Managerial Accounting By Garrison, Noreen, Brewer-13E Built In Ce Job Preparation Guide.pdf

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Managerial
Accounting

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Managerial
Accounting
Thirteenth Edition

Ray H. Garrison, D.B.A., CPA
Professor Emeritus
Brigham Young University

Eric W. Noreen, Ph.D., CMA
Professor Emeritus
University of Washington

Peter C. Brewer, Ph.D., CPA

Miami University—Oxford, Ohio

Boston Burr Ridge, IL Dubuque, IA Madison, WI New York San Francisco St. Louis
Bangkok Bogotá Caracas Kuala Lumpur Lisbon London Madrid Mexico City
Milan Montreal New Delhi Santiago Seoul Singapore Sydney Taipei Toronto


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

MANAGERIAL ACCOUNTING
Published by McGraw-Hill/Irwin, a business unit of The McGraw-Hill Companies, Inc., 1221 Avenue of the
Americas, New York, NY, 10020. Copyright © 2010, 2008, 2006, 2003, 2000, 1997, 1994, 1991, 1988, 1985,
1982, 1979, 1976 by The McGraw-Hill Companies, Inc. All rights reserved. No part of this publication may be
reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the
prior written consent of The McGraw-Hill Companies, Inc., including, but not limited to, in any network or other
electronic storage or transmission, or broadcast for distance learning.
Some ancillaries, including electronic and print components, may not be available to
customers outside the United States.
This book is printed on acid-free paper.
1 2 3 4 5 6 7 8 9 0 DOW/DOW 0 9
ISBN
MHID

978-0-07-337961-6

0-07-337961-1

Vice president and editor-in-chief: Brent Gordon
Editorial director: Stewart Mattson
Publisher: Tim Vertovec
Developmental editor: Emily A. Hatteberg
Marketing manager: Kathleen Klehr
Lead project manager: Pat Frederickson
Senior production supervisor: Debra R. Sylvester
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Cover design: Kay Lieberherr
Cover Photo: © Mark Bertieri, Creative Photo Designs
Typeface: 10.5/12 Times Roman
Compositor: Aptara, Inc.
Printer: R. R. Donnelley
Library of Congress Cataloging-in-Publication Data
Garrison, Ray H.
Managerial accounting / Ray H. Garrison, Eric W. Noreen, Peter C. Brewer.—13th ed.
p. cm.
Includes index.
ISBN-13: 978-0-07-337961-6 (alk. paper)
ISBN-10: 0-07-337961-1 (alk. paper)
1. Managerial accounting. I. Noreen, Eric W. II. Brewer, Peter C. III. Title.
HF5657.4.G37 2010
658.15’11—dc22
2008054773
www.mhhe.com

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About the
Authors
Ray H. Garrison is emeritus professor of
accounting at Brigham Young University, Provo, Utah. He
received his BS and MS degrees from Brigham Young University
and his DBA degree from Indiana University.
As a certified public accountant, Professor Garrison has been
involved in management consulting work with both national
and regional accounting firms. He has published articles in
The Accounting Review, Management Accounting, and other
professional journals. Innovation in the classroom has earned Professor Garrison the
Karl G. Maeser Distinguished Teaching Award from Brigham Young University.

Eric W. Noreen has 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 of Washington
and MBA and PhD degrees from Stanford University. A Certified
Management Accountant, he was awarded a Certificate of
Distinguished Performance by the Institute of Certified Management Accountants.
Professor Noreen has served as associate editor of The Accounting Review and
the Journal of Accounting and Economics. He has numerous articles in academic
journals including: the Journal of Accounting Research; the Accounting Review;

the Journal of Accounting and Economics; Accounting Horizons; Accounting,
Organizations and Society; Contemporary Accounting Research; the Journal of
Management Accounting Research; and the Review of Accounting Studies.
Professor Noreen has won a number of awards from students for his teaching.

Managerial Accounting

Thirteenth Edition

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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.

vi

Garrison

Noreen

Brewer


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GARRISON NOREEN BREWER

Let

Garrison be Your Guide
For centuries, the lighthouse has provided guidance and safe passage
for sailors. Similarly, Garrison/Noreen/Brewer has successfully guided
millions of students through managerial accounting, helping them sail
smoothly through the course.
Decades ago, lighthouses were still being operated manually. In these
days of digital transformation, lighthouses are run using automatic lamp
changers and other modern devices. In much the same way, Garrison/
Noreen/Brewer has evolved over the years. Today, the Garrison book
not only guides students—accounting majors and non-majors alike—
safely through the course, but is enhanced by new forms of media
and technology to augment student learning and increase student
motivation. McGraw-Hill Connect Accounting allows instructors to
build assignments and tests from static and algorithmic versions of
the end-of-chapter material and testbank problems. Integrated iPod
content allows students to download lecture presentations, videos,
and self-quizzes to their MP3 player—giving them a portable
learning tool.
Just as the lighthouse continues to provide reliable guidance to
seafarers, the Garrison/Noreen/Brewer book continues its tradition
of helping students sail successfully through managerial accounting
by always focusing on three important qualities: relevance, accuracy,
and clarity.

Managerial Accounting

Thirteenth Edition

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RELEVANCE. Every effort is made to help students

“Garrison is THE classic
managerial accounting text.”
Angela Sandberg,
Jacksonville State University

“A well-written, well-explained
text with terrific in chapter
examples and excellent end
of chapter materials.”
Charles “Tony” Wain,
Babson College

“I love the text.”
Pam Meyer,
University of Louisiana at Lafayette

“The seminal text on
managerial accounting.”
Dr. Reed W. Easton,
Seton Hall University

viii

relate the concepts in this book to the decisions made by
working managers. With insightful chapter openers, the popular
Managerial Accounting in Action segments within the chapters,
and stimulating end-of-chapter exercises, a student reading
Garrison should never have to ask “Why am I learning this?”

