future, which increased net income in the
This feature is included in most chapters. Focus
Through a series of mergers and acquisitions, WorldCom, Inc. current period. The expenses in question related to line costs
grew to become the nations second-largest long-distance
telecommunications company. WorldComs core communication
the fees that WorldCom pays outside providers for access to their
communications networks. In addition, the company announced
on Ethics poses an ethical dilemma, then asks
services included network data transmission over public and pri- in July 2002 that it had also manipulated reserve accounts,
vate networks. Trouble arose for WorldCom because of the im-
mense overcapacity in the telecommunications industry due to
which affected another $3.8 billion in earnings in 1999 and
2000.
tough questions that underscore the importance of
overly optimistic growth projections during the Internet boom. The problems at WorldCom were discovered during an in-
The combination of overcapacity, decreased demand, and high
fixed costs still poses a serious problem for many of the major
ternal audit and brought to the attention of the companys new
auditors, KPMG. Arthur Andersen served as WorldComs auditors
ethical management. Some of these are based on
real-world incidents while others are fictional but
players in the industry. during the period covered by the alleged accounting scandal.
In June 2002, the company disclosed that it had overstated Arthur Andersen maintained that the details of the accounting
earnings for 2001 and the first quarter of 2002 to the tune of fraud were kept from them by senior WorldCom management.

based on well-established anecdotal evidence.


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XII Preface

A FOCUS ON EXCEPTIONAL
END-OF-CHAPTER MATERIAL
Managerial Accounting is known for its comprehensive and reliable end-of-chapter material.
Each chapter includes an extensive selection of assignment material including Review Questions,
Exercises, Problems, and Cases.

Review Problems on Cost Classifications


Problem 1

Review Problems present both a problem and a Several costs incurred by Myrtle Beach Golf Equipment, Inc. are listed below. For each cost, indicate
which of the following classifications best describe the cost. More than one classification may apply to
the same cost item. For example, a cost may be both a variable cost and a product cost.

complete solution allowing students to review the Cost Classifications


a. Variable

entire problem-solving process. b.


c.
Fixed
Period
d. Product
e. Administrative
f. Selling
g. Manufacturing
h Research and development

Key Terms
For each terms definition refer to the indicated page, or turn to the glossary at the end of the text.

Key Terms are bolded in the text and repeated at


activity accounting, 24 chief financial officer empowerment, 7 staff positions, 13
activity-based costing (CFO), 13 financial accounting, 10 strategic cost
(ABC), 24 continuous improvement, 23 internal auditor, 13 management, 26
activity-based management controller (or just-in-time (JIT) theory of constraints, 26
(ABM), 24 comptroller), 13

the end of the chapter with page references. The


production system, 22 total quality management
attention-directing cost accounting system, 11 line positions, 13 (TQM), 23
function, 7 cost driver, 25 managerial accounting, 4 treasurer, 13
balanced scorecard, 9 cost management non-value-added costs, 24 value chain, 24

book also includes a complete Glossary of Key Certified Management


Accountant (CMA), 28
system, 24

Terms. Key Terms are also available as online


Review Questions
flash cards at the book's Web site. 11. According to some estimates, the volume of electronic
commerce transactions exceeds $3 trillion. Business-to-
110. How could your college or university use the concepts in
the balanced scorecard? List two possible performance
business transactions account for almost half of this measures that would be relevant to a college or univer-
amount. What changes do you believe are in store for sity, for each of the balanced scorecards four areas.
managerial accounting as a result of the explosion in 111. What does the following statement by a managerial ac-
e-commerce? countant at Caterpillar imply about where in the organi-
12. List two plausible goals for each of these organizations: zation the managerial accountants are located? [We] are
Amazon.com, American Red Cross, General Motors, a partner with all of the other functions in the business
Wal-Mart, the City of Seattle, and Hertz. here. (Reference 1a at end of text.)
13. List and define the four basic management activities. 112. What is meant by the following statement? Managerial
14. Give examples of each of the four primary management accounting often serves an attention-directing role.
activities in the context of a national fast-food chain 113. What is the chief difference between manufacturing and
such as Barger King. service industry firms?
15. Give examples of how each of the objectives of manage-
114. Define the following terms: just-in-time, computer-
rial accounting activity would be important in an airline
integrated manufacturing cost management system

Review Questions, Exercises, Problems, and Problems All applicable Problems are available with McGraw-Hills Homework Manager TM.

Cases are comprehensive in covering the points in Problem 342


Schedule of Cost of Goods
Manufactured and Sold;
The following data refer to Twisto Pretzel Company for the year 20x1.
Work-in-process inventory, 12/31/x0 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selling and administrative salaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 8,100
13,800
Income Statement

the chapter. They exhibit a wide range of difficulty


Insurance on factory and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,600
(LO 6)
Work-in-process inventory, 12/31/x1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,300
Finished-goods inventory, 12/31/x0 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,000
Cash balance, 12/31/x1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000

and the Instructor's Manual provides guidance for


Indirect material used . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,900
Depreciation on factory equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,100
Raw-material inventory, 12/31/x0 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,100
Property taxes on factory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,400

the instructor on the difficulty level and time Finished-goods inventory, 12/31/x1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of raw material in 20x1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Utilities for factory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
15,400
39,000
6,000
Utilities for sales and administrative offices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,500

required for each problem. Numerous adapted Other selling and administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Indirect-labor cost incurred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation on factory building . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,000
29,000
3,800

CMA and CPA problems are included.


Depreciation on cars used by sales personnel 1 200
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Preface XIII

Each chapter includes problems and cases exploring key business areas.
Logos next to the problems identify these topics.

Group Work Internet


Ethical Issues
Research

Business Excel
International Issues
Communication Template

EXCEL
Spreadsheet applications are essential to contemporary accounting practice. Students must rec-
ognize the power of spreadsheets and know how accounting data are presented in them. We dis-
cuss Excel applications where appropriate in the text.

Exercise 334
Overapplied or Underapplied The following information pertains to Trenton Glass Works for the year just ended.
Overhead Budgeted direct-labor cost: 75,000 hours at $16 per hour
(LO 4, 5) Actual direct-labor cost: 80,000 hours at $17.50 per hour
Budgeted manufacturing overhead: $997,500

Several exercises and problems in each chapter


Actual selling and administrative expenses: 435,000
Actual manufacturing overhead:
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $231,000
Property taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,000
Indirect labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Supervisory salaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
82,000
200,000
59,000
include an optional requirement for students to
Build a Spreadsheet to develop the solution.
Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,000
Rental of space . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300,000
Indirect material (see data below) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79,000
Indirect material:
Beginning inventory, January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48,000
Purchases during the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94,000
Ending inventory, December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63,000

Required:

1. Compute the firms predetermined overhead rate, which is based on direct-labor hours.
2. Calculate the overapplied or underapplied overhead for the year.
3. Prepare a journal entry to close out the Manufacturing Overhead account into Cost of Goods Sold.
4. Build a spreadsheet: Construct an Excel spreadsheet to solve requirements (1) and (2) above. Show
how the solution will change if the following data change: budgeted manufacturing overhead was
$990,000, property taxes were $25,000, and purchases of indirect material amounted to $97,000.
Exercise 335
Predetermined Overhead The following data pertain to the Oneida Restaurant Supply Company for the year just ended.

