4. iii
iii
The eighth edition of Hansen & Mowen’s Managerial Accounting introduces students
to the fundamentals of management accounting. Though it is assumed that students
have been introduced to the basics of financial accounting, extensive knowledge of
financial accounting is not needed. The emphasis is on the use of accounting infor-
mation in today’s business environment, so this text provides coverage of the most
cutting edge topics and developments in the field. Thus, the text should be of value
to students with a variety of backgrounds. Although written to serve undergraduates,
the text has been used successfully at the graduate level. There is sufficient variety in
the assignment material to accommodate both undergraduate and graduate students.
Many business school students who are required to take a course in manage-
ment accounting are not accounting majors. For these students, it is often difficult to
appreciate the value of the concepts being taught. Managerial Accounting, 8e, over-
comes this attitude by using introductory chapter scenarios based on real-world set-
tings, photos illustrating practical applications of management accounting concepts,
and realistic examples illustrating the concepts within the chapters. Seeing that effec-
tive management requires a sound understanding of how to use accounting informa-
tion should pique the interests of both accounting and nonaccounting majors.
One major area of improvement for this edition has been to enhance the quality
and quantity of end-of-chapter material. As a result of extensive focused reviewing
and analysis, the end-of-chapter material now offers several activities by level of dif-
ficulty for each learning objective to ensure that students will have plenty of oppor-
tunity to practice the concepts they learn in the chapter. The end-of-chapter activities
are unmatched by any text on the market.
We are confident that this innovative managerial accounting text will prepare
your students to perform at their best. The new edition will ensure stronger student
performance and ongoing satisfaction with your managerial accounting course.
NEW Features of the Eighth Edition
The eighth edition now offers even more to ensure you and your students experience
a higher level of performance in managerial accounting, including:
The Most Current Coverage of Contemporary Topics. A new entire chap-
ter on Activity-Based Management (Chapter 5), a new chapter covering Lean
Accounting (Chapter 16), and a new appendix on Joint Product Costing (after Chap-
ter 7) in this edition dedicate significant attention to the most current issues in
managerial accounting today. New materials on simplifying ABC are also introduced
in Chapter 4.
Streamlined, Reorganized Table of Contents. We have streamlined, reor-
ganized, and carefully tailored this edition’s contents to reflect the way your students
best learn contemporary and traditional managerial accounting topics. Special topics
are now grouped together in the last part of the text to enhance understanding.
Variety and Strength in End-of-Chapter Problems and Exercises.
Based on detailed reviewer feedback, exercises and problems now offer more variety
and are clearly classified both by level of difficulty and by corresponding learning
objectives for your ease in selecting appropriate assignments for each class. All end-
of-chapter materials directly correspond to AACSB and CMA standards to ensure stu-
dent comprehension and positive outcomes. Furthermore, there are a significant
number of new and revised exercises and problems in each chapter.
P r e f a c e
5. iv
Connection throughout Chapter-Opening Scenarios. New chapter-opener cases
now introduce a fictional company that is referenced throughout each chapter to
connect and illustrate major chapter concepts. These cases provide a focused look
at how each chapter’s managerial accounting concepts apply to today’s business
world.
New! Ethical Insights Boxes. Important ethical concepts capture student
interest, assist in retaining critical managerial accounting topics, and show students
how to learn from ethical dilemmas as they prepare for CPA and CMA exams. These
are identified by a marginal icon.
New! Managers Decide Decision-Making Boxes. This edition’s new
emphasis on decision-making throughout each chapter challenges students to apply
what they learn in a decision context and shows the relevance of managerial
accounting concepts to the real business world.
NEW! ThomsonNOW™ for Managerial Accounting. This outcomes-driven,
integrated online learning and course management system provides the ultimate in
flexibility and ease of use with the results you want NOW to support your course
goals and ensure positive student performance. You’ll save time as you efficiently
teach and reinforce content with an integrated eBook, interactive learning tools, and
personalized study plans; test with an algorithmic test bank; and grade results based
on AACSB and CMA accreditation standards.
Hallmark Features
We have also retained those features that have made this text successful through
seven editions:
Integrated Strategic Cost Management Concepts. An emphasis on budg-
eting, ABM, and decentralization keeps materials relevant and prepares today’s stu-
dents for situations they will encounter.
Unique Environmental Cost Management Chapter. Introduce your stu-
dents to the emerging field of environmental cost management with new, actual
examples that demonstrate the value of environmental cost management as they
show how managers can reduce costs by implementing environmentally conscious
processes.
New E-Commerce Coverage in First Chapter. A new section presented
early in this edition (within Chapter 1) overviews the impact of e-commerce on
today’s management accounting issues.
Integrated Strategic Cost Management Concepts. An emphasis through-
out this edition on budgeting, ABM, and decentralization keeps the materials rele-
vant to situations encountered in the business world.
Integrated Coverage of Contemporary and Traditional Topics. This
edition introduces the latest costing techniques alongside more traditional topics to
help students see the advantages and disadvantages of a traditional cost manage-
ment system versus cost management systems that include practices such as ABC,
ABM, target costing, and the Balanced Scorecard. Coverage of both traditional and
contemporary topics helps ensure that students are well prepared to work in a vari-
ety of business environments.
Integrated Use of Spreadsheets. To accurately reflect industry practice, this
edition illustrates key managerial techniques, such as regression, using spreadsheets
rather than cumbersome manual calculations.
International Coverage. A full chapter (Chapter 18) highlighting international
issues, as well as numerous international examples integrated throughout the text,
emphasizes the critical importance of this topic.
6. v
Simplified Budgeting Coverage. A simpler example more clearly illustrates
important budgeting concepts in this edition.
Least Squares Regression Manual Computation. Coverage of manual
computation of regression coefficients helps students understand the technical and
theoretical concepts underlying ordinary least squares analysis.
Ethics Coverage. As with previous editions, the eigthth edition emphasizes the
study of ethical conduct for management accountants. The role of ethics is discussed
in Chapter 1, and the Statement of Ethical Professional Conduct developed by the
Institute of Management Accountants is introduced. The impact of the Sarbanes-
Oxley Act and its ethics requirements for publicly traded companies is discussed.
Chapter 1 has several substantive problems on ethics, and subsequent chapters have
at least one problem or case involving an ethical dilemma. These problems allow
the instructor to introduce value judgments into management accounting decision
making. Chapter 14, dealing with international issues in management accounting,
also has a section that discusses ethics in the international environment.
Real-World Emphasis. The eighth edition incorporates real-world applications
of management accounting concepts, making the study of these concepts more
familiar and interesting to the student. Real-company examples are incorporated
throughout. Names of real companies are highlighted throughout the text for easy
identification and are listed in a company index at the back of the text. Photos are
included to help students relate to the real-world nature of management accounting.
Increased Coverage of Service Industry. Service businesses are experienc-
ing unprecedented growth in today’s economy. Managers of service businesses often
use the same management accounting models as manufacturers, but they must
adapt them to their own unique situations of providing intangibles to consumers.
To address this need, many service industry applications are included in the eighth
edition. In addition, many real-company examples of service businesses are given.
Chapter Organization and Structure
Each chapter is carefully structured to help students focus on important concepts
and retain them. Components found in each chapter include:
Learning Objectives. Each chapter begins with a set of learning objectives to
guide students in their study of the chapter. These objectives outline the organiza-
tional flow of the chapter and serve as points of comprehension and evaluation.
Learning objectives are tied to specific sections of topic coverage within the chapter.
They are repeated in the margin at the beginning of the corresponding chapter cov-
erage and are summarized at the end of the chapter.
Summary of Learning Objectives. Each chapter concludes with a compre-
hensive summary of the learning objectives. Students can review and test their
knowledge of key concepts and evaluate their ability to complete chapter objectives.
Scenario. An interesting, real-world scenario opens each chapter. The scenario ties
directly to concepts covered in the chapter and helps students relate chapter topics
to actual business happenings. “Questions to Think About,” critical-thinking ques-
tions that appear at the end of each scenario, are designed to pique student interest
in the chapter and stimulate class discussion.
Key Terms. Throughout each chapter, key terms appear in bold font for quick
identification. A list of key terms, with page references, is presented at the end of
each chapter to provide additional reinforcement. All key terms are defined in a
comprehensive glossary at the end of the text.
Review Problems. Each chapter contains at least one review problem with the
accompanying solution provided. These review problems demonstrate the applica-
tion of major concepts and procedures covered in the chapter.
7. vi
Questions for Writing and Discussion. Approximately 15 to 25 short-answer
questions appear at the end of each chapter to test students’ knowledge of chapter
concepts. Many of the questions call for students to use critical thinking and written
and oral communication skills. Several questions can be used to stimulate class par-
ticipation and discussion.
Exercises and Problems. Exercises and problems are correlated by learning
objectives, listed in the margin below the exercise and problem titles. A document
showing correlations of each end of chapter activity by level of difficulty, learning
objective, and AACSB and CMA learning outcomes standards is available on the free
website. Exercises and problems adapted from past CMA exams are designated with
a margin icon.
Exercises. Exercises usually emphasize one or two chapter concepts and can be
completed fairly quickly (30 minutes maximum). Exercises require basic application
and computation and often ask students to interpret and explain their results.
Problems. Each chapter contains many end-of-chapter problems, with varying
degrees of length and difficulty. Problems usually have more than one issue and
present challenging situations, complex computations, and interpretations.
Managerial Decision Cases. Most chapters contain at least two cases. Cases
have greater depth and complexity than problems. They are designed to help stu-
dents integrate multiple concepts and further develop their analytical skills. Several
cases deal with ethical behavior.
