Horngren’s Cost Accounting: A Managerial Emphasis, Seventeenth Edition
By Srikant M Datar and Madhav V Rajan
Contents:
1 The Manager and Management Accounting 19
For Coca-Cola, Smaller Sizes Mean Bigger Profits 19
Financial Accounting, Management Accounting, and Cost Accounting 20
Strategic Decisions and the Management Accountant 22
Value-Chain and Supply-Chain Analysis and Key Success Factors 22
Value-Chain Analysis 23
Supply-Chain Analysis 24
Key Success Factors 25
Concepts in Action: Cost Leadership at Costco: Rock-Bottom Prices and Sky-High Profits 26
Decision Making, Planning, and Control: The Five-Step Decision Making Process 27
Key Management Accounting Guidelines 30
Cost–Benefit Approach 30
Behavioral and Technical Considerations 31
Different Costs for Different Purposes 31
Organization Structure and the Management Accountant 31
Line and Staff Relationships 31
The Chief Financial Officer and the Controller 32
Management Accounting Beyond the Numbers 33
Professional Ethics 34
Institutional Support 34
Typical Ethical Challenges 35
Problem for Self-Study 37 | Decision Points 37 |
Terms to Learn 38 | Assignment Material 38 |
Questions 38 | Multiple-Choice Questions 39 |
Exercises 39 | Problems 41
2 An Introduction to Cost Terms and Purposes 46
High Fixed Costs Bankrupt Aéropostale 46
Costs and Cost Terminology 47
Direct Costs and Indirect Costs 47
Cost Allocation Challenges 48
Factors Affecting Direct/Indirect Cost Classifications 49
Cost-Behavior Patterns: Variable Costs and Fixed Costs 50
Concepts in Action: Lyft Helps Hospitals Reduce Their Fixed Transportation Costs 52
Cost Drivers 53
Relevant Range 53
Relationships Between Types of Costs 54
Total Costs and Unit Costs 55
Unit Costs 55
Use Unit Costs Cautiously 55
Business Sectors, Types of Inventory, Inventoriable
Costs, and Period Costs 56
Manufacturing-, Merchandising-, and
Service-Sector Companies 56
Types of Inventory 57
Commonly Used Classifications of Manufacturing Costs 57
Inventoriable Costs 57
Period Costs 58
Illustrating the Flow of Inventoriable Costs and Period Costs 59
Manufacturing-Sector Example 59
Recap of Inventoriable Costs and Period Costs 63
Prime Costs and Conversion Costs 64
Measuring Costs Requires Judgment 64
Labor Costs 64
Benefits of Defining Accounting Terms 65
Different Meanings of Product Costs 65
A Framework for Cost Accounting and Cost Management 67
Calculating the Cost of Products, Services, and Other Cost Objects 67
Obtaining Information for Planning and Control and Performance Evaluation 67
Analyzing the Relevant Information for Making Decisions 67
Problem for Self-Study 68 | Decision Points 70 |
Terms to Learn 71 | Assignment Material 71 |
Questions 71 | Multiple-Choice Questions 72 |
Exercises 73 | Problems 78
3 Cost–Volume–Profit Analysis 83
How Coachella Tunes Up the Sweet Sound of Profits 83
Essentials of CVP Analysis 84
Contribution Margin 85
Expressing CVP Relationships 87
Cost–Volume–Profit Assumptions 89
Breakeven Point and Target Operating Income 90
Breakeven Point 90
Target Operating Income 91
Income Taxes and Target Net Income 93
Using CVP Analysis for Decision Making 94
Decision to Advertise 94
Decision to Reduce the Selling Price 95
Determining Target Prices 95
Concepts in Action: Can Cost–Volume–Profit Analysis Help Whole Foods Escape the “Whole Paycheck” Trap? 96
Sensitivity Analysis and Margin of Safety 96
Cost Planning and CVP 98
Alternative Fixed-Cost/Variable-Cost Structures 98
Operating Leverage 99
Effects of Sales Mix on Income 101
CVP Analysis in Service and Not-for-Profit Organizations 103
Contribution Margin Versus Gross Margin 104
Problem for Self-Study 105 | Decision Points 106
APPENDIX: Decision Models and Uncertainty 107
Terms to Learn 110 | Assignment Material 110 |
Questions 110 | Multiple-Choice Questions 111 |
Exercises 111 | Problems 116
4 Job Costing 122
Job Costing and the New Golden State Warriors Arena 122
Building-Block Concepts of Costing Systems 123
