Cost Management : Measuring, Monitoring, and Motivating Performance

by Leslie G. Eldenburg (University of Arizona ); Susan Wolcott (Wolcott Lynch Associates )

• ISBN13: 9780471205494
• ISBN10: 0471205494
• Edition: 1
• Format: Hardcover
• Copyright: 2004-11-01
• Publisher: WILEY

Summary

Cost Management" was written in response to changes in the global business environment. Unbridled access to information and intense competition has meant that cost accounting has become an increasingly important tool for managers and accountants alike. Most textbooks focus on content knowledge and then expect students to \'magically\' demonstrate skills such as decision-making and critical thinking. "Cost Management" better prepares students for professional success by bridging the gaps between Knowledge, Skills and Abilities. Many students fail to recognize the assumptions, limitations, behavioral implications and qualitative factors that influence managerial decision-making. The dynamic, new author team focuses on cost accounting methods, techniques and the quality of cost accounting information used for decision-making to deliver a thoroughly modern treatment of cost accounting topics.

Author Biography

Leslie G. Eldenburg, PhD, is a McCoy-Rogers Fellow at the University of Arizona. She has also taught at California State University-Fresno. She received her MBA and PhD from the University of Washington. She passed the CPA exam in 1985 and has taught review courses for the CMA exam. Leslie has served as faculty advisor for an IMA student chapter and for the Multicultural Business Student Association. She received a number of awards recognizing her activities in teaching, student support, and as faculty advisor for student organizations. She is an active member of the American Accounting Association (AAA), the Management Section of the AAA, the IMA, and the Healthcare Financial Management Association. She has served on and chaired numerous committees within these organizations and currently is the Management Section's Secretary-Treasurer and co-chairs its Doctoral Consortium Committee. Before becoming an academic, she worked in hospital finance at Virginia Mason Hospital in Seattle, Washington. Her research interests include issues in healthcare and hospital accounting, and she has published in The Accounting Review, The Journal of Accounting and Economics, The Journal of Medical Decision Making, The Journal of Corporate Finance, The International Journal of Accounting, Information Systems Research, Healthcare Financial Management, and Controller's Quarterly. In addition, she currently serves on several editorial boards. Leslie has also co-authored chapters in Health Care Administration, The Encyclopedia of Accounting, and the Forthcoming Handbook of Management Accounting research, and Handbook of Cost Accounting.

Susan K. Wolcott, PhD, CPA, CMA, is an educational consultant with WolcottLynch Associates. Her consulting practice takes her to conferences and campuses around the world where she works with faculty and programs to support critical thinking development, competency assessment, and curriculum innovation. Her publication include Developing Critical Thinking Skills: The Key to Professional Competencies, an American Accounting Association Academic Partners Toolkit. She chaired the AICPA Core Competency Framework Curriculum Evaluation Task Force, developed the Taxonomy of AICPA Core Competencies, and authored numerous assessment materials for the AICPA Educational Competency Assessment Web site. Additional publications can be found in Issues in Accounting Education, Journal of Accounting Education, Assessment Update, IDEA Center Papers, and other journals. She is a member of the AAA, IMA, IIA, and Washington Society of CPAs, where she participates on the Consulting Services Committee. She previously served on the board of directors, as President of the Educational Foundation, and as Chair of the Education Committee of the Colorado Society of CPAs. She also served as Vice President of Membership for the Portland-Columbia Chapter of the IMA and was a program committee member and presenter for the AACSB Outcomes Assessment Seminar. She was previously on the accounting faculty at the University of Denver, where she received the MBA Core Diamond Award for teaching. She regularly teaches CPA and CMA review courses, and she ahs also taught courses at the University of Washington, Helsinki School of Economics-Mikkeli, Instituto de Empresa in Madrid, and J.L. Kellogg Graduate School of Management at Northwestern University. She worked in public accounting for ten years, including three years with Coopers & Lybrand (Portland, Oregon). She holds PhD and MS degrees in Accounting and Information Systems from Northwestern University and a BBA in Accounting from the University of Portland.

Table of Contents

PART ONE MEASURING AND USING COSTS FOR MANAGEMENT DECISIONS
The Role of Accounting Information in Management Decision Making	2	(34)
Motorola's Iridium Project: Look Before You Leap	3	(1)
Uncertainties, Biases, and Management Decision Quality	4	(1)
Uncertainties	4	(1)
Biases	4	(1)
Decision Quality	4	(1)
Management Decision Making	4	(4)
Organizational Vision	5	(1)
Organizational Core Competencies	6	(1)
Organizational Strategies	6	(1)
Operating Plans	7	(1)
