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 New in the
5th 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 overhauled the job-order costing chapter to better
explain how companies use multiple overhead rates to
apply overhead costs to individual jobs. This chapter now
has a stronger managerial accounting orientation because
it focuses more on managerial decision making and less on
financial statement preparation.
• We reviewed all end-of-chapter exercises and problems
and revised them as appropriate to better function within
Connect.
• We added eight 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
The Prologue has added coverage of the CGMA exam and an
updated summary of the CMA exam content specifications. It
also contains the updated Institute of Management Accoun-
tants’ Statement of Ethical Professional Practice.
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
We added a new appendix that explains how to analyze mixed
costs using the high-low method and the least-squares
regression method.
Chapter 3
This is a new chapter that explains how to use a job-order
costing system to calculate unit product costs. It describes how
to use plantwide and multiple overhead 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 4
We added new text that better highlights this chapter’s reliance
on actual costing and contrasts it with the job-order costing
chapters’ reliance on normal costing.
Chapter 5
This chapter has a new appendix titled Time-Driven Activity-Based
Costing: A Microsoft Excel-Based Approach.
Chapter 6
We revised the front-end of the chapter to better highlight the
six key concepts that provide the foundation for effective
decision making. We also revised the end-of-chapter exercises
and problems to better dovetail with Connect and streamlined
the coverage of sell or process further decisions to aid student
comprehension. In addition, we relocated the Pricing appendix
to this chapter and added new coverage of customer latitude
and pricing and value-based pricing.
Chapter 7
We revised many end-of-chapter exercises and problems and
extensively revised the formatting within Connect throughout
all the chapters (not just Chapter 7) to allow students greater
flexibility when choosing their preferred approach for solving
problems. For example, students can now use whatever discount
factors they wish (single sums or annuities) to calculate net
present values.
Chapter 8
The end-of-chapter materials include three new exercises/
problems (8-17, 8-18, and 8-27).
Chapter 9
We revised numerous end-of-chapter exercises and problems
to better align them with Connect.
Chapter 10
This chapter includes four new In Business boxes.
Chapter 11
This chapter includes four new In Business boxes.
vii
Noreen’s Powerful Pedagogy
Managerial Accounting for Managers includes pedagogical elements that engage and instruct students without
cluttering the pages or interrupting student learning. Noreen’s key pedagogical tools enhance and support students’
understanding of the concepts rather than compete with the narrative for their attention.
First Pages

Integration Exercises 597

Integration Exercises: An Overview

Successful managers rely on an integrated set of managerial accounting competencies to solve

complex real-world problems. Therefore, we have created eight integration exercises to help you

NEW* Integration Exercises

develop these critically important managerial skills. This collective group of exercises will enable
you to see how the learning objectives throughout the book interrelate with one another. As you
begin to understand “how it all fits together,” you will start the exciting evolution from “number
cruncher” to a manager-in-training.

We have added eight new exercises (located in the back of the book) that
Integration Exercises
INTEGRATION EXERCISE 1 Activity Variance, Spending Variance, Materials Price Variance, Materials
Quantity Variance LO9–1, 9–2, LO9–3, LO10–1
Southside Pizzeria wants to improve its ability to manage the ingredient costs associated with mak-
ing and selling its pizzas. For the month of June, the company plans to make 1,000 pizzas. It has

integrate learning objectives across chapters. These exercises will increase the
created a planning budget that includes a cost formula for mozzarella cheese of $2.40 per pizza. At
the end of June, Southside actually sold 1,100 pizzas, and the actual cost of the cheese that it used
during the month was $2,632.
Required:
1. What is the mozzarella cheese activity variance for June?

students’ level of interest in the course because they forge the connections
2. What is the mozzarella cheese spending variance for June?
3. Assume that the company establishes a price standard of $0.30 per ounce for mozzarella
cheese and a quantity standard of eight ounces of cheese per pizza. Also, assume that Southside
actually used 9,400 ounces of cheese during the month to make 1,100 pizzas.
a. What is the materials price variance for mozzarella cheese for June?
b. What is the materials quantity variance for mozzarella cheese for June?

across chapters. Rather than seeing each chapter as an isolated set of learning
c. What is the materials spending variance for mozzarella cheese for June?

INTEGRATION EXERCISE 2 Different Costs for Different Purposes, Cost-Volume-Profit-Relationships

LO1–1, LO1–2, LO1–3, LO1–4, LO1–5, LO1–6, LO2–1, LO2–3, LO2–5, LO2–7, LO2–8
Hixson Company manufactures and sells one product for $34 per unit. The company maintains no
beginning or ending inventories and its relevant range of production is 20,000 units to 30,000 units.

objectives, students begin to see how “it all fits together” to provide greater
When Hixson produces and sells 25,000 units, its unit costs are as follows:

Amount
Per Unit

Direct materials . . . . . . . . . . . . . . . . . . . . . . . $8 .00

managerial insight and more effective planning, controlling, and decision making.
Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . . . $5 .00
Variable manufacturing overhead . . . . . . . $1 .00
Fixed manufacturing overhead . . . . . . . . . . $6 .00
Fixed selling expense . . . . . . . . . . . . . . . . . . $3 .50
Fixed administrative expense . . . . . . . . . . . $2 .50
Sales commissions . . . . . . . . . . . . . . . . . . . . $4 .00

The integration exercises also are tailor-made for flipping the classroom because
Variable administrative expense . . . . . . . . . $1 .00

Required:
1. For financial accounting purposes, what is the total amount of product costs incurred to make
25,000 units? What is the total amount of period costs incurred to sell 25,000 units?
2. If 24,000 units are produced, what is the variable manufacturing cost per unit produced? What
is the average fixed manufacturing cost per unit produced?
3. If 26,000 units are produced, what is the variable manufacturing cost per unit produced? What
is the average fixed manufacturing cost per unit produced? they offer challenging questions that require students to work in teams to derive
nor69487_Integration_Exercises_597-604 597 08/31/18 10:08 AM
solutions that synthesize what they have learning throughout the semester.
Confirming Pages

44 Chapter 1

The Foundational 15
LEARNING OBJECTIVES 1–1, 1–2,
1–3, 1–4, 1–5, 1–6
Martinez Company’s relevant range of production is 7,500 units to 12,500 units. When it produces
and sells 10,000 units, its average costs per unit are as follows:
The Foundational 15
Each chapter contains one Foundational 15 exercise that includes
Average Cost
per Unit
Direct materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . $6 .00
Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3 .50
Variable manufacturing overhead . . . . . . . . . . . . $1 .50
Fixed manufacturing overhead . . . . . . . . . . . . . . . $4 .00

15 “building-block” questions related to one concise set of data. These exercises

Fixed selling expense . . . . . . . . . . . . . . . . . . . . . . . $3 .00
Fixed administrative expense . . . . . . . . . . . . . . . . $2 .00
Sales commissions . . . . . . . . . . . . . . . . . . . . . . . . . $1 .00
Variable administrative expense . . . . . . . . . . . . . . $0 .50

can be used for in-class discussion or as homework assignments. They are

Required:
1. For financial accounting purposes, what is the total amount of product costs incurred to make
10,000 units?
2. For financial accounting purposes, what is the total amount of period costs incurred to sell
10,000 units?
3. If 8,000 units are produced and sold, what is the variable cost per unit produced and sold?
4. If 12,500 units are produced and sold, what is the variable cost per unit produced and sold?
5. If 8,000 units are produced and sold, what is the total amount of variable costs related to the
units produced and sold?
6. If 12,500 units are produced and sold, what is the total amount of variable costs related to the
units produced and sold?
found before the Exercises and are available in Connect.
7. If 8,000 units are produced, what is the average fixed manufacturing cost per unit produced?
8. If 12,500 units are produced, what is the average fixed manufacturing cost per unit produced?
9. If 8,000 units are produced, what is the total amount of fixed manufacturing cost incurred to
support this level of production?

“This is my favorite part of the text. Its really helps students to

10. If 12,500 units are produced, what is the total amount of fixed manufacturing cost incurred to
support this level of production?
11. If 8,000 units are produced, what is the total amount of manufacturing overhead cost incurred
to support this level of production? What is this total amount expressed on a per unit basis?
12. If 12,500 units are produced, what is the total amount of manufacturing overhead cost incurred

go through all the concepts in the chapters with the same data.
to support this level of production? What is this total amount expressed on a per unit basis?
13. If the selling price is $22 per unit, what is the contribution margin per unit?
14. If 11,000 units are produced, what are the total amounts of direct and indirect manufacturing
costs incurred to support this level of production?
15. What incremental manufacturing cost will Martinez incur if it increases production from

Shorter exercises that only do one step are okay but as a wrap
10,000 to 10,001 units?

Exercises
EXERCISE 1–1 Identifying Direct and Indirect Costs LO 1–1
Northwest Hospital is a full-service hospital that provides everything from major surgery and
emergency room care to outpatient clinics.
Required:
up, the Foundational 15 is much better.”
For each cost incurred at Northwest Hospital, indicate whether it would most likely be a direct cost

Sandra Copa, North Hennepin Community College

or an indirect cost of the specified cost object by placing an X in the appropriate column.

