Ebook Managerial Accounting PDF Full Chapter PDF

Managerial accounting - eBook PDF
Visit to download the full and correct content document:

https://ebooksecure.com/download/managerial-accounting-ebook-pdf/
Managerial
Accounting 15e
Carl S. Warren
Professor Emeritus of Accounting
University of Georgia, Athens
William B. Tayler
Brigham Young University
Australia • Brazil • Mexico • Singapore • United Kingdom • United States

Managerial Accounting, 15e © 2020, 2018 Cengage Learning, Inc.
Carl S. Warren
Unless otherwise noted, all content is © Cengage.
William B. Tayler
ALL RIGHTS RESERVED. No part of this work covered by the copyright herein
may be reproduced or distributed in any form or by any means, except as
Senior Vice President, Higher Ed Product,
permitted by U.S. copyright law, without the prior written permission of the
Content, and Market Development: Erin Joyner
copyright owner.
Product Director: Jason Fremder
Product Manager: Matt Filimonov

For product information and technology assistance, contact us at
Sr. Content Manager: Diane Bowdler
Cengage Customer & Sales Support, 1-800-354-9706 or
Product Assistant: Aiyana Moore support.cengage.com.
Executive Marketing Manager: Nathan Anderson

For permission to use material from this text or product, submit all
Production Service: Lumina Datamatics, Inc. requests online at www.cengage.com/permissions.
Designer: Chris Doughman
Cover and Internal Design: Ke Design Microsoft Excel® is a registered trademark of Microsoft Corporation.
Cover Image: hkeita/Shutterstock.com © 2018 Microsoft.
Intellectual Property Analyst: Reba Frederics Library of Congress Control Number: 2018954981
Intellectual Property Project Manager:

Carly Belcher ISBN: 978-1-337-91202-0
Cengage
20 Channel Center Street
Boston, MA 02210
USA
Cengage is a leading provider of customized learning solutions with

employees residing in nearly 40 different countries and sales in more
than 125 countries around the world. Find your local representative at
www.cengage.com.
Cengage products are represented in Canada by Nelson Education, Ltd.
To learn more about Cengage platforms and services, register or access

your online learning solution, or purchase materials for your course, visit
www.cengage.com.
Printed in the United States of America

Print Number: 01 Print Year: 2018
Preface
Roadmap for Success

Warren/Tayler Managerial Accounting, 15e, provides a sound pedagogy for giving s tudents a solid
foundation in managerial accounting. Warren/Tayler covers the fundamentals AND motivates stu-
dents to learn by showing how accounting is important to businesses.
Warren/Tayler is successful because it reaches students with a combination of new and tried-and-
tested pedagogy.
This revision includes a range of new and existing features that help Warren/Tayler provide
students with the context to see how accounting is valuable to business. These include:
▪▪ New! Make a Decision section
▪▪ New! Pathways Challenge
▪▪ New! Certified Management Accountant (CMA®) Examination Questions
Warren/Tayler also includes a thorough grounding in the fundamentals that any business student
will need to be successful. These key features include:
▪▪ Presentation style designed around the way students learn
▪▪ Updated schema
▪▪ At the start of each chapter, a schema, or roadmap, shows students what they are going to
learn and how it is connected to the larger picture. The schema illustrates how the chapter
content lays the foundation with managerial concepts and principles. Then it moves students
through developing the information and ultimately into evaluating and analyzing information
in order to make decisions.
15 Statement
Chapter
of Cash Flows
Principles
Chapter 1 Introduction to Managerial Accounting
Developing Information
COST SYSTEMS COST ALLOCATIONS
Chapter 2 Job Order Costing Chapter 5 Support Departments

Chapter 3 Process Costing Chapter 5 Joint Costs
Chapter 4 Activity-Based Costing
Decision Making
PLANNING AND EVALUATING TOOLS STRATEGIC TOOLS
Chapter 6 Cost-Volume-Profit Analysis Chapter 12 Capital Investment Analysis

Chapter 7 Variable Costing Chapter 13 Lean Manufacturing
Chapter 8 Budgeting Systems Chapter 13 Activity Analysis
Chapter 9 Standard Costing and Variances Chapter 14 The Balanced Scorecard
Chapter 10 Decentralized Operations Chapter 14 Corporate Social Responsibility
Chapter 11 Differential Analysis
Chapter 15
Statement
Financial of Cash Flows Managerial
accounting accounting
Chapter 16
Financial Statement
Analysis
698
12020_ch15_rev02_698-757.indd 698 8/4/18 11:45 AM
iii
iv Preface
312 Chapter 7 Variable Costing for Management Analysis
▪▪ Link to the “opening company” of each chapter The $80,000calls

increaseout examples
in operating income underof how
Proposal the byconcepts
2 is caused the allocation of the
fixed manufacturing costs of $400,000 over a greater number of units manufactured. Specifically,
introduced in the chapter are connected to the opening company. This shows how
an increase in production from 20,000 units to 25,000 units means that the account-
fixed manufacturing
cost per unit decreases from $20 ($400,000 ÷ 20,000 units) to $16 ($400,000 ÷ 25,000 units). Thus,
ing is used in the real world by real companies.
the cost of goods sold when 25,000 units are manufactured is $4 per unit less, or $80,000 less in
total (20,000 units sold × $4). Since the cost of goods sold is less, operating income is $80,000
more when 25,000 units rather than 20,000 units are manufactured.
Managers should be careful in analyzing operating income under absorption costing when fin-
ished goods inventory changes. Increases in operating income may be created by simply increas-
ing finished goods inventory. Thus, managers could misinterpret such increases (or decreases) in
Adobe Systems Inc. operating income as due to changes in sales volume, prices, or costs.
A ssume that you have three different options for a summer job.
How would you evaluate these options? Naturally there are
many things to consider, including how much you could earn from
Just as you should evaluate the relative income of various
choices, a business also evaluates the income earned from its
choices. Important choices include the products offered and the
each job. geographical regions to be served. Link to In a recent absorption costing income statement, Adobe Systems reported (in millions) total revenue
Determining how much you could earn from each job may
not be as simple as comparing the wage rate per hour. For exam-
A company will often evaluate the profitability of products
and regions. For example, Adobe Systems Inc. (ADBE), Adobe Systems of $5,854, cost of revenue of $820, gross profit of $5,034, operating expenses of $3,541, and operating
income of $1,493.
ple, a job as an office clerk at a local company pays $8 per hour. A one of the largest software companies in the world, determines
job delivering pizza pays $10 per hour (including estimated tips), the income earned from its various product lines, such as Acrobat®,
although you must use your own transportation. Another job work- Photoshop®, Premiere®, and Dreamweaver® software. Adobe uses
ing in a beach resort over 500 miles away from your home pays $8 this information to establish product line pricing, as well as sales,
per hour. All three jobs offer 40 hours per week for the whole sum- support, and development effort. Likewise, Adobe evaluates the Under variable costing, operating income is $200,000, regardless of whether 20,000 units or
mer. If these options were ranked according to their pay per hour, income earned in the geographic regions it serves, such as the 25,000 units are manufactured. This is because no fixed manufacturing costs are allocated to the
the pizza delivery job would be the most attractive. However, the United States, Europe, and Asia. Again, such information aids man- units manufactured. Instead, all fixed manufacturing costs are treated as a period expense.
costs associated with each job must also be evaluated. For exam- agement in managing revenue and expenses within the regions.
ple, the office job may require that you pay for downtown park- In this chapter, how businesses measure profitability using To illustrate, Exhibit 8 shows the variable costing income statements for Frand for the
ing and purchase office clothes. The pizza delivery job will require absorption costing and variable costing is discussed. After illustrat- production of 20,000 units, 25,000 units, and 30,000 units. In each case, the operating income
you to pay for gas and maintenance for your car. The resort job will ing and comparing these concepts, how businesses use them for is $200,000.
require you to move to the resort city and incur additional living controlling costs, pricing products, planning production, analyzing
costs. Only by considering the costs for each job will you be able to market segments, and analyzing contribution margins is described
determine which job will provide you with the most income. and illustrated.
Exhibit 8 Frand Manufacturing Company

Variable Costing Income Statements
Variable Costing
Income Statements 20,000 Units 25,000 Units 30,000 Units
for Three Production Manufactured Manufactured Manufactured
Levels
Sales (20,000 units × $75) . . . . . . . . . . . . . . . . $1,500,000 $1,500,000 $ 1,500,000
Variable cost of goods sold:
Variable cost of goods manufactured:
(20,000 units × $35) . . . . . . . . . . . . . . . $ (700,000)
(25,000 units × $35) . . . . . . . . . . . . . . . $ (875,000)
(30,000 units × $35) . . . . . . . . . . . . . . . $(1,050,000)
Ending inventory:
Pete Jenkins/AlAmy stock Photo
(0 units × $35) . . . . . . . . . . . . . . . . . . . . 0
(5,000 units × $35) . . . . . . . . . . . . . . . . 175,000
(10,000 units × $35) . . . . . . . . . . . . . . . 350,000
Total variable cost of goods sold . . . . . . $ (700,000) $ (700,000) $ (700,000)
Manufacturing margin. . . . . . . . . . . . . . . . . . . $ 800,000 $ 800,000 $ 800,000
52 Chapter 2 Job Order Costing Variable selling and administrative
expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . (100,000) (100,000) (100,000)
Contribution margin. . . . . . . . . . . . . . . . . . . . . $ 700,000 $ 700,000 $ 700,000
Fixed costs:
no discrepancies, a journal entry is made to record the purchase. The journal entry$ to
Link to Adobe Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pages 305, 309, 312, 316, 319
$ (400,000) record$ (400,000)
(400,000) the Fixed manufacturing costs . . . . . . . . . . .
Fixed selling and administrative
supplier’s invoice related to Receiving Report No. 196 in Exhibit 4 is as follows:
(100,000) (100,000) (100,000) expenses . . . . . . . . . . . . . . . . . . . . . . . . .
Total fixed costs . . . . . . . . . . . . . . . . . . . . . . $ (500,000) $ (500,000) $ (500,000)
Operating income . . . . . . . . . . . . . . . . . . . . . . . $ 200,000 $ 200,000 $ 200,000
303
A 5 L 1 E a. Materials 10,500
1 1 Accounts Payable 10,500
12020_ch07_ptg01_302-351.indd 303 7/12/18 12:15 PM
Materials purchased during December.
The storeroom releases materials for use in manufacturing when a materials requisition is 12020_ch07_ptg01_302-351.indd 312 7/12/18 12:15 PM
received. Examples of materials requisitions are shown in Exhibit 4.

The materials requisitions for each job serve as the basis for recording materials used. For direct
materials, the quantities and amounts from the materials requisitions are posted to job cost sheets. Job
▪▪ To
cost aid comprehension
sheets, and to demonstrate
which are also illustrated themake
in Exhibit 4, impact
up of
thetransactions, journal
work in process entriesledger.
subsidiary include
the net effect of the transaction on the accounting equation.
Exhibit 4 shows the posting of $2,000 of direct materials to Job 71 and $11,000 of direct
materials to Job 72.2 Job 71 is an order for 20 units of Jazz Series guitars, while Job 72 is an order
for 60 units of American Series guitars.
A summary of the materials requisitions is used as a basis for the journal entry recording the
materials used for the month. For direct materials, this entry increases (debits) Work in Process and
decreases (credits) Materials as follows:
A 5 L 1 E b. Work in Process 13,000

12 Materials 13,000
Materials requisitioned to jobs
($2,000 + $11,000).
Many companies use computerized information processes to record the use of materials. In
such cases, storeroom employees electronically record the release of materials, which automati-
cally updates the materials ledger and job cost sheets.
Ethics: Do It!
ETHICS
Phony Invoice Scams this information to create a fictitious invoice. The invoice
Preface v
▪▪ Located in each chapter, Why It M atters shows students how accounting is important
to businesses with which they are familiar. A Concept Clip icon indicates which Why It
Matters features have an accompanying concept clip video in CNOWv2.
CONCEPT CLIP
476 Chapter 10 Evaluating Decentralized Operations
Why It Matters CONCEPT CLIP
Coca-Cola Company: Go West Young Man
A
different story. More than 65% of Coca- Cola’s profitability comes
major decision early in the history of Coca-Cola (KO) was to ex- from international segments. Given the revenue segmentation,
314 pand
Chapter 7 Variable Costing outside Analysis
for Management of the United States to the rest of the world. As a result, this suggests that the international profit margins must be higher
Solution: Coca-Cola is known today the world over. What is revealing is how than the North American profit margin. Indeed this is the case, as
a. (1) this decision has impacted the revenues and profitability of Coca-Cola across
Absorption Costing Income Statements can be seen in the following table:
its international and North
Proposal 1: American
Proposal 2: segments.
(30,000 The following
units produced table shows
× $40 variable
the percent of revenues 30,000 Units 40,000 Units

and percent
manufacturing cost per unit) + $600,000
of operating
fixed cost income from the interna-
Profit Margin
Manufactured Manufactured
Sales (30,000 unitstional
× $100) and North American
$ 3,000,000 geographic
$ 3,000,000 segments.
(40,000 units produced × $40 variable manufacturing International average 48.4%
Cost of goods sold: cost per unit) + $600,000 fixed cost
Cost of goods manufactured $(1,800,000) $(2,200,000) North America 24.2%
Ending inventory — 550,000 Operating
10,000 units (40,000 produced – 30,000 sold)
Total cost of goods sold $(1,800,000) $(1,650,000)
Gross profit $ 1,200,000 $ 1,350,000 Revenues Income
× $55 per unit ($2,200,000 ÷ 40,000 units)
The average profit margin for all the international segments is
(30,000 units sold × $7 variable selling cost per
Selling and administrative expenses (350,000) (350,000)
Operating income International segments $ 850,000 $ 1,000,000 58.4%
unit) + $140,000
65.6% two times as large as the North American segment. These results
(2) North American segment 41.6 34.4 reflect the heart of the Coca-Cola marketing strategy. In interna-
Variable Costs
Total Costing Income Statements
Variable 100% 100% tional markets, Coca-Cola is able to charge relatively higher prices
Proposal 1: Proposal 2:
30,000 Units350 40,000 Units 7 Variable
Chapter Costing
30,000 units for Management
produced Analysis
× $40 variable due to high demand and less competition as compared to the North
The first column showsManufactured
Manufactured that the internationalmanufacturing costsegments
per unit provide American market.
over 58% of the$ 3,000,000
Sales (30,000 units × $100)
Variable cost of goods sold:
revenues,$ 3,000,000
while North40,000 America
2. units
Chassen
produced
month
provides
Company,
almost
a cracker and cookie manufacturer, has the following unit costs for the
× $40 variable
manufacturing costofper
June:
unit
Ending inventory
42%manufactured
Variable cost of goods of the revenues.
$(1,200,000) However,
—
$(1,600,000)
400,000
the 10,000
operating income
units (40,000 produced – 30,000 tells a Source:
Variable manufacturing cost The Coca-Cola
$5.00 Company, Form 10-K for the Fiscal Year Ended December 31, 2017.
sold) × $40 variable cost per unit Variable marketing cost 3.50
Total variable cost of goods sold $(1,200,000) $(1,200,000)
Fixed manufacturing cost 2.00
Manufacturing margin $ 1,800,000 $ 1,800,000
Fixed marketing cost 4.00
Variable selling and administrative expenses (210,000) (210,000) 30,000 units sold × $7 variable
Contribution margin $ 1,590,000 $ 1,590,000 A per
selling cost total
unitof 100,000 units were manufactured during June, of which 10,000 remain in ending
Residualare Income
Fixed costs: inventory. Chassen uses the first-in, first-out (FIFO) inventory method, and the 10,000 units
Fixed manufacturing costs $ (600,000) $ (600,000) the only finished goods inventory at June 30. Under the absorption costing concept, the
Fixed Costs
Fixed selling and administrative expenses (140,000) (140,000) value of Chassen’s June 30 finished goods inventory would be:
▪▪ New! Pathways Challenge encourages
Total fixed costs $ (740,000) Residual income
$ (740,000) students’ is useful
a. $50,000. interest in accounting
in overcoming some of and emphasizes of the return on investment.
the disadvantages
Operating income $ 850,000 $ 850,000 b. $70,000.
the critical thinking aspect of Residual income
accounting. A is
suggestedthe excess answerof operating
to theincome over
Pathways aChallenge
minimum acceptable operating income,
b. The difference (in a.) is caused by including $150,000 fixed manufacturing costs (10,000 units × $15 fixedc.manufacturing
$85,000. cost per unit) in the
ending inventory, which decreases the cost of goods sold and increases theas shown
income byin Exhibit
d. $145,000. 7.
is provided at the end of the chapter. 3. Mill Corporation had the following unit costs for the recent calendar year:
operating $150,000.
Check Up Corner
Variable Fixed
Manufacturing $8.00 $3.00
Pathways
Exhibit 7 Challenge Nonmanufacturing 2.00 5.50
Operating Inventory
income for Mill’s sole product totaled 6,000 units on January 1 and 5,200 units on $ XXX
Residual Income
This is Accounting! Minimum acceptable
December 31. When operating
compared income ascosting
to variable a income, Mill’s absorption costing income is:
a. $2,400 lower.
Economic Activity percent ofb.invested assets
$2,400 higher. (XXX)
Absorption costing is required by generally accepted accounting principles (GAAP) for reporting to exter-
Residual
nal stakeholders. Thus, auto manufacturers like Ford Motor income
c. $6,800 lower.
Company (F) and General Motors $ XXX
Company (GM) use absorption costing in preparing their financiald.statements.
$6,800 higher.
Under absorption costing,
fixed manufacturing costs are included in inventory. Thus, the4. moreBethany
cars the auto companies
Company hasmake,
just the lower
completed the first month of producing a new product but has
the fixed cost per car and the smaller the cost of goods sold. In the years preceding
not yet the U.S.
shipped anyfinancial
of this crisis and The product incurred variable manufacturing costs of
product.
economic downturn of 2008, Ford and General Motors produced more cars than were
$5,000,000, fixedsold to customers.1 costs of $2,000,000, variable marketing costs of $1,000,000,
manufacturing
and fixed marketing costs of $3,000,000.
Critical Thinking/Judgment Under the variable costing concept, the inventory value of the new product would be:
The minimum acceptable operating income is computed by multiplying the company minimum
If Ford and General Motors have high fixed costs and low variable costs, how would producing more cars
a. $5,000,000.
affect their operating income under absorption costing? under variable
b. costing?
$6,000,000.
return on investment by the invested assets. The minimum rate is set by top management, based
If absorption costing allows companies like Ford and General Motors to change their operating income by
c. $8,000,000.
increasing or decreasing production, why does GAAP require absorption costing?
d. $11,000,000.
on such factors as theanswer
Suggested cost ofof chapter.
at end financing.
1
Marielle Segarra, “Why the Big Three Put Too Many Cars on theToLot,”illustrate, assume that DataLink Inc. has established 10% as the minimum acceptable return
CFO.com (ww2.cfo.com/management-accounting/2012/02/
Pathways Challenge
why-the-big-three-put-too-many-cars-on-the-lot/), February 2, 2012.
on investment for divisional assets. The residual incomes for the three divisions are shown in
Exhibit 8.
This is Accounting!
12020_ch07_ptg01_302-351.indd 314 Information/Consequences 7/12/18 12:15 PM
By producing more cars than were sold, Ford (F) and General Motors (GM) increased their operat-
Exhibit 8 ing income reported under absorption costing. This is because a portion of their fixed manufacturing costs
were included in ending inventory rather than cost of goods sold. Northern Division Central Division Southern Division
Residual Income— Operating
Underincome $ 70,000
variable costing, producing more cars would not affect operating $ 84,000
income, because all fixed manufac- $ 75,000
turing costs are included in cost of goods sold regardless of how many cars are produced.
DataLink, Inc. Minimum acceptable operating income
A reason often given for why GAAP requires absorption costing is that it focuses on operating income “over
as a percent
the longof invested
term. assets:
” In other words, while operating income may vary from year to year, all manufacturing costs
$350,000 × 10%
are eventually reported on the income statement as cost of goods sold (35,000)
or as a write-down of inventory using
the lower-of-cost-or-market rule. Thus, over the life of a company, the total amount of operating income will
$700,000 × 10%
be the same regardless of whether absorption or variable costing is used. (70,000)
$500,000 × 10% Suggested Answer (50,000)
Residual income $ 35,000 $ 14,000 $ 25,000
12020_ch07_ptg01_302-351.indd 350 7/12/18 12:15 PM

