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

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

Professor Emeritus
Brigham Young University

Eric W. Noreen, Ph.D., CMA

Professor Emeritus
University of Washington

Peter C. Brewer, Ph.D.

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

MANAGERIAL ACCOUNTING, SIXTEENTH EDITION

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

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Library of Congress Cataloging-in-Publication Data

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

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

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

As a certified public accountant, Professor Garrison has been

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

Eric W. Noreen has taught at INSEAD in France and

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

He received his BA degree from the University of Washington

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

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

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

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

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

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

vi Garrison Noreen Brewer

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

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

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

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

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

NEW* Integration Exercises

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

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

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

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

$2,000

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

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

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

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

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

28,000 Completed and transferred

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

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

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

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

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

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

Concept Overview Videos

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

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

CHAPTER 4 Opening Vignette

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

After studying Chapter 4, you should be able to:

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

LO4–2 Compute the equivalent units of

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

LO4–3 Compute the cost per equivalent unit

using the weighted-average method.

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

especially good for introductory

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

154

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

Excellent coverage of the topics. Easy for

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

x Garrison Noreen Brewer

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

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

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

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

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

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

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

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

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

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

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

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

In Business Boxes JUNK FOOD GOES ON A HEALTH KICK

IN BUSINESS

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

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

accounting concepts discussed within the

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

chapter. Each chapter contains multiple

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

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

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

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

CVP Considerations in Choosing a Cost Structure

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

a dialogue; the student then walks through the implementation

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

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

170 Chapter 4

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

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

End-of-Chapter Material
172 Chapter 4

4. Compute the equivalent units of production for materials.

5. Compute the equivalent units of production for conversion.

Managerial Accounting has earned a reputation for the

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

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

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

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

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

narrative in support of it. This unique approach to textbook

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

authoring not only ensured consistency between the

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

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

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

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

superior end-of-chapter material continues to provide

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

accurate, current, and relevant practice for students.

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

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

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

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

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

between chapter content

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

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

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

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

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

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

Bridgewater State University your ending work in process inventories.

Garrison has the best

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

online material I have

ever seen.
Minna Yu, Monmouth
University

xii Garrison Noreen Brewer

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

Business Ethics are of

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

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

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

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

xiv Garrison Noreen Brewer

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

Prologue describes how to use plantwide and multiple overhead

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

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

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

xvi Garrison Noreen Brewer

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

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

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

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

Ray H. Garrison • Eric Noreen • Peter Brewer

xxii Garrison Noreen Brewer

 Brief Contents

Prologue Managerial Accounting: An Overview 1

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

Index 773

xxiii
Contents

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

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

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

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

Chapter

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

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

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

Questions 283 Applying Excel 338

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

8
Appendix 6A: Exercises and Problems 307

7
Chapter

Chapter
Master Budgeting 362

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

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

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

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

10
Appendix 10B: Exercises and Problems 501

Chapter

Standard Costs and Variances

Standard Costs—Setting the Stage 450
449

Setting Direct Materials Standards 451

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

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

The Foundational 15 589 Internal Rate of Return Method 650

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

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

Investing Activities 697 Ratio Analysis—Debt Management 735

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

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

Ratio Analysis—Liquidity 731 Credits for Chapter Openers

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

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

© LuckyImages/Shutterstock.com

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

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

1
2 Prologue

What Is Managerial Accounting?

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

EXHIBIT P–1 Accounting

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

Financial Managerial
Accounting Accounting

Reports to those outside Reports to managers inside

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

Emphasizes financial Emphasizes decisions

consequences of past affecting the future.
activities.

Emphasizes objectivity and Emphasizes relevance.

verifiability.

Emphasizes precision. Emphasizes timeliness.

Emphasizes companywide Emphasizes segment

reports. reports.

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

Mandatory for external reports. Not mandatory.

 Managerial Accounting: An Overview 3

companywide performance, whereas managerial accounting emphasizes decisions affect-

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

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

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

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

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

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

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

EXHIBIT P–2
Examples of Decisions

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

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

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

Why Does Managerial Accounting Matter to Your Career?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Managerial Accounting: Beyond the Numbers

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

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

Code of Conduct for Management Accountants The Institute of ­Management

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

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

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

A Strategic Management Perspective

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

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

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

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

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

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

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

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

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

RESOLUTION OF ETHICAL CONFLICT

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

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

An Enterprise Risk Management Perspective

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

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

MASSACHUSETTS.
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period of six years, the literary products of which were five more
articles for the Edinburgh Review, six more for the Foreign Review,
three articles for the Foreign Quarterly Review, one for the
Westminster Review, about a score of contributions of various
lengths to Fraser’s Magazine, several little papers elsewhere, and,
above all, the Sartor Resartus. There were, indeed, two considerable
breaks in the six years of Craigenputtock hermitship. One was that
second visit to London, from August 1831 to April 1832, in which he
heard of his father’s death, and in which, while endeavouring to get
his Sartor Resartus published in book-form, he added Leigh Hunt,
young John Stuart Mill, and others, to the number of his London
acquaintances. The other was in the winter of 1832–33, when he and
his wife were again in Edinburgh for some months, renewing old ties.
That winter in Edinburgh, however,—just after the death of Scott,
and some months after the death of Goethe,—furnishes nothing
essentially new in the way of incident. Then, in the summer of 1834,
when Carlyle was in his thirty-ninth year, and his Sartor Resartus
was appearing at last by instalments in Fraser’s Magazine, there was
the great final migration to London, beginning the forty-six years of
Carlyle’s life that were to be associated for ever with No. 5 (now No.
24) Cheyne Row, Chelsea. During those forty-six years there were, of
course, frequent trips to Scotland, with chance returns for a few days
to Edinburgh. Most memorable of all was the visit to Edinburgh in
April 1866, for his installation in the Rectorship of Edinburgh
University. Of that visit, perhaps the crowning glory of his old age,
and reconnecting him so conspicuously with Edinburgh at the last,
but saddened for him so fatally by the death of his wife in his
absence, I have not a few intimate recollections; as also of those
later, almost furtive, visits now and again in his declining autumns,
to his eightieth year and beyond, when his real purpose was
pilgrimage to his wife’s grave in Haddington Church, and he would
saunter, or almost shuffle, through the Edinburgh streets as a
bowed-down alien, disconsolate at heart, and evading recognition.
Any such recollections may be reserved. All that is properly the
Edinburgh Life of Carlyle has been described here.
 CHARLES KIRKPATRICK SHARPE[46]

