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Wa r r e n R e e v e D u c h a c MANAGERIAL ACCOUNTING 10e Carl S. Warren Professor Emeritus of Accounting University of Georgia,Athens James M. Reeve Professor Emeritus of Accounting University of Tennessee,Knoxville Jonathan E. Duchac Professor of Accounting Wake Forest University This page intentionally left blank Wa r r e n R e e v e D u c h a c MANAGERIAL ACCOUNTING 10e Carl S. Warren Professor Emeritus of Accounting University of Georgia,Athens James M. Reeve Professor Emeritus of Accounting University of Tennessee,Knoxville Jonathan E. Duchac Professor of Accounting Wake Forest University Managerial Accounting, 10e Warren Reeve Duchac VP/Editorial Director:Jack W. Calhoun © 2009, 2007 South-Western, a part of Cengage Learning Editor in Chief:Rob Dewey ALL RIGHTS RESERVED. No part of this work covered by the Executive Editor:Sharon Oblinger copyright herein may be reproduced, transmitted, stored or used Developmental Editor:Aaron Arnsparger in any form or by any means graphic, electronic, or mechanical, Editorial Assistant:Heather McAuliffe including but not limited to photocopying, recording, scanning, digitizing, taping, Web distribution, information networks, or infor- Marketing Manager:Steven E. Joos mation storage and retrieval systems, except as permitted under Marketing Coordinator:Gretchen Wildauer Section 107 or 108 of the 1976 United States Copyright Act, with- Senior Media Editor:Scott Hamilton out the prior written permission of the publisher. 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For your course and learning solutions, visit www.cengage.com Purchase any of our products at your local college store or at our preferred online store www.ichapters.com Printed in the United States of America 1 2 3 4 5 6 7 11 10 09 08 The Author Team Carl S. Warren Dr.Carl S.Warren is Professor Emeritus of Accounting at the University of Georgia, Athens.Dr.Warren has taught classes at the University of Georgia,University of Iowa, Michigan State University, and University of Chicago. Professor Warren focused his teaching efforts on principles of accounting and auditing.He received his Ph.D.from Michigan State University and his B.B.A.and M.A.from the University of Iowa.During his career,Dr.Warren published numerous articles in professional journals,including The Accounting Review, Journal of Accounting Research, Journal of Accountancy, The CPA Journal, and Auditing: A Journal of Practice & Theory. Dr.Warren has served on numerous committees of the American Accounting Association,the American Institute of Certified Public Accountants,and the Institute of Internal Auditors.He has also consulted with numerous companies and public accounting firms. Warren’s outside interests include playing handball,golfing,skiing,backpacking,and fly-fishing. James M. Reeve Dr.James M.Reeve is Professor Emeritus of Accounting and Information Management at the University of Tennessee. Professor Reeve taught on the accounting faculty for 25 years, after graduating with his Ph.D. from Oklahoma State University. His teaching effort focused on undergraduate accounting principles and graduate education in the Master of Accountancy and Senior Executive MBA programs. Beyond this, Professor Reeve is also very active in the Supply Chain Certification program, which is a major executive education and research effort of the College.His research interests are varied and include work in managerial accounting,supply chain management,lean manufacturing,and information management.He has published over 40articles in academic and professional journals, including the Journal of Cost Management, Journal of Management Accounting Research, Accounting Review, Management Accounting Quarterly, Supply Chain Management Review, and Accounting Horizons. He has consulted or provided training around the world for a wide variety of organizations, including Boeing, Procter and Gamble, Norfolk Southern, Hershey Foods, Coca-Cola, and Sony. When not writing books,Professor Reeve plays golf and is involved in faith-based activities. Jonathan Duchac Dr.Jonathan Duchac is the Merrill Lynch and Co.Professor of Accounting and Director of the Program in Enterprise Risk Management at Wake Forest University.He earned his Ph.D.in accounting from the University of Georgia and currently teaches introductory and advanced courses in financial accounting.Dr.Duchac has received a number of awards during his career,including the Wake Forest University Outstanding Graduate Professor Award,the T.B.Rose award for Instructional Innovation,and the University of Georgia Outstanding Teaching Assistant Award.In addition to his teaching responsibilities,Dr. Duchac has served as Accounting Advisor to Merrill Lynch Equity Research,where he worked with research analysts in reviewing and evaluating the financial reporting prac- tices of public companies.He has testified