Research Assignments. Research assignments appear in all chapters (except
Chapter 1), allowing students to expand their research and communication skills
beyond the classroom. One research assignment in each chapter, labeled “Cyber-
case,” requires the student to research information on the Internet.
Check Figures. Key figures for solutions to selected problems and cases are pro-
vided at the end of the text as an aid to students as they prepare their answers.
Chapter by Chapter Changes
Chapter 1 Added material on Sarbanes-Oxley (SOX) and ethics requirements for
publicly-traded companies. Added section on corporate codes of conduct mandated
by SOX.
Chapter 4 New materials on simplifying ABC have been added.
Chapter 5 This is a newly named and formed chapter with some new material
and some elements previously found in other chapters; consolidating materials per-
taining to activity-based management (ABM).
Chapter 6 Major revision due to the combining of two previous chapters on job-
order costing and process costing.
Chapter 7 Added appendix on joint product costing.
Chapter 10 Combines two previous chapters into one. Includes absorption and
variable costing, segmented reporting, investment center performance evaluation,
and transfer pricing.
Chapter 16 Half of this chapter is brand-new material focusing on lean manufac-
turing and lean accounting. Value streams, pull manufacturing, lead times, forms and
sources of waste, value stream costing, value stream reporting, value stream reporting,
and value-stream performance measurement are examples of topics discussed.
8. vii
Ancillaries
Instructor’s Manual, 0-324-37717-7 (Prepared by Scott Colvin, Naugatuck Val-
ley Community Technical College). The instructor’s manual contains a complete set
of lecture notes for each chapter and a transition guide for the seventh edition of
Management Accounting, as well as other widely used management accounting texts.
Solutions Manual, 0-324-64499-X (Prepared by Don Hansen and Maryanne
Mowen, Oklahoma State University). The solutions manual contains the solutions
for all end-of-chapter questions, exercises, problems, and cases. Solutions have been
verified multiple times to ensure their accuracy and reliability.
Test Bank, 0-324-37622-7 (Prepared by Jane Stoneback, Central Connecticut State
University). Revised for the eighth edition, the test bank offers multiple-choice prob-
lems, short problems, and essay problems. Designed to make exam preparation as
convenient as possible for the instructor, each test bank chapter contains enough
questions and problems to permit the preparation of several exams without repeti-
tion of material. All questions are identified by level of difficulty, learning objective,
and AACSB and CMA learning outcomes standards.
ExamView® Testing Software. This supplement, included on the Instructor’s
Resource CD-ROM, contains all of the questions in the printed test bank. This pro-
gram is an easy-to-use test creation software compatible with Microsoft Windows.
Instructors can add or edit questions, instructions, answers, and select questions
(randomly or numerically) by previewing them on the screen. Instructors can also
create and administer quizzes online, whether over the Internet, a local area network
(LAN), or a wide area network (WAN).
Spreadsheet Templates. Spreadsheet templates using Microsoft Excel are avail-
able for downloading from the product support website. These templates provide
outlined formats of solutions for selected end-of-chapter exercises and problems.
These exercises and problems are identified with a margin symbol. The templates
allow students to develop spreadsheet and “what-if” analysis skills.
PowerPoint Slides (Prepared by Gail Wright, Bryant University). Selected trans-
parencies of key concepts and exhibits from the text are available in PowerPoint
presentation software. Available on the Instructor’s Resource CD-ROM or the prod-
uct support website.
Instructor’s Resource CD-ROM, 0-324-23493-7. Key instructor ancillaries
(solutions manual, instructor’s manual, test bank, ExamView®, and PowerPoint®
slides) are provided on CD-ROM, giving instructors the ultimate tool for customiz-
ing lectures and presentations.
Product Website (http://thomsonedu.com/accounting/hansen). A website
designed specifically for Managerial Accounting, 8e includes online and download-
able instructor and student resources. The website features an interactive study center
organized by chapter, with learning objectives, Web links, glossaries, and online
quizzes with automatic feedback.
ThomsonNOWTM Make the most of your course with ThomsonNOW™ for
Hansen & Mowen Managerial Accounting, 8e. This integrated, online learning and
course management system provides the ultimate in flexibility and ease of use with
the results you want NOW. ThomsonNOW supports your course goals and ensures
positive student performance. You’ll save time as you efficiently teach and reinforce
content with an integrated eBook, Experience Managerial Accounting videos, interac-
tive learning tools, and personalized study plans; test with an algorithmic test bank;
and grade results based on AACSB and CMA accreditation standards. For more infor-
mation visit http://www.thomsonedu.com
9. viii
JoinInTM on TurningPoint® JoinInTM on TurningPoint® is a unique Microsoft®
PowerPoint®-based, interactive student response system and lecture tool that merges
the instructor’s PowerPoint presentation with interactive questions that assess stu-
dents’ understanding of material on the spot. As students are quizzed using clicker
technology, instructors can use the instant feedback to lecture more efficiently.
JoinIn on TurningPoint is the right solution to help you:
•Boost students’ interaction and engagement.
•Assist students who lack confidence to participate by interacting anonymously.
•Illustrate the relevance of lecture topics with polls, data slicing, and ranking the
popularity of answers.
•Check attendance.
•Improve retention.
•Assess students’ understanding of a concept instantaneously and identify the
“Teachable Moment.”
•Manage your lecture, make assessments, collect student responses, and post
results to your gradebook, all in one tool.
WebTutor™ Toolbox on WebCT® and on Blackboard®WebTutor Toolbox
complements Managerial Accounting, 8e by providing interactive reinforcement. Web-
Tutor’s online teaching and learning environment brings together content manage-
ment, assessment, communication, and collaboration capabilities for enhancing in-
class instruction or as a study resource for students. Access certificates for WebTutor
can be bundled with the textbook or sold separately. For more information, includ-
ing a demo, visit http://e.thomsonlearning.com
Business & Company Resource Center. The power to answer all types of
business queries is at your fingertips with Business & Company Resource Center
(BCRC). Unlike other available online business resources, this comprehensive data-
base offers a dynamic research opportunity, providing accurate, up-to-date company
and industry intelligence for thousands of firms. BCRC provides access to a wide
variety of global business information including competitive intelligence, career and
investment opportunities, business rankings, company histories and much more. To
learn more visit http://www.gale.com/BusinessRC/
Experience Managerial Accounting Video Series. A series of 14 videos
illustrating key management accounting concepts including job order, cost volume
profit, activity based costing, Pricing, cost behavior, budgeting, process costing and
more. These videos feature companies such as Washburn Guitar, BP, Hard Rock Café,
Cold Stone Creamery, and more. Access to these videos can be included at no addi-
tional cost with a new book or can be purchased separately at the bookstore or pur-
chased directly online. See your Thomson South-Western sales representative for
more details or visit http://thomsonedu.com/accounting/hansen
Acknowledgments
We would like to express our appreciation for all who have provided helpful com-
ments and suggestions. The reviewers of the prior editions helped make it a success-
ful product. Many valuable comments from instructors and students have helped us
make significant improvements in the text. We would particularly like to thank the
following reviewers, who provided in-depth reviews:
Reviewers
Alex Ampadu
University at Buffalo
James Aselta
Sacred Heart University
Professor Rowland Atiase
University of Texas at Austin
Kashi R. Balachandran
New York University
H. Francis Bush
Virginia Military Institute
Michael Flores
Wichita State University
10. ix
Professor Ananda R. Ganguly
Purdue University
Liming Guan
University of Hawaii at Manoa
Pamela Z. Jackson
Augusta State University
Gordon Klein
UCLA
Cathy X. Larson
Middlesex Community College
J. Mike Metzcar, CPA
Indiana Wesleyan University
Theodora L. Moten
LeTourneau University
Cynthia Nye
Bellevue University
Kathy F. Otero
University of Texas at El Paso
Frederick W. Rankin
Colorado State University
Juan M. Rivera
University of Notre Dame
Richard Schmidt
LeTourneau University Online
E. Daniel Shim
Sacred Heart University
Dr. John J. Surdick
Xavier University
Lynda Thoman
Purdue University
Wendy Tietz
Kent State University
Bill Wempe
Texas Christian University
Scott White
Lindenwood University
James E. Williamson
San Diego State University
George R. Wilson
University of Georgia
Priscilla S. Wisner
Montana State University
Zoomerang Survey Participants
Wagdy M. Abdallah
Seton Hall University
Joseph Adamo
Cazenovia College
Sue Aman
Kaskaskia College
Douglas M. Asbury
University of Findlay
Sandra Bailey
Oregon Tech
Kashi Balachandran
New York University
Carroll Barnes
Minneapolis Community & Technical
College
Nancy E. Coulmas
Bloomsburg University
Kevin Devine
Xavier University
Maggie Houston
Wright State University
Celina Jozsi
University of South Florida
Patti Lopez
Valencia Community College
Lowell Mooney
Georgia Southern University
Abbie Gail Parham
Georgia Southern University
Angela Sandberg
Jacksonville State University
Akili J. Sanyika
Georgia Perimeter College
Ramgopal Venkataraman
University of Minnesota - Twin Cities
Priscilla Wisner
Montana State University
We also would like to thank our verifiers for the text and solutions manual—
Scott Butterfield, Clayton State University; and Ann Martel, Marquette University.
Their careful editing helped us produce a text and ancillary package of high quality
and accuracy.
We also want to express our gratitude to the Institute of Management Accoun-
tants for its permission to use adapted problems from past CMA examinations. The
IMA has also given us permission to reprint the ethical standards of conduct for
management accountants.
