Third Edition Cost Management Strategies for Business Decisions McGRAW-HILL INTERNATIONAL EDITIONThird Edition Cost Management Strategies for Business Decisions Ronald W. Hilton Cornell University Michael W. Maher University of California, Davis Frank H. Selto University of Colorado at Boulder (34 MeGraw-Hilt Caine Kirin Bosion Burr Ridge, IL_ Dubuque, IA Madison, Wi New York San Francisco St. Louis Bangkok Bogeta Caracas Kuala Lumour Lisbon London Madrid Mexico City Mian Montreal New Delhi Santiago Seoul Singapore Sydney Taipel TorontoMcGraw-Hill rwin COSTMANAGEMENT: STRATEGIES FOR BUSINESS DECISIONS Poblished by MeCires-HiMewin, a business unit of The McGrso-Hill Companios fn. 1221 Avenue ofthe Americas. New York, NY. 10020 Copyright® 2006, 2003, 2000 by The MeGr-Hill Companies, Ine All ight serv. No part a this publiestioa may he repniced or tibutet ‘any frm arty say means oF stored in «datbseor retrieval system, witout the priae written consent of he NeGraw-ill Companies, fc ‘ncading, ba ot iid, any network ores electonie storage or transmission or boas for distance learing. Sore ania, inluding elecrons an print component, my aut be avallabew casomers outside the sited Stats, “This books print on acid-free pape, 1234567890 VNHIVNHO98 7054 ISBN. 0.07-111596-%Tomywite, Meg. and to our sons, Tim and Brad, RonaldW. Hiton To my family: my wife Miriam,my daughters Krista and Andrea, and my father Bill, who have taught me just about everything worth knowing. Michael W. Maher Tomy parents, Frank and Dorothy Selto,who taught me the value of love,hard work,and inegriy.To my wite, Linncla, and sons, Michael and Mark, who inspire and support me-To my first accounting teachers, Bill Bruns ana Gary Suncom, who surprised me by demonstrating that accounting can be fun, useful, and inellectually challenging and that an academic career can be immensely rewarding. Finally, o my students, who every somester teach me something significant. Frank H.SeltoABOUT THE AUTHORS Ronald W. Hilton is a Professor of Accounting at Cornell University. With bachelor’s and master’s degrees in accounting from The Pennsylvania State University, he received his Ph.D. from The Ohio State University. A Cornell faculty member since 1977, Professor Hilton also has taught accounting at Ohio State and the University of Florida, where he held the position of Walter |. Matherly Professor of Accounting. Prior to pursuing his doctoral studies, Hilton worked for Peat, w ri Marwick, Mitchell and Company and served as an officer in the United States Air Force. Professor Hilton is a member of the Institute of Management Accountants and has been active in the American Accounting Association. He has served as associate editor of The Accounting Review and as a member of its edit rial board. Hilton also has served on the editorial board of the Journal of Management Accounting Research. He has been a member of the resident faculties of both the Doctoral Consortium and the New Faculty Consortium sponsored by the American Accounting Association. With wide-ranging research interests, Hilton has published articles in many journals, including the Journal of Accounting Research, The Accounting Review, Management Science, Decision Sciences, The Journal of Economic Behavior and Organization, Contemporary Accounting Research, and the Journal of ‘Mathematical Psychology. He also has published a monograph in the AAA Studies in Accounting Research series, and he is the author of Managerial Accounting: Creating Value in a Dynamic Business Environment, and is a co-author of Budgeting: Profit Planning and Control, and Cost Accounting: Concepts and Managerial Applications. Professor Hilton's current research interests focus on contemporary cost management systems and international issues in managerial accounting. In recent years, he has toured manufacturing facilities and consulted with practicing managerial accountants in North America, Europe, Asia, and Austré Michael W. Maher 4 Professor of Management at the University of California-Davis, Professor Maher previously taught at the University of Michigan, the University of Chicago, and the University of Washington. He also worked on the audit staff at Arthur Andersen & Co. and was a self-employed financial consultant for small businesses. He received his BBA from Gonzaga University (which named him Distinguished Alumnus in 1989) and his MBA and Ph.D. from the University of Washington, and he earned the CPA from the state of Washington. Professor Maher was president of the Management Accounting Section of the American ‘Accounting Association and has served on the editorial boards of The Accounting Review, Accounting Horizons, Journal of Management Accounting Research, and Management Accounting. Co-author of two leading textbooks, Principles of Accounting and Managerial Accounting, Maher has co-authoredseveral additional books and monographs, including Internal Controls in U.S. Corporations and ‘Management incentive Compensation Plans, and published articles in many journals, including ‘Management Accounting, The Journal of Accountancy, The Accounting Review, Journal of Accounting Research, Financial Executive, and The Wall Street journal. For his research on internal controls, Professor Maher was awarded the American Accounting Association's Competitive Manuscript Award and the AICPA Notable Contribution to Literature Award. He also has received the award for the Outstanding Tax Manuscript, and from the students at the University of California's Graduate School of Management, he has recelved the Annual Outstanding Teacher Award three times and a special award for outstanding service twice. Maher's current research includes studies of the efficacy of online education, health care costs, and corporate corruption. Frank H. Selto Professor selto has been on the faculty at the University of Colorado at Boulder since 1985, where he has taught accounting at the undergraduate and graduate levels and served as Division Chair of Accounting and Information Systems. He served as a research fellow for six years at the University of Melbourne. Selto has taught at the University of Denver, the University of Colorado at Denver, and the University of Washington. He holds MBA and Ph.D. degrees in accounting from the University ‘of Washington and BS and MS degrees in mechanical engineering from Gonzaga University and the University of Utah, respectively Prior to earning his MBA and Ph.D. degrees, he worked as a mechanical engineer and served as an officer in the US Army Corps of Engineers. ‘Active in the American Accounting Association and its Management Accounting Section, Professor Selto was the editor of the Education Research section of The Accounting Review and has served on the editorial boards of The Accounting Review, Journal of Management Accounting Research, Management Accounting Research, and Accounting Horizons.A researcher of management accounting and management control, Selto has published articles in the Journal of Accounting Research Accounting, Organizations & Society, journal of Cost Management and Journal of ‘Management Accounting Research, one of which was recognized as a Notable Contribution to the Management Accounting Literature.Hilton/Maher/Selto Cost Management. The front view of the Louvre Museum in Paris presents a striking juxtaposition. The museum itself is a Renaissance palace, while the entrance is a modernist glass pyramid. The dramatic combination of these two styles shows how contemporary ideas can provide new perspectives on classic principles. For this reason, we have