before the U.S.House of Representatives,the Financial Accounting Standards Board,and the Securities and Exchange Commission; and has worked with a number of major public companies on financial reporting and accounting policy issues.In addition to his professional interests,Dr.Duchac is the Treasurer of The Special Children’s School of Winston-Salem; a private,nonprofit developmental day school serving children with special needs.Dr.Duchac is an avid long-distance runner, mountain biker, and snow skier. His recent events include the Grandfather Mountain Marathon,the Black Mountain Marathon,the Shut-In Ridge Trail run,and NO MAAM (Nocturnal Overnight Mountain Bike Assault on Mount Mitchell). v Leading by Example For nearly 80years,Accounting has been used effectively to teach generations of busi- nessmen and women. The text has been used by millions of business students. For many,this book provides the only exposure to accounting principles that they will ever receive.As the most successful business textbook of all time,it continues to introduce students to accounting through a variety of time-tested ways. The previous edition, 9e, started a new journey into learning more about the changing needs of accounting students through a variety of new and innovative research and development methods.Our Blue Sky Workshops brought accounting faculty from all over the country into our book development process in a very direct and creative way.Many of the features and themes present in this text are a result of the col- laboration and countless conversations we’ve had with accounting instructors over the last several years.10e continues to build on this philosophy and strives to be reflective of the suggestions and feedback we receive from instructors and students on an ongo- ing basis. We’re very happy with the results, and think you’ll be pleased with the improvements we’ve made to the text. The original author of Accounting,James McKinsey,could not have imagined the success and influence this text has enjoyed or that his original vision would continue to lead the market into the twenty-first century.As the current authors,we appreciate the responsibility of protecting and enhancing this vision,while continuing to refine it to meet the changing needs of students and instructors.Always in touch with a tradition of excellence but never satisfied with yesterday’s success,this edition enthusiastically embraces a changing environment and continues to proudly lead the way.We sincerely thank our many colleagues who have helped to make it happen. “The teaching of accounting is no longer designed to train professional accountants only.With the growing complexity of business and the constantly increasing difficulty of the problems of management,it has become essential that everyone who aspires to a position of responsibility should have a knowledge of the fundamental principles of accounting.” — James O.McKinsey,Author,first edition,1929 vi Leading by Example Textbooks continue to play an invaluable role in the teaching and learning environment. Continuing our focus from previous editions, we reached out to accounting teachers in an effort to improve the textbook presenta- tion. New for this edition, we have extended our discussions to reach out to students directly in order to learn what they value in a textbook. Here’s a preview of some of the improvements we’ve made to this edition based on student input: NEW! Guiding Principles System Students can easily locate the information they need to master course concepts with the new “Guiding Principles System (GPS).” At the beginning of every chapter,this innovative system plots a course through the chapter content by displaying the chapter objectives,major topics,and related Example Exercises.The GPS reference to the chapter “At a Glance” summary completes this proven system. After studying this chapter, you should be able to: 1 2 3 4 Describe managerial Describe and illustrate Describe and Describe the uses of accounting and the role the following costs: illustratethe managerial accounting of managerial 1. direct and indirect followingstatements information. accounting in a costs for a manufacturing business. 