Managerial Accounting, Seventeenth Edition
By Ray H. Garrison, Eric W. Noreen and Peter C. Brewer
Contents:
Prologue
Managerial Accounting: An Overview 1
What Is Managerial Accounting? 2
Planning 3
Controlling 4
Decision Making 4
Why Does Managerial Accounting Matter to Your
Career? 5
Business Majors 5
Accounting Majors 7
Professional Certification—A Smart Investment 7
Managerial Accounting: Understanding the Broader
Context 9
Big Data 9
Ethics 10
Code of Conduct for Management Accountants 10
Strategy 11
Enterprise Risk Management 13
Corporate Social Responsibility 16
Process Management Perspective 17
Leadership 18
Intrinsic Motivation 18
Extrinsic Incentives 18
Cognitive Bias 19
Summary 20
Glossary 20
Questions 20
Exercises 21
Chapter-1
Managerial Accounting and
Cost Concepts 26
Cost Classifications for Assigning
Costs to Cost Objects 27
Direct Cost 28
Indirect Cost 28
Cost Classifications for Manufacturing Companies 28
Manufacturing Costs 28
Direct Materials 28
Direct Labor 29
Manufacturing Overhead 29
Nonmanufacturing Costs 30
Cost Classifications for Preparing Financial Statements 30
Product Costs 31
Period Costs 31
Cost Classifications for Predicting Cost Behavior 32
Variable Cost 33
Fixed Cost 34
The Linearity Assumption and the Relevant Range 35
Mixed Costs 37
Cost Terminology—A Closer Look 38
Cost Classifications for Decision Making 39
Differential Cost and Revenue 39
Opportunity Cost and Sunk Cost 40
Using Different Cost Classifications for Different Purposes 41
The Traditional Format Income Statement 41
The Contribution Format Income Statement 42
Summary 43
Review Problem 1: Cost Terms 43
Review Problem 2: Income Statement Formats 44
Glossary 45
Questions 46
Applying Excel 47
The Foundational 15 48
Exercises 49
Problems 55
Cases 58
Chapter-2
Job-Order Costing: Calculating Unit Product Costs 60
Job-Order Costing—An Overview 61
Job-Order Costing—An Example 62
Measuring Direct Materials Cost 63
Job Cost Sheet 63
Measuring Direct Labor Cost 64
Computing Predetermined Overhead Rates 65
Applying Manufacturing Overhead 66
Manufacturing Overhead—A Closer Look 67
The Need for a Predetermined Rate 68
Computation of Total Job Costs and Unit Product Costs 69
Job-Order Costing—A Managerial Perspective 70
Choosing an Allocation Base—A Key to Job
Cost Accuracy 70
Job-Order Costing Using Multiple Predetermined Overhead Rates 71
Multiple Predetermined Overhead Rates—A
Departmental Approach 71
Multiple Predetermined Overhead Rates—An Activity- Based Approach 73
Job-Order Costing—An External Reporting Perspective 73
Overhead Application and the Income Statement 73
Job Cost Sheets: A Subsidiary Ledger 74
Job-Order Costing in Service Companies 74
Summary 75
Review Problem: Calculating Unit Product Costs 75
Glossary 77
Questions 77
Applying Excel 77
The Foundational 15 79
Exercises 80
Problems 85
Case 88
Appendix 2A: Activity-Based Absorption Costing 89
Glossary (Appendix 2A) 92
Appendix 2A: Exercises, Problems, and Case 92
Appendix 2B: The Predetermined Overhead Rate and Capacity 96
Appendix 2B: Exercises, Problem, and Case 99
Chapter-3
Job-Order Costing: Cost Flows and External Reporting 103
Job-Order Costing—The Flow of Costs 104
The Purchase and Issue of Materials 105
Issue of Direct and Indirect Materials 106
Labor Cost 107
Manufacturing Overhead Costs 108
Applying Manufacturing Overhead 108
The Concept of a Clearing Account 109
Nonmanufacturing Costs 110
Cost of Goods Manufactured 111
Cost of Goods Sold 111
Schedules of Cost of Goods Manufactured and
Cost of Goods Sold 114
