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Interactive Presentations Interactive Presentations cover each chapter’s core learning objectives with narrated, animated presentations that pause frequently to check for comprehension. Interactive Presentations harness the full power of technology to appeal to all learning styles. Interactive Presentations are a great way to improve online or hybrid sections, but also extend the learning opportunity for traditional classes, such as in facilitating a “fl ipped classroom.”

End-of-Chapter Material McGraw-Hill Education redesigned the student interface for our end-of-chapter assessment content. The new interface provides improved answer acceptance to reduce students’ frustration with formatting issues (such as rounding) and, for select questions, provides an expanded table that guides students through the process of solving the problem. Many questions have been redesigned to more fully test students’ mastery of the content.

Guided Examples Guided Examples provide narrated and animated step-by-step walkthroughs of algorithmic versions of assigned exercises. This allows students to identify, review, or reinforce the concepts and activities covered in class. Guided Examples provide immediate feedback and focus on the areas where students need the most guidance.

Connect generates comprehensive reports and graphs that provide instructors with an instant view of the performance of individual students, a specifi c section, or multiple sections. Since all content is mapped to learning objectives, Connect reporting is ideal for accreditation or other administrative documentation.

General Ledger New to 5e are General Ledger problems that offer students the ability to see how transactions post from the general journal all the way through the fi nancial statements. General Ledger (GL) questions provide auto-grading in the same intelligent design as our end-of-chapter content. Critical thinking and analysis components are added to each GL problem to ensure understanding of the entire process.


Connect Insight The fi rst and only analytics tool of its kind, Connect Insight is a series of visual data displays that are each framed by an intuitive question and provide at-a-glance information regarding how an instructor’s class is performing. Connect Insight is available through Connect titles.

Excel Simulations Assignable within Connect Accounting, Excel Simulations allow students to practice their Excel skills—such as basic formulas and formatting—within the context of accounting. These questions feature animated, narrated Help and Show Me tutorials (when enabled). These simulations are auto-graded and provide instant feedback to the student.

Managerial Accounting 5thedition

John J. Wild University of Wisconsin at Madison

Ken W. Shaw University of Missouri at Columbia

To my students and family, especially Kimberly, Jonathan, Stephanie and Trevor. To my wife Linda and children Erin, Emily and Jacob.

MANAGERIAL ACCOUNTING, FIFTH EDITION Published by McGraw-Hill Education, 2 Penn Plaza, New York, NY 10121. Copyright © 2016 by McGraw-Hill Education. All rights reserved. Printed in the United States of America. Previous editions © 2013, 2011, and 2009. No part of this pub- lication 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.

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

ISBN 978-1-259-17649-4 MHID 1-259-17649-5

Senior Vice President, Products & Markets: Kurt L. Strand Vice President, General Manager, Products & Markets: Marty Lange Vice President, Content Design & Delivery: Kimberly Meriwether David Managing Director: Tim Vertovec Marketing Director: Brad Parkins Brand Manager: Steve Schuetz Director, Product Development: Rose Koos Director of Digital Content: Patricia Plumb Lead Product Developer: Ann Torbert Product Developer: Lindsey Schauer Marketing Manager: Michelle Nolte Digital Product Analyst: Xin Lin Director, Content Design & Delivery: Linda Avenarius Program Manager: Daryl Horrocks Content Project Managers: Lori Koetters, Brian Nacik Buyer: Carol A. Bielski Design: Debra Kubiak Content Licensing Specialists: DeAnna Dausener, Keri Johnson Cover Image: Yuri_Arcurs/Getty Images Compositor: Aptara®, Inc. Printer: R.R. Donnelley

All credits appearing on page or at the end of the book are considered to be an extension of the copyright page.

Library of Congress Control Number: 2014957125

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.


Managerial Accounting, 5e

Adapting to the Needs of Today’s Students

Enhancements in technology have changed how we live and learn. Working with learning resources across devices, whether smartphones, tablets, or laptop computers, empowers students to drive their own learning by putting increasingly intelligent technology into their hands.

Whether the goal is to become an accountant, a business- person, or simply an informed consumer of accounting information, Managerial Accounting (MA) has helped gen- erations of students succeed. Its leading-edge accounting content, paired with state-of-the-art technology, supports student learning and elevates understanding of key accounting principles.

MA excels at engaging students with content that will help them see the relevance of accounting. Its chapter- opening vignettes showcase dynamic, successful entrepreneurial indi- viduals and companies and highlight the usefulness of accounting to business owners. This edition’s featured com- panies—Apple, Google, and Samsung— capture student interest with their products, and their annual reports serve as a pathway for learning financial statements. New in this edition, Need-to-Know illustrations in each chapter demon- strate how to apply key accounting procedures. They are supported by guided video presentations.

MA also delivers innovative technology to help student per- formance. Connect Accounting provides students with a media-rich eBook version of the textbook and offers instant grading and feedback for assignments that are completed online. Our system for completing exercise and problem material takes accounting content to the next level, deliver- ing assessment material in a more intuitive, less restrictive format that adapts to the needs of today’s students.

This technology features:

• an auto-calculation feature that allows students to focus on concepts rather than rote tasks.

• a smart (auto-fill) drop-down design. • a general journal interface that looks and feels more

like that found in practice.

The end result is content that better prepares students for the real world.

Connect Accounting also includes digitally based, interactive, adaptive learning tools that provide an opportunity to

engage students more effectively by offering varied instructional methods and more personalized learning paths that build on different learning styles, interests, and abilities.

The revolutionary technology of the LearnSmart Advantage Series—consisting of LearnSmart® and SmartBook®—is available only from McGraw-Hill Education. These prod- ucts are based on an intelligent learning system that uses a series of adaptive questions to pinpoint each student’s knowledge gaps and then provides an optimal learning path. Students spend less time in areas they already know and more time in areas they don’t. The result: Students study more efficiently, learn faster, and retain more knowl- edge. Valuable reports provide insights into how students are progressing through textbook content and informa- tion useful for shaping in-class time or assessment.

Interactive Presentations teach each chapter’s core learn- ing objectives in a rich, multimedia format, bringing the content to life. Your students will come to class prepared when you assign Interactive Presentations. Students can also review the Interactive Presentations as they study. Further, Guided Examples provide students with narrated, animated, step-by-step walk-throughs of algorithmic ver- sions of assigned exercises. Students appreciate the Guided Examples, which help them learn accounting and complete assignments outside of class.

A General Ledger (GL) application, new to 5e, offers stu- dents the ability to see how transactions post from the general journal all the way through the financial state- ments. It uses the intuitive, less restrictive format used for other homework, and it adds critical thinking components to each GL question, to ensure understanding of the entire process.

The first and only analytics tool of its kind, Connect Insight® is a series of visual data displays—each framed by an intuitive question—to provide at-a-glance information about how your class is doing. Connect Insight provides a quick analysis on five key dimensions, available at a moment’s notice from a tablet device: How are my stu- dents doing? How is my section doing? How is this student doing? How are my assignments going? and How is this assignment going?


“This is an excellent book that is well-written and contains excellent illustrations. It has the best online supplements of any of the texts that I have reviewed. . . . This is an excellent book that I would recommend to all of my colleagues.”

—KAREN CRISONINO, County College of Morris


JOHN J. WILD is a distinguished pro- fessor of accounting at the University of Wisconsin at Madison. He previously held appointments at Michigan State University and the University of Manchester in England. He received his BBA, MS, and PhD from the University of Wisconsin.

Professor Wild teaches accounting courses at both the undergraduate and graduate levels. He has received numerous

teaching honors, including the Mabel W. Chipman Excellence-in- Teaching Award, the departmental Excellence-in-Teaching Award, and the Teaching Excellence Award from the 2003 and 2005 busi- ness graduates at the University of Wisconsin. He also received the Beta Alpha Psi and Roland F. Salmonson Excellence-in-Teaching Award from Michigan State University. Professor Wild has received several research honors and is a past KPMG Peat Marwick National Fellow and is a recipient of fellowships from the American Accounting Association and the Ernst and Young Foundation.

Professor Wild is an active member of the American Accounting Association and its sections. He has served on several committees of these organizations, including the Outstanding Accounting Educator Award, Wildman Award, National Program Advisory, Publications, and Research Committees. Professor Wild is author of Fundamental Accounting Principles, Financial Accounting, Financial and Managerial Accounting, and College Accounting, each published by McGraw-Hill Education. His research articles on accounting and analysis appear in The Accounting Review; Journal of Accounting Research; Journal of Accounting and Economics; Contemporary Accounting Research; Journal of Accounting, Auditing and Finance; Journal of Accounting and Public Policy; and other journals. He is past associate editor of Contemporary Accounting Research and has served on several editorial boards including The Accounting Review. Professor Wild is a recognized expert in accounting and financial analysis, and is known for his teaching innovations within an active learning classroom environment.

In his leisure time, Professor Wild enjoys hiking, sports, travel, people, and spending time with family and friends.