Job-Costing and Process-Costing Systems 124
Job Costing: Evaluation and Implementation 125
Time Period Used to Compute Indirect-Cost Rates 126
Normal Costing 128
General Approach to Job Costing Using Normal Costing 128
Concepts in Action: Better Job Costing Through Big Data and Data Analytics 131
The Role of Technology 133
Actual Costing 133
A Normal Job-Costing System in Manufacturing 135
General Ledger 136
Explanations of Transactions 136
Subsidiary Ledgers 139
Materials Records by Type of Material 139
Labor Records by Employee 140
Manufacturing Department Overhead Records by Month 141
Work-in-Process Inventory Records by Jobs 141
Finished Goods Inventory Records by Jobs 142
Other Subsidiary Records 142
Nonmanufacturing Costs and Job Costing 142
Budgeted Indirect Costs and End-of-Accounting-Year Adjustments 143
Underallocated and Overallocated Indirect Costs 143
Adjusted Allocation-Rate Approach 144
Proration Approach 144
Write-Off to Cost of Goods Sold Approach 146
Choosing Among Approaches 147
Variations of Normal Costing: A Service-Sector Example 148
Problem for Self-Study 150 | Decision Points 152 |
Terms to Learn 153 | Assignment Material 153 |
Questions 153 | Multiple-Choice Questions 154 |
Exercises 155 | Problems 161
5 Activity-Based Costing and
Activity-Based Management 167
Activity-Based Costing and the True Cost of Data Breaches 167
Broad Averaging and Its Consequences 168
Undercosting and Overcosting 168
Product-Cost Cross-Subsidization 169
Simple Costing System at Plastim Corporation 169
Design, Manufacturing, and Distribution Processes 169
Simple Costing System Using a Single Indirect-Cost Pool 170
Applying the Five-Step Decision-Making Process at Plastim 172
Refining a Costing System 173
Developments That Have Increased the Demand for Refining Costing Systems 174
Guidelines for Refining a Costing System 174
Activity-Based Costing Systems 175
Plastim’s ABC System 175
Cost Hierarchies 177
Implementing Activity-Based Costing 179
Implementing ABC at Plastim 179
Comparing Alternative Costing Systems 184
Considerations in Implementing Activity-Based
Costing Systems 185
Benefits and Costs of Activity-Based Costing Systems 185
ABC in Service and Merchandising Companies 186
Behavioral Issues in Implementing Activity-Based Costing Systems 186
Concepts in Action: Mayo Clinic Uses Time-Driven
Activity-Based Costing to Reduce Costs and Improve Care 187
Activity-Based Management 188
Pricing and Product-Mix Decisions 188
Cost Reduction and Process Improvement Decisions 189
Design Decisions 190
Planning and Managing Activities 190
Problem for Self-Study 190 | Decision Points 193 |
Terms to Learn 194 | Assignment Material 194 |
Questions 194 | Multiple-Choice Questions 195 |
Exercises 195 | Problems 202
6 Master Budget and Responsibility Accounting 212
“Scrimping” at the Ritz: Master Budgets 212
Budgets and the Budgeting Cycle 213
Strategic Plans and Operating Plans 213
Budgeting Cycle and Master Budget 214
Advantages and Challenges of Implementing Budgets 215
Promoting Coordination and Communication 215
Providing a Framework for Judging Performance and Facilitating Learning 215
Motivating Managers and Other Employees 215
Challenges in Administering Budgets 216
Developing an Operating Budget 216
Time Coverage of Budgets 216
Steps in Preparing an Operating Budget 217
Financial Planning Models and Sensitivity Analysis 229
Concepts in Action: P.F. Chang’s and Internet-Based Budgeting 230
Budgeting and Responsibility Accounting 231
Organization Structure and Responsibility 231 Feedback 232
Responsibility and Controllability 232
Human Aspects of Budgeting 234
Budgetary Slack 234
Stretch Targets 235
Kaizen Budgeting 236
Budgeting for Reducing Carbon Emissions 236
Budgeting in Multinational Companies 237
Problem for Self-Study 237 | Decision Points 238
APPENDIX: The Cash Budget 239
Terms to Learn 245 | Assignment Material 245 |
Questions 245 | Multiple-Choice Questions 246 |
Exercises 247 | Problems 251
