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Managerial
Accounting
© Eli Pascall-Willis/Getty Images
Managerial
Accounting
Sixteenth Edition

Ray H. Garrison, D.B.A., CPA

Professor Emeritus
Brigham Young University

Eric W. Noreen, Ph.D., CMA

Professor Emeritus
University of Washington

Peter C. Brewer, Ph.D.

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

MANAGERIAL ACCOUNTING, SIXTEENTH EDITION

Published by McGraw-Hill Education, 2 Penn Plaza, New York, NY 10121. Copyright © 2018 by McGraw-Hill Education. All rights reserved. Printed in
the United States of America. Previous editions © 2015, 2012, and 2010. No part of this publication may be reproduced or distributed in any form or by any
means, or stored in a database or retrieval system, without the prior written consent of McGraw-Hill Education, including, but not limited to, in any network
or other electronic storage or transmission, or broadcast for distance learning.
Some ancillaries, including electronic and print components, may not be available to customers outside the United States.
This book is printed on acid-free paper.
1 2 3 4 5 6 7 8 9 LWI 21 20 19 18 17 16
ISBN 978-1-259-30741-6
MHID  1-259-30741-7

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Library of Congress Cataloging-in-Publication Data

Names: Garrison, Ray H., author. | Noreen, Eric W., author. | Brewer, Peter
C., author.
Title: Managerial accounting / Ray H. Garrison, D.B.A., CPA, Professor
Emeritus, Brigham Young University, Eric W. Noreen, Ph.D., CMA, Professor
Emeritus, University of Washington, Peter C. Brewer, Ph.D., Wake Forest
University.
Description: Sixteenth edition. | New York, NY : McGraw-Hill Education, [2018]
Identifiers: LCCN 2016040843 | ISBN 9781259307416 (alk. paper)
Subjects: LCSH: Managerial accounting.
Classification: LCC HF5657.4 .G37 2018 | DDC 658.15/11—dc23
LC record available at https://lccn.loc.gov/2016040843

The Internet addresses listed in the text were accurate at the time of publication. The inclusion of a website does not indicate an endorsement by the authors
or McGraw-Hill Education, and McGraw-Hill Education does not guarantee the accuracy of the information presented at these sites.

mheducation.com/highered
About the
Authors
Ray H. Garrison is emeritus professor of accounting
at Brigham Young University, Provo, Utah. He received his BS and
MS degrees from Brigham Young University and his DBA degree
from Indiana University.

As a certified public accountant, Professor Garrison has been

involved in management consulting work with both national
and regional accounting firms. He has published articles in The
Accounting Review, Management Accounting, and other professional
journals. Innovation in the classroom has earned Professor Garrison the Karl G. Maeser
Distinguished Teaching Award from Brigham Young University.

Eric W. Noreen has taught at INSEAD in France and

the Hong Kong Institute of Science and Technology and is emeritus
professor of accounting at the University of Washington. Currently,
he is the Accounting Circle Professor of Accounting, Fox School of
Business, Temple University.

He received his BA degree from the University of Washington

and MBA and PhD degrees from Stanford University. A Certified
Management Accountant, he was awarded a Certificate of
Distinguished Performance by the Institute of Certified Management
Accountants.

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

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

Managerial Accounting S i xt e e n t h E di t i on v
 Peter C. Brewer is a Lecturer in the Department
of Accountancy at Wake Forest University. Prior to joining the
faculty at Wake Forest, he was an accounting professor at Miami
University for 19 years. He holds a BS degree in accounting
from Penn State University, an MS degree in accounting from
the University of Virginia, and a PhD from the University of
Tennessee. He has published more than 40 articles in a variety
of journals including: Management Accounting Research; the
Journal of Information Systems; Cost Management; Strategic Finance; the Journal of
Accountancy; Issues in Accounting Education; and the Journal of Business Logistics.

Professor Brewer has served on the editorial boards of the Journal of Accounting
Education and Issues in Accounting Education. His article “Putting Strategy into the
Balanced Scorecard” won the 2003 International Federation of Accountants’ Articles of
Merit competition, and his articles “Using Six Sigma to Improve the Finance Function”
and “Lean Accounting: What’s It All About?” were awarded the Institute of Management
Accountants’ Lybrand Gold and Silver Medals in 2005 and 2006. He has received Miami
University’s Richard T. Farmer School of Business Teaching Excellence Award.

Prior to joining the faculty at Miami University, Professor Brewer was employed as an
auditor for Touche Ross in the firm’s Philadelphia office. He also worked as an internal
audit manager for the Board of Pensions of the Presbyterian Church (U.S.A.).

vi Garrison Noreen Brewer

 Let Garrison be Your Guide
I am a big fan of this book.
For centuries, the lighthouse has provided guidance and safe
I have taught this course
passage for sailors. Similarly, Garrison/Noreen/Brewer has
with a few other books and
successfully guided millions of students through managerial
this book does the best
accounting, lighting the way and helping them sail smoothly through
the course. job tying all the concepts
together. When asked I
Decades ago, lighthouses were still being operated manually. In always refer to this book as
these days of digital transformation, lighthouses are run using being superior to the other
automatic lamp changers and other modern devices. In much the books that I have used.
same way, Garrison/Noreen/Brewer has evolved over the years.
Today, the Garrison book not only guides students—accounting Garrison truly is the gold
majors and other business majors alike—safely through the standard of managerial
course but is enhanced by a number of powerful tools to augment accounting texts.
student learning and increase student motivation. Connect, Pamela Rouse,
which includes adaptive and interactive study features such Butler University
as SmartBook, Concept Overview Videos, Auto-Graded Excel Christopher O’Byrne,
Simulations, and Guided Examples, as well as a repository of Cuyamaca College
additional resources tied directly to the text, will improve students’
Garrison is clearly
engagement in and and out of class, help them maximize their
the best managerial
study time, and make their learning experience more enjoyable.
accounting text available.
Animated, narrated Concept Overview Videos for each learning
objective teach the core concepts of the text with auto-graded Carleton Donchess,
knowledge-check questions, and animated, narrated Guided Bridgewater State University
Examples connected to practice exercises provide a step-by-step I have always liked
walk through of a similar exercise, assisting students when this textbook in my
they need it most. Excel Simulations provide the student the over 20 years of
opportunity to learn valuable Excel skills while solving problems teaching Accounting.
specific to the text pedagogy. It is quite readable and
Just as the lighthouse continues to provide reliable guidance to comprehensive and the
seafarers, the Garrison/Noreen/Brewer book continues its tradition end-of-chapter material is
of leading the way and helping students sail successfully through quite effective.”
managerial accounting by always focusing on three important Rama Ramamurthy,
qualities: relevance, accuracy, and clarity. Georgetown University

Managerial Accounting S i xt e e n t h E di t i on vii

 Garrison does a superior job
of introducing Managerial
Accounting and necessary
management skills. In
addition, the textbook
discusses the crucial topics of
why managerial accounting
matters to one’s career, ethics,
and social responsibility.
Ann K. Brooks,
University of New Mexico
The authors have done a great
job explaining managerial
accounting concepts and
providing real-world examples
that students can relate to.
Stephen Benner,
Eastern Illinois University
It provides simple and clear
explanations of the concepts
with easy to follow examples.
It is ideal for undergraduate
and graduate level accounting
students.
Rong Huang,
Baruch College
The Garrison [text] is clearly
the best written managerial
accounting book that I have
reviewed. The examples
throughout the chapter would
enable a student to use this
book and learn managerial
accounting in an on-line or
hybrid class.
Edna Mitchell,
Polk State College
viii Garrison
RELEVANCE. Every effort is made to help students
relate the concepts in this book to the decisions made by working
managers. In the sixteenth edition, the authors have added 13
new Integration Exercises that help students learn to think
like managers. These exercises link learning objectives across
chapters in ways that enable students to grasp how managerial
accounting “all fits together” to provide enhanced managerial
insights. New and revised In Business boxes throughout the book
link chapter concepts to pertinent real-world examples. Service
industry references appear throughout the chapter narrative and
end-of-chapter material to provide students with relevant context
for the material they are learning.
ACCURACY. The Garrison book continues to set the
standard for accurate and reliable material in its sixteenth
edition. With each revision, the authors evaluate the book and
its supplements in their entirety, working diligently to ensure that
the end-of-chapter material, solutions manual, and test bank are
consistent, current, and accurate.
CLARITY. Generations of students have praised Garrison
for the friendliness and readability of its writing, but that’s just the
beginning. In the sixteenth edition, the authors have rewritten
various chapters with input and guidance from instructors around
the country to ensure that teaching and learning from Garrison
remains as easy as it can be.
The authors’ steady focus on these three core elements has led to
tremendous results. Managerial Accounting has consistently led
the market, being used by over two million students and earning
a reputation for reliability that other texts aspire to match.
Noreen Brewer
Garrison’s Powerful Pedagogy
Managerial Accounting includes pedagogical elements that engage
and instruct students without cluttering the pages or interrupting student learning. Confirming Pages

Garrison’s key pedagogical tools enhance and support students’ understanding of the
concepts rather than compete with the narrative for their attention. Process Costing 171

You should proceed to the requirements below only after completing your worksheet.
Required:
1. Check your worksheet by changing the beginning work in process inventory to 100 units, the
units started into production during the period to 2,500 units, and the units in ending work in

NEW* Integration Exercises

process inventory to 200 units, keeping all of the other data the same as in the original exam-
ple. If your worksheet is operating properly, the cost per equivalent unit for materials should
now be $152.50 and the cost per equivalent unit for conversion should be $145.50. If you do

We have added 13 new exercises (located in the back of the book) that integrate learning objectives across
2.
not get these answers, find the errors in your worksheet and correct them.
How much is the total cost of the units transferred out? Did it change? Why or why not?
Enter the following data from a different company into your worksheet:

chapters. These exercises will increase the students’ level of interest in the course because they forge the
Beginning work in process inventory:
Units in process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200
Completion with respect to materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100%

connections across chapters. Rather than seeing each chapter as an isolated set of learning objectives,
Completion with respect to conversion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Costs in the beginning work in process inventory:
Materials cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
20%

$2,000

students begin to see how “it all fits together” to provide greater managerial insight and more effective
Conversion cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Units started into production during the period . . . . . . . . . . . . . . . . . . . . . . . . .
Costs added during the period:
$800
1,800

planning, controlling, and decision making. The integration exercises also are tailor-made for flipping
Materials cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $18,400
Conversion cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $38,765
Ending work in process inventory:
Units in process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100

the classroom because they offer challenging questions that require students to work in teams to derive
Completion with respect to materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Completion with respect to conversion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
100%
30%

solutions that synthesize what they have learning throughout the semester.
3.
What is the cost of the units transferred out?
What happens to the cost of the units transferred out in part (2) above if the percentage com-
pletion with respect to conversion for the beginning inventory is changed from 20% to 40%
and everything else remains the same? What happens to the cost per equivalent unit for con-
version? Explain.

The Foundational 15
Clopack Company manufactures one product that goes through one processing department called LO4–1, LO4–2, LO4–3,
Mixing. All raw materials are introduced at the start of work in the Mixing Department. The com-
pany uses the weighted-average method of process costing. Its Work in Process T-account for the
Mixing Department for June follows (all forthcoming questions pertain to June):
LO4–4, LO4–5
The Foundational 15
June 1 balance
Work in Process—Mixing Department

28,000 Completed and transferred

Each chapter contains one Foundational 15 exercise
Materials
Direct labor
120,000
79,500
to Finished Goods ?
that includes 15 “building-block” questions related
to one concise set of data. These exercises can
Overhead 97,000
June 30 balance ?

The June 1 work in process inventory consisted of 5,000 units with $16,000 in materials cost and
$12,000 in conversion cost. The June 1 work in process inventory was 100% complete with respect
to materials and 50% complete with respect to conversion. During June, 37,500 units were started
be used for in-class discussion or as homework
into production. The June 30 work in process inventory consisted of 8,000 units that were 100%
complete with respect to materials and 40% complete with respect to conversion.
Required:
assignments. They are found before the Exercises
1.

2.
Prepare the journal entries to record the raw materials used in production and the direct labor
cost incurred.
Prepare the journal entry to record the overhead cost applied to production.
and are available in Connect.
3. How many units were completed and transferred to finished goods during the period?

gar07417_ch04_154-195.indd 171 08/18/16 08:36 PM

I like the “Foundational 15” and its integration of all the

chapter objectives into one problem that can be reviewed in class.
Melanie Anderson, Slippery Rock University

Concept Overview Videos

New for the 16th edition of Garrison, the Concept Overview Videos cover each learning objective through
narrated, animated presentations. Formerly Interactive Presentation, each Concept Overview Video has been
enhanced for improved accessibility, and includes both the visual animations and transcript to accommodate
all types of learners. The Concept Overview Videos also pause frequently to check for comprehension with
assignable, auto-graded Knowledge Check questions..

Managerial Accounting S i xt e e n t h E di t i on ix
 Rev.Confirming Pages

CHAPTER 4 Opening Vignette

Each chapter opens with a Business Focus
feature that provides a real-world example
for students, allowing them to see how the
chapter’s information and insights apply to
the world outside the classroom. Learning
Process Costing
Objectives alert students to what they should
Costing the “Quicker-Picker-Upper”
expect as they progress through the chapter.
LEARNING OBJECTIVES
BUSINESS FOCUS

After studying Chapter 4, you should be able to:

LO4–1
I like how you engage the reader
Record the flow of materials, labor,
and overhead through a process
costing system.

LO4–2 Compute the equivalent units of

production using the weighted-
with the “Business Focus” at the
beginning of the chapter.
average method.

LO4–3 Compute the cost per equivalent unit

using the weighted-average method.

Kathy Crusto-Way,
© Kristoffer Tripplaar/Alamy
LO4–4 Assign costs to units using the
weighted-average method.
If you have ever spilled milk, there is a good chance that you used Bounty
paper towels to clean up the mess. Procter & Gamble (P&G) manufactures LO4–5 Prepare a cost reconciliation report Tarrant County College
Bounty in two main processing departments—Paper Making and Paper Con- using the weighted-average method.
verting. In the Paper Making Department, wood pulp is converted into paper LO4–6
An excellent text that is
(Appendix 4A) Compute the
and then spooled into 2,000 pound rolls. In the Paper Converting Depart- equivalent units of production using
ment, two of the 2,000 pound rolls of paper are simultaneously unwound the FIFO method.

especially good for introductory

into a machine that creates a two-ply paper towel that is decorated, perfo-
rated, and embossed to create texture. The large sheets of paper towels that
LO4–7 (Appendix 4A) Compute the cost per
equivalent unit using the FIFO method.
emerge from this process are wrapped around a cylindrical cardboard core
measuring eight feet in length. Once enough sheets wrap around the core,
the eight foot roll is cut into individual rolls of Bounty that are sent down a
LO4–8 (Appendix 4A) Assign costs to units
using the FIFO method. managerial accounting classes
because it is organized in a
conveyor to be wrapped, packed, and shipped. LO4–9 (Appendix 4A) Prepare a cost
In this type of manufacturing environment, costs cannot be readily traced to reconciliation report using the FIFO
individual rolls of Bounty; however, given the homogeneous nature of the prod- method.
uct, the total costs incurred in the Paper Making Department can be spread
uniformly across its output of 2,000 pound rolls of paper. Similarly, the total
LO4–10 (Appendix 4B) Allocate service
department costs to operating
logical topic development flow.
costs incurred in the Paper Converting Department (including the cost of the departments using the direct method.
2,000 pound rolls that are transferred in from the Paper Making Department)
can be spread uniformly across the number of cases of Bounty produced. LO4–11 (Appendix 4B) Allocate service depart- Elizabeth Widdison,
ment costs to operating departments
P&G uses a similar costing approach for many of its products such as
Tide detergent, Crest toothpaste, and Dawn dishwashing liquid. ■
using the step-down method. University of Washington, Seattle
Source: Conversation with Brad Bays, formerly a Procter & Gamble financial executive.

154

gar07417_ch04_154-195.indd 154 10/18/16 01:40 PM

Excellent coverage of the topics. Easy for

students to read.
Sharon Bell,
The University of North Carolina at Pembroke

x Garrison Noreen Brewer

 Manufacturing Overhead . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XXX

A similar entry would be made to apply manufacturing overhead cost in the Bottling
Department.

Completing the Cost Flows Once processing has been completed in a department,
the units are transferred to the next department for further processing, as illustrated
in the T-accounts in Exhibit 4–3. The following journal entry transfers the cost of the
units that have been completed within the Formulating Department to the Bottling
Department:

Work in Process—Bottling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XXX

Work in Process—Formulating . . . . . . . . . . . . . . . . . . . . . . . . . . . . XXX

After processing has been finished in the Bottling Department, the costs of the com-
pleted units are transferred to the Finished Goods inventory account:

Finished Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XXX

Work in Process—Bottling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XXX

Finally, when a customer’s order is filled and units are sold, the cost of the units is
transferred to Cost of Goods Sold:

Cost of Goods Sold. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XXX

Finished Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XXX

To summarize, the cost flows between accounts are basically the same in a process
costing system as they are in a job-order costing system. The only difference at this
point is that in a process costing system each department has a separate Work in Process
account.

