Cost Accounting A Managerial Emphasis

Cost Accounting A Managerial Emphasis Thirteenth Edition Charles T. Horngren Stanford University SrikantM. Datar Harvard University George Foster Stanford University MadhavV. Rajan Stanford University Christopher Ittner University of Pennsylvania PEARSON Prentice Hall Pearson Education International

1 The Accountant's Role in the Organization 28 2 An Introduction To Cost Terms and Purposes 52 3 Cost-Volume-Profit Analysis 86 4 Job Costing 122 5 Activity-Based Costing and Activity-Based Management 162 6 Master Budget and Responsibility Accounting 206 7 Flexible Budgets, Direct-Cost Variances, and Mangement Control 250 8 Flexible Budgets, Overhead Cost Variances, and Management Control 286 9 Inventory Costing and Capacity Analysis 324 10 Determining How Costs Behave 362 11 Decision Making and Relevant Information 412 12 Pricing Decisions and Cost Management 454 13 Strategy, Balanced Scorecard, and Strategic Profitability Analysis 488 14 Cost Allocation, Customer-Profitability Analysis, and Sales-Variance Analysis 526 15 Allocation of Support-Department Costs, Common Costs, and Revenues 566 16 Cost Allocation: Joint Products and Byproducts 598 17 Process Costing 626 18 Spoilage, Rework, and Scrap 664 19 Balanced Scorecard: Quality, Time, and the Theory of Constraints 690 20 Inventory Management, Just-in-Time, and Simplified Costing Methods 724 21 Capital Budgeting and Cost Analysis 758 22 Management Control Systems, Transfer Pricing, and Multinational Considerations 794 23 Performance Measurement, Compensation, and Multinational Considerations 824

1O 1 The Accountant's Role in the Organization 28 Xerox Keeps Its Eye on Key Success Factors: Copier Prices Are Down, but Profits Are Up Management Accounting, Financial Accounting, and Cost Accounting 29 Strategic Decisions and the Management Accountant 31 Value-Chain and Supply-Chain Analysis and Key Success Factors 32 Value-Chain Analysis 32 Supply-Chain Analysis 33 Key Success Factors 33 Decision Making, Planning, and Control: The Five-Step Decision-Making Process 35 Key Management Accounting Guidelines 37 Cost-Benefit Approach 38 B'ehavorial and Technical Considerations 38 Different Costs for Different Purposes 38 Organization Structure and the Management Accountant 39 Line and Staff Relationships 39 The Chief Financial Officer and the Controller 39 Professional Ethics 40 Concepts in Action: Management Accounting Beyond the Numbers Ethical Guidelines 41 Typical Ethical Challenges 43 Problem for Self-Study 44 I Decision Points 44 I Terms to Learn 45 I Assignment Material 45 I Questions 45 I Exercises 46 I Problems 48 I Collaborative Learning Problem 50 2 An Introduction To Cost Terms and Purposes 52 GM Struggles Under the Weight of Its Fixed Costs Costs and Cost Terminology 53 Direct Costs and Indirect Costs 54 An Example of Cost Assignment 54 Factors Affecting Direct/Indirect Cost Classifications 55 Cost-Behavior Patterns: Variable Costs and Fixed 'Costs 56 Cost Drivers 58 Relevant Range 58 Concepts in Action: How Flexcar Helps Reduce Business Transportation Costs Relationships of Types of Costs 60 Total Costs and Unit Costs 60 Unit Costs 60 Use Unit Costs Cautiously 61 Manufacturing-, Merchandising-, and Service-Sector Companies 62 Types of Inventory, Inventoriable Costs, and Period Costs 62 Types of Inventory 62 Commonly Used Classifications of Manufacturing Costs 62 Inventoriable Costs 63 Period Costs 63 Illustrating the Flow of Inventoriable Costs and Period Costs 64 Manufacturing-Sector Example 64 Recap of Inventoriable Costs and Period Costs 66 Prime Costs and Conversion Costs 68 Measuring Costs Requires Judgment 69 Measuring Labor Costs 69 Overtime Premium and Idle Time 69 Benefits of Defining Accounting Terms 70 Different Meanings of Product Costs 71 A Framework for Cost Accounting and Cost Management 72 Calculating the Cost of Products, Services, and Other Cost Objects 72 Obtaining Information for Planning and Control and Performance Evaluation 72 Analyzing the Relevant Information for Making Decisions 73 Problem for Self-Study 73 I Decision Points 76 I Terms to Learn 77 I Assignment Material 77 I Questions 77 I Exercises 77 I Problems 81 I Collaborative Learning Problem 85 3 Cost-Volume-Profit Analysis 86 Tiffany Tinkers with Its Sales Mix-and Takes a Cost- Volume-Profit Gamble Essentials of CVP Analysis 87 Equation Method 90 Contribution Margin Method 90 Graph Method 90 Cost-Volume-Profit Assumptions 91 Breakeven Point.and Target Income 92 Target Operating Income 93