7 Flexible Budgets, Direct-Cost
Variances, and Management Control 263
Walmart’s Fleet Goes Green to Reduce Standard Costs 263
Static Budgets and Variances 264
The Use of Variances 264
Static Budgets and Static-Budget Variances 264
Flexible Budgets 266
Flexible-Budget Variances and Sales-Volume Variances 268
Sales-Volume Variances 268
Flexible-Budget Variances 269
Standard Costs for Variance Analysis 270
Obtaining Budgeted Input Prices and Budgeted Input Quantities 270
Price Variances and Efficiency Variances for Direct- Cost Inputs 272
Price Variances 272
Efficiency Variance 273
Journal Entries Using Standard Costs 275
Implementing Standard Costing 277
Management’s Use of Variances 277
Concepts in Action Can Chipotle Wrap Up Its Materials-Cost Increases? 278
Multiple Causes of Variances 278
When to Investigate Variances 278
Using Variances for Performance Measurement 279
Using Variances for Organization Learning 279
Using Variances for Continuous Improvement 279
Financial and Nonfinancial Performance Measures 280
Benchmarking and Variance Analysis 280
Problem for Self-Study 281 | Decision Points 283
APPENDIX: Mix and Yield Variances for Substitutable Inputs 283
Terms to Learn 287 | Assignment Material 287 |
Questions 287 | Multiple-Choice Questions 288 |
Exercises 289 | Problems 293
8 Flexible Budgets, Overhead Cost
Variances, and Management Control 300
Managing Overhead Costs at Wework 300
Planning of Variable and Fixed Overhead Costs 301
Planning Variable Overhead Costs 301
Planning Fixed Overhead Costs 301
Standard Costing at Webb Company 302
Developing Budgeted Variable Overhead Rates 302
Developing Budgeted Fixed Overhead Rates 303
Variable Overhead Cost Variances 304
Flexible-Budget Analysis 304
Variable Overhead Efficiency Variance 305
Variable Overhead Spending Variance 306
Journal Entries for Variable Overhead Costs and Variances 307
Fixed Overhead Cost Variances 308
Production-Volume Variance 309
Interpreting the Production-Volume Variance 310
Concepts in Action: Variance Analysis and Standard
Costing Help Sandoz Manage Its Overhead Costs 312
Journal Entries for Fixed Overhead Costs and Variances 312
Integrated Analysis of Overhead Cost Variances 314
4-Variance Analysis 314
Combined Variance Analysis 316
Production-Volume Variance and Sales-Volume Variance 316
Variance Analysis and Activity-Based Costing 318
Flexible Budget and Variance Analysis for Direct Materials-Handling Labor Costs 319
Flexible Budget and Variance Analysis for Fixed
Setup Overhead Costs 321
Overhead Variances in Nonmanufacturing Settings 323
Financial and Nonfinancial Performance Measures 323
Problem for Self-Study 324 | Decision Points 326 |
Terms to Learn 327 | Assignment Material 327 |
Questions 327 | Multiple-Choice Questions 327 |
Exercises 329 | Problems 333
9 Inventory Costing and Capacity Analysis 340
Under Armour Races to Defeat Its Inventory Backlog 340
Variable and Absorption Costing 341
Variable Costing 341
Absorption Costing 341
Comparing Variable and Absorption Costing 341
Variable Versus Absorption Costing: Operating
Income and Income Statements 343
Comparing Income Statements for One Year 343
Comparing Income Statements for Multiple Years 345
Variable Costing and the Effect of Sales and
Production on Operating Income 348
Absorption Costing and Performance Measurement 349
Undesirable Buildup of Inventories 350
Proposals for Revising Performance Evaluation 351
Comparing Inventory Costing Methods 352
Throughput Costing 352
A Comparison of Alternative Inventory-Costing Methods 353
Denominator-Level Capacity Concepts and Fixed-Cost Capacity Analysis 354
Absorption Costing and Alternative
Denominator-Level Capacity Concepts 355
Effect on Budgeted Fixed Manufacturing Cost Rate 356
Choosing a Capacity Level 357
Product Costing and Capacity Management 357
Pricing Decisions and the Downward Demand Spiral 358
Concepts in Action: Can ESPN Avoid the Cord-Cutting “Death Spiral”? 359
Performance Evaluation 360
