Cost Management Accounting and Control

by Hansen, Don R.; Mowen, Maryanne M.

• ISBN13: 9780324233100
• ISBN10: 0324233108
• Edition: 5th
• Format: Hardcover
• Copyright: 2005-02-15
• Publisher: South-Western College Pub

Summary

COST MANAGEMENT emphasizes that changing conditions often require a change in systems. Emphasizing this point stresses the dynamic and exciting nature of the field. By taking a systems approach -- one that first covers functional-based cost and control and then activity-based cost systems -- students understand how to understand and manage any cost management system.

Author Biography

Don R. Hansen is Head of the School of Accounting at Oklahoma State University.

Table of Contents

Part 1: Foundation Concepts	1	(177)
Introduction to Cost Management	3	(25)
Financial Accounting versus Cost Management	3	(1)
Factors Affecting Cost Management	4	(6)
Global Competition	5	(1)
Growth of the Service Industry	5	(1)
Advances in Information Technology	5	(1)
Advances in the Manufacturing Environment	6	(2)
Customer Orientation	8	(1)
New Product Development	8	(1)
Total Quality Management	8	(1)
Time as a Competitive Element	9	(1)
Efficiency	9	(1)
A Systems Approach	10	(1)
Cost Management: A Cross-Functional Perspective	11	(1)
The Need for Flexibility	11	(1)
Behavioral Impact of Cost Information	12	(1)
The Role of Today's Cost and Management Accountant	12	(3)
Line and Staff Positions	12	(2)
Information for Planning, Controlling, Continuous Improvement, and Decision Making	14	(1)
Accounting and Ethical Conduct	15	(1)
Benefits of Ethical Behavior	15	(1)
Standards of Ethical Conduct for Management Accountants	16	(1)
Certification	16	(12)
The Certificate in Management Accounting	18	(1)
The Certificate in Public Accounting	18	(1)
The Certificate in Internal Auditing	18	(10)
Basic Cost Management Concepts	28	(39)
A Systems Framework	29	(5)
Accounting Information Systems	29	(3)
Relationship to Other Operational Systems and Functions	32	(1)
Different Systems for Different Purposes	32	(2)
Cost Assignment: Direct Tracing, Driver Tracing, and Allocation	34	(3)
Cost Objects	35	(1)
Accuracy of Assignments	35	(2)
Product and Service Costs	37	(4)
Different Costs for Different Purposes	38	(1)
Product Costs and External Financial Reporting	39	(2)
External Financial Statements	41	(4)
Income Statement: Manufacturing Firm	42	(3)
Income Statement: Service Organization	45	(1)
Functional-Based and Activity-Based Cost Management Systems	45	(22)
Functional-Based Cost Management Systems: A Brief Overview	45	(1)
Activity-Based Cost Management Systems: A Brief Overview	46	(2)
Choice of a Cost Management System	48	(19)
Cost Behavior	67	(54)
Basics of Cost Behavior	68	(6)
Measures of Activity Output	68	(1)
Fixed Costs	68	(2)
Variable Costs	70	(1)
Linearity Assumption	71	(1)
Mixed Costs	72	(1)
Time Horizon	73	(1)
Resources, Activities, and Cost Behavior	74	(6)
Flexible Resources	75	(1)
Committed Resources	75	(1)
Implications for Control and Decision Making	76	(1)
Step-Cost Behavior	77	(2)
Activities and Mixed Cost Behavior	79	(1)
Methods for Separating Mixed Costs into Fixed and Variable Components	80	(9)
The High-Low Method	81	(1)
Scatterplot Method	82	(3)
The Method of Least Squares	85	(2)
Using Regression Programs	87	(2)
Reliability of Cost Formulas	89	(4)
Hypothesis Test of Parameters	89	(1)
Goodness of Fit Measures	89	(1)
Confidence Intervals	90	(3)
Multiple Regression	93	(2)