vi Preface
▪▪ To aid learning and problem solving, throughout each chapter the Check Up Corner
exercises provide students with step-by-step guidance on how to solve problems. Problem-
solving tips help students avoid common errors.
Chapter 10 Evaluating Decentralized Operations 467
Check Up Corner 10-1 Cost Center Responsibility Measures

Delinco Tech Inc. manufactures corrosion-resistant water pumps and fluid meters. Its Commercial Products
Division is organized as a cost center. The division’s budget for the month ended July 31 is as follows
(in thousands):
Materials $140,000
Factory wages 77,000
Supervisor salaries 15,500
Utilities 8,700
Depreciation of plant equipment 9,000
Maintenance 3,200
Insurance 750
Property taxes 800
$254,950
During July, actual costs incurred in the Commercial Products Division were as follows:
Materials $152,000
Factory wages 77,800
Supervisor salaries 15,500
Utilities 8,560
Depreciation of plant equipment 9,000
Maintenance 3,025
Insurance 750
Property taxes 820
$267,455
Prepare a budget performance report for the director of the Commercial Products Division for July.
Solution:
The report shows the budgeted costs and

actual costs along with the differences.
Budget Performance Report The report allows cost center

Director, Commercial Products Division managers to focus on areas
For the Month Ended July 31 of significant differences.
}
Over (Under)
Actual Budget Budget Budget
Materials ...................................... $152,000 $140,000 $12,000
Factory wages ............................... 77,800 77,000 800
Supervisor salaries......................... 15,500 15,500
Utilities......................................... 8,560 8,700 $(140) Each difference is classified as
Depreciation of plant equipment .... 9,000 9,000 over budget or under budget.
Maintenance................................. 3,025 3,200 (175)
Insurance ..................................... 750 750
Property taxes ............................... 820 800 20
$267,455 $254,950 $12,820 $(315)
Check Up Corner
Preface vii
▪▪ Analysis for Decision Making highlights how companies use accounting information to make
decisions and evaluate their business. This provides students with context of why accounting
is important 376
to companies.
Chapter 8 Budgeting
Analysis for Decision Making
Objective 6 Nonmanufacturing Staffing Budgets

Describe and
illustrate the use of The budgeting illustrated in this chapter is similar to budgeting used for nonmanufacturing
staffing budgets for businesses. However, many nonmanufacturing businesses often do not have direct materials
nonmanufacturing purchases budgets, direct labor cost budgets, or factory overhead cost budgets. Thus, the bud-
businesses. geted income statement is simplified in many nonmanufacturing settings.
A primary budget in nonmanufacturing businesses is the labor, or staffing, budget. This bud-
get, which is highly flexible to service demands, is used to manage staffing levels. For example,
a theme park will have greater staffing in the summer vacation months than in the fall months.
Likewise, a retailer will have greater staffing during the holidays than on typical weekdays.
To illustrate, Concord Hotel operates a hotel in a business district. The hotel has 150 rooms
that average 120 guests per night during the weekdays and 50 guests per night during the week-
end. The housekeeping staff is able to clean 10 rooms per employee. The number of housekeep-
ers required for an average weekday and weekend is determined as follows:
Weekday Weekend
Number of guests per day 120 50
Rooms per housekeeper ÷ 10 ÷ 10
Number of housekeepers per day 12 5
If each housekeeper is paid $15 per hour for an eight-hour shift per day, the annual budget
for the staff is as follows:
Weekday Weekend Total

Number of housekeepers per day 12 5
Hours per shift × 8 × 8
Days per year × 260* × 104**
Number of hours per year 24,960 4,160
Rate per hour × $15 × $15
Housekeeping staff annual budget $374,400 $62,400 $436,800
* 52 weeks × 5 days
** 52 weeks × 2 days
The budget can be used to plan and manage the staffing of the hotel. For example,
if a wedding were booked for the weekend, the budgeted increase in staffing could be
compared with the increased revenue from the wedding to verify the profit plan.
Make a Decision Nonmanufacturing Staffing Budgets
▪▪ Make a Decision in the end-of-chapter

Analyze Johnson Stores’ staffing budget for holidays (MAD 8-1)
material gives students a chance to analyze real-world
Analyze Mercy Hospital’s staffing budget (MAD 8-2)
business decisions. Chapter 6 Cost-Volume-Profit Analysis
Analyze Adventure Park’s staffing budget (MAD 8-3)
297
Analyze Ambassador Suites’ staffing budget (MAD 8-4)
Make a Decision Make a Decision

Cost-Volume-Profit Analysis for Service Companies
MAD 6-1 Analyze Global Air’s cost-volume-profit relationships Obj. 6

Global Air is considering a new flight between Atlanta and Los Angeles. The average fare per
seat for the flight is $760. The costs associated with the flight are as follows:
Fixed costs for the flight:

Crew salaries . . . . . . . . . . . . . . . . . . $ 5,000
12020_ch08_ptg01_352-409.indd 376 16/07/18 6:34 am
Operating costs . . . . . . . . . . . . . . . 50,000
Aircraft depreciation . . . . . . . . . . 25,000
Total . . . . . . . . . . . . . . . . . . . . . . . . $80,000
Variable costs per passenger:

Passenger check-in . . . . . . . . . . . $ 20
Operating costs . . . . . . . . . . . . . . . 100
Total . . . . . . . . . . . . . . . . . . . . . . . . $120
The airline estimates that the flight will sell 175 seats.
a. Determine the break-even number of passengers per flight.
b. Based on your answer in (a), should the airline add this flight to its schedule?
c. How much profit should each flight produce?
d. What additional issues might the airline consider in this decision?
MAD 6-2 Analyze Ocean Escape Cruise Lines’ cost-volume-profit relationships Obj. 6
Ocean Escape Cruise Lines has a boat with a capacity of 1,200 passengers. An eight-day ocean
cruise involves the following costs:
Crew $240,000
Fuel 60,000
Fixed operating costs 800,000
The variable costs per passenger for the eight-day cruise include the following:
Meals $900
Variable operating costs 400
The price of the cruise is $2,400 per passenger.
a. Determine the break-even number of passengers for the eight-day cruise.
b. Assume 900 passengers booked the cruise. What would be the profit or loss for the cruise?
c. Assume the cruise was booked to capacity. What would be the profit or loss for the cruise?
d. If the cruise cannot book enough passengers to break even, how might the cruise
line respond?
MAD 6-3 Analyze Star Stream’s cost-volume-profit relationships Obj. 6

Star Stream is a subscription-based video streaming service. Subscribers pay $120 per year for the
service. Star Stream licenses and develops content for its subscribers. In addition, Star Stream leases
servers to hold this content. These costs are not variable to the number of subscribers, but must
be incurred regardless of the subscriber base. In addition, Star Stream compensates telecommu-
nication companies for bandwidth so that Star Stream customers receive fast streaming services.
viii Preface
▪▪ At the end of each chapter, Let’s Review is a new chapter summary and self-assessment feature
that is designed to help busy students prepare for an exam. It includes a summary of each
learning objective’s key points, key terms, multiple-choice questions, exercises, and a sample
problem that students may use to practice.
▪▪ Sample multiple-choice questions allow students to practice with the type of assessments they
are likely to see on an exam.
▪▪ Short exercises and a longer problem allow students to apply their knowledge.
▪▪ Answers provided at the end of the Let’s Review section let students check their knowledge
immediately.
▪▪ Take It Further in the end-of-chapter activities allows instructors to assign other special activi-
ties related to ethics, communication, and teamwork.
▪▪ NEW! Certified Management Accountant (CMA®) Examination Questions help students
prepare for the CMA exam so they can earn CMA certification.
CengageNOWv2
CengageNOWv2 is a powerful course management and online homework resource that provides
control and customization to optimize the student learning experience. Included are many proven
resources, such as algorithmic activities, a test bank, course management tools, reporting and
assessment options, and much more.
NEW! Excel Online

Cengage and Microsoft have partnered in CNOWv2 to provide students with a uniform, authentic
Excel experience. It provides instant feedback, built-in video tips, and easily accessible spreadsheet
work. These features allow you to spend more time teaching college accounting applications and
less time troubleshooting Excel.
These new algorithmic activities offer pre-populated data directly in Microsoft Excel Online. Each
student receives his or her own version of the problem to perform the necessary data calculations
in Excel Online. Their work is constantly saved in Cengage cloud storage as a part of homework
assignments in CNOWv2. It’s easily retrievable so students can review their answers without cumber-
some file management and numerous downloads/uploads.
Motivation: Set Expectations and Prepare Students

for the Course
CengageNOWv2 helps motivate students and get them ready to learn by reshaping their misconcep-
tions about the introductory accounting course and providing a powerful tool to engage students.
CengageNOWv2 Start-Up Center

Students are often surprised by the amount of time they need to spend outside of class working
through homework assignments in order to succeed. The CengageNOWv2 Start-Up Center will help
students identify what they need to do and where they need to focus in order to be successful
with a variety of new resources.
▪▪ What Is Accounting? Module ensures students understand course expectations and how to be
successful in the introductory accounting course. This module consists of two assignable vid-
eos: Introduction to Accounting and Success Strategies. The Student Advice Videos offer advice
from real students about what it takes to do well in the course.
▪▪ Math Review Module, designed to help students get up to speed with necessary math skills,
includes math review assignments and Show Me How math review videos to ensure that stu-
dents have an understanding of basic math skills.
▪▪ How to Use CengageNOWv2 Module focuses on learning accounting, not on a particular soft-
ware system. Quickly familiarize your students with CengageNOWv2 and direct them to all of
its built-in student resources.
Preface ix
Motivation: Prepare Them for Class

With all the outside obligations accounting students have, finding time to read the textbook before
class can be a struggle. Point students to the key concepts they need to know before they attend
class.
▪▪ Video: Tell Me More. Short Tell Me More lecture activities explain the core concepts of the
chapter through an engaging auditory and visual presentation. Available either on a stand-
alone basis or as an assignment, they are ideal for all class formats—flipped model, online,
hybrid, or face-to-face.
Provide Help Right When Students Need It

The best way to learn accounting is through practice, but students often get stuck when attempt-
ing homework assignments on their own.
▪▪ Video: Show Me How. Created for the most frequently assigned end-of-chapter items,
Show Me How problem demonstration videos provide a step-by-step model of a similar prob-
lem. Embedded tips help students avoid common mistakes and pitfalls.
SHOW ME HOW
x Preface
Help Students Go Beyond Memorization to True

Understanding
Students often struggle to understand how concepts relate to one another. For most students, an
introductory accounting course is their first exposure to both business transactions and the account-
ing system. While these concepts are already difficult to master individually, their combination
and interdependency in the introductory accounting course often pose a challenge for students.
▪▪ Mastery Problems. Mastery Problems enable you to assign problems and activities designed to
test students’ comprehension and mastery of difficult concepts.
MindTap eReader
The MindTap eReader for Warren/Tayler’s Managerial Accounting is the most robust digital
reading experience available. Hallmark features include:
▪▪ Fully optimized for the iPad.
▪▪ Note taking, highlighting, and more.
▪▪ Embedded digital media.
▪▪ The MindTap eReader also features ReadSpeaker®, an online text-to-speech application that
vocalizes, or “speech-enables,” online educational content. This feature is ideally suited for
both instructors and learners who would like to listen to content instead of (or in addition
to) reading it.
Cengage Unlimited
Cengage Unlimited is a first of-its-kind digital subscription designed specifically to lower costs.
Students get total access to everything Cengage has to offer on demand—in one place. That’s
20,000 eBooks, 2,300 digital learning products, and dozens of study tools across 70 disciplines and
over 675 courses. Currently available in select markets. Details at www.cengage.com/unlimited.
New to This Edition

In all chapters, the following improvements have been made: ▪▪ New items have been added to the Take It Further section
▪▪ Chapter schemas revised throughout. at the end of the chapter.
▪▪ Link to page references added at the beginning of the ▪▪ New Certified Management Accountant (CMA®) Examina-
chapter allow students to easily locate the ties to the tion Questions help students prepare for the CMA exam
opening company throughout the chapter. so they can earn CMA certification.
▪▪ New learning objective for Analysis for Decision Making.
▪▪ Stock ticker symbol has been inserted for all real-world Chapter 1
(publicly listed) companies. This helps students to use ▪▪ “Managerial Accounting in the Organization” section sig-
financial websites to locate real company data. nificantly revised to discuss horizonal and vertical busi-
▪▪ New Pathways Challenge feature added, consistent with ness units; McAfee, Inc., is used as an illustration.
the work of the Pathways Commission. This feature ▪▪ New Why It Matters features the IMA and CMA.
emphasizes the critical thinking aspect of accounting. A ▪▪ New Why It Matters features vertical and horizontal
Suggested Answer to the Pathways Challenge is provided functions for service companies.
at the end of the chapter. ▪▪ Discussion of sustainability and accounting moved to new
▪▪ New Make a Decision section at the end of the Analysis Chapter 14.
for Decision Making directs students and instructors to
the real-world company end-of-chapter materials related Chapter 2
to Analysis for Decision Making. Also, the continuing com-
pany analysis is identified and referenced in this Make a ▪▪ Discussion of sustainability and accounting moved to new
Decision section. Chapter 14.
▪▪ Added one new Analysis for Decision Making item.
Preface xi
Chapter 3 ▪▪ Added four new revenue variance exercises.