ACCURACY. The

Garrison book continues to set
the standard for accurate and reliable material in its thirteenth
edition. With each revision, the authors evaluate the book and
its supplements in their entirety, working diligently to ensure
that the end-of-chapter material, solutions manual, and test
bank, are consistent, current, and accurate.

CLARITY. Generations of students have praised Garrison
for the friendliness and readability of its writing, but that’s just
the beginning. Technical discussions have been simplified,
material has been reordered, and the entire book carefully
retuned to make teaching—and learning—from Garrison as
easy as it can be. In addition, the key supplements were written
by Garrison, Noreen, and Brewer, ensuring that students and
professors will work with clear, well-written supplements that
employ consistent terminology.

The authors’ steady focus

on these three

core elements has led to tremendous results. Managerial
Accounting has consistently led the market, being used by
over two million students and earning a reputation for reliability
that other texts aspire to match.

Garrison Noreen Brewer


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Garrison’s
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 Garrison a beacon for over two million students.
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Opening Vignette

Flexible Budgets and
Performance Analysis
The Inevitability of Forecasting Errors

BUSINESS FOCUS

“This textbook is one of the
best written, best illustrated
textbooks that we have used
for the managerial course.”

10

Chapter

Each chapter opens with a Business Focus
feature that provides a real-world example
for students, allowing them to see how
the chapter’s information and insights
apply to the world outside the classroom.
Learning Objectives alert students to
what they should expect as they progress
through the chapter.

While companies derive numerous benefits from planning for
the future, they must be able to
respond when actual results deviate from the plan. For example,
just two months after telling Wall
Street analysts that it would
breakeven for the first quarter
of 2005, General Motors (GM)
acknowledged that its actual
sales were far less than its original forecast and the company
would lose $850 million in the
quarter. For the year, GM acknowledged that projected earnings would be 80% lower

than previously indicated. The company’s stock price dropped by $4.71.
When a company’s plans deviate from its actual results, managers need to understand the reasons for the deviations. How much is caused by the fact that actual sales
differ from budgeted sales? How much is caused by the actions of managers? In the
case of GM, the actual level of sales is far less than the budget, so some actual costs
are likely to be less than originally budgeted. These lower costs do not signal managerial effectiveness. This chapter explains how to analyze the sources of discrepancies
between budgeted and actual results. ■
Source: Alex Taylor III, “GM Hits the Skids,” Fortune, April 4, 2005, pp. 71–74.

LEARNING OBJECTIVES
After studying Chapter 10, you
should be able to:

LO1

Prepare a flexible budget.

LO2

Prepare a report showing
activity variances.

LO3

Prepare a report showing
revenue and spending
variances.

LO4

Prepare a performance report

that combines activity
variances and revenue and
spending variances.

LO5

Prepare a flexible budget with
more than one cost driver.

LO6

Understand common errors
made in preparing
performance reports based on
budgets and actual results.

Bonnie McQuitter Banks,
Alabama A&M University
417

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Powerful Pedagogy
IN BUSINESS

COST OVERRUNS INCREASE THE BREAK-EVEN POINT
When Airbus launched the A380 555-seat jetliner in 2000 the company said it would need to sell
250 units to break even on the project. By 2006, Airbus was admitting that more than $3 billion of
cost overruns had raised the project’s break-even point to 420 airplanes. Although Airbus has less
than 170 orders for the A380, the company remains optimistic that it will sell 751 units over the
next 20 years. Given that Airbus rival Boeing predicts the total market size for all airplanes with
more than 400 seats will not exceed 990 units, it remains unclear if Airbus will ever break even on
its investment in the A380 aircraft.

These helpful boxed features offer a glimpse
into how real companies use the managerial
accounting concepts discussed within the
chapter. Each chapter contains from three to
fourteen of these current examples.

Source: Daniel Michaels, “Embattled Airbus Lifts Sales Target for A380 to Profit,” The Wall Street Journal,
October 20, 2006, p. A6.

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202

“It’s the best text
currently available.
It’s thorough and
complete and written

in a style that students
understand.”
Rebecca J. Oatsvall,
Meredith College

x

In Business Boxes

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Chapter 5

where no past experience is available concerning activity and costs. In addition, it is
sometimes used together with other methods to improve the accuracy of cost analysis.
Account analysis works best when analyzing costs at a fairly aggregated level, such
as the cost of serving patients in the emergency room (ER) of Cook County General
Hospital. The costs of drugs, supplies, forms, wages, equipment, and so on, can be roughly
classified as variable or fixed and a mixed cost formula for the overall cost of the emergency room can be estimated fairly quickly. However, this method does not recognize
that some of the accounts may have both fixed and variable cost elements. For example,
the cost of electricity for the ER is a mixed cost. Most of the electricity is a fixed cost
because it is used for heating and lighting. However, the consumption of electricity increases with activity in the ER because diagnostic equipment, operating theater lights,
defibrillators, and so on, all consume electricity. The most effective way to estimate the
fixed and variable elements of such a mixed cost may be to analyze past records of cost
and activity data. These records should reveal whether electrical costs vary significantly
with the number of patients and if so, by how much. The remainder of this section explains how to conduct such an analysis of past cost and activity data.

MANAGERIAL
ACCOUNTING IN
ACTION

The Issue

Dr. Derek Chalmers, the chief executive officer of Brentline Hospital, motioned Kinh
Nguyen, the chief financial officer of the hospital, into his office.
Derek: I wanted to talk to you about our maintenance expenses. They seem to be
bouncing around a lot. Over the last half year or so they have been as low as $7,400
and as high as $9,800 per month.
Kinh: That type of variation is normal for maintenance expenses.
Derek: But we budgeted a constant $8,400 a month. Can’t we do a better job of
predicting what these costs are going to be? And how do we know when we’ve
spent too much in a month? Shouldn’t there be some explanation for these
variations?
Kinh: Now that you mention it, we are in the process of tightening up our budgeting
process. Our first step is to break all of our costs down into fixed and variable
components.
Derek: How will that help?
Kinh: Well, it will permit us to predict what the level of costs will be. Some costs are
fixed and shouldn’t change much. Other costs go up and down as our activity goes up
and down. The trick is to figure out what is driving the variable component of the
costs.
Derek: What about the maintenance costs?
Kinh: My guess is that the variations in maintenance costs are being driven by our
overall level of activity. When we treat more patients, our equipment is used more
intensively, which leads to more maintenance expense.
Derek: How would you measure the level of overall activity? Would you use patientdays?
Kinh: I think so. Each day a patient is in the hospital counts as one patient-day. The
greater the number of patient-days in a month, the busier we are. Besides, our budgeting is all based on projected patient-days.
Derek: Okay, so suppose you are able to break the maintenance costs down into fixed
and variable components. What will that do for us?
Kinh: Basically, I will be able to predict what maintenance costs should be as a function of the number of patient-days.

