Brandon company uses normal costing in its job costing system

Prepare, Apply, and Confirm

!.----------:~.:.., 1- ~

• Auto-Graded Excel Projects-Using proven, field-tested technology, MyAccountingLab's new auto-graded Excel Projects allow instructors to seamlessly integrate Excel content into their course without having to manually grade spreadsheets. Students have the opportunity to practice important Accounting skills in Microsoft Excel, helping them to master key concepts and gain proficiency in Excel. Students simply download a spreadsheet, work live on an accounting problem in Excel, and then upload that file back into MyAccountingLab, where they receive reports on their work that provide personalized, detailed feedback to pinpoint where they went wrong on any step of the problem. Available with select titles.

• Enhanced eText- The Pearson eText gives students access to their textbook anytime, anywhere. In addition to note- taking, highlighting, and bookmarking, the Pearson eText offers interactive and sharing features. Students actively read and learn through auto-graded practice, author videos, and more. Instructors can share comments or highlights, and students can add their own, for a tight community of learners in any class.

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Accounting in the Headlines.

One of the biggest challenges for accounting instructors is that students often feel disengaged from the course material, which can seem abstract and unrelated to their personal experiences. But by incorporating real-life exam- ples, instructors can spark student interest and engagement, especially when teaching accounting at the introductory level.

Accounting in the Headlines, an award-winning blog by renowned author Wendy Tietz, does just that with stories about real companies and events that can be used in the accounting classroom to illustrate introductory financial and managerial accounting concepts.

Concise, tailorable, and updated on a weekly basis, these articles easily fit into the typical introductory accounting curriculum, whether the course is delivered in-person or online. Accounting in the Headlines articles, along with multiple-choice and polling questions, can be assigned through MyAccounting lab and Learning Catalytics™. Instructors are also provided with discussion questions, PowerPoint slides, and handout files, to support learning initiatives.

http://accountingintheheadlines.com

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Managerial Accounting

Fifth Edition

Karen Wilken Braun, PhD, CPA, CGMA Case Western Reserve University

Wendy M. Tietz, PhD, CPA, CGMA, CMA Kent State University

@ Pearson New York, NY

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Cataloging-in-Publication Data is on file at the Library of Congress

16

@Pearson ISBN 13: 978-0-13-412852-8 ISBN 10: 0-13-412852-4

BRIEF CONTENTS

1 Introduction to Managerial Accounting 1 2 Building Blocks of Managerial Accounting 48 3 Job Costing 104 4 Activity-Based Costing, Lean Operations, and the Costs of Quality 175 5 Process Costing 245 6 Cost Behavior 307 7 Cost-Volume-Profit Analysis 381 8 Relevant Costs for Short-Term Decisions 443 9 The Master Budget 507

1 Q Performance Evaluation 583 11 Standard Costs and Variances 653 1 2 Capital Investment Decisions and the Time Value of Money 71 o 1 3 Statement of Cash Flows 779 1 4 Financial Statement Analysis 838 1 5 Sustainability 894

Glossary/Index 1-1

V

CONTENTS

1

2

vi

Introduction to Managerial Accounting 1

What Is Managerial Accounting? 2

Managers' Three Primary Responsibilities 2

A Road Map: How Managerial Accounting Fits In 3

Differences Between Managerial Accounting and Financial Accounting 4

What Role Do Management Accountants Play? 6

The Role of Management Accountants 6

The Skills Required of Management Accountants 7

Managerial Accounting Is Important to All Careers 8

Accounting within the Organizational Structure 9

Professional Associations 10

Average Salaries of Management Accountants 12

Professional Ethics 12

Examples of Ethical Dilemmas 14

What Business Trends and Regulations Affect Management Accounting? 18

Big Data, Data Analytics, and Critical Thinking 18

Shifting Economy 20

Globalization 20

Lean Thinking and Focus on Quality 21

Sustainability, Social Responsibility, and the Triple Bottom Line 21

Integrated Reporting 22

The Sarbanes-Oxley Act of 2002 23

End of Chapter 27

Building Blocks of Managerial Accounting 48

What Are the Most Common Business Sectors and Their Activities? 49

Service, Merchandising, and Manufacturing Companies 49

Which Business Activities Make Up the Value Chain? 51

Coordinating Activities Across the Value Chain 52

How Do Companies Define Cost? 55

Cost Objects, Direct Costs, and Indirect Costs 55

Costs for Internal Decision Making and External Reporting 57

Merchandising Companies' Product Costs 58

Manufacturing Companies' Product Costs 60

Prime and Conversion Costs 61

Additional Labor Compensation Costs 62

Recap: Product Costs Versus Period Costs 62

How Are Product Costs and Period Costs Shown in the Financial Statements? 65

Service Companies 65

Merchandising Companies 65

Manufacturing Companies 67

Comparing Balance Sheets 70

What Other Cost Terms Are Used by Managers? 71

Controllable Versus Uncontrollable Costs 71

Relevant and Irrelevant Costs 71

Fixed and Variable Costs 72

How Manufacturing Costs Behave 73

Calculating Total and Average Costs 73

End of Chapter 78

3 Job Costing 104 What Methods Are Used to Determine the

Cost of Manufacturing a Product? 105

Process Costing 105

Job Costing 106

How Do Manufacturers Determine a Job's Cost? 107

Overview: Flow of Inventory Through a Manufacturing System 107

4

Scheduling Production 108

Purchasing Raw Materials 109

Using a Job Cost Record to Keep Track of Job Costs 110

Tracing Direct Materials Cost to a Job 112

Tracing Direct Labor Cost to a Job 114

Allocating Manufacturing Overhead to a Job 116

Completing the Job Cost Record and Using It to Make Business Decisions 119

How Can Job Costing Information Be Enhanced for Decision Making? 121

Non-Manufacturing Costs 121

Direct or Variable Costing 123

How Do Managers Deal with Underallocated or Overallocated Manufacturing Overhead? 127

What Journal Entries Are Needed in a Manufacturer's Job Costing System? 129

APPENDIX 3A 143

How Do Service Firms Use Job Costing to Determine the Amount to Bill Clients? 143

