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Fundamentals of
Cost Accounting

Michael W. Maher
University of California at Davis

William N. Lanen
University of Michigan

Madhav V. Rajan
Stanford University

Boston Burr Ridge, IL Dubuque, IA Madison, WI New York

San Francisco St. Louis Bangkok Bogotá Caracas Kuala Lumpur
Lisbon London Madrid Mexico City Milan Montreal New Delhi
Santiago Seoul Singapore Sydney Taipei Toronto
mah18376_FM.qxd 11/23/04 3:14 PM Page ii

FUNDAMENTALS OF COST ACCOUNTING

Published by McGraw-Hill/Irwin, a business unit of The McGraw-Hill Companies, Inc., 1221
Avenue of the Americas, New York, NY 10020. Copyright © 2006 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 WCK/WCK 0 9 8 7 6 5 4
ISBN 0-07-301837-6
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Publisher: Stewart Mattson
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Library of Congress Cataloging-in-Publication Data
Maher, Michael W., 1946-
Fundamentals of cost accounting / Michael W. Maher, William N. Lanen, Madhav V.
Rajan.—1st ed.
p.cm.
Includes index.
ISBN 0-07-301837-6 (alk. paper)
1. Cost accounting. I. Lanen, William N. II. Rajan, Madhav V. III. Title.
HF5686.C8M224 2006
657'.42—dc22 2004061066
www.mhhe.com
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Dedication
I dedicate this book to my children, Krista and Andrea, and
to my extended family, friends, and colleagues, who have
provided their support and wisdom over the years.

Michael

To my wife, Donna, and my children, Cathy and Tom, for

encouragement, support, patience, and general good cheer
throughout the years.

Bill

To my mentors, Stan and Srikant, for their inspiration; to

my parents, for their encouragement; to my family, for
their love.

Madhav
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About
the
Maher • Lanen • Rajan

Authors
Michael W. Maher

Michael Maher is a Professor of Management at the

University of California-Davis. He 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 & Company 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 PhD from the University of Washington,
and he earned the CPA from the state of Washington.
Michael is a past 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. He is coauthor of two leading textbooks,
Cost Management, 3/e, and Managerial Accounting, 8/e.
Maher has coauthored 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, Michael was
awarded the American Accounting Association’s
Competitive Manuscript Award and the AICPA Notable
Contribution to Literature Award. He also received the
award for the Outstanding Tax Manuscript. He received
the Annual Outstanding Teacher Award three times from
his students at the University of California’s Graduate
School of Management and twice he has received a
special award for outstanding service. Maher’s current
research includes studies of the efficacy of online
education, health care costs, and corporate corruption.

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William N. Lanen
William Lanen is Professor of Accounting
and Michael and Joan Sakkinen Scholar at
the Stephen M. Ross School of Business
at the University of Michigan Business School.
He holds degrees in economics from the
University of California, Berkeley and Purdue
University and earned a PhD in accounting
from the Wharton School of the University
of Pennsylvania.
Bill teaches management accounting in
both the BBA and MBA programs at the
University of Michigan. He also teaches
management accounting in Global MBA
Programs and Executive Education Programs
in Asia, Europe, and Latin America. Before
coming to the University of Michigan, Bill
was on the faculty at the Wharton School
of the University of Pennsylvania where he
taught various financial and managerial
accounting courses at the undergraduate,
MBA, and Executive MBA levels. He has
received teaching awards at both the
University of Michigan and the
Wharton School.
Bill has served on the Editorial Board of
The Accounting Review and the Journal of
Management Accounting Research. He has
published in Journal of Accounting Research,
Journal of Accounting and Economics,
Accounting, Organizations, and Society, and
The Accounting Review. Bill is past-president
of the Management Accounting Section of
the American Accounting Association.
Maher • Lanen • Rajan
Madhav V. Rajan
Madhav Rajan is Gregor G. Peterson Professor
of Accounting at the Graduate School of Business,
Stanford University. Madhav joined Stanford
GSB in 2001, after 12 years on the faculty of the
Wharton School of the University of Pennsylvania.
Madhav received his MS, MBA, and PhD in
Accounting from Carnegie Mellon University.
His dissertation won Carnegie Mellon’s
Alexander Henderson Award for Excellence
in Economic Theory.
Madhav is an editor of The Accounting
Review and an associate editor for Management
Science. He also serves on the editorial boards
of three other academic journals. Madhav’s
primary area of research interest is the economics-
based analysis of issues in management
accounting, using both analytical and empirical
methodologies. His work has been published
in leading journals in accounting, economics,
finance, and operations management. In 2004,
he received the American Accounting Association’s
Notable Contribution to Management Accounting
Literature award.
Madhav has taught courses in cost and managerial
accounting at the undergraduate, MBA, PhD, and
executive MBA levels. He has won numerous
undergraduate and MBA teaching awards at
Wharton and Stanford GSB, including the David
W. Hauck Award, the highest undergraduate
teaching honor at Wharton.
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Helping
Students
Maher • Lanen • Rajan

through the The business world presents an array

of twists and turns, and getting through

Maze them successfully takes

informed decision
making and a
perspective that takes in the whole
picture, not just the view immediately
ahead. Students entering the business
world need to navigate a maze of
information systems, ambiguous
situations, and value- and nonvalue-
added activities. Cost accounting gives
them the skills they need to find their
way through, and Fundamentals of Cost
Accounting is the best choice available to
help them learn the cost concepts they
must know to succeed.

We based this text on the needs of

accounting instructors and students.
In a nationwide survey of cost
accounting instructors, conducted in
May 2004, we asked what the greatest
challenge and most difficult topics are
in this course. The feedback we
received from the market shaped
this book. From the comments we
received, it was clear that the ideal
cost textbook needed to have three
qualities: it needed to develop students’
problem solving skills, be realistic,
and be concise. By accomplishing
these three goals, Fundamentals of
Cost Accounting helps students
through the maze.

vi
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Problem-

Maher • Lanen • Rajan

Solving
Skills
Students learn by doing, so Fundamentals
of Cost Accounting provides a wide range
of challenging and thought-provoking
end-of-chapter material for them to
practice on. The authors have written
the problem material to match precisely
the presentation of concepts in each
chapter; there are no inconsistent terms
or conflicting requirements.
Fundamentals of Cost Accounting is
available with McGraw-Hill’s Homework
Manager, the most powerful system for
creating, assigning, and grading homework.
With this tool, you can use the authors’
problem material to its full potential.
McGraw-Hill’s Homework Manager can
generate unlimited variations of the
end-of-chapter material in Fundamentals
of Cost Accounting, allowing you to create
unique assignments, tests, or practice
problems in minutes.
Realistic
Students enter the cost accounting course
with varying levels of preparedness, and
some lack the experience to understand
how cost accounting relates to all types
of businesses and organizations. For this
reason, Fundamentals of Cost Accounting
presents concepts in context, showing
how cost accounting applies to a variety
of service and manufacturing companies.
Topic Tackler Plus, a multimedia tutorial
available at the text Web site or on an optional
CD-ROM, gives the students even more
real-world flavor with video clips illustrating
text concepts at work in actual companies.
Concise
By focusing on key concepts, we
have kept Fundamentals of Cost
Accounting brief and to the point.
With such a concise book, students
spend less time trying to memorize
details and more time analyzing
and applying fundamental principles.