The Learning Curve and Nonlinear Cost Behavior	95	(3)
Cumulative Average-Time Learning Curve	95	(2)
Incremental Unit-Time Learning Curve	97	(1)
Managerial Judgment	98	(23)
Activity-Based Costing	121	(57)
Unit-Level Product Costing	122	(5)
Overhead Assignment: Plantwide Rates	123	(1)
Disposition of Overhead Variances	124	(2)
Overhead Application: Departmental Rates	126	(1)
Limitations of Plantwide and Departmental Rates	127	(6)
Non-Unit-Related Overhead Costs	127	(1)
Product Diversity	128	(1)
An Example Illustrating the Failure of Unit-Based Overhead Rates	128	(5)
Activity-Based Costing System	133	(9)
Activity Identification, Definition, and Classification	134	(4)
Assigning Costs to Activities	138	(1)
Assigning Secondary Activity Costs to Primary Activities	139	(1)
Cost Objects and Bills of Activities	140	(1)
Activity Rates and Product Costing	140	(2)
Classifying Activities	142	(1)
Reducing the Size and Complexity of an ABC System	142	(4)
Approximately Relevant ABC Systems	143	(1)
Equally Accurate Reduced ABC Systems	144	(2)
ABC System Concepts	146	(32)
ABC Database	147	(1)
ABC and ERP Systems	148	(30)
Part 2: Fundamental Costing and Control	178	(306)
Product and Service Costing: Job-Order System	180	(46)
Characteristics of the Production Process	180	(5)
Manufacturing Firms versus Service Firms	181	(3)
Unique versus Standardized Products and Services	184	(1)
Setting Up the Cost Accounting System	185	(6)
Cost Accumulation	186	(1)
Cost Measurement	186	(2)
Cost Assignment	188	(2)
Choosing the Activity Level	190	(1)
The Job-Order Costing System: General Description	191	(4)
Overview of the Job-Order Costing System	191	(1)
Materials Requisitions	192	(1)
Job Time Tickets	193	(1)
Overhead Application	194	(1)
Unit Cost Calculation	195	(1)
Job-Order Costing: Specific Cost Flow Description	195	(9)
Accounting for Direct Materials	196	(1)
Accounting for Direct Labor Cost	196	(2)
Accounting for Overhead	198	(1)
Accounting for Finished Goods Inventory	199	(2)
Accounting for Cost of Goods Sold	201	(2)
Accounting for Nonmanufacturing Costs	203	(1)
Single versus Multiple Overhead Rates	204	(2)
Appendix: Accounting for Spoilage in a Traditional Job-Order System	206	(20)
Product and Service Costing: A Process Systems Approach	226	(50)
Process-Costing Systems: Basic Operational and Cost Concepts	226	(5)
Cost Flows	227	(2)
The Production Report	229	(1)
Unit Costs	230	(1)
Process Costing with No Work-in-Process Inventories	231	(2)
Service Organizations	231	(1)
JIT Manufacturing Firms	232	(1)
The Role of Activity-Based Costing	232	(1)
Process Costing with Ending Work-in-Process Inventories	233	(3)
Equivalent Units as Output Measures	233	(1)
Cost of Production Report Illustrated	234	(1)
Nonuniform Application of Productive Inputs	235	(1)
Beginning Work-in-Process Inventories	236	(1)
FIFO Costing Method	236	(5)
Step 1: Physical Flow Analysis	237	(1)
Step 2: Calculation of Equivalent Units	238	(1)
Step 3: Computation of Unit Cost	238	(1)
Step 4: Valuation of Inventories	238	(1)
Step 5: Cost Reconciliation	239	(2)
Journal Entries	241	(1)
Weighted Average Costing Method	241	(4)
Step 1: Physical Flow Analysis	241	(1)
Step 2: Calculation of Equivalent Units	241	(1)
Step 3: Computation of Unit Cost	242	(1)
Step 4: Valuation of Inventories	243	(1)
Step 5: Cost Reconciliation	243	(1)
Production Report	243	(1)
FIFO Compared with Weighted Average	243	(2)
Treatment of Transferred-In Goods	245	(4)
Step 1: Physical Flow Schedule	247	(1)