Schedule of Cost of Goods Manufactured 114
Schedule of Cost of Goods Sold 115
Income Statement 116
Underapplied and Overapplied Overhead—A Closer Look 117
Computing Underapplied and Overapplied Overhead 117
Disposition of Underapplied or Overapplied Overhead Balances 118
Closed to Cost of Goods Sold 119
Closed Proportionally to Work in Process, Finished Goods, and Cost of Goods Sold 119
Comparing the Two Methods for Disposing of Underapplied or Overapplied Overhead 121
A General Model of Product Cost Flows 121
Summary 122
Review Problem: The Flow of Costs in a Job-Order Costing System 123
Glossary 125
Questions 126
Applying Excel 126
The Foundational 15 127
Exercises 128
Problems 132
Cases 137
Appendix 3A: Job-Order Costing: A Microsoft Excel-Based Approach 138
Appendix 3A: Exercises and Problems 143
Chapter-4
Process Costing 148
Comparison of Job-Order and Process Costing 149
Similarities between Job-Order and Process Costing 149
Differences between Job-Order and Process Costing 149
Cost Flows in Process Costing 150
Processing Departments 150
The Flow of Materials, Labor, and Overhead Costs 151
Materials, Labor, and Overhead Cost Entries 152
Materials Costs 152
Labor Costs 152
Overhead Costs 152
Completing the Cost Flows 153
Process Costing Computations: Three Key Concepts 153
Key Concept #1 154
Key Concept #2 154
Key Concept #3 154
The Weighted-Average Method: An Example 154
Step 1: Compute the Equivalent Units of Production 156
Step 2: Compute the Cost per Equivalent Unit 158
Step 3: Assign Costs to Units 158
Step 4: Prepare a Cost Reconciliation Report 159
Operation Costing 160
Summary 160
Review Problem: Process Cost Flows and
Costing Units 161
Glossary 163
Questions 163
Applying Excel 164
The Foundational 15 165
Exercises 166
Problems 170
Cases 174
Appendix 4A: FIFO Method 175
Appendix 4A: Exercises, Problems, and Case 180
Appendix 4B: Service Department Cost Allocations 183
Appendix 4B: Exercises, Problems, and Case 186
Chapter-5
Cost-Volume-Profit Relationships 190
The Basics of Cost-Volume-Profit (CVP)
Analysis 192
CVP Relationships in Equation Form 194
CVP Relationships in Graphic Form 195
Preparing the CVP Graph 195
Contribution Margin Ratio (CM Ratio) and the Variable
Expense Ratio 197
Applications of the Contribution Margin Ratio 199
Additional Applications of CVP Concepts 200
Example 1: Change in Fixed Cost and Sales Volume 200
Alternative Solution 1 201
Alternative Solution 2 201
Example 2: Change in Variable Costs and Sales
Volume 201
Solution 201
Example 3: Change in Fixed Cost, Selling Price, and
Sales Volume 201
Solution 202
Example 4: Change in Variable Cost, Fixed Cost, and
Sales Volume 202
Solution 202
Example 5: Change in Selling Price 203
Solution 203
Break-Even and Target Profit Analysis 204
Break-Even Analysis 204
The Equation Method 204
The Formula Method 204
Break-Even in Dollar Sales 205
Target Profit Analysis 205
The Equation Method 206
The Formula Method 206
Target Profit Analysis in Terms of Dollar Sales 206
The Margin of Safety 207
CVP Considerations in Choosing a Cost Structure 208
Cost Structure and Profit Stability 208
Operating Leverage 209
Sales Mix 212
The Definition of Sales Mix 212
Sales Mix and Break-Even Analysis 212
Summary 214
Review Problem: CVP Relationships 214
Glossary 217
Questions 217
Applying Excel 218
The Foundational 15 219
Exercises 220
Problems 225
Case 233
Appendix 5A: Analyzing Mixed Costs 234
Glossary (Appendix 5A) 242
Appendix 5A: Exercises and Problems 242
Chapter-6
Variable Costing and Segment