▪▪ Added one new Analysis for Decision Making item.
▪▪ Why It Matters feature (Sustainable Papermaking) moved
to Chapter 14. Chapter 10
▪▪ Lean manufacturing discussion with related homework
items moved to Chapter 13. ▪▪ Balanced scorecard discussion moved to new Chapter 14.
▪▪ Added one new Analysis for Decision Making item. ▪▪ Added one new Analysis for Decision Making item.
Chapter 4 Chapter 11
▪▪ Added Learning Objective 7: Describe and illustrate the use ▪▪ Total cost and variable cost concepts for product pricing
of activity-based costing information in decision making. were moved to an end-of-chapter appendix.
▪▪ Added one new Make a Decision item.
Chapter 5—NEW Chapter
▪▪ Learning Objectives: Chapter 12
▪▪ Describe support departments and support department
▪▪ Analysis for Decision Making on capital investment for
costs.
sustainability has been moved to new Chapter 14.
▪▪ Describe the allocation of support department costs
▪▪ Added new Analysis for Decision Making entitled “Uncer-
using a single plantwide rate, multiple department
tainty: Sensitivity and Expected Value Analyses.”
rates, and activity-based costing.
▪▪ Added six new Make a Decision items.
▪▪ Allocate support department costs to production
departments using the direct method, sequential Chapter 13
method, and reciprocal services method.
▪▪ Describe joint products and joint costs. ▪▪ Added Objective 4: Describe and illustrate the use of lean
▪▪ Allocate joint costs using the physical units, weighted principles and activity analysis in a service or administra-
average, market value at split-off, and net realizable tive setting.
value methods.
▪▪ Describe and illustrate the use of support department Chapter 14—NEW chapter
and joint cost allocations to evaluate the performance
▪▪ Learning objectives:
of production managers.
▪▪ Describe the concept of a performance measurement
system.
Chapter 6 ▪▪ Describe and illustrate the basic elements of a bal-
▪▪ Added one new Analysis for Decision Making item. anced scorecard.
▪▪ Describe and illustrate the balance scorecard, including
Chapter 7 the use and impact of strategy maps, measure maps,
strategic learning, scorecard cascading, and cognitive
▪▪ Contribution margin analysis deleted from chapter.
biases.
▪▪ Revenue variance added as an appendix to Chapter 9.
▪▪ Describe corporate social responsibility (CSR), includ-
ing methods of measuring and encouraging social
Chapter 8 responsibility using the balanced scorecard.
▪▪ Added one new Analysis for Decision Making item. ▪▪ Use capital investment analysis to evaluate CSR pro-
jects.
Chapter 9
▪▪ Added new appendix on revenue variances.
▪▪ Nonfinancial performance measures (previously Learning
Objective 6) moved to new Chapter 14.
Acknowledgements
The many enhancements to this edition of Managerial Accounting are the direct result of reviews, surveys, and focus groups
with instructors at institutions across the country. We would like to take this opportunity to thank those who have helped
us better understand the challenge of the financial accounting course and provided valuable feedback on our content and
digital assets.
John Alpers, Tennessee Wesleyan Scott Dotson, Tennessee Wesleyan Rodney Michael
Anne Marie Anderson, Raritan Valley University Shawn Miller, Lone Star College
Community College Hong Duong, Salisbury University Dr. April Poe, University of the
Maureen Baker, Long Beach City James Emig, Villanova University Incarnate Word
College Dave Fitzgerald, Jackson College Francisco Rangel, Riverside City
Cindy Bolt, The Citadel Kenneth Flug, St. Thomas Aquinas College
Julie Bonner, Central Washington College Benjamin Reyes, Long Beach City
University Thomas Heikkinen, Jackson College College
Charles Boster, Salisbury University Susanne Holloway, Salisbury University Lauran B. Schmid, The University of
Jerold K. Braun, Daytona State College Daniel Kim, Midlands Technical Texas Rio Grande Valley
Shauna Butler, St. Thomas Aquinas College Meghna Singhvi, Loyola Marymount
College Angela Kirkendall, South Puget Sound University
Kirk Canzano, Long Beach City College Community College Margie Snow, Norco College
Dixon Cooper, Ouachita Baptist Satoshi Kojima, East Los Angeles Michael Stoots, UCLA extension
University College Patricia Tupaj, Quinsigamond
Bryan Corsnitz, Long Beach City Tara Maciel, San Diego Mesa College Community College
College Annette Maddox, Georgia Highlands Randi Watts, Baker College
Pat Creech, Northeastern Oklahoma College Cammy Wayne, Harper College
A&M LuAnn Bean Mangold, Florida Institute Melissa Youngman, National Technical
Daniel De La Rosa, Fullerton College of Technology Institute for the Deaf, RIT
Heather Demshock, Lycoming College Allison McLeod, University of North Texas
xii
About the Authors
Carl S. Warren
Dr. Carl S. Warren is Professor Emeritus of Accounting at the University of Georgia, Athens. Dr.
©Terry R. Spray InHisImage Studios

Warren has taught classes at the University of Georgia, University of Iowa, Michigan State Univer-
sity, and University of Chicago. He has focused his teaching efforts on principles of accounting
and auditing. Dr. Warren received his Ph.D. from Michigan State University and his BBA and MA
from the University of Iowa. During his career, Dr. Warren published numerous articles in pro-
fessional journals, including The Accounting Review, Journal of Accounting Research, Journal of
Accountancy, The CPA Journal, and Auditing: A Journal of Practice and Theory. Dr. Warren has
served on numerous committees of the American Accounting Association, the American Institute of
Certified Public Accountants, and the Institute of Internal Auditors. He has consulted with numer-
ous companies and public accounting firms. His outside interests include handball, golfing, skiing,
backpacking, motorcycling, and fly-fishing. He also enjoys interacting with his five grandchildren,
Bella and Mila (twins), Jeremy, and Brooke and Robbie (twins).
William B. Tayler
Dr. William B. Tayler is the Robert J. Smith Professor of Accountancy in the Marriott School of
Business at Brigham Young University (BYU). Dr. Tayler is an internationally renowned, award-
winning accounting researcher and instructor. He has presented his research as an invited speaker
at universities and conferences across the globe. Dr. Tayler earned his Ph.D. and master’s degree at
Cornell University. He teaches in BYU’s Executive MBA Program and in BYU’s School of Accoun-
tancy, one of the top ranked accounting programs in the world. Dr. Tayler has also taught at
Cornell University and Emory University and has received multiple teaching awards. Dr. Tayler is
a Certified Management Accountant and consultant specializing in cost accounting, performance
© Emory University
measurement, the assignment of decision rights, and incentive compensation. His work has been
published in top journals, including Accounting Horizons, Accounting, Organizations and Soci-
ety, The Accounting Review, Contemporary Accounting Research, IMA Educational Case Journal,
Journal of Accounting Research, Journal of Behavioral Finance, Journal of Finance, Review of
Financial Studies, and Strategic Finance. Dr. Tayler serves on the editorial boards of The Account-
ing Review, Management Accounting Research, and Accounting, Organizations and Society. He is
also director of the Institute of Management Accountants Research Foundation.
xiii
Brief Contents
1 Introduction to Managerial Accounting. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

2 Job Order Costing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
3 Process Cost Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94
4 Activity-Based Costing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150
5 Support Department and Joint Cost Allocation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 204
6 Cost-Volume-Profit Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 248
7 Variable Costing for M
anagement Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 302
8 Budgeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 352
9 Evaluating Variances from Standard Costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 410
10 Evaluating Decentralized Operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 460
11 Differential Analysis and Product Pricing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 510
12 Capital Investment Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 564
13 Lean Manufacturing and Activity Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 612
14 The Balanced Scorecard and Corporate Social Responsibility. . . . . . . . . . . . . . . . . . . . . . . . . . 654
15 Statement of Cash Flows. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 698
16 Financial Statement Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 758
Appendix A Interest Tables. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1

Appendix B Nike Inc., Form 10-K for the Fiscal Year Ended May 31, 2017 Selected Excerpts. . . . B-1
Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . G-1
Index. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-1
xiv
Contents
1 Introduction to Managerial
Accounting 2
Take It Further 89
Certified Management Accountant (CMA®)
Examination Questions (Adapted) 92
Managerial Accounting 4 Pathways Challenge 59, 93
Differences Between Managerial and Financial Accounting 5
3
Managerial Accounting in the Organization 6
The Management Process 8
Uses of Managerial Accounting Information 9
Manufacturing Operations 11
Process Cost Systems 94
Nature of Manufacturing 11
Direct and Indirect Costs 11 Process Manufacturers 96
Manufacturing Costs 12 Comparing Job Order and Process Cost Systems 97
Cost Flows for a Process Manufacturer 98
Financial Statements for a Manufacturing Business 17
Balance Sheet 17 Cost of Production Report 101
Income Statement 18 Step 1: Determine the Units to Be Assigned Costs 102
Step 2: Compute Equivalent Units of Production 102
Analysis for Decision Making 21
Step 3: Determine the Cost per Equivalent Unit 106
Utilization Rates 21
Step 4: Allocate Costs to Units Transferred
Make a Decision 41 Out and Partially Completed Units 107
Preparing the Cost of Production Report 109
Take It Further 43
Journal Entries for a Process Cost System 112
Examination Questions (Adapted) 45 Using the Cost of Production Report 116
Pathways Challenge 13, 45 Analysis for Decision Making 116
Analyzing Process Costs 116
2
Appendix Weighted Average Method 118
Determining Costs Using the Weighted
Average Method 118
Job Order Costing 46 The Cost of Production Report 120
Make a Decision 142

Cost Accounting Systems Overview 48
Job Order Cost Systems 48
Take It Further 145
Process Cost Systems 48 Certified Management Accountant (CMA®)
Job Order Cost Systems for Manufacturing Examination Questions (Adapted) 147
Businesses 49 Pathways Challenge 112, 149
Materials 50
Factory Labor 52
4
Factory Overhead 54
Work in Process 60
Finished Goods 61 Activity-Based Costing 150
Sales and Cost of Goods Sold 61
Period Costs 62
Summary of Cost Flows for Legend Guitars 62 Product Costing Allocation Methods 152
Job Order Cost Systems for Service Businesses 64 Single Plantwide Factory
Types of Service Businesses 64 Overhead Rate Method 153
Flow of Costs in a Service Job Order Cost System 64
Multiple Production Department Factory
Analysis for Decision Making 66 Overhead Rate Method 155
Analyzing Job Costs 66 Department Overhead Rates and Allocation 156
Make a Decision 86 Distortion of Product Costs 157
xv
xvi Contents
Activity-Based Costing Method 160

Activity Rates 162
Allocating Costs 163
Distortion in Product Costs 165
6 Cost-Volume-Profit
Analysis 248
Dangers of Product Cost Distortion 165 Cost Behavior 250
Activity-Based Costing for Variable Costs 251
Selling and Administrative Expenses 167 Fixed Costs 252
Mixed Costs 254
Activity-Based Costing in Service Summary of Cost Behavior Concepts 256
Businesses 168 Cost-Volume-Profit Relationships 258
Analysis for Decision Making 173 Contribution Margin 258
Using ABC Product Cost Information to Reduce Costs 173 Contribution Margin Ratio 258
Unit Contribution Margin 259
Make a Decision 199
Mathematical Approach to Cost-Volume-Profit
Take It Further 201
Analysis 261
Certified Management Accountant (CMA®) Break-Even Point 261
Examination Questions (Adapted) 202 Target Profit 265
Pathways Challenge 171, 203 Graphic Approach to Cost-Volume-Profit Analysis 266

Cost-Volume-Profit (Break-Even) Chart 266
Profit-Volume Chart 268
5
Use of Spreadsheets in Cost-Volume-Profit Analysis 269
Support Department and Joint Assumptions of Cost-Volume-Profit Analysis 270
Cost Allocation 204 Special Cost-Volume-Profit Relationships 272
Sales Mix Considerations 272
Support Departments 206 Operating Leverage 274
Margin of Safety 275
Support Department Cost Allocation 207
Single Plantwide Rate 208 Analysis for Decision Making 277
Multiple Production Department Rates 208 Cost-Volume-Profit Analysis for Service Companies 277
Activity-Based Costing 209 Make a Decision 297
Allocating Support Department Costs Take It Further 298
to Production Departments 210
Direct Method 211
The Sequential Method 213 Examination Questions (Adapted) 300
The Reciprocal Services Method 217 Pathways Challenge 256, 301
Comparison of Support Department Cost
Allocation Methods 221
Joint Costs 222

Joint Cost Allocation 222
The Physical Units Method 222
The Weighted Average Method 223
7 Variable Costing for
Management Analysis 302
The Market Value at Split-Off Method 223 Operating Income: Absorption and Variable Costing 304
The Net Realizable Value Method 224 Absorption Costing 304
Comparison of Joint Cost Allocation Methods 225 Variable Costing 305
By-Products 227 Effects of Inventory 307
Analysis for Decision Making 227 Analyzing Operating Income Using

Using Support Department and Joint Cost Absorption and Variable Costing 310
Allocations for Performance Evaluation 227
Using Absorption and Variable Costing 315
Make a Decision 243 Controlling Costs 315
Take It Further 245 Pricing Products 315
Planning Production 316
Certified Management Accountant (CMA®) Analyzing Market Segments 316
Analyzing Market Segments 316
Pathways Challenge 221, 247 Sales Territory Profitability Analysis 318
Product Profitability Analysis 319
Salesperson Profitability Analysis 319
Contents xvii
Variable Costing for Service Businesses 321 Reviewing and Revising Standards 413
Reporting Income 321 Criticisms of Standard Costs 413
Analyzing Segments 322
Budgetary Performance Evaluation 414
Analysis for Decision Making 324 Budget Performance Report 414
Segment Analysis and EBITDA 324 Manufacturing Cost Variances 415
Make a Decision 346 Direct Materials and

Direct Labor Variances 416
Take It Further 348
Direct Materials Variances 416
Certified Management Accountant (CMA®) Direct Labor Variances 419
Examination Questions (Adapted) 349 Factory Overhead Variances 422
Pathways Challenge 314, 350 The Factory Overhead Flexible Budget 423
Variable Factory Overhead Controllable Variance 424
Fixed Factory Overhead Volume Variance 424
8
Reporting Factory Overhead Variances 426
Factory Overhead Account 427
Budgeting 352 Recording and Reporting Variances
from Standards 430
Nature and Objectives of Budgeting 354 Analysis for Decision Making 432
Objectives of Budgeting 354 Service Staffing Variances 432
Human Behavior and Budgeting 355
Appendix Revenue Variances 433
Budgeting Systems 356
Static Budget 357 Comprehensive Problem 5 453
Flexible Budget 358
Make a Decision 455
Master Budget 360 Take It Further 456
Operating Budgets 361 Certified Management Accountant (CMA®)
Sales Budget 361
Production Budget 362
Direct Materials Purchases Budget 363 Pathways Challenge 418, 459
Direct Labor Cost Budget 364
Factory Overhead Cost Budget 366
10
Cost of Goods Sold Budget 366
Selling and Administrative Expenses Budget 368 Evaluating Decentralized
Budgeted Income Statement 369
Operations 460
Financial Budgets 370
Cash Budget 370
Capital Expenditures Budget 375 Centralized and Decentralized Operations 462
Budgeted Balance Sheet 375 Advantages of Decentralization 462
Disadvantages of Decentralization 463
Analysis for Decision Making 376 Responsibility Accounting 464
Nonmanufacturing Staffing Budgets 376
Responsibility Accounting for Cost Centers 464
Make a Decision 404
Responsibility Accounting for Profit Centers 468
Take It Further 405 Support Department Allocations 468
Certified Management Accountant (CMA®) Profit Center Reporting 470
Examination Questions (Adapted) 407 Responsibility Accounting
Pathways Challenge 370, 408 for Investment Centers 472
Return on Investment 472
Residual Income 476
9
Transfer Pricing 479
Evaluating Variances Market Price Approach 480
from Standard Costs 410 Negotiated Price Approach 480
Cost Price Approach 483
Standards 412 Analysis for Decision Making 483

Franchise Operations 483
Setting Standards 412
Types of Standards 413 Make a Decision 504
xviii Contents
Take It Further 506 Factors That Complicate Capital

