This document provides an overview of the learning outcomes and content covered in Unit VIII of BBA 2301, Principles of Accounting II. The key topics covered include: 1. Explaining how financial information influences short-term and long-term management decisions through tools like standard costs and balanced scorecards. 2. Discussing operational and capital budgets, including describing various capital budgeting methods like net present value, internal rate of return, and payback period. 3. Introducing the concepts of variances in standard costs, which are differences between actual and standard costs that can be analyzed, and the balanced scorecard for evaluating organizational performance using financial and non-financial measures.

1. BBA 2301, Principles of Accounting II 1
Course Learning Outcomes for Unit VIII
Upon completion of this unit, students should be able to:
7. Explain how financial information influences both short-term
and long-term management decisions.
7.1 Describe the use of standard cost manufacturers and service
businesses.
8. Discuss operational and capital budgets.
8.1 Describe capital budgeting methods.
8.2 Identify the use of intangible benefits in capital budgeting.
Course/Unit
Learning Outcomes
Learning Activity
7.1
Unit Lesson
Chapter 26, pp. 26-1 to 26-24
Webpage: Balanced Scorecard Basics

2. Video: What is a balanced scorecard: A simple explanation for
anyone
Unit VIII Case Study
8.1
Unit Lesson
Chapter 27, pp. 27-1 to 27-19
Unit VIII Case Study
8.2
Unit Lesson
Chapter 27, pp. 27-1 to 27-19
Unit VIII Case Study
Required Unit Resources
Chapter 26: Standard Costs and Balanced Scorecard, pp. 26-1 to
26-24
Chapter 27: Planning for Capital Investments, pp. 27-1 to 27-19
In order to access the following resources, click the links
below.
Balanced Scorecard Institute. (n.d.). Balanced scorecard basics.
https://balancedscorecard.org/bsc-basics-
overview/
For the video resource below, a transcript and closed captioning
are available upon accessing the video.
Marr, B. (2019, June 24). What is a balanced scorecard: A
simple explanation for anyone [Video]. Cielo24.

3. https://c24.page/2s4pmxpj2kpwnprckg6p8tcjtu
Unit Lesson
Introduction
This final unit will conclude the study of managerial
accounting. This lesson will share important content for
managers in manufacturing, merchandising, and service
companies. Content includes estimating future costs,
implementing financial and non-financial performance
measures, and incorporating capital budgeting.
Costing requires you to make estimates. As noted in a previous
unit, many people are uncomfortable with this
task, as they are used to having objective numbers given to
them. However, as much as the future is
UNIT VIII STUDY GUIDE
Management: Costs and Capital Investing
https://balancedscorecard.org/bsc-basics-overview/
https://c24.page/2s4pmxpj2kpwnprckg6p8tcjtu
BBA 2301, Principles of Accounting II 2
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4. Title
unpredictable, we are still required to use our experience and
judgment to chart a path forward. In this unit,
you will learn about standard costs. Partially based on prior
period actual costs, they provide the basis for
budgeting and subsequent evaluation. Management accountants,
no matter the title, are integral to the
development of standard costs, implementation of the balanced
scorecard, and the capital budgeting process.
Pay attention as you read, review, and evaluate this unit as it is
almost wholly transferable to any company.
Consider the following questions and how you would respond to
each as you move through this unit.
officer (CFO), how will you set product,
service, or process costs for upcoming periods?
capital investments?
regarding the type of responsibility centers?
Standard Costs
Costing is one of management’s major (and basic)
responsibilities. Standard costing is all about establishing
objectives for future periods. Standard costing puts those
objectives into a written form so they can be
communicated and become the basis for measurement. Standard

5. costs are about amounts per unit. Labor,
materials, and overhead are translated into a dollar amount for
each unit produced. Budgets are total
amounts. The amounts budgeted for different cost components
for a given level of production are the total
budgeted costs.
Setting Standard Costs
Standards are often the subject of debate between management,
professionals, and employees or their
representatives. Take a look at the following four issues
outlined below to help clarify who sets these standard
costs and why.
period start with the actuals from immediate
prior periods. They are then modified with planned business
process changes and technology
changes to be implemented. If non-value steps are removed
from a process, if organizational
changes enhance roles and responsibilities of process
participants, or if technology improves the
outcome quality (accuracy, speed), the standard will change.
ndard costs? While primary
responsibility may rest with a financial
manager, other major participants include operating
management, internal (or external) consultants,
and current process participants. If one or more of these parties
is not present, the acceptance of a
new or changed standard will be lessened.

