## Managerial Accounting, Seventeenth Edition

By Ray H. Garrison, Eric W. Noreen and Peter C. Brewer

Contents:

Prologue

Managerial Accounting: An Overview 1

What Is Managerial Accounting? 2

Planning 3

Controlling 4

Decision Making 4

Why Does Managerial Accounting Matter to Your

Career? 5

Business Majors 5

Accounting Majors 7

Professional Certification—A Smart Investment 7

Managerial Accounting: Understanding the Broader

Context 9

Big Data 9

Ethics 10

Code of Conduct for Management Accountants 10

Strategy 11

Enterprise Risk Management 13

Corporate Social Responsibility 16

Process Management Perspective 17

Leadership 18

Intrinsic Motivation 18

Extrinsic Incentives 18

Cognitive Bias 19

Summary 20

Glossary 20

Questions 20

Exercises 21

Chapter-1

Managerial Accounting and

Cost Concepts 26

Cost Classifications for Assigning

Costs to Cost Objects 27

Direct Cost 28

Indirect Cost 28

Cost Classifications for Manufacturing Companies 28

Manufacturing Costs 28

Direct Materials 28

Direct Labor 29

Manufacturing Overhead 29

Nonmanufacturing Costs 30

Cost Classifications for Preparing Financial Statements 30

Product Costs 31

Period Costs 31

Cost Classifications for Predicting Cost Behavior 32

Variable Cost 33

Fixed Cost 34

The Linearity Assumption and the Relevant Range 35

Mixed Costs 37

Cost Terminology—A Closer Look 38

Cost Classifications for Decision Making 39

Differential Cost and Revenue 39

Opportunity Cost and Sunk Cost 40

Using Different Cost Classifications for Different Purposes 41

The Traditional Format Income Statement 41

The Contribution Format Income Statement 42

Summary 43

Review Problem 1: Cost Terms 43

Review Problem 2: Income Statement Formats 44

Glossary 45

Questions 46

Applying Excel 47

The Foundational 15 48

Exercises 49

Problems 55

Cases 58

Chapter-2

Job-Order Costing: Calculating Unit Product Costs 60

Job-Order Costing—An Overview 61

Job-Order Costing—An Example 62

Measuring Direct Materials Cost 63

Job Cost Sheet 63

Measuring Direct Labor Cost 64

Computing Predetermined Overhead Rates 65

Applying Manufacturing Overhead 66

Manufacturing Overhead—A Closer Look 67

The Need for a Predetermined Rate 68

Computation of Total Job Costs and Unit Product Costs 69

Job-Order Costing—A Managerial Perspective 70

Choosing an Allocation Base—A Key to Job

Cost Accuracy 70

Job-Order Costing Using Multiple Predetermined Overhead Rates 71

Multiple Predetermined Overhead Rates—A

Departmental Approach 71

Multiple Predetermined Overhead Rates—An Activity- Based Approach 73

Job-Order Costing—An External Reporting Perspective 73

Overhead Application and the Income Statement 73

Job Cost Sheets: A Subsidiary Ledger 74

Job-Order Costing in Service Companies 74

Summary 75

Review Problem: Calculating Unit Product Costs 75

Glossary 77

Questions 77

Applying Excel 77