Certified Management Accountant (CMA®) Investment Analysis 579
Income Tax 579
Examination Questions (Adapted) 508 Unequal Proposal Lives 579
Pathways Challenge 463, 509 Lease Versus Capital Investment 581
Uncertainty 581
Changes in Price Levels 582
11
Qualitative Considerations 583
Differential Analysis and Capital Rationing 583
Product Pricing 510
Uncertainty: Sensitivity and Expected
Differential Analysis 512 Value Analyses 584
Lease or Sell 514
Discontinue a Segment or Product 515
Make a Decision 605
Make or Buy 516 Take It Further 607
Replace Equipment 518
Process or Sell 519 Certified Management Accountant (CMA®)
Accept Business at a Special Price 519 Examination Questions (Adapted) 609
Setting Normal Product Selling Prices 522 Pathways Challenge 575, 610
Cost-Plus Methods 523
Product Cost Method 523
13
Illustration 524
Target Costing Method 525 Lean Manufacturing and
Production Bottlenecks 527 Activity Analysis 612
Managing Bottlenecks 528
Pricing Bottleneck Products 528
Lean Principles 614
Analysis for Decision Making 529 Reducing Inventory 615
Yield Pricing in Service Businesses 529 Reducing Lead Times 615
Appendix Total and Variable Cost Methods to Setting Reducing Setup Time 617
Emphasizing Product-Oriented Layout 620
Normal Price 530 Emphasizing Employee Involvement 620
Total Cost Method 530
Emphasizing Pull Manufacturing 620
Variable Cost Method 533
Emphasizing Zero Defects 621
Make a Decision 557 Emphasizing Supply Chain
Management 621
Take It Further 559
Lean Accounting 623
Certified Management Accountant (CMA®) Fewer Transactions 623
Examination Questions (Adapted) 561 Combined Accounts 623
Nonfinancial Performance Measures 625
Pathways Challenge 517, 562
Direct Tracing of Overhead 625
Activity Analysis 626
12
Costs of Quality 626
Capital Investment Quality Activity Analysis 627
Analysis 564 Value-Added Activity Analysis 629
Process Activity Analysis 630
Nature of Capital Investment Analysis 566 Analysis for Decision Making 632
Lean Performance for Nonmanufacturing 632
Methods Not Using Present Values 567
Average Rate of Return Method 567 Make a Decision 649
Cash Payback Method 568 Take It Further 651
Methods Using Present Values 570 Certified Management Accountant (CMA®)
Present Value Concepts 571
Net Present Value Method and Index 573
Internal Rate of Return Method 576 Pathways Challenge 619, 653
Contents xix
14 The Balanced Scorecard

and Corporate Social
Responsibility 654
Cash Flows from Financing
Activities 712
Bonds Payable 712
Common Stock 712
Dividends and Dividends Payable 713
Preparing the Statement of Cash Flows 714
Performance Measurement Systems 656
The Balanced Scorecard 657 Free Cash Flow 716
Performance Perspectives 657
Strategic Objectives 659 Appendix 1 Spreadsheet (Work Sheet)
Performance Metrics 659 for Statement of Cash Flows—The Indirect
Strategic Initiatives 660 Method 717
Performance Targets 661 Analyzing Accounts 718
Using the Balanced Scorecard 661 Retained Earnings 719
Strategy Maps 661 Other Accounts 719
Measure Maps 663 Preparing the Statement of Cash Flows 720
Strategic Learning 665 Appendix 2 Preparing the Statement of Cash
Scorecard Cascading 667
Flows—The Direct Method 720
Cognitive Biases 667
Cash Received from Customers 721
Corporate Social Responsibility 670 Cash Payments for Merchandise 721
CSR Reporting 671 Cash Payments for Operating Expenses 722
Corporate Social Responsibility and the Balanced Scorecard 672 Gain on Sale of Land 722
Encouraging Corporate Social Responsibility 674 Interest Expense 723
Cash Payments for Income Taxes 723
Analysis for Decision Making 674 Reporting Cash Flows from Operating
Capital Investment in CSR 674 Activities—Direct Method 723
Make a Decision 692 Make a Decision 752
Take It Further 693 Take It Further 755
Certified Management Accountant (CMA®) Pathways Challenge 714, 756
16
Pathways Challenge 669, 696
Financial Statement
15
Analysis 758
Statement of Cash
Flows 698 Analyzing and Interpreting Financial Statements 760
The Value of Financial Statement Information 760
Techniques for Analyzing Financial Statements 761
Reporting Cash Flows 700
Cash Flows from Operating Activities 701 Analytical Methods 761
Cash Flows from Investing Activities 703 Horizontal Analysis 761
Cash Flows from Financing Activities 703 Vertical Analysis 763
Noncash Investing and Financing Common-Sized Statements 765
Activities 704
Format of the Statement of Cash Analyzing Liquidity 766
Flows 704 Current Position Analysis 767
No Cash Flow per Share 705 Accounts Receivable Analysis 768
Inventory Analysis 769
Cash Flows from Operating
Activities—The Indirect Method 705 Analyzing Solvency 772
Net Income 707 Ratio of Fixed Assets to Long-Term Liabilities 772
Adjustments to Net Income 707 Ratio of Liabilities to Stockholders’ Equity 772
Times Interest Earned 773
Cash Flows from Investing Activities 710
Land 710 Analyzing Profitability 774
Building and Accumulated Asset Turnover 775
Depreciation—Building 711 Return on Total Assets 775
Return on Stockholders’ Equity 776
xx Contents
Return on Common Stockholders’ Equity 777 Appendix 2 Fair Value and Comprehensive Income 786
Earnings per Share on Common Stock 778 Fair Value 787
Price-Earnings Ratio 779 Comprehensive Income 787
Dividends per Share 780
Dividend Yield 780 Make a Decision 815
Summary of Analytical Measures 782 Take It Further 816
Corporate Annual Reports 783 Pathways Challenge 779, 818
Management Discussion and Analysis 783
Report on Internal Control 784
Report on Fairness of the Financial Statements 784 Appendix A: Interest Tables A-1
Appendix 1 Unusual Items on the Income Statement 785 Appendix B: Nike Inc., Form 10-K for the Fiscal Year
Unusual Items Affecting the Current Period’s Ended May 31, 2017 Selected Excerpts B-1
Income Statement 785
Unusual Items Affecting the Prior Period’s Glossary G-1
Income Statement 786 Index I-1
Managerial
Accounting 15e
1 Introduction to
Chapter
Managerial Accounting
Principles
Chapter 1 Introduction to Managerial Accounting
Developing Information
COST SYSTEMS COST ALLOCATIONS
Chapter 2 Job Order Costing Chapter 5 Support Departments

Chapter 3 Process Costing Chapter 5 Joint Costs
Chapter 4 Activity-Based Costing
Decision Making
PLANNING AND EVALUATING TOOLS STRATEGIC TOOLS
Chapter 6 Cost-Volume-Profit Analysis Chapter 12 Capital Investment Analysis

Chapter 7 Variable Costing Chapter 13 Lean Manufacturing
Chapter 8 Budgeting Systems Chapter 13 Activity Analysis
Chapter 9 Standard Costing and Variances Chapter 14 The Balanced Scorecard
Chapter 10 Decentralized Operations Chapter 14 Corporate Social Responsibility
Chapter 11 Differential Analysis
2
Gibson Guitars
G ibson guitars have been used by musical legends over the

years, including B.B. King, Chet Atkins, Brian Wilson (Beach
Boys), Jimmy Page (Led Zeppelin), Jackson Browne, John Fogerty,
▪ How many employees should the company have working on
each stage of the manufacturing process?
▪ How would purchasing automated equipment affect the costs
Jose F eliciano, Miranda Lambert, Sheryl Crow, and Wynonna Judd. of its guitars?
For example, Sheryl Crow has used her 1964 Gibson Country West-
This chapter introduces managerial accounting concepts that are
ern guitar in all of her recordings.
useful in addressing these questions. This chapter begins by describing
Known for its quality, Gibson Guitars celebrated its 120th
managerial accounting and its relationship to financial accounting.
anniversary in 2014. Staying in business for over 120 years requires
Following this overview, the management process is described along
a thorough understanding of how to manufacture high-quality
with the role of managerial accounting. Finally, characteristics of man-
guitars.1 In addition, it requires knowledge of how to account for
agerial accounting reports, managerial accounting terms, and uses of
the costs of making guitars. For example, Gibson needs cost infor-
managerial accounting information are described and illustrated.
mation to answer the following questions:
▪ What should be the selling price of its guitars? Sources: http://www.gibson.com/Gibson/History.aspx. Chris Kornelis, The
▪ How many guitars does it have to sell in a year to cover its Wall Street Journal, “How Sheryl Crow Finally Broke Her Starbucks Habit,”
costs and earn a profit? May 24, 2017.
Fabio Pagani/Shutterstock.com
Link to Gibson Guitars . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pages 4, 5, 6, 7, 9, 11, 16
1
In May 2016, Gibson Guitars filed for bankruptcy. Gibson blamed its financial woes on the debt it had incurred by acquiring companies that produced headphones, turntables,
and speakers. After satisfying its creditors and reorganizing, Gibson plans to focus its future operations on its core competency—the manufacture of guitars.
3
4 Chapter 1 Introduction to Managerial Accounting
What's Covered
Introduction to Managerial Accounting
Role of Managerial Accounting Manufacturing Operations Manufacturing Financial
▪▪ Differences with Financial Accounting (Obj. 1) ▪▪ Nature of Manufacturing (Obj. 2) Statements
▪▪ Management Organization (Obj. 1) ▪▪ Direct and Indirect Costs (Obj. 2) ▪▪ Balance Sheet (Obj. 3)
▪▪ Management Process (Obj. 1) ▪▪ Manufacturing Costs (Obj. 2) ▪▪ Income Statement (Obj. 3)
▪▪ Uses of Managerial Accounting
Information (Obj. 1)
Learning Objectives
Obj. 1 Describe managerial accounting, including its Obj. 3 Describe and illustrate financial statements for a
differences with financial accounting, its place in manufacturing business, including the balance sheet,
the organization, and its uses. statement of cost of goods manufactured, and income
Obj. 2 Describe and illustrate the nature of manufacturing statement.
operations, including different types and classifications
of costs.

Obj. 4 Describe and illustrate utilization rates in evaluating performance for service companies.
Objective 1
Describe managerial
accounting, including Managers make numerous decisions during the day-to-day operations of a business and in planning
its differences with for the future. Managerial accounting provides much of the information used for these decisions.
financial accounting, its
Some examples of managerial accounting information along with the chapter in which it is
place in the organiza-
tion, and its uses. described and illustrated follow:
▪▪ Classifying manufacturing and other costs and reporting them in the financial statements
(Chapter 1)
▪▪ Determining the cost of manufacturing a product or providing a service (Chapters 2, 3, 4,
and 5)
▪▪ Evaluating the impact of cost allocation and activity-based costing (Chapters 4, 5)
▪▪ Estimating the behavior of costs for various levels of activity and assessing cost-volume-profit
relationships (Chapter 6)
▪▪ Evaluating operating performance using cost behavior relationships (Chapter 7)
▪▪ Planning for the future by preparing budgets (Chapter 8)
▪▪ Evaluating manufacturing costs by comparing actual with expected results (Chapter 9)
▪▪ Evaluating decentralized operations by comparing actual and budgeted costs as well as com-
puting various measures of profitability (Chapter 10)
▪▪ Evaluating special decision-making situations by comparing differential revenues and costs,
pricing products, and managing bottlenecks (Chapter 11)
▪▪ Evaluating alternative proposals for long-term investments in fixed assets (Chapter 12)
▪▪ Planning operations using principles of lean manufacturing and activity analysis (Chapter 13)
▪▪ Evaluating company performance using the balanced scorecard and corporate responsibility
metrics (Chapter 14)
Link to Orville Gibson started producing guitars in 1894 in Kalamazoo, Michigan. He produced guitars and mandolins
Gibson Guitars based upon the arch-top design of violins.
Chapter 1 Introduction to Managerial Accounting 5
Differences Between Managerial and Financial Accounting

Accounting information is often classified into two types: financial and managerial. E
xhibit 1 shows
the relationship between financial accounting and managerial accounting.
Financial Managerial Exhibit 1

Statements Accounting Financial Accounting
Reports and Managerial
Statement of
Cash Flows
Production Accounting
Balance Sheet Report
Activity
Statement of Analysis
Stockholders’ Equity
Budget
Income Report
Statement
Financial Statements Managerial Accounting Reports

Users of Information External users and company management Management
Nature of Information Objective Objective and subjective
Guidelines for Preparation Prepared according to GAAP Prepared according to management needs
Timeliness of Reporting Prepared at fixed intervals Prepared at fixed intervals and on an as-needed basis
Focus of Reporting Company as a whole Company as a whole or segment
Financial accounting information is reported at fixed intervals (monthly, quarterly, yearly)

in general-purpose financial statements. These financial statements—the income statement, state-
ment of stockholders’ equity, balance sheet, and statement of cash flows—are prepared according
to generally accepted accounting principles (GAAP). These statements are used by external users
such as the following:
▪▪ Shareholders
▪▪ Creditors
▪▪ Government agencies
▪▪ The general public
Gibson Mandolin-Guitar Mfg. Co., Ltd. was formed in 1902 in Kalamazoo, M

ichigan, with the Link to
support of five investors.
Gibson Guitars
Managers of a company also use general-purpose financial statements. For example, in plan-
ning future operations, managers often begin by evaluating the current income statement and
statement of cash flows.
Managerial accounting information is designed to meet the specific needs of a company’s
management. This information includes the following:
▪▪ Historical data, which provide objective measures of past operations
▪▪ Estimated data, which provide subjective estimates about future decisions
Management uses both types of information in directing daily operations, planning future oper-
ations, and developing business strategies.
Unlike the financial statements prepared in financial accounting, managerial accounting reports
do not always have to be:
▪▪ Prepared according to generally accepted accounting principles (GAAP). This is because GAAP
may not always be relevant to the specific decision-making needs of management.
▪▪ Prepared at fixed intervals (monthly, quarterly, yearly). Although some management reports are
prepared at fixed intervals, most reports are prepared as management needs the information.
▪▪ Prepared for the business as a whole. Most management reports are prepared for products,
projects, sales territories, or other segments of the company.
Link to Chicago Musical Instrument Company purchased Gibson in 1944.

Gibson Guitars
Managerial Accounting in the Organization

While no two company structures are identical, most large companies are organized in terms of “ver-
ticals” and “horizontals.” Verticals are sometimes referred to as business units, because they are often
structured as separate businesses within the parent company. These verticals normally develop prod-
ucts that are sold directly to customers. Verticals prepare their own income statements, also referred to
as profit and loss (P&L) statements, which report their ongoing performance and profitability.
Horizontals are departments within the company that are not responsible for developing prod-
ucts. The role of horizontals is to provide services to the various verticals and other horizontals.
As such, horizontals do not report profit and loss (P&L) statements. Marketing, human resources,
information technology, legal, facilities, accounting, and finance are normally horizontal depart-
ments within a company.
At McAfee, Inc. (MFE), a cyber security provider, the Chief Financial Office functions as a
horizontal department that serves McAfee’s two main verticals: the Consumer Business Unit and the
Enterprise Business Unit. Rather than hire and train separate accounting and finance departments
within each vertical, it is more efficient to centralize this function as a horizontal department.
To illustrate, a partial organizational chart of McAfee’s Chief Executive Office and Chief Finan-
cial Office are shown in Exhibit 2.
Exhibit 2 Partial Organization Chart for McAfee
Chief Executive Officer (CEO)

Chief Executive Office
Exec. Sr.
Exec. Exec. Exec. Vice President Vice President Sr.
Sr.
Vice President Vice President Vice President (Chief Financial (Chief Tech. Vice President
Vice President
Consumer Enterprise Sales & Officer) Officer) Human
General Counsel
Business Unit Business Unit Marketing Chief Financial Chief Technology Resources
Office Office
Verticals Horizontals
Exec. Vice President

(Chief Financial Officer)
Chief Financial Office
VP, Accounting
VP, Finance (Chief Acct.
VP, Finance VP, Finance VP, Finance
Sales & Officer)
Consumer Enterprise Consolidations
Marketing Chief Accounting
Office
Supports Verticals Supports Horizontals Supports Corporate

As shown in Exhibit 2, the chief financial officer (CFO) is an executive vice president, who,
along with leadership of the other verticals and horizontals, reports directly to the chief executive
officer (CEO). Each of the two verticals (Consumer Business Unit and Enterprise Business Unit)
has a “VP of Finance” that reports to the CFO. In addition, the Sales & Marketing and Consolida-
tions horizontals have their own “VP of Finance” that reports to the CFO.2 The “VP of Accounting”
is called the chief accounting officer (CAO) and oversees technical accounting, accounting policy,
credit, collections, tax, treasury, and internal audit at McAfee. The functions reporting to the CFO
sometimes are grouped together and are referred to as corporate finance.
Finance and accounting professionals often work within verticals and other horizontals man-
aging budgets, tracking key metrics, and generating accounting reports. Doing so requires coor-
dinating and interacting closely with operational employees. As a result, the functions of these
professionals are sometimes referred to as operations finance or as financial planning and anal-
ysis. Although finance and accounting professionals often work within verticals and other horizon-
tals, they do not normally report directly to the heads of those units or departments. Instead, they
report to an accounting and finance VP, who in turn reports to the CFO. This allows the accounting
and finance professionals to maintain their independence.
At some companies, the manager of the accounting function of a vertical (business unit) is
referred to as the controller. At smaller companies, controller may be used to refer to the chief
financial officer. At still other companies, controller may be used to signify rank within the account-
ing and finance function. For example, the head accountant of a manufacturing facility at Deere &
Company (DE) is called a controller. In contrast, at Intel Corporation (INTC), accounting and
finance employees start as analysts, are promoted to senior analysts, then to managers, and then
to controllers.
As discussed above, few accounting and finance professionals are called “managerial accoun-
tants.” However, the work of accounting and finance professionals requires a thorough knowledge
and understanding of managerial accounting, which, in turn, provides a valuable foundation for
advancing to senior management positions.
One of Gibson ’s most influential managers was Ted McCarty, who was the company president from Link to
1950–1966. During this period, Gibson was known for its innovations. For example, in 1954, McCarty invented the
tune-o-matic bridge with adjustable saddles.
Gibson Guitars
Why It Matters
Certified Management Accountants The CMA is not a state or local certificate, but a globally recognized
T
credential. The CMA is earned by passing a two-part examination.
he Institute of Management Accountants (IMA®) is a worldwide
Part 1 covers financial reporting, planning and budgeting, per-
association of over 100,000 accounting and finance profession-
formance management, cost management, and internal controls.
als across more than 140 countries. The IMA works to support
Part 2 covers financial statement analysis, corporate finance, deci-
the management accounting profession with programs involving
sion analysis, risk management, investment decisions, and pro-
continuing education, certification, networking, ethics, research, and
fessional ethics. Those passing the examination have proven that
scholarships. In the United States, there are over 1.3 million accoun-
they have mastered the skills required to oversee the management
tants and auditors, most of whose work involves management
accounting and finance functions within a company or other entity.
accounting. The projected growth rate of the accounting profession
For more information, visit the IMA’s website at www.imanet.org.
over the coming decade is 11%, which is 4% higher than the projected
average growth rate of all professions.
To meet the growing needs of the accounting profession, IMA Source: U.S. Bureau of Labor Statistics: www.bls.gov/ooh/business-and-financial/
offers the Certified Management Accountant (CMA) certificate. accountants-and-auditors.htm#tab-6.
2
Consolidations supports the aggregation of financial statements from other units.
The Management Process

Managerial accounting supports management and the management process. The management
process has the following five basic phases, as shown in Exhibit 3:
▪▪ Planning
▪▪ Directing
▪▪ Controlling
▪▪ Improving
▪▪ Decision making
As Exhibit 3 illustrates, the five phases interact with one another.
Exhibit 3
The Management Operations
Process
Planning: Strategic
Results and Operational Actions
Feedback Plans
Improving Decision Making Directing
Feedback Feedback
Controlling
Planning Management uses planning in developing the company’s objectives (goals) and
translating these objectives into courses of action. For example, a company may set an objective
to increase market share by 15% by introducing three new products. The actions to achieve this
objective might be as follows:
▪▪ Increase the advertising budget
▪▪ Open a new sales territory
▪▪ Increase the research and development budget
Planning may be classified as follows:
▪▪ Strategic planning, which is developing long-term actions to achieve the company’s objectives.
These long-term actions are called strategies, which often involve periods of 5 to 10 years.
Why It Matters
Vertical and Horizontal Functions for Service Companies
F
unctions that are normally performed by vertical and horizontal units may be applied to service companies. Some examples are as follows:
Service Industry Vertical Function Horizontal Function

Airline Crew, baggage handling, and gate staff Information systems, accounting, human resources
Hotel Housekeeping and reception staff Maintenance, hotel manager, grounds
Hospital Doctors, nurses, other caregivers Admissions, records, billing
Banking Tellers, loan officers, trust officers, and brokers Branch manager, information systems
Telecommunications Sales, customer service, and customer Information systems, regional management, and
installation staff network maintenance
▪▪ Operational planning, which develops short-term actions for managing the day-to-day opera-
tions of the company.
Directing The process by which managers run day-to-day operations is called directing. An
example of directing is a production supervisor’s efforts to keep the production line moving
without interruption (downtime). A credit manager’s development of guidelines for assessing the
ability of potential customers to pay their bills is also an example of directing.
Controlling Monitoring operating results and comparing actual results with the expected re-
sults is controlling. This feedback allows management to isolate areas for further investigation
and possible remedial action. It may also lead to revising future plans. This philosophy of con-
trolling by comparing actual and expected r esults is called management by exception.
Improving Feedback is also used by managers to support continuous process improvement.

