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hiL6956X_fm_i-1.indd i 07/05/16 11:49 AM

Managerial Accounting Creating Value in a Dynamic Business Environment

Eleventh Edition

Ronald W. Hilton Cornell University

David E. Platt University of Texas at Austin

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MANAGERIAL ACCOUNTING: CREATING VALUE IN A DYNAMIC BUSINESS ENVIRONMENT, 11TH EDITION

Published by McGraw-Hill Education, 2 Penn Plaza, New York, NY 10121. Copyright © 2017 by McGraw-Hill Education. All rights reserved. Printed in the United States of America. Previous editions © 2014, 2011, and 2009. No part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written consent of McGraw-Hill Education, including, but not limited to, in any network or other electronic storage or transmission, or broadcast for distance learning.

Some ancillaries, including electronic and print components, may not be available to customers outside the United States.

This book is printed on acid-free paper.

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ISBN 978-1-259-56956-2 MHID 1-259-56956-X

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Library of Congress Cataloging-in-Publication Data Names: Hilton, Ronald W., author. | Platt, David E., author. Title: Managerial accounting : creating value in a dynamic business environment/Ronald W. Hilton, Cornell University, David E. Platt, University of Texas at Austin. Description: Eleventh Edition. | Dubuque : McGraw-Hill Education, 2016. | Revised edition of the authors’s Managerial accounting, 2014. Identifiers: LCCN 2016021248 | ISBN 9781259569562 (hardback) Subjects: LCSH: Managerial accounting. | BISAC: BUSINESS & ECONOMICS / Accounting/Managerial. Classification: LCC HF5657.4 .H55 2016 | DDC 658.15/11—dc23 LC record available at https://lccn.loc.gov/2016021248

The Internet addresses listed in the text were accurate at the time of publication. The inclusion of a website does not indicate an endorsement by the authors or McGraw-Hill Education, and McGraw-Hill Education does not guarantee the accuracy of the information presented at these sites.

www.mhhe.com

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David E. Platt: To Nancy, Evan, and Hannah.

Ronald W. Hilton: To Meg, Brad, Molly, Tim, Kerry, and Liliana.

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iv

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Praise for MANAGERIAL ACCOUNTING

“Extremely comprehensive, easy to read managerial accounting textbook that provides well-designed integrated examples along with coverage of service-based companies.”

—Angela Sandberg, Jacksonville State University

“I am loving the book, and I see the students learning the concepts a lot quicker than my previous experience.” —Patti Brown, The University of Texas at Austin

“I would describe it as the Cadillac of core management accounting textbooks.” —Bill Wempe, Texas Christian University

“This is an excellent text—well balanced, well organized, and up to date with current topics, including service industries and state-of-the-art manufacturing environments. I highly recommend it also for the excellent examples and illustrations through focus companies and contrasting companies.”

—John C. Anderson, San Diego State University

“I’ve been using this text since its second edition, and it gets better each year with continuous improvement.” —Steve G. Green, United States Air Force Academy

“Well written with good explanations of the ‘why’ and ‘how’.” —Christa Morgan, Georgia Perimeter College

“Major strength is how it relates managerial accounting to the general management function and reveals the managerial accountant as an important member of the management team.”

—Linda C. Bowen, University of North Carolina–Chapel Hill

“The book goes beyond covering the basics and organizes and integrates contemporary topics nicely.” —Harrison McCraw, State University of West Georgia

“Well written, well organized and excellent end of chapter problems.” —Kathleen Sevigny, Boston College

“The technology supplements and instructor resources are top-notch and very appropriate for our students.” —Marilyn Okleshen, Minnesota State University–Mankato

“The book is very thorough, well written, and still remains student-friendly. The supplements are outstanding.” —Ben Baker, Davidson College

“A solid, well-written, user-friendly book; can’t go wrong with it!” —Rochelle Greenberg, Florida State University

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Preface V

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Hilton & Platt Managerial Accounting: After 11 editions, one of the most enduring and respected managerial accounting books on the market.

Keeping pace with the speed of modern business, the authors combine their experience and expertise to make sure Managerial Accounting is the most relevant, accurate, and up-to-date textbook in the field. Managerial Accounting continues to focus and update content to bridge accounting and management practices.