The Foundational 15 79

Exercises 80

Problems 85

Case 88

Appendix 2A: Activity-Based Absorption Costing 89

Glossary (Appendix 2A) 92

Appendix 2A: Exercises, Problems, and Case 92

Appendix 2B: The Predetermined Overhead Rate and Capacity 96

Appendix 2B: Exercises, Problem, and Case 99

Chapter-3

Job-Order Costing: Cost Flows and External Reporting 103

Job-Order Costing—The Flow of Costs 104

The Purchase and Issue of Materials 105

Issue of Direct and Indirect Materials 106

Labor Cost 107

Manufacturing Overhead Costs 108

Applying Manufacturing Overhead 108

The Concept of a Clearing Account 109

Nonmanufacturing Costs 110

Cost of Goods Manufactured 111

Cost of Goods Sold 111

Schedules of Cost of Goods Manufactured and

Cost of Goods Sold 114

Schedule of Cost of Goods Manufactured 114

Schedule of Cost of Goods Sold 115

Income Statement 116

Underapplied and Overapplied Overhead—A Closer Look 117

Computing Underapplied and Overapplied Overhead 117

Disposition of Underapplied or Overapplied Overhead Balances 118

Closed to Cost of Goods Sold 119

Closed Proportionally to Work in Process, Finished Goods, and Cost of Goods Sold 119

Comparing the Two Methods for Disposing of Underapplied or Overapplied Overhead 121

A General Model of Product Cost Flows 121

Summary 122

Review Problem: The Flow of Costs in a **Job-Order Costing** System 123

Glossary 125

Questions 126

Applying Excel 126

The Foundational 15 127

Exercises 128

Problems 132

Cases 137

Appendix 3A: Job-Order Costing: A Microsoft Excel-Based Approach 138

Appendix 3A: Exercises and Problems 143

Chapter-4

Process Costing 148

Comparison of Job-Order and Process Costing 149

Similarities between Job-Order and Process Costing 149

Differences between Job-Order and Process Costing 149

Cost Flows in Process Costing 150

Processing Departments 150

The Flow of Materials, Labor, and Overhead Costs 151

Materials, Labor, and Overhead Cost Entries 152

Materials Costs 152

Labor Costs 152

Overhead Costs 152

Completing the Cost Flows 153

Process Costing Computations: Three Key Concepts 153

Key Concept #1 154

Key Concept #2 154

Key Concept #3 154

The Weighted-Average Method: An Example 154

Step 1: Compute the Equivalent Units of Production 156

Step 2: Compute the Cost per Equivalent Unit 158

Step 3: Assign Costs to Units 158

Step 4: Prepare a Cost Reconciliation Report 159

Operation Costing 160

Summary 160

Review Problem: Process Cost Flows and

Costing Units 161

Glossary 163

Questions 163

Applying Excel 164

The Foundational 15 165

Exercises 166

Problems 170

Cases 174

Appendix 4A: FIFO Method 175

Appendix 4A: Exercises, Problems, and Case 180

Appendix 4B: Service Department Cost Allocations 183

Appendix 4B: Exercises, Problems, and Case 186

Chapter-5

Cost-Volume-Profit Relationships 190

The Basics of Cost-Volume-Profit (CVP)