Continuous process improvement is the philosophy of continually improving employees, busi-
ness processes, and products. The objective of continuous improvement is to eliminate the source
of problems in a process. In this way, the right products (services) are delivered in the right
quantities at the right time.
Decision Making Inherent in each of the preceding management processes is d ecision

making. In managing a company, management must continually decide among alternative ac-
tions. For example, in directing operations, managers must decide on an operating structure,
training procedures, and staffing of day-to-day operations.
Managerial accounting supports managers in all phases of the management process. For example,
accounting reports comparing actual and expected operating results help managers plan and improve
current operations. Such a report might compare the actual and expected costs of defective materials.
If the cost of defective materials is unusually high, management might decide to change suppliers.
Gibson struggled financially from 1966–1986. The company was purchased and sold several times and Link to
experienced declining sales.
Gibson Guitars
Ethics: Do It! To help managers make sound business decisions, the emerg-
ing field of environmental management accounting focuses on
ETHICS
Environmental Managerial Accounting computing the environmental-related costs of business decisions.
Throughout the last decade, environmental issues have become Environmental managerial accountants evaluate a variety of issues
an increasingly important part of the business environment for such as the volume and level of emissions, the estimated costs of
most companies. Companies and managers must now consid- different levels of emissions, and the impact that environmental
er the environmental impact of their business decisions in the costs have on product cost. Managers use these results to consider
same way that they would consider other operational issues. the environmental effects of their business decisions.
Uses of Managerial Accounting Information

As mentioned earlier, managerial accounting provides information and reports for managers to use
in operating a business. Some examples of how managerial accounting could be used by a guitar
manufacturer include the following:
▪▪ The cost of manufacturing each guitar could be used to determine its selling price.
▪▪ Comparing the costs of guitars over time can be used to monitor and control costs.
▪▪ Performance reports could be used to identify any large amounts of scrap or employee down-
time. For example, large amounts of unusable wood (scrap) after the cutting process should be
investigated to determine the underlying cause. Such scrap may be caused by saws that have
not been properly maintained.
▪▪ A report could analyze the potential efficiencies and savings of purchasing a new computerized
saw to speed up the production process.
▪▪ A report could analyze how many guitars need to be sold to cover operating costs and expenses.
Such information could be used to set monthly selling targets and bonuses for sales personnel.
As the prior examples illustrate, managerial accounting information can be used for a variety
of purposes. For example, managers must consider the social and environmental settings in which
a business operates, in order to make sound strategic and operational decisions. Issues such as
population growth, resource scarcity, declining ecosystems, increasing urbanization, and climate
change all have a direct impact on a company’s potential for long-term success. As a result, man-
agers are using new management techniques and measures that consider these issues. These new
management techniques and measures are described and illustrated in Chapter 14, “The Balanced
Scorecard and Corporate Social Responsibility.”
Check Up Corner 1-1 Management Process

1. Indicate whether the following statements are true or false:
a. Managerial accounting information is designed primarily to meet the needs of external users such as
shareholders, creditors, and the general public.
b. Managerial accounting reports must be prepared for the business as a whole.
c. Operational planning develops short-term actions for managing the day-to-day operations of the company.
2. Three phases of the management process are planning, controlling, and improving. Match the following
descriptions to the proper phase:
Phase of Management Process Description

Planning a. Monitoring the operating results and comparing the actual results
with expected results
Controlling b. Rejects solving problems with temporary solutions that fail to address
the root cause of the problem
Improving c. Used by management to develop the company’s objectives
Solution:
1. a. False. The primary focus and design of managerial accounting information is to meet the specific needs of
a company’s management.
b. False. Managerial accounting reports do not have to be prepared for the business as a whole. Most
management reports are prepared for products, projects, sales territories, or other segments of the company.
c. True. Operational planning develops short-term actions for managing the day-to-day operations of the
company. In contrast, strategic planning develops long-term actions (strategies) to achieve the company’s
objectives.
2. Planning: c. Used by management to develop the company’s objectives
Controlling: a. Monitoring the operating results and comparing the actual results with expected results
Improving: b. Rejects solving problems with temporary solutions that fail to address the root cause of the
problem
Check Up Corner
Why It Matters contracts when such events occur. Such clauses are used when the
normal operating plans are disrupted by events beyond management
Not According to Plan control or expectation. For example, a hotel damaged by Hurricane
Sandy under a force majeure clause would not be required to fulfill a
T
here are times even the best of plans go awry. Sometimes plans contract to supply rooms for a convention. In other cases, events may
are impacted by events outside of management control. For be dramatic, but can be anticipated. An example was the dramatic
example, Hurricane Sandy ruined the beach and resort busi- decline in oil prices during the middle 2010s that reduced the oil
nesses along the New Jersey shore. Few management plans would revenue earned by U.S. shale oil producers. Many of these producers
be able to provide for such an extreme contingency. Force majeure planned and then executed financial contracts, termed hedges, that
(meaning “superior force”) clauses in contracts can be used to nullify earned money from lower oil prices, to partially offset revenue losses.
Manufacturing Operations Objective 2

Describe and
The operations of a business can be classified as service, retail, or manufacturing. Although the illustrate the nature
chapters of this text focus primarily on manufacturing and service businesses, most of the manage- of manufacturing
operations, including
rial accounting concepts discussed also apply to retail businesses.
different types and
classifications of costs.
Nature of Manufacturing
As a basis for illustration of manufacturing operations, a guitar manufacturer, Legend Guitars, is
used. Exhibit 4 is an overview of Legend’s guitar manufacturing operations.
Exhibit 4 Guitar-Making Operations of Legend Guitars
Guitar
Wood Strings
Guitar
Bridge
Customer Places Order Materials Cutting Assembly Finished Guitar
Legend’s guitar-making process begins when a customer places an order for a guitar. Once the
order is accepted, the manufacturing process begins by obtaining the necessary materials. An employee
then cuts the body and neck of the guitar out of raw lumber. Once the wood is cut, the body and neck
of the guitar are assembled. When the assembly is complete, the guitar is painted and finished.
Gibson provides tours of its Memphis guitar factory located at 145 Lt. George W. Lee Avenue. Link to
Gibson Guitars
Direct and Indirect Costs

A cost is a sacrifice made to obtain some benefit. For example, cash (or credit) used to purchase
equipment is the cost of the equipment. If equipment is purchased by exchanging assets other
than cash, the current market value of the assets given up is the cost of the equipment purchased.
In managerial accounting, costs are often assigned to a cost object. A cost object can be anything
to which costs are assigned and will vary depending upon the decision-making needs of manage-
ment. For example, a cost object may be a product, a sales territory, a department, or an activity, such
as research and development. Costs identified with cost objects are either direct costs or indirect costs.
Direct costs are identified with and can be traced to a cost object. For example, as shown in
Exhibit 5, the cost of wood (materials) used by Legend Guitars in manufacturing a guitar is a
direct cost of the guitar.
Materials Cost Object: Guitar Exhibit 5

Direct Costs of Legend
Guitars
Direct Cost
Indirect costs are not identified with or traced to a cost object. For example, as shown in
Exhibit 6, the salaries of the Legend Guitars production supervisors are indirect costs of pro-
ducing a guitar. Although the production supervisors contribute to the production of a guitar, their
salaries cannot be identified with or traced to any individual guitar.
Exhibit 6
Indirect Costs of Production Supervisor Cost Object: Guitar
Legend Guitars
Depending on the cost object, a cost may be either a direct or an indirect cost. For example, the
salaries of production supervisors are indirect costs when the cost object is an individual guitar. If,
however, the cost object is Legend Guitars’ overall production process, then the salaries of pro-
duction supervisors are direct costs.
This process of classifying a cost as direct or indirect is illustrated in Exhibit 7.
Exhibit 7
Direct Cost
Classifying Direct
and Indirect Costs
Identify the Determine if
Traceable
cost object the cost can be
identified with
and traced to the
cost object Not
Traceable Indirect Cost
Manufacturing Costs
The cost of a manufactured product includes the cost of materials used in making the product.
In addition, the cost of a manufactured product includes the cost of converting the materials into
a finished product. For example, Legend Guitars uses employees (direct labor) and machines
(factory overhead) to convert wood (direct materials) into finished guitars. Thus, as shown in
Exhibit 8, the cost of a finished guitar (the cost object) includes the following:
▪▪ Direct materials cost
▪▪ Direct labor cost
▪▪ Factory overhead cost
Exhibit 8
Manufacturing Costs
of Legend Guitars
Direct Materials Direct Labor Factory Overhead
Direct Materials Cost Manufactured products begin with raw materials that are converted into
finished products. The cost of any material that is an integral part of the finished product is classified
as a direct materials cost. For Legend Guitars, direct materials cost includes the cost of the wood
used in producing each guitar. Other examples of direct materials costs include the cost of electronic
components for a television, silicon wafers for microcomputer chips, and tires for an automobile.
For Legend, the cost of the glue used in the guitar is not a direct materials cost. This is because the
cost of glue is an insignificant part of the total cost of each guitar and is difficult to trace accurately
to a guitar. Instead, the cost of glue is classified as a factory overhead cost, which is discussed later.
Direct Labor Cost Most manufacturing processes use employees to convert materials into
finished products. The cost of employee wages that is an integral part of the finished product
is classified as direct labor cost. For Legend Guitars, direct labor cost includes the wages of
the employees who cut each guitar out of raw lumber and assemble it. Other examples of direct
labor costs include mechanics’ wages for repairing an automobile, machine operators’ wages for
manufacturing tools, and assemblers’ wages for assembling a laptop computer.
For Legend, the wages of the janitors who clean the factory are not a direct labor cost. This is
because janitorial costs are not an integral part or a significant cost of each guitar. Instead, janito-
rial costs are classified as a factory overhead cost, which is discussed next.
Pathways Challenge
This is Accounting!
Economic Activity
Whether a specific expenditure is considered a direct cost or an indirect cost with respect to a cost object
depends on a number of factors. While some costs are impossible to trace directly to the cost object, many
costs can be traced directly, but doing so may not be economically feasible or justifiable given the benefits
of direct tracing. In most cases, management subjectively determines whether to treat a cost as d irect or
indirect. Larson & Company, PC, a regional CPA firm based in Utah, bills clients based, in part, on
the costs incurred to serve the client. Some costs, such as billable professional hours, are directly traced to
clients and billed accordingly. Other costs, such as office supplies, are treated as indirect costs. These costs
are not traced directly to clients. Instead, the hourly professional rate is set high enough to provide sufficient
revenue to cover both direct and indirect costs.
Critical Thinking/Judgment
What are the effects of considering indirect costs when determining the hourly professional rate to charge clients?
What happens if serving some clients requires more supplies (printed documents, folders, etc.) than other
clients? Will Larson & Company’s current billing practice capture this difference?
Should Larson & Company consider directly tracing office supplies costs to clients?
Suggested answer at end of chapter.

Factory Overhead Cost Costs other than direct materials and direct labor that are incurred
in the manufacturing process are combined and classified as factory overhead cost. Factory
overhead is sometimes called manufacturing overhead or factory burden.
All factory overhead costs are indirect costs of the product. Some factory overhead costs include
the following:
▪▪ Heating and lighting the factory
▪▪ Repairing and maintaining factory equipment
▪▪ Property taxes on factory buildings and land
▪▪ Insurance on factory buildings
▪▪ Depreciation on factory plant and equipment
Factory overhead cost also includes materials and labor costs that are not directly traced to the
finished product. Examples include the cost of glue used to assemble guitars and the wages of jan-
itorial and supervisory employees.
For Legend Guitars, the costs of glue and janitorial wages are factory overhead costs. Addi-
tional factory overhead costs of making guitars are as follows:
▪▪ Sandpaper
▪▪ Buffing compound
▪▪ Oil used to lubricate machines
▪▪ Power (electricity) to run the machines
▪▪ Depreciation of the machines and building
▪▪ Salaries of production supervisors
Prime Costs and Conversion Costs Direct materials, direct labor, and factory overhead
costs may be grouped together for analysis and reporting. Two such common groupings are as
follows:
▪▪ Prime costs, which consist of direct materials and direct labor costs
▪▪ Conversion costs, which consist of direct labor and factory overhead costs
Conversion costs are the costs of converting the materials into a finished product. Direct labor
is both a prime cost and a conversion cost, as shown in Exhibit 9.
Exhibit 9
Prime Costs and
Conversion Costs
Product Costs and Period Costs For financial reporting purposes, costs are classified as
product costs or period costs.
Why It Matters requires a significant investment in facilities and tools, all of which are
classified as factory overhead costs. As a result, factory overhead costs are
Factory Overhead Costs a much larger portion of the cost of goods sold for defense contractors
than they are in other industries. For example, a U.S. General Accounting
D
efense contractors such as General Dynamics (GD) , Office study of six defense contractors found that overhead costs were
Boeing (BA) , and Lockheed Martin (LMT) sell almost one-third of the price of the final product. This is more than three
products such as airplanes, ships, and military equipment to times greater than the factory overhead costs for a laptop computer,
the U.S. Department of Defense. Building large products such as these which are typically about 10% of the price of the final product.
▪▪ Product costs consist of manufacturing costs: direct materials, direct labor, and factory overhead.
▪▪ Period costs consist of selling and administrative expenses. Selling expenses are incurred in mar-
keting the product and delivering the product to customers. Administrative expenses are incurred
in managing the company and are not directly related to the manufacturing or selling functions.
Examples of product costs and period costs for Legend Guitars are presented in Exhibit 10.
Exhibit 10 Examples of Product Costs and Period Costs—Legend Guitars
Product (Manufacturing) Costs
rs
Legend Guita
Factory Overhead
Direct Materials Cost Direct Labor Cost ▪ Guitar strings
▪ Wood used in neck and body ▪ Wages of saw operator ▪ Wages of janitor
▪ Wages of employees who ▪ Power to run the machines
assemble the guitar ▪ Depreciation expense—factory building
▪ Sandpaper and buffing materials
▪ Oil used to lubricate machines
▪ Salary of production supervisors
Period (Nonmanufacturing) Costs

Selling Expenses Administrative Expenses
▪ Advertising expenses ▪ Office salaries expense
▪ Sales salaries expenses ▪ Office supplies expense
▪ Commissions expenses ▪ Depreciation expense—office building
and equipment
To facilitate control, selling and administrative expenses may be reported by level of respon-
sibility. For example, selling expenses may be reported by products, salespersons, departments,
divisions, or territories. Likewise, administrative expenses may be reported by areas such as human
resources, computer services, legal, accounting, or finance.
The impact on the financial statements of product and period costs is summarized in Exhibit 11.
As product costs are incurred, they are recorded and reported on the balance sheet as inventory.
When the inventory is sold, the cost of the manufactured product sold is reported as cost of goods
sold on the income statement. Period costs are reported as expenses on the income statement in
the period in which they are incurred and, thus, never appear on the balance sheet.
Why It Matters CONCEPT CLIP
Service Companies and Product Costs
T
hough service companies do not produce a tangible prod- Caregivers provide care (similar to direct labor), drugs and
uct, they usually still have labor, materials, and overhead health supplies are administered (similar to direct materials),
costs. These costs are not associated with manufacturing and administrative salaries and utilities are paid (similar to fac-
product, but with serving customers. An example is a hospital. tory overhead).
Exhibit 11 Costs (Payments) for the Purpose

