Fundamentals of Cost Accounting, 3rd Edition

Cover......Page 1
Title Page......Page 2
ISBN-13: 9780073527116......Page 3
Contents......Page 21
1 Cost Accounting: Information for Decision Making......Page 33
Why Start with Value Creation?......Page 34
Value Chain......Page 35
Using Cost Information to Increase Value......Page 36
Cost Accounting......Page 37
Customers of Cost Accounting......Page 38
Decision Making Requires Information......Page 39
Owners Use Cost Information to Evaluate Managers......Page 40
Costs for Decision Making......Page 41
Costs for Control and Evaluation......Page 42
Different Data for Different Decisions......Page 44
Cost Accounting in Design......Page 45
Cost Accounting in Marketing......Page 46
Creating Value in the Organization......Page 47
Key Financial Players in the Organization......Page 48
What Makes Ethics So Important?......Page 49
Sarbanes-Oxley Act of 2002 and Ethics......Page 50
In Action: Options Backdating at Apple......Page 51
The Debrief......Page 52
Appendix: Institute of Management Accountants Code of Ethics......Page 53
Review Questions......Page 55
Exercises......Page 56
Problems......Page 58
Integrative Cases......Page 64
Solutions to Self-Study Questions......Page 65
2 Cost Concepts and Behavior......Page 67
In Action: Higher Transportation Costs Lead Company to Move Manufacturing Back to the United States......Page 68
Cost versus Expenses......Page 69
Presentation of Costs in Financial Statements......Page 70
Service Organizations......Page 71
Retail and Wholesale Companies......Page 72
Direct and Indirect Manufacturing (Product) Costs......Page 73
Nonmanufacturing (Period) Costs......Page 74
In Action: Indirect Costs in Banking......Page 75
Cost Allocation......Page 76
Details of Manufacturing Cost Flows......Page 77
Income Statements......Page 78
Work in Process......Page 79
Cost of Goods Manufactured and Sold Statement......Page 80
An Interim Debrief......Page 81
Fixed versus Variable Costs......Page 82
Unit Fixed Costs Can Be Misleading for Decision Making......Page 84
How to Make Cost Information More Useful for Managers......Page 88
Developing Financial Statements for Decision Making......Page 89
Summary......Page 91
Review Questions......Page 92
Exercises......Page 93
Problems......Page 101
Solutions to Self-Study Questions......Page 109
3 Fundamentals of Cost-Volume-Profit Analysis......Page 111
In Action: Cost-Volume-Profit Analysis and Airline Pricing......Page 112
Profit Equation......Page 113
CVP Example......Page 114
Graphic Presentation......Page 117
Profit-Volume Model......Page 118
Use of CVP to Analyze the Effect of Different Cost Structures......Page 119
Margin of Safety......Page 120
CVP Analysis with Spreadsheets......Page 121
Multiproduct CVP Analysis......Page 122
Assumptions and Limitations of CVP Analysis......Page 124
Summary......Page 125
Review Questions......Page 126
Exercises......Page 127
Problems......Page 132
Integrative Case......Page 138
Solutions to Self-Study Questions......Page 140
4 Fundamentals of Cost Analysis for Decision Making......Page 141
In Action: Cost Analysis and the Choice of Office Space for a Small Business......Page 142
Differential Costs versus Total Costs......Page 143
Short-Run versus Long-Run Pricing Decisions......Page 144
Short-Run Pricing Decisions: Special Orders......Page 145
Cost Analysis for Pricing......Page 147
In Action: Take-Back Laws in Europe......Page 148
Dumping......Page 149
Peak-Load Pricing......Page 150
Make-or-Buy Decisions Involving Differential Fixed Costs......Page 151
Opportunity Costs of Making......Page 155
Decision to Add or Drop a Product Line or Close a Business Unit......Page 156
Product Choice Decisions......Page 158
The Theory of Constraints......Page 161
The Debrief......Page 163
Review Questions......Page 164
Critical Analysis and Discussion Questions......Page 165
Exercises......Page 166
Problems......Page 171
Integrative Cases......Page 181
Solutions to Self-Study Questions......Page 183
5 Cost Estimation......Page 185
Basic Cost Behavior Patterns......Page 186
Engineering Method......Page 187
Account Analysis Method......Page 188
Statistical Cost Estimation......Page 190
Multiple Regression......Page 196
Practical Implementation Problems......Page 197
In Action: Learning Curves......Page 199
Applications......Page 200
Data Problems......Page 202
Effect of Different Methods on Cost Estimates......Page 203
The Debrief......Page 204
Summary......Page 205
Appendix A: Regression Analysis Using Microsoft Excel®......Page 206