Analysis 192

CVP Relationships in Equation Form 194

CVP Relationships in Graphic Form 195

Preparing the CVP Graph 195

Contribution Margin Ratio (CM Ratio) and the Variable

Expense Ratio 197

Applications of the Contribution Margin Ratio 199

Additional Applications of CVP Concepts 200

Example 1: Change in Fixed Cost and Sales Volume 200

Alternative Solution 1 201

Alternative Solution 2 201

Example 2: Change in Variable Costs and Sales

Volume 201

Solution 201

Example 3: Change in Fixed Cost, Selling Price, and

Sales Volume 201

Solution 202

Example 4: Change in Variable Cost, Fixed Cost, and

Sales Volume 202

Solution 202

Example 5: Change in Selling Price 203

Solution 203

Break-Even and Target Profit Analysis 204

Break-Even Analysis 204

The Equation Method 204

The Formula Method 204

Break-Even in Dollar Sales 205

Target Profit Analysis 205

The Equation Method 206

The Formula Method 206

Target Profit Analysis in Terms of Dollar Sales 206

The Margin of Safety 207

CVP Considerations in Choosing a Cost Structure 208

Cost Structure and Profit Stability 208

Operating Leverage 209

Sales Mix 212

The Definition of Sales Mix 212

Sales Mix and Break-Even Analysis 212

Summary 214

Review Problem: CVP Relationships 214

Glossary 217

Questions 217

Applying Excel 218

The Foundational 15 219

Exercises 220

Problems 225

Case 233

Appendix 5A: Analyzing Mixed Costs 234

Glossary (Appendix 5A) 242

Appendix 5A: Exercises and Problems 242

Chapter-6

Variable Costing and Segment

Reporting: Tools for Management 249

Overview of Variable and Absorption Costing 250

Variable Costing 250

Absorption Costing 250

Selling and Administrative Expenses 251

Summary of Differences 251

Variable and Absorption Costing—An Example 252

Variable Costing Contribution Format Income

Statement 252

Absorption Costing Income Statement 254

Reconciliation of Variable Costing with Absorption

Costing Income 256

Advantages of Variable Costing and the Contribution

Approach 258

Enabling CVP Analysis 258

Explaining Changes in Net Operating Income 259

Supporting Decision Making 259

Segmented Income Statements and the Contribution

Approach 260

Traceable and Common Fixed Costs and the Segment

Margin 260

Identifying Traceable Fixed Costs 261

Traceable Fixed Costs Can Become Common Fixed

Costs 261

Segmented Income Statements—An Example 262

Levels of Segmented Income Statements 263

Segmented Income Statements—Decision Making and

Break-Even Analysis 265

Decision Making 265

Break-Even Analysis 266

Segmented Income Statements—Common Mistakes 267

Omission of Costs 267

Inappropriate Methods for Assigning Traceable Costs

among Segments 268

Failure to Trace Costs Directly 268

Inappropriate Allocation Base 268

Arbitrarily Dividing Common Costs among Segments 268

Income Statements—An External Reporting

Perspective 269

Companywide Income Statements 269

Segmented Financial Information 270

Summary 270

Review Problem 1: Contrasting Variable and Absorption

Costing 271

Review Problem 2: Segmented Income Statements 273

Glossary 274

Questions 275

Applying Excel 275

The Foundational 15 277

Exercises 278

Problems 285

Cases 293

Appendix 6A: Super-Variable Costing 295

Glossary (Appendix 6A) 299

Appendix 6A: Exercises and Problems 299

Chapter-7

Activity-Based Costing:

A Tool to Aid Decision Making 302

Activity-Based Costing: An Overview 303

Nonmanufacturing Costs and Activity-Based Costing 303

Manufacturing Costs and Activity-Based Costing 304

Cost Pools, Allocation Bases, and Activity-Based Costing 304

Designing an Activity-Based Costing (ABC) System 307

Steps for Implementing Activity-Based Costing: 309

Step 1: Define Activities, Activity Cost Pools, and Activity Measures 310

The Mechanics of Activity-Based Costing 311

Step 2: Assign Overhead Costs to Activity Cost Pools 311

Step 3: Calculate Activity Rates 314

Step 4: Assign Overhead Costs to Cost Objects 315

Step 5: Prepare Management Reports 318

Comparison of Traditional and ABC Product Costs 320

Product Margins Computed Using the Traditional Cost System 321

The Differences between ABC and Traditional Product Costs 322

Targeting Process Improvements 325

Activity-Based Costing and External Reports 325

The Limitations of Activity-Based Costing 326

Summary 326

Review Problem: Activity-Based Costing 327

Glossary 328

Questions 329

Applying Excel 329

The Foundational 15 331

Exercises 332

Problems 340

Appendix 7A: Time-Driven Activity-Based Costing: A Microsoft Excel-Based Approach 345

