Table Of Contentintroduction
TO
M A N A G E R I A L A C C O U N T I N G
5TH EDITION
P C. B
ETER REWER
Professor, Miami University
R H. G
AY ARRISON
Professor Emeritus, Brigham Young University
E W. N
RIC OREEN
Professor Emeritus, University of Washington
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INTRODUCTION TO MANAGERIAL ACCOUNTING
Published by McGraw-Hill/Irwin, a business unit of The McGraw-Hill Companies, Inc., 1221 Avenue of the
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Library of Congress Cataloging-in-Publication Data
Brewer, Peter C.
Introduction to managerial accounting / Peter C. Brewer, Ray H. Garrison, Eric
W. Noreen. — 5th ed.
p. cm.
Includes index.
ISBN-13: 978-0-07-352707-9 (alk. paper)
ISBN-10: 0-07-352707-6 (alk. paper)
1. Managerial accounting. I. Garrison, Ray H. II. Noreen, Eric W. III. Title.
HF5657.4.B74 2010
658.15'11—dc22
2009025227
www.mhhe.com
DEDICATION
To our families and to our colleagues who use this book.
—Peter C. Brewer, Ray H. Garrison, and Eric W. Noreen
About the Authors
Peter C. Brewer
is a professor in the Department of
Accountancy at Miami University, Oxford, Ohio. 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 30 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 is a member of the editorial boards of Issues in Accounting
Education and the Journal of 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 and has been recognized
on two occasions by the Miami University Associated Student Government
for “making a remarkable commitment to students and their educational
development.” He is a leading thinker in undergraduate management accounting
curriculum innovation and is a frequent presenter at various professional and
academic conferences.
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.). He frequently collaborates with companies such as Harris Corporation,
Ghent Manufacturing, Cintas, Ethicon Endo-Surgery, Schneider Electric,
Lenscrafters, and Fidelity Investments in a consulting or case writing capacity.
iv
Eric W. Noreen
has held
appointments at institutions in the United States,
Europe, and Asia. He is emeritus professor of
accounting at the University of Washington.
He received his BA degree from the University
Ray H. Garrison
of Washington and MBA and PhD degrees from
is emeritus professor of accounting at Brigham Young Stanford University. A Certified Management
University, Provo, Utah. He received his BS and Accountant, he was awarded a Certificate of
MS degrees from Brigham Young University and Distinguished Performance by the Institute of
his DBA degree from Indiana University. Certified Management Accountants.
As a certified public accountant, Professor Garrison Professor Noreen has served as associate editor
has been involved in management consulting work of The Accounting Review and the Journal of
with both national and regional accounting firms. Accounting and Economics. He has numerous
He has published articles in The Accounting Review, articles in academic journals including: the
Management Accounting, and other professional Journal of Accounting Research; The Accounting
journals. Innovation in the classroom has earned Review; the Journal of Accounting and Economics;
Professor Garrison the Karl G. Maeser Distinguished Accounting Horizons; Accounting, Organizations
Teaching Award from Brigham Young University. and Society; Contemporary Accounting Research;
the Journal of Management Accounting Research;
and the Review of Accounting Studies.
Professor Noreen has taught management
accounting at the undergraduate and master’s
levels and has won a number of awards from
students for his teaching.
v
Pointing Students
in the Right Direction
Here’s how your colleagues have described
“Why do I
Brewer’s Introduction to Managerial Accounting:
need to learn
Better than other texts, Brewer is written in
Managerial
a manner that fosters a more mature level of thinking
Accounting?” in the student. When the “whys” and the usefulness
of concepts are presented so well, it makes my job
Brewer’s Introduction to Managerial
so much easier.
Accounting has earned a reputation
as the most concise and readable —M. David Gorton, Eastern Washington University
book on the market. Its manageable
chapters and clear presentation
point students toward under- …This book is so well written that it is easy for the
standing just as the needle of a students to read the text and then be able to work
compass provides direction to
exercises and problems at the end of the chapter. T he
travelers.
topics covered do a great job of preparing business
However, the book’s authors
students for their upper level business courses and it lays
also understand that everyone’s
destinations are different. Some a strong foundation for the accounting majors who will
students will become accountants, take cost accounting. T his book has so many resources for
while others are destined for students to go along with the text that you can individually
careers in management, marketing,
fi t the needs of almost any student. I would highly
or finance. Not only does the
recommend this book for any managerial accounting
Brewer text teach students man-
principle class.
agerial accounting concepts in a
clear and concise way, but it also —Joseph M. Hagan, East Carolina University
asks students to consider how
the concepts they’re learning will
apply to the real world situations
This textbook presents fundamental managerial
they will eventually confront in
accounting concepts in a very clear and concise
their careers. This combination of
manner and offers many effective mechanisms (e.g., end-
conceptual understanding and the
ability to apply that knowledge of-chapter problems and cases; on-line quizzes, videos, and
directs students toward success, slideshows) that help students reinforce the concepts.
whatever their final destination
–Nace Magner, Western Kentucky University
happens to be.
