 Explain the uses of cost accounting
information
-to control current operations
-to plan for the future
-to decide how to allocate resources in a most
efficient and profitable way
-to determine the cost of goods and services
-to capture a company’s total cost of
production
-enable manufacturers to process different
costs associated with manufacturing
-to provide built-in control features
-information provides a basis for determining
costs and selling prices
-helps management plan and control
operations
 describe the ethical responsibilities and
certification requirements for management
accountants as well as corporate governance
ethical responsibilities
-maintaining appropriate level of professional
competence
-refraining from disclosing confidential
information
-avoiding conflicts of interest
-communicating information fairly and
objectively
IMA members should be
-competence
-maintain professional expertise
-perform duties in accordance to laws
-provide information that are ACCT
-recognize professional limitations
-confidentiality
-keep information confidential
-inform, monitor and ensure compliance
-refrain from using confidential info
-integrity
-mitigate conflict of interest
-refrain from engaging in any unethical
conduct
-abstain from any activity that may discredit
the profession
-credibility
-be fair and objective
-disclose relevant information
-disclose delay or deficiencies
certification requirements
-follow your org’s established policies
-discuss the issue
-clarify the issue
-consult to your own attorney
-completes four-year degree from an
accredited college or university
-two continuous years of relevant professional
experience in management or financial
management
-a rigorous two-part examination consisting of
financial planning, performance, and control
-financial decision making with a strong
emphasis on ethics
corporate governance
-is the means by which a company is directed
and controlled
key elements
-certification by CEO and CFO that the
financial statements fairly represent the results
of business operation
-the requirement that a company’s annual
report contain an internal control report that
includes management’s opinion on the
effectiveness of its internal control
-increased criminal penalties for violations of
securities law
 describe the relationship of cost accounting
to financial and management accounting
cost accounting
-includes those parts of financial and
management accounting that collects and
analyze cost information
-provides the product cost data required for
special reports to management and for
inventory costing in the financial statements
financial accounting
-focuses on gathering historical financial
information to be used in preparing financial
statements that meet the needs of investors,
creditors, and other external users of financial
information
management accounting
-focuses on historical and estimated data that
management needs to conduct ongoing
operations and do long-range planning
-involves in partnering in management
decision making, devising planning and
performance management systems
 identify the three basic elements of
manufacturing costs
direct materials
-materials that become part of a certain
manufactured product
-can be readily identified with that product
direct labor
 -labor of employees who work directly on the factory overhead (utilities)
product manufactured S&A exp (utilities)
factory overhead accounts payable
-also known as manufacturing overhead and to record S&A exp
factory burden S&A exp
-all costs related to the maniufacture of a accounts payable
procust except direct materials and direct labor to record factory overhead transferred to
-includes indirect materials work in process
-supplies that cannot be directly work in process
identified with any particular product factory overhead
-have a relatively insignificant cost to record transfer from work in process to
-includes indirect labor finished goods
-employees required for finished goods
manufacturing process but do not work in process
work directly on the units being invoices paid
manufactured accounts payable
prime cost- direct materials and direct labor cash
conversion cost- direct labor and factory to record sales
overhead accounts receivable
 illustrate basic cost accounting procedures sales
-these procedures are used to accumulate and cost of goods sold
allocate all elements of manufacturing costs finished goods
-to produce meaningful data for the internal to record collection of accounts receivable
and external use cash
accounts receivable
materials inv. work in process  distinguish between the two basic types of
cost accounting systems
cost of goods sold finished goods job order cost system
-special or custom-made products
to record purchase of materials -products is made to order
materials -system provides a separate record for the cost
accounts payable of each special order job
to record direct materials issued to wip -also used by firms
work in process (DM) process cost system
factory overhead (IM) -continuous or mass production
materials -homogeneous products
to record the payroll -system accumulates costs for each department
payroll -appropriate for manufacturing situations
wages payable -units are identical
to record payment to employees  illustrate a job order cost system
wages payable -advantage of job order cost system is that the
cash accumulation of costs for a particular job helps
to distribute payroll to appropriate acc. to determine selling price
work in process (DL) -if job is done under contract profit or loss can
factory overhead (IL) readily be determined by comparing contract
S&A exp (salaries) price and cost
payroll job cost sheet
to record depreciation expense -known as job cost record
factory overhead -records and accumulates all the costs assigned
accumulated depreciation to a specific job

 recognize the two basic aspects of materials

to record utilities expense control
 physical control
-limited access (only authorized personnel)
-segregation of duties (divide duties)
-accuracy of recording (accurate)
investment control
-order point (usage, lead time, safety stock)
=usage x lead time + safety stock
-economic order quantity
(order cost, carrying costs, annual units
required)
order cost
-purchasing, receiving, inspecton wages
-telecomm charges, software postage,
stationary
-acctg and recordkeeping
carrying costs
-storage and handling
-interest, issuance, property taxes on inv.
-loss, spoilage, obsolescence
-acctg and recordkeeping
 specify internal control procedures for
materials
purchase and receipt of materials
purchasing agent
-buy materials needed
-work with production manager
-compile and maintain info or negotiate
-placing purchase orders
-supervise the order process
receiving clerk
-supervise the receipt of incoming shipments
storeroom keeper
-incharge of materials after received
-must see that materials are properly stored
production department supervisor
-supervise the operational functions within the
dept.