Financial Reporting 360
Tax Requirements 363
Planning and Control of Capacity Costs 363
Difficulties in Forecasting Chosen Capacity Levels 363
Difficulties in Forecasting Fixed Manufacturing Costs 364
Nonmanufacturing Costs 364
Activity-Based Costing 365
Problem for Self-Study 365 | Decision Points 367
APPENDIX: Breakeven Points in Variable Costing and Absorption Costing 368
Terms to Learn 370 | Assignment Material 370 |
Questions 370 | Multiple-Choice Questions 371 |
Exercises 371 | Problems 376
10 Determining How Costs Behave 384
Southwest Uses “Big Data Analytics” to Reduce Fuel
Consumption and Costs 384
Basic Assumptions and Examples of Cost Functions 385
Basic Assumptions 385
Linear Cost Functions 385
Review of Cost Classification 387
Identifying Cost Drivers 388
The Cause-and-Effect Criterion 388
Cost Drivers and the Decision-Making Process 388
Cost Estimation Methods 389
Industrial Engineering Method 389
Conference Method 390
Account Analysis Method 390
Quantitative Analysis Method 391
Estimating a Cost Function Using Quantitative Analysis 392
High-Low Method 393
Regression Analysis Method 395
Evaluating and Choosing Cost Drivers 396
Cost Drivers and Activity-Based Costing 399
Nonlinear Cost Functions 400
Learning Curves 402
Cumulative Average-Time Learning Model 402
Incremental Unit-Time Learning Model 403
Incorporating Learning-Curve Effects Into Prices and Standards 404
Concepts in Action: Learning Curves and the Falling Price of Renewable Energy 406
Data Collection and Adjustment Issues 406
Problem for Self-Study 408 | Decision Points 410
APPENDIX: Regression Analysis 411
Terms to Learn 420 | Assignment Material 420 |
Questions 420 | Multiple-Choice Questions 421 |
Exercises 421 | Problems 428
11 Data Analytic Thinking and Prediction 437
Predictive Analytics Inside: How Intel Drives Value and Speeds Time to Market 437
Data Science Basics and Management Accounting 438
Outcome Prediction 438
Value Creation 438
Data Science Framework 439
Concepts in Action: Carnival Uses Big Data and
Machine Learning to Sail Toward Greater Profitability 439
Defining the Problem and the Relevant Data 440
Step 1: Gain a Business Understanding of the Problem 440
Step 2: Obtain and Explore Relevant Data 441
Step 3: Prepare the Data 442
Data Algorithms and Models 443
Step 4: Build a Model 443
Refining the Decision Tree 451
Overfitting 451
Pruning 451
Validating and Choosing Models 453
Cross-Validation Using Prediction Accuracy to Choose Between Full and Pruned Decision Trees 453
Using Maximum Likelihood Values to Choose
Between Fully Grown and Pruned Decision Trees 454
Testing the Pruned Decision-Tree Model on the Holdout Sample 456
Evaluating Data Science Models 459
Step 5: Evaluate the Model 459
Step 6: Visualize and Communicate Insights 465
Working With PeerLend Digital Data 466
Using Data Science Models 469
Step 7: Deploy the Model 469
Problem for Self-Study 470 | Decision Points 472 |
Terms to Learn 473 | Assignment Material 473 |
Questions 473 | Multiple-Choice Questions 474 |
Exercises 475 | Problems 479
12 Decision Making and Relevant Information 484
Relevant Costs and Broadway Shows 484
Information and the Decision Process 485
The Concept of Relevance 485
Relevant Costs and Relevant Revenues 485
Qualitative and Quantitative Relevant Information 487
One-Time-Only Special Orders 488
Potential Problems in Relevant-Cost Analysis 490
Short-Run Pricing Decisions 491
Insourcing-Versus-Outsourcing and Make-or-Buy Decisions 492
Outsourcing and Idle Facilities 492
Strategic and Qualitative Factors 494
International Outsourcing 494
The Total Alternatives Approach 495
Concepts in Action: Starbucks Brews Up Domestic Production 495
The Opportunity-Cost Approach 496
Carrying Costs of Inventory 499
Product-Mix Decisions With Capacity Constraints 500
Bottlenecks, Theory of Constraints, and Throughput-Margin Analysis 502
Customer Profitability and Relevant Costs 505
Relevant-Revenue and Relevant-Cost Analysis of Dropping a Customer 506