It is an excellent book. Clearly written and comprehensive. Students are able to
understand the material.
vi
—Anwar Y. Salimi, California State Polytechnic University-Pomona
Introduction to Managerial Accounting, 5th edition,
BREWER/GARRISON/NOREEN
by empowers
your students by offering:
CONCISE COVERAGE
Your students want a text that is concise and that presents material in a
clear and readable manner. Introduction to Managerial Accounting keeps
the material accessible while avoiding advanced topics related to cost
accounting. Students’ biggest concern is whether they can solve the end-of-
chapter problems after reading the chapter. Market research indicates that
Brewer/Garrison/Noreen helps students apply what they’ve learned better
than any other managerial accounting text on the market. Additionally, the key
supplements are written by the authors ensuring that students and instructors
will work with clear, well-written supplements that employ consistent
terminology.
DECISION-MAKING FOCUS
All students who pass through your class need to know how accounting
information is used to make business decisions, especially if they plan to be
future managers. That’s why Brewer, Garrison and Noreen make decision
making a pivotal component of Introduction to Managerial Accounting. In
every chapter you’ll find the following key features that are designed to
teach your students how to use accounting information. Decision Maker
and You Decide Boxes help students to develop analytical, critical thinking,
and problem-solving skills. Building Your Skills cases challenge students’
decision-making skills.
A CONTEMPORARY APPROACH TO LEARNING
Today’s students rely on technology more than ever as a learning tool, and
Introduction to Managerial Accounting offers the finest technology package
of any text on the market. From study aids to online grading and course
management, our technology assets have one thing in common: they make
your class time more productive, more stimulating, and more rewarding for
you and your students. McGraw-Hill’s Connect Accounting is an online
assignment and assessment solution that connects students with the tools
and resources they’ll need to achieve success. Connect Plus™ provides an
online version of the text in addition to access to Connect, giving students
a convenient way to access everything they need to succeed in their course.
The Online Learning Center provides your students with a variety of multi-
media aids to help them learn managerial accounting. McGraw-Hill’s Media
Integration allows students to maximize the technological package available
to them with Brewer. Apple® iPod® icons throughout the text link content
back to quizzes, audio and visual lecture presentations, and course-related
videos—all of which can be downloaded to their iPod or other portable
MP3/MP4 players so they can study and review on the go.
vii
BREWER / GARRISON / NOREEN’S
Introduction to Managerial Accounting is full of pedagogy designed
to make studying productive and hassle-free. On the following pages, you’ll see the
kind of engaging, helpful pedagogical features that have made Brewer one of the best-
selling Managerial Accounting texts on the market.
CHAPTER OUTLINE DECISION FEATURE
Each chapter opens with an outline that provides The Decision Feature at the beginning of each chapter
direction to the student about the road they can expect provides a real-world example for students, allowing
to traverse throughout the chapter. The A Look feature them to see how the chapter’s information and insights
reminds students what they have learned in previous apply to the world outside the classroom. Learning
chapters, what they can expect to learn in the current Objectives alert students to what they should expect as
chapter, and how the topics will build on each other they progress through the chapter.
in chapters to come.
2
Systems Design:
LEARNING
OBJECTIVES
Job-Order Costing
After studying Chapter 10,
you should be able to:
LO1 Prepare a segmented
income statement using the
contribution format, and
<<ALOOKBACK ALOOKATTHISCHAPTER ALOOKAHEAD>> etrxapcleaainb lteh efi xdeidff ecroesntcse a bnedt ween
Chapter 1 described the three major Chapter 2 distinguishes between two Chapter 3 continues the discussion of common fixed costs.
activities of managers and compared costing systems, job-order and process the allocation of manufacturing
and contrasted financial and managerial costing, and then provides an in-depth look overhead costs, showing how these LO2 Compute return on
accounting. It also defined many of the at a job-order costing system. W e describe costs can be more accurately assigned investment (ROI) and show
terms that are used to classify costs how direct material and direct labor costs using activity-based costing. We cover how changes in sales, e xpenses,
in business. We will use many of these are accumulated on jobs. T hen we address process costing in Chapter 4. and assets affect ROI.
terms in Chapter 2. Now would be a manufacturing overhead, an indirect cost
good time to check your understanding that must be allocated (or applied) to jobs. LO3 Compute residual
of those terms by referring to the Finally, we take a more detailed look at income and understand its
glossary at the end of Chapter 1. the flow of costs through a company’s strengths and weaknesses.
accounting system using journal entries.