Actual Operations	7	(1)
Measuring, Monitoring, and Motivating Performance	7	(1)
Cost Accounting and Decision Making	8	(2)
Management Accounting and Financial Accounting	8	(1)
A Brief History of Cost Accounting	8	(1)
Strategic Cost Management	9	(1)
Information Systems and Management Decision Making	10	(1)
Internal and External Reports	10	(1)
Improvements in Information for Management Decision Making	11	(1)
Business Intelligence Systems	11	(1)
Improving Information and Its Use in Decision Making	11	(2)
Types of Uncertainty	11	(1)
Path to Higher-Quality Decisions	12	(1)
Relevant Information for Decision Making	13	(2)
Relevant and Irrelevant Cash Flows	13	(1)
Identifying Relevant Cash Flows	13	(1)
Colorado Boulders: Identifying Relevant Cash Flows	14	(1)
Identifying Relevant Cash Flows	14	(1)
Impact of Biases	15	(1)
Importance of Identifying Relevant Information	15	(1)
Steps for Better Thinking: A Decision-Making Process	15	(2)
Knowing	16	(1)
Step 1--Identifying	17	(1)
Step 2--Exploring	17	(1)
Step 3--Prioritizing	17	(1)
Step 4--Envisioning	17	(1)
Ethical Decision Making	17	(6)
Conflicting Interests	18	(1)
Motive for Ethical Behavior	18	(1)
Focus on Ethical Decision Making: Bausch & Lomb's Sales Tactics	19	(1)
Analyzing the Ethics of a Decision	20	(3)
Building Your Professional Competencies	23	(13)
Focus on Professional Competencies in This Textbook	23	(1)
Steps for Better Thinking: A Tool for Building Professional Competencies	23	(1)
Summary	24	(1)
Self-Study Problems	25	(1)
Review	26	(1)
Questions	26	(1)
Exercises	27	(1)
Problems	28	(4)
Build Your Professional Competencies	32	(4)
The Cost Function	36	(50)
America West Airlines: Weathering an Economic Downturn	37	(1)
Using Relevant Costs to Make Decisions About the Future	38	(1)
Key Decision Factors for America West	38	(1)
Estimating Relevant Costs	38	(1)
Identifying Relevant Costs for a Decision	39	(2)
Relevant Costs for a Cost Object	39	(1)
Identifying Relevant Costs from the Accounting System	39	(1)
Direct and Indirect Costs	39	(1)
Opportunity Costs	40	(1)
Sunk Costs	40	(1)
Cost Behavior	41	(7)
Variable, Fixed, and Mixed Costs	41	(1)
Classifying Costs	42	(1)
Relevant Range	43	(1)
Cost Functions	44	(1)
Cost Driver	44	(1)
Identifying Potential Cost Drivers	45	(1)
No Apparent Cost Driver	45	(1)
Discretionary Costs	46	(1)
Economies of Scale	46	(1)
Learning Curves	46	(1)
Focus on Ethical Decision Making: Discretionary Costs	47	(1)
Practice Ethical Decision Making	48	(1)
Information Used to Estimate Costs	48	(1)
Cost Estimation Techniques	49	(3)
Engineered Estimate of Cost	49	(1)
Analysis at the Account Level	50	(1)
Scatter Plots	50	(1)
Two-Point Method	50	(1)
High-Low Method	51	(1)
Estimating the Cost Function	52	(3)
Small Animal Clinic (Part 1): Creating a Cost Function	52	(1)
Identify Relevant Costs and Obtain Information Needed for Estimation	52	(1)
Categorize Costs, Apply Cost Estimation Techniques, and Estimate Future Costs	53	(1)
Combine All Relevant Cost Estimates	54	(1)
Estimating Profit	54	(1)
Regression Analysis	55	(6)
Simple Regression Analysis	55	(1)
Interpreting Simple Regression Results	56	(2)
Small Animal Clinic (Part 2): Two-Point Method and Regression Analysis	58	(1)
Revised Analysis of the Treatment Supplies Cost	58	(1)
Quarterly Data	58	(1)
Scatter Plots	58	(1)
Two-Point Method	58	(1)
Simple Regression Analysis	59	(1)
Revised Cost Estimate	59	(1)
Review of Methods, Total Cost Function	60	(1)
Uses and Limitations of Cost Estimates	61	(2)
Information Quality	61	(1)
Average Costs	62	(1)
Quality of Estimation Techniques	63	(1)
Reliance on Cost Estimates	63	(1)
Appendix 2A Regression Analysis--Additional Topics	63	(1)
Multiple Regression Analysis	63	(3)
Choosing Cost Drivers for Multiple Regression	63	(1)
Print Masters Print Shop: Using Multiple Regression to Estimate a Cost Function	64	(1)
Scatter Plots and Simple Regression Results	64	(1)
Multiple Regression Analysis	65	(1)
Regression Analysis Assumptions	66	(1)
Additional Regression Analysis Considerations	66	(20)
Stepwise Linear Fixed Costs	66	(1)
Piecewise Linear Variable Costs	67	(1)
Data Limitations	68	(1)
Summary	68	(2)
Self-Study Problems	70	(1)
Review	71	(1)
Questions	72	(1)
Exercises	72	(3)
Problems	75	(9)
Building Your Professional Competencies	84	(2)
Cost-Volume-Profit Analysis	86	(42)
Coleco: Faulty Forecasts	87	(1)
Determining a Profitable Mix of Products	88	(1)
Key Decision Factors for Coleco	88	(1)
Decision Making Using Information about Revenues and Costs	88	(1)
Cost-Volume-Profit Analysis	89	(5)
Profit Equation and Contribution Margin	89	(1)
CVP Analysis in Units	89	(1)
CVP Analysis in Revenues	90	(1)
CVP for Multiple Products	90	(1)
Breakeven Point	91	(1)
Cost-Volume-Profit Graph	91	(1)
CVP with Income Taxes	92	(1)
Die Gefleckte Kuh Eis (The Spotted Cow Creamery) (Part 1): CVP Analysis with Income Taxes	92	(1)
Estimating the Cost Function	92	(1)
Estimating After-Tax Profit	92	(1)
Calculating Revenues to Achieve Targeted After-Tax Profit	93	(1)
Performing CVP Analyses with a Spreadsheet	94	(5)
CVP Calculations for a Sales Mix	94	(2)
CVP Sensitivity Analysis	96	(1)
Discretionary Expenditure Decision	97	(1)
Planning, Monitoring, and Motivating with CVP	97	(1)
Die Gefleckte Kuh Eis (The Spotted Cow Creamery) (Part 2): The Influence of Sales Mix on Profitability	98	(1)
Assumptions and Limitations of Cost-Volume-Profit Analysis	99	(4)