Derek: I can see where that would be useful. We could use it to predict costs for budgeting purposes.
Kinh: We could also use it as a benchmark. Based on the actual number of patient-days
for a period, I can predict what the maintenance costs should have been. We can compare this to the actual spending on maintenance.
Derek: Sounds good to me. Let me know when you get the results.

Managerial
Accounting in
Action Vignettes

These highly praised vignettes
depict cross-functional teams
working together in real-life
settings, working with the
products and services that
students recognize from their
own lives. Students are shown
step-by-step how accounting
concepts are implemented in
organizations and how these concepts are applied to solve everyday business
problems. First, “The Issue” is introduced through a dialogue; the student
then walks through the implementation process; finally, “The Wrap-up”
summarizes the big picture.

Garrison Noreen Brewer


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Utilizing the Icons
To reflect our service-based economy, the text
is replete with examples from service-based
businesses. A helpful icon distinguishes
bu
service-related examples in the text.
se
Ethics assignments and examples serve as
a reminder that good conduct is vital in
business. Icons call out content that relates
to ethical behavior for students.
M
Media integrated icons throughout the text
lin
link content back to chapter-specific quizzes,
au
audio lectures, and visual presentations; all of
w
which can be downloaded to an MP3 player.
Th
This gives students access to a portable,
el
electronic learning option to support their
cla
classroom instruction.
The writing icon denotes problems that require
students to use critical thinking as well as
writing skills to explain their decisions.
An Excel© icon alerts students that spreadsheet
templates

tem
are available for use with select
problems
pr
and cases.
IFRS

“Comprehensive, current book that
is easy to read and follow.”
Rafik Elias,
California State University, Los Angeles

“The Cadillac of the industry—Best
of the managerial accounting texts.”
Joe Gerard,
University of Wisconsin–Whitewater

“The best managerial accounting
book I have found. You can trust
the accuracy of the text material
as well as the accuracy of end of
chapter exercises/problems.”
Claudia M. Gilbertson,
North Hennepin Community College

The IFRS icon highlights content that may
be affected by the impending change to IFRS
and possible convergence between U.S. GAAP
and IFRS.

Managerial Accounting

Thirteenth Edition

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End-of-Chapter Material
Multiple-choice questions are provided on the text website at www.mhhe.com/garrison13e.

Managerial Accounting has earned a reputation
for
f
the best end-of-chapter review
and
a
discussion material of any text
oon the market. Our problem and case
m
material continues to conform to AACSB

recommendations and makes a great
starting point for class discussions and
ggroup projects. When Ray Garrison first
ccreated the Managerial Accounting text,
hhe started with the end-of-chapter material
tthen wrote the narrative in support of
it
it. This unique approach to textbook
aauthoring not only ensured consistency
bbetween the practice material and text
ccontent, but also underscored Garrison’s
ffundamental belief in the importance of
aapplying theory through practice. It is not
eenough for students to read, they must
also understand. To this day, the guiding principle
of that first edition remains and Garrison’s superior
end-of-chapter material continues to provide accurate,
current, and relevant practice for students.
Exercises

EXERCISE 2–1 The Work of Management and Managerial and Financial Accounting [LO1]

A number of terms that relate to organizations, the work of management, and the role of managerial accounting are listed below:
Budgets
Controller
ect g and
a d motivating
ot vat g
eedbac
Directing

Feedback
Financial accounting
Managerial accounting
Performance
Planning
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Precision
Timeliness

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Problems

PROBLEM 2–13 Cost Classification [LO3, LO6, LO7]

4.

Listed below are costs found in various organizations.
1. Property taxes, factory.
2. Boxes used for packaging detergent produced by the company.
3. Salespersons’ commissions.
4. Supervisor’s salary, factory.
5. Depreciation, executive autos.
6. Wages of workers assembling computers.
7. Insurance, finished goods warehouses.
8. Lubricants for production equipment.
9. Advertising costs.
10. Microchips used in producing calculators.

Shipping
on merchandise sold.
of11.
goods
soldcosts
is computed.
12. Magazine subscriptions, factory lunchroom.

tail how the cost
Do you agree that the insurance company owes Solar Technology, Inc., $226,000? Explain
your answer.

RESEARCH AND APPLICATION 2–28

[LO2, LO3, LO6, LO7]

The questions in this exercise are based on Dell, Inc. To answer the questions, you will need to
download Dell’s 2005 Form 10-K by going to www.sec.gov/edgar/searchedgar/companysearch.html.
Input CIK code 826083 and hit enter. In the gray box on the right-hand side of your computer
screen define the scope of your search by inputting 10-K and then pressing enter. Select the
10-K with a filing date of March 8, 2005. You do not need to print this document in order to
answer the questions.
Required:

1.

2.

3.
4.

5.

6.

7.
8.