In Business Boxes JUNK FOOD GOES ON A HEALTH KICK

IN BUSINESS

These helpful boxed features offer a glimpse Candy manufacturers are feeling pressure from customers to remove unhealthy ingredients
Confirming Pages
from their snack food. For example, Nestlé has been working on removing artificial colors (such
as Red 40 and Yellow 5) and artificial flavors (such as Vanillin) from its more than 250 chocolate

into how real companies use the managerial products. The company plans to use Annatto (which comes from achiote trees) instead of arti-
ficial food colors and it intends to replace vanillin with natural vanilla flavor. While these natural

accounting concepts discussed within the

ingredients cost more, Nestlé says that it will not offset these higher material costs with higher
prices. In addition to Nestlé, Mondelez International, the makers of Oreo cookies and Cadbury
chocolate, plans to reduce the saturated fat and sodium in its products by 10% by 2020.

chapter. Each chapter contains multiple

214 Chapter 5 © Ryan Remiorz/The Canadian Press/AP Images
Source: Annie Gasparro, “Nestle Bars Artificial Color, Flavors,” The Wall Street JournaL, February 18, 2015, p. B6.

current examples. This margin of safety means that at the current level of sales and with the company’s cur-
rent prices and cost structure, a reduction in sales of $12,500, or 12.5%, would result in
just breaking even. Process Costing Computations: Three Key Concepts
In a single-product company like Acoustic Concepts, the margin of safety also can be
In process costing, each department needs to calculate two numbers for financial report-
expressed in terms of the number of units sold by dividing the margin of safety ingin dollars
purposes—the cost of its ending work in process inventory and the cost of its com-
by the selling price per unit. In this case, the margin of safety is 50 speakerspleted
($12,500
units ÷
that were transferred to the next stage of the production process. The key to
$250 per speaker = 50 speakers). deriving these two numbers is calculating unit costs within each department. On the sur-
face, these departmental unit cost calculations may seem very straightforward—simply
MANAGERIAL divide the department’s costs (the numerator) by its outputs, or units produced (the
ACCOUNTING IN ACTION Prem Narayan and Bob Luchinni met to discuss the results of Bob’s analysis.denominator). However, to set the stage for correctly performing this seemingly simple
Prem: Bob, everything you have shown me is pretty clear. I can see whatcomputation,
impact theyou will need to understand three key foundational concepts.
THE WRAP-UP

sales manager’s suggestions would have on our profits. Some of those suggestions
are quite good and others are not so good. I am concerned that our margin of safety is
only 50 speakers. What can we do to increase this number?
Bob: Well, we have to increase total sales or decrease the break-even point or both.
Prem: And to decrease the break-even point, we have to either decrease our fixed
expenses or increase our unit contribution margin? gar07417_ch04_154-195.indd 159 08/18/16 08:36 PM

Bob: Exactly.
Prem: And to increase our unit contribution margin, we must either increase our selling
price or decrease the variable cost per unit?
Bob: Correct.
Prem: So what do you suggest?
Bob: Well, the analysis doesn’t tell us which of these to do, but it does indicate we have
a potential problem here.
Prem: If you don’t have any immediate suggestions, I would like to call a general meeting
next week to discuss ways we can work on increasing the margin of safety. I think every-
one will be concerned about how vulnerable we are to even small downturns in sales.

CVP Considerations in Choosing a Cost Structure

Cost structure refers to the relative proportion of fixed and variable costs in an organiza-
Managerial Accounting in Action Vignettes
tion. Managers often have some latitude in trading off between these two types of costs.
For example, fixed investments in automated equipment can reduce variable labor costs.
In this section, we discuss the choice of a cost structure. We also introduce the concept of In-depth, clear coverage;
These vignettes depict cross-functional teams working together in real-life
operating leverage.
interesting updated examples
settings, working withCost
theStructure
products and Profit and Stability services that students recognize from
Which cost structure is better—high variable costs and low fixed costs, or the oppo- in the “In Business” boxes.
their own lives. Students areanswer
site? No single shown step-by-step
to this question howhasaccounting
is possible; each approach its advantages. To concepts
show what we mean, refer to the following contribution format income statements for two
Natalie Allen,
are implemented in organizations
blueberry farms. Bogside Farm and depends how these
on migrant workers concepts are
to pick its berries by hand, applied to
whereas Sterling Farm has invested in expensive berry-picking machines. Consequently, Texas A&M University
solve everyday business problems. First, “The Issue” is introduced through
Bogside Farm has higher variable costs, but Sterling Farm has higher fixed costs:

a dialogue; the student then walks through the implementation

Bogside Farm
Amount Percent
Sterling Farm
Amount Percent
process; Extremely well written with
finally, “The Wrap-up” summarizes
Sales . . . . . . . . . . . . . . . the
. . . . . . . big
Variable expenses. . . . . . . . . . . . . .
picture.
. . . $100,000
60,000
100%
60%
$100,000 100%
30,000 30% great examples, including
Contribution margin . . . . . . . . . . . .
Fixed expenses . . . . . . . . . . . . . . . .
40,000
30,000
40% 70,000
60,000
70%
the “Managerial in Action”
Net operating income. . . . . . . . . . . $ 10,000 $ 10,000
segments.
Loisanne Kattelman,
Weber State University
gar07417_ch05_196-256.indd 214 08/19/16 02:17 AM

Managerial Accounting S i xt e e n t h E di t i on xi
 Confirming Pages

170 Chapter 4

4–6 Assume that a company has two processing departments—Mixing followed by Firing.
Explain what costs might be added to the Firing Department’s Work in Process account
during a period.
4–7 What is meant by the term equivalent units of production when the weighted-average
method is used?
4–8 Watkins Trophies, Inc., produces thousands of medallions made of bronze, silver, and
gold. The medallions are identical except for the materials used in their manufacture.
What costing system would you advise the company to use?

Applying Excel
LO4–2, LO4–3, LO4–4, LO4–5 Confirming
This exercise relates to the Double Diamond Skis’ Shaping and Milling Pages
Department that was dis-
cussed earlier in the chapter. The Excel worksheet form that appears below consolidates data from
Exhibits 4–5 and 4–8. Download the workbook containing this form from Connect, where you will
also receive instructions about how to use this worksheet form.

End-of-Chapter Material
172 Chapter 4

4. Compute the equivalent units of production for materials.

5. Compute the equivalent units of production for conversion.

Managerial Accounting has earned a reputation for the

6. What is the cost of beginning work in process inventory plus the cost added during the period
for materials?
7. What is the cost of beginning work in process inventory plus the cost added during the period
for conversion?

best end-of-chapter practice material of any text on the

8. What is the cost per equivalent unit for materials?
9. What is the cost per equivalent unit for conversion?
10. What is the cost of ending work in process inventory for materials?
11. What is the cost of ending work in process inventory for conversion?
12. What is the cost of materials transferred to finished goods?
13. What is the amount of conversion cost transferred to finished goods?
Confirming
14. Prepare the journal entry to record the transfer of costs from Work Pages
in Process to Finished Goods.
15. What is the total cost to be accounted for? What is the total cost accounted for?
market. Our problem and case material continues to
176
Exercises
Chapter 4
conform to AACSB recommendations and makes a great
starting point for class discussions and group projects.
EXERCISE 4–1 Process Costing Journal Entries LO4–1
Quality Brick Company produces bricks in two processing departments—Molding and Firing.
consisted of Information
3,000 units, relating
which were
to the 80% completeoperations
company’s with respect to materials
in March and 60% complete
follows:
with respect a.
to labor
Rawand overhead.
materials usedThe costs per equivalent
in production: unit for the month
Molding Department, were
$23,000; asFiring
and follows:
Department, $8,000.
b. Direct labor costs incurred: Molding Department, $12,000; and Firing Department, $7,000.
c. Manufacturing overhead was applied:
Cost
$37,000.
per equivalent unit . . . . . . . . . . . . . . .
Molding Department,
Materials
$12.50
Labor
$3.20
$25,000; and Firing Department,
Overhead
$6.40
d. Unfired, molded bricks were transferred from the Molding Department to the Firing Depart-
When Ray Garrison first wrote Managerial Accounting, he
ment. According to the company’s process costing system, the cost of the unfired, molded

started with the end-of-chapter material, then wrote the

Required: bricks was $57,000.
1. Computee.theFinished
equivalent unitswere
bricks of materials,
transferred labor,
from and
theoverhead in the ending
Firing Department to work in process
the finished goods warehouse.
inventory forAccording
the month.to the company’s process costing system, the cost of the finished bricks was $103,000.
2. Computef. theFinished
cost of ending
bricks work
were in soldprocess inventoryAccording
to customers. for materials, labor,
to the overhead,
company’s and incosting system,
process

narrative in support of it. This unique approach to textbook

total for January.
the cost of the finished bricks sold was $101,000.
3. Compute the cost of the units transferred to the next department for materials, labor, overhead,
and in total for January.
Required:
4. Prepare Prepare journal entriesforto January.
a cost reconciliation record items (Note: (a)You
through
will (f)
notabove.
be able to break the cost to
be accounted for into the cost of beginning work in process inventory and costs added during

authoring not only ensured consistency between the

EXERCISE 4–2 Equivalent Units of Production—Weighted-Average Method LO4–2
the month.)
Clonex Labs, Inc., uses the weighted-average method in its process costing system. The following
data are available for one department for October:
Percent Completed
Problems
PROBLEM 4–13 Comprehensive
Work in process, October 1 . . . . . . . . . . . . . . 30,000
Problem;October
Work in process, Second 31
Production
. . . . . . .Department—Weighted-Average
. . . . . 15,000 80%
Units

Method40%
Materials
65%
Conversion
30% end-of-chapter material and text content but also un­­
derscored Garrison’s fundamental belief in the importance
LO4–2, LO4–3, LO4–4, LO4–5
Old Country Links,The department
Inc., started 175,000
produces sausages units intodepartments—Mixing,
in three production production during the month
Casing andand transferred
190,000 completed
Curing, and Packaging. units Department,
In the Mixing to the next department.
meats are prepared and ground and then mixed
gar07417_ch04_154-195.indd 170 08/18/16 08:36 PM
with spices. Required:
The spiced meat mixture is then transferred to the Casing and Curing Department,
where the mixture is force-fed
Compute into casings
the equivalent units and then hung and
of production cured in climate-controlled smoking
for October.
chambers. In the Packaging Department, the cured sausages are sorted, packed, and labeled. The
company uses the weighted-average method in its process costing
EXERCISE 4–3 Cost per Equivalent Unit—Weighted-Average
the Casing and CuringMicro
Superior Department follow:
Products
system. Data
Confirming Method for
Pages LO4–3September for
uses the weighted-average method in its process costing system. Data for
the Assembly Department for May appear below:
of applying theory through practice. It is not enough for
180 Chapter 4 Work in process inventory, September
Cost added during1May. . . . .. .. .. .. . . . . . . . . 1. . . . . 100%
Percent Completed
Materials

$238,900
Labor
Units Mixing Materials Conversion
Work in process, May 1 . . . . . . . . . . . . . . . . . $18,000 $5,500
90% $80,300
Overhead
$27,500
80% $401,500
students to read, they must also understand. To this day, the
guiding principle of that first edition remains, and Garrison’s
Work in process inventory, September
Equivalent units of30 . . . . . . . . . . . . . . . 1. . . . . 100%
production 35,000 80% 33,000 70% 33,000

Required:
Cases Compute the cost per equivalent unit for materials,
Mixing labor,Materials
overhead, andConversion
in total.

superior end-of-chapter material continues to provide

Work in process inventory, September 1 . . . . . . . . . . . . . . $1,670 $90 $605
CASE 4–19 Second Department—Weighted-Average
Cost added during SeptemberMethod
. . . . . . .LO4–2,
. . . . . . LO4–3,
. . . . . . . LO4–4
. . $81,460 $6,006 $42,490
“I think we goofed when we hired that new assistant controller,” said Ruth Scarpino, president
of Provost Industries. “Just look at this report that he prepared for last month for the Finishing
Department. I can’tMixing cost represents
understand it.” the costs of the spiced meat mixture transferred in from the Mixing Depart-

accurate, current, and relevant practice for students.

ment. The spiced meat mixture is processed in the Casing and Curing Department in batches; each
unit incosts:
Finishing Department the above table is a batch and one batch of spiced meat mixture produces a set amount of
gar07417_ch04_154-195.indd
Work in172 sausages
process thatApril
inventory, are 1,
passed on tomaterials
450 units; the Packaging Department. During September, 50 batches (i.e., 08/18/16 08:36 PM

units)conversion
100% complete; were completed and transferred
60% complete . . . . . . .to
. . the
. . . .Packaging
. . . . . . . . . .Department.
..... $ 8,208*
Costs transferred in during the month from the
Required:
preceding department, 1,950 units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,940
1. Determine the Casing and Curing Department’s equivalent units of production for mixing,
Materials cost added during the month . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,210
materials, and conversion for the month of September. Do not round off your computations.
Conversion costs incurred during the month . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,920
2. Compute the Casing and Curing Department’s cost per equivalent unit for mixing, materials,
Total departmental costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $46,278
and conversion for the month of September.
3. Compute
Finishing Department the Casing
costs assigned to: and Curing Department’s cost of ending work in process inventory for
Units completed andmixing, materials,
transferred conversion,
to finished goods,and in total for September.
1,800 units 4. Compute
at $25.71 the .Casing
per unit . . . . . . .and
. . . .Curing
. . . . . . .Department’s
. . . . . . . . . . . . .cost
. . . . of
. . .units
. transferred
$46,278 out to the Packaging
Department
Work in process inventory, Aprilfor
30,mixing,
600 units; materials,
. . . . . . .conversion,
. . . . . . . . . . .and
. . . .in
. . total
. . . for September.
materials 0%5.complete;
Prepareconversion
a cost reconciliation
35% complete report . . .for
. . .the
. . . Casing
. . . . . . . and
. . . .Curing
.. Department
0 for September.
Total departmental costs assigned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $46,278

* Consists of cost transferred in, $4,068; materials cost, $1,980; and conversion cost, $2,160.

“He’s struggling to learn our system,” replied Frank Harrop, the operations manager. “The
problem is that he’s been away from process costing for a long time, and it’s coming back slowly.”
“It’s not just the format of his report that I’m concerned about. Look at that $25.71 unit cost

Strong integration
gar07417_ch04_154-195.indd 176 08/18/16 08:36 PM
that he’s come up with for April. Doesn’t that seem high to you?” said Ms. Scarpino.
“Yes, it does seem high; but on the other hand, I know we had an increase in materials prices
during April, and that may be the explanation,” replied Mr. Harrop. “I’ll get someone else to redo
this report and then we can see what’s going on.”

between chapter content

Provost Industries manufactures a ceramic product that goes through two processing
departments—Molding and Finishing. The company uses the weighted-average method in its
process costing.
Required:

and end-of-chapter
1. Prepare a report for the Finishing Department showing how much cost should have been
assigned to the units completed and transferred to finished goods, and how much cost should
have been assigned to ending work in process inventory in the Finishing Department.
2. Explain to the president why the unit cost on the new assistant controller’s report is so high.

exercises/problems. CASE 4–20 Ethics and the Manager, Understanding the Impact of Percentage Completion on
Profit—Weighted-Average Method LO4–2, LO4–3, LO4–4
Gary Stevens and Mary James are production managers in the Consumer Electronics Division of
General Electronics Company, which has several dozen plants scattered in locations throughout

Clearly written and well- the world. Mary manages the plant located in Des Moines, Iowa, while Gary manages the plant in
El Segundo, California. Production managers are paid a salary and get an additional bonus equal
to 5% of their base salary if the entire division meets or exceeds its target profits for the year. The
bonus is determined in March after the company’s annual report has been prepared and issued to

organized content.
stockholders.
Shortly after the beginning of the new year, Mary received a phone call from Gary that went
like this:
Gary: How’s it going, Mary?
Mary: Fine, Gary. How’s it going with you?
Gary: Great! I just got the preliminary profit figures for the division for last year and we are within

Carleton Donchess, $200,000 of making the year’s target profits. All we have to do is pull a few strings, and we’ll be
over the top!
Mary: What do you mean?
Gary: Well, one thing that would be easy to change is your estimate of the percentage completion of

Bridgewater State University your ending work in process inventories.

Garrison has the best

gar07417_ch04_154-195.indd 180 08/18/16 08:36 PM

online material I have

ever seen.
Minna Yu, Monmouth
University

xii Garrison Noreen Brewer

Utilizing the Icons Guided Examples are one of
To reflect our service-based economy, the text is replete my students’ favorite features
with examples from service-based businesses. A helpful icon in Connect. They use them
distinguishes service-related examples in the text. extensively to help with their
homework.
The IFRS icon highlights content that may be affected by the
Amy Bentley, Tallahassee Community
impending change to IFRS and possible convergence between College
U.S. GAAP and IFRS.
I am a big proponent of
Ethics assignments and examples serve as a reminder that including Excel® in the course.
good conduct is vital in business. Icons call out content that The students really need
relates to ethical behavior for students. practice with Excel and this
course really lends itself to
The writing icon denotes problems that require students to providing good problems they
use critical thinking as well as writing skills to explain their can practice with.
decisions. Stacy Kline, Drexel University

Business Ethics are of

Author-Written Supplements
growing importance and the
Unlike other managerial accounting texts, the book’s authors write the
coverage early in the book is
major supplements such as the test bank and solution files, ensuring a
commendable.
perfect fit between text and supplements.
Heminigild Mpundu,
University of Northern Iowa

Managerial Accounting S i xt e e n t h E di t i on xiii

 Assurance of Learning Ready
Many educational institutions today are focused on the notion of
assurance of learning, an important element of some accreditation
standards. Managerial Accounting, 16e, is designed specifically to support
your assurance of learning initiatives with a simple, yet powerful, solution.
Each question for Managerial Accounting, 16e, maps to a specific chapter
learning outcome/objective listed in the text. The reporting features of
Connect can aggregate student to make the collection and presentation
of assurance of learning data simple and easy.

AACSB Statement
McGraw-Hill Education is a proud corporate member of AACSB International.
Recognizing the importance and value of AACSB accreditation, we have
sought to recognize the curricula guidelines detailed in AACSB standards
for business accreditation by connecting selected questions in Managerial
Accounting, 16e, to the general knowledge and skill guidelines found in the
AACSB standards. The statements contained in Managerial Accounting, 16e,
are provided only as a guide for the users of this text. The AACSB leaves
content coverage and assessment clearly within the realm and control of
individual schools, the mission of the school, and the faculty. The AACSB does
also charge schools with the obligation of doing assessment against their own
content and learning goals. While Managerial Accounting, 16e, and its teaching
package make no claim of any specific AACSB qualification or evaluation, we
have, within Managerial Accounting, 16e, tagged questions according to the
six general knowledge and skills areas. The labels or tags within Managerial
Accounting, 16e, are as indicated. There are, of course, many more within
the test bank, the text, and the teaching package which might be used as a
“standard” for your course. However, the labeled questions are suggested for
your consideration.

xiv Garrison Noreen Brewer

 New in the
Sixteenth Edition
Faculty feedback helps us continue to improve Managerial Accounting. In response to reviewer suggestions, the
authors have made the following changes to the text:
• We split the job-order costing chapter into two chapters to improve the students’ ability to understand the material
and to give professors greater flexibility in choosing how to cover the material.
• We reviewed all end-of-chapter exercises and problems and revised them as appropriate to better function within
Connect.
• We added 13 Integration Exercises in the back of the book to help students connect the concepts. These exercises
are suitable for both a flipped classroom model and in-class active learning environment as they engage students
and encourage critical thinking.
• In-Business boxes are updated throughout to provide relevant and current real-world examples for use in
classroom discussion and to support student understanding of key concepts as they read through a chapter.