Problem 541
Activity-Based Costing World Gourmet Coffee Company (WGCC) is a distributor and processor of different blends of coffee.
(LO 1, 2, 4, 5, 7) The company buys toffee beans from around the world and roasts, blends, and packages them for resale.
WGCC currently has 15 different coffees that it offers to gourmet shops in one-pound bags. The major
cost is raw materials; however, there is a substantial amount of manufacturing overhead in the predom-

Many problems can be solved using the Excel


inantly automated roasting and packing process. The company uses relatively little direct labor.
Some of the coffees are very popular and sell in large volumes, while a few of the newer blends
have very low volumes. WGCC prices its coffee at full product cost, including allocated overhead, plus
a markup of 30 percent. If prices for certain coffees are significantly higher than market, adjustments are
made. The company competes primarily on the quality of its products, but customers are price-conscious
as well.
spreadsheet templates contained on the text's
Data for the 20x1 budget include manufacturing overhead of $3,000,000, which has been allocated
on the basis of each products direct-labor cost. The budgeted direct-labor cost for 20x1 totals $600,000.
Based on the sales budget and raw-material budget, purchases and use of raw materials (mostly coffee Web site. An Excel logo appears in the margin
beans) will total $6,000,000.
The expected prime costs for one-pound bags of two of the companys products are as follows:
Kona Malaysian
next to these problems for easy identification
Direct material . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3.20 $4.20
Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .30 .30
WGCCs controller believes the traditional product-costing system may be providing misleading
cost information. She has developed an analysis of the 20x1 budgeted manufacturing-overhead costs
shown in the following chart.

Good description of managerial accounting tools.


Easy to read and understand. Strength is in the end-
of-chapter problems - good variety and lots of them. Excellent in comparison to the competition. It is
Priscilla Wisner, thorough and has a good quality and quantity of
Thunderbird, The Garvin School of International Man- material for students to test themselves.
agement Laura Rickett,
Kent State University
hiL22853_fm_i-xxxvii 06/26/06 15:39 Page xiv
REVISED PAGES

XIV Preface

WHAT'S NEW IN THE SEVENTH EDITION?


Contrast Companies Updated Topic Tackler
New to the seventh edition is a contrast company This popular tutorial offers a virtual
in each chapter. As in previous editions, each helping hand in understanding the
chapter is built around a realistic Focus Company most challenging topics in the
in which the chapter's key points are illustrated. managerial accounting course.
In this edition, however, a Contrast Company is Through a step-by-step sequence of video clips,
also introduced, which in most cases will feature PowerPoint slides, interactive practice exercises,
an industry different from that of the focus and self-tests, Topic Tackler offers help on two
company. This new feature allows even greater key topics for each chapter. These topics are
emphasis on service-industry firms and other indicated by a logo in the text. New in this edition
non-manufacturing environments. The focus are audio-narrated electronic slides.
companies and contrast companies are listed in
the front endpapers. Focus on Ethics
Several of the Focus on Ethics pieces have been
Greater Emphasis on the Service Industry revised to make this feature even more useful as
In addition to introducing the contrast companies a vehicle for exploring ethical issues in the
described above, a greater effort has been made classroom. The Focus on Ethics piece in Chapter
to point out the relevance of managerial 1 has been revised to reflect the new Statement
accounting concepts and tools in service-industry of Ethical Professional Practice adopted by the
settings. Many examples are given throughout the Institute of Management Accountants in 2005.
text of real-world service-industry firms using The Focus on Ethics piece in Chapter 5
managerial accounting information. addresses difficult ethical issues that can arise in
the aftermath of an ABC project. The Chapter 6
The Sarbanes-Oxley Act ethics piece addresses the use of customer
Three sections of Sarbanes-Oxley (SOX) are profitability analysis as the basis for providing
germane to management accounting, because differential treatment for different classes of
they address aspects of internal controls over customers.
financial reporting. Section 101 establishes the
Public Company Accounting Oversight Board End-of-Chapter Material
(PCAOB), which has established requirements for The end-of-chapter material has once again been
assessing internal controls. The sections that very heavily revised. Several new problems have
have caused the most significant challenges for been added, and virtually all of the exercises,
companies, and hence created the most problems, and cases contain data different from
controversy, are sections 302 and 404. The that in the sixth edition.
implications of these three SOX sections are
covered in the 7th Edition. Build a Spreadsheet
This new feature adds a spreadsheet requirement
Streamlining to several exercises and problems in each
To streamline this edition, Chapters 5 and 6 have chapter. Students are asked to build an Excel
been heavily revised and reorganized. Significant spreadsheet that will solve the exercise and then
changes to both the content and pedagogy in manipulate the solution by changing some of the
these chapters, which cover activity-based key data in the exercise.
costing and activity-based management, make
these challenging topics more accessible to
students.
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REVISED PAGES

Preface XV

Heavily revised coverage of key topical areas, brand new pedagogy for the most
challenging topics, and new assignment material make the seventh edition more
useful than ever to students and faculty alike.

SIGNIFICANT CONTENT CHANGES


Chapter 1: Coverage of IMA's new Statement of Ethical (In contrast to the Focus Company: CozyCamp.com, a
Professional Practice. New coverage of the balanced manufacturer of camping equipment, with online sales)
scorecard using United Parcel Service as an illustration.
Expanded coverage of the value chain. Introduction of Chapter 10: Revision and expansion of coverage of the
Contrast Company: The Gap, an apparel retailer. (In balanced scorecard. Introduction of Contrast Company:
contrast to the Focus Company: The Walt Disney Com- Forest Home National Bank, a financial services com-
pany, an entertainment services company.) pany. (In contrast to the Focus Company:
DCDesserts.com, a producer of fresh fancy desserts with
Chapter 2: Introduction of Contrast Company: Midas, emphasis on e-commerce.)
an automotive service company. (In contrast to the Fo-
cus Company: Comet Computer Company, a manufac- Chapter 11: Introduction of Contrast Company: Upstate
turer.) Auto Rentals, a car-rental service company. (In contrast
to the Focus Company: DCDesserts.com, a producer of
Chapter 3: Introduction of Contrast Company: Midtown fresh fancy desserts with emphasis on e-commerce.)
Advertising Agency, an advertising services company.
(In contrast to the Focus Company: Adirondack Outfit- Chapter 12: Introduction of Contrast Company: Hand-
ters, a manufacturer of canoes and small boats.) ico, a manufacturer of cordless phones. (In contrast to
the Focus Company: Aloha Hotels and Resorts, a hotel
Chapter 5: Heavy revision and reorganization of mater- and resort chain.
ial covering activity-based costing. Brand new pedagogy,
making this challenging topic more accessible to stu- Chapter 13: Introduction of Contrast Company: Sun-
dents. New Focus Company: Patio Grill Company, a coast's Food Processing Division, which operates bak-
manufacturer of gas barbeque grills. Introduction of eries and dairy and meat processing plants for the
Contrast Company: Delaware Medical Center, a health grocery retailer. (In contrast to the Focus Company:
care provider. Suncoast Food Centers, a grocery retailer.)