Appendix B: Learning Curves......Page 211
Review Questions......Page 212
Critical Analysis and Discussion Questions......Page 213
Exercises......Page 214
Problems......Page 219
Integrative Case......Page 227
Solutions to Self-Study Questions......Page 228
6 Fundamentals of Product and Service Costing......Page 229
Reasons to Calculate Product or Service Costs......Page 230
Cost Allocation and Product Costing......Page 231
Fundamental Themes Underlying the Design of Cost Systems for Managerial Purposes......Page 232
Costing with No Work-in-Process Inventories......Page 233
Costing with Ending Work-in-Process Inventories......Page 234
Costing in a Multiple Product, Discrete Process Industry......Page 235
Predetermined Overhead Rates......Page 237
Choice of the Allocation Base for Predetermined Overhead Rate......Page 238
Choosing among Possible Allocation Bases......Page 239
Multiple Allocation Bases and Two-Stage Systems......Page 240
Choice of Allocation Bases......Page 241
Different Companies, Different Production and Costing Systems......Page 242
Operations Costing: An Illustration......Page 243
Summary......Page 245
Critical Analysis and Discussion Questions......Page 246
Exercises......Page 247
Problems......Page 251
Integrative Case......Page 253
Solutions to Self-Study Questions......Page 254
7 Job Costing......Page 257
Defining a Job......Page 258
Records of Costs at InShape......Page 259
How Manufacturing Overhead Costs Are Recorded at InShape......Page 263
Over- and Underapplied Overhead......Page 265
An Alternative Method of Recording and Applying Manufacturing Overhead......Page 267
Using Job Costing in Service Organizations......Page 270
Ethical Issues and Job Costing......Page 272
Misrepresenting the Cost of Jobs......Page 273
The Debrief......Page 275
Summary......Page 276
Critical Analysis and Discussion Questions......Page 277
Exercises......Page 278
Problems......Page 283
Integrative Case......Page 296
Solutions to Self-Study Questions......Page 297
8 Process Costing......Page 299
Determining Equivalent Units......Page 301
Step 2: Compute the Equivalent Units of Production......Page 302
In Action: Overstating Equivalent Units to Commit Fraud......Page 303
Time Out! We Need to Make an Assumption about Costs and the Work-in-Process Inventory......Page 304
Step 4: Compute the Costs per Equivalent Unit: Weighted Average......Page 305
Reporting This Information to Managers: The Production Cost Report......Page 306
Assigning Costs Using First-In, First-Out (FIFO) Process Costing......Page 308
Step 2: Compute the Equivalent Units of Production......Page 309
Step 4: Compute the Costs per Equivalent Unit: FIFO......Page 311
How This Looks in T-Accounts......Page 312
Using Costs Transferred in from Prior Departments......Page 313
Who Is Responsible for Costs Transferred in from Prior Departments?......Page 315
Operation Costing......Page 317
Operation Costing Illustration......Page 318
The Debrief......Page 321
Key Terms......Page 322
Critical Analysis and Discussion Questions......Page 323
Exercises......Page 324
Problems......Page 329
Integrative Cases......Page 336
Solutions to Self-Study Questions......Page 338
9 Activity-Based Costing......Page 341
Dropping a Product......Page 342
The Death Spiral......Page 344
Two-Stage Cost Allocation......Page 345
Two-Stage Cost Allocation and the Choice of Cost Drivers......Page 346
Plantwide versus Department-Specific Rates......Page 348
Choice of Cost Allocation Methods: A Cost-Benefit Decision......Page 349
Activity-Based Costing......Page 350
Developing Activity-Based Costs......Page 351
Cost Hierarchies......Page 353
Step 1: Identify the Activities......Page 354
Step 4: Assign Costs Using Activity-Based Costing......Page 355
Unit Costs Compared......Page 356
Cost Flows through Accounts......Page 357
Choice of Activity Bases in Modern Production Settings......Page 359
Activity-Based Costing in Administration......Page 360
Who Uses ABC?......Page 361
Summary......Page 362
Critical Analysis and Discussion Questions......Page 363
Exercises......Page 364
Problems......Page 371
Integrative Cases......Page 378
Solutions to Self-Study Questions......Page 383
10 Fundamentals of Cost Management......Page 385
Using Activity-Based Cost Management to Add Value......Page 386
Using Activity-Based Cost Information to Improve Processes......Page 388
Managing the Cost of Customers and Suppliers......Page 389
In Action: Customer Profitability—Revenue and Cost Effects......Page 390
Using Activity-Based Costing to Determine the Cost of Customers and Suppliers......Page 391