What is Dell’s strategy for success in the marketplace? Does the company rely primarily on
a customer intimacy, operational excellence, or product leadership customer value proposition? What evidence supports your conclusion?
What business risks does Dell face that may threaten its ability to satisfy stockholder expectations? What are some examples of control activities that the company could use to
reduce these risks? (Hint: Focus on pages 7–10 of the 10-K.)
How has the Sarbanes-Oxley Act of 2002 explicitly affected the disclosures contained in
Dell’s 10-K report? (Hint: Focus on pages 34–35, 59, and 76–78.)
Is Dell a merchandiser or a manufacturer? What information contained in the 10-K supports
your answer?
What are some examples of direct and indirect inventoriable costs for Dell? Why has Dell’s
gross margin (in dollars) steadily increased from 2003 to 2005, yet the gross margin as a
percent of net revenue has only increased slightly?
What is the inventory balance on Dell’s January 28, 2005 balance sheet? Why is the inventory balance so small compared to the other current asset balances? What competitive
advantage does Dell derive from its low inventory levels? Page 27 of Dell’s 10-K reports a
figure called the cash conversion cycle. The cash conversion cycle for Dell has consistently been negative. Is this a good sign for Dell or a bad sign? Why?
Describe some of the various types of operating expenses incurred by Dell. Why are these
expenses treated as period costs?
List four different cost objects for Dell. For each cost object, mention one example of a direct cost and an indirect cost.

Research and Application Cases using 10-K data
from companies such as Whole Foods Market, Dell,
FedEx, and Target offer end-of-chapter learning
opportunities for students to identify strategy and
business risks and evaluate managerial accounting

concepts within a real world context.

xii

Garrison Noreen Brewer


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Author-Written Supplements
Unlike other managerial accounting texts, Garrison,
Noreen, and Brewer write all of the text’s major
supplements, ensuring a perfect fit between text and
supplement. For more information on Managerial
Accounting’s supplements package, see page xviii.

“A solid, well-balanced introductory text
book which I recommend for accounting
and non-accounting majors.”
Pamela Ondeck, University of Pittsburgh
at Greensburg

• Instructor’s Manual
• Test bank
• Solutions Manual
• Workbook/Study Guide

“Garrison’s Managerial
Accounting is, in my opinion,
the best introductory

managerial accounting
textbook on the market. It
is pedagogically sound and
has sufficient breadth in
end-of-chapter materials to
accommodate a variety of
teaching styles.”

“This is a well-written text for both
accounting and general business
majors. It does an excellent job of
incorporating real-world examples
throughout every chapter.
The online learning center is terrific
and would be beneficial to all students.”
Kathleen M. Metcalf, Muscatine
Community College

Dr. G. Todd Jackson, Northeastern
State University

Managerial Accounting

Thirteenth Edition

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New to the
Contents

Thirteenth Edition
Faculty feedback helps us continue to improve Managerial Accounting. In response to reviewer suggestions we have:
• Reordered variances in Chapters 10 and 11. Both chapters have been completely rewritten to follow a more logical flow.
• Streamlined Variable Costing coverage in Chapter 7, making it even more user-friendly.
• Moved the coverage of balanced scorecard from Chapter 10 to Chapter 12, where it more naturally belongs.
• Added International Financial Reporting Standards (IFRS) icons throughout the text to highlight topics that may be affected should
the U.S. adopt IFRS in the future.

Other major changes include:
Chapter 1

•

•
•

Chapter 7

•
•

In Business boxes have been updated throughout
Materials dealing with the distinction between financial and

managerial accounting have been moved to Chapter 2
The section on Technology in Business has been eliminated.
New material on Corporate Social Responsibility has been added.

•

The Schedule of Cost of Goods Manufactured has been simplified
by eliminating the list of the elements of Manufacturing Overhead.
This removes a discrepancy that existed between the coverage of
the Schedule of Cost of Goods Manufactured in Chapters 2 and 3.
The exercises and problems for the appendices have been moved
so that they follow those appendices.

Chapter 3
•
•
•

Portions of the chapter have been rewritten to enhance clarity.
The appendix has been rewritten to highlight its assumptions.
The exercises and problems for the appendix have been moved so
that they follow the appendix.

The chapter has been extensively revised to make the material
more user-friendly. Tables have been simplified and computing cost
of goods sold has been stream-lined.

Chapter 8
•

Chapter 2
•

•

Profit graphs are covered in addition to CVP graphs.

The exercises and problems for the appendices have been moved
so that they follow those appendices.

Chapter 10
•

This chapter has been completely rewritten to follow a logical path
leading from budgeting to performance evaluation, comparing
budgets to actual results and then on to standard cost analysis.
Flexible budgets are used to prepare performance reports with
activity variances and revenue and spending variances.

Chapter 11
•

This chapter now covers all standard cost variances—including
fixed manufacturing overhead variances in an appendix. The
material in this chapter has been extensively rewritten, particularly
the materials dealing with manufacturing overhead.

Chapter 4

Chapter 12

•

•

•

Preparing the Cost Reconciliation Report is now a Learning
Objective.
The exercises and problems for the appendices have been moved
so that they follow those appendices.

Chapter 6
•
•

The basic equations used in target profit analysis and break-even
analysis have been revised to be more intuitive.
Break-even analysis has been moved to follow target profit analysis
because break-even analysis is a special case of target profit
analysis.

xiv

Garrison Noreen Brewer

The Balanced Scorecard has been moved to this chapter, where it
more naturally belongs.

Chapter 15

•
•

The definition of free cash flow has been added to the chapter.
The exercises and problems for the appendix have been moved so
that they follow the appendix.


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Contents

xv

A Market-Leading Book Deserves

Market-Leading Technology

The wide array of technology assets that come with Managerial Accounting aren’t add-ons thrown in
at the last minute: They’re extensions of the textbook itself, that work in unison to make managerial
accounting as easy as possible to learn.
You may be tempted to put aside your CD and registration cards, planning to “get to them
later”; you may even want to discard them outright. Don’t do it! These supplements can
offer you tremendous help as you go through the course; the sooner you become familiar with
them, the sooner you can enjoy the immense benefits they have to offer.

iPod Content
Harness the power of one of the most popular technology tools students use today–the Apple iPod. Our innovative approach allows

students to download audio and video presentations right into their iPod and take learning materials with them wherever they go.
Students just need to visit the Online Learning Center at www.mhhe.com/garrison13e to download our iPod content. For each
chapter of the book they will be able to download audio narrated lecture presentations, managerial accounting videos, and even selfquizzes designed for use on various versions of iPods.
It makes review and study time as easy as putting in headphones.

