Managerial Accounting, 6th edition Karen W. Braun Instructor Manual

Type:

Instructor Manual

Resource:

Managerial Accounting

Edition:

6th Edition

Author(s):

Karen W. Braun Wendy M. Tietz

Contents Chapter 1

Introduction to Managerial Accounting ............................................ 1-1

Chapter 2

Building Blocks of Managerial Accounting ..................................... 2-1

Chapter 3

Job Costing........................................................................................ 3-1

Chapter 4 Activity-Based Costing, Lean Operations, and the Costs of Quality ...................................................................................................... 4-1 Chapter 5

Process Costing .................................................................................. 5-1

Chapter 6

Cost Behavior..................................................................................... 6-1

Chapter 7

Cost-Volume-Profit Analysis............................................................ 7-1

Chapter 8

Relevant Costs for Short-Term Decisions ........................................ 8-1

Chapter 9

The Master Budget ........................................................................... 9-1

Chapter 10

Performance Evaluation ................................................................. 10-1

Chapter 11

Standard Costs and Variances ......................................................... 11-1

Chapter 12

Capital Investment Decisions and the Time Value of Money ........ 12-1

Chapter 13

Statement of Cash Flows ................................................................ 13-1

Chapter 14

Financial Statement Analysis ........................................................... 14-1

Chapter 15

Sustainability.................................................................................... 15-1

Chapter 1 Introduction to Managerial Accounting The chapter introduces managerial accounting along with the fundamental principle of the text, which is the importance of using managerial accounting data in decision making. Students are introduced to the importance of such data in decision making by discussing the primary responsibilities of a manager: planning, directing, and controlling. To help students understand the importance of managerial accounting, financial and managerial accounting are contrasted and compared. Managerial accounting has internal users relying on relevant information prepared specifically for management’s needs, whereas financial accounting has external users using reliable and objective information in the form of financial statements.

The role of managerial accounting is illustrated by comparing the perception and reality of accounting and through the presentation of a typical organizational structure as well as the roles and skills required of management accountants. In addition to their traditional roles, management accountants also play an important role in planning, analyzing, and interpreting accounting data and providing decision support.

Management accountants are often referred to as business advisors, analysts, and finance professionals.

To fulfill these roles, management accountants today must possess both technical and nontechnical competencies, such as solid knowledge of both financial and managerial accounting, analytical skills, knowledge of how a business functions, ability to work on a team, and oral and written communication skills. Management accountants are trusted and valued business advisors. Managerial accounting knowledge is important to all types of careers, including sales professionals and musicians. The IMA is the professional association for management accountants, which also develops standards of ethics and standards of professional conduct. It provides a forum for research, practice development, education, knowledge sharing, and advocacy of the highest ethical and best practices in management accounting and finance. The Certified Management Accountant (CMA) certification, which reinforces the technical skills required for management accountants, is issued by the IMA and requires professionals to pass a rigorous two-part exam, gain two years of relevant professional experience, and maintain continuing professional education. The IMA has also developed principles and standards to help management accountants deal with ethical challenges.

The Decision Guidelines and Summary Problems are useful examples of questions and outlines that help students summarize their learning and reinforce the objectives of the chapter. Two sets of Decision Guidelines and Summary Problems are present in this chapter. The first set of Guidelines reinforces the role of managerial accounting and the management accountant in an organization. The first set of Summary Problems reinforces the concepts introduced in the first part of the chapter. Topics include managements’ responsibilities, managerial versus financial accounting, and ethical responsibilities.

The next section of the chapter presents the implications of business trends on management accounting.

Business trends discussed include enterprise resource planning, critical thinking, implications of a knowledge economy, sustainability, social responsibility, and the triple bottom line. The section ends with a discussion of the Sarbanes-Oxley Act of 2002.

The next section of the chapter focuses on data analytics, which is broadly defined as using data to make good business decisions. Data analytics is distinguished for other forms of data collection by the sheer amount and variety of data collected. The benefits of data analytics discussed include adding more factbased information to the decision-making process, helping businesses make quicker decisions, increasing 1-1 .

Managerial Accounting 6e Instructor’s Resource Manual

the efficiency of internal operations, helping companies better adapt and respond to customers, and driving company innovations. The data analytics process begins with identifying which question needs to be answered or which issue needs to be solved and ends with monitoring the results. Types of data, defined as a collection of observations, collected by the system is then discussed in the context of structured or unstructured data and categorical, ordinal, or quantitative data. Students are told that for purposes of the text, it is assumed that structured data are used from an internal source and that the data are free of errors, duplicates, and missing observations. In summary, data analytics can help to describe what happened, why it happened, what will happen next, and what should be possibly done about it.

These insights are then used to help guide management decisions and actions.

The final section of the chapter discusses the fundamental features of Excel. The elements of an Excel workbook are illustrated by discussing the top and bottom of a worksheet. Students are shown how to select cells, format cells, and navigate a worksheet. In addition, mathematical operations and functions are discussed. In the last learning objective of every chapter, students will learn how to use a specific Excel tool for data analytics in order to gain confidence is using Excel to help solve business issues.

The second set of Decision Guidelines illustrates some of the decisions managers need to consider in response to changes in the regulatory and business environment. An additional Summary Problem allows students to use cost-benefit analysis to determine whether a company should expand or not.

1-2 .

Chapter 1

Introduction to Managerial Accounting

Learning Objectives After studying Chapter 1, your students should be able to: 1. Identify managers’ three primary responsibilities 2. Distinguish financial accounting from managerial accounting 3. Describe the roles and skills required of management accountants within the organization 4. Describe the role of the Institute of Management Accountants (IMA) and apply its ethical standards 5. Discuss the business trends and regulations affecting management accounting 6. Describe foundational concepts in data analytics 7. Describe fundamental Excel features and perform basic Excel operations

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Managerial Accounting 6e Instructor’s Resource Manual

Teaching Outline I.

What Is Managerial Accounting?

A. Managers’ Three Primary Responsibilities 1. Exhibit 1-1: Managers’ Three Primary Responsibilities 2. Planning 3. Directing 4. Controlling B. A Road Map: How Managerial Accounting Fits In 1. Managerial accounting building blocks 2. Determining unit cost (product costing) 3. Making decisions 4. Planning 5. Controlling and evaluating C. Differences Between Managerial Accounting and Financial Accounting 1. Exhibit 1-2: Managerial Accounting Versus Financial Accounting

II.

What Role Do Management Accountants Play?

A. The Role of Management Accountants 1. Exhibit 1-3: The Perception and the Reality 2. What is the business issue, event, or problem, and how can accounting help solve it?

3. What are the “gray areas”?

4. What are the implications for the business if the accounting information used in the decision is “wrong”?

B. The skills Required of Management Accountants 1. Exhibit 1-4: Technical and Nontechnical Competencies Needed by Management Accountants C. Managerial Accounting Is Important to All Careers 1. Entrepreneurs 2. Business management 3. Marking and sales 4. Nonbusiness majors D. Accounting within the Organizational Structure 1. Exhibit 1-5: Typical Organizational Structure 2. Chief operating officer (COO) and chief financial officer (CFO) 3. Treasurer and controller 4. Internal audit function and audit committee E. Professional Associations 1. Institute of Management Accountants (IMA) 2. Certified Management Accountant (CMA) 3. American Institute of Certified Public Accountants (AICPA) 4. Chartered Global Management Accountant (CGMA) F. Average Salaries of Management Accountants G. Professional Ethics 1. IMA’s Statement of Ethical Professional Practice a. Competence b. Confidentiality c. Integrity d. Credibility 2. Exhibit 1-6: Summary of Ethical Standards 1-4 .

Chapter 1

Introduction to Managerial Accounting

3. Exhibit 1-7: IMA Statement of Ethical Professional Practice H. Examples of Ethical Dilemmas 1. Unethical versus illegal behavior III.

What Business Trends and Regulations Affect Management Accounting?

A. Data Analytics and Critical Thinking 1. Enterprise resource planning (ERP) 2. Critical thinking 3. Knowledge economy 4. Globalization 5. Sustainability, social responsibility, and the triple bottom line 6. Exhibit 1-8: The Three Pillars of Sustainability 7. Exhibit 1-9: Sustainability as the Intersection of Three Factors 8. Sarbanes-Oxley Act of 2002 (SOX) 9. Exhibit 1-10: Some Important Features of SOX

IV.

Why and How Do Managers Use Data Analytics?

A. The Heart of Data Analytics B. Benefits of Data Analytics C. Data Analytics Process 1. Business issue 2. Data 3. Tools and technology 4. Analysis and insights 5. Communicate 6. Follow-through D. Different Types of Data 1. Structured, unstructured, or semi-structured data 2. Categorical, ordinal, or quantitative data 3. Big data a. Volume b. Velocity c. Variety d. Veracity e. Value E. Different Types of Analytics 1. Descriptive 2. Diagnostic 3. Predictive 4. Prescriptive 5. Adaptive and autonomous F. Data Visualization 1. Preattentive attributes G. Summary

V.

What Are the Fundamental Excel Features?

A. Elements of an Excel Workbook 1. Exhibit 1-11: Top of an Excel Workbook 2. Exhibit 1-12: Bottom of an Excel Workbook B. Selecting Cells 1. Exhibit 1-13: Selecting a Large Range of Data 1-5 .

Managerial Accounting 6e Instructor’s Resource Manual

C. Formatting Cells 1. Exhibit 1-14: Formatting Numbers in Cells D. Navigating a Worksheet 1. Exhibit 1-15: Navigating a Large Data Set E. Formulas and Relative Cell References 1. Mathematical operations a. Exhibit 1-16: Mathematical Operations and Symbols for Formulas b. Exhibit 1-17: Additional Mathematical Symbols 2. Cell references a. Relative b. Absolute c. Exhibit 1-18: Using Dollar Signs to Denote an Absolute Cell Reference 3. Copy/paste and fill handles a. Exhibit 1-19: Copy and Paste from Home Tab b. Exhibit 1-20 Use Fill Handle to Copy Formulas to Adjacent Cells F. Functions and Specifying Data Ranges 1. Functions a. Exhibit 1-21: Function Library Under Formulas Tab on Ribbon b. Exhibit 1-22: Example of Dialog Box 2. Specifying data ranges a. Exhibit 1-23: Specifying Data Ranges

1-6 .

Chapter 1

Introduction to Managerial Accounting

Key Topics This chapter is the foundation for the rest of the text. Without a good understanding of this chapter, students will have a difficult time understanding the remaining content.

After covering managers’ three primary responsibilities, consider offering the following example: A manager of a cleaning services company may wish to expand its service from cleaning only private homes to also cleaning corporate offices and plants. This goal is then developed into a budget (planning). That budget is analyzed thoroughly to determine both the price points and how to market the service (directing). After comparing the budget to the actual results, the managerial accountant determines that the expansion into the new market is somewhat slower than expected and decides to change its marketing strategy (controlling). Decision making occurs at all levels of the process. For example, if the marketing strategy works and the corporation proceeds toward meeting its goals, the managerial accountant focuses attention on which new services will be offered, how much to charge for the services, and if loyalty discounts should be given to existing customers who purchase these services.

In teams or in partners, have students complete S1-1 Managers’ responsibilities. Call on a student to give the answers.

At this point, accounting students have most likely been exposed only to financial accounting. Students sometimes have a difficult time making the adjustment from financial to managerial accounting. Use Exhibit 1-2 to emphasize the differences between financial and managerial accounting. This is a great time to review the role of financial accountants in our society and then explain the role of management accountants. In doing so, be sure to also point out that the study of financial accounting focuses on external decision makers, whereas managerial accounting focuses on internal decision makers.

Here’s an example: A manager is setting the price of items in the store. In order to make this decision, the manager needs to know the cost of the items, other organizational costs, sales prices for similar items, and so on. Of course, these matters are of great importance to an internal management accountant. An external accountant would not make the same decisions; instead, he or she would make decisions based on information contained in the financial statements.

In teams or in partners, have students complete E1-19A Identify users of accounting information. Point out that most decisions impact nonaccountants and stress the importance for nonaccounting majors to understand managerial accounting.

Many students love to discuss ethical issues. Sometimes ethical issues may be presented to students in a casual way. Here is an example: A supervisor requests that you don’t record your overtime on your timesheet. This will allow the supervisor to stay within the budget, but it doesn’t properly reflect what is happening within the organization. You feel pressure from the supervisor. Ask students what ethical issues are involved in this example and what steps they would take to resolve the ethical dilemma. Ask students how many of them were left unsupervised when they first started a new job. How accurate was their work? Would the students feel responsible for making an error if they had been improperly trained?

Ask students to assume they work for a company. In this scenario, they will have heard that their company is being sold. The information is confidential, and they can’t speak about it. What would they do if their best friend wanted to buy stock?

You can use E1-20A Classify ethical responsibilities as a group or partner exercise.

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Managerial Accounting 6e Instructor’s Resource Manual

When discussing the Sarbanes-Oxley Act, remember that many of today’s students probably don’t remember business before accounting scandals. Students have likely become cynical about accounting practices based on news media. Ask students to identify what would give them confidence in an organization’s accounting decisions.

Many students today are concerned about the impact businesses have on the environment as well as if companies are acting in a socially responsible manner. Discuss the concept of the triple bottom line and the interrelationships among profit, people, and planet. What are the difficulties in measuring the impact a company has on people and planet? Ask students if they think that a company concerned about people and planet can be profitable. Have students share examples of companies that have “green initiatives.” Do these companies advertise that they are “green”? What are some companies that the students think are socially responsible? Have them share examples of what they think companies should be doing to be considered socially responsible. Would a business’s actions (or lack of action) in these areas affect their behavior as consumers?

Integrated reporting is about generating a report that includes essential information about an organization’s strategy, governance, performance, and prospects that lead to the creation of value over the short, medium, and long term. It must be a holistic, balanced, and future-looking report as compared to traditional financial statements. It must include all material elements that create value for the organization. For this reason, large companies use enterprise resource planning (ERP) systems that can integrate all of a company’s worldwide functions, departments, and data.

In the shifting economy, ask students if they think Apple manufactures its own chargers or if they are manufactured by an outside company. Ask them what information might be part of Apple’s decision: How much would it cost Apple to make the chargers? How much would it cost to have someone else make them? If someone else made them, could the chargers manufacturing space be used for additional funds?

For a cost-benefit example, ask students if they think retailers should attach large alarm tags on leather coats that would trigger an alarm if someone carried the coat out of the store without paying. Would these same tags be effective on candy bars? What factors make it better for the coat than the candy?

Ask students to describe what they picture when the term “big data” is used in the context of data analytics. To start developing a working knowledge of data analytics terms, have students discuss S1-12 in teams.

As a class, have students share how they have used Excel in the past. Discuss how Excel can be beneficial to managers, include such topics as decision making, budgeting, and performance evaluation. In teams, have students complete an Excel scavenger hunt using E1-25A.

1-8 .

Chapter 1

Introduction to Managerial Accounting

Chapter 1: Student Summary Handout I.

What is managerial accounting?

A. Managers’ three primary responsibilities 1. Exhibit 1-1: managers’ three primary responsibilities 2. Planning 3. Directing 4. Controlling B. A road map: how managerial accounting fits in 1. Managerial accounting building blocks 2. Determining unit cost 3. Making decisions 4. Planning 5. Controlling and evaluating C. Differences between managerial accounting and financial accounting

II.

What role do management accountants play?

A. The role of management accountants 1. How can accounting help solve the business issue, event, or problem?

2. What are the “gray areas”?

3. What are the implications for the business if the accounting information used in the decision is “wrong”?

B. the skills required of management accountants C. managerial accounting is important to all careers 1. Entrepreneurs 2. Business management 3. Marking and sales 4. Nonbusiness majors D. Accounting within the organizational structure 1. Chief operating officer (coo) and chief financial officer (cfo) 2. Treasurer and controller 3. Internal audit department and audit committee E. Professional associations 1. Institute of management accountants (ima) 2. Certified management accountant (cma) F. Average salaries of management accountants G. Professional ethics 1. Ima’s statement of ethical professional practice a. Competence b. Confidentiality c. Integrity d. Credibility H. Examples of ethical dilemmas 1. Unethical versus illegal behavior

III.

What Business Trends and Regulation Affect Management Accounting?

A. Data Analytics and Critical Thinking 1. Enterprise resource planning (ERP) 2. Critical thinking 3. Knowledge economy 1-9 .

Managerial Accounting 6e Instructor’s Resource Manual

4. Globalization 5. Sustainability, social responsibility, and the triple bottom line 6. Sarbanes-Oxley Act of 2002 (SOX) IV.

Why and how do managers use data analytics?

A. The heart of data analytics B. Benefits of data analytics C. Data analytics process D. Different types of data 1. Structured, unstructured, or semi-structured data 2. Categorical, ordinal, or quantitative data 3. Big data E. Different types of analytics F. Data visualization

V.

What are the fundamental features of excel?

A. Elements of an excel workbook B. Selecting cells C. Formatting cells D. Navigating a worksheet E. Formulas and relative cell references 1. Mathematical operations 2. Cell references 3. Copy/paste and fill handles a. Exhibit 1-19: Copy and paste from home tab F. Functions and specifying data ranges

MyAccountingLab.com homework assignments: E1-17A, E1-19A, E1-20A, E1-21A.

1-10 .

Chapter 1

Introduction to Managerial Accounting

CHAPTER 1: ASSIGNMENT GRID

Assignment

S1-1 S1-2 S1-3 S1-4 S1-5 S1-6 S1-7 S1-8 S1-9 S1-10 S1-11 S1-12

S1-13

S1-14

S1-15

S1-16

E1-17A E1-18A E1-19A E1-20A

Learning Objective(s)

Topic(s)

Short Exercises Managers’ responsibilities 1 Contrast managerial and 2 financial accounting Accounting roles in the 3 organization Role of internal audit 3 function Classify roles within the 3 organization Professional organizations 4 and certifications Violations of ethical 4 standards Identify current competitive 5 tools Identify ethical standards 4 violated Define key terms All Identify types of data 6 analytics Understanding key foundational terms and 6 definitions in data analytics Describe fundamental Excel features and perform basic 7 Excel operations Describe fundamental Excel features and perform basic 7 Excel operations Describe fundamental Excel features and perform basic 7 Excel operations Describe fundamental Excel features and perform basic 7 Excel operations Exercises (Group A) Define key terms 1&2 Identify skills needed by 3 management accountants Identify users of accounting 3 information Classify ethical 4 responsibilities 1-11 .

Estimated Time in Minutes

Level of Difficulty

5

Easy

5

Easy

5

Easy

5

Easy

5

Easy

5

Easy

5

Easy

5

Easy

5

Easy

10

Easy

5

Easy

10

Easy

5

Easy

10

Easy

10

Easy

10

Easy

5

Easy

10

Easy

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Easy

10

Easy

Managerial Accounting 6e Instructor’s Resource Manual

Assignment

E1-21A E1-22A E1-23A E1-24A E1-25A E1-26A

E1-27B E1-28B E1-29B E1-30B E1-31B E1-32B E1-33B E1-34B E1-35B E1-36B

P1-37A P1-38A P1-39A P1-40A P1-41A

Learning Objective(s)

Topic(s)

Equipment purchase cost5 benefit analysis Identify sustainability efforts as impacting people, planet, 5 or profit Describe foundational 6 concepts in data analytics Describe fundamental Excel features and perform basic 7 Excel operations Complete an Excel 7 scavenger hunt Describe fundamental Excel features and perform basic 7 Excel operations Exercises (Group B) Define key terms 1&2 Identify skills needed by 3 management accountants Identify user of accounting 3 information Classify ethical 4 responsibilities Equipment purchase cost5 benefit analysis Identify sustainability efforts as impacting people, planet, 5 or profit Describe foundational 6 concepts in data analytics Describe fundamental Excel features and perform basic 7 Excel operations Complete an Excel 7 scavenger hunt Describe fundamental Excel features and perform basic 7 Excel operations Problems (Group A) Management processes and 1&2 accounting information Ethical dilemmas 4 ERP cost-benefit analysis 5 Online order system cost5 benefit analysis Continuation of P1-40A: 5 revised estimates 1-12 .

Estimated Time in Minutes

Level of Difficulty

10

Medium

5

Easy

5

Easy

10

Easy

10

Medium

10

Easy

5

Easy

5

Easy

5

Easy

10

Easy

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Medium

5

Easy

5

Easy

10

Easy

10

Medium

10

Easy

10

Easy

10 15–20

Medium Medium

10

Medium

15

Medium

Chapter 1

Assignment

P1-42B P1-43B P1-44B P1-45B P1-46B

C1-47

A1-48 A1-49 A1-50 A1-51 A1-52

A1-53

Introduction to Managerial Accounting

Learning Objective(s)

Topic(s)

Problems (Group B) Management processes and 1&2 accounting information Ethical dilemmas 4 ERP cost-benefit analysis 5 Online order system cost5 benefit analysis Continuation of P1-45B: 5 revised estimates Serial Case Discuss how managerial accounting can be used at All Caesars Palace Critical Thinking Discussion & Analysis Discussion questions All Application & Analysis Mini Cases Accountants and their jobs All Ethics at Enron 4 Interviewing a local 5 company about sustainability Ethics and casual 4 conversations Using managerial accounting information to 1&2 manage a Broadway production

1-13 .

Estimated Time in Minutes

Level of Difficulty

10

Easy

10 15–20

Medium Medium

10

Medium

15

Medium

15

Medium

60–90

Medium

30–60 30–60

Medium Medium

60–90

Hard

30

Medium

60–90

Medium

Name____________________________________ Date_________________ Section_______________

CHAPTER 1 TEN-MINUTE QUIZ Circle the letter of the best response.

1.

Which of the following are a manager’s three primary responsibilities?

A. Planning, directing, controlling B. Budgeting, planning, controlling C. Budgeting, directing, lean thinking D. Budgeting, planning, directing

2.

Which of the following is FALSE about managerial accounting versus financial accounting?

A. Managerial reports are prepared annually, whereas financial reports are prepared when required.

B. Managerial accounting is primarily utilized by internal users, whereas financial accounting is primarily utilized by external users.

C. The primary information characteristic for managerial accounting is relevance, whereas the primary information characteristics for financial accounting are reliability and objectivity.

D. No authoritative body requires managerial accounting reports, whereas the SEC requires financial accounting reports for publicly traded companies.

3.

Which of the following statements is TRUE? A. Managers are concerned with the external use of accounting information.

B. Managerial accounting information relies heavily on its reliability and objectivity.

C. The format of managerial accounting reports is determined by GAAP. D. Managerial accounting information must be relevant.

4.

Which of the following statements is TRUE? A. The CEO is elected by the managers.

B. The CFO is responsible for the company’s operations.

C. The board of directors is elected by the stockholders.

D. The internal audit department reports solely to the CFO.

5.

The individual responsible for managing all of the financial aspects of the organization is the A. COO. B. CFO. C. CEO. D. CPA.

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Managerial Accounting 6e Instructor’s Resource Manual

6.

Which of the following skills are required of management accountants?

A. Knowledge of both financial and managerial accounting B. Knowledge of how a business functions C. Oral and written communication skills D. All of the above

7.

All except which of the following are ethical principles identified in the IMA’s Statement of Ethical Professional Practice?

A. Honesty B. Teamwork C. Objectivity D. Responsibility

8.

Which of the following is used in decision making to weigh the expected costs of taking a specific action against the expected benefits of the action?

A. Cross-functional costing B. Enterprise resource planning C. Extensible business reporting language (XBRL) D. Cost-benefit analysis.

9.

Which of the following is NOT one of the three factors influencing a company’s triple bottom line?

A. People B. Development C. Planet D. Profit

10.

Which type of analytics describes what has happened or is happening?

A. B. C. D.

Diagnostic Prescriptive Predictive Descriptive

1-16 .

Chapter 1

Introduction to Managerial Accounting

Answer Key to Chapter 1 Ten-Minute Quiz 1. A 2. A 3. D 4. C 5. B

6. D 7. B 8. D 9. B 10. D

1-17 .

Chapter 2 Building Blocks of Managerial Accounting Chapter 2 begins with a discussion of the three most common business sectors: service, merchandising, and manufacturing. The three types of inventory held by a manufacturer—raw materials, work in process, and finished goods—are also introduced. The text then describes the six business activities that comprise the value chain, focusing on the importance of cross-functional teams in managing and coordinating these business activities. The importance of incorporating sustainability throughout every function of the value chain is discussed. Next, the chapter introduces the concept of cost objects and describes the difference between the direct costs and indirect costs of any chosen cost object. The first half of the chapter concludes by comparing how costs are used for internal decision making and for external reporting.

Internal decision making focuses on using a total cost approach, whereas external reporting focuses on the categorization of product and period costs. This distinction must be made because of Generally Accepted Accounting Principles (GAAP). GAAP does not allow companies to use total costs to report inventory balances or cost of goods sold in the financial statements. For external reporting, GAAP allows only a portion of the total cost to be treated as product costs. Product costs are inventoried by merchandiser and manufacturers until the related unit of product is sold. When the unit of product is sold, the product costs become cost of goods sold. Period costs are not treated as inventory but are expensed in the period in which they are incurred. Specific product cost categories for merchandisers and manufacturers are also discussed.

The first set of Decision Guidelines reinforces the concepts from the first half of the chapter. These concepts include the distinction among service, merchandising, and manufacturing companies; the elements of the value chain; various cost objects; product costs that are useful for internal decision making and those that are used for external reporting; direct and indirect costs; and product costs under GAAP. The first Summary Problem allows students to review the value chain and the correct classification of costs as product costs (DM, DL, or MOH) or period costs.

The second half of the chapter illustrates the similarities and differences among the financial statements of service, merchandising, and manufacturing companies. This discussion includes a detailed example illustrating the computation of Cost of Goods Manufactured for a manufacturing entity. Income statements for all the three types of companies are shown. How inventory is reported in the balance sheets for merchandisers and manufacturers is discussed. Cost terms used for decision making and planning are then discussed and include such categories as controllable and uncontrollable, relevant and irrelevant, and fixed and variable. The chapter concludes with a discussion of how managers use data analytics to analyze revenue, cost, and inventory data. The specifics of how to create, filter, and sort a table are covered in detail.

The final Decision Guidelines review the cost concepts presented in the second half of the chapter including a review of the calculation of cost of goods sold and cost of goods manufactured. The Summary Problem provides an opportunity for the student to practice the computations for cost of goods manufactured, total cost, and average cost.

2-1 .

Managerial Accounting 6e Instructor’s Resource Manual

Learning Objectives After studying Chapter 2, your students should be able to: 1. Distinguish among service, merchandising, and manufacturing companies 2. Describe the value chain and its elements 3. Distinguish between direct and indirect costs 4. Identify product costs and period costs 5. Prepare the income statement for service, merchandising, and manufacturing companies 6. Describe costs that are relevant and irrelevant for decision making 7.

Classify costs as fixed or variable and calculate total and average costs at different volumes

8. Analyze revenue, cost, and inventory data using analytic tools

2-2 .

Chapter 2

Building Blocks of Managerial Accounting

Teaching Outline I.

What Are the Most Common Business Sectors and Their Activities?

A. Service, Merchandising, and Manufacturing Companies 1. Service companies 2. Merchandising companies a. Retailers b. Wholesalers 3. Manufacturing companies a. Raw materials inventory (RM) b. Work in process inventory (WIP) c. Finished goods inventory (FG) d. Exhibit 2-1: Manufacturers’ Three Types of Inventory B. Exhibit 2-2: Service, merchandising, and manufacturing companies C. Which Business Activities Make Up the Value Chain D. Exhibit 2-3: The Value Chain 1. Research and development (R&D) 2. Design 3. Production or purchases 4. Marketing 5. Distribution 6. Customer service E. Coordinating Activities Across the Value Chain F. Sustainability and the Value Chain 1. Life-cycle assessment 2. Biomimicry 3. Greenwashing

II.

How Do Companies Define Cost?

A. Cost Objects, Direct Costs, and Indirect Costs 1. Direct costs a. Trace 2. Indirect costs a. Allocate B. Exhibit 2-4: The Same Cost Can Be Direct or Indirect, Depending on the Cost Object C. Exhibit 2-5: Assigning Direct and Indirect Costs to Cost Objects D. Costs for Internal Decision Making and External Reporting 1. Costs for internal decision making a. Total costs 2. Costs for external reporting a. Product costs b. Period costs E. Exhibit 2-6: Total Costs, Product Costs, and Period Costs F. Merchandising Companies’ Product Costs 1. Purchase cost, freight in, and import duties or taxes G. Exhibit 2-7: Summary of Merchandising Companies’ Total Costs H. Manufacturing Companies’ Product Costs 1. Exhibit 2-8: Summary of the Three Types of Manufacturing Costs 2. Direct materials (DM) 2-3 .

Managerial Accounting 6e Instructor’s Resource Manual

3. Direct labor (DL) 4. Manufacturing overhead (MOH) a. Indirect materials b. Indirect labor c. Other indirect manufacturing costs 5. Exhibit 2-9: Summary of Manufacturing Companies’ Total Costs I. Prime and Conversion Costs 1. Exhibit 2-10: Prime and conversion costs J. Additional Labor Compensation Costs K. Recap: Product Costs Versus Period Costs L. Exhibit 2-11: Summary of Product Costs Versus Period Costs III. How Are Product Costs and Period Costs Shown in the Financial Statements?

A. Service Companies 1. Exhibit 2-12: Service Company Income Statement 2. Operating income B. Merchandising Companies 1. Exhibit 2-13: Merchandiser’s Income Statement 2. Exhibit 2-14: Calculation of Cost Of Goods Sold for a Merchandising Firm a. Perpetual inventory b. Periodic inventory C. Manufacturing Companies 1. Exhibit 2-15: Manufacturer’s Income Statement 2. Calculating the Cost of Goods Manufactured and Cost of Goods Sold a. Exhibit 2-16: Flow of Costs Through a Manufacturer’s Financial Statements b. Exhibit 2-17: Calculation of Direct Materials Used c. Exhibit 2-18: Calculation of Cost of Goods Manufactured (CGM) d. Exhibit 2-19: Calculation of Cost of Goods Sold D. Comparing Balance Sheets IV. What Other Cost Terms Are Used by Managers?

A. Controllable Versus Uncontrollable Costs B. Relevant and Irrelevant Costs 1. Differential cost 2. Sunk cost C. Exhibit 2-20: Comparison of relevant information D. Fixed and Variable Costs 1. Exhibit 2-21: Fixed Cost Behavior 2. Exhibit 2-22: Variable Cost Behavior E. How Manufacturing Costs Behave 1. Exhibit 2-23: The behavior of manufacturing costs F. Calculating Total and Average Costs 1. Average cost 2. Marginal cost V. How Can Managers Use Data Analytics to Analyze Revenue, Cost, and Inventory Data?

A. Exhibit 2-24: Excel Table B. Exhibit 2-25: Sorted and Filtered Table C. How to Create, Filter, and Sort a Table

2-4 .

Chapter 2

Building Blocks of Managerial Accounting

Key Topics Discuss the differences among the three most common types of companies: service, merchandising, and manufacturing. While discussing manufacturing companies, discuss the three types of inventory manufacturers carry: raw material, work in process, and finished goods. Have students work in teams or with a partner and complete S2-1: Identify types of companies and their inventories. Call on a student to report the answers.

Discuss the value chain and its elements. Ask students to describe some of the activities that might take place in each element for a given type of entity and how sustainability might be incorporated in these activities. Explain the importance of cross-functional teams in managing and coordinating the various activities across the value chain. Have students complete and discuss S2-3: Classify costs by value chain function in group.

Discuss the classification of costs as direct and indirect in relationship to a cost object. Address how tracing a direct cost to a cost object is different from assigning an indirect cost to a cost object. Complete S2-4: Classify costs as direct or indirect as a class.

Have students consider how managers define the cost of their products or services. Ask students why this information is important. Discuss how cost information used for internal decision making is often different from costs used for external reporting. Internal reporting focuses on a total cost approach, which includes all resources used throughout the value chain. External reporting is governed by Generally Accepted Accounting Principles (GAAP), which requires costs to be classified as either product costs or period costs. Discuss the links in the value chain that relate to product costs and period costs for merchandisers and manufacturers. For manufacturers, relay to students that products costs are classified as either direct materials (DM), direct labor (DL), or manufacturing overhead (MOH). Discuss that product costs for manufacturers can also be categorized as either prime or conversion costs. Review Exhibit 2-11: Summary of Products Costs Versus Period Costs with students, and then have them complete S2-7: Classify product costs and period costs in groups. In addition, for the costs classified as product costs, ask the students to determine if the cost would be considered DM, DL, or MOH. Discuss with students the differences among the financial statements for service companies, merchandisers, and manufacturers. Using Exhibits 2-12: Service Company Income Statement, 2-13: Merchandiser’s Income Statement, and 2-15: Manufacturer’s Income Statement, show students that only merchandisers and manufacturers report gross profit. Highlight that the reason for this is that those are the two types of companies that hold inventory. Remind students that inventory is reported in the asset section of the balance sheet. For a merchandiser, show students how to calculate the cost of goods sold reported on the income statement by reviewing Exhibit 2-14: Calculation of Cost of Goods Sold for a Merchandising Firm. Next, discuss how the calculation of cost of goods sold for a manufacturer is more complicated because product costs are tracked through three different inventory accounts during the period. The schedule of cost of goods manufactured summarizes the activities that take place in a manufacturing plant over the accounting period. Use Exhibit 2-16: Flow of Costs Through a Manufacturer’s Financial Statement to explain the logical flow of costs in a manufacturing environment. Point out that the first two inventories (RM and WIP) are used in the calculation of the cost of goods manufactured. The cost of goods manufactured and the third inventory (FG) are then used in the calculation of the cost of goods sold for the income statement. Emphasize that the schedule of cost of goods manufactured must be prepared before the income statement because it is needed to compute the cost of goods sold for a manufacturer. Work through an example of a schedule of cost of goods manufactured and the income statement on the board. After working through an example, have students 2-5 .

Managerial Accounting 6e Instructor’s Resource Manual

work in teams or with a partner to complete E2-43B Compute Cost of Goods Manufactured and Cost of Goods Sold. Call on a student to present the answers.

Students must know a few other cost classifications. Managers and students need to distinguish controllable costs from uncontrollable costs. This will help them understand which costs they can influence and which they cannot. For decision making, managers and students need to consider relevant costs. Discuss using relevant costs to determine differential costs of two alternative courses of action. The other cost classification is fixed and variable costs. When describing the differences between fixed and variable costs, be sure to reinforce that these terms illustrate the way in which a cost behaves. If the total cost increases or decreases as a result of changes in sales/production volume, then it’s a variable cost (or a mixed cost). Let them know that sometimes a fixed cost will fluctuate over different time periods, but that it is not changing as a result of changes in sales/production volume. Discuss the importance of being able to calculate total cost and average cost for different levels of production. Tell students that these cost classifications will be discussed in greater detail in later chapters. Have students work in teams to complete E2-46B Compute total and average costs. Have a team present their results to the rest of the class.

This chapter introduces students to the concept that data analytics is used to analyze revenue, cost, and inventory data. As a group, discuss how data are often presented in summary or aggregate, and at times, these data need to be sorted and filtered to provide managers with the information they need to answer questions. One tool available to help managers sort and filter data is Microsoft Excel. Review the steps presented in the chapter to create, sort, and filter a table using the data from E2-33A. After discussing the steps, break students up into group and have them answer the questions in the exercise.

Suggest your students make and use flashcards for all the definitions/terminology in this chapter. In addition, some students are overwhelmed when they see a completed income statement for a manufacturer. Show them how to break it down into smaller pieces and then put it together. For instance, begin with computing gross profit. Sales – Cost of Goods Sold = Gross Profit. Then show the detail for COGS: Beginning inventory + Purchases = Cost of Goods Available for Sale. Cost of Goods Available for Sale – Ending inventory = COGS. (Abbreviations can help students as well: S – COGS = GP; BI + P = GAFS; GAFS – EI = COGS.)

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Chapter 2

Building Blocks of Managerial Accounting

Chapter 2: Student Summary Handout I.

The three types of companies A. Service companies B. Merchandising companies 1. Retailers 2. Wholesalers C. Manufacturing companies 1. Three types of inventory a. Raw materials inventory (RM) b. Work in process inventory (WIP) c. Finished goods inventory (FG) D. The value chain and its elements 1. Research and development (R&D) 2. Design 3. Production or purchases 4. Marketing 5. Distribution 6. Customer service E. Coordinating activities across the value chain 1. Sustainability and the value chain 2. Life-cycle assessment 3. Biomimicry 4. Greenwashing

II.

Defining cost A. Cost objects B. Direct costs 1. Trace C. Indirect costs 1. Allocate D. Costs for internal decision making and external reporting 1. Costs for internal decision making a. Total costs 2. Costs for external reporting a. Product costs b. Period costs E. Merchandising companies’ product costs 1. Purchase cost, freight in, and import duties or taxes F. Manufacturing companies’ product costs 1. Direct materials (DM) 2. Direct labor (DL) 3. Manufacturing overhead (MOH) a. Indirect materials b. Indirect labor c. Other indirect manufacturing costs G. Prime and conversion costs H. Additional labor compensation costs

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Managerial Accounting 6e Instructor’s Resource Manual

III. Reporting product costs and period costs in the financial statements A. Service companies 1. Operating income B. Merchandising companies 1. Perpetual inventory 2. Periodic inventory C. Manufacturing companies 1. Calculating the cost of goods manufactured and cost of goods sold D. Comparing balance sheets of the three types of organizations IV. Other cost terms used by managers A. Controllable versus uncontrollable costs B. Relevant and irrelevant costs 1. Differential cost 2. Sunk cost C. Fixed and variable costs D. How manufacturing costs behave E. Calculating total and average costs 1. Average cost 2. Marginal cost V. Using data analytics to analyze revenue, cost, and inventory data A. How to create, filter, and sort a table

MyAccountingLab.com algorithmic homework assignments: E2-21A, E2-25A, E5-26A, E2-28A, E232A.

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Chapter 2

Building Blocks of Managerial Accounting

CHAPTER 2: ASSIGNMENT GRID

Assignment S2-1 S2-2 S2-3 S2-4 S2-5 S2-6 S2-7 S2-8 S2-9 S2-10 S2-11 S2-12 S2-13 S2-14 S2-15 S2-16 S2-17 S2-18 S2-19

S2-20

Learning Objective(s)

Topic(s)

Short Exercises Identify type of companies 1 and their inventories Identify type of company 1 from balance sheets Classify costs by value chain 2 function Classify costs as direct or 3 indirect Define cost terms 3&4 Identify product costs and 4 period costs Classify product and period 4 costs Classify a manufacturer’s 4 costs Classify costs incurred by a 4 dairy processing company Determine total 4 manufacturing overhead Prepare a retailer’s income 5 statement Compute Cost of Goods 5 Sold for a merchandiser Calculate direct materials 5 used Compute Cost of Goods 5 Manufactured Describe other cost terms 6&7 Classify costs as fixed or 7 variable Calculate total, average, and 7 marginal costs Identify ethical standards All violated Analyze, revenue, cost, and 8 inventory data using data analytics tools Analyze, revenue, cost, and 8 inventory data using data analytics tools

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Estimated Time in Minutes

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Managerial Accounting 6e Instructor’s Resource Manual

Assignment E2-21A E2-22A

E-23A E2-24A E2-25A E2-26A

E2-27A E2-28A

E2-29A

E2-30A E2-31A E2-32A E2-33A

E2-34A

E2-35B E2-36B

Learning Objective(s)

Topic(s)

Exercises (Group A) Classify costs along the 2 value chain for a retailer Classify costs along the 2&4 value chain for a manufacturer Classify costs as direct or 3 indirect Value chain and 2 sustainability efforts Classify and calculate a 4 manufacturer’s costs Construct an income 4&5 statement using product and period costs Prepare a retailer’s income 5 statement Compute direct materials 5 used and Cost of Goods Manufactured Compute Cost of Goods 5 Manufactured and Cost of Goods Sold Continues E2-29A: Prepare 5 income statement Determine whether 6 information is relevant Compute total and average 7 costs Analyze revenue, cost, and 8 inventory data using data analytics tools Analyze revenue, cost, and 8 inventory data using data analytics tools Exercises (Group B) Classify costs along the 2 value chain for a retailer Classify costs along the 2&4 value chain for a manufacturer

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Chapter 2

Assignment E2-37B E2-38B E2-39B E2-40B

E2-41B E2-42B

E2-43B

E2-44B E2-45B E2-46B E2-47B

E2-48B

P2-49A P2-50A P2-51A P2-52A P2-53A P2-54A

Building Blocks of Managerial Accounting

Learning Topic(s) Objective(s) Classify costs as direct or 3 indirect Value chain and 2 sustainability efforts Classify and calculate a 4 manufacturer’s costs Construct an income 4&5 statement using product and period costs Prepare a retailer’s income 5 statement Compute direct materials 5 used and Cost of Goods Manufactured Compute Cost of Goods 5 Manufactured and Cost of Goods sold Continues E2-43B: Prepare 5 income statement Determine whether 6 information is relevant Compute total and average 7 costs Analyze revenue, cost, and 8 inventory data using data analytics tools Analyze revenue, cost, and 8 inventory data using data analytics tools Problems (Group A) Classify costs along the 2&4 value chain Work backward to find 5 missing amounts Determine ending inventory 5 balances Prepare income statements 5 Identify relevant 6 information Calculate the total and 7 average costs

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Estimated Time in Minutes 10

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Managerial Accounting 6e Instructor’s Resource Manual

Assignment P2-55B P2-56B P2-57B P2-58B P2-59B P2-60B

C2-61 A2-62 A2-63

A2-64 A2-65

Learning Objective(s) Problems (Group B) Classify costs along the 2&4 value chain Work backward to find 5 missing amounts Determine ending inventory 5 balances Prepare income statements 5 Identify relevant 6 information Calculate the total and 7 average costs Serial Case Calculate operating income 5 Critical Thinking Discussion questions All Costs in the value chain at a All real company and cost objects Ethics involved with 4&5 assigning costs to inventory Cost definitions 1, 2, 3, & 4 Topic(s)

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Estimated Time in Minutes

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Chapter 2

Building Blocks of Managerial Accounting

Name____________________________________ Date_________________ Section_______________

CHAPTER 2 TEN-MINUTE QUIZ Circle the letter of the best response.