6. updated as organization, process, or
technology changes take place. While there is a balance between
planning and doing, standards
should be revisited at the start of every accounting (business
performance) period.
(i.e., an ideal or perfect performance) will
not motivate those working in the process. Standards set too low
will similarly demotivate managers
and employees, as it will be difficult to compete with external
competitors producing at a higher level.
A balanced approach (i.e. normal) is best. Process participants
must come to agree on the
performance level for it to work. Another level that is often
promoted is a stretch standard, meaning
more than normal but less than ideal and accepted by the
participants.
Now, what makes up the standard?
As you may recall from prior unit lessons, there are three major
cost components that make up a standard.
These cost components are direct materials, direct labor, and
manufacturing overhead. For reference, these
are detailed further in the illustration below.
BBA 2301, Principles of Accounting II 3

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finished product (or service). Materials may
be purchased for use as an intermediate part or the final part of
the production process. In either
case, we can develop a cost per pound (or applicable unit of
measure). The cost should include any
freight or handling charges associated with the materials.
Lastly, multiply by the amount of material
required to make one unit to reach the standard amount.
o The standard DM cost per unit is the standard DM price times
the standard DM quantity.
wage rates (modified for cost of living
adjustments [COLA]) and includes employer taxes and benefits.
The DL quantity standard is the time
required to produce one unit of product. It is the normal time
required.
o The standard DL cost per unit of a finished product is the
standard DL rate times the standard
direct labor hours (DLH).
Companies begin with a
standard predetermined overhead rate
(PDOH), which is the budgeted overhead divided by the
expected standard activity index. In the past,
most companies used a single index (i.e., DLH or machine

8. hours). Today, many firms use activity-
based costing (ABC) to incorporate multiple indices, which will
produce a more accurate overhead
allocation.
o The standard MOH cost per unit is the PDOH rate times the
activity index quantity standard.
Together, these three components become the total standard cost
per unit. Specific examples of these
components are further illustrated in the textbook on pages 26-5
through 26-7 (Weygandt et al., 2018).
Variances
Variances are the partner that make standard costs useful.
Variances are the differences between actual
costs and standard costs. Just as there are components to
standard costs, there are multiple variances. The
total variance equals the sum of materials, labor, and overhead
variances. Variances are expressed in dollar
amounts and are based on the actual production volume. Each of
the three components are further outlined
below. The individual variances and the total may be favorable
or unfavorable. Variance analysis is the first
step in understanding and resolving any number of issues where
variance analysis applies, such as cost,
production, sales, or cash management.
price or quantity differences.
o The total materials variance is the sum of the actual quantity
times the actual price and the

9. standard quantity times the standard price.
o The price variance is the actual quantity times the actual price
less the actual quantity times the
standard price.
o The quantity variance is the actual quantity times the standard
price less the standard quantity
times the standard price.
What causes the variance? Examining the formulas, you can see
that it comes from differences in what the
firm paid for the raw materials and differences in production
volumes. The root cause may be external price
changes in materials, training of production employees,
excessive breakdowns in equipment, etc. The
following matrix outlines the DL variances, and these formulas
are further defined below.
BBA 2301, Principles of Accounting II 4
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10. paid compared to the expected. The
formula is actual hours times the actual rate less the standard
hours times the standard rate.
less the actual hours times the standard
rate.
rate less the standard hours times the
standard rate.
Why is a difference seen? For price variance, the firm either
paid workers at different rates than predicted, or
labor was misallocated (using higher-skilled labor where lower-
skilled labor was predicted). Quantity variance
refers to the efficient (or inefficient) use of labor. Root causes
could include training shortfalls, equipment
breakdown, or poor workplace design.
is the difference between actual
overhead costs and overhead predicted based on standard hours
for the production level. As noted
earlier, machine hours or a combination of activity indices may
be used rather than labor hours.
o The formula for total overhead variance is the actual overhead
less the applied overhead. The
total actual overhead is the sum of variable and fixed overhead.
As with DM and DL, overhead
variance can be further evaluated as controllable (price) or
volume (quantity). Causes of