To as late as the winter of 1850–51 there was to be seen

occasionally in the streets of Edinburgh an old gentleman, very
peculiarly attired in a faded surtout of utterly antique fashion, with a
large and bulging cravat round his throat, the lower curls of a light-
brown wig visible between his hat and his smooth and still ruddy
cheeks, pumps on his thread-stockinged feet instead of shoes or
boots, and in his hand a green silk umbrella. This, you were told, if
you did not know it already, was Charles Kirkpatrick Sharpe. The
mere name probably conveyed some information to you; and on a
little inquiry you could learn more. For nearly forty years, you could
learn, he had been one of the notabilities of Edinburgh: resident
since about 1843 in his present house, No. 28 Drummond Place,
where he lived in a recluse manner, with a wonderful museum of
antiquities and artistic curiosities about him; but remembered for his
more active connection with Edinburgh society in that prior period,
between 1813 and 1840, when his house had been in No. 93 Princes
Street.
It was mainly in this Princes Street portion of Kirkpatrick
Sharpe’s Edinburgh life, bringing him from the thirty-third year of
his age to the sixtieth, that he had made his reputation. A strange
and mixed reputation it was. A zealot in Scottish antiquities and
editor of some Scottish historical books, an occasional scribbler also
in other and semi-private ways on his own account, a dilettante in art
and collector of pictures and engravings, a facile master of the pencil
in portrait and whimsical caricature, a Tory of the most pronounced
old type and hater of everything Whiggish in the past or the present,
he was notorious above all as a Sir Mungo Malagrowther redivivus,
delighting in scandalous anecdote and reminiscence, and in a habit
of cynical sarcasm on all sorts of persons, living or dead. A special
distinction of a large segment of this portion of his life, you could not
fail to be told, had been his intimacy with Sir Walter Scott. The death
of Scott in 1832, removing as it did the one man whose
companionship he had always prized most, and whose influence on
him had been strongest, had, in fact, turned the rest of his life in
Edinburgh into a comparative blank. Still in friendly enough
relations, however, with some of the best-known of Scott’s survivors
in the literary society of Edinburgh, especially Thomas Thomson,
David Laing, and Robert Chambers, and admitting to his
acquaintance now and then a junior of kindred antiquarian tastes,
such as Hill Burton, he had continued to prefer “New Athens,” as he
liked to call it satirically, to any other home. And so, quitting No. 93
Princes Street in 1840, he had, after a brief intervening habitation
somewhere in the Old Town, taken up his final abode, in 1843, as has
been said, in No. 28 Drummond Place, becoming more and more of
an invalid and a recluse there, till at last he had shrunk into that
“lean and slippered pantaloon,” or rather that old gentleman in the
antique blue surtout and light-brown wig, who is remembered as
Charles Kirkpatrick Sharpe by most of those now living in Edinburgh
that can remember him at all. He was not so very old a gentleman,
either; for, when he died in March 1851, he had not quite completed
his seventieth year.
The best sketch of Kirkpatrick Sharpe in his prime is that given
in Lockhart’s Life of Scott, in the form of an extract from Scott’s
Diary, under the date of Sunday, the 20th November 1825. It
chanced that William Clerk and Kirkpatrick Sharpe had dined with
Scott that day in his house in Castle Street; and the Diary, after
describing Clerk, thus describes the other:—
“Charles Kirkpatrick Sharpe is another very remarkable man. He was bred for
a clergyman, but never took orders. He has infinite wit, and a great turn for
antiquarian lore, as the publications of Kirkton, etc., bear witness. His drawings
are the most fanciful and droll imaginable,—a mixture between Hogarth and some
of those foreign masters who painted temptations of St. Anthony and other
grotesque subjects. As a poet he has not a very strong touch. Strange that his
finger-ends can describe so well what he cannot bring out clearly and firmly in
words. If he were to make drawing a resource, it might raise him a large income.
But, though a lover of antiquities, and therefore of expensive trifles, C. K. S. is too
aristocratic to use his art to assist his revenue. He is a very complete genealogist,
and has made detections in Douglas and other books on pedigree, which our
nobles would do well to suppress if they had an opportunity. Strange that a man
should be curious after scandal of centuries old! Not but Charles loves it fresh and
fresh also; for, being very much a fashionable man, he is always master of the
reigning report, and he tells the anecdote with such gusto that there is no helping
sympathising with him,—a peculiarity of voice adding not a little to the general
effect. My idea is that C. K. S., with his oddities, tastes, satire, and high aristocratic
feelings, resembles Horace Walpole; perhaps in his person also in a general way.”
This description, which C. K. S. must have himself read on its
first appearance in Lockhart,[47] had to serve as a sufficient account
of him for the general public so long as he lived, except in so far as it
might be filled up by impressions from his own writings. After his
death there were obituary sketches of him, of course, in the
Edinburgh newspapers; and he figured posthumously, under the thin
disguise of “Fitzpatrick Smart, Esq.,” as one of the typical Edinburgh
bibliomaniacs so cleverly described by Hill Burton in his Book-
Hunter, published in 1862. Not till 1869, however, was there any
adequate commemoration of him. In that year there was published
by Messrs. Blackwood a sumptuous large quarto entitled Etchings by
Charles Kirkpatrick Sharpe, with Photographs from Original
Drawings, Poetical and Prose Fragments, and a Prefatory Memoir.
The volume sufficed in every respect for those who still felt an
interest in Kirkpatrick Sharpe and his memory, save that it contained
hardly any representation of his extensive epistolary correspondence.
The defect has been amply supplied in the two large new volumes
now before us. The Memoir which they contain is substantially a
reproduction of that in the now scarce volume of 1869; but they
consist chiefly of a selection of Kirkpatrick Sharpe’s preserved letters,
and of letters to him, through the long period of fifty-two years
extending from 1798 to 1850. The careful editor, Mr. Allardyce, has
erred rather by excess than by defect in his selection. A good many of
the letters of Sharpe’s correspondents which he has thought worth
giving might well have been spared. With that exception, however,
the editing is admirable; and in the main, the collection is as