chosen the entrance of the Louvre as the cover of Cost Management: Strategies for Business Decisions, by Ronald Hilton, Michael Maher, and Frank Selto. This image—the combination of the classic and the cutting-edgo— encapsulates the authors’ mission and vision. Accountants, financial analysts, and consultants must measure costs, as they always have, but itis vital today that they also identify, : é ‘The tox is user en, does a 9000 fb of analyze, and design opportunities and methods for preseningardaclaning We eter an improving costs and performance. Tomorrow's Unverty of Colorado at Caloraso managers must actively manage costs Springs to deliver more value.Where Tradition and Innovation Converge Focus Companies. The concepts and applications explored in each chapter are developed in the context of a realistic focus company, based aS RRS REE closely onthe practices and experiences ofan actual ‘ates ota. eke orgarizaton, Ronald Hiton pioneered this approach in his ‘era ne ray Managerial Accounting textbook, and HitonMaherSeto's ana nto — Jom Hv Integration of focus companies and real world examples is, unmatched by any other cost accounting book. Balance. Cost Management features a balance of manufacturing, service, government, mature, and start-up focus companies to demonstrate that cost management concerns are Universally applicable, Today's students will work in a wide variety of business environments and will benefit rom ‘nav anys Ceived tet gnc research exposure to the diverse examples used by aud anton bree ash he meee, Hilton/Maher/Selto, This achlved wth he ‘Ressarch nsont” sectors — Douglas Girton, Nother links University Contemporary. ‘The authors combine value chain, activity-based costing, activity-based management, value-added analyses, and economic value added to build a logical and easily communicated view of cost management, one that is highly relevant to business today. Because the field of cost management is evolving daily, the authors incorporate current research throughout the book in Research insights boxes. ision-Maki Te Deciser Mater Boss coroa he course Decision-Making Focus. ee ar aca ‘Concepts are presented in a decision-making context, so increases thelr parcaptions of the course's relevance, 7 Irteve is empress svar Wako, students learn how they can use cost information to make 1 lai Barey Meltfenie eaty of North better business decisions. Each chapter begins with Cost Carofna at Chariots Management Challenges, which engage students and ask them to take a proactive approach to mastering chapter concepts, while numerous You's the Decision Maker applications actively involve the students in problem-solving. ‘Accompanying focus company sites on the book's CD and ‘Online Learning Center give students an opportunity to, perform further analyses and make more decisions based on extensive simulated data,How Does Cost Management: Strategies for Business Decisions Motivate Students? To help students learn the principles of cost management and appreciate their importance in contemporary business, Cost Management includes a wide range of pedagogical features. Learning Objectives ‘These appear at the beginning of every Cost Accumulation for Job-Shop chapter and are re-visited in the margin 7 and Batch Production Operations where they are first addressed. Each end- of-chapter exercise, problem or case references its learning objective. Photos Photos add to the realism of the topics and in Cost Management are carefully chosen for pedagogical value, Photos from real organizations show operational concepts and cost management practices to engage Reaper arena ae students and emphasize key points. iy temepradoren ne 1 focused on dion makirg arc provi sousion wih — Huey-Lian Sun, Mergan State University‘ntenneaving the theoretcal conosots ito the focus Comoany makes the conceats more memearabie. arc urdestanistie, Sudents pica remembar a good ston, Tha focus comoanies a89b the instuctorn dacomng a stoytalec — Linda Maurer, Fontbonne Universty ‘he Fobus Company iastatons eve cre to keeping ry etudonts inlresed in he chacter content. — Aland Sani, Rutgers ‘Univers at Nawarc Focus Companies Each chapter is built around a focus company whose story continues through the chapter. These diverse companies include enough background to add realism to the presentation and stimulate student interest in the topic. They represent manufacturing, retail, not-for-profit, and service firms and are listed on the front endpapers of the text. ‘mreccrrmenaei gs * Every chapter begins with a company in document highlighting a business challenge facing the organization featured in the chapter. Sstmemnearcnecneayae + Each time the focus company is int ence presented in the chapter, its logo is. ingens rc shown so the student sees its application sere to the text topic. Spreadsheet Exhibits ‘Many of the exhibits are Exce! ‘spreadsheets used to make students comfortable with this widely used analytical tool and empha: its use in cost management. Spreadsheets are also used the end-of-chapter materialREAL WORLD EXAMPLES Cost Management Challenges Each chapter begins with this unique feature that focuses students on the key content of the chapter. This feature challenges students to answer questions the cost manager must answer. You're the Decision Maker Each chapter actively involves the student in problem solving by posing strategic questions at key points in the chapter. These aren't quizzes or examples. They expand the text by asking students, to apply the knowledge gained in the chapter to realistic conditions. They actively engage the student in the decisions the focus company face. Cost Management in Practice This feature highlights the cost management practices of real companies. Research Insight We believe an effective way to demonstrate the value of research to cost managers is to include short descriptions of research studies that address important cost management issues. This feature incorporates research that has been replicated and applied successfully. How Does Cost Management Prepare Students to Make Decisions that Influence Company Performance? arin" 8a O88 DardenHow Does Cost Management Reinforce Learning? SUCCESSFUL LEARNING BEGINS WITH PRACTICE There is no shortcut to learning accounting. Students must practice to master basic accounting concepts. The text includes a prodigious supply of practice materials, exercises and problems. End-of-Chapter Material Hilton/Maher/Selto's Gost Management is known for its comprehensive and reliable end- of-chapter material. Each chapter includes an extensive selection of assignment material including Review, Critical Analysis, Exercises, Problems and Cases. Numerous adapted CMA and CPA problems are included to prepare students for the CPA exam. Every chapter in the text includes problems and cases exploring * Ethical issues + International matters * Group work = sinternet use Ha 2 + Communication skills | think your textbook does a great job of using Excel lustrations and providing some ‘substantive Excel problems to assign. —John Haverty, St. Joseph's University Excel Spreadsheets * Build Your Own Spreadsheet. One or more of the exercises and problems in each chapter include an option for students to build a ‘spreadsheet to solve the problem's requirements. Students are also asked to use the spreadsheet to determine the effect on the solutions if various parameters in the problem are changed. This is critical in helping students develop the spreadsheet skills necassary for ‘graduation and on the new CPA exam, Excel templates, Many exercises and problems can be solved using the Excel templates contained on the text's Online Learning Center. An Excel logo appears next to these problems for easy identification. @ Dull your own sprarshet. Build an Excel spo spreadshet to determine the new ve fr the the aca fat {otlowing input parameters changes bythe sown it ach parameter change independently. 