Managerial Accounting 2010 Edition [2010 ed.] 0073379581, 9780073379586, 9780077415662

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iPod Content Available

2010 EDITION

Managerial Accounting John J. Wild Ken W. Shaw

www.mhhe.com/wildMA2e

Managerial Accounting 2010 Edition

John J. Wild University of Wisconsin at Madison

Ken W. Shaw University of Missouri at Columbia

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

To my wife Gail and children, Kimberly, Jonathan, Stephanie, and Trevor. To my wife Linda and children, Erin, Emily, and Jacob.

MANAGERIAL ACCOUNTING: 2010 EDITION Published by McGraw-Hill/Irwin, a business unit of The McGraw-Hill Companies, Inc., 1221 Avenue of the Americas, New York, NY, 10020. Copyright © 2010, 2007 by The McGraw-Hill Companies, Inc. All rights reserved. No part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written consent of The McGraw-Hill Companies, Inc., including, but not limited to, in any network or other electronic storage or transmission, or broadcast for distance learning. Some ancillaries, including electronic and print components, may not be available to customers outside the United States. This book is printed on acid-free paper. 1 2 3 4 5 6 7 8 9 0 DOW/DOW 0 9 ISBN MHID

978-0-07-337958-6 0-07-337958-1

Vice president and editor-in-chief: Brent Gordon Editorial director: Stewart Mattson Publisher: Tim Vertovec Executive editor: Steve Schuetz Senior developmental editor: Christina A. Sanders Executive marketing manager: Sankha Basu Managing editor: Lori Koetters Full service project manager: Sharon Monday, Aptara®, Inc. Lead production supervisor: Carol A. Bielski Lead designer: Matthew Baldwin Senior photo research coordinator: Lori Kramer Photo researcher: Sarah Evertson Senior media project manager: Jennifer Lohn Cover and interior design: Matthew Baldwin Cover image: © Getty Images Typeface: 10.5/12 Times Roman Compositor: Aptara®, Inc. Printer: R. R. Donnelley Library of Congress Cataloging-in-Publication Data Wild, John J. Managerial accounting / John J. Wild, Ken W. Shaw.—2010 ed. p. cm. Includes index. ISBN-13: 978-0-07-337958-6 (alk. paper) ISBN-10: 0-07-337958-1 (alk. paper) 1. Managerial accounting. I. Shaw, Ken W. II. Title. HF5657.4.W523 2010 658.15⬘11—dc22 2008047781 www.mhhe.com

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Dear Colleagues/Friends, As we roll out the new edition of Managerial Accounting, we thank each of you who provided suggestions to enrich this textbook. As teachers, we know how important it is to select the right book for our course.This new edition reflects the advice and wisdom of many dedicated reviewers, focus group participants, students, and instructors. Our book consistently rates number one in customer loyalty because of you.Together, we have created the most readable, concise, current, and accurate managerial accounting book available today. We are thrilled to welcome Ken Shaw to the Managerial Accounting team with this edition. Ken's teaching and work experience, along with his enthusiasm and dedication to students, fit nicely with our continuing commitment to develop cutting–edge classroom materials for instructors and students. Throughout the writing process, we steered this book in the manner you directed.This path of development enhanced this book's technology and content, and guided its clear and concise writing. Reviewers, instructors, and students say this book's enhanced technology caters to different learning styles and helps students better understand accounting. McGraw-Hill Connect Accounting offers new features to improve student learning and to assist instructor grading. Our iPod content lets students study on the go, while our Algorithmic Test Bank provides an infinite variety of exam problems. You and your students will find all these tools easy to apply. We owe the success of this book to our colleagues who graciously took time to help us focus on the changing needs of today's instructors and students.We feel fortunate to have witnessed our profession's extraordinary devotion to teaching. Your feedback and suggestions are reflected in everything we write. Please accept our heartfelt thanks for your dedication in helping today's students understand and appreciate accounting. With kindest regards,