KEN W. SHAW is an associate professor of accounting and the Deloitte Professor of Accounting at the University of Missouri. He previously was on the faculty at the University of Maryland at College Park. He has also taught in international programs at the University of Bergamo (Italy) and the University of Alicante (Spain). He received an accounting degree from Bradley University and an MBA and PhD from the University of Wisconsin. He is a Certified

Public Accountant with work experience in public accounting. Professor Shaw teaches accounting at the undergraduate and

graduate levels. He has received numerous School of Accountancy, College of Business and university-level teaching awards. He was voted the “Most Influential Professor” by three School of Accountancy graduating classes, and is a two-time recipient of the O’Brien Excellence in Teaching Award. He is the advisor to his school’s chapter of the Association of Certified Fraud Examiners.

Professor Shaw is an active member of the American Accounting Association and its sections. He has served on many committees of these organizations and presented his research papers at national and regional meetings. Professor Shaw’s research appears in the Journal of Accounting Research; The Accounting Review; Contemporary Accounting Research; Journal of Financial and Quantitative Analysis; Journal of the American Taxation Association; Strategic Management Journal; Journal of Accounting, Auditing, and Finance; Journal of Financial Research; and other journals. He has served on the editorial boards of Issues in Accounting Education; Journal of Business Research; and Research in Accounting Regulation. Professor Shaw is co-author of Fundamental Accounting Principles, Financial and Managerial Accounting, and College Accounting, all published by McGraw-Hill Education.

In his leisure time, Professor Shaw enjoys tennis, cycling, music, and coaching his children’s sports teams.

About the Authors

Dear Colleagues and Friends,

As we roll out the new edition of Managerial Accounting, we thank each of you who provided suggestions to improve the textbook and its teaching resources. This new edition reflects the advice and wisdom of many dedicated reviewers, symposium and workshop participants, students, and instructors. Throughout the revision process, we steered this textbook and its teaching tools in the man- ner you directed. As you’ll find, the new edition offers a rich set of features— especially digital features—to improve student learning and assist instructor teaching and grading. We believe you and your students will like what you find in this new edition.

Many talented educators and professionals have worked hard to create the mate- rials for this product, and for their efforts, we’re grateful. We extend a special thank-you to our contributing and technology supplement authors, who have worked so diligently to support this product:

Contributing Author: Kathleen O’Donnell, Onondaga Community College Accuracy Checkers: Dave Krug, Johnson County Community College; Mark McCarthy, East Carolina University; Helen Roybark, Radford University; Barbara Schnathorst; and Beth Woods

LearnSmart Author: April Mohr, Jefferson Community and Technical College, SW Interactive Presentations: Jeannie Folk, College of DuPage PowerPoint Presentations: Beth Kane, Northwestern University Instructor Resource Manual: Patricia Walczak, Lansing Community College Test Bank Contributors: Anna Boulware, St. Charles Community College, and Brenda J. McVey, University of Mississippi

Digital Contributor, Connect Content, General Ledger Problems, and Exercise PowerPoints: Kathleen O’Donnell, Onondaga Community College In addition to the invaluable help from the colleagues listed above, we thank the entire MA, 5e, team at McGraw-Hill Education: Tim Vertovec, Steve Schuetz, Michelle Nolte, Lindsey Schauer, Lori Koetters, Ann Torbert, Brad Parkins, Patricia Plumb, Xin Lin, Kevin Moran, Debra Kubiak, Carol Bielski, Keri Johnson, DeAnna Dausener, Sarah Evertson, Ben Pearsall, Brian Nacik, Ron Nelms, and Daryl Horrocks. We could not have completed this new edition without your efforts.

John J. Wild Ken W. Shaw


Easy to Use. Proven Effective. McGraw-Hill CONNECT ACCOUNTING McGraw-Hill Connect Accounting is a digital teaching and learning environment that gives students the means to bet- ter connect with their coursework, with their instructors, and with the important concepts they will need to know for success now and in the future. With Connect Accounting, instructors can easily deliver assignments, quizzes, and tests online. Students can review course material and practice important skills.

McGraw-Hill Connect Accounting provides all of the following learning and teaching resources:

• SmartBook, powered by LearnSmart • Auto-graded Excel simulations • Auto-graded online homework • Interactive Presentations • General ledger problems • Guided Examples

In short, Connect Accounting offers students powerful tools and features that optimize their time and energy, enabling them to focus on learning.

SmartBook, Powered by LearnSmart McGraw-Hill LearnSmart® is the market-leading adaptive study resource that is proven to strengthen memory recall, increase class retention, and boost grades. LearnSmart

allows students to study more efficiently because they are made aware of what they know and don’t know.

SmartBook®, which is powered by LearnSmart, is the first and only adaptive reading experience designed to change the way students read and learn. It creates a personalized reading experience by highlighting the most impactful concepts a student needs to learn at that moment in time. As a student engages with SmartBook, the reading experience continu- ously adapts by highlighting content based on what the student knows and doesn’t know. This ensures that the focus is on the content he or she needs to learn, while simultaneously promoting long-term retention of material.

Use SmartBook’s real-time reports to quickly identify the concepts that require more attention from individual students— or the entire class. The end result? Students are more engaged with course content, can better prioritize their time, and come to class ready to participate.


Tailored to You. Online Assignments Connect Accounting helps students learn more efficiently by pro- viding feedback and practice material when they need it, where they need it. Connect grades homework automatically and gives immediate feedback on any questions students may have missed. Our assignable, gradable end-of-chapter content includes a gen- eral journal application that looks and feels more like what you would find in a general ledger software package. Also, select ques- tions have been redesigned to test students’ knowledge more fully. They now include tables for students to work through rather than requiring that all calculations be done off-line. McGraw-Hill’s redesigned student interface provides a real-world feel to interactive assignments and end-of-chapter assessment content. This robust accounting software allows for flexibility in learning styles and provides opportunities for courses to be delivered in traditional, online, and blended settings.

General Ledger Problems New General Ledger problems for select questions enable students to see how transactions post from the general journal all the way through the financial statements. It provides a much-improved experience for students working with account-

ing cycle questions. Students’ work in the general journal is automati- cally posted to the ledger, navigation is much simpler, scrolling is no longer an issue, and students can easily link back to their original en- tries simply by clicking the ledger if edits are needed. Many questions now have critical thinking components added, to maximize students’ foundational knowledge of accounting concepts and principles.


Interactive Presentations Interactive Presentations provide engaging narratives of all chapter learning objectives in an assignable interactive online format. They follow the structure of the text and are organized to match the specific learning objectives within each chapter. While the Interactive Presentations are not meant to replace the textbook, they provide ad-

ditional explanation and enhance- ment of material from the text chapter, allowing students to learn, study, and practice at their own pace, with instant feedback.

Guided Examples The Guided Examples in Connect Accounting provide a narrated, animated, step-by-step walk- through of select exercises simi- lar to those assigned. These short presentations, which can be turned on or off by instruc- tors, provide reinforcement when students need it most.

Excel Simulations Simulated Excel questions, assignable within Connect Accounting, allow stu- dents to practice their Excel skills—such as basic formulas and formatting— within the context of accounting. These questions feature animated, narrated Help and Show Me tutorials (when enabled), as well as automatic feedback and grading for both students and professors.

Easy to Use. Proven Effective. McGraw-Hill CONNECT ACCOUNTING Features

Simple Assignment Management and Smart Grading With Connect Accounting, creating assignments is easier than ever, enabling in- structors to spend more time teaching and less time managing. Simple assignment management and smart grading allow you to:

• Create and deliver assignments easily with selectable end-of-chapter questions and Test Bank items.

• Have assignments scored automatically, giving students immediate feedback on their work and side-by-side comparisons with correct answers.

• Access and review each response, manually change grades, or leave comments for students to review.

• Reinforce classroom concepts with practice assignments and instant quizzes and exams.

Powerful Instructor and Student Reports Connect Accounting keeps instructors informed about how each student, section, and class is performing, allowing for more productive use of lecture and office hours. The progress-tracking function enables you to:

• View scored work immediately and track individual or group performance with assignment and grade reports.

• Access an instant view of student or class performance relative to learning objectives.

• Collect data and generate reports required by many accreditation organizations, such as AACSB and AICPA.


ennttt RReRepopo trtrtss

For more information about Connect Accounting, go to http://connect.mheducation.com, or contact your local McGraw-Hill Higher Education representative.

Connect Insight The first and only analytics tool of its kind, McGraw-Hill Connect® Insight is a series of visual data displays—each framed by an intuitive question—to pro- vide at-a-glance information about how your class is doing. Connect Insight provides a quick analysis on five key insights, available at a moment’s notice from your tablet device:

• How are my students doing? • How are my assignments going? • How is my section doing? • How is this assignment going? • How is this student doing?

Instructor Library The Connect Accounting Instructor Library is a repository for additional resources to improve student engagement in and out of class. You can select and use any asset that enhances your lecture. The Connect Accounting Instructor Library includes:

• Presentation slides. • Test Bank. • Animated PowerPoint exhibits and exercises. • Instructor’s Resource Manual. • Solutions Manual.

