Managerial Accounting 15e Carl S. Warren Professor Emeritus of Accounting University of Georgia, Athens William B. Tayler Brigham Young University Australia • Brazil • Mexico • Singapore • United Kingdom • United States 12020_fm_ptg01_i-xxi.indd 1 8/25/18 11:30 AM Managerial Accounting, 15e © 2020, 2018 Cengage Learning, Inc. Carl S. Warren Unless otherwise noted, all content is © Cengage. William B. Tayler ALL RIGHTS RESERVED. No part of this work covered by the copyright herein may be reproduced or distributed in any form or by any means, except as Senior Vice President, Higher Ed Product, permitted by U.S. copyright law, without the prior written permission of the  Content, and Market Development: Erin Joyner copyright owner. 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Library of Congress Control Number: 2018954981 Intellectual Property Analyst: Reba Frederics Intellectual Property Project Manager:  Carly Belcher ISBN: 978-1-337-91202-0 Cengage 20 Channel Center Street Boston, MA 02210 USA Cengage is a leading provider of customized learning solutions with employees residing in nearly 40 different countries and sales in more than 125 countries around the world. Find your local representative at www.cengage.com. Cengage products are represented in Canada by Nelson Education, Ltd. To learn more about Cengage platforms and services, register or access your online learning solution, or purchase materials for your course, visit www.cengage.com. Printed in the United States of America Print Number: 01 Print Year: 2018 12020_fm_ptg01_i-xxi.indd 2 28/08/18 7:54 AM Preface Roadmap for Success Warren/Tayler Managerial Accounting, 15e, provides a sound pedagogy for giving s tudents a solid foundation in managerial accounting. Warren/Tayler covers the fundamentals AND m otivates stu- dents to learn by showing how accounting is important to businesses. Warren/Tayler is successful because it reaches students with a combination of new and tried-and- tested pedagogy. This revision includes a range of new and existing features that help Warren/Tayler provide students with the context to see how accounting is valuable to business. These include: ▪▪ New! Make a Decision section ▪▪ New! Pathways Challenge ▪▪ New! Certified Management Accountant (CMA®) Examination Questions Warren/Tayler also includes a thorough grounding in the fundamentals that any business student will need to be successful. These key features include: ▪▪ Presentation style designed around the way students learn ▪▪ Updated schema ▪▪ At the start of each chapter, a schema, or roadmap, shows students what they are going to learn and how it is connected to the larger picture. The schema illustrates how the chapter content lays the foundation with managerial concepts and principles. Then it moves students through developing the information and ultimately into evaluating and analyzing information in order to make decisions. 15 Chapter Soft aCtaesmhe Fnlto w s Principles Chapter 1 Introduction to Managerial Accounting Developing Information COST SYSTEMS COST ALLOCATIONS Chapter 2 Job Order Costing Chapter 5 Support Departments Chapter 3 Process Costing Chapter 5 Joint Costs Chapter 4 Activity-Based Costing Decision Making PLANNING AND EVALUATING TOOLS STRATEGIC TOOLS Chapter 6 C ost-Volume-Profit Analysis Chapter 12 Capital Investment Analysis Chapter 7 Variable Costing Chapter 13 Lean Manufacturing Chapter 8 Budgeting Systems Chapter 13 Activity Analysis Chapter 9 S tandard Costing and Variances Chapter 14 The Balanced Scorecard Chapter 10 D ecentralized Operations Chapter 14 Corporate Social Responsibility Chapter 11 D ifferential Analysis Chapter 15 Statement Financial of Cash Flows Managerial accounting accounting Chapter 16 Financial Statement Analysis 698 12020_ch15_rev02_698-757.indd 698 8/4/18 11:45 AM iii 12020_fm_ptg01_i-xxi.indd 3 8/25/18 11:31 AM iv Preface 312 Chapter 7 Variable Costing for Management Analysis ▪▪ Link to the “opening company” of each chapter calls out examples of how the concepts The $80,000 increase in operating income under Proposal 2 is caused by the allocation of the introduced in the chapter are connected to thfixeed omapnuefanctiunringg ccosots mof $p40a0n,00y0. o vTerh a igrse atserh nuomwbers o f hunoitsw ma naufcacctuoreud. nSptec-ifically, an increase in production from 20,000 units to 25,000 units