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Giáo trình managerial accounting 2nd by balakrishnan

S e c on d E dition

S e c on d Edition

The University of Iowa

K . S I VA R A M A K R I S H N A N
Rice University

G E O F F R E Y B. S P R I N K L E
Indiana University

John Wiley & Sons, Inc

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10 9 8 7 6 5 4 3 2 1


Ramji Balakrishnan
To my parents, Usha, Vasu and Uma

K. Sivaramakrishnan
To my father, my sisters Viji and Parvathi, my wife Devika,
my daughter Vidya, and in loving memory of my mother

Geoffrey B. Sprinkle
To Shari, Jason, Jack, and Scott

About the Authors
Ramji Balakrishnan is the Harry B. Carlson-KPMG Professor of Accounting at
the University of Iowa. Ramji has a B.Sc. in Statistics from the University of Madras
in 1977, an MBA from the Indian Institute of Management, Ahmedabad, in 1979,
and a Ph.D. from Columbia University in 1986. He is a Certified Management
Accountant and is a recipient of the Robert Beyer Bronze Medal. A top-rated teacher,
he has taught managerial accounting at the undergraduate, graduate and doctoral
levels. He joined the University of Iowa in 1986 and has been there since except for
a year at Georgia State University. He has published widely in top-tier journals, with
several of his papers being recognized as “Outstanding Contributions.” He serves
on several editorial boards and is the Editor of the Journal of Management Accounting
Research. A sought after speaker, he has delivered workshops in Asia, Europe and
North America. He was the President of the Management Accounting Section of
the American Accounting Association for 2005-2006

Konduru “Shiva” Sivaramakrishnan is the Henry Gardiner Symonds Professor
in Accounting at the Jesse H. Jones Graduate School of Business, Rice University.
He received his B. Tech in Engineering from the Indian Institute of Technology,
Madras in 1977, an MBA from Xavier Institute, Jamshedpur, India, in 1982, and a
Ph.D. in Accounting and Information Systems from the Kellogg Graduate School
of Management at Northwestern University in 1989. Prior to his current position,
he has held tenured faculty positions at Carnegie Mellon University, Texas A&M
University, and the University of Houston. Most recently, he held the Peggy Pittman
Eminent Scholar Chair at the Mays Business School, Texas A&M University. Dr.
Sivaramakrishnan has significant research and teaching accomplishments. His
research has appeared in premier journals such as The Accounting Review, Journal
of Accounting Research, Contemporary Accounting Research, Management Science, Journal
of Management Accounting Research, Accounting Horizons, Journal of Accounting and
Economics, and Review of Financial Studies. He has won numerous awards for teaching
excellence at both undergraduate and graduate levels.

Geoffrey B. Sprinkle Geoffrey B. Sprinkle is a Professor of Accounting and
Whirlpool Corporation Faculty Fellow at the Kelley School of Business at Indiana
University. Geoff received his B.S. in Accounting and Master of Accountancy
degrees from Arizona State University and his Ph.D. from The University of Iowa.
He earned the Gold Medal in the state of Arizona on the May, 1989 CPA exam
and the Elijah Watts Sells award nationally. Geoff teaches in the areas of cost and
managerial accounting and has received numerous teaching awards. His work
has appeared in journals such as The Accounting Review, The American Economic
Review, Accounting, Organizations and Society, Behavioral Research in Accounting, Games
and Economic Behavior, the Journal of Management Accounting Research, and Issues in
Accounting Education.


Executive Summary
Compared to existing books on the market, we believe
our book offers several advantages and unique features. Below, we summarize the key attributes of our
text. In the pages following the summary, we provide
a richer discussion of our approach and pedagogy.
• We provide an easy to understand integrated
framework that links topics into a seamless
whole. In the early chapters, we introduce two
ideas: More costs and benefits become relevant
as a decision’s horizon expands, and all decisions involve a cycle of planning and control. We
implement the first idea by organizing the text
into modules corresponding to short-term and
long-term decisions. We then address planning
and control decisions within each horizon. We
are pleased to report that our colleagues and
we have received outstanding student feedback
on the tightly integrated nature of our text—
students and instructors report that chapters
follow naturally from one to the next, with
everything “fitting” together.
• Both the overall structure of the book and individual chapters emphasize using accounting
information for decision making. Across chapters,
we use the time-based template to emphasize the
links among the various decisions that managers make, enabling students to see the linkages
among seemingly unrelated decisions. Before
each module, we use a part-opener to remind
students about the relations among organizational decisions, and to place forthcoming topics
in the appropriate context. Within each chapter,
we maintain the focus on decision making by