4. Esimued overhead costs fr the year ate Fo achinn nurs <0) Untievalevemaed sc03 Facity evel overesd, 2106 Nocondo Manefacturing, $00 hors Problem 2.49, fanhattin Consulants bills liens at Job Corts n aS ans were worked in January with 200 Grganizaban urred and asigned 1 clions 0a the seme rahe was MLSE Nf istrative cost, All rnsactons wereinstructors and student reviews, comments and suggestions. Overall Revisions changed, Chapter 1 Expanded coverage of basic ethical behavior standards, and codes, Explained strategie decision making threats to competitive advantages and cost management's support role Deemphasized benchmarking and accountwreceivable analysis. Focused on benefit-cost and variance analysis as fundamental cost ‘management anaysis tools Chapter 2 Content divided into two sections, ‘which can be covered independently Section [covers cost ‘management and product-costing, systems, Seetion Il covers absorption, variable and throughput costing. Emphasized teins between cost man: agement and organizational strategy Added coverage of ethical issues sovolving the intentional overproduction of inventory «0 reduce unit costs and boost current income under absorption costing Added discussion of direct labor as 4 variable ora committed. and largely fixed, cost Chapter 3 Revised and updated end of chapter materia Chapter 4 Revised assignments to demonstate limitations of traditional costing methods Aled new research insight adress: ing the performance of companies {hat installed ARC Chapter § Consolidated discussion of target costing. (Previously discussed in Chapters $ and 12.) ‘+The material in Chapter 21 has been condensed and incorporated into other chapters, primarily Chapters 48 and 20, The new edition has 20 chapters instead of 21. ‘A new Build Your Own Spreadsheet feature appears in one or more exercises or problems in each chapter. Students are asked to build a spreadsheet to solve the problem's requirements, and then are asked to use their spreadsheet to soive the same requirements when key parameters in the problem are ‘In recognition of the need to address ethical issues in accounting, many of the chapters highlight ethical Issues that arise in the context of cost management. ‘= Many of the popular Cost Management in Practice and Research Insight boxes have been replaced or revised to ensure that the third edition is up-to-date and relevant + Many of the exercises, problems and cases have been revised, with new numbers or additional Tequirements. The third edition also contains many new problems. Chapter 6 ‘implied discussion of isetbution Revised discussion of customer sales analysis to make it more clea, Chapter 7 Revised discussion of JIT muanufactue- ing to make the discussion more cleat Expanded discussion of quality 0 ie ito cospornte integrity. Added new chapter summary. Chapter 8 Improved presentation of exhibits 10 ‘make the computations more clear Aled demonstration of cost fo forabaoemal spoilage Chapter 9 Updated Cost Management in Practice,Preface I think your approach to Activity Based Costing is territic and is one of the really strong aspects of this book. — John Haverty, St. Joseph's University Chapter 10 Chapter 13 Chapter 16 Updated Cost Management in Improved introduction and ‘Adiled material on the ethical issves Practice motivation for focus company, surrounding employees’ reluctance to Revised end-of chapter material. Deleted duplicate coverage of share cost-saving ideas, ‘agget costing, which is covered Chapter 11 in Chapter 4 Chapter 17 Revised cost management challenges, __ Improved coverage of ifecycle costs; Updated and revised end-ofchapter added numerical example aiceal Integrated simple and multiple ejesianiaeisica Improved discussion of outsourcing, Added a vestepremesionanahss——evaniconnand ongterm impacts Chapter 18 proces, : Added material using investment Improved cost management ‘center performance measures 0 challenges and chapter summary paged acsiespeaial neerateee (Moxed from Chapter 21.) Moved high low method to separate section after simple regression. Added baste choice among mukiple regression models based on ‘economic plausibly and acjusted Added new focus on strategic Chapter 19 Resquare. investments, ine! ig efiects of Added new Research Insight, Simplified discussion of account ieee eres abt cone Updated and revised endofchaprr analy suateria Aldea discussion of how regression Emphasized modeling external ‘events and competitors-actions. Chapter 14 works to Appendix A Moved learning curve estimation and _‘Introducted real option value (ROV) Chapter 20 fae oppenin Rt analysis, not available in any ‘Combined balanced scorecard and eee ‘competing text. incentive topics to create capstone tevised enchof-chapcer materials cchapret Chapter 12 witness het oon Provided ees appa of Moved material on managing scarce support balanced scorecards, resources and Theory of Constraints Bhiminated quantified roanappenctx scorecanls Chapter 15 Added new research insights covering CAMs beyond budgeting and other new developments in Moved theories of motivation Dudgeting expectancy, goalsetting. and agency) ‘oan appendix Updated and added new endofehapy ter material Focused on ethical issues of (Quote about chapter 2) Excellent presentation of absorption and variable costing. — Scott Butterfield, University of Colorado at Colorado Springs (Quote about chapter 7) This is one of the ” ke Scetandmostcansrotorave haere __(Outlabout chat 4) Du gence Ihave ever seen in the area of quality. texts—great section. Sarena ea —Margaret O'Reilly-Allen, Rider UniversityPreface SUPPLEMENTS Instructor's Resource Manual {raiaol on the Onine Learning Center {010} ane innsctersResaue CD) “This comprehensive manual includes detailed chapter outines with teaching tips and suggestions for alternate ways ‘to procont ho toxt material. twas prepared by Roger Doost of Ciomson Universty. Solutions Manual (ualabi one OLC ana nstuctor Resource CO) Prepared by the authors and carefully reviewed for accuracy, the manual contains complete solutions to al the texts end-ot.cnapter assignments, University at Newark Hilton/Maher/Selto’s Cost Management provides materials that supply you with superior classroom support to bring out the best in your students. Instructor Supplements Test Bank ‘Arabi an he tnsructar's Resource C0) “This est bank in Word format contains ttuetalse, multiple-choice questions, essay, and short problems requiring anaiyss and interpretation. Each test iter is coded for level of cificuty and tiedto a learning objective. twas prepared by Kathleen Sevigny of [Bridgewater State Colage ana Karen ‘Tabak of Maryvale Unversity Computerized Test Bank (hvalable on the irstuciors Resource CO} ‘This test bank ulizes MoGraw-Hills £2 Test testing software to quickly create ‘customized exams. This user-fenaly program allows instructors to sort ‘questions by format, edit existing ‘questions or add new ones. It lso can secamble questions fr multiple versions ofthe seme test Overall, belive tha this isthe best 81 Management tex onthe market xander Sannella, RuIge"s ‘The toxtis clearly superior tocther books inthe manageralcost accounting market — Richard Kesey, Nova Southeastern University PowerPoint