The Connect Accounting Instructor Library also allows you to upload your own files.

Tailored to You. Other Technology Offered by McGraw-Hill Tegrity Campus: Lectures 24/7

Tegrity Campus is a service that makes class time available 24/7 by automatically capturing every lecture. With a simple one-click start-and-stop process, you capture all computer screens and cor- responding audio in a format that is easily searchable, frame by frame. Students can replay any

part of any recorded class with easy-to-use browser-based viewing on a PC, Mac, or mobile device. Help turn your students’ study time into learning moments immediately supported by your lecture. With Tegrity Campus, you also increase intent listening and class participation by easing students’ concerns about note-taking. To learn more about Tegrity, watch a two-minute Flash demo at http://tegritycampus.mhhe.com.

McGraw-Hill Campus McGraw-Hill Campus® is a new one-stop teaching and learning experience available to users of any learning management system. This institutional service allows faculty and students to enjoy single sign-on (SSO) access to all McGraw-Hill Higher Education materials, including the award-

winning McGraw-Hill Connect platform, from directly within the institution’s website. To learn more about McGraw-Hill Campus, visit http://mhcampus.mhhe.com.

Custom Publishing through Create McGraw-Hill CreateTM is a self-service website that allows instructors to create custom course materials by drawing upon McGraw-Hill’s comprehensive, cross-disciplinary content. Instructors can add their own content quickly and easily and tap into other rights-secured, third-party sources as well, then arrange the content in a way that makes the most sense for their course. Through Create, you can: • Combine material from different sources and even upload your own content. • Personalize your product with the course name and information. • Choose the best format for your students—color print, black-and-white print, or eBook. • Edit and update your course materials as often as you’d like. Begin creating now at www.mcgrawhillcreate.com.

ALEKS: A Superior, Student-Friendly Accounting Experience Artificial intelligence: Fills knowledge gaps. Cycle of learning and assessment: Increases learning momentum and engages students. Customizable curriculum: Aligns with your course syllabi and textbooks. Dynamic, automated reports: Monitors detailed student and class progress. To learn more, visit www.aleks.com/highered/business.

CourseSmart CourseSmart is a way for faculty to find and review eTextbooks. It’s also a great option for students who are interested in accessing their course materials digitally and saving money. CourseSmart offers thousands of the most commonly adopted textbooks across hundreds of courses from a wide variety of higher education publishers. With the CourseSmart eTextbook,

students can save up to 45 percent off the cost of a print book, reduce their impact on the environment, and access pow- erful web tools for learning. CourseSmart is an online eTextbook, which means users access and view their textbook online when connected to the Internet. Students can also print sections of the book for maximum portability. CourseSmart eTextbooks are available in one standard online reader with full text search, notes and highlighting, and e-mail tools for sharing notes between classmates. For more information on CourseSmart, go to www.coursesmart.com.


McGraw-Hill Customer Experience Group Contact Information At McGraw-Hill, we understand that getting the most from new technology can be challenging. That’s why our services don’t stop after you purchase our products. You can contact our Product Specialists 24 hours a day to get product train- ing online. Or you can search the knowledge bank of Frequently Asked Questions on our support website. For customer support, call 800-331-5094 or visit www.mhhe.com/support.

Innovative Textbook Features . . .


Using Accounting for Decisions Whether we prepare, analyze, or apply accounting informa- tion, one skill remains essential: decision making. To help de- velop good decision-making habits and to illustrate the relevance of accounting, we use a pedagogical framework we call the Decision Center. This framework encompasses a vari- ety of approaches and subject areas, giving students insight into every aspect of business decision making; see the four nearby examples for the different types of decision boxes, in- cluding those that relate to ethics. Answers to Decision Maker and Ethics boxes are at the end of each chapter.

“Authors do a good job of relating material to real-life situations and putting students in the decision-maker role.”

—MORGAN ROCKETT, Moberly Area Community College

Decision Insight

Make or Buy IT Companies apply make or buy decisions to their ser- vices. Many now outsource their information technology activities. Information technology companies provide infrastructure and services to en- able businesses to focus on their key activities. It is argued that outsourcing saves money and streamlines operations, and without the headaches. ■

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Production Manager You invite three friends to a restaurant. When the dinner check arrives, David, a self- employed entrepreneur, picks it up saying, “Here, let me pay. I’ll deduct it as a business expense on my tax re- turn.” Denise, a salesperson, takes the check from David’s hand and says, “I’ll put this on my company’s credit card. It won’t cost us anything.” Derek, a factory manager for a company, laughs and says, “Neither of you under- stands. I’ll put this on my company’s credit card and call it overhead on a cost-plus contract my company has with a client.” (A cost-plus contract means the company receives its costs plus a percent of those costs.) Adds Derek, “That way, my company pays for dinner and makes a profit.” Who should pay the bill? Why? ■ [Answers follow the chapter’s Summary.]

Decision Ethics

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Partner You are a partner in a small accounting firm that specializes in keeping the books and preparing taxes for clients. A local restaurant is interested in obtaining these services from your firm. Identify factors that are rel- evant in deciding whether to accept the engagement. ■ [Answers follow the chapter’s Summary.]

Decision Maker

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Chapter Preview Each chapter opens with a visual chapter preview. Students can begin their reading with a clear understanding of what they will learn and when, allowing them to stay more focused and organized along the way. Learning objective numbers highlight the location of related content.

Learninggg Objjeectivvvves

CONCEPTUAL C1 Distinguish between direct and indirect

expenses and identify bases for allocating indirect expenses to departments.

C2 Appendix 9A—Explain transfer pricing and methods to set transfer prices.

C3 Appendix 9B—Describe allocation of joint costs across products.

ANALYTICAL A1 Analyze investment centers using

return on investment and residual income.

A2 Analyze investment centers using profit margin and investment turnover.

A3 Analyze investment centers using the balanced scorecard.

A4 Compute cycle time and cycle efficiency, and explain their importance to production management.

PROCEDURAL P1 Prepare a responsibility accounting

report using controllable costs.

P2 Allocate indirect expenses to departments.

P3 Prepare departmental income statements and contribution reports.

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Chhappter Preview


Controllable versus uncontrollable costs

Responsibility accounting system

P1 Responsibility accounting report


C1 Direct and indirect expenses

P2 Allocation of indirect expenses

P3 Departmental income statements

Departmental contribution to overhead


A1 ROI and residual income

A2 Margin and turnover A3 Nonfinancial

performance measures

A4 Cycle time

C2 Transfer pricing C3 Joint costs allocation




Performance evaluation

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CAP Model The Conceptual/Analytical/Procedural (CAP) Model allows courses to be specially designed to meet the teaching needs of a diverse faculty. This model identifies learning objectives, tex- tual materials, assignments, and test items by C, A, or P, allowing different instructors to teach from the same materials, yet easily customize their courses toward a conceptual, analytical, or procedural approach (or a combination thereof) based on personal preferences.

Setting Product PriceDecision Analysis

Relevant costs are useful to management in determining prices for special short-term decisions. But lon- ger run pricing decisions of management need to cover both variable and fixed costs, and yield a profit. There are several methods to help management in setting prices. The cost-plus methods are probably the most common, where management adds a markup to cost to reach a target price. We will describe the total cost method, where management sets price equal to the product’s total costs plus a desired profit on the product. This is a four-step process:

1. Determine total costs.

A2 Determine product selling price based on total costs.

Total costs 5 Production (direct materials, Nonproduction (selling and direct labor, and overhead) costs 1 administrative) costs

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Bring Accounting to Life


Need-to-Know Illustrations New in this edition are several Need-to-Know illustrations lo- cated at key junctures in each chapter. These illustrations pose questions about the material just presented—content that students “need to know” to successfully learn accounting. Accompanying solutions walk students through key procedures and analysis necessary to be successful with homework and test materials. Need-to-Know illustrations are supplemented with narrated, animated, step-by-step walk-through videos led by an instructor and available via Connect.

“I like the layout of the text and the readability. The illustrations and comics in the book make the text seem less intimidating and boring for students. The PowerPoint slides are easy to understand and use, the pictorials are great, and the text has great coverage of accounting material. The addition of IFRS information and the updates to the opening stories are great. I like that the decision insights are about businesses the students can relate to (i.e., Facebook, women start-up businesses, etc.).”

—JEANNIE LIU, Chaffey College

Global View The Global View section explains interna- tional accounting practices relating to the material covered in that chapter. The aim of this section is to describe accounting practices and to identify the similarities and differences in international accounting practices versus those in the United States. As we move toward global convergence in accounting practices, and as we witness the likely convergence of U.S. GAAP to IFRS, the importance of student familiarity with international accounting grows. This inno- vative section helps us begin down that path. This section is purposefully located at the end of each chapter so that each in- structor can decide what emphasis, if at all, is to be assigned to it.

A manufacturing company applied $300,000 of overhead to its jobs during the year. For the independent scenarios below, prepare the journal entry to adjust over- or underapplied overhead. Assume the adjust- ment amounts are not material. 1. Actual overhead costs incurred during the year equal $305,000. 2. Actual overhead costs incurred during the year equal $298,500.