Confirming Pages

Opening Vignette
nor69487_ch01_023-066 44 07/27/18 10:15 AM

2
Chapter

Each chapter opens with a Business Focus feature that provides a real-world
Cost‐Volume‐Profit example for students, allowing them to see how the chapter’s information
© stevecoleimages/Getty Images

Relationships
Kid Rock and Live Nation Entertainment Pull the
CVP Levers
and insights apply to the world outside the classroom. Learning Objectives
alert students to what they should expect as they progress through the
LEARNING OBJECTIVES

After studying Chapter 2, you should

be able to:

LO 2–1 Explain how changes in activity affect

chapter.
contribution margin and net operating
income.
B US I N E S S FO C US

LO 2–2 Prepare and interpret a cost-volume-

profit (CVP) graph and a profit graph.
LO 2–3 Use the contribution margin ratio
(CM ratio) to compute changes in
contribution margin and net operating
income resulting from changes in
sales volume.
LO 2–4

“It is a good readable book for non-accounting majors who are

Show the effects on net operating
income of changes in variable costs,
fixed costs, selling price, and volume.
LO 2–5 Determine the break-even point.
LO 2–6 Determine the level of sales needed to
© Everett Collection Inc/Alamy
achieve a desired target profit.

taking a managerial accounting course. The book is seasoned

Live Nation Entertainment (LNE) owns and operates outdoor amphitheaters. When LO 2–7 Compute the margin of safety and
hosting music concerts the company usually pays a large amount of guaranteed upfront explain its significance.
compensation to musical artists to safeguard them from poor attendance. However, LO 2–8 Compute the degree of operating
rapper-turned-country rocker Kid Rock suggested a different financial arrangement. In leverage at a particular level of sales and
explain how it can be used to predict
exchange for bypassing his up-front fee (which usually ranged between $250,000 and

and generally pleasing to the eye and error free. Publisher

changes in net operating income.
$350,000) and agreeing to share a portion of his ticket revenues with LNE, Kid Rock
asked for a share of the revenues from food, drinks, and parking. He then lowered his LO2–9 Compute the break-even point for a
multiproduct company and explain
ticket prices to $20 in an effort to increase attendance and the amount of discretion-
the effects of shifts in the sales mix
ary spending per customer for food, drinks, and his $20 concert T-shirts. Kid Rock’s on contribution margin and the break-
ultimate goal was to design a financial model that gave fans a more affordable evening even point.

provides very good support.”

of entertainment while still providing his band and LNE adequate profits. ■ LO2–10 (Appendix 2A) Analyze a mixed cost
using a scattergraph plot and the high-
Source: John Jurgensen, “Kid Rock’s Plan to Change the Economics of Touring,” The Wall Street Journal, June 7, low method.
2013, pp. D1–D8. LO2–11 (Appendix 2A) Analyze a mixed cost
using a scattergraph plot and the
least-squares regression method.

67

Jan Duffy, Iowa State University

nor69487_ch02_067-128 67 08/11/18 11:11 AM

viii
“Very thorough coverage of common managerial accounting topics.”
Marco Lam, Western Carolina University
“This textbook would be very useful to our students because it helps
them apply common business concepts to real-world situations.”
Karen Bradshaw McCarron, Ph.D., Georgia Gwinnett College

Concept Overview Videos

New for the 5th edition of Noreen, the Concept Overview Videos cover each
learning objective through narrated, animated presentations. Formerly Interactive
Presentations, each Concept Overview Video has been enhanced for improved
accessibility and includes both the visual animations and transcript to accommodate Confirming Pages

all types of learners. The Concept Overview Videos also pause frequently to check
68 Chapter 2

for comprehension with assignable, auto-graded Knowledge Check questions.

C
Confirming Pages
ost‐volume‐profit (CVP) analysis helps managers make many impor-
tant decisions such as what products and services to offer, what prices to charge,
what marketing strategy to use, and what cost structure to maintain. Its primary
purpose is to estimate how profits are affected by the following five factors:
1. Selling prices.
26 Chapter 1
2. Sales volume.

In Business Boxes IN BUSINESS

3. Unit variable costs.
4. Total fixed costs.
CHEAP
5. MixPART COSTS
of products GENERAL MOTORS A FORTUNE
sold.
A direct material component part, called a detent plunger, is used by General Motors (GM) in the

These helpful boxed features offer a glimpse into how real

To simplify CVP calculations, managers typically adopt the following assumptions with
manufacture of its automobile ignition switches. The part, which can be installed by direct laborers
respect to these factors1:
in a matter of minutes, costs GM between $2.00 and $5.00 per unit to manufacture. However,
1. this
when Selling pricetrivial
seemingly is constant.
component Thepart
price of a product
caused or service
ignition system will
failures notkilled
that change as volume
12 people, its

companies use the managerial accounting concepts discussed

changes.
legal and financial impacts on GM became front-page news.
2. GM’s
Costs are linear
troubles and
include can becriminal
a federal accurately
probedivided
that is into variablewhy
investigating andthefixed components.
company did not
The variable
act sooner costs
to redesign, are constant
recall, and replaceperthe
unit and the
flawed fixed
detent costs Itareappears
plunger. constantas in total GM
though over
learnedthe
of entire
ignitionrelevant range. in its Chevy Cobalt in 2004, but it did not redesign the detent
switch failures

within the chapter. Each chapter contains multiple current examples. © Monty Rakusen/Getty Images
3. Intomultiproduct
plunger eliminate the companies,
problem untilthe mixFurthermore,
2007. of products the soldcompany
remainsdid constant.
not issue a recall for
cars that contained the faulty ignition switches until 2014. Beyond its legal matters, GM expects to
While these assumptions may be violated in practice, the results of CVP analysis are
spend $8 million replacing the ignition switches of 1.6 million recalled vehicles.
often “good enough” to be quite useful. Perhaps the greatest danger lies in relying on
simple
Source: JeffCVP analysis
Bennett, when
“For GM, a manager
Cheap Part Now is contemplating
a Pricey a large
Fix,” The Wall Street change in sales
Journal, March 13, volume
2014,
pp. B1–B2.
that lies outside the relevant range. However, even in these situations the CVP model can
be adjusted to take into account anticipated changes in selling prices, variable costs per
unit, total fixed costs, and the sales mix that arise when the estimated sales volume falls
outside the relevant range.
DirectToLabor Direct
help explain thelabor
role ofconsists of laborincosts
CVP analysis that can
business be easily
decisions, traced
we’ll nowtoturnindi-
our
vidual unitstoofthe
attention product.
case ofDirect
Acousticlabor is sometimes
Concepts, Inc., called
a company labor because
touchfounded by Prem direct labor
Narayan.
workers typically touch the product while it is being made. Examples of direct labor

Managerial Accounting in Action Vignettes MANAGERIAL

Prem, assembly-line
include who was a graduate workers student in engineering
at Toyota, carpentersatatthe thetime,
home started
builderAcoustic
KB Home, Concepts,
and
ACCOUNTING IN Inc., to market
electricians a radical
who install new speaker
equipment he had
on aircraft designed forLearjet.
at Bombardier automobile sound systems.
ACTION The Managers
speaker, called the Sonic
occasionally Blaster,
refer usestwo
to their an direct
advanced microprocessor
manufacturing cost and proprietary
categories as
The Issue
software
prime costs.toPrime
boost cost
amplification
is the sumtoofawesome levels. cost
direct materials Premand contracted
direct laborwith a Taiwanese
cost.