Slides (umiadion tha OLC ard nsructo's Resource CO} ‘Thase stas ilusrate key chapter topics. They were prepared by Jon A. Booker and Oharies W, Caldwell of Tennessee Technological Unversity and Susan Galbreath of David Lipecom University Instructor Resource CD-ROM ISBN o07288018x This CD includes electronic versions of the instructors Manual, Solutions Manual, Test Bank, as wel 3 FowerPoint sides, video clps, exhibits In the tex, and Excel templates and Solutions, ‘Online Learning Center (OLC) wnwwmhhe.com’nitonde ‘See page xi for details,Preface Student Supplements we Xcel ‘mre comitonse ‘Study Guide Check Figures Excel Templates ‘SBN dorzea0083 (Guasane on te Orne sarin Centr Avaiaoteon ne rine Laarnng Center This invalutle guide incorporates many (2) i fe accountng skis essential to ‘These provide key answers or selected This software allows students to develop Student sucness. Each chapter contains probe inthe tex. ‘spreadsheet skllsby using erpltes to an overview of the main topics, chapter solve selecies assignments ideniied by Su augenons, and ceion adsl {an conin the end-ot-chepter materia ‘est questions. twas prepare ‘Thaso wero developed by Peggy Janke Mereba ofNori Carsina A&T PowerPoint Slides Hussey ‘State Univesity. (alate on re Orne Learing Center (ue) Online Learning Center (OLC) ‘wvewmhhe.comfriton3e ‘These sles cover the key concepts ce the next page for deal You'reThe presented in each chapter. ee eee Decision Maker CD This CD incuses simulated internet ‘3s for sical the Focus Companios toundin ne textbook The visually ich Sites are based on and extend the This web-based developmentis anow "Youre the Decision Maker activities ‘and unique concep. i gives students ‘and include management ineriewe, ‘an active leaming experience. They ere ‘company background, and cost immersed inthe company a8 hey are information data on spreadsheets an employee oF consutart and sohing ‘Suen ao asked 10 make decisions fis probions, based on the information nthe txt and — Anwar Sains, Calfornia State foundon the ‘company site" These Polylocie Univorsity at Pomona acts reintorce the importance of ‘cost management and can be used for independent study o adstional assignments by instructors. Students willbe engaged by this unique opportunity fo act as a cost manager ot coneultant who called upoa to solve an important, real-werld company challenge. Thasa simulated stas were prepared by Frank Salto This CD can ‘be packaged withthe text, PowerPoint slides are also ncuded,Our ie Online Learning Center (OLC) www.mhhe.coryhilton3e More and more students are studying online. That's why we offer an Online Learning Center (OLC) that ‘follows Cost Management chapter by chapter. It doesn't require any building or maintenance on your part, I's ready to go the moment you type in the URL. The OLC includes: You're The Decision Maker Activities Text Updates + Excel Templates *+Glossary + Chapter Objectives, + Interactive Quizzes + PowerPoint slides + Check Figures *Key Term Flashcards * Sample Study Guide chapter For instructors, the book's password-protected OLC contains: * instructor's Manual * Solutions Manual +» PowerPoint slides + Excel templates and solutions You're the Decision Maker exercise solutions ‘Transition Notes. "Text Updates Instructors can pull all of this material into their PageOut course syllabus or use it as part of another online course management system. structors fo iol at th CPS Classroom Performance System This is a revolutionary system that brings timate 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. |QWebCT eCollege Bb Online Course Management (WebCT, Blackboard, and eCollege) We offer Cost Management content for ‘complete online courses. You can ‘customize the Online Learning Center ‘content ang author your own course materials. No matter which online course solution you choose, you can count on the highest level of support. Our specialists offer free training and answer any question you have through the life of your adoption. Instructor Resource CD-ROM This CD includes electronic versions of the Instructor's Manual, Solutions Manual, Test Bank, Computerized Test Bank, as well as, PowerPoint slides, video clips, and all exhibits in the text in a PowerPoint format. Excel Spreadsheets ‘One of the key features of Cost Management is the integration of Excel. Many of the problems con the new CPA exam require “simulations” using Excel-like software. Students need to be comfortable using spreadsheets to concentrate on the content of the problem. Beside “Build ‘Your Own Spreadsheet” exercises, Cost Management also includes Excel templates to give students more practice in using this tool, ‘The templates are on the Online Learning Center. PageOut McGraw-Hill’s. Course Management System Pageout is the easiest way to create a Website for your accounting course. Just fll in a series of boxes with plain English and click on one of our professional designs. Inno time your course is online with a Website that contains your syllabus. It you need help, our team of specialists is ready to take your course materials and build a custom website to your specifications. To learn more visit www-pageout.net Knowledge Gateway Knowledge Gateway is an all-purpose service and resource center for instructors teaching online, While training programs from WebCT and Blackboard will help teach you their software, only MeGrew-Hil/Irwin has services to help you actually manage and teach your online course, as well as run and maintain the software. To see how these piatiorms can assist your online course, visit www.mhhe.com/solutions.Acknowledgments We have learned from long experience that the most useful comments challenge our assumptions and expose any weaknesses in our thought or exposition. The many reviewers, editors, and students who challenged us and held us to the highest standards have contributed to the success of this revision. The authors sincerely appreciate the efforts of the many people who have helped to improve this text. Our students continue 10 challenge us and insist that our text be at least as accessible as we are, Numerous professors in reviews and focus groups have thoroughly reviewed, criticized, and commented on the frst and second editions. We have thoroughly digested that invaluable input and feedback, especially when some of it was harsh. In particular, we want Io thank the following professors for their help in preparing the hid ed REVIEWERS Vioya Awasthi Seat Universit Coper, Met oan Coyeewsk Chutes Baws versity Poe MickThe authors this textbook and gratefully acknowledge their valuable constructive criticism and many suggestions. gion University shat Unvessity rsiy af Wyoming 8, Univesity of Cental Flore university ingle, Urner Bole, Mager Tom Bucket, Nor Da Stanislaus Susan Crosson, Sania Fe ce lage Masako 0 Larry Duetiarma, Universi of Washington Michaci Eames Iniversity Leste Bleniavsg, Uberti af An Jomes Oavie rane, Sex Francisco Jarnes Russel Hardin, Pitsburg Slave bi Rosaie Hat Enis Hawtin any. Linersity oH vikishower Ohio Uni Muar Paul Hurchis ‘llege i Notre Dane tate Livers 'so express their appreciation to the many people who have contributed to the development of State Urns _bersity of eranont cational Univer as AngelesLotcan Lowe, University of Nevada, Las Vegas Jor Lut State University Ron Marsh 8, Michigan State Univers Bruce Mile, Univ Davia forts, Nom Geel Ann Murphy, Metro State Do Govdon tt Errova Nez, Rutgers Li Marlys OMleshen, Mankato Slate Universily Richard Orman, U taal Omaha iy of Neb Guy Owings, Pitsburg Sate University Mary