John J. Wild

Ken W. Shaw

iv

Driving Student and Instructor Success Managerial Accounting 2e Help your students steer towards success by giving them the tools they need to accelerate in today’s managerial accounting course. This book helps drive student success by providing leading accounting content that engages students–with innovative technology. One of the greatest challenges students confront in a managerial accounting course is seeing the relevance of materials.This book tackles this issue head on with engaging content and a motivating style. Students are motivated with reading materials that are clear and relevant.This book leads the pack in engaging students. Its chapter-opening vignettes showcase dynamic, successful, entrepreneurial individuals and companies guaranteed to interest and excite readers.This edition’s featured companies (Best Buy, Circuit City, RadioShack, and Apple) engage students with their operations which are great vehicles for learning managerial accounting. This book also delivers innovative technology to help drive student success. McGraw-Hill Connect Accounting provides students with instant grading feedback for assignments that are completed online. Connect Plus integrates an online version of the textbook with our Connect homework management system. An algorithmic test bank in Connect offers infinite variations of numerical test bank questions.This book also offers accounting students portable iPod-ready content. We're confident you'll agree that Wild and Shaw’s Managerial Accounting (MA) will put your students in the driver’s seat to success.

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John J. Wild is a distinguished professor of accounting at the University of Wisconsin at Madison. He previously held appointments at Michigan State University and the University of Manchester in England. He received his BBA, MS, and PhD from the University of Wisconsin. Professor Wild teaches accounting courses at both the undergraduate and graduate levels. He has received numerous teaching honors, including the Mabel W. Chipman Excellence-in-Teaching Award, the departmental Excellence-in-Teaching Award, and the Teaching Excellence Award from the 2003 and 2005 business graduates at the University of Wisconsin. He also received the Beta Alpha Psi and Roland F. Salmonson Excellence-in-Teaching Award from Michigan State University. Professor Wild has received several research honors and is a past KPMG Peat Marwick National Fellow and is a recipient of fellowships from the American Accounting Association and the Ernst and Young Foundation. Professor Wild is an active member of the American Accounting Association and its sections. He has served on several committees of these organizations, including the Outstanding Accounting Educator Award,Wildman Award, National Program Advisory, Publications, and Research Committees. Professor Wild is author of Financial Accounting, Fundamental Accounting Principles, Financial and Managerial Accounting, and College Accounting, each published by McGraw-Hill/Irwin. His research articles on accounting and analysis appear in The Accounting Review, Journal of Accounting Research, Journal of Accounting and Economics, Contemporary Accounting Research, Journal of Accounting, Auditing and Finance, Journal of Accounting and Public Policy, and other journals. He is past associate editor of Contemporary Accounting Research and has served on several editorial boards including The Accounting Review. Professor Wild, his wife, and four children enjoy travel, music, sports, and community activities.

Ken W. Shaw is an associate professor of accounting and the CBIZ/MHM Scholar at the University of Missouri. He previously was on the faculty at the University of Maryland at College Park. He received an accounting degree from Bradley University and an MBA and PhD from the University of Wisconsin. He is a Certified Public Accountant with work experience in public accounting. Professor Shaw teaches financial accounting at the undergraduate and graduate levels. He received the Williams Keepers LLC Teaching Excellence award in 2007, was voted the “Most Influential Professor” by the 2005 and 2006 School of Accountancy graduating classes, and is a two-time recipient of the O'Brien Excellence in Teaching Award. He is the advisor to his School's chapter of Beta Alpha Psi, a national accounting fraternity. Professor Shaw is an active member of the American Accounting Association and its sections. He has served on many committees of these organizations and presented his research papers at national and regional meetings. Professor Shaw's research appears in the Journal of Accounting Research; Contemporary Accounting Research; Journal of Financial and Quantitative Analysis; Journal of the American Taxation Association; Journal of Accounting, Auditing, and Finance; Journal of Financial Research; Research in Accounting Regulation; and other journals. He has served on the editorial boards of Issues in Accounting Education and the Journal of Business Research, and is treasurer of the American Accounting Association’s FARS. Professor Shaw is co-author of Fundamental Accounting Principles and College Accounting, both published by McGraw-Hill. In his leisure time, Professor Shaw enjoys tennis, cycling, music, and coaching his children's sports teams.