' CONTENTS 11 Target Net Income and Income Taxes 94 Using CVP Analysis for Decision Making 95 Decision to Advertise 95 Decision to Reduce Selling Price 96 Sensitivity Analysis and Uncertainty 97 Cost Planning and CVP 98 Alternative Fixed-Cost/Variable-Cost Structures 98 Operating Leverage 99 Effects of Sales Mix on Income 101 Multiple Cost Drivers 102 Concepts in Action: Sky-High Fixed Costs Trouble XM Satellite Radio CVP Analysis in Service and Nonprofit Organizations 104 Contribution Margin versus Gross Margin 105 Problem for Self-Study 105 I Decision Points 106 APPENDIX: Decision Models and Uncertainty 107 Terms to Learn 110 I Assignment Material 111 I Questions 111 I Exercises 1111 Problems 115 I Collaborative Learning Problem 121 4 Job Costing 122 Job Costing Is Job 1 at Sutton Siding Building-Block Concepts of Costing Systems 123 Job-Costing and Process-Costing Systems 125 Job Costing: An Example 126 Actual Costing 127 General Approach to Job Costing 127 The Role of Technology 131 Concepts in Action: Job Costing on the Next- Generation Military Fighter Plane Time Period Used to Compute Indirect-Cost Rates 132 Normal Costing 134 A Normal Job-Costing System in Manufacturing 135 General Ledger 136 Explanations of Transactions 136 Subsidiary Ledgers 138 Budgeted Indirect Costs and End-of-Accounting-Year Adjustments 141 Adjusted Allocation-Rate Approach 142 Proration Approach 143 Write-Off to Cost of Goods Sold Approach 145 Choice Among Approaches 145 Multiple Overhead Cost Pools 145 Variations from Normal Costing: A Service-Sector Example 146 Problem for Self-Study 147 I Decision Points 149 I Terms to Learn 150 I Assignment Material 150 I Questions 150 I Exercises 151 I Problems 157 I Collaborative Learning Problem 161 5 Activity-Based Costing and Activity-Based Management 162 Mystery Solved: London Police Spend $1 Billion-Plus a Year on Paperwork versus Fighting Crime, ABC Analysis Uncovers Broad Averaging and Its Consequences 163 Undercosting and Overcosting 163 Product-Cost Cross-Subsidization 164 Simple Costing System at Plastim Corporation 165 Design, Manufacturing, and Distribution Processes 165 Simple Costing System Using a Single Indirect-Cost Pool 166 Applying the Five-Step Decision-Making Process at Plastim 168 Refining a Costing System 169 Activity-Based Costing Systems 170 Plastim's ABC System 170 Cost Hierarchies 173 Implementing Activity-Based Costing at Plastim 174 Comparing Alternative Costing Systems 178 Using ABC Systems for Improving Cost Management and Profitability 178 Pricing and Product-Mix Decisions 178 Cost Reduction and Process Improvement Decisions 179 Design Decisions 181 Planning and Managing Activities 181 Activity-Based Costing and Department Costing Systems 181 Implementing ABC Systems 182 ABC in Service and Merchandising Companies 183 Concepts in Action: Successfully Championing ABC Concepts in Action: Time-Driven Activity-Based Costing at Charles Schwab Pmblem for Self-Study 186 I Decision Points 188 I Terms to Learn 189 I Assignment Material 189 I Questions 189 I Exercises 190 I Problems 196 I Collaborative Learning Problem 204 6 Master Budget and Responsibility Accounting 206 "Scrimping" at the Ritz: Master Budgets Budgets and the Budgeting Cycle 207 Strategic Plans and Operating Plans 207 Budgeting Cycle and Master Budget 208 Advantages of Budgets 209 Coordination and Communication 209 Framework for Judging Performance and Facilitating Learning 209 Motivating Managers and Other Employees 210 Challenges in Administering Budgets 210 Time Coverage of Budgets 211 Steps in Developing an Operating Budget 211 Computer-Based Financial Planning Models 220 Kaizen Budgeting 221 Concepts in Action: Web-Enabled Budgeting and Hendrick Motorsports Budgeting and Responsibility Accounting 223 Organization Structure and Responsibility 223 Feedback 224 Responsibility and Controllability 224