Prologue describes how to use plantwide and multiple overhead

The Prologue has added coverage of the CGMA exam
and an updated summary of the CMA exam content
specifications.
Chapter 1
The high-low method has been removed from this chapter.
We added an exhibit to visually depict product and period
cost flows. We also made various changes to further
emphasize the chapter’s unifying theme of different cost
classifications for different purposes. We have created 11
new end-of-chapter exercises/problems.
Chapter 2
This is a new chapter that explains how to use a job-
order costing system to calculate unit product costs. It
rates to apply overhead costs to individual jobs. The
chapter has a strong managerial accounting orientation
because it looks at how job-order costing systems serve
the needs of internal managers.
Chapter 3
This is a new chapter that explains how job-order
costing systems can be used to determine the value of
ending inventories and cost of goods sold for external
reporting purposes. The chapter has a strong financial
accounting orientation because it uses journal entries
and T-accounts to explain the flow of costs in a job-order
costing system. The chapter also has a new appendix
that uses Microsoft Excel® to explain the flow of costs in
a job-order costing system.

Managerial Accounting S i xt e e n t h E di t i on xv
 Chapter 4 Chapter 10
We revised the text in the main body of the chapter and We overhauled Appendix 10B to introduce students
Appendix 4A to better highlight the key concepts to a Microsoft Excel-based approach for creating an
and steps needed to perform the weighted-average income statement using standard costing.
and FIFO process costing calculations. We also revised
the first few paragraphs of Appendix 4B to better clarify Chapter 11
its purpose and to better distinguish that purpose from This chapter includes four new In Business boxes.
the intent of the service department cost allocation
Chapter 12
coverage that appears later in the book.
We revised the front-end of the chapter to better
Chapter 5 highlight the six key concepts that provide the
We added a new appendix that explains how to foundation for effective decision making. We also
analyze mixed costs using the high-low method and revised the end-of-chapter exercises and problems
the least-squares regression method. to better dovetail with Connect and streamlined the
coverage of sell or process further decisions to aid
Chapter 6 student comprehension. In addition, we relocated
We added new text that better highlights this chapter’s the Pricing appendix to this chapter and added new
reliance on actual costing and contrasts it with the job- coverage of customer latitude and pricing and value-
order costing chapters’ reliance on normal costing. based pricing.

Chapter 13
Chapter 7
We revised many end-of-chapter exercises and
This chapter has a new appendix titled Time-Driven
problems and extensively revised the formatting
Activity-Based Costing: A Microsoft Excel-Based
within Connect throughout all the chapters, (not just
Approach.
Chapter 13) to allow students greater flexibility for
alternate methods of approaching a problem, such as
Chapter 8
performing net present value calculations.
The end-of-chapter materials include three new
exercises/problems (8-17, 8-18, and 8-27). Chapter 14
We added three new In Business boxes.
Chapter 9
We revised numerous end-of-chapter exercises and Chapter 15
problems to better align them with Connect. We added four new In Business boxes.

xvi Garrison Noreen Brewer

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 Acknowledgments
Suggestions from professors, students, and the professional accounting community continue
to drive the excellence and refinement of each edition of this book. Each of those who have
offered comments and suggestions has our immense gratitude and thanks.
The efforts of many people are needed to continually refine a text and maintain its excellence.
Among these people are the reviewers and consultants who point out areas of concern,
cite areas of strength, and make recommendations for change. In this regard, the following
academics have provided feedback that was enormously helpful in preparing the sixteenth
edition of Managerial Accounting:

Dawn Addington, Central New Mexico Community College
Nasrollah Ahadiat, California State PolytecnicUniversity
Markus Ahrens, St. Louis Community College–Meramec
Akinloye Akindayomi, University Of
Massachusetts–Dartmouth
David Albrecht, Bowling Green State University
Natalie Allen, Texas A & M University
Vern Allen, Central Florida Community College
Shamir Ally, DeSales University
Felix Amenkhienan, Radford University
Jane Austin, Oklahoma City University
John Babich, Kankakee Community College
Ibolya Balog, Cedar Crest College
Bonnie Banks, Alabama A&M University
Scottie Barty, Northern Kentucky University
Eric Bashaw, University of Nevada–Las Vegas
Lamrot Bekele, Dallas County Community College
Sharon Bell, University of North Carolina–Pembroke
Amy Bentley, Tallahassee Community College Pamela
Benner, Stark State College
Stephen Benner, Eastern Illinois University
Scott Berube, University of New Hampshire
Kelly Blacker, Mercy College
Phillip Blanchard, The University of Arizona
Charles Blumer, Saint Charles Community College
Rachel Brassine, East Carolina University
Alison Jill Brock, Imperial Valley College
Ann Brooks, University of New Mexico
Rada Brooks, University of California–Berkeley
Myra Bruegger, Southeastern Community College
Georgia Buckles, Manchester Community College
Esther Bunn, Stephen S. Austin State University
Laurie Burney, Mississippi State University
Marci Butterfield, University of Utah–Salt Lake City
Charles Caliendo, University of Minnesota
Donald Campbell, Brigham Young University–Idaho
Don Campodonico, Notre Dame de Namur University
Dana Carpenter, Madison Area Technical College
Wanda Causseaux, Valdosta State University
David Centers, Grand Valley State University
Sandra Cereola, James Madison University
Gayle Chaky, Dutchess Community College
Pamela Champeau, University of Wisconsin Whitewater
Kathryn Chang, Sonoma State University
Valerie Chau, Palomar College
Clement Chen, University of Michigan–Flint
Carolyn Christesen, Westchester Community College
Star Ciccio, Johnson & Wales University
Richard S. Claire, Canada College
Robert Clarke, Brigham Young University–Idaho
Curtis Clements, Abilene Christian University
Darlene Coarts, University of Northern Iowa
Ron Collins, Miami University–Ohio
Carol Coman, California Lutheran University
Jackie Conrecode, Florida Gulf Coast University
Debora Constable, Georgia Perimeter College
Rita Cook, University of Delaware
Wendy Coons, University of Maine
Susan Corder, Johnson County Community College
Michael Cornick, Winthrop University
Deb Cosgrove, University of Nebraska–Lincoln
Kathy Crusto-Way, Tarrant County College
Robin D’Agati, Palm Beach State College–Lake Worth
Masako Darrough, Baruch College
Patricia Davis, Keystone College
Kathleen Davisson, University of Denver
Nina Doherty, Arkansas Tech University
Patricia Doherty, Boston University
Carleton Donchess, Bridgewater State University
Peter Dorff, Kent State University
David Doyon, Southern New Hampshire University
Emily Drogt, Grand Valley State University
Rita Dufour, Northeast Wisconsin Technical College
Barbara Durham, University of Central Florida
Dean Edmiston, Emporia State University
Barb Eide, University of Wisconsin–Lacrosse

Managerial Accounting S i xt e e n t h E di t i on xix

 Jerrilyn Eisenhauer, Tulsa Community College
Rafik Elias, California State University–Los Angeles
Dr. Gene Elrod, University of Texas at Arlington
Raymond Elson, Valdosta State University
Richard F. Emery, Linfield College
Ruth Epps, Virginia Commonwealth University
John Eubanks, Independence Community College
Christopher M. Fairchild, Southeastern University
Amanda Farmer, University of Georgia
Jack Fatica, Terra Community College
Christos Fatouros, Curry College
Susan Ferguson, James Madison University
Janice Fergusson, University of South Carolina
Jerry Ferry, University of North Alabama
Calvin Fink, Bethune Cookman University
Virginia Fullwood, Texas A&M University–Commerce
Robert Gannon, Alvernia University
Joseph Gerard, University of Wisconsin Whitewater
Frank Gersich, Monmouth College
Hubert Gill, North Florida
Jeff Gillespie, University of Delaware
Earl Godfrey, Gardner–Webb University
Nina Goza, Arkansas Tech University
Marina Grau, Huston Community College–Northwest College
Alfred C. Greenfield, Jr., High Point University
Olen Greer, Missouri State University
Connie Groer, Frostburg State University
Steve Groves, Ivy Tech Community College of
Indiana–Kokomo
Thomas Guarino, Plymouth State University
Bob Gutschick, College of Southern Nevada
Ty Handy, Vermont Technical College
David Harr, George Mason University
Michael Haselkorn, Bentley University
Susan Hass, Simmons College
John Haverty, St. Joseph’s University
Hassan Hefzi, Cal Poly Pomona University
Candice Heino, Anoka Ramsey Community College
Sueann Hely, West Kentucky Community & Technical College
David Henderson, College of Charleston
Donna Hetzel, Western Michigan University–Kalamazoo
Kristina Hoang, Tulane University
Cynthia Hollenbach, University of Denver
Peg Horan, Wagner College
Rong Huang, Baruch College
Steven Huddart, Penn State
George Hunt, Stephen F Austin State University
Marianne James, California State University, Los Angeles
Mary Jepperson, College of Saint Benedict & Saint
John’s University
xx Garrison Noreen Brewer
Gene Johnson, Clark College
Becky Jones, Baylor University
Jeffrey Jones, College of Southern Nevada
Kevin Jones, Drexel University
Bill Joyce, Minnesota State University–Mankato
Celina Jozsi, University of South Florida
Robert L. Kachur, Richard Stockton College of New Jersey
Loisanne Kattelman, Weber State University
Sue Kattelus, Michigan State University–East Lansing
Gokham Karahan, University of Anchorage Alaska
Nancy Kelly, Middlesex Community College
Anna Kenner, Brevard Community College
Sara Kern, Gonzaga University
Lara Kessler, Grand Valley State University
Mozaffar Khan, University of Minnesota
Frank Klaus, Cleveland State University
Shirly Kleiner, Johnson County Community College
Stacy Kline, Drexel University
Christine Kloezeman, Glendale Community College
Bill Knowles, University of New Hampshire
Barbara Kren, Marquette University
Jerry Kreuze, Western Michigan University
David Krug, Johnson County Community College
Wikil Kwak, Nebraska Omaha
C. Andrew Lafond, LaSalle University
Dr. Ben Lansford, Rice University
Yvette Lazdowski, Plymouth Statue University
Ron Lazer, University of Houston–Houston
Raymond Levesque, Bentley College
Jing Lin, Saint Joseph’s University
Dennis Lopez, University of Texas–San Antonio
Gina Lord, Santa Rosa Junior College
Don Lucy, Indian River State College
Cathy Lumbattis, Southern Illinois University
Joseph F. Lupino, St. Mary’s College of California
Patrick M. Lynch, Loyola University of New Orleans
Suneel Maheshwari, Marshall University
Linda Malgeri, Kennesaw State University
Michael Manahan, California State University–Dominquez Hills
Carol Mannino, Milwaukee School of Engineering
Steven Markoff, Montclair State University
Linda Marquis, Northern Kentucky University
Melissa Martin, Arizona State University
Michele Martinez, Hillsborough Community College
Josephine Mathias, Mercer Community College
Florence McGovern, Bergen Community College
Annie McGowan, Texas A&M University
Michael McLain, Hampton University
Gloria McVay, Winona State University
Heidi Meier, Cleveland State University
Edna Mitchell, Polk State College
Kim Mollberg, Minnesota State University–Moorhead
Shirley Montagne, Lyndon State College
Andrew Morgret, Christian Brothers University
Jennifer Moriarty, Hudson Valley Community College
Kenneth Morlino, Wilmington University
Michael Morris, University of Notre Dame
Mark Motluck, Anderson University
Heminigild Mpundu, University of Northern Iowa
Matt Muller, Adirondack Community College
Michael Newman, University of Houston–Houston
Hossein Noorian, Wentworth Institue of Technology
Christopher O’Byrne, Cuyamaca College
Janet O’Tousa, University of Notre Dame
Mehmet Ozbilgin, Bernard M. Baruch College
Janet Papiernik, Indiana University–Purdue University Fort Wayne
Abbie Gail Parham, Georgia Southern
Mary Pearson, Southern Utah University
Judy Peterson, Monmouth College
Yvonne Phang, Bernard M. Baruch College
Debbie Pike, Saint Louis University
Jo Ann Pinto, Montclair State University
Janice Pitera, Broome Community College
Angela Pannell, Mississippi State University
Matthew Probst, Ivy Tech Community College
Laura Prosser, Black Hills State University
Herbert Purick, Palm Beach State College–Lake Worth
Rama Ramamurthy, Georgetown University
Paulette Ratliff-Miller, Grand Valley State University
Vasant Raval, Creighton University
Margaret Reed, University of Cincinnati
Vernon Richardson, University of Arkansas–Fayetteville
Marc B. Robinson, Richard Stockton College of New Jersey
Ramon Rodriguez, Murray State University
Alan Rogers, Franklin University
David Rogers, Mesa State College
Lawrence A. Roman, Cuyahoga Community College
Luther Ross, Sr., Central Piedmont Community College
Pamela Rouse, Butler University
Martin Rudnick, William Paterson University
Amal Said, University of Toledo
Yehia Salama, University of Illinois–Chicago
Mary Scarborough, Tyler Junior College
Rex Schildhouse, Miramar College
Nancy Schrumpf, Parkland College
Jeremy Schwartz, Youngstown State University
Pamela Schwer, St. Xavier University
Vineeta Sharma, Florida International University–Miami
Managerial Accounting
Jeffrey Shields, University of Southern Maine
Kathe Shinham, Northern Arizona University at Flagstaff
Franklin Shuman, Utah State University–Logan
Danny Siciliano, University of Nevada at Las Vegas
Kenneth Sinclair, LeHigh University
Lakshmy Sivaratnam, Kansas City Kansas Community College
Talitha Smith, Auburn University–Auburn
Diane Stark, Phoenix College
Dennis Stovall, Grand Valley State University
Gracelyn Stuart-Tuggle, Palm Beach State
College–Boca Campus
Suzy Summers, Furman University
Kenton Swift, University of Montana
Scott Szilagyi, Fordham University–Rose Hill
Karen Tabak, Maryville University
Rita Taylor, University of Cincinnati
Lisa Tekmetarovic, Truman College
Teresa Thamer, Brenau University
Amanda Thompson-Abbott, Marshall University
Jerry Thorne, North Carolina A&T State University
Don Trippeer, State University of New York at Oneonta
Robin Turner, Rowan-Cabarrus Community College
Tracy Campbell Tuttle, San Diego Mesa Community College
Eric Typpo, University of the Pacific
Suneel Udpa, University of California–Berkeley
Michael Van Breda, Southern Methodist University
Jayaraman Vijayakumar, Virginia Commonwealth University
Ron Vogel, College of Eastern Utah
David Vyncke, Scott Community College
Terri Walsh, Seminole State College of Florida
Lorry Wasserman, University of Portland
Richard Watson, University of California–Santa Barbara
Victoria Wattigny, Midwestern State University
Betsy Wenz, Indiana University–Kokomo
Robert Weprin, Lourdes College
Gwendolen White, Ball State University
Elizabeth Widdison, University of Washington–Seattle
Val Williams, Duquesne University
Janet Woods, Macon State College
John Woodward, Polk State College
Jia Wu, University OF Massachusetts–Dartmouth
Emily Xu, University of New Hampshire
Claire Yan, University or Arkansas–Fayetteville
James Yang, Montclair State University
Jeff Yu, Southern Methodist University
Bert Zarb, Embry-Riddle Aeronautical University
Thomas Zeller, Loyola University–Chicago
S i xt e e n t h E di t i on xxi
 We are grateful for the outstanding support from McGraw-Hill. In particular, we would like to thank Tim Vertovec,
Managing Director; Patricia Plumb, Brand Manager; Erin Quinones, Product Developer; Cheryl Osgood, Marketing
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Ilene Persoff (Long Island University); Ann Brooks (University of New Mexico), for her authoring contributions to the
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We are grateful to the Institute of Certified Management Accountants for permission to use questions and/or unofficial
answers from past Certificate in Management Accounting (CMA) examinations.

Ray H. Garrison • Eric Noreen • Peter Brewer

xxii Garrison Noreen Brewer

 Brief Contents

Prologue Managerial Accounting: An Overview 1

Chapter One Managerial Accounting and Cost Concepts 24
Chapter Two Job-Order Costing: Calculating Unit Product Costs 67
Chapter Three Job-Order Costing: Cost Flows and External Reporting 110
Chapter Four Process Costing 154
Chapter Five Cost-Volume-Profit Relationships 196
Chapter Six Variable Costing and Segment Reporting: Tools for Management 257
Chapter Seven Activity-Based Costing: A Tool to Aid Decision Making 310
Chapter Eight Master Budgeting 362
Chapter Nine Flexible Budgets and Performance Analysis 413
Chapter Ten Standard Costs and Variances 449
Chapter Eleven Performance Measurement in Decentralized Organizations 506
Chapter Twelve Differential Analysis: The Key to Decision Making 560
Chapter Thirteen Capital Budgeting Decisions 632
Chapter Fourteen Statement of Cash Flows 684
Chapter Fifteen Financial Statement Analysis 725
Integration Exercises 762

