1 Introduction to Cost Accounting and Cost Management 1
1 Introduction to Cost Accounting and Cost Management 1
FINANCIAL，MANAGEMENT，AND COST ACCOUNTING 2
Early Accounting Systems 3
THE EVOLUTION OF ACCOUNTING 3
Accounting in the Twentieth Century 4
Total Quality Management 6
Customer Orientation 6
EMERGING THEMES IN COST ACCOUNTING 6
Advances in Information Technology 7
Time as a Competitive Element 7
Advances in the Manufacturing Environment 8
Growth of the Service Industry 10
Global Competition 10
A SYSTEMS APPROACH 10
COST MANAGEMENT-A CROSS-FUNCTIONAL PERSPECTIVE 12
THE ROLE OF TODAY S COST AND MANAGEMENT ACCOUNTANT 13
The Need for Flexibility 13
Behavioral Impact of Cost Information 13
Information for Planning，Controlling，and Decision Making 14
Line and Staff Positions 14
ACCOUNTING AND ETHICAL CONDUCT 16
Ethical Behavior 16
Standards of Ethical Conduct for Management Accountants 17
Ethical Conduct 19
CERTIFICATION 20
The CMA 20
The CPA 20
The CIA 21
2 Basic Cost Management Concepts 30
Part1 Fundamental Cost Management Concepts 30
■2 Basic Cost Management Concepts 30
A SYSTEMS FRAMEWORK 31
Accounting Information Systems 31
Relationship to Other Operational Systems and Functions 34
Different Systems for Different Purposes 36
COST ASSIGNMENT：DIRECT TRACING，DRIVER TRACING，AND ALLOCATION 37
Cost Objects 37
Accuracy of Assignments 38
PRODUCT AND SERVICE COSTS 42
Different Costs for Different Purposes 42
Product Costs and External Financial Reporting 43
EXTERNAL FINANCIAL STATEMENTS 46
Income Statement：Manufacturing Firm 46
Income Statement：Service Organization 48
ACTIVITY DRIVERS AND COST BEHAVIOR 48
Cost Behavior Concepts 48
Fixed Costs 50
■22 Productivity：Measurement and Control 51
Variable Costs 52
Mixed Costs 54
TRADITIONAL AND CONTEMPORARY COST MANAGEMENT SYSTEMS 55
Traditional Cost Management Systems：A Brief Overview 55
Contemporary Cost Management Systems：A Brief Overview 56
Choice of a Cost Management System 58
■3 Activity Cost Behavior 80
3 Activity Cost Behavior 80
COST BEHAVIOR AND THE RESOURCE USAGE MODEL 81
Time Horizon 81
Activities，Resource Usage，and Cost Behavior 82
Measures of Activity Output 84
Step-Cost Behavior 84
Activities and Mixed Cost Behavior 87
METHODS FOR SEPARATING MIXED COSTS INTO EIXED AND VARIABLE COMPONENTS 88
The High-Low Method 89
Scatterplot Method 91
The Method of Least Squares 94
RELIABILITY OF COST FORMULAS 96
Hypothesis Test of Parameters 97
Goodness-of-Fit Measures 97
Confidence Intervals 100
MULTIPLE REGRESSION 101
MANAGERIAL JUDGMENT 103
4 Product and Service Costing：Overhead Application and Job-Order System 126
■4 Product and Service Costing：Overhead Application and Job-Order System 126
Part2 Cost Accounting Systems 126
CHARACTERISTICS OF THE PRODUCTION PROCESS 127
Manufacturing Firms Versus Service Firms 127
Unique Versus Standardized Products and Services 130
Cost Accumulation 131
SETTING UP THE COST ACCOUNTING SYSTEM 131
Cost Measurement 132
Cost Assignment 135
OVERHEAD APPLICATION：A NORMAL COSTING VIEW 136
Predetermined Overhead Rates 136
Choosing the Activity Base 137
Choosing the Activity Level 138
The Basic Concept of Overhead Application 139
Disposition of Overhead Variances 141
THE JOB-ORDER COSTING SYSTEM：GENERAL DESCRIPTION 143
Overview of the Job-Order Costing System 143
Materials Requisitions 144
Job Time Tickets 146
Overhead Application 146
Unit Cost Calculation 147
JOB-ORDER COSTING：SPECIFIC COST FLOW DESCRIPTION 147
Accounting for Materials 147
Accounting for Direct Labor Cost 148
Accounting for Overhead 149
Accounting for Finished Goods 151
Accounting for Cost of Goods Sold 153
Accounting for Nonmanufacturing Costs 154
SINGLE VERSUS MULTIPLE OVERHEAD RATES 155