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Engaging Content Managerial Accounting content continues to set the standard.This book describes key managerial accounting concepts clearly and concisely. For example, Chapter 1 sets the stage for student success by explaining cost classifications and the reporting of production activities. Also, take a look at Chapter 3, which presents a clear 4-step method for process costing involving analysis of (1) physical flow, (2) equivalent units, (3) cost per equivalent unit, and (4) cost assignment and reconciliation. And finally, overhead variances are shown in Chapter 8 with ample visual aids–see samples below. Managerial Accounting also motivates students with engaging chapter openers. Students identify with them and can even picture themselves as future entrepreneurs. Cost Item

By Behavior

By Traceability

By Function

Bicycle tires . . . . . . . . . . . . . . . . . . . Wages of assembly worker* . . . . . . .

Variable Variable

Direct Direct

Product Product

Advertising . . . . . . . . . . . . . . . . . . . . Production manager’s salary . . . . . . . . Office depreciation . . . . . . . . . . . . . .

Fixed Fixed Fixed

Indirect Indirect Indirect

Period Product Period

Step 1: Determine the Physical Flow of Units

A physical flow reconciliation is a report that reconciles (1) the physical units started in a period with (2) the physical units completed in that period. A physical flow reconciliation for GenX is shown in Exhibit 3.12 for April. Units to Account For

Units Accounted For

Beginning goods in process inventory . . . . . . . Units started this period . . . . Total units to account for . . .

Units completed and transferred out . . . . . . . . . . . . . . . Ending goods in process inventory . . . Total units accounted for . . . . . . . . . .

30,000 units 90,000 units 120,000 units

100,000 units 20,000 units 120,000 units

Variable Overhead Variance*

reconciled

Actual Overhead AH ⫻ AVR

Applied Overhead SH ⫻ SVR

AH ⫻ SVR

Spending Variance (AH ⫻ AVR) ⫺ (AH ⫻ SVR)

Efficiency Variance (AH ⫻ SVR) ⫺ (SH ⫻ SVR)

Variable Overhead Variance * AH actual direct labor hours; AVR overhead rate.

State-of-the-Art Technology

actual variable overhead rate; SH

standard direct labor hours; SVR

standard variable

accounting

Managerial Accounting offers the most advanced and comprehensive technology on the market in a seamless, easy-to-use platform. As students learn in different ways, Managerial Accounting provides a technology smorgasbord that helps students learn more effectively and efficiently. Connect Accounting, eBook options, and iPod content are some of the options. Connect Plus Accounting takes learning to another level by integrating an online version of the book with all the power of Connect Accounting.Technology offerings follow: • • •

Connect Accounting Connect Plus Accounting iPod content

• • •

Algorithmic Test Bank Online Learning Center ALEKS for the Accounting Cycle

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accounting

accounting

What Can McGraw-Hill Technology Offer You? Whether you are just getting started with technology in your course, or you are ready to embrace the latest advances in electronic content delivery and course management, McGraw-Hill/Irwin has the technology you need, and provides training and support that will help you every step of the way. Our most popular technologies, Connect Accounting and Connect Plus Accounting, are optional online homework management systems that allow you to assign problems and exercises from the text for your students to work out in an online format. Student results are automatically graded, and the students receive instant feedback on their work. Connect Plus adds an online version of the book. Students can also use the Online Learning Center with this book to enhance their knowledge. Plus we offer iPod content for students who want to study on the go. For instructors, we provide all of the crucial instructor supplements on one easy to use Instructor CD-ROM; we can help build a custom class Website for your course using PageOut; we can deliver an online course cartridge for you to use in Blackboard,WebCT, or eCollege; and we have a technical support team that will provide training and support for our key technology products.

How Can Students Study on the Go Using Their iPod? iPod Content Harness the power of one of the most popular technology tools students use today–the Apple iPod. Our innovative approach allows students to download audio and video presentations right into their iPod and take learning materials with them wherever they go. Students just need to visit the Online Learning Center at www.mhhe.com/wildMA2e to download our iPod content. For each chapter of the book they will be able to download audio narrated lecture presentations and videos for use on various versions of iPods. iPod Touch users can even access selfquizzes. It makes review and study time as easy as putting in headphones.

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How does Technology drive

How Can My Students Use the Web to Complete Their Homework?

accounting

McGraw-Hill Connect Accounting is a web-based assignment and assessment platform that gives students the means to better connect with their coursework, with their instructors, and with the important concepts that they will need to know for success now and in the future. With Connect Accounting instructors can deliver assignments, quizzes, and tests online. Nearly all the questions from the book are presented in an auto-gradable format and tied to the book's learning objectives. Instructors can edit existing questions and author entirely new problems. Track individual student performance—by question, assignment, or in relation to the class overall—with detailed grade reports. Integrate grade reports easily with Learning Management Systems (LMS) such as WebCT and Blackboard.