12 CONTENTS Human Aspects of Budgeting 225 Budgeting in Multinational Companies 227 Problem for Self-Study 227 I Decision Points 228 APPENDIX: The Cash Budget 229 Terms to Learn 235 I Assignment Material 235 I Questions 235 I Exercises 235 I Problems 239 I Collaborative Learning Problem 247 7 Flexible Budgets, Direct-Cost Variances, and Mangement Control 250 Starbucks Tries to Keep a Lid on Costs Amid Expansion The Use of Variances 251 Static Budgets and Static-Budget Variances 252 Flexible Budgets 254 Flexible-Budget Variances and Sales-Volume Variances 254 Sales-Volume Variances 255 Flexible-Budget Variances 256 Price Variances and Efficiency Variances for Direct-Cost Inputs 257 Obtaining Budgeted Input Prices and Budgeted Input Quantities 257 Data for Calculating Webb's Price Variances and Efficiency Variances 259 P-rice Variances 259 Efficiency Variance 261 Summary of Variances 261 Concepts in Action: Weapons Against Waste: Sandoz Uses Variance Analysis to Cut Its Product Costs and Improve Profits Journal Entries Using Standard Costs 263 Implementing Standard Costing 265 Standard Costing and Information Technology 265 Wide Applicability of Standard Costing 265 Management Uses of Variances 266 Multiple Causes of Variances 266 When to Investigate Variances 266 Performance Measurement Using Variances 266 Organization Learning 267 Continuous Improvement 268 Financial and Nonfinancial Performance Measures 268 Variance Analysis and Activity-Based Costing 268 Relating Batch Costs to Product Output 268 Price and Efficiency Variances 269 Focus on Hierarchy 270 Benchmarking and Variance Analysis 270 Problem for Self-Study 272 I Decision Points 273 I Terms to Learn 274 I Assignment Material 274 I Questions 274 I Exercises 274 I Problems 278 I Collaborative Learning Problem 285 8 Flexible Budgets, Overhead Cost Variances, and Management Control 286 CEO Claims He Didn't See Variances, but Jurors Did Planning of Variable and Fixed Overhead Costs 287 Planning Variable Overhead Costs 287 Planning Fixed Overhead Costs 288 Standard Costing at Webb Company 288 Developing Budgeted Variable Overhead Cost Rates 288 Variable Overhead Cost Variances 289 Flexible-Budget Analysis 290 Variable Overhead Efficiency Variance 290 Variable Overhead Spending Variance 291 Journal Entries for Variable Overhead Costs and Variances 293 Developing Budgeted Fixed Overhead Rates 293 Fixed Overhead Cost Variances 295 Production-Volume Variance 296 Computing the Production-Volume Variance 296 Interpreting the Production-Volume Variance 297 Journal Entries for Fixed Overhead Costs and Variances 298 Concepts in Action: Variance Analysis and Standard Costing Help Sandoz Manage Its Overhead Costs Integrated Analysis of Overhead Cost Variances 301 4-Variance Analysis 301 Combined Variance Analysis 301 Production-Volume Variance and Sales-Volume Variance 303 Financial and Nonfinancial Performance Measures 305 Overhead Cost Variances in Nonmanufacturing and Service Settings 305 Activity-Based Costing and Variance Analysis 306 Flexible Budget and Variance Analysis for Variable Setup Overhead Costs 307 Flexible Budget and Variance Analysis for Fixed Setup Overhead Costs 308 Problem for Self-Study 310 I Decision Points 312 I Terms to Learn 312 I Assignment Material 313 I Questions 313 I Exercises 313 I Problems 317 I Collaborative Learning Problem 323 9 Inventory Costing and Capacity Analysis 324 Intel's Inventory Strategy Backfires Part One: Inventory Costing for Manufacturing Companies 325 Variable Costing and Absorption Costing 325 Data for Stassen Company for 2009 326 Comparing Income Statements for One Year 327 Explaining Differences in Operating Income 329 Data for Stassen Company for 2009, 2010, and 2011 329 Comparing Income Statements for Three Years 329 Effect of Sales and Production on Operating Income under Variable Costing 332 Performance Measures and Absorption Costing 332 Undesirable Buildup of Inventories 333