“I have to say that this is the best cost text I have ever seen
by far and I can’t stress that enough. . . . The organization
of this text in general and the individual chapters is
excellent and the clarity of presentation is refreshing.”
John Giles
North Carolina State University

vii
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Your Guide to
Cost Concepts
Maher • Lanen • Rajan

5Chapter Five
Fundamentals of Product
and Service Costing

LEARNING OBJECTIVES
After reading this chapter, you should be able to:
Working in a group in this executive education class
has been really helpful, but maybe not for the reason
the instructor thought. About an hour ago, we broke
out in groups of three to establish a price for a prod-
uct. We decided to start by determining the cost of
making the product. But the three of us in the group
coming up with a solution for the case. Now, w
to get back to the classroom. I hope the cost w
mated makes sense.

Selene Theodakis, the production manager

L.O.1 Explain the fundamental themes underlying the design of cost systems.
L.O.2 Explain how cost allocation is used in a cost management system.
L.O.3 Explain how a basic product costing system works.
work in very different industries, so when we devel-
oped the cost, we all approached it in a different way.
We then spent more time talking about the costing
systems used in each of our companies than about
Boats, a manufacturer of custom-built pleasure
talking during a break at a local college. The othe
ple in her group were Cathy Baxter, owner of Bax
and Tom Adams, the marketing manager at Thom
Sports.

Chapter opener/
opening vignette T his chapter provides an overview of alternative cost systems
for product and service costing. Details and extensions to the basic models described here
are presented in the following three chapters. The fundamental approach and the prob-
Each chapter opens with an engaging, lems that arise from using cost data generated by these basic costing systems can be il-
lustrated by the examples in this chapter. We follow two principles in our discussion: The
realistic story of how an organization cost system should be oriented to the needs of the decision makers (that is users of the in
has used cost accounting principles.
This sets the stage for the rest of the
chapter and encourages students to
think of concepts in context.

240 Chapter 8 Activity-Based Costing

In Action Activity-Based Costing in a Not for Profit

Activity-based costing is not just for manufacturing firms or
even only for-profit firms. Any organization that wants to bet-
ter understand the costs of the goods and services it pro-
vides can benefit from using it.
The following is a cost flow diagram from a proposed
activity-based cost system for a not-for-profit (sometimes
referred to as a nongovernment organization, or NGO) oper-
ating in the Hong Kong Special Administrative Region of
China. Notice that the first stage separates costs into activi-
ties (using number of employees) and then into services us-
ing, for one of the activities—preparing materials, percent of
effort.
Source: P. Ip, P. Li, and J. Yau, “Application of Activity-Based Cost-
ing/(ABC): The Case of a Non-Government Organization,” Interna-
tional Journal of Management, v. 20 (3): 282.

Equipment Salaries Other

In Action boxes First stage Number of employees

These examples, drawn from
contemporary journals and the
authors’ own experiences, Conducting
courses
Preparing
materials
Other

illustrate how to apply cost

accounting methods and tools. % Effort
Second stage

Courses for
AIDS programs Other
domestic help

viii
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job shop, 000 underapplied overhead, 000

normal cost, 000

Review QuestionsReview Questions

6-1. What are characteristics of companies that are likely to use a job cost system?
6-2. Direct labor-hours and direct labor dollars are the most common allocation b
the United States (indeed, throughout the world). Why do you suppose they ar
than others?

Maher • Lanen • Rajan

Analysis and Discussion
CriticalQuestions
Analysis and Discussion Questions
o most companies use normal or standard costing? After all, actual costing gives the
ost, so the firm could just wait until it knows what the cost will be.
control of materials important from a managerial planning perspective?
ing about the choice of an overhead allocation base is a waste of time. In the end,
overhead is charged to production.” Do you agree? Why?
w the manager of a construction company (for example, a company that does house
End-of-chapter
ction, remodeling, landscaping, or street or highway construction) about how the
ny bids on prospective jobs. Does it use cost information from former jobs that are material
to prospective ones, for example? Does it have a specialist in cost estimation who
es the costs of prospective jobs? Write a report to your instructor summarizing the The authors have
of your interview.
ew the manager of a campus print shop or a print shop in the local area about how tested the
mpany bids on prospective jobs. Does it use cost information from former jobs that
swith McGraw-Hill’s Homework Manager ilar to prospective ones, for example? Does it have a specialist in cost estimation
Exercises end-of-chapter
Costs to Jobs (L.O. 1, 2)
material over
ansactions occurred in April at Darlington Workshops, a custom manufacturer of time to ensure
,000 of materials. quality and
of supplies from the materials inventory.
,600 of materials. consistency with
materials purchased in transaction (1).
0 in direct materials to the production department. the chapter
ct labor costs of $10,000, which were credited to Payroll Payable.
cash for utilities, power, equipment maintenance, and other miscellaneous items content.
facturing plant.
head on the basis of 125 percent of $10,000 direct labor costs.Problems Problems
Available with McGraw-Hill’s Homework Manager
epreciation on manufacturing property, plant, and equipment of $5,000.
(L.O. 3) 6-25. Estimate Hours Worked from Overhead Data
entries to record these transactions. Griffin Corporation estimated that direct labor for the year would be 39,000 hours. G
head (all fixed) is applied on the basis of direct labor-hours. The company estimate
C t t J b (L O 1 costs
2) at $156,000. During the year, all overhead costs were exactly as planned ($15
was $5,200 in overapplied overhead.
Required
How many direct labor-hours were worked during the period? Show computations.

(L.O. 2, 3) 6-26. Assigning Costs—Missing Data

The following T-accounts represent September activity.