1.

If the company does not carry Work in Process or Raw Materials inventory, what type of company is illustrated?

A. Merchandising company B. Manufacturing company C. Service company D. Not-for-profit company

2.

Which of the following is NOT a value chain activity?

A. Human resources B. Customer service C. Marketing D. Production

3.

Work in Process inventory includes A. raw materials that will be used in manufacturing.

B. completed goods not yet sold.

C. goods that are in the manufacturing process but are not yet complete.

D. goods that have been shipped to customers.

4.

Which of the following is a direct cost in the production of wine for a winery?

A. Utilities B. Taxes C. Insurance D. Grapes

5.

Which of the following is NOT a component of manufacturing overhead in the production of wine for a winery?

A. Depreciation on the basket press B. Salaries of supervisors C. Oil and lubricants for machines D. Crushing labor

6.

Which of the following types of corporations has all costs along the value chain accounted for as period costs?

A. Manufacturing corporation B. Merchandising corporation C. Service corporation D. None of the above

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Managerial Accounting 6e Instructor’s Resource Manual

7.

Which of the following is a period cost?

A. Direct materials B. Advertising C. Salaries of plant supervisors D. Wages of production line employees

8.

Given the following July financial information for Classic Toy Manufacturing Company, what amount of cost of goods sold would be reported by Classic Toy for the month of July?

Cost of goods manufactured Beginning finished goods inventory Ending finished goods inventory General and administrative expenses Selling expenses A. B. C. D.

9.

$25,000 4,000 6,000 3,000 2,000

$23,000 $25,000 $26,000 $28,000

Far Fly Golf Ball Company’s manufacturing costs for September are as follows: Materials cost: $20,000 Labor cost: $15,500 Overhead $5,500 If the company manufactured 50,000 golf balls during the month of September, what is the cost (rounded) per golf ball?

A. $1.22 B. $0.82 C. $0.71 D. $0.40

10.

Which of the following is NOT a step in converting data to an Excel table?

A. Click on an cell in the data set.

B. Click on the insert tab on the ribbon.

C. Click on the table icon.

D. All of the above steps are performed to convert data to an Excel table.

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Building Blocks of Managerial Accounting

Answer Key to Chapter 2 Ten-Minute Quiz 1. A 2. A 3. C 4. D 5. D

6. C 7. B 8. A 9. B 10. D

2-15 .

Chapter 3 Job Costing This chapter outlines the two basic costing systems: job costing and process costing. Job costing is used when relatively small quantities of unique products are manufactured. Process costing is used when large quantities of homogeneous products are manufactured.

The chapter begins by comparing and contrasting job costing and process costing. Next, the chapter explains the documents and systems used to trace direct materials and direct labor to specific jobs. The text discusses how manufacturing overhead is allocated to each job using a predetermined overhead rate.

It also explains how to determine the cost of a job. Job cost information is then used to make various business decisions. sw The first set of Decision Guidelines explains some of the decisions a company might need to make in designing its costing system. The Summary Problems allow the student to practice calculating the predetermined overhead rate as well as the total cost and unit cost for a specific job.

The second half of the chapter begins with a discussion of the calculation of over- or underallocated manufacturing overhead, as well as the proper treatment of the over- or underallocated amount. The chapter then illustrates all journal entries associated with a job costing system for a manufacturer. Next the text describes how job costing is used by a service company to determine the amount to bill clients.

The discussion includes an illustration of the treatment of the indirect costs of servicing a client, finding the total cost of the job, and adding a profit markup to total costs to determine a price. The chapter concludes with considering how managers use data analytics to analyze job cost data. The steps to create a PivotTable in Excel are outlined.

The last set of Decision Guidelines discusses the implications of over- or underallocating manufacturing overhead. The final Summary Problem allows for practice in recording journal entries and preparing a simple income statement for a manufacturer using a job costing system.

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Managerial Accounting 6e Instructor’s Resource Manual

Learning Objectives After studying Chapter 3, your students should be able to: 1.

2.

3.

4.

5.

6.

7.

8.

Distinguish between job costing and process costing Understand the flow of production and how direct materials and direct labor are traced to jobs Compute a predetermined manufacturing overhead rate and use it to allocate MOH to jobs Determine the cost of a job and use it to make business decisions Compute and dispose of overallocated or underallocated manufacturing overhead Prepare journal entries for a manufacturer’s job costing system Use job costing at a service firm as a basis for billing clients Analyze job cost and profitability data using data analytics tools

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Chapter 3

Job Costing

Teaching Outline I.

What Methods Are Used to Determine the Cost of Manufacturing a Product?

A. Process Costing B. Job Costing C. Exhibit 3-1: Differences Between Job and Process Costing

II.

How Do Manufacturers Determine a Job’s Cost?

A. Flow of Inventory Through a Manufacturing System B. Exhibit 3-2: Flow of Inventory Through a Manufacturing System C. Scheduling Production 1. Stock inventory 2. Production schedule a. Exhibit 3-3: Monthly Production Schedule D. Purchasing Raw Materials 1. Bill of materials a. Exhibit 3-4: Bill of Materials (partial listing) 2. Raw materials record a. Exhibit 3-5: Raw materials record 3. Purchase order 4. Receiving report a. Exhibit 3-6: Individual Raw Materials Records Sum to the Raw Materials Inventory Balance E. Using a Job Cost Record to Keep Track of Job Costs 1. Exhibit 3-7: Job Cost Record 2. Exhibit 3-8: Job Cost Records on Incomplete Jobs Sum to WIP Inventory Balance F. Tracing Direct Materials Cost to a Job 1. Materials requisition a. Exhibit 3-9: Materials Requisition 2. Exhibit 3-10: Raw Materials Record Updated for Materials Received and Used 3. Exhibit 3-11: Posting Direct Materials Used to the Job Cost Record G. Tracing Direct Labor Cost to a Job 1. Exhibit 3-12: Labor Time Record 2. Exhibit 3-13: Posting Direct Labor Used to the Job Cost Record H. Allocating Manufacturing Overhead to a Job 1. What does allocating mean?

2. Steps to allocating manufacturing overhead a. The company estimates its total manufacturing overhead costs for the coming year. b. The company selects an allocation base and estimates the total amount that will be used during the year. i. Cost driver c. The company calculates its predetermined manufacturing overhead rate using the information estimated in Steps 1 and 2. i. Predetermined MOH rate = total estimated manufacturing overhead costs  total estimated allocation base d. The company allocates some manufacturing overhead to each individual job. i. MOH allocated to a job = predetermined MOH rate x actual amount of allocation base used by job 3-3 .

Managerial Accounting 6e Instructor’s Resource Manual

I.

3. When is manufacturing overhead allocated to jobs?

Exhibit 3-14: Posting Manufacturing Overhead and Completing the Job Cost Record

J. Completing the Job Cost Record and Using It to Make Business Decisions 1. Reducing future job costs 2. Assessing and comparing the profitability of each model 3. Dealing with pricing pressure from competitors 4. Allowing discounts on high-volume sales 5. Bidding for custom orders 6. Preparing the financial statements III.

How Can Job Costing Information Be Enhanced for Decision Making A. Non-manufacturing costs B. Direct or variable costing C. Sustainability

IV.

How Do Managers Deal with Underallocated or Overallocated Manufacturing Overhead?

A. Underallocated manufacturing overhead B. Overallocated manufacturing overhead 1. Exhibit 3-15: Underallocated versus overallocated manufacturing overhead C. Adjusting cost of goods sold 1. Exhibit 3-16: Correcting cost of goods sold for underallocated or overallocated manufacturing overhead

V.

What Journal Entries Are Needed in a Manufacturer’s Job Costing System A. Exhibit 3-17: Review of journal entry and T-account mechanics B. Exhibit 3-18: Flow of costs through a manufacturing plant 1. Purchase of raw materials 2. Use of direct materials 3. Use of indirect materials 4. Use of direct labor 5. Use of indirect labor 6. Incurring other manufacturing overhead costs a. Exhibit 3-19: Pooling Actual MOH Costs 7. Allocating Manufacturing Overhead to Jobs a. Exhibit 3-20: Allocating MOH Costs to Individual Jobs 8. Completion of jobs 9. Sale of units 10. Operating expenses 11. Closing manufacturing overhead C. Exhibit 3-21: Income statement after adjusting for underallocated manufacturing overhead

VI.

How Do Service Firms Use Job Costing to Determine the Amount to Bill Clients?

A. Exhibit 3-22: Assigning Costs to Client Jobs B. What Costs Are Considered Direct Costs of Serving the Client?

C. What Costs Are Considered Indirect Costs of Serving the Client?

1. Steps to allocate indirect costs to clients a. Estimate the total indirect costs for the coming year. b. Choose an allocation base and estimate the total amount that will be used during the year. c. Compute the predetermined indirect cost allocation rate.

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Chapter 3

d. Allocate indirect costs to client jobs using the predetermined rate.

D. Finding the Total Cost of the Job and Adding a Profit Markup E. Invoicing the Client Using a Professional Billing Rate 1. Exhibit 3-23: Invoice to Client F. What Journal Entries Are Needed in a Service Firm’s Job Costing System?

VII.

How Can Managers Use Data Analytics to Analyze Job Cost Data?

A. Exhibit 3-24: Job Cost, Sales and Gross Profit Data B. Exhibit 3-25: Pivot Table Showing Average Cost per Unit of Each Model C. Exhibit 3-26: Pivot Table Showing Average Cost per Unit of Each Mode by Plant D. How to Create an Excel PivotTable

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Job Costing

Managerial Accounting 6e Instructor’s Resource Manual

Key Topics Make it clear to students that both a job costing system and a process costing system provide the same basic production costing information. Emphasize that the goal of either system is to find the cost of manufacturing one unit of product. The difference in the two systems is the way they accumulate the costs. The first major distinction between the two systems is quantity and uniqueness of product, and the second is costing. Process costing is used when large quantities of homogeneous product are produced; the total costs are divided by the quantity produced to give the average cost. Job costing is used by companies that produce smaller quantities of relatively unique products that vary in the manufacturing resources required. Direct materials (DM) and direct labor (DL) costs are traced to each job using materials requisitions and labor time records, whereas manufacturing overhead is allocated to each job using a predetermined manufacturing overhead rate.

Have students work in teams or with a partner and complete E3-35B Identify type of costing system.

Call on a student to report the answers.

Stress that there are three product or manufacturing costs: direct material, direct labor, and manufacturing overhead. All manufacturing costs flow into the Work in Process Inventory account. Manufacturing overhead is allocated to jobs based on a predetermined rate using estimated data.

Students are typically confused as to why overhead needs to be allocated rather than added directly to jobs as it is used. Explain that this is a tradeoff between timeliness and accuracy. Companies need the cost information for decision making before the actual costs are known. In order to get actual data, the company would have to wait until the end of the year to set its MOH rate. By then, the information is too late to be useful for making pricing and other decisions related to individual jobs. Use E3-43B Analyze manufacturing overhead to illustrate how the manufacturing overhead rate is predetermined and then how it is used. Help students to understand that debits to the manufacturing overhead account represent actual (or incurred) manufacturing overhead costs, and credits to the Manufacturing Overhead account represent allocated manufacturing overhead. Draw a T-account and write “actual” on the debit side and “allocated” on the credit side. Enter the manufacturing overhead entries into the T-account to show students how to determine whether manufacturing overhead was over- or underallocated. Emphasize that the account is temporary and not shown on any of the company’s financial statements; it must be closed out (zeroed out) at the end of the period. Explain how to close the account at the end of the period.

A job cost record is used to accumulate all costs related to each specific job: direct material used, direct labor incurred, and manufacturing overhead allocated to that specific job. The job cost records serve as subsidiary ledgers keeping track of the specific jobs being produced by the company. The job cost records for incomplete jobs provides the substantial detail for the total Work in Process (WIP) Inventory account.

The job cost records for complete jobs serve as a basis for valuing the Finished Goods Inventory account.

Job cost records also provide important information to make many business decisions, such as reducing future job costs, allowing discounts on high-volume sales, and bidding for custom orders.

Have students work in teams to solve E3-41B Determine the cost of a job. Ask students to explain the differences between the recording of materials and labor.

Over- or underallocated manufacturing overhead at the end of the period should, in theory, be divided among Finished Goods (FG), Work in Process (WIP), and Cost of Goods Sold (COGS) in proportion to their ending balances because these are the accounts affected by allocated manufacturing overhead. If the 3-6 .

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Job Costing

majority of jobs have been sold and the balance in the Manufacturing Overhead account is immaterial, companies typically choose to close the manufacturing overhead only to Cost of Goods Sold.

Most of the accounts involved in a job order costing system can be characterized as cost accounts.

Relating cost accounts to expense accounts and asset accounts can help students quickly grasp the accounting flows. Use E3-46B Analyze T-accounts to illustrate the flow.

Illustrate job costing in a service firm by using a maid service as an example.

1. Estimate total indirect costs—office rent, insurance, and so on. For example, estimate $100,000.

2. Identify a cost allocation base—for example, number of homes cleaned per year.

3. Estimate total quantity of the indirect cost allocation base—for example, 1,000 homes.

4. Compute the predetermined indirect cost allocation rate: $100,000/1,000 = $100 per home.

5. Obtain the actual quantity of the cost allocation base used by individual jobs—for example, 995 homes cleaned.

6. Allocate indirect cost to jobs—for example, if 995 homes were cleaned and the allocation rate is $100 per home, the amount allocated to overhead would be $99,500.

7. Compare actual overhead to the amount allocated to overhead to determine over- or underallocated overhead. For example, if actual indirect costs were 99,000, then $500 would be the amount of overallocated overhead.

Let students know that the cost mark-up varies greatly by industry. In the chapter, they learn that the cross-trainer that sells for $1,900 cost the company $1,160 to produce. Remind students that the markup of $740 is not all profit but must cover sales commissions as well as other operating costs.

Excel PivotTables are a data analytics tool available for managers to use to analyze aggregate job cost data. PivotTables summarize and cross-tabulate data according to specified attributes in the data set. To illustrate the steps involved in generating a PivotTable, divide students into groups and have them complete E3-49B. As a class, discuss how managers could use the data provided by the PivotTable.

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Managerial Accounting 6e Instructor’s Resource Manual

Chapter 3: Student Summary Handout I.

Methods used to determine the cost of a product A. Process costing B. Job costing

II.

How manufacturers determine a job’s cost A. Scheduling production 1. Stock inventory 2. Production schedule B. Purchasing raw materials 1. Bill of materials 2. Raw materials record 3. Purchase order 4. Receiving report C. Using a job cost record to keep track of job costs D. Tracing direct materials cost to a job 1. Materials requisition E. Tracing direct labor cost to a job F. Allocating manufacturing overhead to a job 1. What does allocating mean?

2. Steps to allocating manufacturing overhead a. The company estimates its total manufacturing overhead costs for the coming year. b. The company selects an allocation base and estimates the total amount that will be used during the year. i. Cost driver c. The company calculates its predetermined manufacturing overhead rate using the information estimated in Steps 1 and 2. i. Predetermined MOH rate = total estimated manufacturing overhead costs  total estimated allocation base d. The company allocates some manufacturing overhead to each individual job. i. MOH allocated to a job = predetermined MOH rate x actual amount of allocation base used by job 3. When manufacturing overhead allocated to jobs?

III.

Completing the job cost record and using it to make business decisions A. Reducing future job costs B. Assessing and comparing the profitability of each model C. Dealing with pricing pressure from competitors D. Allowing discounts on high-volume sales E. Bidding for custom orders F. Preparing the financial statements

IV.

Using job cost information for enhanced decision making A. Non-manufacturing costs B. Direct or variable costing C. Sustainability

V.

Dealing with underallocated or overallocated manufacturing overhead A. Underallocated manufacturing overhead 3-8 .

Chapter 3

Job Costing

B. Overallocated manufacturing overhead C. Adjusting cost of goods sold VI.

Journal entries for a manufacturer’s job costing system A. Purchase of raw materials B. Use of direct materials C. Use of indirect materials D. Use of direct labor E. Use of indirect labor F. Incurring other manufacturing overhead costs G. Allocating manufacturing overhead to jobs H. Completion of jobs I. Sale of units J. Operating expenses K. Closing manufacturing overhead

VII.

Using job costing at a service firm to determine the amount to bill clients A. What costs are considered direct costs of serving the client?

B. What costs are considered indirect costs of serving the client?

1. Steps to allocate indirect costs to clients a. Estimate the total indirect costs for the coming year b. Choose an allocation base and estimate the total amount that will be used during the year c. Compute the predetermined indirect cost allocation rate d. Allocate indirect costs to client jobs using the predetermined rate C. Finding the total cost of the job and adding a profit markup D. Invoicing the client using a professional billing rate E. Journal entries needed in a service firm’s job costing system

VIII.

Using data analytics to analyze job cost data A. How to create an Excel PivotTable

MyAccountingLab.com algorithmic homework assignments: E3-19A, E3-21A, E3-23A, E3-25A, E3-27A.

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Managerial Accounting 6e Instructor’s Resource Manual

CHAPTER 3: ASSIGNMENT GRID

Assignment S3-1

S3-2 S3-3 S3-4 S3-5 S3-6 S3-7 S3-8 S3-9 S3-10 S3-11 S3-12 S3-13 S3-14 S3-15 S3-16 S3-17 S3-18

E3-19A E3-20A E3-21A

Learning Objective(s)

Topic(s)

Short Exercises Identify product costs, period 1 costs, and product costing systems Decide on product costing 1 systems Determine the flow of costs 2 between inventory accounts Understanding key document 2 terms in a job cost shop Compute a professional billing 7 rate Compute various manufacturing 3 overhead rates Continuation of S3-6: compute 3 total allocated overhead Continuation of S3-7: Determine 3&5 over- or underallocation Calculate rate and analyze year3&5 end results Calculate job cost and billing at 2, 4, & 7 appliance repair service Calculating overallocated or 5 underallocated overhead Record purchase and use of 6 materials Record manufacturing labor 6 costs Recompute job cost at a legal 3, 4, & 7 firm Identify ethical standards 1, 2, 3, 4, 5, violated &6 Understanding key terms 1, 2, 3, & 4 Analyze job cost and profitability 8 data using data analytics Analyze job cost and profitability 8 data using data analytics Exercises (Group A) Identify type of costing system 1 Understand the flow of costs in a 2 job cost shop Determine the cost of a job and 2, 3, & 4 use it for pricing 3-10 .

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Chapter 3

Assignment E3-22A

E3-23A

E3-23A E3-25A E3-26A E3-27A E3-28A E3-29A E3-30A E3-31A E3-32A E3-33A E3-34A

E3-35B E3-36B E3-37B E3-38B

E3-39B

E3-40B E3-41B E3-42B E3-43B E3-44B E3-45B E3-46B E3-47B

Learning Objective(s)

Topic(s)

Compute a predetermined 3&4 overhead rate and calculate cost of jobs based on direct labor costs Compute a predetermined 3&4 overhead rate and calculate cost of job based on direct labor costs Sustainability and job costing 2, 3, & 4 Determine the cost of a job 2, 3, & 4 Compare bid prices under two 3&4 different allocation bases Analyze manufacturing 3&5 overhead Record manufacturing overhead 5&6 Record journal entries 2, 3, 5, & 6 Analyze T-accounts 2, 3, 5, & 6 Job cost and bid price at a 7 consulting firm Record journal entries 2, 3, 5, & 6 Analyze job cost and profitability 8 data using data analytics tools Analyze job cost and profitability 8 data using data analytics tools Exercises (Group B) Identify type of costing system 1 Understand the flow of costs in a 2 job cost shop Determine the cost of a job and 2, 3, & 4 use it for pricing Compute a predetermined 3&4 overhead rate and calculate cost of jobs Compute a predetermined 3&4 overhead rate and calculate cost of job Sustainability and job costing 2, 3, & 4 Determine the cost of a job 2, 3, & 4 Compare bid prices under two 3&4 different allocation bases Analyze manufacturing 3&5 overhead Record manufacturing overhead 5&6 Record journal entries 2, 3, 5, & 6 Analyze T-accounts 2, 3, 5, & 6 Job cost and bid price at a 7 consulting firm 3-11 .

Job Costing

Estimated Time in Minutes

Level of Difficulty

10

Easy

10

Easy

10 10 15

Medium Medium Medium

15–20

Medium

25 25 20 15

Medium Medium Difficult Medium

15 15

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Medium Medium Medium

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Managerial Accounting 6e Instructor’s Resource Manual

Assignment E3-48B E3-49B E3-50B P3-51A P3-52A P3-53A P3-54A P3-55A P3-56A

P3-57B P3-58B P3-59B P3-60B P3-61B P3-62B

C3-63

A3-64 A3-65 A3-66 A3-67 A3-68

Learning Objective(s)

Topic(s)

Record journal entries 2, 3, 5, & 6 Analyze job cost and profitability 8 data using data analytics tools Analyze job cost and profitability 8 data using data analytics tools Problems (Group A) Analyze manufacturing 3&5 overhead Use job costing at an advertising 3, 4, & 7 agency Use job costing at a consulting 3, 4, & 7 firm Prepare job cost record 2, 3, & 4 Determine and record job costs 2, 3, 4, & 6 Determine flow of costs through 2&6 accounts Problems (Group B) Analyze Manufacturing 3&5 Overhead Use job costing at an advertising 3, 4, & 7 agency Use job costing at a consulting 3, 4, & 7 firm Prepare job cost record 2, 3, & 4 Determine and record job costs 2, 3, 4, & 6 Determine flow of costs through 2&6 accounts Serial Case Job costing or process costing for 1, 2, 3, 4, & 7 wedding services Critical Thinking Discussion questions All Unwrapped or how it’s made All Ethics involved with choice of 2, 3, & 4 cost driver Costs included in product cost 1, 2, 3, & 4 Issues with cost of job 2, 3, & 4

3-12 .

Estimated Time in Minutes

Level of Difficulty

15 15

Medium Medium

15

Medium

20

Medium

20

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20

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20 45 20

Medium Difficult Difficult

20

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60–90 30–60 30–60

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Chapter 3

Job Costing

Name____________________________________ Date_________________ Section_______________

CHAPTER 3 TEN-MINUTE QUIZ Circle the letter of the best response: 1.

Which of the following products would have its costs accumulated using a process costing system?

A. Airplanes B. Luxury yachts C. Dinner at a restaurant D. Fishing supplies

2.

Which of the following companies would use a job costing system?

A. Health care provider B. Crayon manufacturing company C. Potato chip manufacturing corporation D. Spring water bottling company

3.

Which of the following is used to document the manufacturing costs of direct materials, direct labor, and manufacturing overhead?

A. Raw materials record B. Job cost record C. Work in process inventory D. Cost assignment record

4.

When accounting for materials and labor, materials used are recorded in A. raw materials inventory.

B. work in process inventory.

C. finished goods inventory.

D. cost of goods sold.

5.

Smart Corporation is a manufacturer of smartphones. Assume Smart allocates manufacturing overhead based on machine hours. Additional information for Smart is as follows: •

Budgeted 5 million machine hours and $50 million of manufacturing overhead costs

•

Actual machine hours of 6 million

•

Actual total manufacturing overhead costs of $48 million

What is Smart’s predetermined manufacturing overhead rate?

A. $8.00/machine hour B. $8.33/machine hour C. $9.60/machine hour D. $10.00/machine hour

3-13 .

Managerial Accounting 6e Instructor’s Resource Manual

6.

When selecting a manufacturing overhead allocation base, managers should select the A. number of products produced.

B. activity-based products.

C. cost driver of those manufacturing overhead costs.

D. same number used in prior years.

7.

Which of the following is included in the entries to record the sale of a job costing $5,000 to produce?

A. Finished Goods Inventory 5,000 Work in Process Inventory 5,000 B. Cost of Goods Sold 5,000 Work in Process Inventory 5,000 C. Work in Process Inventory 5,000 Finished Goods Inventory 5,000 D. Cost of Goods Sold 5,000 Finished Goods Inventory 5,000

8.

Which of the following is the journal entry to record the closing of manufacturing overhead given the following facts?

The actual manufacturing overhead is $7,100.

The estimated manufacturing overhead was $7,000.

The amount of overhead allocated is $6,900.

A. B. C. D.

Cost of Goods Sold Manufacturing Overheard Cost of Goods Sold Manufacturing Overhead Manufacturing Overhead Cost of Goods Sold Manufacturing Overhead Cost of Goods Sold

200 200 100 100 100 100 200 200

9.

A marketing consultant uses the job costing system and has a predetermined overhead rate of $15 per direct labor hour. This amount is based on an estimated overhead of $30,000 and an average time of 5.0 hours per job. Job #521 incurred direct material costs of $50 and 6 direct labor hours costing $75 per hour. The total cost of job #521 is A. $155.

B. $215.

C. $565.

D. $590.

10.

For which of the following actions would a pivot table be an appropriate data analytics tool?

A. Summarizing transaction data B. Calculating the average cost of product models by location C. Calculating the total costs of product models by month D. A pivot table would be an appropriate data analysis tool for all of the above actions.

3-14 .

Chapter 3

Answer Key to Chapter 3 Ten-Minute Quiz 1. D 2. A 3. B 4. B 5. D

6. C 7. D 8. A 9. D 10. D

3-15 .

Job Costing

Managerial Accounting 6e Instructor’s Resource Manual

3-16 .

Chapter 4 Activity-Based Costing, Lean Operations, and the Costs of Quality The chapter begins with a discussion of cost distortion and how it can occur from using an overly simple cost allocation system. Cost distortion occurs when some products are overcosted, while other products are undercosted by the cost allocation system. By refining their costing systems, companies can more equitably assign indirect costs (such as manufacturing overhead) to their individual jobs, products, or services. Managers can often obtain more accurate product costs by using departmental overhead rates or activity-based costing (ABC) in place of a traditional plantwide overhead allocation rate. ABC allocates indirect costs based on the cost drivers and their varying levels of use for the various products. As managers understand the production cycle and obtain information about how different products use different resources, more accurate costing is used to help managers make better decisions about pricing and production, cutting costs, and routine planning and control. The chapter also addresses the use of ABC in service and merchandising companies. ABC systems are used when the benefits obtained by the new system outweigh the costs incurred to obtain the additional cost information.

The first half of the chapter concludes with Decision Guidelines summarizing the decisions a company might face as it refines its cost system. The first Summary Problem allows students to practice using both activity-based costing rates and a traditional plantwide overhead rate to allocate indirect costs. The problem calls for students to compare the results and make a pricing decision.

An ABC system provides managers with more details on production and sometimes, in turn, reveals the high costs of non-value-added activities, such as storing and moving inventories and producing poorquality products. Many companies have linked their ABC system to a lean operations philosophy, which focuses on manufacturing without waste. The eight wastes of traditional operations have been discussed under DOWNTIME. Lean companies adopt a just-in-time (JIT) inventory philosophy. JIT inventory focuses on purchasing raw materials just in time for production and producing goods just in time for delivery to customers. The quick production and low inventory maintained in a JIT system require a quality product be produced in order to have the product reach the customer in a timely manner.

The chapter continues the discussion of lean operations by discussing the costs of quality framework, which includes total quality management (TQM) and the four costs of quality: prevention, appraisal, internal failure, and external failure. This framework is used to aid managers in their decision making.

The chapter concludes with a discussion of how data analytics, specifically the Excel Correlation Function (CORREL), can be used by managers to identify which allocation base is most highly related, or correlated, to the activity cost pool.

The final set of Decision Guidelines highlights some of the decisions managers must make when adopting lean operations and a TQM philosophy. The accompanying Summary Problem requires a completion of a cost of quality report as well as a discussion of its uses and potential limitations.

4-1 .

Managerial Accounting 6e Instructor’s Resource Manual

Learning Objectives After studying Chapter 4, your students should be able to: 1.

2.

3.

4.

5.

6.

Develop and use departmental overhead rates to allocate indirect costs Develop and use activity-based costing (ABC) to allocate indirect costs Understand the benefits and limitations of ABC/ABM systems Describe lean operations Describe and use the costs of quality framework Analyze activity cost pools and cost drivers using data analytics tools

4-2 .

Chapter 4

Activity-Based Costing, Lean Operations, and the Costs of Quality

Teaching Outline I.

Why and How Do Companies Refine Their Cost Allocation Systems?

A. Simple Cost Allocation Systems Can Lead to Cost Distortion B. Exhibit 4-1: More Refined Versus Less Refined Cost Allocation System C. Review: Using a Plantwide Overhead Rate to Allocate Indirect Costs 1. Exhibit 4-2: Allocating Manufacturing Overhead Using a Plantwide Overhead Rate 2. Exhibit 4-3: Plantwide Allocation System D. Using Departmental Overhead Rates to Allocate Indirect Costs 1. Condition 1: each department incurs different types and amounts of manufacturing overhead (MOH) 2. Condition 2: each product, or job, uses the departments to a different extent a. Departmental overhead rates 3. Exhibit 4-4: Machining and assembly departments’ manufacturing overhead 4. Exhibit 4-5: Circumstances favoring departmental overhead rates E. Four Basic Steps to Computing and Using Departmental Overhead Rates 1. Exhibit 4-6: Four Basic Steps for Allocating Manufacturing Overhead a. Estimate the total manufacturing overhead costs that will be incurred in each department in the coming year b. Select an allocation base for each department and estimate the total amount that will be used during the year c. Calculate the departmental overhead rates using the information estimated in Steps 1 and 2 i. Departmental overhead rate equals total estimated departmental overhead cost pool divided by total estimated amount of the departmental allocations base ii. Exhibit 4-7: Steps to calculating the departmental overhead rates d. Allocate manufacturing overhead from each department to the individual jobs i. MOH allocated to a job equals departmental overhead rate times actual amount of departmental allocation base used by job ii. Exhibit 4-8: Allocating manufacturing overhead to one elliptical using departmental overhead rates iii. Exhibit 4-9: Allocating manufacturing overhead to one treadmill using departmental overhead rates 2. Exhibit 4-10: Departmental cost allocation system 3. Had the Plantwide Overhead Rate Been Distorting Product Costs a. Exhibit 4-11: Cost Distortion Caused by Plantwide Overhead Rate

II.

Using Activity-Based Costing (ABC) to Allocate Indirect Costs A. Four Basic Steps to Computing and Using Activity Cost Allocation Rates 1. Identify primary activities and estimate the total manufacturing overhead costs associated with each activity a. Exhibit 4-12: Primary Activities Identified in the Manufacturing Plant b. Exhibit 4-13: Activity Cost Pools 2. Select an allocation base for each activity and estimate the total amount that will be used during the year a. Exhibit 4-14: Activity Allocation Bases and Total Estimated Amount of Each 3. Calculate the activity cost allocation rates using the information estimated in Steps 1 and 2 4-3 .

Managerial Accounting 6e Instructor’s Resource Manual

a. Activity cost allocation rate equals total estimated activity cost pool divided by total estimated activity allocation base b. Exhibit 4-15: Computing Activity Cost Allocation Rates 4. The company allocates some manufacturing overhead from each activity to the individual jobs that use the activities. a. MOH allocated to a job equal activity cost allocation rate times actual amount of activity allocation base used by job b. Exhibit 4-16: Allocating Manufacturing Overhead to Job 101 (One Elliptical) Using ABC c. Exhibit 4-17: Allocating Manufacturing Overhead to Job 102 (One Treadmill) Using ABC B. Exhibit 4-18: Illustration of the Company’s ABC System C. One Last Look at Cost Distortion: Comparing the Three Allocation Systems 1. Exhibit 4-19: Comparing the Three Cost Allocation Systems 2. ABC is generally thought to be more accurate because ABC takes into account a. The specific resources each product uses b. The extent to which they use these resources 3. If you consider all the products a company produces during the period, the total amount by which some products are overcosted will equal the total amount by which other products are undercosted D. The Cost Hierarchy: A Useful Guide to Setting Up Activity Cost Pools 1. Exhibit 4-20: The Cost Hierarchy a. Unit-level activities b. Batch-level activities c. Product-level activities d. Facility-level activities E. Refined costing systems are almost always a necessity for companies moving toward environmental sustainability III.

How Do Managers Use the Refined Costing Information to Improve Operations A. Activity-Based Management (ABM) 1. Pricing and Product Mix Decisions a. Exhibit 4-21: Typical Result of ABC Costing 2. Cutting Costs a. Value-added activities b. Non-value-added activities (waste activities) 3. Routine Planning and Control Decisions 4. Using ABC Across the Value Chain in Service Aand Merchandising Companies B. Passing the Cost-Benefit Test 1. Circumstances Favoring ABC/ABM systems a. Operating in a competitive market b. Risk of cost distortion is high c. Cost of adopting ABC/ABM systems is generally lower when the information systems and technology are already in place 2. Signs That the Old System May Be Distorting Costs a. Managers don’t understand costs and profits b. The cost system is outdated

4-4 .

Chapter 4

Activity-Based Costing, Lean Operations, and the Costs of Quality

IV.

What Is Lean Thinking?

A. Lean thinking 1. Kaizen 2. Customer response time B. The Eight Wastes of Traditional Operations 1. DOWNTIME (defects, overproduction, waiting, not utilizing people to their full potential, transportation, inventory, movement, excess processing) 2. Exhibit 4-22: The Eight Wastes 3. Exhibit 4-23: Sequence of Operations for Drill Bit Production C. Characteristics of Lean Operations 1. Just-in-Time (JIT) inventory philosophy a. Exhibit 4-24: Traditional System Versus JIT System 2. Value stream mapping 3. Production occurs in self-contained cells a. Exhibit 4-25: Equipment Arrangement in Traditional and Lean Production Systems 4. Employee empowerment: Broad roles and the use of teams 5. 5S workplace organization a. Sort, set in order, shine, standardize, and sustain 6. Continuous flow a. Talk time 7. Pull system 8. Shorter manufacturing cycle times 9. Smaller batches a. Exhibit 4-26: Manufacturing Cycle Time with a Batch Size of 10 b. Exhibit 4-27: Manufacturing Cycle Time with a Batch Size of 1 10. Reduced setup times 11. Point-of-use storage (POUS) 12. Emphasis on quality a. Quality at the source b. Six Sigma 13. Supply-chain management 14. Backflush costing 15. Are there any drawbacks to a lean production system?

D. Lean Operations in Service and Merchandising Companies E. Sustainability and Lean Thinking

V.

How Do Managers Improve Quality?

A. Total quality management B. Costs of Quality 1. Prevention costs 2. Appraisal costs 3. Internal failure costs 4. External failure costs C. Relationship Among Costs 1. Conformance costs 2. Nonconformance costs 3. Exhibit 4-28: Four types of quality costs 4. Cost of Quality at Service and Merchandising Companies D. Using Costs of Quality Reports to Aid Decisions 1. Exhibit 4-29: Global Fitness’s Costs of Quality Report 2. Exhibit 4-30: Cost-Benefit Analysis of Global Fitness’s Proposed Quality Program 4-5 .

Managerial Accounting 6e Instructor’s Resource Manual

VI.

How Do Managers Use Data Analytics to Analyze Cost Pools and Drivers A. Correlation 1. Correlation coefficient 2. Exhibit 4-31: Correlation between materials handling costs and potential allocation bases B. How to Use the Excel Correlation Function (CORREL)

4-6 .

Chapter 4

Activity-Based Costing, Lean Operations, and the Costs of Quality

Key Topics Start by reviewing the traditional method of allocating manufacturing overhead costs (using a plantwide allocation rate). The student will better understand departmental overhead rates and activity-based costing (ABC) when it is shown that these refined costing systems are extensions of the traditional method. All methods of cost allocation essentially use the same four basic steps but use different cost pools and different cost allocation bases.

Create a discussion among students about cost allocation. What if two students wanted to order pizza and two other students weren’t interested? But, when the pizza is delivered, the other two students change their minds. Is it fair to split the price among the four students? What if these students always say no when ordering the pizza but always say yes when it’s delivered? How would the price of a pizza be split if only three students were interested and one of those students only wanted one slice? Is there always a fair way to split the costs? Does splitting the costs based on the slices eaten make sense?

Explain that because competition is greater today than in the past, managers need more accurate estimates of product costs than in the past. Managers need this information to set prices and to identify the most profitable products. ABC can provide this information more accurately. Refined costing systems are also important for companies moving toward environmental sustainability because jobs and products can drive environmental overhead costs differently.

The primary difference between traditional costing and ABC systems is that ABC systems strive to use a cost driver that causes a specific cost. This system leads to a better allocation of costs based on a cause and effect relationship. ABC does this by separately estimating the indirect costs associated with each activity and then allocating those costs based on the volume of activity that caused them. Note that the refined costing system is used when the benefits of the system outweigh the costs of obtaining the additional cost information.

Students are often confused when the focus of a cost goes from company level to the department level.

Students look for a formula to do the same thing every time and varying how the company allocates the costs may be difficult. Students need to understand that the allocation process is the same and that not all costs are broken down to their smallest component.

Use E4-35B Compute activity rates and apply to jobs to illustrate the process of computing cost allocations by activity and applying them to jobs.

It is important for companies to eliminate waste to be competitive in today’s operating environment.

Discuss the eight wastes typically found in traditional organizations using the acronym DOWNTIME. Have students provide examples of each type of waste. Ask students what costs are incurred in maintaining large inventories. Explain how adoption of a just-in-time (JIT) inventory philosophy can aid in achieving lean operations.

In teams or as partners, have students complete E4-42B Differentiate between traditional and lean production. Call on students to give the answers.

Make it clear to students that the goal of total quality management (TQM) is to provide customers with superior products and services. This is accomplished by each business function in the value chain examining its own activities, improving quality, and eliminating defects and waste.

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Managerial Accounting 6e Instructor’s Resource Manual

Students can better understand the benefits of TQM if they understand that the costs for getting good quality and the benefits of good quality are hard to measure. Explain to the students that the biggest benefit of TQM is the reduction of unhappy customers who would never return. Unhappy customers do not appear directly in the accounting records, so TQM programs emphasize nonfinancial measures such as the number of customer complaints.

Have students complete E44B Classify costs and make a quality-initiative decision in groups.

Discuss why it is important for the cost driver chosen to correlate to the activity cost pools. Ask students what would likely be true about the data used for planning and decision making if a strong correlation does not exist between the activity cost pool and the chosen cost driver. Divide students into groups and have them complete E4-45B Analyze activity cost pools and cost drivers using data analytics tools.

4-8 .

Chapter 4

Activity-Based Costing, Lean Operations, and the Costs of Quality

Chapter 4: Student Summary Handout I.

Refining cost allocation systems A. Cost distortion with simple cost allocation systems B. Review: Using a plantwide overhead rate to allocate indirect costs C. Using departmental overhead rates to allocate indirect costs D. Conditions warranting refinement of cost allocation system by department 1. Condition 1: each department incurs different types and amounts of manufacturing overhead (MOH) 2. Condition 2: each product, or job, uses the departments to a different extent a. departmental overhead rates E. Four basic steps to computing and using departmental overhead rates 1. Step 1: Estimate the total manufacturing overhead costs that will be incurred in each department in the coming year 2. Step 2: Select an allocation base for each department and estimate the total amount that will be used during the year 3. Step 3: Calculate the departmental overhead rates using the information estimated in Steps 1 and 2 a. Departmental overhead rate equals total estimated departmental overhead cost pool divided by total estimated amount of the departmental allocations base 4. Step 4: Allocate manufacturing overhead from each department to the individual jobs a. MOH allocated to a job equals departmental overhead rate times actual amount of departmental allocation base used by job 5. Analyzing MOH using departmental overhead rates can uncover that the plantwide overhead rate has been distorting product costs F. Using activity-based costing (ABC) to allocate indirect costs 1. Activity-based costing 2. Four basic steps to computing and using activity cost allocation rates a. Identify primary activities and estimate the total manufacturing overhead costs associated with each activity b. Select an allocation base for each activity and estimate the total amount that will be used during the year c. Calculate the activity cost allocation rates using the information estimated in Steps 1 and 2 i. Activity cost allocation rate equals total estimated activity cost pool divided by total estimated activity allocation base d. The company allocates some manufacturing overhead from each activity to the individual jobs that use the activities. i. MOH allocated to a job equal activity cost allocation rate times actual amount of activity allocation base used by job 3. Cost distortion: Comparing the three allocation systems a. ABC is generally thought to be more accurate because ABC takes into account i. The specific resources each product uses ii. The extent to which they use these resources b. If you consider all the products a company produces during the period, the total amount by which some products are overcosted will equal the total amount by which other products are undercosted 4. The cost hierarchy: A useful guide to setting up activity cost pools a. Unit-level activities b. Batch-level activities 4-9 .

Managerial Accounting 6e Instructor’s Resource Manual

c. Product-level activities d. Facility-level activities 5. Refined costing systems are almost always a necessity for companies moving towards environmental sustainability II.