Chapter 6: Reorganization and revision of activity- Chapter 14: Introduction of Contrast Company: Interna-
based management coverage. New Focus Company: tional Chocolate Company, a chocolate producer. (In
Patio Grill Company, a manufacturer. Introduction of contrast to the Focus Company: Worldwide Airways, an
Contrast Company: Federal Express, a worldwide ex- airline.)
press delivery service.
Chapter 15: Introduction of Contrast Company: Marine
Chapter 7: Introduction of Contrast Company: Cosmos Services, a marina service and construction company.
Communications Technology, a manufacturer of commu- (In contrast to the Focus Company: Sydney Sailing Sup-
nications satellites. (In contrast to the Focus Company: plies, a sailboat manufacturer.)
Tasty Donuts, a restaurant chain.)
Chapter 16: Introduction of Contrast Company: High
Chapter 8: Introduction of Contrast Company: Accu- Country Department Stores, a retailer. (In contrast to the
Time, a manufacturer of digital clocks. (In contrast to the Focus Organization: City of Mountainview, a city govern-
Focus Company: Seattle Contemporary Theater, a non- ment.)
profit theater organization.)
Chapter 18: Introduction of Contrast Company: Interna-
Chapter 9: Movement of the chapter's appendix cover- tional Chocolate Company, a chocolate producer. (In
ing inventory management to a stand-alone appendix at contrast to the Focus Company: Riverside Clinic, a
the end of the textbook. Introduction of Contrast Com- health care provider.)
pany: Philadelphia Fitness Cooperative, a fitness club.
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XVI Preface

HOW CAN TECHNOLOGY SUPPORT


STUDENT SUCCESS?
Our technology resources help students and instructors focus on learning success. By using the Internet and
multimedia resources, students get book-specific help at their convenience. Compare our technology to that
of any other book and were confident youll agree that Managerial Accounting has the best in the market.
Teaching aids make in-class presentations easy and stimulating. These aids give you more power than ever
to teach your class the way you want.

MCGRAW-HILLS MCGRAW-HILLS
HOMEWORK MANAGER HOMEWORK MANAGER
PLUS
McGraw-Hill's Homework Manager is a Web-based
homework management system that gives you unparal- McGraw-Hill's Homework Manager Plus combines the
leled power and flexibility in creating homework assign- power of Homework Manager with the latest interactive
ments, tests, and quizzes. Homework Manager learning technology to create a comprehensive, fully inte-
duplicates problem structures directly from the end-of- grated online study package.
chapter material in your McGraw-Hill textbook, using al-
Students using Homework Manager Plus can access not
gorithms to provide limitless variations of textbook
only Homework Manager itself, but the Interactive On-
problems. Use Homework Manager to supply online self-
line Textbook as well. Far more than a textbook on a
graded practice tests for students, or create assignments
screen, this resource is completely integrated into Home-
and tests with unique versions of every problem: Home-
work Manager, allowing students working on assignments
work Manager can grade assignments automatically, pro-
to click a hotlink and instantly review the appropriate ma-
vide instant feedback to students, and store all results in
terial in the textbook.
your private gradebook. Detailed results let you see at a
glance how each student does and easily track the By including Homework Manager Plus with your textbook
progress of every student in your course. adoption, you're giving your students a vital edge as they
progress through the course and ensuring that the help they
need is never more than a mouse click away.

INTERACTIVE ONLINE
VERSION OF THE TEXTBOOK
In addition to the textbook, students can rely on this online
version of the text for a convenient way to study. While
other publishers offer a simple PDF, this interactive Web-
based textbook contains hotlinks to key definitions and is
integrated with Homework Manager to give students quick
access to relevant content as they work through problems,
exercises, and practice quizzes.
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REVISED PAGES

Preface XVII

TOPIC TACKLER I think this tool is a great way for students to get
additional help in some of the challenging areas of
This software is a complete
Managerial Accounting. It allows them to see the
tutorial focusing on areas in topic explained again, see additional examples, and
the course that give students try extra exercises to help them further their skills and
the most trouble. It provides knowledge.
Laura Rickett,
help on two key topics for
Kent State University
each chapter by use of

Video Clips
PowerPoint Slide Shows
Interactive Exercises
Self-Grading Quizzes

A logo in the text marks the topic covered in Topic


Tackler.

ZINIO DIGITAL EDITION


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

iPOD CONTENT
Harness the power of one of the most popular technology tools students use
todaythe Apple iPod. Our innovative approach allows students to download
audio and video presentations as well as quizzes for each chapter in the text,
right into their iPod and take learning materials with them wherever they go. It
makes review and study time as easy as putting on headphones. Visit the
Managerial Accounting Online Learning Center (www.mhhe.com/hilton7e) to
learn more details on available iPod contentand enhance your learning ex-
perience today.
hiL22853_fm_i-xxxvii 06/26/06 15:39 Page xviii
REVISED PAGES

XVIII Preface

HOW CAN TECHNOLOGY SUPPORT


INSTRUCTOR SUCCESS?
ONLINE COURSE MANAGEMENT
(WebCT, eCollege, and TopClass)

We offer Managerial Accounting content for


complete online courses. You can customize the
Online Learning Center content and author your
own course materials. No matter which online
course solution you choose, you can count on
the highest level of support. Our specialists offer
free training and answer any question you have
through the life of your adoption.

PAGEOUT
McGraw-Hills Course Management System,
PageOut, is the easiest way to create a Web site
for your accounting course. Theres no need for
HTML coding, graphic design, or a thick how-to
book. Just fill in a series of boxes and click on one
of our professional designs. In no time your course
is online with a Web site that contains your
syllabus. If you need help, our team of product
specialists is ready to take your course materials
and build a custom Web site to your specifications.

