Warren Reeve Duchac MANAGERIAL ACCOUNTING 10e Carl S Warren Professor Emeritus of Accounting University of Georgia, Athens James M Reeve Professor Emeritus of Accounting University of Tennessee, Knoxville Jonathan E Duchac Professor of Accounting Wake Forest University This page intentionally left blank Warren Reeve Duchac MANAGERIAL ACCOUNTING 10e Carl S Warren Professor Emeritus of Accounting University of Georgia, Athens James M Reeve Professor Emeritus of Accounting University of Tennessee, Knoxville Jonathan E Duchac Professor of Accounting Wake Forest University Managerial Accounting, 10e Warren Reeve Duchac VP/Editorial Director: Jack W Calhoun Editor in Chief: Rob Dewey Executive Editor: Sharon Oblinger Developmental Editor: Aaron Arnsparger Editorial Assistant: Heather McAuliffe Marketing Manager: Steven E Joos Marketing Coordinator: Gretchen Wildauer Senior Media Editor: Scott Hamilton Senior Content Project Manager: Cliff Kallemeyn Art Director: Stacy Shirley Senior Frontlist Buyer: Doug Wilke Production: LEAP Publishing Services, Inc © 2009, 2007 South-Western, a part of Cengage Learning ALL RIGHTS RESERVED No part of this work covered by the copyright herein may be reproduced, transmitted, stored or used in any form or by any means graphic, electronic, or mechanical, including but not limited to photocopying, recording, scanning, digitizing, taping, Web distribution, information networks, or information storage and retrieval systems, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without the prior written permission of the publisher For permission to use material from this text or product, submit all requests online at www.cengage.com/permissions Further permission questions can be emailed to permissionrequest@cengage.com Composition: GGS Book Services, Inc For product information and technology assistance, contact us at Internal Design: Mike Stratton/Patti Hudepohl/Beckmeyer Design Cengage Learning Academic Resource Center, 1-800-423-0563 Cover Design: Beckmeyer Design Library of Congress Control Number: 2008935463 Cover Image: Getty Images Student Edition ISBN 13: 978-0-324-66382-2 ISBN 10: 0-324-66382-X Instructor Edition ISBN 13: 978-0-324-66387-7 ISBN 10: 0-324-66387-0 South-Western Cengage Learning 5191 Natorp Boulevard Mason, OH 45040 USA Cengage Learning products are represented in Canada by Nelson Education, Ltd For your course and learning solutions, visit www.cengage.com Purchase any of our products at your local college store or at our preferred online store www.ichapters.com Printed in the United States of America 11 10 09 08 The Author Team Carl S Warren Dr Carl S Warren is Professor Emeritus of Accounting at the University of Georgia, Athens Dr Warren has taught classes at the University of Georgia, University of Iowa, Michigan State University, and University of Chicago Professor Warren focused his teaching efforts on principles of accounting and auditing He received his Ph.D from Michigan State University and his B.B.A and M.A from the University of Iowa During his career, Dr Warren published numerous articles in professional journals, including The Accounting Review, Journal of Accounting Research, Journal of Accountancy, The CPA Journal, and Auditing: A Journal of Practice & Theory Dr Warren has served on numerous committees of the American Accounting Association, the American Institute of Certified Public Accountants, and the Institute of Internal Auditors He has also consulted with numerous companies and public accounting firms Warren’s outside interests include playing handball, golfing, skiing, backpacking, and fly-fishing James M Reeve Dr James M Reeve is Professor Emeritus of Accounting and Information Management at the University of Tennessee Professor Reeve taught on the accounting faculty for 25 years, after graduating with his Ph.D from Oklahoma State University His teaching effort focused on undergraduate accounting principles and graduate education in the Master of Accountancy and Senior Executive MBA programs Beyond this, Professor Reeve is also very active in the Supply Chain Certification program, which is a major executive education and research effort of the College His research interests are varied and include work in managerial accounting, supply chain management, lean manufacturing, and information management He has published over 40 articles in academic and professional journals, including the Journal of Cost Management, Journal of Management Accounting Research, Accounting Review, Management Accounting Quarterly, Supply Chain Management Review, and Accounting Horizons He has consulted or provided training around the world for a wide variety of organizations, including Boeing, Procter and Gamble, Norfolk Southern, Hershey Foods, Coca-Cola, and Sony When not writing books, Professor Reeve plays golf and is involved in faith-based activities Jonathan Duchac Dr Jonathan Duchac is the Merrill Lynch and Co Professor of Accounting and Director of the Program in Enterprise Risk Management at Wake Forest University He earned his Ph.D in accounting from