Product Costs, of Generating Revenues
Period Costs, and the
Financial Statements
Product Costs Period Costs
Inventory
(Balance Sheet)
Selling and
Cost of Goods Sold
Administrative Expenses
(Income Statement)
(Income Statement)
Link to In January 1986, guitar enthusiasts Henry Juszkiewicz and David Berryman purchased Gibson. Together they
Gibson Guitars restored Gibson’s reputation for innovation and quality. Under their leadership, Gibson began generating profits.
Check Up Corner 1-2 Manufacturing Operations

A partial list of the costs for MLB Mitt Company, a baseball glove manufacturer, is as follows:
a. Ink used to print a player’s autograph
b. Salesperson’s salary and commission
c. Padding material
d. Coolants for machines that sew the baseball gloves
e. Wages of assembly line employees
f. Cost of endorsement from a professional baseball player
g. Salary of manufacturing plant supervisor
h. Leather used to make the gloves
i. Office supplies used at company headquarters
j. Wages of office administrative staff
Using the following headings, classify each cost as a product cost or a period cost. In addition, identify product costs as:
▪ Direct materials, direct labor, or factory overhead, and

▪ Prime cost, conversion cost, or both.
Product Cost Period Cost
Direct Direct Factory Prime Conversion
Item Materials Labor Overhead Cost Cost
Solution:
Product Cost Period Cost
Direct Direct Factory Prime Conversion
Item Materials Labor Overhead Cost Cost
a. X X
b. X
c. X X
d. X X
e. X X X
f. X
g. X X
h. X X
i. X
j. X
Check Up Corner
Financial Statements for a Objective 3

Describe and illustrate
Manufacturing Business financial statements
for a manufacturing
The statement of stockholders’ equity and statement of cash flows for a manufacturing business business, including
are similar to those for service and retail businesses. However, the balance sheet and income state- the balance sheet,
ment for a manufacturing business are more complex. This is because a manufacturer makes the statement of cost of
products that it sells and, thus, must record and report product costs. The reporting of product goods manufactured,
costs primarily affects the balance sheet and the income statement. and income statement.
Balance Sheet
A manufacturing business reports three types of inventory on its balance sheet as follows:
▪▪ Materials inventory (sometimes called raw materials inventory). This inventory consists of the
costs of the direct and indirect materials that have not entered the manufacturing process.
Examples for Legend Guitars: Wood, guitar strings, glue, sandpaper
▪▪ Work in process inventory. This inventory consists of the direct materials, direct labor, and
factory overhead costs for products that have entered the manufacturing process, but are not
yet completed (in process).
Example for Legend: Unfinished (partially assembled) guitars
▪▪ Finished goods inventory. This inventory consists of completed (or finished) products that
have not been sold.
Example for Legend: Unsold guitars
Exhibit 12 illustrates the reporting of inventory on the balance sheet for a retail and a manu
facturing business. MusicLand Stores, Inc., a retailer of musical instruments, reports only Inven-
tory. In contrast, Legend Guitars, a manufacturer of guitars, reports Finished Goods, Work in
Process, and Materials inventories. In both balance sheets, inventory is reported in the “Current
assets” section.
MusicLand Stores, Inc. Exhibit 12

Balance Sheet
December 31, 20Y8 Balance Sheet
Presentation of
Current assets: Inventory in Retail
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 25,000 and Manufacturing
Accounts receivable (net) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85,000 Companies
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142,000
Supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $262,000
Legend Guitars
Balance Sheet
December 31, 20Y8
Current assets:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 21,000
Accounts receivable (net) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120,000
Inventory:
Direct materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $35,000
Work in process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,000
Finished goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62,500
Total inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121,500
Supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $264,500
Income Statement
The income statements for retail and manufacturing businesses differ primarily in the reporting of
the cost of goods (merchandise) available for sale and sold during the period. These differences
are shown in Exhibit 13.
Exhibit 13 Retail Business Manufacturing Business

Income Statements Income Statement Income Statement
for Retail and Sales $ XXX Sales $ XXX
Manufacturing Beginning Beginning finished
Businesses inventory $ XXX goods inventory $ XXX
Net purchases XXX Cost of goods manufactured XXX
Inventory available Cost of finished goods
for sale $ XXX available for sale $ XXX
Ending inventory (XXX) Ending finished goods inventory (XXX)
Cost of goods sold (XXX) Cost of goods sold (XXX)
Gross profit $ XXX Gross profit $ XXX
As shown in Exhibit 13, a retail business determines its cost of goods sold by first adding
its net purchases for the period to its beginning inventory. This determines inventory available
for sale during the period. The ending inventory is then subtracted to determine the cost of
goods sold.3
In contrast, a manufacturing business makes the products it sells using direct materials, direct
labor, and factory overhead. As a result, a manufacturing business must determine its cost of
goods manufactured during the period.
The cost of goods manufactured is determined by preparing a statement of cost of goods
manufactured.4 This statement summarizes the cost of goods manufactured during the period, as
follows:
Statement of Cost of Goods Manufactured
Beginning work in process inventory . . . . . . . . . . $ XXX
Direct materials:
Beginning materials inventory . . . . . . . . . . . . . $ XXX
Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XXX
Cost of materials available for use . . . . . . . . . . $ XXX
Ending materials inventory . . . . . . . . . . . . . . . . (XXX)
Cost of direct materials used . . . . . . . . . . . . $XXX
Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XXX
Factory overhead . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XXX
Total manufacturing costs incurred in period . . . . . . XXX
Total manufacturing costs . . . . . . . . . . . . . . . . . . . . . $ XXX
Ending work in process inventory . . . . . . . . . . . . . . (XXX)
Cost of goods manufactured . . . . . . . . . . . . . . . . $ XXX
3
To simplify, we use the computation of cost of goods sold for periodic inventory systems.
4
Chapters 2 and 3 describe and illustrate the use of job order and process cost systems. As will be illustrated, these systems do not require a
statement of cost of goods manufactured.
To illustrate, the following data for Legend Guitars are used:

Jan. 1, 20Y8 Dec. 31, 20Y8
Inventories:
Materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 65,000 $ 35,000
Work in process . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,000 24,000
Finished goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,000 62,500
Total inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $155,000 $121,500
Manufacturing costs incurred during 20Y8:
Materials purchased . . . . . . . . . . . . . . . . . . . . . . . $100,000
Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110,000
Factory overhead:
Indirect labor . . . . . . . . . . . . . . . . . . . . . . . . . . $ 24,000
Depreciation on factory equipment . . . . . 10,000
Factory supplies and utility costs . . . . . . . . 10,000
Total factory overhead . . . . . . . . . . . . 44,000
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $254,000
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $366,000
Selling expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,000
Administrative expenses . . . . . . . . . . . . . . . . . . . . . . 15,000
The statement of cost of goods manufactured is prepared using the following three steps:
▪▪ Step 1. Determine the cost of direct materials used during the period.
▪▪ Step 2. Determine the total manufacturing costs incurred during the period.
▪▪ Step 3. Determine the cost of goods manufactured during the period.
Using the data for Legend Guitars, the cost of direct materials used, total manufacturing costs
incurred, and cost of goods manufactured are computed as follows:
Step 1. The cost of direct materials used in production is determined as follows:
Materials inventory, January 1, 20Y8 $ 65,000
Purchases 100,000
Cost of materials available for use $165,000
Materials inventory, December 31, 20Y8 (35,000)
Cost of direct materials used $130,000
The January 1, 20Y8 (beginning), materials inventory of $65,000 is added to the cost of mate-
rials purchased of $100,000 to yield the $165,000 total cost of materials that are available for use
during 20Y8. Deducting the December 31, 20Y8 (ending), materials inventory of $35,000 yields the
$130,000 cost of direct materials used in production.
Step 2. The total manufacturing costs incurred in 20Y8 are determined as follows:
Direct materials used in production (Step 1) $130,000
Direct labor 110,000
Factory overhead 44,000
Total manufacturing costs incurred in 20Y8 $284,000
The total manufacturing costs incurred in 20Y8 of $284,000 are determined by adding the cost
of direct materials used in production (Step 1), the direct labor cost, and the factory overhead costs.
Step 3. The cost of goods manufactured is determined as follows:
Work in process inventory, January 1, 20Y8 $ 30,000
Total manufacturing costs incurred (Step 2) 284,000
Total manufacturing costs incurred $314,000
Work in process inventory, December 31, 20Y8 (24,000)
Cost of goods manufactured in 20Y8 $290,000
The cost of goods manufactured of $290,000 is determined by adding the total manufacturing costs
incurred (Step 2) to the January 1, 20Y8 (beginning), work in process inventory of $30,000. This yields
total manufacturing costs incurred of $314,000. The December 31, 20Y8 (ending), work in process inven-
tory of $24,000 is then deducted to determine the cost of goods manufactured of $290,000.
The income statement and statement of cost of goods manufactured for Legend Guitars are
shown in Exhibit 14.
Exhibit 14 Legend Guitars

Income Statement
Manufacturing For the Year Ended December 31, 20Y8
Company—Income
Statement with Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 366,000
Statement of Cost of Cost of goods sold:
Goods Manufactured Finished goods inventory, January 1, 20Y8 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 60,000
Cost of goods manufactured . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 290,000
Cost of finished goods available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $350,000
Finished goods inventory, December 31, 20Y8 . . . . . . . . . . . . . . . . . . . . . . . . . (62,500)
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (287,500)
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 78,500
Operating expenses:
Selling expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 20,000
Administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,000
Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (35,000)
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 43,500
Legend Guitars
Statement of Cost of Goods Manufactured
For the Year Ended December 31, 20Y8
Work in process inventory, January 1, 20Y8 . . . . . . . . . . . . . . . . . . $ 30,000

Direct materials:
Materials inventory, January 1, 20Y8 . . . . . . . . . . . . . . . . . . . . . $ 65,000
Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000
Cost of materials available for use . . . . . . . . . . . . . . . . . . . . . . . $165,000
Materials inventory, December 31, 20Y8 . . . . . . . . . . . . . . . . . (35,000)
Cost of direct materials used . . . . . . . . . . . . . . . . . . . . . . . . $130,000
Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110,000
Factory overhead:
Indirect labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 24,000
Depreciation on factory equipment . . . . . . . . . . . . . . . . . . . . . 10,000
Factory supplies and utility costs . . . . . . . . . . . . . . . . . . . . . . . . 10,000
Total factory overhead . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44,000
Total manufacturing costs incurred in 20Y8 . . . . . . . . . . . . . . . . . . 284,000
Total manufacturing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $314,000
Work in process inventory, December 31, 20Y8 . . . . . . . . . . . . . . . (24,000)
Cost of goods manufactured . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $290,000
Exhibit 15 summarizes how manufacturing costs flow to the income statement and balance
sheet of a manufacturing business.
Exhibit 15 MANUFACTURING BALANCE INCOME

Flow of COSTS SHEET STATEMENT
Manufacturing Costs
Direct Unused Materials
Materials Inventory
Used
Unfinished Work in
Direct Manufacturing Process
Labor Process Inventory
Finished Finished Sold

Factory Cost of
Goods
Overhead Goods Sold
Inventory
Check Up Corner 1-3 Manufacturing Financial Statements

The following information is available for January for MLB Mitt Company, a baseball glove manufacturer:
Cost of direct materials used in production $25,000
Direct labor 35,000
Factory overhead 20,000
Work in process inventory, January 1 30,000
Work in process inventory, January 31 25,000
Finished goods inventory, January 1 15,000
Finished goods inventory, January 31 12,000
For January, determine (a) the cost of goods manufactured and (b) the cost of goods sold.
Solution:
The cost of goods manufactured is determined by adding the total manufacturing costs incurred to the
beginning work in process inventory.
a. Work in process inventory, January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 30,000
Cost of direct materials used . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 25,000
Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,000
Factory overhead . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,000
Total manufacturing costs incurred in January . . . . . . . . . . . . . . . . . . . . . . 80,000
Total manufacturing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $110,000
Work in process inventory, January 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (25,000)
The cost of goods
Cost of goods manufactured . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 85,000
manufactured is added
to the beginning finished
b. Finished goods inventory, January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 15,000
goods inventory to
Cost of goods manufactured . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85,000
determine the finished
Cost of finished goods available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 100,000
goods available for sale.
Finished goods inventory, January 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (12,000)
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 88,000
Check Up Corner
Utilization Rates Objective 4

Describe and
Nearly 80% of U.S. economic activity (gross domestic product) is represented by services. Ser- illustrate utilization
vices are activities that do not result in the transfer, possession, or ownership of goods. Services rates in evaluating
benefit a customer or an item under a customer’s control. An example of the latter is an auto- performance for
mobile that the owner brings in for maintenance by the dealer. Services cannot be stored and service companies.
are often used instantly. For example, a hotel provides a room to a guest for a night. The guest
does not own the room, but only receives the service for one night. Upon receiving the room,
the service is used or completed by the next morning. Other examples of services are provided
in Exhibit 16.
Many of the principles discussed in this chapter for manufacturing companies can be applied
to service companies. However, the unique characteristics of service companies also create some
differences, as shown in Exhibit 17.
Exhibit 16
Service Industry Service Example Company Example
Examples of Service
Utilities Electric power generation Consolidated Edison (ED)
Industries, Services,
and Companies Transportation Overnight delivery FedEx (FDX)
Information Social media Facebook (FB)
Financial Services Banking Bank of America (BAC)
Education Higher education University of Phoenix
Leisure and Hospitality Entertainment The Walt Disney Company (DIS)
Health General healthcare Hospital Corporation of America (HCA)
Personal Services Fitness club Life Time Fitness
Most of the differences in Exhibit 17 are caused by the nature of services. Service companies
have no inventory or product costs. Managerial accounting in service companies is concerned
with the economic use of people and fixed assets in serving customers.
Exhibit 17 Manufacturing Services

Uses materials, work in process, and Inventory is often limited to supplies.
Differences Between
finished goods inventory.
Manufacturing and
Service Companies Uses both product and period costs. Uses only period costs.
Uses cost of goods sold on the income May use cost of services on the income statement.
statement.
Manufacturing requires a physical Many services require a network that connects the service to the
production site. customer. Examples include telecommunications, banking, power
distribution, distributed entertainment, and transportation.
Manufacturing overhead is an indirect Overhead is an indirect cost incurred in serving customers.

cost in manufacturing products.
Labor is a direct cost to products. Labor is not a direct cost to products, but may be a direct cost to
customers. Examples are accountants in an accounting firm or doctors
in a medical practice.
Materials are a direct cost to products. Materials are often an indirect cost, but may be significant, such as
fuel for transportation or utilities. In other cases, materials are not
significant, such as financial, leisure, information, or education services.
The nature of services influences the performance metrics used by management accountants.
For example, the productive use of fixed assets is an important contributor to financial success
for many service companies. This is because many service companies must build large networks
or other fixed assets in order to deliver a service. For example, the cellular network of Verizon
Communications (VZ) is extremely costly and, thus, the use of the network is key to Verizon’s
financial success. Cruise lines (ships), utilities (power plants), railroads (track), hotels (buildings),
hospitals (buildings), and educational services (buildings) also require costly fixed assets.
An important measure used in many service companies is utilization rate. A utilization rate
measures the use of a fixed asset in serving customers relative to the asset’s capacity. A higher
utilization rate is considered favorable, while a lower utilization rate is considered unfavorable.
Different service industries will have different names and computations used for measuring
utilization rates. Some service industries, such as power generation, freight transportation, and
telecommunications, measure utilization using complex formulas. However, other service indus-
tries use simpler methods to measure utilization. In the hotel industry, for example, utilization is
measured by the occupancy rate, which is computed as:
Guest Nights
Occupancy Rate =
Available Room Nights
where,
Guest nights = number of guests × number of nights per visit (per time period)
Available room nights = number of available rooms × number of nights per time period
The number of guests is determined under single room occupancy, so that the number of
guests is equal to the number of occupied rooms.
To illustrate, assume the EasyRest Hotel is a single hotel with 150 rooms. During the month
of June, the hotel had 3,600 guests, each staying for a single night. The occupancy rate would
be determined as follows:
Guest Nights
Occupancy Rate =
Available Room Nights
3,600 guest nights

