Pearson Education Limited Edinburgh Gate Harlow Essex CM20 2JE England. and Associated Companies throughout the world

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2 AVP/Executive Editor: Stephanie Wall Editorial Director: Sally Yagan Editor in Chief: Donna Battista Director of Editorial Services: Ashley Santora Editorial Project Manager: Christina Rumbaugh Editorial Assistant: Brian Reilly Director of Marketing: Patrice Jones Marketing Assistant: Ian Gold Senior Managing Editor, Production: Cynthia Zonneveld Production Editor: Carol O Rourke Publisher, International Edition: Angshuman Chakraborty Acquisitions Editor, International Edition: Arunabha Deb Publishing Assistant, International Edition: Shokhi Shah Text Permissions Coordinator: Tracy Metivier Senior Operations Specialist: Diane Peirano Art Director: Anthony Gemmellaro Cover Design: Anthony Gemmellaro Cover Illustration/Photo: Image Source/Corbis Full-Service Project Management: S4Carlisle Publishing Services/Lynn Steines Cover printer: Lehigh-Phoenix Color/Hagerstown 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 Anthony A. Atkinson, Robert S. Kaplan, Ella Mae Matsumura, and S. Mark Young to be identified as authors of this work have been asserted by them in accordance with the Copyright, Designs and Patents Act Authorized adaptation from the United States edition, entitled Management Accounting, Information for Decision Making and Strategy Execution, 6th edition, ISBN by Anthony A. Atkinson, Robert S. Kaplan, Ella Mae Matsumura, and S. Mark Young published by Pearson Education 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. ISBN 10: ISBN 13: British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library Typeset in 10/12 Palatino by S4Carlisle Publishing Services/Lynn Steines Printed and bound by Edwards Brothers in the United States of America The publisher's policy is to use paper manufactured from sustainable forests.

3 Management Accounting:Information for Decision-Making and Strategy Execution Table of Contents Cover Contents Preface Acknowledgments About the Authors CHAPTER 1 How Management Accounting Information Supports Decision Making What Is Management Accounting? Management Accounting and Financial Accounting A Brief History of Management Accounting IN PRACTICE: Definition of Management Accounting (2008), Issued by the Institute of Management Accountants Strategy The Plan-Do-Check-Act (PDCA) Cycle IN PRACTICE: Company Mission Statements Behavioral Implications of Management Accounting Information CHAPTER 2 The Balanced Scorecard and Strategy Map The Balanced Scorecard Strategy IN PRACTICE: Infosys Develops a Balanced Scorecard to Describe and Implement Its Strategy Balanced Scorecard Objectives, Measures, and Targets Creating a Strategy Map Financial Perspective Customer Perspective Process Perspective Learning and Growth Perspective Strategy Map and Balanced Scorecard at Pioneer Petroleum Financial Perspective Customer Perspective Process Perspective Learning and Growth Perspective Applying the Balanced Scorecard to Nonprofit and Government Organizations IN PRACTICE: A Balanced Scorecard for a Nonprofit Organization

4 Managing with the Balanced Scorecard Barriers to Effective Use of the Balanced Scorecard Epilogue to Pioneer Petroleum CHAPTER 3 Using Costs in Decision Making How Management Accounting Supports Internal Decision Making Pricing Product Planning Budgeting Performance Evaluation Contracting Variable and Fixed Costs Variable Costs Fixed Costs Cost-Volume-Profit Analysis Developing and Using the CVP Equation IN PRACTICE: Introducing Uncertainty into Cost Volume Profit Analysis Variations on the Theme IN PRACTICE: Breakeven on a Development Project Financial Modeling and What-If Analysis IN PRACTICE: Cost-Volume-Profit Analysis The Multiproduct Firm IN PRACTICE: Estimating the Effect of Unit Sales on Share Price The Assumptions Underlying CVP Analysis Other Useful Cost Definitions Mixed Costs Step Variable Costs Incremental Costs Sunk Costs IN PRACTICE: Sunk Costs IN PRACTICE: Overcoming the Sunk Cost Effect IN PRACTICE: Human Behavior and Sunk Costs Relevant Cost Opportunity Cost Avoidable Cost Make-or-BuyThe Outsourcing Decision IN PRACTICE: Contracting Out Manufacturing Costs