Uncertainties and Quality of Input Data	99	(1)
Quality of CVP Technique	100	(1)
CVP for Nonprofit Organizations	100	(1)
Small Animal Clinic: Not-for-Profit Organization CVP Analysis with Two Relevant Ranges	101	(1)
Breakeven Compared to Budget	101	(1)
Potential Investment in New Equipment	101	(1)
Calculating and Analyzing Targeted Activity Level	102	(1)
CVP Adjusted for Change in Relevant Range	102	(1)
Margin of Safety and Degree of Operating Leverage	103	(5)
Margin of Safety	103	(1)
Degree of Operating Leverage	104	(1)
Using the Degree of Operating Leverage to Plan and Monitor Operations	105	(1)
Focus on Ethical Decision Making: Temporary Labor	106	(1)
Practice Ethical Decision Making	107	(1)
Appendix 3A Spreadsheet Formulas for Magik Bicycles Spreadsheet	108	(20)
Summary	108	(2)
Self-Study Problems	110	(3)
Review	113	(1)
Questions	113	(1)
Exercises	114	(3)
Problems	117	(9)
Build Your Professional Competencies	126	(2)
Relevant Costs for Nonroutine Operating Decisions	128	(46)
Charleston County: Public Opinion and Decision Reversals	129	(1)
Using Cost Information to Make Nonroutine Operating Decisions	130	(1)
Key Decision Factors for the Charleston County Council	130	(1)
Nonroutine Operating Decisions	130	(1)
Decision Process for Nonroutine Operating Decisions	131	(2)
Identify Type of Decision the Managers Must Make	131	(1)
Identify and Apply Relevant Quantitative Analysis Techniques	131	(1)
Identify and Analyze Qualitative Factors	132	(1)
Consider Quantitative and Qualitative Information to Make a Decision	132	(1)
Applications of Nonroutine Operating Decisions	132	(1)
Special Orders	133	(2)
General Rule for Special Order Decisions	133	(1)
Barkley Basketballs: Special Order	133	(1)
Quantitative Analysis	134	(1)
Qualitative Factors	134	(1)
Making the Decision	134	(1)
Evaluating the Decision Process	134	(1)
Product Line and Business Segment (Keep or Drop) Decisions	135	(3)
General Rule for Keep or Drop Decisions	135	(1)
Home Aide Services: Keep or Drop	136	(1)
Quantitative Analysis	136	(1)
Qualitative Factors	137	(1)
Making the Decision	137	(1)
Insource or Outsource (Make or Buy) Decisions	138	(2)
General Rule for Make or Buy Decisions	138	(1)
Roadrunner Publishers (Part 1): Insource or Outsource	138	(1)
Quantitative Analysis	138	(1)
Qualitative Factors	139	(1)
Making the Decision	139	(1)
Quality and Outsourcing Decisions	140	(1)
Product Emphasis Decisions	140	(3)
General Rule for Product Emphasis Decisions	140	(1)
Constrained Resources	141	(1)
General Rule for Choosing the Product Mix When Resources Are Constrained	141	(1)
General Rule for Relaxing Constraints for One or Two Products	141	(1)
Roadrunner Publishers (Part 2): Constrained Resource	142	(1)
Qualitative Factors	142	(1)
Quantitative Analysis	142	(1)
Making the Decision	142	(1)
Product Emphasis: Multiple Resource Constraints and Multiple Products	143	(2)
General Rule for Relaxing Constraints with Multiple Constraints and Multiple Products	143	(1)
Quantitative Analysis for Multiple Products and Multiple Constraints	143	(1)
Bertram Golf Carts: Multiple Capacity Constraints and Multiple Products	144	(1)
Methods for Relaxing Constraints	145	(1)
Use Constrained Resources More Efficiently	145	(1)
Increase Available Resources	146	(1)
Qualitative Factors for Constrained Resource Problems	146	(1)
Uncertainties and Limitations for Nonroutine Operating Decisions	146	(4)
Quality of Information	147	(1)
Uncertainties	148	(1)
Information Timeliness	148	(1)
Analysis Technique Assumptions	148	(1)
Quality of Decision Process	148	(1)
Decision Maker Bias	148	(1)
Sensitivity Analysis	148	(1)
Prioritization	148	(1)
Focus on Ethical Decision Making: Stewardship of Public Funds	149	(1)
Practice Ethical Decision Making	149	(1)
Appendix 4A Using Excel Solver for Product Emphasis and Constrained Resource Decisions	150	(24)
Determine the Objective (Target) Function	150	(1)
Create Formulas for the Resource Constraints	150	(1)
Set Up an Excel Spreadsheet	150	(2)
Use Excel Solver to Maximize the Objective Function	152	(1)
Interpret the Solver Output	153	(1)
Summary	154	(2)
Self-Study Problems	156	(1)
Review	157	(1)
Questions	158	(1)
Exercises	158	(5)
Problems	163	(8)
Build Your Professional Competencies	171	(3)
PART TWO MEASURING AND ASSIGNING COST FOR INTERNAL AND EXTERNAL REPORTING
Job Costing	174	(40)
Bombardier: Custom Manufacturing	175	(1)
Tracking Costs for Customized Products and Services	176	(1)
Key Accounting Design Issues for Bombardier	176	(1)
Measuring and Monitoring Product Costs	177	(1)
Assigning Product Costs to Individual Goods or Services	177	(1)
Process Costing	177	(1)
Job Costing	178	(1)
Job Costing in Manufacturing	178	(2)
Assigning Direct Costs	179	(1)
Computerized and Manual Job Costing Systems	179	(1)
Allocating Overhead	180	(3)
Actual and Normal Costing	182	(1)
Aluminum Benders (Part 1): Allocating Overhead Costs in Job Costing	183	(1)
Evaluating Overhead Cost Pools and Allocation Bases	183	(1)
Understanding the Overhead Cost Allocation Method	183	(1)
General Ledger Entries for a Manufacturer	184	(3)
Overapplied and Underapplied Overhead	186	(1)
Service Sector Job Costing	187	(2)
Nighthawk Law Company: Job Costing in a Law Firm	188	(1)
Estimated Job Costs and Price	188	(1)
Competitor's Job Costs and Price	189	(1)
Monitoring Job Costs	189	(1)
Uses and Limitations of Job Cost Information	189	(5)