These vignettes depict cross-functional teams working together in electronics manufacturer to produce the speaker. With seed money provided by his family,
Prem placed an order
Manufacturing
The Sonic
cost category, Blaster
includes
with the manufacturer
Overhead
allwas
Manufacturing
an immediate
manufacturing
and ran
success,
costs except
advertisements
overhead,
anddirect
salesmaterials
in auto
the third
grew to the andpoint
magazines.
manufacturing
thatlabor.
direct Prem
moved
For the company’s
example, manufacturing headquarters out of his
overhead includes apartment
a portion of rawand into rented
materials knowquarters
as indirectin a

real-life settings, working with the products and services that nearby industrial
materials
a
Ethan
small
Allen
as well aspark.
sales staff
indirect
to
whose
sell
Helabor.
the
also hired

companies
cannot be
a receptionist,
Indirect
speakers to
where
materials are
retail stores.
easilyheorhad
an raw
The
accountant,
materials,
accountant,
used to make electrical connections in a Samsung HDTV and the glue used to assemble an
worked forchair,
several smallcosts acted as atraced
conveniently business
a sales
such as
Bob
manager,
the solder
Luchinni,
advisorproducts.
to finished
and
had
as well as

students recognize from their own lives. Students are shown step-
accountant
Indirect labor and bookkeeper.
refers to employees,The following discussion
such as janitors, occurred
supervisors, soon after
materials Bob was
handlers, hired:
mainte-
nance
Prem: workers,
Bob, I’veandgot
night security
a lot guards, about
of questions that playthean essential role
company’s in running
finances that Iahope
manufactur-
you can
ing facility; however, the cost of compensating these people cannot be easily or conveniently
help answer.
traced to specific units of product. Since indirect materials and indirect
Bob: We’re in great shape. The loan from your family will be paid off within a few months. labor are difficult to

by-step how accounting concepts are implemented in organizations trace

Prem:to specific
I know,products,
Manufacturing
but I am their
What would happen
tracedfarto finished
could sales products
costsabout
worried
overhead
are included
if a competitor
such as putting
drop without
the risksinI’ve
also includesentered
depreciation
us intoofthe
manufacturing
otherthe
taken on byoverhead.
indirect
marketcosts
manufacturing
and our
expanding operations.
thatsales
red? Anotherequipment
cannot
question I’ve
be readily
slipped?
and been
How
the util-
try-
ity costs, property
resolvetaxes,
is howand insurance premiums incurred to operate a manufacturing
and how these concepts are applied to solve everyday business ing to
facility. Although
keting
insurance
Bob: Marketing
campaign
premiums
companies
much
the salesalso
to sustain
always
our sales
incur
staff
would have
depreciation,
is pushing
their money
wants more
for.
nonmanufacturing
to increase

for advertising.
to justify the big mar-
utility costs, property taxes, and
operations, these costs are not
included
Prem: And as part
theyofaremanufacturing
always pushing overhead.
me to drop Onlythethose
sellingindirect
price on costs
the associated with
speaker. I agree

problems. First, “The Issue” is introduced through a dialogue; the operating

withthe
In
them that aare
factory
practice,volume
increased managers
included
lower
willuse
price in
various
offset
manufacturing
will boost our sales
names
the loss in for
overhead.
volume, but I’m not sure the
manufacturing
revenue overhead,
from the lower
manufacturing cost, factory overhead, and factory burden. All of these terms are synonyms
price. such as indirect

for1 manufacturing overhead.oftenAnother term that managers frequently

is thatuse in practice ischange.
con-

student then walks through the implementation process; finally,

One additional assumption used in manufacturing companies inventories do not
version cost.ofConversion
The number units produced cost refers
equals to the sum
the number of sold.
of units direct labor and manufacturing over-
head. The term conversion cost is used to describe direct labor and manufacturing overhead
because these costs are incurred to convert direct materials into finished products.

“The Wrap-up” summarizes the big picture. Nonmanufacturing Costs

Nonmanufacturing costs are often divided into two categories: (1) selling costs and

“The chapter opening material focuses students’ attention on nor69487_ch02_067-128 68

(2) administrative costs. Selling costs include all costs that are incurred to secure cus-
08/11/18 11:11 AM
tomer orders and get the finished product to the customer. These costs are sometimes

the topics each chapter covers. It provides the students real-

world examples to aid in their understanding of business nor69487_ch01_023-066 26 07/27/18 10:15 AM

concepts.”
Karen Bradshaw McCarron, Ph.D., Georgia Gwinnett College

ix
 Confirming Pages

Confirming Pages
154 Chapter 3

EXERCISE 3–15 Plantwide and Departmental Predetermined Overhead Rates; Job Costs LO3–1,
LO3–2, LO3–3, LO3–4
Delph Company uses a job-order costing system and has two manufacturing departments—Molding
96 Chapter 2
and Fabrication. The company provided the following estimates at the beginning of the year:

Applying Excel
Machine-hours . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fixed manufacturing
Molding
20,000
Fabrication
30,000 50,000
Total
End-of-Chapter Material
LEARNING OBJECTIVES 2–4, 2–5, The Excel worksheet overhead form thatcost . appears . . . . below
. . . . . . .is . .to
. . .be
. . .used
. $700,000 $210,000of the
to recreate portions $910,000
Review
2–7, 2–8 Variablerelating
Problem manufacturing
to Voltar overheadCompany. cost Download
per machine-hour
where you will also receive instructions about how to use this worksheet form.
the workbook . . . $3 .00 this form
containing $1 .00from Connect,
Managerial Accounting for Managers has earned a
During the year, the company had no beginning or ending inventories and it started, com-
pleted, and sold only two jobs—Job D-70 and Job C-200. It provided the following information
related to those two jobs:
reputation for the best end-of-chapter practice material
Job D-70
Direct materials cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Molding
$375,000
Fabrication
$325,000 $700,000
Total
of any text on the market. Our problem and case
Direct labor cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Machine-hours . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$200,000
14,000
$160,000 $360,000
6,000 20,000 material continues to conform to AACSB
Confirming Pages
Job C-200
Direct materials cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Molding
$300,000
Fabrication
$250,000 $550,000
Total
recommendations and makes a great starting point for
Direct labor cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Machine-hours . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$175,000
6,000
$225,000 $400,000
24,000 30,000 class discussions and group projects. When the authors
98 Chapter 2

Required:
Delph had no underapplied or overapplied manufacturing overhead during the year.
first wrote Managerial Accounting for Managers, they
Exercises 1. Assume Delph uses a plantwide predetermined overhead rate based on machine-hours.

EXERCISE
a. Compute the plantwide predetermined overhead rate.
b. Compute the total
2–1 The Effect manufacturing
of Changes
If Delph establishes
c. Corporation’s
costonassigned
in Activity
bid prices
to Job Income
Net Operating
that are
D-70 and
150% of
Job C-200.
LO2–1
total manufacturing cost,recent
what bid prices
started with the end-of-chapter material, then wrote
Whirly contribution format income statement for the most month is
would it have established for Job D-70 and Job C-200?
shown below:
d. What is Delph’s cost of goods sold for the year?
2. Assume Delph uses departmental predetermined overhead rates based on machine-hours.
the narrative in support of it. This unique approach to
textbook authoring not only ensured consistency
a. Compute the departmental predetermined overhead rates. Total Per Unit
b. Compute Salesthe total manufacturing
(10,000 units) . . . . . . . . cost
. . . . .assigned
. . . . . . . .to Job D-70 and Job
$350,000 C-200.
$35.00
c. If Delph establishes
Variable bid prices
expenses . . . . . . that
. . . . are
. . . .150%
. . . . . of
. . .total manufacturing
200,000 costs, what bid prices
20.00
would it have established for Job D-70 and Job C-200?
Contribution margin . . . . . . . . . . . . . . . . . . . . .
d. What is Delph’s cost of goods sold for the year?
Fixed expenses. . . . . . . . . . . . . . . . . . . . . . . . .
150,000
135,000
3. What managerial insights are revealed by the computations that you performed in this prob-
$15.00
between the end-of-chapter material and text content
lem? (Hint:Net
Dooperating income
the cost of goods. sold
. . . . .amounts
. . . . . . . .that
. . . .you
. computed
$ 15,000in requirements 1 and 2 dif-
fer from one another? Do the bid prices that you computed in requirementsConfirming
one another? Why?)
1 and 2 differPages
from but also underscored the fundamental belief in the
Required:

Problems
1.
(Consider each case independently):
What would be the revised net operating income per month if the sales volume increases importance of applying theory through practice. It is not
by 100 units?

158
2. What would be the revised net operating income per month if the sales volume decreases by
You3should
PROBLEM
Chapter proceed to
3–16 Plantwide
100 units?
Landen
the requirements
Predetermined OverheadbelowRates; only Pricing
Corporation uses a job-order costing system. At the beginning of the year, the company
after completing LO3–1, LO3–2, your LO3–3
worksheet. enough for students to read, they must also understand.
Required:
3. What would be the revised net operating income per month if the sales volume is 9,000 units?
made

1.
the following
1. Check
Required:
EXERCISE properly,
If Mason
Direct
Prepare
Company
estimates:
your worksheet
ating 2–2
uses
labor-hours
by changing the fixed expenses to $270,000. If your worksheet is oper-
theadegree of operating(CVP)
Cost-Volume-Profit
a plantwide
required
leverage
predetermined
to support
Graphshould
estimated
LO2–2
overhead
be 10. If you do not get this answer,
production rate with .direct140,000
. . . .margin labor-hours as the
To this day, the guiding principle of that first edition
find
Karlik the errors
Enterprises in your worksheet singleand correct them. How much is $24the per unitofand safety percent-
allocation base,distributes
how much amanufacturing product whose
overhead selling
cost would price be is
. . . applied
. . . . . to Job A?whose
Job B?vari-
age?
able Assume
2. expense
Required:
Machine-hours
Did isit$18
that
Fixed
Variable
change? required
Why
per unit.
Mason Company
manufacturing
or why
The
to support
overhead
not? monthly
company’s
uses departmental
based overhead
manufacturing
estimated production
fixed expense is $24,000.
cost . . . . . . . predetermined
2. Enter the following data from a different company into your worksheet:
Department is allocated on machine-hours cost per and
. . . . . . . . . . . . . .overhead
direct thelabor-hour
Assembly . Department
. . . . . . rates.
. . . . .
70,000
The Machining
$784,000
is$2 .00
allocated based
remains, and Noreen’s superior end-of-chapter material
continues to provide accurate, current, and relevant
1. on direct
Prepare alabor-hours. How much
cost-volume-profit
Variable manufacturing graphmanufacturing
overhead for cost peroverhead
the company machine-hour up to cost would
a sales .be
. . .applied
. . . .level of 8,000to Job A? Job B?
units.
$4 .00
Unit sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000
3.
2. If Mason the
Estimate multiplies its job
company’s costs by apoint
break-even markup in unitpercentagesales using to establish selling prices, how
your cost-volume-profit might
graph.
Selling price per unit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $120
plantwide overhead
Variable allocation
expenses adversely
per unit . . . . . . affect
. . . . . .the. . . company’s
. . . . . . . . . . .pricing .. decisions?
$72
EXERCISE 2–3

expense
Prepare
Fixed

is $11
a Profit. .Graph
expenses.