means that the fixed manufacturing ing is used in the real world by real compcoastn peire usni.t decreases from $20 ($400,000 ÷ 20,000 units) to $16 ($400,000 ÷ 25,000 units). Thus, the cost of goods sold when 25,000 units are manufactured is $4 per unit less, or $80,000 less in total (20,000 units sold × $4). Since the cost of goods sold is less, operating income is $80,000 more when 25,000 units rather than 20,000 units are manufactured. Managers should be careful in analyzing operating income under absorption costing when fin- ished goods inventory changes. Increases in operating income may be created by simply increas- ing finished goods inventory. Thus, managers could misinterpret such increases (or decreases) in Adobe Systems Inc. operating income as due to changes in sales volume, prices, or costs. A ssume that you have three different options for a summer job. Just as you should evaluate the relative income of various How would you evaluate these options? Naturally there are choices, a business also evaluates the income earned from its meaacnhy j othbi.ngs to consider, including how much you could earn from cgheooigcreasp. hImicaplo rretgainotn csh too ibcees s ienrcvleudd.e the products offered and the Link to In a recent absorption costing income statement, Adobe Systems reported (in millions) total revenue Determining how much you could earn from each job may A company will often evaluate the profitability of products of $5,854, cost of revenue of $820, gross profit of $5,034, operating expenses of $3,541, and operating not be as simple as comparing the wage rate per hour. For exam- and regions. For example, Adobe Systems Inc. (ADBE), Adobe Systems income of $1,493. ple, a job as an office clerk at a local company pays $8 per hour. A one of the largest software companies in the world, determines job delivering pizza pays $10 per hour (including estimated tips), the income earned from its various product lines, such as Acrobat®, although you must use your own transportation. Another job work- Photoshop®, Premiere®, and Dreamweaver® software. Adobe uses ipnegr ihno au rb. eAallc thh rreeseo jrotb osv oefrf e5r0 400 m hioleusr as wpaeyr wfroeemk yfooru trh heo wmheo plea ysus m$8- tshuips pinofrot,r manadti odne vteol oepstmabelnisth e pffroordt.u Lcitk leinweis per, iAcidnogb, aes e wvaellul aatse ssa tlehse, Under variable costing, operating income is $200,000, regardless of whether 20,000 units or mer. If these options were ranked according to their pay per hour, income earned in the geographic regions it serves, such as the 25,000 units are manufactured. This is because no fixed manufacturing costs are a llocated to the the pizza delivery job would be the most attractive. However, the United States, Europe, and Asia. Again, such information aids man- units manufactured. Instead, all fixed manufacturing costs are treated as a period expense. cpoles,t st haes soofcfiicaete jdo bw imtha ye arcehq ujoirbe mthuastt yaolsuo p baey efvoar lduoatwendt. oFworn e pxaamrk-- agemIne ntth iins mchaanpatgeirn, gh orewv ebnuusein aensds eesx pmeenasseus rwe ipthrionf itthaeb rileitgyio unssi.ng To illustrate, Exhibit 8 shows the variable costing income statements for Frand for the ing and purchase office clothes. The pizza delivery job will require absorption costing and variable costing is discussed. After illustrat- production of 20,000 units, 25,000 units, and 30,000 units. In each case, the operating income you to pay for gas and maintenance for your car. The resort job will ing and comparing these concepts, how businesses use them for is $200,000. require you to move to the resort city and incur additional living controlling costs, pricing products, planning production, analyzing costs. Only by considering the costs for each job will you be able to market segments, and analyzing contribution margins is described determine which job will provide you with the most income. and illustrated. Exhibit 8 Frand Manufacturing Company Variable Costing Variable Costing Income Statements Income Statements 20,000 Units 25,000 Units 30,000 Units for Three Production Manufactured Manufactured Manufactured Levels Sales (20,000 units × $75)................ $1,500,000 $1,500,000 $ 1,500,000 Variable cost of goods sold: Variable cost of goods manufactured: (20,000 units × $35)............... $ (700,000) (25,000 units × $35)............... $ (875,000) (30,000 units × $35)............... $(1,050,000) Ending inventory: 52 Chapter 2 Job Order Costing Pete Jenkins/AlAmy stock Photo MVaarnieTaouxbptflaa(((ee051cl ns ,0tv0uuesa,00nelrrli00siiinatn 0sugb.g .u×n l me.ani .t$ ncias.t3do r.s×5g s.a× )t.i$ dn ..o3$m...f53... gi)5...n....o)i.....so.....td..r...a.....st .....si.....vo.....el.....d......................................... $$ (( 871 000 000 ,,, 000 000 0000 )) $$ (( 8171 07 00 0500 ,,,, 0000 0000 0000 )) $$ (( 837105000000,,,,000000000000 )) Contribution margin..................... $ 700,000 $ 700,000 $ 700,000 no discrepancies, a journal entry is made to record Ftixhed eco stps:urchase. The journal entry to record the Link to Adobe Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pages 305, 309, 312, 316, 319 Fixed manufacturing costs ........... $ (400,000) $ (400,000) $ (400,000) supplier’s invoice related to Receiving Report No. 196 Fiixend seEllinxg ahndi abdmitin is4tra tiivse as follows: expenses ......................... (100,000) (100,000) (100,000) Total fixed costs...................... $ (500,000) $ (500,000) $ (500,000) Operating income ....................... $ 200,000 $ 200,000 $ 200,000 303 A 5 L 1 E a. Materials 10,500 1 1 Accounts Payable 10,500 12020_ch07_ptg01_302-351.indd 303 Mate7r/1i2/a18 l 1s2:1 5p PMurchased during December. The storeroom releases materials for use in manufacturing when a materials requisition is 12020_ch07_ptg01_302-351.indd 312 7/12/18 12:15 PM received. Examples of materials requisitions are shown in Exhibit 4. The materials requisitions for each job serve as the basis for recording materials used. For direct materials, the quantities and amounts from the materials requisitions are posted to job cost sheets. Job ▪▪ To aid comprehension and to demonstrate the impact of transactions, journal entries include cost sheets, which are also illustrated in Exhibit 4, make up the work in process subsidiary ledger. the net effect of the transaction on the accounting equation. Exhibit 4 shows the posting of $2,000 of direct materials to Job 71 and $11,000 of direct materials to Job 72.2 Job 71 is an order for 20 units of Jazz Series guitars, while Job 72 is an order for 60 units of American Series guitars. A summary of the materials requisitions is used as a basis for the journal entry recording the materials used for the month. For direct materials, this entry increases (debits) Work in Process and decreases (credits) Materials as follows: A 5 L 1 E b. Work in Process 13,000 1 2 Materials 13,000 Materials requisitioned to jobs ($2,000 + $11,000). Many companies use computerized information processes to record the use of materials. In such cases, storeroom employees electronically record the release of materials, which automati- cally updates the materials ledger and job cost sheets. Ethics: Do It! PEhTHoICSny Invoice Scams this information to create a fictitious invoice. The invoice A popular method for defrauding a company is to issue a will include names, figures, and other details to give it the phony invoice. The scam begins by initially contacting the appearance of legitimacy. This type of scam can be avoided 12020_fmta_prtgg0e1_ti -xfxiir.inmdd t 4o discover details of key business contacts, if invoices are matched with receiving documents prior to 8/25/18 11:31 AM business operations, and products. The swindler then uses issuing a check. Factory Labor When employees report for work, they may use electronic badges, clock cards, or in-and-out cards to clock in. When employees work on an individual job, they use time tickets to record the amount of time they have worked on a specific job. Exhibit 5 illustrates time tickets for Jobs 71 and 72 at Legend Guitars. Exhibit 5 shows that on December 13, 20Y8, D. McInnis spent six hours working on Job 71 at an hourly rate of $10 for a cost of $60 (6 hrs. × $10). Exhibit 5 also indicates that a total of 350 hours was spent by employees on Job 71 during December for a total cost of $3,500. This total direct labor cost of $3,500 is posted to the job cost sheet for Job 71, as shown in Exhibit 5. Likewise, Exhibit 5 shows that on December 26, 20Y8, S. Andrews spent eight hours on Job 72 at an hourly rate of $15 for a cost of $120 (8 hrs. × $15). A total of 500 hours was spent by employees on Job 72 during December for a total cost of $7,500. This total direct labor cost of $7,500 is posted to the job cost sheet for Job 72, as shown in Exhibit 5. 