Olongapo sports corporation distributes two premium golf balls

Accounting Discussion

S e c o n d E d i t i o n

Eric W. Noreen, Ph.D., CMA Professor Emeritus University of Washington

Peter C. Brewer, Ph.D., CPA Miami University —Oxford, Ohio

Ray H. Garrison, D.B.A., CPA Professor Emeritus Brigham Young University

managersMANAGERIAL ACCOUNTING for

nor27130_fm_i-xxviii.indd inor27130_fm_i-xxviii.indd i 10/5/09 2:49:58 PM10/5/09 2:49:58 PM

Rev.Confirming Pages

MANAGERIAL ACCOUNTING FOR MANAGERS Published by McGraw-Hill/Irwin, a business unit of The McGraw-Hill Companies, Inc., 1221 Avenue of the Americas, New York, NY, 10020. Copyright © 2011, 2008 by The McGraw-Hill Companies, Inc. All rights reserved. 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 The McGraw-Hill Companies, Inc., 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.

1 2 3 4 5 6 7 8 9 0 DOW/DOW 1 0 9 8 7 6 5 4 3 2 1 0

ISBN 978-0-07-352713-0 MHID 0-07-352713-0

Vice president and editor-in-chief: Brent Gordon Editorial director: Stewart Mattson Publisher: Tim Vertovec Director of development: Ann Torbert Development editor: Emily A. Hatteberg Vice president and director of marketing: Robin J. Zwettler Marketing manager: Kathleen Klehr Vice president of editing, design and production: Sesha Bolisetty Lead project manager: Pat Frederickson Lead production supervisor: Carol A. Bielski Senior designer: Mary Kazak Sander Senior photo research coordinator: Lori Kramer Photo researcher: Keri Johnson Media project manager: Jennifer Lohn Cover designer: Gino Cieslik Interior design: Gino Cieslik Cover photo: Integrated Laser Pointer, courtesy of VSON Technology Co., Ltd. Typeface: 10.5/12 Times Roman Compositor: Laserwords Private Limited Printer: R. R. Donnelley

Library of Congress Cataloging-in-Publication Data Noreen, Eric W. Managerial accounting for managers / Eric W. Noreen, Peter C. Brewer, Ray H. Garrison.—2nd ed. p. cm. Includes index. ISBN-13: 978-0-07-352713-0 (alk. paper) ISBN-10: 0-07-352713-0 (alk. paper) 1. Managerial accounting. I. Brewer, Peter C. II. Garrison, Ray H. III. Title. HF5657.4.N668 2011 658.15’11—dc22 2009037451

www.mhhe.com

Dedication To our families and to our many colleagues who use this book.

nor27130_fm_i-xxviii.indd iinor27130_fm_i-xxviii.indd ii 10/5/09 2:49:59 PM10/5/09 2:49:59 PM

www.mhhe.com
Rev.Confirming Pages

iii

About the Authors

Eric W. Noreen has held appointments at institutions in the United States, Europe, and Asia. He is

emeritus professor of accounting at the University of

Washington.

His BA degree is from the University of Washington and his

MBA and PhD degrees are from Stanford University. A Certified

Management Accountant, he was awarded a Certificate of

Distinguished Performance by the Institute of Certified

Management Accountants.

Professor Noreen has served as associate editor of The Accounting Review and the Journal of Accounting and Economics. He has had numerous articles published in academic journals including: the Journal of Accounting Research; the Accounting Review; the Journal of Accounting and Economics; Accounting Horizons; Accounting, Organizations and Society; Contemporary Accounting Research; the Journal of Management Accounting Research; and the Review of Accounting Studies.

Professor Noreen has won a number of awards from students for his teaching.

Peter C. Brewer is a professor in the Department of Accountancy at Miami University, Oxford, Ohio.