By choosing Connect Accounting instructors are providing their students with a powerful tool for improving academic performance and truly mastering course material. Connect Accounting allows students to practice important skills at their own pace and on their own schedule. Importantly, students' assessment results and instructors' feedback are all saved online—so students can continually review their progress and plot their course to success.

your students to succeed?

ix

accounting

Some instructors may also choose Connect Plus Accounting for their students. Like Connect Accounting, Connect Plus Accounting provides students with online assignments and assessments, plus 24/7 online access to an eBook—an online edition of the text—to aid them in successfully completing their work, wherever and whenever they choose. By simply clicking on the eBook button while in Connect, Connect Plus users will be linked directly to the relevant textbook materials without additional login requirements.This feature makes it quick and convenient to study and complete assignments online.

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

How Can Book-Related Web Resources Enhance My Course? Online Learning Center (OLC) We offer an Online Learning Center (OLC) that follows Managerial Accounting chapter by chapter. It doesn’t require any building or maintenance on your part. It’s ready to go the moment you and your students type in the URL: www.mhhe.com/wildMA2e. As students study and learn from Managerial Accounting, they can visit the Student Edition of the OLC Website to work with a multitude of helpful tools: • • • •

Chapter Learning Objectives Interactive Chapter Quizzes PowerPoint® Presentations Narrated PowerPoint® Presentations

• Video Library • Excel Template Assignments • iPod Content

A secured Instructor Edition stores essential course materials to save you prep time before class. Everything you need to run a lively classroom and an efficient course is included. All resources available to students, plus . . . • Instructor’s Manual • Solutions Manual

• Solutions to Excel Template Assignments • Test Bank and Solutions

The OLC Website also serves as a doorway to other technology solutions, like course management systems.

Rick Barnhart, Grand Rapids Community College

“My overall impression (of the Website) is very favorable.... It is very user friendly and easy to navigate. The addition of the iPod content is great, because so many students have an MP3 player.”

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Save money. Go green. McGraw-Hill eBooks. Green…it's on everybody's mind these days. It's not only about saving trees, it's also about saving money. At 55% of the bookstore price, McGraw-Hill eBooks are an eco-friendly and cost-saving alternative to the traditional printed textbook. So, do some good for the environment…and do some good for your wallet.

CourseSmart CourseSmart is a new way to find and buy eTextbooks. CourseSmart has the largest selection of eTextbooks available anywhere, offering thousands of the most commonly adopted textbooks from a wide variety of higher education publishers. CourseSmart eTextbooks are available in one standard online reader with full text search, notes, and highlighting, and email tools for sharing between classmates.Visit www.CourseSmart.com for more information on ordering. McGraw-Hill Connect Plus If you use Connect in your course, your accounting students can purchase McGraw-Hill Connect Plus for MA 2e. Connect Plus Accounting gives students direct access to an online edition of the book while working assignments within Connect Accounting. If you get stuck working a problem, simply click the “Hint” link and jump directly to relevant content in the online edition of the book. Visit the Online Learning Center at www.mhhe.com/wildMA2e to purchase McGraw-Hill’s Connect Plus.

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

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How can Technology give Instructors

How Can McGraw-Hill Help Me Teach My Course Online?

ALEKS® for the Accounting Cycle and ALEKS® for Financial Accounting Available from McGraw-Hill over the World Wide Web, ALEKS (Assessment and LEarning in Knowledge Spaces) provides precise assessment and individualized instruction in the fundamental skills your students need to succeed in accounting. ALEKS motivates your students because ALEKS can tell what a student knows, doesn’t know, and is most ready to learn next. ALEKS does this using the ALEKS Assessment and Knowledge Space Theory as an artificial intelligence engine to exactly identify a student’s knowledge of accounting. When students focus on precisely what they are ready to learn, they build the confidence and learning momentum that fuel success. To learn more about adding ALEKS to your principles course, visit www.business.aleks.com.

How Can I Make My Classroom Discussions More Interactive?