Ellen Oliveto, Pace Unversity naspvania dane Papiztik, Edinboro University of Fe Barra Pack, University of Mlinois-Chieago ct Pralher-Kinsey. University of Missouri a Ber re Purvis, Cattoria ae Univers (ga Quinlana, Universi o Priscilla Reese, State University ang Marshal Lynchburg Cotispe Mic igan University iy of Materdoa siy at Minnesota Hesry Sonwarzbach, University of fo Rat Seay, Murray Slate Univer Al Seuaghat. Layo ge, Marya Ins of Massa Seal, U Doug Sharp, Wishta State U Kart i rman, Lake Supenir State Unive elds, Sulfoc University Frank Shuman, Utah State Unive Kenneth Sinciait, Lehigh University Hank Soczek. Washington Uvers L n, University of Mssourt-Kans Solon arver Sopatinata, Grand Vatey late University olya Stokes, Francs i David Stout, Vito Nathan Stuat, University of Cty Sulivan, James Madison Lin Tandy, University Leslie Turney, Nowdhern Keatucky Uni Gloria Volimets, Univesity of Maine vid Wallin, The Ohio (oma State University te, Lnvversity of arkansas Sally Widener, Rice University Patrick Wl Lin Xia, Urwersity of AlbertaWe thank Beth Woods and Cathleen Burns (University of Colorado at Boulder) for their thorough checking of the text for accuracy and completeness. We also acknowledge Lanny Solomon (University of Missouri for his help with special topics. Supplements are an important part of any textbook and we especially thank the people who helped prepare them, The Study Guide was prepared by Janice Mereba of North Carolina A&T State University. Excel templates developed by Peggy Hussey of Colorado Technical University. The Instructor's Manual was prepared by Roger Doost of Glemson University. Rager also developed the OnLine Quizzes on the text web site. The Test Bank was written by Kathleen Sevigny of Bridgewater State College and Karen Tabak of Maryville University. The PowerPoint Slides were done by Jon A. Booker and Charles W. Caldwell of Tennessee Technological University and Susan Galbreath of Daviel Lipscomb University The authors acknowledge the Institute of Management Accountants for permission to use problems {kom the Cortied Management Accountant (CMA) examinations. We also acknowledge the American Institute of Certified Public Accountants for permission to use problems from the Uniform CPA Examinations. Questions, and Unotticias Answers, Finally, the authors express their gratitude to the many fine people at McGraw-HillIrwin who have so professionally quided this book through the development and publication processes. In particular we: acknowledge Steve DeLancey. Gail Korosa, Christine Vaughan, Matthew Baldwin, Debra Sylvester, Lori Kramer. Elizabeth Mavitz, Mare Chernoff, and Carol Loreth, Ronald W. Hilton Michael W. Maher Frank H. SeltoBrief Contents Part One Setting the Strategic Foundation ‘The Importance of Analyzing and Managing Costs 1 1 Cose Management and Strategic Decision Making Evaluating Opportunities and Leading Change 2 2. Product Costing Systems: Concepts and Design Issues 34 3. Cost Accumulation for Job-Shop and Batch Production Operations 86 Part Two Activity-Based Management 135 4 Activity-Based Costing Systems 136 5. Activity-Based Management 178 6 Managing Customer Profitability 212 7 Managing Qualicy and Time co Create Value 244 Part Three Process Costing and Cost Allocation 291 8 Process-Costing Systems 292 9 Joint-Process Costing 332 10. Managing and Allocating Support-Service Costs 362 Part Four Planning and Decision Making 407 11 Cose Estimation 408 12. Financial and Cose- Volume-Profit Models 458 13 Cost Management and Decision Making 506 14. Strategic Issues in Making Investment Decisions 552 15. Budgeting and Financial Planning 594 Part Five Evaluating and Managing Performance Creating and Managing Value-Added Effore 645 16 Standard Costing, Variance Analysis, and Kaizen Costing 646 17. Flexible Budgets, Overhead Cost Management, and Activity-Based Budgeting 688 18 Organizational Design, Responsibility Accounting, and Evaluation of Divisional Performance 742 19 Transfer Pricing 788 20. Strategy, Balanced Scorecards, and Incentive Systems 818 Glossary 875 Photo Credits 885 Bibliography 887 Company Name Index 893 Subject Index 897Contents Part One Setting the Strategic Foundation ‘The Importance of Analyzing and Managing Costs 1 1 Cost Management and Strategic Decision Making Evaluating Opportunities and Leading Change 2 Evaluation of Opportunities at Pursuit Data 4 Strategic Role of Cost Management 5 Characteristics of Cost Management § Characteristics of Cost-Management Analysts 6 Strategic Decision Making 7 “Where Do We Want 0 Go?" 8 “How Do We Want to Get There?" 10 Formulation of Strategic Action Plans 13 Eight Elements of Leading and Managing Change 13 Evaluation of Plans and Outcomes 15 BonefitCost Analysis 18 Benefitand Cost Variances 16 Chapter Summary 18 Appendix A to Chapter One: Institute of Management Accountants: Standards of Ethical Conduct for Management Accountants 19 ‘Appendix B to Chapter Ono: Proview of the Remaining Cost Management Chapters 20 KeyTorms 22 ‘Meeting the Cost Management Challenges 23 Solutions to You're the Decision Maker 23 Review Questions 24 Critical Analysis 24 Exercises 25 Problems 27 Cases 31 Product Costing Systems: Concepts and Design Issues 34 ‘The Role of Cost Management at CollegePak Company 36 The Meaning of Cost 38 Product Costs, Period Costs, and Experses 36 Costs Reported in Financial Statements 38, Service Firms 40 RetailCompanies 40 Manufacturing Companies 41 ‘Stages of Production and the Flow of Costs 44 Income Statement ang Schedule of Cost of Goods Manulactured ara Sold 45 Flow of Manufacturing Costs 47 Production Costs in the Service industry 48 Cost-Management Goncepts: Different Costs for Different Purposes 48, Cost Drivers 48, Cost Behavior 40 Variable Gosts and Unt-Level Costs 50 Cost of Resources Used versus Resources, Supplied 52 Committed Costs, Opportunity Costs, anc Sunk Costs 54 Traceability of Resources 86we Contents ‘What Costs Should Se Considered Product Costs? 58. Fixed Manufacturing Overhead: The Key 58 Ilustration of Absorption and Variable Costing 59 Absorption Costing Income Statements 69 Varible-Costing Income Statements 59 eeconcilation of Income under Adsorption ‘and Variable Costing 61 Evaluation of Absorption and Variable Costing 62 Throughput Costing 64 ‘Overproduction of Inventory: An Ethical issue 65 Chapter Summary 66 Key Terms 66 ‘Meeting the Cost Management Challenges 67 Solutions to You're the Decision Maker 67 Review Questions 68 Critical Analysis 68 Exercises 69 Problems 75 Cases 84 Cost Accumulation for Job-Shop and Batch Production Operations 86 Choice among Product-Costing Systems 89 Evaluating Major Types of Product-Costing Systems 89 Basic Cost-Flow Model 91 4 Cost Flows and Jobs 92 Managing and Using Cost-Flow Information 93 ‘The Process of Tracking Job-Order Costs 94 Product-Costing Syste Design Issues 95 Recording Job-Order Costs 95 Use of Predetermined Overhead Rates 100 ‘Summary of Job-Cost Flows 106 Seling and Administrative Costs 106 Meaning of the Overhead Variance 106 Difference between Actual, Normal, and Standard Costing 107 ‘Choice of Cost Driver for Overhead Application .Job-Order Casting in Service Organizations Application of Job-Order Costing to the Value Chain 110 Job and Project Management Project Management 112 110 10 ” at Issue ‘and Project Improprieties: An Ethical 113 Use of Job-Order Costing Information for Planning ‘and Decision Making 116 Chapter Summary 115 KeyTorms 116 ‘Meeting the Cost Management Challenges Solutions to You're the Decision Maker 117 Review Questions 117 ical Analysis 