Index 773

xxiii
Contents

Prologue Chapter
1
Managerial Accounting: An Overview 1 Managerial Accounting and
Cost Concepts 24
What Is Managerial Accounting? 2
Planning 3 Cost Classifications for Assigning
Controlling 4 Costs to Cost Objects 25
Decision Making 4 Direct Cost 26
Indirect Cost 26
Why Does Managerial Accounting
Matter to Your Career? 5 Cost Classifications for Manufacturing Companies 26
Business Majors 5 Manufacturing Costs 26
Accounting Majors 7 Direct Materials 27
Professional Certification—A Smart Investment 7 Direct Labor 27
Manufacturing Overhead 27
Managerial Accounting: Beyond the Numbers 9 Nonmanufacturing Costs 28
An Ethics Perspective 9
Code of Conduct for Management Accountants 9 Cost Classifications for Preparing Financial
Statements 28
A Strategic Management Perspective 10
Product Costs 29
An Enterprise Risk Management Perspective 12
Period Costs 29
A Corporate Social Responsibility Perspective 15
A Process Management Perspective 16 Cost Classifications for Predicting Cost Behavior 30
A Leadership Perspective 17 Variable Cost 30
Intrinsic Motivation 17 Fixed Cost 32
Extrinsic Incentives 17 The Linearity Assumption and the Relevant Range 33
Cognitive Bias 18 Mixed Costs 34
Summary 18 Cost Terminology—A Closer Look 36
Glossary 18
Cost Classifications for Decision Making 37
Questions 19
Differential Cost and Revenue 37
Exercises 20
Sunk Cost and Opportunity Cost 38

xxiv

Using Different Cost Classifications for
Different Purposes 38
The Traditional Format Income Statement 39
The Contribution Format Income Statement 40
Summary 40
Review Problem 1: Cost Terms 41
Review Problem 2: Income Statement Formats
Glossary 42
Questions 44
Applying Excel 44
The Foundational 15 45
Exercises 46
Problems 52
Cases 55
Appendix 1A: Cost of Quality 57
Quality Cost Reports 60
International Aspects of Quality 62
Summary (Appendix 1A) 63
Glossary (Appendix 1A) 63
Appendix 1A Exercises and Problems 64
2
Chapter
Job-Order Costing: Calculating
Unit Product Costs 67
Job-Order Costing—An Overview 68
Job-Order Costing—An Example 69
Measuring Direct Materials Cost 70
Job Cost Sheet 70
Measuring Direct Labor Cost 71
Computing Predetermined Overhead Rates 72
Applying Manufacturing Overhead 73
Manufacturing Overhead—A Closer Look 74
The Need for a Predetermined Rate 74
Computation of Total Job Costs and Unit Product
Costs 75
Job-Order Costing—A Managerial Perspective 76
Choosing an Allocation Base—A Key to Job Cost
Accuracy 77
Job-Order Costing Using Multiple Predetermined
Overhead Rates 77
Multiple Predetermined Overhead Rates—A
Departmental Approach 77
Contents xxv
Multiple Predetermined Overhead
Rates—An Activity-Based Approach 79
Job-Order Costing—An External Reporting
Perspective 80
Overhead Application and the Income Statement 80
Job Cost Sheets: A Subsidiary Ledger 81
42
Job-Order Costing in Service Companies 81
Summary 82
Review Problem: Calculating Unit Product Costs 82
Glossary 84
Questions 84
Applying Excel 84
Foundational 15 86
Exercises 87
Problems 92
Case 95
Appendix 2A: Activity-Based Absorption Costing 96
Glossary (Appendix 2A) 99
Appendix 2A: Exercises, Problems, and Case 99
Appendix 2B: The Predetermined Overhead Rate
and Capacity 103
Appendix 2B: Exercises, Problem, and Case 106
Chapter
3
Job-Order Costing: Cost Flows
and External Reporting 110
Job-Order Costing—The Flow of Costs 111
The Purchase and Issue of Materials 112
Issue of Direct and Indirect Materials 113
Labor Cost 114
Manufacturing Overhead Costs 115
Applying Manufacturing Overhead 115
The Concept of a Clearing Account 116
Nonmanufacturing Costs 117
Cost of Goods Manufactured 118
Cost of Goods Sold 118
Schedules of Cost of Goods Manufactured and
Cost of Goods Sold 121
Underapplied and Overapplied
Overhead—A Closer Look 123
Computing Underapplied and Overapplied Overhead 123
xxvi Contents

Disposition of Underapplied or Overapplied The Weighted-Average Method: An Example 160

Overhead Balances 125 Step 1: Compute the Equivalent Units of Production 162
Closed to Cost of Goods Sold 125 Step 2: Compute the Cost per Equivalent Unit 164
Closed Proportionally to Work in Process, Finished Step 3: Assign Costs to Units 164
Goods, and Cost of Goods Sold 125
Step 4: Prepare a Cost Reconciliation Report 165
Comparing the Two Methods for Disposing of
Underapplied or Overapplied Overhead 127 Operation Costing 166
A General Model of Product Cost Flows 127 Summary 166
Summary 128 Review Problem: Process Cost Flows and
Review Problem: The Flow of Costs in a Costing Units 167
Job-Order Costing System 129 Glossary 169
Glossary 131 Questions 169
Questions 132 Applying Excel 170
Applying Excel 132 The Foundational 15 171
The Foundational 15 133 Exercises 172
Exercises 134 Problems 176
Problems 138 Cases 180
Cases 143 Appendix 4A: FIFO Method 181
Appendix 3A: Job-Order Costing: Appendix 4A: Exercises, Problems, and Case 186
A Microsoft Excel-Based Approach 144 Appendix 4B: Service Department Cost Allocations 189
Appendix 3A: Exercises and Problems 149 Appendix 4B: Exercises, Problems, and Case 192

Chapter

Process Costing
4 154
Chapter
5
Cost-Volume-Profit Relationships 196
Comparison of Job-Order and Process Costing 155 The Basics of Cost-Volume-Profit (CVP) Analysis 198
Similarities between Job-Order and Contribution Margin 198
Process Costing 155
CVP Relationships in Equation Form 200
Differences between Job-Order and Process
Costing 155 CVP Relationships in Graphic Form 201
Preparing the CVP Graph 201
Cost Flows in Process Costing 156 Contribution Margin Ratio (CM Ratio) and the Variable
Processing Departments 156 Expense Ratio 203
The Flow of Materials, Labor, and Overhead Costs 157 Applications of the Contribution Margin Ratio 205
Materials, Labor, and Overhead Cost Entries 158 Additional Applications of CVP Concepts 206
Materials Costs 158 Example 1: Change in Fixed Cost and
Labor Costs 158 Sales Volume 206
Overhead Costs 158 Alternative Solution 1 207
Completing the Cost Flows 159 Alternative Solution 2 207
Example 2: Change in Variable Costs and
Process Costing Computations: Three Key Sales Volume 207
Concepts 159 Solution 207
Key Concept #1 160 Example 3: Change in Fixed Cost, Selling Price, and
Key Concept #2 160 Sales Volume 207
Key Concept #3 160 Solution 208
 Contents xxvii

Example 4: Change in Variable Cost, Fixed Cost, and Selling and Administrative Expenses 259
Sales Volume 208 Summary of Differences 259
Solution 208
Example 5: Change in Selling Price 209 Variable and Absorption Costing—An Example 260
Solution 209 Variable Costing Contribution Format Income
Statement 260
Break-Even and Target Profit Analysis 210 Absorption Costing Income Statement 262
Break-Even Analysis 210
The Equation Method 210 Reconciliation of Variable Costing with Absorption
The Formula Method 210 Costing Income 264
Break-Even in Dollar Sales 211 Advantages of Variable Costing and the Contribution
Target Profit Analysis 211 Approach 266
The Equation Method 212 Enabling CVP Analysis 266
The Formula Method 212 Explaining Changes in Net Operating Income 267
Target Profit Analysis in Terms of Dollar Sales 212 Supporting Decision Making 267
The Margin of Safety 213
Segmented Income Statements and the Contribution
CVP Considerations in Choosing a Cost Structure 214 Approach 268
Cost Structure and Profit Stability 214 Traceable and Common Fixed Costs and the Segment
Operating Leverage 215 Margin 268
Structuring Sales Commissions 218 Identifying Traceable Fixed Costs 269
Traceable Fixed Costs Can Become Common Fixed
Sales Mix 218 Costs 269
The Definition of Sales Mix 218
Sales Mix and Break-Even Analysis 219 Segmented Income Statements—An Example 270
Levels of Segmented Income Statements 271
Summary 221
Review Problem: CVP Relationships 221 Segmented Income Statements—Decision Making and
Glossary 224 Break-Even Analysis 273
Questions 224 Decision Making 273
Applying Excel 224 Break-Even Analysis 274
The Foundational 15 226
Segmented Income Statements—Common
Exercises 227 Mistakes 275
Problems 232
Omission of Costs 275
Cases 239
Inappropriate Methods for Assigning Traceable Costs
Appendix 5A: Analyzing Mixed Costs 241 among Segments 276
Glossary (Appendix 5A) 249 Failure to Trace Costs Directly 276
Appendix 5A: Exercises and Problems 249 Inappropriate Allocation Base 276
Arbitrarily Dividing Common Costs among
Segments 276

Chapter
6 Income Statements—An External Reporting
Perspective 277
Companywide Income Statements 277
Segmented Financial Information 278
Variable Costing and Segment
Reporting: Tools for Management 257 Summary 278
Review Problem 1: Contrasting Variable and Absorption
Overview of Variable and Absorption Costing 258 Costing 279
Variable Costing 258 Review Problem 2: Segmented Income Statements 281
Absorption Costing 258 Glossary 282
xxviii Contents

Questions 283 Applying Excel 338

Applying Excel 283 The Foundational 15 340
The Foundational 15 285 Exercises 341
Exercises 286 Problems 349
Problems 293 Appendix 7A: Time-Driven Activity-Based Costing:
Cases 301 A Microsoft Excel-Based Approach 354
Appendix 6A: Super-Variable Costing 303 Appendix 7A: Exercises and Problems 359
Glossary (Appendix 6A) 307

8
Appendix 6A: Exercises and Problems 307

7
Chapter

Chapter
Master Budgeting 362

Activity-Based Costing: Why and How Do Organizations Create Budgets? 363

A Tool to Aid Decision Making 310 Advantages of Budgeting 363
Responsibility Accounting 363
Activity-Based Costing: An Overview 311
Choosing a Budget Period 364
Nonmanufacturing Costs and Activity-Based
The Self-Imposed Budget 364
Costing 311
Human Factors in Budgeting 365
Manufacturing Costs and Activity-Based Costing 312
Cost Pools, Allocation Bases, and Activity-Based The Master Budget: An Overview 365
Costing 312 Seeing the Big Picture 367
Designing an Activity-Based Costing (ABC) System 315 Preparing the Master Budget 368
Steps for Implementing Activity-Based Costing: 317 The Beginning Balance Sheet 369
Step 1: Define Activities, Activity Cost Pools, and The Budgeting Assumptions 369
Activity Measures 318
The Sales Budget 372
The Mechanics of Activity-Based Costing 319 The Production Budget 373
Step 2: Assign Overhead Costs to Activity Cost Pools 319 Inventory Purchases—Merchandising Company 374
Step 3: Calculate Activity Rates 322 The Direct Materials Budget 374
Step 4: Assign Overhead Costs to Cost Objects 323 The Direct Labor Budget 376
Step 5: Prepare Management Reports 326 The Manufacturing Overhead Budget 377
The Ending Finished Goods Inventory Budget 378
Comparison of Traditional and ABC Product
Costs 329 The Selling and Administrative Expense Budget 379
Product Margins Computed Using the Traditional Cost The Cash Budget 380
System 329 The Budgeted Income Statement 384
The Differences between ABC and Traditional Product The Budgeted Balance Sheet 385
Costs 330
Summary 387
Targeting Process Improvements 333 Review Problem: Budget Schedules 387
Activity-Based Costing and External Reports 334 Glossary 389
Questions 389
The Limitations of Activity-Based Costing 334 Applying Excel 390
Summary 335 The Foundational 15 391
Review Problem: Activity-Based Costing 336 Exercises 392
Glossary 337 Problems 400
Questions 338 Cases 410
 Contents xxix

9
A General Model for Standard Cost Variance
Analysis 454
Chapter
Using Standard Costs—Direct Materials
Variances 456
Flexible Budgets and The Materials Price Variance 457
Performance Analysis 413 The Materials Quantity Variance 458

The Variance Analysis Cycle 414 Using Standard Costs—Direct Labor Variances 459
The Labor Rate Variance 459
Flexible Budgets 415 The Labor Efficiency Variance 460
Characteristics of a Flexible Budget 415
Deficiencies of the Static Planning Budget 415 Using Standard Costs—Variable Manufacturing
Overhead Variances 461
How a Flexible Budget Works 418
The Variable Manufacturing Overhead Rate and
Flexible Budget Variances 419 Efficiency Variances 462
Activity Variances 419 An Important Subtlety in the
Revenue and Spending Variances 420 Materials Variances 464
A Performance Report Combining Activity and Revenue
Standard Costs—Managerial Implications 466
and Spending Variances 422
Advantages of Standard Costs 466
Performance Reports in Nonprofit Organizations 425
Potential Problems with Standard Costs 466
Performance Reports in Cost Centers 425
Summary 467
Flexible Budgets with Multiple Cost Drivers 425 Review Problem: Standard Costs 467
Some Common Errors 427 Glossary 469
Questions 470
Summary 429
Applying Excel 470
Review Problem: Variance Analysis
The Foundational 15 472
Using a Flexible Budget 429
Exercises 472
Glossary 431
Problems 475
Questions 431
Cases 480
Applying Excel 431
Appendix 10A: Predetermined Overhead Rates
The Foundational 15 433
and Overhead Analysis in a Standard Costing
Exercises 433 System 481
Problems 440 Glossary (Appendix 10A) 487
Cases 445 Appendix 10A: Exercises and Problems 487
Appendix 10B: Standard Cost Systems: A Financial
Reporting Perspective Using Microsoft Excel 494

10
Appendix 10B: Exercises and Problems 501

Chapter

Standard Costs and Variances

Standard Costs—Setting the Stage 450
449

Setting Direct Materials Standards 451

Chapter
11
Performance Measurement in
Setting Direct Labor Standards 451
Decentralized Organizations 506
Setting Variable Manufacturing Overhead
Standards 452 Decentralization in Organizations 507
Using Standards in Flexible Budgets 453 Advantages and Disadvantages of Decentralization 507
xxx Contents

12
Responsibility Accounting 508
Cost, Profit, and Investment Centers 508
Cost Center 508 Chapter
Profit Center 508
Investment Center 508
Differential Analysis: The Key
Evaluating Investment Center Performance—Return on to Decision Making 560
Investment 509
Decision Making: Six Key Concepts 561
The Return on Investment (ROI) Formula 509
Key Concept #1 561
Net Operating Income and Operating Assets
Defined 509 Key Concept #2 561
Understanding ROI 509 Key Concept #3 561
Criticisms of ROI 512 Key Concept #4 562
Key Concept #5 562
Residual Income 513 Key Concept #6 562
Motivation and Residual Income 514
Divisional Comparison and Residual Income 515 Identifying Relevant Costs and Benefits: An
Example 563
Operating Performance Measures 516
Decision Analysis: The Total Cost and Differential Cost
Throughput (Manufacturing Cycle) Time 516 Approaches 565
Delivery Cycle Time 516 Why Isolate Relevant Costs? 567
Manufacturing Cycle Efficiency (MCE) 517
Example 518 Adding and Dropping Product Lines and Other
Required: 518 Segments 568
Solution 518 An Illustration of Cost Analysis 568
A Comparative Format 570
Balanced Scorecard 519 Beware of Allocated Fixed Costs 570
Common Characteristics of Balanced Scorecards 519
A Company’s Strategy and the Balanced Scorecard 521 Make or Buy Decisions 571
Tying Compensation to the Balanced Scorecard 523 Strategic Aspects of the Make or Buy Decision 572
An Example of Make or Buy 572
Summary 523
Opportunity Cost 574
Review Problem: Return on Investment (ROI) and
Residual Income 524 Special Order Decisions 575
Glossary 525
Questions 525 Volume Trade-Off Decisions 576
Applying Excel 525 What Is a Constraint? 576
The Foundational 15 526 Utilizing a Constrained Resource to Maximize
Exercises 527 Profits 577
Problems 532 Managing Constraints 580
Case 539 Joint Product Costs and Sell or Process Further
Appendix 11A: Transfer Pricing 540 Decisions 581
Appendix 11A: Review Problem: Transfer Pricing 546 Santa Maria Wool Cooperative: An Example 582
Glossary (Appendix 11A) 547
Appendix 11A: Exercises, Problems, and Case 548 Activity-Based Costing and Relevant Costs 585
Appendix 11B: Service Department Charges 552 Summary 585
Charging Costs by Behavior 553 Review Problem: Relevant Costs 585
Some Cautions in Allocating Service Department Costs 555 Glossary 586
Glossary (Appendix 11B) 557 Questions 587
Appendix 11B: Exercises and Problems 557 Applying Excel 587
 Contents xxxi

The Foundational 15 589 Internal Rate of Return Method 650

Exercises 590 Net Present Value Method 650
Problems 598
The Simple Rate of Return Method 651
Cases 606
Appendix 12A: Pricing Decisions 612 Postaudit of Investment Projects 653
The Absorption Costing Approach to Cost-Plus Summary 654
Pricing 614 Review Problem: Comparison of Capital Budgeting
Pricing and Customer Latitude 617 Methods 654
Value-Based Pricing 621 Glossary 656
Target Costing 623 Questions 656
Summary (Appendix 12A) 624 Applying Excel 657
Glossary (Appendix 12A) 625 The Foundational 15 658
Appendix 12A: Exercises and Problems 625 Exercises 659
Problems 663

13
Cases 670
Appendix 13A: The Concept of Present Value 671
Chapter
Appendix 13A: Review Problem: Basic Present Value
Computations 674
Capital Budgeting Decisions 632 Glossary (Appendix 13A) 675
Appendix 13A: Exercises 676
Capital Budgeting—An Overview 633 Appendix 13B: Present Value Tables 677
Typical Capital Budgeting Decisions 633 Appendix 13C: Income Taxes and the Net Present
Cash Flows versus Net Operating Income 633 Value Method 679
Typical Cash Outflows 633 Summary (Appendix 13C) 681
Typical Cash Inflows 634 Appendix 13C: Exercises and Problems 681
The Time Value of Money 634
The Payback Method 635
Evaluation of the Payback Method 635
An Extended Example of Payback 636
Payback and Uneven Cash Flows 636
Chapter
14
Statement of Cash Flows 684
The Net Present Value Method 638 The Statement of Cash Flows: Key Concepts 686
The Net Present Value Method Illustrated 638 Organizing the Statement of Cash Flows 686
Recovery of the Original Investment 641 Operating Activities: Direct or Indirect Method? 687
An Extended Example of the Net Present Value The Indirect Method: A Three-Step Process 688
Method 642
Step 1 688
The Internal Rate of Return Method 644 Step 2 689
The Internal Rate of Return Method Illustrated 644 Step 3 690
Comparison of the Net Present Value and Internal Rate Investing and Financing Activities: Gross Cash Flows 690
of Return Methods 645 Property, Plant, and Equipment 691
Retained Earnings 692
Expanding the Net Present Value Method 646
Summary of Key Concepts 693
Least-Cost Decisions 646
An Example of a Statement of Cash Flows 694
Uncertain Cash Flows 649
Operating Activities 695
An Example 649 Step 1 695
Preference Decisions—The Ranking of Investment Step 2 696
Projects 650 Step 3 697
xxxii Contents

Investing Activities 697 Ratio Analysis—Debt Management 735

Financing Activities 698 Times Interest Earned Ratio 736
Seeing the Big Picture 699 Debt-to-Equity Ratio 736
Equity Multiplier 737
Interpreting the Statement of Cash Flows 701
Consider a Company’s Specific Circumstances 701 Ratio Analysis—Profitability 737
Consider the Relationships among Numbers 702 Gross Margin Percentage 737
Free Cash Flow 702 Net Profit Margin Percentage 738
Earnings Quality 703 Return on Total Assets 739
Summary 703 Return on Equity 739
Review Problem 704
Ratio Analysis—Market Performance 740
Glossary 708
Earnings per Share 740
Questions 708
Price-Earnings Ratio 741
The Foundational 15 708
Exercises 710 Dividend Payout and Yield Ratios 741
Problems 713 The Dividend Payout Ratio 741
Appendix 14A: The Direct Method of Determining the Net The Dividend Yield Ratio 742
Cash Provided by Operating Activities 721 Book Value per Share 742
Appendix 14A: Exercises and Problems 723 Summary of Ratios and Sources of Comparative
Ratio Data 742

15
Summary 744
Review Problem: Selected Ratios and Financial
Chapter Leverage 744
Glossary 747
Questions 747
Financial Statement Analysis 725 The Foundational 15 747
Limitations of Financial Statement Analysis 726 Exercises 748
Comparing Financial Data across Companies 726 Problems 753
Looking beyond Ratios 726
Integration Exercises 762
Statements in Comparative and Common-Size Form 726
Dollar and Percentage Changes on Statements 727 Index 773
Common-Size Statements 729

Ratio Analysis—Liquidity 731 Credits for Chapter Openers

Working Capital 731 (1) © Raymond Boyd/Getty Images; (2) Courtesy of
Current Ratio 732 University Tees, Inc.; (3) © Pixtal/AGE Fotostock; (4) ©
Acid-Test (Quick) Ratio 732 Kristoffer Tripplaar/Alamy; (5) © Everett Collection Inc/
Alamy; (6) © Bloomberg/Getty Images; (7) © Scott Eells/
Ratio Analysis—Asset Management 733 Bloomberg/Getty Images; (8) © Sandee Noreen; (9) ©
Accounts Receivable Turnover 733 Michael Sears/MCT/Newscom; (10) © Bloomberg/Getty
Images; (11) © Luke Sharrett/Bloomberg/Getty Images;
Inventory Turnover 734
(12) © Ian Dagnall/Alamy; (13) © David Goldman/AP
Operating Cycle 734 Images; (14) © Bloomberg/Getty Images; (15) © Lionel
Total Asset Turnover 735 Bonaventure/AFP/Getty Images.
 PROLOGUE
FPO

Managerial Accounting:
An Overview
Managerial Accounting: It’s More Than Just
Crunching Numbers
BUSINESS FOCUS

© LuckyImages/Shutterstock.com

“Creating value through values” is the credo of today’s management

accountant. It means that management accountants should maintain an
unwavering commitment to ethical values while using their knowledge
and skills to influence decisions that create value for organizational stake-
holders. These skills include managing risks and implementing strategy
through planning, budgeting and forecasting, and decision support.
­Management accountants are strategic business partners who under-
stand the financial and operational sides of the business. They report
and analyze financial as well as nonfinancial measures of process perfor-
mance and corporate social performance. Think of these responsibilities
as relating to profits (financial statements), processes (customer focus and
satisfaction), people (employee learning and satisfaction), and the planet
(environmental stewardship). ■
Source: Conversation with Jeff Thomson, president and CEO of the Institute of Management Accountants.