Step 2: Calculation of Equivalent Units	247	(1)
Step 3: Computation of Unit Costs	247	(1)
Step 4: Valuation of Inventories	247	(2)
Operation Costing	249	(3)
Basics of Operation Costing	249	(1)
Operation Costing Example	250	(2)
Appendix: Spoiled Units	252	(24)
Allocating Costs of Support Departments and Joint Products	276	(49)
An Overview of Cost Allocation	276	(6)
Types of Departments	277	(2)
Types of Allocation Bases	279	(1)
Objectives of Allocation	280	(2)
Allocating One Department's Costs to Another Department	282	(6)
A Single Charging Rate	282	(1)
Dual Charging Rates	283	(2)
Budgeted versus Actual Usage	285	(2)
Fixed versus Variable Bases: A Note of Caution	287	(1)
Choosing a Support Department Cost Allocation Method	288	(7)
Direct Method of Allocation	288	(2)
Sequential Method of Allocation	290	(1)
Reciprocal Method of Allocation	291	(3)
Comparison of the Three Methods	294	(1)
Departmental Overhead Rates and Product Costing	295	(1)
Accounting for Joint Production Processes	296	(29)
Cost Separability and the Need for Allocation	297	(1)
Distinction and Similarity between Joint Products and By-Products	298	(1)
Accounting for Joint Product Costs	299	(2)
Allocation Based on Relative Market Value	301	(24)
Budgeting for Planning and Control	325	(57)
The Role of Budgeting in Planning and Control	326	(5)
Purposes of Budgeting	326	(1)
The Budgeting Process	327	(2)
Gathering Information for Budgeting	329	(2)
Preparing the Operating Budget	331	(7)
Operating Budgets for Merchandising and Service Firms	337	(1)
Preparing the Financial Budget	338	(7)
The Cash Budget	338	(4)
Budgeted Balance Sheet	342	(1)
Shortcomings of the Traditional Master Budgeting Process	342	(3)
Flexible Budgets for Planning and Control	345	(6)
Static Budgets versus Flexible Budgets	345	(6)
Activity-Based Budgets	351	(4)
The Behavioral Dimension of Budgeting	355	(27)
Characteristics of a Good Budgetary System	356	(26)
Standard Costing: A Functional-Based Control Approach	382	(48)
Developing Unit Input Standards	383	(2)
Establishing Standards	383	(1)
Usage of Standard Costing Systems	384	(1)
Standard Cost Sheets	385	(2)
Variance Analysis and Accounting: Direct Materials and Direct Labor	387	(9)
Calculating Direct Materials Price and Usage Variances	388	(3)
Accounting for Direct Materials Price and Usage Variances	391	(1)
Calculating Direct Labor Variances	391	(2)
Accounting for the Direct Labor Rate and Efficiency Variances	393	(1)
Investigating Direct Materials and Labor Variances	393	(2)
Disposition of Direct Materials and Direct Labor Variances	395	(1)
Variance Analysis: Overhead Costs	396	(11)
Four-Variance Method: The Two Variable Overhead Variances	396	(4)
Four-Variance Analysis: The Two Fixed Overhead Variances	400	(4)
Accounting for Overhead Variances	404	(1)
Two- and Three-Variance Analyses	405	(2)
Mix and Yield Variances: Materials and Labor	407	(23)
Direct Materials Mix and Yield Variances	407	(1)
Direct Labor Mix and Yield Variances	408	(22)
Decentralization: Responsibility Accounting, Performance Evaluation, and Transfer Pricing	430	(54)
Responsibility Accounting	431	(1)
Types of Responsibility Centers	431	(1)
The Role of Information and Accountability	431	(1)
Decentralization	432	(3)
Reasons for Decentralization	432	(2)
The Units of Decentralization	434	(1)
Measuring the Performance of Investment Centers	435	(10)
Return on Investment	435	(4)
Residual Income	439	(2)
Economic Value Added	441	(3)