Finally, we should offer special thanks to the staffs of Thomson Publishing and
Lachina Publishing Services. They have been helpful and have carried out their tasks
with impressive expertise and professionalism.
Don R. Hansen
Maryanne M. Mowen
11. x
A b o u t t h e A u t h o r s
Don R. Hansen
Dr. Don R. Hansen is Professor of Accounting at Oklahoma State University. He
received his Ph.D. from the University of Arizona in 1977. He has an undergraduate
degree in mathematics from Brigham Young University. His research interests
include activity-based costing and mathematical modeling. He has published articles
in both accounting and engineering journals including The Accounting Review, The
Journal of Management Accounting Research, Accounting Horizons, and IIE Transactions.
He has served on the editorial board of The Accounting Review. His outside interests
include family, church activities, reading, movies, watching sports, and studying
Spanish.
Maryanne M. Mowen
Dr. Maryanne M. Mowen is Associate Professor of Accounting at Oklahoma State
University. She received her Ph.D. from Arizona State University in 1979. Dr. Mowen
brings an interdisciplinary perspective to teaching and writing in cost and manage-
ment accounting, with degrees in history and economics. In addition, she does
scholarly research in behavioral decision theory. She has published articles in jour-
nals such as Decision Science, The Journal of Economics and Psychology, and The Journal
of Management Accounting Research. Dr. Mowen’s interests outside the classroom
include reading, playing golf, traveling, and working crossword puzzles.
12. xi
xi
Preface iii
Part I Basic Management Accounting Concepts 1
B r i e f C o n t e n t s
Chapter 1 Introduction: The Role, History, and Direction of Management
Accounting 2
Chapter 2 Basic Management Accounting Concepts 32
Chapter 3 Activity Cost Behavior 70
Chapter 4 Activity-Based Product Costing 116
Chapter 5 Activity-Based Management 164
Chapter 8 Budgeting for Planning and Control 314
Chapter 9 Standard Costing: A Managerial Control Tool 366
Chapter 10 Segmented Reporting, Investment Center Evaluation,
and Transfer Pricing 416
Part V Managerial Decision Making 469
Chapter 15 Quality Costs and Productivity: Measurement, Reporting,
and Control 666
Chapter 16 Lean Accounting, Target Costing, and the Balanced
Scorecard 722
Chapter 17 Environmental Cost Management 776
Chapter 18 International Issues in Management Accounting 816
Activity-Based Accounting 69
Part II
Part III Product and Service Costing 211
Chapter 6 Job-Order and Process Costing 212
Chapter 7 Support-Department Cost Allocation 270
Part IV Planning and Control 313
Chapter 11 Cost-Volume-Profit Analysis: A Managerial Planning Tool 470
Chapter 12 Tactical Decision Making 514
Chapter 13 Capital Investment Decisions 562
Chapter 14 Inventory Management 620
Part VI Special Topics 665
13. xii
C o n t e n t s
Preface iii
PART 1 BASIC MANAGEMENT ACCOUNTING CONCEPTS
Chapter 1 • Introduction:
The Role, History, and Direction
of Management Accounting 2
Management Accounting Information
System 4
Information Needs of Managers
and Other Users 4 The Management
Process 5 Organization Type 7
Management Accounting and Financial
Accounting 7
A Brief Historical Perspective of
Management Accounting 9
Current Focus of Management
Accounting 10
Activity-Based Management 10 Customer
Orientation 11 Cross-Functional
Perspective 13 Total Quality Management
13 Time as a Competitive Element 14
Efficiency 14 E-business 15
The Role of the Management Accountant 15
Structure of the Company 15 Sarbanes-
Oxley Act of 2002 16
Management Accounting and Ethical
Conduct 17
Ethical Behavior 17 Company Codes
of Conduct and SOX 18 Standards of
Ethical Conduct for Management
Accountants 19
Certification 21
The CMA 21 The CPA 21 The CIA 22
Summary of Learning Objectives 22
Key Terms 23
Questions for Writing and Discussion 23
Exercises 24
Problems 28
Research Assignment 31
Chapter 2 • Basic Management
Accounting Concepts 32
Cost Assignment: Direct Tracing, Driver
Tracing, and Allocation 34
Cost 35 Cost Objects 35 Accuracy of
Assignments 36
Product and Service Costs 39
Different Costs for Different Purposes 41
Product Costs and External Financial
Reporting 42
External Financial Statements 44
Income Statement: Manufacturing
Firm 44 Income Statement: Service
Organization 46
Types of Management Accounting Systems:
A Brief Overview 46
FBM versus ABM Accounting Systems 47
Choice of a Management Accounting
System 50
Summary of Learning Objectives 51
Key Terms 51
Review Problems 52
Questions for Writing and Discussion 54
Exercises 55
Problems 61
Managerial Decision Cases 66
Research Assignments 68
14. xiii
Chapter 3 • Activity Cost
Behavior 70
The Basics of Cost Behavior 72
Fixed Costs 72 Variable Costs 73 Mixed
Costs 74 Classifying Costs According to
Behavior 75
Activities, Resource Usage, and Cost
Behavior 78
Flexible Resources 78 Committed
Resources 78 Step-Cost Behavior 79
Implications for Control and Decision
Making 81
Methods for Separating Mixed Costs into
Fixed and Variable Components 82
Linearity Assumption 83 The High-Low
Method 86 The Scatterplot Method 87
The Method of Least Squares 90 Using
the Regression Programs 91
Reliability of Cost Formulas 93
R2—The Coefficient of Determination 93
Coefficient of Correlation 93
Multiple Regression 94
Managerial Judgment 96
Summary of Learning Objectives 98
Key Terms 98
Review Problems 99
Questions for Writing and Discussion 100
Exercises 101
Problems 109
Managerial Decision Case 114
Research Assignment 115
Chapter 4 • Activity-Based Product
Costing 116
Unit Costs 118
Importance of Unit Product Costs 119
Production of Unit Cost Information 119
Functional-Based Product Costing 119
Plantwide Rates 120 Departmental
Rates 122
Limitations of Functional-Based Cost
Accounting Systems 124
Non-Unit-Related Overhead Costs 125
Product Diversity 126 An Example
Illustrating the Failure of Unit-Based
Overhead Rates 126
Activity-Based Product Costing: Detailed
Description 129
Identifying Activities and Their Attributes
129 Assigning Costs to Activities 132
Assigning Activity Costs to Other Activities
133 Assigning Costs to Products 133
Detailed Classification of Activities 134
Reducing the Size and Complexity of the
Activity-Based Costing System 137
Reducing Rates Using Consumption Ratios
137 Reducing Rates by Approximating
ABC 137 Comparison with Functional-
Based Costing 139
Summary of Learning Objectives 139
Key Terms 140
Review Problems 140
Questions for Writing and Discussion 143
Exercises 144
Problems 150
Managerial Decision Cases 158
Research Assignment 162
Chapter 5 • Activity-Based
Management 164
Activity-Based Management: A Conceptual
Overview 166
Implementing ABM 167 ABM and
Responsibility Accounting 170 Financial-
Based Responsibility Compared with
Activity-Based Responsibility 171
Process Value Analysis 175
Driver Analysis: The Search for Root Causes
175 Activity Analysis: Identifying and
Assessing Value Content 176 Activity
Performance Measurement 178
Measures of Activity Performance 179
PART 2 ACTIVITY-BASED ACCOUNTING
15. xiv
Value- and Non-Value-Added Cost
Reporting 179 Trend Reporting 181
The Role of Kaizen Standards 182
Benchmarking 183 Drivers and
Behavioral Effects 184 Activity Capacity
Management 184
Activity-Based Customer and Supplier
Costing 186
Activity-Based Customer Costing 186
Activity-Based Supplier Costing 188
Summary of Learning Objectives 190
Key Terms 190
Review Problems 190
Questions for Writing and Discussion 192
Exercises 193
Problems 202
Managerial Decision Case 209
Research Assignment 210
PART 3 PRODUCT AND SERVICE COSTING
Chapter 6 • Job-Order and Process
Costing 212
Characteristics of the Job-Order and Process
Environment 214
Job-Order Production and Costing 214
Process Production and Costing 214
Cost Flows Associated with Job-Order
Costing 215
Calculating Unit Cost with Job-Order
Costing 215 Job-Order Cost Sheet 216
The Flow of Costs through the Accounts
218
The Process Environment and Cost
Flows 225
Types of Process Manufacturing 226 How
Costs Flow Through the Accounts in Process
Costing 226 Accumulating Costs in the
Production Report 227
The Impact of Work-in-Process Inventories
on Process Costing 228
Equivalent Units of Production 228 Two
Methods of Treating Beginning Work-in-
Process Inventory 230
Weighted Average Costing 230
Five Steps in Preparing a Production Report
230 Example of the Weighted Average
Method 231 Evaluation of the Weighted
Average Method 233
Multiple Inputs and Multiple
Departments 234
Nonuniform Application of Manufacturing
Inputs 234 Multiple Departments 238
Appendix A: Production Report—FIFO
Costing 239
Differences between the FIFO and
Weighted Average Methods 239 Example of
the FIFO Method 239
Appendix B: Journal Entries Associated with
Job-Order and Process Costing 243
Journal Entries Associated with Job-Order
Costing 243 Journal Entries Associated with
Process Costing 245
Summary of Learning Objectives 246
Key Terms 247
Review Problems 248
Questions for Writing and Discussion 251
Exercises 252
Problems 261
Managerial Decision Case 267
Research Assignment 268
Chapter 7 • Support-Department Cost
Allocation 270
An Overview of Cost Allocation 272
Types of Departments 272 Allocating
Costs from Departments to Products 273
Types of Allocation Bases 274 Objectives
of Allocation 275
Allocating One Department’s Costs to
Another Department 277
A Single Charging Rate 277 Multiple
Charging Rates 278 Budgeted versus
Actual Usage 279
16. xv
Choosing a Support-Department Cost
Allocation Method 280
Direct Method of Allocation 281
Sequential Method of Allocation 282
Reciprocal Method of Allocation 285
Comparison of the Three Methods 286
Departmental Overhead Rates and Product
Costing 288
Appendix: Joint Cost Allocation 289
Accounting for Joint Product Costs 289
Summary of Learning Objectives 291
Key Terms 292
Review Problems 292
Questions for Writing and Discussion 296