1
2 Prologue

What Is Managerial Accounting?

T
he prologue explains why managerial accounting is important to
the future careers of all business students. It begins by answering two questions:
(1) What is managerial accounting? and (2) Why does managerial accounting
matter to your career? It concludes by discussing six topics—ethics, strategic
management, enterprise risk management, corporate social responsibility, process man-
agement, and leadership—that define the business context for applying the quantitative
aspects of managerial accounting.
Many students enrolled in this course will have recently completed an introductory
financial accounting course. Financial accounting is concerned with reporting financial
information to external parties, such as stockholders, creditors, and regulators. ­Managerial
accounting is concerned with providing information to managers for use within the orga-
nization. Exhibit P–1 summarizes seven key differences between financial and managerial
accounting. It recognizes that the fundamental difference between financial and managerial
accounting is that financial accounting serves the needs of those outside the organization,
whereas managerial accounting serves the needs of managers employed inside the organi-
zation. Because of this fundamental difference in users, financial accounting ­emphasizes
the financial consequences of past activities, objectivity and verifiability, p­ recision, and

EXHIBIT P–1 Accounting

Comparison of Financial and
Managerial Accounting Recording
Estimating Financial and
Organizing Operational Data
Summarizing

Financial Managerial
Accounting Accounting

Reports to those outside Reports to managers inside

the organization: the organization for:
Owners Planning
Creditors Controlling
Tax authorities Decision making
Regulators

Emphasizes financial Emphasizes decisions

consequences of past affecting the future.
activities.

Emphasizes objectivity and Emphasizes relevance.

verifiability.

Emphasizes precision. Emphasizes timeliness.

Emphasizes companywide Emphasizes segment

reports. reports.

Must follow GAAP/IFRS. Need not follow GAAP/IFRS.

Mandatory for external reports. Not mandatory.

 Managerial Accounting: An Overview 3

companywide performance, whereas managerial accounting emphasizes decisions affect-

ing the future, relevance, timeliness, and segment performance. A segment is a part or
activity of an organization about which managers would like cost, revenue, or profit data.
Examples of business segments include product lines, customer groups (segmented by age,
ethnicity, gender, volume of purchases, etc.), geographic territories, divisions, plants, and
departments. Finally, financial accounting is mandatory for external reports and it needs to
comply with rules, such as generally accepted accounting principles (GAAP) and interna-
tional financial reporting standards (IFRS), whereas managerial accounting is not manda-
tory and it does not need to comply with externally imposed rules.
As mentioned in Exhibit P–1, managerial accounting helps managers perform three
vital activities—planning, controlling, and decision making. Planning involves establish-
ing goals and specifying how to achieve them. Controlling involves gathering feedback
to ensure that the plan is being properly executed or modified as circumstances change.
Decision making involves selecting a course of action from competing alternatives. Now
let’s take a closer look at these three pillars of managerial accounting.

Planning
Assume that you work for Procter & Gamble (P&G) and that you are in charge of
the company’s campus recruiting for all undergraduate business majors. In this example,
your planning process would begin by establishing a goal such as: our goal is to recruit
the “best and brightest” college graduates. The next stage of the planning process would
require specifying how to achieve this goal by answering numerous questions such as:
∙ How many students do we need to hire in total and from each major?
∙ What schools do we plan to include in our recruiting efforts?
∙ Which of our employees will be involved in each school’s recruiting activities?
∙ When will we conduct our interviews?
∙ How will we compare students to one another to decide who will be extended job offers?
∙ What salary will we offer our new hires? Will the salaries differ by major?
∙ How much money can we spend on our recruiting efforts?
As you can see, there are many questions that need to be answered as part of the plan-
ning process. Plans are often accompanied by a budget. A budget is a detailed plan for
the future that is usually expressed in formal quantitative terms. As the head of recruiting
at P&G, your budget would include two key components. First, you would have to work
with other senior managers inside the company to establish a budgeted amount of total
salaries that can be offered to all new hires. Second, you would have to create a budget
that quantifies how much you intend to spend on your campus recruiting activities.

IN BUSINESS
THE FINANCIAL SIDE OF RUNNING A COMMUNITY THEATRE
Formulating plans and creating budgets is an important part of running a community theater.
For example, the Manatee Players is a theater group from Bradenton, Florida, that has seen
its annual operating budget grow from $480,000 to $1.5 million over the last 10 years. The
theater’s ticket sales cover about 77% of its operating costs, with additional financial support
coming from individual and corporate donors.
In additional to managing its revenues, the theater also seeks to control its costs in various
ways—such as saving $3,000 per year by bringing the production of its programs in-house.
Rather than promoting individual shows, the group has decided to focus its marketing dollars on
touting the entire season of shows. It also shifted a portion of its marketing budget away from
traditional methods to more cost-effective social-media outlets.

Source: Kevin Brass, “Let’s Put on a Show,” The Wall Street Journal, November 3, 2014, p. D7.

© McGraw-Hill Education/Christopher
­Kerrigan, photographer
4 Prologue

Controlling
Once you established and started implementing P&G’s recruiting plan, you would tran-
sition to the control process. This process would involve gathering, evaluating, and
responding to feedback to ensure that this year’s recruiting process meets expectations.
It would also include evaluating the feedback in search of ways to run a more effective
recruiting campaign next year. The control process would involve answering questions
such as:
∙ Did we succeed in hiring the planned number of students within each major and at
each school?
∙ Did we lose too many exceptional candidates to competitors?
∙ Did each of our employees involved in the recruiting process perform satisfactorily?
∙ Is our method of comparing students to one another working?
∙ Did the on-campus and office interviews run smoothly?
∙ Did we stay within our budget in terms of total salary commitments to new hires?
∙ Did we stay within our budget regarding spending on recruiting activities?
As you can see, there are many questions that need to be answered as part of the con-
trol process. When answering these questions your goal would be to go beyond simple
yes or no answers in search of the underlying reasons why performance exceeded or
failed to meet expectations. Part of the control process includes preparing performance
reports. A performance report compares budgeted data to actual data in an effort to
identify and learn from excellent performance and to identify and eliminate sources of
unsatisfactory performance. Performance reports can also be used as one of many inputs
to help evaluate and reward employees.
Although this example focused on P&G’s campus recruiting efforts, we could have
described how planning enables FedEx to deliver packages across the globe overnight,
or how it helped Apple develop and market the iPad. We could have discussed how the
control process helps Pfizer, Eli Lilly, and Abbott Laboratories ensure that their phar-
maceutical drugs are produced in conformance with rigorous quality standards, or how
Kroger relies on the control process to keep its grocery shelves stocked. We also could
have looked at planning and control failures such as Takata’s recall of more than 30 mil-
lion defective driver-side air bags installed by a variety of automakers such as Honda,
Ford, Toyota, and Subaru. In short, all managers (and that probably includes you some-
day) perform planning and controlling activities.

Decision Making
Perhaps the most basic managerial skill is the ability to make intelligent, data-driven
­decisions. Broadly speaking, many of those decisions revolve around the following
three questions. What should we be selling? Who should we be serving? How should we
execute? Exhibit P–2 provides examples of decisions pertaining to each of these three
categories.
The left-hand column of Exhibit P–2 suggests that every company must make deci-
sions related to the products and services that it sells. For example, each year Procter &
Gamble must decide how to allocate its marketing budget across numerous brands that
each generates over $1 billion in sales as well as other brands that have promising growth
potential. Mattel must decide what new toys to introduce to the market. Southwest Airlines
must decide what ticket prices to establish for each of its thousands of flights per day.
General Motors must decide whether to discontinue certain models of automobiles.
The middle column of Exhibit P–2 indicates that all companies must make deci-
sions related to the customers that they serve. For example, Sears must decide how to
allocate its marketing budget between products that tend to appeal to male versus female
customers. FedEx must decide whether to expand its services into new markets across
the globe. Hewlett-Packard must decide what price discounts to offer corporate clients
that purchase large volumes of its products. A bank must decide whether to discontinue
customers that may be unprofitable.
 Managerial Accounting: An Overview 5

EXHIBIT P–2
Examples of Decisions

What should we be selling? Who should we be serving? How should we execute?

What products and services
should be the focus of our
­marketing efforts?
What new products and
­services should we offer?
What prices should we charge
for our products and services?
What products and services
should we discontinue?
Who should be the focus of our
marketing efforts?
Who should we start
serving?
Who should pay price ­premiums
or receive price discounts?
Who should we stop
serving?
How should we supply our
parts and services?
How should we expand our
capacity?
How should we reduce our
capacity?
How should we improve our
efficiency and effectiveness?

The right-hand column of Exhibit P–2 shows that companies also make decisions
related to how they execute. For example, Boeing must decide whether to rely on outside
vendors such as Goodrich, Saab, and Rolls-Royce to manufacture many of the parts used
to make its airplanes. Cintas must decide whether to expand its laundering and cleaning
capacity in a given geographic region by adding square footage to an existing facility or
by constructing an entirely new facility. In an economic downturn, a manufacturer might
have to decide whether to eliminate one 8-hour shift at three plants or to close one plant.
Finally, all companies have to decide among competing improvement opportunities. For
example, a company may have to decide whether to implement a new software system, to
upgrade a piece of equipment, or to provide extra training to its employees.
This portion of the chapter has explained that the three pillars of managerial account-
ing are planning, controlling, and decision making. This book helps prepare you to
become an effective manager by explaining how to make intelligent data-driven deci-
sions, how to create financial plans for the future, and how to continually make progress
toward achieving goals by obtaining, evaluating, and responding to feedback.

Why Does Managerial Accounting Matter to Your Career?

Many students feel anxious about choosing a major because they are unsure if it will pro-
vide a fulfilling career. To reduce these anxieties, we recommend deemphasizing what you
cannot control about the future; instead focusing on what you can control right now. More
specifically, concentrate on answering the following question: What can you do now to
prepare for success in an unknown future career? The best answer is to learn skills that will
make it easier for you to adapt to an uncertain future. You need to become adaptable!
Whether you end up working in the United States or abroad, for a large corporation, a
small entrepreneurial company, a nonprofit organization, or a governmental entity, you’ll
need to know how to plan for the future, how to make progress toward achieving goals,
and how to make intelligent decisions. In other words, managerial accounting skills are
useful in just about any career, organization, and industry. If you commit energy to this
course, you’ll be making a smart investment in your future—even though you cannot
clearly envision it. Next, we will elaborate on this point by explaining how managerial
accounting relates to the future careers of business majors and accounting majors.

Business Majors
Exhibit P–3 provides examples of how planning, controlling, and decision making affect
three majors other than accounting—marketing, supply chain management, and human
resource management.
6 Prologue

EXHIBIT P–3
Relating Managerial Accounting to Supply Chain Human Resource
Three Business Majors Marketing Management Management
Planning How much should How many units How much should
we budget for TV, should we plan we plan to spend for
print, and Internet to produce next occupational safety
advertising? period? training?
How many salespeo- How much should How much should
ple should we plan to we budget for we plan to spend on
hire to serve a new next period’s utility employee recruitment
territory? expense? advertising?

Controlling Is the budgeted price Did we spend more Is our employee

cut increasing unit or less than expected retention rate
sales as expected? for the units we actu- exceeding our goals?
ally produced?
Are we accumulating Are we achieving our Are we meeting our
too much inventory goal of reducing the goal of completing
during the holiday number of defective timely performance
shopping season? units produced? appraisals?

Decision Should we sell our Should we transfer Should we hire an

Making services as one production of a com- on-site medical staff
bundle or sell them ponent part to an to lower our health
separately? overseas supplier? care costs?
Should we sell Should we redesign Should we hire
directly to customers our manufacturing ­temporary workers
or use a distributor? process to lower or full-time
inventory levels? employees?

The left-hand column of Exhibit P–3 describes some planning, controlling, and
d­ecision-making applications in the marketing profession. For example, marketing
­managers make planning decisions related to allocating advertising dollars across various
communication mediums and to staffing new sales territories. From a control standpoint,
they may closely track sales data to see if a budgeted price cut is generating an anticipated
increase in unit sales, or they may study inventory levels during the holiday shopping
­season so that they can adjust prices as needed to optimize sales. Marketing managers also
make many important decisions such as whether to bundle services together and sell them
for one price or to sell each service separately. They may also decide whether to sell prod-
ucts directly to the customer or to sell to a distributor, who then sells to the end consumer.
The middle column of Exhibit P–3 states that supply chain managers have to plan
how many units to produce to satisfy anticipated customer demand. They also need to
budget for operating expenses such as utilities, supplies, and labor costs. In terms of
control, they monitor actual spending relative to the budget, and closely watch opera-
tional measures such as the number of defects produced relative to the plan. Supply chain
managers make numerous decisions, such as deciding whether to transfer production of a
component part to an overseas supplier. They also decide whether to invest in redesigning
a manufacturing process to reduce inventory levels.
The right-hand column of Exhibit P–3 explains how human resource managers make a
variety of planning decisions, such as budgeting how much to spend on occupational safety
training and employee recruitment advertising. They monitor feedback related to numer-
ous management concerns, such as employee retention rates and the timely ­completion of
employee performance appraisals. They also help make many important decisions such as
 Managerial Accounting: An Overview 7

whether to hire on-site medical staff in an effort to lower health care costs, and whether to
hire temporary workers or full-time employees in an uncertain economy.
For brevity, Exhibit P–3 does not include all business majors, such as finance, man-
agement information systems, and economics. Can you explain how planning, control-
ling, and decision-making activities would relate to these majors?

Accounting Majors
Many accounting graduates begin their careers working for public accounting firms that
provide a variety of valuable services for their clients. Some of these graduates will build
successful and fulfilling careers in the public accounting industry; however, most will leave
public accounting at some point to work in other organizations. In fact, the ­Institute of
Management Accountants (IMA) estimates that more than 80% of ­professional accoun-
tants in the United States work in nonpublic accounting environments (www.imanet.org/
about_ima/our_mission.aspx).
The public accounting profession has a strong financial accounting orientation. Its
most important function is to protect investors and other external parties by assuring
them that companies are reporting historical financial results that comply with applicable
accounting rules. Managerial accountants also have strong financial accounting skills.
For example, they play an important role in helping their organizations design and main-
tain financial reporting systems that generate reliable financial disclosures. However, the
primary role of managerial accountants is to partner with their co-workers within the
organization to improve performance.
Given the 80% figure mentioned above, if you are an accounting major there is a very
high likelihood that your future will involve working for a nonpublic accounting employer.
Your employer will expect you to have strong financial accounting skills, but more impor-
tantly, it will expect you to help improve organizational performance by applying the planning,
­controlling, and decision-making skills that are the foundation of managerial accounting.

IN BUSINESS
A NETWORKING OPPORTUNITY
The Institute of Management Accountants (IMA) is a network of more than 70,000 accounting
and finance professionals from over 120 countries. Every year the IMA hosts a student leadership
conference that attracts 300 students from over 50 colleges and universities. Guest speakers at
past conferences have discussed topics such as leadership, advice for a successful career, how to
market yourself in a difficult economy, and excelling in today’s multigenerational w ­ orkforce. One
student who attended the conference said, “I liked that I was able to interact with ­professionals who
are in fields that could be potential career paths for me.” For more information on this ­worthwhile
networking opportunity, contact the IMA at the phone number and website shown below.

Source: Conversation with Jodi Ryan, the Institute of Management Accountants’ Director, Education/Corporate Partnerships.
(201) 474-1556 or visit its website at www.imanet.org.