Relevant-Revenue and Relevant-Cost Analysis of Adding a Customer 508
Relevant-Revenue and Relevant-Cost Analysis of
Closing or Adding Branch Offices or Business Divisions 508
Irrelevance of Past Costs and Equipment-Replacement Decisions 509
Decisions and Performance Evaluation 511
Problem for Self-Study 513 | Decision Points 515
APPENDIX: Linear Programming 516
Terms to Learn 519 | Assignment Material 519 |
Questions 519 | Multiple-Choice Questions 520 |
Exercises 520 | Problems 526
13 Strategy, Balanced Scorecard, and Strategic Profitability Analysis 535
Barclays Turns to the Balanced Scorecard 535
What Is Strategy? 536
Strategy Implementation and the Balanced Scorecard 538
The Balanced Scorecard 538
Strategy Maps and the Balanced Scorecard 539
Implementing a Balanced Scorecard 545
Different Strategies Lead to Different Scorecards 546
Environmental and Social Performance and the Balanced Scorecard 546
Features of a Good Balanced Scorecard 549
Pitfalls in Implementing a Balanced Scorecard 550
Evaluating the Success of Strategy and Implementation 551
Strategic Analysis of Operating Income 552
Growth Component of Change in Operating Income 554
Price-Recovery Component of Change in Operating Income 555
Productivity Component of Change in Operating Income 556
Further Analysis of Growth, Price-Recovery, and Productivity Components 557
Concepts in Action: Operating Income Analysis and the
Decline of Casual Dining Restaurants 559
Downsizing and the Management of Capacity 560
Identifying Unused Capacity Costs 560
Managing Unused Capacity 560
Problem for Self-Study 561 | Decision Points 565
APPENDIX: Productivity Measurement 565
Terms to Learn 568 | Assignment Material 568 |
Questions 568 | Multiple-Choice Questions 569 |
Exercises 569 | Problems 572
14 Pricing Decisions and Cost Management 580
Extreme Pricing and Cost Management at IKEA 580
Major Factors That Affect Pricing Decisions 581
Customers 581
Competitors 581
Costs 581
Weighing Customers, Competitors, and Costs 582
Costing and Pricing for the Long Run 582
Calculating Product Costs for Long-Run Pricing Decisions 583
Alternative Long-Run Pricing Approaches 586
Market-Based Approach: Target Costing for Target Pricing 587
Understanding Customers’ Perceived Value 587
Competitor Analysis 587
Implementing Target Pricing and Target Costing 587
Concepts in Action: Zara Uses Target Pricing to
Become the World’s Largest Fashion Retailer 588
Value Engineering, Cost Incurrence, and Locked-In Costs 589
Value-Chain Analysis and Cross-Functional Teams 590
Achieving the Target Cost per Unit for Provalue 591
Cost-Plus Pricing 593
Cost-Plus Target Rate of Return on Investment 593
Alternative Cost-Plus Methods 594
Cost-Plus Pricing and Target Pricing 595
Life-Cycle Product Budgeting and Costing 596
Life-Cycle Budgeting and Pricing Decisions 596
Managing Environmental and Sustainability Costs 598
Customer Life-Cycle Costing 598
Noncost Factors in Pricing Decisions 598
Predatory Pricing 599
Collusive Pricing 599
Price Discrimination 599
International Pricing 600
Peak-Load Pricing 600
Problem for Self-Study 600 | Decision Points 602 |
Terms to Learn 603 | Assignment Material 604 |
Questions 604 | Multiple-Choice Questions 604 |
Exercises 604 | Problems 609
15 Cost Allocation, Customer- Profitability Analysis, and Sales- Variance Analysis 614
Starbucks Rewards Starts Rewarding Big Spenders 614
Customer-Profitability Analysis 615
Customer-Revenue Analysis 615
Customer-Cost Analysis 616
Customer-Level Costs 617
Customer-Profitability Profiles 620
Concepts in Action: Amazon Prime and Customer Profitability 621
Presenting Profitability Analysis 621
Using the Five-Step Decision-Making Process to Manage Customer Profitability 623
Cost-Hierarchy-Based Operating Income Statement 623
Criteria to Guide Cost Allocations 626
Fully Allocated Customer Profitability 627
Implementing Corporate and Division Cost Allocations 628