CPS CLASSROOM PERFORMANCE SYSTEM


This is a revolutionary system that brings ultimate
interactivity to the classroom. CPS is a wireless response
system that gives you immediate feedback from every
student in the class. CPS units include easy-to-use
software for creating and delivering questions and
assessments to your class. With CPS you can ask
subjective and objective questions. Then every student
simply responds with their individual, wireless response
pad, providing instant results. CPS is the perfect tool for
engaging students while gathering important assessment
data. In response to user feedback from instructors and
students, software features have been added. These
features include a PowerPoint plug-in, an improved data-
sorting capability, a comprehensive grade book
complement, web-based access to all McGraw-Hill CPS
content, and other powerful classroom learning functions.
hiL22853_fm_i-xxxvii 06/26/06 15:39 Page xix
REVISED PAGES

Preface XIX

ONLINE LEARNING CENTER (OLC)


www.mhhe.com/hilton7e

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

Chapter Objectives Spreadsheet Guide & Tips


Glossary Company Web Sites
Topic Tackler Tutorial Accounting Information
PowerPoint Slides Supplementary Chapters
Narrated Slides Sample Study Guide Chapter
Check Figures Text Updates
Excel Spreadsheets Videos

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

Instructors Solutions Manual Video Guide and Exercises


Instructors Resource Manual Excel Solutions
Text Exhibits Supplementary Chapter Solutions
Text Updates PowerPoint Slides
hiL22853_fm_i-xxxvii 06/26/06 15:39 Page xx
REVISED PAGES

XX Preface

SUPPLEMENTS
Hiltons instructor and student support materials are comprehensive,
providing you with superior classroom support and bringing out the
best in your students.
The technology supplements and
instructor resources are top notch, and
very appropriate for our students.
Marilyn Okleshen,
Minnesota State University Mankato
Instructor Supplements

Instructors Manual Test Bank Instructor Resource


(Available on the password-protected (Available on the Instructors CD-ROM
Instructors Edition Online Learning Resource CD)
Center (OLC) and Instructors Resource ISBN-10: 0073022861
CD) This test bank in Word format
contains multiple-choice questions, ISBN-13: 9780073022864
This comprehensive manual essay, and short problems. Each
includes chapter outlines, This CD includes electronic
test item is coded for level of
summaries, and teaching versions of the Instructors Manual,
difficulty, learning objective, and
overviews. A homework grid Solutions Manual, Test Bank, as
type. Type refers to whether the
provides estimated time for each well as PowerPoint slides for
problem is a recall, an application,
assignment and its learning instructor and students, video clips,
or an analysis problem based on
objective. The manual also cross- exhibits in the text, spreadsheet
Blooms taxonomy. Prepared by
references all the key supplements templates with solutions, and
Lanny Solomon.
including the Test Bank, Managerial additional chapters on Process
Accounting Video Series, and Costing: The First-in, First-Out
PowerPoint slides. Prepared by Method, The Statement of Cash
Lanny Solomon of University of Algorithmic Diploma Flows, and Financial Statement
Missouri Kansas City. Analysis and their Solutions
Test Bank
Manuals.
ISBN-10: 007326492X
Solutions Manual ISBN-13: 9780073264929 PowerPoint Slides
(Available on the password-protected (Available on the password-protected
Instructors Edition OLC and Instructor Instructors Edition Online Learning
This computerized test bank Center (OLC) and Instructors Resource
Resource CD) contains algorithmic problems CD)
Prepared by the author, the manual enabling instructors to create
contains complete solutions to all similarly structured problems with These slides cover key concepts
the texts end-of-chapter review different values, allowing every found in each chapter.
questions, exercises, problems, student to be assigned a unique
and cases. quiz or test.

Managerial Accounting
Video Library
It has excellent student and instructor
resources.
These short videos, developed by
Michael Tyler, Dallas County Community College,
Barry University provide for classroom discussion.
Excellent illustrations, pictures, The focus is on the preparation,
support materials, etc. analysis, and use of accounting
K.R. Balachandran, information for business decision
New York University
making.
hiL22853_fm_i-xxxvii 06/26/06 15:39 Page xxi
REVISED PAGES

Preface XXI

Student Supplements

Excel Templates
(Available on the Online Learning Center)

These spreadsheets allow students to


develop business skills by using
templates to solve selected McGraw-Hills Homework
assignments identified by an icon in the Manager Plus
end-of-chapter material.
This integrates all of the texts
multimedia resources. With just one
access code, students can obtain state
Study Guide Check Figures of the art study aids including
(Available on the Online Learning Center) Homework Manager and an online
ISBN-10: 0073022926 version of the text.
These provide key answers for selected
ISBN-13: 9780073022925 problems in the text.
This guide incorporates many of the
accounting skills essential to student
success. Each chapter contains chapter
focus suggestions, read and recall Narrated Slides
questions, self-test questions and (Available on the Online Learning Center)
exercises, and ideas for study groups. McGraw-Hills Homework
In addition to reinforcing and applying These slides cover key chapter topics in Manager
the key concepts in the text, the study an audio-narrated presentation sure to
guide coaches students on how to help learning. This web-based software duplicates
study individually and in groups. problem structures directly from the
Prepared by Douglas deVidal of the end-of-chapter material in the textbook.
University of Texas at Austin. It uses algorithms to provide a limitless
supply of self-graded practice.
PowerPoint Slides
(Available on the Online Learning Center)

These slides offer a great visual


compliment to lectures and cover key
topics for each chapter in the book.

Online Learning Center (OLC)


www.mhhe.com/hilton7e
It has good content and great
Topic Tackler supporting materials, especially for Students can rely on the OLC for help
(Available on the Online Learning students who must miss class from in the course. It provides PowerPoint
Center)
time to time, and want to study on their slides, self-graded quizzes, videos, and
This tutorial offers a virtual own. much more. See page XIX for more
helping hand in Roy Regel, details.
understanding the most University of Montana at Missoula
challenging topics in the managerial
accounting course. Through a step-by-
step sequence of video clips,
PowerPoint slides, interactive practice
exercises, and self-tests, Topic Tackler The book is very thorough, well-written
offers help on two key topics for each and still remains student-friendly. The
chapter. These topics are indicated by supplements are outstanding.
a logo in the text. Ben Baker,
Davidson College
hiL22853_fm_i-xxxvii 06/26/06 16:53 Page xxii
REVISED PAGES

XXII Preface
Acknowledgments
I Am Grateful
I would like to express my appreciation to people who have provided assistance in the development of
this textbook. First, my gratitude goes to the thousands of managerial accounting students I have had
the privilege to teach over many years. Their enthusiasm, comments, and questions have challenged
me to clarify my thinking about many topics in managerial accounting.

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

REVIEWERS Robert Eskew, Purdue University Hamid Mohammadi, St. Xavier University
Andrew Felo, Pennsylvania State Karl Putnam, University of Texas at El Paso
Linda Brown, St. Ambrose University University at Great Valley Roy Regel, University of Montana at
Jeffrey Archambault, Marshall University Michael Flores, Wichita State University Missoula
Ben Baker, Davidson College Sueann Hely, West Kentucky Community & Laura Rickett, Kent State University
K. R. Balachandran, New York University Technical College Don Samelson, Colorado State University
Michael Blue, Bloomsburg University Paul Juras, Wake Forest University Angela Sandberg, Jacksonville State
Wayne Bremser, Villanova University Sherrie Koechling, Lincoln University University
Richard Campbell, University of Rio Christy Larkin, Bacone College Rebecca Sawyer, Univesity of North
Grande Lois Mahoney, Eastern Michigan Carolina at Wilmington
Marilyn Ciolino, Delgado Community University Pamela Schwer, St. Xavier University
College Maureen Mascha, Marquette University Thomas Selling, Thunderbird, the Garvin
Paul Copley, James Madison University Michele Matherly, University of North School of International Management
Patricia Derrick, George Washington Carolina at Charlotte Michael Tyler, Barry University
University Harrison McCraw, State University of Priscilla Wisner, Thunderbird, the Garvin
Barbara Durham, University of Central West Georgia School of International Management
Florida Jamshed Mistry, Worcester Polytechnic Richard Young, Ohio State University
Institute