Materials Inventory Work-In-Process Inven

BB (9/1) 8,000 BB (9/1) 22,300

(a) 4,300 180,500
(b) 121,000
EB (9/30) 9,700 94,000
EB (9/30) 17,700
Finished Goods Inventory

Integrative Cases Integrative Cases

8-38. Cost Allocation and Environmental Processes—Ethical Issues (L. O. 1, 3, 5, 6)
California Circuits Company (3C) manufactures a variety of components. Its Valley plant special-
izes in two electronic components used in circuit boards. These components serve the same func-
tion and perform equally well. The difference in the two products is the raw material. The XL-D
Integrative Cases chip is the older of the two components and is made with a metal that requires a wash prior to as-
sembly. Originally, the plant released the wastewater directly into a local river. Several years ago,
the company was ordered to treat the wastewater before its release, and it installed relatively ex-
These involving cases ask pensive equipment. While the equipment is fully depreciated, annual operating expenses of
$250,000 are still incurred for wastewater treatment.
students to apply the different Two years ago, company scientists developed an alloy with all of the properties of the raw ma-
terials used in XL-D that generates no wastewater. Some prototype components using the new ma-
techniques they have learned terial were produced and tested and found to be indistinguishable from the old components in every
way relating to their fitness for use. The only difference is that the new alloy is more expensive
to a realistic situation. than the old raw material. The company has been test-marketing the newer version of the compo-
nent, referred to as XL-C, and is currently trying to decide its fate.
Manufacturing both components begins in the Production Department and is completed in the
Assembly Department. No other products are produced in the plant. The following provides infor-
mation for the two components:

XL-D XL-C
Units produced . . . . . . . . . . . . . . . . . . . . . . . 100,000 25,000
Raw material costs per unit . . . . . . . . . . . . . $12 $14
Direct Labor-Hours per unit—Production . . . 0.1 0.1
Direct Labor-Hours per unit—Assembly . . . . 0.4 0.4
Direct Labor Rate per hour—all labor . . . . . . $20 $20
Machine-Hours per unit—production . . . . . . 1.6 1.6
Machine-Hours per unit—assembly . . . . . . . 0.4 0.4
Testing Hours per unit (all in production) . . . 3.0 3.0
Shipping weight per unit (pounds) . . . . . . . . 1.0 1.6
Wastewater generated per unit (gallons) . . . 10.0 0.0

Annual overhead costs for the two departments follow:

Production Assembly
Department Department
Supervision . . . . . . . . . . . . . . . $ 100,000 $240,000
Material handling . . . . . . . . . . . 93,000 40,000
Testing . . . . . . . . . . . . . . . . . . . 150,000 –0–
Wastewater treatment . . . . . . . 250,000 –0–
Depreciation on equipment . . . 400,000 100,000
Shipping . . . . . . . . . . . . . . . . . . 7,000 120,000
Total . . . . . . . . . . . . . . . . . . $1,000,000 $500,000

The company president believes that it’s foolish to continue producing two essentially equiv-
l t d t At th ti th t i i h tt ih db f t i

ix
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Map through
the chapters
Maher • Lanen • Rajan
Chapter 1 Cost Accounting: Information
for Decision Making
The text starts with a detailed overview of cost
accounting that describes many of the decisions that
require cost accounting information. It also discusses
ethical decisions and problems students may face in
their careers.
Unlike most first chapters,
it provides a good introduction.
This is not a chapter I’d skip!
—Patricia Derrick, Virginia Tech University
Chapter 2 Cost Concepts and Behavior
This chapter discusses how cost accounting systems
provide information to help managers make better
decisions. Because cost accounting systems are
tailored to the needs of individual companies,
several terms are used in practice to describe the
same or similar cost concepts, depending on the
use or the audience.
I see why your book is different. The
work to integrate topics in the reading
is great. This is a distinct challenge and
I can see why it has not been done in
this way before.
—Thomas Zeller, Loyola University—Chicago
Chapter 3 Fundamentals of Cost Analysis
for Decision Making
Unlike typical cost accounting texts, this chapter
incorporates the discussion of relevant cost and cost
analysis into one chapter. Where most texts cover
these related concepts in multiple chapters,
Fundamentals has grouped the discussion of CVP,
decision making, and constraints into one
comprehensive chapter at the beginning of the text.
Incorporating relevant cost decisions
into the chapter on cost analysis—this
is conceptually sound and not usually
done in texts.
—Margaret O’Reilly-Allen, Rider University
Chapter 4 Cost Estimation
When managers make decisions, they need to
compare the costs (and benefits) among alternative
actions by estimating the costs associated with each
alternative. This chapter discusses how to estimate the
cost data required for decision making and how cost
estimates can be an important element in making
decisions that add value to the company.
x
Fundamentals of Cost Accounting is a
cost accounting text for decision
making. Through real-world examples
and detailed illustrations, each chapter
provides comprehensive coverage of
the basic concepts of cost accounting.
Chapter 5 Fundamentals of
Product and Service Costing
This chapter provides an overview of alternative cost
systems for product and service costing presented in
Chapters 6, 7, and 8. The intuitive approach the chapter
takes highlights the basics of product costing systems.
The fundamental approach and the problems that arise
from using cost data generated by these basic costing
systems are illustrated by the examples in the chapter.
Two principles are emphasized: the cost system should
be oriented to the needs of the decision makers (that is,
users of the information) and the cost system should be
designed so that its benefits exceed its costs.
Good explanation of equivalent units.
Really like the way the reader is lead to
the need for EQU’s. In my experience,
students “get” the concept if they come
to see the need for them by themselves
through an example. Good discussion of
allocation bases. . . . Nice logical flow.
It’s not rushed (as is often the case in
many texts).
—Patricia Derrick, Virginia Tech University
Chapter 6 Job Costing
Chapter 7 Process Costing
Chapter 8 Activity-Based Costing
Chapters 6, 7, and 8 use detailed flow charts and
examples of the various costing systems. Chapter 6
discusses the product costing system, including
accounting for the flows of costs through the inventory
accounts. It describes a job costing system used in
many service and discrete manufacturing settings.
Chapter 7 deepens the discussion by describing the
development of a process costing system. Operations
costing systems are described at the end of the chapter.
Chapter 8 describes innovations to the basic costing
systems, including activity-based costing (ABC), which
has been implemented or considered by manufacturing
firms such as General Motors and Chrysler, financial
service firms such as Citibank, and even agencies of
the U.S. government.
This chapter is written very well
on a very, very difficult topic
for students.
—Jeanne Harrington, Middle Tennessee University
mah18376_FM.qxd 11/23/04 3:16 PM Page xi
Chapter 9 Fundamentals of Cost Management
While Chapter 8 discusses the use of activity-based
costing to compute the costs of products and services,
Chapter 9 considers the use of these methods to
manage and control costs. Activity-based management
does not focus on the detailed calculation of product
costs using activity-based costing already covered in
Chapter 8, but explores management’s uses of activity-
based costing methods to identify ways to assess
customer profitability. The chapter also describes the
assignment of capacity costs and measuring the cost
of quality.
I think this chapter is a major
contribution compared to most
old texts.
—Kathleen Sevigny, Bridgewater State College
Chapter 10 Service Department and
Joint Cost Allocation
Chapter 10 discusses the allocation of service
department costs to production departments. It also
considers product costing when multiple products are
produced from inputs in fixed proportions. The
chapter describes several methods of allocating joint
costs and includes multiple examples.
Having service department allocations
and joint cost allocations in one chapter
is very efficient, and facilitates
understanding of the material.
—Ola Smith, Western Michigan University
Chapter 11 Fundamentals of Management
Control Systems
Students explicitly recognize how individuals
respond to methods used for performance
measurement. Thus, the discussion of the design
and use of management control systems uses
concepts from human and organizational behavior
as well as accounting and economics. This chapter
develops basic issues and a coherent framework for
assessing management control issues.
Resists temptation to fill with “fluff.”
Presents the material well, grounds it
well, but doesn’t add the management
control system du jour, which quickly
dates the book.
—Patricia Derrick, Virginia Tech University
Chapter 12 Planning and Budgeting
This chapter focuses on the planning purposes of the
budgeting process. It shows how a master budget is
developed and how it fits into the overall plan for
achieving organization’s goals. Before investigating
the details of developing a master budget, this chapter
discusses how strategic planning can increase
competitiveness and affect global operations.
Chapter 13 Business Unit Performance
Measurement
Chapter 13 develops and analyzes the performance
measures for investment centers or business units. As
the chapter develops the performance measures, the
Maher • Lanen • Rajan
discussion centers around three questions:
1) Is the performance measure consistent with the
decision authority of the manager?
2) Does the measure reflect the results of the actions
that improve the performance of the organization?
3) What actions can the manager take that improve
reported performance, but are detrimental to
organizational performance?
This is a relatively new and
important topic . . .
well done in this chapter.
—Margaret O’Reilly-Allen, Rider University
Chapter 14 Transfer Pricing
Chapter 14 explains the basic issues involved with
transfer pricing by presenting real-world examples to
show the costs of dysfunctional decision making that
arise when local managers, making decisions based on
local interests, make choices that are suboptimal for
the organization as a whole.
The exercises and problems were very
interesting as they have a high global and
segment reporting content; the examples
used were very realistic. They would
make the classroom experience very
enriching.
—Kim Tan, California State University-Stanislaus
Chapter 15 Fundamentals of Variance Analysis
Chapter 15 discusses the control and evaluation activity
for profit and cost centers. Comparing actual performance
to budgets, students learn how to better understand why
targets are not achieved. This helps maintain control by
identifying areas for improvement. It also allows firms
to assess the performance of managers in different
departments.
Chapter 16 Special Topics in Variance Analysis
This chapter discusses additional variances to illustrate
some of the ways the basic variance analysis model can be
extended and adapted to specific circumstances. The basic
principles are the same as those presented in Chapter 15.
Chapter 17 Nonfinancial and Multiple
Measures of Performance
This chapter discusses how financial performance
measures are commonly used to evaluate employee
performance. In recent years, however, more and more
companies have begun using nonfinancial measures
such as customer satisfaction and product quality
measures. This chapter shows innovative ways to
evaluate performance “beyond the numbers” by
presenting a framework used to ensure that the
performance measures developed are consistent with
the rest of the management control system.
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Technology
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Maher • Lanen • Rajan
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Acknowledgements
Maher • Lanen • Rajan
A special thank you
to the following individuals who helped
develop and critique the book and ancillary
package: Barbi Wiggins, BW Consulting;
Kimberly Richardson, George Mason University;
Cathy Claiborne, California State University—
Channel Islands; Chiaho Chang, Montclair
University; Robert Gruber, University of
Wisconsin—Whitewater; Michael Haselkorn,
Bentley College; Beth Woods, Accuracy Counts;
Alice Sineath, Forsyth Tech Community College;
and Ilene Persoff, CW Post Campus—School
of Professional Accountancy at Long
Island University.