per unit.
. . . . . .LO2–2

The company’s
.............................
Jaffre Enterprises distributes a single product whose selling price is $16 per unit and whose vari-
able What
$420,000
practice for students.
Case is the margin of safety percentage?fixed
Whatexpense is $16,000
is the degree per month.
of operating leverage?
Required:
CASEPrepare
1. 3–22 Plantwide versusfor
a profit graph Departmental
the company Overhead
up to a Rates; Pricing
sales level LO3–1,units.
of 4,000 LO3–2, LO3–3, LO3–4
nor69487_ch03_129-172 154
“Blast it!” said
2. Estimate theDavid Wilson,
company’s presidentpoint
break-even of Teledex Company.
in unit sales “We’ve
using your lost the07/27/18
justgraph.
profit bid on09:44 AM
the

Assurance of Learning Ready

Koopers job by $2,000. It seems we’re either too high to get the job or too low to make any money
on half the jobs we bid.”
EXERCISE 2–4 Computing and Using the CM Ratio LO2–3
Last Teledex Company
month when Holidaymanufactures products
Creations, Inc., to customers’
sold 50,000 specifications
units, total sales were and uses a total
$200,000, job-order
vari-
costing system.were
The$120,000,
company uses a plantwide predetermined overhead rate based on direct labor
Many educational institutions today are focused on the
nor69487_ch02_067-128 96 able expenses and fixed expenses were $65,000. 08/11/18 11:11 AM
cost to apply its manufacturing overhead (assumed to be all fixed) to jobs. The following estimates
Required:
were made at the beginning of the year:
1. What is the company’s contribution margin (CM) ratio?
2. What is the estimated change in the company’s net operating income if it can increase total
sales by $1,000? Department notion of assurance of learning, an important element
Fabricating Machining Assembly Total Plant
EXERCISE 2–5 Changes in Variable Costs, Fixed Costs, Selling Price, and Volume LO2–4
Manufacturing overhead . . . . . . . . . . . . . . .
Data for Hermann Corporation are shown below:
Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . .
$350,000
$200,000
$400,000
$100,000
$90,000
$300,000
$840,000
$600,000
of some accreditation standards. Managerial
Jobs require varying amounts of work in the three departments. The Koopers job, for example,
Selling
would have price.manufacturing
required . . . . . . . . . . . . .costs
. . . . . in
. . the
. . . .three
. . . departments
$ 90 100%
as follows:
Per Unit Percent of Sales
Accounting for Managers, 5e, is designed specifically
to support your assurance of learning initiatives with a
Variable expenses . . . . . . . . . . . . . . . . . . . . . . 63 70
Contribution margin . . . . . . . . . . . . . . . . . . . . . $Department
27 30%

simple, yet powerful, solution.

Fabricating Machining Assembly Total Plant

Author-Written Supplements Fixed expenses are $30,000 per month and the company is selling 2,000 units per month.
Direct materials . . . . . . . . . . . . . . . . . . . . . . .
Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . .
$3,000
$2,800
$200
$500
$1,400
$6,200
$4,600
$9,500
Manufacturing overhead . . . . . . . . . . . . . . .

Unlike other managerial accounting texts, the book’s

? ? ? ?
Each question for Managerial Accounting for
Required:
1. Using the company’s plantwide approach:
authors write the major supplements such as the test
a. Compute the plantwide predetermined rate for the current year. Managers, 5e, maps to a specific chapter learning
nor69487_ch02_067-128 98 b. Determine the amount of manufacturing overhead cost that would have been applied
08/11/18 to
11:11 AM

the Koopers job.

bank and solution files, ensuring a perfect fit between

2. Suppose that instead of using a plantwide predetermined overhead rate, the company had outcome/objective listed in the text. The reporting
used departmental predetermined overhead rates based on direct labor cost. Under these

text and supplements.

conditions:
a. Compute the predetermined overhead rate for each department for the current year. features of Connect can aggregate student to make
b. Determine the amount of manufacturing overhead cost that would have been applied to

3.
the Koopers job.
Explain the difference between the manufacturing overhead that would have been applied to the collection and presentation of assurance of learning
the Koopers job using the plantwide approach in question 1 (b) and using the departmental

4.
approach in question 2 (b).
Assume that it is customary in the industry to bid jobs at 150% of total manufacturing cost data simple and easy.
(direct materials, direct labor, and applied overhead). What was the company’s bid price on the
Koopers job using a plantwide predetermined overhead rate? What would the bid price have
been if departmental predetermined overhead rates had been used to apply overhead cost?

x
nor69487_ch03_129-172 158 07/27/18 09:44 AM
Utilizing the Icons
To reflect our service-based economy, the
text is replete with examples from
service-based businesses. A helpful icon
distinguishes service-related examples in
the text.
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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 for Managers, 5e, to the
general knowledge and skill guidelines found in
the AACSB standards. The statements contained
in Managerial Accounting for Managers, 5e, are
provided only as a guide for the users of this text.
The AACSB leaves content coverage and
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Acknowledgments

S
uggestions have been received from many of our colleagues
throughout the world. Each of those who have offered comments and sugges-
tions has our thanks.
The efforts of many people are needed to develop and improve a text.
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 follow-
ing professors provided feedback that was enormously helpful in preparing the fifth edi-
tion of Managerial Accounting for Managers:

Wagdy Abdallah, Seton Hall University
Linda Abernathy, Kirkwood Community
College
James Andrews, Central New Mexico Com-
munity College
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College
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Carolina–Charlotte
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University
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College–Jacksonville
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Carolina
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College
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University
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Wayne
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University–Columbus
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xiv
 Acknowledgments xv

Christy Land, Catawba Valley Community
College
Ron Lazer, University of Houston
Candace Leuck, Clemson University
Natasha Librizzi, Milwaukee Area Technical
College
William R. Link, University of Missouri–St.
Louis
Kathy Long, University of
Tennessee–Chattanooga
Patti Lopez, Valencia Community College
East
Mary Loretta Manktelow, James Madison
University
Jim Lukawitz, University of Memphis
Anna Lusher, Slippery Rock University
Linda Malgeri, Kennesaw State University
Steve Markoff, Montclair State University
Melissa Martin, Arizona State
University–Tempe
Christian Mastilak, Xavier University
Karen Bardshaw McCarron, Ph.D., Georgia
Gwinnett College
Gary McCombs, College of Charleston
Noel McKeon, Florida State
College–Jacksonville
Jim McKittrick, University of Portland
Laurie McWhorter, Mississippi State
University
James Meddaugh, Ohio University
Tammy Metzke, Milwaukee Area Technical
College–West Allis
Tony Mifsud, Catawba Valley Community
College
Tim Mills, Eastern Illinois University
Mark E. Motluck, Anderson University
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xvi Acknowledgments

We are grateful to the Institute of Certified Management Accountants for permis-

sion to use questions and/or unofficial answers from past Certificate in Management
Accounting (CMA) examinations. Likewise, we thank the American Institute of Certified
Public Accountants, the Society of Management Accountants of Canada, and the Char-
tered Institute of Management Accountants (United Kingdom) for permission to use (or
to adapt) selected problems from their examinations. These problems bear the notations
CPA, SMA, and CIMA respectively.
Eric W. Noreen • Peter C. Brewer • Ray H. Garrison
 Brief Contents

Prologue Managerial Accounting: An Overview   1

Chapter 1 Managerial Accounting and Cost Concepts   23
Chapter 2 Cost–Volume–Profit Relationships  67
Chapter 3 Job–Order Costing: Calculating Unit Product Costs   129
Chapter 4 Variable Costing and Segment Reporting: Tools for Management   173
Chapter 5 Activity–Based Costing: A Tool to Aid Decision Making   226
Chapter 6 Differential Analysis: The Key to Decision Making   279
Chapter 7 Capital Budgeting Decisions   353
Chapter 8 Master Budgeting  406
Chapter 9 Flexible Budgets and Performance Analysis   459
Chapter 10 Standard Costs and Variances   496
Chapter 11 Performance Measurement in Decentralized Organizations   542