PAST EDITION Maureen Crane, California State University, Marilyn Okleshen, Minnesota State
REVIEWERS Fresno University
My grateful appreciation is extended to Stephen Dempsey, University of Vermont Mohamed Onsi, Syracuse University
those who reviewed previous editions: Martha Doran, San Diego State University Samuel Phillips, Shenandoah University
Allan Drebin, Northwestern University Frederick Rankin, Washington University
Denise Guithues Amrhein, Saint Louis James Emig, Villanova University Lanny Solomon, University of Missouri at
University Michael Flores, Wichita State University Kansas City
Florence Atiase, University of Texas at Kimberly Frank, University of Nevada at Lynda Thoman, Purdue University
Austin Las Vegas Wendy Tietz, Kent State University
Rowland Atiase, University of Texas at Alan Friedberg, Florida Atlantic University Ralph Tower, Wake Forest University
Austin Edward Goodhart, Shippensburg University Mark Turner, Stephen F. Austin State
K. R. Balachandran, New York University, Paul Juras, Wake Forest University University
Frederick Bardo, Shippensburg University Stacey Konesky, Kent State University Bill Wempe, Texas Christian University
Linda Bowen, University of North Carolina James Lasseter, Jr. University of South James Williamson, San Diego State
Wayne Bremser, Villanova University Florida University
Richard Brody, University of New Haven Angelo Luciano, Columbia College Priscilla Wisner, Graduate School of
Gyan Chandra, Miami University Ana Marques, University of Texas at Austin International Management
Paul Copley, University of Georgia Sanjay Mehrotra, Northwestern University
Cynthia Nye, Bellevue University
hiL22853_fm_i-xxxvii 06/26/06 15:39 Page xxiii
REVISED PAGES

Preface XXIII

I once again thank those individuals whose input over the last edition has helped the book to evolve
to its present form, especially: Noah Barsky, Villanova University; Mohamed Bayou, University of
Michigan, Dearborn; Bruce Bradford, Fairfield University; Dan Daly, Boston College; Theresa
Hammond, Boston College; and Clifford Nelson, University of Connecticut.

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

The supplements are a great deal of work to prepare. I appreciate the efforts of those who prepared
them, since these valuable aids make teaching the course easier for everyone who uses the text.
Lanny Solomon of the University of Missouri at Kansas City prepared the Test Bank and the
Instructor's Manual. Peggy Hussey of Northern Kentucky University prepared the PowerPoint slides
and Excel spreadsheet templates. Douglas deVidal of the University of Texas at Austin wrote the
Study Guide. Linda Schain of Hofstra University prepared Topic Tackler. Leland Mansuetti authored
the online quizzes.

I acknowledge the Institute of Management Accountants for permission to use problems from Certified
Management Accountant (CMA) examinations. I also acknowledge the American Institute of Certified
Public Accountants for permission to use problems from the Uniform CPA Examinations, Questions,
and Unofficial Answers. I am indebted to Professors Roland Minch, David Solomons and Michael
Maher for allowing the use of their case materials in the text. The source for the actual company
information in Chapters 1 and 2 regarding The Walt Disney Company, Caterpillar, Wal-Mart, and
Southwest Airlines was the companies published annual reports.

Finally, I wish to express my gratitude to the fine people at McGraw-Hill/Irwin who so professionally
guided this book through the publication process. In particular, I wish to acknowledge Steve
DeLancey, Stewart Mattson, Gail Korosa, Susanne Riedell, Elizabeth Mavetz, Rose Hepburn, Krista
Bettino, Adam Rooke, Lori Kramer, Ira Roberts and Matthew Perry.

Ronald W. Hilton
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REVISED PAGES

Contents in Brief

Part I Fundamentals and Cost-Accumulation Systems


1 The Changing Role of Managerial Accounting in a Dynamic Business
Environment
2 Basic Cost Management Concepts and Accounting for Mass Customization
Operations
3 Product Costing and Cost Accumulation in a Batch Production Environment
4 Process Costing and Hybrid Product-Costing Systems

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


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

Part III Planning, Control, and Cost Management Systems


7 Activity Analysis, Cost Behavior, and Cost Estimation
8 Cost-Volume-Profit Analysis
9 Profit Planning, Activity-Based Budgeting, and e-Budgeting
10 Standard Costing, Operational Performance Measures, and the
Balanced Scorecard
11 Flexible Budgeting and the Management of Overhead and Support Activity Costs
12 Responsibility Accounting, Quality Control, and Environmental Cost Management
13 Investment Centers and Transfer Pricing

Part IV Using Accounting Information in Decision Making


14 Decision Making: Relevant Costs and Benefits
15 Target Costing and Cost Analysis for Pricing Decisions
16 Capital Expenditure Decisions

Part V Selected Topics for Further Study


17 Absorption, Variable, and Throughput Costing
18 Allocation of Support Activity Costs and Joint Costs

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


Accounting
Appendix II: Compound Interest and the Concept of Present Value
Appendix III: Inventory Management
References for In Their Own Words
Glossary
Photo Credits
Index of Companies and Organizations
Index of Subjects
xxiv
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REVISED PAGES

Contents

Part I Information and Incentives


Fundamentals and Cost Accumulation Behavioral Issues
Systems Costs and Benefits
Evolution and Adaptation in Managerial
Accounting
e-Business
Service versus Manufacturing Firms
Emergence of New Industries
Global Competition
Focus on the Customer
Cross-Functional Teams
1 The Changing Role of Managerial Computer-Integrated Manufacturing
Accounting in a Dynamic Business Product Life Cycles and Diversity
Environment Time-Based Competition
Managerial Accounting: A Business Partnership with M.A.P. The Internet as a Lifeline
Management Information and Communication Technology
Managing Resources, Activities, and People Just-in-Time Inventory Management
Decision Making Total Quality Management
Planning Continuous Improvement
Directing Operational Activities Cost Management Systems
Controlling Strategic Cost Management and the Value Chain
How Managerial Accounting Adds Value to the Theory of Constraints
Organization
The Ethical Climate of Business and the Role of the
Objectives of Managerial Accounting Activity Accountant
The Balanced Scorecard Managerial Accounting as a Career
M.A.P. The Balanced Scorecard Professional Organizations
Managerial versus Financial Accounting Professional Certification
Managerial Accounting in Different Types of Professional Ethics
Organizations
Focus on Ethics: IMA Statement of Ethical
Where Are Managerial Accountants Located in an Professional Practice
Organization?
Chapter Summary
Organization Chart
Key Terms
Line and Staff Positions
Review Questions
Cross-Functional Deployment
Exercises
Physical Location
Major Themes in Managerial Accounting