CONTENTS 13 Proposals for Revising Performance Evaluation 334 Throughput Costing 335 Comparison of Alternative Inventory-Costing Methods 335 Concepts in Action: Yield Improvements and the Production-Volume Variance at Analog Devices Problem for Self-Study 338 Part Two: Denominator-level Capacity Concepts and Fixed-Cost Capacity Analysis 339 Alternative Denominator-Level Capacity Concepts for Absorption Costing 339 Theoretical Capacity and Practical Capacity 339 Normal Capacity Utilization and Master-Budget Capacity Utilization 340 Effect on Budgeted Fixed Manufacturing Cost Rate 340 Choosing a Capacity Level 341 Product Costing and Capacity Management 341 Pricing Decisions and the Downward Demand Spiral 342 Performance Evaluation 343 External Reporting 344 Tax Requirements 346 Difficulties in Forecasting Chosen Denominator-Level Concept 347 Capacity Costs and Denominator-Level Issues 347 Problem for Self-Study 348 I Decision Points 349 APPENDIX: Breakeven Points in Variable Costing and Absorption Costing 350 Terms to Learn 351 I Assignment Material 351 I Questions 351 I Exercises 352 I Problems 357 I Collaborative Learning Problem 361 10 Determining How Costs Behave 362 Management Accountants at Boeing Embrace Opportunities, Tackle Challenges General Issues in Estimating Cost Functions 363 Basic Assumptions and Examples of Cost Functions 363 Brief Review of Cost Classification 365 Cost Estimation 366 The Cause-and-Effect Criterion in Choosing Cost Drivers 366 Cost Estimation Methods 368 Industrial Engineering Method 368 Conference Method 368 Account Analysis Method 369 Quantitative Analysis Method 369, "Steps in Estimating a Cost Function Using Quantitative Analysis 370 High-Low Method 372 Regression Analysis Method 374 Evaluating Cost Drivers of the Estimated Cost Function 375 Cost Drivers and Activity-Based Costing 378 Nonlinearity and Cost Functions 378 Learning Curves and Nonlinear Cost Functions 379 Concepts in Action: Activity-Based Costing: Identifying Cost and Revenue Drivers Cumulative Average-Time Learning Model 381 Incremental Unit-Time Learning Model 381 Setting Prices, Budgets, and Standards 382 Data Collection and Adjustment Issues 384 Problem for Self-Study 386 I Decision Points 388 APPENDIX: Regression Analysis 389 Terms to Learn 398 I Assignment Material 398 I Questions 398 I Exercises 398 I Problems 404 I Collaborative Learning Problem 410 11 Decision Making and Relevant Information 412 Relevant Costs, the Internet, and Delta Airlines Information and the Decision Process 413 The Concept of Relevance 414 Relevant Costs and Relevant Revenues 414 Qualitative and Quantitative Relevant Information -415 An Illustration of Relevance: Choosing Output Levels 416 One-Time-Only Special Orders 416 Potential Problems in Relevant-Cost Analysis 418 Insourcing-versus-Outsourcing and Make-versus-Buy Decisions 419 Outsourcing and Idle Facilities 419 Strategic and Qualitative Factors 421 Opportunity Costs and Outsourcing 422 The Opportunity-Cost Approach 422 Concepts in Action: The Changing Benefits and Costs of "Offshoring" Carrying Costs of Inventory 425 Product-Mix Decisions with Capacity Constraints 426 Customer Profitability, Activity-Based Costing, and Relevant Costs 427 Relevant-Revenue and Relevant-Cost Analysis of Dropping a Customer 428 Relevant-Revenue and Relevant-Cost Analysis of Adding a Customer 429 Relevant-Revenue and Relevant-Cost Analysis of Closing or Adding Branch Offices or Segments 430 Irrelevance of Past Costs and Equipment-Replacement Decisions 431 Decisions and Performance Evaluation 432 Problem for Self-Study 434 I Decision Points 435 APPENDIX: Linear Programming 436