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VI Preface

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About the Authors

Ronald W. Hilton is a Professor Emeritus of Accounting at Cornell University. With bachelor’s and master’s degrees in accounting from The Pennsylvania State University, he received his PhD from The Ohio State Uni- versity. A Cornell faculty member since 1977, Professor Hilton also has taught accounting at Ohio State and the University of Florida, where he held the position of Walter J. Matherly Professor of Accounting. Prior to pursuing his doctoral studies, Hilton worked for Peat, Marwick, Mitchell and Company and served as an officer in the United States Air Force.

Professor Hilton is a member of the Institute of Management Accountants and has been active in the American Accounting Association. He has served as associate editor of The Accounting Review and as a member of its editorial board. Hilton also has served on the editorial board of the Journal of Manage- ment Accounting Research. He has been a member of the resident faculties of both the Doctoral Consortium and the New Faculty Consortium sponsored by

the American Accounting Association. With wide-ranging research interests, Hilton has published articles in many journals, including the Journal of Accounting Research, The Accounting Review, Management Science, Decision Sciences, the Journal of Economic Behavior and Organization, Contemporary Accounting Research, and the Jour- nal of Mathematical Psychology. He also has published a monograph in the AAA Studies in Accounting Research series, and he is a co-author of Cost Management: Strategies for Business Decisions, Budgeting: Profit Planning and Control, and Cost Accounting: Concepts and Managerial Applications. Professor Hilton’s current research interests focus on contemporary cost management systems and international issues in managerial accounting. In recent years, he has toured manufacturing facilities and consulted with practicing managerial accountants in North America, Europe, Asia, and Australia.

David E. Platt is the Associate Dean for Undergraduate Programs at the McCombs School of Business, University of Texas at Austin. He earned his BS in Economics from the Wharton School at the University of Pennsylvania, his MBA in Marketing from Syracuse University, and his PhD in Accounting from Cornell University. After earning his CPA while working for Pricewater- house Coopers, he spent several years doing financial and product manage- ment at a supply chain systems integrator. Dr. Platt currently teaches a variety of managerial accounting courses at UT, including the sophomore-level Fun- damentals of Managerial Accounting, and has received teaching awards at both the undergraduate and graduate levels. He directed UT–Austin’s Center for International Business Education and Research (CIBER) and has served as a chair of the Partnership in International Management, a consortium of lead- ing graduate business schools worldwide. He has been a visiting lecturer at the Sorbonne Graduate Business School, and has delivered training for com- panies in the U.S., Europe, Latin America, and China.

© Eva Reavley

© Jon Reis Photography

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Preface VII

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Managerial Accounting.

Business is always changing: new technologies, new models, new global competi-

tors. And students, despite being more technologically adept every year, need a frame-

work for all of that change so that they can hit the ground running in their careers. To keep

up, managers must be able to interpret the rapid flow of information and make the right

decisions. Assisted by the tools of managerial accounting, and by managerial accounting

professionals, managers will work side by side in global cross-functional teams to make

the complex decisions that today’s dynamic business environment requires of them. The

goal of Managerial Accounting is to acquaint students of business with the fundamental

tools of managerial decision making and to provide a context for understanding and react-

ing to the dramatic ways in which

business is changing. The em-

phasis throughout the text is on

using accounting information to

help manage an organization,

while explaining concepts in a way

that students can relate to. They

should not only be able to produce

accounting information, but also

understand how managers are

likely to use and react to the infor-

mation in a range of businesses.

“It is a well-written book with numerous well-selected cases, allowing students to see the contemporary business operations and practices in the real world.”

—Dennis Hwang, Bloomsburg University

How Does Hilton & Platt 11e Prepare Students for the Businesses of Today and Tomorrow?

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VIII Preface

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Relevant.

Focus Companies provide a powerful strategy for fos-

tering learning, and the integration of Focus Compa-

nies throughout the Hilton & Platt text is unmatched

by other managerial accounting books. Each chapter

introduces important managerial accounting topics

within the context of a realistic company. Students

see the immediate impact of managerial accounting

decisions on companies and gain exposure to differ-

ent types of organizations.