exploring a specific business problem. Each
chapter also uses the same four-step approach
to solving business problems.
• Both the chapter text and end-of-chapter
materials provide a balanced coverage of
manufacturing and service sectors. Examples
considered in the chapters include a gym, a
caterer, a hospital, a consulting firm, a copy
center, and a call center. Moreover, every
chapter contains numerous exercises and
problems relating to service and nonprofit
settings. We have received rave reviews from
instructors and students about both the breadth
and depth of our end-of-chapter materials.
• The book is student friendly. Our initial
drafts used a conversational tone and everyday examples to illustrate concepts. We then
subjected these drafts to several rounds of
review by English editors, undergraduate students, and faculty to increase accessibility and
impact. In addition to the standard exhibits, we
include “Check It!” boxes of mini-worksheets that
students can use to verify and fine-tune their
understanding of the material.
• We maintain the integrity of the framework while
allowing instructors the flexibility to modify coverage to best suit their individual needs. We help
instructors by presenting several sample syllabi
that show alternate sequencing of topics (please
see Section 5 in this Preface for further details).
The primary flexibility lies in whether, after covering basic terminology and cost flows, instructors
choose to cover product costing or to plunge
directly into short-term decisions.

x Preface

1. Introduction
Managerial accounting facilitates planning and control decisions. Planning decisions relate to choices
about acquiring and using resources to deliver products and services to customers (e.g., which products
and services to offer, their prices, and the resources
needed, such as materials, labor, and equipment).
Control decisions concern how much to delegate,
as well as how to motivate, measure, evaluate, and
reward performance.
Current managerial accounting textbooks generally
group product costing, cost management (ABC/ABM),
short-term decisions, and performance evaluation practices into four separate modules. This grouping allows
students to gain a working knowledge of current managerial accounting practices. However, while each book
may provide solid coverage on one or more important
dimensions, none offers a satisfactory, overarching
theme. The average student walks away with a collection of concepts and techniques but with little idea of
why things work the way they do. Armed with only the
“what” and the “how” but not the “why,” students have
no framework that lets them see the principles that drive
practice or helps them adapt to novel or changing
We provide instructors and students with a unifying,
problem-solving framework. We believe that the framework itself must be the key takeaway from any introductory managerial accounting course. By virtue
of its logic and internal consistency, the framework
allows students to:
• Understand the big picture.
• Examine new ideas and concepts and their
relation to existing practice.
• See how accounting information helps manage
a complex entity.
At the core of our framework is the one feature
common to all decisions—every decision involves a
cost-benefit trade-off. The decision could be personal
(should I eat out or make dinner?) or organizational
(should we continue using traditional performance
measures or switch to the balanced scorecard?). The
decision could relate to planning (how should we
price this product?) or control (where should we set
the sales quota?). The theme of systematically measuring costs and benefits to make effective decisions
runs throughout our text.
The first outgrowth of this theme, indicated by
the titles of the modules, is our emphasis on a
decision’s horizon. Time influences whether a cost

or benefit is relevant for decision. The costs of the
production plant and equipment are not relevant to
many short-term decisions. Thus, there is no need to
allocate these fixed costs to make effective short-term
decisions. In the long term, however, a firm can manage capacity costs by shrinking or expanding its investment in plant and equipment. Thus, to make effective
long-term decisions, a firm needs to identify variations in resource consumption patterns and create
allocation mechanisms that capture the cost impact of
these variations. Ultimately, when confronted with a
decision problem, the successful manager knows what
costs and benefits to include in the decision, and how
to measure these costs and benefits.
A second important aspect of our framework is an
integrated treatment of planning and control decisions. Planning and control are two sides of the same
coin. Diagnostic and feedback measures inform organizations of how well they implemented the plan,
thereby providing input for the next plan. Similarly,
performance evaluation and incentive schemes arise
in response to strategic aspects of the planning process. An integrated treatment highlights these links,
permitting students to perceive planning and control
decisions as part of the same framework.
Students learn best from simple examples. Once
students understand the basic issues at an intuitive
level, it is easier for them to understand similar issues
in other business contexts. We therefore begin each
chapter with an example that students can readily
comprehend and to which they could relate. We then
walk students through the issues and use the vignette
as a springboard to more advanced settings.
In addition to linking topics across chapters, we
tightly integrate topics within a chapter. To this end,
each chapter tells a story. The opening vignette
serves to raise pertinent questions, and the chapter
answers these questions. In this fashion, the student
perceives the concepts as being interrelated and not
We note three other important features:
• We made a strategic decision to collaborate
on one chapter at a time; although more timeconsuming, this team-based approach ensures
that we choose the best among the many ways
of presenting the same material. This approach
ensures that the book speaks with one voice.