-prepare and approve requisitions designating
the quantities and kinds of materials needed
within the dept.
storage of materials
-to maintain control the documents needed are:
purchase requisitions
-notify the purchasing agent that additional
materials are needed
purchase order
-gives purchasing agent the authority to order
vendor’s invoice
-does not arrive with the materials
-goes to acctg dept. and filed
-matched with the receiving report
receiving reports
-to count and identify orders received
-if prepared manually it should have 4 copies
-receiving discrepancies
-to notify the supplier of materials failed to
deliver
debit memorandum
-decrease to acc payable
-notifying the vendor of the amount shortage
-return shipping order could be prepared
-shipment is short and do not meet
specifications
credit memorandum
-increase to acc payable
-notify the vendor of the amount overage
-larger quantity received than expected
requisition and consumption of materials
materials requisition
-to lessen the chance of theft, carelessness,
misuse
-to withdraw materials from storeroom
returned materials report
-the excess materials that were issued should
be returned to storeroom
computerized materials control
-ERP- quite sophisticated and coordinate sales
and production scheduling with supply chain
functions such as purchasing and managing
levels
-EDI- process of business-to-business
electronic communication for the purpose of
expediting commerce and eliminating
paperwork
-BILL OF MATERIALS- listing of all the
materials and components that are included in
that finished product
 account for materials and relate materials
accounting to the ledger
materials ledger
-shows quantity on hand and cost of materials
-usually maintained on computer files
determining the cost of materials issued
-FLOW OF MATERIALS-the order in which
materials are actually issued for use
-FLOW OF COSTS-the order in which unit
costs are assigned to materials based on
assumptions made about how materials are
issued
FIRST-IN, FIRST-OUT METHOD (FIFO)
-has the advantage of simplicity
-assumes that materials issued are takes from
the oldest materials in stock
-materials issued are costed using the prices
paid for the oldest materials
-materials on hand at the end of the period are
costed at the most recent purchase
-the flow of costs using FIFO closely parallels
the physical flow of materials
LAST-IN, LAST-OUT METHOD
-assumes that materials issued for
manufacturing are the most recently purchased
materials
-materials issued are costed at the most recent
purchase prices
-inventories on hand at the end of the period
are costed at prices paid for the earliest
purchases
-closely approximates the physical flow of
materials in some industries
-in inflationary environment, this is sometimes
adopted so that the higher the prices of the
most recently purchased materials may be
charged against the increasingly higher sales
revenue
WEIGHTED AVERAGE METHOD
-assumes that the materials issued at any time
are simply withdrawn from a mixed group of
like materials in storeroom
-no attempt is made to identify the materials
being from the earliest or the latest purchases
-has the disadvantage of requiring more
frequent computations than the other methods
-use of software packages has overcome this
advantage
-an average unit price must be computed every
time new materials are received
-this average unit price must be used to cost all
issues of materials until more are purchased
-this three methods are commonly used
methods of inventory costing
-any of these may be adopted to ,maintain the
materials ledger
-no one method suits all situations
-we should also consider reported income on
tax purposes
accounting procedures
-to provide a summary from general ledger of
the total cost of materials purchased and used
in manufacturing
SUMMARY OF MATERIALS ISSUED AND
RETURNED
-this is where all materials issued during the
month and materials returned are recorded
-undamaged materials returned to storeroom
should also be recorded here
SUMMARY OF MATERIALS
TRANSACTIONS
-presents recording required for the more
typical materials transactions both at the time
of transaction and at the end of the period
-at the time of transaction, the recordings to be
made affect the subsidiary ledgers, such as the
materials ledger and the job cost ledger
-at the end of the period, the recordings to be
made affect the control accounts for materials ,
work in process, and factory overhead in the
general ledger
INVENTORY VERIFICATION
-to guard against error
-materials on hand should be checked
periodically against the individual materials
ledger account balances
-count one lot of materials at a time, so that a
complete check of all inventories in the
storeroom is made on an ongoing basis
-periodic checks also known as cycle counts-
have the advantage of eliminating the costly
and time consuming task of counting the
inventory at one time
-the person making the count should prepare
an INVENTORY REPORT
 account for inventories in a just-in-time(lean
production) system
just-in-time (JIT) inventory system
-also known as lean production
-reduces inventory carrying costs by requiring
that the raw materials be delivered just in time
to be placed into production
-raw materials are issued to production as soon
as they are received from the supplier
-no need to store materials and separate raw
materials account
-account use is RAW AND IN PROCESS – to
record the purchase and issuance of materials
-MANUFACTURING CELLS-
a manufacturing function that were performed
in individual dept in a traditional
 manufacturing system that are combined into
work centers
-for a JIT to work successfully, a high degree
of coordination and cooperation must exist
between the supplier and the manufacturer,
among manufacturing work centers, and
between the manufacturer and the customer
-SUPPLY CHAIN MANAGEMENT- the
coordination between supplier, shipper,
manufacturer, and customer
JIT and cost control
-reducing inventory levels through the use of
lean production techniques may increase
processing speed, thereby reducing the time it
takes for a unit to make it through production
-THROUGHPUT TIME- time it takes a unit to
make it through the system
annual carrying cost
= carrying cost percentage x average WIP
JIT and cost flows
-BACKFLUSH COSTING- is the name for
the acctg system used with lean manufacturing
-derives its name from the fact that costs are
not “flushed out” of the acctg system and
charged to the products until goods are
completed and sold
-TRIGGER POINTS
the purchase of materials
the completion of work in process
the sale of finished goods
-to record sold scrap at inventoried market
value
cash (or acc receivable)
scrap materials
-to record sold scrap
cash (or acc receivable)
scrap revenue (or wip or fo)
spoiled units
-are not by-poducts but imperfect units
-have imperfections that cannot be
economically corrected
-sold as items of inferior quality or “seconds”
defective units
-have imperfections considered correctable
because the increase in market value by
correcting the unit exceeds the cost to correct
it
spoiled work
-loss associated with spoiled goods may be
treated as part of the cost of the job that
produced the spoiled units
-loss may be charged to factory overhead and
allocated among all jobs worked on during the
period
defective work
-there are additional costs for correcting the
imperfections in defective units
these costs if incurred are charged to factory
overhead

 account for scrap materials, spoiled goods,

and defective work
scrap materials
-may result naturally from the production
process
-they may be spoiled or defective units that
result from avoidable or unavoidable mistakes
during production
-determined by the expected sales value of the
scrap
-when small, no entry is made until scrap is
sold
cash (or acc receivable)
scrap revenue
-usually reported as other income in the IS
-when the value is high, an inventory file
should be prepared
-an unexpected by-product
-to record transferred scrap to inventory
scrap materials
scrap revenue (or wip or fo)
 distinguish between the features of hourly-
rate and piece-rate plans
acctg system of a manufacturer
-recording the hours worked
-analyzing the hours worked-determine how
labor time is charged
-charging payroll costs to jobs, process, dept,
and fo
-preparing the payroll- involves computing
and recording employee gross earnings,
withholdings and deductions, and net earnings
WAGE PLANS
-based on plans
-established by management
-approved by unions
-comply with the regulations of gov agencies
hourly-rate plan
-established a rate per hour for each employee
number of hours worked x established rate per
hour
-widely used
-simple to apply
-argued that it doesn’t provide incentive for
employee to do better
-employee is paid for merely ”being on the
job”
-no extra recognition or reward for doing more
than required
-PRODUCTIVITY-measured as the amount of
output per hour of work
piece-rate plan
-gives a high priority to the quantity produced
-bases earnings on employee’s quantity of
production
-provides an incentive for employee to
produce a high level of output
-encourage employees to sacrifice quality
-not appropriate for machines
modified wages plans
-combine some features of the hourly-rate and
piece-rate plans
-set a base hourly wage that the company will
pay if an employee does not attain an
established quota of production
-if the quota is exceeded, an additional
payment per piece would be added to the wage
base
-makeup quarantee will be charged to fo rather
than to wip- because it represents the cost of
inefficient production rather than necessary
cost of the specific jobs worked
-PRODUCTION WORK TEAMS- output is
dependent on contributions made by all
members of the work crew or dept.
