Pearson Education Limited Pearson Education Limited 2012 British Library Cataloguing-in-Publication Data

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2 Editorial Director: Sally Yagan Editor in Chief: Donna Battista AVP/Executive Editor: Stephanie Wall International Senior Acquisitions Editor: Laura Dent International Marketing Manager: Dean Erasmus Editorial Project Manager: Christina Rumbaugh Editorial Assistant: Brian Reilly Director of Marketing: Patrice Jones Senior Managing Editor: Cynthia Zonneveld Senior Project Manager: Lynne Breitfeller Operations Specialist: Natacha Moore Senior Art Director: Anthony Gemmellaro Text Designer: Rachael Cronin Cover Designer: Jodi Notowitz Manager, Rights and Permissions: Hessa Albader Permission Coordinator: Tracy Metevier Manager, Visual Research & Permissions: Karen Sanatar Photo Researcher: Heather Kemp Cover Photo: Valerii Zan/Fotolia.com Media Project Manager: Allison Longley Production Media Project Manager: John Cassar Full-Service Project Management: GEX Publishing Services Printer/Binder: Courier Pearson Education Limited Edinburgh Gate Harlow Essex CM20 2JE England and Associated Companies throughout the world Visit us on the World Wide Web at: Pearson Education Limited 2012 The rights of Charles T. Horngren, Srikant M. Datar and Madhav V. Rajan to be identified as authors of this work have been asserted by them in accordance with the Copyright, Designs and Patents Act Authorised adaptation from the United States edition, entitled Cost Accounting: A Managerial Emphasis, 14 th edition, ISBN by Charles T. Horngren, Srikant M. Datar and Madhav V. Rajan, published by Pearson Education, publishing as Prentice Hall All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without either the prior written permission of the publisher or a licence permitting restricted copying in the United Kingdom issued by the Copyright Licensing Agency Ltd, Saffron House, 6 10 Kirby Street, London EC1N 8TS. All trademarks used herein are the property of their respective owners. The use of any trademark in this text does not vest in the author or publisher any trademark ownership rights in such trademarks, nor does the use of such trademarks imply any affiliation with or endorsement of this book by such owners. Microsoft and Windows are registered trademarks of the Microsoft Corporation in the U.S.A. and other countries. Screen shots and icons reprinted with permission from the Microsoft Corporation. This book is not sponsored or endorsed by or affiliated with the Microsoft Corporation. Credits and acknowledgments borrowed from other sources and reproduced, with permission, in this textbook appear on appropriate page within text (or on page 892). ISBN-13: ISBN-10: British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library Typeset in 10/12 Sabon by GEX Publishing Services Printed and bound by Lehigh-Phoenix Color/Hagerstown in the United States of America The publisher's policy is to use paper manufactured from sustainable forests.

3 Cost Accounting: Global Edition - PDF - PDF - PDF Cover Contents 1 The Manager and Management Accounting itunes Variable Pricing: Downloads Are Down, but Profits Are Up Financial Accounting, Management Accounting, and Cost Accounting Strategic Decisions and the Management Accountant Value Chain and Supply Chain Analysis and Key Success Factors Value-Chain Analysis Supply-Chain Analysis Key Success Factors Decision Making, Planning, and Control: The Five-Step Decision-Making Process Key Management Accounting Guidelines Cost-Benefit Approach Behavioral and Technical Considerations Different Costs for Different Purposes Organization Structure and the Management Accountant Line and Staff Relationships The Chief Financial Officer and the Controller Professional Ethics Institutional Support Concepts in Action: Management Accounting Beyond the Numbers Typical Ethical Challenges 2 An Introduction to Cost Terms and Purposes GM Collapses Under the Weight of its Fixed Costs Costs and Cost Terminology Direct Costs and Indirect Costs Challenges in Cost Allocation Factors Affecting Direct/Indirect Cost Classifications Cost-Behavior Patterns: Variable Costs and Fixed Costs