Appendix 7A: Exercises and Problems 351

Chapter-8

Master Budgeting 354

Why and How Do Organizations Create Budgets? 355

Why Do Organizations Create Budgets? 355

How Do Organizations Create Budgets? 356

The Master Budget: An Overview 326

Seeing the Big Picture 358

Preparing the Master Budget 359

The Beginning Balance Sheet 360

The Budgeting Assumptions 360

The Sales Budget 363

The Production Budget 364

Inventory Purchases—Merchandising Company 365

The Direct Materials Budget 365

The Direct Labor Budget 367

The Manufacturing Overhead Budget 368

The Ending Finished Goods Inventory Budget 369

The Selling and Administrative Expense Budget 369

The Cash Budget 371

The Budgeted Income Statement 375

The Budgeted Balance Sheet 376

Summary 378

Review Problem: Budget Schedules 378

Glossary 380

Questions 380

Applying Excel 380

The Foundational 15 382

Exercises 383

Problems 391

Cases 402

Chapter-9

Flexible Budgets and Performance Analysis 405

The Variance Analysis Cycle 406

Preparing Planning Budgets and Flexible Budgets with One Cost Driver 407

Characteristics of a Flexible Budget 407

Deficiencies of the Static Planning Budget 407

How a Flexible Budget Works 410

Flexible Budget Variances 411

Activity Variances 411

Revenue and Spending Variances 412

A Performance Report Combining Activity and Revenue and Spending Variances 414

Performance Reports in Nonprofit Organizations 417

Performance Reports in Cost Centers 417

Preparing Planning Budgets and Flexible Budgets with Multiple Cost Drivers 417

Summary 420

Review Problem: Variance Analysis Using a Flexible Budget 421

Glossary 422

Questions 423

Applying Excel 423

The Foundational 15 425

Exercises 425

Problems 432

Cases 436

Chapter-10

Standard Costs and Variances 440

Standard Costs—Setting the Stage 441

Setting Direct Materials Standards 442

Setting Direct Labor Standards 442

Setting Variable Manufacturing Overhead Standards 443

Using Standards in Flexible Budgets 444

A General Model for Standard Cost Variance

Analysis 445

Using Standard Costs—Direct Materials

Variances 447

The Materials Price Variance 448

The Materials Quantity Variance 449

Using Standard Costs—Direct Labor Variances 450

The Labor Rate Variance 450

The Labor Efficiency Variance 451

Using Standard Costs—Variable Manufacturing Overhead Variances 452

The Variable Manufacturing Overhead Rate and Efficiency Variances 453

An Important Subtlety in the Materials Variances 455

Standard Costs—Managerial Implications 457

Advantages of Standard Costs 457

Potential Problems with Standard Costs 457

Summary 458

Review Problem: Standard Costs 458

Glossary 460

Questions 461

Applying Excel 461

The Foundational 15 463

Exercises 463

Problems 466

Cases 471

Appendix 10A: Predetermined Overhead Rates and Overhead Analysis in a Standard Costing System 472