Using refined costing information to improve operations A. Activity-based management (ABM) 1. Pricing and product mix decisions a. Typical result of ABC costing 2. Cutting costs a. Value-added activities b. Non-value-added activities (waste activities) 3. Routine planning and control decisions 4. Using ABC across the value chain in service and merchandising companies B. Passing the cost-benefit test 1. Circumstances favoring ABC/ABM systems a. Operating in a competitive market b. Risk of cost distortion is high 2. Cost of adopting ABC/ABM systems is generally lower when the information systems and technology are already in place 3. Signs that the old system may be distorting costs a. Managers don’t understand costs and profits b. The cost system is outdated

III.

Lean Thinking A. Kaizen B. Customer response time C. The eight wastes of traditional operations—DOWNTIME (defects, overproduction, waiting, not utilizing people to their full potential, transportation, inventory, movement, excess processing) D. Characteristics of lean operations 1. Just-in-Time (JIT) inventory philosophy 2. Value stream mapping 3. Production occurs in self-contained cells 4. Employee empowerment: Broad roles and the use of teams 5. 5S workplace organization a. Sort, set in order, shine, standardize, and sustain 6. Continuous flow a. Talk time 7. Pull system 8. Shorter manufacturing cycle times 9. Smaller batch 10. Reduced setup times 11. Point-of-use storage (POUS) 12. Emphasis on quality a. Quality at the source b. Six Sigma 13. Supply-chain management 14. Backflush costing 15. Drawbacks to a lean production system E. Lean operations in service and merchandising companies 4-10 .

Chapter 4

Activity-Based Costing, Lean Operations, and the Costs of Quality

F. Sustainability and lean thinking IV.

Improving quality A. Total quality management B. Costs of quality 1. Prevention costs 2. Appraisal costs 3. Internal failure costs 4. External failure costs C. Relationship among costs 1. Conformance costs 2. Nonconformance costs 3. Four types of quality costs 4. Cost of quality at service and merchandising companies D. Using costs of quality reports to aid decisions

V.

Using data analytics to analyze cost pools and drivers A. Correlation 1. Correlation coefficient B. Excel Correlation Function (CORREL)

MyAccountingLab.com algorithmic homework assignments: E4-21A, E4-25A, E4-27A, E4-29A, E4-31A.

4-11 .

Managerial Accounting 6e Instructor’s Resource Manual

CHAPTER 4: ASSIGNMENT GRID

Assignment S4-1 S4-2 S4-3 S4-4 S4-5 S4-6 S4-7 S4-8 S4-9 S4-10 S4-11 S4-12 S4-13 S4-14 S4-15 S4-16 S4-17 S4-18 S4-19 S4-20

E4-21A E4-22A E4-23A E4-24A E4-25A E4-26A

Learning Objective(s)

Topic(s)

Short Exercises Understand key terms 1, 2, 3, 4, & 5 Use departmental overhead rates to 1 allocate manufacturing overhead Compute departmental overhead rates 1 Compute activity cost allocation rates 2 Continuation of S4-4: Use ABC to 2 allocate overhead Calculate a job cost using ABC 2 Classifying costs within the cost hierarchy 2 Classifying costs within the cost 2 hierarchy Determine the usefulness of refined 3 costing systems in various situations Determine the type of cost pool and 2&3 utility of ABC/ABM Identifying costs as value-added or 3 non-valued-added Identify lean production characteristics 4 Identify the DOWNTIME activities at 4 a manufacturer Identify waste activities in an office 4 Classifying costs of quality 5 Quality initiative decision 5 Assess the impact of a quality initiative 5 Identify ethical standards violated 1, 2, 3, 4, & 5 Analyze activity cost pools and cost 6 drivers using data analytics tools Analyze activity cost pools and cost 6 drivers using data analytics tools Exercises (Group A) Compare traditional and departmental 1 cost allocations Compute activity rates and apply to 2 jobs Apply activity cost allocation rates 2 Using ABC to bill clients at a service 2 firm Compare traditional and ABC 2 allocations at a pharmacy Compare traditional and ABC 2 allocations on a job 4-12 .

Estimated Time in Minutes

Level of Difficulty

10 5

Easy Easy

10 5 10

Easy Easy Easy

15

Easy

5 5

Easy Easy

5

Easy

10

Easy

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Easy Easy

10 5 10 10 15 10

Easy Easy Easy Easy Easy Easy

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Chapter 4

Assignment E4-27A E4-28A E4-29A E4-30A E4-31A E4-32A E4-33A

E4-34B E4-35B E4-36B E4-37B E4-38B E4-39B E4-40B E4-41B E4-42B E4-43B E4-44B E4-45A E4-46A

P4-47A P4-48A P4-49A P4-50A P4-51A

Activity-Based Costing, Lean Operations, and the Costs of Quality

Learning Objective(s)

Topic(s)

Use ABC to allocate manufacturing 2 overhead Continuation of E4-27A: Determine 2&3 product profitability Differentiate between traditional and lean operations 4 Classify costs and make a qualityinitiative decision 5 Prepare a Cost of Quality report 5 Analyze activity cost pools and cost 6 drivers using data analytics tools Analyze activity cost pools and cost 6 drivers using data analytics tools Exercises (Group B) Compare traditional and departmental 1 cost allocations Compute activity rates and apply to 2 jobs Apply activity cost allocation rates 2 Using ABC to bill clients at a service 2 firm Compare traditional and ABC cost 2 allocations at a pharmacy Compare traditional and ABC 2 allocations on a job Use ABC to allocate manufacturing 2 overhead Continuation of E4-40B: Determine 2&3 product profitability Differentiate between traditional and lean production 4 Classify costs and make a qualityinitiative decision 5 Prepare a Cost of Quality report 5 Analyze activity cost pools and cost 6 drivers using data analytics tools Analyze activity cost pools and cost 6 drivers using data analytics tools Problems (Group A) Implementation and analysis of 1 departmental rates Use ABC to compute full product costs 2 Comprehensive ABC implementation 2&3 Using ABC in conjunction with quality decisions 2&5 Comprehensive ABC 2&3 4-13 .

Estimated Time in Minutes

Level of Difficulty

15

Medium

10

Easy

10

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20

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Managerial Accounting 6e Instructor’s Resource Manual

Assignment P4-52B P4-53B P4-54B P4-55B P4-56B C4-57

A4-58 A4-59 A4-60 A4-61 A4-62

Learning Objective(s)

Topic(s)

Problems (Group B) Implementation and analysis of 1 departmental rates Use ABC to compute full product costs 2 Comprehensive ABC implementation 2&3 Using ABC in conjunction with quality decisions 2&5 Comprehensive ABC 2&3 Serial Case Calculate and interpret activity-cost 2 pool rates Critical Thinking Discussion questions All ABC in real companies All Value-added versus non-value-added at All a restaurant Ethics involved with ABC and 2&3 hazardous waste costs Lean production costs and 4&5 sustainability

4-14 .

Estimated Time in Minutes

Level of Difficulty

30

Difficult

30 25

Medium Medium

20 30

Medium Medium

20

Medium

60 30–60 30–60

Medium Medium Medium

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Medium

60

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Chapter 4

Activity-Based Costing, Lean Operations, and the Costs of Quality

Name____________________________________ Date_________________ Section_______________

CHAPTER 4 TEN-MINUTE QUIZ Circle the letter of the best response: 1.

Which of the following circumstances does NOT favor departmental overhead rates?

A. Each department incurs different types and amounts of manufacturing overhead.

B. All departments incur approximately equal types and amounts of manufacturing overhead.

C. Each product or job uses the departments to a different extent.

D. All of the above favor departmental overhead rates.

2.

Activity-based costing helps to A. reduce cost distortion.

B. develop departmental overhead rates.

C. allocate direct costs.

D. develop a plantwide overhead rate.

3.

The cost to set up a machine for a specific production run is an example of which type of activity?

A. Unit-level B. Batch-level C. Product-level D. Facility-level

4.

Which of the following refers to using refined cost information to make decisions that increase profits while satisfying customers’ needs?

A. Traditional costing B. Activity-based costing C. Activity-based management D. Departmental costing

5.

Place the following steps in developing an ABC system in the correct order.

1.

2.

3.

4.

A. B. C. D.

Allocate MOH from each activity to the individual jobs that use the activities.

Identify the primary activities and estimate the total MOH associated with each activity.

Identify the allocation base for each activity’s costs and estimate the total amount to be used for the year.

Calculate an activity cost allocation rate for each activity.

1, 2, 3, 4 2, 1, 4, 3 2, 4, 3, 1 2, 3, 4, 1

4-15 .

Managerial Accounting 6e Instructor’s Resource Manual

Use the following information for questions 6 and 7.

Gale Corporation manufactures windsocks. The business recently decided to adopt an ABC system. The following activities have been identified:

Activity Materials handling Machining Packaging

Cost Driver Chosen As Allocation Base Number of parts Machine hours Number of finished units

Conversion Cost per Unit of Allocation Base $1.00 60.00 2.00

Each windsock requires three parts and spends five minutes in the machining department. The total cost of direct materials and direct labor is $3.50 per windsock. Gale produces 20,000 windsocks each year and sells them at 140% of cost.

6.

The total cost of producing the 20,000 windsocks is A. $160,000.

B. $230,000.

C. $270,000.

D. $1,260,000.

7.

The selling price per windsock is A. $13.50.

B. $18.90.

C. $16.10.

D. $88.20.

8.

The goal of total quality management (TQM) is to A. eliminate waste from operations.

B. determine the cost driver behind each activity.

C. identify non-value-added activities.

D. provide customers with superior products and services.

9.

The primary objective of lean operations is to A. focus on creating value for the customer by eliminating waste.

B. provide customers with superior products and services.

C. make the company’s processes as efficient and effective as possible.

D. use activity-based costing information to make decisions that increase profits while satisfying customer needs.

10.

What does the CORREL function in Excel tell managers?

A. The degree of correlation between two variables B. How to reduce waste of transportation and movement C. The costs incurred to avoid producing poor-quality goods D. How to increase profits while satisfying customers’ needs

4-16 .

Chapter 4

Activity-Based Costing, Lean Operations, and the Costs of Quality

Answer Key to Chapter 4 Ten-Minute Quiz 1. B 2. A 3. B 4. C 5. D

6. C 7. B 8. D 9. A 10. A

4-17 .

Chapter 5 Process Costing Chapter 5 begins with a comparison between job order costing and process costing before discussing in detail how a process costing system works. Process costing is generally used when a company produces large quantities of identical goods. Companies first assign manufacturing costs to each production department and then average those costs over the units that flow through the department during the period. Process costing inventory flow has two common assumptions: the weighted-average method and the first-in, first-out (FIFO) method. This text uses the weighted-average method because it is simpler and the differences between the two methods are usually not material.

Process costing becomes more complicated when beginning and ending Work in Process (WIP) inventories exist. All units, whether complete or in process, are converted to equivalent units based on the amount of work performed on them by the end of the period. The equivalent unit calculation combines partially and fully completed units to express the amount of work done during a period in terms of fully completed units of output. Once the equivalent units have been computed, the company is able to calculate the cost per equivalent unit for both direct materials and conversion costs. These average costs are then used to value the units that were completed as well as those that are still in process at the end of the period.

Five steps are used in the process costing procedure: Step 1: Summarize the flow of physical units of output.

Step 2: Calculate output in terms of equivalent units.

Step 3: Summarize total costs to account for.

Step 4: Calculate the cost per equivalent unit.

Step 5: Assign total costs to units completed and to units in ending Work in Process inventory.

The first half of the chapter shows students how to use the process costing procedure in the first production process. Journal entries are also illustrated, showing the cost flow through the accounts.

The first set of Decision Guidelines illustrates some key decisions that managers must make in setting up a process costing system. The first Summary Problem has students complete the five steps involved in the process costing procedure for the first production department.

The second half of the chapter discusses how to use the process costing procedure in a second or later department. Journal entries are also illustrated showing the cost flow through the accounts.

The chapter ends with a discussion of how managers can use PivotTables for data analytics in a process costing environment.

The second set of Decision Guidelines reviews decisions that arise in a second (or later) process. The second Summary Problem is a continuation of the first problem giving the students practice in completing the five-step process costing procedure for the second production department. By combining calculations for the two departments, students are able to also determine the cost of making one completed unit of product.

5-1 .

Managerial Accounting 6e Instructor’s Resource Manual

Learning Objectives After studying Chapter 5, your students should be able to: 1. Distinguish between the flow of costs in process costing and job costing 2. Calculate equivalent units 3. Use process costing in the first production department 4. Prepare journal entries for a process costing system 5. Use process costing in a second or later production department 6. Analyze process costing information using data analytic tools

5-2 .

Chapter 5

Process Costing

Teaching Outline I.

Process Costing: An Overview A. Two Basic Costing Systems: Job Costing and Process Costing B. How Does the Flow of Costs Differ Between Job and Process Costing?

1. Exhibit 5-1: Flow of Costs in Job Costing (Panel A) and Process Costing (Panel B) 2. Exhibit 5-2: Flow of Costs in Production of Jelly Beans

II.

What Are the Building Blocks of Process Costing?

A. Conversion Costs B. Equivalent Units 1. Exhibit 5-3: Callaway Production Plant Time Line C. Inventory Flow Assumptions 1. First-in, first-out 2. Weighted average

III.

How Does Process Costing Work in the First Processing Department?

A. Exhibit 5-4: SeaView’s Production Process B. Step 1: Summarize the Flow of Physical Units (Exhibit 5-5) 1. Total physical units to account for should always equal total physical units accounted for.

C. Step 2: Calculate Output in Terms of Equivalent Units (Exhibit 5-5) 1. Exhibit 5-6: SeaView’s shaping department time line D. Step 3: Summarize Total Costs toAaccount For (Exhibit 5-7) 1. Total costs to account for must always equal total costs accounted for in Step 5.

2. The total costs to account for represents the total costs in the WIP account.

E. Step 4: Calculate the Cost per Equivalent Unit (Exhibit 5-8) 1. Cost per equivalent unit is the average cost of making one unit in the department.

F. Step 5: Assign Total Costs to Units Completed and to Units in Ending Work in Process Inventory (Exhibit 5-9) 1. Cost assigned to units completed and transferred out moves out of the department along with the units that were transferred out.

2. Total costs accounted for must always equal total costs to account for in Step 3.

G. Average Unit Costs H. Sustainability and Process Costing 1. Waste audits

IV.

What Journal Entries Are Needed in a Process Costing System?

A. Direct materials used 1. Debit Work in Process inventory and credit Raw Materials inventory B. Direct labor used 1. Debit Work in Process inventory and credit Wages Payable C. Allocate manufacturing overhead 1. Debit Work in Process inventory and credit Manufacturing Overhead D. Transfer completed units 1. Debit Work in Process inventory for the next department and credit Work in Process inventory for the current department 2. Amount used in the journal entry is calculated in Step 5 of the process costing procedure 5-3 .

Managerial Accounting 6e Instructor’s Resource Manual

V.

How Does Process Costing Work in a Second or Later Processing Department?

A. Process Costing in SeaView’s Insertion Department (Exhibit 5-10 and Exhibit 5-11) B. Steps 1 and 2: Summarize the Flow of Physical Units and Calculate Output in Terms of Equivalent Units (Exhibit 5-12 Through Exhibit 5-14) 1. Add a new column in Steps 2, 3, 4, and 5 to account for transferred-in units and costs 2. All units are 100% completed with respect to transferred-in work and costs.

C. Steps 3 and 4: Summarize Total Costs to Account for and Calculate the Cost per Equivalent Unit D. Step 5: Assign Total Costs to Units Completed and to Units in Ending Work in Process Inventory E. Determining Unit Costs and Gross Profit F. Production Cost Reports 1. Exhibit 5-15: Production cost report G. Journal Entries in a Second Processing Department 1. Direct Materials Used a. Debit Work in Process inventory and credit Raw Materials inventory 2. Direct Labor Used a. Debit Work in Process inventory and credit Wages Payable 3. Allocate Manufacturing Overhead a. Debit Work in Process inventory and credit Manufacturing Overhead 4. Transfer Completed Units a. Debit Finished Goods and credit Work in Process for the current department (entry assumes that this is the final production department)

VI.

How Can Managers Use Data Analytics in a Process Costing Environment A. Exhibit 5-16: Open Orders Sorted From Largest to Smallest Projected Gross Profit B. Exhibit 5-17: Pivot Table of Gross Profit on Open Orders by Packaging Option and Customer C. How to Create and Sort a PivotTable

5-4 .

Chapter 5

Process Costing

Key Topics Students need to understand that the goal of both process costing and job order costing is the same: to provide product cost information to help managers make decisions. The nature of the production process determines which product costing system is used.

Students sometimes have a difficult time understanding the concept of equivalent units. Students may be able to work through all the computations but not understand why. Emphasize that equivalent units are necessary because of the presence of partially completed units in Work in Process at the end of a period.

Equivalent units express the amount of work done during a period in terms of fully completed units. This allows accountants to fairly assign costs to complete and partially complete products.

Students get confused when using different equivalent units to compute the direct materials cost of ending inventory versus the conversion cost of ending inventory. Using E5-46B Complete the production cost report in first department, explain to students that direct materials are usually introduced at a single point in the production process, whereas conversion costs (labor and manufacturing overhead) are usually incurred evenly throughout the process.

Emphasize that the first two steps in process costing deal with units only. In Steps 3 and 4, beginning inventory costs are combined with the current period’s costs and divided by equivalent units to arrive at a weighted-average unit cost. Step 5 assigns costs to units in ending inventory and units completed and transferred out during the period. Use E5-44B Complete five-step procedure in first department to illustrate the process costing calculations.

The journal entries used in a process costing system are very similar to those used in a job costing system.

The basic difference is that the manufacturing costs (direct materials, direct labor, and manufacturing overhead) are assigned to processing departments rather than jobs. Each processing department has a separate Work in Process account. Work through E5-49B Record journal entries to illustrate the journal entries required in a process costing system.

Have students work in teams or with a partner to complete E5-46B Complete the production cost report in first department and E5-47B Prepare journal entries for first production department.

Have different teams record a portion of the solution on the board to share with the class.

Discuss with students the changes made to the process costing procedures in a second or later department.

Using E5-54B Complete five-step procedure in second department, discuss how a second column in added in Steps 2, 3, 4, and 5 to account for the transferred in units and costs. Ask students how they would calculate the unit gross profit given a sales price.

Discuss as a class what unique challenges manufacturers in a process costing environment face when using data analytics. Specifically, discuss that even though the companies produce mass quantities of identical products, the products may be packaged in differing quantities, which will result in varying profits between packaging options. Divide students into groups and have them complete S5-23.

5-5 .

Managerial Accounting 6e Instructor’s Resource Manual

Chapter 5: Student Summary Handout I.

Two basic costing systems A. Job costing B. Process costing C. Difference in flow of costs differ between job and process costing

II.

Building blocks of process costing A. Conversion costs B. Equivalent units C. Inventory flow assumptions 1. First-in, first-out 2. Weighted average

III.

Process costing in the first processing department A. The five-step process costing procedure 1. Step 1: Summarize the flow of physical units a. Total physical units to account for should always equal total physical units accounted for.

2. Step 2: Calculate output in terms of equivalent units 3. Step 3: Summarize total costs to account for a. Total costs to account for must always equal total costs accounted for in Step 5. b. The total costs to account for represents the total costs in the WIP account.

4. Step 4: Calculate the cost per equivalent unit a. Cost per equivalent unit is the average cost of making one unit in the department.

5. Step 5: Assign total costs to units completed and to units in ending Work in Process inventory a. Cost assigned to units completed and transferred out moves out of the department along with the units that were transferred out. b. Total costs accounted for must always equal total costs to account for in Step 3.

B. Compute average unit costs C. Sustainability and process costing 1. Waste audits

IV.

Journal entries for the first department in a process costing system A. Direct materials used 1. Debit Work in Process Inventory and credit Raw Materials Inventory B. Direct labor used 1. Debit Work in Process Inventory and credit Wages Payable C. Allocate manufacturing overhead 1. Debit Work in Process Inventory and credit Manufacturing Overhead D. Transfer completed units 1. Debit Work in Process Inventory for the next department and credit Work in Process Inventory for the current department 2. Amount used in the journal entry is calculated in Step 5 of the process costing procedure

V.

Use of process costing in a second or later processing department A. Transferred-in costs B. Process costing in SeaView’s insertion department C. The five-step process costing procedure 5-6 .

Chapter 5

Process Costing

1. Add a new column in Steps 2, 3, 4, and 5 to account for transferred-in units and costs a. All units are 100% completed with respect to transferred-in work and costs.

D. Determining unit costs and gross profit E. Production cost reports F. Journal entries in a second or later production department 1. Direct materials used a. Debit Work in Process Inventory and credit Raw Materials Inventory 2. Direct labor used a. Debit Work in Process Inventory and credit Wages Payable 3. Allocate manufacturing overhead a. Debit Work in Process Inventory and credit Manufacturing Overhead 4. Transfer completed units a. Debit Finished Goods and credit Work in Process for the current department (entry assumes that this is the final production department) VI.

Use of data analytics in a process costing environment A. How to create and sort a PivotTable

MyAccountingLab.com algorithmic homework assignments: E5-26A, E5-27A, E5-31A, E5-34A, E5-36A.

5-7 .

Managerial Accounting 6e Instructor’s Resource Manual

CHAPTER 5: ASSIGNMENT GRID Assignment

S5-1 S5-2 S5-3 S5-4 S5-5 S5-6 S5-7 S5-8 S5-9 S5-10 S5-11 S5-12 S5-13 S5-14 S5-15

S5-16 S5-17 S5-18 S5-19

S5-20

Topic(s)

Short Exercises Compare job costing and process costing Flow of costs through Work in Process Inventory Compare job costing and process costing Determine the physical flow of units (process costing Step 1) Compute equivalent units (process costing Step 2) Compute equivalent units (process costing Step 2) Summarize total costs to account for (process costing Step 3) Compute the cost per equivalent unit (process costing Step 4) Assign costs (process costing Step 5) Flow of costs through Work in Process Inventory Assign total costs in a second processing department Find unit cost and gross profit on a final product Compute cost per liter Summarize physical flow and compute equivalent units Continuation of S5-14: Summarize total costs to account for and compute cost per equivalent unit Continuation of S5-14 and S5-15: Assign costs Continuation of S5-16: Record journal entry and post to T-account Compute equivalent units in second department Continuation of S5-18: Compute cost per equivalent unit in second department Continuation of S5-18 and S5-19: assign costs in second department

5-8 .

Learning Objective (s)

Estimated Time in Minutes

Level of Difficulty

1

5

Easy

1

5

Easy

1

5

Easy

3

5

Easy

2&3

5

Easy

2&3

10

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3

5

Easy

3

5

Easy

3 4

10 10

Medium Easy

5

15

Medium

5

10

Medium

1 2

5 10

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3

10

Easy

3

10

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4

10

Easy

2&5

10

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10

Easy

Chapter 5

Assignment

S5-21

S5-22 S5-23

S5-24

E5-25A

E5-26A

E5-27A

E5-28A E5-29A E5-30A

E5-31A

E5-32A

E5-33A E5-34A E5-35A E5-36A E5-37A

Topic(s)

Learning Objective(s)

Continuation of S5-20: 4 Record journal entry and post to T-account Identify ethical standards 1, 2, 3, 4, & 5 violated Analyze process costing 6 information using data analytics tools Analyze process costing 6 information using data analytics tools Exercises (Group A) Analyze flow of costs 1 through inventory T-accounts Summarize physical units 3 and compute equivalent units (process costing Steps 1 and 2) Compute equivalent units in 2&5 a second processing department Complete five-step 3 procedure in first department Continuation of E5-28A: 4 Journal entries Complete the production 3 cost report in the first department Prepare journal entries for 4 the first production department Analyze costs and gross 5 profit in a process costing environment Record journal entries 4 Compute equivalent units 2, 3, & 4 and assign costs Complete five-step 5 procedure in first department Sustainability and process 3 costing Complete five-step 3&4 procedure and journalize result

5-9 .

Process Costing

Estimated Time in Minutes 5

Level of Difficulty

15

Easy

15

Easy

15

Easy

10

Easy

10

Easy

10

Medium

15

Medium

10

Medium

15

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10 10

Easy Easy

20

Medium

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Easy

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Managerial Accounting 6e Instructor’s Resource Manual

Assignment

E5-38A

E5-39A

E5-40A

E5-41B

E5-42B

E5-43B

E5-44B E5-45B E5-46B

E5-47B E5-48B

E5-49B E5-50B E5-51B E5-52B E5-53B

E5-54B

Topic(s)

Learning Objective(s)

Complete five-step 5 procedure in second department Analyze process costing 6 information using data analytic tools Analyze process costing 6 information using data analytic tools Exercises (Group B) Analyze flow of costs 1 through inventory T-accounts Summarize physical units 3 and compute equivalent units (process costing Steps 1 and 2) Compute equivalent units in 2&5 a second processing department Complete five-step 3 procedure in first department Continuation of E5-44B: 4 Journal entries Complete the production 3 cost report in first department Prepare journal entries for 4 first production department Analyze costs and gross 5 profit in process costing environment Record journal entries 4 Compute equivalent units 2, 3, & 4 and assign costs Complete five-step 3 procedure in first department Sustainability and process 3 costing Complete five-step 3&4 procedure and journalize result Complete five-step 5 procedure in second department

5-10 .

Estimated Time in Minutes 15

Level of Difficulty

15

Medium

15

Medium

10

Easy

10

Easy

10

Medium

15

Medium

10

Medium

15

Medium

10

Medium

15

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10 20

Easy Medium

15

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10

Easy

20

Medium

15

Medium

Medium

Chapter 5

E5-55B

E5-56B

P5-57A P5-58A P5-59A P5-60A P5-61A P5-62B P5-63B P5-64B P5-65B P5-66B C5-67

A5-68 A5-69 A5-70 A5-71

Exercises (Group B) Analyze process costing 6 information using data analytic tools Analyze process costing 6 information using data analytic tools Problems (Group A) Process costing in a single 1, 2, & 3 processing department Process costing in a first 1, 3, & 4 department Five-step process: Materials 1, 2, & 3 added at different points Prepare a production cost 4&5 report and journal entries Cost per unit and gross profit 5 Problems (Group B) Process costing in a single 1, 2, & 3 processing department Process costing in first 1, 3, & 4 department Five-step process: Materials 1, 2, & 3 added at different points Prepare a production cost 4&5 report and journal entries Cost per unit and gross profit 5 Serial Case Calculate and interpret 1&2 activity cost pool rates Critical Thinking Discussion questions All Process costing in real companies Ethics and physical 1, 2, 3, 4, & 5 inventory counts Process costing and hybrid 1, 2, 3, 4, & 5 costing issues

5-11 .

Process Costing

15

Medium

15

Medium

15

Medium

15

Medium

20

Medium

20

Difficult

25

Difficult

15

Medium

15

Medium

20

Medium

20

Difficult

25

Difficult

10

Medium

60 30–60

Medium Medium

30–60

Medium

30–60

Medium

Managerial Accounting 6e Instructor’s Resource Manual

Name____________________________________ Date_________________ Section_______________

CHAPTER 5 TEN-MINUTE QUIZ Circle the letter of the best response.

1.

Which of the following would use process costing?

A. Accounting firm B. Custom furniture manufacturer C. Crayon manufacturer D. Airplane manufacturer

2.

Recording the transfer of the cost of items completed in the Forming Department to the Packaging Department would include a A. credit to Work in Process Inventory—Packaging.

B. debit to Work in Process Inventory—Forming.

C. debit to Finished Goods Inventory.

D. debit to Work in Process Inventory—Packaging.

3.

Conversion costs include A. direct labor and manufacturing overhead.

B. manufacturing overhead only.

C. direct materials and direct labor.

D. direct materials and manufacturing overhead.

4.

The number of equivalent units is computed as A. the number of complete units transferred to the next process.

B. the number of physical units times percentage of completion.

C. the number of partially complete units plus the number of units transferred to the next process.

D. beginning Work in Process inventory plus the units transferred in from the previous process.

5.

Hay Company had 3,000 units in its beginning inventory, 2,000 units in its ending inventory, and completed and transferred out 14,000 during the month. What are the total units to account for?

A. 13,000 B. 16,000 C. 17,000 D. 19,000

5-12 .

Chapter 5

Process Costing

6.

Which of the following is included in the costs transferred out of the second process of a threestep production process?

A. Costs incurred in the current process B. Costs incurred in the previous process C. Costs of the previous process combined with costs of the current process D. Costs of the current process combined with costs of the next process

7.

The Shaping Department started the month with a beginning Work in Process Inventory of $15,000. During the month, it was assigned the following costs: direct materials, $120,000; direct labor, $40,000; overhead allocated at the rate of 20% of direct labor cost. Inventory with a cost of $160,000 was transferred to finished goods. What was the ending balance of Work in Process Inventory for the department?

A. $8,000 B. $23,000 C. $168,000 D. $183,000

8.

There are 10,000 units in Work in Process Inventory for the Mixing Department at the end of the month. The units were 60% complete for conversion costs. What are the equivalent units for conversion costs using the weighted-average method?

A. 600 B. 4,000 C. 6,000 D. 10,000

9.

Using the same information as in Question 8, assume that the beginning Work in Process Inventory for the Mixing Department had $12,000 in conversion costs and that $30,000 in conversion costs were added during the month. What is the cost per equivalent unit for conversion costs?

A. $3.50 B. $4.20 C. $5.00 D. $7.00

10.

Which of the following data analysis tools would be best for managers in a process costing environment to use to analyze aggregate data?

A. Pivot table B. Sort C. Filter D. Chart

5-13 .

Managerial Accounting 6e Instructor’s Resource Manual

Answer Key to Chapter 5 Ten-Minute Quiz 1. C 2. D 3. A 4. B 5. B

6. C 7. B 8. C 9. D 10. A

5-14 .

Chapter 6 Cost Behavior This chapter discusses cost behavior and the implications of management understanding cost behavior.

Management must understand how costs are classified, how changes in volume affect costs, and how changes in price affect volume. Costs are classified as fixed, variable, or mixed. Managers always need to keep the relevant range in mind when predicting total costs. The relevant range is the volume over which total fixed costs and variable cost per unit remain constant. As volume changes within the relevant range, total fixed costs remain constant and total variable costs change in direct proportion to changes in volume.

This chapter also presents methods that can be used to analyze mixed costs in order to break them into their cost behavior components. These methods include account analysis, the high-low method, the scatterplot method, and regression analysis.

The differences between absorption and variable costing are also discussed in the chapter. Under absorption costing, all manufacturing related costs, regardless of cost behavior, are treated as product costs. Variable costing treats only variable manufacturing costs as product costs. Absorption costing is required for external reporting and for tax purposes; however, variable costing is used for internal management purposes because it clearly shows managers the additional cost of making one more unit of product.

The chapter concludes with a discussion of how data analytics are used by managers to make cost predictions. Terms such as simple linear regression, independent variable, and dependent variable are defined. Steps to create a scatterplot with a regression line, equation, and R-squared are explained, along with how to obtain regression output for simple linear or multiple regression.

Two sets of Decision Guidelines and Summary Problems accompany the material in the chapter. Both sets of Decision Guidelines address some of the decisions managers might have to make regarding cost behavior. The first set of Summary Problems gives students practice in calculating operating costs at three different volumes. The second set of Summary Problems gives students practice using the various techniques presented in the chapter to predict operating costs. This problem also has students prepare both a traditional income statement and a contribution margin income statement based on the calculated costs.

6-1 .

Managerial Accounting 6e Instructor’s Resource Manual

Learning Objectives After studying Chapter 6, your students should be able to: 1. Describe key characteristics and graphs of various cost behaviors 2. Use cost equations to express and predict costs 3. Use account analysis and scatterplots to analyze cost behavior 4. Use the high-low method to analyze cost behavior 5. Use regression analysis to analyze cost behavior 6. Describe variable costing and prepare a contribution margin income statement 7. Analyze cost behavior and make predictions using data analytic tools

6-2 .

Chapter 6

Cost Behavior

Teaching Outline I.

Cost Behavior: How Do Changes in Volume Affect Costs?

A. Variable Costs 1. Exhibit 6-1: Variable Costs 2. Exhibit 6-2: Key Characteristics of Variable Costs B. Fixed Costs 1. Committed fixed costs 2. Discretionary fixed costs 3. Exhibit 6-3: Fixed Costs 4. Exhibit 6-4: Key Characteristics of Fixed Costs C. Mixed Costs 1. Exhibit 6-5: Mixed Costs 2. Exhibit 6-6: Key Characteristics of Mixed Costs D. Relevant Range 1. Exhibit 6-7: Examples of Different Relevant Ranges for Fixed Costs 2. Exhibit 6-8: Examples of Different Relevant Ranges for Variable Costs 3. Exhibit 6-9: Example of Relevant Ranges E. Other Cost Behaviors 1. Step costs a. Exhibit 6-10: Step Costs 2. Curvilinear costs a. Exhibit 6-11: Curvilinear Costs and Straight-Line Approximations F. Sustainability and Cost Behavior

II.

How Do Managers Determine Cost Behavior?

A. Account Analysis B. Scatterplots 1. Exhibit 6-12: Historical Information on Guest Volume and Utility Costs 2. Exhibit 6-13: Scatterplot of Monthly Data 3. Creating scatterplots using Excel C. High-Low Method 1. Exhibit 6-14: Mixed Cost Line Using High-Low Method 2. Three steps a. Find the slope of the mixed cost line b. Find the vertical intercept c. Write the equation representing the costs’ behavior D. Regression Analysis 1. Exhibit 6-15: Output of Microsoft Excel Regression Analysis 2. Exhibit 6-16: Range of R-Squared Values 3. Performing regression analysis using Excel E. Data Concerns 1. Exhibit 6-17: Effect of Outlier on Cost Equations

III.

What Are the Roles of Variable Costing and the Contribution Margin Income Statement?

A. Comparing Absorption and Variable Costing 1. Absorption costing 2. Variable costing 3. Exhibit 6-18: ShredCo Data 4. Exhibit 6-19: Comparing Inventoriable Product Costs 6-3 .

Managerial Accounting 6e Instructor’s Resource Manual

5. Exhibit 6-20: Comparing Period Costs (Operating Expenses) 6. Only difference is the treatment of fixed MOH a. Under absorption costing, Fixed MOH is treated as a product cost and expensed when the unit is sold. b. Under variable costing, fixed MOH is treated as a period cost and expensed in the period incurred.

B. The Contribution Margin Income Statement 1. Comparing Income Statement Formats a. Exhibit 6-21: Traditional Income Statement Based on Absorption Costing b. Exhibit 6-22: Contribution Margin Income Statement Using Variable Costing i. Contribution margin income statement is organized by cost behavior. ii. All variable costs are expensed above the contribution margin line. iii. Contribution margin is equal to sales revenue minus variable expenses. iv. All fixed costs are expensed below the contribution margin line.

2. Service and Merchandising Companies a. Exhibit 6-23: Contribution Margin Income Statement of a Service Company b. All costs are operating expenses. c. Exhibit 6-24: Contribution Margin Income Statement for a Merchandising Company d. All cost of goods sold are variable.

C. Comparing Operating Income: Variable Versus Absorption Costing 1. Scenario 1: Inventory Levels Remain Constant a. Absorption income equals variable costing income. b. Exhibit 6-25: Inventory Levels Remain Constant 2. Scenario 2: Inventory Levels Increase a. Absorption income is greater than variable costing income. b. Exhibit 6-26: Inventory Levels Increase 3. Scenario 3: Inventory Levels Decrease a. Variable cost income is greater than absorption costing income. b. Exhibit 6-27: Inventory Levels Decrease D. Reconciling Operating Income Between the Two Costing Systems 1. Difference in operating income equals the change in units in inventory times the fixed MOH per unit. a. Exhibit 6-28: Comparing Income When Inventory Levels Increase b. Exhibit 6-29: Comparing Income When Inventory Levels Decrease 2. Exhibit 6-30: Key Points About Variable Costing and the Contribution Margin Income Statement IV.

How Can Managers Use Data Analytics to Make Cost Predictions?

F. Exhibit 6-31: Sample of International Flight Data G. Simple Regression H. Multiple Regression I. Independent Variable J. Explanatory Variable or Predictor Variable K. Dependent Variable or Outcome Variable L. Adjusted R-squared M. Exhibit 6-32: Simple Linear Regression With Cost Equation and R-Squared Value N. Exhibit 6-33: Comparing the Output of Simple Linear Regression and Multiple Regression O. How to Create a Scatterplot with a Regression Line, Equation, and R-Squared P. How to Obtain Regression Output for Simple Linear or Multiple Regression

6-4 .

Chapter 6

Cost Behavior

Key Topics Understanding how costs behave is crucial for planning and decision making. Illustrate cost behavior as follows: Variable costs:

Per unit remains constant Total changes in direct proportion to changes in levels of activity

Fixed costs:

Total remains constant Per unit changes with changes in levels of activity

Ask students for examples of variable and fixed costs. Use the examples given to emphasize the concept of the relevant range. For example, if they suggest rent as a fixed cost, explain how that would change if they needed a bigger (presumably more expensive) apartment due to accepting a new roommate. Have students complete E6-45B Forecast costs at different volumes. Choose a group to present their answers.

Expand your discussion of cost behavior to include mixed costs, step costs, and curvilinear costs. This will lead nicely into a series of exercises (E6-50B Create a scatter plot, E6-51B High-low method, and E6-52B Regression analysis) that show how to analyze cost behavior to predict costs. It is helpful to use Excel for the scatter plot and regression analysis so that students can see how it works. Be sure to cover the meaning and importance of the R-square in the regression analysis output.

Point out that because of outliers, sometimes the highest cost is not always correlated to the highest volume. The high-low method estimates the variable and fixed components of a mixed cost by using data points with the highest and lowest volume of activity and the associated total costs with both of these data points.

Divide the class into three teams where each one prepares one of the following exercises: • • •

E6-54B Create a scatter plot for a hospital laboratory E6-55B Using the high-low method to predict overhead for a hospital laboratory E6-56B Using regression analysis output to predict overhead for a hospital laboratory

Have the groups share their answers with the class.

When introducing variable costing, it is important to highlight that it differs from traditional costing (i.e., absorption costing) in the treatment of fixed manufacturing overhead. Absorption costing is used for external financial reporting because GAAP requires all manufacturing-related costs, whether fixed or variable, to be “absorbed” into the cost of the product. This results in all manufacturing costs being treated as product costs. Remind them that product costs include direct materials, direct labor, and manufacturing overhead. Variable costing treats fixed manufacturing costs as period costs, not product costs, because those fixed costs will be incurred regardless of actual production volume during the period. In variable costing, only variable manufacturing costs (i.e., direct materials, direct labor, and variable manufacturing overhead) are treated as product costs.

When discussing the contribution margin income statement, it is helpful to show students how it differs from the traditional income statement format.

6-5 .

Managerial Accounting 6e Instructor’s Resource Manual

Traditional (costs organized by function) Sales (COGS) Gross profit (Operating expenses) Operating income

Contribution (costs organized by behavior) Sales (Variable costs) Contribution margin (Fixed costs) Operating income

Have students work in teams to complete E6-61B Prepare a contribution margin income statement.

Use the results of this exercise to reconcile the difference in operating income between the traditional income statement that is provided in the exercise and the contribution margin income statement they just prepared. Emphasize the difference between the two related to the treatment of fixed overhead.

• •

In absorption costing, fixed overhead is considered a product cost just as direct materials, direct labor, and variable overhead. Fixed overhead is expensed when the product is sold.

In variable costing, fixed overhead is considered a period cost. Fixed overhead is expensed in the period incurred.

Ask students to explain why the operating income would be the same under absorption and variable costing when inventory levels remain constant. Based on their answers, discuss the “shortcut” to reconciling the difference between the two operating incomes (change in units in ending inventory times the fixed manufacturing overhead cost per unit).

In groups, have students discuss the difference between the independent variable and the dependent variable in regression analysis. Ask what a low R-squared value would indicate about the independent variable’s ability to accurately predict the dependent variable. Discuss options to increase the R-squared value.

6-6 .

Chapter 6

Cost Behavior

Chapter 6: Student Summary Handout I.

Cost behaviors A. Variable costs B. Fixed costs 1. Committed fixed costs 2. Discretionary fixed costs C. Mixed costs D. Relevant range E. Other cost behaviors 1. Step costs 2. Curvilinear costs F. Adopting sustainability practices can cause a change in the way costs behave

II.

Determining cost behavior A. Account analysis B. Scatterplots 1. Creating scatterplots using Excel C. High-low method 1. Three steps a. Find the slope of the mixed cost line b. Find the vertical intercept c. Write the equation representing the costs’ behavior D. Regression analysis 1. Performing regression analysis using Excel E. Data concerns 1. Outliers

III.

The roles of variable costing and the contribution margin income statement A. Comparing absorption and variable costing 1. Absorption costing 2. Variable costing 3. Only difference is the treatment of fixed MOH a. Under absorption costing, fixed MOH is treated as a product cost and expensed when the unit is sold. b. Under variable costing, fixed MOH is treated as a period cost and expensed in the period incurred.

B. Contribution margin income statement 1. Comparing income statement formats a. Contribution margin income statement is organized by cost behavior. b. All variable costs are expensed above the contribution margin line. i. Contribution margin is equal to sales revenue minus variable expenses. c. All fixed costs are expensed below the contribution margin line.

2. Service and merchandising companies a. All costs are operating expenses for a service company. b. All Cost of Goods Sold are variable for a merchandising company.

C. Comparing operating income: Variable versus absorption costing 1. When inventory levels remain constant a. Absorption income equals variable costing income 6-7 .

Managerial Accounting 6e Instructor’s Resource Manual

2. When inventory levels increase a. Absorption income is greater than variable costing income 3. When inventory levels decrease a. Variable cost income is greater than absorption costing income D. Reconciling operating income between the two costing systems 1. Difference in operating income equals the change in units in inventory times the fixed MOH per unit IV.