11. overhead variance include increased or decreased use of indirect
labor, shared plant equipment,
shared technology usage, and utility expense.
Variances may be presented directly in the income statement,
illustrating the cost of goods sold (COGS) and
gross profit (GP) using standard costs, and individual variances
as additions or subtractions to arrive at the
actual GP. Another way that variances can be presented is by
cost-volume-profit (CVP) or through a
contribution margin income statement; an illustration of this can
be found on pages 26-11 and 26-12 of the
textbook. When using this format, the variances are evaluated in
fixed and variable cost components prior
to presentation.
Balanced Scorecard
The balanced scorecard was previously introduced in Unit V.
You may recall that the balanced scorecard
incorporates both financial and non-financial measures when
evaluating a firm’s performance. When fully
implemented, the balanced scorecard cascades into every job
description in an organization. In doing so, it
focuses every manager and employee on individual
contributions to the firm’s goals and objectives.
BBA 2301, Principles of Accounting II 5

12. UNIT x STUDY GUIDE
Title
There are four perspectives to the scorecard; these include
financial, customer, internal process, and learning
and growth. These are further explained below.
1. Financial: These are measures used by most business (e.g.,
sales revenues, profitability).
2. Customer: This is an evaluation by the buyers of the firm’s
products and services and in comparison
to competitors (e.g., price, quality, customer service, retention).
3. Internal process: This is an evaluation of business processes,
including development, production,
distribution, and servicing. Measures may be innovation,
inventory, and quality (waste, errors, and
rework).
4. Learning and growth: These include measures of employee
skills and skill development, including
training programs, employee satisfaction, and communications.
Linking these perspectives pushes company goals and objectives
into every manager and employee job
description and evaluation. The result is a single performance
measurement system where everyone has a
part in the success of the firm.
While much of this lesson focuses on the standard costs and

13. measurements of manufacturers, the material is
applicable across industries and organization size. No matter the
industry, it is important to understand costs,
what is required to produce a product or service, and how to
measure all of the results. Nonprofits and
government organizations will also use standard costs in their
budget preparation. The remainder of this
lesson will focus on capital budgeting.
Planning for Capital Investments
The second half of this lesson will shift to longer-term (year or
more) capital budgeting. While you may not be
as formal as other consumers may, you still evaluate your
capital budgeting options the same way, which may
include budgeting for vehicles, appliances, and house
construction. Questions that a business (and
consumer) might ask when considering investments are listed
below.
its each alternative provides?
The planning process is similar in most companies. A capital
budgeting (investment) committee meets
periodically (perhaps quarterly or annually). As capital
investments may require large financial sums, the

14. committee may consist of higher management, augmented by
professionals representing the discipline
(department) affected by the investment. Capital investment
decisions can influence the firm’s performance
for several years. Good outcomes will propel the firm forward;
bad outcomes can lead to bankruptcy.
Capital Budgeting and Cash Payback
As accounting managers, you will be tasked with answering
management’s questions regarding estimates of
benefits and costs of projects over an anticipated usage time.
These are estimated and measured using cash
flows. Recall discussions and studies you have had regarding
the time value of money (TVM). A dollar today
is worth a dollar. A dollar 5 years from now is worth less. You
will use multiple accepted methods to take time
into consideration.
Decision-making considerations include funds availability,
project independence or dependence, and the risk
of success or failure. The most important point to remember is
the significance of management and
professional judgment. Without good estimates, wrongful
capital allocation could take place. There are five
methods in use to evaluate capital investments. Two of these
methods use TVM techniques (net present
value [NPV] and internal rate of return [IRR]). Look at each
method below for a more detailed explanation.
Cash payback is a straightforward approach to capital
budgeting. An estimate is made of the net annual cash
flows produced by the investment. It is compared to the cost of
the investment. The breakeven time is the
payback period.