We are grateful for the outstanding support

of McGraw-Hill/Irwin. In particular, we would
like to thank Brent Gordon, Editorial Director;
Stewart Mattson, Publisher; Steve Delancey,
Senior Sponsoring Editor; Kimberly Hooker,
Senior Developmental Editor; Marc Chernoff,
Marketing Manager; Mark LaCien, Director of
Advertising and Promotions; Daniel Wiencek,
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Production Supervisor; Elizabeth Mavetz, Media
Producer; Matt Perry, Media Project Manager;
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Shive, Photo Research Coordinator.

Finally, we wish to thank all

the professors who reviewed
Fundamentals of Cost Accounting.
Their detailed comments, suggestions
and words of encouragement were
invaluable in creating this book.

xiv
mah18376_FM.qxd 11/23/04 3:17 PM Page xv

Reviewers Rowland Atiase Daniel Law

Maher • Lanen • Rajan

University of Texas at Austin Gonzaya University
Charles Betts John Logsdon
Delaware Technical Community College Webber International University
Timothy B. Biggart P. Michael McLain
University of North Carolina Hampton University
Rodger Brannan Kathleen Metcalf
University of Minnesota at Duluth Muscatine Community College
Wayne Bremser Karen Nunez
Villanova University North Carolina State University
Nat Briscoe
Margaret O'Reilly-Allen
Northwestern State University
Rider University
Roberta Cable
Tamara Phelan
Pace University
Northern Illinois University
Chiaho Chang
Montclair State University Jeanette Ramos-Alexander
New Jersey City University
Kerry Colton
Aims Community College Gerald Rosson
Lynchburg College
William Cready
Louisiana State University Anwar Salimi
Cal State Poly University-Pomona
Patricia Derrick
Virginia Polytechnic Institute and State University Kathleen Sevigny
Bridgewater State College
Robert Elmore
Tennessee Tech University Kenneth Sinclair
Lehigh University
John Giles
North Carolina State University Ola Smith
Penelope Sue Greenberg Western Michigan University
Widener University Cynthia Sneed
Jeannie Harrinigton Jacksonville State University
Middle Tennessee State University Swaminathan Sridharan
Michael Haselkorn Kellogg School of Management
Bentley College Lorraine Stern
Daniel A. Hinchliffe York College SUNY
Florida Atlantic University Verlindsey Stewart
M. Zafar Iqbal J.F. Drake State Technical College
Cal State Poly University-Pomona
Kim Tan
Richard Kelsey California State University—Stanislaus
NOVA Southeastern University
Debra Warren
Larry N. Killough Chadron State College
Virginia Tech
Anne Warrington
Larissa Kyj Michigan Tech University
Rowan University
Thomas Zeller
Randall E. LaSalle Loyola University at Chicago
West Chester University of Pennsylvania
xv
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Brief Contents