Reporting: Tools for Management 249
Overview of Variable and Absorption Costing 250
Variable Costing 250
Absorption Costing 250
Selling and Administrative Expenses 251
Summary of Differences 251
Variable and Absorption Costing—An Example 252
Variable Costing Contribution Format Income
Statement 252
Absorption Costing Income Statement 254
Reconciliation of Variable Costing with Absorption
Costing Income 256
Advantages of Variable Costing and the Contribution
Approach 258
Enabling CVP Analysis 258
Explaining Changes in Net Operating Income 259
Supporting Decision Making 259
Segmented Income Statements and the Contribution
Approach 260
Traceable and Common Fixed Costs and the Segment
Margin 260
Identifying Traceable Fixed Costs 261
Traceable Fixed Costs Can Become Common Fixed
Costs 261
Segmented Income Statements—An Example 262
Levels of Segmented Income Statements 263
Segmented Income Statements—Decision Making and
Break-Even Analysis 265
Decision Making 265
Break-Even Analysis 266
Segmented Income Statements—Common Mistakes 267
Omission of Costs 267
Inappropriate Methods for Assigning Traceable Costs
among Segments 268
Failure to Trace Costs Directly 268
Inappropriate Allocation Base 268
Arbitrarily Dividing Common Costs among Segments 268
Income Statements—An External Reporting
Perspective 269
Companywide Income Statements 269
Segmented Financial Information 270
Summary 270
Review Problem 1: Contrasting Variable and Absorption
Costing 271
Review Problem 2: Segmented Income Statements 273
Glossary 274
Questions 275
Applying Excel 275
The Foundational 15 277
Exercises 278
Problems 285
Cases 293
Appendix 6A: Super-Variable Costing 295
Glossary (Appendix 6A) 299
Appendix 6A: Exercises and Problems 299
Chapter-7
Activity-Based Costing:
A Tool to Aid Decision Making 302
Activity-Based Costing: An Overview 303
Nonmanufacturing Costs and Activity-Based Costing 303
Manufacturing Costs and Activity-Based Costing 304
Cost Pools, Allocation Bases, and Activity-Based Costing 304
Designing an Activity-Based Costing (ABC) System 307
Steps for Implementing Activity-Based Costing: 309
Step 1: Define Activities, Activity Cost Pools, and Activity Measures 310
The Mechanics of Activity-Based Costing 311
Step 2: Assign Overhead Costs to Activity Cost Pools 311
Step 3: Calculate Activity Rates 314
Step 4: Assign Overhead Costs to Cost Objects 315
Step 5: Prepare Management Reports 318
Comparison of Traditional and ABC Product Costs 320
Product Margins Computed Using the Traditional Cost System 321
The Differences between ABC and Traditional Product Costs 322
Targeting Process Improvements 325
Activity-Based Costing and External Reports 325
The Limitations of Activity-Based Costing 326
Summary 326
Review Problem: Activity-Based Costing 327
Glossary 328
Questions 329
Applying Excel 329
The Foundational 15 331
Exercises 332
Problems 340
Appendix 7A: Time-Driven Activity-Based Costing: A Microsoft Excel-Based Approach 345
Appendix 7A: Exercises and Problems 351
Chapter-8
Master Budgeting 354
Why and How Do Organizations Create Budgets? 355
Why Do Organizations Create Budgets? 355
How Do Organizations Create Budgets? 356
The Master Budget: An Overview 326
Seeing the Big Picture 358
Preparing the Master Budget 359
The Beginning Balance Sheet 360
The Budgeting Assumptions 360
The Sales Budget 363
The Production Budget 364
Inventory Purchases—Merchandising Company 365
The Direct Materials Budget 365
The Direct Labor Budget 367
The Manufacturing Overhead Budget 368
The Ending Finished Goods Inventory Budget 369