15. BBA 2301, Principles of Accounting II 6
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The decision rule for cash payback is as follows: The shorter
the time, the more attractive the investment.
This is the simplest approach but neglects TVM and the
proposed project’s profitability.
NPV, also called new present value, estimates annual cash
outlays and inputs, but adjusting them with TVM,
which is called a discounted cash flow, for time and the firm’s
cost of capital creates a much more accurate
project evaluation.
The decision rule for NPV is that a project is acceptable if the
NPV is positive or zero. Assumptions made in
the analysis are that cash flows occur at the end of the year;
they are immediately reinvested in another
alternative with similar returns, and that cash flow can be
estimated with certainty.

16. Profitability index (PI) is the third approach to evaluating
capital investment alternatives. This is used to solve
the dilemma when multiple projects offer a positive NPV but
are mutually exclusive (i.e., selecting one
alternative means that another alternative should not be
selected).
The PI is calculated by dividing the NPV of a project’s cash
flows by the initial investment, thus taking into
account the size of the capital investment and the discounted
cash flows.
The decision rule for the profitability index is to select the
project with the higher PI.
IRR is the fourth approach, which also uses discounted cash
flows in the IRR model. The rate is the
interest rate, which causes the NPV calculation to be equal to
zero. It is also called the interest yield for
the investment.
The decision rule is to accept a project only when the interest
yield is equal to or higher than the required rate
of return (normally the firm’s cost of capital).
Annual rate of return is the final method to examine. Rather
than using discounted cash flows, this approach
uses the profitability of a project, which is based on accrual
accounting. It is calculated by dividing the
expected net annual net income by the average capital
investment. The average investment is simply the
initial investment added to the salvage value (the value at the
end of the projected life) and then divided
by two.
The decision rule is to accept a project if the rate of return is

17. greater than the required rate of return.
Investments with a higher rate of return are chosen before those
with lower rates.
This approach is simple to use but does not consider TVM.
Capital budgeting mathematics are important tools in running
the numbers to help management prioritize
capital projects. We have looked at five methods each with
different mathematic challenges. The two methods
that employ discounted cash flow analysis or TVM are most
widely used. Additionally, for smaller projects,
especially those with a timeframe of less than 2 years, the cash
payback method is frequently used.
Luckily, today, technological advancements have provided
accounting managers with software programs,
such as Microsoft Excel and financial calculators (including
calculator apps for tablets), to simplify any
required calculations. There are also several tutorials that can
be found online (such as YouTube) that explain
each method and the application of using a calculator or
software program. The examples outlined in the
following section can be used to answer the questions below.
1. What are the inputs into NPV, IRR, or payback?
2. What are the issues around gathering those inputs?

18. BBA 2301, Principles of Accounting II 7
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A Capital Budgeting Example
Assume a project has initial costs of $700,000 and a projected
return of $300,000/year. The firm’s cost of
capital is 15%. If the discount rate, or cost of capital, is
different from 15%, then that would be entered. As
noted earlier, using payback for anything over 2 years is
problematic; this case stretches a little beyond.
For illustration purposes, identical timeframes for each method
(3 years) is used. If the time is longer, there
would be entries for Y4, Y5, etc. If the discount rate or cost of
capital is different from 15%, then that would
be entered.
Additional Factors for Capital Budgeting
Before concluding this lesson, there are some additional factors
to consider. While there are many issues that
may exist in a specific firm and industry, there are three items
for general consideration when allocating
capital funds, which are detailed below.