PART ONE: Introduction and Overview

Chapter One Cost Accounting: Information for Decision Making 2

Chapter Two Cost Concepts and Behavior 28

PART TWO: Cost Analysis and Estimation

Chapter Three Fundamentals of Cost Analysis for Decision Making 66

Chapter Four Cost Estimation 106

PART THREE: Cost Management Systems

Chapter Five Fundamentals of Product and Service Costing 138

Chapter Six Job Costing 162
Chapter Seven Process Costing 192
Chapter Eight Activity-Based Costing 230
Chapter Nine Fundamentals of Cost Management 268
Chapter Ten Service Department and Joint Cost Allocation 298

PART FOUR: Management Control Systems

Chapter Eleven Fundamentals of Management Control Systems 337

Chapter Twelve Planning and Budgeting 362
Chapter Thirteen Business Unit Performance Measurement 400
Chapter Fourteen Transfer Pricing 428
Chapter Fifteen Fundamentals of Variance Analysis 458
Chapter Sixteen Special Topics in Variance Analysis 502
Chapter Seventeen Nonfinancial and Multiple Measures of Performance Evaluation 532

Appendix: Capital Investment Decisions: An Overview 552

Glossary 563
Photo Credits 569
Index 571

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Table of Contents
CHAPTER ONE
Cost Accounting: Information for Decision
Making 2
VALUE CREATION IN ORGANIZATIONS
Value Chain 3
Supply Chain 4
ROLE OF INFORMATION IN THE
ORGANIZATION 4
The Manager’s Job Is to Make Decisions 4
Decision Making Requires Information 4
Managers Are Not Owners 5
Using Cost Information to Increase Value 5
In Action: Palliative Care Unit 5
Finding and Eliminating Activities That Don’t
Add Value 5
Strategic Cost Analysis 6
COST DATA FOR MANAGERIAL
DECISIONS 6
Costs for Decision Making 6
Costs for Control and Evaluation 7
Different Data for Different Decisions
ACCOUNTING SYSTEMS 10
Financial Accounting 10
Cost Accounting 10
Cost Accounting and GAAP 11
Customers of Cost Accounting 11
Ethical Issues and Cost Accounting 12
TRENDS IN COST ACCOUNTING 12
Cost Accounting in High-Tech Production
Settings 12
Just-in-Time Methods 13
Lean Production 13
Emphasis on Quality 13
Benchmarking and Continuous Improvement 13
Activity-Based Costing and Management 13
Enterprise Resource Planning 14
Six Sigma 14
3
Performance Measurement 14
Creating Value in the Organization 14
KEY FINANCIAL PLAYERS IN THE
ORGANIZATION 15
CHOICES: ETHICAL ISSUES FOR
ACCOUNTANTS 16
What Makes Ethics So Important? 16
In Action: Channel Surfing 16
What Should You Do If You Discover Unethical
Conduct? 17
Sarbanes-Oxley Act of 2002 and Ethics 17
COST ACCOUNTING AND OTHER BUSINESS
DISCIPLINES 18
Summary 18
Key Terms 19
Appendix 1A: Institute of Management Accountants Code
of Ethics 19
9 Review Questions 21
Critical Analysis and Discussion Questions 21
Exercises 22
Problems 23
Solutions to Self-Study Questions 26
CHAPTER TWO
Cost Concepts and Behavior 28
WHAT IS A COST? 29
Cost versus Expenses 30
PRESENTATION OF COSTS IN FINANCIAL
STATEMENTS 30
Service Organizations 31
Retail and Wholesale Companies 31
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xviii Table of Contents

Manufacturing Companies 33 Graphic Presentation 71

Direct and Indirect Product Manufacturing Profit-Volume Model 72
(Product) Costs 33 Use of CVP to Analyze the Effect of Different Cost
Prime Costs and Conversion Costs 34 Structures 73
Nonmanufacturing (Period) Costs 34 In Action: Effect of Cost Structure on Operating
In Action: Indirect Costs in Banking 35 and Investing Decisions 74
Margin of Safety 75
COST ALLOCATION 35
CVP Analysis with Spreadsheets 75
Direct versus Indirect Costs 36
Extensions of the CVP Model 76
DETAILS OF MANUFACTURING COST Income Taxes 76
FLOWS 37
Multiproduct CVP Analysis 76
HOW COSTS FLOW THROUGH THE
STATEMENTS 38 DIFFERENTIAL ANALYSIS 77
Income Statements 38 Differential Costs versus Total Costs 78
Cost of Goods Sold 38 Differential Analysis and Pricing Decisions 79
Direct Materials 39 Short-Run versus Long-Run Pricing
Decisions 79
Work in Process 39
Short-Run Pricing Decisions: Special Orders 80
Finished Goods Inventory 40
Long-Run Pricing Decisions 81
Cost of Goods Sold Statement 40
Long-Run versus Short-Run Pricing: Is There a
COST BEHAVIOR 41 Difference? 82
Fixed versus Variable Costs 41 Cost Analysis for Pricing 82
COMPONENTS OF PRODUCT COSTS 43 In Action: Take Back Laws in Europe 83
Unit Fixed Costs Can Be Misleading for Decision USE OF DIFFERENTIAL ANALYSIS FOR
Making 44 PRODUCTION DECISIONS 83
HOW TO MAKE COST INFORMATION MORE Make-It or Buy-It Decisions 83
USEFUL FOR MANAGERS 48 Make-or-Buy Decisions Involving Differential
Gross Margin versus Contribution Margin Income Fixed Costs 83
Statements 48 Opportunity Costs of Making 86
Developing Financial Statements for Decision Decision to Add or Drop a Product Line or
Making 48 Close a Business Unit? 87
Summary 50 Product Choice Decisions 88
Key Terms 51 Summary 90
Review Questions 51 Key Terms 91
Critical Analysis and Discussion Questions 52 Appendix: Theory of Constraints 91
Exercises 52 Review Questions 92
Problems 59 Critical Analysis and Discussion Questions 93
Solutions to Self-Study Questions 63 Exercises 93
Problems 98
CHAPTER THREE Solutions to Self-Study Questions 103
Fundamentals of Cost Analysis for Decision
Making 66 CHAPTER FOUR
Cost Estimation 106
COST-VOLUME-PROFIT ANALYSIS 67
Profit Equation 67 WHY ESTIMATE COSTS? 107
CVP Example 69 BASIC COST BEHAVIOR PATTERNS 107
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WHAT METHODS ARE USED TO ESTIMATE COSTING IN A MULTIPLE PRODUCT, DISCRETE