The Selling and Administrative Expense Budget 369
The Cash Budget 371
The Budgeted Income Statement 375
The Budgeted Balance Sheet 376
Summary 378
Review Problem: Budget Schedules 378
Glossary 380
Questions 380
Applying Excel 380
The Foundational 15 382
Exercises 383
Problems 391
Cases 402
Chapter-9
Flexible Budgets and Performance Analysis 405
The Variance Analysis Cycle 406
Preparing Planning Budgets and Flexible Budgets with One Cost Driver 407
Characteristics of a Flexible Budget 407
Deficiencies of the Static Planning Budget 407
How a Flexible Budget Works 410
Flexible Budget Variances 411
Activity Variances 411
Revenue and Spending Variances 412
A Performance Report Combining Activity and Revenue and Spending Variances 414
Performance Reports in Nonprofit Organizations 417
Performance Reports in Cost Centers 417
Preparing Planning Budgets and Flexible Budgets with Multiple Cost Drivers 417
Summary 420
Review Problem: Variance Analysis Using a Flexible Budget 421
Glossary 422
Questions 423
Applying Excel 423
The Foundational 15 425
Exercises 425
Problems 432
Cases 436
Chapter-10
Standard Costs and Variances 440
Standard Costs—Setting the Stage 441
Setting Direct Materials Standards 442
Setting Direct Labor Standards 442
Setting Variable Manufacturing Overhead Standards 443
Using Standards in Flexible Budgets 444
A General Model for Standard Cost Variance
Analysis 445
Using Standard Costs—Direct Materials
Variances 447
The Materials Price Variance 448
The Materials Quantity Variance 449
Using Standard Costs—Direct Labor Variances 450
The Labor Rate Variance 450
The Labor Efficiency Variance 451
Using Standard Costs—Variable Manufacturing Overhead Variances 452
The Variable Manufacturing Overhead Rate and Efficiency Variances 453
An Important Subtlety in the Materials Variances 455
Standard Costs—Managerial Implications 457
Advantages of Standard Costs 457
Potential Problems with Standard Costs 457
Summary 458
Review Problem: Standard Costs 458
Glossary 460
Questions 461
Applying Excel 461
The Foundational 15 463
Exercises 463
Problems 466
Cases 471
Appendix 10A: Predetermined Overhead Rates and Overhead Analysis in a Standard Costing System 472
Glossary (Appendix 10A) 478
Appendix 10A: Exercises and Problems 478
Appendix 10B: Standard Cost Systems: A Financial
Reporting Perspective Using Microsoft Excel 485
Appendix 10B: Exercises and Problems 492
Chapter-11
Responsibility Accounting Systems 497
Decentralization in Organizations 498
Advantages and Disadvantages of Decentralization 498
Responsibility Accounting 499
Cost, Profit, and Investment Centers 499
Cost Center 499
Profit Center 499
Investment Center 499
Evaluating Investment Center Performance—Return on Investment 500
Net Operating Income and Operating Assets
Defined 500
Understanding ROI 501
Criticisms of ROI 504
Residual Income 504
Motivation and Residual Income 505
Transfer Pricing 506
Negotiated Transfer Prices 507
Negotiated Transfer Prices: An Example 508
The Selling Division’s Lowest Acceptable Transfer Price 508
The Buying Division’s Highest Acceptable Transfer Price 509
Selling Division has Idle Capacity 509
Selling Division has No Idle Capacity 509
Selling Division Has Some Idle Capacity 510
No Outside Supplier 511
Evaluation of Negotiated Transfer Prices 511
Transfers at the Cost to the Selling Division 511
Transfers at Market Price 512
Service Department Charges 512
Service Department Charges: Key Concepts 513
Variable Costs 513
Fixed Costs 514
Service Department Charges: An Example 514