4 Cost Drivers Concepts in Action: How Zipcar Helps Reduce Twitters Transportation Costs Relevant Range Relationships of Types of Costs Total Costs and Unit Costs Unit Costs Use Unit Costs Cautiously Business Sectors, Types of Inventory, Inventoriable Costs, and Period Costs Manufacturing-, Merchandising-, and Service-Sector Companies Types of Inventory Commonly Used Classifications of Manufacturing Costs Inventoriable Costs Period Costs Illustrating the Flow of Inventoriable Costs and Period Costs Manufacturing-Sector Example Recap of Inventoriable Costs and Period Costs Prime Costs and Conversion Costs Measuring Costs Requires Judgment Measuring Labor Costs Overtime Premium and Idle Time Benefits of Defining Accounting Terms Different Meanings of Product Costs A Framework for Cost Accounting and Cost Management Calculating the Cost of Products, Services, and Other Cost Objects Obtaining Information for Planning and Control and Performance Evaluation Analyzing the Relevant Information for Making Decisions 3 Cost-Volume-Profit Analysis How the The Biggest Rock Show Ever Turned a Big Profit Essentials of CVP Analysis Contribution Margins Expressing CVP Relationships Cost-Volume-Profit Assumptions

5 Breakeven Point and Target Operating Income Breakeven Point Target Operating Income Target Net Income and Income Taxes Using CVP Analysis for Decision Making Decision to Advertise Decision to Reduce Selling Price Sensitivity Analysis and Margin of Safety Cost Planning and CVP Alternative Fixed-Cost/Variable-Cost Structures Operating Leverage Effects of Sales Mix on Income Concepts in Action: Choosing Plant Location CVP Analysis in Service and Nonprofit Organizations Contribution Margin Versus Gross Margin APPENDIX: Decision Models and Uncertainty 4 Job Costing Job Costing and Nexamps Next Generation Energy and Carbon Solutions Building-Block Concepts of Costing Systems Job-Costing and Process-Costing Systems Job Costing: Evaluation and Implementation Time Period Used to Compute Indirect-Cost Rates Normal Costing General Approach to Job Costing Concepts in Action: Job Costing on Cowboys Stadium The Role of Technology Actual Costing A Normal Job-Costing System in Manufacturing General Ledger Explanations of Transactions Subsidiary Ledgers

6 Budgeted Indirect Costs and End-of-Accounting-Year Adjustments Underallocated and Overallocated Direct Costs Adjusted Allocation-Rate Approach Proration Approach Write-Off to Cost of Goods Sold Approach Choice Among Approaches Variations from Normal Costing: A Service-Sector Example 5 Activity-Based Costing and Activity-Based Management LG Electronics Reduces Costs and Inefficiencies Through Activity-Based Costing Broad Averaging and Its Consequences Undercosting and Overcosting Product-Cost Cross-Subsidization Simple Costing System at Plastim Corporation Design, Manufacturing, and Distribution Processes Simple Costing System Using a Single Indirect-Cost Pool Applying the Five-Step Decision-Making Process at Plastim Refining a Costing System Reasons for Refining a Costing System Guidelines for Refining a Costing System Activity-Based Costing Systems Plastims ABC System Cost Hierarchies Implementing Activity-Based Costing Implementing ABC at Plastim Comparing Alternative Costing Systems Considerations in Implementing Activity-Based-Costing Systems Concepts in Action: Successfully Championing ABC Using ABC Systems for Improving Cost Management and Profitability Pricing and Product-Mix Decisions Cost Reduction and Process Improvement Decisions Design Decisions

7 Planning and Managing Activities Activity-Based Costing and Department Costing Systems ABC in Service and Merchandising Companies Concepts in Action: Pincky: Capacity Costs and Time Driven Activity-Based Costing 6 Master Budget and Responsibility Accounting Scrimping at the Ritz: Master Budgets Budgets and the Budgeting Cycle Strategic Plans and Operating Plans Budgeting Cycle and Master Budget Advantages of Budgets Coordination and Communication Framework for Judging Performance and Facilitating Learning Motivating Managers and Other Employees Challenges in Administering Budgets Developing an Operating Budget Time Coverage of Budgets Steps in Preparing an Operating Budget Financial Planning Models and Sensitivity Analysis Concepts in Action: Web-Enabled Budgeting and Hendrick Motorsports Budgeting and Responsibility Accounting Organization Structure and Responsibility Feedback Responsibility and Controllability Human Aspects of Budgeting Budgetary Slack Kaizen Budgeting Budgeting in Multinational Companies APPENDIX: The Cash Budget