McGraw-Hill’s Homework Manager®
McGraw-Hill’s Homework Manager® System is an online homework management solution that contains this textbook’s end-of-chapter
material as well as the test bank. Instructors have the option to build assignments from static and algorithmic versions of the end-of-chapter
material or build self-graded quizzes from the test bank.
Features:
• Assigns book-specific problems/exercises to students.
• Provides integrated test bank questions for quizzes and tests.
• Automatically grades assignments and quizzes and stores results in one grade book.
Learn more about McGraw-Hill’s Homework Manager system by referring to the opening pages of this text.

McGraw-Hill’s Homework ManagerPlus™

®

McGraw-Hill’s Homework Manager PLUS™ system gathers all of Managerial Accounting’s online student resources under
one convenient access point, combining the power and flexibility of McGraw-Hill’s Homework Manager ® system with the latest
interactive learning technology to create a comprehensive, fully integrated online study package.
Students using McGraw-Hill’s Homework Manager PLUS system can access not only McGraw-Hill’s Homework Manager system
itself, but the interactive online textbook as well, allowing students working on an assignment to click a hotlink and instantly review
the appropriate material in the textbook.
Students receive full access to McGraw-Hill’s Homework Manager system when they purchase McGraw-Hill’s Homework Manager
PLUS system.

Managerial Accounting

Thirteenth Edition

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McGraw-Hill Connect™ Accounting
The next evolution in online homework management and assessment, McGraw-Hill Connect Accounting is customized to Garrison’s
Managerial Accounting, 13e. With Connect Accounting, instructors can deliver assignments, quizzes, and tests online. The system
allows instructors to assign end-of-chapter material from the text in both static and algorithmic form, providing an endless supply
of practice material for students. In addition, instructors can edit existing questions and author entirely new problems.
Features:
• Assignments are graded automatically, and the results are stored in the instructor’s private gradebook.
• Instructors can track individual student performance by question, assignment, or in comparison to the rest of the class.
• Detailed grade reports are easily integrated with Learning Management Systems, such as WebCT and Blackboard.
McGraw-Hill Connect Accounting is also available with the interactive online version of the text—Connect Accounting Plus. In
addition to providing students with online assignments and assessments, Connect Accounting Plus also gives them 24/7 online
access to an eBook—an identical, electronic edition of the printed text—to aid them in successfully completing their work
wherever and whenever they choose.
In addition to McGraw-Hill Connect Accounting, Garrison 13e can also be purchased with McGraw-Hill’s Homework Manager
system, giving you more than one option to fit your course management needs.

Online Learning Center (OLC) www.mh h e .co m/ga rriso n 13e
More and more students are studying online. That’s why we offer an Online Learning Center (OLC) that follows Managerial
Accounting chapter by chapter. It doesn’t require any building or maintenance on your part. It’s ready to go the moment
you and your students type in the URL.

The Online Learning Center contains:
For the Instructor (on a password protected site):
• Instructor’s Manual
• Solutions Manual
• Test bank
ã Powerpointđ Slides
ã Excel Template Solutions
ã Transparency Masters
For the Student:
ã Practice Quizzes
ã Powerpointđ Slides
ã Excel Templates
ã iPod Content

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CourseSmart
CourseSmart is a new way to find and buy eTextbooks. At CourseSmart you can save up
to 50 percent off the cost of a print textbook, reduce your impact on the environment,
and gain access to powerful Web tools for learning. CourseSmart has the largest selection
of eTextbooks available anywhere, offering thousands of the most commonly adopted
textbooks from a wide variety of higher education publishers. CourseSmart eTextbooks
are available in one standard online reader with full text search, notes and highlighting,

and e-mail tools for sharing notes between classmates.

“Garrison makes it easy for
those students to see the
relevance of the material.
That makes it easier to
learn.”
Linda K. Whitten,
Skyline College

Online Course Management
No matter what online course management system you use (WebCT, BlackBoard, or
eCollege), we have a course cartridge available for Garrison 13e. Our cartridges are
specifically designed to make it easy to navigate and access content online. They are
easier than ever to install on the latest version of the course management system
available today.
Don’t forget that you can count on the highest level of service from McGraw-Hill. Our
online course management specialists are ready to assist you with your online course
needs. They provide training and will answer any questions you have throughout the
life of your adoption. So try our course cartridge for Garrison 13e and make online
course content delivery easy.

“It is an easy to read,
logically sequenced, book.
It has been the standard of
excellence
for years.”
Keith Patterson,
Brigham Young University–Idaho

Apple iPod® iQuiz
Use our EZ Test Online to help your students prepare to succeed with Apple iPod®
iQuiz. Using our EZ Test Online you can make test and quiz content available for a
student’s Apple iPod®. Students must purchase the iQuiz game application from Apple
for 99¢ in order to use the iQuiz content. It works on the iPOD fifth-generation iPODs
and better. Instructors need only EZ Test Online to produce iQuiz ready content.
Instructors take their existing tests and quizzes and export them to a file that can then
be made available to the student to take as a self quiz on their iPods. It’s as simple as
that.

“It is an excellent book
for class as well as a
reference material for all
users.”
Shiv S. Sharma,
Robert Morris University

McGraw-Hill/Irwin CARES
At McGraw-Hill/Irwin, we understand that getting the most from new technology can
be challenging. That’s why our services don’t stop after you purchase our book. You
can e-mail our Product Specialists 24 hours a day, get product training online, or
search our knowledge bank of Frequently Asked Questions on our support Website.
McGraw-Hill/Irwin Customer Care Contact Information
For all Customer Support call (800) 331-5094
Email
Or visit www.mhhe.com/support
One of our Technical Support Analysts will be able to assist you in a timely fashion.