variously amusing, and here and there as startlingly and laughably
odd, as anything of the kind that has been published in Great Britain
for many a day.
By far the largest proportion of the letters belong to what has
been hitherto the least known period of Kirkpatrick Sharpe’s life: to
wit, the period preceding his definite settlement of himself in
Edinburgh in 1813. From these, together with Mr. Bedford’s prefixed
Memoir, we obtain the following facts:—
Born in 1781, at Hoddam Castle, in Dumfriesshire, the third son
of Charles Sharpe, Esq., of Hoddam, and with a pedigree, both on the
father’s side and on the mother’s, of specially marked connections
with some of the oldest houses of the Scottish aristocracy, and some
of the most memorable events of Scottish history, the boy had grown
up to his sixteenth year, one of a large family of well-educated
brothers and sisters, imbibing the family tastes, and strongly
influenced also by the traditions and legends of the antique family-
dwelling itself, and of the adjacent scenery of that old West Border
region. Drawing, howsoever learnt, must have been one of his
earliest accomplishments; and one of the most interesting memories
of his boyhood was that, in consequence of his father’s friendly
relations with the poet Burns, he himself had seen and spoken with
the poet familiarly more than once. It was in the winter after the
poet’s death that Kirkpatrick Sharpe added to his home education by
attending a class or two in the University of Edinburgh. The
intention for the time, however, being that he should become an
English clergyman, he was sent, in 1798, at the age of seventeen, to
Christ Church, Oxford. Mainly here we see him for the next eight
years, taking his B.A. degree in 1802 and his M.A. in 1806, and
meanwhile forming intimacies with a select number of his young
College and University coevals. Chief among these were Earl Gower,
afterwards Duke of Sutherland, Viscount Newtown, afterwards Earl
of Lanesborough, Lord Lewisham, afterwards Earl of Dartmouth, the
Rev. J. J. Conybeare, afterwards Oxford Professor of Poetry, Mr. R.
A. Inglis, afterwards the well-known Sir Robert Inglis, and Elijah B.
Impey, son of the famous Indian Chief-Justice Impey. In the society
of these, and of other young Oxonians, he seems to have made a
strong mark, and to have been greatly liked,—a dandyish young
fellow, but with eccentric ways and bookish tastes, a very shrill voice
and abundant sarcasm in the use of it, no end of knowledge of art
subjects, and an inimitable power of portrait-sketching and
caricaturing. Incidents of the same college period at Oxford were
some contributions by Sharpe to the Anti-Jacobin, and the beginning
of his acquaintance with Scott, first by correspondence, and then
personally. Through the next seven years, when he was passing out of
his twenties into his thirties, we see him, though he still kept up his
connection with Oxford and was occasionally in residence there, yet
moving about a good deal,—sometimes at Hoddam, sometimes in
Edinburgh, sometimes in London, but with frequent visits to the
country-houses of his aristocratic friends. His habits of letter-writing
were now at their briskest; and among his correspondents through
those seven years, besides the Oxonian friends already mentioned,
none of whom forgot him wherever he was, one notes the Margravine
of Anspach, and her son, the Hon. Keppel Craven, the Marchioness
of Stafford, the Countess of Dalkeith, the Count de Gramont, the
Marchioness of Queensberry, Lady Charlotte Campbell (afterwards
Lady Charlotte Bury), Miss Campbell of Monzie, and the Duchess of
Buccleuch. What ended this desultory life of wandering and
fashionable acquaintance-making in England was the death of
Kirkpatrick Sharpe’s father in 1813. The lairdship of Hoddam having
then descended to the eldest son, General Matthew Sharpe,[48] the
old Hoddam household was broken up, and Kirkpatrick Sharpe, at
the age of thirty-two, began, on an allowance from his brother, that
long residence in Edinburgh which has been sketched sufficiently
already.
If we were to regard Kirkpatrick Sharpe as a kind of Scottish
Horace Walpole, it would not be because his correspondence
furnishes, to anything like the same extent as Walpole’s, a
continuous comment of gossip on what was most central in the
history of his time. Even the Edinburgh portion of it will disappoint,
if what is looked for in it is a record of the most important
occurrences in Edinburgh through the time traversed. Some of the
most notable persons in the society of Edinburgh, and even in its
literary society, between 1813 and 1851, are either barely mentioned
or not mentioned at all. The truth is that Kirkpatrick Sharpe moved
through the world in a track, or in a series of tracks, determined by a
few affinities of his own constitution, which led him sometimes into
social companionship, but at other times left him stranded, and at
leisure to find amusement in counting over the stray beads of past
memories. Hence, though his correspondence does contain a good
deal of historical gossip at intervals, its chief interest will be missed
by those who read it only for that kind of recompense, and do not
also find pleasure in it as a revelation of Kirkpatrick Sharpe himself.
 Kirkpatrick Sharpe was, as we have hinted, a born Sir Mungo
Malagrowther. From his first youth, whether in consequence or not
of some constitutional peculiarity, such as might be supposed to be
indicated by his thin and shrill voice,—by the bye, Sir Walter, when
he introduces the original Sir Mungo in his Nigel, expressly notes
that the voice of that original was “high-pitched and querulous,”—the
lad of elegant accomplishments from Hoddam Castle was marked by
a disposition to snarl at things, express shrill and sarcastic views of
things, ventilate the absurdest little momentary animosities. In the
very first of his letters, which is of date November 1798, and
announces to his mother his entry into Christ Church College, his
description of the young men of the college he has yet seen is that
they “are all ugly, conceited, and putting themselves in postures like
Mr. Don, and have the worst legs I ever beheld, crooked thirty
different ways, east, west, north, south, that it is a very shame to be
seen”; and in a later letter the Rev. Dr. Cyril Jackson, the head of the
college, is described as “an inspired swine.” These irreverences and
causticities, characteristic from the first of the conversation and the
letters of a young fellow of indubitable natural talent otherwise, and
of gentlemanly tastes and belongings, must, in fact, have been one
cause of that zest for his society when it could be had, and for
continued epistolary intercourse at other times, which was felt by so
many of his college comrades of the most aristocratic set, and