LO4 Understand how to
construct and use a balanced
scorecard.
CHAPTER OUTLINE DECISION FEATURE
Process and Job-Order Costing ■ Manufacturing Overhead Costs Sony Attempts to Rebound
■ Process Costing ■ Applying Manufacturing Overhead
■ Job-Order Costing ■ Nonmanufacturing Costs LHaoswt ceevnetr,u irny tShoe ndyig ditealli gmhteeddia c uersato Smoenrys hwaist hlo istst Wgraoluknmda nto, t hmea Tnryi nbitertotenr T-mV, atnhaeg ePdla ycSotmatpioenti, taonrds tshuec hC aDs.
■Job-OMredaseurr iCngo sDtiirnegc—t MAante Oriavlse rCvoiestw ■ ■ CCoosstt ooff GGooooddss MSoalndu factured Mmaneidcn rt1os8s o sMuftca, hAx iapmsp Aldeie,b SoPh,a aarr iplsi n, reaen sodtfa uNroroabnkotiatsi.. c SI npo enatyds d; iQsit ia outantle,i atm,h ape t lciinnogem otpofa bnroey buhotaiuqsnu cdel oebslyee dcdt irnsocinnoeinc tpsi;ln a1un,i2tns2g, 0 su ocnlodps rm$o7fei0ttai5cb mlsea illsolieongsn-;
■ Job Cost Sheet ■ Summary of Cost Flows worTthhe o nf eaxsste tsst,e apn dfo er liSmoinnya teisd t5o,7 i0m0p jroobvse. communications across its remaining business units. For
■ Measuring Direct Labor Cost Problems of Overhead Application example, at one point Sony had three business units unknowingly competing against one another by
■ Applying Manufacturing Overhead ■ Underapplied and Overapplied Overhead dmeavkeilnogp tinog spthueri rp roowdnu cdt iignintaol vmatuiosnic, wphlaiylee rcse. nStornalyiz’si ncgh caollenntrgoel iosf tcoo menmcuonuircaagtieo ndse caecnrotrsasl itzheed cdoemcipsaionny
■ Using the Predetermined Overhead Rate ■ Disposition of Underapplied or Overapplied so that engineers do not create competing or incompatible products.
■ The Need for a Predetermined Rate Overhead Balances Source: Marc Gunther, “The Welshman, the Walkman, and the Salarymen,” Fortune, June 12, 2006, pp. 70–83.
■ Choice of an Allocation Base for Overhead Cost ■ A General Model of Product Cost Flows
■ Computation of Unit Costs ■ Multiple Predetermined Overhead Rates
■ Summary of Document Flows Job-Order Costing in Service Companies
Job-Order Costing—The Flow of Costs
■ The Purchase and Issue of Materials
■ Labor Cost Each section of the chapter’s
outline has an introduction about
the business aspect of the topic and
gets the reader engaged before
the topic is covered.
— Kathy Crusto-Way, Tarrant County College
viii
POWERFUL
PEDAGOGY
INFOGRAPHICS
Manufacturing Companies: Classifications of Inventory
Infographics and exhibits help
students visualize key accounting
concepts, such as Static versus
Flexible Budgets, the Activity-
Based Costing Model, and Man-
agement by Exception.
Raw Materials Work in Process Finished Goods
These real world business situations are extremely helpful. These help
students see the application of managerial accounting to real
business operations. It also helps students to see that since the world
is constantly changing, that the applications employed must be adapted
in response to the changing environment.
—Agatha E. Jeffers, Montclair State University
IN BUSINESS BOXES
INBUSINESS Skyrocketing Transportation Costs Affect Direct
Materials Standards
These helpful boxed features offer
a glimpse into how real companies Direct materials price standards should reflect the final delivered cost of the materials. Given
increases in the costs of shipping raw materials across oceans, many companies have increased
use the managerial accounting con- their price standards. For example, the average cost to rent a ship to transport raw materials from
cepts discussed within the chapter. Brazil to China has increased from $65,000 to $180,000. In some instances, shipping costs now
exceed the cost of the cargo itself. It costs about $88 to ship a ton of iron ore from Brazil to Asia;
Every chapter contains these current however, the iron ore itself only costs $60 per ton.
examples. Source: Robert Guy Matthews, “Ship Shortage Pushes Up Prices of Raw Materials,” The Wall Street Journal,
October 22, 2007, p. A1 and A12.
CONCEPT CHECK
✓
1 . The standard and actual prices per pound of raw material are $4.00 and $4.50, CONCEPT
respectively. A total of 10,500 pounds of raw material was purchased and then used Concept Checks allow students to
to produce 5,000 units. The quantity standard allows two pounds of the raw material CHECK
per unit produced. What is the materials quantity variance? test their comprehension of topics
a. $5,000 unfavorable
b. $5,000 favorable and concepts covered at various
c. $2,000 favorable
d. $2,000 unfavorable stages throughout each chapter.