2 To simplify, Exhibit 4 and this chapter use the first-in, first-out cost flow method. 12020_ch02_ptg01_046-093.indd 52 6/20/18 6:32 PM Preface v ▪▪ Located in each chapter, Why It Matters shows students how accounting is important to businesses with which they are familiar. A Concept Clip icon indicates which Why It Matters features have an accompanying concept clip video in CNOWv2. CONCEPT CLIP 476 Chapter 10 Evaluating Decentralized Operations Why It Matters CONCEPT CLIP Coca-Cola Company: Go West Young Man different story. More than 65% of Coca- Cola’s profitability comes Am ajor decision early in the history of Coca-Cola (KO) was to ex- from i nternational segments. Given the revenue segmentation, 314 Chapter 7 Variable Cosptinag nfodr M oanuatgsemidenet Aonfa ltyhsise United States to the rest of the world. As a result, this suggests that the international profit margins must be higher Coca-Cola is known today the world over. What is revealing is how Solution: than the North American profit margin. Indeed this is the case, as a. (1) tAhbisso rdpteiocni sCioostnin hg aInsc oimmep Staactetmeedn ttshe revenues and profitability of Coca- Cola across can be seen in the following table: its international aPnrdop Nosaol r1t: h AmProeproicsaal n2: segme(3n0,t0s0.0 Tunhitse p rfoodulcloedw × $i4n0g va rtiaabble le shows the percent of rev3e0,n00u0e Usn iatsn d p40e,0r0c0e Unntit so f opermaatninufagct uinrincg ocomst peer furnoit)m + $ 6t0h0,0e0 0i nterna- Profit Margin Manufactured Manufactured fixed cost Sales (30,000 unitst ×io $n10a0)l and North A$m 3,0e00r,i0c0a0n geo$ 3g,0r0a0p,00h0ic segm(e40n,0t00s .u nits produced × $40 variable manufacturing International average 48.4% C oCsto ostf ogfo goodos dsso lmd:anufactured $(1,800,000) $(2,200,000) cost per unit) + $600,000 fixed cost North America 24.2% Ending inventory — 550,000 10,000 units (40,000 pOrodpuceedr –a 3t0i,0n00g so ld) Total cost of goods sold $(1,800,000) $(1,650,000) R×e $5v5 epenr uunite ($s2 ,200,00I0n ÷c 40o,0m00 ueni ts) Gross profit $ 1,200,000 $ 1,350,000 (30,000 units sold × $7 variable selling cost per The average profit margin for all the international segments is SOeplleinragt ianngd i nacdommineIisntrtaetivren exapteinosensal segm $ e( 38n5500t,,00s0000) $ 1 (,030500,,000000) uni5t) 8+ $.414%0,000 65.6% two times as large as the North American segment. These results (2) North American segment 41.6 34.4 reflect the heart of the Coca-Cola marketing strategy. In interna- Variable Costs VaTroiatbalel Costing Income Statements 100% 100% tional markets, Coca-Cola is able to charge relatively higher prices Proposal 1: Proposal 2: due to high demand and less competition as compared to the North The first colu30m,00n0 Usnhitos3 5w0s4 0t,0h0aC0h tUa ntpihttse er 7 i nVtareiabr3l0ne,0 Ca0o0ts uitnionitgsn fporaro Mdlu ascneeadg g×e m$m4e0n veta Arninaabtllsyes i psrovide Manufactured Manufactured manufacturing cost per unit American market. Sales (30,000 unitso × v$1e00r) 58% of the$ 3r,0e00v,0e00nues$, 3 ,w000h,0i0l0e North40 ,0A20.0 m un Cietsh rparisocsdeuance dC p ×or m$o4p0v avanirdyia,b eale s c raaclkmer oansdt cookie manufacturer, has the following unit costs for the Variable cost of goods sold: manufactmurionng tcho sot pf eJru unneit: VE anTrdioaintbaglle iv ncavoreisantb otloef r g4ycoo2ostd %os fm g aoonoudffsa scottulhdrede rev$$ ((e 11 ,, 22n 00 00 u ,, 00 e00—00s)). Ho$$ (( 11w ,,462000e000,,,000v000e000))r, the 1soo0l,d0p)0 ×0 e u$n4r0ita sv (a4tr0iia,0bn0le0g cpor sotid pnuecrec udno –it 3m0,00e0 tVVFiaaexrreiiaadlbbl mllseea mmnauaafnr akucefttauincrtignu gcriSo ncsogot sucto rscte : The C$532o...050c000a-Cola Company, Form 10-K for the Fiscal Year Ended December 31, 2017. Manufacturing margin $ 1,800,000 $ 1,800,000 Fixed marketing cost 4.00 Variable selling and administrative expenses (210,000) (210,000) 30,000 units sold × $7 variable Contribution margin $ 1,590,000 $ 1,590,000 selli ng co Ast pteort uanl itof 100,000 units were manufactured during June, of which 10,000 remain in ending Fixed costs: Residua ilnv eInntoryc. Cohasmsen euses the first-in, first-out (FIFO) inventory method, and the 10,000 units Fixed manufacturing costs $ (600,000) $ (600,000) Fixed Coastrse the only