Note: Entries printed in blue denote topics that emphasize


contemporary issues in managerial accounting and cost management.
xxv
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xxvi Contents

Problems
Case

3 Product Costing and Cost Accumulation in


a Batch Production Environment
Product and Service Costing
2 Basic Cost Management Concepts and Product Costing in Nonmanufacturing Firms
Accounting for Mass Customization Flow of Costs in Manufacturing Firms
Operations Types of Product-Costing Systems
What Do We Mean by a Cost? Job-Order Costing Systems
Product Costs, Period Costs, and Expenses Process-Costing Systems
Costs on Financial Statements Summary of Alternative Product-Costing Systems
Income Statement Accumulating Costs in a Job-Order Costing
Balance Sheet System
Manufacturing Operations and Manufacturing Job-Cost Record
Costs Direct-Material Costs
M.A.P. Mass Customization
Direct-Labor Costs
Mass-Customization Manufacturing
Manufacturing-Overhead Costs
Manufacturing Costs
M.A.P. Supply Chain Management
Manufacturing Cost Flows
Summary of Event Sequence in Job-Order
Production Costs in Service Industry Firms and Costing
Nonprofit Organizations
Illustration of Job-Order Costing
Basic Cost Management Concepts: Different Costs for
Purchase of Material
Different Purposes
Use of Direct Material
The Cost Driver Team
Use of Indirect Material
Variable and Fixed Costs
Use of Direct Labor
The Cost Management and Control Team
Use of Indirect Labor
M.A.P. Airline Industry: Cost Structure, Cost Drivers,
and a Shifting Business Model Incurrence of Manufacturing-Overhead Costs
The Outsourcing Action Team Application of Manufacturing Overhead
Costs and Benefits of Information Summary of Overhead Accounting
Costs in the Service Industry Selling and Administrative Costs
Focus on Ethics: Was WorldComs Controller Just Completion of a Production Job
Following Orders? Sale of Goods
Chapter Summary Underapplied and Overapplied Overhead
Review Problems on Cost Classifications Schedule of Cost of Goods Manufactured
Key Terms Schedule of Cost of Goods Sold
Review Questions Posting Journal Entries to the Ledger
Exercises Further Aspects of Overhead Application
Problems Accuracy versus Timeliness of Information:
Cases A Cost-Benefit Issue
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Choosing the Cost Driver for Overhead Application Other Cost Drivers for Overhead Application
Limitation of Direct Labor as a Cost Driver Subsequent Production Departments
Departmental Overhead Rates Hybrid Product-Costing Systems
M.A.P. Are Layoffs a Good Way to Cut Costs During Operation Costing for Batch Manufacturing
an Economic Downturn? Processes
Two-Stage Cost Allocation Chapter Summary
Project Costing: Job-Order Costing in Nonmanufacturing Key Terms
Organizations Appendix to Chapter 4: Process Costing in Sequential
Changing Technology in Manufacturing Operations Production Departments
Electronic Data Interchange Review Questions
M.A.P. Online Purchasing Exercises
Use of Bar Codes Problems
Focus on Ethics: Did Boeing Exploit Accounting Rules to Cases
Conceal Cost Overruns and Production Snafus?
Chapter Summary Part II
Key Terms Cost Management Systems,
Appendix to Chapter 3: Activity-Based Costing: Activity-Based Costing, and Activity-Based
An Introduction
Management
Review Questions
Exercises
Problems
Cases

5 Activity-Based Costing
Traditional, Volume-Based Product-Costing System
Trouble in Denver
Activity-Based Costing System
4 Process Costing and Hybrid Product- ABC Stage One
Costing Systems ABC Stage Two
Comparison of Job-Order Costing and Process Interpreting the ABC Product Costs
Costing
The Punch Line
Flow of Costs
Why Traditional, Volume-Based Systems
Differences Between Job-Order and Process Distort Product Costs
Costing
M.A.P. Cost Distortion at Rockwell
Equivalent Units: A Key Concept International
Equivalent Units M.A.P. Cost Distortion at DHL
Illustration of Process Costing Activity-Based Costing: Some Key Issues
Basic Data for Illustration Cost Drivers
M.A.P. New York Wine Industry M.A.P. Activity Cost Drivers in the Health Care
Weighted-Average Method of Process Costing Industry
Other Issues in Process Costing Collecting ABC Data
Actual versus Normal Costing Activity Dictionary and Bill of Activities
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xxviii Contents

Direct versus Indirect Costs Just-in-Time Inventory and Production Management


When Is a New Product-Costing System Needed? Activity-Based Management in the Service Industry
Activity-Based Costing in the Service Industry ABM and Cost Management at FedEx
Activity-Based Costing at Delaware Focus on Ethics: Customer Profitability Analysis: Ethics of
Medical Center Differential Treatment for Customers
Interpreting the Primary Care Units ABC Chapter Summary
Information Key Terms
Focus on Ethics: Ethical Issues Surrounding Review Questions
Activity-Based Costing
Exercises
Chapter Summary
Problems
Review Problems on Cost Drivers and
Case
Product-Cost Distortion
Key Terms
Review Questions Part III
Exercises Planning, Control, and Cost Management
Problems Systems
Cases

7 Activity Analysis, Cost Behavior, and Cost


6 Activity-Based Management and Estimation
Cost Management Tools Cost Behavior Patterns
Activity-Based Management Variable Costs
Two-Dimensional ABC Step-Variable Costs
Using ABM to Identify Non-Value-Added Fixed Costs
Activities and Costs Step-Fixed Costs
Achieving Cost Reduction Semivariable Cost
Customer-Profitability Analysis Curvilinear Cost
Illustration of Customer-Profitability Analysis Using Cost Behavior Patterns to Predict Costs
M.A.P. Customer Profitability Analysis at M.A.P. Is Direct Labor a Variable or a
Bank One Corp. Fixed Cost?
M.A.P. Customer Profitability Analysis at Engineered,Committed,and Discretionary Costs
Best Buy Shifting Cost Structure in the Contemporary
Target Costing and Kaizen Costing Manufacturing Environment
Target Costing Operations-Based versus Volume-Based Cost
Kaizen Costing Drivers
Toyota: Target Costing and Kaizen Costing in Cost Behavior in Other Industries
Action Cost Estimation
Benchmarking Account-Classification Method
Reengineering Visual-Fit Method
Theory of Constraints High-Low Method
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Least-Squares Regression Method CVP Information in Published Annual Reports