Using Cost of Customer Information to Manage Costs......Page 393
Determining the Cost of Suppliers......Page 394
Capturing the Cost Savings......Page 395
Using and Supplying Resources......Page 396
Computing the Cost of Unused Capacity......Page 398
Assigning the Cost of Unused Capacity......Page 399
Seasonal Demand and the Cost of Unused Capacity......Page 400
How Can We Limit Conflict between Traditional Managerial Accounting Systems and Total Quality Management?......Page 402
What Is the Cost of Quality?......Page 403
Trade-Offs, Quality Control, and Failure Costs......Page 405
In Action: Cost Elements Included in Reported Quality Costs......Page 406
Summary......Page 407
Critical Analysis and Discussion Questions......Page 408
Exercises......Page 409
Problems......Page 415
Integrative Cases......Page 420
Solutions to Self-Study Questions......Page 421
11 Service Department and Joint Cost Allocation......Page 423
Service Department Cost Allocation......Page 424
In Action: Outsourcing Information Services—Managed Service Providers......Page 425
Allocation Bases......Page 426
Direct Method......Page 427
Step Method......Page 430
Reciprocal Method......Page 433
Comparison of Direct, Step, and Reciprocal Methods......Page 435
The Reciprocal Method and Decision Making......Page 437
Reasons for Allocating Joint Costs......Page 439
Net Realizable Value Method......Page 440
Evaluation of Joint Cost Methods......Page 443
Deciding Whether to Sell Goods Now or Process Them Further......Page 444
Deciding What to Do with By-Products......Page 445
The Debrief......Page 446
Summary......Page 447
Appendix: Calculation of the Reciprocal Method Using Computer Spreadsheets......Page 448
Critical Analysis and Discussion Questions......Page 450
Exercises......Page 451
Problems......Page 456
Integrative Case......Page 464
Solutions to Self-Study Questions......Page 466
12 Fundamentals of Management Control Systems......Page 469
Why a Management Control System?......Page 470
Decentralized Organizations......Page 471
Advantages of Decentralization......Page 472
Framework for Evaluating Management Control Systems......Page 473
Elements of a Management Control System......Page 474
Delegated Decision Authority: Responsibility Accounting......Page 475
Discretionary Cost Centers......Page 476
Measuring Performance......Page 477
In Action: Teacher Pay and Student Performance......Page 478
Profit Centers......Page 479
Evaluating Managers’ Performance versus Economic Performance of the Responsibility Center......Page 480
Compensation Systems......Page 481
In Action: Compensation and Performance—AIG and Goldman Sachs......Page 482
Illustration: Corporate Cost Allocation......Page 483
Effective Corporate Cost Allocation System......Page 484
Do Performance Evaluation Systems Create Incentives to Commit Fraud?......Page 485
Internal Controls to Protect Assets and Provide Quality Information......Page 486
Internal Auditing......Page 487
Summary......Page 488
Critical Analysis and Discussion Questions......Page 489
Exercises......Page 490
Problems......Page 493
Integrative Cases......Page 497
Solutions to Self-Study Questions......Page 501
13 Planning and Budgeting......Page 503
How Strategic Planning Increases Competitiveness......Page 504
Organization Goals......Page 505
Master Budget (Tactical Short-Range Profit Plan): Tying the Strategic Plan to the Operating Plan......Page 506
Value of Employee Participation......Page 507
Sales Forecasting......Page 508
Forecasting Production......Page 510
Forecasting Production Costs......Page 511
Completing the Budgeted Cost of Goods Sold......Page 513
Marketing and Administrative Budget......Page 515
Pulling It Together into the Income Statement......Page 517
Using Cash Flow Budgets to Estimate Cash Needs......Page 518
Multiperiod Cash Flows......Page 519
Big Picture: How It All Fits Together......Page 521
Budgeting in Retail and Wholesale Organizations......Page 523
In Action: Budget Is the Law in Government......Page 524
Budgeting under Uncertainty......Page 525
The Debrief......Page 526
Key Terms......Page 527
Exercises......Page 528
Problems......Page 534
Integrative Case......Page 540
Solutions to Self-Study Questions......Page 541
14 Business Unit Performance Measurement......Page 545
In Action: What Determines Whether Firms Use Divisional Measures for Measuring Divisional Performance?......Page 546
Computing Divisional Income......Page 547
Some Simple Financial Ratios......Page 548
Return on Investment......Page 549