Balanced.

Hilton & Platt Managerial Accounting offers the most

balanced coverage of service and manufacturing com-

panies. The authors recognize that students will be work-

ing in a great variety of business environments and will

benefit from exposure to diverse types of companies. A

wide variety of examples from retail, service, manufac-

turing, and nonprofit organizations are included.

Contemporary.

Hilton & Platt continues to be the leader in present-

ing the most contemporary coverage of managerial

accounting topics. The traditional tools of managerial

accounting such as budgeting and product costing

have been updated with current approaches. Emerg-

ing topics such as environmental cost management,

monetizing the Internet, and time-driven activity-

based costing are also discussed.

Flexible.

Managerial Accounting is written in a modular format allowing topics to be covered in

the order you want. For example, some instructors prefer to cover contribution-margin

approaches to decision making and/or relevant costs early in the course. So Chapter 6

(cost behavior and estimation), Chapter 7 (CVP), and Chapter 14 (relevant costs) are written

so they can be covered immediately after Chapter 2, which introduces basic cost concepts.

A table showing the text’s flexibility is in the Introduction to the Instructor’s Manual.

“The company story acts as a hook to get students interested in the chapter material.”

—Michele Matherly, University of North Carolina at Charlotte

“I like the mix of company types.”

—Barbara Durham, University of Central Florida

“A nice intro textbook, with multiple perspectives on the behavioral aspects of managerial accounting. Touches many modern issues facing the field.”

Theodore Rodgers, Emory University

“Balanced, time-proven approach to mana- gerial accounting.”

—Michael Flores, Wichita State University

“Perhaps what sets Hilton & Platt apart from the competition is its recognition that the world consists of more than manufac- turing firms and that managerial account- ing plays a significant role in service and not-for-profit organizations.”

—Lanny Solomon, University of Missouri– Kansas City

“Very current with managerial accounting topics (RFID, . . ., ABC, outsourcing, deci- sion making).”

—Maggie Houston, Wright State University

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Preface IX

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How Does Hilton & Platt 11e Help Students Learn Managerial Accounting in the Context of Business?

FOCUS COMPANIES

Students need to see the relevance of

managerial accounting information in order

to actively engage in learning the material.

Ron Hilton and Dave Platt use their years

working as managers and consultants to

create Focus Companies that illustrate

key concepts, and students immediately

see the significance of the material and

become excited about the content.

Whenever the Focus Company is pre-

sented in the chapter, its logo is shown so

the student sees its application to the text

topic.

CONTRAST COMPANIES

A Contrast Company is also introduced in

each chapter. In most cases these highlight

an industry different from that of the Focus

Company. This feature allows even greater

emphasis on service-industry firms and

other nonmanufacturing environments. It

also helps demonstrate the wide applica-

bility of the managerial accounting tech-

niques being taught.

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1 THIS CHAPTER’S FOCUS

COMPANY is The Walt

Disney Company. This entertainment services

company is a giant in the industry with theme

parks, feature film studios, animation studios,

television broadcasting,

hotels and resorts, and

retail stores. Using The

Walt Disney Company

as an illustration, we

will introduce the field

of managerial account-

ing and its major themes. Some of you are

excited about studying accounting. But even

more of you are asking, “Why

do I need to study mana-

gerial accounting? I’m not

going to be an accountant!”

That is a good question. We

will explore how managerial

accountants work in partner-

ship with managers to add

value to the organization,

and how managers also use

managerial accounting tools

to make their decisions.

FOCUS COMPANY >>>

The Changing Role of Managerial Accounting in a Dynamic Business Environment

© ollyia/123RF.com

© Eye Ubiquitous/SuperStock

Each chapter is built around a focus company in which the chapter’s key points are illustrated. This chapter’s focus is on The Walt Disney Company. The focus compa- nies in subsequent chapters are not real companies, but they are realistic scenarios built on actual company practices. Whenever the focus company is discussed in the chapter, the company logo appears in the margin.