What Costs Are Considered Direct Costs of Serving a Client? 143

What Costs Are Considered Indirect Costs of Serving a Client? 144

Finding the Total Cost of the Job and Adding a Profit Markup 145

Invoicing Clients Using a Professional Billing Rate 145

What Journal Entries Are Needed in a Service Firm's Job Costing System? 146

End of Chapter 147

Activity-Based Costing, Lean Operations, and the Costs of Quality 175

Why and How Do Companies Refine Their Cost Allocation Systems? 176

Simple Cost Allocation Systems Can Lead to Cost Distortion 17 6

Review: Using a Plantwide Overhead Rate to Allocate Indirect Costs 177

Contents vii

Using Departmental Overhead Rates to Allocate Indirect Costs 179

Using Activity-Based Costing to Allocate Indirect Costs 184

How Do Managers Use the Refined Cost Information to Improve Operations? 191

Activity-Based Management (ABM) 191

Passing the Cost-Benefit Test 193

What Is Lean Thinking? 198

The Eight Wastes of Traditional Operations 198

Characteristics of Lean Operations 200

Lean Operations in Service and Merchandising Companies 205

How Do Managers Improve Quality? 206

Costs of Quality (COO) 206

Relationship Among Costs 207

Using Costs of Quality Reports to Aid Decisions 208

End of Chapter 213

5 Process Costing 245 Process Costing: An Overview 246

Two Basic Costing Systems: Job Costing and Process Costing 246

How Does the Flow of Costs Differ Between Job and Process Costing? 247

What Are the Building Blocks of Process Costing? 250

Conversion Costs 250

Equivalent Units 250

Inventory Flow Assumptions 251

How Does Process Costing Work in the First Processing Department? 252

Step 1: Summarize the Flow of Physical Units 254

Step 2: Compute Output in Terms of Equivalent Units 254

Step 3: Summarize Total Costs to Account For 256

Step 4: Compute the Cost per Equivalent Unit 256

Step 5: Assign Total Costs to Units Completed and to Units in Ending Work in Process Inventory 257

Average Unit Costs 257

viii Contents

What Journal Entries Are Needed in a Process Costing System? 259

How Does Process Costing Work in a Second or Later Processing Department? 264

Process Costing in SeaView's Insertion Department 264

Steps 1 and 2: Summarize the Flow of Physical Units and Compute Output in Terms of Equivalent Units 266

Steps 3 and 4: Summarize Total Costs to Account for and Compute the Cost per Equivalent Unit 267

Step 5: Assign Total Costs to Units Completed and to Units in Ending Work in Process Inventory 268

Unit Costs and Gross Profit 268

Production Cost Reports 269

Journal Entries in a Second Processing Department 270

End of Chapter 275

6 Cost Behavior 307 Cost Behavior: How Do Changes in Volume Affect Costs? 308

Variable Costs 308

Fixed Costs 311

Mixed Costs 314

Relevant Range 316

Other Cost Behaviors 317

How Do Managers Determine Cost Behavior? 322

Account Analysis 322

Scatterplots 322

High-Low Method 324

Regression Analysis 326

Data Concerns 330

What Are the Roles of Variable Costing and the Contribution Margin Income Statement? 331