Issues in Allocating Corporate Costs to Divisions and Customers 632
Using Fully Allocated Costs for Decision Making 633
Sales Variances 633
Static-Budget Variance 634
Flexible-Budget Variance and Sales-Volume Variance 635
Sales-Mix Variance 636
Sales-Quantity Variance 637
Market-Share and Market-Size Variances 638
Market-Share Variance 638
Market-Size Variance 638
Problem for Self-Study 640 | Decision Points 642 |
Terms to Learn 643 | Assignment Material 643 |
Questions 643 | Multiple-Choice Questions 644 |
Exercises 644 | Problems 649
16 Allocation of Support-Department Costs, Common Costs, and Revenues 657
Cost Allocation and the United States Postal Service 657
Allocating Support Department Costs Using the Single-Rate and Dual-Rate Methods 658
Single-Rate and Dual-Rate Methods 658
Allocation Based on the Demand for (or Usage of) Materials-Handling Services 659
Allocation Based on the Supply of Capacity 660
Advantages and Disadvantages of Single-Rate Method 661
Advantages and Disadvantages of Dual-Rate Method 662
Budgeted Versus Actual Costs and the Choice of Allocation Base 663
Budgeted Versus Actual Rates 663
Budgeted Versus Actual Usage 664
Fixed-Cost Allocation Based on Budgeted Rates and Budgeted Usage 664
Fixed-Cost Allocation Based on Budgeted Rates and Actual Usage 664
Allocating Budgeted Fixed Costs Based on Actual Usage 665
Allocating Costs of Multiple Support Departments 666
Direct Method 668
Step-Down Method 669
Reciprocal Method 671
Overview of Methods 674
Calculating the Cost of Job WPP 298 675
Allocating Common Costs 676
Stand-Alone Cost-Allocation Method 677
Incremental Cost-Allocation Method 677
Cost Allocations and Contract Disputes 678
Concepts in Action: Contract Disputes Over Reimbursable Costs With the U.S. Government 679
Bundled Products and Revenue Allocation Methods 680
Bundling and Revenue Allocation 680
Stand-Alone Revenue-Allocation Method 680
Incremental Revenue-Allocation Method 681
Problem for Self-Study 684 | Decision Points 686 |
Terms to Learn 687 | Assignment Material 687 |
Questions 687 | Exercises 687 | Problems 691
17 Cost Allocation: Joint Products and Byproducts 697
Joint-Cost Allocation and the Wounded Warrior Project 697
Joint-Cost Basics 698
Concepts in Action: Big Data Joint Products and Byproducts Create New Business Opportunities 699
Allocating Joint Costs 700
Approaches to Allocating Joint Costs 700
Sales Value at Splitoff Method 702
Physical-Measure Method 702
Net Realizable Value Method 704
Constant Gross-Margin Percentage NRV Method 706
Choosing an Allocation Method 707
Not Allocating Joint Costs 708
Why Joint Costs Are Irrelevant for Decision Making 708
Sell-or-Process-Further Decisions 708
Decision Making and Performance Evaluation 709
Pricing Decisions 709
Accounting for Byproducts 710
Production Method: Byproducts Recognized at Time Production Is Completed 710
Sales Method: Byproducts Recognized at Time of Sale 712
Problem for Self-Study 713 | Decision Points 715 |
Terms to Learn 716 | Assignment Material 716 |
Questions 716 | Multiple-Choice Questions 717 |
Exercises 718 | Problems 723
18 Process Costing 728
Cryptocurrency and FIFO Versus LIFO Accounting 728
Illustrating Process Costing 729
Case 1: Process Costing With Zero Beginning or Ending Work-in-Process Inventory 730
Case 2: Process Costing With Zero Beginning and Some Ending Work-in-Process Inventory 731
Summarizing the Physical Units and Equivalent Units (Steps 1 and 2) 732
Calculating Product Costs (Steps 3, 4, and 5) 733 Journal Entries 734
Case 3: Process Costing With Some Beginning and Some Ending Work-in-Process Inventory 736
Weighted-Average Method 736
First-In, First-Out Method 739
Comparing the Weighted-Average and FIFO Methods 743
Transferred-In Costs in Process Costing 744
Transferred-In Costs and the Weighted-Average Method 745
Transferred-In Costs and the FIFO Method 747
Points to Remember About Transferred-In Costs 748
Hybrid Costing Systems 748
Overview of Operation-Costing Systems 749