He holds a BS degree in accounting from Penn State University,

an MS degree in accounting from the University of Virginia, and

a PhD from the University of Tennessee. He has published

more than 30 articles in a variety of journals including:

Management Accounting Research, the Journal of Information Systems, Cost Management, Strategic Finance, the Journal of Accountancy, Issues in Accounting Education, and the Journal of Business Logistics.

nor27130_fm_i-xxviii.indd iiinor27130_fm_i-xxviii.indd iii 10/5/09 2:50:00 PM10/5/09 2:50:00 PM

Rev.Confirming Pages

iv

About the Authors Professor Brewer is a member of the editorial boards of Issues in Accounting Education and the Journal of Accounting Education. His article “Putting Strategy into the Balanced Scorecard” won the 2003 International Federation of Accountants’

Articles of Merit competition and his articles “Using Six Sigma to Improve the

Finance Function” and “Lean Accounting: What’s It All About?” were awarded the

Institute of Management Accountants’ Lybrand Gold and Silver Medals in 2005 and

2006. He has received Miami University’s Richard T. Farmer School of Business

Teaching Excellence Award and has been recognized on two occasions by the Miami

University Associated Student Government for “making a remarkable commitment to

students and their educational development.” He is a leading thinker in undergraduate

management accounting curriculum innovation and is a frequent presenter at various

professional and academic conferences.

Prior to joining the faculty at Miami University, Professor Brewer was employed as

an auditor for Touche Ross in the firm’s Philadelphia office. He also worked as an

internal audit manager for the Board of Pensions of the Presbyterian Church (U.S.A.).

He frequently collaborates with companies such as Harris Corporation, Ghent

Manufacturing, Cintas, Ethicon Endo-Surgery, Schneider Electric, Lenscrafters, and

Fidelity Investments in a consulting or case writing capacity.

Ray H. Garrison is emeritus professor of accounting at Brigham Young University, Provo, Utah. He

received his BS and MS degrees from Brigham Young University

and his DBA degree from Indiana University.

As a certified public accountant, Professor Garrison has been

involved in management consulting work with both national

and regional accounting firms. He has published articles in The Accounting Review, Management Accounting, and other professional journals. Innovation in the classroom has earned

Professor Garrison the Karl G. Maeser Distinguished Teaching Award from Brigham

Young University.

nor27130_fm_i-xxviii.indd ivnor27130_fm_i-xxviii.indd iv 10/5/09 2:50:02 PM10/5/09 2:50:02 PM

Rev.Confirming Pages

v

Focus on the Future Manager

with Noreen/ Brewer/Garrison

In Managerial Accounting for Managers, the authors have crafted a streamlined managerial accounting book that is perfect for non-

accounting majors who intend to move into managerial positions. Topics

such as process costing, the statement of cash flows, and financial state-

ment analysis have been dropped to enable instructors to focus their attention on the bedrocks of managerial accounting—planning, control, and decision making. Noreen/Brewer/Garrison focuses on the

fundamentals, allowing students to develop the conceptual framework

managers need to succeed.

In its second edition, Managerial Accounting for Managers continues to adhere to three core standards:

FOCUS. Noreen/Brewer/Garrison pinpoints the key managerial concepts students will need in their future careers. With no journal

entries or financial accounting topics to worry about, students can focus

on the fundamental principles of managerial accounting.

RELEVANCE. With its insightful Business Focus features to begin each chapter, current In Business examples throughout the text,

and tried-and-true end-of-chapter material, a student will always see the

real-world applicability of Noreen/Brewer/Garrison.

BALANCE. There is more than one type of business, and so Noreen/Brewer/Garrison covers a variety of business models, including

nonprofit, retail, service, wholesale, and manufacturing organizations.

Service company examples are highlighted with icons in the margins of

the text.

nor27130_fm_i-xxviii.indd vnor27130_fm_i-xxviii.indd v 10/5/09 2:50:04 PM10/5/09 2:50:04 PM

Rev.Confirming Pages

vi

Noreen’s Powerful Pedagogy Managerial Accounting for Managers is full of pedagogy designed to make studying productive and hassle free.

Opening Vignette Each chapter opens with a Business Focus

feature that provides a real-world example

for students, allowing them to see how

the chapter’s information and insights apply

to the world outside the classroom.

Learning Objectives alert students to what they should expect as they progress

through the chapter.

“Many concepts in accounting are rather abstract if not given some type of context to understand them in. The

business focus features help to provide this context and can lead to discussions

in class if the instructor wishes.” —Jeffrey Wong, University of Nevada, Reno

B U

S IN

E S

S F

O C

U S

367367

Learning Objectives

After studying Chapter 10, you should be able to:

LO1 Explain how direct materials standards and direct labor standards are set.