8 7 Flexible Budgets, Direct-Cost Variances, and Management Control SingaDeli Bakery Static Budgets and Variances The Use of Variances Static Budgets and Static-Budget Variances Flexible Budgets Flexible-Budget Variances and Sales-Volume Variances Sales-Volume Variances Flexible-Budget Variances Price Variances and Efficiency Variances for Direct-Cost Inputs Obtaining Budgeted Input Prices and Budgeted Input Quantities Data for Calculating Webbs Price Variances and Efficiency Variances Price Variances Efficiency Variance Concepts in Action: Starbucks Reduces Direct-Cost Variances to Brew a Turnaround Summary of Variances Journal Entries Using Standard Costs Implementing Standard Costing Standard Costing and Information Technology Wide Applicability of Standard Costing Management Uses of Variances Multiple Causes of Variances When to Investigate Variances Performance Measurement Using Variances Organization Learning Continuous Improvement Financial and Nonfinancial Performance Measures 266 Benchmarking and Variance Analysis Benchmarking and Variance Analysis APPENDIX: Market-Share and Market-Size Variances

9 8 Flexible Budgets, Overhead Cost Variances, and Management Control Overhead Cost Variances Force Macys to Shop for Changes in Strategy Planning of Variable and Fixed Overhead Costs Planning Variable Overhead Costs Planning Fixed Overhead Costs Standard Costing at Webb Company Developing Budgeted Variable Overhead Rates Developing Budgeted Fixed Overhead Rates Variable Overhead Cost Variances Flexible-Budget Analysis Variable Overhead Efficiency Variance Variable Overhead Spending Variance Journal Entries for Variable Overhead Costs and Variances Fixed Overhead Cost Variances Production-Volume Variance Interpreting the Production-Volume Variance Journal Entries for Fixed Overhead Costs and Variances Integrated Analysis of Overhead Cost Variances 4-Variance Analysis Combined Variance Analysis Production-Volume Variance and Sales-Volume Variance Concepts in Action: Variance Analysis and Standard Costing Help Sandoz Manage Its Overhead Costs Variance Analysis and Activity-Based Costing Flexible Budget and Variance Analysis for Direct Labor Costs Flexible Budget and Variance Analysis for Fixed Setup Overhead Costs Overhead Variances in Nonmanufacturing Settings Financial and Nonfinancial Performance Measures

10 9 Inventory Costing and Capacity Analysis Lean Manufacturing Helps Companies Reduce Inventory and Survive the Recession Variable and Absorption Costing Variable Costing Absorption Costing Comparing Variable and Absoption Costing Variable vs. Absorption Costing: Operating Income and Income Statements Comparing Income Statements for One Year Comparing Income Statements for Three Years Variable Costing and the Effect of Sales and Production on Operating Income Absorption Costing and Performance Measurement Undesirable Buildup of Inventories Proposals for Revising Performance Evaluation Comparing Inventory Costing Methods Throughput Costing A Comparison of Alternative Inventory-Costing Methods Denominator-Level Capacity Concepts and Fixed-Cost Capacity Analysis Absorption Costing and Alternative Denominator-Level Capacity Concepts Effect on Budgeted Fixed Manufacturing Cost Rate Choosing a Capacity Level Product Costing and Capacity Management Pricing Decisions and the Downward Demand Spiral Performance Evaluation Concepts in Action: The Death Spiral and the End of Landline Telephone Service External Reporting Tax Requirements Planning and Control of Capacity Costs Difficulties in Forecasting Chosen Denominator-Level Concept Difficulties in Forecasting Fixed Manufacturing Costs Nonmanufacturing Costs Activity-Based Costing APPENDIX: Breakeven Points in Variable Costing and Absorption Costing

11 10 Determining How Costs Behave Management Accountants at Cisco Embrace Opportunities, Enhance Sustainability Basic Assumptions and Examples of Cost Functions Basic Assumptions Linear Cost Functions Review of Cost Classification Identifying Cost Drivers The Cause-and-Effect Criterion Cost Drivers and the Decision-Making Process Cost Estimation Methods Industrial Engineering Method Conference Method Account Analysis Method Quantitative Analysis Method Steps in Estimating a Cost Function Using Quantitative Analysis High-Low Method Regression Analysis Method Evaluating Cost Drivers of the Estimated Cost Function Choosing Among Cost Drivers Concepts in Action: Activity-Based Costing: Identifying Cost and Revenue Drivers Cost Drivers and Activity-Based Costing Nonlinear Cost Functions Learning Curves Cumulative Average-Time Learning Model Incremental Unit-Time Learning Model Incorporating Learning-Curve Effects into Prices and Standards Data Collection and Adjustment Issues APPENDIX: Regression Analysis