Using data analytics to make cost predictions A. Simple regression B. Multiple regression C. Independent variable D. Explanatory variable or predictor variable E. Dependent variable or outcome variable F. Adjusted R-squared G. How to create a scatterplot with a regression line, equation, and R-squared H. How to obtain regression output for simple linear or multiple regression

MyAccountingLab.com algorithmic homework assignments: E6-24A, E6-28A, E6-31A, E6-33A, E6-42A.

6-8 .

Chapter 6

Cost Behavior

CHAPTER 6: ASSIGNMENT GRID

Assignment S6-1 S6-2 S6-3 S6-4 S6-5 S6-6 S6-7 S6-8 S6-9 S6-10 S6-11 S6-12

S6-13 S6-14 S6-15

S6-16

S6-17 S6-18 S6-19 S6-20

S6-21

Learning Topic(s) Objective(s) Short Exercises Identify cost behavior 1&2 Identify cost behavior 1&2 Compute fixed costs per 2 unit Predict total mixed costs 2 Predict and graph total 1&2 mixed costs Classify cost behavior 1&2 Prepare and analyze a 3 scatterplot Use the high-low method 4 Use the high-low method 4 Predicting costs in a 4 health-care setting Analyze a scatterplot 3&4 Theoretical comparison of 4&5 high-low and regression analysis Write a cost equation given 5 regression output Prepare a contribution 6 margin income statement Prepare income statements 6 using variable costing and absorption costing with no change in inventory levels Prepare income statements 6 using variable costing and absorption costing when inventory units increase Identify cost behavior 1&2 graph Identify cost behavior 1, 2, 3, 4, & terms 5 Identify ethical standards 1, 2, 3, 4, 5, violated &6 Analyze cost behavior and 7 make predictions using data analytics tools Analyze cost behavior and 7 make predictions using data analytics tools

6-9 .

Estimated Time in Minutes

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Managerial Accounting 6e Instructor’s Resource Manual

Assignment E6-22A E6-23A E6-24A E6-25A E6-26A E6-27A E6-28A E6-29A E6-30A E6-31A E6-32A

E6-33A

E6-34A

E6-35A E6-36A E6-37A E6-38A E6-39A E6-40A

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Learning Topic(s) Objective(s) Exercises (Group A) Forecast costs at different 1&2 volumes Prepare income statement 6 in two formats Use unit cost data to 2 forecast total costs Use a cost equation to 2 forecast total costs Sustainability and cost 2 estimation Create a scatterplot 3 Continuation of E6-27A: High-low method Continuation of E6-27A: Regression analysis Regression analysis using Excel output Create a scatterplot for a hospital laboratory Using the high-low method to predict overhead for a hospital laboratory Using regression analysis output to predict overhead for a hospital laboratory Performing a regression analysis to predict overhead for a hospital laboratory Predict operating costs using high-low method Use the high-low method Compare absorption and variable costing Prepare a contribution margin income statement Prepare a contribution margin income statement Prepare income statements using variable costing and absorption costing with changing inventory levels

6-10 .

Chapter 6

Assignment E6-41A

E6-42A E6-43A

E6-44A

E6-45B E6-46B E6-47B E6-48B E6-49B E6-50B E6-51B E6-52B E6-53B E6-54B E6-55B

E6-56B

E6-57B

Learning Objective(s) 6

Topic(s) Prepare a variable costing income statement given an absorption costing income statement Absorption and variable 6 costing income statements Analyze cost behavior and 7 make predictions using data analytic tools Analyze cost behavior and 7 make predictions using data analytic tools Exercises (Group B) Forecast costs at different 1&2 volumes Prepare income statement 6 in two formats Use unit cost data to 2 forecast total costs Use a cost equation to 2 forecast total costs Sustainability and cost 2 estimation Create a scatterplot 3 Continuation of E6-50B: 4 High-low method Continuation of E6-50B: 5 Regression analysis Regression analysis using 5 Excel output Create a scatterplot for a 3 hospital laboratory Using the high-low method 4 to predict overhead for a hospital laboratory Using regression analysis 5 output to predict overhead for a hospital laboratory Performing a regression 5 analysis to predict overhead for a hospital laboratory

6-11 .

Cost Behavior

Estimated Time in Minutes 30

Level of Difficulty Difficult

30–40

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Managerial Accounting 6e Instructor’s Resource Manual

Assignment E6-58B E6-59B E6-60B E6-61B E6-62B E6-63B

E-64B

E6-65B E6-66B

E6-67B

P6-68A

P6-69A P6-70A

P6-71A P6-72A

P6-73B

P6-74B P6-75B

Learning Objective(s) 4

Topic(s) Predict operating costs using high-low method Use the high-low method 4 Compare absorption and 6 variable costing Prepare a contribution 6 margin income statement Prepare a contribution 6 margin income statement Prepare income statements 6 using variable costing and absorption costing with changing inventory levels Prepare a variable costing 6 income statement given an absorption costing income statement Absorption and variable 6 costing income statements Analyze cost behavior and 7 make predictions using data analytic tools Analyze cost behavior and 7 make predictions using data analytic tools Problems (Group A) Analyze cost behavior at a 1, 2, 3, 4, & hospital using various cost 5 estimation methods Analyze cost behavior 1, 2, 3, & 4 Prepare traditional and 6 contribution margin income statements Determine financial 6 statement components Absorption and variable 6 costing income statements Problems (Group B) Analyze cost behavior at a 1, 2, 3, 4, & hospital using various cost 5 estimation methods Analyze cost behavior 1, 2, 3, & 4 Prepare traditional and 6 contribution margin income statements

6-12 .

Estimated Time in Minutes 10

Level of Difficulty Easy

10 25

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Chapter 6

Assignment P6-76B P6-77B

C6-78

A6-79 A6-80 A6-81 A6-82

Learning Objective(s) 6

Topic(s) Determine financial statement components Absorption and variable 6 costing income statements Serial Case Calculate and compare cost 4&5 estimates using high-low and regression methods Critical Thinking Discussion questions All Cost behavior in real All companies Ethics of building 6 inventory Cost behavior and Air 1, 2, & 3 Force One

6-13 .

Cost Behavior

Estimated Time in Minutes 45

Level of Difficulty Difficult

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Managerial Accounting 6e Instructor’s Resource Manual

Name____________________________________ Date_________________ Section_______________

CHAPTER 6 TEN-MINUTE QUIZ Circle the letter of the best response.

1.

Within a relevant range, costs that increase in direct proportion to volume are A. variable costs.

B. fixed costs.

C. mixed costs.

D. step costs.

2.

On a graph, if a horizontal axis represents units of production and the vertical axis represents total costs, the total variable costs line would be shown as a(n) A. horizontal line.

B. vertical line.

C. upward-sloping line.

D. downward-sloping line.

3.

Which of the following statements is NOT true about costs per unit within the relevant range?

A. Fixed costs decrease in proportion to increases in volume.

B. Mixed costs decrease but not in direct proportion to increases in volume.

C. Variable costs stay constant with changes in volume.

D. Curvilinear costs stay constant with changes in volume.

4.

A utility bill consisting of a monthly base, plus an added amount based on usage, is classified as a A. fixed cost.

B. mixed cost.

C. curvilinear cost.

D. variable cost.

6-14 .

Chapter 6

Cost Behavior

5. A company is analyzing its mixed costs. During July, its busiest month, a company had total labor hours of 14,000 and total costs of $40,000. During February, its slowest month, the company had labor hours of 8,000 and total costs of $25,000. The company is planning for 12,000 direct labor hours next April. How many dollars should the company budget for fixed costs during April?

A. $5,000 B. $6,000 C. $35,000 D. $36,000 6.

A company is analyzing its mixed costs. During July, its busiest month, a company had total labor hours of 14,000 and total costs of $40,000. During February, its slowest month, the company had labor hours of 8,000 and total costs of $25,000. The company is planning for 12,000 direct labor hours next April. How many dollars should the company budget for total costs during April?

A. $5,000 B. $6,000 C. $30,000 D. $35,000

7.

Which of the following statements is true regarding regression analysis?

A. Regression analysis considers all of the data points for determining the line that best fits the data so it is usually less accurate than the high-low method.

B. Regression analysis helps generate a statistic, called the R-square, which tells how well the line fits the data points.

C. Regression analysis can only be used by manufacturing companies to predict costs.

D. All of the above are true.

8.

The difference between absorption costing and variable costing is A. the treatment of fixed MOH. B. the timing with which fixed MOH is expensed.

C. Both of the above are differences.

D. None of the above are differences.

9.

Which of the following is NOT true regarding an income statement organized according to the contribution margin approach?

A. The contribution margin income statement is organized by cost behavior.

B. Operating income will always be the same as operating income in a traditional income statement regardless of changes in inventory levels.

C. All fixed costs, including fixed MOH, are expensed below the contribution margin line.

D. The contribution margin is equal to sales revenue minus variable expenses.

10.

Why would a manager choose to use multiple regression rather than simple linear regression?

A. The R-squared value is not used to assess the predictability of the model.

B. Additional independent variables may help predict the dependent variable.

C. The predictor variable is used to predict the outcome of y.

D. To increase the quality of the data used to develop cost equations.

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Managerial Accounting 6e Instructor’s Resource Manual

Answer Key to Chapter 6 Ten-Minute Quiz 1. A 2. C 3. D 4. B 5. A

6. D 7. B 8. C 9. B 10. B

6-16 .

Chapter 7 Cost-Volume-Profit Analysis This chapter discusses how cost-volume-profit (CVP) analysis is used in decision making. CVP analysis expresses the relationships among costs, volume, and the company’s profit. All of the decisions are based on initial CVP assumptions. These assumptions—such as assuming sales revenue is linear and that costs can be classified as either fixed or variable—help managers isolate the decision at hand.

The chapter follows the contribution margin approach introduced in the last chapter and quickly moves into breakeven computations. Total fixed costs divided by the contribution margin or the contribution margin ratio will yield the breakeven point in units or in dollars, respectively. When a target profit is added to the fixed costs, the same computation yields the units or the dollar sales necessary to achieve the target profit.

The first set of Decision Guidelines in the chapter highlights decisions that need to be made when opening a new business. The accompanying Summary Problem gives the student practice in using CVP to calculate the breakeven point, as well as the sales level needed to earn a target operating income.

Managers use CVP concepts to perform sensitivity analysis. Sensitivity analysis is a “what-if” technique that asks what will happen to a company’s breakeven or target profit if sales price, costs, or sales mix change.

The same CVP formulas that are used to perform CVP analysis for a company with a single product can be used for a company with multiple products. However, these formulas will use a weighted-average contribution margin of all products. So each unit’s contribution margin is weighted by the relative number of units sold. Companies that offer many products, however, don’t want to know the breakeven point in terms of units. Rather, they focus on the breakeven (or target profit volumes) in terms of sales revenue.

Therefore, they need to know the weighted-average contribution margin ratio.

The chapter reviews common indicators of risk, including the margin of safety and operating leverage, and explains how to choose the most profitable cost structure.

The chapter concludes with a discussion of how managers can use data analytics to analyze cost, volume, and profit. Step-by-step procedures to create a data table in order to perform “what-if” analysis are listed and illustrated. In addition, how managers can use conditional formatting to shade specific cells is discussed.

The second set of Decision Guidelines in the chapter addresses some decisions that might need to be made in response to changing business conditions. The last Summary Problem gives students practice in determining a company’s margin of safety and operating leverage factor. The Summary Problem concludes with CVP analysis for a company offering multiple products.

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Managerial Accounting 6e Instructor’s Resource Manual

Learning Objectives After studying Chapter 7, your students should be able to: 1. Calculate the unit contribution margin and the contribution margin ratio 2. Use CVP analysis to find the volume needed to break even or earn a target profit 3. Use CVP analysis to measure the impact of changing business conditions 4. Use CVP analysis at multiproduct companies 5. Determine a firm’s margin of safety, operating leverage, and most profitable cost structure 6. Analyze cost, volume, and profit using data analytics tools

7-2 .

Chapter 7

Cost-Volume-Profit Analysis

Teaching Outline I.

How Does Cost-Volume-Profit Analysis Help Managers?

A. Data and Assumptions Required for CVP Analysis 1. Sales price remains constant throughout the relevant range of volume, resulting in revenue that is linear.

2. Managers can classify each cost, or the components of mixed costs, as either variable or fixed. These costs are linear throughout the relevant range of volume.

3. Inventory levels will not change.

4. The mix of products offered for sale remains constant.

B. The Unit Contribution Margin 1. Contribution margin income statement separates costs according to how they behave.

2. Contribution margin is the excess of sales revenue over variable expenses.

3. Unit contribution margin = Sales price per unit – Variable cost per unit 4. Each time a unit is sold, the company’s operating income will improve by the amount of the unit contribution margin.

5. Exhibit 7-3: Operating Income Comparison When One More Poster Is Sold C. The Contribution Margin Ratio 1. Contribution margin ratio is the ratio of contribution to sales revenue. a. Contribution margin per unit  sales price per unit b. Contribution margin  sales revenue 2. Exhibit 7-4: Breakdown of $1 of Sales Revenue 3. Managers can use contribution margin ratio to quickly predict operating income at different sales volumes within the relevant range. a. Exhibit 7-5: Operating Income for $70,000 of Sales Revenue

II.

How Do Managers Find the Breakeven Point?

A. The breakeven point is the sales level at which operating income is zero: total revenues equals total expenses B. The target profit point is the sales level at which operating income is greater than zero: total revenues is greater than total expenses C. Calculating Breakeven And Target Profit 1. At breakeven, operating income is zero.

2. At a target profit, operating income is equal to the target profit.

D. The Income Statement Approach 1. Sales revenue – variable expense – fixed expenses = operating income 2. (Sales price per unit × units sold) – (variable cost per unit × units sold) – fixed expenses = operating income 3. Exhibit 7-6: Contribution Margin Income Statement At Breakeven 4. Exhibit 7-7: Operating Income For A Volume Of 850 Posters E. The shortcut approach using unit contribution margin 1. Units = (fixed expenses + operating income)  contribution margin per unit F. The shortcut approach using contribution margin ratio 1. Breakeven point in sales dollars = (fixed expenses + operating income)  contribution margin ratio 2. Graphing CVP Relationships Step 1: Choose a sale volume and draw the sales revenue line Step 2: Draw the fixed expense line Step 3: Draw the total expense line: Sum of variable expense plus fixed expense 7-3 .

Managerial Accounting 6e Instructor’s Resource Manual

Step 4: Identify the breakeven point: Intersection of sales revenue and total expense lines Step 5: Mark the operating income and operating loss areas 3. Exhibit 7-8: Cost-volume-profit graph III.

How Do Managers USE CVP to Make Decisions When Business Conditions Change?

A. Sensitivity analysis is a “what-if” technique that asks what results will be if actual prices or costs change or if an underlying assumption in the sales mix changes B. Changing the Sales Price And Volume 1. Lowering the sales price reduces the product’s unit contribution margin. As a result, more units need to be sold to breakeven or achieve a given target profit.

2. Exhibit 7-9: The Effect of Changes in Sales Price on the Sales Volume Needed 3. Exhibit 7-10: Before and After Analysis of Change in Sales Price C. Changing Variable Costs 1. Increasing the unit variable cost reduces the product’s unit contribution margin. As a result, more units need to be sold to breakeven or achieve a given target profit.

2. Exhibit 7-11: The Effect of Changes in Variable Costs on Breakeven and Target Profit Volumes 3. Exhibit 7-12 Comparison of Operating Income as Volume Declines and Variable Costs Increase D. Changing Fixed Costs 1. Increasing the fixed costs does not affect the product’s unit contribution margin.

However, more units need to be sold to breakeven or achieve a given target profit.

2. Exhibit 7-13: The Effect of Changes in Fixed Costs on Breakeven and Target Profit Volumes 3. Exhibit 7-14: Before and After Changes in Volume, Variable Costs, and Fixed Costs E. Changing the Mix of Products Offered for Sale 1. Sales mix is the combination of products that make up total sales a. Think of it as the “basket of products.” b. A company earns more operating income by selling high-contribution margin products.

2. Same formulas except for the weighted-average contribution margin of all products is used rather the contribution margin of a sole product.

3. Find breakeven in terms of sales units. a. Weighted-average contribution margin per unit = Total contribution margin of “basket”  number of units in basket b. Exhibit 7-15: Calculating the Weighted-Average Contribution Margin per Unit c. Sales in total units = (Fixed expenses + operating income)  weighted-average contribution margin per unit d. At breakeven, operating income would be zero. e. At a target profit, operating income would equal the target profit.

4. Find breakeven in terms of sales revenue a. Weighted-average contribution margin ratio = Total contribution margin  total sales revenue (totals are taken directly from a contribution margin income statement) b. Exhibit 7-16: Estimating the Weighted-Average Contribution Margin Ratio c. Sales in dollars = (Fixed expenses + operating income)  weighted-average contribution margin ratio

7-4 .

Chapter 7

Cost-Volume-Profit Analysis

IV.

What Are Some Common Indicators of Risk?

A. Margin of Safety 1. In units = expected (or actual) sales in units – breakeven sales in units 2. In dollars = expected (or actual) sales in dollars – breakeven sales in dollars 3. As a percentage a. Margin of safety in units  expected (or actual) sales in units b. Margin of safety in dollars  expected (or actual) sales in dollars B. Operating Leverage 1. Exhibit 7-17: Characteristics of High Operating Leverage Firms 2. Exhibit 7-18: Characteristics of Low Operating Leverage Firms 3. Operating leverage factor = Contribution margin  operating income a. the larger the operating leverage factor, the greater the impact a change in sales volume has on operating income.

C. Choosing a Cost Structure 1. Exhibit 7-19: Costs Associated With Each Leasing Option 2. Exhibit 7-20: Using An Indifference Point to Choose the Most Profitable Cost Structure 3. If sales volume is expected to be below the indifference point, choose the cost structure with the low operating leverage.

4. If sales volume is expected to above the indifference point, choose the cost structure with the high operating leverage.

V.

How Can Managers Use Data Analytics to Analyze Cost, Volume, and Profit?

A. Data Analytics helps managers calculate the impact of different cost scenarios on profit 1. Exhibit 7-21: Kay’s Operating Income at a Volume of 950 Posters per Month 2. Exhibit 7-22: Table of Profit Outcomes at Different Combinations of Sales Prices and Volumes 3. Exhibit 7-23: Table of Profit Outcomes after a Change in Variable and Fixed Costs B. Use “what-if” analysis to create a data table C. How to Use Conditional Formatting to Shade Specific Cells

7-5 .

Managerial Accounting 6e Instructor’s Resource Manual

Key Topics If students understand cost behavior, it makes this chapter much easier to grasp. Remind students that variable costs remain constant per unit and change in total as volume changes and that fixed costs remain constant in total and change per unit as volume changes.

Have students work in teams or with a partner to calculate the contribution margin in Requirement 1 of E7-46B Find breakeven and target profit volume. Call on a student for the answer. Sometimes the contribution margin is expressed as a ratio. Illustrate how to calculate the contribution margin ratio. This can be used to compare different products within a company, to compare one year’s information to another, or to compare one company to another company.

Remind students to keep track of the labels (units, dollars, etc.) when using the breakeven formulas.

Proper attention will ensure that breakeven is accurately shown in units or dollars. Show students how to calculate the breakeven point and target profit using the contribution margin shortcut approaches.

Emphasize that companies want to do more than just breakeven; they want to determine how much must be sold to earn a desired profit. This desired profit is referred to as the target profit. Have students complete Requirements 2 and 3 of E7-46B Find breakeven and target profit volume and share their answers with the class.

The most powerful use of CVP concepts is sensitivity analysis. Sensitivity analysis is a “what-if” technique used to determine what effect a change in sales price, costs, or another underlying assumption will have on a company’s operating income. Have students work in teams to complete and discuss P777B Calculate impact of various changes on operating income.

Managers need to perform sensitivity analysis and be prepared for additional changes to occur after their first decision. For example, if a manager lowers the price, the sales increase is expected to offset the larger amount of sales needed to break even (or reach target profit). However, managers also need to be ready to make additional decisions if the competition reacts and lowers the price of a comparable product.

Discuss with students that a company may break even (or take a loss) on some products in order to sell more profitable products. When a company has more than one product, managers must consider the sales mix when performing CVP analysis. The sales mix is a “basket of products” sold by a company.

Companies that sell multiple products use formulas based on the weighted-average contribution margin of all products. To calculate the weighted-average contribution margin, each unit’s contribution margin is weighted by the relative number of units included in the “basket.” Ask students why stores that sell multiple brands “push” one brand. (Answer: The contribution margin is larger for that brand. This is sometimes referred to as the margin on the product.) Have students complete E7-57B Find breakeven for a multiproduct firm in groups and share their answers with the class.

Margin of safety can be used to determine the risk of a project. It is the excess of expected sales over breakeven sales. The higher the margin of safety, the less risk involved in the business venture. It also tells managers how far sales can drop before they are “in trouble” of incurring a loss. Although CVP analysis relies on certain assumptions, the assumptions are not absolute or guaranteed. Companies obviously want to sell more than breakeven. The amount above breakeven is the margin of safety and indicates a cushion against loss. Have students complete Requirements 1 and 2 of E7-59B Compute margin of safety and operating leverage. Discuss the answers as a group.

Operating leverage refers to the relative amount of fixed and variable costs that make up the total costs of a company. The higher the fixed costs as compared to the variable costs, the higher the leverage and the 7-6 .

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higher the company’s risk if sales decrease. High operating leverage firms are characterized by higher levels of fixed costs, lower levels of variable costs, and higher contribution margin ratios. These firms are more likely to have higher risk and higher potential for rewards. Examples include hotels and cruise lines.

Low operating leverage firms, such as merchandising companies, have the opposite characteristics. Have students complete Requirements 3 and 4 of E7-59B Compute margin of safety and operating leverage.

Discuss the answers as a group.

Point out to students that management often has some control over the structure of a company’s cost.

They may have two or more alternatives to choose from when it comes to how costs are structured. The point at which a company would be indifferent between the two or more options is referred to as the indifference point. Have students complete E7-61B Calculating total costs under two different scenarios. Choose a group to present their answers.

Discuss with students the role of data analytics in cost volume profit analysis. Specifically demonstrate how to create a data table and use conditional formatting to shade specific cells using S7-19 Analyze cost, volume, and profits using data analytics tools.

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Chapter 7: Student Summary Handout I.

Using cost-volume-profit (CVP) analysis A. Assumptions required for CVP analysis 1. Sales price remains constant throughout the relevant range of volume, resulting in revenue that is linear.

2. Managers can classify each cost, or the components of mixed costs, as either variable or fixed. These costs are linear throughout the relevant range of volume.

3. Inventory levels will not change.

4. The mix of products offered for sale remains constant.

B. The unit contribution margin 1. Contribution margin income statement separates costs according to how they behave.

2. Contribution margin is the excess of sales revenue over variable expenses.

3. Unit contribution margin = Sales price per unit – Variable cost per unit 4. Each time a unit is sold, the company’s operating income will improve by the amount of the unit contribution margin.

C. The contribution margin ratio 1. Contribution margin ratio is the ratio of contribution to sales revenue. a. Contribution margin per unit  sales price per unit b. Contribution margin  sales revenue 2. Managers can use contribution margin ratio to quickly predict operating income at different sales volumes within the relevant range.

II.

Using CVP analysis to find volume needed to break even or earn a target profit A. The breakeven point is the sales level at which operating income is zero: Total revenues equals total expenses.

B. The target profit point is the sales level at which operating income is greater than zero: Total revenues is greater than total expenses.

C. Calculating breakeven and target profit 1. At breakeven, operating income is zero.

2. At a target profit, operating income is equal to the target profit.

3. Three approaches a. The income statement approach i. Sales revenue – variable expense – fixed expenses = operating income ii. (Sales price per unit × units sold) – (variable cost per unit × units sold) – fixed expenses = operating income b. The shortcut approach using unit contribution margin i. Units = (fixed expenses + operating income)  contribution margin per unit c. The shortcut approach using contribution margin ratio i. Breakeven point in sales dollars = (fixed expenses + operating income)  contribution margin ratio D. Graphing CVP relationships Step 1: Choose a sale volume and draw the sales revenue line Step 2: Draw the fixed expense line Step 3: Draw the total expense line: Sum of variable expense plus fixed expense Step 4: Identify the breakeven point: Intersection of sales revenue and total expense lines Step 5: Mark the operating income and operating loss areas

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III.

Using CVP to plan for changing business conditions A. Sensitivity analysis is a “what-if” technique that asks what results will be if actual prices or costs change or if an underlying assumption in the sales mix changes.

B. Changing the sales price and volume 1. Lowering the sales price reduces the product’s unit contribution margin. As a result, more units need to be sold to break even or achieve a given target profit.

C. Changing variable costs 1. Increasing the unit variable cost reduces the product’s unit contribution margin. As a result, more units need to be sold to break even or achieve a given target profit.

D. Changing fixed costs 1.

Increasing the fixed costs does not affect the product’s unit contribution margin.

However, more units need to be sold to break even or achieve a given target profit.

E. Changing the mix of products offered for sale 1. Sales mix is the combination of products that make up total sales. a. Think of it as the “basket of products.” b. A company earns more operating income by selling high-contribution margin products.

2. Same formulas except for the weighted-average contribution margin of all products is used rather the contribution margin of a sole product.

3. Find breakeven in terms of sales units a. Weighted-average contribution margin per unit = Total contribution margin of “basket”  number of units in basket b. Sales in total units = (Fixed expenses + operating income)  weighted-average contribution margin per unit i. At breakeven, operating income would be zero. ii. At a target profit, operating income would equal the target profit. iii. Find breakeven in terms of sales revenue c. Weighted-average contribution margin ratio = Total contribution margin  total sales revenue (totals are taken directly from a contribution margin income statement) d. Sales in dollars = (Fixed expenses + operating income)  weighted-average contribution margin ratio

IV.

Common indicators of risk A. Margin of safety is the excess of actual or expected sales over breakeven sales.

B. In units = expected (or actual) sales in units – breakeven sales in units C. In dollars = expected (or actual) sales in dollars – breakeven sales in dollars D. As a percentage 1. Margin of safety in units  expected (or actual) sales in units 2. Margin of safety in dollars  expected (or actual) sales in dollars E. Operating leverage refers to the relative amount of fixed and variable costs that make up total costs.

1. Operating leverage factor = Contribution margin  operating income 2. The larger the operating leverage factor, the greater the impact a change in sales volume has on operating income.

F. Choosing a cost structure 1. If sales volume is expected to be below the indifference point, choose the cost structure with the low operating leverage.

2. If sales volume is expected to above the indifference point, choose the cost structure with the high operating leverage.

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V.

Using data analytics to analyze cost, volume, and profit A. Data analytics helps managers calculate the impact of different cost scenarios on profit.

B. Use “what-if” analysis to create a data table.

C. How to use conditional formatting to shade specific cells

MyAccountingLab.com algorithmic homework assignments: E7-23A, E7-30A, E7-35A, E7-36A, E7-39A.

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Cost-Volume-Profit Analysis

CHAPTER 7: ASSIGNMENT GRID

Assignment S7-1 S7-2 S7-3 S7-4 S7-5 S7-6 S7-7 S7-8 S7-9 S7-10 S7-11 S7-12 S7-13

S7-14 S7-15 S7-16 S7-17 S7-18 S7-19 S7-20

E7-21A E7-22A E7-23A E7-24A

Learning Objective(s)

Topic(s)

Short Exercises Compute unit contribution margin and 1 contribution margin ratio Project change in income 1 Find breakeven 2 Find target profit volume 2 Changes in sales price and variable 3 costs Changes in fixed costs 3 Compute weighted-average 4 contribution margin Continuation of S7-7: Breakeven 4 Compute margin of safety 5 Compute and use operating leverage 5 factor Calculate breakeven and target profit 2 sales volume Interpret a CVP graph 2 Calculate impact of a change in selling 3 price and sales volume on operating income Calculate breakeven for a 1, 2, & 4 multiproduct company Compute margin of safety 5 Compute and use operating leverage 5 factor Calculating total costs under two 5 different scenarios Identify ethical standards violated 1, 2, 3, 4, & 5 Analyze cost, volume, and profit using 6 data analytics tools Analyze cost, volume, and profit using 6 data analytics tools Exercises (Group A) Prepare contribution margin income 1 statements Work backward to find missing 1&2 information Find breakeven and target profit 1&2 volume Continuation of E7-23A: Changing 3 costs

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Assignment E7-25A E7-26A E7-27A E7-28A E7-29A E7-30A E7-31A E7-32A E7-33A E7-34A E7-35A E7-36A E7-37A E7-38A E7-39A E7-40A E7-41A E7-42A E7043A

E7-44B E7-45B E7-46B E7-47B E7-48B

Learning Objective(s)

Topic(s)

Find breakeven and target profit 1&2 volume Continuation of E7-25A: Changing 3 business conditions Compute breakeven and project 1&2 income Continuation of E7-27A: Changing 3 business conditions Sustainability and CVP concepts 3 Work backward to find new breakeven 2&3 point Calculate contribution margin and 1, 2, & 5 breakeven Find consequence of rising fixed costs 1&3 Extension of E7-32A: Multiproduct 4 firm Find breakeven for a multiproduct 4 firm Breakeven and an advertising decision 3&4 at a multiproduct company Compute margin of safety and 5 operating leverage Use operating leverage factor to find 5 fixed costs Calculating total costs under two 5 different scenarios Comprehensive CVP analysis 1, 2, 3, 4, & 5 Comprehensive CVP analysis 1, 2, 3, 4, & 5 Comprehensive CVP analysis 1, 2, 3, 4, & 5 Analyze cost, volume, and profit using 6 data analytics tools Analyze cost, volume, and profit using 6 data analytics tools Exercises (Group B) Prepare contribution margin income 1 statements Work backward to find missing 1&2 information Find breakeven and target profit 1&2 volume Continuation of E7-46B: Changing 3 costs Find breakeven and target profit 1&2 volume 7-12 .

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Assignment E7-49B E7-50B E7-51B E7-52B E7-53B E7-54B E7-55B E7-56B E7-57B E7-58B E7-59B E7-60B E7-61B E7-62B E7-63B E7-64B E7-65B E7-66B

P7-67A P7-68A P7-69A P7-70A P7-71A P7-72A P78-B

Learning Objective(s)

Topic(s)

Continuation of E7-48B: Changing 3 business conditions Compute breakeven and project 1&2 income Continuation of E7-50B: Changing 3 business conditions Sustainability and CVP 3 Work backward to find new breakeven 2&3 point Calculate contribution margin and 1, 2, & 5 breakeven Find consequence of rising fixed costs 1&3 Extension of E7-55B: Multiproduct 4 firm Find breakeven for a multiproduct 4 firm Breakeven and an advertising decision 3&4 at a multiproduct company Compute margin of safety and 5 operating leverage Use operating leverage factor to find 5 fixed costs Calculating total costs under two 5 different scenarios Comprehensive CVP analysis 1, 2, 3, 4, & 5 Comprehensive CVP analysis 1, 2, 3, 4, & 5 Comprehensive CVP analysis 1, 2, 3, 4, & 5 Analyze cost, volume and profit using 6 data analytics tools Analyze cost, volume, and profit using 6 data analytics tools Problems (Group A) Find missing data in CVP 1&2 relationships Find breakeven and target profit and 1&2 prepare income statements Comprehensive CVP problem 1, 2, & 5 Compute breakeven, prepare CVP 1, 2, & 3 graph, and respond to change Calculate impact of various changes 2&3 on operating income CVP analysis at a multiproduct firm 4&5 Problems (Group B) Find missing data in CVP 1&2 relationships 7-13 .

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Assignment P7-74B P7-75B P7-76B P7-77B P7-78B C7-79

A7-80 A7-81 A7-82 A7-83

Learning Objective(s) 1&2

Topic(s) Find breakeven and target profit and prepare income statements Comprehensive CVP problem 1, 2, & 5 Compute breakeven, prepare CVP 1, 2, & 3 graph, and respond to change Calculate impact of various changes 2&3 on operating income CVP analysis at a multiproduct firm 4&5 Serial Case Calculate breakeven and margin of 2 safety after hotel renovation Critical Thinking Discussion questions All CVP for a product All CVP analysis by intern with an ethical 2 dilemma Impact of increases in direct materials 1, 2, & 3 on product breakeven

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Chapter 7

Cost-Volume-Profit Analysis

Name____________________________________ Date_________________ Section_______________

Chapter 7 Ten-Minute Quiz Circle the letter of the best response.

1.

Which of the following is NOT an assumption of cost-volume-profit analysis?

A. Inventory levels will change as production levels vary.

B. Managers can classify each cost as either variable or fixed, and mixed costs can be broken down into their variable or fixed component.

C. Revenues are linear throughout the relevant range of volume.

D. The sales mix remains constant.

2.

If the sales price is $20 per unit, the variable cost is $12 per unit, total fixed costs is $12,000, and 15,000 units are produced, the contribution margin per unit is A. $20.

B. $12.

C. $9.

D. $8.

3.

If the sales price is $60 per unit, the variable cost is $10 per unit, total fixed costs is $60,000, and 12,000 units are produced, the breakeven in units is A. 1,200.

B. 1,000.

C. 240.

D. 200.

4.

If the sales price is $150 per unit, the variable cost is $90 per unit, and total fixed costs is $24,000, the contribution margin ratio is A. 80%.

B. 60%.

C. 40%.

D. 20%.

5.

If the sales price is $150 per unit, the variable cost is $90 per unit, and total fixed costs is $24,000, the breakeven in sales dollars is A. $15,000.

B. $24,000.

C. $36,000.

D. $60,000.

6.

If the sales price is $60 per unit, the variable cost is $36 per unit, total fixed costs is $50,000, how many units need to be sold if the desired profit is $100,000?

A. 1,000 units B. 2,500 units C. 4,100 units D. 6,250 units 7-15 .

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Cost-Volume-Profit Graph $1,100

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C

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B D

0

500 Volume of units

7.

In the cost-volume-profit graph (above), what is represented by the point marked “A”?

A. Breakeven point B. Fixed expenses C. Operating income area D. Operating loss area

8.

In the cost-volume-profit graph (above), what is represented by the point marked “B”?

A. Breakeven point B. Fixed expenses C. Operating income area D. Operating loss area

9.

Leverage Corporation sells two products: Regular and Supreme. Leverage sells three Regulars for every two Supremes. The Regular sells for $20 each with variable costs of $11 each, whereas the Supreme sells for $25 each with variable costs of $15 each. If fixed costs are $21,000, what is the breakeven point in units?

A. 1,167 units of each B. 1,050 units of each C. 1,340 units of Regular and 894 units of Supreme D. 894 units of Regular and 1,340 units of Supreme

10.

Which of the following is a benefit of using data analytics to analyze cost, volume, and profit?

A. Managers can see the impact of many possible combination of variables all at one time.

B. Managers are able to quickly calculate the point at which two options yield the same operating income.

C. Managers can calculate the point at which the high operating leverage option is more profitable.

D. Managers are able to quickly convert unit sales to sales dollars.

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Answer Key to Chapter 7 Ten-Minute Quiz 1. A 2. D 3. A 4. C 5. D

6. D 7. A 8. B 9. C 10. A

7-17 .

Chapter 8 Relevant Costs for Short-Term Decisions The chapter emphasizes decision making and discusses the decision-making process used by managers to define business goals, identify alternative courses of action, and gather and analyze relevant information before selecting the best alternative. As part of this discussion, relevant information is defined as future data that differs among alternatives. Sunk costs are not relevant because they are costs that have been incurred in the past and cannot be changed by the current decision. Relevant nonfinancial (qualitative) information should also be considered in the decision-making process. For example, closing manufacturing plants or laying off employees can seriously hurt the local community and employee morale.

Six kinds of short-term decisions are discussed in this chapter. They are as follows: 1. Pricing 2. Special orders 3. Discontinuing products, departments, or stores 4. Product mix when resources are constrained 5. Outsourcing (make-or-buy decisions) 6. Selling as is or processing further For each alternative, managers must consider how much incremental revenue will be generated and how costs will be affected. The text uses the contribution margin approach in its decision-making process. In all cases, management must consider the financial impact and the nonfinancial impact of each decision.

For the pricing decision, the book discusses the difference between target cost and cost plus pricing. For the remaining four decision-making scenarios, the following is presented in the text: a discussion of what should be considered during the decision-making process, decision rules, a numerical example, and common pitfalls to avoid.

The chapter concludes with a discussion of how the VLOOKUP function can be used by managers in the decision-making process.

Two sets of Decision Guidelines and Summary Problems accompany the material in the text. The midchapter Decision Guidelines highlights some quantitative and qualitative factors managers must consider in making their decisions. The first Summary Problem illustrates the differences between price-takers and price-setters. It also affords the student practice in special-order decisions. The end-of-chapter Decision Guidelines focuses on key guidelines that management can follow in making special business decisions.

The final Summary Problem allows students practice in making product mix decisions and outsourcing decisions.

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Learning Objectives After studying Chapter 8, your students should be able to: 1. Describe and identify information relevant to short-term business decisions 2. Describe and apply different approaches to pricing 3. Decide whether to accept a special order 4. Decide whether to discontinue a product, department, or store 5. Factor resource constraints into product mix decisions 6. Analyze outsourcing (make-or-buy) decisions 7. Decide whether to sell a product “as is” or process it further 8. Analyze business decisions using data analytics tools

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Teaching Outline I.

How Do Managers Make Decisions?

A. Exhibit 8-1: How Managers Make Decisions B. Relevant Information 1. Pertains to the future 2. Differs among alternatives 3. Financial and nonfinancial 4. Exhibit 8-2: Relevant Information C. Keys to Making Short-Term Special Decisions 1. Exhibit 8-3: Two keys to Making Short-Term Special Decisions 2. Incremental analysis a. Focus on relevant revenues, costs, and profits b. Use a contribution margin approach that separates variable costs from fixed costs D. Decision Pitfalls to Avoid 1. Avoid including sunk costs in analysis 2. Avoid using unit costs unless they are purely variable

II.

How Do Managers Make Pricing and Special Order Decisions?

A. Regular Pricing Decisions 1. Exhibit 8-4: Regular Pricing Considerations a. What is our target profit? b. How much are customers willing to pay?

2. Are we a price-taker or a price-setter? a. Exhibit 8-5: Price-Takers Versus Price-Setters b. Exhibit 8-6: Garnier’s Data for the Year 3. Cost-plus pricing c. Exhibit 8-7: Cost-Plus Pricing Analysis 4. Target costing d. Exhibit 8-8: Target Costing Analysis e. Exhibit 8-9: Calculating Target Unit Variable Cost B. Special Order Decisions 1. Exhibit 8-10: Special Order Considerations a. Do we have enough excess capacity? b. Will the reduced sales price cover the incremental costs of filling the order? c. Will regular sales be affected in the long run?

2. Decision rules a. Accept if revenue exceeds incremental costs b. Reject if incremental costs exceed revenue 3. Exhibit 8-11: Incremental Analysis of Special Sales Order 4. Pitfalls to avoid a. Avoid using the absorption cost per unit in analysis b. Use contribution margin approach

III.

How Do Managers Make Other Business Decisions?

A. Decisions to Discontinue Products, Departments, or Stores 1. Exhibit 8-12: Considerations for Discontinuing Products, Departments, or Stores a. Does the product provide a positive contribution margin? b. Are there any fixed costs that can be avoided if the product is discontinued? c. Avoidable fixed costs 8-3 .

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d. Unavoidable fixed costs e. Will discontinuing the product affect sales of the company’s other products? f. What could we do with the freed capacity?

2. Decision rule a. Do not discontinue if contribution margin lost from discontinuing exceeds the fixed cost savings b. Discontinue if the fixed cost savings exceed the contribution margin lost from discontinuing 3. Exhibit 8-13: Product Line Income Statement 4. Exhibit 8-14: Analysis of the Company’s Fixed Costs 5. Exhibit 8-15: Incremental Analysis for Discontinuing a Product Line 6. Pitfalls to avoid a. Common fixed expenses b. Segment margin income statement c. Contribution margin – direct fixed costs = segment margin d. Common fixed costs only shown in total B. Product Mix Decision When Resources Are Constrained 1. Exhibit 8-16: Product Mix Considerations a. What constraint stops us from making all of the units we can sell? b. Which products offer the highest contribution margin per unit of constraint? c. Would emphasizing one product over another affect fixed costs or sales of other products?

2. Decision rule a. If there is no constraint, emphasize the product with the highest unit contribution margin. b. If there is a constraint, emphasize the product with the highest contribution margin per unit of the constraint.

3. Exhibit 8-17: Contribution Margin Data 4. Exhibit 8-18: Calculating the Contribution Margin per Unit of Constraint 5. Changing assumptions a. Unlimited demand b. Limited demand 6. Pitfalls to avoid a. Incorrect calculation of contribution margin per unit of constraint b. CM per unit x Units per hour = CM per hour c. CM per unit ÷ Hours per unit = CM per hour C. Outsourcing Decisions (Make or Buy) 1. Outsourcing versus offshoring a. Contract manufacturers 2. Exhibit 8-20: Outsourcing Considerations a. How do our variable costs per unit compare to the outsourcing cost per unit? b. Are any fixed costs avoidable if we outsource? c. What could we do with the freed capacity? d. Opportunity cost e. What volume do we need?

3. Decision rule a. Outsource if the incremental costs of making exceed the incremental cost of outsourcing. b. Do not outsource if the incremental costs of making are less than the incremental cost of outsourcing.