NEED-TO-KNOW 2-5 Adjusting Overhead

Cost of Goods Sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000 Factory Overhead . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000 To close underapplied overhead to Cost of Goods Sold.

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Sustainability and Accounting New in this edition are brief sections that highlight the importance of sustainability within the broader context of global accounting (and accountability). Companies increasingly address sustainability in their public reporting and consider the sustainabil- ity accounting standards (from the Sustainability Accounting Standards Board) and the expectations of our global society. These boxes, located near the end of the Global View section, cover different as- pects of sustainability, often within the context of the chapter’s featured entrepreneurial company.

Sustainability and Accounting LSTN, as introduced in this chapter’s opening feature, places an emphasis on being a socially conscious and environmentally friendly alternative within the luxury headphone market. LSTN partners with The Starkey Hearing Foundation “to provide hearing for children in deaf schools,” explains Bridget Hilton, its founder. “Ninety-five percent of children in deaf schools worldwide can be helped . . . [and] eighty percent of those people live in developing countries.” LSTN also recognizes the need to work within the local markets so that its successes are sustainable. Our hearing products and services “will not undercut the local economies—these are basic senses that everyone on earth should be able to experience,” explains Bridget. “To me, success in business is doing something you love while being financially secure.” That is something we all hope is sustainable.

Courtesy of Bridget Hilton

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GLOBAL VIEW Porsche AG manufactures high-performance cars. Each car is built according to individual customer specifications. Customers can use the Internet to place orders for their dream cars. Porsche employs just-in-time inventory tech- niques to ensure a flexible production process that can re- spond rapidly to customer orders. For a recent year, Porsche reported €33,781 million in costs of materials and €9,038 million in personnel costs, which helped generate €57,081 million in revenue.

Sustainability and Accounting Porsche’s sustain- ability efforts extend beyond its manufacturing operations to event management. Each year when the company sponsors a professional tennis tournament, it uses a Porsche Cayenne Hybrid to shuttle players to and from the venue. In addition, the company sells event tickets that include public transportation, thus reducing the number of distinct journeys to the venue by about 30%. In addition, Middleton Made Knives applies sustainablity through Quintin Middleton’s choice of materials. The steel used for his knife blades can be recycled, and new trees can be planted to supply the wood for his knife blades.

Sean Gallup/Getty Images

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Comprehensive Need-to-Know Problems pre- sent both a problem and a complete solution, allowing stu- dents to review the entire problem-solving process and achieve success.

Chapter Summaries provide students with a review organized by learning objectives. Chapter Summaries are a component of the CAP model (see page xii), which recaps each conceptual, analytical, and procedural objective.

Key Terms are bolded in the text and repeated at the end of the chapter. A complete glossary of key terms is available online through Connect Accounting.

Quick Study assignments are short exercises that often focus on one learning objective. Most are included in Connect Accounting. There are at least 10–15 Quick Study assignments per chapter.

Problem Sets A & B are proven problems that can be assigned as homework or for in-class projects. All problems are coded according to the CAP model (see page xii), and Set A is included in Connect Accounting.

Exercises are one of this book’s many strengths and a competitive advantage. There are at least 10–15 per chapter, and most are included in Connect Accounting.

Multiple Choice Quiz questions quickly test chapter knowledge before a student moves on to complete Quick Studies, Exercises, and Problems.

Outstanding Assignment Material . . .

Cost accounting system Finished Goods Inventory Job Job cost sheet Job lot Job order costing system

Job order production Materials ledger card Materials requisition Overapplied overhead Predetermined overhead rate Process operations

Receiving report Target cost Time ticket Underapplied overhead Work in Process Inventory

Key Terms

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Multiple Choice Quiz Answers at end of chapter

1. A company’s predetermined overhead allocation rate is 150% of its direct labor costs. How much overhead is ap- plied to a job that requires total direct labor costs of $30,000? a. $15,000 c. $45,000 e. $75,000 b. $30,000 d. $60,000

2. A company’s cost accounting system uses direct labor costs to apply overhead to work in process and finished goods in- ventories. Its production costs for the period are: direct mate- rials, $45,000; direct labor, $35,000; and overhead applied, $38,500. What is its predetermined overhead allocation rate? a. 10% c. 86% e. 117% b. 110% d. 91%

3. A company’s ending inventory of finished goods has a total cost of $10,000 and consists of 500 units. If the overhead

applied to these goods is $4,000, and the predetermined overhead rate is 80% of direct labor costs, how much direct materials cost was incurred in producing these 500 units? a. $10,000 c. $ 4,000 e. $1,000 b. $6,000 d. $5,000

4. A company’s Work in Process Inventory T-account follows.

Beginning balance 9,000 Direct materials 94,200 Direct labor 59,200 Overhead applied 31,600

Ending balance 17,800

Cost of goods ? manufactured

Work in Process Inventory

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d. 91% ending inventory of finished goods has a total 00 and consists of 500 units. If the overhead

Overhead applied 31,600

Ending balance 17,800



QS 1-1 Managerial accounting versus financial accounting C1

Identify whether each description most likely applies to managerial or financial accounting. 1. Its primary users are company managers. 2. Its information is often available only after an audit is complete. 3. Its primary focus is on the organization as a whole. 4. Its principles and practices are very flexible.

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Exercise 2-1 Job order production


Match each of the terms/phrases numbered 1 through 5 with the best definition on the right. 1. Cost accounting system 2. Target cost 3. Job lot 4. Job 5. Job order production

a. Production of products in response to customer orders. b. Production activities for a customized product. c. A system that records manufacturing costs using a perpetual

inventory system. d. The expected selling price of a job minus its desired profit. e. Production of more than one unit of a custom product.

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Problem 10-1A Analysis of income effects of additional business


Jones Products manufac derwater markers at $6 in the table.

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Problem 10-1B Analysis of income effects of additional business


ers approximately 300,000 units per month on and sale of this quantity follow.

$384,000 96,000 288,000 120,000

80 000

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Once a student has finished reading the chapter, how well he or she retains the material can depend greatly on the questions, exercises, and problems that rein- force it. This book leads the way in comprehensive, ac- curate assignments.

The following information reflects Walczak Company’s job order production activities for May.

Walczak’s predetermined overhead rate is 150% of direct labor cost. Costs are allocated to the three jobs worked on during May as follows.



Raw materials purchases . . . . . . . . . . $16,000 Factory payroll cost. . . . . . . . . . . . . . 15,400 Overhead costs incurred Indirect materials . . . . . . . . . . . . . . 5,000 Indirect labor . . . . . . . . . . . . . . . . . 3,500 Other factory overhead . . . . . . . . 9,500

Job 401 Job 402 Job 403

Work in process inventory, April 30 Direct materials . . . . . . . . . . . . . . . . . . . . $3,600 Direct labor . . . . . . . . . . . . . . . . . . . . . . . 1,700 Applied overhead . . . . . . . . . . . . . . . . . . 2,550 Costs during May Direct materials . . . . . . . . . . . . . . . . . . . 3,550 $3,500 $1,400 Direct labor . . . . . . . . . . . . . . . . . . . . . . . 5,100 6,000 800 Applied overhead . . . . . . . . . . . . . . . . . . ? ? ? Status on May 31 . . . . . . . . . . . . . . . . . . . . Finished (sold) Finished (unsold) In process

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Beyond the Numbers exercises ask students to use accounting figures and understand their meaning. Stu- dents also learn how accounting applies to a variety of business situations. These creative and fun exercises are all new or updated and are divided into sections: • Reporting in Action • Comparative Analysis • Ethics Challenge • Communicating in


• Taking It to the Net • Teamwork in Action • Hitting the Road • Entrepreneurial Decision • Global Decision

Helps Students Master Key Concepts

“The serial problems are excellent…. I like the continuation of the same problem to the next chapters if applicable. I use the Quick Studies as practice problems. . . . Students have commented that this really works for them if they work (these questions) before attempting the assigned exercises and problems. I also like the discussion (questions) and make this an assignment. You have done an outstanding job presenting accounting to our students.”

—JERRI TITTLE, Rose State College


Beyond the Numbers

BTN 9-1 Review Apple’s income statement in Appendix A and identify its revenues for the years ended September 28, 2013, September 29, 2012, and September 24, 2011. For the year ended September 28, 2013, Apple reports the following product revenue mix. (Assume that its product revenue mix is the same for each of the three years reported when answering the requirements.)

APPLEiPhone iPad and iPod Mac iTunes, Software and Services, and Accessories 53% 21% 13% 13%


1. Compute the amount of revenue from each of its product lines for the years ended September 28, 2013, September 29, 2012, and September 24, 2011.

2. If Apple wishes to evaluate each of its product lines, how can it allocate its operating expenses to each of them to determine each product line’s profitability?

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Serial Problems use a continuous running case study to illustrate chapter concepts in a familiar context. The Se- rial Problem can be followed continuously from the first chapter or picked up at any later point in the book; enough information is provided to ensure students can get right to work.