Professional Certification—A Smart Investment If you plan to become an

accounting major, the Certified Management Accountant (CMA) and Chartered Global
Management Accountant (CGMA) designations are globally respected credentials that
will increase your credibility, upward mobility, and compensation.
The CMA exam is sponsored by the Institute of Management Accountants (IMA)
in Montvale, New Jersey. To become a CMA requires membership in the IMA, a bach-
elor’s degree from an accredited college or university, two continuous years of relevant
professional experience, and passage of the CMA exam. Exhibit P–4 summarizes the
topics covered in the IMA’s two-part CMA exam. For brevity, we are not going to define
all the terms included in this exhibit. Its purpose is simply to emphasize that the CMA
8 Prologue

EXHIBIT P–4
CMA Exam Content Specifications
Part 1 Financial Reporting, Planning, Performance and Control
External financial reporting decisions
Planning, budgeting, and forecasting
Performance management
Cost management
Internal controls
Part 2 Financial Decision Making
Financial statement analysis
Corporate finance
Decision analysis
Risk management
Investment decisions
Professional ethics

exam focuses on the planning, controlling, and decision-making skills that are critically
important to all managers. Information about becoming a CMA is available on the IMA’s
website (www.imanet.org) or by calling 1-800-638-4427.
The CGMA designaton is co-sponsored by the American Institute of C ­ ertified ­Public
Accountants (AICPA) and the Chartered Institute of Management ­Accountants (CIMA),
each of whom provides a distinct pathway to becoming a CGMA. The AICPA pathway
requires a bachelor’s degree in accounting (accompanied by a total of 150 college credit-
hours), passage of the Certified Public Accountant (CPA) exam, membership in the AICPA,
three years of relevant management accounting work experience, and passage of the CGMA
exam—which is a case-based exam that focuses on technical skills, business skills, leader-
ship skills, people skills, and ethics, integrity, and professionalism. Notice that the AICPA’s
pathway to becoming a CGMA requires passage of the multi-part CPA exam, which empha-
sizes rule-based compliance—assurance standards, financial accounting standards, business
law, and the tax code. Information on becoming a CGMA is available at www.cgma.org.

IN BUSINESS
HOW’S THE PAY?
The Institute of Management Accountants has created the following table that allows individu-
als to estimate what their salary would be as a management accountant.

Your
Calculation
Start with this base amount . . . . . . . . . . . . . . . . . . . . $42,660 $42,660
If you are top-level management . . . . . . . . . . . . . . . ADD $59,595
OR, if you are senior-level management . . . . . . . . . ADD $39,131
OR, if you are middle-level management . . . . . . . . ADD $22,089
Number of years in the field _____ . . . . . . . . . . . . . TIMES $979
If you have an advanced degree . . . . . . . . . . . . . . . ADD $20,102
If you hold the CMA . . . . . . . . . . . . . . . . . . . . . . . . . . ADD $21,919
If you hold the CPA . . . . . . . . . . . . . . . . . . . . . . . . . . . ADD $5,907
Your estimated salary level . . . . . . . . . . . . . . . . . . . .

For example, if you make it to top-level management in 10 years, have an advanced degree and
a CMA, your estimated salary would be $154,066 [$42,660 + $59,595 + (10 × 979) + $20,102 +
$21,919].

Source: Kip Krumweide, “IMA’s Global Salary Survey,” Strategic Finance March 2016, pp. 27–35.
 Managerial Accounting: An Overview 9

Managerial Accounting: Beyond the Numbers

Exhibit P–5 summarizes how each chapter of the book teaches measurement skills that
managers use on the job every day. For example, Chapter 8 teaches you the measurement
skills that managers use to answer the question—how should I create a financial plan
for next year? Chapters 9 and 10 teach you the measurement skills that managers use to
answer the question—how well am I performing relative to my plan? Chapter 7 teaches
you measurement skills related to product, service, and customer profitability. However,
it is vitally important that you also understand managerial accounting involves more than
just “crunching numbers.” To be successful, managers must complement their measure-
ment skills with six business management perspectives that “go beyond the numbers” to
enable intelligent planning, control, and decision making.

An Ethics Perspective
Ethical behavior is the lubricant that keeps the economy running. Without that lubricant,
the economy would operate much less efficiently—less would be available to consumers,
quality would be lower, and prices would be higher. In other words, without fundamental
trust in the integrity of business, the economy would operate much less efficiently. Thus,
for the good of everyone—including profit-making companies—it is vitally important
that business be conducted within an ethical framework that builds and sustains trust.

Code of Conduct for Management Accountants The Institute of ­Management

Accountants (IMA) of the United States has adopted an ethical code called the

EXHIBIT P–5
Chapter Number The Key Question from a Manager’s Perspective Measurement Skills: A Manager’s
Chapter 1 What cost classifications do I use for different management Perspective
purposes?
Chapter 2 How much does it cost us to manufacture customized jobs for
each of our customers?
Chapters 3 & 4 What is the value of our ending inventory and cost of goods
sold for external reporting purposes?
Chapter 5 How will my profits change if I change my selling price, sales
volume, or costs?
Chapter 6 How should the income statement be presented?
Chapter 7 How profitable is each of our products, services, and
customers?
Chapter 8 How should I create a financial plan for next year?
Chapters 9 & 10 How well am I performing relative to my plan?
Chapter 11 What performance measures should we monitor to ensure
that we achieve our strategic goals?
Chapter 12 How do I quantify the financial impact of pursuing one course
of action versus another?
Chapter 13 How do I make long-term capital investment decisions?
Chapter 14 What cash inflows and outflows explain the change in our
cash balance?
Chapter 15 How can we analyze our financial statements to better
­understand our performance?
10 Prologue

Statement of Ethical Professional Practice that describes in some detail the ethical
responsibilities of management accountants. Even though the standards were devel-
oped specifically for management accountants, they have much broader application.
The standards consist of two parts that are presented in full in Exhibit P–6. The first
part provides general guidelines for ethical behavior. In a nutshell, a management
accountant has ethical responsibilities in four broad areas: first, to maintain a high level
of professional competence; second, to treat sensitive matters with confidentiality;
third, to maintain personal integrity; and fourth, to disclose information in a credible
fashion. The second part of the standards specifies what should be done if an individual
finds evidence of ethical misconduct.
The ethical standards provide sound, practical advice for management accountants
and managers. Most of the rules in the ethical standards are motivated by a very practical
consideration—if these rules were not generally followed in business, then the economy
and all of us would suffer. Consider the following specific examples of the consequences
of not abiding by the standards:
∙ Suppose employees could not be trusted with confidential information. Then top
managers would be reluctant to distribute such information within the company
and, as a result, decisions would be based on incomplete information and operations
would deteriorate.
∙ Suppose employees accepted bribes from suppliers. Then contracts would tend to
go to the suppliers who pay the highest bribes rather than to the most competent
suppliers. Would you like to fly in aircraft whose wings were made by the subcon-
tractor who paid the highest bribe? Would you fly as often? What would happen to
the airline industry if its safety record deteriorated due to shoddy workmanship on
contracted parts and subassemblies?
∙ Suppose the presidents of companies routinely lied in their annual reports and finan-
cial statements. If investors could not rely on the basic integrity of a company’s
financial statements, they would have little basis for making informed decisions. Sus-
pecting the worst, rational investors would pay less for securities issued by compa-
nies and may not be willing to invest at all. As a consequence, companies would have
less money for productive investments—leading to slower economic growth, fewer
goods and services, and higher prices.
Not only is ethical behavior the lubricant for our economy, it is the foundation of
managerial accounting. The numbers that managers rely on for planning, controlling,
and decision making are meaningless unless they have been competently, objectively,
and honestly gathered, analyzed, and reported. As your career unfolds, you will inevi-
tably face decisions with ethical implications. Before making such decisions, consider
performing the following steps. First, define your alternative courses of action. Second,
identify all of the parties that will be affected by your decision. Third, define how each
course of action will favorably or unfavorably impact each affected party. Once you have
a complete understanding of the decision context, seek guidance from external sources
such as the IMA Statement of Ethical Professional Practice (see Exhibit P–6), the IMA
Ethics Helpline at (800) 245-1383, or a trusted confidant. Before executing your decision
ask yourself one final question—would I be comfortable disclosing my chosen course of
action on the front page of The Wall Street Journal?

A Strategic Management Perspective

Companies do not succeed by sheer luck; instead, they need to develop a strategy that
defines how they intend to succeed in the marketplace. A strategy is a “game plan” that
enables a company to attract customers by distinguishing itself from competitors. The
focal point of a company’s strategy should be its target customers. A company can only
succeed if it creates a reason for its target customers to choose it over a competitor. These
reasons, or what are more formally called customer value propositions, are the essence
of strategy.
 Managerial Accounting: An Overview 11

EXHIBIT P–6
Institute of Management Accountants (IMA) Statement of Ethical Professional Practice

Members of IMA shall behave ethically. A commitment to ethical professional practice includes: overarching principles
that express our values, and standards that guide our conduct.

PRINCIPLES
IMA’s overarching ethical principles include: Honesty, Fairness, Objectivity, and Responsibility. Members shall act in
accordance with these principles and shall encourage others within their organizations to adhere to them.

STANDARDS
A member’s failure to comply with the following standards may result in disciplinary action.

I. COMPETENCE
Each member has a responsibility to:
1. Maintain an appropriate level of professional expertise by continually developing knowledge and skills.
2. Perform professional duties in accordance with relevant laws, regulations, and technical standards.
3. Provide decision support information and recommendations that are accurate, clear, concise, and timely.
4. Recognize and communicate professional limitations or other constraints that would preclude responsible judg-
ment or successful performance of an activity.

II. CONFIDENTIALITY
Each member has a responsibility to:
1. Keep information confidential except when disclosure is authorized or legally required.
2. Inform all relevant parties regarding appropriate use of confidential information. Monitor subordinates’ activities to
ensure compliance.
3. Refrain from using confidential information for unethical or illegal advantage.

III. INTEGRITY
Each member has a responsibility to:
1. Mitigate actual conflicts of interest. Regularly communicate with business associates to avoid apparent conflicts of
interest. Advise all parties of any potential conflicts.
2. Refrain from engaging in any conduct that would prejudice carrying out duties ethically.
3. Abstain from engaging in or supporting any activity that might discredit the profession.

IV. CREDIBILITY
Each member has a responsibility to:
1. Communicate information fairly and objectively.
2. Disclose all relevant information that could reasonably be expected to influence an intended user’s understanding
of the reports, analyses, or recommendations.
3. Disclose delays or deficiencies in information, timeliness, processing, or internal controls in conformance with
organization policy and/or applicable law.

RESOLUTION OF ETHICAL CONFLICT

In applying the Standards of Ethical Professional Practice, you may encounter problems identifying unethical behavior
or resolving an ethical conflict. When faced with ethical issues, you should follow your organization’s established poli-
cies on the resolution of such conflict. If these policies do not resolve the ethical conflict, you should consider the fol-
lowing courses of action:
1. Discuss the issue with your immediate supervisor except when it appears that the supervisor is involved. In that
case, present the issue to the next level. If you cannot achieve a satisfactory resolution, submit the issue to the
next management level. If your immediate superior is the chief executive officer or equivalent, the acceptable
reviewing authority may be a group such as the audit committee, executive committee, board of directors, board
of trustees, or owners. Contact with levels above the immediate superior should be initiated only with your superi-
or’s knowledge, assuming he or she is not involved. Communication of such problems to authorities or individuals
not employed or engaged by the organization is not considered appropriate, unless you believe there is a clear
violation of the law.
2. Clarify relevant ethical issues by initiating a confidential discussion with an IMA Ethics Counselor or other impartial
advisor to obtain a better understanding of possible courses of action.
3. Consult your own attorney as to legal obligations and rights concerning the ethical conflict.
12 Prologue

Customer value propositions tend to fall into three broad categories—customer inti-
macy, operational excellence, and product leadership. Companies that adopt a customer
intimacy strategy are in essence saying to their customers, “You should choose us because
we can customize our products and services to meet your individual needs better than our
competitors.” Ritz-Carlton, Nordstrom, and Virtuoso (a premium service travel agency)
rely primarily on a customer intimacy value proposition for their success. Companies that
pursue the second customer value proposition, called operational excellence, are saying
to their target customers, “You should choose us because we deliver products and ser-
vices faster, more conveniently, and at a lower price than our competitors.” Southwest
Airlines, Walmart, and Google are examples of companies that succeed first and fore-
most because of their operational excellence. Companies pursuing the third customer
value proposition, called product leadership, are saying to their target customers, “You
should choose us because we offer higher quality products than our competitors.” Apple,
Cisco Systems, and W.L. Gore (the creator of GORE-TEX® fabrics) are examples of
companies that succeed because of their product leadership.1
The plans managers set forth, the variables they seek to control, and the decisions
they make are all influenced by their company’s strategy. For example, Walmart would
not make plans to build ultraexpensive clothing boutiques because these plans would
conflict with the company’s strategy of operational excellence and “everyday low prices.”
Apple would not seek to control its operations by selecting performance measures that
focus solely on cost-cutting because those measures would conflict with its product
leadership customer value proposition. Finally, it is unlikely that Rolex would decide to
implement drastic price reductions for its watches even if a financial analysis indicated
that establishing a lower price might boost short-run profits. Rolex would oppose this
course of action because it would diminish the luxury brand that forms the foundation of
the company’s product leadership customer value proposition.

An Enterprise Risk Management Perspective

Every strategy, plan, and decision involves risks. Enterprise risk management is a pro-
cess used by a company to identify those risks and develop responses to them that enable
it to be reasonably assured of meeting its goals. The left-hand column of Exhibit P–7
provides 10 examples of the types of business risks that companies face. They range
from risks that relate to the weather to risks associated with computer hackers, com-
plying with the law, supplier strikes, and products harming customers. The right-hand
column of Exhibit P–7 provides an example of a control that could be implemented to
help reduce each of the risks mentioned in the left-hand column of the exhibit.2 Although
these types of controls cannot completely eliminate risks, they enable companies to pro-
actively manage their risks rather than passively reacting to unfortunate events that have
already occurred.
In managerial accounting, companies use controls to reduce the risk that their plans
will not be achieved. For example, if a company plans to build a new manufacturing
facility within a predefined budget and time frame, it will establish and monitor control
measures to ensure that the project is concluded on time and within the budget. Risk
management is also a critically important aspect of decision making. For example, when
a company quantifies the labor cost savings that it can realize by sending jobs overseas, it
should complement its financial analysis with a prudent assessment of the accompanying
risks. Will the overseas manufacturer use child labor? Will the product’s quality decline,
thereby leading to more warranty repairs, customer complaints, and lawsuits? Will the

1
These three customer value propositions were defined by Michael Treacy and Fred Wiersema in
“­Customer Intimacy and Other Value Disciplines,” Harvard Business Review, Volume 71 Issue 1,
pp. 84–93.
2
Besides using controls to reduce risks, companies can also choose other risk responses, such as
accepting or avoiding a risk.
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 Total
194.

MASSACHUSETTS.
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 This passive or defensive policy did not suit the Spaniards, while
it encouraged the Aztecs. Therefore two corps were formed, each of
two hundred men, besides allies, under Cortés and Ordaz. Clearing
a path with a volley of artillery, they sallied in different directions to
drive back the assailants, who hurried for safety into lanes and
houses, and behind barricades. This comparative freedom of
advance appears to have been permitted to entice the Spaniards
into a disadvantageous position, for soon the natives reappeared in
swarms in the rear and along the flanks, showering arrows and
stones, and coming to close quarters with spears and swords. The
heaviest attack was from the roofs, on which large supplies of
missiles had been collected, and from which commanding position
the enemy was able to direct the discharges with terrible effect,
particularly upon the naked Tlascaltecs. Several Spaniards also fell,
and the greater number were wounded. Ordaz received three cuts,
and Cortés a wound which maimed two fingers of the left hand.[767]
The assailants were comparatively safe, for those on the roofs could
be picked off only by archers and musketeers, and those below took
refuge when pressed, only to return to fresh attack. Efforts were
made to fire the houses, but this was slow work, since they were
constructed almost wholly of adobe or stone, and were filled with
defenders. Nor would the fire spread, owing to the detached form of
the buildings, separated by alleys or canals, so that the torch had to
be applied to each.
Thus matters continued until Ordaz, who was engaged on the
street to the west of the fort, sent word to Cortés, who was pressing
forward in the direction of the Iztapalapan causeway, that he was
losing ground. Leaving his own forces, the general hurried to the
scene with a few horsemen, and heading the charge, drove back the
warriors at the most exposed point, so as to relieve the infantry in the
retreat which was now found necessary. Returning to his men he
found them also retreating, those who headed the column, including
Andrés Duero, the Cuban secretary, having been cut down. “Shame
upon you!” exclaimed Cortés to the corps, as he led the horsemen to
the rescue of the fallen cavaliers. He was just in time to save them,
for a moment more and Duero, at least, would have been slain. The
elated warriors fell back before the charge of the terrible Malinche,
although they soon recovered. Cortés then concluded to retreat, but
this proved no less dangerous than the advance, and among others
Lezcano was dragged from his horse and killed, after having
distinguished himself for bravery and execution. The fort had
meanwhile sustained an active siege, and when the retreating corps
approached it they found more enemies in waiting, who, fearful of
losing their prey, rushed forward with greater fury than ever. An
entrance was finally effected, the forces in the temple being at the
same time withdrawn for the greater safety of themselves and the
fort.[768]
Swelling with triumph the Aztecs now directed all their efforts
against the Spanish quarters. Burning arrows and whirling brands
began to mingle with their missiles. Although the building itself was
of stone, the roof and portions of the outwork, and the Tlascaltec
camp in the yards, were of inflammable material, and more than
once the flames burst forth, filling the whole place with suffocating
smoke, and calling for the greatest exertions to subdue them. The
little water at hand could not be spared, and so earth was cast up,
and portions of the wall were torn down to check the fire and to stop
the gaps. The assault continued all day, till darkness sent most of the
warriors to their homes.[769]

FOOTNOTES
[744] Which speaks little to the credit of either Mary or Santiago. Bernal Diaz, Hist.
Verdad., 102. ‘Otro miraglo ... é fué muy notorio.’ ‘Ya sé que los incrédulos ... dirán
que mi ocupaçion en esto de miraglos, pues no los ví, es supérflua ... é yo hablo
que esto é más se puede é debe creer;’ for did the Indians have mysteries and
miracles, surely God, the virgin, and the saints could effect greater deeds. Oviedo,
iii. 511. He quotes from Livy and others concerning the reliable miracles of Roman
times. Prescott and others transfer the miracles to the siege under Cortés for
greater effect. Bustamante, the modern champion of the shrines of Mexico, who is
ready to uphold any deed attributed to these images, is rather incredulous about
miracles recorded in favor of Spanish cutthroats. See Chimalpain, Hist. Conq., i.
283 et seq. ‘Si no oviéssemos miedo de esse del caballo blanco, ya vosotros
estaríedes coçidos,’ cried some, Oviedo, iii. 511, while the more valiant added that
‘con todo esto si no soltays a Motecçumacin, y os vays luego, presto sereys
muertos.’ Gomara, Hist. Mex., 152.

[745] Cortés, Cartas, 127. Bernal Diaz, Hist. Verdad., 101-2, says seven, two
having been taken alive. ‘Mataron a Peña, el querido de Motezuma,... Valdibia, y
Juan Martin Narizes.’ Herrera, dec. ii. lib. x. cap. vii.