4. Exhibit 8-21: Production Costs and Volume 5. Exhibit 8-22: Incremental Analysis for Outsourcing Decisions 6. Exhibit 8-23: Alternative Incremental Analysis 8-4 .

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7. Exhibit 8-24: Using an Indifference Point to Find an Acceptable Outsourcing Price 8. Pitfalls to avoid a. Using the absorption cost per unit to make decision 9. Potential benefits and drawbacks of outsourcing a. Benefits b. Concentrate on core competencies c. Take advantage of other companies’ expertise and best practices d. Reduction of risks associated with investing in infrastructure e. Lower cost alternative f. Drawbacks g. Loss of control over quality and scheduling h. May result in layoffs D. Decisions to Sell As Is or Process Further 1. Exhibit 8-26: Sell As Is or Process Further Considerations a. How much revenue will we receive if we sell the product as is? b. How much revenue will we receive if we sell the product after processing it further? c. How much extra will it cost to process the product further?

2. Decision rule a. Process further if the extra revenue from processing further exceeds the extra cost of processing further. b. Do not process further if the extra revenue from processing further is less than the extra cost of processing further.

3. Exhibit 8-27: Incremental Analysis for Sell As Is or Process Further Decision 4. Pitfalls to avoid a. Considering sunk costs IV.

How Can Managers Use Data Analytics to Analyze Business Decisions?

A. Exhibit 8-28: Special Order Received from Customer B. Exhibit 8-29: Partial List of Job Cost Records in Chronological Order (Most Recent First) C. Exhibit 8-30: Completed Special Order Analysis D. How to Use VLOOKUP 1. Stands for vertical lookup

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Managerial Accounting 6e Instructor’s Resource Manual

Key Topics Having the class talk about planning a trip with friends for spring break mirrors a manager’s short-term business decision-making process.

1. Define business goals—what are the friends’ goals for activities during spring break?

2. Identify alternative courses of action—what are the possible things to do: going somewhere, day trips, working, and so on.

3. Gather and analyze relevant information and compare alternatives—cost of trip, making money vs. spending money, and so on.

4. Choose the best alternative—selecting plans for spring break.

Six decision-making scenarios are discussed in the chapter. One approach to making short-term decisions is by using incremental analysis. This approach looks at what will change or differ under each alternative.

For decision-making purposes, remind students that managers should focus on relevant information and use a contribution margin approach. Relevant information differs among alternatives and affects the future. The contribution margin approach separates variable costs from fixed costs. Throughout the scenarios, remind students to avoid using sunk costs and unit costs unless they are purely variable in nature.

The first decision-making scenario discussed in the chapter is regular pricing decisions. Regular pricing decisions are made by considering target profit, determining how much customers will pay, and deciding if the company is a price-taker or a price-setter. Price-takers do not have much control in setting their prices and use a pricing approach known as target costing. Price-setters do not have to worry about the competitor’s price so they can set prices by adding their desired profit to the cost to produce that product.

Price-setters use a pricing approach known as cost-plus pricing. Have students work in teams or with a partner to complete E8-39B Pricing decisions given two scenarios. Call on a student or a group to give their answers.

The second decision-making scenario discussed in the chapter is special order decisions. Special orders generally refer to a one-time order for a large volume of product at a reduced sales price. When making special order decisions, companies should consider if excess capacity is available, if the reduced sales price is high enough to cover incremental costs of filling the special order, and if accepting the special order will affect regular sales in the long run. Remind students to avoid comparing the special order sales price with the absorption cost per unit when making a special order decision. Have students complete E842B Special order decision and considerations as a group. Call on a group to present their finding to the class.

The third decision-making scenario discussed in the chapter relates to the decision to discontinue products, departments, or stores. When making this decision, companies should consider if the product provides a positive contribution margin, if any fixed costs will be avoided if the product is discontinued, if discontinuing the product will affect sales of other produces, and what can be done with any freed up capacity. If the lost revenues exceed the cost savings from discontinuing the product, the product should not be discontinued. However, if the total cost savings exceed the lost revenue from discontinuing the product, the product should be discontinued. Remind students that common fixed costs should not be used when calculating the segment margin. Have students work in teams to complete E8-44B Discontinuing a product line.

The fourth decision-making scenario discussed in the chapter is product mix decisions when resources are constrained. Companies do not have unlimited resources. Constraints that restrict production or sale of a product vary from company to company. When constraints such as labor hours, machine hours, or 8-6 .

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available space are there, the product with the highest contribution margin per unit of the constraint should be emphasized. If fixed costs are unaffected by the product mix, the product with the highest contribution margin per constraint should be allocated the maximum constraint quantity, up to the customer demand. Have students work in teams to complete E8-45B Identify constraint, then determine product mix.

The fifth decision-making scenario discussed in the chapter is outsourcing decisions. This decision is sometimes referred to as “make-or-buy” decisions because managers must decide whether to make or provide a product or service in-house or buy it from another company. In outsourcing decisions, managers must consider how in-house variable costs per unit compare to the outsourcing cost per unit, determine if any fixed costs are avoidable if the company outsources, and consider what could be done with any freed up capacity. If the incremental costs of making exceed the incremental costs of outsourcing, the company should outsource. If the incremental costs of making are less than the incremental costs of outsourcing, the company should continue to make the product or provide the service in house. Discuss the potential benefits and drawbacks of outsourcing as a class. Have students work in teams to complete E8-49B Make-or-buy with alternative use of facilities. Call on a group to give their response. Discuss with students how companies can calculate the maximum outsourcing price using the indifference point calculation. Have students work in the same teams to complete E8-50B Determine maximum outsourcing price. Call on a different group to present their answer.

The sixth decision-making scenario discussed in the chapter is sell as is or process further. This decision determines at which point in processing a company should sell its product. In sell as is or process further decisions, managers must determine how much revenue will be generated if the product is sold as is, how much revenue will be generated if the product is sold after processing it further, and what additional costs will be incurred if the product is processed further. If the extra revenue from processing further exceeds the extra cost of processing further, the company should decide to process further. However, if the extra revenue from processing further is less than the extra cost of processing further, the company should sell the product as is. Have students work in teams to complete E8-51B Sell as is or process further. Call on a student to give the team’s answer.

As a class, discuss the merits of the VLOOKUP function as a data analysis tool in the decision-making process. The function allows managers to use information they know to look up information they do not know offhand but would like to know. Complete requirements 1 through 3 of E8-52B Analyze business decisions using analytics tools as a class. Divide students up into groups to discuss requirement 4 of the exercise. Choose two groups to share their answers and explanations.

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Managerial Accounting 6e Instructor’s Resource Manual

Chapter 8: Student Summary Handout I.

Information relevant to short-term business decisions A. Relevant information 1. Pertains to the future 2. Differs among alternatives 3. Financial and nonfinancial B. Keys to making short-term special decisions 1. Incremental analysis a. Focus on relevant revenues, costs, and profits b. Use a contribution margin approach that separates variable costs from fixed costs C. Decision pitfalls to avoid 1. Avoid including sunk costs in analysis 2. Avoid using unit costs unless they are purely variable D. Making regular pricing decisions 1. What is our target profit?

2. How much are customers willing to pay?

3. Are we a price-taker or a price-setter? a. Price-takers versus price-setters b. Cost-plus pricing c. Target costing

II.

Special order decisions A. Special order considerations 1. Do we have enough excess capacity?

2. Will the reduced sales price cover the incremental costs of filling the order?

3. Will regular sales be affected in the long run?

B. Decision rules 1. Accept if revenue exceeds incremental costs 2. Reject if incremental costs exceed revenue C. Example D. Pitfalls to avoid 1. Avoid using the absorption cost per unit in analysis a. Use contribution margin approach

III.

Making other special business decisions A. Decisions about discontinuing a product, department, or store 1. Considerations for discontinuing products, departments, or stores a. Does the product provide a positive contribution margin? b. Are there any fixed costs that can be avoided if the product is discontinued? c. Avoidable fixed costs d. Unavoidable fixed costs e. Will discontinuing the product affect sales of the company’s other products? f. What could we do with the freed capacity?

2. Decision rule a. Do not discontinue if contribution margin lost from discontinuing exceeds the fixed cost savings b. Discontinue if the fixed cost savings exceed the contribution margin lost from discontinuing 3. Example 8-8 .

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Relevant Costs for Short-Term Decisions

4. Pitfalls to avoid a. Common fixed expenses b. Segment margin income statement c. Contribution margin – direct fixed costs = segment margin d. Common fixed costs only shown in total B. Product mix decision when resources are constrained 1. Product mix considerations a. What constraint stops us from making all of the units we can sell? b. Which products offer the highest contribution margin per unit of constraint? c. Would emphasizing one product over another affect fixed costs or sales of other products?

2. Decision rule a. If there is no constraint, emphasize the product with the highest unit contribution margin. b. If there is a constraint, emphasize the product with the highest contribution margin per unit of the constraint.

3. Example 4. Changing assumptions a. Unlimited demand b. Limited demand 5. Pitfalls to avoid a. Incorrect calculation of contribution margin per unit of constraint b. CM per unit × Units per hour = CM per hour c. CM per unit ÷ Hours per unit = CM per hour C. Outsourcing decisions (make or buy) 1. Outsourcing versus offshoring a. Contract manufacturers 2. Outsourcing considerations a. How do our variable costs per unit compare to the outsourcing cost per unit? b. Are any fixed costs avoidable if we outsource? c. What could we do with the freed capacity? d. Opportunity cost e. What volume do we need?

3. Decision rule a. Outsource if the incremental costs of making exceed the incremental cost of outsourcing. b. Do not outsource if the incremental costs of making are less than the incremental cost of outsourcing.

4. Example 5. Pitfalls to avoid a. Using the absorption cost per unit to make decision 6. Potential benefits and drawbacks of outsourcing a. Benefits b. Concentrate on core competencies c. Take advantage of other companies’ expertise and best practices d. Reduction of risks associated with investing in infrastructure e. Lower cost alternative f. Drawbacks g. Loss of control over quality and scheduling h. May result in layoffs D. Decisions to sell as is or process further 1. Sell as is or process further considerations a. How much revenue will we receive if we sell the product as is?

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Managerial Accounting 6e Instructor’s Resource Manual

b. How much revenue will we receive if we sell the product after processing it further? c. How much extra will it cost to process the product further?

2. Decision rule a. Process further if the extra revenue from processing further exceeds the extra cost of processing further. b. Do not process further if the extra revenue from processing further is less than the extra cost of processing further.

3. Example 4. Pitfalls to avoid a. Considering sunk costs IV.

Using data analytics to make business decisions A. How to use VLOOKUP 1. Stands for vertical lookup

MyAccountingLab.com algorithmic homework assignments: E8-21A, E8-22A, E8-26A, E8-28A, E8-29A, E8-33A.

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Chapter 8

Relevant Costs for Short-Term Decisions

Chapter 8: ASSIGNMENT GRID

Assignment

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S8-1

Determine relevance of information Determine pricing approach and target price Use target costing to analyze data Analyze special order decisions Special order decision Decide whether to discontinue a department Discontinue a department: Revised information Replace a department Product mix decision: Unlimited demand Product mix decision: Limited demand Outsourcing production decision Relevant information for outsourcing delivery function Scrap or process further decision Determine most profitable final product Identify ethical standards violated

S8-2 S8-3 S8-4 S8-5 S8-6 S8-7 S8-8 S8-9 S8-10 S8-11 S8-12 S8-13 S8-14 S8-15 S8-16 S8-17

E8-18A E8-19A E8-20A E8-21A E8-22A E8-23A E8-24A

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Learning Objective(s) Short Exercises 1

Analyze business decisions using data analytics tools Analyze business decisions using 8 data analytics tools Exercises (Group A) Determine relevant and irrelevant 1 information Sustainability and short-term 1 decision making Analyze special order decision 3 Pricing decisions given two 2 scenarios Analyze special order decision 3 Special order decisions given two 3 scenarios Special order decision and 3 considerations

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Managerial Accounting 6e Instructor’s Resource Manual

Assignment E8-25A E8-26A E8-27A E8-28A E8-29A E8-30A E8-31A E8-32A E8-33A E8-34A E8-35A

E8-36B E8-37B E8-38B E8-39B E8-40B E8-41B E8-42B E8-43B E8-44B E8-45B E8-46B E8-47B E8-48B E8-49B E8-50B E8-51B

Learning Objective(s) 4

Topic(s) Decide whether to discontinue a product line Discontinuing a product line 4 Identify constraint and then 5 determine product mix Determine product mix for 5 retailer—two stocking scenarios Analyze outsourcing decision 6 Make-or-buy product component 6 Make-or-buy decision with 6 alternative use of facilities Determine maximum outsourcing 6 price Sell as is or process further 7 Analyze business decisions using 8 data analytics tools Analyze business decisions using 8 data analytics tools Exercises (Group B) Determine relevant and irrelevant 1 information Sustainability and short-term 1 decision making Analyze special order decision 3 Pricing decisions given two 2 scenarios Analyze special order decision 3 Special order decisions given two 3 scenarios Special order decision and 3 considerations Decide whether to discontinue a 4 product line Discontinuing a product line 4 Identify constraint and then 5 determine product mix Determine product mix for 5 retailer—two stocking scenarios Analyze outsourcing decision 6 Make-or-buy product component 6 Make-or-buy decision with 6 alternative use of facilities Determine maximum outsourcing 6 price Sell as is or process further 7 8-12 .

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Chapter 8

Assignment E8-52B E8-53B

P8-54A P8-55A P8-56A

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P8-63B P8-64B P8-65B

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A8-67 A8-68 A8-69 A8-70

Relevant Costs for Short-Term Decisions

Learning Objective(s) 8

Topic(s) Analyze business decisions using data analytics tools Analyze business decisions using 8 data analytics tools Problems (Group A) Pricing of nursery plants 2 Special order decision and 3 considerations Prepare and use contribution 4 margin statements for discontinuing a line decision Product mix decision under 5 constraint Outsourcing decision given 6 alternative use of capacity Sell as is or process further 7 decisions Problems (Group B) Pricing of nursery plants 2 Special order decision and 3 considerations Prepare and use contribution 4 margin statements for discontinuing a line decision Product mix decision under 5 constraint Outsourcing decision given 6 alternative use of capacity Sell as is or process further 7 decisions Serial Case Decide whether to discontinue a 4 department Critical Thinking Discussion questions All Outsourcing decision at a real All company Ethics and outsourcing All Starbucks food waste: Sell now or process further?

1&6

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Managerial Accounting 6e Instructor’s Resource Manual

Name____________________________________ Date_________________ Section_______________

CHAPTER 8 TEN-MINUTE QUIZ Circle the letter of the best response.

1.

Which of the following costs are irrelevant to short-term business decisions?

A. Variable costs B. Costs that differ between alternatives C. Future costs D. Sunk costs

2.

Which of the following is the key to making short-term special decisions?

A. Relevant revenues, costs, and profits B. Use of traditional (absorption costing) income statements C. Use of a contribution margin approach D. Both A and C

3.

A company sells a product that is relatively unique. Consequently, there is not a lot of competition for the product. The company most likely A. is a price-taker.

B. uses a pricing approach emphasizing target costing.

C. is a price-setter.

D. sells commodities.

4.

Fishing Run Corporation received a special order request for 20,000 new fishing poles at a sale price of $30 each. This is a $10 reduction in the normal selling price. The variable costs per fishing pole are $20. The total fixed costs of $110,000 will not change. Which of the following is TRUE? A. Management should accept the order if the variable costs per unit and fixed costs in total will not change with the order.

B. Management should accept the order if they have excess capacity.

C. Management should consider not accepting the order if the customers will expect the price decrease as the standard price in the future.

D. All of the above are true.

5.

Fishing Run Corporation received a special order request for 20,000 new fishing poles at a sale price of $30 each. This is a $10 reduction in the normal selling price. The variable costs per fishing pole are $20. The total fixed costs of $110,000 will not change as a result of the special order. The corporation has enough excess capacity to fill the order without affecting current sales.

What will be the impact on operating income if the special order is accepted?

A. Decrease in operating income of $90,000 B. Decrease in operating income of $200,000 C. Increase in operating income of $90,000 D. Increase in operating income of $200,000

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Relevant Costs for Short-Term Decisions

6.

If factors restrict production capacity, a company should focus on the product line that has the highest A. profit per unit of product.

B. contribution margin per unit of the constraint.

C. contribution margin ratio.

D. selling price per unit of product.

7.

Signature Corporation has three product lines: silver, gold, and platinum. All three products have a positive contribution margin, but the gold line has an operating loss. Management is considering discontinuing the product. Management decides to discontinue the gold line. Which of the following must be true if the management followed the decision rule?

A. Total cost savings exceeded the lost revenues from discontinuing the line.

B. Lost revenues exceeded the cost savings from discontinuing the line.

C. Operating income will not change.

D. Not enough information is present to make that determination.

8.

Thematics Publishing produces 10,000 binders each year. Each binder has a variable cost of $17 and total fixed costs of $110,000 per year. The binders can be purchased from an outside supplier for $20 each. The production space will remain idle, but fixed costs can be reduced by 30%. The annual impact of purchasing the binders will be to A. increase operating income by $3,000.

B. increase operating income by $47,000.

C. decrease operating income by $3,000.

D. decrease operating income by $47,000.

9. Quinn Bakery bakes gingerbread cookies and sells them by the dozen. During the holiday season, they bake 1,000 dozen cookies. They can sell the plain, undecorated cookies (“as is”) for $2.50 per dozen. If they decorate the cookies at an additional cost of $1 per dozen, each decorated dozen could be sold for $4.00. Should Quinn Bakery sell the cookies undecorated (“as is”) or should the cookies be decorated (“processed further”)?

A. Quinn Bakery should sell undecorated cookies (“as is”) because operating income will be higher by $500 than if they sell them decorated (“processed further”).

B. Quinn Bakery should sell undecorated cookies (“as is”) because operating income will be higher by $3,500 than if they sell them decorated (“processed further”).

C. Quinn Bakery should decorate the cookies because operating income will be higher by $500 than if they sell them undecorated (“as is”).

D. Quinn Bakery should decorate the cookies because operating income will be higher by $3,500 than if they sell them undecorated (“as is”).

10.

Complete the following statement: The VLOOKUP function allows managers to use some information they know to look up information they A. want to know.

B. can already access.

C. lost due to a computer virus.

D. recorded in a prior period.

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Managerial Accounting 6e Instructor’s Resource Manual

Answer Key to Chapter 8 Ten-Minute Quiz 1. D 2. D 3. C 4. D 5. D

6. B 7. A 8. A 9. C 10. A

8-16 .

Chapter 9 The Master Budget This chapter presents an overview of the budgeting process and shows how various budgets relate to one another. The chapter focuses on budgets for a manufacturer; however, the budgets for service and merchandising companies are also discussed.

The first half of the chapter focuses on the preparation of the operating budgets. Operating budgets are needed to run the daily operations of the company. Operating budgets culminate in a budgeted income statement. The starting point of an operating budget is the sales budget because it affects most other components of the master budget. The sales budget is the foundation for all budget planning. Once sales have been projected, management can determine the number of units that must be produced. This information is captured on the production budget. Once production volume is established, managers prepare the budgets by determining the amounts of direct materials, direct labor, and manufacturing overhead that will be needed to meet production. Next, managers prepare the operating expenses budget.

After all of these budgets are prepared, management can prepare the budgeted income statement.

The first set of Decision Guidelines addresses some of the decisions a company would make as it sets up its budgeting process. The accompanying Summary Problem requires the student to prepare a sales budget, a production budget, and a direct materials purchases budget.

The second half of the chapter focuses on the preparation of the financial budget, which includes the capital expenditure budget, cash budgets, and the budgeted balance sheet. The importance of sensitivity analysis and flexible budgeting to the budgeting process are also discussed. The chapter concludes by covering how the budgets for service and merchandising companies differ from those of a manufacturer.

The chapter concludes with a discuss of how managers can use data analytics to help with preparing a sales budget. FORCAST.LINEAR, SLOPE, INTERCEPT, and RSQ functions are all illustrated.

The end of the chapter Decision Guidelines covers additional decisions related to the budgeting process and budget preparation. The final Summary Problem allows the student practice in developing cash collections and cash disbursements budgets.

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Managerial Accounting 6e Instructor’s Resource Manual

Learning Objectives After studying Chapter 9, your students should be able to: 1. Describe how and why managers use budgets 2. Prepare the operating budgets 3. Prepare the financial budgets 4. Prepare budgets for a merchandiser 5. Analyze data for budgeting using data analytics tools

9-2 .

Chapter 9

The Master Budget

Teaching Outline I.

How and Why Do Managers Use Budgets?

A. Developing and Using Budgets 1. Exhibit 9-1: Managers Use Budgets to Plan and Control Business Activities 2. How budgets are developed a. Strategic planning b. Rolling budgets 3. Participants in budgeting process a. Participative budgeting b. Budget slack c. Budget committees 4. Starting point for developing the budgets a. Prior year actual or budget b. Zero-based budgeting B. The Benefits of Budgeting 1. Exhibit 9-2: Benefits of Budgeting 2. Planning 3. Coordination and communication 4. Benchmarking 5. Exhibit 9-3: Summary Performance Report C. The Master Budget 1. Exhibit 9-4: Master Budget For A Manufacturing Company

II.

How Are the Operating Budgets Prepared?

A. Sales Budget 1. Number of unit sales x Sales price per unit = Total sales revenue 2. Exhibit 9-5: Sales budget B. Production Budget 1. Safety stock 2. Units needed for sales + Desired units in ending inventory = Total units needed – Units in beginning inventory = Units to produce 3. Exhibit 9-6: Production Budget C. Direct Materials Budget 1. Quantity of DM needed for production + Desired quantity of DM in ending inventory = Total quantity of DM needed – Quantity of DM in beginning inventory = Quantity of DM to purchase 2. Exhibit 9-7: Direct Materials Budget D. Direct Labor Budget 1. Units to be produced x DL hours per unit = Total DL hours required x DL cost per hour = Total direct labor cost 2. Exhibit 9-8: Direct Labor Budget E. Manufacturing Overhead Budget 1. Highly dependent on cost behavior 2. Exhibit 9-9: Manufacturing Overhead Budget F. Operating Expenses Budget 1. Exhibit 9-10: Operating Expenses Budget G. Budgeted Income Statement 1. Exhibit 9-11: Budgeted Cost of Goods Sold per Unit 2. Number of unit sales × Manufacturing cost per unit = Cost of goods sold 9-3 .

Managerial Accounting 6e Instructor’s Resource Manual

3. Exhibit 9-12: Budgeted Income Statement III.

How Are the Financial Budgets Prepared?

A. Capital Expenditures Budget 1. Exhibit 9-13: Capital Expenditures Budget B. Cash Collections Budget 1. Exhibit 9-14: Cash Collections Budget C. Cash Payments Budget 1. Direct materials purchases 2. Direct labor 3. Manufacturing overhead 4. Operating expenses 5. Capital expenditures 6. Income taxes 7. Dividends 8. Exhibit 9-15: Cash Payments Budget D. Combined Cash Budget 1. Beginning cash balance + budgeted cash collections = cash available – budgeted cash payments = ending cash balance before financing 2. Line of credit 3. Exhibit 9-16: Combined Cash Budget E. Budgeted Balance Sheet 1. Exhibit 9-17: Budgeted Balance Sheet F. Sensitivity Analysis and Flexible Budgeting 1. Exhibit 9-18: Sensitivity Analysis

IV.

How Do the Budgets for Service and Merchandising Companies Differ?

A. Service Companies 1. Exhibit 9-19: Master Budget For A Service Company a. Operating budgets: sales budget, operating expenses budget, budgeted income statement b. Financial budgets: capital expenditures, cash budgets, and budgeted balance sheet B. Merchandising Companies 1. Exhibit 9-20: Master Budget For A Merchandising Company a. Operating budgets: sales budget, cost of goods sold, inventory, and purchases budget, operating expense budget, budgeted income statement b. Exhibit 9-21: Merchandiser’s cost of goods sold, inventory, and purchases budget c. Financial budgets: capital expenditures, cash budgets, and budgeted balance sheet C. Impact of Credit and Debit Card Sales On Budgeting 2. Credit and debit cards a. Disadvantage i. Transaction fees b. Advantages i. Gain sales ii. Decrease costs related to accepting checks iii. Improve cash flow 3. Retail credit cards 4. Exhibit 9-22: Comparison of credit cards

V.

How Can Managers Use Data Analytics to Help with Budgeting?

A. Pivot tables B. Visual representations of data 9-4 .

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C. Regression analysis 1. Linear trendline 2. Exhibit 9-23: Relationship between number of promotional coupons and coffee sales volume 3. Exhibit 9-24: Use of Excel functions to make forecasts a. Slope of the trendline b. Intercept of the trendline c. R-squared value D. How to Visualize a Linear Trendline With Forecast Forward E. How to Use the FORECAST.LINEAR, SLOPE, INTERCEPT, and RSQ functions

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Managerial Accounting 6e Instructor’s Resource Manual

Key Topics Preparing budgets can become mechanical for students. Challenge students to think of a mental budget they’ve prepared even if it was just for a shopping trip. This process helps students relate to the business use of budgets. It is also important to remind students of the purpose and benefits of budgeting. Discuss how budgets are all interrelated and show students how one budget affects another.

To help students understand the budgeting process, have them consider a situation where they are saving for a new car. In order to attain the funds needed for a down payment, they would need to develop a strategy (get a job, work more hours, spend less than they are currently spending). The strategy then develops into a plan that includes dollars and specific time frames. The students then follow their plan and, after a period of time, compare their actual savings to their planned savings. Based on the results, a new strategy may be developed and the cycle continues. Explain how businesses follow a very similar cycle: develop strategy, create plan, act on plan, and control.

Companies provide benchmarks to motivate employees and help managers evaluate performance. When actual results are compared to budgeted results, the difference (variance) may be due to poor estimates in the original budget, uncontrollable events, or as a result of the employees’ performance. Students can relate personally to benchmarking. Students typically set a benchmark for a grade in their accounting class. Explain how this process motivates them to study and complete the class work. The grade benchmark also is a way for them to evaluate their performance when they compare their actual grade with their benchmarked grade. Explain that students may do this comparison after each graded assignment so they will have time to make proper adjustments, just as companies do with their budgets.

Discuss the master budget. Explain that the master budget is the comprehensive planning document for the entire organization. It consists of all of the supporting budgets needed to create the company’s budgeted financial statements. Discuss the components of the master budget and explain operating and financial budgets. Stress the importance of the sales budget and how it affects all other budgets in the master budget. If the sales budget is incorrect, it will create a ripple effect on the other budgets within the master budget.

Discuss the difference between sales price and cost. The sales budget deals with the projected sales price to the customer, whereas most of the other budgets deal with the cost to the company. Have students work in teams to complete E9-42B Sales budget for a retail organization. Call on a team to give their response.

When discussing the cash collections budget, highlight the difference between payment terms and a collection pattern. Have students work in pairs to complete E9-52B Cash collections budget.

For the cash payments budget, discuss the types of payments typically included in the budget. Ask students why there would be a difference between expenses reported on the income statement and operating payments made during the period. Discuss differences due to timing and the recognition of noncash expenses such as depreciation and bad debt expenses. Also, discuss the increased use of debit cards as a method of payment and the effect they have on budgeting. Have students work in teams to complete E9-53B Cash payments budget. Choose a team to present their answers to the class.

After completing the cash collections and cash payments budgets, discuss the preparation of the combined cash budgets. Stress the importance of budgeting ending cash for a company. If a company determines it will have a cash surplus, it needs to decide what to do with the extra cash. Discuss options for using a cash surplus. If a company determines it will have a cash deficit at the end of the period, it needs to 9-6 .

Chapter 9

The Master Budget

discuss options for either increasing cash inflows or decreasing cash outflows for the period. Discuss options for overcoming a cash deficit. Have students work in teams to complete E9-54B Combined cash budget.

Discuss the importance of sensitivity analysis and flexible budgeting to respond to changes in key assumptions that will affect the previously prepared budgets. Ask the students to identify some of those changes that might occur. Discuss how a company might need to respond to those changes.

To finish out the chapter, discuss the use of data analytics as it relates to budgeting. Specifically talk about the importance of the sales budget and how data analytics can be used to more accurately predict sales volume. Divide the class into groups and have them complete E9-61B Analyze business decisions using data analytics tools. Ask students to explain why predicting sales volume is critical to the entire budgeting process.

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Managerial Accounting 6e Instructor’s Resource Manual

Chapter 9: Student Summary Handout I.

How and why managers use budgets A. How budgets are used B. How budgets are developed 1. Strategic planning 2. Rolling budgets C. Who develops budgets 1. Participative budgeting a. Budget slack 2. Budget committees D. The starting point for developing the budgets 1. Prior year actual or budget 2. Zero-based budgeting E. The benefits of budgets 1. Planning 2. Coordination and communication 3. Benchmarking F. Master budget for a manufacturing company

II.

Operating budgets A. Sales budget 1. Number of unit sales x Sales price per unit = Total sales revenue B. Production budget 1. Safety stock 2. Units needed for sales + Desired units in ending inventory = Total units needed – Units in beginning inventory = Units to produce C. Direct materials budget 1. Quantity of DM needed for production + Desired quantity of DM in ending inventory = Total quantity of DM needed – Quantity of DM in beginning inventory = Quantity of DM to purchase D. Direct labor budget 1. Units to be produced x DL hours per unit = Total DL hours required x DL cost per hour = Total direct labor cost E. Manufacturing overhead budget 1. Highly dependent on cost behavior F. Operating expenses budget G. Budgeted income statement 1. Number of unit sales × Manufacturing cost per unit = Cost of goods sold

III.

Financial budgets A. Capital expenditures budget B. Cash collections budget C. Cash payments budget 1. Direct materials purchases 2. Direct labor 3. Manufacturing overhead 4. Operating expenses 5. Capital expenditures 6. Income taxes 9-8 .

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7. Dividends 8. Exhibit 9-15: Cash payments budget 9. Combined cash budget a. Beginning cash balance + budgeted cash collections = cash available – budgeted cash payments = ending cash balance before financing b. Line of credit D. Budgeted balance sheet E. Sensitivity analysis and flexible budgeting IV.

Budgets for service and merchandising companies A. Service companies 1. Operating budgets: sales budget, operating expenses budget, budgeted income statement 2. Financial budgets: capital expenditures, cash budgets, and budgeted balance sheet B. Merchandising companies 1. Operating budgets: sales budget, cost of goods sold, inventory, and purchases budget, operating expense budget, budgeted income statement 2. Financial budgets: capital expenditures, cash budgets, and budgeted balance sheet C. Impact of credit and debit card sales on budgeting 1. Disadvantage a. Transaction fees 2. Advantages a. Gain sales b. Decrease costs related to accepting checks c. Improve cash flow D. Retail credit cards

V.

Using data analytics to help with budgeting A. Pivot tables B. Visual representations of data C. Regression analysis 1. Linear trendline 2. Use of Excel functions to make forecasts a. Slope of the trendline b. Intercept of the trendline c. R-squared value D. How to visualize a linear trendline with forecast forward E. How to use the FORECAST.LINEAR, SLOPE, INTERCEPT, and RSQ functions MyAccountingLab.com algorithmic homework assignments: E9-24A, E9-25A, E9-27A, E9-31A, E9-33A.

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Managerial Accounting 6e Instructor’s Resource Manual

CHAPTER 9: ASSIGNMENT GRID

Assignment S9-1 S9-2 S9-3 S9-4 S9-5 S9-6 S9-7 S9-8 S9-9 S9-10 S9-11 S9-12 S9-13 S9-14 S9-15 S9-16 S9-17 S9-18

E9-19A E9-20A E9-21A E9-22A E9-23A E9-24A E9-25A E9-26A E9-27A E9-28A E9-29A E9-30A E9-31A

Learning Topic(s) Objective(s) Short Exercises Order of preparation and 1 components of master budget Explain why companies use 1 zero-based budgeting Understand key terms and 1&2 definitions Sales budget 2 Production budget 2 Direct materials budget 2 Direct labor budget 2 Manufacturing overhead budget 2 Operating expenses budget 2 Budgeted income statement 2 Cash collections budget 3 Cash payments budget 3 Cash budget 3 Estimate credit card fees 4 Cost of goods sold, inventory, 4 and purchases budget Identify ethical standards 1, 2, 3, & 4 violated Analyze business decisions 5 using data analytics tools Analyze business decisions 5 using data analytics tools Exercises (Group A) Budgeting and sustainability 1&2 Sales budget for a retail 2 organization Service revenue budget for a 2 not-for-profit organization Production budget 2 Direct materials budget 2 Production and direct materials 2 budgets Direct labor budget 2 Manufacturing overhead budget 2 Operating expenses budget and 2 an income statement Budgeted income statement 2 Budgeted income statement 2 Cash collections budget 3 Cash payments budget 3 9-10 .

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Chapter 9

Assignment E9-32A E9-33A E9-34A E9-35A E9-36A E9-37A E9-38A E9-39A E9-40A

E9-41B E9-42B E9-43B E9-44B E9-45B E9-46B E9-47B E9-48B E9-49B E9-50B E9-51B E9-52B E9-53B E9-54B E9-55B E9-56B E9-57B E9-58B E9-59B E9-60B

Learning Objective(s) 3 2&3

Topic(s) Combined cash budget Sales and cash collections budgets Budgeted balance sheet 3 Incomplete cash budget 3 Credit and debit card fees 4 calculations and analysis Cost of goods sold, inventory, 4 and purchases budget Cost of goods sold, inventory, 4 and purchases budget Analyze business decisions 5 using data analytics tools Analyze business decisions 5 using data analytics tools Exercises (Group B) Budgeting and sustainability 1&2 Sales budget for a retail 2 organization Service revenue budget for a 2 not-for-profit organization Production budget 2 Direct materials budget 2 Production and direct materials 2 budgets Direct labor budget 2 Manufacturing overhead budget 2 Operating expenses budget and 2 an income statement Budgeted income statement 2 Budgeted income statement 2 Cash collections budget 3 Cash payments budget 3 Combined cash budget 3 Sales and cash collections 2&3 budgets Budgeted balance sheet 3 Incomplete cash budget 3 Credit and debit card fees 4 calculation and analysis Cost of goods sold, inventory, 4 and purchases budget Cost of goods sold, inventory, 4 and purchases budget

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The Master Budget

Estimated Time in Minutes 20 15

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Assignment E9-61B E9-62B

P9-63A P9-64A P9-65A P9-66A P9-67A P9-68A P9-69A P9-70A

P9-71B P9-72B P9-73B P9-74B P9-75B P9-76B P9-77B P9-78B

C9-79

A9-80 A9-81 A9-82 A9-83

Learning Objective(s) 5

Topic(s) Analyze business decisions using data analytics tools Analyze business decisions 5 using data analytics tools Problems (Group A) Comprehensive budgeting 2&3 problem Cash budgets under two 2&3 alternatives Comprehensive summary 2&3 problem Budgeted income statement 2 Cash budgets 3 Combined cash budget and a 3 budgeted balance sheet Cost of goods sold, inventory, 4 and purchases budget Prepare comprehensive budgets 2, 3, & 4 for a retailer Problems (Group B) Comprehensive budgeting 2&3 problem Cash budgets under two 2&3 alternatives Comprehensive summary 2&3 problem Budgeted income statement 2 Cash budgets 3 Combined cash budget and a 3 budgeted balance sheet Cost of goods sold, inventory, 4 and purchases budget Prepare comprehensive budget 2, 3, & 4 for a retailer Serial Case Prepare a budget for newly 2 renovated hotel Critical Thinking Discussion questions All Budgeting for a single product All Ethics and budgetary slack 1, 2, 3, & 4 Budgeting issues at the movies 1, 2, 3, & 4

9-12 .

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Chapter 9

The Master Budget

Name____________________________________ Date_________________ Section_______________

CHAPTER 9 TEN-MINUTE QUIZ Circle the letter of the best response.

1.

Which of the following is NOT true of the budgeting process?

A. Budgeting provides feedback to management to aid in assessing how well they are reaching their goals.

B. Budgets force managers to plan for the future.

C. Budgets force managers to consider relations among operations across the entire value chain.

D. The performance report is prepared as part of the master budget.

2.

Which of the following budgets is the comprehensive planning document for the entire organization?

A. Sales budget B. Capital expenditure budget C. Master budget D. Budgeted income statement

3.

Which type of budgeting involves the participation of many levels of management?

A. Zero-based budgeting B. Participative budgeting C. Group budgeting D. Department budgeting

4.

Green Company has budgeted sales of 23,000 units for June and 25,000 units for July. Green’s policy is to maintain its finished goods inventory at 25% of the following month’s unit sales.

Accordingly, at the end of May, Green had 5,750 units on hand. How many units must it produce in June in order to support the sales goal and maintain its policy regarding finished goods inventory?

A. 6,250 units B. 23,000 units C. 23,500 units D. 29,250 units

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5.

Usually, the first step in the budgetary process is the preparation of the A. budgeted balance sheet.

B. budgeted income statement.

C. combined cash budget.

D. sales budget.

6.

Which of the following would appear on both the budgeted income statement and the cash budget?

A. Depreciation expense B. Capital expenditures C. Rent expense D. Equipment

7.

Which of the following budgets would NOT be prepared by a service company?

A. Operating expense budget B. Production budget C. Budgeted income statement D. Capital expenditures budget

8.

Monroe Group is preparing its cash collections budget. Budgeted sales are $150,000 in July, $175,000 in August, and $200,000 in September. Fifty percent of sales are cash sales; the remainder is on account. Sales on account are expected to be collected 30% in the month of sale, 60% in the month following the month of sale, and 10% in the second month following the month of sale. What are anticipated cash collections during the month of September?

A. $190,000 B. $180,000 C. $130,000 D. $100,000

9.

Beginning inventory is $120,000, and ending inventory is 60% of beginning inventory. Compute cost of goods sold for the period if purchases are $400,000.

A. $72,000 B. $448,000 C. $520,000 D. $592,000

10.

What does a linear trendline indicate?

A. There is a strong relationship between x and y.

B. The actual data points do not fall in a linear pattern.

C. The R-squared value reported from regression analysis would be close to 0%.

D. The actual data points cannot be graphed on a scatterplot.

9-14 .

Chapter 9

Answer Key to Chapter 9 Ten-Minute Quiz 1. D 2. C 3. B 4. C 5. D

6. C 7. B 8. A 9. B 10. A

9-15 .

The Master Budget

Chapter 10 Performance Evaluation This chapter discusses tools used by managers to evaluate the performance of segments, or parts, of the company. As a company grows, it is impossible for a single person to manage the entire organization’s operations. Therefore, most companies decentralize as they grow. Companies that decentralize split their operations into different operating segments based factors on such as geographic area, product lines, and customer bases. Top management delegates decision-making responsibility to the segment managers.

Once a company decentralizes operations, top management is no longer involved in running the day-today operations of the segments. Performance evaluation systems provide upper management with the feedback they need to maintain control over the entire organization. Segments can be further classified as responsibility centers. A responsibility center is a part of an organization whose manager is accountable for planning and controlling certain activities. There are four types of responsibility centers: cost center, revenue center, profit center, and investment center.

The performance of each type of responsibility center can be evaluated using performance reports.

Performance reports compare actual revenues and expenses against budgeted revenues and expenses. This difference is known as a variance. Performance reports for cost centers calculate cost variances.

Performance reports for revenue centers calculate revenue variances. The performance reports for profit and investment centers calculate variances for both revenues and costs and often report segment margins.

In addition to meeting revenue and expenses goals, the investment center is also evaluated on how efficiently the company uses its assets and can also be evaluated using return on investment (ROI) and residual income (RI). The internal sale of products between two different divisions will affect these calculations. Strategies involved in setting transfer prices include market price, negotiated price, and cost or cost plus a markup.

The first set of Decision Guidelines considers some issues regarding performance evaluation. The accompanying Summary Problem allows for practice in calculating the measures used to evaluate investment centers, including ROI, sales margin, capital turnover, and RI. Flexible budgets are budgets prepared for different levels of volume and are used for planning revenues and expenses at different sales volumes. Managers use the flexible budget prepared for the actual sales volume to break down the master budget variance into two broad categories: the volume variance and the flexible budget variance. The volume variance arises when the number of units actually sold differs from the number of units originally anticipated to be sold in the master budget. The flexible budget variance arises when the company actually earned more or less revenue, or incurred more or less cost, than expected for the actual level of output. This variance is due to factors other than volume. The flexible budget performance report can then be used to determine master budget variances.

The balanced scorecard is an evaluation method that allows the manager to consider both financial factors and operational factors when evaluating performance. The balanced scorecard is made up of four perspectives: financial perspective, customer perspective, internal business perspective, and learning and growth perspective. Each company’s balanced scorecard will be unique to its business and strategy and, because each perspective is causally linked to its purpose, most companies benefit from developing key performance indicators (KPIs) for each perspective. Sustainability-related KPIs may be integrated into the balanced scorecard.

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Managerial Accounting 6e Instructor’s Resource Manual

Managers can use data analytics to quickly and easily calculate and label variances for performance evaluation. Using the ABS and IF functions, managers can clearly see the magnitude of each variance and its impact on operating income.

The final set of Decision Guidelines reviews performance evaluation and the balanced scorecard. The last Summary Problem allows students to match KPIs and company initiatives to the related balanced scorecard perspective.

10-2 .

Chapter 10

Performance Evaluation

Learning Objectives After studying Chapter 10, your students should be able to: 1. Understand decentralization and describe different types of responsibility centers 2. Develop performance reports 3. Calculate ROI, sales margin, and capital turnover 4. Describe strategies and mechanisms for determining a transfer price 5. Prepare and evaluate flexible budget performance reports 6. Describe the balanced scorecard and identify KPIs for each perspective 7. Analyze financial performance using data analytics

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Managerial Accounting 6e Instructor’s Resource Manual

Teaching Outline I.