Exercises 296
Problems 304
Managerial Decision Cases 308
Research Assignments 311
PART 4 PLANNING AND CONTROL
Chapter 8 • Budgeting for Planning
and Control 314
Description of Budgeting 316
Budgeting and Planning and Control 316
Advantages of Budgeting 317
Preparing the Master Budget 318
Directing and Coordinating 319 Major
Components of the Master Budget 319
Preparing the Operating Budget 319
Preparing the Financial Budget 325
Using Budgets for Performance
Evaluation 331
Static Budgets versus Flexible Budgets 331
The Behavioral Dimension of Budgeting 334
Activity-Based Budgeting 337
Static Activity Budgets 337 Activity
Flexible Budgeting 338
Summary of Learning Objectives 340
Key Terms 341
Review Problems 341
Questions for Writing and Discussion 344
Exercises 344
Problems 352
Managerial Decision Cases 363
Research Assignment 365
Chapter 9 • Standard Costing: A
Managerial Control Tool 366
Unit Standards 368
How Standards Are Developed 368 Types
of Standards 369 Why Standard Cost
Systems Are Adopted 369
Standard Product Costs 371
Variance Analysis: General Description 373
Price and Efficiency Variances 373 The
Decision to Investigate 373
Variance Analysis: Materials and Labor 376
Direct Materials Variances 376 Direct
Labor Variances 380
Variance Analysis: Overhead Costs 382
Variable Overhead Variances 382 Fixed
Overhead Variances 386
Appendix: Accounting for Variances 389
Entries for Direct Materials Variances 389
Entries for Direct Labor Variances 389
Disposition of Materials and Labor
Variances 390 Overhead Variances 390
Summary of Learning Objectives 391
Key Terms 392
Review Problem 392
Questions for Writing and Discussion 394
Exercises 395
Problems 402
Managerial Decision Cases 410
Research Assignments 413
17. xvi
Chapter 10 • Segmented Reporting,
Investment Center Evaluation, and
Transfer Pricing 416
Decentralization and Responsibility Centers
418
Reasons for Decentralization 418 Divisions
in the Decentralized Firm 419
Measuring the Performance of Profit Centers
Using Variable and Absorption Income
Statements 422
Inventory Valuation 423 Income
Statements Using Variable and Absorption
Costing 423 Production, Sales, and Income
Relationships 424 The Treatment of Fixed
Overhead in Absorption Costing 427
Evaluating Profit-Center Managers 428
Segmented Income Statements Using
Variable Costing 429
Measuring the Performance of Investment
Centers Using ROI 431
Return on Investment 431 Margin and
Turnover 432 Advantages of ROI 433
Disadvantages of the ROI Measure 435
Measuring the Performance of Investment
Centers Using Residual Income and
Economic Value Added 436
Residual Income 436 Economic Value
Added (EVA) 438
Transfer Pricing 439
Impact of Transfer Pricing on Divisions and
the Firm as a Whole 440 Transfer Pricing
Policies 441 Market Price 442 Cost-Based
Transfer Prices 442 Negotiated Transfer
Prices 443
Summary of Learning Objectives 443
Key Terms 444
Review Problems 445
Questions for Writing and Discussion 449
Exercises 450
Problems 455
Managerial Decision Cases 463
Research Assignment 467
PART 5 MANAGERIAL DECISION MAKING
Chapter 11 • Cost-Volume-Profit
Analysis: A Managerial Planning
Tool 470
Break-Even Point in Units 472
Using Operating Income in CVP Analysis
472 Shortcut to Calculating Break-Even
Units 474 Unit Sales Needed to Achieve
Targeted Profit 475
Break-Even Point in Sales Dollars 477
Profit Targets and Sales Revenue 478
Comparison of the Two Approaches 479
Multiple-Product Analysis 479
Break-Even Point in Units 480 Sales Dollars
Approach 482
Graphical Representation of CVP
Relationships 483
The Profit-Volume Graph 483 The Cost-
Volume-Profit Graph 484 Assumptions of
Cost-Volume-Profit Analysis 485
Changes in the CVP Variables 487
Introducing Risk and Uncertainty 489
Sensitivity Analysis and CVP 491
CVP Analysis and Activity-Based Costing 492
Example Comparing Conventional and ABC
Analysis 493 Strategic Implications:
Conventional CVP Analysis versus ABC
Analysis 494 CVP Analysis and JIT 495
Summary of Learning Objectives 496
Key Terms 496
Review Problems 497
Questions for Writing and Discussion 499
Exercises 499
Problems 505
Managerial Decision Cases 511
Research Assignment 513
18. xvii
Chapter 12 • Tactical Decision
Making 514
Tactical Decision Making 516
Model for Making Tactical Decisions 517
Relevant Costs Defined 520 Ethics in
Tactical Decision Making 521
Relevance, Cost Behavior, and the Activity
Resource Usage Model 522
Flexible Resources 522 Committed
Resources 523
Illustrative Examples of Relevant Cost
Applications 524
Make-or-Buy Decisions 524 Keep-or-Drop
Decisions 526 Special-Order Decisions 530
Decisions to Sell or Process Further 531
Product Mix Decisions 533
One Constrained Resource 533 Multiple
Constrained Resources 534
Pricing 534
Cost-Based Pricing 534 Target Costing and
Pricing 536 Legal Aspects of Pricing 537
Fairness and Pricing 539
Appendix: Linear Programming 539
Summary of Learning Objectives 542
Key Terms 543
Review Problem 543
Questions for Writing and Discussion 544
Exercises 544
Problems 551
Managerial Decision Cases 558
Research Assignments 561
Chapter 13 • Capital Investment
Decisions 562
Types of Capital Investment Decisions 564
Nondiscounting Models 566
Payback Period 566 Accounting Rate of
Return 568
Discounting Models: The Net Present Value
Method 569
NPV Defined 569 An Example Illustrating
Net Present Value 570
Internal Rate of Return 570
Example: Multiple-Period Setting with
Uniform Cash Flows 571 Multiple-Period
Setting: Uneven Cash Flows 572
Postaudit of Capital Projects 573
Honley Medical Company: An Illustrative
Application 573 One Year Later 574
Benefits of a Postaudit 574
Mutually Exclusive Projects 575
NPV Compared with IRR 575 Example:
Mutually Exclusive Projects 576
Computation and Adjustment of Cash
Flows 578
Adjusting Forecasts for Inflation 578
Conversion of Gross Cash Flows to
After-Tax Cash Flows 580
Capital Investment: The Advanced
Manufacturing Environment 585
How Investment Differs 586 How
Estimates of Operating Cash Flows Differ
586 Salvage Value 588 Discount Rates
589
Appendix A: Present Value Concepts 589
Future Value 589 Present Value 590
Present Value of an Uneven Series of Cash
Flows 591 Present Value of a Uniform
Series of Cash Flows 591
Summary of Learning Objectives 594
Key Terms 595
Review Problems 595
Questions for Writing and Discussion 597
Exercises 598
Problems 607
Managerial Decision Cases 615
Research Assignments 619
Chapter 14 • Inventory
Management 620
Traditional Inventory Management 622
Inventory Costs 622 Traditional Reasons
for Holding Inventory 622 Economic
Order Quantity: The Traditional Inventory
Model 624 Computing EOQ 625 Reorder
19. xviii
Point 625 EOQ and Inventory
Management 627
JIT Inventory Management 628
Basic Features of JIT 629 Setup and
Carrying Costs: The JIT Approach 632
Due-Date Performance: The JIT Solution
634 Avoidance of Shutdown and Process
Reliability: The JIT Approach 634
Discounts and Price Increases: JIT Purchasing
versus Holding Inventories 637 JIT’s
Limitations 638
Theory of Constraints 639
Basic Concepts 639 TOC Steps 640
Summary of Learning Objectives 645
Key Terms 646
Review Problems 646
Questions for Writing and Discussion 648
Exercises 649
Problems 655
Managerial Decision Case 661
Research Assignment 662
PART 6 SPECIAL TOPICS
Chapter 15 • Quality Costs and
Productivity: Measurement, Reporting,
and Control 666
Measuring the Costs of Quality 668
Quality Defined 668 Costs of Quality
Defined 670 Measuring Quality Costs 671
Reporting Quality Cost Information 673
Quality Cost Reports 673 Quality Cost
Function: Acceptable Quality View 675
Quality Cost Function: Zero-Defects View
675 Activity-Based Management and
Optimal Quality Costs 678 Trend
Analysis 679
Using Quality Cost Information 680
Scenario A: Strategic Pricing 681 Scenario
B: New Product Analysis 683
Productivity: Measurement and Control 684
Partial Productivity Measurement 686
Total Productivity Measurement 688 Price-
Recovery Component 691 Quality and
Productivity 691 Gainsharing 692
Summary of Learning Objectives 693
Key Terms 694
Review Problems 694
Questions for Writing and Discussion 697
Exercises 697
Problems 707
Managerial Decision Cases 717
Research Assignments 719
Chapter 16 • Lean Accounting,
Target Costing, and the Balanced
Scorecard 722
Lean Manufacturing 724
Value by Product 725 Value Stream 725
Value Flow 726 Pull Value 729 Pursue
Perfection 731
Lean Accounting 732
Focused Value Streams and Traceability of
Overhead Costs 733 Value Stream Costing
with Multiple Products 735 Value Stream
Reporting 736 Decision Making 736
Performance Measurement 737
Life-Cycle Cost Management and the Role of
Target Costing 738
The Balanced Scorecard: Basic Concepts 744
Strategy Translation 744 The Role of
Performance Measures 745 The Financial
Perspective 748 Customer Perspective 748
Process Perspective 750 Learning and
Growth Perspective 754
Summary of Learning Objectives 755
Key Terms 755
Review Problems 756
Questions for Writing and Discussion 758
Exercises 758
Problems 765
Managerial Decision Case 774
Research Assignment 775
20. xix
Chapter 17 • Environmental Cost
Management 776
Measuring Environmental Costs 778
The Benefits of Ecoefficiency 778
Environmental Quality Cost Model 780
Environmental Cost Report 782 Reducing
Environmental Costs 783 An
Environmental Financial Report 785
Assigning Environmental Costs 786
Environmental Product Costs 786
Functional-Based Environmental Cost
Assignments 786 Activity-Based
Environmental Cost Assignments 787
Life-Cycle Cost Assessment 788
Product Life Cycle 788 Assessment
Stages 789
Strategic-Based Environmental Responsibility
Accounting 792
Environmental Perspective 793 The Role
of Activity Management 794
Summary of Learning Objectives 797
Key Terms 797
Review Problem 798
Questions for Writing and Discussion 800
Exercises 801
Problems 808
Research Assignment 814
Chapter 18 • International Issues in
Management Accounting 816
Management Accounting in the International