14 CONTENTS Terms to Learn 439 I Assignment Material 440 I Questions 440 I Exercises 440 I Problems 445 / Collaborative Learning Problem 453 12 Pricing Decisions and Cost Management 454 Seeking Perfect Prices, CEO Tears Up the Rules Major Influences on Pricing Decisions 455 Customers, Competitors, and Costs 455 Time Horizon of Pricing Decisions 456 Costing and Pricing for the Short Run 456 Relevant Costs for Short-Run Pricing Decisions 456 Strategic and Other Factors in Short-Run Pricing 457 Costing and Pricing for the Long Run 457 Calculating Product Costs for Long-Run Pricing Decisions 457 Alternative Long-Run Pricing Approaches 459 Target Costing for Target Pricing 460 Understanding Customers' Perceived Value 460 Doing Competitor Analysis 461 Implementing Target Pricing and Target Costing 461 Value Engineering, Cost Incurrence, and Locked-In Costs 462 Concepts in Action: Extreme Target Pricing and Cost Management at IKEA Value-Chain Analysis and Cross-Functional Teams 464 Achieving the Target Cost per Unit for Pro value 465 Cost-Based (Cost-Pius) Pricing 467 Cost-Pius Target Rate of Return on Investment 467 Alternative Cost-Pius Methods 468 Cost-Pius Pricing and Target Pricing 469 Life-Cycle Product Budgeting and Costing 469 Life-Cycle Budgeting and Pricing Decisions 469 Customer Life-Cycle Costing 471 Considerations Other than Costs in Pricing Decisions 471 Effects of Antitrust Laws on Pricing 473 Problem for Self-Study 474 I Decision Points 476 I Terms to Learn 477 I Assignment Material 477 I Questions 477 I Exercises 478 I Problems 482 I Collaborative Learning Problem 487 13 Strategy, Balanced Scorecard, and Strategic Profitability Analysis 488 Balanced Scorecard Helps Bank Hit New Profitability High What Is Strategy? 489 Building Internal Capabilities: Quality Improvement and Reengineering at Chipset 491 Strategy Implementation and the Balanced Scorecard 492 The Balanced Scorecard 492 Four Perspectives of the Balanced Scorecard 493 Implementing a Balanced Scorecard 495 Aligning the Balanced Scorecard to Strategy 497 Features of a Good Balanced Scorecard 497 Pitfalls in Implementing a Balanced Scorecard 498 Evaluating the Success of Strategy and Implementation 499 Strategic Analysis of Operating Income 500 Growth Component of Change in Operating Income 502 Price-Recovery Component of Change in Operating Income 503 Productivity Component of Change in Operating Income 504 Further Analysis of Growth, Price-Recovery, and Productivity Components 505 Applying the Five-Step Decision-Making Framework to Strategy 507 Downsizing and the Management of Capacity 507 Identifying Unused Capacity for Engineered and Discretionary Overhead Costs 508 Concepts in Action: The Growth vs. Profitability Choice at YouTube Managing Unused Capacity 510 Problem for Self-Study 511 I Decision Points 515 APPENDIX: Productivity Measurement 515 Terms to Learn 518 I Assignment Material 518 I Questions 518 I Exercises 519 I Problems 522 I Collaborative Learning Problem 525 14 Cost Allocation, Customer-Profitability Analysis, and Sales-Variance Analysis 526 Minding the Store: Analyzing Customers, Best Buy Decides Not All Are Welcome Purposes of Cost Allocation 527 Criteria to Guide Cost-Allocation Decisions 528 Cost Allocation and Costing Systems 530 Allocating Corporate Costs to Divisions and Products 531 Implementing Corporate Cost Allocations 533 Customer Revenues and Customer Costs 534 Customer-Revenue Analysis 535 Customer-Cost Analysis 535 Customer-Level Costs 536 Customer-Profitability Profiles 538 Using the Five-Step Decision-Making Process to Manage Customer Profitability 540 Concepts in Action: Customer Profitability at Verizon Wireless Sales Variances 541 Budget Data for June 2009 542 Actual Results for June 2009 542 Static-Budget Variance 542 Flexible-Budget Variance and Sales-Volume Variance 543 Sales-Mix and Sales-Quantity Variances 543 Sales-Mix Variance 543 Sales-Quantity Variance 545