Multiple Measures of Performance	444	(1)
Measuring and Rewarding the Performance of Managers	445	(5)
Incentive Pay for Managers---Encouraging Goal Congruence	445	(1)
Managerial Rewards	445	(3)
Measuring Performance in the Multinational Firm	448	(2)
Transfer Pricing	450	(1)
The Impact of Transfer Pricing on Income	450	(1)
Setting Transfer Prices	451	(33)
Market Price	451	(1)
Negotiated Transfer Prices	452	(5)
Cost-Based Transfer Prices	457	(2)
Transfer Pricing and the Multinational Firm	459	(25)
Part 3: Advanced Costing and Control	484	(250)
Strategic Cost Management	486	(62)
Strategic Cost Management: Basic Concepts	487	(6)
Strategic Positioning: The Key to Creating and Sustaining a Competitive Advantage	487	(2)
Value-Chain Framework, Linkages, and Activities	489	(2)
Organizational Activities and Cost Drivers	491	(1)
Operational Activities and Drivers	492	(1)
Value-Chain Analysis	493	(8)
Exploiting Internal Linkages	493	(3)
Exploiting Supplier Linkages	496	(2)
Exploiting Customer Linkages	498	(3)
Life-Cycle Cost Management	501	(8)
Product Life-Cycle Viewpoints	501	(2)
Interactive Viewpoint	503	(4)
Role of Target Costing	507	(2)
Just-In-Time (JIT) Manufacturing and Purchasing	509	(4)
Inventory Effects	510	(1)
Plant Layout	511	(1)
Grouping of Employees	512	(1)
Employee Empowerment	513	(1)
Total Quality Control	513	(1)
JIT and Its Effect on the Cost Management System	513	(35)
Traceability of Overhead Costs	514	(1)
Product Costing	515	(1)
JIT's Effect on Job-Order and Process-Costing Systems	516	(1)
Backflush Costing	516	(32)
Activity-Based Management	548	(42)
The Relationship of Activity-Based Costing and Activity-Based Management	549	(1)
Process Value Analysis	550	(4)
Driver Analysis: Defining Root Causes	550	(1)
Activity Analysis: Identifying and Assessing Value Content	550	(3)
Assessing Activity Performance	553	(1)
Financial Measures of Activity Efficiency	554	(9)
Reporting Value- and Non-Value-Added Costs	554	(2)
Trend Reporting of Non-Value-Added Costs	556	(1)
Drivers and Behavioral Effects	557	(1)
The Role of Kaizen Standards	557	(1)
Benchmarking	558	(1)
Activity Flexible Budgeting	559	(3)
Activity Capacity Management	562	(1)
Implementing Activity-Based Management	563	(3)
Discussion of the ABM Implementation Model	563	(2)
Why ABM Implementations Fail	565	(1)
Financial-Based versus Activity-Based Responsibility Accounting	566	(24)
Assigning Responsibility	567	(1)
Establishing Performance Measures	568	(1)
Evaluating Performance	569	(1)
Assigning Rewards	570	(20)
The Balanced Scorecard: Strategic-Based Control	590	(31)
Activity-Based versus Strategic Based Responsibility Accounting	591	(4)
Assigning Responsibility	592	(1)
Establishing Performance Measures	592	(2)
Performance Measurement and Evaluation	594	(1)
Assigning Rewards	595	(1)
Basic Concepts of the Balanced Scorecard	595	(8)
Strategy Translation	595	(1)
The Financial Perspective, Objectives, and Measures	596	(2)
Customer Perspective, Objectives, and Measures	598	(1)
Process Perspective, Objectives, and Measures	599	(3)
Learning and Growth Perspective	602	(1)
Linking Measures to Strategy	603	(3)
The Concept of a Testable Strategy	604	(1)
Strategic Feedback	605	(1)
Strategic Alignment	606	(15)
Communicating the Strategy	606	(1)
Targets and Incentives	607	(1)
Resource Allocation	608	(13)
Quality Cost Management	621	(43)
Costs of Quality	622	(6)
The Meaning of Quality	623	(1)
Defining Quality Costs	624	(1)
Quality Cost Measurement	625	(3)