Environment 818
Levels of Involvement in International
Trade 818
Importing and Exporting 819
Wholly Owned Subsidiaries 821 Joint
Ventures 822
Foreign Currency Exchange 823
Managing Transaction Risk 824 Managing
Economic Risk 827 Managing Translation
Risk 828
Decentralization 829
Advantages of Decentralization in the MNC
829 Creation of Divisions 830
Measuring Performance in the Multinational
Firm 830
Political and Legal Factors Affecting
Performance Evaluation 832 Multiple
Measures of Performance 833
Transfer Pricing and the Multinational
Firm 833
Performance Evaluation 833 Income Taxes
and Transfer Pricing 834
Ethics in the International Environment 836
Summary of Learning Objectives 838
Key Terms 838
Review Problem 839
Questions for Writing and Discussion 840
Exercises 840
Problems 846
Managerial Decision Cases 848
Research Assignment 851
Glossary 852
Subject Index 864
Company Index 873
23. Introduction: The Role, History,
and Direction of Management
Accounting
l e a r n i n g o b j e c t i v e s
After studying this chapter, you should be able to:
1. Discuss the need for management accounting information.
2. Differentiate between management accounting and financial accounting.
3. Provide a brief historical description of management accounting.
4. Identify the current focus of management accounting.
5. Describe the role of management accountants in an organization.
6. Explain the importance of ethical behavior for managers and management
accountants.
7. List three forms of certification available to management accountants.
chapter 1
24. Scenario
Consider the following comments made by
individuals from several different organizations:
A. Partner of a Legal Firm: The managing
partner of Collins, Ling, and Jefferson, a
large regional law firm, just received a
request to bid on a potential job from
MegaProducts, Inc. (MPI). MPI had decided
to outsource most of its legal work. Its
request for proposals provided each law
firm with a record of the hours of legal
service and the types of services provided
by MPI’s internal legal staff for the past
five years. The bid was to take the form of
a flat hourly billing rate. Competition for
this job was intense. In order to generate
a competitive bid, the partner needed an
accurate assessment of cost per hour for
each type of legal service that would be
performed. Then she could obtain the
weighted-average cost per hour based on
the expected hours of each type of service.
Finally, she could calculate an hourly billing
rate that would provide the law firm with
a reasonable dollar return. (Product costing
and pricing decision)
B. Plant Manager: Jeff Rand, plant manager,
identified three projects that could
improve quality and decrease the factory’s
production time. First, only suppliers who
provide components with a defect rate of
less than one per thousand would be
selected. Second, die-making operations
could be automated. Third, manufacturing
cells would be formed for each major prod-
uct. Jeff knew that once the alternatives
were implemented he would need to know
if and by how much the number of defec-
tive units dropped and if cycle time actu-
ally decreased. He also needed a way to
track those changes to the resulting pro-
duction costs to see if they decreased—to
see if cost improvement actually occurred.
(Continuous improvement)
C. Chief Executive Officer of a Cruise Line:
The recession had resulted in decreased
profits; the CEO wondered if the cruise line
should consider reducing costs and services.
The controller suggested that profit would
increase if current passenger volume was
maintained but variable costs were reduced
by $10 per passenger. The marketing vice
president suggested that reducing fares
could increase overall profit. She claimed
that reducing fares by 20 percent and
increasing advertising by $500,000 would
increase the number of passengers by 20
percent. A combination of the two
approaches might change the strategic
position of the cruise line. Therefore, the
CEO asked for revised budgets to see which
approach (or a combination of the two)
offered the most profit—in both the short
run and the long run. (Planning and cost-
volume-profit analysis)
D. Hospital Administrator: After reading the
latest monthly performance report for sub-
units of the hospital, the administrator was
very pleased with the performance of the
laboratory. Last month, the laboratory had
reduced costs even while the number of
tests run had increased. As a result, the
laboratory attracted more business by
charging lower rates that were justified by
the lower costs. The lab manager had told
the administrator that the activity-based
management approach that had been
installed had resulted in significant waste
reduction. The administrator felt that this
management system could be profitably
used by other subunits, such as radiology
and physical therapy. (Managerial control)
Questions to Think About
1. Who uses management accounting
information?
2. For what purposes is management
accounting information used?
3. Should a management accounting system
provide both financial and nonfinancial
information?
4. What organizations need a management
accounting information system?
25. Management Accounting Information System
The management accounting information system provides information needed to
satisfy specific management objectives. At the heart of a management accounting
information system are processes; they are described by activities such as collecting,
measuring, storing, analyzing, reporting, and managing information. Information on
economic events is processed into outputs that satisfy the system’s objectives. Out-
puts may include special reports, product costs, customer costs, budgets, performance
reports, and even personal communication. The operational model of a manage-
ment accounting information system is illustrated in Exhibit 1-1.
The management accounting information system is not bound by any formal
criteria that define the nature of the processes, inputs, or outputs. The criteria are
flexible and based on management objectives. The management accounting system
has three broad objectives:
1. To provide information for costing out services, products, and other objects of
interest to management.
2. To provide information for planning, controlling, evaluation, and continuous
improvement.
3. To provide information for decision making.
These three objectives show that managers and other users need access to man-
agement accounting information and need to know how to use it. It can help them
identify and solve problems and evaluate performance. Accounting information is
used in all phases of management, including planning, controlling, and decision
making. Furthermore, the need for such information is not limited to manufacturing
organizations; it is used in manufacturing, merchandising, service, and nonprofit
organizations as well.
Information Needs of Managers and Other Users
The opening scenarios can be used to illustrate each of the management accounting
system objectives. Scenario A (bidding by a legal firm) shows the importance of
determining the cost of products (objective 1). Scenario B emphasizes the impor-
tance of tracking costs and nonfinancial measures of performance over time. Thus,
Scenario A emphasizes the importance of accuracy in product costing, while Sce-
nario B underscores the importance of tracking efficiency measures—using both
financial and nonfinancial measures (objective 2). Trends in these measures allow
4 Part 1 / Basic Management Accounting Concepts
Objective 1
Discuss the need
for management
accounting
information.
Processes
Economic Events
Collecting
Measuring
Storing
Analyzing
Reporting
Managing
Users
Inputs
Special Reports
Product Costs
Customer Costs
Budgets
Performance Reports
Personal Communication
Outputs
Exhibit 1-1 Operational Model: Management Accounting Information System
26. managers to evaluate the soundness of decisions designed to improve productivity,
lower costs, increase market share, and improve profitability. For example, Huffman
Corporation, a manufacturer of machine tools, tracks cycle-time changes for pro-
ducing its products. The cycle time for producing the latest version of its computer-
ized grinding machine dropped from 2,400 hours to 800 hours within a five-year
period. These productivity gains have created a 35 percent compound growth rate in
earnings.1 Accuracy in cost assignments and the use of nonfinancial information by
both managers and nonmanagers have emerged as fundamental requirements for
many organizations. These and other related issues have led to the development of
an improved management accounting information system known as an activity-based
cost management information system.
Scenarios B, C, and D illustrate planning, controlling, evaluation, and continu-
ous improvement (objective 2). Managers, executives, and workers need an informa-
tion system that will identify problems, such as the possibility of cost overruns, or
benefits, such as the ability of a subunit manager to innovate and increase efficiency
(Scenario C). Once problems are known, actions can be taken to identify and imple-
ment solutions. Scenario B also illustrates that both financial and nonfinancial
information is needed so that workers can evaluate and monitor the effects of deci-
sions that are intended to improve operational and unit performance. Operational
and financial performance information allows workers to assess the effectiveness of
their efforts to improve. Workers and managers should be committed to continu-
ously improving the activities they perform. Continuous improvement means
searching for ways to increase the overall efficiency and productivity of activities by
reducing waste, increasing quality, and reducing costs. Thus, information is needed
to help identify opportunities for improvement and to evaluate the progress made in
implementing actions designed to create improvement.