LO2 Compute the direct materials price and quantity variances and explain their significance.

LO3 Compute the direct labor rate and efficiency variances and explain their significance.

LO4 Compute the variable manufacturing overhead rate and efficiency variances.

LO5 Compute delivery cycle time, throughput time, and manufacturing cycle efficiency (MCE).

LO6 (Appendix 10A) Compute and interpret the fixed overhead budget and volume variances.

Standard Costs and Operating Performance Measures Managing Materials and Labor

Schneider Electric’s Oxford, Ohio, plant manufactures busways that transport electricity from its point of entry into a building to remote locations throughout the building. The plant’s managers pay close attention to direct material costs because they are more than half of the plant’s total manufacturing costs. To help control scrap rates for direct materials such as copper, steel, and aluminum, the

accounting department prepares direct materials quantity variances. These variances compare the standard quantity of direct materials that should have been used to make a product (according to computations by the plant’s engineers) to the amount of direct materials that were actually used. Keeping a close eye on these differences helps to identify and deal with the causes of excessive scrap, such as an inadequately trained machine operator, poor quality raw material inputs, or a malfunctioning machine.

Because direct labor is also a significant component of the plant’s total manufac- turing costs, the management team daily monitors the direct labor efficiency variance. This variance compares the standard amount of labor time allowed to make a product to the actual amount of labor time used. When idle workers cause an unfavorable labor efficiency variance, managers temporarily move workers from departments with slack to departments with a backlog of work to be done. ■

Source: Author’s conversation with Doug Taylor, plant controller, Schneider Electric’s Oxford, Ohio, plant.

10 C h a p t e r

nor27130_ch10_367-418.indd 367 9/15/09 8:19:34 AM

nor27130_fm_i-xxviii.indd vinor27130_fm_i-xxviii.indd vi 10/5/09 2:50:05 PM10/5/09 2:50:05 PM

Rev.Confirming Pages

vii

In Business Boxes These helpful boxed features offer a glimpse

into how real companies use the managerial

accounting concepts discussed within the

chapter. Each chapter contains from three to

fourteen of these current examples.

Managerial Accounting in Action Vignettes These vignettes depict cross-functional

teams working together in real-life

settings, working with the products and

services that students recognize from

their own lives. Students are shown

step-by-step how accounting concepts

are implemented in organizations and

how these concepts are applied to solve

everyday business problems. First, “The

Issue” is introduced through a dialogue;

the student then walks through the

implementation process; finally, “The

Wrap-up” summarizes the big picture.

“I love these. Again, a connection to real world that adds credence to the course.”

—Larry N. Bitner, Shippensburg University

“This element is exceptional. The situations truly reflect real life issues business people would

face—not just “textbook” manufactured examples that always have black/white answers.”

—Ann E. Selk, University of Wisconsin – Green Bay

IS THIS REALLY A JOB? VBT Bicycling Vacations of Bristol, Vermont, offers deluxe bicycling vacations in the United States, Canada, Europe, and other locations throughout the world. For example, the company offers a 10-day tour of the Puglia region of Italy—the “heel of the boot.” The tour price includes international airfare, 10 nights of lodging, most meals, use of a bicycle, and ground transportation. Each tour is led by at least two local tour leaders, one of whom rides with the guests along the tour route. The other tour leader drives a “sag wagon” that carries extra water, snacks, and bicycle repair equip- ment and is available to shuttle guests back to the hotel or up a hill. The sag wagon also transports guests’ luggage from one hotel to another.

Each specific tour can be considered a job. For example, Giuliano Astore and Debora Trippetti, two natives of Puglia, led a VBT tour with 17 guests over 10 days in late April. At the end of the tour, Giuliano submitted a report, a sort of job cost sheet, to VBT headquarters. This report detailed the on the ground expenses incurred for this specific tour, including fuel and operating costs for the van, lodging costs for the guests, the costs of meals provided to guests, the costs of snacks, the cost of hiring additional ground transportation as needed, and the wages of the tour leaders. In addition to these costs, some costs are paid directly by VBT in Vermont to vendors. The total cost incurred for the tour is then compared to the total revenue collected from guests to determine the gross profit for the tour.