SERIAL PROBLEM Business Solutions

P1 P2 P3

(This serial problem began in Chapter 1 and continues through most of the book. If previous chapter seg- ments were not completed, the serial problem can begin at this point. It is helpful, but not necessary, to use the Working Papers that accompany the book.)

SP 2 The computer workstation furniture manufacturing that Santana Rey started in January is progress- ing well. As of the end of June, Business Solutions’s job cost sheets show the following total costs accu- mulated on three furniture jobs.

Job 602 Job 603 Job 604

Direct materials . . . . . . . . . $1,500 $3,300 $2,700 Direct labor . . . . . . . . . . . . 800 1,420 2,100 Overhead . . . . . . . . . . . . . . 400 710 1,050

Job 602 was started in production in May, and these costs were assigned to it in May: direct materials, $600; direct labor, $180; and overhead, $90. Jobs 603 and 604 were started in June. Overhead cost is applied with a predetermined rate based on direct labor costs. Jobs 602 and 603 are finished in June, and Job 604 is expected to be finished in July. No raw materials are used indirectly in June. (Assume this company’s predetermined overhead rate did not change over these months).

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The End of the Chapter Is Only the Beginning Our valuable and proven assignments aren’t just confined to the book. From problems that require technological solutions to materials found exclusively online, this book’s end-of- chapter material is fully integrated with its technology package.

• Quick Studies, Exercises, and Problems available in Connect are marked with an icon.

• Assignments that focus on global accounting practices and companies are identified with an icon.

• Assignments that involve decision analysis are identified with an icon.

General Ledger Problems New General Ledger prob- lems enable students to see how transactions post. Students can track an amount in any financial statement all the way back to the original journal entry. Critical thinking compo- nents then challenge students to analyze the business activities in the problem.

The General Ledger tool in Connect automates several of the procedural steps in accounting so that the financial professional can focus on the impacts of each transaction on various reports and performance measures.

GL 2-1 General Ledger assignment GL 2-1, based on Problem 2-1A, focuses on transactions related to job-order costing. Prepare summary journal entries to record the cost of jobs and their flow through the manufacturing environment. Then prepare a schedule of cost of goods manufactured and a partial income statement.


Available in Connect


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Content Revisions Enhance Learning

Chapter 1 SunSaluter NEW opener. Revised discussions of the purpose of managerial accounting and cost classifications and their uses. Reduced number of cost classifications from five to three. Revised exhibit and example of direct vs. indirect costs. Added new exhibit comparing the balance sheet and income statement for different types of companies. Reduced level of detail in exhibit on income statement reporting. Revised discussion of the flow of manufacturing costs. New four-step process to illustrate the schedule of cost of goods manufactured (COGM). Added T-accounts to show the flow of costs for the COGM. Added a third column to the schedule of COGM, for enhanced presentation. Simplified exhibit on cost flows across the financial statements. New discussion of corporate social responsibility. Added 6 Quick Studies and 4 Exercises.

Chapter 2 Middleton Made Knives NEW opener. New discussion of differences between job order and process operations. Moved discussion of job order costing for services to later in chapter. Revised/simplified discussions of cost flows and job cost sheets. Simplified journal entries for labor costs. New exhibits to show postings of product cost journal entries to general ledger accounts and to job cost sheets. Revised exhibits on materials and labor cost flows. Revised text and new exhibit on four-step process to record overhead. Revised discussion of applying overhead and recording actual overhead.

Added new discussion and presentation of journal entries for indirect materials and indirect labor. Added new exhibit showing calculations for overhead applied to individual jobs. Added new exhibit on the flow of costs to general ledger accounts, the manufacturing statement, and the financial statements. Added new schedule of cost of goods manufactured exhibit. Added 2 Quick Studies and 2 Exercises.

Chapter 3 Kar’s Nuts NEW opener. Major change: Revised the overview exhibit of process operations and expanded the illustration to show two departments. Major change: Combined coverage of direct labor and overhead into conversion costs. Revised exhibits/examples to show fewer processes and simpler, more engaging products (tennis balls and trail mix). Added discussion, with journal entries, of transfers of costs across departments. Added discussion of multiple work in process (WIP) inventory accounts. Revised discussion of job order vs. process costing. Revised discussion, with new exhibit, on computation of equivalent units. Added conversion costs per unit to equivalent units discussion. Added a section differentiating the weighted- average and FIFO methods. New exhibit showing units transferred out and units remaining in ending work in process inventory. Added formula for computing equivalent units under the weighted-average method. Moved discussion of journal entries to later in the chapter. Revised the process costing summary report to focus on direct materials and conversion costs. Revised journal entries to show two WIP Inventory accounts and to eliminate the Factory Payroll account. Added discussion of Volkswagen’s use of robotics in process operations. Revised and added Comprehensive Need-to- Knows to reflect changes in chapter (including two processes).

New exhibits showing transfer of units and costs across departments, using T-accounts. In the FIFO method appendix: • Added discussion of differences between

FIFO and weighted-average approaches to computing equivalent units.

• Added exhibits on computing equivalent units and cost per equivalent unit under FIFO.

• Revised discussion of applying four-step process using FIFO.

Added 16 Quick Studies and 7 Exercises.

Chapter 4 Suja Juice Company NEW opener. Clarified departmental overhead rate method and ABC methods as four-step processes. Re-graded heading levels to highlight plantwide and departmental overhead rate method topics. Expanded discussion of examples used in the ABC application, to enhance clarity. Revised Exhibit 4.16, separating Costs of Good Quality from Costs of Poor Quality, thus highlighting the Cost of Quality Report. 4 new Quick Studies, and some old Quick Studies repurposed to Exercises.

Chapter 5 Fast Yeti Custom Tees NEW opener. Revised discussion of fixed and variable costs. Revised discussion of relevant range. Reorganized discussion of the high-low method as a three-step process. Enhanced exhibit on high-low method. Revised discussion of how changes in estimates affect break-even points. Revised target income discussion to focus on pretax income. Simplified exhibit on using the contribution margin income statement to compute sales needed for target income. Revised discussion of sensitivity analyses, with examples of buying a new machine or increasing advertising. Added exhibit on using the contribution margin income statement in sensitivity analysis.

This edition’s revisions are driven by feedback from instructors and students.

• Many new, revised, and updated assignments throughout, in- cluding serial problem and entrepreneurial assignments.

• New Need-to-Know illustrations added to each chapter at key junctures to reinforce key topics.

• New Sustainability section for each chapter, with examples linked to the company featured in the chapter opener.

• New annual reports and comparison assignments: Apple, Google, and Samsung.

• New streamlined opening layout for each chapter. • Revised art program, visual infographics, and text layout.

• Updated ratio/tool analysis, using data from well-known firms.

• New General Ledger questions added to most chapters. • New and revised entrepreneurial examples and elements. • New technology content integrated and referenced in the

book. • Revised terminology from goods in process to work in

process. • Changed the title of Manufacturing Statement to Schedule of

Cost of Goods Manufactured due to its use in practice.



Eliminated the weighted-average contribution margin method of computing multiproduct break-even. Added two exhibits on calculations of operating leverage. Added appendix on variable costing. Added 5 Quick Studies and 6 Exercises.

Chapter 6 Happy Family Brands UPDATED opener. Added new discussion of the three-step process to determine product selling price in the “Setting Prices” section. Added short section on sources of data for CVP Analysis when preparing income statement under variable costing versus absorption costing. Replaced previous break-even Decision Analysis example with special-order using IceAge Company. 3 new Quick Studies and 4 new Exercises.

Chapter 7 Solben NEW opener. Major change: Uses a manufacturing company as the example within the chapter. Budgeting for a merchandising company now appears in the chapter-end appendix. Shortened/tightened section on budget process and administration. Added section on the benefits of budgeting. New section on the master budget differences between manufacturers and merchandisers. Revised exhibit on the sequence of preparing the master budget for a manufacturer. Reformatted sales budget exhibit. Streamlined and reformatted several exhibits in Excel format. Rewrote sections on preparing the direct materials, direct labor, and factory overhead budgets. Clarified explanation of capital expenditures budget. Slightly expanded section on preparation of the cash budget. Added section on using the master budget. In appendix, added new exhibit on the master budget sequence for a merchandiser. Added 5 Quick Studies and 6 Exercises.

Chapter 8 Niner Bikes NEW opener. Revised discussions of fixed and flexible budget performance reports. Revised several flexible budget exhibits. Revised discussion of setting standard costs.

Revised discussion of computing and analyzing cost variances. Revised exhibits on computing direct materials and direct labor variances. Revised sections on analyzing materials, labor, and overhead variances. Simplified discussion of setting overhead standards. Revised discussion of computing the predetermined overhead rate. Revised exhibits on overhead variances and overhead variance report. Revised discussion of sales variances in Decision Analysis. Added learning objective for overhead spending and efficiency variances (in appendix). In the appendix, added discussion, with an exhibit, on the standard costing income statement. Added 7 Exercises.