the University of Georgia and currently teaches introductory and advanced courses in financial accounting Dr Duchac has received a number of awards during his career, including the Wake Forest University Outstanding Graduate Professor Award, the T.B Rose award for Instructional Innovation, and the University of Georgia Outstanding Teaching Assistant Award In addition to his teaching responsibilities, Dr Duchac has served as Accounting Advisor to Merrill Lynch Equity Research, where he worked with research analysts in reviewing and evaluating the financial reporting practices of public companies He has testified before the U.S House of Representatives, the Financial Accounting Standards Board, and the Securities and Exchange Commission; and has worked with a number of major public companies on financial reporting and accounting policy issues In addition to his professional interests, Dr Duchac is the Treasurer of The Special Children’s School of Winston-Salem; a private, nonprofit developmental day school serving children with special needs Dr Duchac is an avid long-distance runner, mountain biker, and snow skier His recent events include the Grandfather Mountain Marathon, the Black Mountain Marathon, the Shut-In Ridge Trail run, and NO MAAM (Nocturnal Overnight Mountain Bike Assault on Mount Mitchell) v Leading by Example For nearly 80 years, Accounting has been used effectively to teach generations of businessmen and women The text has been used by millions of business students For many, this book provides the only exposure to accounting principles that they will ever receive As the most successful business textbook of all time, it continues to introduce students to accounting through a variety of time-tested ways The previous edition, 9e, started a new journey into learning more about the changing needs of accounting students through a variety of new and innovative research and development methods Our Blue Sky Workshops brought accounting faculty from all over the country into our book development process in a very direct and creative way Many of the features and themes present in this text are a result of the collaboration and countless conversations we’ve had with accounting instructors over the last several years 10e continues to build on this philosophy and strives to be reflective of the suggestions and feedback we receive from instructors and students on an ongoing basis We’re very happy with the results, and think you’ll be pleased with the improvements we’ve made to the text The original author of Accounting, James McKinsey, could not have imagined the success and influence this text has enjoyed or that his original vision would continue to lead the market into the twenty-first century As the current authors, we appreciate the responsibility of protecting and enhancing this vision, while continuing to refine it to meet the changing needs of students and instructors Always in touch with a tradition of excellence but never satisfied with yesterday’s success, this edition enthusiastically embraces a changing environment and continues to proudly lead the way We sincerely thank our many colleagues who have helped to make it happen “The teaching of accounting is no longer designed to train professional accountants only With the growing complexity of business and the constantly increasing difficulty of the problems of management, it has become essential that everyone who aspires to a position of responsibility should have a knowledge of the fundamental principles of accounting.” — James O McKinsey, Author, first edition, 1929 vi Leading by Example Textbooks continue to play an invaluable role in the teaching and learning environment Continuing our focus from previous editions, we reached out to accounting teachers in an effort to improve the textbook presentation New for this edition, we have extended our discussions to reach out to students directly in order to learn what they value in a textbook Here’s a preview of some of the improvements we’ve made to this edition based on student input: Guiding Principles System NEW! Students can easily locate the information they need to master course concepts with the new “Guiding Principles System (GPS).” At the beginning of every chapter, this innovative system plots a course through the chapter content by displaying the chapter objectives, major topics, and related Example Exercises The GPS reference to the chapter “At a Glance” summary completes this proven system After studying this chapter, you should be able to: Describe managerial accounting and the role of managerial accounting in a business Describe and illustrate the following costs: direct and indirect costs direct materials, direct labor, and factory overhead costs product and period costs Describe and illustrate the following statements for a manufacturing business: balance sheet statement of cost of goods manufactured income statement Describe the uses of managerial accounting information Managerial Accounting Manufacturing Operations: Costs and Terminology Financial Statements for a Manufacturing