communicated by them to the seniors of their families. In English
country-houses, and among great ladies, what more privileged
person than the weak-voiced young Kirkpatrick Sharpe, with his
witty cynicisms and budget of queer stories? And so to the end, with
only the difference made by change of residence back to Scotland,
increasing age, and increasing carelessness in dress,—always a
privileged person, just because he was recognised as so amusing a
Malagrowther. Here, from the abundance in the volumes before us,
are a few of his characteristic Malagrowtherisms, arranged in the
chronological order of their subjects:—
Character of the Countess of Mar, his own ancestress.—“Her good qualities
were not proportioned, as is generally the case, to her rank. She basked all her life
in the beams of royalty, with a pension from the Crown, and yet cultivated the Kirk,
and hounded out her whelps to bark and bite in favour of the Solemn League and
Covenant.”
 Milton.—“I think Milton’s Paradise Lost a heap of blasphemy and obscenity,
with, certainly, numberless poetical beauties. Milton was a Whig, and in my mind
an Atheist. I am persuaded his poem was composed to apologise for the Devil, who
certainly was the first Whig on record.”
Mrs. Siddons.—“I met Mrs. Siddons at dinner one day, just before the death of
her spouse,—’twas at Walter Scott’s,—and you cannot imagine how it annoyed me
to behold Belvidera guzzle boiled beef and mustard, swill streams of porter, cram
up her nose with handfuls of snuff, and laugh till she made the whole room shake
again.”
Madame de Stäel.—“Her face was that of a blackamoor attempted to be
washed white. She wore a wig like a bunch of withered heather, and over that a
turban which looked as if it had been put on in the dark; a short neck, and
shoulders rising so much behind that they almost amounted to a hump. With all
this ugliness all the airs of a beauty,—for ever tormenting her shawl into new
draperies, and distorting her fingers as you see them in the ridiculous French
portraits by Mignard and his followers.”
Queen Caroline.—“Her eyes projected, like those of the royal family. She made
her head large by wearing an immense wig; she also painted her eyebrows, which
gave her face a strange, fierce look. Her skin,—and she showed a great deal,—was
very red. She wore very high-heeled shoes, so that she bent forward when she
stood or walked: her feet and ankles were dreadful.”
Shelley.—“We have lately had a literary sun shine forth upon us here [at
Oxford], before whom our former luminaries must hide their diminished heads,—a
Mr. Shelley, of University College, who lives upon arsenic, aquafortis, half-an-
hour’s sleep in the night, and is desperately in love with the memory of Margaret
Nicholson.”
The Rev. Dr. M’Crie.—“The villainous biographer of John Knox.” “That villain,
Dr. M’Crie.”
The Rev. H. Philpotts (afterwards Bishop of Exeter).—“A hideous fellow of the
name of Fillpot.”
Sir Walter Scott:—(1) First Sight of Scott at Oxford in 1803.—“The Border
Minstrel paid me a visit some time since on his way to town, and I very courteously
invited him to breakfast. He is dreadfully lame, and much too poetical. He spouts
without mercy, and pays compliments so high-flown that my self-conceit, though a
tolerable good shot, could not even wing one of them.” (2) Opinion of the Waverley
Novels in 1839, seven years after Scott’s death.—“As to Sir Walter’s harmless
romances,—not harmless, however, as to bad English,—they contain nothing:
pictures of manners that never were, are, or will be, besides ten thousand blunders
as to chronology, costume, etc. etc., which must mislead the million who admire
such captivating comfits.”
Rachel and Jenny Lind.—“I have seen and heard Misses Rachel and J. Lind.
The Jewess has a good voice,—far inferior, however, to that of Mrs. Siddons,—but
an ungraceful and often vulgar action. As to Miss Jenny, she sings very prettily; but
her highest note is a downright squall, and the buzz like a bee she can make (I have
heard boys in Annandale do something like it) is a trick,—not music.”
These are specimens of what may be called the
Malagrowtherism of Kirkpatrick Sharpe’s disposition,—his readiness
to snarl and snap at everything; but they leave unrepresented the two
special forms of his Malagrowtherism which strike one most
constantly and startlingly in his correspondence. Like Swift, one of
his constitutional resemblances to whom was an extreme personal
fastidiousness,—an extreme sensitiveness to anything about himself
that was offensive to eye, ear, or nostril,—he tended, in a most
inordinate degree, in his writings and letters, as if by revenge against
this constitutional nicety, to descriptions and imaginations of the
physically nasty; and, like Swift also, and probably from some similar
radical cause, he tended, in a most inordinate degree, to sexual
allusions, and to all scandals and speculations of the sexual order.
Illustrations will not be expected here, but will be found in sufficient
number in the volumes which Mr. Allardyce has edited. Mr.
Allardyce has been a bold editor; for there are in the volumes
passages of both the specified kinds that verge on the bounds of what
many people nowadays might regard as the unpublishable. Some of
these passages, it is curious to observe, occur in letters to Sharpe’s
lady-correspondents; one or two of whom, it is also curious to
remark, do not seem at all discomposed, but even,—those were the
days of the Regency!—reciprocate with due elegance. The worst of
the matter is that poor Sir Walter himself, honest man! does not
escape uninvolved. In one or two frank moments, knowing his
friend’s tastes, he had sent him communications which he thought
would suit them; and lo! these now in printed black and white!
Hurrah for old Peveril all the same! What can ever smirch him?
It would be wrong to leave our readers with the impression that
Charles Kirkpatrick Sharpe was nothing more than a Sir Mungo
Malagrowther of the first half of the present century. At the back of
his Malagrowtherism, as appears from plenty of testimony in these
volumes, there was much gentlemanly courtesy, a good deal of
kindliness and willingness to oblige, a highly cultivated critical
judgment in minute matters of art and literature, a sensitiveness to
whatever of the fine and poetical in Scottish tradition he could
discern amid the gross and scandalous, and, most especially, a real
sense of humour. In this last particular his fondness for little scraps
of whimsical or nonsensical verse may be taken as a sure sign. There
must have been some heart of intrinsic fun in the man who could go
about in the streets, or sit alone in his room, repeating to himself, as
we know he did, such scraps as these:—
“Yours till death, till death doth come,
And shut me up in the cold tum.”