COST BEHAVIOR? 107 PROCESS INDUSTRY 144
Engineering Method 108 Predetermined Overhead Rates 146
Account Analysis Method 108 Product Costing of Multiple Products 146
Statistical Cost Estimation 110 Choice of the Allocation Base for Predetermined
In Action: Using Regression to Evaluate Cost Overhead Rate 147
Behavior 116 Choice among Possible Allocation Bases 148
Multiple Regression 116 MULTIPLE ALLOCATION BASES AND TWO-
Practical Implementation Problems 117 STAGE SYSTEMS 149
In Action: Learning Curves 118 Choice of Allocation Bases 150
HOW IS AN ESTIMATION METHOD DIFFERENT COMPANIES, DIFFERENT
CHOSEN? 120 PRODUCTION, AND COSTING SYSTEMS 151
Data Problems 120 Operations Costing: An Illustration 152
Effect of Different Methods on Cost Summary 153
Estimates 121 Key Terms 154
Summary 122 Review Questions 154
Key Terms 123 Critical Analysis and Discussion Questions 155
Appendix 4A: Using Microsoft Excel to Estimate Regression Exercises 155
Coefficients 123 Problems 158
Review Questions 127 Integrative Case 158
Critical Analysis and Discussion Questions 128 Solutions to Self-Study Questions 159
Exercises 128 CHAPTER SIX
Problems 132
Solutions to Self-Study Questions 137
Job Costing 162

CHAPTER FIVE DEFINING IS A JOB? 163

Fundamentals of Product and Service USING ACCOUNTING RECORDS IN A JOB
Costing 138 SHOP 163
COMPUTING THE COST OF A JOB 164
COST MANAGEMENT SYSTEMS 139
Production Process at InShape 164
Reasons to Calculate Product or Service
Costs 139 Record of Costs at InShape 165
In Action: Importance of Distinguishing between How Manufacturing Overhead Costs Are Recorded
Production Costs and Overhead Costs 140 at InShape 168
Cost Allocation and Product Costing 140 In Action: Effect of Overhead Rates on Production
Decisions 168
Cost Flow Diagram 140
Over- and Underapplied Overhead 171
FUNDAMENTAL THEMES UNDERLYING THE Multiple Allocation Bases: The Two-Stage
DESIGN OF COST SYSTEMS FOR Approach 173
MANAGERIAL PURPOSES 141
Summary of Steps in a Job Costing System 173
COSTING IN A SINGLE PRODUCT,
USING JOB COSTING IN SERVICE
CONTINUOUS PROCESS INDUSTRY 142
ORGANIZATIONS 173
Basic Cost Flow Model 142
ETHICAL ISSUES AND JOB COSTING 175
Costing with No Work-in-Process
Inventories 142 Misstating Stage of Completion 176
Costing with Ending Work-in-Process Charging Costs to the Wrong Jobs 176
Inventories 142 Misrepresenting the Cost of Jobs 176
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xx Table of Contents

MANAGING PROJECTS 176 Step 5: Assign Product Cost: FIFO 204

In Action: Determination of Costs of Large How This Looks in T-Accounts 205
Projects and Ethical Implications 178
DETERMINING WHICH IS BETTER: FIFO OR
Summary 178 WEIGHTED AVERAGE? 205
Key Terms 178
Review Questions 178 COMPUTING PRODUCT COSTS: SUMMARY OF
Critical Analysis and Discussion Questions 179 THE STEPS 206
Exercises 179
USING COSTS TRANSFERRED IN FROM PRIOR
Problems 182
DEPARTMENTS 208
Integrative Case 191
Solutions to Self-Study Questions 191 Who Is Responsible for Costs Transferred in from
Prior Departments? 208
CHAPTER SEVEN CHOOSING BETWEEN JOB AND PROCESS
Process Costing 192 COSTING 208
OPERATION COSTING 209
DETERMINING EQUIVALENT UNITS 194
Product Costing in Operations 209
USING PRODUCT COSTING IN A PROCESS Operation Costing Illustration 210
INDUSTRY 194
Step 1: Measure the Physical Flow of COMPARING JOB, PROCESS, AND OPERATION
Resources 195 COSTING 212
Step 2: Compute the Equivalent Units of Summary 213
Production 196 Key Terms 214
Review Questions 214
Step 3: Identify the Products Costs for which to
Critical Analysis and Discussion Questions 214
Account 196
Exercises 215
Time Out! We Need to Make an Assumption about Problems 220
Costs and the Work-in-Process Inventory 197 Solutions to Self-Study Questions 226
Step 4: Compute Costs per Equivalent Unit:
Weighted Average 198 CHAPTER EIGHT
Step 5: Assign Product Cost to Batches of Work: Activity-Based Costing 230
Weighted-Average Process Costing 198
REPORTED PRODUCT COSTS AND DECISION
REPORTING THIS INFORMATION TO
MAKING 231
MANAGERS: THE PRODUCTION COST
REPORT 199 Dropping a Product 231
Sections 1 and 2: Managing the Physical Flow of The Death Spiral 233
Units 200 TWO-STAGE COST ALLOCATION 234
Sections 3, 4, and 5: Managing Costs 200 Two-Stage Cost Allocation and the Choice of Cost
ASSIGNING COSTS USING FIRST-IN, FIRST- Drivers 235
OUT (FIFO) PROCESS COSTING 200 Plantwide versus Department-Specific Rates 238
Step 1: Measure the Physical Flow of Choice of Cost Allocation Methods: A Cost-Benefit
Resources 201 Decision 238
Step 2: Compute the Equivalent Units of ACTIVITY-BASED COSTING 239
Production 201
In Action: Activity-Based Costing in a Not for
Step 3: Identify the Costs for Which to Profit 240
Account 203
Developing Activity-Based Costs 240
Step 4: Compute Costs per Equivalent Unit:
FIFO 203 COST HIERARCHIES 242
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ACTIVITY-BASED COSTING MANAGING THE COST OF CAPACITY 277

ILLUSTRATED 243 Using and Supplying Resources 278
Step 1: Identify the Activities 243 Computing the Cost of Unused Capacity 279
Step 2: Identify the Cost Drivers 243 Assigning the Cost of Unused Capacity 281
Step 3: Compute the Cost Driver Rates 244 Seasonal Demand and the Cost of Unused
Step 4: Assign Costs Using Activity-Based Capacity 281
Costing 244
MANAGING THE COST OF QUALITY 283
Unit Costs Compared 246
How Can Traditional Managerial Accounting
COST FLOWS THROUGH ACCOUNTS 246 Systems Limit the Impact of Total Quality
Management 283
CHOICE OF ACTIVITY BASES IN MODERN
PRODUCTION SETTINGS 248 What Is Quality? 284
In Action: Evidence on the Benefits of Activity- The Cost of Quality 284
Based Costing 249 Trade-Offs, Quality Control and Failure
Costs 286
ACTIVITY-BASED COSTING IN
In Action: Cost Elements included n Reported
ADMINISTRATION 249
Quality Costs 287
WHO USES ABC? 250 Summary 288
Summary 251 Key Terms 289
Key Terms 252 Review Questions 289
Review Questions 252 Critical Analysis and Discussion Questions 289
Critical Analysis and Discussion Questions 252 Exercises 290
Exercises 252 Problems 294
Problems 257 Integrative Case 296
Integrative Cases 263 Solutions to Self-Study Questions 296
Solutions to Self-Study Questions 266
CHAPTER TEN
CHAPTER NINE Service Department and Joint Cost
Fundamentals of Cost Management 268 Allocation 298