r CONTENTS 15 Market-Share and Market-Size Variances Market-Share Variance 545 Market-Size Variance 546 545 Problem for Self-Study 547 I Decision Points 549 APPENDIX: Mix and Yield Variances for Substitutable Inputs 550 Terms to Learn 553.1 Assignment Material 553 I Questions 553 I Exercises 554 I Problems 558 I Collaborative Learning Problem 564 15 Allocation of Support-Department Costs, Common Costs, and Revenues 566 Is Hollywood Taking "Creative License" With Its Cost Allocations? Allocating Costs of a Support Department to Operating Departments 567 Single-Rate and Dual-Rate Methods 568 Allocation Based on the Demand for (or Usage of) Computer Services 568 Allocation Based on the Supply of Capacity 569 Budgeted Usage, Actual Usage, and Capacity-Level Allocation Bases 571 Budgeted versus Actual Rates 572 Allocating Costs of Multiple Support Departments 572 Direct Method 573 Step-Down Method 574 Reciprocal Method 576 Overview of Methods 578 Allocating Common Costs 580 Stand-Alone Cost-Allocation Method 580 Incremental Cost-Allocation Method 580 Cost Allocations and Contracts 581 Contracting with the U.S. Government 581 Fairness of Pricing 582 Revenue Allocation and Bundled Products 582 Revenue-Allocation Methods 583 Stand-Alone Revenue-Allocation Method 583 Incremental Revenue-Allocation Method 584 Concepts in Action: Contract Disputes over Reimbursable Costs for U.S. Government Agencies Other Revenue-Allocation Methods 586 Problem for Self-Study 587 I Decision Points 589 I Terms to Learn 589 I Assignment Material 590 I Questions 590 I Exercises 590 I Problems 594 I Collaborative Learning Problem 597 16 Cost Allocation: Joint Products and Byproducts 598 Medicare Dissects the Costs Allocated to Organ Donations Joint-Cost Basics 599 Main Products, Joint Products, and Byproducts 600 Why Allocate Joint Costs? 601 Approaches to Allocating Joint Costs 601 Sales Value at Splitoff Method 602 Physical-Measure Method 603 Net Realizable Value (NRV) Method 604 Constant Gross-Margin Percentage NRV Method 606 Choosing a Method 607 Not Allocating Joint Costs 608 Irrelevance of Joint Costs for Decision Making 608 Sell-or-Process-Further Decisions 609 Joint-Cost Allocation and Performance Evaluation 609 Pricing Decisions 610 Accounting for Byproducts 610 Production Method: Byproducts Recognized at Time Production Is Completed 611 Sales Method: Byproducts Recognized at Time of Sale 612 Concepts in Action: Chicken Processing: Costing of Joint Products and Byproducts Problem for Self-Study 613 I Decision Points 616 I Terms to Learn 617 I Assignment Material 617 I Questions 617 I Exercises 617 I Problems 622 I Collaborative Learning Problem 625 17 Process Costing 626 Faulty Accounting Forces Shell to Restate Its Earnings Illustrating Process Costing 627 Case 1: Process Costing with Zero Beginning and Zero Ending Work-in-Process Inventory 628 Case 2: Process Costing with Zero Beginning but Some Ending Work-in-Process Inventory 629 Physical Units and Equivalent Units (Steps 1 and 2) 630 Calculation of Product Costs (Steps 3, 4, and 5) 631 Journal Entries 632 Case 3: Process Costing with Some Beginning and Some Ending Work-in-Process Inventory 633 Weighted-Average Method 634 First-In, First-Out Method 636 Comparison of Weighted-Average and FIFO Methods 640 Standard-Costing Method of Process Costing 641 Computations Under Standard Costing 641 Accounting for Variances 643 Transferred-In Costs in Process Costing 645 Transferred-In Costs and the Weighted-Average Method 646 Transferred-In Costs and the FIFO Method 647 Points to Remember About Transferred-In Costs 649 Concepts in Action: Hybrid Costing for Customized Shoes at Adidas Hybrid Costing Systems 650 Problem for Self-Study 651 I Decision Points 652 APPENDIX: Operation Costing 653