Janice Stoudemire, Midlands Technical College

“The supplemental material that this accounting text provides is impressive: Homework Manager, the extensive online learning center, general ledger application software, as well as ALEKS.”

CPS Classroom Performance System This is a revolutionary system that brings ultimate interactivity to the classroom. CPS is a wireless response system that gives you immediate feedback from every student in the class. CPS units include easy-to-use software for creating and delivering questions and assessments to your class. With CPS you can ask subjective and objective questions. Then every student simply responds with their individual, wireless response pad, providing instant results. CPS is the perfect tool for engaging students while gathering important assessment data.

Liz Ott, Casper College

“I originally adopted the book because of the tools that accompanied it: Homework Manager, ALEKS, CPS.”

the tools they need to succeed?

xiii

Online Course Management No matter what online course management system you use (WebCT, BlackBoard, or eCollege), we have a course content ePack available for Managerial Accounting 2e. Our new ePacks are specifically designed to make it easy for students to navigate and access content online.They are easier than ever to install on the latest version of the course management system. Don’t forget that you can count on the highest level of service from McGraw-Hill. Our online course management specialists are ready to assist you with your online course needs. They provide training and will answer any questions you have throughout the life of your adoption. So try our new ePack for Managerial Accounting 2e and make online course content delivery easy and fun.

TM

PageOut: McGraw-Hill’s Course Management System PageOut is the easiest way to create a Website for your course. There is no need for HTML coding, graphic design, or a thick how-to book. Just fill in a series of boxes with simple English and click on one of our professional designs. In no time, your course is online with a Website that contains your syllabus! Should you need assistance in preparing your Website, we can help. Our team of product specialists is ready to take your course materials and build a custom Website to your specifications. You simply need to call a McGraw-Hill PageOut specialist to start the process. To learn more, please visit www.pageout.net and see “PageOut & Service” below. Best of all, PageOut is free when you adopt Managerial Accounting! PageOut Service Our team of product specialists is happy to help you design your own course Website. Call 1-800-634-3963, press 0, and ask to speak with a PageOut specialist.You will be asked to send in your course materials and then participate in a brief telephone consultation. Once we have your information, we build your Website for you.

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What tools drive student engagement

Decision Center Whether we prepare, analyze, or apply accounting information, one skill remains essential: decision-making. To help develop good decision-making habits and to illustrate the relevance of accounting, MA 2e uses a unique pedagogical framework called the Decision Center. This framework is comprised of a variety of approaches and subject areas, giving students insight into every aspect of managerial decision-making. Answers to Decision Maker and Ethics boxes are at the end of each chapter. Decision Insight D

Decision Analysis

Eco-CVP Ford Escape,Toyota Prius, and Honda Insight are hybrids. Many promise to save owners $1,000 or more a year in fuel costs relative to comparables, and they generate fewer greenhouse gases. Are these models economically feasible? Analysts estimate that Ford can break even with its Escape when a $3,000 premium is paid over comparable gas-based models.

A3

Analyze changes in sales using the degree of operating leverage.

CVP analysis is especially useful when management begins outcomes of alternative strategies. These strategies can involv able costs, sales volume, and product mix. Managers are in some or all of these factors. One goal of all managers is to get maximum benefits fro use 100% of their output capacity so that fixed costs are sp

Decision Ethics

Decision Maker

Supervisor Your team is conducting a cost-volume-profit analysis for a new product. Different sales projections have different incomes. One member suggests picking numbers yielding favorable income because any estimate is “as good as any other.” Another member points to a scatter diagram of 20 months’ production on a comparable product and suggests dropping unfavorable data points for cost estimation. What do you do? [Answer—p. 187]

Sales Manager You are evaluating orders from two customers but can accept only one of the orders because of your company’s limited capacity.The first order is for 100 units of a product with a contribution margin ratio of 60% and a selling price of $1,000.The second order is for 500 units of a product with a contribution margin ratio of 20% and a selling price of $800.The incremental fixed costs are the same for both orders.Which order do you accept? [Answer—p. 187]

“This text has the best introductions of any text that I have reviewed or used. Some texts simply summarize the chapter, which is boring to students. Research indicates that material needs to be written in an ‘engaging manner.’ That's what these vignettes do––they get the students interested.” Clarice McCoy, Brookhaven College

CAP Model The Conceptual/Analytical/Procedural (CAP) Model allows courses to be specially designed to meet your teaching needs or those of a diverse faculty. This model identifies learning objectives, textual materials, assignments, and test items by C, A, or P, allowing different instructors to teach from the same materials, yet easily customize their courses toward a conceptual, analytical, or procedural approach (or a combination thereof) based on personal preferences.