“What is impossible can’t be,

And never, never comes to pass.”

“Hey, the haggis o’ Dunbar,

Fatharalinkum feedle;
Mony better, few waur,
Fatharalinkum feedle.”

Above all, we must remember how many attached friends

Kirkpatrick Sharpe had drawn around him in the course of his life,
and how all that survived of the earliest of these kept up their liking
for him, and an affectionate intercourse with him, to the last. In
September 1831, when the dying Scott was departing on his final
journey to the Mediterranean in quest of health, almost the last
friend he wrote to was his “Dear Charles”: and the letter contained
these words—“I should like to have shaken hands with you, as there
are few I regret so much to part with. But it will not be. I will keep my
eyes dry if possible, and therefore content myself with bidding you a
long, perhaps an eternal, farewell.” That, surely, is a testimony by
itself. All in all, then, need we wonder at the rumour that there are
some persons in Edinburgh now so peculiarly tempered, or so ill-
satisfied with their present mercies, that they would be willing to
exchange any three or four of those whom they are pleased to
characterise as the more insipid present celebrities of the town for
the re-apparition among us of that crabbed old gentleman who was
to be seen forty years ago in the Edinburgh streets, with his light-
brown wig, faded blue surtout, ribbon-tied pumps, and green silk
umbrella?
 JOHN HILL BURTON[49]