APPENDIX：ACCOUNTIGN FOR SPOILAGE IN A TRADITIONAL JOB ORDER SYSTEM 158
■5 Product and Service Costing：A Process Systems Approach 180
5 Product and Service Costing：A Process Systems Approach 180
PROCESS COSTING SYSTEMS：BASIC OPERATIONAL AND COST CONCEPTS 181
Cost Flows 181
The Production Report 184
Unit Cost 184
Service Organizations 185
PROCESS COSTING WITH NO WORK IN PROCESS INVENTORIES 185
JIT Manufacturing Firms 186
PROCESS COSTING WITH ENDING WORK IN PROCESS INVENTORIES 187
Equivalent Units as Output Measures 187
Cost of Production Report Illustrated 188
Nonuniform Application of Productive Inputs 189
Beginning Work in Process Inventories 190
FIFO COSTING METHOD 191
Step3：Computation of Unit Cost 192
Step4：Valuation of Inventories 192
Step1：Physical Flow Analysis 192
Step 2：Calculation of Equivalent Units 192
Step5：Cost Reconciliation 194
Journal Entries 194
WEIGHTED AVERAGE COSTING METHOD 196
Step1：Physical Flow Analysis 196
Step2：Calculation of Equivalent Units 197
Step3：Computation of Unit Cost 197
Step4：Valuation of Inventories 197
Production Report 198
Step5：Cost Reconciliation 198
FIFO Compared With Weighted Average 198
TREATMENT OF TRANSFERRED-IN GOODS 200
Step1：Physical Flow Schedule 201
Step2：Calculation of Equivalent Units 202
Step3：Computation of Unit Costs 202
Step4：Valuation of Inventories 202
OPERATION COSTING 203
Basics of Operations Costing 204
Operation Costing Example 205
APPENDIX：SPOILED UNITS 208
■6 Support Department Cost Allocation 231
6 Support Department Cost Allocation 231
AN OVERVIEW OF COST ALLOCATION 232
Types of Departments 232
Types of Allocation Bases 234
OBJECTIVES OF ALLOCATION 235
ALLOCATING ONE DEPARTMENT S COSTS TO ANOTHER DEPARTMENT 237
A Single Charging Rate 238
Dual charging Rates 238
Budgeted Versus Actual Usage 240
Fixed Versus Variable Bases：A Note of Caution 242
CHOOSING A SUPPORT DEPARTMENT COST ALLOCATION METHOD 243
Direct Method of Allocation 244
Sequential Method of Allocation 245
Reciprocal Method of Allocation 246
Comparison of the Three Methods 250
DEPARTMENAL OVERHEAD RATES AND PRODUCT COSTING 251
7 Joint Product and By-product Costing 268
■7 Joint Product and By-product Costing 268
GENERAL CHARACTERISTICS OF JOINT PRODUCTION 269
Cost Separability and the Need for Allocation 270
Distinction and Similarity Between Joint Products and Byproducts 271
Examples of Joint Products and By-prod-ucts 272
ACCOUNTING FOR JOINT PRODUCT COSTS 273
Benefits-Received Approaches 273
Allocation Based on Relative Market Value 276
ACCOUNTING FOR BY-PRODUCTS 279
Noncost Methods of Accounting for By-products 280
Cost Methods of Accounting for By-products 281
Output Decisions 282
EFFECT OF JOINT PRODUCT COSTS ON COST CONTROL AND DECISION MAKING 282
Pricing Joint Products 283
Further Processing Decisions 283
Pricing Based on Cost of Further Production 284
JOINT PRODUCTION OF SERVICES 285
Contemporary Cost Accounting 285
■8 Activity-Based Costing 300
8 Activity-Based Costing 300
Contemporary Cost Accounting 300
LIMITATIONS OF TRADITIONAL COST ACCOUNTING SYSTEMS 301
Plantwide and Departmental Rates 301
The Inadequacy of Plantwide and Departmental Rates 303
An Example Illustrating the Failure of Unit-Based Overhead Rates 305
ACTIVITY-BASED PRODUCT COSTING：GENERAL DESCRIPTION 308
First-Stage Procedure 309
Second-Stage Procedure 311
Comparison of Traditional and ABC Product Costs 312
ABC and Service Organizations 312
ACTIVITY IDENTIFICATION AND CLASSIFICATION 315
Activity Identification 315
Classification of Activities 316
Comparison with Traditional Costing 320
An Illustrative Example 320
Homogeneous Sets：Necessary or Not? 322
ABC DATA BASE 324
ASSIGNING COSTS TO ACTIVITIES 326
■9 Strategic Cost Management，Life Cycle Cost Management，and JIT 353