5 The Decision to Drop a Product IN PRACTICE: Be Wary When Labeling Departments Losers Costing Orders Costing Orders and Opportunity Cost Considerations Relevant Cost and Short-Term Product Mix Decisions Multiple Resource Constraints IN PRACTICE: Choosing the Least Cost Materials Mix Building the Linear Program The Graphical Approach to Solving Linear Programs Epilogue to Nolan Industries IN PRACTICE: Excels Goal Seek and Solver CHAPTER 4 Accumulating and Assigning Costs to Products IN PRACTICE: On the Importance of Understanding Costs in the Restaurant Business Cost Management Systems Cost Flows in Organizations Manufacturing Organizations Retail Organizations Service Organizations Some Important Cost Terms Cost Object Consumable Resources Capacity-Related Resources Direct and Indirect Costs IN PRACTICE: Cost Objects IN PRACTICE: Indirect Costs Cost Classification and Context Going Forward Handling Indirect Costs in a Manufacturing Environment Multiple Indirect Cost Pools Cost Pool Homogeneity Overhead Allocation: Further Issues Using Planned Capacity Cost IN PRACTICE: Why Costing Matters Reconciling Actual and Applied Capacity Costs Estimating Practical Capacity Job Order and Process Systems

6 Job Order Costing Process Costing Some Process Costing Wrinkles Final Comments on Process Costing Epilogue to Stricts Custom Framing Appendix 4-1 Allocating Service Department Costs CHAPTER 5 Activity-Based Cost Systems Traditional Manufacturing Costing Systems Limitations of Madisons Existing Standard Cost System Vanilla Factory and Multiflavor Factory Activity-Based Costing Calculating Resource Capacity Cost Rates Calculating Resource Time Usage per Product Calculating Product Cost and Profitability Possible Actions as a Result of the More Accurate Costing IN PRACTICE: Using Activity-Based Costing to Increase Bank Profitability Measuring the Cost of Unused Resource Capacity Fixed Costs and Variable Costs in Activity-Based Cost Systems Using the ABC Model to Forecast Resource Capacity Updating the ABC Model IN PRACTICE: W.S. Industries Uses ABC Information for Continuous Improvement Service Companies Capacity Cost Rate Calculating the Time Equation for the Consumption of Brokers Capacity Implementation Issues Lack of Clear Business Purpose Lack of Senior Management Commitment Delegating the Project to Consultants Poor ABC Model Design Individual and Organizational Resistance to Change People Feel Threatened Epilogue to Madison Dairy Appendix 5-1 Historical Origins of Activity-Based Costing CHAPTER 6 Measuring and Managing Customer Relationships

7 Measuring Customer Profitability: Extending the Madison Dairy Case Reporting and Displaying Customer Profitability IN PRACTICE: Building a Whale Curve of Customer Profitability Customer Costs in Service Companies Increasing Customer Profitability Process Improvements Activity-Based Pricing Managing Relationships The Pricing Waterfall Salesperson Incentives Life-Cycle Profitability Measuring Customer Performance with Nonfinancial Metrics Customer Satisfaction Customer Loyalty The Net Promoter Score Epilogue to Madison Dairy CHAPTER 7 Measuring and Managing Process Performance Process Perspective and the Balanced Scorecard Facility Layout Systems Process Layouts Product Layouts IN PRACTICE: Manufacturing a CD Group Technology Inventory Costs and Processing Time Inventory and Processing Time Inventory-Related Costs Costs and Benefits of Changing to a New Layout: An Example Using Group Technology of Costs and Benefits IN PRACTICE: History of Lean Manufacturing Cost of Nonconformance and Quality Issues Quality Standards Costs of Quality Control Just-in-Time Manufacturing Implications of JIT Manufacturing JIT Manufacturing and Management Accounting IN PRACTICE: Using Lean Manufacturing in a Hospital Setting

8 Kaizen Costing Comparing Traditional Cost Reduction to Kaizen Costing Concerns about Kaizen Costing Benchmarking Stage 1: Internal Study and Preliminary Competitive Analyses Stage 2: Developing Long-Term Commitment to the Benchmarking Project and Coalescing the Benchmarking Team Stage 3: Identifying Benchmarking Partners Stage 4: Information Gathering and Sharing Methods Stage 5: Taking Action to Meet or Exceed the Benchmark IN PRACTICE: Benchmarking Mobile Web Experiences Epilogue to Blast from the Past Robot Company Production Flows Effects on Work-in-Process Inventory Effect on Production Costs Cost of Rework Cost of Carrying Work-in-Process Inventory Benefits from Increased Sales of Costs and Benefits CHAPTER 8 Measuring and Managing Life-Cycle Costs Managing Products over Their Life Cycle Research, Development, and Engineering Stage Manufacturing Stage Postsale Service and Disposal Stage Target Costing A Target Costing Example Concerns about Target Costing IN PRACTICE: Target Costing and the Mercedes-Benz M-Class Breakeven Time: A Comprehensive Metric for New Product Development Innovation Measures on the Balanced Scorecard Market Research and Generation of New Product Ideas Design, Development, and Launch of New Products IN PRACTICE: Life-Cycle Revenues: The Case of Motion Pictures Environmental Costing Controlling Environmental Costs IN PRACTICE: The Cisco Take-Back and Recycle Program IN PRACTICE: Scientific Progress and the Reduction of Environmental Costs: The