Allocated Overhead Costs and Decision Making	189	(1)
Aluminum Benders (Part 2): Job Costs Relevant for Decision Making	190	(1)
Qualitative Factors	190	(1)
Uncertainties in Measuring Job Costs	191	(1)
Uncertainties in Estimating Future Job Costs	191	(1)
Focus on Ethical Decision Making: Inappropriate Prorating of Underapplied Overhead	192	(1)
Disagreement about Underapplied Overhead Adjustment	192	(1)
Alternative Methods for Prorating Overapplied or Underapplied Overhead	193	(1)
Practice Ethical Decision Making	193	(1)
Spoilage, Rework, and Scrap in Job Costing	194	(2)
Normal and Abnormal Spoilage	194	(1)
Aluminum Benders (Part 3): Assigning Spoilage Costs	195	(1)
Rework	195	(1)
Scrap	195	(1)
Production Quality and Behavior Implications	196	(18)
Spoilage Opportunity Costs	196	(1)
Investing in Quality	197	(1)
Effect of Accounting on Manager Behavior	197	(1)
External Monitoring	198	(1)
Summary	198	(2)
Self-Study Problems	200	(2)
Review	202	(1)
Questions	202	(1)
Exercises	202	(4)
Problems	206	(6)
Build Your Professional Competencies	212	(2)
Process Costing	214	(42)
Elliptec AG: Mini Motor Mass Production	215	(1)
Profitability and Mass Production	216	(1)
Key Decision Factors for Elliptec	216	(1)
Role of Average Costs in Monitoring Profitability	216	(1)
Accounting for the Cost of Mass-Produced Goods	217	(2)
Assigning Direct Materials and Conversion Costs	217	(1)
Work in Process and Equivalent Units	217	(2)
Process Costing Methods	219	(6)
Detailed Example	219	(1)
Process Cost Reports without Beginning or Ending WIP	220	(1)
Process Cost Reports with Ending WIP	221	(2)
Process Cost Reports with Beginning and Ending WIP	223	(2)
General Ledger Accounts for Process Costing	225	(4)
Premier Plastics (Part 1): Choosing a Process Costing Method	226	(1)
Weighted Average and FIFO Process Cost Reports	226	(2)
Comparison of Weighted Average and FIFO	228	(1)
Process Costing Under Different Assumptions	229	(3)
Direct Materials Added During the Process	229	(1)
Nonuniform Conversion Costs and Multiple Cost Pools	229	(1)
Costs Transferred from Another Department	229	(1)
Premier Plastics (Part 2): Costs Transferred from Another Department and Direct Materials Added Later in the Process	230	(2)
Alternative Systems for Costing Mass Production	232	(3)
Standard Costing	232	(2)
Just-in-Time and Long-Term Procurement Contracts	234	(1)
Hybrid Costing Systems and Operation Costing	234	(1)
Accounting for Spoilage in Process Costing	235	(5)
Premier Plastics (Part 3): FIFO Cost Report with Normal and Abnormal Spoilage	236	(1)
FIFO Process Cost Report and Journal Entries with Spoilage	236	(2)
Using Spoilage Cost Information	238	(1)
Quality Related Costs	239	(1)
Focus on Ethical Decision Making: Cost Overruns at Boeing	239	(1)
Practice Ethical Decision Making	240	(1)
Uses and Limitations of Process Costing Information	240	(16)
Monitoring Process Quality and Costs	241	(1)
Process Costing Information and Decision Making	241	(1)
Uncertainties and Mismeasurement of Cost Flows	241	(1)
Work in Process Units at Different Stages of Completion	241	(1)
Summary	242	(2)
Self-Study Problems	244	(2)
Review	246	(1)
Questions	246	(1)
Exercises	246	(2)
Problems	248	(6)
Build Your Professional Competencies	254	(2)
Activity-Based Costing and Management	256	(40)
Reichhold, Inc.: Costing Production Activities	257	(1)
Using Costs to Measure, Monitor, and Motivate	258	(1)
Key Decision Factors for Reichhold	258	(1)
Seeking Better Product Cost Information for Decision Making	258	(1)
Activity-Based Costing (ABC)	259	(2)
Traditional Cost Accounting Systems	259	(1)
Activity-Based Costing Systems	260	(1)
ABC Cost Hierarchy	261	(2)
Organization-Sustaining Activities	261	(1)
Facility-Sustaining Activities	261	(1)
Customer-Sustaining Activities	262	(1)
Product-Sustaining Activities	262	(1)
Batch-Level Activities	263	(1)
Unit-Level Activities	263	(1)
Assigning Costs Using an ABC System	263	(7)
Identify the Relevant Cost Object	263	(1)
Identify Activities	264	(1)
Assign Costs to Activity-Based Cost Pools	264	(1)
For Each ABC Cost Pool, Choose a Cost Driver	265	(1)
For Each ABC Cost Pool, Calculate an Allocation Rate	265	(1)
For Each ABC Cost Pool, Allocate Activity Costs to the Cost Object	266	(1)
Keener Doors and Windows (Part 1): Comparison of ABC and Traditional Job Costing	266	(1)
Product Costs Using Job Costing	267	(1)
Product Costs Using ABC	267	(1)
Using ABC Product Cost Information	268	(2)
ABC for Nonmanufacturing Costs	270	(1)
ABC in Service Organizations	270	(1)
Activity-Based Management	270	(6)
Managing Customer Profitability	270	(1)
Managing Product and Process Design	271	(1)
Keener Doors and Windows (Part 2): Using ABM to Reduce Nonmanufacturing Costs	272	(1)
ABC Costs for Marketing and Warranty	272	(1)
Applying Activity-Based Management	272	(1)
Target and Kaizen Costing	273	(1)
Managing Environmental Costs	273	(1)
Managing Quality	273	(1)
Swiss Watch: ABM and the Cost of Quality	274	(1)
Estimating the Costs of Quality	274	(1)
Using Quality Cost Information to Better Manage Operations	275	(1)
Managing Constrained Resources	276	(1)
Benefits, Costs, and Limitations of ABC Systems	276	(20)
Benefits of an ABC System	276	(1)
Costs of an ABC System	276	(1)
Uncertainties in ABC and ABM Implementation	277	(1)
Mismeasurement of Costs Assigned to ABC Activities	278	(1)
Relevant ABC Costs for Decision Making	278	(1)