9 Strategic Cost Management，Life Cycle Cost Management，and JIT 353
STRATEGIC COST MANAGEMENT 354
Creating and Sustaining a Competitive Advantage 354
Value-Chain Framework，Linkages，and Activities 355
Value-Chain Analysis 359
LIFE CYCLE COST MANAGEMENT 365
Product Life Cycle Viewpoints 365
Interactive Viewpoint 367
Role of Target Costing 371
Short Life Cycles 372
JUST-IN-TIME(JIT) MANUFACTURING AND PURCHASING 372
Inventory Effects 373
Plant Layout 374
Grouping of Employees 376
Employee Empowerment 376
Total Quality Control 376
JIT and Automation 377
JIT AND TTS EFFECT ON THE COST MANAGEMENT SYSTEM 378
Traceability of Overhead Costs 378
Product Costing 378
JIT s Effect on Job-Order and Process Costing Systems 380
Backflush Costing 380
■10 Cost-Volume-Profit Analysis 410
10 Cost-Volume-Profit Analysis 410
Part3 Decision Making：Traditional and Contemporary Approaches 410
THE BREAK-EVEN POINTS IN UNITS 411
Operating-Income Approach 412
Contribution-Margin Approach 413
Profit Targets 413
After-Tax Profit Targets 415
BREAK-EVEN POINT IN SALES DOLLARS 416
Profit Targets 419
Comparison of the Two Approaches 420
MULTIPLE-PRODUCT ANALYSIS 420
Break-even Point in Units 420
Sales Dollars Approach 423
GRAPHICAL REPRESENTATION OF CVP RELATIONSHIPS 424
The Profit-Volume Graph 424
The Cost-Volume-Profit Graph 426
Assumptions of Cost-Volume-Profit Analysis 427
CHANGES IN THE CVP VARIABLES 429
Introducing Risk and Uncertainty 431
Sensitivity Analysis and CVP 433
CVP ANALYSIS AND ACTIVITY-BASED COSTING 434
Example Comparing Conventional and ABC Analysis 435
Strategic Implications：Conventional CVP Analysis Versus ABC Analysis 436
CVP Analysis and JIT 437
■11 Activity Resource Usage Model and Relevant Costing：Tactical Decision Making 463
11 Activity Resource Usage Model and Relevant Costing：Tactical Decision Making 463
The Tactical Decision-Making Process 464
TACTICAL DECISION MAKING 464
Qualitative Factors 466
RELEVANT COSTS AND REVENUES 468
Relevant Costs Illustrated 468
Irrelevant Costs Illustrated 468
RELEVANCY，COST BEHAVIOR，AND THE ACTIVITY RESOURCE USAGE MODEL 469
Resources Acquired as Used and Needed 469
Resources Acquired in Advance(Short Term) 470
Resources Acquired in Advance (Multiperiod Service Capacity) 471
ILLUSTRATIVE EXAMPLES OF TACTICAL DECISION MAKING 471
Make-or-Buy Decisions 471
Keep-or-Drop Decisions 475
Special-Order Decisions 478
Decisions to Sell or Process Further 480
Relevant Costing and Ethical Behavior 482
12 Capital Investment Decisions 502
■12 Capital Investment Decisions 502
TYPES OF CAPITAL INVESTMENT DECISIONS 503
NONDISCOUNTING MODELS 505
Payback Period 505
Accounting Rate of Return 507
DISCOUNTING MODELS：THE NET PRESENT VALUE METHOD 508
NPV Defined 508
An Example Illustrating Net Present Value 509
INTERNAL RATE OF RETURN 509
Example：Multiple-Period Setting with Uniform Cash Flows 511
Multiple-Period Setting：Uneven Cash Flows 511
MUTUALLY EXCLUSIVE PROJECTS 512
NPV Compared with IRR 512
Example：Mutually Exclusive Projects 514
Capital Investment and Ethical Lssues 515
COMPUTATION AND ADJUSTMENT OF CASH FLOWS 516
Adjusting Forecasts for Inflation 517
Conversion of Gross Cash Flows to After-Tax Cash Flows 517
CAPITAL INVESTMENT：THE CONTEMPORARY MANUFACTURING ENVIRONMENT 524
How Investment Differs 525
How Estimates of Operating Cash Flows Differ 525
Salvage Value 528
Discount Rates 529
APPENDIX A：PRESENT VALUE CONCEPTS 530
Future Value 530
Present Value 531
13 Inventory Management：Economic Order Quantity，JIT，and the Theory of Constraints 550
■13 Inventory Management：Economic Order Quantity，JIT，and the Theory of Constraints 550
BASICS OF TRADITIONAL INVENTORY MANAGEMENT 551
Traditional Reasons for Holding Inventory 552