Managerial Accounting

“It is a very well-written,
comprehensive text—with
outstanding illustrations
and relevant real world
examples.”
Michael Tyler, Ph.D.,
Barry University

Thirteenth Edition

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Instructor Supplements
Assurance of Learning Ready

Instructor CD-ROM

Many educational institutions today are focused on the notion of
assurance of learning, an important element of some accreditation
standards. Managerial Accounting, 13e is designed specifically to
support your assurance of learning initiatives with a simple, yet
powerful, solution.
Each test bank question for Managerial Accounting, 13e
maps to a specific chapter learning outcome/objective listed in the
text. You can use our test bank software, EZ Test, to easily query

for learning outcomes/objectives that directly relate to the learning
objectives for your course. You can then use the reporting features
of EZ Test to aggregate student results in similar fashion, making
the collection and presentation of assurance of learning data simple
and easy. You can also use our Algorithmic-Diploma Test Bank to
do this.

MHID 0073359807
ISBN-13 9780073359809
Allowing instructors to create a customized multimedia presentation,
this all-in-one resource incorporates the Test bank, PowerPoint
Slides, Instructor’s Manual, and the Solutions Manual.

AACSB Statement

MHID 0073359726
ISBN-13 9780073359724
Use this test bank to make different versions of the same test,
change the answer order, edit and add questions, and conduct
online testing. Technical support for this software is available.

McGraw-Hill Companies is a proud corporate member of AACSB
International. Recognizing the importance and value of AACSB
accreditation, we have sought to recognize the curricula guidelines
detailed in AACSB standards for business accreditation by connecting
selected questions in Managerial Accounting, 13e to the general
knowledge and skill guidelines found in the AACSB standards. The
statements contained in Managerial Accounting, 13e are provided
only as a guide for the users of this text. The AACSB leaves content
coverage and assessment clearly within the realm and control of

individual schools, the mission of the school, and the faculty. The
AACSB does also charge schools with the obligation of doing
assessment against their own content and learning goals. While
Managerial Accounting, 13e and its teaching package make no
claim of any specific AACSB qualification or evaluation, we have,
within Managerial Accounting, 13e, labeled selected questions
according to the six general knowledge and skills areas. The labels
or tags within Managerial Accounting, 13e are as indicated. There
are, of course, many more within the test bank, the text, and the
teaching package which might be used as a “standard” for your
course. However, the labeled questions are suggested for your
consideration.

Instructor’s Manual
Available on the Instructor CD and the OLC.
Extensive chapter-by-chapter lecture notes help with classroom
presentations and contain useful suggestions for presenting key
concepts and ideas. This edition has been updated to coordinate
the lecture notes closely with the PowerPoint Slides, making
lesson planning even easier.

Computerized Test Bank

Print Test Bank
Volume 1:
MHID 0073359823
ISBN-13 9780073359823
Volume 2:
MHID 007335970X
ISBN-13 9780073359700

Over 2,000 questions are organized by chapter and include
true/false, multiple-choice, and problems. This edition of the test
bank includes worked out solutions and all items have been tied
to AACSB-AICPA standards.

Microsoft Excel® Templates
Available on the Instructor CD and the OLC.
Prepared by Jack Terry of ComSource Associates, Inc., these Excel
templates offer solutions to the student version.

EZ Test
Available on the Instructor’s CD

Check Figures

McGraw-Hill’s EZ Test is a flexible electronic testing program. The
program allows instructors to create tests from book-specific items.
It accommodates a wide range of question types, plus instructors
may add their own questions and sort questions by format. EZ Test
can also scramble questions and answers for multiple versions of
the same test.

These provide key answers for selected problems and cases should
you want to make them available for your students. They are available
on the text’s Web site.

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Student Supplements
iPod Content
Available on the OLC.
The online learning center contains course-related videos, chapterspecific quizzes, and audio and visual lecture presentations that
tie directly to the text. Icons in the margins of the book direct
students to the assets available on the Web site that can offer
them additional help in understanding difficult topics.

Working Papers
Online Learning Center (OLC)
When it comes to getting the most out of your textbook, the
Online Learning Center is the place to start. The OLC follows
Managerial Accounting chapter by chapter, offering all kinds
of supplementary help for you as you read. Before you even start
reading Chapter 1, go to this address and bookmark it:

w w w.mhhe.com/ g ar r is o n 13e
Remember, your Online Learning Center was created specifically
to accompany Managerial Accounting—so don’t let this great
resource pass you by!

Workbook/Study Guide
MHID: 0073359858
ISBN-13: 9780073359854
This study aid provides suggestions for studying chapter material,

summarizes essential points in each chapter, and tests your
knowledge using self-test questions and exercises.

Student Lecture Aid
MHID: 007335984X
ISBN-13: 9780073359847
This booklet offers a hard-copy version of all the Teaching
Transparencies. You can annotate the material during the lecture
and take notes in the space provided.

Managerial Accounting

MHID: 0073359866
ISBN-13: 9780073359861
This study aid contains forms that help you organize your
solutions to homework problems.

Excel® Templates
Available on the OLC.
Prepared by Jack Terry of ComSource Associates, Inc., this
spreadsheet-based software uses Excel to solve selected problems
and cases in the text. These selected problems and cases are
identified in the margin of the text with an appropriate icon.

Practice Set
MHID: 0073396192
ISBN-13: 9780073396194
Authored by Janice L. Cobb of Texas Christian University, Doing
the Job of the Managerial Accountant is a real-world application
for the introductory Managerial Accounting student. The case

is based on an actual growing, entrepreneurial manufacturing
company that is complex enough to demonstrate the decisions
management must make, yet simple enough that a sophomore
student can easily understand the entire operations of the
company. The case requires the student to do tasks they would
perform working as the managerial accountant for the company.
The required tasks are directly related to the concepts learned
in all managerial accounting classes. The practice set can be
used by the professor as a teaching tool for class lectures, as
additional homework assignments, or as a semester project.