How Does Decentralization Affect Performance Evaluation?

A. Ways Companies Decentralize 1. Geographic area 2. Product line 3. Distribution channel 4. Customer base 5. Business function B. Advantages and Disadvantages of Decentralization 1. Advantages a. Frees top management’s time b. Encourages use of expert knowledge c. Improves customer relations d. Provides training e. Improves motivation and retention 2. Disadvantages a. Potential duplication of costs b. Potential problems achieving goal congruence C. Performance Evaluation Systems 1. Communicate expectations 2. Provide benchmarks 3. Motivate segment managers

II.

What Is Responsibility Accounting A. Types of Responsibility Centers 1. Cost 2. Revenue 3. Profit 4. Investment 5. Exhibit 10-1: Four Types of Responsibility Centers 6. Organization chart 7. Exhibit 10-2: Partial organization chart B. Responsibility Center Performance Reports C. Exhibit 10-3: Partial Performance Report for a Revenue Center 1. Variances a. Favorable b. Unfavorable 2. Management by exception 3. Segment margin a. Fixed expenses i. Direct ii. Common b. Exhibit 10-4: Performance report highlighting the profit center’s segment margin 4. Organization-wide performance reports a. Exhibit 10-5: Organization-wide Performance Reports D. Evaluation of investment centers 1. Exhibit 10-6: Division Information for PepsiCo Inc. 2. Return on investment (ROI) 3. ROI = Operating income ÷ Total assets 10-4 .

Chapter 10

4. ROI = Sales margin × Capital turnover a. Sales margin = Operating income ÷ Sales b. Capital turnover = Sales ÷ Total assets 5. Exhibit 10-7: Actual division ROI over time (rounded) E. Residual income (RI) 1. RI = Operating income – (Target rate of return x Total assets) a. Target rate of return 2. Exhibit 10-8: Summary of Investment Center Performance Measures 3. Goal congruence a. Comparing ROI and RI 4. Measurement issues a. Which balance sheet date should we use? b. Should we include all assets? c. Should we use the gross book value or net book value of assets? d. Should we make other adjustments to income or assets?

5. Limitations of financial performance evaluation a. Short-term focus III.

What Is Transfer Pricing?

A. Strategies and Mechanisms for Determining a Transfer Price 1. Exhibit 10-9: Strategies for Determining Transfer Price 2. Market price 3. Negotiated price 4. Cost or cost plus a markup 5. Global considerations a. Differing taxing authorities b. Paying customs and duties

IV.

How Do Managers Use Flexible Budgets to Evaluate Performance?

A. Flexible Budget 1. Master budget variance 2. Exhibit 10-10: Master Budget Performance Report B. Creating a Flexible Budget Performance Report 1. Exhibit 10-11: Flexible Budget Performance Report 2. Volume variance a. Exhibit 10-12: Volume Variances 3. Flexible budget variance a. Exhibit 10-13: Flexible Budget Variances and Volume Variances C. Underlying Causes of the Variances 1. Exhibit 10-14: Master Budget Variance 2. Investigating causes for the variances 3. Manufacturing cost variances

V.

How Do Companies Incorporate Nonfinancial Performance Measurement?

A. Purpose 1. Lag indicators 2. Lead indicators B. Balanced Scorecard 1. Four perspectives a. Financial b. Customer 10-5 .

Performance Evaluation

Managerial Accounting 6e Instructor’s Resource Manual

2.

3.

4.

5.

6.

7.

8.

9.

VI.

c. Internal business d. Learning and growth Exhibit 10-15: The Four Perspectives of the Balanced Scorecard Key performance indicators (KPIs) Performance scorecard or dashboard Exhibit 10-16: Linking Company Goals to Key Performance Indicators Financial perspective a. Exhibit 10-17: Financial Perspective b. Common KPIs: sales revenue growth, ROI, RI Customer perspective a. Exhibit 10-18: Customer Perspective b. Common KPIs: average customer satisfaction rating, number of repeat customers, rate of on-time deliveries Internal business Perspective a. Exhibit 10-19: Internal Business Perspective b. Common KPIs: number of new products developed, manufacturing lead time, average repair time Learning and Growth Perspective a. Exhibit 10-20: Learning and Growth Perspective b. Common KPIs: hours or employee training, employee satisfaction, employee turnover

How Can Managers Use Data Analytics for Performance Evaluation A. Exhibit 10-21: Partial Data for June Performance Report B. Exhibit 10-22: Using ABS and IF Functions to Automate Variance Calculation C. How to Use the ABS Function to Find the Absolute Value D. How to Use the IF Function for a True/False Logic Test

10-6 .

Chapter 10

Performance Evaluation

Key Topics Ask students how they break down large group projects with several requirements. In most cases, students break the project down into parts and assign the parts to individual students or small groups. Continue the discussion by asking them why they break the large projects apart, or why they shouldn’t break the projects apart. Guide the students’ responses to illustrate the benefits and disadvantages of decentralization.

Students need to understand how decentralized companies delegate responsibility for specific decisions to each subunit, creating responsibility centers.

Have students work together to complete E10-34B Identify type of responsibility center. Call on students to give their responses.

Students sometimes have difficulty understanding the presentation of cost center or profit center performance reports. A detailed review of what each column represents and an explanation of the differences in the columns help students understand each report. Point out that the dollar variances should add across and down but that is not the case with the percent variances. Have students work in teams or with a partner to solve E10-35B Complete and analyze a performance report.

The performance report for a profit center is prepared using a contribution margin income statement format and includes a segment margin calculation. The segment margin is the contribution margin attributable to the segment less all traceable fixed costs. Common fixed costs are not included in the segment margin calculation because they will continue even if a segment no longer exists. Have students complete E10-36B Prepare a segment margin performance report in groups. Call on a group to present their answers to the class.

Various tools are used to measure the financial performance of investment centers. For investment centers, it is important to measure two factors: (1) how much income the division is generating and (2) how effectively the division is using its assets (invested capital). Two commonly used performance measures are return on investment (ROI) and residual income (RI). Both measures incorporate the division’s assets and its operating income. Ask students why one division will buy products or components from another division instead of from an outside supplier. Will this impact any of these calculations? Why? Have students work in teams to complete E10-40B Comparison of ROI and residual income. Call on students to give their responses.

Ask students about their budgets at the start of the term. Did they have a set amount to spend or did they have a range? Most students have an idea about how much they spend and are capable of spending more (although not happy about it) if the situation arises. Students don’t think of themselves as having flexible budgets, but they do. Flexible budgets account for volume differences, as they summarize cost and revenue information for several different volume levels within a relevant range. Students sometimes have difficulty understanding the flexible budget performance report. A detailed review of what each column represents and an explanation of the differences in the columns helps students understand the report. Be sure that students understand the difference between flexible budget and volume variances. Have students complete E10-43B Prepare a flexible budget performance report and present their answers to the class.

Differentiate between the concepts of benchmarking and the balanced scorecard. Benchmarking is often a comparison of financial performance to the entity’s past experience and to competitors and industry standards. Benchmarking is largely a lag indicator, an assessment of past results. The balanced scorecard 10-7 .

Managerial Accounting 6e Instructor’s Resource Manual

combines lag indicators with lead indicators and views the company from four different perspectives and uses key performance indicators (KPIs) as performance metrics. The balanced scorecard has four perspectives: financial, customer, internal business, and learning and growth. Discuss with students that the components of the KPIs are more than computations. They are tools used by managers to make comparisons between divisions or competitors. The comparisons are then used to make decisions that will positively impact the company’s future.

Discuss how managers manually calculate and label variances and compare that to how managers can use the ABS and IF functions to calculate and label variances. Divide students into groups and have them complete requirements 1 through 4 of E10-47B Analyze financial performance using data analytics tools. As a class, discuss requirement 5 of the exercise.

10-8 .

Chapter 10

Chapter 10: Student Summary Handout I.

Decentralized operations A. Ways companies decentralize 1. Geographic area 2. Product line 3. Distribution channel 4. Customer base 5. Business function B. Advantages of decentralization 1. Frees top management’s time 2. Encourages use of expert knowledge 3. Improves customer relations 4. Provides training 5. Improves motivation and retention C. Disadvantages of decentralization 1. Potential duplication of costs 2. Potential problems achieving goal congruence D. Performance evaluation systems 1. Communicate expectations 2. Provide benchmarks 3. Motivate segment managers E. Four types of responsibility centers 1. Cost 2. Revenue 3. Profit 4. Investment F. Organization chart G. Responsibility center performance reports 1. Variances a. Favorable b. Unfavorable 2. Management by exception 3. Segment margin 4. Fixed expenses a. Direct b. Common H. Organization-wide performance reports I. Evaluation of investment centers 1. Return on investment (ROI) a. ROI = Operating income ÷ Total assets b. ROI = Sales margin × Capital turnover c. Sales margin = Operating income ÷ Sales d. Capital turnover = Sales ÷ Total assets 2. Residual income (RI) a. RI = Operating income – (Target rate of return x Total assets) b. Target rate of return 3. Goal congruence a. Comparing ROI and RI 4. Measurement issues 10-9 .

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Managerial Accounting 6e Instructor’s Resource Manual

a. Which balance sheet date should we use? b. Should we include all assets? c. Should we use the gross book value or net book value of assets? d. Should we make other adjustments to income or assets?

5. Limitations of financial performance evaluation a. Short-term focus II.

Transfer pricing A. Strategies for determining transfer price 1. Strategies for determining transfer price a. Market price b. Negotiated price c. Cost or cost plus a markup 2. Global considerations a. Differing taxing authorities b. Paying customs and duties

III.

Flexible budget performance reports A. Flexible budget B. Master budget performance report 1. Master budget variance C. Creating a flexible budget performance report 1. Volume variance 2. Flexible budget variance D. Underlying causes of the variances 1. Master budget variance 2. Investigating causes for the variances 3. Manufacturing cost variances

IV.

Nonfinancial performance measurement A. Purpose 1. Lag indicators 2. Lead indicators B. Balanced scorecard 1. Four perspectives a. Financial b. Customer c. Internal business d. Learning and growth 2. Key performance indicators (KPIs) 3. Performance scorecard or dashboard a. Linking company goals to key performance indicators C. Linking the four perspectives of the balanced scorecard 1. Financial perspective a. Common KPIs: sales revenue growth, ROI, RI 2. Customer perspective a. Common KPIs: average customer satisfaction rating, number of repeat customers, rate of on-time deliveries 3. Internal business perspective a. Common KPIs: number of new products developed, manufacturing lead time, average repair time 10-10 .

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Performance Evaluation

4. Learning and growth perspective a. Common KPIs: hours or employee training, employee satisfaction, employee turnover V.

Using data analytics for performance evaluation A. How to use the ABS function to find the absolute value B. How to use the IF function for a true/false logic test MyAccountingLab.com algorithmic homework assignments: E10-20A, E10-22A, E10-25A, E10-26A, E1028A, E10-30A.

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Managerial Accounting 6e Instructor’s Resource Manual

CHAPTER 10: ASSIGNMENT GRID

Assignment S10-1 S10-2 S10-3 S10-4 S10-5 S10-6 S10-7 S10-8 S10-9 S10-10 S10-11 S10-12 S10-13 S10-14 S10-15 S10-16 S10-17 S10-18

E10-19A E10-20A E10-21A E10-22A E10-23A E10-24A E10-25A

Learning Objective(s)

Topic(s)

Short Exercises Identify and understand 1 responsibility centers Identify types of responsibility 1 centers Identify centralized and decentralized 1 organizations Classify types of subunits 1 Calculate performance report 2 variances Calculate ROI, capital turnover, and 3 sales margin Calculate ROI 3 Compute sales margin and capital 3 margin turnover Compute residual income 3 Analyze transfer price scenario 4 Determine transfer price range 4 Interpret a performance report 5 Complete a master budget 5 performance report Classify KPIs by balanced scorecard 6 perspective Use vocabulary terms 1, 2, 3, 4, 5, &6 Identify ethical standards violated 1, 2, 3, 4, 5, &6 Analyze financial performance using 7 data analytics tools Analyze financial performance using 7 data analytics tools Exercises (Group A) Identify type of responsibility center 1 Complete and analyze a performance 2 report Prepare a segment margin 2 performance report Compute and interpret the expanded 3 ROI equation Relationship between ROI and 3 residual income Compute ROI and residual income 3 Comparison of ROI and residual 3 10-12 .

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Chapter 10

Assignment E10-26A E10-27A E10-28A E10-29A E10-30A E10-31A E10-32A E10-33A

E10-34B E10-35B E10-36B E10-37B E10-38B E10-39B E10-40B E10-41B E10-42B E10-43B E10-44B E10-45B E10-46B E10-47B E10-48B

P10-49A P10-50A

Learning Objective(s)

Topic(s)

income Determine transfer price range 4 Comprehensive flexible budget 2&5 problem Prepare a flexible budget 5 performance report Work backward to find missing 5 values Construct a balanced scorecard 6 Sustainability and the balanced 6 scorecard Analyze financial performance using 7 data analytics tools Analyze financial performance using 7 data analytics tools Exercises (Group B) Identify type of responsibility center 1 Complete and analyze a performance 2 report Prepare a segment margin 2 performance report Compute and interpret the expanded 3 ROI equation Relationship between ROI and 3 residual income Compute ROI and residual income 3 Comparison of ROI and residual 3 income Determine transfer price range 4 Comprehensive flexible budget 2&5 problem Prepare a flexible budget 5 performance report Work backward to find missing 5 values Construct a balanced scorecard 6 Sustainability and the balanced 6 scorecard Analyze financial performance using 7 data analytics tools Analyze financial performance using 7 data analytics tools Problems (Group A) Prepare a budget with different 2 volumes for planning Prepare and interpret a performance 2 10-13 .

Performance Evaluation

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Assignment P10-51A P10-52A P10-53A P10-54A P10-55B P10-56B P10-57B P10-58B P10-59B P10-60B C10-61 A10-62 A10-63 A10-64 A10-65 A10-66

Learning Objective(s)

Topic(s)

report Evaluate divisional performance 3 Collect and analyze division data 3 from an annual report Determine transfer price at a 4 manufacturer under various scenarios Evaluate subunit performance 5&6 Problems (Group B) Prepare a budget with different 2 volumes for planning Prepare and interpret a performance 2 report Evaluate divisional performance 3 Collect and analyze division data 3 from an annual report Determine transfer price at a 4 manufacturer under various scenarios Evaluate subunit performance 5&6 Serial Case Analyze segment reporting at a hotel 1 Critical Thinking Discussion questions All Segmented financial information 2&3 Collect and analyze divisional data 4 Ethics and performance evaluation 2&4 Analyzing segment margins reports 2

10-14 .

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Chapter 10

Performance Evaluation

Name____________________________________ Date_________________ Section_______________

CHAPTER 10 TEN-MINUTE QUIZ Circle the letter of the best response.

1.

Which of the following is not an advantage of decentralization?

A. To improve customer relations B. To encourage use of expert knowledge C. To increase employee motivation D. To allow goal congruence to be achieved more easily

2.

Which of the following is not a responsibility center?

A. Profit centers B. Investment centers C. Customer centers D. Cost centers

3.

The differences between actual and budgeted figures are known as A. fluctuations.

B. variances.

C. immaterial.

D. margin.

4.

Which of the following is a performance measure commonly used to assess the performance of investment centers?

A. Return on investment B. Profit margin C. Current ratio D. Gross income

5.

Which of the following is NOT a strategy for determining the transfer price of a product?

A. Related party discounted price B. Market price C. Cost or cost plus a markup D. Negotiated price

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Managerial Accounting 6e Instructor’s Resource Manual

6.

Employee capabilities, information system capabilities, and the company’s “climate for action” are important factors of the A. employee perspective.

B. customer perspective.

C. internal business perspective.

D. learning and growth perspective.

7.

Assume Cucumber Company expects each division to earn an 8% target rate of return. Assume the company’s Pickle Division had the following results: Sales Operating income Total assets

$24,500,000 1,250,000 15,500,000

The Division’s ROI is A. 8.1%.

B. 15.8%.

C. 5.1%.

D. 8.0%.

8.

Assume Ametrine Company expects each division to earn an 8% target rate of return. Assume Division A had the following results: Sales Operating income Total assets

$24,500,000 1,250,000 15,500,000

The Division’s RI is A. ($10,000).

B. $10,000.

C. $710,000.

D. ($710,000).

9.

Which of the following is/are examples of KPIs? A. Average customer satisfaction ratings B. Number of repeat customers C. Sales revenue growth D. All of the above

10.

Which of the following is true regarding the ABS function?

A. The function can only be applied to a single cell.

B. The function returns the value of the referenced cell with the appropriate mathematical sign.

C. To use the function on accounting currency, decimal places must be included.

D. The order of the cells referenced in the formula do not matter.

10-16 .

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Performance Evaluation

Answer Key to Chapter 10 Ten-Minute Quiz 1. D 2. C 3. B 4. A 5. A

6. D 7. A 8. B 9. D 10. D

10-17 .

Chapter 11 Standard Costs and Variances This chapter covers the computation and use of standard costing as it relates to variance calculations. The computation of standard costs is explained and illustrated for direct materials, direct labor, and manufacturing overhead. Managers set direct material and direct labor price and quantity standards that allow for unavoidable waste and spoilage. These are then used to compute the standard cost of one unit.

The use of standard costs to develop the flexible budget is explained in the chapter. These calculations are then used to illustrate specific variances for product costs. Direct material (DM) variances are broken down into the DM price variance and the DM quantity variance. The DM price variance occurs when the actual price paid for the DM input differs from the standard price. The DM quantity variance occurs when the actual quantity used in production differs from the standard quantity allowed for the actual output.

Direct labor (DL) variances are broken down into the direct labor rate variance and the direct labor efficiency variance. The DL rate variance occurs when the actual direct labor rate differs from the standard rate. The DL efficiency variance occurs when the actual direct labor hours used in production differ from the standard hours allowed for the actual output. Variance analysis helps companies to plan and control their cost and usage of materials and labor. The first half of the chapter concludes with a presentation of the advantages and disadvantages of standard costing.

The first set of Decision Guideline addresses decisions managers must make regarding standard costs and variances. The accompanying Summary Problem gives students practice in calculating the standard DM cost and DL cost for a product. In addition, the calculation of DM and DL variances is reinforced.

In addition to the DM and DL standards, companies also set standard manufacturing overhead rates. The second half of the chapter addresses the use of standard costs to compute manufacturing overhead (MOH) variances. Planning for indirect manufacturing costs focuses on efficient use of the resources, with the control function being illustrated by use of standard costing and variance analysis techniques. The MOH variance is broken down into the variable MOH variance and the fixed MOH variance. The variable MOH variance is further broken down into the variable overhead rate variance and the variable overhead efficiency variance. These variances are discussed and illustrated in the chapter. A similar presentation is made for the calculation of the fixed overhead budget variance and the fixed overhead volume variance.

Managers can use data analytics tools to quickly and easily identify the variances that are significant enough to warrant investigation. The chapter demonstrates how to use the IFS function. This function expands on the IF function by allowing for multiple logic outcomes rather than just a true/false outcome.

In addition, conditional formatting is demonstrated because it specifically relates to highlighting variances that were first labeled using the IFS function.

The second set of Decision Guidelines considers some of management’s decisions relating to overhead variances. The accompanying Summary Problem allows for practice in the calculation of both variable and fixed overhead variances.

The appendix reviews standard cost accounting systems whereby inventory-related costs are recorded at standard cost, rather than actual cost. Standard costing saves on bookkeeping costs and also isolates price and efficiency variances as soon as they occur. Standard costing journal entries are explained. At the end of the appendix, a standard costing income statement is shown.

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Managerial Accounting 6e Instructor’s Resource Manual

Learning Objectives After studying Chapter 11, your students should be able to: 1. Explain how and why standards costs are developed 2. Compute and evaluate direct materials variances 3. Compute and evaluate direct labor variances 4. Explain the advantages and disadvantages of using standard costs and variances 5. Compute and evaluate variable overhead variances 6. Compute and evaluate fixed overhead variances 7. Analyze manufacturing variances using data analytics tools 8. (Appendix) Record standard costing journal entries

11-2 .

Chapter 11

Standard Costs and Variances

Teaching Outline I.

What Are Standard Costs?

A. Types of Standards 1. Ideal (or perfection) standards 2. Practical (or attainable) standards B. Information Used to Develop and Update Standards 1. Consider past cost of inputs 2. Consider current costs of inputs 3. Consider expected future costs of inputs C. Computing Standard Costs 1. Standard cost of direct materials (DM) a. Standard quantity of DM × Standard price of DM = Standard cost of DM per unit of output 2. Standard cost of direct labor (DL) b. Standard quantity of DL × Standard price of DL = Standard cost of DL per unit of output 3. Standard cost of manufacturing overhead (MOH) a. Standard quantity of cost driver × Variable MOH rate = Standard variable MOH per unit of output b. Standard quantity of cost driver × Fixed MOH rate = Standard fixed MOH per unit of output 4. Standard cost of one unit a. Standard cost of DM per unit + Standard cost of DL per unit + Standard cost of variable MOH per unit + Standard cost of fixed MOH per unit b. Exhibit 11-1: Standard Cost of Producing One Unit of Product D. Sustainability and Standards

II.

How Do Managers Use Standard Costs to Compute DM and DL Variances A. Using Standard Costs to Develop the Flexible Budget 1. Exhibit 11-2: Comparing Variable Production Costs with the Flexible Budget B. Direct Materials Variances 1. Exhibit 11-3: Splitting the Flexible Budget Variance into Two Components a. Total DM variance = DM price variance + DM quantity variance i. DM price variance = Actual quantity purchased × (actual price – standard price) ii. DM quantity variance = Standard price × (actual quantity used – standard quantity allowed) b. Exhibit 11-4: Direct Materials Variances If DM Purchased Equals DM Used c. Exhibit 11-5: Tucson Tortilla’s Direct Materials Variances 2. Evaluating direct material variances a. Exhibit 11-6: Summary of Direct Materials Variances 3. Computing direct material variances when quantity of direct material purchased differs from quantity of direct material used C. Direct Labor Variances 1. Total DL variance = DL rate variance + DL efficiency variance a. DL rate variance = Actual hours (actual rate – standard rate b. DL efficiency variance = Standard rate x (actual hours – standard hours allowed) 2. Exhibit 11-7: Calculation of Tuscon Tortilla’s Direct Labor Variances 3. Exhibit 11-8: Summary of Direct Labor Variances D. Summary of Direct Material and Direct Labor Variances 1. Exhibit 11-9: Summary of DMs and DL Variance Formulas 11-3 .

Managerial Accounting 6e Instructor’s Resource Manual

E. Advantages and Disadvantages of Using Standard Costs and Variances 1. Advantages a. Cost benchmarks b. Usefulness in budgeting c. Motivation d. Standard cost systems simplify bookkeeping 2. Disadvantages a. Outdated or inaccurate standards b. Lack of timeliness c. Focus on operational performance measures and visual management d. Lean thinking e. Increase in automation and decrease in direct labor f. Unintended behavioral consequences III.

How Do Managers Use Standard Costs to Compute MOH Variances?

A. Total Manufacturing Overhead Variance 1. = Variable MOH rate variance + variable MOH efficiency variance 2. Variable MOH rate (or spending) variance = Actual hours × (actual rate – standard rate) 3. Variable overhead efficiency variance = Standard rate × (actual hours – standard hours allowed) 4. Exhibit 11-10: Calculation of Variable Overhead Variances B. Fixed Manufacturing Overhead Variances 1. = Fixed overhead budget variance + fixed overhead volume variance 2. Fixed overhead budget (or spending) variance= Actual fixed MOH – budgeted fixed MOH 3. Fixed overhead volume variance = Budgeted fixed MOH – standard MOH allocated to production a. Exhibit 11-11: Calculation of Fixed Overhead Variances b. When production volume is higher than anticipated, the fixed overhead volume variance will be favorable c. Exhibit 11-12: Favorable Fixed Overhead Volume Variance d. When production volume is lower than anticipated, the fixed overhead volume variance will be unfavorable e. Exhibit 11-13: Unfavorable Fixed Overhead Volume Variance

IV.

How Can Managers Use Data Analytics for Investigating Variances?

A. Exhibit 11-14: Using IFS Function and Conditional Formatting to Label and Highlight Variances B. Exhibit 11-15: Using a Filter to List Only Price Variances Over $40,000 C. How to Use the IFS Function to Test Multiple Conditions D. How to Use Conditional Formatting to Visually Highlight Cells E. How to Filter a Column of Data

V.

Appendix 11A: Standard Costing A. Standard cost accounting 1. Key points a. Each variance has its own general ledger account. b. Manufacturing costs flow through raw materials, work in process, and finished goods. c. At the end of the period, the variance accounts are closed to COGS. B. Journal entries 1. Recording raw materials purchases 2. Recording use of direct materials 3. Recording direct labor costs 11-4 .

Chapter 11

4. Recording actual manufacturing overhead costs 5. Allocating overhead 6. Recording the completion 7. Recording the sale and release of inventory 8. Closing manufacturing overhead C. Standard Costing Income Statement D. Exhibit 11-14: Standard Costing Income Statement

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Standard Costs and Variances

Managerial Accounting 6e Instructor’s Resource Manual

Key Topics Continue the budget discussion from Chapter 10 with students. Ask students if they have ever saved for one item they really wanted, such as an iPhone or a car. What information did they use to determine how much they needed to save? Did it take them longer to save than they anticipated? If so, did they update their budgeted goal for new information? Did the actual cost differ from what they thought they needed to save? The amount they saved was really the standard cost, which may have ended up differing from the actual cost. Variances from the budget can arise from, and are potentially caused by, a variety of factors.

This chapter focuses on detailed variance calculations and explores the reason behind the variances.

Chapter 11 begins with a discussion and calculation of standard costs. Standard costs are calculated for DM, DL, and MOH. Each cost includes a price/rate component and a quantity/efficiency component.

Have students complete E11-38B Calculate the standard cost per unit.

Stress the logic of DM and DL variances. Encourage them to use common sense when determining whether the variances are favorable or unfavorable. This forces students to examine the formula and think about what occurred. Ask students the following questions: 1. For the DM price variance to be favorable, which would be higher, the actual price or the standard price?

2. For the DM quantity variance to be favorable, which would be higher, the quantity used or the quantity allowed?

3. For the DL rate variance to be favorable, which would be higher, the actual rate or the standard rate?

4. For the DL efficiency variance to be favorable, which would be higher, the hours logged or the hours expected?

5. What would be true about each relationship for the variances to be unfavorable?

Stress that this logic can be applied to all variance calculations in Chapter 11.

Have the students form teams and complete E11-42B Calculate and interpret direct material and direct labor variances. Call on two teams to report their answers.

Review fixed and variable MOH with the students. Ask them whether they think overhead costs can result in variances as DM and DL did. How do they think such variances would be calculated? What would make sense based on the discussion of DM and DL variances? When would a variable overhead variance be favorable? Unfavorable? When would a fixed overhead variance be favorable? Unfavorable? Have students complete E11-47B Calculate and interpret overhead variances.

Review the concept of management by exception. Then discuss how managers can use data analytics to quickly and easily identify variances significant enough to warrant investigation. Specifically discuss the use of the IFS function and conditional formatting in Excel. Divide students into groups and have them complete E11-53B Analyze manufacturing variances using data analytics tools. As a class, discuss possible explanations for all variances that have a light red fill.

Address the key points of standard costing systems: (1) each type of variance has its own general ledger account; (2) standard costs, rather than actual costs, are used to record the manufacturing costs put into the inventory accounts; and (3) at the end of the period, the variance accounts are closed to cost of goods sold to “correct” for the fact that the standard costs recorded in the accounts were different than the actual costs. Have students complete E11-51B Make journal entries in a standard costing system.

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Chapter 11

Standard Costs and Variances

Chapter 11: Student Summary Handout I.

Standard costs A. Budget for a single unit of product B. Types of standards 1. Ideal (or perfection) standards 2. Practical (or attainable) standards C. Developing and updating standard costs 1. Consider past cost of inputs 2. Consider current costs of inputs 3. Consider expected future costs of inputs D. Computing standard costs 1. Standard cost of direct materials (DM) a. Standard quantity of DM × Standard price of DM = Standard cost of DM per unit of output 2. Standard cost of direct labor (DL) a. Standard quantity of DL × Standard price of DL = Standard cost of DL per unit of output 3. Standard cost of manufacturing overhead (MOH) a. Standard quantity of cost driver × Variable MOH rate = Standard variable MOH per unit of output b. Standard quantity of cost driver × Fixed MOH rate = Standard fixed MOH per unit of output 4. Standard cost of one unit a. Standard cost of DM per unit + Standard cost of DL per unit + Standard cost of variable MOH per unit + Standard cost of fixed MOH per unit E. Sustainability and standard costs

II.

Using standard costs to compute direct material and direct labor variances A. Using standard costs to develop the flexible budget B. Direct material variances 1. Splitting the flexible budget variance into two components a. Total DM variance = DM price variance + DM quantity variance iii. DM price variance = Actual quantity purchased × (actual price – standard price) iv. DM quantity variance = Standard price × (actual quantity used – standard quantity allowed) b. Direct materials variances if DM purchased equals DM used 2. Evaluating direct material variances 3. Computing direct material variances when quantity of direct material purchased differs from quantity of direct material used C. Direct labor variances 1. Total DL variance = DL rate variance + DL efficiency variance a. DL rate variance = Actual hours (actual rate – standard rate b. DL efficiency variance = Standard rate × (actual hours – standard hours allowed) D. Advantages and disadvantages of using standard costs and variances 1. Advantages a. Cost benchmarks b. Usefulness in budgeting c. Motivation d. Standard cost systems simplify bookkeeping 11-7 .

Managerial Accounting 6e Instructor’s Resource Manual

2. Disadvantages of using standard costs and variances a. Outdated or inaccurate standards b. Lack of timeliness c. Focus on operational performance measures and visual management d. Lean thinking e. Increase in automation and decrease in direct labor f. Unintended behavioral consequences III.

Using standard costs to compute MOH variances A. Total variable manufacturing overhead variance = Variable MOH rate variance + variable MOH efficiency variance 1. Variable MOH rate (or spending) variance = Actual hours x (actual rate – standard rate) 2. Variable overhead efficiency variance = Standard rate x (actual hours – standard hours allowed) B. Total fixed MOH variance = Fixed overhead budget variance + fixed overhead volume variance 1. Fixed overhead budget (or spending) variance= Actual fixed MOH – budgeted fixed MOH 2. Fixed overhead volume variance = Budgeted fixed MOH – standard MOH allocated to production a. When production volume is higher than anticipated, the fixed overhead volume variance will be favorable. b. When production volume is lower than anticipated, the fixed overhead volume variance will be unfavorable.

IV.

Using data analytics for investigating variances A. Using the IFS function to test multiple conditions B. Using conditional formatting to visually highlight cells C. Filtering a column of data

V.

Appendix 11A: Standard costing A. Standard cost accounting 1. Key points a. Each variance has its own general ledger account. b. Manufacturing costs flow through raw materials, work in process, and finished goods. c. At the end of the period, the variance accounts are closed to COGS. B. Journal entries 1. Recording raw materials purchases 2. Recording use of direct materials 3. Recording direct labor costs 4. Recording actual manufacturing overhead costs 5. Allocating overhead 6. Recording the completion 7. Recording the sale and release of inventory 8. Closing manufacturing overhead C. Standard costing income statement MyAccountingLab.com algorithmic homework assignments: E11-19A, E11-21A, E11-23A, E11-26A, E1129A, E11-34A.

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Chapter 11

Standard Costs and Variances

CHAPTER 11: ASSIGNMENT GRID

Assignment S11-1 S11-2 S11-3 S11-4

S11-5

S11-6 S11-7

S11-8 S11-9 S11-10 S11-11 S11-12 S11-13 S11-14 S11-15 S11-16 S11-17 S11-18

E11-19A E11-20A E11-21A E11-22A

Learning Objective(s)

Topic(s)

Short Exercises Compute the standard cost of direct 1 materials Compute the standard cost of direct 1 labor Explain a direct material variance 2 Calculate direct material variances 2 when the quantity purchased equals the quantity used Calculate direct material variances 2 when the quantity purchased differs from the quantity used Calculate direct labor variance 3 Identify advantages and 4 disadvantages of standards costs and variance analysis Calculate variable overhead 5 variances Calculate fixed overhead variances 6 Calculate and interpret fixed 6 overhead variances Calculate overhead rates 5&6 Calculate and interpret overhead 6 variances Record costing transactions 7 Record standard costing transactions 7 Identify ethical standards violated 1, 2, 3, 4, 5, &6 Vocabulary 1, 2, 3, 4, 5, &6 Analyze manufacturing variances 8 using data analytics tools Analyze manufacturing variances 8 using data analytics tools Exercises (Group A) Calculate standard cost and gross 1 profit per unit Calculate standard cost per unit 1 Calculate and explain direct material 2 variances Calculate missing direct materials 2 variables

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Managerial Accounting 6e Instructor’s Resource Manual

Assignment E11-23A E11-24A E11-25A E11-26A E11-27A

E11-28A

E11-29A E11-30A E11-31A E11-32A E11-33A E11-34A E11-35A E11-36A

E11-37B E11-38B E11-39B E11-40B E11-41B E11-42B E11-43B

Learning Objective(s)

Topic(s)

Calculate and explain direct labor 3 variances Calculate and interpret direct 2&3 material and direct labor variances Calculate the material and labor 2&3 variances Record materials and labor 7 transactions Calculate the standard cost of a 1&4 product before and after proposed sustainability effort changes Recognize advantages and 4 disadvantages of standard cost and variance analysis in various situations Compute and interpret overhead 5&6 variances Calculate and interpret direct 2 material variances Calculate and interpret direct labor 3 variances Calculate and interpret overhead 5&6 variances Make journal entries in a standard 7 costing system Prepare a standard cost income 7 statement Analyze manufacturing variances 8 using data analytics tools Analyze manufacturing variances 8 using data analytics tools Exercises (Group B) Calculate standard cost and gross 1 profit per unit Calculate the standard cost per unit 1 Calculate and explain direct material 2 variances Calculate missing direct materials 2 variables Calculate and explain direct labor 3 variances Calculate and interpret direct 2&3 material and direct labor variances Complete and analyze a 2&3 performance report

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Chapter 11

Assignment E11-44B E11-45B

E11-46B

E11-47B E11-48B E11-49B E11-50B E11-51B E11-52B E11-53B E11-54B

P11-55A P11-56A P11-57A P11-58A P11-59A

P11-60B P11-61B P11-62B P11-63B

Learning Objective(s)

Topic(s)

Record materials and labor 7 transactions Calculate the standard cost of a 1&4 product before and after proposed sustainability effort changes Recognize advantages and 4 disadvantages of standard cost and variance analysis in various situations Calculate and interpret overhead 5&6 variances Calculate and interpret direct 2 materials variances Calculate and interpret direct labor 3 variances Calculate and interpret overhead 5&6 variances Make journal entries in a standard 7 costing system Prepare a standard cost income 7 statement Analyze manufacturing variances 8 using data analytics tools Analyze manufacturing variances 8 using data analytics tools Problems (Group A) Calculate and explain direct material 1, 2, & 3 and direct labor variances Comprehensive standards and 1, 2, 3, 4, 5, variances problem &6 Comprehensive standards and 1, 2, 3, 4, 5, variances problem &6 Work backward through labor 3 variances Determine all variances and make 2, 3, 4, 5, 6, journal entries &7 Problems (Group B) Calculate and explain direct material 1, 2, 3, & 4 and direct labor variances Comprehensive standards and 2, 3, 4, 5, & 6 variances problem Comprehensive standards and 1, 2, 3, 4, 5, variances problem &6 Work backward through labor 3 variances

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Standard Costs and Variances

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Managerial Accounting 6e Instructor’s Resource Manual

Assignment P11-64B

C11-65 A11-66 A11-67 A11-68 A11-69 A11-70

Learning Objective(s)

Topic(s)

Determine all variances and make 2, 3, 4, 5, 6, journal entries &7 Serial Case Calculate labor variances in a hotel 2 Critical Thinking Discussion questions All Analyzing variances and potential All causes Evaluate standard setting approaches 1, 2, 3, 4, 5, &6 Ethics involved with choice of cost 1, 2, 3, 4, 5, 6, driver &7 Impact of manufacturing process 1, 2, 3, 4, 5, changes on variances &6

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Chapter 11

Standard Costs and Variances

Name____________________________________ Date_________________ Section_______________

CHAPTER 11 TEN-MINUTE QUIZ Circle the letter of the best response.

1.

Which of the following is NOT an advantage of using standard costs and variances?

A. Provides a performance benchmark for evaluation of actual costs B. Provides a basis for components of the master budget C. Simplification of bookkeeping D. Changes behavior of managers to obtain desired variances

2.

One level of a company’s flexible budget was prepared for production of 8,000 units. Total costs were $38,000 and included direct materials, direct labor, and variable overhead at $1.50, $2.50, and $0.50 per unit, respectively. What is the total cost of production of 8,500 units?

A. $2,000 B. $38,000 C. $38,250 D. $40,250

3.

A manager purchased better quality materials for a slightly higher cost than anticipated. However, as a result, spoilage was less than normal. What is the effect on the price and quantity variances respectively?

A. Favorable, favorable B. Favorable, unfavorable C. Unfavorable, favorable D. Unfavorable, unfavorable

4.

A company uses a single raw material in its production process. The standard price for a unit of material is $2.00. During the month the company purchased and used 600 units of this material at a price of $2.25 per unit. The standard quantity required per finished product is 2 units and during the month, the company produced 310 finished units. How much was the material price variance?

A. $150 favorable B. $150 unfavorable C. $155 favorable D. $155 unfavorable

5.

A company uses a single raw material in its production process. The standard price for a unit of material is $2.00. During the month, the company purchased and used 600 units of this material at a price of $2.25 per unit. The standard quantity required per finished product is 2 units and during the month, the company produced 310 finished units. How much was the material quantity variance?

A. $40 favorable B. $40 unfavorable C. $45 favorable D. $45 unfavorable 11-13 .

Managerial Accounting 6e Instructor’s Resource Manual

6.

A company produced 2,200 units of output during a production process that normally requires 2 hours of labor per unit of output. The standard labor rate is $16 per hour, but the company paid $15 per hour. Actual hours needed to complete the production process were 4,600. How much was the labor efficiency variance?

A. $3,000 favorable B. $3,000 unfavorable C. $3,200 favorable D. $3,200 unfavorable

7.

A company produced 2,200 units of output during a production process that normally requires 2 hours of labor per unit of output. The standard labor rate is $16 per hour, but the company paid $15 per hour. Actual hours needed to complete the production process were 4,600. How much was the labor rate variance?

A. $4,400 favorable B. $4,400 unfavorable C. $4,600 favorable D. $4,600 unfavorable

8.

Which of the following formulas is used to compute variable overhead rate (or spending) variance?

A. Actual hours × (Actual rate − Standard rate) B. Standard hours allowed × (Actual rate − Standard rate) C. Actual rate × (Actual hours − Standard hours allowed) D. Standard rate × (Actual hours − Standard hours allowed)

9.

Which of the following is a true statement regarding fixed overhead volume variance?

A. If production volume is less than anticipated, then fixed overhead has been underallocated, and the fixed overhead volume variance is favorable.

B. If production volume is less than anticipated, then fixed overhead has been underallocated, and the fixed overhead volume variance is unfavorable.

C. If production volume is greater than anticipated, then fixed overhead has been underallocated, and the fixed overhead volume variance is favorable.

D. If production volume is greater than anticipated, then fixed overhead has been overallocated, and the fixed overhead volume variance is unfavorable.

10.

Which data analysis tool allows for multiple logic outcomes?

A. IF function B. AVERAGE function C. IFS function D. MAX function

11-14 .

Chapter 11

Standard Costs and Variances

Answer Key to Chapter 11 Ten-Minute Quiz 1. D 2. D 3. C 4. B 5. A

6. D 7. C 8. A 9. B 10. C

11-15 .

Chapter 12 Capital Investment Decisions and the Time Value of Money The chapter begins with a discussion of capital investments and the capital budgeting process. After setting the company’s goals, managers evaluate capital investment projects and decide which project should be funded. Some of the strategies used in evaluating investment proposals are the payback period and the accounting rate of return (ARR). The payback period is the number of periods necessary to recover the project’s initial investment. The most optimal project is the one with the lowest payback period. The ARR measures the average annual rate of return over the asset’s life. The ARR is the average annual operating income earned from the asset divided by the initial investment in the asset. If the expected ARR exceeds the company’s required rate of return, the investment should be accepted. The payback period method focuses only on time, not on profitability. The ARR method focuses on the profitability of the asset over its entire life. Neither the payback period nor the ARR considers the time value of money.

The first set of Decision Guidelines presents some questions that must be answered when making capital budgeting decisions. The first Summary Problem gives the student practice in computing payback period and ARR. The student then must make the decision as to whether or not the investment proposal should be considered further.

Other strategies are used in decision making that take into account the time value of money. After a review of time value of money concepts, those strategies are presented. The net present value (NPV) method discounts net cash flows to their present value so that they can be compared fairly to the current cash outflows (i.e., the investment’s cost). The difference between the present value of the net cash inflows and the present value of the cash outflow is the investment’s NPV. If the NPV of the investment is positive, then the investment is accepted. Another evaluation method that considers the time value of money is the internal rate of return (IRR). The IRR is the rate of return where the present value of the investment’s net cash inflows equals the investment’s cost. If the IRR is more than the company’s required minimum rate of return, the investment is accepted.