Dr. Hill Burton used to be a little annoyed by the praises

bestowed on him for his Book-Hunter. He had written books far
more laborious and important, he thought; and why should the
public, why should his own friends even, be always paying him such
special compliments on account of a mere piece of literary bye-play?
The feeling was natural on Dr. Burton’s part; and it is certainly
not to this casual production of his, published originally in 1862, that
one would now point as the most solid exhibition of his powers. Yet
the public were not wrong in their extraordinary fondness for The
Book-Hunter. Not only was it a book of deliciously amusing matter,
such as one prays for on a dull evening or a rainy day; but it was
pervaded, in an unusual degree, by the flavour of the author’s own
peculiar character. If not the most valuable of Dr. Burton’s writings,
it is the most thoroughly Burtonian. Hence a real propriety in the
form of the present republication. If any one of Dr. Burton’s books
was to be converted, by the care of his publishers, into a memorial of
himself, and set forth, therefore, in all the beauties of quarto size,
thick ribbed paper, wide margins, and gilt binding, and with the
accompaniments of a portrait, illustrative vignettes, and a prefixed
biography, which could it be but The Book-Hunter? Messrs.
Blackwood have done well in perceiving this, and in making
reaccessible such a famous book about books, unfortunately so long
out of print, in a new edition devised so expressly, in the first place,
for book-lovers of very æsthetic tastes and correspondingly superior
purses.
No need at this time of day to revert to the book itself for
description of the richly humorous variety of its contents, or for
specification of the parts that are most fascinating and memorable.
No need either to point out the errors into which the author
sometimes fell in his hurry, and some of which remain in the present
text,—as, for example, the extraordinary blunder of making Gilbert
Rule “the founder and first Principal of the University of Edinburgh.”
We prefer attending to what is really the most important, as well as
the most charming, feature of distinction between this new edition of
The Book-Hunter and the older and smaller editions. Biographic
sketches of Dr. Burton, some of them in the shape of obituary
notices, have already made the public acquainted with the main facts
of his life; but there has been no such full, intimate, or interesting
account of him as that furnished in the “Memoir of the Author”
which opens the present volume, and bears the signature of his
widow, “Katharine Burton.” Consisting of no fewer than 104 pages,
and sketching the whole life with sufficient continuity, and with a
pleasant abundance of personal detail, it is exactly the kind of
biographical introduction that one would desire to see prefixed to the
most characteristic work, or to the collected works, of any deceased
author. We should have been grateful for so much information about
Dr. Burton and his habits in whatever form it had been
communicated; but the form itself deserves praise. Although there
has been evidence of Mrs. Burton’s literary ability and skill in former
writings of hers, in none of them has she been more successful than
in this. The style is easy; and the narrative is managed throughout
with an admirable combination of fidelity to fact, dutiful affection for
the subject, and artistic perception of what is historically significant,
or racy, or picturesque. One is struck, also, by the frank candour of
the writer, her abstinence from exaggeration, her resolution that Dr.
Burton should be seen in her pages exactly as he was. In two or three
passages this honesty of the writer, so rare in biographies by
relatives, comes upon the reader with the effect of a surprise.
In the first portion of the Memoir we are with young Burton in
Aberdeen, where he was born in 1809, and where he mainly resided
till 1830. We see him in his boyhood and early youth, growing up
hardily among the quaint and old-fashioned domesticities of his
maternal relatives, the Patons of Grandholm, or moving about
between the two almost contiguous towns, the main Aberdeen and
the smaller Old Aberdeen, that share the mouths of the Dee and the
Don. By-the-bye, why does Mrs. Burton lavish all her affection on
Old Aberdeen, calling it “a sweet, still, little place,” and dilating on
the charms of its college and cathedral and antique streets, while she
has nothing more to say for New Aberdeen than that it is “a highly
prosperous commercial city, as utterly devoid of beauty or interest as
any city under the sun”? About Old Aberdeen all will agree with her;
but who that really knows the Granite City will agree with her about
the New? Is it nothing to be able to walk along the whole length of
her noble Union Street, whether on fair summer mornings, when the
sun is shining, or again in the frosty winter nights, when the eye is
held by the undulating perspective of the lamps, and the very houses
glitter keenly in the starlight, and the aurora borealis is seen dancing
at its best in the northward sky over the chasm from Union Bridge?
Is it nothing to saunter down by the bustling quays and ship-yards,
and thence to the extreme of the harbour, where the great out-jutting
pier of stonework commands the miles of breakers and of sandy
beach to the left, and spikes the wrath of the German Ocean?
To young Burton, at all events, these and other sights and
experiences of his native city were by no means nothing. Familiar,
like all other Aberdonians, with the quiet little old town of the Don,
he was a nursling more peculiarly of the new town of the Dee,—
historically the older town, after all. It was at the Grammar School of
New Aberdeen that he received his first instruction in Latin; and,
when he passed to the University, it was not to King’s College in Old
Aberdeen, but to the amorphous hulk of a building, off the
Broadgate, in the New Town, then famous as Marischal College and
University, where Dugald Dalgetty had been educated long before
him. For a while, indeed, it seemed as if Burton was to be a denizen
of New Aberdeen all his days. Hardly had he left the University when
he was apprenticed to an Aberdeen writer, and began the drudgery of
officework, with a view to being an Aberdeen writer himself. Two
passions, however, had already been developed in him, which made
the prospect of such a life unendurably irksome. One was a passion
for rambling about the country. To the last Dr. Burton was an
indefatigable pedestrian, thinking nothing of a walk of fifty or even
sixty miles in a day, over any tract of country and in any kind of
weather; and the habit, Mrs. Burton tells us, and proves by letters,
had been formed in his boyhood. Nothing more common with him
then than to set off, in the holiday season, with a pound in his pocket,
accomplish some incredible distance on that sum in the
Aberdeenshire, Banffshire, or Morayshire Highlands, and reappear,
draggled and footworn, when the sum was spent. His other passion
was for literature. Letter-writing he disliked, and avoided as much as
he could; but for every other purpose he had always a pen in his
hand. Heaps of early manuscript of his, Mrs. Burton informs us, are
yet extant, conspicuously weak in the spelling, but showing an
extraordinary versatility of taste in the matter. He wrote verse as well
as prose, drama as well as narrative, but had a special propensity to
terrific prose-stories of the blood and murder sort. There were
newspapers in Aberdeen, and even a magazine, at that date; and,
where editors were so good-natured and not over-burdened, it was
not difficult for a clever young scribbler to get a percentage of his
writings into print. The Memoir does not give us particulars; but
Aberdonian legend still preserves the memory of those old days
when young Burton, young Joseph Robertson, young Spalding, and
others, began their literary lives together, and had no higher
ambition as yet than astonishing the Devanha and being read in the
Gallowgate.
Released, by happy chance, from his detested Aberdeen
writership, Burton came to Edinburgh in November 1830, at the age
of one-and-twenty, and was able, by passing some forms of
examination, which seem to have been easier and more rapid than
the corresponding forms now, to qualify himself at once for the
Scottish Bar. He was called in 1831; and from that date he was a
citizen of Edinburgh, never leaving it save for one of his country
rambles, or for an occasional visit to London or the Continent. From
that date, too, his membership of the Bar leading to little or no
practice, but only to more and more distinct recognition of him as
one of the Whig politicians of the Parliament House, literature was
his avowed profession.
The fifty years of Burton’s Edinburgh life are sketched for us in
Mrs. Burton’s Memoir with chronological and topographical
precision. The substance is as follows:—
The thirteen years of his continued bachelorship, from 1831 to
1844, when he was domiciled with his mother and sister, first in
Warriston Crescent, and then in Howard Place, with a little summer
cottage at Brunstane, were a period of extraordinary and most varied
literary industry, chiefly anonymous. He wrote for newspapers and
reviews; he wrote schoolbooks and other compilations; he wrote no
one knows what or how much. “Dr. Burton’s whole resources at this
time,” we are informed, “were derived from his pen.”
It was the same during the five years of his first married life,
from 1844 to 1849, when he and his wife resided in Scotland Street,
and then in Royal Crescent, his mother and sister having taken up
house by themselves,—not at Brunstane, which was given up about
this time,—but at Liberton Bank. It was during those five years,
however, that, while still engaged in a great amount of miscellaneous
hackwork, he emerged into independent authorship in his Life and
Correspondence of David Hume, his Lives of Lord Lovat and
Duncan Forbes of Culloden, his Benthamiana, and his Political and
Social Economy,—the last written for the Messrs. Chambers. This
was the time, too, of his fullest relish for general companionship, his
most frequent appearances at Edinburgh dinner tables, and perhaps
his highest reputation for humorous sociability and powers of table
talk.
The sad death of his wife in 1849, leaving him a widower in his