Limitations of ROI......Page 550
Residual Income Measures......Page 553
Limitations of Residual Income......Page 554
Economic Value Added (EVA)......Page 555
In Action: EVA at Best Buy......Page 556
In Action: Does Using Residual Income as a Performance Measure Affect Managers’ Decisions?......Page 557
Historical Cost versus Current Cost......Page 558
Beginning, Ending, or Average Balance......Page 559
The Debrief......Page 561
Critical Analysis and Discussion Questions......Page 562
Exercises......Page 563
Problems......Page 566
Integrative Cases......Page 571
Solutions to Self-Study Questions......Page 576
15 Transfer Pricing......Page 579
What Is Transfer Pricing and Why Is It Important?......Page 580
In Action: Transfer Pricing at Weyerhaeuser......Page 581
The Setting......Page 582
Case 1: A Perfect Intermediate Market for Wood......Page 583
Case 2: No Intermediate Market......Page 584
Optimal Transfer Price: A General Principle......Page 587
Applying the General Principle......Page 588
Top-Management Intervention in Transfer Pricing......Page 589
Establishing a Market Price Policy......Page 590
Alternative Cost Measures......Page 591
Remedying Motivational Problems of Transfer Pricing Policies......Page 592
Imperfect Markets......Page 593
Multinational Transfer Pricing......Page 594
Segment Reporting......Page 596
Summary......Page 597
Appendix: Case 1a: Perfect Intermediate Markets—Quality Differences......Page 598
Exercises......Page 600
Problems......Page 603
Integrative Cases......Page 609
Solutions to Self-Study Questions......Page 611
16 Fundamentals of Variance Analysis......Page 613
Using Budgets for Performance Evaluation......Page 614
In Action: When a Favorable Variance Might Not Mean “Good” News......Page 615
Why Are Actual and Budgeted Results Different?......Page 616
Flexible Budgeting......Page 617
Sales Activity Variance......Page 618
Profit Variance Analysis as a Key Tool for Managers......Page 619
Performance Measurement and Control in a Cost Center......Page 621
Variable Production Costs......Page 622
General Model......Page 623
Direct Materials......Page 624
Direct Labor......Page 627
Variable Production Overhead......Page 628
Variable Cost Variances Summarized in Graphic Form......Page 629
Fixed Cost Variances......Page 630
Absorption Costing: The Production Volume Variance......Page 631
Summary of Overhead Variances......Page 633
The Debrief......Page 634
Summary......Page 635
Appendix: Recording Costs in a Standard Cost System......Page 636
Critical Analysis and Discussion Questions......Page 639
Exercises......Page 640
Problems......Page 646
Integrative Case......Page 652
Solutions to Self-Study Questions......Page 655
17 Additional Topics in Variance Analysis......Page 657
Profit Variance Analysis When Units Produced Do Not Equal Units Sold......Page 658
Reconciling Variable Costing Budgets and Full Absorption Income Statements......Page 660
Materials Purchases Do Not Equal Materials Used......Page 661
Market Share Variance and Industry Volume Variance......Page 663
Evaluating Sales Mix and Sales Quantity......Page 665
Mix and Yield Variances in Manufacturing......Page 667
Efficiency Measures......Page 670
Mix and Yield Variances in Service Organizations......Page 671
When to Investigate Variances......Page 672
The Debrief......Page 673
Review Questions......Page 674
Exercises......Page 675
Problems......Page 679
Integrative Case......Page 684
Solutions to Self-Study Questions......Page 686
18 Nonfinancial and Multiple Measures of Performance......Page 689
Beyond the Accounting Numbers......Page 690
Responsibilities According to Level of Organization......Page 691
Business Model......Page 692
Multiple Measures or a Single Measure of Performance?......Page 693
Balanced Scorecard......Page 694
Continuous Improvement and Benchmarking......Page 697
In Action: Supplier Scorecards at Sun Microsystems......Page 700
In Action: Sources and Uses of Benchmarking Data......Page 701
Customer Satisfaction Performance Measures......Page 702
Functional Performance Measures......Page 703
Productivity......Page 704
Objective and Subjective Performance Measures......Page 708
Employee Involvement......Page 709
Lack of Correlation between Nonfinancial Measures and Financial Results......Page 710
Summary......Page 711
Exercises......Page 712
Problems......Page 715
Integrative Case......Page 719
Solutions to Self-Study Questions......Page 720
APPENDIX: Capital Investment Decisions: An Overview......Page 722
GLOSSARY......Page 738
PHOTO CREDITS......Page 744
INDEX......Page 746