Learning Objectives

CAP Conceptual

Analytical

Procedural

different types of cost C1 Describe behavior in relation to production

the scatter diagram, highA1 Compare low, and regression methods of

cost estimates using P1 Determine three different methods. (p. 171) the break-even point for a P2 Compute single product company. (p. 175) costs and sales for a single P3 Graph product company. (p. 176) the break-even point for a P4 Compute multiproduct company. (p. 181)

and sales volume. (p. 168) assumptions in cost-volumeC2 Identify profit analysis and explain their impact. (p. 177)

C3

Describe several applications of costvolume-profit analysis. (p. 179)

estimating costs. (p. 173) the contribution margin and A2 Compute describe what it reveals about a company’s cost structure. (p. 174) changes in sales using the A3 Analyze degree of operating leverage. (p. 184)

LP5

xv

and bring Accounting to life? Chapter Preview with Flow Chart This feature provides a handy textual/visual guide at the start of every chapter. Students can now begin their reading with a clear understanding of what they will learn and when, allowing them to stay more focused and organized along the way.

Quick Check These short question/answer features reinforce the material immediately preceding them. They allow the reader to pause and reflect on the topics described, then receive immediate feedback before going on to new topics. Answers are provided at the end of each chapter.

Marginal Student Annotations These annotations provide students with additional hints, tips, and examples to help them more fully understand the concepts and retain what they have learned. The annotations also include notes on global implications of accounting and further examples.

This chapter describes different types of costs and shows how changes in a company’s operating volume affect these costs. The chapter also analyzes a company’s costs and sales to explain how different operating strategies affect profit or loss.

Managers use this type of analysis to forecast what will happen if changes are made to costs, sales volume, selling prices, or product mix. They then use these forecasts to select the best business strategy for the company.

Cost Behavior and Cost-Volume-Profit Analysis

Identifying Cost Behavior

• • • • •

Fixed costs Variable costs Mixed costs Step-wise costs Curvilinear costs

Measuring Cost Behavior

• • • •

Scatter diagrams High-low method Least-squares regression Comparison of cost estimation methods

Using Break-Even Analysis

• Computing contribution

Applying Cost-VolumeProfit Analysis

• Computing income from sales

margin

• Computing break-even • Preparing a cost-volumeprofit chart

• Making assumptions in cost-volume-profit analysis

• • • •

and costs Computing sales for target income Computing margin of safety Using sensitivity analysis Computing multiproduct break-even

Quick Check

Answers—p. 188

4. Which of the following methods is likely to yield the most precise estimated line of cost behavior? (a) High-low, (b) least-squares regression, or (c) scatter diagram. 5. What is the primary weakness of the high-low method? 6. Using conventional CVP analysis, a mixed cost should be (a) disregarded, (b) treated as a fixed cost, or (c) separated into fixed and variable components.

, or $80,000 of monthly sales. units), we prepare a simpli0 revenue from sales of 800

Point: Even if a company operates at a level in excess of its break-even point, management may decide to stop operating because it is not earning a reasonable return on investment.

xvi

How are chapter concepts

Once a student has finished reading the chapter, how well he or she retains the material can depend greatly on the questions, exercises, and problems that reinforce it.This book leads the way in comprehensive, accurate assignments. to the beginning balances.

Demonstration Problems

Solution to Demonstration Problem

Demonstration Problem

present both a problem and a complete solution, allowing students to review the entire problem-solving process and achieve success.

1. Sales budget

Wild Wood Company’ s management asks you to prepare its master budget us mation. The budget is to cover the months of April, May, and June of 2009.

Assets Cash . . . . . . . . . . . . . . . Accounts receivable . . . . Inventory . . . . . . . . . . . Total current assets . . . . Equipment, gross . . . . . . Accumulated depreciation Equipment, net . . . . . . . .

Chapter Summaries provide students with a

. . . . . . .

. . . . . . .

. . . . . . .

. . . . . . .

. . . . . . .

. . . . . . .