Integration Exercises  597

Index  605

xvii
Table of Contents

Prologue Cost Classifications for Manufacturing

Companies  25
Manufacturing Costs  25
Managerial Accounting: An Overview   1 Direct Materials  25
Direct Labor  26
What Is Managerial Accounting?   2 Manufacturing Overhead  26
Planning  3
Nonmanufacturing Costs  26
Controlling  4
Decision Making  4 Cost Classifications for Preparing Financial
Statements  27
Why Does Managerial Accounting Matter to Your Product Costs  27
Career?  5 Period Costs  28
Business Majors  6
Accounting Majors  7 Cost Classifications for Predicting Cost
Professional Certification—A Smart Investment   7 Behavior  29
Variable Cost  29
Managerial Accounting: Beyond the Numbers   9 Fixed Cost  30
An Ethics Perspective   9 The Linearity Assumption and the Relevant
Code of Conduct for Management Accountants   9 Range  31
A Strategic Management Perspective   11 Mixed Costs  33
An Enterprise Risk Management Perspective   12 Cost Terminology—A Closer Look   34
A Corporate Social Responsibility Perspective   14
A Process Management Perspective   15 Cost Classifications for Decision Making   35
A Leadership Perspective   16 Differential Cost and Revenue   35
Intrinsic Motivation  16 Sunk Cost and Opportunity Cost   36
Extrinsic Incentives  17 Using Different Cost Classifications for
Cognitive Bias  17 Different Purposes  36
Summary  18 The Traditional Format Income Statement   37
Glossary  18 The Contribution Format Income Statement   38
Questions  18 Summary  38
Exercises  19 Review Problem 1: Cost Terms   39
Review Problem 2: Income Statement

1
Formats  40
Glossary  41
Chapter Questions  42
Applying Excel  43
The Foundational 15   44
Managerial Accounting and Cost Concepts   23 Exercises  44
Cost Classifications for Assigning Costs to Cost Problems  51
Objects  24 Cases  55
Direct Cost  24
Indirect Cost  25 Appendix 1A: Cost of Quality   56

xviii
 Contents xix

2
The Definition of Sales Mix   89
Sales Mix and Break-Even Analysis   89
Summary  91
Chapter
Review Problem: CVP Relationships   92
Glossary  95
Cost-Volume-Profit Relationships  67 Questions  95
Applying Excel  96
The Basics of Cost-Volume-Profit (CVP) Analysis   69 The Foundational 15   97
Contribution Margin  69
Exercises  98
CVP Relationships in Equation Form   71
Problems  103
CVP Relationships in Graphic Form   72
Cases  111
Preparing the CVP Graph   72
Contribution Margin Ratio (CM Ratio) and the Appendix 2A: Analyzing Mixed Costs   113
Variable Expense Ratio   74
Applications of the Contribution Margin

3
Ratio  76
Additional Applications of CVP Concepts   77
Example 1: Change in Fixed Cost and Sales Chapter
Volume  77
Alternative Solution 1   77
Alternative Solution 2   78 Job-Order Costing: Calculating Unit Product
Example 2: Change in Variable Costs and Sales Costs  129
Volume  78
Solution  78 Job-Order Costing—An Overview   130
Example 3: Change in Fixed Cost, Selling Price, and Job-Order Costing—An Example   131
Sales ­Volume  78 Measuring Direct Materials Cost   132
Solution  79 Job Cost Sheet   132
Example 4: Change in Variable Cost, Fixed Cost, and Measuring Direct Labor Cost   133
Sales Volume  79 Computing Predetermined Overhead Rates   134
Solution  79 Applying Manufacturing Overhead   135
Example 5: Change in Selling Price   80 Manufacturing Overhead—A Closer Look   136
Solution  80 The Need for a Predetermined Rate   136
Computation of Total Job Costs and Unit Product
Break-Even and Target Profit Analysis   81 Costs  137
Break-Even Analysis  81
The Equation Method   81 Job-Order Costing—A Managerial Perspective   138
The Formula Method   81 Choosing an Allocation Base—A Key to Job Cost
Break-Even in Dollar Sales   81 Accuracy  139
Target Profit Analysis   82 Job-Order Costing Using Multiple Predetermined
The Equation Method   82 Overhead Rates  139
The Formula Method   83 Multiple Predetermined Overhead Rates—A
Target Profit Analysis in Terms of Dollar Sales   83 Departmental Approach  139
The Margin of Safety   84 Multiple Predetermined Overhead Rates—An
Activity-Based Approach  141
CVP Considerations in Choosing a Cost Structure   85
Cost Structure and Profit Stability   85 Job-Order Costing—An External Reporting
Operating Leverage  86 Perspective  142
Overhead Application and the Income Statement   142
Structuring Sales Commissions   88 Job Cost Sheets: A Subsidiary Ledger   142

Sales Mix  89 Job-Order Costing in Service Companies   143

xx Contents

Summary  144 Segmented Income Statements—An Example   186

Review Problem: Calculating Unit Product Costs   144 Levels of Segmented Income Statements   187
Glossary  146
Segmented Income Statements—Decision Making and
Questions  146 Break-Even Analysis  189
Applying Excel  147 Decision Making  189
The Foundational 15   148 Break-Even Analysis  190
Exercises  149
Problems  154 Segmented Income Statements—Common
Mistakes  191
Case  158
Omission of Costs   191
Appendix 3A: Activity-Based Absorption Costing   159 Inappropriate Methods for Assigning Traceable Costs
among Segments  192
Appendix 3B: The Predetermined Overhead Rate and Failure to Trace Costs Directly   192
Capacity  166 Inappropriate Allocation Base   192
Arbitrarily Dividing Common Costs among
Segments  192

4
Income Statements—An External Reporting
Perspective  193
Chapter Companywide Income Statements   193
Segmented Financial Information   194
Summary  194
Variable Costing and Segment Reporting: Review Problem 1: Contrasting Variable and Absorption
Tools for Management   173 Costing  195
Overview of Variable and Absorption Costing   174 Review Problem 2: Segmented Income Statements   197
Variable Costing  174 Glossary  199
Absorption Costing  174 Questions  199
Selling and Administrative Expenses   175 Applying Excel  199
Summary of Differences   175 The Foundational 15   201
Exercises  202
Variable and Absorption Costing—An
Problems  209
Example  175
Variable Costing Contribution Format Income Cases  217
Statement  176
Appendix 4A: Super-Variable Costing   219
Absorption Costing Income Statement   178

Reconciliation of Variable Costing with Absorption

5
Costing Income  179

Advantages of Variable Costing and the Contribution

Approach  182
Enabling CVP Analysis   182
Explaining Changes in Net Operating Income   183
Supporting Decision Making   183
Segmented Income Statements and the Contribution
Approach  184
Traceable and Common Fixed Costs and the Segment
Margin  184
Identifying Traceable Fixed Costs   185
Traceable Fixed Costs Can Become Common Fixed
Costs  185
Chapter
Activity-Based Costing: A Tool to Aid Decision
Making  226
Activity-Based Costing: An Overview   227
Nonmanufacturing Costs and Activity-Based
Costing  227
Manufacturing Costs and Activity-Based Costing   228
Cost Pools, Allocation Bases, and Activity-Based
Costing  228
 Contents xxi

Designing an Activity-Based Costing (ABC) Identifying Relevant Costs and Benefits: An

System  231
Steps for Implementing Activity-Based Costing   233
Step 1: Define Activities, Activity Cost Pools, and
Activity Measures  233
The Mechanics of Activity-Based Costing   235
Step 2: Assign Overhead Costs to Activity Cost
Pools  235
Step 3: Calculate Activity Rates   238
Step 4: Assign Overhead Costs to Cost Objects   239
Step 5: Prepare Management Reports   242
Example  282
Decision Analysis: The Total Cost and Differential Cost
Approaches  284
Why Isolate Relevant Costs?   286
Adding and Dropping Product Lines and Other
Segments  286
An Illustration of Cost Analysis   287
A Comparative Format   289
Beware of Allocated Fixed Costs   289

Comparison of Traditional and ABC Product Make or Buy Decisions   290

Costs  244 Strategic Aspects of the Make or Buy Decision   291
Product Margins Computed Using the Traditional An Example of a Make or Buy Decision   291
Cost System  244 Opportunity Cost  293
The Differences between ABC and Traditional
Product Costs  246 Special Order Decisions   294

Volume Trade-Off Decisions   295

Targeting Process Improvements   249
What Is a Constraint?   295
Activity-Based Costing and External Reports   249 Utilizing a Constrained Resource to Maximize
Profits  296
The Limitations of Activity-Based Costing   250 Managing Constraints  299
Summary  251
Review Problem: Activity-Based Costing   251 Joint Product Costs and Sell or Process Further
Glossary  253 Decisions  300
Questions  253 Santa Maria Wool Cooperative: An Example   301
Applying Excel  254 Activity-Based Costing and Relevant Costs   304
The Foundational 15   256 Summary  304
Exercises  257 Review Problem: Differential Analysis   304
Problems  265 Glossary  306
Questions  306
Appendix 5A: Time-Driven Activity-Based Costing: A
Microsoft Excel-Based Approach   270 Applying Excel  307
The Foundational 15   308
Exercises  309