12 11 Decision Making and Relevant Information Relevant Costs, JetBlue, and Twitter Information and the Decision Process The Concept of Relevance Relevant Costs and Relevant Revenues Qualitative and Quantitative Relevant Information An Illustration of Relevance: Choosing Output Levels One-Time-Only Special Orders Potential in Relevant-Cost Analysis Insourcing-versus-Outsourcing and Make-versus-Buy Decisions Outsourcing and Idle Facilities Strategic and Qualitative Factors Concepts in Action: Pringles Prints and the Offshoring of Innovation International Outsourcing Opportunity Costs and Outsourcing The Opportunity-Cost Approach Carrying Costs of Inventory Product-Mix Decisions with Capacity Constraints Customer Profitability, Activity-Based Costing, and Relevant Costs Relevant-Revenue and Relevant-Cost Analysis of Dropping a Customer Relevant-Revenue and Relevant-Cost Analysis of Adding a Customer Relevant-Revenue and Relevant-Cost Analysis of Closing or Adding Branch Offices or Segments Irrelevance of Past Costs and Equipment-Replacement Decisions Decisions and Performance Evaluation APPENDIX: Linear Programming 12 Pricing Decisions and Cost Management Target Pricing and Tata Motors $2,500 Car Major Influences on Pricing Decisions Customers, Competitors, and Costs Costing and Pricing for the Short Run

13 Relevant Costs for Short-Run Pricing Decisions Strategic and Other Factors in Short-Run Pricing Effect of Time Horizon on Short-Run Pricing Decisions Costing and Pricing for the Long Run Calculating Product Costs for Long-Run Pricing Decisions Alternative Long-Run Pricing Approaches Target Costing for Target Pricing Understanding Customers Perceived Value Doing Competitor Analysis Implementing Target Pricing and Target Costing Concepts in Action: Extreme Target Pricing and Cost Management at IKEA Value Engineering, Cost Incurrence, and Locked-In Costs Value-Chain Analysis and Cross-Functional Teams Achieving the Target Cost per Unit for Provalue Cost-Plus Pricing Cost-Plus Target Rate of Return on Investment Alternative Cost-Plus Methods Cost-Plus Pricing and Target Pricing Life-Cycle Product Budgeting and Costing Life-Cycle Budgeting and Pricing Decisions Customer Life-Cycle Costing Additional Considerations for Pricing Decisions Price Discrimination Peak-Load Pricing International Considerations Antitrust Laws 13 Strategy, Balanced Scorecard, and Strategic Profitability Analysis Balanced Scorecard Helps Infosys Transform into a Leading Consultancy What Is Strategy? Building Internal Capabilities: Quality Improvement and Reengineering at Chipset Strategy Implementation and the Balanced Scorecard

14 The Balanced Scorecard Strategy Maps and the Balanced Scorecard Implementing a Balanced Scorecard Aligning the Balanced Scorecard to Strategy Features of a Good Balanced Scorecard Pitfalls in Implementing a Balanced Scorecard Evaluating the Success of Strategy and Implementation Strategic Analysis of Operating Income Growth Component of Change in Operating Income Price-Recovery Component of Change in Operating Income Productivity Component of Change in Operating Income Further Analysis of Growth, Price-Recovery, and Productivity Components Concepts in Action: The Growth Versus Profitability Choice at Facebook Applying the Five-Step Decision-Making Framework to Strategy Downsizing and the Management of Processing Capacity Engineered and Discretionary Costs Identifying Unused Capacity for Engineered and Discretionary Overhead Costs Managing Unused Capacity APPENDIX: Productivity Measurement 14 Cost Allocation, Customer-Profitability Analysis, and Sales-Variance Analysis Globe Express Services (Overseas Group): Analyzing Customers at the United Arab Emirates' Branch Purposes of Cost Allocation Criteria to Guide Cost-Allocation Decisions Cost Allocation Decisions Allocating Corporate Costs to Divisions and Products Implementing Corporate Cost Allocations Customer-Profitability Analysis Customer-Revenue Analysis Customer-Cost Analysis Customer-Level Costs Customer-Profitability Profiles