• We have tried to make the text extremely accessible. This allows instructors, after ensuring that
students understand the basics, to devote some
class time to higher-order learning and explore
conceptual and qualitative issues. As detailed in
Section 4, the end-of-chapter materials contain


thought questions that instructors can use to initiate such discussions.
• We hope to surprise you with both the breadth and
depth of our end-of-chapter materials. We have
devoted substantial efforts to ensuring that the
problems and solutions are of the highest quality.

2. Audience
The typical student has limited exposure to business,
even though she may have taken courses in financial accounting and microeconomics. Accordingly,
the key task is both to explain the many kinds of
decisions needed to operate a successful business
and to communicate how managers use cost information in these decisions. It is not enough to know
prevalent practice. It is vital that the student understand whether and why a certain practice has merit
in a given situation. This understanding requires
a sound framework. In line with the adage about

teaching a man to fish, we believe that the average
student will appreciate our framework for decision
The focus on using cost data for decision making
makes our book well suited for a course that employs
a user-perspective. We believe that such a userfocus is particularly appropriate for the introductory
course. It also is consistent with the widespread
move to change the curriculum from a technicalaccounting perspective to a business-oriented, or
process, perspective.

3. Organization of Content
Our first module contains three chapters. In Chapter
1, we illustrate a four-step framework for decision
making, and we distinguish how individuals make
decisions from how organizations make decisions. We
next introduce two important classes of organizational
decisions—planning decisions and control decisions.
We then discuss how organizations use managerial
accounting information for both planning and control.
We conclude Chapter 1 by examining the role of ethics
in decision making, and discussing how societal and
professional standards shape organizational decisions.
Making a decision requires that we identify what
costs and benefits to measure, and then estimate
them. Chapters 2 focuses on the principles that
help us accomplish these two tasks. We begin with
two principles, controllability and relevance, that

determine which costs and benefits to measure. Using
these principles, we offer an approach for grouping
business decisions per their horizon. This grouping
of decisions forms the basis for the modular approach
that unfolds. We next discuss the principles that are
fundamental to estimating costs and benefits: variability and traceability. Finally, we extend the principle of
variability to develop a hierarchy of costs, which helps
to increase the accuracy of estimated costs.
We conclude this introductory module with a
chapter on cost terminology and an overview of
how accounting systems record the flow of costs.
This chapter begins by discussing cost flows in a service environment such as a health club, where the
accounting and cost flows are somewhat intuitive.
We next move to cost flows in merchandising firms
to introduce the concept of an inventory account.
Finally, we consider manufacturing organizations.

xii Preface
We define the short term as a period over which organizations cannot change capacity costs arising from
long-term commitments related to property, plant,
equipment, and personnel. These costs, which we
often term fixed costs, are therefore not relevant for
short-term decisions. Accordingly, the goal for shortterm decisions is to maximize contribution margin,
which is revenue less variable costs.
We begin Module II with a discussion of how to
estimate relevant costs for short-term decisions. The
key here is to identify fixed and variable costs, leading us to discuss techniques such as account classification, the high-low method, and regression analysis.
We end this chapter by showing how a contribution margin statement helps managers organize the
resulting information to make effective short-term
We devote Chapters 5 and 6 to planning decisions.
In Chapter 5, we introduce Cost-Volume-Profit (CVP)
analysis, a natural outgrowth of the contribution margin statement studied in the previous chapter. The
CVP relations among costs, volume, and profit provide
a convenient tool for profit planning. Following this,
we apply the CVP relation to evaluate decision options
and, in the process, illustrate how managers could use
the CVP relations to evaluate operating risk.
While CVP analysis is useful for overall profit planning, it is not suitable for many localized decision
problems that arise because of the temporary mismatch between the supply and demand for capacity
resources. Specifically, most organizations invest in
capacity resources such as plant, equipment, and personnel based on expectations of long-term demand.
Actual demand rarely equals anticipated demand,
however. In some periods, actual demand falls short
of expectations, meaning that managers must find
ways to utilize idle resources gainfully. At other times,
actual demand exceeds available capacity, changing the manager’s problem to one of extracting the
maximum benefit from available resources. In either
instance, organizations cannot fix the mismatch by
changing capacity because they cannot control capacity levels and costs in the short term. In Chapter 6,
we discuss two approaches—the incremental and
totals—to frame and solve such decision problems.
We illustrate these approaches in several contexts
such as make-or-buy, accepting a special order, and
allocating a scarce resource.
Chapter 7 examines operating budgets. Budgets
incorporate planning decisions on how and where to
use resources. Budgets also serve as the benchmark
for evaluating actual results, a control decision. In
this way, budgets bridge the planning and control