The third objective, providing information for decision making, is intertwined
with the first two. For example, information on the costs of products, customers,
processes, and other objects of interest to management can be the basis for identify-
ing problems and alternative solutions. Similar observations can be made about
information pertaining to planning, controlling, and evaluation. Examples include
using product costs to prepare a bid (Scenario A), helping a manager decide whether
to increase profits by reducing prices and increasing advertising or decreasing vari-
able costs or both, or helping a manager decide whether to change the organiza-
tion’s strategic position (Scenario C). This last scenario also underscores the impor-
tance of strategic decision making, which is defined as the process of choosing
among alternative strategies with the goal of selecting one or more strategies that
provide a company with a reasonable assurance of long-term growth and survival.
The Management Process
The management process is defined by the following activities: (1) planning, (2) con-
trolling, and (3) decision making. The management process describes the functions
carried out by managers and empowered workers. Empowering workers to partici-
pate in the management process means giving them a greater say in how the com-
pany operates. Thus, employee empowerment is the authorizing of operational per-
sonnel to plan, control, and make decisions without explicit authorization from
middle- and higher-level management.
Employee empowerment rests on the belief that employees closest to the work
can provide valuable input in terms of ideas, plans, and problem solving. Workers
are allowed to shut down production and identify and correct problems. Their input
5
Chapter 1 / Introduction: The Role, History, and Direction of Management Accounting
1 Steve Liesman, “High-Tech Devices Speed Manufacturing and May Play Larger Role in Economy,” Wall Street
Journal Interactive Edition (February 15, 2001). Access the referenced article in the chapter web links at the
Interactive Study Center at http://www.thomsonedu.com/accounting/hansen.
28. Controlling Planning is only half the battle. Once a plan is created, it must be
implemented and monitored by managers and workers to ensure that the plan is
being carried out as intended. Controlling is the managerial activity of monitoring
a plan’s implementation and taking corrective action as needed. Control is usually
achieved with the use of feedback. Feedback is information that can be used to
evaluate or correct the steps being taken to implement a plan. Based on feedback,
a manager (or worker) may decide to let the implementation continue as is, take
corrective action of some type to put the actions back in harmony with the original
plan, or do some midstream replanning.
Feedback is a critical part of the control function. Feedback can be financial or
nonfinancial. For example, the chute redesign at Duffy Tool and Stamping saved
more than $14,000 per year (financial feedback). Moreover, the redesign eliminated
machine downtime and increased the number of units produced per hour (opera-
tional feedback). Both measures are part of the management accounting information
system and convey important information. Often financial and nonfinancial feed-
back is in the form of formal reports, called performance reports, that compare
actual data with planned data or benchmarks.
Decision Making The process of choosing among competing alternatives is deci-
sion making. This managerial function is intertwined with planning and control-
ling. A manager cannot plan without making decisions. Managers must choose
among competing objectives and methods to carry out the chosen objectives. Only
one of numerous competing plans can be chosen. Similar comments can be made
concerning the control function.
A major role of the management accounting information system is to supply
information for decision making. For example, the partner in the legal firm in Sce-
nario A was faced with the prospect of submitting a bid on a contract for legal ser-
vices. A large number of bids are possible, but the partner must choose just one to
submit to the prospective customer. The partner requested information concerning
the expected hourly cost for each type of legal service. This cost information, along
with the partner’s knowledge of competitive conditions, should improve his or her
ability to select a bid price. Imagine having to submit a bid without some idea of
the cost of providing the legal services.
Organization Type
The use of accounting information by managers is not limited to manufacturing.
Regardless of the organizational form, managers must be proficient in using
accounting information. The basic concepts taught in this text apply to a variety of
settings. The four scenarios at the beginning of this chapter involved legal services,
manufacturing, health care, leisure services, profit, and nonprofit organizations. Hos-
pital administrators, presidents of corporations, dentists, educational administrators,
and city managers can all improve their managerial skills by being well grounded in
the basic concepts and use of accounting information.
Management Accounting and Financial Accounting
An organization’s accounting information system has two major subsystems: a man-
agement accounting system and a financial accounting system. The two accounting
subsystems differ in their objectives, the nature of their inputs, and the type of
processes used to transform inputs into outputs. The financial accounting informa-
tion system is primarily concerned with producing outputs for external users, using
well-specified economic events as inputs and processes that meet certain rules and
conventions. For financial accounting, the nature of the inputs and the rules and
7
Chapter 1 / Introduction: The Role, History, and Direction of Management Accounting
Objective 2
Differentiate
between
management
accounting and
financial accounting.
29. conventions governing processes are defined by the Securities and Exchange Com-
mission (SEC), the Financial Accounting Standards Board (FASB), and for public
companies, the Public Company Accounting Oversight Board (PCAOB). The overall
objective is the preparation of external reports (financial statements) for investors,
creditors, government agencies, and other outside users. This information is used for
such things as investment decisions, stewardship evaluation, monitoring activities,
and regulatory measures. Financial accounting could be called external accounting.
Because the management accounting system produces information for internal
users, such as managers, executives, and workers, it could be properly called internal
accounting. Management accounting identifies, collects, measures, classifies, and
reports information that is useful to internal users in planning, controlling, and
decision making.
When management accounting is compared with financial accounting, several
differences can be identified. Some of the more important differences are summa-
rized in Exhibit 1-2.
• Targeted users. Management accounting focuses on the information needs of inter-
nal users, while financial accounting focuses on information for external users.
• Restrictions on inputs and processes. Management accounting is not subject to the
requirements of generally accepted accounting principles. The Securities and
Exchange Commission (SEC), the Public Company Accounting Oversight Board
(PCAOB), and the Financial Accounting Standards Board (FASB) set the account-
ing procedures that must be followed for financial reporting. The inputs and
processes of financial accounting are well-defined and restricted. Only certain
kinds of economic events qualify as inputs, and processes must follow generally
accepted methods. Unlike financial accounting, management accounting has no
official body that prescribes the format, content, and rules for selecting inputs
and processes and preparing financial reports. Managers are free to choose what-
ever information they want—provided it can be justified on a cost-benefit basis.
• Type of information. The restrictions imposed by financial accounting tend to pro-
duce objective and verifiable financial information. For management accounting,
information may be financial or nonfinancial and may be more subjective in
nature.
• Time orientation. Financial accounting has a historical orientation. It records and
reports events that have already happened. Although management accounting
also records and reports events that have already occurred, it strongly emphasizes
providing information about future events. Management, for example, may not
only want to know what it costs to produce a product, it may also want to know
what it will cost to produce a product. Knowing what it will cost helps in plan-
ning material purchases and making pricing decisions, among other things. This
future orientation is demanded to support the managerial planning and decision
making.
• Degree of aggregation. Management accounting provides measures and internal
reports used to evaluate the performance of entities, product lines, departments,
and managers. Very detailed information is needed and provided. Financial
accounting, on the other hand, focuses on overall firm performance, providing a
more aggregated viewpoint.
• Breadth. Management accounting is much broader than financial accounting. It
includes aspects of managerial economics, industrial engineering, and manage-
ment science, as well as numerous other areas.
It should be emphasized, however, that both management accounting and
financial accounting information systems are part of the total accounting informa-
tion system. Unfortunately, the content of the management accounting system is
often driven by the needs of the financial accounting system. The reports of manage-
ment and financial accounting are frequently derived from the same database, which
8 Part 1 / Basic Management Accounting Concepts
31. most of this emphasis had been abandoned in favor of inventory costing—assigning
manufacturing costs to products so that the cost of inventories could be reported to
external users of a firm’s financial statements.
Financial reporting became the driving force for the design of cost accounting
systems. Managers and firms were willing to accept aggregated average cost informa-
tion about individual products, as they did not feel the need for more detailed and
accurate cost information about individual products. As long as a company had rela-
tively homogeneous products that consumed resources at about the same rate, the
average cost information supplied by a financially driven cost system was good
enough. Furthermore, for some firms, even as product diversity increased, the need
to have more accurate cost information was offset by the high cost of the processing
required to provide such information. For many firms, the cost of a more detailed
cost system apparently exceeded its benefits.
Some effort to improve the managerial usefulness of conventional cost systems
took place in the 1950s and 1960s. Users discussed the shortcomings of information
supplied by a system designed to prepare financial reports. Efforts to improve the
system, however, essentially centered on making the financial accounting informa-
tion more useful to users rather than on producing an entirely new set of informa-
tion and procedures apart from the external reporting system.
In the 1980s and 1990s, many recognized that the traditional management
accounting practices no longer served managerial needs. Some claimed that existing
management accounting systems were obsolete and virtually useless. More accurate
product and resource costing were needed for managers to improve quality and produc-
tivity and to reduce costs. In response to the perceived failure of the traditional manage-
ment accounting system, efforts were made to develop a new management accounting
system that would satisfy the demands of the current economic environment.
Current Focus of Management Accounting
The economic environment has required the development of innovative and relevant
management accounting practices. Consequently, activity-based management
accounting systems have been developed and implemented in many organizations.
Additionally, the focus of management accounting systems has been broadened to
enable managers to better serve the needs of customers and manage the firm’s value
chain. Furthermore, to secure and maintain a competitive advantage, managers must
emphasize time, quality, and efficiency, and accounting information must be pro-
duced to support these three fundamental organizational goals. More recently, the
emergence of e-business requires management accounting systems to provide infor-
mation that enables managers to deal with this new environment.