2. Referring to the facts in question 1 above, what is the material price variance?
a. $5,250 favorable
b. $5,250 unfavorable
c. $5,000 unfavorable
d. $5,000 favorable
ix
Rick: I think I understand, but it isconfusing.
Victoria: Just remember that a cost is called variable if it is proportional to activity; it
DECISION MAKER is called fixed if it does not depend on the level of activity. However, fixed costs can
The change for reasons unrelated to changes in the level of activity. And controllability
has little to do with whether a cost is variable or fixed. Fixed costs are often more
feature fosters critical thinking and
controllable than variable costs.
decision-making skills by providing
real-world business scenarios that DECISIONMAKER General Manager of a Luxury Resort
require the resolution of a business
You are the general manager of a 200-room luxury resort in Arizona and are responsible for all
issue. The suggested solution is aspects of operations. The budget for the current month called for total revenue from room rentals
of $2,362,500 based on 5,625 room-days. (A room-day is a room rented for one day.) The actual
located at the end of the chapter. revenue from room rentals for the month amounted to $2,502,800 for 6,250 room-days. Using the
flexible budget approach, analyze these results.
Performance Reports in Nonprofit Organizations
The performance reports in nonprofit organizations are basically the same as the per-
formance reports we have considered so far—with one prominent difference. Nonprofit
organizations usually receive a significant amount of funding from sources other than
sales. For example, universities receive their funding from sales (i.e., tuition charged
to s tudents), from endowment income and donations, and—in the case of public
u niversities—from state appropriations. This means that, like costs, the revenue in gov-
ernmental and nonprofit organizations may consist of both fixed and variable elements.
EXHIBIT 8–6
Rick’s Hairstyling Revenue and Spending Variances
Revenue and Spending Variances from Comparing the Flexible
For the Month Ended March 31 Budget to the Actual Results
Revenue
and
Flexible Actual Spending
Budget Results Variances
Client-visits................................................... 1,100 1,100
Revenue ($180.00q) .................................... $198,000 $194,200 $3,800 U
Expenses:
Wages and salaries ($65,000 $37.00q) 105,700 106,900 1,200 U
Hairstyling supplies ($1.50q) .................... 1,650 1,620 30 F
Client gratuities ($4.10q) .......................... 4,510 6,870 2,360 U
Electricity ($1,500 $0.10q) ................... 1,610 1,550 60 F YOU DECIDE
Rent ($28,500) ......................................... 28,500 28,500 0 The feature
Liability insurance ($2,800) ...................... 2,800 2,800 0
Employee health insurance ($21,300) ...... 21,300 22,600 1,300 U challenges students to apply the
Miscellaneous ($1,200 $0.20q) ............ 1,420 2,130 710 U
tools of analysis and make deci sions.
Total expense .............................................. 167,490 172,970 5,480 U
Net operating income ................................... $ 30,510 $ 21,230 $9,280 U The suggested solution is found at
the end of the chapter.
between how much a cost should have been, given the actual level of activity, and the
actual amount of the cost. If the actual cost is greater than what the cost should have been,
the variance is labeled as unfavorable. If the actual cost is less than what the cost should
have been, the variance is labeled as favorable. Why would a cost have a favorable or
unfavorable variance? There are many possible explanations including paying a higher
price for inputs than should have been paid, using too many inputs for the actual level
of activity, a change in technology, and so on. In the next chapter we will delve into this
topic in greater detail.
Note from Exhibit 8–6 that the overall net operating income variance is $9,280 U
(unfavorable). This means that given the actual level of activity for the period, the net
operating income was $9,280 lower than it should have been. There are a number of
reasons for this. The most prominent is the unfavorable revenue variance of $3,800. Next
in line is the $2,360 unfavorable variance for client gratuities. Looking at this in another
way, client gratuities were more than 50% larger than they should have been according
to the flexible budget. This is a variance that Rick would almost certainly want to inves-
tigate further. Rick may directly control the client gratuities himself. If not, he may want
to know who authorized the additional expenditures. Why were they so large? Was more
given away than usual? If so, why? Were more expensive gratuities given to clients? If so,
why? Note that this unfavorable variance is not necessarily a bad thing. It is possible, for
example, that more lavish use of gratuities led to the 10% increase in client-visits.
Owner of Micro-Brewery YOUDECIDE
Hops is an essential ingredient in beer. The brewery’s budget for the current month, which was
based on the production of 800 barrels of beer, allowed for an expense of $960 for hops. The
actual production for the month was 850 barrels of beer and the actual cost of the hops used to
produce that beer was $1,020. Hops is a variable cost. Do you think the expense for hops for the
month was too high?
xx