finished goods inventory at June 30. Under the absorption costing concept, the ▪▪ N F iexTeowdt asel fl!liixn egd Pa cnodsa tasdtmhiniwstrataivey exspe nsCesh$ a ((l7144l00e,,0000n00))ge $ e ((17n4400,,c00R00o00e))usirdaugael si nscvtoaulmau. de $eo5ef 0 ,niC0s0h0t a.ssus’es ne’si fnJuuntlee i3rn0e fisonitsvh eeidrn cgoo omadsc iincnveogn tuosrnoy wmtionueld g ob ef: atnhed deismadpvhaanstaizgeess of the return on investment. tOhpereat ingc inrciotmiecal thinking $ a 8s50p,00e0ct o$ f 8 5a0,0Rc00ceosiudnutailn ign.c oAb.m $s7e0u, 0i0gs0. gthees teexdc eassn sowf oepre rtoat inthge i nPcoamthew oavyesr aC mhianlilmenugme a cceptable operating income, b. The difference (in a.) is caused by including $150,000 fixed manufacturing costs (10,000 units × $15 fixedc m. a$n8u5fa,0c0tu0r.ing cost per unit) in the isen dpingr inovenvtoiryd, wehicdh d eacretas est thhe ecos t oef gnoodds soold afn d tinhcreease s ctheha opase rpastihntgeo inrcwo.m ne b yi $n15 0E,0d0x.0 .h$1i4b5,0i0t0 .7. 3. Mill Corporation had the following unit costs for the recent calendar year: Check Up Corner Variable Fixed Manufacturing $8.00 $3.00 ExhPibaitth 7ways Challenge Nonmanufacturing 2.00 5.50 Operating income $XXX Inventory for Mill’s sole product totaled 6,000 units on January 1 and 5,200 units on ResTidhuiasl iIsn cAocmceounting! Minimum a Dcecceempbtear b31le. W ohpeen rcaotminpagre idn tcoo vmariaeb laes c oas t ing income, Mill’s absorption costing income is: Economic Activity percent ofa .i n$v2,e40s0t leowde ra.ssets (XXX) b. $2,400 higher. Anabls sotrapkteiohno lcdoesrtsi.n Tgh uiss ,r eaquutoir emda nbuy fgacetnuerrearlsl yl ikaec cFeRpotreedds iaMdccouotuaonlrt i inCngo cpmorcin.m pcia$pe6nle,8ys0 (0G( FlAo)wA aPenr). dfo Gr reenpoerrtainlg M too etxoterrs- $XXX Company (GM) use absorption costing in preparing their financiadl s. ta$t6e,m80e0n htsig. Uhenrd.er absorption costing, fixed manufacturing costs are included in inventory. Thus, the4 m. ore B ceatrhs athney a uCtoom copmapnayn iheas sm jaukset, tchoem lopwleert ed the first month of producing a new product but has the fixed cost per car and the smaller the cost of goods sold. In the yneoarts yperet csehdiinpgp tehde Uan.Sy. f ionaf ntchiaisl cprirsios daundc t. The product incurred variable manufacturing costs of economic downturn of 2008, Ford and General Motors produced m$o5re,0 c0a0rs, 0th0a0n, wfiexreed s omlda tnou cfuascttoumrienrsg.1 costs of $2,000,000, variable marketing costs of $1,000,000, and fixed marketing costs of $3,000,000. Critical Thinking/Judgment Under the variable costing concept, the inventory value of the new product would be: If Ford and General Motors have high fixed costsT anhd elo wm vairinabilem cao.u sts$m,5 h,0o 0wa0, 0cw0oc0u.eldp prtoadubcilneg moopre ecarrsa ting income is computed by multiplying the company minimum aIff faebcsto trhpetiiro onp ceorsattiinngg ainllcoowms ec oumndpearn aiebss olirkpert Fieoontrd uc oarsntdnin Gg ?eo nuennrda el riM vnoatrvoiarebsb l.t eso c$t co6mh,s0at0inne0gg,0en?0 t0ht.e ibr oype rtahtineg inicnomvee bsy ted assets. The minimum rate is set by top management, based increasing or decreasing production, why does GAAP require absorpcti.o n$ c8o,0s0t0in,0g0?0. on such factords. $a11s,0 0t0h,00e0. cost of financing. Suggested answer at end of chapter. To illustrate, assume that DataLink Inc. has established 10% as the minimum acceptable return 1 Marielle Segarra, “Why the Big Three Put Too Many Cars on the Lot,” CFO.com (ww2.cfo.com/management-accounting/2012/02/ why-the-big-three-put-too-many-cars-on-the-lot/), Febrouarny 2 , 2i0n12v. estPmaetnht wfoar ydsiv iCsihoanallle anssgeets. The residual incomes for the three divisions are shown in Exhibit 8. This is Accounting! 