Chapter 9 United by Blue UPDATED opener. Added discussion of advantages and disadvantages of decentralization. Reorganized discussion of cost, profit, and investment centers into a bulleted list, with examples using Kraft Foods Group. Revised discussion and exhibit of responsibility accounting for cost centers. Streamlined and clarified discussion and exhibits in the allocation of indirect expenses example. Added discussion of the usefulness of departmental income statements in decision making. Revised discussion of the use of return on investment and residual income in decision making. Revised example of profit margin and investment turnover calculations, using Walt Disney Company Added 3 Quick Studies, 5 Exercises, and 1 Problem.

Chapter 10 Charlie’s Brownies UPDATED opener. Expanded discussion and exhibits for short-term decisions, including additional business, make or buy, scrap or rework, sell or process further, sales mix, and segment elimination. Added a Need-to-Know illustration for each short-term decision. New Global View on segment elimination. Added 3 Quick Studies.

Chapter 11 Adafruit Industries NEW opener. Revised separate discussions of the accounting rate of return, net present value, and internal rate of return. Updated graphic showing cost of capital estimates by industry. Revised discussion of profitability index, with new exhibit. Added 7 Quick Studies and 6 Exercises.

Chapter 12 LSTN NEW opener. New infographics for operating, investing, and financing activities. New linkage of cash flow classifications to balance sheet. Simplified discussion of noncash investing and financing. New, simplified preparation steps for statement of cash flows. New, overall summary T-account for preparing statement of cash flows. New reconstruction entries to help determine cash. Updated cash flow analysis using Nike. Several new Quick Studies and revised Exercises and Problems.

Chapter 13 Motley Fool REVISED opener. New companies—Apple, Google, and Samsung—throughout the text and exhibits. New boxed discussion of the role of financial statement analysis to fight and prevent fraud. Enhanced horizontal and vertical ratio analysis using new companies and industry data. New analysis for segment data.

Appendix C New layout showing financial statements drawn from trial balance. New preliminary coverage of classified and unclassified balance sheets. Changed selected numbers for FastForward. Revised Piaggio’s (IFRS) balance sheet. Updated debt ratio section using Skechers.

Appendix D New LLC example using STARZ. New T-accounts to enhance learning of partnership capital.

Connect is your all-in-one location for a variety of instructor resources. You can create custom presentations from your own materials and access all of the fol- lowing. Here’s what you’ll find there: • Instructor’s Resource Manual

Written by April Mohr, Jefferson Community and Technical College, SW. This manual contains (for each chapter) a Lecture Outline, a chart linking all assignment materials to learning objectives, and additional visuals with transparency masters.

• Solutions Manual Written by John J. Wild, University of Wisconsin–Madison, and Ken W. Shaw, University of Missouri–Columbia.

• Test Bank, Computerized Test Bank Revised by James Racic, Lakeland Community College

• PowerPoint® Presentations Prepared by Anna Boulware, St. Charles Community College. Presentations allow for revision of lecture slide, and include a viewer, allowing screens to be shown with or without the software.

• Exercise PowerPoints Prepared by Kathleen O’Donnell, Onondaga Community College. Exercise PowerPoints are animated walk-throughs of end-of-chapter exercises that you can edit and customize for your classroom use. These presentations are a powerful tool for the smart classroom, allowing you to spend more time teaching and less time writing on the board.

Instructor Resources

Working Papers Available on demand through Create.

Written by John J. Wild.

Connect Accounting with LearnSmart Access Code Card ISBN: 9781259296284 MHID: 1259296288

Student Supplements

“This textbook does address many learning styles and at the same time allows for many teaching styles ... our faculty have been very pleased with the continued revisions and supplements. From paper working papers ... to continually improved homework sites and ebooks. I’m a `Wild’ fan!” —RITA HAYS, Southwestern Oklahoma State University


Meeting Accreditation Needs Assurance of Learning Ready

Many educational institutions today are focused on the notion of assur- ance of learning, an important element of some accreditation standards. Managerial Accounting is designed specifically to support your assurance

of learning initiatives with a simple, yet powerful solution. Each test bank question for Managerial Accounting maps to a specific chapter learning objective listed in the text. You can use our test bank software, EZ Test Online, or Connect Accounting to easily query for learning objectives that directly relate to the learning objectives for your course. You can then use the EZ Test reporting features to aggregate student results in similar fashion, making the collection and presentation of assurance of learning data simple and easy.

AACSB Statement

The McGraw-Hill Companies is a proud corporate member of AACSB International. Understanding the importance and value of AACSB accreditation, Managerial Accounting recognizes the curricula guidelines detailed in the AACSB

standards for business accreditation by connecting selected questions in the test bank to the general knowledge and skill guidelines in the AACSB standards. The statements contained in Managerial Accounting are provided only as a guide for the users of this textbook. The AACSB leaves content coverage and assessment within the purview of individual schools, the mission of the school, and the faculty. While Managerial Accounting and the teaching package make no claim of any specific AACSB qualification or evaluation, we have within Managerial Accounting labeled select questions according to the general knowledge and skills areas.

“Connect certainly offers so much for the students and at the same time helps the professors. The professors can offer more learning opportunities to the students without intensive time investment.”

—CONSTANCE HYLTON, George Mason University


Khaled Abdou, Penn State University–Berks Anne Marie Anderson, Raritan Valley Community College Elaine Anes, Heald College–Fresno Jerome Apple, University of Akron Jack Aschkenazi, American Intercontinental University Sidney Askew, Borough of Manhattan Community College Lawrence Awopetu, University of Arkansas–Pine Bluff Jon Backman, Spartanburg Community College Charles Baird, University of Wisconsin–Stout Michael Barendse, Grossmont College Richard Barnhart, Grand Rapids Community College Beverly R. Beatty, Anne Arundel Community College Anna Beavers, Laney College Judy Benish, Fox Valley Technical College Patricia Bentley, Keiser University Teri Bernstein, Santa Monica College Jaswinder Bhangal, Chabot College Sandra Bitenc, University of Texas at Arlington Susan Blizzard, San Antonio College Marvin Blye, Wor-Wic Community College Patrick Borja, Citrus College Anna Boulware, St. Charles Community College Gary Bower, Community College of Rhode Island–Flanagan Leslee Brock, Southwest Mississippi Community College Gregory Brookins, Santa Monica College Regina Brown, Eastfield College Tracy L. Bundy, University of Louisiana at Lafayette Roy Carson, Anne Arundel Community College Deborah Carter, Coahoma Community College Roberto Castaneda, DeVry University Online Martha Cavalaris, Miami Dade College Amy Chataginer, Mississippi Gulf Coast Community College Gerald Childs, Waukesha County Technical College Colleen Chung, Miami Dade College–Kendall Shifei Chung, Rowan University Robert Churchman, Harding University Marilyn Ciolino, Delgado Community College Thomas Clement, University of North Dakota Oyinka Coakley, Broward College Susan Cockrell, Birmingham-Southern College Lisa Cole, Johnson County Community College Robbie R. Coleman, Northeast Mississippi Community College Christie Comunale, Long Island University–C.W. Post Campus Jackie Conrecode, Florida Gulf Coast University Debora Constable, Georgia Perimeter College Susan Cordes, Johnson County Community College Anne Cordozo, Broward College Cheryl Corke, Genesee Community College James Cosby, John Tyler Community College Ken Couvillion, Delta College Loretta Darche, Southwest Florida College Judy Daulton, Piedmont Technical College Annette Davis, Glendale Community College

Dorothy Davis, University of Louisiana–Monroe Walter DeAguero, Saddleback College Mike Deschamps, MiraCosta College Pamela Donahue, Northern Essex Community College Steve Doster, Shawnee State University Larry Dragosavac, Edison Community College Samuel Duah, Bowie State University Robert Dunlevy, Montgomery County Community College Jerrilyn Eisenhauer, Tulsa Community College–Southeast Ronald Elders, Virginia College Terry Elliott, Morehead State University Patricia Feller, Nashville State Community College Albert Fisher, College of Southern Nevada Annette Fisher, Glendale Community College Ron Fitzgerald, Santa Monica College David Flannery, Bryant and Stratton College Hollie Floberg, Tennessee Wesleyan College Linda Flowers, Houston Community College Jeannie Folk, College of DuPage Rebecca Foote, Middle Tennessee State University Paul Franklin, Kaplan University Tim Garvey, Westwood College Barbara Gershman, Northern Virginia Community College– Woodbridge Barbara Gershowitz, Nashville State Technical Community College Mike Glasscock, Amarillo College Diane Glowacki, Tarrant County College Ernesto Gonzalez, Florida National College Lori Grady, Bucks County Community College Gloria Grayless, Sam Houston State University Ann Gregory, South Plains College Rameshwar Gupta, Jackson State University Amy Haas, Kingsborough Community College Pat Halliday, Santa Monica College Keith Hallmark, Calhoun Community College Rebecca Hancock, El Paso Community College–Valley Verde Mechelle Harris, Bossier Parish Community College Tracey Hawkins, University of Cincinnati–Clermont College Thomas Hayes, University of Arkansas–Ft. Smith Laurie Hays, Western Michigan University Roger Hehman, University of Cincinnati–Clermont College Cheri Hernandez, Des Moines Area Community College Margaret Hicks, Howard University Melanie Hicks, Liberty University James Higgins, Holy Family University Patricia Holmes, Des Moines Area Community College Barbara Hopkins, Northern Virginia Community College–Manassas Wade Hopkins, Heald College Aileen Huang, Santa Monica College Les Hubbard, Solano College Deborah Hudson, Gaston College James Hurst, National College

Acknowledgments John J. Wild, Ken W. Shaw, and McGraw-Hill Education recognize the following instruc- tors for their valuable feedback and involvement in the development of Managerial Accounting, 5e. We are thankful for their suggestions, counsel, and encouragement.