Economic Order Quantity：The Traditional Inventory Model 553
Computing the EOQ 554
Reorder Point 554
Demand Uncertainty and the Reorder Point 554
A Manufacturing Example 556
EOQ and Inventory Management 556
JIT AND INVENTORY MANAGEMENT：A DIFFERENT VIEW 557
A Pull System 558
Setup and Carrying Costs：The JIT Approach 559
Due-Date Performance：The JIT Solution 560
Avoidance of Shutdown and Process Reliability：The JIT Approach 560
Discounts and Price Increases：JIT Purchasing Versus Holding Inventories 564
JIT s Limitations 564
BASIC CONCEPTS OF CONSTRAINED OPTIMIZATION 565
One Binding Internal Constraint 566
Internal Binding Constraint and External Binding Constraint 566
Multiple Internal Binding Constraints 567
THEORY OF CONSTRAINTS 570
Basic Concepts 570
Five-Step Approach 571
■14 Pricing and Revenue Analysis 589
14 Pricing and Revenue Analysis 589
Customer Demand 590
BASIC ECONOMIC PRICING CONCEPTS 590
Price Elasticity of Demand 591
Market Structure and Price 593
COST-BASED PRICING 595
TARGET COSTING AND PRICING 597
LIFE CYCLE PRICING 599
Development Stage 599
Introduction Stage 600
Growth Stage 600
Decline Stage 601
PRICES AND CONTROL 601
Sale Price and Price Volume Variances 601
Maturity Stage 601
Other Methods of Evaluating Revenue 602
LEGAL SYSTEM，ETHICS，AND PRICING 602
Predatory Pricing 603
Price Discrimination 604
Fairness and Pricing 607
■15 Profitability Analysis 619
15 Profitability Analysis 619
REASONS FOR MEASURING PROFIT 620
MEASURES OF PROFIT 621
Absorption Costing Approach to Measuring Profit 621
Variable Costing Approach to Measuring Profit 624
ANALYSIS OF PROFIT-RELATED VARIANCES 627
Contributin Margin Variance 627
Market Share and Size Variances 629
PROFITABILITY OF SEGMENTS 630
Profit by Product Line 630
Divisional Profit 634
Customer Profitability 635
Overall Profit 640
TIME AND PROFIT 640
Short-Run Profitability 641
Long-Run Profitability 641
THE PRODUCT LIFE CYCLE 642
Behavioral Decision Theory 644
THE IMPACT OF PROFIT ON BEHAVIOR 644
Ethics 646
LIMITATIONS OF PROFIT MEASUREMENT 647
16 Budgeting for Planning and Control 676
Part4 Cost Planning and Control Systems 676
■16 Budgeting for Planning and Control 676
THE ROLE OF BUDGETING IN PLANNING AND CONTROL 677
Purposes of Budgeting 677
The Budgeting Process 678
Gathering Information for Budgeting 680
PREPARING THE OPERATING BUDGET 683
PREPARING THE FINANCIAL BUDGET 689
The Cash Budget 690
Static Budgets Versus Flexible Budgets 694
USING BUDGETS FOR CONTROL 694
The Behavioral Dimension of Budgeting 698
Operating Budgets for Merchandising and Service Firms 703
Zero-Base Budgeting 703
OTHER TYPES OF BUDGETS 703
■17 Standard Costing：A Traditional Control Approach 727
17 Standard Costing：A Traditional Control Approach 727
UNIT STANDARDS 728
How Standards Are Developed 728
Types of Standards 729
Why Standard Cost Systems Are Adopted 729
STANDARD PRODUCT COSTS 730
VARIANCE ANALYSIS：GENERAL DESCRIPTION 733
Price and Efficiency Variances 733
The Decision to Investigate 733
VARIANCE ANALYSIS AND ACCOUNTING：MATERIALS AND LABOR 735
Direct Materials Price and Usage Variances 735
Direct Labor Variances 740
Disposition of Materials and Labor Variances 743
VARIANCE ANALYSIS：OVERHEAD COSTS 744
Four-Variance Method：Variable Overhead Variances 745
Four-Variance Analysis：Fixed Overhead Variances 749
Total Fixed Overhead Variance 749
Two-and Three Variance Analyses 753
MIX AND YIELD VARIANCES：MATERIALS AND LABOR 754
Materials Mix and Yield Variances 755
Labor Mix and Yield Variances 757
■18 Decentralization：Responsibility Accounting，Performance Evaluation，and Transfer Pricing 774
18 Decentralization：Responsibility Accounting，Performance Evaluation，and Transfer Pricing 774
RESPONSIBILITY ACCOUNTING 775
Types of Responsibility Centers 775