= = 80%
150 rooms × 30 days
The hotel was occupied to 80% of capacity, which would be considered favorable.
Make a Decision Utilization Rates
Analyze and compare Comfort Plus and Connors Hotel (MAD 1-1)
Analyze and compare Hilton Hotels and Marriott International (MAD 1-2)
Compare Sunrise Suites and Nationwide Inns (MAD 1-3)
Analyze Valley Hospital (MAD 1-4)
Analyze Eastern Skies Airlines (MAD 1-5)
Make a Decision
Let’s Review
Chapter Summary
1. Managerial accounting supports the management process planning long-term strategies and running the day-to-day
by providing reports to aid management in planning, operations. Managerial accounting provides a variety of
directing, controlling, improving, and decision making. information for decision making for use in operating a
This differs from financial accounting, which provides business.
information to users outside of the organization. Man-
agerial accounting reports are designed to meet the 2. Manufacturing companies use machinery and labor to con-
specific needs of management and aid management in vert materials into a finished product. A direct cost can be
(Continued)
directly traced to a finished product, while an indirect cost reports the cost of goods sold, which is the total manu-
cannot. The cost of a finished product is made up of three facturing cost of the goods sold. The income statement
components: direct materials, direct labor, and factory is supported by the statement of cost of goods manu-
overhead. These three manufacturing costs can be catego- factured, which provides the details of the cost of goods
rized into prime costs (direct materials and direct labor) or manufactured during the period.
conversion costs (direct labor and factory overhead). Prod-
4. A utilization rate measures the use of a fixed asset in
uct costs consist of the elements of manufacturing cost—
serving customers relative to the asset’s capacity. Higher
direct materials, direct labor, and factory overhead—while
utilization rates are considered favorable, while lower
period costs consist of selling and administrative expenses.
utilization rates are considered unfavorable. Different
3. The financial statements of manufacturing companies service industries will have different names and com-
differ from those of retail companies. Manufacturing putations used for measuring utilization. For example, a
company balance sheets report three types of inventory: common utilization rate in the hotel industry is the occu-
materials, work in process, and finished goods. pancy rate, which is computed by dividing guest nights
The income statement of manufacturing companies by available room nights.
Key Terms
chief accounting officer (CAO) (7) direct labor cost (13) materials inventory (17)
chief executive officer (CEO) (7) direct materials cost (13) objectives (goals) (8)
chief financial officer (CFO) (7) directing (9) operational planning (9)
continuous process factory burden (14) period costs (15)
improvement (9) factory overhead cost (14) planning (8)
controller (7) feedback (9) prime costs (14)
controlling (9) financial accounting (5) product costs (15)
conversion costs (14) finished goods inventory (17) statement of cost of goods
cost (11) horizontals (6) manufactured (18)
cost object (11) indirect costs (12) strategic planning (8)
cost of goods manufactured (18) management by exception (9) strategies (8)
cost of goods sold (18) management process (8) utilization rate (22)
decision making (9) managerial accounting (5) verticals (6)
direct costs (11) manufacturing overhead (14) work in process inventory (17)
Practice
Multiple-Choice Questions
1. Which of the following best describes the difference between financial and managerial
accounting?
a. Managerial accounting provides information to support decisions, while financial account-
ing does not.
b. Managerial accounting is not restricted to generally accepted accounting principles, while
financial accounting is restricted to GAAP.
c. Managerial accounting does not result in financial reports, while financial accounting
does result in financial reports.
d. Managerial accounting is concerned solely with the future and does not record events
from the past, while financial accounting records only events from past transactions.
2. Which of the following is not one of the five basic phases of the management process?
a. Planning c. Decision making
b. Controlling d. Operating
3. Which of the following is not considered a cost of manufacturing a product?
a. Direct materials cost c. Sales salaries
b. Factory overhead cost d. Direct labor cost
Another random document with
no related content on Scribd:
“Good evening,” she said, as if she were addressing
strangers.
“Who in the world is she?” she asked, and Baron saw that her eyes
were touched with a light which was quite unfamiliar to him.
“I was going to tell you,” he faltered, and then he remembered that
there was practically nothing he could tell. He saved time by
suggesting: “Perhaps she could go up-stairs a minute, while I talk to
you alone?”
“Would it be wrong for me to hear?” This was from the child. “You
know I might throw a little light on the subject myself.”
Mrs. Baron blushed rosily and placed her hand over her mouth,
wrenching a swift smile therefrom. She had heard of precocious
children. She disapproved of them. Neither of her own children had
been in the least precocious. “Who ever heard anything like that?”
she demanded of her son in frank amazement.
“There are some things I ought to say to my mother alone,” declared
Baron. He placed a persuasive hand on the child’s shoulder.
“Afterward you can talk the matter over together.”
Mrs. Baron’s doubts were returning. “I don’t see why we should
make any mysteries,” she said. She looked at the child again, and
again all her defenses were laid low. “I suppose she might go up-
stairs to my sitting-room, if there’s anything to say. Tell me, child,”
and she bent quite graciously over the small guest, “what is your
name?”
“I am Bonnie May,” was the response. The child was inordinately
proud of her name, but she did not wish to be vainglorious now. She
lowered her eyes with an obviously theatrical effect, assuming a nice
modesty.
Mrs. Baron observed sharply, and nodded her head.
“That’s a queer name for a human being,” was her comment. She
looked at her son as if she suddenly had a bad taste in her mouth. “It
sounds like a doll-baby’s name.”
The child was shocked by the unfriendliness—the rudeness—of this.
Mrs. Baron followed up her words with more disparagement in the
way of a steady, disapproving look. Precocious children ought to be
snubbed, she thought.
The good lady would not have offended one of her own age without
a better reason; but so many good people do not greatly mind
offending a child.
“You know,” said Bonnie May, “I really didn’t have anything to do with
picking out my own name. Somebody else did it for me. And maybe
they decided on it because they thought it would look good on the
four-sheets.”
“On the——”
But Baron swiftly interposed.
“We can go into matters of that sort some other time,” he said. “I
think it would be better for you to leave mother and me alone for a
minute just now.”
Bonnie May went out of the room in response to Baron’s gesture. “I’ll
show you the way,” he said, and as he began to guide her up the
stairs she turned toward him, glancing cautiously over his shoulder
to the room they had just quitted.
“Believe me,” she whispered, “that’s the first time I’ve had stage
fright in years.” She mounted three or four steps and then paused
again. “You know,” she confided, turning again, “she makes you think
of a kind of honest sister to Lady Macbeth.”
Baron stopped short, his hand on the balustrade. “Bonnie May,” he
demanded, “will you tell me how old you are?”
He had a sudden fear that she was one of those pitiable creatures
whose minds grow old but whose bodies remain the same from year
to year.
“I don’t know,” she replied, instantly troubled. “Miss Barry never
would tell me.”
“Well, how far back can you remember?”
“Oh, quite a long time. I know I had a real speaking part as long as
four seasons ago. I’ve been doing little Eva off and on over two
years.”
He was greatly relieved. “It seems to me,” he said severely, “that you
know about plays which a little girl ought not to know anything
about.”
“Oh! Well, I was with Miss Barry in lots of plays that I didn’t have any
part in, unless it might be to help out with the populace, or something
like that. And we did stock work for a while, with a new play every
week.”
Somehow this speech had the effect of restoring her to favor with
Baron. Her offenses were clearly unconscious, unintended, while her
alertness, her discernment, were very genuine and native. What a
real human being she was, after all, despite her training in the
unrealities of life! And how quick she was to see when she had
offended, and how ready with contrition and apology! Surely that was
the sort of thing that made for good breeding—even from the
standpoint of a Baron or a Boone!
They traversed the upper hall until they reached an immense front
room which was filled with the mellow sunlight of the late afternoon,
and which was invitingly informal and untidy in all its aspects. It was
one of those rooms which seem alive, because of many things which
speak eloquently of recent occupation and of the certainty of their
being occupied immediately again.
A square piano, pearl inlaid and venerable, caught Bonnie May’s
eyes.
“Oh, how lovely!” she exclaimed. She stood a moment, pressing her
hands to her cheeks. “Yes,” she added musingly, “I can actually see
them.”
“See whom?” Baron demanded, slightly impatient.
“The nice, sweet girls, wearing crinoline, and dancing with their arms
around one another’s waists, and one of them sitting at the piano
playing, and looking over her shoulder at the others. There are
tender smiles on their lips, and their eyes are shining like anything.
They are so dear and happy!”
Baron frowned. Why should the child associate the house, his home,
only with things so remote with respect to time and place? It was a
jealously guarded family secret that life was relentlessly passing on,
leaving them stranded in old ways. But was a child—a waif picked up
in pity, or in a spirit of adventure—to wrest the secret from among
hidden things and flaunt it in his face?
She had gone into the big bay window and was standing with one
hand on the long willow seat, covered with pale-hued cushions. For
the moment she was looking down upon the bit of grass-plot below.
“Make yourself at home,” invited Baron. “I won’t be long.”
He went back to his mother. He wished she might have heard what
the child had said about the girls who were dancing, far away in the
past.
“Well, who is she?” was Mrs. Baron’s abrupt, matter-of-fact question.
“I don’t know. That’s the plain truth. I’m thinking more about what she
is—or what she seems to be.”
He described the incident in the theatre, and explained how he had
been in fear of a panic. “I felt obliged to carry her out,” he concluded
rather lamely.
“I quite see that. But that didn’t make you responsible for her in any
way,” Mrs. Baron reminded him.
“Well now, governess, do be friendly. I’m not responsible for her—I
know that. But you see, she appears to be alone in the world, except
for a Miss Barry, an actress. I couldn’t find her. Of course she’ll be
located to-morrow. That’s all there is to it. And let’s not be so awfully
particular. There can’t be any harm in having the little thing in the
house overnight. Honestly, don’t you think she is wonderful?”
Mrs. Baron was diligently nursing her wrath. “That isn’t the question,”
she argued. “I dare say a good many unidentified children are
wonderful. But that would scarcely justify us in turning our house into
an orphan asylum.”
“Oh! An orphan asylum!” echoed Baron almost despairingly. “Look
here, mother, it was just by chance that I ran across the little thing,
and under the circumstances what was I going to do with her?”
“There were the police, at least.”
“Yes, I thought of that.”
He went to the window and stood with his back to her. For a full
minute there was silence in the room, and then Baron spoke. He did
not turn around.
“Yes, there were the police,” he repeated, “but I couldn’t help
remembering that there was also I—and we. I had an idea we could
do a good deal better than the police, in a case like this. I don’t
understand how women feel, mother, but I can’t help remembering
that every little girl is going to be a woman some day. And I’ve no
doubt that the kind of woman she is going to be will be governed a
good deal by seemingly trivial events. I don’t see why it isn’t likely
that Bonnie May’s whole future may depend upon the way things fall
out for her now, when she’s really helpless and alone for the first
time in her life. I think it’s likely she’ll remember to the end of her
days that people were kind to her—or that they weren’t. We’ve
nothing to be afraid of at the hands of a little bit of a girl. At the most,
we’ll have to give her a bed for the night and a bite to eat and just a
little friendliness. It’s she who must be afraid of us!—afraid that we’ll
be thoughtless, or snobbish, and refuse to give her the comfort she
needs, now that she’s in trouble.”
He paused.
“A speech!” exclaimed Mrs. Baron, and Baron could not fail to note
the irony in her voice. She added, in the same tone: “The haughty
mother yields to the impassioned plea of her noble son!”
Baron turned and observed that she was smiling rather maliciously.
“You’d better go up and look after her,” she added. “Flora will be
home before long.”
CHAPTER IV
A CRISIS
At five o’clock, during a brief lull in the usual noises on the avenue,
there was a faint and aristocratic murmur of machinery in front of the
mansion. The McKelvey girls’ motor-car drew up at the curb, and
Miss Flora Baron alighted.
The Misses McKelvey had come for her early in the afternoon and
had driven her out to their suburban home, where she was always
treated almost like one of the family.
She was the sort of girl that people love unquestioningly: gentle, low-
voiced, seemingly happy, grateful, gracious. Besides, there was a
social kinship between the two families. Mrs. McKelvey had been a
Miss Van Sant before her marriage, and the Van Sants and the
Boones had been neighbors for a century or more.
“Good-by, Flora,” called the McKelvey girls almost in one voice, as
their guest hurried toward her gate. Their cheerful faces were framed
by the open door of their shining coupé. And Flora looked back over
her shoulder and responded gayly, and then hurried up into the
vestibule of the mansion.
She carried an armful of roses which the McKelveys had insisted
upon her bringing home: roses with long stems, from which many of
the green, wax-like leaves had not been removed.
When she entered the hall she paused and sighed. Now that her
friends could not see her any longer, she abandoned a certain
gladsome bearing. It was so lovely out at the McKelveys’, and it was
so—so different, here at home. She had the feeling one might have
upon entering a dungeon.
The fingers of her right hand closed upon the dull-green-and-silver
tailored skirt she was wearing, and one foot was already planted on
the first step of the stairway. She meant to offer the roses to her
mother, who would be in the sitting-room up-stairs.
But before she had mounted to the second step she heard her
brother Victor’s voice in the dining-room, and she knew by his
manner of speaking that he was at the telephone.
This circumstance in itself was not remarkable, but he was asking for
police headquarters!
Visions of a burglary passed before her mind, and she wondered
whimsically what anybody could find in the house worth stealing. Her
brother’s next words reached her clearly:
“Oh, I couldn’t say just how old she is. Say about ten. Somebody
must have reported that she is lost.... Well, that certainly seems
strange....”
Flora changed her mind about going up-stairs immediately. Instead,
she turned toward the dining-room. Victor was continuing his
message: “Are you sure such a report hasn’t been made at one of
the substations?” And after a brief interval there was the sound of
the receiver being hung up.
However, when Flora entered the dining-room her brother was
speaking at the telephone again. More about a little girl. “Mr.
Thornburg’s office? Mr. Thornburg? This is Baron speaking. Say—
has anybody spoken to you about losing a little girl this afternoon?”
Flora perceived that he was deeply concerned; his attitude was even
strikingly purposeful—and Victor usually appeared to have no
definite purposes at all.
“Yes,” he continued, clearly in answer to words from the other end of
the wire, “I brought her home with me. I didn’t know what else to do. I
thought somebody might have inquired at the theatre about her. If
they do, you’ll let me know right away, won’t you? She’ll probably be
with us here until she’s claimed.”
He hung up the receiver. His eyes were unusually bright.
“Here? Who?” demanded Flora.
Baron beamed upon her. “Flora!” he cried. “I’m glad you’ve come.
Something has happened!”
“Who’s here?”
“The renowned actress, Bonnie May.”
“Please tell me!” she begged, as if he had made no response at all.
“A little lost girl.” Then Baron briefly explained.
Miss Baron’s eyes fairly danced. “What an adventure!” She added
presently: “Is she—nice?”
“Nice? That’s a woman’s first question every time, isn’t it?” Baron
reflected. “I suppose so. I know she’s pretty—the very prettiest
thing!”
“And that’s a man’s first consideration, of course. What did mother
say?”
“Mother is—resigned.” They moved toward the stairway. “Try to
persuade mother that a child doesn’t count,” Baron urged. “I’m sure
Mrs. Grundy never had any children. None like Bonnie May, anyway.
When you’ve once seen her——”
They were ascending the stairway eagerly, whispering. A dozen
years at least seemed to have slipped from their shoulders. They
entered Mrs. Baron’s sitting-room quite eagerly.
Mrs. Baron and Bonnie May were sitting quite close together, the
guest in a low chair that was Flora’s. Mrs. Baron was maintaining the
rôle of indulgent but overridden oracle; Bonnie May was amiably
inclined to make allowances. They were conversing in a rather
sedate fashion.
“My sister, Flora, Bonnie May,” said Baron.
The child came forward eagerly. “How lovely!” she exclaimed,
extending her hand.
Flora regarded the child with smiling eyes. “Oh! you mean the
roses,” she said. “Yes, they are.” But she did not look at the flowers
on her arm. She pushed a pennon-like fragment of veil away from
her face and smiled quietly at the child.
“I didn’t mean them,” explained Bonnie May. “I meant it was lovely
that you should be—that I’m to have— Do excuse me, I mean that
you are lovely!”
Only an instant longer Miss Baron remained as if happily spellbound.
A breath that was fragrant and cool emanated from her and her
roses. The hue of pleasure slowly deepened in her cheeks.
“You dear child!” she said at last, the spell broken, “I can’t remember
when anybody has said such a thing to me before.”
She laid the roses in her mother’s lap. “And to think we’re to keep
her!” she added.
“Overnight,” Mrs. Baron made haste to say. “Yes, she is to be our
guest until to-morrow.”
“But nobody has inquired for her,” said Flora. “Victor’s been
telephoning. The police and the people at the theatre——”
“Where did you get such beautiful roses?” inquired Mrs. Baron,
wholly by way of interruption. The arch of her eyebrows was as a
weather-signal which Flora never disregarded. She changed the
subject. She had much to say about her ride. But her eyes kept
straying back to Bonnie May, who remained silent, her body leaning
slightly forward, her head pitched back, her eyes devouring Miss
Baron’s face. The attitude was so touchingly childlike that Flora had
visions of herself in a big rocking-chair, putting the little thing to
sleep, or telling her stories. “Only until to-morrow,” her mother had
said, but no one was asking for the child anywhere. Of course she
would stay until—until——
“Yes,” she said absent-mindedly, in response to a question by her
mother, “they brought me home in their car. They were so lovely to
me!” Her eyes strayed back to Bonnie May, whose rapt gaze was
fixed upon her. The child flushed and smiled angelically.
If any constraint was felt during the dinner-hour, Bonnie May was
evidently less affected than the others at table.
The one test which might have been regarded as a critical one—the
appearance of the head of the household—was easily met.
Mr. Baron came home a little late and immediately disappeared to
dress for dinner. Bonnie May did not get even a glimpse of him until
the family took their places at table.
“Hello! Who said there weren’t any more fairies?” was his cheerful
greeting, as he stood an instant beside his chair before he sat down.
He was a tall, distinguished-looking man with a pointed gray beard,
which seemed always to have been of its present color, rather than
to suggest venerableness. He had piercing gray eyes, which seemed
formidable under their definite black eyebrows. However, his eyes
readily yielded to a twinkle when he smiled. He still adhered rigidly to
the custom of dressing formally for dinner, and he entertained a
suspicion that Victor’s vocation, which consisted of literary work of
some indefinite kind, was making him sadly Bohemian, since his son
did not perceive the need of being so punctilious. “It’s not as if we
had company often,” was Victor’s defense, on one occasion, of the
course he had adopted; but his father’s retort had been that “they
were still in the habit of dining with one another.”
“A little girl we are sheltering to-night,” was Mrs. Baron’s explanation
to her husband, who still regarded the child at the opposite end of
the table.
“I am Bonnie May,” amended the child. “I am very glad to meet you,
I’m sure.” She smiled graciously and nodded with such dignity as
was compatible with a rather difficult position. She was occupying an
“adult” chair, and little more than her head and shoulders was visible.
She had briefly yet firmly discouraged the suggestion that she sit on
a book.
“A—protégée of Victor’s,” added Mrs. Baron, with the amiable malice
which the family easily recognized.
But Flora noted the word “protégée” and smiled. To her mind it
suggested permanency.
“A very fine little girl, I’m sure,” was Mr. Baron’s comment. He was
critically looking at the fowl which Mrs. Shepard, housekeeper and
woman of all work, had placed before him. His entire attention was
immediately monopolized by the carving implements. He appeared
to forget the child’s presence.
This fact is set down as a significant one, because Flora and Baron,
Jr., were both keenly and frankly interested in his impression. If he
didn’t mind having her about, another point in her favor would have
been gained. Mrs. Baron, too, was covertly interested in his attitude.
She was not quite sure whether she wished him to confirm her fears
or to share her son’s and daughter’s faith in the unexpected guest.
Thereafter the meal progressed somewhat silently. Every individual
in the group was alertly awaiting developments.
“Children always like the drumstick,” declared Mr. Baron genially,
looking at Bonnie May.
“Yes, I believe so,” admitted the guest politely. She added casually: “I
usually prefer the wing.”
Mr. Baron rested the carving knife and fork on his plate and
scrutinized the speaker sharply. The child was opening her napkin
with a kind of elegant deliberation.
Then he smiled. “A wing it shall be,” he declared.
Later Mrs. Baron took occasion to assert her authority. “Children
should not stare,” she declared, trying to assume a severe contralto
tone, but taking care to smile, so that her rebuke would seem to
have been kindly offered.
Indeed, Bonnie May was paying less attention to her dinner than to
the exquisite napery, the cut-glass vase in which some of Flora’s
roses had been placed, the dinner-set of chaste design, and to the
countenances about her.
“Quite true,” she admitted, in response to Mrs. Baron. “But you know,
when you get into a new company, it’s quite natural to size
everybody up, so you can make up your mind what to expect of
them.”
She took a very small bite from a young green onion, holding her
little finger elegantly apart. “How prettily the white blends with the
green,” she said approvingly, looking critically at the onion.
Mrs. Baron flushed. “My remark was that children ought not to stare,”
she repeated persistently and less gently.
The child’s serenity failed her. “I don’t, usually,” she said in painful
embarrassment, “and I don’t believe I criticise people’s manners,
either, unless it’s in private.”
She regained her self-control immediately. She replaced the onion
on her plate and lifted her napkin to her lips with exquisite care.
The adult persons at the table were all looking from one to another.
There were horizontal lines in every forehead.
“I can’t remember having been anywhere where the service was so
admirable,” the guest added, directing her glance toward her own
section of the board. There was a suggestion of gentle ennui in her
tone.
Mrs. Baron was glaring at her, her face aflame with mortification. It
was a countenance the family was familiar with.
“Well, what have you been doing to-day, Victor?” inquired Mr. Baron
jocosely.
It was the tone—and the tactics—he always adopted when he
wished to avoid a crisis.
And during the remainder of the meal, Bonnie May was an
extraordinarily circumspect and silent little girl.
CHAPTER V
BONNIE MAY OPENS THE DOOR
There was a polite, somewhat nervous exchange of remarks at the