Multiple Regression M.A.P. Airlines Keep a Close Eye on Break-Even
Data Collection Problems Load Factors
Engineering Method of Cost Estimation CVP Analysis with Multiple Products
Costs and Benefits of Information Assumptions Underlying CVP Analysis
Effect of Learning on Cost Behavior Role of Computerized Planning Models and Electronic
Spreadsheets
Focus on Ethics: Cisco Systems,Wal-Mart, Taco Bell,
Starbucks, U-Haul, General Dynamics, and Farmers CVP Relationships and the Income Statement
Insurance: Is Direct Labor a Variable Cost? Traditional Income Statement
Chapter Summary Contribution Income Statement
Review Problems on Cost Behavior and Estimation Comparison of Traditional and Contribution Income
Key Terms Statements
Appendix to Chapter 7: Finding the Least-Squares Cost Structure and Operating Leverage
Regression Estimates Operating Leverage
Review Questions M.A.P. Operating Leverage Helps These Web
Exercises Companies Become Profitable
Problems Labor-Intensive Production Processes versus Advanced
Manufacturing Systems
Cases
Cost Structure and Operating Leverage:
A Cost-Benefit Issue
M.A.P. Cost Structure and Operating
Leverage
CVP Analysis, Activity-Based Costing, and Advanced
Manufacturing Systems
A Move toward JIT and Flexible Manufacturing
ABC Provides a Richer Understanding of Cost Behavior
and CVP Relationships
8 Cost-Volume-Profit Analysis Chapter Summary
Illustration of Cost-Volume-Profit Analysis Review Problems on Cost-Volume-Profit Analysis
Projected Expenses and Revenue Key Terms
The Break-Even Point Appendix to Chapter 8: Effect of Income Taxes
Contribution-Margin Approach Review Questions
Equation Approach Exercises
Graphing Cost-Volume-Profit Relationships Problems
Interpreting the CVP Graph Cases
Alternative Format for the CVP Graph
Profit-Volume Graph
Target Net Profit
Contribution-Margin Approach
Equation Approach
Graphical Approach
Applying CVP Analysis
Safety Margin
Changes in Fixed Expenses 9 Profit Planning, Activity-Based Budgeting,
Changes in the Unit Contribution Margin and e-Budgeting
Predicting Profit Given Expected Volume Purposes of Budgeting Systems
Interdependent Changes in Key Variables Types of Budgets
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The Master Budget: A Planning Tool Review Questions


Sales of Services or Goods Exercises
Sales Forecasting Problems
Operational Budgets Cases
Budgeted Financial Statements
Nonprofit Organizations
Activity-Based Budgeting
M.A.P. Activity-Based Budgeting (ABB) at American
Express and AT&T Paradyne
Using Activity-Based Budgeting to Prepare the
Master Budget
Sales Budget
Production Budget 10 Standard Costing, Operational
Direct-Material Budget Performance Measures, and the
Direct-Labor Budget Balanced Scorecard
Manufacturing-Overhead Budget Managing Costs
Activity-Based Budgeting and the Cost Hierarchy Management by Exception
Benefits of ABB Setting Standards
Selling, General, and Administrative (SG&A) Methods for Setting Standards
Expense Budget
Participation in Setting Standards
Cash Receipts Budget
Perfection versus Practical Standards:
Cash Disbursements Budget
A Behavioral Issue
Cash Budget: Combining Receipts and
Disbursements Use of Standards by Service
Budgeted Schedule of Cost of Goods Organizations
Manufactured and Sold Cost Variance Analysis
Budgeted Income Statement Direct-Material Standards
Budgeted Statement of Cash Flows Direct-Labor Standards
Budgeted Balance Sheet Standard Costs Given Actual Output
Assumptions and Predictions Underlying the Master Analysis of Cost Variances
Budget Direct-Material Variances
Financial Planning Models Direct-Labor Variances
Budget Administration M.A.P. Parker Hannifin Corporations Brass
M.A.P. Budget Administration at Cornell Products Division
University Multiple Types of Direct Material or Direct Labor
e-Budgeting Allowing for Spoilage or Defects
Firewalls and Information Security Significance of Cost Variances
M.A.P. Lockheed Martin A Statistical Approach
Zero-Base Budgeting Behavioral Impact of Standard Costing
International Aspects of Budgeting Controllability of Variances
Budgeting Product Life-Cycle Costs Interaction among Variances
Behavioral Impact of Budgets Standard Costs and Product Costing
Budgetary Slack: Padding the Budget
Advantages of Standard Costing
Participative Budgeting
Changing Role of Standard-Costing Systems in Todays
Focus on Ethics: Is Padding the Budget Unethical? Manufacturing Environment
Chapter Summary Criticisms of Standard Costing in Todays Manufacturing
Key Terms Environment
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M.A.P. Cost of Ownership Cost Management Using Overhead Cost


Adapting Standard-Costing Systems Variances
Operational Performance Measures in Todays Variable Overhead
Manufacturing Environment Fixed Overhead
Gain-Sharing Plans Overhead Cost Performance Report
The Balanced Scorecard M.A.P. Cost Management Systems in
Lead and Lag Measures: The Key to the Germany
Balanced Scorecard Activity-Based Flexible Budget
Linking the Balanced Scorecard to Flexible Budgeting in the Service Industry
Organizational Strategy Focus on Ethics: Misstated Standards Affect Accuracy
M.A.P. Linking the Balanced Scorecard to of Reports
Organizational Strategy Chapter Summary
Focus on Ethics: Sacrificing Quality to Cut Review Problem on Overhead Variances
Standard Costs
Key Terms
Chapter Summary
Appendix A to Chapter 11: Standard Costs
Review Problems on Standard Costing and Operational and Product Costing
Performance Measures
Appendix B to Chapter 11: Sales Variances
Key Terms
Review Questions
Appendix to Chapter 10: Use of Standard
Exercises
Costs for Product Costing
Problems
Review Questions
Cases
Exercises
Problems
Cases

12 Responsibility-Accounting, Quality
Control, and Environmental Cost
11 Flexible Budgeting and the Management
Management of Overhead and Responsibility Centers
Support Activity Costs Illustration of Responsibility Accounting
Overhead Budgets Performance Reports
Flexible Budgets Budgets, Variance Analysis, and
Advantages of Flexible Budgets Responsibility Accounting
The Activity Measure Cost Allocation
Flexible Overhead Budget Illustrated Cost Allocation Bases
Overhead Application in a Standard-Costing Allocation Bases Based on Budgets
System Activity-Based Responsibility Accounting
Choice of Activity Measure Behavioral Effects of Responsibility
Criteria for Choosing the Activity Measure Accounting
Changing Manufacturing Technology: Information versus Blame
Computer-Integrated Manufacturing Controllability
Cost Drivers Motivating Desired Behavior
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xxxii Contents