Focus on Ethical Decision Making: Promoting Inappropriate Uses of ABC	279	(1)
Practice Ethical Decision Making	279	(1)
Summary	280	(2)
Self-Study Problems	282	(2)
Review	284	(1)
Questions	284	(1)
Exercises	284	(4)
Problems	288	(6)
Build Your Professional Competencies	294	(2)
Measuring and Assigning Support Department Costs	296	(42)
Stanford University: Classifying Indirect Costs	297	(1)
Requesting Reimbursement for Overhead Costs	298	(1)
Key Decision Factors for Stanford	298	(1)
Viewing Overhead as an Integral Part of Operations	298	(1)
Support Department Cost Allocation	299	(2)
Objectives for Support Department Cost Allocation	299	(2)
Process for Allocating Support Department Costs	301	(3)
Clarifying the Purpose	301	(1)
Identifying Support and Operating Department Cost Pools	301	(1)
Assigning Costs to Cost Pools	302	(1)
Choosing Allocation Bases	303	(1)
Allocation Methods	303	(1)
Direct Method	304	(3)
Middletown Children's Clinic (Part 1): Direct Method Allocation	304	(1)
Cost Object, Cost Pools, and Assigning Costs	304	(1)
Choosing Allocation Bases	305	(1)
Direct Method Calculations	305	(2)
Step-Down Method	307	(1)
Middletown Children's Clinic (Part 2): Step-Down Method Allocation	307	(1)
Reciprocal Method	308	(3)
Middletown Children's Clinic (Part 3): Reciprocal Method Allocation	309	(1)
Allocate Support Costs Among Support Departments	309	(1)
Allocate Support Costs to Operating Departments	309	(1)
Comparing Results and Choosing an Allocation Method	310	(1)
Comparing the Direct, Step-Down, and Reciprocal Methods	311	(1)
Single- Versus Dual-Rate Allocations	311	(4)
Middletown Children's Clinic (Part 4): Dual Rates and Reciprocal Method with Three Support Departments	312	(1)
Charges Based on Single-Rate Allocation	312	(1)
Analysis of Cost Behavior and Revision of Cost Pools	312	(1)
Charges Based on Variable Cost Allocation	313	(1)
Dual-Rate Allocation	314	(1)
Support Cost Information Quality	315	(4)
Estimated Versus Actual Support Costs and Rates	316	(1)
Additional Allocation Methods	316	(1)
Cost-Based Contracting	317	(1)
Alternatives to Cost-Based Contracting	318	(1)
Focus on Ethical Decision Making: Quality of Accounting Estimates	318	(1)
Practice Ethical Decision Making	319	(1)
Appendix 8A Using Solver to Calculate Simultaneous Equations for the Reciprocal Method	319	(19)
Summary	321	(2)
Self-Study Problems	323	(2)
Review	325	(1)
Questions	326	(1)
Exercises	326	(3)
Problems	329	(6)
Build Your Professional Competencies	335	(3)
Joint Product and By-Product Costing	338	(32)
Hyperion Treatment Plant: Gains from Waste	339	(1)
Evaluating a Joint Product Decision	340	(1)
Key Decision Factors for the City of Los Angeles	340	(1)
Decisions Involving More Than One Product	340	(1)
Joint Products and Costs	340	(2)
Allocating Joint Costs	342	(3)
Physical Output Method	342	(1)
Sales Value at Split-off Point Method	343	(1)
Net Realizable Value Method	344	(1)
Constant Gross Margin NRV Method	344	(1)
Choosing an Appropriate Joint Cost Allocation Method	345	(2)
Pros and Cons of Alternative Allocation Methods	345	(1)
Merritt Brothers (Part 1): Choosing an Appropriate Allocation Method	346	(1)
Processing a Joint Product Beyond the Split-Off Point	347	(2)
Merritt Brothers (Part 2): Joint Product Decision Making	347	(1)
Quantitative and Qualitative Factors	348	(1)
Uncertainty and Bias in Incremental Revenue and Cost Estimates	348	(1)
Joint Products and By-Products	349	(2)
Accounting for By-Products	349	(1)
By-Product Value Recognized at the Time of Production	350	(1)
By-Product Value Recognized at the Time of Sale	350	(1)
Joint Product Costing with a Sales Mix	351	(19)
Premium Pineapple Company: Joint Product Costing with a Sales Mix	351	(1)
Physical Output Method	351	(1)
Sales Value at Split-Off Point Method	352	(1)
Net Realizable Value Method	352	(1)
Constant Gross Margin NRV Method	352	(1)
Comparing Methods	353	(1)
Uses and Limitations of Joint Cost Information	354	(1)
Focus on Ethical Decision Making: Hazardous Cement	354	(1)
Practice Ethical Decision Making	355	(1)
Summary	356	(2)
Self-Study Problems	358	(2)
Review	360	(1)
Questions	360	(1)
Exercises	360	(4)
Problems	364	(3)
Build Your Professional Competencies	367	(3)
PART THREE PLANNING, MONITORING, AND MOTIVATING
Static and Flexible Budgets	370	(44)
Dupont: Back To Basics	371	(1)
Business Strategies and Budgets	372	(1)
Key Decision Factors for DuPont	372	(1)
Translating Strategies into Budgets	372	(1)
Budgeting	372	(8)
Budget Cycle	373	(1)
Master Budget	374	(1)
Developing a Master Budget	374	(2)
Mountain High Bikes (Part 1): Developing A Master Budget	376	(1)
Developing the Revenue Budget	376	(1)
Developing the Production Budget	376	(1)
Developing the Direct Materials Budget	377	(1)
Developing the Direct Labor Budget	377	(1)
Developing the Manufacturing Overhead Budget	378	(1)
Developing the Inventory and Cost of Goods Sold Budgets	378	(1)
Developing the Support Department Budgets	379	(1)
Developing the Budgeted Income Statement	379	(1)
Budgeting in Nonmanufacturing Organizations	380	(1)
Budgets as Performance Benchmarks	380	(3)
Budget Variances	380	(1)
Variances and Budgeting Uncertainties	381	(1)
Static and Flexible Budgets	381	(1)
Mountain High Bikes (Part 2): Static Versus Flexible Budget Variances	381	(1)
Static Budget Variances	381	(1)
Flexible Budget Variances	382	(1)