Thirteenth Edition

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Acknowledgments
Suggestions have been received from many of our colleagues throughout the world. Each of those who
have offered comments and suggestions 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 following professors provided feedback that was enormously helpful in
preparing the thirteenth edition of Managerial Accounting:
Alfonso Oddo, Niagara University
Angela Sandberg, Jacksonville State University
Ann Ownby Hicks, North Park University

Anna Lusher, Slippery Rock University
Barbara A. Croteau, Santa Rosa Jr. College
Bikki Jaggi, Rutgers University
Bonnie McQuitter Banks, Alabama A&M University
Brian L. McGuire, University of Southern Indiana
Bruce Neumann, University of Colorado-Denver
Carla Cabarle, Minot State University
Carmen Morgan, Oregon Institute of Technology
Cathy Lumbattis, Southern Illinois University
Cecil Battiste, Valencia Community College, East Campus
Charles Wain, Babson College
Cindi Khanlarian, University of Northern Carolina–
Greensboro
Claudia M. Gilbertson, North Hennepin Community College
Clayton Sager, University of Wisconsin–Whitewater
Curtis Howell, Georgia Southern State University
David Krug, Johnson County Community College
Deborah Beard, Southeast Missouri State University
Diane Tanner, University of North Florida
Donald E. Summers, Naval Postgraduate School
G. Todd Jackson, Northeastern State University
Gerald A. Thalmann, North Central College
James F. White, Boston University
Jeanette C. Maier-Lytle, University of Southern Indiana
Jerry W. Hanwell, Robert Morris University
Joe Gerard, University of Wisconsin–Whitewater
John Hoffer, Stark State College
Joseph G. San Miguel, Naval Postgraduate School
Juanita M. Rendon, U.S. Naval Postgrad School
Kashi Balachandran, New York University

Kathleen M. Metcalf, Muscatine Community College
Keith Patterson, BYU–Idaho
Kreag Danvers, Clarion University
Larry Devan, Hood College
Laurie McWhorter, Mississippi State University
Linda J. Benz, Jefferson Comm. & Tech Coll.
Linda K. Whitten, Skyline College

xx

Garrison Noreen Brewer

Linda Tarrago, Hillsborough Community College
Mahmoud M. Nourayi, Loyola Marymount University
Marilyn Brooks-Lewis, Warren County Community College
Mark Juffernbruch, Simpson College
Martin Rudnick, William Paterson University
Mary Michel, Manhattan College
Mary Tichich, University of Wisconsin–River Falls
Michael Tyler, Barry University
Mike Thiry, Harper College
Nat Briscoe, Northwestern State University
Noel McKeon, Florida Community College–Jacksonville,
Downtown Campus
Pam Meyer, University of Louisiana@Lafayette
Pamela Ondeck, University of Pittsburgh/Greensburg
Patricia C. Douglas, Loyola Marymount University
Patricia Fedje, Minot State University
Paul Fisher, Rogue Community College
Priscilla R. Reis, Idaho State University

Rafik Elias, California State University, Los Angeles
Ray Wilson, Boston University
Rebecca J. Oatsvall, Meredith College
Reed W. Easton, Seton Hall University
Rubik Atamian, The University of Texas, Pan Am
Russell Calk, New Mexico State University
Sandra Copa, North Hennepin Community College
Scott Martens, University of Minnesota
Sharon T. Walters, Morehead State University
Shirly A. Kleiner, Johnson County Community College
Shiv S. Sharma, Robert Morris University
Terry Glen Elliott, Morehead State University
Thomas Buckhoff, Georgia Southern University
Wayne C. Ingalls, University of Maine
William Lloyd, Lock Haven University
Helen Adams, University of Washington
Jorja Bradford, Alabama State University
Rob Clarke, Brigham Young University
Bob Conway, University of Wisconsin–Platteville
Hubert Gill, University of North Florida
Judy Harris, Nova Southeastern University
Susan Hass, Simmons College School of Management


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Margaret Hicks, Howard University
Chip Hines, Western Michigan University

Randy D. Johnston, Michigan State University
Celina Jozsi, University of South Florida
Harold Little, Western Kentucky University
Michelle McEacharn, University of Louisiana at Monroe
Brian McGuire, University of Southern Indiana
Michael Newman, University of Houston
Mike Slaubaugh, Indiana University
Scott Stroher, Glendale Community College
Jane Wiese, Valencia Community College
Kathy Crusto-Way, Tarrant County College South East
Ray Elson, Valdosta State University
Ralph Fritzsch, Midwestern State University

Mahmud Hossain, University Of Memphis
Shondra Johnson, Bradley University
Susan Kattelus, Eastern Michigan University
Debbie Madden, Morehead State University
Loretta Manktelow, James Madison University
Richard McDermott, Weber State University
Robert Morse, Ivy Tech Community College of Indiana
Janet O’Tousa, University of Notre Dame
Ronald Reed, University of Northern Colorado
Yehia Salama, University of Illinois–Chicago
Tony Scott, Norwalk Community College
Doris Warmflash, Westchester Community College
Mary Ann Welden, Wayne State University

We are grateful for the outstanding support from McGraw-Hill. In particular, we would like to thank Stewart
Mattson, Editorial Director; Tim Vertovec, Publisher; Emily Hatteberg, Developmental Editor; Kathleen Klehr, Marketing
Manager; Pat Frederickson, Lead Project Manager; Debra Sylvester, Production Supervisor; Matthew Baldwin, Lead

Designer; Susan Lombardi, Media Project Manager; and Lori Kramer, Photo Research Coordinator.
Finally, we would like to thank Beth Woods and Helen Roybark for working so hard to ensure an error-free thirteenth
edition. The authors also wish to thank Linda and Michael Bamber for inspiring the creation of the 10-K Research and
Application exercises that are included in the end-of-chapter materials throughout the book.
We are grateful to the Institute of Certified Management Accountants for permission to use questions and/or unofficial
answers from past Certificate in Management Accounting (CMA) examinations. Likewise, we thank the American Institute
of Certified Public Accountants, the Society of Management Accountants of Canada, and the Chartered 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.