Segmented Reporting Inflation: Historical-Cost versus


Segments versus Segment Managers Current-Value Accounting
Key Features of Segmented Reporting Other Issues in Segment Performance Evaluation
Customer Profitability Analysis and Alternatives to ROI, Residual Income, and Economic
Activity-Based Costing Value Added (EVA)
Total Quality Management Importance of Nonfinancial Information
Measuring and Reporting Quality Costs Measuring Performance in Nonprofit
Organizations
Changing Views of Optimal Product Quality
Transfer Pricing
M.A.P. Six Sigma for Quality Management
and Cost Reduction Goal Congruence
ISO 9000 Standards General Transfer-Pricing Rule
Environmental Cost Management Transfers Based on the External Market Price
Classifying Environmental Costs Negotiated Transfer Prices
Managing Private Environmental Costs Cost-Based Transfer Prices
Environmental Cost Strategies Standard versus Actual Costs
Tie-In to the Responsibility-Accounting System Undermining Divisional Autonomy
Focus on Ethics: Short-Sighted View of Cost Cutting An International Perspective
Chapter Summary M.A.P. Transfer Pricing and Tax Issues
Review Problem on Responsibility Accounting Transfer Pricing in the Service Industry
Key Terms Behavioral Issues: Risk Aversion and Incentives
Review Questions Goal Congruence and Internal Control Systems
Exercises Chapter Summary
Problems Review Problems on Investment Centers
and Transfer Pricing
Cases
Key Terms
Review Questions
Exercises
Problems
Cases

Part IV
13 Investment Centers and Transfer Using Accounting Information in
Pricing Decision Making
Delegation of Decision Making
Obtaining Goal Congruence:
A Behavioral Challenge
Adaptation of Management Control Systems
Measuring Performance in Investment Centers
Return on Investment
Residual Income
Economic Value Added
M.A.P. Pay for Performance Based on EVA 14 Decision Making: Relevant Costs and
Measuring Income and Invested Capital Benefits
Invested Capital The Managerial Accountants Role in Decision Making
Measuring Investment-Center Income Steps in the Decision-Making Process
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Quantitative versus Qualitative Analysis


Obtaining Information: Relevance,
Accuracy, and Timeliness
Relevant Information
Unique versus Repetitive Decisions
Importance of Identifying Relevant
Costs and Benefits
Identifying Relevant Costs and Benefits 15 Target Costing and Cost Analysis for
Sunk Costs Pricing Decisions
Irrelevant Future Costs and Benefits Major Influences on Pricing Decisions
Opportunity Costs Customer Demand
Summary Actions of Competitors
Analysis of Special Decisions Costs
Accept or Reject a Special Offer Political, Legal, and Image-Related Issues
Economic Profit-Maximizing Pricing
Outsource a Product or Service
Total Revenue, Demand, and Marginal
M.A.P. Outsourcing
Revenue Curves
Add or Drop a Service, Product, or
Total Cost and Marginal Cost Curves
Department
Profit-Maximizing Price and Quantity
M.A.P. Adding a Service
Price Elasticity
Special Decisions in Manufacturing Firms
Limitations of the Profit-Maximizing Model
Joint Products: Sell or Process Further
Costs and Benefits of Information
Decisions Involving Limited Resources
Role of Accounting Product Costs in Pricing
Theory of Constraints Cost-Plus Pricing
Uncertainty Absorption-Cost Pricing Formulas
Activity-Based Costing and Todays Advanced Variable-Cost Pricing Formulas
Manufacturing Environment
Determining the Markup
Conventional Outsourcing (Make-or-Buy)
Cost-Plus Pricing: Summary and Evaluation
Analysis
M.A.P. Price Competition and Cost
Activity-Based Costing Analysis of the
Management
Outsourcing Decision
Strategic Pricing of New Products
Other Issues in Decision Making
Target Costing
Incentives for Decision Makers
M.A.P. Pricing on the Internet by e-Tailers
Short-Run versus Long-Run Decisions
A Strategic Profit and Cost Management
Pitfalls to Avoid Process
Focus on Ethics: Effects of Decision to Close a Department Activity-Based Costing and Target Costing
and Outsource Product-Cost Distortion and Pricing:
Chapter Summary The Role of Activity-Based Costing
Review Problem on Relevant Costs Value Engineering and Target Costing
Key Terms Time and Material Pricing
Appendix to Chapter 14: Linear Competitive Bidding
Programming Effect of Antitrust Laws on Pricing
Review Questions Chapter Summary
Exercises Review Problem on Cost-Plus Pricing
Problems Key Terms
Cases Review Questions
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Exercises Focus on Ethics: Dysfunctional Focus on Early


Problems Cash Flows
Cases Chapter Summary
Key Terms
Appendix A to Chapter 16: Future Value and
Present Value Tables
Appendix B to Chapter 16: Impact of Inflation
Review Questions
Exercises
Problems
Cases
16 Capital Expenditure Decisions
Section 1: Discounted-Cash-Flow Analysis
Net-Present-Value Method Part V
Internal-Rate-of-Return Method Selected Topics for Further Study
Comparing the NPV and IRR Methods
Assumptions Underlying Discounted-
Cash-Flow Analysis
Choosing the Hurdle Rate
Depreciable Assets
Comparing Two Investment Projects
Managerial Accountants Role
Postaudit
17 Absorption, Variable, and Throughput
Real Option Analysis
Costing
Section 2: Income Taxes and Capital
Product Costs
Budgeting
Illustration of Absorption and Variable Costing
After-Tax Cash Flows
Absorption-Costing Income Statements
Accelerated Depreciation
Variable-Costing Income Statements
Modified Accelerated Cost Recovery System
(MACRS) Reconciling Income under Absorption
and Variable Costing
Gains and Losses on Disposal
Cost-Volume-Profit Analysis
Investment in Working Capital
Evaluation of Absorption and Variable Costing
Extended Illustration of Income-Tax Effects
in Capital Budgeting M.A.P. IRS: Unique Product Packaging Is an
Inventoriable Cost
M.A.P. Capital Budgeting at Pharmaceutical
Firms Throughput Costing
Ranking Investment Projects Throughput-Costing Income Statements
Section 3: Alternative Methods for Making Investment Focus on Ethics: Incentive to Overproduce
Decisions Inventory
Payback Method Chapter Summary
Key Terms
Accounting-Rate-of-Return Method
Appendix to Chapter 17: Effect of the Volume
Estimating Cash Flows: The Role of Activity-Based
Variance under Absorption and Variable Costing
Costing
Review Questions
M.A.P. Interactive TelevisionCapital
Budgeting and ABC Exercises
Justification of Investments in Advanced Problems
Manufacturing Systems Case
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Chapter Summary
Key Terms
Appendix to Chapter 18:
Reciprocal-Services Method
Review Questions
Exercises
Problems
18 Allocation of Support Activity Costs and Cases
Joint Costs
Section 1: Service Department Cost Allocation
Appendix I: The Sarbanes-Oxley Act,
Direct Method Internal Controls, and Management
Step-Down Method Accounting
Reciprocal-Services Method Appendix II: Compound Interest and the
Fixed versus Variable Costs Concept of Present Value
Dual Cost Allocation
M.A.P. Cost Management in the Health Care
Appendix III: Inventory Management
Industry References for In Their Own Words
Allocate Budgeted Costs
Todays Advanced Manufacturing Environment
Glossary
The Rise of Activity-Based Costing Photo Credits
Section 2: Joint Product Cost Allocation
Index of Companies and
Allocating Joint Costs
Organizations
M.A.P. Joint Cost Allocation in the Petroleum
Industry Index of Subjects
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