Concepts in Action: Hybrid Costing for Adidas Customized 3D Printed Shoes 749
Illustrating an Operation-Costing System 750 Journal Entries 751
Problem for Self-Study 752 | Decision Points 754
APPENDIX: Standard-Costing Method of Process Costing 755
Terms to Learn 759 | Assignment Material 759 |
Questions 759 | Multiple-Choice Questions 759 |
Exercises 761 | Problems 764
19 Spoilage, Rework, and Scrap 769
Rework Hampers Tesla Model 3 Production 769
Defining Spoilage, Rework, and Scrap 770
Two Types of Spoilage 770
Normal Spoilage 770
Abnormal Spoilage 771
Spoilage in Process Costing Using Weighted-Average and FIFO 771
Count All Spoilage 771
Five-Step Procedure for Process Costing With Spoilage 772
Weighted-Average Method and Spoilage 773
FIFO Method and Spoilage 775
Journal Entries 777
Inspection Points and Allocating Costs of Normal Spoilage 777
Job Costing and Spoilage 780
Job Costing and Rework 781
Accounting for Scrap 782
Recognizing Scrap at the Time of Its Sale 783
Recognizing Scrap at the Time of Its Production 784
Concepts in Action: Google’s Zero Waste to Landfill Initiative 785
Problem for Self-Study 785 | Decision Points 786
APPENDIX: Standard-Costing Method and Spoilage 787
Terms to Learn 788 | Assignment Material 789 |
Questions 789 | Multiple-Choice Questions 789 |
Exercises 790 | Problems 793
20 Balanced Scorecard: Quality and Time 797
“Dieselgate” Derails Volkswagen’s Grand Ambitions 797
Quality as a Competitive Tool 798
The Financial Perspective: The Costs of Quality 799
Using Nonfinancial Measures to Evaluate and Improve Quality 801
The Customer Perspective: Nonfinancial Measures of Customer Satisfaction 802
The Internal-Business-Process Perspective: Analyzing Quality Problems and Improving Quality 802
The Learning-and-Growth Perspective: Quality Improvements 805
Weighing the Costs and Benefits of Improving Quality 805
Evaluating a Company’s Quality Performance 807
Time as a Competitive Tool 808
Customer-Response Time and On-Time Performance 808
Time Drivers and Bottlenecks 809
Concepts in Action: Facebook Works to Overcome Mobile Data Bottlenecks 810
Relevant Revenues and Costs of Delays 812
Balanced Scorecard and Time-Based Measures 814
Problem for Self-Study 815 | Decision Points 816 |
Terms to Learn 817 | Assignment Material 817 |
Questions 817 | Multiple-Choice Questions 817 |
Exercises 818 | Problems 822
21 Inventory Management, Just-in-Time, and Simplified Costing Methods 827
Target Leverages the Internet of Things to Respond to the Changing Retail Landscape 827
Inventory Management in Retail Organizations 828
Costs Associated With Goods for Sale 828
The Economic-Order-Quantity Decision Model 829
When to Order, Assuming Certainty 831
Safety Stock 832
Estimating Inventory-Related Relevant Costs and Their Effects 834
Cost of a Prediction Error 834
Conflicts Between the EOQ Decision Model and Managers’ Performance Evaluation 835
Just-in-Time Purchasing 836
JIT Purchasing and EOQ Model Parameters 836
Relevant Costs of JIT Purchasing 836
Supplier Evaluation and Relevant Costs of Quality and Timely Deliveries 838
JIT Purchasing, Planning and Control, and Supply-Chain Analysis 840
Inventory Management, MRP, and JIT Production 841
Materials Requirements Planning 841
Just-in-Time (JIT) Production 841
Features of JIT Production Systems 841
Concepts in Action: Just-in-Time Live Concert Recordings 842
Costs and Benefits of JIT Production 843
JIT in Service Industries 843
Enterprise Resource Planning (ERP) Systems 844
Performance Measures and Control in JIT Production 844
Effect of JIT Systems on Product Costing 844
Backflush Costing 845
Simplified Normal or Standard-Costing Systems 845
Lean Accounting 853
Problems for Self-Study 856 | Decision Points 857 |
Terms to Learn 858 | Assignment Material 858 |
Questions 858 | Multiple-Choice Questions 859 |
Exercises 860 | Problems 862
22 Capital Budgeting and Cost Analysis 867
NPV and California’s New Residential Solar Panel Rules 867