DECENTRALIZATION 776
Reasons for Decentralization 776
The Role of Information and Accountability 776
The Units of Decentralization 778
MEASURING THE PERFORMANCE OF INVESTMENT CENTERS 778
Return on Investment 779
Residual Income 783
Economic Value Added 785
Multiple Measures of Performance 788
Incentive Pay for Managers-Encouraging Goal Congruence 789
Managerial Rewards 789
MEASURIGN AND REWARDING THE PERFORMANCE OF MANAGERS 789
TRANSFER PRICING 792
The Impact of Transfer Pricing on Income 792
The Transfer Pricing Problem 793
SETTING TRANSFER PRICES 794
Market Price 794
Negotiated Transfer Prices 795
Cost-Based Transfer Prices 801
19 International Issues in Cost Management 819
■19 International Issues in Cost Management 819
MANAGEMENT ACCOUNTING IN THE INTERNATIONAL ENVIRONMENT 820
LEVELS OF INVOLVEMENT IN INTERNATIONAL TRADE 820
Importing and Exporting 821
Wholly Owned Subsidiaries 823
Joint Ventures 824
FOREIGN CURRENCY EXCHANGE 826
Managing Transaction Risk 826
Managing Economic Risk 829
Managing Translation Risk 830
DECENTRALIZATION 831
Advantages of Decentralization in the MNC 831
Creation of Divisions 832
MEASURING PERFORMANCE IN THE MULTINATIONAL FIRM 833
Political and Legal Factors Affecting Performance Evaluation 834
Multiple Measures of Performance 836
TRANSFER PRICING AND THE MULTINATIONAL FIRM 836
Performance Evaluation 836
Income Taxes and Transfer Pricing 837
ETHICS IN THE INTERNATIONAL ENVIRONMENT 840
Contemporary Control Systems 840
■20 Contemporary Responsibility Accounting 855
Contemporary Control Systems 855
20 Contemporary Responsibility Accounting 855
RESPONSIBILITY ACCOUNTING 856
Traditional vs．Contemporary Responsibility Accounting 856
Limitations of Traditional Responsibility Accounting 860
Activity-Based Management 862
PROCESS VALUE ANALYSIS 864
Driver Analysis：The Search for Root Causes 864
Activity Analysis 865
Performance Measurement 866
The Role of Interim(Currently Attainable)Standards 870
Benchmarking 871
Drivers and Behavioral Effects 872
ACTIVITY FLEXIBLE BUDGETING 873
Fixed Activity Variances：Detailed Analysis 876
Variable Activity Variances：Detailed Analysis 877
LIFE CYCLE COST BUDGETING 878
Whole-Life Product Cost 879
Budgeting Life Cycle Costs：An Example 879
CONTROL AT THE OPERATING LEVEL 880
Quality 881
Productivity 882
Materials Cost 882
Delivery Performance 882
Inventory 882
Machine Performance 885
Operational Measures：A Qualification 885
■21 Quality Costing：Measurement and Control 906
21 Quality Costing：Measurement and Control 906
MEASURING THE COSTS OF QUALITY 907
Quality Defined 908
Costs of Quality Defined 910
Measuring Quality Costs 912
RETORTING QUALITY COST INFORMATION 914
Quality Cost Reports 914
Optimal Distribution of Quality Cost：Traditional View 916
Quality Cost Function：Contemporary View 917
The Interface Between Cost Management and Total Quality 920
USING QUALITY COST INFORMATION 920
Using Quality Cost Information for Decision Making 921
Certifying Quality Through ISO 9000 923
CONTROLLING QUALITY COSTS 925
Choosing the Quality Standard 925
Types of Quality Performance Reports 927
Using Quality Reports for Control 932
22 Productivity：Measurement and Control 951
PRODUCTIVE EFFICIENCY 952
PARTIAL PRODUCTIVITY MEASUREMENT 954
Partial Productivity Measurement Defined 955
Partial Measures and Measuring Changes in Productive Efficiency 955
Advantages of Partial Measures 955
Disadvantages of Partial Measures 956
TOTAL PRODUCTIVITY MEASUREMENT 956
Profile Productivity Measurement 956
Profit-Linked Productivity Measurement 958
Price-Recovery Component 960
MEASURING CHANGES IN ACTIVITY EFFICIENCY 960
Activity Productivity Analysis 961
Process Productivity Analysis 963
Quality and Productivity 967