The company may have more than one viable investment after analyzing the investment proposals and rejecting those that do not meet the decision rules. When that occurs, the manager engages in capital rationing by using the profitability index and selecting the alternative that best meets the company’s goals. After selecting and funding the project, a post-audit is performed on the capital investment that was selected.

The data analytics section of the chapter focuses on Excel’s IRR function, which can be used to calculate the IRR under various assumptions. Use of the IRR function can greatly reduce the potential for calculation errors.

The final set of Decision Guidelines presents additional questions that must be answered when making capital budgeting decisions. The accompanying Summary Problem continues the earlier Summary Problem by requiring the computation of both NPV and IRR for the same asset presented earlier. The student must then make the final decision as to whether or not the capital asset should be purchased.

Three appendices conclude the chapter. Appendix 12A presents the formulas and resulting tables for both present and future values of single sums and annuities. Appendices 12B and 12C show how to perform calculations using either Excel or a programmed calculator.

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Managerial Accounting 6e Instructor’s Resource Manual

Learning Objectives After studying Chapter 12, your students should be able to: 1. Describe the importance of capital investments and the capital budgeting process 2. Use the payback and accounting rate of return methods to make capital investment decisions 3. Use the time value of money to compute the present and future values of single lump sums and annuities 4. Use discounted cash flow models to make capital investment decisions 5. Compare and contrast the four capital budgeting methods 6. Analyze capital investments using data analytics tools

12-2 .

Chapter 12

Capital Investment Decisions and the Time Value of Money

Teaching Outline I. What Is Capital Budgeting?

A. Four Popular Methods of Capital Budgeting Analysis 1. Payback period 2. Accounting rate of return (ARR) 3. Net present value (NPV) 4. Internal rate of return (IRR) B. Focus on Cash Flows C. Capital Budgeting Process 1. Exhibit 12-1: Capital Budgeting Process 2. Capital rationing 3. Post-audits D. Sustainability and Capital Investments 1. LEED certification II. How Do Managers Calculate the Payback period and Accounting Rate of Return A. Payback Period 1. Payback with equal annual net cash inflows a. Payback period = Initial investment ÷ Expected annual net cash inflows b. Exhibit 12-2: Payback—Equal Annual Net Cash Inflows 2. Payback with Unequal Net Cash Inflows a. Accumulate net cash inflows until the amount of the investment is recovered b. Exhibit 12-3: Payback—Unequal Annual Net Cash Inflows 3. Criticism of the payback period method a. Exhibit 12-4: Comparing Payback Periods Between Investments 4. Decision rule: Investments with shorter payback periods are more desirable, all else being equal.

B. Accounting Rate of Return (ARR) 1. Accounting rate of return = (Average annual net cash inflow – Annual depreciation expense) ÷ Initial investment a. Exhibit 12-5: Review of Straight-Line Depreciation Expense Calculation i. Annual depreciation expense = (Initial cost of asset – Residual value) ÷ Useful life of asset in years 2. Investments with equal annual net cash inflows 3. Investments with unequal net cash inflows 4. Decision rule a. If the expected accounting rate of return exceeds the required rate of return, then invest. b. If the expected accounting rate of return is less than the required rate of return, then do not invest.

III. How Do Managers Calculate the Time Value of Money A. Factors Affecting the Time Value of Money 1. Principal amount (p) a. Single lump-sum b. Annuity 2. Number of periods (n) 3. Interest rate (i) a. Simple interest b. Compound interest 12-3 .

Managerial Accounting 6e Instructor’s Resource Manual

c. Exhibit 12-6: Simple Versus Compound Interest for a Principal Amount of $10,000 at 6% over Five Years B. Future Values and Present Values: Points Along the Time Continuum 1. Exhibit 12-7: Present Value and Future Value Along the Time Continuum a. Present value = Future value – Interest earned b. Future value = Present value + Interest earned C. Future Value and Present Value Factors 1. Using factors a. Present value of $1 b. Present value of an annuity of $1 c. Future value of $1 d. Future value of an annuity of $1 D. Calculating Future Values of Single Sums and Annuities Using FV Factors 1. Future value of single sum = Principal amount × (FV factor for i and n) 2. Future value of an annuity = (Amount of each cash installment) × (Annuity FV factor for i and n) E. Calculating present values of single sums and annuities using PV factors 1. Present value of a single sum = Principal amount × (PV factor for i and n) 2. Present value of an annuity = (Amount of each cash installment) × (Annuity PV factor for i and n) 3. Exhibit 12-8: Comparing Present Values of Lottery Payout Options at i = 8% IV. How Do Managers Calculate the Net Present Value and Internal Rate of Return A. Discounted Cash Flow Methods 1. Net cash inflows 2. Exhibit 12-9: Comparing the present value of an investment’s net cash inflows against the cost of initial investment B. Net Present Value (NPV) 1. NPV = PV of the investment’s net cash inflows – Cost of initial investment a. Discount rate b. Required rate of return 2. NPV with equal annual net cash inflows (annuity) a. Present value = Amount of each cash inflow x (Annuity PV factor for i and n) b. Exhibit 12-10: NPV of Equal Net Cash Inflows—Smartphone Project 3. NPV with unequal annual net cash inflows c. Compute present value of net cash inflows separately, as separate lump sums received in different years d. Exhibit 12-11: NPV with Unequal Net Cash Inflows—Speaker Project 4. Decision rule a. If the net present value is positive, then invest. b. If the net present value is negative, then do not invest.

5. Capital rationing and the profitability index a. Profitable index = PV of net cash inflows ÷ Initial investment i. Number of dollars returned for every dollar invested, with all calculations performed in present value dollars b. Exhibit 12-12: Raycor’s Capital Investment Options 6. NPV of a project with residual value a. Residual value is discounted as a single lump sum b. Exhibit 12-13: NPV of a Project with Residual Value 7. Sensitivity analysis 12-4 .

Chapter 12

Capital Investment Decisions and the Time Value of Money

C. Internal Rate of Return (IRR) 1. Rate of return, based on discounted cash flows, that a company can expect to earn by investing in the project a. Interest rate that makes the NPV of the investment equal to $0 i. Present value of investment’s net cash inflows – Initial investment = $0 ii. Initial investment = Present value of the investment’s net cash inflows 2. IRR with equal annual net cash inflows (annuity) a. Annuity PV factor = Initial investment ÷ Amount of each equal net cash inflow i. i = ?, n = given b. Exhibit 12-14: IRR of the Smartphone Project 3. IRR with unequal annual net cash inflows a. Trial and error b. Exhibit 12-15: Finding the Speaker’s IRR Through Trial and Error 4. Decision rule a. If the IRR exceeds the required rate of return, then invest. b. If the IRR is less than the required rate of return, then do not invest.

V. How Do the Capital Budgeting Methods Compare?

A. Exhibit 12-16: Capital Budgeting Methods That Ignore the Time Value of Money B. Exhibit 12-17: Capital Budgeting Methods That Incorporate the Time Value of Money VI. How Can Managers Use Data Analytics to Analyze Capital Investments A. Scenarios that may require the use of data analytics 1. Cash flows that are higher and/or lower than the original assumptions 2. Include or exclude a residual and/or additional disposal cost 3. Truncate the analysis over a shorter time frame due to changing business conditions B. How to Use the IRR Function to Analyze Capital Investments VII. Appendix 12A: Present Value Tables and Future Value Tables VIII. Appendix 12B: Solutions to Chapter Examples Using Microsoft Excel IX. Appendix 12C: Using a TI-83, TI-83 Plus, TI-84, or TI-84 Plus Calculator to Perform Time Value of Money Calculations

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Key Topics This chapter discusses four common methods used by managers to make long-term decisions regarding capital investments: payback period, accounting rate of return (ARR), net present value (NPV), and internal rate of return (IRR). Emphasize that the payback period, NPV, and IRR methods use future net cash inflows to evaluate capital investments, whereas ARR uses accrual-based accounting income.

First discuss the two methods that do not consider the time value of money: the payback period method and the ARR. Ask students to recall a time when they loaned a friend some money. How long did it take to be repaid? Was getting the money back important to them? What if they invested money in a business?

How soon would they want their money back? Use their answers as a way to illustrate the importance of the payback method to analyze investments. Have students work together in groups to complete E12-40B Compute payback period—equal cash inflows. Call on a group to give their response.

If an individual’s initial investment was returned quickly (within one year) but generated little cash in the following year, would it be a good investment? What if there was another investment that paid back the original investment in two years and provided cash for the following two years? Would that be a better investment? What are some criticisms of the payback period method? Remind students that all else being equal, the payback period method selects the shortest payback.

One of the major differences between the payback period and the ARR calculations is that the payback period uses net cash flows and the ARR uses accrual basis net income. Remind students that calculating accrual basis net income requires that all expenses be subtracted from revenue. Have students work in teams to complete E12-43B ARR with unequal cash inflows. Call on students to give their response.

To begin the discussion of the NPV and IRR methods, tell students that they have just invested $10,000 in a new piece of equipment. Would they rather receive the investment money back in one month or in one year? Obviously the answer is one month. Would they rather receive $1,000 a month for one year or $12,300 in a lump-sum in one year? The answer depends on the time value of money. Both options need to be converted to the same time frame in order to compare them. Therefore, both options have to be converted to the value today—present value.

Discuss how NPV and IRR are the discounted cash flow models, meaning that these models consider the time value of money when analyzing investment alternatives. These models use present value calculations so they allow for a better comparison of an investment’s initial cost to its expected net cash inflows. NPV and IRR compare that initial cost to the expected net cash inflows discounted to present value.

Some students get confused about which table to use when computing the time value of money. They seem to understand the concept but forget how to use the formulas. Review the factors affecting the time value of money and the related tables included in the appendix to the chapter.

Have students work together to complete E12-50B Calculate NPV—equal annual cash inflows. Call on students to give their responses.

Have students work in teams to complete E12-51B Calculate IRR—equal cash inflows. Call on a team to give its response.

The decision rules show students when to accept or reject a project, but what if there are multiple projects that meet the company’s investment requirements? Net present value computations help to compare 12-6 .

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Capital Investment Decisions and the Time Value of Money

multiple projects. Have students complete E12-54B Capital rationing decisions in teams. Call on a team to present their answers.

To complete the chapter, review the decision-making rules as they apply to all four methods. Have students complete E12-58B Comparing capital budgeting methods in groups. Call on a group to give their answers.

As a class, discuss the potential problems and issues with managers manually calculating the IRR. Ask students how using the IRR function in Excel would benefit managers. In small groups, have students complete E12-59B Analyze business decisions using data analytics tools.

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Managerial Accounting 6e Instructor’s Resource Manual

Chapter 12: Student Summary Handout I. Capital budgeting A. Capital assets B. Four methods of capital budgeting analysis 1. Payback period 2. Accounting rate of return (ARR) 3. Net present value (NPV) 4. Internal rate of return (IRR) C. Focus on cash flows D. Capital budgeting process 1. Capital rationing 2. Post-audits E. Sustainability and capital investments 1. LEED certification II. Payback period and accounting rate of return A. Payback period 1. Payback with equal annual net cash inflows a. Payback period = Initial investment ÷ Expected annual net cash inflows 2. Payback with unequal net cash inflows a. Accumulate net cash inflows until the amount of the investment is recovered 3. Criticism of the payback period method 4. Decision rule: Investments with shorter payback periods are more desirable, all else being equal.

B. Accounting rate of return (ARR) 1. Accounting rate of return = (Average annual net cash inflow – Annual depreciation expense) ÷ Initial investment a. Annual depreciation expense = (Initial cost of asset – Residual value) ÷ Useful life of asset in years 2. Investments with equal annual net cash inflows 3. Investments with unequal net cash inflows 4. Decision rule a. If the expected accounting rate of return exceeds the required rate of return, then invest. b. If the expected accounting rate of return is less than the required rate of return, then do not invest.

III. The time value of money A. Factors 1. Principal amount (p) a. Single lump-sum b. Annuity 2. Number of periods (n) 3. Interest rate (i) a. Simple interest b. Compound interest B. Future values and present values 1. Present value = Future value – Interest earned 2. Future value = Present value + Interest earned 12-8 .

Chapter 12

Capital Investment Decisions and the Time Value of Money

3. Using factors a. Present value of $1 b. Present value of an annuity of $1 c. Future value of $1 d. Future value of an annuity of $1 C. Calculating future values of single sums and annuities using FV factors 1. Future value of single sum = Principal amount × (FV factor for i and n) 2. Future value of an annuity = (Amount of each cash installment) × (Annuity FV factor for i and n) D. Calculating present values of single sums and annuities using PV factors 1. Present value of a single sum = Principal amount x (PV factor for i and n) 2. Present value of an annuity = (Amount of each cash installment) x (Annuity PV factor for i and n) IV. Net present value and internal rate of return A. Discounted cash flow methods 1. Net cash inflows B. Net present value (NPV) 1. NPV = PV of the investment’s net cash inflows – Cost of initial investment a. Discount rate b. Required rate of return 2. NPV with equal annual net cash inflows (annuity) a. Present value = Amount of each cash inflow × (Annuity PV factor for i and n) 3. NPV with unequal annual net cash inflows a. Compute present value of net cash inflows separately, as separate lump sums received in different years 4. Decision rule a. If the net present value is positive, then invest. b. If the net present value is negative, then do not invest.

5. Capital rationing and the profitability index a. Profitable index = PV of net cash inflows ÷ Initial investment b. Number of dollars returned for every dollar invested, with all calculations performed in present value dollars 6. NPV of a project with residual value a. Residual value is discounted as a single lump sum 7. Sensitivity analysis C. Internal rate of return (IRR) 1. Rate of return, based on discounted cash flows, that a company can expect to earn by investing in the project a. Interest rate that makes the NPV of the investment equal to $0 i.

Present value of investment’s net cash inflows – Initial investment = $0 ii. Initial investment = Present value of the investment’s net cash inflows 2. IRR with equal annual net cash inflows (annuity) a. Annuity PV factor = Initial investment ÷ Amount of each equal net cash inflow i. i = ?, n = given 3. IRR with unequal annual net cash inflows a. Trial and error 4. Decision rule a. If the IRR exceeds the required rate of return, then invest. b. If the IRR is less than the required rate of return, then do not invest.

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V. Comparison among the four capital budgeting methods VI. Using data analytics to analyze capital investments A. Scenarios that may require the use of data analytics 1. Cash flows that are higher and/or lower than the original assumptions 2. Include or exclude a residual and/or additional disposal cost 3. Truncate the analysis over a shorter time frame due to changing business conditions B. Using the IRR function to analyze capital investments VII. Appendix 12A: Present value tables and future value tables VIII. Appendix 12B: Solutions to chapter examples using Microsoft Excel IX. Appendix 12C: Using a TI-83, TI-83 Plus, TI-84, or TI-84 Plus calculator to perform time value of money calculations MyAccountingLab.com algorithmic homework assignments: E12-21A, E12-23A, E12-24A, E12-27A, E1231A, E12-32A, E12-36A.

12-10 .

Chapter 12

Capital Investment Decisions and the Time Value of Money

Chapter 12: ASSIGNMENT GRID

Assignment S12-1 S12-2 S12-3 S12-4 S12-5 S12-6 S12-7 S12-8 S12-9 S12-10 S12-11 S12-12 S12-13 S12-14 S12-15 S12-16 S12-17 S12-18

E12-19A E12-20A E12-21A E12-22A E12-23A E12-24A E12-25A

Learning Objective(s)

Topic(s)

Short Exercises Order the capital budgeting process 1 Compute payback period—equal cash 2 inflows Compute payback period—unequal 2 cash inflows Compute ARR—equal cash inflows 2 Compute ARR—unequal cash 2 inflows Find the present values of future cash 3 flows Show how timing affects future 3 values Compare payout options at their 3 future values Relationship between the PV tables 3 Compute NPV—equal net cash 4 inflows Compute IRR—equal net cash 4 inflows Compute NPV—unequal net cash 4 inflows Compute IRR—unequal net cash 4 inflows Compare the capital budgeting 5 methods Identify capital investments 1 Identify ethical standards violated 1, 2, 3, 4, & 5 Analyze business decisions using data 6 analytics tools Analyze business decisions using data 6 analytics tools Exercises (Group A) Compute payback period—equal cash 2 inflows Compute payback period and analyze 2 changes Compute payback period—unequal 2 cash inflows ARR with unequal cash inflows 2 Compute and compare ARR 2 Compare retirement savings plans 3 Calculate the payback and NPV for a 1&3 12-11 .

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Managerial Accounting 6e Instructor’s Resource Manual

Assignment E12-26A E12-27A E12-28A E12-29A E12-30A E12-31A E12-32A E12-33A E12-34A E12-35A E12-36A E12-37A E12-38A E12-39A

E12-40B E12-41B E12-42B E12-43B E12-44B E12-45B E12-46B E12-47B E12-48B E12-49B E12-50B E12-51B E12-52B E12-53B E12-54B E12-55B

Learning Objective(s)

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sustainable energy project Fund future cash flows 3 Choosing a lottery payout option 3 Solve various time value of money 3 scenarios Calculate NPV—equal annual cash 4 inflows Calculate IRR—equal cash inflows 4 Calculate NPV—unequal cash flows 4 Compute IRR—unequal cash flows 4 Capital rationing decision 4 Compute payback and ARR with 2 residual value Calculate NPV with and without 4 residual value Compute payback period and discuss 2&5 qualitative factors Comparing capital budgeting methods 5 Analyze business decision using data 6 analytics tools Analyze business decision using data 6 analytics tools Exercises (Group B) Compute payback period—equal cash 2 inflows Compute payback period and analyze 2 changes Compute payback period—unequal 2 cash inflows ARR with unequal cash inflows 2 Compute and compare ARR 2 Compare retirement savings plans 3 Calculate the payback and NPV for a 1&3 sustainable energy project Fund future cash flows 3 Choosing a lottery payout option 3 Solve various time value of money 3 scenarios Calculate NPV—equal annual cash 4 inflows Calculate IRR—equal cash inflows 4 Calculate NPV—unequal cash flows 4 Compute IRR—unequal cash flows 4 Capital rationing decision 4 Compute payback and ARR with 2 residual value 12-12 .

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Chapter 12

Assignment E12-56B E12-57B E12-58B E12-59B E12-60B

P12-61A P12-62A P12-63A P12-64A

P12-65B P12-66B P12-67B P12-68B

C12-69

A12-70 A12-71

A12-72 A12-73

Capital Investment Decisions and the Time Value of Money

Learning Objective(s)

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Calculate NPV with and without 4 residual value Compute payback period and discuss 2&5 qualitative factors Comparing capital budgeting methods 5 Analyze business decisions using data 6 analytics tools Analyze business decisions using data 6 analytics tools Problems (Group A) Solve various time value of money 3&4 scenarios Retirement planning in two stages 3 Evaluate an investment using all four 2&4 methods Compare investments with different 2&4 cash flows and residual values Problems (Group B) Solve various time value of money 3&4 scenarios Retirement planning in two stages 3 Evaluate an investment using all four 2&4 methods Compare investments with different 2&4 cash flows and residual values Serial Case Calculate payback period and NPV 2 after hotel renovation Critical Thinking Discussion questions All Evaluating the purchase of an asset All with various capital budgeting methods Ethics involved with capital 1, 2, 3, 4, & 5 budgeting proposal Capital budgeting qualitative factors 1, 2, 3, 4, & 5

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Managerial Accounting 6e Instructor’s Resource Manual

Name____________________________________ Date_________________ Section_______________

CHAPTER 12 TEN-MINUTE QUIZ Circle the letter of the best response.

1.

Which of the following is correct?

A. All capital budgeting methods produce the same decision, and their use is based on the information available.

B. Payback period ignores the cash flows after the original investment is recovered.

C. The accounting rate of return method considers the time value of money.

D. The cost of capital is the company’s desired rate of return.

2.

Which of the following capital budgeting methods uses accrual accounting rather than net cash flows, as a basis for calculations?

A. Payback method B. Internal rate of return C. Net present value D. Accounting rate of return

3.

Which of the following may be useful when comparing potential investments of different sizes?

A. Accounting rate of return B. Profitability index C. Future value of net cash inflows D. Payback method

4.

The internal rate of return is A. the interest rate at which the net present value of the investment equals the cost of the investment.

B. the interest rate at which the net present value of the investment exceeds the company’s desired rate of return.

C. equal to the accounting rate of return.

D. none of the above.

5.

Which of the following capital budgeting methods ignores the time value of money?

A. Accounting rate of return B. Internal rate of return C. Net present value D. Profitability index

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6.

Eagle Corporation is considering the purchase of a new machine. The machine cost $550,000 and will generate an annual net cash inflow of $100,000. What is the payback period?

A. 4 years and 6 months B. 5 years C. 5 years and 6 months D. 6 years and 1 month

7.

Cardinal Company purchased a new machine for $125,000. The machine will last eight years and will be depreciated using the straight-line method. The estimated residual value of the machine is zero and should generate a yearly cash inflow of $30,000. Ignoring taxes, what is the accounting rate of return?

A. 3.65% B. 11.50% C. 23.00% D. 24.00%

8.

Which of the following decision rules is a correct statement?

A. If the net present value is positive, do not invest in the capital asset.

B. If the internal rate of return is less than the required rate of return, invest in the asset.

C. Investments with longer payback periods are more desirable, all else being equal.

D. If the net present value is positive, invest in the capital asset.

9.

Which of the following is NOT a factor when considering the time value of money?

A. The interest rate B. The principal amount C. The payback period D. The number of periods

10.

The final step in the capital budgeting process is to A. identify potential capital investments.

B. engage in capital rationing, if necessary, to choose among alternative investments.

C. utilize decision rules when screening out undesirable investments.

D. perform post-audits after making capital investments.

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Answer Key to Chapter 12 Ten-Minute Quiz 1. B 2. D 3. B 4. A 5. A

6. C 7. B 8. D 9. C 10. D

12-16 .

Chapter 13 Statement of Cash Flows This chapter begins by reviewing the four basic financial statements and discussing why the statement of cash flows is important. The three types of activities that generate and use cash (operating, investing, and financing) are then covered in detail. Included in the discussion is how noncash investing and financing transactions are treated. The two methods of presenting operating activities, direct and indirect, are then introduced. The direct method lists the receipt and payment of cash for specific operating activities. The indirect method begins with the company’s net income, which is prepared on an accrual basis, and then reconciles it back to the cash basis through a series of adjustments.

The first set of Decision Guidelines presents some decisions that need to be made before preparing the statement of cash flows. The accompanying Summary Problem reinforces the classification of various transactions as operating, investing, or financing activities.

The second part of the chapter fully illustrates the preparation of the statement of cash flows using both the indirect and the direct methods, emphasizing that the two methods differ only in the presentation of operating activities. The investing and financing activities are prepared the same way under both methods.

A section of the chapter describes how to interpret the statement of cash flows and explains how the concept of free cash flow is computed.

The chapter concludes with a discussion of how data analytics can be used to prepare the statement of cash flows. Step-by-step instructions are provided for how to create an Excel PivotTable with a slicer.

The final set of Decision Guidelines provides general guidelines for preparing the statement of cash flows using either the indirect or direct method. The Summary Problem allows practice preparing the statement of cash flows using the indirect method.

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Managerial Accounting 6e Instructor’s Resource Manual

Learning Objectives After studying Chapter 13, your students should be able to: 1. Classify cash flows as operating, investing, or financing activities 2. Prepare the statement of cash flows using the indirect method 3. Prepare the statement of cash flows using the direct method 4. Analyze financial data for the statement of cash flows using data analytics tools

13-2 .

Chapter 13

Statement of Cash Flows

Teaching Outline I.

What Is the Statement of Cash Flows?

A. Four basic financial statements 1. Income statement 2. Balance sheet 3. Statement of stockholders’ equity 4. Statement of cash flows a. Exhibit 13-1: Basic Format of the Statement of Cash Flows B. Cash equivalents C. Three Types of Activities That Generate and Use Cash 1. Operating activities b. Transactions that affect net income, current assets, and current liabilities 2. Investing activities a. Transactions that affect long-term assets 3. Financing activities a. Transactions that affect long-term liabilities and stockholders’ equity 4. Exhibit 13-2: Classification of Activities on the Statement of Cash Flows 5. Noncash investing and financing activities D. Two Methods of Presenting Operating Activities 1. Direct method a. Lists the receipt and payment of cash for specific operating activities 2. Indirect method a. Most commonly used method b. Begins with the company’s accrual basis net income and reconciles it back to the cash basis through a series of adjustments E. Sustainability and the Statement of Cash Flows

II.

How Is the Statement of Cash Flows Prepared Using the Indirect Method?

A. Information Needed to Prepare the Statement of Cash Flows 1. Income statement for the current year a. Exhibit 13-3: Income Statement 2. Comparative balance sheets a. Exhibit 13-4: Comparative Balance Sheets 3. Miscellaneous additional information relating to investing and financing transactions B. Preparing the Cash Flows from Operating Activities 1. Noncash expenses a. Exhibit 13-5: Adjusting Net Income for Depreciation Expense 2. Noncash revenues a. Exhibit 13-6: Adjusting Net Income for Gain on Sale 3. Changes in current asset accounts a. Accounts receivable, prepaid insurance, inventory b. If a current asset account increases, subtract the change from net income c. Exhibit 13-7: General Rule for Increases in Current Asset Accounts d. If a current asset account decreases, add the change from net income e. Exhibit 13-8: General Rule for Decreases in Current Asset Accounts f. Exhibit 13-9: Adjusting Net Income for Changes in Current Asset Accounts 4. Changes in current liability accounts a. Interest payable, wages payable b. If a current liability account decreases, then subtract the change from net income 13-3 .

Managerial Accounting 6e Instructor’s Resource Manual

c. Exhibit 13-10: General Rule For Decreases in Current Liability Accounts d. If a current liability account increases, then add the change to net income e. Exhibit 13-11: General Rule for Increases in Current Liability Accounts 5. Interpreting cash flows from operating activities a. Exhibit 13-12: Cash Flows from Operating Activities (Indirect Method) C. Preparing the Cash Flows from Investing activities 1. Property, plant, and equipment 2. Accumulated depreciation 3. Investments 4. Exhibit 13-13: Investing Activities Section of the Statement of Cash Flows D. Preparing the Cash Flows from Financing Activities 1. Long-term liabilities 2. Common stock 3. Retained earnings E. Exhibit 13-14: Statement of Cash Flows (Indirect Method) F. Interpreting the Statement Of Cash Flows—Free Cash Flow G. Recap: Exhibit 13-15: Steps for Using the Indirect Method III.

How Is the Statement of Cash Flows Prepared Using the Direct Method?

A. Overview B. Exhibit 13-16: Statement of Cash Flows (Direct Method) C. Determining Cash Payments and Receipts 1. Cash receipts from customers 2. Cash payments for inventory 3. Cash payments for insurance 4. Cash payments for salaries and wages 5. Cash payments for interest expense 6. Cash payments for income taxes 7. Cash payments for other operating expenses 8. Cash flows from operating activities 9. Comparing the direct and indirect methods

IV.

How Can Managers Use Data Analytics to Prepare the Statement of Cash Flows?

A. Exhibit 13-17: Partial Listing of Sea-Hawk’s General Ledger Data B. Exhibit 13-18: Pivot Table of Changes in Balance Sheet Line Items C. Exhibit 13-19: Filtered Pivot Table Showing Changes in Current Asset Line Item D. Creating an Excel PivotTable with a Slicer

13-4 .

Chapter 13

Statement of Cash Flows

Key Topics To begin the discussion of the statement of cash flows, ask students what they would do if they needed cash. The answers will vary, but there are basically three ways to do this, and they fall into the three classifications of cash flows on the statement. They either need to earn it (operating activities), sell something they own (investing activities), or borrow it (financing activities). This helps students understand the classification of transactions reported on the statement of cash flows. Emphasize that the disclosure of any noncash investing and financing activities is also important because these activities will affect cash flow in the upcoming years. This information is necessary when making decisions about and for the company.

Illustrate the two methods, direct and indirect, for preparing cash flows from operating activities side by side so that students can see the similarities and the differences. Students are often confused by the reconciliation of net income to net cash flows from operating activities using the indirect method. Show them step by step how each type of account (noncash revenues and expenses, current assets, current liabilities, and gains/losses) can affect net income differently than the corresponding cash flow.

Emphasizing why amounts are added or subtracted as a means to “adding” the items to net income or “removing” the items from net income is helpful. Be sure they understand that regardless of the method used, the net cash flow from operating activities will be exactly the same under both methods.

To help students work with the indirect method concept, show them the following grid: Begin with Net Income (Loss) ADD 1. Noncash expenses such as depreciation

SUBTRACT 1. Gains on sale of property, plant, or equipment 2. Increases in noncash current assets

2. Losses on sale of property, plant, or equipment 3. Decreases in noncash current assets 4. Increases in current liabilities

3. Decreases in current liabilities

Have students work in teams to complete E13-29B Calculate operating cash flows (indirect method) and E13-32B Compute operating cash flows using direct method. Call on two teams to present their solutions. Point out the similarities and differences between the two methods using the results of the two exercises. As an alternative, you might decide to calculate both methods using the same data so that students can see the operating cash flow amounts are the same.

When illustrating the preparation of the investing and financing sections of the statement of cash flows, emphasize that these are prepared exactly the same no matter which method is used for preparing the operating activities section. Be sure students understand that both inflows and outflows of cash for each account must be presented in the investing and financing sections.

Discuss how data analytics can be use by managers to gather, manipulate, and analyze comparative balance sheet data. Using Excel, demonstrate how to create an Excel pivot table with a slicer. Divide students into groups and have them complete E13-36B Analyze financial data for the statement of cash flows using data analytics tools.

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Managerial Accounting 6e Instructor’s Resource Manual

Chapter 13: Student Summary Handout I.

Statement of cash flows A. Four basic statements 1. Income statement 2. Balance sheet 3. Statement of stockholders’ equity 4. Statement of cash flows a. Format of the statement of cash flows B. Three types of activities that generate and use cash 1. Operating activities a. Transactions that affect net income, current assets, and current liabilities 2. Investing activities a. Transactions that affect long-term assets 3. Financing activities a. Transactions that affect long-term liabilities and stockholders’ equity 4. Noncash investing and financing activities C. Two methods of presenting operating activities 1. Direct method a. Lists the receipt and payment of cash for specific operating activities 2. Indirect method a. Most commonly used method b. Begins with the company’s accrual basis net income and reconciles it back to the cash basis through a series of adjustments 3. Sustainability and the statement of cash flows

II.

Statement of cash flows using the indirect method A. Information needed to prepare the statement of cash flows 1. Income statement for the current year 2. Comparative balance sheets 3. Miscellaneous additional information relating to investing and financing transactions B. Operating activities 1. Noncash expenses a. Adjusting net income for depreciation expense 2. Noncash revenues a. Adjusting net income for gain on sale 3. Changes in noncash current asset accounts a. Accounts receivable, prepaid insurance, inventory b. If a current asset account increases, subtract the change from net income c. If a current asset account decreases, add the change from net income 4. Changes in current liability accounts a. Interest payable, wages payable b. If a current liability account decreases, then subtract the change from net income c. If a current liability account increases, then add the change to net income 5. Interpreting cash flows from operating activities C. Investing activities 1. Property, plant, and equipment 2. Accumulated depreciation 3. Investments 13-6 .

Chapter 13

Statement of Cash Flows

D. Financing activities 1. Long-term liabilities 2. Common stock 3. Retained earnings E. Interpreting the statement of cash flows—free cash flow F. Steps for using the indirect method III.

Preparing the statement of cash flows using the direct method A. Operating activities 1. Determine cash receipts a. Cash receipts from customers 2. Determine cash payments a. Cash payments for inventory b. Cash payments for insurance c. Cash payments for salaries and wages d. Cash payments for interest expense e. Cash payments for income taxes f. Cash payments for other operating expenses B. Investing and financing activities—same regardless of method used for operating activities C. Comparing the direct and indirect methods

IV.

Using data analytics to prepare the statement of cash flows A. Creating an Excel PivotTable with a slicer MyAccountingLab.com algorithmic homework assignments: E13-14A, E13-16A, E13-17A, E13-19A, E1320A.

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Managerial Accounting 6e Instructor’s Resource Manual

Chapter 13: ASSIGNMENT GRID

Assignment S13-1 S13-2 S13-3

S13-4 S13-5 S13-6 S13-7 S13-8 S13-9 S13-10 S13-11 S13-12

S13-13

E13-14A E13-15A E13-16A

E13-17A E13-18A E13-19A E13-20A E13-21A

Learning Objective(s)

Topic(s)

Short Exercises Classifying cash flows 1 Preparing the operating cash flows 2 section (indirect method) Identifying activities for the 1&2 statement of cash flows—indirect method Classify cash flows as operating, 1&2 investing, or financing Calculate investing cash flows 1, 2, & 3 Calculate financing cash flows 2&3 Classify cash flows as operating, 1, 2, & 3 investing, or financing Prepare statement of cash flows 2 (indirect method) Calculate increase or decrease in 2 current assets and liabilities Prepare statement of cash flows 3 (direct method) Identify ethical standards violated 1, 2, & 3 Analyze financial data for the 4 statement of cash flows using data analytics tools Analyze financial data for the 4 statement of cash flows using data analytics tools Exercises (Group A) Prepare operating cash flows 2 section (indirect method) Prepare statement of cash flows 2 (indirect method) Calculate cash flows from 2&3 operating, investing, and financing activities (direct method) Calculate operating cash flows 2 (indirect method) Prepare statement of cash flows 2 (indirect method) Prepare statement of cash flows 2 (indirect method) Compute operating cash flows 3 using direct method Prepare statement of cash flows 3 (direct method) 13-8 .

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Chapter 13

Assignment E13-22A E13-23A E13-24A

E13-25A

E13-26B E13-27B E13-28B

E13-29B E13-30B E13-31B E13-32B E13-33B E13-34B E13-35B E13-36A

E13-37A

P13-38A P13-39A P13-40A P13-41A

Learning Objective(s)

Topic(s)

Prepare statement of cash flows 3 (direct method) Classify sustainable activities’ 1, 2, & 3 effect on cash flows Analyze financial data for the 4 statement of cash flows using data analytics tools Analyze financial data for the 4 statement of cash flows using data analytics tools Exercises (Group B) Prepare operating cash flows 2 section (indirect method) Prepare statement of cash flows 2 (indirect method) Calculate cash flows from 2&3 operating, investing, and financing activities (direct method) Calculate operating cash flows 2 (indirect method) Prepare statement of cash flows 2 (indirect method) Prepare statement of cash flows 2 (indirect method) Compute operating cash flows 3 using the direct method Prepare statement of cash flows 3 (direct method) Prepare statement of cash flows 3 (direct method) Classify sustainable activities’ 1, 2, & 3 effect on cash flows Analyze financial data for the 4 statement of cash flows using data analytics tools Analyze financial data for the 4 statement of cash flows using data analytics tools Problems (Group A) Prepare statement of cash flows 2 (indirect method) Prepare statement of cash flows 1&2 (indirect method) Prepare a statement of cash flows 1&3 (direct method) Prepare statements of cash flows 1, 2, & 3 (indirect and direct methods) 13-9 .

Statement of Cash Flows

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Managerial Accounting 6e Instructor’s Resource Manual

Assignment P13-42B P13-43B P13-44B P13-45B

C13-46 A13-47 A13-48 A13-49 A13-50 A13-51

Learning Objective(s)

Topic(s)

Problems (Group B) Prepare statement of cash flows 2 (indirect method) Prepare statement of cash flows 1&2 (indirect method) Prepare a statement of cash flows 1&3 (direct method) Prepare statements of cash flows 1, 2, & 3 (indirect and direct methods) Serial Case Analyze a statement of cash flows 1 Critical Thinking Discussion questions All Cash flow statements from All companies in the same industry Ethics involved with statement of 1, 2, & 3 cash flows preparation Analyzing statements of cash flows 1, 2, & 3 Use cash flow data to evaluate 1&2 potential investments

13-10 .

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Chapter 13

Statement of Cash Flows

Name____________________________________ Date_________________ Section_______________

CHAPTER 13 TEN-MINUTE QUIZ Circle the letter of the best response.

1.

Which of the following statements is TRUE regarding a statement of cash flows?

A. A statement of cash flows measures the profitability of a company using the cash basis of accounting.

B. Two different methods may be used to compute the net cash flows from operating, investing, and financing activities.

C. Noncash investing and financing activities need to be disclosed under “other activities.”

D. The statement of cash flows reports the changes in cash and cash equivalents.

2.

Which of the following activities is an operating activity?

A. Payment on the principal portion of a bank loan B. Collection of cash from issuing stock C. Payment of interest on a bank loan D. Payment of cash dividends

3.

Which of the following activities would NOT be considered an investing activity?

A. Issuance of common stock B. Purchase of used equipment C. Sale of land D. Sale of a long-term investment

4.

Which of the following activities is a financing activity?

A. Purchase of land by issuing stock B. Payment of cash dividends C. Purchase of land for cash D. Purchase of inventory for cash

5.

On a statement of cash flows, the net increase in cash was $24,000. Cash provided from operations was $30,000. If the net cash outflow from investing activities was $7,000, then what was the net cash flow from financing activities?

A. A net inflow of $1,000 B. A net outflow of $1,000 C. A net inflow of $13,000 D. A net outflow of $13,000

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6.

Using the following information for Stewart Auto, Inc., calculate the net cash flow from operating activities using the indirect method.

Net income Depreciation expense Increase in accounts receivable Decrease in inventory Increase in accounts payable Loss on sale of equipment

$150,000 10,000 4,000 5,000 8,000 7,000

The net cash provided by operating activities is A. $142,000.

B. $144,000.

C. $160,000.

D. $176,000.

7.

Which of the following statements is TRUE regarding the indirect method of preparing a statement of cash flows?

A. A decrease in inventory is subtracted from net income.

B. A loss on the sale of an investment is added to net income.

C. Depreciation expense is subtracted from net income.

D. An increase in wages payable is subtracted from net income.

8.

Which of the following statements is TRUE regarding the direct method of preparing a statement of cash flows?

A. Depreciation expense is added as a reconciling item.

B. The directed method is easier and less costly to prepare than the indirect method.

C. A supplementary schedule reconciling net income to the cash basis must also be provided.

D. All of the statements above are correct.

9.

Which of the following is an example of noncash investing and financing activity that is disclosed in a supplementary schedule accompanying the statement of cash flows or in a footnote to the financial statements?

A. Selling goods on credit B. Paying the amount due a creditor C. Purchasing equipment in exchange for a long-term note D. Gain on the sale of land

10.

In an Excel PivotTable, what does a slicer do?

A. Returns a value equal to an exact prompt B. Sums all of the numerical data C. Filters results based on user choice D. Sorts text results alphabetically

13-12 .

Chapter 13

Statement of Cash Flows

Answer Key to Chapter 13 Ten-Minute Quiz 1. D 2. C 3. A 4. B 5. A

6. D 7. B 8. C 9. C 10. C

13-13 .

Chapter 14 Financial Statement Analysis This chapter continues the discussion of performance evaluation and decision making. A company’s performance is often evaluated by comparing its current performance to past performance, to other companies’ performance, or to industry averages. The first half of the chapter illustrates horizontal and vertical analysis. Horizontal analysis compares the company’s financial performance over time.

Horizontal analysis, including both dollar changes and percentage changes, is explained and illustrated using a comparative income statement and balance sheet. Trend percentages are also explained and illustrated. Vertical analysis consists of computing each line of the financial statement as a percentage of a base amount. Total revenue (net sales) serves as the base amount for the income statement, whereas total assets is used as the base amount for the balance sheet. The use of common-size statements as a means of comparing one company with another is illustrated. The use of benchmarking and comparison to industry averages is also discussed.

The first set of Decision Guidelines summarizes how decision makers judge the financial performance of a company using horizontal and vertical analyses. The accompanying Summary Problem gives students practice using the elements of financial statement analysis presented in the first half of the chapter—trend, horizontal, and vertical analysis.

The second half of the chapter presents several of the most commonly used financial statement ratios. The use of ratio analysis to help make business decisions is discussed. Ratio analysis is presented using the following categories: • Ratios measuring a company’s ability to pay current liabilities (working capital, current ratio, and acid-test (quick) ratio) • Ratios measuring a company’s ability to sell inventory and collect receivables (inventory turnover, accounts receivable turnover, and days’ sales in receivables) • Ratios measuring a company’s ability to pay long-term debt (debt ratio and times-interest-earned ratio) • Ratios measuring profitability (gross profit percentage, operating income percentage, rate of return on net sales, rate of return on total assets, rate of return on common stockholders’ equity, and earnings per share of common stock) • Ratios analyzing current or potential stock investments (price/earnings ratio, dividend yield, and book value per share of common stock) This section is followed with a discussion of the red flags that may signal financial trouble, as well as suggestions on how to disclose a company’s sustainability targets and achievements.

The chapter concludes with a discussion on how managers can use data analytics for financial statement analysis. Specifically, the use of Microsoft Excel to find dollar and percentages changes for horizontal and vertical analysis, as well as calculating common financial statement ratios, is addressed. Step-by-step instructions are presented for creating sparklines and line charts in Excel.

The last set of Decision Guidelines summarizes the information that ratios can provide investors, creditors, and managers. The final Summary Problem affords the student practice in the calculation of the ratios presented in the chapter. In addition, the student compares the calculated ratios for the company presented to those of its competitors.

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Managerial Accounting 6e Instructor’s Resource Manual

Learning Objectives After studying Chapter 14, your students should be able to: 1. Perform a horizontal analysis of financial statements 2. Perform a vertical analysis of financial statements 3. Prepare and use common-size financial statements 4. Compute the standard financial ratios 5. Analyze financial trends using data analytics tools

14-2 .