12020_ch07_ptg01_302-351.indd 314 Information/Consequences 7/12/18 12:15 PM By producing more cars than were sold, Ford (F) and General Motors (GM) increased their operat- Exhibit 8 ing income reported under absorption costing. This is becNauoser at phoertironn o Df thieviri fsixieod nmanufaCcteurningt rcaoslts D ivision Southern Division were included in ending inventory rather than cost of goods sold. Residual Income— OperatiUnngde ri nvacrioabmle ceosting, producing more cars would not affect ope$rat7in0g ,in0c0om0e, because all fixed ma$nu8fa4c-,000 $75,000 DataLink, Inc. Minimutumrin ga ccocstes partea inbcllued eod pine corsat toifn gogo dins scooldm regea r dless of how many cars are produced. as a perAc reeansotn o offt einn gvievesnt feord w ahys GsAeAtPs :requires absorption costing is that it focuses on operating income “over the long term.” In other words, while operating income may vary from year to year, all manufacturing costs $350a,r0e 0ev0e n×tu a1ll0y r%eported on the income statement as cost of goods so(l3d 5or, 0as0 a 0w)rite-down of inventory using the lower-of-cost-or-market rule. Thus, over the life of a company, the total amount of operating income will $700b,0e t0h0e s ×am 1e 0re%gardless of whether absorption or variable costing is used. (70,000) $500,000 × 10% (50,000) Suggested Answer Residual income $35,000 $14,000 $25,000 12020_ch07_ptg01_302-351.indd 350 7/12/18 12:15 PM 12020_ch10_ptg01_460-509.indd 476 03/08/18 3:16 PM 12020_fm_ptg01_i-xxi.indd 5 8/25/18 11:31 AM vi Preface ▪▪ To aid learning and problem solving, throughout each chapter the Check Up Corner exercises provide students with step-by-step guidance on how to solve problems. Problem- solving tips help students avoid common errors. Chapter 10 Evaluating Decentralized Operations 467 Check Up Corner 10-1 Cost Center Responsibility Measures Delinco Tech Inc. manufactures corrosion-resistant water pumps and fluid meters. Its Commercial Products Division is organized as a cost center. The division’s budget for the month ended July 31 is as follows (in thousands): Materials $140,000 Factory wages 77,000 Supervisor salaries 15,500 Utilities 8,700 Depreciation of plant equipment 9,000 Maintenance 3,200 Insurance 750 Property taxes 800 $254,950 During July, actual costs incurred in the Commercial Products Division were as follows: Materials $152,000 Factory wages 77,800 Supervisor salaries 15,500 Utilities 8,560 Depreciation of plant equipment 9,000 Maintenance 3,025 Insurance 750 Property taxes 820 $267,455 Prepare a budget performance report for the director of the Commercial Products Division for July. Solution: The report shows the budgeted costs and actual costs along with the differences. Budget Performance Report The report allows cost center Director, Commercial Products Division managers to focus on areas For the Month Ended July 31 } of significant differences. Over (Under) Actual Budget Budget Budget Materials ...................................... $152,000 $140,000 $12,000 Factory wages ............................... 77,800 77,000 800 Supervisor salaries ......................... 15,500 15,500 Utilities ......................................... 8,560 8,700 $(140) Each difference is classified as Depreciation of plant equipment .... 9,000 9,000 over budget or under budget. Maintenance ................................. 3,025 3,200 (175) Insurance ..................................... 750 750 Property taxes ............................... 820 800 20 $267,455 $254,950 $12,820 $(315) Check Up Corner 12020_fm_ptg01_i-xxi.indd 6 8/25/18 11:31 AM 12020_ch10_ptg01_460-509.indd 467 03/08/18 3:16 PM Preface vii ▪▪ Analysis for Decision Making highlights how companies use accounting information to make decisions and evaluate their business. This provides students with context of why accounting is important to companies. 376 Chapter 8 Budgeting Analysis for Decision Making Nonmanufacturing Staffing Budgets Objective 6 Describe and illustrate the use of The budgeting illustrated in this chapter is similar to budgeting used for nonmanufacturing staffing budgets for businesses. However, many nonmanufacturing businesses often do not have direct materials nonmanufacturing purchases budgets, direct labor cost budgets, or factory overhead cost budgets. Thus, the bud- businesses. geted income statement is simplified in many nonmanufacturing settings. A primary budget in nonmanufacturing businesses is the labor, or staffing, budget. This bud- get, which is highly flexible to service demands, is used to manage staffing levels. For example, a theme park will have greater staffing in the summer vacation months than in the fall months. Likewise, a retailer will have greater staffing during the holidays than on typical weekdays. To illustrate, Concord Hotel operates a hotel in a business district. The hotel has 150 rooms that average 120 guests per night during the weekdays and 50 guests per night during the week- end. The housekeeping staff is