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In contrast to the entertain-

ment services setting of The

Walt Disney Company, we

will turn our attention to

Whole Foods Market, Inc. This fast-growing

food retailer has over 400 stores around

North America and Europe. A leader in

the area of corporate social responsibility,

Whole Foods Market is frequently faced

with challenging decisions that require them

to balance the need to run a profitable busi-

ness and satisfy their investors against the

cost of their much-publicized commitment

to organic foods and sustainable production.

We will explore managerial accounting’s con-

tribution to Whole Foods

Market’s efforts to sell

products that are more

costly to produce in a

competitive market while

still achieving appropri-

ate returns for investors.

<<< IN CONTRAST

© Scott Olson/Getty Images

Each chapter also includes a contrast company. In most cases, the contrast company will present a key chapter topic in an industry that is dif- ferent from that of the focus company. In this chapter, the focus company (Walt Disney) is an entertainment services company, whereas the con- trast company (Whole Foods Market) is a food retailer.

© Ed Endicott/Alamy

“I like the ‘Focus on the Company’ at the begin- ning of each chapter and this type of boxed info throughout each chapter.”

—Anna Cianci, Drexel University

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X Preface

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Real-World Examples The Hilton & Platt text provides a variety of

thought-provoking, real-world examples to

focus students on managerial accounting tools

and professionals as an essential part of the

management process. Featured organiza-

tions include Amazon, Ford Motor Company,

Southwest Airlines, Whole Foods Market,

General Electric, FedEx, and many others. These

companies are highlighted in blue in the text.

In Their Own Words Quotes from both practicing managers and

managerial accountants are included in the mar-

gins throughout the text. These actual quotes

show how the field of management accounting

is changing, emphasize how the concepts are

actually used, and demonstrate that manage-

ment accountants are key players in most com-

panies’ management teams. In the e-book, the

quotes are hyperlinked to the appropriate point

in the References. Many references have, in

turn, been hyperlinked to the source material.

Management Accounting Practice The managerial accounting practices of well-

known, real-world organizations are highlighted

in these boxes. They stimulate student inter-

est and provide a springboard for classroom

discussion.

Focus on Ethics This feature is included in most chapters. Focus

on Ethics poses an ethical dilemma, then asks

tough questions that underscore the importance

of ethical management. Some of these are

based on real-world incidents while others are

fictional but based on well-established

anecdotal evidence.

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Seems obvious, doesn’t it? But it is not uncommon for managers to mistakenly act like all the money spent on production should be divided up over the products or services produced, without considering whether some of that spending was for resources supplied but unused.

The moral of the story is that it is very important to distinguish among the cost of resources supplied [column (b) above], the cost of resources used [column (c) above], and the cost of resources unused [column (e) above], which is the same as the cost of unused capacity. An important task for any management team, including the one at Whole Foods Market, is to understand and manage the cost of capacity. Providing them data about the costs of unused capacity gives them an important tool.12

12This is, of course, a very simple illustration, because it focuses on a single resource, i.e., the cost of one employ- ee’s labor. Even an operation as simple as making pizzas involves many resources, such as pizza ingredients, mul- tiple employees, buildings and equipment, and advertising. Imagine how much more complicated capacity issues are for a major airline or a large manufacturer. Nevertheless, by exploring the concepts of capacity and the cost of capacity in a very simple scenario, you should have an initial understanding of this critical issue. For another exam- ple, see D. Welch and I. Rowley, “Risky Business at Nissan,” BusinessWeek, November 2, 2009, p. 34. 13Keith Naughton, “Ford Profit Squeezed by Excess Plant Capacity in Europe,” Bloomberg.com, July 19, 2012; and Keith Naughton and Alex Webb, “Ford to Cut 5,700 Jobs with Three European Plan Closings,” Bloomberg.com, October 25, 2012. 14David Pearson, “Renault Mulls Making Nissan Cars,” Wall Street Journal, January 18, 2013.

MANAGING THE COSTS OF UNUSED CAPACITY IN THE AUTO INDUSTRY: A GLOBAL CHALLENGE

Most companies cannot easily adjust their production capacity to match demand. Once a manufacturer of automobiles has invested in a factory, its options for increasing or decreas- ing that capacity and related costs are limited. If sales are low, management can reduce the hours of production, but the facility costs remain. Moreover, labor costs often cannot easily be adjusted because of national labor laws, union rules, and practical concerns such as training costs and employee loyalty.