-salesperson in a service business, as well as
manufacturing business often are paid on a
commission or salary plus-commission basis
 specify procedures for controlling labor costs
timekeeping and payroll departments
-have the responsibility of maintaining labor
records
timekeeping and payroll functions
-may be established as separate departments
-organized as subdivisions of a single
department
-automated timekeeping technology has
replaced “timekeeping” as separate department
payroll department, or payroll function
-uses labor time records
manually or electronically generated
-to compute each employee’s gross earnings,
withholding and deductions, and net earnings
to be paid to employees
*labor time record
-shows the employee’s time spent on a job
-as well as time spent as indirect labor on
machine repair
-a production supervisor should review the
labor ours recorded on the time record for
accuracy
-the time recorded is the source doc for
allocating the cost of labor to jobs or dept.
-employer must compensate the employee for
the time spent on assigned jobs
-used to record the labor cost in both the
subsidiary job cost ledger and factory
overhead ledger
payroll function
-responsible for computing the employee’s
wages and salaries
-involves combining the daily wages
-determining the total earnings
-computing the withholdings and deductions
for each employee
-PAYROLL- often s function within the acctg
dept
payroll records
-assembles and summarizes each period’s
payroll data
-serves as a subsidiary record for the
preparation of a general journal entry
employee’s earnings records
-record kept of the earnings of each employee
 -needed to compute the amount of employee -added to the regular rate for the additional
earnings subject to FICA and ather payroll hours worked
taxes -TIME AND A HALF PAY- the premium rate
-serves as basis for reporting payroll is one-half the regular rate
information to governmental agencies for the -DOUBLE-TIME PAY- work fone on
purpose of preparing their individual tax Sundays and holidays, the overtime premium
returns may be equal to the regular rate
to record payroll employers’ payroll taxes
payroll -imposed on employers include social security
FICA tax payable tax & federal and state unemployment taxes
employees income tax payable -employers must periodically report and pay
health insurance payable the taxes to the appropriate government
employee receivable agencies
wages payable -employers who fail to file required reports or
payment of net earnings pay taxes due are subject to civil and, in some
-the treasurer’s office is responsible for cases, criminal penalties
making payments to the employees federal insurance contributions act (FICA)
-earnings may be paid through checks using a -requires employers to pay social security
company’s special account, employers taxes on wages and salaries equal to the
encourage direct deposit to their bank accounts amount withheld from employees earnings
to record payment to employees -includes as tax to finance the federal old age,
wages payable survivors, and disability insurance program
cash (OASDI) and the medicare program
 account for labor costs and payroll taxes -due to the future uncertainty that surrounds
-cost accountants examine the labor time the rate and the base wage, an arbitrary fica
records and charge the labor costs to the tax rate of 8% will be applied to the first
appropriate jobs or dept and to fo $120,000 of earnings
-LABOR COST SUMMARY- summarizes the federal unemployment tax act (FUTA)
direct labor and indirect labor charges to a -requires employers to pay an established rate
dept for the period of tax on wages and salaries to provide for
to record the distribution of payroll to compensation to employees if they are laid off
appropriate accounts from their regular employment
work in process -unemployment benefits are actually paid by
factory overhead individual states and not the federal gov
payroll -futa rates ranges from 1.2% - 1.8%
flow of costs from subsidiary ledger records -the maximum suta rate is 5.4% of the first
to general ledger $7,000 of each employee’s earnings
labor time records to record the payroll taxes recognized
factory overhead
job cost factory overhead labor cost fica tax payable
ledger ledger ledger federal unemployment tax payable
stade unemployment tax payable
general journal total earnings x suta/futa tax rate
and general ledger -due dates fro payments depend on the gov
-in preparing the labor cost summary from the to record payment of taxes
labor time records, any overtime must be tax liability accounts
separated from an employee’s regular time cash
-overtime pay to record payment of the net earnings
-the extra pay if an employee works beyond wages payable
the regularly scheduled time but is paid at thw cash
regular hourly rate to record the distribution of the payroll
-overtime premium work in process
-an additional rate for extra hours worked factory overhead (op + indirect factory labor)
 sales salaries -WORK SHIFT- a regularly scheduled work
administrative salaries period for a designated number of hours
payroll -the additional pay received by employees is a
to record employer’s payroll taxes company divides each workday into two or
factory overhead three eight-hour shift
payroll tax exp –sales salaries -additional payroll des not increase the
payroll tax exp- admin salaries productivity of the shifts
FICA tax payable -paid because of the social and other lifestyle
FUTA tax payable adjustments required of the late-shift workers
SUTA tax payable -designed to attract workers to the less
to record to the gl the verified payroll data desirable shifts
payroll employee pension costs
fica tax payable -an agreement between a company and its
employees income tax payable employee group
health insurance premiums payable -company promises to provide income to
wages payable employees after they retire
to record payment of fica and employee -expensed as the employees accrues benefits
income tax -defined benefit plan
fica tax payable -guaranteed amount of pension benefits is paid
employees income tax payable to a retired employee
cash -based on a formula that considers the
 prepare accruals for payroll earnings and employee’s past level of earnings and length
taxes of service with the company
-made when the financial statement date does -defined contribution plan
not coincided with the ending date for a -specifies the maximum amount of
payroll period contributions tat can be made to the plan by
-accrual computations will not include the employer and employee
employees’ withholdings because hey do not -but the amount of the pension benefits, rather
affect the employer’s income or total liabilities than being a guaranteed fixed amount is tied to
to be reported the performance of the company’s stock or
-employer’s taxes are accrued to avoid other investments
understating the expenses and liabilities for the -noncontributory plans
period -completely funded by the company
to record accrued wages -contributory plans
payroll more common in practice, require a partial
wages payable contribution from the employee
to record the distribution of the accrued bonuses
wages -received for a variety of reasons, such as
work in process higher-than-usual company profits, exceeding
factory overhead dept quotas for selling or production, or for
sales salaries any other achievement that the company feels
administrative salaries merits additional pay
payroll -may include some or all employees
to record adjusting entry for accrued -cost of bonuses is generally charged to the
payroll dept in which the employee works
wages payable vacation and holiday pay
payroll -what all permanent employees expects each
 account for special problems in labor costing year
-an employer may be required to account for a -earned by the employees for daily service on
variety of labor-related costs that do not fall the job over the course of the year
into the normal routine of acctg for payroll -accrued throughout the year and assigned to
costs the employee’s dept.