Comparing Absorption Costing and Variable Costing 331

7

The Contribution Margin Income Statement 333

Comparing Operating Income: Variable Versus Absorption Costing 336

Reconciling Operating Income Between the Two Costing Systems 338

End of Chapter 346

Cost-Volume-Profit Analysis 381

How Does Cost-Volume-Profit Analysis Help Managers? 382

Data and Assumptions Required for CVP Analysis 382

The Unit Contribution Margin 383

The Contribution Margin Ratio 385

How Do Managers Find the Breakeven Point? 386

The Income Statement Approach 387

The Shortcut Approach Using the Unit Contribution Margin 388

The Shortcut Approach Using the Contribution Margin Ratio 388

How Do Managers Find the Volume Needed to Earn a Target Profit? 389

How Much Must We Sell to Earn a Target Profit? 389

Graphing CVP Relationships 391

How Do Managers Use CVP to Make Decisions When Business Conditions Change? 396

Changing the Sales Price and Volume 396

Changing Variable Costs 398

Changing Fixed Costs 399

Changing the Mix of Products Offered for Sale 402

What Are Some Common Indicators of Risk? 406

Margin of Safety 406

Operating Leverage 407

Choosing a Cost Structure 409

End of Chapter 415

8 Relevant Costs for Short-Term Decisions 443

How Do Managers Make Decisions? 444

Relevant Information 444

Keys to Making Short-Term Special Decisions 445

Decision Pitfalls to Avoid 446

How Do Managers Make Pricing and Special Order Decisions? 448

Regular Pricing Decisions 448

Special Order Decisions 453

How Do Managers Make Other Special Business Decisions? 460

Decisions to Discontinue Products, Departments, or Stores 460

Product Mix Decisions When Resources Are Constrained 464

Outsourcing Decisions (Make or Buy) 467

Decisions to Sell As Is or Process Further 472

End of Chapter 477

9 The Master Budget 507 How and Why Do Managers Use

Budgets? 508

How Are Budgets Used? 508

How Are Budgets Developed? 508

What Are the Benefits of Budgeting? 510

What Is the Master Budget? 511

How Are the Operating Budgets Prepared? 512

Sales Budget 512

Production Budget 513

Direct Materials Budget 515

Direct Labor Budget 516

Manufacturing Overhead Budget 517

Operating Expenses Budget 518

Budgeted Income Statement 519

How Are the Financial Budgets Prepared? 524

Capital Expenditures Budget 524

Cash Collections Budget 524

Cash Payments Budget 525

Combined Cash Budget 527

Budgeted Balance Sheet 528

Sensitivity Analysis and Flexible Budgeting 530

Contents ix

How Do the Budgets for Service and Merchandising Companies Differ? 531

Service Companies 531

Merchandising Companies 531

Impact of Credit and Debit Card Sales on Budgeting 533

End of Chapter 540

1 Q Performance Evaluation 583 How Does Decentralization Affect

Performance Evaluation? 584

Advantages and Disadvantages of Decentralization 584

Performance Evaluation Systems 585

What Is Responsibility Accounting? 585

Types of Responsibility Centers 586

Responsibility Center Performance Reports 588

Evaluation of Investment Centers 590

What Is Transfer Pricing? 597

Strategies and Mechanisms for Determining a Transfer Price 598

How Do Managers Use Flexible Budgets to Evaluate Performance? 603

Creating a Flexible Budget Performance Report 604

Underlying Causes of the Variances 607

How Do Companies Incorporate Nonfinancial Performance Measurement? 609

The Balanced Scorecard 609

End of Chapter 617

x Contents

11 Standard Costs and Variances 653

What Are Standard Costs? 654

Types of Standards 654

Information Used to Develop and Update Standards 655

Computing Standard Costs 655

How Do Managers Use Standard Costs to Compute DM and DL Variances? 658

Using Standard Costs to Develop the Flexible Budget 658

Direct Materials Variances 658

Direct Labor Variances 664

Summary of Direct Materials and Direct Labor Variances 666

Advantages and Disadvantages of Using Standard Costs and Variances 666

How Do Managers Use Standard Costs to Compute MOH Variances? 671

Variable Manufacturing Overhead Variances 671

Fixed Manufacturing Overhead Variances 673

Standard Costing Systems 675

APPENDIX 11A 679

Standard Costing 679

Standard Costing Income Statement 682

End of Chapter 683

12 Capital Investment Decisions and the Time Value of Money 71 o

What Is Capital Budgeting? 711

Four Popular Methods of Capital Budgeting Analysis 711

Focus on Cash Flows 712

Capital Budgeting Process 712

How Do Managers Calculate the Payback Period and Accounting Rate of Return? 714

Payback Period 714

Accounting Rate of Return (ARR) 717

How Do Managers Compute the Time Value of Money? 723

Factors Affecting the Time Value of Money 723

Future Values and Present Values: Points Along the Time Continuum 724

Future Value and Present Value Factors 725

Calculating Future Values of Single Sums and Annuities Using FV Factors 726

Calculating Present Values of Single Sums and Annuities Using PV Factors 727

How Do Managers Calculate the Net Present Value and Internal Rate of Return? 730

Net Present Value (NPV) 731

Internal Rate of Return (IRR) 736

How Do the Capital Budgeting Methods Compare? 739

APPENDIX 12A 743

Present Value Tables and Future Value Tables 743

Table A Present Value of $1 743

Table B Present Value of Annuity of $1 744

Table C Future Value of $1 745

Table D Future Value of Annuity of $1 746

APPENDIX 12B 747

Solutions to Chapter Examples Using Microsoft Excel 747

APPENDIX 12C 751

Using a Tl-83, Tl-83 Plus, Tl-84, or Tl-84 Plus Calculator to Perform Time Value of Money Calculations 751

End of Chapter 757

1 3 Statement of Cash Flows 779

What Is the Statement of Cash Flows? 780

Three Types of Activities That Generate and Use Cash 781

Two Methods of Presenting Operating Activities 783

How Is the Statement of Cash Flows Prepared Using the Indirect Method? 788

Information Needed to Prepare the Statement of Cash Flows 788

Preparing the Cash Flows from Operating Activities 788

Preparing the Cash Flows from Investing Activities 794

Preparing the Cash Flows from Financing Activities 796

Interpreting the Statement of Cash Flows 798

Recap: Steps to Preparing the Statement of Cash Flows Using the Indirect Method 798

How Is the Statement of Cash Flows Prepared Using the Direct Method? 799

Overview 799

Determining Cash Payments and Receipts 800

End of Chapter 808

14 Financial Statement Analysis 838

What Are the Most Common Methods of Analysis? 839

What Is Horizontal Analysis? 839

Horizontal Analysis of the Income Statement 841

Horizontal Analysis of the Balance Sheet 841

Trend Percentages 841

What Is Vertical Analysis? 843

How Do We Compare One Company with Another? 845

Using Microsoft Excel 845

What Are Some of the Most Common Financial Ratios? 849

Contents xi

Measuring Ability to Pay Current Liabilities 849

Measuring Ability to Sell Inventory and Collect Receivables 850

Measuring Ability to Pay Long-Term Debt 852

Measuring Profitability 853

Analyzing Stock Investments 857

Red Flags in Financial Statement Analysis 858

End of Chapter 865

1 5 Sustainability 894 What Is Sustainability, and How Does It

Create Business Value? 895

Historical Overview 896

The Business Case for Sustainability 897

What Is Sustainability Reporting? 902

Current State of Sustainability Reporting 902

Reasons for Sustainability Reporting 903

Framework for Sustainability Reporting 903

What Is Environmental Management Accounting (EMA)? 908

EMA Systems 908

Uses of Environmental Management Accounting Information 909

Challenges to Implementing EMA Systems 911

Future of Environmental Management Accounting 912

End of Chapter 914

Glossary/Index 1-1

Visual Walk-Through

Technology Makes it Simple Expanded to include several new topics , these features give students step-by-step directions on how to use Microsoft Excel 2016 to perform the accounting task with more efficiency. Examples ----- include: scatterplots, regression analysis, capital budgeting, CVP graphs, budgeting, and sensitivity analysis.

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End-of-Chapter Problems The end-of-chapter content for short exercises, exercises, and problems has been refreshed for this edition. End-of-chapter items are structured to allow students to progress from simple to more rigorous as they move from item to item .

New short exercises based on real world situations have been added to every chapter to help students make the connec- tion between the real world and the concepts being studied.

• ,...,.c:. .. A serial (continuing) case that focuses on one real world company has been added to the end-of-chapter material. The serial case consists of several small cases, one per chapter. These cases are meant to inspire critical thinking and to connect the content with real life by following one company through all of the chapters in managerial ac- counting.

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Critical Thinking Problems are included to provide students with the opportunity for applied critical thinking. These problems include ethical topics, mini cases, and decision-making cases in real companies.

• Ethics Mini Cases based on the IMA Statement of Professional Practice are highlighted with an icon.

(~~ ) • Real Life Mini Cases focusing on a real company and the

decisions presented in business are highlighted with an icon.

•iJU+!iii

• Excel in MyAccountinglab • Students will download and

complete problem in Micro- soft Excel. - ._,,

• Students receive personal- ized, detailed feedback upon uploading their com- pleted spreadsheets .

• Questions will be auto- graded and reported to the grade book.

• • •

Directed Reading Guides

Preparlrtt: a CVP Chart l

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Test Bank and PowerPoints Test bank includes algorithmic questions and 30% new material. PowerPoints have been updated and refreshed for the new edition. Worked-out problems contain the entire problem statement .

Directed reading guides, which have been prepared by the authors, help students take thorough notes while reading the text and glean the most important information from each chapter. Each chapter's reading guide follows the text, paragraph-by-paragraph, asking students to answer questions and fill in the blanks, thereby keeping students actively engaged while preparing for class.