6
Problems  317
Cases  326
Chapter
Appendix 6A: Pricing Decisions   333

Differential Analysis: The Key to Decision

7
Making  279
Decision Making: Six Key Concepts   280
Key Concept #1   280 Chapter
Key Concept #2   280
Key Concept #3   280
Capital Budgeting Decisions   353
Key Concept #4   281
Key Concept #5   281 Capital Budgeting—An Overview   354
Key Concept #6   281 Typical Capital Budgeting Decisions   354
xxii Contents
Cash Flows versus Net Operating Income   354
Typical Cash Outflows   354
Typical Cash Inflows   355
The Time Value of Money   355
The Payback Method   356
Evaluation of the Payback Method   356
An Extended Example of Payback   357
Payback and Uneven Cash Flows   358
The Net Present Value Method   359
The Net Present Value Method Illustrated   359
Recovery of the Original Investment   362
An Extended Example of the Net Present Value
Method  363
The Internal Rate of Return Method   364
The Internal Rate of Return Method
Illustrated  365
Comparison of the Net Present Value and
Internal Rate of Return Methods   366
Expanding the Net Present Value Method   366
Least-Cost Decisions  368
Uncertain Cash Flows   369
An Example  369
Preference Decisions—The Ranking of Investment
Projects  370
Internal Rate of Return Method   371
Net Present Value Method   371
The Simple Rate of Return Method   372
Postaudit of Investment Projects   374
Summary  375
Review Problem: Comparison of Capital Budgeting
Methods  375
Glossary  377
Questions  377
Applying Excel  378
The Foundational 15   379
Exercises  380
Problems  385
Cases  391
Appendix 7A: The Concept of Present
Value  393
Appendix 7B: Present Value Tables   399
Appendix 7C: Income Taxes and the Net Present
Value Method  401
8
Chapter
Master Budgeting  406
Why and How Do Organizations Create Budgets?   407
Advantages of Budgeting   407
Responsibility Accounting  407
Choosing a Budget Period   408
The Self-Imposed Budget   408
Human Factors in Budgeting   409
The Master Budget: An Overview   409
Seeing the Big Picture   411
Preparing the Master Budget   412
The Beginning Balance Sheet   413
The Budgeting Assumptions   413
The Sales Budget   416
The Production Budget   417
Inventory Purchases—Merchandising Company   418
The Direct Materials Budget   419
The Direct Labor Budget   420
The Manufacturing Overhead Budget   421
The Ending Finished Goods Inventory Budget   422
The Selling and Administrative Expense Budget   423
The Cash Budget   424
The Budgeted Income Statement   428
The Budgeted Balance Sheet   429
Summary  431
Review Problem: Budget Schedules   431
Glossary  433
Questions  433
Applying Excel  434
The Foundational 15   435
Exercises  436
Problems  444
Cases  455
9
Chapter
Flexible Budgets and Performance Analysis   459
The Variance Analysis Cycle   460
Flexible Budgets  461
Characteristics of a Flexible Budget   461
 Contents xxiii

Deficiencies of the Static Planning Budget   461 The Variable Manufacturing Overhead Rate
How a Flexible Budget Works   464 and Efficiency Variances   508

Flexible Budget Variances   465 An Important Subtlety in the Materials

Activity Variances  465 Variances  511
Revenue and Spending Variances   467
Standard Costs—Managerial Implications   512
A Performance Report Combining Activity and Revenue Advantages of Standard Costs   512
and Spending Variances   468
Potential Problems with Standard Costs   513
Performance Reports in Nonprofit Organizations   471
Summary  514
Performance Reports in Cost Centers   471
Review Problem: Standard Costs   514
Flexible Budgets with Multiple Cost Drivers   471 Glossary  516
Questions  517
Some Common Errors   473
Applying Excel  518
Summary  474
The Foundational 15   519
Review Problem: Variance Analysis Using a Flexible
Budget  475 Exercises  520
Glossary  477 Problems  522
Questions  477 Cases  527
Applying Excel  477 Appendix 10A: Predetermined Overhead Rates
The Foundational 15   479 and Overhead Analysis in a Standard Costing
Exercises  479 System  528
Problems  487
Cases  492

Chapter
10
Standard Costs and Variances   496
Chapter
11
Performance Measurement in Decentralized
Organizations  542
Standard Costs—Setting the Stage   497 Decentralization in Organizations   543
Setting Direct Materials standards   498 Advantages and Disadvantages of Decentralization   543
Setting Direct Labor Standards   498
Setting Variable Manufacturing Overhead Responsibility Accounting  544
Standards  499 Cost, Profit, and Investment Centers   544
Using Standards in Flexible Budgets   500 Cost Center  544
Profit Center  544
A General Model for Standard Cost Variance Investment Center  544
Analysis  501
Using Standard Costs—Direct Materials Evaluating Investment Center Performance—Return on
Variances  502 Investment  545
The Materials Price Variance   504 The Return on Investment (ROI) Formula   545
The Materials Quantity Variance   504 Net Operating Income and Operating Assets
Defined  545
Using Standard Costs—Direct Labor Variances   505 Understanding ROI  545
The Labor Rate Variance   506 Criticisms of ROI   548
The Labor Efficiency Variance   507
Residual Income  549
Using Standard Costs—Variable Manufacturing Motivation and Residual Income   550
Overhead Variances  508 Divisional Comparison and Residual Income   551
xxiv Contents

Operating Performance Measures   552 Glossary  561

Throughput (Manufacturing Cycle) Time   552 Questions  561
Delivery Cycle Time   552 Applying Excel  562
Manufacturing Cycle Efficiency (MCE)   553 The Foundational 15   563
Example  553 Exercises  563
Solution  554 Problems  568
Case  575
Balanced Scorecard  554
Common Characteristics of Balanced Scorecards   555 Appendix 11A: Transfer Pricing   576
A Company’s Strategy and the Balanced Scorecard   556
Tying Compensation to the Balanced Scorecard   559 Appendix 11B: Service Department Charges   589
Summary  559 Integration Exercises  597
Review Problem: Return on Investment (ROI) and Residual
Income  560 Index  605
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 TO ROAST A HAUNCH OF MUTTON.[79]

79. We recommend Liebig’s directions for roasting (page 171), to be applied

here, and for the joints which follow.

This joint should be well kept, and when the larder-

accommodations of a house not are good, the butcher should be
requested to hang it the proper time. Roast it carefully at a large
sound fire, and let it remain at a considerable distance for at least a
couple of hours; then draw it nearer, but never sufficiently so to burn
or injure the fat. Keep it constantly basted; flour it soon after it is laid
to the fire, instead of frothing it, as this latter mode is not generally
relished, though fashion is in its favour. In from three and a half to
four hours, the haunch will be done, and it will require something
less of time when not kept back at first, as we have advised. Serve it
with a good Espagnole, or with plain mutton-gravy and currant-jelly.
This joint, when the meat is of very fine quality, may be dressed and
served exactly like venison.
3-1/2 to 4 hours. 5 hours or more by the slow method.
 ROAST SADDLE OF MUTTON.

This is an excellent joint, though not considered a very economical

one. It is usual for the butcher to raise the skin from it before it is
sent in, and to skewer it on again, that in the roasting the juices of
the meat may be better preserved, and the fat prevented from taking
too much colour, as this should be but delicately browned. In less
than half an hour before the mutton is done, remove the skin, and
flour the joint lightly after having basted it well. Our own great
objection to frothed meat would lead us to recommend that the skin
should be taken off half an hour earlier, and that the joint should be
kept at sufficient distance from the fire to prevent the possibility of
the fat being burned; and that something more of time should be
allowed for the roasting. With constant basting, great care, and good
management, the cook may always ensure the proper appearance of
this, or of any other joint (except, perhaps, of a haunch of venison)
without having recourse to papering or pasting, or even to replacing
the skin; but when unremitted attention cannot be given to this one
part of the dinner, it is advisable to take all precautions that can
secure it from being spoiled.
2-1/2 to 2-3/4 hours. More if very large.
 TO ROAST A LEG OF MUTTON.