table during the remainder of the dinner-hour. It was the kind of
conversation that is employed sometimes not only to conceal
thought, but to divert attention from the fact that there is anything to
think about.
Nevertheless, every member of the family was thinking hard—and
uncomfortably.
Baron, Sr., was trying patiently to determine what subtle thing had
gone wrong. Mrs. Baron, he knew, was not disagreeable without at
least an imaginary cause.
Victor and Flora were thinking along somewhat similar lines. Why
had their mother deliberately offended an inoffending guest? They
knew their guest was readily to be classified as a “precocious” child,
and Mrs. Baron had always manifested a strong dislike—almost a
dread—of precocious children, whose remarks are sometimes so
disconcerting to those who are not very liberal-minded.
But it was not at all likely that Bonnie May would remain a member of
the household longer than a day or so. Indeed, it seemed quite
probable that she would be called for at any moment. Such a child
would not be permitted by relatives or guardians to go begging.
Yet Mrs. Baron’s conduct might have been accepted as that of one
who begins the tutelage of an adopted daughter. Had their mother
jumped to the conclusion that Bonnie May had come to live with
them permanently, and was she willing to contemplate such an
arrangement?
Beneath their small talk, therefore, they were indulging in decidedly
wild hopes and fancies.
When the family were about to leave the table, Mrs. Baron called the
housekeeper. The others appeared not to notice particularly, but
secretly they were all attention.
Said Mrs. Baron:
“Mrs. Shepard, this little girl’s name is Bonnie May. She is to stay
with us this evening. Will you see that the spare room in the attic is
made ready? and if you can add to her comfort in any way, I’m sure
you will.”
“Yes, ma’am,” said Mrs. Shepard. The good, simple creature was
trying to hide her amazement. The child had been a guest at the
table—and she was to be put up in the attic to sleep! The attic was
really a third floor; but it was used mainly for storing things, and for
the houseman’s quarters. She regarded Bonnie May briefly—and her
eyes twinkled! The child was smiling at her amiably.
“Mother!” was Flora’s hesitating remonstrance, and Victor paid such
studious heed to the folding of his napkin that it was evident he was
trying to hide his discomfort. In a moment he spoke—quite casually:
“I’m afraid it will be lonesome up there for her, mother. Suppose you
let her have my room to-night. I won’t mind giving it up.”
“Nonsense! There’s no need of your being disturbed.” Mrs. Baron’s
forehead was still creased by menacing horizontal lines.
The guest interposed. The family was rising, and she stood with her
back to the table. “If you don’t mind, Mrs. Baron,” she said evenly,
“I’ll go back and make friends with Mrs. Shepard. You know I dearly
love the people who take the—the character parts. They’re usually
so comfortable!”
“Well, run along.” She tried not to speak impatiently. She felt that
there was general disapproval of her mood.
The guest went into the kitchen. At the door she turned. “It was a
lovely dinner,” she said politely. Then she disappeared.
Silence followed, and the family dispersed. Mr. Baron was going out
somewhere. Victor strolled musingly up into the library. Flora
followed her mother up into the sitting-room. There was a good deal
of mental tension, considering the very slight foundation for it.
In the kitchen Bonnie May’s glad bearing vanished. She became
strangely pensive for a little girl. Mrs. Baron did not like her! That
was evident. Yet what had she done, save to take her own part, as
she had always had to do?
Mrs. Shepard did not realize that the child was troubled. When
children were troubled, according to Mrs. Shepard’s experience, their
lips trembled or their eyes filled with tears. There were no such signs
to be read in Bonnie May’s face. She was standing there in that
dazed fashion because she was in a strange place, of course.
“Wait until my work’s done and I’ll bake you a little cake!” said Mrs.
Shepard. She was delighted with the idea. It occurred to her that it
would be a great pleasure to bake a little cake for the child.
“A little cake?” responded Bonnie May dubiously. “It’s kind of you,
you know, but really I’ve just dined.” She put all troubled thoughts
away from her. The kitchen was really a wonderful place. She
examined various utensils with interest. They had all been used. She
had seen many of these things before, but they had always been
shiny and new. The property-man had taken care of them.
A little bell above Mrs. Shepard’s head tinkled energetically. The
housekeeper sighed heavily and began wiping her hands hastily.
“What is it?” inquired Bonnie May.
“The front-door bell,” was the answer.
“Oh! how interesting. Let me answer it—do!”
And before Mrs. Shepard could carefully consider the matter, she
gave a reluctant consent. She would have explained what one
should do under certain contingencies, but there hadn’t been time.
Bonnie May was gone.
As the child passed through the hall she heard the family moving
about up-stairs. Their voices seemed quite remote; they were almost
inaudible. Bonnie May thought it quite probable that they had not
heard the summons at the door.
She felt a new kind of elation at being permitted to officiate in even a
very small domestic function. She was going to admit some one who
really came from out of the unknown—whose every word and
movement would not be known to her beforehand.
Then the mansion seemed to become strangely silent, as if it were
listening uneasily to learn who it was that had come out of the
darkness and sounded a summons to those within.
Bonnie May caught her breath. Her face was fairly glowing when she
opened the door.
A gentleman stood there; a man who was very substantial-looking
and by no means formidable in appearance. The hall-light fell on
him. It seemed to Bonnie May that he was quite middle-aged. He
was well-dressed in a rather informal way. A short-cropped black
mustache had the effect of retreating slightly between two ruddy
cheeks. His eyes expressed some degree of merriment—of mischief,
and this fact gave him standing with Bonnie May immediately.
“Good evening,” said Bonnie May in her most friendly manner. She
waited, looking inquiringly up into the twinkling eyes.
“I came to see Miss Baron. Is she at home?”
“Will you come in? I’ll see.”
She led the way into the big drawing-room, which was in complete
darkness, save for such rays of light as penetrated from the hall. “I’m
afraid I’ll have to ask you to light the gas,” she added. “It’s too high
for me to reach.”
“Maybe I’d better wait in the hall until you go and tell Miss Flora.”
“Certainly not. Light the gas, please.”
He obeyed, and as the light fell suddenly upon his face she saw that
there was a mischievously meditative gleam in his eyes.
Still holding the burnt match in his fingers, he turned to her. “I don’t
believe I’ve met you before?” he said.
“I only came to-day. Will you sit down?”
“You—living here?” The caller appeared to be in no hurry to have his
arrival announced. He listened a moment to the faint voices above,
and seemed reassured.
“Why, yes—I think so. You see, I always live wherever I happen to
be.” She smiled brightly, to rob her words of any seeming
unfriendliness. She regarded him more in detail. He was a big-
bodied man, with a proper tendency to dwindle away neatly from the
shoulders down. His hair was of the sort that refuses to be quite
nice. It was astonishingly thick and dark, with an occasional glint of
silver in it, and it was close-cropped. She liked the way he stood, too;
his chest well out, his head back, and as if nothing could disturb his
balance. Bonnie May had seen so many men who stood as if they
needed propping up, or as if they would be more secure if they had
four legs to stand on.
He returned her careful scrutiny, and the look of approval in her eyes
brought a ruddier glow to his cheeks and a merrier look to his eyes.
He sat down and held out both his hands, smiling so broadly that she
could see many white, lustrous teeth.
She put her hands into his without hesitation. She felt extraordinarily
happy.
“Tell me,” she whispered, “are you the—the Romeo in the cast?”
He released her hands and brought his own down upon his knees
with vehemence. His eyes were almost shouting with merriment now.
“Wasn’t Romeo in kind of bad standing with his prospective parents-
in-law?”
“Something like that. He couldn’t see Her, except up in a balcony.”
He nodded his head. “Well, then, I’m the Romeo!”
Again she regarded him critically. “You seem a little old for the part,”
she suggested.
“Do you think so?” He was thoughtful for a moment. “Maybe that’s
what Mrs. Baron thinks. She won’t even let me stand under a
balcony, when she can help it.”
“Isn’t she quaint!” This with smiling indulgence. “But of course you
don’t pay any attention to that?”
“Oh, yes I do; we—we have to!”
Bonnie May looked puzzled. “I can’t understand it,” she said. “You
look like the kind that they always play the loud music for.”
“The—loud music?” he echoed.
“As if you were the oldest son, come back in the last act to lift the
mortgage.”
They smiled into each other’s eyes, and then Bonnie May drew close
to him. She whispered: “I’ll see if I can’t get her out of the balcony.”
She turned toward the door. “Shall I just tell her that Romeo is here?”
He stared after her in delighted amazement. “Lord help us, no! Say
it’s Mr. Addis.” His face radiated a joyous light even after she went
out of the room and softly closed the door.
She went up-stairs softly singing. At the door of the sitting-room she
paused. Within, Mrs. Baron was reading one of those irreproachable-
looking books which are always about something very remote. She
did not look up at Bonnie May’s approach.
Miss Baron occupied a soft seat in the bay window, and it was clear
that she was troubled a little.
The child beckoned, and Flora’s face instantly brightened.
Mrs. Baron was fully aware of all that transpired. She believed the
guest was afraid of her. She felt a mild gratification.
When Flora came out into the hall Bonnie May whispered: “I want
you to come down-stairs with me.” She took Flora’s hand and patted
it quite blissfully.
They got to the foot of the stairs just in time to see the outlines of a
masculine form mounting the front steps. The frosted glass in the
door permitted this much to be seen.
“Some one else!” commented Bonnie May, and she turned to Flora.
“Do you have so much company every evening?” she asked.
“So much company!” echoed Flora; she looked puzzled.
“Well, never mind,” Bonnie May hastened to add. “Some one is
expecting you in the drawing-room. And please let me receive the
new visitor!”
She opened the drawing-room door, and watched while Flora
wonderingly entered. Then she pulled the door to cautiously. She
had heard a low, forlorn note of surprise in Flora’s voice, and Mr.
Addis’s eager, whispered greeting.
Then she opened the front door in time to prevent the newcomer
from ringing.

Ebook Managerial Accounting PDF Full Chapter PDF

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Ebook Managerial Accounting PDF Full Chapter PDF

Uploaded by

Copyright:

Available Formats

Managerial accounting - eBook PDF

Visit to download the full and correct content document:

Australia • Brazil • Mexico • Singapore • United Kingdom • United States

Product Manager: Matt Filimonov

Executive Marketing Manager: Nathan Anderson

Designer: Chris Doughman

Intellectual Property Project Manager:

Cengage is a leading provider of customized learning solutions with

Cengage products are represented in Canada by Nelson Education, Ltd.

To learn more about Cengage platforms and services, register or access

Printed in the United States of America

Roadmap for Success

Chapter 2 Job Order Costing Chapter 5 Support Departments

Chapter 6 Cost-Volume-Profit Analysis Chapter 12 Capital Investment Analysis

12020_ch15_rev02_698-757.indd 698 8/4/18 11:45 AM

▪▪ Link to the “opening company” of each chapter The $80,000calls

Exhibit 8 Frand Manufacturing Company

Materials purchased during December.

received. Examples of materials requisitions are shown in Exhibit 4.

A 5 L 1 E b. Work in Process 13,000

476 Chapter 10 Evaluating Decentralized Operations

Why It Matters CONCEPT CLIP

Coca-Cola Company: Go West Young Man

the percent of revenues 30,000 Units 40,000 Units

12020_ch07_ptg01_302-351.indd 350 7/12/18 12:15 PM

Chapter 10 Evaluating Decentralized Operations 467

Check Up Corner 10-1 Cost Center Responsibility Measures

The report shows the budgeted costs and

Budget Performance Report The report allows cost center

Analysis for Decision Making

Objective 6 Nonmanufacturing Staffing Budgets

Weekday Weekend Total

Make a Decision Nonmanufacturing Staffing Budgets

▪▪ Make a Decision in the end-of-chapter

Analyze Ambassador Suites’ staffing budget (MAD 8-4)

Make a Decision Make a Decision

MAD 6-1 Analyze Global Air’s cost-volume-profit relationships Obj. 6

Fixed costs for the flight:

Variable costs per passenger:

MAD 6-3 Analyze Star Stream’s cost-volume-profit relationships Obj. 6

NEW! Excel Online

Motivation: Set Expectations and Prepare Students

CengageNOWv2 Start-Up Center

Motivation: Prepare Them for Class

Provide Help Right When Students Need It

Help Students Go Beyond Memorization to True

New to This Edition

Chapter 3 ▪▪ Added four new revenue variance exercises.

©Terry R. Spray InHisImage Studios

1 Introduction to Managerial Accounting. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Appendix A Interest Tables. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1

Make a Decision 142

Activity-Based Costing Method 160

Pathways Challenge 171, 203 Graphic Approach to Cost-Volume-Profit Analysis 266

Joint Costs 222

Analysis for Decision Making 227 Analyzing Operating Income Using

Make a Decision 346 Direct Materials and

Standards 412 Analysis for Decision Making 483

Take It Further 506 Factors That Complicate Capital

Activity Analysis 626

14 The Balanced Scorecard

Chapter 2 Job Order Costing Chapter 5 Support Departments

Chapter 6 Cost-Volume-Profit Analysis Chapter 12 Capital Investment Analysis

14 The Balanced Scorecard

Chapter 6 Cost-Volume-Profit Analysis Chapter 12 Capital Investment Analysis

Improving Feedback is also used by managers to support continuous process improvement.

Decision Making Inherent in each of the preceding management processes is d ecision

Suggested answer at end of chapter.

Utilization Rates Objective 4