9 Case of Chromium in Groundwater CHAPTER 9 Behavioral and Organizational Issues in Management Accounting and Control Systems What Are Management Accounting and Control Systems? The Meaning of Control Characteristics of a Well-Designed MACS Technical Considerations Behavioral Considerations The Human Resource Management Model of Motivation The Organizations Ethical Code of Conduct and MACS Design Avoiding Ethical Dilemmas Dealing with Ethical Conflicts IN PRACTICE: Does Cheating at Golf Lead to Cheating in Business? The Elements of an Effective Ethical Control System Steps in Making an Ethical Decision Motivation and Congruence Task and Results Control Methods IN PRACTICE: Monitoring in the Workplace Using a Mix of Performance Measures: A Balanced Scorecard Approach The Need for Multiple Measures of Performance: NonGoal-Congruent Behavior Dysfunctional Behavior Using the Balanced Scorecard to Align Employees to Corporate Goals and Business Unit Objectives Change Management Empowering Employees to Be Involved in MACS Design Participation in Decision Making Education to Understand Information Behavioral Aspects of MACS Design: An Example from Budgeting Designing the Budget Process Influencing the Budget Process Developing Appropriate Incentive Systems to Reward Performance Choosing between Intrinsic and Extrinsic Rewards Extrinsic Rewards Based on Performance Effective Performance Measurement and Reward Systems Conditions Favoring Incentive Compensation Incentive Compensation and Employee Responsibility Rewarding Outcomes

10 Managing Incentive Compensation Plans Types of Incentive Compensation Plans IN PRACTICE: UNIBANCOTying the Balanced Scorecard to Compensation Epilogue to Advanced Cellular International and Chapter CHAPTER 10 Using Budgets for Planning and Coordination Determining the Levels of Capacity-Related and Flexible Resources The Budgeting Process The Role of Budgets and Budgeting The Elements of Budgeting Behavioral Considerations in Budgeting Budget Components Operating Budgets Financial Budgets The Budgeting Process Illustrated Oxford Tole Art, Buoy Division Demand Forecast The Production Plan Developing the Spending Plans Choosing the Capacity Levels Handling Infeasible Production Plans Interpreting the Production Plan The Financial Plans Understanding the Cash Flow Statement Using the Financial Plans Using the Projected Results What-If Analysis Evaluating Decision-Making Alternatives Sensitivity Analysis Comparing Actual and Planned Results Variance Analysis Basic Variance Analysis Canning Cellular Services First-Level Variances Decomposing the Variances Planning and Flexible Budget Variances Quantity and Price Variances for Material and Labor Sales Variances The Role of Budgeting in Service and Not-For-Profit Organizations

11 Periodic and Continuous Budgeting Controlling Discretionary Expenditures Incremental Budgeting Zero-Based Budgeting Project Funding Managing the Budgeting Process Criticisms of the Traditional Budgeting Model and the Beyond Budgeting Approach Epilogue to the California Budget Crisis CHAPTER 11 Financial Control The Environment of Financial Control Financial Control The Motivation for Decentralization IN PRACTICE: Standard Operating Precedures at Mercedes-Benz USA IN PRACTICE: Evaluating Performance at McDonalds Corporation Restaurants Responsibility Centers and Evaluating Unit Performance Coordinating Responsibility Centers IN PRACTICE: The High Cost of Coordination Responsibility Centers and Financial Control IN PRACTICE: Nonfinancial Performance Measures at Federal Express: The Service Quality Indicator Responsibility Center Types IN PRACTICE: Investment Centers at General Electric in 2010 Evaluating Responsibility Centers IN PRACTICE: Financial Statement Business Segment Reporting Transfer Pricing Approaches to Transfer Pricing IN PRACTICE: International Transfer Pricing Transfer Prices Based on Equity Considerations Assigning and Valuing Assets in Investment Centers The Efficiency and Productivity Elements of Return on Investment Assessing Productivity Using Financial Control Questioning the Return on Investment Approach IN PRACTICE: Labor Productivity in a Consultancy IN PRACTICE: Managing Productivity in Airlines Using Residual Income IN PRACTICE: Organization Adopt Economic Value Added for Different Reasons

12 The Efficacy of Financial Control Epilogue to Adrians Home Services Glossary Subject Index Name and Company Index