Business Uses of Managerial Accounting Direct and Indirect Costs Balance Sheet for a Manufacturing Business Differences Between Managerial and Financial Accounting The Management Accountant in the Organization Manufacturing Costs 1-2 EE (page 10) EE 1-3 (page 11) EE 1-4 (page 13) Managerial Accounting in the Management Process 1-1 EE (page 6) At a Glance NEW! Income Statement for a Manufacturing Company 1-5 EE (page 18) Menu Turn to pg 19 Written for Today’s Students Designed for today’s students, the 10th edition has been extensively revised using an innovative, high-impact writing style that emphasizes topics in a concise and clearly written manner Direct sentences, concise paragraphs, numbered lists, and step-by-step calculations provide students with an easy-to-follow structure for learning accounting This is achieved without sacrificing content or rigor vii Leading by Example NEW! Revised Coverage of Investments A new chapter on investments and fair value accounting has been written to consolidate coverage of both dept and equity investments The chapter also contains a conceptual discussion of fair value accounting and its increasing role in defining today’s modern accounting methods NEW! IFRS No topic is on the minds of many accounting practitioners more than the possible convergence of IFRS and GAAP How accounting educators handle this emerging reality is perhaps even more of a question going forward In the financial chapters found within this text, IFRS icons now exist in the margin to help highlight certain areas where differences exist between these standards NEW! Modern User-Friendly Design Based on students’ testimonials of what they find most useful, this streamlined presentation includes a wealth of helpful resources without the clutter To update the look of the material, some exhibits use computerized spreadsheets to better reflect the changing environment of business Visual learners will appreciate the generous number of exhibits and illustrations used to convey concepts and procedures Exhibit Retained Earnings Statement for Merchandising Business NetSolutions Retained Earnings Statement For the Year Ended December 31, 2011 $128,800 Retained earnings, January 1, 2011 Net income for the year Less dividends Increase in retained earnings Retained earnings, December 31, 2011 $75,400 18,000 57,400 $186,200 Journal Date Description Page 25 Post Ref Debit Credit 2011 Jan viii Cash Sales To record cash sales 1,800 1,800 Leading by Example Chapter Updates and Enhancements The following includes some of the specific content changes that can be found in Managerial Accounting, 10e Chapter 1: Managerial Accounting Concepts and Principles • Added a new section at the beginning of the chapter on the uses of managerial accounting, which references subsequent chapters where the uses are described and illustrated • Added an illustration of comparing merchandising and manufacturing income statements • Added format for the cost of goods manufactured statement • Added stepwise preparation of the cost of goods manufactured Chapter 2: Job Order Costing • Added format for the entries used to dispose of overapplied or underapplied factory overhead • Changed order of entries so that entries for sales and cost of goods sold are shown separately from the finished goods entry for completed units Chapter 3: Process Cost Systems • Revised Exhibit and accompanying narrative so that Exhibit ties into Exhibit 8, which illustrates entries for Frozen Delights • Revised illustration of cost of production report so that units are classified into groups consisting of beginning work in process units (Group 1), started and completed units (Group 2), and ending work in process units (Group 3) This aids students in computing unit costs and assigning costs to groups using first-in, first-out inventory cost flow Accompanying exhibits and art also classify units by these groups • Revised and expanded the section on using the cost of production report for decision making to include an example from Frozen Delights Chapter 4: Cost Behavior and Cost-Volume-Profit Analysis • Supplemented the mixed cost discussion by adding an equation for determining fixed costs • Added contribution margin equation to cost-volume-profit discussion • Added unit contribution margin equation to cost-volume-profit discussion • Added “change in income from operations” equation based on unit contribution margin to cost-volume-profit discussion • Incorporated a discussion of computing break-even in sales dollars using contribution margin ratio • Added a stepwise approach to discussion of preparing cost-volume-profit and profit-volume charts • Added equation for computing the percent change in income from operations using “operating leverage.” • Expanded discussion of margin of safety so that margin of safety may be expressed in sales dollars, units, or percent of current sales • Revised appendix on variable costing to include format for variable costing income statement ix B-18 Appendix B Nike Annual Report ! ! !"'& '" "!&"' !! &'' !'& G ;:@5:A10 ,;8 CEBI