Accounting in the Headlines Blog Accounting in the Headlines, www.accountingintheheadlines.com is a blog written by Wendy Tietz. New stories are added to the blog each week. The blog contains short stories about real-life companies and cur- rent events that can be used in the accounting classroom to illustrate introductory accounting concepts. The blog posts contain discussion questions, PowerPoint slides, and handout files, making it a turnkey solution for instructors wanting to use real-life examples in their classes. All content is intended to be brief and fit eas- ily into the typical introductory accounting class. In addition to the content found on the blog site, multiple- choice questions related to each blog post can be found in MyAccountingLab and in Learning Catalytics.

Concept Videos for Students Short videos focusing on key concepts are available in MyAccountingLab to further emphasize major con- cepts. These videos can be assigned in homework or used as part of a flipped classroom strategy.

CONTENT CHANGES TO THE FIFTH EDITION Both students and instructors will benefit from a variety of new content in the fifth edition.

New and updated content within the text:

• Refreshed chapter opening stories attract student attention and lay the groundwork for the chapter using recognizable, real-world companies.

• Updated sustainability features in each chapter show how sustainability

relates to the chapter content.

• Select modifications and enhancements were made to each chapter to make it easier for students to grasp difficult concepts. Some of these

modifications include the following:

Chapter 1

Chapter 2

Chapter 3

Chapter 5

Chapter 7

Chapter 8

Redesigned to focus on the professional nature of management accounting, including the American

Accounting Association's Vision Model, IMA's definition of management accounting, technical and soft skills required by professionals, summary of CMA exam requirements,

and a step-by-step model for critical thinking that can be referenced and used throughout the course. The chapter also includes a section on why management accounting is important to students majoring in other fields of study.

Simplified language used for product costs (rather than inventoriable product costs) now used throughout the book; revised discussion of direct and indirect costs.

Introduction and illustration of manufacturing overhead as a cost pool; Decision Guidelines now include job costing journal entries.

Red arrows and speech bubbles on Exhibits help students better understand process costing calculations.

Learning objective 3 expanded to illustrate the impact of changing business conditions on operating income as well

as on the breakeven point.

Streamlined introduction on relevant data; new company example for pricing, special order, and product

discontinuation decisions; new "pitfalls to avoid" section with each decision; additional summary problem with worked out solution.

xvii

xviii Content Changes to the Fifth Edition

Chapter 10 To provide continuity between budgeting and performance evaluation, the flexible budgeting example now includes the entire income statement using the company featured in Chapter 9; updated PepsiCo data illustrates responsibility accounting.

Chapter 11 Company example tied to Chapters 9 and 10 to provide continuity between chapter topics; variance exhibits are more specifically labeled to better serve as references for students.

Chapter 14 Updated with the latest financial information from Target, Macy's, Kohl's, and Wal mart; revised description of horizontal and vertical analysis; two additional profitability ratios included in the chapter.

Chapter 15 Updated for recent company examples and new data on sustainability reporting; new sections on the Sustainability Accounting Standards Board and inclusion of the landmark 2015 Paris Agreement.

New and updated content within the end-of-chapter material:

Quick Checks

Short Exercises

Exercises

Problems

Ethics Mini Cases

Updated quick checks in each chapter. These questions are conceptual in nature.

All short exercises have been updated. In addition, a new real world short exercise is included in every chapter.

All exercises have been updated.

All problems have been updated.

Updated case at the end of each chapter based on the IMA Statement of Professional Practice.

Real Life Mini Cases Updated case at the end of each chapter focusing on a real company situation.

Serial Case An all-new serial case has been added to the end-of- chapter material. All of these cases focus on the same real world company and continue throughout the text.

ABOUT THE AUTHORS

Karen Wilken Braun is a professor for the Department of Accountancy in the Weatherhead School of Management at Case Western Reserve University. Dr Braun is also the Beta Alpha Psi adviser and the director of the undergraduate accounting program. Professor Braun was on the faculty of the J.M. Tull School of Accounting at the University of Georgia before her appoint- ment at Case Western Reserve University. She has received several student-nominated Outstanding Teacher of the Year awards at both business schools, and is regularly asked to speak to student clubs and organizations about personal financial planning.

Professor Braun is a Certified Public Accountant and holds membership in the American Accounting Association (AAA), the Institute of Management Accountants, and the American Institute of Certified Public Accountants. She also holds the Chartered Global Management Accountant designation, and is a member of the AANs Management Accounting Section as well as the Teaching, Learning and Curriculum Section. Dr. Braun has has regularly held lead- ership positions with the AANs Conference on Teaching and Learning in Accounting (CTLA) including co-chairing the 2015 and 2016 conferences. She was awarded the 2016 Bea Sand- ers/AICPA Teaching Innovation Award for her development of Excel-based active-learning resources for introductory managerial accounting courses. Dr. Braun's research and teaching interests revolve around lean operations, sustainability, corporate responsibility, and account- ing education. Dr. Braun's work has been published in Contemporary Accounting Research, Issues in Accounting Education, and Journal of Accounting Education.

Dr. Braun received her Ph.D. from the University of Connecticut and her B.A., summa cum laude, from Luther College, where she was a member of Phi Beta Kappa. Dr. Braun gained public accounting experience while working at Arthur Andersen & Co. and accumu- lated additional business and management accounting experience as a corporate controller.

Professor Braun has two daughters who are both in college. In her free time, she enjoys biking, gardening, hiking, skiing, and spending time with family and friends.

To my children, Rachel and Hannah, who are the joy of my life, and to my students, who inspire me daily.

Karen W. Braun

Wendy M. Tietz is a professor for the Department of Accounting in the College of Business Administration at Kent State University. She teaches introductory financial and managerial ac- counting in a variety of formats, including large sections, small sections, and web-based sections. She has received numerous college and university teaching awards while at Kent State University.

Dr. Tietz is a Certified Public Accountant, a Certified Management Accountant, and a Chartered Global Management Accountant. She is a member of the American Accounting Association (AAA), the Institute of Management Accountants and the American Institute of Certified Public Accountants. She is a member of the AANs Management Accounting Section as well as the Teaching, Learning and Curriculum Section. She has published in Strategic Finance, IMA Educational Case Journal, Issues in Accounting Education, Ac- counting Education: An International Journal, and Journal of Accounting & Public Policy. She regularly presents at AAA regional and national meetings.