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Brief Contents 1 Managerial Accounting Concepts and Principles 2 2 Job Order Costing and Analysis 40 3 Process Costing and Analysis 82 4 Activity-Based Costing and Analysis 130 5 Cost Behavior and Cost-Volume-Profit Analysis 172 6 Variable Costing and Analysis 212 7 Master Budgets and Performance Planning 244 8 Flexible Budgets and Standard Costs 296 9 Performance Measurement and Responsibility Accounting 344 10 Relevant Costing for Managerial Decisions 388 11 Capital Budgeting and Investment Analysis 420 12 Reporting Cash Flows 452 13 Analysis of Financial Statements 508 Appendix A Financial Statement Information A-1 Appendix B Time Value of Money B *Appendix C Accounting for Business Transactions: A Review C *Appendix D Accounting for Partnerships

*Appendixes C & D are available in McGraw-Hill Connect and as print copies from a McGraw-Hill representative.


Preface v

1 Managerial Accounting Concepts and Principles 2

Managerial Accounting Basics 4 Purpose of Managerial Accounting 4 Nature of Managerial Accounting 5 Managerial Decision Making 6 Fraud and Ethics in Managerial Accounting 7

Managerial Cost Concepts 8 Types of Cost Classifications 8 Identification of Cost Classifications 10 Cost Concepts for Service Companies 10

Reporting 11 Manufacturers’ Costs 11 Balance Sheet 12 Income Statement 13 Flow of Manufacturing Activities 16 Schedule of Cost of Goods Manufactured 17 Trends in Managerial Accounting 19

Global View 21 Decision Analysis—Raw Materials Inventory

Turnover and Days’ Sales of Raw Materials Inventory 21

2 Job Order Costing and Analysis 40

Job Order Costing 42 Cost Accounting System 42 Job Order Production 42 Comparing Job Order and Process Operations 42 Production Activities in Job Order Costing 43 Cost Flows 43 Job Cost Sheet 44

Job Order Cost Flows and Reports 44 Materials Cost Flows and Documents 44 Labor Cost Flows and Documents 47 Overhead Cost Flows and Recording Applied Overhead 49 Recording Actual Overhead 52 Summary of Cost Flows 53 Schedule of Cost of Goods Manufactured 55

Adjusting Factory Overhead 55 Factory Overhead T-Account 55 Underapplied or Overapplied Overhead 56 Job Order Costing of Services 57

Global View 57 Decision Analysis—Pricing for Services 57

3 Process Costing and Analysis 82

Process Operations 84 Organization of Process Operations 84 Comparing Process and Job Order Costing Systems 85 Equivalent Units of Production 86

Process Costing Illustration 87 Overview of GenX Company’s Process Operation 87 Step 1: Determine Physical Flow of Units 88 Step 2: Compute Equivalent Units of Production 88 Step 3: Compute Cost per Equivalent Unit 89 Step 4: Assign and Reconcile Costs 90 Process Cost Summary 91

Accounting and Reporting for Process Costing 92

Accounting for Materials Costs 93 Accounting for Labor Costs 94 Accounting for Factory Overhead 95 Accounting for Transfers 96 Trends in Process Operations 98


Contents xxv

Global View 98 Decision Analysis—Hybrid Costing System 99 Appendix 3A—FIFO Method of

Process Costing 103

4 Activity-Based Costing and Analysis 130

Assigning Overhead Costs 132 Alternative Methods of Overhead Allocation 132 Plantwide Overhead Rate Method 132 Departmental Overhead Rate Method 134 Assessing the Plantwide and Departmental Overhead Rate Methods 137 Activity-Based Costing Rates and Method 137

Applying Activity-Based Costing 138 Step 1: Identify Activities and the Costs They Cause 138 Step 2: Trace Overhead Costs to Activity Cost Pools 139 Step 3: Determine Activity Rates 139 Step 4: Assign Overhead Costs to Cost Objects 140

Assessing Activity-Based Costing 143 Advantages of Activity-Based Costing 143 Disadvantages of Activity-Based Costing 145 ABC for Service Providers 145 Types of Activities 145

Global View 146 Decision Analysis—Customer Profitability 146

5 Cost Behavior and Cost-Volume-Profit Analysis 172

Identifying Cost Behavior 174 Fixed Costs 174 Variable Costs 175 Mixed Costs 175 Step-wise Costs and the Relevant Range 176 Curvilinear Costs 176

Measuring Cost Behavior 177 Scatter Diagrams 177 High-Low Method 178 Least-Squares Regression 179 Comparison of Cost Estimation Methods 179

Contribution Margin and Break-Even Analysis 180

Contribution Margin and Its Measures 180 Computing the Break-Even Point 181 Computing the Margin of Safety 182 Preparing a Cost-Volume-Profit Chart 182 Working with Changes in Estimates 183

Applying Cost-Volume-Profit Analysis 184

Computing Income from Sales and Costs 184 Computing Sales for a Target Income 185 Using Sensitivity Analysis 187 Computing a Multiproduct Break-Even Point 188 Making Assumptions in Cost-Volume-Profit Analysis 190

Global View 190 Decision Analysis—Degree of Operating

Leverage 191 Appendix 5A Using Excel to Estimate Least-Squares

Regression 193 Appendix 5B Variable Costing and Performance

Reporting 194

6 Variable Costing and Analysis 212

Introducing Variable Costing and Absorption Costing 214

Computing Unit Cost 215

Income Reporting Implications 216 Units Produced Equal Units Sold 216 Units Produced Exceed Units Sold 217 Units Produced Are Less Than Units Sold 218 Summarizing Income Reporting 219 Converting Income under Variable Costing to Absorption Costing 221

xxvi Contents

Comparing Variable Costing and Absorption Costing 221

Planning Production 221 Setting Prices 223 Controlling Costs 224 CVP Analysis 224 Limitations of Reports Using Variable Costing 224 Variable Costing for Service Firms 225

Global View 225 Decision Analysis—Pricing Special Orders 225

7 Master Budgets and Performance Planning 244

Budget Process and Administration 246 Budgeting as a Management Tool 246 Benefits of Budgeting 246 Budgeting and Human Behavior 246 Budget Reporting and Timing 247 Budget Committee 248

The Master Budget 248 Master Budget Components 248 Operating Budgets 250 Cash Budget 256

Budgeted Financial Statements 259 Budgeted Income Statement 259 Budgeted Balance Sheet 260 Using the Master Budget 260

Global View 261 Decision Analysis—Activity-Based Budgeting 261 Appendix 7A Merchandise Purchases

Budget 269

8 Flexible Budgets and Standard Costs 296


Fixed Budget Reports 298 Fixed Budget Performance Report 298 Budget Reports for Evaluation 299

Flexible Budget Reports 300 Purpose of Flexible Budgets 300 Preparation of Flexible Budgets 300 Flexible Budget Performance Report 301


Materials and Labor Standards 304 Identifying Standard Costs 304 Setting Standard Costs 304

Cost Variance Analysis 305 Cost Variance Computation 305 Computing Materials and Labor Variances 306

Overhead Standards and Variances 309 Flexible Overhead Budgets 309 Setting Overhead Standards 309 Computing Overhead Cost Variances 311

Global View 313 Decision Analysis—Sales Variances 314 Appendix 8A Expanded Overhead Variances and

Standard Cost Accounting System 319

9 Performance Measurement and Responsibility Accounting 344

Decentralization 346 Advantages of Decentralization 346 Disadvantages of Decentralization 346 Performance Evaluation 346

Contents xxvii

Responsibility Accounting 347 Controllable versus Uncontrollable Costs 347 Responsibility Accounting System 347 Responsibility Accounting Report 348

Profit Centers 349 Direct and Indirect Expenses 349 Allocation of Indirect Expenses 350 Departmental Income Statements 351 Departmental Contribution to Overhead 355

Evaluating Investment Center Performance 356 Financial Performance Evaluation Measures 356 Nonfinancial Performance Evaluation Measures 359

Global View 361 Decision Analysis—Cycle Time and Cycle

Efficiency 361 Appendix 9A Transfer Pricing 365 Appendix 9B Joint Costs and Their Allocation 366

10 Relevant Costing for Managerial Decisions 388

Decisions and Information 390 Decision Making 390 Relevant Costs and Benefits 390