So, if the costs of unused capacity cannot be adjusted to match demand, how can a company manage capacity to avoid the drain on income that comes with unused capacity? The solution involves isolating the capacity problem: (1) shift production between facilities to maximize utilization of capacity in selected primary facilities while creating additional unused capacity in secondary facilities, and (2) sell or find alternative uses for the now- vastly-underutilized secondary facilities.

American automaker Ford Motor Co. followed exactly this approach in addressing their profitability problems in the European market. “We know what it takes to be profitable in Europe. . . . We’ll work to match capacity with demand while accelerating new-product devel- opment.” A few months after that statement, Ford announced that it would move production of vehicles and components from three underutilized plants in Europe to other facilities and close the plants. “The closings include . . . a 48-year-old plant in Genk [Belgium] that builds cars and minivans. . . . Production of those models will shift to Ford’s plant in Valencia, Spain.”13

Renault SA and Nissan Motor Co., French and Japanese companies, respectively, have used their unusual alliance to manage capacity across the two companies. Each company owns a substantial portion of the other, and they share a CEO, Carlos Ghosn. Nissan recently began manufacturing a vehicle for the U.S. market at “a Renault Samsung Motors plant in Busan, South Korea . . . [that had] been operating at half of its capacity of 300,000 vehicles a year.” Meanwhile, with Renault struggling to manage decreased demand in Europe due to weakness in that mar- ket, Nissan is considering “shifting some of its [production] workload to Renault’s underutilized French facilities” as a way of absorbing strong demand for their products elsewhere.14

Ford, Renault, and Nissan

M

A

P

anagement ccounting ractice

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Focus on Ethics

DID BOEING EXPLOIT ACCOUNTING RULES TO CONCEAL COST OVERRUNS AND PRODUCTION SNAFUS?

Aircraft manufacturers use job-order costing to determine the cost of an airplane. As this chapter discusses, supply chain management and production controls are also impor- tant tools used by manufacturers to manage production costs. As BusinessWeek reports, however, things don’t always go according to plan.

For three years, Boeing’s top management had been seeking a merger with McDonnell-Douglas Corporation, whose board of directors was reluctant to approve the deal. Finally, the deal went through, and the world’s larg- est aerospace company was born—“the first manufacturer ever with the ability to build everything that flies, from helicopters and fighter jets to space stations.”

Unfortunately, “a disaster was quietly unfolding inside Boeing’s sprawling factories—one that would ultimately wind up costing billions of dollars, cause several executives to lose their jobs, and lead to claims of accounting fraud. Fac- ing an unprecedented surge in orders because of a booming economy, workers were toiling around the clock, pushing the assembly line to the breaking point. At the same time, the company was struggling to overhaul outdated production methods. These pressures were building up to what was, in essence, a manufacturing nervous breakdown. In the weeks after the merger announcement, parts shortages and over- time approached all-time highs. As costs went through the roof, the profitability of airliners such as the 777 swooned. A special team formed to study the crisis issued a report with a blunt conclusion: ‘Our production system is broken.’”

Had investors “understood the scope of the problems, the stock would probably have tumbled and the McDonnell deal—a stock swap that hinged on Boeing’s ability to main- tain a lofty share price—would have been jeopardized.”

In May of 2002, BusinessWeek reported the results of its three-month investigation, which “reconstructed this hid- den chapter in the company’s history—and analyzed its cur- rent implications.” The BusinessWeek article alleges that “new details supplied by several inside witnesses indicate that Boe- ing did more than simply fail to tell investors about its produc- tion disaster. It also engaged in a wide variety of aggressive accounting techniques that papered over the mess. Critics say the company should have taken charges for the assem- bly-line disaster in the first half of 1997, even if it meant jeop- ardizing the McDonnell merger. They also claim that Boeing took advantage of the unusual flexibility provided by program accounting—a system that allows the huge upfront expense of building a plane to be spread out over several years—to cover up cost overruns and to book savings from efficiency ini- tiatives that never panned out. ‘Boeing managed its earnings to the point where it got caught,’ says Debra A. Smith, a part- ner at Constraints Management, a Seattle-area manufacturing consultancy, and a former senior auditor at Deloitte & Touche who worked on the company’s account during the early 1980s. ‘Boeing basically decided in the short run that [manag- ing earnings] was a lesser evil than losing the merger,’ adds Smith. At a time when investors are asking themselves how far Corporate America can be trusted, the Boeing saga provides rich new evidence that companies have much greater leeway to manipulate their numbers than most people suspect.”6