Some Cautions in Allocating Service Department Costs 515
Pitfalls in Allocating Fixed Costs 515
Summary 517
Review Problem 1: Return on Investment (ROI) and Residual Income 517
Review Problem 2: Transfer Pricing 518
Glossary 519
Questions 520
Applying Excel 520
The Foundational 15 521
Exercises 522
Problems 528
Case 534
Chapter-12
Strategic Performance Measurement 535
The Balanced Scorecard: An Overview 536
Learning and Growth Measures 537
Internal Business Process Measures 538
Customer Measures 539
Financial Measures 540
Cost of Quality: A Closer Look 541
Cost of Quality 541
Quality Cost Reports: Strengths and Limitations 543
Operating Performance Measures: A Closer Look 543
Throughput (Manufacturing Cycle) Time 543
Delivery Cycle Time 544
Manufacturing Cycle Efficiency (MCE) 545
Example 545
Required: 545
Overall Equipment Effectiveness (OEE) 546
Example 546
Constructing a Balanced Scorecard 547
Selecting Balanced Scorecard Measures 547
Tying Compensation to the Balanced Scorecard 549
Corporate Social Responsibility Performance Measures 550
Global Reporting Initiative 550
Corporate Social Responsibility and the Balanced Scorecard 551
Summary 552
Review Problem: Operating Performance Measures 553
Glossary 553
Questions 554
Applying Excel 554
Exercises 555
Problems 561
Case 568
Chapter-13
Differential Analysis: The Key to Decision Making 570
Decision Making: Six Key Concepts 571
Key Concept #1 571
Key Concept #2 571
Key Concept #3 571
Key Concept #4 572
Key Concept #5 572
Key Concept #6 572
Identifying Relevant Costs and Benefits: An Example 573
Decision Analysis: The Total Cost and Differential Cost Approaches 575
Why Isolate Relevant Costs? 577
Adding and Dropping Product Lines and Other Segments 578
An Illustration of Cost Analysis 578
A Comparative Format 580
Beware of Allocated Fixed Costs 580
Make or Buy Decisions 581
Strategic Aspects of the Make or Buy Decision 582
An Example of a Make or Buy Decision 582
Opportunity Cost 584
Special Order Decisions 585
Volume Trade-Off Decisions 586
What Is a Constraint? 586
Utilizing a Constrained Resource to Maximize Profits 587
Managing Constraints 590
Joint Product Costs and Sell or Process Further Decisions 591
Santa Maria Wool Cooperative: An Example 592
Activity-Based Costing and Relevant Costs 594
Summary 595
Review Problem: Differential Analysis 595
Glossary 596
Questions 597
Applying Excel 597
The Foundational 15 599
Exercises 600
Problems 608
Cases 616
Appendix 13A: Pricing Decisions 622
The Absorption Costing Approach to Cost-Plus
Pricing 624
Pricing and Customer Latitude 627
Value-Based Pricing 631
Target Costing 633
Summary (Appendix 13A) 634
Glossary (Appendix 13A) 635
Appendix 13A: Exercises and Problems 635
Chapter-14
Capital Budgeting Decisions 642
Capital Budgeting—An Overview 643
Typical Capital Budgeting Decisions 643
Cash Flows versus Net Operating Income 643
Typical Cash Outflows 643
Typical Cash Inflows 644
The Time Value of Money 644
The Payback Method 645
Evaluation of the Payback Method 645
An Extended Example of Payback 646
Payback and Uneven Cash Flows 646
The Net Present Value Method 648
The Net Present Value Method Illustrated 648
Recovery of the Original Investment 651
An Extended Example of the Net Present Value Method 652
The Internal Rate of Return Method 654
The Internal Rate of Return Method Illustrated 654
Comparison of the Net Present Value and Internal Rate of Return Methods 655
Expanding the Net Present Value Method 656
Least-Cost Decisions 656
Uncertain Cash Flows 658
An Example 659