Budgets, Incentives, and Rewards	383	(3)
Participative Budgeting	383	(1)
Zero-Based Budgeting	384	(1)
Budget Manipulation	384	(1)
Budget Responsibility	384	(1)
Budget and Variance Adjustments	385	(1)
Mountain High Bikes (Part 3): Budget Adjustments for Performance Evaluation	385	(1)
Evaluation of Department Manager Performance	386	(1)
Beyond Traditional Budgeting	386	(4)
Long-Term Budgets	386	(1)
Rolling Budgets	387	(1)
Activity-Based Budgets	387	(1)
Kaizen Budgets	388	(1)
Extreme Programming	388	(1)
Focus on Ethical Decision Making: Timely Reporting of Budget Problems	388	(1)
Practice Ethical Decision Making	389	(1)
Appendix 10A Developing a Cash Budget	390	(24)
Operating Cash Receipts and Disbursements	390	(1)
Other Planned Cash Flows	390	(1)
Short-Term Borrowing or Investing	390	(1)
Mountain High Bikes (Part 4): Developing a Cash Budget	391	(1)
Cash Receipts	391	(1)
Cash Disbursements	392	(1)
Short-Term Investments and Borrowings	392	(2)
Summary	394	(2)
Self-Study Problems	396	(5)
Review	401	(1)
Questions	401	(1)
Exercises	401	(4)
Problems	405	(6)
Build Your Professional Competencies	411	(3)
Standard Costs and Variance Analysis	414	(50)
Protech: Monitoring Labor Performance	415	(1)
Motivating Labor Productivity	416	(1)
Key Accounting Design Issues for Protech	416	(1)
Monitoring and Motivating Performance	417	(1)
Standard Costs	417	(3)
Standard Cost Categories	418	(1)
Developing Standard Costs	418	(1)
Cementos Juarez (Part 1): Setting Standard Costs	419	(1)
Setting Cost Standards	419	(1)
Summary of Direct and Overhead Cost Standards	419	(1)
Cost Budget	420	(1)
Variance Analysis	420	(2)
Deciding Which Variances to Investigate	420	(1)
Manager Conclusions and Actions	421	(1)
Separating Variances into Components	421	(1)
Direct Cost Variances	422	(5)
Price Variances	422	(1)
Direct Materials Price Variance	423	(1)
Direct Labor Price Variance	423	(1)
Efficiency Variances	423	(1)
Direct Materials Efficiency Variance	424	(1)
Direct Labor Efficiency Variance	424	(1)
Journal Entries for Direct Costs and Variances	424	(2)
Cementos Juarez (Part 2): Variances for Direct Materials and Direct Labor	426	(1)
Direct Materials Price Variance	426	(1)
Direct Labor Price Variance	426	(1)
Direct Materials Efficiency Variance	426	(1)
Direct Labor Efficiency Variance	426	(1)
Summary of Direct Cost Variances	427	(1)
Analyzing Direct Cost Variance Information	427	(3)
Identifying Reasons for Direct Cost Variances	427	(1)
Recognizing Resource and Quality Trade-Offs	428	(1)
Analyzing Interactions Between Incentives and Variances	429	(1)
Cementos Juarez (Part 3): Analyzing Direct Cost Variance Information	429	(1)
Overhead Variances	430	(6)
Variable Overhead Spending Variance	431	(1)
Variable Overhead Efficiency Variance	431	(1)
Fixed Overhead Spending Variance	432	(1)
Production Volume Variance	432	(1)
Journal Entries for Overhead Costs and Variances	433	(1)
Cementos Juarez (Part 4): Overhead Variances	434	(1)
Variable Overhead Spending and Efficiency Variances	434	(1)
Fixed Overhead Spending and Production Volume Variances	434	(2)
Analyzing Overhead Variance Information	436	(1)
Analyzing Overhead Spending Variances	436	(1)
Interpreting the Variable Overhead Efficiency Variance	436	(1)
Interpreting the Production Volume Variance	437	(1)
Cost Variance Adjustments	437	(2)
Focus on Ethical Decision Making: Wasted Soup	438	(1)
Practice Ethical Decision Making	439	(1)
Appendix 11A Profit Related Variances	439	(25)
Revenue Variances	439	(1)
Sales Price and Revenue Sales Quantity Variances	440	(1)
Contribution Margin--Related Variances	441	(1)
Contribution Margin Variance and Contribution Margin Sales Volume Variance	441	(2)
Contribution Margin Sales Mix Variance and Contribution Margin Sales Quantity Variance	443	(1)
Analyzing Revenue and Contribution Margin Variance Information	444	(1)
Summary	445	(2)
Self-Study Problems	447	(4)
Review	451	(1)
Questions	451	(1)
Exercises	451	(3)
Problems	454	(7)
Build Your Professional Competencies	461	(3)
Strategic Investment Decisions	464	(44)
Texas A&M: Bullish Forecasting	465	(1)
Evaluating the Quality of a Decision-Making Aid	466	(1)
Key Decision Aid Issues for Dairy Producers	466	(1)
Importance of Assumptions	467	(1)
Strategic Investment Decisions	467	(2)
Capital Budgeting	467	(1)
Decision Alternatives	467	(1)
Relevant Cash Flows	468	(1)
Quantitative Analysis Techniques	469	(1)
Net Present Value Method	469	(3)
Present Value of a Series of Cash Flows	469	(2)
Net Present Value of a Project	471	(1)
Identifying a Reasonable Discount Rate	471	(1)
Uncertainties and Sensitivity Analysis	472	(4)
Cash Flow Uncertainties	472	(1)
Project Life and Discount Rate Uncertainties	473	(1)
Estimation Bias	473	(1)
Sensitivity Analysis	473	(1)
Gordon's Health Club: Net Present Value and Sensitivity Analysis	474	(1)
Relevant Cash Flows and Timeline	474	(1)
NPV Analysis	474	(2)
Internal Rate of Return	476	(1)
IRR Calculations	476	(1)
Comparison of NPV and IRR Methods	477	(1)
Payback Method	477	(1)
Advantages and Disadvantages of the Payback Method	477	(1)
Accrual Accounting Rate of Return Method	478	(1)
Advantages and Disadvantages of the Accrual Accounting Rate of Return Method	478	(1)
Other Considerations for Strategic Investment Decisions	478	(3)
Qualitative Factors	478	(1)
Reputation, Environment, Quality, and Community	479	(1)
Making and Monitoring Strategic Investment Decisions	480	(1)