118 Exercises 118 Problems 123 Case 133 116 PART TWO Activity-Based Management 135 Activity-Based Costing Systems 136 PMI Background 138 PM's Competitive Situation 138 Pal Products and Processes 138 PMI Costing-System Options 139 PMs Costing System Team 140 Traditional Costing System 140Undereosting and Qvercosting Products Cost of Dinner Example 140 Refining @ Tradtionel Costing System 141 Activity-Based Costing System 141 Step 1: Identity and Classify Activities Related to Products 143 Bakery Example 143 Five-Level Hierarchy of Resources andActvities 143 Classification Objectives 144 [Methods for ering and Classifying Actviies 145 PMis Activity List 145 Step 2: Estimate the Cost of Activities 147 PMIs Use of the Employee Activity Data Shes 147 Activity Data Sheet Combined with Accounting Information 147 ‘Step 3: Calculate a Cost-Driver Rate for the Activity 148 Cost-Driver Rates: Bakery Example 148 Practical Capacity Nole 148 Driver Rates to PMI Assignment of Activities 148 Stop 4: Assign Activity Costs to Products 151 Bakery Example 187 PMI ample 181 Product and Customer Profitability 153 Product Proftabilily 153 Customer Proiitabilty 154 Estimation of Costs of New Products Using ABC 155 ‘MegaBurger Novelty Toy Decision 155 ‘Activity-Based Costing in Service and Merchandising Companies 157 Costs and Benefits of Using Activity-Based Costing 157 Chapter Summary 158 ‘Appendix to Chapter Four: Unit-Level ABC Costing 158, KeyTerms 159 ‘Meeting the Cost Management Challenges 159 Solutions to You're the Decision Maker 160 Review Questions 180 Critical Analysis 161 Exercises 162 Problems 165 Cases 175 5 Contents Based Management 178 Importance of Activity-Based Information toPMI's Success 180 Activity-Based Costing: Foundation of Process Improvement 180 Combination of ABC and Target Costing 181 Importance of Customer-Percelved Value 183 iminating NonValue-Added Activites, ynpeitive Necessty 183 Icentiying Value-Added Activities 184 Perfouning PMs Value-Added Analysis 186 ‘Tasks Required by Activity-Based Management 187 Detailed Activity Analysis 187 Identification of Process-Improvement Opportunities 188 ‘Asking the Question, Why? 188 Identiying the Cost of Saved Resources 190 Capacity Utilization 190 Activity Based ReporingofUnused Resources 191 Implementation of Activity-Based Costing and Management 192 Should All O-ganizations Adopt ABC and ABM? 192 Can You Be Sure That ABC and ABM Wil Be Successiul? 193, PMI’s Decision to Keep MegaBurger as a Customer 196 Chapter Summary 197 Key Terms 197 Meeting the Cost Management Challenges 197 Solutions to You're the Decision Maker 197 Review Questions 198 Critical Analysis 198 Exercises 199 Probloms 203 Cases 2076 Contents Managing Customer Profitability HealthWave, Ltd. 214 Healthivave's Products 214 HealthWavels Customers 214 Importance of Customer Profitability 214 Measurement of Customer Profitability 215 Identfication of Effective and ineffective CusiomerRelated Acivilies 216 HealthWave's Traditional Profitability Analysis by Product Line 217 Customer Sales Analysis 219 HealthWave Customer Profile 219 Analysis of Customer SalesPatierns 219 Sales and Administrative Cost Analysis 220 Customer Seling Costs 221 Customer Marketing Costs 222 Customer Distroution Costs 223 Customer General and Administration Costs 224 Customer Profitability Analysis 226 Identification of Alternative Actions and Choice of Appropriate One 228 CommonSize ProfitStatements 228 Continue the Status Que; Do Nothing 223 Drop Pharmacy Customers 229 ery of Serving Pharm: Increase the Etc Customers 232 Decrease Operating Activity Costs for Al Customers 233 Chapter Summary 234 Key Terms 284 Meeting the Cost Management Challenges 234 ‘Solutions to You're the Decision Maker 235, Review Questions 236 Critical Analysis 236 Exercises 237 Problems 298 Cases 242 Managing Quality and Time to Create Value 244 Importance of Quality 246 Costs of Improving Quality 247 “olal Quality Managenent (TQM) 247 Peturn on Qualty (ROG) 247 Comparison ofthe Views of Quality 248 Conflict between TQM and ROG 248 Dimensions of Quality 249 Procuct and Service Atributes 249 Customer Service before and after the Sale 249 How Organizations Measure Quality 250 Ircieators of Quality 250 Diagrostic Information 252 Customer Satisfaction 256 Trade-offs between Quality and Price 257 identiying Costs of Qualty 257 Controling Quality 257 Failing to Contro! Quay 256 Measuring Costs of Quality 269 Reporting Costs cf Quality 259 Corporate Integrity and Quality 260 Quality Awards and Certiicates 261 Importance of Managing Time in a Compe Environment 261 New Pradtt (or Service} Develooment Time 261 Sustamer-Response Time and Cycle Time 262 Costs of Time 262 Management of Process Productivity and Efficiency 263, Measuring Productivity 263, Measuring Cycle Time 264 Measuring Throughput Elicioncy 264 Managing Process Capacity 265 Measuring Capacity 266 Managing Quality + Time + Productivity + Capacity = JIT 266UIT Manufacturing 267 UIT Success Factors 268 Chapter Summary 271 ‘Appendix to Chapter Seven: Construction and Use of Control Charts 271 Koy Terms 274 Meeting the Cost Management Challenges 275 Solutions to You're the Decision Maker 275 Review Questions 276 Gritical Analysis 276 Exercises 27 Problems 282 Cases 287 PART THREE Process Costing and Cost Allocation 8 291 Process-Costing Systems 292 Introduction to Process Costing 294 Importance of Process Cost Information 205 Assignment of Costs to Products 295 Example 1: Department with No Beginning or Ending WIP Inventory 295 Example 2: Department with Ending WIP Inventory 286 Step 1, Summarize the Fow of Physical Units 296 Step 2. Compute the Equivalent Number of Units Procuced 296 Steps 9,4, and. Cost Analysis 297 Example 8: Department with Beginning and Ending WIP Inventory 298 The Basic Idea: Applying tne Basic Cost-Flow Model 299 Five Key Steps 299, Managerial Use of the Production Gost Report 303 Sections 1 and 2. Managing the Physical Flow ofUnis 304) 9 Contents vin Sections 3,4, and; Managing Costs 304 Example 4: Department with Costs Transferred in from Prior Departments 304 Accounting for Tiansferec:in Costs 304 Responsibility for Costs Transierted in from Prior Departments 305 Example 5: Department with Spoilage Gosts 305 Normal versus Abnermal Spoilege: Is Spoilage Ever Normal? 306 Accounting for Spollage Costs 308 Management of Spirit Beverages’ Costs 308 Choice between Job and Process Costing 309 Chapter Summary 310 ‘Appendix A to Chapter Eight: Cost Assignment to Products Using First-In, First-Out Costing 311 Appendix B to Chapter Eight: Operation Costing 317 Key Terms 320 Meeting the Cost Management Challenges 320 Solutions to You're the Decision Maker 320 Review Questions 321 Critical Analysis 321 Exercises 322 Problems 325 Cases 329 Joint-Process Costing 332 Joint Product Processes 334 ‘The Importance of Spl Off 334 One Input—More Than One Output 334 ‘The Decision Challenge: Which Joint Products to Produce 335 Estimation of Profs fran Joint Products 335 Decision to Sell Products at Salt Of or Process Them Further 337 Profit Maximizaton of JonntProduct Processes. S37 Profit Analysis of Option +: Grade A Standars Lumber 33710 Contes Profit Analysis of Opton 2: Grade A Specialty Lumber and Grade B Standard Lumber 337 Most Profitable Products 337 Reasons for Allocating Joint Costs 338 Measuring Performance 338 Estimating Casualty Losses 939 Determining and Responding to Regulated Rates 330 Specifying and Resolving Contractual interests and Obligations 249 Joint-Cost Implications in Contracts 340 Joint Cost-Allocation Methods 341 Dastinguishing