shift premium
-HOLIDAY PAY- based on an agreement
between management and company employees
-agreement stipulates that certain holidays
during the year will e paid for by the company,
but they are nonworking days for employees
to record payroll, and bonuses, vacation,
and holiday pay
work in process
factory overhead (bonuses)
factory overhead (vacation)
factory overhead (holiday)
payroll
bonus liability
vacation pay liability
holiday pay liability
 identify cost behavior patterns
-FACTORY OVERHEAD- all costs incurred
in the factory that are not chargeable directly
to the finished product
-operating costs of the factory that cannot be
traced specifically to the product
-includes indirect materials, labor and all other
indirect manufacturing expenses
-VARIABLE COSTS- costs that vary in direct
proportion to volume changes
-FIXED COSTS- unchanging costs, costs that
remains the same
-SEMIVARIABLE COSTS- called mixed
costs and have characteristics of both variable
and fixed costs
-STEP-VARIABLE COSTS- will remain
constant over a range of production, and then
abruptly change

 separate semivariable costs into variable and

fixed components
-it is important for companies to be able to
determine patterns in cost behavior
-total costs= fixed costs + variable costs
observation method
-also called the account analysis method
 prepare a budget for factory overhead costs
 account for actual factory overhead
 distribute service department factory
overhead costs to production department
 apply factory overhead using predetermined
rates
 account for actual and applied factory
overhead
 discuss basic pricing concepts
demand and supply
-demand interacts with supply
-customer want high-quality goods and
services at a low price
-customers-will buy at lower prices and buy
less at higher price
-producers-is willing and able to supply more
at higher prices than they can in lower prices
-MARKET CLEARING/EQUILIBRIUM
PRICE- located at the intersection of supply
and demand curves –it is the price which the
amount that the producers are willing to
supply equals the amount that consumers
demand
-if firms charge a price higher than the market
clearing price, demand falls short of supply
price elasticity of demand
-ELASTIC DEMAND- a price increase
(decrease) of a certain percent lowers (raises)
the quantity demanded by more than that
percentage
-goods that are price elastic tend to have many
substitutes
-not necessities
-take a relatively large amount of customer
income
-e.g demand for movie tickets, restaurant
meals and automobiles
-INELASTIC DEMAND -occurs when price
change of a certain percent is associated with a
quantity change of less than that percent
-goods that have few substitutes
-are necessities
-constitute a relatively small percentage of
consumer income
-ARBITRAGE- occurs when the customers
who purchase the good at the lower price are
able to resell it to other customers
market structure and price
-affects price, as well as the costs necessary to
support that price
-has four types: perfect competition,
monopolistic competition, oligopoly,
monopoly
-these markets differ accdg to
-the number of buyers and sellers,
-degree of uniqueness of the product,
-relative case of entry by firms into and out of
the market
-PERFECT COMPETITION
-has many buyers and sellers
-no one of which is large enough to influence
the market
-homogeneous product
-easy entry and exit
-cannot charge a higher price than the market
price bc no one would buy their product
-will not set a lower price because they can sel
all they can produce at market price
-MONOPOLY-
-barriers to entry are so high that there is only
one firm in the market
-product is unique
-allows the firm to be the price setter
-does not mean it can force consumers o buy
a somewhat higher price can be set
-legally enforce barriers to entry
-MONOPOLISTIC COMPETITION
-has characteristics of both monopoly and
perfect competition
-mush closer to the competitive situation
-e.g restaurants
-slightly raise prices above the perfectly
competitive price, as customers agree to pay a
little for the unique feature that appeals them
-OLIGOPOLY
-characterized by few sellers
-barriers to entry are high
-are usually cost related
-oligopolists has some market power to set
price, but it constantly must be aware of its
competitors actions
 calculate a markup on cost and a target cost
pricing policies
-companies use various strategies to set price
-cost is an important determinant of supply
-companies base price of cost
cost-based pricing
-calculate product cost and add the desire
profit
-mechanics of this approach are
straightforward
-there is some cost base and a markup
-markup- a percentage applied to base cost----
includes desire profit and any costs not
included in the base cost
markup on COGS= (s&a exp + operating
income)/ COGS
markup on direct materials= (dl + overhead +
s&a ecp + operating income)/ direct materials
bid price =estimated unit cost + markup
target costing
-a method of determining cost or service based
on price (target price) that consumers are
willing to pay
-involves much more upfront work than cost-
based pricing
-if the cost-based pricing turns out to be higher
than what customers will accept additional
work must be done
-arduous task of bringing costs into line to
support a lower price
-the opportunity cost of missing the market
altogether begins
other pricing policies
-target costing is also effectively used in
conjunction with marketing decisions to
engage in price skimming or penetration
pricing
penetration pricing
-pricing of a new product at low initial price,
perhaps even lower than cost to build market
share quickly
-useful when the product or service is new and
customers have great uncertainty as to its
value
-important difference is the intent
-not meant to destroy competition
-e.g accountants, lawyers, and other
professionals with new practices often use
penetration to a established customer base
price skimming
-a higher price is charged when a product or
service is first introduced
-used most effectively when the product
-is new
-a small group of consumers value it
-and the company enjoys monopolistic
advantage
-companies engaged are hoping to recoup the
expenses of research and development through
initial pricing
-cost consideration is that, in the start phase of
production, economies of scale and learning
effects have not occurred
price gouging
-occur when firms with market power price
products “too high”
-anytime price just covers cost, gouging does
not occur – this is why many firms go to
considerable trouble to explain their cost
structure and point out costs that consumers
may not realize exist
 discuss the impact of the legal system and
ethics on pricing
-government also has an important impact on
pricing
-basic principle behind much pricing
regulation competition is good and sould be
encouraged
-collusion of companies to set prices and drive
out competition is prohibited
predatory pricing
-practice of setting price below cost for the
purpose of injuring competitors and
eliminating competition
-pricing below cost is not necessarily
predatory pricing
-companies frequently price an time below
cost by practicing penetration pricing