Ray H. Garrison • Eric Noreen • Peter Brewer

“Garrison is the premier M[anagerial]
A[ccounting] text. Very comprehensive, very
readable and understandable. The end of chapter
problems are very well done, allowing teachers to
find excellent examples of a variety of topics and
difficulty. Head and shoulders above anything
else I have seen or used.”
Ray Wilson,
Boston University

Managerial Accounting

Thirteenth Edition

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Brief Contents
Chapter One

Managerial Accounting and the Business Environment

Chapter Two

Managerial Accounting and Cost Concepts

Chapter Three

30

88

Chapter Four

Systems Design: Process Costing

148

Chapter Five

Cost Behavior: Analysis and Use

188

Chapter Six

Cost-Volume-Profit Relationships

233

Chapter Seven

Variable Costing: A Tool for Management

Chapter Eight

Activity-Based Costing: A Tool to Aid Decision Making

Chapter Nine

Profit Planning

Chapter Ten

xxii

Systems Design: Job-Order Costing

1

279
307

368

Flexible Budgets and Performance Analysis

417

Chapter Eleven

Standard Costs and Operating Performance Measures

Chapter Twelve

Segment Reporting, Decentralization, and the Balanced Scorecard

Chapter Thirteen

Relevant Costs for Decision Making

Chapter Fourteen

Capital Budgeting Decisions

450

578

627

Chapter Fifteen

“How Well Am I Doing?” Statement of Cash Flows

Chapter Sixteen

“How Well Am I Doing?” Financial Statement Analysis

Appendix A

Pricing Products and Services

Appendix B

Profitability Analysis

777

761

687
723

507


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Contents

1

Chapter

Chapter

2

Managerial Accounting and the
Business Environment 1

Managerial Accounting and Cost
Concepts 30

Globalization 2
Strategy 4
Organizational Structure 5
Decentralization 5
The Functional View of Organizations 5

The Work of Management and the Need
for Managerial Accounting Information 31
Planning 31
Directing and Motivating 32
Controlling 32
The End Results of Managers’ Activities 33
The Planning and Control Cycle 33

Process Management 7
Lean Production 8
The Lean Thinking Model 8

The Theory of Constraints 10
Six Sigma 11
The Importance of Ethics in Business 12
Code of Conduct for Management Accountants 14
Company Codes of Conduct 14
Codes of Conduct on the International Level 17
Corporate Governance 17
The Sarbanes-Oxley Act of 2002

18

Enterprise Risk Management 19
Identifying and Controlling Business Risks
Corporate Social Responsibility 21
The Certified Management Accountant
(CMA) 22
Summary 23
Glossary 24
Questions 25
Exercises 25
Problems 26
Research and Application

29

19

Comparison of Financial and Managerial
Accounting 33
Emphasis on the Future 34

Relevance of Data 34
Less Emphasis on Precision 35
Segments of an Organization 35
Generally Accepted Accounting Principles (GAAP)
Managerial Accounting—Not Mandatory 35

35

General Cost Classifications 36
Manufacturing Costs 36
Direct Materials 36
Direct Labor 37
Manufacturing Overhead 37
Nonmanufacturing Costs 38
Product Costs versus Period Costs 38
Product Costs 38
Period Costs 39
Prime Cost and Conversion Cost 39
Cost Classifications on Financial Statements 41
The Balance Sheet 41
The Income Statement 42
Schedule of Cost of Goods Manufactured 44
Product Cost Flows 45
Inventoriable Costs 46
An Example of Cost Flows

46

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Contents

Cost Classifications for Predicting Cost Behavior
Variable Cost 48
Fixed Cost 49

46

Cost Classifications for Assigning Costs to Cost
Objects 51
Direct Cost 51
Indirect Cost 51
Cost Classifications for Decision Making
Differential Cost and Revenue 52
Opportunity Cost 53
Sunk Cost 54

52

Summary 54
Review Problem 1: Cost Terms 55
Review Problem 2: Schedule of Cost of Goods
Manufactured and Income Statement 56

Glossary 57
Questions 58
Exercises 59
Problems 64
Cases 71
Research and Application 73
Appendix 2A: Further Classification
of Labor Costs 73
Appendix 2B: Cost of Quality 76

Chapter

3

Systems Design: Job-Order
Costing 88
Process and Job-Order Costing
Process Costing 89
Job-Order Costing 89

89

Job-Order Costing—An Overview 90
Measuring Direct Materials Cost 91
Job Cost Sheet 92
Measuring Direct Labor Cost 93
Applying Manufacturing Overhead 94
Using the Predetermined Overhead Rate 95
The Need for a Predetermined Rate 95
Choice of an Allocation Base for Overhead Cost 96

Computation of Unit Costs 98
Summary of Document Flows 98

Job-Order Costing—The Flow of Costs 98
The Purchase and Issue of Materials 98
Issue of Direct and Indirect Materials 100
Labor Cost 100
Manufacturing Overhead Costs 101
Applying Manufacturing Overhead 102
The Concept of a Clearing Account 103
Nonmanufacturing Costs 104
Cost of Goods Manufactured 104
Cost of Goods Sold 105
Summary of Cost Flows 105
Problems of Overhead Application 109
Underapplied and Overapplied Overhead 109
Disposition of Underapplied or Overapplied
Overhead Balances 110
Closed Out to Cost of Goods Sold 111
Allocated between Accounts 112
Which Method Should Be Used for Disposing
of Underapplied or Overapplied Overhead? 112
A General Model of Product Cost Flows 112
Multiple Predetermined Overhead Rates 113
Job-Order Costing in Service Companies
Use of Information Technology 114
Summary 116
Review Problem: Job-Order Costing
Glossary 119
Questions 119

Exercises 120
Problems 127
Cases 138
Research and Application 140

113

116

Appendix 3A: The Predetermined Overhead Rate
and Capacity 141

Chapter

4

Systems Design: Process
Costing 148
Comparison of Job-Order and Process Costing
Similarities between Job-Order and Process
Costing 149
Differences between Job-Order and Process
Costing 149

149