Dr. Tietz authors a blog, Accounting in the Headlines, which has real-world news sto- ries and resources for use in the introductory accounting classroom. Dr. Tietz was awarded the Bea Sanders/AICPA Teaching Innovation Award for her blog in 2014 and the Jim Bull- och/IMA Award for Innovations in Management Accounting Education in 2016. She was also awarded the Best Educational/Case Award for the Teaching, Learning and Curriculum Section (AAA, Ohio Region) in 2016. Dr. Tietz earned her Ph.D. from Kent State University. She received both her M.B.A. and B.S.A. from the University of Akron. She worked in in- dustry for several years, both as a controller for a financial institution and as the operations manager and controller for a recycled plastics manufacturer.

Dr. Tietz and her husband, Russ, have two grown sons. In her spare time, she enjoys walking, reading, and spending time with family and friends. She is also intensely interested in using technology and social media in education.

To my husband, Russ, who steadfastly and enthusiastically supports every new project.

Wendy M. Tietz xix

ACKNOWLEDGMENTS

We'd like to ext~nd a special_ thank you to our reviewers who took the time to help us develop teachmg and learmng tools for Managerial Accounting courses to come. We value and appreciate their commitment, dedication, and passion for their students and the classroom:

Managerial Accounting, Se and prior editions Arinola Adebayo , University of South Carolina Aiken, Nasrollah Ahadiat, California State Polytechnic University, Markus Ahrens, St. Louis Community College, Dave Alldredge, Salt Lake Community College; Natalie Allen, Texas A&M University; Vern Allen, Central Florida Community College; Lynn Almond, Virginia Tech; Felix E. Amenkhienan, Radford University; Arnold I. Barkman, Texas Christian University; Gary Barnett, Salt Lake Community College; Scott Berube, University of New Hampshire; Michael T. Blackwell, West Liberty State College; Phillip A . Blanchard, The University of Arizona; Charles Blumer, St. Charles Community College; Kevin Basner, SUNY Genesco; Anna Boulware, St. Charles Community College; Ann K. Brooks, University of New Mexico; Molly Brown , James Madison University; Nina E. Brown, Tarrant County College; Helen Brubeck, San Jose State University; Janet B. Butler, Texas State University-San Marcos; Jennifer Cainas, University of South Florida; David Centers, Grand Valley State University; Sandra Cereo/a, James Madison University; Mike Chatham, Radford University; Julie Chenier, Louisiana State University; Robert Clarke, Brigham Young University-Idaho; Thomas Clevenger, Washburn University; Jay Cohen, Oakton Community College; Cheryl Copeland, California State University Fresno; Robert Cornell, Oklahoma State University; Deb Cosgrove, University of Nebraska at Lincoln; Patrick Cunningham , Dawson Community College; Alan B. Czyzewski, Indiana State University; Kreag Danvers, Clarion University; David L. Davis, Tallahassee Community College; Mike Deschamps, MiraCosta College; Patricia A. Doherty, Boston University School of Management; Jimmy Dong, Sacramento City College; Kevin Dooley, Kapiolani Community College;Jan Duffy, Iowa State University; Barbara Durham, University of Central Florida; Lisa Dutchik, Kirkwood Community College; Darlene K. Edwards, Bellingham Technical College; Robert S. Ellison, Texas State University-San Marcos; Anita Ellzey, Harford Community College; Gene B. Elrod, The University of North Texas; Jame M. Emig, Villanova University; Martin Epstei, Central New Mexico Community College; Diane Eure, Texas State University; Robert Everett, Lewis & Clark Community College; Dr. Kurt Fanning, Grand Valley State University; Amanda Farmer, University of Georgia; Janice Fergusson, University of South Carolina; Richard Filler, Franklin University; Jean Fornasieri, Bergen Community College; Ben Foster, University of Louisville; Faith Fugate, University of Nevada, Reno; Mary Anne Gaffney, Temple University; Karen Geiger, Arizona State University; Lisa Gillespie, Loyola University-Chicago; Shirley Glass, Macomb Community College; Marina Grau, Houston Community College; Timothy Griffin, Hillsborough Community College; Michael R. Hammond, Missouri State University; Michael R. Hammond, Missouri State University; Fei Han, Robert Morris University; Sheila Handy, East Stroudsburg University; Christopher Harper, Grand Valley State University; Sueann Hely, West Kentucky

xx

Community & Technical College; Pamela Hopcroft, Florida State College at Jacksonville; Audrey S. Hunter, Broward College; Frank Ilett, Boise State University; Ron Jastrzebski, Penn State Univer~ity-Berks; Catherine Jeppson, California State University, Northndge; Nancy Jones, California State University-Chico; Mark T. Judd, University of San Diego; David Juriga, St. Louis Community College; Thomas Kam, Hawaii Pacific University; Ken Koerber, Bucks County Community College; Emil Koren, Saint Leo University; Ron Lazer, University of Houston-Bauer College; Pamela Legner, College of DuPage; Elliott Levy, Bentley University; Harold T. Little, Western Kentucky University; William Lloyd, Lock Haven University D .Jordan Lowe, Arizona State University, West Campus; Lois S. Mahoney, Eastern Michigan University; Diane Ma_rker,_ Univ~rsity of Toledo; Linda Marquis, Northern Kentucky Umvers1ty; Lizbeth Matz, University of Pittsburgh at Bradford; David Mautz, University of North Carolina-Wilmington; Florence McGovern, Bergen Community College; Noel McKean, Florida State College at Jacksonville; Mallory Mc Williams, San Jose State University; Robert Meyer, Parkland College; Michael Newman, University of Houston; Kitty O'Donnell, Onondaga Community College; Mehmet Ozbilgin, Baruch College, City University of New York; Abbie Gail Parham, Georgia Southern University; Glenn Pate, Palm Beach Community College; Paige Paulsen, Salt Lake Community College; Deborah Pavelka, Roosevelt University; Sheldon Peng, Washburn University; Tamara Phelan, Northern Illinois University; Letitia Pleis, Metropolitan State College of Denver; Cindy Powell, Southern Nazarene University; Will Quilliam, Florida Southern College; Paulette A. Ratliff-Miller, Grand Valley State University; Donald Reynolds, Calvin College; Christina M. Ritsema, University of Northern Colorado; Doug Roberts, Appalachian State University; Amal Said, University of Toledo; Anwar Salimi, California State Polytechnic University; Kathryn Savage, Northern Arizona University; Christine Schalow, California State University-San Bernadino; Tony Scott, Norwalk Community College; Lloyd Seaton, University of Northern Colorado; David Skougstad , Metropolitan State College of Denver; John Stancil, Florida Southern College;Jenny Staskey, Northern Ar~ona University; Dennis Stovall, Grand Valley State University; Olm Scott Stovall, Abilene Christian University; Gloria Stuart, Georgia Southern University; Iris Stuart, California State University, Fullerton; Gracelyn V. Stuart-Tuggle, Palm Beach State College, Boca Raton; Jan Sweeney, Baruch College, City University of New York; Pavani Tallapally, Slippery Rock University; Lloyd Tanlu, University of Washington; Diane Tanner, University of North Florida; Linda Hayden Tarrago, Hillsborough Community College; Steven Thoede, Texas State University; Geoffrey Tickell, Indiana University of Pennsylvania; Don Trippeer, SUNY Oneonta; Igor Vaysman, Baruch College; John Virchick, Chapman University; Terri Walsh, Seminole State; Andy Williams, Edmonds Community Co!lege! Jeff Wong, University of Nevada Reno; Michael Yampuler, Umvers1ty of Houston (Main Campus); Jeff Jiewei Yu, Southern Methodist University; Judith Zander, Grossmont College; James Zeigler, Bowling Green State University