2. direct materials, direct business: labor, and factory 1. balance sheet overhead costs 2. statement of cost of 3. product and period goods manufactured costs 3. income statement Managerial Manufacturing Financial Statements Uses of Managerial Accounting Operations: Costs for a Manufacturing Accounting and Terminology Business Differences Between Managerial and Direct and Balance Sheet for a Financial Accounting Indirect Costs Manufacturing Business The Management Manufacturing Accountant in the Costs Organization EE1-2 Ifnocr oam Me aSntuaftaecmtuernitng (page 10) Company MAcacnoaugnetirniagl in the EE1-3 EE1-5 MProacneasgsement EE(1p-a4ge 11) (page 18) EE1-1 (page 13) (page 6) At a Glance Menu Turn to pg 19 NEW! Written for Today’s Students Designed for today’s students,the 10th edition has been extensively revised using an innovative, high-impact writing style that emphasizes topics in a concise and clearly written manner.Direct sentences,concise paragraphs,numbered lists,and step-by-step calculations provide students with an easy-to-follow structure for learning accounting. This is achieved without sacrificing content or rigor. vii Leading by Example NEW! Revised Coverage of Investments A new chapter on investments and fair value accounting has been written to consoli- date coverage of both dept and equity investments. The chapter also contains a con- ceptual discussion of fair value accounting and its increasing role in defining today’s modern accounting methods. NEW! IFRS No topic is on the minds of many accounting practitioners more than the possible convergence of IFRS and GAAP. How accounting educators handle this emerging reality is perhaps even more of a question going forward. In the financial chapters found within this text, IFRS icons now exist in the margin to help highlight certain areas where differences exist between these standards. NEW! Modern User-Friendly Design Based on students’testimonials of what they find most useful,this streamlined presenta- tion includes a wealth of helpful resources without the clutter.To update the look of the material,some exhibits use computerized spreadsheets to better reflect the changing envi- ronmentof business.Visual learners will appreciate the generous number of exhibits and illustrations used to convey concepts and procedures. Exhibit 4 Retained NetSolutions Earnings Retained Earnings Statement For the Year Ended December 31, 2011 Statement for Merchandising Retained earnings, January 1, 2011 $128,800 Business Net income for the year $75,400 Less dividends 18,000 Increase in retained earnings 57,400 Retained earnings, December 31, 2011 $186,200 Journal Page 25 Post. Date Description Ref. Debit Credit 2011 Jan. 3 Cash 1,800 Sales 1,800 To record cash sales. viii Leading by Example Chapter Updates and Enhancements The following includes some of the specific content changes that can be found in Managerial Accounting, 10e. Chapter 1: Managerial Accounting Concepts and Principles • Added a new section at the beginning of the chapter on the uses of managerial accounting,which references subsequent chapters where the uses are described and illustrated. • Added an illustration of comparing merchandising and manufacturing income statements. • Added format for the cost of goods manufactured statement. • Added stepwise preparation of the cost of goods manufactured. Chapter 2: Job Order Costing • Added format for the entries used to dispose of overapplied or underapplied factory overhead. • Changed order of entries so that entries for sales and cost of goods sold are shown separately from the finished goods entry for completed units. Chapter 3: Process Cost Systems • Revised Exhibit 2 and accompanying narrative so that Exhibit 2 ties into Exhibit 8, which illustrates entries for Frozen Delights. • Revised illustration of cost of production report so that units are classified into groups consisting of beginning work in process units (Group 1),started and completed units (Group 2),and ending work in process units (Group 3).This aids students in computing unit costs and assigning costs to groups using first-in, first-out inventory cost flow. Accompanying exhibits and art also classify units by these groups. • Revised and expanded the section on using the cost of production report for decision making to include an example from Frozen Delights. Chapter 4: Cost Behavior and Cost-Volume-Profit Analysis • Supplemented the mixed cost discussion by adding an equation for determining fixed costs. • Added contribution margin equation to cost-volume-profit discussion. • Added unit contribution margin equation to cost-volume-profit discussion. • Added “change in income from operations” equation based on unit contribution margin to cost-volume-profit discussion. • Incorporated a discussion of computing break-even in sales dollars using contribution margin ratio. • Added a stepwise approach to discussion of preparing cost-volume-profit and profit-volume charts. • Added equation for computing the percent change in income from operations using “operating leverage.” • Expanded discussion of margin of safety so that margin of safety may be expressed in sales dollars,units,or percent of current sales. • Revised appendix on variable costing to include format for variable costing income statement. ix

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submit all requests online at www.cengage.com/permissions .. Chapter 4: Cost Behavior and Cost-Volume-Profit. Analysis. • Supplemented the mixed cost discussion by Added unit contribution margin equation to cost-volume-profit discussion. Special Cost-Volume-Profit Relationships 150.