Managerial Decision Scenarios 391 Additional Business 391 Make or Buy 393 Scrap or Rework 395 Sell or Process Further 395 Sales Mix Selection When Resources Are Constrained 396 Segment Elimination 398 Keep or Replace Equipment 399

Global View 400 Decision Analysis—Setting Product Price 400

11 Capital Budgeting and Investment Analysis 420

Methods Not Using Time Value of Money 422 Payback Period 422 Accounting Rate of Return 424

Methods Using Time Value of Money 426 Net Present Value 426 Internal Rate of Return 429 Comparison of Capital Budgeting Methods 431

Global View 432 Decision Analysis—Break-Even Time 432 Appendix 11A Using Excel to Compute Net Present

Value and Internal Rate of Return 435

12 Reporting Cash Flows 452 Basics of Cash Flow Reporting 454

Purpose of the Statement of Cash Flows 454 Importance of Cash Flows 454 Measurement of Cash Flows 454 Classification of Cash Flows 455 Noncash Investing and Financing 456 Format of the Statement of Cash Flows 457 Preparing the Statement of Cash Flows 457

Cash Flows from Operating 459 Indirect and Direct Methods of Reporting 459 Applying the Indirect Method of Reporting 461 Summary Adjustments for Operating Activities—Indirect Method 464

Cash Flows from Investing 465 Three-Stage Process of Analysis 465 Analyzing Noncurrent Assets 465 Analyzing Additional Assets 466

xxviii Contents

Cash Flows from Financing 467 Three-Stage Process of Analysis 467 Analyzing Noncurrent Liabilities 467 Analyzing Equity 468 Proving Cash Balances 469

Overall Summary Using T-Accounts 470 Global View 472 Decision Analysis—Cash Flow Analysis 472 Appendix 12A Spreadsheet Preparation of the

Statement of Cash Flows 477 Appendix 12B Direct Method of Reporting Operating

Cash Flows 479

13 Analysis of Financial Statements 508

Basics of Analysis 510 Purpose of Analysis 510 Building Blocks of Analysis 510 Information for Analysis 511 Standards for Comparisons 511 Tools of Analysis 512

Horizontal Analysis 512 Comparative Statements 512 Trend Analysis 515

Vertical Analysis 517 Common-Size Statements 517 Common-Size Graphics 517

Ratio Analysis 520 Liquidity and Efficiency 521 Solvency 524 Profitability 526 Market Prospects 527 Summary of Ratios 528

Global View 530 Decision Analysis—Analysis Reporting 531 Appendix 13A Sustainable Income 534

Appendix A Financial Statement Information A-1 Apple A-2 Google A-10 Samsung A-14 Appendix B Time Value of Money B *Appendix C Accounting for Business Transactions:

A Review C *Appendix D Accounting for Partnerships Index IND Chart of Accounts CA

*Appendixes C & D are available in McGraw-Hill Connect and as print copies from a McGraw-Hill representative.

Managerial Accounting

Chhappter Preview

1 cha

pte r

Managerial Accounting Concepts and Principles

Learninggg Objjeectivvvees

CONCEPTUAL C1 Explain the purpose and nature of,

and the role of ethics in, managerial accounting.

C2 Describe accounting concepts useful in classifying costs.

C3 Define product and period costs and explain how they impact financial statements.

C4 Explain how balance sheets and income statements for manufacturing, merchandising, and service companies differ.

C5 Explain manufacturing activities and the flow of manufacturing costs.

C6 Describe trends in managerial accounting.

ANALYTICAL A1 Assess raw materials inventory

management using raw materials inventory turnover and days’ sales in raw materials inventory.

PROCEDURAL P1 Compute cost of goods sold for a

manufacturer and for a merchandiser.

P2 Prepare a schedule of cost of goods manufactured and explain its purpose and links to financial statements.


C2 Types of cost classifications C3 Identification of cost


Cost concepts for service companies


C4 Manufacturer costs Balance sheet

P1 Income statement C5 Flow of activities P2 Schedule of cost of goods


C6 Managerial accounting trends

A1 Inventory analysis


C1 Purpose of managerial accounting

Nature of managerial accounting

Managerial decisions

Fraud and ethics in managerial accounting

CALGARY, CANADA—As a child, Eden Full experimented with

solar electricity, starting with a desktop solar car she built from

a kit as a 10-year-old. In high school, Eden tinkered with how to

arrange solar panels to generate the most electricity. “I found

that to get the most electricity, you

have to face your solar panels toward

the sun,” says Eden. Thus was born

the SunSaluter, Eden’s invention that

uses a water filtration system to automatically rotate solar pan-

els to follow the sun’s path each day.

Like most successful entrepreneurs, Eden is finding suc-

cess by creating a niche. While solar tracking is not a novel

idea, Eden notes that “solar trackers can be expensive, many

require electricity, and they often involve complex mechanisms

prone to failure. A lot of technologies fail simply because they

are too complicated.” Because Eden’s product does not use

electricity, and it creates clean filtered water while it also pro-

duces solar electricity, its use has great potential benefit in de-

veloping countries. “When I realized I could invent a technology

for social good, I fell in love with tinkering with something that

mattered,” she says.

With her product and a desire to change the world, Eden

started her company, SunSaluter. Though still small, her com-

pany generates enough revenue to cover its costs. Eden

stresses it is good to start a business when one is young.

Risk is low, and “if the owners are passionate about their idea,

someone will provide financing.” In addition to passion and

seed money, aspiring entrepreneurs need to understand basic

managerial principles, cost classifications,

and cost flows. Managerial accounting in-

formation enables Eden to plan and con-

trol costs and make good decisions. But,

as Eden notes, “innovators must execute what they plan to

do,” and information on costs can help owners see if their

plans are working.

Eden notes that it took her a while to “understand how to

develop a realistic product with market potential.” While finan-

cial success ultimately rests on monitoring and controlling op-

erations, Eden measures success by more than just profits.

“Anything that provides economic value should have a positive

social impact,” claims Eden. “You have to think about long-

term returns.” Eden offers sound advice for aspiring entrepre-

neurs: “Find your passion. But, no matter what your dream is,

there will be tough days. Don’t give up.” And, of course, follow

the sun.

Sources: SunSaluter website, January 2015; Conscious Magazine; Entrepreneur.com, April 18, 2013; Carbon Talks, www.carbontalks.ca/ innovator-profile/eden-full; EnergyMatters.com, June 10, 2011; NPR, December 2012

“If it’s beneficial and sustainable, you have to keep pushing”

—Eden Full


Follow the SunCour te

sy o

f S un

S al

ut er

4 Chapter 1 Managerial Accounting Concepts and Principles

MANAGERIAL ACCOUNTING BASICS Managerial accounting is an activity that provides financial and nonfinancial information to an organization’s managers. Managers include, for example, employees in charge of a company’s divisions; the heads of marketing, information technology, and human resources; and top-level managers such as the chief executive officer (CEO) and chief financial officer (CFO). To do their jobs, such managers need more than just the general-purpose financial statements provided by the financial accounting system. This section explains the purpose of managerial accounting (also called management accounting) and compares it with financial accounting.

Purpose of Managerial Accounting The purpose of managerial accounting is to provide useful information to managers of an orga- nization. Managerial accounting helps managers with three key tasks: (1) determining the costs of an organization’s products and services, (2) planning future activities, and (3) comparing actual results to planned results. For example, managerial accounting information can help the marketing manager decide whether to advertise on social media such as Twitter; it also can help the information technology manager decide whether to buy new computers. Managerial accounting information also helps the CEO decide which divisions to expand and which to eliminate.

The remainder of this book looks carefully at how managerial accounting information is gathered and how managers use it. We begin by showing how the managerial accounting system collects cost information and assigns it to an organization’s products and services. Information about such costs is important for many decisions that managers make, such as predicting the future costs of a product or service. Predicted costs are used in product pricing, profitability analysis, and in deciding whether to make or buy a product or component. More generally, much of managerial accounting involves gathering information about costs for planning and control decisions.

Planning is the process of setting goals and making plans to achieve them. Companies make long-term strategic plans that usually span a 5- to 10-year horizon. Strategic plans usually set a firm’s long-term direction based on opportunities such as new products, new markets, and capi- tal investments. A strategic plan’s goals and objectives are broadly defined given its long-term orientation. With long-term plans in place, companies then set short-term plans, which are more operational in nature. Short-term plans translate the strategic plan into actions, and they are more concrete and consist of better-defined objectives and goals. A short-term plan often covers a one-year period that, when translated in monetary terms, is known as a budget.

Control is the process of monitoring planning decisions and evaluating an organization’s activities and employees. It includes the measurement and evaluation of actions, processes, and outcomes. Feedback provided by the control function allows managers to revise their plans. Measurement of actions and processes also allows managers to take corrective actions to obtain better outcomes. For example, managers periodically compare actual results with planned re- sults. Exhibit 1.1 portrays the important management functions of planning and control. In later chapters, we explain how managers also use this information to direct and improve business operations.

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