Glossary (Appendix 10A) 478

Appendix 10A: Exercises and Problems 478

Appendix 10B: Standard Cost Systems: A Financial

Reporting Perspective Using Microsoft Excel 485

Appendix 10B: Exercises and Problems 492

Chapter-11

Responsibility Accounting Systems 497

Decentralization in Organizations 498

Advantages and Disadvantages of Decentralization 498

Responsibility Accounting 499

Cost, Profit, and Investment Centers 499

Cost Center 499

Profit Center 499

Investment Center 499

Evaluating Investment Center Performance—Return on Investment 500

Net Operating Income and Operating Assets

Defined 500

Understanding ROI 501

Criticisms of ROI 504

Residual Income 504

Motivation and Residual Income 505

Transfer Pricing 506

Negotiated Transfer Prices 507

Negotiated Transfer Prices: An Example 508

The Selling Division’s Lowest Acceptable Transfer Price 508

The Buying Division’s Highest Acceptable Transfer Price 509

Selling Division has Idle Capacity 509

Selling Division has No Idle Capacity 509

Selling Division Has Some Idle Capacity 510

No Outside Supplier 511

Evaluation of Negotiated Transfer Prices 511

Transfers at the Cost to the Selling Division 511

Transfers at Market Price 512

Service Department Charges 512

Service Department Charges: Key Concepts 513

Variable Costs 513

Fixed Costs 514

Service Department Charges: An Example 514

Some Cautions in Allocating Service Department Costs 515

Pitfalls in Allocating Fixed Costs 515

Summary 517

Review Problem 1: Return on Investment (ROI) and Residual Income 517

Review Problem 2: Transfer Pricing 518

Glossary 519

Questions 520

Applying Excel 520

The Foundational 15 521

Exercises 522

Problems 528

Case 534

Chapter-12

Strategic Performance Measurement 535

The Balanced Scorecard: An Overview 536

Learning and Growth Measures 537

Internal Business Process Measures 538

Customer Measures 539

Financial Measures 540

Cost of Quality: A Closer Look 541

Cost of Quality 541

Quality Cost Reports: Strengths and Limitations 543

Operating Performance Measures: A Closer Look 543

Throughput (Manufacturing Cycle) Time 543

Delivery Cycle Time 544

Manufacturing Cycle Efficiency (MCE) 545

Example 545

Required: 545

Overall Equipment Effectiveness (OEE) 546

Example 546

Constructing a Balanced Scorecard 547

Selecting Balanced Scorecard Measures 547

Tying Compensation to the Balanced Scorecard 549

Corporate Social Responsibility Performance Measures 550

Global Reporting Initiative 550

Corporate Social Responsibility and the Balanced Scorecard 551

Summary 552

Review Problem: Operating Performance Measures 553

Glossary 553

Questions 554

Applying Excel 554

Exercises 555

Problems 561

Case 568

Chapter-13

Differential Analysis: The Key to Decision Making 570

Decision Making: Six Key Concepts 571

Key Concept #1 571

Key Concept #2 571

Key Concept #3 571

Key Concept #4 572

Key Concept #5 572

Key Concept #6 572

Identifying Relevant Costs and Benefits: An Example 573

Decision Analysis: The Total Cost and Differential Cost Approaches 575

Why Isolate Relevant Costs? 577

Adding and Dropping Product Lines and Other Segments 578

An Illustration of Cost Analysis 578

A Comparative Format 580

Beware of Allocated Fixed Costs 580

Make or Buy Decisions 581

Strategic Aspects of the Make or Buy Decision 582

An Example of a Make or Buy Decision 582

Opportunity Cost 584

Special Order Decisions 585

Volume Trade-Off Decisions 586

What Is a Constraint? 586

Utilizing a Constrained Resource to Maximize Profits 587

Managing Constraints 590

Joint Product Costs and Sell or Process Further Decisions 591

Santa Maria Wool Cooperative: An Example 592

Activity-Based Costing and Relevant Costs 594

Summary 595

Review Problem: Differential Analysis 595

Glossary 596

Questions 597

Applying Excel 597

The Foundational 15 599

Exercises 600

Problems 608

Cases 616

Appendix 13A: Pricing Decisions 622

The Absorption Costing Approach to Cost-Plus

Pricing 624

Pricing and Customer Latitude 627

Value-Based Pricing 631

Target Costing 633

Summary (Appendix 13A) 634

Glossary (Appendix 13A) 635

Appendix 13A: Exercises and Problems 635

Chapter-14

Capital Budgeting Decisions 642

Capital Budgeting—An Overview 643

Typical Capital Budgeting Decisions 643

Cash Flows versus Net Operating Income 643