Reporting Quality Costs	628	(5)
Quality Cost Reports	628	(1)
Distribution of Quality Costs: The Acceptable Quality View	628	(2)
Distribution of Quality Costs: Zero-Defects View	630	(2)
The Role of Activity-Based Cost Management	632	(1)
Quality Cost Information and Decision Making	633	(4)
Decision Making Contexts	633	(2)
Certifying Quality Through ISO 9000	635	(2)
Controlling Quality Costs	637	(27)
Choosing the Quality Standard	637	(2)
Types of Quality Performance Reports	639	(25)
Productivity Measurement and Control	664	(31)
Productive Efficiency	665	(1)
Partial Productivity Measurement	665	(3)
Partial Productivity Measurement Defined	666	(1)
Partial Measures and Measuring Changes in Productive Efficiency	667	(1)
Advantages of Partial Measures	668	(1)
Disadvantages of Partial Measures	668	(1)
Total Productivity Measurement	668	(4)
Profile Productivity Measurement	668	(2)
Profit-Linked Productivity Measurement	670	(2)
Price-Recovery Component	672	(1)
Measuring Changes in Activity and Process Efficiency	672	(23)
Activity Productivity Analysis	673	(2)
Process Productivity Analysis	675	(1)
Process Productivity Model	676	(3)
Quality and Productivity	679	(16)
Environmental Costs: Measurement and Control	695	(39)
Defining, Measuring, and Controlling Environmental Costs	696	(9)
The Ecoefficiency Paradigm	696	(2)
Competing Paradigms	698	(1)
Environmental Costs Defined	699	(1)
Environmental Cost Report	700	(2)
Environmental Cost Reduction	702	(2)
An Environmental Financial Report	704	(1)
Environmental Costing	705	(2)
Environmental Product Costs	705	(1)
Unit-Based Environmental Cost Assignments	705	(1)
Activity-Based Environmental Cost Assignments	706	(1)
Life-Cycle Cost Assessment	707	(4)
Product Life Cycle	707	(1)
Assessment Stages	708	(3)
Strategic-Based Environmental Responsibility Accounting	711	(23)
Environmental Perspective	711	(2)
The Role of Activity Management	713	(21)
Part 4: Decision Making	734	(233)
Cost-Volume-Profit Analysis	736	(45)
The Break-Even Point in Units	737	(4)
Operating-Income Approach	737	(1)
Contribution-Margin Approach	738	(1)
Profit Targets	739	(1)
After-Tax Profit Targets	740	(1)
Break-Even Point in Sales Dollars	741	(4)
Profit Targets	744	(1)
Comparison of the Two Approaches	745	(1)
Multiple Product Analysis	745	(4)
Break-Even Point in Units	745	(3)
Sales Dollars Approach	748	(1)
Graphical Representation of CVP Relationships	749	(4)
The Profit-Volume Graph	749	(1)
The Cost-Volume-Profit Graph	749	(2)
Assumptions of Cost-Volume-Profit Analysis	751	(2)
Changes in the CVP Variables	753	(6)
Introducing Risk and Uncertainty	755	(4)
Sensitivity Analysis and CVP	759	(1)
CVP Analysis and Activity-Based Costing	759	(22)
Example Comparing Conventional and ABC Analysis	760	(1)
Strategic Implications: Conventional CVP Analysis versus ABC Analysis	761	(1)
CVP Analysis and JIT	762	(19)
Activity Resource Usage Model and Tactical Decision Making	781	(42)
Tactical Decision Making	782	(3)
The Tactical Decision-Making Process	782	(2)
Qualitative Factors	784	(1)
Relevant Costs and Revenues	785	(3)
Relevant Costs Illustrated	785	(1)
Irrelevant Cost Illustrated	786	(1)
Relevant Costs and Benefits in International Trade	786	(2)
Relevancy, Cost Behavior, and the Activity Resource Usage Model	788	(2)
Flexible Resources	788	(1)
Committed Resources	788	(2)
Illustrative Examples of Tactical Decision Making	790	(33)
Make-or-Buy Decisions	790	(4)
Keep-or-Drop Decisions	794	(3)