Activity-Based Management
The demand for more accurate and relevant management accounting information
has led to the development of activity-based management. Activity-based manage-
ment is a systemwide, integrated approach that focuses management’s attention on
activities with the objective of improving customer value and the resulting profit.
Activity-based management emphasizes activity-based costing (ABC) and process
value analysis. Activity-based costing improves the accuracy of assigning costs by first
tracing costs to activities and then to products or customers that consume these
activities. Process value analysis emphasizes activity analysis—trying to determine
why activities are performed and how well they are performed. The objective is to
find ways to perform necessary activities more efficiently and to eliminate those that
do not create customer value.
10 Part 1 / Basic Management Accounting Concepts
Objective 4
Identify the
current focus of
management
accounting.
32. Customer Orientation
Activity-based management has the objective of increasing customer value by man-
aging activities. Customer value is a key focus because a firm can establish a compet-
itive advantage by creating better customer value for the same or lower cost than
that of its competitors or creating equivalent value for a lower cost than that of its
competitors. Customer value is the difference between what a customer receives
(customer realization) and what the customer gives up (customer sacrifice). What is
received is called the total product. The total product is the complete range of tangi-
ble and intangible benefits that a customer receives from a purchased product. Thus,
customer realization includes basic and special product features, service, quality,
instructions for use, reputation, brand name, and any other factors deemed impor-
tant by customers. Customer sacrifice includes the cost of purchasing the product,
the time and effort spent acquiring and learning to use the product, and postpur-
chase costs, which are defined as the costs of using, maintaining, and disposing
of the product. Increasing customer value means increasing customer realization,
decreasing customer sacrifice, or both.
Strategic Positioning Increasing customer value to create a sustainable compet-
itive advantage is achieved through judicious selection of strategies. Cost informa-
tion plays a critical role in this process through a process called strategic cost manage-
ment. Strategic cost management is the use of cost data to develop and identify
superior strategies that will produce a sustainable competitive advantage. Generally,
firms choose a strategic position that corresponds to one of two general strategies:
(1) cost leadership and (2) superior products through differentiation.5 The objective
of the cost leadership strategy is to provide the same or better value to customers at
a lower cost than competitors; its objective is to increase customer value by reducing
sacrifice. For example, reducing the cost of making a product by improving a process
would allow the firm to reduce the product’s selling price, thus reducing customer
sacrifice. A differentiation strategy, on the other hand, increases customer value by
increasing realization. Providing customers with something not provided by com-
petitors creates a competitive advantage. For example, a computer retailer could offer
on-site repair service, a feature not offered by other rivals in the local market. Of
course, a viable differentiation strategy must ensure that the value added to the cus-
tomer by differentiation exceeds the firm’s cost of providing the differentiation. Typi-
cally, different strategies require different cost information, implying that cost sys-
tems may differ according to the strategy adopted by a firm.
Value-Chain Framework A focus on customer value means that the manage-
ment accounting system should produce information about both realization and
sacrifice. Collecting information about customer sacrifice means gathering informa-
tion outside the firm. But there are even deeper implications. Successful pursuit of
cost leadership and/or differentiation strategies requires an understanding of a firm’s
internal and industrial value chains. Effective management of the internal value
chain is fundamental to increasing customer value, especially if maximizing cus-
tomer realization at the lowest possible cost (to the firm) is a goal. The internal
value chain is the set of activities required to design, develop, produce, market, and
deliver products and services to customers. Thus, emphasizing customer value forces
managers to determine which activities in the value chain are important to cus-
tomers. A management accounting system should track information about a wide
variety of activities that span the internal value chain. Consider, for example, the
11
Chapter 1 / Introduction: The Role, History, and Direction of Management Accounting
5 Japanese firms have also shown that it is possible to pursue a strategy that combines the two: a differentia-
tion with cost advantage strategy.
33. 12 Part 1 / Basic Management Accounting Concepts
Firm A
End-Use Customer
Product Disposal
Supermarkets
Applesauce
Distribution
Applesauce
Production
Distribution
of Apples
Harvesting
Planting and
Cultivating
Firm B
Firm C
Exhibit 1-3 Value Chain: Apple Industry
delivery segment. Timely delivery of a product or service is part of the total product
and, thus, of value to the customer. Customer value can be increased by increasing
the speed of delivery and response. Federal Express exploited this part of the value
chain and successfully developed a service that was not being offered by the U.S.
Postal Service. Today, many customers believe that a delivery delayed is a delivery
denied. This seems to indicate that a good management accounting system ought to
develop and measure indicators of customer satisfaction.
The industrial value chain is also critical for strategic cost management. The
industrial value chain is the linked set of value-creating activities from basic raw
materials to the disposal of the final product by end-use customers. Exhibit 1-3 illus-
trates a possible value chain for the apple industry. A given firm operating within
the industry may not span the entire value chain. The exhibit illustrates that differ-
ent firms participate in different segments of the chain. Breaking down a firm’s value
chain into its strategically important activities is basic to successful implementation
of cost leadership and differentiation strategies. Fundamental to a value-chain frame-
work is the recognition of the complex linkages and interrelationships among activi-
ties both within and external to the firm. There are two types of linkages: internal
and external. Internal linkages are relationships among activities that are performed
within a firm’s portion of the industrial value chain (the internal value chain). Exter-
nal linkages are activity relationships between the firm and the firm’s suppliers and
customers. Thus, we can talk about supplier linkages and customer linkages. Using these
34. linkages to bring about a win-win outcome for the firm, its suppliers, and its cus-
tomers is the key to successful strategic cost management. It is also the key feature
of what is now called supply chain management. Supply chain management is the
management of material flows beginning with suppliers and their upstream suppli-
ers, moving to the transformation of materials into finished goods, and finishing
with the distribution of finished goods to customers and their downstream customers.
Understanding the industrial value chain and going beyond immediate suppliers
and customers may reveal hidden benefits. Of course, the firm’s objective is to man-
age these linkages better than its competitors, thus creating a competitive advantage.
Companies have internal customers as well. For example, the procurement
process acquires and delivers parts and materials to producing departments. Provid-
ing high-quality parts on a timely basis to managers of producing departments is
just as vital for procurement as it is for the company as a whole to provide high-
quality goods to external customers. The emphasis on managing the internal value
chain and servicing internal customers reveals the importance of a cross-functional
perspective.
Cross-Functional Perspective
Managing the value chain means that a management accountant must understand
many functions of the business, from manufacturing to marketing to distribution to
customer service. This need is magnified when the company is involved in interna-
tional trade. We see this in the varying definitions of product cost. Activity-based
management has moved beyond the traditional manufacturing cost definition of
product cost to more inclusive definitions. These product costs may include initial
design and engineering costs, manufacturing costs, and the costs of distribution,
sales, and service. An individual who understands the shifting definitions of cost
from the short run to the long run can be invaluable in determining what informa-
tion is relevant in decision making. For example, strategic decisions may require a
product cost definition that assigns the costs of all value-chain activities, whereas a
short-run decision that is concerned with whether a special order should be accepted
or rejected may require a product cost that assigns only marginal or incremental
costs.
Why try to relate management accounting to marketing, management, engineer-
ing, finance, and other business functions? When a value-chain approach is taken
and customer value is emphasized, we see that these disciplines are interrelated; a
decision affecting one affects the others. For example, many manufacturing compa-
nies engage in frequent trade loading, the practice of encouraging (often by offering
huge discounts) wholesalers and retailers to buy more product than they can quickly
resell. As a result, inventories become bloated, and the wholesalers and retailers stop
purchasing for a time. This looks like a marketing problem, but it is not—at least
not entirely. When selling stops, so does production. Thus, trade-loading companies
experience wild swings in production. Sometimes, their factories produce around the
clock to meet demand for the heavily discounted product; other times, their factories
are idle, and workers are laid off. In effect, the sales end up costing the companies mil-
lions of dollars of added production cost. A cross-functional perspective lets us see the
big picture. This broader vision allows managers to increase quality, reduce the time
required to service customers (both internal and external), and improve efficiency.
Total Quality Management
Continuous improvement is crucial to establishing manufacturing excellence. Mak-
ing products with little waste that actually perform according to specifications are
the twin objectives of world-class firms; they are the keys to survival in today’s
world-class competitive environment. A philosophy of total quality management,
13
Chapter 1 / Introduction: The Role, History, and Direction of Management Accounting
35. in which manufacturers strive to create an environment that will enable workers to
manufacture perfect (zero-defect) products, has replaced the “acceptable quality”
attitudes of the past. This total emphasis on quality has also created a demand for a
management accounting system that provides financial and nonfinancial informa-
tion about quality.
Service industries are also dedicated to improving quality. Service firms present
special problems because quality may differ from employee to employee. As a result,
service firms are emphasizing consistency through the development of systems to
support employee efforts. For example, Park Place Lexus of Plano, Texas, is a 2005
Malcolm Baldridge Quality Award winner. Park Place Lexus measures client satisfac-
tion with new vehicles (99.8 percent), with pre-owned vehicles (98 percent), and
with vehicle maintenance and service (near 98 percent). Park Place Lexus is also
improving in profitability; its gross profit increased by 51.3 percent from 2000 to
2004. Clearly, quality initiatives are paying off.6
Quality cost measurement and reporting are key features of a management
accounting system for manufacturing and service industries. In both cases, the sys-
tem should be able to provide both operational and financial information about
quality, including information such as the number of defects, quality cost reports,
quality cost trend reports, and quality cost performance reports.