USING ACTIVITY-BASED COST MANAGEMENT SERVICE DEPARTMENT COST

TO ADD VALUE 269 ALLOCATION 299
Using Activity-Based Cost Information to Improve METHODS OF ALLOCATING SERVICE
Processes 271 DEPARTMENT COSTS 301
Using Cost Hierarchies 271 Allocation Bases 301
MANAGING THE COST OF CUSTOMERS AND Direct Method 301
SUPPLIERS 272 Step Method 305
Using Activity-Based Costing to Determine the In Action: Step Method at Stanford
Cost of Customers and Suppliers 273 University 307
Determining Why the Cost of Customers Reciprocal Method 307
Matters 275
Comparison of the Direct, Step, and Reciprocal
Using Cost of Customer Information to Manage Methods 310
Costs 275
In Action: Customer, Not Product, ALLOCATION OF JOINT COSTS 311
Profitability 276 Joint Costing Defined 311
Determining the Cost of Suppliers 276 REASONS FOR ALLOCATING JOINT
Capturing the Cost Savings 277 COSTS 311
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xxii Table of Contents

JOINT COST ALLOCATION METHODS 312 Revenue Centers 342

Net Realizable Value Method 312 Profit Centers 342
Physical Quantities Method 315 Investment Centers 343
Evaluation of Joint Cost Methods 315 Responsibility Centers and Organization
Structure 343
DECIDING WHETHER TO SELL GOODS NOW
OR PROCESS THEM FURTHER 316 MEASURING PERFORMANCE 344
In Action: Different Demands for Different Two Basic Questions 344
Parts 316 In Action: Teacher Pay and Student
WHAT TO DO WITH BY-PRODUCTS 316 Performance 345
Cost Centers 345
Summary 318
Key Terms 319 Revenue Centers 345
Appendix 10A: Calculation of the Reciprocal Method Using Profit Centers 345
Computer Spreadsheets 319 Investment Centers 346
Review Questions 321
Critical Analysis and Discussion Questions 321 EVALUATING PERFORMANCE 346
Exercises 322 Relative Performance versus Absolute Performance
Problems 326 Standards 346
Integrative Case 332 Evaluating Managers’ Performance versus
Solutions to Self-Study Questions 333 Economic Performance of the Responsibility
Center 347
CHAPTER ELEVEN Relative Performance Evaluations in
Fundamentals of Management Control Organizations 347
Systems 336 COMPENSATION SYSTEMS 348
In Action: Beware of the “Kink” 348
WHY A MANAGEMENT CONTROL
SYSTEM? 337 Illustration: Corporate Cost Allocation 349
Incentive Problems with Allocated Costs 349
Alignment of Managerial and Organizational
Interests 337 Effective Corporate Cost Allocation 350
Evolution of the Control Problem: An DO PERFORMANCE EVALUATION
Example 337 SYSTEMS CREATE INCENTIVES TO
COMMIT FRAUD? 351
DECENTRALIZED ORGANIZATIONS 338
Why Decentralize the Organization? 338 Summary 352
Key Terms 353
Advantages of Decentralization 339
Review Questions 353
Disadvantages of Decentralization 339 Critical Analysis and Discussion Questions 353
Exercises 354
FRAMEWORK FOR EVALUATING
Problems 355
MANAGEMENT CONTROL SYSTEMS 340
Integrative Case 357
Organizational Environment and Strategy 340 Solutions to Self-Study Questions 360
Results of the Management Control System 340
Elements of a Management Control System 340 CHAPTER TWELVE
Balancing the Elements 341
Planning and Budgeting 362
DELEGATED DECISION AUTHORITY:
RESPONSIBILITY ACCOUNTING 342 HOW STRATEGIC PLANNING INCREASES
Cost Centers 342 COMPETITIVENESS 363
Discretionary Cost Centers 342 OVERALL PLAN 364
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Table of Contents xxiii

Organization Goals 364 Summary 384

Strategic Long-Range Profit Plan 364
Master Budget (Tactical Short-Range Profit Plan):
Tying the Strategic Plan to the Operating
Plan 364
HUMAN ELEMENT IN BUDGETING 365
Value of Employee Participation 366
DEVELOPING THE MASTER
BUDGET 366
WHERE TO START? 366
Sales Forecasting 366
COMPREHENSIVE ILLUSTRATION 368
Forecasting Production 368
Forecasting Production Costs 369
Direct Labor 371
Overhead 371
Completing the Budgeted Cost of Goods
Sold 372
Revising the Initial Budget 373
MARKETING AND ADMINISTRATIVE
BUDGET 373
PULLING IT TOGETHER INTO THE INCOME
STATEMENT 374
KEY RELATIONSHIPS: THE SALES CYCLE
USING CASH FLOW BUDGETS TO ESTIMATE
CASH NEEDS 376
Multiperiod Cash Flows 377
In Action: The “Curse” of Growth 378
PLANNING FOR THE ASSETS AND
LIABILITIES ON THE BUDGETED BALANCE
SHEETS 379
BIG PICTURE: HOW IT ALL FITS
TOGETHER 379
BUDGETING IN RETAIL AND WHOLESALE
ORGANIZATIONS 379
BUDGETING IN SERVICE
ORGANIZATIONS 381
In Action: Budget is the Law of Government
ETHICAL PROBLEMS IN BUDGETING
BUDGETING UNDER UNCERTAINTY
Key Terms 385
Review Questions 385
Critical Analysis and Discussion Questions 385
Exercises 385
Problems 390
Integrative Case 395
Solutions to Self-Study Questions 396
CHAPTER THIRTEEN
Business Unit Performance
Measurement 400
In Action: What Determination whether Firms Use
Divisional Measures for Measuring Divisional
Performance 401
ACCOUNTING INCOME 402
Computing Divisional Income 402
Advantages and Disadvantages of Divisional
Income 402
Some Simple Financial Ratios 403
RETURN ON INVESTMENT 404
Performance Measures for Control: A Short
Detour 405
Limitations of ROI 405
RESIDUAL INCOME MEASURES 408
Limitations of Residual Income 409
375
ECONOMIC VALUE ADDED (EVA®) 410
Limitations of EVA 411
In Action: Does Using Residual Income as a
Performance Measure Affect Managers’
Decisions? 412
MEASURING THE INVESTMENT BASE 412
Gross Book Value versus Net Book Value 412
Historical Cost versus Current Cost 413
Beginning, Ending, or Average Balance 415
OTHER ISSUES IN DIVISIONAL
PERFORMANCE MEASUREMENT 415
Summary 416
Key Terms 416
Review Questions 416
Critical Analysis and Discussion Questions 417
382
Exercises 417
382 Problems 420
Integrative Case 423
383 Solutions to Self-Study Questions 426
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xxiv Table of Contents