16 CONTENTS Terms to Learn 656 I Assignment Material 656 I Questions 656 I Exercises 656 I Problems 660 I Collaborative Learning Problem 663 18 Spoilage, Rework, and Scrap 664 Rework Delays Airbus Terminology 665 Different Types of Spoilage 665 Normal Spoilage 666 Abnormal Spoilage 666 Process Costing and Spoilage 666 Count All Spoilage 667 Five-Step Procedure for Process Costing with Spoilage 668 Weighted-Average Method and Spoilage 669 FIFO Method and Spoilage 669 Standard-Costing Method and Spoilage 672 Journal Entries 672 Inspection Points and Allocating Costs of Normal Spoilage 674 Job Costing and Spoilage 674 Job Costing and Rework 676 Accounting for Scrap 677 Recognizing Scrap at the Time of Its Sale 677 Recognizing Scrap at the Time of Its Production 678 Concepts in Action: Managing Waste and Environmental Costs at Toyota Problem for Self-Study 680 I Decision Points 680 APPENDIX: Inspection and Spoilage at Various Stages of Completion in Process Costing 681 Terms to Learn 683 I Assignment Material 683 I Questions 683 I Exercises 683 I Problems 686 I Collaborative Learning Problem 689 19 Balanced Scorecard: Quality, Time, and the Theory of Constraints 690 JetBlue Plans Overhaul after Snafus Irk Customers Part One: Quality as a Competitive Tool 691 The Financial Perspective: Costs of Quality 693 < The Custorner Perspective: Nonfinancial Measures of Customer Satisfaction 695 The Internal-Business-Process Perspective: Analyzing Quality Problems and Improving Quality 696 Control Charts 696 Pareto Diagrams 697 Cause-and-Effect Diagrams 697 Relevant Costs and Benefits of Evaluating Quality Improvement 698 Nonfinancial Measures of Internal-Business-Process ' Quality 700 The Learning-and-Growth Perspective for Quality Improvements 700 Evaluating Quality Performance 700 Advantages of COQ Measures 700 Advantages of Nonfinancial Measures of Quality 701 Part Two: Time as a Competitive Tool 701 Customer-Response Time and On-Time Performance 701 Time Drivers and Costs of Time 702 Uncertainty and Bottlenecks as Drivers of Time 703 Concepts in Action: Overcoming Bottlenecks on the Internet Relevant Revenues and Costs of Time 705 Part Three: Theory of Constraints and Throughput- Contribution Analysis 706 Managing Bottlenecks 707 Balanced Scorecard and Time-Related Measures 710 Problem for Self-Study 711 I Decision Points 712 I Terms to Learn 713 I Assignment Material 713 I Questions 713 I Exercises 713 I Problems 717 I Collaborative Learning Problem 722 20 Inventory Management, Just-in-Time, and Simplified Costing Methods 724 Best Buy and Chrysler Use New Technology to Proactively Manage Their Inventories Inventory Management in Retail Organizations 725 Costs Associated with Goods for Sale 725 Economic-Order-Quantity Decision Model 726 When to Order, Assuming Certainty 728 Safety Stock 729 Estimating Inventory-Related Relevant Costs and Their Effects 731 Considerations in Obtaining Estimates of Relevant Costs 731 Cost of a Prediction Error 731 Conflict Between the EOQ Decision Model and Managers' Performance Evaluation 732 Just-in-Time Purchasing 732 JIT Purchasing and EOQ Model Parameters 733 Relevant Costs of JIT Purchasing 733 Supplier Evaluation and Relevant Costs of Quality and Timely Deliveries 734 JIT Purchasing, Planning and Control, and Supply-Chain Analysis 735 Inventory Management and MRP 736 Inventory Management and JIT Production 737 Financial Benefits of JIT and Relevant Costs 737 Concepts in Action: After the Encore: Just-in-Time Live Concert CDs JIT in Service Industries 738 Enterprise Resource Planning (ERP) Systems 739 Performance Measures and Control in JIT Production 740 Effect of JIT Systems on Product Costing 740 Backflush Costing 740 Simplified Normal or Standard Costing 741