In a cool and airy larder a leg of mutton will hang many days with
advantage, if the kernel be taken out, and the flap wiped very dry
when it is first brought in; and it is never tender when freshly killed: in
warm weather it should be well dredged with pepper to preserve it
from the flies. If washed before it is put upon the spit, it should be
wiped as dry as possible afterwards, and well floured soon after it is
laid to the fire. When the excellence of the joint is more regarded
than the expense of fuel, it should be roasted by what we have
denominated the slow method; that is to say, it should be kept at a
considerable distance from the fire, and remain at it four hours
instead of two: it may be drawn nearer for the last twenty or thirty
minutes to give it colour. The gravy will flow from it in great
abundance when it is cut, and the meat will be very superior to that
roasted in the usual way. When this plan is not pursued, the mutton
should still be kept quite a foot from the fire until it is heated through,
and never brought sufficiently near to scorch or to harden any part. It
should be constantly basted with its own fat, for if this be neglected,
all other precautions will fail to ensure a good roast; and after it is
dished a little fine salt should be sprinkled lightly on it, and a
spoonful or two of boiling water ladled over. This is the most
palatable mode of serving it, but it may be frothed when it is
preferred so, though we would rather recommend that the flour
should be dredged on in the first instance, as it then prevents the
juices of the meat from escaping, and forms a savoury coating to it;
while the raw taste which it so often retains with mere frothing is to
many eaters especially objectionable.
Leg of mutton, 7 to 8 lbs.: slow method 4 hours, common method
1-3/4 to 2 hours.
Obs.—Many common cooks injure their roasts exceedingly by
pouring abundance of hot water over them, “to make gravy” as they
call it. This should never be done. The use of any portion may,
perhaps, be rationally objected to; but when the joint is not carefully
cooked it is sometimes very dry without it. A few spoonsful of
Liebeg’s extract of meat will supply excellent gravy for this, or for any
other dish of roasted meat.
 BRAISED LEG OF MUTTON.

Take out the bone as far as the first joint by the directions of the
following receipt; roll some large strips of bacon in a seasoning of
mixed spice, and of savoury herbs minced extremely fine or dried
and reduced to powder, and with these lard the inside of the boned
portion of the joint; or fill the cavity with forcemeat highly seasoned
with eschalot or garlic. Sew up the meat, and place it in a braising-
pan or ham-kettle nearly of its size, with slices of bacon under and
over it, two or three onions, four or five carrots, two bay leaves, a
large bunch of savoury herbs, a few bones, or bits of undressed
mutton or veal, and about three quarters of a pint of gravy. Stew the
meat as softly as possible from four to five hours, and keep live
embers on the pan (or, as this mode of cooking is not general in
England, set the mutton, if it can be done conveniently, into a
moderately-heated oven, after having luted the edges of the vessel
in which it is arranged with a bit of coarse paste); lift it out, strain the
gravy, reduce it quickly to glaze, and brush the meat with it; or
merely strain, free it from fat, and pour it over the mutton. White
beans (haricots blancs), boiled tender and well drained, or a mild
ragout of garlic or eschalots, may be laid in the dish under it. The
joint can be braised equally well without any part of it being boned.
3 to 5 hours.
 LEG OF MUTTON BONED AND FORCED.

Select for this dish a joint of South Down or of any other delicate-
sized mutton, which has been kept sufficiently long to render it very
tender. Lay it on a clean cloth spread upon a table, and turn the
underside upwards. With a sharp-edged boning-knife cut through the
middle of the skin, from the knuckle to the first joint, and raise it from
the flesh on the side along which the bone runs, until the knife is just
above it, then cut through the flesh down to the bone; work the knife
round it in every part till you reach the socket; next remove the flat
bone from the large end of the joint, and pass the knife freely round
the remaining one, as it is not needful to take it out clear of the meat;
when you again reach the middle joint, loosen the skin round it with
great care, and the two bones can then be drawn out without being
divided. This being done, fill the cavities with the forcemeat, No. 1.
(Chapter VIII.), adding to it a somewhat high seasoning of eschalot,
garlic, or onion; or cut out with the bone, nearly a pound of the inside
of the mutton, chop it fine with six ounces of delicate striped bacon,
and mix with it thoroughly three quarters of an ounce of parsley, and
half as much of thyme and winter savoury, all minced extremely
small; a half teaspoonful of pepper (or a third as much of cayenne);
the same of mace, salt, and nutmeg, and either the grated rind of a
small lemon, or four eschalots finely shred. When the lower part of
the leg is filled, sew the skin neatly together where it has been cut
open, and tie the knuckle round tightly, to prevent the escape of the
gravy. Replace the flat bone at the large end, and with a long needle
and twine, draw the edges of the meat together over it. If it can be
done conveniently, it is better to roast the mutton thus prepared in a
cradle spit or upon a bottle-jack, with the knuckle downwards. Place
it at first far from the fire, and keep it constantly basted. It will require
nearly or quite three hours’ roasting. Remove the twine before it is
served, and send it very hot to table with some rich brown gravy.
 A BOILED LEG OF MUTTON WITH TONGUE AND TURNIPS.

(An excellent Receipt.)

Trim into handsome form a well-kept, but perfectly sweet leg of
mutton, of middling weight; wash, but do not soak it; lay it into a
vessel as nearly of its size as convenient, and pour in rather more
than sufficient cold water[80] to cover it; set it over a good fire, and
when it begins to boil take off the scum, and continue to do so until
no more appears; throw in a tablespoonful of salt (after the first
skimming), which will assist to bring it to the surface, and as soon as
the liquor is clear, add two moderate-sized onions stuck with a dozen
cloves, a large faggot of parsley, thyme, and winter savoury, and four
or five large carrots, and half an hour afterwards as many turnips.
Draw the pan to the side of the fire, and let the mutton be simmered
gently from two hours to two and a half, from the time of its first
beginning to boil. Serve it with caper, brown cucumber, or oyster
sauce. If stewed softly, as we have directed, the mutton will be found
excellent dressed thus; otherwise, it will but resemble the
unpalatable and ragged-looking joints of fast-boiled meat, so
constantly sent to table by common English cooks. Any undressed
bones of veal, mutton, or beef, boiled with the joint will improve it
much, and the liquor will then make excellent soup or bouillon. A
small smoked ox-tongue boiled very tender will generally be much
approved as an accompaniment to the mutton, though it is out of the
usual course to serve them together: innovation on established
usages is, however, sometimes to be recommended. The tongue
should be garnished with well-prepared mashed turnips, moulded
with a tablespoon into the form of a half-egg, and sent to table as hot
as possible; or the turnips may be dished apart.
80. We have left this receipt unaltered, instead of applying to it Baron Liebeg’s
directions for his improved method of boiling meat, because his objections to
the immersion of the joint in cold water are partially obviated, by its being
placed immediately over a sound fire, and heated quickly; and the mutton is
very good thus dressed.
2 to 2-1/2 hours.
 ROAST OR STEWED FILLET OF MUTTON.

Cut some inches from either end of a large and well-kept leg of
mutton, and leave the fillet shaped like one of veal. Remove the
bone, and fill the cavity with forcemeat (No. 1, Chapter VIII.), which
may be flavoured with a little minced eschalot, when its flavour is
liked: more forcemeat may be added by detaching the skin
sufficiently on the flap side to admit it. When thus prepared, the fillet
may be roasted, and served with currant-jelly and brown gravy, or
with only melted butter poured over it; or it may be stewed gently for
nearly or quite four hours, in a pint of gravy or broth, after having
been floured and browned all over in a couple of ounces of butter: it
must then be turned every hour that it may be equally done. Two or
three small onions, a faggot of herbs, a couple of carrots sliced, four
or five cloves, and twenty whole peppercorns can be added to it at
will.
Roasted 2 hours, or stewed 4 hours.
Obs.—At a large fire, half an hour less of time will roast the mutton
sufficiently for English taste in general.
 TO ROAST A LOIN OF MUTTON.

The flesh of the loin of mutton is superior to that of the leg, when
roasted; but to the frugal housekeeper this consideration is usually
overbalanced by the great weight of fat attached to it; this, however,
when economy is more considered than appearance, may be pared
off and melted down for various kitchen uses. When thus reduced in
size, the mutton will be soon roasted. If it is to be dressed in the
usual way, the butcher should be desired to take off the skin; and
care should be taken to preserve the fat from being ever so lightly
burned: it should be managed, indeed, in the same manner as the
saddle, in every respect, and carved also in the same way, either in
its entire length or in oblique slices.
Without the fat, 1 to 1-1/2 hour; with 1-1/4 to 1-3/4 hour.
 TO DRESS A LOIN OF MUTTON LIKE VENISON.

Skin and bone a loin of mutton, and lay it into a stewpan, or

braising-pan, with a pint of water, a large onion stuck with a dozen
cloves, half a pint of port wine and a spoonful of vinegar; add, when
it boils, a small faggot of thyme and parsley, and some pepper and
salt: let it stew three hours, and turn it often. Make some gravy of the
bones, and add it at intervals to the mutton when required. This
receipt comes to us so strongly recommended by persons who have
partaken frequently of the dish, that we have not thought it needful to
prove it ourselves.
3 hours.
 ROAST NECK OF MUTTON.