Boeing allegedly used a system they called program accounting to spread their huge cost overruns across sev- eral years, thereby propping up earnings and the company’s share price. After the merger with McDonnell-Douglas, how- ever, the truth came out in the form of much lower earnings.

What is your view of how Boeing handled its cost overruns, its production problems, and the merger with McDonnell-Douglas? Did the company’s top executives act ethically? How about their accountants?

6Stanley Holmes and Mike France, “Boeing’s Secret: Did the Aircraft Giant Exploit Accounting Rules to Conceal a Huge Factory Snafu?” Businessweek, May 20, 2002, pp. 110–120. Also see Andy Pasztor and Anne Soueo, “Boeing Could Pay Large Penalty to Settle Probes, Avoid Prosecution,” The Wall Street Journal, September 17, 2005, pp. A1, A8. Unrelated to the ethical issues described above, Boeing has experienced more recent setbacks relating to the grounding of its 787 Dreamliner, due to problems with the aircraft’s lithium-ion batteries. As this book goes to press, the problem had apparently been solved, and several airlines had resumed their flights of the Dreamliner. See Christopher Drew, “United Joins in Grounded Dreamliners’ Return to the Skies,” The New York Times (online), May 20, 2013, p. 1

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accountants have served as top executives in such companies as General Motors, Singer, General Electric, and Fruehauf.

In addition to the CFO or controller for the entire corporation, most companies, including The Walt Disney Company, have divisional controllers. Thus, Disney’s detailed organization chart would show a controller for Disney/ABC Television Group, Disney- land Paris, The Walt Disney Studios, and so forth.

In recent years, an increasing awareness of the importance of planning, budgeting, and analysis of performance has caused some larger organizations to adopt a variation on the model just described. In this alternate structure, a subset of the managerial accounting functions relating to financial planning and analysis are overseen by a chief performance analyst. Sometimes the chief performance analyst reports to the CFO. But often, as in the case of Disney’s chief performance analyst, the Sr. VP for Planning and Control, the unit is separate from the CFO (see the Disney organization chart).

Treasurer The treasurer typically is responsible for raising capital and safeguarding the organization’s assets. In addition, the treasurer is responsible for management of the organization’s cash and investments, its credit policy, and its insurance coverage.

Internal Auditor Most large corporations and governmental agencies have an internal auditor. An organization’s internal auditor, who in larger organizations is the director of an internal audit department, is responsible for reviewing the accounting procedures, records, and reports in both the managerial and financial accounting areas of responsi- bility. The auditor then expresses an opinion to top management and the organization’s board of directors regarding the effectiveness of the organization’s accounting system and its system of internal controls. In some organizations, the internal auditor’s role is much more extensive than this and can include a broad assessment of company operations.

Cross-Functional Deployment On a formal organization chart, accountants generally are in a staff capacity, as explained in the preceding section. However, managerial accountants are increasingly being deployed in cross-functional management teams. Managerial accountants work with executives from top management, marketing and sales personnel, design engineers, operations managers, legal experts, quality-control personnel, and virtually every other specialized type of employee in an organization. Managerial teams are formed to make decisions, engage in planning exercises, or address operational problems from many perspectives. Since financial and other managerial accounting issues often are criti- cally important in addressing business problems, managerial accountants routinely play a major role in these cross-functional teams. Panel B of Exhibit 1–4 depicts several plausible cross-functional teams formed to address a variety of hypothetical business problems at The Walt Disney Company. Notice that each of these teams pulls together individuals from a variety of specialties, such as marketing, operations, general manage- ment, customer relations, and the general counsel’s office (legal issues). Given Disney’s overall business strategy, creative talent is almost always present in these cross- functional teams; moreover, managerial accountants play an important role as well.