[746] ‘Tuvieron guerra con los yndios en esta Cibdad dos medios dias que fueron
jueves e viernes.’ ‘Guerra casy dos dias.’ Lopes and Flores, in Ramirez, Proceso
contra Alvarado, 131, 134. ‘Dieron bateria los Mexicanos á los Españoles siete
dias, y los tuvieron cercados veinte y tres dias.’ Sahagun, Hist. Conq., 29.
‘Cercados los españoles ocho dias.’ Id. (ed. 1840), 105. ‘Pelearõ y combatieron la
casa diez dias arreo.’ Gomara, Hist. Mex., 151. Torquemada explains this by
assuming two days of fighting and eight days of close siege, with attacks upon all
who sallied, i. 490. Sahagun states that Itzquauhtzin, governor of Tlatelulco,
accompanied Montezuma to the roof and spoke to the people, representing that
the Spaniards, as the mightier race, would inflict great injury on them unless they
ceased to fight, and that the emperor would be murdered. The Mexicans
responded with insults and missiles, but as the soldiers interposed their shields no
harm was done. They appear to have stopped active operations, however. Hist.
Conq., 28-9. The insults and missiles belong no doubt to the later siege under
Cortés. Duran states, however, that Montezuma was henceforth looked on as an
accomplice of the Spaniards, and discarded as a ruler, it being resolved to kill him
and his family. Hist. Ind., MS., ii. 463. According to Oviedo the news came at this
time of the victory over Narvaez, ‘é Monteçuma mandó á los indios que dexassen
de pelear é dexassen venir los otros chripstianos, porque á todos juntos
matassen; é aquesto se cree que fué su intento.’ iii. 512. That he may have urged
this with intent or as a bait is not unlikely, but it should apply equally to Narvaez’
men, since it appears that their defeat could not yet have been known. When
known, however, it must have had its effect. ‘Quando supieron nuestra vitoria,
cessarõ de dalle guerra.’ Bernal Diaz, Hist. Verdad., 101. Yet Gomara writes that
on learning of the large forces coming against them, the besiegers resumed the
attack at one time. Hist. Mex., 151.
[747] This spring was rediscovered during the reign of Viceroy Revilla Gigedo.
Bustamante, Mem. Piedad Mex., 7. A pool of sweet water was the chief
inducement for founding the city on this site in 1325. Native Races, ii. 559-61; v.
345 et seq.

[748] Cortés, Cartas, 126. The Spanish messenger from Mexico returned
wounded. Peter Martyr, dec. v. cap. v. With him, or about the same time, arrived
four chiefs sent by Montezuma to complain that Alvarado had attacked the nobles
without cause. While defending themselves six soldiers had fallen. Cortés told the
chiefs with stern countenance that he was returning to investigate the matter. A
letter was sent to Alvarado enjoining him to guard the emperor closely. Bernal
Diaz, Hist. Verdad., 101.

[749] And the zealous aid of Velazquez de Leon, who did so much toward
securing the Goazacoalco command for Cortés when Narvaez sent letters to win it
over. Cortés, Residencia, i. 409; ii. 6, 31, 165-6. He is accused by his enemies of
impiety and licentiousness, and as one whom the general favored above more
worthy men. Solis assumes that Sandoval nominally retained the command of the
coast province, Rangel being merely his lieutenant. Hist. Mex., ii. 108.

[750] ‘Llegò aquel dia [the first] à la Rinconada, el segundo caminò siete Leguas
... llegò à Tlaxcalla à diez y siete de Junio.’ Torquemada, i. 492. Herrera tells a
long story of suffering from hunger and thirst during the march through the desert.
Marquez and Ojeda were sent ahead to Tlascala for supplies, and came back with
1200 carriers laden with fowl, bread, fruit, and other refreshments. Cortés, among
others, was found starving, and a number were discovered on the road almost
dead. All, it seems, were rescued. dec. ii. lib. x. cap. vii. There are several reasons
for believing that Herrera, who is somewhat confused about this period, has
confounded the present march with the flight from Mexico to Tlascala of a month
later, when the people were really starving. This seems confirmed by the
erroneous statement that the troops arrived at Tlascala July 17th, the time,
according to Herrera’s own later statement, when they reached that place after the
flight. The account also intimates that the starving army was met among the Otomí
settlements, where food could readily be obtained, without the necessity for
Marquez and Ojeda to go ten leagues farther, to the capital, to obtain it. These and
other discrepancies are overlooked by all who refer to the march. Prescott dwells
in particular on the suffering from thirst, forgetful of the statement on a previous
page that the rainy season had begun about three weeks before, and that water
must have been abundant along the whole route. Solis finds that the effeminate
followers of Narvaez endured the suffering remarkably well. Hist. Mex., ii. 109.

[751] ‘Embiò a fray Bartolome de Olmedo ... a Motezuma.’ Herrera, dec. ii. lib. x.
cap. vii. It is unlikely that so valuable a man would have been sent while affairs
were threatening.

[752] Narvaez landed with about 900 soldiers, including 80 horsemen, 120 with
bows, and 80 with fire-arms. A number had been picked up at Cozumel, but an
equal proportion perished by shipwreck. Cortés had about 250 men, and 200 were
probably left on the coast, of garrison, guards, and invalids. To the 950 soldiers
thus taken may be added at least 150 from the crews of the dismantled or
destroyed vessels. Prescott manages to mysteriously increase the horses and
projectile arms beyond what he previously assigns to Narvaez and Cortés. One
thousand infantry, 100 horsemen, and many allies, say Gomara and Herrera. The
Probanza de Lejalde, in Icazbalceta, Col. Doc., i. 425, indicates 80 horses. Bernal
Diaz places the figures as high as 1300 soldiers, including 96 or 97 horsemen, 80
archers, 80 musketeers, and 2000 Tlascaltec warriors; while Cortés, with a
prudent desire to cover the subsequent losses at Mexico, reduces them to 500
infantry and 70 cavalry. Solis gives the reason of the profound historian for the
small number of allies taken to Mexico: ‘Por no escandalizar á Motezuma, ó poner
en desesperacion á los rebeldes.’ Hist. Mex., ii. 111.

[753] The arrival at Tezcuco is evidence enough that a more northern road was
taken than the one previous. The middle route by Telapon appears somewhat
more direct for Mexico, but requires a detour to reach the Acolhua capital, and it is
not likely that an army in hurried march could afford to go out of its way. Hence the
Calpulalpan road must have been followed.

[754] See Native Races, ii. 162-3, 168-73, 569; v., passim; Motolinia, Hist. Ind.,
181-3.

[755] Cortés writes that he was on the point of sending a Spaniard to Mexico with
Tezcucan rowers, a chief being taken as hostage, but just then came this canoe.
Cartas, 127.

[756] Two, named Santa Clara and Pedro Hernandez, says Herrera, dec. ii. lib. x.
cap. vii.

[757] ‘Parò en Tepeaquilla, lugar a legua de Mexico.’ Id. Now the shrine of
Guadalupe. Prescott assumes that the Iztapalapan road was taken, as before, but
it was avoided probably because Cortés feared the fort Xoloc, which guarded the
centre. It was also longer, and had more movable bridges than the other
causeways.

[758] ‘Riñas por San Iuan pazes para todo el año.’ Vetancvrt, Teatro Mex., pt. iii.
139. The following day a dress was found hanging from a beam, and in a square a
pile of bread, with over 500 fowl, without a guard. This Cortés considered less
favorable, and said ‘que serian riñas de por San Iuan.’ Herrera, dec. ii. lib. x. cap.
vii.-viii.

[759] ‘Para dar á entender con esto que ellos estaban de guerra y muy ofendidos
de los españoles que él habia dejado.’ Sahagun, Hist. Conq. (ed. 1840), 108. His
account of deserted streets, applied to Cortés’ first arrival in Mexico, belongs no
doubt to this occasion. Duran argues that had the massacre taken place before
Cortés’ arrival he would not have been allowed to enter. Hist. Ind., MS., ii. 470.
Equally in the dark is Acosta, who assumes that the Indians were openly at war,
but the custom being to rest every fourth day, Cortés managed to enter during the
cessation of hostilities. Hist. Ind., 522. Oviedo looks on the non-resistance of the
Indians as a wile to entrap all the Spaniards. iii. 510.

[760] Herrera writes amusingly that Cortés shouted before the closed gates,
‘Open!’ ‘Who is there?’ demanded Alvarado. ‘I,’ replied Cortés. ‘Do you come with
full liberty, and power to command, as before?’ ‘Yes, and with victory, and greater
forces.’ Alvarado thereupon opened, kissed his hand, and surrendered the keys!
dec. ii. lib. x. cap. viii.

[761] ‘Con que aventuró la mayor parte de sus fuerzas.’ Solis, Hist. Mex., ii. 120.
Or perhaps because he had not had recourse to some safer measure, such as
arresting the leaders of the proposed plot, for hostages. ‘Le dixo muy enojado, q̄
era muy mal hecho, y grande desatino, y poca verdad ... no le hablò mas en ello.’
Bernal Diaz, Hist. Verdad., 102. Cortés would hardly have told him that he lied,
since his statements were confirmed by so many; they certainly were years after.
Vetancurt supposes that Cortés told him he should have allowed the emperor to
attend the festival, and should have awaited the attack rather than opened the
war. Teatro Mex., pt. iii. 140. ‘Dissimulo por no enojar a los que lo hizieron.’
Gomara, Hist. Mex., 151.

[762] Solis supposes, however, that the two met in friendly intercourse, and takes
Bernal Diaz and Herrera to task for asserting the contrary. Hist. Mex., ii. 112-14.
He refers to Cortés’ friendly message from Tezcuco, which is doubtful, and to
Gomara, who certainly allows Cortés to refer to Montezuma and his courtiers as
‘dogs.’ Hist. Mex., 153. In the testimony during Cortés’ residencia the discourtesy
is asserted. Cortés, Residencia, i. 42 etc. Clavigero suggests ‘ch’era d’uopo il far
sembianza di credere il Re colpevole dell’inquietudine.’ Storia Mess., iii. 121.

[763] Native Races, ii. 134-6; v. 462-4; ‘Il y joignait, comme de coutume, la charge
du grand prêtre de Huitzilopochtli.’ Brasseur de Bourbourg, Hist. Nat. Civ., iv. 309.
Gomara assumes that Cortés orders a chief to open the market. He, offended at
the insults used, goes only to rouse the people. Hist. Mex., 153. Ixtlilxochitl
supposes that the chief is offended at the reprimand administered for delaying to
open the market. Hist. Chich., 301. ‘Mandò Hernando Cortes llamar a los mas
principales caualleros, hizoles vna larga platica diziẽdo, que les perdonaua lo
passado, con que para adelãte fuessen ... amigos: ... sin responder ... se fueron.’
Herrera, dec. ii. lib. x. cap. viii.

[764] Duran enumerates some of the provinces summoned, as Xilotepec and

Matlaltzinco. ‘Mandó llamar á ... Encantadores y Hechiceros para que los
asombrasen y los mostrasen algunas visiones de noche, ... para que alli muriesen
de espanto.’ Hist. Ind., MS., ii. 462-6.

[765] Cortés describes first a brief attack, then a sally, succeeded by a fresh
assault on the fort, while Bernal Diaz and Herrera let a force advance against the
Indians before they reached the palace. I follow Cortés as the chief guide,
because his account of all this period was written while quite fresh in his mind, and
appears the most sensible and correct, while the other versions depend more or
less on faint recollection and hearsay. Cortés as a rule did not wait till the enemy
approached, but he may not have been prepared for the sudden attack. Yet it is
probable that he wished in his report to lay the responsibility of the attack upon the
enemy. I do not think Cortés inclined to misrepresent in general or without an
object.

[766] For war customs see Native Races, ii. 400-32.

[767] ‘Sinistræ manus digitis duobus mutilis.’ Peter Martyr, De Insvlis, 5. Cortés
also says ‘quedé manco,’ Cartas, 142, 131, yet Cano ridicules the statement, and
declares ‘nunca fué manco dellos ni le faltan.’ Oviedo, iii. 551-2.

[768] Cortés, Cartas, 128-9. Bernal Diaz speaks of a sally by Ordaz, with 400
men, before the natives reach the fort. He is sorely beset, as related, and retires
with a loss of 23 soldiers. Hist. Verdad., 102-3. Herrera’s account, as usual, is
confused. After Rio returns wounded to report the uprising of warriors, five
horsemen rally to reconnoitre. The following day Ojeda and Marquez set out to
forage, and come to announce the approach of assailants. Two hundred men now
make a sortie and kill a multitude without losing a man. dec. ii. lib. x. cap. viii. It is
useless to follow this author here except for incidents.

[769] Bernal Diaz places the dead at 35 soldiers, besides a large number of allies.
Eight fell during the first discharge upon Ordaz’ party and fifteen more before he
regained the fort, while of the 46 wounded among the garrison twelve died. Hist.
Verdad., 103. Cortés, with his usual prudent suppression of evil news, allows four
deaths and over 80 wounded. He never refers to those who die of wounds.
Gomara follows him. Hist. Mex., 153.
 CHAPTER XXIV.
FIGHT UPON THE TEMPLE SUMMIT.

June, 1520.

The Natives Continue the Assault—Their Fierce Bravery—The Spaniards

Build Turrets—Still the Mexicans Prove too Strong for Them—
Montezuma Called to Intercede—He is Insulted and Stoned by his
Subjects—Cortés Attempts Egress by the Tlacopan Causeway—Failure
of Escobar to Take the Pyramid—Cortés Gains the Slippery Height—
The Gladiatorial Combat there.