Pickture /Alamy

Sources: Starbuck s 2015 10-K filing www

.sta rbucks.co m/about-us /c omp any-information/ starbucks-comp any-time line ; starbu cks.com / respon sib ility

Introduction to Managerial Accounting

Learning Objectives

• 1 Identify managers' three primary responsibilities

• 2 Distinguish financial accounting from managerial accounting

• 3 Describe the roles and skills required of management accountants within the organization

• 4 Describe the role of the Institute of Management Accountants (IMA) and apply its ethical standards

• 5 Discuss the business trends and regulations affecting management accounting

Starbucks Corporation, which began operations in 1971 as a sole coffee bean shop in Seattle's well-known Pike Street Market, now has over 23,000 company-owned and

licensed stores in 68 countries around the world . The company's success can be attributed to

innovative thinking, carefully disciplined expansion, and a focus on corporate responsibility . The

company believes that its commitment to ethically sourced coffee, contributions to local com-

munities, and superior employee benefits to part-time as well as full-time employees contribute

to the company's objective of being one of the most recognized and respected brands in the

world . Management accounting plays a role in implementing the company's strategy . Without

information on the costs and benefits of different beverages, programs, distribution channels,

and geographic areas, Starbucks would not be able to make responsible, yet profitable, deci-

sions . Starbucks uses management accounting to make operating decisions that focus on cor-

porate responsibility, while also keeping the company financially strong . Case in point : $100

invested in Starbucks's stock in 2010 would have been worth $480 at the end of fiscal 2015, a

return well above the S&P 500 .

2 CHAPTER 1

1 _identify managers' -: ---three primary

· responsibilities

As the Starbucks story shows, managers use accounting information for much more than preparing annual financial statements. They use managerial accounting information to guide their actions and decisions. For Starbucks, these decisions might include opening new stores, adding new products, or even providing new employee benefits, such as Starbucks's new tuition reimbursement plan. Management accounting information helps management decide whether any or all of these actions will help accomplish the company's ultimate goals. In this chapter, we'll introduce managerial accounting, describe how it differs from financial accounting, and discuss the skills and ethics management accountants need. We will also discuss the regulatory and business environment in which today's managers and management accountants operate.

What Is Managerial Accounting? Managerial accounting, also referred to as management accounting, focuses on the finan- cial insight needed for an organization to achieve success. In the words of the Institute of Management Accountants,

Management accounting is a profession that involves partnering in manage- ment decision making, devising planning and performance management systems, and providing expertise in financial reporting and control to assist management in the formulation and implementation of an organization's strategy. 1

As you will see throughout the book, managerial accounting is very different from finan- cial accounting. Financial accounting focuses on providing stockholders and creditors with the information they need to make investment and lending decisions. This informa- tion takes the form of financial statements: the balance sheet, income statement, statement of shareholders' equity, and statement of cash flows. On the other hand, managerial ac- counting focuses on identifying, interpreting, analyzing, and implementing the financial information internal management needs to run the company efficiently, effectively, and profitably. This information takes many forms depending on management's needs.

To understand the kind of information managers need, let's first look at their primary responsibilities.

Managers' Three Primary Responsibilities Managerial accounting helps managers fulfill their three primary responsibilities, as shown in Exhibit 1-1: planning, directing, and controlling. Integrated throughout these responsibil- ities is decision making (identifying alternative courses of action and choosing among them).

EXHIBIT 1-1 Managers' Three Primary Responsibilities

Decision making Feedback

1Statement on Management Accounting, "Definition of Management Accounting," Institute of Management Accountants, 2008.

Introduction to Managerial Accounting 3

• Planning involves setting goals and objectives for the company and determining how to achieve them. For example, one of Starbucks's goals is to generate more sales. One strategy to achieve this goal is to open more retail locations. For example, the company opened 731 new company-operated stores in fiscal 2015, roughly half in the United States and half in China and the Asia-Pacific.2 Another strategy is to develop new products and new distribution channels (such as selling coffee through grocery stores and warehouse clubs). Managerial accounting translates these plans into budgets-the quantitative expression of a plan. Management analyzes the budgets before proceeding to determine whether its expansion plans make financial sense.

• Directing means overseeing the company's day-to-day operations. Management uses sales and costs information by store, region, and distribution channel, to run daily business operations. For example, Starbucks managers use sales data to determine which beverages on the menu and products in the stores are generating the most sales. They use that information to adjust product offerings, marketing strategies, and retail expansion decisions.

• Controlling means evaluating the results of business operations against the plan and making adjustments to keep the company pressing toward its goals. Starbucks uses performance reports to compare each store's actual performance against the budget and then based on that feedback take corrective actions if needed. If actual costs are higher than planned, or actual sales are lower than planned, then management may revise its plans or adjust operations.

Management is continually making decisions while it plans, directs, and controls operations. Starbucks management must decide where to open new stores, which stores to refurnish, what prices to set for beverages and other products in the store, and so forth. Managerial accounting provides the financial insight needed to help make these decisions.