Sources: Giuliano Astore and Gregg Marston, President, VBT Bicycling Vacations. For more information about VBT, see www.vbt.com .

I N B U S I N E S S

nor27130_ch05_164-205.indd 166 8/31/09 2:20:41 PM

338 Chapter 9

Victoria: How is the budgeting going? Rick: Pretty well. I didn’t have any trouble putting together the budget for March. I also

prepared a report comparing the actual results for March to the budget, but that report isn’t giving me what I really want to know.

Victoria: Because your actual level of activity didn’t match your budgeted activity? Rick: Right. I know the level of activity shouldn’t affect my fixed costs, but we had

more client-visits than I had expected and that had to affect my other costs. Victoria: So you want to know whether the higher actual costs are justified by the

higher level of activity you actually had in March? Rick: Precisely. Victoria: If you leave your reports and data with me, I can work on it later today, and by

tomorrow I’ll have a report to show you.

How a Flexible Budget Works A flexible budget approach recognizes that a budget can be adjusted to show what costs should be for the actual level of activity. To illustrate how flexible budgets work, Victoria prepared the report in Exhibit 9–4 that shows what the revenues and costs should have been given the actual level of activity in March. Preparing the report is straightforward. The cost formula for each cost is used to estimate what the cost should have been for 1,100 client- visits—the actual level of activity for March. For example, using the cost formula $1,500 � $0.10q, the cost of electricity in March should have been $1,610 (� $1,500 � $0.10 � 1,100).

We can see from the flexible budget that the net operating income in March should have been $30,510, but recall from Exhibit 9–2 that the net operating income was actually only $21,230. The results are not as good as we thought. Why? We will answer that question shortly.

To summarize to this point, Rick had budgeted for a profit of $16,800. The actual profit was quite a bit higher—$21,230. However, given the amount of business the salon had in March, the profit should have been even higher—$30,510. What are the causes of these discrepancies? Rick would certainly like to build on the positive factors, while working to reduce the negative factors. But what are they?

To answer Rick’s questions concerning the discrepancies between budgeted and actual costs, we will need to break down the variances shown in Exhibit 9–3 into two types of variances— activity variances and revenue and spending variances. We do that in the next two sections.

Flexible Budget Variances

MANAGERIAL ACCOUNTING IN ACTION The Issue

Rick’s Hairstyling Flexible Budget

For the Month Ended March 31

Actual client-visits (q) .................................................. 1,100

Revenue ($180.00q) ................................................... $198,000 Expenses: Wages and salaries ($65,000 � $37.00q) ............... 105,700 Hairstyling supplies ($1.50q) ................................... 1,650 Client gratuities ($4.10q) ......................................... 4,510 Electricity ($1,500 � $0.10q) .................................. 1,610 Rent ($28,500) ........................................................ 28,500 Liability insurance ($2,800) ...................................... 2,800 Employee health insurance ($21,300) ..................... 21,300 Miscellaneous ($1,200 � $0.20q) ........................... 1,420 Total expense .............................................................. 167,490 Net operating income .................................................. $ 30,510

E X H I B I T 9 – 4 Flexible Budget Based on Actual Activity

nor27130_ch09_334-366.indd 338 9/15/09 10:06:31 AM

nor27130_fm_i-xxviii.indd viinor27130_fm_i-xxviii.indd vii 10/26/09 4:43:01 PM10/26/09 4:43:01 PM

www.vbt.com
Rev.Confirming Pages

viii

“This text is a clear, succinct presentation of appropriate

managerial accounting topics for an introductory course. The

management focus makes the text more relevant to the

introductory accounting course in which the majority of students

are non-accounting majors.” —Darlene Coarts, University of

Northern Iowa

“This text is very thorough and has lots of rich current examples and applications. It has exceptional supplements of all types. It is a very user oriented book and

very appropriate for courses for non-accounting majors as a second accounting course.” —Dana Carpenter, Madison Area

Technical College

“Clear, concise, covers the most relevant topics for students in all concentrations of business and a great text for students that are going into Cost Accounting.” —Shirley Polejewski, University of

St. Thomas

“This is a very comprehensive Managerial Accounting textbook

with an excellent use of examples within the text.”

—Tammy Metzke, Milwaukee Area Technical College-West Allis

Utilizing the Icons