fortieth year, with three young daughters, produced a change in that
respect from which he never quite recovered. He was all but
shattered by the blow, and went about for a time broken-hearted,
shunning all ordinary society, and finding relief only in aimless walks
by night and day, and in strenuous and solitary work. Through the
whole of his widowerhood, in fact, he remained very much of a
recluse, living laboriously with his children and his books, first in
Castle Street and then in Ann Street, and having intercourse only
with a few intimates: such as Joseph Robertson, John Ritchie,
Alexander Russel and other Scotsman friends, and Professor Cosmo
Innes. With the last of these, especially, he was in the habit of taking
long Saturday and Sunday walks; which ended generally in his dining
with the Innes family, the one guest at their table in Inverleith Row,
of a Saturday or Sunday evening. This, we believe, was the time of
the beginning of his important connection with Blackwood’s
Magazine, as it was certainly of the publication of his Narratives
from Criminal Trials in Scotland, his Treatise of the Law of
Bankruptcy in Scotland, and his History of Scotland from the
Revolution to the Extinction of the last Jacobite Rebellion. His
appointment in 1854 to the Secretaryship of the Scottish Prisons
Board, with a salary of £700 a year, made his circumstances easier,
and at the same time provided him with that regular occupation in
official business for so many hours every day which he thought
desirable for any man of letters. The appointment caused him to
remove to a largish, semi-rural house in Lauriston Place, backing on
the Meadows, the site of which is now occupied by the Simpson
Memorial Hospital.
In August 1855 he married his second wife,—the daughter of his
friend Cosmo Innes, and writer of the present Memoir. As is natural,
she devotes a considerable proportion of the Memoir to recollections
of the subsequent six-and-twenty years of her husband’s life. Till
March 1861 they remained in Lauriston Place,—where three more
children were born to Dr. Burton, a son and two daughters; but in
that month they entered on the tenancy of Craighouse, a quaint old-
sixteenth century fortalice, near the Braid Hills, and two miles out of
Edinburgh, on which they had set their hearts, partly for the charm
of its own ruinous picturesqueness, partly for its historical
associations with the reigns of Queen Mary and James VI., and partly
on account of the singular beauty of the views in its vicinity. Here,
having reduced the ruin into habitable and pleasant order, they lived
till 1878, on the verge of the Edinburgh world, and sufficiently close
to it for the daily business purposes of such an inveterate pedestrian
as Burton, but still so much out of it that the recluse evening habits
into which he had settled could be interrupted only when he chose,
whether by the reception of a friend or two now and then under his
own roof, or by the still rarer accident of a visit to some friend’s
house in town.
Incidents of those seventeen years at Craighouse, besides the
birth of his seventh child and youngest son, were his honorary
graduation as LL.D. by the University of Edinburgh, his election to
the membership of the Athenæum Club in London, his appointment
to the dignity of the Historiographership-Royal for Scotland, and his
honorary graduation as D.C.L. by the University of Oxford. These
honours were successive acknowledgments of that growth of his
literary reputation which had attended the appearance of such
results of his continued industry for Blackwood as his Book-Hunter
and his Scot Abroad, but, above all, the publication of his completed
History of Scotland in eight volumes. Hardly had this last, his
largest, work been finished when he projected his History of the
Reign of Queen Anne.
That work, however, prosecuted slowly and intermittently, and
requiring visits to London and to the Continent for its preparation,
was not concluded in Craighouse, but in another country house,
called Morton House, at the foot of the Pentland Hills, to which he
was reluctantly obliged to remove in 1878, when a new speculation
affecting the future property of Craighouse and its neighbourhood
dispossessed him from that much-loved home. The last three years of
his life, marked by the publication of his History of the Reign of
Queen Anne, in three volumes, and then, as if in final farewell to
authorship of any kind, by the sale of his library, were spent in this
Morton House; and here he died in 1881. As he had by that time
retired from his official duties in connection with the Prisons Board,
and had few business occasions for being in Edinburgh, he was even
more of a recluse at Morton than he had been before. Many of the
younger Edinburgh generation, however, that knew nothing of him
personally in his prime, must have a vivid recollection of casual
glimpses of him in those still recent years, when his stooping,
eccentric figure, very untidily dressed, and with the most battered
and back-hanging of hats, would be seen pushing rapidly along
Princes Street, or some other thoroughfare, with a look that seemed
to convey the decided intimation: “Don’t stop me; I care for none of
you.” But, if you did have a meeting with Burton in circumstances
that made colloquy possible, he was the most kindly of men in his
rough and unsophisticated way, with a quantity of the queerest and
most entertaining old lore, and no end of good Scottish stories.
For the filling-out of this mere chronological scheme with the
particulars that make it lively and interesting, the reader must go to
Mrs. Burton’s own pages. She has judiciously interwoven her own
narrative with a selection from the simple and chatty letters which,
with all his dislike of letter-writing, he did punctually send to his
family whenever he chanced to be absent from them. Of her account
of his domestic habits, and of the singular honesty which tempers, as
we have said, her affectionate estimate of his character all-in-all, the
following sentences, strung together from different parts of the
Memoir, will be a sufficient specimen here:—
 “His defect in conversation was that he was a bad listener. His own part was
well sustained. His enormous store of varied information poured forth naturally
and easily, and was interspersed with a wonderful stock of lively anecdotes and
jokes. But he always lacked that greatest power of the conversationalist, the subtle
ready sympathy which draws forth the best powers of others. He was invaluable at
a dull dinner-table, furnishing the whole frais de la conversation himself.... His
mode of life at that time [during his residence at Lauriston Place and at
Craighouse] was to repair to the office of the Prison Board, in George Street, about
eleven. He remained there till four, and made it a matter of conscience neither to
do any extra-official writing nor to receive visits during those hours.... Returning
from his office to dinner at five, he would, after dinner, retire to the library for
twenty minutes or half-an-hour’s perusal of a novel as mental rest. His taste in
novels has been already described. Although he would read only those called
exciting, they did not, apparently, excite him, for he read them as slowly as if he
was learning them by heart. He would return to the drawing-room to drink a large
cup of extremely strong tea, then retire again to the library to commence his day of
literary work about eight in the evening. He would read or write without cessation,
and without the least appearance of fatigue or excitement, till one or two in the
morning.... Constitutionally irritable, energetic, and utterly persistent, Dr. Burton
did not know what dulness or depression of spirits was. With grief he was indeed
acquainted, and while such a feeling lasted it engrossed him; but his spirits were
naturally elastic, and both by nature and on principle he discouraged in himself
and others any dwelling on the sad or pathetic aspects of life. He has said that the
nearest approach he had ever felt to low spirits was when he had finished some
great work and had not yet begun another.... John Hill Burton can never have been
handsome, and he so determinedly neglected his person as to increase its natural
defects. His greatest mental defect was an almost entire want of imagination. From
this cause the characters of those nearest and dearest to him remained to his life’s
end a sealed book.... Dr. Burton was excessively kind-hearted within the limits
placed by this great want. To any sorrow or suffering which he could understand he
craved with characteristic impatience to carry immediate relief; and the greatest
enjoyment of his life, especially of its later years, was to give pleasure to children,
poor people, or the lower animals. Many humble folks will remember the bunches
of flowers he thrust silently into their hands, and the refreshment he never failed to
press on their acceptance in his own peculiar manner. He was liberal of money to a
fault. He never refused any application even from a street beggar.... No printer’s
devil or other chance messenger failed to receive his sixpence or shilling, besides a
comfortable meal.... Many of the ‘motley crew’ along with whom Dr. Burton
received his education fell into difficulties in the course of their lives. Application
from one of them always met with a prompt response. To send double the amount
asked on such occasions was his rule, if money was the object desired. In his earlier
life he would also spare no trouble in endeavouring to help these unfortunates to
help themselves. As he grew older he was less zealous, probably from being less
sanguine of success, in this service.”
 The illustrations that accompany the Memoir deserve a word.
The portrait of Dr. Burton, etched by Mr. W. B. Hole, A.R.S.A., after
a photograph, and representing him walking away, with a book in his
hand, from an old book-stall near Candlemaker Row, is done to the
life, slightly tidied perhaps in the look of the costume, but catching
his gait and the keen expression of his eyes and face with wonderful
fidelity. Very faithful and pleasing, also, are the vignettes of
Craighouse Avenue and Craighouse itself, the view of a nook in the
library of Craighouse, and the vignette of Dalmeny Churchyard,
where Dr. Burton lies buried, all drawn by his daughter Miss Rose
Burton, and engraved by her sister Miss E. P. Burton.
 DR. JOHN BROWN OF EDINBURGH[50]