This is a very favourite joint in many families, the flesh being more
tender and succulent than that even of the loin; and when only a
small roast is required, the best end of the neck of mutton, or the
middle, if divested of a large portion of the fat and cut into good
shape, will furnish one of appropriate size and of excellent quality.
Let the ends be cut quite even and the bones short, so as to give a
handsome squareness of form to the meat. The butcher, if directed
to do so, will chop off the chine bone, and divide the long bones
sufficiently at the joints to prevent any difficulty in separating them at
table. From four to five pounds weight of the neck will require from
an hour to an hour and a quarter of roasting at a clear and brisk, but
not fierce, fire. It should be placed at a distance until it is heated
through, and then moved nearer, and kept thoroughly basted until it
is done. Tomatas baked or roasted may be sent to table with it; or a
little plain gravy and red currant-jelly; or it may be served without
either.
When the entire joint, with the exception of the scrag-end (which
should always be taken off), is cooked, proportionate time must be
allowed for it.
 TO ROAST A SHOULDER OF MUTTON.

Flour it well, and baste it constantly with its own dripping; do not
place it close enough to the fire for the fat to be in the slightest
degree burned, or even too deeply browned. An hour and a half will
roast it, if it be of moderate size. Stewed onions are often sent to
table with it. A shoulder of mutton is sometimes boiled, and
smothered with onion sauce.
1-1/2 hour.
 THE CAVALIER’S BROIL.

Half roast or stew, or parboil, a small, or moderate-sized shoulder

of mutton; lift it into a hot dish, score it on both sides down to the
bone, season it well with fine salt and cayenne or pepper, and finish
cooking it upon the gridiron over a brisk fire. Skim the fat from any
gravy that may have flowed from it, and keep the dish which contains
it quite hot to receive the joint again. Warm a cupful of pickled
mushrooms, let a part of them be minced, and strew them over the
broil when it is ready to be served; arrange the remainder round it,
and send it instantly to table. The reader will scarcely need to be told
that this is an excellent dish.
 FORCED SHOULDER OF MUTTON.

Cut off all the flesh from the inside of the joint down to the blade-
bone, and reserve it for a separate dish. It may be lightly browned
with some turnips or carrots, or both, and made into a small harrico
or stewed simply in its own gravy, or it will make in part, a pie or
pudding. Bone the mutton (see page 219), flatten it on a table, lay
over the inside some thin and neatly-trimmed slices of striped bacon,
and spread over them some good veal forcemeat (No. 1, Chapter
VIII.) to within an inch of the outer edge; roll the joint up tightly
towards the knuckle (of which the bone may be left in or not, at
pleasure), secure it well with tape or twine, and stew it gently in good
gravy, from four hours to four and a half.
4 to 4-1/2 hours.
Obs.—In France it is usual to substitute sausage-meat for the
bacon and veal stuffing in this dish, but it does not appear to us to be
well suited to it.
 MUTTON CUTLETS STEWED IN THEIR OWN GRAVY.

(Good.)
Trim the fat entirely from some cutlets taken from the loin; just dip
them into cold water, dredge them moderately with pepper, and
plentifully on both sides with flour; rinse a thick iron saucepan with
spring water, and leave three or four tablespoonsful in it; arrange the
cutlets in one flat layer, if it can be done conveniently, and place
them over a very gentle fire; throw in a little salt when they begin to
stew, and let them simmer as softly as possible, but without ceasing,
from an hour and a quarter to an hour and a half. If dressed with
great care, which they require, they will be equally tender, easy of
digestion, and nutritious; and being at the same time free from
everything which can disagree with the most delicate stomach, the
receipt will be found a valuable one for invalids. The mutton should
be of good quality, but the excellence of the dish mainly depends on
its being most gently stewed; for if allowed to boil quickly all the
gravy will be dried up, and the meat will be unfit for table. The cutlets
must be turned when they are half done: two or three spoonsful of
water or gravy may be added to them should they not yield sufficient
moisture; or if closely arranged in a single layer at first, water may be
poured in to half their depth. The advantage of this receipt is, that
none of the nutriment of the meat is lost; for that which escapes from
the cutlets remains in the gravy, which should all be served with
them: any fat which may be perceived upon it should be carefully
skimmed off. Cold broth used for it instead of water will render it
extremely good.
1-1/4 to 1-3/4 hour.
 TO BROIL MUTTON CUTLETS. (ENTRÉE.)

These may be taken from the loin, or the best end of the neck, but
the former are generally preferred. Trim off a portion of the fat, or the
whole of it, unless it be liked; pepper the cutlets, heat the gridiron,
rub it with a bit of the mutton suet, broil them over a brisk fire, and
turn them often until they are done; this, for the generality of eaters,
will be in about eight minutes, if they are not more than half an inch
thick, which they should not be. French cooks season them with
pepper and salt, and brush them lightly with dissolved butter or oil,
before they are laid to the fire, and we have found the cutlets so
managed extremely good.
Lightly broiled, 7 to 8 minutes. Well done, 10 minutes.
Obs.—A cold Maître d’Hôtel sauce may be laid under the cutlets
when they are dished; or they may be served quite dry, or with brown
gravy; or with good melted butter seasoned with mushroom catsup,
cayenne, and chili vinegar or lemon-juice.
 CHINA CHILO

Mince a pound of an undressed loin or leg of mutton, with or

without a portion of its fat; mix with it two or three young lettuces
shred small, a pint of young peas, a teaspoonful of salt, half as much
pepper, four tablespoonsful of water, from two to three ounces of
good butter, and, if the flavour be liked, a few green onions minced.
Keep the whole well stirred with a fork over a clear and gentle fire
until it is quite hot, then place it closely covered by the side of the
stove, or on a high trivet, that it may stew as softly as possible for a
couple of hours. One or even two half-grown cucumbers, cut small
by scoring the ends deeply as they are sliced, or a quarter of a pint
of minced mushrooms may be added with good effect; or a
dessertspoonful of currie-powder and a large chopped onion. A dish
of boiled rice should be sent to table with it.
Mutton, 1 pint; green peas, 1 pint: young lettuces, 2; salt, 1
teaspoonful; pepper, 1/2 teaspoonful; water, 4 tablespoonsful; butter,
2 to 3 oz.: 2 hours. Varieties: cucumbers, 2; or mushrooms minced,
1/4 pint; or currie-powder, 1 dessertspoonful, and 1 large onion.
 A GOOD FAMILY STEW OF MUTTON.

Put into a broad stewpan or saucepan, a flat layer of mutton

chops, freed entirely from fat and from the greater portion of the
bone, or in preference a cutlet or two from the leg, divided into bits of
suitable size, then just dipped into cold water, seasoned with pepper,
and lightly dredged with flour; on these put a layer of mild turnips
sliced half an inch thick, and cut up into squares; then some carrots
of the same thickness, with a seasoning of salt and black pepper
between them; next, another layer of mutton, then plenty of
vegetables, and as much weak broth or cold water as will barely
cover the whole; bring them slowly to a boil, and let them just simmer
from two to three hours, according to the quantity. One or two
minced onions may be strewed between the other vegetables when
their flavour is liked. The savour of the dish will be increased by
browning the meat in a little butter before it is stewed, and still more
so by frying the vegetables lightly as well, before they are added to
it. A head or two of celery would to many tastes improve the flavour
of the whole. In summer, cucumber, green onions, shred lettuces,
and green peas may be substituted for the winter vegetables.
Mutton, free from fat, 2-1/2 lbs.; turnips, 3 lbs; carrots, 3 lbs.;
celery (if added), 2 small heads: 2 to 3 hours.
Obs.—The fat and trimmings of the mutton used for this and for
other dishes into which only the lean is admissible, may be turned to
useful account by cutting the whole up rather small, and then boiling
it in a quart of water to the pound, with a little spice, a bunch of herbs
and some salt, until the fat is nearly dissolved: the liquid will then, if
strained off and left until cold, make tolerable broth, and the cake of
fat which is on the top, if again just melted and poured free of
sediment into small pans, will serve excellently for common pies and
for frying kitchen dinners. Less water will of course produce broth of
better quality, and the addition of a small quantity of fresh meat or
bones will render it very good.
 AN IRISH STEW.

Take two pounds of small thick mutton cutlets with or without fat,
according to the taste of the persons to whom the stew is to be
served; take also four pounds of good potatoes, weighed after they
are pared; slice them thick, and put a portion of them in a flat layer
into a large thick saucepan or stewpan; season the mutton well with
pepper, and place some of it on the potatoes; cover it with another
layer, and proceed in the same manner with all, reserving plenty of
the vegetable for the top; pour in three quarters of a pint of cold
water, and add, when the stew begins to boil, an ounce of salt; let it
simmer gently for two hours, and serve it very hot. When the addition
of onion is liked, strew some minced over the potatoes.
Mutton cutlets, 2 lbs.; potatoes, 4 lbs.; pepper, 1/2 oz.; salt, 1 oz.;
water, 3/4 pint: 2 hours.
Obs.—For a real Irish stew the potatoes should be boiled to a
mash: an additional quarter of an hour may be necessary for the full
quantity here, but for half of it two hours are quite sufficient.