Preference Decisions—The Ranking of Investment Projects 660
Internal Rate of Return Method 660
Net Present Value Method 660
The Simple Rate of Return Method 661
Postaudit of Investment Projects 663
Summary 664
Review Problem: Comparison of Capital Budgeting Methods 664
Glossary 666
Questions 666
Applying Excel 667
The Foundational 15 668
Exercises 669
Problems 673
Cases 680
Appendix 14A: The Concept of Present Value 681
Appendix 14A: Review Problem: Basic Present Value
Computations 684
Glossary (Appendix 14A) 685
Appendix 14A: Exercises 686
Appendix 14B: Present Value Tables 687
Appendix 14C: Income Taxes and the Net Present Value
Method 689
Summary (Appendix 14C) 691
Appendix 14C: Exercises and Problems 691
Chapter-15
Statement of Cash Flows 694
The Statement of Cash Flows:
Key Concepts 696
Organizing the Statement of
Cash Flows 696
Operating Activities: Direct or Indirect Method? 696
The Indirect Method: A Three-Step Process 697
Step 1 697
Step 2 698
Step 3 699
Investing and Financing Activities: Gross Cash Flows 699
Property, Plant, and Equipment 700
Retained Earnings 701
Summary of Key Concepts 702
An Example of a Statement of Cash Flows 703
Operating Activities 704
Step 1 704
Step 2 705
Step 3 706
Investing Activities 706
Financing Activities 707
Seeing the Big Picture 708
Interpreting the Statement of Cash Flows 710
Consider a Company’s Specific Circumstances 710
Consider the Relationships among Numbers 710
Free Cash Flow 711
Earnings Quality 712
Summary 712
Review Problem 713
Glossary 717
Questions 717
The Foundational 15 717
Exercises 719
Problems 722
Appendix 15A: The Direct Method of Determining the Net
Cash Provided by Operating Activities 730
Appendix 15A: Exercises and Problems 732
Chpter-16
Financial Statement Analysis 734
Limitations of Financial Statement Analysis 735
Comparing Financial Data across Companies 735
Looking beyond Ratios 735
Statements in Comparative and Common-Size Form 735
Dollar and Percentage Changes on Statements 736
Common-Size Statements 738
An Example of a Statement of Cash Flows 703
Operating Activities 704
Step 1 704
Step 2 705
Step 3 706
Investing Activities 706
Financing Activities 707
Seeing the Big Picture 708
Interpreting the Statement of Cash Flows 710
Consider a Company’s Specific Circumstances 710
Consider the Relationships among Numbers 710
Free Cash Flow 711
Earnings Quality 712
Summary 712
Review Problem 713
Glossary 717
Questions 717
The Foundational 15 717
Exercises 719
Problems 722
Appendix 15A: The Direct Method of Determining the Net
Cash Provided by Operating Activities 730
Appendix 15A: Exercises and Problems 732
Ratio Analysis—Liquidity 740
Working Capital 741
Current Ratio 741
Acid-Test (Quick) Ratio 742
Ratio Analysis—Asset Management 742
Accounts Receivable Turnover 742
Inventory Turnover 743
Operating Cycle 743
Total Asset Turnover 744
Ratio Analysis—Debt Management 744
Times Interest Earned Ratio 745
Debt-to-Equity Ratio 745
Equity Multiplier 746
Ratio Analysis—Profitability 746
Gross Margin Percentage 746
Net Profit Margin Percentage 747
Return on Total Assets 748
Return on Equity 748
Ratio Analysis—Market Performance 749
Earnings per Share 749
Price-Earnings Ratio 750
Dividend Payout and Yield Ratios 750
The Dividend Payout Ratio 750
The Dividend Yield Ratio 751
Book Value per Share 751
Summary of Ratios and Sources of Comparative Ratio
Data 751
Summary 753
Review Problem: Selected Ratios and Financial
Leverage 753
Glossary 756
Questions 756
The Foundational 15 757
Exercises 758
Problems 763
Integration Exercises 772
Index 790