Chapter 14

Financial Statement Analysis

Teaching Outline I.

What Are the Most Common Methods of Analysis?

A. Horizontal analysis B. Vertical analysis C. Ratio analysis D. Exhibit 14-1: Supermart Income Statement E. Exhibit 14-2: Supermart Balance Sheet

II.

What Is Horizontal Analysis?

A. Comparison of financial statement line items between accounting periods B. Change can be stated as a dollar amount or as a percentage 1. Dollar change is computed by subtracting the line item’s balance in the earlier period from its balance in the later period 2. Percentage is computed by dividing the dollar amount of change by the balance in the earlier period (base year) C. Comparative financial statements 1. Exhibit 14-3: Supermart Comparative Income Statement—Horizontal Analysis 2. Exhibit 14-4: Comparative Balance Sheet—Horizontal Analysis D. Trend percentages 1. Indicate the direction a business is taking over a longer period of time a. Trend % = (line item balance ($) in any year ÷ line item balance ($) in base year) × 100 2. Exhibit 14-5: Supermart’s Sales Trends 3. Exhibit 14-6: Line Graph of Sales Trend

III.

What Is Vertical Analysis?

A. Shows the relative size of each financial statement line item as a percentage of a total amount, or base figure B. Income statement: Sales revenue is the base amount 1. Vertical analysis % for income statement = Each income statement line item ÷ Sales revenue 2. Exhibit 14-7: Income Statement—Vertical Analysis C. Balance sheet: Total assets is the base amount 1. Vertical analysis % for balance sheet = Each balance sheet line item ÷ Total assets 2. Exhibit 14-8: Balance Sheet—Vertical Analysis D. How Do We Compare One Company with Another?

1. Benchmark b. Compare to a competitor c. Compare to industry averages 2. Common-size statement d. Reports only percentages as they appear in a vertical analysis e. Exhibit 14-9: Common-Size Income Statement

IV.

What Are Some of the Most Common Financial Ratios?

A. Measuring Ability to Pay Current Liabilities 1. Working capital = Current assets – Current liabilities 2. Current ratio = Current assets ÷ Current liabilities 3. Acid-test ratio (quick ratio) = (Cash + Short-term investments + Net current receivables) ÷ Current liabilities B. Measuring Ability to Sell Inventory and Collect Receivables 1. Inventory turnover = COGS ÷ Average inventory 14-3 .

Managerial Accounting 6e Instructor’s Resource Manual

2. Accounts receivable turnover = Net credit sales ÷ Average net accounts receivable 3. Days’ sales in receivables = Average net accounts receivable ÷ One day’s sales a. One day’s sales = Net sales ÷ 365 days C. Measuring Ability to Pay Long-Term Debt 1. Debt ratio = Total liabilities ÷ Total assets 2. Times-interest-earned ratio = Income from operations ÷ Interest expense D. Measuring Profitability 1. Gross profit percentage = Gross profit ÷ Net sales 2. Operating income percentage = Operating income ÷Net sales 3. Rate of return on net sales = Net income ÷ Net sales 4. Rate of return on total assets = (Net income + Interest expense) ÷ Average total assets a. Also referred to as return on assets 5. Rate of return on common stockholders’ equity (return on equity) = (Net income – Preferred dividends) ÷ Average common stockholders’ equity a. Also referred to as return on equity 6. Earnings per share of common stock = (Net income – Preferred dividends) ÷ Number of shares of common stock outstanding a. Number of shares of common stock outstanding = issued stock – treasury stock E. Analyzing Stock Investments 1. Price/Earnings ratio = Market price per share of common stock ÷ Earnings per share a. Also referred to as P/E ratio 2. Dividend yield = Dividend per share of common stock ÷ Market price per share of common stock 3. Book value per share of common stock = (Total stockholders’ equity – Preferred equity) ÷ Number of shares of common stock outstanding V.

Red Flags in Financial Statement Analysis A. Movement of sales, inventory, and receivables B. Earnings problems C. Decreased cash flow D. Too much debt E. Inability to collect receivables F. Buildup of inventories G. Sustainability and financial statement analysis

VI.

How Can Managers Use Data Analytics for Financial Statement Analysis?

A. Microsoft Excel can be used to 1. Find dollar changes for horizontal analysis 2. Find percentage changes for horizontal and vertical analysis 3. Calculate common financial statements B. Exhibit 14-10: Quarterly sales and gross profit data by distribution channel for past two years C. Sparklines are mini-graphs contained in one cell that visualize the data in a selected range of cells 1. Exhibit 14-11: Sparklines Visualize Sales and Gross Profit Trends over Time 2. Exhibit 14-12: Line Chart of Quarterly Sales Revenue by Distribution Channel 3. Exhibit 14-13: Gross Profit Percentage Trends over Time D. How to Create Sparklines E. How to Create Line Charts

14-4 .

Chapter 14

Financial Statement Analysis

Key Topics Emphasize that horizontal analysis looks at numbers across the balance sheet and income statement over time. On the other hand, vertical analysis looks down the balance sheet and income statement, expressing the percentage of each line item as a percentage of a total (base) amount. Net sales revenue is used as the base amount on the income statement, whereas total assets is used as the base amount on the balance sheet.

Students sometimes get confused with the horizontal analysis calculations for subtracted/negative numbers (such as expenses on the income statement). Point out that the absolute values of these numbers are used to determine if there is an increase or a decrease.

Have students work in teams to complete E14-28B Horizontal analysis. Call on a team to give their responses.

The base year is the starting point to determine whether an account increased or decreased. Although the base year is often the prior year, it does not have to be (for example, one account may be looked at over multiple years, all compared to the base year, to determine its trend). Explain that trend percentages are a form of horizontal analysis. Trends indicate the direction a business is taking over a longer period of time.

Have student complete E14-29B Compute trend percentages. Discuss the calculations as a group.

Explain that vertical analysis of a financial statement shows the relationship of each item to a base amount, which is the 100% figure. Every other item on the statement is then reported as a percentage of that base. Have students work together to complete E14-30B Perform vertical analysis. Call on students to give their responses.

Show students that the gross profit percentage and net income as a percentage of sales ratios are part of the vertical analysis of the income statement.

Be sure to explain how to interpret the results of the financial ratios. Students need to not only know how to do the calculations, but also how to understand the results. Is the number a good one? Has the company improved? Which company is better? Once students have the result, what do they do with it?

Start a discussion among students about how much cash a company should maintain. For example, imagine a company having $1,000,000 cash in excess of its liabilities. How much cash is too much (a high current ratio)? What if the amount of cash was not enough to pay its liabilities (a low current ratio)?

Continue the discussion and ask students about the ability to pay current liabilities in a financial emergency. If a company needed cash the same day, what could it use? What information is available from the acid-test ratio that would differ from the current ratio? The assets used in the acid-test ratio exclude inventory, so having a high current ratio doesn’t translate into a high acid-test ratio if the company is holding a large dollar amount in inventory.

Analysis of turnover ratios follows the same pattern. When inventory is sold, it becomes cost of goods sold. Accounts receivable develop from credit sales. So inventory turnover = cost of goods sold/average inventory and accounts receivable turnover = net credit sales/average net accounts receivable.

Start a discussion among the students about comparing companies to industry averages. If one company has an inventory turnover of four, it sells the inventory roughly every three months. That might be good 14-5 .

Managerial Accounting 6e Instructor’s Resource Manual

for a furniture store, but it is not appetizing for a grocery store, which may sell its entire dollar value of inventory every three days.

If students understand the theory behind calculating the accounts receivable turnover ratio and the days’ sales in average accounts receivable ratio, they can understand that days’ sales in average accounts receivables can be calculated as 365 ÷ accounts receivable turnover ratio.

If a company normally requires its customers to pay their accounts receivables within 20 days, what can be determined from a company that has 18 average days’ sales remaining in accounts receivable? The company strongly enforces its accounts receivable collection policies.

Current ratios illustrate the company’s ability to pay its current liabilities. The debt ratio illustrates the portion of assets that are financed with liabilities. That is why liabilities are the denominator in the current ratio and the numerator in the debt ratio.

Have students work together to complete E14-32B Calculate ratios. Call on students to give their responses. As a group, interpret the answers.

Students may not realize why it is important to know how many times interest is earned through operating income. Ask students if they have ever had a car loan. What is the biggest part of each monthly payment?

For the first 65% of the payment period, most loan payments are primarily interest.

Point out to students that all of the profitability ratios have something in common: They all begin with income. Have students complete E14-34B Compute profitability ratios in groups. As a class, discuss the answers and have students provide appropriate interpretations.

Ask students what a shareholder hopes to get out of his investment in a company. Stress that shareholders look to receive some combinations of cash dividends and an increase in the market value of the shares held. Divide the students into teams of two and have them complete E14-35B Compute stock ratios.

Encourage students to interpret and discuss the calculated ratios within their teams.

Discuss common red flags that may signal a company is in financial trouble. What could an increase in inventory and a decrease in accounts receivable signal? Are the company’s earnings per share negative?

What would that mean for the long-term sustainability of the company? What would an increasing days’ sales in receivable indicate? How could this be compared to the credit terms extended to customers? Is the company’s inventory turnover increasing? What could this mean about the ability of the company generate sales?

As a class, discuss how Microsoft Excel could be used for horizontal, vertical, and trend analysis, as well as for computing financial statement ratios. Demonstrate how to create sparklines using E14-39B Analyze financial trends using data analytics tools. Divide students into groups to discuss part 5. of the exercise.

14-6 .

Chapter 14

Financial Statement Analysis

Chapter 14: Student Summary Handout I.

Three common ways to analyze financial statements A. Horizontal analysis B. Vertical analysis C. Ratio analysis

II.

Horizontal analysis of financial statements A. Comparison of financial statement line items between accounting periods B. Change can be stated as a dollar amount or as a percentage 1. Dollar change is computed by subtracting the line item’s balance in the earlier period from its balance in the later period 2. Percentage is computed by dividing the dollar amount of change by the balance in the earlier period (base year) C. Comparative financial statements D. Trend percentages 1. Indicate the direction a business is taking over a longer period of time 2. Trend % = (line item balance ($) in any year ÷ line item balance ($) in base year) × 100

III.

Vertical analysis of financial statements A. Shows the relative size of each financial statement line item as a percentage of a total amount, or base figure B. Income statement: Sales revenue is the base amount 1. Vertical analysis % for income statement = Each income statement line item ÷ Sales revenue C. Balance sheet: Total assets is the base amount 1. Vertical analysis % for balance sheet = Each balance sheet line item ÷ Total assets D. Common-size financial statements 1. Benchmark a. Compare to a competitor b. Compare to industry averages 2. Common-size statement a. Reports only percentages as they appear in a vertical analysis

IV.

Financial ratios A. Measuring ability to pay current liabilities 1. Working capital = Current assets – Current liabilities 2. Current ratio = Current assets ÷ Current liabilities 3. Acid-test ratio (quick ratio) = (Cash + Short-term investments + Net current receivables) ÷ Current liabilities B. Measuring ability to sell inventory and collect receivables 1. Inventory turnover = COGS ÷ Average inventory 2. Accounts receivable turnover = Net credit sales ÷ Average net accounts receivable 3. Days’ sales in receivables = Average net accounts receivable ÷ One day’s sales a. One day’s sales = Net sales ÷ 365 days C. Measuring ability to pay long-term debt 1. Debt ratio = Total liabilities ÷ Total assets 2. Times-interest-earned ratio = Income from operations ÷ Interest expense D. Measuring profitability 1. Gross profit percentage = Gross profit ÷ Net sales 2. Operating income percentage = Operating income ÷Net sales 14-7 .

Managerial Accounting 6e Instructor’s Resource Manual

3. Rate of return on net sales = Net income ÷ Net sales 4. Rate of return on total assets = (Net income + Interest expense) ÷ Average total assets a. Also referred to as return on assets 5. Rate of return on common stockholders’ equity (return on equity) = (Net income – Preferred dividends) ÷ Average common stockholders’ equity a. Also referred to as return on equity 6. Earnings per share of common stock = (Net income – Preferred dividends) ÷ Number of shares of common stock outstanding a. Number of shares of common stock outstanding = issued stock – treasury stock E. Analyzing stock investments 1. Price/Earnings ratio = Market price per share of common stock ÷ Earnings per share a. Also referred to as P/E ratio 2. Dividend yield = Dividend per share of common stock ÷ Market price per share of common stock 3. Book value per share of common stock = (Total stockholders’ equity – Preferred equity) ÷ Number of shares of common stock outstanding V.

Discuss red flags in financial statement analysis A. Movement of sales, inventory, and receivables B. Earnings problems C. Decreased cash flow D. Too much debt E. Inability to collect receivables F. Buildup of inventories G. Sustainability and financial statement analysis

VI.

Using data analytics for financial statement analysis A. Microsoft Excel can be used to 1. find dollar changes for horizontal analysis 2. find percentage changes for horizontal and vertical analysis B. calculate common financial statements C. Sparklines are mini-graphs contained in one cell that visualize the data in a selected range of cells D. How to create sparklines E. How to create line charts

MyAccountingLab.com algorithmic homework assignments: E14-14A, E14-15A, E14-17A, E14-18A, E1423A.

14-8 .

Chapter 14

Financial Statement Analysis

Chapter 14: ASSIGNMENT GRID

Assignment S14-1 S14-2 S14-3 S14-4 S14-5 S14-6 S14-7 S14-8 S14-9 S14-10 S14-11 S14-12 S14-13

E14-14A E14-15A E14-16A E14-17A E14-18A E14-19A E14-20A E14-21A E14-22A E14-23A E14-24A

E14-25A E14-26A

E14-27B E14-28B E14-29B

Learning Objective(s)

Topic(s)

Short Exercises Horizontal analysis of revenue and 1 cost of sales Find trend percentages 1 Vertical analysis of assets 2 Prepare common-size income 3 statements Analyze common-size income 1, 2, & 3 statements Find current ratio 4 Analyze inventory and receivables 4 Compute and interpret debt ratio 4 Compute profitability ratios 4 Determine earnings per share 4 Identify ethical standards violated 1, 2, 3, & 4 Analyze financial trends using data 5 analytics tools Analyze financial trends using data 5 analytics tools Exercises (Group A) Trend analysis of working capital 1 Horizontal analysis 1 Compute trend percentages 1 Perform vertical analysis 2 Prepare a common-size income 3 statement Calculate ratios 4 More ratio analysis 4 Compute profitability ratios 4 Compute stock ratios 4 Calculate ratios 4 Classify company sustainability 4 measurements into triple bottom line components Analyze financial trends using data 5 analytics tools Analyze financial trends using data 5 analytics tools Exercises (Group B) Trend analysis of working capital 1 Horizontal analysis 1 Compute trend percentages 1 14-9 .

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Managerial Accounting 6e Instructor’s Resource Manual

Assignment E14-30B E14-31B E14-32B E14-33B E14-34B E14-35B E14-36B E14-37B

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P14-40A P14-41A P14-42A P14-43A P14-44A P14-45B P14-46B P14-47B P14-48B P14-49B C14-50

A14-51 A14-52 A14-53 A14-54 A14-55

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Perform vertical analysis 2 Prepare common-size income 3 statement Calculate ratios 4 More ratio analysis 4 Compute profitability ratios 4 Compute stock ratios 4 Calculate ratios 4 Classify company sustainability 4 measurements into triple-bottomline components Analyze financial trends using data 5 analytics tools Analyze financial trends using data 5 analytics tools Problems (Group A) Prepare trend analysis 1&4 Comprehensive analysis 2, 3, & 4 Effect of transactions on ratios 4 Ratio analysis over two years 4 Make an investment decision 4 Problems (Group B) Prepare trend analysis 1&4 Comprehensive analysis 2, 3, & 4 Effect of transactions on ratios 4 Ratio analysis over two years 4 Make an investment decision 4 Serial Case Analyze various financial 1 statement ratios Critical Thinking Discussion & questions All Calculating ratios for companies All within the same industry Ethics of financial statement 1, 2, 3, & 4 analysis Using financial statement ratios to 1, 2, 3, & 4 analyze CVS and Walgreens Comparison of common-size 3 financials

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Chapter 14

Financial Statement Analysis

Name____________________________________ Date_________________ Section_______________

CHAPTER 14 TEN-MINUTE QUIZ Circle the letter of the best response.

1.

A company’s income statement reports the following:

Net sales Cost of goods sold Gross profit Selling expenses Administrative expenses Net income

2020 $48,000 26,000 22,000 7,000 9,000 $6,000

2019 $50,500 27,250 23,250 7,200 9,100 $6,950

Using horizontal analysis, compute the percent change for gross profit.

A. (5.38)% B. (5.68)% C. 27.27% D. 100.00% 2.

A company’s income statement reports the following:

Net sales Cost of goods sold Gross profit Selling expenses Administrative expenses Net income

2020 $48,000 26,000 22,000 7,000 9,000 $6,000

2019 $50,500 27,250 23,250 7,200 9,100 $6,950

For the year 2020, vertical analysis computes the net income percentage as A. (13.7)%.

B. 12.5%.

C. 27.3%.

D. 100.0%.

3.

A common-size financial statement is a useful tool in performance evaluation because it enables the user to A. compare a company’s operational efficiency in different periods.

B. evaluate the direction a business is taking over a longer period of time.

C. determine the intrinsic value of each line item.

D. compare companies of different sizes in the same industry.

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Managerial Accounting 6e Instructor’s Resource Manual

4.

The following amounts were selected from ABC company’s income statements:

Net sales

Year 4 $155,000

Year 3 $150,000

Year 2 $130,000

Year 1 $100,000

Using trend analysis and Year 1 as the base year, the trend percentage for Year 4 is A. 35%.

B. 55%.

C. 100%.

D. 155%.

5.

The accounts receivable turnover shows the A. proportion of assets financed with debt.

B. ability to pay receivables.

C. ability to collect cash from credit customers.

D. number of times a company sells its average level of inventory during the year.

6.

A company’s balance sheet reports the following: Cash Accounts receivable Inventory Plant & equipment Total assets

$ 50,000 75,000 110,000 95,000 $330,000

Current liabilities Long-term liabilities Stockholders’ equity Total liabilities & stockholders’ equity

$105,000 110,000 115,000 $330,000

The debt ratio is A. 0.65.

B. 0.95.

C. 1.19.

D. 1.87.

14-12 .

Chapter 14

Financial Statement Analysis

7.

Shaker Corporation was organized on January 1 of the current year with 200,000 shares of $15 par value common stock authorized with 100,000 shares issued on that date. No other changes in common stock occurred during the year. The annual preferred stock dividend is $30,000. Net income for the current year was $400,000. What was the earnings per share reported on the income statement for the current year?

A. $1.85 B. $2.00 C. $3.70 D. $4.00

8.

Which of the following is NOT a measure of a company’s ability to pay its current liabilities?

A. Current ratio B. Working capital C. Debt ratio D. Acid-test (quick) ratio

9.

Which of the following helps measure a company’s profitability?

A. Accounts receivable turnover B. Gross profit percentage C. Times-interest-earned ratio D. Current ratio

10.

Which of the following best defines a sparkline?

A. Charts used to visualize time series data.

B. Measure of a company’s ability to collect cash from credit customers.

C. Mini-graphs contained in one cell that visualize the data in a selected range of cells.

D. A year-to-year comparison of a company’s performance in different periods.

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Managerial Accounting 6e Instructor’s Resource Manual

Answer Key to Chapter 14 Ten-Minute Quiz 1. A 2. B 3. D 4. D 5. C

6. A 7. C 8. C 9. B 10. C

14-14 .

Chapter 15 Sustainability The chapter is devoted to the importance of environmental sustainability to today’s organizations.

Students are introduced to environmental management accounting (EMA) and how it can help support an organization’s efforts toward environmental sustainability. A historical overview of the evolution of EMA is discussed, as are the business reasons for adopting environmentally sustainable practices.

The process of sustainability reporting assists companies with setting goals, measuring performance, and managing change. Sustainability reporting results in an economic model that produces long-term profit and encourages environmental care and social responsibility. The current state of sustainability reporting is discussed in the chapter. Sustainability reporting is used as an internal change management tool and a means of disclosing the social and environmental impact of a company’s operations. The framework for sustainability reporting is led by the Global Reporting Initiative (GRI). The latest GRI standards were released in 2016 and focus on the concepts of materiality and the triple bottom line: economic standards, environmental standards, and social standards.

EMA systems are used for the identification, collection, analysis, and use of information needed for internal decision making and external reporting. EMA collects two types of data: monetary and physical.

Common areas where management accountants can support an organization’s sustainability efforts include compliance, strategy development, systems and information flow, costing, investment appraisal, performance management, and external reporting. The areas of an organization that can impose challenges in implementing EMA include communication issues, hidden costs, aggregated accounting information, the historical orientation of accounting, and the fact that EMA is a relatively new, undeveloped field.

Managers can use dashboards to visually display key performance indicators (KPIs). The column chart icon in Microsoft Excel can be used to create charts from data.

The Decision Guidelines illustrate some of the business reasons for adopting sustainable business practices. The guidelines outline the types of information an EMA system collects and analyzes. The Decision Guidelines conclude with how EMA information is used and the challenges faced in implementing an EMA system.

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Managerial Accounting 6e Instructor’s Resource Manual

Learning Objectives After studying Chapter 15, your students should be able to: 1. Describe sustainability and how it can create business value 2. Describe sustainability reporting and the leading reporting frameworks 3. Describe EMA systems and their uses and challenges 4. Analyze sustainability performance using data analytics tools

15-2 .

Chapter 15

Teaching Outline I.

What Is Sustainability, and How Does It Create Business Value?

A. Define sustainability B. Triple bottom line C. Exhibit 15-1: Three Interrelated Factors of Sustainability D. Historical Overview 1. Non-governmental organizations (NGOs) 2. 2030 Agenda for Sustainable Development adopted 3. Sustainable development goals E. Forward-Thinking Business Model 1. Internal costs 2. External costs 3. Life-cycle assessment (LCA) 4. Exhibit 15-2: Assessing product impact from cradle to grave F. The Business Case for Sustainability 1. Exhibit 15-3: Business Reasons for Adopting Sustainable Practices a. Reducing costs i. Eco-efficiency ii. Waste audits b. Generating new revenue streams c. Increasing market share d. Supply-chain assessment e. Improving external image f. Reducing compliance and litigation risks g. Attracting and retaining labor talent h. Attracting capital i. Principles for Responsible Investment (PRI)

II.

What Is Sustainability Reporting?

A. Sustainability report B. Current State of Sustainability Reporting C. Reasons for Sustainability Reporting 1. Internal change management tool 2. Disclosure of social and environmental impacts D. Framework for Sustainability Reporting 1. Global Reporting Initiative (GRI) 2. Development of the GRI guidelines 3. Summary of the GRI guidelines a. Material topics b. Topic-specific disclosures c. Core report d. Comprehensive report 4. Exhibit 15-4: GRI Standards 5. Assurance of data in CSR reports a. Assurance 6. Sustainability Accounting Standards Board (SASB) E. Integrated Reporting 1. Integrated report a. Financial capital 15-3 .

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Managerial Accounting 6e Instructor’s Resource Manual

b. c. d. e. f.

Manufactured capital Intellectual capital Human capital Social and relationship capital Natural capital

III.

What Is Environmental Management Accounting (EMA)?

A. EMA Systems 1. Monetary information 2. Physical information 3. Materials flow accounting a. Exhibit 15-5: Materials Flow Accounting: Equating Inputs with the Company’s Outputs 4. ISO 14000 B. Uses of Environmental Management Accounting Information 1. Compliance a. Extended producer responsibility (EPR) laws 2. Strategy development 3. Systems and information flow 4. Costing 5. Investment appraisal a. Social return on investment (SROI) 6. Performance management 7. External reporting C. Challenges to Implementing EMA systems 1. Communication issues 2. Hidden costs 3. Aggregated accounting information and archaic information systems 4. Historical orientation of accounting 5. Undeveloped field

IV.

How Do Managers Analyze Sustainability Performance Using Data Analytics Tools?

A. Exhibit 15-6: Monthly Data on Pounds Landfilled and Units Produced B. Exhibit 15-7: Total Pounds of Waste Landfilled by Plant C. Exhibit 15-8: Pounds of Waste Landfilled per Unit Produced D. How to Create Column Charts

15-4 .

Chapter 15

Sustainability

Key Topics This chapter can be used to illustrate how the various concepts and techniques learned in earlier chapters can be applied to environmental sustainability. Begin by asking students why they think sustainability is important to today’s organizations. This is also a good time to review management’s four primary responsibilities: planning, directing, controlling, and decision making. Ask the students to give examples of responsibilities in each area as related to environmental sustainability.

Ask students to identify an organization that has been in the news as a company concerned about the effect of their operations on the environment. Using that organization, have the students give examples of business reasons for the organization adopting sustainable practices. Categorize the reasons by category: reducing costs, generating new revenue streams, increasing market share, improving external image, reducing compliance and litigation risks, attracting and retaining labor talent, or attracting capital.

Introduce the concept of environmental management accounting (EMA). For the company identified above, what are some examples of monetary and physical information that the organization might use in internal decision making? How can the information be used by the company?

In teams or in partners, have students complete E15-28B Identify impact of sustainability efforts. Call on a student to give the answers.

Ask the students what they see as the challenges to implementing EVM. Do they think that more organizations will begin using EMA and reporting environmental information?

As time allows, students can be divided into teams to complete selected exercises that illustrate how the concepts and techniques learned throughout the course can be applied to environmental sustainability.

The importance of these concepts and techniques in making management decisions about sustainability should be emphasized. Following are some suggested exercises: E15-29B Sustainability and the value chain E15-30B Sustainability and job costing E15-31B Sustainability and activity-based costing E15-32B Sustainability and process costing E15-33B Sustainability and cost behavior E15-34B Sustainability and CVP concepts E15-35B Sustainability and short-term decision making E15-36B Sustainability and budgeting E15-37B Sustainability and the balanced scorecard E15-38B Sustainability and standard costing E15-39B Sustainability and capital investments E15-40B Sustainability and the statement of cash flows E15-41B Sustainability and external financial reporting Discuss use the broad use of data analytics as it relates to EMA. As a class, complete and discuss E1542B Analyze sustainability performance using data analytics tools.

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Managerial Accounting 6e Instructor’s Resource Manual

Chapter 15: Student Summary Handout I.

Sustainability and how it creates business value A. Define sustainability B. Triple bottom line C. Historical overview 1. Non-governmental organizations (NGOs) 2. 2030 Agenda for Sustainable Development adopted 3. Sustainable development goals D. Forward-thinking business model 1. Internal costs 2. External costs 3. Life-cycle assessment (LCA) E. The business case for sustainability 1. Reducing costs a. Eco-efficiency b. Waste audits 2. Generating new revenue streams 3. Increasing market share 4. Supply-chain assessment 5. Improving external image 6. Reducing compliance and litigation risks 7. Attracting and retaining labor talent 8. Attracting capital a. Principles for Responsible Investment (PRI)

II.

Sustainability reporting A. Sustainability report B. Current state of sustainability reporting C. Reasons for sustainability reporting 1. Internal change management tool 2. Disclosure of social and environmental impacts D. Framework for sustainability reporting 1. Global Reporting Initiative (GRI) 2. Development of the GRI guidelines 3. Summary of the GRI guidelines a. Material topics b. Topic-specific disclosures c. Core report d. Comprehensive report 4. Assurance of data in CSR reports a. Assurance 5. Sustainability Accounting Standards Board (SASB) E. Integrated reporting 1. Integrated report a. Financial capital b. Manufactured capital c. Intellectual capital d. Human capital e. Social and relationship capital 15-6 .

Chapter 15

f.

Sustainability

Natural capital

III.

Environmental management accounting (EMA) A. Types of information used for internal decision making 1. Monetary information 2. Physical information 3. Materials flow accounting 4. ISO 14000 B. Uses of environmental management accounting information 1. Compliance a. Extended producer responsibility (EPR) laws 2. Strategy development 3. Systems and information flow 4. Costing 5. Investment appraisal a. Social return on investment (SROI) 6. Performance management 7. External reporting C. Challenges to implementing environmental management systems 1. Communication issues 2. Hidden costs 3. Aggregated accounting information and archaic information systems 4. Historical orientation of accounting 5. Undeveloped field

IV.

Using data analytics tools to analyze sustainability performance A. How to create column charts

MyAccountingLab.com algorithmic homework assignments: E15-21A, E15-14A, E15-15A, E15-17A, E1523A, E15-25A.

15-7 .

Managerial Accounting 6e Instructor’s Resource Manual

CHAPTER 15: ASSIGNMENT GRID

Assignment

S15-1 S15-2 S15-3 S15-4 S15-5 S15-6 S15-7 S15-8 S15-9 S15-10 S15-11

E15-12A E15-13A E15-14A E15-15A E15-16A E15-17A E15-18A E15-19A E15-20A E15-21A E15-22A E15-23A E15-24A E15-25A

Learning Objective(s)

Topic(s)

Short Exercises Identifying reasons to pursue 1 sustainability Identify sustainable development 1 goals (SDGs) Identify aspects within each 2 standard on a GRI report Use SASB materiality map to locate reporting information by sector and 2 industry Classifying sustainability costs 3 Distinguish between monetary and 3 physical information Identifying implementation 3 challenges Define key sustainability terms 1, 2, & 3 Identify ethical standards violated 1, 2, & 3 Analyze sustainability performance 4 using data analytics tools Analyze sustainability performance 4 using data analytics tools Exercises (Group A) Identify impact of sustainability 1 efforts Sustainability and the value chain 1 Sustainability and job costing 1 Sustainability and activity-based 1 costing Sustainability and process costing 1 Sustainability and cost behavior 1 Sustainability and CVP concepts 1 Sustainability and short-term 1 decision making Sustainability and budgeting 1 Sustainability and the balanced 1 scorecard Sustainability and standard costing 1 Sustainability and capital 1 investments Sustainability and the statement of 1 cash flows Sustainability and external financial 1 reporting 15-8 .

Estimated Time in Minutes

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5

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Chapter 15

Assignment

A15-49

Analyze sustainability performance using data analytics tools Analyze sustainability performance using data analytics tools Exercises (Group B) Identify impact of sustainability efforts Sustainability and the value chain Sustainability and job costing Sustainability and activity-based costing Sustainability and process costing Sustainability and cost behavior Sustainability and CVP concepts Sustainability and short-term decision making Sustainability and budgeting Sustainability and the balanced scorecard Sustainability and standard costing Sustainability and capital investments Sustainability and the statement of cash flows Sustainability and external financial reporting Analyze sustainability performance using data analytics tools Analyze sustainability performance using data analytics tools Problems (Group A) Sustainability and cost behavior Sustainability and capital investments Problems (Group B) Sustainability and cost behavior Sustainability and capital investments Serial Case Classify Caesars Entertainment Corporation’s sustainability efforts Critical Thinking Discussion questions

A15-50

Corporate sustainability reports

A15-51

Sustainability and investment choices

E15-26A E15-27A

E15-28B E15-29B E15-30B E15-31B E15-32B E15-33B E15-34B E15-35B E15-36B E15-37B E15-38B E15-39B E15-40B E15-41B E15-42B E15-43B P15-44A P15-45A P15-46B P15-47B

C15-48

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15

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1 1

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15–20

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15-9 .

Sustainability

Managerial Accounting 6e Instructor’s Resource Manual

Assignment

A15-52 A15-53

Topic(s)

Ethics of internal sustainability reporting FirstEnergy and its sustainability report

15-10 .

Learning Objective(s)

Estimated Time in Minutes

Level of Difficulty

1, 2, & 3

30

Medium

1, 2, & 3

30–60

Medium

Chapter 15

Sustainability

Name____________________________________ Date_________________ Section_______________

CHAPTER 15 TEN-MINUTE QUIZ Circle the letter of the best response.

1.

Which of the following is NOT a reason for a business to adopt environmentally sustainable practices?

A. Cost reduction B. Competitive strategy C. Stakeholder influence D. Historical orientation of accounting

2.

What type(s) of information are used for internal decision making in environmental management accounting?

A. Monetary information B. Physical information C. Neither monetary or physical information D. Both monetary and physical information

3.

What are the three pillars of the triple bottom line?

A. Process, productivity, and profit B. Communication, compliance, competition C. Economic, environment, and social D. Materials, labor, and overhead

4.

Which of the following statements is FALSE? A. Environmental management accounting is used for the identification, collection, analysis, and use of both monetary information and physical information for management decision making.

B. Materials flow accounting reconciles physical inputs with physical outputs.

C. Physical information is the type of information traditionally used in accounting systems.

D. Physical information is one type of information used in an environmental management accounting system.

5.

External costs are the costs A. borne by society as a result of a company’s operations and the products and services it sells.

B. that are incurred and paid for by the organization and recorded in GAAP-based accounting records.

C. that cannot be illuminated through the use of life-cycle assessment.

D. that are irrelevant.

15-11 .

Managerial Accounting 6e Instructor’s Resource Manual

6.

Which of the following is NOT an example of a key performance indicator for the financial perspective?

A. Recycling revenues B. Percent of employees with environmental responsibilities C. Energy costs D. Cost of engineering change orders

7.

Which of the following is NOT a potential challenge inherent in implementing and using an environmental accounting system?

A. Communication between various groups in the organization B. Simplicity of information required for environmental management accounting C. Identifying hidden environmental costs D. The historical orientation of accounting

8.

The cost of treating wastewater to meet requirements of the Environmental Protection Agency is an example of A. monetary information included in an EMA system.

B. physical information included in an EMA system.

C. a cost irrelevant for inclusion in an EMA system.

D. a key performance indicator for the customer perspective.

9.

Increasing pressure from customers led Circuit Power and Light to add solar energy as a choice for how their electricity is generated. This is an example of which business reason for adopting environmentally sustainable products?

A. Competitive strategy B. Cost reduction C. Stakeholder influence D. Regulatory compliance

10.

What is the use of a dashboard for purposes of analyzing sustainability performance?

A. To summarize the external costs associated with a sustainability practice B. To determine if the EMA is efficient C. To visually display appropriate KPIs D. To comply with the framework adopted by the GRI

15-12 .

Chapter 15

Answer Key to Chapter 15 Ten-Minute Quiz 1. D 2. D 3. C 4. C 5. A

6. B 7. B 8. A 9. C 10. C

15-13 .

Sustainability

Course # Managerial Accounting Sample Syllabus: Fall 2020 (16 week course) Professor

Address and Telephone

XXX

Office Hours

XXX

XXX

Course Schedule

Session 1

Date

Topic Ch 1: Introduction to Managerial Accounting

After Class Reading Assignment Homework and Class Preparation Assignment S1-1, S1-2, S1-3, S1-8, S1-6, E1-17A, E1S1-10 19A, E1-20A Quiz

2

Ch 2: Building Blocks of Managerial Accounting

S2-3, S2-7, S2-11, S212, S2-13 Quiz

S2-1, S2-10, E222A, E2-28A, E229A, E2-30A

3

Ch 3: Job Costing

S3-2, S3-3, S3-6, S3-7, S3-8 Quiz

E3-19A, E3-20A, E3-21A, E3-22A, E3-28A

4

Ch 4: Activity-Based Costing, Lean Operations, and the Costs of Quality

S4-2, S4-4, S4-5, S4-7, S4-11, S4-15 Quiz

S4-13, E4-22A, E424A, E4-31A

5

Ch 5: Process Costing

S5-13, S5-14, S5-15, S5-16, S5-17 Quiz

S5-4, S5-5, S5-6, S5-7, S5-8, S5-9, E5-28A, E5-35A

6

Ch 6: Cost Behavior

S6-1, S6-6, S6-8, S613, S6-15 Quiz

S6-17, E6-27A, E628A, E6-29A, E630A, E6-42A

7

Ch 7: Cost-Volume-Profit Analysis

S7-1, S7-3, S7-4, S7-7, S7-9, S7-10, S7-12 Quiz

E7-21A, E7-25A, E7-26A, E7-39A, E7-40A, E7-41A

8

Mid-term

9

Ch 8: Relevant Costs for Short-Term Decisions

S8-1, S8-2, S8-5, S8-6, S8-11, S8-13 Quiz

E8-21A, E8-23A, E8-25A, E8-28A, E8-30A, E8-33A

Copyright © 2020 Pearson Education, Inc.

Session 10

Date

Topic Ch 9: The Master Budget

After Class Reading Assignment Homework and Class Preparation Assignment S9-4, S9-5, S9-6, S9-7, E9-20A, E9-24A, S9-11, S9-12, S9-13 E9-30A, E9-31A, E9-32A Quiz

11

Ch 10: Performance Evaluation

S10-1, S10-4, S10-5, S10-7, S10-8, S10-9, S10-12, S10-14 Quiz

S10-3, E10-19A, E10-20A, E10-24A, E10-26A, E10-30A, E10-31A

12

Ch 11: Standard Costs and Variances

S11-1, S11-2, S11-4, S11-6, S11-8, S11-9 Quiz

E11-19A, E11-21A, E11-23A, E11-29A, E11-30A, E11-31A, E11-32A

13

Ch 12: Capital Investment Decisions and the Time Value of Money

S12-2, S12-3, S12-4, S12-5, S12-10, S12-11 Quiz

E12-21A, E12-23A, E12-31A, E12-33A, E12-37A

14

Ch 13: Statement of Cash Flows

S13-1, S13-5, S13-8, S13-9, S13-10

S13-3, S13-4, E1314A, E13-15A, E1322A

Ch 14: Financial Statement Analysis 15

E14-14A, E14-15A, E14-16A, E14-20A, E14-21A, E14-23A

S15-1, S15-4, S15-5, S15-6, S15-7 Quiz

E15-12A, E15-17A, E15-18A, E15-20A, E15-23A, E15-24A

Complete Chapter 14 Ch 15: Sustainability

16

Quiz S14-1, S14-2, S14-3, S14-4, S14-6, S14-7, S14-8, S14-9, S14-10 Quiz

Final Exam

Copyright © 2020 Pearson Education, Inc.

Course # Managerial Accounting Sample Syllabus: Fall 2020 (10 week course) Professor

Address and Telephone

XXX

Office Hours

XXX

XXX

Course Schedule

Session 1

Date

Topic Ch 1: Introduction to Managerial Accounting

After Class Reading Assignment Homework and Class Preparation Assignment S1-1, S1-2, S1-3, S1-8, S1-6, E1-17A, E1S1-10 19A, E1-20A Quiz

Ch 2: Building Blocks of Managerial Accounting

S2-3, S2-7, S2-11, S212, S2-13 Quiz

S2-1, S2-10, E2-22A, E2-28A, E2-29A, E230A

2

Ch 3: Job Costing

S3-2, S3-3, S3-6, S3-7, S3-8 Quiz

E3-19A, E3-20A, E321A, E3-22A, E3-28A

3

Ch 4: Activity-Based Costing, S4-2, S4-4, S4-5, S4-7, Lean Operations, and the S4-11, S4-15 Costs of Quality Quiz

S4-13, E4-22A, E424A, E4-31A

4

Ch 5: Process Costing

S5-13, S5-14, S5-15, S5-16, S5-17 Quiz

S5-4, S5-5, S5-6, S5-7, S5-8, S5-9, E5-28A, E5-35A

5

Ch 6: Cost Behavior

S6-1, S6-6, S6-8, S613, S6-15

S6-17, E6-27A, E628A, E6-29A, E6-30A, E6-42A

Quiz Ch 7: Cost-Volume-Profit Analysis

S7-1, S7-3, S7-4, S7-7, S7-9, S7-10, S7-12 Quiz

E7-21A, E7-25A, E726A, E7-39A, E7-40A, E7-41A

S8-1, S8-2, S8-5, S8-6, S8-11, S8-13 Quiz

E8-21A, E8-23A, E825A, E8-28A, E8-30A, E8-33A

Mid-Term 6

Ch 8: Relevant Costs for Short-Term Decisions

Copyright © 2020 Pearson Education, Inc.

Session 7

8

Date

Topic Ch 9: The Master Budget

Ch 10: Performance Evaluation

After Class Reading Assignment Homework and Class Preparation Assignment S9-4, S9-5, S9-6, S9-7, E9-20A, E9-24A, E9S9-11, S9-12, S9-13 30A, E9-31A, E9-32A Quiz S10-1, S10-4, S10-5, S10-7, S10-8, S10-9, S10-12, S10-14

S10-3, E10-19A, E1020A, E10-24A, E1026A, E10-30A, E1031A

Quiz

9

Ch 11: Standard Costs and Variances

S11-1, S11-2, S11-4, S11-6, S11-8, S11-9 Quiz

E11-19A, E11-21A, E11-23A, E11-29A, E11-30A, E11-31A, E11-32A

Ch 12: Capital Investment Decisions and the Time Value of Money

S12-2, S12-3, S12-4, S12-5, S12-10, S12-11

E12-21A, E12-23A, E12-31A, E12-33A, E12-37A

Quiz Ch 13: Statement of Cash Flows

S13-1, S13-5, S13-8, S13-9, S13-10

S13-3, S13-4, E1314A, E13-15A, E1322A

Quiz 10

Ch 14: Financial Statement Analysis

S14-1, S14-2, S14-3, S14-4, S14-6, S14-7, S14-8, S14-9, S14-10

E14-14A, E14-15A, E14-16A, E14-20A, E14-21A, E14-23A

Quiz Ch 15: Sustainability

S15-1, S15-4, S15-5, S15-6, S15-7 Quiz

Final Exam

Copyright © 2020 Pearson Education, Inc.

E15-12A, E15-17A, E15-18A, E15-20A, E15-23A, E15-24A