Focus on Ethical Decision Making: The Right Thing to Do	480	(1)
Practice Ethical Decision Making	481	(1)
Income Taxes and the Net Present Value Method	481	(2)
Calculating Incremental Tax Cash Flows	482	(1)
Appendix 12A Inflation and the Net Present Value Method	483	(7)
Real and Nominal Methods for NPV Analysis	483	(1)
Internal Consistency in NPV Analysis	484	(1)
Effects of U.S. Depreciation Rules	485	(2)
Central Irrigation, Inc. (Part 1): NPV Analysis with Inflation	487	(1)
NPV Calculations: Real Method	487	(1)
NPV Calculations: Nominal Method	488	(1)
Comparison of Nominal and Real Methods	489	(1)
Real and Nominal Methods under Varying Inflation Rates	489	(1)
Appendix 12B Present and Future Value Tables	490	(18)
Summary	494	(2)
Self-Study Problems	496	(2)
Review	498	(1)
Questions	498	(1)
Exercises	499	(2)
Problems	501	(5)
Build Your Professional Competencies	506	(2)
Joint Management of Revenues and Costs	508	(40)
Microsoft: XBOX Strategic Losses	509	(1)
Simultaneously Managing Revenues and Costs	510	(1)
Key Decision Issues for Microsoft	510	(1)
Simultaneous Management of Costs and Revenues	511	(1)
Section 1 Continuous Cost Improvement	511	(1)
Value Chain Analysis	511	(4)
Value-Added and Non-Value-Added Activities	511	(1)
Supply Chain Analysis	512	(1)
Using the Internet to Improve Inventory Supply	513	(1)
Just-in-Time Production	514	(1)
Other Benefits of Analyzing Production and Service Systems	515	(1)
Building Desired Profit Into Decisions	515	(1)
Target Costing	516	(5)
Target Costing Process	516	(1)
Determine the Product Target Price, Quality, and Functionality	517	(1)
Determine Target Cost	517	(1)
Design Product and Production Process to Achieve the Target Cost	517	(1)
Use Pilot Project to Evaluate Feasibility	518	(1)
Factors That Affect the Success of Target Costing	518	(1)
Mount Rainier Bikes (Part 1): Target Costing	518	(1)
Determine Product Target Price, Quality, and Functionality	518	(1)
Determine Target Cost	519	(1)
Design Product and Production Process to Achieve Target Cost	519	(1)
Product Design Changes	519	(1)
Supplier Negotiations	519	(1)
Nonmanufacturing Costs	520	(1)
Total Planned Cost Reduction	520	(1)
Pilot Project to Evaluate Feasibility	520	(1)
Kaizen Costing	521	(2)
Planned Cost Reductions	521	(1)
Achieving Planned Cost Reductions	521	(1)
Mount Rainier Bikes (Part 2): Kaizen Costing	522	(1)
Cost Reductions	522	(1)
Continuous Monitoring of Costs	523	(1)
Using Target and Kaizen Costing Over Time	523	(1)
Life Cycle Costing	523	(2)
Section 2 Price Management	525	(1)
Pricing Methods	525	(2)
Cost-Based Pricing	525	(1)
Market-Based Pricing	526	(1)
Profit-Maximizing Market-Based Price	527	(2)
Price Elasticity of Demand	527	(1)
French Perfumery: Using Price Elasticity to Calculate Product Prices	528	(1)
Profit-Maximizing Prices for Breezy and Exotique	528	(1)
Market Price Guidelines	528	(1)
Estimating the Effect of Prices on Demand	529	(1)
Other Market-Based Pricing Methods	529	(1)
Cost-Based Versus Market-Based Pricing	529	(1)
Other Influences on Price	530	(1)
Focus on Ethical Decision Making: Price Gouging After Tragedy	531	(1)
Practice Ethical Decision Making	531	(1)
Pricing in Not-For-Profit Organizations	531	(1)
Government Regulations and Pricing	532	(16)
Summary	533	(3)
Self-Study Problems	536	(1)
Review	537	(1)
Questions	538	(1)
Exercises	538	(3)
Problems	541	(4)
Build Your Professional Competencies	545	(3)
Measuring and Assigning Costs for Income Statements	548	(40)
Harley-Davidson: Scarcity or Abundance?	549	(1)
Monitoring Inventory and Production Costs	550	(1)
Key Analysis Issues for Harley-Davidson's Investors	550	(1)
Different Measures of Cost for Different Purposes	551	(1)
Absorption Costing and Variable Costing	551	(6)
Absorption Costing	551	(1)
Variable Costing	552	(1)
Absorption Costing Compared to Variable Costing	553	(1)
Boats Afloat Yacht Company (Part 1): Absorption Costing and Variable Costing Income Statements	554	(1)
Absorption Costing	554	(1)
Reconciling Absorption and Variable Costing Incomes	555	(1)
Boats Afloat Yacht Company (Part 2): Reconciling Absorption Costing and Variable Costing Income Statements	556	(1)
Absorption Costing Using Normal Costing	557	(9)
Motivation for Normal Costing	558	(1)
Allocation Rate Denominator Considerations	558	(1)
Volume Variance with Normal Costing	559	(1)
Evaluating Denominator Choices	559	(1)
SKI Doodle: Comparing Results Using Actual Production Volumes and Normal Capacity	560	(1)
Variable Costing	560	(1)
Absorption Costing With Actual Volume	560	(1)
Absorption Costing With Normal Capacity	561	(1)
Choice of Fixed Overhead Allocation Rate Denominator and Volume Variance Adjustment	561	(2)
The Effects of Beginning Inventory Balances on Income Reconciliation	563	(1)
Flying Fortress: Absorption and Variable Income Statements with Beginning Inventories	563	(1)
Variable Costing	563	(1)
Absorption Costing	564	(1)
Reconciliation of Variable and Absorption Costing Income	565	(1)
Using Variable and Absorption Cost Information	565	(1)
Incentives to Build Up Inventories	566	(2)
Disincentives to Build Up Inventories	566	(1)
Uncertainties about Desirable Inventory Levels	567	(1)
Focus on Ethical Decision Making: Channel Stuffing at Bristol-Myers Squibb	567	(1)
Practice Ethical Decision Making	567	(1)
Throughput Costing	568	(2)
Advantages of Throughput Costing	569	(1)