A Road Map: How Managerial Accounting Fits In This book will show you how managerial accounting helps managers fulfill their respon- sibilities. The rest of the text is organized around the following themes:

1. Managerial Accounting Building Blocks Chapter 1 helps you understand more about the management accounting profession and today's business environment. Chapter 2 teaches you some of the language that is commonly used in managerial accounting. Just as musicians must know the notes to the musical scale, management accountants and managers must have a common understanding of these terms to communicate effectively with one another.

2. Determining Unit Cost (Product Costing) To run a business profitably, manag- ers must be able to identify the costs associated with manufacturing its products or delivering its services. For example, Starbucks's managers need to know the cost of producing each beverage on the menu as well as the cost of operating each retail location. Managers must have this information so that they can set prices high enough to cover costs and generate an adequate profit. Chapters 3, 4, and 5 show you how businesses determine these costs. Chapter 4 also shows how managers can effectively control costs by eliminating wasteful activities and focusing on quality.

3. Making Decisions Before Harold Schultz opened the first Starbucks coffee house, he must have thought about the volume of sales needed just to break even-that is, just to cover costs. In order to do so, he had to first identify and estimate the types of costs the coffee house would incur, as well as the profit that would be generated on each beverage served. These topics are covered in Chapters 6 and 7. Chapter 6 shows how managers identify different types of cost behavior, while Chapter 7 shows how managers determine the profitability of each unit sold as well as the

2Starbucks 2015 10-K filing.

4 CHAPTER 1

2 .Distinguish financial -: .:accounting from

manageria l accounting

company's breakeven point. Chapter 8 continues to use cost behavior information to walk through common business decisions, such as outsourcing and pricing deci- sions. Finally, Chapter 12 shows how managers decide whether to invest in new equipment, new projects, or new locations.

4. Planning Budgets are management's primary tool for expressing its plans. Chapter 9 discusses all of the components of the master budget and the way companies like Starbucks use the budgeting process to implement their business goals and strategies.

5. Controlling and Evaluating Management uses many different performance evalu- ation tools to determine whether individual segments of the business are reaching company goals. Chapters 10 and 11 describe these tools in detail. Chapters 13 and 14 describe how the statement of cash flows and financial statement analysis can be used to evaluate the performance of the company as a whole. Finally, Chapter 15 discusses how companies are beginning to address the sustainability of their operations, by measuring, reporting, and minimizing the negative impact of their operations on people and the environment. As you saw in the opening story, some of Starbucks's primary business concerns are to use ethically sourced coffee, contribute to local communities, and provide superior employee benefits to part-time as well as full-time employees.

Differences Between Managerial Accounting and Financial Accounting Managerial accounting information differs from financial accounting information in many respects. Exhibit 1-2 summarizes these differences. Take a few minutes to study the exhibit (on page 5), and then we'll apply it to Starbucks.

Starbucks's financial accounting system is geared toward producing annual and quarterly consolidated financial statements that will be used by investors and credi- tors to make investment and lending decisions. Since Starbucks is a publicly traded company, its financial statements can be easily found on the Internet by searching for its 10-K (annual) and 10-Q (quarterly) SEC filings. The financial statements, which must be prepared in accordance with Generally Accepted Accounting Prin- ciples (GAAP), objectively summarize the transactions that occurred between Star- bucks and external parties during the previous period. The Securities and Exchange Commission (SEC) requires that the annual financial statements of publicly traded companies, such as Starbucks, be audited by independent certified public accoun- tants (CPAs). Starbucks's financial statements are useful to its investors and creditors, but they do not provide management with enough information to run the company effectively.

Starbucks's managerial accounting system is designed to provide internal managers with the accounting information needed to plan, direct, and control operations. Since managerial accounting information is specifically designed to help internal management, it is confidential information that is generally not available to the public. There are no GAAP-type standards or audits required for managerial accounting. To provide Starbucks's management with the information needed to make good business decisions, managerial accounting reports focus on smaller segments of the company (such as individual retail locations, geographic areas, and specific beverages and products) rather than the company as a whole. Rather than preparing reports just once a year, Starbucks prepares manage- rial accounting reports as often as needed, which could be as frequently as daily or even hourly. Many companies even use "real-time performance dashboards" that constantly update so that managers have the financial information they need to control operations and make timely decisions. Since managerial accounting revolves around planning and decision making, much of it focuses on the future rather than on the past. Any informa- tion that is relevant to management will be included. Finally, since every company is dif- ferent, managerial accounting systems will vary from company to company. In designing

EXHIBIT 1-2 Manageria l Accounting Versus Financial Accounting

MANAGERIAL ACCOUNTING

Internal users such as managers.

To help managers plan, direct, and control business operations and

make business decisions.

Any internal accounting report deemed worthwhile by management.

Management determines what it wants in a report, and how it wants it formatted. Reports are

prepared only when management believes the benefit of using the

report exceeds the cost of preparing the report

While some information is based on pasttransactions, managerial accounting focuses on the future.

It provides information on both external and internal transactions.

The information must be relevant

Segments of the business, such as products, customers, geographical regions,

departments, and divisions.

It depends on management's needs. Some reports are prepared

daily, while others may be prepared only one time.

There are no independent audits. However, the company's internal audit function may examine the procedures used in preparing

the reports.

No authoritative body requires managerial accounting reports.

Management carefully considers behavioral implications when

designing the managerial accounting system.

ISSUE

Introduction to Managerial Accounting 5

FINANCIAL ACCOUNTING

External users, such as creditors, stockholders, and government

regulators.

To help external users make investing and lending decisions.

Financial statements.

Generally Accepted Accounting Principles (GAAP) determine the

content and format of financial statements.

The information is based on historical transactions with

external parties.

The information must be reliable and objective.

The company as a whole (consolidated financial

statements). Limited segment data is provided in the footnotes.

Annually and quarterly.

Yes, the Securities and Exchange Commission (SEC) requires publicly traded companies to issue annual

audited financial statements.

The concern is about adequacy of disclosure; behavioral

implications are secondary.

the system, management will weigh the costs of collecting and analyzing information with the benefits they expect to receive. Management will also consider how the system will affect employees' behavior. Employees try to perform well on the parts of their jobs that the accounting system measures and rewards.

.... -·

6 CHAPTER 1

3 .Describe the roles -: .-·and skills required

· of management accountants within the organization

What Role Do Management Accountants Play? In this section, we'll look at the role of management accountants within the organization and the skills they need to help their organizations succeed.