. . . . . . .

. . . . . . .

. . . . . . .

. . . . . . .

. . . . . . .

. . . . . . .

. . . . . . .

. . . . . . .

Total assets . . . . . . . . . . . . . . . . . . . . . . . .

review organized by learning objectives. Chapter Summaries are a component of the CAP model (see page xiv), which recaps each conceptual, analytical, and procedural objective.

$741,000

Next period’s unit sales (part 1) . . Ending inventory percent . . . . . . . a. Sales for March total 10,000 units. Each month’ s sales are expected to exceDesired ending inventory . . . . . . . Current period’s unit sales (part 1) sults by 5%. The product’ s selling price is $25 per unit. b. Company policy calls for a given month’ s ending inventory to equal 80% of thUnits to be available . . . . . . . . . . . unit sales. The March 31 inventory is 8,400 units, which complies with the poLess beginning inventory . . . . . . . . is $15 per unit. Units to be purchased . . . . . . . . .

May

10,500 ⫻ $25 $262,500

11,025 ⫻ $25 $275,625

April

....... ....... ....... ....... ....... ....... .......

⫻

11,025 80% 8,820 10,500 19,320 8,400 10,920

May 11,5 ⫻ 9,2 11,0 20,2 8,8 11,4

Cash budget (p. 248) Continuous budgeting (p. 240) General and administrative expense budget (p. 246) Manufacturing budget (p. 257) Master budget (p. 242)

Answers on p. 275

Additional Quiz Questions are available at the book’s W 1. A plan that reports the units or costs of merchandise to be pur-

chased by a merchandising company during the budget period is called a a. Capital expenditures budget. b. Cash budget. c. Merchandise purchases budget. d. Selling expenses budget. e S l b d t

$240,000 $225,000 $ 60,000 $165,000 $220,000 4. A plan that shows during the budget a. b. c. d. e.

Chapter 7 Master Budgets and Performance Planning

exercises that often focus on one learning objective. All are included in Connect. There are usually 8-10 Quick Study assignments per chapter.

April

Key Terms are available at the book’s Website for learning and testing in an onli Activity-based budgeting (ABB) (p. 251) Budget (p. 238) Budgeted balance sheet (p. 250) Budgeted income statement (p. 250) Budgeting (p. 238) Capital expenditures budget (p. 247)

Multiple Choice Quiz

Multiple Choice Questions

10,500 525 11,025

Key Terms

with page numbers indicating their location. The book also includes a complete Glossary of Key Terms.

Multiple Choice Questions quickly test chapter knowledge before a student moves on to complete Quick Studies, Exercises, and Problems.

May

10,000 500 10,500

Liabilities and Equity Accounts payable . . . . . Short-term notes payable Projected unit sales . . . . . . . . . . Total current liabilities . Selling price per unit . . . . . . . . . . Long-term note payable Projected sales . . . . . . . . . . . . . . Total liabilities . . . . . . . Common stock . . . . . . 2. Purchases budget Retained earnings . . . . . Total stockholders’ equit Total liabilities and equity

$ 50,000 175,000 126,000 351,000 480,000 (90,000) 390,000

Additional Information

Key Terms are bolded in the text and repeated at the end of the chapter

Quick Study assignments are short

April Prior period’s unit sales . . . . . . . Plus 5% growth . . . . . . . . . . . . . Projected unit sales . . . . . . . . . .

WILD WOOD COMPANY Balance Sheet March 31, 2009

261

Available with McGraw-Hill Connect Accounting

Which one of the following sets of items are all necessary components of the master budget? 1. Prior sales reports, capital expenditures budget, and financial budgets. 2. Sales budget, operating budgets, and historical financial budgets. 3. Operating budgets, financial budgets, and capital expenditures budget. 4. Operating budgets, historical income statement, and budgeted balance sheet.

QUICK STUDY

The moti ation of emplo ees is one goal of b dgeting Identif three g idelines that organi ations sho ld

QS 7 2

QS 7-1 Components of a master budget

C3

Bank loan owed . . . . . . . . . . . . . . . .

Exercises

are one of this book’s many strengths and a competitive advantage. There are about 10-15 per chapter and all are included in Connect.