CHAPTER FOURTEEN Exercises 447

Problems 449
Transfer Pricing 428
Integrative Cases 454
Solutions to Self-Study Questions 456
WHAT IS TRANSFER PRICING AND WHY IS IT
IMPORTANT? 429 CHAPTER FIFTEEN
DETERMINING THE OPTIMAL TRANSFER Fundamentals of Variance Analysis 458
PRICE 430
The Setting 430 USING BUDGETS FOR PERFORMANCE
Determining Whether a Transfer Price Is EVALUATION 459
Optimal 430 PROFIT VARIANCE 460
Case 1: A Perfect Intermediate Market 432 Why Are Actual and Budgeted Results
In Action: Transfer Pricing in State-Owned Different? 461
Enterprises 434
FLEXIBLE BUDGETING 461
Case 2: No Intermediate Market 434
COMPARING BUDGETS AND RESULTS 463
OPTIMAL TRANSFER PRICE: A GENERAL
PRINCIPLE 435 Sales Activity Variance 463
Other Market Conditions 436 In Action: Using the Sales Activity Variance to
Explain Results 464
APPLYING THE GENERAL PRINCIPLE 436
PROFIT VARIANCE ANALYSIS AS A KEY TOOL
HOW TO HELP MANAGERS ACHIEVE THEIR FOR MANAGERS 464
GOALS WHILE ACHIEVING THE Sales Price Variance 466
ORGANIZATION’S GOALS 437
Variable Production Cost Variances 466
TOP-MANAGEMENT INTERVENTION IN Fixed Production Cost Variance 466
TRANSFER PRICING 438 Marketing and Administrative Variances 466
CENTRALLY ESTABLISHED TRANSFER PRICE PERFORMANCE MEASUREMENT AND
POLICIES 438 CONTROL IN A COST CENTER 466
Establishing a Market Price Policy 438 Variable Production Costs 467
Establishing a Cost-Basis Policy 439
VARIABLE COST VARIANCE ANALYSIS 468
Alternative Cost Measures 440
General Model 468
Remedying Motivational Problems of Transfer
Pricing Policies 441 Direct Materials 469
Direct Labor 471
NEGOTIATING THE TRANSFER PRICE 441
Variable Production Overhead 472
IMPERFECT MARKETS 442 Variable Cost Variances Summarized in Graphic
Form 474
GLOBAL PRACTICES 442
In Action: Management Control and Tax FIXED COST VARIANCES 475
Consideration in Transfer Pricing 443 Fixed Cost Variances with Variable Costing 475
MULTINATIONAL TRANSFER PRICING 443 Absorption Costing: The Production Volume
Variance 476
SEGMENT REPORTING 444
SUMMARY OF OVERHEAD VARIANCES 478
Summary 445
Key Terms 446
Key Points 478
Review Questions 446 In Action: Does Standard Costing lead
Critical Analysis and Discussion Questions 446 to Waste? 479
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Summary 479 Review Questions 519

Key Terms 480 Critical Analysis and Discussion Questions 519
Appendix A Recording Costs in a Standard Cost System 480 Exercises 519
Review Questions 483 Problems 522
Critical Analysis and Discussion Questions 484 Integrative Case 526
Exercises 484 Solutions to Self-Study Questions 528
Problems 490
Integrative Case 496 CHAPTER SEVENTEEN
Solutions to Self-Study Questions 499
Nonfinancial and Multiple Measures of
CHAPTER SIXTEEN Performance 532
Additional Topics in Variance Analysis 502
BEYOND THE ACCOUNTING NUMBERS 533
PROFIT VARIANCE ANALYSIS WHEN UNITS ORGANIZATIONAL ENVIRONMENT AND
PRODUCED DO NOT EQUAL UNITS SOLD 503 BUSINESS STRATEGY 534
In Action: Financial Analysis and Variance
RESPONSIBILITIES ACCORDING TO LEVEL OF
Analysis 505
ORGANIZATION 534
Reconciling Variable Costing Budgets and Full-
Absorption Income Statements 505 BUSINESS MODEL 535
MATERIALS PURCHASES DO NOT EQUAL MULTIPLE MEASURES OR A SINGLE MEASURE
MATERIALS USED 506 OF PERFORMANCE? 536
MARKET SHARE VARIANCE AND INDUSTRY Balanced Scorecard 536
VOLUME VARIANCE 508 In Action: Using Balanced Scorecard Information
to Evaluate Multiple Divisions 539
SALES ACTIVITY VARIANCES WITH MULTIPLE
Continuous Improvement and Benchmarking 539
PRODUCTS 509
In Action: Sources and uses of Benchmarking
Evaluating Product Mix 509
Data 541
Evaluating Sales Mix and Sales Quantity 510
In Action: Sales Mix and financial Reporting 511 PERFORMANCE MEASUREMENT FOR
CONTROL 542
PRODUCTION MIX AND YIELD
VARIANCES 512 SOME COMMON NONFINANCIAL
PERFORMANCE MEASURES 542
Mix and Yield Variances in Manufacturing 512
Customer Satisfaction Performance
VARIANCE ANALYSIS IN Measures 542
NONMANUFACTURING SETTINGS 515
Functional Performance Measures 543
Using the Profit Variance Analysis in Service and
Nonfinancial Performance and Activity-Based
Merchandise Organizations 515
Management 544
Efficiency Measures 515
Objective and Subjective Performance
Mix and Yield Variances in Service Measures 544
Organizations 516
EMPLOYEE INVOLVEMENT 545
KEEPING AN EYE ON VARIANCES AND
STANDARDS 516 Summary 546
Key Terms 547
How Many Variances to Calculate 516
Review Questions 547
When to Investigate Variances 517 Critical Analysis and Discussion Questions 547
Updating Standards 518 Exercises 548
Summary 518 Problems 549
Key Terms 518 Solutions to Self-Study Questions 551
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APPENDIX
Capital Investment Decisions:
An Overview 552

GLOSSARY 563

PHOTO CREDITS 569

INDEX 571
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Fundamentals of
Cost Accounting