between Main and y-Products 342 Using the Net Realizable Value Method 342 Using the PhysicalMeasures Method 343 Choosing amcng Joint-Cos Allocation Methods 945 Basics of Accounting for By-Products 245 Disposal of Scrap and Waste 348, Chapter Summary 347 Appendix to Chapter Nine: Other Economic Value Methods 347 KeyTorms 348 Meeting the Cost Management Challenges 349 Solutions to You're the Decision Maker 349 Review Questions 360 Critical Analysis 350 Exercises 351 Problems 354 Cases 958 Deciding Wha Pays for Internal Support-Servica Costs 367 Reasons for Allocating Service Costs 367 Decision Making and Cost Allocations 367 COiner Uses of Cost Alcations 368 Cost-Management Implications for internal Suppor Sewvices 369 Cost Allocation trom Support-Service Departments to Internal Customers 369 Step 1: dently the Costs to Be Allocated to Internal Customers $70 ‘Stop 2: Choose the Appropriate Cost- Allocation Base(s) and Rete(s) 371 Step: Selact and Use @ Cast-Alecetion Methoo 373 Step 4: Determine Whether the Cost Allocations Achieve the Dasired Results 982 Ethical Issues 384 Chapter Summary 385 ‘Appendix to Chapter Ten: Reciprocal Method 385 Key Terms 389 ‘Meeting the Cost Management Challenges 389 Solutions to You're the Decision Maker 390 Review Questions 391 Critical Analysis 392 Exercises 393 Problems 396 Cases 401 Part Four Planning and Decision Making 407 Managing and Allocating Support-Service Costs 362 : 11 Cost Estimation 408 Service-Cost Challenge 364 Internat or Outsourced Support Services? 364 Management of Internal Suppor-Sarvice Costs 985 Distinguishing between Suppor-Seevos and Producion Depertments 388 Cost Estimation 410 Costs Do Net Just Happen 410 Reasons for Estimating Costs 411 Cost Management 411Decision Making 411 Planning and Standard Setting 412 Simple Model: One Cost Driver and Fixed/Variable Cost Behavior 412 ‘A More Compiox Model: Multiple Cost Drivers and Complex Cost Behavior 413 Cost BerelitTest 413 Step Cosis 413 Mixed Coste 415 Nonlinear Cost Behevior Cost-Estimation Methods 418 Statistical Cost Estimation Using Simple Regression Analysis 416 ‘Simple Model for Regression Analysis 416 ats. Application of Simple Rogression Anaiyeis to CO. Catering 417 Use ofthe Regression Results 420 High-Low Method 421 Application of the High-Low Method to CG. Catering 421 Use of Multiple Regression Analysis to Estimate Cost-Driver Rates 422 Application of Multo'e Regression Analysts 10 CC Catering 422 Cautionary Note about Lising Regression 426 Account Analysis Method 427 Applicatonol Account Analysist0C.C. Catering 427 Engineering Method 429 Application of the Engineering Method to CO Catering 429 Comparison of the Methods and Estimates 430 Relevance of Dala Inputs 430 Costs and Benefits of Mare Sophist Detailed Methods 431 Choice af Cost Equation 431 ‘edand Applicaton of the Methods 10 C.C. Catering 431 (OC. Catering’s Hybrid Cost-Estimation Model 432 Use of the Results 439 Forecasting 433 ‘Outsourcing Decision 495 Costs and Benefits of Product Variety 495 Ethical Issues 436 Chapter Summary 437 ‘Appendix A to Chapter Eleven: Technical Notes on Regression 437 Appendix B to Chapter Elovon: Learning Curves 440 KeyTorms 449 Contents xxi Meoting the Cost Management Challenges 443 443 Solutions to You're the Decision Maker Review Questions 444 Critical Analysis 444 Exercises 445 Problems 451 Cases 456 1 and Cost-Volume-Profit 458 Financi Models Introducing Financial Modeling 460 Definition of Financial Models 460 Objectives of Financial Modeling 461 Using Cost-Volume-Protit (CVP] Planning Models 462 Basic Cost-Velume-Prott Model 463, Cost-Volume-Prefit Vadel and the Break Even Point 463 Basic CVP Model in Graphical Format 465 CuP and Target Income 485 Operating Leverage 466 Identifying Elements of a Financial Model 467 Rolalions among Reverues and Costs 467 Menual versus Computer Models 467 Set Up of Computer Spreadsheet Models 467 Modeling Taxes 469 Modeling Multiple Products 470 Mutiproduct Profi Planing Model 472 Modeling Multiple Cost Drivers 473, Diiversof Profits 473 Profi-Plaming Mode's with Multiple Cost Divers 474 Use of ABC in Financial Modeling 475 Using Sensitivity and Scenario Analyses 476 Sensitivity Analysis: What |? 477 Scenatio Analysis (Best, Worst, and Most Likely Cases) 4793 Contents Modeling Scarce Resources 480 Prof froma Single Scarce Rescurce Maxirization 480 Chapter Summary 481 Appendix A to Chapter Twelve: Theory of Constraints 482 Appendix B to Chapter Twelve: Linear Programming 435 Key Torms 489 ‘Meeting the Cost Management Challenges 489 Solutions to You're the Decision Maker 489 Review Questions 490 Critical Analysis 491 Exercises 491 Problems 496 Cases 501 Cost Management and Decision Making 506 Decision-Making Process 508 ‘Stage I: Setting Goals and Objectives 509 Selecting Goals 509 Specifying Tangible Objectives 508 Salting Tangible Objectives 510 Stage Il: Gathering Information 511 Objectivity versus Subjectivity 512 Accuracy 612 Timeliness 512 Relevance 512 identification of Relevant Costs and Benefits 513 Impacton the Fulure 514 Trade-Off between information Cost and Quality 615 ‘Stage Ill: Evaluating Altornatives 616 The Decision Tree: A Helpful Decision Aid 816 Anticipation of the Future Outcome(s) of Each 516 Choice of the Best Allerative: Estimated Benelits ancCosts 517 Choice of ne Best Alternative Using Both Quantitative and Qualitative information 519 Examples of Common Decisions: Outsource, or ‘Add or Drop a Product, or Service, or Business. Unit 519 Outsourcing or Make-or Buy Decision 519 Decision to Adie! or Diop a Product, Services, or Business Unk 521 ele int Costs of Replacing Equipment 523 Pricing Decisions 525 Influences on Prices 525 Spocial-Order Price Decisions 530 Chapter Summary 33 Key Terms 533 ‘Meeting the Cost Management Challenges 533, Solutions to You're the Decision Maker 534 Review Questions 535 Critical Analysis 595 Exercises 636 Problems 538 Cases 548 Strategic Issues in Making Investment Decisions 552 Investment Decisions 554 Strategic Investments 654 Uncontollable External Factors 5 Information about External Everts 556 Identiication of Uncontrollable Future Events 556 Licelhoad of the Occurrence of Future Events. 858 Expected Value Analysis 59 Intemal Information $60 Forecasts 0! ShadeTiees Investmentinformation S61 Future Actions of Competitors $64 Real Option Value Analysis 56615 Value of Dsterring Iroversibie Decisions $67 Value of the Option toWat $70 Legal and Ethical Issues in Strategic Investment Analysis 671 World Demands Ethical Invesimont Practiog, but Wat is 2 571 Internal Ethical Pressures $72 Roles of iniornal Controls and Audits $72 Chapter Summary 573 ‘Appendix A to Chapter Fourteen: Discounted Cash Flow Analysis 573 Appendix B to Chapter Fourteen: Analysis of ‘ShadeTree Roasters’ Decision to Invest Now, Years 1-6 579 KeyTerms 580 Meeting the Cost Management Challenges 581 Solutions to You're the Decision Maker 581 Review Questions $83 Critical Analysis 584 Exercises 584 Problems 587 Cases 590 Budgeting and Financial Planning 594 Strategle Planning: Achioving and Maintaining a Compettive Advantage 596 What s 2 Stategie Long-Range Plan? £96 What Are the Key Purposes of Budgeting Systems? 