At dawn the assault was renewed with the same fierceness as

before, and with even less regard for the sweeping volleys of the
cannon, which were fired without aim into the packed masses of the
natives, bringing them down by the score. The gaps were quickly
closed, and the rapidly repeated shots seemed to make no more
impression on the surging mass than pebbles dropped into the
boiling surf. It was a critical time for Cortés, who seemed not yet to
recognize the full extent of the danger. He felt the necessity of open
communication with the mainland, for obvious reasons, and to this
end, in the course of the morning, he arranged another sortie like
that of the preceding day, but in one direction only. The Indians
retired, as before, into lanes and buildings, and beyond canals,
raising; the bridges behind them. Barricades having been thrown up
to impede the advance since the last sally, some guns were brought
to the front, and with their aid a few of the obstructions were
demolished and more than one bridge was gained, together with a
number of houses, to which the torch was applied. The discharges
from the roofs were kept up with galling pertinacity, although the
effect was not so fatal as during the preceding day, owing to the
experience then gained. The forces below, who had retired before
the charges of the advance, rolled back like recurring billows, and in
ever increasing number, upon flank and rear, as if to overwhelm
them. Such were their numbers and stubborn recklessness that ten
thousand Hectors and Rolands, says Bernal Diaz, could have
effected nothing against them, and soldiers from the Italian war
swore that never among Christians or Turks had they witnessed
such fierceness. Considerable alarm was also created by the
appearance of long pikes, like those of the Chinantecs, directed
particularly against the cavalry. Fortunately they were not numerous,
nor were the pikemen sufficiently practised to be very dangerous.
Worn out in the unequal contest Cortés turned to gain his camp,
which was no easy task, since the natives were massed in greatest
number in the rear, determined to cut off retreat. The fort was gained,
nevertheless, although hardly a man escaped uninjured, while about
a dozen were killed; one unfortunate soldier being captured and
sacrificed in full view of the garrison.[770]
It had been found that the greatest danger to the sallying parties
came from the roofs, whence discharges could be directed with
comparative impunity and with greater effect than from the ground.
In order to counteract them, three mantas, or movable turrets, were
planned, whose occupants were to devote their attention wholly to
clearing the roofs of assailants. The completing of these machines
and other preparations kept the garrison busy all the 27th of June, so
that no sally was made. Ascribing this to fear, the Indians became
more pressing in their assault, and more profuse with their insults.
“Dogs!” cried some, “of hunger and thirst shall you die!” Others
shouted, “Here is a piece of my tortilla!” at the same time flinging
them unpalatable fragments of toasted bread. “Eat it, you perjured
villains, who can fight only on the backs of animals; for soon shall
your own bodies be cut up for food and cast before the beasts!” The
enemy appeared more numerous than ever, and the roofs and yards
were literally covered with their missiles. The greatest danger to the
Spaniards lay in the operations of the battering and mining parties,
who, regardless of bullets from the wall turrets, sought steadily to
open fresh breaches. Conspicuous in the hostile camp was a richly
dressed Indian, surrounded by a staff of finely attired warriors, who
seemed to direct operations, and whose orders were received with
the deepest reverence. This personage the prisoners declared to be
Cuitlahuatzin, and the next in rank Quauhtemotzin.[771] Charge after
charge was made by his direction, and with a vehemence that
threatened to carry everything before it; and loudly rang the yells,
whether of delight at some advantage gained or of fury over a
repulse.
Thus the besieged were harassed beyond endurance. Large
numbers were wounded, and all were exhausted from vigils, hard
fighting, trying work, and the want of sufficient water and food; for in
view of the stoppage of supplies, rations had been reduced. Those
of the Narvaez expedition were particularly disheartened, and
bestowed freely their maledictions, first on Velazquez, who had sent
them to such a country, and then upon Cortés, whose promises of
golden treasures and well stocked encomiendas had lured them to
this plight. Perceiving, however, that unity of purpose alone could
save them, they stifled regrets and showed Cortés that something
must immediately be done to stay the onslaught, lest the building fall
about their ears. It was exceedingly disagreeable, but it must be
done; the proud Spanish general must sue to the greatly injured
captive king, pleading for his influence in behalf of peace.[772]
Montezuma had all these days been closely confined to his rooms
brooding over the insults offered him, and apparently indifferent to
the danger from without. When the message was brought he sullenly
said, “Why does Malinche address himself to me, who care no
longer for life? I will not listen to him, for he it is who has brought me
into this plight.” He intimated further that the promises of the general
could not be relied upon, and that his words carried a double
meaning. Olmedo and Olid, who had come to urge the request, had
recourse to soothing words and persuasion, and succeeded in
mollifying him somewhat.[773] He replied, however, that it was
probably too late to appease the Mexicans by promises. “They have
now a new leader,” he said, “who is resolved to spare no Spaniard,
and I believe that you have all to die in this city.”[774] Nevertheless he
yielded, and as befitted the momentous point at issue, he arrayed
himself in the richly bejewelled robes of state, and placed upon his
head the mitred copilli, beneath whose precious feathers gleamed
the golden plate.[775] Carefully guarded he ascended to the roof and
stepped to the parapet, preceded by a courtier who bore the triple
wand of the empire, as was customary on such occasions. Instantly
the tumult was hushed, even before the leaders could issue orders
for a stay of hostilities; instantly a thousand heads were bent in
humble adoration before the august majesty of their sovereign. This
attitude, however, was assumed but for a moment; soon these same
heads were held higher than ever. Then the chiefs drew near to
listen to the unhappy monarch.
Montezuma had appeared with a feeling of mingled fear and
doubt as to what his reception might be, and he did not fail to
observe that the accustomed reverence was shown only for an
instant, involuntarily, as it were, and that silence was prompted
rather by curiosity than respect. The urgency of the moment
demanded that he should speak, but it was rather as supplicant than
ruler that he turned to his people.
 “You are in arms, my children,” he said, “in hot battle. Why is
this? You will be slain, and there will be heard throughout the land for
many years the wail of wives and little ones. You would give me my
liberty, and I thank you. You do not turn from me in anger, and I
thank you. You have not chosen another king in my stead, and I
thank you. Such an act would displease the gods, and bring
destruction on all. And see! I am no prisoner. Go your way; I am free.
By divine command I must remain the guest of the Spaniards yet a
little longer, and you must not molest them, for soon they will return
whence they came. Alas, my people, my country, my crown!”[776]
With a heavy sigh, and midst copious tears, his head fell on his
breast. The monarch’s strength had indeed departed. The people
knew that he spoke falsely, that he was little better than imbecile,
unfit to be their sovereign. Oh, if he but had the good fortune to die
while helping them to grind to powder these hated enemies! Only a
little while ago his words would have been received as the
utterances of a deity. Now the scales had fallen from their eyes, and
they saw him as he was. They could bear no more. Jeers and
groans reached him from every direction. “Coward! chicken! Woman
to the Spaniards, fit only for the gown and the spindle! Murderer of
your nobles!” Such were the cries which now reached his ears as he
stood stupefied with agony. Presently came a shower of arrows and
stones, and before the Spanish guard could interpose their shields
several missiles struck him, one on the left temple, which caused
him to fall senseless into the arms of the by-standers.[777]
Startled by the crime they had committed, awe fell upon the
multitude as the stricken sovereign was led away. Taking advantage
of this feeling Cortés beckoned the chiefs to a parley with a view to
explain what Montezuma had intended to convey. He had always
wished them well, he said, and felt grieved to wage war for what had
occurred during his absence. He desired peace, yet the desire was
not prompted by fear, but by consideration for their safety and that of
the city. The chiefs replied that the Spaniards must leave the country
to the natives, and depart at once. That was exactly what they
wished to do, replied Cortés, but they would not be driven away. If
the Mexicans desired them to go, they must abandon the siege, tear
down the barricade, and retire to their homes; they must likewise
restore the bridges and supply provisions. To this the chiefs declined
to listen, declaring that they would not lay down their arms so long as
there was a Spaniard left on whom to use them.[778] The evident
desire of the besieged for peace served only to encourage the
Indians, and the assault was renewed with an increased ardor that
taxed the defenders to the utmost.
And now, whatever the cost, a way out of this place must be
opened. Cortés knew of three causeways which led to the mainland,
the only means of exit for his forces. He knew that they were low and
narrow, exposed on both sides to the attacks of canoe fleets, and
intersected by a number of bridges which were perhaps by this time
raised. Each of these openings was an almost impassable chasm.
The southern causeway to Iztapalapan was two leagues in length,
and provided with seven drawbridges, besides a strong fortress,
which rendered it impassable to an enemy. The northern, leading to
Tepeyacac, was one league long, while the shortest, conducting
westward to Tlacopan, half a league distant, was broken by only
three bridges.[779] Cortés resolved to undertake the passage by this
last named causeway. During the night had been completed three
mantas, of light framework and planks, each to hold twenty
musketeers and archers, with which it was hoped to check the
assailants on the roofs. These mantas were built with two chambers,
provided with loop-holes; the upper ranged on a level with the
house-tops of ordinary one-story buildings of the city, and had doors,
so as to allow of sallies upon the roofs.[780]
 The following morning, June 28th, Cortés placed himself at the
head of five hundred Spaniards and over three thousand allies, and
took the direction of the Tlacopan causeway.[781] By a sudden
charge the cavalry drove back the Indians and allowed the free
passage of the mantas, which were drawn and pushed by
Tlascaltecs, and protected by bodies of infantry. A corps of pioneers
accompanied them with pickaxes, mattocks, crow-bars, and ladders,
to destroy barricades and walls, and to scale buildings. Four cannon
were also brought. The rear was protected by a portion of the
cavalry. The Aztecs were at first amazed at the curious moving
turrets, and feared that they might contain more terrible destroyers
even than the grape-charged guns; but finding them less dangerous,
they continued their efforts, and fast and thick poured the stones and
arrows on the line of advance, particularly on the engines, which
were severely damaged. The march proceeded, however, with more
or less interruption till a raised bridge was reached on the main road,
where the Indians had gathered in vast numbers, with an evident
determination to check the expedition. The turrets were brought
alongside the houses adjoining the canal in order to clear the
crowded roofs, but regardless of the volleys from the firelocks, the
natives on the roofs plied their missiles only the faster, letting fly
heavy rocks[782] upon the engine coverings, so as to render them
untenable and hinder the manœuvring of the cannon. This success
enabled the warriors beyond the canal and behind the barricades to
maintain their assault with great effect, and to prevent a further
advance. They gained a considerable advantage by a change of
tactics in directing the missiles to a great extent against the legs of
the Spaniards, to their serious discomfiture.[783] After spending the
greater part of the forenoon in an unsuccessful attempt to destroy
the houses nearest the canal, and to fill a passage across it, the
troops retired to the fort greatly disheartened. Even the Tlascaltecs,
who were usually so glib of tongue in replying to Aztec taunts, for
once held their peace.[784]
Meanwhile the battle raged fiercely round the fort. The temple in
front of it, since its evacuation by the Spaniards, had been occupied
by some five hundred Mexicans, chosen men,[785] who introduced a
large quantity of ammunition and supplies, and began to batter the
besieged quarter. It was this shower which had first damaged the
turrets and harassed the march. Perceiving the danger of leaving so
commanding a position in hostile hands, Cortés had sent his
chamberlain, Escobar, with one hundred men[786] and some allies to
dispossess them. This was no easy task, for the pyramid was of
great extent and over eighty feet in height, composed of a series of
abrupt stone terraces, each receding about six feet from the one
beneath, and so arranged that the ascent led along the entire circuit
of each ledge before the steps conducting to the next could be
gained.[787] Twenty men, says Cortés, could have held it against a
thousand; yet the one hundred were to attempt it. Step by step they
fought their way, beneath showers of arrows, and against javelins,
and sword and lance thrusts from the upper ledges. More dangerous
even than these weapons were the cumbrous missiles in the shape
of heavy stones and timber which came crashing down upon them.
Three times[788] did Escobar lead his men to the charge, only to see
them repulsed and sent rolling down the steps and over the ledges.
Finally he sent word to Cortés that the task was impracticable. The
general received this notice while vainly battling at the canal, and he
eagerly seized upon it as excuse for changing his base of operation.
He hurried to the spot, threw a cordon round the pyramid, and
although badly wounded in the left hand he immediately led his men
to the charge. The Spaniards were making fair progress, when two
heavy beams, which had been reserved at the summit for the last
extremity, were loosened and sent tumbling down the side, so
directed as to sweep to destruction the assailants along its entire
length. At about the centre of their terrible passage, full before them,
stood Cortés. Immediate death for himself and his brave comrades
seemed inevitable, when behold! by some unseen finger the beams
were turned end foremost and shot harmlessly through the opening
made for them by the soldiers. “Thanks be to God and the virgin,
whose image was placed in this tower!” cried Cortés, as without the
loss of a moment he sprang forward and speedily gained the
summit. There the fight assumed the form of a gladiatorial combat, a
hand-to-hand and line-to-line conflict, poised in mid-air on this
narrow slippery summit, and in full view of the whole city. As if by
common consent the combatants below paused in their bloody work
and stood breathless, lost in the more thrilling sight above.
At the eastern end of the platform stood the two three-story
chapels, over fifty feet in height, originally dedicated to Huitzilopochtli
and Tezcatlipoca. Against this the Indians had massed themselves,
fierce in their desperation. The Castilians had taken their stand at the
other end. It was an awful situation, dire destruction being inevitable
to one side or the other. With nerves and sinews strained to their
utmost tension, they stood between attacks regarding each other,
regarding every motion, anon picking from the other’s number with
javelin, dart, or musket, as they were able. It was with difficulty the
Spaniards could stand, and there was no railing round the slippery
height; but fortune again assisted by unveiling the sun and sending
its blinding rays full in the face of the enemy. Every now and then the
soldiers charged in solid phalanx into the centre of the opposite
mass, only to be obliged to retire under the pressure of its weight,
and to receive the counter-charge, encouraged by wildly
gesticulating priests, who flitted to and fro in bloody robes and
dishevelled hair. Aware of the inferiority of their weapons, the natives
sought rather to seize hold of the Spaniards, singly or in groups, and
with the recklessness of doomed men to hurl themselves with their
victims from the dizzy height. In one instance Cortés himself was
selected for this terrible fate. Inspired to martyrdom and revenge, two
young nobles watched their opportunity, and approached him on
their knees, as if pleading for mercy. Ere he had time to consider the
situation they had seized him in their arms and were struggling to
gain the edge. One moment more and he would have been dashed
to death, but by putting forth his whole strength, nerved by
desperation, he succeeded in freeing himself from their grasp. Ojeda
was singled out for a similar attempt, and would have perished had
not a Genoese come to his aid.[789]
For three hours the struggle lasted, while one Indian after
another was picked off by the bullet and the arrow, or pierced by the
pike and sword, or sent headlong over the platform, either to be
crushed by the fall or to be transfixed by the Spaniards on the ledges
below. As their number diminished, many a one sought the higher
martyrdom by leaping from the sacred spot into paradise. Thus
melted away that fated band of Aztec warriors. At the portal of
Huitzilopochtli’s chapel fell the last defender; and two priests, one of
them the high-priest, alone remained to offer themselves as
captives. On entering the chapel consecrated to the virgin no traces
appeared of the holy emblems, only evidences of idolatrous rites,
and upon the altar stains from the blackened hands of the temple
attendants.[790] In the adjoining chapel the war-god was found
reinstalled in all its glittering hideousness. Some consolation for this
sacrilegious intrusion was offered to the victors in despoiling it of the
rich ornaments, while the cacao and other provisions stored here by
the garrison proved a prize to the half-famished Spaniards. The
Tlascaltecs, so long deprived of meat, pounced upon the bodies of
the slain heroes to secure them for a feast, which should not only
satisfy the cravings of hunger, but infuse their hearts and minds with
some of the qualities of the valiant dead.[791] The chapels were then
fired. The upper portion of the structure being of wood, the flames
rose in columns heavenward, heralding the triumph of the Spaniard,
and striking the Indian with awe. It was a great and thrilling feat, this
fight upon the temple top; and so the natives regarded it, their heart,
and mind, and paintings being all stained sanguine over its
remembrance.[792]

FOOTNOTES
[770] Bernal Diaz mentions the death of ten or twelve, but Cortés acknowledges
only three score of wounded. On this occasion, apparently, Herrera allows Cortés
to gain Tacuba, whither he might have retreated in safety with all his forces and
wealth; yet he states that the return fight proved most severe, the fort being
regained with difficulty, after the loss of two guns and several soldiers, one taken
alive. dec. ii. lib. x. cap. ix. Solis manages to transform the operation into a victory,
wherein Cortés stays the slaughter out of mercy. Prescott is quite arbitrary in the
use of the chronicles. He combines the incidents of several days into one and
transposes them at pleasure, with the sole aim apparently of presenting an
exciting description of what the siege might have been. A few facts are elaborated,
and the rest sacrificed to style.

[771] Marina asked Montezuma if a new king had been chosen, but he did not
think they would elect one while he lived. Vetancvrt, Teatro Mex., pt. iii. 141.

[772] ‘Fue acordado de demandalles pazes para salir de Mexico, ... acordò
Cortes, que el gran Monteçuma les hablasse.’ Bernal Diaz, Hist. Verdad., 104.
‘Muteczuma ... dijo que le sacasen ... y que él hablaria á los capitanes.’ Cortés,
Cartas, 129-30. The latter statement may be Herrera’s authority for saying that
Montezuma was the first to propose speaking to the Mexicans. dec. ii. lib. x. cap.
x. Observing Cuitlahuatzin’s regal authority over the besieging forces, Montezuma
was seized with a fit of jealous alarm for throne and life. ‘Chiamò Cortès, ...
pregandolo instantemente di non differir più la sua partenza.’ Clavigero, Storia
Mess., iii. 124. This implies that the emperor was not aware of the vain efforts
made to open communication with the mainland, or even to approach it. Cortés
had to urge him in any case to speak to his subjects, an unwelcome task in view of
his declining influence and of the merely partial success of the former appeal.

[773] Among other reasons it was represented that Cortés was not to blame for
the late massacre. ‘Que si la indignacion de los mexicanos podia templarse con el
castigo de los culpados ... le prometia castigar.’ So says the native version of
Tezozomoc, Recop. tradiciones, MS., cap. vi.; Chimalpain, Hist. Conq., 287-8.

[774] He felt no eagerness to plead in behalf of those who had caused all his
misfortunes, and he was only too conscious that his pusillanimity must have
degraded him in the eyes of his subjects, while the elevation of his brother to the
leadership must have diminished the influence which till then may have remained
with him. He could hardly avoid a feeling of jealousy at the thought of this
elevation; and if he, during an impulse of anger against Cortés, had counselled the
proceedings of Cuitlahuatzin, he now felt probably both grieved and terrified at the
storm he had raised. He also harbored a wholesome fear of Malinche, and the
prospect of his speedy departure helped to stir anew the embers of hope. All might
yet be well: the capital might be spared further desolation, and he again resume
his former grandeur.

[775] See description of his first meeting with Cortés, Native Races, ii. This
appearance of the emperor took place on the 27th of June, as Cortés states, but
Bernal Diaz, Herrera, and Ixtlilxochitl place it respectively on the 5th, 6th, and 7th
day of the siege.

[776] Herrera, dec. ii. lib. x. cap. x.; Bernal Diaz, Hist. Verdad., 104. ‘No
molestàsen à los estrangeros y fuésen sus amigos, pues su persona corria
riesgo.’ Tezozomoc, Recop. tradiciones, MS., cap. vi. Cortés, followed by Gomara,
gives him no time to speak ere the people assault.

[777] They would no longer recognize him as emperor, etc. Saying this, a chief
threw a stone which struck Montezuma on the forehead. Duran, Hist. Ind., MS., ii.
468. Acosta attributes this first throw to ‘Quicuxtemoc,’ the later king of Mexico.
Hist. Ind., 523. ‘Ma io nol credo,’ says Clavigero, Storia Mess., iii. 126. ‘Aunque vn
Castellano tenia cuydado de arrodelar a Motezuma ... le acertò vna piedra en las
sienes.’ Herrera, dec. ii. lib. x. cap. x. Had not the Spaniards held up a shield
before Montezuma the people would have known it was he and not thrown the
stone which killed him, says Cano, his later son-in-law. Oviedo, iii. 550. Gomara is
inclined to believe this, for his people ‘no lo quisieran hazer mas que sacarse los
ojos.’ Hist. Mex., 154. ‘Una saéta alcanzó al emperador en el estòmago que lo
atravezó por el baso, y una piedra le dió en la sien izquierda.’ The people would
never have thrown missiles, for they pitied him, and were prepared to obey his
injunctions, but Cacama, who stood behind the emperor, made signs that they
should continue the attack without regard for him or for the monarch. Tezozomoc,
Recop. tradiciones, MS., cap. vi. According to Bernal Diaz, the four chiefs who had
approached to confer with him expressed their sympathy for his misfortunes. They
had now chosen as leader ‘Coadlabacan, señor de Iztapalapa,’ and had sworn to
the gods to continue the war till all Spaniards were exterminated. Yet they prayed
daily to the gods for his safety, and if all went well he would more than ever be
their lord. They had hardly finished when showers of missiles fell, of which three
stones and an arrow hit him, on the head, arm, and leg. Hist. Verdad., 104.
‘Remorse succeeded to insult,’ and they fled, says Robertson, Hist. Am., 90, a
statement which Prescott improves by stating that the square before the fort was
left empty. But remorse must have been brief, for the main authorities, Cortés,
Gomara, Bernal Diaz, and Torquemada, either declare or intimate that the assault
never stopped. ‘No por eso cesó la guerra y muy mas recia y muy cruda de cada
dia.’ Cortés, Cartas, 130.

[778] ‘Esta Fortaleza casi no tiene exemplar,’ exclaims Lorenzana, forgetting that
Cortés’ firmness was due to the justifiable fear that a trap was intended. Cortés,
Hist. N. España, 136-7. Cortés concludes the sentence about Montezuma’s being
wounded by saying that he died within three days. He thereupon resumes the
account of parleys and siege operations, leaving the impression that these took
place after his death, while such was not the case. Nevertheless, Gomara,
Herrera, and others, Bernal Diaz not excluded, are misled, by this vagueness
evidently, into extending the siege and confounding the events, so that modern
historians have all more or less remained mystified. Solis assumes that during
Montezuma’s illness the siege was conducted only by straggling parties, the main
forces being occupied with crowning the new emperor. Hist. Mex., ii. 155-6. This is
probably due to a misconstruction of Bernal Diaz.

[779] ‘En esta auia tres no mas, y en la de Yztapalapà, siete.’ Herrera, dec. ii. lib.
x. cap. xi.; Native Races, ii. 561 et seq.

[780] Cortés, Cartas, 130, 133. ‘Quatro ingenios ... en que pudiessen yr veynte y
cinco hombres,’ says Bernal Diaz, Hist. Verdad., 103. ‘Tres mantas ... cõ sus
ruedas; leuauan treynta hombres a cada vna, cubierta con tablas gruessas de tres
dedos.’ Herrera, loc. cit. Drawn by men within, adds Peter Martyr, dec. v. cap. v.
‘Cabia cada vno veynte hombres, con picas escopetas y ballestas y vn tiro.’
Gomara, Hist. Mex., 154.

[781] Herrera unwisely assumes that the three towers with their forces were
respectively directed against the three causeway approaches.

[782] ‘De tres y quatro arrouas, que maltrataron a los que yuan en los ingenios, y
rompieron las tablas.’ Herrera, dec. ii. lib. x. cap. xi.

[783] ‘Hirieron a mas de docientos Castellanos.’ Id., cap. ix.

[784] ‘Nos mataron un español y hirieron muchos.’ Cortés, Cartas, 130-1.