Special-Order Decisions	797	(2)
Decisions to Sell or Process Further	799	(2)
Relevant Costing and Ethical Behavior	801	(22)
Pricing and Profitability Analysis	823	(55)
Basic Pricing Concepts	824	(2)
Demand and Supply	824	(1)
Price Elasticity of Demand	824	(1)
Market Structure and Price	825	(1)
Pricing Policies	826	(3)
Cost Based Pricing	826	(2)
Target Costing and Pricing	828	(1)
Other Pricing Policies	829	(1)
The Legal System and Pricing	829	(3)
Predatory Pricing	829	(1)
Price Discrimination	830	(1)
Ethics	831	(1)
Measuring Profit	832	(7)
Reasons for Measuring Profit	832	(2)
Absorption-Costing Approach to Measuring Profit	834	(2)
Variable-Costing Approach to Measuring Profit	836	(3)
Profitability of Segments	839	(7)
Profit by Product Line	839	(4)
Divisional Profit	843	(1)
Customer Profitability	843	(2)
Overall Profit	845	(1)
Analysis of Profit-Related Variances	846	(3)
Sales Price and Price Volume Variances	846	(1)
Contribution Margin Variance	847	(1)
Market Share and Market Size Variances	848	(1)
The Product Life Cycle	849	(3)
Limitations of Profit Measurement	852	(26)
Capital Investment	878	(51)
Capital Investment Decisions	879	(2)
Payback and Accounting Rate of Return: Nondiscounting Methods	881	(2)
Payback Period	881	(2)
Accounting Rate of Return	883	(1)
The Net Present Value Method	883	(2)
The Meaning of NPV	884	(1)
Weighted Average Cost of Capital	884	(1)
An Example Illustrating Weighted Average Cost of Capital	885	(1)
Internal Rate of Return	885	(2)
Example with Uniform Cash Flows	885	(2)
IRR and Uneven Cash Flows	887	(1)
NPV versus IRR: Mutually Exclusive Projects	887	(3)
NPV Compared with IRR	888	(2)
Example: Mutually Exclusive Projects	890	(1)
Computing After-Tax Cash Flows	890	(9)
Inflationary Adjustments	892	(1)
Conversion of Gross Cash Flows to After-Tax Cash Flows	892	(7)
Capital Investment: Advanced Technology and Environmental Considerations	899	(6)
How Investment Differs	900	(1)
How Estimates of Operating Cash Flows Differ	900	(1)
An Example: Investing in Advanced Technology	901	(1)
Salvage Value	902	(1)
Discount Rates	903	(2)
Appendix A: Present Value Concepts	905	(3)
Future Value	905	(1)
Present Value	906	(1)
Present Value of an Uneven Series of Cash Flows	906	(1)
Present Value of a Uniform Series of Cash Flows	907	(1)
Appendix B: Present Value Tables	908	(21)
Inventory Management: Economic Order Quantity, JIT, and the Theory of Constraints	929	(38)
Just-in-Case Inventory Management	930	(5)
Justifying Inventory	930	(1)
Economic Order Quantity: A Model for Balancing Acquisition and Carrying Costs	931	(1)
Calculating EOQ	932	(1)
When to Order or Produce	933	(1)
Demand Uncertainty and Reordering	933	(1)
An Example Involving Setups	934	(1)
EOQ and Inventory Management	934	(1)
JIT Inventory Management	935	(8)
A Pull System	936	(1)
Setup and Carrying Costs: The JIT Approach	937	(1)
Due-Date Performance: The JIT Solution	938	(1)
Avoidance of Shutdown and Process Reliability: The JIT Approach	938	(3)
Discounts and Price Increases: JIT Purchasing versus Holding Inventories	941	(1)
JIT's Limitations	941	(2)
Basic Concepts of Constrained Optimization	943	(4)
One Binding Internal Constraint	943	(1)
Internal Binding Constraint and External Binding Constraint	944	(1)
Multiple Internal Binding Constraints	944	(3)
Theory of Constraints	947	(20)
Operational Measures	947	(2)
Five-Step Method for Improving Performance	949	(18)
Glossary	967	(12)
Subject Index	979	(24)
Company Index	1003