able to clean 10 rooms per employee. The number of housekeep- ers required for an average weekday and weekend is determined as follows: Weekday Weekend Number of guests per day 120 50 Rooms per housekeeper ÷ 10 ÷ 10 Number of housekeepers per day 12 5 If each housekeeper is paid $15 per hour for an eight-hour shift per day, the annual budget for the staff is as follows: Weekday Weekend Total Number of housekeepers per day 12 5 Hours per shift × 8 × 8 Days per year × 260* × 104** Number of hours per year 24,960 4,160 Rate per hour × $15 × $15 Housekeeping staff annual budget $374,400 $62,400 $436,800 * 52 weeks × 5 days ** 52 weeks × 2 days The budget can be used to plan and manage the staffing of the hotel. For example, if a wedding were booked for the weekend, the budgeted increase in staffing could be compared with the increased revenue from the wedding to verify the profit plan. Make a Decision Nonmanufacturing Staffing Budgets ▪▪ Make a Decision in the end-oAf-ncalhyzae pJothensro nm Staortees’r sitaaflfi ngg bivudegset fsotr uhodlideanyst (sM AaD 8c-1h) ance to analyze real-world Analyze Mercy Hospital’s staffing budget (MAD 8-2) business decisions. Chapter 6 Cost-Volume-Profit Analysis 297 Analyze Adventure Park’s staffing budget (MAD 8-3) Analyze Ambassador Suites’ staffing budget (MAD 8-4) Make a Decision Make a Decision Cost-Volume-Profit Analysis for Service Companies MAD 6-1 Analyze Global Air’s cost-volume-profit relationships Obj. 6 Global Air is considering a new flight between Atlanta and Los Angeles. The average fare per seat for the flight is $760. The costs associated with the flight are as follows: Fixed costs for the flight: Crew salaries .................. $ 5,000 12020_ch08_ptg01_352-409.indd 376 Operating costs ............... 50,000 16/07/18 6:34 am Aircraft depreciation .......... 25,000 Total ........................ $80,000 Variable costs per passenger: Passenger check-in ........... $ 20 Operating costs ............... 100 Total ........................ $120 The airline estimates that the flight will sell 175 seats. a. Determine the break-even number of passengers per flight. b. Based on your answer in (a), should the airline add this flight to its schedule? c. How much profit should each flight produce? d. What additional issues might the airline consider in this decision? MAD 6-2 Analyze Ocean Escape Cruise Lines’ cost-volume-profit relationships Obj. 6 Ocean Escape Cruise Lines has a boat with a capacity of 1,200 passengers. An eight-day ocean cruise involves the following costs: Crew $240,000 Fuel 60,000 Fixed operating costs 800,000 The variable costs per passenger for the eight-day cruise include the following: Meals $900 Variable operating costs 400 The price of the cruise is $2,400 per passenger. a. Determine the break-even number of passengers for the eight-day cruise. b. Assume 900 passengers booked the cruise. What would be the profit or loss for the cruise? c. Assume the cruise was booked to capacity. What would be the profit or loss for the cruise? d. If the cruise cannot book enough passengers to break even, how might the cruise line respond? MAD 6-3 Analyze Star Stream’s cost-volume-profit relationships Obj. 6 Star Stream is a subscription-based video streaming service. Subscribers pay $120 per year for the service. Star Stream licenses and develops content for its subscribers. In addition, Star Stream leases servers to hold this content. These costs are not variable to the number of subscribers, but must be incurred regardless of the subscriber base. In addition, Star Stream compensates telecommu- nication companies for bandwidth so that Star Stream customers receive fast streaming services. These costs are variable to the number of subscribers. These and other costs are as follows: Server lease costs per year ....................... $ 100,000,000 Content costs per year ........................... 2,000,000,000 12020_fm_ptg01_i-xxi.indd 7 8/25/18 11:31 AM Fixed operating costs per year .................... 900,000,000 Bandwidth costs per subscriber per year ........... 15 Variable operating costs per subscriber per year .... 