597 Peming 597 Faclitsing Communication and Coordination $97 Alocating Resources 597 Managing Financial and Operational Portormance 838 Evaluating Porformance and Providing Incentives 598 Organizations Use Many Types of Budgets 598 Contents eel Master Budget as a Planning Tool 598 Seles Budgot: Tho Starting Point $98 Operational Sudgets: Mesting the Demand for Goods and Services 601 Budgeted Financia Statements: Completing the Master Budgel 601 Master Budget for Nonprofit Organizations 601 International Aspects of Budgeting 602 Activity-Based Budgeting 603 Illustrating the Master Budget 604 Sales Budget 604 Production Budget 604 Direct-Material Budget 606 Direct-Labor Budge: 607 Marufacturing-Overhead Budget 607 Seling, General, and Administrative (SG&A) Expense Budgst 609 Cash Receipts Budget 610 Cash Disbursements Budget 611 Cash Budget’ Combining Receipts and Disbursements 612 Budgeted Schedule of Cost of Goods Manufactured and So 613 Budgeted Income Statement 614 Bucigeted Balance Sheet 614 Assumptions and Predictions Underlying the Master Budget 614 Financial Planning Models 616 Responsibility for Budget Administration 617 Behavioral Implications of Budgets 618 Budgeiary Slack: Padding the Budget 618 Participative Budgeting 619 Ethical Issuesin Budgeting 619 Zero-Base Budgeting for Discretionary Costs 620 Base Budgeting 620 Contemporary Trends in Budgeting and Financial Planning 620 Chapter Summary 621 ‘Appendix to Chapter Fifteen: Inventory Management 621 KeyTerms 625 ‘Meeting the Cost Management Challenges 626 ‘Solutions to You're the Decision Maker 626 Review Questions 627 Critical Analysis 627 Exercises 628 Problems 632 Cases 640oxy Contents Part Five Evaluating and Managing Performance Creating and Managing Value-Added Effort 645 16. Standard Costing, Variance Analysis, and Kaizen Costing 646 Use of Standard-Costing Systems for Control 648 Management by Exception 648 Setting Standards 649 Ferfection versus Practical Stanciards: ABohewioral Issue 650 Use of Standards by Nenmanutacturing Organizations 651 Costs and Benefits of Standar Systems 652 Cost Variance Analysis 652 Direct Material Standards 652 Direct-Labor Standards 653 Standard Costs Given Actual Output 653, Analysis of Cost Variances 653 Ditect-Materiat Variances 654 Direct-Labor Variances 655 td-Costing Mutiple Types of Direct Material and Direct Lavor 8 Allowance for Detects or Spolage 657 Significance of Cost Variances: When to Follow Up 658 Size ofVerances @58 Recurring Variances 658 Tends 659 Contolabitiy 659 Favorable Variances 659 Costs and Benefits of investigation 659 Statistical Analysis 660 Behavioral Effects of Standard Costing 661 Controllability of Variances 661 Which Managers Influence Gost Variances? 662 Interaction among Variances 682 Use of Standard Costs for Product Costing 664 Journal Erttios undor Standarc Costing 664 Cost Fiows under Standard Costing 665 Impact of Information Technology on Standard Costing 666 Use of Bar Codes 666 Computer-Aided Design 686 ‘Standard Costing: Its Traditional Advantages 887 Changing Role of Standard-Costing Systems in Today's Manufacturing Environment 667 Citcisms of Standard Costing in Today's Manufacturing Environment 668 Adaptation of Standard Costing Systems 668 Kaizen Costing 670 Chapter Summary 671 Appendix to Chapter Sixteen: Production Mix and Yield Variances 671 Key Terms 675 Meeting the Cost-Management Challenges 675 Solution to You're the Decision Maker 676 Review Questions 677 Critical Analysis 677 Exercises 678 Problems 681 Cases 686 Flexible Budgets, Overhead Cost Management, and Activity-Based Budgeting 688 Definition of Flexible-Overhead Budgets 690Advantages of Flexible Budgets 691 Activity Measure: Based on Input or Ouou? 6 Floxible-Overhead Budget ilustrated 693, Overhead Application in a Standard-Costing System 694 Choice of Activity Measure 696 Impact of Information Technology 696 Overhead Cost Variances 697 Flexible Budget: Basis for Management of Overhead Cost 697 Variabe-Ovethead Variances 697 Fixec-Overhead Variances 700 \What Do Four Way, Three-Way, and Two-Way Variance Analyses Tell tho Cost Manager? 703 Using the Overhead Cost Performance Report in Gost Management 704 Using Standard Costs in Product Costing 705 Journal Enires uncer Standard Costing 708 Disposition of Veriances 706 Aotivity-Based Flexible Budget 706 How Doas ABC Aftoct Performance Reporting? 707 ‘Other Issues in Variance Analysis 709 ‘Standard Costing in a Just-in-Time wirenment 708 Sales-Variance Analysis 709 Chapter Summary 709 Appendix A to Chapter Seventeen: Proration of Cost Variances 709 Appendix B to Chapter Seventeen: Standard Costing in a Just-in-Time Environment 712 Appendix C to Chapter Seventeen: Sales Variance Analysis 714 Key Terms 721 ‘Meeting the Cost-Management Challenges 721 Solution to You're the Decision Maker 722 Review Questions 724 Critical Analysis 724 Exercises 724 Problems 729 Cases 737 Contents Organizational Design, Responsibility Accounting, and Evaluation of Divisional Performance 742 Decentralized Organizations and Responsibility Accounting 744 Centralzation versus Decentralization 744 Beneiits anc Costs of a Decentralized Organization Sructue 744 Responsibility Accounting 746 Cost Center 746 Discretionary Cost Center 746 Revenue Center 746 Profit Center 746 Invesiment Center 747 Uustration of Responsibility Accounting 747 Corporate Level 747 Division Level 748, PrantLevel 749 Department Level 749 Work CenterLevel 750 Performance Reports 750 Budgels, Variance Analysis, and Responstolity Accounting 752 Activity: Based Responsibility Accourting 752 How Responsibility Accounting Affects Behavior 752 Does It Provide Information or Place Biare? 763 Js There Realy Cost or Reverie Contllabity? 753 How Can Dosired Behavior Be Motivated? 753 Performance Measurement in Investment Centers 754 Return on Investmont as a Performance Measure 755 Residual Income as a Performance Measure 757soni Con Economic Value Adced (EVA) as a Performance Measure 760 Measuring Invested Capital and Income 761 Measuring Investad Capital 761 Measuring Invesiment-Center Income 764 Determining the Impact of inflation and Deflation: Current Value versus Historical Cost Accounting 765 Measuring Income and Invested Capita Summary 766 Use of Investment Center Performance Measures to Provide Managerial Incentives 766 Return on investment (RON) 768 Residual Income or Economic Value Added 767 Stock-Price Performance 76 Nonfinancial Performance Measures 768 Viewing an Investent Center as a Collection of Investments 770 Performance Measurement in Nonprofit Organizations 770 Chapter Summary 771 Key Terms 774 Meeting the Cost Management Challenges 771 Solutions to You're the Decision Maker 772 Review Questions 772 Critical Analysis 773 Exercises 773 Problems 776 Cases 783 20 19 Transfer Pricing 788 Impact of Transfer Pricing on Organizations 790 ‘Gal and Behavioral Congruence 791 General TansferPricing Rule 791 ‘Tansters Based on the External Market Price 734 Negotiated Transfer Prices 795 CostBased Transfer Prices 798 Standard versus Actual Casts 798 Activity Based Costing 798, Remedy for Motivational Problems of Transfer: Pricing Policies 798 Undermining of Divisional Autonomy 798, Dual Transfer Prices 799 Global Transfer-Pricing Practices 800 Mutinational Transfer Pricing 00 ‘Segment Reporting and Transfer Pricing 802 ‘Transfer Pricing in the Service Industry 803 Chapter Summary 803 Key Terms 803, Mesting the Cost-Management Challenges 803, Solutions to You're the Decision Maker 804 Review Questions 604 Critical Analysis 806 Exercises 805 Problems 808 Cases 814 Strategy, Balanced Scorecards, and Incentive Systems 818. Valley Commercial Bank: Ahead of the Competition 820 Using Leading and Lagging Indicators in Balanced ‘Scorecards to Communicate, Motivate, and Evaluate 620 Leading and Lagging Indicators 820 Communicating Strategy to Ermployees 821 Motivating Emplayees and Evaiuating Performance 821 Modern Origin ard Use of Balanced Scorecards 822