Comparison of Absorption, Variable, and Throughput Costing	570	(18)
Different Methods for Different Purposes	571	(1)
Summary	571	(3)
Self-Study Problems	574	(4)
Review	578	(1)
Questions	578	(1)
Exercises	578	(3)
Problems	581	(4)
Build Your Professional Competencies	585	(3)
Performance Evaluation and Compensation	588	(40)
Hedgewood Properties: Empowering Teams for Success	589	(1)
Giving Decision Responsibility to Employees	590	(1)
Key Decision Factors for Hedgewood Properties	590	(1)
Importance of Measuring, Monitoring, and Motivating Decision Making	591	(1)
Agency Theory	591	(1)
Agency Costs	591	(1)
Decision-Making Authority and Responsibility	592	(3)
Centralized and Decentralized Organizations	593	(1)
General Versus Specific Knowledge	593	(1)
Technology and Globalization	593	(1)
Choosing a Centralized Versus Decentralized Organizational Structure	594	(1)
Responsibility Accounting	595	(2)
Cost Centers	595	(1)
Revenue Centers	596	(1)
Profit Centers	596	(1)
Investment Centers	596	(1)
Responsibility Centers and Suboptimal Decision Making	596	(1)
Income-Based Performance Evaluation	597	(6)
Return on Investment	597	(1)
Computer Wizards (Part 1): Return on Investment	598	(1)
Increasing ROI	598	(1)
Choosing a Plan of Action	599	(1)
Advantages and Disadvantages of ROI	599	(1)
Residual Income	600	(1)
Computer Wizards (Part 2): Residual Income	600	(1)
Advantages and Disadvantages of Residual Income	601	(1)
Economic Value Added	601	(1)
Computer Wizards (Part 3): Economic Value Added	602	(1)
Comparison of ROI, Residual Income, and EVA	603	(1)
Advantages and Disadvantages of EVA	603	(1)
Motivating Performance with Compensation	603	(4)
Bonus System Incentives	603	(1)
Long-Term Versus Short-Term Incentives	604	(1)
International Compensation	605	(1)
Focus on Ethical Decision Making: Level of Executive Pay	605	(1)
Practice Ethical Decision Making	606	(1)
Transfer Price Policies	607	(5)
Transfer Prices and Conflicts Among Managers	607	(2)
Setting an Appropriate Transfer Price	609	(1)
Cost-Based Transfer Prices	609	(1)
Activity-Based Transfer Prices	609	(1)
Market-Based Transfer Prices	610	(1)
Dual Rate Transfer Prices	610	(1)
Negotiated Transfer Prices	610	(1)
Computer Wizards (Part 4): Negotiated Transfer Prices	610	(2)
Additional Transfer Price Considerations	612	(16)
International Income Taxes	612	(1)
Transfer Prices for Support Services	612	(1)
Setting Transfer Prices for Internal Services	612	(1)
Transfer of Corporate Overhead Costs	613	(1)
Summary	613	(2)
Self-Study Problems	615	(1)
Review	616	(1)
Questions	616	(1)
Exercises	617	(3)
Problems	620	(5)
Build Your Professional Competencies	625	(3)
Strategic Performance Measurement	628	(47)
Wal-Mart Stores: Maintaining a Low-Cost Strategy	629	(1)
Long Term Strategic Performance	630	(1)
Key Strategic Decision Issues for Wal-Mart	630	(1)
Monitoring Long-Term Performance	630	(1)
Strategic Decision Making	631	(3)
Communicating the Organization's Vision	632	(1)
Clarifying Core Competencies and Developing Strategies	632	(1)
Cost Leadership	633	(1)
Product Differentiation: Quality and Functionality	633	(1)
Other Pricing Strategies	633	(1)
Developing Operating Plans	633	(1)
Management Decision Making Throughout an Organization	633	(1)
Measuring Organizational Performance	634	(2)
Financial Measures	634	(1)
Nonfinancial Measures	635	(1)
Using a Combination of Measures	635	(1)
Balanced Scorecard	636	(6)
Royal Philips Electronics: Adopting a Balanced Scorecard	637	(1)
Financial Perspective and Related Measures	638	(1)
Customer Perspective and Related Measures	638	(1)
Internal Business Process Perspective and Related Measures	639	(1)
Innovation Cycle and Related Measures	639	(1)
Operations Cycle and Related Measures	640	(1)
Post-Sales Service Cycle and Related Measures	640	(1)
Traditional Versus Balanced Scorecard Approaches to Internal Business Processes	640	(1)
Learning and Growth Perspective and Related Measures	641	(1)
Implementing a Balanced Scorecard	642	(8)
Clarify Vision, Core Competencies, and Strategies	642	(1)
Analyze Perspectives to Develop Performance Objectives and Measures	642	(2)
Communicate, Link Throughout the Organization, and Refine	644	(1)
Establish Performance Targets and Action Plans	644	(1)
Collect and Analyze Scorecard Data	645	(1)
Investigate Variances and Reward Employees	646	(1)
Provide Feedback and Refine Balanced Scorecard	646	(1)
Community Hospital: Implementing a Balanced Scorecard	646	(1)
Clarify Vision, Core Competencies, and Strategies	646	(1)
Analyze Perspectives to Develop Performance Objectives and Measures	647	(1)
Communicate, Link Throughout the Organization, and Refine	648	(1)
Establish Performance Targets and Action Plans	648	(2)
Strengths and Weaknesses of the Balanced Scorecard	650	(5)
Strengths	650	(1)
Weaknesses	651	(1)
Uncertainties	651	(1)
Mistakes in Implementation	652	(1)
Biases	652	(1)
Other Factors	652	(1)
How Valuable Is the Balanced Scorecard?	653	(1)
Focus on Ethical Decision Making: Accountable Volunteer Organizations	653	(1)
Practice Ethical Decision Making	654	(1)
Envisioning the Future of Cost Accounting	655	(20)
Summary	656	(3)
Self-Study Problems	659	(2)
Review	661	(1)
Questions	661	(1)
Exercises	662	(3)
Problems	665	(7)
Build Your Professional Competencies	672	(3)
Glossary	675	(14)
Credits	689	(2)
Organization and People Index	691	(3)
Subject Index	694