25 (Continued) 12020_ch06_ptg01_248-301.indd 297 7/27/18 9:48 AM viii Preface ▪▪ At the end of each chapter, Let’s Review is a new chapter summary and self-assessment feature that is designed to help busy students prepare for an exam. It includes a summary of each learning objective’s key points, key terms, multiple-choice questions, exercises, and a sample problem that students may use to practice. ▪▪ Sample multiple-choice questions allow students to practice with the type of assessments they are likely to see on an exam. ▪▪ Short exercises and a longer problem allow students to apply their knowledge. ▪▪ Answers provided at the end of the Let’s Review section let students check their knowledge immediately. ▪▪ Take It Further in the end-of-chapter activities allows instructors to assign other special activi- ties related to ethics, communication, and teamwork. ▪▪ NEW! Certified Management Accountant (CMA®) Examination Questions help students prepare for the CMA exam so they can earn CMA certification. CengageNOWv2 CengageNOWv2 is a powerful course management and online homework resource that provides control and customization to optimize the student learning experience. Included are many proven resources, such as algorithmic activities, a test bank, course management tools, reporting and assessment options, and much more. NEW! Excel Online Cengage and Microsoft have partnered in CNOWv2 to provide students with a uniform, authentic Excel experience. It provides instant feedback, built-in video tips, and easily accessible spreadsheet work. These features allow you to spend more time teaching college accounting applications and less time troubleshooting Excel. These new algorithmic activities offer pre-populated data directly in Microsoft Excel Online. Each student receives his or her own version of the problem to perform the necessary data calculations in Excel Online. Their work is constantly saved in Cengage cloud storage as a part of homework assignments in CNOWv2. It’s easily retrievable so students can review their answers without cumber- some file management and numerous downloads/uploads. Motivation: Set Expectations and Prepare Students for the Course CengageNOWv2 helps motivate students and get them ready to learn by reshaping their misconcep- tions about the introductory accounting course and providing a powerful tool to engage students. CengageNOWv2 Start-Up Center Students are often surprised by the amount of time they need to spend outside of class working through homework assignments in order to succeed. The CengageNOWv2 Start-Up Center will help students identify what they need to do and where they need to focus in order to be successful with a variety of new resources. ▪▪ What Is Accounting? Module ensures students understand course expectations and how to be successful in the introductory accounting course. This module consists of two assignable vid- eos: Introduction to Accounting and Success Strategies. The Student Advice Videos offer advice from real students about what it takes to do well in the course. ▪▪ Math Review Module, designed to help students get up to speed with necessary math skills, includes math review assignments and Show Me How math review videos to ensure that stu- dents have an understanding of basic math skills. ▪▪ How to Use CengageNOWv2 Module focuses on learning accounting, not on a particular soft- ware system. Quickly familiarize your students with CengageNOWv2 and direct them to all of its built-in student resources. 12020_fm_ptg01_i-xxi.indd 8 8/25/18 11:31 AM Preface ix Motivation: Prepare T hem for Class With all the outside obligations accounting students have, finding time to read the textbook before class can be a struggle. Point students to the key concepts they need to know before they attend class. ▪▪ Video: Tell Me More. Short Tell Me More lecture activities explain the core concepts of the chapter through an engaging auditory and visual presentation. Available either on a stand- alone basis or as an assignment, they are ideal for all class formats—flipped model, online, hybrid, or face-to-face. Provide Help Right When Students Need It The best way to learn accounting is through practice, but students often get stuck when attempt- ing homework assignments on their own. ▪▪ Video: Show Me How. Created for the most frequently assigned end-of-chapter items, Show Me How problem demonstration videos provide a step-by-step model of a similar prob- lem. Embedded tips help students avoid common mistakes and pitfalls. SHOW ME HOW 12020_fm_ptg01_i-xxi.indd 9 8/25/18 11:31 AM