Typical Cash Outflows 643

Typical Cash Inflows 644

The Time Value of Money 644

The Payback Method 645

Evaluation of the Payback Method 645

An Extended Example of Payback 646

Payback and Uneven Cash Flows 646

The Net Present Value Method 648

The Net Present Value Method Illustrated 648

Recovery of the Original Investment 651

An Extended Example of the Net Present Value Method 652

The Internal Rate of Return Method 654

The Internal Rate of Return Method Illustrated 654

Comparison of the Net Present Value and Internal Rate of Return Methods 655

Expanding the Net Present Value Method 656

Least-Cost Decisions 656

Uncertain Cash Flows 658

An Example 659

Preference Decisions—The Ranking of Investment Projects 660

Internal Rate of Return Method 660

Net Present Value Method 660

The Simple Rate of Return Method 661

Postaudit of Investment Projects 663

Summary 664

Review Problem: Comparison of Capital Budgeting Methods 664

Glossary 666

Questions 666

Applying Excel 667

The Foundational 15 668

Exercises 669

Problems 673

Cases 680

Appendix 14A: The Concept of Present Value 681

Appendix 14A: Review Problem: Basic Present Value

Computations 684

Glossary (Appendix 14A) 685

Appendix 14A: Exercises 686

Appendix 14B: Present Value Tables 687

Appendix 14C: Income Taxes and the Net Present Value

Method 689

Summary (Appendix 14C) 691

Appendix 14C: Exercises and Problems 691

Chapter-15

Statement of Cash Flows 694

The Statement of Cash Flows:

Key Concepts 696

Organizing the Statement of

Cash Flows 696

Operating Activities: Direct or Indirect Method? 696

The Indirect Method: A Three-Step Process 697

Step 1 697

Step 2 698

Step 3 699

Investing and Financing Activities: Gross Cash Flows 699

Property, Plant, and Equipment 700

Retained Earnings 701

Summary of Key Concepts 702

An Example of a Statement of Cash Flows 703

Operating Activities 704

Step 1 704

Step 2 705

Step 3 706

Investing Activities 706

Financing Activities 707

Seeing the Big Picture 708

Interpreting the Statement of Cash Flows 710

Consider a Company’s Specific Circumstances 710

Consider the Relationships among Numbers 710

Free Cash Flow 711

Earnings Quality 712

Summary 712

Review Problem 713

Glossary 717

Questions 717

The Foundational 15 717

Exercises 719

Problems 722

Appendix 15A: The Direct Method of Determining the Net

Cash Provided by Operating Activities 730

Appendix 15A: Exercises and Problems 732

Chpter-16

Financial Statement Analysis 734

Limitations of Financial Statement Analysis 735

Comparing Financial Data across Companies 735

Looking beyond Ratios 735

Statements in Comparative and Common-Size Form 735

Dollar and Percentage Changes on Statements 736

Common-Size Statements 738

An Example of a Statement of Cash Flows 703

Operating Activities 704

Step 1 704

Step 2 705

Step 3 706

Investing Activities 706

Financing Activities 707

Seeing the Big Picture 708

Interpreting the Statement of Cash Flows 710

Consider a Company’s Specific Circumstances 710

Consider the Relationships among Numbers 710

Free Cash Flow 711

Earnings Quality 712

Summary 712

Review Problem 713

Glossary 717

Questions 717

The Foundational 15 717

Exercises 719

Problems 722

Appendix 15A: The Direct Method of Determining the Net

Cash Provided by Operating Activities 730

Appendix 15A: Exercises and Problems 732

Ratio Analysis—Liquidity 740

Working Capital 741

Current Ratio 741

Acid-Test (Quick) Ratio 742

Ratio Analysis—Asset Management 742

Accounts Receivable Turnover 742

Inventory Turnover 743

Operating Cycle 743

Total Asset Turnover 744

Ratio Analysis—Debt Management 744

Times Interest Earned Ratio 745

Debt-to-Equity Ratio 745

Equity Multiplier 746

Ratio Analysis—Profitability 746

Gross Margin Percentage 746

Net Profit Margin Percentage 747

Return on Total Assets 748

Return on Equity 748

Ratio Analysis—Market Performance 749

Earnings per Share 749

Price-Earnings Ratio 750

Dividend Payout and Yield Ratios 750

The Dividend Payout Ratio 750

The Dividend Yield Ratio 751

Book Value per Share 751

Summary of Ratios and Sources of Comparative Ratio

Data 751

Summary 753

Review Problem: Selected Ratios and Financial

Leverage 753

Glossary 756

Questions 756

The Foundational 15 757

Exercises 758

Problems 763

Integration Exercises 772

Index 790