-DUMPING- predatory pricing on the
international market
-occurs when companies sell below cost in
other countries and domestic industry is
injured
price discrimination
-charging of different prices to different
customers for essentially the same product
-ROBINSON-PATMAN ACT- allow
discrimination under conditions such as:
1. if the competitive situation demands it
2. if costs can justify the lower price
-price discrimination may occur if the price
includes freight or delivery
ethics
-just as company can practice unethical
behavior in applying costs, it can mislead in
pricing
 explain why firms measure profit, and
calculate measures of profit using absorption
and variable costing
-profit is a measure of the difference between contribution margin
what a firm puts into making and selling a less:
product or service and what it receives fixed manufacturing overhead
reasons for measuring profit fixed s&a exp
-determining the viability of the firm operating income
-measuring managerial performance -has an advantage in addition to providing
-determining whether or not a firm adheres to better signals regarding performance
government regulations -provides more useful information for
-signaling the market about the opportunities management decision making
for others to earn profit
-owners of the company want to know if the
company is viable in both the short term and
the long term
-work gives meaning to life
absorption costing approach to measuring
 determine the profitability of segments
profit
-SEGMENT- could be a product, division,
-also known as full costing
sales territory, or customer group
-required for external reporting
profit by product line
-fixed costs are treated as if they were variable
-dropping products unprofitable
by assigning some toe ach unit of production
-merit additional time and attention to
-assigns all manufacturing costs, direct
profitable ones
materials, direct labor, variable overhead, and
-easy to compute if all costs and revenues
a share of fixed overhead to each unit of
were easily traceable to each product which is
product
seldom the case
-each unit of product absorbs some of the
-with that company must first determine how
fixed manufacturing overhead in addition to
profit will be computed
the variable costs incurred to manufacture it
-three possibilities of increasing possibilities
-used to calculate three measures of profit
-absorption costing
gross profit, operating profit, operating
-variable costing
income, and net income
-activity-based costing
-it is not a useful format for decision making
-the company’s need for accuracy determines
to prepare income statement for absorption
which approach is used
sales
-USING VARIABLE COSTING TO
less: cost of goods sold
MEASURE SEGMENT PROFIT
gross profit
-fixed expenses do not change as units
less: variable marketing expenses
produced and sold change
fixed s&a exp
-valuable tool for management decisions
operating income
-fixed costs were not assigned to either
variable costing approach to measuring
product
profit
-USING ACTIVITY-BASED COSTING TO
-avoids the problems inherent in making fixed
MEASURE PROFIT
overhead a variable cost
-its insight into unit-level, batch level, product
-also known as direct costing
level, and facility-level costs, may give
-assigns only unit level variable manufacturing
management a more accurate feel for profits
costs to the product
attributable to different product lines
-fixed overhead is treated as period costs
-not acceptable for external financial reporting
-only direct materials, direct labor, and
variable overhead are inventoried

divisional profit
to prepare income statement for variable
-used in evaluating the performance of
sales
managers
less: variable expenses
 -failure to earn profit can lead to division’s
closing
-may be calculated using any of the three
approaches
-absorption-based approach is usually used
-a share of corporate expense is allocated to
each division to remind them that all expenses
of the company must be covered
customer profitability
-some customers are more profitable than
others
-companies that assess he profitability of
various customer groups can more accurately
target their markets and increase profits
-first step is to identify the customer
-then second, is to determine which customers
add value to the company
-ORIGINATING AND KEEPING
CUSTOMERS
-keep the existing customers in those groups,
and add more of them
-it is more costly to win a customer than to
keep a customer
-originating-may require advertising, sales
calls, the drafting of proposals, and the
generation of prospective customer lists and
these are costly
-keeping-requires effort
-firms must understand the profitability
contribution of customers’ relationship
-CUSTOMER LIFE CYCLE APPROACH-
recognizing that a loyal customer will yield
significant revenue over the years
overall profit
-is consistently positive
-company remains in business even if one or
more segments is losing money
 compute the sales price, price volume,
contribution margin volume, sales mix,
market share, and market size variances
sales price variance
-the difference between actual price and
expected price multiplied by the actual
quantity or volume sold
sales price variance = (actual price – expected
volume) x expected price
price volume variance
-the difference between actual volume sold
and expected volume sold multiplied by the
expected price
price volume variance = (actual volume –
expected volume) x expected price
-favorable if the variance increases profit
-unfavorable if the variance decrease profit
total (overall) sales variance
-sum of the sales price and price volume
variances
-the difference between actual and expected
revenue
-breaking the overall sales variance into price
and volume components gives managers a
better feel for why actual revenue may differ
from budgeted revenue
-these variance begin to alert managers to
problems in pricing and sales
-significant variances are investigated to
discover the underlying reasons for the
difference between expected and actual results
-the case of unfavorable sales price variance,
reason may be the giving of unanticipated
price discounts
-sales price and price volume variances
interact
contribution margin variance
-simply the difference between actual and
budgeted contribution margin
contribution margin variance =
actual contribution margin – budgeted
contribution margin
-variance is favorable if the actual contribution
margin is higher than the budgeted
contribution margin volume variance
-difference between actual quantity sold an the
budgeted quantity sold multiplied by the
budgeted average unit contribution margin
-gives management information about gained
or lost profit due to changes in the quantity of
sales
contribution margin volume variance =
(actual quantity sold – budgeted quantity sold)
x budgeted average unit contribution margin
budgeted average unit contribution margin =
budgeted contribution margin / budgeted total
number of units to be sold
sales mix variance
-SALES MIX-represents the proportion of
total sales yielded by each product
 -the sum of the change in units for each
product multiplied by the difference between
the budgeted contribution margin and the