19. customer service, and enhanced
customer loyalty from more accurate or faster processing. Some
firms choose to ignore intangibles
and require investment decisions to be based solely on tangible
benefits. There are two options to
incorporate intangible benefits in the decision process.
o Calculate the value of intangible benefits in sales, profits,
etc., and compare the value to the
amount of negative NPV.
o Calculate and project conservative estimates for the
intangibles, and incorporate them directly
into the NPV calculation and investment assessment.
costs and future cash flows. Managers
and professionals with specific knowledge are tasked with these
estimates. As noted by those making
the estimate, projections may have more or less risk associated
with the project. In order to take into
account a project with a higher risk of attaining the outcomes,
an approach is to use a higher discount
rate (required rate of return).
o This satisfies those concerned with the accuracy of future
estimates but may cause some
projects to be rejected that offer high returns.
hat makes a
capital commitment in order to evaluate the
progress and results of its investment. If the firm does not audit
its capital projects, shame on them.
o When a firm commits capital funds to a project that will
potentially require multiple accounting

20. periods to fully implement and multiple accounting periods to
earn the return (the economic
benefits), always put in place an audit process. The process will
mimic the original project
evaluation. If projects on outlays and benefits are not happening
as proposed, the firm must be
able to either halt the project entirely or, at a minimum, make
needed alterations (e.g., change
personnel, processes, or technology).
BBA 2301, Principles of Accounting II 8
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Conclusion
Capital budgets implement the firm’s strategy. Evaluating,
selecting, and managing the implementation of
capital projects is one of management’s most important
activities. Now that you have learned about costs,
capital budgeting, and investing, can you answer the questions
posed at the beginning of this lesson?

21. Reference
Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2018).
Accounting principles (13th ed.). Wiley.
https://online.vitalsource.com/#/books/9781119411017
Suggested Unit Resources
In order to access the following resources, click the links
below.
For the video resources below, transcripts and closed captioning
are available upon accessing the videos.
You will learn about the methods used to evaluate and rank
capital investment alternatives in the following
video.
Cambridge, T. (2017, March 11). Financial management:
Capital investment [Video]. Cielo24.
https://c24.page/8ppc2n9ajb8u599x2c83jk28c6
The video below explains the use of the discounted cash flow
model to value an investment.
Corporate Finance Institute. (2018, June 27). Discounted cash
flow (DCF) model [Video]. Cielo24.
https://c24.page/yd54w9e53jbqk45crbqkabxjg4
The following video provides examples for how to calculate
standard cost.

22. Croesus Financial Training. (2016, October 25). Standard
costing [Video]. Cielo24.
https://c24.page/w7w83egemyxe78v6gbtxq7vygs
The following video tutorial provides a thorough presentation of
time value of money (TVM).
Subjectmoney. (2014, October 21). Time value of money TVM
lesson/tutorial future/present value formula
interest annuities perpetuities [Video]. Cielo24.
https://c24.page/9wqxdqmc2r75dmhvdt7wnu796t
Learning Activities (Nongraded)
Nongraded Learning Activities are provided to aid students in
their course of study. You do not have to submit
them. If you have questions, contact your instructor for further
guidance and information.
This is an opportunity for you to express your thoughts about
the material you are studying by writing about it.
Conceptual thinking is a great way to study because it gives you
a chance to process what you have learned,
and it increases your ability to remember it.
In order to practice what you have learned, please attempt the
exercises and problems below, which can be
found in your textbook.
https://c24.page/8ppc2n9ajb8u599x2c83jk28c6

23. https://c24.page/yd54w9e53jbqk45crbqkabxjg4
https://c24.page/w7w83egemyxe78v6gbtxq7vygs
https://c24.page/9wqxdqmc2r75dmhvdt7wnu796t
https://c24.page/9wqxdqmc2r75dmhvdt7wnu796t
BBA 2301, Principles of Accounting II 9
UNIT x STUDY GUIDE
Title
Chapter 26:
-31
-32
-32
xercises (E26.6), page 26-34
-35
-40
-44
Chapter 27:

24. -28
-28
-29
-30
-31
-33
If you have any questions or do not understand a concept,
contact your professor for clarification. Completing
these practice exercises and problems will give you practice,
which will be helpful as you complete the
assignment for this unit.