Stages of Capital Budgeting 868
Concepts in Action: AkzoNobel Integrates Sustainability Into Capital Budgeting 870
Discounted Cash Flow 871
Net Present Value Method 872
Internal Rate-of-Return Method 873
Comparing the Net Present Value and Internal Rate-of-Return Methods 875
Sensitivity Analysis 875
Payback Method 876
Uniform Cash Flows 876
Nonuniform Cash Flows 877
Accrual Accounting Rate-of-Return Method 879
Relevant Cash Flows in Discounted Cash Flow Analysis 880
Relevant After-Tax Flows 881
Categories of Cash Flows 882
Project Management and Performance Evaluation 886
Post-Investment Audits 886
Performance Evaluation 887
Strategic Considerations in Capital Budgeting 887
Investment in Research and Development 888
Customer Value and Capital Budgeting 888
Problem for Self-Study 889 | Decision Points 891
APPENDIX: Capital Budgeting and Inflation 892
Terms to Learn 894 | Assignment Material 895 |
Questions 895 | Multiple-Choice Questions 895 |
Exercises 896 | Problems 900 | Answers to Exercises in Compound Interest (Exercise 22-21) 904
23 Management Control Systems, Transfer Pricing, and Multinational Considerations 905
Apple Forced to Pay Ireland €14.3 Billion in Tax Settlement 905
Management Control Systems 906
Formal and Informal Systems 906
Effective Management Control 907
Decentralization 907
Benefits of Decentralization 908
Costs of Decentralization 908
Comparing Benefits and Costs 909
Decentralization in Multinational Companies 910
Choices About Responsibility Centers 910
Transfer Pricing 911
Criteria for Evaluating Transfer Prices 911
Calculating Transfer Prices 912
An Illustration of Transfer Pricing 912
Market-Based Transfer Prices 915
Perfect Competition 915
Imperfect Competition 915
Cost-Based Transfer Prices 916
Full-Cost Bases 916
Variable-Cost Bases 918
Hybrid Transfer Prices 918
Prorating the Difference Between Maximum and Minimum Transfer Prices 919
Negotiated Pricing 919
Dual Pricing 920
A General Guideline for Transfer-Pricing Situations 921
How Multinationals Use Transfer Pricing to
Minimize Their Income Taxes 923
Concepts in Action: IRS Accuses Medtronic of Unfair Tax Deal 924
Transfer Prices Designed for Multiple Objectives 926
Problem for Self-Study 926 | Decision Points 928 |
Terms to Learn 930 | Assignment Material 930 |
Questions 930 | Exercises 930 | Problems 934
24 Performance Measurement, Compensation, and Multinational Considerations 941
CEO Compensation at General Electric 941
Financial and Nonfinancial Performance Measures 942
Accounting-Based Measures for Business Units 943
Return on Investment 943
Residual Income 945
Economic Value Added 947
Return on Sales 948
Comparing Performance Measures 949
Choosing the Details of the Performance Measures 949
Alternative Time Horizons 949
Alternative Definitions of Investment 950
Alternative Asset Measurements 950
Target Levels of Performance and Feedback 953
Choosing Target Levels of Performance 954
Choosing the Timing of Feedback 954
Performance Measurement in Multinational Companies 954
Calculating a Foreign Division’s ROI in the Foreign Currency 955
Calculating a Foreign Division’s ROI in U.S. Dollars 956
Distinguishing the Performance of Managers From the Performance of Their Subunits 957
The Basic Tradeoff: Creating Incentives Versus Imposing Risk 957
Intensity of Incentives and Financial and Nonfinancial Measurements 958
Concepts in Action: Performance Measurement at Unilever 959
Benchmarks and Relative Performance Evaluation 959
Performance Measures at the Individual Activity Level 959
Executive Performance Measures and Compensation 960
Strategy and Levers of Control 961
Boundary Systems 962
Belief Systems 963
Interactive Control Systems 963
Problem for Self-Study 963 | Decision Points 965 |
Terms to Learn 966 | Assignment Material 966 |
Questions 966 | Multiple-Choice Questions 966 |
Exercises 967 | Problems 972
Appendix A: Notes on Compound Interest and Interest
Tables 978
Glossary 986
Index 997