budgeted average nit contribution margin
for two products
market share
-gives the proportion of industry sales
accounted for by a company
market size
-the total revenue for the industry
market share variance
-the difference between the actual market
share percentage and the budgeted market
share percentage multiplied by actual industry
sales in units budgeted average unit
contribution margin
market size variance
-difference between actual and budgeted
industry sales in units multiplied by the
budgeted market share percentage times the
budgeted average unit contribution margin
-profits stabilize
-product has found its market, and revenues
are relatively stable
-investment is down, and all learning effects in
production are realized, leading stable costs
-decline
-product reaches the end of its cycle, and
revenues and profits decline
-costs may still be low, nut not enough to slip
in below sales
-helps marketers understand he difference
competitive pressures on a product in each
stage
-important for planning purposes
-each stage demonstrates a fairly predictable
impact on various types of costs

 discuss the variations in price, cost, and

profit over the product life cycle
product life cycle
-knowledge of the product life cycle is
important for cost management
-we can easily see the impact of the four stages
and the growth and decline of sales
-describes the profit history of the product
accdg to four stages:
-introduction
-in the introductory phase, two reasons why
profit are low:
-1. revenues are low as the product gains
market acceptance
-2. investment and learning may be high,
leading to higher expenses
-growth
-growth stage, characterized by increasing
market acceptance and sales, as well as  describe some of the limitations of profit
economies of scale, which bring down measures
expenses -include focus on past performance
-product breaks even and profit rises -uncertain economic conditions
-maturity
 -the difficulty of capturing all imp-include
focus on past performance
-uncertain economic conditions
-the difficulty of capturing all important
factors in financial measures
-successful firms measure far more than
accounting profit
-they are aware of their impact on the
community and on they employees
-ethical behavior is fostered by appropriate
emphasis on profit
 describe the tactical decision-making model
tactical decision making
-consists of choosing among alternatives with
an immediate or limited end in view
-accepting a special order for less than the
normal selling price to utilize idle capacity and
increase this year’s profits
-to exploit idle productive capacity so that
short-run profits can be increased
-some tend to be short run in nature
-it should be emphasized that short- run
decisions often have long-run consequences
-often small scale actions that serve a larger
purpose
- even if the immediate objective is short-run
or small scale should support the overall
objective of strategic decision making-
selecting among alternative strategies so that a
long-term competitive advantage is established
-sound tactical decision making means that the
decisions made achieve not only the limited
objective but also serve as a larger purpose
-no tactical decision should be made that does
not serve the overall strategic goals of an
organization
tactical decision making process
1. defining the problem
2. identifying feasible alternatives
3. predicting costs and benefits and
eliminating irrelevant costs
4. comparing relevant costs and relating to
strategic goals
5. selecting the best alternative
decision model
-a set of procedures that, if followed, will lead
to a decision
tactical cost analysis
-the use of relevant cost data to identify the
alternative that provides the greatest benefit to
the organization
-includes predicting costs, identifying relevant
costs, and comparing relevant costs
-is only part of the overall decision making
process
-qualitative factors also must be considered
qualitative factors
-needed to make an informed decision
-qualitative factors must be identified
-are simply more difficult to quantify, but not
impossible
-such as the impact of late orders on customer
relations, must be taken into consideration in
the final step of the decision-making model
 define the concept of relevant costs and
revenues
-in choosing between the two alternatives,
only the costs and revenues relevant to the
decision should be considered
-identifying and comparing relevant costs and
revenues is the heart of the tactical decision
model
relevant costs (revenues)
-are future costs (revenues) that differ across
alternatives
-all decisions relate to the future; accordingly,
only future costs can be relevant to decisions
-however, to be relevant, a cost must not only
be a future cost, but it also must differ from
one alternative to another
- irrelevant costs if a future cost is the same
for more than one alternative, it has no effect
on the decision
-ability to identify relevant and irrelevant costs
is an important decision making skill
 past costs
-SUNK COST- an allocation of a past costs
-sunk costs are past costs
-always the same across alternatives and are
therefore always irrelevant
future costs
-cost of providing plant utilities that must be
paid in future years
-irrelevant costs
tarrif
-a tax on imports levied by the federal
government
 explain how the activity resource usage
model is used in assessing relevancy
activity resource usage model has two
resource categories:
1. flexible resources
2. committed resources
flexible resources
-RESOURCE SPNDING- the cost of
acquiring activity capacity
-ACTIVITY COST-amount paid for the
supply of an activity
-the activity resources demanded (used) equal
resources supplied
-if the demand for an activity changes across
alternatives- then resource spending will
change and the cost of the activity is relevant
to the decision
-two alternative- 1. accept a special 1-time
order, 2. reject the special order
committed resources
-acquired in advance of usage through implicit
contracting
-usually acquired in lumpy amounts
-the organization will maintain employment
levels even though there may be temporary
downturns in the amount of an activity used
-this means that an activity may have unused
capacity available
-thus, an increase in demand for an activity
across alternatives may not mean that the
activity will increase
-a change in resource spending can occur in
one or two ways:
1. the demand for the resource exceeds the
supply (increases resource spending)
2. the demand for the resource drops
permanently and supply exceeds demand
enough so that activity capacity can be
reduced (decreases resource spending)
 apply the tactical decision-making concepts
in a variety of business situations
-activity resource usage model and the concept
of relevancy are valuable tools in making
tactical decisions
-it is important to see how they
make or buy a component,
to keep or drop a segment or product line,
to accept or reject a special order at less than
the usual price,
and to process a joint product further or sell it
at the split-off point
make-or-buy decision
-a decision of whether to make or buy
components or services used in making a
product or providing a service