15 Presenting Profitability Analysis Using the Five-Step Decision-Making Process to Manage Customer Profitability Concepts in Action: Measuring Customer Profitability of Subscription-Based Services Sales Variances Static-Budget Variance Flexible-Budget Variance and Sales-Volume Variance Sales-Mix Variance Sales-Quantity Variance APPENDIX: Mix and Yield Variances for Substitutable Inputs 15 Allocation of Support-Department Costs, Common Costs, and Revenues Cost Allocation and the Future of Smart Grid Energy Infrastructure Allocating Support Department Costs Using the Single-Rate and Dual-Rate Methods Single-Rate and Dual-Rate Methods Allocation Based on the Demand for (or Usage of) Computer Services Allocation Based on the Supply of Capacity Single-Rate Versus Dual-Rate Method Budgeted Versus Actual Costs, and the Choice of Allocaton Base Budgeted Versus Actual Rates Budgeted Versus Actual Usage Allocating Costs of Multiple Support Departments Direct Method Step-Down Method Reciprocal Method Overview of Methods Allocating Common Costs Stand-Alone Cost-Allocation Method Incremental Cost-Allocation Method Cost Allocations and Contract Disputes Contracting with the U.S. Government Fairness of Pricing Concepts in Action: Contract Disputes over Reimbursable Costs for the U.S.

16 Department of Defense Bundled Products and Revenue Allocation Methods Bundling and Revenue Allocation Stand-Alone Revenue-Allocation Method Incremental Revenue-Allocation Method Terms to Leam 16 Cost Allocation: Joint Products and Byproducts Joint Cost Allocation and the Production of Ethanol Fuel Joint-Cost Basics Allocating Joint Costs Approaches to Allocating Joint Costs Sales Value at Splitoff Method Physical-Measure Method Net Realizable Value Method Constant Gross-Margin Percentage NRV Method Choosing an Allocation Method Not Allocating Joint Costs Irrelevance of Joint Costs for Decision Making Sell-or-Process-Further Decisions Joint-Cost Allocation and Performance Evaluation Pricing Decisions Accounting for Byproducts Concepts in Action: Byproduct Costing Keeps Wendys Chili Profitable... and on the Menu Production Method: Byproducts Recognized at Time Production Is Completed Sales Method: Byproducts Recognized at Time of Sale Terms to Leam

17 17 Process Costing ExxonMobil and Accounting Differences in the Oil Patch Illustrating Process Costing Case 1: Process Costing with No Beginning or Ending Work-in-Process Inventory Case 2: Process Costing with Zero Beginning and Some Ending Work-in-Process Inventory Physical Units and Equivalent Units (Steps 1 and 2) Calculation of Product Costs (Steps 3, 4, and 5) Journal Entries Case 3: Process Costing with Some Beginning and Some Ending Work-in-Process Inventory Weighted-Average Method First-In, First-Out Method Comparison of Weighted-Average and FIFO Methods Transferred-In Costs in Process Costing Transferred-In Costs and the Weighted-Average Method Transferred-In Costs and the FIFO Method Points to Remember About Transferred-In Costs Hybrid Costing Systems Overview of Operation-Costing Systems Concepts in Action: Hybrid Costing for Customized Shoes at Adidas Illustration of an Operation-Costing System Journal Entries APPENDIX: Standard-Costing Method of Process Costing 18 Spoilage, Rework, and Scrap Rework Delays the Boeing Dreamliner by Three Years Defining Spoilage, Rework and Scrap Two Types of Spoilage Normal Spoilage

18 Abnormal Spoilage Spoilage in Process Costing Using Weighted-Average and FIFO Count All Spoilage Five-Step Procedure for Process Costing with Spoilage Weighted-Average Method and Spoilage FIFO Method and Spoilage Journal Entries Inspection Points and Allocating Costs of Normal Spoilage Job Costing and Spoilage Job Costing and Rework Accounting for Scrap Recognizing Scrap at the Time of Its Sale Recognizing Scrap at the Time of Its Production Concepts in Action: Managing Waste and Environmental Costs at KB Home APPENDIX: Standard-Costing Method and Spoilage 19 Balanced Scorecard: Quality, Time, and the Theory of Constraints Toyota Plans Changes After Millions of Defective Cars Are Recalled Quality as a Competitive Tool The Financial Perspective: Costs of Quality The Customer Perspective: Nonfinancial Measures of Customer Satisfaction The Internal-Business-Process Perspective: Analyzing Quality and Improving Quality Nonfinancial Measures of Internal-Business-Process Quality The Learning-and-Growth Perspective: Quality Improvements Making Decisions and Evaluating Quality Performance Time as a Competitive Tool Customer-Response Time and On-Time Performance Bottlenecks and Time Drivers Concepts in Action: Overcoming Wireless Data Bottlenecks Relevant Revenues and Relevant Costs of Time Theory of Constraints and Throughput-Margin Analysis