Since the last session of our University, Edinburgh has lost two
of her citizens of literary mark. Dr. John Brown died, in his house in
Rutland Street, on the 11th of May, in the seventy-second year of his
age; and his friend, Dr. William Hanna, died in London on the 24th
of the same month, aged seventy-three. They were both buried in
Edinburgh. As I had the honour of knowing them both well, I cannot
let the present occasion pass without asking you to join with me in
remembering them affectionately. I could say much to you of Dr.
Hanna, the son-in-law and biographer of Dr. Chalmers. I could dwell
on the merits of his Life of that great man and of his other well-
known works, and on his fine liberality of intellect and the keen and
warm geniality of his Scoto-Irish heart. In this place, however, it is
naturally of Dr. John Brown that I feel myself entitled to speak at
some length. He was, in a sense, during the latter part of his life,
peculiarly our Edinburgh man of letters, the man most fondly
thought of in that character by many people at a distance. They had
begun, long before his death, to call him “The Scottish Charles
Lamb”; and the name is applied to him still by English critics.
Born at Biggar in Lanarkshire, in 1810, the son of the Secession
minister of that town, and of a family already in the third generation
of its remarkable distinction in the Scottish religious world as “The
Browns of Haddington,” our friend came to Edinburgh in 1822, when
he was twelve years old. His father had then removed from Biggar, to
assume that pastorate of the Rose Street Secession Church in this
city in which, and subsequently in his ministry in the Broughton
Place Church, and in his Theological Professorship in connection
with the Associate Synod, he attained his celebrity. When I first knew
Edinburgh there was no more venerable-looking man in it than this
Dr. John Brown of Broughton Place Church. People would turn in