The Role of Management Accountants When you think of accountants, what do you picture? Many people picture accountants the way they were 50 to 100 years ago, before the widespread use of computers when every- thing about measuring business transactions was relatively simplistic. As shown on the left in Exhibit 1-3, many people have the erroneous conception that accountants are nothing more than "bean counters," plugging numbers into set formulas and using a black and white set of rules to churn out information for others to use. If this were true, being an accountant would be tedious and noncreative work indeed. Thankfully, nothing could be farther from the truth.

EXHIBIT 1-3 The Perception and the Reality

What is Accounting?

The perception he rea lity

ThlJ-k i.tl)'Tlle~C-mlJ!lonand 1111ct- .. nc11i,.~COfll-Mllti.lllaft~)b""'-'" UColil

Source:© Amer ican Account ing Association. Used with permiss ion.

As shown on the right in Exhibit 1-3, today's accountants are professionals who use an immense amount of critical thinking, insight, and judgment to capture the reality of today's complex economic events. As valued financial advisors, managerial accountants partner with management to make critical business decisions that have widespread and significant consequences for the business and for society. Let's face it: the business world is much more complex than it was in your grandparents' day. With rapidly changing technology and continual business innovation, the role of accountants has drastically changed from what it used to be. In fact, management accountants are rarely referred to by that name any more; instead, they are usually referred to as business advisors, analysts, or finance professionals.

Introduction to Managerial Accounting 7

As you go through each topic in this book, keep the blue picture in Exhibit 1-3 in mind, and ask yourself the following questions:

1. What is the business issue, event, or problem, and how can accounting help to solve it? Management accounting always begins with some relevant business issue that man- agement is facing or some economic event that occurred in the past or might occur in the future. Management accounting is used to shed light on the issue and direct management's path.

2. What are the "gray areas"? In other words, what differences in methods, assump- tions, estimates, measurement choices, and judgment calls might impact the infor- mation that is used for decision making? Because of the gray areas and judgment involved, accounting numbers are rarely as precise as they may seem.

3. What are the implications for the business if the accounting information used in the decision is "wrong"? Because of the gray areas, it's difficult to say that accounting information is ever "wrong." However, judgment in these gray areas could lead to financial estimates that are on the high side or on the low side. What are the conse- quences of numbers that are too high or too low? Would estimates that are "off" in one direction be worse than the other direction?

Since you are studying management accounting for the first time, the topics in the book may at first appear very straightforward and immutable. However, if you consider the three questions listed above, you'll begin to see the significance of the judgment calls that go into management accounting and the ramifications to the business decisions that are consequently made.

The Skills Required of Management Accountants To understand the skills required of management accountants, let's go back to the defini- tion of management accounting with which we started the chapter:

Management accounting is a profession that involves partnering in manage- ment decision making, devising planning and performance management systems, and providing expertise in financial reporting and control to assist management in the formulation and implementation of an organization's strategy.3

First and foremost, management accounting is a profession (in a later section, we'll describe the professional organizations that represent management accountants). Since management accountants work in a professional advisory role, they need a vast array of

EXHIBIT 1-4 Technical and Nontechnical Competencies Needed by Management Accountants

Technical Competencies

• Planning, budgeting, and forecasting • Ethics

• Internal financial reporting • Communication

• Performance management • Customer service

• Cost management • Adaptability

• Internal controls • Strategic thinking

• Technology • Process improvement

• Decision analysis • Leadership

• Financial statement analysis • Collaboration

• Investment decision making • Business acumen

• Enterprise risk management • Change management

3Statement on Management Accounting, "Definition of Management Accounting," Institute of Management Accountants, 2008.

8 CHAPTER 1

skills. Some of these skills are technical, whereas others are nontechnical competencies, which are often referred to as "soft-skills." A recent survey of management accounting professionals revealed some of the top skills they need to help their organizations achieve success. Exhibit 1-4 summarizes some of these competencies. 4

This book will introduce you to most of the technical competencies listed in Exhibit 1-4, as well as give you the opportunity to advance many of your nontechnical skills. As you can see in the exhibit, the ability to use technology and common software, such as Microsoft Excel, is a critical skill management accountants need to possess. Because Excel is used so per- vasively in business, you will see many of the exhibits in this book featured in Excel. You will also see features in several chapters that teach you how to use Excel to perform various tasks. Regardless of your future career path, becoming as proficient as you can with Excel during this course will help you become more marketable and more valuable to your future employer.

Managerial Accounting Is Important to All Careers As you can see, management accountants don't fit the stereotypical accountant portrayed in movies and shows. Because of their expanding role, management accountants have truly become trusted and valued internal business advisors. But what if you don't plan to major in accounting? How can this course be of use to you? Here are just a few specific ways this course can help you prepare for your future business career:

• Entrepreneurs If you are planning to be an entrepreneur, you'll first want to know if your business idea makes financial sense. How high will volume have to be for your busi- ness to at least break even? How high will it have to be for your business to earn the level of profit that you want to achieve? As you begin to implement your business plan, should you negotiate sales contracts that are more fixed (flat fee) or variable (fee per activity)? What about costs? Would having more fixed costs or variable costs be better? How sensi- tive will your profits be to changes in volume if the economy booms or if it takes a turn for the worse? How will you decide whether to invest in new equipment and technology? As your business grows in size, how will you divide it into manageable segments and relinquish oversight of day-to-day operations to others, while at the same time retain con- trol? How can you design systems to ensure your managers will make decisions that are consistent with your goals? And if you decide to raise capital or sell your business, what will potential investors want to see when they analyze your financial statements and study your statement of cash flows? All of these topics are addressed in this book.

• Business Management If you are planning to be a general business manager, not a day will go by in which you don't consider the financial ramifications of your decisions. You'll need to have a firm grasp on the costs of obtaining or manufacturing every product you sell and/or every service you deliver. You'll also want to understand how costly every activity within the company is to perform and have specific strategies in hand for controlling and reducing those costs. You'll need to understand which costs will increase as your volume increases and which costs will be unaffected by changes in volume. Cost information will drive many, if not all, of your decisions about where to locate, what to produce, which suppliers to use, whether to outsource, which products to emphasize, whether to implement quality improvement initiatives, whether to auto- mate some of your processes, how to price your products or bid for jobs, whether to discontinue certain products or operations, and so forth. Every business decision you make will be rooted in revenue and cost information, so it will be important for you to understand how those costs were obtained and what they include. Different costs will be used for different purposes. All of these topics are addressed in this book.