19 Managing Bottlenecks Balanced Scorecard and Time-Related Measures Terms to Leam 20 Inventory Management, Just-in-Time, and Simplified Costing Methods Costco Aggressively Manages Inventory to Thrive in Tough Times Inventory Management in Retail Organizations Costs Associated with Goods for Sale Economic-Order-Quantity Decision Model When to Order, Assuming Certainty Safety Stock Estimating Inventory-Related Relevant Costs and Their Effects Considerations in Obtaining Estimates of Relevant Costs Cost of a Prediction Error Conflict Between the EOQ Decision Model and Managers Performance Evaluation Just-in-Time Purchasing JIT Purchasing and EOQ Model Parameters Relevant Costs of JIT Purchasing Supplier Evaluation and Relevant Costs of Quality and Timely Deliveries JIT Purchasing, Planning and Control, and Supply- Chain Analysis Inventory Management, MRP and JIT Production Materials Requirements Planning JIT Production Features of JIT Production Systems Financial Benefits of JIT and Relevant Costs JIT in Service Industries Enterprise Resource Planning (ERP) Systems Concepts in Action: After the Encore: Just-in-Time Live Concert Recordings Performance Measures and Control in JIT Production Effect of JIT Systems on Product Costing Backflush Costing Simplified Normal or Standard Costing Systems Accounting for Variances Special Considerations in Backflush Costing

20 Lean Accounting Terms to Leam 21 Capital Budgeting and Cost Analysis Targets Capital Budgeting Hits the Bulls-Eye Stages of Capital Budgeting Discounted Cash Flow Net Present Value Method Internal Rate-of-Return Method Comparison of Net Present Value and Internal Rateof-Return Methods Sensitivity Analysis Payback Method Uniform Cash Flows Nonuniform Cash Flows Accrual Accounting Rate-of-Return Method Relevant Cash Flows in Discounted Cash Flow Analysis Relevant After-Tax Flows Categories of Cash Flows Project Management and Performance Evaluation Post-Investment Audits Performance Evaluation Strategic Considerations in Capital Budgeting Investment in Research and Development Customer Value and Capital Budgeting Concepts in Action: International Capital Budgeting at Disney APPENDIX: Capital Budgeting and Inflation

21 Answers to in Compound Interest (Exercise 21-16) 22 Management Control Systems, Transfer Pricing, and Multinational Considerations Transfer Pricing Disputes and Tax Issues Stop Collaborations Between Subunits of Mehr Co. Management Control Systems Formal and Informal Systems Effective Management Control Decentralization Benefits of Decentralization Costs of Decentralization Comparison of Benefits and Costs Decentralization in Multinational Companies Choices About Responsibility Centers Transfer Pricing Criteria for Evaluating Transfer Prices Calculating Transfer Prices An Illustration of Transfer Pricing Market-Based Transfer Prices Perfectly-Competitive-Market Case Distress Prices Imperfect Competition Cost-Based Transfer Prices Full-Cost Bases Variable-Cost Bases Hybrid Transfer Prices Prorating the Difference Between Maximum and Minimum Transfer Prices Negotiated Pricing Dual Pricing A General Guideline for Transfer-Pricing Situations Multinational Transfer Pricing and Tax Considerations Transfer Pricing for Tax Minimization Concepts in Action: Transfer Pricing Dispute Temporarily Stops the Flow of Fiji Water Transfer Prices Designed for Multiple Objectives Additional Issues in Transfer Pricing Terms to Leam

22 23 Performance Measurement, Compensation, and Multinational Considerations Misalignment Between CEO Compensation and Performance at AIG Financial and Nonfinancial Performance Measures Accounting-Based Measures for Business Units Return on Investment Residual Income Economic Value Added Return on Sales Comparing Performance Measures Choosing the Details of the Performance Measures Alternative Time Horizons Alternative Definitions of Investment Alternative Asset Measurements Target Levels of Performance and Feedback Choosing Target Levels of Performance Choosing the Timing of Feedback Performance Measurement in Multinational Companies Calculating the Foreign Divisions ROI in the Foreign Currency Calculating the Foreign Divisions ROI in U.S. Dollars Distinction Between Managers and Organization Units The Basic Trade-Off: Creating Incentives Versus Imposing Risk Intensity of Incentives and Financial and Nonfinancial Measurements Benchmarks and Relative Performance Evaluation Performance Measures at the Individual Activity Level Executive Performance Measures and Compensation Concepts in Action: Government Bailouts, Record Profits, and the 2009 Wall Street Compensation Dilemma Strategy and Levers of Control Boundary Systems Belief Systems Interactive Control Systems Terms to Leam

23 Appendix: A Glossary Author Index Company Index Subject Index