-are not short-run in nature but fall into the
small-scale tactical decision category
-making instead of buying or buying instead of
making is a one way of reducing the cost of
producing the main product
-choosing to make or buy may be a way of
increasing the quality of the component and
thus increasing the overall quality of the final
product
-outsourcing of technical and professional jobs
is becoming an important make-or-buy issue
-OUTSOURCING-is the payment by a
company for a business function that was
formerly done in-house
-refers to the move of a business function to
another company, either inside or outside the
country (US)
-qualitative considerations also play into the
outsourcing decision
-time is a valuable resource, and many
companies have found that a global presence
leads to time and quality enhancement
keep-or-drop decisions relevant costing and ethical behavior
-uses relevant cost analysis to determine -relevant costs are used in making tactical
whether a segment of a business should be decisions- decisions that have an immediate
kept or dropped view or limited objective in mind
-in a functional-based cost management -decision makers should always keep the
system, segmented IC, using unit-based fixed decisions within an ethical framework
or variable costs, improve the ability to make -reaching objectives is important, but how you
keep-or-drop decisions get there is perhaps even more important
-decisions to drop or keep a segment are -unfortunately, many managers have the
facilitated by the increased number or directly opposite view
attributable costs in a JIT environment
special order decisions
-focus on whether a specially prices order
should be accepted or rejected
-are examples of tactical decisions with a
short-term focus
-increasing short-term profits is the limited
objective
-care should be taken so that acceptance of
special orders does not jeopardize normal
distribution channels or adversely affect other
strategic elements
-special orders often can be attractive,
especially when the firm is operating below its
maximum productive capacity
-when other activities have sufficient unused
capacity to absorb any incremental demands
the order may make
-relevance is established by assessing where
activity demand increases
decisions to sell or process further
-JOINT PRODUCTS-have common processes
and costs of production up to a split-off point
-at that point they become distinguishable
-SPLIT-OFF POINT- point of separation
-often, joint products are sold at the split-off
point
-but sometimes it is more profitable to process
a joint product further, beyond the split-off
point, prior to selling it
-SELL OR PROCESS FURTHER-an
important decision that a manager must make
-the relevance of processing costs depends on
the nature of the resource demands
-the demand for resources acquired as needed
will increase, and these costs are relevant
 define responsibility accounting and describe
the four types of responsibility centers
responsibility accounting
-a system that measures the results of each
responsibility center
-compares those results with some measure of
expected or budgeted income
-system of responsibility, accountability and
performance evaluation
responsibility center
-a segment of the business whose manager is
accountable for specified sets of activities
four types of responsibility centers
-cost center –manager is responsible only for
costs (e.g. production dept)
-revenue center- manager is responsible only
for revenues (e.g. marketing dept)
-profit center- manager is responsible for
both revenues and costs (e.g. plant managers)
-investment center- manager is responsible
for revenues, costs, and investments
(e.g. divisional managers)
 explain why firms choose to decentralize
centralized decision making
-decisions are made at the very top level
-lower level managers are charged with
implementing these decisions
decentralized decision making
-allows managers at lower levels to make and
implement key decisions pertaining to their
areas of responsibility
decentralization
-the practice of delegating or decentralizing
decision-making authority to the lower levels
reasons for decentralization
-better access to local information
-cognitive limitations
-more timely response
-focusing of central management
-training and evaluation of segment managers
-motivation of segment managers
-enhanced competition
efficiency
-means how well activities are performed
-might be measured by the number of units
produced per hour or by the cost of those units
effectiveness
-whether the manager has performed the right
activities
performance reports
-typical instruments used in evaluating
efficiency and effectiveness
 compute and explain return on investment
(ROI), residual income (RI), and economic
values added (EVA)
three performance evaluation measures
-return on investment
-residual income
-economic value added
return on investment (ROI)
-most common measure of performance for an
investment center
-it is of value both externally and internally
-externally- used by stockholders as an
indicator of the health of a company
-internally-used to measure the relative
performance of divisions
ROI = operating income / average operating assets
ROI = (operating income/sales) x (sales/average
operating assets)
ROI = operating income margin x operating asset
turnover
-OPERATING INCOME- earnings before
interest and income taxes
-OPERATING ASSETS- all assets acquired to
generate operating income
average operating assets =
(beginning net book value + ending net book value)
2
margin
ration of operating income to sales
margin = operating income/sales
turnover
-a different measure
-found by dividing sales by average operating
assets
turnover = sales/average operating assets
advantages of ROI
-encourages managers to pay careful attention
to the relationship among sales, expenses, and
investment
-encourages cost efficiency
-discourages excessive investment in operating
assets
disadvantages of ROI
-discourages managers from investing in
projects that would decrease the divisional
ROI but would increase the profitability of the
company as a whole (projects with an ROI less
than a division’s current OI would be rejected)
-encourage myopic behavior – managers may
focus on the short run at the expense of the
long run
myopic behavior
-the emphasis on short run results at the
expense of the long run
 residual income
-difference between operating income and the
minimum dollar return required on a
company’s operating assets
residual income = operating income – (minimum
rate of return x operating assets)
advantages of RI
-takes into account the opportunity cost of
tying up assets in the division
-minimum rate of return can vary depending
on the riskiness of the division
-different assets can be required to earn
different returns
disadvantages of RI
-an absolute measure of return
-does not discourage myopic behavior
-can encourage a short run orientation
economic value added
-after-tax operating income minus the total
annual cost of capital
-positive EVA- company is creating wealth
-negative EVA- company is destroying capital
EVA = after-tax operating – (weighted average cost
of capital x total capital employed)
two steps involved