- CONTENTS 17 Accounting for Variances 743 Special Considerations in Backflush Costing 746 Lean Accounting 747 Problems for Self-Study 748 I Decision Points 749 I Terms to Learn 750 I Assignment Material 750 I Questions 750 I Exercises 751 I Problems 753 I Collaborative Learning Problem 757 21 Capital Budgeting and Cost Analysis 758 Chevron Pumps Up Its Capital Budget Two Dimensions of Cost Analysis 759 Stages of Capital Budgeting 760 Discounted Cash Flow 761 Net Present Value Method 762 Internal Rate-of-Return Method 763 Comparison of Net Present Value and Internal Rate-of-Return Methods 765 Sensitivity Analysis 765 Payback Method 766 Uniform Cash Flows 766 Nonuniform Cash Flows 767 Accrual Accounting Rate-of-Return Method 768 Evaluating Managers and Goal-Congruence Issues 769 Relevant Cash Flows in Discounted Cash Flow Analysis 770 Relevant After-Tax Flows 770 Categories of Cash Flows 771 Managing the Project 776 Strategic Considerations in Capital Budgeting 776 Concepts in Action: Globalizing Capital Budgeting at AES Corporation Customer Value and Capital Budgeting 778 Investment in Research and Development 778 Problem for Self-Study 778 I Decision Points 781 APPENDIX: Capital Budgeting and Inflation 782 Terms to Learn 784 I Assignment Material 784 I Questions 784 I Exercises 785 I Problems 789 I Collaborative Learning Problem 792 I Answers to Exercises in Compound Interest (Exercise 21-16) 792 22 Management Control Systems, Transfer Pricing, and Multinational Considerations 794 Transfer Pricing Leads Symantec to $1 Billion Dispute with the IRS Management Control Systems 795 Evaluating Management Control Systems 796 Organization Structure and Decentralization 797 Benefits of Decentralization 797.Costs of Decentralization 798 Comparison of Benefits and Costs 798 Decentralization in Multinational Companies 799 Choices About Responsibility Centers 799 Transfer Pricing 799 An Illustration of Transfer Pricing 801 Market-Based Transfer Prices 802 Perfectly-Competitive-Market Case 803 Distress Prices 804 Cost-Based Transfer Prices 804 Full-Cost Bases 805 Variable-Cost Bases 806 Prorating the Difference Between Maximum and Minimum Transfer Prices 807 Dual Pricing 807 Negotiated Transfer Prices 808 A General Guideline for Transfer-Pricing Situations 808 Multinational Transfer Pricing and Tax Considerations 810 Concepts in Action: U.S. Internal Revenue Service, Japanese National Tax Agency, and Transfer- Pricing Disputes Problem for Self-Study 813 I Decision Points 815 I Terms to Learn 816 I Assignment Material 816 I Questions 816 I Exercises 816 I Problems 819 I Collaborative Learning Problem 823 23 Performance Measurement, Compensation, and Multinational Considerations 824 Retooling CEO Compensation at Home Depot Financial and Nonfinancial Performance Measures 825 Choosing Among Different Performance Measures: Step 1 826 -.Return on Investment 827 Residual Income 829 Economic Value Added 830 Return on Sales 831 Comparing Performance Measures 831 Choosing the Time Horizon of the Performance Measures: Step 2 832 Choosing Alternative Definitions for Performance Measures: Step 3 833 Choosing Measurement Alternatives for Performance Measures: Step 4 833 Current Cost 833 Long-Term Assets: Gross or Net Book Value? 834 Choosing Target Levels of Performance: Step 5 836 Choosing the Timing of Feedback: Step 6 836 Performance Measurement in Multinational Companies 837 Calculating the Foreign Division's ROI in the Foreign Currency 837 Calculating the Foreign Division's ROI in U.S. Dollars 838 Distinction Between Managers and Organization Units 839 The Basic Trade-Off: Creating Incentives versus Imposing Risk 839 Intensity of Incentives and Financial and Nonfinancial Measurements 840

18 CONTENTS Benchmarks and Relative Performance Evaluation 841 Performance Measures at the Individual Activity Level 841 Performing Multiple Tasks 841 Team-Based Compensation Arrangements 842 Executive Performance Measures and Compensation 842 Strategy and Levers of Control 843 Concepts in Action: CEO Compensation and Company Performance Problems for Self-Study 846 I Decision Points 847 I Terms to Learn 848 I Assignment Material 848 I Questions 848 / Exercises 849 / Problems 853 / Collaborative Learning Problem 856 Appendix A 858 Appendix B 862 Appendix C 869 Glossary 873 Author Index 884 Company Index 886 Subject Index 888 -