________

Available with McGraw-Hill Connect Accounting

EXERCISES Exercise 7-1 Preparation of merchandise purchases budgets (for three periods)

Troy Company prepares monthly budgets. The current budget plans for a September ending inventory of 38,000 units. Company policy is to end each month with merchandise inventory equal to a specified percent of budgeted sales for the following month. Budgeted sales and merchandise purchases for the three most recent months follow. (1) Prepare the merchandise purchases budget for the months of July, August, and September. (2) Compute the ratio of ending inventory to the next month’ s sales for each budget prepared in part 1. (3) How many units are budgeted for sale in October?

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Sales (Units)

Purchases (Units)

170,000 320,000 280,000

200,000 312,000 262,000

July . . . . . . . . . . . . . August . . . . . . . . . . September . . . . . . .

Check July budgeted ending inventory, 64,000

Available with McG

PROBLEM SET A

Problem Sets A & B

Problem 7-1A

are proven problems that can be assigned as homework. All problems are coded according to the CAP model (see page xiv), and Set A is included in Connect.

C3 P1

Preparation and analysis of merchandise purchases budgets

Herron Supply is a merchandiser of three different products. footwear, 18,500 units; sports equipment, 80,000 units; and a that excessive inventories have accumulated for all three pro ending inventory in any month should equal 29% of the ex Expected sales in units for March, April, May, and June foll Budge March

x

e cel mhhe.com/wildMA2e

A

Footwear . . . . . . . . . . . . .

15,000

26

Sports equipment . . . . . . .

70,500

89

Apparel . . . . . . . . . . . . . . .

40,000

38

PROBLEM SET B Problem 7-1B Preparation and analysis of merchandise purchases budgets

Water Sports Corp. is a merchandiser of thr are water skis, 60,000 units; tow ropes, 45,00 that excessive inventories have accumulated ending inventory in any month should equa Expected sales in units for April, May, June

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Water skis . . . . . . . . Tow ropes . . . . . . . . Life jackets . . . . . . .

Required Check (I) March budgeted purchases Footwear, 4,185; Sports equip., 16,310; Apparel, 1,020

1. Prepare a merchandise purchases budget (in units) for eac

April, and May. Analysis Component 2. The purchases budgets in part 1 should reflect fewer pur

pared to those in April and May. What factor caused few ness conditions that would cause this factor to both occu

Required Check (1) April budgeted purchases: Water skis, 58,500; Tow ropes, 9,500; Life jackets, 14,500

1. Prepare a merchandise purchases budget

May, and June. A

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i C

t

xvii

reinforced and mastered? Beyond the Numbers exercises ask students to use accounting figures and understand their meaning. Students also learn how accounting applies to a variety of business situations. These creative and fun exercises are all new or updated, and are divided into sections: • Reporting in Action • Comparative Analysis • Ethics Challenge • Communicating in Practice • Taking It To The Net

Beyond the Numbers (BTN) is a special problem section aimed to refine communication, conceptual, analysis, and research skills. It includes many activities helpful in developing an active learning environment.

BEYOND THE NUMBERS REPORTING IN ACTION C1 C2

BTN 1-1 Managerial accounting is more than recording, maintaining, and reporting financial results. Managerial accountants must provide managers with both financial and nonfinancial information including estimates, projections, and forecasts. There are many accounting estimates that management accountants must make, and Best Buy must notify shareholders of these estimates. Required 1. Access and read Best Buy’ s “Critical Accounting Estimates” section (six pages), which is part of its

Management’s Discussion and Analysis of Financial Condition and Results of Operations section, from either its annual report or its 10 K for the year ended March 3 2007 [BestBuy com] What are some

• Teamwork in Action • Hitting the Road • Entrepreneurial Decision • Global Decision

Serial Problem uses a continuous running case study to illustrate chapter concepts in a familiar context. The Serial Problem can be followed continuously from the first chapter or picked up at any later point in the book; enough information is provided to ensure students can get right to work.

The serial problem starts in this chapter and continues throughout most chapters of the book.

SP 1 On October 1, 2009, Adriana Lopez launched a computer services and merchandising company, Success Systems, that offers consulting services, system installation, and business software sales. In late 2009, Adriana decides to diversify her business by also manufacturing computer workstation furniture.

SERIAL PROBLEM Success Systems

Required 1. Classify the following manufacturing costs of Success Systems by behavior and traceability.