1. determine the weighted average cost of
capital
2. determine the total dollar amount of
capital employed
weighted average cost of capital
-computed by taking the proportion of capital
from each source of financing and multiplying
it by its cost
financial measures of performance
-ROI
-RI
-EVA
nonfinancial measures of performance
-market share
-customer complaints
-personnel turnover ratios
-personnel development
 discuss methods of evaluating and rewarding
managerial performance
incentive pay for managers-encouraging
goal congruence
-managers may not provide good service
because of three reasons:
---they may have an inadequate ability to
perform the job ---owners have to discover
information about manager before hiring him
---they may prefer not to work hard ---owners
need to monitor the manager
---they may prefer to spend company
resources on perquisites ---owners need to
arrange an incentive scheme that will more closely
ally the manager’s goals with those of the owner
perquisites
-a type of fringe benefit received over and
above salary
-can be well used to make manager more
efficient
managerial rewards
-includes salary increases
-bonuses based on reported incomes
-stock options
-noncash compensation
cash compensation
-includes salaries and bonuses
-granting periodic raises is a way a company
may reward good managerial performance
-however, once raise take effect it is usually
permanent
-bonuses give a company more flexibility
-many companies use the combination of
salary and bonus to reward performance by
keeping salaries fairly level and allowing
bonuses to fluctuate with reported income
-INCME BASED COMPENSATION- can
encourage dysfunctional behavior--- manager
may engage in unethical practices
-PROFIT SHARING PLANS--- make
employees partial owners in the sense that they
receive a share of the profits
stock-based compensation
-STOCK- is a share in the company
-issue of stock to managers makes them part
owners of the company
-encourage goal congruence
-a disadvantage—share price can fall for
reasons beyond the control of managers
-companies often offer stock options to
managers
-STOCK OPTION- the right to buy a certain
number of shares of the company’s stock at a
particular price and after a set length of time
-the objective is to encourage managers to
focus on the longer term
-the price of the option shares is usually set at
market price at the time of issue
noncash compensation
-a important part of the management reward
structure
-autonomy in the conduct of their daily
business is an important type of noncash
compensation
 explain the role of transfer pricing in a
decentralized firm
transfer prices
-prices charged for goods produced by one
division and transferred to another
-the price charged affects the revenues of the
transferring division and the costs of the
receiving division
-the profitability, roi, and managerial
performance evaluation of both divisions are
affected
impact of transfer pricing to income
-while the transfer price nets out for the
company as a whole transfer pricing can affect
the level of profits earned by the company as a
whole if it affects divisional behavior
-divisions, acting independently, may set
transfer prices that maximize divisional profits
but adversely affect firm wide profits
 discuss the methods of setting transfer prices
three objectives should justify transfer
pricing
--accurate performance evaluation
---no one divisional manager should benefit at
the expense of another
--goal congruence
---divisional managers select actions that
maximize firm wide profits
--preservation of divisional autonomy
---central management should not interfere
with the decision-making freedom of
divisional managers
transfer pricing problems
-concerns finding a system that simultaneously
satisfies all three objectives
opportunity cost approach
-minimum price that a selling division would
be willing to accept
-the maximum price that the buying division
would be willing to pay
minimum transfer price
-or floor
-the transfer price that would leave the selling
division no worse off if the good is sold to an
internal division
maximum transfer price
-or ceiling
-transfer price that would leave the buying
division no worse off is an input is purchased
from an internal division
three commonly used policies
-each of these can be evaluated according to
the opportunity cost approach
market-based transfer pricing (market
price)
-if there is an outside market for the
intermediate product
-outside market is perfectly competitive
-the correct transfer price accdg to the
opportunity cost approach
-moving away from the market price will
decrease the overall profitability of the firm
negotiated transfer prices
-when imperfections exists in the market for
the intermediate product
-opportunity costs can be used to define the
boundaries of the negotiation set
-should be agreed to only if the opportunity
cost of the selling division is less than the
company cost of the buying division
-disadvantages---
1. one divisional manager, possessing private
information may take advantage of another
divisional manager
2. performance measures may be distorted by
negotiating skills of managers
3. negotiation can consume considerable time
and resources
-advantages—
1. offer some hope of complying with the three
criteria of goal congruence autonomy, and
accurate performance evaluation
cost-based transfer prices
-in all three cases, to avoid passing on the
inefficiencies of one division to another,
standard cost should be used to determine the
transfer price
---full- cost transfer pricing
-least desirable type of transfer pricing
approach
-only real virtue is simplicity
-can provide perverse incentives
-distort performance measures
-rarely will it provide accurate information
about opportunity costs
-would have shut down the negotiated prices
---full-cost plus markup
-suffers from virtually the same problem as
full cost
-if the markup can be negotiated, it is
somewhat less perverse
-in some cases, formula may be the outcome
of negotiation
---variable cost plus fixed fee
-can be a useful transfer pricing approach
provided that the fixed fee is negotiable
-has one advantage over full cost plus
markup---if the selling division is operating
below capacity, variable cost is its opportunity
costs
-assuming that the fixed fee is negotiable, this
approach can be equivalent to negotiated
transfer pricing
transfer pricing and the multinational firm
-OBJECTIVES
1. performance evaluation
2. optimal determination of income taxes
IRS allows three pricing methods
-comparable uncontrolled price method
---essentially market price
-resale price method
---equal to the sales price received by the
seller less an appropriate markup
----the subsidiary purchasing a good for resale
sets a transfer price equal to the resale price
less a gross profit percentage
-cost-plus method
---simply the cost-based transfer price
advance pricing agreements (APA)
-to assist tax-paying firms to determine
whether a proposed transfer price is acceptable
to the IRS in advance of income tax filling
-an agreement between IRS and a taxpayer on
pricing method to be applied in an
international transaction
-can cover transfer on intangibles