dimensions. We emphasize the tension between
the planning and control roles for budgets in our
discussion of both the mechanics of budgeting and
the budgeting process.
Chapter 8 focuses on short-term control decisions.
We begin by introducing the concept of a variance,
which is the deviation between a budgeted and actual
result. We then present the mechanics of variance
analysis, with a focus on using variances to reconcile
budgeted and actual profit. Finally, we emphasize the
link back to planning decisions by discussing how to
construct and interpret a profit reconciliation statement to determine possible corrective actions.

Over the long term, organizations can control most
costs considered fixed in the short term. That is, organizations can alter capacity levels over this horizon.
Thus, the goal for long-term decisions is to maximize profit, which is revenue less variable costs less
capacity costs. However, it often is difficult to estimate
the controllable costs for many long-term decisions
that pertain to individual products or customers.
The difficulty arises because products and customers
typically share capacity resources, meaning that organizations cannot trace capacity costs to individual
products and customers. In the language of Chapter
2, capacity costs are indirect costs. Consequently,
while performing a detailed account analysis to
estimate controllable capacity costs is the economically correct approach, it is not cost effective. Thus,
as a practical matter, firms use cost allocations to
approximate the change in capacity costs.
We devote Chapter 9 to cost allocations, a tool
that firms employ to estimate costs over the long
term. We begin by describing how a firm might use
allocations in a common decision problem—setting
prices. We note that firms allocate costs not just
for decision making but for other reasons as well,
including reporting income to external parties such
as shareholders and the IRS, justifying cost-based
reimbursements, and influencing behavior within
the organization. Accordingly, we discuss these uses
of cost allocations and how an allocation’s intended
purpose guides the choice of an allocation procedure. In this way, the chapter provides an integrated
discussion of the various demands for cost allocations
within an organization.
We focus Chapter 10 on activity-based costing
(ABC) and management. At its core, ABC is a
refined methodology for allocating capacity costs.
We examine how ABC can lead to better decisions

by improving estimates of controllable capacity costs.
We then discuss the steps associated with designing
product-costing systems and symptoms that might
help organizations decide if they need to update
the current costing system. We end by highlighting
some of the costs and benefits of implementing
ABC. ABC exploits the linkages among resources,
activities, and products to provide more accurate
measures of product profitability than traditional
allocation systems do. Thus, after describing the
mechanics of ABC, we discuss how to use ABC data
to improve profitability by managing products,
customers, and resources. Customer Profitability
Analysis allows organizations to identify profitable
and unprofitable customers, and suggests ways to
increase profit by managing customer relationships.
We refer to this and other uses of activity-based costing information to manage profit as activity-based
management, or ABM.
Despite their widespread use, allocations have two
limitations when used to make decisions: (1) They do
not consider the time value of money; and (2) they do
not consider the lumpy nature of capacity resources.
These limitations are of particular concern when the
firm is considering a large expenditure on a longlived resource. For such expenditures, organizations
routinely engage in capital budgeting, the focus of
Chapter 11. As operational budgets do for short-term
decisions, capital budgets provide the link between
long-term planning and control decisions. In particular, capital budgets provide an economic basis for
analyzing expenditures on capacity resources, and
control decisions focus on the effective use of these
Chapter 12 examines control decisions over the
long term. Most organizations delegate decisions over
the use of resources to managers lower in the organizational hierarchy. Decentralization leads to a conflict arising from the lack of goal congruence among
different levels in the organization. Accordingly, we
begin the chapter by discussing the benefits and
costs associated with decentralizing decision making.
We describe common forms of decentralization in
organizations and highlight the critical role of performance evaluation systems in these environments.
We discuss the principles that govern performance
measurement in organizations, and apply them to
measure and evaluate the performance of different
responsibility centers.
In Chapter 13, we discuss how an organization’s
strategy affects its cost structure and defines the
business and operational constructs that require
measurement. We also introduce and present the
balanced scorecard as a means of effectively integrating an organization’s strategy with its control


system. We begin with value chain analysis and
strategic planning. We introduce strategy and, using
real-world examples, highlight the critical linkages
between the value chain, strategy, and cost structure. We next discuss the impact of strategy on key
organizational processes. In each instance, our aim
is to show why the process configuration follows
naturally from the strategic choice and provides a