Time as a Competitive Element
Time is a crucial element in all phases of the value chain.7 World-class firms reduce
time to market by compressing design, implementation, and production cycles.
These firms deliver products or services quickly by eliminating non-value-added
time, that is, time of no value to the customer (for example, the time a product
spends on the loading dock). Interestingly, decreasing non-value-added time appears
to go hand in hand with increasing quality. The overall objective, of course, is to
increase customer responsiveness.
The rate of technological innovation has increased for many industries, and the
life of a particular product can be quite short. Managers must be able to respond
quickly and decisively to changing market conditions. Information to allow them to
accomplish this must be available. For example, Hewlett-Packard has found that it
is better to be 50 percent over budget in new product development than to be six
months late. This correlation between cost and time is the kind of information that
should be available from a management accounting information system.
Efficiency
While quality and time are important, improving these dimensions without corre-
sponding improvements in profit performance may be futile, if not fatal. Improving
efficiency is also a vital concern. Both financial and nonfinancial measures of effi-
ciency are needed. Cost is a critical measure of efficiency. Trends in costs over time
and measures of productivity changes can provide important measures of the effi-
cacy of continuous improvement decisions. For these efficiency measures to be of
value, costs must be properly defined, measured, and assigned; furthermore, produc-
tion of output must be related to the inputs required, and the overall financial effect
of productivity changes should be calculated.
14 Part 1 / Basic Management Accounting Concepts
6 As reported in the Baldridge Award Recipient profile, http://www.nist.gov/public_affairs/baldrige_2005/
parkplacelexus.htm.
7 An excellent analysis of time as a competitive element is contained in A. Faye Borthick and Harold P. Roth,
“Accounting for Time: Reengineering Business Processes to Improve Responsiveness,” Journal of Cost Manage-
ment (Fall 1993): pp. 4–14.
36. E-business
Electronic business (e-business) is any business transaction or information exchange
that is executed using information and communication technology. E-business is
expected to grow significantly over the coming years. It provides opportunities for a
company to expand sales throughout the world and may lower costs significantly rel-
ative to paper-based transactions. It also facilitates value-chain (supply) management.
Management accountants need to understand the benefits and risks of e-business as
well as its opportunities. They also play a vital role in providing relevant cost infor-
mation concerning e-business. For example, managers may need to know the cost
per electronic transaction versus the cost per paper transaction.
The Role of the Management Accountant
Business today is moving faster than ever before. Changes in technology, communi-
cations, economic conditions, and the legal environment are affecting firms and
their management accountants in new ways. Management accountants must support
management in all phases of business decision making. As specialists in accounting,
they must be intelligent, well prepared, up to date with new developments, and
familiar with the customs and practices of all countries in which their firms operate.
They are expected to be knowledgable about the legal environment of business and,
in particular, about the Sarbanes-Oxley Act of 2002.
Structure of the Company
The role of management accountants in an organization is one of support. They
assist those individuals who are responsible for carrying out an organization’s basic
objectives. Positions that have direct responsibility for the basic objectives of an
organization are referred to as line positions. Positions that are supportive in nature
and have only indirect responsibility for an organization’s basic objectives are called
staff positions.
For example, assume that the basic mission of an organization is to produce and
sell laser printers. The vice presidents of manufacturing and marketing, the factory
manager, and the assemblers are all line positions. The vice presidents of finance
and human resources, the cost accountant, and the purchasing manager are all staff
positions.
The partial organization chart shown in Exhibit 1-4 illustrates the organizational
positions for production and finance. Because one of the basic objectives of the
organization is to produce, those directly involved in production hold line positions.
Although management accountants, such as controllers and cost accounting man-
agers, may wield considerable influence in the organization, they have no authority
over the managers in the production area. The managers in line positions are the
ones who set policy and make the decisions that impact production. However, by
supplying and interpreting accounting information, management accountants can
have significant input into policies and decisions.
The controller, the chief accounting officer, supervises all accounting depart-
ments. Because of the critical role that management accounting plays in the opera-
tion of an organization, the controller is often viewed as a member of the top
management team and is encouraged to participate in planning, controlling, and
decision-making activities. As the chief accounting officer, the controller has respon-
sibility for both internal and external accounting requirements. This charge may
include direct responsibility for internal auditing, cost accounting, financial account-
ing (including SEC reports and financial statements), systems accounting (including
15
Chapter 1 / Introduction: The Role, History, and Direction of Management Accounting
Objective 5
Describe the role
of management
accountants in an
organization.
37. analysis, design, and internal controls), and taxes. The duties and organization of
the controller’s office vary from firm to firm. For example, in some firms, the inter-
nal audit department may report directly to the financial vice president; similarly,
the systems department may report directly to the financial vice president or some
other vice president. One possible organization of a controller’s office is also shown
in Exhibit 1-4.
The treasurer is responsible for the finance function. Specifically, the treasurer
raises capital and manages cash and investments. The treasurer may also be in
charge of credit, collection, and insurance. As shown in Exhibit 1-4, the treasurer
reports to the financial vice president.
Sarbanes-Oxley Act of 2002
In June 2002, Congress passed the Sarbanes-Oxley Act. This legislation was passed
in response to the collapse of Enron and the revelations of securities fraud and
accounting misconduct associated with companies such as WorldCom, Adelphia,
and HealthSouth. The Sarbanes-Oxley Act (SOX) established stronger government
control and regulation of public companies in the United States. SOX applies to
publicly traded companies, companies that issue stock traded on U.S. stock
exchanges. Major sections of SOX include establishment of the Public Company
Accounting Oversight Board (PCAOB), enhanced auditor independence, tightened
regulation of corporate governance, control over management, and management/
auditor assessment of the firm’s internal controls. SOX also led to increased atten-
tion to corporate ethics, and this is discussed in the next section.
Importantly, private companies, nonprofit entities, and governmental agencies
or entities are not covered by SOX and not subject to PCAOB control. However,
these entities have been affected by SOX through their dealings with constituents
and their boards of directors. In particular, the intense scrutiny of internal control
under SOX is a feature that many would like to see applied to nonprofit entities.
Internal control is a process put into place by management and the board of direc-
tors to ensure that objectives are achieved in the areas of effectiveness and efficiency
of operations, reliability of financial reporting, and compliance with applicable laws
16 Part 1 / Basic Management Accounting Concepts
Line Function
Production
Vice President
Staff Function
Production
Supervisor
Machining
Foreman
Assembly
Foreman
President
Financial
Vice President
Controller Treasurer
Internal
Audit
Cost Systems
Financial Tax
Exhibit 1-4 Partial Organization Chart, Manufacturing Company
38. and regulations.8 All entities should achieve their legitimate objectivies, and good
internal control can help to ensure that. Management accountants, through the
offices of internal auditing or the chief financial officer (CFO), are the people in
the organization who are expected to help their organizations comply with SOX.
Management Accounting and Ethical Conduct
Virtually all management accounting practices were developed to assist managers in
maximizing profits. Traditionally, the economic performance of the firm has been
the overriding concern. Yet managers and management accountants should not
become so focused on profits that they develop a belief that the only goal of a busi-
ness is maximizing its net worth. The objective of profit maximization should be
constrained by the requirement that profits be achieved through legal and ethical
means. While this has always been an implicit assumption of management account-
ing, the assumption should be made explicit. To help achieve this objective, many
of the problems in this text force explicit consideration of ethical issues.
Ethical Behavior
Ethical behavior involves choosing actions that are “right,” “proper,” and “just.”
Our behavior can be right or wrong; it can be proper or improper; and the decisions
we make can be just or unjust. Though people often differ in their views of the
meaning of the ethical terms cited, a common principle seems to underlie all ethical
systems. This principle is expressed by the belief that each member of a group bears
some responsibility for the well-being of other members. Willingness to sacrifice
one’s self-interest for the well-being of the group is the heart of ethical action.
This notion of sacrificing one’s self-interest for the well-being of others produces
some core values—values that describe what is meant by right and wrong in more
concrete terms. James W. Brackner, writing for the “Ethics Column” in Management
Accounting, made the following observation:
For moral or ethical education to have meaning, there must be agreement
on the values that are considered “right.” Ten of these values are identified
and described by Michael Josephson in “Teaching Ethical Decision Making
and Principled Reasoning.” The study of history, philosophy, and religion
reveals a strong consensus as to certain universal and timeless values essen-
tial to the ethical life.
These ten core values yield a series of principles that delineate right and
wrong in general terms. Therefore, they provide a guide to behavior.9
The ten core values referred to in the quotation follow:
1. Honesty
2. Integrity
3. Promise keeping
4. Fidelity
5. Fairness
6. Caring for others
7. Respect for others
8. Responsible citizenship
9. Pursuit of excellence
10. Accountability
17
Chapter 1 / Introduction: The Role, History, and Direction of Management Accounting
8 Definition taken from COSO Internal Control Integrated Framework, http://www.coso.org/publications/
executive_summary_integrated_framework.htm.
9 James W. Brackner, “Consensus Values Should Be Taught,” Management Accounting (August 1992): p. 19. For
a more complete discussion of the ten core values, see also Michael Josephson, “Teaching Ethical Decision
Making and Principled Reasoning,” Ethics: Easier Said Than Done (Winter 1988): pp. 29–30.
Objective 6
Explain the
importance of
ethical behavior
for managers
and management
accountants.
Although it may seem contradictory, sacrificing one’s self-interest for the collective
good may not only be right and bring a sense of individual worth but may also
ET
ETHICS
